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(Exact name of registrant as specified in its charter)
iDelaware
i20-5197013
(State
or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
i511 W. Freshwater Way
i53204
iMilwaukee,
iWisconsin
(Zip
Code)
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: (i414) i643-3739
Securities registered pursuant to Section 12(b) of the Act:
Title
of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
iCommon Stock, $.01 par value
iRXN
iThe
New York Stock Exchange
iDepositary Shares, each representing a 1/20th interest in a share of 5.75% Series A Mandatory Convertible Preferred Stock, $.01 par value
iRXN.PRA
As of November 15, 2019,
there were not any Depositary Shares outstanding, and on that date a Form 25 was filed by ithe New York Stock Exchange related to such securities. The Depositary Shares were removed from listing on the New York Stock Exchange on November 26, 2019.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§229.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge accelerated filer
☒
Accelerated filer
☐
Non-accelerated
filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes i☐ No
☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Our disclosure and analysis in this report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in developing and expanding our business and the realization of sales from our backlog, include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects,”“anticipates,”“intends,”“plans,”“believes,”“estimates” and similar expressions are forward-looking statements. Although these statements are based upon reasonable assumptions, including projections of orders, sales, operating margins, earnings, cash flows, research and development costs, working capital and capital expenditures,
they are subject to risks and uncertainties that are described more fully herein and in our Annual Report on Form 10-K for the year ended March 31, 2019 in Part I, Item 1A, “Risk Factors” and in Part I under the heading "Cautionary Notice Regarding Forward-Looking Statements." Accordingly, we can give no assurance that we will achieve the results anticipated or implied by our forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
General
Our fiscal year is the year ending March 31 of the corresponding calendar year. For example, our fiscal year 2020, or fiscal 2020, means the period from April 1, 2019 to
March 31, 2020, and the third quarter of fiscal 2020 and 2019 means the fiscal quarters ended December 31, 2019 and December 31, 2018, respectively.
Current
portion of pension and postretirement benefit obligations
i3.3
i3.3
Other
current liabilities
i116.8
i137.1
Total
current liabilities
i347.3
i397.0
Long-term
debt
i1,147.2
i1,236.8
Pension
and postretirement benefit obligations
i150.5
i158.0
Deferred
income taxes
i130.2
i125.9
Other
liabilities
i118.2
i111.0
Total
liabilities
i1,893.4
i2,028.7
Stockholders'
equity:
Common stock, $ii0.01/
par value; ii200,000,000/ shares authorized;
shares issued and outstanding: ii121,855,827/
at December 31, 2019 and ii104,842,299/
at March 31, 2019
i1.2
i1.0
Preferred
stock, $ii0.01/ par value;
ii10,000,000/ shares
authorized; shares of i5.75% Series A Mandatory Convertible Preferred Stock issued and outstanding: ii0/
at December 31, 2019 and ii402,500/
at March 31, 2019
i0.0
i0.0
Additional
paid-in capital
i1,320.9
i1,293.5
Retained
earnings
i147.9
i30.7
Accumulated
other comprehensive loss
(i104.4)
(i96.6)
Total
Rexnord stockholders' equity
i1,365.6
i1,228.6
Non-controlling
interest
i2.6
i2.4
Total
stockholders' equity
i1,368.2
i1,231.0
Total
liabilities and stockholders' equity
$
i3,261.6
$
i3,259.7
See
notes to the condensed consolidated financial statements.
1. iBasis
of Presentation and Significant Accounting Policies
The unaudited condensed consolidated financial statements included herein have been prepared by Rexnord Corporation (“Rexnord” or the “Company”) in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
In the opinion of management, the condensed consolidated
financial statements include all adjustments necessary for a fair presentation of the results of operations for the interim periods. Results for the interim periods are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2020. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's fiscal 2019 Annual Report on Form 10-K.
Rexnord is a growth-oriented, multi-platform industrial company with what it believes to be leading market shares and highly-trusted brands that serve a diverse
array of global end markets. The Company's heritage of innovation and specification have allowed it to provide highly-engineered, mission-critical solutions to customers for decades and affords it the privilege of having long-term, valued relationships with market leaders. The Company operates in a disciplined way and the Rexnord Business System (“RBS”) is its operating philosophy. Grounded in the spirit of continuous improvement, RBS creates a scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating performance throughout all aspects of its business.
The Process & Motion Control platform designs, manufactures, markets and services a comprehensive
range of specified, highly-engineered mechanical components used within complex systems where the Company's customers' reliability requirements and costs of failure or downtime are high. The Process & Motion Control portfolio includes motion control products, shaft management products, aerospace components, and related value-added services.
The Water Management platform designs, procures, manufactures, and markets products that provide and enhance water quality, safety, flow control and conservation. The Water Management product portfolio includes professional grade water control and safety, water distribution and drainage, finish plumbing and site works products for primarily nonresidential buildings.
i
Recent
Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). The FASB issued this update as part of its initiative to reduce complexity in accounting standards. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also improve consistent application of other areas by clarifying and amending existing guidance. ASU 2019-12 is effective for the Company in fiscal 2022 and early adoption is permitted. Certain amendments of this ASU may be adopted on a retrospective basis,
modified retrospective basis or prospective basis. The Company is currently evaluating the impact this guidance will have on its condensed consolidated financial statements.
In June 2016, the FASB ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which establishes Accounting Standards Codification (“ASC”) 326, Financial Instruments - Credit Losses. The ASU revises the measurement of credit losses for financial assets measured at amortized cost from an incurred loss methodology to an expected loss methodology. The ASU affects trade receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. Additional disclosures about significant estimates and credit quality are also required. In November 2018,
the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This ASU clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. In May 2019, the FASB issued ASU No. 2019-05, Targeted Transition Relief, which amends ASC 326. This ASU provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. ASU 2016-13 is effective for the Company in fiscal 2021. The Company expects that it will adopt the ASU using a modified-retrospective approach. The Company is currently evaluating the impact this guidance will have on its condensed consolidated
financial statements and does not anticipate that the guidance will materially impact its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans ("ASU 2018-14"), which updates the standard to remove disclosures that no longer are considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant.
ASU 2018-14 is effective for the Company in fiscal 2021 on a retroactive basis. This guidance will have no impact on the Company's condensed consolidated financial statements upon adoption other than with respect to the updated disclosure requirements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which modifies the disclosure requirements in ASC 820, Fair Value Measurement ("ASC 820"). The Company adopted this ASU on April
1, 2019. There was no impact to the Company's condensed consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU was issued following the enactment of the U.S. Tax Cuts and Jobs Act of 2017 ("Tax Act") and permits entities to elect a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The Company adopted the standard effective April 1, 2019, and did not reclassify tax effects stranded in accumulated other comprehensive loss. As such, there
was no impact on the Company’s condensed consolidated financial position, results of operations, and cash flows as a result of the adoption of the ASU.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"), which expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The Company adopted this ASU on April 1, 2019. There was no impact to the
Company's condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU 2018-11, Leases (Topic 842): Targeted Improvements, which addressed implementation issues related to the new lease standard. These and certain other lease-related ASUs have generally been codified in ASC 842, Leases (“ASC 842”). ASC 842 supersedes the lease accounting requirements in ASC 840, Leases (“ASC 840”). ASC 842 establishes a right-of-use model
that requires a lessee to record a right-of-use (“ROU”) asset and a lease liability on the balance sheet for all leases. Under ASC 842, leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The standard also requires disclosures around the amount, timing and uncertainty of cash flows arising from leases. The Company adopted ASC 842 effective April 1, 2019, using a modified retrospective approach. Prior period financial statements continue to be presented under ASC 840 based on the accounting standards originally in effect for such periods.
The Company elected certain practical expedients permitted under the
transition guidance within ASC 842 to leases that commenced before April 1, 2019, including the package of practical expedients that resulted in the Company not reassessing its prior conclusions under ASC 840 related to lease identification, lease terms, lease classification and initial direct costs for expired and existing leases prior to April 1, 2019, and therefore there was no adjustment to the opening balance of retained earnings. The Company also elected the practical expedient to combine lease and non-lease components for all asset classes, and has made a policy election not to capitalize leases with an initial term of 12 months or less.
Upon adoption,
the Company recognized ROU assets and lease liabilities of approximately $i70.8 million and $i73.0
million, respectively, as of April 1, 2019. Adoption of the new standard did not have a significant impact on the Company’s consolidated results of operations or cash flows. See Note 18, Leases for additional information.
i
Reclassifications
Certain prior year amounts have been reclassified to conform to the fiscal 2020 presentation.
On May 10, 2019, the Company acquired substantially all of the assets of East Creek Corporation (d/b/a StainlessDrains.com), a manufacturer of stainless steel drains, grates and accessories for industrial and commercial end markets,
for a cash purchase price of $i24.8 million, excluding transaction costs and net of cash acquired. StainlessDrains.com, headquartered in Greenville, Texas, added complementary product lines to the Company's existing Water Management platform.
The Company's results of operations include the acquired
operations subsequent to the aforementioned acquisition date. Pro-forma results of operations and certain other U.S. GAAP disclosures related to this acquisition have not been presented because they are not significant to the Company's condensed consolidated statements of operations or financial position. The acquisition of StainlessDrains.com has been accounted for as a business combination and was recorded by allocating the purchase price to the fair value of assets acquired and liabilities assumed at the acquisition date. The excess of the purchase price over the fair value assigned to the assets acquired and liabilities assumed was recorded as goodwill. The purchase price allocation associated with this acquisition resulted in tax deductible goodwill of $i12.7
million, other intangible assets of $i8.0 million (including tradenames of $i0.7
million and $i7.3 million of customer relationships), $i1.9
million of trade working capital and other net assets of $i2.2 million. The purchase price allocation was adjusted during the third quarter of fiscal 2020, resulting in a reduction to goodwill of $i1.2 million,
related to the refinement of the estimated fair value of intangible assets acquired.
During the second quarter of fiscal 2020, the Company acquired the remaining non-controlling interest in a Process and Motion Control joint venture for a cash purchase price of $i0.3 million. The acquisition of the remaining minority interest was not material to the
Company's condensed consolidated statements of operations or financial position.
