Notes to Condensed Consolidated Financial Statements
June 30, 2015
(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. Results for the interim periods are not necessarily indicative of results that may be expected for the fiscal year ending
March 31, 2016
. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's fiscal 2015 Annual Report on Form 10-K.
During
fiscal 2015
, the Company completed a plan to discontinue the operations and exit its non-core business that manufactured ring gears and pinions (“Mill Products”) utilized for crushing machinery applications in the mining sector. Accordingly, the results of operations of the Mill Products business have been reported as discontinued operations in the condensed consolidated statements of operations for all periods presented. The corresponding assets and liabilities of the discontinued operations have been reclassified in accordance with authoritative literature and classified as assets held for sale for all periods presented in the condensed consolidated balance sheets. See Note
3
for further information regarding the discontinued operation.
The Company
Rexnord is a growth-oriented, multi-platform industrial company with what it believes are 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 Rexnord Innovation Center provides on-going, cross-platform support of these capabilities. The Company operates in a disciplined way and the Rexnord Business System (“RBS”) is the 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 the business.
The Process & Motion Control platform designs, manufactures, markets and services specified, highly-engineered mechanical components used within complex systems where the customers' reliability requirements and cost of failure or downtime is extremely high. The Process & Motion Control product portfolio includes gears and gear drives, couplings, industrial bearings, tabletop and engineered chain, aerospace bearings and seals, conveying equipment and specialty components, as well as repair and on-going service.
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 specification drainage systems, sensor flush valves and faucets, point-source wastewater pretreatment devices, backflow prevention devices, pressure release valves, sluice and slide gates, butterfly and plug valves, control valves and actuation systems and PEX piping.
Recent Accounting Pronouncements
In April 2015 the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03,
Interest—Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs
("ASU 2015-03"). The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement of debt issuance costs is not affected by the amendments in this update. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 and is required to be applied retrospectively to all prior periods presented. As permitted by ASU 2015-03, the Company elected to early adopt this guidance beginning with the first quarter of fiscal 2016, which resulted in
the reclassification of
$10.0 million
and
$10.5 million
of unamortized debt issuance costs from other assets to long-term debt on the condensed consolidated balance sheets as of
June 30, 2015
and
March 31, 2015
, respectively. Refer to Note
12
for additional discussion regarding debt instruments and related classification.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
("ASU 2014-09")
in order to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The guidance specifies revenue should be recognized in the amount that reflects the consideration the company expects to be entitled to in exchange for the transfer of promised goods or services to customers. ASU 2014-09 will be effective for the Company in the first quarter of fiscal 2019 and allows for full retrospective adoption applied to all periods presented or retrospective adoption with the cumulative effect of initially applying this update recognized at the date of initial application. The Company is currently evaluating the method of adoption and the potential impact adoption will have on its condensed consolidated financial statements.
In the
first quarter
of
2016
, the Company adopted FASB ASU No. 2014-08,
Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
("ASU 2014-08"), which changes the criteria for reporting discontinued operations. ASU 2014-08 allows only disposals representing a strategic shift in operations to be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. In addition, the new guidance requires expanded disclosures about discontinued operations, as well as pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. As this guidance is a prospective change, the significance of ASU 2014-08 for the Company is dependent on any future dispositions or disposals.
2
. Acquisitions
Fiscal Year 2015 Acquisitions
On
January 12, 2015
, the Company acquired Euroflex Transmissions (India) Private Limited ("Euroflex") for a preliminary cash purchase price of
$76.0 million
, excluding transaction costs and net of cash acquired. During the
first quarter
of
fiscal 2016
, the Company received
$1.1 million
in cash from the sellers in connection with finalizing the amount of acquisition date working capital. The preliminary purchase price was adjusted to reflect this change, which resulted in a
$1.1 million
decrease to goodwill. Euroflex, based in Hyderabad, India, is a supplier of high performance disc couplings used in power generation, gas compression and industrial process machinery applications. The acquisition of Euroflex added complementary product lines to the Company's existing Process & Motion Control platform.
On
October 30, 2014
, the Company acquired Tollok S.p.A. ("Tollok"), a supplier of highly engineered shaft locking devices for the power generation and process industries, as well as general industrial applications. The preliminary purchase price, excluding transaction costs and net of cash acquired, was
$39.2
million. Under the terms of the agreement, the purchase price is comprised of
$33.4
million that was paid at closing and
$3.4
million to be paid in annual installments on October 30, 2015 and October 30, 2016. During the
first quarter
of
fiscal 2016
, the Company finalized the amount of acquisition date working capital which resulted in a
$1.7 million
decrease to the preliminary purchase price, which the Company will receive by reducing the amount of the first annual installment payment to the previous Tollok shareholders by
$1.7 million
. The preliminary purchase price allocation has been adjusted to reflect this change, which resulted in a
$1.7 million
decrease to goodwill. Pursuant to the terms of the agreement, the Company is also contingently obligated to make additional consideration payments, not to exceed
$3.8
million, in
two
years to the sellers should Tollok's financial performance exceed certain thresholds during the two years following the acquisition. Cash payments made after the acquisition date will be made in Euros based on prevailing exchange rates at the time of payment. Tollok, based in Ferrara, Italy, added complementary product lines to the Company's existing Process & Motion Control platform.
On
April 15, 2014
, the Company acquired Green Turtle Technologies Ltd., Green Turtle Americas Ltd. and Filamat Composites Inc. (collectively "Green Turtle") for a total cash purchase price of
$27.7 million
, excluding transaction costs and net of cash acquired. Green Turtle, based in Toronto, Ontario, and Charlotte, North Carolina, is a manufacturer of branded fiberglass oil and grease separators and traps. This acquisition broadened the product portfolio of the Company's existing Water Management platform.
The Company's results of operations include the acquired operations subsequent to the respective acquisition dates. The acquisitions of Green Turtle, Tollok and Euroflex were not material to the Company’s condensed consolidated financial statements. Pro-forma results of operations and certain other U.S. GAAP disclosures related to the acquisitions during the fiscal year ended March 31, 2015 have not been presented because they are not significant to the Company's condensed consolidated statements of operations and financial position.
The fiscal 2015 acquisitions were accounted for as business combinations and recorded by allocating the purchase price of the acquisitions to the fair value of the assets acquired and liabilities assumed at the respective acquisition date. The excess of the acquisition purchase price over the fair value assigned to the assets acquired and liabilities assumed was recorded as goodwill. The preliminary purchase price allocations for the fiscal 2015 acquisitions, after incorporating the changes described above, resulted in non-tax deductible goodwill of
$71.9 million
, other intangible assets of
$67.2 million
and other net assets of
$3.8 million
. The purchase price allocations of Tollok and Euroflex are preliminary and subject to final valuation related adjustments that will be completed within the one year period following the respective acquisition date.
