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ANNUAL REPORT 2016
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About Rexnord
Headquartered in Milwaukee, Wisconsin (USA), Rexnord is a leading worldwide industrial company
comprised of two strategic platforms: Process & Motion Control and Water Management, with
approximately 7,700 employees globally. Within our platforms, we serve a diverse array of growing,
global end markets by offering what we believe are the broadest, most reliable product portfolios and
trusted brands in our industries.
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 fi nancial results by targeting
world-class operating performance throughout all aspects of our business.
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 the cost of failure or downtime are high.
Our Water Management platform designs, procures, manufactures and markets products that provide
and enhance water quality, safety, fl ow control and conservation.
Corporate Information
FORM 10-K REPORT
The company’s Fiscal 2016 Form 10-K annual report has
been fi led with the Securities and Exchange Commission.
A copy is included as part of this annual report.
ANNUAL MEETING
Stockholders are invited to attend the Fiscal 2017 Annual
Meeting on Thursday, July 28, 2016, at 9:00 a.m. Central
Time, at the Water Council Building, 247 Freshwater Way,
Milwaukee, WI.
CORPORATE HEADQUARTERS
Rexnord Corporation
247 Freshwater Way, P.O. Box 2022
Milwaukee, WI 53201
www.rexnord.com
COMMON STOCK LISTING
New York Stock Exchange
Symbol: RXN
TRANSFER AGENT
American Stock Transfer & Trust Company, LLC
6201 15th Ave., Brooklyn, NY 11219
(800) 937-5449
www.amstock.com
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
Milwaukee, Wisconsin
LEGAL COUNSEL
Quarles & Brady LLP
Milwaukee, Wisconsin
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REXNORD | ANNUAL REPORT 2016
Fellow Shareholders,
Our sales for fi scal 2016 totaled $1.9 billion compared to
In addition to our growth investments, we have made solid
$2.1 billion last fi scal year. The stronger U.S. dollar and weak
progress on our supply chain and footprint repositioning
market conditions in the majority of our process industry
initiative we announced last year. We are on track to
end markets, particularly those directly related to commod-
deliver an incremental $30 million in earnings and cash fl ow
ities, more than offset the sales growth we generated from
annually, when fully implemented in early fi scal 2018, while
our share gain initiatives across the company as well as the
permanently reducing our recurring capital expenditures
growth in our water, aerospace, and food and beverage
and making our cost structure more variable. Among the
end markets. With respect to profi tability and cash fl ow,
key milestones in this initiative was the commissioning of
our adjusted EBITDA margin was 19.4% and we generated
our new 250,000-square-foot facility in Monterrey, Mexico in
$171 million of free cash fl ow, or 113% of our adjusted
April 2016.
net income, as our teams executed well throughout the
fi scal year in the face of the overall sales headwinds. We
As we start the new fi scal year, we anticipate ongoing head-
leveraged the sales growth that we generated in pockets of
winds in our process industry end markets, with stability in
the company, managed our cost structure where we faced
the commercial aerospace and consumer end markets, and
challenging market conditions, and continued to drive
another year of projected growth in our Water Management
Rexnord Business System (RBS)-led continuous improvement
businesses. We remain focused on controlling what we can
initiatives across the organization, while funding our growth
and driving RBS-led continuous improvement initiatives
investments and our supply chain optimization and footprint
across the company to deliver above market growth, margin
repositioning initiatives.
expansion and strong free cash fl ow while effectively
deploying our capital to strategic inorganic growth opportu-
Last year, I highlighted the numerous RBS initiatives we had
nities while reducing our leverage over time. We believe
launched to improve our systems, tools and processes to
these actions will continue to position the company for
enhance our commercial, go-to-market strategies — all
growth and will deliver value to our customers, shareholders
aimed at generating more growth opportunities for our-
and associates.
selves. One year later, I am pleased to say that we have made
solid progress on these initiatives and have put ourselves
I want to close by thanking all of our customers, associates,
in a better position to leverage our broad product portfolio
partners and Board of Directors for your continued support
and leading brands to further drive market share gains and
over the course of the past year. This upcoming year marks
further enhance the sustainable competitive advantages
Rexnord’s 125th anniversary since its founding — a milestone
we have within our businesses. We will continue to invest
few companies ever realize. As we look to the next chapter
organically and inorganically in our end markets with higher,
in our history, we’re deeply committed to building on this
long-term secular growth.
incredible history and are confi dent that we’ll continue to
create value for all stakeholders.
In May of 2016, we announced the acquisition of Cambridge
International Holdings, one of the world’s largest suppliers
of metal conveying and engineered woven metal solutions,
primarily used in food processing end markets. Cambridge
aligns well with our strategy to expand our presence in
consumer-driven end markets and when included in our fi scal
Todd A. Adams
2016 sales on a pro-forma basis, brings sales from our water,
President and CEO, Rexnord
aerospace and consumer-facing end markets to nearly 70%
of our consolidated sales.
REXNORD | ANNUAL REPORT 2016
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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, 2016
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)
20-5197013
(I.R.S. Employer Identification No.)
247 Freshwater Way, Suite 300, Milwaukee, Wisconsin
(Address of Principal Executive Offices)
53204
(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 30, 2015, the end of the Registrant's second fiscal quarter, the aggregate market value of the shares of common stock (based upon the
$16.98 closing price on the New York Stock Exchange on September 30, 2015) held by non-affiliates (excludes shares reported as beneficially owned by then-
current directors and executive officers - does not constitute an admission as to affiliate status) was approximately $1,700.5 million.
As of May 12, 2016, there were 101,695,697 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 2017 annual
meeting of stockholders, to be held on or about July 28, 2016, which proxy statement will be subsequently filed.
DOCUMENTS INCORPORATED BY REFERENCE
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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
21
22
23
23
23
24
26
28
42
44
87
87
87
88
88
88
88
88
90
2
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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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the impact of our indebtedness;
our competitive environment;
general economic and business conditions, market factors and our dependence on customers in cyclical industries;
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;
risks associated with our international operations;
the loss of any significant customer;
dependence on independent distributors;
increases in cost of our raw materials and our possible inability to increase product prices to offset such increases;
impact of weather on the demand for our products;
changes in technology and manufacturing techniques;
performance, and potential failure, of our information and data security systems;
the costs of environmental compliance and/or the imposition of liabilities under environmental, health and safety
laws and regulations;
the costs associated with asbestos claims and other potential product liability;
the costs related to strategic acquisitions or divestitures or the integration of recent and future acquisitions into our
business;
our access to available and reasonable financing on a timely basis;
changes in governmental laws and regulations, or the interpretation or enforcement thereof, including for
environmental matters;
reliance on intellectual property;
• work stoppages by unionized employees;
•
•
•
•
loss of key personnel;
changes in pension funding requirements;
potential impairment of goodwill and intangible assets; and
the other factors set forth herein, including those set forth under “Risk Factors” in Part I Item 1A.
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.
3
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Table of Contents
ITEM 1. BUSINESS.
General
Rexnord Corporation (“Rexnord”), a Delaware corporation, was incorporated in 2006 as a holding company for the
businesses within our Process & Motion Control platform. 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 Divestitures” below for further information as to recent 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 2016, or fiscal 2016, means the period from April 1, 2015 to March 31, 2016.
Additional Information
The address of our principal executive office is 247 Freshwater Way, Milwaukee, Wisconsin 53204. Our phone number
is (414) 643-3000. 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 for industrial and aerospace applications worldwide. Our Process & Motion Control portfolio includes
products and services used to safely, reliably and efficiently solve a wide range of demanding process and discrete automation
and motion control applications. Our Water Management platform is a leader in the multi-billion dollar, specification-driven,
commercial and institutional construction market for water management products as well as municipal water and wastewater
treatment markets. Our Water Management product portfolio includes building and site water management solutions used primarily
in nonresidential construction and retrofit end markets and engineered flow control products for the municipal water and wastewater
treatment market worldwide.
Our products are generally “specified” or requested by end users across both of our strategic platforms as a result of our
products’ 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 retrofit of existing structures
to make them more energy and water efficient, commercial and institutional construction, and, to a lesser extent, residential
4
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Table of Contents
construction. We believe we have become a market leader in the industry by developing innovative products that meet the stringent
third-party regulatory, building, and plumbing code requirements and by 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 45 principal Process & Motion Control manufacturing,
warehouse, and repair facilities and 26 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
Year Ended March 31, 2016
United States
Europe
Rest of World
Total Net Sales
$
$
730.3
$
219.5
$
150.5
$
1,100.3
66.4%
576.6
70.0%
19.9%
151.3
18.4%
13.7%
95.6
11.6%
100.0%
823.5
100.0%
1,306.9
$
370.8
$
246.1
$
1,923.8
67.9%
19.3%
12.8%
100.0%
See more information regarding our segments and sales by geography within Part II Item 8, Note 20 Business Segment
Information to the consolidated financial statements.
Process & Motion Control
Our Process & Motion Control platform designs, manufactures, markets and services a broad range of specified, highly-
engineered mechanical components used within complex systems where our customers' reliability requirements and costs of failure
or downtime are high. The Process & Motion Control portfolio includes motion control products, shaft management products,
aerospace components, and related value-added services. Our products and services are marketed and sold globally under widely
recognized brand names, including Rexnord®, Rex®, FlatTop™, Falk®, and Link-Belt®. We sell our Process & Motion Control
products and services into a diverse group of attractive end markets, including food and beverage, aerospace, mining, petrochemical,
energy and power generation, cement and aggregates, forest and wood products, agriculture, and general industrial and automation
applications.
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 maintenance, repair, and operations ("MRO") demand for our products. We estimate that
approximately half of our Process & Motion Control net sales are to distributors, who provide an aftermarket channel to primarily
serve OEM and end-user MRO demand generated by the installed base of our products through approximately 2,300 distribution
points across 108 countries.
Most of our products are critical components in large scale manufacturing processes, where the cost of component failure
and resulting down-time is high. Many customer facilities have a range of requirements and applications for multiple products
across our expansive product portfolio. We believe our reputation for superior quality, reliability, application expertise, and ability
to meet lead time expectations are highly valued by our customers, as demonstrated by their preference to specify and purchase
Rexnord brand products when it is time to replace an installed Rexnord product, or “like-for-like” product replacements. We
believe this replacement dynamic for our products, our focus on capturing first-fit installations, our significant installed base, and
our global supply chain and manufacturing footprint enables us to achieve premium pricing, world-class customer satisfaction,
recurring revenue generation, and a competitive advantage.
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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 water control
and safety, water distribution and drainage, finish plumbing, and site works products for primarily nonresidential buildings and
flow control products for water and wastewater treatment infrastructure markets. Our products are marketed and sold under widely
recognized brand names, including Zurn®, Wilkins®, and VAG®.
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, institutional, and commercial construction and, to a lesser
extent, the residential construction end markets. Segments of the infrastructure end market include: municipal water and wastewater,
transportation, and hydropower. Segments of the institutional construction end market include 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 retrofit of existing structures
(to make them more energy and water efficient), and new commercial and institutional building 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 Foundation for Cross-Connection Control
and Hydraulic Research at the University of Southern California, the International Association of Plumbing and Mechanical
Officials (“IAPMO”), the National Sanitation Foundation (“NSF”), the Plumbing and Drainage Institute (“PDI"), the Underwriters
Laboratories (“UL”), Factory Mutual (“FM”), the American Waterworks Association (“AWWA”), Deutscher Verein des Gas- und
Wasserfaches e.V. (“DVGW”), Umwelt Bundesamt (“UBA”), Water Regulations Advisory Scheme (“WRAS”), ANCOR Groupe
(“NF”), Direction générale de la Santé (“ACS”), and Keurings Instituut voor Waterleiding Artikelen (“KIWA”) 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 200 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.
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 have been
commoditized 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 across each of our product line categories. 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 through innovating to
meet the changes in customer demands and focusing on higher growth end-markets, Process & Motion Control 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 design and produce a broad number of niche products with short lead times, 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, sectors, 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
our served markets are growing long term at relatively strong rates, and that the growing demand for water conservation, quality,
and safety can potentially support market growth above that of overall United States industrial production. 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,
commercial, and institutional construction, which we believe have significant long-term growth fundamentals. Historically, the
infrastructure, commercial, and institutional construction sectors have been more stable and less vulnerable to down-cycles than
the residential construction industry. Compared with residential construction cycles, downturns in infrastructure, commercial, and
institutional 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, commercial, and institutional construction
markets, as well as mitigate cyclical downturns.
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 a 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 products “like-for-like” while driving recurring MRO revenues and linking first-fit specifications to market share gain.
Our leading Process & Motion Control brands include Rexnord, Rex, Addax, Euroflex, Falk, FlatTop, Link-Belt, Omega, PSI,
Shafer, Stearns, Thomas, and Tollok.
Motion Control Products
We are a leading manufacturer and supplier of highly engineered mechanical power transmission components used to
affect and control material movement within heavy-duty process automation and discrete automation applications. Our motion
control products include table top conveying chain and related accessories, gearing & gear drives, conveying equipment, industrial
chain, and custom assemblies. Our FlatTop™ highly-engineered table top conveyor chain and related conveyor system accessories
are used in discrete automation applications such as high-speed beverage-filling operations and is primarily sold to the food and
beverage processing and packaging, consumer products, warehousing and distribution, automotive, and parts processing industries.
Gear drives 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 or an element of a larger mechanical system (such as a conveyor system). We produce a wide range
of heavy, medium, and light-duty gear drives for bulk and unit material handling, mixing, pumping, and general gearing applications.
Our conveying equipment components and industrial chain products are used primarily in heavy-duty process automation
applications in numerous industries, including mining, construction and agricultural equipment, forest and wood products, cement
and aggregates processing, and hydrocarbon processing. We also produce custom-engineered, application-specific miniature
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gearboxes and motion control assemblies and components that are supplied to a variety of end markets, including aerospace and
defense, medical equipment, robotics, semiconductor, instrumentation, and satellite communications.
Shaft Management Products
We are a leading manufacturer and supplier of highly engineered mechanical power transmission components used to
control, support, and protect rotating shafts within process automation and discrete automation applications. Rotating shafts
transmit system power to the moving elements in machinery and equipment. Our shaft management products include couplings,
torque limiters, electromagnetic clutches and brakes, industrial bearings, and shaft locking assemblies. Couplings are primarily
used in high-speed, high-torque applications and are the interface between two shafts that permit power to be safely and efficiently
transmitted from one shaft to the other. Torque limiters, clutches, and brakes are used in machinery applications to safely control
shaft engagement and stopping. Industrial bearings are components that support, guide and reduce the friction of motion between
fixed and moving machine parts. 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. Shaft locking assemblies
are used to secure machine shafts to hubs through a mechanical interference fit that eliminates shaft backlash and improves
transmission of high torques and axial loads. Our shaft management products are used in a wide range of end markets that include
food and beverage, mining, energy and power generation, aggregates processing, pulp and paper, steel, chemical, forest and wood
products, agricultural equipment, and general industrial and automation.
Aerospace Components
We supply our aerospace components primarily to the commercial and military aircraft 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 aerospace bearing and mechanical seal
products for their aircraft and turbine engine platforms, often based on proprietary designs, capabilities, and solutions. We also
supply highly specialized gears and related products through our aerospace-focused build-to-print manufacturing operations.
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, reinforced
by our investments in developing innovative new product solutions. 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 (such as IAPMO, NSF, UL, FM, PDI, AWWA,
DVGW, UBA, WRAS, NF, ACS, and KIWA). In addition, many of these products must meet detailed specifications set by water
management engineers, contractors, builders, and architects. Among our leading brands are Zurn, Wilkins®, and VAG.
Water Safety, Quality, and Flow Control Products
Our water safety, quality, and flow control products are sold under the Zurn and Wilkins® brand names and encompass a
wide range of valve products, distribution and drainage products, and site works products. Key valve products include backflow
preventers, fire system valves, pressure reducing valves, and thermostatic mixing valves. These highly-specified and engineered
flow control devices protect and control the potable water supply and emergency water supply within a building or site. 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, they are sold into commercial, institutional, and industrial new construction and retrofit
applications as well as the fire protection, waterworks, and irrigation end markets.
Engineered water distribution solutions that protect human health and gravity drainage products that protect the
environment are sold under the Zurn brand and are typically required in the early stages of a construction or retrofit project, when
potable water and non-potable water distribution and drainage systems are installed. Specification drainage products include
point drains (such as roof drains and floor drains), hydrants, fixture carrier systems, and chemical drainage systems that are used
to control storm water, process water, and potable water in various commercial, institutional, industrial, civil, and irrigation
applications. Water distribution products include PEX piping, valves, fittings, and installation tools. PEX tubing is manufactured
from cross-linked polyethylene and is designed for high temperature and pressure fluid distribution piping applications for both
potable water and radiant heating systems in the residential and nonresidential construction industries. These systems are engineered
to meet stringent NSF and ASTM standards helping water professionals provide safe and efficient building and site water
management solutions.
Site works products are commonly installed within a building or on a site to manage storm water and wastewater. Linear
drainage systems are used to capture and direct storm water in a wide variety of commercial, institutional, industrial, and
transportation infrastructure applications. Our wastewater pre-treatment products include oil and grease interceptors and separators,
acid neutralization systems, and remote monitoring systems and are marketed under the Zurn and Green Turtle brands. Interceptors
are used to separate and capture fats, oils, and greases from wastewater before it is discharged into the municipal wastewater
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collection system. Our proprietary designs are primarily fabricated from fiberglass reinforced polyester, which we believe is
gaining market share from traditional concrete products due to its reliability, service life, ease of service, and lowest cost of
ownership. Applications include restaurants and institutional foodservice operations, office buildings, hotels, entertainment venues,
schools, grocery and convenience stores, airports, vehicle service garages, and fleet operations and maintenance facilities; acid
neutralization systems are primarily used in schools, hospitals, and laboratories.
Water Conservation Products
Water conservation products are typically required in the latter stages of a construction or retrofit project, when interior
spaces are being outfitted with fixtures, valves, and faucets. Zurn's finish plumbing products include manual and sensor-operated
flush valves marketed under the Aquaflush®, AquaSense®, and AquaVantage® names and heavy duty commercial faucets marketed
under the AquaSpec® name. Innovative water conserving fixtures are marketed under the EcoVantage® and Zurn One® 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 valve and/or faucet products with 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 retrofit bathroom fixture installations.
Water and Wastewater Infrastructure Products
Our water and wastewater products are primarily sold under the VAG®, GA®, and Wilkins® brand names and are used to
control the flow of water and wastewater throughout the water cycle from raw water through collection, storage, distribution, and
wastewater treatment. These products are highly specified, designed, and engineered; many include proprietary design features
that provide differentiated component performance and enhanced system reliability. Products include automatic control valves,
check valves, air valves, butterfly valves, hydrants, actuation systems, and other specialized products for municipal, industrial,
and hydropower applications. Our comprehensive product range is primarily sold into the growing and less-cyclical water supply
and treatment markets worldwide.
Acquisitions and Divestitures
Mergers and acquisitions are a critical part of the Rexnord growth strategy. Our strategy is to build around our global
strategic platforms by acquiring leading industrial manufacturing companies in attractive markets, with businesses that we believe
will benefit from the Rexnord Business System to increase customer satisfaction, revenue growth and operating margins. In our
last three fiscal years, we have completed several acquisitions within our Process & Motion Control and Water Management
platforms focused on expanding our product portfolio and global presence in the end markets we serve; those acquisitions are
further described below. The purchase price for the below transactions is stated net of cash acquired and excludes transaction
costs.
Process & Motion Control
•
January 12, 2015 - We acquired Euroflex Transmissions (India) Private Limited ("Euroflex"), an India-based supplier of
high performance disc couplings used in power generation, gas compression and industrial process machinery applications,
for a cash purchase price of $76.0 million.
• October 30, 2014 - We acquired Tollok S.p.A. ("Tollok"), an Italy-based supplier of highly engineered shaft locking
devices for the power generation and process industries, as well as general industrial applications, for a cash purchase
price of $39.2 million.
• December 16, 2013 - We acquired Precision Gear Holdings, LLC (“PGH”) for a cash purchase price of $77.1 million.
PGH, with operations in Antigo, Wisconsin and Twinsburg, Ohio, is a build-to-print manufacturer of high-quality gearing
and highly specialized gearboxes and gears to the North American oil and gas, aerospace and other industrial markets.
• August 21, 2013 - We acquired certain assets of Micro Precision Gear Technology Limited (“Micro Precision"), a United
Kingdom-based build-to-print manufacturer of specialty gears and electric motor components primarily sold to the
aerospace market, for a cash purchase price of $22.2 million.
Water Management
• April 15, 2014 - We acquired Green Turtle Technologies Ltd., Green Turtle Americas Ltd. and Filamat Composites Inc.
(collectively, "Green Turtle"), a Canada-based manufacturer of branded fiberglass oil and grease separators and traps,
for a total cash purchase price of $27.7 million.
• August 30, 2013 - We acquired certain assets of L.W. Gemmell ("LWG"), a distributor of non-residential plumbing
products based in Australia, for a total cash purchase price of $8.2 million.
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• April 26, 2013 - We acquired Klamflex Pipe Couplings Ltd. ("Klamflex"), a South Africa-based manufacturer of pipe
couplings, flange adapters, dismantling joints and repair clamps for a total cash purchase price of $4.5 million.
In addition to making acquisitions, we from time to time review our operations to determine whether it would be in our
interest to divest of certain non-core or non-strategic businesses. Information regarding divestitures within our Process & Motion
Control and Water Management platforms during the last three fiscal years are included below.
Process & Motion Control
• During fiscal 2015, we ceased operations on our non-core Mill Products business, which conducted its operations in the
United States and Australia. 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. Refer to Item 8, Note 4
Discontinued Operations for additional information.
Water Management
• During the fourth quarter of fiscal 2016, we made the decision to exit product lines sold under the Rodney Hunt®
Fontaine® tradename. The exit of this non-strategic product line also resulted in the recognition of various non-cash
charges related to the impairment of property and equipment, impairment of intangible assets and other exit related costs
associated with this product line. Refer to Item 8, Note 5 Restructuring and Other Similar Charges for additional
information.
