Rexnord is a growth-oriented, multiplatform
industrial company with leading market shares and
highly trusted brands that serve a diverse array of
global end markets. Our heritage of innovation
and specification has 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.
C O N T E N T S
Letter to Shareholders . . . . . . . . . . 3-5
Business Platforms
Process & Motion Control . . . . . .. 6
Water Management . . . . . . . . . . .. 7
Rexnord Business System . . . . . . . 8-11
Creating Value for Customers . . . 12-13
Financial Highlights . . . . . . . . . . . . .. 14
Our goal is to consistently create
superior value for our customers,
shareholders and associates.
F E L L O W
S H A R E H O L D E R S
I want to start by thanking you and all of
our customers, associates, partners and Board
of Directors for your continued support over
the course of the past year.
Rexnord’s strategy is simple and disciplined by design.
We are in the business of providing sustainable, superior
value creation for our customers, shareholders and
associates. This singular focus is why we created the
Rexnord Business System (RBS). We believe that having
a standard by which we operate the company drives
consistent, scalable, and sustainable execution and is
what ultimately differentiates us.
RBS provides the framework, common language, tools
and processes for us to proactively address our served
market realities, make the appropriate course corrections
and continually strive for world-class performance across
all facets of our business. We set high expectations for
ourselves and have an environment inside the company
that drives us to compete every day – for our customers,
shareholders and associates. Our company delivered
another record year in fiscal 2014. More importantly, we
listened, learned, examined our progress and prioritized
areas that we need to improve going forward. With the
successes of fiscal 2014 behind us, we have turned our
focus toward making fiscal 2015 another record year for
Rexnord. This is what we expect of ourselves and what
shareholders should expect from us, year in and year out.
Focus + Execution = Superior Value Creation
In fiscal 2014 our sales grew 4% to $2.1 billion, our
Adjusted EBITDA grew to $413 million and our operating
cash flow grew to $191 million. Our Adjusted Earnings
per Share grew 42% to $1.39. During the year, we
completed a debt refinancing, improving our free cash
flow by roughly $50 million on an annual basis. We
reinvested $52 million of capital back into our businesses
to improve our organic growth and profitability. We also
invested $112 million in four acquisitions that added
over $800 million to our served markets, enhanced
our competitive advantage in the marketplace and are
projected to deliver high returns on invested capital.
Over the course of the year, our stock price grew 41%
333
3
In the Water Management Platform, our core growth
in fiscal 2014 was 8% in advance of what we see as a
multiyear recovery for our non-residential construction
markets and sustained long-term secular growth
for global water infrastructure markets. We see the
opportunity for Water Management to deliver compound
core growth rates in the mid-to-high single digit range in
the coming years, along with our expectations for three
to five points of margin expansion. In our Zurn business,
we have successfully increased our specification share
in domestic non-residential construction markets as
key customer specifiers respond favorably to our value
proposition built around superior customer service,
product innovation and reduced product lifecycle costs.
Our Valve and Gate Group continues to benefit from
accelerated investment in water and wastewater systems
in the Middle East, South America and Asia. We expect
ongoing strong growth and significant margin expansion
in fiscal 2015.
In fiscal 2015 and beyond, we expect to continue driving
value creation through strategic acquisitions. Our ability
to generate free cash flow has become a hallmark
of Rexnord and underpins the continued long-term
value creation opportunity we see in the coming years.
Strategic acquisitions have the potential to enhance
our market penetration, strengthen our competitive
advantages, and augment our returns. Our served
markets are large ($17+ billion) and fragmented, creating
a target-rich environment. Our rigorous and standardized
acquisition identification, execution and integration
process gives us confidence that we can effectively
execute on a strong and active acquisition funnel over
the next several years and deliver double digit returns on
invested capital over our targeted horizon.
and we completed two secondary offerings of our stock
(and a third in early fiscal 2015). The only way we were
able to accomplish everything in fiscal 2014 was through
the dedication, commitment and discretionary effort we
received from our associates.
In fiscal 2014, we continued to improve overall customer
satisfaction in all of our business groups and are
becoming increasingly differentiated relative to our
competition. More specifically, we are beginning to
hear from our customers that they are experiencing
the tangible benefits of the investments we’ve made in
technology, innovation and overall service levels. We
also don’t measure successful value creation in one year
increments. Fiscal 2014 was a solid year and one we’re
proud of, but more importantly, it was a year that we
know we can build upon moving forward.
Leveraging Platforms
We made meaningful progress in enhancing the
sustainable advantages of our platforms in fiscal 2014.
In the Process & Motion Control (PMC) Platform,
we delivered above-market core growth and a 69%
incremental Adjusted EBITDA margin despite headwinds
related to our mining end markets. We continued to invest
in new product development as our vitality rate reached
17% for the year, up from 15% last year. Fundamental to
the strategy in PMC is growing our installed base through
leveraging our product and application engineering
expertise. This drives specification in new markets,
with new and existing customers, and in high-reliability
applications all over the world. Heading into fiscal
2015, the platform is positioned to continue delivering
strong margin performance in a slower-growth industrial
environment and to build an even larger installed base.
Over the coming years, we see with increasing clarity
the potential that PMC has to further enhance its
profile as a best-in-class industrial platform.
4
The Rexnord Business System (RBS)
Whether it’s improving lead times for our customers,
maximizing cash flow generation for our shareholders or
providing development opportunities for our associates
to grow inside Rexnord, the purpose of RBS is to
deliver results. RBS is about leveraging proven tools
and processes to do the “little things” exceedingly well
as we strive to deliver world-class performance across
all facets of our business. This dynamic creates the
efficiencies that enable us to invest more of our time
and resources on what we call breakthroughs.
Over the past year we invested over $20 million into our
businesses to fund breakthroughs, which we define as
opportunities that we project will provide accelerated
growth, profit and cash flow opportunities over the
next three to five years. Our current breakthrough
initiatives are focused on accessing new vertical
markets, improving our ease of doing business and
reducing our overall fixed costs. These breakthroughs
will differentiate us over time and are all incremental
to the steady, sustained progress achieved daily by our
associates as they live the standard we have established.
Later in this annual report, you’ll see just a few
examples selected from hundreds of case studies
that demonstrate how we’ve leveraged RBS to
create value on multiple fronts. In one case, it’s a
nearly 70% reduction in our incident rate that means
highly engaged associates and the world-class
safety levels that could ultimately save us millions of
dollars in insurance premiums. In another, it’s the 95%
improvement in the quality of a particular product
line that resulted in $5 million of annual savings and
more satisfied customers. Other examples illustrate
how our associates’ sustained focus can contribute
to faster growth, with more than
50% reduction in lead time, and to
stronger profits – with a 70% reduction
in costs. By doing all of these things,
we enable better core growth, strong
incremental margins and, ultimately, greater
free cash flow. Aligning and driving our actions
to these core value creation measures are what
define RBS.
Moving Forward
As we look to the future, we have high expectations
for what we believe Rexnord can be. We are also
keenly aware that we need to compete to win business,
compete for investors and compete to attract, retain
and develop highly engaged associates. Our business
system is designed to ensure that we align our goals
with that end in mind. We appreciate the trust you have
placed in us and thank you again for all of your past and
prospective support.
Todd A. Adams
President and Chief Executive Officer of Rexnord
LEV ER AGE
PLATFO RM S
ROB UST & SC ALAB LE
BUSI NESS SY STEM
SUPERIOR
VALUE CREATI ON
MULT IBILLION DOLLAR
GLO BAL MARKETS
LEADING MARKET
POSITIONS AND BRANDS
LONG-TERM
GRO WTH PO TENTI AL
CORE
GROWTH
INCREMENTAL
MARGINS
ACQUISITIONS
CUSTO MER S ATISFACTION
ASSOCI ATE ENGAGEMENT
SUSTAINABLE CO MPETITIVE
ADVANTAGE
SUPERIOR
FREE C ASH
FLOW
SHAREHOLD ER R ETURNS
5
PROCESS &
MOTION CONTROL
Our Process & Motion Control (PMC) platform
designs, manufactures, markets and services
specified, highly engineered mechanical components
used within complex systems where our customers’
reliability requirements and the cost of failure or
downtime are extremely high.
Our products are generally specified or requested by end users as a
result of their reliable performance in demanding environments, our
application engineering capabilities and our ability to provide global
customer support. Over our history we’ve built a vast installed base of
our products into demanding applications all over the world. Given the
nature of these applications, our products wear in use and are typically
replaced like-for-like, which creates a significant aftermarket revenue
opportunity for us. Rexnord leverages an extensive network of more than
2,300 distribution locations and is a leading supplier to the industry’s
largest distributors with long and outstanding channel relationships.
Growing our installed base via new products, applications, geographies
and customers is a key part of our growth strategy.
2014 PMC SALES BY END MARKET
General
Industrial
35%
4% Agriculture
4% Forest & Wood
Products
3% Cement &
Aggregates
3% Construction
Equipment
Energy
6%
11%
Aerospace
17%
17%
Food &
Beverage
Bulk Material
Handling
2014 PMC SALES BY CHANNEL
Aftermarket
54%
46%
OEM & End
Users
PRODUCTS & SERVICES
Offerings include gears, couplings, industrial bearings, FlatTop and
engineered chain, aerospace bearings and seals, conveying equipment
and specialty components, repair and on-going service, Rexnord
Innovation Center and Rexnord Technical Services.
Rest of
World
21%
Europe
16%
US &
Canada
63%
2014 PMC SALES BY DESTINATION
TOP END MARKETS
GENERAL INDUSTRIAL
FOOD & BEVERAGE
BULK MATERIAL
AEROSPACE
ENERGY
6
WATER
MANAGEMENT
Our Water Management (WM) platform designs,
procures, manufactures, and markets products that
provide and enhance water quality, safety, flow
control and conservation.
Our products are integral to the safe distribution and treatment of water.
They are project critical and primarily specification driven. Our WM
platform serves a blue-chip customer base through an extensive sales and
marketing network spanning 49 countries that consists of approximately
1,000 independent sales representatives across 240 sales agencies, in
addition to 240 direct sales and marketing associates worldwide, who
work with local engineers, contractors, builders and architects to specify
our products for use in construction projects.
Our leading brands, broad product portfolio and strong global presence
position us to benefit from global growth trends across a wide array of
end markets and applications, including non-residential construction,
institutional construction, industrial/commercial construction, water and
wastewater infrastructure, and power generation.
PRODUCTS & SERVICES
Offerings include specification drainage systems, sensor flush valves
and faucets, backflow prevention devices, pressure relief valves, sluice
and slide gates, butterfly and plug valves, control valves and actuation
systems, and PEX® piping.
TOP END MARKETS
2014 WM SALES BY END MARKET
Water &
Wastewater
Infrastructure
38%
Residential
Construction
12%
25%
Non-residential
Construction —
Institutional
25%
Non-residential
Construction —
Commercial &
Industrial
2014 WM SALES BY APPLICATION
Retrofit
Construction/
Replacement
25%
37%
New Building
Construction
38%
Water
Treatment,
Distribution
& Storage;
Hydropower
2014 WM SALES BY DESTINATION
Europe
16%
16%
Rest of
World
68%
US &
Canada
NON-RESIDENTIAL CONSTRUCTION
INSTITUTIONAL CONSTRUCTION
WATER & WASTEWATER
RESIDENTIAL CONSTRUCTION
7
REXNORD
BUSINESS SYSTEM
(RBS)
A disciplined approach to sustainable,
superior value creation
The basic tenants of the Rexnord Business System:
Voice of the Customer
Our goal is to be recognized by our customers
as their very best supplier and partner.
We develop and execute strategies that are
consumer centric and market based.
We provide innovative solutions and invest in
relationships.
LEVERAGE
PLATFORMS
ROBUST & SC ALABLE
BUSINESS SYSTEM
SUPERIOR
VALUE CREATION
MULTIBILLION DOLLAR
GLOBAL MARKETS
LEADING MARKET
POSITIONS AND BRANDS
LONG-TERM
GROWTH POTENTIAL
CORE
GROWTH
INCREMENTAL
MARGINS
ACQUISITIONS
CUSTOMER SATISFACTION
ASSOCIATE ENGAGEMENT
SUSTAINABLE CO MPETITIVE
ADVANTAGE
SUPERIOR
FREE CASH
FLOW
SHAREHOLDER RETURNS
Culture of Continuous Improvement
We strive for world-class performance in safety,
quality, delivery, cost and growth in all aspects
of our business and expect to improve each and
every day.
We set high expectations for everyone and
compete to win every day.
Total Associate
Engagement
We believe that the best team
wins and we win as a team.
We invest in the development
of our associates.
We create an environment to
engage everyone in creative
ideas and solutions to provide
value.
Process-based Tools &
Scalable Execution
We develop and deploy world
class tools and processes to
deliver sustainable results.
We believe that what makes our business system unique is that it aligns with the objectives of our
customers, shareholders and associates. The next few pages highlight just a few examples of how we
leverage our business system, everyday, everywhere in the world to create superior value.
8
Total Associate Engagement &
World-class Safety Performance
World-class performance is commonly recognized
in manufacturing as achieving a Total Recordable
Incidence Rate (TRIR) of 1.0 or less. We target a Zero
Injury Workplace. This sends the message to all of our
associates that we are striving for perfection in their
overall safety, and in turn they are engaged in how we
create, establish and sustain some of the safest work
environments in the industry.
It starts with doing the little things like 5S. It migrates to
remarkable associate-driven accomplishments like going
over 1,000 days without a safety incident at one of our
factories; a perfect safety record for four of the last five
years in a different factory or achieving a 68% reduction
incident rates in another.
It leads to more engaged associates and better service
levels for our customers. It results in a $4 million
reduction in safety related costs since fiscal year 2011.
The processes and methodology are all repeatable and
scalable and are leveraged across Rexnord.
Rexnord is committed to achieve a
Zero Injury Workplace and recognizes
the value it presents.
Bearing Safety Index
68%
reduction
Over $4 million
cumulative savings
RBS deployment begins with
a strong foundation. 5S
demonstrates the Rexnord
standard for a clean,
organized, safe and
productive workplace.
9
REXNORD
BUSINESS SYSTEM
(continued)
Quality Improvement
95%
improvement
Over $5 million
cumulative savings
Customer Survey Quality Score
(on a 10 point scale)
Voice of the Customer &
Process-based Tools
Our customers consistently rate product performance
and quality as the highest attributes in determining
why they choose Rexnord. Universally, a metric used
to gauge the degree of quality is defective parts per
million (DPPM). World-class quality, or Six Sigma, is only
3.4 DPPM. In this pursuit, we target a 50% improvement
in our quality performance, year in and year out.
We leverage proven and sophisticated tools and
processes such as Variation Reduction Kaizen, FMEA,
Cause & Effect, and Statistical Process Capability to
drive sustainable improvements. We have more than
120 associates who are certified in Six Sigma and we
certify another 20 annually. We target these types of
improvements and have built these capabilities because
it’s the most important thing to our customers.
As one of many examples within our business, a core
product line reduced DPPM by 95% over the past five
years. This generated over $5 million of cumulative
savings during that time frame. Over the same time
period, our customers consistently rated our quality
performance as the highest among any of our
competition. This example highlights how we operate
the company and the power of the alignment within our
business system. Listening to what our customers want,
establishing world-class expectations, and leveraging
proven tools and processes leads to enhanced customer
satisfaction, improved financial performance and
sustainable capabilities that we leverage across Rexnord.
10
Continuous Improvement
With an increasingly global customer base, our ability to
deliver highly engineered products to demanding
schedules is paramount. With more than 60 manufacturing,
warehousing and service facilities globally, Rexnord is
equipped to efficiently support our customers on a
regional basis with quick response and delivery.
Freight Costs
70%
reduction
Over $20 million cumulative savings
By deploying RBS throughout our vast supply chain
network, we have driven improvements in lead time,
working capital, and cost efficiencies. Reducing lead
times throughout the supply chain by over 50% and
improving delivery by over 25% has industry-generated
leading customer satisfaction ratings. Thousands of
associates engaged in kaizen methodology to drive
continuous improvement on a daily basis create the
foundation for this performance engine. Regardless of
whether we are streamlining the quoting process,
creating assemble-to-order cells, deploying total
preventive maintenance, or installing kanban systems; we
are constantly eliminating waste in the value chain and
enhancing our ability to service our customers.
One example of driving continuous improvement was the
focus on our distribution network and freight optimization
where our teams have delivered over $20 million in
cumulative cost reduction while improving our ability to
respond and service our broad customer base. A more cost
efficient and effective supply chain was created by
optimizing regional product availability and distribution,
improving our global logistics container consolidation and
cross-docking capability, and investing in a state of the art
transportation management system. Deployment of this
RBS roadmap globally and throughout future acquisitions
will continue to generate customer and shareholder value.
Breakthroughs
Three years ago we established a “breakthrough
objective” to permanently reduce our material costs by
$20 million on an annual basis. We didn’t know how to
do it then, but had a view that as we looked ahead, we
needed to ensure that we were positioned to provide
more value in our products relative to their total cost.
Value Engineering Savings Projections
(in millions)
We started by
modifying our
new product
development
process, or stage
gate process, into
a tool that helped
us think differently
about overall
product costs
and the various
features and
benefits relative
to their cost.
We invested in
engineering and
material science
capabilities at
the Rexnord
Innovation Center and leveraged our strategy
deployment process to focus resources, create
stretch goals and objectives, and accountability
within high impact teams. As a result, in the past
two years we have established a robust Value Add
& Value Engineering (VAVE) process to make our
products more cost effective by reducing material
weight, developing and using alternative materials,
and modifying elements of the manufacturing process
to reduce cost. Through last year, as a result of
building this scalable process-based tool, born from
a breakthrough idea, we have already generated over
$13 million in cumulative, permanent cost reductions,
and are actively leveraging this internally developed
process across a funnel of over 300 projects.
Over $13 million cumulative
savings through FY2014
The Rexnord Business Excellence Award was modeled
after the Shingo Prize to drive continuous improvement
and higher levels of operational excellence. This year the
Rexnord Innovation Center won the annual prize for their
development of the VAVE breakthrough.
11
CREATING VALUE
FOR CUSTOMERS
A reputation of differentiated
innovation and expertise.
We deliver solutions to customers
that improve performance, maximize
productivity and enhance safety at the
lowest total cost of ownership. These
differentiators are why customers
worldwide specify Rexnord products.
Engineered Solutions
• Product lines designed for easy
installation generate ~40%
labor savings per project versus
competition.
• Continuous innovation drives higher
levels of specification, up 30% over
the past five years.
• A diverse product portfolio maximizes
specified content per square foot in
new and retrofit installations.
12
VAG Moves Water
• Less than 1% of the Earth’s water is
suitable for drinking purposes.
• Today 1 billion people have no access
to clean drinking water.
• Investments in water networks to improve
distribution and mitigate losses are necessary.
• VAG projects in the last 12 months have
delivered water to approximately 141 million
people.
Keeping the Industry Moving
• Patented Rexnord technology enhances
automotive assembly line safety and
productivity by up to 60%.
• More than 400 global assembly lines translates
to greater than $600M market potential.
• Demonstrated reliability and continuously
improving our customers’ bottom line
through innovation and application
expertise.
Unmatched Engineering Capability
• Our expertise makes us uniquely
qualified to engineer products for the
most critical aircraft applications.
• Continued demands for lighter weight
and more fuel efficient aircraft expand
application opportunities.
• Our engineering success over the
past several years means content per
aircraft has never been higher.
13
FINANCIAL
HIGHLIGHTS
(dollars in millions, except per share amounts)
FISCAL
2014
FISCAL
2013
GROWTH
Sales
$2,082
$2,005
4%
Operating Income
280
255
10%
Sales
(in millions)
Restructuring and other similar charges
Actuarial loss on pension plans
Acquisition fair value / Inventory adjustments
Zurn PEX loss contingency
Stock option expense / LIFO
9
3
2
—
11
9
6
—
10
13
Adjusted Operating Income*
305
293
4%
% of Sales
14.6%
14.6%
Adjusted EBITDA*1
413
405
2%
% of Sales
Adjusted EPS*
Free Cash Flow*2
Net Debt*3
19.8%
20.2%
1.39
144
0.98
103
42%
41%
1,633
1,608
Net Debt / Adjusted EBITDA Ratio4
3.9x
3.9x
* Non-GAAP Financial Measures; see the inside back cover for further explanation.
1 Adjusted EBITDA as defined on page 39 of the Rexnord Fiscal 2014 Form 10-K.
$2250
$2000
$1750
$1500
$1250
$1000
$450
$350
$250
$150
CAGR 9%**
FY10
FY11
FY12
FY13
FY14
Adjusted EBITDA*
(in millions)
CAGR 10%**
3
1
4
$
FY10
FY11
FY12
FY13
FY14
2 Free cash flow calculated as cash flow from operations, less capital expenditures, plus non-cash
excess tax benefit on stock option exercises.
*Non-GAAP Financial Measure
** Compound Annual Growth Rate (CAGR)
3 Net Debt calculated as total debt less cash and cash equivalents.
4 Net Debt / Adjusted EBITDA ratio calculated as net debt divided by adjusted EBITDA pro forma
for acquisitions as permitted by our credit agreement.
2014 SALES BY SEGMENT
2014 TOTAL SALES BY DESTINATION
Process
& Motion
Control
62%
Europe
16%
19%
Rest of
World
65%
US &
Canada
38%
Water
Management
14
Table of Contents
(Mark one)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2014
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: 001-35475
_________________________________________________
REXNORD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
4701 West Greenfield Avenue, Milwaukee, Wisconsin
(Address of Principal Executive Offices)
20-5197013
(I.R.S. Employer Identification No.)
53214
(Zip Code)
Registrant’s telephone number, including area code: (414) 643-3739
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock $.01 par value
Name of Each Exchange of Which Registered
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
__________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
No
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 and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted 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 and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
As of September 28, 2013, the end of the Registrant's second fiscal quarter, the aggregate market value of the shares of common stock (based upon the
$20.85 closing price on the New York Stock Exchange on September 27, 2013, the last trading date of that quarter) held by non-affiliates (excludes shares reported
as beneficially owned by then-current directors, executive officers and by Apollo-entity stockholders - does not constitute an admission as to affiliate status) was
approximately $825.4 million.
As of May 15, 2014, there were 101,216,598 shares of common stock outstanding.
Part III of this Annual Report on Form 10-K incorporates by reference certain information from the Proxy Statement for the Registrant's fiscal 2015 annual
meeting of stockholders, to be held on or about July 31, 2014, which proxy statement will be subsequently filed.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
TABLE OF CONTENTS
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
Executive Officers of the Registrant
Part II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Part III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
Part IV
4
13
23
24
26
26
26
26
28
30
45
46
88
88
88
90
90
90
90
90
92
2
Table of Contents
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements” within the meaning of the federal securities laws that involve risks and
uncertainties. Forward-looking statements include statements we make concerning our plans, objectives, goals, strategies,
future events, future revenues or performance, capital expenditures, financing needs and other information that is not historical
information and, in particular, appear in Items 1, 1A and 7 hereof. When used in this report, the words “estimates,” “expects,”
“anticipates,” “projects,” “forecasts,” “plans,” “believes,” “foresees,” “seeks,” “likely,” “may,” “might,” “will,” “should,”
“goal,” “target” or “intends” and variations of these words or similar expressions (or the negative versions of any such words)
are intended to identify forward-looking statements. All forward-looking statements are based upon information available to us
on the date of this report.
These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of our
control, that could cause actual results to differ materially from the results discussed in the forward-looking statements,
including, among other things, the matters discussed in this report in the Items identified above. Some of the factors that we
believe could affect our results include:
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the impact of our substantial indebtedness;
the effect of local, national and international economic, credit and capital market conditions on the economy in
general, and on our customers and the industries in which we operate in particular;
general economic and business conditions, market factors and our dependence on customers in cyclical industries;
the seasonality of our sales;
our access to available and reasonable financing on a timely basis and the availability of financing for our
customers;
our competitive environment;
the loss of any significant customer;
increases in cost of our raw materials and our possible inability to increase product prices to offset such increases;
viability of key suppliers;
dependence on independent distributors;
certain rights of our principal stockholders and anti-takeover provisions in our charter documents;
changes in technology and manufacturing techniques;
loss of key personnel;
the costs of environmental compliance and/or the imposition of liabilities under environmental, health and safety
laws and regulations;
the costs of asbestos claims;
impact of weather on the demand for our products;
risks associated with international operations, which have increased in size due to our recent acquisitions;
the costs related to strategic acquisitions or divestitures or the integration of recent and future acquisitions into our
business;
inability to make necessary capital expenditures;
reliance on intellectual property;
potential product liability claims;
• work stoppages by unionized employees;
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performance, and potential failure, of our information and data security systems;
changes in pension funding requirements and costs of maintaining healthcare insurance and benefits;
potential impairment of goodwill and intangible assets;
changes in governmental laws and regulations, or the interpretation or enforcement thereof, including for
environmental matters; and
the other factors set forth herein, including those set forth under “Risk Factors” in Part I Item 1A.
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There are likely other factors that could cause our actual results to differ materially from the results referred to in the forward-
looking statements. All forward-looking statements attributable to us apply only as of the date of this report and are expressly
qualified in their entirety by the cautionary statements included in this report. We undertake no obligation to publicly update or
revise forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of
unanticipated events, except as required by law.
ITEM 1. BUSINESS.
General
Rexnord Corporation (“Rexnord”), a Delaware corporation, was incorporated in 2006 in connection with the acquisition by
affiliates of the private equity firm Apollo Management, L.P. (“Apollo”) and certain members of management of RBS Global, Inc.
("RBS Global"), which is the foundation of our Process & Motion Control platform, from its previous owners. Since then, we
have expanded significantly, including the creation of our Water Management platform in 2007 by the acquisition of the Zurn
Plumbing products business and, by means of acquisitions of other companies or operations. See “Acquisitions and Transactions”
below for further information as to these transactions.
Unless otherwise noted, “Rexnord,” “we,” “us,” “our” and the “Company” means Rexnord Corporation and its consolidated
subsidiaries, including RBS Global and Rexnord LLC. Our fiscal year is the year ending March 31 of the corresponding calendar
year. For example, our fiscal year 2014, or fiscal 2014, means the period from April 1, 2013 to March 31, 2014.
Additional Information
The address of our principal executive office is 4701 W. Greenfield Avenue, Milwaukee, Wisconsin 53214. Our phone
number is (414) 643-3739. Our internet website address is www.rexnord.com. We make available free of charge, on or through
our internet website, as soon as reasonably practicable after they are electronically filed or furnished to the Securities and Exchange
Commission (the “SEC”), our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
proxy statements on Schedule 14A, as well as amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Exchange Act. Copies of any materials that we file with the SEC can also be obtained free of charge through the SEC's
website at www.sec.gov. The SEC's Public Reference Room can be contacted at 100 F Street, N.E., Washington, D.C. 20549, or
by calling 1-800-732-0330. In addition, the (i) charters for the Audit, Nominating and Corporate Governance, and Compensation
Committees of our Board of Directors; (ii) our Corporate Governance Guidelines; and (iii) our Code of Business Conduct and
Ethics are also available on our website. We will also post any amendments to these documents, or information about any waivers
granted to directors or executive officers with respect to the Code of Ethics, on our website at the above web address. Our internet
website and the information contained on or connected to that site are not incorporated by reference into this Form 10-K.
Our Company
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.
Our strategy is to build the Company around multiple, global strategic platforms that participate in end-markets with
sustainable growth characteristics where we are, or have the opportunity to become, the industry leader. We have a track record
of acquiring and integrating companies and expect to continue to pursue strategic acquisitions within our existing platforms that
will expand our geographic presence, broaden our product lines and allow us to move into adjacent markets. Over time, we may
add strategic platforms to our Company. Currently, our business is comprised of two platforms, Process & Motion Control and
Water Management.
We believe that we have one of the broadest portfolios of highly engineered, mission and project critical Process & Motion
Control products in the industrial and aerospace end-markets. Our Process & Motion Control product portfolio includes gears,
couplings, industrial bearings, aerospace bearings and seals, FlatTop™ chain, engineered chain and conveying equipment. Our
Water Management platform is a leader in the multi-billion dollar, specification-driven, commercial construction market for water
management products. Through acquisitions, we have gained entry into the municipal water and wastewater treatment markets.
Our Water Management product portfolio includes professional grade specification drainage products, flush valves and faucet
products, backflow prevention pressure release valves, PEX piping used primarily in non-residential construction end-markets
and engineered valves and gates for the water and wastewater treatment market.
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Our products are generally “specified” or requested by end users across both of our strategic platforms as a result of their
reliable performance in demanding environments, our custom application engineering capabilities and our ability to provide global
customer support. Typically, our Process & Motion Control products are initially incorporated into products sold by original
equipment manufacturers (“OEMs”) or sold to end users as critical components in large, complex systems where the cost of failure
or downtime is high and thereafter replaced through industrial distributors as they are consumed or require replacement.
The demand for our Water Management products is primarily driven by new infrastructure, the retro-fit of existing structures
to make them more energy and water efficient, commercial construction and, to a lesser extent, residential construction. We believe
we have become a market leader in the industry by meeting the stringent third-party regulatory, building and plumbing code
requirements and subsequently achieving specification of our products into projects and applications.
We are led by an experienced, high-caliber management team that employs RBS as a proven operating philosophy to drive
excellence and world-class performance in all aspects of our business by focusing on the “Voice of the Customer” process and
ensuring superior customer satisfaction. Our footprint encompasses 39 principal Process & Motion Control manufacturing,
warehouse and repair facilities and 27 principal Water Management manufacturing and warehouse facilities located around the
world which allow us to meet the needs of our increasingly global customer base as well as our distribution channel partners.
Our Platforms
Below is a summary of our net sales by segment and geographic region of origination (dollars in millions):
Process & Motion Control
% of net sales
Water Management
% of net sales
Consolidated
% of net sales
United States
Year Ended March 31, 2014
Europe
Rest of World
Total Net Sales
850.5
$
236.3
$
199.1
$
1,285.9
66.1%
525.9
66.1%
18.4%
172.8
21.7%
15.5%
97.4
12.2%
100.0%
796.1
100.0%
1,376.4
$
409.1
$
296.5
$
2,082.0
66.1%
19.7%
14.2%
100.0%
$
$
See more information regarding our segments and sales by geography within Part II Item 8, Note 21 Business Segment
Information to the consolidated financial statements.
Process & Motion Control
Our 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 high. The Process & Motion Control product portfolio includes gears, couplings, industrial bearings, aerospace bearings and
seals, FlatTop™ chain, engineered chain and conveying equipment and are marketed and sold globally under several brands,
including Rexnord®, Rex®, Falk® and Link-Belt®. We sell our Process & Motion Control products into a diverse group of attractive
end-markets, including mining, general industrial applications, cement and aggregates, agriculture, forest and wood products,
petrochemical, energy, food and beverage, aerospace and wind energy.
We have established long-term relationships with OEMs and end users serving a wide variety of industries. As a result of
our long-term relationships with OEMs and end users, we have created a significant installed base for our Process & Motion
Control products, which are consumed or worn in use and have a relatively predictable replacement cycle. We believe this
replacement dynamic drives recurring after market demand for our products. We estimate that approximately 54% of our Process &
Motion Control net sales are to distributors, who primarily serve the end user/OEM after market demand for our products.
Most of our products are critical components in large scale manufacturing processes, where the cost of component failure
and resulting down time is high. We believe our reputation for superior quality, application expertise and ability to meet lead time
expectations are highly valued by our customers, as demonstrated by their preference to replace their worn Rexnord products with
new Rexnord products, or “like-for-like” product replacements. We believe this replacement dynamic for our products, combined
with our significant installed base, enables us to achieve premium pricing, generates a source of recurring revenue and provides
us with a competitive advantage. We believe the majority of our products are purchased by customers as part of their regular
maintenance budget, and in many cases do not represent significant capital expenditures.
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Water Management
Our 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, engineered valves and gates for the water and wastewater treatment market
and PEX piping and are marketed and sold through widely recognized brand names, including Zurn®, Wilkins®, VAG®, GA®,
Rodney Hunt® and Fontaine®.
Over the past century, the businesses that comprise our Water Management platform have established themselves as
innovators and leading designers, manufacturers and distributors of highly engineered products and solutions that control the flow,
delivery, treatment and conservation of water to the infrastructure construction, commercial construction and, to a lesser extent,
the residential construction end-markets. Segments of the infrastructure end market include: municipal water and wastewater,
transportation, government, health care and education. Segments of the commercial construction end-market include: lodging,
retail, dining, sports arenas, and warehouse/office. The demand for our Water Management products is primarily driven by new
infrastructure, the retro-fit of existing structures (to make them more energy and water efficient) and commercial construction.
Our Water Management products are principally specification-driven and project-critical and typically represent a low
percentage of the overall project cost. We believe these characteristics, coupled with our extensive distribution network, create a
high level of end user loyalty for our products and allow us to maintain leading market shares in the majority of our product lines.
We believe we have become a market leader in the industry by meeting the stringent country specific regulatory, building and
plumbing code requirements and subsequently achieving specification of our products into projects and applications. The majority
of these stringent testing and regulatory approval processes are completed through the University of Southern California (“USC”),
the International Association of Plumbing and Mechanical Codes (“IAPMO”), the National Sanitation Foundation (“NSF”), the
Underwriters Laboratories (“UL”), Factory Mutual (“FM”), and the American Waterworks Association (“AWWA”) prior to the
commercialization of our products.
Our Water Management platform has an extensive sales and marketing network spanning 49 countries, which consists of
approximately 1,000 independent sales representatives across 240 sales agencies in addition to 240 direct sales and marketing
associates who work with local engineers, contractors, builders and architects to specify our products for use in construction
projects. Specifically, it has been our experience that, once an architect, engineer, contractor or owner has specified our product
with satisfactory results, that person will generally continue to use our products in future projects. The inclusion of our products
with project specifications, combined with our ability to innovate, engineer and deliver products and systems that save time and
money for engineers, contractors, builders and architects, has resulted in growing demand for our products. Our distribution model
is predicated upon maintaining high product availability near our customers. We believe that this model provides us with a
competitive advantage as we are able to meet our customer demand with local inventory at significantly reduced lead times as
compared to others in our industry.
On April 15, 2014, we 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. Green Turtle, based in Toronto, Ontario, and Charlotte,
North Carolina, is a manufacturer of branded fiberglass oil and grease separators and traps. This acquisition broadens the product
portfolio of our existing Water Management platform. Our fiscal 2015 financial position and results from operations will include
the Green Turtle operations subsequent to April 15, 2014.
Our Markets
We evaluate our competitive position in our markets based on available market data, relevant benchmarks compared to our
relative peer group and industry trends. We generally do not participate in segments of our served markets that are thought of as
commodities or in applications that do not require differentiation based on product quality, reliability and innovation. In both of
our platforms, we believe the end-markets we serve span a broad and diverse array of commercial and industrial end-markets with
solid fundamental long-term growth characteristics.
Process & Motion Control Market
The market for Process & Motion Control products is very fragmented with most participants having single or limited product
lines and serving specific geographic markets. While there are numerous competitors with limited product offerings, there are
only a few national and international competitors of a size comparable to us. While we compete with certain domestic and
international competitors across a portion of our product lines, we do not believe that any one competitor directly competes with
us on all of our product lines. The industry's customer base is broadly diversified across many sectors of the economy. We believe
that growth in the Process & Motion Control market is closely tied to overall growth in industrial production which we believe
has fundamental and significant long-term growth potential. In addition, we believe that Process & Motion Control manufacturers
who innovate to meet the changes in customer demands and focus on higher growth end-markets can grow at rates faster than
overall United States industrial production.
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The Process & Motion Control market is also characterized by the need for sophisticated engineering experience, the ability
to produce a broad number of niche products with very little lead time and long-standing customer relationships. We believe entry
into our markets by competitors with lower labor costs, including foreign competitors, will be limited due to the fact that we
manufacture highly specialized niche products that are critical components in large scale manufacturing processes. In addition,
we believe there is an industry trend of customers increasingly consolidating their vendor bases, which we believe should allow
suppliers with broader product offerings such as ourselves, to capture additional market share.
Water Management Market
We believe the markets in which our Water Management platform participates are relatively fragmented with competitors
across a broad range of industries and product lines. Although competition exists across all of our Water Management businesses,
we do not believe that any one competitor directly competes with us across all of our product lines. We believe that we can continue
to grow our platform at rates above the growth rate of the overall market and the growth rate of our competition, by focusing our
efforts and resources towards end-markets that have above average growth characteristics.
We believe the areas of the Water Management industry in which we compete are tied to growth in infrastructure and
commercial construction, which we believe have significant long-term growth fundamentals. Historically, the infrastructure and
commercial construction industry has been more stable and less vulnerable to down-cycles than the residential construction industry.
Compared to residential construction cycles, downturns in infrastructure and commercial construction have been shorter and less
severe, and upturns have lasted longer and had higher peaks in terms of spending as well as units and square footage. In addition,
we believe that water management manufacturers with innovative products, like ours, are able to grow at a faster pace than the
broader infrastructure and commercial construction markets, as well as mitigate downturns in the cycle.
The Water Management industry's specification-driven end-markets require manufacturers to work closely with engineers,
contractors, builders and architects in local markets to design specific applications on a project-by-project basis. As a result,
building and maintaining relationships with architects, engineers, contractors and builders, who specify products for use in
construction projects, and having flexibility in design and product innovation are critical to compete effectively in the market.
