Zurn Elkay Water Solutions (ZWS) - 2020 Q4 - Annual Report

PART I Cautionary Notice Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to various risks and uncertainties, many outside the company's control, which could cause actual results to differ materially - Forward-looking statements are identified by specific keywords such as "estimates," "expects," and "anticipates"[18] - Key factors affecting results include indebtedness, the competitive environment, economic conditions, COVID-19 impact, cybersecurity threats, acquisition costs, and international operations risks[19] Item 1. Business Rexnord Corporation is a multi-platform industrial company operating in Process & Motion Control and Water Management, focusing on highly-engineered, mission-critical solutions driven by continuous improvement and strategic acquisitions - Rexnord Corporation operates in two strategic platforms: Process & Motion Control and Water Management[21] - The company's operating philosophy, the Rexnord Business System (RBS), drives continuous improvement for superior customer satisfaction and financial results[21][28] - The strategy involves building global strategic platforms and pursuing acquisitions to expand geographic presence, product lines, and enter adjacent markets[22] Our Company Rexnord Corporation, incorporated in 2006, is a growth-oriented, multi-platform industrial company with leading market shares and trusted brands, guided by the Rexnord Business System (RBS) - Rexnord Corporation was incorporated in Delaware in 2006[21] - The company operates in two strategic platforms: Process & Motion Control and Water Management, both expanded through acquisitions[21] - The Rexnord Business System (RBS) is the operating philosophy, emphasizing continuous improvement and superior customer satisfaction[21] RBS The Rexnord Business System (RBS) is a scalable, process-based framework designed to enhance customer satisfaction and financial results through world-class operating performance - RBS principles include strategy deployment, performance measurement based on 'Voice of the Customer,' and a culture of Kaizen (continuous improvement)[28] - Application of RBS has led to improvements in growth, productivity, cost reduction, and asset efficiency[28] Our Platforms Rexnord operates two main platforms: Process & Motion Control, offering highly-engineered mechanical components for complex systems, and Water Management, providing products for water quality, safety, and conservation Process & Motion Control The Process & Motion Control platform designs, manufactures, markets, and services highly-engineered mechanical components for complex systems where reliability is critical, serving diverse industrial markets globally - Process & Motion Control products are highly-engineered mechanical components for complex systems requiring high reliability and where failure costs are significant[29] - Key brands include Rexnord®, Falk®, Link-Belt®, and Centa®[29] - Approximately half of Process & Motion Control net sales are to distributors, serving OEM and end-user MRO demand through ~2,600 distribution points across 110 countries[31] Water Management The Water Management platform offers products for water quality, safety, flow control, and conservation, primarily for nonresidential buildings, driven by specification and regulatory compliance - Water Management products enhance water quality, safety, flow control, and conservation, primarily for nonresidential buildings[33] - Key brands include Zurn®, Wilkins®, and World Dryer®[33] - Demand is driven by new commercial and institutional building construction, retrofits, and infrastructure/residential construction, with products being specification-driven and project-critical[34][35] Our Markets Rexnord evaluates its competitive position in fragmented markets, avoiding commoditized segments and focusing on differentiation through product quality, reliability, and innovation - Rexnord avoids commoditized market segments, focusing on differentiation through product quality, reliability, and innovation[38] - Both platforms serve diverse commercial and industrial end markets with solid long-term growth characteristics, despite COVID-19 impacts[38] Process & Motion Control Market The Process & Motion Control market is highly fragmented, with growth tied to industrial production, and entry barriers include sophisticated engineering and long-standing customer relationships - The Process & Motion Control market is fragmented, with growth tied to overall industrial production[39] - Key competitive factors include sophisticated engineering, ability to produce niche products with short lead times, and long-standing customer relationships[40] Water Management Market The Water Management market is fragmented, with strong long-term growth potential driven by demand for water conservation, quality, and safety, relying on collaboration with specifiers and continuous innovation - The Water Management market is fragmented, with strong long-term growth potential driven by demand for water conservation, quality, and safety[41] - Market growth is tied to commercial and institutional construction and infrastructure, which are historically more stable than residential construction[42] - Effective competition requires building relationships with specifiers (architects, engineers, contractors) and demonstrating flexibility in design and product innovation[44] Our Products Rexnord's product portfolio spans Process & Motion Control and Water Management, offering critical, highly-engineered solutions that emphasize quality, reliability, and innovation to meet market demands Process & Motion Control Products Process & Motion Control products are critical components where failure costs are substantial, driving customers to prioritize quality, reliability, and availability, supported by an extensive distribution network for recurring MRO revenues - Process & Motion Control products are critical components where failure costs are substantial, leading customers to prioritize quality, reliability, and availability over price[45] - Success relies on a reputation for quality and reliability and an extensive distribution network to drive recurring MRO revenues and first-fit specifications[45] - Leading brands include Rexnord®, Falk®, Link-Belt®, and Centa®[45] Motion Control Products Rexnord is a leading manufacturer of highly engineered mechanical power transmission components for heavy-duty process and discrete automation, including conveying chain, gearing, and industrial chain - Motion control products include conveying