Critical Accounting Policies and Estimates The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities on the date of the financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), of our Annual Report on Form 10-K for the fiscal year ended March 31, 2012 for information with respect to our critical accounting policies, which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management. Except for the items reported below, management believes that as of September 29, 2012 and during the period from April 1, 2012 through September 29, 2012, there has been no material change to this information. Evaluation of Subsequent Events
We evaluated subsequent events from the balance sheet date of September 29, 2012 through the date of this filing. Subsequent to the balance sheet date, on October 4, 2012, the Company entered into an Incremental Assumption Agreement relating to the Second Restated Credit Agreement, which reduces the effective interest rate applicable to the borrowings under the term loan facility by fifty basis points. See Part I, Note 21 Subsequent Events for further information. Recent Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board ("FASB") issued an update to Accounting Standards Codification ("ASC") No. 350, Intangibles - Goodwill and Other, which now permits entities to initially perform a qualitative assessment on indefinite-lived intangible asset impairment to assess whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, as a result of the qualitative assessment, it is determined that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. In addition, in September 2011, the FASB issued a similar update which also 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. An entity also has the option to forgo the qualitative assessment for any indefinite-lived intangible asset or goodwill in any period and proceed directly to performing the quantitative test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The Company will adopt the guidance for our annual impairment tests performed in fiscal 2013. The application of this guidance to our annual impairment test is not expected to have a significant impact on the Company's results of operations, financial position, or cash flows.
In June 2011, the FASB 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 stockholders' equity. Rather, the Company must elect to present the items of net (loss) income and other comprehensive (loss) income in a single continuous statement of comprehensive (loss) 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 Company adopted this guidance effective April 1, 2012 using two separate, but consecutive, statements. As the new guidance relates to presentation only, the adoption did not have a significant impact on the Company's results of operations, financial position or cash flows. Fiscal Year
Our fiscal year ends on March 31. Throughout this MD&A, we refer to the period from July 1, 2012 through September 29, 2012 as the "second quarter of fiscal 2013" or the "second quarter ended September 29, 2012." Similarly, we refer to the period from July 3, 2011 through October 1, 2011 as the "second quarter of fiscal 2012" or the "second quarter ended October 1, 2011."

Results of Operations
General
Rexnord is a growth-oriented, multi-platform industrial company with what we believe are leading market shares and highly trusted brands that serve a diverse array of global end-markets. Our heritage of innovation and specification have allowed us to provide highly engineered, mission critical solutions to customers for decades and affords us the privilege of having long-term, valued relationships with market leaders. We operate our Company in a disciplined way and the Rexnord Business System ("RBS") is our operating philosophy. Grounded in the spirit of continuous improvement, RBS creates a scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating performance throughout all aspects of our business.
The following information should be read in conjunction with the consolidated financial statements and notes thereto, along with Item 7 "MD&A" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012. Consolidated Overview
Net sales for the second quarter of fiscal 2013 increased 11% from the prior year to $500 million, primarily due to the acquisition of VAG in the third quarter of fiscal 2012. Net sales excluding the impact of foreign currency fluctuations and the effect of acquisitions and divestitures ("core sales"), increased 2% year-over-year in the second quarter. Income from operations for the second quarter of fiscal 2013, which included $2.4 million of restructuring costs, was $66.1 million compared to $61.1 million in the second quarter of fiscal 2012. Income from operations for the second quarter excluding restructuring costs increased 12.1% to $68.5 million, or 13.7% of sales. Net sales for the first six months of fiscal 2013 increased 8% from the comparable period in the prior year to $993 million. Income from operations for the first six months of fiscal 2013 was $121.1 million and included $4.0 million of restructuring costs and a $10.1 million charge related to a pending legal settlement reached in connection with the Zurn brass fittings litigation (recorded in the first quarter of fiscal 2013). Income from operations for the first six months of fiscal 2013 excluding these items increased 9.3% to $135.2 million, or 13.6% of sales.
Second Quarter Ended September 29, 2012 Compared with the Second Quarter Ended October 1, 2011:

Net sales
(Dollars in Millions)
                                  Quarter Ended
                          September 29,      October 1,
                               2012             2011         Change    % Change
Process & Motion Control $         309.1    $      310.3    $ (1.2 )      -  %
Water Management                   190.4           138.2      52.2       38  %
 Consolidated            $         499.5    $      448.5    $ 51.0       11  %

