Rexnord Reports Q3 FY2019 Financial Results and Increases FY2019 Operating Outlook

Rexnord Corporation (NYSE:RXN)

Third Quarter Highlights

• Net sales were $485 million and increased 11% year over year (+6% core sales⁽¹⁾, +7% acquisitions, -2% foreign currency translation).
• Net income from continuing operations was $53 million (diluted EPS of $0.43), compared with $86 million (diluted EPS of $0.70) in the year-ago quarter.
• Net income⁽²⁾ was $20 million (diluted EPS of $0.21), including a $28 million loss from discontinued operations (primarily due to the elimination of the cumulative foreign currency translation adjustment upon completion of the sale of VAG), and compared with net income⁽²⁾ of $76 million (diluted EPS of $0.67) in the year-ago quarter.
• Adjusted EPS⁽¹⁾ increased 21% year over year and was $0.47 compared with $0.39 in the year-ago quarter.
• Adjusted EBITDA⁽¹⁾ increased 11% year over year and was $103 million (21.3% of net sales) compared with $93 million (21.3% of net sales) in last year's third quarter.
• Net debt leverage ratio decreased to 2.3x.

Todd A. Adams, President and Chief Executive Officer, commented, “Net sales grew 11% year over year in our third quarter as we delivered 6% core growth and 11% Adjusted EBITDA growth while our increased free cash flow puts us on a path to a leverage ratio of 2.1x at the end of our fourth quarter. Our solid execution around mitigating tariffs and inflation gives us confidence that we can deliver a record fiscal 2019, and we believe that wrapping up the second phase of our Supply Chain Optimization and Footprint Repositioning (“SCOFR”) program and accelerating our DiRXN strategy positions us well heading into our fiscal 2020.”

“Sales in our Process & Motion Control (“PMC”) platform grew 12% year over year and 4% on a core basis while we built backlog in the quarter. Overall market trends across the business continue to be broadly stable, and we believe our Smart Condition Monitoring System ("SCMS") solution for retrofit applications is going to be a nice growth opportunity for us moving forward. We continue to stay disciplined in our approach to simplifying the business, selectively pruning certain product/customer combinations, in turn, reducing both complexity and costs while making targeted investments to drive better growth.”

“Our Water Management platform posted another quarter of double-digit core growth as we delivered 10% net sales growth with an Adjusted EBITDA margin of 25.6%. We are successfully managing through a challenging tariff situation while advancing several strategic initiatives that have expanding runway as we head into our upcoming fiscal year, including our connected products strategy. Demand from our North American nonresidential construction markets has been robust and we continue to feel good about overall demand growth as we head into the upcoming construction season.”

Fiscal 2019 Outlook

Adams continued, “With one quarter left in our fiscal 2019, we’re increasing our operating outlook to reflect our operational execution and the progress of we’ve made on a number of strategic initiatives throughout the year. Our revised outlook includes our net income from continuing operations to be in a range of $169 million to $171 million and our Adjusted EBITDA to be in a range of $437 million to $443 million. We are reiterating our outlook for free cash flow⁽¹⁾ to exceed net income, which as a consequence of the earnings outlook, would equate to a record year for free cash flow.”

Third Quarter Fiscal 2019 Segment Highlights

Process & Motion Control

Process & Motion Control net sales increased 12% year over year to $327 million in the third quarter of fiscal 2019. Core sales increased 4%, our prior year acquisition of Centa contributed 10% and foreign currency translation had an unfavorable impact of 2% year over year. The increase in core sales is the result of favorable demand trends across the majority of our served end markets.

PMC income from operations for the third quarter of fiscal 2019 was $53 million, or 16.3% of net sales. Income from operations as a percentage of net sales was consistent with the prior year as increased core sales and RBS-led productivity gains were offset by investments in innovation and market expansion initiatives and the relatively lower margins at Centa.

Adjusted EBITDA⁽¹⁾ in the third quarter was $73 million. Adjusted EBITDA as a percentage of net sales also remained consistent with the prior year at 22.3%.

