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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________________________________________
FORM 10-Q
(Mark one)
 
 
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended September 30, 2018
 
o
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
 
20-5197013
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
511 West Freshwater Way, Milwaukee, WI
 
53204
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (414) 643-3739

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  x    No   o

Indicate by checkmark whether the registrant has submitted electronically 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 such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
o
 
 
 
 
 
 
Emerging growth company
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  o    No   x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 
Class
 
Outstanding at October 26, 2018
Rexnord Corporation Common Stock, $0.01 par value per share
 
104,662,463 shares


Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 


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Private Securities Litigation Reform Act Safe Harbor Statement
 
Our disclosure and analysis in this report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in developing and expanding our business and the realization of sales from our backlog, include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” and similar expressions are forward-looking statements. Although these statements are based upon reasonable assumptions, including projections of orders, sales, operating margins, earnings, cash flows, research and development costs, working capital and capital expenditures, they are subject to risks and uncertainties that are described more fully herein and in our Annual Report on Form 10-K for the year ended March 31, 2018 in Part I, Item 1A, “Risk Factors” and in Part I under the heading "Cautionary Notice Regarding Forward-Looking Statements", as well as in other filings with the Securities and Exchange Commission. Accordingly, we can give no assurance that we will achieve the results anticipated or implied by our forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

General

Our fiscal year is the year ending March 31 of the corresponding calendar year. For example, our fiscal year 2019, or fiscal 2019, means the period from April 1, 2018 to March 31, 2019, and the second quarter of fiscal 2019 and 2018 means the fiscal quarters ended September 30, 2018 and September 30, 2017, respectively.


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PART I - FINANCIAL INFORMATION

ITEM  1.
FINANCIAL STATEMENTS

Rexnord Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(in Millions, except share amounts)
(Unaudited) 
 
 
September 30, 2018
 
March 31, 2018
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
223.5

 
$
193.2

Receivables, net
 
314.0

 
314.7

Inventories
 
334.9

 
304.1

Income tax receivable
 
24.5

 
17.5

Other current assets
 
38.2

 
37.9

Current assets held for sale
 
90.1

 
130.3

Total current assets
 
1,025.2

 
997.7

Property, plant and equipment, net
 
385.7

 
396.5

Intangible assets, net
 
508.9

 
530.9

Goodwill
 
1,275.1

 
1,276.1

Other assets
 
118.0

 
114.0

Non-current assets held for sale
 

 
108.5

Total assets
 
$
3,312.9

 
$
3,423.7

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Current maturities of debt
 
$
1.4

 
$
3.9

Trade payables
 
173.1

 
189.9

Compensation and benefits
 
51.5

 
63.9

Current portion of pension and postretirement benefit obligations
 
4.0

 
4.0

Other current liabilities
 
162.3

 
127.4

Current liabilities held for sale
 
67.7

 
65.1

Total current liabilities
 
460.0

 
454.2


 
 
 
 
Long-term debt
 
1,336.6

 
1,352.1

Pension and postretirement benefit obligations
 
155.8

 
163.2

Deferred income taxes
 
136.2

 
149.3

Other liabilities
 
80.0

 
78.3

Non-current liabilities held for sale
 

 
13.8

Total liabilities
 
2,168.6

 
2,210.9


 
 
 
 
Stockholders' equity:
 
 
 
 
Common stock, $0.01 par value; 200,000,000 shares authorized; shares issued and outstanding: 104,648,591 at September 30, 2018 and 104,179,037 at March 31, 2018
 
1.0

 
1.0

Preferred stock, $0.01 par value; 10,000,000 shares authorized; shares of 5.75% Series A Mandatory Convertible Preferred Stock issued and outstanding: 402,500 at September 30, 2018 and March 31, 2018
 
0.0

 
0.0

Additional paid-in capital
 
1,285.6

 
1,277.8

Retained (deficit) earnings
 
(36.1
)
 
8.0

Accumulated other comprehensive loss
 
(106.5
)
 
(74.1
)
Total Rexnord stockholders' equity
 
1,144.0

 
1,212.7

Non-controlling interest
 
0.3

 
0.1

Total stockholders' equity
 
1,144.3

 
1,212.8

Total liabilities and stockholders' equity
 
$
3,312.9

 
$
3,423.7

See notes to the condensed consolidated financial statements.

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Rexnord Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(in Millions, except share and per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Net sales
 
$
524.8

 
$
453.8

 
$
1,028.4

 
$
897.0

Cost of sales
 
321.6

 
280.2

 
629.7

 
559.3

Gross profit
 
203.2

 
173.6

 
398.7

 
337.7

Selling, general and administrative expenses
 
109.6

 
95.0

 
221.4

 
191.7

Restructuring and other similar charges
 
3.7

 
2.8

 
6.8

 
5.1

Amortization of intangible assets
 
8.5

 
7.7

 
17.0

 
15.6

Income from operations
 
81.4

 
68.1

 
153.5

 
125.3

Non-operating expense:
 

 
 
 

 
 
Interest expense, net
 
(18.7
)
 
(20.1
)
 
(37.3
)
 
(40.0
)
Other income, net
 

 
0.9

 
1.7

 
1.9

Income before income taxes
 
62.7

 
48.9

 
117.9

 
87.2

Provision for income taxes
 
(17.2
)
 
(15.6
)
 
(31.7
)
 
(24.5
)
Equity method investment income
 
0.7

 

 
2.2

 

Net income from continuing operations
 
46.2

 
33.3

 
88.4

 
62.7

Loss from discontinued operations, net of tax
 
(83.7
)
 
(3.5
)
 
(126.5
)
 
(6.4
)
Net (loss) income
 
(37.5
)
 
29.8

 
(38.1
)
 
56.3

Non-controlling interest income
 
0.1

 

 
0.2

 

Net (loss) income attributable to Rexnord
 
(37.6
)
 
29.8

 
(38.3
)
 
56.3

Dividends on preferred stock
 
(5.8
)
 
(5.8
)
 
(11.6
)
 
(11.6
)
Net (loss) income attributable to Rexnord common stockholders
 
$
(43.4
)
 
$
24.0

 
$
(49.9
)
 
$
44.7

 
 
 
 
 
 
 
 
 
Basic net income (loss) per share attributable to Rexnord common stockholders:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.39

 
$
0.26

 
$
0.73

 
$
0.49

Discontinued operations
 
$
(0.80
)
 
$
(0.03
)
 
$
(1.21
)
 
$
(0.06
)
Net (loss) income
 
$
(0.42
)
 
$
0.23

 
$
(0.48
)
 
$
0.43

Diluted net income (loss) per share attributable to Rexnord common stockholders:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.37

 
$
0.26

 
$
0.71

 
$
0.48

Discontinued operations
 
$
(0.68
)
 
$
(0.03
)
 
$
(1.18
)
 
$
(0.06
)
Net (loss) income
 
$
(0.30
)
 
$
0.23

 
$
(0.46
)
 
$
0.42

Weighted-average number of shares outstanding (in thousands):
 
 
 
 
 
 
Basic
 
104,570

 
103,812

 
104,455

 
103,753

Diluted
 
123,376

 
105,540

 
107,376

 
105,443

See notes to the condensed consolidated financial statements.

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Rexnord Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(in Millions)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Net (loss) income attributable to Rexnord
 
$
(37.6
)
 
$
29.8

 
$
(38.3
)
 
$
56.3

Other comprehensive loss:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(0.9
)
 
16.2

 
(36.6
)
 
34.1

Net change in unrealized losses on interest rate derivatives, net of tax
 
2.0

 
1.7

 
4.0

 
2.9

Change in pension and postretirement defined benefit plans, net of tax
 
0.4

 
(0.3
)
 
0.2

 
(0.6
)
Other comprehensive income (loss), net of tax
 
1.5

 
17.6

 
(32.4
)
 
36.4

Non-controlling interest income
 
0.1

 

 
$
0.2

 

Total comprehensive (loss) income
 
$
(36.0
)
 
$
47.4

 
$
(70.5
)
 
$
92.7


See notes to the condensed consolidated financial statements.