Companies with a strong network of such relationships have a competitive advantage. Specifically, it has been our experience
that, once an engineer, contractor, builder or architect has specified our product with satisfactory results, that person often will
continue to use our products in future projects.
Our Products
Process & Motion Control Products
Our Process & Motion Control products are generally critical components in the machinery or plant in which they operate,
yet they typically account for a low percentage of an end user's total production cost. We believe, because the costs associated
with Process & Motion Control product failure to the end user can be substantial, end users in most of the markets we serve focus
on Process & Motion Control products with superior quality, reliability and availability, rather than considering price alone, when
making a purchasing decision. We believe that the key to success in our industry is to develop and maintain a reputation for quality
and reliability, as well as create and maintain an extensive distribution network, which we believe leads to a strong preference to
replace “like-for-like” products driving recurring aftermarket revenues and market share gain.
Gears
We are a leading manufacturer of gear drives and gear sets for the heavy duty industrial market. Gear drives and gear sets
reduce the output speed and increase the torque from an electronic motor or engine to the level required to drive a particular piece
of equipment. Our gear drives, service and gear sets are used in a number of heavy duty industries. These primary industries
include the natural resource extraction, steel, pulp and paper, chemical, forest and wood industries. We manufacture a wide range
of heavy duty, medium and light duty gear drives used for bulk material handling, mixing, pumping and general gearing applications.
We also operate a gear service and repair business through our Product Service group (PragerTM,, Renew® and Cline).
Couplings
Couplings are primarily used in high-speed, high-torque applications and are the interface between two shafts that permit
power to be transmitted from one shaft to the other. Our couplings are sold to a variety of end-markets, including the petrochemical
and refining, wood processing, chemical, power generation and natural resources industries. Couplings are comprised of the grid,
flexible disc, elastomeric and gear product lines and are sold under the Steelflex®, Thomas®, Omega®, Rex®, Viva®, Wrapflex®,
Lifelign®, True Torque®, Addax® and Autogard® brand names.
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Industrial Bearings
Industrial bearings are components that support, guide and reduce the friction of motion between fixed and moving machine
parts. These products are primarily sold for use in the mining, aggregates, forest and wood products, construction equipment, and
agricultural equipment industries. Industrial bearings are sold either mounted or unmounted. We primarily produce mounted
bearings, which are offered in a variety of specialized housings to suit specific industrial applications, and generally command
higher margins than unmounted bearings.
FlatTop
Our FlatTop™ chain is a highly-engineered conveyor chain that provides a smooth continuous conveying surface that is
critical to high-speed operations such as those used to transport cans and bottles in beverage-filling operations, and is primarily
sold to the food and beverage, consumer products, warehousing and distribution, automotive and parts processing industries.
Aerospace Bearings and Seals
We supply our aerospace bearings and seals to the commercial aircraft, military aircraft and regional jet end-markets for use
in door systems, engine accessories, engine controls, engine mounts, flight control systems, gearboxes, landing gear and rotor
pitch controls. The majority of our sales are to engine and airframe OEMs that specify our Process & Motion Control products
for their aircraft platforms. Our aerospace bearings and seals products consist of rolling element airframe bearings sold under the
Shafer® brand name, slotted-entry and split-ball sliding bearings sold under the PSI® brand name and aerospace seals that are sold
under the Cartriseal® brand name, which are primarily sold for use in both aerospace and industrial applications. During fiscal
2014, we expanded our product portfolio through the acquisitions of build-to-print manufacturers of highly specialized gears sold
under the Precision Gear LLC ("Precision Gear") and Micro Precision Gear Technology ("Micro Precision") brand names.
Special Components
Our special components products are comprised of three primary product lines: electric motor brakes, miniature Process &
Motion Control components and security devices for utility companies. These products are manufactured by our niche businesses:
Stearns, W.M. Berg and Highfield. Stearns' products are used in a diverse range of applications, including steel mills, oil field
equipment, pulp processing equipment, large textile machines, rubber mills, metal forming machinery and dock and pier handling
equipment. W.M. Berg sells its products to a variety of markets, including aerospace, semiconductor, medical equipment, robotics,
instrumentation, office equipment and satellite communications. Highfield's products are sold to a variety of markets, including
electric, gas, water, telecommunications and utilities.
Conveying Equipment and Engineered Chain
Our conveying equipment and industrial chain products are used in various applications in numerous industries, including
food and food processing, beverage and container, mining, construction and agricultural equipment, hydrocarbon processing and
cement and aggregates processing. Our primary products include (i) conveying equipment, (ii) engineered steel chain, and
(iii) roller chain. Our conveying equipment product group provides design, assembly, installation and after-the-sale services
primarily to the mining, cement and aggregates industries. Its products include engineered elevators, conveyors and components
for medium to heavy duty material handling applications. Our engineered steel chain products, which are sold under the Link-
Belt® and Rexnord® brand names, are designed and manufactured to meet the demands of customers' specific applications. These
products are used in many applications including cement elevators, construction and mining equipment and conveyors, and they
are supplied to the cement and aggregates, energy, food and beverage, and forest and wood products industries.
Water Management Products
Water Management products tend to be project-critical, highly-engineered and high value-add and typically are a low
percentage of overall project cost. We believe the combination of these features creates a high level of end user loyalty. Demand
for these products is influenced by regulatory, building and plumbing code requirements. Many Water Management products must
meet the stringent country specific regulatory, building and plumbing code requirements prior to the commercialization of our
products (for example, USC, IAPMO, NSF, UL, FM and AWWA). In addition, many of these products must meet detailed
specifications set by water management engineers, contractors, builders and architects.
Specification Drainage
Specification drainage products are used to control storm water, process water and potable water in various commercial,
industrial, civil and irrigation applications. This product line includes point drains (such as roof drains and floor drains), linear
drainage systems, interceptors, hydrants, fixture carrier systems, chemical drainage systems and light commercial drainage
products.
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Water Control and Safety
Our water control and safety products are sold under the Wilkins® brand name and encompass a wide variety of valves,
including backflow preventers, fire system valves, pressure reducing valves and thermostatic mixing valves. These products are
designed to meet the stringent requirements of independent test labs, such as the Foundation for Cross Connection Control and
Hydraulic Research at USC, NSF, UL and FM, and are sold into the commercial and industrial construction applications as well
as the fire protection, waterworks and irrigation end-markets.
Commercial Brass
Zurn's commercial brass products include manual and sensor operated flush valves marketed under the Aquaflush®,
AquaSense®, AquaVantage® and HydroVantageTM brand names and heavy duty commercial faucets marketed under the AquaSpec®
brand name. Innovative water conserving fixtures are marketed under the EcoVantage® and Zurn One® brand names. These products
are commonly used in office buildings, schools, hospitals, airports, sports facilities, convention centers, shopping malls, restaurants
and industrial production buildings. The Zurn One Systems® integrate commercial brass and fixtures into complete, easily
customizable plumbing systems, and thus provide a valuable time and cost-saving means of delivering commercial and institutional
bathroom fixtures. The EcoVantage® fixture systems promote water-efficiency and low consumption of water that deliver savings
for building owners in new construction and retro-fit bathroom fixture installations.
PEX
PEX is our product line manufactured out of cross-linked polyethylene into tubing and is well-suited for high temperature
and pressure fluid distribution piping. Our PEX products include complete lines of pipe, fittings, valves and installation tools for
both potable water and radiant heating systems. These systems are engineered to meet stringent NSF requirements.
Water and Wastewater
Our water and wastewater products are primarily sold under the VAG®, GA®, Rodney Hunt® and Fontaine® brand names and
are used to control the flow of water and wastewater throughout the water cycle from raw water through collection, distribution
and wastewater treatment. These products are highly specified, designed and manufactured. Products include automatic control
valves, check valves, air valves, butterfly valves, water control gates, hydrants, actuation systems, and other specialized products
for municipal, industrial, and hydropower applications. Our comprehensive product lines are primarily sold into the growing and
less-cyclical water supply and treatment markets worldwide.
Acquisitions and Transactions
Rexnord has grown significantly in recent years by means of acquisitions. Information regarding some of our recent
acquisitions and a joint venture, are included below. Our results of operations include the acquired operations subsequent to the
respective acquisition dates included below.
Precision Gear Holdings LLC Acquisition
On December 16, 2013, we acquired Precision Gear Holdings, LLC (“PGH”) for a total cash purchase price of $77.1 million,
net of cash acquired and excluding transaction costs. PGH has two operating subsidiaries, Merit Gear LLC (“Merit Gear”), located
in Antigo, Wisconsin, and Precision Gear, located in Twinsburg, Ohio. Merit Gear is a build-to-print manufacturer of high-quality
gearing and specialized gearboxes primarily for the North American oil and gas market, along with other diversified industrial
markets. Precision Gear is a leading manufacturer of highly specialized gears primarily serving the aerospace market, along with
various other industrial markets. This acquisition was complementary to our existing Process & Motion Control product portfolio.
L.W. Gemmell Acquisition
On August 30, 2013, we acquired certain assets of L.W. Gemmell ("LWG") for a total cash purchase price of $8.2 million,
excluding transactions costs. LWG, based in Australia, is a distributor of non-residential plumbing products. A portion of LWG's
historical sales were from existing Rexnord Water Management product lines. As such, the acquisition provided us with additional
product offerings and the opportunity to expand our international presence through a more direct ownership structure as well as
additional product offerings.
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Micro Precision Gear Technology Limited Acquisition
On August 21, 2013, we acquired certain assets of Micro Precision for a total cash purchase price of $22.2 million, excluding
transactions costs. Micro Precision, based in the United Kingdom, is a built-to-print manufacturer of specialty gears and electric
motor components primarily sold to the aerospace market. This acquisition expanded our Process & Motion Control product
offerings and our presence in Europe.
Klamflex Pipe Couplings Ltd. Acquisition
On April 26, 2013, we acquired Klamflex Pipe Couplings Ltd. ("Klamflex") for a total cash purchase price of $4.5 million,
net of cash acquired and excluding transaction costs. Klamflex, based in South Africa, is a manufacturer of pipe couplings, flange
adapters, dismantling joints and repair clamps. This acquisition broadened the product portfolio of our existing Water Management
platform and expanded our global presence.
Water Management Joint Venture
During the fiscal 2014, we established a new French sales office for our Water Management platform to expand its European
water and wastewater market presence via a joint venture between us and six external sales associates. We contributed an immaterial
amount of capital to the joint venture. We have a 51% ownership stake and the new joint venture has been wholly-consolidated
in our financial statements.
Cline Acquisition
On December 13, 2012, we acquired Cline Acquisition Corp. ("Cline") for a total cash purchase price of $19.6 million, net
of cash acquired and excluding transaction costs. Cline, based in Taylors, South Carolina, is a service business specializing in the
manufacturing, repair and refurbishment of drive shafts, clutches and brakes. This acquisition was a product line extension of our
existing Process & Motion Control service offerings and expanded our presence in the southeast region of the U.S.
VAG Holding Acquisition
On October 10, 2011, we acquired VAG Holding GmbH (“VAG”) for a total cash purchase price of $238.6 million, net of
cash acquired and excluding transaction costs. VAG is a global leader in engineered valve solutions across a broad range of
applications, including water distribution, wastewater treatment, dams and hydropower generation, as well as various other
industrial applications. This acquisition expanded our Water Management platform and granted further access to key markets
outside of North America.
Autogard Acquisition
On April 2, 2011, we acquired Autogard Holdings Limited and affiliates (“Autogard”) for a total cash purchase price of
$18.2 million, net of cash acquired. Autogard is a European-based manufacturer of torque limiters and couplings. The acquisition
further expanded our global Process & Motion Control product portfolio and allowed us to provide increased capabilities and
support to our global customer base.
Divestitures
In addition to making acquisitions, we from time to time review our operations to determine whether it would be in our
interest to dispose of non-core business units, and make strategic dispositions if and when appropriate.
During fiscal 2013, we completed the sale of a non-core engineered chain business located in Shanghai, China within the
Process & Motion Control segment for a total sale price of $2.5 million (the "discontinued operation"). We recorded a pre-tax loss
on disposal of approximately $0.5 million in fiscal 2013, which is presented on the consolidated Statement of Operations as a loss
from discontinued operations, net of tax. We have no continuing involvement in the business subsequent to the sale and historical
results are presented as a discontinued operation in our consolidated financial statements.
Additionally, during fiscal 2012, we sold substantially all of the net assets of a non-material, underperforming product line
within our Process & Motion Control segment based in Germany for a total sale price of $4.5 million (the “divestiture”). We
recorded a pre-tax loss on divestiture of approximately $6.4 million during fiscal 2012.
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Customers
Process & Motion Control Customers
Our Process & Motion Control components are either incorporated into products sold by OEMs or sold to end users through
industrial distributors as aftermarket products. While approximately 54% of our Process & Motion Control net sales are aftermarket,
OEMs and end users ultimately drive the demand for our Process & Motion Control products. With approximately 2,400 distributor
locations worldwide, we have one of the most extensive distribution networks in the industry. The largest of our Process & Motion
Control industrial distributors, which is also our largest customer, accounted for approximately 8.6%, 7.9%, and 7.4% of
consolidated net sales during the fiscal years ended March 31, 2014, 2013 and 2012, respectively.
Rather than serving as passive conduits for delivery of product, our industrial distributors participate in the overall competitive
dynamic in the Process & Motion Control industry. Industrial distributors play a role in determining which of our Process &
Motion Control products are stocked at their distributor centers and branch locations and, consequently, are most readily accessible
to aftermarket buyers, and the price at which these products are sold.
We market our Process & Motion Control products both to OEMs and directly to end users to create preference of our
products through end user specification. We believe this customer preference is important in differentiating our Process & Motion
Control products from our competitors' products, and preserves our ability to create channel partnerships where distributors will
recommend Rexnord products to OEMs and end users. In some instances, we have established a relationship with the end user
such that we, the end user, and the end user's preferred distributor enter into a trilateral agreement whereby the distributor will
purchase our Process & Motion Control products and stock them for the end user. We believe our extensive product portfolio
positions us to benefit from the trend towards rationalizing suppliers by industrial distributors.
Water Management Customers
Our products sold to customers in our commercial construction, infrastructure and residential construction end-markets are
distributed through independent sales representatives, plumbing wholesalers and industry-specific distributors in the food service,
industrial, janitorial and sanitation industries.
Our independent sales representatives work with wholesalers to assess and meet the needs of building contractors. They
also combine knowledge of our products, installation and delivery with knowledge of the local markets to provide contractors
with value added service. We use several hundred independent sales representatives nationwide, along with a network of
approximately 90 third-party warehouses, to provide our customers with same-day service and quick response times.
Water and wastewater end users primarily consist of municipalities. Our independent sales representatives, as well as
approximately 240 direct sales and marketing associates, work with these end users, as well as their general contractors and
engineering firms, to provide them with the engineered solutions that meet their needs. VAG®, GA®, Rodney Hunt® and Fontaine®
benefit from strong brand recognition in the industry, which is further bolstered by a strong customer propensity to replace “like-
for-like” products.
In addition to our domestic Water Management manufacturing facilities, we have maintained a global network of independent
sources that manufacture high quality, lower cost component parts for our commercial and institutional products. These sources
fabricate parts to our specifications using our proprietary designs, which enables us to focus on product engineering, assembly,
testing and quality control. By closely monitoring these sources and through extensive product testing, we are able to maintain
product quality and be a cost competitive producer of commercial and institutional products.
Product Development
The majority of our new product development begins with our extensive “Voice of the Customer” operating philosophy. We
have a team of approximately 400 engineers and technical employees who are organized by product line. Each of our product
lines has technical staff responsible for product development and application support. The Rexnord Innovation Center provides
additional support through enhanced capabilities and specialty expertise that can be utilized for product innovation and new product
development. The Rexnord Innovation Center is a certified lab comprised of approximately 40 specialists that offers testing
capability and support during the development process to all of our product lines. Our existing pipeline and continued investment
in new product development are expected to drive revenue growth as we address key customer needs.
In both of our Process & Motion Control and Water Management platforms, we have demonstrated a commitment to
developing technologically advanced products within the industries we serve. In the Process & Motion Control platform, we had
approximately 150 and approximately 600 active United States and foreign patents, respectively, as of March 31, 2014. In addition,
we thoroughly test our Process & Motion Control products to ensure their quality, understand their wear characteristics and improve
their performance. These practices have enabled us, together with our customers, to develop reliable and functional Process &
Motion Control solutions. In our Water Management platform, we had approximately 80 and approximately 90 active United
States and foreign patents, respectively, as of March 31, 2014. Product innovation is crucial in the commercial and institutional
plumbing products markets because new products must continually be developed to meet specifications and regulatory demands.
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Zurn's plumbing products are known in the industry for such innovation. During fiscal 2014, 2013, and 2012 our total investment
in research, development and engineering was $41.4 million, $38.0 million, and $37.8 million, respectively, or approximately 2%
of net sales.
Rexnord Business System (“RBS”)
We operate our Company in a disciplined way. The Rexnord Business System is our operating philosophy and it creates a
scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-
class operating performance. RBS is based on the following principles: (1) strategy deployment (a long-term strategic planning
process that determines annual improvement priorities and the actions necessary to achieve those priorities); (2) measuring our
performance based on customer satisfaction, or the “Voice of the Customer;” (3) involvement of all our associates in the execution
of our strategy; and (4) a culture that embraces Kaizen, the Japanese philosophy of continuous improvement. We believe applying
RBS can yield superior growth, quality, delivery and cost positions relative to our competition, resulting in enhanced profitability
and ultimately the creation of stockholder value. As we have applied RBS over the past several years, we have experienced
significant improvements in growth, productivity, cost reduction and asset efficiency and believe there are substantial opportunities
to continue to improve our performance as we continue to apply RBS.
Suppliers and Raw Materials
The principal materials used in our Process & Motion Control and Water Management manufacturing processes are
commodities and components available from numerous sources. The key materials used in our Process & Motion Control
manufacturing processes include: sheet, plate and bar steel, castings, forgings, high-performance engineered plastic and a variety
of components. Within our Water Management platform, we purchase a broad range of materials and components throughout the
world in connection with our manufacturing activities that include: bar steel, brass, castings, copper, zinc, forgings, plate steel,
high-performance engineered plastic and resin. Our global sourcing strategy is to maintain alternate sources of supply for our
important materials and components wherever possible within both our Process & Motion Control and Water Management
platforms. Historically, we have been able to successfully source materials, and consequently are not dependent on a single source
for any significant raw material or component. As a result, we believe there is a readily available supply of materials in sufficient
quantity from a variety of sources to serve both our short-term and long-term requirements. Additionally, we have not experienced
any significant shortage of our key materials and have not historically engaged in hedging transactions for commodity supplies.
We generally purchase our materials on the open market. However, in certain situations we have found it advantageous to enter
into contracts for certain commodity purchases. Although currently we are not a party to any unconditional purchase obligations,
including take-or-pay contracts or through-put contracts, these contracts generally have had one to five-year terms and have
contained competitive and benchmarking clauses to ensure competitive pricing.
Backlog
Our backlog of unshipped orders was $468 million at both March 31, 2014 and 2013. As of March 31, 2014, approximately
11% of our backlog was scheduled to ship beyond fiscal 2015. Also, see Risk Factor titled “The loss or financial instability of any
significant customer could adversely affect our business, financial condition, results of operations or cash flows.” within Part I
Item 1A of this report for more information on the risks associated with backlog.
Seasonality
We do not experience significant seasonality of demand for our Process & Motion Control products, although sales generally
are slightly higher during our fourth fiscal quarter as our customers spend against recently approved capital budgets and perform
maintenance and repairs in advance of spring and summer activity. Our Process & Motion Control end-markets also do not
experience significant seasonality of demand.
Demand for our Water Management products is primarily driven by commercial construction activity, remodeling and retro-
fit opportunities, and to a lesser extent, new home starts as well as water and wastewater infrastructure expansion for municipal,
industrial and hydropower applications. Accordingly, weather has an impact on the cyclicality of certain end-markets. With the
exception of our remodeling and retro-fit opportunities, weather is an important variable as it significantly impacts construction.
Spring and summer months in the United States and Europe represent the main construction season for increased construction in
the commercial and institutional markets, as well as new housing starts. As a result, sales generally decrease slightly in the third
and fourth fiscal quarters as compared to the first two quarters of the fiscal year. The autumn and winter months generally impede
construction and installation activity.
Our business also depends upon general economic conditions and other market factors beyond our control, and we serve
customers in cyclical industries. As a result, our operating results could be negatively affected during economic downturns. See
Risk Factor titled "Weak and volatile economic and financial market conditions and market cycles have impacted our business
operations and/or our customers and may adversely affect our results of operations and financial condition in the future” within
Part I Item 1A of this report for more information on the risks associated with general economic conditions.
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Employees
As of March 31, 2014, we had approximately 7,400 employees, of whom approximately 4,400 were employed in the United
States. Approximately 500 of our United States employees are represented by labor unions. The five United States collective
bargaining agreements to which we are a party have expiration dates between February 2015 and September 2016. Additionally,
approximately 1,800 of our employees reside in Europe, where trade union membership is common. We believe we have a strong
relationship with our employees, including those represented by labor unions.
Environmental Matters
Our operations and facilities worldwide are subject to extensive laws and regulations related to pollution and the protection
of the environment, health and safety, including those governing, among other things, emissions to air, discharges to water, the
generation, handling, storage, treatment and disposal of hazardous wastes and other materials, and the remediation of contaminated
sites. A failure by us to comply with applicable requirements or the permits required for our operations could result in civil or
criminal fines, penalties, enforcement actions, third-party claims for property damage and personal injury, requirements to clean
up property or to pay for the costs of cleanup or regulatory or judicial orders enjoining or curtailing operations or requiring
corrective measures, including the installation of pollution control equipment or remedial actions.
Some environmental laws and regulations impose requirements to investigate and remediate contamination on present and
former owners and operators of facilities and sites, and on a potentially responsible party (“PRP”) for sites to which such parties
may have sent waste for disposal. Such liability can be imposed without regard to fault and, under certain circumstances, may be
joint and several, resulting in one PRP being held responsible for the entire obligation. Liability may also include damages to
natural resources. On occasion we are involved in such investigations and/or cleanup, and also have been or could be named as a
PRP in environmental matters.
ITEM 1A. RISK FACTORS.
We have identified the following material risks to our business. The risks described below are not the only risks facing us.
Additional risks and uncertainties not currently known to us, or those risks we currently view to be immaterial, may also materially
and adversely affect our business, financial condition or results of operations. If any of these risks materialize, our business,
financial condition, results of operations or cash flows could be materially and adversely affected.
Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our
ability to react to changes in the economy or our industry and prevent us from making debt service payments.
We are a highly leveraged company. As of March 31, 2014 we had $1,972.0 million of outstanding indebtedness. Our
ability to generate sufficient cash flow from operations to make scheduled payments on our debt will depend on a range of economic,
competitive and business factors, many of which are outside our control. Our business may not generate sufficient cash flow from
operations to meet our debt service and other obligations, and currently anticipated cost savings and operating improvements may
not be realized on schedule, or at all. If we are unable to meet our expenses and debt service and other obligations, we may need
to refinance all or a portion of our indebtedness on or before maturity, sell assets or raise equity. We may not be able to refinance
any of our indebtedness, sell assets or raise equity on commercially reasonable terms or at all, which could cause us to default on
our obligations and impair our liquidity. Our inability to generate sufficient cash flow to satisfy our debt obligations or to refinance
our obligations on commercially reasonable terms would have a material adverse effect on our business, financial condition, results
of operations and cash flows.
Our substantial indebtedness could also have other important consequences with respect to our ability to manage our business
successfully, including the following:
• it may limit our ability to borrow money for our working capital, capital expenditures, strategic initiatives or other
purposes;
• it may make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to
comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions,
could result in an event of default under our senior secured credit facilities and our other indebtedness;
• a substantial portion of our cash flow from operations will be dedicated to the repayment of our indebtedness and
so will not be available for other purposes;
• it may limit our flexibility in planning for, or reacting to, changes in our operations or business;
• we are and will continue to be more highly leveraged than some of our competitors, which may place us at a competitive
disadvantage;
• it may make us more vulnerable to downturns in our business or the economy;
• it may restrict us from making strategic acquisitions or divestitures, introducing new technologies or exploiting
business opportunities; and
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• it, along with the financial and other restrictive covenants in the documents governing our indebtedness, among other
things, may limit our ability to borrow additional funds, make acquisitions or capital expenditures, dispose of assets
or take certain of the actions mentioned above, any of which could restrict our operations and business plans.
Furthermore, a substantial portion of our indebtedness, including the senior secured credit facilities and borrowings
outstanding under our accounts receivable securitization facility, bears interest at rates that fluctuate with changes in certain short-
term prevailing interest rates. As of March 31, 2014, we had $1,921.9 million of floating rate debt under our senior secured credit
facilities, of which $650.0 million was hedged to convert the floating rate debt to fixed rate debt on a forward starting basis
(effective September 2015). A 100 basis point increase in the March 31, 2014 interest rates would increase interest expense under
our senior secured credit facilities by approximately $2.9 million on an annual basis (when considering a 1% LIBOR floor).
Also, we may still incur significantly more debt, which could intensify the risks described above. For more information, see
Part II Item 8, Note 11 Long-Term Debt to the consolidated financial statements.
Weak and volatile economic and financial market conditions and market cycles have impacted our business operations
and/or our customers and may adversely affect our results of operations and financial condition in the future.
Weak and volatile global economic and financial market conditions in recent years have affected our business operations
and recurring weakness or a further downturn may adversely affect our future results of operations and financial condition. Weak
or challenging economic conditions in the end-markets, businesses or geographic areas in which we sell our products could reduce
demand for products and result in a decrease in sales volume for a prolonged period of time, which would have a negative impact
on our future results of operations. Also, a weak recovery could prolong, or resume, the negative effects we have experienced in
the past.
Our financial performance depends, in large part, on conditions in the markets that we serve in the U.S. and the global
economy generally. Some of the industries we serve are highly cyclical, such as the aerospace, energy and industrial equipment
industries. We have undertaken cost reduction programs as well as diversified our markets to mitigate the effects of economic
downturns; however, such programs may be unsuccessful. Any sustained weakness in demand or downturn or uncertainty in the
economy generally would materially reduce our net sales and profitability.
For example, sales to the construction industry are driven by trends in commercial and residential construction, housing
starts and trends in residential repair and remodeling. Consumer confidence, mortgage rates, credit standards and availability and
income levels play a significant role in driving demand in the residential construction, repair and remodeling sector. A drop or
weakness in consumer confidence, restrictions in the credit market or an increase in mortgage rates, credit standards or
unemployment could delay a recovery of commercial and residential construction levels and have a material adverse effect on our
business, financial condition, results of operations or cash flows. This may express itself in the form of substantial downward
pressure on product pricing and our profit margins, thereby adversely affecting our financial results.
Additionally, many of our products are used in the energy, mining and cement and aggregates markets. With the recent
increases and volatility in commodity prices, certain customers may defer or cancel anticipated projects or expansions until such
time as these projects will be profitable based on the underlying cost of commodities compared to the cost of the project. Volatility
and disruption of financial markets, as in recent years, could limit the ability of our customers to obtain adequate financing to
maintain operations and may cause them to terminate existing purchase orders, reduce the volume of products they purchase from
us in the future or impact their ability to pay their receivables. Adverse economic and financial market conditions may also cause
our suppliers to be unable to meet their commitments to us or may cause suppliers to make changes in the credit terms they extend
to us, such as shortening the required payment period for outstanding accounts receivable or reducing or eliminating the amount
of trade credit available to us.
Demand for our Water Management products depends on availability of financing.
Many customers who purchase our Water Management products depend on third-party financing. There have been significant
disruptions in the availability of financing on reasonable terms. Fluctuations in prevailing interest rates affect the availability and
cost of financing to our customers. Given these market conditions, some lenders and institutional investors have significantly
reduced, and in some cases ceased to provide, funding to borrowers. The lack of availability or increased cost of credit could lead
to decreased construction, which would result in a reduction in demand for our products and have a material adverse effect on our
Water Management business, financial condition, results of operations or cash flows.
The markets in which we sell our products are highly competitive.
We operate in highly fragmented markets within the Process & Motion Control platform. As a result, we compete against
numerous companies. Some of our competitors have achieved substantially more market penetration in certain of the markets in
which we operate, and some of our competitors have greater financial and other resources than we do. Competition in our business
lines is based on a number of considerations, including product performance, cost of transportation in the distribution of products,
brand reputation, quality of client service and support, product availability and price. Additionally, some of our larger customers
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are attempting to reduce the number of vendors from which they purchase in order to increase their efficiency. If we are not selected
to become one of these preferred providers, we may lose access to certain sections of the markets in which we compete. Our
customers increasingly demand a broad product range and we must continue to develop our expertise in order to manufacture and
market these products successfully. To remain competitive, we will need to invest continuously in manufacturing, customer service
and support, marketing and our distribution networks. We may also have to adjust the prices of some of our Process & Motion
Control products to stay competitive. We cannot assure you that we will have sufficient resources to continue to make these
investments or that we will maintain our competitive position within each of the markets we serve.
Within the Water Management platform, we compete against both large international and national rivals, as well as many
regional competitors. Some of our competitors have greater resources than we do. Significant competition in any of the markets
in which the Water Management platform operates could result in substantial downward pressure on product pricing and our profit
margins, thereby adversely affecting the Water Management financial results. Furthermore, we cannot provide assurance that we
will be able to maintain or increase the current market share of our products successfully in the future.
The loss or financial instability of any significant customer could adversely affect our business, financial condition, results of
operations or cash flows.
We have certain customers that are significant to our business. During fiscal 2014, our top 20 customers accounted for
approximately 35.1% of our consolidated net sales, and our largest customer accounted for 8.6% of our consolidated net sales.
Our competitors may adopt more aggressive sales policies and devote greater resources to the development, promotion and sale
of their products than we do, which could result in a loss of customers. The loss of one or more of our major customers or
deterioration in our relationship with any of them could have a material adverse effect on our business, financial condition, results
of operations or cash flows.
Our contracted backlog is comprised of future orders for our products from a broad number of customers. Defaults by any
of the customers that have placed significant orders with us could have a significant adverse effect on our net sales, profitability
and cash flow. Our customers may in the future default on their obligations to us due to bankruptcy, lack of liquidity, operational
failure or other reasons deriving from the general economic environment or circumstances affecting those customers in particular.
If a customer defaults on its obligations to us, it could have a material adverse effect on our business, financial condition, results
of operations or cash flows. As of March 31, 2014, approximately 11% of our backlog was scheduled to ship beyond fiscal 2015.
Increases in the cost of our raw materials, in particular bar steel, brass, castings, copper, forgings, high-performance engineered
plastic, plate steel, resin, sheet steel and zinc, as well as petroleum products, or the loss of a substantial number of our suppliers,
could adversely affect our business, financial condition, results of operations or cash flows.
We depend on third parties for the raw materials used in our manufacturing processes. We generally purchase our raw
materials on the open market on a purchase order basis. These contracts generally have had one to five year terms and have
contained competitive and benchmarking clauses intended to ensure competitive pricing. While we currently maintain alternative
sources for raw materials, our business is subject to the risk of price fluctuations, delays in the delivery of and potential unavailability
of our raw materials. Any such price fluctuations or delays, if material, could harm our profitability or operations. In addition, the
loss of a substantial number of suppliers could result in material cost increases or reduce our production capacity.
In addition, prices for petroleum products and other carbon-based fuel products have experienced significant volatility in
recent years. Price increases, and consequent increases in the cost of electricity and for products for which petroleum-based products
are components or used in part of the process of manufacture, may substantially increase our costs for transportation, fuel, component
parts and manufacturing. We may not be able to recoup the costs of these increases by adjusting our prices.
We do not typically enter into hedge transactions to reduce our exposure to price risks and cannot assure you that we would
be successful in passing on any attendant costs if these risks were to materialize. In addition, if we are unable to continue to
purchase our required quantities of raw materials on commercially reasonable terms, or at all, or if we are unable to maintain or
enter into our purchasing contracts for our larger commodities, our business operations could be disrupted and our profitability
could be impacted in a material adverse manner.
We rely on independent distributors. Termination of one or more of our relationships with any of those independent distributors
or an increase in the distributors’ sales of our competitors’ products could have a material adverse effect on our business,
financial condition, results of operations or cash flows.
In addition to our own direct sales force, we depend on the services of independent distributors to sell our Process & Motion
Control products and provide service and aftermarket support to our OEMs and end users. We rely on an extensive distribution
network, with nearly 2,400 distributor locations nationwide; however, for fiscal 2014, approximately 23% of our Process & Motion
Control net sales were generated through sales to three of our key independent distributors, the largest of which accounted for
14% of Process & Motion Control net sales. Rather than serving as passive conduits for delivery of product, our industrial distributors
are active participants in the overall competitive dynamic in the Process & Motion Control industry. Industrial distributors play a
significant role in determining which of our Process & Motion Control products are stocked at the branch locations, and hence
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are most readily accessible to aftermarket buyers, and the price at which these products are sold. Almost all of the distributors
with whom we transact business also offer competitors’ products and services to our customers. Within Water Management, we
depend on a network of several hundred independent sales representatives and approximately 90 third-party warehouses to distribute
our products; however, for fiscal 2014, our three key independent distributors generated approximately 27% of our Water
Management net sales with the largest accounting for 15% of Water Management net sales.
Our Process & Motion Control and Water Management distributorship sales are made on terms that we believe are
consistent with customary standards in our industry. Our agreements with our distributors are generally non-exclusive and do not
require minimum volumes of purchases by the distributors, with prices based on expected margins and all sales subject to credit
approval; they generally contain a limited warranty against material and workmanship defects and provide for a freight allowance
when minimum quantities are met.
The loss of one of our key distributors or of a substantial number of our other distributors or an increase in the distributors'
sales of our competitors' products to our customers could have a material adverse effect on our business, financial condition, results
of operations or cash flows.
Apollo is our largest stockholder and has significant influence over us, and its interests may conflict with or differ from your
interests as a stockholder.
As of March 31, 2014, Apollo and its affiliates beneficially own approximately 42% of our common stock. As long as Apollo
beneficially owns at least 33 1/3% of our outstanding stock, Apollo will be able to designate three of our directors, and the consent
of a majority of the voting directors designated by Apollo is required under our bylaws in connection with certain important
corporate actions. As a result of that representation and various bylaw provisions, Apollo has the ability to prevent any transaction
that requires the approval of the directors designated by Apollo, including the approval of significant corporate transactions such
as mergers and acquisitions, issuances of equity, the incurrence of debt and the sale of substantially all of our assets.
The interests of Apollo could conflict with or differ from the interests of our other stockholders. For example, the concentration
of ownership held by Apollo could delay, defer, cause or prevent a change of control of us or impede a merger, takeover or other
business combination that you as a stockholder may otherwise view favorably. Apollo is in the business of making or advising on
investments in companies and holds, and may from time to time in the future acquire, interests in or provide advice to businesses
that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. Apollo may also
pursue acquisitions that may be complementary to our business, and, as a result, those acquisition opportunities may not be available
to us.
Our certificate of incorporation provides that we expressly renounce any interest or expectancy in any business opportunity,
transaction or other matter in which Apollo or any of its members, directors, employees or other affiliates (the "Apollo Group")
participates or desires or seeks to participate in, even if the opportunity is one that we would reasonably be deemed to have pursued
if given the opportunity to do so. The renouncement does not apply to any business opportunities that are presented to an Apollo
Group member solely in such person's capacity as a member of our board of directors and with respect to which no other member
of the Apollo Group independently receives notice or otherwise identifies such business opportunity prior to us becoming aware
of it, or if the business opportunity is initially identified by the Apollo Group solely through the disclosure of information by or
on behalf of us.
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Our organizational documents and the provisions of a nominating agreement with Apollo may impede or discourage a takeover,
which could deprive our investors of the opportunity to receive a premium for their shares.
Provisions of our certificate of incorporation and bylaws and a nominating agreement with Apollo may make it more difficult
for, or prevent a third party from, acquiring control of us without the approval of our board of directors, including in some cases
the approval of a majority of the directors nominated by Apollo. These provisions include:
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having a classified board of directors;
establishing limitations on the removal of directors;
prohibiting cumulative voting in the election of directors;
empowering only the board to fill any vacancy on our board of directors, whether such vacancy occurs as a
result of an increase in the number of directors or otherwise, and requiring that, as long as Apollo continues
to beneficially own at least 33 1/3% of our common stock, any vacancy resulting from the death, removal or
resignation of an Apollo designee be filled by a majority of the remaining directors nominated by Apollo;
authorizing the issuance of "blank check" preferred stock without any need for action by stockholders;
prohibiting stockholders from acting by written consent or calling a special meeting;
requiring the approval of a majority of the directors nominated by Apollo voting on the matter to approve
certain business combinations and certain other significant matters so long as Apollo beneficially owns at
least 33 1/3% of our common stock; and
establishing advance notice requirements for nominations for election to our board of directors or for proposing
matters that can be acted on by stockholders at stockholder meetings.
Our issuance of shares of preferred stock could delay or prevent a change in control of us. Our board of directors has the
authority to cause us to issue, without any further vote or action by the stockholders, shares of preferred stock, par value $0.01
per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or
prices and liquidation preferences of such series. The issuance of shares of our preferred stock may have the effect of delaying,
deferring or preventing a change in control without further action by the stockholders, even where stockholders are offered a
premium for their shares.