Process & Motion Control
Process & Motion Control net sales in the second quarter of fiscal 2013 were $309.1 million compared to $310.3 in the second quarter fiscal 2012. Core net sales increased 3% from the prior year second quarter driven primarily by growth in aerospace, energy and food and beverage end-markets. The increase in core net sales was offset by the unfavorable impact of foreign currency fluctuations and a fiscal 2012 second quarter divestiture. Water Management
Water Management net sales in the second quarter of fiscal 2013 increased 38% from the prior year to $190.4 million, driven by the acquisition of VAG. Core sales, which excludes the impact of the VAG acquisition, were flat year-over-year in the fiscal 2013 second quarter as market share gains and increased alternative market sales in our non-residential construction end-markets were offset by expected lower shipments to our North American municipal water end-markets.

Income (loss) from operations
(Dollars in Millions)

                                 Quarter Ended
                          September 29,     October 1,
                              2012             2011        Change     % Change
Process & Motion Control $        56.5     $     53.2     $ 3.3          6  %
  % of net sales                  18.3 %         17.1 %     1.2  %
Water Management                  18.4           14.6       3.8         26  %
  % of net sales                   9.7 %         10.6 %    (0.9 )%
Corporate                         (8.8 )         (6.7 )    (2.1 )      (31 )%
  Consolidated           $        66.1     $     61.1     $ 5.0          8  %
    % of net sales                13.2 %         13.6 %    (0.4 )%

Process & Motion Control
Process & Motion Control income from operations for the second quarter of fiscal 2013 was $56.5 million, which includes $2.2 million of restructuring charges, compared to $53.2 million for the second quarter of fiscal 2012. Excluding the impact of the restructuring charges, fiscal 2013 second quarter income from operations increased 10.3% from the prior year comparable period and as a percentage of net sales increased 190 basis points to 19.0%, compared to the second quarter of fiscal 2012, as a result of productivity gains and efficiencies as well as increased operating leverage on higher year-over-year core sales.

Water Management
Water Management income from operations for the second quarter of fiscal 2013 increased 26.0% to $18.4 million, compared to $14.6 million for the second quarter of fiscal 2012, primarily due to the acquisition of VAG. Income from operations as a percent of net sales was 9.7% for the second quarter of fiscal 2013 as core operating margin expansion year-over-year was offset by the mix impact of the VAG acquisition.
Corporate
Corporate expenses were $8.8 million and $6.7 million in the second quarter of fiscal 2013 and fiscal 2012, respectively. The increase in corporate expenses primarily relate to the timing of professional services incurred in the second quarter of fiscal 2013, as well as an increase in stock based compensation expense resulting from additional fiscal 2013 stock option grants associated with our initial public offering.

Interest expense, net

Interest expense, net was $37.2 million in the second quarter of fiscal 2013 compared to $42.8 million in the second quarter of fiscal 2012. The year-over-year decrease in interest expense is primarily the result of a reduction in the total outstanding debt, partially offset by higher weighted average borrowing rates.

Other income (expense), net

Other income, net for the quarter ended September 29, 2012, consists of foreign currency transaction losses of $0.1 million, a $0.1 million loss on the sale of property, plant and equipment and other miscellaneous income of $0.4 million. Other expense, net for the quarter ended October 1, 2011, consists of management fee expense of $0.8 million, foreign currency transaction losses of $5.9 million and other miscellaneous losses of $0.9 million.

Provision (benefit) for income taxes

The income tax provision was $8.8 million in the second quarter of fiscal 2013 compared to an income tax benefit of $0.4 million in the second quarter of fiscal 2012. The effective income tax rate for the second quarter of fiscal 2013 was 30.2% versus (10.5)% in the second quarter of fiscal 2012. The effective income tax rate for the second quarter of fiscal 2013 is below the U.S. federal statutory rate of 35% due to the accrual of foreign income taxes at rates which are generally below the U.S. federal statutory rate, as well as the recognition of certain foreign related branch losses for U.S. income tax purposes. The income tax benefit, associated with the income before income taxes, for the second quarter of fiscal 2012 is attributable to the recognition of certain, previously unrecognized tax benefits due to the lapse of the applicable statute of limitations.

Net income from continuing operations

Our net income from continuing operations for the second quarter of fiscal 2013 was $20.3 million compared to net income of $4.2 million in the second quarter of fiscal 2012 as a result of the factors described above. Diluted income per share from continuing operations increased $0.14 or 250% to $0.20. Diluted net income per share is impacted by the dilutive effect of the current year increase in average outstanding shares from our initial public offering.

