S-1/A 1 d279016ds1a.htm AMENDMENT NO. 6 TO FORM S-1 Amendment No. 6 to Form S-1
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As filed with the Securities and Exchange Commission on March 19, 2012

Registration No. 333-174504

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

AMENDMENT No. 6

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

REXNORD CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   3560   20-5197013

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification No.)

 

 

4701 West Greenfield Avenue

Milwaukee, WI 53214

(414) 643-3000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Patricia M. Whaley

Vice President, General Counsel and Secretary

Rexnord Corporation

4701 West Greenfield Avenue

Milwaukee, WI 53214

(414) 643-3000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

William Kuesel, Esq.

O’Melveny & Myers LLP

7 Times Square

New York, New York 10036

(212) 326-2000

 

Kenneth V. Hallett, Esq.

Quarles & Brady LLP

411 East Wisconsin Avenue

Milwaukee, Wisconsin 53202

(414) 277-5000

 

Gregory A. Ezring, Esq.

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, New York 10019

(212) 373-3000

 

Michael Kaplan, Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

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   ¨    Accelerated filer   ¨
Non-accelerated filer (Do not check if a smaller reporting company)   x    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each Class of Securities to be Registered   Amount to be
Registered (a)
 

Proposed Maximum

Offering Price

Per Share

  Proposed Maximum
Aggregate Offering
Price (b)
  Amount of
Registration Fee (c)

Common stock, $0.01 par value per share

 

27,236,842

 

$20.00

 

$544,736,840

  $62,426.84

 

 

(a) Includes 3,552,631 shares of common stock that the underwriters have the option of purchasing.
(b) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) promulgated under the Securities Act of 1933.
(c) Previously paid.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities, in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated March 19, 2012

PROSPECTUS

23,684,211 Shares

 

LOGO

Rexnord Corporation

Common Stock

 

 

 

This is Rexnord Corporation’s initial public offering. We are selling all of the shares being offered hereby.

We expect the public offering price to be between $18.00 and $20.00 per share. Currently, no public market exists for our common stock. We have applied to list our common stock on the New York Stock Exchange under the symbol “RXN.” Following this offering, we will remain a “controlled company” as defined under the New York Stock Exchange listing rules, and Apollo Management, L.P. and its affiliates will beneficially own 69.1% of our shares of outstanding common stock, assuming the underwriters do not exercise their option to purchase up to 3,552,631 additional shares.

Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 15 of this prospectus.

 

 

 

     Per Share     

Total

 

Public offering price

   $        $    

Underwriting discounts and commissions

   $        $    

Proceeds, before expenses, to Rexnord Corporation

   $        $    

The underwriters may also purchase up to an additional 3,552,631 shares from us at the initial public offering price less the underwriting discount.

The shares will be ready for delivery on or about                     , 2012.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

BofA Merrill Lynch   Goldman, Sachs & Co.   Credit Suisse   Deutsche Bank Securities
Barclays

 

Baird  

Lazard Capital Markets

  BMO Capital Markets   Janney Montgomery Scott

Apollo Global Securities

    Morgan Joseph TriArtisan

The date of this prospectus is                     , 2012.


Table of Contents

TABLE OF CONTENTS

 

SUMMARY

     1   

RISK FACTORS

     15   

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

     32   

USE OF PROCEEDS

     34   

DIVIDEND POLICY

     35   

CAPITALIZATION

     36   

DILUTION

     38   

SELECTED FINANCIAL INFORMATION

     40   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     42   

BUSINESS

     67   

MANAGEMENT

     86   

COMPENSATION DISCUSSION AND ANALYSIS

     92   

PRINCIPAL STOCKHOLDERS

     110   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     112   

DESCRIPTION OF CAPITAL STOCK

     116   

DESCRIPTION OF INDEBTEDNESS

     120   

SHARES ELIGIBLE FOR FUTURE SALE

     126   

MATERIAL UNITED STATES TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK

     128   

UNDERWRITING (CONFLICTS OF INTEREST)

     131   

LEGAL MATTERS

     139   

EXPERTS

     139   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     139   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

We have not authorized anyone to provide any information other than that contained or incorporated by reference in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

Dealer Prospectus Delivery Obligations

Until                     , 2012 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.

 

 

MARKET AND INDUSTRY DATA AND FORECASTS

This prospectus includes industry data that we obtained from periodic industry publications and internal company surveys. This prospectus includes market share and industry data that we prepared primarily based on management’s knowledge of the industry and industry data. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. Unless otherwise noted, statements as to our market share and market position relative to our competitors are approximated and based on management estimates using the above-mentioned latest-available third-party data and our internal analyses and estimates.

 

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While we are not aware of any misstatements regarding any industry data presented herein, our estimates, in particular as they relate to market share and our general expectations, involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Risk Factors,” “Cautionary Notice Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus.

TRADEMARKS

The following terms used in this prospectus are our Process & Motion Control trademarks: Falk®, Rexnord®, Rex®, Prager™, Renew®, FlatTop™, Steelflex®, Thomas®, Omega®, Viva®, Wrapflex®, Lifelign®, True Torque®, Addax®, Shafer®, PSI®, Cartriseal® and Autogard®. The following terms used in this prospectus are our Water Management trademarks: Zurn®, Wilkins®, Aquaflush®, AquaSense®, AquaVantage®, Zurn One®, Zurn One Systems®, EcoVantage®, HydroVantage™, AquaSpec®, VAG®, GA®, Rodney Hunt® and Fontaine®. All other trademarks appearing in this prospectus are the property of their holders.

 

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SUMMARY

The following summary highlights information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and consolidated financial statements included elsewhere in this prospectus. This summary is not complete and may not contain all of the information that may be important to you. You should read the entire prospectus, including the “Risk Factors” section and our consolidated financial statements and notes to those statements, before making an investment decision.

Unless otherwise noted, “Rexnord,” “we,” “us,” “our” and the “Company” mean Rexnord Corporation (formerly known as Rexnord Holdings, Inc.) and its predecessors and consolidated subsidiaries, including RBS Global, Inc. (“RBS Global”) and Rexnord LLC, and “Rexnord Corporation” means Rexnord Corporation and its predecessors but not its subsidiaries. As used in this prospectus, “fiscal year” refers to our fiscal year ending March 31 of the corresponding calendar year (for example, “fiscal year 2011” or “fiscal 2011” means the period from April 1, 2010 to March 31, 2011).

Unless otherwise indicated, the information contained in this prospectus assumes that (i) the underwriters’ option to purchase up to 3,552,631 additional shares will not be exercised, (ii) each share of common stock outstanding immediately prior to the 4.1627-for-one stock split will have been split into 4.1627 shares of common stock and (iii) the number of our authorized shares of capital stock will have been increased to 200,000,000 shares of common stock and 10,000,000 shares of preferred stock pursuant to our amended and restated certificate of incorporation.

Our Company

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.

Our strategy is to build the Company around multiple, global strategic platforms that participate in end-markets with sustainable growth characteristics where we are, or have the opportunity to become, the industry leader. We have a track record of acquiring and integrating companies and expect to continue to pursue strategic acquisitions within our existing platforms that will expand our geographic presence, broaden our product lines and allow us to move into adjacent markets. Over time, we anticipate adding additional strategic platforms to our company. Currently, our business is comprised of two platforms, Process & Motion Control and Water Management.

We believe that we have one of the broadest portfolios of highly engineered, mission and project critical Process & Motion Control products in the industrial and aerospace end-markets. Our Process & Motion Control product portfolio includes gears, couplings, industrial bearings, aerospace bearings and seals, FlatTop chain, engineered chain and conveying equipment, and are marketed and sold globally under several brands, including Rexnord®, Rex®, Falk® and Link-Belt®. Our Water Management platform is a leader in the multi-billion dollar, specification-driven, commercial construction market for water management products and, through recent acquisitions, has entered the municipal water and wastewater treatment markets. Our Water Management product portfolio includes professional grade specification drainage products, flush valves and faucet products, backflow prevention pressure release valves, PEX piping and engineered valves and gates for the water and wastewater treatment markets. These products are marketed and sold through widely recognized brand names, including Zurn®, Wilkins®, VAG®, GA®, Rodney-Hunt® and Fontaine®.

 

 

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We believe our portfolio includes premier and widely known brands in the Process & Motion Control and Water Management markets in which we participate, as well as one of the broadest and most extensive product offerings. We estimate that over 85% of our total net sales come from products in which we have leading market share positions. Our products are generally “specified” or requested by end-users across both of our strategic platforms as a result of their reliable performance in demanding environments, our custom application engineering capabilities and our ability to provide global customer support.

Typically, products in our Process & Motion Control platform are initially incorporated into products sold by original equipment manufacturers (“OEMs”) or sold to end-users as critical components in large, complex systems where the cost of failure or down-time is high and thereafter replaced through industrial distributors as they are consumed or require replacement. We have established long-term relationships with OEMs and end-users serving a wide variety of industries. As a result of these relationships, we have created a significant installed base for our Process & Motion Control products, which are consumed or worn in use and have a relatively predictable replacement cycle. We believe this replacement dynamic drives recurring aftermarket demand for our products. We estimate that approximately 50% of our Process & Motion Control net sales are to distributors, who primarily serve the end-user/OEM aftermarket demand for our products. We believe our reputation for superior quality, application expertise and ability to meet lead time expectations are highly valued by our customers, as demonstrated by their preference to replace their worn Rexnord products with new Rexnord products, or “like-for-like” product replacements. We believe the majority of our Process & Motion Control products are purchased by customers as part of their regular maintenance budget, and in many cases do not represent significant capital expenditures.

 

Process & Motion Control

Net Sales by End-Market (1)

  

Process & Motion Control Net Sales

End-User/OEM vs. Aftermarket (1)

LOGO

  

LOGO

  (1) Percentages are calculated based on a last twelve month, or LTM, net sales of $1,299.0 million as of December 31, 2011.
  (2) General Industrial includes, but is not limited to, material handling, package handling, utilities, automation and robotics, marine and steel processing, none of which individually represented more than 2% of the December 31, 2011 LTM net sales.

Our Water Management products are principally specification-driven and project-critical and typically represent a low percentage of the overall project cost. We believe these characteristics, coupled with our extensive distribution network and approximately 240 direct sales and marketing associates in 18 countries, create a high level of end-user loyalty for our products and allow us to maintain leading market shares in the majority of our product lines. Demand is primarily driven by new infrastructure, the retro-fit of existing structures to make them more energy and water efficient, commercial construction and, to a lesser extent, residential construction. We believe we have become a market leader in the industry by meeting the stringent third party regulatory, building and plumbing code requirements and subsequently achieving specification of our products into projects and applications.

 

 

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Water Management

Net Sales by End-Market (1)

  

Water Management Net Sales

New Construction vs. Retrofit (1)

LOGO    LOGO

 

(1) Percentages are calculated based on an LTM net sales of $734.5 million as of December 31, 2011, which includes a $149.5 million adjustment to include the pro forma impact of VAG.

We operate a global footprint encompassing 36 principal Process & Motion Control manufacturing, warehouse and repair facilities located around the world and 27 principal Water Management manufacturing and warehouse facilities, which allows us to meet the needs of our increasingly global customer base as well as our distribution channel partners. We also have extensive distribution networks in both of our platforms—in Process & Motion Control, we have over 2,600 distributor locations serving our customers globally and, in Water Management, we have more than 1,100 independent sales representatives across approximately 210 sales agencies, as well as approximately 240 direct sales and marketing associates in 18 countries that work directly with our in-house technical team to drive specification of our products.

We employ approximately 7,400 employees across 63 locations around the world. For the fiscal year ended March 31, 2011, we generated net sales of $1.7 billion, income from operations of $219.1 million and a net loss of $51.3 million. Fiscal 2011 results reflect the effect of a $100.8 million loss on debt extinguishment recorded during the year as a result of the early repayment of debt pursuant to cash tender offers. For the nine months ended December 31, 2011 we generated net sales of $1,423.8 million, income from operations of $175.9 million and net income of $21.3 million.

In addition to net income (loss), we believe Adjusted EBITDA is an important measure under our senior secured credit facilities, as our ability to incur certain types of acquisition debt or 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 by comparing the ratio of our senior secured bank debt to our Adjusted EBITDA. Adjusted EBITDA for the fiscal year ended March 31, 2011 was $335.7 million and adjusted EBITDA for the twelve months ended December 31, 2011 was $382.6 million, which includes the pro forma impact of VAG. For more information on these and other adjustments and the limitations of Adjusted EBITDA, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Covenant Compliance.”

VAG Holding Acquisition

On October 10, 2011, we acquired VAG Holding GmbH (“VAG”) for a total cash purchase price of $238.6 million, net of cash acquired and excluding transaction costs. VAG is a global leader in engineered valve solutions across a broad range of applications, including water distribution, wastewater treatment, dams and hydropower generation, as well as various other industrial applications. This acquisition is complementary to our existing Water Management platform and allows us to further expand into key markets outside of North America.

 

 

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VAG employs approximately 1,200 associates worldwide and reported net sales in excess of €145 million for the twelve months ended December 31, 2011. Headquartered in Mannheim, Germany, VAG operates three other principal manufacturing operations in Hodonin, Czech Republic, Secunderabad, India and Taicang, China, as well as sales offices in eighteen countries to service its global customer base. Our financial position and results of operations include VAG subsequent to October 10, 2011.

Our Markets

We evaluate our competitive position in our markets based on available market data, relevant benchmarks compared to our relative peer group and industry trends. We generally do not participate in segments of our served markets that are thought of as commodities or in applications that do not require differentiation based on product quality, reliability and innovation.

Process & Motion Control Market

Within the overall Process & Motion Control market, we estimate that the addressable North American market for our current product offerings is approximately $5.0 billion in net sales per year. Globally, we estimate our addressable market to be approximately $12.0 billion in net sales per year. The market for Process & Motion Control products is very fragmented with most participants having single or limited product lines and serving specific geographic markets. While there are numerous competitors with limited product offerings, there are only a few national and international competitors of a size comparable to us. While we compete with certain domestic and international competitors across a portion of our product lines, we do not believe that any one competitor directly competes with us on all of our product lines. The industry’s customer base is broadly diversified across many sectors of the economy. We believe that growth in the Process & Motion Control market is closely tied to overall growth in industrial production, which we believe has fundamental and significant long-term growth potential. In addition, we believe that Process & Motion Control manufacturers who innovate to meet changes in customer demands and focus on higher growth end-markets can grow at rates faster than overall United States industrial production.

The Process & Motion Control market is also characterized by the need for sophisticated engineering experience, the ability to produce a broad number of niche products with very little lead time and long-standing customer relationships. We believe entry into our markets by competitors with lower labor costs, including foreign competitors, will be limited due to the fact that we manufacture highly specialized niche products that are critical components in large scale manufacturing processes. In addition, we believe there is an industry trend of customers increasingly consolidating their vendor bases, which we believe should allow suppliers with broader product offerings such as ourselves to capture additional market share.

Water Management Market

Within the overall Water Management market, we estimate that the addressable North American market for our current product offerings is approximately $2.3 billion in net sales per year. Globally, we estimate our addressable market to be approximately $5.3 billion in net sales per year. We believe the markets in which our Water Management platform participates are relatively fragmented with competitors across a broad range of industries and product lines. Although competition exists across all of our Water Management businesses, we do not believe that any one competitor directly competes with us across all of our product lines. We believe that we can continue to grow our Water Management platform at rates above the growth rates of the overall market and our competition by focusing our efforts and resources towards end-markets that have above average growth characteristics.

We believe the areas of the Water Management industry in which we compete are tied to growth in infrastructure and commercial construction, as well as the retro-fit of existing structures to make them more

 

 

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energy and water efficient, which we believe have significant long-term growth fundamentals. Historically, the infrastructure and commercial construction industry has been more stable and less vulnerable to down-cycles than the residential construction industry. Compared to residential construction cycles, downturns in infrastructure and commercial construction have been shorter and less severe, and upturns have lasted longer and had higher peaks in terms of spending as well as units and square footage. In addition, we believe that water management manufacturers with innovative products, like ours, are able to grow at a faster pace than the broader infrastructure and commercial construction markets, as well as mitigate downturns in the cycle.

The Water Management industry’s specification-driven end-markets require manufacturers to work closely with engineers, contractors, builders and architects in local markets to design specific applications on a project-by-project basis. As a result, building and maintaining relationships with architects, engineers, contractors and builders, who specify products for use in construction projects, and having flexibility in design and product innovation are critical to compete effectively in the market. Companies with a strong network of such relationships have a competitive advantage. Specifically, it has been our experience that, once an engineer, contractor, builder or architect has specified our product with satisfactory results, that person often will continue to use our products in future projects.

Our Competitive Strengths

Key characteristics of our business that we believe provide us with a competitive advantage and position us for future growth include the following:

The Rexnord Business System. We operate our company in a disciplined way. The Rexnord Business System, or RBS, is our operating philosophy and it creates a scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating performance. RBS is based on the following principles: (1) strategy deployment—a long-term strategic planning process that determines annual improvement priorities and the actions necessary to achieve those priorities; (2) measuring our performance based on customer satisfaction, or the “Voice of the Customer”; (3) involvement of all our associates in the execution of our strategy; and (4) a culture that embraces Kaizen, the Japanese philosophy of continuous improvement. We believe applying RBS can yield superior growth, quality, delivery and cost positions relative to our competition, resulting in enhanced profitability and ultimately the creation of stockholder value. As we have applied RBS over the past several years, we have experienced significant improvements in growth, productivity, cost reduction and asset efficiency and believe there are substantial opportunities to continue to improve our performance as we continue to apply RBS.

Experienced, High-Caliber Management Team. Our management team is led by Todd Adams, President and Chief Executive Officer. George Sherman, our Non-Executive Chairman of the Board and, from 1990 to 2001, the CEO of Danaher Corporation, collaborates with the management team to establish the strategic direction of the Company. We believe the overall talent level within our organization is a competitive strength, and we have added a number of experienced key managers across our platforms over the past several years. Mr. Sherman and the management team currently maintain a significant equity investment in the Company. As of March 19, 2012, giving effect to this offering, their ownership interest represented approximately 14.8% of our common stock on a fully diluted basis.

Strong Financial Performance and Free Cash Flow. Since implementing RBS, we have established a solid track-record of delivering strong financial performance measured in terms of net sales growth, margin expansion and free cash flow conversion (cash flow from operations less capital expenditures compared to net income). Since fiscal 2004, net sales have grown at a compound annual growth rate of 14% inclusive of acquisitions, and Adjusted EBITDA margins (Adjusted EBITDA divided by net sales) have expanded to 19.8%. Additionally, we have consistently delivered strong free cash flow over the past several years by improving working capital performance and maintaining capital expenditures at reasonable levels.

 

 

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Leading Market Positions in Diversified End-Markets. Our high-margin performance is driven by our industry-leading positions in the diversified end-markets in which we compete. We estimate that greater than 85% of our net sales are derived from products in which we have leading market share positions. We believe we have achieved leadership positions in these markets through our focus on customer satisfaction, extensive offering of quality products, ability to service our customers globally, positive brand perception, highly engineered product lines, extensive specification efforts and market/application experience. We serve a diverse set of end-markets with our largest single end-market, mining, accounting for 13% of consolidated net sales in fiscal 2011.

Broad Portfolio of Highly Engineered, Specification-Driven Products. We believe we offer one of the broadest portfolios of highly engineered, specification-driven, project-critical products in the end-markets we serve. Our array of product applications, knowledge and expertise applied across our extensive portfolio of products allows us to work closely with our customers to design and develop solutions tailored to their individual specifications. Within our Water Management platform, our representatives work directly with engineers, contractors, builders and architects to specify our Water Management products early in the design phase of a project. We have found that once these customers have specified a company’s product with satisfactory results, they will generally use that company’s products in future projects. Furthermore, we believe our strong application engineering and new product development capabilities have contributed to our reputation as an innovator in each of our end-markets.

Large Installed Base, Extensive Distribution Network and Strong Aftermarket Revenues. Over the past century we have established relationships with OEMs and end-users across a diverse group of end-markets, creating a significant installed base for our Process & Motion Control products. This installed base generates significant aftermarket sales for us as our products are consumed or worn in use and must be replaced in relatively predictable cycles. In order to provide our customers with superior service, we have cultivated relationships with over 2,600 distributor locations serving our customers globally. Additionally, our Water Management platform has 27 principal manufacturing and warehouse facilities and uses approximately 90 third-party distribution facilities at which it maintains inventory. This broad distribution network provides us with a competitive advantage and drives demand for our Water Management products by allowing quick delivery of project-critical products to our customers facing short lead times. We believe this extensive distribution network also provides us with an opportunity to capitalize on the expanding renovation and repair market as building owners begin to upgrade existing commercial and institutional bathroom fixtures with high efficiency systems.

Significant Experience Identifying and Integrating Strategic Acquisitions. Since 2005, we have completed strategic acquisitions that have significantly expanded our Process & Motion Control platform and, through the $943 million acquisition of Zurn, established our Water Management platform. We have successfully completed and integrated several acquisitions in recent years totaling more than $1.5 billion of total transaction value. These strategic acquisitions have allowed us to establish and expand a new platform, widen our geographic presence, broaden our product lines and, in other instances, move into adjacent markets. We believe these acquisitions have created stockholder value through the implementation of RBS operating principles, which has resulted in identifying and achieving cost synergies, as well as driving growth and operational and working capital improvements.

 

 

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Our Business Strategy

We strive to create stockholder value by seeking to deliver sales growth, profitability and asset efficiency, which we believe will result in superior financial performance and free cash flow generation when compared to other leading multi-platform industrial companies by focusing on the following key strategies:

Drive Profitable Growth. Our key growth strategies are:

 

   

Accelerate Growth in Key Vertical End-Markets—We believe that we have an opportunity to accelerate our overall net sales growth over the next several years by deploying resources to leverage our highly engineered product portfolio, industry expertise, application knowledge and unique manufacturing capabilities into certain key vertical end-markets that we expect to have above market growth rate potential. We believe those end-markets include, but are not limited to, mining, energy, aerospace, cement and aggregates, food and beverage, water infrastructure and the renovation and repair of existing commercial buildings and infrastructure.

 

   

Product Innovation and Resourcing “Break-throughs”—We intend to continue to invest in strong application engineering and new product development capabilities and processes. Our disciplined focus on innovation begins with our extensive “Voice of the Customer” process and follows a systematic process, ensuring that the commercialization and profitability of new products meet both the markets’ and our expectations. Additionally, we will continue resourcing “break-throughs,” which we define as potential products or other growth opportunities that have an annual net sales potential of $20 million or more over 3 to 5 years. We believe growing demands for more energy and water conservation products will also provide opportunities for us to grow through innovation in both platforms.

 

   

Drive Specification for Our Products—We intend to increase our installed base and grow aftermarket revenues by continuing to partner with OEMs to specify our Process & Motion Control products on original equipment applications. Within our Water Management platform, we intend to leverage our sales and distribution network and to increase specification for our products by working directly with our customers to drive specification for our products in the early design stages of a project.

 

   

Expand Internationally—We believe there is substantial growth potential outside the United States for many of our existing products by expanding distribution, further penetrating key vertical end-markets that are growing faster outside the United States and selectively pursuing acquisitions that will provide us with additional international exposure.

 

   

Pursue Strategic Acquisitions—We believe the fragmented nature of our Process & Motion Control and Water Management markets will allow us to continue to identify attractive acquisition candidates in the future that have the potential to complement our existing platforms by either broadening our product offerings, expanding our geographic presence or addressing an adjacent market opportunity.

Platform Focused Strategies. We intend to build our business around leadership positions in platforms that participate in multi-billion dollar, global, growing end-markets. Within our two existing platforms, we expect to continue to leverage our overall market presence and competitive position to provide further growth and diversification and increase our market share.

The Rexnord Business System. We operate our company in a disciplined way through the Rexnord Business System. RBS is our operating philosophy and it creates a scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating performance. We believe applying RBS can yield superior growth, quality, delivery and cost positions relative to our competition, resulting in enhanced profitability and ultimately the creation of stockholder value.

 

 

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Our Ownership Structure

The chart below is a summary of our organizational structure after giving effect to this offering and the refinancing of our senior secured credit facilities, which was completed on March 15, 2012. Unless otherwise indicated, the indebtedness information below is as of December 31, 2011.

 

LOGO

 

(1) Includes investment funds affiliated with, or co-investment vehicles managed by, Apollo Management VI, L.P., an affiliate of Apollo Management, L.P., which, as of the date of this prospectus, collectively beneficially owned 93.6% of our common stock, with the balance beneficially owned by the management stockholders.
(2) As of December 31, 2011, $760.0 million was outstanding; as a result of our recent refinancing of our senior secured credit facilities on March 15, 2012, $950.0 million was outstanding on that date. See “Recent Developments” below in this Summary for information related to the refinancing of the senior secured credit facilities.
(3) As of December 31, 2011, $1,147.0 million was outstanding.
(4) As of December 31, 2011, $300.0 million was outstanding. We intend to use a portion of the proceeds of this offering to redeem $300.0 million in principal amount of the 11.75% senior subordinated notes due 2016.
(5) As of December 31, 2011, $75.0 million was outstanding; as a result of our recent refinancing of our senior secured credit facilities and related debt repayments, at March 15, 2012, no amounts were outstanding under this facility. See “Recent Developments” below in this Summary for information related to the repayment of the amount outstanding under the accounts receivable securitization facility.
(6) As of December 31, 2011, $89.8 million was outstanding; as a result of our recent refinancing of our senior secured credit facilities and related debt repayments, at March 15, 2012, no amounts were outstanding under this facility. See “Recent Developments” below in this Summary for information related to the refinancing of the revolving credit facility.
(7)

As of December 31, 2011, $32.3 million was outstanding. Primarily consists of $23.4 million of loans payable as a result of the New Market Tax Credit financing agreements ($17.9 million of which is derived from funds provided by us in the form of a loan receivable), as well as foreign borrowings and capitalized

 

 

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  lease obligations. For further information regarding the New Market Tax Credit financing, see Note 11 to our unaudited condensed consolidated financial statements for the third quarter ended December 31, 2011 included elsewhere in this prospectus.
(8) Guarantors of the senior secured credit facilities, the senior notes and the senior subordinated notes include substantially all of the domestic operating subsidiaries of RBS Global as of the date of this prospectus other than Rexnord LLC, which is a co-issuer of the notes, but do not include any of its foreign subsidiaries.

Our Principal Stockholders

Our principal stockholders are investment funds affiliated with, or co-investment vehicles managed by, Apollo Management VI, L.P., an affiliate of Apollo Management, L.P., which we collectively refer to herein as “Apollo” (unless the context otherwise indicates) and which prior to this offering collectively beneficially owned 93.6% of our common stock and will beneficially own 69.1% or 62,554,046 shares of our common stock after this offering, assuming the underwriters do not exercise their option to purchase up to 3,552,631 additional shares. Apollo Investment Fund VI, L.P., which is the sole member of one of our principal stockholders, is an investment fund with committed capital, along with its co-investment affiliates, of approximately $10.1 billion. Apollo Management, L.P., is an affiliate of Apollo Global Management, LLC, a leading global alternative asset manager with offices in New York, Los Angeles, London, Frankfurt, Luxembourg, Singapore, Hong Kong and Mumbai. As of December 31, 2011, Apollo Global Management, LLC and its subsidiaries had assets under management of approximately $75 billion in private equity, hedge funds, distressed debt and mezzanine funds invested across a core group of industries where Apollo Global Management, LLC has considerable knowledge and resources.

We currently have a management consulting agreement with Apollo for advisory and consulting services. In each of fiscal 2010 and 2011, we paid or accrued $3.0 million in fees and out-of-pocket expenses under the agreement, which Apollo intends to terminate upon completion of this offering. Upon termination of the agreement, Apollo will receive a fee of $15.0 million (plus any unreimbursed expenses) from us. See “Certain Relationships and Related Party Transactions” for more detail regarding our arrangement with Apollo.

Risk Factors

Investing in our common stock involves substantial risk. Our ability to execute our strategy is also subject to certain risks. The risks described under the heading “Risk Factors” immediately following this summary may cause us not to realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. These risks include, among others:

 

   

Our substantial indebtedness could have a material adverse effect on our operations, which could prevent us from satisfying our debt obligations and have a material adverse effect on the value of our common stock. Our business may not generate sufficient cash flow from operations to meet our debt service and other obligations, and currently anticipated cost savings and operating improvements may not be realized on schedule, or at all.

 

   

Our business and financial performance depend on general economic conditions and other market factors beyond our control. Any sustained weakness in demand or downturn or uncertainty in the economy generally would materially reduce our net sales and profitability.