3
. Discontinued Operations
During the fourth quarter of fiscal 2015, the Company ceased all operations related to the Mill Products business, which conducted its operations in the United States and Australia and was a component of the Process & Motion Control segment. As a result, the Company met the criteria to present this business as a discontinued operation in accordance with the authoritative guidance. During the second half of fiscal 2015, the Company sold certain assets associated with the Mill Products business for aggregate cash consideration of approximately
$9.2 million
. The exit of the business resulted a net charge of
$9.7 million
, consisting of a
$3.8 million
impairment loss associated with property, plant and equipment, a
$4.1 million
impairment of goodwill allocated to the discontinued operation and other exit related costs of
$1.8 million
.
The condensed consolidated statement of operations for the
first quarter ended
June 30, 2015
does not include any activity for Mill Products as the operations were ceased. The following table summarizes the results of the Mill Products business for the
first quarter ended
June 30, 2014
included within income from discontinued operations, net of tax on the condensed consolidated statements of operations (in millions):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
June 30, 2014
|
|
Net sales
|
$
|
6.2
|
|
|
Income from operations
|
0.7
|
|
|
Provision for income taxes
|
(0.3
|
)
|
|
Net income
|
$
|
0.4
|
|
|
|
|
|
Net income per share from discontinued operations:
|
|
|
Basic
|
$
|
—
|
|
|
Diluted
|
$
|
—
|
|
Included as assets held for sale on the condensed consolidated balance sheets as of each of
June 30, 2015
and
March 31, 2015
are long-lived assets of the Mill Products business of
$2.6 million
. As of June 30, 2015 and March 31, 2015, the long-lived assets were recorded at the estimated fair value. See Note
14
for additional detail on fair value measurements used by the Company to estimate fair value. The Company is actively engaged in the sale of remaining assets; however, given the nature of the assets involved, the expected timing of cash flows related to the sale is indeterminable. The Company has no continuing involvement in the Mill Products business.
4
. Restructuring and Other Similar Charges
During the quarter ended
June 30, 2015
, 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 to optimize its operating margin and manufacturing footprint as well as select product-line rationalizations. As such, the Company expects further expenses related to workforce reductions, impairment of assets, lease termination costs, and other facility rationalization costs. The Company's restructuring plans are preliminary and related expenses are not yet estimable.
The following table summarizes the Company's restructuring and other similar charges during the
three months ended
June 30, 2015
and
June 30, 2014
by classification of operating segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and Other Similar Charges
Three Months Ended June 30, 2015
|
|
|
|
Process & Motion Control
|
|
Water Management
|
|
Corporate
|
|
Consolidated
|
|
Severance costs
|
|
$
|
1.1
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
1.6
|
|
|
Lease termination and other costs
|
|
0.2
|
|
|
0.1
|
|
|
—
|
|
|
0.3
|
|
|
Total restructuring and other similar costs
|
|
$
|
1.3
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and Other Similar Charges
Three Months Ended June 30, 2014
|
|
|
|
Process & Motion Control
|
|
Water Management
|
|
Corporate
|
|
Consolidated
|
|
Severance costs
|
|
$
|
1.5
|
|
|
$
|
0.7
|
|
|
$
|
—
|
|
|
$
|
2.2
|
|
|
Lease termination and other costs
|
|
0.4
|
|
|
0.8
|
|
|
—
|
|
|
1.2
|
|
|
Total restructuring and other similar costs
|
|
$
|
1.9
|
|
|
$
|
1.5
|
|
|
$
|
—
|
|
|
$
|
3.4
|
|
The following table summarizes the activity in the Company's restructuring accrual for the
three months ended
June 30, 2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Costs
|
|
Lease Termination and Other Costs
|
|
Total
|
|
Restructuring accrual, March 31, 2015 (1)
|
|
$
|
6.7
|
|
|
$
|
0.3
|
|
|
$
|
7.0
|
|
|
Charges
|
|
1.6
|
|
|
0.3
|
|
|
1.9
|
|
|
Cash payments
|
|
(4.1
|
)
|
|
(0.3
|
)
|
|
(4.4
|
)
|
|
Restructuring accrual, June 30, 2015 (1)
|
|
$
|
4.2
|
|
|
$
|
0.3
|
|
|
$
|
4.5
|
|
|
|
|
|
(1)
|
The restructuring accrual is included in other current liabilities in the condensed consolidated balance sheets.
|
5
. Income Taxes
The provision for income taxes for all periods presented is based on an estimated effective income tax rate for the respective full fiscal years. The estimated annual effective income tax rate is determined excluding the effect of significant discrete items or items that are reported net of their related tax effects. The tax effect of significant discrete items is reflected in the period in which they occur. The Company's income tax expense is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are generally lower 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 and net operating loss (“NOL”) carryforwards.
The Company regularly reviews its deferred tax assets for recoverability and establishes valuation allowances based on historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences as deemed appropriate. In addition, all other available positive and negative evidence is taken into consideration for purposes of determining the proper balances of such valuation allowances. As a result of this review, the Company continues to maintain valuation allowances against the deferred tax assets relating to certain foreign and state net operating loss 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
$10.0 million
in the
first quarter
of
fiscal 2016
compared to an income tax provision of
$21.5 million
in the
first quarter
of
fiscal 2015
. The effective income tax rate for the
first quarter
of
fiscal 2016
was
32.1%
versus
65.0%
in the
first quarter
of
fiscal 2015
. The effective income tax rate for the
first quarter
of
fiscal 2016
was below the U.S. federal statutory rate of
35%
primarily due to the accrual of foreign income taxes at rates which are generally below the U.S federal statutory rate, the recognition of certain foreign branch related losses for U.S. income tax purposes and the recognition of certain, previously unrecognized tax benefits due to the lapse of the applicable statutes of limitations. The effective income tax rate for the
first quarter
of
fiscal 2015
was significantly higher than the U.S. federal statutory rate of
35%
primarily due to certain one-time costs associated with a change to the U.S. income tax entity classification of a foreign subsidiary, partially offset by the recognition of certain foreign related branch losses for U.S. income tax purposes.
At
June 30, 2015
, the Company had a
$26.5 million
liability for unrecognized net income tax benefits. At
March 31, 2015
, the Company’s total liability for unrecognized net income tax benefits was
$26.6 million
. The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in income tax expense. As of
June 30, 2015
and
March 31, 2015
, the total amount of gross, unrecognized income tax benefits included
$12.9 million
and
$12.4 million
of accrued interest and penalties, respectively. The Company recognized
$0.2 million
of net interest and penalties as income tax expense during both the
three months ended
June 30, 2015
, as well as, the
three months ended
June 30, 2014
.
