Rexnord (RXN) Beats Q3 Earnings Estimates, Raises FY19 View

Rexnord Corporation (NYSE:RXN) kept its earnings streak alive in third-quarter fiscal 2019 (ended Dec 31, 2018). It pulled off a positive earnings surprise of 17.5%. The company's share price increased 1.8% on Jan 31, closing the trading session at $26.15.

This machinery company’s adjusted earnings in the reported quarter were 47 cents per share, surpassing the Zacks Consensus Estimate of 40 cents. Also, the bottom line increased 20.5% from the year-ago quarter’s number of 39 cents.

Core Sales and Acquisitions Drive Revenues

In the reported quarter, Rexnord’s net sales were $485 million, increasing 11.1% year over year. The improvement was driven by a 6% contribution from core sales growth and 7% from net positive impact of acquisitions/divestitures, partially offset by 2% adverse impact of foreign currency translation.

However, the top line was in line with the Zacks Consensus Estimate.

The company reports results under two segments — Process & Motion Control, and Water Management. The quarterly segmental results are briefly discussed below:

Revenues from Process & Motion Control totaled $326.7 million, increasing 11.7% year over year. It represented 67.4% of net sales. Solid demand across many of the end markets drove 4% growth in core sales. Acquisition of Centa Power added 10% to sales growth while unfavorable movements in foreign currencies negatively impacted results by 2%.

Water Management revenues, representing 32.6% of net sales, were $158.3 million, up 9.8% year over year. The core sales growth of 10% was driven by rise in demand from building construction markets in North America.

Gross Margin Falls Y/Y

In the reported quarter, Rexnord’s cost of sales grew 12.8% year over year to $300.7 million. It represented 62% of net sales versus 61% recorded in the year-ago quarter. Gross margin decreased 100 basis points (bps) to 38%. Selling, general and administrative expenses of $102.4 million increased 8.6% year over year, and represented 21.1% of net sales versus 21.6% in the year-ago quarter.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $103.1 million, up 11% year over year. Adjusted EBITDA margin was 21.3%, flat on a year-over-year basis.

For the Process & Motion Control segment, adjusted EBITDA margin was flat at 22.3% compared with the year-ago quarter while that for the Water Management segment expanded 10 bps to 25.6%.

Balance Sheet and Cash Flow

Exiting the fiscal third quarter, Rexnord had cash and cash equivalents of $297.1 million, reflecting 32.9% growth from $223.5 million recorded in the last reported quarter. Long-term debt slipped 1.9%, sequentially, to $1,311 million.

Notably, the company repaid $272.7 million of debt during the first nine months of fiscal 2019 while raised funds amounting to $249.8 million through debt borrowings.

In the first nine months of fiscal 2019, Rexnord generated net cash of $145.3 million from operating activities, reflecting year-over-year growth of 19.2%. The company increased the capital investment for purchasing property, plant and equipment by 5.6% over the year-ago tally to $26.5 million. Free cash flow was $118.8 million, increasing 22.7% from the year-ago comparable period.

Outlook

For fiscal 2019, Rexnord anticipates benefiting from strengthening demand, initiatives to mitigate impacts of tariffs and inflation, higher free cash flow generation and supply-chain optimization, and footprint-repositioning programs (“SCOFR”).

The Process & Motion Control segment will flourish on the back of strengthening demand in global food & beverage, global process industries, and global commercial aerospace end markets. Industrial-distribution business in the United States and Canada will also increase.

Sales in the Water Management segment will gain from a solid product portfolio and healthy demand from non-residential construction markets of the United States and Canada.

For fiscal 2019, the company anticipates core sales to grow in a mid-single digit. Adjusted EBITDA is projected to be $437-$443 million versus $433-$443 million mentioned earlier. The improvement was driven by solid operational execution and anticipated benefits from initiatives.

Net income will likely be $169-$171 million versus $147-$154 million stated previously. The effective tax rate is expected to be roughly 25-26%. Capital expenditure is anticipated to be approximately 2.2% of sales. Free cash will exceed net income.

Rexnord Corporation Price, Consensus and EPS Surprise