RXN 6.30.15 10-Q
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 June 30, 2015
 
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.)
 
 
 
247 Freshwater Way, Suite 300, 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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   o

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

Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
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 July 31, 2015
Rexnord Corporation Common Stock, $0.01 par value per share
 
100,348,016 shares



Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
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 in our Annual Report on Form 10-K for the year ended March 31, 2015 in Part I, Item 1A, “Risk Factors” and in Part I under the heading "Cautionary Notice Regarding Forward-Looking Statements." 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 2016, or fiscal 2016, means the period from April 1, 2015 to March 31, 2016 and the first quarters of fiscal 2016 and 2015 mean the fiscal quarters ended June 30, 2015 and June 30, 2014, 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) 
 
 
June 30, 2015
 
March 31, 2015
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
329.7

 
$
370.3

Receivables, net
 
318.5

 
336.0

Inventories, net
 
372.6

 
367.7

Assets held for sale
 
2.6

 
2.6

Other current assets
 
49.5

 
49.7

Total current assets
 
1,072.9

 
1,126.3

Property, plant and equipment, net
 
412.8

 
417.6

Intangible assets, net
 
574.6

 
587.7

Goodwill
 
1,201.3

 
1,202.3

Insurance for asbestos claims
 
35.0

 
35.0

Other assets
 
32.5

 
33.1

Total assets
 
$
3,329.1

 
$
3,402.0

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Current maturities of debt
 
$
23.6

 
$
24.3

Trade payables
 
192.6

 
234.1

Compensation and benefits
 
50.5

 
53.9

Current portion of pension and postretirement benefit obligations
 
5.0

 
5.0

Other current liabilities
 
120.9

 
127.3

Total current liabilities
 
392.6

 
444.6


 
 
 
 
Long-term debt
 
1,912.0

 
1,915.7

Pension and postretirement benefit obligations
 
201.3

 
203.0

Deferred income taxes
 
179.9

 
184.4

Reserve for asbestos claims
 
35.0

 
35.0

Other liabilities
 
67.4

 
66.6

Total liabilities
 
2,788.2

 
2,849.3


 
 
 
 
Stockholders' equity:
 
 
 
 
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued
 

 

Common stock, $0.01 par value; 200,000,000 shares authorized; shares issued: 100,348,016 at June 30, 2015 and 102,681,964 at March 31, 2015
 
1.0

 
1.0

Additional paid-in capital
 
842.5

 
885.9

Retained deficit
 
(176.2
)
 
(197.5
)
Accumulated other comprehensive loss
 
(126.1
)
 
(130.2
)
Treasury stock at cost; 0 and 900,904 shares at June 30, 2015 and March 31, 2015, respectively
 

 
(6.3
)
Total Rexnord stockholders' equity
 
541.2

 
552.9

Non-controlling interest
 
(0.3
)
 
(0.2
)
Total stockholders' equity
 
540.9

 
552.7

Total liabilities and stockholders' equity
 
$
3,329.1

 
$
3,402.0

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)
 
 
First Quarter Ended
 
 
June 30, 2015
 
June 30, 2014
Net sales
 
$
485.1

 
$
503.6

Cost of sales
 
315.3

 
325.4

Gross profit
 
169.8

 
178.2

Selling, general and administrative expenses
 
100.4

 
104.4

Restructuring and other similar charges
 
1.9

 
3.4

Amortization of intangible assets
 
14.3

 
13.5

Income from operations
 
53.2

 
56.9

Non-operating expense:
 
 
 
 
Interest expense, net
 
(21.6
)
 
(22.5
)
Other expense, net
 
(0.4
)
 
(1.3
)
Income from continuing operations before income taxes
 
31.2

 
33.1

Provision for income taxes
 
10.0

 
21.5

Net income from continuing operations
 
21.2

 
11.6

Income from discontinued operations, net of tax
 

 
0.4

Net income
 
21.2

 
12.0

Non-controlling interest loss
 
(0.1
)
 
(0.1
)
Net income attributable to Rexnord
 
$
21.3

 
$
12.1

 
 
 
 
 
Net income from continuing operations per share:
 
 
 
 
Basic
 
$
0.21

 
$
0.11

Diluted
 
$
0.20

 
$
0.11

Net loss per share from discontinued operations:
 
 
 
 
Basic
 
$

 
$

Diluted
 
$

 
$

Net income per share attributable to Rexnord:
 
 
 
 
Basic
 
$
0.21

 
$
0.12

Diluted
 
$
0.20

 
$
0.12

Weighted-average number of shares outstanding (in thousands):
 
 
Basic
 
101,409

 
101,235

Effect of dilutive equity awards
 
2,958

 
3,294

Diluted
 
104,367

 
104,529


Rexnord Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(in Millions)
(Unaudited)
 
 
First Quarter Ended
 
 
June 30, 2015
 
June 30, 2014
Net income attributable to Rexnord
 
$
21.3

 
$
12.1

Other comprehensive (loss) income:
 
 
 
 
Foreign currency translation adjustments
 
4.4

 
(1.7
)
Unrealized income on interest rate derivatives, net of tax
 

 
(3.7
)
Change in pension and other postretirement defined benefit plans, net of tax
 
(0.3
)
 
(0.3
)
Other comprehensive income (loss), net of tax
 
4.1

 
(5.7
)
Non-controlling interest loss
 
(0.1
)
 
(0.1
)
Total comprehensive income
 
$
25.3

 
$
6.3


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)
 
 
Three Months Ended
 
 
June 30, 2015
 
June 30, 2014
Operating activities
 
 
 
 
Net income
 
$
21.2

 
$
12.0

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
Depreciation
 
13.9

 
14.7

Amortization of intangible assets
 
14.3

 
13.5

Amortization of deferred financing costs
 
0.5

 
0.4

Gain on dispositions of property, plant and equipment
 
(0.1
)
 

Deferred income taxes
 
(1.7
)
 
14.4

Other non-cash charges
 
(1.6
)
 
(0.1
)
Stock-based compensation expense
 
1.9

 
1.6

Changes in operating assets and liabilities:
 

 

Receivables
 
4.3

 
19.8

Inventories
 
(3.8
)
 
(19.3
)
Other assets
 
1.0

 
1.5

Accounts payable
 
(42.8
)
 
(43.2
)
Accruals and other
 
0.8

 
(8.9
)
Cash provided by operating activities
 
7.9

 
6.4

 
 
 
 
 
Investing activities
 
 
 
 
Expenditures for property, plant and equipment
 
(7.7
)
 
(8.7
)
Acquisitions, net of cash acquired
 
1.1

 
(27.7
)
Proceeds from dispositions of long-lived assets
 
0.5

 

Cash used for investing activities
 
(6.1
)
 
(36.4
)
 
 
 
 
 
Financing activities
 
 
 
 
Repayments of long-term debt
 
(4.9
)
 
(4.9
)
Proceeds from borrowings of short-term debt
 

 
4.6

Repayments of short-term debt
 
(0.7
)
 
(0.1
)
Proceeds from exercise of stock options
 

 
0.4

Repurchase of Company common stock
 
(40.0
)
 

Excess tax benefit on exercise of stock options
 
1.0

 
1.6

Cash (used for) provided by financing activities
 
(44.6
)
 
1.6

Effect of exchange rate changes on cash and cash equivalents
 
2.2

 
0.7

Decrease in cash and cash equivalents
 
(40.6
)
 
(27.7
)
Cash and cash equivalents at beginning of period
 
370.3

 
339.0

Cash and cash equivalents at end of period
 
$
329.7

 
$
311.3


See notes to the condensed consolidated financial statements.

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Rexnord Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2015
(Unaudited)

1. Basis of Presentation and Significant Accounting Policies
                
The unaudited condensed consolidated financial statements included herein have been prepared by Rexnord Corporation (“Rexnord” or the "Company"), in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

In the opinion of management, the condensed consolidated financial statements include all adjustments necessary for a fair presentation of the results of operations for the interim periods. Results for the interim periods are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2016. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's fiscal 2015 Annual Report on Form 10-K.

During fiscal 2015, the Company completed a plan to discontinue the operations and exit its non-core business that manufactured ring gears and pinions (“Mill Products”) utilized for crushing machinery applications in the mining sector. Accordingly, the results of operations of the Mill Products business have been reported as discontinued operations in the condensed consolidated statements of operations for all periods presented. The corresponding assets and liabilities of the discontinued operations have been reclassified in accordance with authoritative literature and classified as assets held for sale for all periods presented in the condensed consolidated balance sheets. See Note 3 for further information regarding the discontinued operation.

The Company

Rexnord is a growth-oriented, multi-platform industrial company with what it believes are leading market shares and highly trusted brands that serve a diverse array of global end-markets. The Company's heritage of innovation and specification have allowed it to provide highly engineered, mission critical solutions to customers for decades and affords it the privilege of having long-term, valued relationships with market leaders. The Rexnord Innovation Center provides on-going, cross-platform support of these capabilities. The Company operates in a disciplined way and the Rexnord Business System (“RBS”) is the operating philosophy. Grounded in the spirit of continuous improvement, RBS creates a scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating performance throughout all aspects of the business.

The Process & Motion Control platform designs, manufactures, markets and services specified, highly-engineered mechanical components used within complex systems where the customers' reliability requirements and cost of failure or downtime is extremely high. The Process & Motion Control product portfolio includes gears and gear drives, couplings, industrial bearings, tabletop and engineered chain, aerospace bearings and seals, conveying equipment and specialty components, as well as repair and on-going service.

The Water Management platform designs, procures, manufactures and markets products that provide and enhance water quality, safety, flow control and conservation. The Water Management product portfolio includes specification drainage systems, sensor flush valves and faucets, point-source wastewater pretreatment devices, backflow prevention devices, pressure release valves, sluice and slide gates, butterfly and plug valves, control valves and actuation systems and PEX piping.