Fiscal Year 2019
On January 23, 2019, the Company acquired an additional i47.5% interest in Centa MP (Hong Kong) Co., Limited ("Centa China"), a joint venture in which the
Company previously maintained a i47.5% non-controlling interest, for $i21.4 million, net of cash held by the former
joint venture. Centa China, a manufacturer and distributor of premium flexible couplings and drive shafts for industrial, marine, rail and power generation applications within the Company's Process & Motion Control platform, provides the Company with the opportunity to expand its product offerings within its Asia Pacific end markets. Prior to this transaction, the Company accounted for its non-controlling interest in Centa China as an equity method investment. The acquisition of the additional i47.5%
interest was considered to be an acquisition achieved in stages, whereby the Company remeasured the previously held equity method investment to fair value. The Company considered multiple factors in determining the fair value of the previously held equity method investment, including: (i) the price negotiated with the selling shareholder for the i47.5% equity interest in Centa
China, (ii) an income valuation model (discounted cash flow), and (iii) current trading multiples for comparable companies. Based on this analysis, during the fourth quarter of fiscal 2019, the Company recognized a $i0.2 million gain on the remeasurement of the previously held equity method investment and a $i1.8
million loss associated with the historical foreign currency translation adjustments associated with the equity method investment. iThe purchase price for this business combination is estimated as follows (in millions):
Fair value of consideration transferred:
Cash
paid, net of cash acquired
$
i21.4
Other items to be allocated to identifiable assets acquired and liabilities assumed
Book value of investment in Centa China at the acquisition date
i21.8
Gain
recognized from step acquisition
i0.2
Fair value of remaining non-controlling interest
i2.3
Total
$
i45.7
The
Company allocated the purchase price to the fair value of assets acquired and liabilities assumed at the acquisition date. The excess of the acquisition purchase price over the fair value assigned to the assets acquired and liabilities assumed was recorded as goodwill. The preliminary purchase price allocation was adjusted during the first nine months of fiscal 2020, resulting in an increase to goodwill of $i0.4 million, primarily related to the refinement of the estimated fair value of intangible assets and other working capital acquired. As of December
31, 2019, the preliminary purchase price allocation associated with this acquisition resulted in non-tax deductible goodwill of $i20.5 million, other intangible assets of $i20.1
million (including tradenames of $i1.3 million and $i18.8
million of customer relationships), $i7.1 million of trade working capital and other net liabilities of $i2.0
million. The preliminary purchase price allocation will be completed within the one year period following the acquisition date.
On September 24, 2018, the Company acquired certain assets associated with the design and distribution of various roof drains, spouts and flow sensors for institutional, commercial and industrial buildings for $i2.0
million. The acquisition of these assets added complementary product lines to the Company's existing Water Management platform and was accounted for as a business combination. This acquisition did not materially affect the Company's condensed consolidated statements of operations or financial position.
The Company's results of operations include the acquired operations subsequent to the respective acquisition dates. Pro-forma results of operations and certain other U.S. GAAP disclosures related to the fiscal 2020 and 2019 acquisitions have not been presented because they are not significant to the
Company's condensed consolidated statements of operations or financial position.
3. iRestructuring and Other Similar Charges
During fiscal 2020, the Company continued to execute various restructuring actions. These initiatives were implemented to drive efficiencies and reduce operating costs
while also modifying the Company's footprint to reflect changes in the markets it serves, the impact of acquisitions on the Company's overall manufacturing capacity and the refinement of its overall product portfolio. These restructuring actions primarily resulted in workforce reductions, lease termination costs, and other facility rationalization costs. Management expects to continue executing initiatives and select product-line rationalizations to optimize its operating margin and manufacturing footprint. As such, the Company expects further expenses related to workforce reductions, potential impairment or accelerated depreciation of assets, lease termination costs, and other facility rationalization costs.
The Company's restructuring plans are preliminary and related expenses are not yet estimable.
iThe following table summarizes the Company's restructuring and other similar charges during the three and nine months ended December 31, 2019 and December 31,
2018 by classification of operating segment (in millions):
Restructuring and Other Similar Charges Three Months Ended December 31, 2019
(1)The
restructuring accrual is included in other current liabilities in the condensed consolidated balance sheets.
In connection with the ongoing supply chain optimization and footprint repositioning initiatives, the Company has taken several actions to consolidate existing manufacturing facilities and rationalize its product offerings. These actions require the Company to assess whether the carrying amount of impacted long-lived assets will be recoverable as well as whether the remaining useful lives require adjustment. As a result, the Company recognized accelerated depreciation of $i0.7
million and $i2.0 million during the three and nine months ended December 31, 2019, and $i1.2
million and $i3.7 million during the three and nine months ended December 31, 2018. Accelerated depreciation is recorded within Cost of sales in the condensed consolidated statements of operations.
During fiscal 2019, the Company completed the sale of the VAG business, which was previously included within the Water Management platform. The operating results of the VAG business are reported as discontinued operations in the condensed consolidated statements
of operations for all periods presented, as the sale of VAG represented a strategic shift that had a major impact on operations and financial results. The sale price was subject to customary working capital and cash balance adjustments, which were finalized in fiscal 2020. As a result of these adjustments and other related costs, the Company recognized an additional $i1.8
million loss on the sale of discontinued operations during the nine months ended December 31, 2019.
iThe major components of Loss from discontinued operations, net of tax presented in the condensed consolidated statements of operations consisted of the following (in millions):
Loss
from discontinued operations before income tax
i—
(i23.6)
(i1.8)
(i154.8)
Income
tax (expense) benefit
i—
(i4.2)
i—
i0.5
Loss
from discontinued operations, net of tax
$
i—
$
(i27.8)
$
(i1.8)
$
(i154.3)
____________________
(1) The
Company recorded non-cash impairments of $i126.0 million during the nine months ended December 31, 2018, to reflect the Company's estimated fair value less costs to sell the VAG business based on the value of preliminary bids received at that time.
(2) Results from operations in fiscal 2019 reflect the period through November 26, 2018, the date on which the sale of the VAG business was completed.
The
condensed consolidated statements of cash flows for the prior period presented has not been adjusted to separately disclose cash flows related to discontinued operations. However, the capital expenditures, depreciation, amortization and other significant non-cash amounts associated with the discontinued operations were as follows (in millions):
A
performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606, Revenue from Contracts with Customers ("ASC 606"). A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized when obligations under the terms of a contract with the customer are satisfied. For the majority of the Company's product sales, revenue is recognized at a point-in-time
when control of the product is transferred to the customer, which generally occurs when the product is shipped from the Company's manufacturing facility to the customer.
When contracts include multiple products to be delivered to the customer, generally each product is separately priced and is determined to be distinct within the context of the contract. Other than a standard assurance-type warranty that the product will conform to agreed-upon specifications, there are generally no other significant post-shipment obligations. The expected costs associated with standard warranties continues to be recognized as an expense when the products are sold.
When the contract provides the customer the right to return eligible products or when the customer is part of a sales rebate program, the Company reduces revenue at the point of sale using current facts and historical experience by using an estimate for expected product returns and rebates associated with the transaction. The Company adjusts these estimates at the earlier of when the most likely amount of consideration that is expected to be received changes or when the consideration becomes fixed. Accordingly, an increase or decrease to revenue is recognized at that time.
iSales
and other taxes collected concurrent with revenue-producing activities are excluded from revenue. The Company has elected to recognize the cost for freight and shipping when control of products has transferred to the customer as a component of cost of sales in the condensed consolidated statements of operations. The Company classifies shipping and handling fees billed to customers as net sales and the corresponding costs are classified as Cost of sales in the condensed consolidated statements of operations.
Revenue by Category
The Company has itwo
business segments, Process & Motion Control and Water Management. iThe following tables present our revenue disaggregated by customer type and geography (in millions):
For substantially all of the Company's Process & Motion Control and Water Management product sales, the customer is billed 100% of the contract value when the product ships and payment is generally due 30 days from shipment. Certain contracts include longer payment periods; however, the Company has elected to utilize the practical expedient in which the Company will only recognize a financing component to the sale if payment is due more than one year from the date of shipment.
The
Company receives payment from customers based on the contractual billing schedule and specific performance requirements established in the contract. Billings are recorded as accounts receivable when an unconditional right to the contractual consideration exists. Contract assets arise when the Company performs by transferring goods or services to a customer before the customer pays consideration, or before the customer’s payment is due. A contract liability exists when the Company has received consideration or the amount
is due from the customer in advance of revenue recognition. Contract liabilities and contract assets are recognized in Other current liabilities and Receivables, net, respectively, in the Company's condensed consolidated balance sheets.
i
The
following table presents changes in the Company’s contract assets and liabilities during the nine months ended December 31, 2019 (in millions):
(1)Contract
liabilities are reduced when revenue is recognized.
Backlog
The Company has backlog of $i389.5 million as of December 31, 2019, which represents the most likely amount of consideration expected to be received in satisfying the remaining backlog under open contracts.
The Company has elected to use the optional exemption provided by ASC 606-10-50-14A for variable consideration, and has not included estimated rebates in the amount of unsatisfied performance obligations. The Company expects to recognize approximately 61% of the unsatisfied performance obligations as revenue in fiscal 2020 and the remaining approximately 39% in fiscal 2021 and beyond.
Timing of Performance Obligations Satisfied at a Point in Time
The
Company determined that the customer is able to control the product when it is delivered to them; thus, depending on the shipping terms, control will transfer at different points between the Company's manufacturing facility or warehouse and the customer’s location. The Company considers control to have transferred upon shipment or delivery because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.
Variable
Consideration
The Company provides volume-based rebates and the right to return product to certain customers, which are accrued for based on current facts and historical experience. Rebates are paid either on an annual or quarterly basis. There are no other significant variable consideration elements included in the Company's contracts with customers.
The Company has elected to expense
contract costs as incurred if the amortization period is expected to be one year or less. If the amortization period of these costs is expected to be greater than one year, the costs would be subject to capitalization. As of December 31, 2019, the contract assets capitalized, as well as amortization recognized in fiscal 2020, are not significant and there have been ino
impairment losses recognized.
6. iIncome Taxes
The provision for income taxes for all periods presented is based on an estimated effective income tax rate for the respective full fiscal years. The estimated annual effective income tax rate is determined excluding the effect of significant discrete items or items that are reported net of their related tax effects. The tax effect of significant discrete items
is reflected in the period in which they occur. The Company's income tax expense is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are generally higher than the U.S. federal statutory rate, state tax rates in the jurisdictions where the Company does business and the Company's ability to utilize various tax credits, capital loss and net operating loss (“NOL”) carryforwards.
The Company regularly reviews its deferred tax assets for recoverability and valuation allowances are established based on historical
losses, projected future taxable income and the expected timing of the reversals of existing temporary differences, as deemed appropriate.In addition, all other available positive and negative evidence is taken into consideration for purposes of determining the proper balances of such valuation allowances. As a result of this review, the Company continues to maintain a full valuation allowance against U.S. federal and state capital loss carryforwards and a partial valuation allowance against certain foreign NOL carryforwards and other related foreign deferred tax assets, as well as certain U.S. state NOL carryforwards. Future changes to the balances of these valuation allowances, as a result of this continued review and analysis by the Company, could
result in a material impact to the financial statements for such period of change.
The income tax provision was $i13.4 million in the third quarter of fiscal 2020, compared to $i9.1
million in the third quarter of fiscal 2019. The effective income tax rate for the third quarter of fiscal 2020 was i21.7% versus i15.0% in the third quarter
of fiscal 2019. The effective income tax rate for the third quarter of fiscal 2020 was slightly above the U.S. federal statutory rate of 21% primarily due to the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of additional income taxes associated with global intangible low-taxed income (“GILTI”) and the accrual of various state income taxes, substantially offset by the recognition of certain previously unrecognized tax benefits generally due to the lapse of the applicable statutes of limitations, the recognition of income tax benefits associated with share-based payments, net income tax benefits recognized in association with changes to certain foreign income tax rates and the recognition of income tax benefits associated with foreign-derived intangible income (“FDII”). The effective income tax rate for the third quarter of fiscal 2019 was below the U.S. federal statutory rate of 21% primarily due
to the recognition of certain previously unrecognized tax benefits due to the lapse of applicable statutes of limitations partially offset by the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of additional taxes associated with GILTI and the accrual of various state income taxes.