 

   

We face significant competition from numerous companies both on the international and national levels. Some of our competitors have achieved substantially more market penetration in certain of the markets in which we operate, and some of our competitors have greater financial and other resources than we do. We cannot provide assurance that we will be able to maintain or increase the current market share of our products successfully in the future.

 

 

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Some of the industries we serve are highly cyclical, such as the aerospace, energy and industrial equipment industries. Any declines in commercial, institutional or residential construction starts or demand for replacement building and home improvement products may impact us in a material adverse manner, and there can be no assurance that any such adverse effects would not continue for a prolonged period of time.

 

   

We have grown substantially by acquisitions of other companies, and have recently completed several acquisition transactions. We may be unable to realize the intended benefits of future or past acquisitions.

If any of the foregoing risks or the risks described under the heading “Risk Factors” were to occur, you may lose part or all of your investment. You should carefully consider all the information in this prospectus, including matters set forth under the heading “Risk Factors” on page 15 before making an investment decision.

Additional Information

Rexnord Corporation is a Delaware corporation. Our principal executive offices are located at 4701 West Greenfield Avenue, Milwaukee, Wisconsin 53214. Our telephone number is (414) 643-3000. Our website is located at www.rexnord.com; however, the information on or accessible from our website is not part of this document.

Recent Developments

On March 15, 2012, we entered into a Second Amended and Restated Credit Agreement, dated as of March 15, 2012 (the “New Credit Agreement”), which replaced in its entirety our prior credit agreement dated as of October 5, 2009. By entering into the New Credit Agreement, we have refinanced our senior secured credit facilities to, among other things: (i) increase the amount of the term loans to $950.0 million; (ii) increase the applicable LIBOR margin with respect to the term loans and/or the revolver commitments to 4.00% with a potential stepdown to 3.75% for the revolver commitments after this offering, subject to a first lien senior secured leverage test; (iii) extend the maturity of the term loans to April 1, 2018; (iv) extend the maturity date of the revolver commitments to March 15, 2017 and (v) modify certain other provisions of the senior secured credit facilities, including the terms for determining the interest payable thereunder; these provisions generally include higher interest rates to reflect current market conditions. See “Description of Indebtedness—Senior Secured Credit Facilities” for a further description of the New Credit Agreement.

In connection with the refinancing, we repaid the amounts outstanding under the prior credit facility, including the term loans aggregating to $760.0 million and the $89.8 million of then-outstanding debt under our revolving credit facility. In addition, we repaid $75.0 million of then-outstanding debt under our accounts receivable securitization facility.

In addition, we recently terminated the interest rate swap agreements aligned to our prior term loans. We will continue to assess the appropriateness of corresponding interest rate swaps aligned to the variable rate debt under the new senior secured credit facilities.

 

 

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The Offering

 

Issuer

Rexnord Corporation

 

Common stock offered by us

23,684,211 shares.

 

Common stock to be outstanding immediately after the offering

90,524,593 shares.

 

Underwriters’ option to purchase 3,552,631 additional shares of common stock in this offering

We have granted to the underwriters a 30-day option to purchase up to 3,552,631 additional shares at the initial public offering price less underwriting discounts and commissions. The underwriters do not intend to confirm sales to discretionary accounts that exceed 5% of the total number of shares offered by them.

 

Common stock voting rights

Each share of our common stock will entitle its holder to one vote.

 

Dividend policy

We currently intend to retain all future earnings, if any, for use in the operation of our business and to fund future growth. The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including factors such as our results of operations, financial condition and requirements, business conditions and covenants under any applicable contractual arrangements, including our indebtedness. See “Dividend Policy.”

 

Use of proceeds

We estimate that our net proceeds from this offering will be approximately $421.3 million after deducting the estimated underwriting discounts and commissions and other expenses of $28.7 million payable by us, assuming the shares are offered at $19.00 per share, which represents the midpoint of the range set forth on the front cover of this prospectus. We intend to use a portion of these net proceeds to:  first, redeem $300.0 million aggregate principal amount of the outstanding 11.75% senior subordinated notes due 2016 plus pay early redemption premiums of $17.6 million and approximately $15 million of accrued interest; and second, pay Apollo or its affiliates a fee of $15.0 million (plus any unreimbursed expenses) upon the consummation of this offering in connection with the termination of our management services agreement, as described under “Certain Relationships and Related Party Transactions—Management Services Fee.” We will use the remaining net proceeds for general corporate purposes. For sensitivity analyses as to the offering price and other information, see “Use of Proceeds.”

 

NYSE symbol

“RXN”

 

Risk factors

You should carefully read and consider the information set forth under “Risk Factors” beginning on page 15 of this prospectus and all other information set forth in this prospectus before deciding to invest in our common stock.

 

 

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Conflicts of Interest

Apollo Global Securities, LLC, an underwriter of this offering, is an affiliate of Apollo, our controlling stockholder. Since Apollo beneficially owns more than 10% of our outstanding common stock, a “conflict of interest” is deemed to exist under Rule 5121(f)(5)(B) of the Conduct Rules of the Financial Industry Regulatory Authority, or FINRA. In addition, since an affiliate of Morgan Joseph TriArtisan LLC, an underwriter of this offering, is owned by Apollo Global Management, LLC which is an affiliate of Apollo, our controlling stockholder, a “conflict of interest” is deemed to exist under Rule 5121(f)(5)(B) of the Conduct Rules of FINRA. In addition, affiliates of Goldman, Sachs & Co., an underwriter of this offering, will receive more than 5% of net offering proceeds (approximately $48.5 million) by virtue of their ownership of our 11.75% senior subordinated notes outstanding and will have a “conflict of interest” pursuant to Rule 5121(f)(5)(C)(ii) of the Conduct Rules of FINRA. Accordingly, this offering will be made in compliance with the applicable provisions of Rule 5121. As such, any underwriter that has a conflict of interest pursuant to Rule 5121 will not confirm sales to accounts in which it exercises discretionary authority without the prior written consent of the customer. Pursuant to Rule 5121, a “qualified independent underwriter” (as defined in Rule 5121) must participate in the preparation of the prospectus and perform its usual standard of due diligence with respect to the registration statement and this prospectus. Credit Suisse Securities (USA) LLC has agreed to act as qualified independent underwriter for the offering and to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act of 1933, specifically including those inherent in Section 11 of the Securities Act. See “Underwriting (Conflicts of Interest).”

Except as otherwise indicated, all of the information in this prospectus assumes:

 

   

a 4.1627 for one stock split described below has been completed;

 

   

no exercise of the underwriters’ option to purchase up to 3,552,631 additional shares of common stock;

 

   

an initial offering price of $19.00 per share, the midpoint of the range set forth on the cover page of this prospectus; and

 

   

our amended and restated certificate of incorporation and amended and restated bylaws are in effect, pursuant to which the provisions described under “Description of Capital Stock” will become operative.

Prior to completion of this offering, we will effect a stock split whereby holders of our outstanding shares of common stock will receive 4.1627 shares of common stock for each share they currently hold. The number of shares of common stock to be outstanding after completion of this offering is based on 23,684,211 shares of our common stock to be sold by us in this offering and, except where we state otherwise, the information with respect to our common stock we present in this prospectus:

 

   

does not give effect to 10,894,373 shares of our common stock issuable upon the exercise of outstanding options as of March 19, 2012, at a weighted-average exercise price of $5.28 per share; and

 

   

does not give effect to 379,343 shares of common stock reserved for future issuance under Rexnord Corporation’s 2006 Stock Option Plan and 8,350,000 shares of common stock reserved for future issuance under Rexnord Corporation’s 2012 Performance Incentive Plan (including 937,000 shares of common stock subject to a stock option award to be granted to our President and Chief Executive Officer in connection with and conditioned upon the consummation of the offering with a per share exercise price at the per share initial public offering price for our common stock).

 

 

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Summary Historical Financial and Other Data

The summary historical financial data for the fiscal years ended March 31, 2009, 2010 and 2011 have been derived from our consolidated financial statements and related notes thereto which have been audited by Ernst & Young LLP, an independent registered public accounting firm and are included elsewhere in this prospectus. The summary historical financial data for the nine months ended January 1, 2011 and December 31, 2011 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Results for the nine months ended January 1, 2011 and December 31, 2011 are not necessarily indicative of the results that may be expected for the entire fiscal year.

The following data should be read in conjunction with “Risk Factors,” “Selected Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

(in millions)

  Year Ended
March 31,
2009 (1)(2)
    Year Ended
March 31,
2010 (1)
    Year Ended
March 31,
2011
    Nine Months
Ended
January 1,
2011
    Nine Months
Ended
December
31, 2011 (3)
 

Statement of Operations:

         

Net Sales

  $ 1,882.0      $ 1,510.0      $ 1,699.6      $ 1,239.4      $ 1,423.8   

Cost of Sales

    1,290.1        994.4        1,102.8        807.0        931.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

    591.9        515.6        596.8        432.4        492.5   

Selling, General and Administrative Expenses

    467.8        297.7        329.1        237.2        276.3   

Intangible Impairment Charges

    422.0        —          —          —          —     

Restructuring and Other Similar Costs

    24.5        6.8        —          —          2.7   

Amortization of Intangible Assets

    48.9        49.7        48.6        36.4        37.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Income from Operations

    (371.3     161.4        219.1        158.8        175.9   

Non-Operating (Expense) Income:

         

Interest Expense, net

    (230.4     (194.2     (180.8     (136.7     (132.3

Gain (Loss) on Debt Extinguishment

    103.7        167.8        (100.8     (100.8     (0.7

Loss on Divestiture

    —          —          —          —          (6.9

Other (Expense) Income, net

    (3.0     (16.4     1.1        (2.8     (10.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Income Before Income Taxes

    (501.0     118.6        (61.4     (81.5     25.2   

(Benefit) Provision for Income Taxes

    (72.0     30.5        (10.1     (27.5     3.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss) Income

  $ (429.0   $ 88.1      $ (51.3   $ (54.0   $ 21.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Data:

         

Net Cash (Used for) Provided by:

         

Operating Activities

    155.0        155.5        164.5        76.5        60.7   

Investing Activities

    (54.5     (22.0     (35.5     (17.6     (304.7

Financing Activities

    36.6        (161.5     (6.9     (5.4     81.0   

Depreciation and Amortization of Intangible Assets

    109.6        109.3        106.1        79.6        83.8   

Capital Expenditures

    39.1        22.0        37.6        19.7        39.0   

 

 

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     March 31,     December 31,
2011
 

(in millions)

   2009     2010     2011    

Balance Sheet Data:

        

Cash and Cash Equivalents

   $ 287.9      $ 263.9      $ 391.0      $ 225.6   

Working Capital (4)

     555.2        481.9        483.6        511.3   

Total Assets

     3,218.8        3,016.5        3,099.7        3,207.4   

Total Debt (5)

     2,526.1        2,215.5        2,314.1        2,404.1   

Stockholders’ Equity (Deficit)

     (177.8     (57.5     (88.2     (73.1

 

(1) Financial data for fiscal 2009 and 2010 has been adjusted for our voluntary change in accounting for actuarial gains and losses related to our pension and other postretirement benefit plans. See Note 2 to our audited consolidated financial statements included elsewhere in this prospectus.
(2) Consolidated financial data as of and for the year ended March 31, 2009 reflects the acquisition of Fontaine on February 27, 2009. As a result, the comparability of the operating results for the periods presented is affected by the revaluation of the assets acquired and liabilities assumed on the date of the Fontaine acquisition.
(3) Consolidated financial data as of and for the nine months ended December 31, 2011 reflect the acquisitions of Autogard subsequent to April 2, 2011 and VAG subsequent to October 10, 2011 and excludes the assets associated with a divestiture of a German subsidiary on July 19, 2011. As a result, the comparability of the operating results for the period presented is affected by the revaluation of the assets acquired and the liabilities assumed on the date of the acquisitions and the assets divested on the date of the divestiture.
(4) Working capital represents total current assets less total current liabilities.
(5) Total debt represents long-term debt plus the current portion of long-term debt.

In addition to net (loss) income, we believe Adjusted EBITDA is an important measure under our senior secured credit facilities, as our ability to incur certain types of acquisition debt or 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 by comparing the ratio of our net senior secured bank debt to our Adjusted EBITDA. We reported Adjusted EBITDA of $335.7 million in fiscal 2011, and of $382.6 million, which includes the pro forma impact of VAG, for the twelve month period ended December 31, 2011. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Covenant Compliance.”

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risk factors set forth below as well as the other information contained in this prospectus before investing in our common stock. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition, results of operations or cash flows. Any of the following risks could materially and adversely affect our business, financial condition, results of operations or cash flows. In such a case, you may lose part or all of your original investment.

Risks Related to Our Business

Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from making debt service payments.

We are a highly leveraged company. As of December 31, 2011 we had $2,404.1 million of outstanding indebtedness, and our remaining fiscal 2012 debt service payment obligations at December 31, 2011 were $26.8 million (including approximately $17.7 million of debt service on fixed rate obligations). On March 15, 2012, we refinanced our senior secured credit facilities; giving effect to that refinancing, we increased the amount of our term loans to $950.0 million and repaid a total of $924.8 million of then-outstanding indebtedness under our prior term debt, our revolving credit facility and our accounts receivable securitization facility. As of December 31, 2011, after giving pro forma effect to the refinancing of our senior secured credit facilities and related debt repayments, and further adjusted giving pro forma effect to this offering and the use of the net proceeds therefrom, we would have had $2,124.5 million of outstanding indebtedness. Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt will depend on a range of economic, competitive and business factors, many of which are outside our control. Our business may not generate sufficient cash flow from operations to meet our debt service and other obligations, and currently anticipated cost savings and operating improvements may not be realized on schedule, or at all. If we are unable to meet our expenses and debt service and other obligations, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets or raise equity. Furthermore, Apollo has no obligation to provide us with debt or equity financing and we therefore may be unable to generate sufficient cash to service all of our indebtedness. We may not be able to refinance any of our indebtedness, sell assets or raise equity on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity. Our inability to generate sufficient cash flow to satisfy our debt obligations or to refinance our obligations on commercially reasonable terms would have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our substantial indebtedness could also have other important consequences with respect to our ability to manage our business successfully, including the following:

 

   

it may limit our ability to borrow money for our working capital, capital expenditures, debt service requirements, strategic initiatives or other purposes;

 

   

it may make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under our senior secured credit facilities, the indentures governing our senior notes, senior subordinated notes and our other indebtedness;

 

   

a substantial portion of our cash flow from operations will be dedicated to the repayment of our indebtedness and so will not be available for other purposes;

 

   

it may limit our flexibility in planning for, or reacting to, changes in our operations or business;

 

   

we are and will continue to be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;

 

   

it may make us more vulnerable to further downturns in our business or the economy;

 

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it may restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities; and

 

   

it, along with the financial and other restrictive covenants in the documents governing our indebtedness, among other things, may limit our ability to borrow additional funds or dispose of assets.

Furthermore, our interest expense could increase if interest rates increase because a portion of the debt under our senior secured credit facilities is unhedged variable-rate debt. For the last several quarters, interest rates have been subject to extreme volatility, which may intensify this risk. Also, we may still incur significantly more debt, which could intensify the risks described above. For more information, see Note 10 to our audited consolidated financial statements included elsewhere in this prospectus.

Weak economic and financial market conditions have impacted our business operations and may adversely affect our results of operations and financial condition.

Weak global economic and financial market conditions in recent years have affected our business operations and continuing weakness or a further downturn may adversely affect our future results of operations and financial condition. Economic conditions in the end-markets, businesses or geographic areas in which we sell our products could reduce demand for these products and result in a decrease in sales volume for a prolonged period of time, which would have a negative impact on our future results of operations. Also, a weak recovery could prolong, or resume, the negative effects we have experienced in the past.

For example, sales to the construction industry are driven by trends in commercial and residential construction, housing starts and trends in residential repair and remodeling. Consumer confidence, mortgage rates, credit standards and availability and income levels play a significant role in driving demand in the residential construction, repair and remodeling sector. A prolonged or further drop in consumer confidence, continued restrictions in the credit market or an increase in mortgage rates, credit standards or unemployment could delay the recovery of commercial and residential construction levels and have a material adverse effect on our business, financial condition, results of operations or cash flows. This may express itself in the form of substantial downward pressure on product pricing and our profit margins, thereby adversely affecting our financial results.

Additionally, many of our products are used in the energy, mining and cement and aggregates markets. With the recent increases and volatility in commodity prices, certain customers may defer or cancel anticipated projects or expansions until such time as these projects will be profitable based on the underlying cost of commodities compared to the cost of the project. Volatility and disruption of financial markets, as in recent years, could limit the ability of our customers to obtain adequate financing to maintain operations and may cause them to terminate existing purchase orders, reduce the volume of products they purchase from us in the future or impact their ability to pay their receivables. Adverse economic and financial market conditions may also cause our suppliers to be unable to meet their commitments to us or may cause suppliers to make changes in the credit terms they extend to us, such as shortening the required payment period for outstanding accounts receivable or reducing or eliminating the amount of trade credit available to us.

Demand for our Water Management products depends on availability of financing.

Many customers who purchase our Water Management products depend on third-party financing. There have been significant disruptions in the availability of financing on reasonable terms. Fluctuations in prevailing interest rates affect the availability and cost of financing to our customers. Given recent market conditions, some lenders and institutional investors have significantly reduced, and in some cases ceased to provide, funding to borrowers. The lack of availability or increased cost of credit could lead to decreased construction, which would result in a reduction in demand for our products and have a material adverse effect on our Water Management business, financial condition, results of operations or cash flows.

 

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The markets in which we sell our products are highly competitive.

We operate in highly fragmented markets within the Process & Motion Control platform. As a result, we compete against numerous companies. Some of our competitors have achieved substantially more market penetration in certain of the markets in which we operate, and some of our competitors have greater financial and other resources than we do. Competition in our business lines is based on a number of considerations, including product performance, cost of transportation in the distribution of our Process & Motion Control products, brand reputation, quality of client service and support, product availability and price. Additionally, some of our larger, more sophisticated customers are attempting to reduce the number of vendors from which they purchase in order to increase their efficiency. If we are not selected to become one of these preferred providers, we may lose access to certain sections of the markets in which we compete. Our customers increasingly demand a broad product range and we must continue to develop our expertise in order to manufacture and market these products successfully. To remain competitive, we will need to invest continuously in manufacturing, customer service and support, marketing and our distribution networks. We may also have to adjust the prices of some of our Process & Motion Control products to stay competitive. We cannot assure you that we will have sufficient resources to continue to make these investments or that we will maintain our competitive position within each of the markets we serve.

Within the Water Management platform, we compete against both large international and national rivals, as well as many regional competitors. Some of our competitors have greater resources than we do. Significant competition in any of the markets in which the Water Management platform operates could result in substantial downward pressure on product pricing and our profit margins, thereby adversely affecting the Water Management financial results. Furthermore, we cannot provide assurance that we will be able to maintain or increase the current market share of our products successfully in the future.

Our business depends upon general economic conditions and other market factors beyond our control, and we serve customers in cyclical industries. As a result, our operating results could further be negatively affected during any continued or future economic downturn.

Our financial performance depends, in large part, on conditions in the markets that we serve in the U.S. and the global economy generally. Some of the industries we serve are highly cyclical, such as the aerospace, energy and industrial equipment industries. We have undertaken cost reduction programs as well as diversified our markets to mitigate the effect of downturns in economic conditions; however, such programs may be unsuccessful. Any sustained weakness in demand or downturn or uncertainty in the economy generally, such as the recent unprecedented volatility in the capital and credit markets, would materially reduce our net sales and profitability.

The demand in the water management industry is influenced by new construction activity, both residential and commercial, and the level of repair and remodeling activity. The level of new construction and repair and remodeling activity is affected by a number of factors beyond our control, including the overall strength of the U.S. economy (including confidence in the U.S. economy by our customers), the strength of the residential and commercial real estate markets, institutional building activity, the age of existing housing stock, unemployment rates and interest rates. Any declines in commercial, institutional or residential construction starts or demand for replacement building and home improvement products may impact us in a material adverse manner and there can be no assurance that any such adverse effects would not continue for a prolonged period of time.

The loss of any significant customer could adversely affect our business.

We have certain customers that are significant to our business. During fiscal 2011, our top 20 customers accounted for approximately 32% of our consolidated net sales, and our largest customer accounted for 8% of our consolidated net sales. Our competitors may adopt more aggressive sales policies and devote greater resources to the development, promotion and sale of their products than we do, which could result in a loss of customers. The loss of one or more of our major customers or deterioration in our relationship with any of them could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

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Increases in the cost of our raw materials, in particular bar steel, brass, castings, copper, forgings, high-performance engineered plastic, plate steel, resin, sheet steel and zinc, as well as petroleum products, or the loss of a substantial number of our suppliers, could adversely affect our financial condition.

We depend on third parties for the raw materials used in our manufacturing processes. We generally purchase our raw materials on the open market on a purchase order basis. These contracts generally have had one to five year terms and have contained competitive and benchmarking clauses intended to ensure competitive pricing. While we currently maintain alternative sources for raw materials, our business is subject to the risk of price fluctuations, delays in the delivery of and potential unavailability of our raw materials. Any such price fluctuations or delays, if material, could harm our profitability or operations. In addition, the loss of a substantial number of suppliers could result in material cost increases or reduce our production capacity.

In addition, prices for petroleum products and other carbon-based fuel products have also significantly increased recently. These price increases, and consequent increases in the cost of electricity and for products for which petroleum-based products are components or used in part of the process of manufacture, may substantially increase our costs for transportation, fuel, component parts and manufacturing. We may not be able to recoup the costs of these increases by adjusting our prices.

We do not typically enter into hedge transactions to reduce our exposure to price risks and cannot assure you that we would be successful in passing on any attendant costs if these risks were to materialize. In addition, if we are unable to continue to purchase our required quantities of raw materials on commercially reasonable terms, or at all, or if we are unable to maintain or enter into our purchasing contracts for our larger commodities, our business operations could be disrupted and our profitability could be impacted in a material adverse manner.

We rely on independent distributors. Termination of our relationships with more than one of our independent distributors or an increase in the distributors’ sales of our competitors’ products could have a material adverse effect on our business, financial condition, results of operations or cash flows.

In addition to our own direct sales force, we depend on the services of independent distributors to sell our Process & Motion Control products and provide service and aftermarket support to our OEMs and end-users. We rely on an extensive distribution network, with nearly 2,600 distributor locations nationwide; however, for fiscal 2011, approximately 21% of our Process & Motion Control net sales were generated through sales to three of our key independent distributors, the largest of which accounted for 12% of Process & Motion Control net sales. Rather than serving as passive conduits for delivery of product, our industrial distributors are active participants in the overall competitive dynamic in the Process & Motion Control industry. Industrial distributors play a significant role in determining which of our Process & Motion Control products are stocked at the branch locations, and hence are most readily accessible to aftermarket buyers, and the price at which these products are sold. Almost all of the distributors with whom we transact business also offer competitors’ products and services to our customers. Within Water Management, we depend on a network of several hundred independent sales representatives and approximately 90 third-party warehouses to distribute our products, as well as approximately 240 direct sales and marketing associates in 18 countries; however, for fiscal 2011, our three key independent distributors generated approximately 28% of our Water Management net sales with the largest accounting for 20% of Water Management net sales.

Our Process & Motion Control and Water Management distributorship sales are made on terms that we believe are consistent with customary standards in our industry. Our agreements with our distributors are generally non-exclusive and do not require minimum volumes of purchases by the distributors, with prices based on expected margins and all sales subject to credit approval; they generally contain a limited warranty against material and workmanship defects and provide for a freight allowance when minimum quantities are met. In addition, certain key distributors are on rebate programs, including our top three Water Management distributors. For more information on our rebate programs, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revenue Recognition.”

 

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While the loss of any one distributor would not be material, the loss of multiple key distributors or of a substantial number of our other distributors or an increase in the distributors’ sales of our competitors’ products to our customers could have a material adverse effect on our business, financial condition, results of operations or cash flows.

We could be adversely affected if any of our significant customers default in their obligations to us.

Our contracted backlog is comprised of future orders for our products from a broad number of customers. Defaults by any of the customers that have placed significant orders with us could have a significant adverse effect on our net sales, profitability and cash flow. Our customers may in the future default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons deriving from the current general economic environment. More specifically, the recession and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of customer confidence, increased market volatility and widespread reduction of business generally. Accordingly, the recession and tightening of credit increases the risks associated with our backlog. If a customer defaults on its obligations to us, it could have a material adverse effect on our business, financial condition, results of operations or cash flows. Approximately 95% of our backlog at December 31, 2011 is currently scheduled to ship within the next twelve months.

We are subject to risks associated with changing technology and manufacturing techniques, which could place us at a competitive disadvantage.

The successful implementation of our business strategy requires us to continuously evolve our existing products and introduce new products to meet customers’ needs in the industries we serve. Our products are characterized by stringent performance and specification requirements that mandate a high degree of manufacturing and engineering expertise. If we fail to meet these requirements, our business could be at risk. We believe that our customers rigorously evaluate their suppliers on the basis of a number of factors, including product quality, price competitiveness, technical and manufacturing expertise, development and product design capability, new product innovation, reliability and timeliness of delivery, operational flexibility, customer service and overall management. Our success will depend on our ability to continue to meet our customers’ changing specifications with respect to these criteria. We cannot assure you that we will be able to address technological advances or introduce new products that may be necessary to remain competitive within our businesses. Furthermore, we cannot assure you that we can adequately protect any of our own technological developments to produce a sustainable competitive advantage.

If we lose certain of our key associates and management personnel, our business may be adversely affected.

Our success depends on our ability to recruit, retain and motivate highly-skilled management, sales, marketing and engineering personnel. Competition for these persons in our industry is intense and we may not be able to successfully recruit, train or retain qualified personnel. If we fail to retain and recruit the necessary personnel, our business and our ability to obtain new customers, develop new products and provide acceptable levels of customer service could materially suffer. In addition, we cannot assure you that these individuals will continue their employment with us. If any of these key personnel were to leave our company, it could be difficult to replace them, and our business could be materially harmed.

We may incur significant costs for environmental compliance and/or to address liabilities under environmental laws and regulations.

Our operations and facilities are subject to extensive laws and regulations related to pollution and the protection of the environment, health and safety, including those governing, among other things, emissions to air, discharges to water, the generation, handling, storage, treatment and disposal of hazardous wastes and other materials, and the remediation of contaminated sites. A failure by us to comply with applicable requirements or the permits required for our operations could result in civil or criminal fines, penalties, enforcement actions, third-party claims for property damage and personal injury, requirements to clean up property or to pay for the costs of cleanup or regulatory or judicial orders enjoining or curtailing operations or requiring corrective

 

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measures, including the installation of pollution control equipment or remedial actions. Moreover, if applicable environmental, health and safety laws and regulations, or the interpretation or enforcement thereof, become more stringent in the future, we could incur capital or operating costs beyond those currently anticipated.

Some environmental laws and regulations, including the federal Superfund law, impose requirements to investigate and remediate contamination on present and former owners and operators of facilities and sites, and on potentially responsible parties (“PRPs”) for sites to which such parties may have sent waste for disposal. Such liability can be imposed without regard to fault and, under certain circumstances, may be joint and several, resulting in one PRP being held responsible for the entire obligation. Liability may also include damages to natural resources. We are currently conducting or are otherwise involved in investigations and/or cleanup of known or potential contamination at several of our current and former facilities and have been named as a PRP at several third party Superfund sites. The discovery of additional contamination, including at acquired facilities or operations, the imposition of more stringent cleanup requirements, disputes with our insurers or indemnitors or the insolvency of other responsible parties could require significant expenditures by us in excess of our current reserves. In addition, we occasionally evaluate various alternatives with respect to our facilities, including possible dispositions or closures. Investigations undertaken in connection with these activities may lead to discoveries of contamination that must be remediated, and closures of facilities may trigger remediation requirements that are not currently applicable to our operating facilities. We may also face liability for alleged personal injury or property damage due to exposure to hazardous substances used or disposed of by us, that may be contained within our current or former products, or that are present in the soil or groundwater at our current or former facilities. Significant costs could be incurred in connection with such liabilities.

We believe that, subject to various terms and conditions, we have certain indemnification protection from Invensys plc (“Invensys”) with respect to certain environmental liabilities that may have occurred prior to the acquisition by the Carlyle Group (the “Carlyle Acquisition”) of the capital stock of 16 entities comprising the Rexnord group of Invensys, including certain liabilities associated with our Downers Grove, Illinois facility and with respect to personal injury claims for alleged exposure to hazardous materials associated with such facility. We also believe that, subject to various terms and conditions, we have certain indemnification protection from Hamilton Sundstrand Corporation (“Hamilton Sundstrand”), with respect to certain environmental liabilities that may have arisen from events occurring at Falk facilities prior to the Falk acquisition, including certain liabilities associated with personal injury claims for alleged exposure to hazardous materials. If Invensys or Hamilton Sundstrand becomes unable to, or otherwise does not, comply with its indemnity obligations, or if certain contamination or other liability for which we are obligated is not subject to such indemnities or historic insurance coverage, we could incur significant unanticipated costs. As a result, it is possible that we will not be able to recover pursuant to these indemnities a substantial portion, if any, of the costs that we may incur which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Certain subsidiaries are subject to numerous asbestos claims.

