Machinery company Rexnord Corporation kept its earnings streak alive in the third quarter of fiscal 2018 (ended Dec 31, 2017) with adjusted earnings of 37 cents per share, surpassing the Zacks Consensus Estimate of 27 cents by 37%. Also, the bottom line increased 48% from the year-ago tally of 25 cents.

The quarterly results exclude the impact of $55 million non-recurring charge related to the U.S. tax reform.

Notably, it pulled off an average positive earnings surprise of 14.7% for the first three quarters of the fiscal year.

Core & Forex Gains Drive Revenues

Net sales in the quarter were $492.3 million, exceeding the Zacks Consensus Estimate of $482.8 million by roughly 2%. Also, the top line increased 9% year over year, supported by 6% growth in core sales, 2% positive impact of currency translation and 1% net positive impact of acquisitions/divestitures.

Both the segments — Process & Motion Control and Water Management — reported impressive results. The segmental quarterly results are briefly discussed below:

Revenues from Process & Motion Control totaled $292.5 million, increasing 8.2% year over year. It represented 59.4% of the quarter’s net sales. The segment’s results benefited from improved demand in its end markets.

Water Management revenues, representing 40.6% of net sales, were $199.8 million, up 10.1% year over year. However, the figure jumped 11.6%, excluding the impact of RHF product line exit. The performance was driven by rise in demand from nonresidential construction and water infrastructure end markets.

Decline in Costs Boosts Margins

In the quarter, Rexnord’s cost of sales increased 3.5% year over year while, as a percentage of net sales, it represented 62.8%. In the year-ago quarter, cost of sales was 66.1% of net sales. Gross margin improved 330 basis points (bps) to 37.2%.

Selling, general and administrative expenses, as a percentage of net sales, decreased 30 bps year over year to 21.8%. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) in the quarter were $94.9 million, up 19.8%. Adjusted EBITDA margin was 19.3%, up 180 bps year over year.

Balance Sheet and Cash Flow

Exiting the third quarter of the fiscal year, Rexnord’s cash and cash equivalents were $234.8 million, down 55.8% from $531.3 million in the preceding quarter. Long-term debt declined 17.3% sequentially to $1,322.9 million.

In the first nine months of fiscal 2018, the company’s net cash generation totaled $121.9 million versus $122.1 million generated in the year-ago period. Spending on property, plant and equipment decreased 43% to $25.1 million. Free cash flow was $96.8 million versus $78.1 million in comparable period in fiscal 2017.

During the nine months of fiscal 2018, the company repaid long-term debts totaling $1,603.2 million.

Outlook

For fiscal 2018, Rexnord anticipates benefiting from innovation of new products and strengthening demand in end markets. Also, the company is realizing benefits from its supply-chain optimization and footprint-repositioning programs completed in the fiscal first quarter.

Sales in the Process & Motion Control segments will benefit from Rexnord’s digital enterprise strategy, DiRXN. This platform integrates innovative Industrial Internet of Things and e-commerce technologies to enable customers improve productivity.

Also, the segment’s business will flourish on the back of strengthening demand from global food & beverage, global process industries and global commercial aerospace end markets. Industrial distribution business in the United States & Canada, Europe and Rest of the World will also grow.

Sales in the Water Management segment will gain from a solid product portfolio and healthy demand from nonresidential and residential construction markets of the United States and Canada as well as water and wastewater infrastructure markets of China and Rest of the World. Results from water and wastewater infrastructure market of Europe will be flat while that in the Middle East will likely decline. Also, World Dryer buyout (completed in October 2017) will prove beneficial as its hand dryers will strongly complement the segment’s Zurn business while Centa Power Transmission buyout, when completed, will add approximately $100 million in revenues annually.

For fiscal 2018, the company now anticipates core sales growth to be mid-single digits versus low-to-mid single digits expected earlier. Adjusted EBITDA is projected to be $381-$387 million, up from the previous forecast of $375-$385 million.

Net income will likely be within $155-$159 million, a revision from the earlier forecast of $95-$102 million. The revised guidance includes the impact of demand growth and tax reforms. The effective tax rate is expected to be roughly 30%, down from 32% expected earlier. Capital expenditure is anticipated to be approximately 2% of sales versus the previous estimates of 2-2.5%. Free cash will exceed net income.

Rexnord Corporation Price, Consensus and EPS Surprise