The income tax provision recorded in the first nine months of fiscal 2020 was $i47.7 million, compared to $i40.8
million recorded in the first nine months of fiscal 2019. The effective income tax rate for the first nine months of fiscal 2020 was i23.7% versus i22.8%
in the first nine months of fiscal 2019. The effective income tax rate for the first nine months of fiscal 2020 was above the U.S. federal statutory rate of 21% primarily due to the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of additional income taxes associated with GILTI and the accrual of various state income taxes, partially offset by the recognition of certain previously unrecognized tax benefits generally due to the lapse of the applicable statutes of limitations, the recognition of income tax benefits associated with share-based payments, net income tax benefits recognized in association with changes to certain foreign income tax rates and FDII. The effective income
tax
rate for the first nine months of fiscal 2019 was slightly above the U.S. federal statutory rate of 21% primarily due to the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of additional taxes associated with GILTI and the accrual of various state income taxes substantially offset by the recognition of certain previously unrecognized tax benefits due to the lapse of applicable statutes of limitations, the recognition of excess tax benefits associated with share-based payments and the recognition of a tax benefit associated with a foreign country enacted rate reduction.
The Company’s total liability for net unrecognized tax benefits as of December 31, 2019 and March 31, 2019, was $i17.9
million and $i21.8 million, respectively. The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in income tax expense. As of December 31, 2019 and March 31, 2019, the total amount of gross, unrecognized income tax benefits included $i2.1
million and $i4.3 million of accrued interest and penalties, respectively. The Company recognized $i0.7
million and $i0.4 million of net interest and penalties as income tax benefit during the nine months ended December 31, 2019 and December 31, 2018, respectively.
The Company conducts business in multiple locations within and outside the U.S. Consequently, the
Company is subject to periodic income tax examinations by domestic and foreign income tax authorities. Currently, the Company is undergoing routine, periodic income tax examinations in both domestic and foreign jurisdictions. The Company is currently undergoing an income tax examination by the U.S. Internal Revenue Service (IRS) of the Company’s U.S. consolidated federal income tax returns for the tax years ended March 31, 2016 and 2017. In addition, in accordance with the terms of the VAG sale agreement, the Company is required
to indemnify the purchaser for any future income tax liabilities associated with all open tax years ending prior to, and including, the short period ended on the date of the Company's sale of VAG.During the first quarter of fiscal 2020, VAG was notified by the German tax authorities of its intention to conduct an income tax examination of the VAG German entities’ income tax returns for the tax years ended March 31, 2014 through 2017. The Company anticipates the related fieldwork will begin during the fourth quarter of fiscal 2020. During the second quarter of fiscal 2019, the IRS completed an income tax examination of the
Company’s amended U.S. consolidated federal income tax return for the tax year ended March 31, 2015, and the Company paid approximately $i0.4 million upon conclusion of such examination. It appears reasonably possible that the amounts of unrecognized income tax benefits could change in the next twelve months upon conclusion of the
Company’s current ongoing examinations; however, any potential payments of income tax, interest and penalties are not expected to be significant to the Company's consolidated financial statements. With certain exceptions, the Company is no longer subject to U.S. federal income tax examinations for tax years ending prior to March 31, 2016, state and local income tax examinations for years ending prior to fiscal 2016 or significant foreign income tax examinations for years ending prior to fiscal 2015.
Basic net income (loss) per share attributable to Rexnord common stockholders
Numerator:
Net
income from continuing operations
$
i48.4
$
i52.9
$
i153.6
$
i141.3
Less:
Non-controlling interest (loss) income
(i0.1)
(i0.3)
i0.2
(i0.1)
Less:
Dividends on preferred stock
i2.8
i5.8
i14.4
i17.4
Net
income from continuing operations attributable to Rexnord common stockholders
$
i45.7
$
i47.4
$
i139.0
$
i124.0
Loss
from discontinued operations, net of tax
$
i—
$
(i27.8)
$
(i1.8)
$
(i154.3)
Net
income (loss) attributable to Rexnord common stockholders
$
i45.7
$
i19.6
$
i137.2
$
(i30.3)
Denominator:
Weighted-average
common shares outstanding, basic
i113,448
i104,777
i108,250
i104,562
Diluted
net income (loss) per share attributable to Rexnord common stockholders
Numerator:
Net income from continuing operations
$
i48.4
$
i52.9
$
i153.6
$
i141.3
Less:
Non-controlling interest (loss) income
(i0.1)
(i0.3)
i0.2
(i0.1)
Less:
Dividends on preferred stock
—
—
—
—
Net income from continuing operations attributable to Rexnord common stockholders
$
i48.5
$
i53.2
$
i153.4
$
i141.4
Loss
from discontinued operations, net of tax
$
i—
$
(i27.8)
$
(i1.8)
$
(i154.3)
Net
income (loss) attributable to Rexnord common stockholders
$
i45.7
$
i19.6
$
i137.2
$
(i30.3)
Plus:
Dividends on preferred stock
i2.8
i5.8
i14.4
i17.4
Net
income (loss) attributable to Rexnord common stockholders
$
i48.5
$
i25.4
$
i151.6
$
(i12.9)
Denominator:
Weighted-average
common shares outstanding, basic
i113,448
i104,777
i108,250
i104,562
Effect
of dilutive equity securities
i2,246
i2,289
i2,253
i2,794
Preferred
stock under the "if-converted" method (1)
i7,989
i15,979
i13,307
i15,979
Weighted-average
common shares outstanding, diluted
i123,683
i123,045
i123,810
i123,335
____________________
(1)During
the third quarter of fiscal 2020, the Company issued i15,980,050 shares of common stock upon the mandatory conversion of Preferred stock; see Note 8, Stockholders' Equity for additional information.
/
The
computation of diluted net income per share for the three months and nine months ended December 31, 2019 excludes i0.7 million and i1.1
million shares, respectively, related to equity awards due to their anti-dilutive effects. The computation of diluted net income (loss) per share for the three months and nine months ended December 31, 2018 excludes i2.3 million and i1.0
million shares, respectively, related to equity awards due to their anti-dilutive effects.
(1)For the three and nine months ended December 31, 2019, the Company issued i563,779 and i1,672,978
shares of common stock, respectively, upon the exercise of stock options and vesting of restricted stock units and performance stock units.
(2)During fiscal 2019, represents a i30% non-controlling interest in two Process & Motion Control controlled subsidiaries. During the second quarter of fiscal 2020, the
Company acquired the remaining i30% non-controlling interest associated with one of the aforementioned Process & Motion Control joint ventures for a cash purchase price of $i0.3
million. Following this transaction, represents a i30% non-controlling interest in the remaining Process & Motion Control controlled subsidiary and a i5%
non-controlling interest in another Process & Motion Control joint venture relationship.
(3)During the third quarter of fiscal 2020, the Company issued i15,980,050 shares of common stock upon the mandatory conversion of preferred stock; see "Preferred Stock" below.
(4)During
fiscal 2020, the Company repurchased and canceled i639,500 shares of common stock at a total cost of $i20.0
million at a weighted average price of $i31.30 per share. See "Share Repurchase Program" below.
Preferred Stock
During the third quarter of fiscal 2020, i402,500
shares of i5.75% Series A Mandatory Convertible Preferred Stock (the "Series A Preferred Stock") automatically converted into i15,980,050
shares of the Company's common stock. The number of shares of common stock issued upon conversion was determined based on a defined average volume weighted average price per share of the Company’s common stock. Upon conversion, there were ino shares of Series A Preferred Stock outstanding.
Dividends were paid on the Series A Preferred Stock quarterly. The
final dividend payment was made on November 15, 2019. During the three and nine months ended December 31, 2019, the Company paid $i5.8 million and $i17.4
million of dividends on the Series A Preferred Stock, respectively.
Share Repurchase Program
During fiscal 2015, the Company's Board of Directors approved a common stock repurchase program (the "Repurchase Program") authorizing the repurchase of up to $i200.0 million of the Company's common stock from
time to time on the open market or in privately negotiated transactions. The Repurchase Program does not require the Company to acquire any particular amount of common stock and does not specify the timing of purchases or the prices to be paid. During the third quarter of fiscal 2020, the Company repurchased i639,500 shares of common stock for a total cost of $i20.0
million at a weighted average price of $i31.30 per share. The repurchased shares were canceled by the Company upon receipt. A total of approximately $i140.0
million of the existing authority remained under the Repurchase Program at December 31, 2019.
For more information related to the Repurchase Program, see Note 22, Subsequent Events.
9. iAccumulated Other Comprehensive Loss
iThe
changes in accumulated other comprehensive loss, net of tax, for the nine months ended December 31, 2019 are as follows (in millions):
iThe following table summarizes the amounts reclassified from accumulated other comprehensive loss to net income during the three and nine months ended December 31, 2019 and December 31, 2018 (in millions):
iiThe
gross carrying amount and accumulated amortization for each major class of identifiable intangible assets as of December 31, 2019 and March 31, 2019 are as follows (in millions): /
Customer
relationships (including distribution network)
i13 years
i713.5
(i523.1)
i190.4
Tradenames
i13
years
i40.4
(i11.3)
i29.1
Intangible
assets not subject to amortization - tradenames
i280.9
—
i280.9
Total
intangible assets, net
i13 years
$
i1,085.7
$
(i574.2)
$
i511.5
Intangible
asset amortization expense totaled $i8.8 million and $i26.3 million for the three and nine months ended December 31,
2019. Intangible asset amortization expense totaled $i8.4 million and $i25.4 million for the three and nine months ended December 31,
2018. Tradenames and customer relationship intangible assets acquired during fiscal 2020 were assigned a weighted average useful life of i15 years and i14
years, respectively.
The Company expects to recognize amortization expense on the intangible assets subject to amortization of $i35.1 million in fiscal year 2020 (inclusive of $i26.3
million of amortization expense recognized in the nine months ended December 31, 2019), $i34.0 million in fiscal year 2021, $i29.7
million in fiscal year 2022, $i15.4 million in fiscal year 2023, $i14.6
million in fiscal year 2024 and $i14.3 million in fiscal year 2025.
The Company evaluates the carrying value of goodwill annually as of October 1 during the third quarter of each fiscal year, and more frequently if events or changes in circumstances indicate that an impairment may exist. The
Company completed the testing of indefinite-lived intangible assets (tradenames) and goodwill for impairment as of October 1, 2019, using primarily an income valuation model (discounted cash flow) and market approach (guideline public company comparables), which indicated that the fair value of the Company's indefinite-lived intangible assets and all reporting units exceeded their carrying value; therefore, no impairment was present.
(1)Includes
unamortized debt issuance costs of $i4.4 million and $i6.6 million at December 31,
2019 and March 31, 2019, respectively.
(2)Includes unamortized debt issuance costs of $i4.5 million and $i5.0
million at December 31, 2019 and March 31, 2019, respectively.
(3)See more information related to finance leases within Note 18, Leases.
/
Senior Secured Credit Facility
At December 31, 2019, the Company’s Third Amended and Restated First Lien Credit Agreement, as amended (the “Credit Agreement”), is funded by a syndicate of banks and other financial institutions and provides for (i) a $i725.0
million term loan facility (which was reduced to $i625.0 million as a result of a December 2019 voluntary prepayment, as discussed below) and (ii) a $i264.0
million revolving credit facility.