Certain subsidiaries are co-defendants in various lawsuits filed in a number of jurisdictions throughout the United States alleging personal injury as a result of exposure to asbestos that was used in certain components of our products. The uncertainties of litigation and the uncertainties related to the collection of insurance and indemnification coverage make it difficult to accurately predict the ultimate financial effect of these claims. In the event our insurance or indemnification coverage becomes insufficient to cover our potential financial exposure, or the actual number or value of asbestos-related claims differs materially from our existing estimates, we could incur material costs that could have a material adverse effect on our business, financial condition, results of operations or cash flows. See “Business—Legal Proceedings.”

Certain Water Management subsidiaries are subject to a number of class action claims.

Certain Water Management subsidiaries are defendants in a class action lawsuit pending in U.S. federal court in Minnesota and in a number of putative class action lawsuits pending in various other U.S. federal courts.

 

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The plaintiffs in these suits represent or seek to represent a class of plaintiffs alleging damages due to the alleged failure or anticipated failure of the Zurn brass crimp fittings on the PEX plumbing systems in homes and other structures. The complaints assert various causes of action, including but not limited to negligence, breach of warranty, fraud, and violations of the Magnuson-Moss Act and certain state consumer protection laws, and seek declaratory and injunctive relief, and damages (including punitive damages). We may not be successful in defending such claims, and the resulting liability could be substantial and may not be covered by insurance. Our insurance carriers currently are funding our defense in these proceedings; however, they have filed suit for a declaratory judgment in Florida state court challenging their coverage obligations with respect to certain classes of claims. The Florida suit currently is stayed, pending resolution of the underlying claims. As a result of the preceding, although we continue to vigorously defend ourselves in the various court proceedings and continue to vigorously pursue insurance coverage, the uncertainties of litigation, and insurance coverage and collection, as well as the actual number or value of claims, may subject us to substantial liability that could have a material adverse effect on our business, financial condition, results of operations or cash flows. See “Business—Legal Proceedings.”

Weather could adversely affect the demand for products in our Water Management platform and decrease its net sales.

Demand for our Water Management products is primarily driven by commercial construction activity, remodeling and retro-fit opportunities, and to a lesser extent, new home starts as well as water and wastewater infrastructure expansion for municipal, industrial and hydropower applications. Weather is an important variable affecting financial performance as it significantly impacts construction activity. Spring and summer months in the United States and Europe represent the main construction seasons. Adverse weather conditions, such as prolonged periods of cold or rain, blizzards, hurricanes and other severe weather patterns, could delay or halt construction and remodeling activity, which could have a negative affect on our business. For example, an unusually severe winter can lead to reduced construction activity and magnify the seasonal decline in our Water Management net sales and earnings during the winter months. In addition, a prolonged winter season can delay construction and remodeling plans and hamper the typical seasonal increase in net sales and earnings during the spring months.

Our international operations are subject to uncertainties, which could adversely affect our operating results.

Our business is subject to certain risks associated with doing business internationally. Approximately 36% of our total net sales originate outside of the United States (based on a last twelve month, or LTM, basis as of December 31, 2011, including the pro forma impact of VAG). The portion of our net sales and operations that is outside of the United States has increased in recent years, and may further increase as a result of internal growth and/or acquisition activity. Accordingly, our future results could be harmed by a variety of factors relating to international operations, including:

 

   

fluctuations in currency exchange rates, particularly fluctuations in the Euro against the U.S. dollar;

 

   

exchange controls;

 

   

compliance with export controls and trade compliance regulations;

 

   

tariffs or other trade protection measures and import or export licensing requirements;

 

   

changes in tax laws;

 

   

interest rates;

 

   

changes in regulatory requirements;

 

   

differing labor regulations;

 

   

requirements relating to withholding taxes on remittances and other payments by subsidiaries;

 

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restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions;

 

   

restrictions on our ability to repatriate dividends from our subsidiaries; and

 

   

exposure to liabilities under the Foreign Corrupt Practices Act.

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. However, any of these factors could have a material adverse effect on our international operations and, consequently, our business, financial condition, results of operations or cash flows.

We may be unable to identify potential acquisition candidates, or to realize the intended benefits of future or past acquisitions.

We cannot assure you that suitable acquisition candidates will be identified and acquired in the future, that the financing of any such acquisition will be available on satisfactory terms, that we will be able to complete any such acquisition or that we will be able to accomplish our strategic objectives as a result of any such acquisition. Nor can we assure you that our acquisition strategies will be successfully received by customers or achieve their intended benefits.

Acquisitions are often undertaken to improve the operating results of either or both of the acquirer and the acquired company and we cannot assure you that we will be successful in this regard nor can we provide any assurance that we will be able to realize all of the intended benefits from our prior acquisitions, as well as our recent acquisition of VAG. We have encountered, and may encounter, various risks in acquiring other companies (including in connection with our recent acquisition of VAG) including the possible inability to integrate an acquired business into our operations, potential failure to realize anticipated benefits, diversion of management’s attention, issues in customer transitions, potential inadequacies of indemnities and other contractual remedies and unanticipated problems, risks or liabilities, including environmental, some or all of which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

We may be unable to make necessary capital expenditures.

We periodically make capital investments to, among other things, maintain and upgrade our facilities and enhance our products’ processes. As we grow our businesses, we may have to incur significant capital expenditures. We believe that we will be able to fund these expenditures through cash flow from operations and borrowings under our senior secured credit facilities. However, our senior secured credit facilities, the indentures governing our senior notes and the indenture governing our senior subordinated notes contain limitations that could affect our ability to fund our future capital expenditures and other capital requirements. We cannot assure you that we will have, or be able to obtain, adequate funds to make all necessary capital expenditures when required, or that the amount of future capital expenditures will not be materially in excess of our anticipated or current expenditures. If we are unable to make necessary capital expenditures, our product line may become dated, our productivity may be decreased and the quality of our products may be adversely affected, which, in turn, could materially reduce our net sales and profitability.

Our debt agreements impose significant operating and financial restrictions, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our senior secured credit facilities and the indentures governing our senior notes and senior subordinated notes contain various covenants that limit or prohibit our ability, among other things, to:

 

   

incur or guarantee additional indebtedness or issue certain preferred shares;

 

   

pay dividends on our capital stock or redeem, repurchase, retire or make distributions in respect of our capital stock or subordinated indebtedness or make other restricted payments;

 

   

make certain loans, acquisitions or investments;

 

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sell certain assets, including stock of our subsidiaries;

 

   

enter into sale and leaseback transactions;

 

   

create or incur liens;

 

   

consolidate, merge, sell, transfer or otherwise dispose of all or substantially all of our assets; and

 

   

enter into certain transactions with our affiliates.

The indentures governing our senior notes and senior subordinated notes contain covenants that restrict our ability to take certain actions, such as incurring additional debt, if we are unable to meet defined specified financial ratios. As of December 31, 2011, our senior secured bank leverage ratio was 1.70x. Failure to comply with the leverage covenant of the senior secured credit facilities can result in limiting our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions. A breach of any of these covenants could result in a default under our debt agreements. For more information, see Note 10 to our audited consolidated financial statements included elsewhere in this prospectus.

The restrictions contained in the agreements that govern the terms of our debt could:

 

   

limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans;

 

   

adversely affect our ability to finance our operations, to enter into strategic acquisitions, to fund investments or other capital needs or to engage in other business activities that would be in our interest; and

 

   

limit our access to the cash generated by our subsidiaries.

Upon the occurrence of an event of default under the senior secured credit facilities, the lenders could elect to declare all amounts outstanding under the senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under the senior secured credit facilities could proceed against the collateral granted to them to secure the senior secured credit facilities on a first-priority lien basis. If the lenders under the senior secured credit facilities accelerate the repayment of borrowings, such acceleration could have a material adverse effect on our business, financial condition, results of operations or cash flows. In addition, we may not have sufficient assets to repay our senior notes and senior subordinated notes upon acceleration. For a more detailed description of the limitations on our ability to incur additional indebtedness, see Note 10 to our audited consolidated financial statements included elsewhere in this prospectus and “Description of Indebtedness.”

Because a substantial portion of our indebtedness bears interest at rates that fluctuate with changes in certain prevailing short-term interest rates, we are vulnerable to interest rate increases.

A substantial portion of our indebtedness, including the senior secured credit facilities and borrowings outstanding under our accounts receivable securitization facility, bears interest at rates that fluctuate with changes in certain short-term prevailing interest rates. As of December 31, 2011, we had $760.0 million of floating rate debt under the senior secured credit facilities. Of the $760.0 million of floating rate debt, $370.0 million of our term loans are subject to interest rate swaps, in each case maturing in July 2012. After considering the interest rate swaps, a 100 basis point increase in the December 31, 2011 interest rates would increase interest expense under the senior secured credit facilities by approximately $3.9 million on an annual basis. See “Summary—Recent Developments” for subsequent developments related to the senior secured credit facilities and the corresponding interest rate swaps.

We rely on intellectual property that may be misappropriated or otherwise successfully challenged.

We attempt to protect our intellectual property through a combination of patent, trademark, copyright and trade secret protection, as well as third-party nondisclosure and assignment agreements. We cannot assure you that any of our applications for protection of our intellectual property rights will be approved and maintained or

 

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that our competitors will not infringe or successfully challenge our intellectual property rights. We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require employees, consultants and advisors to enter into confidentiality agreements. We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure. If we are unable to maintain the proprietary nature of our technologies, our ability to sustain margins on some or all of our products may be affected, which could have a material adverse effect on our business, financial condition, results of operations or cash flows. In addition, in the ordinary course of our operations, from time to time we pursue and are pursued in potential litigation relating to the protection of certain intellectual property rights, including some of our more profitable products, such as FlatTop chain. An adverse ruling in any such litigation could have a material adverse effect on our business, financial condition, results of operations or cash flows.

We could face potential product liability claims relating to products we manufacture or distribute.

We may be subject to additional product liability claims in the event that the use of our products, or the exposure to our products or their raw materials, is alleged to have resulted in injury or other adverse effects. We currently maintain product liability insurance coverage but we cannot assure you that we will be able to obtain such insurance on commercially reasonable terms in the future, if at all, or that any such insurance will provide adequate coverage against claims. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome. An unsuccessful product liability defense could have a material adverse effect on our business, financial condition, results of operations or cash flows. In addition, our business depends on the strong brand reputation we have developed. In the event that this reputation is damaged as a result of a product liability claim, we may face difficulty in maintaining our pricing positions and market share with respect to some of our products, which could have a material adverse effect on our business, financial condition, results of operations or cash flows. See “Business—Legal Proceedings.”

We, our customers and our shippers have unionized employees who may stage work stoppages which could seriously impact the profitability of our business.

As of December 31, 2011, we had approximately 7,400 employees, of whom approximately 4,300 were employed in the United States. Approximately 535 of our U.S. employees are represented by labor unions. Additionally, approximately 1,700 of our employees reside in Europe, where trade union membership is common. Although we believe that our relations with our employees are currently strong, if our unionized workers were to engage in a strike, work stoppage or other slowdown in the future, we could experience a significant disruption of our operations, which could interfere with our ability to deliver products on a timely basis and could have other negative effects, such as decreased productivity and increased labor costs. Such negative effects could have a material adverse effect on our business, financial condition, results of operations or cash flows. In addition, if a greater percentage of our workforce becomes unionized, our business and financial results could be affected in a material adverse manner. Further, many of our direct and indirect customers and their suppliers, and organizations responsible for shipping our products, have unionized workforces and their businesses may be impacted by strikes, work stoppages or slowdowns, any of which, in turn, could have a material adverse effect on our business, financial condition, results of operations or cash flows.

We could incur substantial business interruptions as the result of updating our Enterprise Resource Planning (“ERP”) systems.

Utilizing a phased approach, we are updating our ERP systems across both our Process & Motion Control and Water Management platforms. If these updates are unsuccessful, we could incur substantial business interruptions, including the inability to perform routine business transactions, which could have a material adverse effect on our financial performance.

 

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Our required cash contributions to our pension plans have increased and may increase further and we could experience a material change in the funded status of our defined benefit pension plans and the amount recorded in our consolidated balance sheets related to those plans. Additionally, our pension costs could increase in future years.

Recent legislative changes have reformed funding requirements for underfunded U.S. defined benefit pension plans. The revised statute, among other things, increases the percentage funding target of U.S. defined benefit pension plans from 90% to 100% and requires the use of a more current mortality table in the calculation of minimum yearly funding requirements. Our future required cash contributions to our U.S. defined benefit pension plans may increase based on the funding reform provisions that were enacted into law. In addition, if the returns on the assets of any of our U.S. defined benefit pension plans were to decline in future periods, if the Pension Benefit Guaranty Corporation (“PBGC”) were to require additional contributions to any such plans as a result of our recent acquisitions or if other actuarial assumptions were to be modified, our future required cash contributions to such plans could increase. Any such increases could have a material and adverse effect on our business, financial condition, results of operations or cash flows.

The need to make these cash contributions to such plans may reduce the cash available to meet our other obligations, including our debt obligations with respect to our senior secured credit facilities, our senior notes and our senior subordinated notes, or to meet the needs of our business. In addition, the PBGC may terminate our U.S. defined benefit pension plans under limited circumstances, including in the event the PBGC concludes that the risk may increase unreasonably if such plans continue. In the event a U.S. defined benefit pension plan is terminated for any reason while it is underfunded, we could be required to make an immediate payment to the PBGC of all or a substantial portion of such plan’s underfunding, as calculated by the PBGC based on its own assumptions (which might result in a larger obligation than that based on the assumptions we have used to fund such plan), and the PBGC could place a lien on material amounts of our assets.

The deterioration experienced in fiscal 2009 in the securities markets has impacted the value of the assets included in our defined benefit pension plans. The deterioration in pension asset values has led to additional contribution requirements (in accordance with the plan funding requirements of the U.S. Pension Protection Act of 2006). Any further deterioration may also lead to further cash contribution requirements and increased pension costs. Recent pension funding legislative and regulatory relief provided by the U.S. government in light of the securities markets decline has reduced our short-term required pension contributions from the amount required before relief. The impact of this relief has been reflected in our projected cash contribution requirements disclosed in the consolidated financial statements.

Our historical financial data is not comparable to our current financial condition and results of operations because of our use of purchase accounting in connection with various acquisitions and due to the different basis of accounting used by us prior to the acquisition by Apollo in 2006.

It may be difficult for you to compare both our historical and future results. These acquisitions were accounted for utilizing the purchase method of accounting, which resulted in a new valuation for the assets and liabilities to their fair values. This new basis of accounting began on the date of the consummation of each transaction. Also, until our purchase price allocations are finalized for an acquisition (generally less than one year after the acquisition date), our allocation of the excess purchase price over the book value of the net assets acquired is considered preliminary and subject to future adjustment.

Risks Related to This Offering

There is no existing market for our common stock and we do not know if one will develop, which could impede your ability to sell your shares and may depress the market price of our common stock.

There has not been a public market for our common stock prior to this offering. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any of our

 

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common stock that you buy. The initial public offering price for the common stock will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. See “Underwriting (Conflicts of Interest).” Consequently, you may be unable to sell our common stock at prices equal to or greater than the price you pay in this offering.

Apollo controls us and its interests may conflict with or differ from your interests as a stockholder.

After the consummation of this offering, Apollo will beneficially own approximately 69.1% of our common stock, assuming the underwriters do not exercise their option to purchase additional shares, or 66.5% if the underwriters exercise their option in full. In addition, representatives of Apollo comprise 4 of our 8 directors. As a result, Apollo will continue to have the ability to prevent any transaction that requires the approval of our board of directors or stockholders, including the approval of significant corporate transactions such as mergers and the sale of substantially all of our assets.

The interests of Apollo could conflict with or differ from your interests as a holder of our common stock. For example, the concentration of ownership held by Apollo could delay, defer or prevent a change of control of us or impede a merger, takeover or other business combination that you as a stockholder may otherwise view favorably. Apollo is in the business of making or advising on investments in companies and holds, and may from time to time in the future acquire, interests in or provide advice to businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. They may also pursue acquisitions that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

Our certificate of incorporation will provide that we expressly renounce any interest or expectancy in any business opportunity, transaction or other matter in which Apollo or any of its members, directors, employees or other affiliates (the “Apollo Group”) participates or desires or seeks to participate in, even if the opportunity is one that we would reasonably be deemed to have pursued if given the opportunity to do so. The renouncement does not apply to any business opportunities that are presented to an Apollo Group member solely in such person’s capacity as a member of our board of directors and with respect to which no other member of the Apollo Group independently receives notice or otherwise identifies such business opportunity prior to us becoming aware of it, or if the business opportunity is initially identified by the Apollo Group solely through the disclosure of information by or on behalf of us.

So long as Apollo continues to beneficially own a significant amount of our equity, even if such amount is less than 50%, it may continue to be able to strongly influence or effectively control our decisions. For example, our bylaws will require the approval of a majority of the directors nominated by Apollo voting on the matter for certain important matters, including mergers and acquisitions, issuances of equity and the incurrence of debt, so long as Apollo beneficially owns at least 33 1/3% of our outstanding common stock. See “Management—Apollo Approval of Certain Matters and Rights to Nominate Certain Directors,” “Certain Relationships and Related Party Transactions—Nominating Agreement” and “Description of Capital Stock—Certain Anti-Takeover, Limited Liability and Indemnification Provisions—Apollo Approval Rights.”

We will be a “controlled company” within the meaning of the New York Stock Exchange rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.

Upon the closing of this offering, Apollo will continue to control a majority of our voting common stock. As a result, we will be a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards. Under the rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain New York Stock Exchange corporate governance requirements, including:

 

   

the requirement that we have a majority of independent directors on our board of directors;

 

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the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

Following this offering, we intend to utilize certain exemptions from the New York Stock Exchange corporate governance requirements, including the foregoing. As a result, we will not have a majority of independent directors nor will our nominating and corporate governance and compensation committees consist entirely of independent directors and we will not be required to have an annual performance evaluation of the nominating and corporate governance and compensation committees. See “Management.” Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the New York Stock Exchange corporate governance requirements.

Certain underwriters have interests in this offering beyond customary underwriting discounts and commissions; specifically, certain underwriters are affiliates of our controlling stockholder and another underwriter has an affiliate that will receive more than 5% of the net proceeds of this offering.

Apollo Global Securities, LLC, an underwriter of this offering, is an affiliate of Apollo, our controlling stockholder. Since Apollo beneficially owns more than 10% of our outstanding common stock, a “conflict of interest” is deemed to exist under Rule 5121(f)(5)(B) of the Conduct Rules of the Financial Industry Regulatory Authority, or FINRA. In addition, since an affiliate of Morgan Joseph TriArtisan LLC, an underwriter of this offering, is owned by Apollo Global Management, LLC which is an affiliate of Apollo, our controlling stockholder, a “conflict of interest” is deemed to exist under Rule 5121(f)(5)(B) of the Conduct Rules of FINRA. There may be a conflict of interest between their interests as underwriters (e.g., in negotiating the initial public offering price) and your interest as a purchaser. As affiliates of participants in this offering that may seek to realize the value of their investments in us, these underwriters could have interests beyond customary underwriting discounts and commissions. Since an affiliate of Goldman, Sachs & Co., an underwriter of this offering, will receive more than 5% of net offering proceeds (approximately $48.5 million) by virtue of their ownership of our 11.75% senior subordinated notes outstanding, a “conflict of interest” is deemed to exist under Rule 5121(f)(5)(C)(ii) of the Conduct Rules of FINRA. Accordingly, this offering will be made in compliance with the applicable provisions of Rule 5121. Pursuant to Rule 5121, a “qualified independent underwriter” (as defined in Rule 5121) must participate in the preparation of the prospectus and perform its usual standard of due diligence with respect to the registration statement and this prospectus. Credit Suisse Securities (USA) LLC has agreed to act as qualified independent underwriter for the offering and to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act of 1933, specifically including those inherent in Section 11 of the Securities Act. Although the qualified independent underwriter has participated in the preparation of the prospectus and conducted due diligence, we cannot assure you that this will adequately address any potential conflicts of interest. See “Underwriting (Conflicts of Interest).”

The price of our common stock may fluctuate significantly and you could lose all or part of your investment.

Volatility in the market price of our common stock may prevent you from being able to sell your common stock at or above the price you paid for your common stock. The market price for our common stock could fluctuate significantly for various reasons, including:

 

   

our operating and financial performance and prospects;

 

   

our quarterly or annual earnings or those of other companies in our industry;

 

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conditions that impact demand for our products and services;

 

   

future announcements concerning our business or our competitors’ businesses;

 

   

the public’s reaction to our press releases, other public announcements and filings with the U.S. Securities and Exchange Commission, or SEC;

 

   

changes in earnings estimates or recommendations by securities analysts who track our common stock or industry;

 

   

market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

 

   

strategic actions by us or our competitors, such as acquisitions or restructurings;

 

   

changes in government and environmental laws and regulation (or interpretation or enforcement thereof);

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

arrival or departure of key personnel;

 

   

the number of shares to be publicly traded after this offering;

 

   

sales of common stock by us, Apollo or its affiliated funds or members of our management team;

 

   

adverse resolution of new or pending litigation against us; and

 

   

changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events.

In addition, the stock market has experienced significant price and volume fluctuations in recent years. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industries. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially reduce our share price.

We currently have no plans to pay regular dividends on our common stock, so you may not receive funds without selling your common stock.

We currently have no plans to pay regular dividends on our common stock. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends, and other considerations that our board of directors deems relevant. The terms governing our outstanding debt also include limitations on the ability of our subsidiaries to pay dividends to us. Accordingly, you may have to sell some or all of your common stock in order to generate cash flow from your investment.

Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of shares of our common stock.

We may sell additional shares of common stock in subsequent public offerings or otherwise, including to finance acquisitions. We have 200,000,000 authorized shares of common stock, of which 90,524,593 shares will be outstanding upon consummation of this offering. The outstanding share number includes shares that we are selling in this offering, which may be resold immediately in the public market. Of the remaining outstanding shares, 65,591,251, or 98.1%, are restricted from immediate resale under the federal securities laws and the lock-up agreements with the underwriters described in the “Underwriting (Conflicts of Interest)” section of this

 

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prospectus, but may be sold into the market in the near future. These shares will become available for sale at various times following the expiration of the lock-up agreements, which, without the prior consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co. and Credit Suisse Securities (USA) LLC, is 180 days after the date of this prospectus, subject to certain exceptions. Immediately after the expiration of the lock-up period, the shares will be eligible for resale under Rule 144 or Rule 701 of the Securities Act of 1933, as amended (the “Securities Act”), subject to volume limitations and applicable holding period requirements.

As soon as practicable after the completion of this offering, we intend to file registration statements on Form S-8 under the Securities Act covering 10,894,373 shares of our common stock reserved for issuance upon exercise of outstanding options under our 2006 Stock Option Plan (the “2006 Option Plan”) or pursuant to options converted in connection with the Apollo acquisition (“Roll-Over Options”), 379,343 shares reserved for future issuance under the 2006 Option Plan and 8,350,000 shares of common stock reserved for issuance under the Rexnord Corporation 2012 Performance Incentive Plan (the “2012 Incentive Plan”) (including 937,000 shares of common stock subject to a stock option award to be granted to our President and Chief Executive Officer in connection with and conditioned upon the consummation of the offering with a per share exercise price at the per share initial public offering price for our common stock), our new long-term incentive plan. Accordingly, shares of our common stock registered under such registration statements will be available for sale in the open market upon exercise by the holders, subject to vesting restrictions, Rule 144 limitations applicable to our affiliates and the contractual lock-up provisions described below.

We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including any shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.

Our organizational documents may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium for their shares.

Provisions of our certificate of incorporation and bylaws may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our board of directors. These provisions include:

 

   

having a classified board of directors;

 

   

establishing limitations on the removal of directors;

 

   

prohibiting cumulative voting in the election of directors;

 

   

empowering only the board to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise, and requiring that, as long as Apollo continues to beneficially own at least 33 1/3% of our common stock, any vacancy resulting from the death, removal or resignation of an Apollo designee be filled by a majority of the remaining directors nominated by Apollo;

 

   

as long as Apollo continues to beneficially own more than 50.1% of our common stock, granting Apollo the right to increase the size of our board of directors and to fill the resulting vacancies at any time;

 

   

authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;

 

   

prohibiting stockholders from acting by written consent or calling a special meeting if less than 50.1% of our outstanding common stock is beneficially owned by Apollo;

 

   

requiring the approval of a majority of the directors nominated by Apollo voting on the matter to approve certain business combinations and certain other significant matters so long as Apollo beneficially owns at least 33 1/3% of our common stock; and

 

   

establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

 

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Our issuance of shares of preferred stock could delay or prevent a change in control of us. Our board of directors has the authority to cause us to issue, without any further vote or action by the stockholders, shares of preferred stock, par value $0.01 per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series. The issuance of shares of our preferred stock may have the effect of delaying, deferring or preventing a change in control without further action by the stockholders, even where stockholders are offered a premium for their shares.

Our bylaws will also require the approval of a majority of directors nominated by Apollo voting on the matter for certain important matters, including mergers and acquisitions, issuances of equity and the incurrence of debt, as long as Apollo beneficially owns at least 33 1/3% of our outstanding common stock. In addition, as long as Apollo beneficially owns a majority of our outstanding common stock, Apollo will be able to control all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and certain corporate transactions. See “Management—Apollo Approval of Certain Matters and Rights to Nominate Certain Directors.” Together, these charter, bylaw and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock. Furthermore, the existence of the foregoing provisions, as well as the significant common stock beneficially owned by Apollo and its rights to nominate a specified number of directors in certain circumstances, could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of us, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

You will experience an immediate and substantial dilution in the net tangible book value of the common stock you purchase.

Prior investors have paid substantially less per share than the price in this offering. We expect to have a net tangible book deficit after this offering of $16.03 per share. Based on an assumed initial public offering price of $19.00 per share, the midpoint of the estimated offering range set forth on the cover page of this prospectus, you will experience immediate and substantial dilution of approximately $35.03 per share in net tangible book value of the common stock you purchase in this offering. See “Dilution,” including the discussion of the effects on dilution from a change in the price of this offering.

Despite our substantial indebtedness, we may still be able to incur significantly more indebtedness, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

The terms of the indentures governing our senior notes and senior subordinated notes and our senior secured credit facilities contain restrictions on our ability to incur additional indebtedness. These restrictions are subject to a number of important qualifications and exceptions, and the indebtedness, if any, incurred in compliance with these restrictions could be substantial. Accordingly, we or our subsidiaries could incur significant additional indebtedness in the future. Additional leverage could have a material adverse effect on our business, financial condition, results of operations or cash flows and could increase the risks described in “Risks Related to Our Business—Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from making debt service payments,” “Risks Related to Our Business—Our debt agreements impose significant operating and financial restrictions, which could have a material adverse effect on our business, financial condition, results of operations or cash flows” and “Risks Related to Our Business—Because a substantial portion of our indebtedness bears interest at rates that fluctuate with changes in certain prevailing short-term interest rates, we are vulnerable to interest rate increases.”

 

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The additional requirements of having a class of publicly traded equity securities may strain our resources and distract management.

Even though RBS Global and Rexnord LLC currently file reports with the SEC, after the consummation of this offering, we will be subject to additional reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act. The Dodd-Frank Act, signed into law on July 21, 2010, effects comprehensive changes to public company governance and disclosures in the United States and will subject us to additional federal regulation. We cannot predict with any certainty the requirements of the regulations ultimately adopted or how the Dodd-Frank Act and such regulations will impact the cost of compliance for a company with publicly traded common stock. We are currently evaluating and monitoring developments with respect to the Dodd-Frank Act and other new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. We also expect that being a company with publicly traded common stock and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control for financial reporting. These requirements may place a strain on our systems and resources. Under Section 404 of the Sarbanes-Oxley Act, we will be required to include a report of management on our internal control over financial reporting in our Annual Reports on Form 10-K. After consummation of this offering, our independent public accountants auditing our financial statements must attest to the effectiveness of our internal control over financial reporting. This requirement will first apply to our Annual Report on Form 10-K for our year ending March 31, 2013. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. If we are unable to conclude that our disclosure controls and procedures and internal control over financial reporting are effective, or if our independent public accounting firm is unable to provide us with an unqualified report as to management’s assessment of the effectiveness of our internal control over financial reporting in future years, investors may lose confidence in our financial reports and our stock price may decline.

