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Rexnord (RXN) June-End Quater Earnings Beat, Decline Y/Y

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Rexnord Corporation (RXN - Free Report) 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%.

It is worth mentioning here that the company is in the process of switching into a December-ending reporting period in 2020. Earlier, its reporting period ended March every year. This step has been taken to help investors better evaluate its operating and financial performance compared with most of its peers.

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.

Five days before the earnings release on Jul 28, the company’s board of directors approved the payment of a quarterly dividend of 8 cents per share to shareholders of record as of Aug 20. The disbursement will be made on Sep 8.

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.

Rexnord Corporation Price, Consensus and EPS Surprise

 

Rexnord Corporation Price, Consensus and EPS Surprise

Rexnord Corporation price-consensus-eps-surprise-chart | Rexnord Corporation Quote

Zacks Rank & Stocks to Consider

With a market capitalization of $3.7 billion, Rexnord currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the industry are II-VI Incorporated (IIVI - Free Report) , Regal Beloit Corporation (RBC - Free Report) and SPX FLOW, Inc. (FLOW - Free Report) . While II-VI currently sports a Zacks Rank #1 (Strong Buy), both Regal Beloit and SPX FLOW carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for these companies have improved for the current year. Further, earnings surprise for the last four quarters, on average, was 52.08% for II-VI, 5.69% for Regal Beloit and 100.77% for SPX FLOW.

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