Customers
Process & Motion Control Customers
Our Process & Motion Control components are either incorporated into products sold by OEMs or sold to end users for
their MRO requirements either directly in certain regions or, more commonly, through industrial distributors as aftermarket
products. While approximately 49% of our Process & Motion Control net sales are through our distribution partners, OEMs and
end users ultimately drive the demand for our Process & Motion Control products. With approximately 2,300 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 8.4%, 8.9%, and 7.8% of consolidated net
sales during the fiscal years ended March 31, 2016, 2015 and 2014, 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 MRO 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 water safety, quality, flow control, and conservation products are sold for new construction, remodeling, and retrofit
applications to customers in our commercial construction, institutional, infrastructure, and residential construction end markets
and are distributed through independent sales representatives, plumbing wholesalers, and industry-specific distributors in the
foodservice, industrial, janitorial, and sanitation industries. Our independent sales representatives work with architects, engineers,
building owners and operators, contractors, and builders, to specify our water safety, quality, flow control and conservation products
for their use and with wholesalers to assess and meet the needs of building contractors in construction projects. They also combine
knowledge of our products’ installation methods and delivery availability with knowledge of the local markets to provide contractors
with value-added service. We use several hundred independent sales representatives, along with a network of regional distribution
centers and 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 200 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®, and Wilkins® benefit from
strong brand recognition in the industry, which is further bolstered by a strong customer propensity to replace “like-for-like”
products.
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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, institutional, infrastructure,
and residential 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 350 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 30 specialists that offers testing
capability and design 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 200 and approximately 500 active United States and foreign patents, respectively, as of March 31, 2016. 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 200 and approximately 100 active United
States and foreign patents, respectively, as of March 31, 2016. 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.
Zurn's plumbing products are known in the industry for such innovation. During fiscal 2016, 2015, and 2014 our total investment
in research, development and engineering was $37.2 million, $38.8 million, and $41.4 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.
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Backlog
Our backlog of unshipped orders was $409 million and $443 million as of March 31, 2016 and March 31, 2015,
respectively. As of March 31, 2016, approximately 16% of our backlog was scheduled to ship beyond fiscal 2017. 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
retrofit 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 seasonality of certain end markets. With the
exception of our remodeling and retrofit 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, institutional, and infrastructure 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 "General economic financial market weakness, as well as overall challenging market cycles may adversely affect
our financial condition or results of operations” within Part I Item 1A of this report for more information on the risks associated
with general economic conditions.
Employees
As of March 31, 2016, we had approximately 7,700 employees, of whom approximately 4,200 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 August 2016 and October 2019. Additionally,
approximately 1,900 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.
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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.
Strategic Risks
Strategic risk relates to the Company's business plans and strategies, including the risks associated with: competitive
threats; the global macro-environment in which we operate; international uncertainties; restructuring initiatives; mergers and
acquisitions; protection of intellectual property; and other risks, including customer concentration, reliance on independent
distributors and retention of key personnel.
The markets in which we sell our products are highly competitive.
We operate in highly competitive markets in both of our platforms. Some of our competitors have achieved substantially
more market penetration in certain of the markets in which we operate. Some of our competitors are larger and may have greater
financial and other resources than we do, and our competitors may adopt more aggressive sales policies and devote greater resources
to the development, promotion and sale of their products than we do, all of which could result in a loss of customers and in turn
adversely affect our results of operations.
We operate in highly fragmented markets within the Process & Motion Control platform. As a result, we compete against
numerous companies. 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 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 competitively priced 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
cannot assure 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. 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.
General economic financial market weakness, as well as overall challenging market cycles, may adversely affect our
financial condition or results of operations.
Our business operations have been adversely affected in recent years by volatility and weaknesses in the global economy
and financial markets. A weakening of current conditions or a future downturn may adversely affect our future results of operations
and financial condition. Weak, challenging or volatile 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.
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, weather conditions, mortgage rates, credit standards
and availability of consumer credit and income levels play a significant role in driving demand in commercial and residential
construction, repair and remodeling sector. A drop or weakness in consumer confidence, prolonged adverse weather conditions,
lack of availability or increased cost of credit, 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 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. Recent reductions
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and volatility in the prices of petroleum-related products and certain other mined raw materials costs have adversely affected the
energy and mining industries, reducing their capital investments and the demand for certain of the Company's products. Some
customers may defer or cancel anticipated expenditures, 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. Weakness in those markets may also affect
pricing of our products that are sold for use in those markets.
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.
The loss or financial instability of any significant customer or customers accounting for our backlog could adversely affect
our business, financial condition, results of operations or cash flows.
A substantial part of our business is concentrated with a few customers, and we have certain customers that are significant
to our business. During fiscal 2016, our top 20 customers accounted for approximately 37.6% of our consolidated net sales, and
our largest customer accounted for 8.4% of our consolidated net sales. The loss of one or more of these 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 backlog, business, financial condition,
results of operations or cash flows. As of March 31, 2016, approximately 16% of our backlog was scheduled to ship beyond fiscal
2017.
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 2,300 distributor locations nationwide; however, for fiscal 2016, approximately 25% of our
Process & Motion Control net sales were generated through sales to three of our key independent distributors, the largest of which
accounted for 15% of Process & Motion Control net sales. Water Management, we depend on a network of several hundred
independent sales representatives and approximately 60 third-party warehouses to distribute our products; however, for fiscal
2016, our three key independent distributors generated approximately 28% of our Water Management net sales with the largest
accounting for 16% of Water Management net sales.
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.
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. A significant portion of our sales
are international; approximately 32% of our total net sales in fiscal 2016 originated outside of the U.S. Additionally, we have
significant manufacturing operations outside of the U.S. Accordingly, our future results could be harmed by a variety of factors
relating to global operations, including:
•
•
•
•
•
•
•
•
fluctuations in currency exchange rates, particularly fluctuations in the Euro against the U.S. dollar;
foreign 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;
differences in business practices in various countries;
changes and differences in regulatory requirements in countries in which we operate or make sales;
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•
•
•
•
•
differing labor regulations, practices and standards;
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 under U.S. tax laws and other laws on our ability to repatriate dividends from our foreign subsidiaries;
and
exposure to liabilities under anti-corruption laws in various countries, including the U.S. Foreign Corrupt
Practices Act of 1977 ("FCPA").
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 realize intended benefits from our cost reduction, restructuring and divestiture efforts, and as a result
our profitability may be hurt or our business otherwise might be adversely affected.
In order to operate more efficiently and control costs, we undertake from time to time restructuring plans, which include
global facility consolidations, product rationalizations, workforce reductions and other cost reduction initiatives. We also choose
to divest operations which we no longer believe are additive or complementary to our platforms or strategic direction. These plans
are intended to reduce operating costs, to modify our footprint to reflect changes in the markets we serve, to reflect changes in
business focus and/or to address overall manufacturing overcapacity, including as a result of acquisitions. We may undertake
further restructuring actions, workforce reductions or divestitures in the future. These types of activities are complex. If we do not
successfully manage our current restructuring activities, or any other restructuring activities or divestitures that we may undertake
in the future, expected efficiencies, benefits and cost savings might be delayed or not realized, and our operations and business
could be disrupted.
In addition, as a result of such actions, we expect to incur restructuring expenses and other charges, which may be material,
and may exceed our estimates Several factors could cause restructuring or divestiture activities to adversely affect our business,
financial condition and results of operations. These include potential disruption of our operations and other aspects of our business.
Employee morale and productivity could also suffer or result in unintended employee attrition. These activities require substantial
management time and attention and may divert management from other important work or result in a failure to meet operational
targets. Divestures may also give rise to obligations to buyers or other parties that could have a financial effect after the transaction
is completed. Moreover, we could encounter changes to, or delays in executing, any restructuring or divestiture plans, any of which
could cause further disruption and additional unanticipated expense.
Inability to identify, or effectively integrate, acquisitions could adversely affect our business, financial condition, results of
operations or cash flows.
We cannot ensure 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, that we will be
able to successfully integrate any acquired business or operations, or that we will be able to accomplish our strategic objectives
as a result of any such acquisition. Nor can we ensure 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 ensure that we will be successful in this regard. We cannot provide any assurance that we will be able to
fully realize the intended benefits from our 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.
The inability to adequately protect intellectual property, or defend against infringement claims brought against us, could
adversely affect our business.
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 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
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agreements. We cannot assure 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.
Our inability to attract and retain key personnel may adversely affect our business.
Our success depends on our ability to recruit, retain and develop highly-skilled management and key 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 could materially suffer.
Terrorism, conflicts and wars may materially adversely affect our business, financial condition and results of operations.
As a global company with a large international footprint, we are subject to increased risk of damage or disruption to us,
our employees, facilities, partners, suppliers, distributors, resellers or customers due to acts of terrorism, political conflicts and
wars, in multiple locations around the world. The potential for future attacks, the national and international responses to attacks
or perceived threats to national security, and other actual or potential actions, conflicts or wars have created, and will continue to
create, economic and political uncertainties. In addition, as a global company with headquarters and significant operations located
in the U.S., actions against or by the U.S. may particularly impact our business or employees. Although it is impossible to predict
the occurrences or consequences of any such events, they could result in disruptions to our operations, decreases in demand for
our products, difficulty or impossibility in delivering products to our customers or receiving components from our suppliers, delays
and inefficiencies in our supply chain and risks to our employees, resulting in, among other things, temporarily closed facilities,
travel restrictions or longer-term disruptions, any of which could adversely affect our business, financial condition, results of
operations and cash flows.
Operational Risks
Operational risk relates to risks arising from innovation, systems, processes, and external or internal events that affect
the operation of our businesses. It includes product life cycle and execution; information management and data protection and
security, including cyber security; supply chain and business disruption; and other risks, including human resources and employee
relations.
We are subject to risks associated with changing technology, manufacturing techniques, distribution channels 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 ensure 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 ensure 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 ensure that we can adequately protect against
such a loss.
Increases in the cost or availability of raw materials could adversely affect our business, financial condition, results of operations
or cash flows.
Our manufacturing processes depend on third parties for 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 and other carbon-based
fuel products. 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 most raw materials, our business is subject to the risk of price fluctuations,
inefficiencies in the event of a need to change our suppliers, and 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
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substantial number of suppliers could result in material cost increases or reduce our production capacity.
We do not typically enter into hedge transactions to reduce our exposure to purchase price risks and cannot ensure that
we would be successful in recouping these increases 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.
The ongoing updates to our Enterprise Resource Planning (“ERP”) systems, as well as failures of our data security and
information technology infrastructure and cyber security, could cause substantial business interruptions and/or adversely affect
our business.
Utilizing a phased approach, we continue to update 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 and operations,
support our customers’ requirements and protect sensitive information. There have been significant and increasing instances of
data and security breaches, malicious interference with technology systems and industrial espionage involving companies in
numerous industries. While we have taken steps to maintain and enhance adequate data security and address these risks and
uncertainties by implementing additional security technologies, internal controls, network and data center resiliency, and
redundancy and recovery processes, these measures may be inadequate. As a result, any inability by us to successfully manage
our information systems, or respond effectively to any attack on or interference with our 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 employees, our suppliers and other business partners, comply with our
third party obligations of confidentiality and care, or otherwise carry on business in the normal course. Any such events could
require significant costly remediation and 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
a material adverse effect on our business, financial condition, results of operations or cash flows.
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
retrofit 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. 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.
Disruptions caused by labor disputes or organized labor activities could adversely affect our business or financial results.
As of March 31, 2016, we had approximately 7,700 employees. Approximately 500 of our United States employees are
represented by labor unions and approximately 1,900 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 as a result of legal or regulatory
changes which may make union organizing easier, or otherwise, our costs could increase and our efficiency be affected in a material
adverse manner, negatively impacting our business and financial results. 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.
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Financial Risks
Financial risk relates to our ability to meet our financial obligations. It includes our highly leveraged disposition,
compliance with debt covenants, access to liquidity and restrictive credit agreements.
Our debt levels 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, inhibit us from making beneficial acquisitions and prevent us from making debt
service payments.
We are a highly leveraged company. 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 and
grow our business successfully, including the following:
•
•
•
•
•
•
•
•
it may limit our ability to borrow money for our working capital, capital expenditures, strategic initiatives,
acquisitions 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 credit agreement 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, or in taking
advantage of strategic opportunities;
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
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, acquire
or 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. In addition, our hedging arrangements may not protect us to the extent we expect. See Part II Item
7A, Quantitative and Qualitative Disclosures About Market Risk for additional information.
Also, in spite of the limitations in our credit agreement, we may still incur significantly more debt, which could intensify
the risks described above on our business, results and financial condition. For more information about our indebtedness, see Part
II Item 8, Note 11 Long-Term Debt to the consolidated financial statements.
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;
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.
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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, 2016, our first lien leverage ratio was 3.9x. 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;
restrict our announced plans to repurchase shares of our common stock;
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".
Our goodwill and intangible assets are valued at an amount that is high relative to our total assets and in excess of our
stockholders equity.
As of March 31, 2016, goodwill and intangible assets totaled $1,193.8 million and $520.9 million, respectively, and
represent a substantial portion of our assets. 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 impairment in the value
of our goodwill and indefinite lived intangible assets. Significant negative industry or economic trends, disruptions to our
business, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes to the use of
our assets, changes in the structure of our business, divestitures, market capitalization declines, or increases in associated discount
rates may impair our goodwill and other intangible assets. Any determination requiring the impairment of goodwill or intangible
assets would negatively affect our results of operations, particularly in the period in which we take any related charges, and financial
condition.
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.
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Legal and Compliance Risks
Legal and compliance risk relates to risks arising from conformity with external policies and procedures, government
and regulatory compliance, and ongoing environment and legal proceedings. These include customer driven policies, government
and regulatory requirements and environmental health and safety litigation. These types of risks may impose additional cost on
us or cause us to have to change our business models or practices.
Our failure to comply with third-party certification requirements and customer-driven policies and standards, including those
related to social responsibility, could adversely affect our reputation, business and results of operations.
In addition to complying with laws and applicable government regulations and requirements, prevailing industry standards,
competitive pressures and/or our customers may require us to comply with further quality, social responsibility, or other business
policies or standards, before customers and prospective customers commence, or continue, doing business with us. These
expectations, policies and standards may be more restrictive than current laws and regulations as well as our own pre-existing
policies; they may be customer-driven, established by the industry sectors in which we operate or imposed by third-party
organizations.
Our compliance with these policies, standards and third party certification requirements could be costly and could
in some cases require us to change the way in which we operate. In addition, if we fail to comply, or if our compliance
increases our costs and/or restricts our ability to do business as compared to our competitors that do not adhere to such standards,
we could experience an adverse effect on our customer relationships, reputation, operations, cost structure and/or profitability.
We are subject to changes in legislative, regulatory and legal developments involving taxes.
We are subject to U.S. federal and state, and other countries' and jurisdictions', income, payroll, property, sales and use,
fuel, and other types of taxes. Changes in tax rates, enactment of new tax laws, revisions of tax regulations, and claims or litigation
with taxing authorities may require significant judgment in determining the appropriate provision and related accruals for these
taxes; and as a result, such changes could result in substantially higher taxes and, therefore, could have a significant adverse effect
on our results or operations, financial conditions and liquidity. In this regard, the U.S., the European Union and member states
along with numerous other countries are currently engaged in establishing fundamental changes to tax laws affecting the taxation
of multinational corporations. Currently, a significant amount of our revenue is generated from customers located outside of the
United States, and an increasingly greater portion of our assets and employees are located outside of the U.S. U.S. income tax and
foreign withholding taxes have not been provided on undistributed earnings for certain non-U.S. subsidiaries, because such earnings
are intended to be indefinitely reinvested in the operations of those subsidiaries. However, current U.S. tax laws may provide
significant impediments to and tax expense upon repatriating funds, if we would determine to do so in the future. Future legislation
may substantially reduce (or have the effect of substantially reducing) our ability to defer U.S. taxes on profit permanently reinvested
outside the United States. Additionally, any such developments in the U.S. or other countries could have a negative impact on our
ability to compete in the global marketplace.
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 materially 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
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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 18 Commitments and Contingencies to the consolidated financial
statements.
Certain subsidiaries are subject to litigation, including numerous asbestos and product liability claims, which could adversely
affect our business, financial condition, results of operations or cash flows.
Certain subsidiaries are co-defendants in various lawsuits in a number of U.S. jurisdictions 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 insurance and indemnification coverage make it difficult to accurately predict the ultimate financial effect of these claims.
If our insurance or indemnification coverage is 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.
In addition, we may be subject to product liability claims if 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 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. In
addition, our business depends on the strong brand reputation we have developed; if this reputation is damaged as a result of a
product liability claim, it may be difficult to maintain our pricing positions and market share with respect to our products. An
unsuccessful product liability defense could have a material adverse effect on our business, financial condition, results of operations
or cash flows.
See Part II Item 8, Note 18 Commitments and Contingencies to the consolidated financial statements for additional details.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
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ITEM 2. PROPERTIES.
Within Process & Motion Control, as of March 31, 2016, we had 45 principal manufacturing, warehouse and repair
facilities as set forth below:
Location
Number of
Facilities
Owned
Leased
Total Square Feet
North America
Europe
Asia
South America
Africa
Australia
23
11
6
2
1
2
2,617,000
442,000
292,000
77,000
80,000
—
5,305,000
266,000
39,000
15,000
—
63,000
Within Water Management, as of March 31, 2016, we had 26 principal manufacturing and warehouse facilities as set
forth below:
Location
Number of
Facilities
Owned
Leased
Total Square Feet
North America
Europe
Asia
Africa
Australia
20
2
2
1
1
1,167,000
1,240,000
79,000
—
—
806,000
356,000
265,000
22,000
29,000
We believe our Process & Motion Control and Water Management properties are suitable for their respective operations
and provide sufficient capacity 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 18 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
Rodney Jackson
George J. Powers
Craig G. Wehr
Patricia M. Whaley
Kevin J. Zaba
Age
45
44
46
49
51
57
49
Position(s)
In Current
Position(s) since
President, Chief Executive Officer and Director
Senior Vice President and Chief Financial Officer
Senior Vice President-Business and Corporate Development
Chief Human Resources Officer
Group Executive, President - Zurn
Vice President, General Counsel and Secretary
Group Executive, President - Process & Motion Control Platform
2009
2011
2014
2015
2013
2002
2016
Information about the business experience of our executive officers during at least 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.
Rodney Jackson became Senior Vice President – Business & Corporate Development in 2014. Prior to joining Rexnord,
Mr. Jackson was a member of Danaher Corporation’s Corporate Development team, most recently as Vice President of Corporate
Development and M&A lead for its product identification and motion platforms. Prior to joining Danaher in 2007, Mr. Jackson
served in various roles of increasing responsibility with Pentair and worked in investment banking at Goldman Sachs. Mr. Jackson
started his career at Arthur Andersen.
George J. Powers became our Chief Human Resources Officer in January 2015. Prior to joining Rexnord, Mr. Powers
served in various positions with Schneider Electric, a global energy management company, since 1993, most recently as Senior
Vice President, Human Resources – Global Solutions Division, from 2013 to 2015, and as Senior Vice President, Human Resources
& Administration – North America Operating Division from 2008 to 2012.
Craig G. Wehr became President of our Zurn Group in 2013. Mr. Wehr previously served in various positions with Zurn
Industries LLC since 1993, including as Vice President / General Manager of Zurn Specification Drain Operations from 2011 to
2012 and as Zurn Group Vice President of Sales and Marketing from 2007 to 2011.
Patricia M. Whaley became our Vice President, General Counsel and Secretary in 2002. Ms. Whaley previously served
in various legal positions of increasing responsibility with Rexnord and its prior parent corporations, including as Division Senior
Counsel for the Automation Systems Division of Invensys plc and corporate counsel for BTR Inc.
Kevin J. Zaba became President of our Process & Motion Control Platform in April 2016. He also served as the President
of our Power Transmission Group from 2014 to 2016. Prior to joining Rexnord, Mr. Zaba served in various positions with Rockwell
Automation, Inc. since 2004, most recently as Vice President – Solutions, Services & Sales in 2014, as Vice President / General
Manager – Control & Visualization Products Business from 2011 to 2014 and as Managing Director – Systems and Solutions Asia
Pacific Region from 2008 to 2011.
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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 2015
Fiscal 2016
First quarter
Second quarter
Third quarter
Fourth quarter
First quarter
Second quarter
Third quarter
Fourth quarter
High
$30.25
$29.88
$29.95
$28.36
High
$27.73
$24.32
$20.98
$20.63
Low
$25.08
$26.22
$24.89
$24.20
Low
$23.42
$16.60
$16.33
$14.04
As of May 12, 2016, there were 101,695,697 shares of our common stock outstanding held by 5 holders of record. We
believe the number of beneficial owners of our common stock exceeds 1,000.
Dividend Policy
We did not pay any dividends in fiscal 2016 or 2015. 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 borrowing agreements and other contractual arrangements.
Issuer Purchases of Equity Securities
Refer to Item 8, Note 19. Common stock repurchases and public offerings for information related to our fiscal 2016 share
repurchases. There were no shares repurchased in the fourth quarter of fiscal 2016.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required is incorporated by reference from the section entitled "Equity Compensation Plan Information"
in the Fiscal 2017 Proxy Statement.
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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 four-year period ended March 31, 2016 (since our initial
public offering). We chose the Russell 2000 Index because it represents companies with a market capitalization similar to that of
Rexnord. We added the S&P 1500 Industrial Index in fiscal 2016 because a portion of our Performance Stock Units are measured
relative to the total shareholder return of this index. Refer to Note 15, Stock-Based Compensation, for additional information.
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
3/15
3/16
Rexnord Corporation
S&P 500 Index
Russell 2000 Index
S&P 1500 Industrial Index
$
$
$
$
100.00 $
100.62 $
137.35 $
126.49 $
95.83
100.00 $
111.41 $
132.93 $
146.82 $
146.24
100.00 $
114.60 $
141.28 $
150.88 $
134.17
100.00 $
113.69 $
141.37 $
150.17 $
150.13
25
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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 2016, or fiscal 2016, means
the period from April 1, 2015 to March 31, 2016. The Statements of Operations, Other Data and Balance Sheet Data are derived
from our audited financial statements.