chain, gearing & gear drives, and industrial chain[46] - Products are used in discrete automation (e.g., beverage-filling) and heavy-duty process automation (e.g., mining, construction)[46] Shaft Management Products Rexnord is a leading supplier of highly engineered mechanical power transmission components for controlling, supporting, and protecting rotating shafts, including couplings, torque limiters, and industrial bearings - Shaft management products include couplings, torque limiters, clutches and brakes, and industrial bearings[48] - These products control, support, and protect rotating shafts in machinery and automation applications[48] - In fiscal 2018, Rexnord acquired Centa Power Transmission, adding premium flexible couplings and drive shafts[49] Aerospace Components Rexnord supplies aerospace components, including bearings, mechanical seals, and specialized gears, primarily to commercial and military aircraft markets for critical systems - Aerospace components are supplied to commercial and military aircraft markets[50] - Products include aerospace bearings, mechanical seals, and specialized gears, often based on proprietary designs[50] Water Management Products Water Management products are project-critical, highly-engineered, and high value-add, requiring compliance with stringent regulatory and building codes, focusing on water safety, quality, flow control, and conservation - Water Management products are project-critical, highly-engineered, and high value-add, requiring compliance with stringent regulatory and building codes[51] - Leading brands include Zurn® and Wilkins®[51] Water Safety, Quality, and Flow Control Products These products, sold under Zurn and Wilkins brands, include a wide range of valve products, distribution and drainage products, and site works products, designed to protect and control water supplies and manage wastewater - Products include backflow preventers, fire system valves, drainage products, and wastewater pre-treatment products[52][53][54] - These products are sold into commercial, institutional, and industrial new construction and retrofit applications, as well as fire protection and municipal water/wastewater markets[52] - In fiscal 2020, Rexnord acquired StainlessDrains.com, adding specialized stainless steel drains to this portfolio[55] Water Conservation and Finish Plumbing Products These products, typically installed in later stages of construction, include flush valves, commercial faucets, and water-conserving fixtures, expanded through acquisitions like World Dryer and Just Manufacturing - Products include manual and sensor-operated flush valves, heavy-duty commercial faucets, and water-conserving fixtures[56] - Zurn One Systems® integrate valve/faucet products with fixtures into complete plumbing systems, offering time and cost savings[56] - Acquisitions of World Dryer (fiscal 2018) and Just Manufacturing (fiscal 2020) expanded eco-friendly hand dryer and stainless steel sink offerings[57] Acquisitions and Divestitures Mergers and acquisitions are a core growth strategy for Rexnord, focusing on expanding product portfolios and global presence within its platforms, while also divesting non-core businesses - Acquisitions are a critical part of Rexnord's growth strategy, expanding product portfolios and global presence within existing platforms[58] - The company also periodically divests non-core or non-strategic businesses[61] Process & Motion Control In fiscal 2018, Rexnord acquired Centa Power Transmission, adding premium flexible couplings and drive shafts, and further consolidated a Centa joint venture in fiscal 2019 - On February 9, 2018, Centa, a manufacturer of premium flexible couplings and drive shafts, was acquired for $129.7 million[59] - On January 23, 2019, an additional 47.5% interest in a Centa joint venture was acquired for $21.4 million, leading to consolidation[59] Water Management Rexnord made several acquisitions in its Water Management platform, including Just Manufacturing, StainlessDrains.com, and World Dryer, while divesting the VAG business - On January 28, 2020, Just Manufacturing (stainless steel sinks and plumbing fixtures) was acquired for approximately $59.4 million[61] - On May 10, 2019, StainlessDrains.com (stainless steel drains, grates, and accessories) was acquired for $24.8 million[61] - On October 4, 2017, World Dryer (commercial electric hand dryers) was acquired for $50.0 million[61] - On November 26, 2018, the VAG business was sold, with results presented as discontinued operations[62] Customers Rexnord serves a diverse customer base, with Process & Motion Control products sold through industrial distributors and Water Management products distributed via independent sales representatives and plumbing wholesalers, focusing on specification-driven sales Process & Motion Control Customers Process & Motion Control products are sold to OEMs and end-users, with a significant portion through industrial distributors who influence product stocking and pricing - Approximately 44% of Process & Motion Control net sales are through industrial distributors[63] - Industrial distributors actively participate in determining product stocking, accessibility, and pricing[64] - Rexnord markets to OEMs and end-users to create product preference and differentiate from competitors[65] Water Management Customers Water Management products are sold for new construction, remodeling, and retrofit applications through independent sales representatives, plumbing wholesalers, and industry-specific distributors, emphasizing high product availability - Water Management products are sold for new construction, remodeling, and retrofit applications[66] - Distribution channels include independent sales representatives, plumbing wholesalers, and industry-specific distributors[66] - The distribution model focuses on high product availability and quick response times, supported by strong brand recognition and 'like-for-like' replacement[66] Product Development Rexnord's new product development is guided by its 'Voice of the Customer' philosophy, supported by a team of engineers and the Rexnord Innovation Center, holding numerous global patents and integrating IIoT through DiRXN™ - New product development is guided by the 'Voice of the Customer' philosophy, supported by approximately 380 engineers and the Rexnord Innovation Center[68] - As of March 31, 2020, Process & Motion Control held ~200 U.S. and ~900 foreign active patents, while Water Management held ~200 U.S. and ~100 foreign active patents[69][70] - DiRXN™ (Direction) is a digital enterprise initiative