10-K 1 pcp2015052810k.htm FORM 10-K PCP 20150528 10K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended March 29, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period From                          to                     
Commission File Number 1-10348
PRECISION CASTPARTS CORP.
(Exact name of registrant as specified in its charter)
Oregon
93-0460598
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
4650 S.W. Macadam Ave., Suite 400
Portland, OR
97239-4262
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (503) 946-4800
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
Name of each exchange on which registered
Common Stock, without par value
New York Stock Exchange
Series A Preferred Stock Purchase Rights
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes x  No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨  No x
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 x  No ¨
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
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 ¨        Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨  No x
The aggregate market value of common equity held by non-affiliates of the Registrant as of September 26, 2014, was $34,132,467,040.
As of the close of business on May 19, 2015, the Registrant had 138,228,926 shares of Common Stock, without par value, outstanding.
Portions of the Registrant’s Proxy Statement to be filed in connection with the 2015 Annual Meeting of Shareholders are incorporated by reference in Part III.



TABLE OF CONTENTS
  
Page
 
 
 
 
 
 
 
 
 
 



PART I

ITEM 1.
BUSINESS    
Precision Castparts Corp. (“PCC”, “the Company”, or “we”), a worldwide manufacturer of complex metal components and products, provides high-quality investment castings, forgings, fasteners/fastener systems and aerostructures for critical aerospace and power applications. We also provide seamless pipe for coal-fired, industrial gas turbine ("IGT") and nuclear power plants; downhole casing, clad pipe, fittings and various mill forms in a variety of nickel and steel alloys for severe-service oil and gas environments; investment castings and forgings for general industrial, armament, medical and other applications; nickel and titanium alloys in all standard mill forms from large ingots and billets to plate, foil, sheet, strip, tubing, bar, rod, extruded shapes, rod-in-coil, wire and welding consumables, as well as cobalt alloys, for the aerospace, chemical processing, oil and gas, pollution control and other industries; revert management solutions; fasteners for automotive and general industrial markets; specialty alloys for the investment casting and forging industries; heat treating and destructive testing services for the investment cast products and forging industries; refiner plates, screen cylinders and other products for the pulp and paper industry; grinder pumps and affiliated components for low-pressure sewer systems; critical auxiliary equipment and gas monitoring systems for the power generation industry; and metalworking tools for the fastener market and other applications.

Products and Markets
We manufacture complex metal components and products in three principal business segments: Investment Cast Products, Forged Products and Airframe Products. Each of these three business segments is described below.
Investment Cast Products
Our Investment Cast Products segment manufactures investment castings for aircraft engines, IGT engines, airframes, medical implants, armament, unmanned aerial vehicles and other industrial applications. The segment also provides alloys to PCC’s investment casting operations, as well as to other investment casting companies. The Investment Cast Products segment accounted for approximately 25 percent of our sales in fiscal 2015.
We are the market leader in manufacturing large, complex, structural investment castings, and we are the leading manufacturer of airfoil investment castings used in jet aircraft engines. We manufacture investment castings for every jet aircraft engine program in production or under development by our key customers. We are also the market leader in manufacturing structural and airfoil investment castings for IGT and aeroderivative engines used for electric power generation and other applications, and we have expanded into the structural airframe and armament markets. In addition, we make investment castings for use in the medical implant, satellite launch vehicle and general industrial markets.
Investment casting technology involves a multi-step process that uses ceramic molds in the manufacture of metal components with more complex shapes, closer tolerances and finer surface finishes than parts manufactured using other casting methods. The investment casting process begins with the creation of a wax pattern of the part to be cast, along with wax gates and risers to create pathways through which molten metal can flow throughout the ceramic mold. A ceramic shell is then formed around the wax pattern, followed by melting and draining the wax from the shell. Finally, molten metal is poured into the shell, which is removed after the metal cools, and the part undergoes final processing and inspection.
Because of the complexity of the manufacturing process and the application of proprietary technologies, we are currently one of the few manufacturers that can consistently produce the largest, complex, structural investment castings in quantities sufficient to meet our customers’ quality and delivery requirements. Our emphasis on low-cost, high-quality products and timely delivery has enabled us to become the leading supplier of structural and airfoil castings for jet aircraft and IGT engines and to expand into the structural airframe and armament markets.
Large jet aircraft engines are manufactured by a limited number of suppliers, including General Electric (“GE”), Pratt & Whitney (a division of United Technologies Co.), Rolls-Royce and several joint venture partners. With this highly concentrated and sophisticated customer base, we believe customer service and long-term customer relationships will continue to be important to achieving our goals. We have been supplying castings for jet engines to GE, Pratt & Whitney and Rolls-Royce for several decades. As we have been able to cast larger and more complex parts, manufacturers of large jet aircraft engines have increased their use of our structural castings.
Aerospace Structural Castings
Our structural castings business manufactures the largest-diameter, nickel-based superalloy, titanium and stainless steel investment castings in the world, as well as a variety of medium and small structural castings in these same alloys and in aluminum. The nickel, titanium and steel castings are stationary components that form portions of the fan, compressor,

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combustor and turbine sections of a jet aircraft engine, where strength and structural integrity are critical. Aluminum structural castings are used in such applications as doors and thrust reversers. Structural investment castings are sold primarily as original equipment to jet aircraft engine manufacturers.
We believe that trends in the design of aircraft jet engines will continue to increase our revenue per engine. As the design of new-generation aircraft engines has emphasized increased thrust, higher fuel efficiency and reduction of noise and exhaust emissions, engine operating temperatures and pressures have increased. These conditions require the use of engine parts made of alloys that are able to withstand extreme operating conditions and provide an optimum strength-to-weight ratio. Many of these alloys are particularly suited for use in the investment castings we manufacture. In addition, titanium, a metal with a lower melting temperature than stainless steel or superalloys, is used for structural castings in all but the hottest parts of the engine because of its high mechanical properties and considerable weight savings. Titanium is a challenging metal to cast because of its reaction with other elements. However, we have developed the advanced technology and manufacturing processes to cast large, complex investment castings in a variety of titanium alloys. Many new-generation engines, which are expected to be built through the next decade and beyond, make significantly greater use of our products than did previous engine designs.
We have also expanded into the structural airframes market through the production of components manufactured primarily from titanium and aluminum alloys. Aircraft manufacturers have shown substantial interest in using investment castings for airframe applications such as titanium aileron and flap hinges, pylons (engine mounts), heat shields, wing spars and wing ribs, as well as aluminum alloy nacelle segments (thrust reversers), cascades, aircraft access doors, electronic boxes and pump housings for hydraulic and fuel systems.
Aerospace Airfoil Castings
We manufacture precision cast airfoils, such as the stationary vanes and rotating blades used in the turbine section of jet aircraft engines. This part of the engine is considered the “hot section,” where temperatures may exceed 2,400 degrees Fahrenheit. These conditions require use of special nickel-based superalloys and state-of-the-art casting techniques to manufacture airfoil castings with internal cooling passages that enable the airfoils to operate in an environment with temperatures higher than the melting point of the metal of which they are made.
We use various casting technologies to manufacture turbine airfoils. A conventional casting process enables us to produce equiaxed airfoil castings, in which the metal grains are oriented randomly throughout the casting. A more advanced process enables us to produce directionally solidified (“DS”) airfoil castings, in which the metal grains are aligned longitudinally. This alignment decreases the internal stress on the weakest portion of a metal part where the various grains adjoin, thereby providing increased strength and improved efficiencies in engine performance over equiaxed parts. An even more advanced process enables us to produce single crystal (“SX”) airfoil castings, which consist of one crystal without grain boundaries. SX castings provide greater strength and performance characteristics than either equiaxed or DS castings, as well as longer engine life. In addition, we have developed a process to cast titanium aluminide blades, the first use of lightweight titanium in the hot section of an aircraft engine. These airfoils are incorporated into the GEnX engine for the Boeing 787.
As engines continue to target increased fuel efficiency and lower emissions, the turbine sections of these engines must burn hotter. As a result, the major aircraft engine manufacturers have increasingly been designing their engines with a greater number of DS and SX blades and vanes. The DS and SX cast airfoils we produce, with their complex cooling passages, have been instrumental in enabling these engines to operate at higher temperatures. SX cast airfoils are used in both new and redesigned engines where performance requirements are higher.
The demand for aerospace airfoil castings is determined primarily by the number and type of engines required for new jet aircraft; the intervals between hot section maintenance, which are driven by engine cycles (takeoffs and landings); and the inventory levels of replacement parts maintained by the principal jet aircraft engine manufacturers, repair centers and airlines. A jet engine’s airfoil components have shorter useful lives than structural investment castings and are replaced periodically during engine maintenance. As a result, our sales of aerospace airfoil castings are less affected by the cyclical patterns of the aerospace industry than are our sales of structural investment castings. The timing for replacement of aerospace airfoil castings principally depends on engine cycles and the expected life of the airfoil casting. We believe that approximately 30 percent of our sales of airfoil castings used in aircraft turbine engines are replacement parts.
IGT Castings
We are the leading supplier of investment castings used in IGT engines. IGTs have been a preferred power source for several decades, and original equipment manufacturers ("OEM") expect that trend to continue due to the availability of natural gas, overall efficiency of operation and relative speed/ease of installation. Most sales growth is anticipated in turbines of 180MW and above, which have higher PCC dollar content. In addition to IGT components, we manufacture structural and

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airfoil castings for aeroderivative gas turbine engines, which are also used for power generation, as well as for other commercial and military land- and marine-based applications.
IGT manufacturers have significantly improved the efficiency and reduced the emissions profiles of industrial gas turbines, principally by incorporating advanced components in new engines as well as in refurbished and upgraded turbines in the field. We have leveraged our DS and SX airfoil casting knowledge from the aerospace market into the IGT market to produce blades and vanes that are better able to withstand the extreme heat and stresses of new, higher-temperature gas turbines. IGT engines are built with investment castings that are similar, but much larger, than the blades and vanes we manufacture for the aerospace market. Because of their size, IGT airfoils are usually more difficult to cast than smaller aerospace airfoils with the same properties.
Since industrial gas turbines are primarily used in electrical power generation, castings sales for new IGT engines are tied to the growth of global electricity consumption, while spares demand depends on the size and utilization rate of the installed base.
Other Investment Casting Products
Our strategy for profitable growth also includes the pursuit of other opportunities for our existing investment casting technology. We have expanded the application of our investment casting technology in the medical prosthesis, unmanned aerial vehicles (“UAV”) and general industrial markets by manufacturing such products as artificial hips and knees, landing gear struts and engine inlets for UAVs and impellers for pumps and compressors. In addition, we manufacture large titanium components for armament systems.
Internal Alloy-Making Capability
An operation within our Investment Cast Products segment produces alloys used by PCC and other manufacturers of investment castings. Several of these alloys are patented and trademarked, and specifically formulated for the casting of DS and SX airfoils that operate in high-temperature, high-stress engine environments. This operation supplements our other ingot-making furnaces located in Portland, Oregon, and Minerva, Ohio, and our internal supply of nickel-based alloy for investment casting is managed through this group of facilities. The alloys produced also serve such diverse markets as medical, recreational and general industrial.
Forged Products
We are among the leading manufacturers of forged components for the aerospace and power generation markets. Forged Products’ aerospace and IGT sales are primarily derived from the same large engine customers served by the Investment Cast Products segment, with additional aerospace sales to manufacturers of landing gear and airframes. Therefore, the dynamics of the aerospace and IGT markets, as described in the Investment Cast Products section above, are virtually the same for Forged Products, with the exception that Forged Products' IGT sales are mainly for OEM new equipment. We also produce seamless pipe for coal-fired, industrial gas turbine and nuclear power plants, as well as downhole casings and clad pipe for severe service oil and gas environments. In addition, we manufacture high-performance, nickel-based alloys used to produce forged components for aerospace and non-aerospace applications in such markets as oil and gas, chemical processing and pollution control. Our titanium products are used to manufacture components for the commercial and military aerospace, power generation, energy, and industrial end markets. The Forged Products segment accounted for approximately 43 percent of our sales in fiscal 2015.
Forged Components
We manufacture forged components from titanium and nickel-based alloys for commercial and military aircraft engines and IGT power plants, including fan discs, compressor discs, turbine discs, seals, spacers, shafts, hubs and cases. Our airframe structural components are used on both commercial and military aircraft and include landing gear beams, bulkheads, wing structures, engine mounts, struts and tail flaps, and housings. We also produce a variety of mechanical and structural tubular products from steel and nickel alloys, primarily in the form of extruded seamless pipe, for domestic and international energy markets, which include coal, IGT and nuclear power plants and co-generation projects, as well as nickel-alloy casing and tubular products for exploration and production by the oil and gas industry. For naval defense applications, we supply forged components for propulsion systems on nuclear submarines and aircraft carriers, as well as forgings for pumps, valves and structural applications.
Our forged component operations, which employ nine different manufacturing processes, involve heating high-temperature nickel alloys, titanium or steel and then shaping the metal through pressing or extrusion, using hydraulic and

