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Precision Castparts 10-Q 2009
Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarter Ended December 28, 2008

Commission File No. 1-10348

Precision Castparts Corp.

An Oregon Corporation

IRS Employer Identification No. 93-0460598

4650 S.W. Macadam Avenue

Suite 400

Portland, Oregon 97239-4254

Telephone: (503) 417-4800

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨            Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares of Common Stock, no par value, outstanding as of January 28, 2009: 139,935,050

Note: This 10-Q was filed electronically via EDGAR with the Securities and Exchange Commission.

 

 

 


PART 1: FINANCIAL INFORMATION

 

Item 1. Financial Statements

Precision Castparts Corp. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

(In millions, except per share data)

 

     Three Months Ended  
     12/28/08     12/30/07  

Net sales

   $ 1,614.7     $ 1,668.2  

Cost of goods sold

     1,146.9       1,207.4  

Selling and administrative expenses

     93.2       88.9  

Restructuring and asset impairment

     11.8       —    

Interest expense

     4.4       11.4  

Interest income

     (2.4 )     (1.3 )
                

Income before income taxes and minority interest

     360.8       361.8  

Income tax expense

     124.0       120.3  

Minority interest in earnings of consolidated entities

     —         (0.3 )
                

Net income from continuing operations

     236.8       241.2  

Net income from discontinued operations

     2.3       5.3  
                

Net income

   $ 239.1     $ 246.5  
                

Net income per common share – basic:

    

Net income from continuing operations

   $ 1.70     $ 1.74  

Net income from discontinued operations

     0.02       0.04  
                
   $ 1.72     $ 1.78  
                

Net income per common share – diluted:

    

Net income from continuing operations

   $ 1.69     $ 1.72  

Net income from discontinued operations

     0.01       0.04  
                
   $ 1.70     $ 1.76  
                

Weighted average common shares outstanding:

    

Basic

     139.4       138.3  

Diluted

     140.3       140.4  

See Notes to the Condensed Consolidated Financial Statements.

 

2


Precision Castparts Corp. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

(In millions, except per share data)

 

     Nine Months Ended  
     12/28/08     12/30/07  

Net sales

   $ 5,223.5     $ 4,983.5  

Cost of goods sold

     3,732.6       3,624.7  

Selling and administrative expenses

     290.4       273.5  

Restructuring and asset impairment

     11.8       —    

Interest expense

     13.9       40.4  

Interest income

     (6.9 )     (4.1 )
                

Income before income taxes and minority interest

     1,181.7       1,049.0  

Income tax expense

     406.2       353.1  

Minority interest in earnings of consolidated entities

     (0.4 )     (0.9 )
                

Net income from continuing operations

     775.1       695.0  

Net income from discontinued operations

     9.1       13.3  
                

Net income

   $ 784.2     $ 708.3  
                

Net income per common share – basic:

    

Net income from continuing operations

   $ 5.56     $ 5.04  

Net income from discontinued operations

     0.07       0.10  
                
   $ 5.63     $ 5.14  
                

Net income per common share – diluted:

    

Net income from continuing operations

   $ 5.50     $ 4.96  

Net income from discontinued operations

     0.07       0.10  
                
   $ 5.57     $ 5.06  
                

Weighted average common shares outstanding:

    

Basic

     139.3       137.9  

Diluted

     140.8       140.1  

See Notes to the Condensed Consolidated Financial Statements.

 

3


Precision Castparts Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(In millions)

 

     12/28/08     3/30/08  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 276.9     $ 221.3  

Receivables, net

     896.5       1,013.3  

Inventories

     1,217.4       986.2  

Prepaid expenses

     23.1       21.6  

Deferred income taxes

     70.9       83.0  

Discontinued operations

     21.2       46.9  
                

Total current assets

     2,506.0       2,372.3  
                

Property, plant and equipment, at cost

     2,024.8       1,959.5  

Less - accumulated depreciation

     (890.8 )     (853.1 )
                

Net property, plant and equipment

     1,134.0       1,106.4  
                

Goodwill

     2,464.1       2,282.4  

Acquired intangible assets, net

     114.5       55.4  

Other assets

     207.9       203.2  

Discontinued operations

     22.2       30.4  
                
   $ 6,448.7     $ 6,050.1  
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Long-term debt currently due and short-term borrowings

   $ 52.5     $ 19.5  

Accounts payable

     596.7       679.0  

Accrued liabilities

     396.1       416.4  

Income taxes payable

     56.7       65.4  

Discontinued operations

     14.9       24.5  
                

Total current liabilities

     1,116.9       1,204.8  

Long-term debt

     259.3       334.4  

Pension and other postretirement benefit obligations

     280.7       274.5  

Other long-term liabilities

     96.8       142.5  

Deferred income taxes

     79.9       45.0  

Discontinued operations

     2.0       3.9  

Commitments and contingencies (See Notes)

    

Shareholders’ equity:

    

Common stock

     139.4       139.0  

Paid-in capital

     1,073.7       1,016.6  

Retained earnings

     3,645.1       2,873.4  

Accumulated other comprehensive (loss) income

     (245.1 )     16.0  
                

Total shareholders’ equity

     4,613.1       4,045.0  
                
   $ 6,448.7     $ 6,050.1  
                

See Notes to the Condensed Consolidated Financial Statements.

 

4


Precision Castparts Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In millions)

 

     Nine Months Ended  
     12/28/08     12/30/07  

Operating activities:

    

Net income

   $ 784.2     $ 708.3  

Net income from discontinued operations

     (9.1 )     (13.3 )

Non-cash items:

    

Depreciation and amortization

     103.7       93.9  

Stock-based compensation expense

     29.3       26.9  

Deferred income taxes

     45.4       36.3  

Excess tax benefits from share-based payment arrangements

     (10.5 )     (38.9 )

Other non-cash items

     2.2       —    

Changes in assets and liabilities, excluding effects of acquisitions and dispositions of businesses:

    

Receivables

     137.6       (105.0 )

Inventories

     (155.7 )     (12.1 )

Other current assets

     0.4       1.3  

Payables, accruals and current taxes

     (120.4 )     (57.4 )

Retirement benefit obligations

     11.2       (38.7 )

Other non-current assets and liabilities

     (30.6 )     (32.1 )

Net cash provided by operating activities of discontinued operations

     6.3       6.5  
                

Net cash provided by operating activities

     794.0       575.7  
                

Investing activities:

    

Acquisitions of businesses

     (490.7 )     (254.2 )

Capital expenditures

     (149.5 )     (152.9 )

Dispositions of businesses and other

     14.9       7.8  

Net cash provided (used) by investing activities of discontinued operations

     4.0       (2.3 )
                

Net cash used by investing activities

     (621.3 )     (401.6 )
                

Financing activities:

    

Net change in commercial paper and short-term borrowings

     2.4       149.8  

Net change in long-term debt

     (46.1 )     (376.1 )

Common stock issued

     12.7       37.6  

Excess tax benefits from share-based payment arrangements

     10.5       38.9  

Cash dividends

     (12.5 )     (12.4 )

Other

     —         (2.1 )

Net cash used by financing activities of discontinued operations

     (0.6 )     (0.3 )
                

Net cash used by financing activities

     (33.6 )     (164.6 )
                

Effect of exchange rate changes on cash and cash equivalents

     (83.5 )     16.6  
                

Net increase in cash and cash equivalents

     55.6       26.1  

Cash and cash equivalents at beginning of period

     221.3       150.4  
                

Cash and cash equivalents at end of period

   $ 276.9     $ 176.5  
                

See Notes to the Condensed Consolidated Financial Statements.

 

5


Precision Castparts Corp. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

(In millions, except share and per share data)

 

(1) Basis of Presentation

The condensed consolidated financial statements have been prepared by Precision Castparts Corp. (“PCC” or the “Company”), without audit and subject to year-end adjustment, in accordance with accounting principles generally accepted in the United States of America, except that certain information and footnote disclosures made in the latest annual report on Form 10-K have been condensed or omitted for the interim statements. Certain costs are estimated for the full year and allocated in interim periods based on estimates of operating time expired, benefit received, or activity associated with the interim period. The condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair representation of the results for the interim periods. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

(2) Stock-based compensation

During the three and nine months ended December 28, 2008 and December 30, 2007, we recorded stock-based compensation expense under our stock option, employee stock purchase, deferred stock unit and deferred compensation plans. A detailed description of the awards under these plans and the respective accounting treatment is included in the “Notes to the Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended March 30, 2008.

The following table sets forth total stock-based compensation expense and the related tax benefit recognized in our Condensed Consolidated Statements of Income:

 

     Three Months Ended     Nine Months Ended  
     12/28/08     12/30/07     12/28/08     12/30/07  

Cost of goods sold

   $ 4.4     $ 3.1     $ 10.6     $ 8.0  

Selling, general and administrative

     7.7       5.7       18.7       18.9  
                                

Stock-based compensation expense before income taxes

     12.1       8.8       29.3       26.9  

Income tax benefit

     (3.7 )     (2.7 )     (8.7 )     (8.4 )
                                

Total stock-based compensation expense after income taxes

   $ 8.4     $ 6.1     $ 20.6     $ 18.5  
                                

 

6


(3) Business Acquisitions

Fiscal 2009

In the third quarter of fiscal 2009, we acquired the following three entities for a total cost of approximately $469.5 million, which was primarily paid in cash. These transactions resulted in $343.5 million of goodwill (of which $215.9 million is deductible for tax purposes) and other intangible assets. The impact of these acquisitions was not material to our consolidated results of operations; consequently, pro forma information has not been included. As of December 28, 2008, the purchase price allocations are subject to further refinement as analyses are completed, including the valuation of intangible assets.

On December 4, 2008, we acquired Hackney Ladish Holding Corp. (“Hackney Ladish”), a leading producer of forged pipe fittings for critical energy infrastructure and related applications. With more than 80 years of experience manufacturing pipe fittings, Hackney Ladish offers the widest range of product types and sizes in the industry. Fittings are used in piping systems throughout the energy value chain, from drilling through processing and storage. Hackney Ladish’s products connect pipe, change the direction of flow, increase or reduce pipe sizes, join or separate flow, or cap pipe ends. Headquartered in Dallas, Texas, Hackney Ladish operates manufacturing facilities in Russellville, Arkansas and Enid, Oklahoma. The Hackney Ladish acquisition is a stock purchase for tax purposes and operates as part of the Forged Products segment.

On November 21, 2008, we acquired Fatigue Technology, Inc. (“FTI”), headquartered in Seattle, Washington. FTI pioneered the cold expansion process in 1969 and is the technology leader in fatigue life extension for both metal and composite airframe fastener holes. The FTI acquisition is an asset purchase for tax purposes and operates as part of the Fastener Products segment.

On September 30, 2008, we acquired Airdrome Holdings, LLC (“Airdrome”), which consists of Airdrome Precision Components (“APC”) and AF Aerospace Ltd. (“AFA”). APC, located in Long Beach, California, is a leading supplier of hydraulic and pneumatic fluid fittings primarily for airframe applications. AFA, located in Rugby, England, manufactures a variety of machined components for aerospace applications, including fittings and other fluid conveyance products, ultra-high tensile bolts, and machined details. Fluid fittings, manufactured in nickel, titanium, and stainless steel alloys, are the critical connectors for hoses transporting fuel, hydraulic fluid, and pneumatic pressure throughout an aircraft. The Airdrome acquisition is an asset purchase for tax purposes and operates as part of the Fastener Products segment.