 

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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes “forward-looking statements” within the meaning of the federal securities laws that involve risks and uncertainties. Forward-looking statements include statements we make concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs and other information that is not historical information and, in particular, appear under the headings “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” When used in this prospectus, the words “estimates,” “expects,” “anticipates,” “projects,” “forecasts,” “plans,” “intends,” “believes,” “foresees,” “seeks,” “likely,” “may,” “might,” “will,” “should,” “goal,” “target” or “intends” and variations of these words or similar expressions (or the negative versions of any such words) are intended to identify forward-looking statements. All forward-looking statements are based upon information available to us on the date of this prospectus.

These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of our control, that could cause actual results to differ materially from the results discussed in the forward-looking statements, including, among other things, the matters discussed in this prospectus in the sections captioned “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Some of the factors that we believe could affect our results include:

 

   

the impact of our substantial indebtedness;

 

   

the effect of local, national and international economic, credit and capital market conditions on the economy in general, and on the industries in which we operate in particular;

 

   

access to available and reasonable financing on a timely basis;

 

   

our competitive environment;

 

   

dependence on independent distributors;

 

   

general economic and business conditions, market factors and our dependence on customers in cyclical industries;

 

   

the seasonality of our sales;

 

   

impact of weather on the demand for our products;

 

   

availability of financing for our customers;

 

   

changes in technology and manufacturing techniques;

 

   

loss of key personnel;

 

   

increases in cost of our raw materials and our possible inability to increase product prices to offset such increases;

 

   

the loss of any significant customer;

 

   

inability to make necessary capital expenditures;

 

   

risks associated with international operations, which have increased in size due to our recent acquisitions;

 

   

the costs of environmental compliance and/or the imposition of liabilities under environmental, health and safety laws and regulations;

 

   

the costs of asbestos claims;

 

   

the costs of Zurn’s class action litigation;

 

   

a declining construction market;

 

   

solvency of insurance carriers;

 

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changes in governmental laws and regulations, or the interpretation or enforcement thereof, including for environmental matters;

 

   

viability of key suppliers;

 

   

reliance on intellectual property;

 

   

potential product liability claims;

 

   

work stoppages by unionized employees;

 

   

integration of recent and future acquisitions into our business;

 

   

changes in pension funding requirements;

 

   

control by our principal equityholders; and

 

   

the other factors set forth herein, including those set forth under “Risk Factors.”

There are likely other factors that could cause our actual results to differ materially from the results referred to in the forward-looking statements. All forward-looking statements attributable to us apply only as of the date of this prospectus and are expressly qualified in their entirety by the cautionary statements included in this prospectus. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events, except as required by law.

 

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USE OF PROCEEDS

Assuming an initial public offering price of $19.00 per share, we estimate that we will receive net proceeds from this offering of approximately $421.3 million, after deducting underwriting discounts and commissions and other estimated expenses of $28.7 million payable by us. This estimate assumes an initial public offering price of $19.00 per share, the midpoint of the range set forth on the cover page of this prospectus. A $1.00 increase (decrease) in the assumed initial public offering price of $19.00 per share would increase (decrease) the net proceeds to us from this offering by $22.3 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

We intend to use the net proceeds that we receive (i) to redeem up to $300.0 million in aggregate principal amount of our 11.75% senior subordinated notes due 2016 plus pay early redemption premiums of $17.6 million and approximately $15 million of accrued interest, (ii) to pay Apollo or its affiliates a fee of $15.0 million (plus any unreimbursed expenses) upon the consummation of this offering in connection with the termination of our management services agreement, as described under “Certain Relationships and Related Party Transactions—Management Services Fee,” and (iii) for general corporate purposes. As of December 31, 2011, we had $300.0 million in aggregate principal amount of our 11.75% senior subordinated notes outstanding, which bear interest at a rate of 11.75% per annum and mature on August 1, 2016.

Any net proceeds used to redeem all $300.0 million of outstanding aggregate principal amount of our 11.75% senior subordinated notes would be first contributed by the Company to RBS Global so that RBS Global may effect such redemption. Pending the application of the net proceeds of this offering, as described above, all or a portion of the net proceeds of this offering may be invested by us in short-term interest bearing investments.

Our affiliates, including Mr. Sherman (our Non-Executive Chairman) and Messrs. Adams and Jeyarajah (both of whom are executive officers), who are holders of our 11.75% senior subordinated notes will receive net proceeds from this offering in connection with the repayment of such indebtedness. See “Certain Relationships and Related Party Transactions—Debt Transactions and Purchases of Debt Securities.” As of the date of this prospectus these affiliates held $3.8 million of our 11.75% senior subordinated notes, all of which will be repaid with the net proceeds of this offering. In addition, pursuant to the terms of the indebtedness being repaid, our affiliates that hold such indebtedness would be entitled to receive accrued interest and prepayment premiums in respect of such indebtedness. As such, assuming that our affiliates neither increase nor decrease their holdings of the indebtedness to be repaid, we estimate that they would receive $4.0 million in the aggregate upon completion of this offering and repayment of such indebtedness, excluding any accrued interest that will be paid at the date of redemption. Additionally, affiliates of certain of the underwriters are or may become holders of the 11.75% senior subordinated notes outstanding and, as a result, will receive a portion of the proceeds from this offering when such senior subordinated notes are repaid. See “Underwriting (Conflicts of Interest)—Relationships.”

 

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DIVIDEND POLICY

We currently intend to retain all future earnings, if any, for use in the operation of our business and to fund future growth. In addition, our senior secured credit facilities and the indentures governing our senior notes limit our ability to pay dividends or other distributions on our common stock. See “Description of Indebtedness.” The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including factors such as our results of operations, financial condition and requirements, business conditions and covenants under any applicable contractual arrangements.

 

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CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2011:

 

   

on an actual basis;

 

   

on a pro forma basis giving effect to the refinancing of the senior secured credit facilities as described in “Summary—Recent Developments” above, which occurred on March 15, 2012;

 

   

on a pro forma, as adjusted, basis giving effect to our sale of 23,684,211 shares of common stock in this offering at an assumed offering price of $19.00, which is the midpoint of the range listed on the cover page of this prospectus, and our expected use of the net proceeds of this offering, as well as the refinancing of the senior secured credit facilities, which occurred on March 15, 2012.

You should read this table in conjunction with our financial statements and related notes for the third quarter ended December 31, 2011, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Use of Proceeds” included elsewhere in this prospectus.

 

      As of December 31, 2011 (1)  
      Actual     Pro forma for
refinancing of
credit facilities
    Pro forma as
adjusted (2)
 

Debt:

      

Term loans due 2012 (3)

   $ 760.0      $ -      $ -   

Term loans due 2018 (4)

     -        945.3        945.3   

8.50% Senior notes due 2018

     1,145.0        1,145.0        1,145.0   

11.75% Senior subordinated notes due 2016

     300.0        300.0        -   

Borrowing under revolving credit facility (3)

     89.8        -        -   

Borrowings under accounts receivable securitization (3)

     75.0        -        -   

8.875% Senior notes due 2016

     2.0        2.0        2.0   

Other (5)

     32.3        32.3        32.2   
  

 

 

   

 

 

   

 

 

 

Total

   $ 2,404.1      $ 2,424.6      $ 2,124.5   
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity (deficit):

      

Common stock, $0.01 par value; 200,000,000 shares authorized; and 67,627,815 shares issued, actual; 91,312,026 shares issued; as adjusted (6)

  

 

0.7

  

    0.7        0.9   

Additional paid-in capital

     295.5        295.5        716.6   

Retained deficit (7)

     (370.2     (374.4     (396.6

Accumulated other comprehensive income

     8.2        8.2        8.2   

Treasury stock at cost (900,904 shares)

     (6.3     (6.3     (6.3
  

 

 

   

 

 

   

 

 

 

Total Rexnord stockholders’ equity (deficit)

     (72.1     (76.3     322.8   

Non-controlling interest

     (1.0     (1.0    

 

(1.0

 

 

  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (73.1     (77.3     321.8   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 2,331.0      $ 2,347.3      $ 2,446.3   
  

 

 

   

 

 

   

 

 

 

 

 

(1) As of December 31, 2011, we had cash and cash equivalents of $225.6 million on an actual basis, $232.3 million on a pro forma basis, for the refinancing of our term loans, and $306.1 million, on a pro forma basis, as adjusted to give effect to the offering.
(2)

A $1.00 increase (decrease) in the assumed initial public offering price of $19.00 per share (the midpoint of the range set forth on the cover page of this prospectus) would increase (decrease) each of cash, additional paid-in capital and total capitalization by $22.3 million, assuming the number of shares offered by us, as set

 

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  forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.
(3) See “Summary—Recent Developments” for information related to our refinancing of the senior secured credit facilities and related debt repayments, all of which occurred on March 15, 2012.
(4) Includes unamortized original issue discount of $4.75 million as of March 15, 2012.
(5) Primarily consists of $23.4 million of loans payable as a result of the New Market Tax Credit financing agreements ($17.9 million of which is derived from funds provided by us in the form of a loan receivable), as well as foreign borrowings and capitalized lease obligations. For further information regarding the New Market Tax Credit financing, see Note 11 to our unaudited condensed consolidated financial statements for the third quarter ended December 31, 2011 included elsewhere in this prospectus.
(6) We expect to complete a 4.1627 for one stock split of our common stock prior to the completion of this offering. All share amounts have been retroactively adjusted to give effect to this stock split.
(7) Pro forma, as adjusted retained deficit reflects the impact of this offering and the intended use of proceeds. The pro forma amounts of $(374.4) and $(396.6) include the impact on retained deficit of writing off $10.3 million of deferred financing costs ($6.8 million related to the refinancing of our credit facilities and $3.5 million related to the redemption of our 11.75% senior subordinated notes due 2016). Additionally, the “pro forma as adjusted” amount also includes the impact of a $17.6 million tender premium to be paid to redeem our 11.75% senior subordinated notes. All amounts have been recorded net of applicable taxes and will be expensed in the period in which they are incurred.

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of the common stock to be sold in this offering exceeds the net tangible book value per share of common stock after the offering. Net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding at that date. There will be 10,894,373 shares of our common stock reserved for issuance under Roll-Over Options and existing awards under our 2006 Option Plan, 379,343 shares of our common stock reserved for future awards under our 2006 Option Plan and 8,350,000 shares of our common stock available for future awards under our 2012 Incentive Plan (including 937,000 shares of common stock subject to a stock option award to be granted to our President and Chief Executive Officer in connection with and conditioned upon the consummation of the offering with a per share exercise price at the per share initial public offering price for our common stock) as of the consummation of this offering.

Our net tangible book deficit as of December 31, 2011 was $1,838.7 million, or $27.53 per share. After giving effect to the receipt and our intended use of approximately $421.3 million of estimated net proceeds from our sale of 23,684,211 shares of common stock in this offering at an assumed offering price of $19.00 per share, which represents the midpoint of the range set forth on the front cover of this prospectus, our adjusted net tangible book deficit as of December 31, 2011 would have been approximately $1,449.9 million, or $16.03 per share. This represents an immediate increase in pro forma net tangible book value of $11.50 per share to existing stockholders and an immediate dilution of $35.03 per share to new investors purchasing shares of common stock in the offering. The following table illustrates this substantial and immediate per share dilution to new investors:

 

     Per Share  

Assumed initial public offering price per share

   $ 19.00  

Net tangible book value (deficit) before the offering

     (27.53

Increase per share attributable to investors in the offering

     11.50   
  

 

 

 

Pro forma net tangible book value (deficit) after the offering

     (16.03
  

 

 

 

Dilution per share to new investors

   $ 35.03   
  

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $19.00 per share would increase (decrease) our pro forma net tangible book value by $22.3 million, the as adjusted net tangible book value per share after this offering by $0.23 per share and the dilution per share to new investors in this offering by $0.23, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

The following table summarizes on an as adjusted basis as of December 31, 2011, giving effect to:

 

   

the total number of shares of common stock purchased from us;

 

   

the total consideration paid to us, assuming an initial public offering price of $19.00 per share (before deducting the estimated underwriting discount and commissions and offering expenses payable by us in connection with this offering); and

 

   

the average price per share paid by existing stockholders and by new investors purchasing shares in this offering:

 

     Shares Purchased     Total Consideration     Average Price  Per
Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     66,840,382         73.8   $ 746,978,272         62.4   $ 11.18   

Investors in the offering

     23,684,211         26.2     450,000,009         37.6     19.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     90,524,593         100   $ 1,196,978,281         100   $ 13.22   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $19.00 per share (the midpoint of the range set forth on the cover page of this prospectus) would increase (decrease) total consideration paid by

 

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new investors and the average price per share by $23,684,211 and $0.26, respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and without deducting underwriting discounts and commissions and estimated expenses payable by us.

The tables and calculations above assume no exercise of stock options outstanding as of March 19, 2012 to purchase 10,894,373 shares of common stock at a weighted average exercise price of $5.28 per share. If these options were exercised at the weighted average exercise price, the additional dilution per share to new investors would be $6.46.

The tables and calculations above also assume no exercise of the underwriters’ option to purchase              additional shares. If the underwriters exercise their option to purchase 3,552,631 additional shares in full, then new investors would purchase 27,236,842 shares, or approximately 29% of shares outstanding, the total consideration paid by new investors would increase to $517,499,998, or 41% of the total consideration paid (based on the midpoint of the range set forth on the cover page of this prospectus), and the additional dilution per share to new investors would be $1.16.

 

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SELECTED FINANCIAL INFORMATION

The selected financial information as of March 31, 2010 and 2011 and for our fiscal years ended March 31, 2009, 2010 and 2011 has been derived from our consolidated financial statements and related notes thereto, which have been audited by Ernst & Young LLP, an independent registered public accounting firm, and are included elsewhere in this prospectus. The selected financial information as of and for the nine months ended January 1, 2011 and December 31, 2011 has been derived from our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this prospectus. Results for the nine months ended January 1, 2011 and December 31, 2011 are not necessarily indicative of the results that may be expected for the entire fiscal year. The financial information for the years ended March 31, 2007 and 2008 has also been derived from financial statements audited by Ernst & Young LLP. The period from April 1, 2006 to July 21, 2006 includes the accounts of RBS Global prior to the acquisition by Apollo. The period from July 22, 2006 to March 31, 2007 includes the accounts of RBS Global after the Apollo acquisition. These two periods account for our fiscal year ended March 31, 2007. We refer to the financial statements prior to the Apollo acquisition as “Predecessor.” The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

    Predecessor (1)          Successor  

(in millions, except share and

per share amounts)

  Period from
April 1,  2006
through
July  21,
2006
         Period from
July 22,  2006
through
March 31,
2007  (2)
    Year
Ended
March 31,
2008
(3) (4)
    Year
Ended
March 31,
2009
(4) (5)
    Year
Ended
March  31,

2010 (4)
    Year
Ended
March  31,

2011
    Nine
Months
Ended
January 1,
2011
    Nine Months
Ended
December 31,
2011 (6)
 

Statement of Operations:

                   

Net Sales

  $ 334.2          $ 921.5      $ 1,853.5      $ 1,882.0      $ 1,510.0      $ 1,699.6      $ 1,239.4      $ 1,423.8   

Cost of Sales

    237.7            628.2        1,250.4        1,290.1        994.4        1,102.8        807.0        931.3   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

    96.5            293.3        603.1        591.9        515.6        596.8        432.4        492.5   

Selling, General and Administrative Expenses

    63.1            159.3        313.3        467.8        297.7        329.1        237.2        276.3   

(Gain) on Canal Street Facility Accident, net (7)

    —              (6.0     (29.2     —          —          —          —          —     

Intangible Impairment Charges

    —              —          —          422.0        —          —          —          —     

Transaction-Related Costs (8)

    62.7            —          —          —          —          —          —          —     

Restructuring and Other Similar Costs

    —              —          —          24.5        6.8        —          —          2.7   

Amortization of Intangible Assets

    5.0            26.9        49.9        48.9        49.7        48.6        36.4        37.6   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Income from Operations

    (34.3         113.1        269.1        (371.3     161.4        219.1        158.8        175.9   

Non-Operating Income (Expense):

                   

Interest Expense, net

    (21.0         (109.8     (254.3     (230.4     (194.2     (180.8     (136.7     (132.3

Gain (Loss) on Debt Extinguishment

    —              —          —          103.7        167.8        (100.8     (100.8     (0.7

Loss on Divestiture

    —              —          (11.2     —          —          —          —          (6.9

Other (Expense) Income, net

    (0.4         5.7        (5.3     (3.0     (16.4     1.1        (2.8     (10.8
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Income Before Income Taxes

    (55.7         9.0        (1.7     (501.0     118.6        (61.4     (81.5     25.2   

(Benefit) Provision for Income Taxes

    (16.1         9.2        (1.3     (72.0     30.5        (10.1     (27.5     3.9   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss) Income

  $ (39.6       $ (0.2   $ (0.4   $ (429.0   $ 88.1      $ (51.3   $ (54.0   $ 21.3   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss) Income per share:

                   

Basic

    NM          $ —        $ (0.01   $ (6.43   $ 1.32      $ (0.77   $ (0.81   $ 0.32   

Diluted

    NM          $ —        $ (0.01   $ (6.43   $ 1.27      $ (0.77   $ (0.81   $ 0.30   

Weighted-average number of shares outstanding:

                   

Basic

    NM            44,541        65,771        66,728        66,753        66,757        66,770        66,724   

Effect of dilutive stock options

    NM            —          —          —          2,410        —          —          5,266   
   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    NM            44,541        65,771        66,728        69,163        66,757        66,770        71,990   
   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Other Data:

                   

Net Cash (Used for) Provided by:

                   

Operating Activities

    (4.4         63.4        232.7        155.0        155.5        164.5        76.5        60.7   

Investing Activities

    (15.7         (1,925.5     (121.6     (54.5     (22.0     (35.5     (17.6     (304.7

Financing Activities

    8.2            1,909.0        (15.6     36.6        (161.5     (6.9     (5.4     81.0   

Depreciation and Amortization of Intangible Assets

    19.0            63.0        104.1        109.6        109.3        106.1        79.6        83.8   

Capital Expenditures

    11.7            28.0        54.9        39.1        22.0        37.6        19.7        39.0   

 

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     March 31,     December 31,  
(in millions)    2007      2008      2009     2010     2011     2011  

Balance Sheet Data:

              

Cash and Cash Equivalents

   $ 58.2       $ 156.3       $ 287.9      $ 263.9      $ 391.0      $ 225.6   

Working Capital (9)

     368.5         447.1         555.2        481.9        483.6        511.3   

Total Assets

     3,783.4         3,826.3         3,218.8        3,016.5        3,099.7        3,207.4   

Total Debt (10)

     2,496.9         2,536.8         2,526.1        2,215.5        2,314.1        2,404.1   

Stockholders’ Equity (Deficit)

     256.3         273.1         (177.8     (57.5     (88.2     (73.1

 

(1) Consolidated financial data for all periods subsequent to July 21, 2006 (the date of the Apollo acquisition) reflects the fair value of assets acquired and liabilities assumed as a result of that transaction. The comparability of the operating results for the periods presented is affected by the revaluation of the assets acquired and liabilities assumed on the date of the Apollo acquisition.
(2) Consolidated financial data as of March 31, 2007 and for the period from July 22, 2006 through March 31, 2007 reflects the estimated fair value of assets acquired and liabilities assumed in connection with the Zurn acquisition on February 7, 2007. As a result, the comparability of the operating results for the periods presented is affected by the revaluation of the assets acquired and liabilities assumed on the date of both the Apollo and Zurn acquisitions.
(3) Consolidated financial data as of and for the year ended March 31, 2008 reflects the estimated fair value of assets acquired and liabilities assumed in connection with the GA acquisition on January 31, 2008. As a result, the comparability of the operating results for the periods presented is affected by the revaluation of the assets acquired and liabilities assumed on the date of the GA acquisition.
(4) Financial data for fiscal 2008 to 2010 has been adjusted for our voluntary change in accounting for actuarial gains and losses related to its pension and other postretirement benefit plans. The change in accounting did not have any impact on the financial data prior to fiscal 2008. See Note 2 to our audited consolidated financial statements included elsewhere in this prospectus.
(5) Consolidated financial data as of and for the year ended March 31, 2009 reflects the estimated fair value of assets acquired and liabilities assumed in connection with the Fontaine acquisition on February 27, 2009. As a result, the comparability of the operating results for the periods presented is affected by the revaluation of the assets acquired and liabilities assumed on the date of the Fontaine acquisition.
(6) Consolidated financial data as of and for the nine months ended December 31, 2011 reflects the acquisitions of Autogard subsequent to April 2, 2011 and VAG subsequent to October 10, 2011 and excludes the assets associated with a divestiture of a German subsidiary on July 19, 2011. As a result, the comparability of the operating results for the period presented is affected by the revaluation of the assets acquired and the liabilities assumed on the date of the acquisitions and the assets divested on the date of the divestiture.
(7) We recognized a net gain of $35.2 million related to an accident at our Canal Street (Wisconsin) facility from the date of the accident (December 6, 2006) through March 31, 2008. $14.2 million of the net gain represents the excess property insurance recoveries (at replacement value) over the write-off of tangible assets (at net book value) and other direct expenses related to the accident. The remaining $21.0 million gain is comprised of business interruption insurance recoveries.
(8) Transaction-related costs represent expenses incurred in connection with the Apollo acquisition on July 21, 2006.
(9) Represents total current assets less total current liabilities.
(10) Total debt represents long-term debt plus the current portion of long-term debt.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of results of operations and financial condition covers periods prior to the acquisition of Fontaine-Alliance Inc. and affiliates (“Fontaine”), Autogard Holdings Limited and affiliates (“Autogard”) and VAG Holding GmbH and affiliates (“VAG”), as well as after the divestiture of a non-material, underperforming business (the “divestiture”). Our financial performance includes Fontaine subsequent to February 28, 2009, Autogard subsequent to April 2, 2011, VAG subsequent to October 10, 2011, and excludes the divestiture subsequent to July 19, 2011. Accordingly, the discussion and analysis of fiscal 2009 does not fully reflect the impact of the Fontaine transaction and the discussion and analysis for years prior to fiscal 2012 does not reflect the impact of the Autogard and VAG transactions or the divestiture. You should read the following discussion of our results of operations and financial condition together with the “Selected Financial Information” and all of our consolidated financial statements and related notes included elsewhere in this prospectus. Our fiscal year is the year ending March 31 of the corresponding calendar year. For example, our fiscal year 2011 means the period from April 1, 2010 to March 31, 2011 and the third quarter and first nine months of fiscal 2012 means the quarter and nine months ended December 31, 2011. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of this prospectus. Actual results may differ materially from those contained in any forward-looking statements. See also “Cautionary Notice Regarding Forward-Looking Statements” found elsewhere in this prospectus.

The information contained in this section is provided as a supplement to the audited consolidated financial statements and the related notes included elsewhere in this prospectus to help provide an understanding of our financial condition, changes in our financial condition and results of our operations. This section is organized as follows:

Company Overview. This section provides a general description of our business.

Restructuring and Other Similar Costs. This section provides a description of the restructuring actions we executed to reduce operating costs and improve profitability.

Financial Statement Presentation. This section provides a brief description of certain items and accounting policies that appear in our financial statements and general factors that impact these items.

Critical Accounting Estimates. This section discusses the accounting policies and estimates that we consider to be important to our financial condition and results of operations and that require significant judgment and estimates on the part of management in their application.

Results of Operations. This section provides an analysis of our results of operations for our fiscal quarters and nine months ended January 1, 2011 and December 31, 2011, and our fiscal years ended March 31, 2009, 2010 and 2011, in each case as compared to the prior period’s performance.

Non-GAAP Financial Measure. This section provides an explanation of a certain Non-GAAP financial measure we use.

Covenant Compliance. This section provides a description of certain restrictive covenants with which our senior secured credit facilities require us to comply.

Liquidity and Capital Resources. This section provides an analysis of our cash flows for our nine months ended January 1, 2011 and December 31, 2011, and our fiscal years ended March 31, 2009, 2010 and 2011, as well as a discussion of our indebtedness and its potential effects on our liquidity.

Tabular Disclosure of Contractual Obligations. This section provides a discussion of our commitments as of March 31, 2011.

Quantitative and Qualitative Disclosures about Market Risk. This section discusses our exposure to potential losses arising from adverse changes in interest rates and commodity prices.

 

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Company Overview

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 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.

Restructuring and Other Similar Costs

Beginning with the quarter ended September 28, 2008 and through fiscal 2010, we executed certain restructuring actions to reduce operating costs and improve profitability. As these restructuring actions were substantially completed during fiscal 2010, we did not record any restructuring charges during the year ended March 31, 2011. Comparatively, we recorded restructuring charges of $24.5 million and $6.8 million for the years ended March 31, 2009 and 2010, respectively, primarily consisting of severance costs related to workforce reductions.

During the third quarter ended December 31, 2011, we commenced certain restructuring actions to reduce operating costs while modifying our footprint to reflect changes in the markets we serve, as well as the impact of acquisitions on our overall manufacturing capacity. The restructuring actions primarily resulted in workforce reductions, lease termination, and the consolidation of certain North American water and waste water treatment facilities. We recorded restructuring charges of $2.7 million during the quarter ended December 31, 2011. These restructuring actions should be completed by March 31, 2012 and are expected to result in an additional cash restructuring charge of between $2.0 and $3.0 million.

Financial Statement Presentation

The following paragraphs provide a brief description of certain items and accounting policies that appear in our financial statements and general factors that impact these items.

Net Sales. Net sales represent gross sales less deductions taken for sales returns and allowances and incentive rebate programs.

Cost of Sales. Cost of sales includes all costs of manufacturing required to bring a product to a ready for sale condition. Such costs include direct and indirect materials, direct and indirect labor costs, including fringe benefits, supplies, utilities, depreciation, insurance, pension and postretirement benefits, information technology costs and other manufacturing related costs.

The largest component of our cost of sales is cost of materials, which represented approximately 36% of net sales in fiscal 2011. The principal materials used in our Process & Motion Control manufacturing processes are commodities that are available from numerous sources and include sheet, plate and bar steel, castings, forgings, high-performance engineered plastics and a wide variety of other components. Within Water Management, we purchase a broad range of materials and components throughout the world in connection with our manufacturing activities. Major raw materials and components include bar steel, brass, castings, copper, forgings, high-performance engineered plastic, plate steel, resin, sheet plastic and zinc. We have a strategic sourcing program to significantly reduce the number of direct and indirect suppliers we use and to lower the cost of purchased materials.

The next largest component of our cost of sales is direct and indirect labor, which represented approximately 16% of net sales in fiscal 2011. Direct and indirect labor and related fringe benefit costs are susceptible to inflationary trends.

 

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Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily includes sales and marketing, finance and administration, engineering and technical services and distribution. Our major cost elements include salary and wages, fringe benefits, pension and postretirement benefits, insurance, depreciation, advertising, travel and information technology costs.

Critical Accounting Estimates

The methods, estimates and judgments we use in applying our critical accounting policies have a significant impact on the results we report in our consolidated financial statements. We evaluate our estimates and judgments on an on-going basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely event that would result in materially different amounts being reported.

We believe the following accounting policies are the most critical to us in that they are important to our financial statements and they require our most difficult, subjective or complex judgments in the preparation of our consolidated financial statements.

Revenue recognition. Net sales are recorded upon transfer of title and risk of product loss to the customer. Net sales relating to any particular shipment are based upon the amount invoiced for the delivered goods less estimated future rebate payments and sales returns which are based upon historical experience. Revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. The value of returned goods during each of the years ended March 31, 2009, 2010 and 2011 was approximately 1.0% or less of net sales. Other than a standard product warranty, there are no other significant post-shipment obligations.

Receivables. Receivables are stated net of allowances for doubtful accounts of $9.6 million at March 31, 2010 and $5.3 million at March 31, 2011. On a regular basis, we evaluate our receivables and establish the allowance for doubtful accounts based on a combination of specific customer circumstances and historical write-off experience. Credit is extended to customers based upon an evaluation of their financial position. Generally, advance payment is not required. Credit losses are provided for in the consolidated financial statements and consistently have been within management’s expectations.

Inventory. Inventories are stated at the lower of cost or market. Market is determined based on estimated net realizable values. Approximately 70% of the Company’s total inventories as of March 31, 2010 and 2011 were valued using the “last-in, first-out” (LIFO) method. All remaining inventories are valued using the “first-in, first-out” (FIFO) method. The valuation of inventories includes material, labor and overhead and requires management to determine the amount of manufacturing variances to capitalize into inventories. We capitalize material, labor and overhead variances into inventories based upon estimates of key drivers, which generally include raw material purchases (for material variances), standard labor (for labor variances) and calculations of inventory turnover (for overhead variances).