Recent Accounting Pronouncements

In April 2015 the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement of debt issuance costs is not affected by the amendments in this update. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 and is required to be applied retrospectively to all prior periods presented. As permitted by ASU 2015-03, the Company elected to early adopt this guidance beginning with the first quarter of fiscal 2016, which resulted in

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the reclassification of $10.0 million and $10.5 million of unamortized debt issuance costs from other assets to long-term debt on the condensed consolidated balance sheets as of June 30, 2015 and March 31, 2015, respectively. Refer to Note 12 for additional discussion regarding debt instruments and related classification.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") in order to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The guidance specifies revenue should be recognized in the amount that reflects the consideration the company expects to be entitled to in exchange for the transfer of promised goods or services to customers. ASU 2014-09 will be effective for the Company in the first quarter of fiscal 2019 and allows for full retrospective adoption applied to all periods presented or retrospective adoption with the cumulative effect of initially applying this update recognized at the date of initial application. The Company is currently evaluating the method of adoption and the potential impact adoption will have on its condensed consolidated financial statements.

In the first quarter of 2016, the Company adopted FASB ASU No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"), which changes the criteria for reporting discontinued operations. ASU 2014-08 allows only disposals representing a strategic shift in operations to be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. In addition, the new guidance requires expanded disclosures about discontinued operations, as well as pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. As this guidance is a prospective change, the significance of ASU 2014-08 for the Company is dependent on any future dispositions or disposals.

    


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2. Acquisitions

Fiscal Year 2015 Acquisitions

On January 12, 2015, the Company acquired Euroflex Transmissions (India) Private Limited ("Euroflex") for a preliminary cash purchase price of $76.0 million, excluding transaction costs and net of cash acquired. During the first quarter of fiscal 2016, the Company received $1.1 million in cash from the sellers in connection with finalizing the amount of acquisition date working capital. The preliminary purchase price was adjusted to reflect this change, which resulted in a $1.1 million decrease to goodwill.  Euroflex, based in Hyderabad, India, is a supplier of high performance disc couplings used in power generation, gas compression and industrial process machinery applications.  The acquisition of Euroflex added complementary product lines to the Company's existing Process & Motion Control platform.

On October 30, 2014, the Company acquired Tollok S.p.A. ("Tollok"), a supplier of highly engineered shaft locking devices for the power generation and process industries, as well as general industrial applications. The preliminary purchase price, excluding transaction costs and net of cash acquired, was $39.2 million. Under the terms of the agreement, the purchase price is comprised of $33.4 million that was paid at closing and $3.4 million to be paid in annual installments on October 30, 2015 and October 30, 2016. During the first quarter of fiscal 2016, the Company finalized the amount of acquisition date working capital which resulted in a $1.7 million decrease to the preliminary purchase price, which the Company will receive by reducing the amount of the first annual installment payment to the previous Tollok shareholders by $1.7 million.  The preliminary purchase price allocation has been adjusted to reflect this change, which resulted in a $1.7 million decrease to goodwill. Pursuant to the terms of the agreement, the Company is also contingently obligated to make additional consideration payments, not to exceed $3.8 million, in two years to the sellers should Tollok's financial performance exceed certain thresholds during the two years following the acquisition. Cash payments made after the acquisition date will be made in Euros based on prevailing exchange rates at the time of payment. Tollok, based in Ferrara, Italy, added complementary product lines to the Company's existing Process & Motion Control platform.

On April 15, 2014, the Company acquired Green Turtle Technologies Ltd., Green Turtle Americas Ltd. and Filamat Composites Inc. (collectively "Green Turtle") for a total cash purchase price of $27.7 million, excluding transaction costs and net of cash acquired. Green Turtle, based in Toronto, Ontario, and Charlotte, North Carolina, is a manufacturer of branded fiberglass oil and grease separators and traps. This acquisition broadened the product portfolio of the Company's existing Water Management platform.

The Company's results of operations include the acquired operations subsequent to the respective acquisition dates. The acquisitions of Green Turtle, Tollok and Euroflex were not material to the Company’s condensed consolidated financial statements. Pro-forma results of operations and certain other U.S. GAAP disclosures related to the acquisitions during the fiscal year ended March 31, 2015 have not been presented because they are not significant to the Company's condensed consolidated statements of operations and financial position.

The fiscal 2015 acquisitions were accounted for as business combinations and recorded by allocating the purchase price of the acquisitions to the fair value of the assets acquired and liabilities assumed at the respective acquisition date. The excess of the acquisition purchase price over the fair value assigned to the assets acquired and liabilities assumed was recorded as goodwill. The preliminary purchase price allocations for the fiscal 2015 acquisitions, after incorporating the changes described above, resulted in non-tax deductible goodwill of $71.9 million, other intangible assets of $67.2 million and other net assets of $3.8 million. The purchase price allocations of Tollok and Euroflex are preliminary and subject to final valuation related adjustments that will be completed within the one year period following the respective acquisition date. 
 






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3. Discontinued Operations
           
During the fourth quarter of fiscal 2015, the Company ceased all operations related to the Mill Products business, which conducted its operations in the United States and Australia and was a component of the Process & Motion Control segment. As a result, the Company met the criteria to present this business as a discontinued operation in accordance with the authoritative guidance. During the second half of fiscal 2015, the Company sold certain assets associated with the Mill Products business for aggregate cash consideration of approximately $9.2 million. The exit of the business resulted a net charge of $9.7 million, consisting of a $3.8 million impairment loss associated with property, plant and equipment, a $4.1 million impairment of goodwill allocated to the discontinued operation and other exit related costs of $1.8 million.

The condensed consolidated statement of operations for the first quarter ended June 30, 2015 does not include any activity for Mill Products as the operations were ceased. The following table summarizes the results of the Mill Products business for the first quarter ended June 30, 2014 included within income from discontinued operations, net of tax on the condensed consolidated statements of operations (in millions):
 
Three Months Ended
 
June 30, 2014
Net sales
$
6.2

Income from operations
0.7

Provision for income taxes
(0.3
)
Net income
$
0.4

 
 
Net income per share from discontinued operations:
 
Basic
$

Diluted
$


Included as assets held for sale on the condensed consolidated balance sheets as of each of June 30, 2015 and March 31, 2015 are long-lived assets of the Mill Products business of $2.6 million. As of June 30, 2015 and March 31, 2015, the long-lived assets were recorded at the estimated fair value. See Note 14 for additional detail on fair value measurements used by the Company to estimate fair value. The Company is actively engaged in the sale of remaining assets; however, given the nature of the assets involved, the expected timing of cash flows related to the sale is indeterminable. The Company has no continuing involvement in the Mill Products business.

4. Restructuring and Other Similar Charges

During the quarter ended June 30, 2015, the Company continued to execute various restructuring actions. These initiatives were implemented to drive efficiencies and reduce operating costs while also modifying the Company's footprint to reflect changes in the markets it serves, the impact of acquisitions on the Company's overall manufacturing capacity and the refinement of its overall product portfolio. These restructuring actions primarily resulted in workforce reductions, lease termination costs, and other facility rationalization costs. Management expects to continue executing initiatives to optimize its operating margin and manufacturing footprint as well as select product-line rationalizations. As such, the Company expects further expenses related to workforce reductions, impairment of assets, lease termination costs, and other facility rationalization costs. The Company's restructuring plans are preliminary and related expenses are not yet estimable.
 
The following table summarizes the Company's restructuring and other similar charges during the three months ended June 30, 2015 and June 30, 2014 by classification of operating segment (in millions):
 
 
Restructuring and Other Similar Charges
Three Months Ended June 30, 2015
 
 
Process & Motion Control
 
Water Management
 
Corporate
 
Consolidated
Severance costs
 
$
1.1

 
$
0.5

 
$

 
$
1.6

Lease termination and other costs
 
0.2

 
0.1

 

 
0.3

Total restructuring and other similar costs
 
$
1.3

 
$
0.6

 
$

 
$
1.9


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Restructuring and Other Similar Charges
Three Months Ended June 30, 2014
 
 
Process & Motion Control
 
Water Management
 
Corporate
 
Consolidated
Severance costs
 
$
1.5

 
$
0.7

 
$

 
$
2.2

Lease termination and other costs
 
0.4

 
0.8

 

 
1.2

Total restructuring and other similar costs
 
$
1.9

 
$
1.5

 
$

 
$
3.4

    
The following table summarizes the activity in the Company's restructuring accrual for the three months ended June 30, 2015 (in millions):
 
 
 Severance Costs
 
Lease Termination and Other Costs
 
Total
Restructuring accrual, March 31, 2015 (1)
 
$
6.7

 
$
0.3

 
$
7.0

    Charges
 
1.6

 
0.3

 
1.9

    Cash payments
 
(4.1
)
 
(0.3
)
 
(4.4
)
Restructuring accrual, June 30, 2015 (1)
 
$
4.2

 
$
0.3

 
$
4.5


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

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5. Income Taxes

The provision for income taxes for all periods presented is based on an estimated effective income tax rate for the respective full fiscal years. The estimated annual effective income tax rate is determined excluding the effect of significant discrete items or items that are reported net of their related tax effects. The tax effect of significant discrete items is reflected in the period in which they occur. The Company's income tax expense is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are generally lower than the U.S. federal statutory rate, state tax rates in the jurisdictions where the Company does business and the Company's ability to utilize various tax credits and net operating loss (“NOL”) carryforwards.

