Rexnord (RXN) Down 0.3% Since Last Earnings Report: Can It Rebound?
A month has gone by since the last earnings report for Rexnord (RXN). Shares have lost about 0.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Rexnord due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Rexnord June-End Quarter Earnings Beat, Decline Y/Y
Rexnord kept its earnings streak alive in the quarter ended Jun 30, 2020. Its earnings beat estimates by 33.3%, while sales exceeded the same by 7.7%.
The machinery company’s adjusted earnings in the reported quarter were 36 cents per share, surpassing the Zacks Consensus Estimate of 27 cents. However, the bottom line decreased 25% from the year-ago quarter number of 48 cents due mainly to lower sales generation.
Sales Details
In the reported quarter, Rexnord’s net sales were $449.1 million, decreasing 11.6% from the year-ago quarter. The results suffered from a 12% decline in core sales and 1% adverse impacts of forex woes, partially offset by a 1% gain from acquisitions/divestitures.
However, the company’s net sales surpassed the Zacks Consensus Estimate of $416.8 million.
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 $274.4 million, down 17% year over year. It represented 61.1% of the company’s quarterly net sales. Core sales in the quarter decreased 15% as the pandemic disrupted the production activities of customers. Business in process and aerospace end markets were weak. Also, unfavorable movements in foreign currencies adversely impacted results by 2%.
Water Management’s revenues, representing 38.9% of net sales, were $174.7 million, down 2% year over year. Core sales in the quarter decreased 5%, partially offset by a 3% gain from acquired assets — Just Manufacturing Co. in January 2020 and Stainlessdrains.com in June 2019.
The fall in core sales was due mainly to the shutdown of construction sites in institutional and commercial end markets, partially offset by a hike in demand for hygienic and touchless solutions.
Margin Profile
In the reported quarter, Rexnord’s cost of sales decreased 11.2% year over year to $272.2 million. It represented 60.6% of net sales versus 60.3% recorded in the year-ago quarter. Gross margin decreased 30 basis points (bps) to 39.4%. Selling, general and administrative expenses of $100.2 million decreased 8.5% year over year and represented 22.3% of net sales versus 21.5% in the year-ago quarter.
Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $103.1 million, down 7.1% year over year. Adjusted EBITDA margin was 23%, up 110 bps from the prior-year quarter. For the Process & Motion Control segment, adjusted EBITDA margin decreased 80 bps to 21.6%, while that for the Water Management segment expanded 270 bps to 29.1%.
Adjusted operating income declined 9.7% year over year to $81.8 million, while margin grew 40 bps to 18.2%.
Balance Sheet and Cash Flow
Exiting the June-end quarter, Rexnord had cash and cash equivalents of $353.4 million, reflecting a 38.4% decline from $573.4 million recorded in the last reported quarter. Long-term debt decreased 17.8% sequentially to $1,148 million.
Notably, the company repaid $250.3 million of debt in the reported quarter.
In the reported quarter, the company generated net cash of $47.6 million from operating activities, surging 150.5% year over year. Capital investment for purchasing property, plant and equipment rose 44.1% to $8.5 million. Free cash flow was $39.1 million, increasing from $13.1 million in the year-ago quarter.
During the quarter, the company paid out dividends amounting to $9.6 million. It refrained from repurchasing shares in the quarter, while expects to restart buyback activities in the second half calendar 2020.
Outlook
Going forward, Rexnord anticipates benefiting from a diversified business structure, operational execution and supply-chain optimization, and footprint-repositioning programs (“SCOFR”). Also, focus on digital transformation will likely be beneficial.
In addition, it anticipates investing in acquisitions for improving growth, innovation and productivity; buying back shares (annually $75-$150 million); making annual increments in dividends; and keeping net debt leverage ratio within 2-3. Notably, net debt leverage ratio was 1.9 at the end of the June-end quarter.
The company is wary about the difficult macro conditions due to the pandemic for the rest of calendar 2020. For the September-end quarter, it expects a year-over-year sales decline of 12-17%. Adjusted EBITDA for segments is predicted to be 22-24%.
Corporate expenses for the quarter will likely be $8 million and interest expenses will probably be $12 million.
For the nine months between April and December 2020, the company expects capital expenditure of $25 million. Cash restructuring expenses will likely be $15-$17 million and cash interest payment will probably be $42 million. Free cash flow is anticipated to exceed net income.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
VGM Scores
At this time, Rexnord has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Rexnord has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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