Zurn Elkay Water Solutions Corp 10-Q for FY2021 Q2
Zurn Elkay Water Solutions Corp (ZWS)
10-Q
2021-07-20
For: 2021-06-30
View Original
Added on
April 12, 2026
About this 10-Q
Zurn Elkay Water Solutions Corp filed this 10-Q on July 20, 2021, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $568.3M
- up 26.5% from $449.1M a year earlier
- Net income
- $73.2M
- up 105.6% from net income of $35.6M a year earlier
- Diluted EPS
- $0.59
- up 103.4% from $0.29 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________________________________________
FORM 10-Q
| (Mark one) | ||||||||
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the quarter ended June 30, 2021
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the transition period from to
| Commission File Number: | |||||
_________________________________________________
| (Exact name of registrant as specified in its charter) | ||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Zip Code) | |||||||||||
| (Address of Principal Executive Offices) | |||||||||||
Registrant’s telephone number, including area code: (414 ) 643-3739
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||
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. Yes ☒ 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). Yes ☒ 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.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
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 ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
| Class | Outstanding at July 16, 2021 | |||||||
| Rexnord Corporation Common Stock, $0.01 par value per share | ||||||||
TABLE OF CONTENTS
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
2
Private Securities Litigation Reform Act Safe Harbor Statement
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 Transition Report on Form 10-K for the transition period ended December 31, 2020, in Part I, Item 1A, “Risk Factors” and in Part I under the heading "Cautionary Notice Regarding Forward-Looking Statements", as well as in our other filings with the Securities and Exchange Commission. In addition, our previously announced transaction with Regal Beloit Corporation is subject to various risks, uncertainties and factors including, among others: the inability to complete the transaction; the inability to recognize the anticipated benefits of the proposed transaction, including due to the failure to receive required security holder approvals, or the failure of other closing conditions; and costs related to the proposed transaction; see also Part II, Item 1A, "Risk Factors" herein. 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. In addition, the effects of the ongoing COVID-19 pandemic on our employees, customers and supply chain, including those related to governmental actions, all of which are uncertain at this time, may, among other impacts, heighten the effects on our business, results of operations and financial condition of the risk factors identified in our Transition Report on Form 10-K.
General
Following the end of our fiscal year ended March 31, 2020, we transitioned to a December 31 fiscal year-end date. The nine-month period from April 1, 2020, to December 31, 2020, served as a transition period, and we provided one-time, nine-month transitional financial statements for the transition period in a Transition Report on Form 10-K on February 16, 2021. Prior to the transition period, our fiscal year was the year ending on March 31 of the corresponding calendar year. For example, our fiscal year 2020, or fiscal 2020, was the period from April 1, 2019, to March 31, 2020. Our fiscal year 2021 commenced on January 1, 2021.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Rexnord Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(in Millions, except share amounts)
(Unaudited)
| June 30, 2021 | December 31, 2020 | |||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Receivables, net | ||||||||||||||
| Inventories | ||||||||||||||
| Income tax receivable | ||||||||||||||
| Other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities and stockholders' equity | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Current maturities of debt | $ | $ | ||||||||||||
| Trade payables | ||||||||||||||
| Compensation and benefits | ||||||||||||||
| Current portion of pension and postretirement benefit obligations | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt | ||||||||||||||
| Pension and postretirement benefit obligations | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Other liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Stockholders' equity: | ||||||||||||||
Common stock, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Total Rexnord stockholders' equity | ||||||||||||||
| Non-controlling interest | ||||||||||||||
| Total stockholders' equity | ||||||||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||||||||
See notes to the condensed consolidated financial statements.
4
Rexnord Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(in Millions, except share and per share amounts)
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||||||||
| Restructuring and other similar charges | ||||||||||||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||||||||||||
| Income from operations | ||||||||||||||||||||||||||
| Non-operating expense: | ||||||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | ||||||||||||||||||||||
| Actuarial loss on pension and postretirement benefit obligations | ( | |||||||||||||||||||||||||
| Other income (expense), net | ( | |||||||||||||||||||||||||
| Income before income taxes | ||||||||||||||||||||||||||
| Provision for income taxes | ( | ( | ( | ( | ||||||||||||||||||||||
| Equity method investment income (loss) | ( | |||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||
| Non-controlling interest income | ||||||||||||||||||||||||||
| Net income attributable to Rexnord | $ | $ | ||||||||||||||||||||||||
| Net income per share attributable to Rexnord: | ||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted-average number of shares outstanding (in thousands): | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Effect of dilutive equity awards | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
See notes to the condensed consolidated financial statements.
5
Rexnord Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(in Millions)
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||
| Net income attributable to Rexnord | $ | $ | $ | $ | ||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||
| Foreign currency translation adjustments | ( | |||||||||||||||||||||||||
| Change in pension and postretirement defined benefit plans, net of tax | ( | ( | ( | ( | ||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | |||||||||||||||||||||||||
| Non-controlling interest income | ||||||||||||||||||||||||||
| Total comprehensive income | $ | $ | $ | $ | ||||||||||||||||||||||
See notes to the condensed consolidated financial statements.
6
Rexnord Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in Millions)
(Unaudited)
| Six Months Ended | ||||||||||||||
| June 30, 2021 | June 30, 2020 | |||||||||||||
| Operating activities | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||||||
| Depreciation | ||||||||||||||
| Amortization of intangible assets | ||||||||||||||
| Gains on dispositions of long-lived assets | ( | ( | ||||||||||||
| Deferred income taxes | ( | ( | ||||||||||||
| Other non-cash (income) expenses | ( | |||||||||||||
| Actuarial loss on pension and postretirement benefit obligations | ||||||||||||||
| Stock-based compensation expense | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Receivables | ( | ( | ||||||||||||
| Inventories | ( | |||||||||||||
| Other assets | ( | |||||||||||||
| Accounts payable | ( | |||||||||||||
| Accruals and other | ||||||||||||||
| Cash provided by operating activities | ||||||||||||||
| Investing activities | ||||||||||||||
| Expenditures for property, plant and equipment | ( | ( | ||||||||||||
| Acquisitions, net of cash acquired | ( | ( | ||||||||||||
| Proceeds from dispositions of long-lived assets | ||||||||||||||
| Cash used for investing activities | ( | ( | ||||||||||||
| Financing activities | ||||||||||||||
| Proceeds from borrowings of debt | ||||||||||||||
| Repayments of debt | ( | ( | ||||||||||||
| Proceeds from exercise of stock options | ||||||||||||||
| Taxes withheld and paid on employees' share-based payment awards | ( | ( | ||||||||||||
| Repurchase of common stock | ( | ( | ||||||||||||
| Payment of common stock dividends | ( | ( | ||||||||||||
| Cash used for financing activities | ( | ( | ||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | |||||||||||||
| Increase in cash, cash equivalents and restricted cash | ||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | ||||||||||||
See notes to the condensed consolidated financial statements.
7
Rexnord Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2021
(Unaudited)
1. Basis 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. Following the end of the Company's fiscal year ended March 31, 2020, the Company transitioned to a December 31 fiscal year-end date. Results for the interim periods are not necessarily indicative of results that may be expected for the year ending December 31, 2021. 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 Transition Report on Form 10-K for the nine-month transition period ended December 31, 2020 (the "Transition Period").
The Company
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, hygienic and environmental site works products for primarily nonresidential buildings.
Expected Spin-Off of Process & Motion Control Segment
On February 15, 2021, Rexnord and Regal Beloit Corporation (“Regal”) entered into definitive agreements whereby Rexnord will separate its Process & Motion Control segment by way of a tax-free spin-off to Rexnord’s stockholders and then immediately combine it with Regal in a Reverse Morris Trust (“RMT”) transaction. Closing of this transaction is subject to various closing conditions, including the receipt of regulatory approvals, receipt of the approval of Regal and Rexnord stockholders (which each of Regal and Rexnord will solicit at special meetings of their respective stockholders at a later date), and other customary closing conditions. This transaction is expected to close during the second half of 2021.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate that is expected to be discontinued because of reference rate reform. The amendments in this update provide optional expedients and exceptions for applying GAAP to instruments affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in this ASU are effective for all entities as of March 12, 2020,
8
9
2. Acquisitions and Divestiture
Six Months Ended June 30, 2021
On April 16, 2021, the Company acquired substantially all of the assets of Advance Technology Solutions, LLC (d/b/a ATS GREASEwatch) ("ATS GREASEwatch") for a cash purchase price of $4.5 million, excluding transaction costs and net of cash acquired. The Company paid $3.8 million to the sellers at closing, with the remaining $0.7 million payable to the sellers upon settlement of certain indemnities within two years of closing, ATS GREASEwatch, headquartered in Saginaw, Michigan, develops, manufactures and markets remote tank monitoring devices, alarms, software and services for various applications and provides technology to enhance and expand our current product offerings within the Company's existing Water Management platform.
The acquisition 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 the acquisition resulted in goodwill of $2.7 million, other intangibles assets of $1.6 million and $0.2 million of other net assets. This acquisition did not materially affect the Company's condensed consolidated statements of operations or financial position.
Nine Month Transition Period Ended December 31, 2020
On December 11, 2020, the Company acquired substantially all of the assets of Hadrian Manufacturing Inc. and 100 % of the stock of Hadrian Inc. (collectively, "Hadrian") for a total cash purchase price of $101.3 million, excluding transaction costs and net of cash acquired. During the six months ended June 30, 2021, the Company received a cash payment of $0.4 million from the sellers in connection with finalizing the acquisition date trade working capital, which is included in the total cash purchase price mentioned above. Hadrian, based in Burlington, Ontario, Canada, manufactures washroom partitions and lockers primarily used in institutional and commercial end markets and complements the Company's existing Water Management platform.
The acquisition has been accounted for as a business combination and was recorded by allocating the preliminary 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 preliminary purchase price allocations associated with the acquisition resulted in goodwill of $43.0 million ($37.0 million tax deductible), other intangible assets of $32.4 million (including tradenames of $0.8 million and $31.6 million of customer relationships), $17.1 million of fixed assets, $9.7 million of trade working capital and other net liabilities of $0.9 million. The preliminary purchase price allocations for Hadrian were adjusted during the six months ended June 30, 2021, resulting in a $0.2 million increase in goodwill related to aforementioned cash payment received, partially offset by the refinement of the estimated fair value of the liabilities assumed. The Company is continuing to evaluate the preliminary purchase price allocations for Hadrian related to the fair values assigned to fixed assets and net working capital acquired, which will be completed within the one year period following its acquisition date.
On October 1, 2020, the Company completed the sale of its gearbox product line in China within its Process & Motion Control platform for aggregate cash consideration of $5.8 million. The gearbox product line was not material to the Company's consolidated statements of operations or financial position and did not meet the criteria to be presented as discontinued operations. In completing the sale, the Company sold inventory, fixed assets and other intellectual property associated with the business with a carrying value of $5.0 million. In addition, the Company allocated $1.8 million of goodwill from the Process & Motion Control platform that was included in the calculation of the gain on sale of the business. The Company recognized a gain of $0.8 million within other income (expense), net in the condensed consolidated statements of operations during the nine months ended December 31, 2020.