integrating IIoT and e-commerce to optimize customer productivity through Smart Tags and embedded sensors[71] Suppliers and Raw Materials Rexnord's manufacturing relies on commodities and components from numerous sources, employing a global sourcing strategy to maintain alternate supplies and avoid dependence on a single source - Principal materials include steel, castings, forgings, engineered plastic, brass, copper, zinc, and resin[72] - The global sourcing strategy maintains alternate sources of supply to avoid single-source dependence, with no significant shortages experienced[72] Backlog Rexnord's backlog of unshipped orders increased slightly to $381 million as of March 31, 2020, with a portion scheduled to ship beyond the next fiscal year Backlog of Unshipped Orders | Metric | Amount (Millions) | | :--------------------------------- | :---------------- | | Backlog as of March 31, 2020 | $381 | | Backlog as of March 31, 2019 | $373 | - Approximately 11% of the backlog as of March 31, 2020, is scheduled to ship beyond March 31, 2021[73] Seasonality Demand for Process & Motion Control products does not experience significant seasonality, while Water Management product demand is seasonal due to construction activity and weather - Process & Motion Control products do not experience significant seasonality, with slightly higher sales in the fourth fiscal quarter[74] - Water Management product demand is seasonal, driven by construction activity, with sales generally decreasing in the third and fourth fiscal quarters due to weather[75] Employees As of March 31, 2020, Rexnord had approximately 6,800 employees globally, with a portion of U.S. and European employees covered by collective bargaining agreements Employee Count (as of March 31, 2020) | Category | Count | | :----------------- | :---- | | Total Employees | 6,800 | | US Employees | 3,500 | | Unionized US Employees | 200 | | European Employees | 1,200 | - Three collective bargaining agreements in the U.S. expire between November 2021 and June 2022[77] Environmental Matters Rexnord's global operations are subject to extensive environmental, health, and safety laws and regulations, with non-compliance potentially leading to fines, penalties, and cleanup liabilities - Operations are subject to extensive global environmental, health, and safety laws and regulations[78] - Non-compliance can result in fines, penalties, enforcement actions, and cleanup requirements[78] - Liability for contamination can be imposed without fault and may be joint and several, with the company occasionally named as a Potentially Responsible Party (PRP)[79] Additional Information This section provides Rexnord Corporation's principal executive office address, telephone number, and website, where SEC filings and corporate governance documents are available free of charge - Principal executive office is located at 511 West Freshwater Way, Milwaukee, Wisconsin 53204[80] - SEC filings and corporate governance documents are available on www.rexnordcorporation.com and **www.sec.gov**[80](index=80&type=chunk) Item 1A. Risk Factors This section details various risks that could materially and adversely affect Rexnord's business, financial condition, or results of operations, categorized into strategic, operational, financial, and legal/compliance risks - Risks are categorized into Strategic, Operational, Financial, and Legal and Compliance risks[82][110][121][131] - The COVID-19 pandemic is expected to adversely affect business, financial condition, employees, customers, distributors, and supply chain, with its full impact rapidly evolving and unknown[83][84] Strategic Risks Strategic risks include competitive threats, adverse effects from the COVID-19 pandemic, challenges in integrating acquisitions, uncertainties in international operations, and the potential loss of significant customers or distributors - The COVID-19 pandemic has caused disruptions in manufacturing, distribution, and supply chains, leading to temporary reductions or suspensions of operations[83] - Operating in highly competitive and fragmented markets poses risks of losing customers due to competitors' aggressive sales policies or greater resources[85][86][88] - Inability to effectively integrate acquisitions could adversely affect business, financial condition, results of operations, or cash flows[98][99] - International operations are subject to risks including tariff increases, currency fluctuations, foreign exchange controls, and differing regulatory requirements[100] - Loss or financial instability of significant customers (top 5 accounted for 25.8% of consolidated net sales in fiscal 2020) or key independent distributors could have a material adverse effect[102][104][105] - Inability to adequately protect intellectual property or defend against infringement claims could adversely affect the business[106][107][108] Operational Risks Operational risks encompass challenges in managing changing technology, increases in raw material costs, failures in data security or IT infrastructure, inability to attract key personnel, weather impacts, and labor disputes - Increases in the cost or availability of raw materials, including due to tariffs or trade protection measures, could adversely affect profitability[111][112] - Unsuccessful updates to ERP systems or failures in data security and IT infrastructure (including cybersecurity threats) could cause substantial business interruptions and financial harm[113][115] - Inability to attract and retain highly-skilled management and key personnel may adversely affect the business[117] - Adverse weather conditions can negatively affect demand for Water Management products and decrease net sales[118] - Labor disputes or organized labor activities, particularly in Europe where union membership is common, could disrupt operations and negatively impact financial results[119][120] Financial Risks Financial risks primarily stem from Rexnord's highly leveraged capital structure, which could limit its ability to raise additional capital or react to economic changes, alongside potential impairment of goodwill and increased pension costs - High debt levels could limit the ability to borrow for working capital, capital expenditures, or acquisitions, and make it difficult to meet debt service obligations[122][123] - Financing agreements impose restrictive covenants (e.g., on indebtedness, payments, mergers, asset sales) that could limit business activities and growth prospects[125][126] - Goodwill ($1,321.9 million) and intangible assets ($514.2 million) as of March 31, 2020, represent a