10-Q 1 pcp2013122910-q.htm FORM 10-Q PCP 20131229 10-Q



 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 29, 2013
Commission File Number 1-10348
 
 
 
 
Precision Castparts Corp.
 
 
 
 
 
 
 
An Oregon Corporation
IRS Employer Identification No. 93-0460598
4650 S.W. Macadam Avenue
Suite 400
Portland, Oregon 97239-4262
Telephone: (503) 946-4800
 
 
 
 
 
Indicate by check mark 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 [ ]  No [x]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  [x] Yes  [  ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
[x]
Accelerated filer
[  ]
Non-accelerated filer
[  ] (Do not check if a smaller reporting company)
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 30, 2014: 145,227,756
 
 





PART I. 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
 
Nine Months Ended
 
12/29/13
 
12/30/12
 
12/29/13
 
12/30/12
Net sales
$
2,357

 
$
2,034

 
$
7,086

 
$
5,927

Costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
1,548

 
1,381

 
4,675

 
4,020

Selling and administrative expenses
150

 
135

 
459

 
376

Interest expense
20

 
12

 
59

 
18

Interest income
(1
)
 
(2
)
 
(3
)
 
(5
)
Total costs and expenses
1,717

 
1,526

 
5,190

 
4,409

Income before income tax expense and equity in earnings of unconsolidated affiliates
640

 
508

 
1,896

 
1,518

Income tax expense
(206
)
 
(167
)
 
(611
)
 
(503
)
Equity in earnings of unconsolidated affiliates

 
(2
)
 
1

 
1

Net income from continuing operations
434

 
339

 
1,286

 
1,016

Net income (loss) from discontinued operations
1

 
(1
)
 
12

 
(3
)
Net income
435

 
338

 
1,298

 
1,013

Net income attributable to noncontrolling interests
(2
)
 

 
(5
)
 
(1
)
Net income attributable to Precision Castparts Corp. (“PCC”)
$
433

 
$
338

 
$
1,293

 
$
1,012

Net income per common share attributable to PCC shareholders - basic:
 
 
 
 
 
 
 
Net income from continuing operations
$
2.97

 
$
2.32

 
$
8.79

 
$
6.98

Net income (loss) from discontinued operations
0.01

 

 
0.08

 
(0.02
)
Net income per share
$
2.98

 
$
2.32

 
$
8.87

 
$
6.96

Net income per common share attributable to PCC shareholders - diluted:
 
 
 
 
 
 
 
Net income from continuing operations
$
2.95

 
$
2.31

 
$
8.73

 
$
6.93

Net income (loss) from discontinued operations
0.01

 
(0.01
)
 
0.08

 
(0.02
)
Net income per share
$
2.96

 
$
2.30

 
$
8.81

 
$
6.91

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
145.3

 
145.8

 
145.7

 
145.5

Diluted
146.5

 
146.8

 
146.7

 
146.5

See Notes to the Condensed Consolidated Financial Statements.



1



Precision Castparts Corp. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In millions)
 
Three Months Ended
 
Nine Months Ended
 
12/29/13
 
12/30/12
 
12/29/13
 
12/30/12
Net income
$
435

 
$
338

 
$
1,298

 
$
1,013

Other comprehensive income (loss) ("OCI"), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
37

 
(1
)
 
133

 

Gain (loss) on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized losses on available-for-sale securities (net of income tax benefit of $6, $0, $3 and $0, respectively)
(12
)
 

 
(6
)
 

Less: reclassification adjustment for gains included in net income (net of income tax expense of $0 in all periods)

 

 
(1
)
 

Gain (loss) on derivatives:
 
 
 
 
 
 
 
Unrealized gains due to periodic revaluations (net of income tax expense of $0, $0, $2 and $0, respectively)
2

 
3

 
6

 
5

Less: reclassification adjustment for gains included in net income (net of income tax expense of $0 in all periods)
(1
)
 
(1
)
 

 

Other comprehensive income, net of tax
26

 
1

 
132

 
5

Total comprehensive income attributable to noncontrolling interests
(3
)
 

 
(10
)
 
(1
)
Total comprehensive income attributable to PCC
$
458

 
$
339

 
$
1,420

 
$
1,017

See Notes to the Condensed Consolidated Financial Statements.

2



Precision Castparts Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(In millions)
 
12/29/13
 
3/31/13
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
337

 
$
280

Receivables, net
1,470

 
1,507

Inventories
3,312

 
2,980

Prepaid expenses and other current assets
144

 
159

Income tax receivable
9

 
5

Deferred income taxes
67

 
101

Discontinued operations
6

 
48

Total current assets
5,345

 
5,080

Property, plant and equipment, at cost
3,881

 
3,517

Accumulated depreciation
(1,624
)
 
(1,440
)
Net property, plant and equipment
2,257

 
2,077

Goodwill
6,535

 
5,904

Acquired intangible assets, net
3,426

 
3,021

Investment in unconsolidated affiliates
426

 
445

Other assets
316

 
300

Discontinued operations
27

 
69

 
$
18,332

 
$
16,896

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Long-term debt currently due and short-term borrowings
$
3

 
$
204

Accounts payable
959

 
940

Accrued liabilities
605

 
552

Discontinued operations
5

 
16

Total current liabilities
1,572

 
1,712

Long-term debt
3,618

 
3,602

Pension and other postretirement benefit obligations
540

 
548

Other long-term liabilities
630

 
457

Deferred income taxes
912

 
762

Discontinued operations
1

 
11

Commitments and contingencies (See Notes)

 

Equity:
 
 
 
Preferred stock

 

Common stock
146

 
146

Paid-in capital
1,618

 
1,777

Retained earnings
9,692

 
8,413

Accumulated other comprehensive loss
(421
)
 
(553
)
Total PCC shareholders' equity
11,035

 
9,783

Noncontrolling interest
24

 
21

Total equity
11,059

 
9,804

 
$
18,332

 
$
16,896

See Notes to the Condensed Consolidated Financial Statements.

3



Precision Castparts Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In millions)
 
Nine Months Ended
 
12/29/13
 
12/30/12
Operating activities:
 
 
 
Net income
$
1,298

 
$
1,013

Net (income) loss from discontinued operations
(12
)
 
3

Non-cash items:
 
 
 
Depreciation and amortization
217

 
146

Deferred income taxes
106

 
69

Stock-based compensation expense
45

 
38

Excess tax benefits from share-based payment arrangements
(20
)
 
(21
)
Other non-cash adjustments
(15
)
 
(7
)
Changes in assets and liabilities, excluding effects of acquisitions and dispositions of businesses:
 
 
 
Receivables
107

 
53

Inventories
(233
)
 
(185
)
Prepaid expenses and other current assets
(15
)
 
(7
)
Income tax receivable and payable
(3
)
 
3

Payables and accruals

 
(34
)
Pension and other postretirement benefit plans
(36
)
 
(24
)
Dividends from equity method investments
28

 

Other non-current assets and liabilities
(40
)
 
(63
)
Net cash used by operating activities of discontinued operations
(2
)
 
(13
)
Net cash provided by operating activities
1,425

 
971

Investing activities:
 
 
 
Acquisitions of businesses, net of cash acquired
(859
)
 
(4,538
)
Capital expenditures
(261
)
 
(202
)
Dispositions of businesses
64

 
31

Sale of marketable securities
38

 

Other investing activities, net
13

 
(13
)
Net cash used by investing activities of discontinued operations

 
(2
)
Net cash used by investing activities
(1,005
)
 
(4,724
)
Financing activities:
 
 
 
Net change in commercial paper borrowings
17

 
611

Proceeds from issuance of long-term debt

 
2,992

Principle payments of long-term debt
(201
)
 
(122
)
Payments for debt issuance costs

 
(23
)
Common stock issued
68

 
77

Excess tax benefits from share-based payment arrangements
20

 
20

Repurchase of common stock
(293
)
 

Cash dividends
(14
)
 
(13
)
Other financing activities, net
(1
)
 
(1
)
Net cash (used) provided by financing activities
(404
)
 
3,541

Effect of exchange rate changes on cash and cash equivalents
41

 
(4
)
Net increase (decrease) in cash and cash equivalents
57

 
(216
)
Cash and cash equivalents at beginning of period
280

 
699

Cash and cash equivalents at end of period
$
337

 
$
483

 
 
 
 
See Notes to the Condensed Consolidated Financial Statements.

4



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”, the “Company”, or “we”), without audit and are subject to year-end adjustment, in accordance with accounting principles generally accepted in the United States of America ("GAAP"), 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 into 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 presentation 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) Acquisitions
Fiscal 2014
During the second quarter of fiscal 2014, we completed two small acquisitions in the Airframe Products segment.
On October 31, 2013, we acquired Permaswage SAS ("Permaswage"), a world-leading designer and manufacturer of aerospace fluid fittings, for approximately $600 million in cash, funded by commercial paper borrowings. Permaswage's primary focus is the design and manufacture of permanent fittings used in fluid conveyance systems for airframe applications, as well as related installation tooling. The company operates manufacturing locations in Gardena, California; Paris, France; and Suzhou, China, and employs approximately 680 people. The Permaswage acquisition was a stock purchase for tax purposes and operates as part of the Airframe Products segment.
During the third quarter of fiscal 2014, we completed two additional small acquisitions in the Forged Products segment.
Fiscal 2013
On April 2, 2012, we acquired RathGibson LLC ("RathGibson"). RathGibson manufactures precision thin-wall, nickel-alloy and stainless steel welded and seamless tubing, with broad capabilities in length, wall thickness, and diameter. RathGibson's products are used in a multitude of oil & gas, chemical/petrochemical processing and power generation applications, as well as in other commercial markets. RathGibson operates three facilities in Janesville, Wisconsin; North Branch, New Jersey; and Clarksville, Arkansas. The RathGibson acquisition was an asset purchase for tax purposes and operates as part of the Forged Products segment.
On May 18, 2012, we acquired Centra Industries ("Centra"), a state-of-the art aerostructures manufacturer located in Cambridge, Ontario, Canada. Centra manufactures a range of machined airframe components and assemblies, in both aluminum and hard metals. Core competencies include the high-speed machining of complex, high-precision structures, sub-assembly and kit integration. The Centra acquisition was a stock purchase for tax purposes and operates as part of the Airframe Products segment.
On June 15, 2012, we acquired Dickson Testing Company ("Dickson") and Aerocraft Heat Treating Company ("Aerocraft"). Dickson offers a full range of destructive testing services including: mechanical properties; metallurgical and chemical analyses and low-cycle fatigue testing. Dickson is located in South Gate, California. Aerocraft provides precision heat treating services for titanium and nickel alloy forgings and castings used in the aerospace industry, as well as other related services including straightening, de-twisting and forming. Aerocraft is located in Paramount, California. The acquisition was an asset purchase for tax purposes and operates as part of the Forged Products segment.
On August 7, 2012, we acquired Klune Industries ("Klune"), a manufacturer of complex aluminum, nickel, titanium and steel aerostructures. Klune focuses on complex forming, machining, and assembly of aerostructure parts, in addition to offering significant expertise in a range of cold-formed sheet metal components. Klune operates facilities in North Hollywood, California; Spanish Fork, Utah; and Kent, Washington. The Klune acquisition was a stock purchase for tax purposes and operates as part of the Airframe Products segment.
On August 31, 2012, we acquired certain aerostructures business units from Heroux-Devtek Inc. (collectively referred to as "Progressive"). These aerostructures operations manufacture a wide variety of components and assemblies from aluminum, aluminum-lithium and titanium, such as bulkheads, wing ribs, spars, frames and engine mounts. The aerostructures operations

5



include Progressive Incorporated in Arlington, Texas, as well as plants in Dorval (Montreal), Canada, and Queretaro, Mexico. The Progressive acquisition was an asset purchase for tax purposes and operates as part of the Airframe Products segment.
On October 24, 2012, we acquired Texas Honing, Inc. ("THI"). THI provides precision, tight tolerance pipe processing services, including honing, boring, straightening and turning. THI's products are used in oil & gas drilling, completion and production applications, as well as other commercial markets. THI operates three facilities in the Houston, Texas area. The THI acquisition was a stock purchase for tax purposes and operates as part of the Forged Products segment.
On December 12, 2012, we acquired Synchronous Aerospace Group ("Synchronous"), a leading build-to-print supplier of highly complex mechanical assemblies for commercial aerospace and defense markets. Synchronous manufactures such mechanical assemblies as high-lift mechanisms and secondary flight controls, as well as structural components, including wing ribs, bulkheads, and track and beam assemblies. Synchronous has four primary locations: Santa Ana, California; Kent, Washington; Wichita, Kansas; and Tulsa, Oklahoma. The Synchronous acquisition was a stock purchase for tax purposes and operates as part of the Airframe Products segment.
The purchase price allocations for Permaswage and several small acquisitions are subject to further refinement. The impact of the acquisitions above is not material to our consolidated results of operations; consequently, pro forma information has not been included.
On December 21, 2012, we completed the initial cash tender offer (the "Offer") for all of the outstanding shares of common stock of Titanium Metals Corporation ("TIMET") for $16.50 per share. Approximately 150,520,615 shares (representing approximately 86% of the outstanding shares) had been validly tendered and not withdrawn from the Offer. The transaction resulted in a payment for such shares of approximately $2.5 billion in cash. On December 17, 2012, we issued $3.0 billion of senior, unsecured notes, and the majority of the proceeds were used to purchase the shares noted above. On January 7, 2013, we completed the acquisition of TIMET. Each remaining share of TIMET common stock not tendered in PCC's previous tender offer for TIMET shares (other than shares as to which holders properly exercised appraisal rights) was converted in the merger into the right to receive $16.50 per share without interest. As a result of the merger, TIMET common stock ceased to be traded on the New York Stock Exchange. TIMET, the largest titanium manufacturer in the United States, offers a full range of titanium products, including ingot and slab, forging billet and mill forms. TIMET operates seven primary melting or mill facilities in Henderson, Nevada; Toronto, Ohio; Morgantown, Pennsylvania; Vallejo, California; Witton, England; Waunarlwydd, Wales; and Savoie, France. The TIMET acquisition was a stock purchase for tax purposes and operates as part of the Forged Products segment.
The assets purchased and liabilities assumed for TIMET have been reflected in our condensed consolidated balance sheets as of March 31, 2013 and December 29, 2013 and the results of operation are included in our condensed consolidated statement of income since the closing date of the acquisition. Included in the following table in other long-term liabilities and accrued liabilities are $404 million and $82 million, respectively, of estimated liabilities related to environmental remediation.  Refer to Footnote 13 Commitments and Contingencies for further discussion of environmental matters. In addition, the following table includes noncontrolling interest as we owned approximately 86% of TIMET's outstanding shares at the acquisition date. Consistent with guidance for acquisition accounting, we have completed our analysis of the purchase price allocation, including environmental liabilities, as allowed within the measurement period. The measurement period adjustments did not have a material impact on our financial position and results of operations and therefore, we did not retrospectively adjust the consolidated financial statements. The following table summarizes the current estimates of fair values of assets acquired and liabilities assumed (except for estimated liabilities related to environmental remediation, which are recorded as loss contingencies):

