UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended October 3, 2004
OR
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: 333-102428				Commission file number: 033-25967

 

 

Registrant’s telephone number, including area code:  (414) 643-3000

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: None

 

 

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 ý  No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o  No ý

 

 

TABLE OF CONTENTS

 

Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 5.	Other Information
Item 6.	Exhibits
Signatures
Exhibits

 

Private Securities Litigation Reform Act Safe Harbor Statement

 

This report contains, in addition to historical information, statements by us with regard to our expectations as to financial results and other aspects of our business that involve risks and uncertainties and may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

 

Forward-looking statements are presented for illustrative purposes only and reflect our current expectations concerning future results and events. All statements other than statements of historical fact are “forward-looking” statements for purposes of federal and state securities laws, including any projections of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.

 

You can identify these forward-looking statements by our use of words such as “anticipates,” “believes,” “continues,” “expects,” “intends,” “likely,” “may,” “opportunity,” “plans,” “potential,” “project,” “will,” and similar expressions to identify forward-looking statements, whether in the negative or the affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations. These forward-looking statements are subject to risks, uncertainties and other factors, some of which are beyond our control, which could cause actual results to differ materially from those forecast or anticipated in such forward-looking statements. You should not place undue reliance on these forward-looking statements, which reflect our view only as of the date of this report. We undertake no obligation to update these statements or publicly release the result of any revision(s) to these statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

 

Key risks to our company are described in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 15, 2004.

 

2

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.     FINANCIAL STATEMENTS

 

RBS Global, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions)

 

		October 3, 2004			March 31, 2004
		(Unaudited)
Assets
Current assets:
Cash		$	16.4		$	21.8
Receivables, net		112.3			120.2
Inventories		145.2			134.7
Other current assets		15.4			14.6
Total current assets		289.3			291.3
Property, plant and equipment, net		267.7			270.2
Intangible assets, net		118.3			125.2
Goodwill		582.1			582.1
Other assets		28.7			30.3
		$	1,286.1		$	1,299.1
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt		$	2.3		$	2.0
Trade payables			62.2			72.9
Income taxes payable		7.9			4.8
Deferred income taxes		6.7			6.4
Compensation and benefits		27.7			29.3
Other current liabilities		33.3			42.1
Total current liabilities		140.1			157.5
Long-term debt		544.5			548.8
Pension obligations		88.1			92.7
Postretirement benefit obligations		41.4			43.9
Deferred income taxes		52.2			49.7
Other liabilities		8.0			7.4
Total liabilities		874.3			900.0
Stockholders’ equity
Common stock, $0.01 par value; authorized 5,000,000 shares issued and outstanding 3,595,001 shares		0.1			0.1
Additional paid in capital		361.3			359.4
Accumulated other comprehensive income		16.4			15.8
Retained earnings		34.0			23.8
Total stockholders’ equity		411.8			399.1
		$	1,286.1		$	1,299.1

 

See notes to the condensed consolidated financial statements.

 

3

 

RBS Global, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

(in millions)

 

		Three Months Ended						Six Months Ended
		October 3, 2004			September 30, 2003			October 3, 2004			September 30, 2003
Net sales		$	199.3		$	171.8		$	388.1		$	333.6
Cost of sales		137.6			118.6			265.3			232.3
Gross profit		61.7			53.2			122.8			101.3
Selling, general and administrative expenses		37.2			35.5			75.3			71.6
Restructuring and other similar costs		1.3			1.0			1.3			1.7
Amortization of intangible assets		3.4			3.4			6.9			6.9
Income from operations		19.8			13.3			39.3			21.1
Non-operating income (expense):
Interest expense, net		(11.0		)	(11.3		)	(21.6		)	(22.7		)
Other, net		0.1			(1.4		)	(0.5		)	(1.9		)
Income (loss) before income taxes		8.9			0.6			17.2			(3.5		)
Provision (benefit) for income taxes		3.7			0.2			7.0			(1.4		)
Net income (loss)		$	5.2		$	0.4		$	10.2		$	(2.1	)

 

See notes to the condensed consolidated financial statements.