substantial portion of assets, and impairment could negatively affect results[128] - Required cash contributions to pension plans may increase, and changes in funded status or actuarial assumptions could adversely affect financial condition and results[129][130] Legal and Compliance Risks Legal and compliance risks include significant costs from failing to comply with regulations, changes in tax laws, environmental remediation liabilities, and litigation, including asbestos and product liability claims - Failure to comply with government regulations, third-party certification requirements, and customer-driven policies (including social responsibility) could adversely affect reputation and results[132][133] - Changes in legislative, regulatory, and legal developments involving taxes (e.g., U.S. Tax Reform) could result in substantially higher taxes[134][135] - Significant costs may be incurred for environmental compliance and to address liabilities under environmental laws and regulations, including remediation of contaminated sites[136][137][138] - Certain subsidiaries are subject to litigation, including numerous asbestos and product liability claims, which could have a material adverse effect if insurance or indemnification is inadequate[139][141] Item 1B. Unresolved Staff Comments This section states that there are no unresolved staff comments from the SEC Item 2. Properties Rexnord operates 46 principal Process & Motion Control facilities and 17 principal Water Management facilities globally, which are a mix of owned and leased properties deemed suitable for current and anticipated needs Principal Facilities as of March 31, 2020 | Platform | Location | Number of Facilities | Owned (Sq. Ft.) | Leased (Sq. Ft.) | | :---------------------- | :----------- | :------------------- | :---------------- | :---------------- | | Process & Motion Control | North America | 26 | 1,941,000 | 1,524,000 | | Process & Motion Control | Europe | 11 | 738,000 | 178,000 | | Process & Motion Control | Asia | 5 | 292,000 | 35,000 | | Process & Motion Control | South America | 2 | 77,000 | 19,000 | | Process & Motion Control | Australia | 2 | — | 35,000 | | Water Management | North America | 16 | 653,000 | 1,030,000 | | Water Management | Australia | 1 | — | 27,000 | - The company believes its properties are suitable and provide sufficient capacity for current and future anticipated needs[144] Item 3. Legal Proceedings Information regarding Rexnord's legal proceedings is incorporated by reference from Item 8, Note 18, Commitments and Contingencies - Legal proceedings information is detailed in Item 8, Note 18, Commitments and Contingencies[146] Item 4. Mine Safety Disclosure This item is not applicable to Rexnord Corporation Information about our Executive Officers This section provides a list of Rexnord's executive officers as of the report date, including their age, current positions, and a brief overview of their business experience Executive Officers (as of report date) | Name | Age | Position(s) | In Current Position(s) since | | :--------------- | :-- | :-------------------------------------------- | :--------------------------- | | Todd A. Adams | 49 | President, Chief Executive Officer and Director | 2009 | | Mark W. Peterson | 48 | Senior Vice President and Chief Financial Officer | 2011 | | Sudhanshu Chhabra | 54 | Vice President - Rexnord Business Systems | 2018 | | Rodney Jackson | 50 | Senior Vice President - Business and Corporate Development | 2014 | | George J. Powers | 53 | Chief Human Resources Officer | 2015 | | Michael D. Troutman | 53 | Chief Information Officer | 2007 | | Craig G. Wehr | 55 | Group Executive, President - Zurn | 2013 | | Patricia M. Whaley | 61 | Vice President, General Counsel and Secretary | 2002 | | Kevin J. Zaba | 53 | Group Executive, President - Process & Motion Control Platform | 2016 | PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Rexnord's common stock is listed on the NYSE under 'RXN', with the company declaring its first quarterly cash dividend in fiscal 2020 and increasing its share repurchase authority before a temporary suspension due to COVID-19 - Rexnord's common stock is listed on the New York Stock Exchange (NYSE) under the symbol "RXN"[160] - An initial quarterly cash dividend of $0.08 per share was paid on March 6, 2020, the first since the 2012 IPO[161] - The Board of Directors increased the common stock repurchase program authority to $300.0 million on January 27, 2020[162] Issuer Purchases of Equity Securities (Q4 Fiscal 2020) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :------------------------- | :------------------------------- | :--------------------------- | | January 1 - January 31, 2020 | 147,755 | $32.62 | | February 1 - February 29, 2020 | 367,500 | $32.05 | | March 1 - March 31, 2020 | 2,450,400 | $26.17 | - As of March 31, 2020, approximately $223.0 million of repurchase authority remained, but share repurchases were temporarily suspended on April 8, 2020, due to COVID-19[162][163] Dividend Policy On January 27, 2020, Rexnord's Board of Directors declared an initial quarterly cash dividend of $0.08 per share, paid on March 6, 2020, with future decisions based on financial performance and borrowing agreements - An initial quarterly cash dividend of $0.08 per share was declared on January 27, 2020, and paid on March 6, 2020[161] - This was the first dividend on common stock paid since the 2012 initial public offering[161] Issuer Purchases of Equity Securities Rexnord's Board of Directors approved increasing the common stock repurchase program to $300.0 million on January 27, 2020, repurchasing $80.7 million in Q4 fiscal 2020 before a temporary suspension due to COVID-19 uncertainty - Share repurchase authority increased to $300.0 million on January 27, 2020[162] Q4 Fiscal 2020 Share Repurchases | Period | Shares Purchased | Cost (Millions) | Weighted Average Price | | :------------------------- | :--------------- | :-------------- | :--------------------- | | January 1 - March 31, 2020 | 3.0 million | $80.7 | $27.22 | - As of March 31, 2020, $223.0 million of repurchase authority remained[162] - Share repurchases were temporarily suspended on April 8, 2020, due to COVID-19 uncertainty[162] Performance Graph The performance graph compares the cumulative total shareholder return of Rexnord's common stock with the S&P 500 Index and the S&P 1500 Industrials Index for the five-year period ended March 31, 2020 Cumulative Total Shareholder Return (March 31, 2015 = $100) | Date | Rexnord Corporation | S&P 500 Index | S&P 1500 Industrials Index | | :----------- | :------------------ | :------------ | :------------------------- | | 3/31/2015 | $100.00 | $100.00 | $100.00 | | 3/31/2016 | $75.76 | $99.61 | $99.97 | | 3/31/2017 | $86.47 | $114.26 | $116.83 | | 3/31/2018 | $111.20 | $127.71 | $131.11 | | 3/31/2019 | $94.19 | $137.07 | $132.31 | | 3/31/2020 | $84.94 | $124.99 | $104.51 | Item 6. Selected Financial Data This section presents selected historical financial information for Rexnord Corporation for fiscal years 2016 through 2020, reflecting acquisitions, divestitures, and the company's transition to a December 31 fiscal year-end Selected Statements of Operations Data (in millions, except per share amounts) | Metric | March 31, 2020 | March 31, 2019 | March 31, 2018 | March 31, 2017 | March 31, 2016 | | :---------------------------------------------- | :------------- | :------------- | :------------- | :------------- | :------------- | | Net sales | $2,068.3 | $2,050.9 | $1,851.6 | $1,712.5 | $1,672.2 | | Gross profit | $818.0 | $784.8 | $706.5 | $626.4 | $609.6 | | Income from operations | $334.3 | $305.6 | $266.4 | $203.2 | $210.1 | | Net income attributable to Rexnord common stockholders | $165.7 | $11.1 | $52.7 | $66.8 | $67.9 | | Diluted net income per share | $1.45 | $0.28 | $0.62 | $0.64 | $0.66 | Selected Other Data (in millions) | Metric | March 31, 2020 | March 31, 2019 | March 31, 2018 | March 31, 2017 | March 31, 2016 | | :----------------------------------- | :------------- | :------------- | :------------- | :------------- | :------------- | | Net cash provided by operating activities | $298.6 | $258.1 | $228.5 | $195.1 | $219.0 | | Net cash used for investing activities | $(123.1) | $(53.3) | $(208.8) | $(264.0) | $(45.2) | | Net cash provided by (used for) financing activities | $114.9 | $(116.7) | $(308.8) | $79.9 | $(56.3) | | Capital expenditures | $41.4 | $42.5 | $38.0 | $50.8 | $46.7 | | Common stock dividend per share | $0.08 | — | — | — | — | Selected Balance Sheet Data (in millions) | Metric | March 31, 2020 | March 31, 2019 | March 31, 2018 | March 31, 2017 | March 31, 2016 | | :---------------------- | :------------- | :------------- | :------------- | :------------- | :------------- | | Cash and cash equivalents | $573.4 | $292.5 | $193.2 | $464.6 | $443.9 | | Total assets | $3,627.1 | $3,259.7 | $3,423.7 | $3,539.3 | $3,354.8 | | Total debt | $1,473.4 | $1,238.0 | $1,356.0 | $1,622.7 | $1,920.1 | | Stockholders' equity | $1,313.7 | $1,231.0 | $1,212.8 | $1,070.6 | $588.0 | - Rexnord is transitioning to a December 31 fiscal year-end, with a nine-month transition period from April 1, 2020, to December 31, 2020[168] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed analysis of Rexnord's financial condition and results of operations for fiscal years 2020, 2019, and 2018, discussing the impact of acquisitions, divestitures, critical accounting estimates, and the COVID-19 pandemic - The discussion includes periods prior to the acquisitions of World Dryer, Centa, Centa China, StainlessDrains.com, and Just Manufacturing, and excludes the VAG business reclassified to discontinued operations[174][175] - The company is transitioning to a December 31 fiscal year-end, with a nine-month transition period from April 1, 2020, to December 31, 2020[176] Company Overview Rexnord is a growth-oriented, multi-platform industrial company with leading market shares and trusted brands in Process & Motion Control and Water Management, driven by the Rexnord Business System (RBS) and strategic acquisitions - Rexnord operates in two platforms: Process & Motion Control and Water Management, providing highly-engineered, mission-critical solutions[184] - The Rexnord Business System (RBS) is the operating philosophy, focused on driving superior customer satisfaction and financial results through world-class operating performance[184] - Strategy involves building global strategic platforms and pursuing acquisitions to expand geographic presence, product lines, and enter adjacent markets[185] Financial Statement Presentation This section briefly describes key financial statement items and accounting policies, including net sales, cost of sales (with materials as a major component), and selling, general, and administrative expenses - Net sales represent gross sales less deductions for returns, allowances, and incentive rebate programs[187] - Cost of sales includes direct/indirect materials and labor, supplies, utilities, depreciation, and freight[188] - Cost of materials was approximately 34% of net sales in fiscal 2020[189] - Selling, General and Administrative expenses primarily cover sales, marketing, finance, administration, engineering, and warehousing[190] Critical Accounting Estimates This section outlines Rexnord's critical accounting policies requiring significant management judgment and estimates, including revenue recognition, inventory valuation, goodwill impairment, retirement benefits, income taxes, and commitments and contingencies - Revenue is generally recognized at a point-in-time when control of the product is transferred to the customer, typically upon shipment[193] - Inventories are valued at the lower of cost or market, with approximately 61% using LIFO and the remainder FIFO as of March 31, 2020[198] - Goodwill and indefinite-lived intangible assets are tested annually for impairment using discounted cash flow and market value approaches; no impairment was present in fiscal 2020[202] - Retirement benefits involve actuarial valuations with key assumptions (discount rates, asset returns, mortality rates), and net actuarial gains/losses are recognized quarterly or annually[206][207] - Income taxes require significant judgment for worldwide provision, deferred tax assets/liabilities, and uncertain tax positions, with U.S. Tax Reform having a net income tax benefit of $65.9 million in fiscal 2018[209][210][211][212] - Accruals for commitments and contingencies, including product warranty and asbestos claims, are based on professional knowledge, historical experience, and legal counsel discussions[213][214][215][216] Recent Accounting Pronouncements This section refers to Item 8, Note 2 for details on recent accounting pronouncements, highlighting the adoption of ASU 2016-13 (Credit Losses) and ASC 842 (Leases) with no significant impact on financial statements or operations - ASU No. 2020-04 (Reference Rate Reform) provides optional expedients for contracts affected by LIBOR discontinuation, effective through December 31, 2022[383] - ASU No. 2019-12 (Simplifying Income Taxes) is effective for the Company in fiscal 2022, with impact