Precision Castparts Corp.’s (PCP) first quarter 2014 earnings from continuing operations of $2.88 per share missed the Zacks Consensus Estimate of $2.90 by 0.7%. However, quarterly earnings were up 22.6% year over year from $2.35 in the first quarter of 2013.
Profits were primarily driven by strong contributions from recent acquisitions, profits in commercial aerospace production and stable demand for industrial gas turbine spares.
Revenues
Revenues increased 20.4% year over year to $2.36 billion from $1.96 billion in the prior-year quarter, primarily driven by accretive acquisitions in the recent past. The company reported strong revenue growth in two of its three operating segments, which also contributed to the top-line growth. However, revenues were below the Zacks Consensus Estimate of $2.5 billion.
Segment Results
Investment Cast Products revenues declined 0.6% from year-ago quarter to $616 million. Revenue growth was driven by the segment's aerospace OEM business that is associated with current commercial aircraft production rates and future ramps in aircraft build schedules. However, this was almost fully offset by negative impacts from contractual pass-through pricing of about $2 million and union activity in one of the company’s facility of approximately $12 million.
Forged Products revenues surged 24.9% year over year to $1.06 billion. The robust increase in revenues was driven primarily by the Timet acquisition, which was the largest driver of the sales growth in the first quarter.
In addition, the top line also benefited from the upside opportunities as commercial OEMs ramp production and new aircraft and engine development programs progress. Further, downhole casing for the oil and gas market continued to show a robust shipping profile for the third quarter in a row.
Airframe Products revenues increased a robust 39.1% year over year to $686 million. During the quarter, critical aerospace fasteners sales surged by about 12% year over year. This is primarily attributable to the Boeing 787 program, where the segment’s fastener plants are supplying at an average pace of approximately five shipsets in a month.
Further, the base aerostructures business grew 5% year over year and follows the current commercial OEM build rates. Therefore, this is expected to accelerate in line with further ramp-ups in aircraft schedules.
Profit
Operating income surged 21.6% year over year to $625 million in the reported quarter. This represents an increase from $514 million in the comparable prior-year quarter. Gross margins during the quarter increased 38 basis points (bps) to 33.7% from 32.3% in the comparable prior-year period. Operating margin during the reported quarter was 26.4% compared with 26.1% in the comparable prior-year quarter. Strong synergies from the company’s acquisitions drove the overall profitability of the company.
Balance Sheet
Exiting the quarter, Precision Castparts had a cash balance of $293 million, which was up 4.6% from $280 million as on Mar 31, 2013. The increase is attributable to efficient working capital management.
As on Mar 31, 2013, Precision Castparts had total debt of $3.3 billion versus $3.8 billion as on Mar 31, 2013. The company has a debt to capitalization ratio of 25.0% 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 amounted to $82 million.
Outlook
Concurrent with the earnings release, the company provided an outlook for the rest of fiscal 2014. Base commercial aerospace is expected to grow in the coming 12 to 14 months, driven primarily by the Boeing 787 ramp up.
Furthermore, Industrial Gas Turbines IGT is also showing good momentum in its aftermarket backlog as the company is shipping out large quantities of nickel-based, severe service tubular product over the upcoming four quarters. The company expects its major end markets to drive organic growth.
Precision Castparts currently has a Zacks Rank #2 (Buy). Other stocks in the same industry worth a look are AO Smith Corp. (AOS), Plug Power Inc. (PLUG) and Micheal Baker Corp. (BKR). All three carry a Zacks Rank #2 (Buy).
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