Fiscal 2008

On July 5, 2007, we acquired Caledonian Alloys Group Limited (“Caledonian”) for approximately $208.1 million in cash, of which $165.1 million was paid at close, and $21.2 million was paid in the second quarter of fiscal 2009. We expect to pay one additional contingent payment of approximately $21.2 million in the second quarter of fiscal 2010. Caledonian is a market leader in providing nickel superalloy and titanium revert management solutions for the aerospace and industrial gas turbine (“IGT”) industries. Revert includes metal chips, casting gates, bar ends, forging flash, and other byproducts from casting, forging, and fastener manufacturing processes that can be re-melted and reused. The acquisition of Caledonian provides us with the infrastructure and capabilities needed to create a closed loop system for the retention and reuse of internally-generated revert. In addition, Caledonian provides access to new sources of material outside the Company and helps determine optimal utilization of revert streams throughout our melting operations worldwide. Headquartered in Livingston, Scotland, Caledonian employs approximately 300 people and operates nine revert processing facilities in six countries as of the date of acquisition. The Caledonian acquisition is a stock purchase for tax purposes and operates as part of the Forged Products segment. This transaction resulted in $154.8 million of goodwill (which is not deductible for tax purposes) and other intangibles. The impact of this acquisition was not material to our consolidated results of operations; consequently, pro forma information has not been included.

 

7


(4) Discontinued Operations

In the third quarter of fiscal 2009, we decided to dispose of two automotive fastener operations. The decision to discontinue these automotive fastener operations resulted from their non-core nature coupled with further erosion in the automotive market. These operations have been reclassified from the Fasteners Products segment to discontinued operations in the third quarter of fiscal 2009.

In the first quarter of fiscal 2009, we sold the stock of our Technova entities, a foreign operation held for sale and previously recorded as discontinued from our former Flow Technologies pumps and valves business. The transaction resulted in a gain of approximately $3.0 million.

In the fourth quarter of fiscal 2008, we entered into an agreement to sell the Unbrako fastener business headquartered in Shannon, Ireland. The sale was completed in the second quarter of fiscal 2009, resulting in a gain of approximately $3.5 million. Unbrako was reclassified from the Fastener Products segment to discontinued operations in the fourth quarter of fiscal 2008.

Also in the fourth quarter of fiscal 2008, we decided to sell the Kladno alloy manufacturing business located in the Czech Republic. Kladno primarily supplied steel ingots to Wyman-Gordon’s Grafton, Massachusetts operation. Kladno was reclassified from the Forged Products segment to discontinued operations in the fourth quarter of fiscal 2008 and continues to be marketed.

These businesses meet the criteria as a component of an entity under Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, any operating results of these businesses are presented in our Condensed Consolidated Statements of Income as discontinued operations, net of income tax, and all prior periods have been reclassified. In addition, gains and losses on operations discontinued in prior periods are also included below.

The components of discontinued operations for the periods presented are as follows:

 

     Three Months Ended     Nine Months Ended  
     12/28/08     12/30/07     12/28/08     12/30/07  

Net sales

   $ 18.0     $ 41.6     $ 76.1     $ 138.5  

Cost of goods sold

     17.7       35.8       74.2       113.4  

Selling and administrative expenses

     1.0       3.4       1.6       9.6  

Interest income

     —         (0.1 )     (0.1 )     (0.1 )
                                

(Loss) income from operations before income taxes

     (0.7 )     2.5       0.4       15.6  

Income tax (benefit) expense

     (0.4 )     0.9       0.8       5.4  
                                

Net (loss) income from operations

     (0.3 )     1.6       (0.4 )     10.2  

Gain on disposal, net of $(0.3), $4.2, $(0.6) and $4.4 tax (expense) benefit, respectively

     2.6       3.7       9.5       3.1  
                                

Net income from discontinued operations

   $ 2.3     $ 5.3     $ 9.1     $ 13.3  
                                

 

8


Included in our Condensed Consolidated Balance Sheets are the following major classes of assets and liabilities associated with the discontinued operations after adjustment for write-downs to fair value less cost to sell:

 

     12/28/08    3/30/08

Assets of discontinued operations

     

Current assets

   $ 21.2    $ 46.9

Net property, plant and equipment

     20.3      29.8

Other assets

     1.9      0.6
             
   $ 43.4    $ 77.3
             

Liabilities of discontinued operations

     

Long term debt currently due

   $ 0.5    $ 0.6

Other current liabilities

     14.4      23.9

Long term debt

     —        0.5

Other liabilities

     2.0      3.4
             
   $ 16.9    $ 28.4
             

 

(5) Inventories

Inventories consisted of the following:

 

     12/28/08    3/30/08  

Finished goods

   $ 292.5    $ 236.2  

Work-in-process

     547.3      540.3  

Raw materials and supplies

     344.9      263.8  
               
     1,184.7      1,040.3  

LIFO provision

     32.7      (54.1 )
               

Total inventory

   $ 1,217.4    $ 986.2  
               

 

(6) Goodwill and Acquired Intangibles

We perform our annual goodwill assessment test during the second quarter of each fiscal year. For fiscal 2009, it was determined that the fair value of the related operations was greater than book value and that there was no impairment of goodwill. There were no triggering events during the current quarter requiring a goodwill impairment test in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” other than the change in the reporting units within the Fasteners operating segment as discussed in our Critical Accounting Policies.

The changes in the carrying amount of goodwill by reportable segment for the nine months ended December 28, 2008, were as follows:

 

     Balance at
3/30/08
   Acquired    Currency
Translation
and Other*
    Balance at
12/28/08

Investment Cast Products

   $ 349.1    $ —      $ (6.4 )   $ 342.7

Forged Products

     884.4      105.5      (126.7 )     863.2

Fastener Products

     1,048.9      211.2      (1.9 )     1,258.2
                            

Total

   $ 2,282.4    $ 316.7    $ (135.0 )   $ 2,464.1
                            

 

* Includes final purchase price allocations of Caledonian and McWilliams Forge Company acquisitions, which increased acquired intangibles and decreased goodwill.

 

9


The gross carrying amount and accumulated amortization of our acquired intangible assets were as follows:

 

     12/28/08    3/30/08
     Gross
Carrying
Amount
   Accumulated
Amortization
   Gross
Carrying
Amount
   Accumulated
Amortization

Patents

   $ 10.3    $ 4.1    $ 9.7    $ 3.3

Proprietary technology

     2.3      0.8      2.3      0.7

Tradenames

     2.9      0.4      0.5      0.3

Long-term customer relationships

     20.5      2.4      9.4      0.5

Backlog

     6.5      4.7      2.7      1.7
                           
   $ 42.5    $ 12.4    $ 24.6    $ 6.5
                           

Unamortized intangible assets:

           

Tradenames

   $ 84.4       $ 37.3   
                   

Amortization expense for acquired intangible assets for the three and nine months ended December 28, 2008 was $2.2 million and $5.9 million, respectively. Amortization expense for acquired intangible assets for the three and nine months ended December 30, 2007 was $0.7 million and $2.1 million, respectively. Amortization expense related to finite-lived intangible assets is projected to total $8.5 million for fiscal 2009. Projected amortization expense for the succeeding five fiscal years is as follows:

 

Fiscal Year

   Estimated
Amortization
Expense

2010

   $ 6.8

2011

     5.9

2012

     4.8

2013

     4.1

2014

     2.7

The amortization could change in future periods if other intangible assets are acquired, existing intangibles are disposed or impairments are recognized.

 

(7) Guarantees

In the ordinary course of business, we generally warrant that our products will conform to our customers’ specifications over various time periods. The warranty accrual as of December 28, 2008 and March 30, 2008 is immaterial to our financial position, and the change in the accrual for the current quarter is immaterial to our results of operations and cash flows.

In conjunction with certain transactions, primarily divestitures, we may provide routine indemnifications (e.g., retention of previously existing environmental and tax liabilities) with terms that range in duration and often are not explicitly defined. Where appropriate, an obligation for such indemnifications is recorded as a liability. Because the obligated amounts of these types of indemnifications often are not explicitly stated, the overall maximum amount of the obligation under such indemnifications cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of divestiture, we have not historically made significant payments for these indemnifications.

 

10


(8) Earnings per share

The weighted average number of shares outstanding used to compute earnings per share were as follows (in millions):

 

     Three Months
Ended
   Nine Months
Ended
     12/28/08    12/30/07    12/28/08    12/30/07

Basic weighted average shares outstanding

   139.4    138.3    139.3    137.9

Dilutive stock options and employee stock purchase plan

   0.9    2.1    1.5    2.2
                   

Average shares outstanding assuming dilution

   140.3    140.4    140.8    140.1
                   

Basic earnings per share are calculated based on the weighted average number of shares outstanding. Diluted earnings per share are computed based on that same number of shares plus additional dilutive shares representing stock distributable under stock option and employee stock purchase plans computed using the treasury stock method.

For the three and nine months ended December 28, 2008, stock options to purchase 3.3 million shares and 1.2 million shares of common stock, respectively, were not dilutive. For the three and nine months ended December 30, 2007, stock options to purchase 0.6 million and 0.2 million shares of common stock, respectively, were not dilutive. These shares were excluded from the computation of diluted earnings per share because to do so would have been antidilutive. These options could be dilutive in the future.

 

(9) Comprehensive Income

Total comprehensive income consisted of the following:

 

     Three Months Ended     Nine Months Ended  
     12/28/08     12/30/07     12/28/08     12/30/07  

Net income

   $ 239.1     $ 246.5     $ 784.2     $ 708.3  

Other comprehensive (loss) income, net of tax:

        

Unrealized translation adjustments

     (167.2 )     (0.4 )     (255.2 )     33.1  

Pension and postretirement obligations

     0.3       —         2.1       —    

Unrealized (loss) gain on derivatives:

        

Periodic revaluations (net of income tax benefit of $4.0, $0.7, $2.4 and $0.9, respectively)

     (9.1 )     (2.0 )     (5.0 )     (2.6 )

Reclassification to net income of previously deferred (losses) gains (net of income tax (benefit) expense of $(0.6), $0.1, $(2.0) and $0.2, respectively)

     (1.2 )     —         (3.0 )     0.5  
                                

Other comprehensive (loss) income

     (177.2 )     (2.4 )     (261.1 )     31.0  
                                

Total comprehensive income

   $ 61.9     $ 244.1     $ 523.1     $ 739.3  
                                

Accumulated other comprehensive (loss) income consisted of the following:

 

     12/28/08     3/30/08  

Cumulative unrealized foreign currency translation (losses) gains

   $ (97.3 )   $ 157.9  

Pension and postretirement obligations

     (136.2 )     (138.3 )

Unrealized loss on derivatives

     (11.6 )     (3.6 )
                

Accumulated other comprehensive (loss) income

   $ (245.1 )   $ 16.0  
                

 

11


(10)  Fair Value Measurements

On March 31, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), as it relates to financial assets and financial liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the Financial Accounting Standards Board (“FASB”) issued FSP No. 157-2, “Effective Date of FASB Statement No. 157,” which delayed the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS No. 157 as it relates to financial assets and financial liabilities did not have a material impact on our consolidated financial position, results of operations or cash flows.

SFAS No. 157 defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1    Quoted prices in active markets for identical assets or liabilities.
Level 2    Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value on a recurring basis

 

December 28, 2008

     Fair Value Measurements Using     

(in millions)

   Level 1    Level 2    Level 3    Assets/Liabilities
at Fair Value

Assets:

           

Derivative contracts

   $ —      $ 2.4    $ —      $ 2.4

Liabilities:

           

Derivative contracts

   $ —      $ 18.6    $ —      $ 18.6
                           

Derivative contracts consist of foreign currency forward contracts accounted for as either cash flow hedges or fair value hedges. Cash flow hedges are used to hedge the variability in cash flows from forecasted receipts or expenditures denominated in currencies other than the functional currency. Fair value hedges are used to hedge against the risk of change in the fair value of sales and purchase commitments denominated in foreign currencies attributable to fluctuations in exchange rates.

Derivative contracts’ value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. There were no changes in our valuation techniques used to measure assets and liabilities at fair value on a recurring basis.

We believe that there is no significant credit risk associated with the potential non-performance of any counterparty to perform under the terms of any derivative financial instrument.