The Company regularly reviews its deferred tax assets for recoverability and establishes valuation allowances based on historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences as deemed appropriate. In addition, all other available positive and negative evidence is taken into consideration for purposes of determining the proper balances of such valuation allowances. As a result of this review, the Company continues to maintain valuation allowances against the deferred tax assets relating to certain foreign and state net operating loss carryforwards. Future changes to the balances of these valuation allowances, as a result of this continued review and analysis by the Company, could result in a material impact to the financial statements for such period of change.

The income tax provision was $10.0 million in the first quarter of fiscal 2016 compared to an income tax provision of $21.5 million in the first quarter of fiscal 2015. The effective income tax rate for the first quarter of fiscal 2016 was 32.1% versus 65.0% in the first quarter of fiscal 2015. The effective income tax rate for the first quarter of fiscal 2016 was below the U.S. federal statutory rate of 35% primarily due to the accrual of foreign income taxes at rates which are generally below the U.S federal statutory rate, the recognition of certain foreign branch related losses for U.S. income tax purposes and the recognition of certain, previously unrecognized tax benefits due to the lapse of the applicable statutes of limitations. The effective income tax rate for the first quarter of fiscal 2015 was significantly higher than the U.S. federal statutory rate of 35% primarily due to certain one-time costs associated with a change to the U.S. income tax entity classification of a foreign subsidiary, partially offset by the recognition of certain foreign related branch losses for U.S. income tax purposes.

At June 30, 2015, the Company had a $26.5 million liability for unrecognized net income tax benefits. At March 31, 2015, the Company’s total liability for unrecognized net income tax benefits was $26.6 million. The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in income tax expense. As of June 30, 2015 and March 31, 2015, the total amount of gross, unrecognized income tax benefits included $12.9 million and $12.4 million of accrued interest and penalties, respectively. The Company recognized $0.2 million of net interest and penalties as income tax expense during both the three months ended June 30, 2015, as well as, the three months ended June 30, 2014.

The Company conducts business in multiple locations within and outside the U.S. Consequently, the Company is subject to periodic income tax examinations by domestic and foreign income tax authorities. Currently, the Company is undergoing routine, periodic income tax examinations in both domestic and foreign jurisdictions. The Internal Revenue Service is currently conducting fieldwork relating an income tax examination of the Company’s U.S. federal income tax return for the tax year ended March 31, 2013. It appears reasonably possible that the amounts of unrecognized income tax benefits could change in the next twelve months as a result of such examinations; however, any potential payments of income tax, interest and penalties are not expected to be significant to the Company's consolidated financial statements. With certain exceptions, the Company is no longer subject to U.S. federal income tax examinations for tax years ending prior to March 31, 2012, state and local income tax examinations for years ending prior to fiscal 2011 or significant foreign income tax examinations for years ending prior to fiscal 2010. With respect to the Company's U.S. federal NOL carryforward, the short tax period from July 21, 2006 to March 31, 2007 (due to the change in control when Apollo Management, L.P. acquired the Company) and the tax years ended March 31, 2008, 2009, 2010 and 2011 are open under statutes of limitations; whereby, the Internal Revenue Service may not adjust the income tax liability for these years, but may reduce the NOL carryforward and any other tax attribute carryforwards to future, open tax years.

6. Earnings per Share

Basic net income per share is computed by dividing net income by the corresponding weighted average number of common shares outstanding for the period. Diluted net income per share is computed based on the weighted average number of common shares outstanding increased by the number of incremental shares that would have been outstanding if the potential dilutive shares were issued through the exercise of outstanding equity awards to purchase common shares, except when the effect would be anti-dilutive. The computation for diluted net income per share for the first quarter ended June 30, 2015 excludes equity awards to acquire 2,226,000 shares due to their anti-dilutive effect. The computation for diluted net income per share for the first quarter ended June 30, 2014 excludes options to purchase 86,909 shares due to their anti-dilutive effect.

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Table of Contents


7. Stockholders' Equity

Stockholders' equity consists of the following (in millions):
 
Preferred Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock (1)
 
Non-controlling Interest (2)
 
Total
Stockholders’
Equity
Balance at March 31, 2015
$

 
$
1.0

 
$
885.9

 
$
(197.5
)
 
$
(130.2
)
 
$
(6.3
)
 
$
(0.2
)
 
$
552.7

Total comprehensive income (loss)

 

 

 
21.3

 
4.1

 

 
(0.1
)
 
25.3

Stock-based compensation expense

 

 
1.9

 

 

 

 

 
1.9

Common stock repurchased and canceled

 

 
(40.0
)
 

 

 

 

 
(40.0
)
Cancellation of treasury stock

 

 
(6.3
)
 

 

 
6.3

 

 

Tax benefit on stock option exercises

 

 
1.0

 

 

 

 

 
1.0

Balance at June 30, 2015
$

 
$
1.0

 
$
842.5

 
$
(176.2
)
 
$
(126.1
)
 
$

 
$
(0.3
)
 
$
540.9

____________________
(1) During the first quarter of fiscal 2016, the Company canceled all outstanding shares held in treasury stock and returned such shares to the status of authorized but unissued shares.
(2) Represents a 49% non-controlling interest in a Water Management joint venture.

Stock Repurchase Program

In February 2015, the Company's Board of Directors approved a stock repurchase program (the "Repurchase Program") authorizing the repurchase of up to $200.0 million of the Company's common stock from time-to-time on the open market or in privately negotiated transactions. The Repurchase Program does not require the Company to acquire any particular amount of common stock and does not specify the timing of purchases or the prices to be paid. During the first quarter of fiscal 2016, the Company repurchased 1,552,500 shares of common stock at a total cost of $40.0 million. The shares repurchased were canceled by the Company upon receipt. At June 30, 2015, approximately $160.0 million of repurchase authority remained.

8. Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss, net of tax, for the three months ended June 30, 2015 are as follows (in millions):
 
 
Interest Rate Derivatives
 
Foreign Currency Translation
 
Pension and Postretirement Plans
 
Total
Balance at March 31, 2015
 
$
(12.6
)
 
$
(76.5
)
 
$
(41.1
)
 
$
(130.2
)
Other comprehensive income before reclassifications
 

 
4.4

 

 
4.4

Amounts reclassified from accumulated other comprehensive loss
 

 

 
(0.3
)
 
(0.3
)
Net current period other comprehensive loss
 

 
4.4

 
(0.3
)
 
4.1

Balance at June 30, 2015
 
$
(12.6
)
 
$
(72.1
)
 
$
(41.4
)
 
$
(126.1
)

The following table summarizes the amounts reclassified from accumulated other comprehensive loss to net income during the three months ended June 30, 2015 (in millions):
 
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
 
Income Statement Line
Pension and other postretirement plans
 
 
 
 
 
 
Amortization of prior service credit
 
$
(0.5
)
 
$
(0.5
)
 
Selling, general and administrative expenses
Provision for income taxes
 
0.2

 
0.2

 
 
Total net of tax
 
$
(0.3
)
 
$
(0.3
)
 
 





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Table of Contents

9. Inventories

The major classes of inventories are summarized as follows (in millions):
 
 
June 30, 2015
 
March 31, 2015
Finished goods
$
150.0

 
$
146.0

Work in progress
63.1

 
69.6

Purchased components
91.1

 
85.2

Raw materials
62.6

 
61.1

Inventories at First-in, First-Out ("FIFO") cost
366.8

 
361.9

Adjustment to state inventories at Last-in, First-Out ("LIFO") cost
5.8

 
5.8

 
$
372.6

 
$
367.7


10. Goodwill and Intangible Assets

The changes in the net carrying value of goodwill and identifiable intangible assets for the three months ended June 30, 2015 by operating segment, are presented below (in millions):
 
 
 
 
 
 
Amortizable Intangible Assets
 
 
 
 
Goodwill
 
Indefinite Lived Intangible Assets (tradenames)
 
Tradenames
 
Customer Relationships
 
Patents
 
Total Identifiable Intangible Assets Excluding Goodwill
Process & Motion Control
 
 
 
 
 
 
 
 
 
 
 
 
Net carrying amount as of March 31, 2015
 
$
949.9

 
$
192.9

 
$
7.3

 
$
113.0

 
$
2.5

 
$
315.7

Purchase price allocation adjustments (1)
 
(2.8
)
 

 

 

 

 

Amortization
 

 

 
(0.3
)
 
(8.3
)
 
(0.3
)
 
(8.9
)
Currency translation adjustment
 
0.7

 
0.1

 

 
0.1

 

 
0.2

Net carrying amount as of June 30, 2015
 
$
947.8

 
$
193.0

 
$
7.0

 
$
104.8

 
$
2.2

 
$
307.0

Water Management
 
 
 
 
 
 
 
 
 
 
 
 
Net carrying amount as of March 31, 2015
 
$
252.4

 
$
135.2

 
$
1.4

 
$
129.1

 
$
6.3

 
$
272.0

Amortization
 

 

 

 
(4.8
)
 
(0.6
)
 
(5.4
)
Currency translation adjustment
 
1.1

 
0.4

 

 
0.3

 
0.3

 
1.0

Net carrying amount as of June 30, 2015
 
$
253.5

 
$
135.6

 
$
1.4

 
$
124.6

 
$
6.0

 
$
267.6

Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
Net carrying amount as of March 31, 2015
 
$
1,202.3

 
$
328.1

 
$
8.7

 
$
242.1

 
$
8.8

 
$
587.7

Purchase price allocation adjustments (1)
 
(2.8
)
 

 

 

 

 

Amortization
 

 

 
(0.3
)
 
(13.1
)
 
(0.9
)
 
(14.3
)
Currency translation adjustment
 
1.8

 
0.5

 

 
0.4

 
0.3

 
1.2

Net carrying amount as of June 30, 2015
 
$
1,201.3

 
$
328.6

 
$
8.4

 
$
229.4

 
$
8.2


$
574.6

____________________
(1) Refer to Note 2 for additional information regarding purchase price allocation adjustments.

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Table of Contents

The gross carrying amount and accumulated amortization for each major class of identifiable intangible assets as of June 30, 2015 and March 31, 2015 are as follows (in millions):  
 
 
 
June 30, 2015
 
Weighted Average Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets subject to amortization:
 
 
 
 
 
 
 
Patents
10 years
 
$
40.4

 
$
(32.2
)
 
$
8.2

Customer relationships (including distribution network)
13 years
 
635.8

 
(406.4
)
 
229.4

Tradenames
8 years
 
10.0

 
(1.6
)
 
8.4

Intangible assets not subject to amortization - tradenames
 
 
328.6

 

 
328.6

 
 
 
$
1,014.8

 
$
(440.2
)
 
$
574.6

 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
 
Weighted Average Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets subject to amortization:
 
 
 
 
 
 
 
Patents
10 years
 
$
40.1

 
$
(31.3
)
 
$
8.8

Customer relationships (including distribution network)
13 years
 
635.4

 
(393.3
)
 
242.1

Tradenames
8 years
 
10.0

 
(1.3
)
 
8.7

Intangible assets not subject to amortization - tradenames
 
 
328.1

 

 
328.1

 
 
 
$
1,013.6

 
$
(425.9
)
 
$
587.7


Intangible asset amortization expense totaled $14.3 million for the three months ended June 30, 2015. Intangible asset amortization expense totaled $13.5 million for the three months ended June 30, 2014.
 