under evaluation[384][385] - ASU No. 2016-13 (Credit Losses) was adopted on April 1, 2020, with no significant impact[386] - ASC 842 (Leases) was adopted effective April 1, 2019, recognizing ROU assets and lease liabilities of approximately $70.8 million and $73.0 million, respectively, with no significant impact on operations or cash flows[391][393] Overview of Recent Developments Recent developments include the ongoing impact of the COVID-19 pandemic, the sale of the VAG business, and continued restructuring actions to drive efficiencies and optimize the manufacturing footprint - The COVID-19 pandemic has led to disruptions in manufacturing, distribution, and supply chains, prompting furloughs, workforce reductions, and spending cuts[219][220] - The VAG business sale was completed in fiscal 2019, with results reported as discontinued operations; an additional $1.8 million loss on sale was recognized in fiscal 2020[221][222] - Restructuring charges were $15.5 million in fiscal 2020, $12.1 million in fiscal 2019, and $14.1 million in fiscal 2018, primarily for workforce reductions and facility rationalization[225][227] Results of Operations This section provides a comparative analysis of Rexnord's financial performance for fiscal years 2020 vs. 2019 and 2019 vs. 2018, influenced by acquisitions, divestitures, productivity gains, and economic factors Fiscal Year Ended March 31, 2020 Compared with the Fiscal Year Ended March 31, 2019 In fiscal 2020, consolidated net sales increased by 0.8% to $2,068.3 million, with Process & Motion Control sales decreasing and Water Management sales increasing, leading to a significant rise in net income due to lower loss from discontinued operations Net Sales Comparison (Fiscal 2020 vs. 2019) | Segment | FY2020 Net Sales (Millions) | FY2019 Net Sales (Millions) | Change (Millions) | % Change | | :----------------------- | :-------------------------- | :-------------------------- | :---------------- | :------- | | Process & Motion Control | $1,358.2 | $1,380.6 | $(22.4) | (1.6)% | | Water Management | $710.1 | $670.3 | $39.8 | 5.9% | | Consolidated | $2,068.3 | $2,050.9 | $17.4 | 0.8% | - Process & Motion Control core net sales decreased 1% due to product line simplification and softer industrial demand, partially offset by aerospace and consumer-facing end-market growth[229] - Water Management core net sales increased 4% due to increased demand in North American building construction, partially offset by product line simplification[230] Income from Operations Comparison (Fiscal 2020 vs. 2019) | Segment | FY2020 Income (Millions) | FY2019 Income (Millions) | Change (Millions) | % Change | | :----------------------- | :----------------------- | :----------------------- | :---------------- | :------- | | Process & Motion Control | $228.4 | $226.1 | $2.3 | 1.0% | | Water Management | $163.1 | $139.7 | $23.4 | 16.8% | | Corporate | $(57.2) | $(60.2) | $3.0 | (5.0)% | | Consolidated | $334.3 | $305.6 | $28.7 | 9.4% | - Consolidated net income attributable to Rexnord common stockholders was $165.7 million in fiscal 2020, up from $11.1 million in fiscal 2019, primarily due to lower loss from discontinued operations[241] Fiscal Year Ended March 31, 2019 Compared with the Fiscal Year Ended March 31, 2018 In fiscal 2019, consolidated net sales increased by 10.8% to $2,050.9 million, driven by growth in both Process & Motion Control and Water Management, while net income decreased due to a higher loss from discontinued operations Net Sales Comparison (Fiscal 2019 vs. 2018) | Segment | FY2019 Net Sales (Millions) | FY2018 Net Sales (Millions) | Change (Millions) | % Change | | :----------------------- | :-------------------------- | :-------------------------- | :---------------- | :------- | | Process & Motion Control | $1,380.6 | $1,241.2 | $139.4 | 11.2% | | Water Management | $670.3 | $610.4 | $59.9 | 9.8% | | Consolidated | $2,050.9 | $1,851.6 | $199.3 | 10.8% | - Process & Motion Control core net sales increased 5% due to favorable demand trends across most served end markets[244] - Water Management core net sales increased 4% due to favorable demand trends in nonresidential construction end markets[245] Income from Operations Comparison (Fiscal 2019 vs. 2018) | Segment | FY2019 Income (Millions) | FY2018 Income (Millions) | Change (Millions) | % Change | | :----------------------- | :----------------------- | :----------------------- | :---------------- | :------- | | Process & Motion Control | $226.1 | $191.3 | $34.8 | 18.2% | | Water Management | $139.7 | $125.7 | $14.0 | 11.1% | | Corporate | $(60.2) | $(50.6) | $(9.6) | (19.0)% | | Consolidated | $305.6 | $266.4 | $39.2 | 14.7% | - Consolidated net income attributable to Rexnord common stockholders was $11.1 million in fiscal 2019, down from $52.7 million in fiscal 2018, primarily due to a higher loss from discontinued operations[256] Non-GAAP Financial Measures This section defines and explains Rexnord's non-GAAP financial measures: Core sales, EBITDA, and Adjusted EBITDA, which are used for performance evaluation and covenant compliance but have limitations - Core sales exclude the impact of acquisitions, divestitures, and foreign currency translation for better comparability[258] - EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a supplemental measure for performance evaluation and debt service ability[259] - Adjusted EBITDA is used to measure compliance with credit agreement covenants, particularly the net first lien leverage ratio[260][261] - Adjusted EBITDA is not a GAAP measure and has limitations, as it excludes recurring cash charges and may include estimated cost savings[263][264] Covenant Compliance Rexnord's credit agreement contains restrictive covenants, including a maximum total net leverage ratio, which the company was in compliance with as of March 31, 2020, using Adjusted EBITDA for assessment - The credit agreement includes restrictive covenants on indebtedness, payments, mergers, asset sales, and financial ratios[261][125] - A key financial maintenance covenant is a maximum total net leverage ratio of 6.75 to 1.0[261] Adjusted EBITDA and Leverage Ratio (Fiscal 2020) | Metric | Amount (Millions) | | :---------------------------------------------- | :---------------- | | Net income attributable to Rexnord common stockholders | $165.7 | | Adjusted EBITDA | $460.2 | | Pro forma Adjusted EBITDA | $465.2 | | Consolidated indebtedness | $984.0 | | Total net leverage ratio | 2.1 | - As of March 31, 2020, Rexnord was in compliance with all applicable covenants, with a total net leverage ratio of 2.1 to 