Rexnord’s Q1 Earnings Beat, Down Y/Y; Outlook Slashed

Zacks

Rexnord Corporation RXN reported impressive results for first-quarter fiscal 2016 (ended Jun 30, 2015). Adjusted earnings came in at 30 cents per share, surpassing the Zacks Consensus Estimate of 21 cents and ahead of the guided range of 26−28 cents per share.

However, the bottom line came 9.1% below the year-ago tally of 33 cents per share.

Revenues

Rexnord generated net sales of $485.1 million in the quarter, down 3.7% year over year. However, the top line comfortably surpassed the guided range of $467−$477 million as well as the Zacks Consensus Estimate of $479 million.

The year-over-year fall was triggered by core sales decline of 1% and negative impact of 5% from foreign currency translation, partially offset by 2% gain from acquisitions.

Rexnord reports its top-line results under two heads — Process & Motion Control and Water Management. The segmental quarterly results are briefly discussed below:

Revenues from the Process & Motion Control segment totaled $271.6 million, down 9% year over year. It represented 56% of net sales versus 59.3% in the year-ago quarter.

Water Management revenues were $213.5 million, reflecting an increase of 4% year over year and accounting for 44% of net revenue.

Margins

Rexnord’s cost of sales declined 3.1% year over year, representing 65% of net sales as against 64.6% in the year-ago quarter. Gross margin inched down 40 basis points (bps) to 35%. Selling, general and administrative expenses, as a percentage of total revenue, were flat year over year at 20.7%.

Adjusted earnings before interest, tax, depreciation and amortization (“EBITDA”) in the quarter were $85.2 million, down 7.1% year over year.

Balance Sheet and Cash Flow

Exiting first-quarter fiscal 2016, Rexnord had cash and cash equivalents of $329.7 million, down from $370.3 million in the preceding quarter. Long-term debt was $1,912 million as against $1,926.2 million in the fourth-quarter of the prior fiscal year.

In the first quarter, Rexnord generated cash of $7.9 million from its operating activities, up from $6.4 million in the year-ago quarter. Investment on property, plant and equipment declined 11.5% year over year to $7.7 million.

During the quarter, the company bought back shares worth $40 million.

Outlook

For fiscal 2016, Rexnord anticipates heavy de-stocking by industrial distribution channels will adversely impact its top line. However, improved performance in Water Management and aerospace end-markets will partially offset the setback in industrial business.

The company has lowered its adjusted earnings guidance to $1.50−$1.58 per share from $1.53−$1.63 predicted earlier. Core sales will likely be down 3% to flat in the quarter. The effective tax rate is expected to be around 30%, while capital expenditure is anticipated to be approximately 3% of sales. Free cash will exceed net income.

For fiscal second quarter, Rexnord projects adjusted earnings within 31−33 cents per share. Sales are expected to come in the $480−$490 million range.

By fiscal 2017, Rexnord anticipates realizing $30 million of annual cost savings from its recently launched supply-chain optimization and footprint-repositioning program.

With a market capitalization of $2.2 billion, Rexnord Corporation presently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the machinery industry are AZZ incorporated AZZ, AO Smith Corp. AOS and EnerSys ENS. While both AZZ incorporated and AO Smith Corp. sport a Zacks Rank #1 (Strong Buy), EnerSys carries a Zacks Rank #2 (Buy).

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