Our bylaws and a nominating agreement with Apollo also require the approval of a majority of directors nominated by Apollo
voting on the matter for certain important matters, including mergers and acquisitions, issuances of equity and the incurrence of
debt, as long as Apollo beneficially owns at least 33 1/3% of our outstanding common stock. Together, these provisions could
make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a
premium over prevailing market prices for our common stock. Furthermore, the existence of the foregoing provisions, as well as
the significant common stock beneficially owned by Apollo and its rights to designate three directors, could limit the price that
investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of us,
thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
We are subject to risks associated with changing technology and manufacturing techniques, and business continuity, which
could place us at a competitive disadvantage.
The successful implementation of our business strategy requires us to continuously evolve our existing products and introduce
new products to meet customers' needs in the industries we serve. Our products are characterized by stringent performance and
specification requirements that mandate a high degree of manufacturing and engineering expertise. If we fail to meet these
requirements, our business could be at risk. We believe that our customers rigorously evaluate their suppliers on the basis of a
number of factors, including product quality, price competitiveness, technical and manufacturing expertise, development and
product design capability, new product innovation, reliability and timeliness of delivery, operational flexibility, customer service
and overall management. Our success will depend on our ability to continue to meet our customers' changing specifications with
respect to these criteria. We cannot assure you that we will be able to address technological advances or introduce new products
that may be necessary to remain competitive within our businesses. We cannot assure you that we can adequately protect any of
our own technological developments to produce a sustainable competitive advantage. Furthermore, we may be subject to business
continuity risk in the event of an unexpected loss of a material facility or operation. We cannot assure you that we can adequately
protect against such a loss.
If we lose or are unable to retain certain key associates or management personnel, our business may be adversely affected.
Our success depends on our ability to recruit, retain, train and motivate highly-skilled management, sales, marketing and
engineering personnel. Competition for these persons in our industry is intense and we may not be able to successfully recruit,
train or retain qualified personnel, or to effectively implement successions to existing personnel. If we fail to retain and recruit
the necessary personnel or arrange for successors to key personnel, our business and our ability to obtain new customers, develop
new products and provide acceptable levels of customer service could materially suffer. In addition, we cannot assure you that
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these individuals will continue their employment with us. If any of these key personnel were to leave our company, it could be
difficult to replace them, and our business could be materially harmed.
We may incur significant costs for environmental compliance and/or to address liabilities under environmental laws and
regulations.
Our operations and facilities worldwide are subject to extensive laws and regulations related to pollution and the protection
of the environment, health and safety, including those governing, among other things, emissions to air, discharges to water, the
generation, handling, storage, treatment and disposal of hazardous wastes and other materials, and the remediation of contaminated
sites. A failure by us to comply with applicable requirements or the permits required for our operations could result in civil or
criminal fines, penalties, enforcement actions, third-party claims for property damage and personal injury, requirements to clean
up property or to pay for the costs of cleanup or regulatory or judicial orders enjoining or curtailing operations or requiring corrective
measures, including the installation of pollution control equipment or remedial actions.
Some environmental laws and regulations impose requirements to investigate and remediate contamination on present and
former owners and operators of facilities and sites, and on potentially responsible parties (“PRPs”) for sites to which such parties
may have sent waste for disposal. Such liability can be imposed without regard to fault and, under certain circumstances, may be
joint and several, resulting in one PRP being held responsible for the entire obligation. Liability may also include damages to
natural resources. On occasion we are involved in such investigations and/or cleanup, and also have been or could be named as a
PRP in environmental matters.
The discovery of additional contamination, including at acquired facilities, the imposition of more stringent environmental,
health and safety laws and regulations, including cleanup requirements, disputes with our insurers or the insolvency of other
responsible parties could require us to incur significant capital expenditures or operating costs in excess of our accruals. Future
investigations we undertake may lead to discoveries of contamination that must be remediated, and decisions to close facilities
may trigger remediation requirements that are not currently applicable. We may also face liability for alleged personal injury or
property damage due to exposure to hazardous substances used or disposed of by us, contained within our current or former
products, or present in the soil or groundwater at our current or former facilities. We could incur significant costs in connection
with such liabilities. See Part II Item 8, Note 19 Commitments and Contingencies to the consolidated financial statements.
Certain subsidiaries are subject to numerous asbestos claims, which could adversely affect our business, financial condition,
results of operations or cash flows.
Certain subsidiaries are co-defendants in various lawsuits filed in a number of jurisdictions throughout the U.S. alleging
personal injury as a result of exposure to asbestos that was used in certain components of our products. The uncertainties of
litigation and the uncertainties related to the collection of insurance and indemnification coverage make it difficult to accurately
predict the ultimate financial effect of these claims. In the event our insurance or indemnification coverage becomes insufficient
to cover our potential financial exposure, or the actual number or value of asbestos-related claims differs materially from our
existing estimates, we could incur material costs that could have a material adverse effect on our business, financial condition,
results of operations or cash flows. See Part II Item 8, Note 19 Commitments and Contingencies to the consolidated financial
statements.
Weather could adversely affect the demand for products in our Water Management platform and decrease its net sales.
Demand for our Water Management products is primarily driven by commercial construction activity, remodeling and retro-
fit opportunities, and to a lesser extent, new home starts as well as water and wastewater infrastructure expansion for municipal,
industrial and hydropower applications. Weather is an important variable affecting financial performance as it significantly impacts
construction activity. Spring and summer months in the U.S. and Europe represent the main construction seasons. Adverse weather
conditions, such as prolonged periods of cold or rain, blizzards, hurricanes and other severe weather patterns, could delay or halt
construction and remodeling activity, which could have a negative effect on our business. For example, an unusually severe winter
can lead to reduced construction activity and magnify the seasonal decline in our Water Management net sales and earnings during
the winter months. In addition, a prolonged winter season can delay construction and remodeling plans and hamper the typical
seasonal increase in net sales and earnings during the spring months.
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Our international operations are subject to uncertainties, which could adversely affect our business, financial condition, results
of operations or cash flows.
Our business is subject to certain risks associated with doing business internationally. Approximately 34% of our total net
sales in fiscal 2014 originated outside of the U.S. The portion of our net sales and operations that is outside of the U.S. has increased
in recent years, and may further increase as a result of internal growth and/or acquisition activity. Accordingly, our future results
could be harmed by a variety of factors relating to international operations, including:
•
•
•
•
•
•
•
•
•
•
•
•
fluctuations in currency exchange rates, particularly fluctuations in the Euro against the U.S. dollar;
exchange controls;
compliance with export controls and trade compliance regulations;
tariffs or other trade protection measures and import or export licensing requirements;
changes in tax laws;
interest rates;
changes in regulatory requirements;
differing labor regulations;
requirements relating to withholding taxes on remittances and other payments by subsidiaries;
restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these
jurisdictions;
restrictions on our ability to repatriate dividends from our subsidiaries; and
exposure to liabilities under anti-corruption laws in various countries, including the U.S. Foreign Corrupt
Practices Act.
As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and
effectively manage these and other risks associated with our international operations. However, any of these factors could have a
material adverse effect on our international operations and, consequently, our business, financial condition, results of operations
or cash flows.
We may be unable to identify potential acquisition candidates, or to realize the intended benefits of future or past acquisitions.
We cannot assure you that suitable acquisition candidates will be identified and acquired in the future, that the financing of
any such acquisition will be available on satisfactory terms, that we will be able to complete any such acquisition or that we will
be able to accomplish our strategic objectives as a result of any such acquisition. Nor can we assure you that our acquisition
strategies will be successfully received by customers or achieve their intended benefits.
Acquisitions are often undertaken to improve the operating results of either or both of the acquirer and the acquired company
and we cannot assure you that we will be successful in this regard nor can we provide any assurance that we will be able to realize
all of the intended benefits from our prior acquisitions. We have encountered, and may encounter, various risks in acquiring other
companies including the possible inability to integrate an acquired business into our operations, potential failure to realize
anticipated benefits, diversion of management's attention, issues in customer transitions, potential inadequacies of indemnities
and other contractual remedies and unanticipated problems, risks or liabilities, including environmental, some or all of which
could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We may be unable to make necessary capital expenditures.
We periodically make capital investments to, among other things, maintain and upgrade our facilities and enhance our
products' processes. As we grow our businesses, we may have to incur significant capital expenditures. We believe that we will
be able to fund these expenditures through cash flow from operations and borrowings under our senior secured credit facilities.
However, our credit agreement contains limitations that could affect our ability to fund our future capital expenditures and other
capital requirements. We cannot assure you that we will have, or be able to obtain, adequate funds to make all necessary capital
expenditures when required, or that the amount of future capital expenditures will not be materially in excess of our anticipated
or current expenditures. If we are unable to make necessary capital expenditures, our product line may become dated, our
productivity may be decreased and the quality of our products may be adversely affected, which, in turn, could materially reduce
our net sales and profitability.
Our credit agreement imposes significant operating and financial restrictions, which could have a material adverse effect on
our business, financial condition, results of operations or cash flows.
Our credit agreement contains various covenants that limit or prohibit our ability, among other things, to:
•
•
•
incur or guarantee additional indebtedness;
pay dividends on our capital stock or redeem, repurchase, retire or make distributions in respect of our capital
stock or subordinated indebtedness or make other restricted payments;
make certain loans, acquisitions, capital expenditures or investments;
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•
•
•
•
•
sell certain assets, including stock of our subsidiaries;
enter into sale and leaseback transactions;
create or incur liens;
consolidate, merge, sell, transfer or otherwise dispose of all or substantially all of our assets; and
enter into certain transactions with our affiliates.
Our credit agreement contains covenants that restrict our ability to take certain actions, such as incurring additional debt, if
we are unable to meet defined specified financial ratios. As of March 31, 2014, our first lien leverage ratio was 3.98x. Failure to
comply with the leverage covenant of the credit agreement can result in limiting our long-term growth prospects by hindering our
ability to incur future indebtedness or grow through acquisitions. A breach of any of these covenants could result in a default under
our debt agreements. For more information, see Part II Item 7 "Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Liquidity and Capital Resources".
The restrictions contained in the credit agreement could:
•
•
•
limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities
or business plans;
adversely affect our ability to finance our operations, to enter into strategic acquisitions, to fund investments
or other capital needs or to engage in other business activities that would be in our interest; and
limit our access to the cash generated by our subsidiaries.
Upon the occurrence of an event of default under the credit agreement, the lenders could elect to declare all amounts
outstanding under the senior secured credit facilities to be immediately due and payable and terminate all commitments to extend
further credit. If we were unable to repay those amounts, the lenders under the senior secured credit facilities could proceed against
the collateral granted to them to secure the senior secured credit facilities on a first-priority lien basis. If the lenders under the
senior secured credit facilities accelerate the repayment of borrowings, such acceleration could have a material adverse effect on
our business, financial condition, results of operations or cash flows. For a more detailed description of the limitations on our
ability to incur additional indebtedness, see Part II Item 7 "Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Liquidity and Capital Resources".
We rely on intellectual property that may be misappropriated or otherwise successfully challenged.
We attempt to protect our intellectual property through a combination of patent, trademark, copyright and trade secret
protection, as well as third-party nondisclosure and assignment agreements. We cannot assure you that any of our applications for
protection of our intellectual property rights will be approved and maintained or that our competitors will not infringe or successfully
challenge our intellectual property rights. We also rely on unpatented proprietary technology. It is possible that others will
independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our
trade secrets and other proprietary information, we require employees, consultants and advisors to enter into confidentiality
agreements. We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or
other proprietary information in the event of any unauthorized use, misappropriation or disclosure. If we are unable to maintain
the proprietary nature of our technologies, our ability to sustain margins on some or all of our products may be affected, which
could have a material adverse effect on our business, financial condition, results of operations or cash flows. In addition, in the
ordinary course of our operations, from time to time we pursue and are pursued in potential litigation relating to the protection of
certain intellectual property rights, including some of our more profitable products. An adverse ruling in any such litigation could
have a material adverse effect on our business, financial condition, results of operations or cash flows.
We could face potential product liability claims relating to products we manufacture or distribute.
We may be subject to additional product liability claims in the event that the use of our products, or the exposure to our
products or their raw materials, is alleged to have resulted in injury or other adverse effects. We currently maintain product liability
insurance coverage but we cannot assure you that we will be able to obtain such insurance on commercially reasonable terms in
the future, if at all, or that any such insurance will provide adequate coverage against claims. Product liability claims can be
expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the
ultimate outcome. An unsuccessful product liability defense could have a material adverse effect on our business, financial
condition, results of operations or cash flows. In addition, our business depends on the strong brand reputation we have developed.
In the event that this reputation is damaged as a result of a product liability claim, we may face difficulty in maintaining our pricing
positions and market share with respect to some of our products, which could have a material adverse effect on our business,
financial condition, results of operations or cash flows. See Part II Item 8, Note 19 Commitments and Contingencies to the
consolidated financial statements.
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We, our customers and our shippers have unionized employees who may stage work stoppages which could seriously impact
the profitability of our business.
As of March 31, 2014, we had approximately 7,400 employees, of whom approximately 4,400 were employed in the U.S.
Approximately 500 of our U.S. employees are represented by labor unions. Additionally, approximately 1,800 of our employees
reside in Europe, where trade union membership is common. Although we believe that our relations with our employees are
currently strong, if our unionized workers were to engage in a strike, work stoppage or other slowdown in the future, we could
experience a significant disruption of our operations, which could interfere with our ability to deliver products on a timely basis
and could have other negative effects, such as decreased productivity and increased labor costs. Such negative effects could have
a material adverse effect on our business, financial condition, results of operations or cash flows. In addition, if a greater percentage
of our workforce becomes unionized, our business and financial results could be affected in a material adverse manner. Further,
many of our direct and indirect customers and their suppliers, and organizations responsible for shipping our products, have
unionized workforces and their businesses may be impacted by strikes, work stoppages or slowdowns, any of which, in turn, could
have a material adverse effect on our business, financial condition, results of operations or cash flows.
The updates to our Enterprise Resource Planning (“ERP”) systems, as well as failures of our data security and information
technology infrastructure and security, could cause substantial business interruptions and/or adversely affect our business.
Utilizing a phased approach, we are updating our ERP systems across both our Process & Motion Control and Water
Management platforms. If these updates are unsuccessful, we could incur substantial business interruptions, including the inability
to perform routine business transactions, which could have a material adverse effect on our financial performance. Further, these
updates may not result in the benefits we intend or be implemented on a timely basis.
In addition, we depend heavily on information technology infrastructure to manage our business objectives, support our
customers’ requirements and protect sensitive information. As a result, any inability to successfully manage our information
systems, including matters related to system and data security, privacy, reliability, compliance, performance and access, problems
related to our systems caused by natural disasters, security breaches or malicious attacks, and any inability of these systems to
fulfill their intended business purpose, could impede our ability to record or process orders, manufacture and ship in a timely
manner, account for and collect receivables, protect sensitive data of the Company, our customers, our suppliers and business
partners, or otherwise carry on business in the normal course. Any such events could cause us to lose customers and/or revenue,
require us to incur significant expense to remediate, including as a result of legal or regulatory claims or proceedings, or damage
our reputation, any of which could have an adverse effect our business, financial condition, results of operations or cash flows.
Our required cash contributions to our pension plans may increase further and we could experience a material change in the
funded status of our defined benefit pension plans and the amount recorded in our consolidated balance sheets related to those
plans. Additionally, our pension costs could increase in future years.
The funded status of the defined benefit pension plans depends on such factors as asset returns, market interest rates,
legislative changes and funding regulations. If the returns on the assets of any of our plans were to decline in future periods, if
market interest rates were to decline, if the Pension Benefit Guaranty Corporation (“PBGC”) were to require additional contributions
to any such plans as a result of acquisitions or if other actuarial assumptions were to be modified, our future required cash
contributions and pension costs to such plans could increase. Any such increases could have a material and adverse effect on our
business, financial condition, results of operations or cash flows.
The need to make contributions, which may be substantial, to such plans may reduce the cash available to meet our other
obligations, including our obligations under our credit agreement or to meet the needs of our business. In addition, the PBGC may
terminate our U.S. defined benefit pension plans under limited circumstances, including in the event the PBGC concludes that the
risk may increase unreasonably if such plans continue. In the event a U.S. defined benefit pension plan is terminated for any reason
while it is underfunded, we could be required to make an immediate payment to the PBGC of all or a substantial portion of such
plan's underfunding, as calculated by the PBGC based on its own assumptions (which might result in a larger obligation than that
based on the assumptions we have used to fund such plan), and the PBGC could place a lien on material amounts of our assets.
The cost to provide employee healthcare insurance and/or benefits could increase in the future.
The Affordable Care Act (the “ACA”), which was adopted in 2010 and is being phased in over several years, significantly
affects the provision of both healthcare services and benefits in the U.S. It is possible that the ACA will increase our cost of
providing health insurance and/or benefits, and may also impact various other aspects of our business. While the ACA did not
have a material impact on the Company in fiscal 2014, management is continuing to assess the future impact that the ACA could
have on our healthcare benefit costs.
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Our goodwill and intangible assets are valued at an amount that is high relative to our total assets, and a write-off of all or a
portion of our recorded amounts would negatively affect our operating results and financial condition.
As of March 31, 2014, goodwill and intangible assets totaled $1,150.7 million and $592.6 million, respectively. These assets
result from our acquisitions, representing the excess of cost over the fair value of the tangible net assets we have acquired. We
assess at least annually whether there has been an impairment in the value of our goodwill and indefinite lived intangible assets.
If future operating performance at one or more of our business units were to fall significantly below forecast levels, if we change
the use of our tradenames in the marketplace, if interest rates rise or there are other macroeconomic factors that affect the value
of these units, we could incur a non-cash charge to operating earnings. Any determination requiring the write-off of a significant
portion of goodwill or intangible assets would negatively affect our results of operations and financial condition, particularly in
the period in which we take any related charges.
Our historical financial data is not comparable to our current financial condition and results of operations because of our use
of purchase accounting in connection with various acquisitions.
It may be difficult for you to compare both our historical and future results. Our acquisitions were accounted for utilizing
the purchase method of accounting, which resulted in a new valuation for the assets and liabilities to their fair values. This new
basis of accounting began on the date of the consummation of each transaction. Also, until our purchase price allocations are
finalized for an acquisition (generally less than one year after the acquisition date), our allocation of the excess purchase price
over the book value of the net assets acquired is considered preliminary and subject to future adjustment.
The price of our common stock may fluctuate significantly and you could lose all or part of your investment.
Volatility in the market price of our common stock may prevent you from being able to sell your common stock at or above
the price you paid for your common stock. The market price for our common stock could fluctuate significantly for various
reasons, including: our operating and financial performance and prospects; our quarterly or annual earnings or those of other
companies in our industry; conditions that impact demand for our products and services; future announcements concerning our
business or our competitors' businesses; the public's reaction to our press releases, other public announcements and filings with
the U.S. Securities and Exchange Commission ("SEC"); changes in earnings estimates or recommendations by securities analysts
who track our common stock or industry; market and industry perception of our success, or lack thereof, in pursuing our growth
and other strategies; strategic actions by us or our competitors, such as restructurings or acquisitions (including the issuance of
shares in connection with an acquisition); changes in government and environmental laws and regulation (or interpretation or
enforcement thereof); changes in accounting standards, policies, guidance, interpretations or principles; arrival or departure of
key personnel; the number of shares publicly traded; sales of common stock by us, Apollo or its affiliated funds or members of
our board or management team; adverse resolution of new or pending litigation against us; changes in our capital structure; and
changes in general market, economic and political conditions in the United States and global economies or financial markets,
including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events.
In addition, the stock market has experienced significant price and volume fluctuations in recent years. This volatility has
had a significant impact on the market price of securities issued by many companies, including companies in our industries. The
changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of
our common stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially
reduce our share price.
We currently have no plans to pay regular dividends on our common stock, so you may not receive funds without selling your
common stock.
We currently have no plans to pay regular dividends on our common stock. Any payment of future dividends will be at the
discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements,
level of indebtedness, statutory and contractual restrictions applying to the payment of dividends, and other considerations that
our board of directors deems relevant. The terms governing our outstanding debt also include limitations on the ability of our
subsidiaries to pay dividends to us. Accordingly, you may have to sell some or all of your common stock in order to generate cash
flow from your investment.
Despite our substantial indebtedness, we may still be able to incur significantly more indebtedness, which could have a material
adverse effect on our business, financial condition, results of operations or cash flows.
Our credit agreement contains restrictions on our ability to incur additional indebtedness. These restrictions are subject to
a number of important qualifications and exceptions, and the indebtedness, if any, incurred in compliance with these restrictions
could be substantial. Accordingly, we or our subsidiaries could incur significant additional indebtedness in the future. Additional
leverage could have a material adverse effect on our business, financial condition, results of operations or cash flows and could
increase the risks described above in "Our substantial indebtedness could adversely affect our ability to raise additional capital to
fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from making debt service
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payments" and "Our credit agreement imposes significant operating and financial restrictions, which could have a material adverse
effect on our business, financial condition, results of operations or cash flows."
The costs and requirements of being a public company may strain our resources and distract management.
As a company with publicly-traded equity securities, we are subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and increasingly stringent laws, regulation and other requirements, including those
created by the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), and the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the "Dodd-Frank Act"). These laws affect, among other areas, our accounting, internal controls, corporate
governance practices, securities disclosures and reporting. For example, the Sarbanes-Oxley Act requires that we maintain effective
disclosure controls and procedures and internal control for financial reporting. In addition, the Dodd-Frank Act effects
comprehensive changes to public company governance and disclosures in the United States and will subject us to additional federal
regulation, which has not yet been finalized and or fully implemented, and potential related effects. For example, as required by
the Dodd-Frank Act, the SEC recently adopted disclosure requirements related to the use of specified minerals ("conflict minerals")
that are necessary to the functionality or production of products manufactured, or contracted to be manufactured, by publicly-held
companies. The consequences of the conflict mineral rules may also adversely affect the sourcing, availability and pricing of
certain of these minerals and our relations with customers, as well as increase our compliance costs.
These requirements increase our costs, may place a strain on our systems and resources, and may divert management's
attention from other business concerns. Further, our failure to comply with any of the above requirements could materially affect
our reputation, business, financial condition, results of operations or cash flows.
We are no longer a “controlled company” within the meaning of the New York Stock Exchange ("NYSE") rules and we are
in a phase-in period for compliance with additional governance requirements under NYSE rules.
During fiscal 2014, we ceased to be a “controlled company” under NYSE rules and, as a result, we are subject to additional
governance requirements under NYSE rules, including the requirements to have a majority of independent directors on our board
of directors; a nominating and corporate governance committee that is composed entirely of independent directors with a written
charter addressing the committee’s purpose and responsibilities; a compensation committee that is composed entirely of independent
directors with a written charter addressing the committee’s purpose and responsibilities; and an annual performance evaluation of
the nominating and corporate governance and compensation committees.
The NYSE rules provide for phase-in periods for these requirements, but we must be fully compliant with the new requirements
by February 5, 2015. During this transition period, our stockholders may not have the same protections afforded to stockholders
of companies that are subject to all of the NYSE corporate governance requirements.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
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ITEM 2. PROPERTIES.
Within Process & Motion Control, as of March 31, 2014, we had 39 principal manufacturing, warehouse and repair facilities,
25 of which are located in North America, seven in Europe, three in Asia, two in South America, one in Africa, and one in Australia.
All of our facilities listed below are suitable for their respective operations and provide sufficient capacity to meet reasonably
foreseeable production requirements.
We own and lease our Process & Motion Control facilities throughout the United States and in several foreign countries.
Listed below are the locations of our principal Process & Motion Control manufacturing, warehouse and repair facilities:
Facility Location
Product/Use
Size (square feet)
Owned/Leased
North America
Antigo, WI
Auburn, AL
Clinton, TN
Cudahy, WI
Downers Grove, IL (two facilities)
Grafton, WI
Grove City, OH
Indianapolis, IN
Lincoln, NE
Mexico City, Mexico
Milwaukee, WI
New Berlin, WI
New Berlin, WI
New Orleans, LA
Rockford, IL
Salt Lake City, UT
Simi Valley, CA (two facilities)
Stuarts Draft, VA
Taylors, SC
Toronto, Canada
Toronto, Canada
Twinsburg, OH
West Milwaukee, WI
Europe
Betzdorf, Germany
Corregio, Italy
Dortmund, Germany (two facilities)
Gloucestershire, England
Gravenzande, Netherlands
Mechelen, Belgium
Asia
Changzhou, China
Taicang, China
Thane, India
South America
Santiago, Chile
Sao Leopoldo, Brazil
Africa
Chamdor, South Africa
Australia
Newcastle, Australia
Gear
Coupling
Industrial Bearings
Special Components
Aerospace
Flattop
Warehouse
Industrial Bearings
Coupling
Warehouse and Gear
Gear
Gear Repair
Coupling
Gear Repair
Coupling
Warehouse
Aerospace
Gear
Warehouse
Gear Repair
Warehouse
Aerospace
Industrial Chain
Industrial Chain
Flattop
Coupling
Coupling
Flattop
Coupling
Gear and Coupling
Flattop
Coupling
Gear Repair
Industrial Chain
Warehouse
Gear
24
120,000
133,000
180,000
100,000
248,000
95,000
73,000
527,000
34,000
36,000
1,100,000
47,000
54,000
54,000
16,000
29,000
55,000
97,000
48,000
30,000
33,000
46,000
370,000
179,000
81,000
98,000
20,000
100,000
26,000
206,000
28,000
11,000
15,000
77,000
Owned
Leased
Owned
Leased
Owned
Owned
Leased
Owned
Leased
Leased
Owned
Leased
Owned
Owned
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Owned
Owned
Owned
Owned/Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
80,000
Owned
65,000
Owned
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Within Water Management, as of March 31, 2014, we had 27 principal manufacturing and warehouse facilities, 19 of which
are located in North America, three in Europe, three in Asia, one in Africa, and one in Australia, as set forth below:
Facility Location
Product/Use
Size (square feet)
Owned/Leased
North America
Abilene, Texas
Calgary, Canada
Carrollton, Texas
Commerce, Texas
Cranberry TWP., Pennsylvania
Elkhart, Indiana
Erie, Pennsylvania
Erie, Pennsylvania
Harborcreek, Pennsylvania
Levittown, Pennsylvania
Mars, Pennsylvania
Mississauga, Ontario (two facilities)
Norcross, Georgia
Ontario, California
Orange, Massachusetts
Paso Robles, California
Sanford, North Carolina
Sanford, North Carolina
Europe
Hodonin, Czech Republic
Mannheim, Germany
Warsaw, Poland
Asia
Secunderabad, India
Taicang, China (2 facilities)
Africa
Kyalami, South Africa
Australia
Broadmeadows, Australia
Commercial Brass
Warehouse
Warehouse
PEX
Water and Wastewater
PEX
Specification Drainage
Specification Drainage
Specification Drainage/PEX
Manufacturing/Warehouse
Water and Wastewater
Warehouse
Warehouse
Warehouse
Water and Wastewater
Water Control
Commercial Brass
Warehouse
Water and Wastewater
Water and Wastewater
Warehouse
Water and Wastewater
Water and Wastewater
Warehouse
LWG Zurn
177,000
19,000
84,000
175,000
37,000
110,000
210,000
119,000
91,000
67,000
63,000
54,000
96,000
115,000
250,000
158,000
78,000
24,000
1,240,000
356,000
71,000
79,000
265,000
Owned
Leased
Leased
Owned
Owned
Owned
Leased
Owned
Leased
Leased
Owned
Leased
Leased
Leased
Owned
Owned
Owned
Leased
Owned
Leased
Leased
Owned
Leased
22,000
Leased
29,000
Leased
In addition, we lease various sales offices, and an engineering and sourcing center in China and various warehouses in
Australia.
We believe our Process & Motion Control and Water Management properties are sufficient for our current and future
anticipated needs.
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ITEM 3. LEGAL PROCEEDINGS.
Information with respect to our legal proceedings is contained in Part II Item 8, Note 19 Commitments and Contingencies
to the consolidated financial statements.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
Executive Officers of the Registrant
The following table sets forth information concerning our executive officers as of the date of this report:
Name
Todd A. Adams
Mark W. Peterson
Praveen R. Jeyarajah
Age
43
42
46
Position(s)
President, Chief Executive Officer and Director
Senior Vice President and Chief Financial Officer
Executive Vice President-Corporate & Business
Development
In Current
Position(s) since
2009
2011
2010
Information about the business experience of our executive officers during the past five fiscal years is as follows:
Todd A. Adams became our President and Chief Executive Officer in 2009. Mr. Adams joined us in 2004 as Vice President,
Treasurer and Controller; he has also served as Senior Vice President and Chief Financial Officer from 2008 to 2009 and as
President of the Water Management platform in 2009.
Mark W. Peterson became our Senior Vice President and Chief Financial Officer in 2011. Mr. Peterson previously served
as Vice President and Controller of Rexnord from 2008 to 2011 and as a Rexnord Divisional CFO from 2006 to 2008. Mr. Peterson
is a certified public accountant.
Praveen R. Jeyarajah became our Executive Vice President-Corporate & Business Development in 2010. Also,
Mr. Jeyarajah served as a director from 2006 through 2012. Prior to becoming our Executive Vice President-Corporate & Business
Development, Mr. Jeyarajah was a Managing Director at Cypress Group, LLC from 2006 to 2010 and a Director of Jacuzzi Brands
Corp. until 2010.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock has been listed on the New York Stock Exchange (“NYSE”) under the symbol “RXN” since March 29,
2012. Prior to that date, there was no public trading market for our common stock. The following table sets forth for the indicated
period the high and low sales prices per share for our common stock on the NYSE:
Fiscal 2012
Fourth quarter (from March 29, 2012)
Fiscal 2013
Fiscal 2014
First quarter
Second quarter
Third quarter
Fourth quarter
First quarter
Second quarter
Third quarter
Fourth quarter
High
$21.50
High
$22.83
$21.58
$21.90
$22.45
High
$21.21
$20.97
$26.95
$30.94
26
Low
$19.00
Low
$18.92
$14.87
$16.38
$19.20
Low
$15.88
$17.05
$19.73
$25.50
Table of Contents
As of May 15, 2014, there were 101,216,598 shares of our common stock outstanding held by 13 holders of record. We
believe the number of beneficial owners of our common stock exceeds 500.
Dividend Policy
We did not pay any dividends in fiscal 2014, 2013, or 2012. We currently intend to retain all future earnings, if any, for use
in the operation of our business and to fund future growth. In addition, our credit agreement limits our ability to pay dividends or
other distributions on our common stock. The decision whether to pay dividends will be made by our Board of Directors in light
of conditions then existing, including factors such as our results of operations, financial condition and requirements, business
conditions and covenants under any applicable contractual arrangements.
Performance Graph
Set forth below is a line graph comparing the cumulative total shareholder return of our common stock with the Standard &
Poor's (the "S&P") 500 Index and the Russell 2000 Index, for the two-year period ended March 31, 2014 (since our initial public
offering). We chose the Russell 2000 Index because it represents companies with a market capitalization similar to that of Rexnord.
The graph assumes the value of the investment in our common stock and each index was $100 on March 30, 2012 and that all
dividends were reinvested. The shareholder return shown on the graph below is not necessarily indicative of future performance
and the indices included do not necessarily reflect management's opinion that such indices are an appropriate measure of the
relative performance of Rexnord's stock.
3/12
3/13
3/14
Rexnord Corporation
S&P 500 Index
Russell 2000 Index
$
$
$
100.00 $
100.62 $
137.35
100.00 $
111.41 $
132.93
100.00 $
114.60 $
141.28
27
Table of Contents
ITEM 6. SELECTED FINANCIAL DATA.
The following table of selected historical financial information is based on our consolidated financial statements, including
those included elsewhere in this Form 10-K. This data should be read in conjunction with Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations and Item 8, Financial Statements and Supplementary Data. Our fiscal
year is the year ending on March 31 of the corresponding calendar year. For example, our fiscal year 2014, or fiscal 2014, means
the period from April 1, 2013 to March 31, 2014. The Statements of Operations, Other Data and Balance Sheet Data are derived
from our audited financial statements.
Year Ended
March 31, 2014
(1)
Year Ended
March 31, 2013
(2)
Year Ended
March 31, 2012
(3)
Year Ended
March 31, 2011
Year Ended
March 31, 2010
$
2,005.1
$
1,944.2
$
1,674.9
$
1,489.3
2,082.0
1,318.4
763.6
424.5
—
8.7
50.8
279.6
(109.1)
(133.2)
—
(15.1)
22.2
(7.4)
29.6
—
29.6
(0.6)
30.2
0.30
0.29
$
$
$
$
$
$
$
$
— $
— $
0.31
0.30
$
$
(in millions, except share and per share amounts)
Statements of Operations:
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Zurn PEX loss contingency (4)
Restructuring and other similar costs
Amortization of intangible assets
Income from operations
Non-operating income (expense):
Interest expense, net
(Loss) gain on the extinguishment of debt (5)
Loss on divestiture (6)
Other (expense) income, net (7)
Income (loss) from continuing operations before
income taxes
(Benefit) provision for income taxes
Net income (loss) from continuing operations
(Loss) income from discontinued operations, net of tax
Net income (loss)
Non-controlling interest loss
Net income (loss) attributable to Rexnord
$
$
$
Net income (loss) per share from continuing operations (8):
Basic
Diluted
$
$
Net (loss) income per share from discontinued operations:
Basic
Diluted
Net income (loss) per share attributable to Rexnord:
Basic
Diluted
Weighted-average number of shares outstanding:
Basic
Effect of dilutive stock options
Diluted
Other Data:
Net cash provided by (used for):
Operating activities
Investing activities
Financing activities
Depreciation and amortization of intangible assets
Capital expenditures
1,273.7
731.4
406.2
10.1
8.6
51.1
255.4
(153.3)
(24.0)
—
(2.9)
75.2
20.3
54.9
(4.8)
50.1
—
50.1
0.57
0.55
(0.05)
(0.05)
0.52
0.50
$
$
$
$
$
$
$
$
1,254.1
690.1
387.1
—
6.8
50.9
245.3
(176.2)
(10.7)
(6.4)
(7.1)
44.9
9.4
35.5
(5.6)
29.9
—
29.9
0.53
0.50
(0.08)
(0.08)
0.45
0.42
66,751
5,314
72,065
139.3
(324.2)
93.2
114.0
58.5
$
$
$
$
$
$
$
$
1,082.4
592.5
326.7
—
—
48.6
217.2
(180.8)
(100.8)
—
1.1
(63.3)
(10.2)
(53.1)
1.8
(51.3)
—
(51.3)
(0.80)
(0.80)
0.03
0.03
(0.77)
(0.77)
66,757
—
66,757
164.5
(35.5)
(6.9)
105.9
37.6
$
$
$
$
$
$
$
$
977.6
511.7
295.3
—
6.6
49.7
160.1
(194.2)
167.8
—
(16.4)
117.3
30.3
87.0
1.1
88.1
—
88.1
1.30
1.25
0.02
0.02
1.32
1.27
66,753
2,410
69,163
155.5
(22.0)
(161.5)
109.1
22.0
98,105
3,213
101,318
95,972
3,894
99,866
190.8
(163.8)
(210.3)
108.5
52.2
144.5
(81.8)
165.7
112.4
60.1
28
Table of Contents
(in millions)
Balance Sheet Data:
Cash and cash equivalents
Working capital (9)
Total assets
Total debt (10)
Stockholders’ equity (deficit)
_______________________
2014
2013
March 31,
2012
2011
2010
$
339.0
$
524.1
$
298.0
$
391.0
$
671.3
3,383.5
1,972.0
562.1
638.9
3,473.8
2,131.6
428.5
549.7
3,290.9
2,423.7
(80.8)
486.8
3,099.7
2,314.1
(88.2)
263.9
484.6
3,016.5
2,215.5
(57.5)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Consolidated financial data as of and for the year ended March 31, 2014 reflects the acquisition of Klamflex subsequent
to April 26, 2013, Micro Precision subsequent to August 21, 2013, LWG subsequent to August 30, 2013, and PGH
subsequent to December 16, 2013. As a result, the comparability of the operating results for the period presented is
affected by the revaluation of the assets acquired and the liabilities assumed on the respective dates of the acquisitions.
Consolidated financial data as of and for the year ended March 31, 2013 reflects the acquisition of Cline subsequent to
December 13, 2012 and excludes the assets associated with a divestiture of an engineered chain business located in
Shanghai, China on December 18, 2012. As a result, the comparability of the operating results for the period presented
is affected by the revaluation of the assets acquired and the liabilities assumed on the date of the acquisitions and the
assets divested on the date of that divestiture.
Consolidated financial data as of and for the year ended March 31, 2012 reflects the acquisition of Autogard subsequent
to April 2, 2011 and VAG subsequent to October 10, 2011 and excludes the assets associated with a divestiture of a
German subsidiary on July 19, 2011. As a result, the comparability of the operating results for the period presented is
affected by the revaluation of the assets acquired and the liabilities assumed on the date of the acquisitions and the assets
divested on the date of that divestiture.
In the year ended March 31, 2013, the Company recognized a $10.1 million incremental charge related to a legal settlement
reached in connection with litigation associated with alleged failure or anticipated failure of Zurn brass fittings.
See Item 8 Note 11 Long-Term Debt for further information regarding the Company's loss on debt extinguishment.
On July 19, 2011, the Company sold substantially all of the net assets of a non-material business based in Germany. The
Company recorded a pre-tax loss on divestiture of approximately $6.4 million during fiscal 2012.
Other (expense) income, net includes the impact of foreign currency transactions, sale of property, plant and equipment,
and other miscellaneous expenses and income. See Item 7, Management Discussion and Analysis of Financial Condition
and Results of Operations for further information.