(Loss) income from discontinued operations

Our net loss from discontinued operations was $1.1 million in the second quarter of fiscal 2013 as compared to income from discontinued operations of $0.3 million in the second quarter of fiscal 2012. The loss on discontinued operations relates to the planned divestiture by sale of a non-core engineered chain business located in Shanghai, China within the Process & Motion Control platform. The Company is currently engaged in an active sale process and expects the transaction to be completed within the next 12 months.

Six Months Ended September 29, 2012 Compared with the Six Months Ended
October 1, 2011:
Net sales
(Dollars in Millions)
                                 Six Months Ended
                          September 29,      October 1,
                               2012             2011         Change     % Change
Process & Motion Control $         623.0    $      635.0    $ (12.0 )     (2 )%
Water Management                   370.1           283.2       86.9       31  %
 Consolidated            $         993.1    $      918.2    $  74.9        8  %

Process & Motion Control

Process & Motion Control net sales in the first six months of fiscal 2013 were $623.0 million compared to $635.0 million in the first six months of fiscal 2012. Core net sales, which excludes 3% of unfavorable currency fluctuations and a 1% unfavorable impact from our second quarter fiscal 2012 divestiture, increased by 2% year-over-year, driven primarily by growth in non-U.S. mining, aerospace, and energy end-markets.

Water Management

Water Management net sales in the first six months of fiscal 2013 increased 31% to $370.1 million compared to $283.2 million of net sales reported in the first six months of fiscal 2012 as a 36% increase in sales due to the VAG acquisition was partially offset by a 5% decrease in core net sales, due to expected lower shipments to our North American municipal water end-markets partially offset by market share gains and growth in alternative markets within our non-residential construction end-markets.

Income (loss) from operations
(Dollars in Millions)

                                 Six Months Ended
                          September 29,      October 1,
                               2012             2011         Change      % Change
Process & Motion Control $        112.0     $     103.1     $  8.9          9  %
  % of net sales                   18.0 %          16.2 %      1.8  %
Water Management                   34.9            34.4        0.5          1  %
  % of net sales                    9.4 %          12.1 %     (2.7 )%
Corporate                         (25.8 )         (13.8 )    (12.0 )      (87 )%
  Consolidated           $        121.1     $     123.7     $ (2.6 )       11  %
    % of net sales                 12.2 %          13.5 %     (1.2 )%

Process & Motion Control
Process & Motion Control income from operations for the first six months of fiscal 2013 was $112.0 million, which included $3.1 million of restructuring charges, compared to $103.1 million in the first six months of fiscal 2012. Income from operations excluding restructuring charges increased 12% from the prior year and as a percent of net sales increased 230 basis points from the prior year to 18.5% of sales. The improvement in fiscal 2013 operating margin resulted from productivity gains and efficiencies as well as increased operating leverage on higher year-over-year core sales. Water Management
Water Management income from operations for the first six months of fiscal 2013 was $34.9 million, which includes $0.9 million of restructuring charges, compared to $34.4 million in the first six months of fiscal 2012. Income from operations excluding the restructuring charges as a percent of net sales decreased 240 basis points from the first six months of the prior year to 9.7%. The decline in fiscal 2013 operating margin is primarily due to reduced operating leverage on lower year-over-year net sales within our North American water markets as well as the mix impact of the VAG acquisition. Corporate
Corporate expenses increased by $12.0 million from $13.8 million in the first six months of fiscal 2012 to $25.8 million in the first six months of fiscal 2013 primarily due to a $10.1 million incremental charge related to a pending legal settlement reached in connection with ongoing litigation associated with alleged failure or anticipated failure of Zurn brass fittings. See Part I Item I, Note 15 Commitments and Contingencies for additional information. The first six months of fiscal 2013 also included an increase in stock based compensation expense resulting from stock option grants associated with our initial public offering.
Interest expense, net
Interest expense, net was $75.5 million in the first six months of fiscal 2013 compared to $87.2 million in the first six months of fiscal 2012. The year-over-year reduction in interest expense is primarily the result of the reduction in outstanding debt, partially offset by higher weighted average borrowing rates.
Loss on extinguishment of debt

During the first six months of fiscal 2013, we recorded a $21.1 million loss on extinguishment of debt as a result of our early redemption of all of the then outstanding 11.75% Notes, which primarily consisted of a $17.6 million premium related to redemption and $3.5 million of a non-cash write-off of the deferred financing costs. During the first six 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 income (expense), net
Other income, net for the first six months of fiscal 2013 was $0.7 million and consisted of management fee expense of $15.0 million to terminate our management agreement with Apollo, foreign currency transaction losses of $4.9 million, a CDSOA recovery of $16.6 million, a $4.1 million gain on the sale of property, plant and equipment and other miscellaneous losses of $0.1 million. Other expense, net for the first six months of fiscal 2012 was $7.8 million and consisted of management fee expense of $1.5 million, foreign currency transaction losses of $5.3 million and other miscellaneous losses of $1.0 million.