(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 (5)
Restructuring and other similar costs
Actuarial loss on pension and postretirement benefit obligations
Amortization of intangible assets
Income from operations
Non-operating (expense) income:
Interest expense, net
Loss on the extinguishment of debt (6)
Loss on divestiture (7)
Other income (expense), net (8)
Income from continuing operations before income taxes
Provision (benefit) for income taxes
Net income from continuing operations
(Loss) income from discontinued operations, net of tax (9)
Net income
Non-controlling interest loss
Net income attributable to Rexnord
Net income per share from continuing operations (10):
Basic
Diluted
Net (loss) income per share from discontinued operations:
Basic
Diluted
Net income 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
Year Ended
March 31, 2016
Year Ended
March 31, 2015
(1)
Year Ended
March 31, 2014
(2)
Year Ended
March 31, 2013
(3)
Year Ended
March 31, 2012
(4)
$
1,923.8
$
2,050.2
$
2,034.3
$
1,943.5
$
1,258.6
665.2
385.7
—
34.9
12.9
57.4
174.3
1,304.0
746.2
415.1
—
12.9
59.4
55.1
203.7
(91.4)
(87.9)
—
—
3.1
86.0
17.1
68.9
(1.4)
67.5
(0.4)
—
—
(7.2)
108.6
16.8
91.8
(8.0)
83.8
—
1,280.9
753.4
419.1
—
8.4
2.7
50.8
272.4
(109.1)
(133.2)
—
(15.1)
15.0
(10.0)
25.0
4.6
29.6
(0.6)
1,226.9
716.6
398.4
10.1
8.6
5.5
51.1
242.9
(153.3)
(24.0)
—
(2.9)
62.7
15.4
47.3
2.8
50.1
—
$
$
$
$
$
$
$
67.9
$
83.8
$
30.2
$
50.1
$
0.68
0.67
$
$
(0.01) $
(0.01) $
0.67
0.66
$
$
0.90
0.88
$
$
(0.08) $
(0.08) $
0.82
0.80
$
$
0.25
0.25
0.05
0.05
0.31
0.30
$
$
$
$
$
$
0.49
0.47
0.03
0.03
0.52
0.50
$
$
$
$
$
$
100,841
2,469
103,310
101,530
3,197
104,727
98,105
3,213
101,318
95,972
3,894
99,866
245.9
(177.3)
(17.4)
112.2
48.8
190.8
(163.8)
(210.3)
106.9
52.2
144.5
(81.8)
165.7
110.9
60.1
219.0
(45.2)
(56.3)
115.4
52.1
26
1,882.6
1,202.7
679.9
375.6
—
6.8
9.1
50.9
237.5
(176.2)
(10.7)
(6.4)
(7.1)
37.1
6.5
30.6
(0.7)
29.9
—
29.9
0.46
0.42
0.01
0.01
0.45
0.41
66,751
5,314
72,065
139.3
(324.2)
93.2
112.7
58.5
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(in millions)
Balance Sheet Data:
Cash and cash equivalents
Working capital (11)
Total assets
Total debt (12)
Stockholders’ equity (deficit)
_______________________
2016
2015
March 31,
2014
2013
2012
$
484.6
$
370.3
$
339.0
$
524.1
$
771.7
3,354.8
1,920.1
588.0
694.6
3,409.3
1,940.0
552.7
700.0
3,371.3
1,959.8
562.1
666.7
3,455.5
2,113.3
428.5
298.0
574.2
3,264.6
2,397.4
(80.8)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Consolidated financial data as of and for the year ended March 31, 2015 reflects the acquisition of Green Turtle subsequent
to April 15, 2014, Tollok subsequent to October 30, 2014 and Euroflex subsequent to January 12, 2015. 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, 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 Acquisition
Corp. 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 Holdings
Limited subsequent to April 2, 2011 and VAG Holdings GmbH 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, we 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.
In the year ended March 31, 2014, we recognized a $133.2 million loss on the extinguishment of debt, which consisted
of a $109.9 million bond tender premium paid to holders of the 8.50% Notes as a result of the tender offer and redemption,
third party transaction costs of $5.3 million and a $14.0 million non-cash write-off of deferred financing fees and net
original issue discount associated with the extinguished, then-existing term loan debt. In addition, we recognized a $4.0
million loss associated with the $150.0 million prepayment under the former credit agreement.
On July 19, 2011, we 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 income (expense), 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.
In fiscal 2015, we discontinued the operations and exited our non-core business that manufactured ring gears and pinions
(“Mill Products”) utilized for crushing machinery applications in the mining sector. In fiscal 2013, we completed the sale
of a non-core engineered chain business located in Shanghai, China. Accordingly, the results of operations for both have
been reported as discontinued operations in the consolidated statements of operations for all periods presented.
Our 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.
(11) Working capital represents total current assets less total current liabilities.
(12)
Total debt represents long-term debt, net of an unamortized original issue discount and deferred financing costs, plus the
current portion of long-term debt.
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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 acquisitions of
Klamflex Pipe Couplings Ltd. ("Klamflex"), Micro Precision Gear Technology ("Micro Precision"), L.W. Gemmell ("LWG"),
Precision Gear Holdings, LLC ("PGH"), Green Turtle Technologies Ltd., Green Turtle Americas Ltd., and Filamat Composites
Inc. (collectively "Green Turtle"), Tollok S.p.A. ("Tollok"), and Euroflex Transmissions (India) Private Limited ("Euroflex"). Our
financial performance includes 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, Green Turtle subsequent to April 15, 2014, Tollok
subsequent to October 30, 2014 and Euroflex subsequent to January 12, 2015. Accordingly, the discussion and analysis does not
reflect the impact of Klamflex, Micro Precision, LWG, PGH, Green Turtle, Tollok and Euroflex transactions prior to the respective
closing date.
In addition, the following discussion of results of operations and financial condition exclude our former non-core business
that manufactured ring gears and pinions utilized for crushing machinery applications in the mining sector ("Mill Products") and
our former non-core engineered chain business located in Shanghai, China. We exited the Mill Products business during fiscal
2015 and accordingly all results of operations and financial condition associated with Mill Products have been reclassified to
discontinued operations.
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 2016, or fiscal 2016, means the period from April 1, 2015 to March 31,
2016.
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.
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.
Overview. This section provides a description of the current events impacting the fiscal 2016 results of operations.
Results of Operations. This section provides an analysis of our results of operations for our fiscal years ended March 31,
2016 and 2015 in each case as compared to the prior period's performance.
Non-GAAP Financial Measures. This section provides an explanation of certain financial measures we use that are not
in accordance with U.S. generally accepted accounting principles ("GAAP").
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,
2016, 2015 and 2014, 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,
2016.
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.
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Company Overview
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. Refer to Item 1, Business, for additional information.
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 37% of net sales in fiscal
2016. 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 16% of net sales in
fiscal 2016.
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, 2016, 2015 and
2014 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 $8.9 million at March 31, 2016 and $16.8
million at March 31, 2015. 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
based upon an evaluation of their financial position. Generally, advance payment is not required. Allowances for doubtful accounts
established are recorded within Selling, general and administrative expenses within the consolidated statements of operations.
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Inventory. Inventories are stated at the lower of cost or market. Market is determined based on estimated net realizable
values. Approximately 64% of the Company’s total inventories as of March 31, 2016 and 2015 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 $9.5 million, $5.2 million and $3.8 million, during fiscal
2016, 2015 and 2014, 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.
In connection with the fiscal 2016 footprint optimization initiatives and the decision to exit the non-strategic Rodney
Hunt® Fontaine® (“RHF”) flow control gate product line, we recognized impairment charges associated with related fixed assets
and intangible assets of $6.6 million and $10.9 million, respectively. See Item 8, Note 5 Restructuring and Other Similar Costs,
to the consolidated financial statements for more information. The impairment of fixed assets was determined utilizing independent
appraisals of the assets, classified as Level 3 inputs within the Fair Value hierarchy. Refer to Note 13, Fair Value Measurements,
for additional information.
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). During fiscal
2016, 2015 and 2014, we recognized $12.9 million, $59.4 million and $2.7 million, respectively, of non-cash actuarial losses in
connection with re-measurements of the plan. 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.
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
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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. As of March 31, 2016 and 2015, our liability for unrecognized tax benefits was
$15.6 million and $26.6 million, respectively.
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 (“NOL’s”), 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 continue to
maintain a partial valuation allowance against certain foreign NOL carryforwards and other related deferred tax assets, as well as
certain state NOL carryforwards. As of March 31, 2016 and 2015, valuation allowances of $27.2 and $25.0 million were recorded
against our deferred tax assets. See Item 8, Note 17 Income Taxes, for additional information.
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. Refer to Item 8, Note 18
Commitments and Contingencies, for additional information.
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.
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 18 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 will decline modestly through the next ten years; (iii) the values by disease will remain
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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 2016 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 March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")
2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU
2016-09"), which simplifies the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective
for annual and interim periods beginning in late 2017 with early adoption permitted. We are currently evaluating the impact ASU
2016-09 will have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02''). The ASU requires management
to recognize lease assets and lease liabilities by lessees for all operating leases. ASU 2016-02 is effective for fiscal 2019 and
interim periods included therein on a modified retrospective basis. We are currently evaluating the impact this guidance will have
on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred
Taxes ("ASU 2015-17"). The update changes how deferred taxes are classified on the balance sheet, eliminating the current
requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet.
Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The ASU is effective for
fiscal years and interim periods within those years beginning after December 15, 2016. We elected to early adopt the ASU for
fiscal 2016 on a retrospective basis in order to enhance comparability. Accordingly, we have presented prior period amounts for
deferred income taxes in a manner that conforms to the current period presentation.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805) Simplifying the Accounting for
Measurement-Period Adjustments ("ASU 2015-16"). This update removes the requirement to restate prior periods to reflect
adjustments made to provisional amounts. Rather, adjustments to the provisional amounts are to be recognized in the reporting
period in which the adjustments are recognized. The adjustments related to previous reporting periods since the acquisition date
must be disclosed by income statement line item either on the face of the income statement or in the notes. As permitted by ASU
2015-16, we elected to early adopt this guidance beginning with the second quarter of fiscal 2016, with no material effect to the
financial statements or related notes thereto.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory ("ASU 2015-11"). The new
guidance requires inventory to be measured at the lower of cost and net realizable value, which is defined as the estimated selling
price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. Under current
guidance, net realizable value is one of several calculations needed to measure inventory at lower of cost or market and as such,
the new guidance reduces the complexity in measurement. This new guidance is effective for our first quarter of fiscal year 2018
and early adoption is permitted. The guidance must be applied prospectively. We are currently evaluating the impact of the adoption
of this requirement on the consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30) Simplifying the
Presentation of Debt Issuance Costs ("ASU 2015-03"). The amendments in ASU 2015-03 require that debt issuance costs related
to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The recognition and measurement of debt issuance costs is not affected by the amendments in this
update. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 and is required to be applied retrospectively
to all prior periods presented. As permitted by ASU 2015-03, we elected to early adopt this guidance beginning with the first
quarter of fiscal 2016, which resulted in the reclassification of $10.5 million of unamortized debt issuance costs from other assets
to long-term debt on the consolidated balance sheets as of March 31, 2015. Refer to Item 8, Note 11 Long-Term Debt for additional
information.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") in order
to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The guidance specifies
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revenue should be recognized in the amount that reflects the consideration the company expects to be entitled to in exchange for
the transfer of promised goods or services to customers. ASU 2014-09 will be effective for our first quarter of fiscal 2019 and
allows for full retrospective adoption applied to all periods presented or retrospective adoption with the cumulative effect of initially
applying this update recognized at the date of initial application. We are currently evaluating the method of adoption and the
potential impact adoption will have on our consolidated financial statements.
In the first quarter of 2016, we adopted FASB ASU No. 2014-08, Presentation of Financial Statements and Property,
Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU
2014-08"), which changes the criteria for reporting discontinued operations. ASU 2014-08 allows only disposals representing a
strategic shift in operations to be presented as discontinued operations. Those strategic shifts should have a major effect on the
organization’s operations and financial results. In addition, the new guidance requires expanded disclosures about discontinued
operations, as well as pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for
discontinued operations reporting. As this guidance is a prospective change, the significance of ASU 2014-08 is dependent on any
qualifying future dispositions or disposals.
Overview
Restructuring and Other Similar Costs
During fiscal 2016, we continued to execute various restructuring actions. These initiatives were implemented to drive
efficiencies and 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 the refinement of our overall product portfolio. These restructuring
actions primarily resulted in workforce reductions, impairment of related manufacturing facilities, equipment and intangible assets,
lease termination costs, and other facility rationalization costs. We expect to continue executing 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 reductions, potential impairment of assets, lease termination costs, and other facility rationalization costs. As of the
date of this filing, our full supply chain optimization and footprint repositioning plan remains preliminary and related expenses
are not yet estimable.
We recorded restructuring charges of $34.9 million, $12.9 million and $8.4 million during the fiscal years ended March 31,
2016, 2015 and 2014, respectively.
Product Line Divestiture
During the fourth quarter of fiscal 2016, we made the decision to exit the non-strategic Rodney Hunt® Fontaine® (“RHF”)
flow control gate product line. In connection with the decision, we deemed that certain intangible assets associated with the RHF
tradename, customer relationships and patents had no future value resulting in impairment charges of $10.4 million, $0.3 million
and $0.2 million, respectively. We also recognized impairment charges associated with fixed assets of $5.6 million.
For purposes of comparison in the following discussion of Results of Operations, the RHF net sales and operating losses
for the years ended March 31, 2016 and 2015 are presented below:
Net sales
Loss from operations (1)
Year Ended
March 31, 2016
March 31, 2015
Change
% Change
$
39.0
$
41.6
$
(42.8)
(12.7)
(2.6)
(30.1)
(6.3)%
237.0 %
(1) Loss from operations in fiscal 2016 includes $19.5 million of impairment charges related to fixed and intangible assets, as well as other
charges associated with the decision to exit RHF. Refer to Item 8. Note 5 Restructuring and Other Similar Charges, for more information.
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Results of Operations
Fiscal Year Ended March 31, 2016 Compared with the Fiscal Year Ended March 31, 2015:
Net sales
(Dollars in Millions)
Process & Motion Control
Water Management
Consolidated
Process & Motion Control
Year Ended
March 31,
2016
March 31,
2015
Change
% Change
$
$
1,100.3
823.5
1,923.8
$
$
1,230.2
820.0
2,050.2
$
$
(129.9)
3.5
(126.4)
(10.6)%
0.4 %
(6.2)%
Process & Motion Control net sales for the year ended March 31, 2016 decreased 10.6% from the prior year to $1,100.3
million. Core net sales (which excludes 2% growth from acquisitions and a 4% adverse impact from foreign currency translation)
declined 9% as growth in our Aerospace and food and beverage end markets was more than offset by the adverse demand across
several of our process industry end markets coupled with the related de-stocking within our corresponding distribution channels
during the first half of fiscal 2016.
Water Management
Water Management net sales for the year ended March 31, 2016 increased 0.4% from the prior year to $823.5 million.
Core net sales (which excludes a 4% adverse impact from foreign currency translation and a 1% adverse impact associated with
the exit of our RHF product line) increased 5% as a result of favorable demand trends across the majority of our end markets as
well as the timing of project shipments to our water and wastewater infrastructure end markets.
Income (loss) from operations
(Dollars in Millions)
Process & Motion Control
$
146.8
$
219.6
$
(72.8)
(33.2)%
Year Ended
March 31,
2016
March 31,
2015
Change
% Change
% of net sales
Water Management
% of net sales
Corporate
Consolidated
% of net sales
Process & Motion Control
13.3%
72.8
8.8%
(45.3)
174.3
9.1%
$
17.9%
79.0
9.6%
(94.9)
203.7
9.9%
$
(4.6)%
(6.2)
(0.8)%
49.6
(29.4)
(0.8)%
$
(7.8)%
(52.3)%
(14.4)%
Process & Motion Control income from operations for fiscal 2016 was $146.8 million compared to $219.6 million for
fiscal 2015. Operating income as a percentage of net sales decreased 460 basis points to 13.3% in fiscal 2016 as a result of reduced
absorption on lower year over year sales, adverse product mix associated with lower sales to our U.S. general industrial end markets
and incremental investments in our market expansion and supply chain optimization and footprint repositioning initiatives.
Water Management
Water Management income from operations for fiscal 2016 was $72.8 million compared to $79.0 million in fiscal 2015.
Operating income as a percentage of net sales decreased 80 basis points to 8.8% in fiscal 2016 compared to fiscal 2015. Excluding
the incremental year over year loss from operations of RHF and the absence of the fiscal 2015 charge to establish reserves for
accounts receivable and inventory related to a Venezuelan customer, Water Management operating income as a percentage of net
sales increased by 210 basis points to 14.7% related to the benefit of core volume growth and RBS-driven productivity gains and
efficiencies.
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Corporate
Corporate expenses were $45.3 million in fiscal 2016 compared to $94.9 million in fiscal 2015. The year over year
decrease was primarily driven by the recognition of $12.9 million non-cash actuarial pension and other postretirement losses in
fiscal 2016 compared to the recognition of $59.4 million of non-cash actuarial losses in fiscal 2015. The recognition of higher
non-cash actuarial losses in fiscal 2015 was driven primarily by the adoption of the updated mortality assumptions released by
the Society of Actuaries in fiscal 2015, lower discount rates used in performing our annual re-measurement of our pension and
post-retirement obligations and the completion of a lump sum settlement associated with our domestic non-union defined benefit
plan. See Item 8, Note 16 Retirement Benefits to the consolidated financial statements for additional information. The remaining
decrease in Corporate expenses from fiscal 2015 to fiscal 2016 was due to project-related expenses.
Interest expense, net
Interest expense, net was $91.4 million in fiscal 2016 compared to $87.9 million in fiscal 2015. The year over year
increase in interest expense reflects the partial year impact of our interest rate swaps becoming effective in the third quarter of
fiscal 2016. These interest rate swaps raised our effective interest rate by approximately 1.55% on $650.0 million of our term
loans during the second half of fiscal 2016. See Item 8, Note 11 Long-Term Debt to the consolidated financial statements for
more information.
Other income (expense), net
Other income (expense), net for fiscal 2016 was $3.1 million of income, which resulted primarily from of an $8.4 million
CDSOA anti-dumping settlement. See Item 8, Note 6 Recovery Under Continued Dumping and Subsidy Offset Act ("CDSOA")
to the consolidated financial statements for more information. This settlement was partially offset by foreign currency transaction
losses of $3.0 million, losses on the sale of property, plant and equipment of $0.6 million and other miscellaneous losses of $1.7
million. Other expense, net for fiscal 2015 was $7.2 million which consisted of foreign currency transaction losses of $1.5 million,
$1.4 million of losses on the sale of property, plant and equipment and other miscellaneous losses of $4.3 million.
Provision for income taxes
The income tax provision in fiscal 2016 was $17.1 million or an effective tax rate of 19.9%. The provision recorded was
below the U.S. federal statutory rate of 35% due to the recognition of certain foreign-related branch losses for U.S. income tax
purposes, the reduction in the overall state effective rate applied to the Company’s net deferred tax liabilities and the recognition
of certain, previously unrecognized income tax benefits due to the lapse of the applicable statutes of limitations, partially offset
by the increase in the valuation allowance recorded against certain foreign net operating loss carryforwards and related deferred
tax assets in which the realization of such benefits was no longer deemed more-likely-than-not. The income tax provision in fiscal
2015 was $16.8 million or an effective tax rate of 15.5%. 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, the reduction in the valuation allowance recorded against
certain foreign tax credit and state net operating loss carryforwards in which the realization of such benefits was now deemed
more-likely-than-not and the recognition of certain, previously unrecognized income tax benefits due to the lapse of the applicable
statutes of limitations, partially offset by certain one-time costs associated with a change to the U.S. income tax entity classification
of a foreign subsidiary.
Net income from continuing operations
Our net income from continuing operations in fiscal 2016 was $68.9 million compared to $91.8 million in fiscal 2015
due to the factors described above. Diluted net income per share from continuing operations in fiscal 2015 was $0.67, compared
to $0.88 in fiscal 2015. Comparability between periods is impacted by the anti-dilutive effect of the current year decrease in
average outstanding shares primarily resulting from our fiscal 2016 repurchase of 1,552,500 shares of our common stock.
Loss from discontinued operations, net of tax
Our loss from discontinued operations, net of tax was $1.4 million for fiscal 2016 compared to $8.0 million in fiscal
2015. The loss from discontinued operations is related to the discontinuance of the non-core Mill Products business within our
Process & Motion Control platform during fiscal 2015. See Item 8, Note 4 Discontinued Operations to the consolidated financial
statements for more information.
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Fiscal Year Ended March 31, 2015 Compared with the Fiscal Year Ended March 31, 2014
Net sales
(Dollars in Millions)
Process & Motion Control
Water Management
Consolidated
Process & Motion Control
Year Ended
March 31, 2015
March 31, 2014
Change
% Change
$
$
1,230.2
$
1,238.2
$
820.0
796.1
2,050.2
$
2,034.3
$
(8.0)
23.9
15.9
(0.6)%
3.0 %
0.8 %
Process & Motion Control net sales for the year ended March 31, 2015 decreased 0.6% from the prior year to $1,230.2
million. Core net sales (which excludes 3% growth from acquisitions and a 2% adverse impact from foreign currency translation)
decreased 2% year-over-year as the expected declines in our bulk material handling end market and soft global demand in the
beverage sector more than offset moderate sales growth in the majority of our other end-markets.
Water Management
Water Management net sales for the year ended March 31, 2015 increased 3% from the prior year to $820.0 million. Core
net sales (which excludes 2% growth from acquisitions and a 3% adverse impact from foreign currency translation) also increased
4% as a result of favorable demand trends across the majority of our end markets, partially offset by the unexpected delay of
shipments for certain large water infrastructure projects and the weather delayed seasonal ramp-up of new construction activity
in our fiscal 2015 fourth quarter.
Income (loss) from operations
(Dollars in Millions)
Process & Motion Control
% of net sales
Water Management
% of net sales
Corporate
Consolidated
% of net sales
Process & Motion Control
Year Ended
March 31, 2015
March 31, 2014
Change
% Change
$
219.6
$
237.7
$
(18.1)
(7.6)%
17.9%
79.0
9.6%
(94.9)
19.2%
72.2
9.1%
(37.5)
$
203.7
$
272.4
$
9.9%
13.4%
(1.3)%
6.8
0.5 %
(57.4)
(68.7)
(3.5)%
9.4 %
(153.1)%
(25.2)%
Process & Motion Control income from operations for fiscal 2015 was $219.6 million compared to $237.7 million for
fiscal 2014. Operating income as a percentage of net sales decreased 130 basis points to 17.9% primarily related to incremental
restructuring charges, the recognition of higher year over year depreciation, amortization and inventory fair value adjustments in
connection with our recently completed acquisitions and incremental investments to fund market expansion initiatives.
Water Management
Water Management income from operations for fiscal 2015 was $79.0 million compared to $72.2 million in fiscal 2014.
