It has been about a month since the last earnings report for Rexnord (RXN - Free Report) . Shares have lost about 13.6% 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 drivers.
Rexnord Earnings Surpass Estimates in Q1, Sales Lag
Rexnord reported better-than-expected results for the first quarter of fiscal 2020 (ended Jun 30, 2019). It pulled a positive earnings surprise of 11.6%.
This machinery company’s adjusted earnings in the reported quarter were 48 cents per share, surpassing the Zacks Consensus Estimate of 43 cents. Also, the bottom line gained 17.1% from the year-ago quarter number of 41 cents on healthy organic sales, buyouts and margin improvement.
Core Sales and Acquisitions Drive Revenues
In the reported quarter, Rexnord’s net sales were $508.3 million, increasing 0.9% year over year. The improvement was driven by a 2% contribution from core sales growth and 1% from net positive impact of acquisitions/divestitures, partially offset by a 2% adverse impact of foreign currency translation. However, the company’s net sales lagged the Zacks Consensus Estimate of $513.7 million by 1%.
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 $330.1 million, decreasing 1% year over year. It represented 64.9% of net sales. Core sales in the quarter grew 1% as healthy growth in North America end market was more than offset by product line simplification actions and weakness in Asia and Europe markets. The acquisition of Centa Power added 1% to sales growth while unfavorable movements in foreign currencies negatively impacted results by 3%.
Water Management revenues, representing 35.1% of net sales, were $178.2 million, up 4% year over year. Core sales in the quarter grew 4% backed by demand growth in building construction markets in North America. However, product line simplification actions played spoilsport in the quarter.
Gross Margin Improve Y/Y
In the reported quarter, Rexnord’s cost of sales decreased 0.5% year over year to $306.7 million. It represented 60.3% of net sales versus 61.2% recorded in the year-ago quarter. Gross margin increased 90 bps to 39.7%. Selling, general and administrative expenses of $109.5 million decreased 2.1% year over year and represented 21.5% of net sales versus 22.2% in the year-ago quarter.
Adjusted EBITDA was $111 million, up 5.7% year over year. Adjusted EBITDA margin was 21.8%, up roughly 90 bps from the prior-year quarter. For the Process & Motion Control segment, adjusted EBITDA margin increased 90 bps to 22.4% while that for the Water Management segment expanded 100 bps to 26.4%.
Adjusted tax rate in the quarter was 23.6% versus 26.2% in the year-ago quarter.
Balance Sheet and Cash Flow
Exiting the fiscal first quarter, Rexnord had cash and cash equivalents of $271.8 million, reflecting a 7.1% decline from $292.5 million recorded in the last reported quarter. Long-term debt increased 2.2% sequentially to $1,263.5 million. Notably, the company repaid $3.9 million of debt in the fiscal first quarter.
In the quarter under review, it generated net cash of $19 million from operating activities, reflecting 17.3% year-over-year growth. It decreased the capital investment for purchasing property, plant and equipment by 46.8% from the previous year to $5.9 million. Free cash flow was $13.1 million, increasing 156.9% from the year-ago figure.
For fiscal 2020, Rexnord anticipates benefiting from operational execution and SCOFR program. As noted, the company is working on the third phase of SCOFR initiatives. The third leg of this program, likely to be completed in fiscal 2021, is anticipated to result in structural cost reductions (annualized) of $20 million by fiscal 2022.
The Process & Motion Control segment will likely benefit from strengthening demand in global process industries and global commercial aerospace end markets. The industrial distribution business in the United States and Canada will probably increase as well. However, the industrial distribution business in Europe will likely be weak.
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 maintained its projections, with core sales still likely to grow in a low-single digit. Product line simplification initiatives are predicted to have an adverse impact of 150-200 bps on sales (same as the previous projection).
Adjusted EBITDA guidance is maintained at $460-$475 million. Net income from continuing operations will likely be $181-$191 million, slightly above previously mentioned $180-$190 million. The effective tax rate is expected to be roughly 26-27%.
Capital expenditure is anticipated to be below 2.5% of sales. Free cash will exceed net income. Interest expenses are predicted to be approximately $65 million, down from the previously stated $67 million.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
At this time, Rexnord has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile 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 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.