Provision for income taxes
The income tax provision recorded in the first six months of fiscal 2013 was $5.6 million compared to an income tax provision of $6.0 million in the first six months of fiscal 2012. Our effective income tax rate for the first six months of fiscal 2013 was 22.2% versus 28.4% in the first six months of fiscal 2012. The effective income tax rate for the first six months of fiscal 2013 is below the U.S. federal statutory rate of 35% due to the accrual of foreign income taxes at rates which are generally below the U.S. federal statutory rate, the recognition of certain foreign related branch losses for U.S. income tax purposes, as well as the higher tax benefit associated with significant, discrete items compared to the overall forecasted rate in conjunction with the relatively low amount of income before income taxes. The effective income tax rate for the first six months of fiscal 2012 is below the U.S. federal statutory rate of 35% due to the recognition of certain, previously unrecognized tax benefits as a result of the lapse of the applicable statute of limitations. Net income from continuing operations
Our net income from continuing operations for the first six months of fiscal 2013 increased 29.8% to $19.6 million compared to a net income from continuing operations of $15.1 million in the first six months of fiscal 2012 due to the factors described above. Diluted income per share from continuing operations in the first six months of fiscal 2013 was $0.20, compared to diluted net income from continuing operations per share of $0.21 in the first six months of second quarter of fiscal 2012. Comparability is impacted by the dilutive effect of the current year increase in average outstanding shares from our initial public offering.

(Loss) income from discontinued operations

Our net loss from discontinued operations was $2.6 million for the first six months of fiscal 2013 as compared to income from discontinued operations of $0.6 million in the first six months fiscal 2012. The loss on discontinued operations relates to the planned divestiture by sale of a non-core engineered chain business located in Shanghai, China within the Process & Motion Control platform. The Company is currently engaged in an active sale process and expects the transaction to be completed within the next 12 months.

Non-GAAP Financial Measures
Core sales excludes the impact of acquisitions, divestitures and foreign currency translation. Management believes that core sales facilitates easier comparisons of our net sales performance with prior and future periods and to our peers. We exclude the effect of acquisitions because the nature, size and number of acquisitions can vary dramatically from period to period and between us and our peers, and can also obscure underlying business trends and make comparisons of long-term performance difficult. We exclude the effect of foreign currency translation from this measure because the volatility of currency translation is not under management's control.
In addition to net income, we believe Adjusted EBITDA (as described below in "Covenant Compliance") is an important measure because, under our senior secured credit facilities, 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). We reported Adjusted EBITDA in the second quarter and six months ended September 29, 2012, of $100.5 million and $198.0 million, respectively, and net income for the same periods of $19.2 million and $17.0 million, respectively. Covenant Compliance
The credit agreement and indenture that governs our notes 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 indenture that governs 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, certain non-payments or defaults under other indebtedness, covenant defaults, events of bankruptcy and a change of control. Certain covenants contained in the credit agreement 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 of 5.0 to 1.0 as of the end of each fiscal quarter. Certain covenants contained in the indenture that governs 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 indenture, 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.
"Fixed Charges" is defined in our indentures as net interest expense, excluding the amortization or write-off of deferred financing costs.
"Adjusted EBITDA" is the term we use to describe EBITDA as defined and adjusted in our senior secured credit facilities, which is net income, adjusted for the items summarized in the table below. Adjusted EBITDA is intended to show our unleveraged, pre-tax operating results and therefore reflects our financial performance based on operational factors, excluding non-operational, non-cash or non-recurring losses or gains. Adjusted EBITDA is not a presentation made in accordance with GAAP, and our use of the term Adjusted EBITDA varies from others in our industry. This measure should not be considered as an alternative to net income, income from operations or any other performance measures derived in accordance with GAAP. Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted EBITDA does not reflect: (a) our capital expenditures, future requirements for capital expenditures or contractual commitments; (b) changes in, or cash requirements for, our working capital needs; (c) the significant interest expenses, or the cash requirements necessary to service interest or principal payments, on our debt; (d) tax payments that represent a reduction in cash available to us; (e) any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future; (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 . . .