Water Management ⁽²⁾

Water Management net sales were $158 million in the third quarter of fiscal 2019, an increase of 10%. The 10% increase in core growth is the result of increased demand across North American building construction end markets.

Water Management income from operations was $33 million for the third quarter of fiscal 2019, or 20.9% of net sales. Income from operations as a percentage of net sales increased by 110 basis points year over year as a result of incremental sales and RBS-led productivity gains, partially offset by investments in innovation and market expansion initiatives.

Adjusted EBITDA⁽¹⁾ in the third quarter was $41 million or 25.6% of net sales. Adjusted EBITDA as a percentage of net sales increased by 10 basis points year over year.

Non-GAAP Financial Measures

The following non-GAAP financial measures are utilized by management in comparing our operating performance on a consistent basis. We believe that these financial measures are appropriate to enhance an overall understanding of our underlying operating performance trends compared to historical and prospective periods and our peers. Management also believes that these measures are useful to investors in their analysis of our results of operations and provide improved comparability between fiscal periods as well as insight into the compliance with our debt covenants. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information calculated in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures. A reconciliation of non-GAAP financial measures presented above to our GAAP results has been provided in the financial tables included in this press release.

Core Sales

Core sales excludes the impact of acquisitions (such as the Centa and World Dryer acquisitions), divestitures, discontinued operations (such as the VAG business) and foreign currency translation. Management believes that core sales facilitates easier and more meaningful comparison of our net sales performance with prior and future periods and to our peers. We exclude the effect of acquisitions and divestitures because the nature, size and number of acquisitions and divestitures can vary dramatically from period to period and between us and our peers, and can also obscure underlying business trends and make comparisons of long-term performance difficult. We exclude the effect of foreign currency translation from this measure because the volatility of currency translation is not under management's control.

Adjusted Net Income and Adjusted Earnings Per Share

Adjusted net income and adjusted earnings per share (calculated on a diluted basis) exclude actuarial gains and losses on pension and postretirement benefit obligations, restructuring and other similar charges, gains or losses on divestitures, discontinued operations (such as VAG), gains or losses on extinguishment of debt, the impact of acquisition-related fair value adjustments in connection with purchase accounting, amortization of intangible assets, and other non-operational, non-cash or non-recurring losses, net of their income tax impact. The tax rates used to calculate adjusted net income and adjusted earnings per share are based on a transaction specific basis. We believe that adjusted net income and adjusted earnings per share are useful in assessing our financial performance by excluding items that are not indicative of our core operating performance or that may obscure trends useful in evaluating our continuing results of operations. All references to Net Income and EPS within this earnings release refer to net income attributable to Rexnord common stockholders and net income per diluted share attributable to Rexnord common stockholders, respectively.

EBITDA

EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA is presented because it is an important supplemental measure of performance and it is frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. EBITDA is also presented and compared by analysts and investors in evaluating our ability to meet debt service obligations. Other companies in our industry may calculate EBITDA differently. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity or an alternative to net income as indicators of operating performance or any other measures of performance derived in accordance with GAAP. Because EBITDA is calculated before recurring cash charges, including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a measure of discretionary cash available to invest in the growth of the business.

Adjusted EBITDA

“Adjusted EBITDA” is the term we use to describe EBITDA as defined and adjusted in our credit agreement, which is net income, adjusted for the items summarized in the Reconciliation of GAAP to Non-GAAP Financial Measures table below. Adjusted EBITDA is intended to show our unleveraged, pre-tax operating results and therefore reflects our financial performance based on operational factors, excluding non-operational, non-cash or non-recurring losses or gains. In view of our debt level, it is also provided to aid investors in understanding our compliance with our debt covenants. Adjusted EBITDA is not a presentation made in accordance with GAAP, and our use of the term Adjusted EBITDA varies from others in our industry. This measure should not be considered as an alternative to net income, income from operations (as it relates to our two reportable segments, we adjust from income from operations because “non-operating” expenses such as interest and income taxes are not allocated to our segments and therefore net income is not presented at the segment level) or any other performance measures derived in accordance with GAAP. Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for, analysis of our results as reported under GAAP. For example, Adjusted EBITDA does not reflect: (a) our capital expenditures, future requirements for capital expenditures or contractual commitments; (b) changes in, or cash requirements for, our working capital needs; (c) the significant interest expenses, or the cash requirements necessary to service interest or principal payments, on our debt; (d) tax payments that represent a reduction in cash available to us; (e) any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future; or (f) the impact of earnings or charges resulting from matters that we and the lenders under our credit agreement may not consider indicative of our ongoing operations. In particular, our definition of Adjusted EBITDA allows us to add back certain non-cash, non-operating or non-recurring charges that are deducted in calculating net income, even though these are expenses that may recur, vary greatly and are difficult to predict and can represent the effect of long-term strategies as opposed to short-term results.