The Company conducts business in multiple locations within and outside the U.S. Consequently, the Company is subject to periodic income tax examinations by domestic and foreign income tax authorities. Currently, the Company is undergoing routine, periodic income tax examinations in both domestic and foreign jurisdictions. The Internal Revenue Service is currently conducting fieldwork relating an income tax examination of the Company’s U.S. federal income tax return for the tax year ended March 31, 2013. It appears reasonably possible that the amounts of unrecognized income tax benefits could change in the next twelve months as a result of such examinations; however, any potential payments of income tax, interest and penalties are not expected to be significant to the Company's consolidated financial statements. With certain exceptions, the Company is no longer subject to U.S. federal income tax examinations for tax years ending prior to March 31, 2012, state and local income tax examinations for years ending prior to fiscal 2011 or significant foreign income tax examinations for years ending prior to fiscal 2010. With respect to the Company's U.S. federal NOL carryforward, the short tax period from July 21, 2006 to March 31, 2007 (due to the change in control when Apollo Management, L.P. acquired the Company) and the tax years ended March 31, 2008, 2009, 2010 and 2011 are open under statutes of limitations; whereby, the Internal Revenue Service may not adjust the income tax liability for these years, but may reduce the NOL carryforward and any other tax attribute carryforwards to future, open tax years.
6
. Earnings per Share
Basic net income per share is computed by dividing net income by the corresponding weighted average number of common shares outstanding for the period. Diluted net income per share is computed based on the weighted average number of common shares outstanding increased by the number of incremental shares that would have been outstanding if the potential dilutive shares were issued through the exercise of outstanding equity awards to purchase common shares, except when the effect would be anti-dilutive. The computation for diluted net income per share for the
first quarter
ended
June 30, 2015
excludes equity awards to acquire
2,226,000
shares due to their anti-dilutive effect. The computation for diluted net income per share for the
first quarter
ended
June 30, 2014
excludes options to purchase
86,909
shares due to their anti-dilutive effect.
7
. Stockholders' Equity
Stockholders' equity consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Deficit
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Treasury Stock (1)
|
|
Non-controlling Interest (2)
|
|
Total
Stockholders’
Equity
|
|
Balance at March 31, 2015
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
885.9
|
|
|
$
|
(197.5
|
)
|
|
$
|
(130.2
|
)
|
|
$
|
(6.3
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
552.7
|
|
|
Total comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
21.3
|
|
|
4.1
|
|
|
—
|
|
|
(0.1
|
)
|
|
25.3
|
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
1.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.9
|
|
|
Common stock repurchased and canceled
|
—
|
|
|
—
|
|
|
(40.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(40.0
|
)
|
|
Cancellation of treasury stock
|
—
|
|
|
—
|
|
|
(6.3
|
)
|
|
—
|
|
|
—
|
|
|
6.3
|
|
|
—
|
|
|
—
|
|
|
Tax benefit on stock option exercises
|
—
|
|
|
—
|
|
|
1.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.0
|
|
|
Balance at June 30, 2015
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
842.5
|
|
|
$
|
(176.2
|
)
|
|
$
|
(126.1
|
)
|
|
$
|
—
|
|
|
$
|
(0.3
|
)
|
|
$
|
540.9
|
|
____________________
(1) During the first quarter of fiscal 2016, the Company canceled all outstanding shares held in treasury stock and returned such shares to the status of authorized but unissued shares.
(2) Represents a
49%
non-controlling interest in a Water Management joint venture.
Stock Repurchase Program
In February 2015, the Company's Board of Directors approved a stock repurchase program (the "Repurchase Program") authorizing the repurchase of up to
$200.0 million
of the Company's common stock from time-to-time on the open market or in privately negotiated transactions. The Repurchase Program does not require the Company to acquire any particular amount of common stock and does not specify the timing of purchases or the prices to be paid. During the
first quarter
of
fiscal 2016
, the Company repurchased
1,552,500
shares of common stock at a total cost of
$40.0 million
. The shares repurchased were canceled by the Company upon receipt. At
June 30, 2015
, approximately
$160.0 million
of repurchase authority remained.
8
. Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss, net of tax, for the
three months ended
June 30, 2015
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Derivatives
|
|
Foreign Currency Translation
|
|
Pension and Postretirement Plans
|
|
Total
|
|
Balance at March 31, 2015
|
|
$
|
(12.6
|
)
|
|
$
|
(76.5
|
)
|
|
$
|
(41.1
|
)
|
|
$
|
(130.2
|
)
|
|
Other comprehensive income before reclassifications
|
|
—
|
|
|
4.4
|
|
|
—
|
|
|
4.4
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
|
Net current period other comprehensive loss
|
|
—
|
|
|
4.4
|
|
|
(0.3
|
)
|
|
4.1
|
|
|
Balance at June 30, 2015
|
|
$
|
(12.6
|
)
|
|
$
|
(72.1
|
)
|
|
$
|
(41.4
|
)
|
|
$
|
(126.1
|
)
|
The following table summarizes the amounts reclassified from accumulated other comprehensive loss to net income during the
three months ended
June 30, 2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2015
|
|
Three Months Ended June 30, 2014
|
|
Income Statement Line
|
|
Pension and other postretirement plans
|
|
|
|
|
|
|
|
Amortization of prior service credit
|
|
$
|
(0.5
|
)
|
|
$
|
(0.5
|
)
|
|
Selling, general and administrative expenses
|
|
Provision for income taxes
|
|
0.2
|
|
|
0.2
|
|
|
|
|
Total net of tax
|
|
$
|
(0.3
|
)
|
|
$
|
(0.3
|
)
|
|
|
9
. Inventories
The major classes of inventories are summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
March 31, 2015
|
|
Finished goods
|
$
|
150.0
|
|
|
$
|
146.0
|
|
|
Work in progress
|
63.1
|
|
|
69.6
|
|
|
Purchased components