3


mechanical presses with capacities ranging up to 50,000 tons. The process employed is determined based on the raw materials and the product application. The nine manufacturing processes are summarized below:
Open-Die Forging—In this process, the metal is pressed between dies that never completely surround the metal, thus allowing it to be observed during the process. This manufacturing method is used to create relatively simple, preliminary shapes to be processed further by other die forging processes.
Closed-Die Forging—Closed-die forging involves pressing heated metal into shapes and sizes determined by machined impressions in specially prepared dies that completely surround the metal. This process enables the metal to flow more easily within the die cavity and thus produces forgings with superior surface finish, tighter tolerances and unique shapes, with enhanced repeatability of the part shape.
Hammer Forging—This form of closed-die forging uses multiple impact blows to shape a component between specially contoured dies. Forging hammers can be classified into two main types: single action and counterblow. Our counterblow hammers, which couple upper- and lower-ram movement to produce the impact forces required for large components, can offer improved near-net-shape capability compared to conventional press forging. Hammer forging is one of the oldest forging processes; however, computer-controlled technology has enabled the process to meet modern manufacturing requirements.
Conventional/Multi-Ram—The closed-die, multi-ram process enables us to produce complex forgings with multiple cavities, such as valve bodies, in a single heating and pressing cycle. Dies may be split on either a vertical or a horizontal plane, and shaped punches may be operated by side rams, piercing rams or both. This process also optimizes grain flow and uniformity of deformation and reduces machining requirements.
Isothermal Forging—Isothermal forging is a closed-die process in which the dies are heated to the same temperature as the metal being forged, typically in excess of 1,900 degrees Fahrenheit. Because the dies may oxidize at these elevated temperatures, this process is performed in a vacuum or inert gas atmosphere. Our isothermal press produces near-net-shape components, requiring less machining by our customers.
Extrusion—The extrusion process is capable of producing thick-wall, seamless pipe, with outside diameters of up to 48 inches and a wall thickness from 0.5 inches to 7 inches for applications in the power generation and oil and gas industries, including main steam lines, hot re-treat lines and other high-stress/high-temperature fluid transmission systems. Our 35,000-ton vertical extrusion press is one of the largest and most advanced in the world. In addition to solid metals, powdered metals can be compacted and extruded into forging billets with this press.
Ring Rolling—The radial ring-rolling process thins the wall thickness and thus enlarges the inside and outside diameter of a rough ring blank, which is generally made by piercing a solid piece of metal in an open or closed-die forging press. In the ring-rolling process, tonnage is applied to the wall of the blank between a mandrel on the inside diameter and a work-roll on the outside diameter. The outer work-roll rotates the ring and progressively reduces the wall thickness. In radial-axial ring rolling, two additional rollers apply tonnage on the end faces of the ring to control the ring height.
Flash Welding Rings—The process involves taking a shaped or rectangular cross-sectional bar and bending it into a hoop to form a ring. The ring is clamped in the flash-welding machine, which heats the ends of the bar to form a molten metal interface and then forges the ends together. After the ends are forged together, the expelled molten metal from the weld joint (flash) is ground down to match the parent material surface. Following the welding process, the rings are finished by rounding and flattening.
Tru-Form Process—Tru-Form is a near-net-shaped, cold-rolling process, which starts with flash-welded or seamless, rolled rings. The high-tonnage rolls of the Tru-Form process apply point contact to thin the wall thickness of a ring and grow the axial height. The rolling tools are programmed to follow profiles unique to the finished product definition. After the rolling process, additional forming operations are performed to transform the rolled ring into a finished near-net-shape contour.
We believe that we are the world leader in producing forged rotating components for use in jet aircraft engines. These parts are forged from billets (ingots converted in our cogging and extrusion presses) and from metal powders (primarily nickel alloys) that are produced, consolidated and extruded into billets entirely in our own facilities. In addition, we purchase billets from outside metal suppliers.
High-Performance Alloys
We believe that we are the world’s largest and most diversified producer of high-performance, nickel-based alloys, supplying more than 5,000 customers. Our alloys, which provide high-temperature strength and corrosion resistance, as well as toughness and strength in certain embrittling environments, are used to manufacture components required in the most technically demanding industries and applications. Power (primarily oil & gas) and commercial and military aerospace represent the largest markets served; other markets served include chemical and petrochemical processing, thermal processing, electrical and heating elements, and marine and welding applications.
Our alloying processes utilize electric arc, air induction and vacuum induction melting furnaces, while a few specialized alloys are made using a mechanical alloying process. Refining facilities include furnaces for argon/oxygen decarburization, vacuum arc remelting and electroslag remelting. Our major hot finishing processes include rotary forging, plate rolling, bar

4


rolling, press forging and extrusion of seamless tubulars and shapes. Cold finishing processes include cold rolled sheet and strip, tube and pipe pilgering, cold drawing of bar and wire, and cold drawing and rolling of pipe and tubulars. We produce nickel alloys in all standard mill forms from large ingots and billets to plate, sheet, strip, tubing, bar and wire, the latter of which includes core and filler wires for welding products. Our alloys are classified into unique families recognized worldwide and are sold under such trademarks as INCONEL®, INCOLOY®, MONEL®, NIMONIC®, UDIMET®, BRIGHTRAY® and NILO®.
Titanium Alloys
We are one of the world's leading producers of titanium melted and mill products. Our titanium products, which have uniquely high strength-to-weight and corrosion-resistance properties, are used to manufacture components for the commercial and military aerospace, power generation, energy and industrial end markets. Commercial aerospace represents our largest market, and new generations of fuel-efficient aircraft, including the Boeing 787 and Airbus A350, are increasing the content of titanium in airframe and engine applications.
As a fully integrated titanium component manufacturer, our breadth of production capabilities enable us to start with titanium-bearing sands and deliver a finished titanium shape to our end customer. Our titanium sponge production employs a vacuum distillation process and combines a titanium-containing feedstock ore with chlorine and petroleum coke to produce titanium tetrachloride, which is then reacted with magnesium to produce sponge. Melted products (ingot, electrode and slab) are produced by melting sponge, titanium scrap and alloying agents to produce various grades of titanium products. Mill products are produced by forging or rolling melt products into smaller gauge materials, including billet, bar, plate, sheet, strip and pipe. Our melting processes employ vacuum arc remelting (VAR) and electron-beam cold-hearth melting (EBCHM) single melt and EBCHM plus VAR; in addition, we have installed and are seeking qualification for plasma cold-hearth melting plus VAR capability. Our mill product processes include open die forging, vacuum annealing, rotary/radial forging, vacuum creep flattening and rolling mills. We also operate a global network of service centers that sell value-added and customized mill products.
Revert Management
We are the market leader in providing nickel superalloy and titanium revert management solutions for the aerospace, oil and gas, and energy markets. Revert includes metal chips, casting gates, bar ends, forging flash and other byproducts from forging, casting, fasteners and aerostructures manufacturing processes that can be re-melted and reused. Our infrastructure and capabilities create a closed loop system for the retention and reuse of internally-generated revert. We also provide metallurgical processing solutions and services worldwide for our use and for other companies that require the melting and processing of specialty alloys. Major markets include specialty alloy producers, foundries and other industries with special metallurgical requirements.
Airframe Products
We are a leading developer and manufacturer of highly engineered fasteners, fastener systems, aerostructures and precision components, primarily for critical aerospace applications. Much of our Airframe Products sales come from the same aerospace customer base served by our Investment Cast Products and Forged Products segments, with the exception that our aerostructures business is primarily driven by original equipment demand. In this regard, Airframe Products is subject to many of the same market forces as these other two segments. The balance of the segment’s sales is derived from construction, automotive, heavy truck and general industrial markets, including farm machinery, mining and construction equipment, shipbuilding, machine tools, medical equipment, appliances and recreation. The Airframe Products segment accounted for approximately 32 percent of our sales in fiscal 2015.
In general, fastener manufacturing begins with metal alloy wire or bar of various diameters, which is cut into fastener blanks of prescribed lengths, formed by highly engineered tools into complex head shapes and dimensional configurations, heat-treated to desired properties and then thread-rolled to meet exacting customer requirements.
Our aerospace fasteners and related components are manufactured from a variety of nickel, titanium, aluminum and steel alloys and are used on airframes, jet engines, aircraft wheels and brakes, landing gear assemblies, floor boards and hydraulic systems. They are found in critical areas of an aircraft, including wing-to-fuselage, stabilizer-to-fuselage and the engine-to-wing joints, as well as airfoil-to-disc and disc-to-shaft connections on a jet engine. These fasteners and related components are not only incorporated in new aircraft builds, but are also integrally involved in the maintenance and replacement cycle, particularly in aircraft engine and wheel and brake applications. The product line includes a variety of bolts, sleeved fastening systems, nuts, nut plates, latches, expandable diameter fasteners, quick release pins, hydraulic fittings, bushings, inserts, collars and other precision components, including but not limited to metallic and composite assemblies, and precision-machined components for airframe applications. While the fasteners and related components are predominantly produced to demanding

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customer designs, we continue to be active in developing trademarked alloys for applications requiring high strength, elevated temperature, corrosion resistance and/or lighter weight including AEREX®, MULTIPHASE®, MP35N® and MP159® high-temperature, nickel-based alloys.
We have also developed a variety of fasteners, fittings, related components and installation tools for use in aerospace and industrial applications requiring proven strength, close dimensional tolerances and high reliability. These technically-advanced, proprietary products are marketed under the brand names of AVILOK®, BALL-LOK®, CHERRYBUCK®, CHERRYMAX®, CHERRYLOCK®, E-NUT®, FLEXLOC®, FLEXMATE®, FORCEMATE®, FORCETEC®, GROMEX®, HI-LIFE®, MAKE FROM SOLIDTM, MAXIBOLT®, PERMALITE®, PERMASWAGE®, SLEEVbolt®, STA-LOK®, TELLEP® and TUKLOC®. We also hold licenses to use various, well-recognized trademarks and technology in the manufacture of our fasteners and related components. These licensed trademarks include HI-LITE®, HI-LOK®, HI-TIGUE®, TORX®, TORX-PLUS®, TAPTITE®, MORTORQ® and MAThread®.
Our aerostructures facilities manufacture complex components and structural assemblies, including three- to five-axis prismatic and long-bed machined aluminum and titanium components, complex sheet metal fabrications, and composite and metal-bonded components. In addition, we have the capability to machine castings in a range of sizes, provide full-service chemical processing and metal finishing, and to kit, assemble and integrate multiple component parts.
Product applications include wing and fuselage structural parts; engine pylon-related assemblies; engine lock-plates and bracketry; complete passenger and exit doors; major flap support and actuation structures; spars, skins, and bulkheads up to 60 meters; swaged control rods, cables, and actuation and flight control assemblies; and complex latches, quick release BALL-LOK® pins, and specialized fasteners.
The Airframe Products segment also includes businesses that produce refiner plates for use in the pulp and paper industry; grinder pumps and affiliated components for low-pressure sewer systems for residential and commercial applications; critical auxiliary equipment and gas monitoring systems utilized in the power generation industry; critical engineered fasteners and cold-formed parts for the automotive and general industrial market; and a broad range of thread-rolling dies, trimming dies, pins and steel and carbide forging tools for fastener production, principally for aerospace, automotive, and general industrial and other applications.
In fiscal 2015, we acquired two businesses in the Airframe Products segment, including Aerospace Dynamics International ("ADI"). ADI is one of the premier suppliers in the aerospace industry, operating a wide range of high-speed machining centers. ADI has developed particular expertise in large complex components, hard-metal machining, and critical assemblies. ADI is located in Valencia, California, and employs approximately 625 people.


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Sales and Distribution
We sell our complex metal components and products into three major market areas: aerospace, power, and general industrial and other. The percentage of sales to these markets is shown below for fiscal 2015, 2014 and 2013.

Our sales to the aerospace market of $6,961 million in fiscal 2015 increased 6 percent from $6,547 million in fiscal 2014. Sales to the aerospace market as a percentage of total net sales increased from 69 percent in fiscal 2014 to 70 percent in fiscal 2015, principally reflecting our strong positions on key growth commercial aerospace platforms, including the Boeing 787, Airbus A350 and the next-generation narrow-bodies. Our sales to the aerospace market of $6,547 million in fiscal 2014 increased 20 percent from $5,472 million in fiscal 2013. Sales to the aerospace market as a percentage of total net sales increased from 65 percent in fiscal 2013 to 69 percent in fiscal 2014, principally reflecting stable aircraft schedules and continued share gains on new airframe and engine development programs, and sales from acquired businesses.
Our sales of investment cast products and forged products are made through direct sales personnel located in each business operation and through field sales representatives located at U.S. and international locations near our major customers, as well as through distributors. Our airframe products and services are sold through a worldwide network of distributors and independent sales representatives and by a direct sales and marketing staff. Industrial metalworking tools and other metal products are sold by both internal sales forces and sales representatives in the U.S., Europe, Asia, Australia and Latin America. Due to the sophisticated nature of our products, our sales efforts require technical personnel to work closely with customers to identify and assist in the development of new and modified products and to provide other services that are necessary to obtain new and repeat orders.
For information on revenue from external customers, profit or loss and total assets for each segment, refer to Part II, Item 8. Financial Statements and Supplementary Data, Note 19—Segment information.


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Major Customers
Net direct sales to General Electric Company were approximately 13 percent, 13 percent and 15 percent of total sales in fiscal 2015, 2014 and 2013, respectively, as follows:
 
  
2015
 
2014
 
2013
Investment Cast Products
$
828

 
$
736

 
$
697

Forged Products
435

 
412

 
540

Airframe Products
36

 
66

 
39

 
$
1,299

 
$
1,214

 
$
1,276

 
 
 
 
 
 
No other customer directly accounted for more than 10 percent of total sales; however, The Boeing Company, Airbus, Rolls-Royce plc, United Technologies Corporation, and Spirit AeroSystems are also considered key customers, and the loss of their business could have a material adverse effect on our financial results.