In some cases we have determined a certain portion of our inventories are excess or obsolete. In those cases, we write down the value of those inventories to their net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. The total write-down of inventories charged to expense was $17.2 million, $7.1 million, and $3.8 million, during fiscal 2009, 2010, and 2011, respectively. The reduction in inventory write-downs charged to expense in fiscal 2010 and 2011 relates to decreased levels of excess and obsolete inventory given the stabilization in market conditions that were the cause of significant destocking throughout fiscal 2009.

 

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Impairment of intangible assets and tangible fixed assets. Our intangible assets and tangible fixed assets are held at historical cost, net of depreciation and amortization, less any provision for impairment.

Intangible assets are amortized over the shorter of their legal life or estimated useful life as follows:

 

Trademarks and tradenames    No amortization
(indefinite life)

Patents

   2 to 20 years

Customer Relationships

   3 to 15 years

Non-compete

   2 to 5 years

Tangible fixed assets are depreciated to their residual values on a straight-line basis over their estimated useful lives as follows:

 

Land    No depreciation

Buildings and improvements

   10 to 30 years

Machinery and equipment

   5 to 10 years

Computer hardware and software

   3 to 5 years

An impairment review of specifically identifiable amortizable intangible or tangible fixed assets is performed if an indicator of impairment, such as an operating loss or cash outflow from operating activities or a significant adverse change in the business or market place, exists. Estimates of future cash flows used to test the asset for impairment are based on current operating projections extended to the useful life of the asset group and are, by their nature, subjective.

Our recorded goodwill and indefinite lived intangible assets are not amortized but are tested annually for impairment or whenever circumstances indicate that impairment may exist using a discounted cash flow methodology based on future business projections and a market value approach. The discount rate utilized within our impairment test is based upon the weighted average cost of capital of comparable public companies.

During the year ended March 31, 2009, we recorded a non-cash pre-tax impairment charge associated with goodwill and identifiable intangible assets of $422.0 million, of which $319.3 million related to goodwill impairment and $102.7 million related to other identifiable intangible asset impairments. See Note 8 to our audited consolidated financial statements included elsewhere in this prospectus for more information regarding the prior year impairment charge.

We expect to recognize amortization expense on the intangible assets subject to amortization of $49.7 million in fiscal 2012, $49.7 million in fiscal 2013, $49.6 million in fiscal 2014, $49.3 million in fiscal 2015, and $48.9 million in fiscal 2016.

Retirement benefits. We have significant pension and post-retirement benefit income and expense and assets/liabilities that are developed from actuarial valuations. These valuations include key assumptions regarding discount rates, expected return on plan assets, mortality rates, merit and promotion increases and the current health care cost trend rate. We consider current market conditions in selecting these assumptions. Changes in the related pension and post-retirement benefit income/costs or assets/liabilities may occur in the future due to changes in the assumptions and changes in asset values.

During the fourth quarter of fiscal 2011, we voluntarily changed our method of accounting for actuarial gains and losses related to our pension and other post-retirement benefit plans. Previously, we recognized actuarial gains and losses as a component of Stockholders’ Equity on the consolidated balance sheets and amortized the actuarial gains and losses over participants’ average remaining service period, or average remaining life expectancy, when all or almost all plan participants are inactive, as a component of net periodic benefit cost if the unrecognized gain or loss exceeded 10 percent of the greater of the market-related value of plan assets or the plan’s projected benefit obligation at the beginning of the year (the “corridor”). Under the new

 

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method, the net actuarial gains or losses in excess of the corridor will be recognized immediately in operating results during the fourth quarter of each fiscal year (or upon any re-measurement date). Net periodic benefit costs recorded on a quarterly basis would continue to primarily be comprised of service and interest cost, amortization of unrecognized prior service cost and the expected return on plan assets. While the historical method of recognizing actuarial gains and losses was considered acceptable, we believe this method is preferable as it accelerates the recognition of actuarial gains and losses outside of the corridor. See Note 2 to our audited consolidated financial statements included elsewhere in this prospectus for a presentation of our operating results before and after the application of this accounting change.

The obligation for postretirement benefits other than pension also is actuarially determined and is affected by assumptions including the discount rate and expected future increase in per capita costs of covered postretirement health care benefits. Changes in the discount rate and differences between actual and assumed per capita health care costs may affect the recorded amount of the expense in future periods.

Income taxes. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and recording the related deferred tax assets and liabilities.

We assess our income tax positions and record tax liabilities for all years subject to examination based upon management’s evaluation of the facts and circumstances and information available at the reporting dates. For those income tax positions where it is more-likely-than-not that a tax benefit will be sustained upon the conclusion of an examination, we have recorded the largest amount of tax benefit having a cumulatively greater than 50% likelihood of being realized upon ultimate settlement with the applicable taxing authority, assuming that it has full knowledge of all relevant information. For those tax positions which do not meet the more-likely-than-not threshold regarding the ultimate realization of the related tax benefit, no tax benefit has been recorded in the financial statements. In addition, we have provided for interest and penalties, as applicable, and record such amounts as a component of the overall income tax provision.

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, net operating losses, tax credits and other carryforwards. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. As a result of this review, we have established a valuation allowance against substantially all of our deferred tax assets relating to foreign loss carryforwards, state net operating loss and foreign tax credit carryforwards.

Commitments and Contingencies. We are subject to proceedings, lawsuits and other claims related to environmental, labor, product and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. We determine the amount of reserves needed, if any, for each individual issue based on our professional knowledge and experience and discussions with legal counsel. The required reserves may change in the future due to new developments in each matter, the ultimate resolution of each matter or changes in approach, such as a change in settlement strategy.

Through acquisitions, we have assumed presently recorded and potential future liabilities relating to product liability, environmental and other claims. We have recorded reserves for claims related to these obligations when appropriate and, on certain occasions, have obtained the assistance of an independent actuary in the determination of those reserves. If actual experience deviates from our estimates, we may need to record adjustments to these liabilities in future periods.

Warranty Reserves. Reserves are recorded on our consolidated balance sheets to reflect our contractual liabilities relating to warranty commitments to our customers. We provide warranty coverage of various lengths and terms to our customers depending on standard offerings and negotiated contractual agreements. We record an estimate for warranty expense at the time of sale based on historical warranty return rates and repair costs.

 

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Should future warranty experience differ materially from our historical experience, we may be required to record additional warranty reserves which could have a material adverse effect on our results of operations in the period in which these additional reserves are required.

Environmental Liabilities. We accrue an estimated liability for each environmental matter when the likelihood of an unfavorable outcome is probable and the amount of loss associated with such unfavorable outcome is reasonably estimable. We presume that a matter is probable of an unfavorable outcome if (a) litigation has commenced or a claim has been asserted or if commencement of litigation or assertion of a claim is probable and (b) if we are somehow associated with the site. In addition, if the reporting entity has been named as a PRP, an unfavorable outcome is presumed.

Estimating environmental remediation liabilities involves an array of issues at any point in time. In the early stages of the process, cost estimates can be difficult to derive because of uncertainties about a variety of factors. For this reason, estimates developed in the early stages of remediation can vary significantly, and, in many cases, early estimates later require significant revision. The following are some of the factors that are integral to developing cost estimates:

 

   

the extent and types of hazardous substances at a site;

 

   

the impact, if any, on natural resources or third parties;

 

   

the range of technologies that can be used for remediation;

 

   

evolving standards of what constitutes acceptable remediation; and

 

   

the number and financial condition of other PRPs and the extent of their responsibility for the remediation.

An estimate of the range of an environmental remediation liability typically is derived by combining estimates of various components of the liability, which themselves are likely to be ranges. At the early stages of the remediation process, particular components of the overall liability may not be reasonably estimable. This fact does not preclude our recognition of a liability. Rather, the components of the liability that can be reasonably estimated are viewed as a surrogate for the minimum in the range of our overall liability. Estimated legal and consulting fees are included as a component of our overall liability.

Asbestos Claims and Insurance for Asbestos Claims. As noted in Note 18 to our consolidated financial statements included elsewhere in this prospectus, certain Water Management subsidiaries are subject to asbestos litigation. As a result, we have recorded a liability for pending and potential future asbestos claims, as well as a receivable for insurance coverage of such liability. The valuation of our potential asbestos liability was based on the number and severity of future asbestos claims, future settlement costs, and the effectiveness of defense strategies and settlement initiatives.

The present estimate of our asbestos liability assumes (i) our continuous vigorous defense strategy will remain effective; (ii) new asbestos claims filed annually against Zurn will decline modestly through the next ten years; (iii) the values by disease will remain consistent with past experience and (iv) our insurers will continue to pay defense costs without eroding the coverage amounts of our insurance policies. Our potential asbestos liability could be adversely affected by changes in law and other factors beyond our control. Further, while our current asbestos liability is based on an estimate of claims through the next ten years, such liability may continue beyond that time period and such liability could be substantial.

We estimate that our available insurance to cover our potential asbestos liability as of the end of fiscal 2011 is greater than our potential asbestos liability. This conclusion was reached after considering our experience in asbestos litigation, the insurance payments made to date by our insurance carriers, existing insurance policies, the industry ratings of the insurers and the advice of insurance coverage counsel with respect to applicable insurance coverage law relating to the terms and conditions of those policies. We used these same considerations when evaluating the recoverability of our receivable for insurance coverage of potential asbestos claims.

 

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Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board issued an update to Accounting Standards Codification (“ASC”) No. 350, “Intangibles—Goodwill and Other” (“ASC 350”), which now permits entities to initially perform a qualitative assessment on goodwill impairment to assess whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with earlier adoption permitted. The implementation of this guidance is not expected to have a material impact on our results of operations, financial position, or cash flows.

In June 2011, the Financial Accounting Standards Board issued an update to ASC No. 220, “Presentation of Comprehensive Income,” which no longer permits presentation of other comprehensive income and its components in the statement of shareholders’ equity. Rather, companies may elect to present the items of net income and other comprehensive income in a single continuous statement of comprehensive income or in two separate, but consecutive, statements. Under either method the statement must be presented with equal prominence as the other primary financial statements. The amended guidance, which must be applied retroactively, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012, with earlier adoption permitted. The implementation of this guidance is not expected to have a material impact on our results of operations, financial position, or cash flows.

Evaluation of Subsequent Events

We evaluated subsequent events from the balance sheet date of December 31, 2011 through March 19, 2012 and have concluded that the following subsequent events have occurred during such period:

On March 15, 2012, we entered into a Second Amended and Restated Credit Agreement, dated as of March 15, 2012 (the “New Credit Agreement”), which replaced in its entirety our prior credit agreement dated as of October 5, 2009. By entering into the New Credit Agreement, we have refinanced our senior secured credit facilities to, among other things: (i) increase the amount of the term loans to $950.0 million; (ii) increase the applicable LIBOR margin with respect to the term loans and/or the revolver commitments to 4.00% with a potential stepdown to 3.75% for the revolver commitments after this offering, subject to a first lien senior secured leverage test; (iii) extend the maturity of the term loans to April 1, 2018; (iv) extend the maturity date of the revolver commitments to March 15, 2017 and (v) modify certain other provisions of the senior secured credit facilities, including the terms for determining the interest payable thereunder; these provisions generally include higher interest rates to reflect current market conditions. See “Description of Indebtedness—Senior Secured Credit Facilities” for a further description of the New Credit Agreement.

In connection with the refinancing, we repaid the amounts outstanding under the prior credit facility, including the term loans aggregating to $760.0 million and the $89.8 million of then-outstanding debt under our revolving credit facility. In addition, we repaid $75.0 million of then-outstanding debt under our accounts receivable securitization facility.

In addition, we recently terminated the interest rate swap agreements aligned to our prior term loans. We will continue to assess the appropriateness of corresponding interest rate swaps aligned to the variable rate debt under the new senior secured credit facilities.

Our board of directors has approved a 4.1627-for-one stock split of our common stock, which will become effective prior to the effectiveness of the registration statement filed with the SEC in connection with this offering. The effect of the stock split on outstanding shares, earnings per share and dividends per share has been retroactively applied to all periods presented elsewhere herein.

 

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Results of Operations

Third Quarter and Nine Months Ended January 1, 2011 Compared with the Third Quarter and Nine Months Ended December 31, 2011

VAG Holding Acquisition

On October 10, 2011, we acquired VAG for a total cash purchase price of $238.6 million, net of cash acquired and excluding transaction costs. VAG is a global leader in engineered valve solutions across a broad range of applications, including water distribution, wastewater treatment, dams and hydropower generation, as well as various other industrial applications. This acquisition is complementary to our existing Water Management platform and allows us to further expand into key markets outside of North America. VAG employs approximately 1,200 associates worldwide and reported net sales in excess of €145 million for the twelve months ended December 31, 2011. Headquartered in Mannheim, Germany, VAG operates three other principal manufacturing operations in Hodonin, Czech Republic, Secunderabad, India and Taicang, China, as well as sales offices in eighteen countries to service its global customer base. Our financial position and results of operations include VAG subsequent to October 10, 2011.

Divestiture

On July 19, 2011, we sold substantially all of the net assets of a non-material, underperforming business within our Process & Motion Control segment based in Germany for a total sale price of $4.5 million ($3.9 million received to date and $0.6 million to be received in future periods) (the “divestiture”). We recorded a pre-tax loss on the divestiture of approximately $6.9 million during the second quarter of fiscal 2012, which is subject to a final working capital settlement. Our financial position and results of operations include the divestiture up to July 19, 2011.

Autogard Acquisition

On April 2, 2011, we acquired Autogard for a total cash purchase price of $18.2 million, net of cash acquired. Autogard is a European-based manufacturer of torque limiters and couplings. The acquisition further expands our global Process & Motion Control platform and will allow us to provide increased capabilities and support to our global customer base. Our financial position and results of operations include Autogard subsequent to April 2, 2011.

Update on Goodwill and Other Intangible Assets

During the third quarter ended December 31, 2011, we completed the testing of our indefinite lived intangible assets (tradenames) and goodwill for impairment in accordance with ASC 350. Pursuant to the guidance, an impairment loss is recognized if the estimated fair value of the intangible asset or reporting unit is less than its carrying amount. The fair value of our indefinite lived intangible assets and reporting units were primarily estimated using an income valuation model (discounted cash flow) and market approach (guideline public company comparables), which indicated that the fair value of our indefinite lived intangible assets and reporting units exceeded their carrying value, therefore, no impairment was present. The estimated fair value of our reporting units was dependent on several significant assumptions, including our weighted average cost of capital (discount rate) and future earnings and cash flow projections.

Consolidated Overview

Net sales for the third quarter of fiscal 2012 increased 17% from the prior year to $492.4 million, while net sales for the first nine months of fiscal 2012 were $1,423.8 million, an increase of $184.4 million, or 15%, compared to the first nine months of fiscal 2011. The acquisition of VAG resulted in net sales of $52.6 million in

 

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the third quarter of fiscal 2012. Core net sales (which excludes foreign currency fluctuations, our divestiture, and our acquisition of VAG as discussed above) for the third quarter of fiscal 2012 increased 7% year-over-year, while core net sales for the first nine months of fiscal 2012 increased 10% through focus on emerging markets, share gain initiatives and fundamental market growth, net of weakness in the North American municipal water markets.

Our backlog as of December 31, 2011 was $491 million compared to $379 million as of March 31, 2011, an increase of approximately 30% in the first nine months, which includes the net impact of our acquisition of VAG and our divestiture. The backlog improvement during the first nine months of fiscal 2012 is primarily the result of an additional $66 million of backlog as a result of the acquisition of VAG, as well as strong order rates within our Process & Motion Control businesses.

Income from operations for the third quarter of fiscal 2012 was $51.3 million or 10.4% of net sales compared to $52.6 million or 12.5% of net sales for the third quarter of fiscal 2011. Income from operations for the first nine months of fiscal 2012 was $175.9 million or 12.4% of net sales compared to $158.8 million or 12.8% of net sales for the first nine months of fiscal 2011. Fiscal 2012 operating results were adversely impacted by $2.7 million of restructuring charges and $5.3 million of inventory adjustments primarily related to the acquisition of VAG, short-term facility consolidation costs and lower profitability of certain long-lead time projects for the North American municipal water markets, offset by productivity gains and operating leverage on higher year-over-year sales volume in our Process & Motion Control businesses.

Third Quarter Ended January 1, 2011 Compared with the Third Quarter Ended December 31, 2011

Net sales

(dollars in millions)

     Quarter Ended      Change      % Change  
     January 1, 2011      December 31, 2011        

Process & Motion Control

   $ 299.6       $ 323.0       $ 23.4         8

Water Management

     120.2         169.4         49.2         41
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated

   $ 419.8       $ 492.4       $ 72.6         17
  

 

 

    

 

 

    

 

 

    

Process & Motion Control

Process & Motion Control net sales in the third quarter of fiscal 2012 increased 8% from the prior year to $323.0 million. Core net sales, which excludes foreign currency fluctuations and a 3% unfavorable year-over-year impact from a second quarter fiscal 2012 divestiture, increased by 11% year-over-year, due to solid demand and market share gains across the majority of our served global markets.

Water Management

Water Management net sales in the third quarter of fiscal 2012 increased 41% from the prior year to $169.4 million. Core net sales, which excludes foreign currency fluctuations and the impact of the VAG acquisition, decreased by 3% year-over-year, as market share gains and increased alternative market sales were more than offset by weakness in the North American municipal water markets.

 

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Income (loss) from operations

(dollars in millions)

 

     Quarter Ended     Change     % Change  
     January 1, 2011     December 31, 2011      

Process & Motion Control

   $ 46.2      $ 55.3      $ 9.1        20

% of net sales

     15.4 %      17.1 %      1.7 %   

Water Management

     13.3        4.0        (9.3     (70 )% 

% of net sales

     11.1 %      2.4 %      (8.7 )%   

Corporate

     (6.9     (8.0     (1.1     (16 )% 
  

 

 

   

 

 

   

 

 

   

Consolidated

   $ 52.6      $ 51.3      $ (1.3     (3 )% 

% of net sales

     12.5 %      10.4 %      (2.1 )%   

Process & Motion Control

Process & Motion Control income from operations for the third quarter of fiscal 2012 was $55.3 million or 17.1% of net sales (includes $0.6 million of restructuring charges) compared to $46.2 million or 15.4% of net sales for the third quarter of fiscal 2011. Income from operations as a percent of net sales increased 170 basis points from the prior period as the result of productivity gains and operating leverage on higher year-over-year sales volume net of increased investment in new product development and global growth capabilities.

Water Management

Water Management income from operations for the third quarter of fiscal 2012 was $4.0 million or 2.4% of net sales. Fiscal 2012 operating margins were adversely impacted by $1.6 million of restructuring charges and $5.3 million of inventory adjustments primarily related to the acquisition of VAG (an aggregate 400 basis point impact), as well as short-term facility consolidation costs and lower profitability of certain long-lead time projects for the North American municipal water markets. Income from operations for the third quarter of fiscal 2011 was $13.3 million or 11.1% of net sales.

Corporate

Corporate expenses were $6.9 million and $8.0 million in the third quarter of fiscal 2011 and fiscal 2012, respectively.

Interest expense, net

Interest expense, net was $44.5 million in the third quarter of fiscal 2011 compared to $45.1 million in the third quarter of fiscal 2012. The year-over-year increase in interest expense is primarily the result of the increase in average debt outstanding, slightly offset by lower weighted average borrowing rates.

Other expense, net

Other expense, net for the quarter ended January 1, 2011, consists of management fee expense of $0.8 million, foreign currency translation losses of $4.4 million, CDSOA recovery of $0.7 million and other miscellaneous losses of $0.2 million. Other expense, net for the quarter ended December 31, 2011, consists of management fee expense of $0.7 million, foreign currency transaction losses of $2.7 million, CDSOA recovery of $0.5 million and other miscellaneous losses of $0.1 million.

Provision (benefit) for income taxes

The income tax provision was $2.4 million in the third quarter of fiscal 2011 compared to an income tax benefit of $(2.4) million in the third quarter of fiscal 2012. Our effective income tax rate for the third quarter of fiscal 2011 was 70.6% versus (75.0)% in the third quarter of fiscal 2012. The income tax benefit, associated with

 

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the income before income taxes, for the third quarter of fiscal 2012 is attributable to the utilization of U.S. foreign tax credit carryforwards, the majority of which had a valuation allowance recorded against them for financial statement purposes based upon the original determination that realization of such benefits was not deemed more-likely-than-not, in conjunction with the relatively low amount of income before income taxes. The effective income tax rate of 70.6% for the third quarter of fiscal 2011 is mainly due to an increase in the valuation allowance relating to foreign tax credits generated for which realization of such benefits is not deemed more-likely-than-not, in conjunction with the relatively low amount of income before income taxes.

Net income

Our net income for the third quarter of fiscal 2011 was $1.0 million compared to net income of $5.6 million in the third quarter of fiscal 2012 as a result of the factors described above.

Nine Months Ended January 1, 2011 Compared with the Nine Months Ended December 31, 2011:

Net sales

(dollars in millions)

 

     Nine Months Ended      Change      % Change  
     January 1, 2011      December 31, 2011        

Process & Motion Control

   $ 847.2       $ 971.2       $ 124.0         15

Water Management

     392.2         452.6         60.4         15
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated

   $ 1,239.4       $ 1,423.8       $ 184.4         15
  

 

 

    

 

 

    

 

 

    

Process & Motion Control

Process & Motion Control net sales in the first nine months of fiscal 2012 were $971.2 million, an increase of $124.0 million, or 15%, from $847.2 million in the first nine months of fiscal 2011. Core net sales, which excludes 2% of favorable currency fluctuations and a 1% unfavorable year-over-year impact from a second quarter fiscal 2012 divestiture, increased by 14% year-over-year, due to solid demand and market share gains across the majority of our served global markets.

Water Management

Water Management net sales in the first nine months of fiscal 2012 were $452.6 million, an increase of $60.4 million, or 15%, from $392.2 million in the first nine months of fiscal 2011. Core net sales, excluding the acquisition of VAG, increased by 2% year-over-year, as market share gains and increased alternative market sales was partially offset by weakness in the North American municipal water markets.

Income (loss) from Operations

(dollars in millions)

 

     Nine Months Ended              
     January 1, 2011     December 31, 2011     Change     % Change  

Process & Motion Control

   $ 124.1      $ 159.3      $ 35.2        28

% of net sales

     14.6 %      16.4 %      1.8 %   

Water Management

     54.9        38.4        (16.5     (30 )% 

% of net sales

     14.0 %      8.5 %      (5.5 )%   

Corporate

     (20.2     (21.8     (1.6     (8 )% 
  

 

 

   

 

 

   

 

 

   

Consolidated

   $ 158.8      $ 175.9      $ 17.1        11

% of net sales

     12.8 %      12.4 %      (0.4 )%   

 

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Process & Motion Control

Process & Motion Control income from operations for the first nine months of fiscal 2012 was $159.3 million or 16.4% of net sales (includes $0.6 million of restructuring charges) compared to $124.1 million or 14.6% of net sales in the first nine months of fiscal 2012. Income from operations as a percent of sales increased 180 basis points as the result of productivity gains and operating leverage on higher year-over-year sales volume net of increased investment in new product development and global growth capabilities.

Water Management

Water Management income from operations for the first nine months of fiscal 2012 was $38.4 million or 8.5% of net sales. Fiscal 2012 operating margins were adversely impacted by $1.6 million of restructuring charges and $5.3 million of inventory adjustments primarily related to the acquisition of VAG (an aggregate 150 basis point impact), as well as short-term facility consolidation costs and lower profitability of certain long-lead time projects for the North American municipal water markets. Income from operations for the first nine months of fiscal 2011 was $54.9 million or 14.0% of net sales.

Corporate

Corporate expenses were $20.2 million and $21.8 million in the first nine months of fiscal 2011 and fiscal 2012, respectively.

Interest Expense, net

Interest expense, net was $136.7 million in the first nine months of fiscal 2011 compared to $132.3 million in the first nine months of fiscal 2012. The year-over-year reduction in interest expense is primarily the result of the extinguishment of our remaining PIK toggle senior indebtedness in the first quarter of fiscal 2012.

Loss on the extinguishment of debt

During the first nine months of fiscal 2011, we recorded a $100.8 million loss on debt extinguishment as a result of the cash tender offer for certain RBS Global outstanding debt, which was completed on May 5, 2010. See Note 11 to our unaudited financial statements for the third quarter ended December 31, 2011 included elsewhere in this prospectus for more details regarding this transaction. During the first nine months of fiscal 2012, we recorded a $0.7 million loss on debt extinguishment as a result of the extinguishment of all of our then- remaining PIK toggle senior indebtedness.

Other expense, net

Other income, net for the nine months ended January 1, 2011, consists of management fee expense of $2.3 million, income in unconsolidated affiliates of $4.0 million (includes $3.4 million gain recorded as a result of our step acquisition of 100% of the voting shares in Mecánica Falk in August 2010), foreign currency transaction losses of $3.4 million, a CDSOA recovery of $0.7 million and other miscellaneous losses of $1.8 million. Other expense, net for the nine months ended December 31, 2011, consists of management fee expense of $2.2 million, foreign currency transaction losses of $8.0 million, a CDSOA recovery of $0.5 million and other miscellaneous losses of $1.1 million.

(Benefit) provision for income taxes

The income tax benefit recorded in the first nine months of fiscal 2011 was $(27.5) million compared to an income tax provision recorded of $3.9 million in the first nine months of fiscal 2012. Our effective income tax rate for the first nine months of fiscal 2011 was 33.7% versus 15.5% in the first nine months of fiscal 2012. The

 

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effective income tax rate of 15.5% for the first nine months of fiscal 2012 is attributable to the utilization of U.S. foreign tax credit carryforwards, the majority of which had a valuation allowance recorded against them for financial statement purposes based upon the original determination that realization of such benefits was not deemed more-likely-than-not, as well as, recognition of certain, previously unrecognized tax benefits due to the lapse of the applicable statute of limitations. The effective income tax rate of 33.7% for the first nine months of fiscal 2011, associated with the (loss) before income taxes, is mainly due to the accrual of state income taxes, as well as, an increase in the valuation allowance relating to state net operating losses generated for which realization of such benefits is not deemed more-likely-than-not.

Net (loss) income

Our net loss for the first nine months of fiscal 2011 was $54.0 million compared to net income of $21.3 million in the first nine months of fiscal 2012 due to the factors described above.

Fiscal Year Ended March 31, 2011 Compared with the Fiscal Year Ended March 31, 2010

Net Sales

(dollars in millions)

 

     Fiscal Year Ended                
     March 31, 2010      March 31, 2011      Change      % Change  

Process & Motion Control

   $ 1,003.7       $ 1,175.1       $ 171.4         17.1

Water Management

     506.3         524.5         18.2         3.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated

   $ 1,510.0       $ 1,699.6       $ 189.6         12.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Process & Motion Control

Process & Motion Control net sales for the year ended March 31, 2011 increased 17.1% from the prior year to $1,175.1 million. Core net sales, which excludes foreign currency fluctuations, increased by 17.5% year-over-year driven by solid international growth, improved demand in our North America end-markets and market share gains across many of our products.

Water Management

Water Management net sales for the year ended March 31, 2011 increased 3.6% from the prior year to $524.5 million. Core net sales, which excludes the foreign currency fluctuations, increased by 3.1% year-over-year as a result of targeted market share gains and growth in alternative markets, which more than offset the overall decline in the core infrastructure and commercial construction markets, which we estimate to be down 15% year-over-year based on McGraw-Hill construction data.

Income from Operations

(dollars in millions)

 

     Fiscal Year Ended        
     March 31, 2010     March 31, 2011     Change  

Process & Motion Control

   $ 116.5      $ 181.1      $ 64.6   

% of net sales

     11.6     15.4     3.8

Water Management

     76.1        69.4        (6.7

% of net sales

     15.0     13.2     (1.8 %) 

Corporate

     (31.2     (31.4     (0.2
  

 

 

   

 

 

   

 

 

 

Consolidated

   $ 161.4      $ 219.1      $ 57.7   
  

 

 

   

 

 

   

 

 

 

% of net sales

     10.7     12.9     2.2

 

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Process & Motion Control

Process & Motion Control income from operations for the year ended March 31, 2011 increased 55.5% to $181.1 million compared to fiscal 2010. Income from operations as a percent of net sales increased 380 basis points from the prior year to 15.4%. The improvement in fiscal 2011 operating margin is primarily the result of our improved operating leverage on higher year-over-year net sales volume, productivity gains and cost reduction actions, partially offset by higher material costs and targeted investments in new product development and global growth capabilities.