Operating income as a percentage of net sales increased 50 basis points in fiscal 2015 compared to fiscal 2014. On-going cost
reduction initiatives as well as RBS-driven productivity gains and efficiencies generated approximately 200 basis points of operating
margin improvement year over year that were partially offset by the negative impact of a $10.0 million charge to establish reserves
for accounts receivable and inventory exposures related to a Venezuelan customer, incremental restructuring charges and the
recognition of higher year over year depreciation, amortization and inventory fair value adjustments in connection with our
acquisitions completed in that time period.
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Corporate
Corporate expenses were $94.9 million in fiscal 2015 compared to $37.5 million in fiscal 2014. The year-over-year
increase was primarily driven by the recognition of $59.4 million non-cash actuarial pension and other postretirement loss in fiscal
2015 compared to the recognition of $2.7 million of non-cash actuarial losses in fiscal 2014. The recognition of higher non-cash
actuarial losses in fiscal 2015 was driven primarily by the adoption of the updated mortality assumptions released by the Society
of Actuaries in fiscal 2015, lower discount rates used in performing our annual re-measurement of our pension and post-retirement
obligations and the fiscal 2015 lump sum settlement of our domestic non-union defined benefit plan. See Item 8, Note 16 Retirement
Benefits to the consolidated financial statements for additional information.
Interest expense, net
Interest expense, net was $87.9 million in fiscal 2015 compared to $109.1 million in fiscal 2014. The year over year
reduction in interest expense is primarily the result of the retirement of our 8.50% senior notes due 2018 (the "8.50% Notes") and
the refinancing of our term loan facility in the second quarter of fiscal 2014. As a result of these transactions, our effective interest
rate on approximately $1.1 billion of our outstanding debt was reduced by approximately 450 basis points.
Loss on extinguishment of debt
In fiscal 2014, we completed a re-pricing of our then-outstanding term loan facilities, a re-financing of our term loan
facility and a full retirement of our then outstanding 8.50% Notes. In fiscal 2014, we recognized a $133.2 million loss in accordance
with ASC 470-50 on the extinguished debt which was comprised of a $109.9 million bond tender premium paid to holders as a
result of the tender offer and redemption, third party transaction costs of $6.1 million and a $17.2 million non-cash write-off of
deferred financing fees and net original issue discount associated with the extinguished debt. We had no such charges in fiscal
2015.
Other expense, net
Other expense, net for fiscal 2015 was $7.2 million which consisted of foreign currency transaction losses of $1.5 million,
$1.4 million of losses on the sale of property, plant and equipment and other miscellaneous losses of $4.3 million. 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.
Provision (benefit) for income taxes
The income tax provision in fiscal 2015 was $16.8 million or an effective tax rate of 15.5%. 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, the reduction in
the valuation allowance recorded against certain foreign tax credit and state net operating loss carryforwards in which the realization
of such benefits was now deemed more-likely-than-not and the recognition of certain, previously unrecognized income tax benefits
due to the lapse of the applicable statutes of limitations, partially offset by certain one-time costs associated with a change to the
U.S. income tax entity classification of a foreign subsidiary. The income tax benefit in fiscal 2014 was $10.0 million or an effective
tax rate of (66.7)%. 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.
Net income from continuing operations
Our net income from continuing operations in fiscal 2015 was $91.8 million compared to $25.0 million in fiscal 2014
due to the factors described above. Diluted net income per share from continuing operations in fiscal 2015 was $0.88, compared
to $0.25 in fiscal 2014. 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 a fiscal 2014 offering.
(Loss) income from discontinued operations, net of tax
Our loss from discontinued operations, net of tax was $8.0 million for fiscal 2015 compared to income from discontinued
operations, net of tax of $4.6 million in fiscal 2014. The (loss) income from discontinued operations is related to the discontinuance
of the Mill Products business during fiscal 2015. See Item 8, Note 4 Discontinued Operations to the consolidated financial
statements for more information.
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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.
EBITDA
EBITDA is earnings before interest, taxes, depreciation and amortization. EBITDA is presented because it is an important
supplemental measure of performance and it is frequently used by analysts, investors and other interested parties in the evaluation
of companies in our industry. EBITDA is also presented and compared by analysts and investors, as well as management, in
evaluating our ability to meet debt service obligations. Other companies in our industry may c alculate EBITDA differently. EBITDA
is not a measurement of financial performance under U.S. GAAP and should not be considered as an alternative to cash flow from
operating activities or as a measure of liquidity or an alternative to net income as indicators of operating performance or any other
measures of performance derived in accordance with U.S. GAAP. Because EBITDA is calculated before recurring cash charges,
including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the
business, it should not be considered as a measure of discretionary cash available to invest in the growth of the business.
Adjusted EBITDA
Adjusted EBITDA (as described below in “Covenant Compliance”) is an important measure because, under our credit
agreement, our ability to incur certain types of acquisition debt and certain types of subordinated debt, make certain types of
acquisitions or asset exchanges, operate our business and make dividends or other distributions, all of which will impact our
financial performance, is impacted by our Adjusted EBITDA, as our lenders measure our performance with a net first lien leverage
ratio by comparing our senior secured bank indebtedness to our Adjusted EBITDA (see “Covenant Compliance” for additional
discussion of this ratio, including a reconciliation to our net income).We reported Adjusted EBITDA for the fiscal year ended
March 31, 2016 of $365.5 million and net income for the same period of $67.5 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
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 (3.91 to 1.0 at March 31, 2016). 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 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.
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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, 2016 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.
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 provision
Depreciation and amortization
EBITDA
Adjustments to EBITDA:
Actuarial loss on pension and postretirement benefit obligation
Loss on RHF product line exit (1) (excluding restructuring and related charges)
Restructuring and other similar charges (2)
Operating loss from discontinued operations, net of tax (3)
Stock-based compensation expense
LIFO income (4)
Other income, net (5)
Subtotal of adjustments to EBITDA
Adjusted EBITDA
Senior secured bank indebtedness (6)
Net first lien leverage ratio (7)
__________________________________
Year ended
March 31, 2016
67.5
91.4
17.1
115.4
291.4
12.9
21.3
34.9
1.4
7.5
(0.8)
(3.1)
74.1
365.5
1,429.0
3.91x
$
$
$
$
$
(1)
(2)
(3)
(4)
(5)
(6)
(7)
During the fourth quarter of fiscal 2016, we made the determination to exit a product lines within our Water Management
platform with products sold under the RHF tradename. The operating loss (excluding restructuring and related charges
included in their respective adjusting lines above) is not included in Adjusted EBITDA in accordance with our credit
agreement. See Item 8, Note 5 Restructuring and Other Similar Costs to the consolidated financial statements for more
information.
Represents restructuring costs comprised of workforce reductions, impairment of related manufacturing facilities,
equipment and intangible assets, lease termination costs, and other facility rationalization costs. See Item 8, Note 5
Restructuring and Other Similar Costs to the consolidated financial statements for more information.
Represents the loss on discontinued operations related to Mill Products. See Item 8, Note 4 Discontinued Operations of
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 income, net for the year ended March 31, 2016, consists of an $8.4 million CDSOA anti-dumping settlement receipt,
partially offset by foreign currency transaction losses of $3.0 million, losses on the sale of property, plant and equipment
of $0.6 million and other miscellaneous costs of $1.7 million.
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 $452.0 million (as defined by the credit agreement) at March 31, 2016. Senior secured bank
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 bank 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, 2016, we had $484.6 million of cash and cash equivalents and $343.9 million of additional borrowing
capacity ($243.9 million of available borrowings under our revolving credit facility and $100.0 million available under our accounts
receivable securitization program). As of March 31, 2016, the available borrowings under our credit facility were reduced by $21.1
million due to outstanding letters of credit. As of March 31, 2015, we had $370.3 million of cash and approximately $341.0 million
of additional borrowing capacity ($241.0 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.
During fiscal 2016, we amended the agreement under the accounts receivable securitization program which extended the
maturity of the facility and modified the terms. See Item 8, Note 11 Long-Term Debt for additional information.
Cash Flows
Net cash provided by operating activities in fiscal 2016 was $219.0 million compared to $245.9 million in fiscal 2015.
The decrease in operating cash was primarily driven by reduced operating profit on lower net sales and higher cash income taxes,
partially offset by the CDSOA anti-dumping settlement receipt and the expected benefit of lower trade working capital.
Net cash provided by operating activities in fiscal 2015 was $245.9 million compared to $190.8 million in fiscal 2014.
The increase in operating cash was primarily driven by a decrease in cash interest as a result of our August 2013 debt refinancing.
Cash used for investing activities was $45.2 million in fiscal 2016 compared to $177.3 million in fiscal 2015. Investing
activities in fiscal 2016 included the receipt of $1.1 million in cash associated with finalizing working capital related to the Euroflex
acquisition whereas fiscal 2015 included $138.2 million of net cash used to fund the acquisitions of Euroflex, Tollok and Green
Turtle. See Item 8, Note 3 Acquisitions for additional information. We invested $52.1 million in capital expenditures in fiscal 2016
compared to $48.8 million in fiscal 2015.
Cash used for investing activities was $177.3 million in fiscal 2015 compared to $163.8 million in fiscal 2014. We invested
$48.8 million in capital expenditures in fiscal 2015 compared to $52.2 million in fiscal 2014. Cash used for investing activities
in fiscal 2015 also included $138.2 million for the acquisitions of Euroflex, Tollok and Green Turtle (net of cash acquired), as
compared to $112.0 million for acquisitions in fiscal 2014. In fiscal 2015, we also received proceeds of $9.7 million in connection
with the sale of certain property, plant and equipment, primarily resulting from the sale of certain assets of the Mill Products
business. See Item 8, Note 4 Discontinued Operations for additional information.
Cash used for financing activities was $56.3 million in fiscal 2016 compared to $17.4 million in fiscal 2015. Cash used
for financing activities in fiscal 2016 consisted of $40.0 million of cash used to repurchase outstanding shares of our common
stock under our board-authorized stock repurchase program (see Item 8 Note 19 Common stock repurchases and public offerings
for additional details). In addition, we made $19.5 million of principal payments on our term loans and $5.9 million of other
payments on short-term debt (inclusive of the $1.3 million redemption of our 8.875% senior notes). This was partially offset by
$5.1 million of proceeds from stock option exercises and $4.0 million related to the excess tax benefit on the option exercises.
The cash used for financing activities in fiscal 2015 consisted of $19.8 million principal payments on our term loans and $4.5
million of other net debt payments. The cash used by financing activities in fiscal 2015 also includes $5.8 million related to the
excess tax benefit on stock option exercises and $1.1 million of proceeds on stock option exercises.
Cash used for financing activities was $17.4 million in fiscal 2015, as described above, compared to $210.3 million in
fiscal 2014. The cash used by financing activities in the fiscal 2 014 consisted of a $150.0 million prepayment of our then-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 for $1,950.0 million (net of $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
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 a common stock offering in
February 2014, net of underwriting discounts and commissions and other direct costs of the offering.
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Tabular Disclosure of Contractual Obligations
The table below lists our contractual obligations at March 31, 2016 by period when due:
(in millions)
Term loans (1)
Other long-term debt (2)
Interest on long-term debt obligations (3)
Purchase commitments
Operating lease obligations
Pension and post-retirement plans (4)
Totals
_______________________
Total
Less than
1 Year
1-3 Years
3-5 Years
More than
5 Years
Payments Due by Period
$
1,901.2
$
19.5
$
39.0
$
1,842.7
$
39.7
406.5
150.9
83.4
94.3
0.7
87.5
141.7
14.8
6.4
0.8
170.3
8.5
26.9
24.4
0.4
148.6
0.7
19.0
63.5
$
2,676.0
$
270.6
$
269.9
$
2,074.9
$
—
37.8
0.1
—
22.7
60.6
n/a
(1)
(2)
(3)
(4)
Excludes an unamortized original issue discount and debt issuance costs of $20.2 million at March 31, 2016.
Includes $37.4 million of financing related to the Company's participation in the New Market Tax Credit incentive
program. Excludes unamortized debt issuance costs of $0.6 million at March 31, 2016.
Interest on long-term debt obligations represents the cash interest expense using March 31, 2016 LIBOR rates.
Represents expected pension and post-retirement contributions and benefit payments to be paid directly by us.
Contributions and benefit payments beyond fiscal 2021 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 $15.6 million
as of March 31, 2016, have been excluded from the contractual obligations table above. See Part II Item 8, Note 17 Income Taxes
of the consolidated financial statements for more information related to our unrecognized tax benefits.
No provision has been made for United States federal income taxes related to approximately $174.8 million of undistributed
earnings of foreign subsidiaries that are considered to be permanently reinvested; see Part II Item 8, Note 17 Income Taxes to the
consolidated financial statements for further information.
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 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.”
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Indebtedness
As of March 31, 2016 we had $1,920.1 million of total indebtedness outstanding as follows (in millions):
Term loans (1)
Other (2)
Total
Total Debt at
March 31, 2016
Short-term Debt
and Current
Maturities of Long-
Term Debt
Long-term
Portion
$
$
1,881.0
39.1
1,920.1
$
$
19.5
0.7
20.2
$
$
1,861.5
38.4
1,899.9
(1) Includes unamortized original issue discount and debt issuance costs of $20.2 million at March 31, 2016.
(2) Includes $36.8 million of financing related to the Company's participation in the New Market Tax Credit incentive
program and unamortized debt issuance costs of $0.6 million.
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.
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 32% of our sales originated outside of the United States in fiscal 2016. 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 will 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,
2016, stockholders' equity decreased by $10.0 million from March 31, 2015 as a result of foreign currency translation adjustments.
If the USD had strengthened by an additional 10% as of March 31, 2016, the result would have further decreased stockholders'
equity by approximately $51.8 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, 2016, 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 $1.9 million increase in the fair value of foreign exchange forward contacts as of March 31, 2016.
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, 2016, our outstanding borrowings
under the term loan facility were $1,881.0 million (net of $20.2 million unamortized original issue discount and debt issuance
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costs). As of March 31, 2016, current borrowings under the Company's credit agreement had an effective and weighted average
interest rate of 4.00%, determined as LIBOR (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). Those interest rate swaps became effective beginning on September 28, 2015 with a maturity of September 27,
2018. In fiscal 2015, we also entered into two interest rate caps in order to mitigate exposure to increasing interest rates on our
variable-rate interest loans. The interest rate caps were effective beginning as of October 24, 2014, with a maturity of October 24,
2018, and cap the interest on $750.0 million of our variable-rate interest loans at 3%, plus the applicable margin. The existing
interest rate swaps and interest rate caps together have effectively hedged approximately 74% of our outstanding variable rate
term loans with a weighted average interest rate that cannot exceed 2.79% plus the applicable margin of 3%.
Our net income would likely be affected by changes in market interest rates. As discussed above, our term loan facilities
are subject to a 1% LIBOR floor. Therefore, a 100 basis point increase in the March 31, 2016 market interest rate would increase
interest expense under the senior secured credit facilities by approximately $5.5 million on an annual basis. An additional 100
basis point increase in the LIBOR rate would add approximately $12.5 million of annual interest expense under our term loan
facility.
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.
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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, 2016 and 2015 and
for the years ended March 31, 2016, 2015, and 2014
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
45
47
48
48
49
50
51
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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, 2016 and 2015,
and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each
of the three years in the period ended March 31, 2016. 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, 2016 and 2015, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended March 31, 2016, 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, 2016, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
Framework) and our report dated May 18, 2016 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Milwaukee, Wisconsin
May 18, 2016
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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, 2016, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 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, 2016, 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, 2016 and 2015, and the related consolidated statements
of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended
March 31, 2016 of Rexnord Corporation and our report dated May 18, 2016 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Milwaukee, Wisconsin
May 18, 2016
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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:
Rexnord Corporation and Subsidiaries
Consolidated Balance Sheets
(in Millions, except share amounts)
March 31, 2016
March 31, 2015
$
$
$
$
484.6
317.6
327.2
46.7
1,176.1
397.2
520.9
1,193.8
32.0
34.8
3,354.8
20.2
200.8
54.0
5.0
124.4
404.4
1,899.9
195.5
186.0
32.0
49.0
2,766.8
—
1.0
856.2
(129.6)
(139.0)
—
588.6
(0.6)
588.0
3,354.8
$
$
$
$
370.3
336.0
367.7
53.6
1,127.6
417.6
587.7
1,202.3
35.0
39.1
3,409.3
24.3
234.1
53.9
5.0
115.7
433.0
1,915.7
203.0
203.3
35.0
66.6
2,856.6
—
1.0
885.9
(197.5)
(130.2)
(6.3)
552.9
(0.2)
552.7
3,409.3
Current maturities of debt
Trade payables
Compensation and benefits
Current portion of pension and postretirement benefit obligations
Other current liabilities
Total current liabilities
Long-term debt
Pension and postretirement benefit obligations
Deferred income taxes
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: 101,435,762 at March
31, 2016 and 102,681,964 at March 31, 2015
Additional paid-in capital
Retained deficit
Accumulated other comprehensive loss
Treasury stock at cost; 0 and 900,904 shares at March 31, 2016 and March 31, 2015, respectively
Total Rexnord stockholders' equity
Non-controlling interest
Total stockholders' equity
Total liabilities and stockholders' equity
See notes to consolidated financial statements.
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Rexnord Corporation and Subsidiaries
Consolidated Statements of Operations
(in Millions, except share and per share amounts)
March 31, 2016
March 31, 2015
March 31, 2014
Year Ended
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Restructuring and other similar charges
Actuarial loss on pension and postretirement benefit obligations
Amortization of intangible assets
Income from operations
Non-operating expense:
Interest expense, net
Loss on the extinguishment of debt
Other income (expense), net
Income from continuing operations before income taxes
Provision (benefit) for income taxes
Net income from continuing operations
(Loss) income 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) income 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
$
$
$
$
$
$
$
$
1,923.8
$
1,258.6
2,050.2
$
1,304.0
665.2
385.7
34.9
12.9
57.4
174.3
(91.4)
—
3.1
86.0
17.1
68.9
(1.4)
67.5
(0.4)
746.2
415.1
12.9
59.4
55.1
203.7
(87.9)
—
(7.2)
108.6
16.8
91.8
(8.0)
83.8
—
67.9
$
83.8
$
0.68
0.67
(0.01)
(0.01)
0.67
0.66
$
$
$
$
$
$
0.90
0.88
(0.08)
(0.08)
0.82
0.80
$
$
$
$
$
$
100,841
2,469
103,310
101,530
3,197
104,727
2,034.3
1,280.9
753.4
419.1
8.4
2.7
50.8
272.4
(109.1)
(133.2)
(15.1)
15.0
(10.0)
25.0
4.6
29.6
(0.6)
30.2
0.25
0.25
0.05
0.05
0.31
0.30
98,105
3,213
101,318
Rexnord Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in Millions)
March 31, 2016
March 31, 2015
March 31, 2014
Year Ended
Net income attributable to Rexnord
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 (loss) income, net of tax
Non-controlling interest loss
Total comprehensive income (loss)
$
$
67.9
$
83.8
$
(10.0)
(4.3)
5.5
(8.8)
(0.4)
(84.3)
(10.9)
(11.2)
(106.4)
—
58.7
$
(22.6)
$
30.2
7.1
(1.7)
9.5
14.9
(0.6)
44.5
See notes to consolidated financial statements.
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Rexnord Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in Millions)
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 (3)
Exercise of stock options, net of shares surrendered
Tax benefit on stock option exercises
Balance at March 31, 2014
Comprehensive income (loss):
Net income
Foreign currency translation adjustments
Unrealized loss on interest rate derivatives, net of $4.2
million income tax benefit
Change in pension and other postretirement defined
benefit plans, net of $4.3 million income tax benefit
Total comprehensive income (loss)
Stock-based compensation expense
Exercise of stock options, net of shares surrendered
Tax benefit on stock option exercises
Balance at March 31, 2015
Comprehensive income (loss):
Net income
Foreign currency translation adjustments
Unrealized loss on interest rate derivatives, net of $2.6
million income tax benefit
Change in pension and other postretirement defined
benefit plans, net of $3.0 million income tax expense
Total comprehensive income (loss)
Stock-based compensation expense
Common stock repurchased and canceled (4)
Exercise of stock options, net of shares surrendered
Cancellation of treasury stock
Tax benefit on stock option exercises
Balance at March 31, 2016
Common
Stock
Additional
Paid-In
Capital
Retained
(Deficit)
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Treasury
Stock (1)
Non-
controlling
interest (2)
Total
Stockholders’
(Deficit) Equity
1.0
784.0
(311.5)
(38.7)
(6.3)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7.0
—
73.8
2.1
5.8
30.2
—
—
—
30.2
—
—
—
—
—
—
7.1
(1.7)
9.5
14.9
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(0.6)
—
—
—
(0.6)
—
0.4
—
—
—
428.5
29.6
7.1
(1.7)
9.5
44.5
7.0
0.4
73.8
2.1
5.8
$
1.0
$
872.7
$
(281.3)
$
(23.8)
$
(6.3)
$
(0.2)
$
562.1
—
—
—
—
—
—
—
—
—
—
—
—
—
6.3
1.1
5.8
83.8
—
—
—
83.8
—
—
—
—
(84.3)
(10.9)
(11.2)
(106.4)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
83.8
(84.3)
(10.9)
(11.2)
(22.6)
6.3
1.1
5.8
$
1.0
$
885.9
$
(197.5)
$
(130.2)
$
(6.3)
$
(0.2)
$
552.7
—
—
—
—
—
—
—
—
—
1.0
—
—
—
—
—
7.5
(40.0)
5.1
(6.3)
4.0
67.9
—
—
—
67.9
—
—
—
—
—
(10.0)
(4.3)
5.5
(8.8)
—
—
—
—
856.2
(129.6)
(139.0)
—
—
—
—
—
—
—
—
6.3
—
—
(0.4)
—
—
—
(0.4)
—
—
—
—
(0.6)
67.5
(10.0)
(4.3)
5.5
58.7
7.5
(40.0)
5.1
—
4.0
588.0
(1) During fiscal 2016, the Company canceled all outstanding shares held in treasury stock and returned such shares to the status of authorized but unissued shares..
(2) Represents a 49% non-controlling interest in a Water Management joint venture.
(3) On February 5, 2014, the Company closed a public offering of shares of its common stock. In 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.
(4) During fiscal 2016, the Company repurchased and canceled 1,552,500 shares of common stock at a total cost of $40.0 million at an average price of $25.76. Refer to Note 15 for
additional information regarding the stock repurchase program.
See notes to consolidated financial statements.