|
91.1
|
|
|
85.2
|
|
|
Raw materials
|
62.6
|
|
|
61.1
|
|
|
Inventories at First-in, First-Out ("FIFO") cost
|
366.8
|
|
|
361.9
|
|
|
Adjustment to state inventories at Last-in, First-Out ("LIFO") cost
|
5.8
|
|
|
5.8
|
|
|
|
$
|
372.6
|
|
|
$
|
367.7
|
|
10
. Goodwill and Intangible Assets
The changes in the net carrying value of goodwill and identifiable intangible assets for the
three months ended
June 30, 2015
by operating segment, are presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable Intangible Assets
|
|
|
|
|
|
Goodwill
|
|
Indefinite Lived Intangible Assets (tradenames)
|
|
Tradenames
|
|
Customer Relationships
|
|
Patents
|
|
Total Identifiable Intangible Assets Excluding Goodwill
|
|
Process & Motion Control
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount as of March 31, 2015
|
|
$
|
949.9
|
|
|
$
|
192.9
|
|
|
$
|
7.3
|
|
|
$
|
113.0
|
|
|
$
|
2.5
|
|
|
$
|
315.7
|
|
|
Purchase price allocation adjustments (1)
|
|
(2.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
(8.3
|
)
|
|
(0.3
|
)
|
|
(8.9
|
)
|
|
Currency translation adjustment
|
|
0.7
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.2
|
|
|
Net carrying amount as of June 30, 2015
|
|
$
|
947.8
|
|
|
$
|
193.0
|
|
|
$
|
7.0
|
|
|
$
|
104.8
|
|
|
$
|
2.2
|
|
|
$
|
307.0
|
|
|
Water Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount as of March 31, 2015
|
|
$
|
252.4
|
|
|
$
|
135.2
|
|
|
$
|
1.4
|
|
|
$
|
129.1
|
|
|
$
|
6.3
|
|
|
$
|
272.0
|
|
|
Amortization
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4.8
|
)
|
|
(0.6
|
)
|
|
(5.4
|
)
|
|
Currency translation adjustment
|
|
1.1
|
|
|
0.4
|
|
|
—
|
|
|
0.3
|
|
|
0.3
|
|
|
1.0
|
|
|
Net carrying amount as of June 30, 2015
|
|
$
|
253.5
|
|
|
$
|
135.6
|
|
|
$
|
1.4
|
|
|
$
|
124.6
|
|
|
$
|
6.0
|
|
|
$
|
267.6
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount as of March 31, 2015
|
|
$
|
1,202.3
|
|
|
$
|
328.1
|
|
|
$
|
8.7
|
|
|
$
|
242.1
|
|
|
$
|
8.8
|
|
|
$
|
587.7
|
|
|
Purchase price allocation adjustments (1)
|
|
(2.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
(13.1
|
)
|
|
(0.9
|
)
|
|
(14.3
|
)
|
|
Currency translation adjustment
|
|
1.8
|
|
|
0.5
|
|
|
—
|
|
|
0.4
|
|
|
0.3
|
|
|
1.2
|
|
|
Net carrying amount as of June 30, 2015
|
|
$
|
1,201.3
|
|
|
$
|
328.6
|
|
|
$
|
8.4
|
|
|
$
|
229.4
|
|
|
$
|
8.2
|
|
|
$
|
574.6
|
|
____________________
(1) Refer to Note
2
for additional information regarding purchase price allocation adjustments.
The gross carrying amount and accumulated amortization for each major class of identifiable intangible assets as of
June 30, 2015
and
March 31, 2015
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
|
Weighted Average Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
Patents
|
10 years
|
|
$
|
40.4
|
|
|
$
|
(32.2
|
)
|
|
$
|
8.2
|
|
|
Customer relationships (including distribution network)
|
13 years
|
|
635.8
|
|
|
(406.4
|
)
|
|
229.4
|
|
|
Tradenames
|
8 years
|
|
10.0
|
|
|
(1.6
|
)
|
|
8.4
|
|
|
Intangible assets not subject to amortization - tradenames
|
|
|
328.6
|
|
|
—
|
|
|
328.6
|
|
|
|
|
|
$
|
1,014.8
|
|
|
$
|
(440.2
|
)
|
|
$
|
574.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
|
Weighted Average Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
Patents
|
10 years
|
|
$
|
40.1
|
|
|
$
|
(31.3
|
)
|
|
$
|
8.8
|
|
|
Customer relationships (including distribution network)
|
13 years
|
|
635.4
|
|
|
(393.3
|
)
|
|
242.1
|
|
|
Tradenames
|
8 years
|
|
10.0
|
|
|
(1.3
|
)
|
|
8.7
|
|
|
Intangible assets not subject to amortization - tradenames
|
|
|
328.1
|
|
|
—
|
|
|
328.1
|
|
|
|
|
|
$
|
1,013.6
|
|
|
$
|
(425.9
|
)
|
|
$
|
587.7
|
|
Intangible asset amortization expense totaled
$14.3 million
for the
three months ended
June 30, 2015
. Intangible asset amortization expense totaled
$13.5 million
for the
three months ended
June 30, 2014
.
The Company expects to recognize amortization expense on the intangible assets subject to amortization of
$57.0 million
in fiscal year
2016
(inclusive of
$14.3 million
of amortization expense recognized in the
three months ended
June 30, 2015
),
$37.8 million
in fiscal year 2017,
$24.6 million
in fiscal year 2018,
$24.3 million
in fiscal year 2019 and
$24.1 million
in fiscal year 2020.
11
. Other Current Liabilities
Other current liabilities are summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
March 31, 2015
|
|
Customer advances
|
|
$
|
7.1
|
|
|
$
|
7.0
|
|
|
Sales rebates
|
|
19.0
|
|
|
25.4
|
|
|
Commissions
|
|
4.0
|
|
|
3.9
|
|
|
Restructuring and other similar charges (1)
|
|
4.5
|
|
|
7.0
|
|
|
Product warranty (2)
|
|
6.7
|
|
|
6.8
|
|
|
Risk management (3)
|
|
9.9
|
|
|
9.4
|
|
|
Legal and environmental
|
|
3.2
|
|
|
3.8
|
|
|
Deferred income taxes
|
|
15.9
|
|
|
12.9
|
|
|
Taxes, other than income taxes
|
|
6.5
|
|
|
8.0
|
|
|
Income tax payable
|
|
22.5
|
|
|
17.9
|
|
|
Interest payable
|
|
5.6
|
|
|
5.5
|
|
|
Other
|
|
16.0
|
|
|
19.7
|
|
|
|
|
$
|
120.9
|
|
|
$
|
127.3
|
|
____________________
|
|
|
|
(1)
|
See more information related to the restructuring obligations within Note
4
Restructuring and Other Similar Charges.
|
|
|
|
|
(2)
|
See more information related to the product warranty obligations within Note
15
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, 2015
|
|
March 31, 2015
|
|
Term loan (1)
|
|
$
|
1,892.1
|
|
|
$
|
1,895.8
|
|
|
8.875% senior notes due 2016
|
|
1.3
|
|
|
1.3
|
|
|
New Market Tax Credit (2)
|
|
36.7
|
|
|
36.8
|
|
|
Other (3)
|
|
5.5
|
|
|
6.1
|
|
|
Total
|
|
1,935.6
|
|
|
1,940.0
|
|
|
Less current maturities
|
|
23.6
|
|
|
24.3
|
|
|
Long-term debt
|
|
$
|
1,912.0
|
|
|
$
|
1,915.7
|
|
____________________
|
|
|
|
(1)
|
Includes an unamortized original issue discount and debt issuance costs of
$23.8 million
and
$25.0 million
at
June 30, 2015
and
March 31, 2015
, respectively.
|
|
|
|
|
(2)
|
Includes unamortized debt issuance costs of
$0.6 million
at each of
June 30, 2015
and
March 31, 2015
. In connection with the New Market Tax Credit incentive program, the Company also invested an aggregate
$27.6 million
in the form of a loan receivable. The aggregate loan receivable is presented within other assets on the condensed consolidated balance sheets as of
June 30, 2015
and
March 31, 2015
.