Water Management

Water Management income from operations for the year ended March 31, 2011 declined 8.8% to $69.4 million compared to fiscal 2010. Income from operations as a percent of net sales decreased 180 basis points from the prior year to 13.2%. The decline in fiscal 2011 operating margin is primarily the result of higher year-over-year material costs and the impact of profit variability within certain water and wastewater project shipments in the current year compared to the prior year as well as investments in new product development and growth initiatives.

Corporate

Corporate expenses increased by $0.2 million from $31.2 million in fiscal 2010 to $31.4 million in fiscal 2011.

Interest Expense, Net. Interest expense, net was $194.2 million during the year ended March 31, 2010 compared to $180.8 million during the year ended March 31, 2011. The year-over-year reduction in interest expense is primarily the result of the lower weighted average fixed borrowing rates on our senior notes, partially offset by a slight increase in average debt outstanding as a result of the incremental notes issued in connection with the April 2010 refinancing described below.

Gain (Loss) on Debt Extinguishment. During fiscal 2010, we recorded a $167.8 million gain on debt extinguishment as a result of the purchase and extinguishment of a portion of our PIK toggle senior indebtedness and our April 2009 debt exchange offer. During fiscal 2011, we recorded a $100.8 million loss on debt extinguishment as a result of our early repayment of debt in April 2010 pursuant to cash tender offers. The $100.8 million charge was comprised of a bond tender premium paid to the lenders and the non-cash write-off of deferred financing fees and net original issuance discount.

Purchase and Extinguishment of a Portion of PIK Toggle Senior Indebtedness

During fiscal 2010, we purchased and extinguished $67.4 million of outstanding face value PIK toggle senior indebtedness due 2013 for $36.5 million in cash. As a result, we recognized a $30.3 million gain during the year ended March 31, 2010, which was measured based on the difference between the cash paid and the net carrying amount of the debt (the net carrying amount of the debt included unamortized original issue discount of $0.6 million, unamortized debt issuance costs of $0.6 million, and $0.3 million of accrued interest) along with the forgiveness of $0.4 million of accrued interest.

Debt Exchange

During fiscal 2010, we completed an exchange offer by which (i) approximately $71.0 million principal amount of 8.875% Senior Notes due 2014 (the “8.875% Notes”), (ii) approximately $235.7 million principal amount of PIK Toggle Notes, and (iii) approximately $7.9 million principal amount of PIK Toggle Loans were exchanged for $196.3 million of aggregate principal of 9.50% Senior Notes due 2014 (the “2009 9.50% Notes”) (excluding a net original issue discount of $20.6 million).

 

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The Company accounted for the debt exchange transaction pursuant to ASC 470-50 Debt Modifications and Extinguishments (“ASC 470-50”). As a result of the debt exchange, the Company recognized a gain of $137.5 million on the extinguishment of 8.875% Notes, PIK Toggle Notes and PIK Toggle Loans. The gain on extinguishment of $137.5 million relates to the extinguishment of $235.7 million of outstanding face value 8.875% Notes and PIK Toggle Notes and $7.9 million of outstanding face value of PIK Toggle Loans and is measured based on the difference between the fair market value of the 9.50% Notes issued of $104.5 million and the net carrying amount of the debt (the net carrying amount of the debt includes unamortized original issue discount of $2.5 million, unamortized debt issuance costs of $2.2 million and $3.1 million of accrued interest).

Tender Offer and Note Issuance

During fiscal 2011, we purchased by means of cash tender offers and extinguished $794.1 million of 9.50% Senior Notes due 2014 issued in 2006 (the “2006 9.50% Notes”), $196.3 million of 2009 9.50% Notes and $77.0 million of 8.875% Notes, and issued $1,145.0 million of 8.50% Senior Notes due 2018 (the “8.50% Notes”). We accounted for the cash tender offers and the issuance of the 8.50% Notes in accordance with ASC 470-50. Pursuant to this guidance, the cash tender offers were accounted for as an extinguishment of debt. In connection with the note offering, we incurred an increase in long-term debt of approximately $89.5 million, and we also recognized a $100.8 million loss on the debt extinguishment, which was comprised of a bond tender premium paid to lenders, as well as the non-cash write-off of deferred financing fees and net original issue discount associated with the extinguished debt. Additionally, we capitalized approximately $14.6 million of third party transaction costs, which are being amortized over the life of the 8.50% Notes as interest expense using the effective interest method. Below is a summary of the transaction costs and other offering expenses recorded along with their corresponding pre-tax financial statement impact (dollars in millions):

 

     Financial Statement Impact  
     Balance Sheet -Debit (Credit)     Statement of
Operations
        
     Deferred Financing
Costs (1)
    Original Issue
Discount (2)
    Expense (3)      Total  

Cash transaction costs:

         

Third party transaction costs

   $ 14.6      $ —        $ —         $ 14.6   

Bond tender premiums (paid to lenders)

     —          —          63.5         63.5   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total expected cash transaction costs

     14.6        —          63.5       $ 78.1   
         

 

 

 

Non-cash write-off of unamortized amounts:

         

Deferred financing costs

     (25.4     —          25.4      

Net original issue discount

     —          (11.9     11.9      
  

 

 

   

 

 

   

 

 

    

Net financial statement impact

   $ (10.8   $ (11.9   $ 100.8      
  

 

 

   

 

 

   

 

 

    

 

(1) Recorded as a component of other assets within the consolidated balance sheet.
(2) Recorded as a reduction in the face value of long-term debt within the consolidated balance sheet.
(3) Recorded as a component of other non-operating expense within the consolidated statement of operations.

Other Income (Expense), Net. Other expense, net for the year ended March 31, 2010 was $16.4 million, which consisted of management fee expense of $3.0 million, transaction costs associated with a debt exchange offer of $6.0 million, foreign currency transaction losses of $4.3 million and other net miscellaneous expenses of $3.1 million. Other income, net for the year ended March 31, 2011 was $1.1 million, which consisted of management fee expense of $3.0 million, income in unconsolidated affiliates of $4.1 million (including a $3.4 million gain recorded as a result of our step acquisition of 100% of the voting shares in Mecánica Falk on August 31, 2010), foreign currency transaction gains of $1.5 million and other net miscellaneous expenses of $1.5 million.

 

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Provision (Benefit) for Income Taxes. The income tax provision in fiscal 2010 was $30.5 million or an effective tax rate of 25.7%. The provision recorded differs from the statutory rate mainly due to the effect of the income tax benefit recognized as a result of a decrease to the liability for unrecognized tax benefits associated with the conclusion of the Internal Revenue Service (“IRS”) examination and certain benefits provided under a new Brazilian tax settlement program. The income tax benefit in fiscal 2011 was $(10.1) million or an effective tax rate of 16.4%. The benefit recorded differs from the U.S. federal statutory rate mainly due to the effect of the increase in the valuation allowance related to foreign tax credit carryforwards for which such realization is not deemed to be more-likely-than-not. See Note 16 to our audited consolidated financial statements included elsewhere in this prospectus for information on income taxes.

Net Income (Loss). The net income recorded in fiscal 2010 was $88.1 million compared to a net loss of $51.3 million in fiscal 2011 due to the factors described above.

Fiscal Year Ended March 31, 2010 Compared with the Fiscal Year Ended March 31, 2009

Net Sales

(dollars in millions)

 

     Fiscal Year Ended               
     March 31, 2009      March 31, 2010      Change     % Change  

Process & Motion Control

   $ 1,321.7       $ 1,003.7       $ (318.0     (24.1 )% 

Water Management

     560.3         506.3         (54.0     (9.6 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Consolidated

   $ 1,882.0       $ 1,510.0       $ (372.0     (19.8 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Process & Motion Control

Process & Motion Control net sales decreased $318.0 million, or 24.1%, from $1,321.7 million for the year ended March 31, 2009 to $1,003.7 million for the year ended March 31, 2010. Excluding foreign currency fluctuations, year-over-year core net sales decreased by $316.4 million, or 23.9%, which is attributable to the impact the economic downturn has had on our end-markets.

Water Management

Water Management net sales decreased $54.0 million, or 9.6%, from $560.3 million for the year ended March 31, 2009 to $506.3 million for the year ended March 31, 2010. Excluding foreign currency fluctuations, year-over-year core net sales decreased by $52.3 million, or 9.3%, which is attributable to softness within our commercial and residential construction end-markets as well as certain segments of our infrastructure end-markets. These declines were partially offset by an increase in year-over-year net sales in our water and wastewater treatment markets.

Income (loss) from Operations

(dollars in millions)

 

     Fiscal Year Ended        
     March 31, 2009     March 31, 2010     Change  

Process & Motion Control

   $ 15.6      $ 116.5      $ 100.9   

% of net sales

     1.2     11.6     10.4

Water Management

     (212.8     76.1        288.9   

% of net sales

     (38.0 )%      15.0     53.0

Corporate

     (174.1     (31.2     142.9   
  

 

 

   

 

 

   

 

 

 

Consolidated

   $ (371.3   $ 161.4      $ 532.7   
  

 

 

   

 

 

   

 

 

 

% of net sales

     (19.7 )%      10.7     30.4

 

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Process & Motion Control

Process & Motion Control income from operations for the year ended March 31, 2009 was $15.6 million compared to income from operations of $116.5 million during the year ended March 31, 2010. The comparability of our year-over-year results has been significantly impacted by the $149.0 million impairment charge taken on our goodwill and other identifiable intangible assets during the year ended March 31, 2009. In addition, income from operations for the year ended March 31, 2009 included $16.5 million of restructuring expenses, compared to restructuring expense of $6.3 million during the year ended March 31, 2010. Excluding the impact of the impairment charge and restructuring expenses, income from operations would have decreased $58.3 million, or 32.2%, and income from operations as a percent of net sales would have declined by 150 basis points to 12.2% of net sales during the year ended March 31, 2010 versus the comparable prior year period. The remaining decline in income from operations as a percent of net sales was primarily driven by the unfavorable impact of lower year-over-year net sales, partially offset by productivity gains, cost reduction initiatives and lower material prices.

Water Management

Water Management loss from operations was $212.8 million for the year ended March 31, 2009 compared to $76.1 million of income from operations for the year ended March 31, 2010. The comparability of our year-over-year results has been significantly impacted by the $273.0 million impairment charge taken on our goodwill and other identifiable intangible assets during the year ended March 31, 2009. In addition, income from operations for the year ended March 31, 2009 included $7.8 million of restructuring expenses, compared to restructuring expense of $0.5 million during the year ended March 31, 2010. Excluding the impact of impairment charges and restructuring expenses, income from operations would have increased $8.6 million, or 12.6%, and income from operations as a percent of net sales would have expanded by 300 basis points to 15.1% of sales for the year ended March 31, 2010 versus the comparable prior year period as cost reduction actions, lower material prices and productivity gains more than offset the unfavorable impact of lower sales.

Corporate

Corporate expenses decreased by $142.9 million from $174.1 million during the year ended March 31, 2009 to $31.2 million during the year ended March 31, 2010. The comparability of corporate expenses is primarily attributable to a net reduction in actuarial losses related to our pension and other postretirement benefit plans recognized year-over-year.

Interest Expense, Net. Interest expense, net was $230.4 million and $194.2 million in fiscal 2009 and fiscal 2010, respectively. The decrease in interest expense is due to the lower year-over-year weighted-average outstanding indebtedness (resulting from the completion of our debt exchange offer during the first quarter of fiscal 2010 and various purchases and extinguishments of our PIK toggle senior indebtedness, beginning in the third quarter of fiscal 2009) as well as the lower relative variable rate borrowing costs year-over-year.

Gain on Debt Extinguishment. During fiscal 2009, the Company recorded a $103.7 million gain on debt extinguishment as a result of the purchase and extinguishment of a portion of our PIK toggle senior indebtedness. During fiscal 2010, the Company recorded a $167.8 million gain on debt extinguishment as a result of the purchase and extinguishment of a portion of our PIK toggle senior indebtedness and our April 2009 debt exchange offer.

During fiscal 2009, we purchased and extinguished $174.6 million of outstanding face value PIK toggle senior indebtedness due 2013 for $72.9 million in cash. As a result, we recognized a $103.7 million gain during the year ended March 31, 2009, which was measured based on the difference between the cash paid and the net carrying amount of the debt (the net carrying amount of the debt included unamortized original issue discounts of $2.0 million, unamortized debt issuance costs of $1.8 million and $5.8 million of accrued interest).

 

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For more information regarding the gain on debt extinguishment for fiscal 2010, see “—Results of Operations—Fiscal Year Ended March 31, 2011 Compared with the Fiscal Year Ended March 31, 2010—Gain (Loss) on Debt Extinguishment.”

Other Expense, Net. Other expense, net for the year ended March 31, 2009 was $3.0 million, which consisted of management fee expense of $3.0 million, foreign currency transaction gains of $2.4 million and other net miscellaneous expenses of $2.4 million. Other expense, net for the year ended March 31, 2010 was $16.4 million, which consisted of management fee expense of $3.0 million, transaction costs associated with the debt exchange offer of $6.0 million, foreign currency transaction losses of $4.3 million and other net miscellaneous expenses of $3.1 million.

Provision (Benefit) for Income Taxes. The income tax benefit in fiscal 2009 was $(72.0) million or an effective tax rate of 14.4%. The benefit recorded differs from the statutory rate mainly due to the effect of approximately $304.8 million of nondeductible expenses relating to the impairment charges recorded in fiscal 2009 as a result of then-existing economic conditions. The income tax provision in fiscal 2010 was $30.5 million or an effective tax rate of 25.7%. The provision recorded differs from the U.S. federal statutory rate mainly due to the effect of the income tax benefit recognized as a result of a decrease to the liability for unrecognized tax benefits associated with the conclusion of the IRS examination and certain benefits provided under a new Brazilian tax settlement program. See Note 16 to our audited consolidated financial statements included elsewhere in this prospectus for more information on income taxes.

Net Income (Loss). The net loss recorded in fiscal 2009 was $429.0 million compared to net income of $88.1 million in fiscal 2010 due to the factors described above.

Non-GAAP Financial Measure

In addition to net income (loss), we believe Adjusted EBITDA (as described below in “Covenant Compliance”) is an important measure under our senior secured credit facilities, as 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 by comparing the ratio of our senior secured bank debt to our Adjusted EBITDA (see “Covenant Compliance” for additional discussion of this ratio, including a reconciliation to our net income (loss)). We reported Adjusted EBITDA of $274.2 million in the first nine months of fiscal 2012, and net income for the same period of $21.3 million.

Covenant Compliance

The senior secured credit facilities contain, 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 senior secured credit facilities and indentures that govern our notes 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, covenant defaults, events of bankruptcy and a change of control. Certain covenants contained in the credit agreement that governs our senior secured credit facilities restrict our ability to take certain actions, such as incurring additional debt or making acquisitions, if we are unable to meet certain maximum senior secured bank debt to Adjusted EBITDA ratios and, with respect to our revolving facility, also require us to remain at or below a certain maximum senior secured bank debt to Adjusted EBITDA ratio as of the end of each fiscal quarter. Certain covenants contained in the indentures that govern our notes restrict our ability to take certain actions, such as incurring additional debt or making acquisitions, if we are unable to achieve a minimum Adjusted EBITDA to Fixed Charges ratio. Under such indentures, our ability to incur additional indebtedness and our ability to make future acquisitions under certain circumstances requires us to have an Adjusted EBITDA to Fixed Charges ratio (measured on a last twelve months, or LTM, basis) of at least 2.0 to 1.0. Failure to comply with this covenant could limit our long-term growth prospects by hindering our ability to obtain future debt or make acquisitions.

 

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“Fixed Charges” is defined in our indentures as net interest expense, excluding the amortization or write-off of deferred financing costs.

“Adjusted EBITDA” is defined in our senior secured credit facilities as 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; (f) management fees that may be paid to Apollo; or (g) the impact of earnings or charges resulting from matters that we and the lenders under our secured senior credit facilities 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 to 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.

As of December 31, 2011, the calculation of Adjusted EBITDA under our senior secured credit facilities results in a substantially identical calculation. However, the results of such calculations could differ in the future based on the different types of adjustments that may be included in such respective calculations at the time.

 

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Set forth below is a reconciliation of net (loss) income to Adjusted EBITDA for the periods indicated below.

 

(in millions)

  Nine months
ended

January  1, 2011
    Year
ended
March 31, 2011
    Nine months
ended
December
31, 2011
    Twelve  months
ended

December 31, 2011
 

Net (loss) income

  $ (54.0   $ (51.3   $ 21.3      $ 24.0   

Interest expense, net

    136.7        180.8        132.3        176.4   

Income tax (benefit) provision

    (27.5     (10.1     3.9        21.3   

Depreciation and amortization

    79.6        106.1        83.8        110.3   
 

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $  134.8      $ 225.5      $ 241.3      $ 332.0   

Adjustments to EBITDA:

       

Loss on divestiture (1)

    —          —          6.9        6.9   

Restructuring and other similar charges (2)

    —          —          2.7        2.7   

Loss on extinguishment of debt (3)

    100.8        100.8        0.7        0.7   

Impact of inventory fair value adjustment

    —          —          4.2        4.2   

Stock option expense

    4.1        5.6        2.7        4.2   

LIFO expense (4)

    3.0        4.9        4.9        6.8   

CDSOA Recovery

    (0.7     (0.7     (0.5     (0.5

Other expense (income), net (5)

    3.5        (0.4     11.3        7.4   
 

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal of adjustments to EBITDA

  $ 110.7      $ 110.2      $ 32.9      $ 32.4   
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $  245.5      $ 335.7      $ 274.2      $ 364.4   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma adjustment for acquisition of VAG (6)

          18.2   
       

 

 

 

Pro forma Adjusted EBITDA

        $ 382.6   
       

 

 

 

Fixed charges of RBS Global, Inc. and subsidiaries (7)

        $ 166.1   

Ratio of Adjusted EBITDA to Fixed Charges – RBS Global and Subsidiaries

          2.30x   

Senior secured bank indebtedness (8)

        $ 649.4   

Senior secured bank leverage ratio (9)

          1.70x   

 

(1) Represents our loss on the divestiture. See Note 2 to our unaudited condensed consolidated financial statements of the third quarter ended December 31, 2011 included elsewhere in this prospectus.
(2) Represents restructuring costs comprised of work force reduction, lease termination, and other facility rationalization costs.
(3) The loss on extinguishment of debt is the result of the cash tender offer that we completed during the first quarter of fiscal 2011, as well as the retirement of the PIK toggle senior indebtedness in the first quarter of fiscal 2012. See Note 11 to our unaudited condensed consolidated financial statements of the third quarter ended December 31, 2011 included elsewhere in this prospectus.
(4) Last-in first-out (LIFO) inventory adjustments are excluded in calculating Adjusted EBITDA as defined in our senior secured credit facilities.
(5) Other expense (income), net for the periods indicated below consists of:

 

(in millions)

  Nine months
ended

January  1, 2011
    Year
Ended
March 31, 2011
    Nine months
ended
December 31, 2011 
    Twelve months
ended
December 31, 2011
 

Management fee expense

  $ 2.3      $ 3.0      $ 2.2      $ 2.9   

(Gain) loss on foreign currency transactions

    3.4        (1.5     8.0        3.1   

Income in unconsolidated affiliates

    (4.0     (4.1     —          (0.1

Other expense

    1.8        2.2        1.1        1.5   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3.5      $ (0.4   $ 11.3      $ 7.4   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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(6) Represents a pro forma adjustment to include the Adjusted EBITDA related to the acquisition of VAG for the period from January 1, 2011 through October 10, 2011 as permitted by our senior secured credit facilities and indentures that govern our notes.
(7) The indentures governing our senior notes define fixed charges as interest expense excluding the amortization or write-off of deferred financing costs for the trailing four quarters.
(8) The senior secured credit facilities define senior secured bank debt as consolidated secured indebtedness for borrowed money, less unrestricted cash, which was $200.4 million (as defined by the senior secured credit facilities) at December 31, 2011. Senior secured bank debt reflected in the table consists of borrowings under our senior secured credit facilities.
(9) The senior secured credit facilities define the senior secured bank leverage ratio as the ratio of senior secured bank debt to Adjusted EBITDA for the trailing four fiscal quarters.

Liquidity and Capital Resources

Our primary sources of liquidity are available cash and cash equivalents, cash flow from operations and borrowing availability under our $180.0 million revolving credit facility and our $100.0 million accounts receivable securitization program.

As of March 31, 2011, we had $391.0 million of cash and approximately $219.6 million of additional borrowing capacity ($121.7 million of available borrowings under our revolving credit facility and $97.9 million available under our accounts receivable securitization program). As of December 31, 2011, we had $225.6 million of cash and cash equivalents and approximately $74.0 million of additional borrowing capacity ($49.0 million of available borrowings under our revolving credit facility and $25.0 million available under our accounts receivable securitization program). As of December 31, 2011, the available borrowings under our credit facility have been reduced by $41.2 million due to outstanding letters of credit. Both our revolving credit facility and accounts receivable securitization program are available to fund our working capital requirements, capital expenditures and for other general corporate purposes. See “Evaluation of Subsequent Events” above for information related to certain debt repayments in connection with the refinancing of our senior secured credit facilities that occurred in March 2012.

Indebtedness

As of December 31, 2011 we had $2,404.1 million of total indebtedness outstanding as follows (in millions):

 

    Total Debt at
December 31, 2011
    Short-term Debt
and Current
Maturities of
Long-Term
Debt
    Long-term
Portion
 

Term loans (1)

  $ 760.0      $ 2.0      $ 758.0   

8.50% Senior notes due 2018

    1,145.0        —          1,145.0   

11.75% Senior subordinated notes due 2016

    300.0        —          300.0   

Borrowing under revolving credit facility (1)

    89.8        —          89.8   

Borrowing under accounts receivable securitization (1)

    75.0        —          75.0   

8.875% Senior notes due 2016

    2.0        —          2.0   

Other

    32.3        1.3        31.0   
 

 

 

   

 

 

   

 

 

 

Total Debt

  $ 2,404.1      $ 3.3      $ 2,400.8   
 

 

 

   

 

 

   

 

 

 

 

(1) See “Summary—Recent Developments” and “Capitalization” elsewhere in this prospectus for information related to the refinancing of the senior secured credit facilities and related debt repayments in connection therewith.

 

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At December 31, 2011, our outstanding debt was issued by RBS Global and various subsidiaries of RBS Global. RBS Global, as well as its wholly owned subsidiary Rexnord LLC, are the co-issuers of the term loans, senior notes and senior subordinated notes.

For a description of our outstanding indebtedness, see “Description of Indebtedness” elsewhere in this prospectus.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet or unconsolidated special-purpose entities.

Cash Flows

Cash provided by operating activities in the first nine months of fiscal 2011 was $76.5 million compared to $60.7 million in the first nine months of fiscal 2012. The reduction in operating cash flow was primarily driven by a $15.0 million increase in working capital as a result of our increased sales volume and timing as well as a $21.0 million year-over-year increase in cash interest due to the timing of our coupon interest payments related to a prior year refinancing. That increase was partially offset by approximately $20.2 million of incremental cash flows generated on $123.4 million of higher net core sales year-over-year.

Cash used for investing activities was $17.6 million in the first nine months of fiscal 2011 compared to a use of $304.7 million in the first nine months of fiscal 2012. The year-over-year increase in cash used for investing activities relates to the $256.8 million used for the acquisitions of VAG and Autogard (net of cash acquired), a $19.3 million increase in capital expenditures primarily due to certain facilities modernization projects, and a $17.9 million use of cash for the New Market Tax Credit project, partially offset by an incremental $8.1 million of cash proceeds received in connection with the sale of certain property, plant and equipment and the divestiture during the first nine months of fiscal 2012.

Cash used for financing activities was $5.4 million in the first nine months of fiscal 2011 compared to a source of $81.0 million in the first nine months of fiscal 2012. The cash used for financing activities in the first nine months of fiscal 2011 consisted of a source of cash from the issuance of $1,145.0 million of 8.50% Senior Notes due 2018 (the “8.50% Notes”), the proceeds of which were utilized to retire $1,067.4 million of previously outstanding senior notes, pay the $63.5 million tender premium to holders of the retired senior notes, as well as $14.6 million of related debt issue costs. Additionally, we made repayments of $3.0 million of other long-term debt (including a $1.5 million payment on RBS Global’s term loan and a $0.9 million payment to redeem 100% of RBS Global’s then outstanding 9.50% senior notes) and $0.2 million of net short-term borrowings at various foreign subsidiaries. Additionally, $1.0 million of cash was used for the purchase of common stock and $1.2 million of net cash used resulting from stock option exercises and subsequent repurchases of shares. The cash provided by financing activities in the first nine months of fiscal 2012 consisted of, $75.0 million source of cash borrowed under the Accounts Receivable Securitization Program and the $89.8 million source of cash borrowed under the Revolving Credit Facility to partially fund the purchase of VAG, as well as proceeds of $23.4 million related to the New Market Tax Credit financing, partially offset by a $93.5 million repayment to retire the then-outstanding PIK toggle senior indebtedness due 2013, net repayments of outstanding borrowings of $10.2 million (including a $1.5 million payment on our term loan) and a $3.5 million payment of debt issue costs (including $1.3 million incurred in connection with our Accounts Receivable Securitization Program refinancing, $1.6 million incurred in connection with our Credit Agreement extension, and $0.6 million related to the New Market Tax Credit financing).

Net cash provided by operating activities in fiscal 2010 was $155.5 million compared to $164.5 million in fiscal 2011, representing a $9.0 million increase year-over-year. The improvement in cash provided by operating activities was driven by $53.9 million of incremental cash generated on $189.6 million of higher year-over-year net sales, an $18.2 million reduction in year-over-year cash interest payments, and a $14.2 million reduction in

 

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year-over-year cash restructuring payments. That increase was partially offset by a $77.3 million increase in trade working capital (accounts receivable, inventories and accounts payable) as a result of the year-over-year change in sales volume.

Net cash provided by operating activities in fiscal 2009 was $155.0 million compared to $155.5 million in fiscal 2010. Fiscal 2010 cash provided by operating activities includes an incremental $6.0 million of transaction costs associated with our April 2009 debt exchange offer and $16.5 million of restructuring payments, compared to $5.7 million cash restructuring payments during fiscal 2009. Excluding the incremental transaction and restructuring payments, cash flow from operations improved by $17.3 million. Decreases in trade working capital (accounts receivable, inventories and accounts payable) contributed a $62.3 million source of cash year-over-year. The remaining decline in operating cash flow is due to the impact of $372.0 million of lower net sales, partially offset by the cash savings generated from our restructuring initiatives year-over-year.

Cash used for investing activities was $22.0 million during fiscal 2010 compared to $35.5 million during fiscal 2011. The year-over-year increase in cash used for investing activities relates to a $15.6 million increase in capital expenditures partially offset by the net cash acquired in connection with the acquisition of Mecánica Falk (excluding a $6.1 million seller-financed note payable assumed in connection with the acquisition) and $0.9 million of cash proceeds received in connection with the sale of our 9.5% interest in a non-core joint venture within our Water Management platform.

Cash used for investing activities was $54.5 million during fiscal 2009 compared to $22.0 million during fiscal 2010. The year-over-year decrease in cash used for investing activities is primarily due to lower capital expenditures as we aligned our capital expenditures with current sales volume at that time as well as the fiscal 2009 acquisition of Fontaine.

Cash used for financing activities was $161.5 million during fiscal 2010 compared to a use of $6.9 million during fiscal 2011. The cash used for financing activities during fiscal 2011 consisted of a source of cash from the issuance of $1,145.0 million of 8.50% Notes, the proceeds of which were utilized to retire $1,067.4 million of previously outstanding senior notes, pay the $63.5 million tender premium to holders of the retired senior notes as well as $14.6 million of related debt issue costs. Additionally, during fiscal 2011 we made repayments of $3.7 million of other long-term debt (including a $2.0 million payment on our term loan and a $0.9 million payment to redeem 100% of our then outstanding 9.50% Notes), $0.8 million of net short-term borrowings and repayments at various foreign subsidiaries ($2.0 million of borrowings and $2.8 million of repayments). The current year also includes a $1.0 million use for the purchase of common stock and a $1.4 million use for the payments in connection with stock option exercises.

Cash provided by financing activities was $36.6 million during fiscal 2009 compared to a use of $161.5 million during fiscal 2010. The cash used for financing activities during fiscal 2010 consisted of a $36.5 million payment made to retire a portion of our outstanding PIK toggle senior indebtedness due 2013, financing fee payments of $4.9 million associated with our April 2009 debt exchange offer, $116.1 million of long-term debt repayments (comprised of $82.7 million on our revolving credit facility, $30.0 million on our accounts receivable facility, $2.0 million of mandatory repayments on our term loans and $1.4 million on all other debt) and repayments of $2.8 million on miscellaneous short-term debt. Fiscal 2010 also included a $0.4 million use of cash for the purchase of common stock and $1.5 million of cash used to cancel stock options.