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Rexnord Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in Millions)
March 31, 2016
March 31, 2015
March 31, 2014
Year Ended
Operating activities
Net income
Adjustments to reconcile net income to cash provided by operating activities:
$
67.5
$
83.8
$
Depreciation
Amortization of intangible assets
Amortization of deferred financing costs
Non-cash asset impairment
Loss on dispositions of property, plant and equipment
Deferred income taxes
Non-cash charge for disposal of discontinued operations
Actuarial loss on pension and post retirement benefit obligations
Other non-cash charges (credits)
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
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 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
Repurchase of Company common stock
Excess tax benefit on exercise of stock options
Cash used for financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
58.0
57.4
2.0
17.5
0.6
(13.9)
1.5
12.9
9.6
—
7.5
1.5
37.7
7.5
(32.4)
(15.9)
219.0
(52.1)
1.1
5.8
—
(45.2)
0.9
(19.5)
—
(5.9)
(0.9)
—
—
5.1
—
(40.0)
4.0
(56.3)
(3.2)
114.3
370.3
484.6
$
57.1
55.1
2.1
—
3.0
(36.9)
9.7
59.4
(9.8)
—
6.4
6.1
(15.2)
0.1
3.7
21.3
245.9
(48.8)
(138.2)
0.5
9.2
(177.3)
0.1
(19.8)
11.5
(16.1)
—
—
—
1.1
—
—
5.8
(17.4)
(19.9)
31.3
339.0
370.3
$
$
29.6
56.1
50.8
2.6
—
2.3
(27.6)
—
2.7
(0.1)
133.2
7.0
(11.3)
(11.3)
(6.8)
26.0
(62.4)
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
See notes to consolidated financial statements.
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Rexnord Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2016
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 to be leading market shares and
highly-trusted brands that serve a diverse array of global end markets. The Company's heritage of innovation and specification
have allowed it to provide highly-engineered, mission-critical solutions to customers for decades and affords the privilege of
having long-term, valued relationships with market leaders. The Company operates in a disciplined way and its Rexnord Business
System (“RBS”) is the operating philosophy. Grounded in the spirit of continuous improvement, RBS creates a scalable, process-
based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating
performance throughout all aspects of its business.
The Process & Motion Control platform designs, manufactures, markets and services a comprehensive range of specified,
highly-engineered mechanical components used within complex systems where our customers' reliability requirements and costs
of failure or downtime are high. The Process & Motion Control portfolio includes motion control products, shaft management
products, aerospace components, and related value-added services.
The Water Management platform designs, procures, manufactures, and markets products that provide and enhance water
quality, safety, flow control and conservation. The Water Management product portfolio includes professional grade water control
and safety, water distribution and drainage, finish plumbing, and site works products for primarily nonresidential buildings and
flow control products for water and wastewater treatment infrastructure markets.
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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the fiscal 2016 presentation.
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, 2016, 2015 and
2014 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.
Stock-Based Compensation
The Company accounts for stock based compensation in accordance with Accounting Standards Codification ("ASC")
718, Accounting for Stock Compensation ("ASC 718"). ASC 718 requires compensation costs related to stock-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 equity plans in Note 15, Stock-Based Compensation.
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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) income from discontinued operations, respectively, by the corresponding weighted average number
of common shares outstanding for the period. Diluted net income (loss) 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, 2016, 2015 and 2014 excludes 2,896,640, 1,268,623 and 1,278,316 shares due to their anti-dilutive
effects, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less to be cash and cash
equivalents.
Receivables
Receivables are stated net of allowances for doubtful accounts of $8.9 million at March 31, 2016 and $16.8 million at
March 31, 2015. 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. Allowances for doubtful accounts
established are recorded within Selling, general and administrative expenses within the consolidated statements of operations.
Significant Customers
The Company’s largest customer accounted for 8.4%, 8.9% and 7.8% of consolidated net sales for the years ended
March 31, 2016, 2015 and 2014, respectively. Receivables related to this Process & Motion Control industrial distributor at
March 31, 2016 and 2015 were $8.1 million and $10.2 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 64% of the Company’s total inventories
as of both March 31, 2016 and 2015 were valued using the “last-in, first-out” (LIFO) method. All remaining inventories are valued
using the “first-in, first-out” (FIFO) method.
In some cases, the Company has determined a certain portion of inventories are excess or obsolete. In those cases, the
Company writes 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 more or less favorable than those projected by management, adjustments
to established inventory reserves may be required. The total write-down of inventories charged to expense was $9.5 million, $5.2
million and $3.8 million, during fiscal 2016, 2015 and 2014, respectively.
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. Where appropriate, the depreciable lives of certain assets may be adjusted to reflect a change in the use of those assets,
or depreciation may be accelerated in the case of an eventual asset disposal. 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)
and patents. The customer relationships, patents, and certain tradenames are being amortized using the straight-line method over
their estimated useful lives of 3 to 20 years, 3 to 15 years, and 3 to 10 years, respectively. Goodwill, trademarks and certain
tradenames have indefinite lives and are not amortized. However, the goodwill and intangible assets are tested annually for
impairment using a discounted cash flow and market value approach analysis and may be tested more frequently if any triggering
events occur that would reduce the recoverability of the asset.
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
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Table of Contents
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.
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, 2016
Year Ended
March 31, 2015
Year Ended
March 31, 2014
$
$
6.8
$
8.0
$
—
2.8
(2.8)
—
1.8
(3.0)
6.8
$
6.8
$
7.7
0.2
3.9
(3.8)
8.0
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, Income Taxes, for additional information.
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Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss, net of tax, for the fiscal years ending March 31, 2016, 2015 and
2014 are as follows (in millions):
Interest Rate
Derivatives
Foreign
Currency
Translation
Pension and
Postretirement
Plans
Total
Balance April 1, 2013
Other comprehensive (loss) income before reclassifications
Amounts reclassified from accumulated other comprehensive
loss
Net current period other comprehensive (loss) income
Balance at March 31, 2014
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive
loss
Net current period other comprehensive loss
Balance at March 31, 2015
Other comprehensive (loss) income before reclassifications
Amounts reclassified from accumulated other comprehensive
loss
Net current period other comprehensive (loss) income
Balance at March 31, 2016
$
$
—
(1.7)
—
(1.7)
(1.7)
(10.9)
—
(10.9)
(12.6)
$
(4.3)
—
(4.3)
(16.9)
$
0.7
7.1
—
7.1
7.8
(84.3)
—
(84.3)
(76.5)
(10.0)
—
(10.0)
(86.5)
$
$
(39.4)
10.5
(1.0)
9.5
(29.9)
(14.1)
2.9
(11.2)
(41.1)
$
6.7
(1.2)
5.5
(38.7)
15.9
(1.0)
14.9
(23.8)
(109.3)
2.9
(106.4)
(130.2)
(7.6)
(1.2)
(8.8)
(35.6)
$
(139.0)
The following table summarizes the amounts reclassified from accumulated other comprehensive loss to net income
during the fiscal years ending March 31, 2016, 2015 and 2014 (in millions):
Pension and postretirement plans
Amortization of prior service credit
Lump Sum Settlement
Provision (benefit) for income taxes
Total, net of income taxes
Derivative Financial Instruments
Year Ending
March 31, 2016
Year Ending
March 31, 2015
Year Ending
March 31, 2014
$
$
(1.9)
$
(1.7)
$
—
0.7
6.5
(1.9)
(1.2)
$
2.9
$
(1.7)
—
0.7
(1.0)
Income Statement Line Item
Selling, general and
administrative expenses
Actuarial loss on pension and
postretirement benefit obligations
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 derivatives 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.
The Company accounts for derivative instruments in accordance with 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. 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, 2016 and 2015, the Company
had forward-starting interest rate swaps and interest rate caps 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 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 expense. See Note 12, Derivative Financial Instruments, for further information regarding the
classification and accounting.
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 and cap contracts with various high-
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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 $3.0 million, $1.5 million and $3.9 million for the years ended March 31,
2016, 2015 and 2014, respectively.
Advertising Costs
Advertising costs are charged to selling, general and administrative expenses on the consolidated statements of operations
as incurred and amounted to $9.2 million, $10.4 million, and $9.6 million for the years ended March 31, 2016, 2015 and 2014,
respectively.
Research, Development and Engineering Costs
Research, development and engineering costs are charged to selling, general and administrative expenses on the
consolidated statements of operations as incurred and for the years ended March 31, 2016, 2015 and 2014 amounted to the
following (in millions):
Research and development costs
Engineering costs
Total
Concentrations of Credit Risk
Year Ended March 31,
2016
Year Ended March 31,
2015
Year Ended March 31,
2014
$
$
12.4
24.8
37.2
$
$
12.8
26.0
38.8
$
$
13.0
28.4
41.4
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.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")
2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU
2016-09"). ASU 2016-09 simplifies the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective
for annual and interim periods beginning in 2017 with early adoption permitted. The Company is evaluating the impact of the
adoption of ASU 2016-09 on its consolidated financial statements.
In February 2015, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02''), which requires management to
recognize lease assets and lease liabilities by lessees for all operating leases on the consolidated balance sheets. ASU 2016-02 is
effective for the Company's fiscal 2019 and interim periods included therein on a modified retrospective basis. The Company is
currently evaluating the impact this guidance will have on its financial statements upon adoption.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred
Taxes ("ASU 2015-17"). ASU 2015-17 changes how deferred taxes are classified on the balance sheet, eliminating the current
requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet.
Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. ASU 2015-17 is effective
for fiscal years and interim periods within those years beginning after December 15, 2016. The Company elected to early adopt
ASU 2015-17 for fiscal 2016 on a retrospective basis in order to enhance comparability. Accordingly, the Company has presented
prior period amounts for deferred income taxes in a manner that conforms to the current period presentation.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805) Simplifying the Accounting for
Measurement-Period Adjustments ("ASU 2015-16"), which removes the requirement to restate prior periods to reflect adjustments
made to provisional amounts. Rather, adjustments to the provisional amounts are to be recognized in the reporting period in which
the adjustments are recognized. The adjustments related to previous reporting periods since the acquisition date must be disclosed
by income statement line item either on the face of the income statement or in the notes. As permitted by ASU 2015-16, the
Company elected to early adopt this guidance beginning in the second quarter of fiscal 2016 with no material impact to the financial
statements or related notes thereto.
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In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory ("ASU 2015-11"). ASU
2015-11 requires inventory to be measured at the lower of cost and net realizable value, which is defined as the estimated selling
price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. Under existing
guidance, net realizable value is one of several calculations needed to measure inventory at lower of cost or market and as such,
the new guidance reduces the complexity in measurement. ASU 2015-11 is effective for the Company's first quarter of fiscal year
2018, with early adoption is permitted, and must be applied prospectively. The Company is currently evaluating the impact of the
adoption of this requirement on the consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30) Simplifying the
Presentation of Debt Issuance Costs ("ASU 2015-03"). The amendments in ASU 2015-03 require that debt issuance costs related
to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The recognition and measurement of debt issuance costs is not affected by the amendments in this
update. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 and is required to be applied retrospectively
to all prior periods presented. As permitted by ASU 2015-03, the Company elected to early adopt this guidance beginning with
the first quarter of fiscal 2016, which resulted in the reclassification of $10.5 million of unamortized debt issuance costs from
other assets to long-term debt on the consolidated balance sheets as of March 31, 2015. Refer to Note 11, Long-Term Debt for
additional discussion regarding debt instruments and related classification.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") in order
to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The guidance specifies
revenue should be recognized in the amount that reflects the consideration the company expects to be entitled to in exchange for
the transfer of promised goods or services to customers. ASU 2014-09 will be effective for the Company in the first quarter of
fiscal 2019 and allows for full retrospective adoption applied to all periods presented or retrospective adoption with the cumulative
effect of initially applying this update recognized at the date of initial application. The Company is currently evaluating the method
of adoption and the potential impact adoption will have on its consolidated financial statements.
In the first quarter of 2016, the Company adopted FASB ASU No. 2014-08, Presentation of Financial Statements and
Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an
Entity ("ASU 2014-08"), which changes the criteria for reporting discontinued operations. ASU 2014-08 allows only disposals
representing a strategic shift in operations to be presented as discontinued operations. Those strategic shifts should have a major
effect on the organization’s operations and financial results. In addition, the new guidance requires expanded disclosures about
discontinued operations, as well as pre-tax income attributable to a disposal of a significant part of an organization that does not
qualify for discontinued operations reporting. As this guidance is a prospective change, the significance of ASU 2014-08 for the
Company is dependent on any future dispositions or disposals.
3. Acquisitions
The purchase price for the below transactions is stated net of cash acquired and excludes transaction costs.
Fiscal Year 2015
On January 12, 2015, the Company acquired Euroflex Transmissions (India) Private Limited ("Euroflex") for a cash
purchase price of $76.0 million. Euroflex, based in Hyderabad, India, is a supplier of high performance disc couplings used in
power generation, gas compression and industrial process machinery applications. The acquisition of Euroflex added
complementary product lines to the Company's existing Process & Motion Control platform.
On October 30, 2014, the Company acquired Tollok S.p.A. ("Tollok"), a supplier of highly engineered shaft locking
devices for the power generation and process industries, as well as general industrial applications. The purchase price was $39.2
million, which was comprised of $33.4 million that was paid at closing, $3.4 million of deferred purchase price payable in fiscal
2017 and additional consideration, not to exceed $3.8 million, in 2 years following the acquisition. Cash payments made after the
acquisition date are settled in Euros based on prevailing exchange rates at the time of payment. Tollok, based in Ferrara, Italy,
added complementary product lines to the Company's existing Process & Motion Control platform.
On April 15, 2014, the Company acquired Green Turtle Technologies Ltd., Green Turtle Americas Ltd. and Filamat
Composites Inc. (collectively "Green Turtle") for a total cash purchase price of $27.7 million. Green Turtle, based in Toronto,
Ontario, and Charlotte, North Carolina, is a manufacturer of branded fiberglass oil and grease separators and traps. This acquisition
broadened the product portfolio of the Company's existing Water Management platform.
The Company's results of operations include the acquired operations subsequent to the respective acquisition dates. The
acquisitions of Green Turtle, Tollok and Euroflex were not material to the Company’s consolidated financial statements. Pro-
forma results of operations and certain other U.S. GAAP disclosures related to the acquisitions during the fiscal year ended March
31, 2015 have not been presented because they are not significant to the Company's consolidated statements of operations and
financial position.
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The fiscal 2015 acquisitions were accounted for as business combinations and recorded by allocating the purchase price
of the acquisitions to the fair value of the assets acquired and liabilities assumed at the respective acquisition date. The excess of
the acquisition purchase price over the fair value assigned to the assets acquired and liabilities assumed was recorded as goodwill.
During the twelve months ended March 31, 2016, the Company adjusted the purchase price allocation by reducing goodwill by
$4.8 million in connection with the finalization of Euroflex and Tollok acquisition date working capital, refinement of the fair
value assigned to acquired intangible assets and establishment of income tax positions within the opening balance sheet. After
incorporating the changes described above, the purchase price allocation resulted in non-tax deductible goodwill of $69.9 million,
other intangible assets of $71.4 million and other net assets of $1.6 million.
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. 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. LWG, based in Australia, is a distributor of non-residential plumbing products. A portion of LWG's historical sales
were from existing 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. 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. 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. 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 respective acquisition dates. The
excess of the acquisition purchase prices over the fair value assigned to the assets acquired and liabilities assumed was recorded
as goodwill. During fiscal 2015, the Company adjusted the preliminary allocations for the Micro Precision and PGH purchase
prices in connection with finalizing the valuation of each businesses' tradenames and the time period each tradename will be
utilized by the Company post-acquisition. The opening balance sheet has been adjusted to reflect these changes, which included
an increase to goodwill of $1.8 million and a net decrease to intangible assets of $1.8 million. The amortization expense recognized
in historical periods was not materially impacted as a result of the adjustments to the purchase price allocations. The final aggregate
purchase price allocation of these acquisitions resulted in goodwill of $26.7 million ($24.6 million of tax deductible goodwill),
other intangible assets of $23.3 million, property, plant and equipment of $36.7 million and other net assets of $25.3 million.
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.
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4. Discontinued Operations
As indicated in Note 2 Significant Accounting Policies, the Company adopted ASU 2014-08 effective April 1, 2015.
Prior to the adoption of this guidance, in fiscal 2015 the Company ceased all operations related to its former Mill Products business,
which conducted its operations in the United States and Australia and was a component of the Process & Motion Control operating
segment. As a result, the Company met the criteria to present this business as a discontinued operation in accordance with the
authoritative guidance. Accordingly, the results of operations of the Mill Products business are reported as discontinued operations
in the consolidated statements of operations for all periods presented. The corresponding assets and liabilities related to the prior
period were reclassified in accordance with authoritative literature and classified as assets held for sale for all periods presented
in the consolidated balance sheets. The consolidated statements of cash flows for the fiscal years ended March 31, 2016, 2015
and 2014 have not been adjusted to separately disclose cash flows related to discontinued operations.
The following table summarizes the results of the Mill Products business included within (loss) income from discontinued
operations, net of tax on the consolidated statements of operations (in millions):
Net sales
(Loss) income from operations before income taxes
(Benefit) provision for income taxes
Net (loss) income from discontinued operations
Net (loss) income per share from discontinued operations:
Basic
Diluted
Year Ended
March 31, 2016
March 31, 2015
March 31, 2014
$
$
$
$
— $
34.1
$
(2.2)
(0.8)
(10.9)
(2.9)
(1.4)
$
(8.0)
$
(0.01)
(0.01)
$
$
(0.08)
(0.08)
$
$
47.7
7.2
2.6
4.6
0.05
0.05
In exiting the Mill Products business in fiscal 2015, the Company agreed to sell certain assets associated with the business
for aggregate cash consideration of approximately $9.2 million and the remaining assets and liabilities of the discontinued operation
were adjusted to reflect their net realizable value. As of March 31, 2015, included as Other current assets on the consolidated
balance sheets was $2.6 million of long-lived assets. The exit of Mill Products resulted in the Company recording a net charge
of $9.7 million, consisting of a $3.8 million impairment loss associated with property, plant and equipment, $4.1 million impairment
of goodwill allocated to the discontinued operation and other exit related costs of $1.8 million.
During fiscal 2016, the Company disposed most of the assets originally classified as Other current assets on the
consolidated balance sheets. However, after actively marketing the assets and not being able to find a buyer, the remaining assets
were written off, contributing to the loss from discontinued operations noted above.
5. Restructuring and Other Similar Charges
During fiscal 2016, the Company continued to execute various restructuring actions. These initiatives were implemented
to drive efficiencies and reduce operating costs while also modifying the Company's footprint to reflect changes in the markets it
serves, the impact of acquisitions on the Company's overall manufacturing capacity and the refinement of its overall product
portfolio. These restructuring actions primarily resulted in workforce reductions, impairment of related manufacturing facilities,
equipment and intangible assets, lease termination costs, and other facility rationalization costs. Management expects to continue
executing initiatives to optimize its operating margin and manufacturing footprint as well as select product-line rationalizations.
As such, the Company expects further expenses related to workforce reductions, potential impairment of assets, lease termination
costs, and other facility rationalization costs. The Company's restructuring plans are preliminary and related expenses are not yet
estimable.
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The following table summarizes the Company's restructuring and other similar costs incurred during the years ended
March 31, 2016, 2015 and 2014 by classification of operating segment (in millions):
Severance costs
Asset impairment charges (1)
Lease termination and other costs
Total restructuring and other similar costs
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
Severance costs
Asset impairment charges
Lease termination and other costs
Total restructuring and other similar costs
Year Ended March 31, 2016
Process & Motion
Control
Water Management
Corporate
Consolidated
$
$
10.8
1.0
0.5
12.3
$
$
4.2
16.5
1.6
22.3
$
$
0.3
$
— $
—
0.3
$
15.3
17.5
2.1
34.9
Year Ended March 31, 2015
Process & Motion
Control
Water Management
Corporate
Consolidated
$
$
7.6
1.2
8.8
$
$
3.3
0.8
4.1
$
$
— $
—
— $
10.9
2.0
12.9
Year Ended March 31, 2014
Process & Motion
Control
Water Management
Corporate
Consolidated
$
$
3.3
1.6
4.9
$
$
2.0
0.7
2.7
$
$
0.8
—
0.8
$
$
6.1
2.3
8.4
Restructuring Costs To-date (Period from April 1, 2013 to March 31, 2016)
Process & Motion
Control
Water Management
Corporate
Consolidated
$
$
21.7
1.0
3.3
26.0
$
$
9.5
16.5
3.1
29.1
$
$
1.1
$
— $
—
1.1
$
32.3
17.5
6.4
56.2
(1)
In connection with the fiscal 2016 footprint optimization initiatives and the decision to exit the non-strategic Rodney Hunt® Fontaine®
(“RHF”) flow control gate product line, the Company recognized impairment charges associated with related fixed assets and intangible
assets of $6.6 million and $10.9 million, respectively. The impairment of fixed assets was determined utilizing independent appraisals
of the assets, classified as Level 3 inputs within the Fair Value hierarchy. Refer to Note 13 for additional information. Following the
Company’s decision to exit the RHF product line, the Company deemed certain intangible assets associated with the RHF tradename,
customer relationships and patents had no future value resulting in impairment charges of $10.4 million, $0.3 million and $0.2 million,
respectively.
The Company evaluated the requirements for held-for-sale and discontinued operations presentation in connection with
the decision to exit its flow-control gate product line and determined the product line did not meet the definition provided within
the authoritative literature of held for sale or discontinued operations. Pre-tax loss from operations associated with this non-
strategic exit of the RHF product-line were as follows in each of the last three fiscal years:
Years ending March 31,
Pre-tax Loss
Description
2016
$
2015
2014
(43.1)
Includes asset impairments described above and other restructuring charges (primarily severance
costs) of $16.5 million and $2.9 million, respectively
(14.0)
Includes other restructuring charges (primarily severance costs) of $2.2 million
(10.1)
Includes other restructuring charges of (primarily severance costs) $0.3 million
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The following table summarizes the activity in the Company's accrual for restructuring costs for the fiscal years ended
March 31, 2016 and 2015 (in millions):
Severance
Costs
Asset
impairment
charges
Lease
Termination
and Other Costs
Total
Accrued Restructuring Costs, March 31, 2014
$
3.4
$
— $
Charges
Cash payments
Non-cash charges
Accrued Restructuring Costs, March 31, 2015 (1)
Charges
Cash payments
Non-cash charges
10.9
(7.6)
—
6.7
15.3
(11.5)
—
—
—
—
—
17.5
—
(17.5)
Accrued Restructuring Costs, March 31, 2016 (1)
$
10.5
$
— $
(1)
The restructuring accrual is included in Other current liabilities on the consolidated balance sheets.