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Rexnord Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in Millions)
(Unaudited)
 
 
Six Months Ended
 
 
September 30, 2018
 
September 30, 2017
Operating activities
 
 
 
 
Net (loss) income
 
$
(38.1
)
 
$
56.3

Adjustments to reconcile net (loss) income to cash provided by operating activities:
 
 
 
 
Depreciation
 
31.2

 
27.4

Amortization of intangible assets
 
17.3

 
16.2

Amortization of deferred financing costs
 
0.8

 
1.0

Non-cash asset impairment
 
126.0

 

Deferred income taxes
 
(16.6
)
 
(11.2
)
Other non-cash charges
 
5.4

 
2.7

Stock-based compensation expense
 
11.8

 
10.8

Changes in operating assets and liabilities:
 

 

Receivables
 
(14.5
)
 
(13.0
)
Inventories
 
(39.7
)
 
(29.3
)
Other assets
 
(1.8
)
 
1.6

Accounts payable
 
(16.1
)
 
(0.6
)
Accruals and other
 
9.4

 
(1.4
)
Cash provided by operating activities
 
75.1

 
60.5

 
 
 
 
 
Investing activities
 
 
 
 
Expenditures for property, plant and equipment
 
(17.6
)
 
(15.9
)
Acquisitions, net of cash acquired
 
(2.0
)
 

Proceeds from dispositions of long-lived assets
 
3.5

 
1.8

Cash used for investing activities
 
(16.1
)
 
(14.1
)
 
 
 
 
 
Financing activities
 
 
 
 
Proceeds from borrowings of debt
 
209.7

 

Repayments of debt
 
(227.6
)
 
(8.2
)
Proceeds from exercise of stock options
 
5.0

 
2.8

Shares repurchased to cover taxes associated with equity awards
 
(3.2
)
 

Payments of preferred stock dividends
 
(11.6
)
 
(11.6
)
Cash used for financing activities
 
(27.7
)
 
(17.0
)
Effect of exchange rate changes on cash and cash equivalents
 
(10.2
)
 
11.8

Increase in cash and cash equivalents
 
21.1

 
41.2

Cash, cash equivalents and restricted cash at beginning of period
 
217.6

 
490.1

Cash, cash equivalents and restricted cash at end of period
 
$
238.7

 
$
531.3


See notes to the condensed consolidated financial statements.

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Rexnord Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

1. Basis of Presentation and Significant Accounting Policies

The unaudited condensed consolidated financial statements included herein have been prepared by Rexnord Corporation (“Rexnord” or the "Company") in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
In the opinion of management, the condensed consolidated financial statements include all adjustments necessary for a fair presentation of the results of operations for the interim periods. Results for the interim periods are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2019. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's fiscal 2018 Annual Report on Form 10-K.
During the first quarter of fiscal 2019, the net assets of the Company’s VAG business included within the Water Management platform met the criteria to be classified as “held for sale” and, in accordance with the authoritative guidance, the operating results of the VAG business are reported as discontinued operations in all periods presented. The condensed consolidated statements of cash flows for the current and prior periods presented have not been adjusted to separately disclose cash flows related to discontinued operations. See Note 4, Discontinued Operations, for further information.
The Company
Rexnord is a growth-oriented, multi-platform industrial company with what it believes to be leading market shares and highly-trusted brands that serve a diverse array of global end markets. The Company's heritage of innovation and specification have allowed it to provide highly-engineered, mission-critical solutions to customers for decades and affords it the privilege of having long-term, valued relationships with market leaders. The Company operates in a disciplined way and the Rexnord Business System (“RBS”) is its operating philosophy. Grounded in the spirit of continuous improvement, RBS creates a scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating performance throughout all aspects of its business.
The Process & Motion Control platform designs, manufactures, markets and services a comprehensive range of specified, highly-engineered mechanical components used within complex systems where 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 infrastructure markets.
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans ("ASU 2018-14"), which updates the standard to remove disclosures that no longer are considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant. ASU 2018-14 is effective for the Company in fiscal 2021 on a retroactive basis. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements upon adoption.    
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which modifies the disclosure requirements in Topic 820, Fair Value Measurement. ASU 2018-13 is effective for the Company in fiscal 2020. Amendments related to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty will be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments will be applied

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retrospectively to all periods presented upon the effective date. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements upon adoption.   
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"), which gives entities the option to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and are intended to improve the usefulness of information reported to financial statement users. ASU 2018-02 is effective for the Company's fiscal 2020 and interim periods included therein, and is to be applied either in the period of adoption or on a retrospective basis to each period affected. The Company is currently evaluating the impact of this guidance and has not determined whether it will elect to reclassify stranded amounts; however, the adoption of ASU 2018-02 is not expected to have a material effect on its consolidated financial statements. 
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"), which expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU 2017-12 is effective for the beginning of the Company's fiscal 2020, with early adoption permitted, and must be applied prospectively. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements upon adoption.    
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”), which changes how employers that sponsor defined benefit pension or other postretirement benefit plans present the net periodic benefit cost in the income statement. The new guidance requires the service cost component of net periodic benefit cost to be presented in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period with only the service cost component eligible for capitalization in assets. Other components of the net periodic benefit cost are to be stated separately from the line item(s) that includes the service cost and outside of operating income. The Company adopted ASU 2017-07 on April 1, 2018 on a retrospective basis, which resulted in the reclassification of certain amounts from “Cost of sales” and “Selling, general and administrative expenses” to “Other income, net” in the condensed consolidated statements of operations. As a result, prior period amounts impacted have been revised accordingly. The adoption of ASU 2017-07 resulted in the reclassification of $0.8 million and $1.5 million of net periodic benefit credits previously recorded within "Costs of sales" to "Other income, net" for the three and six months ended September 30, 2017, respectively. The adoption also resulted in a reclassification of $0.1 million and $0.2 million of net periodic benefit credits previously recorded within "Selling, general and administrative expenses," to "Other income, net" on the condensed consolidated statements of operations for the three and six months ended September 30, 2017, respectively.
In February 2015, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02''), which requires lessees to recognize lease assets and lease liabilities for all leases on the balance sheets. ASU 2016-02 is effective beginning for the Company's fiscal 2020 and interim periods included therein on a modified retrospective basis. The Company expects the new lease standard to increase its total assets and liabilities; however, it is currently evaluating the magnitude of the impact on its consolidated financial statements upon adoption.
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 that revenue should be recognized in an amount that reflects the consideration the company expects to be entitled to in exchange for the transfer of promised goods or services to customers. The guidance provides a five-step process that entities should follow in order to achieve that core principal. The Company adopted ASU 2014-09 effective April 1, 2018, using the modified retrospective method. See more information related to the adoption of ASU 2014-09 within Note 5, Revenue Recognition.