|
|
|
|
|
(3)
|
Includes additional debt at various wholly-owned subsidiaries, comprised primarily of borrowings at foreign subsidiaries, capital lease obligations and unamortized debt issuance costs of
$0.2 million
and
$0.3 million
at
June 30, 2015
and
March 31, 2015
, respectively.
|
Senior Secured Credit Facility
The Company’s Third Amended and Restated First Lien Credit Agreement (“the Credit Agreement”) includes senior secured credit facilities funded by a syndicate of banks and other financial institutions and provide for (i) a
$1,950.0 million
term loan facility (“Term Loan”); and (ii) a
$265.0 million
revolving credit facility. At June 30, 2015, the borrowings under the Credit Agreement had an effective and average interest rate of
4.00%
, determined as the London Interbank Offered Rate or LIBOR (subject to a
1%
floor) plus an applicable margin of
3.00%
. No amounts were borrowed under the revolving credit facility at June 30, 2015 or March 31, 2015; however,
$22.4 million
and
$24.0 million
of the revolving credit facility were considered utilized in connection with outstanding letters of credit at
June 30, 2015
and
March 31, 2015
, respectively.
As of
June 30, 2015
, the Company was in compliance with all applicable covenants under its Credit Agreement, including compliance with a maximum permitted first lien leverage ratio (the Company's sole financial maintenance covenant under its revolver) of
7.75
to
1.0
. The Company's first lien leverage ratio was
4.0
to
1.0
as of
June 30, 2015
.
Accounts Receivable Securitization Program
In fiscal 2012, the Company entered into a
five
-year Amended and Restated Receivables Funding and Administration Agreement (the “RFAA”) by and among Rexnord Funding LLC (“Funding,” a wholly-owned bankruptcy-remote special purpose subsidiary), the financial institutions from time to time party thereto, and General Electric Capital Corporation, as a lender, a swing line lender and administrative agent. The RFAA is the principal operative agreement under which certain subsidiaries continuously sell substantially all of their domestic trade accounts receivable to Funding for cash and subordinated notes (the “Program”).
At
June 30, 2015
, the Company's available borrowing capacity under the Program was
$100.0 million
, based on the current accounts receivables balance subject to the Program. As of
June 30, 2015
, Funding was in compliance with all applicable covenants and performance ratios contained in the RFAA.
See Note 11 to the audited consolidated financial statements of the Company's fiscal
2015
Annual Report on Form 10-K for further information regarding long-term debt.
13
. Derivative Financial Instruments
The Company is exposed to certain financial risks relating to fluctuations in foreign currency exchange rates. The Company currently selectively uses foreign currency forward exchange contracts to manage its foreign currency risk. All hedging transactions are authorized and executed pursuant to defined policies and procedures that prohibit the use of financial instruments for speculative purposes.
Foreign Exchange Contracts
The Company periodically enters into foreign currency forward contracts to mitigate the foreign currency volatility relative to certain intercompany and external cash flows expected to occur. These foreign currency forward contracts were not accounted for as effective cash flow hedges in accordance with ASC 815,
Derivatives and Hedging
(“ASC 815”) and as such were marked to market through earnings. See the amounts recorded on the condensed consolidated balance sheets and recognized within the condensed consolidated statements of operations related to the Company's foreign currency forward contracts within the tables below.
Interest Rate Derivatives
During fiscal 2014, the Company entered into three forward-starting interest rate swaps to hedge the variability in future cash flows associated with a portion of the Company’s variable-rate term loans. The forward-starting interest rate swaps convert
$650.0 million
of the Company’s variable-rate term loans to a weighted average fixed interest rate of
2.55%
plus the applicable margin (inclusive of a
1%
LIBOR floor). The interest rate swaps become effective beginning on September 28, 2015 with a maturity of September 27, 2018. The interest rate swaps have been designated as effective cash flow hedges in accordance with ASC 815.
During fiscal 2015, the Company entered into
two
interest rate caps in order to mitigate the Company's exposure to increasing interest rates on its variable-rate interest loans. Those interest rate caps were effective beginning as of October 24, 2014, with a maturity of October 24, 2018; they cap the interest on
$750.0
million of the Company's variable-rate interest loans at
3%
, plus the applicable margin. In executing the interest rate caps, the Company paid a premium of
$5.8
million. The interest rate caps have been designated as effective cash flow hedges in accordance with ASC 815. When combined with the Company's existing interest rate swaps, the Company has effectively hedged approximately
74%
of its outstanding variable rate term loans with a weighted average interest rate that cannot exceed
2.79%
plus the applicable margin of
3%
.
The fair values of the Company's interest rate derivatives are recorded on the condensed consolidated balance sheets with the corresponding offset recorded as a component of accumulated other comprehensive loss, net of tax. See the amounts recorded on the condensed consolidated balance sheets related to the Company's interest rate derivatives within the tables below.
The Company's derivatives are measured at fair value in accordance with ASC 820,
Fair Value Measurements and Disclosure
(“ASC 820”). See Note
14
for more information as it relates to the fair value measurement of the Company's derivative financial instruments.
The following tables indicate the location and the fair value of the Company's derivative instruments within the condensed consolidated balance sheets segregated between designated, qualifying ASC 815 hedging instruments and non-qualifying, non-designated hedging instruments.
Fair value of derivatives designated as hedging instruments under ASC 815 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
March 31, 2015
|
|
Balance Sheet Classification
|
|
|
|
Liability Derivatives
|
|
Interest rate swaps
|
|
$
|
17.2
|
|
|
$
|
17.7
|
|
|
Other long-term liabilities
|
|
|
|
Asset Derivatives
|
|
Interest rate caps
|
|
$
|
2.5
|
|
|
$
|
3.0
|
|
|
Other long-term assets
|
Fair value of derivatives not designated as hedging instruments under ASC 815 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
March 31, 2015
|
|
Balance Sheet Classification
|
|
|
|
Asset Derivatives
|
|
Foreign currency forward contracts
|
|
$
|
0.2
|
|
|
$
|
0.4
|
|
|
Other current assets
|
The following table indicates the location and the amount of gains or losses associated with the Company's derivative instruments, net of tax, within the condensed consolidated balance sheets (for qualifying ASC 815 instruments) and recognized within the condensed consolidated statements of operations. The information is segregated between designated, qualifying ASC 815 hedging instruments and non-qualifying, non-designated hedging instruments (in millions). As of
June 30, 2015
, there was no ineffectiveness on the Company's designated hedging instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of loss recognized in accumulated other comprehensive loss on derivatives
|
|
Derivative instruments designated as cash flow hedging relationships under ASC 815
|
|
|
|
June 30, 2015
|
|
March 31, 2015
|
|
Interest rate swaps
|
|
$
|
10.7
|
|
|
$
|
9.2
|
|
|
Interest rate caps
|
|
1.9
|
|
|
$
|
1.7
|
|
The Company expects to reclassify approximately
$7.7 million
of losses related to its interest rate derivatives recorded within accumulated other comprehensive loss into earnings as interest expense during the next twelve months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount recognized in other expense, net
|
|
Derivative instruments not designated as hedging instruments under ASC 815
|
|
Condensed Consolidated Statements of Operations Classification
|
|
First Quarter Ended
|
|
|
|
June 30, 2015
|
|
June 30, 2014
|
|
Foreign currency forward contracts
|
|
Other income, net
|
|
$
|
0.1
|
|
|
$
|
(0.4
|
)
|
14
. Fair Value Measurements
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. ASC 820 also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed assumptions about the assumptions a market participant would use.
