Rexnord Corp. (RXN)

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Rexnord Corp. (RXN)
December 12, 2013
Water and Renewable Energy Solutions
Initiating Coverage with OUTPERFORM; Benefiting from
Improving Cash Flow and Recovering Water Markets
• Well positioned to benefit from firming markets and disciplined structure.
Given RXN’s short history as a publicly traded company, we believe few investors
appreciate the improving outlook resulting from strengthening end markets and a
disciplined operating and cash flow-driven culture. In our view, RXN stands to
benefit from its portfolio of water offerings amid a recovering water market and
ongoing global water challenges. Furthermore, we believe investors will continue
to warm up to an improved cash flow outlook from a recent debt refinancing and
operating leverage achieved through productivity and cost-containment initiatives.
• Water business is recovering. While the water management segment (WM) has
been revenue-constrained from FY09-FY12, the segment has experienced healthy
mid-single-digit organic growth over the last three quarters as it benefits from a
modest recovery in its end markets, new product introductions, and increasing
market share. Based on a recovering residential market, increasing state and local
taxes, ongoing water rate increases and what we anticipate as a recovery in nonresidential construction, the water segment should continue to grow in the midsingle digits or higher over the next three-five years.
• Recent refinancing helps improve cash flow and liquidity. On August 21, the
company tendered its 8.5% senior notes financed through a new credit facility at a
rate of 4%. This translates into approximately $48 million per year in interest
savings, or about $0.30 per share. As a result of the refinancing and ongoing
operating leverage, we estimate that free cash flow should approach $1.90 per
share in the next fiscal year (FY15, ending in March).
• High-margin business is still in recovery stage and could provide material
upside as end markets recover. While the WM segment appears to be
recovering, the high-margin Process & Motion Controls (PMC) business is still
sluggish owing to exposure to mining. We believe stabilization in the mining
market next year should provide fewer headwinds and possible upside to estimates
as other industrial markets demonstrate modest growth.
• Valuation. In valuing these shares, we rely on peer group multiples to EBITDA
and our DCF model. Incorporating both methodologies and using a peer group
multiple of 11X on our FY15 EBITDA estimate given the company’s growth and
improving margin profile, we arrive at a 12-month price target of $30 based on a
heavier weighting on the more conservative methodology.
FYE Mar
2013A
REV (M)
ACTUAL
CURR.
2014E
Q1 Jun
Q2 Sep
Q3 Dec
Q4 Mar
Year*
Change
$493.6A
$499.5A
$471.7A
$540.3A
$2,005.1A
2.5%
$508.7A
$514.5A
$493.6E
$563.4E
$2,080.2E
3.7%
2013A
EPS
Q1 Jun
Q2 Sep
Q3 Dec
Q4 Mar
Year*
P/E
Change
PREV.
2015E
CONS.
CURR.
$493.6A
$514.7A
$499.9E
$571.8E
$2,094.9E
$534.8E
$540.2E
$509.5E
$579.6E
$2,164.1E
4.0%
CONS.
CURR.
$0.19A
$0.26A
$0.32E
$0.48E
$1.34E
$0.33E
$0.41E
$0.39E
$0.49E
$1.62E
14.9x
27.0%
2014E
ACTUAL
CURR.
$0.19A
$0.20A
$0.10A
$0.25A
$0.74A
32.5x
8.8%
$0.17A
$0.32A
$0.35E
$0.43E
$1.27E
18.9x
71.9%
PREV.
PREV.
Price
$24.06
Rating
OUTPERFORM
12-Month Price Target
$30
David L. Rose, CFA
(213) 688-4319
david.rose@wedbush.com
James Kim
(213) 688-4380
james.kim@wedbush.com
Company Information
Shares Outst (M)
Market Cap (M)
52-Wk Range
Book Value/sh
Cash/sh
Enterprise Value (M)
LT Debt/Cap %
100.6
$2,419.3
$15.88 - $25.50
$4.0
$2.1
$4,198.3
74.4
Company Description
Rexnord is a leading manufacturer of
highly-engineered and specification-driven
products (valves, drainage equipment,
bearings and conveyer equipment), serving
a diverse array of end markets, including
industrial, commercial, aerospace and
municipal water.
CONS.
$539.5E
$548.3E
$529.8E
$604.4E
$2,216.1E
2015E
PREV.
CONS.
$0.35E
$0.43E
$0.39E
$0.54E
$1.70E
Source: Thomson Reuters
Consensus estimates are from Thomson First Call.
* Numbers may not add up due to rounding.
** WS EPS does not exclude stock options, LIFO inventory adjustment and other non-operating items
Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors
should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision. Please see page 25 of this
report for analyst certification and important disclosure information.
INVESTMENT THESIS
We believe Rexnord is well positioned to address the increasing global water challenges created by population growth, industrialization
of emerging markets, and the increased demand for clean, accessible water. Furthermore, through its disciplined operating structure
and a second platform offering highly engineered products to a variety of industrial markets, the company should experience steady
operating income growth and improving margins, while also benefiting from its substantial free cash flow to de-lever its balance sheet.
Given the short history as a publicly traded company and the highly levered balance sheet, we believe Rexnord’s value is still
underappreciated and the shares will outperform the peer group as investors recognize the margin and earnings improvement from
recovering end markets and the ongoing benefits from operating initiatives driven by a disciplined culture that is based on lean
management practices.
Formed by Apollo Management through a series of acquisitions, Rexnord operates two key platforms, Process & Motion Controls
(PMC) and Water Management. Following the IPO in March of 2012, results fell well below expectations as RXN customers reacted
quickly to the economic events coming out of Europe. A year later, the shares are now rebounding as end markets recover and
management is demonstrating the operating leverage inherent in its business, while also restoring credibility.
In our view, the company is starting to see the early benefits of a recovery in its water markets and several cost-containment initiatives
that should provide a further boost to margins and free cash flow. A significant debt refinancing this past quarter also paves the road
for a dramatic earnings step-up over the next four quarters.
As a highly levered company, Rexnord should see a meaningful increase in earnings as operating results improve. Furthermore, on
August 21, 2013, the company tendered its 8.5% notes, reducing interest expense by approximately $48 million annually, or $0.30 per
share. Meanwhile, the company continues to generate a significant amount of fee cash flow that should reach approximately $190
million next fiscal year, or $1.90/sh.
As a leading provider of valves, flood gates, backflow preventers, and other water safety products, we believe Rexnord is well
positioned to benefit from global water needs to manage water challenges. Most investors are aware the U.S. municipal water market
has been challenged over the last three years; and we believe there are early signs of a recovery as the rebound in residential housing
provides a stronger backdrop for municipalities through increased taxes and connection fees. Meanwhile, we continue to see water
rate increases of approximately 6% annually. All this provides a healthy backdrop while Rexnord continues to gain market share. For
the last three quarters, the water management segment has experienced YOY core (organic) growth between 6% and 11%. We would
not only expect a recovering housing market to benefit the municipal water market, but also non-residential construction as noted by the
improving ABI. This support a mid-single-digit growth outlook as the company benefits from a rebound in its end markets while also
benefiting from a substantial repair and replacement market. Importantly, we believe with modest revenue growth the company can
improve margins. Margins in the Water Management segment are still 500 bps below FY10 peak levels.
While the company’s water management business is demonstrating signs of recovery, RXN’s high-margin PMC business still hasn’t hit
full stride following the financial crisis and a more recent decline in the mining markets. However, owing to its strong after-market
business and ongoing productivity initiatives, operating margins continue to grow, with EBITDA margins reaching an impressive 25% in
FY13. We believe the company will continue to build on this platform with bolt-on acquisitions and look for opportunities to drive
margins higher through its disciplined operating structure based on lean initiatives.
Despite an environment where revenue growth for industrials companies has been tepid, RXN is demonstrating that it can drive growth
by incorporating lean management techniques in its operating philosophy (RBS) to drive productivity and cash flow while garnering
market share. Although leverage has been an issue for many investors, we believe the company’s focus on cash flow and its ability to
successfully navigate through the financial crisis make it a less risky investment than it may appear. The recent debt re-financing along
with a recovery in its businesses should create a meaningful improvement in cash flow over the next two years, creating a much
stronger financial position.
In valuing these shares, we rely on peer group multiples to EBITDA and our DCF model. Given the dramatic improvement in earnings
and cash flow resulting from the re-financing and the operating leverage in the business, we believe investors should look to FY15
(ending March) EBITDA. Incorporating both methodologies and using a peer group multiple of 11X on our FY15 EBITDA estimate
given the company’s growth and improving margin profile, we arrive at a 12-month price target of $30 based on a heavier weighting on
the more conservative methodology.
Risks to the attainment of our price target include: Given the company’s leveraged balance sheet, a sudden deterioration in end
markets could have a pronounced negative effect on profitability and valuation. Given the strength in the residential markets and the
encouraging indicators for non-residential construction such as the ABI, investor sentiment is becoming more constructive on the
potential turn-around in the commercial construction sector. A reversal in these trends could have a negative impact on valuation.
Additionally, our valuation includes peer group multiples which have appreciated dramatically over the last 12 months. A revaluation of
industrial valuations could also affect our price target. Additionally, RXN’s largest shareholder, Apollo Management, is in the process of
divesting its ownership stake. As a result, it may sell additional shares of the company or look to sell part or all of the company.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 2
COMPANY OVERVIEW
Formed in 2006 through the acquisition of RBS Global by certain affiliates of private equity firm Apollo and its management, Rexnord
operates under two key platforms, Process & Motion Control (PMC) and Water Management (WM). The first platform, PMC,
manufactures specification-driven and highly-engineered mechanical components including gears, bearings, couplings and conveying
equipment for a diverse set of industrial markets, including general industrial, mining, food & beverage, aerospace, energy, agriculture,
forest & wood, construction & equipment and cement & aggregates. The second platform, WM, formed through the acquisition of the
Zurn plumbing business in 2007, is the water segment which manufactures valves, drainage products and gates primarily for the
commercial construction and municipal water and wastewater markets, and to a lesser extent, residential construction. The water
management segment now represents approximately 37% of Rexnord’s sales. The company completed its initial public offering in
March 2012 at $18 per share, using most of the proceeds to repay debt while also creating an exit strategy for Apollo. Following the
company’s June 2013 secondary offering, Apollo reduced its ownership to approximately 57% of its common stock outstanding.
