Precision Castparts Corp. (PCP) reported strong second quarter fiscal 2014 results with record revenues and earnings per share from continuing operations. Net income from operations increased 27.7% to $424 million in the reported quarter from $332 million in the prior-year quarter.
The company reported earnings from continuing operations of $2.90 per share, which beat the Zacks Consensus Estimate of $2.82 by 2.8%. Quarterly earnings were up 27.7% year over year from $2.27 in the second quarter of fiscal 2013.
Revenues
Revenues increased 22.6% year over year to $2,362 million from $1,927 million in the prior-year quarter, primarily driven by organic growth of 6%. The company reported strong revenue growth in two of its three operating segments, which also contributed to the top-line improvement. However, revenues were short of Zacks Consensus Estimate of $2,365 million.
Segment Results
Investment Cast Products revenues declined 0.6% to $608 million from $612 million reported in the year-ago quarter. Revenues increased in the segment's aerospace OEM (original equipment manufacturer) and spare sales business that is associated with current commercial aircraft production rates and future ramps in aircraft build schedules. However, this was almost offset by negative impacts from contractual pass-through pricing of about $3 million and a weak performance of the company’s jet and military spares businesses. The segment’s operating income increased 4.8% year over year.
Forged Products revenues increased a robust 39% year over year to $1,061 million compared with $762 million in the year-earlier quarter. The robust increase in revenues was driven primarily by the segment’s strong performance in the aerospace and power sectors. Also, revenues from the acquisitions of Timet and Texas Honing added to the top-line growth of the segment. In addition, the top-line also benefited from opportunities based on commercial OEMs ramp production and new aircraft and engine development programs. Further, downhole casing for the oil and gas market continued to show a robust shipping profile for the fourth quarter in a row. The segment’s operating income improved a considerable 65.4% year over year.
Airframe Productsrevenues surged 25.3% year over year to $693 million compared with $553 million in the year-ago quarter. During the quarter, critical aerospace fasteners sales improved marginally due to the sluggish build-rate of commercial aircrafts including Boeing 787. However, the base aerostructures business surged 66% year over year. The increase was primarily attributed to healthy returns from the new acquisitions and a significant increase in organic business. This is expected to accelerate in near future with more acquisitions in the pipeline. The segment’s operating income increased 26.5% year over year.
Margins
Operating income surged 30% year over year to $649 million from $498 million in the prior-year quarter. Gross margins during the quarter increased 71 basis points (bps) year over year to 17.9%. Strong synergies from acquisitions drove the overall profitability of the company. Profits were also driven by strong contribution of commercial aerospace production and stable demand for industrial gas turbine spares.
Balance Sheet
Exiting the quarter, Precision Castparts had a cash balance of $269 million, a decrease of 3.9% from $280 million as on Mar 31, 2013.
As on Sep 29, 2013, Precision Castparts had total debt of $3,558 million versus $3,807 billion as on Mar 31, 2013. The company has a debt to capitalization ratio of 25.2% versus 28.0% as on Mar 31, 2013. Despite major acquisitions, the company has managed its debt well. Total capital expenditure incurred by the company in the quarter aggregated $94 million.
Outlook
Concurrent with the earnings release, the company provided a positive outlook going forward. The company’s business in Industrial Gas Turbines (IGT) is showing good momentum in the aftermarket services, driven by the increased demand for turbine-based power generators. The company expects the demand for it’s interconnect pipe (for supplying coal to India and China) to increase significantly in the next two years. The company is also planning to introduce various new projects in the next couple of years and they include improved retrofit designs for the OEM business and mega downhole projects for the oil and gas industry.
Precision Castparts currently has a Zacks Rank #4 (Sell). Other stocks in the industry worth a look include AO Smith Corp. (AOS), NSK Ltd. (NPSKY) and Timken Co. (TKR). While AO Smith Corp and NSK both carry a Zacks Rank #1 (Buy), Timken retains a Zacks Rank #2 (Buy).
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