 

12


On March 31, 2008, we adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to elect to measure eligible financial instruments at fair value on an instrument-by-instrument basis. The adoption of SFAS No. 159 had no impact on our consolidated financial position, results of operations or cash flows as we did not elect to measure any eligible financial instruments at fair value under this guidance.

 

(11)  Pensions and Other Postretirement Benefit Plans

We sponsor many domestic and foreign defined benefit pension plans. In addition, we offer postretirement medical benefits for certain eligible employees. These plans are more fully described in the “Notes to the Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended March 30, 2008.

The net periodic benefit cost for our pension plans consisted of the following components:

 

     Three Months Ended     Nine Months Ended  
     12/28/08     12/30/07     12/28/08     12/30/07  

Service cost

   $ 9.2     $ 9.1     $ 29.6     $ 27.7  

Interest cost

     22.4       19.7       72.3       60.1  

Expected return on plan assets

     (27.7 )     (25.2 )     (89.4 )     (76.6 )

Recognized net actuarial loss

     0.2       3.0       2.9       9.1  

Amortization of prior service cost

     1.7       0.8       4.4       2.4  
                                

Net periodic benefit cost

   $ 5.8     $ 7.4     $ 19.8     $ 22.7  
                                

The net periodic benefit cost of postretirement benefits other than pensions consisted of the following components:

 

     Three Months Ended     Nine Months Ended  
     12/28/08    12/30/07     12/28/08    12/30/07  

Service cost

   $ 0.4    $ 0.4     $ 1.2    $ 1.2  

Interest cost

     2.1      2.0       6.3      5.8  

Recognized net actuarial loss

     0.2      —         0.3      —    

Amortization of prior service cost

     —        (0.1 )     0.1      (0.3 )
                              

Net periodic benefit cost

   $ 2.7    $ 2.3     $ 7.9    $ 6.7  
                              

We made contributions to the defined benefit pension plans of $2.9 million and $10.6 million for the three and nine month periods ended December 28, 2008, respectively. Projected contributions are expected to total approximately $26.5 million for fiscal year 2009, of which $11.0 million will be voluntary.

 

(12)  Commitments and contingencies

Various lawsuits arising during the normal course of business are pending against us. In the opinion of management, the outcome of these lawsuits, either individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations, cash flows or business.

 

13


(13)  New Accounting Pronouncements

In October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP No. FAS 157-3”). This FSP clarifies the application of SFAS No. 157 as it relates to the valuation of financial assets in a market that is not active for those financial assets. This FSP is effective immediately and includes prior periods for which financial statements have not been issued. We currently do not hold any financial assets subject to measurement under SFAS No. 157 for which there is an inactive market, and as such there is no impact on our consolidated financial position, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and establishes the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with Generally Accepted Accounting Principles (“GAAP”). SFAS No. 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The adoption will not have a material impact on our consolidated financial position, results of operations or cash flows.

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. FAS 142-3”). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The objective of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(Revised), “Business Combinations” (“SFAS No. 141(R)”) and other U.S. GAAP. This FSP is effective for periods beginning in the first quarter of fiscal 2010, and will be applied prospectively to intangible assets acquired after the effective date.

On March 19, 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“SFAS No. 161”). This new standard requires enhanced disclosures for derivative instruments, including those used in hedging activities. SFAS No. 161 is effective for periods beginning in the fourth quarter of fiscal 2009. The adoption of SFAS No. 161 will not have a material impact on our consolidated financial position, results of operations or cash flows.

On December 4, 2007, the FASB issued SFAS No. 141(Revised), “Business Combinations” (“SFAS No. 141(R)”), and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS No. 160”). These new standards are the U.S. GAAP outcome of a joint project with the International Accounting Standards Board. SFAS No. 141(R) and SFAS No. 160 introduce significant changes in the accounting for and reporting of business acquisitions and noncontrolling interests in a subsidiary. SFAS No. 141(R) and SFAS No. 160 continue the movement toward the greater use of fair values in financial reporting and increased transparency through expanded disclosures. SFAS No. 141(R) changes how business acquisitions are accounted for, including expensing acquisition costs as incurred, and will impact financial statements at the acquisition date and in subsequent periods. SFAS No. 160 requires noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. SFAS No. 141(R) and SFAS No. 160 are effective for business combinations for which the acquisition date is on or after the beginning of our fiscal year 2010. We are currently evaluating the impact of the adoption of SFAS No. 141(R) and SFAS No. 160 on our consolidated financial position, results of operations and cash flows.

On April 1, 2007, we adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”), which required that our Consolidated Balance Sheets reflect the funded status of the pension and postretirement plans. We have historically used a December 31 measurement date for our pension and postretirement plans. Effective for our fiscal year 2009, SFAS No. 158 will require us to measure plan assets and obligations as of March 29, 2009, the end of our fiscal year, eliminating the option in SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” to measure up to three months prior to the financial statement date.

 

14


(14)  Restructuring, asset impairment and other non-recurring charges

In the third quarter of fiscal 2009, we incurred restructuring and impairment charges of $11.8 million pursuant to plans to downsize operations across all segments. We had been gearing up for aerospace growth into fiscal 2010, whereas future demand now appears to be flattening out, particularly in the casting and forging aerospace markets. The charges consisted of $9.2 million for employee severance expenses and $2.6 million for impairments and relocation expenses related to long lived assets. These restructuring plans provide for terminations of approximately 550 employees in the third and fourth quarters of fiscal 2009. The restructuring and impairment charges recorded by the Investment Cast Products segment, Forged Products segment and Fastener Products segment were $4.9 million, $4.9 million and $2.0 million, respectively, during the three and nine month periods ended December 28, 2008. As of December 28, 2008, $9.2 million remained in accrued liabilities related to the restructuring plans.

 

15


(15)  Segment Information

Information regarding segments is presented in accordance with SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information.” Based on the criteria outlined in SFAS No. 131, our operations are classified into three reportable business segments: Investment Cast Products, Forged Products and Fastener Products. The Investment Cast Products and Forged Products segments are comprised of more than one operating segments, which are aggregated in accordance with paragraph 17 of SFAS No. 131 in our determination of reportable segments.

 

     Three Months Ended  
     12/28/08     12/30/07  

Net sales:

    

Investment Cast Products

   $ 541.5     $ 540.9  

Forged Products

     702.8       771.6  

Fastener Products

     370.4       355.7  
                

Consolidated net sales

   $ 1,614.7     $ 1,668.2  
                

Intersegment sales1:

    

Investment Cast Products

   $ 5.4     $ 7.0  

Forged Products

     24.0       12.0  

Fastener Products

     1.0       0.2  
                

Total intersegment sales

   $ 30.4     $ 19.2  
                

Segment operating income (loss):

    

Investment Cast Products

   $ 135.8     $ 131.6  

Forged Products

     154.8       169.1  

Fastener Products

     109.4       96.7  

Corporate expense

     (25.4 )     (25.5 )
                

Total segment operating income

     374.6       371.9  

Restructuring and asset impairment

     11.8       —    

Interest expense

     4.4       11.4  

Interest income

     (2.4 )     (1.3 )
                

Consolidated income before income taxes and minority interest

   $ 360.8     $ 361.8  
                

 

1

Intersegment sales consist of sales between reportable segments.

 

16


     Nine Months Ended  
     12/28/08     12/30/07  

Net sales:

    

Investment Cast Products

   $ 1,751.2     $ 1,581.4  

Forged Products

     2,300.4       2,358.1  

Fastener Products

     1,171.9       1,044.0  
                

Consolidated net sales

   $ 5,223.5     $ 4,983.5  
                

Intersegment sales1:

    

Investment Cast Products

   $ 18.7     $ 21.9  

Forged Products

     44.6       24.1  

Fastener Products

     2.5       1.7  
                

Total intersegment sales

   $ 65.8     $ 47.7  
                

Segment operating income (loss):

    

Investment Cast Products

   $ 442.9     $ 376.8  

Forged Products

     490.7       515.0  

Fastener Products

     340.5       267.8  

Corporate expense

     (73.6 )     (74.3 )
                

Total segment operating income

     1,200.5       1,085.3  

Restructuring and asset impairment

     11.8       —    

Interest expense

     13.9       40.4  

Interest income

     (6.9 )     (4.1 )
                

Consolidated income before income taxes and minority interest

   $ 1,181.7     $ 1,049.0  
                

 

1

Intersegment sales consist of sales between reportable segments.

 

17


(16)  Condensed Consolidating Financial Information

Certain of our subsidiaries guarantee our registered securities consisting of $200 million 5.6% Senior Notes due 2013, as well as our private notes, bank credit facilities and commercial paper (“CP”). The following condensed consolidating financial statements present, in separate columns, financial information for (i) Precision Castparts Corp. (on a parent only basis) with its investment in its subsidiaries recorded under the equity method, (ii) guarantor subsidiaries that guarantee the Company’s public and private notes, bank credit facilities and CP on a combined basis, with any investments in non-guarantor subsidiaries recorded under the equity method, (iii) direct and indirect non-guarantor subsidiaries on a combined basis, (iv) the eliminations necessary to arrive at the information for the Company and its subsidiaries on a consolidated basis, and (v) the Company on a consolidated basis, in each case for balance sheets as of December 28, 2008 and March 30, 2008, statements of income for the three and nine months ended December 28, 2008 and December 30, 2007 and statements of cash flows for the nine months ended December 28, 2008 and December 30, 2007. The public and private notes, bank facility and CP are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary. The guarantor subsidiaries include our domestic subsidiaries within the Investment Cast Products, Forged Products and Fastener Products segments that are 100% owned, directly or indirectly, by the Company within the meaning of Rule 3-10(h)(1) of Regulation S-X. There are no contractual restrictions limiting transfers of cash from guarantor and non-guarantor subsidiaries to the Company. The condensed consolidating financial information is presented herein, rather than separate financial statements for each of the guarantor subsidiaries, because guarantors are 100% owned and the guarantees are full and unconditional, joint and several.

 

18


Condensed Consolidating Statements of Income

Three Months Ended December 28, 2008

(Unaudited)

 

     Precision
Castparts
Corp.
    Guarantor
Subsidiaries
    Non-
Guarantor

Subsidiaries
    Eliminations     Total

Net sales

   $ —       $ 1,349.6     $ 335.4     $ (70.3 )   $ 1,614.7

Cost of goods sold

     4.4       958.9       253.9       (70.3 )     1,146.9

Selling and administrative expenses

     20.9       52.8       19.5       —         93.2

Restructuring and asset impairment

     —         8.4       3.4       —         11.8

Other (income) expense

     (0.4 )     (2.6 )     3.0       —         —  

Interest (income) expense, net

     (18.0 )     20.7       (0.7 )     —         2.0

Equity in earnings of subsidiaries

     (254.7 )     (7.4 )     —         262.1       —  
                                      

Income (loss) before income tax and minority interest

     247.8       318.8       56.3       (262.1 )     360.8

Income tax expense (benefit)

     8.7       103.3       12.0       —         124.0

Minority interest

     —         —         —         —         —  
                                      

Net income (loss) from continuing operations

     239.1       215.5       44.3       (262.1 )     236.8

Net income from discontinued operations

     —         0.3       2.0       —         2.3
                                      

Net income (loss)

   $ 239.1     $ 215.8     $ 46.3     $ (262.1 )   $ 239.1
                                      

 

19


Condensed Consolidating Statements of Income

Three Months Ended December 30, 2007

(Unaudited)

 

     Precision
Castparts
Corp.
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Total  