In accordance with ASC 820, fair value measurements are classified under the following hierarchy:
|
|
|
|
•
|
Level 1- Quoted prices for identical instruments in active markets.
|
|
|
|
|
•
|
Level 2- Quoted prices for similar instruments; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable.
|
|
|
|
|
•
|
Level 3- Model-derived valuations in which one or more inputs or value-drivers are both significant to the fair value measurement and unobservable.
|
If applicable, the Company uses quoted market prices in active markets to determine fair value, and therefore classifies such measurements within Level 1. In some cases where market prices are not available, the Company makes use of observable market-based inputs to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters. These measurements are classified within Level 3 if they use significant unobservable inputs.
Fair Value of Derivative Instruments
The Company transacts in foreign currency forward contracts, interest rate swaps, and interest rate caps. The fair value of foreign currency forward contracts is based on a pricing model that utilizes the differential between the contract price and the market-based forward rate as applied to fixed future deliveries of currency at pre-designated settlement dates. The fair value of interest rate swaps and interest rate caps is based on pricing models. These models use discounted cash flows that utilize the appropriate market-based forward swap curves and interest rates.
The Company endeavors to utilize the best available information in measuring fair value. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Foreign currency forward contracts and interest rate swaps reside within Level 2 of the fair value hierarchy. There were no transfers of assets or liabilities between levels for the periods presented. The following table provides a summary of the Company's assets and liabilities recognized at fair value on a recurring basis as of
June 30, 2015
and
March 31, 2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of June 30, 2015
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
$
|
—
|
|
|
$
|
2.5
|
|
|
$
|
—
|
|
|
$
|
2.5
|
|
|
Foreign currency forward contracts
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
Total assets at fair value
|
|
$
|
—
|
|
|
$
|
2.7
|
|
|
$
|
—
|
|
|
$
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
17.2
|
|
|
$
|
—
|
|
|
$
|
17.2
|
|
|
Total liabilities at fair value
|
|
$
|
—
|
|
|
$
|
17.2
|
|
|
$
|
—
|
|
|
$
|
17.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of March 31, 2015
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
$
|
—
|
|
|
$
|
3.0
|
|
|
$
|
—
|
|
|
$
|
3.0
|
|
|
Foreign currency forward contracts
|
|
—
|
|
|
0.4
|
|
|
—
|
|
|
0.4
|
|
|
Total assets at fair value
|
|
$
|
—
|
|
|
$
|
3.4
|
|
|
$
|
—
|
|
|
$
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
17.7
|
|
|
$
|
—
|
|
|
$
|
17.7
|
|
|
Total liabilities at fair value
|
|
$
|
—
|
|
|
$
|
17.7
|
|
|
$
|
—
|
|
|
$
|
17.7
|
|
Fair Value of Non-Derivative Financial Instruments
The carrying amounts of cash, receivables, payables and accrued liabilities approximated fair value at
June 30, 2015
and
March 31, 2015
due to the short-term nature of those instruments. The fair value of long-term debt as of
June 30, 2015
and
March 31, 2015
was approximately
$1,959.3 million
and
$1,970.6 million
, respectively. The fair value is based on quoted market prices for the same issues.
Long-lived Assets and Intangible Assets
Long-lived assets (which includes property, plant and equipment and real estate) may be measured at fair value if such assets are held-for-sale or when there is a determination that the asset is impaired. Intangible assets (which include patents, tradenames, customer relationships, and non-compete agreements) also may be measured at fair value when there is a determination that the asset is impaired. The determination of fair value for these assets is based on the best information available that resides within Level 3 of the fair value hierarchy, including internal cash flow estimates discounted at an appropriate interest rate, quoted market prices when available, market prices for similar assets and independent appraisals, as appropriate. For real estate, cash flow estimates are based on current market estimates that reflect current and projected lease profiles and available industry information about expected trends in rental, occupancy and capitalization rates. As of
June 30, 2015
and
March 31, 2015
, the remaining assets of the Mill Products business are classified as "held for sale" on the condensed consolidated balance sheet. These assets are recorded at their estimated net realizable value. The estimated fair value of the assets has been determined utilizing independent appraisals of the assets, classified as Level 3 inputs within the fair value hierarchy. See Note
3
for additional information.
15
. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending
|
|
|
|
June 30, 2015
|
|
June 30, 2014
|
|
Balance at beginning of period
|
|
$
|
6.8
|
|
|
$
|
8.0
|
|
|
Charged to operations
|
|
0.6
|
|
|
0.1
|
|
|
Claims settled
|
|
(0.7
|
)
|
|
(0.9
|
)
|
|
Balance at end of period
|
|
$
|
6.7
|
|
|
$
|
7.2
|
|
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 the Carlyle acquisition in November 2002, Invensys plc ("Invensys") has 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. Rexnord Industries' allocated share of past and future costs related to the Site, including for investigation and/or remediation, could be significant. All previously pending property damage and personal injury lawsuits against the Company related to the Site have been settled or dismissed. Pursuant to its indemnity obligation, Invensys continues to defend the Company in known matters related to the Site and has paid
100%
of the costs to date.
|
|
|
|
|
•
|
Multiple lawsuits (with approximately
500
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 a defendant in
two
pending multi-defendant lawsuits relating to alleged personal injuries due to the alleged presence of asbestos in a product allegedly manufactured by Prager. Additionally, there are numerous individuals who have filed asbestos related claims against Prager; however, these claims are currently on the Texas Multi-district Litigation inactive docket. The ultimate outcome of these asbestos matters cannot presently be determined. 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.
|
In connection with the acquisition of The Falk Corporation (“Falk”), Hamilton Sundstrand has 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, 2015
, Zurn and numerous other unrelated companies were defendants in approximately
6,000
asbestos related lawsuits representing approximately
20,000
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, 2015
, 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
$35.0 million
, of which Zurn expects its insurance carriers to pay approximately
$27.0 million
in the next
ten
years on such claims, with the balance of the estimated liability being paid in subsequent years. The
$35.0 million
was developed based on an actuarial study and represents the projected indemnity payout for claims filed in the next
ten
years. However, 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. Further, while this current asbestos liability is based on an estimate of claims through the next
ten
years, such liability may continue beyond that time frame, and such liability could be substantial.