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2. Acquisitions
Fiscal Year 2019
On September 24, 2018, the Company acquired certain assets associated with the design and distribution of various roof drains, spouts and flow sensors for institutional, commercial and industrial buildings for $2.0 million. The acquisition of these assets added complementary product lines to the Company's existing Water Management platform and was accounted for as a business combination. The acquisition of these assets did not materially affect the Company's condensed consolidated statements of operations or financial position.
Fiscal Year 2018
On February 9, 2018, the Company acquired Centa Power Transmission (Centa Antriebe Kirschey GmbH) ("Centa"), a leading manufacturer of premium flexible couplings and drive shafts for industrial, marine, rail and power generation applications. The preliminary purchase price, excluding transaction costs and net of cash acquired, was $129.7 million plus assumed debt. The purchase price is comprised of $123.6 million paid at closing and $6.1 million of deferred purchase price payable in fiscal 2020. The preliminary cash purchase price is subject to customary post-closing adjustments for variances between estimated asset and liability targets and actual acquisition date net assets. Cash payments made after the acquisition date are settled in Euros based on prevailing exchange rates at the time of payment. Centa, headquartered in Haan, Germany, added complementary product lines to the Company's existing Process & Motion Control platform. In completing the acquisition of Centa, the Company also acquired two previously established joint venture relationships. The Company now owns a non-controlling interest in each of the joint ventures and therefore accounts for these investments utilizing the equity method.
On October 4, 2017, the Company acquired World Dryer Corporation (“World Dryer”) for a cash purchase price of $50.0 million, excluding transaction costs and net of cash acquired. World Dryer is a leading global manufacturer of commercial electric hand dryers. This acquisition added complementary product lines to the Company's existing Water Management platform.
The Company's results of operations include the acquired operations subsequent to the respective acquisition dates. Pro-forma results of operations and certain other U.S. GAAP disclosures related to the fiscal 2018 acquisitions have not been presented because they are not significant to the Company's condensed consolidated statements of operations or financial position.
The fiscal 2018 acquisitions were accounted for as business combinations and recorded by allocating the purchase price to the fair value of assets acquired and liabilities assumed at the acquisition dates. The excess of the acquisition purchase price over the fair value assigned to the assets acquired and liabilities assumed was recorded as goodwill. The preliminary purchase price allocation was adjusted during the first six months of fiscal 2019 in connection with determining the fair value of fixed assets acquired and acquisition date trade working capital. The preliminary purchase price allocation as of September 30, 2018 resulted in non-tax deductible goodwill of $59.5 million, other intangible assets of $44.9 million (includes tradenames of $9.9 million$29.4 million of customer relationships and $5.6 million of patents), $43.2 million of trade working capital, $53.7 million of fixed assets, $16.6 million of long-term debt and other net liabilities of $5.0 million. The Company is continuing to evaluate the initial purchase price allocations related to final working capital adjustments, the fair values assigned to intangible assets and equity method investments, as well as the finalization of related income tax analysis for the Centa acquisition, which will be completed within the one year period following its acquisition date.

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3. Restructuring and Other Similar Charges
During fiscal 2019, the Company continued to execute various restructuring actions. These initiatives were implemented to drive efficiencies and reduce operating costs while also modifying the Company's footprint to reflect changes in the markets it serves, the impact of acquisitions on the Company's overall manufacturing capacity and the refinement of its overall product portfolio. These restructuring actions primarily resulted in workforce reductions, lease termination costs, and other facility rationalization costs. Management expects to continue executing initiatives and select product-line rationalizations to optimize its operating margin and manufacturing footprint. As such, the Company expects further expenses related to workforce reductions, potential impairment or accelerated depreciation of assets, lease termination costs, and other facility rationalization costs. The Company's restructuring plans are preliminary and related expenses are not yet estimable.
The following table summarizes the Company's restructuring and other similar charges during the three and six months ended September 30, 2018 and September 30, 2017 by classification of operating segment (in millions):
 
 
Restructuring and Other Similar Charges
Three Months Ended September 30, 2018
 
 
Process & Motion Control
 
Water Management
 
Corporate
 
Consolidated
Employee termination benefits
 
$
1.9

 
$

 
$

 
$
1.9

Contract termination and other associated costs
 
0.8

 

 
1.0

 
1.8

Total restructuring and other similar costs
 
$
2.7

 
$

 
$
1.0

 
$
3.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring and Other Similar Charges
Six Months Ended September 30, 2018
 
 
Process & Motion Control
 
Water Management
 
Corporate
 
Consolidated
Employee termination benefits
 
$
3.7

 
$
0.3

 
$
0.6

 
$
4.6

Contract termination and other associated costs
 
1.0

 
0.1

 
1.1

 
2.2

Total restructuring and other similar costs
 
$
4.7

 
$
0.4

 
$
1.7

 
$
6.8

 
 
Restructuring and Other Similar Charges
Three Months Ended September 30, 2017
 
 
Process & Motion Control
 
Water Management
 
Corporate
 
Consolidated
Employee termination benefits
 
$
1.3

 
$
0.3

 
$

 
$
1.6

Contract termination and other associated costs
 
1.2

 

 

 
1.2

Total restructuring and other similar costs
 
$
2.5

 
$
0.3

 
$

 
$
2.8

 
 
 
 
 
 
 
 
 
 
 
Restructuring and Other Similar Charges
Six Months Ended September 30, 2017
 
 
Process & Motion Control
 
Water Management
 
Corporate
 
Consolidated
Employee termination benefits
 
$
1.8

 
$
0.3

 
$

 
$
2.1

Contract termination and other associated costs
 
2.9

 
0.1

 

 
3.0

Total restructuring and other similar costs
 
$
4.7

 
$
0.4

 
$

 
$
5.1

The following table summarizes the activity in the Company's restructuring accrual for the six months ended September 30, 2018 (in millions):
 
 
Employee termination benefits
 
Contract termination and other associated costs
 
Total
Restructuring accrual, March 31, 2018 (1)
 
$
2.3

 
$
0.3

 
$
2.6

Charges
 
4.6

 
2.2

 
6.8

Cash payments
 
(3.9
)
 
(1.1
)
 
(5.0
)
Restructuring accrual, September 30, 2018 (1)
 
$
3.0

 
$
1.4

 
$
4.4

(1)     The restructuring accrual is included in other current liabilities in the condensed consolidated balance sheets.


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In connection with the ongoing supply chain optimization and footprint repositioning initiatives, the Company has taken several actions to consolidate existing manufacturing facilities and rationalize its product offerings. These actions require the Company to assess whether the carrying amount of impacted long-lived assets will be recoverable as well as whether the remaining useful lives require adjustment. As a result, the Company recognized accelerated depreciation of $1.2 million and $2.5 million during the three months and six ended September 30, 2018, and zero and $1.0 million during the three and six months ended September 30, 2017. Accelerated depreciation is recorded within Cost of sales in the condensed consolidated statements of operations.



12

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4. Discontinued Operations

During the first quarter of fiscal 2019, the Board of Directors approved a plan to sell the net assets of the Company’s VAG business included within the Water Management platform. Going forward the Company plans to focus and build its Water Management platform around its Zurn specification-grade commercial plumbing products, which represents a strategic shift that has a major impact on the Company's operations and financial results. As a result, in accordance with the authoritative guidance, the operating results of the VAG business are reported as discontinued operations in the condensed consolidated statements of operations for all periods presented. The assets and liabilities of the VAG business remaining as of September 30, 2018 are presented as current assets and current liabilities held for sale in the condensed consolidated balance sheets.
    
On October 5, 2018, the Company entered into a definitive sale and purchase agreement (the "Agreement") to sell the Company's VAG business. The transaction is anticipated to close in the third quarter of the Company's fiscal 2019 and is subject to customary closing conditions, including antitrust approval in Germany and Austria. Based on the terms of the Agreement, the Company anticipates receiving approximately $25 million of cash proceeds upon closing, subject to customary working capital and cash balance adjustments at closing. The Agreement also provides for the Company to receive contingent consideration of up to an additional $20 million based on the attainment of Earn-out EBITDA, as defined in the Agreement, in the Company’s fiscal years ending March 31, 2019, 2020 and 2021. Based on the estimated cash proceeds the Company expects it will receive in connection with the Agreement less the expected costs incurred in connection with the sale, the Company recorded a non-cash impairment charge of $82.0 million during the second quarter of fiscal 2019 to reduce the carrying amount of the VAG business to its estimated fair value less costs to sell as of September 30, 2018. As noted above, the timing and completion of the Agreement is subject to closing conditions and other factors may interfere with the timing of the transaction, the amount received or its ultimate completion, and the sale price for the VAG business is subject to closing adjustments, and therefore the estimated fair value less costs to sell is subject to change.