Net sales

   $ —       $ 1,342.1     $ 401.8     $ (75.7 )   $ 1,668.2  

Cost of goods sold

     1.4       966.9       314.8       (75.7 )     1,207.4  

Selling and administrative expenses

     22.4       47.0       19.5       —         88.9  

Other (income) expense

     (0.4 )     (1.7 )     2.1       —         —    

Interest (income) expense, net

     (12.3 )     31.7       (9.3 )     —         10.1  

Equity in earnings of subsidiaries

     (248.0 )     (12.1 )     —         260.1       —    
                                        

Income (loss) before income tax and minority interest

     236.9       310.3       74.7       (260.1 )     361.8  

Income tax (benefit) expense

     (9.6 )     108.2       21.7       —         120.3  

Minority interest

     —         0.3       (0.6 )     —         (0.3 )
                                        

Net income (loss) from continuing operations

     246.5       202.4       52.4       (260.1 )     241.2  

Net income from discontinued operations

     —         2.5       2.8       —         5.3  
                                        

Net income (loss)

   $ 246.5     $ 204.9     $ 55.2     $ (260.1 )   $ 246.5  
                                        

 

20


Condensed Consolidating Statements of Income

Nine Months Ended December 28, 2008

(Unaudited)

 

     Precision
Castparts
Corp.
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Total  

Net sales

   $ —       $ 4,234.6     $ 1,214.9     $ (226.0 )   $ 5,223.5  

Cost of goods sold

     10.6       2,999.4       948.6       (226.0 )     3,732.6  

Selling and administrative expenses

     62.8       158.5       69.1       —         290.4  

Restructuring and asset impairment

     —         8.4       3.4       —         11.8  

Other (income) expense

     (1.7 )     (4.9 )     6.6       —         —    

Interest (income) expense, net

     (47.6 )     56.0       (1.4 )     —         7.0  

Equity in earnings of subsidiaries

     (808.5 )     (22.5 )     —         831.0       —    
                                        

Income (loss) before income tax and minority interest

     784.4       1,039.7       188.6       (831.0 )     1,181.7  

Income tax (benefit) expense

     0.2       353.2       52.8       —         406.2  

Minority interest

     —         —         (0.4 )     —         (0.4 )
                                        

Net income (loss) from continuing operations

     784.2       686.5       135.4       (831.0 )     775.1  

Net income from discontinued operations

     —         1.9       7.2       —         9.1  
                                        

Net income (loss)

   $ 784.2     $ 688.4     $ 142.6     $ (831.0 )   $ 784.2  
                                        

 

21


Condensed Consolidating Statements of Income

Nine Months Ended December 30, 2007

(Unaudited)

 

     Precision
Castparts
Corp.
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Total  

Net sales

   $ —       $ 4,030.9     $ 1,160.2     $ (207.6 )   $ 4,983.5  

Cost of goods sold

     8.0       2,924.5       899.8       (207.6 )     3,624.7  

Selling and administrative expenses

     66.2       152.7       54.6       —         273.5  

Other (income) expense

     (1.3 )     (1.7 )     3.0       —         —    

Interest (income) expense, net

     (29.7 )     89.5       (23.5 )     —         36.3  

Equity in earnings of subsidiaries

     (729.4 )     (36.2 )     —         765.6       —    
                                        

Income (loss) before income tax and minority interest

     686.2       902.1       226.3       (765.6 )     1,049.0  

Income tax (benefit) expense

     (22.1 )     310.4       64.8       —         353.1  

Minority interest

     —         2.6       (3.5 )     —         (0.9 )
                                        

Net income (loss) from continuing operations

     708.3       594.3       158.0       (765.6 )     695.0  

Net income from discontinued operations

     —         9.3       4.0       —         13.3  
                                        

Net income (loss)

   $ 708.3     $ 603.6     $ 162.0     $ (765.6 )   $ 708.3  
                                        

 

22


Condensed Consolidating Balance Sheets

December 28, 2008

(Unaudited)

 

     Precision
Castparts
Corp.
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Total  

Assets

          

Current assets:

          

Cash and cash equivalents

   $ 133.7     $ 1.7     $ 141.5     $ —       $ 276.9  

Receivables

     45.2       1,807.0       121.1       (1,076.8 )     896.5  

Inventories

     —         989.5       227.9       —         1,217.4  

Prepaid expenses

     0.6       9.5       13.0       —         23.1  

Deferred income taxes

     20.9       24.9       25.1       —         70.9  

Discontinued operations

     —         44.6       87.4       (110.8 )     21.2  
                                        

Total current assets

     200.4       2,877.2       616.0       (1,187.6 )     2,506.0  
                                        

Property, plant and equipment, net

     40.0       845.1       248.9       —         1,134.0  

Goodwill, net

     —         1969.9       494.2       —         2,464.1  

Deferred income taxes

     20.0       —         —         (20.0 )     —    

Investments in subsidiaries

     5,954.4       447.4       —         (6,401.8 )     —    

Other assets

     129.4       108.6       66.1       18.3       322.4  

Discontinued operations

     —         15.5       6.7       —         22.2  
                                        
   $ 6,344.2     $ 6,263.7     $ 1,431.9     $ (7,591.1 )   $ 6,448.7  
                                        

Liabilities and Shareholders Investment

          

Current liabilities:

          

Long-term debt currently due and short-term borrowings

   $ 48.7     $ 0.6     $ 3.2     $ —       $ 52.5  

Accounts payable

     1,239.2       428.3       116.8       (1,187.6 )     596.7  

Accrued liabilities

     27.1       294.2       75.9       (1.1 )     396.1  

Income taxes payable

     19.5       2.7       34.5       —         56.7  

Discontinued operations

     —         11.2       3.7       —         14.9  
                                        

Total current liabilities

     1,334.5       737.0       234.1       (1,188.7 )     1,116.9  
                                        

Long-term debt

     252.2       6.6       0.5       —         259.3  

Pension and other postretirement benefit obligations

     139.8       135.3       5.6       —         280.7  

Deferred income taxes

     —         81.3       18.6       (20.0 )     79.9  

Other long-term liabilities

     4.6       81.7       10.5       —         96.8  

Discontinued operations

     —         1.2       0.8       —         2.0  

Commitments and contingencies (See Notes)

          

Shareholders’ equity:

          

Common stock and paid-in capital

     1,213.1       2,818.3       919.9       (3,738.2 )     1,213.1  

Retained earnings

     3,645.1       2,447.1       413.5       (2,860.6 )     3,645.1  

Accumulated other comprehensive (loss) income

     (245.1 )     (44.8 )     (171.6 )     216.4       (245.1 )
                                        

Total shareholders’ investment

     4,613.1       5,220.6       1,161.8       (6,382.4 )     4,613.1  
                                        
   $ 6,344.2     $ 6,263.7     $ 1,431.9     $ (7,591.1 )   $ 6,448.7  
                                        

 

23


Condensed Consolidating Balance Sheets

March 30, 2008

(Unaudited)

 

     Precision
Castparts
Corp.
   Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
   Eliminations     Total

ASSETS

            

Current assets:

            

Cash and cash equivalents

   $ 69.6    $ 0.8     $ 150.9    $ —       $ 221.3

Receivables, net

     35.1      1,148.6       560.8      (731.2 )     1,013.3

Inventories

     —        716.7       269.5      —         986.2

Prepaid expenses

     3.1      8.0       10.5      —         21.6

Deferred income taxes

     29.1      29.4       24.5      —         83.0

Discontinued operations

     —        28.8       75.4      (57.3 )     46.9
                                    

Total current assets

     136.9      1,932.3       1,091.6      (788.5 )     2,372.3
                                    

Property, plant and equipment, net

     42.2      770.3       293.9      —         1,106.4

Goodwill

     —        1,659.9       622.5      —         2,282.4

Deferred income taxes

     55.1      —         —        (55.1 )     —  

Investments in subsidiaries

     4,954.3      421.0       —        (5,375.3 )     —  

Other assets

     121.5      86.6       36.4      14.1       258.6

Discontinued operations

     —        15.7       14.7      —         30.4
                                    
   $ 5,310.0    $ 4,885.8     $ 2,059.1    $ (6,204.8 )   $ 6,050.1
                                    

LIABILITIES AND SHAREHOLDERS’ EQUITY

            

Current liabilities:

            

Long-term debt currently due and short-term borrowings

   $ 19.0    $ 0.3     $ 0.2    $ —       $ 19.5

Accounts payable

     699.3      475.5       292.7      (788.5 )     679.0

Accrued liabilities

     27.3      291.5       98.7      (1.1 )     416.4

Income taxes payable

     32.7      2.4       30.3      —         65.4

Discontinued operations

     —        11.6       12.9      —         24.5
                                    

Total current liabilities

     778.3      781.3       434.8      (789.6 )     1,204.8
                                    

Long-term debt

     327.3      6.8       0.3      —         334.4

Pension and other postretirement benefit obligations

     133.9      134.2       6.4      —         274.5

Deferred income taxes

     —        80.2       19.9      (55.1 )     45.0

Other long-term liabilities

     25.5      82.2       34.8      —         142.5

Discontinued operations

     —        3.5       0.4      —         3.9

Commitments and contingencies (See Notes)

            

Shareholders’ equity:

            

Common stock and paid-in capital

     1,155.6      2,084.4       1,201.3      (3,285.7 )     1,155.6

Retained earnings

     2,873.4      1,758.7       270.9      (2,029.6 )     2,873.4

Accumulated other comprehensive income (loss)

     16.0      (45.5 )     90.3      (44.8 )     16.0
                                    

Total shareholders’ equity

     4,045.0      3,797.6       1,562.5      (5,360.1 )     4,045.0
                                    
   $ 5,310.0    $ 4,885.8     $ 2,059.1    $ (6,204.8 )   $ 6,050.1
                                    

 

24


Condensed Consolidating Statements of Cash Flows

Nine Months Ended December 28, 2008

(Unaudited)

 

     Precision
Castparts
Corp.
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Total  

Net cash provided by operating activities

   $ 29.0     $ 599.6     $ 165.4     $ —       $ 794.0  
                                        

Acquisitions of businesses

     (486.9 )     —         (3.8 )     —         (490.7 )

Capital expenditures

     (1.1 )     (101.2 )     (47.2 )     —         (149.5 )

Intercompany advances

     —         (544.3 )     6.4       537.9       —    

Intercompany loans

     3.5       —         —         (3.5 )     —    

Disposition of businesses and other

     15.5       (1.3 )     0.7       —         14.9  

Net cash (used) provided by investing activities of discontinued operations

     —         (1.1 )     4.2       0.9       4.0  
                                        

Net cash (used) provided by investing activities

     (469.0 )     (647.9 )     (39.7 )     535.3       (621.3 )
                                        

Net change in commercial paper and short-term borrowings

     —         —         2.4       —         2.4  

Net change in long-term debt

     (45.4 )     (0.2 )     (0.5 )     —         (46.1 )

Common stock issued

     12.7       —         —         —         12.7  

Excess tax benefits from share-based payment arrangements

     10.5       —         —         —         10.5  

Cash dividends

     (12.5 )     —         —         —         (12.5 )

Intercompany advances

     538.8       —         —         (538.8 )     —    

Intercompany loans

     —         50.0       (52.9 )     2.9       —    

Net cash (used) provided by financing activities of discontinued operations

     —         (0.6 )     (0.6 )     0.6       (0.6 )
                                        

Net cash provided (used) by financing activities

     504.1       49.2       (51.6 )     (535.3 )     (33.6 )
                                        

Effect of exchange rate changes on cash and cash equivalents

     —         —         (83.5 )     —         (83.5 )
                                        

Net increase (decrease) in cash and cash equivalents

     64.1       0.9       (9.4 )     —         55.6  

Cash and cash equivalents at beginning of period

     69.6       0.8       150.9       —         221.3  
                                        

Cash and cash equivalents at end of period

   $ 133.7     $ 1.7     $ 141.5     $ —       $ 276.9  
                                        

 

25


Condensed Consolidating Statements of Cash Flows

Nine Months Ended December 30, 2007

(Unaudited)

 