The Company's initial public offering closed on April 3, 2012. Therefore, the common stock issued in connection with
the initial public offering is not included in the outstanding shares as of March 31, 2012 or any prior date.
Working capital represents total current assets less total current liabilities.
Total debt represents long-term debt, net of an unamortized original issue discount, plus the current portion of long-term
debt.
29
Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion of results of operations and financial condition includes periods prior to the acquisition of Autogard
Holdings Limited and affiliates ("Autogard"), VAG Holdings GmbH and affiliates ("VAG"), Cline Acquisition Corporation
("Cline"), Klamflex Pipe Couplings Ltd. ("Klamflex"), Micro Precision Gear Technology ("Micro Precision"), L.W. Gemmell
("LWG"), Precision Gear Holdings, LLC ("PGH"), and the divestiture of a non-material, underperforming business (the
"divestiture"). Our financial performance includes Autogard subsequent to April 2, 2011, VAG subsequent to October 10, 2011,
Cline subsequent to December 13, 2012, Klamflex subsequent to April 26, 2013, Micro Precision subsequent to August 21, 2013,
LWG subsequent to August 30, 2013, PGH subsequent to December 16, 2013, and excludes the divestiture subsequent to July 19,
2011. Accordingly, the discussion and analysis does not reflect the impact of the Autogard, VAG, Cline, Klamflex, Micro Precision,
LWG, and PGH transactions or the divestiture prior to their respective dates. You should read the following discussion of our
financial condition and results of operations together with Item 6, Selected Financial Data and Item 8, Financial Statements and
Supplementary Data. Our fiscal year is the year ending March 31 of the corresponding calendar year. For example, our fiscal year
2014, or fiscal 2014, means the period from April 1, 2013 to March 31, 2014.
This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not
limited to, those described in the “Risk Factors” in Part I, Item 1A of this report. Actual results may differ materially from those
contained in any forward-looking statements. See also “Cautionary Notice Regarding Forward-Looking Statements” found
elsewhere in this report.
The information contained in this section is provided as a supplement to the consolidated financial statements and the related
notes included elsewhere in this Form 10-K to help provide an understanding of our financial condition, changes in our financial
condition and results of our operations. This section is organized as follows:
Company Overview. This section provides a general description of our business.
Restructuring and Other Similar Costs. This section provides a description of the restructuring actions we executed
to reduce operating costs and improve profitability.
Financial Statement Presentation. This section provides a brief description of certain items and accounting policies
that appear in our financial statements and general factors that impact these items.
Critical Accounting Estimates. This section discusses the accounting policies and estimates that we consider to be
important to our financial condition and results of operations and that require significant judgment and estimates on the part
of management in their application.
Results of Operations. This section provides an analysis of our results of operations for our fiscal years ended March 31,
2014 and 2013 in each case as compared to the prior period's performance.
Non-GAAP Financial Measures. This section provides an explanation of certain Non-GAAP financial measures we
use.
Covenant Compliance. This section provides a description of certain restrictive covenants with which our credit
agreement require us to comply.
Liquidity and Capital Resources. This section provides an analysis of our cash flows for our fiscal years ended March 31,
2014, 2013 and 2012, as well as a discussion of our indebtedness and its potential effects on our liquidity.
Tabular Disclosure of Contractual Obligations. This section provides a discussion of our commitments as of March 31,
2014.
Quantitative and Qualitative Disclosures about Market Risk. This section discusses our exposure to potential losses
arising from adverse changes in interest rates and commodity prices.
Company Overview
We believe we are 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.
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Restructuring and Other Similar Costs
During fiscal 2014, we continued to execute various restructuring actions initiated in the prior fiscal year. These restructuring
actions were implemented to reduce operating costs while also modifying our footprint to reflect changes in the markets we serve,
the impact of acquisitions on our overall manufacturing capacity and refinement of our overall product portfolio. The restructuring
actions primarily resulted in workforce reductions and lease terminations. We recorded restructuring charges of $8.7 million during
fiscal 2014. We expect to continue executing initiatives to optimize our operating margin and manufacturing footprint as well as
select product-line rationalizations. As such, we expect further expenses related to workforce reduction, lease termination, and
other facility rationalization costs. Our restructuring plans are preliminary and related expenses are not yet estimateable.
We recorded restructuring charges of $8.6 million and $6.8 million during the fiscal years ended March 31, 2013 and March
31, 2012, respectively, primarily consisting of severance costs related to workforce reductions and the consolidation of certain
North American water and waste water treatment facilities.
Financial Statement Presentation
The following paragraphs provide a brief description of certain items and accounting policies that appear in our financial
statements and general factors that impact these items.
Net Sales. Net sales represent gross sales less deductions taken for sales returns and allowances and incentive rebate programs.
Cost of Sales. Cost of sales includes all costs of manufacturing required to bring a product to a ready for sale condition.
Such costs include direct and indirect materials, direct and indirect labor costs, including fringe benefits, supplies, utilities,
depreciation, insurance, pension and postretirement benefits, information technology costs and other manufacturing related costs.
The largest component of our cost of sales is cost of materials, which represented approximately 36% of net sales in fiscal
2014. The principal materials used in our Process & Motion Control manufacturing processes are commodities that are available
from numerous sources and include sheet, plate and bar steel, castings, forgings, high-performance engineered plastics and a wide
variety of other components. Within Water Management, we purchase a broad range of materials and components throughout the
world in connection with our manufacturing activities. Major raw materials and components include bar steel, brass, castings,
copper, forgings, high-performance engineered plastic, plate steel, resin, sheet plastic and zinc. We have a strategic sourcing
program to significantly reduce the number of direct and indirect suppliers we use and to lower the cost of purchased materials.
The next largest component of our cost of sales is direct and indirect labor, which represented approximately 15% of net sales in
fiscal 2014.
Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily includes sales and
marketing, finance and administration, engineering and technical services and distribution. Our major cost elements include salary
and wages, fringe benefits, pension and postretirement benefits, insurance, depreciation, advertising, travel and information
technology costs.
Critical Accounting Estimates
The methods, estimates and judgments we use in applying our critical accounting policies have a significant impact on the
results we report in our consolidated financial statements. We evaluate our estimates and judgments on an on-going basis. We base
our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience
and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could
change our reported results. Within the context of these critical accounting policies, we are not currently aware of any reasonably
likely event that would result in materially different amounts being reported.
We believe the following accounting policies are the most critical to us in that they are important to our financial statements
and they require difficult, subjective and/or complex judgments in the preparation of our consolidated financial statements.
Revenue recognition. Net sales are recorded upon transfer of title and risk of product loss to the customer. Net sales relating
to any particular shipment are based upon the amount invoiced for the delivered goods less estimated future rebate payments and
sales returns which are based upon historical experience. Revisions to these estimates are recorded in the period in which the facts
that give rise to the revision become known. The value of returned goods during the years ended March 31, 2014, 2013 and 2012
was approximately 1.0% or less of net sales. Other than a standard product warranty, there are no other significant post-shipment
obligations.
Receivables. Receivables are stated net of allowances for doubtful accounts of $6.4 million at March 31, 2014 and $7.7
million at March 31, 2013. We evaluate the collectability of our receivables and establish the allowance for doubtful accounts
based on a combination of specific customer circumstances and historical write-off experience. Credit is extended to customers
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based upon an evaluation of their financial position. Generally, advance payment is not required. Credit losses are provided for in
the consolidated financial statements and consistently have been within management’s expectations.
Inventory. Inventories are stated at the lower of cost or market. Market is determined based on estimated net realizable
values. Approximately 50% of the Company’s total inventories as of March 31, 2014 and 2013 were valued using the “last-in,
first-out” (LIFO) method. All remaining inventories are valued using the “first-in, first-out” (FIFO) method. The valuation of
inventories includes material, labor and overhead and requires management to determine the amount of manufacturing variances
to capitalize into inventories. We capitalize material, labor and overhead variances into inventories based upon estimates of key
drivers, which generally include raw material purchases (for material variances), standard labor (for labor variances) and
calculations of inventory turnover (for overhead variances).
In some cases we have determined a certain portion of our inventories are excess or obsolete. In those cases, we write down
the value of those inventories to their net realizable value based upon assumptions about future demand and market conditions. If
actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
The total write-down of inventories charged to expense was $3.8 million, $4.9 million and $2.6 million, during fiscal 2014, 2013
and 2012, respectively.
Impairment of intangible assets and tangible fixed assets.
The carrying value of long-lived assets, including amortizable intangible assets and tangible fixed assets, are evaluated for
impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.
Impairment of amortizable intangible assets and tangible fixed assets is generally determined by comparing projected undiscounted
cash flows to be generated by the asset, or group of assets, to its carrying value. If impairment is identified, a loss is recorded equal
to the excess of the asset's net book value over its fair value, and the cost basis is adjusted. Determination of the fair value requires
various estimates including internal cash flow estimates generated from the asset, quoted market prices and appraisals as appropriate
to determine fair value. Actual results could vary from these estimates.
Our recorded goodwill and indefinite lived intangible assets are not amortized but are tested annually for impairment or
whenever circumstances indicate that impairment may exist using a discounted cash flow methodology based on future business
projections and a market value approach. The estimated fair value of the Company's reporting units is dependent on several
significant assumptions, including its weighted average cost of capital (discount rate) and future earnings and cash flow projections.
Retirement benefits. We have significant pension and post-retirement benefit income and expense and assets/liabilities that
are developed from actuarial valuations. These valuations include key assumptions regarding discount rates, expected return on
plan assets, mortality rates and the current health care cost trend rate. We consider current market conditions in selecting these
assumptions. Changes in the related pension and post-retirement benefit income/costs or assets/liabilities may occur in the future
due to changes in the assumptions and changes in asset values.
We recognize the net actuarial gains or losses in excess of unrecognized gain or loss exceeding 10 percent of the greater of
the market-related value of plan assets or the plan's projected benefit obligation at re-measurement (the "corridor") in the Corporate
segment operating results during the fourth quarter of each fiscal year (or upon any re-measurement date). Net periodic benefit
costs recorded on a quarterly basis are primarily comprised of service and interest cost, amortization of unrecognized prior service
cost and the expected return on plan assets. See Item 8, Note 16 Retirement Benefits to the consolidated financial statements for
additional information.
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The obligation for postretirement benefits other than pension also is actuarially determined and is affected by assumptions
including the discount rate and expected future increase in per capita costs of covered postretirement health care benefits. Changes
in the discount rate and differences between actual and assumed per capita health care costs may affect the recorded amount of
the expense in future periods.
Income taxes. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment
is required in determining our worldwide provision for income taxes and recording the related deferred tax assets and liabilities.
We assess our income tax positions and record tax liabilities for all years subject to examination based upon management's
evaluation of the facts and circumstances and information available at the reporting dates. For those income tax positions where
it is more-likely-than-not that a tax benefit will be sustained upon the conclusion of an examination, we have recorded the largest
amount of tax benefit having a cumulatively greater than 50% likelihood of being realized upon ultimate settlement with the
applicable taxing authority, assuming that it has full knowledge of all relevant information. For those tax positions which do not
meet the more-likely-than-not threshold regarding the ultimate realization of the related tax benefit, no tax benefit has been recorded
in the financial statements. In addition, we have provided for interest and penalties, as applicable, and record such amounts as a
component of the overall income tax provision.
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts
and the tax bases of assets and liabilities, net operating losses, tax credit and other carryforwards. We regularly review our deferred
tax assets for recoverability and establish a valuation allowance based on historical losses, projected future taxable income and
the expected timing of the reversals of existing temporary differences. As a result of this review, we have established a partial
valuation allowance against our deferred tax assets relating to certain foreign and state net operating loss carryforwards as well
as our foreign tax credit carryforwards.
Commitments and Contingencies. We are subject to proceedings, lawsuits and other claims related to environmental, labor,
product and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well
as potential ranges of probable losses. We determine the amount of accruals needed, if any, for each individual issue based on our
professional knowledge and experience and discussions with legal counsel. The required accruals may change in the future due
to new developments in each matter, the ultimate resolution of each matter or changes in approach, such as a change in settlement
strategy.
Through acquisitions, we have assumed presently recorded and potential future liabilities relating to product liability,
environmental and other claims. We have recorded accruals for claims related to these obligations when appropriate and, on certain
occasions, have obtained the assistance of an independent actuary in the determination of those accruals. If actual experience
deviates from our estimates, we may need to record adjustments to these liabilities in future periods.
Warranty Accruals. Accruals are recorded on our consolidated balance sheets to reflect our contractual liabilities relating
to warranty commitments to our customers. We provide warranty coverage of various lengths and terms to our customers depending
on standard offerings and negotiated contractual agreements. We accrue an estimate for warranty expense at the time of sale based
on historical warranty return rates and repair costs. Should future warranty experience differ materially from our historical
experience, we may be required to record additional warranty accruals which could have a material adverse effect on our results
of operations in the period in which these additional accruals are required.
Environmental Liabilities. We accrue an estimated liability for each environmental matter when the likelihood of an
unfavorable outcome is probable and the amount of loss associated with such unfavorable outcome is reasonably estimable. We
presume that a matter is probable of an unfavorable outcome if (a) litigation has commenced or a claim has been asserted or if
commencement of litigation or assertion of a claim is probable and (b) if we are somehow associated with the site. In addition, if
the reporting entity has been named as a Potentially Responsible Party (“PRP”), an unfavorable outcome is presumed.
Estimating environmental remediation liabilities involves an array of issues at any point in time. In the early stages of the
process, cost estimates can be difficult to derive because of uncertainties about a variety of factors. For this reason, estimates
developed in the early stages of remediation can vary significantly, and, in many cases, early estimates later require significant
revision. The following are some of the factors that are integral to developing cost estimates:
•
•
•
•
•
The extent and types of hazardous substances at a site;
The impact, if any, on natural resources and third parties
The range of technologies that can be used for remediation;
Evolving standards of what constitutes acceptable remediation; and
The number and financial condition of other PRPs and the extent of their responsibility for the remediation.
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An estimate of the range of an environmental remediation liability typically is derived by combining estimates of various
components of the liability, which themselves are likely to be ranges. At the early stages of the remediation process, particular
components of the overall liability may not be reasonably estimable. This fact does not preclude our recognition of a liability.
Rather, the components of the liability that can be reasonably estimated are viewed as a surrogate for the minimum in the range
of our overall liability. Estimated legal and consulting fees are included as a component of our overall liability.
Asbestos Claims and Insurance for Asbestos Claims. As noted in Item 8, Note 19 Commitments and Contingencies to the
consolidated financial statements, certain Water Management subsidiaries are subject to asbestos litigation. As a result, we have
recorded a liability for pending and potential future asbestos claims, as well as a receivable for insurance coverage of such liability.
The valuation of our potential asbestos liability was based on the number and severity of future asbestos claims, future settlement
costs, and the effectiveness of defense strategies and settlement initiatives.
The present estimate of our asbestos liability assumes (i) our continuous vigorous defense strategy will remain effective;
(ii) new asbestos claims filed annually against Zurn will decline modestly through the next ten years; (iii) the values by disease
will remain consistent with past experience and (iv) our insurers will continue to pay defense costs without eroding the coverage
amounts of our insurance policies. Our potential asbestos liability could be adversely affected by changes in law and other factors
beyond our control. Further, while our current asbestos liability is based on an estimate of claims through the next ten years, such
liability may continue beyond that time period and such liability could be substantial.
We estimate that our available insurance to cover our potential asbestos liability as of the end of fiscal 2014 is greater than
our potential asbestos liability. This conclusion was reached after considering our experience in asbestos litigation, the insurance
payments made to date by our insurance carriers, existing insurance policies, the industry ratings of the insurers and the advice of
insurance coverage counsel with respect to applicable insurance coverage law relating to the terms and conditions of those policies.
We used these same considerations when evaluating the recoverability of our receivable for insurance coverage of potential asbestos
claims.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit
Carryforward Exists (“ASU 2013-11”), which generally requires an unrecognized tax benefit, or portion of an unrecognized tax
benefit, be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit
carryforward. However, if an applicable deferred tax asset is not available or a company does not expect to use the applicable
deferred tax asset, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be
combined with an unrelated deferred tax asset. This guidance is effective for unrecognized tax benefits that exist at the effective
date for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted.
We elected early adoption and implemented this guidance in the second quarter of fiscal 2014 resulting in an increase in the
presentation of our noncurrent deferred income tax liability and a reduction in the presentation of our unrecognized tax benefits
(within other liabilities) in the amount of $7.0 million and $6.3 million at March 31, 2014 and March 31, 2013, respectively.
In February 2013, the FASB issued another update to Accounting Standards Codification ("ASC") No. 220, Presentation of
Comprehensive Income, which requires an entity to provide information about the amounts reclassified out of accumulated other
comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net
income is presented or in the notes, certain significant amounts reclassified out of accumulated other comprehensive income by
the respective line items of net income. This guidance is effective prospectively for fiscal years and interim periods within those
years beginning after December 15, 2012, with early adoption permitted. This guidance was implemented in the first quarter of
fiscal year 2014 and did not have a material impact on our results of operations, financial position or cash flows.
In March 2014, the FASB issued 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.
This guidance is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2014.
As this guidance is a prospective change will be adopted in the first quarter of fiscal year 2016, adoption of this standard is not
expected to have a material impact on our results of operations, financial position or cash flows.
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Subsequent Events
Green Turtle Acquisition
On April 15, 2014, we 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 broadens the product portfolio of our existing Water Management platform. Our fiscal 2015
financial position and results from operations will include Green Turtle subsequent to April 15, 2014. This acquisition is not
expected to have a material impact on our consolidated financial statements.
Mill Products Strategic Review
On May 15, 2014, our Board of Directors approved a plan to assess the potential exit of a non-core product-line that
manufactures ring gears and pinions (“Mill Products”) utilized in mining sector crushing machinery applications. The exit plan
includes the exploration of various strategic alternatives which could include the possible sale of the entire business or the sale of
individual net assets. The exploration of strategic alternatives is expected to be completed by the end of fiscal 2015. Given the
preliminary stage of this analysis, the range of potential outcomes from the resulting exit of this business are not yet determinable.
Results of Operations
Fiscal Year Ended March 31, 2014 Compared with the Fiscal Year Ended March 31, 2013:
Net sales
(Dollars in Millions)
Process & Motion Control
Water Management
Consolidated
Process & Motion Control
Year Ended
March 31,
2014
March 31,
2013
Change
% Change
$
$
1,285.9
796.1
2,082.0
$
$
1,266.1
739.0
2,005.1
$
$
19.8
57.1
76.9
1.6%
7.7%
3.8%
Process & Motion Control net sales for the year ended March 31, 2014 increased 1.6% from the prior year to $1,285.9
million. Core net sales (which excludes a 1% impact of acquisitions) increased 1% over the prior year as single digit growth in
the majority of our end-markets was partially offset by a decline in sales to our bulk material handling markets.
Water Management
Water Management net sales for the year ended March 31, 2014 increased 7.7% from the prior year to $796.1 million. Core
net sales also increased 7.7% as a result of market share gains in the majority of our served markets and increased alternative
market sales in our non-residential construction end-markets, partially offset by the impact of severe weather in the fourth quarter
of the current year.
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Income (loss) from operations
(Dollars in Millions)
Year Ended
March 31,
2014
March 31,
2013
Change
% Change
Process & Motion Control
$
244.9
$
232.2
$
% of net sales
Water Management
% of net sales
Corporate
Consolidated
% of net sales
Process & Motion Control
19.0%
72.2
9.1%
(37.5)
279.6
13.4%
$
18.3%
67.9
9.2%
(44.7)
255.4
12.7%
$
$
12.7
0.7 %
4.3
(0.1)%
7.2
24.2
0.7 %
5.5%
6.3%
16.1%
9.5%
Process & Motion Control income from operations increased 5.5% from the prior year to $244.9 million and income from
operations as a percentage of net sales increased 70 basis points to 19.0% as a result of productivity gains and benefits from cost
saving initiatives implemented in the fiscal year.
Water Management
Water Management income from operations for fiscal 2014 was $72.2 million compared to $67.9 million in fiscal 2013.
Operating margins were relatively flat year-over-year as lower amortization and depreciation related to intangible assets from the
acquisition of VAG that were fully amortized in the prior year and a lower depreciable fixed asset base in the current year resulting
from the consolidation of our North American manufacturing footprint were offset by the impact of shipment timing of certain
water infrastructure projects, adverse mix in our non-residential construction and water infrastructure markets (primarily related
to severe weather) as well as the acceleration of costs to fund initiatives to improve our North American valve and gate group
asset utilization.
Corporate
Corporate expenses were $37.5 million in fiscal 2014 compared to $44.7 million in fiscal 2013. The year-over-year decrease
was primarily due to a $10.1 million charge recorded in fiscal 2013 related to a legal settlement reached in connection with litigation
associated with the alleged failure or anticipated failure of Zurn brass fittings. See Item 8, Note 19 Commitments and Contingencies
to the consolidated financial statements for additional information.
Interest expense, net
Interest expense, net was $109.1 million in fiscal 2014 compared to $153.3 million in fiscal 2013. The year-over-year
reduction in interest expense is primarily the result of the full retirement of our 8.50% senior notes due 2018 (the "8.50% Notes")
and lower average outstanding borrowings in fiscal 2014 as compared to fiscal 2013. See Item 8, Note 11 Long-Term Debt to the
consolidated financial statements for more information.
Loss on extinguishment of debt
During fiscal 2014, we recorded a $133.2 million loss on extinguishment of debt resulting from two transactions. During
the first quarter of fiscal 2014, we completed a re-pricing of the applicable margin on our then-outstanding term loan facilities
and recognized a pre-tax loss of $4.0 million, which was comprised of $0.8 million of fees paid to lenders, a non-cash write-off
of $2.4 million of unamortized deferred financing costs and $0.8 million of original issue discount. During the second quarter of
fiscal 2014, we completed a refinancing of our term loan facilities and a full retirement of our 8.50% Notes. In connection with
this transaction, we recognized a pre-tax loss of $129.2 million, which was comprised of a $109.9 million note tender premium
paid to holders, $5.3 million of fees paid to lenders, as well as a non-cash write-off of $12.4 million of unamortized deferred
financing costs and $1.6 million of original issue discount associated with previously outstanding debt.
During fiscal 2013, we recorded a $24.0 million loss on extinguishment of debt resulting from two debt transactions. During
the first quarter of fiscal 2013, we recognized a $21.1 million loss from the early redemption of all of our then-outstanding 11.75%
senior subordinated notes due 2016 (the "11.75% Notes"), which primarily consisted of a $17.6 million premium related to
redemption and $3.5 million of a non-cash write-off of the deferred financing costs. Additionally, during the third quarter of fiscal
2013, we completed a re-pricing of the effective interest rate on our then-outstanding term loan facilities and recognized a pre-
tax loss of $2.9 million, which was comprised of $1.3 million of fees paid to lenders and the related non-cash write-off of $1.1
million of unamortized deferred financing costs and $0.5 million of original issue discount, respectively.
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Other expense, net
Other expense, net for fiscal 2014 was $15.1 million, which consisted of $3.0 million of costs attributable to the now-
concluded review of strategic alternatives that was initiated by our Board of Directors, foreign currency transaction losses of $3.9
million, $2.3 million of losses on the sale of property, plant and equipment and other miscellaneous losses of $5.9 million. Other
expense, net for fiscal 2013 was $2.9 million and consisted of management fee expense of $15.0 million to terminate our
management agreement with Apollo, foreign currency transaction losses of $6.8 million and other miscellaneous losses of $1.3
million, partially offset by a CDSOA recovery of $16.6 million and a $3.6 million gain on the sale of property, plant and equipment.
(Benefit) provision for income taxes
The income tax benefit in fiscal 2014 was $7.4 million or an effective tax rate of (33.3)%. The income tax benefit recorded
on income before taxes was due to the reduction in the valuation allowance recorded against certain U.S. foreign tax credit
carryforwards as a result of certain changes in circumstances, making the realization of such benefits to now be more-likely-than-
not; and the recognition of certain, previously unrecognized income tax benefits due to the lapse of the applicable statutes of
limitations. The income tax provision in fiscal 2013 was $20.3 million or an effective tax rate of 27.0%. The provision recorded
was below the U.S. federal statutory rate of 35% due to the accrual of foreign income taxes at rates which were generally below
the U.S. federal statutory rate, the recognition of certain foreign-related branch losses for U.S. income tax purposes and the reduction
in the valuation allowance recorded against certain state net operating losses in which the realization of such benefits was now
deemed more-likely-than-not, partially offset with the increase in the valuation allowance related to foreign tax credit carryforwards
for which such realization was not deemed more-likely-than-not.
Net income from continuing operations
Our net income from continuing operations in fiscal 2014 was $29.6 million, inclusive of the $133.2 million loss on the
extinguishment of debt, compared to $54.9 million in fiscal 2013 due to the factors described above. Diluted net income per share
from continuing operations in fiscal 2014 was $0.29, compared to $0.55 in fiscal 2013. Comparability between periods is impacted
by the dilutive effect of the current year increase in average outstanding shares primarily resulting from our sale of 3,000,000
shares of common stock in an offering that closed in February 2014.
Loss from discontinued operations
We did not experience any income or losses from discontinued operations in fiscal 2014. Our loss from discontinued
operations, net of tax was $4.8 million for fiscal 2013. The loss from discontinued operations is related to the divestiture by sale
in fiscal 2013 of a non-core engineered chain business located in Shanghai, China within Process & Motion Control.
Fiscal Year Ended March 31, 2013 Compared with the Fiscal Year Ended March 31, 2012
Net Sales
(Dollars in Millions)
Process & Motion Control
Water Management
Consolidated
Process & Motion Control
Fiscal Year Ended
March 31, 2013
March 31, 2012
Change
% Change
$
$
1,266.1
$
1,310.7
$
739.0
633.5
2,005.1
$
1,944.2
$
(44.6)
105.5
60.9
(3.4)%
16.7 %
3.1 %
Process & Motion Control net sales for the year ended March 31, 2013 was $1,266.1 million compared to $1,310.7 million
in fiscal 2012. Core net sales (which excludes 2.4% related to adverse foreign currency fluctuations and the unfavorable impact
of our second quarter fiscal 2012 divestiture) decreased 1% over fiscal 2012 as growth in sales to our mining, energy and aerospace
end-markets was offset by slower global industrial demand in our remaining end-markets.
Water Management
Water Management net sales for the year ended March 31, 2013 increased 16.7% to $739.0 million compared to fiscal 2012
primarily due to the acquisition of VAG in fiscal 2012. Core net sales increased 1% as market share gains and increased alternative
market sales within our non-residential construction end-markets were partially offset by expected lower shipments to our North
American municipal water end-markets.
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Income from Operations
(Dollars in Millions)
Process & Motion Control
% of net sales
Water Management
% of net sales
Corporate
Consolidated
% of net sales
Process & Motion Control
Fiscal Year Ended
March 31, 2013
March 31, 2012
Change
% Change
$
232.2
$
233.8
$
18.3%
67.9
9.2%
(44.7)
17.8%
51.2
8.1%
(39.7)
$
255.4
$
245.3
$
12.7%
12.6%
(1.6)
0.5%
16.7
1.1%
(5.0)
10.1
0.1%
(0.7)%
32.6 %
(12.6)%
4.1 %
Process & Motion Control income from operations for the year ended March 31, 2013 was $232.2 million, or 18.3% of net
sales. Ongoing restructuring initiatives impacted operating performance for the year ended March 31, 2013 and 2012 by $6.4
million and $0.8 million, respectively. Excluding the impact of restructuring, income from operations as a percent of sales increased
90 basis points from fiscal 2012 to 18.8%. The improvement in fiscal 2013 operating margin resulted from productivity gains
and efficiencies as well as the realization of cost savings associated with our previously implemented restructuring programs,
which was partially offset by investments in growth initiatives.
Water Management
Water Management income from operations for the year ended March 31, 2013 increased 32.4% to $67.9 million, or 9.2%
of net sales. Previously announced restructuring initiatives impacted operating performance for the year end March 31, 2013 and
2012 by $2.2 million and $5.1 million, respectively. Additionally, income from operations in fiscal year 2012 included an inventory
fair value adjustment primarily related to the acquisition of VAG. Excluding these items, income from operations as a percent of
sales increased 17.4% over fiscal 2012 to 9.5%.
Corporate
Corporate expenses were $44.7 million in fiscal 2013 compared to $39.7 million in fiscal 2012. The increase was primarily
due to a $10.1 million incremental charge taken in the second quarter of fiscal 2013 related to a legal settlement in connection
with ongoing litigation associated with alleged failure or potential future failure of Zurn brass fittings. See Item 8, Note 19
Commitments and Contingencies to the consolidated financial statements for additional information. The $10.1 million of
incremental expense was primarily offset by lower year-over-year fourth quarter pension adjustment. In accordance with our policy
on retirement benefits, we recognize the net actuarial gains or losses in excess of unrecognized gain or loss exceeding 10 percent
of the greater of the market-related value of plan assets or the plan's projected benefit obligation at the time of re-measurement
(the "corridor") in the Corporate segment operating results during the fourth quarter of each fiscal year. The fiscal 2013 fourth
quarter pension adjustment was $5.5 million compared to $9.1 million in fiscal 2012.
Interest expense, net
Interest expense, net was $153.3 million in fiscal 2013 compared to $176.2 million in fiscal 2012. The year-over-year
reduction in interest expense is primarily the result of the reduction in outstanding debt related to the Company's April 2012 full
redemption of the then-outstanding $300.0 million of 11.75% Notes discussed below. The impact of the debt reduction on interest
expense was partially offset by higher weighted average borrowing rates on our term loans.
Loss on extinguishment of debt
During fiscal 2013, we recorded a $24.0 million loss on extinguishment of debt resulting from two debt transactions. During
the first quarter of fiscal 2013 we recognized a $21.1 million loss from the early redemption of all of the then- outstanding 11.75%
Notes, which primarily consisted of a $17.6 million premium related to redemption and $3.5 million of a non-cash write-off of
the deferred financing costs. Additionally, during the third quarter of fiscal 2013, we completed a re-pricing of the effective interest
rate on our term loan facilities and recognized a pre-tax loss of $2.9 million related to the portion of debt that was considered
modified in the accordance with ASC 470-50 Debt - Modifications and Extinguishments, which was comprised of $1.3 million
of fees paid to lenders, and the non-cash write-off of $1.1 million of unamortized deferred financing costs and $0.5 million of
original issue discount. During fiscal 2012 we recorded a $0.7 million and $10.0 million loss on debt extinguishment as a result
of the extinguishment of the PIK toggle senior indebtedness and the refinancing of the senior secured credit facilities, respectively.
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Other expense, net
Other expense, net for fiscal 2013 was $2.9 million and consisted of management fee expense of $15.0 million to terminate
our management agreement with Apollo, foreign currency transaction losses of $6.8 million and other miscellaneous losses of
$1.3 million, partially offset by a CDSOA recovery of $16.6 million and a $3.6 million gain on the sale of property, plant and
equipment. Other expense, net for fiscal 2012 was $7.1 million and consisted of management fee expense of $3.0 million, foreign
currency transaction losses of $5.2 million and other miscellaneous income of $1.1 million.
Provision for income taxes
The income tax provision in fiscal 2013 was $20.3 million or an effective tax rate of 27.0%. The provision recorded was
below the U.S. federal statutory rate of 35% due to the accrual of foreign income taxes at rates which were generally below the
U.S. federal statutory rate, the recognition of certain foreign-related branch losses for U.S. income tax purposes and the reduction
in the valuation allowance recorded against certain state net operating losses in which the realization of such benefits was now
deemed more-likely-than-not, partially offset with the increase in the valuation allowance related to foreign tax credit carryforwards
for which such realization was not deemed more-likely-than-not. The income tax provision in fiscal 2012 was $9.4 million or an
effective tax rate of 20.9%. The provision recorded was below the U.S. federal statutory rate of 35% due to the utilization of certain
U.S. foreign tax credit carryforwards that had a valuation allowance recorded against them based upon the original determination
that the realization of such benefits was not deemed more-likely-than-not and the recognition of certain foreign-related branch
losses for U.S. income tax purposes, partially offset with an increase in the valuation allowance related to foreign net operating
loss carryforwards for which such realization was not deemed more-likely-than-not.
Net income from continuing operations
Our net income from continuing operations in fiscal 2013 increased 54.6% to $54.9 million compared to a net income from
continuing operations of $35.5 million in fiscal 2012 due to the factors described above. Diluted net income per share from
continuing operations in fiscal 2013 was $0.55. Comparability between periods is impacted by the dilutive effect of the fiscal 2013
increase in average outstanding shares primarily resulting from our initial public offering in April 2012.
Loss from discontinued operations
Our net loss from discontinued operations was $4.8 million in fiscal 2013 compared to $5.6 million in fiscal 2012. The loss
from discontinued operations relates to the divestiture by sale of a non-core engineered chain business located in Shanghai, China
within the Process & Motion Control platform. On December 18, 2012, we completed the sale of that business for a total sale
price of $2.5 million and recorded a pre-tax loss on disposal of approximately $0.5 million. The pre-tax loss on disposal is combined
with other operating expenses during the period in the loss on discontinued operations for fiscal 2013.
Non-GAAP Financial Measures
Core sales
Core sales excludes the impact of acquisitions, divestitures and foreign currency translation. Management believes that core
sales facilitates easier comparisons of our net sales performance with prior and future periods and to our peers. We exclude the
effect of acquisitions because the nature, size and number of acquisitions 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.
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 Adjusted EBITDA for the fiscal year ended
March 31, 2014 of $413.0 million and net income for the same period of $29.6 million.
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
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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 certain maximum net first lien leverage ratios and, with
respect to our revolving facility, also require us to remain at or below a maximum net first lien leverage ratio of 7.75 to 1.0 as of
the end of each fiscal quarter (3.98x to 1.0 at March 31, 2014). Failure to comply with this covenant could limit our long-term
growth prospects by hindering our ability to incur future debt or make acquisitions.
“Adjusted EBITDA” is the term we use to describe EBITDA as defined and adjusted in our credit agreement, which is net
income, adjusted for the items summarized in the table below. Adjusted EBITDA is intended to show our unleveraged, pre-tax
operating results and therefore reflects our financial performance based on operational factors, excluding non-operational, non-
cash or non-recurring losses or gains. Adjusted EBITDA is not a presentation made in accordance with accounting principles
generally accepted in the United States ("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 you should not consider
it 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 restructurings,
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 March 31, 2014 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.
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Set forth below is a reconciliation of net income to Adjusted EBITDA for the period indicated below.
(Dollars in Millions)
Net income
Interest expense, net
Income tax benefit
Depreciation and amortization
EBITDA
Adjustments to EBITDA:
Actuarial loss on pension and postretirement benefit obligation
Restructuring and other similar charges (1)
Impact of inventory fair value adjustment
Loss on extinguishment of debt (2)
Stock-based compensation expense
LIFO expense (3)
Other expense, net (4)
Subtotal of adjustments to EBITDA
Adjusted EBITDA
Pro forma adjustment for acquisitions (5)
Pro forma Adjusted EBITDA
Senior secured bank indebtedness (6)
Net first lien leverage ratio (7)
Year ended
March 31, 2014
29.6
109.1
(7.4)
108.5
239.8
2.7
8.7
1.7
133.2
7.0
4.8
15.1
173.2
413.0
10.0
423.0
1,682.9
3.98x
$
$
$
$
$
$
$
__________________________________
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Represents restructuring costs comprised of workforce reductions, lease terminations, and other facility rationalization
costs. See Item 8, Note 5 Restructuring and Other Similar Costs to the consolidated financial statements for more
information.
The loss on extinguishment of debt is the result of the re-pricing of our then-outstanding term loans, the refinancing of
our first lien term loan, and the cash tender offer and redemption of the 8.50% Notes during fiscal 2014. See Item 8, Note
11 Long-Term Debt to the consolidated financial statements for more information.
Last-in first-out (LIFO) inventory adjustments are excluded in calculating Adjusted EBITDA as defined in our credit
agreement.
Other expense, net for the year ended March 31, 2014, consists of foreign currency transaction losses of $3.9 million,
loss on sale of property, plant and equipment of $2.3 million, expenses of $3.0 million related to the Board of Director's
review of strategic alternatives, and other miscellaneous expenses of $5.9 million.
Represents a pro forma adjustment to include the Adjusted EBITDA related to the acquisitions of PGH, LWG, Micro
Precision, and Klamflex as permitted by our credit agreement. The pro forma adjustment includes the period from April
1, 2013 through the date of each acquisition. See Item 8, Note 3 Acquisitions and Divesture to the consolidated financial
statements for more information.
The credit agreement defines our senior secured bank indebtedness (or other consolidated debt secured on a pari passu
basis) as consolidated first lien indebtedness for borrowed money (other than letter of credit or bank guarantees), less
unrestricted cash, which was $239.0 million (as defined by the credit agreement) at March 31, 2014. Senior secured
indebtedness reflected in the table consists of borrowings under our credit agreement.
The credit agreement defines the net first lien leverage ratio as the ratio of senior secured indebtedness (as described
above) to Adjusted EBITDA for the trailing four fiscal quarters.
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Liquidity and Capital Resources
Our primary sources of liquidity are available cash and cash equivalents, cash flow from operations and borrowing availability
under our $265.0 million revolving credit facility and our $100.0 million accounts receivable securitization program.