As noted above, the company currently operates under two segments. The PMC segment was the foundation of RBS Global that was
acquired by Rexnord and represents approximately 63% of total sales and 74% of total adjusted EBITDA, as of FY2013. The WM
segment was a new platform created through the acquisition in 2007 and represents approximately 37% of total sales and 26% of total
adjusted EBITDA.
The company sells primarily to domestic markets comprising approximately 67% of the total sales. Sales in Europe represent
approximately 19% of total sales while rest of the world represents 14%. The company has 37 principal PMC manufacturing, repair and
warehouse facilities, and 25 WM manufacturing and warehouse facilities around the world.
As of March 2013, the PMC segment had approximately 280 US and 870 foreign active patents and the WM segment had
approximately 80 US and 70 foreign active patents.
Figure 1: TTM Revenue by Segment (FY2013)
Water
Management,
37%
Total Sales:
$2,005 Process &
Motion
Control, 63%
Source: Company data, Wedbush Securities, Inc.
Figure 2: Revenue by Geography (FY2013)
Europe
19%
Rest of
World
14%
US
67%
Source: Company data, Wedbush Securities, Inc.
The Process & Motion Control segment is the larger segment by revenue and operating income and benefits from higher margins due
to highly engineered and specified product offerings. However, the Water Management segment is starting to benefit from the recent
signs of recovery in commercial construction and municipal spending, following several significant acquisitions and having undergone a
slower recovery in its end markets. We believe the water management segment should see a meaningful improvement in operating
margins as the end markets begin to recover and the company benefits from ongoing lean initiatives.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 3
The following table provides an overview of each segment.
Figure 3: Company Overview ($ in millions)
FY2013 Financials
Process & Motion Control
Water Managem ent
$1,266
$739
% of total sales
63%
37%
EBITDA*
Sales
$310
$111
EBITDA margin %
24%
15%
Adj. Operating inc.*
$239
$70
EBIT margin %
19%
9%
End Markets
General Industrial, Mining, Food & Beverage,
Aerospace, Energy, Agriculture,
Forest & Wood, Construction & Equipment
Cement & Aggregates
Water Infrastructure (municipal),
Infrastructure,
Business / Commercial,
Residential
Products
Gears, Couplings, Industrial Bearings,
Aerospace Bearings and Seals, FlatTop Chain,
Engineering Chain, and Conveying Equipment
Drainage Products,
Flush Valves and Faucet products,
Engineered Valves and Gates for the w ater
and w astew ater treatment market, and
PEX piping
Select Brands
Rexnord® , Rex®, Falk®, Marbett®, MCC, LinkBelt®, Thomas®
Zurn®, Wilkins®, VAG®, GA®, Rodney
Hunt® and Fontaine®
ABB, Emerson, Eaton, Kayden, NSK,
RBC Bearings, Schaeffler, SKF, Timken
ITT, Watts, Mueller Water Products, Sloan,
DeZURIK, Cla-val, NIBCO, Apolllo Valves
Key Com petitors
Source: Company data, Wedbush Securities, Inc.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 4
As seen below, the company experienced significant volatility in its core growth during the recent economic downturn primarily driven
by a more volatile PMC segment. However, the company’s backlog is beginning to stabilize as end markets begin to recover.
Figure 4: Company Revenues & Segment Core Growth
$2,500
Figure 5: Company Backlog
20%
15%
$2,000
$600
25%
$550
10%
5%
$1,500
0%
20%
$500
$450
15%
(5%)
$1,000
(10%)
(15%)
$500
$400
10%
$350
(20%)
(25%)
(30%)
–
$300
5%
$250
$200
0%
FY2008A
Revenue
WM Core Growth
FY2010A
Backlog
PMC Core Growth
Source: Company data, Wedbush Securities, Inc.
FY2009A
FY2011A
FY2012A
FY2013A
% Ship beyond next fiscal year
Source: Company data, Wedbush Securities, Inc.
The following is a list of corporate events in the company history. Through the acquisition of Zurn in 2007, the company began its water
business, and has since made meaningful and successful acquisitions to expand and broaden its product portfolio in both segments.
Figure 6: Company History – Significant Corporate Events
Date
Aug-13
Corporate Event
Acquired certain assets of L.W.Gemmell (LWG) for $7.7 million (Australia-based distributor of non-residential plumbing
products)
Aug-13
Redeemed 8.5% senior notes due 2018 with a new term loan
Aug-13
Acquired Micro Precision Gear Technology Limited for $22.2 million (United Kingdom-based built-to-print
manufacturer of specialty gears and electric motor components primarily sold to the aerospace market)
Apr-13
Acquired Klamflex Pipe Couplings Ltd. for $4.5 million (South Africa-based manufacturer of pipe couplings, flange
adapters, dismantling joints and repair clamps)
Dec-12
Acquired Cline Acquisition Corp. for $19.6 million (service business specializing in the manufacturing, repair and
refurbishment of drive shafts, clutches and brakes)
Apr-12
Redeemed 11.75% notes due 2016 with the proceeds from the IPO
Apr-12
Completed the IPO of its common stock (27.2 million) with aggregate proceeds of $458.3 million, net of costs
Oct-11
Acquired VAG Holding GmbH for $238.6 million (a global manufacturer of engineered valve solutions across a broad
range of applications, including water distribution, wastewater treatment, dams and hydropower generation, as well as
various other industrial applications)
Apr-11
Acquired Autogard Holdings Ltd for $18.2 million (European-based manufacturer of torque limiters and couplings)
Aug-10
Acquired full control of Mecanica Falk, a joint venture (Mexico-based distributor of its Process & Motion Control product
lines in Latin America)
Feb-09
Acquired Fontaine for $24.2 million (manufacturer of stainless steel slide gates and other engineered flow control
products for the municipal water and wastewater markets)
Feb-07
Acquired Zurn Plumbing products business to begin its Water Management business
Jul-06
Rexnord incorporated in connection with the acquisition by affiliates of Apollo Management and management of RBS
Global (foundation of Process & Motion Control), which was acquired from the Carlyle Group for $1,825 million
May-05
Acquired Falk Corporation from Hamilton Sundstrand for $301.3 (manufacturer of gears and lubricated couplings)
Source: Company data, Wedbush Securities, Inc.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 5
SEGMENT OVERVIEW
The company is comprised of two businesses, Process & Motion Control and Water Management. The PMC segment was the initial
platform of the RBS Global that was acquired to form Rexnord, while the WM segment was created through the acquisition of Zurn
Plumbing in 2007 and expanded through additional acquisitions. The company has also been actively making strategic acquisitions in
its PMC segment as it continues to build a diversified portfolio.
Figure 7: PMC Financials
Figure 8: WM Financials
$1,600
26%
$800
26%
$1,400
24%
$700
24%
$1,200
22%
$600
22%
20%
$1,000
20%
$500
18%
$800
18%
$400
16%
16%
$600
14%
$400
12%
$200
10%
8%
–
Revenue
Adj. Op Margin
Adj. EBITDA
Source: Company data, Wedbush Securities, Inc.
$300
14%
$200
12%
$100
10%
8%
–
Revenue
Adj. Op Margin
Adj. EBITDA
Source: Company data, Wedbush Securities, Inc.
Process & Motion Control segment manufactures and sells highly-engineered mechanical components including gears, coupling,
bearing, seals, chains and conveyor equipment. Most of these products are integrated into large-scale manufacturing processes and
are specified into customers’ initial designs, providing Rexnord with an installed customer base with a predictable replacement cycle.
As a result, the company has a stable recurring business with approximately 47% of its total sales from aftermarket business in FY
2013. Customers include OEMs and distributors from a variety of industries, including general industrial, mining, food & beverage,
aerospace, energy, agriculture, forest & wood, construction & equipment and cement & aggregates. This industry is fragmented, with
many small local competitors and several large domestic and global companies that have a small percentage of their businesses that
compete with Rexnord.
Rexnord PMC components are either incorporated into products sold by OEMs or sold to end users through its distributors as
aftermarket products. The company has more than 2,600 distributor locations worldwide for its PMC products and its largest distributor
is also its largest customer accounting for approximately 8% in FY2013.
Figure 9: PMC Revenue by End Market (FY2013)
Agriculture
4%
Construction &
Equipment
3%
Energy
7%
Forest & Wood
4%
Cement &
Aggregates
3%
General
Industrial
30%
Mining
20%
Source: Company data, Wedbush Securities, Inc.
David L. Rose, CFA (213) 688-4319
Rest of World
16%
Europe
17%
US
67%
Aerospace
13%
Food &
Beverage
16%
Figure 10: PMC Revenue by Geography (FY2013)
Source: Company data, Wedbush Securities, Inc.
Rexnord Corp. | 6
The PMC segment benefited from strong demand, market share gains, and new product growth in FY2012 and generated 14% core
growth. However, slower industrial demand in its end markets, excluding mining, energy and aerospace, resulted in a slightly down
year in FY2013. In 1H FY2014, recovery in industrial and continuing growth in energy and aerospace offset a decline in its mining
market, which comprised 20% of segment sales in FY13.
Figure 11: PMC Historical YOY Core Growth Rates
1Q12A 2Q12A 3Q12A 4Q12A FY2012A 1Q13A 2Q13A 3Q13A 4Q13A FY2013A 1Q14A 2Q14A
PMC
20%
12%
11%
14%
14%
2%
3%
(3%)
(4%)
(1%)
–
1%
Source: Company data, Wedbush Securities, Inc.
The PMC market is largely represented by the bearings and the conveyor equipment industries. A Freedonia Group study estimates
1
that the bearings market in the US is expected to increase 4.4% per year to $12.9 billion in 2017 from 2012 . This market includes
products, such as ball bearings, roller bearings, plain bearings and mounted bearings, and serves a variety of industries, including
automobiles, machinery, aerospace, engines, turbines, power transmission, construction, mining and oilfield machinery, and material
handling.
According to the Conveyor Equipment Manufacturers Association (CEMA), total shipments of unit handling equipment and bulk
handling equipment, including bearings used in conveyors, in North America totaled $10.4 billion in 2012, up 22.4% YOY, while new
2
orders amounted to $10.6 billion, up 14.1%. CEMA estimates a more modest increase of 5% in shipments for 2013.
Figure 12: Shipments and Orders of Unit/Bulk Handling Equipment in North America
$12
40%
30%
$10
20%
in Billions
$8
10%
0%
$6
-10%
$4
-20%
$2
-30%
$0
-40%
2007
2008
Orders
2009
2010
Shipments
2011
2012
% Chg Book
2013 1H
% Chg Ship
Source: CEMA, Wedbush Securities, Inc.
