Machinery company Rexnord Corporation RXN delivered a positive earnings surprise of 3.2% in second-quarter fiscal 2018 (ended Sep 30, 2017). This marks the fourth consecutive quarter of better-than-expected results.
Adjusted earnings in the quarter came in at 32 cents per share, marginally beating the Zacks Consensus Estimate of 31 cents. However, the bottom line slipped 15.8% from the year-ago quarter tally of 38 cents.
Segmental Growth Drives Revenues
The quarter’s net sales amounted to $510.8 million, surpassing the Zacks Consensus Estimate by 1%. Also, the top line grew 4% year over year, supported by 4% growth in core sales and 1% positive impact of currency translation. This was partially offset by negative 1% impact from RHF product line exit.
Both the segments — Process & Motion Control and Water Management — reported impressive results for the quarter. The segmental quarterly results are briefly discussed below:
Revenues from Process & Motion Control totaled $300.4 million, increasing 4.7% year over year. It represented 58.8% of the quarter’s net sales. The segment’s results benefited from improved demand in the majority of its end markets.
Water Management revenues, representing 41.2% of net sales, were $210.4 million, up 3.1% year over year. However, the figure jumped 5.9%, excluding the impact of RHF product line exit. The performance was driven by rise in demand from nonresidential construction and water and wastewater infrastructure end markets.
Margins Improve on Falling Cost Proportion
In the quarter, Rexnord’s cost of sales represented 63.1% of net sales, down from 64.6% in the year-ago quarter. Gross margin improved 150 basis points (bps) to 36.9%.
Selling, general and administrative expenses, as a percentage of net sales, decreased 30 bps year over year to 21.4%. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) in the quarter were $98.1 million, up 8.6%.
Balance Sheet and Cash Flow
Exiting the second quarter of the fiscal year, Rexnord had cash and cash equivalents of $531.3 million, increasing 2.9% from $516.2 million in the preceding quarter. Long-term debt slipped 20 bps to $1,599.4 million.
In the first half of fiscal 2018, the company’s net cash generation totaled $60.5 million versus $59 million generated in the year-ago period. Spending on property, plant and equipment decreased 45% to $15.9 million. During the fiscal first half, the company repaid debts of $8.2 million.
Outlook
For fiscal 2018, Rexnord anticipates benefiting from innovation of new products and strengthening consumer driven end markets. Also, the company has started 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 and global commercial aerospace end markets. Industrial distribution business in 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. Also, World Dryer buyout (completed in October) will prove beneficial as its hand dryers will strongly complement the segment’s Zurn business.
For fiscal 2018, the company now anticipated core sales growth to be in low-to-mid single digits versus the previous expectation of low single-digit. Adjusted EBITDA is projected to be $375-$385 million compared with the earlier forecast of $365-$385 million.
Net income will likely be within $95-$102 million, a revision from the earlier forecast of $87-$107 million. The effective tax rate is expected to be around 32% while capital expenditure is anticipated to be approximately 2-2.5% of sales. Free cash will exceed net income.
Rexnord Corporation Price and Consensus
Rexnord Corporation Price and Consensus | Rexnord Corporation Quote
Zacks Rank & Stocks to Consider
With a market capitalization of $2.6 billion, Rexnord presently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the machinery space are Sun Hydraulics Corporation SNHY, A. O. Smith Corporation AOS and SPX FLOW, Inc. FLOW. While Sun Hydraulics sports a Zacks Rank #1 (Strong Buy), both A. O. Smith and SPX FLOW carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Sun Hydraulics’ earnings estimates for 2017 and 2018 improved in the last 60 days. Also, the pulled off an average positive earnings surprise of 3.47% in the last four quarters.
A. O. Smith reported better-than-expected results in three of last four quarters, with an average positive earnings surprise of 2.61%. Also, its earnings estimates for 2017 and 2018 improved in the last 60 days.
SPX FLOW’s earnings are projected to grow 28.3% in the next three to five years. Its earnings for 2017 are predicted to jump 9.4% year over year while that for 2018 are expected to surge 64.1%.
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