On November 24, 2020, the Company acquired the remaining non-controlling interest in a Process & Motion Control joint venture for a cash purchase price of $0.3 million. The acquisition of the remaining minority interest was not material to the Company's condensed consolidated statements of operations or financial position.
The Company's results of operations include the acquired operations subsequent to the acquisition date. Pro-forma results of operations and certain other U.S. GAAP disclosures related to the acquisition have not been presented because they are not significant to the Company's condensed consolidated statements of operations or financial position.
10
Fiscal Year Ended March 31, 2020
On January 28, 2020, the Company acquired substantially all of the assets of Just Manufacturing Company ("Just Manufacturing") for a cash purchase price of $59.4 million, excluding transaction costs and net of cash 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.
On May 10, 2019, the Company acquired substantially all of the assets of 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 the Company's existing Water Management platform.
The Company's results of operations include the acquired operations subsequent to the aforementioned acquisitions dates. Pro-forma results of operations and certain other U.S. GAAP disclosures related to these acquisitions have not been presented because they are not significant to the Company's condensed consolidated statements of operations or financial position.
These acquisitions have been accounted for as business combinations and were 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 allocations associated with these acquisitions resulted in tax deductible goodwill of $27.3 million, other intangible assets of $40.9 million (including tradenames of $2.2 million and $38.7 million of customer relationships), $8.4 million of fixed assets, $9.1 million of trade working capital and other net liabilities of $1.5 million.
During the fiscal year ended March 31, 2020, the Company acquired the remaining non-controlling interest in a Process and Motion Control joint venture for a cash purchase price of $0.3 million. The acquisition of the remaining minority interest was not material to the Company's condensed consolidated statements of operations or financial position.
3. Restructuring and Other Similar Charges
During the three and six months ended June 30, 2021, 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, lease termination costs, and other facility rationalization costs. Since the Company’s evaluation of other potential restructuring actions are in process, related restructuring expenses, if any, are not yet estimable.
| Restructuring and Other Similar Charges Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||
| Process & Motion Control | Water Management | Corporate | Consolidated | |||||||||||||||||||||||
| Employee termination benefits | $ | $ | $ | $ | ||||||||||||||||||||||
| Contract termination and other associated costs | ||||||||||||||||||||||||||
| Total restructuring and other similar costs | $ | $ | $ | $ | ||||||||||||||||||||||
| Restructuring and Other Similar Charges Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||
| Process & Motion Control | Water Management | Corporate | Consolidated | |||||||||||||||||||||||
| Employee termination benefits | $ | $ | $ | $ | ||||||||||||||||||||||
| Contract termination and other associated costs | ||||||||||||||||||||||||||
| Total restructuring and other similar costs | $ | $ | $ | $ | ||||||||||||||||||||||
11
| Restructuring and Other Similar Charges Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||
| Process & Motion Control | Water Management | Corporate | Consolidated | |||||||||||||||||||||||
| Employee termination benefits | $ | $ | $ | $ | ||||||||||||||||||||||
| Contract termination and other associated costs | ||||||||||||||||||||||||||
| Total restructuring and other similar costs | $ | $ | $ | $ | ||||||||||||||||||||||
| Restructuring and Other Similar Charges Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||
| Process & Motion Control | Water Management | Corporate | Consolidated | |||||||||||||||||||||||
| Employee termination benefits | $ | $ | $ | $ | ||||||||||||||||||||||
| Contract termination and other associated costs | ||||||||||||||||||||||||||
| Total restructuring and other similar costs | $ | $ | $ | $ | ||||||||||||||||||||||
The following table summarizes the activity in the Company's restructuring accrual for the six months ended June 30, 2021 (in millions):
| Employee termination benefits | Contract termination and other associated costs | Total | ||||||||||||||||||||||||
| Restructuring accrual, December 31, 2020 (1) | $ | $ | $ | |||||||||||||||||||||||
| Charges | ||||||||||||||||||||||||||
| Cash payments | ( | ( | ( | |||||||||||||||||||||||
| Restructuring accrual, June 30, 2021 (1) | $ | $ | $ | |||||||||||||||||||||||
____________________
(1)The restructuring accrual is included in other current liabilities in the condensed consolidated balance sheets.
4. Revenue Recognition
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
12
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.
Sales 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 two business segments, Process & Motion Control and Water Management. The following tables present our revenue disaggregated by customer type and originating geography (in millions):
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||
| Original equipment manufacturers/end users | $ | $ | $ | $ | ||||||||||||||||||||||
| Maintenance, repair, and operations | ||||||||||||||||||||||||||
| Total Process & Motion Control | $ | $ | $ | $ | ||||||||||||||||||||||
| Water safety, quality, flow control and conservation | $ | $ | $ | $ | ||||||||||||||||||||||
| Water infrastructure | ||||||||||||||||||||||||||
| Total Water Management | $ | $ | $ | $ | ||||||||||||||||||||||
| Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | |||||||||||||||||||||||||
| Process & Motion Control | Water Management | Process & Motion Control | Water Management | |||||||||||||||||||||||
| United States and Canada | $ | $ | $ | $ | ||||||||||||||||||||||
| Europe | ||||||||||||||||||||||||||
| Rest of world | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
| Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | |||||||||||||||||||||||||
| Process & Motion Control | Water Management | Process & Motion Control | Water Management | |||||||||||||||||||||||
| United States and Canada | $ | $ | $ | $ | ||||||||||||||||||||||
| Europe | ||||||||||||||||||||||||||
| Rest of world | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
Contract Balances
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
13
liabilities and contract assets are recognized in Other current liabilities and Receivables, net, respectively, in the Company's condensed consolidated balance sheets.
The following table presents changes in the Company’s contract assets and liabilities during the six months ended June 30, 2021 (in millions):
| Balance Sheet Classification | December 31, 2020 | Additions | Deductions | June 30, 2021 | ||||||||||||||||||||||||||||
| Contract assets | Receivables, net | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Contract liabilities (1) | Other current liabilities | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
____________________
Backlog
The Company has a backlog of $435.2 million as of June 30, 2021, 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 83 % of the unsatisfied performance obligations as revenue in the remaining six months of the year ending December 31, 2021, and the remaining approximately 17 % in 2022 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.
Contract Costs
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 June 30, 2021, the contract assets capitalized, as well as amortization recognized in the three and six months ended June 30, 2021, are not significant and there have been no
Allowance for Doubtful Accounts
5. Income Taxes
The provision for income taxes for all periods presented is based on an estimated effective income tax rate for the respective 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
14
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 $20.5 million in the three months ended June 30, 2021, compared to $17.2 million in the three months ended June 30, 2020. The effective income tax rate for the three months ended June 30, 2021, was 21.9 % versus 32.5 % in the three months ended June 30, 2020. The effective income tax rate for the three months ended June 30, 2021 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”), the accrual of unrecognized income tax benefits in which such realization is not deemed more-likely-than-not, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code and the accrual of various state income taxes, substantially offset by the recognition of certain previously unrecognized tax benefits due to the lapse of the applicable statutes of limitations and the recognition of income tax benefits associated with share-based payments and foreign-derived intangible income (“FDII”). The effective income tax rate for the three months ended June 30, 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 compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of withholding taxes associated with foreign dividends, and the accrual of various state income taxes, partially offset by the recognition of income tax benefits associated with share-based payments and FDII.
The income tax provision was $37.7 million in the six months ended June 30, 2021, compared to $23.6 million in the six months ended June 30, 2020. The effective income tax rate for the six months ended June 30, 2021 was 23.4 % versus 26.8 % in the six months ended June 30, 2020. The effective income tax rate for the six months ended June 30, 2021 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, the accrual of unrecognized income tax benefits in which such realization is not deemed more-likely-than-not, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code and the accrual of various state income taxes, partially offset by the recognition of a discrete foreign financing-related income tax benefit, the recognition of certain previously unrecognized tax benefits due to the lapse of the applicable statutes of limitations and the recognition of income tax benefits associated with share-based payments and FDII. The effective income tax rate for the six months ended June 30, 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 compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of withholding taxes associated with foreign dividends, and the accrual of various state income taxes, partially offset by the recognition of certain previously unrecognized tax benefits due to the lapse of the applicable statutes of limitations as well as the recognition of income tax benefits associated with share-based payments and FDII.
The Company’s total liability for net unrecognized tax benefits as of June 30, 2021 and December 31, 2020, was $18.5 million and $18.6 million, respectively. The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in income tax expense. As of June 30, 2021 and December 31, 2020, the total amount of gross, unrecognized income tax benefits included accrued interest and penalties of $1.4 million and $1.6 million, respectively. The Company recognized $0.2 million and $(0.4 ) million of net interest and penalties as income tax expense (benefit) during the six months ended June 30, 2021 and June 30, 2020, 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. During the three months ended June 30, 2020, the Internal Revenue Service (the “IRS”) completed an income tax examination of the Company’s U.S. consolidated federal income tax returns for the tax years ended March 31, 2016 and 2017. The Company paid approximately $1.5 million upon the conclusion of such examination, all of which was previously accrued in the Company’s financial statements. During the three months ended March 31, 2020, the German tax authorities concluded an examination of the corporate income and trade tax returns for the Company’s CENTA German subsidiary for the tax years ended December 31, 2014 through December 31, 2017. The conclusion of the tax examination resulted in additional tax liabilities of approximately $1.7 million, all of which was subject to indemnification under the terms of the applicable purchase agreement or otherwise appropriately accrued in the Company’s financial statements. During the three months ended March 31, 2020, the Italian tax authorities began conducting an income tax examination of the income tax return of one of the Company’s Italian subsidiaries for the tax year ended March 31, 2018. In addition, certain of the Company’s German subsidiaries are currently undergoing a corporate income and trade tax examination by the German tax authorities for the tax years or period ended March 31, 2015
15
6. Earnings per Share
16
7. Stockholders' Equity
Stockholders' equity consists of the following (in millions):
| Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Non-controlling interest | Total stockholders’ equity | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income (loss) | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Proceeds from exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
Common stock dividends ($ | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Proceeds from exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Taxes withheld and paid on employees' share-based payment awards | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
Common stock dividends ($ | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Common stock (1) | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Non-controlling interest (2) | Total stockholders’ equity | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income (loss) | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Proceeds from exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
Common stock dividends ($ | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Proceeds from exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Taxes withheld and paid on employees' share-based payment awards | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
Common stock dividends ($ | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||
____________________
(1)For the three and six months ended June 30, 2021, the Company issued 1,348,848 and 1,538,477 shares of common stock upon the exercise of stock options, vesting of restricted stock units, and for other common stock awards, respectively.
(2)On November 24, 2020, the Company acquired the remaining 30 % non-controlling interest associated with in one Process & Motion Control joint venture for a cash purchase price of $0.3 million. Following this transaction, represents a 5 % non-controlling interest in one remaining Process & Motion Control controlled subsidiary.