 

4

 

RBS Global, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(in millions)

 

		Six Months Ended
		October 3, 2004			September 30, 2003
Operating activities
Net income (loss)		$	10.2		$	(2.1	)
Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities:
Depreciation		15.8			15.6
Amortization of intangible assets		6.9			6.9
Amortization of deferred financing costs		1.6			1.5
Other noncash items		(1.0		)	4.0
Changes in operating assets and liabilities:
Receivables		8.6			19.3
Inventories		(9.9		)	1.1
Other assets		(0.5		)	(2.6		)
Accounts payable		(11.1		)	1.1
Accruals and other liabilities		(11.8		)	(29.7		)
Cash provided by operating activities		8.8			15.1
Investing activities
Expenditures for property, plant and equipment		(13.0		)	(7.7		)
Proceeds from dispositions of fixed assets		1.0			1.0
Adjustment of purchase price for Rexnord		—			(10.4		)
Cash used for investing activities		(12.0		)	(17.1		)
Financing activities
Net payments on long-term debt		(4.0		)	(18.8		)
Stock options exercised		1.9			—
Cash used for financing activities		(2.1		)	(18.8		)
Effect of exchange rate changes on cash		(0.1		)	1.5
Decrease in cash		(5.4		)	(19.3		)
Cash at beginning of period		21.8			37.2
Cash at end of period		$	16.4		$	17.9

 

See notes to the condensed consolidated financial statements.

 

5

 

RBS Global, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

October 3, 2004

(Unaudited)

 

1.                          Basis of Presentation and Significant Accounting Policies

 

The unaudited condensed consolidated financial statements of RBS Global, Inc. and subsidiaries (collectively, “the Company”) included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and 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 accounting principles generally accepted in the United States 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 (consisting only of normal recurring 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, 2005. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements of the Company including the notes thereto included in the Company’s most recent Annual Report on Form 10-K.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.  Stock options are granted at prices equal to the fair market value of the Company’s common stock on the date of grant; therefore, no compensation expense has been recognized. Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans under a fair value-based method.  Had compensation cost been determined based upon the fair value at the grant date under the provisions of SFAS No. 123, the Company’s pro forma net income (loss) would have been as follows (in millions):

 

		Three Months Ended						Six Months Ended
		October 3, 2004			September 30, 2003			October 3, 2004			September 30, 2003
Reported net income (loss)		$	5.2		$	0.4		$	10.2		$	(2.1	)
Stock based employee compensation expense determined under fair value based method, net of tax		(0.2		)	(0.2		)	(0.4		)	(0.4		)
Pro forma net income (loss)		$	5.0		$	0.2		$	9.8		$	(2.5	)

 

The Company determined the fair value of options granted using the minimum value option-pricing model. Fair value under the minimum value option-pricing model was determined using the following weighted-average assumptions: dividend yield of 0%, expected life in years of 7 for the three and six months ending October 3, 2004 and 10 years for the three and six months ending September 30, 2003; and risk-free rate of interest of 3.8%.  The pro forma effects of applying the provisions of SFAS No. 123 are not necessarily representative of the effects on net income in future years.

 

The Company

 

The Company is a manufacturer of mechanical power transmission components whose product portfolio includes flattop chain and modular conveyor belts, industrial bearings, aerospace bearings and seals, special components, couplings and gears and industrial chain. The products are either incorporated into products sold by original equipment manufacturers (“OEMs”) or sold to end-users through industrial distributors as aftermarket products.

 

6

 

The Acquisition

 

RBS Global, Inc. is the parent company of Rexnord Corporation, a holding company (“Rexnord”), which owns several domestic and foreign subsidiaries.  On November 25, 2002, pursuant to a Stock Purchase Agreement between RBS Acquisition Corporation and Invensys plc (“Invensys”) and certain of its affiliates, RBS Acquisition Corporation acquired the net assets of the Rexnord Group (the “Predecessor”) for $923.9 million, including direct costs of the acquisition of $11.8 million (“the Acquisition”). RBS Acquisition Corporation is a wholly owned subsidiary of Rexnord. The purchase price was financed by a $359.5 million equity investment from affiliates of The Carlyle Group and certain members of management of the Company, $360.0 million of term loans and $225.0 million of senior subordinated notes.

