Rexnord Corporation RXN kept its earnings streak alive in third-quarter fiscal 2019 (ended Dec 31, 2018). It pulled off a positive earnings surprise of 17.5%. The company's share price increased 1.8% on Jan 31, closing the trading session at $26.15.
This machinery company’s adjusted earnings in the reported quarter were 47 cents per share, surpassing the Zacks Consensus Estimate of 40 cents. Also, the bottom line increased 20.5% from the year-ago quarter’s number of 39 cents.
Core Sales and Acquisitions Drive Revenues
In the reported quarter, Rexnord’s net sales were $485 million, increasing 11.1% year over year. The improvement was driven by a 6% contribution from core sales growth and 7% from net positive impact of acquisitions/divestitures, partially offset by 2% adverse impact of foreign currency translation.
However, the top line was in line with the Zacks Consensus Estimate.
The company reports results under two segments — Process & Motion Control, and Water Management. The quarterly segmental results are briefly discussed below:
Revenues from Process & Motion Control totaled $326.7 million, increasing 11.7% year over year. It represented 67.4% of net sales. Solid demand across many of the end markets drove 4% growth in core sales. Acquisition of Centa Power added 10% to sales growth while unfavorable movements in foreign currencies negatively impacted results by 2%.
Water Management revenues, representing 32.6% of net sales, were $158.3 million, up 9.8% year over year. The core sales growth of 10% was driven by rise in demand from building construction markets in North America.
Gross Margin Falls Y/Y
In the reported quarter, Rexnord’s cost of sales grew 12.8% year over year to $300.7 million. It represented 62% of net sales versus 61% recorded in the year-ago quarter. Gross margin decreased 100 basis points (bps) to 38%. Selling, general and administrative expenses of $102.4 million increased 8.6% year over year, and represented 21.1% of net sales versus 21.6% in the year-ago quarter.
Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $103.1 million, up 11% year over year. Adjusted EBITDA margin was 21.3%, flat on a year-over-year basis.
For the Process & Motion Control segment, adjusted EBITDA margin was flat at 22.3% compared with the year-ago quarter while that for the Water Management segment expanded 10 bps to 25.6%.
Balance Sheet and Cash Flow
Exiting the fiscal third quarter, Rexnord had cash and cash equivalents of $297.1 million, reflecting 32.9% growth from $223.5 million recorded in the last reported quarter. Long-term debt slipped 1.9%, sequentially, to $1,311 million.
Notably, the company repaid $272.7 million of debt during the first nine months of fiscal 2019 while raised funds amounting to $249.8 million through debt borrowings.
In the first nine months of fiscal 2019, Rexnord generated net cash of $145.3 million from operating activities, reflecting year-over-year growth of 19.2%. The company increased the capital investment for purchasing property, plant and equipment by 5.6% over the year-ago tally to $26.5 million. Free cash flow was $118.8 million, increasing 22.7% from the year-ago comparable period.
Outlook
For fiscal 2019, Rexnord anticipates benefiting from strengthening demand, initiatives to mitigate impacts of tariffs and inflation, higher free cash flow generation and supply-chain optimization, and footprint-repositioning programs (“SCOFR”).
The 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 and Canada will also increase.
Sales in the Water Management segment will gain from a solid product portfolio and healthy demand from non-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 $437-$443 million versus $433-$443 million mentioned earlier. The improvement was driven by solid operational execution and anticipated benefits from initiatives.
Net income will likely be $169-$171 million versus $147-$154 million stated previously. The effective tax rate is expected to be roughly 25-26%. 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 $2.7 billion, Rexnord currently carries a Zacks Rank #2 (Buy).
Some other top-ranked stocks in the Zacks Industrial Products sector are DXP Enterprises, Inc. DXPE, Colfax Corporation CFX and Pioneer Power Solutions, Inc. PPSI. While DXP Enterprises sports a Zacks Rank #1 (Strong Buy), both Colfax and Pioneer Power carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 60 days, earnings estimates on DXP Enterprises and Colfax improved for 2019, and remained unchanged for Pioneer Power. Positive earnings surprise for the last four quarters was 112.62% for DXP Enterprises, 8.88% for Colfax and 208.48% for Pioneer Power.
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