6



 
12/21/12
Cash and cash equivalents
$
22

Receivables, net
138

Inventories
787

Prepaid expenses and other current assets
101

Current deferred income taxes
102

Property, plant and equipment, net
386

Goodwill
1,654

Acquired intangible assets, net
827

Other assets
50

Long-term debt currently due and short-term borrowings
(1
)
Accounts payable
(53
)
Accrued liabilities
(220
)
Income tax payable
(2
)
Long-term debt
(123
)
Pension and other postretirement benefit obligations
(128
)
Other long-term liabilities
(502
)
Long-term deferred income taxes
(132
)
Noncontrolling interest
(422
)
Total purchase price
$
2,484

 
 
The following pro forma information presents a summary of our results of operations assuming the TIMET acquisition had occurred at the beginning of the periods presented. The pro forma results include the amortization associated with acquired intangible assets and interest expense associated with debt used to fund the acquisition, as well as fair value adjustments for property, plant and equipment. To better reflect the combined operating results, significant nonrecurring charges directly attributable to the transaction have been excluded. In addition, the pro forma results do not include any anticipated synergies or other expected benefits of the acquisition. Accordingly, the unaudited pro forma information is not necessarily indicative of the results that would have occurred had the acquisition been completed at the beginning of the periods presented, nor is it necessarily indicative of future results.
 
Three Months Ended
 
Nine Months Ended
 
12/29/13
 
12/30/12
 
12/29/13
 
12/30/12
 
Actual
 
Pro forma
 
Actual
 
Pro forma
Net sales
$
2,357

 
$
2,246

 
$
7,086

 
$
6,592

Net income attributable to PCC
$
433

 
$
344

 
$
1,293

 
$
1,046

Net income per share - basic
$
2.98

 
$
2.36

 
$
8.87

 
$
7.19

Net income per share - diluted
$
2.96

 
$
2.34

 
$
8.81

 
$
7.14


(3) Discontinued Operations
During the first quarter of fiscal 2014, we decided to divest a small non-core business in the Airframe Products segment and reclassified it to discontinued operations.
During the second quarter of fiscal 2013, we decided to divest a small non-core business in the Forged Products segment and reclassified it to discontinued operations. The sale of the business was completed in the second quarter of fiscal 2013. The transaction resulted in a gain of approximately $2 million (net of tax) and cash proceeds of $6 million.
During the fourth quarter of fiscal 2012, we decided to divest a small non-core business in the Airframe Products segment and reclassified it to discontinued operations. The sale of the business was completed in the first quarter of fiscal 2014. The transaction resulted in a gain of approximately $14 million (net of tax) and cash proceeds of $63 million. For tax purposes, the sale generated a capital loss that was offset by a valuation allowance.

7



During the first quarter of fiscal 2011, we decided to divest a small non-core business in the Airframe Products segment and reclassified it to discontinued operations. The sale of the business was completed in the second quarter of fiscal 2013. The transaction resulted in a loss of less than $1 million (net of tax) and proceeds of $25 million in cash and an unsecured, subordinated, convertible promissory note in the principal amount of $18 million. The note is due on August 7, 2017 and pays interest quarterly based on the 5-year Treasury Note Constant Maturity Rate.
The components of discontinued operations for the periods presented are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
12/29/13
 
12/30/12
 
12/29/13
 
12/30/12
Net sales
$
4

 
$
23

 
$
19

 
$
76

Cost of goods sold
4

 
20

 
19

 
67

Selling and administrative expenses
1

 
3

 
3

 
11

Loss from operations before income taxes
(1
)
 

 
(3
)
 
(2
)
Income tax benefit (expense)
2

 
(1
)
 
4

 
(2
)
Gain (loss) from operations
1

 
(1
)
 
1

 
(4
)
Gain on disposal and other expenses, net of $0, $1, $0, and ($2) tax benefit (expense), respectively

 

 
11

 
1

Net income (loss) from discontinued operations
$
1

 
$
(1
)
 
$
12

 
$
(3
)
 
 
 
 
 
 
 
 
Included in the 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:
 
 
12/29/13
    
3/31/13
Assets of discontinued operations:
 
    
 
Current assets
$
6

    
$
48

Net property, plant and equipment
14

    
47

Other assets
13

    
22

 
$
33

    
$
117

Liabilities of discontinued operations:
 
    
 
Current liabilities
$
5

    
$
16

Long-term debt
1

 
1

Other long-term liabilities

    
10

 
$
6

    
$
27


(4) Inventories
Inventories consisted of the following:
 
 
12/29/13
    
3/31/13
Finished goods
$
567

    
$
519

Work-in-process
1,309

    
1,251

Raw materials and supplies
980

    
904

 
2,856

    
2,674

Excess of LIFO cost over current cost
456

    
306

Total inventory
$
3,312

    
$
2,980


(5) Goodwill and Acquired Intangibles
We perform our annual goodwill and indefinite-lived intangible assets impairment testing during the second quarter of each fiscal year. For fiscal 2014, it was determined that the fair value of the related reporting units was greater than book value and that there was no impairment of goodwill. Furthermore, it was determined that the fair value of indefinite-lived intangible assets was greater than the carrying value and that there was no impairment of indefinite-lived intangible assets.

8



The changes in the carrying amount of goodwill by reportable segment for the nine months ended December 29, 2013 were as follows:
 
 
Balance at
 
 
 
Adjustments, Currency
Translation
and Other 1
 
Balance at
 
3/31/13
 
Acquired
  
 
12/29/13
Investment Cast Products
$
337

 
$

 
$
2

 
$
339

Forged Products
3,267

 
33

 
342

 
3,642

Airframe Products
2,300

 
286

 
(32
)
 
2,554

Total
$
5,904

 
$
319

  
$
312

 
$
6,535


1 Includes adjustments to the purchase price allocations of RathGibson, Centra, Klune, Progressive, THI, Synchronous, TIMET and several other small acquisitions.
The gross carrying amount and accumulated amortization of our acquired intangible assets were as follows:
 
 
December 29, 2013
  
March 31, 2013
 
Gross
Carrying
Amount
  
Accumulated
Amortization
 
Net
Carrying
Amount
  
Gross
Carrying
Amount
  
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizable intangible assets:
 
  
 
 
 
  
 
  
 
 
 
Patents
$
13

  
$
(11
)
 
$
2

  
$
15

  
$
(11
)
 
$
4

Proprietary technology
2

  
(2
)
 

  
2

  
(1
)
 
1

Long-term customer relationships
484

  
(58
)
 
426

  
426

  
(38
)
 
388

Backlog
56

  
(30
)
 
26

  
56

  
(22
)
 
34

Revenue sharing agreements
29

  
(2
)
 
27

  
29

  
(2
)
 
27

 
$
584

  
$
(103
)
 
481

  
$
528

  
$
(74
)
 
454

Unamortizable intangible assets:
 
  
 
 
 
  
 
  
 
 
 
Tradenames
 
  
 
 
654

  
 
  
 
 
639

Long-term customer relationships
 
  
 
 
2,291

  
 
  
 
 
1,928

Acquired intangibles, net
 
  
 
 
$
3,426

  
 
  
 
 
$
3,021

Amortization expense for acquired intangible assets for the three and nine months ended December 29, 2013 was $12 million and $32 million, respectively. Amortization expense for acquired intangible assets for the three and nine months ended December 30, 2012 was $6 million and $16 million, respectively. Amortization expense related to finite-lived intangible assets is projected to total $40 million for fiscal 2014. Amortization expense related to finite-lived intangible assets for fiscal 2013 was $26 million. Projected amortization expense for the succeeding five fiscal years is as follows: 
Fiscal Year
 
Estimated
Amortization
Expense
2015
 
$
43

2016
 
40

2017
 
34

2018
 
27

2019
 
27

The amortization will change in future periods if other intangible assets are acquired, existing intangibles are disposed, impairments are recognized or the preliminary valuations as part of our purchase price allocations are refined.


9



(6) Financing Arrangements
Long-term debt is summarized as follows:
 
 
12/29/13
 
03/31/13
5.60% Senior Notes due fiscal 2014 ($200 face value plus unamortized premium of $0 and $1)
$

 
$
201

0.70% Senior Notes due fiscal 2016 ($500 face value less unamortized discount of $0 and $0)
500

 
500

1.25% Senior Notes due fiscal 2018 ($1,000 face value less unamortized discount of $1 and $2)
999

 
998

2.50% Senior Notes due fiscal 2023 ($1,000 face value less unamortized discount of $5 and $6)
995

 
994

3.90% Senior Notes due fiscal 2043 ($500 face value less unamortized discount of $3 and $3)
497

 
497

Commercial paper
618

 
601

Other
12

 
15

 
3,621

 
3,806

Less: Long-term debt currently due
3

 
204

Total
$
3,618

 
$
3,602

 
 
 
 
Long-term debt maturing in each of the next five fiscal years, excluding the discount and premium, is as follows:
 
Fiscal
Debt
2014
$
1

2015
3

2016
507

2017
1

2018
1,000

Thereafter
2,118

Total
$
3,630

 
 
On December 16, 2013, we entered into a 364-day, $1.0 billion revolving credit facility maturing December, 2014 (the “364-Day Credit Agreement”), unless converted into a one-year term loan at the option of the Company at the end of the revolving period. The 364-Day Credit Agreement replaces the prior 364-day credit agreement that expired December, 2013. The 364-Day Credit Agreement contains customary representations and warranties, events of default, and financial and other covenants.
On December 16, 2013, we entered into a five-year, $1.0 billion revolving credit facility (the "New Credit Agreement") (with a $500 million increase option, subject to approval of the lenders) maturing December 2018, unless extended pursuant to two 364-day extension options. On the same day, we terminated the prior credit agreement maturing November 30, 2016. The New Credit Agreement contains customary representations and warranties, events of default, and financial and other covenants. The 364-Day and New Credit Agreements may be referred to collectively as the "Credit Agreements." We had not borrowed funds under the Credit Agreements as of December 29, 2013.
On September 30, 2013, we exercised the make-whole early prepayment option and redeemed all $200 million of the 5.6% Senior Notes, with the funding provided by commercial paper borrowings. As of September 30, 2013, our long-term debt is not guaranteed by any PCC subsidiaries.
On December 17, 2012, we entered into an underwriting agreement with a group of investment banks for the issuance and sale by the Company of $3.0 billion aggregate principal amount of notes (collectively, the “Notes”) as follows: $500 million of 0.70% Senior Notes due 2015 (the "2015 Notes"); $1.0 billion of 1.25% Senior Notes due 2018 (the "2018 Notes"); $1.0 billion of 2.50% Senior Notes due 2023 (the "2023 Notes"); and $500 million of 3.90% Senior Notes due 2043 (the "2043 Notes").
The Notes are unsecured senior obligations of the Company and rank equally with all of the other existing and future senior, unsecured and unsubordinated debt of the Company. The Company pays interest on the 2015 Notes on June 20 and December 20 of each year and pays interest on the 2018 Notes, the 2023 Notes and the 2043 Notes on January 15 and July 15 of each year.
Historically, we have issued commercial paper as a method of raising short-term liquidity. We believe we continue to have the ability to issue commercial paper and have issued commercial paper to fund acquisitions and short-term cash requirements in recent quarters. As of December 29, 2013, the amount of commercial paper borrowings outstanding was $618 million and the weighted average interest rate was 0.2%. For the nine months ended December 29, 2013, the average amount of commercial

10



paper borrowings outstanding was $595 million and the weighted average interest rate was 0.2%. For the nine months ended December 30, 2012, the average amount of commercial paper borrowings outstanding was $319 million and the weighted average interest rate was 0.2%. During the first nine months of fiscal 2014, the largest daily balance of outstanding commercial paper borrowings was $1,151 million.
The maximum amount that can be borrowed under our Credit Agreements and commercial paper program is $2.0 billion. Our unused borrowing capacity as of December 29, 2013 was $1,382 million due to our outstanding commercial paper borrowings of $618 million.
Our financial covenant requirement and actual ratio as of December 29, 2013 was as follows:
  
Covenant Requirement
 
Actual
Consolidated leverage ratio1
65.0
%
(maximum)
 
24.7
%
1 

Terms are defined in the Credit Agreements.
As of December 29, 2013, we were in compliance with the financial covenant in the Credit Agreements.

