Rexnord Reports Fiscal 2007 Results

Rexnord Reports Fiscal 2007 Results Rexnord LLC reported results for fourth quarter and fiscal year 2007, ended March 31, 2007. Formerly a publicly-traded company, Rexnord was taken private in mid-2006 via a leveraged buyout When Apollo Group and Rexnord management acquired it from another leveraged private equity firm, Carlyle Group. Rexnord now operates in two segments, power transmission (PT) and water management (WM). It had only been in PT, but in February Rexnord acquired Zurn for a stunning $942.5 million in a follow-on deal when Apollo acquired Zurn's parent Jacuzzi Brands for $1.25 billion. Because the transaction price seemed out of sync and adding Zurn appeared to offer little or no synergy for Rexnord's existing operations, eBearing turned to a financial consultant to explain the Zurn acquisition. The explanation: "$942.5 million is incomprehensible in every sense. But private equity is a parallel universe of other people's money (OPM) and massive debt. So Rexnord/Apollo 'bought' Zurn from Jacuzzi/Apollo using $669.3 million of freshly minted debt, or OPM. Look at Rexnord's burden on that debt: $319.3 million at 9.5% and $150 million at 8.875%, in addition to using $200 million of Apollo's credit facility. Just covering the debt load will decimate Zurn's net. But it allows Apollo to put Jacuzzi on the books for just $307.5 million. Compare Zurn at $943 million to the lowly $880 million Timken paid for Torrington. That's old school. This is new school: Rexnord's parent holding company took a six-year $400 million term loan in February and used it all to pay dividends." Zurn's yearly sales are approximately $425 million, on which it nets around $80 million. However, Zurn is significantly more profitable than Jacuzzi has been on sales of approximately $765 million. The net prices paid put Zurn at 2.2x trailing sales and Jacuzzi at 0.4x trailing sales. On December 6, 2006, Rexnord's Falk division gear plant in Milwaukee suffered a massive propane gas explosion and resulting fire in which three workers died and 47 others were injured, many seriously. Damage was spread across the entire 15-building complex on Canal Street, and at least 75,000 square feet of manufacturing and warehouse floorspace was razed. Falk employs approximately 800 people at the Canal Street operations. The high-precision manufacturing equipment was some distance from the center of the blast and largely undamaged. Full-scale operations are expected to be restored as early as this summer, but rebuilding and repair will continue. Rexnord's various bearing operations are: Link-Belt Bearing Division, headquartered in Indianapolis, Indiana, manufactures a wide range of automotive and industrial bearings, inserts and mounted units. A second manufacturing location in Clinton, Tennessee produces cylindrical roller bearings. Link-Belt is best known for its industrial bearing inserts and mounted units, including pillow blocks, flange units, plummer blocks and all-stainless units. Link-Belt offers not only ball bearings and cylindrical roller bearings, but also sleeve bearings in babbitt, bronze and cast iron. Rex Bearing, in Downers Grove, Illinois, manufactures three product lines -- Rex mounted roller bearings, Shafer aerospace bearings, and Duralon / Turflite filament bearings. Rex and Shafer bearings are mounted roller bearings, pillow blocks, flange blocks and take-up units which allow for a wide degree of shaft misalignment within the bearing itself. The filament bearings are made of Teflon and carbon fiber. MB Bearings is located in Valparaiso, Indiana. Acquired by Rexnord in 1998, MB manufactures standard and custom precision mounted bearings and inserts -- pillow blocks, flange units, take-up units, flange brackets and hanger units. W.M. Berg, Inc. is located in Rockaway, New York. Berg specializes in manufacturing and distributing miniature precision mechanical components. The Berg miniature bearing line includes ball, roller, needle, nonmetallic, sintered, spherical, thrust and oilless. Sizes range from 3/64" to 1/2". For 2007, Rexnord PT segment sales were up 10%, reaching $1.2 billion, although results were hurt by the Canal Street accident and resulting interruption adding up to as much as $48 million in lost sales. Business interruption insurance should be covering the shortfall, however. Approximately $80 million of the organic sales increase is due to, "strength in the power transmission products end markets of natural resource extraction, metals processing, infrastructure expansion (mining, cement aggregates) and strong demand for our aerospace products." Foreign currency effects added almost $19 million. PT's order backlog at the end of fiscal 2007 was $405 million, after growing by $98 million through the year. The company received $8.8 million in CDSOA payments for fiscal 2007. Rexnord CEO Bob Hitt said: "We're pleased with the fourth quarter results as well as full year, fiscal 2007 results. Fiscal 2007 was an eventful year for Rexnord. We completed the sale of the company to Apollo and management in July 2006; we announced the Zurn acquisition in October 2006; in December 2006 we had the tragic accident at our Canal Street facility; and finally, in February 2007 we completed the acquisition of Zurn. As a result of the outstanding effort of our employees, we begin fiscal 2008 having significantly improved our strategic position compared to one year ago. We're now a multi-platform industrial company, with an annual sales run rate approaching $1.7 billion. We've also improved our future growth opportunities and diversification with the acquisition of Zurn. The solid margins and cash flow generation in our power transmission business continue to improve and complement that, we've added Zurn, which has an equally attractive margin and cash flow generation profile. Finally, the recovery we've made in just a few short months from the accident at our Canal Street facility has been outstanding and is a result of the efforts of our employees at Canal Street. The progress we've made gives us, and most importantly, our customers, the confidence that we'll be back to full production by the summer and that our gear business will continue to be the market leader for years to come." Mr. Hitt added: "Overall, we continue to see growth across many of our end markets. Within our Power Transmission platform, mining, energy, aggregates and aerospace continue to grow above our aggressive PT growth rates. Consistent with the overall market, we've seen slower growth rates in some general industries and a decline in forest products. Within Water Management, commercial construction continues to be solid, and we continue to see good growth in the civil/municipal market. In summary, as we start fiscal 2008, we continue to see growth, albeit at lower rates than we experienced in fiscal 2007." Looking ahead, he said: "As we look to fiscal year 2008, our priorities are to continue the recovery process at the Canal Street facility to be back to full production by the summer and to continue to focus on the needs of our customers. We expect to continue to reduce our leverage by focusing on driving growth, expanding margins and generating cash to reduce our debt."