Backlog
The backlog of unfilled orders believed to be firm at the end of each of our last three fiscal years was $8.1 billion as of March 29, 2015, $7.3 billion as of March 30, 2014, and $6.8 billion as of March 31, 2013. The majority of the backlog is for sales to aerospace and power market customers in the Investment Cast Products, Forged Products and Airframe Products segments. The increase in backlog during fiscal 2015 reflects sales of machined parts mainly for the commercial aerospace market. The increase in backlog during fiscal 2014 reflects the continued growth in commercial aerospace and power markets, including interconnect pipe. Approximately 72 percent of our backlog is expected to be filled within the 2016 fiscal year.
The majority of sales to customers are made on individual purchase orders generated from long-term agreements. Most of our orders are subject to termination by the customer upon payment of the cost of work in process, plus a related profit factor. We typically do not experience significant order cancellations, although we periodically receive requests for delays in delivery schedules.

Competition
We are subject to substantial competition in all of the markets we serve. Components and products similar to those we make can be produced by competitors using either the same types of manufacturing processes or other forms of manufacturing. Although we believe our manufacturing processes, technology and experience provide advantages to our customers, such as high quality, competitive prices and physical properties that often meet more stringent demands, alternative forms of manufacturing can be used to produce many of the components and products we make. Despite intense competition, we believe we are the number one or two supplier in most of our principal markets. Several factors, including long-standing customer relationships, technical expertise, state-of-the-art facilities and dedicated employees, aid us in maintaining our competitive advantages.
In the Investment Cast Products segment, our principal competitor is Alcoa Inc. ("Alcoa"). Alcoa produces superalloy, titanium, stainless steel and aluminum investment castings principally for the aerospace and IGT markets. We believe that Alcoa is capable of producing investment castings comparable to all but the largest and most complex of our structural investment castings. We also believe Alcoa has the financial and technical resources to produce structural castings as large and complex as those produced by us, should they decide to do so. In addition, Allegheny Technologies, Inc. ("ATI"), manufactures large titanium investment castings for jet engine and airframe applications. Many other companies throughout the world also produce superalloy, titanium, stainless steel and aluminum investment castings, and some of these companies currently compete with us in the aerospace and other markets. Others are capable of competing with us if they choose to do so.
In the Forged Products segment, our largest competitors are ATI, Aubert & Duval SAS, and Otto Fuchs KG for aerospace turbine products, Alcoa for aerospace structural products, Vallourec SA and Nippon Steel Sumitomo Metal Corporation for energy products and ATI, Carpenter Technology Corporation, and ThyssenKrupp AG for nickel-based alloys and superalloys. We also face increased competition from international companies as customers seek lower cost sources of supply.
Our principal competitors in the aerospace titanium market are ATI and RTI International Metals, Inc. ("RTI"), both based in the U.S., and Verkhnaya Salda Metallurgical Production Organization ("VSMPO"), based in Russia. UNITI (a joint venture between ATI and VSMPO), RTI and certain Japanese producers are our principal competitors in the industrial and emerging markets.

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International competition in the forging and casting processes may also increase in the future as a result of strategic alliances among aircraft prime contractors and overseas companies, particularly where “offset” or “local content” requirements create purchase obligations with respect to products manufactured in or directed to a particular country. Competition is often intense among the companies currently involved in the industry. We continue to strive to maintain competitive advantages with high-quality products, low-cost manufacturing, excellent customer service and expertise in engineering and production.
Our Airframe Products operations compete with a large number of companies based primarily on technology, price, service, product quality, product performance and delivery performance. Of these companies, our largest competitors are Alcoa, LISI, and TransDigm Group, Inc., in fastener products, and GKN PLC, Triumph Group, Inc., Mitsubishi Heavy Industries, Ltd., Kawasaki Heavy Industries, Ltd., and the internal machining operations of certain of our OEM customers in aerostructures products. We believe that we maintain our strong market position through our high-quality product performance, service to our customers and competitive synergies with other PCC business units.

Research and Development
We have departments involved in research and development in all three of our reportable segments. The research and development effort at these operations is primarily directed at the technical aspects of developing new and improved manufacturing processes. In addition, a substantial amount of our technological capability is the result of engineering work and experimentation performed on the shop floor in connection with process development and production of new parts. This engineering work and experimentation are charged to the cost of production.

Employees
At March 29, 2015, we had approximately 30,100 employees, including nearly 7,750 employees in the Investment Cast Products segment, approximately 9,450 employees in the Forged Products segment, approximately 12,550 employees in the Airframe Products segment, approximately 150 employees in corporate functions, and approximately 200 employees in discontinued operations. Approximately 22 percent of our employees are affiliated with unions or covered by collective bargaining agreements. We expect to negotiate 13 collective bargaining agreements affecting approximately 7 percent of the workforce during fiscal 2016. Management believes that labor relations in the Company have generally been satisfactory.

Patents and Trademarks
From time to time, we seek U.S. and foreign patent protection on certain of our processes and products. We have also federally registered several of our trademarks in the U.S. and foreign countries. We do not view patents or trademarks as materially important to our business as a whole. We also have rights and obligations under various license agreements. We receive no significant royalty income from patents.

Materials & Supplies
We use a number of raw materials in our products, including certain metals such as nickel, titanium, cobalt, tantalum and molybdenum, which are found in only a few parts of the world. These metals are required for the alloys used or manufactured in our Investment Cast, Forged and Airframe Product segments. The availability and costs of these metals may be influenced by private or governmental cartels, changes in world politics, labor relations between the metal producers and their work forces, and/or unstable governments in exporting nations and inflation. Supplies of the tool-grade steel we use may similarly be subject to variations in availability and cost. We have escalation clauses for nickel and other metals in certain of our long-term contracts with major customers, and we 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 shipment. We also enter into long-term supply agreements to fix the purchase price of strategic raw materials. Shortages of and price increases for certain raw materials we use have occurred in the past and may occur in the future. Future shortages or price fluctuations in raw materials could have a material adverse effect on us.

Government Regulations
Certain 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. 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.


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International Operations
We purchase products from and supply products to businesses located outside the U.S. We have also been expanding our international activities during the past several years, primarily through acquisitions and the development of overseas subsidiaries. This expansion is part of our strategy to acquire and develop businesses that complement our core competencies, provide low-cost manufacturing, have strong growth prospects and maintain leading positions in their respective market niches. Certain risks are inherent in international operations, including the risk of government-financed competition, changes in trade policies, tariff regulations, the relative stability of certain foreign currencies and difficulties in obtaining U.S. export and import licenses. Information with respect to sales and assets by geographic location is included in Part II, Item 8. Financial Statements and Supplementary Data, Note 19—Segment information.

Environmental Compliance
We are subject to various federal, state and foreign environmental laws concerning, among other things, water discharges, air emissions, waste management, toxic use reduction and environmental cleanup. Environmental laws and regulations continue to evolve, and it is likely we will be 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. It is also likely that we will 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 are 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. At March 29, 2015, we had accrued environmental liabilities of approximately $448 million. We believe these liabilities are adequate to cover the cost of remedial measures that may eventually be required by environmental authorities with respect to known environmental matters. Our liabilities represent our best estimate of probable future obligations for the investigation and remediation of known contaminated sites. The liabilities include potential costs associated with asserted and unasserted claims. Our actual future expenditures, however, relating to compliance and cleanup of environmental conditions at our properties cannot be conclusively determined. The estimate of our environmental costs is 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. Further, 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 have identified vary across the spectrum, many of our sites could be considered at an early stage of the investigation and remediation process. Therefore, our cost estimates, and our 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 an estimated 41 years.
We have been named as a potentially responsible party (“PRP”) at sites identified by the Environmental Protection Agency (“EPA”) and state regulatory agencies for investigation and remediation under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and similar state statutes. In the environmental remediation context, PRPs may be subject to an allocation process to assess liability, and therefore the Company 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 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 for contributing to the cost of cleanup. We are a party to various cost-sharing arrangements with other PRPs at certain sites. Our estimates of current liabilities factor in these cost-sharing arrangements and an assessment of the likelihood that such parties will fulfill their obligations at such sites. In the unlikely event that we are required to fully fund the remediation of a site, the statutory framework would allow us to pursue rights of contribution from other PRPs. We are identified as a PRP at the following federally designated Superfund sites: Boarhead Farms, Bridgeton, Pennsylvania; Operating Industries, Monterey Park, California; Casmalia Resources Site, Casmalia, California; Pasco Sanitary Landfill, Pasco, Washington; Quanta Resources Corp., Edgewater, New Jersey; and Peterson-Puritan Site, Cumberland, Rhode Island. Generally, these Superfund sites are mature, and almost all of the sites are in the remedial implementation phase and, as a consequence, are subject to less

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uncertainty than newly discovered sites. These Superfund sites constitute approximately $2 million, or less than 1 percent, of our estimated environmental liabilities.
We have notified our insurers of potential environmental cleanup liabilities at various facilities, including the Superfund sites identified above, and have asserted that we are entitled to recover the defense and indemnity costs incurred, and to be incurred, under certain historic insurance policies. Our accruals include our best estimate of all probable costs, without reduction for anticipated recovery from insurance or third parties unless collection is probable. We have also asserted indemnity claims against third-parties for certain sites, and we expect to recover a portion of our losses with respect to these sites.
The Financial Accounting Standards Board (“FASB”) issued guidance on asset retirement and environmental obligations that clarifies the term "conditional asset retirement obligation" and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. Asset retirement obligations covered by this guidance include those for which an entity has an obligation to perform an asset retirement activity. However, the timing or method of settling the obligation are conditional on a future event that may not be within the control of the entity. This guidance also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation.
In accordance with the asset retirement and environmental obligations guidance, we record all known asset retirement obligations for which the liability can be reasonably estimated. Currently, we have identified known asset retirement obligations associated with environmental contamination at several of our manufacturing facilities and have accrued approximately $5 million to satisfy these asset retirement obligations. However, we have not recognized a liability for an asset retirement obligation at two of our manufacturing facilities, because the fair value of the retirement obligation at these sites cannot be reasonably estimated since the settlement date is unknown at this time. The settlement date is unknown because the retirement obligation (remediation of contamination) of these sites is not required until production ceases, and we have no current or future plans to cease production. These asset retirement obligations, when estimable, are not expected to have a material adverse effect on our consolidated financial position, results of operations, cash flows or business.

Forward-looking Statements
Information included within this Form 10-K 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, and our ability to accelerate production levels to meet order increases on new or existing programs in a timely fashion; the availability and cost of energy, raw materials, supplies, and insurance; the cost of pension and postretirement medical benefits; equipment failures; product liability claims; changes in inventory valuations; 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; fluctuations in oil & gas prices and production; the impact of adverse weather conditions or natural disasters; the availability and cost of financing; and the 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.

Available Information
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, proxy statement, current reports on Form 8-K and amendments to these reports filed with the Securities and Exchange Commission, as well as the annual report to shareholders, quarterly earnings releases, the Audit Committee Charter, the Nominating and Corporate Governance Committee Charter, the Compensation Committee Charter, Corporate Governance Guidelines and the Code of Conduct may be received free of charge by calling Investor Relations at (503) 946-4850 or sending an email to info@precastcorp.com. This information may also be downloaded from the PCC Corporate Center at www.precast.com.
 

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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. 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 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 70 percent of our total sales in fiscal 2015. Our sales to the power market constituted 17 percent of our total sales in fiscal 2015.
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.
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 oil and gas, automotive, chemical and petrochemical, medical, industrial process, and other general industrial markets. Each of these markets is cyclical in nature, and the market for oil and gas products can be particularly volatile. 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, which for the oil and gas market include the levels of exploration, development, and production activity of oil and natural gas companies and the trends in oil and natural gas prices. 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, Spirit AeroSystems, and The Boeing Company. General Electric accounted for approximately 13 percent of our total sales for fiscal 2015. No other customer directly accounted for more than 10 percent of total sales; however, Boeing, Airbus, Rolls Royce, Spirit AeroSystems, and United Technologies are also considered key customers. A financial hardship experienced by any one of these key customers,

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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 10 percent of our fiscal 2015 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, Airbus A330neo and F-35 programs. We are currently under contract to supply components for a number of new commercial, general aviation and military aircraft programs. These new programs as well as certain existing aircraft programs are scheduled to have production increases over the next several years. Our failure to accelerate production levels to timely match these order increases could have a material adverse effect on our business. 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 new aircraft programs or to the scheduled production increases for existing aircraft programs, could also 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 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 (either to us or our customers) or price fluctuations in raw materials could result in decreased sales or 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

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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 environmental permits required for our operations. 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, a majority 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 an estimated 41 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. 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 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 2015, approximately 17 percent of our total sales were attributable to our non-U.S.

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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. 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 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, 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, our access to short-term commercial paper markets may be restricted, 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, or could otherwise have a material adverse effect on our business.
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.
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.

