10-KT 1 pcp2016040810kt.htm FORM 10-KT 10-KT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KT
(Mark one)
¨
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended ______________
or
x
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period From March 30, 2015 to January 3, 2016
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
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-KT or any amendment to this Form 10-KT.  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 27, 2015, was $31,506,449,425.
As of the close of business on April 1, 2016, the Registrant had 100 shares of Common Stock, without par value, outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (I)(1)(a) AND (b) OF FORM 10-KT AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.


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.

Merger with Berkshire Hathaway
On January 29, 2016, Berkshire Hathaway Inc. ("Berkshire") acquired all outstanding shares of Precision Castparts Corp. (the "Merger"). In February 2016, we changed the date of our fiscal year end to align our financial reporting calendar with that of Berkshire. This Transition Report on Form 10-KT reports our financial results for the nine-month period from March 30, 2015 through January 3, 2016, which we refer to as "fiscal 2016" throughout this report. The fiscal years ended March 29, 2015 and March 30, 2014 reflect the twelve-month results of the respective fiscal years.

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 27 percent of our sales in fiscal 2016.
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

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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, 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.
In fiscal 2016, we acquired Composites Horizons, LLC ("CHI"), the leading independent supplier of high temperature carbon and ceramic composite components, including ceramic matrix composites (CMC), for use in next-generation aerospace engines. Using proprietary technologies, CHI manufactures specialized, performance-critical components with exceptional strength and high-temperature tolerance, thus allowing aircraft engines to operate with higher fuel efficiency and lower emissions. In combination with CHI, we are now able to offer our engine customers metallic and CMC material capability to meet a broader range of customer requirements.
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 and will be incorporated into future civil engine applications.
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.

2

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 a 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 product content. In addition to IGT components, we manufacture structural and 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 and operating conditions.
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 40 percent of our sales in fiscal 2016.

3

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 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

4

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 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 a 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,

5

shipbuilding, machine tools, medical equipment, appliances and recreation. The Airframe Products segment accounted for approximately 33 percent of our sales in fiscal 2016.
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 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 2016, we acquired Noranco for approximately $560 million. Noranco is a premier supplier of complex machined and fabricated components for aero-engine, landing gear and airframe applications. Noranco provides significant value to aerospace customers through a wide range of sophisticated capabilities including high precision machining and sheet metal fabrication, processing, assembly and testing. Noranco's aerostructures business strengthens our existing market position in airframe products, and their engine, landing gear, and machining capability expands our product offering on current and next generation aircraft.


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Major Customers
Net direct sales to General Electric Company were approximately 15 percent, 13 percent and 13 percent of total sales in fiscal 2016, 2015 and 2014, respectively. Net direct sales to The Boeing Company were approximately 10 percent of total sales in fiscal 2016 and although less than 10 percent of total sales were considered significant in fiscal 2015 and 2014.
 
 
Boeing
 
General Electric
 
Nine Months Ended
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Investment Cast Products
$
10

 
$
701

 
$
828

 
$
736

Forged Products
177

 
340

 
435

 
412

Airframe Products
527

 
37

 
36

 
66

 
$
714

 
$
1,078

 
$
1,299

 
$
1,214

 
 
 
 
 
 
 
 
No other customer directly accounted for more than 10 percent of total sales; however, 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.

Employees
At January 3, 2016, we had approximately 30,550 employees, including nearly 8,100 employees in the Investment Cast Products segment, approximately 9,000 employees in the Forged Products segment, approximately 13,200 employees in the Airframe Products segment, approximately 150 employees in corporate functions, and approximately 100 employees in discontinued operations.

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 74 percent of our total sales in fiscal 2016. Our sales to the power market constituted 14 percent of our total sales in fiscal 2016.
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 volatility in 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

7

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 and Boeing accounted for approximately 15 percent and 10 percent of our total sales, respectively, for fiscal 2016. No other customer directly accounted for more than 10 percent of total sales; however, Airbus, Rolls Royce, Spirit AeroSystems, and United Technologies are also considered key customers. A financial hardship experienced by any one of these key customers, the loss of any of them or a reduction in or substantial delay of orders from any of them could have a material adverse effect on our business.
In addition, a significant portion of our aerospace products are ultimately used in the production of new commercial aircraft. There are only two primary manufacturers of large commercial aircraft in the world, Boeing and Airbus. A significant portion of our aerospace sales are dependent on the number of new aircraft built by these two manufacturers, which is in turn dependent on a number of factors over which we have little or no control. Those factors include the demand for new aircraft from airlines around the globe and factors that impact manufacturing capabilities, such as the availability of raw materials and manufactured components, changes in the regulatory environment and labor relations between the aircraft manufacturers and their work forces. A significant interruption or slowdown in the number of new aircraft built by aircraft manufacturers could have a material adverse effect on our business.
Sales to the military sector constituted approximately 9 percent of our fiscal 2016 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 and our ability to accelerate production levels to timely match order increases on new or existing 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, Bombardier CSeries 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 or cancellations 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

8

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 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

9

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 40 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 2016, approximately 16 percent of our total sales were attributable to our non-U.S. subsidiaries. A number of risks inherent in international operations could have a material adverse effect on our results of operations, including:
•
fluctuations in U.S. dollar value arising from transactions denominated in foreign currencies and the translation of certain foreign currency subsidiary balances;
•
difficulties in staffing and managing multi-national operations;
•
general economic and political uncertainties and potential for social unrest in countries in which we or our customers operate;
•
limitations on our ability to enforce legal rights and remedies;
•
restrictions on the repatriation of funds;
•
changes in trade policies;
•
tariff regulations;
•
difficulties in obtaining export and import licenses;
•
the risk of government financed competition; and
•
compliance with a variety of international laws as well as U.S. and other laws affecting the activities of companies abroad.
A majority of our sales of extruded pipe for the power generation market have been exported to power generation customers in China. 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-

10

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.
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. 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 first-in, first-out ("FIFO") cost, there is

11

an increased likelihood that our inventories could be subject to write-downs to market value. As of January 3, 2016, the LIFO cost of our inventories exceeds the current FIFO cost by $740 million. The key drivers that are causing our LIFO costs to exceed current FIFO costs are discussed in Part II, Item 7. Management’s Narrative Analysis of 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:
•
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.


12

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
56

 
972,941

 
2,542,133

 
3,515,074

International
5

 
1,116

 
416,334

 
417,450

Forged Products
 
 
 
 
 
 

Domestic
92

 
2,224,319

 
9,959,393

 
12,183,712

International
27

 
944,589

 
2,075,706

 
3,020,295

Airframe Products
 
 
 
 
 
 

Domestic
82

 
1,848,313

 
3,839,647

 
5,687,960

International
31

 
869,610

 
1,052,953

 
1,922,563

Discontinued Operations
 
 
 
 
 
 

Domestic
1

 
—

 
48,252

 
48,252

International
3

 
295,576

 
—

 
295,576

Total Company
 
 
 
 
 
 

Domestic
232

 
5,045,573

 
16,431,543

 
21,477,116

International
67

 
2,112,203

 
3,544,993

 
5,657,196

Total
299

 
7,157,776

 
19,976,536

 
27,134,312

 
 
 
 
 
 
 
 

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 Narrative Analysis of Results of Operations.
 
ITEM 3.
LEGAL PROCEEDINGS
The Company, the Company’s directors, Berkshire Hathaway Inc. (“Berkshire”) and NW Merger Sub Inc. are named as defendants in a purported class action lawsuit relating to the acquisition of the Company by Berkshire (the “Merger”) that is pending in the Circuit Court of the State of Oregon for Multnomah County.  During the months of August and September 2015, eight separate lawsuits were filed relating to the Merger.  The eight pending lawsuits were consolidated by the court in December 2015.   Plaintiffs filed their consolidated complaint on February 18, 2016, which generally alleges that the Company’s directors breached their fiduciary duties to Company shareholders by, among other things, agreeing to enter into the transaction for an allegedly unfair price and as the result of an allegedly unfair process. The lawsuit also alleges that the Company, Berkshire and/or NW Merger Sub Inc. aided and abetted the alleged breaches by the Company’s directors.  The consolidated complaint seeks monetary damages as the sole remedy.   Plaintiffs claim that their alleged damages will be proven at trial but further state that they currently estimate damages to be as high as 35% of the sale price or $80 per share, which would equate to about $11 billion.  The Company believes that the lawsuit lacks merit and intends to defend the claims vigorously.
The Company, Mark Donegan (“Donegan”) the Chief Executive Officer of the Company and Shawn Hagel (“Hagel”) the Company’s Chief Financial Officer are named as defendants in a lawsuit, Kevin Murphy v. Precision Castparts Corp. et al., filed on March 25, 2016, in the United States District Court in Oregon. Case No. 3:16-CV-00521 in the United States District Court of Oregon, which seeks to certify a class action of shareholders that owned Company shares between May 9, 2013 and January 15, 2015.  The claims in the litigation arise from certain allegations asserting the Company, Donegan, and Hagel, committed Securities Exchange Act violations from May 9, 2013 to January 15, 2015, by allegedly making false and/or misleading statements and/or failing to disclose: (1) the Company was losing significant market share to its competitors; (2) that this loss of business to competitors was not, as the Company represented, a temporary decline in sales that would reappear in the near future, but was allegedly instead a permanent decline in demand for the Company’s products; and (3) that, as a result, the Company’s positive statements about its business, operations, and prospects lacked a reasonable basis allegedly resulting in the Company’s securities to be overvalued and artificially inflated.   Plaintiffs have not identified a damage amount,

13

rather they claim that their alleged damages will be proven at trial.  The Company has not been served with the lawsuit at this time; however, believes that the lawsuit lacks merit and intends to defend the claims vigorously.
On or about February 26, 2016, the California Air Resources Board (ARB) issued notice to the Company of its failure to maintain two registered account representatives under ARB’s greenhouse gas cap and trade program.  ARB assessed the Company a penalty of $130,000.  The Company is now in compliance with this requirement and will pay the fine.
As of January 3, 2016, there were approximately 87 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:
 
Fiscal
2016
 
2015
New Claims Filed
11

 
44

Claims Disposed Of
40

 
21

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.

PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES    
PCC's common stock is owned by Berkshire Hathaway Inc. and therefore is not traded on any market.

14

ITEM 7.
MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
(in millions, except per share data)
This Management’s Narrative Analysis of Results of Operations (“Narrative Analysis”) should be read together with our Consolidated Financial Statements and the Notes to the Consolidated Financial Statements. This Narrative Analysis is provided pursuant to General Instruction I(2)(a) of Form 10-KT. This section includes a brief narrative analysis of the factors that materially affected our operating results for the nine month transition period ended January 3, 2016, and a comparative analysis of the nine month period ended December 28, 2014. This section also includes discussion of results by segment and discussion of our Critical Accounting Policies. This Transition Report on Form 10-KT reports our financial results for the nine-month period from March 30, 2015 through January 3, 2016, which we refer to as "fiscal 2016" throughout this report.

 
Nine Months Ended
 
% Increase/(Decrease)
  
January 3, 2016
 
December 28, 2014
 
Net sales
$
7,002

 
$
7,501

 
(7
)%
Costs and expenses:
 
 
 
 
 
Cost of goods sold
4,999

 
4,913

 
2
 %
Selling and administrative expenses
614

 
474

 
30
 %
Asset impairment
56

 
—

 
100
 %
Interest expense, net
83

 
48

 
73
 %
Total costs and expenses
5,752

 
5,435

 
 
Income before income tax expense and equity in loss of unconsolidated affiliates
1,250

 
2,066

 
(39
)%
Income tax expense
(420
)
 
(667
)
 
(37
)%
Effective tax rate
33.6
%
 
32.3
%
 


Equity in loss of unconsolidated affiliates
(6
)
 
(2
)
 
(200
)%
Net income from continuing operations
824

 
1,397

 
(41
)%
Net loss from discontinued operations
(7
)
 
(1
)
 
(600
)%
Net income
817

 
1,396

 
(41
)%
Net income attributable to noncontrolling interest
(4
)
 
(1
)
 
300
 %
Net income attributable to PCC
$
813

 
$
1,395

 
(42
)%
 
 
 
 
 
 
 
Nine Months Ended
 
% Increase/(Decrease)
Sales by Market
January 3, 2016
 
December 28, 2014
 
Aerospace
$
5,158

 
$
5,196

 
(1
)%
% of total
74
%
 
69
%
 
 
Power
1,022

 
1,303

 
(22
)%
% of total
14
%
 
18
%
 
 
General Industrial & Other
822

 
1,002

 
(18
)%
% of total
12
%
 
13
%
 
 
Total Sales
$
7,002

 
$
7,501

 
(7
)%
% of total
100
%
 
100
%
 
 
 
 
 
 
 
 


15

Nine months ended January 3, 2016 compared with December 28, 2014
Reasons for Material Changes in Revenue:
•Total sales for fiscal 2016 decreased $499 million, or 7 percent, compared to a year ago due to the following factors:
◦Sharp decline in oil & gas and other non-IGT (industrial gas turbine) power generation demand
◦Lower regional/business jet and military aerospace sales, partially offset by higher large commercial aerospace sales
◦Lower general industrial and other sales, primarily due to the automotive and industrial processing sectors and the second-derivative impact of lower oil prices and weak overall demand through distribution channels
◦Negative effect of foreign currency exchange rates
Reasons for Material Changes in Expense Items:
•
Cost of goods sold was 71 percent of sales in fiscal 2016 compared to 65 percent of sales in the prior year. Cost of goods sold was negatively impacted by inventory valuation adjustments and payments made to customers to settle disputes during fiscal 2016
•
Selling and administrative expenses were 9 percent of sales in fiscal 2016 compared to 6 percent of sales in the prior year, primarily due to higher expenses associated with our stock-based compensation plans. Expense recognition was accelerated for all previously unvested options upon shareholder approval of the Merger with Berkshire in accordance with the terms of the grants
•
In response to the current market conditions, we wrote down the carrying value of our available for sale securities due to the severity and duration of the decline in market value of the investments, which resulted in an asset impairment charge in fiscal 2016
•
We issued $2.0 billion of debt during the first quarter of fiscal 2016 and therefore incurred additional interest and financing expenses associated with that debt
•
The higher effective income tax rate in fiscal 2016 was primarily due to an increase in non-deductible acquisition costs, primarily related to the Merger with Berkshire, partially offset by increased benefits from changes in prior year tax assets and liabilities compared to the same period last year
•
The net loss from discontinued operations was largely due to an asset impairment charge and operating losses at our businesses held for sale

16

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.
 
 
Nine Months Ended
 
% Increase/(Decrease)
  
January 3, 2016
 
December 28, 2014
 
Net sales:
 
 
 
 
 
Investment Cast Products
$
1,911

 
$
1,888

 
1
 %
Forged Products
2,779

 
3,192

 
(13
)%
Airframe Products
2,312

 
2,421

 
(5
)%
Consolidated net sales
$
7,002

 
$
7,501

 
(7
)%
Segment operating income:
 
 
 
 
 
Investment Cast Products
$
703

 
$
680

 
3
 %
% of sales
36.8
%
 
36.0
%
 
 
Forged Products
415

 
815

 
(49
)%
% of sales
14.9
%
 
25.5
%
 
 
Airframe Products
505

 
731

 
(31
)%
% of sales
21.8
%
 
30.2
%
 
 
Corporate expense
(234
)
 
(112
)
 
109
 %
Asset impairment
(56
)
 
—

 
100
 %
Total segment operating income
1,333

 
2,114

 
(37
)%
% of sales
19.0
%
 
28.2
%
 
 
Interest expense, net
83

 
48

 
 
Consolidated income before income tax expense and equity in loss of unconsolidated affiliates
$
1,250

 
$
2,066

 
 
 
 
 
 
 
 


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 and other industrial applications.
 
 
Nine Months Ended
 
% Increase/(Decrease)
  
January 3, 2016
 
December 28, 2014
 
Sales by Market:
 
 
 
 
 
Aerospace
$
1,233

 
$
1,198

 
3
 %
% of total
65
%
 
63
%
 
 
Power
578

 
568

 
2
 %
% of total
30
%
 
30
%
 
 
General Industrial & Other
100

 
122

 
(18
)%
% of total
5
%
 
7
%
 
 
Total Sales
$
1,911

 
$
1,888

 
1
 %
Operating income
$
703

 
$
680

 
3
 %
% of sales
36.8
%
 
36.0
%
 
 
 
 
 
 
 
 


17

Nine months ended January 3, 2016 compared with December 28, 2014
•
Investment Cast Products' segment sales increased $23 million, or 1 percent, compared to a year ago due to the following factors:
◦
Higher commercial aerospace and regional/business jet sales driven by solid demand on current aerospace platforms, partially offset by lower military aerospace shipments reflecting weaker demand for components for new build aircraft
◦
Growth in IGT sales driven by the Company's higher content on upgrade programs and new turbine designs
•
Operating income as a percent of sales increased by 0.8 percentage points year-over-year as the segment continued to deliver solid operating margins by effectively leveraging higher volumes
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.
 