Prior to entering into the Agreement and in connection with the preparation of the financial statements for the three months ended June 30, 2018, the Company recorded a $44.0 million non-cash impairment during the first quarter of fiscal 2019 to reflect the Company's estimated fair value less costs to sell of the VAG business, which was based on the value of preliminary bids received and an assessment of the fair value of the assets and liabilities during the preliminary stages of the sale process as of June 30, 2018. The major components of the Loss from discontinued operations, net of tax associated with the VAG business presented in the condensed consolidated statements of operations for the three and six months ended September 30, 2018 and 2017 are included in the table below (in millions):
 
Three Months Ended
 
Six Months Ended
 
September 30, 2018

September 30, 2017
 
September 30, 2018
 
September 30, 2017
Net sales
$
49.0

 
$
57.0

 
$
97.0

 
$
101.5

Cost of sales
37.8

 
43.1

 
74.7

 
76.4

Selling, general and administrative expenses
11.8

 
14.4

 
24.9

 
27.7

Amortization of intangible assets

 
0.3

 
0.3

 
0.6

Non-cash asset impairments
82.0

 

 
126.0

 

Other non-operating expenses, net
0.6

 
3.5

 
2.3

 
4.7

Loss from discontinued operations before income tax
(83.2
)
 
(4.3
)
 
(131.2
)
 
(7.9
)
Income tax (expense) benefit
(0.5
)
 
0.8

 
4.7

 
1.5

Loss from discontinued operations, net of tax
$
(83.7
)
 
$
(3.5
)
 
$
(126.5
)
 
$
(6.4
)


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The carrying amounts of major classes of assets and liabilities included as part of discontinued operations presented in the condensed consolidated balance sheets as of September 30, 2018 and March 31, 2018 were as follows (in millions):
 
September 30, 2018
 
March 31, 2018
Assets
 
 
 
Cash and cash equivalents
$
15.2

 
$
24.4

Receivables, net
51.0

 
58.5

Inventories
42.1

 
40.7

Other current assets
10.8

 
6.7

Property, plant and equipment, net (1)
53.0

 
59.9

Intangible assets, net (1)

 
46.6

Other assets (1)

 
2.0

Valuation allowance (2)
(82.0
)
 

Assets held for sale
$
90.1

 
$
238.8

 
 
 
 
Liabilities
 
 
 
Trade payables
$
31.6

 
$
36.1

Compensation and benefits
6.5

 
6.1

Other current liabilities
26.2

 
22.9

Deferred income taxes (1)
3.4

 
7.3

Other liabilities (1)

 
6.5

Liabilities held for sale
$
67.7

 
$
78.9

____________________
(1)
Amounts classified as non-current for the period ended March 31, 2018.
(2)
Represents the second quarter fiscal 2019 non-cash impairment charge of $82.0 million recorded to reduce the net assets of the VAG business to their estimated fair value.
The condensed consolidated statements of cash flows for the current and prior periods presented have not been adjusted to separately disclose cash flows related to discontinued operations. However, the capital expenditures, depreciation, amortization and other significant non-cash amounts associated with the discontinued operations were as follows (in millions):
 
Six Months Ended
 
September 30, 2018
 
September 30, 2017
Depreciation
$
4.1

 
$
4.2

Amortization of intangible assets
0.3

 
0.6

Non-cash asset impairment
126.0

 

Stock-based compensation
0.2

 
0.3

Capital expenditures
1.5

 
0.9


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5. Revenue Recognition
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Accounting Standards Codification ("ASC") 606. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized when obligations under the terms of a contract with the customer are satisfied. For the majority of the Company's product sales, revenue is recognized at a point-in-time when control of the product is transferred to the customer, which generally occurs when the product is shipped from the Company's manufacturing facility to the customer. When contracts include multiple products to be delivered to the customer, generally each product is separately priced and is determined to be distinct within the context of the contract. Other than a standard assurance-type warranty that the product will conform to agreed-upon specifications, there are generally no other significant post-shipment obligations. The expected costs associated with standard warranties continues to be recognized as an expense when the products are sold.
When the contract provides the customer the right to return eligible products or when the customer is part of a sales rebate program, the Company reduces revenue at the point of sale using current facts and historical experience by using an estimate for expected product returns and rebates associated with the transaction. The Company adjusts these estimates at the earlier of when the most likely amount of consideration that is expected to be received changes or when the consideration becomes fixed. Accordingly, an increase or decrease to revenue is recognized at that time.
Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue. The Company has elected to recognize the cost for freight and shipping when control of products has transferred to the customer as a component of cost of sales in the condensed consolidated statements of operations. The Company classifies shipping and handling fees billed to customers as net sales and the corresponding costs are classified as cost of sales in the condensed consolidated statements of operations.
Revenue by Category
The Company has two business segments, Process & Motion Control and Water Management. The following table presents our revenue disaggregated by customer type and geography (in millions):
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Original equipment manufacturers/end users
 
$
192.3

 
$
169.2

 
$
378.0

 
$
331.2

Maintenance, repair, and operations
 
156.4

 
131.2

 
303.1

 
256.9

    Total Process & Motion Control
 
$
348.7

 
$
300.4

 
$
681.1

 
$
588.1

 
 
 
 
 
 
 
 
 
Water safety, quality, flow control and conservation
 
$
164.1

 
$
142.0

 
$
322.9

 
$
286.4

Water infrastructure
 
12.0

 
11.4

 
24.4

 
22.5

    Total Water Management
 
$
176.1

 
$
153.4

 
$
347.3

 
$
308.9

 
 
 
 
 
 
 
 
 

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Three Months Ended
 
Six Months Ended
 
 
September 30, 2018
 
September 30, 2018
 
 
Process & Motion Control
 
Water Management
 
Process & Motion Control
 
Water Management
United States and Canada
 
$
226.9

 
$
172.2

 
$
440.8

 
$
339.7

Europe
 
84.7

 

 
166.9

 

Rest of world
 
37.1

 
3.9

 
73.4

 
7.6

    Total
 
$
348.7

 
$
176.1

 
$
681.1

 
$
347.3

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30, 2017
 
September 30, 2017
 
 
Process & Motion Control
 
Water Management
 
Process & Motion Control
 
Water Management
United States and Canada
 
$
208.3

 
$
150.5

 
$
409.6

 
$
303.4

Europe
 
58.0

 

 
113.8

 

Rest of world
 
34.1

 
2.9

 
64.7

 
5.5

    Total
 
$
300.4

 
$
153.4

 
$
588.1

 
$
308.9

Contract Balances
For substantially all of the Company's Process & Motion Control and Water Management product sales, the customer is billed 100% of the contract value when the product ships and payment is generally due 30 days from shipment. Certain contracts include longer payment periods; however, the Company has elected to utilize the practical expedient in which the Company will only recognize a financing component to the sale if payment is due more than one year from the date of shipment.
The Company receives payment from customers based on the contractual billing schedule and specific performance requirements established in the contract. Billings are recorded as accounts receivable when an unconditional right to the contractual consideration exists. Contract assets arise when the Company performs by transferring goods or services to a customer before the customer pays consideration, or before the customer’s payment is due. A contract liability exists when the Company has received consideration or the amount is due from the customer in advance of revenue recognition. Contract liabilities and contract assets are recognized in Other current liabilities and Receivables, net, respectively, in the Company's condensed consolidated balance sheets.
The following table presents changes in the Company’s contract assets and liabilities during the six months ended September 30, 2018 (in millions):
 
 
Balance Sheet Classification
 
March 31, 2018
 
Additions
 
Deductions
 
September 30, 2018
Contract Assets
 
Receivables, net
 
$
0.7

 
$
1.7

 
$
(0.6
)
 
$
1.8

Contract Liabilities (1)
 
Other current liabilities
 
$
3.2

 
$
5.8

 
$
(5.7
)
 
$
3.3

____________________
(1)
Contract liabilities are reduced when revenue is recognized.
Backlog
As of September 30, 2018, the Company has unsatisfied performance obligations of $340.7 million, which represent the most likely amount of consideration expected to be received for satisfying the remaining performance obligations under open contracts. The Company has elected to use the optional exemption provided by ASC 606-10-50-14A for variable consideration, and has not included estimated rebates in the amount of unsatisfied performance obligations. The Company expects to recognize approximately 82% of the unsatisfied performance obligations as revenue in fiscal 2019 and the remaining 18% in fiscal 2020 and beyond.
Significant Judgments

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Timing of Performance Obligations Satisfied at a Point in Time
The Company determined that the customer is able to control the product when it is delivered to them; thus, depending on the shipping terms, control will transfer at different points between the Company's manufacturing facility or warehouse and the customer’s location. The Company considers control to have transferred upon shipment or delivery because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.
Variable Consideration
The Company provides volume-based rebates and the right to return product to certain customers, which are accrued for based on current facts and historical experience. Rebates are paid either on an annual or quarterly basis. There are no other significant variable consideration elements included in the Company's contracts with customers.
Contract Costs
The Company has elected to expense contract costs as incurred if the amortization period is expected to be one year or less. If the amortization period of these costs is expected to be greater than one year, the costs would be subject to capitalization. As of September 30, 2018, the contract assets capitalized, as well as amortization recognized in fiscal 2019, are not significant and there have been no impairment losses recognized.