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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 contractual liability 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, tolerances and delivery schedules using complex manufacturing processes. If we fail to meet the contractual requirements for a product we may be subject to contractual liability costs and claims. Contractual liability costs are generally not insured.
Our inventories could be subject to significant valuation changes due to our use of the last-in, first-out ("LIFO") inventory valuation method.
The cost for the majority of our inventories is determined on a LIFO basis. Under the LIFO valuation method for inventories, changes in the cost inputs to produce inventories, including raw materials, labor and fixed costs, are recognized in cost of goods sold in the current period. Accordingly, the carrying value of our LIFO inventories may be higher or lower than current replacement costs for such inventory. When LIFO cost is greater than current cost, there is an increased likelihood that our inventories could be subject to write-downs to market value. As of March 29, 2015, the LIFO cost of our inventories exceeds the current cost by $679 million. The key drivers that are causing our LIFO costs to exceed current costs are discussed in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading of “Critical accounting policies” and the sub-heading “Valuation of inventories.” If actual demand is significantly less than the future demand that we have projected, inventory write-downs may be required, which could have a material adverse effect on the value of our inventories and reported operating results.
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:

16


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
increases in corporate tax rates to finance government spending programs.

ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.

ITEM 2.
PROPERTIES    
Our manufacturing plants and administrative offices, along with certain information concerning the products and facilities are described below:
 
 
 
 
Building Space (sq. ft.)
Division
No. of Facilities
 
Leased
 
Owned
 
Total
Executive & Corporate Offices
 
 
 
 
 
 
 
Domestic
1

 

 
42,118

 
42,118

International
1

 
1,312

 

 
1,312

Investment Cast Products
 
 
 
 
 
 

Domestic
50

 
783,520

 
2,519,127

 
3,302,647

International
4

 

 
404,856

 
404,856

Forged Products
 
 
 
 
 
 

Domestic
87

 
2,481,706

 
9,623,890

 
12,105,596

International
33

 
998,068

 
2,083,465

 
3,081,533

Airframe Products
 
 
 
 
 
 

Domestic
79

 
1,753,133

 
3,871,063

 
5,624,196

International
28

 
596,066

 
1,092,836

 
1,688,902

Discontinued Operations
 
 
 
 
 
 

Domestic
2

 

 
120,200

 
120,200

International
4

 
295,576

 
44,882

 
340,458

Total Company
 
 
 
 
 
 

Domestic
219

 
5,018,359

 
16,176,398

 
21,194,757

International
70

 
1,891,022

 
3,626,039

 
5,517,061

Total
289

 
6,909,381

 
19,802,437

 
26,711,818

 
 
 
 
 
 
 
 

We believe our principal properties include facilities suitable and adequate for our present needs for the manufacture of our products; see Item 7. Management’s Discussion and Analysis.
 
ITEM 3.
LEGAL PROCEEDINGS
For a general description of environmental matters, see Item 1. Business—Environmental Compliance.
As of March 29, 2015, there were approximately 117 lawsuits pending against the Company alleging personal injury as the result of exposure to particulates, including asbestos, integrated into our premises or processes or into certain historical products.  It is frequently not possible at the outset of a case to determine which of the plaintiffs actually will pursue a claim against the Company.  Typically, that can only be determined through discovery after a case has been filed.  Thus, in a case involving multiple plaintiffs, unless otherwise expressed in the pleadings, the Company accounts for the lawsuit as one claim against it.  Provided below is a chart showing the number of new claims filed (as described above), the number of claims disposed of (settled or otherwise dismissed) and the approximate dollar amount paid by or on behalf of (including through insurance) the Company in settlement of these claims:
 

17


Fiscal
2015
 
2014
New Claims Filed
44

 
42

Claims Disposed Of
21

 
12

Dollars Paid in Settlement (in millions)
$

 
$

 
 
 
 
The Company considers that all such claims are tort claims while noting that some claims, such as those filed in West Virginia, were historically common law “employer liability” cases and are now based on a statutory definition of requisite intent.
The particulates in question are no longer incorporated into our products, and we have implemented safety protocols to reduce exposure to remaining particulates in the workplace. Based on the information available to us at the date of filing of this report, we believe, based on our review of the facts and law, that the potential exposure from the resolution of any or all of these matters will not have a material adverse effect on our consolidated financial position, results of operations, cash flows or business. 
Various claims and lawsuits arising during the normal course of business are pending against us. In the opinion of management, the outcome of these lawsuits will not have a material adverse effect on our consolidated financial position, results of operations, cash flows or business.

ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

ITEM 4A.
EXECUTIVE OFFICERS OF THE REGISTRANT (a) 
 
Name
Officer Since
Age
Position Held With the Registrant
Mark Donegan
(b) 1992 
58
Chairman and Chief Executive Officer
Shawn R. Hagel
(c) 1997 
49
Executive Vice President, Chief Financial Officer and Assistant Secretary
Ruth A. Beyer
(d) 2013 
59
Senior Vice President, General Counsel and Secretary
Steven G. Hackett
(e) 2004
57
Executive Vice President
Andrew V. Masterman
(f) 2012
47
Executive Vice President and President - Wyman-Gordon
James R. Pieron
(g) 2015
60
Senior Vice President and President - TIMET and Special Metals
Alan J. Power
(h) 2015
52
Senior Vice President and President - Airframe Products
Kirk G. Pulley
(i)  2004
46
Vice President - Strategic Planning and Corporate Development
_________________________
(a)
The above information is reported as of May 21, 2015. The officers serve for a term of one year and until their successors are elected. Unless otherwise indicated, all positions have been held for the last five years.
(b)
Elected Chairman in 2003 and Chief Executive Officer in 2002. Previously was elected Executive Vice President in 1992. Named President - Wyman-Gordon in 1999. Previously served as President - PCC Structurals.
(c)
Elected Executive Vice President in 2012 and Chief Financial Officer and Assistant Secretary in 2008. Previously was elected Vice President and Corporate Controller in 2000.
(d)
Elected Senior Vice President, General Counsel and Secretary in 2013. Prior to joining PCC, she was a Partner at Stoel Rives LLP.
(e)
Elected Executive Vice President in 2013 and previously served as Senior Vice President and President of TIMET. Prior to that he served in various roles as Senior Vice President, New Business Integration; Executive Vice President and President of Investment Cast Products; Executive Vice President and President of Fastener Products; and Vice President in charge of PCC Structurals’ Small Structural Business Operations.
(f)
Elected Executive Vice President and President - Wyman-Gordon in May 2015. Previously elected Executive Vice President and President - Airframe Products in November 2013. He became Senior Vice President in August 2013 and President - PCC Fastener Products and a PCC Vice President in April 2012. Prior to joining PCC, he served as President & CEO of ESAB North America.
(g)
Elected Senior Vice President and President - TIMET and Special Metals in May 2015. He became President of TIMET in October 2013 and prior to that served as TIMET’s Executive Vice President of Global Operations.
(h)
Elected Senior Vice President and President - Airframe Products in May 2015. Prior to joining PCC, he was President and Chief Operating Officer from 2009 to 2013 of the Industrial & Automotive and Gates Corporation divisions of Tomkins plc.
(i)
Elected Vice President - Strategic Planning and Corporate Development in 2004. Prior to joining PCC, he was a Vice President in investment banking with Goldman Sachs & Co.




18


PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES    
As of March 29, 2015, there were 793 shareholders of record of our common stock. The principal market for our common stock is the New York Stock Exchange, where it trades under the symbol PCP. For information concerning the quarterly high and low sales prices of PCC common stock and dividend data, refer to the Quarterly Financial Information table in Item 8. Financial Statements and Supplementary Data. We expect to continue to pay quarterly cash dividends, subject to our earnings, financial condition and other factors.
Return to Shareholders Performance Graph
The following line graph provides a comparison of the annual percentage change in the Company’s cumulative total shareholder return on its common stock to the cumulative total return of the S&P 500 Index and the S&P 500 Aerospace and Defense Index. The comparison assumes that $100 was invested on March 31, 2010 in PCC common stock and in each of the foregoing indices and, in each case, assumes the reinvestment of dividends.


MEASUREMENT PERIOD
(by fiscal year)
 
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015
S&P 500
100.00

 
116.50

 
125.82

 
143.39

 
173.35

 
196.29

S&P 500 Aerospace & Defense
100.00

 
111.27

 
115.76

 
134.28

 
189.54

 
218.50

Precision Castparts Corp.
100.00

 
120.94

 
139.87

 
153.51

 
200.53

 
171.95



19


Issuer Purchases of Equity Securities
The following table provides information about purchases of our common stock during the quarter ended March 29, 2015:

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 that May Yet Be Purchased Under the Plans or Programs (1)           (in millions)
12/29/14-2/1/15
2,339,368

 
$
208.29

 
8,670,835

 
$
556

2/2/15-3/1/15
863,798

 
$
212.30

 
9,534,633

 
$
372

3/2/15-3/29/15
277,461

 
$
209.09

 
9,812,094

 
$
314

Total
3,480,627

 
$
209.35

 
9,812,094

 
$
314

 
 
 
 
 
 
 
 
    
(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. On August 13, 2014, the Board of Directors approved an additional $1.0 billion, effective immediately and continuing through September 30, 2016.

*
On May 13, 2015, the Board of Directors approved a $2.0 billion expansion to the Company's existing program to repurchase shares of the Company’s common stock, effective immediately and continuing through June 30, 2017. The Company intends to repurchase outstanding shares from time to time in the open market, subject to market conditions.

20


ITEM 6.
SELECTED FINANCIAL DATA
Five-Year Summary of Selected Financial Data
 
(Unaudited)
(In millions, except employee, shareholder and per share data)
 
 
 
 
 
 
 
 
Fiscal
2015
 
2014
 
2013
 
2012
 
2011
Net sales
$
10,005

 
$
9,533

 
$
8,347

 
$
7,202

 
$
6,209

Net income
$
1,533

 
$
1,784

 
$
1,430

 
$
1,226

 
$
1,015

Net income attributable to PCC shareholders:
 
 
 
 
 
 
 
 
 
Continuing operations
$
1,545

 
$
1,752

 
$
1,431

 
$
1,230

 
$
1,009

Net income attributable to PCC shareholders
$
1,530

 
$
1,777

 
$
1,427

 
$
1,224

 
$
1,014

Return on sales from continuing operations
15.4
%
 
18.4
%
 
17.1
%
 
17.1
%
 
16.3
%
Return on beginning shareholders’ equity from continuing operations
13.5
%
 
17.9
%
 
17.1
%
 
17.2
%
 
17.1
%
Net income per common share attributable to PCC (basic):
 
 
 
 
 
 
 
 
 
Continuing operations
$
10.83

 
$
12.03

 
$
9.82

 
$
8.52

 
$
7.07

Net income
$
10.73

 
$
12.20

 
$
9.79

 
$
8.48

 
$
7.10

Net income per common share attributable to PCC (diluted):
 
 
 
 
 
 
 
 
 
Continuing operations
$
10.77

 
$
11.95

 
$
9.75

 
$
8.45

 
$
7.01

Net income
$
10.66

 
$
12.12

 
$
9.72

 
$
8.41

 
$
7.04

Weighted average shares of common stock outstanding
 
 
 
 
 
 
 
 
 
Basic
142.6

 
145.6

 
145.7

 
144.4

 
142.7

Diluted
143.5

 
146.6

 
146.7

 
145.6

 
143.9

Cash dividends declared per common share
$
0.12

 
$
0.12

 
$
0.12

 
$
0.12

 
$
0.12

Working capital
$
3,145

 
$
3,899

 
$
3,368

 
$
2,715

 
$
2,709

Total assets
$
19,428

 
$
18,586

 
$
16,896

 
$
10,559

 
$
8,956

Total debt(1)
$
4,587

 
$
3,572

 
$
3,807

 
$
208

 
$
237

Total equity
$
10,957

 
$
11,413

 
$
9,804

 
$
8,365

 
$
7,164

Total debt as a percent of total debt and equity
29.5
%
 
23.8
%
 
28.0
%
 
2.4
%
 
3.2
%
Book value per share
$
79.05

 
$
78.66

 
$
67.06

 
$
57.57

 
$
49.85

Capital expenditures(1)
$
457

 
$
355

 
$
323

 
$
194

 
$
121

Number of employees(1)
30,106

 
29,085

 
28,510

 
21,480

 
18,308

Number of shareholders of record
793

 
848

 
933

 
1,068

 
1,206

 
 
 
 
 
 
 
 
 
 
____________________________________________
(1)
Includes discontinued operations



21


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in millions, except per share data)