 
Nine Months Ended
 
% Increase/(Decrease)
  
January 3, 2016
 
December 28, 2014
 
Sales by Market:
 
 
 
 
 
Aerospace
$
1,837

 
$
1,849

 
(1
)%
% of total
66
%
 
58
%
 
 
Power
418

 
711

 
(41
)%
% of total
15
%
 
22
%
 
 
General Industrial & Other
524

 
632

 
(17
)%
% of total
19
%
 
20
%
 
 
Total Sales
$
2,779

 
$
3,192

 
(13
)%
Operating income
$
415

 
$
815

 
(49
)%
% of sales
14.9
%
 
25.5
%
 
 
 
 
 
 
 
 
Nine months ended January 3, 2016 compared with December 28, 2014
•
Forged Products' segment sales decreased $413 million, or 13 percent, compared to a year ago due to the following factors:
◦
Lower sales to the power markets driven by lower oil & gas and other non-IGT power generation demand
◦
Lower general industrial and other sales primarily due to the second-derivative impact of lower oil prices and weak overall demand through distribution channels
◦
Lower military aerospace sales due to similar dynamics as Investment Cast Products, partially offset by higher commercial and regional/business jet aerospace sales, both due to solid demand
◦
Negative effect of foreign currency exchange rates
•
Operating income as a percent of sales decreased 10.6 percentage points compared to a year ago as a result of negative volume leverage and weaker pricing in the oil & gas market, coupled with higher variable costs and inventory valuation adjustments


18

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.
 
 
Nine Months Ended
 
% Increase/(Decrease)
  
January 3, 2016
 
December 28, 2014
 
Sales by Market:
 
 
 
 
 
Aerospace
$
2,088

 
$
2,149

 
(3
)%
% of total
90
%
 
89
%
 
 
Power
26

 
24

 
8
 %
% of total
1
%
 
1
%
 
 
General Industrial & Other
198

 
248

 
(20
)%
% of total
9
%
 
10
%
 
 
Total Sales
$
2,312

 
$
2,421

 
(5
)%
Operating income
$
505

 
$
731

 
(31
)%
% of sales
21.8
%
 
30.2
%
 
 
 
 
 
 
 
 
Nine months ended January 3, 2016 compared with December 28, 2014
•
Airframe Products segment sales decreased $109 million, or 5 percent, compared to a year ago due to the following factors:
◦
Lower regional/business jet and military aerospace sales, primarily reflecting difficult year-over-year comparisons and lower military demand
◦
Lower general industrial and other sales, primarily within the automotive and pulp and paper sectors
◦
Commercial aerospace sales, the chief driver of this segment, were relatively flat year-over-year due to lower sales of aerospace fasteners, which were negatively impacted by demand timing associated with the expansion of a customer's supply chain management initiatives
◦
Negative effect of foreign currency exchange rates
•
Operating income as a percent of sales decreased 8.4 percentage points compared to a year ago as a result of lower volumes and product mix, coupled with initial inefficiencies and costs related to new product introductions

Critical accounting policies
We have identified the policies below as critical to our business operations and the understanding of our results of operations. For a detailed discussion on the application of these and other significant accounting policies, see the Notes to Consolidated Financial Statements of this report. Note that the preparation of this 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, first-out (“LIFO”) basis. The average inventory cost method is utilized for most other inventories. We regularly review

19

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 first-in, first-out ("FIFO") cost, there is an increased likelihood that our inventories could be subject to write-downs to market value. As of January 3, 2016, the LIFO cost of our inventories exceeds the current FIFO cost by $740 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. During fiscal 2016, we recognized a non-cash inventory impairment charge of $43 million, pre-tax, primarily in our oil & gas, pipe and associated raw material operations, reflecting the more challenging environment and declines in market value. 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 FIFO costs are as follows:
•
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
•
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
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.
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

20

the carrying value of these assets are more likely than not to exceed their fair value. For fiscal 2016, 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.
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 2016 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 3% to 9% 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 $305 million of goodwill recorded as of January 3, 2016. Using a terminal value growth rate of 3% instead of 3.5% would not result in impairment for any of our reporting units. 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 7% or the discount rate utilized could increase by approximately 0.5 percentage points, and the goodwill of our reporting units would not require additional impairment testing. For fiscal 2016, we determined that the fair value of our reporting units substantially exceeded their carrying value and that there was no impairment of goodwill.
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 as the initial asset value determination. If the carrying value exceeds the estimated fair value, impairment is recorded. Assets for which fair value does not substantially exceed carrying value may have a higher risk of impairment in future periods. For fiscal 2016, we determined that the fair value of our indefinite-lived intangible assets substantially exceeded their carrying value for all but one asset, which had a carrying value of approximately $30 million as of January 3, 2016, and that there was no impairment of indefinite-lived intangible assets.
Environmental costs
Total environmental liabilities accrued at January 3, 2016 were $440 million. The estimated future costs for known environmental remediation requirements are accrued on an undiscounted basis when it is probable that a liability has been incurred, and the amount of remediation costs can be reasonably estimated. When only a range of amounts is established, and no amount within the range is better than another, the minimum amount of the range is recorded. The estimated upper end of the range of reasonably possible environmental costs exceeded amounts accrued by approximately $355 million at January 3, 2016. Actual future losses may be lower or higher given the uncertainties regarding the status of laws, regulations, enforcement policies, the impact of potentially responsible parties, technology and information related to individual sites.
Recoveries of environmental remediation costs from other parties are recorded as assets when collection is probable. Adjustments to our accruals may be necessary to reflect new information as investigation and remediation efforts proceed. The amounts of any such adjustments could have a material adverse effect on our results of operations in a given period.
Due to the nature of its historical operations, TIMET has significant environmental liabilities at its titanium manufacturing plants. It has for many years, under the oversight of government agencies, conducted investigations of the soil and groundwater contamination at its plant sites. TIMET has initiated remedial actions at its properties, including the capping of former on-site landfills, removal of contaminated sediments from on-site surface impoundments, remediation of contaminated soils and the construction of a slurry wall and groundwater extraction system to treat contaminated groundwater as well as other remedial actions. Although it is anticipated that significant remediation will be completed within the next two years, it is expected that a substantial portion of the TIMET environmental accruals will be expended within an estimated 40 years. Expenditures related to these remedial actions and for resolving TIMET's other environmental liabilities will be applied against existing liabilities. As the remedial actions are implemented at these sites, the liabilities will be adjusted based on the progress made in determining the extent of contamination and the extent of required remediation. While the existing liability generally represents our current best estimate of the costs or range of costs of resolving the identified environmental liabilities, these costs may change substantially due to factors such as the nature and extent of contamination, changes in legal and

21

remedial requirements, the allocation of costs among potentially responsible parties as well as other third parties, and technological changes, among others.
Guidance on asset retirement and environmental obligations 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 a significant 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 $7 million to satisfy these asset retirement obligations. However, we have not recognized a liability for an asset retirement obligations at two of our manufacturing facilities because the fair value 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.
Unconsolidated affiliates
We have equity interests in various businesses, which we account for under the equity method as we do not exercise control of the major operating and financial policies. The carrying value of these investments as of January 3, 2016 was $225 million. We regularly assess the profitability and valuation of our investments for any potential impairment. At various times, we may be in discussions with the other owners of these businesses on a variety of topics, including status of the jointly owned entities.
Available for sale securities
Available for sale securities consist of investments in shares of publicly traded companies, which we account for at fair value. The carrying value of our investments as of January 3, 2016 was $8 million. We regularly assess the valuation of our investments for potential impairment. During fiscal 2016, we determined the decline in the valuation was not temporary based on the severity and duration of the decline in the market value of these investments and recognized a non-cash impairment charge of $54 million, pre-tax.
Income taxes
Provisions for federal, state and foreign income taxes are calculated on reported pre-tax earnings based on current tax law and also include, in the current period, the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provisions differ from the amounts currently receivable or payable, because certain items of income and expense are recognized in different time periods for financial reporting purposes than for income tax purposes. Significant judgment is required in determining income tax provisions and evaluating tax positions. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Tax benefits arising from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination by the relevant tax authorities. The amount recognized in the financial statements is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. We recognize interest and penalties, if any, related to uncertain tax positions in income tax expense.
Pension and other postretirement benefit plans
We sponsor many U.S. and non-U.S. defined benefit pension plans. Our pension and postretirement benefit plans are accounted for in accordance with defined benefit pension and other postretirement plans accounting guidance. Plan assets have been valued at fair value in accordance with this guidance. Pension and postretirement expense and liability amounts are derived from several significant assumptions, including the discount rate, expected return on plan assets and health care cost trend rate.  For valuation of our pension liabilities, we derive a market-based discount rate from yields on high quality, liquid fixed income securities at the end of our fiscal year. We use only highly-rated bonds (AA/Aa or higher) to estimate the interest rate at which our pension benefits could be effectively settled. For our U.S. Plans, we used a discount rate assumption of 4.55% for the total benefit obligation of our pension plans at our January 3, 2016 measurement date. For our non-U.S. Plans,

22

we used a discount rate assumption of 3.79% for the total benefit obligation of our pension plans at our January 3, 2016 measurement date.
In developing the long-term rate of return on plan assets assumptions, we evaluate input from third-party investment consultants and actuaries, and review asset allocation and investment strategies, ranges of projected and historical returns, and inflation and economic assumptions. The expected return assumptions are derived from asset allocations within the Company's target asset allocation ranges consistent with our diversified investment approach. As the assumed rate of return on plan assets is a long-term assumption, it is not anticipated to be as volatile as the discount rate, which is a point-in-time measurement. For our U.S. Plans, we used a long-term rate of return assumption of 7.50% to calculate the 2016 net periodic pension cost. For our non-U.S. Plans, we used a long-term rate of return assumption of 6.50% to calculate the 2016 net periodic pension cost. For fiscal 2016, our U.S. net periodic pension expense was $34 million and non-U.S. net periodic pension expense was $2 million. Our U.S. net postretirement benefit cost was $4 million for fiscal 2016.
The table below quantifies the approximate impact, as of January 3, 2016, of a one-quarter percentage point decrease in our assumptions for discount rate and expected return on assets, holding other assumptions constant.
 
(In millions)
0.25 Percentage
Point Decrease
Increase in annual costs:
 
Discount rate
$
7

Expected long-term rate of return
$
5

Increase in projected benefit obligation:
 
Discount rate
$
99

 
 
The approximate impact, as of January 3, 2016, of a one percentage point increase in our assumption for the health care cost trend rate, holding other assumptions constant, on our total service and interest cost components and accumulated postretirement benefit obligation is not significant.

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    
At various times, we use derivative financial instruments to limit exposure to changes in foreign currency exchange rates, interest rates and prices of strategic raw materials. Because derivative instruments are used solely as hedges and not for speculative trading purposes, fluctuations in the market values of such derivative instruments are generally offset by reciprocal changes in the underlying economic exposures that the instruments are intended to hedge. For further discussion of derivative financial instruments, refer to Item 8. Financial Statements and Supplementary Data, Note 17—Derivatives and hedging activities.
Interest Rate Risk
We have variable rate debt obligations that expose us to interest rate risk.  If market interest rates had averaged 10 percent higher than actual levels in fiscal 2016 or 2015, the effect on our interest expense and net income would not have been material.
Foreign Currency Risk
The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars; however, we are exposed to fluctuations in foreign currencies for transactions denominated in other currencies. As discussed in Item 8. Financial Statements and Supplementary Data, Note 1—Summary of significant accounting policies, we had foreign currency hedges in place at January 3, 2016 and March 29, 2015 to reduce such exposure. The estimated loss in fair value on foreign currency hedges outstanding as of January 3, 2016, from a hypothetical 10 percent adverse change in exchange rates, would not have been material.
Material Cost Risk
We have entered into long-term supply agreements to fix the purchase price of certain strategic raw materials as of January 3, 2016 and March 29, 2015. In addition, we had escalation clauses related to raw material pricing in certain of our sales contracts at January 3, 2016 and March 29, 2015. If market rates had averaged 10 percent higher than actual levels in either fiscal 2016 or 2015, the effect on our cost of sales and net earnings, after considering the effects of these supply agreements and related sales contracts, would not have been material.


23

ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Statements of Income
 
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
(In millions, except per share data)
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Net sales
$
7,002

 
$
10,005

 
$
9,533

Costs and expenses:
 
 
 
 
 
Cost of goods sold
4,999

 
6,752

 
6,253

Selling and administrative expenses
614

 
641

 
621

Restructuring and asset impairment
56

 
8

 
—

Interest expense
86

 
69

 
76

Interest income
(3
)
 
(4
)
 
(5
)
Total costs and expenses
5,752

 
7,466

 
6,945

Income before income tax expense and equity in (loss) earnings of unconsolidated affiliates
1,250

 
2,539

 
2,588

Income tax expense
(420
)
 
(816
)
 
(830
)
Equity in (loss) earnings of unconsolidated affiliates
(6
)
 
(175
)
 
1

Net income from continuing operations
824

 
1,548

 
1,759

Net (loss) income from discontinued operations
(7
)
 
(15
)
 
25

Net income
817

 
1,533

 
1,784

Net income attributable to noncontrolling interests
(4
)
 
(3
)
 
(7
)
Net income attributable to Precision Castparts Corp. (“PCC”)
$
813

 
$
1,530

 
$
1,777

Net income (loss) per common share attributable to PCC shareholders— basic:
 
 
 
 
 
Net income per share from continuing operations
$
5.95

 
$
10.83

 
$
12.03

Net (loss) income per share from discontinued operations
(0.05
)
 
(0.10
)
 
0.17

Net income per share (basic)
$
5.90

 
$
10.73

 
$
12.20

Net income (loss) per common share attributable to PCC shareholders— diluted:
 
 
 
 
 
Net income per share from continuing operations
$
5.92

 
$
10.77

 
$
11.95

Net (loss) income per share from discontinued operations
(0.05
)
 
(0.11
)
 
0.17

Net income per share (diluted)
$
5.87

 
$
10.66

 
$
12.12

Weighted average common shares outstanding:
 
 
 
 
 
Basic
137.7

 
142.6

 
145.6

Diluted
138.6

 
143.5

 
146.6

 
 
 
 
 
 
See Notes to Consolidated Financial Statements.

24

Consolidated Statements of Comprehensive Income
 
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
(In millions)
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Net income
$
817

 
$
1,533

 
$
1,784

Other comprehensive income (loss) ("OCI"), net of tax:
 
 
 
 
 
Foreign currency translation adjustments
(58
)
 
(353
)
 
148

Gain (loss) on available for sale securities:
 
 
 
 
 
Unrealized losses on available for sales securities (net of income tax benefit of $0, $2, and $13 respectively)
(24
)
 
(12
)
 
(22
)
Less: reclassification adjustment for losses (gains) included in net income (net of income tax expense of $0, $0, and $(1) respectively)
54

 
—

 
(2
)
Gain (loss) on derivatives:
 
 
 
 
 
Unrealized (losses) gains due to periodic revaluations (net of income tax (expense) benefit of $(2), $6, and $(2) respectively)
—

 
(17
)
 
7

Less: reclassification adjustment for losses (gains) included in net income (net of income tax benefit of $4, $0, and $0 respectively)
10

 
(1
)
 
(2
)
Pension and post retirement obligations (net of income tax (expense) benefit of $(40), $56, and $(29) respectively)
77

 
(154
)
 
6

Other comprehensive income (loss), net of tax
59

 
(537
)
 
135

Total comprehensive (income) loss attributable to noncontrolling interests
(4
)
 
18

 
(13
)
Total comprehensive income attributable to PCC
$
872

 
$
1,014

 
$
1,906

 
 
 
 
 
 
See Notes to Consolidated Financial Statements.


25

Consolidated Balance Sheets
 
(In millions, except share data)
January 3, 2016
 
March 29, 2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
343

 
$
474

Receivables, net of allowance of $10 in 2016 and $12 in 2015
1,502

 
1,710

Inventories
3,779

 
3,640

Prepaid expenses and other current assets
59

 
81

Income tax receivable
126

 
37

Deferred income taxes
—

 
2

Discontinued operations
26

 
28

Total current assets
5,835

 
5,972

Property, plant and equipment:
 
 
 
Land
205

 
192

Buildings and improvements
608

 
578

Machinery and equipment
3,519

 
3,234

Construction in progress
350

 
324

 
4,682

 
4,328

Accumulated depreciation
(2,022
)
 
(1,854
)
Net property, plant and equipment
2,660

 
2,474

Goodwill
7,002

 
6,661

Acquired intangible assets, net
4,275

 
3,744

Investment in unconsolidated affiliates
225

 
238

Other assets
495

 
311

Discontinued operations
5

 
28

 
$
20,497

 
$
19,428

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

 
$
1,093

Accounts payable
893

 
1,162

Accrued liabilities
549

 
559

Current deferred tax liability
35

 
—

Discontinued operations
8

 
13

Total current liabilities
1,485

 
2,827

Long-term debt
5,184

 
3,493

Pension and other postretirement benefit obligations
551

 
678

Other long-term liabilities
534

 
546

Deferred income taxes
1,001

 
924

Discontinued operations
3

 
3

Commitments and contingencies (See Notes)

 

Equity:
 
 
 
Preferred stock, no par, 1,000,000 shares authorized and unissued in 2016 and 2015
—

 
—

Common stock, $1 stated value, authorized: 450,000,000 shares; issued and outstanding: 137,738,667 and 138,586,810 shares in 2016 and 2015
138

 
139

Paid-in capital
—

 
60

Retained earnings
12,467

 
11,685

Accumulated other comprehensive loss
(896
)
 
(955
)
Total PCC shareholders’ equity
11,709

 
10,929

Noncontrolling interest
30

 
28

Total equity
11,739

 
10,957

 
$
20,497

 
$
19,428

 
 
 
 
See Notes to Consolidated Financial Statements.