On November 21, 2019, the Company entered into an Incremental Assumption Agreement (the “Amendment”) with Credit Suisse AG, Cayman Islands Branch, as administrative agent and as the refinancing term lender, relating to the Credit Agreement.Prior to the Amendment, the term loan facility under the Credit Agreement, which was originally issued in an aggregate principal amount of $i800.0 million,
had a principal balance of $725.0 million on account of a $i75.0 million voluntary prepayment by the Company in the fourth quarter of fiscal 2019 ("Prior Term Loan"). The Amendment provided for the issuance of a term loan facility in an aggregate principal amount of $i725.0 million
("Term Refinancing Loan") and the proceeds were used to repay in full the aggregate principal amount of the Prior Term Loan.
Borrowings under the Term Refinancing Loan, as amended, bear interest at either (i) an Adjusted LIBOR Rate (subject to a i0% floor) plus an applicable margin of i1.75%
(which was reduced from i2.0%) or at an alternative base rate plus an
applicable margin of i0.75%
(which was reduced from i1.00%). At December 31, 2019, the borrowings under the Term Refinancing Loan had a weighted-average effective interest rate of i3.51%.
The weighted-average interest rate for the nine months ended December 31, 2019, was i4.15%. The Amendment did not change the maturity date or interest rate with respect to the revolving credit facility under the Credit Agreement.iiNo/
amounts were borrowed under the revolving credit facility at December 31, 2019 or March 31, 2019; however, $i5.1 million and $i5.6 million
of the revolving credit facility were considered utilized in connection with outstanding letters of credit at December 31, 2019, and March 31, 2019, respectively.
In connection with the above transaction, the Company recognized a $i1.5 million loss on the debt extinguishment in the third quarter of
fiscal 2020, which was comprised of $i0.7 million of refinancing related costs, as well as a non-cash write-off of debt issuance costs associated with previously outstanding debt of $i0.8 million.
Additionally, the Company capitalized $i0.1 million of direct costs associated with the Term Refinancing Loan, which will be amortized over the life of the loan as interest expense using the effective interest method.
As of December 31, 2019, the Company was in compliance with all applicable
covenants under the Credit Agreement, including compliance with a maximum permitted total net leverage ratio (the Company's sole financial maintenance covenant under the revolving credit facility discussed below) of i6.75 to 1.0. The Company's total net leverage ratio was i2.0
to 1.0 as of December 31, 2019.
On December 6, 2019, the Company made a voluntary prepayment on its Term Refinancing Loan of $i100.0 million. In connection with this prepayment, the Company recognized a $i0.7 million
loss on debt extinguishment to write off a portion of the unamortized debt issuance costs.
i4.875% Senior Notes due 2025
OnDecember 7, 2017, the Company issued $i500.0
million aggregate principal amount of i4.875% senior notes due 2025 (the “Notes”). The Notes were issued by RBS Global, Inc. and Rexnord LLC (Company subsidiaries; collectively, the “Issuers”) pursuant to an Indenture, dated as of December 7, 2017 (the “Indenture”),
by and among the Issuers, the domestic subsidiaries of the Company (with certain exceptions) as guarantors named therein (the “Subsidiary Guarantors”) and Wells Fargo Bank, National Association (the “Trustee”). The Notes are general senior unsecured obligations of the Issuers. Rexnord Corporation separately entered into a Parent Guarantee with the Trustee whereby it guaranteed certain obligations of the Issuers under the Indenture. The Notes pay interest semi-annually on June 15 and December 15. The Notes were not and will not be registered under the Securities Act of 1933 or any state securities laws.
Accounts Receivable Securitization Program
The
Company has an amended accounts receivable securitization facility (the "Securitization") with Wells Fargo & Company ("Wells Fargo"). Pursuant to the agreements evidencing the Securitization, Rexnord Funding LLC ("Rexnord Funding") (a wholly owned bankruptcy-remote special purpose subsidiary) has granted Wells Fargo a security interest in all of its current and future receivables and related assets in exchange for a credit facility permitting borrowings of up to a maximum aggregate amount of $i100.0
million outstanding from time to time. Such borrowings are used by Rexnord Funding to finance purchases of accounts receivable. The amount of advances available will be determined based on advance rates relating to the eligibility of the receivables held by Rexnord Funding at that time. Advances bear interest based on LIBOR plus i1.20%. The last date on which advances may be made is December 30, 2020, unless the maturity of the Securitization is otherwise accelerated. In addition to other customary fees associated
with financings of this type, Rexnord Funding pays an unused line fee to Wells Fargo based on any unused portion of the Securitization facility. If the average daily outstanding principal amount during a calendar month is less than i50% of the average daily aggregate commitment in effect during such month, the unused line fee is i0.50% per
annum; otherwise, it is i0.375% per annum.
The Securitization constitutes a "Permitted Receivables Financing" under the Credit Agreement and does not qualify for sale accounting under ASC 860, Transfers and Servicing. Any borrowings under the Securitization are accounted for as secured borrowings on the Company's condensed consolidated
balance sheets. Financing costs associated with the Securitization are recorded within "Interest expense, net" in the condensed consolidated statements of operations if revolving loans or letters of credit are obtained under the facility.
At December 31, 2019 and March 31, 2019, the Company's borrowing capacity under the Securitization was $i89.1
and $i100.0 million, respectively, based on the current accounts receivables balance. iiNo/
amount was borrowed under the Securitization as of December 31, 2019 or March 31, 2019. In addition, $i6.9 million and $i7.1
million of available borrowing capacity under the Securitization was considered utilized in connection with outstanding letters of credit at December 31, 2019 and March 31, 2019, respectively. As of December 31, 2019, the Company was in compliance with all applicable covenants and performance ratios contained in the Securitization.
Other Subsidiary Debt
Prior to 2016, the Company received an aggregate of $i9.8
million in net proceeds from financing agreements related to facility modernization projects at itwo North American manufacturing facilities. These financing agreements were structured
with unrelated third party financial institutions (the "Investors") and their wholly-owned community development entities
in connection with the Company's participation in transactions qualified under the federal New Market Tax Credit program pursuant to Section 45D of the Internal Revenue Code of 1986, as amended. Upon closing of these transactions, the Company provided an aggregate of $i27.6 million to the Investor, in the form of loans receivable, with a term of i30
years, bearing an interest rate of approximately i2.0% per annum. Under the terms of the financing agreements and upon meeting certain conditions, both the Investors and the Company have the ability to trigger forgiveness of the net debt. During the third quarter of fiscal year 2019, $i23.4
million of the associated loans and $i17.9 million of the related loans receivable were forgiven by both the Investors and the Company resulting in a non-cash gain on debt extinguishment of $i5.0
million, net of the write-off of $i0.5 million of unamortized debt issuance costs associated with the forgiven debt. During the second quarter of fiscal year 2020, the remaining $i14.0 million
of aggregate loans and $i9.7 million of loans receivable remaining were also jointly forgiven by the Company and the Investors, resulting in a non-cash gain on debt extinguishment of $i3.2
million. As of December 31, 2019, there are no outstanding balances related to the New Market Tax Credit related debt.
For more information related to finance leases, see Note 18, Leases.
See Note 11, Long-Term Debt to the audited consolidated financial statements of the Company's fiscal 2019 Annual Report on Form 10-K for further information regarding long-term debt.
14. iDerivative
Financial Instruments
The Company is exposed to certain financial risks relating to fluctuations in foreign currency exchange rates. The Company currently selectively uses foreign currency forward exchange contracts to manage its foreign currency risk. All hedging transactions are authorized and executed pursuant to defined policies and procedures that prohibit the use of financial instruments for speculative purposes.
The
Company periodically enters into foreign currency forward contracts to mitigate the foreign currency volatility relative to certain intercompany and external cash flows expected to occur. These foreign currency forward contracts were not accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging (“ASC 815”), and as such were marked to market through earnings. The amounts recorded on the condensed consolidated balance sheets and recognized within the condensed consolidated statements of operations related to the Company's foreign currency forward contracts
for the three and nine months ended December 31, 2019 and 2018 were not material.
15. iFair Value Measurements
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants. ASC 820 also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed assumptions about the assumptions a market participant would use.
In accordance with ASC 820, fair value measurements are classified under the following hierarchy:
•Level 1 - Quoted prices for identical instruments in active markets.
•Level 2 - Quoted prices for similar instruments; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable.
•Level
3 - Model-derived valuations in which one or more inputs or value-drivers are both significant to the fair value measurement and unobservable.
If applicable, the Company uses quoted market prices in active markets to determine fair value, and therefore classifies such measurements within Level 1. In some cases where market prices are not available, the Company makes use of observable market based inputs to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters. These measurements are classified within Level 3 if they use significant unobservable inputs.
The
Company has a nonqualified deferred compensation plan where assets are invested in mutual funds and corporate-owned life insurance contracts held in a rabbi trust, which is restricted for payments to participants of the plan. The Company has elected to use the fair value option for the mutual funds, which are measured using quoted prices of identical instruments in active markets categorized as Level 1. Corporate-owned life insurance contracts are recorded at cash surrender value, which is provided by a third party and reflects the net asset value of the underlying publicly traded mutual funds categorized as Level 2. The deferred compensation assets are classified within other assets on the condensed
consolidated balance sheets. Deferred compensation liabilities are measured at fair value based on quoted prices of identical instruments to the investment vehicles selected by the participants categorized as Level 1. Deferred compensation liabilities are classified within other liabilities on the condensed consolidated balance sheets.
iThe following table provides a summary of the
Company's assets and liabilities that were recognized at fair value on a recurring basis as of December 31, 2019 and March 31, 2019 (in millions):
Fair
Value of Non-Derivative Financial Instruments
The carrying amounts of cash, receivables, payables and accrued liabilities approximated fair value at December 31, 2019 and March 31, 2019 due to the short-term nature of those instruments. The fair value of long-term debt as of December 31, 2019 and March 31, 2019 was approximately $i1,176.2
million and $i1,238.1 million, respectively. The fair value is based on quoted market prices for the same instruments.
16. iCommitments
and Contingencies
Warranties:
The Company offers warranties on the sales of certain products and records an accrual for estimated future claims. Such accruals are based upon historical experience and management's estimate of the level of future claims. iThe following table presents changes in the
Company's product warranty liability (in millions):
The Company's subsidiaries are involved in various unresolved legal actions, administrative proceedings and claims in the ordinary course of business involving, among other things, product liability, commercial, employment, workers' compensation, intellectual property claims and environmental matters. The Company establishes accruals in a manner that is consistent with accounting principles generally accepted in the United States for costs associated with such matters when liability is probable and those costs are capable of being reasonably estimated. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or
the range of possible loss or recovery, based upon current information, management believes the eventual outcome of these unresolved legal actions, either individually or in the aggregate, will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
In connection with its sale, Invensys plc ("Invensys") provided the Company with indemnification against certain contingent liabilities, including certain pre-closing environmental liabilities. The
Company believes that, pursuant to such indemnity obligations, Invensys is obligated to defend and indemnify the Company with respect to the matters described below relating to the Ellsworth Industrial Park Site and to various asbestos claims. The indemnity obligations relating to the matters described below are subject, together with indemnity obligations relating to other matters, to an overall dollar cap equal to the purchase price, which is an amount in excess of $i900
million. The following paragraphs summarize the most significant actions and proceedings:
•In 2002, Rexnord Industries, LLC ("Rexnord Industries") was named as a potentially responsible party ("PRP"), together with at least iten other companies, at the Ellsworth Industrial Park Site, Downers Grove, DuPage County, Illinois (the "Site"), by the United States Environmental Protection Agency ("USEPA"), and the Illinois Environmental Protection Agency
("IEPA"). Rexnord Industries' Downers Grove property is situated within the Ellsworth Industrial Complex. The USEPA and IEPA allege there have been ione or more releases or threatened releases of chlorinated solvents and other hazardous substances, pollutants or contaminants, allegedly including but not limited to a release or threatened release on or from the Company's property, at the Site. The relief sought
by the USEPA and IEPA includes further investigation and potential remediation of the Site and reimbursement of USEPA's past costs. Rexnord Industries' allocated share of past and future costs related to the Site, including for investigation and/or remediation, could be significant. All previously pending property damage and personal injury lawsuits against the Company related to the Site have been settled or dismissed. Pursuant to its indemnity obligation, Invensys continues to defend the Company in known matters related to the Site and has paid i100% of
the costs to date.