As of March 31, 2014, we had $339.0 million of cash and cash equivalents and $335.9 million of additional borrowing
capacity ($235.9 million of available borrowings under our revolving credit facility and $100.0 million available under our accounts
receivable securitization program). As of March 31, 2014, the available borrowings under our credit facility have been reduced
by $29.1 million due to outstanding letters of credit. As of March 31, 2013, we had $524.1 million of cash and approximately
$324.9 million of additional borrowing capacity ($224.9 million of available borrowings under our revolving credit facility and
$100.0 million available under our accounts receivable securitization program). Both our revolving credit facility and accounts
receivable securitization program are available to fund our working capital requirements, capital expenditures and other general
corporate purposes.
On February 5, 2014, we closed an offering of shares of our common stock. As part of that offering, we sold 3,000,000
shares of common stock and received total proceeds of $73.8 million, net of underwriter discounts and commissions and other
direct costs of the offering.
Cash Flows
Net cash provided by operating activities in fiscal 2014 was $190.8 million compared to $144.5 million in fiscal 2013. The
increase in cash flow from operations is primarily the result of working capital management (accounts receivable, inventory and
accounts payable), which contributed to $40.8 million of the year-over-year increase. Transactional items impacting the comparison
of operating cash flows include a net use of cash of $19.0 million year-over-year related to an $11.5 million cash payment of
plaintiffs attorneys fees as well as the required funding of the class action claims fund associated with the February 2013 Zurn
brass fitting legal settlement (see Item 8, Note 19 Commitments and Contingencies for additional information), $8.8 million of
cash costs related to our Board of Directors' now-concluded review of strategic alternatives and non-capitalizable fees as a result
of our August 2013 refinancing of our term debt, and $10.9 million of lower customer advance payments that we received associated
with capital intensive bulk material handling projects. These transactional uses of cash were offset by $12.3 million of lower excess
tax benefits on stock option exercises. The remaining increase in cash flow from operations was a result of the incremental cash
flow generated on higher year-over-year net sales.
Net cash provided by operating activities in fiscal 2013 was $144.5 million compared to $139.3 million in fiscal 2012. The
increase in operating cash flows were impacted by a number of transactional items. Specifically, in connection with our April 2012
initial public offering (“IPO”), we incurred a $15.7 million fee (including out of pocket expenses) to terminate our management
agreement with Apollo (a $12.7 million year-over-year increase in management fees). We also utilized a portion of our IPO proceeds
to complete a full redemption of $300.0 million of our then-outstanding 11.75% Notes, which substantially contributed to a $22.1
million reduction in cash interest year-over-year. Subsequent to the closing of our IPO, option holders exercised options for
approximately 3.7 million shares in fiscal 2013 with an intrinsic value of approximately $56.1 million. These exercises generated
a future tax benefit of $18.1 million that is reflected as a source of cash in the financing section of the statement of cash
flows. However, in accordance with ASC 230, Statement of Cash Flows, an offsetting use of cash to record an excess tax benefit
on stock option exercises must be presented as an operating cash flow activity. Additionally, in April 2012, we received
approximately $18.5 million in CDSOA recoveries representing the disbursement of cumulative amounts withheld by Customs
and Border Protection from anti-dumping recoveries dating back to 2006 (see Item 8, Note 6 Recovery Under Continued Dumping
and Subsidy Offset Act to the consolidated financial statements for more information). Excluding the aforementioned transactional
cash flow impacts, investments in trade working capital contributed to an incremental $22.5 million use of cash which was partially
offset by the remaining $17.9 million of operating cash flows generated on higher year-over-year net sales.
Cash used for investing activities was $163.8 million in fiscal 2014 compared to a use of $81.8 million in fiscal 2013. We
invested $52.2 million in capital expenditures in fiscal 2014 compared to $60.1 million in fiscal 2013, due to the timing of certain
capital projects. The use of cash in fiscal 2014 also included $112.0 million for the acquisitions of Klamflex, LWG, Micro Precision
and PGH (net of cash acquired) as compared to a use of cash of $21.0 million for acquisitions in fiscal 2013, see Item 8, Note 3
Acquisitions and Divestiture to the consolidated financial statements for additional information. Investing cash flows in fiscal
2013 included the use of cash of $9.7 million in providing a loan receivable under the New Market Tax Credit incentive program,
$6.7 million of proceeds received from the sale of certain property, plant and equipment and proceeds from the divestiture of a
non-core engineered chain business located in Shanghai, China in fiscal 2013.
Cash used for investing activities was $81.8 million in fiscal 2013 compared to a use of $324.2 million in fiscal 2012. The
use of cash in fiscal 2013 included $21.0 million for the acquisition of Cline as well as the acquisition of the remaining minority
interest in VAG-Valves India Private Limited and the acquisition of an independently owned VAG sales office in the United
Kingdom (net of cash acquired), compared to $256.8 million of cash used for the acquisition of VAG and Autogard (net of cash
acquired) in fiscal 2012. Fiscal 2013 and fiscal 2012 also included a use of cash of $9.7 million and $17.9 million, respectively,
through the funding of a loan receivable in connection with our participation in the New Market Tax Credit program (see Item 8,
42
Table of Contents
Note 11 Long-Term Debt to the consolidated financial statements for additional information). In addition, we invested an
incremental $1.6 million of capital expenditures over fiscal 2012 and received proceeds of $9.0 million in connection with the
sale of certain property, plant and equipment and the divestiture of a non-core Process & Motion Control business located in
Shanghai, China during fiscal 2013. In fiscal 2012 we also received $9.0 million of cash proceeds in connection with the sale of
certain property, plant and equipment and the divestiture of a non-material product-line based in Germany within Process & Motion
Control during fiscal 2012.
Cash used for financing activities was $210.3 million in fiscal 2014 compared to cash provided by financing activities of
$165.7 million in fiscal 2013. The cash used for financing activities in fiscal 2014 consisted of a $150.0 million prepayment of
our outstanding term loan associated with the re-pricing of our term loan facility in April 2013. Fiscal 2014 also included a source
of cash from the August 2013 refinancing of our term loan of $1,950.0 million (net of a $19.5 million original issue discount), the
proceeds of which were utilized to fully retire the previously outstanding $1,145.0 million of 8.50% Notes and $786.2 million of
term loan borrowings and pay a $109.9 million tender premium to holders of the retired 8.50% Notes. The above transactions also
included $17.1 million of related debt issue costs. Additionally, we received $73.8 million of proceeds from the closing of our
common stock offering on February 5, 2014, net of underwriting discounts and commissions and other direct costs of the offering.
The cash provided by financing activities in fiscal 2013 consisted of $458.3 million of proceeds from the closing of our IPO on
April 3, 2012, net of underwriting discounts and commissions and other direct costs of the offering. During fiscal 2013 we also
received proceeds of $14.0 million under the New Market Tax Credit incentive program. These sources of cash were partially
offset by the full redemption in April 2012 of $300.0 million principal amount of then-outstanding 11.75% Notes, a $17.6 million
early redemption premium, and other net repayments of debt of $7.4 million. Additionally, $18.1 million was recognized in fiscal
2013 as an excess tax benefit on option exercises that occurred throughout the fiscal year.
Cash provided by financing activities was $165.7 million in fiscal 2013 compared to $93.2 million in fiscal 2012. The cash
provided by financing activities in fiscal 2013 consisted of $458.3 million of proceeds from the closing of our IPO on April 3,
2012, net of underwriting discounts and commissions and other direct costs of the offering. During fiscal 2013 we also received
proceeds of $14.0 million under the New Market Tax Credit incentive program (to fund two domestic plant modernization projects)
and $14.0 million from other foreign borrowings. These sources of cash were partially offset by the full redemption on April 17,
2012 of $300.0 million of our then-outstanding 11.75% Notes, a related $17.6 million early redemption premium, and other net
repayments of debt of $21.4 million (including $11.8 million from our term loan). Additionally, $18.1 million was recognized in
fiscal 2013 as an excess tax benefit on option exercises that occurred throughout the fiscal year. The cash provided by financing
activities in fiscal 2012 consisted of a $945.3 million (net of $4.7 million unamortized original issue discount) source of cash
borrowed under the term loan issued in connection with the refinancing of our senior secured credit facilities in March 2012,
proceeds of $23.4 million related to the New Market Tax Credit financing, as well as a $10.7 million payment of debt issuance
costs, partially offset by the $760.0 million repayment of the old term loans in connection with the refinancing of the senior secured
credit facilities, $93.5 million repayment to retire the then-outstanding PIK toggle senior indebtedness and net repayments of
outstanding borrowings of $8.2 million (including a $1.5 million payment on our then-outstanding term loan). Additionally, $2.1
million of cash was provided by the issuance of common stock.
No provision has been made for United States income taxes related to approximately $141.4 million of undistributed earnings
of foreign subsidiaries that are considered to be permanently reinvested; see Item 8, Note 17 Income Taxes to the consolidated
financial statements for further information.
43
Table of Contents
Tabular Disclosure of Contractual Obligations
The table below lists our contractual obligations at March 31, 2014 by period when due:
(in millions)
Term loans (1)
8.875% Senior notes due 2016
Other long-term debt (2)
Interest on long-term debt obligations
Purchase commitments
Operating lease obligations
Pension and post-retirement plans (3)
Totals
_______________________
Payments Due by Period
Less than
1 Year
1-3 Years
3-5 Years
19.5
—
9.5
78.9
144.3
15.9
15.7
39.0
1.3
1.0
154.3
11.5
21.9
28.7
39.0
—
—
150.8
2.6
14.0
32.6
More than
5 Years
1,842.7
—
38.3
27.8
—
7.7
n/a
Total
1,940.2
1.3
48.8
411.8
158.4
59.5
77.0
$
2,697.0
$
283.8
$
257.7
$
239.0
$
1,916.5
(1)
(2)
(3)
Excludes an unamortized original issue discount of $18.3 million at March 31, 2014.
Includes $37.4 million of financing related to the Company's participation in the New Market Tax Credit incentive
program.
Represents expected pension and post-retirement contributions and benefit payments to be paid directly by us.
Contributions and benefit payments beyond fiscal 2019 cannot be reasonably estimated.
We may be required to make significant cash outlays related to our unrecognized tax benefits, including interest and penalties.
However, due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable
to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly,
unrecognized tax benefits, including interest and penalties and federal tax benefits where applicable, of $23.6 million as of March 31,
2014, have been excluded from the contractual obligations table above. See Item 8, Note 17 Income Taxes to the consolidated
financial statements for more information related to our unrecognized tax benefits.
Our pension and post-retirement benefit plans are discussed in detail in Item 8, Note 16 Retirement Benefits to the consolidated
financial statements. The pension plans cover most of our employees and provide for monthly pension payments to eligible
employees upon retirement. Other post-retirement benefits consist of retiree medical plans that cover a portion of employees in
the United States that meet certain age and service requirements and other post-retirement benefits for employees at certain foreign
locations. See “Risk Factors - Our required cash contributions to our pension plans may increase further and we could experience
a material change in the funded status of our defined benefit pension plans and the amount recorded in our consolidated balance
sheets related to those plans. Additionally, our pension costs could increase in future years.”
Indebtedness
As of March 31, 2014 we had $1,972.0 million of total indebtedness outstanding as follows (in millions):
Term loans (1)
8.875% Senior notes due 2016
Other (2)
Total
Total Debt at
March 31, 2014
Short-term Debt
and Current
Maturities of Long-
Term Debt
Long-term
Portion
$
$
1,921.9
$
1.3
48.8
1,972.0
$
19.5
—
9.5
29.0
$
$
1,902.4
1.3
39.3
1,943.0
(1) Includes an unamortized original issue discount of $18.3 million at March 31, 2014.
(2) Includes $37.4 million of financing related to the Company's participation in the New Market Tax Credit incentive
program.
See Item 8, Note 11 Long-Term Debt to the consolidated financial statements for a description of our outstanding indebtedness.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet or non-consolidated special-purpose entities.
44
Table of Contents
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 and interest rate swaps to cover known foreign
currency transactions and interest rate fluctuations.
Foreign Currency Exchange Rate Risk
Our exposure to foreign currency exchange rates relates primarily to our foreign operations. For our foreign operations,
exchange rates impact the U.S. Dollar ("USD") value of our reported earnings, our investments in the subsidiaries and the
intercompany transactions with the subsidiaries. See Part I Item 1A “Our international operations are subject to uncertainties,
which could adversely affect our business, financial condition, results of operations or cash flows.”
Approximately 34% of our sales originated outside of the United States in fiscal 2014. As a result, fluctuations in the value
of foreign currencies against the USD, particularly the Euro, may have a material impact on our reported results. Revenues and
expenses denominated in foreign currencies are translated into USD at the end of the fiscal period using the average exchange
rates in effect during the period. Consequently, as the value of the USD changes relative to the currencies of our major markets,
our reported results vary.
Fluctuations in currency exchange rates also impact the USD amount of our stockholders' equity. The assets and liabilities
of our non-U.S. subsidiaries are translated into USD at the exchange rates in effect at the end of the fiscal periods. As of March 31,
2014, stockholders' equity increased by $7.1 million from March 31, 2013 as a result of foreign currency translation adjustments.
If the USD had strengthened by 10% as of March 31, 2014, the result would have decreased stockholders' equity by approximately
$49.5 million.
As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and
effectively manage these and other risks associated with our international operations. However, any of these factors could adversely
affect our international operations and, consequently, our operating results.
At March 31, 2014, we had entered into certain foreign currency forward contracts. 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. A hypothetical 10% adverse change in the foreign currency exchange rates would
have resulted in a $0.7 million increase in the fair value of foreign exchange forward contacts as of March 31, 2014.
Interest Rate Risk
We utilize a combination of short-term and long-term debt to finance our operations and are exposed to interest rate risk on
these debt obligations.
A substantial portion of our indebtedness, including indebtedness under the senior secured credit facilities bears interest at
rates that fluctuate with changes in certain short-term prevailing interest rates. As of March 31, 2014, our outstanding borrowings
under the term loan facility were $1,921.9 million (net of $18.3 million of unamortized original issue discount). As of March 31,
2014, current borrowings under the Company's credit agreement had an effective and weighted average interest rate of 4.00%,
determined as the LIBO rate (subject to a 1% floor) plus an applicable margin of 3.00%. In fiscal 2014, we entered into three
forward-starting interest rate swaps to hedge the variability in future cash flows associated with a portion of the variable-rate term
loans. The forward-starting interest rate swaps convert $650.0 million of the variable-rate term loans to a weighted average fixed
interest rate of 2.55% plus the applicable margin (and inclusive of a 1% LIBOR floor). All of the interest rate swaps become
effective beginning on September 28, 2015 with a maturity of September 27, 2018.
Our net income would likely be affected by changes in market interest rates on our variable-rate obligations (which comprises
approximately 97% of our total indebtedness). As discussed above, our term loan facilities are subject to a 1% LIBOR floor.
Therefore, a 100 basis point increase in the March 31, 2014 market interest rate would increase interest expense under the senior
secured credit facilities by approximately $2.9 million on an annual basis.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information with respect to the Company's market risk is contained under the caption "Quantitative and Qualitative
Disclosures About Market Risk" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of
Operations.
45
Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements included in this Form 10-K include the accounts of Rexnord Corporation and
subsidiaries (collectively, the "Company”).
Index to Financial Statements
Rexnord Corporation and Subsidiaries
Consolidated Financial Statements
As of March 31, 2014 and 2013 and
for the years ended March 31, 2014, 2013, and 2012
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
47
49
50
50
51
52
53
46
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Rexnord Corporation
We have audited the accompanying consolidated balance sheets of Rexnord Corporation as of March 31, 2014 and 2013,
and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the
three years in the period ended March 31, 2014. Our audits also included the financial statement schedule listed in Item 15(a)(2).
These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Rexnord Corporation at March 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended March 31, 2014, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Rexnord Corporation’s internal control over financial reporting as of March 31, 2014, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992
Framework) and our report dated May 21, 2014 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Milwaukee, Wisconsin
May 21, 2014
47
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Rexnord Corporation
We have audited Rexnord Corporation’s internal control over financial reporting as of March 31, 2014, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (1992 Framework) (the “COSO criteria”). Rexnord Corporation’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial statements.
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 changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Rexnord Corporation maintained, in all material respects, effective internal control over financial reporting
as of March 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Rexnord Corporation as of March 31, 2014 and 2013, and the related consolidated statements
of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended March
31, 2014 of Rexnord Corporation and our report dated May 21, 2014 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Milwaukee, Wisconsin
May 21, 2014
48
Rexnord Corporation and Subsidiaries
Consolidated Balance Sheets
(in Millions, except share amounts)
March 31, 2014
March 31, 2013
Table of Contents
Assets
Current assets:
Cash and cash equivalents
Receivables, net
Inventories, net
Other current assets
Total current assets
Property, plant and equipment, net
Intangible assets, net
Goodwill
Insurance for asbestos claims
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
Interest payable
Other current liabilities
Total current liabilities
Long-term debt
Pension and postretirement benefit obligations
Deferred income taxes
Reserve for asbestos claims
Other liabilities
Total liabilities
Stockholders' equity:
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued
Common stock, $0.01 par value; 200,000,000 shares authorized; shares issued: 102,055,058 at March
31, 2014 and 98,108,438 at March 31, 2013
Additional paid-in capital
Retained deficit
Accumulated other comprehensive loss
Treasury stock at cost; 900,904 shares at March 31, 2014 and March 31, 2013
Total Rexnord stockholders' equity
Non-controlling interest
Total stockholders' equity
Total liabilities and stockholders' equity
See notes to consolidated financial statements.
49
$
$
$
$
339.0
368.3
359.7
53.8
1,120.8
440.9
592.6
1,150.7
36.0
42.5
3,383.5
29.0
241.1
61.4
5.8
—
112.2
449.5
1,943.0
147.7
207.1
36.0
38.1
2,821.4
—
1.0
872.7
(281.3)
(23.8)
(6.3)
562.3
(0.2)
562.1
3,383.5
$
$
$
$
524.1
350.4
326.2
46.4
1,247.1
410.7
613.5
1,118.4
35.0
49.1
3,473.8
169.3
208.3
55.6
5.7
48.1
121.2
608.2
1,962.3
170.8
225.2
35.0
43.8
3,045.3
—
1.0
784.0
(311.5)
(38.7)
(6.3)
428.5
—
428.5
3,473.8
Table of Contents
Rexnord Corporation and Subsidiaries
Consolidated Statements of Operations
(in Millions, except share and per share amounts)
March 31, 2014
March 31, 2013
March 31, 2012
Year Ended
$
2,082.0
$
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Zurn PEX loss contingency
Restructuring and other similar charges
Amortization of intangible assets
Income from operations
Non-operating expense:
Interest expense, net
Loss on the extinguishment of debt
Loss on divestiture
Other expense, net
Income from continuing operations before income taxes
(Benefit) provision for income taxes
Net income from continuing operations
Loss from discontinued operations, net of tax
Net income
Non-controlling interest loss
Net income attributable to Rexnord
Net income per share from continuing operations:
Basic
Diluted
Net loss per share from discontinued operations:
Basic
Diluted
Net income per share attributable to Rexnord:
Basic
Diluted
Weighted-average number of shares outstanding (in thousands):
Basic
Effect of dilutive stock options
Diluted
$
$
$
$
$
$
$
1,318.4
763.6
424.5
—
8.7
50.8
279.6
(109.1)
(133.2)
—
(15.1)
22.2
(7.4)
29.6
—
29.6
(0.6)
2,005.1
$
1,273.7
731.4
406.2
10.1
8.6
51.1
255.4
(153.3)
(24.0)
—
(2.9)
75.2
20.3
54.9
(4.8)
50.1
—
30.2
$
50.1
$
0.30
0.29
$
$
— $
— $
0.31
0.30
$
$
98,105
3,213
101,318
0.57
0.55
(0.05)
(0.05)
0.52
0.50
$
$
$
$
$
$
95,972
3,894
99,866
1,944.2
1,254.1
690.1
387.1
—
6.8
50.9
245.3
(176.2)
(10.7)
(6.4)
(7.1)
44.9
9.4
35.5
(5.6)
29.9
—
29.9
0.53
0.50
(0.08)
(0.08)
0.45
0.42
66,751
5,314
72,065
Rexnord Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(in Millions)
March 31, 2014
March 31, 2013
March 31, 2012
Year Ended
Net income
Other comprehensive income (loss):
Foreign currency translation adjustments
Unrealized loss on interest rate derivatives, net of tax
Change in pension and other postretirement defined benefit
plans, net of tax
Other comprehensive income (loss), net of tax
Non-controlling interest loss
Total comprehensive income
$
$
30.2
$
50.1
$
7.1
(1.7)
9.5
14.9
(0.6)
(14.3)
—
(13.1)
(27.4)
—
44.5
$
22.7
$
29.9
0.2
4.8
(32.3)
(27.3)
—
2.6
See notes to consolidated financial statements.
50
Table of Contents
Rexnord Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In Millions)
Common
Stock
Preferred
Stock
Additional
Paid-In
Capital
Retained
(Deficit)
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Non-
controlling
interest (1)
Total
Stockholders’
(Deficit) Equity
Balance at March 31, 2011
$
0.7
$
— $
292.8
$
(391.5)
$
16.1
$
(6.3)
$
— $
(88.2)
Comprehensive income (loss):
Net income
Foreign currency translation
adjustments
Unrealized gain on interest rate
derivatives, net of $3.1 million
income tax expense
Change in pension and other
postretirement defined benefit plans,
net of $19.5 million income tax
benefit
Total comprehensive income (loss)
Stock-based compensation expense
Non-controlling interest in VAG sales
subsidiary
Sale of common stock
Balance at March 31, 2012
Comprehensive income (loss):
Net income
Foreign currency translation
adjustments
Change in pension and other
postretirement defined benefit plans,
net of $6.9 million income tax benefit
Total comprehensive income (loss)
Stock-based compensation expense
Issuance of common stock in IPO, net of
direct offering costs
Exercise of stock options, net of shares
surrendered
Acquisition of non-controlling interest
Tax benefit on stock option exercises
Balance at March 31, 2013
Comprehensive income (loss):
Net income (loss)
Foreign currency translation
adjustments
Unrealized loss on interest rate
derivatives, net of $1.0 million
income tax benefit
Change in pension and other
postretirement defined benefit plans,
net of $4.9 million income tax
expense
Total comprehensive income (loss)
Stock-based compensation expense
Issuance of equity to non-controlling
interest holders
Issuance of common stock, net of direct
offering costs
Exercise of stock options, net of shares
surrendered
Tax benefit on stock option exercises
—
—
—
—
—
—
—
—
0.7
—
—
—
—
—
0.3
—
—
—
1.0
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3.7
—
2.1
29.9
—
—
—
29.9
—
—
—
—
0.1
4.8
(32.3)
(27.4)
—
—
—
—
—
—
—
—
—
—
—
298.6
(361.6)
(11.3)
(6.3)
—
—
—
—
7.1
458.0
2.0
0.2
18.1
784.0
—
—
—
—
—
7.0
—
73.8
2.1
5.8
50.1
—
—
50.1
—
—
—
—
—
—
(14.3)
(13.1)
(27.4)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(311.5)
(38.7)
(6.3)
30.2
—
—
—
30.2
—
—
—
—
—
—
7.1
(1.7)
9.5
14.9
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.1
—
—
0.1
—
(1.0)
—
(0.9)
—
—
—
—
—
—
—
0.9
—
—
(0.6)
—
—
—
(0.6)
—
0.4
—
—
—
Balance at March 31, 2014
$
1.0
$
— $
872.7
$
(281.3)
$
(23.8)
$
(6.3)
$
(0.2)
$
29.9
0.2
4.8
(32.3)
2.6
3.7
(1.0)
2.1
(80.8)
50.1
(14.3)
(13.1)
22.7
7.1
458.3
2.0
1.1
18.1
428.5
29.6
7.1
(1.7)
9.5
44.5
7.0
0.4
73.8
2.1
5.8
562.1
(1) Fiscal 2012 represents a 20% non-controlling interest formerly held by a local director of VAG-Valves India Private Limited. In fiscal 2013, the Company purchased that interest.
Fiscal 2014 represents a 49% non-controlling interest in a Water Management joint venture.
See notes to consolidated financial statements.
51
Table of Contents
Rexnord Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in Millions)
March 31, 2014
March 31, 2013
March 31, 2012
Year Ended
$
29.6
$
50.1
$
Operating activities
Net income
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation
Amortization of intangible assets
Amortization of deferred financing costs
Loss (gain) on dispositions of property, plant and equipment
Deferred income taxes
Non-cash loss on divestiture
Non-cash restructuring charges
Other non-cash (credits) charges
Loss on extinguishment of debt
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
Loan receivable for financing under New Market Tax Credit incentive program
Proceeds from dispositions of property, plant and equipment
Proceeds from divestiture, net of cash
Cash used for investing activities
Financing activities
Proceeds from borrowings of long-term debt
Repayments of long-term debt
Proceeds from borrowings of short-term debt
Repayments of short-term debt
Payment of deferred financing fees
Payment of tender premium
Proceeds from issuance of common stock, net of direct offering costs
Proceeds from exercise of stock options
Third party investment in non-controlling interest
Excess tax benefit on exercise of stock options
Cash (used for) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
57.7
50.8
2.6
2.3
(24.9)
—
—
(0.1)
133.2
7.0
(11.3)
(11.3)
(6.8)
26.0
(64.0)
190.8
(52.2)
(112.0)
—
0.4
—
(163.8)
1,935.1
(1,948.4)
13.5
(165.6)
(17.1)
(109.9)
73.8
2.1
0.4
5.8
(210.3)
(1.8)
(185.1)
524.1
339.0
$
61.3
51.1
3.9
(3.6)
(15.4)
—
—
7.3
24.0
7.1
(20.3)
(12.8)
7.5
(4.3)
(11.4)
144.5
(60.1)
(21.0)
(9.7)
6.7
2.3
(81.8)
15.4
(313.2)
12.6
(8.2)
(2.0)
(17.6)
458.3
2.3
—
18.1
165.7
(2.3)
226.1
298.0
524.1
$
29.9
63.1
50.9
7.8
1.2
(22.2)
4.5
4.6
14.8
10.7
3.7
(33.8)
(3.4)
(10.7)
22.3
(4.1)
139.3
(58.5)
(256.8)
(17.9)
5.6
3.4
(324.2)
960.6
(762.0)
10.7
(105.0)
(13.2)
—
2.1
—
—
—
93.2
(1.3)
(93.0)
391.0
298.0
See notes to consolidated financial statements.
52
Table of Contents
Rexnord Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2014
1. Basis of Presentation and Description of Business
The 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 ("GAAP") pursuant to the rules
and regulations of the Securities and Exchange Commission. The consolidated financial statements include the accounts of the
Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion
of management, the consolidated financial statements include all adjustments necessary for a fair presentation of the financial
position and the results of operations for the periods presented.
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 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.
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 primarily in non-
residential construction end-markets and engineered valves and gates for the water and wastewater treatment market.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from
those estimates.
Revenue Recognition
Net sales are recorded upon transfer of title and risk of product loss to the customer. Net sales relating to any particular
shipment are based upon the amount invoiced for the delivered goods less estimated future rebate payments and sales returns
which are based upon the Company’s historical experience. Revisions to these estimates are recorded in the period in which the
facts that give rise to the revision become known. The value of returned goods during the years ended March 31, 2014, 2013 and
2012 was approximately 1.0% or less of net sales. Other than a standard product warranty, there are no post-shipment obligations.
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 consolidated statements of operations.
Share Based Payments
The Company accounts for share based payments in accordance with Accounting Standards Codification ("ASC") 718,
Accounting for Stock Compensation ("ASC 718"). 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 grant-date fair
value of the equity instruments issued. Compensation cost is recognized over the requisite service period, generally as the awards
vest. See further discussion of the Company’s stock option plans in Note 15.
Per Share Data
Basic net income (loss) per share from continuing and discontinued operations is computed by dividing net income from
continuing operations and loss from discontinued operations, respectively, by the corresponding weighted average number of
common shares outstanding for the period. Diluted net income per share from continuing and discontinued operations 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 stock options to purchase
common shares, except when the effect would be anti-dilutive. The computation for diluted net income per share for the fiscal
year ended March 31, 2014, 2013 and 2012 excludes 1,278,316, 2,924,547 and 431,459 shares due to their anti-dilutive effects,
respectively.
53
Table of Contents
Receivables
Receivables are stated net of allowances for doubtful accounts of $6.4 million at March 31, 2014 and $7.7 million at March 31,
2013. The Company evaluates the collectability of its receivables and establishes the allowance for doubtful accounts based on a
combination of specific customer circumstances and historical write-off experience. Credit is extended to customers based upon
an evaluation of their financial position. Generally, advance payment is not required. Credit losses are provided for in the
consolidated financial statements and consistently have been within management’s expectations.
Significant Customers
The Company’s largest customer accounted for 8.6%, 7.9% and 7.4% of consolidated net sales for the years ended March 31,
2014, 2013 and 2012, respectively. Receivables related to this Process & Motion Control industrial distributor at March 31, 2014
and 2013 were $9.8 million and $13.9 million, respectively.
Inventories
Inventories are comprised of material, direct labor and manufacturing overhead, and are stated at the lower of cost or market.
Market is determined based on estimated net realizable values. Approximately 50% of the Company’s total inventories as of both
March 31, 2014 and 2013 were valued using the “last-in, first-out” (LIFO) method. All remaining inventories are valued using
the “first-in, first-out” (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided using the straight-line method over 10 to 30 years
for buildings and improvements, 5 to 10 years for machinery and equipment and 3 to 5 years for computer hardware and software.
Maintenance and repair costs are expensed as incurred.
Goodwill and Intangible Assets
Intangible assets consist of acquired trademarks and tradenames, customer relationships (including distribution network),
patents and non-compete intangibles. The customer relationships, patents, and certain tradenames are being amortized using the
straight-line method over their estimated useful lives of 1 to 20 years, 2 to 15 years, and 5 to 10 years, respectively. Goodwill,
trademarks and certain tradenames have indefinite lives and are not amortized but are tested annually for impairment using a
discounted cash flow and market value approach analysis.
Impairment of Long-Lived Assets
The carrying value of long-lived assets, including amortizable intangible assets and tangible fixed assets, are evaluated for
impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.
Impairment of amortizable intangible assets and tangible fixed assets is generally determined by comparing projected undiscounted
cash flows to be generated by the asset, or group of assets, to its carrying value. If impairment is identified, a loss is recorded equal
to the excess of the asset's net book value over its fair value, and the cost basis is adjusted. Determination of the fair value requires
various estimates including internal cash flow estimates generated from the asset, quoted market prices and appraisals as appropriate
to determine fair value. Actual results could vary from these estimates.
Deferred Financing Costs
Other assets at March 31, 2014 and 2013, include deferred financing costs of $12.1 million and $18.5 million, respectively,
net of accumulated amortization of $4.7 million and $6.7 million, respectively. These costs were incurred to obtain long-term
financing and are being amortized using the effective interest method over the term of the related debt. See Note 11 for further
information on the Company's long-term financing.
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Table of Contents
Product Warranty
The Company offers warranties on the sales of certain of its 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 during each of the periods presented (in
millions):
Balance at beginning of period
Acquired obligations
Charged to operations
Claims settled
Balance at end of period
Income Taxes
Year Ended
March 31, 2014
Year Ended
March 31, 2013
Year Ended
March 31, 2012
$
$
$
8.8
0.2
3.8
(4.2)
8.6
$
$
8.7
—
4.4
(4.3)
8.8
$
8.6
1.1
1.6
(2.6)
8.7
The Company accounts for income taxes in accordance with ASC 740, Accounting for Income Taxes (“ASC 740”). Deferred
income taxes are provided for future tax effects attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases, net operating losses, tax credits and other applicable
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be actually paid or recovered. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the results of continuing operations in the period that includes the date of
enactment.
The Company regularly reviews its deferred tax assets for recoverability and provides a valuation allowance against its
deferred tax assets if, based upon consideration of all positive and negative evidence, the Company determines that it is more-
likely-than-not that a portion or all of the deferred tax assets will ultimately not be realized in future tax periods. Such positive
and negative evidence would include review of historical earnings and losses, anticipated future earnings, the time period over
which the temporary differences and carryforwards are anticipated to reverse and implementation of feasible, prudent tax planning
strategies.
The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is
required in determining the Company's worldwide provision for income taxes and recording the related deferred tax assets and
liabilities. In the ordinary course of the Company's business, there is inherent uncertainty in quantifying the ultimate tax outcome
of all of the numerous transactions and required calculations relating to the Company's tax positions. Accruals for unrecognized
tax benefits are provided for in accordance with the requirements of ASC 740. An unrecognized tax benefit represents the difference
between the recognition of benefits related to uncertain tax positions for income tax reporting purposes and financial reporting
purposes. The Company has established a reserve for interest and penalties, as applicable, for uncertain tax positions and it is
recorded as a component of the overall income tax provision.
The Company is subject to periodic income tax examinations by domestic and foreign income tax authorities. Although the
outcome of income tax examinations is always uncertain, the Company believes that it has appropriate support for the positions
taken on its income tax returns and has adequately provided for potential income tax assessments. Nonetheless, the amounts
ultimately settled relating to issues raised by the taxing authorities may differ materially from the amounts accrued for each year.
See Note 17 for more information on income taxes.
Accumulated Other Comprehensive Loss
At March 31, 2014, accumulated other comprehensive loss consisted of $7.8 million of foreign currency translation gains,
$1.7 million, after tax, of unrealized loss on interest rate derivatives, and $29.9 million, after tax, of unrecognized actuarial losses
and unrecognized prior services costs, net of tax. At March 31, 2013, accumulated other comprehensive loss consisted of $0.7
million of foreign currency translation gains and $39.4 million of unrecognized actuarial losses and unrecognized prior services
costs, net of tax.
Derivative Financial Instruments
The Company is exposed to certain financial risks relating to fluctuations in foreign currency exchange rates and interest
rates. The Company selectively uses foreign currency forward contracts and interest rate swap contracts to manage its foreign
currency and interest rate risks. All hedging transactions are authorized and executed pursuant to defined policies and procedures
which prohibit the use of financial instruments for speculative purposes.
55
Table of Contents
The Company accounts for derivative instruments based on ASC 815, Accounting for Derivative Instruments and Hedging
Activities (“ASC 815”). ASC 815 requires companies to recognize all of its derivative instruments as either assets or liabilities in
the balance sheet at fair value. Fair value is defined under ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), 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. See more information as it
relates to applying fair value to derivative instruments at Note 13. The accounting for changes in the fair value of a derivative
instrument depends on whether the derivative instrument has been designated and qualifies as part of a hedging relationship and
further, on the type of hedging relationship. As of March 31, 2014, the Company had forward-starting interest rate swaps on its
variable rate term debt that are designated and qualify as hedging instruments. For the derivative instruments designated and
qualifying as effective hedging instruments under ASC 815, the changes in the fair value of the effective portion of the instrument
are recognized in accumulated other comprehensive income (loss) whereas any changes in the fair value of a derivative instrument
that is not designated or does not qualify as an effective hedge are recorded in other non-operating income (expense). See Note
12 for further information regarding the classification and accounting for the Company’s derivative financial instruments.
Financial Instrument Counterparties
The Company is exposed to credit losses in the event of non-performance by counterparties to its financial instruments. The
Company anticipates, however, that counterparties will be able to fully satisfy their obligations under these instruments. The
Company places cash and temporary investments and foreign currency and interest rate swap contracts with various high-quality
financial institutions. Although the Company does not obtain collateral or other security to support these financial instruments, it
does periodically evaluate the credit-worthiness of each of its counterparties.
Foreign Currency Translation
Assets and liabilities of subsidiaries operating outside of the United States with a functional currency other than the U.S.
dollar are translated into U.S. dollars using exchange rates at the end of the respective period. Revenues and expenses of such
entities are translated at average exchange rates in effect during the respective period. Foreign currency translation adjustments
are included as a component of accumulated other comprehensive loss. Currency transaction losses are included in other expense,
net in the consolidated statements of operations and totaled $3.9 million, $6.8 million and $5.2 million for the years ended March 31,
2014, 2013 and 2012, respectively.
Advertising Costs
Advertising costs are charged to selling, general and administrative expenses as incurred and amounted to $9.6 million,
$10.0 million, and $10.2 million for the years ended March 31, 2014, 2013 and 2012, respectively.
Research, Development and Engineering Costs
Research, development and engineering costs are charged to selling, general and administrative expenses as incurred for the
years ended March 31, 2014, 2013 and 2012 amounted to the following (in millions):
Research and development costs
Engineering costs
Total
Concentrations of Credit Risk
Year Ended
March 31, 2014
Year Ended
March 31, 2013
Year Ended
March 31, 2012
$
$
13.0
28.4
41.4
$
$
13.7
24.3
38.0
$
$
15.4
22.4
37.8
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and
temporary investments, forward currency contracts and trade accounts receivable.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax
Credit Carryforward Exists (“ASU 2013-11”), which generally requires an unrecognized tax benefit, or portion of an unrecognized
tax benefit, be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax
credit carryforward. However, if an applicable deferred tax asset is not available or a company does not expect to use the applicable
deferred tax asset, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be
combined with an unrelated deferred tax asset. This guidance is effective for unrecognized tax benefits that exist at the effective
56
Table of Contents
date for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted.
The Company elected early adoption and implemented this guidance in the second quarter of fiscal 2014 resulting in an increase
in the presentation of our noncurrent deferred income tax liability and a reduction in the presentation of our unrecognized tax
benefits (within other liabilities) in the amount of $7.0 million and $6.3 million at March 31, 2014 and March 31, 2013, respectively.