Share Repurchase Program
17
8. Accumulated Other Comprehensive Loss
| Foreign Currency Translation | Pension and Postretirement Plans | Total | ||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||
| Other comprehensive income before reclassifications | ||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | ( | ( | ||||||||||||||||||||||||
| Net current period other comprehensive income (loss) | ( | |||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | Income Statement Line | ||||||||||||||||||||||||||||
| Pension and other postretirement plans | ||||||||||||||||||||||||||||||||
| Amortization of prior service credit | $ | ( | $ | ( | $ | ( | $ | ( | Other income (expense), net | |||||||||||||||||||||||
| Provision for income taxes | — | — | ||||||||||||||||||||||||||||||
| Total net of tax | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
9. Inventories
| June 30, 2021 | December 31, 2020 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Work in progress | |||||||||||
| Purchased components | |||||||||||
| Raw materials | |||||||||||
| Inventories at First-in, First-Out ("FIFO") cost | |||||||||||
| Adjustment to state inventories at Last-in, First-Out ("LIFO") cost | ( | ||||||||||
| $ | $ | ||||||||||
18
10. Goodwill and Intangible Assets
| Process & Motion Control | Water Management | Consolidated | ||||||||||||||||||
| Net carrying amount as of December 31, 2020 | $ | $ | $ | |||||||||||||||||
| Currency translation adjustments | ||||||||||||||||||||
Acquisition (1) | ||||||||||||||||||||
| Purchase accounting adjustments (1) | ||||||||||||||||||||
| Net carrying amount as of June 30, 2021 | $ | $ | $ | |||||||||||||||||
____________________
(1) Refer to Note 2, Acquisitions and Divestiture for additional information regarding acquisitions.
| June 30, 2021 | |||||||||||||||||||||||
| Weighted Average Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
| Intangible assets subject to amortization: | |||||||||||||||||||||||
| Patents | $ | $ | ( | $ | |||||||||||||||||||
| Customer relationships (including distribution network) | ( | ||||||||||||||||||||||
| Tradenames | ( | ||||||||||||||||||||||
| Intangible assets not subject to amortization - tradenames | — | ||||||||||||||||||||||
| Total intangible assets, net | $ | $ | ( | $ | |||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Weighted Average Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
| Intangible assets subject to amortization: | |||||||||||||||||||||||
| Patents | $ | $ | ( | $ | |||||||||||||||||||
| Customer relationships (including distribution network) | ( | ||||||||||||||||||||||
| Tradenames | ( | ||||||||||||||||||||||
| Intangible assets not subject to amortization - tradenames | — | ||||||||||||||||||||||
| Total intangible assets, net | $ | $ | ( | $ | |||||||||||||||||||
Intangible asset amortization expense totaled $9.1 million and $18.5 million for the three and six months ended June 30, 2021. Intangible asset amortization expense totaled $9.0 million and $18.1 million for the three and six months ended June 30, 2020. Customer relationships acquired during the six months ended June 30, 2021 were assigned a weighted average useful life of 10 years.
The Company expects to recognize amortization expense on the intangible assets subject to amortization of $36.9 million in the year ending December 31, 2021 (inclusive of the $18.5 million of amortization expense recognized in the six months ended June 30, 2021), $21.2 million in 2022, $18.7 million in 2023, $18.6 million in 2024, $17.5 million in 2025 and $16.5 million in 2026.
19
11. Other Current Liabilities
Other current liabilities are summarized as follows (in millions):
| June 30, 2021 | December 31, 2020 | |||||||||||||
| Contract liabilities | $ | $ | ||||||||||||
| Sales rebates | ||||||||||||||
| Commissions | ||||||||||||||
| Restructuring and other similar charges (1) | ||||||||||||||
| Product warranty (2) | ||||||||||||||
| Risk management (3) | ||||||||||||||
| Legal and environmental | ||||||||||||||
| Taxes, other than income taxes | ||||||||||||||
| Income tax payable | ||||||||||||||
| Interest payable | ||||||||||||||
| Other | ||||||||||||||
| $ | $ | |||||||||||||
____________________
(1)See more information related to the restructuring obligations within Note 3, Restructuring and Other Similar Charges.
(2)See more information related to the product warranty obligations within Note 14, Commitments and Contingencies.
(3)Includes projected liabilities related to losses arising from automobile, general and product liability claims.
12. Long-Term Debt
Long-term debt is summarized as follows (in millions):
| June 30, 2021 | December 31, 2020 | |||||||||||||
| Term loan (1) | $ | $ | ||||||||||||
| Finance leases and other subsidiary debt | ||||||||||||||
| Total | ||||||||||||||
| Less current maturities | ||||||||||||||
| Long-term debt | $ | $ | ||||||||||||
____________________
(1)Includes unamortized debt issuance costs of $3.0 million and $3.5 million at June 30, 2021 and December 31, 2020, respectively.
(2)Includes unamortized debt issuance costs of $3.3 million and $3.7 million at June 30, 2021 and December 31, 2020, respectively.
Senior Secured Credit Facility
At June 30, 2021, 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 $725.0 million term loan facility, which was reduced to $625.0 million as a result of a December 2019 voluntary prepayment, and (ii) a $264.0 million revolving credit facility. The term loan facility has a maturity date of August 21, 2024, and there are no required principal payments due or scheduled under the term debt until the maturity date. As of June 30, 2021 and for the six month period then ended, the borrowings under the Term Loan had a weighted-average effective interest rate of 1.85 % and 1.87 %, respectively. No 8.2 million and $3.0 million of the revolving credit facility were considered utilized in connection with outstanding letters of credit at June 30, 2021 and December 31, 2020, respectively.
As of June 30, 2021, 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 6.75 to 1.0. The Company's total net leverage ratio was 1.9 to 1.0 as of June 30, 2021.
20
On December 7, 2017, the Company issued $500.0 million aggregate principal amount of 4.875 % 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.
Accounts Receivable Securitization Program
On May 17, 2021, the Company terminated it's $100.0 million accounts receivable securitization facility with Mizuho Bank, Ltd (the “Securitization”). At December 31, 2020, the Company's total borrowing capacity under the Securitization was $85.7 million based on the then-current accounts receivable balances. As of December 31, 2020, no amounts were borrowed under the Securitization. In addition, $7.5 million of available borrowing capacity under the Securitization was considered utilized in connection with outstanding letters of credit at December 31, 2020.
See Note 11, Long-Term Debt to the audited consolidated financial statements of the Company's Transition Report on Form 10-K for the Transition Period ended December 31, 2020 for further information regarding long-term debt.
Debt Commitment Letters related to Transaction with Regal
In connection with the Company’s proposed transaction with Regal discussed in Note 1, on February 14, 2021, the Company entered into a debt commitment letter (the “Debt Commitment Letter”) and related fee letters with Credit Suisse AG, Cayman Islands Branch (“CS”) and Credit Suisse Loan Funding LLC, pursuant to which, and subject to the terms and conditions set forth therein, CS committed to provide up to $708.0 million in an aggregate principal amount of senior term loans under a senior secured term loan facility (“Term Loan Facility”) and up to $200.0 million in an aggregate principal amount of senior revolving loans under a senior secured revolving credit facility. The proceeds of the loans under the Term Loan Facility may be used by the Company, together with a dividend from Land Newco, Inc., a wholly-owned indirect subsidiary of the Company (“Land”) and cash on RBS Global, Inc.’s balance sheet, (a) to redeem or prepay in full (i) all obligations currently outstanding under the Credit Agreement and (ii) the 4.875 % senior unsecured notes due 2025; (b) to pay fees and expenses in connection with the transactions; and (c) for general corporate purposes.
In connection with the proposed transaction, Land also entered into a commitment letter dated as of February 15, 2021 (which we refer to as the “Land Commitment Letter”) with certain financial institutions (which we refer to as the “Land Commitment Parties”), pursuant to which the Land Commitment Parties committed to provide senior bridge loans under a 364 -day senior bridge loan credit facility in an aggregate principal amount of up to approximately $486.8 million (which we refer to as the “Land Bridge Facility”), subject to the terms and conditions of the Land Commitment Letter. On May 14, 2021 Land entered into a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent and the lenders named therein, providing for a delayed draw term loan facility with commitments thereunder in an aggregate principal amount of approximately $486.8 million, maturing on August 25, 2023 (which we refer to as the “DDTL Facility”). Subject to satisfaction of the conditions therein, the DDTL Facility may be drawn in connection with the consummation of the Transactions in order to fund the Land Cash Payment. The loans under the DDTL Facility will bear interest at floating rates, plus an applicable margin determined by reference to a consolidated funded debt to consolidated EBITDA ratio or at an alternative base rate. Upon the effectiveness of the DDTL Facility, the Land Commitment Letter and the commitments thereunder were terminated. No amounts may be drawn under the DDTL Facility until the closing. Regal has agreed to indemnify Rexnord with respect to certain aspects of the DDTL Facility.
13. Fair Value Measurements
21
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.
Fair Value of Financial Instruments
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.
| Fair Value as of June 30, 2021 | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Deferred compensation assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Deferred compensation liabilities | ||||||||||||||||||||||||||
| Fair Value as of December 31, 2020 | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Deferred compensation assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Deferred compensation liabilities | ||||||||||||||||||||||||||
There were no transfers of assets between levels at June 30, 2021 and December 31, 2020, respectively.
Fair Value of Non-Derivative Financial Instruments
22
14. Commitments 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. The following table presents changes in the Company's product warranty liability (in millions):
| Six Months Ended | ||||||||||||||
| June 30, 2021 | June 30, 2020 | |||||||||||||
| Balance at beginning of period | $ | $ | ||||||||||||
| Acquired obligations | ||||||||||||||
| Charged to operations | ||||||||||||||
| Claims settled | ( | ( | ||||||||||||
| Balance at end of period | $ | $ | ||||||||||||
Contingencies:
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 $900 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 ten 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 one 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. In early 2020, Rexnord Industries entered into an administrative order with the USEPA to do remediation work on its Downers Grove property. The remediation work started in 2020 and is on-going. 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, including the costs of the remediation work pursuant to the 2020 administrative order, and has paid 100 % of the costs to date.
•Multiple lawsuits (with approximately 300 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 100 % 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 100 % 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.
23
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 100 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 100 % of the costs to date.
Certain Water Management subsidiaries are also subject to asbestos litigation. As of June 30, 2021, Zurn and numerous other unrelated companies were defendants in approximately 5,000 asbestos related lawsuits representing approximately 7,000 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 June 30, 2021, 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 ten years to be approximately $59.0 million, of which Zurn expects its insurance carriers to pay approximately $42.0 million in the next ten years on such claims, with the balance of the estimated liability being paid in subsequent years. The $59.0 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 June 30, 2021, is in excess of the 10 year estimated exposure, and accordingly, believes that all current claims are covered by insurance.
As of June 30, 2021, the Company had a recorded receivable from its insurance carriers of $59.0 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 one 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 was 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 utilized a seven year claims fund, which was capped at $20.0 million, and was funded in installments over the seven year period based on claim activity and minimum funding criteria. The seven year filing period expired on April 1, 2020. Any claims after April 1, 2020 are time barred. The Company expects to make payment on any remaining timely filed claims and close out the settlement fund. The Company has recorded an accrual for the balance of this liability.