      Precision
Castparts
Corp.
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Total  

Net cash (used) provided by operating activities

   $ (115.6 )   $ 538.7     $ 194.4     $ (41.8 )   $ 575.7  
                                        

Acquisitions of businesses

     (113.3 )     1.2       (142.1 )     —         (254.2 )

Capital expenditures

     (13.2 )     (103.5 )     (36.2 )     —         (152.9 )

Intercompany advances

     —         (476.1 )     (187.4 )     663.5       —    

Intercompany receivables securitization

     —         —         (41.8 )     41.8       —    

Intercompany loans

     (125.0 )     —         —         125.0       —    

Other

     0.9       5.1       1.8       —         7.8  

Net cash (used) provided by investing activities of discontinued operations

     —         (1.7 )     (0.4 )     (0.2 )     (2.3 )
                                        

Net cash (used) provided by investing activities

     (250.6 )     (575.0 )     (406.1 )     830.1       (401.6 )
                                        

Net change in commercial paper and short-term borrowings

     —         (0.1 )     149.9       —         149.8  

Net change in long-term debt

     (375.6 )     (0.2 )     (0.3 )     —         (376.1 )

Common stock issued

     37.6       —         —         —         37.6  

Excess tax benefits on equity instruments issued under share-based payment arrangements

     38.9       —         —         —         38.9  

Cash dividends

     (12.4 )     —         —         —         (12.4 )

Intercompany advances

     663.3       —         —         (663.3 )     —    

Intercompany loans

     —         29.7       95.3       (125.0 )     —    

Other

     2.9       (0.4 )     (4.6 )     —         (2.1 )

Net cash used by financing of discontinued operations

     —         (0.3 )     —         —         (0.3 )
                                        

Net cash provided (used) by financing activities

     354.7       28.7       240.3       (788.3 )     (164.6 )
                                        

Effect of exchange rate changes on cash and cash equivalents

     —         —         16.6       —         16.6  
                                        

Net (decrease) increase in cash and cash equivalents

     (11.5 )     (7.6 )     45.2       —         26.1  

Cash and cash equivalents at beginning of period

     18.1       7.6       124.7       —         150.4  
                                        

Cash and cash equivalents at end of period

   $ 6.6     $ —       $ 169.9     $ —       $ 176.5  
                                        

 

26


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Results of Operations - Comparison Between the Three Months Ended December 28, 2008 and December 30, 2007

 

      Three Months Ended     Increase / (Decrease)  

(In millions, except per share data)

   12/28/08     12/30/07     $     %  

Net sales

   $ 1,614.7     $ 1,668.2     $ (53.5 )   (3.2 )%

Cost of goods sold

     1,146.9       1,207.4       (60.5 )   (5.0 )

Selling and administrative expenses

     93.2       88.9       4.3     4.8  

Restructuring and asset impairment

     11.8       —         11.8     100  

Interest expense

     4.4       11.4       (7.0 )   (61.4 )

Interest income

     (2.4 )     (1.3 )     1.1     84.6  
                              

Income before income taxes and minority interest

     360.8       361.8       (1.0 )   (0.3 )

Income tax expense

     124.0       120.3       3.7     3.1  

Effective tax rate

     34.4 %     33.3 %    

Minority interest

     —         (0.3 )     0.3     100  
                              

Net income from continuing operations

     236.8       241.2       (4.4 )   (1.8 )

Net income from discontinued operations

     2.3       5.3       (3.0 )   (56.6 )
                              

Net income

   $ 239.1     $ 246.5     $ (7.4 )   (3.0 )%
                              

Net income per share from continuing operations – diluted

   $ 1.69     $ 1.72     $ (0.03 )   (1.7 )%

Net income per share from discontinued operations – diluted

     0.01       0.04       (0.03 )   (75.0 )
                              

Net income per share - diluted

   $ 1.70     $ 1.76     $ (0.06 )   (3.4 )%
                              

Average market price of key metals

(per pound)

   Three Months Ended     Increase/ (Decrease)  
   12/28/08     12/30/07     $     %  

Nickel

   $ 5.12     $ 13.54     $ (8.42 )   (62 )%

London Metals Exchange1

        

Titanium

   $ 1.53     $ 5.83     $ (4.30 )   (74 )%

Ti 6-4 bulk, Metalprices.com

        

Cobalt

   $ 24.06     $ 33.19     $ (9.13 )   (28 )%

Metal Bulletin COFM.8 Index1

        

 

1

Source:Bloomberg

 

27


Sales for the third quarter of fiscal 2009 were $1,614.7 million, down $53.5 million from $1,668.2 million in the same quarter last year. The decrease in sales was principally driven by the Boeing strike, which negatively impacted aerospace sales by approximately $129 million in the current quarter, and lower nickel alloy selling prices and increased internal mill sales, which negatively impacted sales by approximately $75 million. Contractual material pass-through pricing also declined, increasing sales by approximately $96.7 million in the current quarter versus approximately $116.0 million in the same quarter last year. Contractual material pass-through pricing adjustments are calculated based on market prices shown in the above table in trailing periods from one to twelve months. In addition, our foreign operations reported approximately $70 million in reduced sales year-over-year due to the strong increase in the value of the U.S. dollar relative to international currencies, primarily the British pound, Euro, Brazilian real and Australian dollar. These decreases were partially offset by the addition of approximately $21.5 million of quarter sales from the current quarter acquisitions of Airdrome, Fatigue and Hackney Ladish, and from steady improvement in industrial gas turbine (“IGT”), extruded pipe and aerospace fasteners sales. With regard to the commercial aircraft industry, aircraft deliveries decreased 3.4 percent in calendar year 2008 and Boeing and Airbus have announced relatively flat growth rates through calendar year 2009. Due to manufacturing lead times, our production volumes are approximately 6 to 9 months ahead of aircraft deliveries. While Boeing aircraft production rates are resuming after the 58-day machinist strike last fall, we do not expect recovery to pre-strike levels in fiscal 2009.

Net income from continuing operations for the third quarter of fiscal 2009 was $236.8 million, or $1.69 per share (diluted). By comparison, net income from continuing operations for the third quarter of fiscal 2008 was $241.2 million, or $1.72 per share (diluted). Net income (after discontinued operations) for the third quarter of fiscal 2009 was $239.1 million, or $1.70 per share (diluted), compared with net income of $246.5 million, or $1.76 per share (diluted), in the same period last year.

Interest and Income Tax

Net interest expense for the third quarter of fiscal 2009 was $2.0 million, compared with $10.1 million for the third quarter last year. The lower net expense is primarily due to significantly reduced debt levels and higher interest income resulting from increased cash balances compared to the same quarter last year.

The effective tax rate for the third quarter of fiscal 2009 was 34.4 percent, 1.1 percentage points higher than the 33.3 percent effective rate in the same quarter last year. The increase in tax rate compared to last year was primarily due to an increase in liabilities for uncertain tax positions and a reduction in benefits from audit settlements compared to the prior year, partially offset by increased benefits from the federal research and development tax credit in the current quarter.

Restructuring

We regularly assess our cost structure to ensure that operations are properly sized for prevailing market conditions, taking into consideration current and forecasted conditions in the markets we serve.

In the third quarter of fiscal 2009, we incurred restructuring and impairment charges of $11.8 million pursuant to plans to downsize operations across all segments. The tax-affected impact of these charges was $7.9 million, or $0.05 per share (diluted). We had been gearing up for aerospace growth into fiscal 2010, whereas future demand now appears to be flattening out, particularly in the casting and forging aerospace markets. The charges consisted of $9.2 million for employee severance expenses and $2.6 million for impairments and relocation expenses related to long lived assets. These restructuring plans provide for terminations of approximately 550 employees in the third and fourth quarters of fiscal 2009. The restructuring and impairment charges recorded by the Investment Cast Products segment, Forged Products segment and Fastener Products segment were $4.9 million, $4.9 million and $2.0 million, respectively, during the quarter.

 

28


Business Acquisitions

Fiscal 2009

In the third quarter of fiscal 2009, we acquired the following three entities for a total cost of approximately $469.5 million, which was primarily paid in cash. These transactions resulted in $343.5 million of goodwill (of which $215.9 million is deductible for tax purposes) and other intangible assets. The impact of these acquisitions was not material to our consolidated results of operations; consequently, pro forma information has not been included. As of December 28, 2008, the purchase price allocations are subject to further refinement as analyses are completed, including the valuation of intangible assets.

On December 4, 2008, we acquired Hackney Ladish Holding Corp. (“Hackney Ladish”), a leading producer of forged pipe fittings for critical energy infrastructure and related applications. With more than 80 years of experience manufacturing pipe fittings, Hackney Ladish offers the widest range of product types and sizes in the industry. Fittings are used in piping systems throughout the energy value chain, from drilling through processing and storage. Hackney Ladish’s products connect pipe, change the direction of flow, increase or reduce pipe sizes, join or separate flow, or cap pipe ends. Headquartered in Dallas, Texas, Hackney Ladish operates manufacturing facilities in Russellville, Arkansas and Enid, Oklahoma. The Hackney Ladish acquisition is a stock purchase for tax purposes and operates as part of the Forged Products segment.

On November 21, 2008, we acquired Fatigue Technology, Inc. (“FTI”), headquartered in Seattle, Washington. FTI pioneered the cold expansion process in 1969 and is the technology leader in fatigue life extension for both metal and composite airframe fastener holes. The FTI acquisition is an asset purchase for tax purposes and operates as part of the Fastener Products segment.

On September 30, 2008, we acquired Airdrome Holdings, LLC (“Airdrome”), which consists of Airdrome Precision Components (“APC”) and AF Aerospace Ltd. (“AFA”). APC, located in Long Beach, California, is a leading supplier of hydraulic and pneumatic fluid fittings primarily for airframe applications. AFA, located in Rugby, England, manufactures a variety of machined components for aerospace applications, including fittings and other fluid conveyance products, ultra-high tensile bolts, and machined details. Fluid fittings, manufactured in nickel, titanium, and stainless steel alloys, are the critical connectors for hoses transporting fuel, hydraulic fluid, and pneumatic pressure throughout an aircraft. The Airdrome acquisition is an asset purchase for tax purposes and operates as part of the Fastener Products segment.

Fiscal 2008

On July 5, 2007, we acquired Caledonian Alloys Group Limited (“Caledonian”) for approximately $208.1 million in cash, of which $165.1 million was paid at close and $21.2 million was paid in the second quarter of fiscal 2009. We expect to pay one additional contingent payment of approximately $21.2 million in the second quarter of fiscal 2010. Caledonian is a market leader in providing nickel superalloy and titanium revert management solutions for the aerospace and IGT industries. Revert includes metal chips, casting gates, bar ends, forging flash, and other byproducts from casting, forging, and fastener manufacturing processes that can be re-melted and reused. Headquartered in Livingston, Scotland, Caledonian employs approximately 300 people and operates nine revert processing facilities in six countries as of the date of acquisition.

 

29


Discontinued Operations

Our financial statements were impacted by activities relating to the planned divestiture of a number of our businesses. These businesses have been accounted for under Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, any operating results of these businesses are presented in the Condensed Consolidated Statements of Income as discontinued operations, net of tax, and all prior periods have been reclassified.

In the third quarter of fiscal 2009, we decided to dispose of two automotive fastener operations. The decision to discontinue these automotive fastener operations resulted from their non-core nature coupled with further erosion in the automotive market. These operations have been reclassified from the Fastener Products segment to discontinued operations.

In the first quarter of fiscal 2009, we sold the stock of our Technova entities, a foreign operation held for sale and previously recorded as discontinued from our former Flow Technologies pumps and valves business. This transaction resulted in a gain of approximately $3.0 million.