In February 2013, the FASB issued another update to ASC No. 220, Presentation of Comprehensive Income, which requires
an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.
In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, certain
significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. This
guidance is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2012.
This guidance was implemented in the first quarter of fiscal year 2014 and did not have a material impact on the Company's results
of operations, financial position or cash flows.
In March 2014, the FASB issued 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.
This guidance is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2014.
As this guidance is a prospective change will be adopted in the first quarter of fiscal year 2016, adoption of this standard is not
expected to have a material impact on the Company's results of operations, financial position or cash flows.
3. Acquisitions and Divestitures
Fiscal Year 2014
On December 16, 2013, the Company acquired Precision Gear Holdings, LLC (“PGH”) for a total cash purchase price of
$77.1 million, net of cash acquired and excluding transaction costs. PGH has two operating subsidiaries, Merit Gear LLC (“Merit
Gear”), located in Antigo, Wisconsin, and Precision Gear LLC (“Precision Gear”), located in Twinsburg, Ohio. Merit Gear is a
build-to-print manufacturer of high-quality gearing and specialized gearboxes primarily for the North American oil and gas market,
along with other diversified industrial markets. Precision Gear is a leading manufacturer of highly specialized gears primarily
serving the aerospace market, along with various other industrial markets. This acquisition was complementary to the Company's
existing Process & Motion Control product portfolio.
On August 30, 2013, the Company acquired certain assets of L.W. Gemmell ("LWG") for a total cash purchase price of $8.2
million, excluding transactions costs. LWG, based in Australia, is a distributor of non-residential plumbing products. A portion of
LWG's historical sales were from existing Rexnord Water Management product lines. As such, the acquisition provided the
Company with additional product offerings and the opportunity to expand its international presence through a more direct ownership
structure.
On August 21, 2013, the Company acquired certain assets of Micro Precision Gear Technology Limited ("Micro Precision")
for a total cash purchase price of $22.2 million, excluding transactions costs. Micro Precision, based in the United Kingdom, is a
built-to-print manufacturer of specialty gears and electric motor components primarily sold to the aerospace market. This acquisition
expanded the Company's existing Process & Motion Control product offerings and its presence in Europe.
On April 26, 2013, the Company acquired Klamflex Pipe Couplings Ltd. ("Klamflex") for a total cash purchase price of $4.5
million, net of cash acquired and excluding transaction costs. Klamflex, based in South Africa, is a manufacturer of pipe couplings,
flange adapters, dismantling joints and repair clamps. This acquisition broadened the product portfolio of the Company's existing
Water Management platform and expanded the Company's global presence.
The Company's results of operations include the acquired operations subsequent to the respective acquisition dates included
above. The acquisitions of PGH, LWG, Micro Precision and Klamflex were not material to the Company’s consolidated financial
statements, either individually or in the aggregate. Pro-forma results of operations and certain other U.S. GAAP disclosures related
to the acquisitions during the fiscal year ended March 31, 2014 have not been presented because they are not significant to the
Company's consolidated statements of operations and financial position, either individually or in the aggregate.
The fiscal year 2014 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 acquisition date. The excess of the acquisition
57
Table of Contents
purchase price over the fair value assigned to the assets acquired and liabilities assumed was recorded as goodwill. The aggregate
purchase price allocation of these acquisitions resulted in goodwill of $24.9 million ($22.8 million of tax deductible goodwill),
other intangible assets of $25.1 million, property, plant and equipment of $36.7 million and other net assets of $25.3 million. The
purchase price allocation for all acquisitions is preliminary and subject to valuation adjustments that will be completed within the
one year period following each acquisition date.
During fiscal 2014, the Company also established a new French sales office in its Water Management platform to expand
its European water and wastewater market presence via a joint venture between the Company and six external sales associates.
The Company contributed an immaterial amount of capital to the joint venture. As the Company has a 51% ownership stake and
is deemed to have significant control over the new legal entity, the financial statements of the new joint venture have been wholly
consolidated in accordance with ASC 810, Consolidations. The remaining 49% of the joint venture that is not owned by the
Company has been presented as a non-controlling interest throughout the consolidated financial statements.
Fiscal Year 2013
On December 13, 2012, the Company acquired Cline Acquisition Corp. ("Cline") for a total cash purchase price of $19.6
million, net of cash acquired and excluding transaction costs. Cline, based in Taylors, South Carolina, is a service business
specializing in the manufacturing, repair and refurbishment of drive shafts, clutches and brakes. This acquisition was a product
line extension of the Company's existing Process & Motion Control service offerings and expanded its presence in the southeast
region of the U.S. As a result of this transaction, the Company acquired $21.8 million of intangible assets consisting of $12.2
million of goodwill (which is not deductible for tax purposes) and $9.6 million of all other intangible assets based on the Company's
final purchase price allocation.
During the third quarter of fiscal 2013, the Company completed the acquisition of a remaining minority interest in VAG-
Valves India Private Limited and the acquisition of an independently owned VAG Holding GmbH (“VAG”) sales office in the
United Kingdom for a cash purchase price of $1.4 million, net of cash acquired and excluding transactions costs.
The Company's fiscal 2013 results of operations include the acquired operations subsequent to the respective acquisition
dates included above. The acquisitions of Cline, VAG-Valves India Private Limited and the VAG sales office were not material
to the Company’s consolidated financial statements, either individually or in the aggregate.
Fiscal Year 2012
On October 10, 2011, the Company acquired VAG for a total cash purchase price of $238.6 million, net of cash acquired
and excluding transaction costs. VAG is a global leader in engineered valve solutions across a broad range of applications, including
water distribution, wastewater treatment, dams and hydropower generation, as well as various other industrial applications. This
acquisition further expanded the Company's Water Management platform. As a result of this transaction, the Company acquired
$138.3 million of intangible assets consisting of $82.6 million of goodwill (which is not deductible for tax purposes) and $55.7
million of all other intangible assets.
On April 2, 2011, the Company acquired Autogard Holdings Limited and affiliates (“Autogard”) for a total cash purchase
price of $18.2 million, net of cash acquired. Autogard is a European-based manufacturer of torque limiters and couplings. The
acquisition further expanded the Company’s global Process & Motion Control product portfolio. As a result of this transaction,
the Company acquired $17.0 million of intangible assets consisting of $9.1 million of goodwill (which is not deductible for tax
purposes) and $7.9 million of all other intangible assets.
The Company's fiscal 2012 results of operations include the acquired operations subsequent to the respective acquisition
dates included above. The acquisitions of VAG and Autogard were not material to the Company’s consolidated financial statements,
either individually or in the aggregate.
On July 19, 2011, the Company sold substantially all of the net assets of a non-material, underperforming product line within
the Process & Motion Control segment based in Germany for a total sale price of $4.5 million. The Company recorded a pre-tax
loss on divestiture of $6.4 million during fiscal 2012. The Company's financial position and results of operations exclude the
divested entity subsequent to July 19, 2011.
58
Table of Contents
4. Discontinued Operations
During fiscal 2013, the Company completed the sale of a non-core engineered chain business located in Shanghai, China
within the Process & Motion Control platform for a total sale price of $2.5 million. The Company recorded a pre-tax loss on
disposal of approximately $0.5 million during fiscal 2013. The Company has no continuing involvement in the business subsequent
to the sale.
The results of operations of the business for the years ended March 31, 2013 and 2012 are presented on the Statements
of Operations as loss from discontinued operations, net of tax.
5. Restructuring and Other Exit Costs
During fiscal 2014, the Company executed various restructuring actions. These initiatives were implemented to reduce
operating costs while also modifying the Company's footprint to reflect changes in the markets it serves, the impact of acquisitions
on its 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. The Company recorded
restructuring charges of $8.7 million during fiscal 2014. 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 reduction, lease termination, and other facility rationalization costs. The Company's restructuring
plans are preliminary and related expenses are not yet estimateable.
During fiscal 2013 and fiscal 2012, the Company executed various restructuring actions initiated in fiscal 2012 to reduce
operating costs and complete the consolidation of certain North American water and waste water treatment facilities. The Company
recorded restructuring charges of $8.6 million and $6.8 million during the years ended March 31, 2013 and 2012, respectively.
The following table summarizes the Company's restructuring costs incurred during the years ended March 31, 2014, 2013,
and 2012 by classification of operating segment (in millions):
Process &
Motion Control
Year Ended March 31, 2014
Water
Management
Corporate
Consolidated
Severance costs
Lease termination and other costs
Total restructuring and other similar costs
$
$
3.6
1.6
5.2
$
$
$
$
$
$
2.0
0.7
2.7
$
$
0.8
—
0.8
$
$
6.4
2.3
8.7
Year Ended March 31, 2013
Water
Management
Corporate
1.5
0.7
2.2
$
$
Consolidated
— $
—
— $
6.8
1.8
8.6
Year Ended March 31, 2012
Water
Management
Corporate
Consolidated
2.6
2.5
5.1
$
$
0.9
—
0.9
$
$
4.3
2.5
6.8
Severance costs
Lease termination and other costs
Total restructuring and other similar costs
$
Severance costs
Lease termination and other costs
Total restructuring and other similar costs
$
Process &
Motion Control
5.3
$
Process &
Motion Control
0.8
$
1.1
6.4
—
0.8
2.7
12.4
59
Severance costs
Lease termination and other costs
Total restructuring and other similar costs
$
Restructuring Costs To-date (Period from April 1, 2011 to March 31, 2014)
Process &
Motion Control
9.7
$
Water
Management
$
$
6.1
3.9
10.0
$
$
Corporate
Consolidated
1.7
—
1.7
$
$
17.5
6.6
24.1
Table of Contents
The following table summarizes the activity in the Company's accrual for restructuring costs for the fiscal years ended
March 31, 2014 and 2013 (in millions):
Accrued Restructuring Costs, March 31, 2012
Charges
Cash payments
Accrued Restructuring Costs, March 31, 2013 (1)
Charges
Cash payments
Accrued Restructuring Costs, March 31, 2014 (1)
Total
$
Severance Costs
Lease Termination
and Other Costs
$
1.9
6.8
(5.0)
3.7
6.4
(6.4)
0.6
1.8
(2.3)
0.1
2.3
(2.0)
3.7
$
0.4
$
$
$
2.5
8.6
(7.3)
3.8
8.7
(8.4)
4.1
(1) Accrued restructuring costs are included in other current liabilities in the consolidated balance sheets.
6. Recovery Under Continued Dumping and Subsidy Offset Act (“CDSOA”)
The Company, as a producer of ball bearing products in the U.S., participated in the distribution of monies collected by
Customs and Border Protection (“CBP”) from anti-dumping cases under the CDSOA. Through its participation the Company
provided relevant information to CBP regarding historical manufacturing, personnel and development costs for previous calendar
years. In February 2006, U.S. legislation was enacted that ended CDSOA distributions to U.S. manufacturers for imports covered
by anti-dumping duty orders entering the U.S. after September 30, 2007. Because monies were collected by CBP until September 30,
2007 and for prior year entries, the Company has received periodic recoveries. In connection with this legislation, the Company
recorded $2.4 million of income in fiscal 2012.
In connection with this program, beginning in 2006, CBP began to withhold amounts that would have otherwise been
distributed as a result of pending litigation challenging past and future distributions and the administrative operation of the law.
During fiscal 2013, CBP began to distribute these withheld funds to domestic producers. In connection with the distribution of
these withheld funds, the Company recorded $16.6 million of income during fiscal 2013. The Company did not receive any
distributions in fiscal 2014. CDSOA recoveries are included in "Other expense, net" on the consolidated statements of operations
for each respective fiscal year. As a result of still pending litigation, the Company cannot reasonably estimate the amount of
CDSOA payments, if any, that it may receive in future years and/or whether it will be required to repay any previously received
distributions.
7. Inventories
The major classes of inventories are summarized as follows (in millions):
Finished goods
Work in progress
Raw materials
Inventories at First-in, First-Out ("FIFO") cost
Adjustment to state inventories at Last-in, First-Out ("LIFO") cost
March 31,
2014
2013
$
$
227.4
72.4
58.0
357.8
1.9
359.7
$
$
203.0
73.5
43.0
319.5
6.7
326.2
60
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8. Property, Plant and Equipment
Property, plant and equipment is summarized as follows (in millions):
Land
Buildings and improvements
Machinery and equipment
Hardware and software
Construction in-progress
Less accumulated depreciation
March 31,
2014
2013
$
$
33.8
224.3
411.5
62.6
24.6
756.8
(315.9)
$
440.9
$
33.5
212.8
359.8
69.1
21.9
697.1
(286.4)
410.7
9. Goodwill and Intangible Assets
The changes in the net carrying value of goodwill and identifiable intangible assets for the years ended March 31, 2014 and
2013 by operating segment, are presented below (in millions):
Amortizable Intangible Assets
Indefinite
Lived
Intangible
Assets
Goodwill
Trade-
Names
Customer
Relationships
Patents
Non-
Compete
Total
Identifiable
Intangible Assets
Excluding
Goodwill
Process & Motion Control
Net carrying amount as of March 31, 2012
Acquisitions
Amortization
Currency translation adjustment
Net carrying amount as of March 31, 2013
Acquisitions
Purchase price allocation adjustments
Amortization
Currency translation adjustment
Net carrying amount as of March 31, 2014
Water Management
Net carrying amount as of March 31, 2012
Acquisitions
Purchase price allocation adjustments
Amortization
Currency translation adjustment
Net carrying amount as of March 31, 2013
Acquisitions
Amortization
Currency translation adjustment
Net carrying amount as of March 31, 2014
Consolidated
Net carrying amount as of March 31, 2012
Acquisitions
Purchase price allocation adjustments
Amortization
Currency translation adjustment
Net carrying amount as of March 31, 2013
Acquisitions
Purchase price allocation adjustments
Amortization
Currency translation adjustment
Net carrying amount as of March 31, 2014
$
$
$
$
$
$
$
$
$
865.3
12.2
—
(0.4)
877.1
21.9
1.1
—
3.9
904.0
249.4
0.4
(5.5)
—
(3.0)
241.3
3.0
—
2.4
246.7
1,114.7
12.6
(5.5)
—
(3.4)
1,118.4
24.9
1.1
—
6.3
1,150.7
$
$
$
$
$
$
$
$
$
192.3
1.9
—
(0.3)
193.9
2.7
—
—
1.0
197.6
135.0
—
3.9
—
(0.8)
138.1
1.2
—
1.5
140.8
327.3
1.9
3.9
—
(1.1)
332.0
3.9
—
—
2.5
338.4
$
$
$
$
$
$
$
$
$
61
— $
—
—
—
— $
2.0
—
(0.1)
—
1.9
$
— $
—
—
—
—
— $
—
—
—
— $
— $
—
—
—
—
— $
2.0
—
(0.1)
—
1.9
$
125.6
7.7
(28.2)
(0.2)
104.9
18.3
—
(29.3)
0.5
94.4
177.6
—
5.8
(20.0)
(0.6)
162.8
0.9
(18.4)
1.7
147.0
303.2
7.7
5.8
(48.2)
(0.8)
267.7
19.2
—
(47.7)
2.2
241.4
$
$
$
$
$
$
$
$
$
6.0
—
(1.1)
—
4.9
—
—
(1.2)
—
3.7
10.5
—
0.2
(1.7)
(0.1)
8.9
—
(1.8)
0.1
7.2
16.5
—
0.2
(2.8)
(0.1)
13.8
—
—
(3.0)
0.1
10.9
$
$
$
$
$
$
$
$
$
— $
—
—
—
— $
—
—
—
—
— $
$
0.1
—
—
(0.1)
—
— $
—
—
—
— $
$
0.1
—
—
(0.1)
—
— $
—
—
—
—
— $
323.9
9.6
(29.3)
(0.5)
303.7
23.0
—
(30.6)
1.5
297.6
323.2
—
9.9
(21.8)
(1.5)
309.8
2.1
(20.2)
3.3
295.0
647.1
9.6
9.9
(51.1)
(2.0)
613.5
25.1
—
(50.8)
4.8
592.6
Table of Contents
The gross carrying amount and accumulated amortization for each major class of identifiable intangible assets as of March 31,
2014 and March 31, 2013 are as follows (in millions):
Intangible assets subject to amortization:
Patents
Customer relationships (including distribution network)
Tradenames
Intangible assets not subject to amortization - trademarks and tradenames
Intangible assets subject to amortization:
Patents
Customer relationships (including distribution network)
Intangible assets not subject to amortization - trademarks and tradenames
Weighted
Average Useful
Life
10 years
12 years
7 years
Weighted
Average Useful
Life
10 years
12 years
March 31, 2014
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
$
$
38.7
584.3
2.0
338.4
963.4
$
$
(27.8) $
(342.9)
(0.1)
—
(370.8) $
10.9
241.4
1.9
338.4
592.6
March 31, 2013
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
$
$
38.6
562.9
332.0
933.5
$
$
(24.8) $
(295.2)
—
(320.0) $
13.8
267.7
332.0
613.5
Intangible asset amortization expense totaled $50.8 million, $51.1 million and $50.9 million for the years ended March 31,
2014, 2013 and 2012, respectively.
The Company expects to recognize amortization expense on the intangible assets subject to amortization of $52.0 million
in fiscal years 2015 and 2016, $32.9 million in fiscal year 2017, $22.4 million in fiscal year 2018, and $22.2 million in fiscal year
2019.
During the third quarter of fiscal 2014, the Company completed the testing of indefinite lived intangible assets (tradenames)
and goodwill for impairment in accordance with ASC 350, Intangibles-Goodwill and Other. The fair value of the Company's
indefinite lived intangible assets and reporting units were primarily estimated using an income valuation model (discounted cash
flow) and market approach (guideline public company comparables), which indicated that the fair value of the Company's indefinite
lived intangible assets and reporting units exceeded their carrying value; therefore, no impairment was present. Total cumulative
goodwill impairment charges recorded in historical periods were $319.3 million at March 31, 2014 and March 31, 2013, all of
which were incurred in fiscal 2009.
10. Other Current Liabilities
Other current liabilities are summarized as follows (in millions):
Customer advances
Sales rebates
Commissions
Restructuring and other similar charges (1)
Product warranty (2)
Risk management (3)
Legal and environmental
Deferred income taxes
Taxes, other than income taxes
Income taxes payable
Other
March 31,
2014
2013
8.1
22.7
7.9
4.1
8.6
9.1
4.5
10.9
9.5
11.2
15.6
112.2
$
$
19.0
16.2
7.5
3.8
8.8
9.3
14.8
11.2
9.0
7.5
14.1
121.2
$
$
____________________
(1)
(2)
(3)
See more information related to the restructuring obligations balance within Note 5.
See more information related to the product warranty obligations balance within Note 2.
Includes projected liabilities related to losses arising from automobile, general and product liability claims.
62
Table of Contents
11. Long-Term Debt
Long-term debt is summarized as follows (in millions):
8.50% Senior notes due 2018
Term loans (1)
8.875% Senior notes due 2016
Other (2)
Total
Less current maturities
Long-term debt
March 31,
2014
2013
— $
1,921.9
1.3
48.8
1,972.0
29.0
1,943.0
$
1,145.0
934.7
2.0
49.9
2,131.6
169.3
1,962.3
$
$
____________________
(1)
Includes an unamortized original issue discount of $18.3 million and $3.5 million at March 31, 2014 and March 31, 2013,
respectively.
Includes financing related to the Company's participation in the New Market Tax Credit incentive program of $37.4
million as of March 31, 2014 and 2013.
(2)
Refinancing of Term Loan and Extinguishment of 8.50% Senior Notes due 2018
On August 21, 2013, the Company entered into a Third Amended and Restated First Lien Credit Agreement (the “Third
Restated Credit Agreement”), which amended and restated in its entirety the Second Amended and Restated Credit Agreement,
dated as of March 15, 2012, as amended (the "Former Credit Agreement"). The Third Restated Credit Agreement provides for
loans consisting of a new term loan in the aggregate principal amount of $1,950.0 million (the “New Term Loan”) and a revolving
credit facility of up to $265.0 million.
The proceeds from the New Term Loan were $1,930.5 million, net of a $19.5 million original issue discount, and were used
to (i) repay in full the $786.2 million aggregate principal amount of existing term loans then-outstanding under the Former Credit
Agreement, together with accrued interest thereon, (ii) retire (through a cash tender offer and redemption) all of the 8.50% Notes
and (iii) pay related fees and expenses. Upon the redemption, the indenture governing the 8.50% Notes was discharged in accordance
with its terms. See "Senior Secured Credit Facility" below for more information regarding the Third Restated Credit Agreement.
The Company accounted for the above transactions in accordance with ASC 470-50, Debt Modifications and Extinguishments
(“ASC 470-50”). Upon finalizing the accounting for these transactions, the Company recognized a $129.2 million loss on the debt
extinguishment, which was comprised of a bond tender premium paid to holders as a result of the tender offer and redemption, as
well as a non-cash write-off of deferred financing fees and net original issue discount associated with the extinguished debt.
Additionally, the Company capitalized approximately $10.8 million of third party transaction costs on the New Term Loans, which
will be amortized over the life of the New Term Loan as interest expense using the effective interest method. Below is a summary
of the transaction costs and other offering expenses recorded along with their corresponding pre-tax financial statement impact
(in millions):
Financial Statement Impact
Balance Sheet -Debit (Credit)
Deferred Financing
Costs (1)
Original Issue
Discount (2)
Statement of
Operations
Expense (3)
Total
Cash transaction costs:
Third party transaction costs
Bond tender premiums (paid to holders)
Total cash transaction costs
Non-cash write-off of unamortized amounts:
Deferred financing costs
Net original issue discount
Net financial statement impact
$
$
10.8
$
— $
—
—
—
17.9
17.9
$
—
10.8
(12.4)
—
(1.6) $
63
$
$
16.1
109.9
126.0
5.3
109.9
115.2
12.4
1.6
129.2
Table of Contents
(1) Recorded as a component of other assets within the consolidated balance sheet.
(2) Recorded as a reduction in the face value of long-term debt within the consolidated balance sheet.
(3) Recorded as a component of other non-operating expense within the consolidated statement of operations.
Senior Secured Credit Facility
During the second quarter of fiscal 2014, the Company entered into the Third Restated Credit Agreement. The senior
secured credit facilities under the Third Restated Credit Agreement are funded by a syndicate of banks and other financial institutions
and provide for loans of up to $2,215.0 million, consisting of (i) a $1,950.0 million term loan facility with a maturity date of
August 21, 2020; and (ii) a $265.0 million revolving credit facility with a maturity date of March 15, 2017; under the revolving
credit facility, the Company has borrowing capacity available for letters of credit and for borrowings on a same-day notice, referred
to as swingline loans.
As of March 31, 2014, the Company's outstanding borrowings under the term loan facility were $1,921.9 million (net of
$18.3 million unamortized original issue discount). At March 31, 2014, the borrowings under the Third Restated Credit Agreement
had an effective and average interest rate of 4.00%, determined as the LIBO rate (subject to a 1% floor) plus an applicable margin
of 3.00%. The interest rates for the term loan facility are subject to a leverage-based pricing grid. As of March 31, 2014, interest
rates under the Third Restated Credit Agreement for the term loan facility were at the Company's option of either "(a)" or "(b)"
as further described here: (a) in the case of alternative base rate ("ABR") borrowings, 2.00% (subject to a first lien leverage ratio)
plus a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the prime rate
determined from time to time by Credit Suisse AG, the administrative agent under the Third Restated Credit Agreement and (3)
the LIBO rate in effect for a one-month period plus 1.00%; or (b) in the case of Eurocurrency borrowings, 3.00% (subject to a
first lien leverage ratio) plus a Eurocurrency rate (subject to a 1% LIBOR floor). In the event the Company's first lien leverage
ratio is less than 3.25x to 1.0, its applicable margin on both ABR and Eurocurrency term loan borrowings would decrease by
twenty-five (25) basis points.
For revolving commitments, the Company's applicable margin above the base rate (as described above) is 3.00% in the case
of ABR borrowings and 4.00% in the case of Eurocurrency borrowings, subject to a first lien leverage test. In the event the
Company's first lien leverage ratio is less than 1.5x to 1.0, its applicable margin on both ABR and Eurocurrency borrowings would
decrease by twenty-five (25) basis points. The Company's actual first lien leverage ratio was 3.98x to 1.0 as of March 31, 2014.
As of March 31, 2014, in addition to paying interest on outstanding principal under the senior secured credit facilities, the
Company is subject to a commitment fee to the lenders under the revolving credit facility with respect to the unutilized commitments
thereunder at a rate equal to 0.500% per annum.
As of March 31, 2014, the remaining mandatory principal payments prior to maturity on the term loan facilities were $121.8
million. Principal payments of $4.9 million are scheduled to be made at the end of each calendar quarter until June 30, 2020.
All amounts outstanding under the revolving credit facility will be due and payable in full, and the commitments thereunder
will terminate, on March 15, 2017. No amounts were borrowed under the revolving credit facility at March 31, 2014 or March 31,
2013; however, $29.1 million and $40.1 million of the revolving credit facility was considered utilized in connection with
outstanding letters of credit at March 31, 2014 and March 31, 2013, respectively.
The Third Restated Credit Agreement, among other things: (i) allows for one or more future issuances of secured notes,
which may include, in each case, indebtedness secured on a pari passu basis with the obligations under the senior secured credit
facilities, so long as, in each case, among other things, an agreed amount of the net cash proceeds from any such issuance are used
to prepay term loans under the senior secured credit facilities at par; (ii) subject to the requirement to make such offers on a pro
rata basis to all lenders and certain other restrictions, allows the Company to agree with individual lenders to extend the maturity
date of any of the loans and/or commitments provided by such lenders and to otherwise modify the terms of the loans and/or
commitments provided by such lenders (including, without limitation, increasing the interest rate or fees payable in respect of
such loans and/or commitments and/or modifying the amortization schedule in respect of such loans); and (iii) allows for one or
more future issuances of additional secured notes, which may include, in each case, indebtedness secured on a pari passu basis
with the obligations under the senior secured credit facilities, in an amount not to exceed the amount of incremental facility
availability under the senior secured credit facilities.
The Third Restated Credit Agreement also contains a number of typical covenants that, among other things, constrain, subject
to certain fully-negotiated exceptions, the Company's ability, and the ability of the Company's subsidiaries, to: sell assets; incur
additional indebtedness; repay other indebtedness; pay dividends and distributions, repurchase its capital stock, or make payments,
redemptions or repurchases in respect to certain indebtedness; create liens on assets; make investments, loans, guarantees or
advances; make certain acquisitions; engage in certain mergers or consolidations; enter into sale-and-leaseback transactions; engage
in certain transactions with affiliates; amend certain material agreements governing its indebtedness; make capital expenditures;
enter into hedging agreements; amend its organizational documents; change the business conducted by it and its subsidiaries; and
enter into agreements that restrict dividends from subsidiaries. In addition, payment of borrowings under the Third Restated Credit
64
Table of Contents
Agreement may be accelerated upon an event of default. Events of default include, among others, the failure to pay principal and
interest when due, a material breach of a representation or warranty, covenant defaults, certain non-payments or defaults under
other material indebtedness, events of bankruptcy and a change of control. As of March 31, 2014, the Company was in compliance
with all applicable covenants under its senior secured credit facilities, including compliance with a maximum permitted first lien
leverage ratio (the Company's sole financial maintenance covenant under its revolver) of 7.75x to 1.00.
Partial Prepayment of Old Term Loan
During fiscal 2014, the Company entered into an Incremental Assumption Agreement relating to the Former Credit
Agreement, subsequently superseded by the Third Restated Credit Agreement described above, which reduced the then-applicable
margin on the term loan facility by seventy-five (75) basis points. In connection with the Incremental Assumption Agreement, the
Company made a $150.0 million prepayment on the term loan facility, which was classified within current maturities of debt on
the balance sheet at March 31, 2013. The Company also recognized a related pre-tax loss of $4.0 million related to the portion
of debt that was considered modified in accordance with ASC 470-50, which was comprised of $0.8 million of fees paid to lenders
and a non-cash write-off of $2.4 million of deferred financing costs and $0.8 million of original issue discount, respectively.
Senior Notes and Former Senior Subordinated Notes
Outstanding Tranche of Notes
During the fiscal 2014, the Company purchased $0.7 million of outstanding principal of its 8.875% senior notes due 2016
(the "8.875% Notes") from an individual holder. At March 31, 2014 and 2013, the Company had outstanding $1.3 million and
$2.0 million, respectively, in principal of the 8.875% Notes. The indenture governing the 8.875% Notes does not contain any
material restrictive covenants and permits optional redemption of the notes by the Company on terms specified therein.
Former Tranches of Notes
During fiscal 2013, the Company completed a full redemption of all $300.0 million principal amount of its then-outstanding
11.75% senior subordinated notes due 2016 (the "11.75% Notes") for $325.0 million in cash, which included $7.4 million of
accrued interest and $17.6 million of early redemption premiums. The Company recognized related pre-tax expense of $21.1
million, which was comprised of a $17.6 million early redemption premiums and a $3.5 million non-cash write-off of unamortized
deferred financing costs associated with the 11.75% Notes. Upon the redemption, the indenture governing the 11.75% Notes was
discharged in accordance with its terms.
Other Subsidiary Debt
During the fiscal 2013 and fiscal 2012, the Company received $4.3 million and $5.5 million, respectively, in net proceeds
from financing agreements related to facility modernization projects at two North American manufacturing facilities. These
financing agreements were structured with unrelated third party financial institutions (the "Investor") and their wholly-owned
community development entities in connection with the Company's participation in transactions qualified under the federal New
Market Tax Credit program, pursuant to Section 45D of the Internal Revenue Code of 1986, as amended. Through its participation
in this program, the Company has secured low interest financing and the potential for future debt forgiveness related to eligible
capital projects. Upon closing of these transactions, the Company provided an aggregate of $27.6 million to the Investor, in the
form of loans receivable, with a term of thirty years, bearing an interest rate of approximately 2.0% per annum. As collateral for
these loans, the Company has granted a security interest in the assets acquired with the loan proceeds. No earlier than December
2018, and upon meeting certain conditions, both the Investor and the Company have the ability to trigger forgiveness of the net
debt which could result in a net non-operating gain of up to $9.8 million, excluding applicable transaction costs. To the extent the
loans payable are not forgiven, the Company would be required to repay the full amount of the outstanding $37.4 million principal
balance and would concurrently receive a loan repayment of $27.6 million on the aforementioned loans receivable, resulting in a
net $9.8 million use of liquidity.
At March 31, 2014 and March 31, 2013, the aggregate loans of $37.4 million are recorded in Long-Term Debt on the
consolidated balance sheets and the aggregate loans receivable of $27.6 million are recorded in Other Assets on the consolidated
balance sheets. The Company incurred $0.7 million of debt issuance costs related to the above transactions, which are being
amortized over the life of the agreements.
At March 31, 2014 and March 31, 2013, various wholly-owned subsidiaries had additional debt of $48.8 million and $49.9
million, respectively, comprised primarily of loans payable as a result of the New Market Tax Credit financing agreements referenced
above as well as borrowings at various foreign subsidiaries and capital lease obligations.
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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 (“GECC”). 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”). Funding in turn may obtain revolving loans and letters of credit from GECC under the RFAA. The maximum borrowing
amount under the RFAA is $100.0 million, subject to certain eligibility requirements related to the amount and type of receivables
owned by Funding; the RFAA also contains an “accordion” provision pursuant to which Funding can request that the facility be
increased by $75.0 million. All of the receivables purchased by Funding are pledged as collateral for revolving loans and letters
of credit obtained from GECC under the RFAA.
The Program does not qualify for sale accounting under ASC 860, Transfers and Servicing (“ASC 860”), and as such, any
borrowings are accounted for as secured borrowings on the consolidated balance sheet. Financing costs associated with the Program
are recorded within “Interest expense, net” in the consolidated statement of operations if revolving loans or letters of credit are
obtained under the RFAA.
Borrowings under the RFAA bear interest at a rate equal to LIBOR plus 2.25%. Outstanding borrowings mature on May 20,
2016. In addition, a non-use fee of 0.50% is applied to the unutilized portion of the $100.0 million commitment. These rates are
per annum and the fees are paid to GECC on a monthly basis.
At March 31, 2014, the Company's available borrowing capacity under the Program was $100.0 million, based on the current
accounts receivables balance subject to the Program. There were no borrowings outstanding under the Program as of March 31,
2014 and 2013. Additionally, the Program requires compliance with certain covenants and performance ratios contained in the
RFAA. As of March 31, 2014, Funding was in compliance with all applicable covenants and performance ratios.
Future Debt Maturities
Future maturities of debt as of March 31, 2014 were as follows (in millions):
Years ending March 31:
2015
2016
2017
2018
2019
Thereafter (1)
$
$
29.0
20.0
21.3
19.5
19.5
1,881.0
1,990.3
(1)
Excludes the unamortized original issue discount of $18.3 million at March 31, 2014 from the term loan facility.
Cash interest paid for the fiscal years ended March 31, 2014, 2013 and 2012 was $151.1 million, $149.4 million, and $171.5
million, respectively.
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12. Derivative Financial Instruments
The Company is exposed to certain financial risks relating to fluctuations in foreign currency exchange rates and interest
rates. The Company currently selectively uses foreign currency forward exchange contracts and interest rate swap contracts to
manage its foreign currency and interest rate risks. 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 and as such were marked to market through earnings. See the amounts
recorded on the consolidated balance sheets and recognized within the consolidated statements of operations related to the Company's
foreign currency forward contracts within the tables below.
Interest Rate Swaps
During the 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 2.50% plus the applicable
margin (inclusive of a 1% LIBOR floor). All of the interest rate swaps become effective beginning on September 28, 2015 with a
maturity of September 27, 2018. These interest rate derivatives have been designated as effective cash flow hedges in accordance
with ASC 815. The fair values of these interest rate derivatives are recorded on the Company's consolidated balance sheets with
the corresponding offset recorded as a component of accumulated other comprehensive loss, net of tax.
The Company's derivatives are measured at fair value in accordance with ASC 820. See Note 13 Fair Value Measurements
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 consolidated
balance sheets.
Fair value of derivatives designated as hedging instruments under ASC 815 (in millions):
Interest rate swaps
$
2.7
$
—
Other liabilities
Liability Derivatives
March 31, 2014
March 31, 2013
Balance Sheet
Classification
Fair value of derivatives not designated as hedging instruments under ASC 815 (in millions):
Asset Derivatives
March 31, 2014
March 31, 2013
Balance Sheet
Classification
0.3
Other current assets
Liability Derivatives
0.1
Other current liabilities
Foreign currency forward contracts
Foreign currency forward contracts
$
$
0.1
—
$
$
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The following tables indicate the location and the amount of losses and gains associated with the Company's derivative
instruments, net of tax, within the consolidated balance sheets (for qualifying ASC 815 instruments) and recognized within the
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 March 31, 2014, there was no ineffectiveness on the
Company's designated hedging instruments.
Derivative instruments designated as cash
flow hedging relationships under ASC 815
Interest rate swaps
Amount of loss recognized in
accumulated other
comprehensive loss on derivatives
March 31, 2014 March 31, 2013
$
1.7
$
—
Amount of loss reclassified from accumulated
OCI into income
Derivative instruments designated
as cash flow hedging relationships
under ASC 815
Location of loss reclassified
from accumulated OCI into
income
March 31,
2014
Year Ended
March 31,
2013
March 31,
2012
Interest rate swaps
Interest expense, net
Loss on the extinguishment of
debt
Total
$
$
— $
—
— $
— $
—
— $
(5.8)
(3.2)
(9.0)
Derivative instruments not
designated as hedging instruments
under ASC 815
Location of gain recognized
in income on derivatives
March 31,
2014
Year Ended
March 31,
2013
March 31,
2012
Foreign currency forward contracts
Other income, net
$
0.4
$
0.5
$
0.5
Amount recognized in other expense, net
Due to the forward-starting nature of the interest rate swaps, the Company does not expect to reclassify any amount within
accumulated other comprehensive loss into earnings as interest expense during the next twelve months.
13. 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.
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Foreign Currency Forward Contracts and Interest Rate Swaps
The Company transacts in foreign currency forward contracts and interest rate swaps, which are impacted by ASC 820. 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 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.
The Company has determined that its foreign currency forward contracts and interest rate swaps reside within Level 2 of the fair
value hierarchy. There were no transfers of assets between levels during the years ended March 31, 2014 and March 31, 2013.
The following table provides a summary of the Company's assets and liabilities that were recognized at fair value on a recurring
basis as of March 31, 2014 and March 31, 2013 (in millions):
Assets:
Foreign currency forward contracts
Total assets at fair value
Liabilities:
Interest rate swaps
Total liabilities at fair value
Assets:
Foreign currency forward contracts
Total assets at fair value
Liabilities:
Foreign currency forward contracts
Total liabilities at fair value
Fair Value as of March 31, 2014
Level 1
Level 2
Level 3
Total
—
—
—
—
$
$
$
$
0.1
0.1
2.7
2.7
$
$
$
$
— $
— $
— $
— $
Fair Value as of March 31, 2013
Level 1
Level 2
Level 3
Total
—
—
—
—
$
$
$
$
0.3
0.3
0.1
0.1
$
$
$
$
— $
— $
— $
— $
0.1
0.1
2.7
2.7
0.3
0.3
0.1
0.1
$
$
$
$
$
$
$
$
Fair Value of Non-Derivative Financial Instruments
The carrying amounts of cash, receivables, payables and accrued liabilities approximated fair value at March 31, 2014 and
March 31, 2013 due to the short-term nature of those instruments. The carrying value of long-term debt recognized within the
consolidated balance sheets as of March 31, 2014 and March 31, 2013 was approximately $1,972.0 million and $2,131.6 million,
respectively, whereas the fair value of long-term debt as of March 31, 2014 and March 31, 2013 was approximately $1,995.1
million and $2,254.1 million, respectively. The fair value is based on quoted market prices for the same issues.