1
2
The Freedonia Group, August 2013. Bearings. US Industry Study with Forecasts for 2017 & 2022
Conveyor Equipment Manufacturers Association, March 2013. Semi-Annual Press Release
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 7
We believe that the growth of bearings market is directly proportional to the global industrial production. As depicted below, industrial
production has been steadily recovering from the recent downturn and many industrial companies are seeing the bottom and beginning
to see the momentum turn to their favor. Furthermore, aerospace order trend is a good indicator of Rexnord’s aerospace business that
makes up approximately 13% of its PMC sales. Based on order trends and the company and competitor commentary, aircraft orders
have picked up in recent quarters which should benefit Rexnord for the next several years.
Figure 13: Industrial Production
Figure 14: Aircraft Orders
Boeing & Airbus Gross Orders
3,500
250%
3,000
200%
2,500
150%
2,000
100%
1,500
50%
1,000
0%
500
-50%
0
-100%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Boeing & Airbus
Source: Federal Reserve
David L. Rose, CFA (213) 688-4319
% Change
Source: Boeing and Airbus Company data, Wedbush Securities, Inc.
Rexnord Corp. | 8
The following figures demonstrate the wide range of product offerings in Rexnord’s PMC portfolio.
Figure 15: Rexnord Bulk Handling Product Portfolio
Source: Company data
Figure 16: Rexnord Unit Handling Product Portfolio
Source: Company data
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 9
Below are figures of highly engineered components offered by Rexnord in its PMC product portfolio.
Figure 17: Gear Drives
Figure 18: Bearings
Source: Company data
Source: Company data
Figure 19: Couplings
Figure 20: Conveyor Chains & Equipment
Source: Company data
Source: Company data
Figure 21: Brakes and Clutches
Figure 22: Seals
Source: Company data
Source: Company data
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 10
Water Management segment manufactures and sells professional grade specification drainage products, flush valves, faucet products,
backflow prevention pressure release valves, and engineering valves and gates for the water and wastewater treatment markets,
including municipal, infrastructure, commercial/business and residential construction markets. This industry is highly competitive, but
no competitor directly competes with Rexnord on all of its product offerings. Many of the products are specified in a project, while its
well-established brands improve its competitive positioning.
Rexnord WM products are distributed through independent sales representatives, plumbing wholesalers and distributors. The company
has approximately 1,100 independent sales representatives for its WM products across 210 sales agencies in North America and
approximately 240 direct sales and marketing associates in 18 countries outside of North America.
Figure 23: WM Revenue by End Market (FY2013)
Figure 24: WM Revenue by Geography (FY2013)
Residential
11%
Rest of World
12%
Europe
22%
Water
Infrastructure
38%
Business /
Commercial
24%
US
66%
Infrastructure
27%
Source: Company data, Wedbush Securities, Inc.
Source: Company data, Wedbush Securities, Inc.
The following table shows the company’s water management product/brand portfolio and their respective markets.
Figure 25: Water Management Product Portfolio
Water Managem ent
Product Description
Zurn
Plumbing fixtures and fittings, including specification drainage, chemical drainage, flo-thru trench drain, light commercial
specialty plumbing, commercial brass flush valve and commercial faucet products for non-residential construction market
VAG
Highly engineered valves for applications in the water, wastewater and power generation industries w orldw ide
GA Industries
Automatic control, check and gate valves and other engineered flow control products used in the w ater and w astew ater
markets in municipal, hydropower and industrial environments
Rodney Hunt
Valves, gates, and actuator systems for engineered flow control in water, wastewater and hydropower facilities w orldw ide
Fontaine
Sluice gates and engineered flow -control systems for municipal water treatment markets w orldw ide
Source: Company data, Wedbush Securities, Inc.
Rebounding from the trough of the U.S. municipal water market that has been challenged over the last three years, we believe Rexnord
is poised to benefit from a recovering non-residential market and construction backlog build. For the last three quarters, the water
management segment has experienced YOY core (organic) growth between 6% and 11% in good part driven by market share gains.
We would expect mid-single-digit growth as the company begins to benefit from a rebound in its water end markets as the recovery in
residential housing provides support for municipal water infrastructure through increased taxes and connection fees. We also believe
the commercial segment rebound is not far behind based on end market commentary and an improving ABI.
Figure 26: Water Management Core Growth
1Q12A 2Q12A 3Q12A 4Q12A FY2012A 1Q13A 2Q13A 3Q13A 4Q13A FY2013A 1Q14A 2Q14A
WM
2%
6%
(3%)
1%
2%
(9%)
–
1%
11%
1%
8%
6%
Source: Company data, Wedbush Securities, Inc.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 11
The following figures demonstrate the wide range of water flow and management products offered in Rexnord’s WM portfolio.
Figure 27: Water Treatment – GA Industries
Figure 28: Wastewater – VAG
Source: Company data
Source: Company data
Figure 29: Pressure Management – VAG
Figure 30: Power Plants – Rodney Hunt
Source: Company data
Source: Company data
Figure 31: Industrial – Fontaine
Figure 32: Commercial – Zurn Wilkins Water Control
Source: Company data
Source: Company data
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 12
The following figure demonstrates Zurn’s total building solutions for water management
Figure 33: Zurn Product Portfolio – Total Building Solutions
Source: Company data
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 13
INVESTMENT OUTLOOK
We believe the investment backdrop remains favorable for Rexnord as the company continues to benefit from an economic recovery,
its specification-driven and highly-engineered business model with a strong installed customer base and after-market business, and its
lean and disciplined operating culture driven by the Rexnord Business System (RBS). Furthermore, we expect the company to build on
its track record of successful acquisitions and expand its product offerings and end markets through strategic acquisitions.
•
Gradual recovery in North American Municipal. We believe there is continued evidence that the North American municipal
water market is beginning to demonstrate signs of a gradual recovery that should strengthen into next year. An improving
residential market has boosted state and municipal taxes (as seen below) and connection fees, while water agencies continue to
raise rates by approximately 6% annually, shoring up water budgets. The green shoots we have seen to date have largely been in
the maintenance, repair and operations category as municipalities play catchup on delayed spending. Based on our discussions
with industry leaders, including our roundtable from WEFTEC this fall, we believe the outlook for 2014 should improve, further
supported by the aforementioned factors that are shoring up municipal budgets.
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
15%
10%
5%
0%
(5%)
(10%)
(15%)
Q1'06
Q2'06
Q3'06
Q4'06
Q1'07
Q2'07
Q3'07
Q4'07
Q1'08
Q2'08
Q3'08
Q4'08
Q1'09
Q2'09
Q3'09
Q4'09
Q1'10
Q2'10
Q3'10
Q4'10
Q1'11
Q2'11
Q3'11
Q4'11
Q1'12
Q2'12
Q3'12
Q4'12
Q1'13
Q2'13
(in billions)
Figure 34: Total State and Local Tax Revenue
Source: US Census Bureau, Wedbush Securities, Inc.
•
Commercial construction market should provide a nice tailwind. As evidenced by increasing construction backlog in the US
and Canada, Rexnord is seeing the initial signs of the early recovery in the commercial market, which should provide a nice
tailwind for the next several years. The commercial/business end markets represent approximately 24% of the WM segment sales.
In our view, Rexnord is poised to benefit from this recovering market given the strength of its brands along with its broad offerings
and distribution. In order to fully benefit from the expected recovery, the company has invested in adding additional product
offerings and expanded into regions where it did not previously compete in in order to further drive growth. Incorporating its Voice
of Customer philosophy, RXN continues to identify new products and opportunities to drive its vitality index and market share.
Figure 35: U.S. Non-Residential Construction Spending – Seasonally Adjusted Annual Rate
Source: US Census
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 14
•
Meaningful operating leverage, use of RBS to drive operating margins. The company has embraced lean manufacturing
practices and developed its Rexnord Business System (RBS) over several years based on customer and employee engagement,
process-based operating practices that are scalable, with a focus on continuous improvement. Through RBS, the company is
lowering material costs, driving productivity, reducing its manufacturing footprint, controlling SG&A, while also driving organic
growth. As part of implementing RBS in Zurn, it improved its on-time delivery from 85% to 94%. By moving to electronic Kaban,
the company was able to dramatically reduce inventory while offering two-day delivery capability to customers. We continue to see
this play out across the global platform as the company improves the efficiency of the supply chain and reduces waste within the
four walls. The company is also focused on cost take-out through value add/value engineering (VAVE). Over the lasts 2.5 years,
the company has taken several actions to reduce its manufacturing footprint, incurring $23 million in restructuring charges. While
reducing costs and controlling SG&A, RXN has created significant, meaningful operating leverage that should become much more
evident as end markets rebound.
The following figures show our margin growth expectations for each segment. Even though we have factored in modest margin
improvements in the next few years, we believe our water management margin projections are still well below peak margins,
providing potential upside to our estimates.
Figure 36: PMC Margin Growth Projections
Figure 37: WM Margin Growth Projections
$1,600
26%
$900
26%
$1,400
24%
$800
24%
$1,200
22%
$700
22%
20%
$600
20%
18%
$500
18%
16%
$400
16%
14%
$300
14%
$400
12%
$200
12%
$200
10%
$100
10%
$1,000
$800
$600
8%
–
Revenue
Adj. Op Margin
Source: Company data, Wedbush Securities, Inc.
Adj. EBITDA
8%
–
Revenue
Adj. Op Margin
Adj. EBITDA
Source: Company data, Wedbush Securities, Inc.
•
Refinancing improves financial outlook. In August 2013, the company tendered its 8.5% senior notes financed through a new
credit facility at a rate of 4%. This translates into approximately $48 million per year in interest savings, or about $0.30 per share.
As a result of the refinancing, the company has substantially improved its cash flow position and we estimate that free cash flow
should approach $1.90 per share in the next fiscal year (FY15). Additionally, we expect a healthy EBITDA to net interest expense
ratio of approximately 5.5x in FY15.