In the fourth quarter of fiscal 2008, we entered into an agreement to sell the Unbrako fastener business headquartered in Shannon, Ireland. The sale was completed in the second quarter of fiscal 2009, resulting in a gain of approximately $3.5 million. Unbrako was reclassified from the Fastener Products segment to discontinued operations in the fourth quarter of fiscal 2008.

Also in the fourth quarter of fiscal 2008, we decided to sell the Kladno alloy manufacturing business located in the Czech Republic. Kladno primarily supplied steel ingots to Wyman-Gordon’s Grafton, Massachusetts operation. Kladno was reclassified from the Forged Products segment to discontinued operations in the fourth quarter of fiscal 2008 and continues to be marketed.

Net income from discontinued operations was $2.3 million, or $0.01 per share (diluted) in the third quarter of fiscal 2009 compared with net income of $5.3 million, or $0.04 per share (diluted), in the same quarter last year. The net income from discontinued operations in the current quarter consists primarily of a curtailment gain related to Unbrako’s pension plan and a return to tax provision true-up, partially offset by operating losses and shutdown costs associated with Kladno and one of our discontinued automotive fastener operations. The net income from discontinued operations in the third quarter of last year principally reflects operating results from the Unbrako, Shape Memory Alloys (“SMA”) and automotive fastener operations, partially offset by shutdown costs associated with the J&L East business.

Overall Outlook and Impacts of the Global Economic Recession

Recent economic events have created recessionary economic conditions in many industries and created a crisis in global financial markets including commercial credit markets. While we are not immune to impacts of the current global recession, we believe our strong financial position will enable us to take advantage of opportunities in our markets to win market share from our customers and continue to make operational improvements in our businesses.

During the recently completed third quarter of fiscal 2009, approximately 53% of our sales were to customers in the global aerospace markets. Until the recent economic events occurred, we believed, based on customer forecasts, that the aerospace production rates would continue to experience growth throughout fiscal 2010 and possibly beyond, particularly due to anticipated build rates of major new aerospace programs such as the Boeing 787 and Airbus A380, each of which contains significant per-ship-set revenue for PCC. We had built up our employee base in anticipation of that growth. We now believe that the aerospace production rates will remain relatively flat with second quarter fiscal 2009 levels, particularly given the lower than anticipated build rates and delays in both the Boeing 787 and Airbus A380 programs. We still believe that these programs will represent significant future revenue streams for the company, but the revenues will be recognized later than originally anticipated. During the third quarter, we recognized restructuring charges of $11.8 million (before income taxes), which primarily relate to downsizing the workforce in anticipation of the moderating future aerospace growth in the near-term. We have, however, been able to increase our market share in aerospace, particularly in the Fasteners Products segment. Our most significant customers in the aerospace industry are primarily large, well-financed businesses that we believe have the ability to weather the economic downturn.

 

30


Therefore, while there is significant uncertainty as to the direction of the economy in future periods, we do not anticipate significant collection issues with our accounts receivable or marketability of our in-process inventories. However, our customers depend on demand from their end-use customers, as well as the end-use customers’ financial viability, of which we are unable to make an assessment. We must rely on the forecasted information provided from time to time by our customers as guidance with regard to the impacts from the current and future economic environment.

During the third quarter of fiscal 2009, approximately 27% of our sales were to customers in the global power generation markets, which include our IGT business as well as sales of our seamless extruded pipe. We expect continued growth in both of these product lines due to demand rates, large current sales backlogs and our ability to win further market share. Our most significant customers in the power generation markets are primarily large, well-financed businesses that we believe should have the ability to weather the economic downturn or are customers for which sales are backed by letters of credit on which we believe there is little risk of default. Therefore, we do not anticipate significant collection issues with our accounts receivable or marketability of our in-process inventories. However, our customers depend on demand from their end-use customers, as well as the end-use customers’ financial viability, of which we are unable to make an assessment. We must rely on the forecasted information provided from time to time by our customers as guidance with regard to the impacts from the current and future economic environment.

The remaining 20% of our sales in the third quarter of fiscal 2009 were into general industrial markets, including the automotive markets. It is difficult to summarize the opportunities and challenges in these markets, because the circumstances vary widely from one individual market to another. We have taken, and will continue to take, precautionary measures with customers in these markets to limit our exposure, to the extent possible, to potential bankruptcies and other financial issues experienced by these customers. These measures include shortening cash collection terms, regular updating of credit profiles, discontinuance of further business with customers not paying in a timely manner and the requirement of cash in advance of shipments, among others. Due to the diversity of markets and customer profiles in these businesses and the precautionary steps referred to previously, we do not anticipate severe impacts on our business or significant exposure to credit losses in these markets. However, it is reasonably possible that we may experience unanticipated unfavorable impacts.

We follow an investment philosophy of diversified investing and risk mitigation when managing our pension plans. The investments in our pension plans, which totaled approximately $1.5 billion as of the end of December 2007 (the date of our last actuarial measurement, converted using March 2008 foreign exchange rates), have experienced investment losses that average an estimated 6 to 8 percent through the end of December 2008. This compares with our weighted average expected long-term annual investment return of 8 percent for US plans and 7.5 percent for non-US plans. We anticipate that the losses on our pension investments will result in increased net periodic pension expense in fiscal 2010, although we are currently unable to estimate the amount of the increase as our next actuarial measurement date will be at the end of our fiscal year. We may provide additional funding to certain of our pension plans in fiscal 2010 to mitigate the impact of these pension investment losses on our income in future years. We believe our financial position and liquidity will allow us to make all required pension contributions as well as additional voluntary contributions that management deems advisable.

See the Changes in Financial Condition and Liquidity section for a discussion of the impact of the global financial climate and credit shortage on liquidity.

 

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Results of Operations by Segment – Comparison Between the Three Months Ended December 28, 2008 and December 30, 2007

 

      Three Months Ended     Increase/ (Decrease)  

(In millions)

   12/28/08     12/30/07     $     %  

Net sales:

        

Investment Cast Products

   $ 541.5     $ 540.9     $ 0.6     0.1 %

Forged Products

     702.8       771.6       (68.8 )   (8.9 )

Fastener Products

     370.4       355.7       14.7     4.1  
                              

Consolidated net sales

   $ 1,614.7     $ 1,668.2     $ (53.5 )   (3.2 )%
                              

Segment operating income (loss):

        

Investment Cast Products

   $ 135.8     $ 131.6     $ 4.2     3.2 %

% of sales

     25.1 %     24.3 %    

Forged Products

     154.8       169.1       (14.3 )   (8.5 )

% of sales

     22.0 %     21.9 %    

Fastener Products

     109.4       96.7       12.7     13.1  

% of sales

     29.5 %     27.2 %    

Corporate expense

     (25.4 )     (25.5 )     0.1     (0.4 )
                              

Consolidated segment operating income

     374.6       371.9     $ 2.7     0.7 %

% of sales

     23.2 %     22.3 %    

Restructuring and asset impairment

     11.8       —        

Interest expense, net

     2.0       10.1      
                    

Income before income taxes and minority interest

   $ 360.8     $ 361.8      
                    
      Three Months Ended     Increase/ (Decrease)  

Intercompany sales1

   12/28/08     12/30/07     $     %  

Investment Cast Products2

   $ 50.9     $ 23.4     $ 27.5     118 %

Forged Products3

     216.7       154.7       62.0     40  

Fastener Products4

     27.0       32.3       (5.3 )   (16 )
                              

Total intercompany sales

   $ 294.6     $ 210.4     $ 84.2     40 %
                              

 

1

Intercompany sales consist of each segment’s total intercompany sales, including intercompany sales within a segment and between segments.

 

2

Investment Cast Products: Includes sales between segments of $5.4 million and $7.0 million for the third quarter of fiscal 2009 and 2008, respectively.

 

3

Forged Products: Includes sales between segments of $24.0 million and $12.0 million for the third quarter of fiscal 2009 and 2008, respectively.

 

4

Fastener Products: Includes sales between segments of $1.0 million and $0.2 million for the third quarter of fiscal 2009 and 2008, respectively.

 

32


Investment Cast Products

Investment Cast Products’ sales increased 0.1 percent from $540.9 million in the third quarter of fiscal 2008 to $541.5 million this year. Operating income increased 3.2 percent from $131.6 million in the third quarter of fiscal 2008 to $135.8 million in the same quarter this year, while operating income as a percent of sales increased from 24.3 percent to 25.1 percent of sales. The slight year-over-year increase in sales reflects continuing strength and increased customer penetration in the global IGT markets, partially offset by reduced commercial aerospace sales resulting from the Boeing strike, which we estimate negatively impacted sales by approximately $73 million in the current quarter. Sales also include approximately $18.1 million of contractual pricing related to pass-through of increased material costs in the third quarter of fiscal 2009 compared to $22.2 million in the same period last year. In addition, our foreign operations reported approximately $13 million in reduced sales year-over-year due to the strong increase in the value of the U.S. dollar relative to international currencies, primarily the British pound and Euro. The increase in operating income reflected the impact of cost reductions and improved productivity, which helped to offset the negative impact of lost sales due to the Boeing strike. The improvement in operating margins as a percent of sales was mainly due to higher productivity, effective revert usage and lower scrap costs. Contractual material pass-through pricing diluted operating margins by 0.9 percentage points in the third quarter of fiscal 2009 compared to 1.0 percentage point in the same period a year ago.

Sales from this segment are expected to see a continued negative impact of the Boeing strike in the fourth quarter of this year, with production rates not expected to resume to pre-strike levels during fiscal 2009. While we cannot determine what the total Boeing strike impact will be, we are estimating our fourth quarter sales for the Investment Cast Products segment will be adversely affected by a lesser extent as compared to the third quarter impact. Continued weakness in international currencies will also impact this segment. We expect sales to benefit from further IGT growth, with additional capacity utilized to support this growth. In addition to the Deer Creek expansion completed in the second quarter of this year, the new Renaissance Park IGT facility in Painesville, Ohio was completed on time and on budget in the third quarter, with production expected to start to ramp up in the fourth quarter.

Forged Products

Forged Products’ sales were $702.8 million for the quarter, a decrease of 8.9 percent, compared to sales of $771.6 million in the third quarter of fiscal 2008. Operating income decreased 8.5 percent from $169.1 million in the third quarter of fiscal 2008 to $154.8 million in the same quarter this year, while operating income as a percent of sales increased from 21.9 percent to 22.0 percent of sales. The decrease in sales from the prior year reflects the decline in external selling prices of nickel alloy from the segment’s three primary mills, which negatively impacted external sales by approximately $59 million in the current quarter versus a year ago. Nickel prices decreased approximately 62 percent on the London Metal Exchange (LME) compared to the same quarter last year. In addition, we estimate the third quarter was negatively impacted by the Boeing strike in the amount of approximately $48 million. The Forged Products segment continued to dedicate more resources for internal production, which impacts top-line revenues. In addition, our foreign operations reported approximately $37 million in reduced sales year-over-year due to the strong increase in the value of the U.S. dollar relative to international currencies, primarily the British pound, Euro and Australian dollar. Intercompany sales for this segment, which includes sales within and between segments, increased from $154.7 million in third quarter of fiscal 2008 to $216.7 million in the current quarter (these sales are eliminated in consolidation). These declines were partially offset by a $50 million, or 66 percent increase in extruded pipe sales. Operating income was negatively impacted in the third quarter due to reduced margin on lost sales related to the Boeing strike. Increased efficiencies and improved internal coordination of resources and revert usage helped to offset the negative impact, resulting in a slightly improved operating margin over the prior year. In addition, contractual pricing related to pass-through of increased raw material costs accounted for approximately $75.1 million of sales in the third quarter of fiscal 2009 compared to $90.2 million in the same period last year, which diluted operating margins by 2.6 percentage points in the current quarter compared to 2.9 percentage points the same period a year ago.

