Triumph Group’s turnaround effort received a proverbial punch to the gut July 26 after the major aerospace supplier reported financial earnings and forecasts so far off Wall Street’s expectations that the company’s stock price tumbled 18%.
Whether stock traders had the right expectations ahead of the first-quarter fiscal 2018 report and executive teleconference is debatable. Regardless, the latest results reminded many that the Berwyn, Pennsylvania-based provider of aircraft structures and systems faces a long, hard slog as it tries to stabilize its business.
“Expectations for Triumph rallied sharply last quarter after management came to some shrewd contract agreements with their OEM counterparts, but this quarter’s results show that investors may have gotten ahead of management on how long it will take to turn the ship around operationally,” noted analysts at Vertical Research Partners . “Given that aerospace sentiment (and [stock price] multiples) are trending up, we think investors are cognizant of receiving the benefit of higher growth and free cash flow, and on those two metrics Triumph is significantly trailing their peer group.”
Triumph reported a net loss of $1.9 million, or $0.04 per diluted share for the quarter ended June 30. Cash used in operations was $99 million, while free cash use was $111.1 million.
According to Vertical, sales in all Triumph segments were down, with Integrated Systems 7% lower due to corporate divestitures, B777 and A380 rate cuts, Precision Components off 7% on lower B777 production rates and pricing and lower B787 pricing, Product Support dipping 6% on deferred maintenance that should rebound later this year, and Aerospace Structures plunging 17% on completion of the C-17 and G450, as well as rate reductions and price step-downs on B747-8, B777 and G550.
Cowen and Co. analysts called the results “a step back from momentum” generated the quarter before. Beyond the latest accounting, the company issued “disappointing” guidance for a free cash flow usage of $450-500 million this fiscal year, as well as an adjusted earnings-per-share estimate of $2.25-2.75 that is “far below” the street's $3.74.
Dan Crowley, Triumph’s president and CEO, tried to emphasize the positive in his prepared remarks to investors and analysts, including backlog growth of more than 5% to $4.2 billion, and a new deal to provide various hydraulic and mechanical actuation assemblies for legacy Boeing programs, including the 737 Next-Generation, 737 MAX, 747-8, 767, 767-2C and 777 and 777X.
But he had to explain what the company was doing to continue its turnaround effort. “The sales decline in the first quarter was anticipated and primarily driven by the ending of production on two large legacy programs,” he said.
“Our Integrated Systems segment continues to deliver strong profitability, with operating margin expanding both sequentially and year-over-year despite lower sales. Product Support results reflected the effect of divestitures, deferred customer contracts and changes in mix. Operational improvement for our Aerospace Structures and Precision Components segments will remain key areas of focus over the course of this year,” he added.
Two days earlier, the company announced new leadership at its Precision Components unit. Pete Wick was promoted to executive vice president and will continue to report directly to Crowley.