Rexnord Corporation reported better-than-expected results for fourth-quarter fiscal 2018 (ended Mar 31, 2018), delivering positive earnings and sales surprise of 7.7% and 4.2%, respectively. Average earnings surprise for the four quarters of fiscal 2018 was 12.96%.

The machinery company’s adjusted earnings were 42 cents per share, surpassing the Zacks Consensus Estimate of 39 cents. Also, the bottom line increased 20% from the year-ago tally of 35 cents.

For fiscal 2018, the company’s adjusted earnings per share were $1.39, surpassing the Zacks Consensus Estimate of $1.36. Also, the yearly results marked an increase of 5.3% from the year-ago tally of $1.32.

Segmental Performance Drives Net Sales

In the reported quarter, Rexnord’s net sales were $575.2 million, increasing 14.2% year over year. The improvement was driven by 7% contribution from core sales growth, 3% from the positive impact of currency translation and 4% from net positive impact of acquisitions/divestitures.

Also, the top line increased 4.2%, surpassing the Zacks Consensus Estimate of $551.8 million.

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

Revenues from Process & Motion Control totaled $360.6 million, increasing 14.9% year over year. It represented 62.7% of net sales. The segment’s results benefited from improved demand in its end markets, resulting in 6% growth in core sales and 5% gains from the acquisition of Centa Power. Also, favorable movements in foreign currencies positively impacted results by 4%.

Water Management revenues, representing 37.3% of net sales, were $214.6 million, up 13.2% year over year. The core sales growth of 8% was driven by rise in demand from non-residential construction and water infrastructure end markets. Also, acquired assets added 2% and forex gains contributed 3% to the revenues.

In fiscal 2017, the company’s net sales were at $2,066 million, increasing 7.7% year over year. Also, the top line surpassed the Zacks Consensus Estimate of $2.04 billion.

Margin Profile Mixed

In the reported quarter, Rexnord’s cost of sales grew 11.4% year over year to $365.5 million. It represented 63.5% of net sales versus 65.1% recorded in the year-ago quarter. Gross margin improved 160 basis points (bps) to 36.5%.

Selling, general and administrative expenses of $122.9 million increased 22.8% year over year and represented 21.4% of net sales versus 19.9% in the year-ago quarter.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $111 million, up 13.3% year over year. Adjusted EBITDA margin was 19.3%, down 20 bps year over year.

Balance Sheet and Cash Flow

Exiting the fourth quarter of fiscal 2018, Rexnord had cash and cash equivalents of $217.6 million, down from $234.8 million in the preceding quarter. Long-term debt inched up 2.2% sequentially to $1,352.1 million.

In fiscal 2018, the company generated net cash of $228.5 million from its operating activities, increasing 17.1% from the year-ago tally. Also, capital invested in purchasing property, plant and equipment decreased 25.3% year over year to $40.7 million. Free cash flow was $187.8 million versus $140.6 million in fiscal 2017.

During the fiscal, the company repaid long-term debts, totaling $1,791.9 million.

Outlook

For fiscal 2019, Rexnord anticipates benefiting from the innovation of new products and strengthening demand in end markets. Also, the company anticipates realizing cost reductions of $15 million annually after completing the second phase of its supply-chain optimization and footprint-repositioning programs in fiscal 2020.

Sales in the Process & Motion Control segment will benefit from Rexnord’s digital enterprise strategy, DiRXN. This platform integrates innovative Industrial Internet of Things and e-commerce technologies, enabling customers to improve productivity. Also, the segment will gain from the acquired assets of Centa Power Transmission. It is on track to integrate these assets successfully.

Also, the segment’s business 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, Canada and the Rest of the World will also increase.

Sales in the Water Management segment will gain from a solid product portfolio and healthy demand from non-residential and residential construction markets of the United States and Canada. Also, World Dryer buyout (completed in October 2017) will prove beneficial as its hand dryers will strongly complement the segment’s Zurn business.

The company has planned to divest its VAG operations from the Water Management segment. This business — focused on manufacturing and supplying engineered valves for hydropower, water and wastewater infrastructure markets — was acquired by the company in fiscal 2012. The divestment of this non-strategic business will free resources that can be utilized by the company for lowering its debt burden. Starting first-quarter fiscal 2019, the company will report results of this business under discontinued operations.

For fiscal 2019, the company anticipates core sales to grow in mid-single digit. Gains from cost-reduction initiatives and improved operating leverage will be partially offset by higher investments in innovation and growth programs, and rise in raw-material costs. Adjusted EBITDA is projected to be $420-$440 million.

Net income will likely be $129-$143 million. The effective tax rate is expected to be roughly 29%. Capital expenditure is anticipated to be approximately 2.2% of sales. Free cash will exceed net income.

Rexnord Corporation Price and EPS Surprise