6. Recovery Under Continued Dumping and Subsidy Offset Act (“CDSOA”)
0.4
2.0
(1.3)
(0.8)
0.3
2.1
(2.1)
—
0.3
$
$
3.8
12.9
(8.9)
(0.8)
7.0
34.9
(13.6)
(17.5)
10.8
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 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.
Beginning in fiscal 2013, CBP began to distribute these withheld funds to domestic producers. In connection with the distribution
of these withheld funds, the Company recorded $8.4 million of income during fiscal 2016. The Company did not receive any
distributions in fiscal 2015 or 2014. CDSOA recoveries are recorded within Other income (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
Purchased components
Raw materials
Inventories at First-in, First-Out ("FIFO") cost
Adjustment to state inventories at Last-in, First-Out ("LIFO") cost
March 31,
2016
2015
$
148.4
$
55.3
67.6
49.3
320.6
6.6
$
327.2
$
168.5
70.7
69.9
52.8
361.9
5.8
367.7
Certain prior year balances have been reclassified to conform to the current period presentations.
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8. Property, Plant and Equipment
Property, plant and equipment, net is summarized as follows (in millions):
Land
Buildings and improvements
Machinery and equipment
Hardware and software
Construction in-progress
Less accumulated depreciation
March 31,
2016
2015
$
$
31.2
210.8
401.0
65.4
37.6
746.0
(348.8)
$
397.2
$
33.5
217.7
388.2
61.5
25.9
726.8
(309.2)
417.6
9. Goodwill and Intangible Assets
The changes in the net carrying value of goodwill and identifiable intangible assets for the years ended March 31, 2016
and 2015 by operating segment, are presented below (in millions):
Amortizable Intangible Assets
Indefinite
Lived
Intangible
Assets
Goodwill
Trade-
Names
Customer
Relationships
Patents
Total
Identifiable
Intangible Assets
Excluding
Goodwill
Process & Motion Control
Net carrying amount as of March 31, 2014
Acquisitions
Purchase price allocation adjustments (1)
Amortization
Currency translation adjustment and other (2)
Net carrying amount as of March 31, 2015
Purchase price allocation adjustments (1)
Amortization
Currency translation adjustment and other
Net carrying amount as of March 31, 2016
Water Management
Net carrying amount as of March 31, 2014
Acquisitions
Amortization
Currency translation adjustment and other
Net carrying amount as of March 31, 2015
Amortization
Currency translation adjustment and other (3)
Net carrying amount as of March 31, 2016
Consolidated
Net carrying amount as of March 31, 2014
Acquisitions
Purchase price allocation adjustments (1)
Amortization
Currency translation adjustment and other (2)
Net carrying amount as of March 31, 2015
Purchase price allocation adjustments (1)
Amortization
Currency translation adjustment and other (3)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
904.0
54.7
1.8
—
(10.6)
949.9
(4.8)
—
(2.7)
942.4
246.7
20.0
—
(14.3)
252.4
—
(1.0)
251.4
1,150.7
74.7
1.8
—
(24.9)
1,202.3
(4.8)
—
(3.7)
$
$
$
$
$
$
$
$
197.6
—
(3.1)
—
(1.6)
192.9
—
—
(2.2)
190.7
140.8
—
—
(5.6)
135.2
—
(10.2)
125.0
338.4
—
(3.1)
—
(7.2)
328.1
—
—
(12.4)
$
$
1.9
5.2
1.3
(1.0)
(0.1)
7.3
4.2
(1.7)
(0.7)
9.1
$
— $
1.6
(0.2)
—
1.4
$
$
$
$
(0.3)
(0.5)
0.6
1.9
6.8
1.3
(1.2)
(0.1)
8.7
4.2
(2.0)
(1.2)
$
$
$
$
$
$
$
$
94.4
51.6
—
(31.0)
(2.0)
113.0
—
(32.9)
(1.1)
79.0
147.0
7.3
(19.4)
(5.8)
129.1
(19.2)
(0.1)
109.8
241.4
58.9
—
(50.4)
(7.8)
242.1
—
(52.1)
(1.2)
Net carrying amount as of March 31, 2016
$
1,193.8
$
315.7
$
9.7
$
188.8
$
____________________
(1)
Refer to Note 3 Acquisitions for additional information regarding purchase price allocation adjustments.
61
3.7
—
—
(1.2)
—
2.5
—
(1.2)
0.6
1.9
7.2
1.5
(2.3)
(0.1)
6.3
(2.1)
0.6
4.8
10.9
1.5
—
(3.5)
(0.1)
8.8
—
(3.3)
1.2
6.7
$
$
$
$
$
$
$
$
$
297.6
56.8
(1.8)
(33.2)
(3.7)
315.7
4.2
(35.8)
(3.4)
280.7
295.0
10.4
(21.9)
(11.5)
272.0
(21.6)
(10.2)
240.2
592.6
67.2
(1.8)
(55.1)
(15.2)
587.7
4.2
(57.4)
(13.6)
520.9
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(2)
(3)
Includes $4.1 million of goodwill allocated to the Mill Products business in connection to the Company's decision to discontinue the
Mill Products business during fiscal 2015. See Note 4 Discontinued Operations for additional information regarding the discontinued
operation.
Includes $10.4 million, $0.3 million, and $0.2 million of impairment of indefinite-lived intangible assets, customer relationships and
patents, respectively, associated with the exit of the RHF product line. Refer to Note 5 Restructuring and Other Similar Charges, for
additional information.
The gross carrying amount and accumulated amortization for each major class of identifiable intangible assets as of
March 31, 2016 and March 31, 2015 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)
Tradenames
Intangible assets not subject to amortization - trademarks and tradenames
Weighted
Average Useful
Life
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
March 31, 2016
10 years
13 years
8 years
$
$
41.3
$
(34.6) $
628.4
12.7
315.7
(439.6)
(3.0)
—
998.1
$
(477.2) $
March 31, 2015
6.7
188.8
9.7
315.7
520.9
Weighted
Average Useful
Life
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
10 years
13 years
8 years
$
$
40.1
$
(31.3) $
635.4
10.0
328.1
(393.3)
(1.3)
—
1,013.6
$
(425.9) $
8.8
242.1
8.7
328.1
587.7
Intangible asset amortization expense totaled $57.4 million, $55.1 million and $50.8 million for the years ended March 31,
2016, 2015 and 2014, respectively. Patents, tradenames, and customer relationships acquired during fiscal 2015 were assigned a
weighted-average useful life of 3 years, 9 years, and 17 years, respectively.
The Company expects to recognize amortization expense on the intangible assets subject to amortization of $37.8 million
in fiscal year 2017, $27.0 million in fiscal year 2018, $26.7 million in fiscal year 2019, $26.5 million in fiscal year 2020, and
$25.1 million in fiscal year 2021.
During the third quarter of fiscal 2016, 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 as of March 31, 2016 and 2015 was $323.4 million.
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10. Other Current Liabilities
Other current liabilities are summarized as follows (in millions):
March 31, 2016
March 31, 2015
Customer advances
Sales rebates
Commissions
Restructuring and other similar charges (1)
Product warranty (2)
Risk management (3)
Legal and environmental
Taxes, other than income taxes
Income taxes payable
Interest payable
Other
$
$
8.3
28.2
7.9
10.8
6.8
9.9
4.6
6.6
15.0
5.6
20.7
____________________
(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.
$
124.4
$
11. Long-Term Debt
Long-term debt is summarized as follows (in millions):
Term loans (1)
8.875% Senior notes due 2016
Other (2)
Total
Less current maturities
Long-term debt
March 31,
2016
2015
1,881.0
—
39.1
1,920.1
20.2
$
1,899.9
$
7.0
25.4
3.9
7.0
6.8
9.4
3.8
8.0
19.2
5.5
19.7
115.7
1,895.8
1.3
42.9
1,940.0
24.3
1,915.7
____________________
(1)
(2)
Includes an unamortized original issue discount and debt issuance costs of $20.2 million and $25.0 million at March 31, 2016 and
March 31, 2015, respectively.
Includes unamortized debt issuance costs of $0.6 million at each of March 31, 2016 and 2015. Refer to "Other Subsidiary Debt" below
for additional information.
Senior Secured Credit Facility
During fiscal 2014, the Company entered into the Third Amended and Restated First Lien Credit Agreement (the "Credit
Agreement"). The senior secured credit facilities under the 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 (the "Term Loan"); 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.
The proceeds of the Term Loan were used to (i) repay in full the $786.2 million aggregate principal amount of existing
term loans then-outstanding under the Company's former credit agreement, together with accrued interest thereon, (ii) retire
(through a cash tender offer and redemption) all of the Company's former 8.50% Senior Notes due 2018 (the “8.50% Notes”) and
(iii) pay related fees and expenses. The Company accounted for these transactions in accordance with ASC 470-50, Debt
Modifications and Extinguishments (“ASC 470-50”). The Company recognized a $129.2 million loss on the debt extinguishment
which was comprised of a $109.9 million bond tender premium paid to holders of the 8.50% Notes as a result of the tender offer
and redemption, third party transaction costs of $5.3 million, and a $14.0 million non-cash write-off of deferred financing fees
and net original issue discount associated with the extinguished debt.
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Earlier in fiscal 2014, the Company had made a $150.0 million prepayment under the former credit agreement and
recognized a related pre-tax loss of $4.0 million 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 $3.2 million of deferred financing fees and net original issue discount associated with
the extinguished debt.
As of March 31, 2016 and March 31, 2015, the Company's outstanding borrowings under the Term Loan was $1,881.0
million and $1,895.8 million, respectively (net of $20.2 million and $25.0 million unamortized original issue discount and debt
issuance costs, respectively). At March 31, 2016 and March 31, 2015, the term borrowings under the Credit Agreement had an
effective and average interest rate of 4.00%, determined as the London Interbank Offered Rate or LIBOR (subject to a 1% floor)
plus an applicable margin of 3.00%. The interest rates for the Term Loan are subject to a leverage-based pricing grid. As of M arch 31,
2016 and March 31, 2015, interest rates under the Credit Agreement for the Term Loan 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 Credit Agreement and (3) LIBOR
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 3.25
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 1.5 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 3.91 to 1.0 as of March 31, 2016.
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 0.50% per annum.
As of March 31, 2016, the remaining mandatory principal payments prior to maturity on the term loan facilities were
$82.9 million. Principal payments of $4.9 million are scheduled to be made at the end of each calendar quarter until June 30, 2020,
after which the entire term facility matures.
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, 2016 or March 31,
2015; however, $21.1 million and $24.0 million of the revolving credit facility was considered utilized in connection with
outstanding letters of credit at March 31, 2016 and 2015, respectively.
The 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 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 Credit 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, 2016, the Company was in compliance
with all applicable covenants under its Credit Agreement, including compliance with a maximum permitted first lien leverage
ratio (the Company's sole financial maintenance covenant under its revolver) of 7.75 to 1.00.
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Senior Notes
Outstanding Tranche of Notes
At March 31, 2015, the Company had outstanding $1.3 million in principal of 8.875% Senior Notes due in fiscal 2016.
Those Notes were redeemed in full during fiscal 2016.
Other Subsidiary Debt
During 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 and unamortized
debt issuance 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, 2016 and 2015, the aggregate loans of $36.8 million, net of debt issuance costs, 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.
At March 31, 2016 and 2015, various wholly owned subsidiaries had additional debt of $39.1 million and $42.9 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.
Accounts Receivable Securitization Program
During fiscal 2016, the Company entered into an Omnibus Amendment (the "Omnibus Amendment") which extended
the maturity of the Company's accounts receivable securitization facility (the “Securitization”) with General Electric Company,
successor by merger to General Electric Capital Corporation (“GEC”). Terms of the Securitization remained comparable to the
agreement prior to the Omnibus Amendment, except as set forth below. On March 1, 2016, Wells Fargo & Company completed
the purchase of portions of GEC's commercial and corporate finance businesses, and all rights and obligations under the Omnibus
Amendment were assigned to Wells Fargo Bank, N.A. as agent and lender as of that date.
Pursuant to the agreements evidencing the Securitization, Rexnord Funding (a wholly owned bankruptcy-remote special
purpose subsidiary) has granted GEC a security interest in all of its current and future receivables and related assets in exchange
for a credit facility permitting borrowings of up to a maximum aggregate amount of $100.0 million (unchanged by the Omnibus
Amendment) outstanding from time to time. Such borrowings will be used by Rexnord Funding to finance purchases of accounts
receivable. The amount of advances available will be determined based on advance rates relating to the eligibility of the receivables
held by Rexnord Funding at that time. Advances will bear interest based on LIBOR plus 1.75%. The last date on which advances
may be made is December 3 0, 2020 unless the maturity of the Securitization is otherwise accelerated. In addition to other customary
fees associated with financings of this type, Rexnord Funding will also pay an unused line fee to GEC based on any unused portion
of the Securitization facility. If the average daily outstanding principal amount during a calendar month is less than 50% of the
average daily aggregate commitment in effect during such month, the unused line fee will be 0.50% per annum; otherwise, it will
be 0.375% per annum.
The Securitization continues to constitute a “Permitted Receivables Financing” under Article 1 and Article 6 of the Credit
Agreement and does not qualify for sale accounting under ASC 860, Transfers and Servicing. Any borrowings under the
Securitization continue to be accounted for as secured borrowings on the Company's consolidated balance sheet. Financing costs
associated with the Securitization are recorded within "Interest expense, net" in the consolidated statement of operations if revolving
loans or letters of credit are obtained under the Omnibus Amendment.
At March 31, 2016, the Company's available borrowing capacity under the Securitization was $100.0 million, based on
the current accounts receivables balance. As of March 31, 2016, the Company was in compliance with all applicable covenants
and performance ratios contained in the Securitization.
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Future Debt Maturities
Future maturities of debt as of March 31, 2016, excluding the unamortized original issue discount and debt issuance costs
of $20.8 million, were as follows (in millions):
Years ending March 31:
2017
2018
2019
2020
2021
Thereafter
$
$
20.2
19.9
19.9
19.7
1,823.4
37.8
1,940.9
Cash interest paid for the fiscal years ended March 31, 2016, 2015 and 2014 was $87.7 million, $84.1 million, and $151.1
million, respectively.
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 and cap 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 Derivatives
During fiscal 2014, the Company entered into three forward-starting interest rate swaps to hedge the variability in future
cash flows associated with a portion of the Company’s variable rate term loans. The forward-starting interest rate swaps convert
$650.0 million of the Company’s variable-rate term loans to a weighted average fixed interest rate of 2.55% plus the applicable
margin (inclusive of a 1% LIBOR floor). Those interest rate swaps became 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.
During fiscal 2015, the Company entered into two interest rate caps in order to mitigate the Company's exposure to
increasing interest rates on its variable-rate interest loans. Those interest rate caps were effective as of October 24, 2014, with a
maturity of October 24, 2018; they cap the interest on $750.0 million of the Company's variable-rate interest loans at 3%, plus the
applicable margin. In executing the interest rate caps, the Company paid a premium of $5.8 million. The interest rate caps have
been designated as effective cash flow hedges in accordance with ASC 815. When combined with the Company's existing interest
rate swaps, the Company has effectively hedged approximately 74% of its outstanding variable rate term loans with a weighted
average interest rate that cannot exceed 2.79% plus the applicable margin of 3%.
The fair values of the Company's interest rate derivatives are recorded on the consolidated balance sheets with the
corresponding offset recorded as a component of accumulated other comprehensive loss, net of tax. See the amounts recorded on
the consolidated balance sheets related to the Company's interest rate derivatives within the tables below.
The Company's derivatives are measured at fair value in accordance with ASC 820. See Note 13 Fair Value Measurements
for more information as it relates to the fair value measurement of the Company's derivative financial instruments.
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The following tables indicate the location and the fair value of the Company's derivative instruments within the consolidated
balance sheets segregated between designated, qualifying ASC 815 hedging instruments and non-qualifying, non-designated hedging
instruments (in millions).
Fair value of derivatives designated as hedging instruments under ASC 815 (in millions):
Interest rate swaps
Interest rate caps
March 31, 2016
March 31, 2015
Liability Derivatives
Balance Sheet
Classification
$
$
21.8
0.3
$
$
17.7
Other liabilities
Asset Derivatives
3.0
Other assets
Fair value of derivatives not designated as hedging instruments under ASC 815 (in millions):
March 31, 2016
March 31, 2015
Liability Derivatives
Balance Sheet
Classification
Foreign currency forward contracts
Foreign currency forward contracts
$
$
0.9
—
$
$
—
Other current liabilities
Asset Derivatives
0.4
Other current assets
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, 2016, 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
Interest rate caps
Cumulative loss recognized, net of
tax, in accumulated other
comprehensive loss on derivatives
March 31, 2016
March 31, 2015
$
$
13.5
3.4
$
$
11.0
1.7
Derivative instruments not designated as
hedging instruments under ASC 815
Location of gain recognized in income on
derivatives
Amount recognized in other income (expense), net
Year Ended
March 31, 2016
March 31, 2015
March 31, 2014
Foreign currency forward contracts
Other income (expense), net
$
— $
0.5
$
0.4
During fiscal 2016, the Company reclassified $5.2 million of accumulated other comprehensive loss into earnings as
interest expense related to interest rate derivative and expects to reclassify $10.9 million of accumulated other comprehensive loss
into earnings as interest expense during the next twelve months. The Company did not reclassify any amounts from other
comprehensive loss into earnings as interest expense during the fiscal years ending 2015 and 2014.
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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.
Fair Value of Derivative Instruments
The Company transacts in foreign currency forward contracts and interest rate swaps and caps, 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 and caps is based on pricing models. These models use discounted cash flows that
utilize the appropriate market-based forward swap curves and interest rates.
The Company endeavors to utilize the best available information in measuring fair value. As required by ASC 820,
financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value
measurement. 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, 2016 and March 31,
2015. 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, 2016 and March 31, 2015 (in millions):
Assets:
Interest rate caps
Total assets at fair value
Liabilities:
Interest rate swaps
Foreign currency forward contracts
Total liabilities at fair value
Assets:
Interest rate caps
Foreign currency forward contracts
Total assets at fair value
Liabilities:
Interest rate swaps
Total liabilities at fair value
Fair Value as of March 31, 2016
Level 1
Level 2
Level 3
Total
—
—
—
—
—
$
$
$
$
$
0.3
0.3
21.8
0.9
22.7
$
$
$
$
$
— $
— $
— $
— $
— $
0.3
0.3
21.8
0.9
22.7
Fair Value as of March 31, 2015
Level 1
Level 2
Level 3
Total
—
—
—
—
—
$
$
$
$
3.0
0.4
3.4
17.7
17.7
$
$
$
$
— $
—
— $
3.0
0.4
3.4
— $
— $
17.7
17.7
$
$
$
$
$
$
$
$
$
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Fair Value of Non-Derivative Financial Instruments
The carrying amounts of cash, receivables, payables and accrued liabilities approximated fair value at March 31, 2016
and March 31, 2015 due to the short-term nature of those instruments. The fair value of long-term debt recorded on the consolidated
balance sheets as of March 31, 2016 and March 31, 2015 was approximately $1,913.2 million and $1,970.6 million, respectively.
The fair value is based on quoted market prices for the same issues.
Long-lived Assets and Intangible Assets
Long-lived assets (which include property, plant and equipment and real estate) may be measured at fair value if such
assets are held-for-sale or when there is a determination that the asset is impaired. Intangible assets (which include patents,
tradenames, customer relationships, and non-compete agreements) also may be measured at fair value when there is a determination
that the asset is impaired. The determination of fair value for these assets is based on the best information available that resides
within Level 3 of the fair value hierarchy, including internal cash flow estimates discounted at an appropriate interest rate, quoted
market prices when available, market prices for similar assets and independent appraisals, as appropriate. For real estate, cash
flow estimates are based on current market estimates that reflect current and projected lease profiles and available industry
information about expected trends in rental, occupancy and capitalization rates.
As disclosed in Note 5, the Company recorded an impairment loss of approximately $6.6 million during fiscal 2016 to
place certain property, plant and equipment associated with the Company's supply chain optimization and footprint optimization
actions at net realizable value. Net realizable value of these assets was determined using independent appraisals of the assets,
classified as Level 3 inputs within the fair value hierarchy. As of March 31, 2016, these assets have a net realizable value of $5.3
million and are classified within property, plant and equipment on the consolidated balance sheets.
During fiscal 2015, the Company ceased operations of its Mill Products business and recorded a net impairment loss of
$3.8 million to place the long-lived assets of that business at net realizable value. The impairment loss recognized was determined
utilizing independent appraisals of the assets, classified as Level 3 inputs within the fair value hierarchy. At March 31, 2016 and
2015, the remaining long-lived assets of the Mill Products business have a net realizable value of approximately $0 and $2.6
million, respectively, and are classified within assets held for sale on the consolidated balance sheets. See Note 4 Discontinued
Operations for additional information.
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 2027. Rent expense under operating leases totaled
$18.2 million, $19.4 million and $17.0 million for the fiscal years ended March 31, 2016, 2015 and 2014, respectively.
Future minimum rental payments for operating leases with initial terms in excess of one year as of March 31, 2016 are
as follows (in millions):
Years ending March 31:
2017 $
2018
2019
2020
2021
Thereafter
$
14.8
14.6
12.3
10.8
8.2
22.7
83.4
15. Stock-Based Compensation
In accordance with ASC 718, the Company recognizes compensation costs related to share-based payment transactions.
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
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("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 "Incentive 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. To date, stock options, Restricted Stock Units ("RSUs") and
Performance Stock Units ("PSUs") have been issued under the Incentive Plans.
The options granted under the 2012 Incentive Plan have a maximum term of ten years after the grant date. Options granted
from the inception of the plan through July 31, 2014 vest 50% three years after the grant date and the remaining 50% vest five
years after the grant date. Options and RSUs granted from July 31, 2014 through May 21, 2015 vest ratably over four years.
Options and RSUs granted subsequent to May 21, 2015 vest ratably over three years. PSUs granted in fiscal 2016 cliff vest after
three years. Options granted to directors of the Company 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.
