A month has gone by since the last earnings report for Rexnord (RXN). Shares have lost about 2.3% 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 Earnings Surpass Estimates in Q4, Rise Y/Y
Rexnord kept its earnings streak alive in fourth-quarter fiscal 2019 (ended Mar 31, 2019). It pulled a positive earnings surprise of 10.87%.
This machinery company's adjusted earnings in the reported quarter were 51 cents per share, surpassing the Zacks Consensus Estimate of 46 cents. Also, the bottom line increased 8.5% from the year-ago quarter number of 47 cents.
For fiscal 2019, the company's adjusted earnings were $1.85 per share, surpassing the Zacks Consensus Estimate of $1.80 and the year-ago quarter’s figure of $1.48.
Core Sales and Acquisitions Drive Revenues
In the reported quarter, Rexnord's net sales were $537.5 million, increasing 3.8% year over year. The improvement was driven by a 4% contribution from core sales growth and 2% from net positive impact of acquisitions/divestitures, partially offset by 2% adverse impact of foreign currency translation.
However, the top line lagged the Zacks Consensus Estimate of $542 million by 0.79%.
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 $372.8 million, increasing 3.4% year over year. It represented 69.4% of net sales. Healthy growth in aerospace end market and demand-stability witnessed outside Europe drove 3% growth in core sales. The acquisition of Centa Power added 3% to sales growth while unfavorable movements in foreign currencies negatively impacted results by 3%.
Water Management revenues, representing 30.6% of net sales, were $164.7 million, up 4.7% year over year. Core sales in the quarter grew 5%. However, adverse weather played spoilsport to the extent of 200-300 basis points (bps).
For fiscal 2019, the company's net sales were $2,050.9 million, roughly in line with the Zacks Consensus Estimate and 10.8% above the year-ago figure of $1,851.6 million.
Gross Margin Falls Y/Y
In the reported quarter, Rexnord's cost of sales grew 5.2% year over year to $335.7 million. It represented 62.5% of net sales versus 61.6% recorded in the year-ago quarter. Gross margin decreased 90 basis points (bps) to 37.5%. Selling, general and administrative expenses of $109.3 million increased 1.4% year over year, and represented 20.3% of net sales versus 20.8% in the year-ago quarter.
Adjusted EBITDA was $119.9 million, up 6.4% year over year. Adjusted EBITDA margin was 22.3%, up roughly 50 bps over the prior-year quarter.
For the Process & Motion Control segment, adjusted EBITDA margin increased 60 bps to 24.2% while that for the Water Management segment expanded 30 bps to 24.5%.
Balance Sheet and Cash Flow
Exiting the fiscal fourth quarter, Rexnord had cash and cash equivalents of $292.5 million, reflecting 1.5% decline from $297.1 million recorded in the last reported quarter. Long-term debt slipped 5.7% sequentially to $1,236.8 million.
Notably, the company repaid $369 million of debt during fiscal 2019 while raised funds amounting to $270.8 million through debt borrowings.
In fiscal 2019, the company generated net cash of $258.1 million from operating activities, reflecting year-over-year growth of 13%. It increased the capital investment for purchasing property, plant and equipment by 10.3% over the previous year to $44.9 million. Free cash flow was $213.2 million, increasing 13.5% from the fiscal 2018 figure.
For fiscal 2020, Rexnord anticipates benefiting from strengthening demand, initiatives to mitigate impacts of tariffs and inflation, higher free cash flow generation and SCOFR.
As noted by the company, the first phase of SCOFR was completed in the second quarter of fiscal 2018 (resulted in structural costs reductions of $25 million) and the second phase was completed in the fourth quarter of fiscal 2018 (anticipated to result in structural costs reductions of $15 million in fiscal 2020). In addition, the company started with 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 costs reductions (annualized) of $20 million by fiscal 2022.
The Process & Motion Control segment will flourish on the back of strengthening demand in global process industries and global commercial aerospace end markets. Industrial-distribution business in the United States and Canada as well as Rest of World (excludes Europe) will also increase.
Sales in the Water Management segment will 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 anticipates core sales to grow in a low-single digit. Product line simplification initiatives are predicted to have an adverse impact of 150-200 bps on sales.
Adjusted EBITDA is projected to be $460-$475 million. The improvement was driven by solid operational execution and anticipated benefits from initiatives. Impacts of tariffs will be fully negated in the year.
Net income will likely be $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 $67 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, Rexnord has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. 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 indicates a downward shift. It's no surprise Rexnord has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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