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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.

Outlook

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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