24
15. Retirement Benefits
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||
| Pension Benefits: | ||||||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Interest cost | ||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ||||||||||||||||||||||
| Recognition of actuarial losses | ||||||||||||||||||||||||||
| Net periodic benefit cost | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||
| Other Postretirement Benefits: | ||||||||||||||||||||||||||
| Interest cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Amortization: | ||||||||||||||||||||||||||
| Prior service credit | ( | ( | ( | ( | ||||||||||||||||||||||
| Recognition of actuarial gains | ( | |||||||||||||||||||||||||
| Net periodic benefit cost | $ | $ | $ | $ | ||||||||||||||||||||||
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 income (expense), net. The Company recognizes the net actuarial gains or losses in excess of the corridor in operating results during the final quarter of each fiscal year (or upon any required re-measurement event). During the three months ended March 31, 2020, the Company performed its annual remeasurement as of its previous fiscal year ended March 31, 2020, which resulted in the recognition of a $35.8 million non-cash actuarial loss during the six months ended June 30, 2020. This amount is recorded within Actuarial loss on pension and postretirement benefit obligations in the condensed consolidated statements of operations.
During the six months ended June 30, 2021 and June 30, 2020, the Company made contributions of $1.8 million and $1.1 million, respectively, to its U.S. qualified pension plan trusts.
See Note 16, Retirement Benefits, to the audited consolidated financial statements of the Company's December 31, 2020 Transition Report on Form 10-K for further information regarding retirement benefits.
16. Stock-Based Compensation
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 six months ended June 30, 2021, the Company recognized $12.2 million and $27.0 million of stock-based compensation expense, respectively. For the three and six months ended June 30, 2020, the Company recognized $13.3 million and $21.5 million of stock-based compensation expense, respectively.
| Award Type | Number of Awards | Weighted Average Grant-Date Fair Value | ||||||||||||
| Stock options | $ | |||||||||||||
| Restricted stock units | $ | |||||||||||||
| Performance stock units | $ | |||||||||||||
| Common stock | $ | |||||||||||||
See Note 15, Stock-Based Compensation, to the audited consolidated financial statements included in the Company's Transition Report on Form 10-K for the Transition Period ended December 31, 2020, for further information regarding stock-based compensation.
25
17. Business Segment Information
26
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.
Business Segment Information:
(in Millions)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||
| Net sales | ||||||||||||||||||||||||||
| Process & Motion Control | $ | $ | $ | $ | ||||||||||||||||||||||
| Water Management | ||||||||||||||||||||||||||
| Consolidated net sales | ||||||||||||||||||||||||||
| Income from operations | ||||||||||||||||||||||||||
| Process & Motion Control | ||||||||||||||||||||||||||
| Water Management | ||||||||||||||||||||||||||
| Corporate | ( | ( | ( | ( | ||||||||||||||||||||||
| Consolidated income from operations | ||||||||||||||||||||||||||
| Non-operating expense: | ||||||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | ||||||||||||||||||||||
| Actuarial loss on pension and postretirement benefit obligations | ( | |||||||||||||||||||||||||
| Other income (expense), net | ( | |||||||||||||||||||||||||
| Income before income taxes | ||||||||||||||||||||||||||
| Provision for income taxes | ( | ( | ( | ( | ||||||||||||||||||||||
| Equity method investment income (loss) | ( | |||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||
| Non-controlling interest income | ||||||||||||||||||||||||||
| Net income attributable to Rexnord | $ | $ | $ | $ | ||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Process & Motion Control | $ | $ | $ | $ | ||||||||||||||||||||||
| Water Management | ||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||
| Consolidated | $ | $ | $ | $ | ||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||
| Process & Motion Control | $ | $ | $ | $ | ||||||||||||||||||||||
| Water Management | ||||||||||||||||||||||||||
| Consolidated | $ | $ | $ | $ | ||||||||||||||||||||||
27
18. Guarantor Subsidiaries
The following schedules present condensed consolidating financial information as of June 30, 2021 and December 31, 2020, and for the three and six month periods ended June 30, 2021 and 2020 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.
Condensed Consolidating Balance Sheets
June 30, 2021
(in millions)
| Parent | Issuers | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Receivables, net | ||||||||||||||||||||||||||||||||||||||
| Inventories | ||||||||||||||||||||||||||||||||||||||
| Income tax receivable | ||||||||||||||||||||||||||||||||||||||
| Other current assets | ||||||||||||||||||||||||||||||||||||||
| Total current assets | ||||||||||||||||||||||||||||||||||||||
| Property, plant and equipment, net | ||||||||||||||||||||||||||||||||||||||
| Intangible assets, net | ||||||||||||||||||||||||||||||||||||||
| Goodwill | ||||||||||||||||||||||||||||||||||||||
| Investment in: | ||||||||||||||||||||||||||||||||||||||
| Issuer subsidiaries | — | — | — | ( | — | |||||||||||||||||||||||||||||||||
| Guarantor subsidiaries | — | — | — | ( | — | |||||||||||||||||||||||||||||||||
| Non-guarantor subsidiaries | — | — | — | ( | — | |||||||||||||||||||||||||||||||||
| Other assets | — | |||||||||||||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||
| Liabilities and stockholders' equity | ||||||||||||||||||||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||||||||||||||||||||
| Current maturities of debt | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Trade payables | ||||||||||||||||||||||||||||||||||||||
| Compensation and benefits | ||||||||||||||||||||||||||||||||||||||
| Current portion of pension and postretirement benefit obligations | ||||||||||||||||||||||||||||||||||||||
| Other current liabilities | ||||||||||||||||||||||||||||||||||||||
| Total current liabilities | ||||||||||||||||||||||||||||||||||||||
| Long-term debt | ||||||||||||||||||||||||||||||||||||||
| Note payable to (receivable from) affiliates, net | ( | |||||||||||||||||||||||||||||||||||||
| Pension and postretirement benefit obligations | ||||||||||||||||||||||||||||||||||||||
| Deferred income taxes | ||||||||||||||||||||||||||||||||||||||
| Other liabilities | ||||||||||||||||||||||||||||||||||||||
| Total liabilities | ( | |||||||||||||||||||||||||||||||||||||
| Total stockholders' equity | ( | |||||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||
28
Condensed Consolidating Balance Sheets
December 31, 2020
(in millions)
| Parent | Issuers | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Receivables, net | ||||||||||||||||||||||||||||||||||||||
| Inventories | ||||||||||||||||||||||||||||||||||||||
| Income tax receivable | ||||||||||||||||||||||||||||||||||||||
| Other current assets | ||||||||||||||||||||||||||||||||||||||
| Total current assets | ||||||||||||||||||||||||||||||||||||||
| Property, plant and equipment, net | ||||||||||||||||||||||||||||||||||||||
| Intangible assets, net | ||||||||||||||||||||||||||||||||||||||
| Goodwill | ||||||||||||||||||||||||||||||||||||||
| Investment in: | ||||||||||||||||||||||||||||||||||||||
| Issuer subsidiaries | — | — | — | ( | — | |||||||||||||||||||||||||||||||||
| Guarantor subsidiaries | — | — | — | ( | — | |||||||||||||||||||||||||||||||||
| Non-guarantor subsidiaries | — | — | — | ( | — | |||||||||||||||||||||||||||||||||
| Other assets | — | |||||||||||||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||
| Liabilities and stockholders' equity | ||||||||||||||||||||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||||||||||||||||||||
| Current maturities of debt | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Trade payables | ||||||||||||||||||||||||||||||||||||||
| Compensation and benefits | ||||||||||||||||||||||||||||||||||||||
| Current portion of pension and postretirement benefit obligations | ||||||||||||||||||||||||||||||||||||||
| Other current liabilities | ||||||||||||||||||||||||||||||||||||||
| Total current liabilities | ||||||||||||||||||||||||||||||||||||||
| Long-term debt | ||||||||||||||||||||||||||||||||||||||
| Note payable to (receivable from), net | ( | |||||||||||||||||||||||||||||||||||||
| Pension and postretirement benefit obligations | ||||||||||||||||||||||||||||||||||||||
| Deferred income taxes | ||||||||||||||||||||||||||||||||||||||
| Other liabilities | ||||||||||||||||||||||||||||||||||||||
| Total liabilities | ( | |||||||||||||||||||||||||||||||||||||
| Total stockholders' equity | ( | |||||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||
29
Condensed Consolidating Statements of Operations
For the Six Months Ended June 30, 2021
(in millions)
| Parent | Issuers | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Cost of sales | ( | ||||||||||||||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||||||||||||||
| Restructuring and other similar charges | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||||||||||||||
| Non-operating income (expense): | |||||||||||||||||||||||||||||||||||
| Interest income (expense), net: | |||||||||||||||||||||||||||||||||||
| To third parties | ( | ( | ( | ||||||||||||||||||||||||||||||||
| To affiliates | ( | ( | |||||||||||||||||||||||||||||||||
| Other (expense) income, net | ( | ||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||||||||||||||
| Provision for income taxes | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Equity method investment income | |||||||||||||||||||||||||||||||||||
| Income (loss) before equity in earnings of subsidiaries | ( | ||||||||||||||||||||||||||||||||||
| Equity in income of subsidiaries | ( | ||||||||||||||||||||||||||||||||||
| Net income | ( | ||||||||||||||||||||||||||||||||||
| Non-controlling interest income | |||||||||||||||||||||||||||||||||||
| Net income attributable to Rexnord | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
30
Condensed Consolidating Statements of Operations
For the Three Months Ended June 30, 2021
(in millions)
| Parent | Issuers | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Cost of sales | ( | ||||||||||||||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||||||||||||||
| Restructuring and other similar charges | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||||||||||||||
| Non-operating income (expense): | |||||||||||||||||||||||||||||||||||
| Interest income (expense), net: | |||||||||||||||||||||||||||||||||||
| To third parties | ( | ( | ( | ||||||||||||||||||||||||||||||||
| To affiliates | ( | ( | |||||||||||||||||||||||||||||||||
| Other (expense) income, net | ( | ||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||||||||||||||
| Provision for income taxes | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Equity method investment income | |||||||||||||||||||||||||||||||||||
| Income (loss) before equity in earnings of subsidiaries | ( | ||||||||||||||||||||||||||||||||||
| Equity in income of subsidiaries | ( | ||||||||||||||||||||||||||||||||||
| Net income | ( | ||||||||||||||||||||||||||||||||||
| Non-controlling interest income | |||||||||||||||||||||||||||||||||||
| Net income attributable to Rexnord | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
31
Condensed Consolidating Statements of Operations
For the Six Months Ended June 30, 2020
(in millions)
| Parent | Issuers | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Cost of sales | ( | ||||||||||||||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||||||||||||||
| Restructuring and other similar charges | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||||||||||||||
| Non-operating income (expense): | |||||||||||||||||||||||||||||||||||
| Interest income (expense), net: | |||||||||||||||||||||||||||||||||||
| To third parties | ( | ( | ( | ||||||||||||||||||||||||||||||||
| To affiliates | ( | ( | |||||||||||||||||||||||||||||||||
| Actuarial loss on pension and postretirement benefit obligations | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Other expense, net | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||||||||||||||
| Provision for income taxes | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Equity method investment loss | ( | ( | |||||||||||||||||||||||||||||||||
| Income (loss) before equity in earnings of subsidiaries | ( | ||||||||||||||||||||||||||||||||||
| Equity in income of subsidiaries | ( | ||||||||||||||||||||||||||||||||||
| Net income | ( | ||||||||||||||||||||||||||||||||||
| Non-controlling interest income | |||||||||||||||||||||||||||||||||||