 

In conjunction with the Acquisition, the Company recorded liabilities in connection with the business combination primarily for plant exit costs and employee severance costs.  During the three and six month periods ending October 3, 2004 cash payments totaling $0.9 million and $2.7 million, respectively, related to severance and plant exit costs associated with the Acquisition were charged against previously recorded reserves.  For the prior year three and six month periods ending September 30, 2003, cash payments of $4.3 million and $7.4 million, respectively, related to severance and plant exit costs were charged to previously recorded reserves.   Non-cash charges related to the write-off of inventory and manufacturing equipment amounted to $0.4 million and $2.5 million in the three and six month periods ending September 30, 2003, respectively.  At October 3, 2004, there were $8.9 million of severance and plant exit related reserves remaining related to the Acquisition versus $15.8 million recorded as of September 30, 2003, of which approximately $7.4 million was reserved for non-cash items.

 

2.                          Income Taxes

 

The provision/(benefit) for income taxes for the three and six month periods ended October 3, 2004 and September 30, 2003 are 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 unusual items or items that are reported net of their related tax effects.  The tax effect of significant unusual items is reflected in the period in which they occur.

 

3.                          Comprehensive Income

 

Comprehensive income consists of the following (in millions):

 

		Three Months Ended						Six Months Ended
		October 3, 2004			September 30, 2003			October 3, 2004			September 30, 2003
Net income (loss)		$	5.2		$	0.4		$	10.2		$	(2.1	)
Other comprehensive income –					0
Foreign currency translation adjustments		2.3			0.5			0.6			6.2
Comprehensive income		$	7.5		$	0.9		$	10.8		$	4.1

 

4.                          Inventories

 

The major classes of inventories are summarized as follows (in millions):

 

		October 3, 2004			March 31, 2004
Finished goods		$	94.0		$	85.6
Work in process		22.3			23.5
Raw materials		29.3			24.9
Inventories at FIFO cost		145.6			134.0
Adjustment to state inventories at LIFO cost		(0.4		)	0.7
		$	145.2		$	134.7

 

7

 

5.                          Other Current Liabilities

 

Other current liabilities are summarized as follows (in millions):

 

		October 3, 2004			March 31, 2004
Taxes, other than income taxes		$	1.8		$	2.5
Interest payable		9.9			10.8
Sales rebates		2.6			5.2
Severance obligations		8.5			10.4
Liabilities recorded in connection with business combination		0.4			1.2
Other		10.1			12.0
		$	33.3		$	42.1

 

6.                          Long-Term Debt

 

Long-term debt is summarized as follows (in millions):

 

		October 3, 2004			March 31, 2004
Term loans		$	316.0		$	320.0
10.125% senior subordinated notes due 2012		225.0			225.0
Other debt		5.8			5.8
Total		546.8			550.8
Less current portion		2.3			2.0
Long-term debt		$	544.5		$	548.8

 

On November 25, 2002, Rexnord entered into a seven-year bank term loan credit agreement (the Credit Agreement) under which Rexnord had outstanding borrowings of $316.0 million at October 3, 2004. Borrowings under the Credit Agreement are secured by substantially all of the Company’s assets.  On February 24, 2004, the Credit Agreement was amended to reduce the interest rate on the term loans by 75 basis points.  At the option of Rexnord, borrowings under the term loans bear interest at the following rates per annum: (i) 1.75% plus the Base Rate, or (ii) 3.00% plus the Eurodollar Rate. At October 3, 2004, $304 million of term loans bear interest at 4.88% and $12 million bear interest at 5.01%.

 

The Credit Agreement also provides Rexnord with a $75 million revolving credit facility under which there were no outstanding borrowings at October 3, 2004; however $11.0 million of the facility was considered utilized in connection with outstanding letters of credit.