 

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Tabular Disclosure of Contractual Obligations

The table below lists our contractual obligations, as of March 31, 2011, by period:

 

            Payments Due by Period  
(dollars in millions)    Total      Less than
1 Year
     1-3 Years      3-5 Years      More than
5 Years
 

8.50% senior notes due 2018

   $ 1,145.0       $ —         $ —         $ —         $ 1,145.0   

Term loans

     761.5         2.0         759.5         —           —     

11.75% senior subordinated notes due 2016

     300.0         —           —           —           300.0   

PIK toggle senior indebtedness due 2013 (1)

     93.2         93.2         —           —           —     

8.875% senior notes due 2016

     2.0         —           —           —           2.0   

Other long-term debt

     12.4         9.0         2.2         0.5         0.7   

Interest on long-term debt obligations

     932.5         158.1         293.8         265.5         215.1   

Purchase commitments

     174.3         165.0         9.3         —           —     

Operating lease obligations

     50.4         15.1         18.0         8.8         8.5   

Pension and post retirement plans (2)

     93.7         14.8         35.9         43.0         n/a   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals (3)

   $ 3,565.0       $ 457.2       $ 1,118.7       $ 317.8       $ 1,671.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes unamortized original issue discount of $0.4 million at March 31, 2011. The PIK toggle senior indebtedness was fully extinguished in the first quarter of fiscal 2012.
(2) Represents expected pension and post retirement contributions and benefit payments to be paid directly by the Company. Contributions and benefit payments beyond fiscal 2016 cannot be reasonably estimated.
(3) Does not include payments related to unrecognized tax benefits of approximately $26.0 million as of March 31, 2011 due to the uncertainty of the timing of any such payment.

Our pension and postretirement benefit plans are discussed in detail in Note 15 of our audited consolidated financial statements included elsewhere in this prospectus. The pension plans cover most of our employees and provide for monthly pension payments to eligible employees upon retirement. Other postretirement benefits consist of retiree medical plans that cover a portion of employees in the United States that meet certain age and service requirements and other postretirement benefits for employees at certain foreign locations. See “Risk Factors—Risks Related to Our Business—Our required cash contributions to our pension plans may increase further and we could experience a material change in the funded status of our defined benefit pension plans and the amount recorded in our consolidated balance sheets related to those plans. Additionally, our pension costs could increase in future years.”

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk during the normal course of business from changes in foreign currency exchange rates and interest rates. The exposure to these risks is managed through a combination of normal operating and financing activities and derivative financial instruments in the form of foreign currency forward contracts and interest rate swaps to cover known foreign currency transactions and interest rate fluctuations.

Foreign Currency Exchange Rate Risk

Our exposure to foreign currency exchange rates relates primarily to our foreign operations. For our foreign operations, exchange rates impact the U.S. Dollar (“USD”) value of our reported earnings, our investments in the subsidiaries and the intercompany transactions with the subsidiaries. See “Risk Factors—Risks Related to Our Business—Our international operations are subject to uncertainties, which could adversely affect our operating results.”

Approximately 36% of our sales originate outside of the United States (based on a last twelve month, or LTM, basis as of December 31, 2011, including the pro-forma impact of VAG). As a result, fluctuations in the

 

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value of foreign currencies against the USD, particularly the Euro, may have a material impact on our reported results. Revenues and expenses denominated in foreign currencies are translated into USD at the end of the fiscal period using the average exchange rates in effect during the period. Consequently, as the value of the USD changes relative to the currencies of our major markets, our reported results vary.

Fluctuations in currency exchange rates also impact the USD amount of our stockholders’ deficit. The assets and liabilities of our non-U.S. subsidiaries are translated into USD at the exchange rates in effect at the end of the fiscal periods. As of December 31, 2011, stockholders’ equity decreased by $11.6 million from March 31, 2011 as a result of foreign currency translation adjustments. If the USD had strengthened by 10% as of December 31, 2011, the result would have decreased stockholders’ equity by approximately $36.4 million.

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. However, any of these factors could adversely affect our international operations and, consequently, our operating results.

At December 31, 2011, we had outstanding forward foreign currency contracts that exchange Canadian dollars (“CAD”) for USD. The forward contracts in place as of December 31, 2011 expire between January and March of 2012 and have notional amounts ranging from $1.6 million USD ($1.5 million CAD) to $3.1 million USD ($3.0 million CAD) and contract rates of approximately $0.96USD:$1CAD. These foreign exchange 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. We believe that a hypothetical 10% adverse change in the foreign currency exchange rates would have resulted in a $0.5 million decrease in the fair value of foreign exchange forward contacts as of December 31, 2011.

Interest Rate Risk

We utilize a combination of short-term and long-term debt to finance our operations and are exposed to interest rate risk on these debt obligations.

A substantial portion of our indebtedness, including indebtedness under the senior secured credit facilities, bears interest at rates that fluctuate with changes in certain short-term prevailing interest rates. As of December 31, 2011, our outstanding borrowings under the senior secured term loan credit facility were $760.0 million. The term loan credit facility under the prior credit agreement was apportioned between two primary tranches: a $570.0 million term loan B1 facility and a $190.0 million term loan B2 facility. As a result of our refinancing of the senior secured credit facilities as of March 15, 2012, we had $950.0 million outstanding under our term loan credit facility. Borrowings under the term loan facility and the revolving credit facility bear interest at a per annum rate equal to, at our option, either (a) 3.00% plus a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the prime rate determined from time to time by Credit Suisse AG, the administrative agent under the New Credit Agreement and (3) the LIBOR rate in effect for a one-month period plus 1.00%; or (b) 4.00% plus a Eurocurrency rate determined by reference to an annual interest rate equal to (x) the LIBOR rate in effect for a given interest period divided by (y) one minus a statutory reserve applicable to such borrowing. The weighted average interest rate on the outstanding term loans at December 31, 2011 and March 15, 2012 was 3.67% and 5.00%, respectively, including the impact of our interest rate swap contracts. We have entered into three interest rate swaps, which became effective beginning October 20, 2009 and mature on July 20, 2012, to hedge the variability in future cash flows associated with our variable-rate term loans. The three swaps convert an aggregate of $370.0 million of our variable-rate term loans to fixed interest rates ranging from 2.08% to 2.39%, plus the applicable margin. Those interest rate swap agreements were terminated in the fourth quarter. See “Evaluation of Subsequent Events” above.

Our income before income taxes would likely be affected by changes in market interest rates on the un-hedged portion of these variable-rate obligations. After considering the interest rate swaps, a 100 basis point increase in the December 31, 2011 and March 15, 2012 interest rates would increase interest expense under the senior secured credit facilities by approximately $3.9 million and $9.5 million, respectively, on an annual basis.

 

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BUSINESS

Our Company

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.

Our strategy is to build the Company around multiple, global strategic platforms that participate in end-markets with sustainable growth characteristics where we are, or have the opportunity to become, the industry leader. We have a track record of acquiring and integrating companies and expect to continue to pursue strategic acquisitions within our existing platforms that will expand our geographic presence, broaden our product lines and allow us to move into adjacent markets. Over time, we anticipate adding additional strategic platforms to our company. Currently, our business is comprised of two platforms, Process & Motion Control and Water Management.

We believe that we have one of the broadest portfolios of highly engineered, mission and project critical Process & Motion Control products in the industrial and aerospace end-markets. Our Process & Motion Control product portfolio includes gears, couplings, industrial bearings, aerospace bearings and seals, FlatTop chain, engineered chain and conveying equipment. Our Water Management platform is a leader in the multi-billion dollar, specification-driven, commercial construction market for water management products. Through recent acquisitions, we have gained entry into the municipal water and wastewater treatment markets. Our Water Management product portfolio includes professional grade specification drainage products, flush valves and faucet products, backflow prevention pressure release valves, PEX piping and engineered valves and gates for the water and wastewater treatment market.

Our products are generally “specified” or requested by end-users across both of our strategic platforms as a result of their reliable performance in demanding environments, our custom application engineering capabilities and our ability to provide global customer support. Typically, our Process & Motion Control products are initially incorporated into products sold by original equipment manufacturers (“OEMs”) or sold to end-users as critical components in large, complex systems where the cost of failure or downtime is high and thereafter replaced through industrial distributors as they are consumed or require replacement.

The demand for our Water Management products is primarily driven by new infrastructure, the retro-fit of existing structures to make them more energy and water efficient, commercial construction and, to a lesser extent, residential construction. We believe we have become a market leader in the industry by meeting the stringent third party regulatory, building and plumbing code requirements and subsequently achieving specification of our products into projects and applications.

We are led by an experienced, high-caliber management team that employs RBS as a proven operating philosophy to drive excellence and world-class performance in all aspects of our business by focusing on the “Voice of the Customer” process and ensuring superior customer satisfaction. Our global footprint encompasses 36 principal Process & Motion Control manufacturing, warehouse and repair facilities located around the world and 27 principal Water Management manufacturing and warehouse facilities which allow us to meet the needs of our increasingly global customer base as well as our distribution channel partners.

On July 21, 2006 (the “Merger Date”), affiliates of Apollo, George M. Sherman and certain members of management acquired RBS Global through the merger of Chase Merger Sub, Inc., an indirect, wholly-owned

 

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subsidiary of an Apollo affiliate, Rexnord Corporation, with and into RBS Global, and RBS Global became an indirect, wholly-owned subsidiary of Rexnord Corporation. Rexnord Corporation, formerly known as Rexnord Holdings, Inc., was incorporated in Delaware in 2006.

Our Strategic Platforms

Below is a summary of our net sales by segment and geographic region:

Net Sales by Geographic Region

(dollars in millions)

 

     Year Ended March 31, 2011  
     United States     Europe     Rest of World     Total Net Sales  

Process & Motion Control

   $ 751.6      $ 225.8      $ 197.7      $ 1,175.1   

% of net sales

     64.0     19.2     16.8     100.0

Water Management

     461.2        4.8        58.5        524.5   

% of net sales

     87.9     0.9     11.2     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

   $ 1,212.8      $ 230.6      $ 256.2      $ 1,699.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

% of net sales

     71.3     13.6     15.1     100.0

See more information regarding our segments and sales by geography within Note 19 to our audited consolidated financial statements included elsewhere in this prospectus.

Process & Motion Control

Our 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 high. The Process & Motion Control product portfolio includes gears, couplings, industrial bearings, aerospace bearings and seals, FlatTop chain, engineered chain and conveying equipment and are marketed and sold globally under several brands, including Rexnord®, Rex®, Falk® and Link-Belt®. We sell our Process & Motion Control products into a diverse group of attractive end-markets, including mining, general industrial applications, cement and aggregates, agriculture, forest and wood products, petrochemical, energy, food and beverage, aerospace and wind energy.

We have established long-term relationships with OEMs and end-users serving a wide variety of industries. As a result of our long-term relationships with OEMs and end-users, we have created a significant installed base for our Process & Motion Control products, which are consumed or worn in use and have a relatively predictable replacement cycle. We believe this replacement dynamic drives recurring aftermarket demand for our products. We estimate that approximately 50% of our Process & Motion Control net sales are to distributors, who primarily serve the end-user/OEM aftermarket demand for our products.

Most of our products are critical components in large scale manufacturing processes, where the cost of component failure and resulting down time is high. We believe our reputation for superior quality, application expertise and ability to meet lead time expectations are highly valued by our customers, as demonstrated by their preference to replace their worn Rexnord products with new Rexnord products, or “like-for-like” product replacements. We believe this replacement dynamic for our products, combined with our significant installed base, enables us to achieve premium pricing, generates a source of recurring revenue and provides us with a competitive advantage. We believe the majority of our products are purchased by customers as part of their regular maintenance budget, and in many cases do not represent significant capital expenditures.

Water Management

Our 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

 

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professional grade specification drainage products, flush valves and faucet products, engineered valves and gates for the water and wastewater treatment market and PEX piping and are marketed and sold through widely recognized brand names, including Zurn®, Wilkins®, VAG®, GA®, Rodney Hunt® and Fontaine®.

Over the past century, the businesses that comprise our Water Management platform have established themselves as innovators and leading designers, manufacturers and distributors of highly engineered products and solutions that control the flow, delivery, treatment and conservation of water to the infrastructure construction, commercial construction and, to a lesser extent, the residential construction end-markets. Segments of the infrastructure end-market include: municipal water and wastewater, transportation, government, health care and education. Segments of the commercial construction end-market include: lodging, retail, dining, sports arenas, and warehouse/office. The demand for our Water Management products is primarily driven by new infrastructure, the retro-fit of existing structures to make them more energy and water efficient, commercial construction and, to a lesser extent, residential construction.

Our Water Management products are principally specification-driven and project-critical and typically represent a low percentage of the overall project cost. We believe these characteristics, coupled with our extensive distribution network, create a high level of end-user loyalty for our products and allow us to maintain leading market shares in the majority of our product lines. We believe we have become a market leader in the industry by meeting the stringent country specific regulatory, building and plumbing code requirements and subsequently achieving specification of our products into projects and applications. The majority of these stringent testing and regulatory approval processes are completed through the University of Southern California (“USC”), the International Association of Plumbing and Mechanical Codes (“IAPMO”), the National Sanitation Foundation (“NSF”), the Underwriters Laboratories (“UL”), Factory Mutual (“FM”), the American Waterworks Association (“AWWA”) prior to the commercialization of our products.

Our Water Management platform has an extensive network of approximately 1,100 independent sales representatives across approximately 210 sales agencies in North America who work with local engineers, contractors, builders and architects to specify our products for use in construction projects. Approximately 85% of our Water Management platform net sales come from products that are specified for use in projects by engineers, contractors, owners or architects. Specifically, it has been our experience that, once an architect, engineer, contractor or owner has specified our product with satisfactory results, that person will generally continue to use our products in future projects. The inclusion of our products with project specifications, combined with our ability to innovate, engineer and deliver products and systems that save time and money for engineers, contractors, builders and architects, has resulted in growing demand for our products. Our distribution model is predicated upon maintaining high product availability near our customers. We believe that this model provides us with a competitive advantage as we are able to meet our customer demand with local inventory at significantly reduced lead times as compared to others in our industry.

Our Markets

We evaluate our competitive position in our markets based on available market data, relevant benchmarks compared to our relative peer group and industry trends. We generally do not participate in segments of our served markets that are thought of as commodities or in applications that do not require differentiation based on product quality, reliability and innovation. In both of our platforms, we believe the end-markets we serve span a broad and diverse array of commercial and industrial end-markets with solid fundamental long-term growth characteristics.

Process & Motion Control Market

Within the overall Process & Motion Control market, we estimate that the addressable North American market for our current product offerings is approximately $5.0 billion in net sales per year. Globally, we estimate our addressable market to be approximately $12.0 billion in net sales per year. The market for Process & Motion

 

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Control products is very fragmented with most participants having single or limited product lines and serving specific geographic markets. While there are numerous competitors with limited product offerings, there are only a few national and international competitors of a size comparable to us. While we compete with certain domestic and international competitors across a portion of our product lines, we do not believe that any one competitor directly competes with us on all of our product lines. The industry’s customer base is broadly diversified across many sectors of the economy. We believe that growth in the Process & Motion Control market is closely tied to overall growth in industrial production which we believe has fundamental and significant long-term growth potential. In addition, we believe that Process & Motion Control manufacturers who innovate to meet the changes in customer demands and focus on higher growth end-markets can grow at rates faster than overall United States industrial production.

The Process & Motion Control market is also characterized by the need for sophisticated engineering experience, the ability to produce a broad number of niche products with very little lead time and long-standing customer relationships. We believe entry into our markets by competitors with lower labor costs, including foreign competitors, will be limited due to the fact that we manufacture highly specialized niche products that are critical components in large scale manufacturing processes. In addition, we believe there is an industry trend of customers increasingly consolidating their vendor bases, which we believe should allow suppliers with broader product offerings such as ourselves, to capture additional market share.

Water Management Market

Within the overall Water Management market, we estimate that the addressable North American market for our current product offerings is approximately $2.3 billion in net sales per year. Globally, we estimate our addressable market to be approximately $5.3 billion in net sales per year. We believe the markets in which our Water Management platform participates are relatively fragmented with competitors across a broad range of industries and product lines. Although competition exists across all of our Water Management businesses, we do not believe that any one competitor directly competes with us across all of our product lines. We believe that we can continue to grow our platform at rates above the growth rate of the overall market and the growth rate of our competition, by focusing our efforts and resources towards end-markets that have above average growth characteristics.

We believe the areas of the Water Management industry in which we compete are tied to growth in infrastructure and commercial construction, which we believe have significant long-term growth fundamentals. Historically, the infrastructure and commercial construction industry has been more stable and less vulnerable to down-cycles than the residential construction industry. Compared to residential construction cycles, downturns in infrastructure and commercial construction have been shorter and less severe, and upturns have lasted longer and had higher peaks in terms of spending as well as units and square footage. In addition, we believe that water management manufacturers with innovative products, like ours, are able to grow at a faster pace than the broader infrastructure and commercial construction markets, as well as mitigate downturns in the cycle.

The Water Management industry’s specification-driven end-markets require manufacturers to work closely with engineers, contractors, builders and architects in local markets across the United States to design specific applications on a project-by-project basis. As a result, building and maintaining relationships with architects, engineers, contractors and builders, who specify products for use in construction projects, and having flexibility in design and product innovation are critical to compete effectively in the market. Companies with a strong network of such relationships have a competitive advantage. Specifically, it has been our experience that, once an engineer, contractor, builder or architect has specified our product with satisfactory results, that person often will continue to use our products in future projects.

 

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Our Products

Process & Motion Control Products

Our Process & Motion Control products are generally critical components in the machinery or plant in which they operate, yet they typically account for a low percentage of an end-user’s total production cost. We believe, because the costs associated with Process & Motion Control product failure to the end-user can be substantial, end-users in most of the markets we serve focus on Process & Motion Control products with superior quality, reliability and availability, rather than considering price alone, when making a purchasing decision. We believe that the key to success in our industry is to develop and maintain a reputation for quality and reliability, as well as create and maintain an extensive distribution network, which we believe leads to a strong preference to replace “like-for-like” products driving recurring aftermarket revenues and market share gain.

Gears

We are a leading manufacturer of gear drives and large gear sets for the heavy duty industrial market. Gear drives and gear sets reduce the output speed and increase the torque from an electronic motor or engine to the level required to drive a particular piece of equipment. Our gear drives, service and gear sets are used in a number of heavy duty industries. These primary industries include the natural resource extraction, steel, pulp and paper, chemical, forest and wood industries. We manufacture a wide range of heavy duty, medium and light duty gear drives used for bulk material handling, mixing, pumping and general gearing applications. We also operate a gear service and repair business through our Product Service group (PragerTM and Renew®).

Couplings

Couplings are primarily used in high-speed, high-torque applications and are the interface between two shafts that permit power to be transmitted from one shaft to the other. Our couplings are sold to a variety of end-markets, including the petrochemical and refining, wood processing, chemical, power generation and natural resources industries. Couplings are comprised of the grid, flexible disc, elastomeric and gear product lines and are sold under the Steelflex®, Thomas®, Omega®, Rex®, Viva®, Wrapflex®, Lifelign®, True Torque®, Addax® and Autogard® brand names.

Industrial Bearings

Industrial bearings are components that support, guide and reduce the friction of motion between fixed and moving machine parts. These products are primarily sold for use in the mining, aggregates, forest and wood products, construction equipment, and agricultural equipment industries. Industrial bearings are sold either mounted or unmounted. We primarily produce mounted bearings, which are offered in a variety of specialized housings to suit specific industrial applications, and generally command higher margins than unmounted bearings.

FlatTop

Our FlatTop chain is a highly-engineered conveyor chain that provides a smooth continuous conveying surface that is critical to high-speed operations such as those used to transport cans and bottles in beverage-filling operations, and is primarily sold to the food and beverage, consumer products, warehousing and distribution, and parts processing industries.

Aerospace Bearings and Seals

We supply our aerospace bearings and seals to the commercial aircraft, military aircraft and regional jet end-markets for use in door systems, engine accessories, engine controls, engine mounts, flight control systems, gearboxes, landing gear and rotor pitch controls. The majority of our sales are to engine and airframe OEMs that specify our Process & Motion Control products for their aircraft platforms. Our aerospace bearings and seals

 

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products consist of rolling element airframe bearings sold under the Shafer® brand name, slotted-entry and split-ball sliding bearings sold under the PSI® brand name and aerospace seals that are sold under the Cartriseal® brand name, which are primarily sold for use in both aerospace and industrial applications.

Special Components

Our special components products are comprised of three primary product lines: electric motor brakes, miniature Process & Motion Control components and security devices for utility companies. These products are manufactured by our niche businesses: Stearns, W.M. Berg and Highfield. Stearns’ products are used in a diverse range of applications, including steel mills, oil field equipment, pulp processing equipment, large textile machines, rubber mills, metal forming machinery and dock and pier handling equipment. W.M. Berg sells its products to a variety of markets, including aerospace, semiconductor, medical equipment, robotics, instrumentation, office equipment and satellite communications. Highfield’s products are sold to a variety of markets, including electric, gas, water, telecommunications, utilities and plumbing and heating.

Conveying Equipment and Engineered Chain

Our conveying equipment and industrial chain products are used in various applications in numerous industries, including food and food processing, beverage and container, mining, construction and agricultural equipment, hydrocarbon processing and cement and aggregates processing. Our primary products include (i) conveying equipment, (ii) engineered steel chain, and (iii) roller chain. Our conveying equipment product group provides design, assembly, installation and after-the-sale services primarily to the mining, cement and aggregates industries. Its products include engineered elevators, conveyors and components for medium to heavy duty material handling applications. Our engineered steel chain products, which are sold under the Link-Belt® and Rexnord® brand names, are designed and manufactured to meet the demands of customers’ specific applications. These products are used in many applications including cement elevators, construction and mining equipment and conveyors, and they are supplied to the cement and aggregates, energy, food and beverage, and forest and wood products industries.

Water Management Products

Water Management products tend to be project-critical, highly-engineered and high value-add and typically are a low percentage of overall project cost. We believe the combination of these features creates a high level of end-user loyalty. Demand for these products is influenced by regulatory, building and plumbing code requirements. Many Water Management products must meet the stringent country specific regulatory, building and plumbing code requirements prior to the commercialization of our products (for example, USC, IAPMO, NSF, UL, FM and AWWA). In addition, many of these products must meet detailed specifications set by water management engineers, contractors, builders and architects.

Specification Drainage

Specification drainage products are used to control storm water, process water and potable water in various commercial, industrial, civil and irrigation applications. This product line includes point drains (such as roof drains and floor drains), linear drainage systems, interceptors, hydrants, fixture carrier systems, chemical drainage systems and light commercial drainage products.

Water Control and Safety

Our water control and safety products are sold under the Wilkins® brand name and encompass a wide variety of valves, including backflow preventers, fire system valves, pressure reducing valves and thermostatic mixing valves. These products are designed to meet the stringent requirements of independent test labs, such as the Foundation for Cross Connection Control and Hydraulic Research at USC, the NSF, UL and FM, and are sold into the commercial and industrial construction applications as well as the fire protection, waterworks and irrigation end-markets.

 

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Commercial Brass

Zurn’s commercial brass products include manual and sensor operated flush valves marketed under the Aquaflush®, AquaSense®, AquaVantage® and HydroVantageTM brand names and heavy duty commercial faucets marketed under the AquaSpec® brand name. Innovative water conserving fixtures are marketed under the EcoVantage® and Zurn One® brand names. These products are commonly used in office buildings, schools, hospitals, airports, sports facilities, convention centers, shopping malls, restaurants and industrial production buildings. The Zurn One Systems® integrate commercial brass and fixtures into complete, easily customizable plumbing systems, and thus provide a valuable time and cost-saving means of delivering commercial and institutional bathroom fixtures. The EcoVantage® fixture systems promote water-efficiency and low consumption of water that deliver savings for building owners in new construction and retro-fit bathroom fixture installations.

PEX

PEX is our product line manufactured out of cross-linked polyethylene into tubing and is well-suited for high temperature and pressure fluid distribution piping. Our PEX products include complete lines of pipe, fittings, valves and installation tools for both potable water and radiant heating systems. These systems are engineered to meet stringent NSF requirements.

Water and Wastewater

Our water and wastewater products are sold under the VAG®, GA®, Rodney Hunt® and Fontaine® brand names and are used to control the flow of water and wastewater throughout the water cycle from raw water through collection, distribution and wastewater treatment. These products are highly specified, designed and manufactured. Products include automatic control valves, check valves, air valves, butterfly valves, water control gates, hydrants, actuation systems, and other specialized products for municipal, industrial, and hydropower applications. Our comprehensive product lines are primarily sold into the growing and less-cyclical water supply and treatment markets worldwide.

Acquisitions and Other Transactions

We have grown significantly in recent years by means of acquisitions. Information regarding some of our recent acquisitions and recent dispositions follows.

VAG Holding Acquisition

On October 10, 2011, we acquired VAG Holding GmbH (“VAG”) for a total cash purchase price of $238.6 million, net of cash acquired and excluding transaction costs. VAG is a global leader in engineered valve solutions across a broad range of applications, including water distribution, wastewater treatment, dams and hydropower generation, as well as various other industrial applications. This acquisition is complementary to our existing Water Management platform and allows us to further expand into key markets outside of North America. VAG employs approximately 1,200 associates worldwide and reported net sales in excess of €145 million for the twelve months ended December 31, 2011. Headquartered in Mannheim, Germany, VAG operates three other principal manufacturing operations in Hodonin, Czech Republic, Secunderabad, India and Taicang, China, as well as sales offices in eighteen countries to service its global customer base. Our financial position and results of operations include VAG subsequent to October 10, 2011.

Autogard Holdings Acquisition

On April 2, 2011, we acquired Autogard Holdings Limited and affiliates (“Autogard”) for a total cash purchase price of $18.2 million, net of cash acquired. Autogard is a European-based manufacturer of torque limiters and couplings. The acquisition further expands our global Process & Motion Control platform and will allow us to provide increased capabilities and support to our global customer base. Our financial position and results of operations include Autogard subsequent to April 2, 2011.

 

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The Mecánica Falk Acquisition

On August 31, 2010, we acquired full control of Mecánica Falk, a joint venture in which we previously maintained a 49% non-controlling interest for a $6.1 million seller-financed note. Located in Mexico City, Mexico, Mecánica Falk primarily serves as a distributor of our existing Process & Motion Control product lines in Latin America. The acquisition of the remaining 51% interest in Mecánica Falk provides us with the opportunity to expand our international presence through a more direct ownership structure. The financial position and results of operations of Mecánica Falk have been wholly consolidated subsequent to August 31, 2010.

The Fontaine Acquisition

On February 27, 2009, we acquired the stock of Fontaine for a total purchase price of $24.2 million, net of $0.6 million of cash acquired. This acquisition further expanded our water management platform. Fontaine manufactures stainless steel slide gates and other engineered flow control products for the municipal water and wastewater markets. Fontaine is included in our financial position and results of operations subsequent to February 28, 2009.

The GA Acquisition

On January 31, 2008, we utilized existing cash balances to purchase GA for $73.7 million, net of $3.2 million of cash acquired. This acquisition expanded our Water Management platform into the water and wastewater markets, specifically in municipal, hydropower and industrial environments. GA is comprised of GA Industries and Rodney Hunt. GA Industries is a manufacturer of automatic control valves, check valves and air valves. Rodney Hunt, its wholly owned subsidiary at the time of closing, is a leader in the design and manufacturer of sluice/slide gates, butterfly valves, cone valves and actuation systems. GA is included in our financial position and results of operations subsequent to February 1, 2008.

The Zurn Acquisition

On February 7, 2007, we acquired Zurn from an affiliate of Apollo for a cash purchase price of $942.5 million, including transaction costs. The purchase price was financed through an equity investment by Apollo and its affiliates of approximately $282.0 million and debt financing of approximately $669.3 million. This acquisition created a new strategic water management platform for the Company. Zurn is a leader in the multi-billion dollar commercial construction and replacement market for plumbing fixtures and fittings. It designs and manufactures plumbing products used in commercial and industrial construction, renovation and facilities maintenance markets in North America, and holds a leading market position across most of its businesses. Zurn is included in our financial position and results of operations subsequent to February 8, 2007.