•
Potential for future acquisitions and further review of strategic alternatives. While we are not factoring in any acquisitions,
Rexnord has a disciplined operating structure with a history of making strategic acquisitions to expand and further diversify its
product offerings. We believe this provides additional upside to our estimates. In early 2013, the board also reviewed strategic
alternatives to enhance shareholder value by assessing potential sale or divestiture of its business platforms. Although the board
had concluded that the best alternative at that time was to maintain status quo, we believe the board would still consider divesting
some or all of the assets in the future if market conditions become more favorable to the company.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 15
FINANCIAL OVERVIEW AND ANALYSIS
The company continues to benefit from recovering end markets, market share gains, and strategic acquisitions, while improving its cash
flow generation as it continues to transition from an LBO company to a public company. Rexnord registered strong core growth rates of
10% and 13% in FY2012 and 2011, respectively, primarily driven by strong core growth from PMC that experienced 14% and 18%
increases in FY2012 and 2011, respectively. Even though 2013 was a muted year with flat revenue growth, the company is starting to
benefit from market share gains and a recovery in the non-residential market registering, high-single to low-double-digit core growth for
the Water Management segment in the past three quarters ending 2QFY14. We expect that Rexnord will benefit materially from the
recovering end markets, particularly in non-residential construction market, and return to more consistent mid- to high-single-digit
growth for the next three to five years.
Revenues
In the most recent quarter (2QFY14), the company reported revenues of $514.5 million consisting of 3% core growth YOY, comprised
of 6% core growth in water management and 1% core growth in process and motion control.
For the Process & Motion Control segment, revenues of $311.8 million experienced a 1% core growth YOY, driven by low-single-digit
growth in most of its end markets (particularly energy, food & beverage and aerospace), partially offset by a decline of approximately
9% to 11% in the bulk material handling (mining) markets. Its book-to-bill of 1.0 in the quarter was at or above 1.0 for first time in the
last 5 quarters indicating a stabilizing order trend.
For the Water Management segment, revenues of $202.7 million experienced 6% core growth primarily driven by market share gains
and increased sales in its non-residential construction markets. Zurn benefited from high-single-digit core growth, primarily driven by
market share gains, despite still-declining market conditions that are poised for a strong recovery, while VAG experienced its backlog
grow based on its book-to-bill of 1.16 in the quarter. We believe the company is also well positioned to benefit from a market recovery
in the non-residential market as we see construction backlog build in the US and Canada.
Margins
For the quarter, the company reported adjusted EBITDA of 20.0%, down 10 bps YOY. The reported adjusted operating margin was
14.8%, up 50 bps YOY. The company excludes all non-recurring, one-time charges, as well as stock options and LIFO inventory
adjustments from its adjusted figures. Including stock options and LIFO expenses, our adjusted EBITDA margin for the quarter was
19.6%.
The PMC segment reported adjusted EBITDA margin of 24.9%, which declined 20 bps YOY. The reported adjusted operating margin
of 19.5% improved 20 bps YOY due to higher incremental margin from RBS-driven margin expansion. Including stock options and
LIFO expenses, our adjusted EBITDA margin and operating margin were 24.6% and 19.2%, respectively.
The WM segment reported adjusted EBITDA margin of 15.8%, which declined 20 bps YOY. The reported adjusted operating margin of
11.1% improved 80 bps YOY, resulting from increased operating leverage on higher YOY sales and lower amortization expense related
to intangible assets acquired from VAG, partially offset by investments in strategic growth initiatives. Including stock options and LIFO
expenses, our adjusted EBITDA margin and operating margin were 15.6% and 11.0%, respectively.
Balance Sheet and Liquidity
At the end of Q2FY2014, the company had a total debt balance of $1,985 million and a cash balance of $206 million, resulting in a net
debt leverage ratio of 4.3x. During the quarter, the company refinanced its debt and retired its high interest-bearing senior notes, which
should generate approximately $48 million of cash interest savings annually, or $0.30 of EPS accretion. In the quarter, the company
generated approximately $25 million of free cash flow and we expect the company to materially improve its free cash flow generation as
a result of the recent refinancing terms. In connection with the transaction, the company incurred $129 million pretax loss in the debt
extinguishment including the tender premium, write-off of deferred financing fees, and transaction expenses.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 16
The below figure shows the capital structure of the company over time, highlighting its refinancing events.
Figure 38: Long-term Debt
2Q14A
FY2013A
FY2012A
$1,930.1
$934.7
$945.3
11.75% Senior subordinated notes due 2016
–
–
$300.0
10.125% Senior subordinated notes due 2012
–
–
$0.3
8.50% Senior notes due 2018
–
$1,145.0
$1,145.0
$2.0
$2.0
$2.0
Other
$53.3
$49.9
$31.1
Total
$1,985.4
$2,131.6
$2,423.7
$33.2
$169.3
$10.3
$1,952.2
$1,962.3
$2,413.4
4.3x
3.9x
5.3x
Term Loans
8.875% Senior notes due 2016
Less current maturities
Long-term debt
Bank Net Debt Leverage Ratio
Source: Company data, Wedbush Securities, Inc.
Since the IPO, the company has continued to improve its liquidity through free cash flow generation and by retiring its high interestbearing notes and refinancing with more favorable terms as highlighted below.
•
On August 21, 2013, the company amended its credit agreement (Third Restated Credit Agreement) which currently consists of a
new term loan of $1,950 million and a revolver of up to $265 million. The proceeds from the new term loan were used to retire all
of the 8.50% senior notes due 2018 and its previous term loans and other fees and expenses. As of September 2013, the
weighted average interest rate was 4.00%, determined as the LIBOR (1% floor) plus an applicable margin of 3.00%.
•
During Q1FY2013, the company used a portion of its proceeds from the IPO completed on April 3, 2012 to retire all of the 11.75%
senior subordinated notes due 2016.
During the quarter, the company also entered into $650 million of interest rate swaps to fix a portion of its variable rate debt at
approximately 4.55%.
Additionally, Rexnord has continued to be acquisitive and executed three acquisitions during the quarter of which two transactions
closed in the quarter. The two acquisitions contributed approximately $25 million to $30 million of revenue and $0.04 of EPS on an
annualized basis.
Outlook
Management provided adjusted EPS guidance of $1.32 to $1.38, up from $1.12 to $1.18, for the full year, and $0.29 to $0.32 for the
third quarter. The company also raised its core growth expectations to 3% to 4% for the full year, up from 2% to 4%. For the third
quarter, the company expects revenues in the range of $495 million to $505 million.
Given its strong operating leverage and increasing market share, we expect FY2014 EPS estimate of $1.27, which does not adjust for
stock options, LIFO inventory adjustments and all other non-operating items added back in the company EPS guidance figures. In the
first half of the year, the company added back adjustments totaling $11.8 million, or approximately $0.08 per share, after tax –
comprised of $3.5 million, $2.2 million and $6.1 million for stock options, LIFO expense and all other non-operating items, respectively.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 17
MANAGEMENT OVERVIEW
Executive Management:
Todd A. Adams – President and Chief Executive Officer
Mr. Adams became President and Chief Executive Officer of Rexnord in September 2009 and became a director in October 2009. He
joined the company in 2004 as Vice President, Treasurer and Controller and has also served as Senior Vice President and Chief
Financial Officer from April 2008 to September 2009 and as President, Water Management in 2009. Prior to Rexnord, Mr. Adams held
various positions at The Boeing Company, APW Ltd. and Applied Power Inc. (currently Actuant Corporation).
Mark W. Peterson – Senior Vice President and Chief Financial Officer
Mr. Peterson became Senior Vice President and Chief Financial Officer in November 2011. He has also served as Vice President and
Controller of Rexnord from 2008 to 2011 and as a Rexnord Divisional CFO from 2006 to 2008. Prior to Rexnord, Mr. Peterson was
Corporate Controller of Gehl Company from 2002 to 2006, and held positions at APW Limited and KPMG. Mr. Peterson is a certified
public accountant.
Praveen R. Jeyarajah – Corporate & Business Development
Mr. Jeyarajah became Executive Vice President, Corporate & Business Development in April 2010. He first became a director of
Rexnord in connection with the Carlyle Acquisition in 2002 and served in that capacity until the Apollo acquisition in July 2006. He
again became a director in October 2006. Prior to joining the management team, he was a Managing Director at Cypress Group, LLC
from 2006 to 2010 and a Director of Jacuzzi Brands Corp. until 2010. He was also a Managing Director of Carlyle from 2000 to 2006.
Prior to that, Mr. Jeyarajah worked at Saratoga Partners and Dillon, Read & Co., Inc.
Board of Directors:
George M. Sherman – Non-Executive Chairman
Mr. Sherman has served as Non-Executive Chairman and director since 2002. He is a principal of Cypress Group LLC. Mr. Sherman
also currently serves as the non-executive Chairman of Jacuzzi Brands Corp. and has served as the Chairman of Campbell Soup
Company from 2001 to 2004. Prior to Campbell Soup, he was President and Chief Executive Officer at Danaher Corporation from 1990
to 2001. Prior to Danaher, he was Executive Vice President at Black & Decker Corporation.
Laurence M. Berg – Director
Mr. Berg became a director in July 2006 upon consummation of the Apollo acquisition. He is a Senior Partner of Apollo Management,
L.P. Prior to joining Apollo in 1992, Mr. Berg was a member of the Mergers and Acquisition Group at Drexel Burnham Lambert. He is
also a director of Jacuzzi Brands Corp., Panolam Industries International, Inc. and ABC Supply Co. Inc., and has previously served as a
director of Connections Academy LLC, Bradco Supply Corp., Educate, Inc., GNC Corp., Goodman Global Holdings, Inc., Hayes
Lemmerz International, Inc. and Rent A Center, Inc.
Peter P. Copses – Director
Peter P. Copses became director in July 2006 upon consummation of the Apollo acquisition. He is a Senior Partner of Apollo
Management, L.P. Prior to joining Apollo in 1990, Mr. Copses was an investment banker at Drexel Burnham Lambert, and
subsequently at Donaldson, Lufkin & Jenrette Securities. Mr. Copses is also a director of Claire’s Stores, Inc. and CKE Restaurants,
Inc. and has previously served as a director of Linens N’ Things, Inc., GNC Corp., Rent A Center, Inc. and Smart & Final, Inc.
Damian J. Giangiacomo – Director
Mr. Giangiacomo became a director in October 2006. He is a principal of Apollo Management, L.P. Prior to joining Apollo in July
2000, Mr. Giangiacomo was an investment banker at Morgan Stanley & Co. He is also a director of Jacuzzi Brands Corp. and
Connections Academy LLC, and has previously served as director of Linens N’ Things, Inc.
