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Rexnord (RXN) Tops Q1 Earnings on Solid Sales, Margin Growth

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Rexnord Corporation (RXN - Free Report) reported better-than-expected results for first-quarter fiscal 2019 (ended Jun 30, 2018). Keeping its earnings streak alive, the company pulled off an earnings beat of 13.9%. Sales surprise recorded in the quarter under review was 1.1%.

This machinery company’s adjusted earnings in the reported quarter were 41 cents per share, surpassing the Zacks Consensus Estimate of 36 cents. Also, the bottom line increased 41.4% from the year-ago tally of 29 cents.

Organic and Inorganic Performances Drive Net Sales

In the reported quarter, Rexnord’s net sales were $503.6 million, increasing 13.6% year over year. The improvement was driven by a 4% contribution from core sales growth, 2% from the positive impact of currency translation and 8% from net positive impact of acquisitions/divestitures.

Also, the top line surpassed the Zacks Consensus Estimate of $498 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 $332.4 million, increasing 15.5% year over year. It represented 66% of net sales. The segment’s results benefited from an improved demand in the majority of its end markets, resulting in 3% growth in core sales and 11% gain from the acquisition of Centa Power. Moreover, favorable movements in foreign currencies positively impacted results by 2%.

Water Management revenues, representing 34% of net sales, were $171.2 million, up 10.1% year over year. The core sales growth of 7% was driven by rise in demand from non-residential construction end markets. Also, acquired assets of World Dryer added 3% to revenues.

In first-quarter fiscal 2019, the company has started reporting results of its VAG operations from the Water Management segment under discontinued operations. Divestment of this business — focused on manufacturing and supplying engineered valves for hydropower, water and wastewater infrastructure markets — will free resources that can be utilized by the company for lowering its debt burden.

Margins Improve

In the reported quarter, Rexnord’s cost of sales grew 10.4% year over year to $308.1 million. It represented 61.2% of net sales versus 63% recorded in the year-ago quarter. Gross margin improved 180 basis points (bps) to 38.8%. Selling, general and administrative expenses of $111.8 million increased 15.6% year over year and represented 22.2% of net sales versus 21.8% in the year-ago quarter.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $105 million, up 23.4% year over year. Adjusted EBITDA margin was 20.8%, up 160 bps year over year. Margin gained from the company’s actions to manage material costs, price increases and supply chain management.

On a segmental basis, adjusted EBITDA margin of Process & Motion Control segment increased 180 bps year over year to 21.5% on the back of an increase in core sales, gains from footprint repositioning actions and productivity initiatives. For the Water Management segment, adjusted EBITDA margin expanded 100 bps to 25.4%, driven by cost sales growth and gains from cost-reduction, and productivity initiatives.

Balance Sheet and Cash Flow

Exiting the first quarter of fiscal 2019, Rexnord had cash and cash equivalents of $179 million, down roughly 17.7% from $217.6 million in the last reported quarter. Long-term debt slipped 1.4%, sequentially, to $1,333.7 million. It’s worth noting here that the company repaid $127.1 million of debt during the reported quarter while it raised funds amounting to $110.7 million through debt borrowings.

In the reported quarter, the company generated net cash of $16.2 million from its operating activities, reflecting 56.2% fall from the year-ago tally. The company increased its capital investment for purchasing property, plant and equipment by 60.9% over the year-ago tally to $11.1 million.

Fall in cash generation from operating activities and rise in capital spending led to 83.1% decline in free cash flow over the year-ago quarter to $5.1 million.


For fiscal 2019, Rexnord anticipates benefiting from the innovation of products, strengthening demand in end markets and synergistic gains from acquired assets. Also, the company anticipates benefiting from its supply-chain optimization and footprint-repositioning programs.

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, Canada and the Rest of the World will also increase.

Sales in the Water Management segment will gain from a solid product portfolio and a healthy demand from non-residential and 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 $425-$440 million versus $420-$440 million predicted earlier.

Net income will likely be $132-$143 million versus the previous prediction of $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, Consensus and EPS Surprise

Rexnord Corporation Price, Consensus and EPS Surprise | Rexnord Corporation Quote

Zacks Rank & Stocks to Consider

With a market capitalization of approximately $3.1 billion, Rexnord currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks worth considering in the industry are AZZ Inc. (AZZ - Free Report) , A. O. Smith Corporation (AOS - Free Report) and Capstone Turbine Corporation (CPST - Free Report) . While AZZ sports a Zacks Rank #1 (Strong Buy), both A. O. Smith and Capstone Turbine carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, bottom-line estimates for these three stocks improved for the current year. Also, earnings surprise for the last quarter was a positive 27.66% for AZZ, 6.45% for A. O. Smith and 50% for Capstone Turbine.

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