(7) Earnings per Share and Shareholders' Equity
Net income and weighted average number of shares outstanding used to compute earnings per share were as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
12/29/13
 
12/30/12
 
12/29/13
 
12/30/12
Amounts attributable to PCC shareholders:
 
 
 
 
 
 
 
Net income from continuing operations
$
432

 
$
339

 
$
1,281

 
$
1,015

Net income (loss) from discontinued operations
1

 
(1
)
 
12

 
(3
)
Net income attributable to PCC shareholders
$
433

 
$
338

 
$
1,293

 
$
1,012


 
Three Months Ended
 
Nine Months Ended
 
12/29/13
 
12/30/12
 
12/29/13
 
12/30/12
Weighted average shares outstanding-basic
145.3

 
145.8

 
145.7

 
145.5

Effect of dilutive stock-based compensation plans
1.2

 
1.0

 
1.0

 
1.0

Weighted average shares outstanding-dilutive
146.5

 
146.8

 
146.7

 
146.5


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 (if any) representing stock distributable under stock option, employee stock purchase, deferred stock unit and phantom stock plans computed using the treasury stock method.
For the three and nine months ended December 29, 2013, stock options to purchase 0.5 million and 0.4 million shares of common stock were excluded from the computation of diluted earnings per share, respectively, because they would have been antidilutive. For the three and nine months ended December 30, 2012, stock options to purchase 1.5 million and 1.2 million shares of common stock were excluded from the computation of diluted earnings per share, respectively, because they would have been antidilutive. These options could be dilutive in the future.
Share repurchase program
On January 24, 2013, the Board of Directors approved a $750 million program to repurchase shares of the Company's common stock. On August 13, 2013, the Board of Directors approved an additional $750 million for the Company's stock repurchase program, effective immediately and continuing through June 30, 2015. Repurchases under the Company's program may be made in open market or privately negotiated transactions in compliance with Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements, and other relevant factors. This share repurchase program does not obligate PCC to acquire any particular amount of common stock, and it may be suspended at any time at the Company's discretion.
During the three months ended December 29, 2013, the Company repurchased 35,000 shares under this program for an aggregate purchase price of $9 million. During the nine months ended December 29, 2013, the Company repurchased

11



1,335,000 shares under this program for an aggregate purchase price of $293 million. As of December 29, 2013, the Company had repurchased 1,835,000 shares under this program for an aggregate purchase price of $385 million.

(8) Stock-based Compensation
During the three and nine months ended December 29, 2013 and December 30, 2012, 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 31, 2013.
The following table sets forth total stock-based compensation expense and related tax benefit recognized in our Condensed Consolidated Statements of Income:
 
 
Three Months Ended
 
Nine Months Ended
 
12/29/13
 
12/30/12
 
12/29/13
 
12/30/12
Cost of goods sold
$
5

 
$
4

 
$
13

 
$
12

Selling and administrative expenses
10

 
9

 
32

 
26

Stock-based compensation expense before income taxes
15

 
13

 
45

 
38

Income tax benefit
(5
)
 
(4
)
 
(14
)
 
(12
)
Total stock-based compensation expense after income taxes
$
10

 
$
9

 
$
31

 
$
26


(9) Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) ("AOCI") by component, net of tax, for the three months ended December 29, 2013 were as follows:
 
 
Cumulative unrealized foreign currency translation gains (losses)
 
Pension and postretirement obligations
 
Unrealized gain (loss) on derivatives
 
Unrealized gain on available-for-sale securities
 
Total
Balance at September 29, 2013
$
17

 
$
(489
)
 
$
6

 
$
19

 
$
(447
)
OCI before reclassifications
37

 

 
2

 
(12
)
 
27

Amounts reclassified from AOCI1

 

 
(1
)
 

 
(1
)
Net current period OCI
37

 

 
1

 
(12
)
 
26

Balance at December 29, 2013
$
54

 
$
(489
)
 
$
7

 
$
7

 
$
(421
)

Changes in AOCI by component, net of tax, for the nine months ended December 29, 2013 were as follows:
 
 
Cumulative unrealized foreign currency translation gains (losses)
 
Pension and postretirement obligations
 
Unrealized gain (loss) on derivatives
 
Unrealized gain on available-for-sale securities
 
Total
Balance at March 31, 2013
$
(79
)
 
$
(489
)
 
$
1

 
$
14

 
$
(553
)
OCI before reclassifications
133

 

 
6

 
(6
)
 
133

Amounts reclassified from AOCI1

 

 

 
(1
)
 
(1
)
Net current period OCI
133

 

 
6

 
(7
)
 
132

Balance at December 29, 2013
$
54

 
$
(489
)
 
$
7

 
$
7

 
$
(421
)
1 

Reclassifications out of AOCI for the three and nine months ended December 29, 2013 were not significant.

(10) Derivatives and Hedging Activities
We hold and issue derivative financial instruments for the purpose of hedging the risks of certain identifiable and anticipated transactions and to protect our investments in foreign subsidiaries. In general, the types of risks hedged are those relating to the variability of future earnings and cash flows caused by movements in foreign currency exchange rates and changes in commodity prices and interest rates. We document our risk management strategy and hedge effectiveness at the inception of and during the term of each hedge.

12



Derivative financial instruments are recorded in the financial statements and measured at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in income or shareholders' equity (as a component of accumulated other comprehensive income (loss)), depending on whether the derivative is being used to hedge changes in fair value, cash flows, or a net investment in a foreign operation. In the normal course of business we execute the following types of hedge transactions:
Fair value hedges
We have sales and purchase commitments denominated in foreign currencies. Foreign currency forward contracts are used to hedge against the risk of change in the fair value of these commitments attributable to fluctuations in exchange rates. We also have exposure to fluctuations in interest rates. Interest rate swaps may be used to hedge against the risk of changes in the fair value of fixed rate borrowings attributable to changes in interest rates. Changes in the fair value of the derivative instrument are offset in the income statement by changes in the fair value of the item being hedged.
Net investment hedges
We may use foreign currency forward contracts to hedge net investments in certain foreign subsidiaries whose functional currency is the local currency. The effective portion of the gains and losses on net investment hedge transactions are reported in cumulative translation adjustment as a component of shareholders' equity.
Cash flow hedges
We have exposure to fluctuations in foreign currency exchange rates. Foreign currency forward contracts and options are used to hedge the variability in cash flows from forecast receipts or expenditures denominated in currencies other than the functional currency. We also have exposure to fluctuations in commodity prices. Commodity swaps may be used to hedge against the variability in cash flows from forecasted commodity purchases. For cash flow hedge transactions, the effective portion of changes in the fair value of the derivative instruments are reported in accumulated other comprehensive income (loss). The gains and losses on cash flow hedge transactions that are reported in accumulated other comprehensive income (loss) are reclassified to earnings in the periods in which earnings are affected by the variability of the cash flows of the hedged item. The ineffective portions of all hedges are recognized in current period earnings.
We formally assess, both at the hedge's inception and on an ongoing basis, whether the derivatives that are designated as hedging instruments have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not, or has ceased to be, highly effective as a hedge, we discontinue hedge accounting prospectively.
As of December 29, 2013, there were $6 million of deferred net gains (pre-tax) relating to derivative activity in accumulated other comprehensive loss that are expected to be transferred to net earnings over the next twelve months when the forecasted transactions actually occur. As of December 29, 2013, the maximum term over which we are hedging exposures to the variability of cash flows for all forecasted and recorded transactions is 15 months. The amount of net notional foreign exchange contracts outstanding as of December 29, 2013 was approximately $770 million. We believe that there is no significant credit risk associated with the potential failure of any counterparty to perform under the terms of any derivative financial instrument.
Derivative instruments are measured at fair value within the Condensed Consolidated Balance Sheet either as assets or liabilities. As of December 29, 2013, accounts receivable included foreign exchange contracts of $10 million and accounts payable included foreign exchange contracts of $4 million. As of March 31, 2013, accounts receivable included foreign exchange contracts of $2 million and accounts payable included foreign exchange contracts of $5 million.
For the three months ended December 29, 2013 and December 30, 2012, we recognized gains of $2 million and $1 million, respectively, in the consolidated statements of income for derivatives designated as hedging instruments. For the three months ended December 29, 2013 and December 30, 2012, we recognized gains of $12 million and $3 million, respectively, in the consolidated statements of income for derivatives not designated as hedging instruments. The ineffective portion of gains and losses relating to derivatives designated as hedging instruments in either period was not significant.
For the nine months ended December 29, 2013 and December 30, 2012, we recognized gains of $3 million and $2 million, respectively, in the consolidated statements of income for derivatives designated as hedging instruments. For the nine months ended December 29, 2013 and December 30, 2012, we recognized gains of $27 million and less than $1 million, respectively, in the consolidated statements of income for derivatives not designated as hedging instruments. The ineffective portion of gains and losses relating to derivatives designated as hedging instruments in either period was not significant.


13



(11) Fair Value Measurements
Fair value guidance within GAAP defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Fair value guidance 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. Fair value guidance 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 guidance 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.

The following table presents the assets and liabilities measured at fair value on a recurring basis as of December 29, 2013:
 
 
Fair Value Measurements Using
  
Assets/Liabilities
at Fair Value
 
Level 1
  
Level 2
  
Level 3
  
Assets:
 
  
 
  
 
  
 
Trading securities
$
30

 
$

 
$

 
$
30

Available for sale securities
$
75

 
$

 
$

 
$
75

Derivative instruments
$

  
$
10

  
$

  
$
10

Liabilities:
 
  
 
  
 
  
 
Derivative instruments
$

  
$
4

  
$

  
$
4

The following table presents the assets and liabilities measured at fair value on a recurring basis as of March 31, 2013:
 
 
Fair Value Measurements Using
  
Assets/Liabilities
at Fair Value
 
Level 1
  
Level 2
  
Level 3
  
Assets:
 
  
 
  
 
  
 
Trading securities
$
19

 
$

 
$

 
$
19

Available for sale securities
$
111

 
$

 
$

 
$
111

Derivative instruments
$

  
$
2

  
$

  
$
2

Liabilities:
 
  
 
  
 
  
 
Derivative instruments
$

  
$
5

  
$

  
$
5

Trading securities consist of money market funds, commercial paper, and other highly liquid short-term instruments with maturities of three months or less at the time of purchase. These investments are readily convertible to cash with market value approximating cost. There were no transfers between Level 1 and Level 2 fair value measurements during the first nine months of fiscal 2014 or fiscal 2013.
Available for sale securities consist of investments in shares of publicly traded companies which were acquired through the purchase of TIMET. All available for sale securities are carried at fair value using quoted prices in active markets. Any unrealized gains or losses on these securities are recognized through other comprehensive income.
Derivative instruments consist of fair value hedges, net investment hedges, and cash flow hedges. Foreign exchange, commodity swap and interest rate swap contract values are determined using pricing models 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 estimate that the fair value of our long-term fixed rate debt instruments was $2,839 million compared to a book value of $2,998 million at December 29, 2013. At March 31, 2013, the estimated fair value of our long-term fixed rate debt instruments was $3,210 million compared to a book value of $3,198 million. The fair value of long-term fixed rate debt was estimated using a combination of observable trades and quoted prices on such debt, as well as observable market data for comparable instruments. Long-term fixed rate debt would be classified as Level 2 within the fair value hierarchy if it were measured at fair value. The estimated fair value of our miscellaneous long-term debt approximates book value.

14



(12) 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 fiscal year ended March 31, 2013.
The net periodic pension cost for our pension plans consisted of the following components:
 
 
Three Months Ended
 
Nine Months Ended
 
12/29/13
 
12/30/12
 
12/29/13
 
12/30/12
Service cost
$
13

 
$
11

 
$
39

 
$
34

Interest cost
26

 
23

 
78

 
69

Expected return on plan assets
(41
)
 
(33
)
 
(123
)
 
(100
)
Amortization of net actuarial loss
1

 
11

 
27

 
34

Amortization of prior service cost
13

 
1

 
15

 
3

Net periodic pension cost
$
12

 
$
13

 
$
36

 
$
40

The net periodic benefit cost of postretirement benefits other than pensions consisted of the following components:
 
 
Three Months Ended
 
Nine Months Ended
 
12/29/13
 
12/30/12
 
12/29/13
 
12/30/12
Service cost
$

 
$
1

 
$
1

 
$
1

Interest cost
1

 
1

 
4

 
3

Amortization of net actuarial loss
1

 

 
1

 
1

Amortization of prior service cost

 

 

 

Net periodic benefit cost
$
2

 
$
2

 
$
6

 
$
5

During the three and nine months ended December 29, 2013, we contributed $3 million and $68 million, respectively, to the defined benefit pension plans, of which $0 and $50 million was voluntary. During the three and nine months ended December 30, 2012, we contributed $4 million and $60 million, respectively, to the defined benefit pension plans, of which $0 and $50 million was voluntary. We expect to contribute approximately $3 million of additional required contributions in fiscal 2014, for total contributions to the defined benefit pension plans of approximately $71 million in fiscal 2014. Including contributions in the first nine months of fiscal 2014, we expect to contribute a total of approximately $8 million to the other postretirement benefit plans during fiscal 2014.