Steven Martinez – Director
Mr. Martinez became a director in July 2006 upon the consummation of the Apollo acquisition. He is a Senior Partner of Apollo
Management, L.P. Prior to joining Apollo in 2000, Mr. Martinez worked for Goldman, Sachs & Co. and Bain & Company, Inc. He also
serves as a director of Prestige Cruise Holdings, Inc., NCL Corporation Ltd., Hughes Telematics, Inc., Principal Maritime and Veritable
Maritime Holdings, LLC, and has previously served as a director of Jacuzzi Brands Corp., Allied Waste Industries, Inc. and Goodman
Global Holdings, Inc.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 18
John S. Stroup – Director
Mr. Stroup became a director in October 2008. He is currently president and chief executive officer and a member of the board of
directors of Belden Inc., a public company that manufactures cable, connectivity, and networking products in markets including
industrial automation, enterprise, transportation, infrastructure, and consumer electronics. Prior to joining Belden Inc. in 2005, Mr.
Stroup was employed by Danaher Corporation and has served as President of a division of Danaher’s Motion Group and later to Group
Executive of the Motion Group and Vice President, Business Development. Prior to that, he was Vice President of Marketing and
General Manager with Scientific Technologies Inc.
Mark S. Bartlett – Director
Mr. Bartlett became a director in June 2012. Mr. Bartlett is a retired Ernst & Young LLP (“E&Y”) partner having worked there from 1972
to 2012. He served as Managing Partner of E&Y’s Baltimore office and as Senior Client Service Partner for the Mid-Atlantic Region.
Mr. Bartlett is a certified public accountant and has extensive experience serving global manufacturers, as well as companies in other
industries.
Thomas D. Christopoul – Director
Mr. Christopoul became a director in February 2013. He has been a Senior Managing Director in the Real Estate Group at
Guggenheim Partners since April 2013, and also an active venture capital investor through Somerset Shore Associates, Inc., a private
investment company he founded in 2006. Further, Mr. Christopoul is non-executive chairman of Hudson Cross, LLC, a travel industry
consulting partnership, and also serves as a director, member of the audit committee and chairman of the compensation committee of
the board of directors of Apollo Residential Mortgage, Inc. and on the boards of directors of several private companies. Previously, he
was a senior advisor at Falconhead Capital, LLC, a boutique private equity firm, and served as executive chairman of two of
Falconhead’s portfolio companies – GPSi Holdings, LLC and Rita’s Water Ice Franchise Company. Prior to joining Falconhead in 2009,
Mr. Christopoul was president and chief executive officer of Resources Connection, Inc., a multi-national professional services firm from
2008 to 2009 and an independent member on Resources’ board of directors from 2006 to 2008.
MANAGEMENT COMPENSATION
Management compensation is primarily comprised of base salary, stock options, and cash incentives, which are based on Management
Incentive Compensation Plan (MICP) and annual improvement priorities (AIPs) that are tied to corporate financial performance and
individual target performance, respectively.
Under MICP, corporate financial performance metrics for FY2013 included consolidated EBITDA target of $440.0 million and unlevered
free cash flow target of $267.5 million, each 50% weighted. The company achieved 92% of the EBITDA target and 98% of the FCF
target, which resulted in a payout of 75% of the target according to the payout schedule laid out in the company proxy. This payout
based on corporate performance is then combined with the achievement of AIPs, resulting in a personal performance multiplier for each
executive. For FY2013, Mr. Adams’ AIPs focused on overall growth and performance of the company; Mr. Peterson’s AIPs focused on
compliance and the financial strength and systems of the company; and Mr. Jeyarajah’s AIPs focused on establishing processes and
identifying opportunities for potential acquisitions – resulting in a multiplier of 1.21 for Mr. Adams, 1.35 for Mr. Peterson and 1.20 for Mr.
Jeyarajah.
Figure 39: Management Compensation
$3,000,000
$2,500,000
* CEO awarded $6.7 million of
stock options contingent on
the IPO (with the intention he
would not receive additional
options for the next 4 years)
$2,000,000
$1,500,000
$1,000,000
$500,000
$0
2013
Adams / CEO
2012*
Salary
2013
Peterson /
CFO
Option awards
2012
Cash incentive awards (incl. bonus)
2013
Jeyarajah /
EVP, Corp
Dev
Others
2012
Source: Company data, Wedbush Securities, Inc.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 19
VALUATION AND CONCLUSION
In valuing these shares, we rely on peer group multiples to EBITDA and our DCF model. Given the dramatic improvement in earnings
and cash flow resulting from the re-financing and the operating leverage in the business, we believe investors should look to FY15
(ending March) EBITDA. Incorporating both methodologies and using a peer group multiple of 11X on our FY15 EBITDA estimate
given the company’s growth and improving margin profile, we arrive at a 12-month price target of $30 based on a heavier weighting on
the more conservative methodology.
Figure 40: Valuation
Method 1
TEV/EBITDA
EBITDA (as adjusted)
Average multiple for group
FY2013A
FY2014E
FY2015E
$390.4
$403.9
$421.6
11.0
11.0
11.0
TEV
$4,294
$4,443
$4,638
Less debt
2,131.6
1,975.6
1,956.0
524.1
308.3
482.3
$3,164.4
Add back cash
Equity value
$2,686.9
$2,775.4
Shares outstanding
98.6
100.5
100.6
Fair value/share
$27.24
$27.61
$31.47
12 Month Price Target
$30.01
Method 2
DCF
2014E
Free cash flow
$101.6
FCF/share
Shares Outstanding
Discounted by WACC
2015E
$193.5
2016E
$203.3
2017E
$185.4
2018E
$186.2
1.01
1.92
2.02
1.84
1.85
100.521
100.552
100.552
100.552
100.552
$0.30
$1.75
$1.70
$1.44
$1.34
Sum of annual DCF
$6.52
PV of terminal value
$29.13
Total PV
$35.65
12 Month Forward Price Target
$38.44
Assumptions
WACC
7.8%
Growth rate
3.0%
Source: Company data, Wedbush Securities, Inc.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 20
Figure 41: Comparable Analysis
Company
Actuant
Emerson
Franklin Electric
IDEX Corp.
ITT Corp
Mueller Water
Pentair
RBC Bearings
Timken
Watts Water
Xylem
Ticker
ATU
EMR
FELE
IEX
ITT
MWA
PNR
ROLL
TKR
WTS
XYL
Price
38.04
66.38
41.96
69.85
41.07
8.25
69.80
65.91
50.47
58.73
33.41
Shares
73.22
703.96
47.65
81.12
90.70
158.36
199.33
23.09
97.64
35.29
184.49
Rexnord Corp
Blank space
Comp Mean
Comp Median
RXN
24.06
100.55
Market Cap
2,785
46,729
1,999
5,666
3,725
1,307
13,914
1,522
4,928
2,072
6,164
2,419
Total
Debt
515
5,642
191
784
68
601
2,595
10
477
308
1,202
1,985
Enterprise
Value
3,196
49,096
2,072
6,051
3,210
1,892
15,408
1,120
4,986
2,109
6,862
4,198
TTM
ROE
2.8%
18.9%
15.1%
4.6%
55.9%
10.5%
9.1%
10.9%
12.4%
14.6%
14.2%
TTM
ROA
1.4%
13.2%
8.1%
4.4%
5.0%
2.3%
5.1%
13.9%
10.4%
8.2%
6.4%
2012A
1,590
24,656
891
1,954
2,255
1,054
7,282
411
4,987
1,456
3,791
SALES
2013E
1,326
24,672
954
2,024
2,483
1,149
7,359
422
4,325
1,478
3,791
2014E
1,439
25,137
1,032
2,142
2,657
1,241
7,757
457
4,585
1,553
3,944
2012A
279
5,194
131
438
308
129
652
101
902
188
631
20.2%
2.6%
1,956
2,005
2,080
374.5
EBITDA
2013E 2014E
259
290
4,895 5,248
156
179
474
512
362
396
166
204
1,168 1,357
107
123
645
763
189
222
587
645
390.4
403.9
2012A
2.07
3.51
1.57
2.68
1.70
0.05
2.54
2.44
4.64
2.20
1.76
0.68
EPS
2013E 2014E
1.95
2.19
3.56
3.92
1.72
1.93
3.06
3.36
1.99
2.32
0.21
0.36
3.20
3.92
2.65
3.09
3.01
3.63
2.26
2.88
1.63
1.91
0.74
1.27
EV/EBITDA
2013E 2014E
12.3
11.0
10.0
9.4
13.3