14. Leases
The Company leases manufacturing and warehouse facilities and data processing and other equipment under non-cancelable
operating leases which expire at various dates primarily through 2024. Rent expense under operating leases totaled $17.0 million,
$16.0 million and $14.8 million for the fiscal years ended March 31, 2014, 2013 and 2012, respectively.
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Future minimum rental payments for operating leases with initial terms in excess of one year as of March 31, 2014 are as
follows (in millions):
Years ending March 31:
Thereafter
2015 $
2016
2017
2018
2019
$
15.9
12.5
9.4
7.6
6.4
7.7
59.5
15. Stock Options
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 grant-date fair value of the equity instruments issued. Compensation cost
is recognized over the requisite service period, generally as the awards vest.
In fiscal 2007, the Board of Directors adopted, and stockholders approved, the 2006 Stock Option Plan (the “2006 Option
Plan”). The maximum number of shares of the Company's common stock that may be issued or transferred pursuant to options
under the 2006 Option Plan equals 11,239,290 shares. Following the consummation of the Company's initial public offering
("IPO") in April 2012, all outstanding unvested options under the 2006 Option Plan, including that portion of options that was
scheduled to vest with respect to fiscal 2012 Company performance, were amended to vest solely based on continued employment
with the Company over the 5 year vesting period. No further options are being granted under the 2006 Option Plan.
In fiscal 2012, the Board of Directors adopted, and stockholders approved, the Rexnord Corporation 2012 Performance
Incentive Plan (the "2012 Incentive Plan", and together with the 2006 Option Plan, the "Option Plans"), which operates as a
successor plan to the 2006 Option Plan. The 2012 Incentive Plan is intended to provide performance incentives to the Company's
officers, employees, directors and certain others by permitting grants of equity awards and performance-based cash awards to such
persons, to encourage them to maximize Rexnord's performance and create value for Rexnord's stockholders, but broadens the
types of awards that had been permitted by the 2006 Option Plan. The options under the 2012 Incentive Plan have a maximum
term of ten years after the grant date with 50% of the options vesting three years after the grant date and the remaining 50% vesting
five years after the grant date, with the exception of options granted to directors of the Company, which vest ratably over three
years.
The 2012 Incentive Plan permits the grant of awards that may deliver up to an aggregate of 8,350,000 shares of common
stock further subject to limits on the number of shares that may be delivered pursuant to incentive stock options and on the shares
that may be delivered on the awards to any individual in a single year, within the meaning of Section 162(m) of the Internal
Revenue Code. The 2012 Incentive Plan is administered by the Compensation Committee.
The fair value of each option granted under the Option Plans was estimated on the date of grant using the Black-Scholes
valuation model that uses the following weighted-average assumptions:
Expected option term (in years)
Expected volatility factor
Weighted-average risk free interest rate
Expected dividend rate
Year Ended
March 31, 2014
Year Ended
March 31, 2013
Year Ended
March 31, 2012
7.5
35%
1.57%
0.0%
7.5
34%
1.71%
0.0%
7.5
34%
1.64%
0.0%
Options granted under the Option Plans have a term of ten years. Management’s estimate of the option term for options
granted under the Option Plans is 7.5 years 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 weighted-average grant date fair
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value of options granted under the Option Plans during fiscal 2014, 2013 and 2012 was $8.06, $8.22 and $7.46, respectively. The
total fair value of options vested during fiscal 2014, 2013 and 2012 was $1.8 million, $2.2 million and $9.0 million, respectively.
During fiscal 2014, 2013 and 2012, the Company recorded $7.0 million, $7.1 million and $3.7 million of stock-based
compensation, respectively (the related tax benefit on these amounts was $2.5 million for fiscal 2014, $2.5 million for fiscal 2013,
and $1.4 million for fiscal 2012). During fiscal 2014, 2013 and 2012, the Company also recorded $5.8 million, $18.1 million and
$0.0 million, respectively, of an excess tax benefit related to stock options exercised during the fiscal year. As of March 31, 2014,
there was $15.4 million of total unrecognized compensation cost related to non-vested stock options granted under the Option
Plans. That cost is expected to be recognized over a weighted-average period of 3.4 years.
Other information relative to stock options and the changes period over period are as follows:
Number of shares under options:
Outstanding at beginning of period
Granted
Exercised (1)
Canceled/Forfeited
Outstanding at end of period (2)
Exercisable at end of period (3)
Year-Ended March 31, 2014
Year-Ended March 31, 2013
Year-Ended March 31, 2012
Shares
9,450,197
978,849
(1,154,011)
(622,201)
8,652,834
5,225,236
Weighted
Avg. Exercise
Price
$
$
$
9.85
19.82
5.91
19.91
10.79
5.46
Shares
10,874,371
2,626,157
(3,746,740)
(303,591)
9,450,197
5,879,052
Weighted
Avg. Exercise
Price
$
$
$
5.27
20.56
3.77
13.58
9.85
5.30
Shares
10,700,275
431,459
(5,465)
(251,898)
10,874,371
8,949,922
Weighted
Avg. Exercise
Price
$
$
$
4.74
18.74
4.80
5.39
5.27
4.49
______________________
(1)
(2)
(3)
The total intrinsic value of options exercised during fiscal 2014, 2013 and 2012 was $18.7 million, $56.1 million and $0.1 million,
respectively.
The weighted average remaining contractual life of options outstanding is 5.5 years at March 31, 2014, 6.1 years at March 31, 2013
and 5.7 years at March 31, 2012. The aggregate intrinsic value of options outstanding at March 31, 2014 is $157.4 million.
The weighted average remaining contractual life of options exercisable is 3.7 years at March 31, 2014, 4.6 years at March 31, 2013
and 5.0 years at March 31, 2012. The aggregate intrinsic value of options exercisable at March 31, 2014 is $122.9 million.
Non-vested options at March 31, 2013
Granted
Vested
Canceled/Forfeited
Non-vested options at March 31, 2014
16. Retirement Benefits
Shares
3,571,145
$
978,849
(505,357)
(617,039)
3,427,598
$
Weighted
Average Grant
Date Fair Value
6.99
8.06
3.53
8.02
7.62
The Company sponsors pension and other postretirement benefit plans for certain employees. Most of the Company’s
employees are accumulating retirement income benefits through defined contribution plans. However, the Company does sponsor
frozen pension plans for its salaried participants and ongoing pension benefits for certain employees represented by collective
bargaining. These plans provide for monthly pension payments to eligible employees upon retirement. Pension benefits for salaried
employees generally are based on years of frozen credited service and average earnings. Pension benefits for hourly employees
generally are based on specified benefit amounts and years of service. The Company’s policy is to fund its pension obligations in
conformity with the funding requirements under applicable laws and governmental regulations. Other postretirement benefits
consist of retiree medical plans that cover a portion of employees in the United States that meet certain age and service requirements.
The corridor is 10% of the higher of the pension benefit obligation or the fair value of the plan assets. The Company recognizes
the net actuarial gains or losses in excess of 10% of the higher of the pension benefit obligation or the fair value of the plan assets
in operating results during the fourth quarter of each fiscal year (or upon any required re-measurement event). Net periodic benefit
costs recorded on a quarterly basis are primarily comprised of service and interest cost, amortization of unrecognized prior service
cost and the expected return on plan assets.
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Table of Contents
The components of net periodic benefit cost reported in the consolidated statements of operations are as follows (in millions):
March 31, 2014
March 31, 2013
March 31, 2012
Year Ended
Pension Benefits:
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Prior service cost
Curtailment loss
Recognition of actuarial losses
Net periodic benefit cost
Other Postretirement Benefits:
Service cost
Interest cost
Amortization:
Prior service credit
Recognition of actuarial (gains) losses
Net periodic benefit cost
$
$
$
$
1.8
30.1
(30.5)
0.2
—
2.7
4.3
0.1
1.2
(1.9)
—
(0.6)
$
$
$
$
1.9
31.6
(31.9)
0.6
0.2
7.2
9.6
0.1
1.5
(2.0)
(1.7)
(2.1)
$
$
$
$
1.9
33.6
(33.1)
0.3
—
7.5
10.2
0.1
1.8
(2.0)
1.6
1.5
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Table of Contents
The status of the plans are summarized as follows (in millions):
Pension Benefits
Year Ended
March 31, 2014
Year Ended
March 31, 2013
Other Postretirement Benefits
Year Ended
Year Ended
March 31, 2013
March 31, 2014
Benefit obligation at beginning of period
$
(720.6) $
(679.0) $
(33.6) $
Service cost
Interest cost
Actuarial (losses) gains
Plan amendments
Benefits paid
Plan participant contributions
Acquisitions
Curtailment
Translation adjustment
Benefit obligation at end of period
Plan assets at the beginning of the period
Actual return on plan assets
Contributions
Benefits paid
Acquisitions
Translation adjustment
Plan assets at end of period
Funded status of plans
Net amount on Consolidated Balance Sheets consists of:
Current liabilities
Long-term liabilities
Total net funded status
(1.8)
(30.1)
18.2
0.2
38.5
(0.4)
—
—
(4.0)
(1.9)
(31.6)
(50.5)
0.4
40.1
(0.3)
(1.2)
1.1
2.3
(0.1)
(1.2)
0.4
—
4.1
(0.8)
—
—
—
$
$
$
$
$
$
(700.0) $
577.7
$
(720.6) $
549.2
$
(31.2) $
— $
25.6
12.8
(38.5)
—
0.1
54.7
13.3
(40.1)
1.1
(0.5)
577.7
$
(122.3) $
577.7
$
(142.9) $
(3.0) $
(2.9) $
(119.3)
(140.0)
(122.3) $
(142.9) $
—
4.1
(4.1)
—
—
— $
(31.2) $
(2.8) $
(28.4)
(31.2) $
(37.0)
(0.1)
(1.5)
1.8
—
4.2
(1.0)
—
—
—
(33.6)
—
—
4.2
(4.2)
—
—
—
(33.6)
(2.8)
(30.8)
(33.6)
As of March 31, 2014, the Company had pension plans with a combined projected benefit obligation of $700.0 million
compared to plan assets of $577.7 million, resulting in an under-funded status of $122.3 million compared to an under-funded
status of $142.9 million at March 31, 2013. The Company’s funded status has improved year-over-year primarily as a result of the
increase interest rates in fiscal 2014. Any further changes in the assumptions underlying the Company’s pension values, including
those that arise as a result of declines in equity markets and changes in interest rates, could result in increased pension obligation
and pension cost which could negatively affect the Company’s consolidated financial position and results of operations in future
periods.
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Table of Contents
Amounts included in accumulated other comprehensive loss (income), net of tax, related to defined benefit plans at March 31,
2014 consist of the following (in millions):
Unrecognized prior service cost (credit)
Unrecognized actuarial loss
Accumulated other comprehensive loss (income), gross
Deferred income tax (benefit) provision
Accumulated other comprehensive loss (income), net
Unrecognized prior service cost (credit)
Unrecognized actuarial loss
Accumulated other comprehensive loss (income), gross
Deferred income tax (benefit) provision
Accumulated other comprehensive loss (income), net
Pension
Benefits
As of March 31, 2014
Postretirement
Benefits
Total
0.5
$
(9.1) $
54.9
55.4
(19.7)
0.4
(8.7)
2.9
35.7
$
(5.8) $
Pension
Benefits
As of March 31, 2013
Postretirement
Benefits
Total
1.0
$
(11.1) $
70.4
71.4
(25.2)
0.8
(10.3)
3.5
46.2
$
(6.8) $
(8.6)
55.3
46.7
(16.8)
29.9
(10.1)
71.2
61.1
(21.7)
39.4
$
$
$
$
The amounts in accumulated other comprehensive (loss) income expected to be recognized as components of net periodic
benefit cost during the next year are: prior service cost (credit) of $0.2 million and $(2.0) million for pension benefits and other
postretirement benefits, respectively.
The following table presents significant assumptions used to determine benefit obligations and net periodic benefit cost
(income) in weighted-average percentages:
March 31,
2014
Pension Benefits
March 31,
2013
March 31,
2012
Other Postretirement Benefits
March 31,
2013
March 31,
2012
March 31,
2014
Benefit Obligations:
Discount rate
Rate of compensation increase
Net Periodic Benefit Cost:
Discount rate
Rate of compensation increase
Expected return on plan assets
4.54%
3.41%
4.25%
3.42%
5.48%
4.25%
3.42%
4.83%
3.40%
6.00%
4.83%
3.40%
5.75%
3.40%
6.58%
4.30%
n/a
3.80%
n/a
4.40%
n/a
3.80%
4.40%
5.40%
n/a
n/a
n/a
n/a
n/a
n/a
In evaluating the expected return on plan assets, consideration was given to historical long-term rates of return on plan assets
and input from the Company’s pension fund consultant on asset class return expectations, long-term inflation and current market
conditions.
The following table presents the Company’s target investment allocations for the year ended March 31, 2014 and actual
investment allocations at March 31, 2014 and 2013.
Equity securities
Debt securities (including cash and cash equivalents)
Other
Plan Assets
2014
Target
Allocation (2)
Actual
Allocation
2013
Actual
Allocation
29%
68%
3%
30%
67%
3%
30%
67%
3%
Investment
Policy (1)
20 - 30%
55 - 80%
0 - 10%
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Table of Contents
(1)
(2)
The investment policy allocation represents the guidelines of the Company's principal U.S. pension plans based on the changes in the
plans funded status.
The target allocations represent the weighted average target allocations for the Company's principal U.S. pension plans.
The Company's defined benefit pension investment strategy is evolving from an objective of maximizing asset returns
toward a dynamic liability driven investment (“LDI”) strategy as the funded status improves. The objective is to more closely
align the pension plan assets with its liabilities in terms of how both respond to interest rate changes. The plan assets are allocated
into two investment categories: (i) LDI, comprised of high quality, investment grade fixed income securities and (ii) return seeking,
comprised of traditional securities and alternative asset classes. All assets are managed externally according to guidelines established
individually with investment managers and the Company's investment consultant. The Company periodically undertakes asset and
liability modeling studies to determine the appropriateness of the investments. The Company intends to continuously reduce the
assets allocated to the return seeking category, thereby increasing the assets allocated to the LDI category based on the overall
improvement in the plan funded status. No equity securities of the Company are held in the portfolio.
The fair values of the Company’s pension plan assets for both the U.S and non-U.S. plans at March 31, 2014 and 2013, by
asset category were as follows (in millions). For information on the fair value hierarchy and the inputs used to measure fair value,
see Note 13 Fair Value Measurements. Certain prior year amounts have been reclassified to conform to the fiscal 2014 presentation.
Cash and cash equivalents
Investment funds
Fixed income funds (1)
U.S. equity funds (2)
International equity funds (2)
Balanced funds (2)
Alternative investment funds (3)
Insurance contracts
Total
Cash and cash equivalents
Investment funds
Fixed income funds (1)
US equity funds (2)
International equity funds (2)
Balanced funds (2)
Alternative investment funds (3)
Insurance contracts
Total
$
$
$
$
As of March 31, 2014
Quoted Prices in
Active Market
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
Total
5.8
$
3.0
$
— $
—
—
—
—
—
—
374.4
74.4
39.8
10.2
—
—
—
—
—
—
53.6
16.5
5.8
$
501.8
$
70.1
$
As of March 31, 2013
Quoted Prices in
Active Market
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
Total
1.2
$
4.1
$
— $
—
—
—
—
—
—
380.7
77.6
39.9
9.9
—
—
—
—
—
—
52.0
12.3
1.2
$
512.2
$
64.3
$
8.8
374.4
74.4
39.8
10.2
53.6
16.5
577.7
5.3
380.7
77.6
39.9
9.9
52.0
12.3
577.7
(1)
(2)
(3)
The Company's fixed income mutual and commingled funds primarily include investments in U.S. government securities and corporate
bonds. The commingled funds also include an insignificant portion of investments in asset-backed securities or partnerships. The
mutual and commingled funds are valued using quoted market prices of the underlying investments.
The Company's equity mutual and commingled funds primarily include investments in U.S. and international common stock. The
balanced mutual and commingled funds invest in a combination of fixed income and equity securities. The mutual and commingled
funds are valued using quoted market prices of the underlying securities.
The Company's alternative investments include venture capital and partnership investments. Alternative investments are valued using
the net asset value, which reflects the plan's share of the fair value of the investments.
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The table below sets forth a summary of changes in the fair value of the Level 3 investments for the years ended March 31,
2014 and 2013 (in millions):
Beginning balance, March 31, 2012
$
54.8
$
8.8
$
Alternative
Investments
Insurance
Contracts
Total
Actual return on assets:
Related to assets held at reporting date
Related to assets sold during the period
Purchases, sales, issuances and settlements
Transfers in and/or out of Level 3
Ending balance, March 31, 2013
Actual return on assets:
Related to assets held at reporting date
Related to assets sold during the period
Purchases, sales, issuances and settlements
Transfers in and/or out of Level 3
Ending balance, March 31, 2014
(0.6)
1.8
(4.0)
—
52.0
2.4
0.1
(0.9)
—
3.5
—
—
—
12.3
4.2
—
—
—
$
53.6
$
16.5
$
63.6
2.9
1.8
(4.0)
—
64.3
6.6
0.1
(0.9)
—
70.1
During fiscal 2015, the Company expects to contribute approximately $9.4 million to its defined benefit plans and $2.8
million to its other postretirement benefit plans.
Expected benefit payments to be paid in each of the next five fiscal years and in the aggregate for the five fiscal years
thereafter are as follows (in millions):
Year Ending March 31:
Pension
Benefits
Other
Postretirement
Benefits
2015
2016
2017
2018
2019
2020-2024
$
40.1
$
40.7
41.4
42.0
42.6
219.3
2.8
2.9
2.9
2.9
2.8
11.7
Pension Plans That Are Not Fully Funded
At March 31, 2014, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the
pension plans with accumulated benefit obligations in excess of the fair value of plan assets were $695.8 million, $687.2 million
and $573.5 million, respectively.
At March 31, 2013, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the
pension plans with accumulated benefit obligations in excess of the fair value of plan assets were $720.6 million, $710.5 million
and $577.7 million, respectively.
Other Postretirement Benefits
The other postretirement benefit obligation was determined using an assumed health care cost trend rate of 7.5% in fiscal
2014 grading down to 5.0% in fiscal 2019 and thereafter. The discount rate, compensation rate increase and health care cost trend
rate assumptions are determined as of the measurement date.
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Assumed health care cost trend rates have a significant effect on amounts reported for the retiree medical plans. A one-
percentage point change in assumed health care cost trend rates would have the following effect (in millions):
One Percentage Point Increase
Year Ended March 31,
2013
2014
2012
One Percentage Point Decrease
Year Ended March 31,
2013
2014
2012
Increase (decrease) in total of service and interest cost components $
Increase (decrease) in postretirement benefit obligation
$
0.1
2.4
$
0.1
2.7
$
0.1
2.7
(0.1) $
(2.1)
(0.1) $
(2.3)
(0.1)
(2.4)
Multi-Employer and Government-sponsored Plans
The Company participates in certain multi-employer and government-sponsored plans for eligible employees. Expense
related to these plans was $0.3 million in each of the years ended March 31, 2014, 2013 and 2012, respectively.
Defined Contribution Savings Plans
The Company sponsors certain defined-contribution savings plans for eligible employees. Expense related to these plans
was $15.6 million, $14.2 million, and $11.0 million for the years ended March 31, 2014, 2013 and 2012, respectively.
17. Income Taxes
The provision for income taxes consists of amounts for taxes currently payable and amounts for tax items deferred to future
periods, as well as adjustments relating to the Company's determination of uncertain tax positions, including interest and penalties.
The Company recognizes deferred tax assets and liabilities based on the future tax consequences attributable to tax net operating
loss ("NOL") carryforwards, tax credit carryforwards and differences between the financial statement carrying amounts and the
tax bases of applicable assets and liabilities. Deferred tax assets are regularly reviewed for recoverability and valuation allowances
are established based on historical losses, projected future taxable income and the expected timing of the reversals of existing
temporary differences. As a result of this review, we have established a partial valuation allowance against our deferred tax assets
relating to certain foreign and state net operating loss carryforwards as well as our foreign tax credit carryforwards.
Income Tax (Benefit) Provision
The components of the (benefit) provision for income taxes are as follows (in millions):
Current:
United States
Non-United States
State and local
Total current
Deferred:
United States
Non-United States
State and local
Total deferred
2014
Year ended March 31,
2013
2012
$
0.8
$
0.1
$
14.2
2.0
17.0
(6.0)
(16.4)
(2.0)
(24.4)
16.9
1.0
18.0
10.3
(7.0)
(1.0)
2.3
(Benefit) provision for income taxes
$
(7.4) $
20.3
$
1.1
16.7
1.6
19.4
(0.7)
(6.4)
(2.9)
(10.0)
9.4
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The (benefit) provision for income taxes differs from the United States statutory income tax rate due to the following items
(in millions):
Provision for income taxes at U.S. federal statutory income tax rate
$
7.8
$
26.3
$
Year ended March 31,
2013
2012
2014
State and local income taxes, net of federal benefit
Net effects of foreign rate differential
Net effects of foreign related operations
Net effect to deferred taxes for changes in tax rates
Unrecognized tax benefits, net of federal benefit
Change in valuation allowance
Capitalized transaction costs
Other
(Benefit) provision for income taxes
(0.8)
(3.6)
5.5
0.6
(4.7)
(11.5)
—
(0.7)
3.0
(5.4)
(4.2)
(0.1)
0.2
—
0.2
0.3
$
(7.4) $
20.3
$
15.7
0.9
(1.9)
(4.3)
(1.2)
(0.8)
(0.9)
1.3
0.6
9.4
The (benefit) provision for income taxes was calculated based upon the following components of income (loss) before
income taxes (in millions):
United States
Non-United States
Income before income taxes
Year ended March 31,
2013
2012
2014
$
$
(18.0) $
40.2
22.2
$
38.5
$
36.7
75.2
$
21.3
23.6
44.9
Deferred Income Tax Assets and Liabilities
Deferred income taxes consist of the tax effects of the following temporary differences (in millions):
Deferred tax assets:
Compensation and retirement benefits
US federal and state tax operating loss carryforwards
Foreign tax credit carryforwards
Foreign net operating loss carryforwards
Other
Total deferred tax assets before valuation allowance
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Property, plant and equipment
Inventories
Intangible assets and goodwill
Cancellation of indebtedness
Total deferred tax liabilities
Net deferred tax liabilities
March 31, 2014 March 31, 2013
$
76.5
$
63.1
46.8
17.2
7.4
211.0
(54.4)
156.6
45.6
31.8
222.7
74.5
374.6
$
218.0
$
82.5
63.9
50.5
15.6
20.2
232.7
(73.1)
159.6
46.3
34.6
236.7
78.4
396.0
236.4
These deferred tax assets and liabilities are classified in the consolidated balance sheets based on the balance sheet
classification of the related assets and liabilities.
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Management has reviewed its deferred tax assets and has analyzed the uncertainty with respect to ultimately realizing the
related tax benefits associated with such assets. Based upon this analysis, management has determined that a valuation allowance
should be established for deferred tax assets relating to certain foreign and state NOL carryforwards, as well as foreign tax credit
carryforwards. Significant factors considered by management in this determination included the historical operating results of the
Company as well as anticipated reversals of future taxable temporary differences. A valuation allowance was recorded at March 31,
2014 and 2013 for deferred tax assets related to state NOL carryforwards, foreign NOL carryforwards and foreign tax credit
carryforwards for which utilization is uncertain. The significant reduction in the valuation allowance presented above was generally
due to a change in management's view that the realization of certain foreign NOL and foreign tax credit carryforwards (previously
having a valuation allowance recorded) is now deemed more-likely-than-not as well as write-offs of certain deferred tax assets as
a result of the carryforward period expiring prior to utilization. The carryforward period for the foreign tax credit is ten years. The
carryforward period for the U.S. federal NOL carryforward is twenty years. The carryforward periods for the state NOLs range
from five to twenty years. Certain foreign NOL carryforwards are subject to a five-year expiration period, and the carryforward
period for the remaining foreign NOLs is indefinite.
As of March 31, 2014, the Company had approximately $114.8 million of federal NOL carryforwards expiring over various
years ending through March 31, 2031. No valuation allowance was recorded against the related federal NOL deferred tax asset.
In addition, the Company had approximately $566.0 million of state NOL carryforwards at March 31, 2014, expiring over various
years ending through March 31, 2034. The Company has a valuation allowance of $19.9 million recorded against the related
deferred tax asset. Lastly, at March 31, 2014, the Company had approximately $86.9 million of foreign NOL carryforwards in
which the majority of these losses can be carried forward indefinitely. There exists a valuation allowance of $6.4 million against
these NOL carryforwards as well as other related deferred tax assets.
No provision has been made for United States income taxes related to approximately $141.4 million of undistributed earnings
of foreign subsidiaries that are considered to be permanently reinvested. Due to existing net operating loss and foreign tax credit
carryforwards, no income tax liability would generally result if such earnings were repatriated to the U.S., other than potential
out-of-pocket withholding taxes of approximately $3.9 million.
Net cash paid for income taxes to governmental tax authorities for the years ended March 31, 2014, 2013 and 2012 was
$13.6 million, $16.7 million and $17.5 million, respectively.
Liability for Unrecognized Tax Benefits
The Company's total liability for unrecognized tax benefits as of March 31, 2014 and March 31, 2013 was $23.6 million
and $27.5 million, respectively.
The following table represents a reconciliation of the beginning and ending amount of the gross unrecognized tax benefits,
excluding interest and penalties, for the fiscal years ended March 31, 2014 and March 31, 2013 (in millions):
Balance at beginning of period
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Reductions due to lapse of applicable statute of limitations
Cumulative translation adjustment
Balance at end of period
Year Ended March 31,
2013
2014
$
24.0
$
2.5
—
—
(0.8)
(4.7)
(0.1)
$
20.9
$
29.6
—
—
—
(5.0)
(0.8)
0.2
24.0
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of
March 31, 2014 and March 31, 2013, the total amount of unrecognized tax benefits includes $9.9 million and $10.5 million of
gross accrued interest and penalties, respectively. The amount of interest and penalties recorded as income tax (benefit) expense
during the fiscal years ended March 31, 2014, 2013 and 2012 was $(0.6) million, $0.9 million, and $0.8 million, respectively.
During the second quarter of fiscal 2013, the Company completed an examination of its German corporate income and trade
tax returns relating to VAG's German operations for the tax periods ended December 31, 2006 through December 31, 2010. The
majority of the settlement amount noted in the table above was a result of the completion of this examination. The Company paid
approximately $0.4 million upon the conclusion of this examination; however, this amount was subsequently reimbursed by the
prior owners in accordance with an existing tax indemnity agreement. In addition, as the Company was still within the one-year
window from the acquisition date of VAG, the additional decrease in unrecognized net income tax benefits resulting from this
settlement was treated as a reduction to goodwill versus a reduction to income tax expense.
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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 first quarter ended June 29, 2013, the
Company completed an examination of its Italian corporate income tax returns for the years ended March 31, 2008 through March
31, 2011. Similarly, during the second quarter ended September 28, 2013, the Company completed an examination of certain
German subsidiaries' corporate income and trade tax returns for the tax years ended March 31, 2006 through March 31, 2010. The
Company paid approximately $0.7 million and $0.4 million upon the conclusion of the Italian and German examinations,
respectively. However, these amounts did not have a negative financial statement impact to the Company as the amounts were
either previously reserved as an unrecognized tax benefit or appropriately accounted for as a deferred tax item. 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, 2011, state and local income tax examinations for years ending prior to
fiscal 2010 or significant foreign income tax examinations for years ending prior to fiscal 2009. 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 and 2010 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.
18. Related Party Transactions
Management Services Fee
From 2006 to 2012, the Company had a management services agreement with an affiliate of Apollo for advisory and consulting
services related to corporate management, finance, product strategy, investment, acquisitions and other matters relating to our
business. Under the terms of the agreement, the Company incurred $3.0 million of costs in the year ended March 31, 2012, plus
out-of-pocket expenses. Upon the consummation of the Company's IPO in fiscal 2012, the Company and Apollo and its affiliates
terminated the management consulting agreement, and in connection with the termination Apollo and its affiliates have received
$15.0 million (plus $0.7 million of unreimbursed expenses) from the Company. Such payment was negotiated as a reduced amount
in lieu of the one-time termination fee of $20.1 million that Apollo otherwise would be entitled to receive under the management
consulting agreement, corresponding to the present value of the aggregate annual fees that would have been payable during the
remainder of the term of the agreement (assuming a twelve-year term from the date of the amended agreement). No other costs
or fees were incurred under the agreement in fiscal 2014 and 2013.
Consulting Services
From 2006 to 2012, the Company had a management consulting agreement (the “Cypress Agreement”) with Mr. George
Sherman, the Chairman of the Board, and two entities then-controlled by Mr. Sherman, Cypress Group, LLC and Cypress Industrial
Holdings, LLC (collectively, “Cypress”). The Cypress Agreement provided that Mr. Sherman had a right to serve as our Non-
Executive Chairman of the Board. The Cypress Agreement was terminated as of November 2012 as a consequence of the IPO and
Cypress Industrial Holdings, LLC's then-pending dissolution. During fiscal 2014, 2013 and 2012, Mr. Sherman did not receive
consulting fees under the Cypress Agreement; he did, however, receive fees in fiscal 2014, 2013 and 2012 for serving on Rexnord's
board of directors, including $250,000 annually for serving as Chairman of the Board.
During the year ended March 31, 2012, the Company paid fees of approximately $0.2 million for consulting services provided
by Next Level Partners, L.L.C. (“NLP”), an entity that is controlled by certain of the Company's minority stockholders. NLP
provided consulting services to the Company related primarily to lean manufacturing processes, consolidation and integration of
operations, strategic planning and recruitment of managers and executives. During fiscal 2014 and 2013, no fees were paid to
NLP.
Stockholders' Agreements
In connection with Apollo's acquisition of the Company in 2006, the Company entered into two separate stockholders'
agreements one with Rexnord Acquisition Holdings I, LLC, Rexnord Acquisition Holdings II, LLC (together with Rexnord
Acquisition Holdings I, LLC, the “Apollo Holders”) and certain other of our stockholders, and the other with the Apollo Holders,
George M. Sherman and Cypress (collectively, the “Stockholders' Agreements”). All terms of the Stockholders' Agreements
terminated upon the consummation of the Company's IPO with the exception of the registration rights provisions described below.
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Under the terms of the Stockholders' Agreements, the Company has agreed to register shares of its common stock owned
by affiliates of the Apollo Holders and by Mr. Sherman, as well as bear related expenses of offerings by them, under the following
circumstances:
• Demand Registration Rights. At any time upon the written request from the Apollo Holders, the Company will use
its best efforts to register as soon as possible, but in any event within 90 days, the Company's restricted shares specified
in such request for resale under the Securities Act, subject to customary cutbacks. The Apollo Holders have the right
to make two such written requests in any 12-month period. The Company may defer a demand registration by up to
90 days if its board of directors determines it would be materially adverse to it to file a registration statement.
• Piggyback Rights. If at any time the Company proposes to register restricted shares under the Securities Act (other
than on Form S-4 or Form S-8), prompt written notice of its intention shall be given to each stockholder. If within 15
days of delivery of such notice, stockholders elect to include in such registration statement any restricted shares such
person holds, the Company will use its best efforts to register all such restricted shares. The Company will also include
all such restricted shares in any demand registration or registration on Form S-3, subject to customary cutbacks.
• Registrations on Form S-3. The Apollo Holders may request in writing an unlimited number of demand registrations
on Form S-3 of its restricted shares. At any time upon the written request from the Apollo Holders, prompt written
notice of the proposed registration shall be given to each stockholder. Within 15 days of delivery of such notice, the
stockholders may elect to include in such registration statement any restricted shares such person holds, subject to
customary cutbacks. Twice in fiscal 2014, the Apollo Holders made a request for demand registration on Form S-3
with respect to its shares; consequently, the Company filed two shelf registration statements on Form S-3 related to
the offer and sale of the shares of Company securities, including the common stock held by the Apollo Holders and
by Mr. Sherman (and affiliates).
• Holdback. In consideration of the foregoing registration rights, each stockholder has agreed not to transfer any restricted
shares without the Company's prior written consent for a period not to begin more than 10 days prior to the effectiveness
of the registration statement pursuant to which any Company public offering shall be made and not to exceed 90 days
following the consummation of any future public offering.
Pursuant to the Stockholders’ Agreements, the Company was required to pay all of the offering expenses (other than
underwriters’ discounts and commissions on the shares of common stock sold by the Apollo Holders or Mr. Sherman and affiliate
entities) related to the two registration statements filed in fiscal 2014. The offering expenses (excluding such underwriters’
discounts and commissions) paid by the Company on behalf of the selling stockholders were $1.0 million and $0.4 million for the
offerings completed in the first quarter and fourth quarter of fiscal 2014, respectively.
Nominating Agreement
On April 3, 2012, the Company entered into an agreement with Apollo pursuant to which Apollo has the right, at any time
until Apollo no longer beneficially owns at least 33 1/3% of the Company's outstanding common stock, to designate three directors
to the Company's board of directors. In addition, under the Company's bylaws, until such time as Apollo no longer beneficially
owns at least 33 1/3% of the Company's outstanding common stock, certain important matters require the approval of a majority
of the directors designated by Apollo voting on such matters.
Debt Transactions and Purchases of Debt Securities
From time to time, Apollo and the Company's directors and executive officers have purchased debt securities from, or
financed borrowings involving, the Company, or otherwise purchased the Company's debt securities. The following paragraphs
describe any such transactions that occurred during fiscal 2014, 2013 and 2012.
During fiscal 2014 and 2013, no debt securities were purchased by Apollo or the Company's directors and executive officers.
During fiscal 2012, Mr. Sherman, the Company's Chairman and a director, purchased approximately $0.1 million of the Company's
then-outstanding senior notes due 2018, which he subsequently sold to a third party on the open market in fiscal 2014.
In fiscal 2013, the Company redeemed $300.0 million in aggregate principal amount of its then-outstanding 11.75% Notes,
and paid early redemption premiums of $17.6 million and $7.4 million of accrued interest. Certain of the Company's affiliates,
including Messrs. Sherman, Adams and Jeyarajah were holders of the 11.75% Notes at the redemption date and, therefore, received
payments of principal, as well as accrued interest and prepayment premiums, in respect of such indebtedness upon the redemption
in the following amounts: $2.6 million, $0.3 million and $0.3 million, respectively.
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Other
Apollo Global Securities, LLC, which was one of the underwriters in each of the two fiscal 2014 securities offerings, is an
affiliate of Apollo. Apollo Global Securities, LLC received (on a pro rata basis) discounts and commissions of approximately
$0.1 million related to the sale of securities by Rexnord as part of the February 2014 offering. The underwriters’ discounts and
commissions related to the shares sold by Apollo or Mr. Sherman and affiliated entities in the two fiscal 2014 offerings were paid
by them and not by the Company.
Apollo Global Securities, LLC served as a joint lead arranger and joint bookrunner in the refinancing of our credit facilities
in August 2013, and in connection with that transaction, received a structuring/arrangement fee from the Company of $0.6 million.
One of the underwriters in the Company's IPO (Apollo Global Securities, LLC) is an affiliate of Apollo, and an affiliate of
another underwriter in the IPO (Morgan Joseph TriArtisan LLC) is owned by an affiliate of Apollo. In fiscal 2013, those underwriters
received customary discounts and commissions out of the Company's IPO proceeds in pro rata proportion to the other underwriters
as follows: Apollo Global Securities LLC received $1.4 million and Morgan Joseph TriArtisan LLC received $0.3 million.
19. Commitments and 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 1,000 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
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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 March 31, 2014, Zurn and numerous
other unrelated companies were defendants in approximately 7,000 asbestos related lawsuits representing approximately 26,000
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 March 31, 2014, 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 $36.0 million of which Zurn expects its insurance
carriers to pay approximately $29.0 million in the next ten years on such claims, with the balance of the estimated liability being
paid in subsequent years. The $36.0 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 March 31, 2014, is
approximately $251.2 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 $175.2 million of aggregate liabilities.
As of March 31, 2014, the Company had a recorded receivable from its insurance carriers of $36.0 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 $251.2 million of insurance coverage will ultimately be available or that this
asbestos liability will not ultimately exceed $251.2 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 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.
In January 2010, Sloan Valve Company (“Sloan”) filed a complaint against the Company’s subsidiary, Zurn Industries, for
patent infringement in the United States District Court for the Northern District of Illinois. The complaint alleges, among other
things, that Zurn Industries’ manual dual flush valve infringes Sloan’s patent for its “Flush Valve Handle Assembly Providing
Dual Mode Operation” and seeks an unspecified amount of damages, including a request for treble damages and attorneys’ fees
related to Sloan’s allegation of willful infringement. Trial for this matter is currently scheduled for September 2014. While the
83
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Company intends to continue vigorously defending itself in this action, it may be subject to liability beyond the accruals that have
been recorded to date.