17

Table of Contents


6. Income Taxes
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“U.S. Tax Reform”). U.S. Tax Reform incorporates significant changes to U.S. corporate income tax laws including, among other items, a reduction in the statutory federal corporate income tax rate from 35% to 21%, an exemption for dividends received from certain foreign subsidiaries, a one-time repatriation tax on deemed repatriated earnings from foreign subsidiaries, immediate taxation of deemed low-taxed “intangible” income earned in foreign jurisdictions (referred to as global intangible low-taxed income or “GILTI”), immediate expensing of certain depreciable tangible assets, limitations on the deduction for net interest expense and certain executive compensation and the repeal of the Domestic Production Activities Deduction (“DPAD”).
In acknowledgment of the substantial and substantive changes incorporated in U.S. Tax Reform, in conjunction with the timing of the enactment being just weeks before the majority of the provisions became effective, the SEC staff issued Staff Accounting Bulletin (“SAB”) 118 to provide certain guidance in determining the accounting for income tax effects of the legislation in the accounting period of enactment as well as provide a measurement period (similar to that used when accounting for business combinations) within which to finalize and reflect such final effects associated with U.S. Tax Reform. Further, SAB 118 summarizes a three-step approach to be applied each reporting period within the overall measurement period: (1) amounts should be reflected in the period including the date of enactment for those items which are deemed to be complete (i.e. all information is available and appropriately analyzed to determine the applicable financial statement impact), (2) to the extent the effects of certain changes due to U.S. Tax Reform for which the accounting is not deemed complete but for which a reasonable estimate can be determined, such provisional amount(s) should be reflected in the period so determined and adjusted in subsequent periods as such effects are finalized and (3) to the extent a reasonable estimate cannot be determined for a specific effect of the tax law change associated with U.S. Tax Reform, no provisional amount should be recorded but rather, continue to apply ASC 740, Accounting for Income Taxes (“ASC 740”), based upon the tax law in effect prior to the enactment of U.S. Tax Reform. Such measurement period is deemed to end when all necessary information has been obtained, prepared and analyzed such that a final accounting determination can be concluded, but in no event should the period extend beyond one year.
In consideration of this guidance, the Company obtained, prepared and analyzed various information associated with the enactment of U.S. Tax Reform (including subsequent Internal Revenue Service (“IRS”) Notices, etc.). Based upon this review, the Company recognized an estimated net income tax benefit with respect to US Tax Reform for fiscal 2018 of $66.5 million. This net income tax benefit reflects a $66.5 million net estimated income tax benefit associated with the remeasurement of the Company’s net U.S. deferred tax liability (including consideration of executive compensation limitations under U.S. Tax Reform) and the one-time repatriation tax of $1.4 million (including state income tax), offset by $1.4 million relating to the remeasurement of unrecognized tax benefits impacted by the one-time repatriation tax. Due to the timing and complexity of the various technical provisions provided for under U.S. Tax Reform, the financial statement impacts recorded for fiscal 2018 relating to U.S. Tax Reform are not deemed to be complete but rather are deemed to be reasonable, provisional estimates based upon the current available information and related interpretations. For example, the Company was required to use estimates for earnings and profits and taxes in conjunction with determining the impact of the one-time repatriation tax. Similarly, due to recent acquisitions, deferred taxes generally remain “open”, such that any purchase accounting entries recorded that impact opening deferred taxes will automatically require a restatement to the 21% statutory federal tax rate (from the 35% rate required to be used for purchase accounting purposes). In addition, in relation to the remeasurement of the Company’s net U.S. deferred tax liability (as well as numerous other aspects of U.S. Tax Reform), the Company had to use judgment based upon currently available guidance and interpretations of such guidance. Future guidance could result in changes to the Company’s current interpretation, and as such, result in changes to previously recorded amounts. Such changes will be reflected as discrete items in the applicable period. Although the Company believes the net income tax benefit recognized for fiscal 2018 as outlined above was a reasonable estimate based upon the available information and analysis completed at that date, these related amounts will likely change, possibly materially, based upon finalization of actual financial information and as further clarification is provided with respect to the application of various tax law changes incorporated by U.S. Tax Reform. As such, the Company expects to update and finalize the accounting for the tax effect of the enactment of U.S. Tax Reform in future quarters in accordance with the guidance as outlined in SAB 118, as deemed necessary. The Company has reviewed and analyzed various IRS Notices, proposed regulations and other pertinent information that became available during the first six months of fiscal 2019. Based upon this review and analysis to date, the Company has determined that no changes are currently required with regard to the net estimated impact reflected in fiscal 2018 and such items continue to be deemed incomplete.
The Company continues to evaluate the potential future impact of the GILTI provisions of U.S. Tax Reform. In accordance with U.S. GAAP, any potential future impacts of GILTI can either be treated as a period expense in the period incurred or considered in the determination of the Company’s deferred tax balances. The Company has provisionally elected to account for GILTI as a period expense; however, the Company has not made a final accounting policy decision with respect to this item as such decision will be dependent upon further analysis, clarification of GILTI tax provisions and potential future changes to the Company’s existing legal structure, all of which are currently unknown. Although none of the Company’s material foreign subsidiaries operate within tax jurisdictions that would otherwise meet the definition of “low-taxed” as outlined in the GILTI tax rules, the Company

18

Table of Contents

is nevertheless subject to the GILTI tax as a result of one particular aspect of the U.S. foreign income tax credit limitation rules requiring the allocation of U.S. interest expense against the GILTI income. Such allocation effectively results in the allocated interest expense being non-deductible for U.S. federal income tax purposes. Were it not for this requirement, the Company would generally not be subject to the GILTI tax as it is currently outlined.
The provision for income taxes for all periods presented is based on an estimated effective income tax rate for the respective full fiscal years. The estimated annual effective income tax rate is determined excluding the effect of significant discrete items or items that are reported net of their related tax effects. The tax effect of significant discrete items is reflected in the period in which they occur. The Company's income tax expense is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are generally higher than the U.S. federal statutory rate, state tax rates in the jurisdictions where the Company does business and the Company's ability to utilize various tax credits and net operating loss (“NOL”) carryforwards.
The Company regularly reviews its deferred tax assets for recoverability and establishes valuation allowances based on historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences, as deemed appropriate. In addition, all other available positive and negative evidence is taken into consideration for purposes of determining the proper balances of such valuation allowances. As a result of this review, the Company continues to maintain valuation allowances against the deferred tax assets relating to certain foreign and state net operating loss carryforwards. Future changes to the balances of these valuation allowances, as a result of this continued review and analysis by the Company, could result in a material impact to the financial statements for such period of change.
The income tax provision was $17.2 million in the second quarter of fiscal 2019 compared to an income tax provision of $15.6 million in the second quarter of fiscal 2018. The effective income tax rate for the second quarter of fiscal 2019 was 27.4% versus 31.9% in the second quarter of fiscal 2018. The effective income tax rate for the second quarter of fiscal 2019 was above the U.S. federal statutory rate of 21% primarily due to the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of additional taxes associated with GILTI and the accrual of various state income taxes, partially offset by the recognition of excess tax benefits associated with share-based payments. The effective income tax rate for the second quarter of fiscal 2018 was below the U.S. federal statutory rate of 35% primarily due to the recognition of net tax benefits associated with the accrual of the DPAD and the recognition of certain foreign branch related losses for U.S. income tax purposes, partially offset with an increase in valuation allowances relating to certain foreign net operating losses.
The income tax provision recorded in the first six months of fiscal 2019 was $31.7 million compared to an income tax provision of $24.5 million in the first six months of fiscal 2018. The effective income tax rate for the first six months of fiscal 2019 was 26.9% versus 28.1% in the first six months of fiscal 2018. The effective income tax rate for the first six months of fiscal 2019 was above the U.S. federal statutory rate of 21% primarily due to the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of additional taxes associated with GILTI and the accrual of various state income taxes, partially offset by the recognition of excess tax benefits associated with share-based payments and the recognition of a tax benefit associated with a foreign country enacted rate reduction. The effective income tax rate for the first six months of fiscal 2018 was below the U.S. federal statutory rate of 35% primarily due to the recognition of net tax benefits associated with the accrual of the DPAD, the recognition of excess U.S. foreign tax credits, the recognition of certain foreign branch related losses for U.S. income tax purposes and the recognition of certain previously unrecognized tax benefits due to the lapse of the applicable statutes of limitations, partially offset by the increase in valuation allowances related to certain foreign net operating losses.
At September 30, 2018, the Company had an $20.9 million liability for unrecognized net income tax benefits. At March 31, 2018, the Company’s total liability for unrecognized net income tax benefits was $20.1 million. The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in income tax expense. As of September 30, 2018 and March 31, 2018, the total amount of gross, unrecognized income tax benefits included $6.1 million and $5.7 million of accrued interest and penalties, respectively. The Company recognized $0.3 million of net interest and penalties as income tax expense during both the six months ended September 30, 2018 and September 30, 2017.
The Company conducts business in multiple locations within and outside the U.S. Consequently, the Company is subject to periodic income tax examinations by domestic and foreign income tax authorities. Currently, the Company is undergoing routine, periodic income tax examinations in both domestic and foreign jurisdictions (including a review of a few specific items on certain corporate income tax returns of the Company’s Netherlands subsidiaries for the tax years ended March 31, 2011 through 2016). During the second quarter of fiscal 2019, the U.S. Internal Revenue Service completed an income tax examination of the Company’s amended U.S. consolidated federal income tax return for the tax year ended March 31, 2015 and the Company paid approximately $0.4 million upon conclusion of such examination. It appears 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 31, 2015, state and local income tax examinations for years ending prior to fiscal 2014 or significant foreign income tax examinations for years ending prior to fiscal 2013. With respect to the Company's U.S. federal NOL carryforward (which was