26

Consolidated Statements of Cash Flows
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
(In millions)
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Operating Activities:
 
 
 
 
 
Net income
$
817

 
$
1,533

 
$
1,784

Net loss (income) from discontinued operations
7

 
15

 
(25
)
Non-cash items:
 
 
 
 
 
Depreciation and amortization
259

 
325

 
292

Deferred income taxes
65

 
147

 
177

Stock-based compensation expense
124

 
57

 
60

Excess tax benefits from share-based payment arrangements
(5
)
 
(13
)
 
(22
)
Restructuring and inventory and other asset impairment
99

 
309

 
—

Other non-cash adjustments
(7
)
 
(9
)
 
(28
)
Changes in assets and liabilities, excluding effects of acquisitions and dispositions of businesses:
 
 
 
 
 
Receivables
266

 
(137
)
 
8

Inventories
(92
)
 
(292
)
 
(361
)
Prepaid expenses and other current assets
—

 
12

 
15

Income tax receivable and payable
(68
)
 
(15
)
 
6

Payables and accruals
(304
)
 
—

 
31

Pension and other postretirement benefit plans
(22
)
 
23

 
27

Dividends from equity method investments
—

 
—

 
29

Other non-current assets and liabilities
(178
)
 
(253
)
 
(132
)
Net cash (used) provided by operating activities of discontinued operations
(8
)
 
—

 
21

Net cash provided by operating activities
953

 
1,702

 
1,882

Investing Activities:
 
 
 
 
 
Acquisitions of businesses, net of cash acquired
(1,108
)
 
(637
)
 
(1,012
)
Capital expenditures
(337
)
 
(455
)
 
(351
)
Dispositions of businesses
24

 
24

 
64

Sale of marketable securities
—

 
—

 
40

Other investing activities, net
(11
)
 
59

 
19

Net cash used by investing activities of discontinued operations
(5
)
 
—

 
(4
)
Net cash used by investing activities
(1,437
)
 
(1,009
)
 
(1,244
)
Financing Activities:
 
 
 
 
 
Net change in commercial paper borrowings
(893
)
 
1,017

 
(30
)
Proceeds from issuance of long-term debt
1,996

 
—

 
—

Repayments of long-term debt
(506
)
 
—

 
(203
)
Payments for debt issuance costs
(14
)
 
—

 
—

Common stock issued
62

 
102

 
114

Excess tax benefits from share-based payment arrangements
5

 
13

 
22

Repurchase of common stock
(271
)
 
(1,598
)
 
(487
)
Cash dividends
(12
)
 
(17
)
 
(18
)
Other financing activities, net
(2
)
 
(2
)
 
(1
)
Net cash provided (used) by financing activities
365

 
(485
)
 
(603
)
Effect of exchange rate changes on cash and cash equivalents
(12
)
 
(95
)
 
46

Net (decrease) increase in cash and cash equivalents
(131
)
 
113

 
81

Cash and cash equivalents at beginning of period
474

 
361

 
280

Cash and cash equivalents at end of period
$
343

 
$
474

 
$
361

Supplemental Disclosures
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
Interest
$
67

 
$
66

 
$
80

Income taxes, net of refunds received
$
437

 
$
651

 
$
624

Non-cash investing and financing activities:
 
 
 
 
 
Dividends declared but not paid
$
4

 
$
4

 
$
4

 
 
 
 
 
 
See Notes to Consolidated Financial Statements.

27

Consolidated Statements of Equity

 
PCC Shareholders
 
Non-controlling
Interest
 
Total
Equity
 
Common Stock
Outstanding
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) / Income
 
 
(In millions, except per share data)
Shares
 
Amount
 
 
 
 
 
Balance at March 31, 2013
146.2

 
$
146

 
$
1,777

 
$
8,413

 
$
(553
)
 
$
21

 
$
9,804

Common stock issued pursuant to stock plans
1.0

 
1

 
113

 
—

 
—

 
—

 
114

Repurchase of common stock
(2.1
)
 
(2
)
 
(485
)
 
—

 
—

 
—

 
(487
)
Stock-based compensation expense
—

 
—

 
60

 
—

 
—

 
—

 
60

Tax benefit from stock-based compensation
—

 
—

 
22

 
—

 
—

 
—

 
22

Cash dividends ($0.12 per share)
—

 
—

 
—

 
(18
)
 
—

 
—

 
(18
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Net income
—

 
—

 
—

 
1,777

 
—

 
7

 
1,784

Other comprehensive income
—

 
—

 
—

 
—

 
135

 
—

 
135

Balance at March 30, 2014
145.1

 
145

 
1,487

 
10,172

 
(418
)
 
27

 
11,413

Common stock issued pursuant to stock plans
0.7

 
1

 
101

 
—

 
—

 
—

 
102

Repurchase of common stock
(7.2
)
 
(7
)
 
(1,599
)
 
—

 
—

 
—

 
(1,606
)
Stock-based compensation expense
—

 
—

 
58

 
—

 
—

 
—

 
58

Tax benefit from stock-based compensation
—

 
—

 
13

 
—

 
—

 
—

 
13

Cash dividends ($0.12 per share)
—

 
—

 
—

 
(17
)
 
—

 
—

 
(17
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(2
)
 
(2
)
Net income
—

 
—

 
—

 
1,530

 
—

 
3

 
1,533

Other comprehensive loss
—

 
—

 
—

 
—

 
(537
)
 
—

 
(537
)
Balance at March 29, 2015
138.6

 
139

 
60

 
11,685

 
(955
)
 
28

 
10,957

Common stock issued pursuant to stock plans
0.4

 
—

 
62

 
—

 
—

 
—

 
62

Repurchase of common stock
(1.3
)
 
(1
)
 
(251
)
 
(19
)
 
—

 
—

 
(271
)
Stock-based compensation expense
—

 
—

 
124

 
—

 
—

 
—

 
124

Tax benefit from stock-based compensation
—

 
—

 
5

 
—

 
—

 
—

 
5

Cash dividends ($0.09 per share)
—

 
—

 
—

 
(12
)
 
—

 
—

 
(12
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(2
)
 
(2
)
Net income
—

 
—

 
—

 
813

 
—

 
4

 
817

Other comprehensive income
—

 
—

 
—

 
—

 
59

 
—

 
59

Balance at January 3, 2016
137.7

 
$
138

 
$
—

 
$
12,467

 
$
(896
)
 
$
30

 
$
11,739

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements.

28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except option share and per share data)

1. Summary of significant accounting policies
Principles of consolidation
The consolidated financial statements include the accounts of Precision Castparts Corp. (“PCC”, the “Company”, or “we”) and subsidiaries after elimination of intercompany accounts and transactions. Subsidiaries include majority-owned companies and other companies which are fully consolidated based on PCC having a controlling financial interest or an obligation to consolidate under accounting principles generally accepted in the United States of America (“GAAP”). Investments in affiliated companies are accounted for using the equity method when PCC has a non-controlling ownership interest, generally between twenty and fifty percent, giving us significant influence; and investments are accounted for using the cost method when PCC has a non-controlling ownership interest of less than 20 percent. Unless otherwise noted, disclosures herein pertain to our continuing operations.
In February 2016, we changed the date of our fiscal year end. Our fiscal year is now based on a 52-53 week year ending the Sunday closest to December 31 of each year. Previously, our fiscal year was based on a 52-53 week year ending the Sunday closest to March 31. The Company made this change to align its financial reporting calendar with that of Berkshire Hathaway Inc. ("Berkshire"), which acquired the Company pursuant to the previously announced merger that closed on January 29, 2016 (the "Merger"). This Transition Report on Form 10-KT reports our financial results for the nine-month period from March 30, 2015 through January 3, 2016, which we refer to as "fiscal 2016" throughout this report. The fiscal years ended March 29, 2015 and March 30, 2014 reflect the twelve-month results of the respective fiscal years. Refer to Note 21—Transition period comparative data for the nine months ended December 28, 2014. Fiscal 2017 refers to the twelve-months ending January 1, 2017.
Certain reclassifications have been made to prior year amounts to conform to the current year presentation. Such reclassifications had no effect on previously reported shareholders’ equity or net income.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and highly liquid short-term instruments with maturities of three months or less at the time of purchase. These investments are available for sale with market values approximating cost.
Inventories
All inventories are stated at the lower of cost or current market values. Cost for inventories at the majority of our operations is determined on a last-in, first-out (“LIFO”) basis. The average inventory cost method is utilized for most other inventories. Costs utilized for inventory valuation purposes include material, labor and manufacturing overhead.
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation of plant and equipment is computed using the straight-line method based on the estimated service lives of the assets. Estimated service lives are generally 20 to 40 years for buildings and improvements, 20 to 25 years for furnaces, 3 to 12 years for machinery and equipment and 3 to 7 years for computer hardware and software. Depreciation expense was $217 million, $275 million and $246 million in fiscal 2016, 2015 and 2014, respectively. Gains and losses from the disposal of property, plant and equipment are included in the consolidated statements of income and were not material for any period presented. Expenditures for routine maintenance, repairs and minor improvements are charged to expense as incurred.
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 intangible assets
Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses, and acquired intangible assets represent items such as patents, proprietary technology, tradenames, backlog and customer relationships that are assigned a fair value at the date of acquisition. Goodwill and other intangible assets deemed to have indefinite lives are not subject to amortization in accordance with accounting guidance provided by GAAP through the

29

Accounting Standards Codification ("guidance"). Goodwill and intangible assets with indefinite lives are tested for impairment at a minimum each fiscal year in the second quarter, or when impairment indicators exist, using the guidance and criteria described in the guidance. This testing compares the carrying values of each intangible asset or reporting unit to estimated fair values. If the carrying value of these assets is in excess of estimated fair value, the carrying value is reduced to their estimated fair value or, in the case of goodwill, implied fair value.
Acquired intangible assets with finite lives are amortized using the straight-line method and include the following: patents, 7 to 19 years; customer relationships, 5 to 26 years; and backlog, 0 to 5 years.
Long-lived assets
Long-lived assets held for use are subject to an impairment assessment upon certain triggering events. If the carrying value is no longer recoverable based upon the undiscounted future cash flows, an impairment is recorded for the difference between the carrying amount and the fair value of the asset. Long-lived assets considered held for sale are stated at the lower of carrying value or fair value less the cost to sell.
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 fees and costs
Shipping and handling fees and costs charged to customers are reflected in net revenues and cost of goods sold as appropriate.
Environmental costs
We own, or previously owned, properties that may require environmental remediation or action. We estimate the range of loss for environmental liabilities based on current remediation technology, enacted laws and regulations, industry experience gained at similar sites and an assessment of the probable level of involvement and financial condition of other potentially responsible parties. Due to the numerous uncertainties surrounding the course of environmental remediation and the preliminary nature of some site investigations, in some cases, we may not be able to reasonably estimate the high end of the range of possible loss. The estimated future costs for known environmental remediation requirements are accrued on an undiscounted basis when it is probable that a liability has been incurred and the amount of remediation costs can be reasonably estimated. When only a range of amounts is established, and no estimated amount within the range is better than another, the minimum amount of the range is recorded. Recoveries of environmental remediation costs from other parties are recorded as assets when collection is probable. Adjustments to our accruals may be necessary to reflect new information as investigation and remediation efforts proceed. The amounts of any such adjustments could have a material adverse effect on our results of operations in a given period, but any amounts are not reasonably estimable at this time. Total environmental liabilities accrued at January 3, 2016 and March 29, 2015 were $440 million and $448 million, respectively. The decrease in environmental liabilities during fiscal 2016 was primarily due to remediation of TIMET environmental liabilities that existed as of the acquisition date.
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 $7 million to satisfy these asset retirement obligations. However, we have not recognized a liability under guidance for asset retirement obligations at two of our manufacturing facilities because the fair value 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.
Foreign currency translation
Assets and liabilities of our foreign affiliates are translated at current foreign currency exchange rates, while income and expenses are translated at average rates for the period. Translation gains and losses are reported as a component of shareholders’ equity.

30

Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, except those transactions that have been designated as hedges of identifiable foreign currency commitments or investment positions, are included in the results of operations as incurred. Transaction gains and losses had no material impact on our results of operations for any period presented.
Financial instruments
Our financial instruments include cash and cash equivalents, marketable securities, debt, and derivative instruments, including foreign currency forward contracts and options, commodity swap and interest rate swap contracts, where applicable. Because of their short maturity, the carrying amounts of cash and cash equivalents and short-term bank debt approximate fair value. Available for sale securities consist of investments in shares of publicly traded companies. All available for sale securities are carried at fair value using quoted prices in active markets. Any unrealized gains or losses are recognized through other comprehensive income. Refer to Note 20—Inventory and other asset impairment charges for discussion of recognized losses related to these investments.
Fair value of long-term debt is based on quoted market prices or estimated using our borrowing rate at year-end for similar types of borrowing arrangements. Refer to Note 12—Fair value measurements.
At various times, we use derivative financial instruments to limit exposure to changes in foreign currency exchange rates, interest rates and prices of strategic raw materials. We account for derivatives pursuant to derivative instruments and hedging activities accounting guidance. This guidance requires that all derivative financial instruments be recorded in the financial statements and measured at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in income or shareholders’ equity (as a component of accumulated other comprehensive income (loss)) depending on whether the derivative is being used to hedge designated changes in fair value or cash flows. Refer to Note 17—Derivatives and hedging activities.
Stock-based compensation
We account for our stock based compensation plans in accordance with stock-based compensation guidance, which requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements, with the cost measured based on the estimated fair value of the equity or liability instruments issued. Our stock-based employee compensation plans are described more fully in Note 15—Stock-based compensation plans. We recognize the compensation costs related to stock options on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of four years. In accordance with the terms of the grants, all outstanding stock options vested upon shareholder approval of the Merger.
Income taxes
Provisions for federal, state and foreign income taxes are calculated on reported pre-tax earnings based on current tax law and also include, in the current period, the cumulative effect of any changes in tax rates from those previously used in determining deferred tax assets and liabilities. Such provisions differ from the amounts currently receivable or payable because certain items of income and expense are recognized in different time periods for financial reporting purposes than for income tax purposes. Significant judgment is required in determining income tax provisions and evaluating tax positions. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Tax benefits arising from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination by the relevant tax authorities. The amount recognized in the financial statements is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. We recognize interest and penalties, if any, related to uncertain tax positions in income tax expense.
Retirement and other postretirement benefit plans
We sponsor various defined benefit and defined contribution plans covering substantially all employees. We also sponsor postretirement benefit plans other than pensions, consisting principally of health care coverage to eligible retirees and qualifying dependents, covering approximately 15% of our workforce. The liabilities and net periodic cost of our defined benefit pension and other post-retirement plans are determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate, the rate of return on plan assets, and medical trend rate (rate of growth for medical costs). For the United States ("U.S.") plans, the discount rate was determined based on the results of a bond matching model that constructed a portfolio of bonds with credit ratings of AA/Aa or higher that match our expected pension benefit cash flows. The discount rate was determined on the basis of the internal rate of return on the bond portfolio. For the non-U.S. plans, Aon Hewitt, Merrill Lynch and other long-term Corporate bond indices were used as the primary basis for determining discount

31

rates. A portion of net periodic pension cost is included in production costs, which are included in inventories and subsequently recognized in net earnings as inventories are liquidated and charged to cost of sales. We amortize gains and losses, which occur when actual experience differs from actuarial assumptions, over the average future service period of employees. Our funding policy for pension plans is to contribute, at a minimum, the amounts required by applicable laws. During fiscal 2016, 2015 and 2014, we made voluntary contributions to pension plans totaling $31 million, $8 million, and $50 million, respectively.
Related party transactions
The business transactions with our equity investees were not considered significant.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. Recently issued accounting standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The guidance is effective for the Company for the quarter ending March 31, 2019. The Company is in the process of determining the impact of this guidance on our consolidated financial position, results of operations, and cash flows.
In January 2016, the FASB issued guidance to revise an entity's accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. Under the new guidance, equity investments are measured at fair value, with changes in fair value recognized in net income. The guidance is effective for the Company for the quarter ending April 1, 2018. The adoption of this guidance is not expected to have a significant impact on our consolidated financial position, results of operations, or cash flows.
In November 2015, the FASB issued guidance to simplify the presentation of deferred income taxes. Under the new guidance, deferred tax assets and liabilities must be classified as noncurrent in a classified statement of financial position. The guidance is effective for the Company for the quarter ending April 2, 2017. The adoption of this guidance is not expected to have a significant impact on our consolidated financial position, results of operations, or cash flows.
In September 2015, the FASB issued guidance to simplify the adjustments made to provisional numbers recognized in a business combination. As a result, the new guidance eliminates the requirement to retrospectively account for such adjustments. The guidance is effective for the Company for the quarter ending April 3, 2016. The adoption of this guidance is not expected to have a significant impact on our consolidated financial position, results of operations, or cash flows.
In April 2015, the FASB issued guidance on measuring the fair value of plan assets of a defined benefit pension plan for a reporting entity with a fiscal year-end that does not coincide with a month-end. Under the new guidance, the reporting entity is permitted to measure defined benefit plan assets and obligations using the month-end that is closest to the entity's fiscal year-end. We elected early adoption of this guidance in fiscal 2016 using a December 31, 2015 measurement date as a practical expedient. The adoption did not have a significant impact on our consolidated financial position, results of operations, or cash flows.
In April 2015, the FASB issued guidance to simplify the presentation of debt issuance costs. The new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is effective for the Company for the quarter ending April 3, 2016, with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on our consolidated financial position.
In January 2015, the FASB issued guidance which eliminates the concept of an extraordinary item. As a result, entities will no longer segregate an extraordinary item from the results of ordinary operations; separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; and disclose income taxes and earnings per share data applicable to an extraordinary item. The guidance is effective for the Company for the quarter ending April 3, 2016 with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on our consolidated financial position, results of operations, or cash flows.