(13) 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 effect on our consolidated financial position, results of operations or cash flows.
PCC Environmental Matters
PCC continues to participate in environmental assessments and cleanups at several locations. These include currently owned and/or operating facilities and adjoining properties, previously owned or operated facilities and adjoining properties and waste sites, including Superfund (Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")) sites.
A liability is recorded for environmental remediation on an undiscounted basis when a cleanup program becomes probable and the costs or damages can be reasonably estimated. As assessments and cleanups proceed, the liability is adjusted based on progress made in determining the extent of remedial actions and related costs and damages. The liability can change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, the allocation of costs among potentially responsible parties as well as other third parties, and technological changes, among others. The amounts of any such adjustments could have a material adverse effect on our results of operations in a given period.
The Company's environmental liability balance was $543 million and $294 million at December 29, 2013 and March 31, 2013, of which $76 million and $50 million was classified as a current liability, respectively, and generally reflects the best estimate of the costs or range of costs to remediate identified environmental conditions for which costs can be reasonably estimated. If no point in a range of costs is a better estimate than others, the low end of the range of costs is accrued. The estimated upper end of the range of reasonably possible environmental costs exceeded amounts accrued by approximately $400 million at December 29, 2013. Actual future losses may be lower or higher given the uncertainties regarding the status of laws,

15



regulations, enforcement policies, the impact of potentially responsible parties, technology and information related to individual sites.
In the first nine months of fiscal 2014, the environmental liability increased $249 million, primarily due to additional investigation of the nature and extent of TIMET environmental liabilities that existed as of the acquisition date. The investigation resulted in an increase to the environmental liability of $266 million, which was partially offset by remediation expenditures applied against the environmental liability of $13 million and other adjustments. The measurement period adjustments did not have a significant impact on our financial position and results of operations and therefore, we did not retrospectively adjust the consolidated financial statements. Due to the nature of its historical operations, TIMET has significant environmental liabilities at its titanium manufacturing plants. It has for many years, under the oversight of government agencies, conducted investigations of the soil and groundwater contamination at its plant sites. TIMET has initiated remedial actions at its properties, including the capping of former on-site landfills, removal of contaminated sediments from on-site surface impoundments, remediation of contaminated soils and the construction of a slurry wall and groundwater extraction system to treat contaminated groundwater as well as other remedial actions. Although it is anticipated that significant remediation will be completed within the next two to three years, it is expected that a substantial portion of the TIMET environmental accruals will be expended within 45 years. Expenditures related to these remedial actions and for resolving TIMET's other environmental liabilities will be applied against existing liabilities. As the remedial actions are implemented at these sites, the liabilities will be adjusted based on the progress made in determining the extent of contamination and the extent of required remediation. While the existing liability generally represents our current best estimate of the costs or range of costs of resolving the identified environmental liabilities, these costs may change substantially due to factors such as the nature and extent of contamination, changes in legal and remedial requirements, the allocation of costs among potentially responsible parties as well as other third parties, and technological changes, among others.

(14) New Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued guidance on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires entities to present an unrecognized tax benefit netted against certain deferred tax assets when specific requirements are met. The guidance is effective for the Company beginning the first quarter of fiscal 2015. The adoption of this guidance is not expected to have a significant impact on our consolidated financial position, results of operations, or cash flows.
In July 2013, the FASB issued guidance which updates the benchmark interest rates allowed for hedge accounting. The guidance permits companies to use the Federal Funds Effective Swap Rate (or Overnight Index Swap Rate) as a benchmark interest rate for hedge accounting purposes, in addition to the U.S. Treasury rate and LIBOR. The guidance was effective for the Company beginning the second quarter of fiscal 2014. The adoption of this guidance had no impact on the Company; however, it could impact the Company in the future.
In March 2013, the FASB issued guidance to address the accounting for the cumulative translation adjustment when a parent entity sells or transfers either a subsidiary or a group of assets within a foreign entity. The guidance is effective for the Company beginning the first quarter of fiscal 2015 and will be applied prospectively. The adoption of this guidance is not expected to have a significant impact on our consolidated financial position, results of operations, or cash flows.
In February 2013, the FASB issued guidance which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income ("AOCI"), including (1) changes in AOCI balances by component and (2) significant items reclassified out of AOCI. The guidance does not amend any existing requirements for reporting net income or OCI in the financial statements. The guidance was effective for the Company beginning the first quarter of fiscal 2014 and has been applied prospectively. The adoption of this guidance did not have a significant impact on our consolidated financial position, results of operations, or cash flows.
In July 2012, the FASB issued guidance which amends the guidance on testing indefinite-lived intangible assets, other than goodwill, for impairment. Under the new guidance, an entity testing an indefinite-lived intangible asset for impairment has the option of performing a qualitative assessment before calculating the fair value of the asset. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not impaired, the entity would not need to calculate the fair value of the asset. The guidance was effective for the Company for our annual impairment test for fiscal 2014. The adoption of this guidance did not have a significant impact on our consolidated financial position, results of operations, or cash flows.
In December 2011, the FASB issued guidance increasing disclosures regarding offsetting of assets and liabilities in the balance sheet. For derivatives and financial assets and liabilities, the amendments require disclosure of gross asset and liability amounts, amounts offset on the balance sheet, and amounts subject to the offsetting requirements but not offset on the balance sheet. The guidance was effective for the Company beginning the first quarter of fiscal 2014. The adoption of this guidance

16



did not have a significant impact on our consolidated financial position, results of operations, or cash flows and therefore, we did not provide additional disclosure in our financial statements.

(15) Segment Information
Information regarding segments is presented in accordance with segment disclosure guidance. Based on the criteria outlined in this guidance, our operations are classified into three reportable business segments: Investment Cast Products, Forged Products and Airframe Products. 
 
Three Months Ended
 
Nine Months Ended
 
12/29/13
 
12/30/12
 
12/29/13
 
12/30/12
Net sales:
 
 
 
 
 
 
 
Investment Cast Products
$
609

 
$
613

 
$
1,833

 
$
1,845

Forged Products
1,026

 
833

 
3,152

 
2,448

Airframe Products
722

 
588

 
2,101

 
1,634

Consolidated net sales
$
2,357

 
$
2,034

 
$
7,086

 
$
5,927

Segment operating income (loss):
 
 
 
 
 
 
 
Investment Cast Products
$
218

 
$
209

 
$
650

 
$
624

Forged Products
261

 
173

 
786

 
524

Airframe Products
216

 
178

 
631

 
490

Corporate expenses
(36
)
 
(42
)
 
(115
)
 
(107
)
Total segment operating income
659

 
518

 
1,952

 
1,531

Interest expense
20

 
12

 
59

 
18

Interest income
(1
)
 
(2
)
 
(3
)
 
(5
)
Consolidated income before income tax expense and equity in earnings of unconsolidated affiliates
$
640

 
$
508

 
$
1,896

 
$
1,518


(16) Subsequent Events
During the fourth quarter of fiscal 2014, we completed two small acquisitions in the Forged Products and Airframe Products segments.


17



Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results of Operations - Comparison Between Three Months Ended December 29, 2013 and December 30, 2012

  
Three Months Ended
 
Increase/(Decrease)
(in millions, except per share and per pound data)
  
12/29/13
 
12/30/12
 
$
 
%
Net sales
  
$
2,357

 
$
2,034

 
$
323

 
16
 %
Costs and expenses:
  

 

 

 

Cost of goods sold
  
1,548

 
1,381

 
167

 
12

Selling and administrative expenses
  
150

 
135

 
15

 
11

Interest expense, net
  
19

 
10

 
9

 
90

Total costs and expenses
  
1,717

 
1,526

 
191

 
13

Income before income tax expense and equity in earnings of unconsolidated affiliates
  
640

 
508

 
132

 
26

Income tax expense
  
(206
)
 
(167
)
 
(39
)
 
(23
)
Effective tax rate
  
32.2
%
 
32.9
%
 

 

Equity in earnings of unconsolidated affiliates
  

 
(2
)
 
2

 
100

Net income from continuing operations
  
434

 
339

 
95

 
28

Net income (loss) from discontinued operations
  
1

 
(1
)
 
2

 
200

Net income
  
435

 
338

 
97

 
29

Net income attributable to noncontrolling interests
  
(2
)
 

 
(2
)
 
n/a

Net income attributable to Precision Castparts Corp. (“PCC”)
  
$
433

 
$
338

 
$
95

 
28
 %
Net income per common share attributable to PCC shareholders - diluted:
  

 

 

 

Net income per share from continuing operations
  
$
2.95

 
$
2.31

 
$
0.64

 
28
 %
Net income (loss) per share from discontinued operations
  
0.01

 
(0.01
)
 
0.02

 
200

Net income per share
  
$
2.96

 
$
2.30

 
$
0.66

 
29
 %
Average market price of key metals
(per pound)
  
Three Months Ended
 
Increase/(Decrease)
  
12/29/13
 
12/30/12
 
$
 
%
Nickel
  
$
6.34

  
$
7.72

 
$
(1.38
)
 
(18
)%
London Metal Exchange1
  


 
 

 

Titanium
  
$
1.95

  
$
2.58

 
$
(0.63
)
 
(24
)%
Ti 6-4 bulk, Metalprices.com
  


 
 

 

Cobalt
  
$
12.94

  
$
12.58

 
$
0.36

 
3
 %
Metal Bulletin COFM.8 Index1
  



 

 

1 
Source: Bloomberg
Intercompany sales1 
  
Three Months Ended
 
Increase/(Decrease)
  
12/29/13
 
12/30/12
 
$
 
%
Investment Cast Products2
  
$
72

  
$
73

  
$
(1
)
 
(1
)%
Forged Products3
  
428

  
243

  
185

 
76
 %
Airframe Products4
  
54

  
38

  
16

 
42
 %
Total intercompany sales
  
$
554

  
$
354

  
$
200

 
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 $11 million for both the third quarter of fiscal 2014 and 2013, respectively.
3 
Forged Products: Includes sales between segments of $31 million and $25 million for the third quarter of fiscal 2014 and 2013, respectively.
4 
Airframe Products: Includes sales between segments of $2 million for both the third quarter of fiscal 2014 and 2013.

18



Sales for the third quarter of fiscal 2014 were $2,357 million, an increase of $323 million, or 16%, from $2,034 million in the same quarter last year. The current quarter includes sales and earnings for seven businesses acquired after the beginning of the third quarter of fiscal 2013 and five businesses acquired in the first nine months of fiscal 2014 that were not included in the prior year. These acquisitions contributed approximately $350 million of additional sales in the third quarter of fiscal 2014. Metal pricing and pass-through negatively impacted organic growth by approximately 3% year over year. Nickel prices decreased 18%, as reported on the London Metal Exchange (LME), compared to the same quarter last year. The decline in external selling prices of nickel alloy from the Forged Products segment's three primary nickel conversion mills negatively impacted external sales by approximately $38 million in the current quarter versus a year ago and the falling price of revert and other alloys negatively impacted sales by an additional $8 million. Contractual material pass-through pricing increased sales by $65 million in the current quarter, compared to $69 million in the same quarter a year ago, a decrease of $4 million. Contractual material pass-through pricing adjustments are calculated based on average market prices of key metals as shown in the above table in trailing periods ranging from approximately one to twelve months. Including the impact of acquisitions, aerospace sales increased approximately 21% from the prior year as commercial aircraft production rates continued to drive steady demand for airframe and engine components. The increase in commercial aerospace was partially offset by a slight decline in regional/business jet and base military demand. Sales to our power markets decreased approximately 1% over the prior year, primarily as a result of lower oil and gas deliveries and lower industrial gas turbine (“IGT”) sales, partially offset by improved seamless interconnect pipe sales. General industrial and other sales increased approximately 14%, primarily due to the contribution from Titanium Metals Corporation ("TIMET"), which was acquired late in the third quarter of fiscal 2013.
Based on data from The Airline Monitor as of January 2014, Boeing and Airbus aircraft deliveries are expected to moderately increase through calendar year 2014 as compared to 2013. Due to manufacturing lead times and scheduled build rates, our production volumes are approximately three to six months ahead of aircraft deliveries for mature programs. The Airline Monitor is projecting further growth in aircraft deliveries in calendar year 2015, and therefore we anticipate that our aerospace sales will increase in fiscal 2015 compared to fiscal 2014.
Net income from continuing operations attributable to PCC for the third quarter of fiscal 2014 was $432 million, or $2.95 per share (diluted) compared to net income from continuing operations attributable to PCC for the third quarter of fiscal 2013 of $339 million, or $2.31 per share (diluted). Net income attributable to PCC (including discontinued operations) for the third quarter of fiscal 2014 was $433 million, or $2.96 per share (diluted), compared with net income attributable to PCC of $338 million, or $2.30 per share (diluted), in the same period last year.
Interest and Income Tax
Interest expense for the third quarter of fiscal 2014 was $20 million, compared to $12 million for the third quarter last year. Near the end of the third quarter of fiscal 2013, we issued $3.0 billion of debt to finance the acquisition of TIMET and therefore incurred additional interest expense associated with that debt for a full quarter in fiscal 2014 versus only a partial quarter last year. Interest income was $1 million for the third quarter of fiscal 2014, compared to $2 million for the third quarter of fiscal 2013. The decrease was a result of lower cash balances invested at higher rates outside the U.S.
The effective tax rate for the third quarter of fiscal 2014 was 32.2% compared to 32.9% for the third quarter of fiscal 2013. The lower effective tax rate in the current quarter is primarily due to increased benefits from earnings taxed at rates lower than the U.S. statutory rate, nonrecurring adjustments to prior year tax assets and liabilities, and the federal research and development tax credit, partially offset by reduced benefits from the domestic manufacturing deduction.
In September 2013, the Internal Revenue Service issued final regulations governing the income tax treatment of acquisitions, dispositions, and repairs of tangible property. Taxpayers are required to follow the new regulations beginning in calendar year 2014. The new regulations did not have a material impact on our financial statements.
Acquisitions
Fiscal 2014
During the second quarter of fiscal 2014, we completed two small acquisitions in the Airframe Products segment.
On October 31, 2013, we acquired Permaswage SAS ("Permaswage"), a world-leading designer and manufacturer of aerospace fluid fittings, for approximately $600 million in cash, funded by commercial paper borrowings. Permaswage's primary focus is the design and manufacture of permanent fittings used in fluid conveyance systems for airframe applications, as well as related installation tooling. The company operates manufacturing locations in Gardena, California; Paris, France; and Suzhou, China, and employs approximately 680 people. The Permaswage acquisition was a stock purchase for tax purposes and operates as part of the Airframe Products segment.
During the third quarter of fiscal 2014, we completed two additional small acquisitions in the Forged Products segment.

