It has been about a month since the last earnings report for Rexnord (
RXN Quick Quote RXN - Free Report) . Shares have lost about 0.9% 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 drivers.
Rexnord Q1 Earnings Beat, Fall Y/Y on Lower Sales
Rexnord reported mixed results for the first quarter of 2021. Its earnings surpassed estimates, whereas sales lagged the same.
The machinery company’s adjusted earnings in the reported quarter were 47 cents per share, surpassing the Zacks Consensus Estimate of 46 cents. However, the bottom line decreased 14.5% from the year-ago quarter number of 55 cents due mainly to lower sales generation and a fall in operating margin. Sales Details
In the reported quarter, Rexnord’s net sales were $526.1 million, decreasing 4% from the year-ago quarter. The results suffered from an 8% decline in core sales, partially offset by a 2% positive impact of foreign currency translations and a 2% gain from acquired assets.
Also, the company’s net sales lagged the Zacks Consensus Estimate of $533 million. The company reports results under two segments — Process & Motion Control, and Water Management. Notably, Rexnord announced that it signed an agreement with Regal Beloit to combine its Process & Motion Control segment with the latter. The deal was reached this February. It is predicted to be completed in the fourth quarter of 2021. Preparations for the merger are on track/or as planned by the parties. The first-quarter segmental results are briefly discussed below: Revenues from Process & Motion Control totaled $320.9 million, down 12% year over year. It represented 61% of the company’s quarterly net sales. Core sales in the reported quarter decreased 13% year over year due mainly to weakness in the aerospace business. Also, divestiture had an adverse impact of 1%, while foreign currency translations benefited the company by 2%. Water Management’s revenues, representing 39% of net sales, were $205.2 million, up 12% year over year. Core sales in the reported quarter increased 4%, whereas acquired assets (Hadrian and Just Manufacturing) contributed 8% to sales growth. The rise in core sales was driven by high demand for environmental and hygienic solutions. Margin Profile
In the reported quarter, Rexnord’s cost of sales decreased 3.7% year over year to $318.2 million. It represented 60.5% of net sales versus 60.4% recorded in the year-ago quarter. Gross margin decreased 10 basis points (bps) to 39.5%. Selling, general and administrative expenses of $119.3 million increased 5.8% year over year and represented 22.7% of net sales versus 20.6% in the year-ago quarter.
Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $120.2 million, up from ($9.6) million recorded in the year-ago quarter. Adjusted EBITDA margin was 22.8% in the quarter under review. For the Process & Motion Control segment, adjusted EBITDA margin was stable year over year at 23.8%, whereas that for the Water Management segment grew 40 bps to 26%. Adjusted operating income declined 5.5% year over year to $96.7 million, while margin fell 30 bps to 18.4%. Interest expenses, net, in the reported quarter were $11 million, down 17.9% year over year. Balance Sheet and Cash Flow
Exiting the first quarter of 2021, Rexnord had cash and cash equivalents of $307.3 million, reflecting 20.2% growth from $255.6 million recorded in the last reported quarter. Long-term debt was stable sequentially at $1,189.3 million.
In the quarter under review, the company generated net cash of $71.3 million from operating activities, decreasing 42.5% year over year. Capital investment for purchasing property, plant and equipment declined 42.1% to $9.2 million. Free cash flow was $62.1 million, decreasing from $108 million in the prior-year quarter. In the quarter under review, the company paid out dividends amounting to $10.8 million. It also repurchased shares worth $0.9 million during the same period. Outlook
For the second quarter of 2021, the company expects Water Management sales to increase in high 20% (on a year-over-year basis), with organic sales growth of high-teens. Adjusted EBITDA margin for the segment is expected to be 26-27%.
Further, core sales for Process & Motion Control segment are anticipated to increase in mid to high-teen percentage (on a year-over-year basis). Adjusted EBITDA margin for the segment is expected to be 23-24%. Corporate expenses for the second quarter are expected to be $10 million, whereas interest expenses will likely be $12 million and adjusted tax rate will probably be 28%. How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
At this time, Rexnord has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Rexnord has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.