32

In May 2014, the FASB issued guidance on revenue from contracts with customers. The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. Companies may adopt the guidance using a full retrospective approach or report the cumulative effect as of the date of adoption. In July 2015, the FASB voted to approve a one-year deferral of the effective date. The guidance is effective for the Company for the quarter ending April 1, 2018. The Company is in the process of determining the impact of this guidance on our consolidated financial position, results of operations, and cash flows.    

3. Acquisitions
Fiscal 2016
•
During the first quarter of fiscal 2016, we completed two small acquisitions in the Forged Products segment.
•
On July 31, 2015, we acquired Composites Horizons, LLC ("CHI"), the leading independent supplier of high temperature carbon and ceramic composite components, including ceramic matrix composites (CMC), for use in next-generation aerospace engines. Using proprietary technologies, CHI manufactures specialized, performance-critical components with exceptional strength and high-temperature tolerance, thus allowing aircraft engines to operate with higher fuel efficiency and lower emissions. In combination with CHI, we are now able to offer our engine customers metallic and CMC material capability to meet a broader range of customer requirements. CHI operates from one site in Covina, California, and employs approximately 200 people. The CHI acquisition was an asset and stock purchase for tax purposes and operates as part of the Investment Cast Products segment.
•
On October 30, 2015, we acquired Noranco for approximately $560 million. Noranco is a premier supplier of complex machined and fabricated components for aero-engine, landing gear and airframe applications. Noranco provides significant value to aerospace customers through a wide range of sophisticated capabilities including high precision machining and sheet metal fabrication, processing, assembly and testing. Noranco's aerostructures business strengthens our existing market position in airframe products, and their engine, landing gear, and machining capability expands our product offering on current and next generation aircraft. Noranco employs approximately 1,100 employees across seven manufacturing sites in North America. The Noranco acquisition was a stock purchase for tax purposes and operates as part of the Airframe Products segment.
•
During the third quarter of fiscal 2016, we completed a small acquisition in the Airframe Products segment.
The purchase price allocations for certain acquisitions noted above are subject to further refinement. The impact of the acquisitions above is not material to our consolidated results of operations; consequently, pro forma information has not been included.
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. 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.
•
On October 31, 2013, we acquired Permaswage SAS ("Permaswage"), a world-leading designer and manufacturer of aerospace fluid fittings, for approximately $600 million in cash, funded by commercial paper borrowings. Permaswage's primary focus is the design and manufacture of permanent fittings used in fluid conveyance systems for airframe applications, as well as related installation tooling. The company operates manufacturing locations in Gardena, California; Paris, France; and Suzhou, China. 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.
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.

33

4. Discontinued operations
Fiscal 2016
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. The sale of the business was completed in the third quarter of fiscal 2016. The transaction resulted in a gain of approximately $1 million and cash proceeds of $23 million.
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 third quarter of fiscal 2016, we recognized an impairment charge of $5 million, pre-tax, as the fair value, as determined by expected net proceeds, did not exceed the carrying value.
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 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 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.
The components of discontinued operations for the periods presented are as follows:
 
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Net sales
$
27

 
$
51

 
$
107

Cost of goods sold
28

 
48

 
87

Selling and administrative expenses
3

 
6

 
9

Restructuring and asset impairment
5

 
16

 
—

Net (loss) gain from operations before income taxes
(9
)
 
(19
)
 
11

Income tax (expense) benefit
(1
)
 
3

 
1

Net (loss) gain from operations
(10
)
 
(16
)
 
12

Gain on disposal and other expenses, net of tax benefit of $1, $0 and $2 respectively
3

 
1

 
13

Net (loss) income from discontinued operations
$
(7
)
 
$
(15
)
 
$
25

 
 
 
 
 
 

Included in the Consolidated Balance Sheets are the following major classes of assets and liabilities associated with the discontinued operations:
 
January 3, 2016
 
March 29, 2015
Assets of discontinued operations:
 
 
 
Current assets
$
26

 
$
28

Net property, plant and equipment
5

 
20

Other assets
—

 
8

 
$
31

 
$
56

Liabilities of discontinued operations:
 
 
 
Current liabilities
$
8

 
$
13

Long-term debt
—

 
1

Other long-term liabilities
3

 
2

 
$
11

 
$
16

 
 
 
 

34

5. Concentration of credit risk
Approximately 74 percent, 70 percent and 69 percent of business activity was with companies in the aerospace industry in fiscal 2016, 2015 and 2014, respectively. Approximately 15 percent, 13 percent and 13 percent of total sales were directly to General Electric Company in fiscal 2016, 2015 and 2014, respectively, and approximately 10 percent of total sales were directly to The Boeing Company in fiscal 2016. Accordingly, we are exposed to a concentration of credit risk for this portion of receivables. We have long-standing relationships with our aerospace customers, and management considers the credit risk to be low.

6. Inventories
Inventories consisted of the following:
 
 
January 3, 2016
 
March 29, 2015
Finished goods
$
602

 
$
544

Work-in-process
1,363

 
1,262

Raw materials and supplies
1,074

 
1,155

 
3,039

 
2,961

Excess of LIFO cost over current FIFO cost
740

 
679

Total
$
3,779

 
$
3,640

 
 
 
 
Approximately 96 percent of total inventories were valued on a LIFO basis at January 3, 2016 and March 29, 2015. During fiscal 2016 and 2015, certain LIFO inventory quantities were reduced. The liquidation of LIFO inventory quantities carried at costs paid in prior years increased cost of goods sold by $26 million in fiscal 2016 and $13 million in fiscal 2015.
As of January 3, 2016, the percentage of our U.S. inventories which are valued using LIFO for book purposes was 93 percent. As of January 3, 2016, none of our U.S. inventories were valued using LIFO for tax purposes. Refer to Note 20—Inventory and other asset impairment charges for discussion of a non-cash inventory impairment charge recognized in fiscal 2016.

7. Goodwill and acquired intangibles
We perform our annual goodwill and indefinite-lived intangible assets impairment test during the second quarter of each fiscal year. If the carrying value exceeds the estimated fair value, impairment is recorded. Assets for which fair value does not substantially exceed carrying value may have a higher risk of impairment in future periods. For fiscal 2016, 2015 and 2014, it was determined that the fair value of the related reporting units substantially exceeded their carrying value and that there was no impairment of goodwill. Furthermore, it was determined that the fair value of indefinite-lived intangible assets substantially exceeded their carrying value for all but one asset, which had a carrying value of approximately $30 million as of January 3, 2016, and that there was no impairment of indefinite-lived intangible assets. We considered the impact of the asset impairment charges recorded during fiscal 2016 on related goodwill and intangible assets and concluded that no impairment was indicated. There were no other changes during the fiscal year requiring a goodwill or indefinite-lived intangible assets impairment test in accordance with goodwill and other intangible assets accounting guidance.
The changes in the carrying amount of goodwill by reportable segment for fiscal 2016 and 2015 were as follows:
 
 
March 30, 2014
 
Acquired
 
Currency
translation
and other (1)
 
March 29, 2015
 
Acquired
 
Currency
translation
and other (1)
 
January 3, 2016
Investment Cast Products
$
339

 
$
—

 
$
(2
)
 
$
337

 
$
74

 
$
—

 
$
411

Forged Products
3,666

 
—

 
(113
)
 
3,553

 
130

 
(4
)
 
3,679

Airframe Products
2,608

 
211

 
(48
)
 
2,771

 
152

 
(11
)
 
2,912

Total
$
6,613

 
$
211

 
$
(163
)
 
$
6,661

 
$
356

 
$
(15
)
 
$
7,002

 
 
 
 
 
 
 
 
 
 
 
 
 
 

(1)
Includes adjustments to the purchase price allocations of several acquisitions.


35

The gross carrying amount and accumulated amortization of our acquired intangible assets were as follows:
 
 
January 3, 2016
 
March 29, 2015
  
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Patents
$
9

 
$
(8
)
 
$
1

 
$
13

 
$
(11
)
 
$
2

Proprietary technology
—

 
—

 
—

 
2

 
(2
)
 
—

Long-term customer relationships
751

 
(97
)
 
654

 
482

 
(85
)
 
397

Backlog
44

 
(36
)
 
8

 
56

 
(41
)
 
15

Revenue sharing agreements
29

 
(3
)
 
26

 
29

 
(3
)
 
26

 
$
833

 
$
(144
)
 
689

 
$
582

 
$
(142
)
 
440

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Tradenames
 
 
 
 
696

 
 
 
 
 
699

Long-term customer relationships
 
 
 
 
2,890

 
 
 
 
 
2,605

Acquired intangibles, net
 
 
 
 
$
4,275

 
 
 
 
 
$
3,744

 
 
 
 
 
 
 
 
 
 
 
 
Amortization expense for finite-lived acquired intangible assets was $34 million, $42 million and $41 million for fiscal 2016, 2015 and 2014, respectively. In fiscal 2016, we removed $32 million of fully amortized intangible assets from the gross carrying amount and accumulated amortization. Projected amortization expense for finite-lived intangible assets for the succeeding five fiscal years is as follows:
Fiscal
Estimated
Amortization
Expense
2017
$
47

2018
41

2019
40

2020
39

2021
39

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

8. Accrued liabilities
Accrued liabilities consisted of the following:
 
 
January 3, 2016
 
March 29, 2015
Salaries and wages payable
$
165

 
$
204

Other accrued liabilities
384

 
355

Total
$
549

 
$
559

 
 
 
 


36

9. Financing arrangements
Long-term debt is summarized as follows:
 
 
January 3, 2016
 
March 29, 2015
0.700% Senior Notes due fiscal 2016 ($500 face value less unamortized discount of $0 and $0)
$
—

 
$
500

1.250% Senior Notes due fiscal 2019 ($1,000 face value less unamortized discount of $1 and $1)
999

 
999

2.250% Senior Notes due fiscal 2021 ($550 face value less unamortized premium of $1 and $0)
551

 
—

2.500% Senior Notes due fiscal 2024 ($1,000 face value less unamortized discount of $4 and $5)
996

 
995

3.250% Senior Notes due fiscal 2026 ($850 face value less unamortized discount of $2 and $0)
848

 
—

4.200% Senior Notes due fiscal 2036 ($275 face value less unamortized discount of $1 and $0)
274

 
—

3.900% Senior Notes due fiscal 2044 ($500 face value less unamortized discount of $3 and $3)
497

 
497

4.375% Senior Notes due fiscal 2046 ($325 face value less unamortized discount of $1 and $0)
324

 
—

Commercial paper
694

 
1,587

Other
1

 
8

 
5,184

 
4,586

Less: Long-term debt currently due
—

 
1,093

Total
$
5,184

 
$
3,493

 
 
 
 
Long-term debt maturing in each of the next five fiscal years, excluding the discount and/or premium, is as follows:
 
Fiscal
Debt
2017
$
—

2018
1

2019
1,000

2020
694

2021
550

Thereafter
2,950

Total
$
5,195

 
 
    
On June 1, 2015, we issued $2.0 billion aggregate principal amount of notes (collectively, the "Senior Notes") as follows: $550 million of 2.250% Senior Notes due 2020; $850 million of 3.250% Senior Notes due 2025; $275 million of 4.200% Senior Notes due 2035; and $325 million of 4.375% Senior Notes due 2045. The Senior Notes are unsecured obligations of the Company and rank equally with all of the other existing and future senior, unsecured and unsubordinated debt of the Company.
On December 14, 2015, we entered into a 364-day, $1.0 billion revolving credit facility maturing December 2016 (the “364-Day Credit Agreement”), unless converted into a one-year term loan at the option of the Company at the end of the revolving period. The 364-Day Credit Agreement replaces the prior 364-day credit agreement that expired December 2015. 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 "2013 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 June 15, 2015, we amended the agreement to extend the maturity date one year to December 2019, utilizing one of the two extension options. The 2013 Credit Agreement contains customary representations and warranties, events of default, and financial and other covenants. The 364-Day and 2013 Credit Agreements may be referred to collectively as the "Credit Agreements." We had not borrowed funds under the Credit Agreements as of January 3, 2016.
Historically, we have issued commercial paper as a method of raising short-term liquidity. We believe we continue to have the ability to issue commercial paper and have issued commercial paper to cover acquisitions and short-term cash requirements in recent quarters. As of January 3, 2016, the amount of commercial paper borrowings outstanding was $694 million and the weighted average interest rate was 0.5%. As of March 29, 2015, the amount of commercial paper borrowings

37

outstanding was $1,587 million and the weighted average interest rate was 0.2%. During fiscal 2016, the average amount of commercial paper borrowings outstanding was $603 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 2016 and 2015, the largest daily balance of outstanding commercial paper borrowings was $1,872 million and $1,737 million, respectively.
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 January 3, 2016 was $1.3 billion due to our outstanding commercial paper borrowings of $694 million.
Our financial covenant requirement and actual ratio as of January 3, 2016 was as follows:

  
Covenant Requirement
Actual
Consolidated leverage ratio(1)
65.0
%
(maximum)
30.7
%
 
 
 
_________________________
(1)
Terms are defined in the Credit Agreements.

As of January 3, 2016, we were in compliance with the financial covenant in the Credit Agreements.

10. Income taxes
Total pre-tax income before equity in earnings of unconsolidated affiliates was:
 
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Domestic
$
1,035

 
$
2,154

 
$
2,197

Foreign
215

 
385

 
391

Total pretax income
$
1,250

 
$
2,539

 
$
2,588

 
 
 
 
 
 
The provision for income taxes consisted of the following:
 
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Current taxes:
 
 
 
 
 
Federal
$
270

 
$
526

 
$
510

Foreign
60

 
90

 
96

State
20

 
44

 
42

 
350

 
660

 
648

Deferred income taxes:
 
 
 
 
 
Federal
$
71

 
$
148

 
$
159

Foreign
(9
)
 
10

 
13

State
8

 
(2
)
 
10

 
70

 
156

 
182

Provision for income taxes
$
420

 
$
816

 
$
830

 
 
 
 
 
 
We have not provided U.S. income taxes on cumulative earnings of non-U.S. affiliates and associated companies that have been reinvested indefinitely. These earnings relate to ongoing operations and at January 3, 2016, were approximately $1,546 million. Most of these earnings have been reinvested in active non-U.S. business operations, and we do not intend to use these earnings as a source of funding for U.S. operations. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the U.S. federal income tax liability that would be payable if such earnings were not reinvested indefinitely.

38

A reconciliation of the U.S. federal statutory rate to the effective income tax rate follows:
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Statutory federal rate
35.0
 %
 
35.0
 %
 
35.0
 %
Effect of:
 
 
 
 
 
State taxes, net of federal benefit
1.5
 %
 
1.0
 %
 
1.8
 %
Domestic manufacturing deduction
(2.3
)%
 
(2.1
)%
 
(2.1
)%
Earnings taxed at different rates in foreign jurisdictions
(1.7
)%
 
(1.6
)%
 
(1.8
)%
Other
1.1
 %
 
(0.2
)%
 
(0.8
)%
Effective rate
33.6
 %
 
32.1
 %
 
32.1
 %
 
 
 
 
 
 
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis, as well as net operating loss and tax credit carryforwards, and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred income tax assets and liabilities represent amounts available to reduce or increase taxes payable on taxable income in future years. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including carrybacks (if applicable), reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.
Significant components of our deferred tax assets and liabilities were as follows:

 
January 3, 2016
 
March 29, 2015
Deferred tax assets arising from:
 
 
 
Environmental reserves and other expense accruals
$
234

 
$
227

Acquired loss contracts liabilities
47

 
66

Stock options
83

 
49

Post-retirement benefits other than pensions
119

 
115

Pension accruals
67

 
108

Net operating and capital loss carryforwards
68

 
67

Tax credit carryforwards
6

 
7

Valuation allowances
(58
)
 
(51
)
Gross deferred tax assets
566

 
588

Deferred tax liabilities arising from:
 
 
 
Depreciation/amortization
(219
)
 
(218
)
Goodwill
(362
)
 
(324
)
Acquired intangible assets
(863
)
 
(844
)
Inventory basis differences
(158
)
 
(124
)
Gross deferred tax liabilities
(1,602
)
 
(1,510
)
Net deferred tax liabilities
$
(1,036
)
 
$
(922
)
 
 
 
 
The valuation allowances for deferred tax assets as of January 3, 2016 were $58 million. The net change for total valuation allowances for the year ended January 3, 2016 was an increase of $7 million, including a $3 million decrease from foreign company tax losses, partially offset by a $10 million increase from U.S. capital losses. As of January 3, 2016, we had net capital and operating loss carryforward benefits of approximately $14 million that expire in the fiscal years ending December 2020 through December 2037. Valuation allowances of $12 million were recognized to offset the deferred tax asset relating to those carryforward deferred tax benefits.