In addition, certain of these expenses can represent the reduction of cash that could be used for other corporate purposes. Further, although not included in the calculation of Adjusted EBITDA below, the measure may at times allow us to add estimated cost savings and operating synergies related to operational changes ranging from acquisitions to dispositions to restructurings and/or exclude one-time transition expenditures that we anticipate we will need to incur to realize cost savings before such savings have occurred. Further, management and various investors use the ratio of total debt less cash to Adjusted EBITDA (which includes a full pro-forma last-twelve-month impact of acquisitions), or "net debt leverage", as a measure of our financial strength and ability to incur incremental indebtedness when making key investment decisions and evaluating us against peers.

Free Cash Flow

We define Free Cash Flow as cash flow from operations less capital expenditures, and we use this metric in analyzing our ability to service and repay our debt and to forecast future periods. However, this measure does not represent funds available for investment or other discretionary uses since it does not deduct cash used to service our debt.

About Rexnord

Headquartered in Milwaukee, Wisconsin, Rexnord is comprised of two strategic platforms, Process & Motion Control and Water Management, with approximately 7,000 employees worldwide. The Process & Motion Control platform designs, manufactures, markets and services specified, highly-engineered mechanical components used within complex systems. The Water Management platform designs, procures, manufactures and markets products that provide and enhance water quality, safety, flow control and conservation. Additional information about the Company can be found at www.rexnordcorporation.com.

Conference Call Details

Rexnord will hold a conference call on Thursday, January 31, 2019 at 8:00 a.m. Eastern Time to discuss its fiscal 2019 third quarter results and provide a general business update. Rexnord President and CEO, Todd Adams, and Senior Vice President and CFO, Mark Peterson, will co-host the call. The conference call can be accessed via telephone as follows:

Domestic toll-free #: 888-771-4371
International toll #: 847-585-4405
Access Code: 4810 9131

A live webcast of the call will also be available on the Company's investor relations website. Please go to the website (investors.rexnord.com) at least fifteen minutes prior to the start of the call to register, download and install any necessary audio software.

If you are unable to participate during the live teleconference, a replay of the conference call will be available from 10:30 a.m. Eastern Time, January 31, 2019 until 11:59 p.m. Eastern Time on February 14, 2019. To access the replay, please dial 888-843-7419 (domestic) or 630-652-3042 (international). The passcode for the replay is: 4810 9131#. The replay will also be available as a webcast on Rexnord's investor relations website.

Cautionary Statement on Forward-Looking Statements

Information in this release may involve outlook, expectations, beliefs, plans, intentions, strategies or other statements regarding the future, which are forward-looking statements. These forward-looking statements involve risks and uncertainties. All forward-looking statements included in this release are based upon information available to Rexnord Corporation as of the date of the release, and Rexnord Corporation assumes no obligation to update any such forward-looking statements. The statements in this release are not guarantees of future performance, and actual results could differ materially from current expectations. Numerous factors could cause or contribute to such differences. Please refer to "Risk Factors" and "Cautionary Notice Regarding Forward-Looking Statements" in the Company's Form 10-K for the fiscal year ended March 31, 2018 as well as the Company's annual, quarterly and current reports filed on Forms 10-K, 10-Q and 8-K from time to time with the Securities and Exchange Commission for a further discussion of the factors and risks associated with the business.

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Rob McCarthy
Vice President - Investor Relations
414.223.1615