| Net income attributable to Rexnord | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
32
Condensed Consolidating Statements of Operations
For the Three Months Ended June 30, 2020
(in millions)
| Parent | Issuers | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Cost of sales | ( | ||||||||||||||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||||||||||||||
| Restructuring and other similar charges | ( | ||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||||||||||||||
| Non-operating income (expense): | |||||||||||||||||||||||||||||||||||
| Interest income (expense), net: | |||||||||||||||||||||||||||||||||||
| To third parties | ( | ( | ( | ||||||||||||||||||||||||||||||||
| To affiliates | ( | ( | |||||||||||||||||||||||||||||||||
| Other (expense) income, net | ( | ||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||||||||||||||
| Provision for income taxes | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Equity method investment income | |||||||||||||||||||||||||||||||||||
| Income (loss) before equity in earnings of subsidiaries | ( | ||||||||||||||||||||||||||||||||||
| Equity in income of subsidiaries | ( | ||||||||||||||||||||||||||||||||||
| Net income | ( | ||||||||||||||||||||||||||||||||||
| Non-controlling interest income | |||||||||||||||||||||||||||||||||||
| Net income attributable to Rexnord | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
33
Condensed Consolidating Statements of Cash Flows
For the Six Months Ended June 30, 2021
(in millions)
| Parent | Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||
| Operating activities | ||||||||||||||||||||||||||||||||||||||
| Cash provided by operating activities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Investing activities | ||||||||||||||||||||||||||||||||||||||
| Expenditures for property, plant and equipment | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Acquisitions, net of cash acquired | ( | ( | ||||||||||||||||||||||||||||||||||||
| Proceeds from dispositions of long-lived assets | ||||||||||||||||||||||||||||||||||||||
| Cash (used for) provided by investing activities | ( | ( | ||||||||||||||||||||||||||||||||||||
| Financing activities | ||||||||||||||||||||||||||||||||||||||
| Repayments of debt | ( | ( | ||||||||||||||||||||||||||||||||||||
| Proceeds from exercise of stock options | ||||||||||||||||||||||||||||||||||||||
| Taxes withheld and paid on employees' share-based payment awards | ( | ( | ||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ||||||||||||||||||||||||||||||||||||
| Payment of common stock dividend | ( | ( | ||||||||||||||||||||||||||||||||||||
| Cash used for financing activities | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ||||||||||||||||||||||||||||||||||||||
| (Decrease) increase in cash, cash equivalents and restricted cash | ( | |||||||||||||||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | ||||||||||||||||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
34
Condensed Consolidating Statements of Cash Flows
For the Six Months Ended June 30, 2020
(in millions)
| Parent | Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||
| Operating activities | ||||||||||||||||||||||||||||||||||||||
| Cash provided by operating activities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Investing activities | ||||||||||||||||||||||||||||||||||||||
| Expenditures for property, plant and equipment | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Acquisitions, net of cash acquired | ( | ( | ||||||||||||||||||||||||||||||||||||
| Proceeds from dispositions of long-lived assets | ||||||||||||||||||||||||||||||||||||||
| Cash used for investing activities | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Financing activities | ||||||||||||||||||||||||||||||||||||||
| Proceeds from borrowings of long-term debt | ||||||||||||||||||||||||||||||||||||||
| Repayments of debt | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ||||||||||||||||||||||||||||||||||||
| Payment of common stock dividends | ( | ( | ||||||||||||||||||||||||||||||||||||
| Proceeds from exercise of stock options | ||||||||||||||||||||||||||||||||||||||
| Taxes withheld and paid on employees' share-based payment awards | ( | ( | ||||||||||||||||||||||||||||||||||||
| Cash (used for) provided by financing activities | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ( | ||||||||||||||||||||||||||||||||||||
| Increase in cash, cash equivalents and restricted cash | ||||||||||||||||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | ||||||||||||||||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
35
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 Transition Report on Form 10-K for the nine month transition period ended December 31, 2020 (the "Transition Period").
Fiscal Year
Following the end of our fiscal 2020, we transitioned from a March 31 fiscal year-end date to a December 31 fiscal year-end date. Throughout this MD&A, we refer to the period from April 1, 2020 through June 30, 2020, as the “three months ended June 30, 2020” or the “quarter ended June 30, 2020.” We refer to the period from April 1, 2021 through June 30, 2021, as the "three months ended June 30, 2021" or the “quarter ended June 30, 2021.”
Expected Spin-Off of Process & Motion Control Segment
On February 15, 2021, Rexnord and Regal entered into definitive agreements whereby Rexnord will separate its Process & Motion Control segment by way of a tax-free spin-off to Rexnord’s stockholders and then immediately combine it with Regal in a RMT transaction. Closing of this transaction is subject to various closing conditions, including the receipt of regulatory approvals, receipt of the approval of Regal and Rexnord stockholders (which each of Regal and Rexnord will solicit at special meetings of their respective stockholders at a later date), and other customary closing conditions. This transaction is expected to close during the second half of 2021.
Critical Accounting Policies and Estimates
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 Transition Report on Form 10-K for the Transition Period 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 June 30, 2021, and during the period from January 1, 2021 through June 30, 2021, 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.
COVID-19 Pandemic
The ongoing coronavirus ("COVID-19") pandemic and the actions taken by various governments and third parties to combat the spread of COVID-19 (including, in some cases, mandatory quarantines and other suspensions of non-essential business operations) have led to disruptions in our manufacturing and distribution operations and supply chains, including temporary reductions or suspensions of operations at some of our manufacturing and distribution locations around the world. In addition, our suppliers, business partners and customers have also experienced similar negative impacts from the COVID-19 pandemic. However, as of June 30, 2021, essentially all of our global facilities were operating with only intermittent interruptions and we are not currently experiencing any significant issues with respect to our distribution operations and supply chains. We remain focused on the health and well-being of our associates and have undertaken numerous actions within our offices and manufacturing sites that are intended to minimize the spread of COVID-19, including implementing work from home policies, establishing social distancing protocols for associates while at work and providing associates with access to numerous collaboration and productivity tools to facilitate communication in lieu of travel and face-to-face meetings.
36
In order to reduce our cash outflows during this period of uncertainty and economic volatility, we implemented workforce reductions in 2020 and reductions of non-essential spending. Our objective with respect to these actions was to attempt to control the downside risk to our financial results, while ensuring that we maintain the capacity and flexibility to fully participate in the recovery. While the duration of the COVID-19 pandemic is currently unknown and it is not possible at this time to estimate the scope and severity of the impact that the pandemic could have on our operations, the measures taken, and those that may be taken in the future, by the governments of countries affected, actions taken to protect employees, actions taken to shutdown or temporarily discontinue operations in certain locations, changes in customer buying patterns and the impact of the pandemic on various business activities in affected countries and the economy generally, it could adversely affect our financial condition, results of operations and cash flows.
Acquisitions and Divestiture
On April 16, 2021, we acquired substantially all of the assets of Advance Technology Solutions, LLC (d/b/a ATS GREASEwatch) ("ATS GREASEwatch") for a total cash purchase price of $4.5 million. ATS GREASEwatch, headquartered in Saginaw, Michigan, develops, manufactures and markets remote tank monitoring devices, alarms, software and services for various applications and provides technology to enhance and expand our current product offerings within the Company's existing Water Management platform.
On December 11, 2020, we acquired substantially all of the assets of Hadrian Manufacturing Inc. and 100% of the stock of Hadrian, Inc. (collectively, "Hadrian") for a total cash purchase price of $101.3 million. Hadrian, based in Burlington, Ontario, Canada, manufactures washroom partitions and lockers primarily used in institutional and commercial end markets and complements our existing Water Management platform.
On November 24, 2020, we acquired the remaining non-controlling interest in a joint venture for a cash purchase price of $0.3 million. The acquisition of the remaining minority interest was not material to the Company's consolidated statements of operations or financial position.
On October 1, 2020, we completed the sale of our gearbox product line in China within our Process & Motion Control platform for aggregate cash consideration of $5.8 million. The gearbox product line was not material to the Company's consolidated statements of operations or financial position and did not meet the criteria to be presented as discontinued operations.
On January 28, 2020, we acquired substantially all of the assets of Just Manufacturing Company ("Just Manufacturing") for a cash purchase price of $59.4 million, excluding transaction costs and net of cash 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 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. StainlessDrains.com, headquartered in Greenville, Texas, added complementary product lines to our existing Water Management platform.
Restructuring and Other Similar Costs
During the three and six months ended June 30, 2021, we 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 the refinement of our overall product portfolio. These restructuring actions primarily resulted in workforce reductions, impairment of related manufacturing facilities, equipment and intangible assets, lease termination costs, and other facility rationalization costs. We expect to continue executing similar initiatives to optimize our operating margin and manufacturing footprint. As we continue to evaluate the impact of the ongoing COVID-19 pandemic and the resulting effects on the global economy, we may also execute additional restructuring actions. As such, we expect further expenses related to workforce reductions, lease termination costs, and other facility rationalization costs on our overall manufacturing capacity, and refining our overall product portfolio. For the three and six months ended June 30, 2021, restructuring charges totaled $1.1 million and $1.7 million, respectively. For the three and six months ended June 30, 2020, restructuring charges totaled $1.7 million and $8.3 million, respectively. Refer to Item 1, Note 3, Restructuring and Other Similar Charges for further information.
37
Results of Operations
Three Months Ended June 30, 2021 compared with the Three Months Ended June 30, 2020:
Net sales
(Dollars in Millions)
| Three Months Ended | |||||||||||||||||||||||
| June 30, 2021 | June 30, 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 | % | |||||||||||||||
Process & Motion Control
Process & Motion Control net sales were $324.6 million during the three months ended June 30, 2021, an increase of 18% as compared to the prior year. Excluding a 4% increase to net sales associated with foreign currency translation and a 2% decrease from a small divestiture, core sales increased by 16% year over year as core sales growth of 21% in our non-aerospace markets, driven by growth across nearly all product categories and geographies, was partially offset by the anticipated core sales decline of 15% in our Aerospace markets as a result of the lower year over year backlog given the change in customer buying patterns due to the COVID-19 pandemic over the past 12 months.