Business overview
Fiscal 2015 presented Precision Castparts Corp. ("PCC") with a number of opportunities as well as challenges. We continued to be well-positioned in the core commercial aerospace and industrial gas turbine ("IGT") markets, which provided us with sales and earnings growth throughout the fiscal year. However, beginning late in the third quarter, we experienced demand softness in our oil & gas and pipe markets, with customers deferring decisions on large projects and distribution demand falling almost to zero. Despite these dynamics, we believe the combination of our strong technical capabilities and improved cost structure places us in a solid position to serve our customers now and when increased demand returns.
In the first quarter of fiscal 2015, we saw both solid operating results and a significant shift in customer order dynamics in our major end markets. Commercial aerospace activity was the biggest driver of growth as base aircraft production continued. We also saw an upward shift in orders from our customers in power markets. Continued expansion in interconnect pipe demand provided further upside. In the oil & gas market, we won sizeable new orders that leveraged our unique capabilities.
We continued to grow total year-over-year sales and earnings in the second quarter of fiscal 2015, demonstrating solid leverage of our strong market share position in primary end markets. Commercial aerospace sales continued a steady upward trajectory fueled by the segment's strong presence on all major aircraft/engine platforms, both in production and in development. IGT orders also steadily improved as a result of solid positions on upgrade programs, higher content on new production turbines and higher spares requirements.
The third quarter of fiscal 2015 included some clear achievements, but we also faced some real challenges in several of our end markets. On the plus side, we made solid progress on our production and development aircraft and engine programs. In addition, our growth in IGT outpaced the market, given our higher content on new and upgrade platforms, and provided a steady supply of spares to the installed base. On the other hand, the third quarter also presented us with rapid declines in demand from our oil & gas customers and continued destocking from one of our large aerospace customers.
We continued to face sizable challenges in our oil & gas and pipe markets in the fourth quarter of fiscal 2015, which had a negative impact on our financial results. In response, we took multiple actions to adjust our operations to the realities of the demand environment by right-sizing our operations, evaluating our inventory positions, and making decisions to exit underperforming investments. We recognized $127 million in pre-tax charges related to asset and inventory valuation adjustments and $8 million related to restructuring activities. In addition, we recognized $174 million, pre-tax, of impairment charges primarily associated with the company’s ownership interest in Yangzhou Chengde Steel Tube Co., Ltd. (Chengde).
Our capital allocation framework supports a multi-pronged strategy that prioritizes internal investment and value-creating acquisitions, with excess cash returned to shareholders in the form of share repurchases once the first two criteria are met. During fiscal 2015, we acquired two businesses for a total of approximately $637 million. The larger acquisition, Aerospace Dynamics International, broadens our large gantry capabilities and provides us with significant additional share on the Airbus A350 program. Subsequent to year-end, we acquired two small businesses, which expand our vertical integration capabilities. We continue to be very active on the acquisition front, with several potential opportunities in front of us. We delivered on our share repurchase program during fiscal 2015, returning $1.6 billion of cash to shareholders. During May 2015, the PCC Board of Directors added an additional $2.0 billion to our share repurchase authorization, which we expect to complete in the next 12 to 18 months, subject to market conditions, with the objective of lowering our share count over time. We remain committed to our value-creating capital deployment strategy, focused on growing the business organically and through acquisitions and on returning excess cash to shareholders via share repurchases.

22


 
Fiscal Year
 
% Increase/(Decrease)
  
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Net sales
$
10,005

 
$
9,533

 
$
8,347

 
5
 %
 
14
%
Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of goods sold
6,752

 
6,253

 
5,654

 
8
 %
 
11
%
Selling and administrative expenses
641

 
621

 
534

 
3
 %
 
16
%
Restructuring expense
8

 

 

 
100
 %
 
%
Interest expense, net
65

 
71

 
31

 
(8
)%
 
129
%
Total costs and expenses
7,466

 
6,945

 
6,219

 
 
 
 
Income before income tax expense and equity in earnings of unconsolidated affiliates
2,539

 
2,588

 
2,128

 
(2
)%
 
22
%
Income tax expense
(816
)
 
(830
)
 
(695
)
 
(2
)%
 
19
%
Equity in (loss) earnings of unconsolidated affiliates
(175
)
 
1

 
1

 
(17,600
)%
 
%
Net income from continuing operations
1,548

 
1,759

 
1,434

 
(12
)%
 
23
%
Net (loss) income from discontinued operations
(15
)
 
25

 
(4
)
 
(160
)%
 
725
%
Net income
1,533

 
1,784

 
1,430

 
(14
)%
 
25
%
Net income attributable to noncontrolling interest
(3
)
 
(7
)
 
(3
)
 
(57
)%
 
133
%
Net income attributable to PCC
$
1,530

 
$
1,777

 
$
1,427

 
(14
)%
 
25
%
Net income per common share attributable to PCC shareholders (basic):
 
 
 
 
 
 
 
 
 
Net income per share from continuing operations
$
10.83

 
$
12.03

 
$
9.82

 
(10
)%
 
23
%
Net (loss) income per share from discontinued operations
(0.10
)
 
0.17

 
(0.03
)
 
(159
)%
 
667
%
Net income per share (basic)
$
10.73

 
$
12.20

 
$
9.79

 
(12
)%
 
25
%
Net income per common share attributable to PCC shareholders (diluted):
 
 
 
 
 
 
 
 
 
Net income per share from continuing operations
$
10.77

 
$
11.95

 
$
9.75

 
(10
)%
 
23
%
Net (loss) income per share from discontinued operations
(0.11
)
 
0.17

 
(0.03
)
 
(165
)%
 
667
%
Net income per share (diluted)
$
10.66

 
$
12.12

 
$
9.72

 
(12
)%
 
25
%
 
 
 
 
 
 
 
 
 
 
 
Fiscal Year
 
% Increase/(Decrease)
Sales by Market
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Aerospace
$
6,961

 
$
6,547

 
$
5,472

 
6
 %
 
20
%
% of total
70
%
 
69
%
 
65
%
 
 
 
 
Power
1,722

 
1,668

 
1,633

 
3
 %
 
2
%
% of total
17
%
 
17
%
 
20
%
 
 
 
 
General Industrial & Other
1,322

 
1,318

 
1,242

 
 %
 
6
%
% of total
13
%
 
14
%
 
15
%
 
 
 
 
Total Sales
$
10,005

 
$
9,533

 
$
8,347

 
5
 %
 
14
%
% of total
100
%
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 

23


Average market price of key metals
 (per pound)
Fiscal Year
 
Increase/(Decrease)
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
  
  
 
  
 
  
 
$        
 
%        
 
$        
 
%        
Nickel
$
7.67

 
$
6.54

 
$
7.71

 
$
1.13

 
17
%
 
$
(1.17
)
 
(15
)%
London Metals Exchange (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Titanium
$
2.97

 
$
1.98

 
$
2.82

 
$
0.99

 
50
%
 
$
(0.84
)
 
(30
)%
Ti 6-4 bulk, Metalprices.com
 
 
 
 
 
 
 
 
 
 
 
 
 
Cobalt
$
14.37

 
$
13.63

 
$
13.33

 
$
0.74

 
5
%
 
$
0.30

 
2
 %
Metal Bulletin COFM.8 Index (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_________________________
(1)
Source: Bloomberg

Fiscal 2015 compared with fiscal 2014
Total sales for fiscal 2015 were $10,005 million, an increase of $472 million, or 5 percent, from fiscal 2014 sales of $9,533 million. Fiscal 2015 includes the contribution from seven businesses acquired after the beginning of fiscal 2014 and two businesses acquired in fiscal 2015. These acquisitions contributed more than $350 million of additional sales in fiscal 2015 compared to fiscal 2014. Excluding the impact of acquisitions and metal pricing, organic sales growth on a constant currency basis year-over-year was approximately 2 percent, despite the continuing impact of an aerospace customer's inventory actions and challenges in oil & gas and pipe markets. Lower market-driven pricing of raw material inputs negatively impacted external sales year-over-year as raw material input prices were approximately $50 million lower than a year ago. The cost of rutile (a primary raw material in titanium production) decreased approximately 12 percent; purchased titanium sponge decreased approximately 13 percent; and titanium revert decreased approximately 8 percent over the prior year. Although the market price of titanium 6-4 bulk increased 50 percent, as reported on metalprices.com, compared to the same period last year, our actual titanium prices decreased due to buy forwards and order lead times. Contractual material pass-through pricing increased sales by approximately $239 million in fiscal 2015 versus approximately $265 million in fiscal 2014, a decrease of $26 million. Contractual material pass-through pricing adjustments are calculated based on market prices such as those shown in the above table in trailing periods from one to twelve months.
Including the impact of acquisitions, aerospace sales increased approximately $414 million, or 6 percent, over fiscal 2014, primarily within our Airframe Products segment. Commercial aircraft production rates continue to drive steady demand for airframe and engine components. Commercial and regional/business jet aerospace sales improved, while military demand declined. Aerospace sales increased from 69 percent of total sales in fiscal 2014 to 70 percent of total sales in fiscal 2015. Sales to our power markets increased approximately $54 million, or 3 percent, over the prior year, primarily as a result of further growth in IGT sales throughout the year and seamless interconnect pipe sales in the first half of fiscal 2015. IGT orders have steadily increased as a result of higher content on new and upgrade platforms and higher spares requirements. Partially offsetting this growth was declining demand from our oil & gas customers, particularly over the last half of the year. Sales to our power markets remained constant at 17 percent of total sales in both fiscal 2014 and 2015. General industrial and other sales were essentially flat when compared to the prior year, primarily due to higher sales to the industrial processing and automotive sectors, offset by lower sales to the mining and construction sectors. General industrial and other sales decreased from 14 percent of total sales in fiscal 2014 to 13 percent of total sales in fiscal 2015.
Cost of goods sold was $6,752 million, or 67 percent of sales, in fiscal 2015, compared to $6,253 million, or 66 percent of sales, in fiscal 2014. Cost of goods sold was negatively impacted by inventory valuation adjustments and other asset impairment charges recognized during the fourth quarter of fiscal 2015 totaling $127 million. Contractual material pass-through pricing diluted gross margin by 0.8 percentage points in fiscal 2015 compared to 1.0 percentage point in fiscal 2014.
Selling and administrative expenses were $641 million, or 6 percent of sales, in fiscal 2015, compared to $621 million, or 7 percent of sales, in fiscal 2014. The slightly lower year-over-year percentage was primarily due to lower legal expenses.
Net income from continuing operations attributable to PCC for fiscal 2015 was $1,545 million, or $10.77 per share (diluted). By comparison, net income from continuing operations attributable to PCC for fiscal 2014 was $1,752 million, or $11.95 per share (diluted). Fiscal 2015 net income includes net charges of $265 million, or $1.85 per share (diluted), related to inventory valuation adjustments, asset impairment charges and restructuring activities. Fiscal 2015 net income attributable to PCC including discontinued operations was $1,530 million, or $10.66 per share (diluted), compared with net income of $1,777 million, or $12.12 per share (diluted) in fiscal 2014. Fiscal 2015 results include a net loss of $15 million, or $0.11 per share (diluted), from discontinued operations, compared to net income of $25 million, or $0.17 per share (diluted), in the prior year.

24



Fiscal 2014 compared with fiscal 2013
Total sales for fiscal 2014 were $9,533 million, an increase of $1,186 million, or 14 percent, from fiscal 2013 sales of $8,347 million. Fiscal 2014 sales include the contribution from eleven businesses acquired after the beginning of fiscal 2013 and seven businesses acquired in fiscal 2014 that were not fully included in the prior year. These acquisitions contributed more than $1.2 billion of additional sales in fiscal 2014 compared to fiscal 2013. Contractual pass-through pricing and other changes in metal/revert pricing offset organic growth by approximately 3 percent year over year. Nickel prices decreased 15 percent, as reported on the London Metal Exchange (LME) compared to the same period last year. Lower external selling prices of nickel alloy from the Forged Products segment’s three primary nickel conversion mills reduced top-line revenues by approximately $142 million in fiscal 2014 versus fiscal 2013 and the falling price of revert and other alloys negatively impacted sales by approximately $55 million. Contractual material pass-through pricing increased sales by approximately $265 million in fiscal 2014 versus approximately $279 million in fiscal 2013, a decrease of $14 million. Contractual material pass-through pricing adjustments are calculated based on market prices such as those shown in the above table in trailing periods from one to twelve months.
Including the impact of acquisitions, aerospace sales increased approximately $1,075 million, or 20 percent, over fiscal 2013, primarily within our Forged Products and Airframe Products segments. Commercial aircraft production rates continue to drive steady demand for airframe and engine components. The increase in commercial aerospace sales was partially offset by a decline in regional/business jet sales, while military aerospace sales were relatively flat. Aerospace sales increased from 65 percent of total sales in fiscal 2013 to 69 percent of total sales in fiscal 2014. Sales to our power markets increased approximately $35 million, or 2 percent, over the prior year, primarily as a result of higher seamless interconnect pipe sales, improved oil and gas shipments, and solid IGT sales performance. Sales to our power markets decreased from 20 percent of total sales in fiscal 2013 to 17 percent of total sales in fiscal 2014. General industrial and other sales increased approximately $76 million, or 6 percent, over fiscal 2013, primarily due to the contribution from TIMET, which was acquired in the third quarter of fiscal 2013. General industrial and other sales decreased from 15 percent of total sales in fiscal 2013 to 14 percent of total sales in fiscal 2014.
Cost of goods sold was $6,253 million, or 66 percent of sales, in fiscal 2014 as compared to $5,654 million, or 68 percent of sales, in fiscal 2013. The improvement in the year-over-year percentage reflects the impact of lower raw material costs due to lower metal/revert pricing, and operational efficiencies, most notably at our TIMET facilities. Contractual material pass-through pricing diluted gross margin by 1.0 percentage point in fiscal 2014 compared to 1.1 percentage points in fiscal 2013.
Selling and administrative expenses were $621 million, or 7 percent of sales, in fiscal 2014 compared to $534 million, or 6 percent of sales, in fiscal 2013. The higher year-over-year percentage was primarily due to higher stock-based compensation expense.
Net income from continuing operations attributable to PCC for fiscal 2014 was $1,752 million, or $11.95 per share (diluted). By comparison, net income from continuing operations attributable to PCC for fiscal 2013 was $1,431 million, or $9.75 per share (diluted). Fiscal 2014 net income attributable to PCC including discontinued operations was $1,777 million, or $12.12 per share (diluted), compared with net income of $1,427 million, or $9.72 per share (diluted) in fiscal 2013. Fiscal 2014 results include net income of $25 million, or $0.17 per share (diluted), from discontinued operations, compared to a net loss of $4 million, or $0.03 per share (diluted), in fiscal 2013.