 

33


We expect sales for the Forged Products segment to moderately increase in the fourth quarter of fiscal 2009, but to continue to be adversely affected by the Boeing strike. While we cannot determine what the total Boeing impact will be, we are estimating our fourth quarter sales for the Forged Products segment will be negatively impacted by a lesser extent as compared to the third quarter impact. In addition, the fourth quarter will be negatively impacted by the damaged 29,000 ton forging press in Houston, including production inefficiencies, requalification costs at other Wyman-Gordon facilities, and lost leverage. The press is expected to be back on line at the beginning of fiscal 2010. Continued weakness in international currencies will also impact this segment. Offsetting these events, we expect continuing growth in seamless pipe sales, which continues to have a robust backlog of over $1.0 billion, and non-aerospace nickel alloy sales from our Special Metals Corporation mills, in addition to a full quarter of sales from Hackney Ladish.

Fastener Products

The Fastener Products segment reported $370.4 million of sales with operating income of $109.4 million, or 29.5 percent of sales, in the third quarter of fiscal 2009, compared to sales of $355.7 million and operating income of $96.7 million, or 27.2 percent of sales, in the third quarter of fiscal 2008. The increase in sales primarily resulted from aerospace sales growing approximately $30 million or 11 percent compared to the prior year, including approximately $16 million related to the current quarter acquisitions of Airdrome and Fatigue. We estimate the Boeing strike accounted for a decrease in Fastener Products sales of approximately $8 million in the third quarter. Additional negative impacts to sales in this segment included the continuation of a depressed North American automotive market, coupled with softening in both the European and Brazilian automotive markets, as well as weakness in other areas of the general industrial market. In addition, our foreign operations reported approximately $20 million in reduced sales year-over-year due to the strong increase in the value of the U.S. dollar relative to international currencies, primarily the British pound, Euro and Brazilian real. Despite the challenges, the segment reported record operating income as a percent of sales, primarily due to continued focus on productivity, improved yields, reduced scrap and rework costs, and increased leverage from higher sales volume.

Projected fourth quarter sales for the Fastener Products segment will be impacted by the Boeing strike by a lesser extent as compared to the third quarter impact, but will benefit from a greater number of manufacturing days, a full quarter of sales from the acquisitions completed in the third quarter, and solid sales backlog for its products. In addition, continued weakness in international currencies will impact this segment.

 

34


Consolidated Results of Operations - Comparison Between the Nine Months Ended December 28, 2008 and December 30, 2007

 

      Nine Months Ended     Increase/(Decrease)  

(In millions, except per share data)

   12/28/08     12/30/07     $     %  

Net sales

   $ 5,223.5     $ 4,983.5     $ 240.0     4.8 %

Cost of goods sold

     3,732.6       3,624.7       107.9     3.0  

Selling and administrative expenses

     290.4       273.5       16.9     6.2  

Restructuring and asset impairment

     11.8       —         11.8     100  

Interest expense

     13.9       40.4       (26.5 )   (65.6 )

Interest income

     (6.9 )     (4.1 )     2.8     68.3  
                              

Income before income taxes and minority interest

     1,181.7       1,049.0       132.7     12.7  

Income tax expense

     406.2       353.1       53.1     15.0  

Effective tax rate

     34.4 %     33.7 %    

Minority interest

     (0.4 )     (0.9 )     0.5     55.6  
                              

Net income from continuing operations

     775.1       695.0       80.1     11.5  

Net income from discontinued operations

     9.1       13.3       (4.2 )   (31.6 )
                              

Net income

   $ 784.2     $ 708.3     $ 75.9     10.7 %
                              

Net income per share from continuing operations – diluted

   $ 5.50       4.96     $ 0.5     10.9 %

Net income per share from discontinued operations – diluted

     0.07       0.10       (0.0 )   (30.0 )
                              

Net income per share - diluted

   $ 5.57     $ 5.06     $ 0.5     10.1 %
                              
Average market price of key metals
   Nine Months Ended     Increase/(Decrease)  

(per pound)

   12/28/08     12/30/07     $     %  

Nickel

   $ 8.55     $ 15.96     $ (7.41 )   (46 )%

London Metals Exchange1

        

Titanium

   $ 3.23     $ 7.04     $ (3.81 )   (54 )%

Ti 6-4 bulk, Metalprices.com

        

Cobalt

   $ 36.12     $ 29.67     $ 6.45     22 %

Metal Bulletin COFM.8 Index1

        

 

1

Source:Bloomberg

Sales for the first nine months of fiscal 2009 were $5,223.5 million, up $240.0 million from $4,983.5 million in the same period last year. The increase in sales benefited from continued strength in the IGT markets and, to a lesser extent the aerospace market. The aerospace market showed strong demand through the first six months of the year. In the third quarter, aerospace sales were hindered by the Boeing strike, which we estimate resulted in approximately $129 million of decreased sales. Contractual material pass-through pricing increased sales by approximately $317.6 million this year versus approximately $338.0 million last year. Contractual material pass-through pricing adjustments are calculated based on market prices shown in the above table in trailing periods from one to twelve months. The average market price of nickel and titanium decreased 46 percent and 54 percent, respectively, compared to the same period last year. With regard to the commercial aircraft industry, aircraft deliveries decreased 3.4 percent in calendar year 2008 and Boeing and Airbus have announced relatively flat growth rates through calendar year 2009. Due to manufacturing lead times, our production volumes are approximately 6 to 9 months ahead of aircraft deliveries.

 

35


Net income from continuing operations for the first nine months of fiscal 2009 was $775.1 million, or $5.50 per share (diluted), compared to net income from continuing operations for the first nine months of fiscal 2008 of $695.0 million, or $4.96 per share (diluted). Net income (after discontinued operations) for the first nine months of fiscal 2009 was $784.2 million, or $5.57 per share (diluted), compared with net income of $708.3 million, or $5.06 per share (diluted), in the same period last year. The primary drivers of the increased income are discussed in the sections below.

Interest and Income Tax

Net interest expense for the nine months ended December 28, 2008 was $7.0 million, as compared with $36.3 million for the same period last year. The lower net expense is primarily due to significantly reduced debt levels and higher interest income resulting from increased cash balances compared to the same period last year.

The effective tax rate for the first nine months of fiscal 2009 was 34.4 percent, 0.7 percentage points higher than the 33.7 percent effective tax rate in the same period last year. The increase in the tax rate was primarily due to an increase in liabilities for uncertain tax positions for the nine months of fiscal 2009 and from favorable audit settlements and the reversal of valuation allowances recognized in the first nine months of fiscal 2008.

Discontinued Operations

The net income from discontinued operations was $9.1 million, or $0.07 per share (diluted), for the nine months ended December 28, 2008 compared with net income of $13.3 million, or $0.10 per share (diluted), in the same period last year. The net income from discontinued operations in the first nine months of fiscal 2009 consists primarily of the gains from the sales of the Unbrako fastener business and the Technova business, in addition to operating income from the discontinued automotive fastener operations. The net income from discontinued operations in the same period of last year principally reflects operating income from the Unbrako, Rescal, SMA and automotive fastener operations, partially offset by operating losses from the Kladno business and miscellaneous expenses associated with our former Flow Technologies pumps & valves businesses.

 

36


Results of Operations by Segment – Comparison Between the Nine Months Ended December 28, 2008 and December 30, 2007

 

     Nine Months Ended     Increase/ (Decrease)  

(In millions)

   12/28/08     12/30/07     $     %  

Net sales:

        

Investment Cast Products

   $ 1,751.2     $ 1,581.4     $ 169.8     10.7 %

Forged Products

     2,300.4       2,358.1       (57.7 )   (2.4 )

Fastener Products

     1,171.9       1,044.0       127.9     12.3  
                              

Consolidated net sales

   $ 5,223.5     $ 4,983.5     $ 240.0     4.8 %
                              

Operating income (loss):

        

Investment Cast Products

   $ 442.9     $ 376.8     $ 66.1     17.5 %

% of sales

     25.3 %     23.8 %    

Forged Products

     490.7       515.0       (24.3 )   (4.7 )

% of sales

     21.3 %     21.8 %    

Fastener Products

     340.5       267.8       72.7     27.1  

% of sales

     29.1 %     25.7 %    

Corporate expense

     (73.6 )     (74.3 )     0.7     0.9  

Consolidated segment operating income

     1,200.5       1,085.3     $ 115.2     10.6 %
                              

% of sales

     23.0 %     21.8 %    

Restructuring and asset impairment

     11.8       —        

Interest expense, net

     7.0       36.3      
                    

Income before income taxes and minority interest

   $ 1,181.7     $ 1,049.0      
                    
     Nine Months Ended     Increase/ (Decrease)  

Intercompany sales1

   12/28/08     12/30/07     $     %  

Investment Cast Products2

   $ 195.2     $ 85.1     $ 110.1     129 %

Forged Products3

     655.8       432.5       223.3     52  

Fastener Products4

     87.8       82.3       5.5     7  
                              

Total intercompany sales

   $ 938.8     $ 599.9     $ 338.9     56 %
                              

 

1

Intercompany sales consist of each segment’s total intercompany sales, including intercompany sales within a segment and between segments.

 

2

Investment Cast Products: Includes sales between segments of $18.7 million and $21.9 million for the first nine months of fiscal 2009 and 2008, respectively.

 

3

Forged Products: Includes sales between segments of $44.6 million and $24.1 million for the first nine months of fiscal 2009 and 2008, respectively.

 

4

Fastener Products: Includes sales between segments of $2.5 million and $1.7 million for the first nine months of fiscal 2009 and 2008, respectively.

 

37


Investment Cast Products

Investment Cast Products’ sales increased 10.7 percent from $1,581.4 million in the first nine months of fiscal 2008 to $1,751.2 million this year. Operating income for the segment increased 17.5 percent, from $376.8 million, or 23.8 percent of sales, a year ago to $442.9 million, or 25.3 percent of sales, in the first nine months of fiscal 2009. The increase in sales was driven by continued strength in the IGT markets, and to a lesser extent the aerospace market. The aerospace market showed strong demand through the first six months of the year. In the third quarter, aerospace sales were hindered by the Boeing strike, which we estimate resulted in approximately $73 million of decreased sales. The increase in operating income reflected the impact of the higher sales volume and operating improvements. The increase in operating margins as a percentage of sales was mainly due to the leverage from higher sales volume and improved manufacturing performance. The first nine months of fiscal 2009 included approximately $69.4 million related to contractual pass-through of material costs versus approximately $71.7 million in the same period last year, diluting operating margins by 1.0 percentage point in the first nine months of fiscal 2009 compared to 1.1 percentage points in the same period a year ago.

Forged Products

Forged Products’ sales were $2,300.4 million for the first nine months of fiscal 2009, a decrease of 2.4 percent, compared to sales of $2,358.1 million in the same period last year. Operating income decreased 4.7 percent from $515.0 million, or 21.8 percent of sales, in the first nine months of fiscal 2008 to $490.7 million, or 21.3 percent of sales, this year. The decrease in sales reflects significantly lower external selling prices of alloy from the segment’s three primary mills, primarily nickel and titanium, which decreased approximately 46 percent and 54 percent, respectively, compared to the same period last year. In addition, top-line revenues were impacted by increased intercompany sales, which increased 52 percent over the prior year, and we estimate the Boeing strike negatively impacted sales by approximately $48 million. These decreases in sales were partially offset by increased demand for extruded pipe, which increased $120.6 million or 46 percent year-over-year. Operating income was negatively impacted in the first nine months of fiscal 2009 due to Hurricane Ike, damage to two forging presses at Wyman-Gordon, and negative leverage from the Boeing strike. These effects were partially offset by successful implementation of cost-reduction initiatives. The first nine months of fiscal 2009 included approximately $237.9 million related to contractual pass-through of higher material costs versus approximately $255.2 million in the same period last year, diluting operating margins by 2.5 percentage points in the first nine months of fiscal 2009 compared to 2.7 percentage points in the same period a year ago.