The Company expects to recognize amortization expense on the intangible assets subject to amortization of $57.0 million in fiscal year 2016 (inclusive of $14.3 million of amortization expense recognized in the three months ended June 30, 2015), $37.8 million in fiscal year 2017, $24.6 million in fiscal year 2018, $24.3 million in fiscal year 2019 and $24.1 million in fiscal year 2020.

11. Other Current Liabilities

Other current liabilities are summarized as follows (in millions):
 
 
June 30, 2015
 
March 31, 2015
Customer advances
 
$
7.1

 
$
7.0

Sales rebates
 
19.0

 
25.4

Commissions
 
4.0

 
3.9

Restructuring and other similar charges (1)
 
4.5

 
7.0

Product warranty (2)
 
6.7

 
6.8

Risk management (3)
 
9.9

 
9.4

Legal and environmental
 
3.2

 
3.8

Deferred income taxes
 
15.9

 
12.9

Taxes, other than income taxes
 
6.5

 
8.0

Income tax payable
 
22.5

 
17.9

Interest payable
 
5.6

 
5.5

Other
 
16.0

 
19.7

 
 
$
120.9

 
$
127.3

____________________
(1)
See more information related to the restructuring obligations within Note 4 Restructuring and Other Similar Charges.
(2)
See more information related to the product warranty obligations within Note 15 Commitments and Contingencies.
(3)
Includes projected liabilities related to losses arising from automobile, general and product liability claims.






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Table of Contents

12. Long-Term Debt
 
Long-term debt is summarized as follows (in millions):
 
 
June 30, 2015
 
March 31, 2015
Term loan (1)
 
$
1,892.1

 
$
1,895.8

8.875% senior notes due 2016
 
1.3

 
1.3

New Market Tax Credit (2)
 
36.7

 
36.8

Other (3)
 
5.5

 
6.1

Total
 
1,935.6

 
1,940.0

Less current maturities
 
23.6

 
24.3

Long-term debt
 
$
1,912.0

 
$
1,915.7

____________________
(1)
Includes an unamortized original issue discount and debt issuance costs of $23.8 million and $25.0 million at June 30, 2015 and March 31, 2015, respectively.
(2)
Includes unamortized debt issuance costs of $0.6 million at each of June 30, 2015 and March 31, 2015. In connection with the New Market Tax Credit incentive program, the Company also invested an aggregate $27.6 million in the form of a loan receivable. The aggregate loan receivable is presented within other assets on the condensed consolidated balance sheets as of June 30, 2015 and March 31, 2015.
(3)
Includes additional debt at various wholly-owned subsidiaries, comprised primarily of borrowings at foreign subsidiaries, capital lease obligations and unamortized debt issuance costs of $0.2 million and $0.3 million at June 30, 2015 and March 31, 2015, respectively.

Senior Secured Credit Facility

The Company’s Third Amended and Restated First Lien Credit Agreement (“the Credit Agreement”) includes senior secured credit facilities funded by a syndicate of banks and other financial institutions and provide for (i) a $1,950.0 million term loan facility (“Term Loan”); and (ii) a $265.0 million revolving credit facility. At June 30, 2015, the borrowings under the Credit Agreement had an effective and average interest rate of 4.00%, determined as the London Interbank Offered Rate or LIBOR (subject to a 1% floor) plus an applicable margin of 3.00%. No amounts were borrowed under the revolving credit facility at June 30, 2015 or March 31, 2015; however, $22.4 million and $24.0 million of the revolving credit facility were considered utilized in connection with outstanding letters of credit at June 30, 2015 and March 31, 2015, respectively.
 
As of June 30, 2015, the Company was in compliance with all applicable covenants under its Credit Agreement, including compliance with a maximum permitted first lien leverage ratio (the Company's sole financial maintenance covenant under its revolver) of 7.75 to 1.0. The Company's first lien leverage ratio was 4.0 to 1.0 as of June 30, 2015.

Accounts Receivable Securitization Program

In fiscal 2012, the Company entered into a five-year Amended and Restated Receivables Funding and Administration Agreement (the “RFAA”) by and among Rexnord Funding LLC (“Funding,” a wholly-owned bankruptcy-remote special purpose subsidiary), the financial institutions from time to time party thereto, and General Electric Capital Corporation, as a lender, a swing line lender and administrative agent. The RFAA is the principal operative agreement under which certain subsidiaries continuously sell substantially all of their domestic trade accounts receivable to Funding for cash and subordinated notes (the “Program”).

At June 30, 2015, the Company's available borrowing capacity under the Program was $100.0 million, based on the current accounts receivables balance subject to the Program. As of June 30, 2015, Funding was in compliance with all applicable covenants and performance ratios contained in the RFAA.

See Note 11 to the audited consolidated financial statements of the Company's fiscal 2015 Annual Report on Form 10-K for further information regarding long-term debt.







16

Table of Contents

13. Derivative Financial Instruments

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

Foreign Exchange Contracts

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

Interest Rate Derivatives

During fiscal 2014, the Company entered into three forward-starting interest rate swaps to hedge the variability in future cash flows associated with a portion of the Company’s variable-rate term loans. The forward-starting interest rate swaps convert $650.0 million of the Company’s variable-rate term loans to a weighted average fixed interest rate of 2.55% plus the applicable margin (inclusive of a 1% LIBOR floor). The interest rate swaps become effective beginning on September 28, 2015 with a maturity of September 27, 2018. The interest rate swaps have been designated as effective cash flow hedges in accordance with ASC 815.

During fiscal 2015, the Company entered into two interest rate caps in order to mitigate the Company's exposure to increasing interest rates on its variable-rate interest loans. Those interest rate caps were effective beginning as of October 24, 2014, with a maturity of October 24, 2018; they cap the interest on $750.0 million of the Company's variable-rate interest loans at 3%, plus the applicable margin. In executing the interest rate caps, the Company paid a premium of $5.8 million. The interest rate caps have been designated as effective cash flow hedges in accordance with ASC 815. When combined with the Company's existing interest rate swaps, the Company has effectively hedged approximately 74% of its outstanding variable rate term loans with a weighted average interest rate that cannot exceed 2.79% plus the applicable margin of 3%.
 
The fair values of the Company's interest rate derivatives are recorded on the condensed consolidated balance sheets with the corresponding offset recorded as a component of accumulated other comprehensive loss, net of tax. See the amounts recorded on the condensed consolidated balance sheets related to the Company's interest rate derivatives within the tables below.

The Company's derivatives are measured at fair value in accordance with ASC 820, Fair Value Measurements and Disclosure (“ASC 820”). See Note 14 for more information as it relates to the fair value measurement of the Company's derivative financial instruments.
The following tables indicate the location and the fair value of the Company's derivative instruments within the condensed consolidated balance sheets segregated between designated, qualifying ASC 815 hedging instruments and non-qualifying, non-designated hedging instruments.

Fair value of derivatives designated as hedging instruments under ASC 815 (in millions):
 
 
June 30, 2015
 
March 31, 2015
 
Balance Sheet Classification
 
 
Liability Derivatives
Interest rate swaps
 
$
17.2

 
$
17.7

 
 Other long-term liabilities
 
 
Asset Derivatives
Interest rate caps
 
$
2.5

 
$
3.0

 
 Other long-term assets

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Table of Contents


Fair value of derivatives not designated as hedging instruments under ASC 815 (in millions):
 
 
June 30, 2015
 
March 31, 2015
 
Balance Sheet Classification
 
 
Asset Derivatives
Foreign currency forward contracts
 
$
0.2

 
$
0.4

 
 Other current assets

The following table indicates the location and the amount of gains or losses associated with the Company's derivative instruments, net of tax, within the condensed consolidated balance sheets (for qualifying ASC 815 instruments) and recognized within the condensed consolidated statements of operations. The information is segregated between designated, qualifying ASC 815 hedging instruments and non-qualifying, non-designated hedging instruments (in millions). As of June 30, 2015, there was no ineffectiveness on the Company's designated hedging instruments.
 
 
Amount of loss recognized in accumulated other comprehensive loss on derivatives
Derivative instruments designated as cash flow hedging relationships under ASC 815
 
 
June 30, 2015
 
March 31, 2015
Interest rate swaps
 
$
10.7

 
$
9.2

Interest rate caps
 
1.9

 
$
1.7


The Company expects to reclassify approximately $7.7 million of losses related to its interest rate derivatives recorded within accumulated other comprehensive loss into earnings as interest expense during the next twelve months.
 