Water Management
Water Management net sales were $243.7 million during the three months ended June 30, 2021, an increase of 39% year over year. Excluding a 1% increase to net sales associated with foreign currency transaction and a 9% increase in net sales resulting from our prior-year acquisition of Hadrian, core sales increased 29% year over year driven by increased demand across all of our product categories.
Income from operations
(Dollars in Millions)
| Three Months Ended | |||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | Change | % Change | ||||||||||||||||||||
| Process & Motion Control | $ | 66.8 | $ | 39.6 | $ | 27.2 | 68.7 | % | |||||||||||||||
| % of net sales | 20.6 | % | 14.4 | % | 6.2 | % | |||||||||||||||||
| Water Management | 52.8 | 40.1 | 12.7 | 31.7 | % | ||||||||||||||||||
| % of net sales | 21.7 | % | 23.0 | % | (1.3) | % | |||||||||||||||||
| Corporate | (16.0) | (13.7) | (2.3) | (16.8) | % | ||||||||||||||||||
| Consolidated | $ | 103.6 | $ | 66.0 | $ | 37.6 | 57.0 | % | |||||||||||||||
| % of net sales | 18.2 | % | 14.7 | % | 3.5 | % | |||||||||||||||||
Process & Motion Control
Process & Motion Control income from operations during the three months ended June 30, 2021 was $66.8 million, or 20.6% of net sales. Income from operations as a percentage of net sales increased by 620 basis points year over year due to gains recognized on the sale of certain fixed assets, benefits from cost reduction and productivity initiatives and the favorable impact of higher year over year sales growth, partially offset by the benefit of temporary cost reduction actions in the prior year second quarter in response to the COVID-19 pandemic.
Water Management
Water Management income from operations was $52.8 million during the three months ended June 30, 2021, or 21.7% of net sales. Income from operations as a percentage of net sales decreased by 130 basis points year over year as the favorable impact of higher sales growth year over year was more than offset by the temporary mix impact of the Hadrian acquisition, the year-over-year change in the adjustment to state inventories at last-in-first-out cost and the benefit of temporary cost reduction actions in the prior year second quarter in response to the COVID-19 pandemic.
Corporate
Corporate expenses were $16.0 million and $13.7 million during the three months ended June 30, 2021 and 2020, respectively. The increase in corporate expenses during the three months ended June 30, 2021, is primarily the result of lower spending and cost reduction actions taken in the prior year in response to the COVID-19 pandemic.
38
Interest expense, net
Interest expense, net was $11.7 million during the three months ended June 30, 2021, compared to $13.4 million during the three months ended June 30, 2020. The decrease in interest expense as compared to the prior year's period is primarily a result of the impact of lower outstanding borrowings and lower average interest rates. See Item 1, Note 12 Long-Term Debt for more information.
Other income, net
Other income, net during the three months ended June 30, 2021 and 2020, was $1.7 million and $0.4 million, respectively. Other income, net consists primarily of foreign currency transaction gains and losses and the non-service cost components associated with our defined benefit plans. The year-over-year change is primarily driven by lower year over year interest cost within the non-service cost components of our defined benefit plans.
Provision for income taxes
The income tax provision was $20.5 million during the three months ended June 30, 2021, compared to $17.2 million in the three months ended June 30, 2020. The effective income tax rate for the three months ended June 30, 2021 was 21.9% versus 32.5% in the three months ended June 30, 2020. The effective income tax rate for the three months ended June 30, 2021 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”), the accrual of unrecognized income tax benefits in which such realization is not deemed more-likely-than-not, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code and the accrual of various state income taxes, substantially offset by the recognition of certain previously unrecognized tax benefits due to the lapse of the applicable statutes of limitations and the recognition of income tax benefits associated with share-based payments and foreign-derived intangible income (“FDII”). The effective income tax rate for the three months ended June 30, 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 compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of withholding taxes associated with foreign dividends, and the accrual of various state income taxes, partially offset by the recognition of income tax benefits associated with share-based payments and FDII.
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 attributable to Rexnord
Net income attributable to Rexnord during the three months ended June 30, 2021, was $73.2 million compared to $35.6 million during the three months ended June 30, 2020. Diluted net income per share attributable to Rexnord for the three months ended June 30, 2021 and June 30, 2020, was $0.59 and $0.29, respectively, as a result of the factors described above.
Six Months Ended June 30, 2021 compared with the Six Months Ended June 30, 2020:
Net sales
(Dollars in Millions)
| Six Months Ended | |||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | Change | % Change | ||||||||||||||||||||
| Process & Motion Control | $ | 645.5 | $ | 638.0 | $ | 7.5 | 1.2 | % | |||||||||||||||
| Water Management | 448.9 | 358.1 | 90.8 | 25.4 | % | ||||||||||||||||||
| Consolidated | $ | 1,094.4 | $ | 996.1 | $ | 98.3 | 9.9 | % | |||||||||||||||
Process & Motion Control
Process & Motion Control net sales were $645.5 million and $638.0 million during the six months ended June 30, 2021 and 2020, respectively. Excluding a 3% increase to net sales associated with foreign currency translation and a 1% decrease from a small divestiture, core sales decreased by 1% year over year as the second quarter of 2021 core sales increase
39
discussed above was more than offset by the 13% core sales decrease in the first quarter of 2021 as a result of the lower level of order backlog entering the three months ended June 30, 2021 and changes in customer buying patterns given the COVID-19 pandemic. Net sales in our non-aerospace markets increased by 5% year over year which was offset by a 33% decrease in our aerospace markets.
Water Management
Water Management net sales were $448.9 million during the six months ended June 30, 2021, an increase of 25% year over year. Excluding a 1% increase to net sales associated with foreign currency translation and a 8% year over year increase in net sales resulting from our prior-year acquisitions of Just Manufacturing and Hadrian, core sales increased 16% driven by increased demand across the majority of our product categories.
Income from operations
(Dollars in Millions)
| Six Months Ended | |||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | Change | % Change | ||||||||||||||||||||
| Process & Motion Control | $ | 121.8 | $ | 101.0 | $ | 20.8 | 20.6 | % | |||||||||||||||
| % of net sales | 18.9 | % | 15.8 | % | 3.1 | % | |||||||||||||||||
| Water Management | 93.4 | 81.9 | 11.5 | 14.0 | % | ||||||||||||||||||
| % of net sales | 20.8 | % | 22.9 | % | (2.1) | % | |||||||||||||||||
| Corporate | (33.0) | (28.9) | (4.1) | (14.2) | % | ||||||||||||||||||
| Consolidated | $ | 182.2 | $ | 154.0 | $ | 28.2 | 18.3 | % | |||||||||||||||
| % of net sales | 16.6 | % | 15.5 | % | 1.1 | % | |||||||||||||||||
Process & Motion Control
Process & Motion Control income from operations during the six months ended June 30, 2021 was $121.8 million, or 18.9% of net sales. Income from operations as a percentage of net sales increased by 310 basis points year over year primarily as a result of gains recognized on the sale of certain fixed assets, lower year-over-year restructuring expense and benefits obtained from our cost reduction and productivity initiatives, partially offset by higher year over year stock based compensation expense and the benefit of temporary cost reduction actions in the prior year second quarter in response to the COVID-19 pandemic.
Water Management
Water Management income from operations was $93.4 million during the six months ended June 30, 2021, or 20.8% of net sales. Income from operations as a percentage of net sales decreased by 210 basis points year over year as the favorable impact of higher sales growth year over year was primarily more than offset by the year-over-year change in the adjustment to state inventories at last-in-first-out cost, the temporary mix impact of the Hadrian acquisition and the benefit of temporary cost reduction actions in the prior year second quarter in response to the COVID-19 pandemic.
Corporate
Corporate expenses were $33.0 million and $28.9 million during the six months ended June 30, 2021 and 2020, respectively. The increase in corporate expenses during the six months ended June 30, 2021, is primarily the result of lower spending and cost reduction actions taken in the prior year in response to the COVID-19 pandemic.
Interest expense, net
Interest expense, net was $22.7 million during the six months ended June 30, 2021, compared to $26.8 million during the six months ended June 30, 2020. The decrease in interest expense as compared to the prior year's period is primarily a result of the impact of lower outstanding borrowings and lower average interest rates. See Item 1, Note 12 Long-Term Debt for more information.
Actuarial loss on pension and postretirement benefit obligations
There was no actuarial loss on pension and postretirement benefit obligations recognized in the six months ended June 30, 2021. Actuarial loss on pension and postretirement benefit obligations in the six months ended June 30, 2020, was $35.8 million. The non-cash actuarial loss recognized during the six months ended June 30, 2020, was primarily the result of
40
decreases in discount rates coupled with lower-than-expected asset returns, partially offset by decreases in life expectancy assumptions utilized within the remeasurement of our defined benefit plans in connection with our previous March 31st fiscal year end.
Other income (expense), net
Other income (expense), net during the six months ended June 30, 2021 and 2020 was $1.3 million and $(3.2) million, respectively. Other income (expense), net consists primarily of foreign currency transaction gains and losses and the non-service cost components associated with our defined benefit plans. The year-over-year change is primarily driven by changes in foreign currency rates and lower year over year interest cost within the non-service cost components of our defined benefit plans.
Provision for income taxes
The income tax provision was $37.7 million during the six months ended June 30, 2021, compared to $23.6 million in the six months ended June 30, 2020. The effective income tax rate for the six months ended June 30, 2021 was 23.4% versus 26.8% in the six months ended June 30, 2020. The effective income tax rate for the six months ended June 30, 2021 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, the accrual of unrecognized income tax benefits in which such realization is not deemed more-likely-than-not, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code and the accrual of various state income taxes, partially offset by the recognition of a discrete foreign financing-related income tax benefit, the recognition of certain previously unrecognized tax benefits due to the lapse of the applicable statutes of limitations and the recognition of income tax benefits associated with share-based payments and FDII. The effective income tax rate for the six months ended June 30, 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 compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of withholding taxes associated with foreign dividends, and the accrual of various state income taxes, partially offset by the recognition of certain previously unrecognized tax benefits due to the lapse of the applicable statutes of limitations as well as the recognition of income tax benefits associated with share-based payments and FDII.
Net income attributable to Rexnord
Net income attributable to Rexnord during the six months ended June 30, 2021, was $123.2 million compared to $64.1 million during the six months ended June 30, 2020. Diluted net income per share attributable to Rexnord for the six months ended June 30, 2021 and June 30, 2020, was $0.99 and $0.52, respectively, as a result of the factors described above.
41
Non-GAAP Financial Measures
Non-GAAP financial measures are intended to supplement and not replace financial measures prepared in accordance with GAAP. The following non-GAAP financial measures are utilized by management in comparing our operating performance on a consistent basis. We believe that these financial measures are appropriate to enhance an overall understanding of our underlying operating performance trends compared to historical and prospective periods and our peers. Management also believes that these measures are useful to investors in their analysis of our results of operations and provide improved comparability between fiscal periods as well as insight into the compliance with our debt covenants. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information calculated in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures.