19



Fiscal 2013
On April 2, 2012, we acquired RathGibson LLC ("RathGibson"). RathGibson manufactures precision thin-wall, nickel-alloy and stainless steel welded and seamless tubing, with broad capabilities in length, wall thickness, and diameter. RathGibson's products are used in a multitude of oil & gas, chemical/petrochemical processing and power generation applications, as well as in other commercial markets. RathGibson operates three facilities in Janesville, Wisconsin; North Branch, New Jersey; and Clarksville, Arkansas. The RathGibson acquisition was an asset purchase for tax purposes and operates as part of the Forged Products segment.
On May 18, 2012, we acquired Centra Industries ("Centra"), a state-of-the art aerostructures manufacturer located in Cambridge, Ontario, Canada. Centra manufactures a range of machined airframe components and assemblies, in both aluminum and hard metals. Core competencies include the high-speed machining of complex, high-precision structures, sub-assembly and kit integration. The Centra acquisition was a stock purchase for tax purposes and operates as part of the Airframe Products segment.
On June 15, 2012, we acquired Dickson Testing Company ("Dickson") and Aerocraft Heat Treating Company ("Aerocraft"). Dickson offers a full range of destructive testing services including: mechanical properties; metallurgical and chemical analyses and low-cycle fatigue testing. Dickson is located in South Gate, California. Aerocraft provides precision heat treating services for titanium and nickel alloy forgings and castings used in the aerospace industry, as well as other related services including straightening, de-twisting and forming. Aerocraft is located in Paramount, California. The acquisition was an asset purchase for tax purposes and operates as part of the Forged Products segment.
On August 7, 2012, we acquired Klune Industries ("Klune"), a manufacturer of complex aluminum, nickel, titanium, and steel aerostructures. Klune focuses on complex forming, machining, and assembly of aerostructure parts, in addition to offering significant expertise in a range of cold-formed sheet metal components. Klune operates facilities in North Hollywood, California; Spanish Fork, Utah; and Kent, Washington. The Klune acquisition was a stock purchase for tax purposes and operates as part of the Airframe Products segment.
On August 31, 2012, we acquired certain aerostructures business units from Heroux-Devtek Inc. (collectively referred to as "Progressive"). These aerostructures operations manufacture a wide variety of components and assemblies from aluminum, aluminum-lithium and titanium, such as bulkheads, wing ribs, spars, frames and engine mounts. The aerostructures operations include Progressive Incorporated in Arlington, Texas, as well as plants in Dorval (Montreal), Canada, and Queretaro, Mexico. The Progressive acquisition was an asset purchase for tax purposes and operates as part of the Airframe Products segment.
On October 24, 2012, we acquired Texas Honing, Inc. ("THI"). THI provides precision, tight tolerance pipe processing services, including honing, boring, straightening and turning. THI's products are used in oil & gas drilling, completion and production applications, as well as other commercial markets. THI operates three facilities in the Houston, Texas area. The THI acquisition was a stock purchase for tax purposes and operates as part of the Forged Products segment.
On December 12, 2012, we acquired Synchronous Aerospace Group ("Synchronous"), a leading build-to-print supplier of highly complex mechanical assemblies for commercial aerospace and defense markets. Synchronous manufactures such mechanical assemblies as high-lift mechanisms and secondary flight controls, as well as structural components, including wing ribs, bulkheads, and track and beam assemblies. Synchronous has four primary locations: Santa Ana, California; Kent, Washington; Wichita, Kansas; and Tulsa, Oklahoma. The Synchronous acquisition was a stock purchase for tax purposes and operates as part of the Airframe Products segment.
On December 21, 2012, we completed the initial cash tender offer (the "Offer") for all of the outstanding shares of common stock of TIMET for $16.50 per share. Approximately 150,520,615 shares (representing approximately 86% of the outstanding shares) had been validly tendered and not withdrawn from the Offer. The transaction resulted in a payment for such shares of approximately $2.5 billion in cash. On December 17, 2012, we issued $3.0 billion of senior, unsecured notes, and the majority of the proceeds were used to purchase the shares noted above.  On January 7, 2013, we completed the acquisition of TIMET. Each remaining share of TIMET common stock not tendered in PCC's previous tender offer for TIMET shares (other than shares as to which holders properly exercised appraisal rights) was converted in the merger into the right to receive $16.50 per share without interest. As a result of the merger, TIMET common stock ceased to be traded on the New York Stock Exchange. TIMET, the largest titanium manufacturer in the United States, offers a full range of titanium products, including ingot and slab, forging billet and mill forms. TIMET operates seven primary melting or mill facilities in Henderson, Nevada; Toronto, Ohio; Morgantown, Pennsylvania; Vallejo, California; Witton, England; Waunarlwydd, Wales; and Ugine, France. The TIMET acquisition was a stock purchase for tax purposes and operates as part of the Forged Products segment.
Discontinued Operations
Net income from discontinued operations was $1 million, or $0.01 per share (diluted) for the third quarter of fiscal 2014 compared with a net loss of $1 million, or $0.01 per share (diluted) in the same period last year. Net income or loss from

20



discontinued operations represents the results of operations of entities that have been disposed of, or are classified as held for sale in accordance with discontinued operations guidance.
Subsequent Events
During the fourth quarter of fiscal 2014, we completed two small acquisitions in the Forged Products and Airframe Products segments.

Results of Operations by Segment - Comparison Between Three Months Ended December 29, 2013 and December 30, 2012
(in millions)
  
Three Months Ended
 
Increase/(Decrease)
  
12/29/13
 
12/30/12
 
$
 
%
Net sales:
  

 

 

 

Investment Cast Products
  
$
609

 
$
613

 
$
(4
)
 
(1
)%
Forged Products
  
1,026

 
833

 
193

 
23

Airframe Products
  
722

 
588

 
134

 
23

Consolidated net sales
  
$
2,357

 
$
2,034

 
$
323

 
16
 %
Segment operating income (loss):
  

 

 

 

Investment Cast Products
  
$
218

 
$
209

 
$
9

 
4
 %
% of sales
  
35.8
%
 
34.1
%
 

 

Forged Products
  
261

 
173

 
88

 
51

% of sales
  
25.4
%
 
20.8
%
 

 

Airframe Products
  
216

 
178

 
38

 
21

% of sales
  
29.9
%
 
30.3
%
 

 

Corporate expenses
  
(36
)
 
(42
)
 
6

 
14

Total segment operating income
  
659

 
518

 
$
141

 
27
 %
% of sales
  
28.0
%
 
25.5
%
 

 

Interest expense, net
  
19

 
10

 

 

Consolidated income before income tax expense and equity in earnings of unconsolidated affiliates
  
$
640

 
$
508

 

 

Investment Cast Products
Investment Cast Products' sales were $609 million for the quarter, compared to sales of $613 million in the third quarter of fiscal 2013, a decrease of $4 million. Operating income was $218 million for the quarter, an increase of $9 million from $209 million in the third quarter of fiscal 2013. Operating income as a percent of sales for the third quarter increased to 35.8% from 34.1% of sales in the same quarter last year. Aerospace sales grew by approximately 2%, as the segment continued to see solid aerospace schedules in line with the current levels of base commercial aircraft production rates. Commercial aerospace production, which accounts for more than 40% of the segment's sales, increased approximately 12% over the prior year. However, growth was tempered by a double digit decline in regional/business jet and military activity. Within our power markets, IGT sales, including both spares and original equipment manufacturer ("OEM") activity, decreased approximately 3% year over year.
The segment increased operating income by $9 million year over year despite a $4 million decrease in sales. Operating income as a percent of sales increased 1.7 percentage points over the prior year. The segment's operations delivered higher operating margins by consistently implementing new initiatives to reduce costs and improve production, as well as due to higher aerospace sales volume. Contractual pricing related to pass-through of increased material costs was approximately $16 million in the third quarter of fiscal 2014 compared to approximately $18 million in the same period last year. Contractual material pass-through pricing diluted operating margins by 1.0 percentage point in both the third quarter of fiscal 2014 and fiscal 2013.
The Investment Cast Products segment has a solid market position on current and future aircraft and engine development programs. Sales gains are expected to be driven by acceleration of the new development engines for re-engined narrow-body aircraft platforms. We anticipate flat activity in the regional/business jet end market and a modest recovery in military demand. Potential IGT growth drivers include upgrade programs, increased content on new product launches, and additional spares demand.

21



Forged Products
Forged Products' sales were $1,026 million for the quarter, compared to sales of $833 million in the third quarter of fiscal 2013, an increase of $193 million. Operating income was $261 million for the quarter, an increase of $88 million from $173 million in the third quarter of fiscal 2013. Operating income as a percent of sales for the third quarter increased to 25.4% from 20.8% of sales in the same quarter last year. Third quarter fiscal 2014 results include the benefit for a full quarter from the acquisitions of THI, TIMET and two smaller businesses. The segment experienced aerospace sales growth of approximately 32% year over year, driven by the inclusion of TIMET and stable commercial aerospace demand. Similar to the Investment Cast Products segment, aerospace OEM business continues to be aligned with current commercial aircraft production rates. Sales to power markets improved approximately 3% when compared to the same quarter last year, driven by increased shipments of seamless interconnect pipe, which increased approximately 52% over the prior year. Sales to the oil and gas market decreased approximately 6% in the current quarter, compared to the same quarter last year, which had experienced significant growth. General industrial and other sales increased approximately 27% compared to the prior year, driven almost entirely by TIMET. Lower market-driven pricing of raw material inputs had a significant negative impact on the segment's year-over-year sales. Nickel prices decreased 18%, as reported on the London Metal Exchange (LME), compared to the same quarter last year. The decline in external selling prices of nickel alloy from the segment's three primary nickel conversion mills negatively impacted external sales by approximately $38 million in the current quarter versus a year ago and the falling price of revert and other alloys negatively impacted sales by an additional $8 million. Contractual material pass-through pricing contributed approximately $47 million of sales in the third quarter of fiscal 2014 compared to approximately $49 million of sales in the prior year (also included in market increases discussed above).
Operating income as a percent of sales increased 4.6 percentage points compared to a year ago, primarily driven by the inclusion of TIMET, including operational improvements that are being implemented. Operational performance in this segment also benefited from better material usage in its manufacturing operations. Contractual pass-through of raw material costs diluted operating margins by 1.3 percentage points in both the current quarter and the same quarter a year ago.
The Forged Products segment is well-positioned to benefit from the acceleration of the new re-engined narrow-body platforms. TIMET continues to drive operational improvements through cost reductions and through share gains, which should improve its competitive position in the marketplace. Within the power markets, we are seeing improved demand for interconnect pipe due to the increased construction of coal-fired power plants, primarily in Asia. We are also in active discussions with oil and gas customers on sizable near-term projects. Additionally, IGT upgrade programs and increased content on new product launches provide further upside potential.
Airframe Products
Airframe Products' sales were $722 million for the quarter, compared to sales of $588 million in the third quarter of fiscal 2013, an increase of $134 million. Operating income was $216 million for the quarter, an increase of $38 million from $178 million in the third quarter of fiscal 2013. Operating income as a percent of sales for the third quarter decreased to 29.9% of sales from 30.3% in the same quarter last year. Third quarter fiscal 2014 results include a full quarter of Synchronous and several small acquisitions, as well as the addition of Permaswage for two months. This segment experienced strong aerospace sales growth of approximately 27% due to a solid contribution from new acquisitions and improvement in core commercial aerospace fasteners. Shipments of fastener products for the Boeing 787 are now at an average of six shipsets per month and continue to close the gap with commercial aircraft production schedules. The base aerostructures businesses grew year-over-year aerospace sales by approximately 11%, due to market growth and market share gains, and are shipping Boeing 787 content at approximately seven shipsets per month. General industrial sales were flat when compared to the prior year, reflecting an increase in the mining and construction markets that was offset by a decrease in non-aerospace military sales.
Operating income as a percent of sales decreased 0.4 percentage points compared to a year ago, due to the inclusion of several lower-margin acquisitions, which diluted operating margins by 1.9 percentage points. Airframe Products' operating income improved due to the rapid integration of the acquisitions completed over the last two years, leverage of higher volumes over an improving cost structure, and strong incremental margins in the base business of more than 50%.
The Airframe Products segment has substantial aerostructures and fasteners content on the Boeing 787, and sales are expected to accelerate as the segment further aligns with current build rates and with future share gains on current and next-generation platforms. With the acquisitions completed over the last two years, we continue to see strong growth in commercial aerospace markets and performance improvements. The integration of Permaswage and other new acquisitions will provide additional top- and bottom- line growth opportunities.