 
 
 
Amount recognized in other expense, net
Derivative instruments not designated as hedging instruments under ASC 815
 
Condensed Consolidated Statements of Operations Classification
 
First Quarter Ended
 
 
June 30, 2015
 
June 30, 2014
Foreign currency forward contracts
 
Other income, net
 
$
0.1

 
$
(0.4
)

14. Fair Value Measurements

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. ASC 820 also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed assumptions about the assumptions a market participant would use.
In accordance with ASC 820, fair value measurements are classified under the following hierarchy:
Level 1- Quoted prices for identical instruments in active markets.
Level 2- Quoted prices for similar instruments; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable.
Level 3- Model-derived valuations in which one or more inputs or value-drivers are both significant to the fair value measurement and unobservable.

If applicable, the Company uses quoted market prices in active markets to determine fair value, and therefore classifies such measurements within Level 1. In some cases where market prices are not available, the Company makes use of observable market-based inputs to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters. These measurements are classified within Level 3 if they use significant unobservable inputs.





18

Table of Contents

Fair Value of Derivative Instruments

The Company transacts in foreign currency forward contracts, interest rate swaps, and interest rate caps. The fair value of foreign currency forward contracts is based on a pricing model that utilizes the differential between the contract price and the market-based forward rate as applied to fixed future deliveries of currency at pre-designated settlement dates. The fair value of interest rate swaps and interest rate caps is based on pricing models. These models use discounted cash flows that utilize the appropriate market-based forward swap curves and interest rates.

The Company endeavors to utilize the best available information in measuring fair value. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Foreign currency forward contracts and interest rate swaps reside within Level 2 of the fair value hierarchy. There were no transfers of assets or liabilities between levels for the periods presented. The following table provides a summary of the Company's assets and liabilities recognized at fair value on a recurring basis as of June 30, 2015 and March 31, 2015 (in millions):
 
 
Fair Value as of June 30, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Interest rate caps
 
$

 
$
2.5

 
$

 
$
2.5

Foreign currency forward contracts
 

 
0.2

 

 
0.2

Total assets at fair value
 
$

 
$
2.7

 
$

 
$
2.7

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
17.2

 
$

 
$
17.2

Total liabilities at fair value
 
$

 
$
17.2

 
$

 
$
17.2

 
 
Fair Value as of March 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Interest rate caps
 
$

 
$
3.0

 
$

 
$
3.0

Foreign currency forward contracts
 

 
0.4

 

 
0.4

Total assets at fair value
 
$

 
$
3.4

 
$

 
$
0.4

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
17.7

 
$

 
$
17.7

Total liabilities at fair value
 
$

 
$
17.7

 
$

 
$
17.7


Fair Value of Non-Derivative Financial Instruments

The carrying amounts of cash, receivables, payables and accrued liabilities approximated fair value at June 30, 2015 and March 31, 2015 due to the short-term nature of those instruments. The fair value of long-term debt as of June 30, 2015 and March 31, 2015 was approximately $1,959.3 million and $1,970.6 million, respectively. The fair value is based on quoted market prices for the same issues.

Long-lived Assets and Intangible Assets

Long-lived assets (which includes property, plant and equipment and real estate) may be measured at fair value if such assets are held-for-sale or when there is a determination that the asset is impaired. Intangible assets (which include patents, tradenames, customer relationships, and non-compete agreements) also may be measured at fair value when there is a determination that the asset is impaired. The determination of fair value for these assets is based on the best information available that resides within Level 3 of the fair value hierarchy, including internal cash flow estimates discounted at an appropriate interest rate, quoted market prices when available, market prices for similar assets and independent appraisals, as appropriate. For real estate, cash flow estimates are based on current market estimates that reflect current and projected lease profiles and available industry information about expected trends in rental, occupancy and capitalization rates. As of June 30, 2015 and March 31, 2015, the remaining assets of the Mill Products business are classified as "held for sale" on the condensed consolidated balance sheet. These assets are recorded at their estimated net realizable value. The estimated fair value of the assets has been determined utilizing independent appraisals of the assets, classified as Level 3 inputs within the fair value hierarchy. See Note 3 for additional information.

19

Table of Contents

15. Commitments and Contingencies
 
Warranties:
The Company offers warranties on the sales of certain products and records an accrual for estimated future claims. Such accruals are based upon historical experience and management's estimate of the level of future claims. The following table presents changes in the Company's product warranty liability (in millions):
 
 
Period Ending
 
 
June 30, 2015
 
June 30, 2014
Balance at beginning of period
 
$
6.8

 
$
8.0

Charged to operations
 
0.6

 
0.1

Claims settled
 
(0.7
)
 
(0.9
)
Balance at end of period
 
$
6.7

 
$
7.2


Contingencies:
The Company's subsidiaries are involved in various unresolved legal actions, administrative proceedings and claims in the ordinary course of business involving, among other things, product liability, commercial, employment, workers' compensation, intellectual property claims and environmental matters. The Company establishes accruals in a manner that is consistent with accounting principles generally accepted in the United States for costs associated with such matters when liability is probable and those costs are capable of being reasonably estimated. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss or recovery, based upon current information, management believes the eventual outcome of these unresolved legal actions, either individually or in the aggregate, will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
    
In connection with the Carlyle acquisition in November 2002, Invensys plc ("Invensys") has provided the Company with indemnification against certain contingent liabilities, including certain pre-closing environmental liabilities. The Company believes that, pursuant to such indemnity obligations, Invensys is obligated to defend and indemnify the Company with respect to the matters described below relating to the Ellsworth Industrial Park Site and to various asbestos claims. The indemnity obligations relating to the matters described below are subject, together with indemnity obligations relating to other matters, to an overall dollar cap equal to the purchase price, which is an amount in excess of $900 million. The following paragraphs summarize the most significant actions and proceedings:

In 2002, Rexnord Industries, LLC (“Rexnord Industries”) was named as a potentially responsible party (“PRP”), together with at least ten other companies, at the Ellsworth Industrial Park Site, Downers Grove, DuPage County, Illinois (the “Site”), by the United States Environmental Protection Agency (“USEPA”), and the Illinois Environmental Protection Agency (“IEPA”). Rexnord Industries' Downers Grove property is situated within the Ellsworth Industrial Complex. The USEPA and IEPA allege there have been one or more releases or threatened releases of chlorinated solvents and other hazardous substances, pollutants or contaminants, allegedly including but not limited to a release or threatened release on or from the Company's property, at the Site. The relief sought by the USEPA and IEPA includes further investigation and potential remediation of the Site and reimbursement of USEPA's past costs. Rexnord Industries' allocated share of past and future costs related to the Site, including for investigation and/or remediation, could be significant. All previously pending property damage and personal injury lawsuits against the Company related to the Site have been settled or dismissed. Pursuant to its indemnity obligation, Invensys continues to defend the Company in known matters related to the Site and has paid 100% of the costs to date.
Multiple lawsuits (with approximately 500 claimants) are pending in state or federal court in numerous jurisdictions relating to alleged personal injuries due to the alleged presence of asbestos in certain brakes and clutches previously manufactured by the Company's Stearns division and/or its predecessor owners. Invensys and FMC, prior owners of the Stearns business, have paid 100% of the costs to date related to the Stearns lawsuits. Similarly, the Company's Prager subsidiary is a defendant in two pending multi-defendant lawsuits relating to alleged personal injuries due to the alleged presence of asbestos in a product allegedly manufactured by Prager. Additionally, there are numerous individuals who have filed asbestos related claims against Prager; however, these claims are currently on the Texas Multi-district Litigation inactive docket. The ultimate outcome of these asbestos matters cannot presently be determined. To date, the Company's insurance providers have paid 100% of the costs related to the Prager asbestos matters. The Company believes that the combination of its insurance coverage and the Invensys indemnity obligations will cover any future costs of these matters.

In connection with the acquisition of The Falk Corporation (“Falk”), Hamilton Sundstrand has provided the Company with indemnification against certain products-related asbestos exposure liabilities. The Company believes that, pursuant to such

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indemnity obligations, Hamilton Sundstrand is obligated to defend and indemnify the Company with respect to the asbestos claims described below, and that, with respect to these claims, such indemnity obligations are not subject to any time or dollar limitations.

The following paragraph summarizes the most significant actions and proceedings for which Hamilton Sundstrand has accepted responsibility:
Falk, through its successor entity, is a defendant in multiple lawsuits pending in state or federal court in numerous jurisdictions relating to alleged personal injuries due to the alleged presence of asbestos in certain clutches and drives previously manufactured by Falk. There are approximately 100 claimants in these suits. The ultimate outcome of these lawsuits cannot presently be determined. Hamilton Sundstrand is defending the Company in these lawsuits pursuant to its indemnity obligations and has paid 100% of the costs to date.

Certain Water Management subsidiaries are also subject to asbestos litigation. As of June 30, 2015, Zurn and numerous other unrelated companies were defendants in approximately 6,000 asbestos related lawsuits representing approximately 20,000 claims. Plaintiffs' claims allege personal injuries caused by exposure to asbestos used primarily in industrial boilers formerly manufactured by a segment of Zurn. Zurn did not manufacture asbestos or asbestos components. Instead, Zurn purchased them from suppliers. These claims are being handled pursuant to a defense strategy funded by insurers.