•Multiple lawsuits (with approximately i300 claimants) are pending in state or federal court in numerous jurisdictions relating to alleged personal injuries due to the alleged presence of asbestos in certain brakes and clutches previously manufactured by the Company's Stearns division and/or its predecessor owners. Invensys and FMC, prior owners of the Stearns business, have paid i100% of
the costs to date related to the Stearns lawsuits. Similarly, the Company's Prager subsidiary is the subject of claims by multiple claimants alleging personal injuries due to the alleged presence of asbestos in a product allegedly manufactured by Prager. However, all these claims are currently on the Texas Multi-district Litigation inactive docket, and the Company does not believe that they will become active in the future. To date, the Company's insurance providers have paid i100% of
the costs related to the Prager asbestos matters. The Company believes that the combination of its insurance coverage and the Invensys indemnity obligations will cover any future costs of these matters.
In connection with the Company's acquisition of The Falk Corporation ("Falk"), Hamilton Sundstrand provided the Company with indemnification against certain products-related asbestos exposure liabilities. The Company believes that, pursuant to such indemnity obligations, Hamilton Sundstrand is obligated to defend and indemnify the
Company with respect to the asbestos claims described below, and that, with respect to these claims, such indemnity obligations are not subject to any time or dollar limitations.
The following paragraph summarizes the most significant actions and proceedings for which Hamilton Sundstrand has accepted responsibility:
•Falk, through its successor entity, is a defendant in multiple lawsuits pending in state or federal court in numerous jurisdictions relating to alleged personal injuries due to the alleged presence of asbestos in certain clutches and drives previously manufactured by Falk. There are approximately i100
claimants in these suits. The ultimate outcome of these lawsuits cannot presently be determined. Hamilton Sundstrand is defending the Company in these lawsuits pursuant to its indemnity obligations and has paid i100% of the costs to date.
Certain Water Management subsidiaries
are also subject to asbestos litigation. As of December 31, 2019, Zurn and numerous other unrelated companies were defendants in approximately i5,000 asbestos related lawsuits representing approximately i7,000
claims. Plaintiffs' claims allege personal injuries caused by exposure to asbestos used primarily in industrial boilers formerly manufactured by a segment of Zurn. Zurn did not manufacture asbestos or asbestos components. Instead, Zurn purchased them from suppliers. These claims are being handled pursuant to a defense strategy funded by insurers.
As of December 31, 2019, the Company estimates the potential liability for the asbestos-related claims described above as well as the claims expected to be filed in the next iten
years to be approximately $i40.0 million, of which Zurn expects its insurance carriers to pay approximately $i30.0
million in the next iten years on such claims, with the balance of the estimated liability being paid in subsequent years. The $i40.0 million was developed
based on actuarial studies and represents the projected indemnity payout for current and future claims. There are inherent uncertainties involved in estimating the number of future asbestos claims, future settlement costs, and the effectiveness of defense strategies and settlement initiatives. As a result, actual liability could differ from the estimate described herein and could be substantial. The liability for the asbestos-related claims is recorded in Other liabilities within the condensed consolidated balance sheets.
Management estimates that its available insurance to cover this potential asbestos liability as of December 31,
2019, is in excess of the i10 year estimated exposure, and accordingly, believes that all current claims are covered by insurance.
As of December 31, 2019, the Company had a recorded receivable from its insurance carriers of $i40.0
million, which corresponds to the amount of this potential asbestos liability that is covered by available insurance and is currently determined to be probable of recovery. However, there is no assurance the Company's current insurance coverage will ultimately be available or that this asbestos liability will not ultimately exceed the Company's coverage limits. Factors that could cause a decrease in the amount of available coverage or create gaps in coverage include: changes in law governing the policies, potential disputes and settlements with the carriers regarding the scope of coverage, and insolvencies of ione
or more of the Company's carriers. The receivable for probable asbestos-related recoveries is recorded in Other assets within the condensed consolidated balance sheets.
Certain Company subsidiaries were named as defendants in a number of individual and class action lawsuits in various United States courts claiming damages due to the alleged failure or anticipated failure of Zurn brass fittings on the PEX plumbing systems in homes and other structures. In fiscal 2013, the Company reached a court-approved agreement to settle the liability underlying this litigation. The settlement is designed to resolve, on a national basis, the
Company's overall exposure for both known and unknown claims related to the alleged failure or anticipated failure of such fittings. The settlement utilizes a seven year claims fund, which is capped at $i20.0 million, and is funded in installments over the seven year period based on claim activity and minimum funding criteria. The settlement also covers class action plaintiffs' attorneys' fees and expenses. Historically, the
Company's insurance carrier had funded the Company's defense in the above referenced proceedings. The Company, however, reached a settlement agreement with its insurer, whereby the insurer paid the Company a lump sum in exchange for a release of future exposure related to this liability. The Company has recorded an accrual related to this brass fittings liability, which takes into account, in pertinent part, the insurance carrier contribution, as well as exposure from the claims fund and the waiver of future insurance coverage.
17.
iRetirement Benefits
i
The components of net periodic benefit cost are as follows (in millions):
The
service cost component of net periodic benefits is presented within Cost of sales and Selling, general and administrative expenses in the condensed consolidated statements of operations, while the other components of net periodic benefit cost are presented within Other (expense) income, net.
During the first nine months of fiscal 2020 and 2019, the Company made contributions of $i0.2 million
and $i1.1 million, respectively, to its U.S. qualified pension plan trusts.
During fiscal 2019, the Company offered participants in the defined benefit plan of Cambridge International Holdings Corp., which was acquired by the Company in fiscal 2017, the opportunity to receive a lump sum settlement as part
of the termination process for that plan. During the first quarter of fiscal 2020, the obligations associated with the individuals that did not accept the lump sum settlement offer were transferred to an insurance company through the purchase of an annuity. The Company's cash contribution to purchase the annuity contract was $i3.9 million. Following
the purchase of the annuity contract, the Company has no remaining obligations to participants of this plan. The termination of this plan resulted in the recognition of $i0.8 million non-cash pre-tax losses during the first quarter of fiscal 2020.
See Note 16, Retirement Benefits, to the audited consolidated financial statements of the Company's fiscal 2019 Annual Report on Form 10-K for further information regarding retirement benefits.
The
Company determines if a contract is (or contains) a lease at inception by evaluating whether the contract conveys the right to control the use of an identified asset. The Company has operating and finance leases primarily associated with real estate, automobiles and manufacturing and office equipment.
The Company has lease agreements that include lease and non-lease components, which the Company has elected to account for as a single lease component for all classes of the underlying
assets. The term of the Company’s leases generally reflects the non-cancellable period of the lease. Some of the Company’s lease agreements include options to extend or terminate the lease, which are excluded from the minimum lease terms unless the Company is reasonably certain the option will be exercised. Lease expense for operating leases and amortization expense for finance leases is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets and are instead recognized on a straight-line basis over the lease term
Right-of-use (“ROU”) assets and liabilities
are recognized in the condensed consolidated balance sheets based on the present value of remaining lease payments over the lease term. Additionally, ROU assets include any lease payments made at or before the lease commencement date, any initial direct costs incurred, and are reduced by lease incentives received. As most of the Company’s leases do not provide an implicit rate, the present value of lease payments is determined using the Company’s incremental borrowing rate at the commencement date of the lease. Lease payments included in the measurement of the lease liabilities are comprised of fixed payments, variable payments that depend on an index or rate, and amounts probable to be paid if an option is reasonably certain to be exercised. Variable lease payments, typically based on usage of
the asset or changes in an index or rate, are excluded from the lease liabilities and are recognized in the period in which the obligation for those payments is incurred.
During fiscal 2018, the Company entered into a sale-leaseback arrangement for an owned facility in Downers Grove, Illinois. In accordance with the sale-leaseback guidance of ASC 840, the property did not qualify for sale accounting and as a result was accounted for as a financing transaction. No gain or loss was recognized in connection with this transaction. Upon the Company's adoption of ASC 842 on April 1, 2019, this financing transaction did not qualify for sale-leaseback accounting under the requirements of ASC 842 and, accordingly, continued to be accounted for as a financing obligation. The financing obligation and related asset of $i4.6
million and $i3.0 million, respectively, are recorded in Property, plant and equipment, net and Other liabilities in the condensed consolidated balance sheet as of December 31, 2019.
Prior to the adoption of ASC 842, the Company was considered, for accounting purposes only, the owner of the new facility due to the
Company's continuing involvement with the new manufacturing facility during the construction period and accordingly recorded the construction asset and financing obligation within its consolidated balance sheets. Upon the adoption of ASC 842 on April 1, 2019, the Company derecognized approximately $i23.0 million of the construction asset and financing obligation recorded as of March
31, 2019, and has accounted for the new facility as a finance lease in accordance with ASC 842.
The Rexnord Corporation Performance Incentive Plan (the "Plan") is utilized to provide performance incentives to the Company's officers, employees, directors and certain others by permitting grants of equity awards (for common stock), as well as performance-based cash awards, to such persons to encourage them to maximize Rexnord's performance and create value for Rexnord's stockholders. For the three and nine months ended December 31, 2019, the Company recognized $i5.9
million and $i18.7 million of stock-based compensation expense, respectively. For the three and nine months ended December 31, 2018, the Company recognized $i5.7
million and $i17.3 million, respectively, of stock-based compensation expense.
i
During
the nine months ended December 31, 2019, the Company granted the following stock options, restricted stock units, and performance stock units to directors, executive officers, and certain other employees:
Award Type
Number of Awards
Weighted Average Grant-Date Fair Value
Stock
options
i154,934
$
i9.50
Restricted
stock units
i421,697
$
i27.51
Performance
stock units
i324,619
$
i27.50
/
See
Note 15, Stock-Based Compensation, to the audited consolidated financial statements of the Company's fiscal 2019 Annual Report on Form 10-K for further information regarding stock-based compensation.