Acquisitions
Fiscal 2015
On April 25, 2014, we acquired Aerospace Dynamics International ("ADI") for approximately $625 million. ADI is one of the premier suppliers in the aerospace industry, operating a wide range of high-speed machining centers. ADI has developed particular expertise in large complex components, hard-metal machining, and critical assemblies. ADI is located in Valencia, California, and employs approximately 625 people. The ADI acquisition was an asset purchase for tax purposes and operates as part of the Airframe Products segment.
During the second quarter of fiscal 2015, we completed a small acquisition in the Airframe Products segment.
Fiscal 2014
During the second quarter of fiscal 2014, we completed two small acquisitions in the Airframe Products segment.

25


On October 31, 2013, we acquired 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. 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 small acquisitions in the Forged Products segment.
During the fourth quarter of fiscal 2014, we completed a small acquisition in the Forged Products segment and a small acquisition in the Airframe 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, 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 acquisitions were asset purchases for tax purposes and operate 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.

26


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) were 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 exercise 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 U.S., 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.
Over the course of fiscal 2013, we completed several additional minor acquisitions that provide us with expanded manufacturing capabilities.
The above business acquisitions were accounted for under the acquisition method of accounting and, accordingly, the results of operations have been included in the Consolidated Statements of Income since the acquisition date.

Discontinued operations
Our financial statements were impacted by activities relating to the planned or completed divestiture of certain of our businesses. These businesses have been accounted for under discontinued operations guidance. Accordingly, any operating results of these businesses are presented in our Consolidated Statements of Income as discontinued operations, net of income tax, and all prior periods have been reclassified.
Fiscal 2015
During the fourth quarter of fiscal 2015, we recognized a goodwill impairment charge of $13 million, pre-tax, related to three of our discontinued operations held for sale as the fair value, as determined by expected net proceeds, did not exceed the carrying value. We also recognized $3 million, pre-tax, of other asset impairment charges.
During the fourth quarter of fiscal 2015, we decided to divest a small non-core business in the Forged Products segment and reclassified it to discontinued operations.
During the second quarter of fiscal 2015, we decided to divest a small non-core business in the Forged Products segment and reclassified it to discontinued operations.
Fiscal 2014
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 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.
Fiscal 2013
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 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 promissory note was due on August 7, 2017 and paid interest quarterly based on the 5-year Treasury Note Constant Maturity Rate. The note, which allowed for early payment, was repaid in the first quarter of fiscal 2015.


27


Subsequent events
During the first quarter of fiscal 2016, we completed two small acquisitions in the Forged Products segment.
On May 13, 2015, the Board of Directors approved a $2.0 billion expansion to the Company's existing program to repurchase shares of the Company’s common stock, effective immediately and continuing through June 30, 2017. The Company intends to repurchase outstanding shares from time to time in the open market, subject to market conditions.

Fiscal 2016 outlook
Based on data from The Airline Monitor as of February 2015, Boeing and Airbus aircraft deliveries are expected to moderately increase through calendar year 2015 as compared to 2014. 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 2016, and therefore we anticipate that our aerospace sales will continue to increase in fiscal 2016 compared to fiscal 2015.
Looking at the key end market drivers for this fiscal 2016 plan, we expect mid-single digit revenue growth in commercial aerospace, driven by higher build rates on the Boeing 787 and Airbus A350, as well as growing activity on the LEAP engine, and share gains in our aerostructures operations. We have also factored in the announced build rate cuts on the Airbus A330. In military, we see fiscal 2016 looking much like fiscal 2015, with stable build rates and also stable activity in our spares sales. On the regional/business jet side, we anticipate continued healthy demand for mid to large cabin sizes, which will drive continued growth. We have a number of new platforms starting to ramp in fiscal 2016 and that are expected to yield a high single digit growth rate for the regional/business jet end market. In IGT, we expect continued strong growth driven by our position on the H-class platform and upgrade programs. Given the weak global oil & gas demand, we are anticipating volume and price pressures and expect declines in excess of 30 percent in this market for fiscal 2016. Within our general industrial and other markets, we are expecting fiscal 2016 to be similar to fiscal 2015, with risk of derivative impacts due to weakness in the oil & gas markets. We believe our plan for fiscal 2016 is balanced and achievable, targeting growth and margin expansion in the Investment Cast Products and Airframe Products segments over fiscal 2015 levels, while we expect the Forged Products segment will experience low single-digit sales decline with modest margin expansion.



28


Financial results by segment
We analyze our operating segments and manage our business across three reportable segments: Investment Cast Products, Forged Products and Airframe Products.
 
 
Fiscal Year
 
% Increase/(Decrease)
  
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Net sales:
 
 
 
 
 
 
 
 
 
Investment Cast Products
$
2,536

 
$
2,462

 
$
2,480

 
3
 %
 
(1
)%
Forged Products
4,259

 
4,189

 
3,552

 
2
 %
 
18
 %
Airframe Products
3,210

 
2,882

 
2,315

 
11
 %
 
24
 %
Consolidated net sales
$
10,005

 
$
9,533

 
$
8,347

 
5
 %
 
14
 %
Segment operating income:
 
 
 
 
 
 
 
 
 
Investment Cast Products
$
913

 
$
874

 
$
838

 
4
 %
 
4
 %
% of sales
36.0
%
 
35.5
%
 
33.8
%
 
 
 
 
Forged Products
1,008

 
1,075

 
779

 
(6
)%
 
38
 %
% of sales
23.7
%
 
25.7
%
 
21.9
%
 
 
 
 
Airframe Products
968

 
863

 
687

 
12
 %
 
26
 %
% of sales
30.2
%
 
29.9
%
 
29.7
%
 
 
 
 
Corporate expense
(150
)
 
(153
)
 
(145
)
 
(2
)%
 
6
 %
Restructuring and inventory and other asset impairment
(135
)
 

 

 
100
 %
 
 %
Total segment operating income
2,604

 
2,659

 
2,159

 
(2
)%
 
23
 %
% of sales
26.0
%
 
27.9
%
 
25.9
%
 
 
 
 
Interest expense, net
65

 
71

 
31

 
 
 
 
Consolidated income before income tax expense and equity in earnings of unconsolidated affiliates
$
2,539

 
$
2,588

 
$
2,128

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal Year
 
% Increase/(Decrease)
  
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Contractual material pass-through:
 
 
 
 
 
 
 
 
 
Investment Cast Products
$
55

 
$
63

 
$
75

 
(13
)%
 
(16
)%
Forged Products
175

 
192

 
194

 
(9
)%
 
(1
)%
Airframe Products
9

 
10

 
10

 
(10
)%
 
 %
Total contractual material pass-through
$
239

 
$
265

 
$
279

 
(10
)%
 
(5
)%
 
 
 
 
 
 
 
 
 
 
 
Fiscal Year
 
% Increase/(Decrease)
  
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Intercompany sales activity:(1)
 
 
 
 
 
 
 
 
 
Investment Cast Products(2)
$
273

 
$
276

 
$
303

 
(1
)%
 
(9
)%
Forged Products(3)
1,857

 
1,770

 
991

 
5
 %
 
79
 %
Airframe Products(4)
272

 
203

 
149

 
34
 %
 
36
 %
Total intercompany sales activity
$
2,402

 
$
2,249

 
$
1,443

 
7
 %
 
56
 %
 
 
 
 
 
 
 
 
 
 
_________________________
(1)
Intercompany sales activity consists of each segment’s total intercompany sales activity, including intercompany sales activity within a segment and between segments.
(2)
Investment Cast Products: Includes intersegment sales activity of $39 million, $44 million and $52 million for fiscal 2015, 2014 and 2013, respectively.
(3)
Forged Products: Includes intersegment sales activity of $123 million, $128 million and $102 million for fiscal 2015, 2014 and 2013, respectively.
(4)
Airframe Products: Includes intersegment sales activity of $6 million, $7 million and $6 million for fiscal 2015, 2014 and 2013, respectively.


29


Investment Cast Products
The Investment Cast Products segment manufactures investment castings and provides related investment casting materials and alloys, for aircraft engines, IGT engines, airframes, armaments, medical prostheses, unmanned aerial vehicles and other industrial applications.
 
 
Fiscal Year
 
% Increase/(Decrease)
  
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Sales by Market:
 
 
 
 
 
 
 
 
 
Aerospace
$
1,605

 
$
1,572

 
$
1,579

 
2
 %
 
 %
% of total
63
%
 
64
%
 
64
%
 
 
 
 
Power
768

 
714

 
718

 
8
 %
 
(1
)%
% of total
30
%
 
29
%
 
29
%
 
 
 
 
General Industrial & Other
163

 
176

 
183

 
(7
)%
 
(4
)%
% of total
7
%
 
7
%
 
7
%
 
 
 
 
Total Sales
$
2,536

 
$
2,462

 
$
2,480

 
3
 %
 
(1
)%
Operating income
$
913

 
$
874

 
$
838

 
4
 %
 
4
 %
% of sales
36.0
%
 
35.5
%
 
33.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2015 compared with fiscal 2014
Investment Cast Products' segment sales were $2,536 million for fiscal 2015, an increase of 3 percent from fiscal 2014 sales of $2,462 million. Commercial aerospace sales increased approximately 2 percent year-over-year, continuing a steady upward trajectory fueled by the segment's strong presence on all major aircraft/engine platforms, both in production and in development. Improved regional/business jet sales positively impacted segment sales; however, growth was partially offset by continued weak demand in military markets. In addition, the segment saw growth of approximately 8 percent in its power business, driven by higher content on IGT upgrade programs and new turbine designs, and growing spares demand. General industrial and other sales declined approximately 7 percent, primarily as a result of lower sales to the non-aerospace military sector. Fiscal 2015 sales also include $55 million of contractual pricing related to pass-through of raw material costs compared to $63 million in fiscal 2014, a decrease of $8 million.
Operating income for the Investment Cast Products segment was $913 million or 36.0 percent of sales in fiscal 2015, compared to $874 million, or 35.5 percent of sales, in fiscal 2014. The segment's operating income as a percent of sales increased by 0.5 percentage points year-over-year. The segment's operations continued to deliver solid operating margins by effectively leveraging higher volumes. Contractual material pass-through pricing diluted operating margins by 0.8 percentage points in fiscal 2015 compared to 0.9 percentage points in fiscal 2014.
The Investment Cast Products segment has solid content on most major aircraft production platforms. Fiscal 2016 sales gains are expected to be driven by the next step-up in commercial build rates on platforms such as the Boeing 787 and Airbus A350 and narrow-body re-engining. We expect to leverage higher commercial aerospace volumes by adding incremental capacity to meet higher demand and at the same time, improve our overall efficiency and cost structure. We expect IGT growth to continue into fiscal 2016 due to growth in high-efficiency, large-capacity new IGT platforms, IGT upgrade programs and higher spares activity. Overall, we expect mid-single digit sales growth with incremental operating margins above our typical 35 to 40 percent.
Fiscal 2014 compared with fiscal 2013
Investment Cast Products' segment sales were $2,462 million for fiscal 2014, a decrease of 1 percent from fiscal 2013 sales of $2,480 million. Large commercial aerospace sales increased approximately 8 percent as the segment continued to see solid schedules in line with the current levels of base commercial aircraft production rates. However, growth was tempered by a double-digit decline in regional/business jet and military shipments. The segment's power business continued to see strong demand, driven by IGT upgrade programs, share gains, and spares sales. General industrial and other sales declined approximately 4 percent as a result of lower sales to the non-aerospace military sector. Fiscal 2014 sales also include $63 million of contractual pricing related to pass-through of raw material costs compared to $75 million in fiscal 2013, a decrease of $12 million.

30


Operating income for the Investment Cast Products segment was $874 million or 35.5 percent of sales in fiscal 2014, compared to $838 million, or 33.8 percent of sales, in fiscal 2013. The segment's operating income as a percent of sales increased by 1.7 percentage points year-over-year despite a slight decline in sales. The segment's operations improved operating margins by consistently implementing new initiatives to reduce costs and improve productivity on steady, high-volume production. Contractual material pass-through pricing diluted operating margins by 0.9 percentage points in fiscal 2014 compared to 1.1 percentage points in fiscal 2013.
Forged Products
The Forged Products segment manufactures forged components from titanium and nickel-based alloys principally for the aerospace and power markets and manufactures nickel, titanium and cobalt-based alloys used to produce forged components for aerospace and non-aerospace markets which include products for oil and gas, chemical processing and pollution control applications. The segment also provides nickel superalloy and titanium revert management solutions, re-melting various material byproducts to be reused in casting, forging and fastener manufacturing processes. Forged Products’ sales to the aerospace and power markets are derived primarily from the same large engine customers served by the Investment Cast Products segment, with additional aerospace sales to manufacturers of landing gear and other airframe components. The Forged Products segment also produces interconnect pipe and downhole casings for the oil and gas industries.
 