19

Table of Contents

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 prior change in control of the Company) and the tax years ended March 31, 2008 through March 31, 2013 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.


20

Table of Contents

7. Earnings per Share
The following table presents the basis for net (loss) income per share computations (in millions, except share amounts):
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Basic net (loss) income per share attributable to Rexnord common stockholders
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
46.2

 
$
33.3

 
$
88.4

 
$
62.7

Less: Non-controlling interest income
 
0.1

 

 
0.2

 

Less: Dividends on preferred stock
 
(5.8
)
 
(5.8
)
 
(11.6
)
 
(11.6
)
Net income from continuing operations attributable to Rexnord common stockholders
 
$
40.3

 
$
27.5

 
$
76.6

 
$
51.1

 
 
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax
 
$
(83.7
)
 
$
(3.5
)
 
$
(126.5
)
 
$
(6.4
)
 
 
 
 
 
 
 
 
 
Net (loss) income attributable to Rexnord common stockholders
 
$
(43.4
)
 
$
24.0

 
$
(49.9
)
 
$
44.7

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic
 
104,570

 
103,812

 
104,455

 
103,753

 
 
 
 
 
 
 
 
 
Diluted net (loss) income per share attributable to Rexnord common stockholders
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
46.2

 
$
33.3

 
$
88.4

 
$
62.7

Less: Non-controlling interest income
 
0.1

 

 
0.2

 

Less: Dividends on preferred stock (1)
 

 
(5.8
)
 
(11.6
)
 
(11.6
)
Net income from continuing operations attributable to Rexnord common stockholders
 
$
46.1

 
$
27.5

 
$
76.6

 
$
51.1

 
 
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax
 
$
(83.7
)
 
$
(3.5
)
 
$
(126.5
)
 
$
(6.4
)
 
 
 
 
 
 
 
 
 
Net (loss) income attributable to Rexnord common stockholders
 
$
(43.4
)
 
$
24.0

 
$
(49.9
)
 
$
44.7

Plus: Dividends on preferred stock (1)
 
(5.8
)
 

 

 

Net (loss) income attributable to Rexnord common stockholders
 
$
(37.6
)
 
$
24.0

 
$
(49.9
)
 
$
44.7

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic
 
104,570

 
103,812

 
104,455

 
103,753

Effect of dilutive equity awards
 
2,826

 
1,728

 
2,921

 
1,690

Preferred stock under the "if-converted" method
 
15,980

 

 

 

Weighted-average common shares outstanding, diluted
 
123,376

 
105,540

 
107,376

 
105,443

                                                                
(1) The "if-converted" method was dilutive for the three months ended September 30, 2018. Under the "if-converted" method, diluted net income per share is calculated under the assumption that the shares of Series A Preferred Stock have been converted into shares of the Company's common stock as of the beginning of the respective periods, and therefore no dividends would have been provided to holders of the Series A Preferred Stock.
The computation of diluted net (loss) income per share for the three and six months ended September 30, 2018 excludes 0.5 million and 0.9 million shares, respectively, related to equity awards due to their anti-dilutive effects. The computation for diluted net (loss) income per share also does not include shares of preferred stock that are convertible into a weighted average 16.0 million common shares for the six months ended September 30, 2018, because to do so would have been anti-dilutive.
The computation of diluted net (loss) income per share for the three and six months ended September 30, 2017 excludes 2.8 million and 5.1 million shares, respectively, related to equity awards due to their anti-dilutive effects. The computation for diluted net (loss) income per share also does not include shares of preferred stock that are convertible into a weighted average 16.7 and 17.0 million common shares for the three and six months ended September 30, 2017, respectively, because to do so would have been anti-dilutive.


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8. Stockholders' Equity

Stockholders' equity consists of the following (in millions):
 
Common stock
 
Preferred stock
 
Additional
paid-in
capital
 
Retained
earnings
(deficit)
 
Accumulated
other
comprehensive
loss
 
Non-controlling interest (1)
 
Total
stockholders’
equity
Balance at March 31, 2018
$
1.0

 
$

 
$
1,277.8

 
$
8.0

 
$
(74.1
)
 
$
0.1

 
$
1,212.8

Total comprehensive (loss) income

 

 

 
(38.3
)
 
(32.4
)
 
0.2

 
(70.5
)
Stock-based compensation expense

 

 
11.8

 

 

 

 
11.8

Exercise of stock options, net

 

 
1.8

 

 

 

 
1.8

Preferred stock dividends

 

 
(5.8
)
 
(5.8
)
 

 

 
(11.6
)
Balance at September 30, 2018
$
1.0

 
$

 
$
1,285.6

 
$
(36.1
)
 
$
(106.5
)
 
$
0.3

 
$
1,144.3

____________________
(1)
Represents a 30% non-controlling interest in two Process & Motion Control controlled subsidiaries.
Preferred Stock
As of September 30, 2018, there were 402,500 shares of 5.75% Series A Mandatory Convertible Preferred Stock (the "Series A Preferred Stock") outstanding. Unless converted earlier, each share of Series A Preferred Stock will convert automatically on the mandatory conversion date, which is November 15, 2019, into between 39.7020 and 47.6420 shares of the Company’s common stock, subject to customary anti-dilution adjustments. The number of shares of common stock issuable upon conversion will be determined based on a defined average volume weighted average price per share of the Company’s common stock preceding November 15, 2019. Holders of the Series A Preferred Stock may elect on a voluntary basis to convert their shares into common stock at the minimum exchange ratio at any time prior to the mandatory conversion date.
Dividends accumulate from the issuance date. Rexnord may pay such dividends in cash or, subject to certain limitations, by delivery of shares of the Company's common stock or through any combination of cash and shares of the Company's common stock as determined by the Company in its sole discretion. Any unpaid dividends will continue to accumulate. Dividends are payable quarterly, ending on November 15, 2019. The shares of Series A Preferred Stock have a liquidation preference of $1,000 per share, plus accrued but unpaid dividends. With respect to dividend and liquidation rights, the Series A Preferred Stock ranks senior to the Company's common stock and junior to all existing and future indebtedness.
During the three and six months ended September 30, 2018, the Company paid $5.8 million and $11.6 million of dividends on the Series A Preferred Stock. As of September 30, 2018, there were no dividends in arrears on the Series A Preferred Stock. See Note 19, Public Offering and Common Stock Repurchases, to the audited consolidated financial statements of the Company's fiscal 2018 Annual Report on Form 10-K for further information regarding stockholders' equity.

9. Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss, net of tax, for the six months ended September 30, 2018 are as follows (in millions):
 
 
Interest Rate Derivatives
 
Foreign Currency Translation
 
Pension and Postretirement Plans
 
Total
Balance at March 31, 2018
 
$
(3.7
)
 
$
(42.2
)
 
$
(28.2
)
 
$
(74.1
)
Other comprehensive (loss) income before reclassifications
 

 
(36.6
)
 
0.6

 
(36.0
)
Amounts reclassified from accumulated other comprehensive loss
 
4.0

 

 
(0.4
)
 
3.6

Net current period other comprehensive income (loss)
 
4.0

 
(36.6
)
 
0.2

 
(32.4
)
Balance at September 30, 2018
 
$
0.3

 
$
(78.8
)
 
$
(28.0
)
 
$
(106.5
)

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The following table summarizes the amounts reclassified from accumulated other comprehensive loss to net (loss) income during the three and six months ended September 30, 2018 and September 30, 2017 (in millions):
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
Income Statement Line
Pension and other postretirement plans
 
 
 
 
 
 
 
 
 
 
Amortization of prior service credit
 
$
(0.3
)
 
$
(0.5
)
 
$
(0.6
)
 
$
(1.0
)
 
Other income, net
Provision for income taxes
 
0.1

 
0.2

 
0.2

 
0.4

 
 
Total net of tax
 
$
(0.2
)
 
$
(0.3
)
 
$
(0.4
)
 
$
(0.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
 
 
 
 
 
 
 
 
 
 
Net realized losses on interest rate hedges
 
$
2.7

 
$
2.6

 
$
5.3

 
$
5.4

 
Interest expense, net
Benefit for income taxes
 
(0.7
)
 
(1.0
)
 
(1.3
)
 
(2.1
)
 
 
Total net of tax
 
$
2.0

 
$
1.6

 
$
4.0

 
$
3.3

 
 
10. Inventories

The major classes of inventories are summarized as follows (in millions):
 
September 30, 2018
 
March 31, 2018
Finished goods
$
155.4

 
$
134.2

Work in progress
38.5

 
35.2

Purchased components
81.7

 
76.0

Raw materials
54.3

 
53.2

Inventories at First-in, First-Out ("FIFO") cost
329.9

 
298.6

Adjustment to state inventories at Last-in, First-Out ("LIFO") cost
5.0

 
5.5

Total inventories
$
334.9

 
$
304.1


11. Goodwill and Intangible Assets

The changes in the net carrying value of goodwill for the six months ended September 30, 2018 by operating segment are presented below (in millions):
 
 
 Process & Motion Control
 
 Water Management
 
 Consolidated
Net carrying amount as of March 31, 2018
 
$
1,102.5

 
$
173.6

 
$
1,276.1

Acquisition (1)
 

 
1.2

 
1.2

Purchase accounting adjustments
 
4.1

 
0.2

 
4.3

Currency translation adjustment and other
 
(6.3
)
 
(0.2
)
 
(6.5
)
Net carrying amount as of September 30, 2018
 
$
1,100.3

 
$
174.8

 
$
1,275.1

______________________
(1) Refer to Note 2 for additional information regarding acquisitions.


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Table of Contents

The gross carrying amount and accumulated amortization for each major class of identifiable intangible assets as of September 30, 2018 and March 31, 2018 are as follows (in millions):  
 
 
 
September 30, 2018
 
Weighted Average Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets subject to amortization:
 
 
 
 
 
 
 
Patents
10 years
 
$
51.1

 
$
(39.1
)
 
$
12.0

Customer relationships (including distribution network)
13 years
 
694.8

 
(508.2
)
 
186.6

Tradenames
13 years
 
39.3

 
(9.8
)
 
29.5

Intangible assets not subject to amortization - tradenames
 
 
280.8

 

 
280.8

Total intangible assets, net
13 years
 
$
1,066.0

 
$
(557.1
)
 
$
508.9

 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
 
Weighted Average Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets subject to amortization:
 
 
 
 
 
 
 
Patents
10 years
 
$
51.3

 
$
(38.4
)
 
$
12.9

Customer relationships (including distribution network)
13 years
 
700.3

 
(494.8
)
 
205.5

Tradenames
13 years
 
40.1

 
(8.5
)
 
31.6

Intangible assets not subject to amortization - tradenames
 
 
280.9

 

 
280.9

Total intangible assets, net
13 years
 
$
1,072.6

 
$
(541.7
)
 
$
530.9


Intangible asset amortization expense totaled $8.5 million and $17.0 million for the three and six months ended September 30, 2018. Intangible asset amortization expense totaled $7.7 million and $15.6 million for the three and six months ended September 30, 2017.
    
The Company expects to recognize amortization expense on the intangible assets subject to amortization of $33.8 million in fiscal year 2019 (inclusive of $17.0 million of amortization expense recognized in the six months ended September 30, 2018), $33.5 million in fiscal year 2020, $32.4 million in fiscal year 2021, $28.1 million in fiscal year 2022 and $13.8 million in fiscal year 2023.

12. Other Current Liabilities

Other current liabilities are summarized as follows (in millions):
 
 
September 30, 2018
 
March 31, 2018
Contract liabilities
 
$
3.3

 
$
3.2

Sales rebates
 
31.7

 
26.8

Commissions
 
6.0

 
6.1

Restructuring and other similar charges (1)
 
4.4

 
2.6

Product warranty (2)
 
8.0

 
7.7

Risk management (3)
 
10.1

 
10.1

Legal and environmental
 
4.7

 
3.4

Taxes, other than income taxes
 
9.4

 
8.0

Income tax payable
 
32.4

 
19.4

Interest payable
 
7.6

 
8.7

Other
 
44.7

 
31.4

 
 
$
162.3

 
$
127.4

____________________
(1)
See more information related to the restructuring obligations within Note 3, Restructuring and Other Similar Charges.
(2)
See more information related to the product warranty obligations within Note 16, Commitments and Contingencies.
(3)
Includes projected liabilities related to losses arising from automobile, general and product liability claims.

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Table of Contents

13. Long-Term Debt
Long-term debt is summarized as follows (in millions):
 
 
September 30, 2018
 
March 31, 2018
Term loan (1)
 
$
792.1

 
$
791.5

4.875% Senior Notes due 2025 (2)
 
494.6

 
494.2

Securitization facility borrowings (3)
 

 
18.3

Other subsidiary debt (4)
 
51.3

 
52.0

Total
 
1,338.0

 
1,356.0

Less current maturities
 
1.4

 
3.9

Long-term debt
 
$
1,336.6

 
$
1,352.1

____________________
(1)
Includes unamortized debt issuance costs of $7.9 million and $8.5 million at September 30, 2018 and March 31, 2018, respectively.
(2)
Includes unamortized debt issuance costs of $5.4 million and $5.8 million at September 30, 2018 and March 31, 2018, respectively.
(3)
Includes unamortized debt issuance costs of $0.5 million at March 31, 2018.
(4)
Includes unamortized debt issuance costs of $0.5 million and $0.5 million at September 30, 2018 and March 31, 2018, respectively.
Senior Secured Credit Facility
At September 30, 2018, the Company’s Third Amended and Restated First Lien Credit Agreement, as amended (the “Credit Agreement”) is funded by a syndicate of banks and other financial institutions and provides for (i) an $800.0 million term loan facility and (ii) a $264.0 million revolving credit facility. The term loan facility has a maturity date of August 21, 2024, and there are no required principal payments due or scheduled under the term debt until the maturity date. During August 2018, the Company met the required rating of the Credit Agreement allowing the applicable margin under the Term Loan to be reduced from 2.25% to 2.00%. At September 30, 2018, the borrowings under the Term Loan had a weighted-average effective interest rate of 4.26%, determined as the London Interbank Offered Rate (“LIBOR”) (subject to a 0% floor) plus an applicable margin of 2.00%. The weighted-average interest rate for the six months ended September 30, 2018, was 4.20% determined as LIBOR (subject to a 0.0% floor) plus an applicable margin of 2.00%No amounts were borrowed under the revolving credit facility at September 30, 2018 or March 31, 2018; however, $6.2 million and $8.3 million of the revolving credit facility were considered utilized in connection with outstanding letters of credit at September 30, 2018 and March 31, 2018, respectively.