20. iBusiness Segment Information
The Company's
results of operations are reported in itwo business segments, consisting of the Process & Motion Control platform and the Water Management platform. The Process & Motion Control platform designs, manufactures, markets and services a comprehensive range of specified, highly-engineered mechanical components used within complex systems where customers' reliability requirements and costs of failure or downtime are high. The Process & Motion Control portfolio includes motion control products, shaft management products, aerospace components, and related
value-added services. Products and services are marketed and sold globally under widely recognized brand names, including Rexnord®, Rex®, Addax®, Euroflex®, Falk®, FlatTop®, Cambridge®, Link-Belt®, Omega®, PSI®, Shafer®, Stearns®, Highfield®, Thomas®, Centa®, and Tollok®. Process & Motion Control products and services are sold into a diverse group of attractive end markets, including food and beverage, aerospace, mining, petrochemical, energy and power generation, cement and aggregates, forest and wood products, agriculture, and general industrial and automation applications. The Water Management platform designs, procures, manufactures, and markets products that provide and enhance water quality, safety, flow control and conservation. The Water Management product portfolio includes professional grade water control and safety, water distribution and drainage, finish plumbing, and site works products for primarily nonresidential buildings. Products are marketed and
sold under widely recognized brand names, including Zurn®, Wilkins®, Green Turtle®, World Dryer® and StainlessDrains.com®. The financial information of the Company's segments is regularly evaluated by the chief operating decision maker in determining resource allocation and assessing performance. Management evaluates the performance of each business segment based on its operating results. The same accounting policies are used throughout the organization. See Note 1, Basis of Presentation and Significant Accounting Policies for further information.
During fiscal 2019, the Company sold its VAG business included within the Water Management platform and in accordance with the authoritative guidance, the operating results of the VAG business are reported
as discontinued operations in all periods presented. See Note 4, Discontinued Operations, for further information.
The following schedules present condensed consolidating financial information of the Company as of December 31, 2019 and March 31, 2019, and for the three and nine month periods ended December 31, 2019 and 2018 for (a) Rexnord Corporation, the parent company (the "Parent"); (b) RBS Global, Inc. and its wholly-owned subsidiary Rexnord LLC, which together are co-issuers (the “Issuers”) of the outstanding Notes; (c) on a combined basis, the domestic subsidiaries
of the Company, all of which are wholly-owned by the Issuers (collectively, the “Guarantor Subsidiaries”) and guarantors of those Notes; and (d) on a combined basis, the foreign subsidiaries of the Company (collectively, the “Non-Guarantor Subsidiaries”). Separate financial statements of the Guarantor Subsidiaries are not presented because their guarantees of the senior notes and senior subordinated notes are full, unconditional
and joint and several, and the Company believes separate financial statements and other disclosures regarding the Guarantor Subsidiaries are not material to investors.
Net
proceeds from divestiture of discontinued operations
i—
i—
i3.0
i6.0
i—
i9.0
Cash
used for investing activities
i—
i—
(i14.6)
(i0.1)
i—
(i14.7)
Financing
activities
Proceeds from borrowings of long-term debt
i—
i247.0
i—
i2.8
i—
i249.8
Repayments
of debt
i—
(i265.8)
i—
(i6.9)
i—
(i272.7)
Proceeds
from exercise of stock options
i6.6
i—
i—
i—
i—
i6.6
Taxes
withheld and paid on employees' share-based payment awards
(i3.2)
i—
i—
i—
i—
(i3.2)
Payments
of preferred stock dividends
(i17.4)
i—
i—
i—
i—
(i17.4)
Cash
used for by financing activities
(i14.0)
(i18.8)
i—
(i4.1)
i—
(i36.9)
Effect
of exchange rate changes on cash and cash equivalents
i—
i—
i—
(i14.2)
i—
(i14.2)
Increase
(decrease) in cash and cash equivalents
i1.9
i0.2
i88.4
(i11.0)
i—
i79.5
Cash,
cash equivalents and restricted cash at beginning of period
i—
i—
i40.9
i176.7
i—
i217.6
Cash,
cash equivalents and restricted cash at end of period
$
i1.9
$
i0.2
$
i129.3
$
i165.7
$
i—
$
i297.1
22.
iSubsequent Events
On January 28, 2020, the Company acquired substantially all of the assets of Just Manufacturing Company ("Just Manufacturing") for a total preliminary cash purchase price of approximately $i60.0 million,
excluding transaction costs and net of cash acquired. The preliminary purchase price is subject to customary post-closing adjustments for variances between estimated asset and liability targets and actual acquisition date net assets acquired. Just Manufacturing, based in Franklin Park, Illinois, manufactures stainless steel sinks and plumbing fixtures primarily used in institutional and commercial end markets and complements the Company's existing Water Management platform. The Company's financial position and results from operations will include Just Manufacturing subsequent to January 28, 2020. As of the date of this filing, the Company has not completed the preliminary
allocation of the purchase price to the assets acquired and liabilities assumed. This acquisition is not expected to have a material impact on the Company's consolidated financial statements.
On January 27, 2020, the Company's Board of Directors declared an initial quarterly cash dividend on the Company's common stock of $i0.08
per-share to be paid on March 6, 2020, to stockholders of record as of February 21, 2020. In addition, the Board of Directors approved increasing the Company’s existing share repurchase authority to $i300.0 million of available capacity under the Repurchase Program. See Note 8, Stockholders’ Equity, for additional information about the Repurchase Program.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Rexnord is a growth-oriented, multi-platform industrial company with what we believe are leading market shares and highly-trusted brands that serve a diverse array of global end markets. Our heritage of innovation and specification have allowed us to provide highly-engineered, mission-critical solutions to customers for decades and affords us the privilege of having long-term, valued relationships with market leaders. We operate our Company in a disciplined
way and the Rexnord Business System (“RBS”) is our operating philosophy. Grounded in the spirit of continuous improvement, RBS creates a scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating performance throughout all aspects of our business.
The following information should be read in conjunction with the audited consolidated financial statements and notes thereto, along with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"), which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities
on the date of the financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Refer to Item 7, MD&A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2019, for information with respect to our critical accounting policies, which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management. Except for the items reported below, management believes that as of December 31, 2019 and during the period from April 1, 2019 through December 31, 2019, there has been no material change to this information.
Recent Accounting Pronouncements
See
Item 1, Note 1, Basis of Presentation and Significant Accounting Policies regarding recent accounting pronouncements.
Acquisitions
On January 28, 2020, we acquired substantially all of the assets of Just Manufacturing Company ("Just Manufacturing") for a total preliminary cash purchase price of approximately $60.0 million, excluding transaction costs and net of cash acquired. The preliminary purchase price is subject to customary post-closing adjustments for variances between estimated asset and liability targets and actual acquisition date net assets acquired. Just Manufacturing, based in Franklin Park, Illinois, manufactures stainless steel sinks and plumbing fixtures primarily used in institutional and commercial end markets and complements our existing Water Management platform.
On
May 10, 2019, we acquired substantially all of the assets of East Creek Corporation (d/b/a StainlessDrains.com), a manufacturer of stainless steel drains, grates and accessories for industrial and commercial end markets, for a cash purchase price of $24.8 million, excluding transaction costs and net of cash acquired. StainlessDrains.com, headquartered in Greenville, Texas, added complementary product lines to our existing Water Management platform.
On January 23, 2019, we acquired an additional 47.5% interest in Centa MP (Hong Kong) Co., Limited ("Centa China"), a joint venture in which we previously maintained a 47.5% non-controlling interest, for $21.4 million, net of cash held by the former joint venture. The acquisition of the additional interest in Centa China, a manufacturer and distributor of premium
flexible couplings and drive shafts for industrial, marine, rail and power generation applications within our existing Process & Motion Control platform, provides us with the opportunity to expand our product offerings within our Asia Pacific end markets.
Discontinued Operations
During fiscal 2019, we completed the sale of our VAG business, which was previously included within our Water Management platform. As a result, the operating results of the VAG business are reported as discontinued operations in the consolidated statements of operations for all periods presented, as the sale of VAG represented a strategic shift that had a major impact on our operations and financial results. The sale price was subject to customary working capital and cash balance
adjustments, which were finalized during the first quarter of fiscal 2020. As a result of these adjustments and other related costs, we recognized an additional $1.8 million loss on the sale of discontinued operations during the first quarter of fiscal 2020.
During the nine months ended December 31, 2018, we recorded non-cash impairment charges of $126.0 million, to reflect the estimated fair value less costs to sell the VAG business based on the value of preliminary bids received at that time. For other elements of the loss from discontinued operations during the three and nine months ended December 31, 2019, refer to Item 1, Note 4, Discontinued Operations for further information. The analysis of our results of operations below focuses on our results
from continuing operations.
Restructuring
During fiscal 2020, we have continued to execute various restructuring initiatives focused on driving efficiencies, reducing operating costs by modifying our footprint to reflect changes in the markets we serve and the impact of acquisitions on our overall manufacturing capacity, and refining our overall product portfolio. We expect these initiatives to continue, which may result in further workforce reductions, lease termination costs, and other facility rationalization costs, including the impairment or accelerated depreciation of assets. At this time, our full repositioning plan is preliminary and related expenses are not yet estimable. For the three and nine months ended December 31, 2019, restructuring charges totaled $3.6 million and $8.9 million, respectively. For the three
and nine months ended December 31, 2018, restructuring charges totaled $2.6 million and $9.4 million, respectively. Refer to Item 1, Note 3, Restructuring and Other Similar Charges for further information.
Process & Motion Control net sales were $327.5 million and $326.7 million in the third quarter of fiscal 2020 and fiscal 2019, respectively. Excluding a 1% increase in sales associated with the acquisition of Centa China and a 1% unfavorable impact from foreign currency translation, core sales were flat year over year as sales growth in our aerospace and consumer-facing end markets was offset by softer demand across several of our industrial process end markets, coupled with the impact of our ongoing product line simplification initiatives.
Water Management
Water Management net sales were $164.2 million in the third quarter of fiscal 2020, an increase of 4% year over year. Excluding a 1% year over year increase in net sales resulting from our acquisition of Stainlessdrains.com, core sales increased
3% in the third quarter of fiscal 2020 as a result of increased demand across our North American building construction end markets, partially offset by a modest impact of our ongoing product line simplification initiatives.
Process & Motion Control income from operations for the third quarter of fiscal 2020 was $53.6 million, or 16.4% of net sales. Income from operations
as a percentage of net sales increased by 10 basis points year over year as higher year over year restructuring costs were more than offset by RBS-led productivity gains and benefits from our completed footprint repositioning actions.
Water Management
Water Management income from operations was $37.6 million for the third quarter of fiscal 2020, or 22.9% of net sales. Income from operations as a percentage of net sales increased by 200 basis points year over year primarily due to the increase in sales and benefits associated with ongoing cost reduction and productivity initiatives and a reduction in the adjustment to state inventories at last-in-first-out cost.
Corporate
Corporate expenses were $13.6
million in the third quarter of fiscal 2020 and $15.6 million in the third quarter of fiscal 2019. The decrease in corporate expenses is primarily associated with the recognition of lease facility termination costs during the third quarter of fiscal 2019 in connection with our ongoing footprint optimization actions.
Interest expense, net
Interest expense, net was $14.4 million in the third quarter of fiscal 2020 compared to $16.8 million in the third quarter of fiscal 2019. The decrease in interest expense as compared to the prior year's period is primarily a result of the impact of lower outstanding borrowings in the third quarter of fiscal 2020 following $75.0 and $100.0 million voluntary prepayments on our term loan during the fourth quarter of fiscal 2019 and the third quarter of fiscal 2020, respectively. In addition, year-over-year interest expense decreased as
a result of the lower average interest rate on our term loan following the refinancing of our term loan, which was completed during the third quarter of fiscal 2020. See Item 1, Note 13 Long-Term Debt for more information.