1.0[261][266] Liquidity and Capital Resources Rexnord's liquidity primarily comes from cash, operating cash flow, and borrowing capacity under its revolving credit and securitization facilities, with cash flows from operating activities increasing in fiscal 2020 - Primary liquidity sources are cash and cash equivalents, cash flow from operations, and borrowing availability under a $264.0 million revolving credit facility and a $100.0 million accounts receivable securitization program[267] Liquidity Position (as of March 31) | Metric | 2020 (Millions) | 2019 (Millions) | | :----------------------------------- | :-------------- | :-------------- | | Cash and cash equivalents | $573.4 | $292.5 | | Additional borrowing capacity | $28.6 | $351.3 | | (Revolving credit facility) | $9.3 | $258.4 | | (Accounts receivable securitization) | $19.3 | $92.9 | Cash Flows In fiscal 2020, net cash from operating activities increased, while cash used for investing activities rose due to acquisitions, and financing activities shifted to a net cash inflow driven by debt borrowings Cash Flow Summary (Fiscal Years Ended March 31) | Activity | 2020 (Millions) | 2019 (Millions) | 2018 (Millions) | | :----------------------- | :-------------- | :-------------- | :-------------- | | Operating activities | $298.6 | $258.1 | $228.5 | | Investing activities | $(123.1) | $(53.3) | $(208.8) | | Financing activities | $114.9 | $(116.7) | $(308.8) | - Fiscal 2020 investing activities included $84.5 million for StainlessDrains.com and Just Manufacturing acquisitions[271] - Fiscal 2020 financing activities included $214.4 million of net borrowings on outstanding debt, offsetting $100.7 million for common stock repurchases and $9.8 million for common stock dividends[272] - Fiscal 2019 investing activities included $23.4 million for the Centa China acquisition[274] - Fiscal 2019 financing activities included $98.2 million for debt repayment and $23.2 million for preferred stock dividends[275] Indebtedness As of March 31, 2020, Rexnord had $1,473.4 million in total indebtedness, primarily comprising term loans, 4.875% Senior Notes due 2025, revolving credit facility borrowings, and securitization facility borrowings Total Indebtedness (as of March 31, 2020) | Debt Type | Total Debt (Millions) | | :------------------------------- | :-------------------- | | Term loans | $620.8 | | 4.875% Senior Notes due 2025 | $495.7 | | Revolving credit facility | $249.2 | | Securitization facility borrowings | $74.9 | | Other subsidiary debt | $32.8 | | Total | $1,473.4 | - Total indebtedness increased from $1,238.0 million at March 31, 2019, to $1,473.4 million at March 31, 2020[282] Off-Balance Sheet Arrangements Rexnord Corporation does not have any off-balance sheet or non-consolidated special-purpose entities - The company does not have any off-balance sheet or non-consolidated special-purpose entities[285] Tabular Disclosure of Contractual Obligations As of March 31, 2020, Rexnord's total contractual obligations amounted to $2,098.2 million, including significant amounts for term loans, senior notes, and other long-term debt, with a majority due in more than 5 years Contractual Obligations (as of March 31, 2020, in millions) | Obligation Type | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :-------------------------------- | :--------- | :--------------- | :-------- | :-------- | :---------------- | | Term loans | $625.0 | $— | $— | $625.0 | $— | | 4.875% Senior Notes due 2025 | $500.0 | $— | $— | $— | $500.0 | | Revolving credit facility | $250.0 | $— | $250.0 | $— | $— | | Securitization facility borrowings | $75.0 | $75.0 | $— | $— | $— | | Other long-term debt | $32.8 | $1.5 | $2.6 | $2.8 | $25.9 | | Interest on long-term debt obligations | $274.1 | $54.6 | $105.8 | $75.6 | $38.1 | | Purchase commitments | $152.7 | $143.7 | $7.2 | $1.8 | $— | | Operating lease obligations | $92.3 | $14.6 | $28.9 | $20.3 | $28.5 | | Pension and post-retirement plans | $96.3 | $9.2 | $41.6 | $45.5 | See note (6) | | Totals | $2,098.2 | $298.6 | $436.1| $771.0| $592.5 | - Unrecognized tax benefits of $14.8 million and deferred compensation liability of $7.4 million are excluded due to uncertainty in timing of cash settlement[279][280] Quantitative and Qualitative Disclosures about Market Risk Rexnord is exposed to market risks from foreign currency exchange rates and interest rates, managed through operating activities, financing, and derivative instruments, with a significant portion of sales originating outside the U.S - Market risks include foreign currency exchange rates and interest rates, managed through operating activities, financing, and derivative financial instruments[286] - Approximately 29% of fiscal 2020 sales originated outside the United States, exposing the company to foreign currency exchange rate fluctuations[288] - A 10% strengthening of the USD would have decreased stockholders' equity by approximately $39.9 million as of March 31, 2020[289] - Approximately 59% of indebtedness bears interest at rates that fluctuate with short-term prevailing interest rates, primarily LIBOR[292] - A 100 basis point increase in the market interest rate would increase annual interest expense under the term loan facility by approximately $8.8 million[292] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This section refers to the "Quantitative and Qualitative Disclosures About Market Risk" subsection within Item 7 for detailed information on the company's market risk exposures Item 8. Financial Statements and Supplementary Data This section presents Rexnord Corporation's consolidated financial statements for fiscal years 2020, 2019, and 2018, including reports from Ernst & Young LLP and extensive notes detailing accounting policies and financial information - The consolidated financial statements include accounts of Rexnord Corporation and its subsidiaries, prepared in accordance with GAAP[295][341] - Ernst & Young LLP provided an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[299][300][317][318] Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm Ernst & Young LLP provided an unqualified opinion on Rexnord's consolidated financial statements for fiscal years 2020, 2019, and 2018, and on the effectiveness of internal control over financial reporting as of March 31, 2020 - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the periods ended March 31, 2020, 2019, and 2018[299] - An unqualified opinion was also expressed on the effectiveness of the company's internal control over financial reporting as of March 31, 2020[300][317] - Critical audit matters