22



Consolidated Results of Operations - Comparison Between Nine Months Ended December 29, 2013 and December 30, 2012
 
  
Nine Months Ended
 
Increase/(Decrease)
(in millions, except per share and per pound data)
  
12/29/13
 
12/30/12
 
$
 
%
Net sales
  
$
7,086

 
$
5,927

 
$
1,159

 
20
 %
Costs and expenses:
  
 
 
 
 
 
 
 
Cost of goods sold
  
4,675

 
4,020

 
655

 
16

Selling and administrative expenses
  
459

 
376

 
83

 
22

Interest expense, net
  
56

 
13

 
43

 
331

Total costs and expenses
  
5,190

 
4,409

 
781

 
18

Income before income tax expense and equity in earnings of unconsolidated affiliates
  
1,896

 
1,518

 
378

 
25

Income tax expense
  
(611
)
 
(503
)
 
(108
)
 
(21
)
Effective tax rate
  
32.2
%
 
33.1
%
 
 
 
 
Equity in earnings of unconsolidated affiliates
  
1

 
1

 

 

Net income from continuing operations
  
1,286

 
1,016

 
270

 
27

Net income (loss) from discontinued operations
  
12

 
(3
)
 
15

 
500

Net income
  
1,298

 
1,013

 
285

 
28

Net income attributable to noncontrolling interests
  
(5
)
 
(1
)
 
(4
)
 
(400
)
Net income attributable to Precision Castparts Corp. (“PCC”)
  
$
1,293

 
$
1,012

 
$
281

 
28
 %
Net income per common share attributable to PCC shareholders - diluted:
  
 
 
 
 
 
 
 
Net income per share from continuing operations
  
$
8.73

 
$
6.93

 
$
1.80

 
26
 %
Net income (loss) per share from discontinued operations
  
0.08

 
(0.02
)
 
0.10

 
500

Net income per share
  
$
8.81

 
$
6.91

 
$
1.90

 
27
 %

Average market price of key metals
(per pound)
  
Nine Months Ended
 
Increase/(Decrease)
  
12/29/13
 
12/30/12
 
$
 
%
Nickel
  
$
6.50

 
$
7.65

 
$
(1.15
)
 
(15
)%
London Metal Exchange1
  
 
 
 
 
 
 
 
Titanium
  
$
1.88

 
$
2.96

 
$
(1.08
)
 
(36
)%
Ti 6-4 bulk, Metalprices.com
  
 
 
 
 
 
 
 
Cobalt
  
$
13.45

 
$
13.64

 
$
(0.19
)
 
(1
)%
Metal Bulletin COFM.8 Index1
  
 
 
 
 
 
 
 
1 
Source: Bloomberg
Intercompany sales1 
  
Nine Months Ended
 
Increase/(Decrease)
  
12/29/13
 
12/30/12
 
$
 
%
Investment Cast Products2
  
$
212

 
$
231

  
$
(19
)
 
(8
)%
Forged Products3
  
1,277

 
689

  
588

 
85
 %
Airframe Products4
  
142

 
108

  
34

 
31
 %
Total intercompany sales
  
$
1,631

 
$
1,028

  
$
603

 
59
 %

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 $37 million and $40 million for the first nine months of fiscal 2014 and 2013, respectively.
3 
Forged Products: Includes sales between segments of $89 million and $74 million for the first nine months of fiscal 2014 and 2013, respectively.
4 
Airframe Products: Includes sales between segments of $5 million for both the first nine months of fiscal 2014 and 2013.

23



Sales for the first nine months of fiscal 2014 were $7,086 million, an increase of $1,159 million, or 20%, from $5,927 million in the same period last year. The current period includes the contribution from eleven businesses acquired after the beginning of fiscal 2013 and five businesses acquired in the first nine months of fiscal 2014 that were not included in the prior year. These acquisitions contributed more than $1.2 billion of additional sales in the first nine months of fiscal 2014. Metal pricing and pass-through negatively impacted organic growth by approximately 3% year over year. Nickel prices decreased 15%, as reported on the London Metal Exchange (LME), compared to the same period last year. The decline in external selling prices of nickel alloy from the Forged Products segment's three primary nickel conversion mills negatively impacted external sales by approximately $107 million in the current period versus a year ago and the falling price of revert and other alloys negatively impacted sales by an additional $46 million. Contractual material pass-through pricing increased sales by $191 million in the first nine months of fiscal 2014, compared to $204 million in the first nine months of fiscal 2013. Contractual material pass-through pricing adjustments are calculated based on average market prices of key metals as shown in the above table in trailing periods ranging from approximately one to twelve months. Including the impact of acquisitions, aerospace sales increased 25% from the prior year as commercial aircraft production rates continue to drive steady demand for airframe and engine components. The increase in commercial aerospace was partially offset by a decline in regional/business jet and base military demand. Sales to our power markets increased 4% over the prior year, primarily as a result of higher seamless interconnect sales and improved oil and gas shipments. IGT sales, including both spares and OEM activity, maintained solid levels. General industrial and other sales increased 15%, primarily due to the contribution from TIMET, which was acquired in the third quarter of fiscal 2013.
Net income from continuing operations attributable to PCC for the first nine months of fiscal 2014 was $1,281 million, or $8.73 per share (diluted) compared to net income from continuing operations attributable to PCC for the first nine months of fiscal 2013 of $1,015 million, or $6.93 per share (diluted). Net income attributable to PCC (including discontinued operations) for the first nine months of fiscal 2014 was $1,293 million, or $8.81 per share (diluted), compared with net income attributable to PCC of $1,012 million, or $6.91 per share (diluted), in the same period last year.
Interest and Income Tax
Interest expense for the first nine months of fiscal 2014 was $59 million, compared with $18 million for the first nine months of last year. Near the end of the third quarter of fiscal 2013, we issued $3.0 billion of debt to finance the acquisition of TIMET and therefore incurred additional interest expense associated with that debt. Interest income for the first nine months of fiscal 2014 was $3 million, compared with $5 million for the first nine months last year. The decrease was a result of lower cash balances invested at higher rates outside the U.S.
The effective tax rate for the first nine months of fiscal 2014 was 32.2%, compared to 33.1% for the same period last year. The lower effective rate in the current period is primarily due to increased benefits from earnings taxed at rates lower than the U.S. statutory rate, nonrecurring adjustments to prior year tax assets and liabilities, and the federal research and development tax credit, partially offset by reduced benefits from the domestic manufacturing deduction.
Discontinued Operations
Net income from discontinued operations was $12 million, or $0.08 per share (diluted), for the first nine months of fiscal 2014 compared with a net loss of $3 million, or $0.02 per share (diluted), in the same period last year. Net income or loss from discontinued operations represents the results of operations of entities that have been disposed of, or are classified as held for sale in accordance with discontinued operations guidance. Net income from discontinued operations in the current period was primarily due to a gain from the completion of a sale of a small non-core business in the first quarter of fiscal 2014.


24



Results of Operations by Segment - Comparison Between Nine Months Ended December 29, 2013 and December 30, 2012
(in millions)
  
Nine Months Ended
 
Increase/(Decrease)
  
12/29/13
 
12/30/12
 
$
 
%
Net sales:
  
 
 
 
 
 
 
 
Investment Cast Products
  
$
1,833

 
$
1,845

 
$
(12
)
 
(1
)%
Forged Products
  
3,152

 
2,448

 
704

 
29

Airframe Products
  
2,101

 
1,634

 
467

 
29

Consolidated net sales
  
$
7,086

 
$
5,927

 
$
1,159

 
20
 %
Segment operating income (loss):
  
 
 
 
 
 
 
 
Investment Cast Products
  
$
650

 
$
624

 
$
26

 
4
 %
% of sales
  
35.5
%
 
33.8
%
 
 
 
 
Forged Products
  
786

 
524

 
262

 
50

% of sales
  
24.9
%
 
21.4
%
 
 
 
 
Airframe Products
  
631

 
490

 
141

 
29

% of sales
  
30.0
%
 
30.0
%
 
 
 
 
Corporate expenses
  
(115
)
 
(107
)
 
(8
)
 
(7
)
Total segment operating income
  
1,952

 
1,531

 
$
421

 
27
 %
% of sales
  
27.5
%
 
25.8
%
 
 
 
 
Interest expense, net
  
56

 
13

 
 
 
 
Consolidated income before income tax expense and equity in earnings of unconsolidated affiliates
  
$
1,896

 
$
1,518

 
 
 
 
Investment Cast Products
Investment Cast Products' sales were $1,833 million for the first nine months of fiscal 2014, compared to sales of $1,845 million in the first nine months of fiscal 2013, a decrease of $12 million. Operating income was $650 million for the first nine months of fiscal 2014, an increase of $26 million from $624 million in the first nine months of fiscal 2013. Operating income as a percent of sales for the first nine months of fiscal 2014 increased to 35.5% from 33.8% of sales in the same period last year. Large commercial OEM sales grew by approximately 10% as the segment continued to see solid aerospace schedules in line with the current levels of base commercial aircraft production rates. However, growth was offset by a double-digit decline in regional/business jet and military activity. IGT OEM and spares sales increased approximately 1% year over year. The increase in IGT sales was offset by a decline in general industrial and other sales of approximately 2% as a result of lower sales to the non-aerospace military sector.
The segment increased operating income by $26 million year over year despite a $12 million decrease in sales. The segment's operating income as a percent of sales increased by 1.7 percentage points over the prior year. The segment's operations improved operating margins by consistently implementing new initiatives to reduce costs and improve productivity on steady, high-volume production. Contractual pricing related to pass-through of increased material costs was approximately $49 million in the first nine months of fiscal 2014, compared to approximately $56 million in the same period last year. Contractual material pass-through pricing diluted operating margins by 0.9 percentage points in the first nine months of fiscal 2014 compared to 1.1 percentage points in the first nine months of fiscal 2013.
Forged Products
Forged Products' sales were $3,152 million for the first nine months of fiscal 2014, compared to sales of $2,448 million in the first nine months of fiscal 2013, an increase of $704 million. Operating income was $786 million for the first nine months of fiscal 2014, an increase of $262 million from $524 million in the first nine months of fiscal 2013. Operating income as a percent of sales for the first nine months of fiscal 2014 increased to 24.9% from 21.4% of sales in the same period last year. Results for the first nine months of fiscal 2013 include contributions from Aerocraft/Dickson for six and a half months and THI for two months versus a full nine months of TIMET, Aerocraft/Dickson and THI in fiscal 2014. The segment experienced aerospace sales growth of approximately 39% year over year, driven by the inclusion of TIMET and higher commercial aerospace demand. Similar to the Investment Cast Products segment, aerospace OEM business continues to be aligned with current commercial aircraft production rates. The reduced capacity and subsequent repair of the 29,000-ton press in the Wyman-Gordon Houston facility also created a drag on sales for the first nine months of fiscal 2014. Sales to power markets improved approximately 7% compared to a year ago, driven by increased demand for downhole casing and seamless interconnect pipe. General industrial and other sales increased approximately 29% compared to the prior year, driven almost

25



entirely by the addition of TIMET. Lower market-driven pricing of raw material inputs had a significant negative impact on the segment's year-over-year sales. Nickel prices decreased 15%, as reported on the London Metal Exchange (LME), compared to the same period last year. The decline in external selling prices of nickel alloy from the segment's three primary nickel conversion mills negatively impacted external sales by approximately $107 million in the first nine months of fiscal 2014 versus a year ago and the falling price of revert and other alloys negatively impacted sales by an additional $46 million. Contractual material pass-through pricing contributed approximately $136 million of sales in the first nine months of fiscal 2014 compared to approximately $140 million of sales in the same period last year (also included in market increases discussed above).
Operating income as a percent of sales increased 3.5 percentage points compared to a year ago, driven by the inclusion of TIMET, including operational improvements that are being implemented, and higher seamless pipe shipments. The Forged Products segment achieved these results while also successfully rebuilding the 29,000-ton forging press in Houston. Contractual pass-through of higher raw material costs diluted operating margins by 1.2 percentage points in the first nine months of fiscal 2014 compared to 1.3 percentage points in the same period a year ago.
Airframe Products
Airframe Products' sales were $2,101 million for the first nine months of fiscal 2014, compared to sales of $1,634 million in the first nine months of fiscal 2013, an increase of $467 million. Operating income was $631 million for the first nine months of fiscal 2014, an increase of $141 million from $490 million in the first nine months of fiscal 2013. Operating income as a percent of sales was 30.0% for both the first nine months of fiscal 2014 and fiscal 2013. Results for the first nine months of fiscal 2013 include contributions from Centra for approximately seven months of the period, Klune for five months and Progressive for four months versus a full nine months in fiscal 2014. In addition, the current period includes the results of Synchronous for nine months and Permaswage for two months. This segment experienced strong growth in aerospace sales of approximately 34% due to solid contributions from new acquisitions coupled with organic aerostructures sales expansion. The base aerostructures businesses grew year-over-year aerospace sales by approximately 13%, due to market growth plus share gains. Critical aerospace fasteners sales, which improved slightly year over year, continue to lag the current commercial aircraft build rates, particularly on the Boeing 787 program, due to customer destocking. General industrial and other sales were flat when compared to the prior year, due to an increase in the automotive market offset by a decrease in non-aerospace military sales.
Operating income as a percent of sales was flat when compared to a year ago, due the inclusion of several lower-margin acquisitions offset by strong drop-through from base operations. Airframe Products' operating income improved due to the rapid integration of the acquisitions completed over the last two years, leverage of higher volumes over an improving cost structure, and strong incremental margins in the base business of more than 50%.