As of June 30, 2015, the Company estimates the potential liability for the asbestos-related claims described above, as well as the claims expected to be filed in the next ten years to be approximately $35.0 million, of which Zurn expects its insurance carriers to pay approximately $27.0 million in the next ten years on such claims, with the balance of the estimated liability being paid in subsequent years. The $35.0 million was developed based on an actuarial study and represents the projected indemnity payout for claims filed in the next ten years. However, there are inherent uncertainties involved in estimating the number of future asbestos claims, future settlement costs, and the effectiveness of defense strategies and settlement initiatives. As a result, actual liability could differ from the estimate described herein. Further, while this current asbestos liability is based on an estimate of claims through the next ten years, such liability may continue beyond that time frame, and such liability could be substantial.

Management estimates that its available insurance to cover this potential asbestos liability as of June 30, 2015, is approximately $247.4 million, and believes that all current claims are covered by insurance. However, principally as a result of the past insolvency of certain of the Company's insurance carriers, certain coverage gaps will exist if and after the Company's other carriers have paid the first $171.4 million of aggregate liabilities.

As of June 30, 2015, the Company had a recorded receivable from its insurance carriers of $35.0 million, which corresponds to the amount of this potential asbestos liability that is covered by available insurance and is currently determined to be probable of recovery. However, there is no assurance that $247.4 million of insurance coverage will ultimately be available or that this asbestos liability will not ultimately exceed $247.4 million. Factors that could cause a decrease in the amount of available coverage include: changes in law governing the policies, potential disputes with the carriers regarding the scope of coverage, and insolvencies of one or more of the Company's carriers.

The Company's subsidiaries, Zurn PEX, Inc. and Zurn Industries, LLC ("Zurn Industries"), were named as defendants in a number of individual and class action lawsuits in various United States courts. The plaintiffs in these suits claimed damages due to the alleged failure or anticipated failure of Zurn brass fittings on the PEX plumbing systems in homes and other structures.

In July 2012, the Company reached an agreement in principle to settle the liability underlying this litigation.  The settlement is designed to resolve, on a national basis, the Company's overall exposure for both known and unknown claims related to the alleged failure or anticipated failure of Zurn brass fittings on PEX plumbing systems, subject to the right of eligible class members to opt-out of the settlement and pursue their claims independently.  The settlement received final court approval in February 2013, and utilizes a seven year claims fund, which is capped at $20.0 million, and is funded in installments over the seven year period based on claim activity and minimum funding criteria.  The settlement also covers class action plaintiffs' attorneys' fees and expenses totaling $8.5 million, which were paid in the first quarter of fiscal 2014.

Historically, the Company's insurance carrier had funded the Company's defense in the above referenced proceedings. The Company, however, reached a settlement agreement with its insurer, whereby the insurer paid the Company a lump sum in exchange for a release of future exposure related to this liability.

The Company has recorded an accrual related to this brass fittings liability, which takes into account, in pertinent part, the insurance carrier contribution, as well as exposure from the claims fund, opt-outs and the waiver of future insurance coverage.



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16. Retirement Benefits

The components of net periodic benefit cost are as follows (in millions):
 
Three Months Ended
 
June 30, 2015
 
June 30, 2014
Pension Benefits:
 
 
 
Service cost
$
0.6

 
$
0.4

Interest cost
6.4

 
7.7

Expected return on plan assets
(7.2
)
 
(7.7
)
Net periodic benefit (credit) cost
$
(0.2
)
 
$
0.4

Other Postretirement Benefits:
 
 
 
Interest cost
$
0.3

 
$
0.3

Amortization:
 
 
 
Prior service credit
(0.5
)
 
(0.5
)
Net periodic benefit credit
$
(0.2
)
 
$
(0.2
)

During the first three months of fiscal 2016 and 2015, the Company made contributions of $1.3 million and $1.5 million, respectively, to its U.S. qualified pension plan trusts.

In accordance with the Company's accounting policy for defined benefit pension and other postretirement benefit plans, actuarial gains and losses above the corridor are immediately recognized in the Company's operating results. The corridor is 10% of the higher of the pension benefit obligation or the fair value of the plan assets. This adjustment is typically recorded annually in connection with the Company's required year-end re-measurement of plan assets and benefit obligations, or upon any off-cycle re-measurement event.

See Note 16 to the audited consolidated financial statements of the Company's fiscal 2015 Annual Report on Form 10-K for further information regarding retirement benefits.

17. Stock-Based Compensation

The Rexnord Corporation 2012 Performance Incentive Plan (the "Plan") is utilized to provide performance incentives to the Company's officers, employees, directors and certain others by permitting grants of equity awards, as well as performance-based cash awards, to such persons, to encourage them to maximize Rexnord's performance and create value for Rexnord's stockholders. ASC 718, Compensation-Stock Compensation (“ASC 718”), requires compensation costs related to share-based payment transactions to be recognized in the financial statements. Generally, compensation cost is measured based on the estimated grant-date fair value of the equity instruments issued and is recognized over the requisite service period of the equity instrument, which generally coincides with the vesting period of the award. See Note 15 to the audited consolidated financial statements of the Company's fiscal 2015 Annual Report on Form 10-K for further information regarding stock-based compensation and related plans.

For the three months ended June 30, 2015 and June 30, 2014, the Company recorded $1.9 million and $1.6 million, respectively, of stock-based compensation expense. As of June 30, 2015, there was $24.3 million of total unrecognized compensation cost related to non-vested equity awards that is expected to be recognized over a weighted-average period of 3.1 years.

Stock Options

During the three months ended June 30, 2015, the Company granted 872,590 stock options to certain of the Company's officers and employees which vest over a weighted-average term of three years. The fair value of each option granted under the Plan during the three months ended June 30, 2015 was estimated on the grant date using the Black-Scholes valuation model utilizing the following weighted-average assumptions:

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Three Months Ended June 30, 2015
Expected option term (in years)
6.5
Expected volatility factor
24%
Weighted-average risk-free interest rate
1.86%
Expected dividend rate
0.0%
Stock option fair value
$7.41

The Company estimates the expected life of stock options granted based on the midpoint between when the options vest and when they expire. The Company uses the simplified method to determine the expected term, as management does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term due to the limited period of time its common stock shares has been publicly traded. The Company’s expected volatility assumptions are based on the expected volatilities of publicly-traded companies within the Company’s industry. The weighted-average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Management also assumes expected dividends of zero.

The following table presents the Company's stock option activity during the first three months of fiscal 2016 and 2015, respectively:
 
Period Ending
 
June 30, 2015
 
June 30, 2014
 
Shares
 
Weighted Avg. Exercise Price
 
Shares
 
Weighted Avg. Exercise Price
Number of shares under option:
 
 
 
 
 
 
 
Outstanding at beginning of period
8,588,518

 
$
13.06

 
8,652,834

 
$
10.79

Granted
872,590

 
25.77

 

 

Exercised
(165,992
)
 
7.25

 
(206,155
)
 
7.19

Canceled/Forfeited
(98,536
)
 
22.55

 
(104,148
)
 
20.00

Outstanding at end of period (1)
9,196,580

 
14.27

 
8,342,531

 
10.76

Exercisable at end of period (2)
5,536,335

 
$
7.95

 
5,039,432

 
$
5.45

______________________
(1)
The weighted average remaining contractual life of options outstanding at June 30, 2015 is 5.2 years.
(2)
The weighted average remaining contractual life of options exercisable at June 30, 2015 is 3.1 years.  


Restricted Stock Units

During the three months ended June 30, 2015, the Company granted 66,622 restricted stock units ("RSUs") to certain of its officers, directors, and employees. RSUs granted during the three months ended June 30, 2015 vest ratably over three years and the fair value of each award is determined based on the Company's closing stock price on the date of grant. The weighted-average grant date fair value of the RSUs granted and outstanding under the Plan for the three months ended June 30, 2015 was $25.77 per unit. There was no RSU activity during the three months ended June 30, 2014. A summary of RSU activity during the three months ended June 30, 2015 is as follows:
 
Period Ending
 
June 30, 2015
 
Shares
 
Weighted Avg. Exercise Price
Nonvested RSUs at beginning of period
53,813

 
$
29.06

Granted
66,622

 
25.77

Vested

 

Canceled/Forfeited
(2,372
)
 
28.46

Nonvested RSUs at end of period
118,063

 
$
27.21

    


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Performance Stock Units

During the three months ended June 30, 2015, the Company granted 50,711 performance stock units (“PSUs”) to certain of its officers and employees at a weighted-average grant date fair value of $28.57 per PSU. Those PSUs have a three-year performance period, and are earned and vested based in part on the Company’s performance relative to pre-defined goals for absolute free cash flow conversion and in part on relative total shareholder return (“TSR”) as compared to companies in the S&P 1500 Industrial Index. Based on the Company’s actual performance at the end of the three-year performance cycle period, the number of performance share awards earned, which can range between 0% and 200% of the target awards granted, will be satisfied with Rexnord common stock.

The fair value of the portion of PSUs with free cash flow vesting conditions is determined based on the Company's closing stock price on the date of grant. The fair value of the portion of PSUs based on TSR is determined utilizing the Monte Carlo simulation model. Assumptions used to determine the fair value of each PSU were based on historical data and standard industry valuation practices and methodology. The following weighted-average assumptions were used for the PSUs granted during the three months ended June 30, 2015:
 
Three Months Ended June 30, 2015
Expected volatility factor
31
%
Weighted-average risk-free interest rate
1.01
%
Expected dividend rate
0.0
%
Stock option fair value
$32.06


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18. Business Segment Information
    
The results of operations are reported in two business segments, consisting of the Process & Motion Control platform and the Water Management platform. The Process & Motion Control platform designs, manufactures, markets and services specified, highly engineered mechanical components used within complex systems where our customers' reliability requirements and cost of failure or downtime is extremely high. The Process & Motion Control product portfolio includes gears, couplings, industrial bearings, aerospace bearings and seals, FlatTop™ chain, engineered chain and conveying equipment. This segment serves a diverse group of end markets, including mining, general industrial applications, cement and aggregates, agriculture, forest and wood products, petrochemical, energy, food & beverage, aerospace and wind energy. The Water Management platform designs, procures, manufactures and markets products that provide and enhance water quality, safety, flow control and conservation. The Water Management product portfolio includes professional grade specification drainage products, flush valves and faucet products, backflow prevention pressure release valves and PEX piping used in non-residential construction end-markets and engineered valves and gates for the water and wastewater treatment market. The financial information of the Company's segments is regularly evaluated by the chief operating decision maker in determining resource allocation and assessing performance. Management evaluates the performance of each business segment based on its operating results. The same accounting policies are used throughout the organization (see Note 1).