During fiscal 2016, 2015 and 2014, the Company recorded $7.5 million, $6.4 million and $7.0 million of stock-based
compensation, respectively (the related tax benefit on these amounts was $2.8 million for fiscal 2016, $2.2 million for fiscal 2015,
and $2.5 million for fiscal 2014). During fiscal 2016, 2015 and 2014, the Company also recorded $4.0 million, $5.8 million and
$5.8 million, respectively, of an excess tax benefit related to stock options exercised during each fiscal year. As of March 31, 2016,
there was $16.7 million of total unrecognized compensation cost related to non-vested stock options, RSUs and PSUs granted
under the Incentive Plans. That cost is expected to be recognized over a weighted-average period of 2.3 years.
In February 2015, the Company's Board of Directors approved a stock repurchase program (the "Repurchase Program")
authorizing the repurchase of up to $200 million of the Company's common stock from time to time on the open market or in
privately negotiated transactions. The Repurchase Program does not require the Company to acquire any particular amount of
common stock and does not specify the timing of purchases or the prices to be paid. During fiscal 2016, the Company
repurchased 1,552,500 shares of common stock at a total cost of $40.0 million at an average price of $25.76. The repurchased
shares were canceled by the Company upon receipt. A total of approximately $160.0 million of the existing repurchase authority
remained at March 31, 2016.
Stock Options
The fair value of each option granted under the Incentive 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, 2016
Year Ended
March 31, 2015
Year Ended
March 31, 2014
6.5
24%
1.82%
0.0%
7.1
26%
2.10%
0.0%
7.5
35%
1.57%
0.0%
Options granted under the Incentive Plans have a term of ten years. Management’s estimate of the option term for options
granted under the Incentive Plans is 6.5 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
value of options granted under the Incentive Plans during fiscal 2016, 2015 and 2014 was $6.92, $9.21 and $8.06, respectively.
The total fair value of options vested during fiscal 2016, 2015 and 2014 was $9.8 million, $1.3 million and $1.8 million, respectively.
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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, 2016
Year-Ended March 31, 2015
Year-Ended March 31, 2014
Shares
8,588,518
1,072,556
(1,278,017)
(528,372)
7,854,685
4,678,216
Weighted
Avg. Exercise
Price
$
$
$
13.04
24.14
5.55
23.53
15.10
9.52
Shares
8,652,834
1,268,124
(743,807)
(588,633)
8,588,518
4,798,457
Weighted
Avg. Exercise
Price
$
$
$
10.79
28.30
5.85
21.65
13.06
5.67
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
______________________
(1)
(2)
(3)
The total intrinsic value of options exercised during fiscal 2016, 2015 and 2014 was $16.3 million, $16.7 million and $18.7 million,
respectively.
The weighted average remaining contractual life of options outstanding was 5.0 years at March 31, 2016, 5.0 years at March 31, 2015
and 5.5 years at March 31, 2014. The aggregate intrinsic value of options outstanding at March 31, 2016 was $54.8 million.
The weighted average remaining contractual life of options exercisable was 3.0 years at March 31, 2016, 2.6 years at March 31, 2015
and 3.7 years at March 31, 2014. The aggregate intrinsic value of options exercisable at March 31, 2016 was $52.6 million.
Nonvested options at beginning of period
Granted
Vested
Canceled/Forfeited
Nonvested options at end of period
Restricted Stock Units
Weighted
Avg.
Exercise
Price
22.43
24.14
21.09
24.05
23.30
Shares
3,788,315
$
1,072,556
(1,220,559)
(463,843)
3,176,469
$
During the twelve months ended March 31, 2016 and 2015, the Company granted restricted stock units ("RSUs") to
certain of its officers, directors, and employees. No RSUs were granted in fiscal 2014. RSUs granted during the twelve months
ended March 31, 2016, and 2015 vest ratably over three and four years, respectively. The fair value of each award is determined
based on the Company's closing stock price on the date of grant. A summary of RSU activity during the twelve months ended
March 31, 2016, and 2015 is as follows:
Nonvested RSUs at beginning of period
Granted
Vested
Canceled/Forfeited
Nonvested RSUs at end of period
Performance Stock Units
Twelve Months Ended
March 31, 2016
March 31, 2015
Shares
Weighted Avg.
Grant Date Fair
Value
Shares
Weighted Avg.
Grant Date Fair
Value
53,813
$
96,952
(12,866)
(12,592)
125,307
$
29.06
23.20
29.09
27.62
24.67
— $
58,883
—
(5,070)
53,813
$
—
29.08
—
29.31
29.06
During the twelve months ended March 31, 2016, the Company granted 50,711 performance stock units (“PSUs”) to
certain of its officers and employees at a weighted-average grant date fair value of $28.57 per PSU. Those PSUs have a three-
year performance period, and are earned and vest, subject to continued employment, based in part on the Company’s performance
relative to pre-defined goals for absolute free cash flow conversion and in part on relative total shareholder return (“TSR”) as
compared to companies in the S&P 1500 Industrial Index. The number of performance share awards earned, which can range
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between 0% and 200% of the target awards granted depending on the Company's actual performance during the three-year
performance period, will be satisfied with Rexnord common stock.
The fair value of the portion of PSUs with vesting based on free cash flow conversion is determined based on the Company's
closing stock price on the date of grant. The fair value of the portion PSUs with vesting based on TSR is determined utilizing the
Monte Carlo simulation model. Assumptions used to determine the fair value of each PSU were based on historical data and
standard industry valuation practices and methodology. The following weighted-average assumptions were used for the PSUs
granted during the twelve months ended March 31, 2016:
Expected volatility factor
Weighted-average risk-free interest rate
Expected dividend rate
PSU fair value per share
Twelve Months Ended
March 31, 2016
31%
1.01%
0.0%
$32.06
As of March 31, 2016, 49,136 PSUs were outstanding and unvested at a weighted-average fair value of $28.57, net of
1,575 PSUs canceled or forfeited.
16. Retirement Benefits
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). During
the fiscal years ending March 31, 2016, 2015 and 2014, the Company recognized non-cash actuarial losses of $12.9 million, $59.4
million and $2.7 million, respectively, in connection with this accounting policy. 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.
In conjunction with the re-measurement of the pension and other post retirement obligations in fiscal 2016, lower than
projected asset growth, partially offset by a slightly higher discount rate and shorter life expectancy assumptions resulted in the
recognition of non-cash actuarial losses of $12.9 million. In fiscal 2015, the Society of Actuaries issued revised mortality tables
(RP 2014) and a mortality improvement scale (MP 2014) for use by actuaries, insurance companies, governments, benefit plan
sponsors and others in setting assumptions regarding life expectancy in the United States for purposes of estimating pension and
OPEB obligations, costs and required contribution amounts. The new mortality tables indicate substantial life expectancy
improvements since the last study published in 2000 (RP 2000). In conjunction with the re-measurement of the pension and other
post-retirement obligations in fiscal 2015, the adoption of the newly issued mortality tables and mortality improvement scale,
lower discount rates, and the lump-sum settlement completed in fiscal 2015 resulted in the recognition of non-cash actuarial losses
of $59.4 million.
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The components of net periodic benefit cost reported in the consolidated statements of operations are as follows (in
millions):
Pension Benefits:
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Prior service cost
Settlement loss (1)
Recognition of actuarial losses
Net periodic benefit cost
Other Postretirement Benefits:
Service cost
Interest cost
Amortization:
Prior service credit
Recognition of actuarial losses (gains)
Net periodic benefit cost
March 31, 2016
March 31, 2015
March 31, 2014
Year Ended
$
$
$
$
2.2
25.5
(28.8)
0.1
—
13.0
12.0
0.1
1.2
(2.0)
(0.1)
(0.8)
$
$
$
$
1.4
30.0
(29.8)
0.2
6.5
51.7
60.0
0.1
1.3
(1.9)
1.2
0.7
$
$
$
$
1.8
30.1
(30.5)
0.2
—
2.7
4.3
0.1
1.2
(1.9)
—
(0.6)
(1)
During fiscal 2015 the Company offered approximately 4,500 inactive participants in its domestic non-union defined benefit plans
with vested benefits the opportunity to receive a lump sum settlement of the value of the participant’s pension benefit. Acceptance of
the offer by a participant was completely voluntary, and if accepted, participants could elect to receive the settlement in the form of a
single lump sum payment or in the form of a monthly annuity beginning during fiscal 2015. The election period for this voluntary
offer closed on October 15, 2014 and a total of $65.0 million was paid to electing participants during fiscal 2015. The settlement and
corresponding re-measurement of the domestic non-union defined benefit plan resulted in the recognition of non-cash actuarial losses
during fiscal 2015 of $6.5 million.
The Company made contributions to its U.S. qualified pension plan trusts of $4.9 million, $7.9 million, and $7.8 million
during the years ended March 31, 2016, 2015 and 2014, respectively. During fiscal 2017, the Company expects to contribute
approximately $0.4 million to its U.S. qualified defined benefit plans and $2.6 million to its other postretirement benefit plans.
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The status of the plans are summarized as follows (in millions):
Benefit obligation at beginning of period
$
(718.8) $
(700.0) $
(32.4) $
(31.2)
Pension Benefits
Other Postretirement Benefits
Year Ended
March 31, 2016
Year Ended
March 31, 2015
Year Ended
March 31, 2016
Year Ended
March 31, 2015
Service cost
Interest cost
Actuarial (losses) gains
Benefits paid
Plan participant contributions
Settlements
Translation adjustment
Benefit obligation at end of period
Plan assets at the beginning of the period
Actual return on plan assets
Contributions
Benefits paid
Settlements
Translation adjustment
Plan assets at end of period
Funded status of plans
Net amount on Consolidated Balance Sheets consists of:
Long-term assets
Current liabilities
Long-term liabilities
Total net funded status
(2.2)
(25.5)
35.1
38.8
(0.4)
—
(1.0)
(1.4)
(30.0)
(114.2)
40.8
(0.4)
65.0
21.4
(0.1)
(1.2)
0.7
4.0
(0.6)
—
—
(674.0) $
543.2
$
(718.8) $
577.7
$
(29.6) $
— $
(9.5)
8.6
(38.8)
—
0.1
65.0
12.5
(40.8)
(65.0)
(6.2)
—
4.0
(4.0)
—
—
503.6
$
(170.4) $
543.2
$
(175.6) $
— $
(29.6) $
0
.
5$
— $
— $
(2.4)
(168.5)
(2.3)
(173.3)
(2.6)
(27.0)
(170.4) $
(175.6) $
(29.6) $
$
$
$
$
$
$
(0.1)
(1.3)
(2.1)
3.2
(0.9)
—
—
(32.4)
—
—
3.2
(3.2)
—
—
—
(32.4)
—
(2.7)
(29.7)
(32.4)
As of March 31, 2016, the Company had pension plans with a combined projected benefit obligation of $674.0 million
compared to plan assets of $503.6 million, resulting in an under-funded status of $170.4 million compared to an under-funded
status of $175.6 million at March 31, 2015. The Company’s funded status has improved year over year primarily as a result of
actuarial gains as a result of higher discount rates and shorter life expectancy assumptions partially offset by lower than projected
asset returns. 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.
Amounts included in accumulated other comprehensive loss (income), net of tax, related to defined benefit plans at
March 31, 2016 and 2015 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
Pension
Benefits
As of March 31, 2016
Postretirement
Benefits
Total
0.1
$
(5.1) $
61.9
62.0
(23.6)
0.6
(4.5)
1.7
38.4
$
(2.8) $
(5.0)
62.5
57.5
(21.9)
35.6
$
$
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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, 2015
Postretirement
Benefits
Total
0.2
$
(7.1) $
71.7
71.9
(27.4)
1.2
(5.9)
2.5
44.5
$
(3.4) $
(6.9)
72.9
66.0
(24.9)
41.1
$
$
The Company expects to recognize $0.1 million and $(2.0) million of prior service costs (credits) included in accumulated
other comprehensive (loss) income for pension benefits and other postretirement benefits, respectively, as components of net
periodic benefit cost during the next fiscal year.
The following table presents significant assumptions used to determine benefit obligations and net periodic benefit cost
(income) in weighted-average percentages:
Benefit Obligations:
Discount rate
Rate of compensation increase
Net Periodic Benefit Cost:
Discount rate
Rate of compensation increase
Expected return on plan assets
Pension Benefits
Other Postretirement Benefits
March 31,
2016
March 31,
2015
March 31,
2014
March 31,
2016
March 31,
2015
March 31,
2014
3.84%
3.07%
3.70%
3.40%
5.33%
3.70%
3.40%
4.54%
3.41%
5.30%
4.54%
3.41%
4.25%
3.42%
5.48%
3.90%
n/a
3.80%
n/a
4.30%
n/a
3.80%
4.30%
3.80%
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, 2016 and actual
investment allocations at March 31, 2016 and 2015.
Plan Assets
2016
Target
Allocation (2)
Actual
Allocation
2015
Actual
Allocation
29%
66%
5%
28%
66%
6%
28%
67%
5%
Investment
Policy (1)
20 - 30%
55 - 80%
0 - 10%
Equity securities
Debt securities (including cash and cash equivalents)
Other
(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 utilizes a dynamic liability driven investment (“LDI”) strategy. 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.
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The fair values of the Company’s pension plan assets for both the U.S and non-U.S. plans at March 31, 2016 and 2015,
by asset category are included in the table below (in millions). For additional information on the fair value hierarchy and the inputs
used to measure fair value, see Note 13 Fair Value Measurements.
As of March 31, 2016
Quoted Prices in
Active Market
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
Total
1.7
$
4.9
$
— $
—
—
—
—
—
—
328.8
63.7
35.3
9.1
—
—
—
—
—
—
37.5
22.6
1.7
$
441.8
$
60.1
$
As of March 31, 2015
Quoted Prices in
Active Market
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
Total
1.8
$
5.6
$
— $
—
—
—
—
—
—
355.5
68.1
35.8
10.1
—
—
—
—
—
—
42.9
23.4
1.8
$
475.1
$
66.3
$
$
$
$
$
6.6
328.8
63.7
35.3
9.1
37.5
22.6
503.6
7.4
355.5
68.1
35.8
10.1
42.9
23.4
543.2
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.
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)
U.S. equity funds (2)
International equity funds (2)
Balanced funds (2)
Alternative investment funds (3)
Insurance contracts
Total
(1)
(2)
(3)
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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,
2016 and 2015 (in millions):
Beginning balance, March 31, 2014
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, 2015
Actual return on assets:
Related to assets held at reporting date
Related to assets sold during the period
Purchases, sales, issuances and settlements
Alternative
Investments
Insurance
Contracts
Total
$
53.6
$
16.5
$
70.1
(1.6)
2.3
(11.4)
—
42.9
(2.4)
1.5
(4.5)
6.9
—
—
—
23.4
(0.8)
—
—
5.3
2.3
(11.4)
—
66.3
(3.2)
1.5
(4.5)
60.1
Ending balance, March 31, 2016
$
37.5
$
22.6
$
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
2017
2018
2019
2020
2021
2022-2026
$
40.1
$
40.3
40.5
40.2
40.2
200.4
2.6
2.7
2.6
2.5
2.4
9.9
Pension Plans That Are Not Fully Funded
At March 31, 2016, 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 $665.3 million, $657.1 million
and $494.5 million, respectively.
At March 31, 2015, 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 $717.7 million, $706.3 million
and $541.5 million, respectively.
Other Postretirement Benefits
The other postretirement benefit obligation was determined using an assumed health care cost trend rate of 7.0% in fiscal
2016 grading down to 5.0% in fiscal 2024 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
One Percentage Point Decrease
Year Ended March 31,
Year Ended March 31,
2016
2015
2014
2016
2015
2014
Increase (decrease) in total of service and interest cost components
$
Increase (decrease) in postretirement benefit obligation
$
0.1
2.6
$
0.1
2.9
0.1
2.4
$
(0.1) $
(0.1) $
(2.2)
(2.5)
(0.1)
(2.1)
Multi-Employer and Government-sponsored Plans
The Company participates in certain multi-employer and government-sponsored plans for eligible employees. Expense
recognized related to these plans was $0.2 million, $0.2 million, and $0.3 million in the years ended March 31, 2016, 2015 and
2014, respectively.
Defined Contribution Savings Plans
The Company sponsors certain defined-contribution savings plans for eligible employees. Expense recognized related to
these plans was $14.2 million, $15.2 million, and $15.6 million for the years ended March 31, 2016, 2015 and 2014, respectively.
17. Income Taxes
The provision for income taxes consists of amounts for taxes currently payable, 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, the Company continues to maintain a partial valuation allowance against certain
foreign NOL carryforwards and other related foreign deferred tax assets, as well as certain state NOL carryforwards.
Income Tax Provision (Benefit)
The components of the provision (benefit) 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
Provision (benefit) for income taxes
Year ended March 31,
2016
2015
2014
$
$
24.0
15.3
3.9
43.2
(10.2)
1.1
(17.0)
(26.1)
$
17.2
15.6
4.7
37.5
(8.2)
(10.5)
(2.0)
(20.7)
$
17.1
$
16.8
$
0.8
14.6
1.6
17.0
(8.6)
(16.4)
(2.0)
(27.0)
(10.0)
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The provision (benefit) 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
$
30.1
$
37.9
$
Year ended March 31,
2016
2015
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
Domestic production activities deduction
Change in valuation allowance
Other
Provision (benefit) for income taxes
2.7
(3.0)
(2.1)
(0.8)
(11.3)
(1.3)
2.3
0.5
2.6
(3.3)
8.9
0.2
(0.5)
(2.3)
(27.4)
0.7
$
17.1
$
16.8
$
5.2
(1.1)
(3.6)
5.7
0.6
(4.7)
—
(11.5)
(0.6)
(10.0)
The provision (benefit) 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
Deferred Income Tax Assets and Liabilities
Year ended March 31,
2016
2015
2014
$
$
45.3
40.7
86.0
$
$
89.9
18.7
108.6
$
$
(25.9)
40.9
15.0
Deferred income taxes consist of the tax effects of the following temporary differences (in millions):
Deferred tax assets:
Compensation and retirement benefits
General accruals and reserves
State tax net 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
Net amount on Consolidated Balance Sheet consists of:
Other assets
Deferred income taxes
Net long-term deferred tax liabilities
March 31, 2016
March 31, 2015
$
$
$
$
$
84.4
18.3
19.6
4.3
17.7
14.5
158.8
(27.2)
131.6
42.8
30.1
197.7
43.4
314.0
182.4
$
3.6
$
(186.0)
(182.4) $
86.9
16.9
20.9
26.5
17.1
15.3
183.6
(25.0)
158.6
47.8
30.8
218.5
58.8
355.9
197.3
6.0
(203.3)
(197.3)
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 certain foreign NOL carryforwards and related deferred tax assets, as well as certain state NOL
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carryforwards as of March 31, 2016. 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. Similarly, a valuation
allowance was recorded at March 31, 2015 for certain foreign NOL carryforwards and related deferred tax assets, as well as certain
state NOL carryforwards for which utilization was deemed uncertain. The increase in the valuation allowance presented above
was generally due to a change in management’s view that the realization of certain foreign NOL carryforwards and other related
deferred tax assets is no longer deemed more-likely-than-not. 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.
At March 31, 2016, the Company had approximately $508.9 million of state NOL carryforwards, expiring over various
years ending through March 31, 2036. The Company has a valuation allowance of $18.1 million recorded against the related
deferred tax asset. In addition, at March 31, 2016, the Company had approximately $79.0 million of foreign NOL carryforwards
in which the majority of these losses can be carried forward indefinitely. There exists a valuation allowance of $7.2 million against
these NOL carryforwards as well as other related deferred tax assets.
No provision has been made for United States federal income taxes related to approximately $174.8 million of undistributed
earnings of foreign subsidiaries considered to be permanently reinvested. Due to the resulting additional foreign tax credits, the
additional income tax liability that would result if such earnings were repatriated to the U.S., other than potential out-of-pocket
withholding taxes of approximately $4.4 million, would not be expected to be significant to the Company’s consolidated financial
statements.
The Company’s total liability for net accrued income taxes as of March 31, 2016 and March 31, 2015 was $13.3 million
and $17.9 million, respectively. This net amount was presented in the consolidated balance sheet as Income taxes payable (as
separately disclosed in Other current liabilities) of $15.0 million and $19.2 million as of March 31, 2016 and March 31, 2015,
respectively; and as income taxes receivable (included in Other current assets) of $1.7 million and $1.3 million as of March 31,
2016 and March 31, 2015, respectively. Net cash paid for income taxes to governmental tax authorities for the years ended March 31,
2016, 2015 and 2014 was $46.9 million, $21.2 million and $13.6 million, respectively.
Liability for Unrecognized Tax Benefits
The Company's total liability for net unrecognized tax benefits as of March 31, 2016 and March 31, 2015 was $15.6
million and $26.6 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, 2016 and March 31, 2015 (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
Reductions due to lapse of applicable statute of limitations
Cumulative translation adjustment
Balance at end of period
Year Ended March 31,
2016
2015
$
$
21.7
$
0.8
1.2
(0.1)
(10.3)
(0.1)
13.2
$
20.9
3.2
—
—
(1.7)
(0.7)
21.7
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As
of March 31, 2016 and March 31, 2015, the total amount of unrecognized tax benefits includes $3.8 million and $12.4 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, 2016, 2015, and 2014 was $(8.6) million, $0.7 million, and $(0.6) million, respectively.
The Company conducts business in multiple locations within and outside the U.S. Consequently, the Company is subject
to periodic income tax examinations by domestic and foreign income tax authorities. As of the fiscal year ended March 31, 2016,
the Company is undergoing routine, periodic income tax examinations in both domestic and foreign jurisdictions (including a
review of a few specific items on certain of the Company’s Netherlands companies' corporate income tax returns for the tax years
ended March 31, 2011, through 2013). In addition, a number of the Company's German subsidiaries are under examination for
their German corporate and trade tax returns for the tax years ended March 31, 2011 through 2014. Similarly, a number of the
Company’s Italian subsidiaries are under examination with respect to their corporate income tax returns for the tax years ended
March 31, 2013 through 2015. During the second quarter of fiscal 2016, the U.S. Internal Revenue Service completed an income
tax examination of the Company’s U.S. Consolidated federal income tax return for the tax year ended March 31, 2013. The
conclusion of the audit resulted in no changes to previously reported taxable income or income tax for such return. It appears
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reasonably possible that the amounts of unrecognized income tax benefits could change in the next twelve months upon conclusion
of the Company’s current ongoing 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 3 1, 2013, state and local income tax examinations
for years ending prior to fiscal 2012 or significant foreign income tax examinations for years ending prior to fiscal 2011. With
respect to the Company's U.S. federal NOL carryforward (which was fully utilized for the tax year ended March 31, 2015), the
short tax period from July 21, 2006 to March 31, 2007 (due to a change in control of the Company) and the tax years ended March
31, 2008, 2009, 2010, 2011 and 2012 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 currently
open tax years.