Core sales
Core sales excludes the impact of acquisitions (such as the Hadrian and Just Manufacturing acquisitions), divestitures 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 in the six months ended June 30, 2021, of $123.2 million and Adjusted EBITDA for the same period of $253.6 million. See “Covenant Compliance” for a reconciliation of Adjusted EBITDA to net income attributable to Rexnord.
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 June 30, 2021, our net leverage ratio was 1.9 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.
42
“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 June 30, 2021, 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.
43
Set forth below is a reconciliation of net income attributable to Rexnord common stockholders to Adjusted EBITDA for the periods indicated below.
| (in millions) | Three months ended June 30, 2020 | Nine months ended December 31, 2020 | Six months ended June 30, 2021 | Twelve months ended June 30, 2021 | |||||||||||||||||||
| Net income attributable to Rexnord | $ | 35.6 | $ | 118.2 | $ | 123.2 | $ | 205.8 | |||||||||||||||
| Non-controlling interest income | 0.2 | 0.4 | 0.2 | 0.4 | |||||||||||||||||||
| Equity method investment income | — | (0.2) | (0.3) | (0.5) | |||||||||||||||||||
| Income tax provision | 17.2 | 36.3 | 37.7 | 56.8 | |||||||||||||||||||
| Actuarial loss on pension and postretirement benefit obligations | — | 1.6 | — | 1.6 | |||||||||||||||||||
| Other income, net (1) | (0.4) | (4.5) | (1.3) | (5.4) | |||||||||||||||||||
| Interest expense, net | 13.4 | 36.6 | 22.7 | 45.9 | |||||||||||||||||||
| Depreciation and amortization | 21.7 | 67.0 | 46.6 | 91.9 | |||||||||||||||||||
| EBITDA | $ | 87.7 | 255.4 | 228.8 | 396.5 | ||||||||||||||||||
| Adjustments to EBITDA: | |||||||||||||||||||||||
| Restructuring and other similar charges (2) | 1.7 | 14.6 | 1.7 | 14.6 | |||||||||||||||||||
| Stock-based compensation expense | 13.3 | 36.6 | 27.0 | 50.3 | |||||||||||||||||||
| Last-in first-out inventory adjustments (3) | — | — | 4.7 | 4.7 | |||||||||||||||||||
| Acquisition-related fair value adjustment | 0.9 | 1.2 | 0.6 | 0.9 | |||||||||||||||||||
| Other, net (4) | (0.5) | (0.3) | (9.2) | (9.0) | |||||||||||||||||||
| Subtotal of adjustments to EBITDA | 15.4 | 52.1 | 24.8 | 61.5 | |||||||||||||||||||
| Adjusted EBITDA | $ | 103.1 | $ | 307.5 | $ | 253.6 | $ | 458.0 | |||||||||||||||
Pro forma adjustment for acquisitions (5) | 3.4 | ||||||||||||||||||||||
| Pro forma Adjusted EBITDA | 461.4 | ||||||||||||||||||||||
| Consolidated indebtedness (6) | $ | 887.8 | |||||||||||||||||||||
| Total net leverage ratio (7) | 1.9 | ||||||||||||||||||||||
__________________________________
(1)Other income, net for the periods indicated, consists primarily of gains and losses from foreign currency transactions and the non-service cost components of net periodic benefit costs associated with our defined benefit plans.
(2)Restructuring and other similar charges is comprised of costs associated with workforce reductions, 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 of gains and losses on the disposition of long-lived assets.
(5)Represents a pro forma adjustment to include Adjusted EBITDA related to the acquisition of Hadrian, which was permitted by our credit agreement. The pro forma adjustment includes the period from July 1, 2020, through the date of the Hadrian acquisition. See Item 1, Note 2, Acquisitions and Divestiture 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 $304.1 million (as defined by the credit agreement) at June 30, 2021.
(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.
44
Liquidity and Capital Resources
Our primary sources of liquidity are available cash and cash equivalents, cash flow from operations, and borrowing availability of up to $264.0 million under our revolving credit facility.
As of June 30, 2021, we had $390.7 million of cash and cash equivalents and $255.8 million of additional borrowing capacity. As of June 30, 2021, the available borrowings under our credit facility were reduced by $8.2 million due to outstanding letters of credit. As of December 31, 2020, we had $255.6 million of cash and cash equivalents and approximately $339.2 million of additional borrowing capacity ($261.0 million of available borrowings under our revolving credit facility and $78.2 million available under our accounts receivable securitization program).
Our revolving credit facility is available to fund our working capital requirements, capital expenditures and for other general corporate purposes.
In the six months ended June 30, 2021, the Company and Land Newco, Inc., a wholly-owned indirect subsidiary of the Company (“Land”), each entered into a debt commitment letter with various lenders in connection with the proposed transaction with Regal disclosed in Item 1, Note 1, Basis of Presentation and Significant Accounting Policies. The lenders committed to provide us with up to $708.0 million in an aggregate principal amount of senior term loans under a senior secured term loan facility and up to $200.0 million in an aggregate principal amount of senior revolving loans under a senior secured revolving credit facility. In addition, Land entered into a land commitment letter to which the lenders committed to provide senior bridge loans under a 364-day senior bridge loan credit facility in an aggregate principal amount of up to approximately $486.8 million. Land also entered into the DDTL Facility providing for a delayed draw term loan facility with commitments thereunder in an aggregate principal amount of approximately $486.8 million. The DDTL Facility may be drawn in connection with the consummation of the Transactions in order to fund the Land Cash Payment. Upon the effectiveness of the DDTL Facility, the land commitment letter and the commitments thereunder were terminated. No amounts may be drawn under the DDTL Facility until the closing. Regal has agreed to indemnify Rexnord with respect to certain aspects of the DDTL Facility.
Cash Flows
Cash provided by operating activities was $145.0 million and $171.5 million during the six months ended June 30, 2021 and 2020, respectively. Higher trade working capital and the impact of timing of payments on accrued expenses were partially offset by higher net income generated during the six months ended June 30, 2021.
Cash used for investing activities was $4.4 million during the six months ended June 30, 2021 compared to $81.7 million during the six months ended June 30, 2020. Investing activities during the six months ended June 30, 2021, primarily included $14.0 million of capital expenditures and $3.4 million for the acquisition of ATS GREASEwatch, partially offset by the receipt of $13.0 million in connection with the sale of certain long-lived assets. Investing activities during the six months ended June 30, 2020, included $24.4 million of capital expenditures and $59.4 million for the acquisition of Just Manufacturing, partially offset by the receipt of $2.1 million in connection with the sale of certain long-lived assets.
Cash used for financing activities was $5.6 million during the six months ended June 30, 2021, compared to $9.6 million during the six months ended June 30, 2020. During the six months ended June 30, 2021, we utilized $1.1 million of cash for payments on outstanding debt, $21.6 million for the payment of common stock dividends and $0.9 million to repurchase shares of common stock. The six months ended June 30, 2021, also includes $19.4 million of cash proceeds associated with stock option exercises, partially offset by $1.4 million of cash used for the payment of withholding taxes on employees' share-based awards. During the six months ended June 30, 2020, we borrowed a net $74.4 million under our credit facilities and we utilized $19.4 million for the payment of common stock dividends and $80.7 million to repurchase common stock. The six months ended June 30, 2020, also includes $25.5 million of cash proceeds associated with stock option exercises, partially offset by $9.4 million of cash used for the payment of withholding taxes on employees' share-based awards.
Indebtedness
As of June 30, 2021, we had $1,191.9 million of total indebtedness outstanding as follows (in millions):
| Total Debt at June 30, 2021 | Current Maturities of Debt | Long-term Portion | ||||||||||||||||||
| Term loan (1) | $ | 622.0 | $ | — | $ | 622.0 | ||||||||||||||
| 4.875% Senior Notes due 2025 (2) | 496.7 | — | 496.7 | |||||||||||||||||
| Finance leases and other subsidiary debt | 73.2 | 2.4 | 70.8 | |||||||||||||||||
| Total | $ | 1,191.9 | $ | 2.4 | $ | 1,189.5 | ||||||||||||||
___________________________________________
(1)Includes unamortized debt issuance costs of $3.0 million at June 30, 2021.
(2)Includes unamortized debt issuance costs of $3.3 million at June 30, 2021.
45
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 Transition Report on Form 10-K for the Transition Period ended December 31, 2020.
46
ITEM 4. CONTROLS AND PROCEDURES
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 June 30, 2021, 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.
47
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the information under the heading "Commitments and Contingencies" in Note 14 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 1A. RISK FACTORS
In addition to the risks and uncertainties discussed in this quarterly report on Form 10-Q, particularly those disclosed in the MD&A, see Part I, Item 1A, “Risk Factors,” in the Company’s Transition Report on Form 10-K for the Transition Period ended December 31, 2020. There have been no material changes to the Risk Factors except as set forth below:
Risks Related to the Transactions with Regal Beloit Corporation
We and Regal may be unable to satisfy the conditions or obtain the approvals required to complete the expected spin-off of the Process & Motion Control segment (the “Spin-Off”) and related transactions (collectively, the “Transactions”).
The consummation of the Transactions is subject to numerous conditions, including consummation of certain transactions contemplated by the Agreement and Plan of Merger, dated as of February 15, 2021 (the “Merger Agreement”) and the Separation and Distribution Agreement, dated as of February 15, 2021 (the “Separation Agreement”), the receipt of the approval of our stockholders and Regal’s shareholders, the receipt of regulatory approvals, and other closing conditions. Neither we nor Regal can make any assurances that the Transactions will be consummated on the terms or timeline currently contemplated, or at all. Both we and Regal have and will continue to expend time and resources and incur expenses related to the Transactions.
Both Regal and Land Newco, Inc., a wholly-owned indirect subsidiary of the Company (“Land”), are expected to need to obtain debt financing to complete the Transactions. Although commitment letters have been obtained from various lenders, the obligations of the lenders under the commitment letters are subject to the satisfaction or waiver of customary conditions, including, among others, the absence of any material adverse effect. Accordingly, there can be no assurance that these conditions will be satisfied or, if not satisfied, waived by the lenders. If Regal or Land is not able to obtain alternative financing on commercially reasonable terms, it could prevent the consummation of the Transactions.
We will incur significant costs related to the Transactions that could have an adverse effect on our liquidity, cash flows and operating results.
We expect to incur significant one-time costs in connection with the Transactions, including the cost of financing and other transaction costs, integration costs, and other costs that our management team believes are necessary to realize the anticipated synergies from the Transactions. In connection with the termination of the Merger Agreement under certain specified circumstances, we may be required to pay Regal a termination fee of $150 million. The incurrence of these costs could have a material adverse effect on our liquidity, cash flows and operating results in the periods in which they are incurred.
The market price of our common stock may decline as a result of the Transactions and the market price of our common stock after the consummation of the Transactions may be affected by factors different from those affecting the price of our common stock before the Transactions.
The market price of our common stock may decline as a result of the Transactions if we do not achieve the perceived benefits of the Transactions or if the effect of the Transactions on our financial results are not consistent with the expectations of financial or industry analysts. Our results of operations, as well as the market price of our common stock after the Transactions, may be affected by factors in addition to those currently affecting our results of operations and the market price of our common stock and other differences in assets and capitalization. Accordingly, our historical market price and financial results may not be indicative of these matters after the consummation of the Transactions.