39

Uncertain Tax Positions
The following table summarizes the activity related to our reserve for uncertain tax positions:
 
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Beginning Balance
$
16

 
$
14

 
$
24

Gross increases related to prior period tax positions
4

 
3

 
10

Gross decreases related to prior period tax positions
(2
)
 
—

 
(6
)
Gross increases related to current period tax positions
—

 
—

 
2

Decreases related to settlements with tax authorities
(3
)
 
(1
)
 
(15
)
Expiration of the statute of limitations for assessment of taxes
—

 
—

 
(1
)
Ending Balance
$
15

 
$
16

 
$
14

 
 
 
 
 
 
Our policy is to recognize interest and penalties accrued on uncertain tax positions as part of the provision for income taxes. During fiscal 2016, 2015 and 2014, the amount of tax expense recognized related to interest and penalties was not significant. The reserve for uncertain tax positions as of January 3, 2016, March 29, 2015 and March 30, 2014 included an accrual for interest and penalties of $4 million, $4 million, and $3 million, respectively.
We file income tax returns in the U.S. federal jurisdiction, the United Kingdom, and other state, local, and foreign jurisdictions. As of January 3, 2016, the U.S. Internal Revenue Service has completed examinations of tax years through March 30, 2014. We are no longer subject to examination in the United Kingdom for fiscal years through 2012. For other state, local, and foreign jurisdictions, with few exceptions, the statutes of limitation are closed for all tax years through March 28, 2010.
Included in the reserve for uncertain tax positions at January 3, 2016 and March 29, 2015 are $7 million and $13 million, respectively, of unrecognized tax benefits that, if recognized, would impact the effective tax rate. We estimate that within the next twelve months, the reserve for uncertain tax positions could change by $0 to $4 million. The tax matters associated with these uncertain tax positions primarily relate to state tax positions in various states. These tax matters are under audit, but we cannot reasonably predict the timing or the ultimate outcome of these matters.

11. Earnings per share
Net income and weighted average number of shares outstanding used to compute earnings per share were as follows:
 
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Amounts attributable to PCC shareholders:
 
 
 
 
 
Net income from continuing operations
$
820

 
$
1,545

 
$
1,752

Net (loss) income from discontinued operations
(7
)
 
(15
)
 
25

Net income attributable to PCC shareholders
$
813

 
$
1,530

 
$
1,777

 
 
 
 
 
 
 
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Weighted average shares outstanding-basic
137.7

 
142.6

 
145.6

Effect of dilutive stock-based compensation plans
0.9

 
0.9

 
1.0

Weighted average shares outstanding-diluted
138.6

 
143.5

 
146.6

 
 
 
 
 
 
Basic earnings per share are calculated based on the weighted average number of shares outstanding. Diluted earnings per share are computed based on that same number of shares plus additional dilutive shares representing stock distributable under stock option, phantom stock, deferred stock unit and employee stock purchase plans computed using the treasury stock method.
Options to purchase 2.2 million, 1.5 million and 0.4 million shares of common stock were outstanding during fiscal 2016, 2015 and 2014, respectively, and were not included in the computation of diluted earnings per share because to do so would have been antidilutive. These options could be dilutive in the future.


40

12. Fair value measurements
Fair value guidance defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. Fair value guidance defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
 
Level 1
Quoted prices in active markets for identical assets or liabilities.
 
 
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table presents the assets and liabilities measured at fair value on a recurring basis as of January 3, 2016:
 
 
Fair Value Measurements Using
 
 
  
Level 1    
 
Level 2    
 
Level 3    
 
Assets/Liabilities
at Fair Value
Assets:
 
 
 
 
 
 
 
Available for sale securities
$
8

 
$
—

 
$
—

 
$
8

Derivative instruments
$
—

 
$
4

 
$
—

 
$
4

Liabilities:
 
 
 
 
 
 
 
Derivative instruments
$
—

 
$
27

 
$
—

 
$
27

 
 
 
 
 
 
 
 

The following table presents the assets and liabilities measured at fair value on a recurring basis as of March 29, 2015:
 
 
Fair Value Measurements Using
 
 
  
Level 1    
 
Level 2    
 
Level 3    
 
Assets/Liabilities
at Fair Value
Assets:
 
 
 
 
 
 
 
Available for sale securities
$
32

 
$
—

 
$
—

 
$
32

Derivative instruments
$
—

 
$
4

 
$
—

 
$
4

Liabilities:
 
 
 
 
 
 
 
Derivative instruments
$
—

 
$
30

 
$
—

 
$
30

 
 
 
 
 
 
 
 
Available for sale securities consist of investments in shares of publicly traded companies. All available for sale securities are carried at fair value using quoted prices in active markets. Any unrealized gains or losses on these securities are recognized through other comprehensive income. Refer to Note 20—Inventory and other asset impairment charges for discussion of recognized losses related to these investments. There were no transfers between Level 1 and Level 2 fair value measurements during fiscal 2016 or 2015.
Derivative instruments consist of fair value hedges, net investment hedges, and cash flow hedges. At various times, we use derivative financial instruments to limit exposure to changes in foreign exchange rates, interest rates and prices of strategic raw materials. Foreign exchange, interest rate and commodity derivative instruments' fair values are determined using pricing models with inputs that are observable in the market or can be derived principally from, or corroborated by, observable market data. There were no changes in our valuation techniques used to measure assets and liabilities at fair value on a recurring basis.
We estimate that the fair value of our long-term fixed rate debt instruments was $4,439 million compared to a book value of $4,489 million at January 3, 2016. At March 29, 2015, the estimated fair value of our long-term fixed rate debt instruments was $3,013 million compared to a book value of $2,997 million. The fair value of long-term fixed rate debt was estimated using a combination of observable trades and quoted prices on such debt, as well as observable market data for comparable

41

instruments. Long-term fixed rate debt would be classified as Level 2 within the fair value hierarchy if it were measured at fair value. The estimated fair value of our miscellaneous long-term debt approximates book value.

13. Commitments and contingencies
We lease certain facilities, office space and equipment under operating leases for varying periods. Future minimum rental payments under non-cancelable operating leases with initial or remaining terms of one year or more at January 3, 2016 are as follows:
 
Fiscal
  
2017
$
44

2018
36

2019
29

2020
20

2021
13

Thereafter
48

Total
$
190

 
 
Operating lease obligations attributable to operations held-for-sale were $5 million. Total rent expense for all operating leases was $34 million, $45 million and $46 million for fiscal 2016, 2015 and 2014, respectively.
Various lawsuits arising during the normal course of business are pending against us. In the opinion of management, the outcome of these lawsuits, either individually or in the aggregate, will not have a material effect on our consolidated financial position, results of operations, cash flows or business.
In the ordinary course of business, we warrant that our products will conform to contractually established standards and tolerances over various time periods. The warranty accrual as of January 3, 2016 and March 29, 2015, and the change in the accrual for fiscal 2016, 2015 and 2014, is not material to our consolidated financial position, results of operations or cash flows.
In connection with certain transactions, primarily divestitures, we may provide routine indemnifications (e.g., retention of previously existing environmental and tax liabilities) with terms that range in duration and often are not explicitly defined. Where appropriate, an obligation for such indemnifications is recorded as a liability. Because the obligated amounts of these types of indemnifications often are not explicitly stated, the overall maximum amount of the obligation under such indemnifications cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of divestiture, we have not historically made significant payments for these indemnifications.
Environmental Matters
The Company continues to participate in environmental assessments and cleanups at several locations. These include currently owned and/or operating facilities and adjoining properties, previously owned or operated facilities and adjoining properties and waste sites, including Superfund (Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")) sites.
A liability is recorded for environmental remediation on an undiscounted basis when a cleanup program becomes probable and the costs or damages can be reasonably estimated. As assessments and cleanups proceed, the liability is adjusted based on progress made in determining the extent of remedial actions and related costs and damages. The liability can change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, the allocation of costs among potentially responsible parties as well as other third parties, and technological changes, among others. The amounts of any such adjustments could have a material adverse effect on our results of operations in a given period.
The Company's environmental liability balance was $440 million and $448 million at January 3, 2016 and March 29, 2015, of which $72 million and $95 million was classified as a current liability, respectively, and generally reflects the best estimate of the costs to remediate identified environmental conditions for which costs can reasonably be estimated. If no point in a range of costs is a better estimate than others, the low end of the range of costs is accrued. The estimated upper end of the range of reasonably possible environmental costs exceeded amounts accrued by approximately $355 million at January 3, 2016. Actual future losses may be lower or higher given the uncertainties regarding the status of laws, regulations, enforcement policies, the impact of potentially responsible parties, technology and information related to individual sites.

42

Due to the nature of its historical operations, TIMET has significant environmental liabilities at its titanium manufacturing plants. It has for many years, under the oversight of government agencies, conducted investigations of the soil and groundwater contamination at its plant sites. TIMET has initiated remedial actions at its properties, including the capping of former on-site landfills, removal of contaminated sediments from on-site surface impoundments, remediation of contaminated soils and the construction of a slurry wall and groundwater extraction system to treat contaminated groundwater as well as other remedial actions. Although it is anticipated that significant remediation will be completed within the next two years, it is expected that a substantial portion of the TIMET environmental accruals will be expended within an estimated 40 years. Expenditures related to these remedial actions and for resolving TIMET's other environmental liabilities will be applied against existing liabilities. As the remedial actions are implemented at these sites, the liabilities will be adjusted based on the progress made in determining the extent of contamination and the extent of required remediation. While the existing liability generally represents our current best estimate of the costs or range of costs of resolving the identified environmental liabilities, these costs may change substantially due to factors such as the nature and extent of contamination, changes in legal and remedial requirements, the allocation of costs among potentially responsible parties as well as other third parties, and technological changes, among others.

14. Shareholders’ equity
Authorized shares of common stock, with no par value and $1 stated value, consisted of 450.0 million shares at January 3, 2016 and March 29, 2015. Authorized and unissued no par serial preferred stock consisted of 1.0 million shares at January 3, 2016 and March 29, 2015.
Share repurchase program
During fiscal 2013 through 2015, the Board of Directors approved $2.5 billion for use in the Company's stock repurchase program. 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. Repurchases under the Company's program may be made in open market or privately negotiated transactions in compliance with Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements, and other relevant factors. This share repurchase program did not obligate PCC to acquire any particular amount of common stock, and it could have been suspended at any time at the Company's discretion. As part of the Merger with Berkshire, the Company agreed not to repurchase additional shares.
During the nine months ended January 3, 2016, the Company repurchased 1,292,056 shares under this program at an average price paid per share of $210.01 for an aggregate purchase price of approximately $271 million. As of January 3, 2016, the Company had repurchased a total of 11,104,150 shares under this program for an aggregate purchase price of $2,457 million.

15. Stock-based compensation plans
We account for our stock based compensation plans in accordance with stock-based compensation guidance, which requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements over the vesting period, with the cost measured based on the estimated fair value of the equity or liability instruments issued.
Prior to the Merger with Berkshire, we had three stock incentive plans for certain officers, key salaried employees and directors: the 1994 Stock Incentive Plan, the 1999 Nonqualified Stock Option Plan, and the 2001 Stock Incentive Plan. Shares authorized under these plans totaled approximately 35,192,000 shares at the time of inception. The plans allow for the grant of stock options, stock bonuses, stock appreciation rights, cash bonus rights and restricted stock.
Stock option awards
The Compensation Committee of the Board of Directors determines awards granted under officer and employee stock option plans. To date, all stock option awards under the stock incentive plans have been nonqualified stock option grants. The Compensation Committee fixes the time limit within which options may be exercised and other stock option terms. To date, option grant prices under the three stock incentive plans have been at the fair market value on the date of grant. Generally, options become exercisable at a rate of 25% each year over four years from the date of grant and expire ten years from the date of grant. Total expense recognized was $117 million, $48 million, and $50 million for fiscal 2016, 2015 and 2014, respectively. In accordance with the terms of the grants, all outstanding stock options vested upon shareholder approval of the Merger.
Deferred stock unit awards
The Deferred Stock Unit Award Program provides for the grant of deferred stock units (“DSUs”) to non-employee directors pursuant to the 2001 Stock Incentive Plan. At a date immediately following the Annual Meeting of Shareholders, each

43

director was granted DSUs in an amount equal to $155,000 in fiscal 2016 and $140,000 in fiscal 2015 and 2014, divided by the closing price of PCC common stock on that date. Under the terms of the program, the units vest over three years, with provisions for accelerated vesting in certain circumstances. The DSUs are settled in shares of common stock equal to the number of units in a director’s account at the time of settlement, which is no earlier than upon cessation of board service. At the time of the annual grant, the director will receive the value of the dividends that would have been paid on the stock underlying the DSUs during the year. The value of the dividends is divided by the closing price of PCC common stock to determine the number of units granted. The cost of these awards is determined as the market value of the shares at the date of grant. Total expense recognized was $2 million for fiscal 2016 and $1 million in fiscal 2015 and 2014. In accordance with the terms of the grants, all outstanding deferred stock unit awards vested upon shareholder approval of the Merger.
Employee stock purchase plan
Prior to the Merger with Berkshire, we had an Employee Stock Purchase Plan (“ESPP”) whereby we are authorized to issue shares of common stock to our full-time employees, nearly all of whom are eligible to participate. Under the terms of the plan, employees can choose to have up to 10 percent of their annual base earnings and bonus withheld to purchase PCC common stock subject to limitations established in the Internal Revenue Code. Employees then have the option to use the withheld funds to purchase shares of PCC common stock at the lower of 85 percent of the fair market value of the stock on the date of grant or on the date of purchase. Total expense recognized was $5 million in fiscal 2016 and $8 million in fiscal 2015 and 2014. As PCC's common stock is no longer traded on any market, the ESPP was no longer available to employees after December 31, 2015.
Deferred compensation plan
We have a deferred compensation plan whereby eligible executives may elect to defer up to 100% of their regular cash compensation and cash incentive awards, and non-employee Board members may elect to defer up to 100% of their cash compensation for Board service. The compensation deferred under this plan is credited with earnings and losses as determined by the rate of return on investments selected by the plan participants. Each participant is fully vested in all deferred compensation and those earnings that have been credited to their individual accounts. Our promise to pay amounts deferred under this plan is an unsecured obligation. Balances at January 3, 2016 and March 29, 2015 of $78 million and $75 million, respectively, are reflected in pension and other postretirement benefit obligations in the Consolidated Balance Sheets.
Prior to the Merger with Berkshire, one investment election of the deferred compensation plan was Phantom Stock Units, an investment that tracks the value of PCC common stock. Investments in Phantom Stock Units may not be exchanged during the period of employment at PCC. Payment of investments in Phantom Stock Units following retirement or termination of employment is made only in shares of PCC common stock and therefore, Phantom Stock Units are accounted for as equity awards. The stock-based compensation expense is calculated at the date of purchase of Phantom Stock Units and recorded as additional paid in capital. At January 3, 2016 and March 29, 2015, there was $12 million and $11 million, respectively, of deferred compensation related to Phantom Stock Units included in additional paid-in capital.
The total amount of cash received from the exercise of stock options was $62 million, $69 million, and $84 million in fiscal 2016, 2015 and 2014, respectively. The related tax benefit was $11 million, $20 million, and $32 million in fiscal 2016, 2015 and 2014, respectively.
The outstanding options for stock incentive plan shares have expiration dates ranging from fiscal 2017 to fiscal 2026. At January 3, 2016, approximately 5,945,000 stock incentive plan shares were available for future grants.
There were approximately 148,000 shares issued under the 2008 ESPP during the year ended January 3, 2016. At January 3, 2016, there were approximately 1,051,000 shares available for issuance under the 2008 Employee Stock Purchase Plan.
The following table sets forth total stock-based compensation expense and related tax benefit recognized in the Consolidated Statements of Income: 
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Cost of goods sold
$
24

 
$
16

 
$
17

Selling and administrative expenses
100

 
41

 
43

Stock-based compensation expense before income taxes
124

 
57

 
60

Income tax benefit
(42
)
 
(17
)
 
(19
)
Total stock-based compensation expense after income taxes
$
82

 
$
40

 
$
41

 
 
 
 
 
 