Changes in Financial Condition and Liquidity
Total assets of $18,332 million at December 29, 2013 represented a $1,436 million increase from the $16,896 million balance at March 31, 2013. The increase in total assets principally reflects cash generated from operations during the first nine months of fiscal 2014 totaling $1,425 million and increased inventories, primarily in the Forged Products segment, driven by operational and strategic development initiatives, partially offset by debt repayments and the repurchase of common stock.
Total capitalization at December 29, 2013 was $14,657 million, consisting of $3,622 million of total debt and $11,035 million of PCC shareholders' equity. The debt-to-capitalization ratio declined to 24.7% at December 29, 2013 from 28.0% at the end of fiscal 2013, reflecting the repayment of our $200 million 5.6% Senior Notes and the impact of increased equity from earnings and higher cumulative translation adjustments.
Cash as of December 29, 2013 was $337 million, an increase of $57 million from the end of fiscal 2013. Total debt was $3,622 million, a decrease of $185 million from the end of fiscal 2013. The net cash inflow primarily reflects cash generated by operations for the first nine months of fiscal 2014 of $1,425 million (after $50 million of cash paid for voluntary pension contributions) and cash received from the dispositions of businesses of $64 million, partially offset by stock repurchases of $293 million, capital expenditures of $261 million and cash paid to acquire businesses (net of cash acquired) of $859 million.
We expect our baseline capital expenditures for fiscal 2014 to be modestly higher than fiscal 2013 based on our current forecasts of spending for the fourth quarter of fiscal 2014. These expenditures will be targeted for equipment upgrades, capacity expansion, and cost reduction and productivity projects across all segments.
In the first nine months of fiscal 2014, we contributed $68 million to our defined benefit pension plans, of which $50 million was voluntary. We expect to contribute approximately $3 million of additional required contributions in fiscal 2014, for total contributions to the defined benefit pension plans of approximately $71 million in fiscal 2014. Including contributions in the first nine months of fiscal 2014, we expect to contribute a total of approximately $8 million to other postretirement benefit plans during fiscal 2014.

26



Historically, we have issued commercial paper as a method of raising short-term liquidity. We believe we continue to have the ability to issue commercial paper and have issued commercial paper to fund acquisitions and short-term cash requirements in recent quarters. As of December 29, 2013, the amount of commercial paper borrowings outstanding was $618 million and the weighted average interest rate was 0.2%. For the nine months ended December 29, 2013, the average amount of commercial paper borrowings outstanding was $595 million and the weighted average interest rate was 0.2%. For the nine months ended December 30, 2012, the average amount of commercial paper borrowings outstanding was $319 million and the weighted average interest rate was 0.2%. During the first nine months of fiscal 2014, the largest daily balance of outstanding commercial paper borrowings was $1,151 million. We do not anticipate any changes in our ability to borrow under our current credit facilities, 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.
On December 16, 2013, we entered into a 364-day, $1.0 billion revolving credit facility maturing December, 2014 (the “364-Day Credit Agreement”), unless converted into a one-year term loan at the option of the Company at the end of the revolving period. The 364-Day Credit Agreement replaces the prior 364-day credit agreement that expired December, 2013. The 364-Day Credit Agreement contains customary representations and warranties, events of default, and financial and other covenants.
On December 16, 2013, we entered into a five-year, $1.0 billion revolving credit facility (the "New Credit Agreement") (with a $500 million increase option, subject to approval of the lenders) maturing December 2018, unless extended pursuant to two 364-day extension options. On the same day, we terminated the prior credit agreement maturing November 30, 2016. The New Credit Agreement contains customary representations and warranties, events of default, and financial and other covenants. The 364-Day and New Credit Agreements may be referred to collectively as the "Credit Agreements." We had not borrowed funds under the Credit Agreements as of December 29, 2013.
The maximum amount that can be borrowed under our Credit Agreements and commercial paper program is $2.0 billion. Our unused borrowing capacity as of December 29, 2013 was $1,382 million due to our outstanding commercial paper borrowings of $618 million.
Our financial covenant requirement and actual ratio as of December 29, 2013 was as follows:
 
 
Covenant Requirement
 
Actual
Consolidated leverage ratio1
65.0%
(maximum)
 
24.7%
1 
Terms are defined in the Credit Agreements.
As of December 29, 2013, we were in compliance with the financial covenant in the Credit Agreements.
On September 30, 2013, we exercised the make-whole early prepayment option and redeemed all $200 million of the 5.6% Senior Notes, with the funding provided by commercial paper borrowings. As of September 30, 2013, our long-term debt is not guaranteed by any PCC subsidiaries.
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 with the cash generated from operations, borrowing from our Credit Agreements or new bank credit facilities, the issuance of public or privately placed debt securities, or the issuance of equity instruments.
Environmental Costs
Total environmental liabilities accrued at December 29, 2013 and March 31, 2013 were $543 million and $294 million, respectively. The estimated future costs for known environmental remediation requirements are accrued on an undiscounted basis when it is probable that a liability has been incurred, and the amount of remediation costs can be reasonably estimated. When only a range of amounts is established, and no amount within the range is better than another, the minimum amount of the range is recorded. The estimated upper end of the range of reasonably possible environmental costs exceeded amounts accrued by approximately $400 million at December 29, 2013. Actual future losses may be lower or higher given the uncertainties regarding the status of laws, regulations, enforcement policies, the impact of potentially responsible parties, technology and information related to individual sites.
Recoveries of environmental remediation costs from other parties are recorded as assets when collection is probable. Adjustments to our accruals may be necessary to reflect new information as investigation and remediation efforts proceed. The amounts of any such adjustments could have a material adverse effect on our results of operations in a given period.
During the first nine months of fiscal 2014, the environmental liability increased $249 million, primarily due to additional investigation of the nature and extent of TIMET environmental liabilities that existed as of the acquisition date. The

27



investigation resulted in an increase to the environmental liability of $266 million, which was partially offset by remediation expenditures applied against the environmental liability of $13 million and other adjustments. Due to the nature of its historical operations, TIMET has significant environmental liabilities at its titanium manufacturing plants. It has for many years, under the oversight of government agencies, conducted investigations of the soil and groundwater contamination at its plant sites. TIMET has initiated remedial actions at its properties, including the capping of former on-site landfills, removal of contaminated sediments from on-site surface impoundments, remediation of contaminated soils and the construction of a slurry wall and groundwater extraction system to treat contaminated groundwater as well as other remedial actions. Although it is anticipated that significant remediation will be completed within the next two to three years, it is expected that a substantial portion of the TIMET environmental accruals will be expended within 45 years. Expenditures related to these remedial actions and for resolving TIMET's other environmental liabilities will be applied against existing liabilities. As the remedial actions are implemented at these sites, the liabilities will be adjusted based on the progress made in determining the extent of contamination and the extent of required remediation. While the existing liability generally represents our current best estimate of the costs or range of costs of resolving the identified environmental liabilities, these costs may change substantially due to factors such as the nature and extent of contamination, changes in legal and remedial requirements, the allocation of costs among potentially responsible parties as well as other third parties, and technological changes, among others.
Critical Accounting Policies
For a discussion of our critical accounting policies, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K filed on May 30, 2013.
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 concentration of a substantial portion of our business with a relatively small number of key customers; the impact on the Company of customer or supplier labor disputes; demand, timing and market acceptance of new commercial and military programs, including the Boeing 787; the availability and cost of energy, raw materials, supplies, and insurance; the cost of pension and postretirement medical benefits; equipment failures; product liability claims; cybersecurity threats; relations with our employees; our ability to manage our operating costs and to integrate acquired businesses in an effective manner, including the ability to realize expected synergies; the timing of new acquisitions; misappropriation of our intellectual property rights; 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 31, 2013.

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.



28



PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
In April 2009, as a result of Environmental Protection Agency ("EPA") inspections, the EPA issued a Notice of Violation ("Notice") to TIMET alleging that TIMET had violated certain provisions of the Resource Conservation and Recovery Act and the Toxic Substances Control Act ("TSCA") at its Henderson, Nevada plant. Since 2009, TIMET has been working cooperatively to address issues identified in the Notice. No specific penalties were identified in the Notice but we believe that any final resolution of the Notice will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.
In May 2013, as a result of TIMET's disclosure of noncompliance to the Nevada Division of Environmental Protection ("NDEP") on December 4, 2012 and February 19, 2013, the NDEP issued a Finding of Alleged Violation and Order ("FOAV") to TIMET. The FOAV alleges that TIMET violated its permit by discharging partially treated wastewater from an unauthorized bypass for approximately four years from September 2008 through October 2012. TIMET has been working cooperatively with the NDEP to address issues identified in the FOAV. In January 2014, the NDEP offered to resolve the FAOV in exchange for payment from TIMET of $135,000.
Item 1A.
Risk Factors
Our growth strategy includes business and capital equipment acquisitions with associated risks.
Our growth strategy includes the acquisition of strategic operations and capital equipment. We have completed a number of acquisition transactions in recent years, including the acquisition of Titanium Metals Corporation (“TIMET”) in fiscal 2013, a manufacturer of a full range of titanium products, including ingot and slab, forging billet and mill forms. We expect that we will continue to seek acquisitions of complementary businesses, products, capital equipment and technologies to add products and services for our core customer base and for related markets, and will also continue to expand each of our businesses geographically. The success of the TIMET acquisition and the other 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 and capital equipment acquisitions entail a number of other risks, including as applicable:
inaccurate assessment of liabilities;
entry into markets in which we may have limited or no experience;
diversion of management's attention from our existing businesses;
difficulties in realizing projected efficiencies, synergies, installation schedules and cost savings;
decrease in our cash or an increase in our indebtedness and a limitation in our ability to access additional capital
when needed; and
risks associated with investments where we do not have full operational control.
Our failure to adequately address these acquisition risks could cause us to incur increased expenses or 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 65 percent of our total sales in fiscal 2013. Our power sales constituted 20 percent of our total sales in fiscal 2013.
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, health and safety concerns and environmental constraints imposed upon aircraft operators. 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. 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.

29



The power generation market is also cyclical in nature. Demand for power generation products is global and is affected by the state of the U.S. and world economies, the availability of financing to power generation project sponsors, the political environments of numerous countries and environmental constraints imposed upon power project operators. The availability of fuels and related prices also have a large impact on demand. Reductions in demand for our power generation products could have a material adverse effect on our business.
We also sell products and services to customers in the automotive, chemical and petrochemical, medical, industrial process, and other general industrial markets. Each of these markets is cyclical in nature. Customer demand for our products or services in these markets may fluctuate widely depending upon U.S. and world economic conditions, the availability of financing and industry-specific factors. Cyclical declines or sustained weakness in any of these markets could have a material adverse effect on our business.
Our business is dependent on a small number of direct and indirect customers.
A substantial portion of our business is conducted with a relatively small number of large direct and indirect customers, including General Electric Company, United Technologies Corporation, Rolls Royce plc, Airbus and The Boeing Company. General Electric accounted for approximately 15 percent of our total sales for fiscal 2013. No other customer directly accounted for more than 10 percent of total sales; however, Boeing, Airbus, Rolls Royce and United Technologies are also considered key customers. A financial hardship experienced by any one of these key customers, the loss of any of them or a reduction in or substantial delay of orders from any of them could have a material adverse effect on our business.
In addition, a significant portion of our aerospace products are ultimately used in the production of new commercial aircraft. There are only two primary manufacturers of large commercial aircraft in the world, Boeing and Airbus. A significant portion of our aerospace sales are dependent on the number of new aircraft built by these two manufacturers, which is in turn dependent on a number of factors over which we have little or no control. Those factors include the demand for new aircraft from airlines around the globe and factors that impact manufacturing capabilities, such as the availability of raw materials and manufactured components, changes in the regulatory environment and labor relations between the aircraft manufacturers and their work forces. A significant interruption or slowdown in the number of new aircraft built by aircraft manufacturers could have a material adverse effect on our business.
Sales to the military sector constituted approximately 12 percent of our fiscal 2013 sales. Defense spending is subject to appropriations and to political pressures that influence which programs are funded and which are canceled. Reductions in domestic or foreign defense budgets or military aircraft procurement, delays in funding or reprioritization of government spending away from defense programs in which we participate could adversely affect our business.
Our business depends, in part, on the success of new commercial and military aircraft programs.
The success of our business will depend, in part, on the success of new commercial and military aircraft programs including the Boeing 787, Boeing 737Max, Boeing 777X, Airbus A350, Airbus A320neo and F-35 programs. We are currently under contract to supply components for a number of new commercial, general aviation and military aircraft programs. Cancellation, reductions or delays of orders or contracts by our customers on any of these programs, or regulatory or certification-related groundings or other delays to any of these new aircraft programs, could have a material adverse effect on our business.
The competitive nature of our business results in pressure for price concessions to our customers and increased pressure to reduce our costs.
We are subject to substantial competition in all of the markets we serve, and we expect this competition to continue. As a result, we have made significant long-term price concessions to our customers in the aerospace and power generation markets from time to time, and we expect customer pressure for further long-term price concessions to continue. Maintenance of our market share will depend, in part, on our ability to sustain a cost structure that enables us to be cost-competitive. If we are unable to adjust our costs relative to our pricing, our profitability will suffer. Our effectiveness in managing our cost structure will be a key determinant of future profitability and competitiveness.
Our business is dependent on a number of raw materials that are subject to volatility in price and availability.
We use a number of raw materials in our products, including certain metals such as nickel, titanium, cobalt, tantalum and molybdenum, various rare earth elements, and titanium-containing feedstock ore (natural rutile and upgraded ilmenite), which are found in only a few parts of the world, are available from a limited number of suppliers and, in some cases, are considered conflict minerals for U.S. regulatory purposes if originating in certain countries. The availability and costs of these metals and elements may be influenced by private or government cartels, changes in world politics or regulatory requirements, labor relations between the producers and their work forces, unstable governments in exporting nations, export quotas imposed by governments in countries with rare earth element supplies, market forces of supply and demand, and inflation. These raw materials are required for the alloys or processes used or manufactured in our investment cast products, forged products and