 
Fiscal Year
 
% Increase/(Decrease)
  
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Sales by Market:
 
 
 
 
 
 
 
 
 
Aerospace
$
2,498

 
$
2,478

 
$
1,960

 
1
 %
 
26
%
% of total
58
%
 
59
%
 
55
%
 
 
 
 
Power
921

 
920

 
891

 
 %
 
3
%
% of total
22
%
 
22
%
 
25
%
 
 
 
 
General Industrial & Other
840

 
791

 
701

 
6
 %
 
13
%
% of total
20
%
 
19
%
 
20
%
 
 
 
 
Total Sales
$
4,259

 
$
4,189

 
$
3,552

 
2
 %
 
18
%
Operating income
$
1,008

 
$
1,075

 
$
779

 
(6
)%
 
38
%
% of sales
23.7
%
 
25.7
%
 
21.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2015 compared with fiscal 2014
Forged Products segment sales were $4,259 million in fiscal 2015, an increase of 2 percent from fiscal 2014 sales of $4,189 million. Results for fiscal 2015 include contributions from three small acquisitions late in fiscal 2014 that were included in the prior year results. The segment experienced stable aerospace sales, increasing approximately $20 million, or 1 percent, year-over-year, with growth in regional/business jet sales offset by decreased military sales. Commercial aerospace sales were flat due to the continued destocking at a single aerospace customer. Sales to the power markets were also flat when compared to the prior year, driven by higher interconnect pipe sales in the first half of the year, offset by lower oil & gas demand in the last half of the year and lower IGT demand. General industrial and other sales increased approximately $49 million, or 6 percent, during fiscal 2015, primarily due to higher sales to the industrial process and marine equipment sectors, partially offset by lower sales to the mining sector. Lower market-driven pricing of raw material inputs negatively impacted external sales year-over-year as raw material input prices were approximately $50 million lower than a year ago. The cost of rutile decreased approximately 12 percent; purchased titanium sponge decreased approximately 13 percent; and titanium revert decreased approximately 8 percent over the prior year. Although the market price of titanium 6-4 bulk increased 50 percent, as reported on metalprices.com, compared to the same period last year, our actual titanium prices decreased due to buy forwards and order lead times. Fiscal 2015 sales also include $175 million of contractual pricing related to pass-through of raw material costs compared to $192 million in fiscal 2014, a decrease of $17 million (also included in market increases discussed above).
Operating income for the Forged Products segment was $1,008 million, or 23.7 percent of sales, in fiscal 2015, compared to $1,075 million, or 25.7 percent of sales, in fiscal 2014. Operating income as a percent of sales decreased 2.0 percentage points compared to a year ago as a result of negative volume leverage and a weaker product mix in oil & gas markets, magnified by lower throughput associated with the decline in oil & gas and other distribution channels, which resulted in higher levels of inflation in year-end inventory balances. The contractual pass-through of raw material costs diluted operating margins by 1.0 percentage point in fiscal 2015 compared to 1.2 percentage points in fiscal 2014.

31


Similar to the Investment Cast Products segment, the Forged Products segment is aligned with large commercial aerospace build rates. We expect increased demand in fiscal 2016 in aerospace and IGT markets, with TIMET share gains favorably impacting sales, partially offset by foreign currency headwinds. However, given the continued uncertainty in the oil and gas market, we cannot predict when this market will recover, and further sales reductions may occur. All those inputs net to our expectation for a low-single digit sales decline versus fiscal 2015. Furthermore, in March 2015, the TIMET Morgantown facility suffered a serious incident and an electron beam furnace will be out of commission for an extended period of time. We anticipate this will have a $25 million to $30 million negative impact to operating income in fiscal 2016. The segment will benefit from the impact of restructuring actions taken at the end of fiscal 2015. As is the case every year, we will perform maintenance during the second quarter, and in fiscal 2016, we have a planned press upgrade, which will result in an extended outage occurring at our Wyman-Gordon UK facility. Taking into consideration all of the factors above, we expect modest margin expansion at Forged Products versus fiscal 2015.
Fiscal 2014 compared with fiscal 2013
Forged Products segment sales were $4,189 million in fiscal 2014, an increase of 18 percent from fiscal 2013 sales of $3,552 million. Results for fiscal 2013 include the benefit from the acquisitions of Aerocraft and Dickson for more than nine months, THI for five months, and TIMET for three months, versus a full year in fiscal 2014. The segment experienced aerospace sales growth of approximately $518 million, or 26 percent, year over year, driven primarily by the inclusion of TIMET and higher commercial aerospace demand. Similar to the Investment Cast Products segment, aerospace OEM business continued to be aligned with current commercial aircraft production rates. However, the reduced capacity and subsequent repair of the 29,000-ton press in Wyman-Gordon's Houston facility created a drag on sales in fiscal 2014. Sales to power markets improved approximately $29 million, or 3 percent, compared to fiscal 2013, driven by increased demand for seamless interconnect pipe and higher oil and gas shipments. General industrial and other sales increased approximately $90 million, or 13 percent, during fiscal 2014, driven almost 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 percent, as reported on the LME, compared to the same period in fiscal 2013. The decline in external selling prices of nickel alloy sales from the segment’s three primary nickel conversion mills reduced top-line revenues by approximately $142 million in fiscal 2014 versus fiscal 2013 and the falling price of revert and other alloys negatively impacted sales by approximately $55 million. Fiscal 2014 sales also include $192 million of contractual pricing related to pass-through of increased raw material costs compared to $194 million in fiscal 2013, a decrease of $2 million (also included in market increases discussed above).
Operating income for the Forged Products segment was $1,075 million, or 25.7 percent of sales, in fiscal 2014, compared to $779 million, or 21.9 percent of sales, in fiscal 2013. Operating income as a percent of sales increased 3.8 percentage points compared to fiscal 2013, driven by higher seamless pipe shipments and operational improvements at TIMET as well as the base businesses. TIMET continued its rapid integration, aggressively improving its cost models and delivering significant value across its operations. The Forged Products segment achieved these results while also successfully rebuilding the 29,000-ton forging press in Houston. The contractual pass-through of raw material costs diluted operating margins by 1.2 percentage points in both fiscal 2014 and 2013.

Airframe Products
The Airframe Products segment manufactures highly engineered fasteners, fastener systems, fluid fittings, aerostructures and precision components, primarily for critical aerospace applications. The balance of the segment’s sales is derived from construction, automotive, heavy truck and general industrial markets.
 
 
Fiscal Year
 
% Increase/(Decrease)
  
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Sales by Market:
 
 
 
 
 
 
 
 
 
Aerospace
$
2,858

 
$
2,497

 
$
1,933

 
14
 %
 
29
 %
% of total
89
%
 
87
%
 
84
%
 
 
 
 
Power
33

 
34

 
24

 
(3
)%
 
42
 %
% of total
1
%
 
1
%
 
1
%
 
 
 
 
General Industrial & Other
319

 
351

 
358

 
(9
)%
 
(2
)%
% of total
10
%
 
12
%
 
15
%
 
 
 
 
Total Sales
$
3,210

 
$
2,882

 
$
2,315

 
11
 %
 
24
 %
Operating income
$
968

 
$
863

 
$
687

 
12
 %
 
26
 %
% of sales
30.2
%
 
29.9
%
 
29.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 

32


Fiscal 2015 compared with fiscal 2014
Airframe Products segment sales were $3,210 million in fiscal 2015, an 11 percent increase from fiscal 2014 sales of $2,882 million. Results for fiscal 2015 include contributions from Permaswage and three small acquisitions in fiscal 2014 and the results of ADI for nearly a full year. This segment experienced strong growth in aerospace sales of approximately $361 million, or 14 percent. Commercial aerospace sales, the chief driver of this segment, showed approximately 17 percent growth relative to the prior year. The fastener operations continue to maintain a high level of activity to meet aerospace production schedules and to benefit from the rapid integration of the most recent acquisitions. Similarly, the aerostructures operations saw further demand from a broad aerospace customer base, while ramping up production to support new contracts. General industrial and other sales decreased approximately $32 million, or 9 percent, when compared to the prior year, primarily due to lower sales to the construction and industrial process sectors, partially offset by higher sales to the automotive sector.
Operating income for the Airframe Products segment was $968 million, or 30.2 percent of sales, in fiscal 2015, compared to $863 million, or 29.9 percent of sales, in fiscal 2014. Operating income as a percent of sales increased 0.3 percentage points compared to fiscal 2014. Airframe Products' continued to achieve strong operational drop-through as a result of focused integration of its most recent acquisitions, effective leverage of increased assets, and strategic deployment of production assets.
Airframe Products is expecting a strong fiscal 2016 year, with sales up mid-single digits, reflecting higher aerospace build rates, share gains, and further contributions from recent acquisitions, partially offset by foreign currency headwinds. Demand to support current build rates is expected to drive sales in the fasteners operations in fiscal 2016. New business wins have secured market share for the aerostructures operations, and we anticipate that the contracts in place will lead to increased production in the second half of fiscal 2016. Build rate increases on platforms such as the Boeing 787 and Airbus A350 and narrow-body re-engining should provide further upside over the next 24 months. We expect the segment to deliver strong leverage on its growth, with incremental margins above the typical 35 to 40 percent level.
Fiscal 2014 compared with fiscal 2013
Airframe Products segment sales were $2,882 million in fiscal 2014, a 24 percent increase from fiscal 2013 sales of $2,315 million. Results for fiscal 2013 include contributions from Centra for nearly ten months, Klune for eight months, Progressive for seven months, and Synchronous for three months, versus a full year in fiscal 2014. In addition, fiscal 2014 includes the results of Permaswage for five months. This segment experienced strong growth in aerospace sales of approximately $564 million, or 29 percent, due to solid contributions from new acquisitions coupled with organic sales expansion. The base aerostructures businesses grew year-over-year aerospace sales by approximately 14 percent, due to market growth and share gains, and shipped Boeing 787 content at approximately ten shipsets per month. Critical aerospace fasteners shipments improved 6 percent year over year, and continued to close the gap with commercial aircraft production schedules. General industrial and other sales decreased approximately $7 million, or 2 percent when compared to fiscal 2013 primarily due to a decrease in non-aerospace military sales, partially offset by an increase in the mining sector.
Operating income for the Airframe Products segment was $863 million, or 29.9 percent of sales, in fiscal 2014, compared to $687 million, or 29.7 percent of sales, in fiscal 2013. Operating income as a percent of sales increased 0.2 percentage points compared to fiscal 2013 despite the inclusion of several lower-margin acquisitions due to continued achievement of strong incremental margins on base sales and organic growth. Airframe Products' operating income improved due to the leverage of increased throughput over an improving cost structure and variable cost improvements in the base businesses.
Restructuring and asset impairment
In the fourth quarter of fiscal 2015, we recognized a non-cash inventory and other asset impairment charge of $127 million, pre-tax, primarily in our oil & gas, pipe and associated raw material operations, reflecting the more challenging environment, declines in market value, and size or quality characteristics that impact marketability. In addition, to improve our cost structure and in response to the current market conditions, we implemented headcount reductions at impacted operations, which resulted in a pre-tax charge of $8 million in the fourth quarter of fiscal 2015. These restructuring plans provided for terminations of approximately 490 employees in the fourth quarter of fiscal 2015 and the first quarter of fiscal 2016. The restructuring and asset impairment charges recorded by segment are as follows:
Fiscal
2015
Investment Cast Products
$
4

Forged Products
127

Airframe Products
4

 
$
135

 
 

33


Interest and taxes
Net interest expense during fiscal 2015 was $65 million, compared with $71 million during fiscal 2014. On September 30, 2013, we exercised the make-whole early prepayment option and redeemed all $200 million of the 5.60% Senior Notes then outstanding, and therefore incurred interest expense associated with that debt in the prior year. Interest income was $4 million for fiscal 2015 compared to $5 million in fiscal 2014. The decrease was a result of lower interest rates on cash balances invested outside the U.S.
Net interest expense during fiscal 2014 was $71 million, compared with $31 million in fiscal 2013. The significant increase was due to debt associated with the acquisition of TIMET. Near the end of the third quarter of fiscal 2013, we issued $3.0 billion of debt to finance the acquisition of TIMET. In fiscal 2014, we incurred additional interest expense associated with that debt as it was outstanding for the full year. Interest income for fiscal 2014 was $5 million compared to $7 million in fiscal 2013. The decrease was a result of lower cash balances invested outside the U.S., which generally earn higher rates of return.
The effective tax rate for both fiscal 2015 and 2014 was 32.1 percent. In fiscal 2015, we realized a tax benefit from remeasuring our domestic deferred tax assets and liabilities due to a reduction in our state effective tax rate This tax benefit was offset by reduced benefits in the current year from nonrecurring changes in tax assets and liabilities compared to fiscal 2014.
The effective tax rate for fiscal 2014 was 32.1 percent, 0.6 percentage points lower than the 32.7 percent effective tax rate in fiscal 2013. The lower effective tax rate is primarily due to an increase in earnings taxed at rates lower than the U.S. statutory rate, the impact of the U.K. statutory rate reduction on deferred tax liabilities, and the settlement of a federal environmental penalty by TIMET that resulted in pre-tax income but not taxable income.