20. Common stock public offerings
Fiscal 2014 Common Stock Offering
On February 5, 2014, the Company closed a public offering of shares of its common stock. As part of that offering, the
Company sold 3,000,000 shares of common stock, at a public offering price of $25.75 per share for aggregate offering proceeds
of $73.8 million, net of underwriting discounts and commissions and other direct costs of the offering.
Fiscal 2013 Initial Public Offering
On April 3, 2012, the Company closed the IPO of its common stock. In connection with the IPO, the Company registered
its common stock with the SEC and subsequently offered and sold 27,236,842 shares of common stock, at a public offering price
of $18.00 per share for aggregate offering proceeds of $458.3 million, net of $28.2 million of underwriting discounts and
commissions and other direct costs of the offering.
21. 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 2).
84
March 31, 2014
March 31, 2013
March 31, 2012
Year Ended
Table of Contents
Business Segment Information:
(in Millions)
Net sales
Process & Motion Control
Water Management
Consolidated
Income (loss) from operations
Process & Motion Control
Water Management
Corporate
Consolidated
Non-operating expense:
Interest expense, net
Loss on the extinguishment of debt
Loss on divestiture
Other expense, net
Income from continuing operations before income
taxes
(Benefit) provision for income taxes
Net income from continuing operations
Loss from discontinued operations, net of tax
Net income
Non-controlling interest loss
Net income attributable to Rexnord
$
$
$
$
$
$
$
1,285.9
796.1
2,082.0
244.9
72.2
(37.5)
279.6
(109.1)
(133.2)
—
(15.1)
22.2
(7.4)
29.6
—
29.6
(0.6)
30.2
Restructuring and other similar costs (included in income from operations)
Process & Motion Control
Water Management
Corporate
Consolidated
Depreciation and Amortization
Process & Motion Control
Water Management
Consolidated
Capital Expenditures
Process & Motion Control
Water Management
Consolidated
Total Assets
Process & Motion Control
Water Management
Corporate
Consolidated
$
$
$
$
$
$
$
$
5.2
2.7
0.8
8.7
71.3
37.2
108.5
39.4
12.8
52.2
March 31, 2014
2,251.7
1,039.0
92.8
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,266.1
739.0
2,005.1
232.2
67.9
(44.7)
255.4
(153.3)
(24.0)
—
(2.9)
75.2
20.3
54.9
(4.8)
50.1
—
50.1
6.4
2.2
—
8.6
71.3
41.1
112.4
39.6
20.5
60.1
March 31, 2013
2,426.2
1,012.5
35.1
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,310.7
633.5
1,944.2
233.8
51.2
(39.7)
245.3
(176.2)
(10.7)
(6.4)
(7.1)
44.9
9.4
35.5
(5.6)
29.9
—
29.9
0.8
5.1
0.9
6.8
80.2
33.8
114.0
41.5
17.0
58.5
March 31, 2012
2,203.8
1,044.2
42.9
3,290.9
3,383.5
$
3,473.8
$
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Net sales to third parties and long-lived assets by geographic region are as follows (in millions):
United States
Europe
Rest of World
Year Ended
March 31, 2014
Net Sales
Year Ended
March 31, 2013
Year Ended
March 31, 2012
March 31,
2014
Long-lived Assets
March 31,
2013
March 31,
2012
$
$
1,376.4
$
1,335.0
$
1,326.4
$
293.3
$
266.3
$
409.1
296.5
379.5
290.6
339.2
278.6
98.6
49.0
93.1
51.3
2,082.0
$
2,005.1
$
1,944.2
$
440.9
$
410.7
$
267.3
103.0
48.9
419.2
Net sales to third parties are attributed to the geographic regions based on the country in which the shipment originates.
Amounts attributed to the geographic regions for long-lived assets are based on the location of the entity that holds such assets.
In accordance with ASC 280, Segment Reporting, long-lived assets includes movable assets and excludes net intangible assets
and goodwill.
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22. Quarterly Results of Operations (unaudited)
(in millions, except per share amounts)
First Quarter
$
Net sales
Gross profit
Net income (loss) from continuing operations
Loss from discontinued operations, net of tax
Net income (loss)
Non-controlling interest loss
Net income (loss) attributable to Rexnord
Net income (loss) per share from continuing operations:
Basic
Diluted
Net income (loss) per share attributable to Rexnord:
Basic
Diluted
$
$
$
$
$
Net sales
Gross profit
Net (loss) income from continuing operations
Loss from discontinued operations, net of tax
Net (loss) income
Net (loss) income attributable to Rexnord
Net (loss) income per share from continuing operations:
Basic
Diluted
Loss per share from discontinued operations:
Basic
Diluted
Net (loss) income per share attributable to Rexnord:
Basic
Diluted
$
$
$
$
$
$
$
Second Quarter
514.5
$
191.8
(52.5)
—
(52.5)
(0.2)
(52.3)
Fiscal 2014
Third Quarter
489.1
181.2
28.6
—
28.6
(0.1)
28.7
Fourth Quarter
569.7
$
208.7
39.9
—
39.9
(0.1)
40.0
508.7
181.9
13.6
—
13.6
(0.2)
13.8
0.14
0.14
0.14
0.14
$
$
$
$
(0.54) $
(0.54) $
(0.54) $
(0.54) $
0.29
0.28
0.29
0.28
$
$
$
$
0.40
0.39
0.40
0.39
First Quarter
$
Second Quarter
499.5
$
186.6
20.3
(1.1)
19.2
19.2
Fiscal 2013
Third Quarter
471.7
167.9
11.4
(2.2)
9.2
9.2
Fourth Quarter
540.3
$
198.2
23.9
—
23.9
23.9
493.6
178.7
(0.7)
(1.5)
(2.2)
(2.2)
— $
— $
(0.02) $
(0.02) $
(0.02) $
(0.02) $
0.21
0.20
$
$
(0.01) $
(0.01) $
0.20
0.19
$
$
0.12
0.11
$
$
(0.02) $
(0.02) $
0.10
0.09
$
$
0.25
0.24
$
$
— $
— $
0.25
0.24
$
$
$
$
$
$
$
$
Total
2,082.0
763.6
29.6
—
29.6
(0.6)
30.2
0.30
0.29
0.31
0.30
Total
2,005.1
731.4
54.9
(4.8)
50.1
50.1
0.57
0.55
(0.05)
(0.05)
0.52
0.50
23. Subsequent Events
Green Turtle Acquisition
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 broadens the product portfolio of the Company's existing Water Management
platform. The Company's fiscal 2015 financial position and results from operations will include Green Turtle subsequent to April
15, 2014. This acquisition is not expected to have a material impact on the Company's consolidated financial statements.
Mill Products Strategic Review
On May 15, 2014, the Company's Board of Directors approved a plan to assess the potential exit of a non-core product-line
that manufactures ring gears and pinions (“Mill Products”) utilized in mining sector crushing machinery applications. The exit
plan includes the exploration of various strategic alternatives which could include the possible sale of the entire business or the
sale of individual net assets. The exploration of strategic alternatives is expected to be completed by the end of fiscal 2015. Given
the preliminary stage of this analysis, the range of potential outcomes from the resulting exit of this business are not yet determinable.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure 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 and 15d-15 of the Exchange Act. Based on that evaluation, 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.
Management’s Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal
control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (1992 Framework) (COSO). Based upon that evaluation, management
has concluded that our internal control over financial reporting was effective as of March 31, 2014.
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.
The effectiveness of the Company's internal control over financial reporting as of March 31, 2014, has been audited by
Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which appears herein.
Changes in Internal Control Over Financial Reporting
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.
ITEM 9B. OTHER INFORMATION.
None.
* * * * *
Disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
Apollo Global Management, LLC (“Apollo”) has provided notice to us that, as of October 24, 2013, certain investment
funds managed by affiliates of Apollo beneficially owned approximately 22% of the limited liability company interests of CEVA
Holdings, LLC (“CEVA”). Under the limited liability company agreement governing CEVA, certain investment funds managed
by affiliates of Apollo hold a majority of the voting power of CEVA and have the right to elect a majority of the board of CEVA.
CEVA may be deemed to be under common control with us, but this statement is not meant to be an admission that common
control exists. As a result, it appears that we are required to provide disclosures as set forth below pursuant to Section 219 of the
Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”) and Section 13(r) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”).
88
Table of Contents
Apollo has informed us that CEVA has provided it with the information below relevant to Section 13(r) of the Exchange Act. The
disclosure below does not relate to any activities conducted by us and does not involve us or our management. The disclosure
relates solely to activities conducted by CEVA and its consolidated subsidiaries. We have not independently verified or participated
in the preparation of the disclosure below.
“Through an internal review of its global operations, CEVA has identified the following transactions in an Initial Notice of
Voluntary Self-Disclosure that CEVA filed with the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”) on
October 28, 2013. CEVA’s review is ongoing. CEVA will file a further report with OFAC after completing its review.
The internal review indicates that, in February 2013, CEVA Freight Holdings (Malaysia) SDN BHD (“CEVA Malaysia”) provided
customs brokerage for export and local haulage services for a shipment of polyethylene resin to Iran shipped on a vessel owned
and/or operated by HDS Lines, also an SDN. The revenues and net profits for these services were approximately $779.54 USD
and $311.13 USD, respectively. In September 2013, CEVA Malaysia provided customs brokerage services for the import into
Malaysia of fruit juice from Alifard Co. in Iran via HDS Lines. The revenues and net profits for these services were approximately
$227.41 USD and $89.29 USD, respectively.
These transactions violate the terms of internal CEVA compliance policies, which prohibit transactions involving Iran. Upon
discovering these transactions, CEVA promptly launched an internal investigation, and is taking action to block and prevent such
transactions in the future. CEVA intends to cooperate with OFAC in its review of this matter.”
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item is incorporated by reference from the sections entitled "Election of Directors" and
"Corporate Governance" and in the definitive Proxy Statement for the Company’s fiscal 2015 annual meeting, to be held on or
about July 31, 2014 (the "Fiscal 2015 Proxy Statement"), and to the information under the caption “Executive Officers of the
Registrant” in Part I hereof.
Code of Ethics
We have adopted a written code of ethics, referred to as the Rexnord Code of Business Conduct and Ethics, applicable to
all directors, officers and employees, which includes provisions relating to accounting and financial matters applicable to the
principal executive officer, principal financial officer and principal accounting officer and controller. We have posted a copy of
the Code of Business Conduct and Ethics on our website at www.rexnord.com. To obtain a copy, free of charge, please submit a
written request to Investor Relations, 4701 West Greenfield Avenue, Milwaukee, Wisconsin 53214. If we make any substantive
amendments to, or grant any waivers from, the code of ethics for any director or officer, we will disclose the nature of such
amendment or waiver on our corporate website at www.rexnord.com or in a Current Report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference from the sections entitled "Proposal 1: Election of
Directors", "Corporate Governance", "Compensation Discussion and Analysis", "Compensation Committee Report", "Executive
Compensation", and "Directors' Compensation" in the Fiscal 2015 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The information required by this Item is incorporated by reference from the sections entitled "Security Ownership of
Certain Beneficial Owners and Management" in the Fiscal 2015 Proxy Statement.
The following chart gives aggregate information regarding grants under all equity compensation plans of the Company
through March 31, 2014.
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available
for future issuance under
equity compensation
plans (excluding
securities reflected
in first column)
8,652,834
None
8,652,834
$10.79
None
$10.79
4,744,994
None
4,744,994
Plan category
Equity compensation plans
approved by security holders (1)
Equity compensation plans not
approved by security holders
Total
(1) All options or shares in these columns relate to options granted under the Company's 2006 Stock Option Plan, which was
approved by stockholders in 2006, or the Company's 2012 Performance Incentive Plan, which was approved by stockholders
in 2012. No further options are being granted under the 2006 Stock Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference from the sections entitled "Corporate Governance"
and "Certain Relationships and Related Party Transactions" in the Fiscal 2015 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is incorporated by reference from the section entitled "Report of the Audit
Committee" and "Auditors" in the Fiscal 2015 Proxy Statement.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
PART IV
The Company’s consolidated financial statements included in Part II, Item 8 hereof are for the years ended March 31,
2014, 2013 and 2012 and consist of the following:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules.
The Financial Statement Schedule of the Company appended hereto for the years ended March 31, 2014, 2013 and
2012 consists of the following:
Schedule II – Valuation and Qualifying Accounts
(in Millions)
Description
Fiscal Year 2012:
Valuation allowance for trade and notes receivable
Valuation allowance for excess and obsolete
inventory
Valuation allowance for income taxes
Fiscal Year 2013:
Valuation allowance for trade and notes receivable
Valuation allowance for excess and obsolete
inventory
Valuation allowance for income taxes
Fiscal Year 2014:
Valuation allowance for trade and notes receivable
Valuation allowance for excess and obsolete
inventory
Valuation allowance for income taxes
Balance at
Beginning
of Year
Charged to
Costs and
Expenses
Additions
Acquired
Obligations
Charged
to Other
Accounts
Deductions
(1)
Balance at
End of
Year
$
$
$
5.0
$
1.1
$
1.8
$
0.1
$
(1.8) $
29.3
111.2
2.6
6.5
3.5
—
(0.5)
—
(4.0)
(27.4)
6.2
$
1.3
$
1.4
$
(0.7) $
(0.5) $
30.9
90.3
4.9
3.9
3.3
—
(4.2)
—
(4.4)
(21.1)
7.7
$
1.0
$
0.2
$
(0.1) $
(2.4) $
30.5
73.1
3.8
3.9
4.1
—
0.2
—
(4.8)
(22.6)
6.2
30.9
90.3
7.7
30.5
73.1
6.4
33.8
54.4
(1) Uncollectible amounts, dispositions charged against the accrual and utilization of net operating losses.
All other schedules have been omitted because they are not applicable or because the information required is included in the
notes to the consolidated financial statements.
(a) (3) Exhibits.
See Exhibit Index included after the signature page to this report, which Exhibit Index is incorporated by reference herein.
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EXHIBIT INDEX
Exhibit
2.1
3.1
3.2
4.1
Description
Incorporated Herein by Reference to
Filed
Herewith
Stock Purchase Agreement dated as of April 5,
2005, by and among Rexnord LLC, Hamilton
Sundstrand Corporation and The Falk
Corporation
Exhibit 99.2 to the Form 8-K filed by RBS
Global, Inc./Rexnord LLC on May 19,
2005+
Amended and Restated Certificate of
Incorporation as amended through April 3,
2012
Exhibit 3.1 to the Company's Form 8-K
dated April 3, 2012 (“4/3/12 8-K”)
Amended and Restated By-Laws as amended
through April 3, 2012
Exhibit 3.2 to the 4/3/12 8-K
Nominating Agreement, dated April 3, 2012,
by and among the Company and Apollo
Management VI, L.P.
Exhibit 10.1 to the 4/3/12 8-K
10.1(a)
The Company's 2006 Stock Option Plan, as
amended (“2006 Option Plan”)* (superseded)
Exhibit 10.6 to the Form 10-K filed by
RBS Global, Inc./Rexnord LLC for the
fiscal year ended March 31, 2010
10.1(b)
10.1(c)
10.1(d)
10.2
10.3
Form of Executive Non-Qualified Stock
Option Agreement under the 2006 Option
Plan*
Exhibit 10.10 to the Form 8-K/A filed by
RBS Global, Inc./Rexnord LLC on July 27,
2006 (the “7/27/06 8-K/A”)
Form of George M. Sherman Non-Qualified
Stock Option Agreement under the 2006
Option Plan*
Exhibit 10.11 to the 7/27/06 8-K/A
Form of Non-Employee Director (Apollo
Director) Non-Qualified Stock Option
Agreement under the 2006 Option Plan*
Exhibit 10.8 to the Form 10-K filed by
RBS Global Inc./Rexnord LLC for the
fiscal year ended March 31, 2007
Amended and Restated Non-Qualified Stock
Option Agreement, dated April 16, 2010,
between the Company and Praveen Jeyarajah,
amending and restating the option agreement
dated as of October 29, 2009*
Exhibit 10.1 to the Form 8-K filed by RBS
Global, Inc./Rexnord LLC on April 22,
2010
Rexnord Management Incentive
Compensation Plan (revised as of July 29,
2010)*
Exhibit 10.1 to the Form 10-Q for the
quarter ended October 2, 2010 filed by
RBS Global, Inc./Rexnord LLC
10.4(a)
The Company's 2012 Performance Incentive
Plan (the “2012 Incentive Plan”)*
Exhibit 10.32 to the Company's
Registration Statement on Form S-1, SEC
File No. 333-174504 (the “2012 S-1”)
10.4(b)
Form of Option Agreement under the 2012
Incentive Plan*
Exhibit 10.4 to the Company's Form 10-Q
for the quarter ended June 30, 2012
10.5
10.6
Employment Agreement, dated November 9,
2012, between Rexnord Corporation and Todd
A. Adams*
Exhibit 10.1 to the Company's Form 10-Q
for the quarter ended September 29, 2012
(“9/29/12 10-Q”)
Employment Agreement, dated November 9,
2012, between Rexnord Corporation and
Mark W. Peterson*
Exhibit 10.2 to the 9/29/12 10-Q
92
Table of Contents
10.7
10.8
Employment Agreement, dated November 9,
2012, between Rexnord Corporation and
Praveen R. Jeyarajah*
Schedule of Compensation for independent
directors, effective for fiscal 2013*
Exhibit 10.3 to the 9/29/12 10-Q
Exhibit 10.10 to the Company's Form 10-K
for the fiscal year ended March 31, 2012
(“2012 10-K”)
10.9
Form of Indemnification Agreement
Exhibit 10.31 to the 2012 S-1
Exhibit 10.1 to the Company’s Form 8-K
dated August 21, 2013
Exhibit 10.1 to the Form 8-K filed by RBS
Global, Inc./Rexnord LLC on March 16,
2012 (the “3/16/12 8-K”)
Exhibit 10.1 to the Company's Form 8-K
dated April 17, 2012 (the “4/17/12 8-K”)
Exhibit 10.1 to the Company's Form 8-K
dated October 4, 2012
Exhibit 10.1 to the Company's Form 8-K
dated April 24, 2013
Exhibit 10.2 to the 3/16/12 8-K
10.10(a)
10.10(b)
10.10(c)
10.10(d)
10.10(e)
10.11
Third Amended and Restated First Lien Credit
Agreement dated as of August 21, 2013, as
adopted pursuant, and filed as Exhibit B, to
the Incremental Assumption Agreement dated
as of August 21, 2013 relating to the Second
Amended and Restated Credit Agreement
dated as of March 15, 2012, among Chase
Acquisition I, Inc., RBS Global, Inc., Rexnord
LLC, certain subsidiaries of Rexnord LLC,
the lenders party thereto and Credit Suisse
AG, as administrative agent
Second Amended and Restated Credit
Agreement, dated as of March 15, 2012,
among Chase Acquisition I, Inc., RBS Global,
Inc., Rexnord LLC, the lenders party hereto
from time to time and Credit Suisse AG,
Cayman Islands Branch (formerly known as
Credit Suisse, Cayman Islands Branch), as
administrative agent for the lenders
(superseded)
Incremental Assumption Agreement, dated as
of April 18, 2012, relating to the Second
Amended and Restated Credit Agreement,
dated as of March 15, 2012 among Chase
Acquisition I, Inc., RBS Global, Inc., Rexnord
LLC, the lenders party thereto from time to
time and Credit Suisse AG, as administrative
agent (superseded)
Incremental Assumption Agreement dated as
of October 4, 2012, relating to the Second
Amended and Restated Credit Agreement
dated as of March 15, 2012, among Chase
Acquisition I, Inc., RBS Global, Inc., Rexnord
LLC, the lenders party thereto from time to
time and Credit Suisse AG, as administrative
agent (superseded)
Incremental Assumption Agreement dated as
of April 24, 2013, relating to the Second
Amended and Restated Credit Agreement
dated as of March 15, 2012, among Chase
Acquisition I, Inc., RBS Global, Inc., Rexnord
LLC, the lenders party thereto from time to
time and Credit Suisse AG, as administrative
agent (superseded)
Second Amended and Restated Guarantee and
Collateral Agreement, dated and effective as
of March 15, 2012, among Chase Acquisition
I, Inc., RBS Global, Inc., Rexnord LLC, each
subsidiary of the borrowers identified therein
and Credit Suisse AG, as Administrative
Agent for the Credit Agreement Secured
Parties
93
Exhibit 10.1 to the Form 8-K filed by RBS
Global, Inc./Rexnord LLC on October 1,
2007
Exhibit 10.2 to the Form 8-K filed by RBS
Global, Inc./Rexnord LLC on May 23,
2011 (the “5/23/11 8-K”)
Exhibit 10.3 to the 5/23/11 8-K
Exhibit 10.1 to the 5/23/11 8-K
Exhibit 10.5 to the 7/27/06 8-K/A
Exhibit 10.6 to the 7/27/06 8-K/A
Exhibit 1.1 to the Company's Form 8-K
dated June 20, 2013
Exhibit 1.1 to the Company's Form 8-K
dated January 30, 2014
Table of Contents
10.12(a)
10.12(b)
10.12(c)
10.13
10.14
10.15
10.16
10.17
Receivables Sale and Servicing Agreement,
dated September 26, 2007, by and among the
Originators, Rexnord Industries, LLC as
Servicer, and Rexnord Funding LLC
First Amendment, dated as of November 30,
2007, to the Receivables Sale and Servicing
Agreement, dated as of September 26, 2007,
among Rexnord Funding LLC, as the buyer,
Rexnord Industries, LLC, as the servicer and
an originator, Zurn Industries, LLC, as an
originator, Zurn PEX, Inc., as an originator,
and General Electric Capital Corporation, as
the administrative agent
Second Amendment, dated as of May 20,
2011, to the Receivables Sale and Servicing
Agreement, dated as of September 26, 2007,
among Rexnord Funding LLC, as the buyer,
Rexnord Industries, LLC, as the servicer and
an originator, Zurn Industries, LLC, as an
originator, Zurn PEX, Inc., as an originator,
and General Electric Capital Corporation, as
the administrative agent
Amended and Restated Receivables Funding
and Administration Agreement, dated as of
May 20, 2011, by and among Rexnord
Funding LLC, the financial institutions from
time to time party thereto and General Electric
Capital Corporation
Stockholders' Agreement of the Company,
Rexnord Acquisition Holdings I, LLC,
Rexnord Acquisition Holdings II, LLC and
certain other stockholders, dated July 21, 2006
(no longer in effect, except as to certain
registration rights provisions)
Stockholders' Agreement of the Company,
Rexnord Acquisition Holdings I, LLC,
Rexnord Acquisition Holdings II, LLC,
Cypress Industrial Holdings, LLC and George
M. Sherman, dated July 21, 2006 (no longer
in effect, except as to certain registration
rights provisions)
Underwriting Agreement, dated as of June 20,
2013, by and among Rexnord Corporation,
Rexnord Acquisition Holdings I, LLC and
Rexnord Acquisition Holdings II, LLC, as the
selling stockholders, and Deutsche Bank
Securities Inc. and Goldman, Sachs & Co., as
representatives of the several underwriters
named in Schedule A thereto
Underwriting Agreement, dated as of January
30, 2014, by and among Rexnord Corporation,
Rexnord Acquisition Holdings I, LLC,
Rexnord Acquisition Holdings II, LLC and
each of the shareholders of the Company
named in Schedule A-2 thereto as the selling
stockholders, and Goldman, Sachs & Co.,
Robert W. Baird & Co. Incorporated and
Credit Suisse Securities (USA) LLC, as
representatives of the several underwriters
named in Schedule A-1 thereto
94
Table of Contents
10.18(a)
10.18(b)
10.18(c)
10.18(d)
10.18(e)
Indenture, dated as of April 28, 2010, with
respect to the 8-1/2% Senior Notes due 2018,
by and among RBS Global, Inc., Rexnord
LLC, the guarantors named therein and Wells
Fargo Bank, National Association (“Wells
Fargo”), as Trustee (no longer in effect)
First Supplemental Indenture, dated as of
April 9, 2011, with respect to the 8-1/2%
Senior Notes due 2018, by and among RBS
Global, Inc., Rexnord LLC, American
Autogard LLC, the Guarantors listed therein
and Wells Fargo (no longer in effect)
Second Supplemental Indenture, dated as of
April 17, 2012, with respect to the 8-1/2%
Senior Notes due 2018, by and among RBS
Global, Inc., Rexnord LLC, the Company, the
other guarantors named therein and Wells
Fargo (no longer in effect)
Third Supplemental Indenture, dated as of
November 9, 2012, with respect to the 8-1/2%
Senior Notes due 2018, by and among RBS
Global, Inc., Rexnord LLC, VAG Valves USA
Inc., the other guarantors named therein and
Wells Fargo (no longer in effect)
Fourth Supplemental Indenture, dated as of
January 31, 2013, with respect to the 8-1/2%
Senior Notes due 2018, by and among RBS
Global, Inc., Rexnord LLC, Cline Acquisition
Corp., the other guarantors named therein and
Wells Fargo (no longer in effect)
Exhibit 4.1 to the Form 8-K filed by RBS
Global, Inc./Rexnord LLC on April 28,
2010
Exhibit 4.11 to the 2012 S-1
Exhibit 4.1 to the 4/17/12 8-K
Exhibit 4.2(d) to the Company's Form 10-
K for the fiscal year ended March 31, 2013
(the “2013 10-K”)
Exhibit 4.2(e) to the 2013 10-K
10.18(f)
Form of Unrestricted Global Note evidencing
the 8-1/2% Senior Notes due 2018 (no longer
in effect)
Exhibit 4.6(e) to the Registration Statement
on Form S-4 (SEC File No. 333-167904)
filed by RBS Global, Inc./Rexnord LLC on
June 30, 2010
21.1
23.1
31.1
31.2
32.1
List of Subsidiaries of the Company
Consent of Independent Registered Public
Accounting Firm
Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
Certification of Chief Executive Officer and
Chief Financial Officer
101.INS
XBRL Instance Document
101.SCH
101.CAL
101.DEF
XBRL Taxonomy Extension Schema
Document
XBRL Taxonomy Extension Calculation
Linkbase Document
XBRL Taxonomy Extension Definition
Linkbase Document
95
X
X
X
X
X
X
X
X
X
Table of Contents
101.LAB
101.PRE
XBRL Taxonomy Extension Label Linkbase
Document
XBRL Taxonomy Extension Presentation
Linkbase Document
X
X
* Denotes management plan or compensatory plan or arrangement.
The Company agrees to furnish supplementally a copy of the schedules omitted from this exhibit to the Commission upon
request.
+
96
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
REXNORD CORPORATION
By:
Name:
Title:
Date:
/s/ Todd A. Adams
Todd A. Adams
President and Chief Executive Officer
May 21, 2014
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Todd
A. Adams, Mark W. Peterson and Patricia M. Whaley, and each of them, his or her true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities,
to sign any and all amendments to this report, and to file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, and any other regulatory authority, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or their substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Todd A. Adams
Todd A. Adams
President, Chief Executive Officer
(Principal Executive Officer) and Director
/s/ Mark W. Peterson
Mark W. Peterson
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ George M. Sherman
George M. Sherman
/s/ Mark S. Bartlett
Mark S. Bartlett
/s/ Laurence M. Berg
Laurence M. Berg
/s/ Thomas D. Christopoul
Thomas D. Christopoul
/s/ Peter P. Copses
Peter P. Copses
/s/ Damian J. Giangiacomo
Damian J. Giangiacomo
/s/ John M. Stropki
John M. Stropki
/s/ John S. Stroup
John S. Stroup
Director
Director
Director
Director
Director
Director
Director
Director
97
May 21, 2014
May 21, 2014
May 21, 2014
May 21, 2014
May 21, 2014
May 21, 2014
May 21, 2014
May 21, 2014
May 21, 2014
May 21, 2014
Name
American Autogard LLC
Chase Acquisition I, Inc.
Merit Gear LLC
RBS Global, Inc
Rexnord LLC
The Falk Service Corporation
Precision Gear Holdings, LLC
Precision Gear LLC
PT Components, Inc.
RBS Acquisition Corporation
RBS China Holdings, L.L.C.
Rexnord Funding, LLC
Rexnord Industries, LLC
Rexnord International Inc.
Rexnord-Zurn Holdings, Inc.
OEI, Inc.
OEP, Inc.
Krikles, Inc.
Zurco, Inc.
Zurn International, Inc.
Zurn Industries, LLC
Zurn PEX, Inc.
GA Industries Holdings, LLC
VAG Valves USA Inc.
Prager Incorporated
Rodney Hunt-Fontaine, Inc.
Fontaine USA Inc.
Cline Acquisition Corp.
GA Industries, LLC
Autogard Asia Pacific Pty
Falk Australia Pty Ltd.
LWG Zurn Australia Pty Ltd.
Rexnord Australia Pty Ltd.
VAG Armaturen At GmbH
Rexnord NV
Rexnord Correntes Ltda
Rexnord do Brasil Industrial Ltda
Rexnord Canada Ltd.
Zurn Industries Limited
Rodney Hunt-Fontaine Ltd.
Zurn Asia Holdings Ltd.
Rexnord Chile Commercial Limitada
VAG Armaturen Chile Limitada
Changzhou Rexnord Transmission Co. Ltd.
Falk Shanghai Co., Ltd.
Rexnord Corporation
List of Subsidiaries
Place of Incorporation
Exhibit 21.1
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Illinois
Louisiana
Massachusetts
New Hampshire
North Carolina
Pennsylvania
Australia
Australia
Australia
Australia
Austria
Belgium
Brazil
Brazil
Canada
Canada
Canada
Cayman Islands
Chile
Chile
China
China
Rexnord Conveyor Products (Wuxi) Co. Ltd.
Rexnord Hong Kong Holdings Ltd.
Rexnord Industries Enterprise Management (Shanghai) Co. Ltd.
Rexnord Power Transmission Products (Taicing) Co. Ltd.
VAG Water Systems (Taicang) Co., Ltd.
Jihomoravska armaturka Spol. S.r.O.
Rexnord France Holdings SAS
Fontaine Europe SAS
VAG Valves France SARL
Autogard Kupplungen Gmbh
MCC Deutschland Kette GmbH
Rexnord GmbH
Rexnord Kette GmbH
Rexnord Hameln Gmbh
VAG Armaturen Gmbh
VAG Holding Gmbh
Rexnord India Private Limited
VAG-Valves India (Private) Limited
Autogard Italy Srl
Rexnord FlatTop Europe Srl (f/k/a/Rexnord Marbett Srl)
VAG Valvole Italia Srl
VAG-Valves Malaysia Sdn.Bhd.
Valvulas VAG de Mexico, S.A. de C.V.
Mecánica Falk S.A. de C.V.
Rexnord Industrial S.A. de C.V.
Rexnord S.A. de C.V.
Rexnord Asia Pacific Pte. Ltd.
Rexnord Finance BV
Rexnord FlatTop Europe BV
Rexnord Flat Top Holdings B.V.
Rexnord Dutch One C.V.
Rexnord Dutch Two C.V.
VAG Armatura Polska Sp.Z.O.O.
OOO VAG Armaturen RUS
Klamflex Pipe Couplings (Pty) Ltd
Pipe Couplings (Pty) Ltd
Rexnord South Africa Pty
Samal Investment (Pty) Ltd
VAG Valves South Africa Pty
VAG-Valves Middle East FZE
Autogard Holdings Limited
British Autogard Limited
Fiert Holdings Limited
Fontaine Holdings Limited
Fontaine UK Ltd.
Micro Precision Gear Technology Limited
Rexnord Industries (UK) Limited
VAG Valves UK Limited
Zurn Europe Limited
Falk de Venezuela, SA
China
China
China
China
China
Czech Republic
France
France
France
Germany
Germany
Germany
Germany
Germany
Germany
Germany
India
India
Italy
Italy
Italy
Malaysia
Mexico
Mexico
Mexico
Mexico
Singapore
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Poland
Russia
South Africa
South Africa
South Africa
South Africa
South Africa
UAE
UK
UK
UK
UK
UK
UK
UK
UK
UK
Venezuela
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-193610) of Rexnord Corporation
and in the Registration Statements pertaining to the Rexnord Corporation 2006 Stock Option Plan (Form S-8 No. 333-180434)
and the Rexnord Corporation 2012 Performance Incentive Plan (Form S-8 No. 333-180450) of our reports dated May 21, 2014,
with respect to the consolidated financial statements and schedule of Rexnord Corporation and the effectiveness of internal control
over financial reporting of Rexnord Corporation included in this Annual Report (Form 10-K) of Rexnord Corporation for the year
ended March 31, 2014.
/s/ Ernst & Young LLP
Milwaukee, WI
May 21, 2014
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
1.
2.
3.
4.
I, Todd A. Adams, President and Chief Executive Officer of Rexnord Corporation, certifies that:
I have reviewed this annual report on Form 10-K of Rexnord Corporation;
Based on my knowledge, this annual 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 annual report;
Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;
The registrants' other certifying officer(s) 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 registrants 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 registrants, including their
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this annual 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 registrants' 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 registrants' internal control over financial reporting that occurred during
the registrants' most recent fiscal quarter (the registrants' fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrants' internal control over financial
reporting; and
5.
The registrants' other certifying officer(s) 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 registrants' 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 registrants' 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 registrants' internal control over financial reporting.
Date: May 21, 2014
/s/ TODD A. ADAMS
By:
Name: Todd A. Adams
Title:
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
1.
2.
3.
4.
I, Mark W. Peterson, Senior Vice President and Chief Financial Officer of Rexnord Corporation, certifies that:
I have reviewed this annual report on Form 10-K of Rexnord Corporation;
Based on my knowledge, this annual 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 annual report;
Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;
The registrants' other certifying officer(s) 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 registrants 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 registrants, including their
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this annual 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 registrants' 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 registrants' internal control over financial reporting that occurred during
the registrants' most recent fiscal quarter (the registrants' fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrants' internal control over financial
reporting; and
5.
The registrants' other certifying officer(s) 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 registrants' 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 registrants' 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 registrants' internal control over financial reporting.
Date: May 21, 2014
/s/ MARK W. PETERSON
By:
Name: Mark W. Peterson
Title:
Senior Vice President and Chief Financial Officer
CERTIFICATION
Pursuant to 18 United States Code § 1350
EXHIBIT 32.1
Each of the undersigned hereby certifies that the Annual Report on Form 10-K for the fiscal year ended March 31, 2014
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: May 21, 2014
Date: May 21, 2014
/s/ TODD A. ADAMS
By:
Name: Todd A. Adams
Title:
President and Chief Executive Officer
/s/ MARK W. PETERSON
By:
Name: Mark W. Peterson
Title:
Senior Vice President and Chief Financial Officer
This certification accompanies the Annual Report on Form 10-K 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.
CORPORATE
INFORMATION
E X EC U TI V E O F F I C E R S
Todd A. Adams
President and
Chief Executive Officer
Mark W. Peterson
Senior Vice President and
Chief Financial Officer
Praveen R. Jeyarajah
Executive Vice President -
Corporate and Business
Development
Non-GAAP Financial Information
In this annual report, we provide certain non-
GAAP supplemental financial information that we
believe is useful to our shareholders in assessing
our performance. Adjusted EBITDA is provided
because it is a key metric used to measure our
compliance with our financial covenants under
our credit agreement. Management uses the
other non-GAAP supplemental information
to assess our ongoing financial performance
because it provides additional insight into that
performance by eliminating certain unusual or
non-recurring items that we do not believe are
indicative of continuing trends. In considering
this non-GAAP supplemental information, please
refer to the explanations and reconciliations
provided or referenced in this annual report,
including our fiscal 2014 Form 10-K, and
our filings with the Securities and Exchange
Commission.
D I R EC T O R S
George M. Sherman (d)*
Non-Executive Chairman, Rexnord
Todd A. Adams (d)
President and CEO, Rexnord
Mark S. Bartlett (a)* (c)
Retired Partner, Ernst & Young LLP
Laurence M. Berg (b)* (c)* (d)
Senior Partner,
Apollo Management, LP
Thomas D. Christopoul (a)
Senior Managing Director,
Real Estate Group, Guggenheim
Partners
Peter Copses
Senior Partner,
Apollo Management, LP
Damian J. Giangiacomo
Managing Member,
Nexus Partners LLC
John M. Stropki (b) (c)
Retired Chairman and CEO, Lincoln
Electric
John S. Stroup (a) (b)
President and CEO, Belden, Inc.
T R A N S F E R A G E N T
American Stock Transfer &
Trust Company, LLC
6201 15th Ave.
Brooklyn, NY 11219
(800) 937-5449
www.amstock.com
I N D E P E N D E N T R E GI S T E R E D
P U B L I C A C C O U N TI N G F IR M
Ernst & Young LLP
Milwaukee, Wisconsin
L E G A L C O U N S E L
Quarles & Brady LLP
Milwaukee, Wisconsin
C O M M O N S T OC K L I S TI N G
New York Stock Exchange
Symbol: RXN
F O RM 1 0 -K R E P O R T
The company’s Fiscal 2014 Form 10-K
annual report has been filed with the
Securities and Exchange Commission.
A copy is included as part of this
annual report.
Committees of the Board
(a) Audit
(b) Compensation
(c) Nominating and Corporate Governance
(d) Executive
*Denotes Committee Chairman
A N N U A L M E E TI N G
Shareholders are invited to attend
the 2014 Annual Meeting on Thursday,
July 31, 2014, at 1:00 P.M. Eastern Time
at the Sebonack Golf Club,
405 Sebonac Road, Southampton, NY.
C O R P O R AT E H E A DQ U A R T E R S
Rexnord Corporation
4701 West Greenfield Avenue
Milwaukee, WI 53214-5310
www.rexnord.com