30



airframe products segments. We have escalation clauses for nickel, titanium and other metals in a number of our long-term contracts with major customers, but we are not usually able to fully offset the effects of changes in raw material costs. We also employ “price-in-effect” metal pricing in our alloy production businesses to lock-in the current cost of metal at the time of production or time of shipment. The ability of key metal suppliers to meet quality and delivery requirements can also impact our ability to meet commitments to customers. Future shortages or price fluctuations in raw materials could result in decreased sales and margins or otherwise adversely affect our business. The enactment of new or increased import duties on raw materials imported by us could also increase the costs to us of obtaining the raw materials and might adversely affect our business.
Our business is affected by federal rules, regulations and orders applicable to government contractors.
A number of our products are manufactured and sold under U.S. government contracts or subcontracts. Consequently, we are directly and indirectly subject to various federal rules, regulations and orders applicable to government contractors. From time to time, we are also subject to government inquiries and investigations of our business practices due to our participation in government programs. These inquiries and investigations are costly and consuming of internal resources. Violation of applicable government rules and regulations could result in civil liability, in cancellation or suspension of existing contracts or in ineligibility for future contracts or subcontracts funded in whole or in part with federal funds, any of which could have a material adverse effect on our business.
Our business is subject to environmental regulations and related liabilities and liabilities associated with chemicals and substances in the workplace.
We are subject to various federal, state and foreign environmental laws and regulations concerning, among other things, water discharges, air emissions, hazardous material and waste management and environmental cleanup. Environmental laws and regulations continue to evolve and we may become subject to increasingly stringent environmental standards in the future, particularly under air quality and water quality laws and standards related to climate change issues, such as reporting of greenhouse gas emissions. We are required to comply with environmental laws and the terms and conditions of multiple environmental permits. Failure to comply with these laws or permits could result in fines and penalties, interruption of manufacturing operations or the need to install pollution control equipment that could be costly. We also may be required to make additional expenditures, which could be significant, relating to environmental matters on an ongoing basis. We also own properties, or conduct or have conducted operations at properties, where hazardous materials have been used for many years, including during periods before careful management of these materials was required or generally believed to be necessary. Consequently, we will continue to be subject to environmental laws that impose liability for historical releases of hazardous substances.
Our financial statements include estimated liabilities for future costs arising from environmental issues relating to our properties and operations. Our accruals for known environmental liabilities represent our best estimate of our probable future obligations for the investigation and remediation of known contaminated sites. Our accruals include asserted and unasserted claims. The estimates of our environmental costs are based on currently available facts, present laws and regulations and current technology and take into consideration our prior experience in site investigation and remediation, the data available for each site and the professional judgment of our environmental specialists and consultants. Although recorded liabilities include our best estimate of all probable costs, our total costs for the final settlement of each site cannot be predicted with certainty due to the variety of factors that make potential costs associated with contaminated sites inherently uncertain, such as: the nature and extent of site contamination, available remediation alternatives, the extent to which remedial actions will be required, the time period over which costs will be incurred, the number and economic viability of other responsible parties and whether we have any opportunity of contribution from third parties, including recovery from insurance policies. In addition, sites that are in the early stages of investigation are subject to greater uncertainties than mature sites that are close to completion. Although the sites we identify vary across the spectrum, approximately half of our sites could be considered at an early stage of the investigation and remediation process. Therefore, our cost estimates and the accruals associated with those sites are subject to greater uncertainties. Environmental contingent liabilities are often resolved over a long period of time, and the timing of expenditures depends on a number of factors that vary by site. We expect that we will expend present accruals over many years, and that remediation of all currently known sites will be completed within 45 years. We cannot ensure that our estimated liabilities are adequate to cover the total cost of remedial measures that may eventually be required by environmental authorities with respect to known environmental matters or the cost of claims that may be asserted in the future with respect to environmental matters about which we are not yet aware. Accordingly, the costs of environmental remediation or claims may exceed the amounts accrued.
We have been named as a PRP at sites identified by the EPA and state regulatory agencies for investigation and remediation under CERCLA and similar state statutes. Under common law, as applied in the environmental remediation context, potentially responsible parties may be subject to an allocation process to determine liability, and therefore we may be potentially liable to the government or third parties for an allocated portion or full cost of remediating contamination at our facilities or former facilities or at third-party sites where we have been designated a PRP. In estimating our current liabilities for environmental

31



matters, we have assumed that we will not bear the entire cost of remediation of every site to the exclusion of other PRPs who may also be liable. It is also possible that we will be designated a PRP at additional sites in the future.
Like many other industrial companies in recent years, we are defendants in lawsuits alleging personal injury as a result of exposure to chemicals and substances in the workplace, including asbestos. To date, we have been dismissed from a number of these suits and have settled a number of others. The outcome of litigation such as this is difficult to predict, and a judicial decision unfavorable to us could be rendered, possibly having a material adverse effect on our business.
Our business is subject to risks associated with international operations.
We purchase products from and supply products to businesses located outside of the U.S. We also have significant operations located outside the U.S. In fiscal 2013, approximately 17 percent of our total sales were attributable to our non-U.S. subsidiaries. A number of risks inherent in international operations could have a material adverse effect on our results of operations, including:
fluctuations in U.S. dollar value arising from transactions denominated in foreign currencies and the translation of certain foreign currency subsidiary balances;
difficulties in staffing and managing multi-national operations;
general economic and political uncertainties and potential for social unrest in countries in which we or our customers operate;
limitations on our ability to enforce legal rights and remedies;
restrictions on the repatriation of funds;
changes in trade policies;
tariff regulations;
difficulties in obtaining export and import licenses;
the risk of government financed competition; and
compliance with a variety of international laws as well as U.S. and other laws affecting the activities of companies abroad.
A majority of our sales of extruded pipe for the power generation market have been exported to power generation customers in China and India. These sales are subject to the risks associated with international sales generally. In addition, changes in demand could result from a reduction of power plant build rates in China or India due to economic conditions or otherwise, or increased competition from local manufacturers who have cost advantages or who may be preferred suppliers, or effects of anti-dumping or other import duties. Also, with respect to China, Chinese commercial laws, regulations and interpretations applicable to non-Chinese market participants such as us are rapidly changing. These laws, regulations and interpretations could impose restrictions on our ownership or operations of our interests in China and have a material adverse effect on our business.
Any lower-than-expected rating of our bank debt and debt securities could adversely affect our business.
Two rating agencies, Moody's and Standard & Poor's, rate our debt securities. If the rating agencies were to reduce their current ratings, our interest expense may increase, and the terms of future borrowing arrangements may become more stringent or require additional credit support. Our ability to comply with covenants contained in the instruments governing our existing and future indebtedness may be affected by events and circumstances beyond our control. If we breach any of these covenants, one or more events of default, including cross-defaults between multiple components of our indebtedness, could result. These events of default could permit our creditors to declare all amounts owing to be immediately due and payable and terminate any commitments to make further extensions of credit.
Our production may be interrupted due to equipment failures or other events affecting our factories.
Our manufacturing processes depend on certain sophisticated and high-value equipment, such as some of our forging presses for which there may be only limited or no production alternatives. Unexpected failures of this equipment could result in production delays, revenue loss and significant repair costs. In addition, our factories rely on the availability of electrical power and natural gas, transportation for raw materials and finished products and employee access to our workplace that are subject to interruption in the event of severe weather conditions or other natural or manmade events. While we maintain backup resources to the extent practicable, a severe or prolonged equipment outage or other interruptive event affecting areas where we have significant manufacturing operations may result in loss of manufacturing or shipping days, which could have a material adverse effect on our business. Natural or manmade events that interrupt significant manufacturing operations of our customers also could have a material adverse effect on our business.

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Failure to protect our intellectual property rights could adversely affect our business.
We rely on a combination of confidentiality, invention assignment and other types of agreements and trade secret, trademark, and patent law to establish, maintain, protect and enforce our intellectual property rights. Our efforts in regard to these measures may be inadequate, however, to prevent others from misappropriating our intellectual property rights. In addition, laws in some non-U.S. countries affecting intellectual property are uncertain in their application, which can affect the scope or enforceability of our intellectual property rights. Any of these events or factors could diminish or cause us to lose the competitive advantages associated with our intellectual property, which could have a material adverse effect on our business.
We could be faced with labor shortages, disruptions or stoppages if our relations with our employees were to deteriorate.
Our operations rely heavily on our skilled employees. Any labor shortage, disruption or stoppage caused by any deterioration in employee relations or difficulties in the renegotiation of labor contracts could reduce our operating margins and income. Approximately 22 percent of our employees are affiliated with unions or covered by collective bargaining agreements. Failure to negotiate a new labor agreement when required could result in a work stoppage. Although we believe that our labor relations have generally been satisfactory, it is possible that we could become subject to additional work rules imposed by agreements with labor unions, or that work stoppages or other labor disturbances could occur in the future, any of which could reduce our operating margins and income and place us at a disadvantage relative to non-union competitors.
Cybersecurity threats could disrupt our business and result in the loss of critical and confidential information.
We have experienced, and expect to continue to experience, cybersecurity threats, including threats to our information technology infrastructure and attempts to gain access to our confidential and proprietary information.  Although we maintain information security policies and procedures to prevent, detect, and mitigate these threats, cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations.  The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties, theft of intellectual property, and increased cybersecurity protection and remediation costs, which in turn could have a material adverse effect on our business.
Product liability and product warranty risks could adversely affect our operating results.
We produce many critical parts for commercial and military aircraft, for high-pressure applications in power plants and for oil and gas applications. Failure of our parts could give rise to substantial product liability claims. We maintain insurance addressing the risk of product liability claims arising from bodily injury or property damage (which generally does not include damages for pollution or environmental liability), but there can be no assurance that the insurance coverage will be adequate or will continue to be available on terms acceptable to us. We manufacture most of our parts to strict contractually-established standards and tolerances using complex manufacturing processes. If we fail to meet the contractual requirements for a product we may be subject to product warranty costs and claims. Product warranty costs are generally not insured.
We could be required to make additional contributions to our defined benefit pension and postretirement benefit plans as a result of adverse changes in interest rates and pension investments.
Our estimates of liabilities and expenses for pensions and other postretirement benefits incorporate significant assumptions including the rate used to discount the future estimated liability, the long-term rate of return on plan assets and assumptions relating to the employee workforce including salary increases, medical costs, retirement age and mortality. Our results of operations, liquidity or shareholders' equity in a particular period could be affected by a decline in the rate of return on plan assets, the rate used to discount the future estimated liabilities or changes in employee workforce assumptions. We may have to contribute more cash to various pension plans and record higher pension-related expenses in future periods as a result of decreases in the value of investments held by these plans or changes in discount rates or other pension assumptions.
A global recession or disruption in global financial markets could adversely affect us.
A global recession or disruption in the global financial markets presents risks and uncertainties that we cannot predict. During the recent recession, we saw a moderate decline in demand for our products due to global economic conditions. However, our access to credit to finance our operations was not materially limited. If recessionary economic conditions or financial market disruptions were to return, we would face risks that may include:
declines in revenues and profitability from reduced or delayed orders by our customers;
supply problems associated with any financial constraints faced by our suppliers;
restrictions on our access to short-term commercial paper borrowings or other credit sources;
reductions to our banking group or to our committed credit availability due to combinations or failures of financial institutions; and

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increases in corporate tax rates to finance government spending programs.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES
The following table provides information about purchases of our common stock during the quarter ended December 29, 2013:
 
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)           (in millions)
9/30/13-11/3/13
 

 
$

 
1,800,000

 
$
1,123

11/4/13-12/1/13
 
32,553

 
$
248.42

 
1,832,553

 
$
1,115

12/2/13-12/29/13
 
2,447

 
$
254.25

 
1,835,000

 
$
1,115

Total
 
35,000

 
$
248.83

 
1,835,000

 
$
1,115


(1 ) On January 24, 2013, we publicly announced that our Board of Directors had authorized a program for the Company to purchase up to $750 million of
our Company's common stock. On August 13, 2013, the Board of Directors approved an additional $750 million for use in the Company's stock repurchase program, effective immediately and continuing through June 30, 2015.

Item 6.
Exhibits
(a) Exhibits
 
 
10.1
Credit Agreement, dated December 16, 2013, by and among Precision Castparts Corp., Bank of America, N.A., as Administrative Agent, Citibank, N.A. and Wells Fargo Bank, National Association, as Syndication Agents, Mizuho Bank (USA), PNC Bank, National Association, The Bank of Tokyo-Mitsubishi UFJ, Ltd., and U.S. Bank National Association, as Co-Documentation Agents, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Book Managers, and other lenders from time to time party thereto (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 18, 2013).
 
 
 
 
10.2
Credit Agreement, dated December 16, 2013, by and among Precision Castparts Corp., Bank of America, N.A., as Administrative Agent, Citibank, N.A. and Wells Fargo Bank, National Association, as Syndication Agents, Mizuho Bank, Ltd., PNC Bank, National Association, The Bank of Tokyo-Mitsubishi UFJ, Ltd., and U.S. Bank National Association, as Co-Documentation Agents, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Book Managers, and other lenders from time to time party thereto (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on December 18, 2013).
 
 
 
 
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
32.1
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
32.2
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
101.INS
XBRL Instance Document.
 
 
 
 
101.SCH
XBRL Taxonomy Extension Schema Document.
 
 
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
                                                                                          
PRECISION CASTPARTS CORP.
 
 
 
DATE:
February 6, 2014
/s/ Shawn R. Hagel
 
 
Shawn R. Hagel
Executive Vice President and
Chief Financial Officer
(Authorized Signatory and Principal Financial and Accounting Officer)
 

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