44

    
No stock-based compensation expense was capitalized in fiscal 2016, 2015 or 2014 as it was not material. In accordance with the terms of the grants, all outstanding stock options vested upon shareholder approval of the Merger. Therefore, the remaining expense associated with our stock-based compensation plans totaling approximately $93 million was recognized during the third quarter of fiscal 2016.
The fair value of the stock-based awards, as determined under the Black-Scholes valuation model, was estimated using the weighted-average assumptions outlined below: 
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Stock option plans:
 
 
 
 
 
Risk-free interest rate
1.3
%
 
1.4
%
 
1.1
%
Expected dividend yield
0.1
%
 
0.1
%
 
0.1
%
Expected volatility
23.4
%
 
23.7
%
 
26.3
%
Expected life (in years)
4.2
–
4.4

 
3.3
–
4.4

 
3.2
–
4.4

Employee Stock Purchase Plan:
 
 
 
 
 
Risk-free interest rate
0.3
%
 
0.2
%
 
0.1
%
Expected dividend yield
0.1
%
 
0.1
%
 
0.1
%
Expected volatility
19.4
%
 
19.8
%
 
20.2
%
Expected life (in years)
1.0
 
 
1.0
 
 
1.0
 
 
 
 
 
 
 
We use the U.S. Treasury (constant maturity) interest rate as the risk-free interest rate, and we use 4-year historical volatility for stock option plans and 1-year historical volatility for the Employee Stock Purchase Plan as the expected volatility. Our determination of expected terms and estimated pre-vesting forfeitures is based on an analysis of historical and expected patterns.
The weighted-average fair value of stock-based compensation awards granted and the intrinsic value of options exercised during the period were: 
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Stock option plans:
 
 
 
 
 
Grant date fair value per share
$
46.41

 
$
48.74

 
$
56.71

Total fair value of awards granted (in millions)
$
2

 
$
72

 
$
63

Total intrinsic value of options exercised (in millions)
$
35

 
$
64

 
$
104

Employee Stock Purchase Plan:
 
 
 
 
 
Grant date fair value per share
$
47.63

 
$
53.22

 
$
45.44

Total fair value (in millions)
$
5

 
$
8

 
$
8

 
 
 
 
 
 


45

Additional information with respect to stock option activity is as follows: 
 
Option
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(years)
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding at March 31, 2013
4,562,000

 
$
136.70

 
7.50
 
$
242

Granted
1,115,000

 
245.91

 
 
 
 
Exercised
(774,000
)
 
108.42

 
 
 
 
Forfeited or expired
(167,000
)
 
179.06

 
 
 
 
Outstanding at March 30, 2014
4,736,000

 
165.57

 
7.30
 
389

Granted
1,484,000

 
226.49

 
 
 
 
Exercised
(552,000
)
 
125.70

 
 
 
 
Forfeited or expired
(358,000
)
 
204.85

 
 
 
 
Outstanding at March 29, 2015
5,310,000

 
184.19

 
7.21
 
203

Granted
35,000

 
216.32

 
 
 
 
Exercised
(437,000
)
 
142.64

 
 
 
 
Forfeited or expired
(241,000
)
 
220.20

 
 
 
 
Outstanding at January 3, 2016
4,667,000

 
186.48

 
6.48
 
227

Vested and Exercisable at January 3, 2016
4,667,000

 
186.48

 
6.48
 
227

 
 
 
 
 
 
 
 

16. Accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss) ("AOCI") consists of cumulative unrealized foreign currency translation adjustments, pension and postretirement obligations, unrealized gains (losses) on certain derivative instruments, and unrealized gains (losses) on available for sale securities.
The components of AOCI (net of tax) for the nine months ended January 3, 2016 were as follows :
 
Cumulative unrealized foreign currency translation gains (losses)
 
Pension and postretirement obligations
 
Unrealized gain (loss) on derivatives
 
Unrealized gain (loss) on available for sale securities
 
Total
Balance at March 29, 2015
$
(284
)
 
$
(637
)
 
$
(12
)
 
$
(22
)
 
$
(955
)
OCI before reclassifications
(58
)
 
45

 
—

 
(24
)
 
(37
)
Amounts reclassified from AOCI
—

 
32

 
10

 
54

 
96

Net current period OCI
(58
)
 
77

 
10

 
30

 
59

Balance at January 3, 2016
$
(342
)
 
$
(560
)
 
$
(2
)
 
$
8

 
$
(896
)
 
 
 
 
 
 
 
 
 
 
The components of AOCI (net of tax) for the fiscal year ended March 29, 2015 were as follows:
 
Cumulative unrealized foreign currency translation gains (losses)
 
Pension and postretirement obligations
 
Unrealized gain (loss) on derivatives
 
Unrealized gain (loss) on available for sale securities
 
Total
Balance at March 30, 2014
$
69

 
$
(483
)
 
$
6

 
$
(10
)
 
$
(418
)
OCI before reclassifications
(353
)
 
(185
)
 
(17
)
 
(12
)
 
(567
)
Amounts reclassified from AOCI
—

 
31

 
(1
)
 
—

 
30

Net current period OCI
(353
)
 
(154
)
 
(18
)
 
(12
)
 
(537
)
Balance at March 29, 2015
$
(284
)
 
$
(637
)
 
$
(12
)
 
$
(22
)
 
$
(955
)
 
 
 
 
 
 
 
 
 
 


46

Reclassifications from AOCI for the periods ended January 3, 2016 and March 29, 2015 are summarized in the following table:
 
 
Nine Months Ended
 
Twelve Months Ended
 
 
Details about Accumulated Other Comprehensive Income Components
 
January 3, 2016
 
March 29, 2015
 
Affected Line Item in Statement Where Net Income Is Presented
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Gain (loss) on cash flow hedges:
 
 
 
 
 
 
Foreign exchange contracts
 
$
(11
)
 
$
1

 
Sales
Foreign exchange contracts
 
(3
)
 
—

 
Cost of goods sold
 
 
(14
)
 
1

 
Total before tax
 
 
4

 
—

 
Tax benefit
 
 
$
(10
)
 
$
1

 
Net of tax
 
 
 
 
 
 
 
Loss on available for sale securities
 
$
(54
)
 
$
—

 
Restructuring and asset impairment
 
 
—

 
—

 
Tax benefit
 
 
$
(54
)
 
$
—

 
Net of tax
 
 
 
 
 
 
 
Amortization of defined benefit pension items:
 
 
 
 
 
 
Prior-service cost
 
$
(2
)
 
$
(3
)
 
(a)
Net actuarial loss
 
(44
)
 
(45
)
 
(a)
 
 
(46
)
 
(48
)
 
Total before tax
 
 
14

 
17

 
Tax benefit
 
 
$
(32
)
 
$
(31
)
 
Net of tax
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(96
)
 
$
(30
)
 
Net of tax
 
 
 
 
 
 
 

(a) These AOCI components are included in the computation of net periodic pension cost (see Note 18 for additional details). The net periodic pension cost is included in cost of sales and selling and administrative line items in the Consolidated Statements of Income.

17. Derivatives and hedging activities
We hold and issue derivative financial instruments for the purpose of hedging the risks of certain identifiable and anticipated transactions and to protect our investments in foreign subsidiaries. In general, the types of risks hedged are those relating to the variability of future earnings and cash flows caused by movements in foreign currency exchange rates and changes in commodity prices and interest rates. We document our risk management strategy and hedge effectiveness at the inception of and during the term of each hedge.
Derivative financial instruments are recorded in the financial statements and measured at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in income or shareholders' equity (as a component of accumulated other comprehensive income (loss)) depending on whether the derivative is being used to hedge changes in fair value, cash flows, or a net investment in a foreign operation. In the normal course of business, we execute the following types of hedge transactions:
Fair value hedges
We have sales and purchase commitments denominated in foreign currencies. Foreign currency derivative instruments are used to hedge against the risk of change in the fair value of these commitments attributable to fluctuations in exchange rates. We also have exposure to fluctuations in interest rates. Interest rate swaps are used to hedge against the risk of changes in the fair value of fixed rate borrowings attributable to changes in interest rates. Changes in the fair value of the derivative instrument are offset in the income statement by changes in the fair value of the item being hedged.
Net investment hedges
We may use foreign currency derivative instruments to hedge net investments in certain foreign subsidiaries whose functional currency is the local currency. The effective portion of the gains and losses on net investment hedge transactions are reported in cumulative translation adjustment as a component of shareholders' equity.

47

Cash flow hedges
We have exposure to fluctuations in foreign currency exchange rates. Foreign currency forward contracts and options are used to hedge the variability in cash flows from forecast receipts or expenditures denominated in currencies other than the functional currency. We also have exposure to fluctuations in commodity prices. Commodity derivative instruments may be used to hedge against the variability in cash flows from forecasted commodity purchases. For cash flow hedge transactions, the effective portion of changes in the fair value of the derivative instruments is reported in accumulated other comprehensive income (loss). The gains and losses on cash flow hedge transactions that are reported in accumulated other comprehensive income (loss) are reclassified to earnings in the periods in which earnings are affected by the variability of the cash flows of the hedged item. The ineffective portions of all hedges are recognized in current period earnings.
We formally assess, both at the hedge's inception and on an ongoing basis, whether the derivatives that are designated as hedging instruments have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not, or has ceased to be, highly effective as a hedge, we discontinue hedge accounting prospectively.
As of January 3, 2016, there were $10 million of deferred net losses (pre-tax) relating to derivative activity in accumulated other comprehensive loss that would be expected to be transferred to net earnings over the next twelve months when the forecasted transactions actually occur. However, due to the Merger with Berkshire, it is expected that the majority of this deferred loss will not be recognized through income as the instruments will be recognized at fair value at the acquisition date. As of January 3, 2016, the maximum term over which we are hedging exposures to the variability of cash flows for all forecasted and recorded transactions is 4 years, 11 months. As of January 3, 2016, the amount of net notional foreign exchange, commodity, and interest rate contracts outstanding was approximately $960 million, $19 million, and $100 million, respectively. We believe that there is no significant credit risk associated with the potential failure of any counterparty to perform under the terms of any derivative financial instrument.
Derivative instruments are measured at fair value within the consolidated balance sheet either as assets or liabilities. As of January 3, 2016, accounts receivable, accounts payable and other long-term liabilities included foreign exchange contracts of $3 million, $24 million and $2 million, respectively, while other non-current assets included interest rate contracts of $1 million and other long-term liabilities included commodity contracts of $1 million. As of March 29, 2015, accounts receivable included foreign exchange contracts of $4 million and accounts payable included foreign exchange contracts of $29 million and interest rate contracts of $1 million.
For the periods ended January 3, 2016, March 29, 2015 and March 30, 2014, we recognized $11 million of losses, less than $1 million of losses and $5 million of gains, respectively, in the consolidated statements of income for derivatives designated as hedging instruments. For the periods ended January 3, 2016, March 29, 2015 and March 30, 2014, we recognized $4 million of gains, $31 million of losses, and $39 million of gains, respectively, in the consolidated statements of income for derivatives not designated as hedging instruments. Gains and losses on derivatives not designated as hedging instruments are primarily offset by losses or gains arising from the revaluation of foreign currency denominated assets and liabilities. The ineffective portion of gains and losses relating to derivatives designated as hedging instruments in fiscal 2016, 2015 or 2014 was not significant.


48

18. Pension and other postretirement benefit plans
We sponsor many U.S. and non-U.S. defined benefit pension plans. Benefits provided by these plans are generally based on years of service and compensation. Our general funding policy for qualified pension plans is to contribute amounts at least sufficient to satisfy regulatory funding standards. We also provide postretirement medical benefits for certain eligible employees who have satisfied plan eligibility provisions, which include age and/or service requirements.
Pension and postretirement benefit obligations and funded status
 
Pension Benefits
 
Other
Postretirement Benefits
Fiscal
2016
 
2015
 
2016
 
2015
Change in plan assets:
 
 
 
 
 
 
 
Beginning fair value of plan assets
$
2,325

 
$
2,267

 
$
—

 
$
—

Actual return on plan assets
27

 
232

 
—

 
—

Company contributions
52

 
34

 
5

 
8

Plan participants’ contributions
2

 
2

 
—

 
—

Benefits paid
(83
)
 
(102
)
 
(5
)
 
(8
)
Exchange rate and other
(7
)
 
(108
)
 
—

 
—

Ending fair value of plan assets
$
2,316

 
$
2,325

 
$
—

 
$
—

Change in projected benefit obligations:
 
 
 
 
 
 
 
Beginning projected benefit obligations
$
2,843

 
$
2,553

 
$
97

 
$
94

Service cost
38

 
45

 
1

 
1

Interest cost
80

 
112

 
2

 
4

Plan participants’ contributions
2

 
2

 
—

 
—

Amendments/curtailments/settlement
(1
)
 
(1
)
 
—

 
—

Actuarial (gains) losses
(168
)
 
353

 
(1
)
 
6

Benefits paid
(83
)
 
(102
)
 
(5
)
 
(8
)
Exchange rate and other
(8
)
 
(119
)
 
—

 
—

Ending projected pension and postretirement benefit obligations
$
2,703

 
$
2,843

 
$
94

 
$
97

Funded Status:
 
 
 
 
 
 
 
Fair value of plan assets less than projected pension and postretirement benefit obligations
$
(387
)
 
$
(518
)
 
$
(94
)
 
$
(97
)
Amounts recognized in the balance sheets:
 
 
 
 
 
 
 
Noncurrent asset
$
8

 
$
—

 
$
—

 
$
—

Current liabilities
(13
)
 
(7
)
 
(7
)
 
(7
)
Noncurrent liabilities
(382
)
 
(511
)
 
(87
)
 
(90
)
Net amount recognized
$
(387
)
 
$
(518
)
 
$
(94
)
 
$
(97
)
Amounts recognized in accumulated other comprehensive loss consist of:
 
 
 
 
 
 
 
Net actuarial loss
$
794

 
$
908

 
$
13

 
$
14

Prior service cost
6

 
8

 
—

 
—

Net amount recognized, before tax effect
$
800

 
$
916

 
$
13

 
$
14

 
 
 
 
 
 
 
 
Several of our defined benefit pension plans have accumulated benefit obligations in excess of plan assets. As of January 3, 2016, the aggregate projected benefit obligation was $1,729 million, the aggregate accumulated benefit obligation was $1,609 million, and the aggregate fair value of plan assets was $1,367 million associated with these defined benefit pension plans. As of March 29, 2015, the aggregate projected benefit obligation was $2,133 million, the aggregate accumulated benefit obligation was $1,995 million, and the aggregate fair value of plan assets was $1,682 million associated with these defined benefit pension plans.

49

Components of net periodic pension cost
The net periodic pension cost for our pension plans consisted of the following components:
 
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Service cost
$
40

 
$
47

 
$
52

Interest cost
80

 
112

 
112

Expected return on plan assets
(129
)
 
(160
)
 
(171
)
Amortization of prior service cost
2

 
3

 
3

Amortization of net actuarial loss
43

 
44

 
51

Net periodic pension cost
$
36

 
$
46

 
$
47

 
 
 
 
 
 
The net postretirement benefit cost of our postretirement benefit plans consisted of the following components:
 
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Service cost
$
1

 
$
1

 
$
1

Interest cost
2

 
4

 
5

Amortization of net actuarial loss
1

 
1

 
1

Net postretirement benefit cost
$
4

 
$
6

 
$
7

 
 
 
 
 
 
Components of amounts recognized in other comprehensive income
The changes in plan assets and benefit obligations recognized in other comprehensive income for our pension plans consisted of the following:
 
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Net actuarial (gain) loss
$
(99
)
 
$
232

 
$
(23
)
Amortization of net actuarial loss
(13
)
 
(11
)
 
(7
)
Amortization of prior service cost
(2
)
 
(3
)
 
(3
)
Exchange rate (gain) loss
(2
)
 
(11
)
 
10

Total recognized in OCI
$
(116
)
 
$
207

 
$
(23
)
 
 
 
 
 
 
The changes in plan assets and benefit obligations recognized in other comprehensive income for our postretirement benefit plans consisted of net actuarial (gain) loss of $(1) million, $4 million and $(12) million for fiscal 2016, 2015 and 2014, respectively.