Liquidity and capital resources
Total assets of $19,428 million at March 29, 2015 represented an $842 million increase from the $18,586 million balance at March 30, 2014. The increase in total assets principally reflects cash generated from operations during fiscal 2015 totaling $1,702 million and tangible and intangible assets acquired with the purchase of ADI, which was funded by commercial paper borrowings, partially offset by the repurchase of common stock totaling $1,598 million.
Total capitalization at March 29, 2015 was $15,516 million, consisting of $4,587 million of total debt and $10,929 million of PCC shareholders' equity. The debt-to-capitalization ratio increased to 29.6% at March 29, 2015 from 23.9% at the end of fiscal 2014, reflecting additional commercial paper borrowings to fund the acquisition of ADI and common stock repurchases, and lower cumulative translation adjustments, partially offset by the impact of increased equity from net income.
Cash as of March 29, 2015 was $474 million, an increase of $113 million from the end of fiscal 2014, and total debt was $4,587 million, an increase of $1,015 million since the end of fiscal 2014. The net change in cash and debt primarily reflects stock repurchases of $1,598 million, cash paid to acquire businesses (net of cash acquired) of $637 million, and capital expenditures of $455 million, partially offset by cash generated from operations of $1,702 million and common stock issuances of $102 million.
Capital spending of $455 million in fiscal 2015 principally provided for new buildings and facility expansions to increase capacity, and new equipment purchases and refurbishments, primarily in the Forged Products and Airframe Products segments. We expect capital expenditures for fiscal 2016 to increase to approximately $550 million based on our current forecasts. These expenditures will be targeted for facility expansions to increase capacity and reduce costs, equipment upgrades and press refurbishments, primarily in the Forged Products and Airframe Products segments.
During fiscal 2015, we contributed $34 million to our defined benefit pension plans, of which $8 million was voluntary. In the first quarter of fiscal 2016, we made $31 million of voluntary contributions to our U.S. defined benefit pension plans. We expect to contribute approximately $20 million of required contributions in fiscal 2016, for total contributions to the defined benefit pension plans of approximately $51 million in fiscal 2016. In addition, we contributed $8 million to other postretirement benefit plans during fiscal 2015. We expect to contribute approximately $7 million to these other postretirement benefit plans during fiscal 2016.
Our international operations hold cash that is denominated in foreign currencies. We manage our worldwide cash requirements by evaluating the available funds from our various subsidiaries and the cost effectiveness of accessing those funds. The repatriation of cash from our foreign subsidiaries could have an adverse effect on our effective tax rate. As discussed in Item 8. Financial Statements and Supplementary Data, Note 10—Income taxes, U.S. taxes have not been provided on the cumulative earnings of non-U.S. affiliates and associated companies. Our intention is to reinvest these earnings indefinitely.

34


Historically, we have issued commercial paper as a method of raising short-term liquidity. We believe we will continue to have the ability to issue commercial paper and have issued commercial paper to fund acquisitions and short-term cash requirements in recent years. As of March 29, 2015, the amount of commercial paper borrowings outstanding was $1,587 million and the weighted average interest rate was 0.2%. As of March 30, 2014, the amount of commercial paper borrowings outstanding was $570 million and the weighted average interest rate was 0.2%. During fiscal 2015, the average amount of commercial paper borrowings outstanding was $1,315 million and the weighted average interest rate was 0.2%. During fiscal 2014, the average amount of commercial paper borrowings outstanding was $674 million and the weighted average interest rate was 0.2%. During fiscal 2015 and 2014, the largest daily balance of outstanding commercial paper borrowings was $1,737 million and $1,151 million, respectively.
On December 15, 2014, we entered into a 364-day, $1.0 billion revolving credit facility maturing December 2015 (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 in December 2014. 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 March 29, 2015.
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 17, 2012, we issued $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.
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 March 29, 2015 was $413 million due to our outstanding commercial paper borrowings of $1,587 million.
Our financial covenant requirement and actual ratio as of March 29, 2015 was as follows:
  
Covenant Requirement
Actual
Consolidated leverage ratio(1)
65.0
%
(maximum)
29.6
%
 
 
 
_________________________
(1)
Terms are defined in the Credit Agreements.
As of March 29, 2015, we were in compliance with the financial covenant in the Credit Agreements.
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, environmental remediation, 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.

Off-balance sheet arrangements
There are currently no off-balance sheet arrangements that are, or are reasonably likely to have, a current or future material effect on our financial condition.

35



Contractual obligations and commercial commitments
We are obligated to make future payments under various contracts such as debt agreements and lease agreements. The following table represents our contractual payment obligations as of March 29, 2015 and the estimated timing of future cash payments:
 
Contractual Cash Obligations
Total
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
Long-term debt
$
4,595

 
$
1,093

 
$
1

 
$
1,001

 
$
1,000

 
$

 
$
1,500

Operating leases(1)
173

 
42

 
33

 
27

 
20

 
14

 
37

Cash contributions to qualified pension plans
128

 
51

 
20

 
19

 
19

 
19

 

Environmental remediation
12

 
12

 

 

 

 

 

Interest on fixed-rate debt
778

 
61

 
58

 
55

 
45

 
45

 
514

Interest on variable-rate debt(2)
12

 
4

 
3

 
3

 
2

 

 

Total
$
5,698

 
$
1,263

 
$
115

 
$
1,105

 
$
1,086

 
$
78

 
$
2,051

 
 
 
 
 
 
 
 
 
 
 
 
 
 
_________________________
(1)
Operating lease obligations attributable to operations held-for-sale were $8 million.
(2)
Interest on variable-rate debt is based on current prevailing interest rates.
Our reserve for uncertain tax positions at March 29, 2015 was $16 million. Due to the uncertainties associated with settling these liabilities, we are unable to make reasonable estimates of the period of cash settlement. As a result, our reserve for unrecognized tax benefits is excluded from the table above. See Item 8. Financial Statements and Supplementary Data, Note 10—Income taxes for additional information regarding our reserve for uncertain tax positions.
We also have benefit payments due under our non-qualified pension and other post-retirement benefit plans that are not required to be funded in advance, but are paid in the same period that benefits are provided. See Item 8. Financial Statements and Supplementary Data, Note 18—Pension and other postretirement benefit plans for additional information.
As of March 29, 2015, we had accrued environmental liabilities of $448 million for future costs arising from environmental issues relating to our properties and operations. Only contractual payment obligations for environmental remediation are included in the table above. Our total future expenditures, however, relating to compliance and cleanup of environmental conditions at our properties cannot be conclusively determined and are excluded from the table above. See Item 8. Financial Statements and Supplementary Data, Note 13—Commitments and contingencies for additional information.

Critical accounting policies
We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout Management’s Discussion and Analysis where such policies affect reported and expected financial results. For a detailed discussion on the application of these and other significant accounting policies, see the Notes to the Consolidated Financial Statements of this Annual Report. Note that the preparation of this Annual Report requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.
Revenue recognition
We recognize revenue when the earnings process is complete. This occurs when products are delivered in accordance with the contract or purchase order, ownership and risk of loss have passed to the customer, collectability is reasonably assured, and pricing is fixed and determinable. In instances where title does not pass to the customer upon shipment, we recognize revenue upon delivery or customer acceptance, depending on terms of the sales agreement. Service sales, representing maintenance and engineering activities, are recognized as services are performed. Shipping and handling costs billed to customers are included in revenue.
Valuation of inventories
All inventories are stated at the lower of their cost or market value, with the market value being determined based on sales in the ordinary course of business. Cost for inventories at a significant number of our operations is determined on a last-in,

36


first-out (“LIFO”) basis. The average inventory cost method is utilized for most other inventories. We regularly review inventory quantities on hand and record a provision for excess or obsolete inventory equal to the difference between the cost of the inventory and the estimated market value based on the age, historical usage or assumptions about future demand for the inventory. 
We also regularly review inventory balances on a LIFO basis to ensure the balances are stated at the lower of cost or market as of the balance sheet date. For those inventories valued using LIFO, their carrying value may be higher or lower than current replacement costs for such inventory, since the LIFO costing assumption matches current costs with current sales, not with current inventory values. When the LIFO cost is greater than the current cost, there is an increased likelihood that our inventories could be subject to write-downs to market value. As of March 29, 2015, the LIFO cost of our inventories exceeds the current cost by $679 million. If actual demand is significantly less than the future demand that we have projected, inventory write-downs may be required, which could have a material adverse effect on the value of our inventories and reported operating results. In the fourth quarter of fiscal 2015, we recognized a non-cash inventory impairment charge of $120 million, pre-tax, primarily in our oil & gas, pipe and associated raw material operations, reflecting the more challenging environment, declines in market value, and size or quality characteristics that impact marketability. The projections of future demand by management are based upon firm orders (including long-term agreements), forecasted demand from customers, and macro-economic industry data.
The key drivers that are causing our LIFO inventory costs to exceed current costs are as follows:
Decreases in raw material prices in recent fiscal years, including nickel, titanium, cobalt, rutile, titanium sponge and revert
Reduced variable manufacturing costs as a result of operational efficiencies and improved labor productivity
Decreased fixed costs per unit of inventory due to cost controls and increasing production volumes
Inventory added through acquisitions that are valued at fair market value (typically higher than historical cost) that remains in the LIFO cost basis unless liquidated through quantity reductions
As we acquire additional businesses, management first determines if the acquired business should account for inventory on a LIFO basis due to the nature of the business and materiality of the inventory balances. If LIFO treatment is deemed appropriate, management then determines whether to incorporate the acquired inventories into existing LIFO pools or create a new LIFO pool based on several factors. Those factors include, but are not limited to:
Similarity or dissimilarity of nature of operations, including raw materials used, product produced and cost structure, to existing businesses. The more similar businesses are, the more likely they will have common LIFO pools
Location of the business as LIFO pools do not typically include operations in more than one country for tax, functional currency and other reasons
The size of the acquisition in relation to the existing pool(s). Smaller businesses are often incorporated into existing LIFO pools
Acquisition accounting
We account for acquired businesses using the acquisition method of accounting. This requires that we make various assumptions and estimates regarding the fair value of assets, liabilities, and contractual and non-contractual contingencies at the date of acquisition. These assumptions can have a material impact on our balance sheet valuations and the related amount of depreciation and amortization expense that will be recognized in the future.
Goodwill and acquired intangibles
We regularly acquire businesses in purchase transactions that typically result in the recognition of goodwill and other intangible assets, which may affect the amount of future period amortization expense and possible impairment charges. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect the consolidated financial statements.
We recognize indefinite-lived intangible assets when circumstances are identified whereby there is no foreseeable limit on the period of time over which the asset is expected to contribute to the cash flows of the acquired entity. We evaluate many criteria and factors when determining whether an asset life is either indefinite or limited. Among the most significant factors are: the economic effects of competition, obsolescence and demand; the relative cost to the customer for terminating the relationship; the forecasted customer turnover rate and whether there are legal, regulatory, contractual, or other factors that limit the useful life of the asset. If no factors are identified that would limit the asset life then it is considered indefinite.

37


Goodwill and indefinite-lived intangible assets related to our continuing operations are tested for impairment at a minimum each fiscal year at the end of the second month in the second quarter or when events or circumstances indicate that the carrying value of these assets are more likely than not to exceed their fair value. For fiscal 2015, our reporting units consisted of two reporting units within our Investment Cast Products reportable operating segment, three reporting units within our Forged Products reportable operating segment, as well as five reporting units in our Airframe Products reportable operating segment.
In the fourth quarter of fiscal 2015, we recognized a goodwill impairment charge of $13 million, pre-tax, related to three of our discontinued operations held for sale as the fair value, as determined by expected net proceeds, did not exceed the carrying value.
Testing for goodwill impairment involves the estimation of the fair value of the reporting units. Discounted cash flow and market-based valuation multiple models are typically used in these valuations. Such models require the use of significant estimates and assumptions primarily based on such factors as future cash flows, expected market growth rates, estimates of sales volumes, market valuation multiples, sales prices and related costs, and discount rates, which reflect the weighted average cost of capital. Management uses the best available information at the time fair values of the reporting units are estimated; however, estimates could be materially impacted by such factors as changes in growth trends and specific industry conditions, with the potential for a corresponding adverse effect on the consolidated financial statements which could potentially result in an impairment of goodwill. The discounted cash flow models used to determine fair value are sensitive to the expected future cash flows and the discount rate for each reporting unit. The discount rate used in the cash flow models for the fiscal 2015 goodwill impairment analysis ranged from 8% to 14% depending on the reporting unit. The annual growth rate for earnings before interest and taxes varied by reporting unit and ranged from 7% to 15% over the initial five-year forecast period. We used a terminal value growth rate of 3.5% and found that the reporting unit that would be most sensitive to worsening economic conditions has $1.6 billion of goodwill recorded as of March 29, 2015. We performed additional sensitivity analysis and determined that the forecast for future earnings before interest and taxes used in the cash flow model could decrease by more than 11% or the discount rate utilized could increase by approximately 1 percentage point, and the goodwill of our reporting units would not require additional impairment testing.
The impairment test for indefinite-lived intangible assets encompasses calculating the fair value of an indefinite-lived intangible asset and comparing the fair value to its carrying value. The testing methodology utilizes a discounted cash flow model, consistent with goodwill impairment testing. Indefinite-lived intangible asset testing is performed at the same business unit or division level as the initial asset value determination. If the carrying value exceeds the estimated fair value, impairment is recorded. For fiscal