included the valuation of acquired intangible assets (customer relationships) and the assessment of valuation allowances for deferred tax assets and uncertain tax positions[305][306][310][311] Consolidated Balance Sheets The consolidated balance sheets present Rexnord's financial position as of March 31, 2020, and March 31, 2019, showing increases in cash, total assets, total debt, and stockholders' equity Consolidated Balance Sheet Summary (in millions) | Metric | March 31, 2020 | March 31, 2019 | | :-------------------------- | :------------- | :------------- | | Cash and cash equivalents | $573.4 | $292.5 | | Total current assets | $1,264.3 | $982.9 | | Property, plant and equipment, net | $378.8 | $383.0 | | Intangible assets, net | $514.2 | $511.5 | | Goodwill | $1,321.9 | $1,299.7 | | Total assets | $3,627.1 | $3,259.7 | | Current maturities of debt | $76.4 | $1.2 | | Total current liabilities | $455.5 | $397.0 | | Long-term debt | $1,397.0 | $1,236.8 | | Total liabilities | $2,313.4 | $2,028.7 | | Total stockholders' equity | $1,313.7 | $1,231.0 | Consolidated Statements of Operations The consolidated statements of operations show Rexnord's financial performance for fiscal years 2020, 2019, and 2018, with increased net sales and income from operations, and a significant rise in net income attributable to common stockholders in fiscal 2020 Consolidated Statements of Operations Summary (in millions, except per share amounts) | Metric | March 31, 2020 | March 31, 2019 | March 31, 2018 | | :---------------------------------------------- | :------------- | :------------- | :------------- | | Net sales | $2,068.3 | $2,050.9 | $1,851.6 | | Gross profit | $818.0 | $784.8 | $706.5 | | Income from operations | $334.3 | $305.6 | $266.4 | | Net income from continuing operations | $182.2 | $189.0 | $206.6 | | Loss from discontinued operations, net of tax | $(1.8) | $(154.7) | $(130.6) | | Net income attributable to Rexnord common stockholders | $165.7 | $11.1 | $52.7 | | Diluted net income per share | $1.45 | $0.28 | $0.62 | Consolidated Statements of Comprehensive Income The consolidated statements of comprehensive income show Rexnord's total comprehensive income for fiscal years 2020, 2019, and 2018, with a significant increase in fiscal 2020 primarily due to higher net income and changes in foreign currency translation adjustments Consolidated Statements of Comprehensive Income Summary (in millions) | Metric | March 31, 2020 | March 31, 2019 | March 31, 2018 | | :---------------------------------------------- | :------------- | :------------- | :------------- | | Net income attributable to Rexnord | $180.1 | $34.3 | $75.9 | | Foreign currency translation adjustments | $(24.5) | $(17.9) | $57.1 | | Net change in unrealized losses on interest rate derivatives, net of tax | — | $4.5 | $5.8 | | Change in pension and other postretirement defined benefit plans, net of tax | $(3.3) | $(9.1) | — | | Total comprehensive income | $152.6 | $11.8 | $138.9 | Consolidated Statements of Stockholders' Equity The consolidated statements of stockholders' equity detail changes for fiscal years 2020, 2019, and 2018, highlighting a significant increase in retained earnings in fiscal 2020, offset by common stock repurchases and dividends Consolidated Statements of Stockholders' Equity Summary (in millions) | Metric | March 31, 2020 | March 31, 2019 | March 31, 2018 | | :---------------------------------------------- | :------------- | :------------- | :------------- | | Common Stock | $1.2 | $1.0 | $1.0 | | Additional Paid-In Capital | $1,348.3 | $1,293.5 | $1,277.8 | | Retained Earnings | $85.9 | $30.7 | $8.0 | | Accumulated Other Comprehensive Loss | $(124.4) | $(96.6) | $(74.1) | | Total Rexnord Stockholders' Equity | $1,311.0 | $1,228.6 | $1,212.8 | | Non-controlling interest | $2.7 | $2.4 | $0.1 | | Total Stockholders' Equity | $1,313.7 | $1,231.0 | $1,212.8 | - During fiscal 2020, 16.0 million shares of common stock were issued upon the mandatory conversion of Series A Preferred Stock[334] - In fiscal 2020, the company repurchased and canceled 3.6 million shares of common stock at a total cost of $100.7 million[334] Consolidated Statements of Cash Flows The consolidated statements of cash flows detail Rexnord's cash movements for fiscal years 2020, 2019, and 2018, showing increased operating cash flows and a shift to net cash inflow from financing activities in fiscal 2020 Consolidated Statements of Cash Flows Summary (in millions) | Activity | March 31, 2020 | March 31, 2019 | March 31, 2018 | | :------------------------------------------------ | :------------- | :------------- | :------------- | | Net cash provided by operating activities | $298.6 | $258.1 | $228.5 | | Cash used for investing activities | $(123.1) | $(53.3) | $(208.8) | | Cash provided by (used for) financing activities | $114.9 | $(116.7) | $(308.8) | | Effect of exchange rate changes on cash | $(9.5) | $(13.2) | $16.6 | | Increase (decrease) in cash, cash equivalents and restricted cash | $280.9 | $74.9 | $(272.5) | | Cash, cash equivalents and restricted cash at end of period | $573.4 | $292.5 | $217.6 | Notes to Consolidated Financial Statements These notes provide detailed explanations and disclosures supporting the consolidated financial statements, covering accounting policies, acquisitions, debt, retirement benefits, income taxes, and other financial information 1. Basis of Presentation and Description of Business This note clarifies that the consolidated financial statements are prepared in accordance with U.S. GAAP and include Rexnord Corporation and its subsidiaries, reiterating Rexnord's identity as a multi-platform industrial company guided by RBS - Consolidated financial statements are prepared in accordance with U.S. GAAP and include Rexnord Corporation and its subsidiaries[341] - Rexnord operates in two platforms: Process & Motion Control and Water Management, with RBS as its operating philosophy[342] - The VAG business, previously in Water Management, is reported as discontinued operations for all periods presented[344] 2. Significant Accounting Policies This note details Rexnord's significant accounting policies, including revenue recognition, leases, inventory valuation, goodwill impairment, and income taxes, along with recent accounting pronouncements - Revenue is recognized at a point-in-time when control of the product is transferred to the customer, generally upon shipment[347][416] - Inventories are stated at the lower of cost or market, with 61% LIFO and the remainder FIFO as of March 31, 2020[354] - **Goodwill and indefinite-lived int