Precision Castparts Corp. PCP reported second-quarter fiscal 2016 earnings from continuing operations of $2.49 per share, which lagged the Zacks Consensus Estimate of $2.94. Also, the bottom line declined 23.1% on a year-over-year basis.
The decline in bottom line was mainly led by poor top-line performance during the quarter. Moreover, higher interest expense as well as selling & administrative costs dragged earnings. This apart, pricing pressure in the oil & gas market, persistent “fastener destocking” and operational issues in the Airframe Products segment added to the year-over-year fall in earnings.
Inside the Headlines
Net sales for the second quarter of fiscal 2016 decreased about 9.3% year over year to $2.28 billion, which fell short of the Zacks Consensus Estimate of $2.48 billion.
The year-over-year decline in net sales was primarily attributed to lower sales from Forged Products and Airframe Products in the reported quarter. Moreover, softness in the power markets, primarily industrial gas turbine (“IGT”) and non-IGT oil & gas and pipe markets, were responsible for the poor top-line performance.
Segmental Results
Investment Cast Products sales inched up 0.8% year over year to $636 million. The growth was driven by robust demand in current aerospace platforms fueled by impressive commercial sales (up 6%) and regional jet sales (up 15%). However, lower shipments in the military markets (down 12%) due to unfavorable customer demand and lower IGT sales led by poor aftermarket sales hurt the overall performance of this segment.
Forged Products sales declined 15.8% year over year to $905 million owing to negative impact from metal prices and contractual “pass-through” pricing issues. Lower military power sales (down 50%) due to challenges in the oil and gas market, coupled with sluggish industrial demand, were mainly responsible for this decline. Moreover, lower sales in the military market (down 15%) worsened the fall. However, higher sales in the commercial aerospace (up 4%) and regional/business jet markets compensated this fall to some extent.
Airframe Products sales fell 8.6% year over year to $746 million. The decline was largely brought about by lower sales in the aerospace and general industrial business lines. Inventory management efforts by key fastener customers adversely affected the performance of commercial aerospace sales. Also, lower sales in the military and regional/business jet markets acted as a significant headwind.
Liquidity
As of Sep 27, 2015, Precision Castparts had cash balance of $632 million, down from $1.05 billion recorded on Jun 28, 2015. The company’s total debt was $4.99 billion compared with $5.28 billion as on Jun 28, 2015.
Merger with Berkshire Hathaway
On Aug 10, 2015, Precision Castparts disclosed the signing of a merger deal with Berkshire Hathaway Inc. for about $37.2 billion. The deal is expected to conclude in the first quarter of calendar year 2016, upon fulfillment of customary closing conditions.
Post completion of the acquisition, the company will operate under the same name across the globe, as a wholly owned subsidiary of Berkshire Hathaway. Notably, Berkshire Hathaway’s Precision Castparts buyout is the biggest in its history.
Due to the ongoing acquisition process, Precision Castparts will not be providing any update to its annual guidance.
Zacks Rank
Precision Castparts currently carries a Zacks Rank #2 (Buy). Other well-ranked stocks in the industry include Global Brass and Copper Holdings, Inc. BRSS, NN Inc. NNBR and Worthington Industries, Inc. WOR. While Global Brass and Copper Holdings sports a Zacks Rank #1 (Strong Buy), both NN Inc. and Worthington Industries hold the same Zacks Rank as Precision Castparts.
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