50

Weighted-average assumptions
The weighted-average assumptions used in determining the pension and postretirement benefit obligations in our pension and postretirement plans in fiscal 2016 and 2015 were as follows:
 
U.S. Plans
Pension Benefits
 
Other
Postretirement Benefits
Fiscal
2016
 
2015
 
2016
 
2015
Discount rate
4.55
%
 
4.05
%
 
4.55
%
 
4.05
%
Rate of compensation increase
3.00
%
 
3.00
%
 
3.00
%
 
3.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. Plans
 
 
 
 
Pension Benefits
Fiscal
  
 
  
 
2016
 
2015
Discount rate
 
 
 
 
3.79
%
 
3.54
%
Rate of compensation increase
 
 
 
 
2.74
%
 
2.74
%
 
 
 
 
 
 
 
 
As of January 3, 2016, the projected U.S. pension benefit obligation was $1,641 million and the non-U.S. pension benefit obligation was $1,062 million.
The weighted-average assumptions used in determining the net periodic pension and postretirement benefit cost in our pension and postretirement plans in fiscal 2016, 2015 and 2014 were as follows:
 
U.S. Plans
Pension Benefits
 
Other
Postretirement Benefits
Fiscal
2016
 
2015
 
2014
 
2016
 
2015
 
2014
Discount rate
4.05
%
 
4.70
%
 
4.25
%
 
4.05
%
 
4.70
%
 
4.25
%
Expected return on plan assets
7.75
%
 
7.75
%
 
8.00
%
 
—

 
—

 
—

Rate of compensation increase
3.00
%
 
3.00
%
 
3.00
%
 
3.00
%
 
3.00
%
 
3.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. Plans
 
 
 
 
 
 
Pension Benefits
Fiscal
  
 
  
 
  
 
2016
 
2015
 
2014
Discount rate
 
 
 
 
 
 
3.54
%
 
4.67
%
 
4.76
%
Expected return on plan assets
 
 
 
 
 
 
7.00
%
 
7.25
%
 
7.50
%
Rate of compensation increase
 
 
 
 
 
 
2.74
%
 
2.98
%
 
2.98
%
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended January 3, 2016, our U.S. net periodic pension cost was $34 million and our non-U.S. net periodic pension cost was $2 million.
Health care trend rates
The health care cost trend rates used in fiscal 2016 and 2015 were as follows:
 
 
Other
Postretirement Benefits
Fiscal
2016
 
2015
Health care cost trend assumed for next year
5.82
%
 
5.71
%
Ultimate trend rate
4.30
%
 
4.30
%
Year ultimate rate is reached
2073

 
2094

 
 
 
 

51

A one-percentage-point change in assumed health care cost trend rates would have the following effects:
 
 
1 percentage
point increase
 
1 percentage
point decrease
Effect on total of service and interest cost components
$
—

 
$
—

Effect on postretirement benefit obligation
$
3

 
$
(3
)
 
 
 
 
During fiscal 2016, we contributed $52 million to our defined benefit pension plans, of which $31 million was voluntary. We expect to contribute approximately $15 million of required contributions to the defined benefit pension plans in fiscal 2017. In addition, we contributed $5 million to the other postretirement benefit plans during fiscal 2016. We expect to contribute approximately $7 million to these other postretirement benefit plans during fiscal 2017.
Estimated future benefit payments for our pension and other postretirement benefit plans are expected to be:
 
Fiscal
Pension
Benefits
 
Other
Postretirement Benefits
2017
$
141

 
$
7

2018
121

 
7

2019
127

 
7

2020
132

 
7

2021
138

 
7

2022-2026
780

 
31

 
 
 
 
Plan asset allocations
The Company’s asset allocation strategy is designed to balance the objectives of achieving the asset return assumption consistently over the long-term in order to fund future payment obligations and broadly diversifying investments across financial markets to protect investment values against adverse movements. In addition, we seek to minimize the volatility of the plans’ funded status and the Company’s pension expense. Asset classes with differing expected rates of return, return volatility and correlations are utilized to control risk and provide diversification. The asset categories are described below, along with the investment level classification under fair value guidance as defined in Note 12—Fair value measurements.
Public Equity Securities (Long/Hedged)
Long equity investments consist of publicly traded equity securities that are well diversified across managers, styles, sectors and countries. Hedged equity investments typically add short positions in equities or equity futures in order to generate absolute returns regardless of equity market direction. Public equity investments made directly through managed (separate) account structures and valued based upon closing prices reported in active trading markets are classified as Level 1. Equity investments made indirectly via pooled funds offering daily to quarterly liquidity and valued at the net asset value ("NAV") of the fund are classified as Level 2. Such investments are typically valued at the most recently published NAV of the fund, which may be derived from underlying investment values one quarter earlier, unless management believes an adjustment to NAV is warranted based on changes in observable inputs or an expectation that an investment will be sold at a value other than NAV.
Private Equity
Private equity investments consist of investments in limited partnerships or commingled vehicles with managers who purchase interests in non-public companies. Sub-categories of private equity may include venture capital, early stage, special situations or restructuring funds. Private equity funds typically have low liquidity, a 10 year or longer investment commitment, and valuation methodologies that require the use of significant unobservable inputs. Private equity investments are classified as Level 3 and are typically valued at the most recently published NAV of the fund, unless management believes an adjustment is warranted as described above. For the periods ended January 3, 2016 and March 29, 2015, no material adjustments were made to fund NAVs. As of January 3, 2016, unfunded capital commitments to private equity investments were $23 million.
Absolute Return (Market Sectors/Arbitrage)
Absolute return strategies are investments with managers who seek specified levels of absolute returns with minimal correlation to market movements. Absolute return managers typically invest in futures, forwards or options on a variety of asset classes. Market sector strategies seek to capitalize on movements in commodity, currency, interest rate and/or other traditional markets while arbitrage strategies focus on credit, volatility or other alternative asset classes. Investments are typically made in

52

limited partnerships and classified as Level 2 when funds offer daily to quarterly liquidity at fund NAVs and reported values are based on significant observable inputs. All other investments are classified as Level 3 and are typically valued at the most recently published NAV of the fund, unless management believes an adjustment is warranted as described above. As of January 3, 2016, unfunded capital commitments to absolute return investments were $3 million.
Royalty Investments
Royalty investments are made through a limited partnership which purchases income-producing royalties derived from sales of pharmaceutical products. Valuation of the fund is determined from an independent appraisal process whereby significant observable inputs are used in determining the fund’s NAV. Liquidity is typically arranged in the secondary market with trades occurring at the most recent published NAV. Royalty investments are classified as Level 2 and are typically valued at the most recently published NAV of the fund, unless management believes an adjustment is warranted as described above.
Fixed Income (Investment/Non-Investment Grade)
Fixed income investments consist of public and private fixed income securities of U.S. and non-U.S. government and corporate issuers, fixed income mutual funds and interest rate derivatives intended to hedge a portion of the pension plan's sensitivity to interest changes. Fixed income investments made directly through managed (separate) account structures and valued based upon closing prices reported in the active trading markets are classified as Level 1. Over-the-counter derivatives and fixed income investments made indirectly via pooled funds offering daily to quarterly liquidity and valued at the NAV of the fund are classified as Level 2. Fixed income investments with low liquidity and valuation methodologies that require the use of significant unobservable inputs are classified as Level 3. As of January 3, 2016, unfunded capital commitments to fixed income investments were $12 million.
The fair value methods employed by PCC as noted above may not be validated at the time of sale and may not reflect future fair value measurements. The use of different assumptions of valuation methodologies may lead to different fair value measurements.
Cash/Other
Cash and other investments include highly liquid money market securities, demand deposits and other cash equivalents.
The table below sets forth our target asset allocation for fiscal 2016 and the actual allocations at January 3, 2016 and March 29, 2015:
 
 
Target
Allocation
 
Actual
Allocation
 
Actual
Allocation
 
2016
 
January 3, 2016
 
March 29, 2015
Equity
25
%
–
60%
 
44
%
 
46
%
Fixed Income
5
%
–
50%
 
22
%
 
23
%
Absolute Return
5
%
–
40%
 
16
%
 
16
%
Royalties
0
%
–
15%
 
14
%
 
12
%
Cash/Other
1
%
–
10%
 
4
%
 
3
%
Total
 
 
100
%
 
100
%
 
 
 
 
 
 

53

The fair value of our pension plan assets at January 3, 2016 by asset category are as follows:
 
Fair Value Measurements Using
 
 
  
Level 1    
 
Level 2    
 
Level 3    
 
Total
Equity:
 
 
 
 
 
 
 
Long
$
300

 
$
181

 
$
—

 
$
481

Hedged
48

 
179

 
1

 
228

Private Equity
—

 
—

 
324

 
324

Total Equity
348

 
360

 
325

 
1,033

Absolute Return:
 
 
 
 
 
 
 
Market Sectors
24

 
216

 
—

 
240

Arbitrage
—

 
125

 
2

 
127

Total Absolute Return
24

 
341

 
2

 
367

Royalties
—

 
328

 
—

 
328

Fixed Income:
 
 
 
 
 
 
 
Investment Grade
340

 
33

 
—

 
373

Non-Investment Grade
4

 
45

 
82

 
131

Total Fixed Income
344

 
78

 
82

 
504

Cash/Other
83

 
1

 
—

 
84

Total
$
799

 
$
1,108

 
$
409

 
$
2,316

 
 
 
 
 
 
 
 

The table below sets forth a summary of changes in the fair value of the pension plan’s Level 3 assets for the nine months ended January 3, 2016:
 
 
Investment
 
 
 
Hedge Equity
 
Private Equity
 
Arbitrage
 
Fixed Income - Non-Investment Grade
 
Total
 
 
 
 
 
March 29, 2015
$
1

 
$
316

 
$
2

 
$
95

 
$
414

Realized Gain
—

 
—

 
—

 
9

 
9

Unrealized Gain/(Loss)
—

 
(9
)
 
—

 
(5
)
 
(14
)
Contributions
—

 
27

 
1

 
5

 
33

Redemptions
—

 
(10
)
 
(1
)
 
(22
)
 
(33
)
Transfers Into Level 3
—

 
—

 
—

 
—

 
—

January 3, 2016
$
1

 
$
324

 
$
2

 
$
82

 
$
409

 
 
 
 
 
 
 
 
 
 

54

The fair value of our pension plan assets at March 29, 2015 by asset category are as follows:
 
Fair Value Measurements Using
 
 
  
Level 1    
 
Level 2    
 
Level 3    
 
Total
Equity:
 
 
 
 
 
 
 
Long
$
327

 
$
182

 
$
—

 
$
509

Hedged
50

 
197

 
1

 
248

Private Equity
—

 
—

 
316

 
316

Total Equity
377

 
379

 
317

 
1,073

Absolute Return:
 
 
 
 
 
 
 
Market Sectors
24

 
196

 
—

 
220

Arbitrage
—

 
149

 
2

 
151

Total Absolute Return
24

 
345

 
2

 
371

Royalties
—

 
277

 
—

 
277

Fixed Income:
 
 
 
 
 
 
 
Investment Grade
360

 
34

 
—

 
394

Non-Investment Grade
4

 
51

 
95

 
150

Total Fixed Income
364

 
85

 
95

 
544

Cash/Other
59

 
1

 
—

 
60

Total
$
824

 
$
1,087

 
$
414

 
$
2,325

 
 
 
 
 
 
 
 

The table below sets forth a summary of changes in the fair value of the pension plan’s Level 3 assets for the year ended March 29, 2015:
 
 
Investment
 
 
 
Hedge Equity
 
Private Equity
 
Arbitrage
 
Fixed Income - Non-Investment Grade

 
Total
 
 
 
 
 
March 30, 2014
$
1

 
$
226

 
$
3

 
$
66

 
$
296

Realized Gain
—

 
—

 
—

 
2

 
2

Unrealized Gain/(Loss)
—

 
3

 
(1
)
 
3

 
5

Contributions
—

 
91

 
—

 
34

 
125

Redemptions
(1
)
 
(4
)
 
—

 
(10
)
 
(15
)
Transfers Into Level 3
1

 
—

 
—

 
—

 
1

March 29, 2015
$
1

 
$
316

 
$
2

 
$
95

 
$
414

 
 
 
 
 
 
 
 
 
 

55

Multi-employer pension plans
We are a participating employer in several trustee-managed multiemployer, defined benefit pension plans for employees who participate in collective bargaining agreements. The risks of participating in these multiemployer plans are different from single-employer plans in that (i) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be required to be assumed by the remaining participating employers; and (iii) if we choose to stop participating in any of our multiemployer plans, we may be required to pay those plans a withdrawal amount based on the underfunded status of the plan. The following table outlines our participation in multiemployer plans:
 
 
 
 
 
Contributions of PCC
 
 
 
Pension Fund
EIN/Pension Plan Number
Pension Protection Act
Zone Status (a)
FIP/RP Status (b)
 
FY2016
 
FY2015
 
FY2014
 
Surcharge Imposed
Expiration Date of Collective Bargaining Agreement
IAM National Pension Plan
51-6031295/ 002 (c)
Green
Not Applicable
 
$
1

 
$
1

 
$
1

 
No
2/28/2021 6/30/2017 8/15/2016
Steelworkers Pension Trust
23-6648508/ 499
Green
Not Applicable
 
3

 
4

 
4

 
No
8/10/2018 9/17/2017
Boilermaker-Blacksmith National Pension Trust
48-6168020/ 001 (c)(d)
Yellow
Implemented
 
1

 
1

 
1

 
No
6/15/2019 7/15/2017
 
 
Total Contributions:
 
$
5

 
$
6

 
$
6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(a) Unless otherwise noted in the table, the most recent Pension Protection Act zone status available in fiscal 2016 is for the plan's year-end at December 31, 2014. The zone status is based on the latest information that we received from the plan and is certified by the plan's actuary.

(b) The “FIP/RP Status” column indicates plans for which a Funding Improvement Plan (“FIP”) or a Rehabilitation Plan (“RP”) is either pending or has been implemented.

(c) The plan's zone status was calculated after taking into account IRS approval for an "amortization extension", adjusting future benefit accruals, and electing other funding relief measures made available under the Pension Relief Act of 2010.

(d) Beginning on January 1, 2010, the minimum contribution rate required to be paid by the employers is equal to the base contribution rate in effect, for the collective bargaining agreement in effect on September 30, 2008, multiplied by 275% after January 1, 2014.
Defined contribution plans
The expense related to employer contributions to our defined contribution plans was $33 million, $38 million and $35 million in fiscal 2016, 2015 and 2014, respectively.


56

19. Segment information
Information regarding segments is presented in accordance with segment disclosure guidance. Based on the criteria outlined in this guidance, our operations are classified into three reportable operating segments: Investment Cast Products, Forged Products and Airframe Products.
Investment Cast Products
The Investment Cast Products segment manufactures investment castings, and provides related investment casting materials and alloys, for aircraft engines, industrial gas turbine engines, airframes, armaments, medical prostheses and other industrial applications.
Forged Products
The Forged Products segment manufactures forged components from sophisticated titanium and nickel-based alloys principally for the aerospace and power markets, and manufactures metal 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. The Forged Products segment also produces seamless pipe for the power and the oil and gas industries.
Airframe Products
The Airframe Products segment primarily produces highly engineered fasteners, fastener systems, fluid fittings, aerostructures, and precision components for critical applications in the aerospace, automotive and industrial machinery markets. The majority of our Airframe Products sales come from the same aerospace customer base served by our Investment Cast Products and Forged Products segments. The balance of the segment’s sales is derived from automotive and general industrial markets, including farm machinery, construction equipment, machine tools, medical equipment, appliances and recreation.

57

Our chief operating decision maker evaluates performance and allocates resources based on revenues, operating income and net assets employed. The accounting policies of the reportable segments are the same as those described in Note 1—Summary of significant accounting policies. Segment results are as follows:
 
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Net sales:
 
 
 
 
 
Investment Cast Products
$
1,911

 
$
2,536

 
$
2,462

Forged Products
2,779

 
4,259

 
4,189

Airframe Products
2,312

 
3,210

 
2,882

Consolidated net sales
$
7,002

 
$
10,005

 
$
9,533

Intercompany sales activity (1):
 
 
 
 
 
Investment Cast Products (2)
$
203

 
$
273

 
$
276

Forged Products (3)
1,142

 
1,857

 
1,770

Airframe Products (4)
214

 
272

 
203

Total intercompany sales activity
$
1,559

 
$
2,402

 
$
2,249

Segment operating income (loss):
 
 
 
 
 
Investment Cast Products
$
703

 
$
913

 
$
874

Forged Products
415

 
1,008

 
1,075

Airframe Products
505

 
968

 
863

Corporate expense
(234
)
 
(150
)
 
(153
)
Restructuring and asset impairment (5)
(56
)
 
(135
)
 
—

Total segment operating income
1,333

 
2,604

 
2,659

Interest expense, net
83

 
65

 
71

Consolidated income before income taxes and equity in (loss) earnings of unconsolidated affiliates
$
1,250

 
$
2,539

 
$
2,588

Depreciation and amortization expense:
 
 
 
 
 
Investment Cast Products
$
34

 
$
42

 
$
39

Forged Products
147

 
190

 
171

Airframe Products
69

 
82

 
71

Corporate
9

 
11

 
11

Consolidated depreciation and amortization expense
$
259

 
$
325

 
$
292

Capital expenditures:
 
 
 
 
 
Investment Cast Products
$
40

 
$
54

 
$
49

Forged Products
201

 
260

 
231

Airframe Products
74

 
137

 
69

Corporate
22

 
4

 
2

Consolidated capital expenditures
$
337

 
$
455

 
$
351

Total assets:
 
 
 
 
 
Investment Cast Products
$
1,871

 
$
1,577

 
 
Forged Products (6)
10,257

 
10,209

 
 
Airframe Products
7,593

 
6,958

 
 
Corporate (7)
745

 
628

 
 
Discontinued operations
31

 
56

 
 
Consolidated total assets
$
20,497

 
$
19,428

 
 
 
 
 
 
 
 
(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 $28 million, $39 million and $44 million for fiscal 2016, 2015 and 2014, respectively.
(3)
Forged Products: Includes intersegment sales activity of $78 million, $123 million and $128 million for fiscal 2016, 2015 and 2014, respectively.
(4)
Airframe Products: Includes intersegment sales activity of $6 million, $6 million and $7 million for fiscal 2016, 2015 and 2014, respectively.
(5)
See Note 20 for detail of inventory and other asset impairment charges by segment.
(6)
Forged Products assets include $221 million and $235 million in fiscal 2016 and 2015, respectively, related to investments in unconsolidated affiliates.
(7)
Corporate assets consist principally of cash and cash equivalents, property, plant & equipment and other assets.