 

7.                          Product Warranty

 

The Company offers warranties on the sales of certain of its products and records an accrual for estimated future claims. Such accruals are based upon historical experience and management’s estimate of the level of future claims. The following table presents the Company’s product warranty liability activity (in millions):

 

		Three Months Ended						Six Months Ended
		October 3, 2004			September 30, 2003			October 3, 2004			September 30, 2003
Balance at beginning of period		$	1.2		$	1.3		$	1.1		$	1.3
Expense		0.5			0.2			0.7			0.4
Claims settled		(0.2		)	(0.4		)	(0.3		)	(0.6		)
Balance at end of period		$	1.5		$	1.1		$	1.5		$	1.1

 

8

 

8.                          Retirement Benefits

 

During the fiscal year ended March 31, 2004, the Company made significant modifications to its defined benefit pension plans covering certain U.S. employees by freezing credited service as of March 31, 2004.  The components of net periodic benefit cost are as follows (in millions):

 

		Three Months Ended						Six Months Ended
		October 3, 2004			September 30, 2003			October 3, 2004			September 30, 2003
Pension Benefits:
Service cost		$	0.8		$	1.8		$	1.6		$	3.6
Interest cost		3.2			3.3			6.4			6.6
Expected return on plan assets		(2.7		)	(2.3		)	(5.4		)	(4.6		)
Amortization:
Prior service cost		0.1			—			0.2			—
Net periodic benefit cost		$	1.4		$	2.8		$	2.8		5.6
Other Postretirement Benefits:
Service cost		$	0.2		$	0.2		$	0.4		$	0.4
Interest cost		0.7			0.8			1.4			1.6
Amortization:
Prior service cost		(0.1		)	(0.3		)	(0.2		)	(0.6		)
Net periodic benefit cost		$	0.8		$	0.7		$	1.6		$	1.4

 

Through the first six months of fiscal 2005, the Company has made contributions of $7.9 million to its U.S. qualified pension plan trusts.  In the first six months of fiscal 2004, the Company contributed $20.4 million to those same plans.  As of April 1, 2004, the Company added a discretionary contribution equal to 3% of pay covering certain U.S. employees to its 401(k) deferred contribution plan.  The expense associated with the discretionary contribution was $0.9 million and $1.8 million for the three and six months, respectively, ended October 3, 2004.

 

9.                          Guarantor Subsidiaries

 

The following schedules present condensed consolidating financial information at October 3, 2004 and March 31, 2004 and for the three and six month periods ended October 3, 2004 and September 30, 2003 for: (a) RBS Global, Inc., which is also referred to as the “Parent”; (b) Rexnord, which is also referred to as the Issuer; (c) on a combined basis, the domestic subsidiaries of the Company, all of which are wholly-owned by the Parent (collectively, the “Guarantor Subsidiaries”); and (d) on a combined basis, the foreign subsidiaries of the Company (collectively, the “Non-Guarantor Subsidiaries”). Separate financial statements of the Guarantor Subsidiaries are not presented because their guarantees of the senior subordinated notes are full and unconditional and joint and several, and the Company believes separate financial statements and other disclosures regarding the Guarantor Subsidiaries are not material to investors. The Guarantor Subsidiaries guarantee the senior subordinated notes issued in connection with the acquisition of the Company.

 

9

 

Condensed Consolidating Balance Sheet (Unaudited)

October 3, 2004

 