Management estimates that its available insurance to cover this potential asbestos liability as of
June 30, 2015
, is approximately
$247.4 million
, and believes that all current claims are covered by insurance. However, principally as a result of the past insolvency of certain of the Company's insurance carriers, certain coverage gaps will exist if and after the Company's other carriers have paid the first
$171.4 million
of aggregate liabilities.
As of
June 30, 2015
, the Company had a recorded receivable from its insurance carriers of
$35.0 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 that
$247.4 million
of insurance coverage will ultimately be available or that this asbestos liability will not ultimately exceed
$247.4 million
. Factors that could cause a decrease in the amount of available coverage include: changes in law governing the policies, potential disputes with the carriers regarding the scope of coverage, and insolvencies of one or more of the Company's carriers.
The Company's subsidiaries, Zurn PEX, Inc. and Zurn Industries, LLC ("Zurn Industries"), were named as defendants in a number of individual and class action lawsuits in various United States courts. The plaintiffs in these suits claimed damages due to the alleged failure or anticipated failure of Zurn brass fittings on the PEX plumbing systems in homes and other structures.
In July 2012, the Company reached an agreement in principle to settle the liability underlying this litigation. The settlement is designed to resolve, on a national basis, the Company's overall exposure for both known and unknown claims related to the alleged failure or anticipated failure of Zurn brass fittings on PEX plumbing systems, subject to the right of eligible class members to opt-out of the settlement and pursue their claims independently. The settlement received final court approval in February 2013, and utilizes a
seven
year claims fund, which is capped at
$20.0 million
, and is funded in installments over the
seven
year period based on claim activity and minimum funding criteria. The settlement also covers class action plaintiffs' attorneys' fees and expenses totaling
$8.5 million
, which were paid in the first quarter of fiscal 2014.
Historically, the Company's insurance carrier had funded the Company's defense in the above referenced proceedings. The Company, however, reached a settlement agreement with its insurer, whereby the insurer paid the Company a lump sum in exchange for a release of future exposure related to this liability.
The Company has recorded an accrual related to this brass fittings liability, which takes into account, in pertinent part, the insurance carrier contribution, as well as exposure from the claims fund, opt-outs and the waiver of future insurance coverage.
16
. Retirement Benefits
The components of net periodic benefit cost are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
June 30, 2015
|
|
June 30, 2014
|
|
Pension Benefits:
|
|
|
|
|
Service cost
|
$
|
0.6
|
|
|
$
|
0.4
|
|
|
Interest cost
|
6.4
|
|
|
7.7
|
|
|
Expected return on plan assets
|
(7.2
|
)
|
|
(7.7
|
)
|
|
Net periodic benefit (credit) cost
|
$
|
(0.2
|
)
|
|
$
|
0.4
|
|
|
Other Postretirement Benefits:
|
|
|
|
|
Interest cost
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
Amortization:
|
|
|
|
|
Prior service credit
|
(0.5
|
)
|
|
(0.5
|
)
|
|
Net periodic benefit credit
|
$
|
(0.2
|
)
|
|
$
|
(0.2
|
)
|
During the
first three months
of fiscal
2016
and
2015
, the Company made contributions of
$1.3
million and
$1.5
million, respectively, to its U.S. qualified pension plan trusts.
In accordance with the Company's accounting policy for defined benefit pension and other postretirement benefit plans, actuarial gains and losses above the corridor are immediately recognized in the Company's operating results. The corridor is
10%
of the higher of the pension benefit obligation or the fair value of the plan assets. This adjustment is typically recorded annually in connection with the Company's required year-end re-measurement of plan assets and benefit obligations, or upon any off-cycle re-measurement event.
See Note 16 to the audited consolidated financial statements of the Company's fiscal 2015 Annual Report on Form 10-K for further information regarding retirement benefits.
17
. Stock-Based Compensation
The Rexnord Corporation 2012 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, 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. ASC 718,
Compensation-Stock Compensation
(“ASC 718”), requires compensation costs related to share-based payment transactions to be recognized in the financial statements. Generally, compensation cost is measured based on the estimated grant-date fair value of the equity instruments issued and is recognized over the requisite service period of the equity instrument, which generally coincides with the vesting period of the award. See Note 15 to the audited consolidated financial statements of the Company's fiscal
2015
Annual Report on Form 10-K for further information regarding stock-based compensation and related plans.
For the
three months ended
June 30, 2015
and
June 30, 2014
, the Company recorded
$1.9 million
and
$1.6 million
, respectively, of stock-based compensation expense. As of
June 30, 2015
, there was
$24.3 million
of total unrecognized compensation cost related to non-vested equity awards that is expected to be recognized over a weighted-average period of
3.1
years.
Stock Options
During the
three months ended
June 30, 2015
, the Company granted
872,590
stock options to certain of the Company's officers and employees which vest over a weighted-average term of
three
years. The fair value of each option granted under the Plan during the
three months ended
June 30, 2015
was estimated on the grant date using the
Black-Scholes valuation model
utilizing the following weighted-average assumptions:
|
|
|
|
|
|
|
Three Months Ended June 30, 2015
|
|
Expected option term (in years)
|
6.5
|
|
Expected volatility factor
|
24%
|
|
Weighted-average risk-free interest rate
|
1.86%
|
|
Expected dividend rate
|
0.0%
|
|
Stock option fair value
|
$7.41
|
The Company estimates the expected life of stock options granted based on the midpoint between when the options vest and when they expire. The Company uses the simplified method to determine the expected term, as management does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term due to the limited period of time its common stock shares has been publicly traded. The Company’s expected volatility assumptions are based on the expected volatilities of publicly-traded companies within the Company’s industry. The weighted-average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Management also assumes expected dividends of zero.
The following table presents the Company's stock option activity during the
first three months
of fiscal
2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending
|
|
|
June 30, 2015
|
|
June 30, 2014
|
|
|
Shares
|
|
Weighted Avg. Exercise Price
|
|
Shares
|
|
Weighted Avg. Exercise Price
|
|
Number of shares under option:
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
8,588,518
|
|
|
$
|
13.06
|
|
|
8,652,834
|
|
|
$
|
10.79
|
|
|
Granted
|
872,590
|
|
|
25.77
|
|
|
—
|
|
|
—
|
|
|
Exercised
|
(165,992
|
)
|
|
7.25
|
|
|
(206,155
|
)
|
|
7.19
|
|
|
Canceled/Forfeited
|
(98,536
|
)
|
|
22.55
|
|
|
(104,148
|
)
|
|
20.00
|
|
|
Outstanding at end of period (1)
|
9,196,580
|
|
|
14.27
|
|
|
8,342,531
|
|
|
10.76
|
|
|
Exercisable at end of period (2)
|
5,536,335
|
|
|
$
|
7.95
|
|
|
5,039,432
|
|
|
$
|
5.45
|
|
______________________
|
|
|
|
(1)
|
The weighted average remaining contractual life of options outstanding at
June 30, 2015
is
5.2
years.
