Based in Milwaukee, Wisconsin, Rexnord (RXN) scheduled a $450 million IPO with a market capitalization of $1.7 billion at a price range mid-point of $19 for Thursday, March 29, 2012.
RXNis one of nine new IPOs scheduled for March 26 week.
A product of a leveraged buyout, RXN is an industry leader in dull and boring markets: industrial process control customers (2/3 of sales) and municipal governments, primarily for water & waste water treatment products. Apollo Global Management (APO) affiliates control 94% of RXN's stock pre-IPO.
RXN's balance sheet is very highly leveraged, with a market capitalization-to-tangible net worth ratio of -1.2.
Historical income statements are not comparable based on recent acquisitions. In adjusting for the IPO debt repayments for the nine months ended December 2011, the P/E ratio is 38, which seems high.
However, tthe VAG Holding Acquisition was completed in October 2011 for $236 million and financials are only include from that date going forward. The SEC should have required RXN to include income statements showing combined RXN/VAG results from the beginning of the fiscal year, which was April 1, 2011.
In general, institutional investors seem to like companies with dominate market shares, in the hopes they can squeeze out more earnings going forward.
In RXN's case the gross margin is relatively low at 35%, which means there's not much to squeeze. And in order to expect much in the way of top line revenue increases, RXN's markets for their products must show reasonable increases; which appears problematic.
We think it's ok to take RXN on the IPO, mainly because results from the $236 million purchase (completed in October 2011) price aren't fully included in the financials, RXN is profitable and the price to sales is only .9. On the surface, however, a 38 times trailing 12 months P/E multiple is high for a prosaic business, even one that is relatively dominant in its markets.
FINANCIAL STATEMENTS NOT COMPARABLE
(1) Financial data for fiscal 2009 and 2010 has been adjusted for RXN's voluntary change in accounting for actuarial gains and losses related to pension and other postretirement benefit plans.
(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.
S-1, page 14
VAG Holding Acquisition
On October 10, 2011, RXN 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 RXN's existing Water Management platform and allows RXN 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.
RXN's financial position and results of operations include VAG subsequent to October 10, 2011.
On April 2, 2011, RXN 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 RXN's global customer base. RXN's financial position and results of operations include Autogard subsequent to April 2, 2011.
RXN says its is a "growth-oriented, multi-platform industrial company with what RXN believes has leading market shares and highly trusted brands that serve a diverse array of global end-markets. "
RXN then goes on the say "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."
More to follow: "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."
Process & Motion Control product portfolio: 2/3 of revenue
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®.
Water Management platform: 1/3 of revenue
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®.
NINE MONTH CORE SALES
Process & Motion Control, +14%
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, +2%
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.
LEADING MARKET SHARE
RXN estimates that over 85% of its total net sales come from products in which it has a leading market share position. RXN products are generally "specified" or requested by end-users across both strategic platforms as a result of their reliable performance in demanding environments, custom application engineering capabilities and RXN's ability to provide global customer support.
RXN says it generally does not participate in segments of its 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
RXN estimates that the addressable North American market for its current product offerings is approximately $5.0 billion in net sales per year.
Globally, RXN estimates its 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 RXN competes with certain domestic and international competitors across a portion of its product lines, RXN does not believe that any one competitors directly competes on all of product lines.
Water Management Market
RXN estimates that the addressable North American market for current product offerings is approximately $2.3 billion in net sales per year.
Globally, RXN estimates its addressable market to be approximately $5.3 billion in net sales per year.
RXN believes the markets in which its Water Management platform participates are relatively fragmented with competitors across a broad range of industries and product lines.
Although competition exists across all of Water Management businesses, RXN does not believe that any one competitor directly competes with across all of our product lines.
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 RXN's experience that, once an engineer, contractor, builder or architect has specified RXN product with satisfactory results, that person often will continue to use RXN products in future projects.
Process & Motion Control Customers
RXN's 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 Process & Motion Control net sales are aftermarket, OEMs and end-users ultimately drive the demand for Process & Motion Control products.
With more than 2,600 distributor locations worldwide, RXN has one of the most extensive distribution networks in the industry. The largest of our Process & Motion Control industrial distributors, which is also RXN's 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.
Water Management Customers
RXN's Water Management products are branded under the Zurn, VAG, GA, Rodney Hunt and Fontaine tradenames.
RXN products are sold to customers in 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.
Water and wastewater end-users primarily consist of municipalities. 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.
RXN's senior secured credit facilities and the indentures governing its senior notes limits RXN's ability to pay dividends or other distributions on common stock.
RXH's 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 beneficially owned 93.6% of RXN's common stock and will beneficially own 69.1% or 62,554,046 shares of RXN's common stock after this offering, assuming the underwriters do not exercise their option to purchase up to 3,552,631 additional shares.
USE OF PROCEEDS
RXN expects to net $271 million from its IPO. The proceeds are alloated to pay Apollo a $15 million management termination fee, with the balance to repay debt.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Rexford (RXN) is scheduled to price Wed for trading Thursday.