The pendency of the Transactions could adversely affect our business and operations.
In connection with the pending Transactions, some of our current or prospective customers, borrowers, managers or vendors may delay or defer decisions related to their business dealings with us, which could negatively impact our revenues, earnings, cash flows and expenses, regardless of whether the Transactions are consummated. In addition, under the Merger Agreement, we and Regal with respect to the Process & Motion Control business are each subject to certain restrictions on the conduct of our respective business prior to completing the Transactions. These restrictions may prevent us from taking certain actions with respect to capital stock or equity awards, amending organizational documents, taking certain actions with respect to material contracts and benefit plans, pursuing certain strategic transactions, acquiring and disposing assets, undertaking certain capital projects, undertaking certain financing transactions or incurring certain indebtedness, changing accounting or tax filing practices, settling certain legal proceedings, failing to maintain insurance, abandoning or selling certain material intellectual
48
property and otherwise pursuing other actions that are not in the ordinary course of business, even if such actions could prove beneficial. These restrictions may impede our growth which could negatively impact our revenue, earnings and cash flows. Additionally, the pendency of the Transactions may make it more difficult for us to effectively retain and incentivize key personnel.
If the Reorganization and the Distributions do not qualify as tax-free under Sections 355 and 368(a) of the Internal Revenue Code (the “Code”), including as a result of an error in the determination of overlap shareholders or subsequent acquisitions of our common stock, then our stockholders may be required to pay substantial U.S. federal income taxes, and Land (guaranteed by Regal) may be obligated to indemnify us for such taxes imposed on us.
The obligation of us and Land to complete the Transactions is conditioned on receipt of a tax opinion , which will include an opinion to the effect that our transfer to Land of substantially all of the assets, and Land’s assumption from Rexnord of substantially all of the liabilities, of the Process & Motion Control business (the “Reorganization”), together with the series of distributions of all of the issued and outstanding shares of Land common stock from an indirect subsidiary of Rexnord to our stockholders.(the “Distributions”), will qualify as tax-free to us, Land and our stockholders, as applicable, for U.S. federal income tax purposes (collectively, the “Rexnord Tax Opinion”). The Rexnord Tax Opinion will be based on, among other things, certain representations and assumptions as to factual matters and certain covenants made by us, Regal and Land. The failure of any factual representation, assumption or covenant to be true, correct and complete in all material respects could adversely affect the validity of the opinion of counsel. An opinion of counsel represents counsel’s best legal judgment, is not binding on the Internal Revenue Service (the “IRS”) or the courts, and the IRS or the courts may not agree with the opinion. In addition, the opinion will be based on current law, and cannot be relied upon if current law changes with retroactive effect.
The Spin-Off will be taxable to us pursuant to Section 355(e) of the Code if there is a 50% or greater change in ownership of either us or Land, directly or indirectly, as part of a plan or series of related transactions that include the Spin-Off. For this purpose, any acquisitions of our, Land’s or Regal’s stock within the period beginning two years before the Spin-Off and ending two years after the Spin-Off are presumed to be a part of such plan, although we and Regal may be able to rebut that presumption. We have requested a private letter ruling from the IRS with respect to certain tax aspects of the Transactions, including matters relating to the nature and extent of shareholders who may be counted for tax purposes as overlap shareholders (i.e., investors who are both Rexnord stockholders and Regal shareholders immediately prior to the Transactions) for purposes of determining the exchange ratio in the Merger Agreement (the “IRS Ruling”). Assuming the IRS Ruling is received, the Merger Agreement provides that the number of shares of Regal common stock that may be issued in the Transactions is subject to increase at closing such that the former stockholders of Land (taking into account the overlap shareholders) own at least 50.8% of the outstanding Regal common stock for tax purposes immediately following the closing of the merger of Phoenix 2021, Inc., a wholly-owned subsidiary of Regal (“Merger Sub”) with and into Land, with Land surviving as a wholly-owned subsidiary of Regal (the “Merger”). This percentage is reduced to 50.1% if the IRS Ruling is not received or in certain other circumstances in which overlap shareholders are not counted for this purpose. If the IRS Ruling is received, the continuing validity of such ruling will be subject to the accuracy of factual representations and assumptions made in the ruling request. Moreover, the IRS Ruling, if received, will only describe the time, manner and methodology for measuring Overlap Shareholders and may be subject to varying interpretations. The actual determination and calculation of Overlap Shareholders will be made by us, Regal and each of our respective advisors based on the IRS Ruling, but no assurance can be given that the IRS will agree with these determinations or calculations. If the IRS were to determine that the Merger, as a result of an error in the determination of Overlap Shareholders, or other acquisitions of our, Land’s or Regal’s stock, either before or after the Spin-Off, resulted in a 50% or greater change in ownership and were part of a plan or series of related transactions that included the Spin-Off, such determination could result in significant tax to us. In certain circumstances and subject to certain limitations, under the Tax Matters Agreement, dated as of February 15, 2021 (the “Tax Matters Agreement”), Land (then a subsidiary of Regal) is required to indemnify us if the Distributions become taxable as a result of certain actions by Land or Regal or as a result of a miscalculation of the Overlap Shareholders. If this occurs and Land is required to indemnify us, this indemnification obligation could be substantial and could have a material adverse effect on Land and Regal, including with respect to financial condition and results of operations given that Regal has guaranteed the indemnification obligations of Land.
If the Merger does not qualify as a tax-free reorganization under Section 368(a) of the Code, our stockholders may be required to pay substantial U.S. federal income taxes.
The obligations of Land and Regal to consummate the Merger are conditioned, respectively, on our receipt of the Rexnord Tax Opinion and Regal’s receipt of the Regal Tax Opinion, in each case to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code. These opinions will be based upon, among other things, certain representations and assumptions as to factual matters and certain covenants made by us, Regal, Land and Merger Sub. The failure of any factual representation, assumption or covenant to be true, correct and complete in all material respects could adversely affect the validity of the opinions. An opinion of counsel represents counsel’s best legal judgment, is not binding on the IRS or the courts, and the IRS or the courts may not agree with the opinion. In addition, the opinions will be based on current law, and cannot be relied upon if current law changes with retroactive effect. If the Merger were taxable, U.S. holders,
49
as defined below, of Land would be considered to have made a taxable sale of their Land common stock to Regal, and such U.S. holders of Land would generally recognize taxable gain or loss on their receipt of Regal common stock in the Merger. Under the Tax Matters Agreement, Land is required to indemnify us if the Distributions become taxable as a result of certain actions by Land or Regal or as a result of a miscalculation of the overlap shareholders.
If the Merger is not completed by the outside date specified in the Merger Agreement, we or Regal may terminate the Merger Agreement.
Either we or Regal may terminate the Merger Agreement under certain circumstances, including if the Merger has not been consummated by November 15, 2021 (or any extensions of such date pursuant to the Merger Agreement). However, this termination right will not be available to a party if that party failed to fulfill its obligations under the Merger Agreement and that failure was the primary cause of the failure to consummate the Merger. If either party terminates the Merger Agreement, this could result in a material adverse impact on our results of operations.
Following consummation of the Transaction, we, Regal and Land will each be required to abide by potentially significant restrictions which could limit each company’s ability to undertake certain corporate actions (such as the issuance of common stock or the undertaking of certain business combinations) that otherwise could be advantageous.
The Tax Matters Agreement will impose certain restrictions on us, Regal and Land during the two-year period following the Spin-Off, subject to certain exceptions, with respect to actions that could cause the Reorganization and the Distributions to fail to qualify for their intended tax treatment. As a result of these restrictions, our, Regal’s and Land’s ability to engage in certain transactions, such as the issuance or purchase of stock or certain business combinations, may be limited.
If we, Regal or Land take any enumerated actions or omissions, or if certain events relating to us, Land or Regal occur that would cause the Reorganization or the Distributions to become taxable, the party whose actions or omissions (or event relating to) generally will be required to bear the cost of any resulting tax liability of ours (but not our stockholders). If the Reorganization or the Distributions became taxable, we would be expected to recognize a substantial amount of gain, which would result in a material amount of taxes. Any such taxes would be expected to be material to us or Regal, as applicable, and could cause its business, financial condition and operating results to suffer. These restrictions may reduce our and Regal’s ability to engage in certain business transactions that otherwise might be advantageous to them, which could adversely affect our or Regal’s respective business, results of operations, or financial condition.
50
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. On January 27, 2020, the Company's Board of Directors increased the remaining share repurchase authority under the Repurchase Program to $300.0 million. 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. The Company did not repurchase any shares during the three months ended June 30, 2021. A total of approximately $162.8 million of the existing repurchase authority remained under the Repurchase Program at June 30, 2021.
51
ITEM 6. EXHIBITS
| Exhibit No. | Description | Filed Herewith | ||||||||||||||||||
| 10.1 | ||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||
| 31.2 | X | |||||||||||||||||||
| 32.1 | X | |||||||||||||||||||
| 101.INS | 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.) | X | ||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||
| 104 | Cover Page Inline XBRL data (contained in Exhibit 101) | X | ||||||||||||||||||
* Incorporated by reference to the same exhibit number in the Company's Current Report on Form 8-K, dated May 20, 2021.
52
SIGNATURE
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.
| REXNORD CORPORATION | ||||||||||||||
| Date: | July 20, 2021 | By: | /S/ MARK W. PETERSON | |||||||||||
| Name: | Mark W. Peterson | |||||||||||||
| Title: | Senior Vice President and Chief Financial Officer | |||||||||||||
53
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Todd A. Adams, President and Chief Executive Officer of Rexnord Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rexnord Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's quarter ended June 30, 2021, in the case of this quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrants' other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants' auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: July 20, 2021
| By: | /s/ TODD A. ADAMS | ||||
| Name: | Todd A. Adams | ||||
| Title: | Chair of the Board, President and Chief Executive Officer | ||||
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Mark W. Peterson, Senior Vice President and Chief Financial Officer of Rexnord Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rexnord Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's quarter ended June 30, 2021, in the case of this quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants' auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: July 20, 2021
| By: | /s/ MARK W. PETERSON | ||||
| Name: | Mark W. Peterson | ||||
| Title: | Senior Vice President and Chief Financial Officer | ||||
EXHIBIT 32.1
CERTIFICATION
Pursuant to 18 United States Code § 1350
Each of the undersigned hereby certifies that the Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 of Rexnord Corporation filed with the Securities and Exchange Commission on or about the date hereof fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: July 20, 2021
| By: | /s/ TODD A. ADAMS | ||||
| Name: | Todd A. Adams | ||||
| Title: | Chair of the Board, President and Chief Executive Officer | ||||
Date: July 20, 2021
| By: | /s/ MARK W. PETERSON | ||||
| Name: | Mark W. Peterson | ||||
| Title: | Senior Vice President and Chief Financial Officer | ||||
This certification accompanies the Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.