|
|
|
|
|
(2)
|
The weighted average remaining contractual life of options exercisable at
June 30, 2015
is
3.1
years.
|
Restricted Stock Units
During the
three months ended
June 30, 2015
, the Company granted
66,622
restricted stock units ("RSUs") to certain of its officers, directors, and employees. RSUs granted during the
three months ended
June 30, 2015
vest ratably over
three
years and the fair value of each award is determined based on the Company's closing stock price on the date of grant. The weighted-average grant date fair value of the RSUs granted and outstanding under the Plan for the
three months ended
June 30, 2015
was
$25.77
per unit. There was no RSU activity during the
three months ended
June 30, 2014
. A summary of RSU activity during the
three months ended
June 30, 2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending
|
|
|
June 30, 2015
|
|
|
Shares
|
|
Weighted Avg. Exercise Price
|
|
Nonvested RSUs at beginning of period
|
53,813
|
|
|
$
|
29.06
|
|
|
Granted
|
66,622
|
|
|
25.77
|
|
|
Vested
|
—
|
|
|
—
|
|
|
Canceled/Forfeited
|
(2,372
|
)
|
|
28.46
|
|
|
Nonvested RSUs at end of period
|
118,063
|
|
|
$
|
27.21
|
|
Performance Stock Units
During the
three months ended
June 30, 2015
, the Company granted
50,711
performance stock units (“PSUs”) to certain of its officers and employees at a weighted-average grant date fair value of
$28.57
per PSU. Those PSUs have a
three
-year performance period, and are earned and vested based in part on the Company’s performance relative to pre-defined goals for absolute free cash flow conversion and in part on relative total shareholder return (“TSR”) as compared to companies in the S&P 1500 Industrial Index. Based on the Company’s actual performance at the end of the three-year performance cycle period, the number of performance share awards earned, which can range between
0%
and
200%
of the target awards granted, will be satisfied with Rexnord common stock.
The fair value of the portion of PSUs with free cash flow vesting conditions is determined based on the Company's closing stock price on the date of grant. The fair value of the portion of PSUs based on TSR is determined utilizing the Monte Carlo simulation model. Assumptions used to determine the fair value of each PSU were based on historical data and standard industry valuation practices and methodology. The following weighted-average assumptions were used for the PSUs granted during the three months ended June 30, 2015:
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2015
|
|
Expected volatility factor
|
31
|
%
|
|
Weighted-average risk-free interest rate
|
1.01
|
%
|
|
Expected dividend rate
|
0.0
|
%
|
|
Stock option fair value
|
$32.06
|
18
. Business Segment Information
The results of operations are reported in
two
business segments, consisting of the Process & Motion Control platform and the Water Management platform. The Process & Motion Control platform designs, manufactures, markets and services specified, highly engineered mechanical components used within complex systems where our customers' reliability requirements and cost of failure or downtime is extremely high. The Process & Motion Control product portfolio includes gears, couplings, industrial bearings, aerospace bearings and seals, FlatTop™ chain, engineered chain and conveying equipment. This segment serves a diverse group of end markets, including mining, general industrial applications, cement and aggregates, agriculture, forest and wood products, petrochemical, energy, food & beverage, aerospace and wind energy. 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 specification drainage products, flush valves and faucet products, backflow prevention pressure release valves and PEX piping used in non-residential construction end-markets and engineered valves and gates for the water and wastewater treatment market. The financial information of the Company's segments is regularly evaluated by the chief operating decision maker in determining resource allocation and assessing performance. Management evaluates the performance of each business segment based on its operating results. The same accounting policies are used throughout the organization (see Note
1
).
Business Segment Information:
(in Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
June 30, 2015
|
|
June 30, 2014
|
|
Net sales by product
|
|
|
|
|
|
Process & Motion Control:
|
|
|
|
|
|
Original equipment manufacturers/ end-users
|
|
$
|
152.3
|
|
|
$
|
160.1
|
|
|
Aftermarket
|
|
119.3
|
|
|
138.3
|
|
|
Total Process & Motion Control
|
|
271.6
|
|
|
298.4
|
|
|
Water Management:
|
|
|
|
|
|
Water safety, quality, flow control and conservation
|
|
136.5
|
|
|
131.8
|
|
|
Water infrastructure
|
|
77.0
|
|
|
73.4
|
|
|
Total Water Management
|
|
213.5
|
|
|
205.2
|
|
|
Consolidated net sales
|
|
$
|
485.1
|
|
|
$
|
503.6
|
|
|
Income (loss) from operations
|
|
|
|
|
|
Process & Motion Control
|
|
$
|
35.6
|
|
|
$
|
47.6
|
|
|
Water Management
|
|
27.4
|
|
|
18.5
|
|
|
Corporate
|
|
(9.8
|
)
|
|
(9.2
|
)
|
|
Consolidated income from operations
|
|
$
|
53.2
|
|
|
$
|
56.9
|
|
|
Non-operating expense:
|
|
|
|
|
|
Interest expense, net
|
|
$
|
(21.6
|
)
|
|
$
|
(22.5
|
)
|
|
Other expense, net
|
|
(0.4
|
)
|
|
(1.3
|
)
|
|
Income from continuing operations before income taxes
|
|
31.2
|
|
|
33.1
|
|
|
Provision for income taxes
|
|
10.0
|
|
|
21.5
|
|
|
Net income from continuing operations
|
|
21.2
|
|
|
11.6
|
|
|
Income from discontinued operations, net of tax
|
|
—
|
|
|
0.4
|
|
|
Net income
|
|
21.2
|
|
|
12.0
|
|
|
Non-controlling interest loss
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
Net income attributable to Rexnord
|
|
$
|
21.3
|
|
|
$
|
12.1
|
|
|
Depreciation and amortization
|
|
|
|
|
|
Process & Motion Control
|
|
$
|
19.2
|
|
|
$
|
18.6
|
|
|
Water Management
|
|
9.0
|
|
|
9.6
|
|
|
Consolidated
|
|
$
|
28.2
|
|
|
$
|
28.2
|
|
|
Capital expenditures
|
|
|
|
|
|
Process & Motion Control
|
|
$
|
6.3
|
|
|
$
|
7.7
|
|
|
Water Management
|
|
1.4
|
|
|
1.0
|
|
|
Consolidated
|
|
$
|
7.7
|
|
|
$
|
8.7
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
March 31, 2015
|
|
Total assets
|
|
|
|
|
|
Process & Motion Control
|
|
$
|
2,346.6
|
|
|
$
|
2,412.8
|
|
|
Water Management
|
|
981.9
|
|
|
980.8
|
|
|
Corporate
|
|
0.6
|
|
|
8.4
|
|
|
Consolidated
|
|
$
|
3,329.1
|
|
|
$
|
3,402.0
|
|
