Zurn Elkay Water Solutions (ZWS) - 2021 Q2 - Quarterly Report

Part I Financial Statements This section presents Rexnord Corporation's unaudited condensed consolidated financial statements, including balance sheets, operations, and cash flows, as of June 30, 2021 Condensed Consolidated Financial Statements The company's financial position strengthened, performance improved significantly, and operating cash flow decreased Condensed Consolidated Balance Sheet Highlights (in Millions) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $390.7 | $255.6 | | Total current assets | $1,144.9 | $907.7 | | Total assets | $3,602.3 | $3,401.1 | | Total current liabilities | $382.7 | $317.5 | | Long-term debt | $1,189.5 | $1,189.2 | | Total liabilities | $2,014.8 | $1,961.8 | | Total stockholders' equity | $1,587.5 | $1,439.3 | Condensed Consolidated Statement of Operations Highlights (in Millions, except per share data) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $568.3 | $449.1 | $1,094.4 | $996.1 | | Gross profit | $235.8 | $176.9 | $443.7 | $393.4 | | Income from operations | $103.6 | $66.0 | $182.2 | $154.0 | | Net income attributable to Rexnord | $73.2 | $35.6 | $123.2 | $64.1 | | Diluted EPS | $0.59 | $0.29 | $0.99 | $0.52 | Condensed Consolidated Statement of Cash Flows Highlights (in Millions) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Cash provided by operating activities | $145.0 | $171.5 | | Cash used for investing activities | $(4.4) | $(81.7) | | Cash used for financing activities | $(5.6) | $(9.6) | | Increase in cash | $135.1 | $76.4 | Notes to Condensed Consolidated Financial Statements These notes detail significant corporate events, accounting policies, backlog, tax rates, and legal contingencies - Rexnord agreed to separate its Process & Motion Control (PMC) segment via a tax-free spin-off and combine it with Regal Beloit Corporation in a Reverse Morris Trust (RMT) transaction, expected to close in the second half of 2021[31] - The company acquired ATS GREASEwatch for $4.5 million in cash to enhance its Water Management platform's technology offerings on April 16, 2021[36] - As of June 30, 2021, the company's order backlog was $435.2 million, with approximately 83% expected to be recognized as revenue in the remainder of 2021[60] Revenue by Business Segment (in Millions) | Segment | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Process & Motion Control | $324.6 | $274.4 | $645.5 | $638.0 | | Water Management | $243.7 | $174.7 | $448.9 | $358.1 | - The company estimates a potential $59.0 million liability for asbestos-related claims over the next ten years, largely covered by a corresponding $59.0 million receivable from insurance carriers[107][109] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial performance, liquidity, cash flows, and non-GAAP measures, emphasizing segment growth and the PMC spin-off Results of Operations Consolidated net sales and operating income significantly increased, driven by strong demand in Water Management and non-aerospace markets Q2 2021 vs Q2 2020 Net Sales (in Millions) | Segment | Q2 2021 | Q2 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Process & Motion Control | $324.6 | $274.4 | $50.2 | 18.3% | | Water Management | $243.7 | $174.7 | $69.0 | 39.5% | | Consolidated | $568.3 | $449.1 | $119.2 | 26.5% | Q2 2021 vs Q2 2020 Income from Operations (in Millions) | Segment | Q2 2021 | Q2 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Process & Motion Control | $66.8 | $39.6 | $27.2 | 68.7% | | Water Management | $52.8 | $40.1 | $12.7 | 31.7% | | Consolidated | $103.6 | $66.0 | $37.6 | 57.0% | - Process & Motion Control core sales increased 16% in Q2, driven by 21% growth in non-aerospace markets, partially offset by a 15% decline in aerospace markets[144] - Water Management core sales increased 29% in Q2, driven by increased demand across all product categories[145] Non-GAAP Financial Measures This section defines and reconciles non-GAAP metrics, including Core Sales and Adjusted EBITDA, used for performance evaluation and debt covenant compliance Reconciliation of Net Income to Adjusted EBITDA (LTM ended June 30, 2021, in Millions) | Metric | Amount | | :--- | :--- | | Net income attributable to Rexnord | $205.8 | | Income tax provision | $56.8 | | Interest expense, net | $45.9 | | Depreciation and amortization | $91.9 | | EBITDA | $396.5 | | Adjustments (Restructuring, Stock Comp, etc.) | $61.5 | | Adjusted EBITDA | $458.0 | | Pro forma adjustment for acquisitions | $3.4 | | Pro forma Adjusted EBITDA | $461.4 | - The company's total net leverage ratio was 1.9 to 1.0 as of June 30, 2021, well below the maximum permitted ratio of 6.75 to 1.0[174][182] Liquidity and Capital Resources The company's liquidity is supported by cash, operating cash flow, and credit facilities, with debt commitments secured for the proposed transaction - As of June 30, 2021, the company had $390.7 million in cash and cash equivalents and $255.8 million in additional borrowing capacity under its credit facility[184] - Total outstanding indebtedness was $1,191.9 million as of June 30, 2021, primarily consisting of a term loan and senior notes[190] - The company secured debt commitment letters for term loans, revolving credit facilities, and a delayed draw term loan facility for the proposed Regal transaction[186] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign currency and interest rate risks, managed through operations and derivatives, with no material changes since the last 10-K - The company's market risk exposure, primarily from foreign currency and interest rate changes, has not materially changed from its last Form 10-K disclosures[192] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[195] - No changes occurred in the last fiscal quarter that have not materially affected the company's internal control over financial reporting[197] Part II Legal Proceedings This section refers to Note 14 for details on legal proceedings, including product liability, asbestos claims, and environmental matters - For details on legal proceedings, the report refers to Note 14, "Commitments and Contingencies," in the financial statements[200] Risk Factors This section updates risk factors, focusing on new risks related to the planned PMC segment spin-off, including transaction completion, costs, and tax implications - The transaction with Regal is subject to numerous conditions, including approvals, and there is no assurance it will be completed[201] - The company expects to incur significant one-time costs related to the transaction, with a potential $150 million termination fee payable to Regal[203] - There is a significant risk that the spin-off may not qualify as tax-free, potentially resulting in substantial tax liabilities for the company and its stockholders[207][208] - The pendency of the transaction could adversely affect business, as customers or vendors may delay decisions, and the company faces restrictions on its business conduct until closing[205] Unregistered Sales of Equity Securities and Use of Proceeds This section discusses the company's stock repurchase program, noting no repurchases in Q2 2021 and the remaining repurchase authority - The company did not repurchase any of its common stock during the three months ended June 30, 2021[215] - As of June 30, 2021, approximately $162.8 million of authority remained under the company's stock repurchase program[215] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications, XBRL data, and the incorporated Credit Agreement - Exhibits filed include CEO/CFO certifications (31.1, 31.2, 32.1) and XBRL data files[217] Signatures The report is signed on July 20, 2021, by Mark W. Peterson, Senior Vice President and Chief Financial Officer of Rexnord Corporation