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Precision Unveils Q4 Asset Charges & Restructuring Actions - Analyst Blog

Leading manufacturer of complex metal components and products, Precision Castparts Corp. PCP, recently reviewed its oil & gas, and power pipe end-markets and inventories to reveal certain asset-rationalization charges as well as restructuring operations for fiscal fourth-quarter 2015. Continued deterioration of demand in oil & gas and power pipe markets compelled the company to take measures for improving its cost and capacity position. The restructuring actions also involve certain non-essential investments.

Inside the Headlines

Precision will bear pre-tax non-cash impairment charges of $210–$220 million related to the sale of its 50% ownership interest in Yangzhou Chengde Steel Tube Co., Ltd. (Chengde). Combination of three main issues, namely, a challenging market environment, decline in market value and adverse marketability issues will trigger pre-tax non-cash inventory and other asset impairment charges in the range of $125–$135 million. Moreover, partial outage of the company’s TIMET Morgantown facility will continue through fiscal 2016, since it is undergoing an investigation regarding an unfavorable incident in electron beam furnace.

Precision also expects a pre-tax charge of approximately $8 million associated with headcount reductions and right-sizing activities. After considering these charges, annual cost savings are projected in the range of $30–$35 million.

The company expects earnings per share in the range of 65–80 cents after accounting for pre-tax charges of roughly $343–$363 million. However, excluding the impairment and restructuring charges, adjusted earnings per share are expected within $2.90–$2.95. Primary headwinds like unfavorable mix, unimpressive pricing and sales volumes, and foreign exchange fluctuations also impact the company’s earnings per share.

Bottom Line

Precision’s ‘aggressive actions’ come as part of its efforts to align its cost structure with the level of orders received. The company feels that, over time, it has managed to develop strong capabilities in the oil & gas and power pipe markets, which, presently, stand threatened by uncertainties in short-term demand. Management expects that withdrawal from the Chengde joint venture will free resources for deployment in more productive activities.

Also, Precision’s concerted efforts to expand capacity of its U.S.-based pipe operations will eventually strengthen its position in the power pipe markets. We also believe that the company’s cost-restructuring and business-streamlining initiatives will provide a significant boost to its  profitability going forward, thereby allowing it to gain greater market share.

Zacks Rank

Precision currently has a Zacks Rank #3 (Hold). Better-ranked stocks include NSK Ltd. NPSKY, AB SKF SKFRY and Codexis, Inc. CDXS. While NSK Ltd. And AB SKF sport a Zacks Rank #1 (Strong Buy) each, Codexis, Inc. carries a Zacks Rank #2 (Buy).


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