11.6
12.8
11.8
8.9
8.1
11.4
9.3
13.2
11.4
10.4
9.1
7.7
6.5
11.2
9.5
11.7
10.6
P/E
2013E 2014E
19.5
17.4
18.6
16.9
24.4
21.7
22.8
20.8
20.6
17.7
39.6
22.8
21.8
17.8
24.9
21.3
16.8
13.9
26.0
20.4
20.5
17.5
10.8
10.4
32.5
18.9
11.2
11.4
9.8
9.5
23.2
21.8
18.9
17.8
Source: Company data, Thomson, Wedbush Securities, Inc.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 21
Figure 42: Income Statement
Rexnord Corp Income Statement ($ in millions)
David L. Rose, CFA (213-688-4319)
Period ending March 31st
3/31/2008 3/31/2009 3/31/2010 3/31/2011
3/31/12 Restated Restated
FY2008A FY2009A FY2010A FY2011A FY2012A
Process Motion Control
Water Management
Revenue
% Growth (Y/Y)
$1,342.3
$511.2
$1,853.5
47.6%
$1,321.7 $1,003.7 $1,175.1 $1,310.7
$560.3
$506.3
$524.5
$633.5
$1,882.0 $1,510.0 $1,699.6 $1,956.4
1.5%
(19.8%)
12.6%
15.1%
1Q13A
2Q13A
12/29/12
3Q13A
3/31/13
4Q13A
3/31/13
FY2013A
6/29/13
1Q14A
9/28/13
2Q14A
3/31/14
3Q14E
4Q14E
FY2014E
3/31/2015 3/31/2016 3/31/2017 3/31/2018
1Q15E
2Q15E
3Q15E
4Q15E
FY2015E FY2016E FY2017E FY2018E
$313.9
179.7
$493.6
5.1%
$309.1
190.4
$499.5
11.4%
$302.9
168.8
$471.7
(4.2%)
$340.2 $1,266.1
200.1
$739.0
$540.3 $2,005.1
(1.0%)
2.5%
$314.6
194.1
$508.7
3.1%
$311.8
202.7
$514.5
3.0%
$311.4
182.2
$493.6
4.6%
$353.2 $1,291.0
210.2
$789.2
$563.4 $2,080.2
4.3%
3.7%
$326.7
208.1
$534.8
5.1%
$323.5
216.6
$540.2
5.0%
$318.9
190.6
$509.5
3.2%
$360.1 $1,329.2 $1,357.1 $1,385.1 $1,412.8
219.5
$834.9
865.3
891.9
919.5
$579.6 $2,164.1 $2,222.3 $2,277.1 $2,332.3
2.9%
4.0%
2.7%
2.5%
2.4%
COGS
Gross Profit
% Gross Margin
1,250.4
603.1
32.5%
1,277.0
605.0
32.1%
994.4
515.6
34.1%
1,102.8
596.8
35.1%
1,264.9
691.5
35.3%
314.9
178.7
36.2%
312.9
186.6
37.4%
303.8
167.9
35.6%
342.1
198.2
36.7%
1,273.7
731.4
36.5%
326.8
181.9
35.8%
322.7
191.8
37.3%
312.8
180.8
36.6%
353.2
210.2
37.3%
1,315.5
764.7
36.8%
342.6
192.3
36.0%
337.7
202.5
37.5%
321.9
187.6
36.8%
362.2
217.4
37.5%
1,364.5
799.7
37.0%
1,399.0
823.4
37.1%
1,431.2
845.9
37.1%
1,463.5
868.8
37.3%
SG&A
% of Revneues
312.2
16.8%
316.6
16.8%
297.7
19.7%
329.1
19.4%
388.3
19.8%
99.0
20.1%
104.8
21.0%
93.7
19.9%
108.7
20.1%
406.2
20.3%
106.6
21.0%
105.4
20.5%
95.2
19.3%
111.7
19.8%
418.9
20.1%
112.0
20.9%
110.4
20.4%
97.6
19.2%
114.2
19.7%
434.1
20.1%
446.2
20.1%
457.7
20.1%
469.3
20.1%
–
–
–
–
–
–
–
–
–
–
–
10.1
–
–
–
10.1
–
–
–
–
–
–
49.9
13.1
151.2
24.5
48.9
6.8
49.7
–
48.6
11.4
50.9
1.6
13.0
2.4
13.3
2.3
12.4
2.3
12.4
8.6
51.1
1.8
12.5
1.2
12.6
–
12.4
–
12.4
–
–
–
–
–
–
–
3.0
49.9
12.4
12.4
12.4
12.4
–
–
–
–
–
–
–
–
49.6
49.7
30.6
20.1
31.9
659.7
56.5
48.6
62.3
24.7
15.7
14.7
14.7
69.8
14.3
13.8
12.4
12.4
52.9
12.4
12.4
12.4
12.4
49.6
49.7
30.6
20.1
$259.0
($371.3)
$161.4
$219.1
$240.9
$55.0
$66.1
$59.5
$74.8
$255.4
$61.0
$72.6
$73.2
$86.1
$292.9
$67.9
$79.7
$77.6
$90.8
$316.0
$327.5
$357.6
$379.4
(191.8)
(194.2)
167.8
–
(16.4)
(42.8)
118.6
30.5
88.1
(180.8)
(100.8)
–
1.1
(280.5)
(61.4)
(10.1)
(51.3)
(176.2)
(10.7)
(6.4)
(7.1)
(200.4)
40.5
11.2
29.3
(38.3)
(21.1)
–
0.5
(58.9)
(3.9)
(3.2)
(0.7)
(37.2)
0.0
–
0.2
(37.0)
29.1
8.8
20.3
(39.1)
-2.9
–
(2.2)
(44.2)
15.3
3.9
11.4
(38.7)
0
–
(1.4)
(40.1)
34.7
10.8
23.9
(153.3)
(24.0)
–
(2.9)
(180.2)
75.2
20.3
54.9
(35.0)
(4.0)
(29.2)
(129.2)
(19.8)
(19.6)
(19.3)
(19.2)
(19.0)
(64.4)
(54.8)
0.1
(158.3)
(85.7)
(33.2)
(52.5)
(19.8)
53.4
18.7
34.7
(19.6)
66.5
23.3
43.2
(19.5)
48.4
15.5
32.9
(19.3)
60.4
19.3
41.0
(19.2)
58.4
18.7
39.7
(19.0)
71.8
23.0
48.8
(77.0)
–
–
–
(77.0)
239.0
76.5
162.5
(74.2)
(6.2)
(45.2)
15.8
2.2
13.6
(103.6)
(133.2)
–
(6.1)
(242.9)
50.0
11.0
39.0
(19.5)
(5.3)
(197.1)
61.9
21.0
40.9
(230.4)
103.7
–
(3.0)
(129.7)
(501.0)
(72.0)
(429.0)
(74.2)
253.3
81.0
172.2
(64.4)
293.2
93.8
199.4
(54.8)
324.6
103.9
220.7
$40.9
($429.0)
–
$88.1
–
($51.3)
0.6
$29.9
(1.5)
($2.2)
(1.1)
$19.2
(2.2)
$9.2
–
$23.9
(4.8)
$50.1
–
($52.5)
(0.2)
($52.3)
$34.7
$43.2
$32.9
$41.0
$39.7
$48.8
$162.5
$172.2
$199.4
$220.7
$34.7
($0.54)
$0.36
($0.52)
$0.35
$0.33
$0.36
$0.32
$0.35
63.8% 233.6%
Zurn PEX loss contingency
Intangible impairment charges
Loss on divestiture
(Gain) on canal street facility accident, net
Transaction Related Costs
Actuarial Pension Loss (COGS)
Actuarial Pension Loss (SG&A)
Restructuring and other similar charges
Amortization of intangible assets
Total Other OpEx
EBIT
Interest expense, net
Loss on the extinguishment of debt
Loss on divestiture
Other income (expense), net
Non-operating Income (expense):
EBT (continuing operations)
Tax expense (benefit)
Net Income (continuing operations)
(Loss) income discontinued ops
Net Income
Non-controlling interest loss
Net income (loss) attributable to Rexnord
422.0
11.2
(29.2)
$40.9
($429.0)
$88.1
($51.3)
$29.9
($2.2)
$19.2
$9.2
$23.9
$50.1
–
$13.6
(0.2)
$13.8
EPS (basic)
EPS (diluted)
EPS Adjusted (basic)
EPS Adjusted (diluted)
% Growth (Y/Y)
-----
-----
$1.32
$1.27
($0.25)
($0.24)
($0.77)
($0.77)
$0.21
$0.21
$0.45
$0.42
$0.73
$0.68
219.5%
($0.02)
($0.02)
$0.19
$0.19
11.9%
$0.20
$0.19
$0.21
$0.20
53.3%
$0.10
$0.09
$0.11
$0.10
1.6%
$0.25
$0.24
$0.26
$0.25
(10.6%)
$0.52
$0.51
$0.76
$0.74
8.8%
$0.14
$0.14
$0.18
$0.17
(6.6%)
Weighted Avg. Basic Shares ('000s)
Weighted Avg. Diluted Shares ('000s)
---
---
66,753
69,163
66,757
66,757
66,750
72,029
94,104
94,104
95,878
99,746
96,789
100,278
97,103
100,458
95,969
98,647
97,237
100,429
97,457
100,552
97,457
100,552
$43.2
–
$39.0
(0.4)
$39.4
$32.9
$41.0
$39.7
$48.8
$162.5
$172.2
$199.4
$220.7
$0.44
$0.43
$0.44
$0.43
69.9%
$0.40
$0.39
$1.31
$1.27
71.9%
$0.34
$0.33
$0.34
$0.33
87.2%
$0.42
$0.41
$0.42
$0.41
26.4%
$0.41
$0.39
$0.41
$0.39
14.4%
$0.50
$0.49
$0.50
$0.49
13.1%
$1.67
$1.62
$1.67
$1.62
27.0%
$1.77
$1.71
$1.77
$1.71
6.0%
$2.05
$1.98
$2.05
$1.98
15.8%
$2.27
$2.20
$2.27
$2.20
10.7%
97,457
100,552
97,402
100,521
97,457
100,552
97,457
100,552
97,457
100,552
97,457
100,552
97,457
100,552
97,457
100,552
97,457
100,552
97,457
100,552
Source: Company data, Wedbush Securities, Inc.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 22
Figure 43: Balance Sheet
Rexnord Corp Balance Sheet ($ in millions)
David L. Rose, CFA (213-688-4319)
Period ending March 31st
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 Non-Current Assets
Total Assets
3/31/2013 6/30/2013 9/28/2013
3/31/2008 3/31/2009 3/31/2010 3/31/2011 3/31/2012
FY2008A
FY2009A FY2010A FY2011A FY2012A
1Q13A
2Q13A
3Q13A
4Q13A
FY2013A
1Q14A
3/31/2014
3/31/2015 3/31/2016 3/31/2017 3/31/2018
2Q14A
3Q14E
4Q14E
FY2014E
3Q15E
3Q15E
3Q15E
4Q15E
FY2015E FY2016E FY2017E FY2018E
$141.9
$277.5
$263.2
$391.0
$298.0
288.5
258.8
234.1
270.1
337.9
370.3
327.1
273.8
283.8
320.3
35.0
29.0
29.4
36.5
62.1
$835.7
$892.4
$800.5
$981.4 $1,018.3
443.3
413.5
376.2
358.4
419.2
883.9
736.4
688.5
644.7
647.1
1,331.7 1,010.9 1,012.2 1,016.2 1,114.7
134.0
90.0
86.0
65.0
42.0
176.6
61.6
51.8
34.0
49.6
$2,969.5 $2,312.4 $2,214.7 $2,118.3 $2,272.6
$3,805.2 $3,204.8 $3,015.2 $3,099.7 $3,290.9
$392.9
$440.2
$452.5
$524.1
$524.1
$334.9
314.2
327.9
295.9
350.4
350.4
347.2
334.9
349.3
356.9
326.2
326.2
340.0
47.9
54.2
49.8
46.4
46.4
48.3
$1,089.9 $1,171.6 $1,155.1 $1,247.1 $1,247.1 $1,070.4
408.8
413.9
412.5
410.7
410.7
404.8
633.1
629.1
627.3
613.5
613.5
602.4
1,111.9 1,108.2 1,121.2 1,118.4 1,118.4 1,119.8
42.0
42.0
42.0
35.0
35.0
35.0
45.5
50.7
48.8
49.1
49.1
45.9
$2,241.3 $2,243.9 $2,251.8 $2,226.7 $2,226.7 $2,207.9
$3,331.2 $3,415.5 $3,406.9 $3,473.8 $3,473.8 $3,278.3
$206.4
352.8
355.7
48.9
$963.8
408.1
601.7
1,133.9
35.0
43.6
$2,222.3
$3,186.1
$263.2
348.7
347.1
50.6
$1,009.6
407.2
589.3
1,119.8
35.0
43.6
$2,194.9
$3,204.5
$308.3
352.6
350.0
51.6
$1,062.5
413.9
576.9
1,133.9
35.0
43.6
$2,203.3
$3,265.8
$308.3
352.6
350.0
51.6
$1,062.5
413.9
576.9
1,133.9
35.0
43.6
$2,203.3