58

Net direct sales to General Electric Company were approximately 15 percent, 13 percent and 13 percent of total sales in fiscal 2016, 2015 and 2014, respectively. Net direct sales to The Boeing Company were approximately 10 percent of total sales in fiscal 2016 and although less than 10 percent of total sales were considered significant in fiscal 2015 and 2014.

 
Boeing
 
General Electric
 
Nine Months Ended
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
Investment Cast Products
$
10

 
$
701

 
$
828

 
$
736

Forged Products
177

 
340

 
435

 
412

Airframe Products
527

 
37

 
36

 
66

 
$
714

 
$
1,078

 
$
1,299

 
$
1,214

 
 
 
 
 
 
 
 
No other customer directly accounted for more than 10 percent of net sales.
Our business is conducted on a global basis with manufacturing, service and sales undertaken in various locations throughout the world. Net sales are attributed to geographic areas based on the location of the assets producing the revenues. Long-lived assets consist of net property, plant and equipment and certain other tangible long-term assets of continuing operations. Geographic information regarding our net sales and long-lived assets is as follows:
 
 
Nine Months Ended
 
Twelve Months Ended
 
Twelve Months Ended
 
January 3, 2016
 
March 29, 2015
 
March 30, 2014
United States
$
5,859

 
$
8,258

 
$
7,742

United Kingdom
638

 
968

 
1,087

Other countries
505

 
779

 
704

Net sales
$
7,002

 
$
10,005

 
$
9,533

 
 
 
 
 
 
 
January 3, 2016
 
March 29, 2015
 
 
United States
$
2,515

 
$
2,247

 
 
United Kingdom
248

 
233

 
 
Other countries
222

 
206

 
 
Assets of discontinued operations
4

 
20

 
 
Total tangible long-lived assets (1)
$
2,989

 
$
2,706

 
 
 
 
 
 
 
 
(1)
Long-lived assets exclude $225 million and $238 million in fiscal 2016 and 2015, respectively, related to investments in unconsolidated affiliates.

20. Inventory and other asset impairment charges
During fiscal 2016, we recognized a non-cash inventory impairment charge of $43 million, pre-tax, primarily in our oil & gas, pipe and associated raw material operations, reflecting the more challenging environment and declines in market value. In addition, in response to the current market conditions, we wrote down the carrying value of our available for sale securities due to the severity and duration of the decline in market value of the investments, which resulted in a pre-tax charge of $54 million in fiscal 2016.
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. As of January 3, 2016, there were no accrued liabilities remaining related to our restructuring plans.

59

Restructuring and asset impairment charges incurred in fiscal 2016 and 2015 were recorded in the Consolidated Statement of Income as follows:
 
Nine Months Ended
Twelve Months Ended
 
January 3, 2016
March 29, 2015
Cost of goods sold
$
43

$
127

Restructuring and asset impairment
56

8

Equity in loss of unconsolidated affiliates
—

174

 
$
99

$
309

 
 
 
Restructuring and asset impairment charges incurred in fiscal 2016 and 2015 recorded by segment are as follows:
 
Nine Months Ended
Twelve Months Ended
 
January 3, 2016
March 29, 2015
Investment Cast Products
$
—

$
4

Forged Products
99

127

Airframe Products
—

4

 
$
99

$
135

 
 
 

21. Transition period comparative data

Consolidated Statements of Income Data
 
Nine Months Ended
 
January 3, 2016
 
December 28, 2014
(In millions, except per share data)
 
 
(Unaudited)
Net sales
$
7,002

 
$
7,501

Total costs and expenses
5,752

 
5,435

Income before income tax expense and equity in loss of unconsolidated affiliates
1,250

 
2,066

Income tax expense
(420
)
 
(667
)
Equity in loss of unconsolidated affiliates
(6
)
 
(2
)
Net income from continuing operations
824

 
1,397

Net loss from discontinued operations
(7
)
 
(1
)
Net income
817

 
1,396

Net income attributable to noncontrolling interests
(4
)
 
(1
)
Net income attributable to Precision Castparts Corp. (“PCC”)
$
813

 
$
1,395

Net income (loss) per common share attributable to PCC shareholders— basic:
 
 
 
Net income per share from continuing operations
$
5.95

 
$
9.73

Net loss per share from discontinued operations
(0.05
)
 
(0.01
)
Net income per share (basic)
$
5.90

 
$
9.72

Net income (loss) per common share attributable to PCC shareholders— diluted:
 
 
 
Net income per share from continuing operations
$
5.92

 
$
9.66

Net loss per share from discontinued operations
(0.05
)
 
(0.01
)
Net income per share (diluted)
$
5.87

 
$
9.65

Weighted average common shares outstanding:
 
 
 
Basic
137.7

 
143.5

Diluted
138.6

 
144.5

 
 
 
 


60

Condensed Consolidated Statements of Cash Flows Data
 
Nine Months Ended
 
January 3, 2016
 
December 28, 2014
(In millions)
 
 
(Unaudited)
Net cash provided by operating activities
953

 
1,242

Net cash used by investing activities
(1,437
)
 
(865
)
Net cash provided (used) by financing activities
365

 
(247
)
Effect of exchange rate changes on cash and cash equivalents
(12
)
 
(61
)
Net (decrease) increase in cash and cash equivalents
(131
)
 
69

Cash and cash equivalents at beginning of period
474

 
361

Cash and cash equivalents at end of period
$
343

 
$
430

 
 
 
 

22. Subsequent events
•
On January 29, 2016, Berkshire completed the acquisition of PCC for $235 per share in an all-cash transaction. The transaction was valued at approximately $37.2 billion, including outstanding PCC net debt.
•
On February 2, 2016, we completed a small acquisition in the Airframe Products segment.

61

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of Precision Castparts Corp.
Portland, Oregon

We have audited the accompanying consolidated balance sheets of Precision Castparts Corp. and subsidiaries (the "Company") as of January 3, 2016 and March 29, 2015, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the period March 30, 2015 through January 3, 2016 and for each of the two years in the period ended March 29, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Precision Castparts Corp. and subsidiaries at January 3, 2016 and March 29, 2015, and the results of their operations and their cash flows for the period March 30, 2015 through January 3, 2016, and for each of the two years in the period ended March 29, 2015, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of January 3, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 8, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Portland, Oregon
April 8, 2016


62

Quarterly Financial Information (1) 
(Unaudited)
(In millions, except per share data)
 
 
 
 
 
 
 
2016
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
 
Net sales
$
2,412

 
$
2,287

 
$
2,303

 
 
Gross profit
$
787

 
$
715

 
$
501

 
 
Net income
$
400

 
$
344

 
$
73

 
 
Net income (loss) attributable to PCC shareholders:
 
 
 
 
 
 
 
Continuing operations
$
399

 
$
344

 
$
77

 
 
Discontinued operations
—

 
(1
)
 
(6
)
 
 
 
$
399

 
$
343

 
$
71

 
 
Net income (loss) per share-basic:
 
 
 
 
 
 
 
Continuing operations
$
2.89

 
$
2.50

 
$
0.56

 
 
Discontinued operations
—

 
(0.01
)
 
(0.04
)
 
 
 
$
2.89

 
$
2.49

 
$
0.52

 
 
Net income (loss) per share-diluted:
 
 
 
 
 
 
 
Continuing operations
$
2.87

 
$
2.49

 
$
0.56

 
 
Discontinued operations
—

 
(0.01
)
 
(0.05
)
 
 
 
$
2.87

 
$
2.48

 
$
0.51

 
 
Cash dividends per share
$
0.03

 
$
0.03

 
$
0.03

 
 
Common stock prices:
 
 
 
 
 
 
 
High
$
221.91

 
$
231.47

 
$
232.58

 
 
Low
$
200.27

 
$
187.00

 
$
228.77

 
 
End
$
203.20

 
$
229.03

 
$
232.01

 
 
 
 
 
 
 
 
 
 
2015
1st Quarter
 
2nd Quarter
 
3rd Quarter 
 
4th Quarter
Net sales
$
2,520

 
$
2,522

 
$
2,459

 
$
2,504

Gross profit
$
893

 
$
864

 
$
831

 
$
665

Net income
$
482

 
$
468

 
$
446

 
$
137

Net income attributable to PCC shareholders:
 
 
 
 
 
 
 
Continuing operations
$
485

 
$
468

 
$
443

 
$
149

Discontinued operations
(2
)
 
(1
)
 
2

 
(14
)
 
$
483

 
$
467

 
$
445

 
$
135

Net income per share-basic:
 
 
 
 
 
 
 
Continuing operations
$
3.35

 
$
3.27

 
$
3.11

 
$
1.07

Discontinued operations
(0.02
)
 
(0.01
)
 
0.02

 
(0.11
)
 
$
3.33

 
$
3.26

 
$
3.13

 
$
0.96

Net income per share-diluted:
 
 
 
 
 
 
 
Continuing operations
$
3.32

 
$
3.24

 
$
3.09

 
$
1.06

Discontinued operations
(0.01
)
 
—

 
0.02

 
(0.10
)
 
$
3.31

 
$
3.24

 
$
3.11

 
$
0.96

Cash dividends per share
$
0.03

 
$
0.03

 
$
0.03

 
$
0.03

Common stock prices:
 
 
 
 
 
 
 
High
$
275.09

 
$
261.49

 
$
245.05

 
$
242.96

Low
$
238.01

 
$
226.38

 
$
215.09

 
$
186.17

End
$
254.36

 
$
239.50

 
$
241.26

 
$
212.18

 
 
 
 
 
 
 
 
 ____________________
(1)
Historical amounts have been restated to present certain businesses as discontinued operations.

63

ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
 
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
We maintain disclosure controls and procedures that are designed with the objective of providing reasonable assurance that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply their judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of January 3, 2016.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during our most recent fiscal year that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Chief Executive Officer and Chief Financial Officer Certifications
The certifications of our Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as this term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting process is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control— Integrated Framework (2013). Based on our assessment using that criteria, our management concluded that, as of January 3, 2016, the Company’s internal control over financial reporting was effective.
During fiscal 2016, PCC acquired five businesses. Management has excluded these businesses from its assessment of internal control over financial reporting as of January 3, 2016 as it was determined that management could not complete an assessment of the internal control over financial reporting of the acquired businesses in the period between the acquisition date and the date of management's assessment date. Total assets and revenues of these acquisitions represent approximately 5.9% and 1.2%, respectively, of the related consolidated financial statement amounts as of and for the fiscal year ended January 3, 2016.

64

Our internal control over financial reporting as of January 3, 2016 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.

65

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of Precision Castparts Corp.
Portland, Oregon

We have audited the internal control over financial reporting of Precision Castparts Corp. and subsidiaries (the "Company") as of January 3, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at five businesses, which were acquired during the period March 30, 2015 through January 3, 2016, and whose financial statements constitute, in aggregate, 5.9% of total assets and 1.2% of revenues of the consolidated financial statement amounts as of and for the period ended January 3, 2016. Accordingly, our audit did not include the internal control over financial reporting at such businesses. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 3, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the period March 30, 2015 through January 3, 2016 of the Company and our report dated April 8, 2016 expressed an unqualified opinion on those financial statements.

/s/ DELOITTE & TOUCHE LLP

Portland, Oregon
April 8, 2016

 

66

ITEM 9B.
OTHER INFORMATION
None.

PART III

ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The Company incurred the following fees for services performed by Deloitte & Touche for fiscal 2016 and 2015:
2016
 
Audit Fees
$
10,562,530

Audit Related Fees
257,600

Tax Fees
122,000

All Other Fees
—

 
 
2015
 
Audit Fees
$
9,545,728

Audit Related Fees
189,800

Tax Fees
83,605

All Other Fees
—


Audit fees include annual audit of the Company's consolidated financial statements and review of interim financial statements in the Company's Quarterly Reports on Form 10-Q. Audit related fees include audits of the Company's employee benefit plans, acquisition due diligence, review of registration statements and issuance of comfort letters and other audit reports required by regulation or contract. Tax fees include tax advice and planning for income and other taxes for various legal entities of the Company and tax-related acquisition date due diligence.

67

PART IV

ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following consolidated financial statements of Precision Castparts Corp. are included in Item 8. Financial Statements and Supplementary Data.
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Equity
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
(a)(2) Financial Statement Schedules
None.
(a)(3) Exhibits
 
2.1
Agreement and Plan of Merger, dated as of August 8, 2015, by and among Precision Castparts Corp., Berkshire Hathaway Inc. and NW Merger Sub Inc. (Incorporated herein by reference to Exhibit 2.1 to the Form 8-K filed August 10, 2015.)
 
 
3.1
Amended and Restated Articles of Incorporation of Precision Castparts Corp., adopted January 29, 2016 (Incorporated herein by reference to Exhibit 3.1 to the Form 8-K filed February 4, 2016.)
 
 
3.2
Amended and Restated Bylaws of Precision Castparts Corp., adopted January 29, 2016 (Incorporated herein by reference to Exhibit 3.2 to the Form 8-K filed February 4, 2016.)
 
 
4.1
Indenture dated December 17, 1997 between J.P. Morgan Trust Company, National Association (as successor to Bank One Trust Company, N.A., which was the successor to The First National Bank of Chicago) as Trustee and PCC (Incorporated herein by reference to Exhibit (4)A to the Form 10-K filed June 26, 1998.)
 
 
4.2
Twenty-Sixth Supplemental Indenture dated December 20, 2012 between Precision Castparts Corp. and U.S. Bank National Association (including forms of Notes) (Incorporated herein by reference to Exhibit 4.1 to the Form 8-K filed December 20, 2012.)
 
 
4.3
Twenty-Seventh Supplemental Indenture dated June 10, 2015 between Precision Castparts Corp. and U.S. Bank National Association (including forms of Notes) (Incorporated herein by reference to Exhibit 4.1 to the Form 8-K filed June 5, 2015.)
 
 
10.1
Credit Agreement, dated December 16, 2013, by and among Precision Castparts Corp., Bank of America, N.A., as Administrative Agent, Citibank, N.A. and Wells Fargo Bank, National Association, as Syndication Agents, Mizuho Bank (USA), PNC Bank, National Association, The Bank of Tokyo-Mitsubishi UFJ, Ltd., and U.S. Bank National Association, as Co-Documentation Agents, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Book Managers, and other lenders from time to time party thereto (Incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed December 18, 2013.)
 
 
10.2
Credit Agreement, dated December 14, 2015, by and among Precision Castparts Corp., Bank of America, N.A., as Administrative Agent, Citibank, N.A. and Wells Fargo Bank, National Association, as Syndication Agents, Mizuho Bank, Ltd., PNC Bank, National Association, The Bank of Tokyo-Mitsubishi UFJ, Ltd., and U.S. Bank National Association, as Co-Documentation Agents, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Bookrunners, and other lenders from time to time party thereto (Incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed December 17, 2015.)
 
 
10.3
Amendment No. 2 and Consent to Credit Agreement, dated June 15, 2015, among Precision Castparts Corp. and Bank of America, N.A., as Administrative Agent (Incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed August 7, 2015.)
 
 
10.4
Amendment No. 3, dated December 14, 2015, among Precision Castparts Corp., Bank of America, N.A., and the financial institutions party thereto, to that certain Credit Agreement, dated December 16, 2013 (Incorporated herein by reference to Exhibit 10.2 to the Form 8-K filed December 17, 2015.)

68

 
 
12.1
Computation of Ratio of Earnings to Fixed Charges
 
 
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
101.INS
XBRL Instance Document.
 
 
101.SCH
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
(b) See a(3) above.
(c) See a(2) above.

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
PRECISION CASTPARTS CORP.
 
 
 
 
BY:
/S/ MARK DONEGAN
 
 
Mark Donegan
Chairman and Chief Executive Officer
Dated: April 8, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
Signature
  
Title
 
Date
 
 
 
 
 
As officers or directors of
PRECISION CASTPARTS CORP.
  
 
 
 
 
 
 
 
 
/S/ MARK DONEGAN
  
Chairman and Chief Executive Officer
 
April 8, 2016
Mark Donegan
 
 
 
 
 
 
 
 
 
/S/ SHAWN R. HAGEL
  
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
 
April 8, 2016
Shawn R. Hagel
 
 
 
 
 
 
 
 
 
/S/ RUTH A. BEYER
  
Director
 
April 8, 2016
Ruth A. Beyer
 
 
 
 
 
 
 
 
 
/S/ MARC D. HAMBURG
  
Director
 
April 8, 2016
Marc D. Hamburg
 
 
 
 
 
 
 
 
 

69