18. 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 its sale of the Company, 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 300 claimants) are pending in state or federal court in numerous jurisdictions
relating to alleged personal injuries due to the alleged presence of asbestos in certain brakes and clutches previously
manufactured by the Company's Stearns division and/or its predecessor owners. Invensys and FMC, prior owners of the
Stearns business, have paid 100% of the costs to date related to the Stearns lawsuits. Similarly, the Company's Prager
subsidiary is 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 Company's acquisition of The Falk Corporation (“Falk”), Hamilton Sundstrand has provided the
Company with indemnification against certain products-related asbestos exposure liabilities. The Company believes that, pursuant
to such indemnity obligations, Hamilton Sundstrand is obligated to defend and indemnify the Company with respect to the asbestos
claims described below, and that, with respect to these claims, such indemnity obligations are not subject to any time or dollar
limitations.
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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, 2016, Zurn and numerous
other unrelated companies were defendants in approximately 6,000 asbestos related lawsuits representing approximately 19,000
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, 2016, the Company estimates the potential liability for the asbestos-related claims described above as
well as the claims expected to be filed to be approximately $32.0 million of which Zurn expects its insurance carriers to pay
approximately $23.0 million in the next ten years on such claims, with the balance of the estimated liability being paid in subsequent
years. The $32.0 million was developed based on actuarial studies and represents the projected indemnity payout for current and
future claims. The balance decreased by $3.0 million in fiscal 2016. There are inherent uncertainties involved in estimating the
number of future asbestos claims, future settlement costs, and the effectiveness of defense strategies and settlement initiatives. As
a result, actual liability could differ from the estimate described herein and could be substantial.
Management estimates that its available insurance to cover this potential asbestos liability as of March 31, 2016, is
approximately $244.9 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 $168.9 million of aggregate liabilities.
As of March 31, 2016, the Company had a recorded receivable from its insurance carriers of $32.0 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 $244.9 million of insurance coverage will ultimately be available or
that this asbestos liability will not ultimately exceed $244.9 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.
Certain Company subsidiaries, were named as defendants in a number of individual and class action lawsuits in various
United States courts claiming damages due to the alleged failure or anticipated failure of Zurn brass fittings on the PEX plumbing
systems in homes and other structures.
In fiscal 2013, the Company reached 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 such fittings, 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 fiscal 2013, and utilizes a seven year claims
fund, which is capped at $20.0 million, and is funded in installments over the seven year period based on claim activity and
minimum funding criteria. The settlement also covers class action plaintiffs' attorneys' fees and expenses totaling $8.5 million,
which were paid in 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.
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19. Common stock repurchases and public offerings
Issuer Purchases of Equity Securities
In February 2015, the Company's Board of Directors approved a common stock repurchase program (the "Repurchase
Program") authorizing the repurchase of up to $200.0 million of the Company's common stock from time to time on the open
market or in privately negotiated transactions. The Repurchase Program does not require the Company to acquire any particular
amount of common stock and does not specify the timing of purchases or the prices to be paid. During fiscal 2016, the Company
repurchased 1,552,500 shares of common stock at a total cost of $40.0 million. The repurchased shares were canceled by the
Company upon receipt. At March 31, 2016, approximately $160.0 million of repurchase authority remained.
Fiscal 2014 Common Stock Offering
In fiscal 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.
20. 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 a
comprehensive range of specified, highly-engineered mechanical components used within complex systems where our customers'
reliability requirements and costs of failure or downtime are high. The Process & Motion Control portfolio includes motion control
products, shaft management products, aerospace components, and related value-added services. Products and services are marketed
and sold globally under widely recognized brand names, including Rexnord®, Rex®, FlatTop™, Falk®, and Link-Belt®. Process &
Motion Control products and services are sold into a diverse group of attractive end markets, including food and beverage,
aerospace, mining, petrochemical, energy and power generation, cement and aggregates, forest and wood products, agriculture,
and general industrial and automation applications. The Water Management platform designs, procures, manufactures, and markets
products that provide and enhance water quality, safety, flow control and conservation. The Water Management product portfolio
includes professional grade water control and safety, water distribution and drainage, finish plumbing, and site works products
for primarily nonresidential buildings and flow control products for water and wastewater treatment infrastructure markets. Products
are marketed and sold under widely recognized brand names, including Zurn®, Wilkins®, and VAG®. 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).
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Business Segment Information:
(in Millions)
Net sales by product
Process & Motion Control:
Original equipment manufacturers/ end-users
Maintenance, repair, and operations
Total Process & Motion Control
Water Management:
Water safety, quality, flow control and conservation
Water infrastructure
Total Water Management
Consolidated net sales
Income (loss) from operations
Process & Motion Control
Water Management
Corporate
Consolidated
Non-operating expense:
Interest expense, net
Loss on the extinguishment of debt
Other income (expense), net
Income from continuing operations before income taxes
Provision (benefit) provision for income taxes
Net income from continuing operations
(Loss) income from discontinued operations, net of tax
Net income
Non-controlling interest loss
Net income attributable to Rexnord
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
March 31, 2016
March 31, 2015
March 31, 2014
Year Ended
572.3
528.0
1,100.3
534.1
289.4
823.5
1,923.8
146.8
72.8
(45.3)
174.3
(91.4)
—
3.1
86.0
17.1
68.9
(1.4)
67.5
(0.4)
67.9
77.3
38.1
115.4
43.6
8.5
52.1
$
$
$
$
$
$
$
$
$
$
$
$
642.1
588.1
1,230.2
517.1
302.9
820.0
2,050.2
219.6
79.0
(94.9)
203.7
(87.9)
—
(7.2)
108.6
16.8
91.8
(8.0)
83.8
—
83.8
74.1
38.1
112.2
37.7
11.1
48.8
$
$
$
$
$
$
$
$
$
$
$
$
621.1
617.1
1,238.2
465.6
330.5
796.1
2,034.3
237.7
72.2
(37.5)
272.4
(109.1)
(133.2)
(15.1)
15.0
(10.0)
25.0
4.6
29.6
(0.6)
30.2
69.7
37.2
106.9
39.4
12.8
52.2
March 31, 2016
March 31, 2015
March 31, 2014
2,412.7
$
2,419.0
$
933.2
8.9
981.9
8.4
3,354.8
$
3,409.3
$
2,251.4
1,038.7
80.7
3,370.8
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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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
Net Sales
Long-lived Assets
Year Ended
March 31, 2016
Year Ended
March 31, 2015
Year Ended
March 31, 2014
March 31, 2016 March 31, 2015 March 31, 2014
$
$
1,306.9
$
1,380.0
$
1,337.2
$
276.0
$
279.4
$
370.8
246.1
374.0
296.2
409.1
288.0
80.5
40.7
92.1
46.1
1,923.8
$
2,050.2
$
2,034.3
$
397.2
$
417.6
$
284.6
98.6
40.5
423.7
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.
21. Quarterly Results of Operations (unaudited)
(in millions, except per share amounts)
Net sales
Gross profit
Net income 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 per share from continuing operations:
Basic
Diluted
(Loss) per share from discontinued operations:
Basic
Diluted
Net income per share attributable to Rexnord:
Basic
Diluted
Net sales
Gross profit
Net income (loss) from continuing operations
Income (loss) from discontinued operations, net of tax
Net income (loss)
Non-controlling interest (loss) income
Net income (loss) attributable to Rexnord
Net income per share from continuing operations:
Basic
Diluted
Income (loss) per share from discontinued operations:
Basic
Diluted
Net income per share attributable to Rexnord:
Basic
Diluted
$
$
$
$
$
$
$
$
$
$
$
$
$
Second Quarter
485.9
$
169.3
Fiscal 2016
Third Quarter
460.2
$
158.3
Fourth Quarter
492.6
$
167.8
$
Total
1,923.8
665.2
First Quarter
485.1
169.8
21.2
—
21.2
(0.1)
21.3
22.6
—
22.6
—
22.6
0.23
0.22
$
$
— $
—
0.23
0.22
$
$
24.3
—
24.3
(0.1)
24.4
0.24
0.24
$
$
— $
— $
0.24
0.24
$
$
0.8
(1.4)
(0.6)
(0.2)
(0.4)
0.01
0.01
$
$
(0.01) $
(0.01) $
— $
— $
First Quarter
503.6
178.2
11.6
0.4
12.0
(0.1)
12.1
Second Quarter
531.0
$
Fiscal 2015
Third Quarter
497.1
$
Fourth Quarter
518.5
$
$
197.0
37.8
(0.7)
37.1
(0.1)
37.2
0.37
0.36
$
$
(0.01) $
(0.01) $
0.37
0.36
$
$
181.5
6.7
(4.5)
2.2
—
2.2
0.07
0.06
$
$
(0.04) $
(0.04) $
0.02
0.02
$
$
189.5
35.7
(3.2)
32.5
0.2
32.3
0.35
0.34
$
$
(0.03) $
(0.03) $
0.32
0.31
$
$
68.9
(1.4)
67.5
(0.4)
67.9
0.68
0.67
(0.01)
(0.01)
0.67
0.66
Total
2,050.2
746.2
91.8
(8.0)
83.8
—
83.8
0.90
0.88
(0.08)
(0.08)
0.82
0.80
0.21
0.20
$
$
— $
—
0.21
0.20
$
$
0.11
0.11
$
$
— $
— $
0.12
0.12
$
$
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22. Related Party Transactions
Former 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 its stockholders, and the other with the Apollo Holders,
George M. Sherman (the Company's former Chairman of the Board of Directors) and entities then-controlled by Mr. Sherman
(collectively, the “Stockholders' Agreements”). All terms of the Stockholders' Agreements terminated upon the consummation of
the Company's IPO, except for the registration rights provisions described below.
Under the terms of the Stockholders' Agreements, the Company 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, in certain circumstances.
Three times in fiscal 2015 and twice is fiscal 2014, the Apollo Holders exercised their registration rights with respect to their
shares.
Consequently, 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 affiliated entities) related to those offerings. The offering expenses (excluding such underwriters’ discounts and commissions)
paid by the Company on behalf of the selling stockholders were $0.5 million and $1.4 million for the offerings completed in fiscal
2015 and 2014, respectively. Following these offerings, Apollo no longer owns any shares of the Company's stock.
Other
Apollo Global Securities, LLC, which was one of the underwriters in one of the fiscal 2015 securities offerings and each
of the fiscal 2014 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 Holders or Mr. Sherman and affiliated entities in
the fiscal 2015 and fiscal 2014 offerings were paid by them and not by the Company.
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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 (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon that evaluation, management has
concluded that our internal control over financial reporting was effective as of March 31, 2016.
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, 2016, 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.
87
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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 "Proposal 1: Election of
Directors" and "Corporate Governance" and in the definitive Proxy Statement for the Company’s fiscal 2017 annual meeting, to
be held on or about July 28, 2016 (the "Fiscal 2017 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 Rexnord Investor Relations, 247 Freshwater Way, Milwaukee, Wisconsin 53204. 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 "Corporate Governance - Directors' Compensation" in the Fiscal 2017 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" and "Proposal 2: Approval of the Amendment to, and Restatement of, the
Rexnord Corporation Performance Incentive Plan--Equity Compensation Plan Information" in the Fiscal 2017 Proxy
Statement.
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 2017 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 2017 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,
2016, 2015 and 2014 and consist of the following:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
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, 2016, 2015 and 2014
consists of the following:
Schedule II – Valuation and Qualifying Accounts
(in Millions)
Description
Fiscal Year 2014:
Valuation allowance for trade and notes receivable
Valuation allowance for excess and obsolete inventory
Valuation allowance for income taxes
Fiscal Year 2015:
Valuation allowance for trade and notes receivable
Valuation allowance for excess and obsolete inventory
Valuation allowance for income taxes
Fiscal Year 2016:
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
7.7
$
30.5
73.1
$
1.0
3.8
3.9
6.4
$
10.7
$
5.2
2.0
$
$
0.2
4.1
—
0.6
0.8
—
(0.1) $
(2.4) $
0.2
—
(4.8)
(22.6)
(0.4) $
(0.5) $
(0.6)
—
(3.5)
(31.4)
$
(6.8) $
— $
(0.1) $
(1.0) $
9.5
4.2
—
—
(0.3)
—
(7.3)
(2.0)
33.8
54.4
16.8
35.7
25.0
6.4
33.8
54.4
16.8
35.7
25.0
8.9
37.6
27.2
(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.
89
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EXHIBIT INDEX
Exhibit
Description
Incorporated Herein by Reference to
Filed
Herewith
2.1
3.1
3.2
10.1(a)
10.1(b)
10.2
10.3(a)
10.3(c)
10.3(d)
10.3(e)
10.3(f)
10.3(g)
10.4 (a)
10.4(b)
10.5
10.6
10.7
10.8(a)
10.8(b)
10.8(c)
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
Amended and Restated By-Laws as adopted on July 14,
2014
Exhibit 3.1 to the Company's Form 8-K dated July 14,
2014
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
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
Rexnord Management Incentive Compensation Plan
(revised as of July 29, 2010)*
The Company's 2012 Performance Incentive Plan (the
“Performance Incentive Plan”)*
Exhibit 10.1 to the Form 10-Q for the quarter ended
October 2, 2010 filed by RBS Global, Inc./Rexnord
LLC
Exhibit 10.32 to the Company's Registration
Statement on Form S-1, SEC File No. 333-174504
(the “2012 S-1”)
Form of Option Agreement under the Performance
Incentive Plan*
Exhibit 10.4 to the Company's Form 10-Q for the
quarter ended June 30, 2012
Form of Option and Restricted Stock Unit Agreement
under the Performance Incentive Plan*
Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended September 30, 2014
Form of Non-Qualified Stock Option and Performance
Stock Unit Agreement under the Performance Incentive
Plan*
Form of Restricted Stock Unit Agreement (Deferred
RSUs) for Directors under the Performance Incentive
Plan
Form of Restricted Stock Unit Agreement for Directors
under the Performance Incentive Plan (used for fiscal
2016 grants; superseded)*
Exhibit 10.2 to the Company’s Form 10-Q for the
quarter ended June 30, 2015
Exhibit 10.3 to the Company’s Form 10-Q for the
quarter ended June 30, 2015
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”)
First Amendment, dated August 6, 2015, to Employment
Agreement between Rexnord Corporation and Todd A.
Adams*
Exhibit 10.1 to the Company’s Form 8-K dated
August 6, 2015
Employment Agreement, dated November 9, 2012,
between Rexnord Corporation and Mark W. Peterson*
Exhibit 10.2 to the 9/29/12 10-Q
Form of Retention Bonus and Change in Control
Severance Agreement with certain Water Management
officers and key employees (including Craig Wehr)*
Rexnord Corporation Deferred Compensation Plan,
effective as of January 1, 2016
Exhibit 10.1 to the Company’s Form 10-Q for the
quarter ended December 31, 2015
Schedule of Compensation and Stock Ownership
Guidelines for outside members of the board, revised as
of December 2015*
Exhibit 10.2 to the Company’s Form 10-Q for the
quarter ended December 31, 2015
Scheduled of Compensation for outside members of the
board, effective May 2015* (superseded)
Exhibit 10.1 to the Company’s Form 10-Q for the
quarter ended June 30, 2015
Schedule of Compensation for outside members of the
board, effective for fiscal 2013* (superseded)
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
X
X
90
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10.10
10.12
10.12(a)
10.12(b)
10.1(c)
10.12(d)
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 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
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
Omnibus Amendment, dated as of December 30, 2015,
to the Receivables Sale and Servicing Agreement, dated
September 26, 2007, and to the Amended and Restated
Receivables Funding and Administration Agreement,
dated May 20, 2011, by and among Rexnord Funding
LLC., as an Originator, as the buyer and as the borrower,
Zurn Industries, LLC, as an originator, Zurn PEX, Inc.,
as an originator, Rodney Hunt - Fontaine Inc., as an
originator, GA Industries, LLC, as an originator,
Rexnord Industries, LLC, as the servicer, General
Electric Company as successor by merger to General
Electric Capital Corporation, as administrative agent,
and the swing line lender and the lenders signatory
thereto
Exhibit 10.1 to the Company’s Form 8-K dated
August 21, 2013
Exhibit 10.2 to the Form 8-K filed by RBS Global,
Inc./Rexnord LLC on March 16, 2012
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 Company’s Form 8-K dated
December 30, 2015
10.13(a)
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
Exhibit 10.1 to the 5/23/11 8-K
10.13(b)
See Exhibit 10.12(d) above
See Exhibit 10.12(d) above
10.14
10.15
10.16
Underwriting Agreement, dated as of May 28, 2014, by
and among Rexnord Corporation, Rexnord Acquisition
Holdings I, LLC and Rexnord Acquisition Holdings II,
LLC, as the selling stockholders, and Goldman, Sachs &
Co., Credit Suisse Securities (USA) LLC, Robert W.
Baird & Co. Incorporated and Deutsche Bank Securities
Inc., as representatives of the several underwriters named
in Schedule A thereto
Underwriting Agreement, dated as of August 11, 2014, 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.
Underwriting Agreement, dated as of November 12, 2014,
by and among Rexnord Corporation, Rexnord Acquisition
Holdings I, LLC and Rexnord Acquisition Holdings II,
LLC, as the selling stockholders, and Credit Suisse
Securities (USA) LLC
Exhibit 1.1 to the Company's Form 8-K dated May 28,
2014 (and filed on June 3, 2014)
Exhibit 1.1 to the Company's Form 8-K dated August
11, 2014
Exhibit 1.1 to the Company's Form 8-K dated
November 12, 2014
21.1
List of Subsidiaries of the Company
X
91
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Table of Contents
23.1
24
31.1
31.2
32.1
Consent of Independent Registered Public Accounting
Firm
Power of Attorney
Signatures page hereto
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
XBRL Taxonomy Extension Schema Document
101.CAL
101.DEF
XBRL Taxonomy Extension Calculation Linkbase
Document
XBRL Taxonomy Extension Definition Linkbase
Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
Document
X
X
X
X
X
X
X
X
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.
92
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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 18, 2016
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.
President, Chief Executive Officer
May 18, 2016
(Principal Executive Officer) and Director
Senior Vice President and Chief Financial Officer
May 18, 2016
(Principal Financial and Accounting Officer)
/s/ Todd A. Adams
Todd A. Adams
/s/ Mark W. Peterson
Mark W. Peterson
/s/ Paul W. Jones
Paul W. Jones
/s/ Mark S. Bartlett
Mark S. Bartlett
Director
Director
/s/ Thomas D. Christopoul
Director
Thomas D. Christopoul
/s/ Theodore D. Crandall
Director
Theodore D. Crandall
/s/ George C. Moore
George C. Moore
/s/ David C. Longren
David C. Longren
/s/ John M. Stropki
John M. Stropki
/s/ John S. Stroup
John S. Stroup
/s/ Robin A. Walker-Lee
Robin A. Walker-Lee
Director
Director
Director
Director
Director
93
May 18, 2016
May 18, 2016
May 18, 2016
May 18, 2016
May 18, 2016
May 18, 2016
May 18, 2016
May 18, 2016
May 18, 2016
89219 Rexnord 10-K.indd 93
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Management and Directors
EXECUTIVE OFFICERS
Todd A. Adams
President and Chief Executive Offi cer
Mark W. Peterson
Senior Vice President and
Chief Financial Offi cer
Rodney Jackson
Senior Vice President, Business
and Corporate Development
George J. Powers
Chief Human Resources Offi cer
Craig G. Wehr
Group Executive, President, Zurn
Patricia M. Whaley
Vice President, General Counsel
and Secretary
Kevin J. Zaba
Group Executive, President,
Process & Motion Control
DIRECTORS
Todd A. Adams (d)
President and CEO, Rexnord
Mark S. Bartlett (a)*
Retired Partner, Ernst & Young LLP
Thomas D. Christopoul (b)*
Co-founder and Executive Vice President,
54 Madison Partners
Theodore D. Crandall (a)
Senior Vice President and Chief Financial Offi cer,
Rockwell Automation, Inc.
Paul W. Jones (b) (d)*
Non-Executive Chairman, Rexnord, and
Retired Chairman and CEO, A.O. Smith Corporation
David C. Longren (c)
Senior Vice President, Polaris Industries, Inc.
George C. Moore (a)
Director, Wastequip, Inc., Pro Mach, Inc., and Encapsys, LLC,
and Retired Executive, Rexnord
John M. Stropki (b)
Retired Chairman, CEO and President,
Lincoln Electric Holdings, Inc.
John S. Stroup (c)* (d)
President and CEO, Belden Inc.
Robin A. Walker-Lee (c)
Retired Executive Vice President, General Counsel
and Secretary, TRW Automotive Holdings, Inc.
Committees of the Board
(a) Audit
(b) Compensation
(c) Nominating and Corporate
Governance
(d) Executive
*Denotes Committee Chairman
Non-GAAP Financial Information
In this annual report, we provide certain non-GAAP supplemental fi nancial information that we believe is useful to our stockholders in assessing our performance. Adjusted
EBITDA is provided because it is a key metric used to measure our compliance with our fi nancial covenants under our credit agreement. Management uses the other
non-GAAP supplemental information to assess our ongoing fi nancial 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 fi scal 2016 Form 10-K, and our fi lings with the Securities and Exchange Commission.
Cautionary Statement on Forward-Looking Statements
Information in this report may involve outlook, expectations, beliefs, plans, intentions, strategies or other statements regarding the future, which are forward-looking
statements. These forward-looking statements involve risks and uncertainties. All forward-looking statements included in this report are based upon information available
to Rexnord Corporation as of the date of the report, and Rexnord Corporation assumes no obligation to update any such forward-looking statements. The statements in
this report are not guarantees of future performance, and actual results could differ materially from current expectations. Numerous factors could cause or contribute to
such differences. Please refer to “Risk Factors” and “Cautionary Notice Regarding Forward-Looking Statements” in our fi scal 2016 Form 10-K, as well as Rexnord’s annual,
quarterly and current reports fi led on Forms 10-K, 10-Q and 8-K from time to time with the Securities and Exchange Commission for a further discussion of the factors
and risks associated with the business.
REXNORD | ANNUAL REPORT 2016
89219 RexnordAR2016_Cover.indd 6
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R
E
X
N
O
R
D
|
A
N
N
U
A
L
R
E
P
O
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T
2
0
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CORPORATE HEADQUARTERS
247 Freshwater Way
P.O. Box 2022
Milwaukee, WI 53201
(414) 643-3000
www.rexnord.com
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