$3,265.8
$346.1
357.0
354.2
53.1
$1,110.4
411.6
564.5
1,133.9
35.0
43.6
$2,188.6
$3,298.9
$388.2
361.4
358.2
53.9
$1,161.6
412.4
552.1
1,133.9
35.0
43.6
$2,177.0
$3,338.6
$432.9
364.1
360.7
55.0
$1,212.6
412.7
539.7
1,133.9
35.0
43.6
$2,164.9
$3,377.5
$482.3
$482.3
$466.0
$429.8
366.8
366.8
376.7
385.9
363.1
363.1
372.3
380.8
53.6
53.6
55.0
56.4
$1,265.7 $1,265.7 $1,269.9 $1,253.0
419.3
419.3
426.3
458.7
527.3
527.3
477.6
447.0
1,133.9 1,133.9 1,133.9 1,133.9
35.0
35.0
35.0
35.0
43.6
43.6
43.6
43.6
$2,159.1 $2,159.1 $2,116.4 $2,118.2
$3,424.8 $3,424.8 $3,386.3 $3,371.1
$396.4
395.3
389.4
57.8
$1,238.9
503.1
426.9
1,133.9
35.0
43.6
$2,142.5
$3,381.4
Liabilities & Equity
Current maturities of debt
$2.9
$8.1
$5.3
$104.2
$10.3
Trade payables
178.6
134.6
135.3
181.7
215.6
Compensation and benefits
71.3
62.1
58.7
67.9
61.8
Current portion of pension and postretirement benefit obligations
6.6
4.8
6.1
6.1
6.3
Interest payable
27.4
24.3
30.2
51.8
49.9
Other current liabilities
112.3
109.7
80.3
86.1
124.7
Total Current Liabilities
$399.1
$343.6
$315.9
$497.8
$468.6
Long-term debt
2,021.6 2,132.4 2,123.9 2,209.9 2,413.4
Pension and postretirement benefit obligations
118.5
159.3
137.5
113.2
160.5
Deferred income taxes
318.2
263.6
249.9
254.9
245.7
Reserve for asbestos claims
134.0
90.0
86.0
65.0
42.0
Other liabilities
69.2
58.5
47.8
47.1
41.5
Total Liabilities
$3,060.6 $3,047.4 $2,961.0 $3,187.9 $3,371.7
$16.1
$23.1
$21.9
$169.3
$169.3
$24.0
190.1
181.4
180.3
208.3
208.3
203.5
50.3
51.9
52.8
55.6
55.6
50.8
6.4
6.4
6.4
5.7
5.7
5.7
20.7
38.6
19.9
48.1
48.1
17.0
107.6
129.1
132.5
121.2
121.2
107.0
$391.2
$430.5
$413.8
$608.2
$608.2
$408.0
2,104.9 2,115.6 2,115.4 1,962.3 1,962.3 1,961.4
155.3
150.6
149.7
170.8
170.8
168.8
223.6
233.5
226.8
225.3
225.3
223.2
42.0
42.0
42.0
35.0
35.0
35.0
41.7
34.5
34.6
43.7
43.7
39.9
$2,958.7 $3,006.7 $2,982.3 $3,045.3 $3,045.3 $2,836.3
$33.2
204.1
52.1
5.8
0.3
110.2
$405.7
1,952.2
165.1
191.0
35.0
32.5
$2,781.5
$19.6
200.4
52.1
5.8
0.3
116.6
$394.8
1,960.9
165.1
191.0
35.0
32.5
$2,779.3
$19.6
205.5
52.1
5.8
0.3
120.4
$403.7
1,956.0
165.1
191.0
35.0
32.5
$2,783.3
$19.6
205.5
52.1
5.8
0.3
120.4
$403.7
1,956.0
165.1
191.0
35.0
32.5
$2,783.3
$19.6
208.0
52.1
5.8
0.3
123.0
$408.8
1,951.1
165.1
191.0
35.0
32.5
$2,783.5
$19.6
210.4
52.1
5.8
0.3
124.2
$412.3
1,946.2
165.1
191.0
35.0
32.5
$2,782.1
$19.6
211.8
52.1
5.8
0.3
126.8
$416.4
1,941.3
165.1
191.0
35.0
32.5
$2,781.3
$19.6
$19.6
$21.6
$19.6
213.2
213.2
218.6
223.6
52.1
52.1
52.1
52.1
5.8
5.8
5.8
5.8
0.3
0.3
0.3
0.3
128.8
128.8
132.2
134.2
$419.8
$419.8
$430.6
$435.7
1,936.4 1,936.4 1,714.8 1,495.2
165.1
165.1
165.1
165.1
191.0
191.0
191.0
191.0
35.0
35.0
35.0
35.0
32.5
32.5
32.5
32.5
$2,779.8 $2,779.8 $2,569.0 $2,354.5
$19.6
228.7
52.1
5.8
0.3
138.4
$444.8
1,275.6
165.1
191.0
35.0
32.5
$2,144.0
Total Equity
Total Liabilities & Shareholders Equity
$744.6
$157.4
$54.2
($88.2)
($80.8)
$3,805.2 $3,204.8 $3,015.2 $3,099.7 $3,290.9
$442.0
$404.6
$425.2
$482.5
$482.5
$515.5
$556.5
$596.2
$3,331.2 $3,415.5 $3,406.9 $3,473.8 $3,473.8 $3,278.3
$372.5
$408.8
$424.6
$428.5
$428.5
$3,186.1
$3,204.5
$3,265.8
$3,265.8
$3,298.9
$3,338.6
$3,377.5
$817.3 $1,016.7
$1,237.4
$3,424.8 $3,424.8 $3,386.3 $3,371.1
$645.0
$645.0
$3,381.4
Source: Company data, Wedbush Securities, Inc.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 23
Figure 44: Cash Flow Statement
Rexnord Corp Balance Sheet ($ in millions)
David L. Rose, CFA (213-688-4319)
3/31/2013
Period ending March 31st
FY2008A FY2009A FY2010A FY2011A FY2012A
Operating Activities
Net income
$40.9
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation
54.2
Amortization of intangible assets
49.9
Amortization of deferred financing costs
9.4
(Gain) loss on dispositions of property, plant and equipment)
0.3
Non-cash loss on divestiture
0.0
Deferred income taxes
(14.2)
Other non-cash charges
5.4
Loss on debt extinguishment
0.0
Stock-based compensation expense
7.4
Changes in operating assets and liabilities:
Receivables
(12.1)
Inventories
37.1
Other assets
3.3
Accounts payable
16.2
Accruals and other
35.0
Cash provided by operating activities
$232.8
Investing Activities
Expenditures for property, plant and equipment
($54.9)
Acquisitions, net of cash
($73.7)
Loan receivable for financing under New Market Tax Credit incentive program 0.0
Proceeds from dispositions of property, plant and equipment
0.4
Proceeds from divestiture, net of transaction costs
6.6
Cash used for investing activities
($121.6)
Financing Activities
Proceeds from borrowings of long-term debt
Repayments of long-term debt
Proceeds from borrowings of short-term debt
Repayments of short-term debt
Payment of tender premium
Proceeds from issuance of common stock / dividend
Proceeds from exercise of stock options
Third party investment in non-controlling interest
Payment of deferred financing fees
Payment of early redemption premium on LTD & Fees for Stock Issuance
Excess tax benefit on exercise of stock options
Cash provided by (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
1Q13A
2Q13A
3Q13A
4Q13A
FY2013A
3/31/2014
1Q14A
3Q14E
4Q14E
FY2014E
3/31/2015 3/31/2016 3/31/2017 3/31/2018
1Q15E
2Q15E
3Q15E
4Q15E
FY2015E FY2016E FY2017E
FY2018E
($394.3)
$88.1
($51.3)
$29.9
($2.2)
$19.2
$9.2
$23.9
$50.1
($52.5)
$34.7
$43.2
$39.0
$32.9
$41.0
$39.7
$48.8
$162.5
$172.2
$199.4
$220.7
60.7
470.9
9.1
0.8
0.0
(4.4)
7.3
0.0
6.9
59.6
49.7
11.4
2.5
0.0
33.3
17.3
(167.8)
5.5
57.5
48.6
7.9
1.7
0.0
(22.9)
3.9
100.8
5.6
63.5
50.9
7.8
1.2
4.5
(21.8)
19.4
10.7
3.7
15.1
13.0
1.0
(4.2)
0.0
(16.9)
13.2
21.1
1.6
15.6
13.3
1.0
0.1
0.0
2.0
(7.5)
0.0
1.9
14.5
12.4
1.0
0.1
0.0
2.0
2.3
2.9
1.9
16.1
12.4
0.9
0.4
0.0
(2.5)
(0.7)
0.0
1.7
61.3
51.1
3.9
(3.6)
0.0
(15.4)
7.3
24.0
7.1
15.0
12.5
1.0
0.4
0.0
0.8
1.4
4.0
1.5
13.8
12.6
0.6
0.7
0.0
(38.5)
(3.0)
129.2
2.0
13.9
12.4
13.8
12.4
56.5
49.9
1.6
1.1
0.0
(37.7)
(1.6)
133.2
3.5
14.1
12.4
14.0
12.4
14.0
12.4
14.0
12.4
56.1
49.6
0.0
0.0
0.0
0.0
0.0
0.0
0.0
56.1
49.7
32.2
30.6
21.7
20.1
28.2
38.4
(9.3)
(41.9)
(16.3)
$156.1
29.8
57.7
4.8
(0.5)
(35.9)
$155.5
(30.4)
(2.9)
(3.5)
43.0
6.5
$164.5
(33.7)
(2.1)
(12.5)
22.5
(4.7)
$139.3
10.9
(19.8)
(4.4)
(26.1)
(40.2)
($37.9)
(7.5)
(13.6)
5.8
(5.0)
21.1
$46.4
32.8
(8.2)
(2.3)
(2.4)
(25.6)
$40.6
(56.5)
28.8
8.4
29.2
33.3
$95.4
(20.3)
(12.8)
7.5
(4.3)
(11.4)
$144.5
(2.8)
(12.8)
(2.7)
(5.8)
(53.4)
($27.3)
2.8
(7.9)
(1.6)
(2.0)
(19.8)
$36.4
4.1
8.6
(1.7)
(3.7)
6.4
$74.7
(3.9)
(2.9)
(1.0)
5.1
3.8
$70.5
0.2
(15.0)
(7.0)
(6.4)
(63.0)
$154.3
(4.4)
(4.2)
(1.5)
2.5
2.6
$54.4
(4.4)
(4.0)
(0.8)
2.3
1.2
$61.8
(2.7)
(2.4)
(1.1)
1.4
2.7
$64.0
(2.8)
(2.4)
1.4
1.4
2.0
$74.9
(14.2)
(13.0)
(2.0)
7.7
8.4
$255.0
(9.9)
(9.2)
(1.4)
5.4
3.5
$266.4
(9.3)
(8.6)
(1.4)
5.0
2.0
$250.1
(9.4)
(8.6)
(1.3)
5.1
4.1
$252.4
($39.1)
($16.6)
0.0
0.3
0.9
($54.5)
($22.0)
$0.0
0.0
0.0
0.0
($22.0)
($37.6)
1.2
0.0
0.0
0.9
($35.5)
($58.5)
(256.8)
(17.9)
5.6
3.4
($324.2)
($14.4)
0.0
0.0
4.6
0.0
($9.8)
($18.1)
0.0
(9.7)
0.9
0.0
($26.9)
($9.0)
(21.1)
0.0
0.6
2.3
($27.2)
(18.6)
0.1
0.0
0.6
0.0
($17.9)
($60.1)
(21.0)
(9.7)
6.7
2.3
($81.8)
($7.8)
(4.4)
0.0
0.0
0.0
($12.2)
($11.4)
(30.0)
0.0
0.0
0.0
($41.4)
($13.0)
($20.5)
($11.7)
($14.8)
($14.3)
($20.6)
($64.6)
($66.1)
($20.5)
($11.7)
($14.8)
($14.3)
($20.6)
($61.5)
0.0
0.0
0.0
0.0
($61.5)
($63.1)
($13.0)
($52.7)
(34.4)
0.0
0.0
0.0
($87.1)
($63.1)
($64.6)
($66.1)
$0.5 $1,145.0
(116.1) (1,071.1)
0.0
2.0
(2.8)
(2.8)
$960.6
(762.0)
10.7
(105.0)
$0.5
(302.5)
0.0
(0.4)
$14.9
(4.8)
7.3
(0.3)
$0.0
(0.8)
2.9
(4.4)
0.0
(5.1)
2.4
(3.1)
(17.6)
0.0
0.0
0.0
0.0
17.6
0.9
($4.9)
(1.0)
$71.6
$452.5
$524.1
$15.4
(313.2)
12.6
(8.2)
(17.6)
458.3
2.3
0.0
(2.0)
0.0
18.1
$165.7
(2.3)
$226.1
$298.0