		Parent			Issuer			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Assets:
Current assets:
Cash		$	—		$	—		$	5.2		$	11.2		$	—		$	16.4
Receivables, net		—			—			59.2			53.1			—			112.3
Inventories		—			—			88.7			56.5			—			145.2
Other current assets		0.5			—			8.6			6.3			—			15.4
Total current assets		0.5			—			161.7			127.1						289.3
Receivable from (payable to) affiliates		—			94.2			36.3			(130.5		)	—			—
Property, plant and equipment, net		—			—			202.3			65.4			—			267.7
Intangible assets, net		—			—			110.4			7.9			—			118.3
Goodwill		—			8.1			399.8			174.2			—			582.1
Investment in:
Guarantor subsidiaries		412.2			915.5			—			—			(1,327.7		)	—
Non-guarantor subsidiaries		—			—			113.0			—			(113.0		)	—
Other assets		—			20.7			7.0			1.0			—			28.7
Total assets		$	412.7		$	1,038.5		$	1,030.5		$	245.1		$	(1,440.7	)	$	1,286.1
Liabilities and stockholders’ equity
Current liabilities:
Trade payables		$	—		$	—		$	32.8		$	29.4		—			$	62.2
Income taxes payable		(0.4		)	(7.0		)	8.3			7.0			—			7.9
Deferred income taxes		(0.1		)	—			4.6			2.2			—			6.7
Compensation and benefits		—			—			18.7			9.0			—			27.7
Current portion of long-term debt		—			—			0.1			2.2			—			2.3
Other current liabilities		—			9.8			12.8			10.7			—			33.3
Total current liabilities		(0.5		)	2.8			77.3			60.5			—			140.1
Long-term debt		—			541.0			0.9			2.6			—			544.5
Notes payable to (receivable from) affiliates, net		1.4			82.1			(108.2		)	24.7			—			—
Pension obligations		—			—			49.9			38.2			—			88.1
Postretirement benefit obligations		—			—			39.5			1.9			—			41.4
Deferred income taxes		—			0.4			48.2			3.6			—			52.2
Other liabilities		—			—			7.4			0.6			—			8.0
Total liabilities		0.9			626.3			115.0			132.1			—			874.3
Stockholders’ equity		411.8			412.2			915.5			113.0			(1,440.7		)	411.8
Total liabilities and stockholders’ equity		$	412.7		$	1,038.5		$	1,030.5		$	245.1		$	(1,440.7	)	$	1,286.1

 

10

 

Condensed Consolidating Balance Sheet

March 31, 2004

(in millions)

 

		Parent			Issuer			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Assets:
Current assets:
Cash		$	—		$	—		$	9.1		$	12.7		$	—		$	21.8
Receivables, net		—			—			59.2			61.0			—			120.2
Inventories		—			—			80.3			54.4			—			134.7
Other current assets		—			—			8.2			6.4			—			14.6
Total current assets		—			—			156.8			134.5			—			291.3
Receivable from (payable to) affiliates		—			94.2			36.3			(130.5		)	—			—
Property, plant and equipment, net		—			—			202.7			67.5			—			270.2
Intangible assets, net		—			—			117.2			8.0			—			125.2
Goodwill		—			8.1			399.8			174.2			—			582.1
Investment in:
Guarantor subsidiaries		400.9			894.0			—			—			(1,294.9		)	—
Non-guarantor subsidiaries		—			—			109.9			—			(109.9		)	—
Other assets		—			22.3			6.9			1.1			—			30.3
Total assets		$	400.9		$	1,018.6		$	1,029.6		$	254.8		$	(1,404.8	)	$	1,299.1
Liabilities and stockholders’ equity
Current liabilities:
Trade payables		$	—		$	—		$	40.2		$	32.7		$	—		$	72.9
Income taxes payable		—			—			(0.7		)	5.5			—			4.8
Deferred income taxes		—			—			4.2			2.2			—			6.4
Compensation and benefits		—			—			19.0			10.3			—			29.3
Current portion of long-term debt		—			—			0.1			1.9			—			2.0
Other current liabilities		—			10.7			17.4			14.0			—			42.1
Total current liabilities		—			10.7			80.2			66.6			—			157.5
Long-term debt		—			545.0			1.0			2.8			—			548.8
Notes payable to (receivable from) affiliates, net		1.8			61.6			(95.2		)	31.8			—			—
Pension obligations		—			—			55.0			37.7			—			92.7
Postretirement benefit obligations		—			—			42.1			1.8			—			43.9
Deferred income taxes		—			0.4			45.6			3.7			—			49.7
Other liabilities		—			—			6.9			0.5			—			7.4
Total liabilities		1.8			617.7			135.6			144.9			—			900.0
Stockholders’ equity		399.1			400.9			894.0			109.9			(1,404.8		)	399.1
Total liabilities and stockholders’ equity		$	400.9		$	1,018.6		$	1,029.6		$	254.8		$	(1,404.8	)	$	1,299.1

 

11