Fastener Products

The Fastener Products segment reported $1,171.9 million of sales with operating income of $340.5 million, or 29.1 percent of sales, in the first nine months of fiscal 2009, compared to sales of $1,044.0 million and operating income of $267.8 million, or 25.7 percent of sales in the same period last year. The increase in sales was driven by continued strength and market share increases in the aerospace markets, resulting in an approximately 16 percent increase in aerospace sales over the same period a year ago. This increase was partially offset by a decline in automotive fastener sales, driven by slowing North American, and more recently, European and Brazilian automobile production. Operating income as a percent of sales benefited from strong aerospace sales and the impact of continued cost take-outs and improved manufacturing processes throughout the segment.

Changes in Financial Condition and Liquidity

Total assets of $6,448.7 million at December 28, 2008 represented a $398.6 million increase from the $6,050.1 million balance at March 30, 2008, principally reflecting a $496.8 million addition of total assets from the acquisitions of Airdrome, Fatigue and Hackney Ladish, in addition to $55.6 million of higher cash balances. Total capitalization at December 28, 2008 was $4,925.4 million, consisting of $312.3 million of debt and $4,613.1 million of equity. The debt-to-capitalization ratio declined to 6.3% at December 28, 2008 from 8.1% at the end of fiscal 2008.

 

38


Cash as of December 28, 2008 was $276.9 million, up $55.6 million from the end of fiscal 2008, and total debt was $312.3 million (including $0.5 million from discontinued operations), down $42.7 million since the end of fiscal 2008. Debt, net of cash, decreased from $133.7 million at the end of fiscal 2008 to $35.4 million at December 28, 2008, reflecting $98.3 million of positive cash flow for the first nine months of the year. The net positive cash flow reflects cash generation from operations of $795.2 million and $23.2 million from the issuance of common stock and related tax benefits, partially offset by $469.5 million of cash paid for the acquisitions of Airdrome, Fatigue and Hackney Ladish, capital expenditures of $149.5 million, effect of exchange rate changes of $83.5 million, and cash dividends of $12.5 million.

Capital spending during fiscal 2009, which is anticipated to be between approximately $210 million and $230 million, will principally provide for additional capacity expansion, cost reduction, and equipment upgrades throughout the company. We expect to contribute approximately $26.4 million to the defined benefit pension plans during fiscal year 2009, of which approximately $11.0 million is expected to be voluntary. In addition, we expect to contribute approximately $11.0 million to the other postretirement benefit plans during fiscal year 2009.

We believe we will be able to meet our short- and longer-term liquidity needs for working capital, pension and other postretirement benefit obligations, capital spending, cash dividends, scheduled repayment of debt and potential acquisitions from cash generated from operations, borrowing from our existing $1.0 billion revolving credit facility or new bank credit facilities, issuance of public or privately placed debt securities, or the issuance of equity instruments.

As noted above, our revolving bank credit facility (“Credit Agreement”) provides available borrowing up to $1.0 billion through May 2012. The full amount was available for borrowings as of the end of the third quarter of fiscal 2009. Early in the fourth quarter, our unused borrowing capacity decreased approximately $16 million as we issued a stand-by letter of credit under the credit facility. The Credit Agreement contains various standard financial covenants, including maintenance of minimum net worth, interest coverage ratio and leverage ratio. The financial covenants in the Credit Agreement are our most restrictive covenants.

Our covenant requirements and actual ratios as of December 28, 2008 were as follows (dollars in millions):

 

     Covenant Requirement    Actual

Consolidated minimum net worth (1)

   $2,488.9 (minimum)    $ 4,613.1

Consolidated interest coverage ratio (1)

   2.25:1.00 (minimum)      78.76:1.00

Consolidated leverage ratio (1)

   3.25:1.00 (maximum)      0.17:1.00

 

(1)

Terms are defined in the Amended and Restated Credit Agreement filed as an exhibit to Form 8-K on October 19, 2005.

As of December 28, 2008, we were in compliance with all financial covenants of our loan agreements.

Historically, we have also issued commercial paper as a method of raising short-term liquidity. We believe we continue to have the ability to issue commercial paper, even in the current credit markets, and have issued minor amounts of commercial paper in the third quarter and early in the fourth quarter to cover short-term cash requirements. We do not anticipate any changes in our ability to borrow under our current credit facility, but changes in the financial condition of the participating financial institutions could negatively impact our ability to borrow funds in the future. Should that circumstance arise, we believe that we would be able to arrange any needed financing, although we are not able to predict what the terms of any such borrowings would be, or the source of the borrowed funds, due to the current instability in the global credit markets.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results may differ from those estimates.

We believe that the estimates, assumptions and judgments involved in the accounting policies described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our most recent Annual Report on Form 10-K are critical to our business operations and the understanding of our results of operations. There have been no significant changes in our critical accounting policies during the first nine months of fiscal 2009.

 

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The discussion below expands the disclosure from the Annual Report on Form 10-K for the year ended March 30, 2008 with respect to goodwill and acquired intangibles.

Goodwill and acquired intangibles

From time to time, we acquire businesses in purchase transactions that typically result in the recognition of goodwill and other intangible assets. Acquired goodwill is not amortized but is subject to impairment testing at least annually and as other events and circumstances dictate, as discussed below. Other intangible assets are typically subject to amortization and therefore will likely increase future expenses. The determination of the value of such intangible assets requires management to make estimates and assumptions.

Goodwill and indefinite-lived intangible assets are tested for impairment at a minimum each fiscal year in the second quarter or when events or circumstances indicate that the carrying value of these assets may not be recoverable. Our reporting units consist of our Investment Cast Products and Forged Products operating segments as well as a number of reporting units in our Fasteners Products operating segment. The Fasteners Products operating segment includes several aggregated component units (referred to as the Fasteners Products reporting unit) and three other reporting units for which the segment manager regularly reviews performance. During the nine months ended December 28, 2008, PCC Precision Tool group (“PTG”) was included in the Fasteners Group reporting unit as the business is closely related and integral to the Fasteners Group reporting unit. During fiscal year 2008, PTG was a separate reporting unit. We performed an impairment test for the Fasteners Products reporting unit as a result of this change and no impairment was indicated. There were no other changes to our reporting units for goodwill impairment testing during the nine months ended December 28, 2008 and fiscal year 2008.

Testing for goodwill impairment involves the estimation of the fair value of the reporting units. Discounted cash flow models are typically used in these valuations. Such models require the use of significant estimates and assumptions primarily based on future cash flows, expected market growth rates, our estimates of sales volumes, sales prices and related costs, and the discount rate applied, which reflects the weighted average cost of capital. Management uses the best available information at the time fair values of the reporting units are estimated; however, estimates could be materially impacted by factors such as changes in growth trends and specific industry conditions, with the potential for a corresponding adverse effect on the consolidated financial statements potentially resulting in impairment of the goodwill. We also consider comparable transactions to estimate the fair value of the reporting units. The cash flow models used to determine fair value are most sensitive to the expected future cash flows and the discount rate for each reporting unit. We performed a sensitivity analysis on both of these factors and determined that the forecast for future earnings before interest and taxes used in the cash flow model could decrease by 10% and the discount rate used could increase by a factor of 4% from the rate utilized, and the goodwill of our reporting segments would not be impaired. The reporting unit that would be most sensitive to worsening economic conditions has $12.4 million of goodwill recorded as of December 28, 2008. Other than the change in reporting units within the Fasteners operating segment, there were no triggering events during the current quarter requiring a goodwill impairment test in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.”

 

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Forward-Looking Statements

Information included within this Form 10-Q describing the projected growth and future results and events constitutes forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results in future periods may differ materially from the forward-looking statements because of a number of risks and uncertainties, including but not limited to fluctuations in the aerospace, power generation and general industrial cycles; the relative success of our entry into new markets; competitive pricing; the financial viability of our significant customers; the impact on the Company of customer labor disputes; demand, timing, and market acceptance of new commercial and military programs; the availability and cost of energy, materials, supplies, and insurance; the cost of pension and postretirement medical benefits; equipment failures; relations with our employees; our ability to manage our operating costs and to integrate acquired businesses in an effective manner; governmental regulations and environmental matters; risks associated with international operations and world economies; the relative stability of certain foreign currencies; the impact of adverse weather conditions or natural disasters; the availability and cost of financing; and implementation of new technologies and process improvements. Any forward-looking statements should be considered in light of these factors. We undertake no obligation to update any forward-looking information to reflect anticipated or unanticipated events or circumstances after the date of this document.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our market risk exposure since March 30, 2008.

 

Item 4. Controls and Procedures

PCC management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15(b). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to Company management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. There have been no changes in internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

In October 2008, the West Virginia Department of Environmental Protection (“DEP”) filed a lawsuit in the Circuit Court of Cabell County alleging that a Special Metals Corporation subsidiary placed off-site hazardous waste water from its Burnaugh, Kentucky facility into two non-permitted sumps at its Huntington, West Virginia facility. The waste water was transported in 26 shipments over a three-day period in May-June 2007. The complaint acknowledges the subsidiary’s eventual proper treatment and disposal of the waste water. The complaint does not allege any harm to the environment. The DEP seeks a fine of up to $25,000 per day in statutory civil penalties for each violation, in addition to attorney fees and costs. We are currently investigating the incident and believe that any resulting judgment or settlement will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Various lawsuits arising during the normal course of business are pending against us. In the opinion of management, the outcome of these lawsuits, either individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations, cash flows or business.

 

Item 1A. Risk Factors

Our growth strategy includes business acquisitions with associated risks.

In fiscal 2009, we completed the acquisition of Airdrome Holdings LLC, Fatigue Technology, Inc. and Hackney Ladish Holding Corp. We expect that we will continue to make acquisitions of complementary businesses, products and technologies to enable us to add products and services for our core customer base and for related markets, and to expand each of our businesses geographically. Our ability to continue to engage in acquisitions may be limited if necessary financing is difficult to access, unavailable or too costly to support a transaction. The success of completed transactions will depend on our ability to integrate assets and personnel and to apply our manufacturing processes and controls to the acquired businesses. Although our acquisition strategy generally emphasizes the retention of key management of the acquired businesses and an ability of the acquired business to continue to operate independently, various changes may be required to integrate the acquired businesses into our operations, to assimilate new employees and to implement reporting, monitoring and forecasting procedures. Business acquisitions entail a number of other risks, including:

 

   

inaccurate assessment of undisclosed liabilities;

 

   

entry into markets in which we may have limited or no experience;

 

   

diversion of management’s attention from our core businesses;

 

   

difficulties in realizing projected efficiencies, synergies and cost savings; and

 

   

increase in our indebtedness and a limitation in our ability to access additional capital when needed.

Our failure to adequately address these acquisition risks could cause us to fail to realize the benefits we anticipated from the transactions.

We operate in cyclical markets.

A significant portion of our revenues are derived from the highly cyclical aerospace and power generation markets. Our sales to the aerospace industry constituted 55 percent of our total sales in fiscal 2008. Our power generation sales constituted 24 percent of our total sales in fiscal 2008.

The commercial aerospace industry is historically driven by the demand from commercial airlines for new aircraft. The U.S. and international commercial aviation industries continue to face challenges arising from competitive pressures and fuel costs. Demand for commercial aircraft is influenced by airline industry profitability, trends in airline passenger traffic, the state of U.S. and world economies, the ability of aircraft purchasers to obtain required financing and numerous other factors including the effects of terrorism and health and safety concerns. The military aerospace cycle is highly dependent on U.S. and foreign government funding; however, it is also driven by the effects of terrorism, a changing global political environment, U.S. foreign policy, the retirement of older aircraft and technological improvements to new engines that increase reliability. Accordingly, the timing, duration and severity of cyclical upturns and downturns cannot be forecast with certainty. Downturns or reductions in demand could have a material adverse effect on our business.

 

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