(Loss) gain on extinguishment of debt
During the third quarter of fiscal 2020, we recognized a $2.2 million loss on the extinguishment of debt in connection with both the refinancing of our term loan and a $100 million voluntary prepayment on our term loan. During the third quarter of fiscal 2019, we recognized a $5.0 million gain on the extinguishment of debt in connection with the forgiveness of the net debt associated with the New Market Tax Credit program. See Item 1, Note 13 Long-Term Debt for more information.
Other income, net
Other income, net
for the third quarter of fiscal 2020 was $0.8 million, compared to $1.6 million for the third quarter of fiscal 2019. Other income, net consists primarily of foreign currency transaction gains and losses and the non-service cost components associated with our defined benefit plans.
Provision for income taxes
The income tax provision was $13.4 million in the third quarter of fiscal 2020, compared to $9.1 million in the third quarter of fiscal 2019. The effective income tax rate for the third quarter of fiscal 2020 was 21.7% versus 15.0% in the third quarter of fiscal 2019. The effective income tax rate for the third quarter of fiscal 2020 was slightly above the U.S. federal statutory rate of 21% primarily due to the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of additional income taxes associated with global intangible
low-taxed income (“GILTI”) and the accrual of various state income taxes, substantially offset by the recognition of certain previously unrecognized tax benefits generally due to the lapse of the applicable statutes of limitations, the recognition of income tax benefits associated with share-based payments, net income tax benefits recognized in association with changes to certain foreign income tax rates and the recognition of income tax benefits associated with foreign-derived intangible income (“FDII”). The effective income tax rate for the third quarter of fiscal 2019 was below the U.S. federal statutory rate of 21% primarily due to the recognition of certain previously unrecognized tax benefits due to the lapse of applicable statutes of limitations partially offset by the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of additional taxes associated with GILTI and the accrual of various state income
taxes.
On a quarterly basis, we review and analyze our valuation allowances associated with deferred tax assets relating to certain foreign and state net operating loss carryforwards as well as U.S. federal and state capital loss carryforwards.In conjunction with this analysis, we weigh both positive and negative evidence for purposes of determining the proper balances of such valuation allowances. Future changes to the balances of these valuation allowances, as a result of our continued review and analysis, could result in a material impact to the financial statements for such period of change.
Net income from continuing operations for the third quarter of fiscal 2020 was $48.4 million, compared to net income from continuing operations of $52.9 million in the third quarter of fiscal 2019, as a result of the factors described above. Diluted net income per share from continuing operations was $0.39 in the third quarter of fiscal 2020, as compared to diluted net income per share from continuing operations of $0.43 in the third quarter of fiscal 2019.
Net income attributable to Rexnord common stockholders
Net income attributable to Rexnord common stockholders for the third quarter of fiscal 2020 was $45.7 million compared to $19.6 million in the third quarter of fiscal 2019. Diluted net income per share attributable to Rexnord common stockholders for the three
months ended December 31, 2019 and December 31, 2018 was $0.39 and $0.21, respectively. The year-over-year change is primarily a result of the $27.8 million, or $0.23 per diluted share, loss from discontinued operations, net of tax, in the third quarter of fiscal 2019, and the other factors described above.
Process & Motion Control net sales decreased 1% year over year to $994.6 million in the first nine months of fiscal 2020. Excluding a 1% increase in sales from the acquisition of Centa China and a 2% unfavorable impact from foreign currency translation, core net sales were flat year over year. Core sales growth in our aerospace and consumer-facing end-markets was offset by the impact of our ongoing product line simplification initiatives as well as softer demand across several of our industrial process end markets.
Water Management
Water Management net sales were $526.7 million in the first nine months of fiscal 2020, a 4% increase year over year. Excluding a 1% increase in net sales associated with our acquisition of Stainlessdrains.com, core net sales increased 3% during
the first nine months of fiscal 2020. The increase in core net sales is primarily the result of increased demand across our North American building construction end markets, partially offset by a modest impact of our ongoing product line simplification initiatives.
Process & Motion Control income from operations for the first nine months of fiscal 2020 was $167.0 million or 16.8% of net sales. Income from operations
as a percentage of net sales increased by 100 basis points year over year in the first nine months of fiscal 2020 primarily due to RBS-led productivity gains, benefits from our completed footprint repositioning actions and lower year-over-year acquisition-related fair value adjustments that were partially offset by higher restructuring-related costs recognized in fiscal 2020 in connection with our ongoing footprint repositioning initiatives.
Water Management
Water Management income from operations was $121.3 million for the first nine months of fiscal 2020, or 23.0% of net sales. Income from operations as a percentage of net sales increased 110 basis points in the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019 primarily due to the increase in sales and benefits associated with our ongoing cost reduction and productivity
initiatives and a reduction in the adjustment to state inventories at last-in-first-out cost.
Corporate
Corporate expenses were $42.0 million in the first nine months of fiscal 2020 compared to $46.2 million in the first nine months of fiscal 2019. The decrease in corporate expenses is primarily the result of the prior year recognition of lease facility termination costs incurred in connection with our ongoing footprint optimization actions.
Interest expense, net
Interest expense, net was $45.2 million in the first nine months of fiscal 2020 compared to $54.1 million in the first nine months of fiscal 2019. The decrease in interest expense as compared to the prior year's period is primarily a result of the impact of lower outstanding borrowings in
the first nine months of fiscal 2020 following $75.0 and $100.0 million voluntary prepayments on our term loan during the fourth quarter of fiscal 2019 and the third quarter of fiscal 2020, respectively. In addition, year-over-year interest expense decreased as a result of the lower average interest rate on our term loan following the refinancing of our term loan, which was completed during the third quarter of fiscal 2020. In addition, the first nine months of fiscal 2019 included the amortization of unrealized losses associated with the interest rate derivatives that matured during fiscal 2019. See Item 1, Note 13 Long-Term Debt for more information.
Gain on extinguishment of debt
During the first nine months of fiscal 2020, we recognized a $1.0 million gain on the extinguishment of debt, consisting of a $3.2 million gain in connection with the forgiveness of the remaining
net debt associated with the New Market Tax Credit program, partially offset by a $2.2 million loss in connection with the fiscal 2020 refinancing of our term loan and a $100.0 million voluntary prepayment made on our term loan. During the first nine months of fiscal 2019, we recognized a $5.0 million gain in connection with the forgiveness of the net debt associated with the New Market Tax Credit program.
Other expense (income), net
Other expense, net for the first nine months of fiscal 2020 was $1.0 million compared to other income, net of $3.3 million for the first nine months of fiscal 2019. Other (expense) income, net consists primarily of gains and losses from foreign currency transactions, the non-service cost components of net periodic benefit costs associated with our defined benefit plans and actuarial gains and losses incurred in connection with defined benefit
plan remeasurements.The year-over-year change is primarily driven by foreign currency transaction losses and the recognition of actuarial losses in connection with the termination of a domestic defined benefit plan during the first nine months of fiscal 2020.
Provision for income taxes
The income tax provision recorded in the first nine months of fiscal 2020 was $47.7 million, compared to $40.8 million recorded in the first nine months of fiscal 2019. The effective income tax rate for the first nine months of fiscal 2020 was 23.7% versus 22.8% in the first nine months of fiscal 2019. The effective income tax rate for the first nine months of fiscal 2020 was above the U.S. federal statutory rate of 21% primarily due to the accrual of foreign income taxes, which are generally above the U.S. federal statutory
rate, the accrual of additional income taxes associated with GILTI and the accrual of various state income taxes, partially offset by the recognition of certain previously unrecognized tax benefits generally due to the lapse of the applicable statutes of limitations, the recognition of income tax benefits associated with share-based payments, net income tax benefits recognized in association with changes to certain foreign income tax rates and FDII. The effective income tax rate for the first nine months of fiscal 2019 was slightly above the U.S. federal statutory rate of 21% primarily due to the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of additional taxes associated with GILTI and the accrual of various state income taxes substantially offset by the recognition of certain previously unrecognized tax benefits due to the lapse of applicable statutes of limitations, the recognition of excess tax benefits associated
with share-based payments and the recognition of a tax benefit associated with a foreign country enacted rate reduction.
Net income from continuing operations for the first nine months of fiscal 2020 was $153.6 million, compared to net income from continuing operations of $141.3 million in the first nine months of fiscal 2019, as a result of the factors described above. Diluted net income per share from continuing operations was $1.24 in the first nine months of fiscal 2020, as compared to diluted net income per share from continuing operations of $1.15 in the first nine months of fiscal 2019.
Net
income (loss) attributable to Rexnord common stockholders
Our net income attributable to Rexnord common stockholders for the first nine months of fiscal 2020 was $137.2 million, compared to a net loss attributable to Rexnord common stockholders of $30.3 million for the first nine months of fiscal 2019. Diluted net income per share attributable to Rexnord common stockholders was $1.22 in the first nine months of fiscal 2020, as compared to a diluted net loss per share attributable to Rexnord common stockholders of $0.10 per share in the first nine months of fiscal 2019. The year-over-year change is primarily a result of the $154.3 million, or $1.25 per diluted share, loss from discontinued operations, net of tax, in the first nine months of fiscal 2019, and the other factors described above.
Non-GAAP
Financial Measures
Non-GAAP financial measures are intended to supplement and not replace financial measures prepared in accordance with GAAP.
Core sales
Core sales excludes the impact of acquisitions (such as the Centa China and StainlessDrains.com acquisitions), divestitures (such as the VAG business) and foreign currency translation. Management believes that core sales facilitates easier and more meaningful comparisons of our net sales performance with prior and future periods and to our peers. We exclude the effect of acquisitions and divestitures because the nature, size and number of acquisitions and divestitures can vary dramatically from period to period and between us and our peers, and can also obscure underlying business trends and make comparisons of long-term performance difficult.
We exclude the effect of foreign currency translation from this measure because the volatility of currency translation is not under management's control.
EBITDA
EBITDA represents earnings from continuing operations before interest and other debt related activities, taxes, depreciation and amortization. EBITDA is presented because it is an important supplemental measure of performance and it is frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. EBITDA is also presented and compared by analysts and investors in evaluating our ability to meet debt service obligations. Other companies in our industry may calculate EBITDA differently. EBITDA is not a measurement of financial performance under U.S. GAAP and should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity
or an alternative to net income as indicators of operating performance or any other measures of performance derived in accordance with U.S. GAAP. Because EBITDA is calculated before recurring cash charges, including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a measure of discretionary cash available to invest in the growth of the business.
Adjusted EBITDA
Adjusted EBITDA (as described below in “Covenant Compliance”) is an important measure because, under our credit agreement, our ability to incur certain types of acquisition debt and certain types of subordinated debt, make certain types of acquisitions or asset exchanges, operate our business and make dividends or other distributions, all of which will impact our financial performance, is impacted by
our Adjusted EBITDA, as our lenders measure our performance with a net first lien leverage ratio by comparing our senior secured bank indebtedness to our Adjusted EBITDA (see “Covenant Compliance” for additional discussion of this ratio, including a reconciliation to our net income). We reported net income attributable to Rexnord common stockholders in the nine months ended December 31, 2019 of $137.2 million and Adjusted EBITDA for the same period of $336.2 million. See “Covenant Compliance” for a reconciliation of Adjusted EBITDA to net income attributable to Rexnord common stockholders.