$524.1
(4.9)
(4.9)
(4.9)
(4.9)
(19.6)
(219.6)
(221.6)
(219.6)
$0.0
(27.4)
0.0
0.0
$0.0
(3.2)
112.7
0.0
0.0
0.0
(70.0)
0.0
(0.4)
(1.5)
(1.0)
0.0
2.1
0.0
458.3
0.7
0.0
1.6
0.0
0.0
(0.6)
0.0
0.0
($28.0)
2.6
$85.8
$56.1
$141.9
0.0
0.0
0.0
$39.5
(5.5)
$135.6
$141.9
$277.5
(4.9)
(36.3)
0.0
($161.5)
4.0
($24.0)
$277.5
$253.5
(14.6)
(64.9)
0.5
($6.9)
5.0
$127.1
$263.2
$390.3
(13.2)
0.0
0.0
$93.2
(1.3)
($93.0)
$391.0
$298.0
(0.3)
(17.6)
7.6
$146.3
(3.7)
$94.9
$298.0
$392.9
(0.1)
0.0
7.0
$25.6
2.2
$47.3
$392.9
$440.2
(1.6)
0.0
2.6
($1.3)
0.2
$12.3
$440.2
$452.5
$13.6
2Q14A
0 $1,930.5
(1.9) (1,931.3)
5.3
0.7
(150.6)
(3.6)
0.0
0.0
0.0
0.3
1.0
0.4
0.0
(1.1)
(15.2)
0.0
(109.9)
0.5
1.9
($147.1) ($125.9)
(2.6)
2.4
($189.2) ($128.5)
$524.1
$334.9
$334.9
$206.4
(4.9)
1,930.5
(4.9) (1,943.0)
6.0
(154.2)
($4.9)
($4.9)
$56.8
$206.4
$263.2
$45.1
$263.2
$308.3
0.0
1.3
0.4
(16.3)
(109.9)
2.4
($282.8)
(0.2)
($215.8)
$524.1
$308.3
($4.9)
($4.9)
($4.9)
($4.9)
($19.6)
($219.6)
($221.6)
($219.6)
$37.7
$308.3
$346.1
$42.1
$346.1
$388.2
$44.7
$388.2
$432.9
$49.4
$432.9
$482.3
$173.9
$308.3
$482.3
($16.3)
$482.3
$466.0
($36.2)
$466.0
$429.8
($33.4)
$429.8
$396.4
Source: Company data, Wedbush Securities, Inc.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 24
Analyst Biography
David Rose covers the water and renewable energy solutions sectors. He has over ten years' experience in equity research as a senior
analyst, previously with JMP Securities, Jefferies & Company, and Furman Selz. In 2013, he was ranked the #3 analyst for stock
picking by The Financial Times/Starmine in the machinery category, and in 1998, he was named by The Wall Street Journal as the #1
ranked analyst for stock picking in the restaurant sector. Prior to joining Wedbush Securities, David was CEO of a restaurant developer
and operator in Chile and subsequently provided finance, strategy and operations consulting services in Panama covering a variety of
industries. He has lived in Latin America for nearly seven years and is fluent in Spanish.
Mr. Rose holds a B.S. in Business Administration from the University of California, Riverside and is a CFA charter holder.
David's Edge: David has applied his analytical and operations background in emerging markets to help understand key drivers and
growth challenges facing the water industry. His edge is being able to synthesize macro themes with company specific drivers in the
water segment. As one of the few dedicated non-utility water analysts, David has developed a network of industrial water technology,
municipal and regulatory contacts that uniquely identify opportunities in the water markets.
Analyst Certification
I, David L. Rose, CFA, James Kim, certify that the views expressed in this report accurately reflect my personal opinion and that I have not and
will not, directly or indirectly, receive compensation or other payments in connection with my specific recommendations or views contained in
this report.
Disclosure information regarding historical ratings and price targets is available at http://www.wedbush.com/ResearchDisclosure/DisclosureQ313.pdf
Investment Rating System:
Outperform: Expect the total return of the stock to outperform relative to the median total return of the analyst’s (or the analyst’s team) coverage
universe over the next 6-12 months.
Neutral: Expect the total return of the stock to perform in-line with the median total return of the analyst’s (or the analyst’s team) coverage
universe over the next 6-12 months.
Underperform: Expect the total return of the stock to underperform relative to the median total return of the analyst’s (or the analyst’s team)
coverage universe over the next 6-12 months.
The Investment Ratings are based on the expected performance of a stock (based on anticipated total return to price target) relative to the
other stocks in the analyst’s coverage universe (or the analyst’s team coverage).*
Rating Distribution
(as of September 30, 2013)
Outperform:55%
Neutral: 41%
Underperform: 4%
Investment Banking Relationships
(as of September 30, 2013)
Outperform:14%
Neutral: 2%
Underperform: 0%
The Distribution of Ratings is required by FINRA rules; however, WS’ stock ratings of Outperform, Neutral, and Underperform most closely
conform to Buy, Hold, and Sell, respectively. Please note, however, the definitions are not the same as WS’ stock ratings are on a relative
basis.
The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity. The
analysts receive compensation that is based upon various factors including WS’ total revenues, a portion of which are generated by WS’
investment banking activities.
Wedbush Equity Research Disclosures as of December 12, 2013
Company
Disclosure
Rexnord Corp.
1
Research Disclosure Legend
1.
WS makes a market in the securities of the subject company.
2.
WS managed a public offering of securities within the last 12 months.
3.
WS co-managed a public offering of securities within the last 12 months.
4.
WS has received compensation for investment banking services within the last 12 months.
5.
WS provided investment banking services within the last 12 months.
6.
WS is acting as financial advisor.
7.
WS expects to receive compensation for investment banking services within the next 3 months.
8.
WS provided non-investment banking securities-related services within the past 12 months.
9.
WS has received compensation for products and services other than investment banking services within the past 12 months.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 25
10.
11.
12.
The research analyst, a member of the research analyst’s household, any associate of the research analyst, or any individual
directly involved in the preparation of this report has a long position in the common stocks.
WS or one of its affiliates beneficially own 1% or more of the common equity securities.
The analyst maintains Contingent Value Rights that enables him/her to receive payments of cash upon the company’s meeting
certain clinical and regulatory milestones.
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Wedbush disclosure price charts are updated within the first fifteen days of each new calendar quarter per FINRA regulations. Price charts for
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* WS changed its rating system from (Strong Buy/Buy/Hold/Sell) to (Outperform/ Neutral/Underperform) on July 14, 2009.
Please access the attached hyperlink for WS’ Coverage Universe: http://www.wedbush.com/services/cmg/equities-division/research/equityresearch Applicable disclosure information is also available upon request by contacting Ellen Kang in the Research Department at (213) 6884529, by email to ellen.kang@wedbush.com, or the Business Conduct Department at (213) 688-8090. You may also submit a written request
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OTHER DISCLOSURES
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CORPORATE HEADQUARTERS (213) 688-8000
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representation by this corporation, nor is any recommendation made herein based on any privileged information. This information is not intended to be
nor should it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation of an offer to sell or buy any security mentioned
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information contained herein may be obtained upon request.
David L. Rose, CFA (213) 688-4319
Rexnord Corp. | 26
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(213) 688-4529
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Mark D. Benson (213) 688-4435
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