The Apollo Transaction

On July 21, 2006, certain affiliates of Apollo and certain members of management purchased RBS Global from The Carlyle Group for approximately $1.825 billion, excluding transaction fees, through the merger of Chase Merger Sub, Inc., an entity formed and controlled by Apollo, with and into RBS Global. The Apollo acquisition was financed with (i) $485.0 million of 9.50% senior notes due 2014, (ii) $300.0 million of 11.75% senior subordinated notes due 2016, (iii) $645.7 million of borrowings under new senior secured credit facilities (consisting of a seven-year $610.0 million term loan facility and $35.7 million of borrowings under a six-year $150.0 million revolving credit facility) and (iv) $475.0 million of equity contributions (consisting of a $438.0 million cash contribution from Apollo and $37.0 million of rollover stock and stock options held by management participants). The proceeds from the Apollo cash contribution and the new financing arrangements, net of related debt issuance costs, were used to (i) purchase the Company from its then existing stockholders for $1,018.4 million, including transaction costs; (ii) repay all outstanding borrowings under our previously existing credit agreement as of the Merger Date, including accrued interest; (iii) repurchase substantially all $225.0 million of our 10.125% senior subordinated notes outstanding as of the Merger Date pursuant to a tender offer, including accrued interest and tender premium; and (iv) pay certain seller-related transaction costs.

 

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The Dalong Chain Company Acquisition

On July 11, 2006, we acquired Dalong Chain Company (“Dalong”) located in China for a total cash purchase price of $5.9 million, net of $0.4 million of cash acquired, plus the assumption of certain liabilities. Dalong is included in our financial position and results of operations subsequent to July 12, 2006.

The Falk Acquisition

On May 16, 2005, we acquired the Falk Corporation (“Falk”) from Hamilton Sundstrand, a division of United Technologies Corporation, for $301.3 million ($306.2 million purchase price including related expenses, net of cash acquired of $4.9 million) and the assumption of certain liabilities. Falk is a manufacturer of gears and lubricated couplings and is a recognized leader in the gear and coupling markets. The Falk acquisition significantly enhanced our position as a leading manufacturer of highly engineered Process & Motion Control products. By combining our leadership positions in FlatTop chain, industrial bearings, non-lubricated couplings and industrial chain with Falk’s complementary leadership positions in gears and lubricated couplings, as well as a growing gear repair business, the Falk acquisition resulted in a comprehensive, market-leading product portfolio that we believe to be one of the broadest in the Process & Motion Control industry. Falk is included in our financial position and results of operations for all periods presented herein.

Divestiture

We continually review all our businesses for strategic fit. On July 19, 2011, we sold substantially all of the net assets of a non-material, underperforming business within our Process & Motion Control segment based in Germany for a total sale price of $4.5 million ($3.9 million received to date and $0.6 million to be received in future periods) (the “divestiture”). We recorded a pre-tax loss on divestiture of approximately $6.9 million during the second quarter of fiscal 2012, which is subject to a final working capital settlement. Our financial position and results of operations include the divestiture up to July 19, 2011.

Customers

Process & Motion Control Customers

Our Process & Motion Control components are either incorporated into products sold by OEMs or sold to end-users through industrial distributors as aftermarket products. While approximately 50% of our Process & Motion Control net sales are aftermarket, OEMs and end-users ultimately drive the demand for our Process & Motion Control products. With more than 2,600 distributor locations worldwide, we have one of the most extensive distribution networks in the industry. The largest of our Process & Motion Control industrial distributors, which is also our largest customer, accounted for approximately 7.7%, 7.1%, and 8.0% of consolidated net sales during the years ended March 31, 2009, 2010, and 2011, respectively.

Rather than serving as passive conduits for delivery of product, our industrial distributors participate in the overall competitive dynamic in the Process & Motion Control industry. Industrial distributors play a role in determining which of our Process & Motion Control products are stocked at their distributor centers and branch locations and, consequently, are most readily accessible to aftermarket buyers, and the price at which these products are sold.

We market our Process & Motion Control products both to OEMs and directly to end-users to create preference of our products through end-user specification. We believe this customer preference is important in differentiating our Process & Motion Control products from our competitors’ products, and preserves our ability to create channel partnerships where distributors will recommend Rexnord products to OEMs and end-users. In some instances, we have established a relationship with the end-user such that we, the end-user, and the end- user’s preferred distributor enter into a trilateral agreement whereby the distributor will purchase our Process & Motion Control products and stock them for the end-user. We believe our extensive product portfolio positions us to benefit from the trend towards rationalizing suppliers by industrial distributors.

 

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Water Management Customers

Our Water Management products are branded under the Zurn, VAG, GA, Rodney Hunt and Fontaine tradenames.

Our products sold to customers in our commercial construction, infrastructure and residential construction end-markets are distributed through independent sales representatives, plumbing wholesalers and industry-specific distributors in the food service, industrial, janitorial and sanitation industries.

Our independent sales representatives work with wholesalers to assess and meet the needs of building contractors. They also combine knowledge of our products, installation and delivery with knowledge of the local markets to provide contractors with value added service. We use several hundred independent sales representatives nationwide, along with a network of approximately 90 third-party warehouses, to provide our customers with same-day service and quick response times.

Water and wastewater end-users primarily consist of municipalities. Our independent sales representatives, as well as approximately 240 direct sales and marketing associates, work with these end-users, as well as their general contractors and engineering firms, to provide them with the engineered solutions that meet their needs. VAG, GA, Rodney Hunt and Fontaine benefit from strong brand recognition in the industry, which is further bolstered by a strong customer propensity to replace “like-for-like” products.

In addition to our domestic Water Management manufacturing facilities, we have maintained a global network of independent sources that manufacture high quality, lower cost component parts for our commercial and institutional products. These sources fabricate parts to our specifications using our proprietary designs, which enables us to focus on product engineering, assembly, testing and quality control. By closely monitoring these sources and through extensive product testing, we are able to maintain product quality and be a cost competitive producer of commercial and institutional products.

Product Development

The majority of our new product development begins with our extensive “Voice of the Customer” process. We have a team of approximately 350 engineers and technical employees who are organized by product line. Each of our product lines has technical staff responsible for product development and application support. The Rexnord Innovation Center provides additional support through enhanced capabilities and specialty expertise that can be utilized for product innovation and new product development. The Rexnord Innovation Center is a certified lab comprised of approximately 25 specialists that offers testing capability and support during the development process to all of our product lines. Our existing pipeline and continued investment in new product development are expected to drive revenue growth as we address key customer needs.

In both of our Process & Motion Control and Water Management platforms, we have demonstrated a commitment to developing technologically advanced products within the industries we serve. In the Process & Motion Control platform, we had approximately 200 and approximately 800 active United States and foreign patents, respectively, as of March 31, 2011. In addition, we thoroughly test our Process & Motion Control products to ensure their quality, understand their wear characteristics and improve their performance. These practices have enabled us, together with our customers, to develop reliable and functional Process & Motion Control solutions. In our Water Management platform, we had approximately 60 and approximately 30 active United States and foreign patents, respectively, as of March 31, 2011. Product innovation is crucial in the commercial and institutional plumbing products markets because new products must continually be developed to meet specifications and regulatory demands. Zurn’s plumbing products are known in the industry for such innovation. During fiscal 2011 our total investment in research, development and engineering was $33.7 million.

 

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Our Competitive Strengths

Key characteristics of our business that we believe provide us with a competitive advantage and position us for future growth include the following:

The Rexnord Business System. We operate our company in a disciplined way. The Rexnord Business System is our operating philosophy and it creates a scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating performance. RBS is based on the following principles: (1) strategy deployment—a long-term strategic planning process that determines annual improvement priorities and the actions necessary to achieve those priorities; (2) measuring our performance based on customer satisfaction, or the “Voice of the Customer;” (3) involvement of all our associates in the execution of our strategy; and (4) a culture that embraces Kaizen, the Japanese philosophy of continuous improvement. We believe applying RBS can yield superior growth, quality, delivery and cost positions relative to our competition, resulting in enhanced profitability and ultimately the creation of stockholder value. As we have applied RBS over the past several years, we have experienced significant improvements in growth, productivity, cost reduction and asset efficiency and believe there are substantial opportunities to continue to improve our performance as we continue to apply RBS.

Experienced, High-Caliber Management Team. Our management team is led by Todd Adams, President and Chief Executive Officer. George Sherman, our Non-Executive Chairman of the Board and, from 1990 to 2001, the CEO of Danaher Corporation, collaborates with the management team to establish the strategic direction of the Company. Other members of the management team include Mark Peterson, Senior Vice President and Chief Financial Officer, and Praveen Jeyarajah, Executive Vice President—Corporate and Business Development. We believe the overall talent level within our organization is a competitive strength, and we have added a number of experienced key managers across our platforms over the past several years. Mr. Sherman and the management team currently maintain a significant equity investment in the Company. As of March 19, 2012, after giving effect to this offering, their ownership interest represented approximately 14.8% of our common stock on a fully diluted basis.

Strong Financial Performance and Free Cash Flow. Since implementing RBS, we have established a solid track-record of delivering strong financial performance measured in terms of net sales growth, margin expansion and free cash flow conversion (cash flow from operations less capital expenditures compared to net income). Since fiscal 2004, net sales have grown at a compound annual growth rate of 14% inclusive of acquisitions, and Adjusted EBITDA margins (Adjusted EBITDA divided by net sales) have expanded to 19.8%. Additionally, we have consistently delivered strong free cash flow over the past several years by improving working capital performance and maintaining capital expenditures at reasonable levels. By continually focusing on improving our overall operating performance and free cash flow conversion, we believe we can create long-term stockholder value by using our cash flows to manage our leverage, as well as to drive growth through acquisitions over time.

Leading Market Positions in Diversified End-Markets. Our high-margin performance is driven by our industry leading positions in the diversified end-markets in which we compete. We estimate that greater than 85% of our net sales are derived from products in which we have leading market share positions. We believe we have achieved leadership positions in these markets through our focus on customer satisfaction, extensive offering of quality products, ability to service our customers globally, positive brand perception, highly engineered product lines, extensive specification efforts and market/application experience. We serve a diverse set of end-markets with our largest single end-market, mining, accounting for 13% of consolidated net sales in fiscal 2011.

Broad Portfolio of Highly Engineered, Specification-Driven Products. We believe we offer one of the broadest portfolios of highly engineered, specification-driven, project-critical products in the end-markets we serve. Our array of product applications, knowledge and expertise applied across our extensive portfolio of products allows us to work closely with our customers to design and develop solutions tailored to their individual specifications. Within our Water Management platform, our representatives work directly with engineers,

 

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contractors, builders and architects to specify our Water Management products early in the design phase of a project. We have found that once these customers have specified a company’s product with satisfactory results, they will generally use that company’s products in future projects. Furthermore, we believe our strong application engineering and new product development capabilities have contributed to our reputation as an innovator in each of our end-markets.

Large Installed Base, Extensive Distribution Network and Strong Aftermarket Revenues. Over the past century we have established relationships with OEMs and end-users across a diverse group of end-markets, creating a significant installed base for our Process & Motion Control products. This installed base generates significant aftermarket sales for us, as our products are consumed in use and must be replaced in relatively predictable cycles. In order to provide our customers with superior service, we have cultivated relationships with over 2,600 distributor locations serving our customers globally. Additionally, our Water Management platform has 27 principal manufacturing and warehouse facilities and uses approximately 90 third-party distribution facilities at which it maintains inventory. This broad distribution network provides us with a competitive advantage and drives demand for our Water Management products by allowing quick delivery of project-critical products to our customers facing short lead times. We believe this extensive distribution network also provides us with an opportunity to capitalize on the expanding renovation and repair market as building owners begin to upgrade existing commercial and institutional bathroom fixtures with high efficiency systems.

Significant Experience Identifying and Integrating Strategic Acquisitions. Since 2005, we have completed strategic acquisitions that have significantly expanded our Process & Motion Control platform and, through the $943 million acquisition of Zurn, established our Water Management platform. We have successfully completed and integrated several acquisitions in recent years totaling more than $1.5 billion of total transaction value. These strategic acquisitions have allowed us to establish and expand a new platform, widen our geographic presence, broaden our product lines and, in other instances, move into adjacent markets. We believe these acquisitions have created stockholder value through the implementation of RBS operating principles, which has resulted in identifying and achieving cost synergies, as well as driving growth and operational and working capital improvements.

Our Business Strategy

We strive to create stockholder value by seeking to deliver sales growth, profitability and asset efficiency, which we believe will result in superior financial performance and free cash flow generation when compared to other leading multi-platform industrial companies by focusing on the following key strategies:

Drive Profitable Growth. Our key growth strategies are:

 

   

Accelerate Growth in Key Vertical End-Markets—We believe that we have an opportunity to accelerate our overall net sales growth over the next several years by deploying resources to leverage our highly engineered product portfolio, industry expertise, application knowledge and unique manufacturing capabilities into certain key vertical end-markets that we expect to have above market growth rate potential. We believe those end-markets include, but are not limited to, mining, energy, aerospace, cement and aggregates, food and beverage, water infrastructure and the renovation and repair of existing commercial buildings and infrastructure.

 

   

Product Innovation and Resourcing “Break-throughs”—We intend to continue to invest in strong application engineering and new product development capabilities and processes. Our disciplined focus on innovation begins with our extensive “Voice of the Customer” process and follows a systematic process, ensuring that the commercialization and profitability of new products meet our expectations. Additionally, we will continue resourcing “break-throughs,” which we define as potential products or other growth opportunities that have an annual net sales potential of $20 million or more over 3 to 5 years. We believe growing demands for more energy and water conservation products will also provide opportunities for us to grow through innovation in both platforms.

 

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Drive Specification for Our Products—We intend to increase our installed base and grow aftermarket revenues by continuing to partner with OEMs to specify our Process & Motion Control products on original equipment applications. Within our Water Management platform, we intend to leverage our sales and distribution network and to increase specification for our products by working directly with our customers to drive specification for our products in the early design stages of a project.

 

   

Expand Internationally—We believe there is substantial growth potential outside the United States for many of our existing products by expanding distribution, further penetrating key vertical end-markets that are growing faster outside the United States and selectively pursuing acquisitions that will provide us with additional international exposure.

 

   

Pursue Strategic Acquisitions—We believe the fragmented nature of our Process & Motion Control and Water Management markets will allow us to continue to identify attractive acquisition candidates in the future that have the potential to complement our existing platforms by either broadening our product offerings, expanding our geographic presence or addressing an adjacent market opportunity.

Platform Focused Strategies. We intend to build our business around leadership positions in platforms that participate in multi-billion dollar, global, growing end-markets. Within our two existing platforms, we expect to continue to leverage our overall market presence and competitive position to provide further growth and diversification and increase our market share.

The Rexnord Business System. We operate our company in a disciplined way through the Rexnord Business System. RBS is our operating philosophy and it creates a scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating performance. We believe applying RBS can yield superior growth, quality, delivery and cost positions relative to our competition, resulting in enhanced profitability and ultimately the creation of stockholder value.

Suppliers and Raw Materials

The principal materials used in our Process & Motion Control and Water Management manufacturing processes are commodities and components available from numerous sources. The key materials used in our Process & Motion Control manufacturing processes include: sheet, plate and bar steel, castings, forgings, high-performance engineered plastic and a variety of components. Within our Water Management platform, we purchase a broad range of materials and components throughout the world in connection with our manufacturing activities that include: bar steel, brass, castings, copper, zinc, forgings, plate steel, high-performance engineered plastic and resin. Our global sourcing strategy is to maintain alternate sources of supply for our important materials and components wherever possible within both our Process & Motion Control and Water Management platforms. Historically, we have been able to successfully source materials, and consequently are not dependent on a single source for any significant raw material or component. As a result, we believe there is a readily available supply of materials in sufficient quantity from a variety of sources to serve both our short-term and long-term requirements. Additionally, we have not experienced any significant shortage of our key materials and have not historically engaged in hedging transactions for commodity supplies. We generally purchase our materials on the open market. However, in certain situations we have found it advantageous to enter into contracts for certain commodity purchases. Although currently we are not a party to any unconditional purchase obligations, including take-or-pay contracts or through-put contracts, these contracts generally have had one to five-year terms and have contained competitive and benchmarking clauses to ensure competitive pricing.

Backlog

Our backlog of unshipped orders was $379.4 million and $491.3 million at March 31, 2011 and December 31, 2011, respectively, which includes the impact of our acquisition of VAG and our divestiture. Approximately 95% of our backlog at December 31, 2011 is currently scheduled to ship within the next twelve months. See “Risk Factors—Risks Related to Our Business—We could be adversely affected if any of our significant customers default in their obligations to us” for more information on the risks associated with backlog.

 

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Geographic Areas

For historical financial information about geographic areas, see Note 19 to our audited consolidated financial statements included elsewhere in this prospectus.

Seasonality

We do not experience significant seasonality of demand for our Process & Motion Control products, although sales generally are slightly higher during our fourth fiscal quarter as our customers spend against recently approved capital budgets and perform maintenance and repairs in advance of spring and summer activity. Our Process & Motion Control end-markets also do not experience significant seasonality of demand.

Demand for our Water Management products is primarily driven by commercial construction activity, remodeling and retro-fit opportunities, and to a lesser extent, new home starts as well as water and wastewater infrastructure expansion for municipal, industrial and hydropower applications. Accordingly, weather has an impact on the cyclicality of certain end-markets. With the exception of our remodeling and retro-fit opportunities, weather is an important variable as it significantly impacts construction. Spring and summer months in the United States and Europe represent the main construction season for increased construction in the commercial and institutional markets, as well as new housing starts. As a result, sales generally decrease slightly in the third and fourth fiscal quarters as compared to the first two quarters of the fiscal year. The autumn and winter months generally impede construction and installation activity.

Our business also depends upon general economic conditions and other market factors beyond our control, and we serve customers in cyclical industries. As a result, our operating results could be negatively affected during economic downturns. See further information within “Risk Factors—Risks Related to Our Business—Our business depends upon general economic conditions and other market factors beyond our control, and we serve customers in cyclical industries. As a result, our operating results could further be negatively affected during any continued or future economic downturns.”

Employees

As of December 31, 2011, we had approximately 7,400 employees, of whom approximately 4,300 were employed in the United States. Approximately 535 of our United States employees are represented by labor unions. The five United States collective bargaining agreements to which we are a party will expire between February 2012 and September 2016. Additionally, approximately 1,700 of our employees reside in Europe, where trade union membership is common. We believe we have a strong relationship with our employees, including those represented by labor unions.

Environmental Matters

Our operations and facilities are subject to extensive federal, state, local and foreign laws and regulations related to pollution and the protection of the environment, health and safety and natural resources, including those governing, among other things, emissions to air, discharges to water, the use, generation, handling, storage, treatment and disposal of hazardous substances and wastes and other materials, and the remediation of contaminated sites. We have incurred and expect to continue to incur significant costs to maintain or achieve compliance with these requirements. The operation of manufacturing plants entails risks in these areas, and a failure by us to comply with applicable environmental laws, regulations or to obtain and comply with the permits required for our operations, could result in civil or criminal fines, penalties, enforcement actions, third party claims for property damage and personal injury, requirements to clean up property or to pay for the capital or operating costs of cleanup, or regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, including the installation of pollution control equipment or remedial actions. Moreover, if applicable environmental, health and safety laws and regulations, or the interpretation or enforcement thereof, become more stringent in the future, we could incur capital or operating costs beyond those currently anticipated.

 

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Some environmental laws and regulations, including the federal Superfund law, impose liability to investigate and remediate contamination on present and former owners and operators of facilities and sites, and on PRPs for third-party sites to which such PRPs may have sent waste for disposal. Such liability can be imposed without regard to fault and, under certain circumstances, may be joint and several resulting in one PRP being held responsible for the entire obligation. Liability may also include damages to natural resources. We are currently conducting or are otherwise involved in investigations and/or cleanup of known or potential contamination at certain of our current or former facilities, and have been named as a PRP at certain third party Superfund sites. See Note 18 to our audited consolidated financial statements included elsewhere in this prospectus for further discussion regarding our Downers Grove, Illinois facility and the Ellsworth Industrial Park Site. The discovery of additional contamination, including at acquired facilities or operations, or the imposition of more stringent cleanup requirements, could require us to make significant expenditures in excess of current reserves and/or available indemnification. In addition, we occasionally evaluate various alternatives with respect to our facilities, including possible dispositions or closures. Investigations undertaken in connection with these activities may lead to discoveries of contamination that must be remediated, and closures of facilities may trigger remediation requirements that are not applicable to operating facilities. We also may face liability for alleged personal injury or property damage due to exposure to hazardous substances used or disposed of by us, that may be contained within our current or former products, or that are present in the soil or ground water at our current or former facilities.

Legal Proceedings

Our 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. We established reserves 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 our financial position, results of operations or cash flows.

In connection with the Carlyle Acquisition in November 2002, Invensys plc has provided us with indemnification against certain contingent liabilities, including certain pre-closing environmental liabilities. We believe that, pursuant to such indemnity obligations, Invensys is obligated to defend and indemnify us with respect to the matters described below relating to the Ellsworth Industrial Park Site and to various asbestos claims. The indemnity notice period for certain pre-closing environmental liabilities, other than those set forth below relating to the Ellsworth Industrial Park Site, expired in November 2009, and the indemnity notice period for certain pre-closing environmental liabilities relating to the Ellsworth Industrial Park Site expires in November 2012. 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 adjusted 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 our 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

 

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against us related to the Site have been settled or dismissed. Pursuant to its indemnity obligation, Invensys continues to defend us in matters related to the Site and has paid 100% of the costs to date.

 

   

Multiple lawsuits (with approximately 1,000 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 our 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, our 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 approximately 4,000 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, our insurance providers have paid 100% of the costs related to the Prager asbestos matters. We believe that the combination of its insurance coverage and the Invensys indemnity obligations will cover any future costs of these matters.

In connection with the Falk Corporation (“Falk”) acquisition, Hamilton Sundstrand has provided us with indemnification against certain contingent liabilities, including coverage for certain pre-closing environmental liabilities and certain products-related asbestos exposure liabilities. We believe that, pursuant to such indemnity obligations, Hamilton Sundstrand is obligated to defend and indemnify us 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. Certain pre-closing environmental matters are subject to an indemnity notice period that expires in May 2012.

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 approximately 200 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 500 claimants in these suits. The ultimate outcome of these lawsuits cannot presently be determined. Hamilton Sundstrand is defending us 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 and class action related litigation. As of December 31, 2011, Zurn and an average of approximately 80 other unrelated companies were defendants in approximately 7,000 asbestos related lawsuits representing approximately 27,000 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 December 31, 2011, we estimate the potential liability for asbestos-related claims pending against Zurn as well as the claims expected to be filed in the next ten years to be approximately $65.0 million of which Zurn expects to pay approximately $53.0 million in the next ten years on such claims, with the balance of the estimated liability being paid in subsequent 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, Zurn’s 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 its potential asbestos liability as of December 31, 2011, is approximately $258.0 million, and believes that all current claims are covered by this insurance. However, principally as a result of the past insolvency of certain of our insurance carriers, certain coverage gaps will exist if and after our other carriers have paid the first $182.0 million of aggregate liabilities. In order for the next $51.0 million of insurance coverage from solvent carriers to apply, management estimates

 

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that it would need to satisfy $14.0 million of asbestos claims. Layered within the final $25.0 million of the total $258.0 million of coverage, management estimates that it would need to satisfy an additional $80.0 million of asbestos claims. If required to pay any such amounts, we could pursue recovery against the insolvent carriers, but it is not currently possible to determine the likelihood or amount of such recoveries, if any.

As of December 31, 2011, we recorded a receivable from our insurance carriers of $65.0 million, which corresponds to the amount of its potential asbestos liability that is covered by available insurance and is currently determined to be probable of recovery. However, there is no assurance that $258.0 million of insurance coverage will ultimately be available or that Zurn’s asbestos liabilities will not ultimately exceed $258.0 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 our carriers.

Our subsidiaries, Zurn PEX, Inc. and Zurn Industries, LLC (formerly known as Zurn Industries, Inc.), have been named as defendants in fifteen lawsuits, brought between July 2007 and July 2011, in various United States courts (MN, ND, CO, NC, MT, AL, VA, LA, NM, MI and HI). The plaintiffs in these suits represent (in the case of the proceedings in Minnesota), or seek to represent, a class of plaintiffs alleging damages due to the alleged failure or anticipated failure of the Zurn brass crimp fittings on the PEX plumbing systems in homes and other structures. The complaints assert various causes of action, including but not limited to negligence, breach of warranty, fraud, and violations of the Magnuson Moss Act and certain state consumer protection laws, and seek declaratory and injunctive relief, and damages (including punitive damages). All but the Hawaii suits, which remain in Hawaii state court, have been transferred to a multi-district litigation docket in the District of Minnesota for coordinated pretrial proceedings. The court in the Minnesota proceedings certified certain classes of plaintiffs in Minnesota for negligence and negligent failure to warn claims and for breach of warranty claims. On July 6, 2011, the U.S. Court of Appeals for the 8th Circuit affirmed the class certification order of the Minnesota court. Class certification has not been granted in the other state court actions. Our insurance carriers currently are funding our defense in these proceedings; however, they have filed suit for a declaratory judgment in Florida state court challenging their coverage obligations with respect to certain classes of claims. The Florida suit currently is stayed, pending resolution of the underlying claims. Although we continue to vigorously defend ourselves in the various court proceedings and continue to vigorously pursue insurance coverage, the uncertainties of litigation, and insurance coverage and collection, as well as the actual number or value of claims, may subject us to substantial liability that could have a material adverse effect on us.

Properties

Within Process & Motion Control, as of the date hereof, we have 36 principal manufacturing, warehouse and repair facilities, 24 of which are located in North America, five in Europe, one in Australia, two in South America and four in Asia. All of our facilities listed below are suitable for their respective operations and provide sufficient capacity to meet reasonably foreseeable production requirements.

 

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We own and lease our Process & Motion Control facilities throughout the United States and in several foreign countries. Listed below are the locations of our principal Process & Motion Control manufacturing, warehouse and repair facilities:

 

Facility Location

 

Product/Use

 

Size (square feet)

   

Owned/Leased

North America

     

Auburn, AL

  Coupling     133,000      Leased

Bridgeport, CT

  Special Components     31,000      Owned

Clinton, TN

  Industrial Bearings     180,000      Owned

Cudahy, WI

  Special Components     100,000      Leased

Downers Grove, IL (2 facilities)

  Aerospace     248,000      Owned

Grafton, WI

  Flattop     95,000      Owned

Grove City, OH

  Warehouse     73,000      Leased

Indianapolis, IN

  Industrial Bearings     527,000      Owned

Lincoln, NE

  Coupling     34,000      Leased

Mexico City, Mexico

  Warehouse and Gear     36,000      Leased

Milwaukee, WI

  Gear     1,100,000      Owned

New Berlin, WI

  Gear Repair     47,000      Leased

New Berlin, WI

  Coupling     54,000      Owned

New Orleans, LA

  Gear Repair     54,000      Owned

Rockford, IL

  Coupling     22,500      Leased

Salt Lake City, UT

  Warehouse     29,000      Leased

Simi Valley, CA (2 facilities)

  Aerospace     55,000      Leased

Stuarts Draft, VA

  Gear     97,000      Owned

Toronto, Canada

  Gear Repair     30,000      Leased

Toronto, Canada

  Warehouse     33,000      Leased

West Milwaukee, WI

  Industrial Chain     370,000      Owned

Wheeling, IL

  Aerospace     83,000      Owned

Europe

     

Betzdorf, Germany

  Industrial Chain     179,000      Owned

Corregio, Italy

  Flattop     79,000      Owned

Dortmund, Germany

  Coupling     36,000      Owned

Gloucestershire, England

  Coupling     20,500      Leased

Gravenzande, Netherlands

  Flattop     117,000      Leased

South America

     

Sao Leopoldo, Brazil

  Industrial Chain     77,000      Owned

Santiago, Chile

  Gear Repair     15,000      Leased

Australia

     

Newcastle, Australia

  Gear     65,000      Owned

Asia

     

Changzhou, China

  Gear and Coupling     206,000      Owned

Shanghai, China

  Gear and Coupling     47,000      Leased

Shanghai, China

  Industrial Chain and Flattop     134,000      Leased

Thane, India

  Coupling     16,500      Leased

 

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Within Water Management, as of the date hereof, we have 27 principal manufacturing and warehouse facilities, 22 of which are located in North America, two in Europe and three in Asia, as set forth below:

 

Facility Location

 

Product/Use

 

Size (square feet)

   

Owned/Leased

North America

     

Abilene, Texas

  Commercial Brass     177,000      Owned

Commerce, Texas

  PEX     175,000      Owned

Cranberry TWP., Pennsylvania

  Water and Wastewater     37,000      Owned

Dallas, Texas

  Warehouse     52,000      Leased

Elkhart, Indiana

  PEX     110,000      Owned

Erie, Pennsylvania

  Specification Drainage     210,000      Leased

Erie, Pennsylvania

  Specification Drainage     100,000      Owned

Falconer, New York*

  Specification Drainage/Commercial Brass     151,500      Leased

Harborcreek, Pennsylvania

  Specification Drainage/PEX     15,000