Covenant Compliance
Our credit agreement, which governs our senior secured credit facilities, contains, among other provisions, restrictive covenants regarding indebtedness, payments and distributions, mergers and acquisitions,
asset sales, affiliate transactions, capital expenditures and the maintenance of certain financial ratios. Payment of borrowings under the credit agreement may be accelerated if there is an event of default. Events of default include the failure to pay principal and interest when due, a material breach of a representation or warranty, certain non-payments or defaults under other indebtedness, covenant defaults, events of bankruptcy and a change of control. Certain covenants contained in the credit agreement restrict our ability to take certain
actions, such as incurring additional debt or making acquisitions, if we are unable to meet a maximum total net leverage ratio of 6.75 to 1.0
as of the end of each fiscal quarter. At December 31, 2019, our net leverage ratio was 2.0 to 1.0. Failure to comply with these covenants could limit our long-term growth prospects by hindering our ability to borrow under the revolver, to obtain future debt and/or to make acquisitions.
“Adjusted EBITDA” is the term we use to describe EBITDA as defined and adjusted in our credit agreement, which is net income, adjusted for the items summarized in the table below. Adjusted EBITDA is intended to show our unleveraged, pre-tax operating results and therefore reflects our financial performance based on operational factors, excluding non-operational, non-cash or non-recurring losses or gains. In view of our debt level, it is also provided to aid investors in understanding our compliance with our debt covenants. Adjusted EBITDA is not a presentation made in accordance
with GAAP, and our use of the term Adjusted EBITDA varies from others in our industry. This measure should not be considered as an alternative to net income, income from operations or any other performance measures derived in accordance with GAAP. Adjusted EBITDA has important limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted EBITDA does not reflect: (a) our capital expenditures, future requirements for capital expenditures or contractual commitments; (b) changes in, or cash requirements for, our working capital needs; (c) the significant interest expenses, or the cash requirements necessary to service interest or principal payments, on our debt; (d) tax payments that represent a reduction in cash available to us; (e) any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future; or (f) the impact of
earnings or charges resulting from matters that we and the lenders under our credit agreement may not consider indicative of our ongoing operations. In particular, our definition of Adjusted EBITDA allows us to add back certain non-cash, non-operating or non-recurring charges that are deducted in calculating net income, even though these are expenses that may recur, vary greatly and are difficult to predict and can represent the effect of long-term strategies as opposed to short-term results.
In addition, certain of these expenses can represent the reduction of cash that could be used for other corporate purposes. Further, although not included in the calculation of Adjusted EBITDA below, the measure may at times allow us to add estimated cost savings and operating synergies related to operational changes ranging from acquisitions or dispositions to restructuring, and/or exclude one-time transition expenditures that
we anticipate we will need to incur to realize cost savings before such savings have occurred.
The calculation of Adjusted EBITDA under our credit agreement as of December 31, 2019, is presented in the table below. However, the results of such calculation could differ in the future based on the different types of adjustments that may be included in such respective calculations at the time.
Net (loss) income attributable to Rexnord common stockholders
$
(30.3)
$
11.1
$
137.2
$
178.6
Dividends
on preferred stock
17.4
23.2
14.4
20.2
Non-controlling interest (loss) income
(0.1)
—
0.2
0.3
Loss
from discontinued operations, net of tax
154.3
154.7
1.8
2.2
Equity method investment income
(3.5)
(3.6)
(0.2)
(0.3)
Income
tax provision
40.8
53.4
47.7
60.3
Other (income) expense, net (1)
(3.3)
1.2
1.0
5.5
Gain
on the extinguishment of debt
(5.0)
(4.3)
(1.0)
(0.3)
Interest expense, net
54.1
69.9
45.2
61.0
Depreciation
and amortization
66.0
87.9
64.3
86.2
EBITDA
$
290.4
$
393.5
$
310.6
$
413.7
Adjustments
to EBITDA:
Restructuring and other similar charges (2)
9.4
12.1
8.9
11.6
Stock-based
compensation expense
17.3
22.6
18.7
24.0
Last-in first-out inventory adjustments (3)
0.8
6.7
(2.2)
3.7
Acquisition-related
fair value adjustment
3.5
3.6
0.7
0.8
Other, net (4)
1.5
4.3
(0.5)
2.3
Subtotal
of adjustments to EBITDA
$
32.5
$
49.3
$
25.6
$
42.4
Adjusted EBITDA
$
322.9
$
442.8
$
336.2
$
456.1
Pro
forma adjustment for acquisitions (5)
$
2.2
Pro forma Adjusted EBITDA
$
458.3
Consolidated indebtedness (6)
$
924.0
Total
net leverage ratio (7)
2.0
__________________________________
(1)Other (income) expense, net for the periods indicated, consists primarily of gains and losses from foreign currency transactions, the non-service cost components of net periodic benefit costs associated with our defined benefit plans and other actuarial gains and losses.
(2)Restructuring and other similar charges is comprised of costs associated with workforce
reductions, impairment of related manufacturing facilities, equipment and intangible assets, lease termination costs, and other facility rationalization costs. See Item 1, Note 3, Restructuring and Other Similar Charges for more information.
(3)Last-in first-out (LIFO) inventory adjustments are excluded in calculating Adjusted EBITDA as defined in our credit agreement.
(4)Other, net for the periods indicated, consists primarily gains and losses on the disposition of long-lived assets and cash dividends received from our equity method investment.
(5)Represents a pro forma adjustment to include Adjusted EBITDA related to the acquisitions of Centa China and StainlessDrains.com, as permitted by our credit agreement. The pro forma adjustment includes the period from January
1, 2019 through the dates of the Centa China and StainlessDrains.com acquisitions. See Item 1, Note 2, Acquisitions for more information.
(6)Our credit agreement defines our consolidated indebtedness as the sum of all indebtedness (other than letters of credit or bank guarantees, to the extent undrawn) consisting of indebtedness for borrowed money and capitalized lease obligations, less unrestricted cash, which was $224.5 million (as defined by the credit agreement) at December 31, 2019.
(7)Our credit agreement defines the total net leverage ratio as the ratio of consolidated indebtedness (as described above) to Adjusted EBITDA for the trailing four fiscal quarters.
Our primary sources of liquidity are available cash and cash equivalents, cash flow from operations, borrowing availability of up to $264.0 million under our revolving credit facility and availability of up to $100.0 million under our accounts receivable securitization program.
As of December 31, 2019, we had $277.0 million of cash and cash equivalents and $348.0 million of additional borrowing capacity ($258.9 million of available borrowings under our revolving credit facility and $89.1 million available under our accounts receivable securitization program). As of December 31, 2019, the available borrowings under our credit facility and accounts
receivable securitization were reduced by $12.0 million due to outstanding letters of credit. As of March 31, 2019, we had $292.5 million of cash and cash equivalents and approximately $351.3 million of additional borrowing capacity ($258.4 million of available borrowings under our revolving credit facility and $92.9 million available under our accounts receivable securitization program).
On January 27, 2020, our Board of Directors declared an initial quarterly cash dividend on our common stock of $0.08 per-share to be paid on March 6, 2020, to stockholders of record as of February 21, 2020. In addition, the Board of Directors approved increasing our existing share repurchase authority to $300.0 million of available capacity
under the Repurchase Program. See Note 8, Stockholders’ Equity, for additional information about the Repurchase Program.
Both our revolving credit facility and accounts receivable securitization program are available to fund our working capital requirements, capital expenditures and for other general corporate purposes.
Cash Flows
Net cash provided by operating activities was $174.7 million and $145.3 million in the first nine months of fiscal 2020 and 2019, respectively. Incremental profit generated in the first nine months of fiscal 2020 and lower trade working capital were partially offset by the timing of payments on accrued expenses.
Cash used for investing activities was $49.0 million in the first nine months of fiscal 2020 compared to $14.7 million in the first nine
months of fiscal 2019. Investing activities in the first nine months of fiscal 2020 primarily included $25.5 million of capital expenditures and $25.1 million in connection with acquisitions, partially offset by the receipt of $2.9 million in connection with the sale of certain long-lived assets. Investing activities during the first nine months of fiscal 2019 included $26.5 million of capital expenditures and $2.0 million for an acquisition of assets, partially offset by the receipt of $3.5 million in connection with the sale of certain long-lived assets.
Cash used for financing activities was $138.5 million in the first nine months of fiscal 2020 compared to $36.9 million in the first nine months of fiscal 2019. During the first nine months of fiscal 2020, we utilized a net $110.3 million of cash for payments on outstanding debt (including $100.0 million for a voluntary prepayment on our term loan in the third quarter
of fiscal 2020), $20.0 million for repurchases of our common stock (see Item 1, Note 8 Stockholders' Equity for additional details) and $17.4 million for the payment of preferred stock dividends. The first nine months of fiscal 2020 also includes $16.8 million of cash proceeds associated with stock option exercises, partially offset by $7.6 million of cash used for the payment of withholding taxes on employees' share-based payment awards. During the first nine months of fiscal 2019, we utilized a net $22.9 million of cash for the payment of outstanding debt and $17.4 million for the payment of preferred stock dividends. The first nine months of fiscal 2019 also includes $6.6 million of cash proceeds associated with stock option exercises, partially offset by $3.2 million of cash used for the payment of withholding taxes on employees' share-based payment awards.
Indebtedness
As
of December 31, 2019, we had $1,148.6 million of total indebtedness outstanding as follows (in millions):
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk during the normal course of business
from changes in foreign currency exchange rates and interest rates. The exposure to these risks is managed through a combination of normal operating and financing activities and derivative financial instruments in the form of foreign currency forward contracts, interest rate swaps and interest rate caps to cover certain known foreign currency transactional risks, as well as identified risks due to interest rate fluctuations. There have been no material changes in market risk from the information provided in "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in our Form 10-K.
We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Based on that evaluation as of December 31, 2019, the Chief Executive Officer and Chief Financial Officer concluded that, as of such date, the
Company's disclosure controls and procedures are adequate and effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, in a manner allowing timely decisions regarding required disclosure. As such, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the period covered by this report.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of the changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
See the information under the heading "Commitments and Contingencies" in Note 16 to the condensed consolidated financial statements contained in Part I, Item 1 of this report, which is incorporated in this Part II, Item 1 by reference.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In fiscal 2015, the Company's Board of Directors approved a stock repurchase
program (the "Repurchase Program") authorizing the repurchase of up to $200.0 million of the Company's common stock from time to time on the open market or in privately negotiated transactions. The Repurchase Program does not require the Company to acquire any particular amount of common stock and does not specify the timing of purchases or the prices to be paid; however, the program will continue until the maximum amount of dollars authorized have been expended or until it is modified or terminated by the Board. During the third quarter of fiscal 2020, the Company repurchased 639,500 shares of common stock at a total cost of $20.0 million at a weighted average price of $31.30 per share. The repurchased
shares were canceled by the Company upon receipt. A total of approximately $140.0 million of the existing repurchase authority remained under the Repurchase Program at December 31, 2019. As discussed in Note 22 to the condensed consolidated financial statements contained in Part I, Item 1 of this report, on January 27, 2020, the Board of Directors approved increasing the Company’s existing share repurchase authority to $300.0 million of available capacity under the Repurchase Program.
ISSUER
PURCHASES OF EQUITY SECURITIES
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
Maximum Approximate Dollar Value that may yet be Purchased Under the Plans or Programs (1)
Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.)
Pursuant to the requirements of the Securities Exchange Act of 1934, Rexnord
Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