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Business Segment Information:
(in Millions)
 
 
First Quarter Ended
 
 
June 30, 2015
 
June 30, 2014
Net sales by product
 
 
 
 
Process & Motion Control:
 
 
 
 
Original equipment manufacturers/ end-users
 
$
152.3

 
$
160.1

Aftermarket
 
119.3

 
138.3

Total Process & Motion Control
 
271.6

 
298.4

Water Management:
 
 
 
 
Water safety, quality, flow control and conservation
 
136.5

 
131.8

Water infrastructure
 
77.0

 
73.4

Total Water Management
 
213.5

 
205.2

  Consolidated net sales
 
$
485.1

 
$
503.6

Income (loss) from operations
 
 
 
 
Process & Motion Control
 
$
35.6

 
$
47.6

Water Management
 
27.4

 
18.5

Corporate
 
(9.8
)
 
(9.2
)
  Consolidated income from operations
 
$
53.2

 
$
56.9

Non-operating expense:
 
 
 
 
Interest expense, net
 
$
(21.6
)
 
$
(22.5
)
Other expense, net
 
(0.4
)
 
(1.3
)
Income from continuing operations before income taxes
 
31.2

 
33.1

Provision for income taxes
 
10.0

 
21.5

Net income from continuing operations
 
21.2

 
11.6

Income from discontinued operations, net of tax
 

 
0.4

Net income
 
21.2

 
12.0

Non-controlling interest loss
 
(0.1
)
 
(0.1
)
Net income attributable to Rexnord
 
$
21.3

 
$
12.1

Depreciation and amortization
 
 
 
 
Process & Motion Control
 
$
19.2

 
$
18.6

Water Management
 
9.0

 
9.6

  Consolidated
 
$
28.2

 
$
28.2

Capital expenditures
 
 
 
 
Process & Motion Control
 
$
6.3

 
$
7.7

Water Management
 
1.4

 
1.0

  Consolidated
 
$
7.7

 
$
8.7

 
 
 
 
 
 
 
June 30, 2015
 
March 31, 2015
Total assets
 
 
 
 
Process & Motion Control
 
$
2,346.6

 
$
2,412.8

Water Management
 
981.9

 
980.8

Corporate
 
0.6

 
8.4

  Consolidated
 
$
3,329.1

 
$
3,402.0


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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies and Estimates
 
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities on the date of the financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), of our Annual Report on Form 10-K for the fiscal year ended March 31, 2015 for information with respect to our critical accounting policies, which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management. Except for the items reported below, management believes that as of June 30, 2015 and during the period from April 1, 2015 through June 30, 2015, there has been no material change to this information.

Recent Accounting Pronouncements

In April 2015 the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement of debt issuance costs is not affected by the amendments in this update. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 and is required to be applied retrospectively to all prior periods presented. As permitted by ASU 2015-03, we elected to early adopt this guidance beginning with the first quarter of fiscal 2016, which resulted in the reclassification of $10.0 million and $10.5 million of unamortized debt issuance costs from other assets to long-term debt on the condensed consolidated balance sheets as of June 30, 2015 and March 31, 2015, respectively. Refer to Note 12 for additional information.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") in order to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The guidance specifies revenue should be recognized in the amount that reflects the consideration the company expects to be entitled to in exchange for the transfer of promised goods or services to customers. ASU 2014-09 will be effective in the first quarter of fiscal 2019 and allows for full retrospective adoption applied to all periods presented or retrospective adoption with the cumulative effect of initially applying this update recognized at the date of initial application. We are currently evaluating the method of adoption and the potential impact adoption will have on its condensed consolidated financial statements.

In the first quarter of 2016, we adopted FASB ASU No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"), which changes the criteria for reporting discontinued operations. ASU 2014-08 allows only disposals representing a strategic shift in operations to be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. In addition, the new guidance requires expanded disclosures about discontinued operations, as well as pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. As this guidance is a prospective change, the significance of ASU 2014-08 is dependent on any future dispositions or disposals.

Acquisition of Euroflex Transmissions (India) Private Limited

On January 12, 2015, we acquired Euroflex Transmissions (India) Private Limited ("Euroflex") for a preliminary cash purchase price of $76.0 million, excluding transaction costs and net of cash acquired. During the first quarter of fiscal 2016, we received $1.1 million in cash from the previous owners of Euroflex in connection with finalizing the amount of acquisition date working capital. The preliminary purchase allocation was adjusted to reflect this change, which resulted in a $1.1 million decrease to goodwill.  Euroflex, based in Hyderabad, India, is a supplier of high performance disc couplings used in power generation, gas compression and industrial process machinery applications.  The acquisition of Euroflex added complementary product lines to our existing Process & Motion Control platform.

Acquisition of Tollok S.p.A

On October 30, 2014, we acquired Tollok S.p.A. ("Tollok"), a supplier of highly engineered shaft locking devices for the power generation and process industries, as well as general industrial applications. The preliminary purchase price, excluding transaction costs and net of cash acquired, was $39.2 million. Under the terms of the agreement, the purchase price is comprised

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of $33.4 million that was paid at closing and $3.4 million to be paid in annual installments on October 30, 2015 and October 30, 2016. During the first quarter of fiscal 2016, we finalized the amount of acquisition date working capital which resulted in a $1.7 million decrease to the preliminary purchase price, which we will receive by reducing the amount of the first annual installment payment to the previous Tollok shareholders by $1.7 million. The preliminary purchase price allocation has been adjusted to reflect this change, which resulted in a $1.7 million decrease to goodwill. Pursuant to the terms of the agreement, we are also contingently obligated to make additional consideration payments, not to exceed $3.8 million, in two years to the sellers should Tollok's financial performance exceed certain thresholds during the two years following the acquisition. Cash payments made after the acquisition date will be made in Euros based on prevailing exchange rates at the time of payment. Tollok, based in Ferrara, Italy, added complementary product lines to our existing Process & Motion Control platform.

Acquisition of Green Turtle

On April 15, 2014, we acquired Green Turtle Technologies Ltd., Green Turtle Americas Ltd. and Filamat Composites Inc. (collectively "Green Turtle") for a total cash purchase price of $27.7 million, excluding transaction costs and net of cash acquired. Green Turtle, based in Toronto, Ontario, and Charlotte, North Carolina, is a manufacturer of branded fiberglass oil and grease separators and traps. This acquisition broadened the product portfolio of our existing Water Management platform.

Divestiture of Mill Products

During the fourth quarter of fiscal 2015, we ceased all operations related to the our non-core business that manufactured ring gears and pinions ("Mill Products") utilized for crushing machinery applications in the mining sector business, which conducted its operations in the United States and Australia and was a component of the Process & Motion Control segment. As a result, we met the criteria to present this business as a discontinued operation in accordance with the authoritative guidance. During fiscal 2015, we sold certain assets associated with the Mill Products business for aggregate cash consideration of approximately $9.2 million. The exit of Mill Products resulted a net charge of $9.7 million, consisting of a $3.8 million impairment loss associated with property, plant and equipment, $4.1 million impairment of goodwill allocated to the discontinued operation and other exit related costs of $1.8 million.

Fiscal Year

Our fiscal year ends on March 31. Throughout this MD&A, we refer to the period from April 1, 2015 through June 30, 2015 as the “first quarter of fiscal 2016” or the “first quarter ended June 30, 2015.” Similarly, we refer to the period from April 1, 2014 through June 30, 2014 as the “first quarter of fiscal 2015” or the “first quarter ended June 30, 2014.”

Results of Operations
General
  
Rexnord is a growth-oriented, multi-platform industrial company with what we believe are leading market shares and highly trusted brands that serve a diverse array of global end-markets. Our heritage of innovation and specification have allowed us to provide highly engineered, mission critical solutions to customers for decades and affords us the privilege of having long-term, valued relationships with market leaders. We operate our Company in a disciplined way and the Rexnord Business System (“RBS”) is our operating philosophy. Grounded in the spirit of continuous improvement, RBS creates a scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating performance throughout all aspects of our business.
    
The following information should be read in conjunction with the audited consolidated financial statements and notes thereto, along with Item 7 “MD&A” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015.












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First Quarter Ended June 30, 2015 Compared with the First Quarter Ended June 30, 2014:
Net sales
(Dollars in Millions)
 
Quarter Ended
 
 
 
 
 
June 30, 2015
 
June 30, 2014
 
Change
 
% Change
Process & Motion Control
$
271.6

 
$
298.4

 
$
(26.8
)
 
(9.0
)%
Water Management
213.5

 
205.2

 
8.3

 
4.0
 %
  Consolidated
$
485.1

 
$
503.6

 
$
(18.5
)
 
(3.7
)%

Process & Motion Control

Process & Motion Control net sales were $271.6 million in the first quarter of fiscal 2016. Core net sales declined 7%, acquisitions contributed 3%, and foreign currency translation had a 5% adverse impact. The decrease in year-over-year core net sales was driven primarily by adverse demand across several of our industrial process end markets coupled with the related de-stocking within our corresponding distribution channels.