As of September 30, 2018, the Company was in compliance with all applicable covenants under the Credit Agreement, including compliance with a maximum permitted total net leverage ratio (the Company's sole financial maintenance covenant under the revolving credit facility discussed below) of 6.75 to 1.0. The Company's total net leverage ratio was 2.7 to 1.0 as of September 30, 2018.

4.875% Senior Notes due 2025
On December 7, 2017, the Company issued $500.0 million aggregate principal amount of 4.875% senior notes due 2025 (the “Notes”). The Notes were issued by RBS Global, Inc. and Rexnord LLC (Company subsidiaries; collectively, the “Issuers”) pursuant to an Indenture, dated as of December 7, 2017 (the “Indenture”), by and among the Issuers, the domestic subsidiaries of the Company (with certain exceptions) as guarantors named therein (the “Subsidiary Guarantors”) and Wells Fargo Bank, National Association (the “Trustee”). The Notes are general senior unsecured obligations of the Issuers. Rexnord Corporation separately entered into a Parent Guarantee with the Trustee whereby it guaranteed certain obligations of the Issuers under the Indenture. The Notes pay interest semi-annually on June 15 and December 15. The Notes were not and will not be registered under the Securities Act of 1933 or any state securities laws.
Accounts Receivable Securitization Program
The Company maintains an accounts receivable securitization facility (the “Securitization”) with Wells Fargo Bank, N.A. Pursuant to the Securitization, Rexnord Funding (a wholly owned bankruptcy-remote special purpose subsidiary) has granted the lender under the Securitization 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 outstanding from time to time. Such borrowings will be used by Rexnord Funding to finance purchases of accounts receivable. The Securitization constitutes a

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Table of Contents

“Permitted Receivables Financing” under Article 1 and Article 6 of the Credit Agreement. Any borrowings under the Securitization are accounted for as secured borrowings on the Company's condensed consolidated balance sheets.

At September 30, 2018 and March 31, 2018, the Company's borrowing capacity under the Securitization was $100.0 million, based on the current accounts receivables balance. No amount was borrowed under the Securitization as of September 30, 2018, and $18.8 million was borrowed under the Securitization as of March 31, 2018. In addition, $7.6 million and $7.9 million of available borrowing capacity under the Securitization was considered utilized in connection with outstanding letters of credit at September 30, 2018 and March 31, 2018, respectively. As of September 30, 2018, the Company was in compliance with all applicable covenants and performance ratios contained in the Securitization.
See Note 11 to the audited consolidated financial statements of the Company's fiscal 2018 Annual Report on Form 10-K for further information regarding long-term debt.

14. Derivative Financial Instruments

The Company is exposed to certain financial risks relating to fluctuations in foreign currency exchange rates. The Company currently selectively uses foreign currency forward exchange contracts to manage its foreign currency risk. All hedging transactions are authorized and executed pursuant to defined policies and procedures that prohibit the use of financial instruments for speculative purposes.

Foreign Exchange Contracts
The Company periodically enters into foreign currency forward contracts to mitigate the foreign currency volatility relative to certain intercompany and external cash flows expected to occur. These foreign currency forward contracts were not accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging (“ASC 815”), and as such were marked to market through earnings. The amounts recorded on the condensed consolidated balance sheets and recognized within the condensed consolidated statements of operations related to the Company's foreign currency forward contracts are set forth within the tables below.

Interest Rate Derivatives
The Company utilized three interest rate swaps to hedge the variability in future cash flows associated with the Company's variable-rate term loans. The interest rate swaps, which originally became effective in fiscal 2016, converted $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 and matured on September 27, 2018. In addition, the Company utilized two interest rate caps to further mitigate the Company's exposure to increasing interest rates on its variable-rate interest loans. Those interest rate caps were effective beginning in fiscal 2015 and matured on October 24, 2018, and they capped the interest on $750.0 million of the Company's variable-rate interest loans at 3.0%, plus the applicable margin.
The Company's derivatives are measured at fair value in accordance with ASC 820, Fair Value Measurements and Disclosure (“ASC 820”). See Note 15 for more information as it relates to the fair value measurement of the Company's derivative financial instruments. The following tables indicate the location and the fair value of the Company's non-qualifying, non-designated derivative instruments within the condensed consolidated balance sheets (in millions):
 
 
September 30, 2018
 
March 31, 2018
 
Balance Sheet Classification
 
 
Asset Derivatives
Foreign currency forward contracts
 
$

 
$
0.5

 
Other current assets
 
 
 
 
 
 
 
 
 
Liability Derivatives
Interest rate swaps
 
$

 
$
0.8

 
Other current liabilities
Foreign currency forward contracts
 
$
0.1

 
$

 
Other current liabilities
The following table segregates the location and the amount of gains or losses associated with the changes in the fair value of the Company's derivative instruments, net of tax, within the consolidated balance sheets (for instruments no longer qualifying for hedge accounting under ASC 815) and recognized within the consolidated statements of operations (for non-qualifying, non-designated derivative instruments):

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Table of Contents

 
 
Amount of loss (gain) recognized in accumulated other comprehensive loss
Derivative instruments no longer qualifying for hedge accounting under ASC 815 (in millions)
 
 
September 30, 2018
 
March 31, 2018
Interest rate swaps
 
$
(0.5
)
 
$
2.3

Interest rate caps
 
(0.1
)
 
1.4


Non-qualifying, non-designated derivative instruments (in millions)
 
Condensed Consolidated Statements of Operations Classification
 
Amount recognized as income (expense)
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Foreign currency forward contracts
 
Other income (expense), net
 
$
(0.3
)
 
$
(0.6
)
 
$
(0.1
)
 
$
(0.8
)
Interest rate swaps
 
Interest income (expense), net
 
0.3

 

 
0.8

 


As of September 30, 2018, the Company expects to reclassify the remaining $0.3 million of losses related to its interest rate derivatives recorded within accumulated other comprehensive loss into earnings as interest expense during the next quarter.
 
15. 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 Financial 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.
The Company has a nonqualified deferred compensation plan where assets are invested in mutual funds and corporate-owned life insurance contracts held in a rabbi trust, which is restricted for payments to participants of the plan. The Company has elected to use the fair value option for the mutual funds, which are measured using quoted prices of identical instruments in active markets categorized as Level 1. Corporate-owned life insurance contracts are recorded at cash surrender value, which is provided by a third party and reflects the net asset value of the underlying publicly traded mutual funds categorized as Level 2. The deferred compensation assets are classified within other assets on the condensed consolidated balance sheets. Deferred compensation liabilities are measured at fair value based on quoted prices of identical instruments to the investment vehicles selected by the participants categorized as Level 1. Deferred compensation liabilities are classified within other liabilities on the condensed consolidated balance sheets.
There were no transfers of assets between levels at September 30, 2018 and March 31, 2018, respectively.
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 September 30, 2018 and March 31, 2018 (in millions):
 
 
Fair Value as of September 30, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Deferred compensation assets
 
$
3.4

 
$
1.9

 
$

 
$
5.3

Total assets at fair value
 
$
3.4

 
$
1.9

 
$

 
$
5.3

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
$

 
$
0.1

 
$

 
$
0.1

Deferred compensation liabilities
 
5.3

 

 

 
5.3

Total liabilities at fair value
 
$
5.3

 
$
0.1

 
$

 
$
5.4

 
 
Fair Value as of March 31, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
$

 
$
0.5

 
$

 
$
0.5

Deferred compensation assets
 
1.6

 
1.9

 

 
3.5

Total assets at fair value
 
$
1.6

 
$
2.4

 
$

 
$
4.0