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A month has gone by since the last earnings report for Rexnord (RXN). Shares have lost about 7.6% 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 Surpasses Q3 Earnings Estimates, Revises View
Rexnord reported better-than-expected results for the third quarter of fiscal 2020 (ended Dec 31, 2019), with earnings and sales surpassing estimates by 14.3% and 0.8%, respectively.
The machinery company’s adjusted earnings in the reported quarter were 48 cents per share, surpassing the Zacks Consensus Estimate of 42 cents. Also, the bottom line gained 2.1% from the year-ago quarter number of 47 cents on sales growth and margin improvement.
Core Sales and Acquisitions Drive Revenues
In the reported quarter, Rexnord’s net sales were $491.7 million, increasing 1.4% year over year. The improvement was driven by a 1% contribution from core sales growth and 1% from net positive impact of acquisitions/divestitures, partially offset by a 1% adverse impact of foreign currency translation. Also, the company’s net sales surpassed the Zacks Consensus Estimate of $487.7 million.
It is worth noting here that product line simplification initiatives had an adverse 150 basis points (bps) impact on sales.
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 $327.5 million, roughly flat year over year. It represented 66.6% of the company’s quarterly net sales. Core sales in the quarter were flat as gains from consumer-facing and aerospace end markets were offset by the impacts of product line simplification actions and soft demand in industrial process markets. Acquisitions added 1% to sales growth, while unfavorable movements in foreign currencies affected results by 1%.
Water Management’s revenues, representing 33.4% of net sales, were $164.2 million, up 3.7% year over year. Core sales in the quarter grew 3%, backed by demand growth in building construction markets in North America. However, product line simplification actions played spoilsport in the quarter. Also, acquisitions added 1% to sales growth in the quarter.
It is worth mentioning here that Rexnord completed the acquisition of Just Manufacturing Co. in January.
Margin Improves Y/Y
In the reported quarter, Rexnord’s cost of sales decreased 0.2% year over year to $300 million. It represented 61% of net sales versus 62% recorded in the year-ago quarter. Gross margin increased 100 bps to 39%. Selling, general and administrative expenses of $101.7 million decreased 0.7% year over year and represented 20.7% of net sales versus 21.1% in the year-ago quarter.
Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $107 million, up 3.7% year over year. Adjusted EBITDA margin was 21.8%, up roughly 50 bps from the prior-year quarter. For the Process & Motion Control segment, adjusted EBITDA margin increased 40 bps to 22.7%, while that for the Water Management segment expanded 40 bps to 26%.
Balance Sheet and Cash Flow
Exiting the fiscal third quarter, Rexnord had cash and cash equivalents of $277 million, reflecting a 13.4% decline from $319.8 million recorded in the last reported quarter. Long-term debt decreased 8.2% sequentially to $1,147.2 million.
Notably, the company repaid $835.3 million of debt in the nine months ended December 2019. Proceeds from borrowings of debt totaled $725 million during the same period.
In the first three quarters of fiscal 2020, the company generated net cash of $174.7 million from operating activities, reflecting 20.2% year-over-year growth. It decreased the capital investment for purchasing property, plant and equipment by 3.8% from the previous year to $25.5 million. Free cash flow was $149.2 million, increasing 25.6% from the year-ago figure.
During the period, the company repurchased shares worth $20 million.
For fiscal 2020 (ending March 2020), Rexnord anticipates benefiting from operational execution and SCOFR initiatives. Cumulative cost savings from the first and second phases of SCOFR initiatives will likely be $40 million in fiscal 2020. Notably, the company is also working on the third phase of the program. Cumulative savings from the first three phases of SCOFR actions will likely total $60 million in fiscal 2022.
The Process & Motion Control segment is expected to gain from strengthening demand in the global commercial aerospace end market and growth in the industrial distribution business (in the United States and Canada). However, weakness is predicted in the industrial distribution business in Europe.
Sales in the Water Management segment will likely gain from a solid product portfolio and healthy demand from non-residential construction markets of the United States and Canada, especially from institutional clients.
For fiscal 2020, the company predicts core sales growth in low-single digits. Product line simplification initiatives are predicted to have an adverse impact of 150 bps on sales versus 150-200 bps impact mentioned earlier.
Adjusted EBITDA is anticipated to be $460-$464 million, revised from $460-$467 million stated earlier. The company believes that the production halt of the 737MAX aircraft will have adverse impacts on its fiscal fourth-quarter results.
Net income from continuing operations will likely be $192-$195 million, above the previously mentioned $184-$189 million. The effective tax rate is expected to be 25%, down from 26% stated earlier.
Capital expenditure is anticipated to be below 2.5% of sales. Free cash will likely exceed net income. Interest expenses are predicted to be $59 million, down from previously stated $62 million.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
Currently, Rexnord has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. 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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