Water Management

Water Management net sales increased 4.0% year-over-year to $213.5 million in the first quarter of fiscal 2016. Excluding a 5% unfavorable impact from foreign currency translation, core net sales increased 9% year-over-year as a result of favorable demand trends across the majority of our end markets as well as relatively higher project shipments to our water and wastewater infrastructure end markets.

Income from operations
(Dollars in Millions)
 
Quarter Ended
 
 
 
 
 
June 30, 2015
 
June 30, 2014
 
Change
 
% Change
Process & Motion Control
$
35.6

 
$
47.6

 
$
(12.0
)
 
(25.2
)%
    % of net sales
13.1
%
 
16.0
%
 
(2.9
)%
 

Water Management
27.4

 
18.5

 
8.9

 
48.1
 %
    % of net sales
12.8
%
 
9.0
%
 
3.8
 %
 

Corporate
(9.8
)
 
(9.2
)
 
(0.6
)
 
(6.5
)%
    Consolidated
$
53.2

 
$
56.9

 
$
(3.7
)
 
(6.5
)%
        % of net sales
11.0
%
 
11.3
%
 
(0.3
)%
 
 

Process & Motion Control

Process & Motion Control income from operations for the first quarter of fiscal 2016 was $35.6 million, or 13.1% of net sales. Year-over-year income from operations as a percentage of net sales decreased by 290 basis points in the first quarter of fiscal 2016 as a result of the adverse product mix associated with lower sales to our U.S. general industrial end markets and the incremental investments in market expansion and footprint repositioning initiatives.

Water Management

Water Management income from operations was $27.4 million for the first quarter of fiscal 2016. Operating margin was 12.8% of net sales, an increase of 380 basis points year-over-year which reflects the benefit of volume growth and on-going cost reduction initiatives, lower year-over-year restructuring costs, and RBS-driven productivity gains and efficiencies.

Corporate
  
Corporate expenses were $9.8 million and $9.2 million in the first quarter of fiscal 2016 and 2015, respectively. Corporate expenses increased year-over year as a result of the timing of incurred professional services.

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Interest expense, net
    
Interest expense, net was $21.6 million in the first quarter of fiscal 2016 compared to $22.5 million in the first quarter of fiscal 2015. The year-over-year decrease in interest expense was primarily due to lower outstanding debt in the current quarter.

Other expense, net

Other expense, net for the first quarter of fiscal 2016, consisted of foreign currency transaction losses of $0.2 million , a $0.1 million gain on the sale of property, plant and equipment and other miscellaneous expenses of $0.3 million. Other expense, net for the first quarter of fiscal 2015, consisted of foreign currency losses of $0.5 million and other miscellaneous expenses of $0.8 million.

Provision for income taxes

The income tax provision was $10.0 million in the first quarter of fiscal 2016 compared to an income tax provision of $21.5 million in the first quarter of fiscal 2015. The effective income tax rate for the first quarter of fiscal 2016 was 32.1% versus 65.0% in the first quarter of fiscal 2015. The effective income tax rate for the first quarter of fiscal 2016 was below the U.S. federal statutory rate of 35% primarily due to the accrual of foreign income taxes at rates which are generally below the U.S. federal statutory rate, the recognition of certain foreign branch related losses for U.S. income tax purposes and the recognition of certain, previously unrecognized tax benefits due to the lapse of the applicable statutes of limitations. The effective income tax rate for the first quarter of fiscal 2015 was significantly higher than the U.S. federal statutory rate of 35% primarily due to certain one-time costs associated with a change to the U.S. income tax entity classification of a foreign subsidiary, partially offset by the recognition of certain foreign related branch losses for U.S. income tax purposes.

On a quarterly basis, we review and analyze our valuation allowances associated with deferred tax assets relating to certain foreign and state net operating loss carryforwards as well as foreign tax credit carryforwards. In conjunction with this analysis, we weigh both positive and negative evidence for purposes of determining the proper balances of such valuation allowances. Future changes to the balances of these valuation allowances, as a result of our continued review and analysis, could result in a material impact to the financial statements for such period of change.

Net income from continuing operations

Our net income from continuing operations for the first quarter of fiscal 2016 was $21.2 million, compared to net income of $11.6 million in the first quarter of fiscal 2015, as a result of the factors described above. Diluted net income per share from continuing operations was $0.20 in the first quarter of fiscal 2016, as compared to $0.11 in the first quarter of fiscal 2015.

Non-GAAP Financial Measures
Core sales

Core sales excludes the impact of acquisitions, divestitures and foreign currency translation. Management believes that core sales facilitates easier comparisons of our net sales performance with prior and future periods and to our peers. We exclude the effect of acquisitions because the nature, size and number of acquisitions can vary dramatically from period to period and between us and our peers, and can also obscure underlying business trends and make comparisons of long-term performance difficult. We exclude the effect of foreign currency translation from this measure because the volatility of currency translation is not under management's control.

EBITDA

EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA is presented because it is an important supplemental measure of performance and it is frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. EBITDA is also presented and compared by analysts and investors in evaluating our ability to meet debt service obligations. Other companies in our industry may calculate EBITDA differently. EBITDA is not a measurement of financial performance under U.S. GAAP and should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity or an alternative to net income as indicators of operating performance or any other measures of performance derived in accordance with U.S. GAAP. Because EBITDA is calculated before recurring cash charges, including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a measure of discretionary cash available to invest in the growth of the business.


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Adjusted EBITDA

Adjusted EBITDA (as described below in “Covenant Compliance”) is an important measure because, under our credit agreement, our ability to incur certain types of acquisition debt and certain types of subordinated debt, make certain types of acquisitions or asset exchanges, operate our business and make dividends or other distributions, all of which will impact our financial performance, is impacted by our Adjusted EBITDA, as our lenders measure our performance with a net first lien leverage ratio by comparing our senior secured bank indebtedness to our Adjusted EBITDA (see “Covenant Compliance” for additional discussion of this ratio, including a reconciliation to our net income). We reported Adjusted EBITDA in the three months ended June 30, 2015 of $85.2 million and net income for the same period of $21.2 million.

Covenant Compliance

Our credit agreement, which governs our senior secured credit facilities, contains, among other provisions, restrictive covenants regarding indebtedness, payments and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and the maintenance of certain financial ratios. Payment of borrowings under the credit agreement may be accelerated if there is an event of default. Events of default include the failure to pay principal and interest when due, a material breach of a representation or warranty, certain non-payments or defaults under other indebtedness, covenant defaults, events of bankruptcy and a change of control. Certain covenants contained in the credit agreement restrict our ability to take certain actions, such as incurring additional debt or making acquisitions, if we are unable to meet certain maximum net first lien leverage ratios and, with respect to our revolving facility, also require us to remain at or below a maximum net first lien leverage ratio of 7.75 to 1.0 as of the end of each fiscal quarter (4.0 to 1.0 at June 30, 2015). Failure to comply with this covenant could limit our long-term growth prospects by hindering our ability to obtain future debt or make acquisitions.

“Adjusted EBITDA” is the term we use to describe EBITDA as defined and adjusted in our credit agreement, which is net income, adjusted for the items summarized in the table below. Adjusted EBITDA is intended to show our unleveraged, pre-tax operating results and therefore reflects our financial performance based on operational factors, excluding non-operational, non-cash or non-recurring losses or gains. Adjusted EBITDA is not a presentation made in accordance with GAAP, and our use of the term Adjusted EBITDA varies from others in our industry. This measure should not be considered as an alternative to net income, income from operations or any other performance measures derived in accordance with GAAP. Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted EBITDA does not reflect: (a) our capital expenditures, future requirements for capital expenditures or contractual commitments; (b) changes in, or cash requirements for, our working capital needs; (c) the significant interest expenses, or the cash requirements necessary to service interest or principal payments, on our debt; (d) tax payments that represent a reduction in cash available to us; (e) any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future; or (f) the impact of earnings or charges resulting from matters that we and the lenders under our credit agreement may not consider indicative of our ongoing operations. In particular, our definition of Adjusted EBITDA allows us to add back certain non-cash, non-operating or non-recurring charges that are deducted in calculating net income, even though these are expenses that may recur, vary greatly and are difficult to predict and can represent the effect of long-term strategies as opposed to short-term results.

In addition, certain of these expenses can represent the reduction of cash that could be used for other corporate purposes. Further, although not included in the calculation of Adjusted EBITDA below, the measure may at times allow us to add estimated cost savings and operating synergies related to operational changes ranging from acquisitions or dispositions to restructurings, and/or exclude one-time transition expenditures that we anticipate we will need to incur to realize cost savings before such savings have occurred.


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The calculation of Adjusted EBITDA under our credit agreement as of June 30, 2015 is presented in the table below. However, the results of such calculation could differ in the future based on the different types of adjustments that may be included in such respective calculations at the time.
    
Set forth below is a reconciliation of net income to Adjusted EBITDA for the periods indicated below.
(in millions)
Three months ended June 30, 2014
 
Year ended
March 31, 2015
 
Three months ended June 30, 2015
 
Twelve months ended June 30, 2015
Net income
$
12.0

 
$
83.8

 
$
21.2

 
$
93.0

Interest expense, net
22.5

 
87.9

 
21.6

 
87.0

Income tax provision
21.5

 
16.8

 
10.0

 
5.3

Depreciation and amortization
28.2

 
112.2

 
28.2

 
112.2

EBITDA
$
84.2

 
$
300.7

 
$
81.0

 
$
297.5

Adjustments to EBITDA:
 
 
 
 
 
 
 
(Income) loss from discontinued operations, net of tax (1)
(0.4
)
 
8.0

 

 
8.4

Restructuring and other similar charges (2)
3.4

 
12.9

 
1.9

 
11.4

Stock-based compensation expense
1.6

 
6.4