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PCP > SEC Filings for PCP > Form 10-K on 29-May-2014All Recent SEC Filings

Show all filings for PRECISION CASTPARTS CORP

Form 10-K for PRECISION CASTPARTS CORP


29-May-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

(in millions, except per share data)

Business overview
Fiscal 2014 was another strong year for Precision Castparts Corp., both in terms of increasing sales and adding market share and in terms of achieving solid leverage on those sales quarter after quarter. Well-positioned in our key markets, our base businesses grew in line with the aerospace and industrial gas turbine ("IGT") industries and played an increasing role in serving important niches in seamless pipe and oil and gas applications. The ability to supply the bulk of our own nickel alloy needs has been a major asset to our operations for many years and, with the acquisition of Titanium Metals Corporation ("TIMET") in December of 2012, we largely became independent of outside titanium suppliers. TIMET proved to be a major driver of both sales and earnings in fiscal 2014 by utilizing PCC's knowledge and methodologies to improve its cost position and gain market share. All three of our segments continued to capture new business opportunities and to find additional ways to take out cost and improve productivity.
Results in the first quarter of fiscal 2014 indicated that the course we set out for ourselves over the past decade was playing out as we expected. We achieved strong earnings growth on stable aircraft schedules and continued to gain share on new airframe and engine development programs. Investment Cast Products supported aerospace schedules in line with the high levels of commercial original equipment manufacturer ("OEM") production and saw higher IGT sales driven by increased OEM demand. However, the segment experienced some year-over-year sales softness as its Portland, Oregon, locations addressed union organizing activity. The Portland employees voted not to unionize, and delinquencies were shipped out over the next two quarters. Despite these disruptions, the segment managed to deliver record operating margins. Forged Products, like Investment Cast Products, supplied commercial aircraft components at levels consistent with aircraft build rates. On the power side of the business, both interconnect and oil and gas shipments grew year over year. In addition, TIMET began to make solid contributions to the segment's results. Airframe Products' critical aerospace fastener sales showed solid improvement over the previous fiscal year, although shipments of these fasteners still had not caught up fully to aircraft production rates. Base aerostructures sales also increased, more closely tracking the commercial OEM build rates. In the second quarter of fiscal 2014, we again delivered strong sales and earnings, driven by solid commercial aerospace demand, steady recovery in power markets, further top- and bottom-line contributions from TIMET, and steady focus on operational improvements in each of our facilities. In Investment Cast Products, large commercial OEM and spares sales increased, though tempered by a decline in regional business/jet and military spares activity. In addition, OEM and spares sales to the IGT market, basically flat year over year, still maintained very high production levels. Forged Products' aerospace sales showed significant growth, with a full quarter of TIMET strongly adding to improvements in the base businesses. In the power market, sales also grew year over year, spurred by further demand from interconnect pipe and oil and gas customers. Fastener sales in Airframe Products improved but continued to lag commercial aircraft build rates, particularly on the Boeing 787 program. Aerostructures showed vigorous growth, with a strong contribution from acquisitions boosting solid growth in the base businesses.
While we continued to ship into healthy end markets and to effectively leverage operational throughput, our third quarter results were somewhat tempered by late-quarter customer schedule shifts and fewer shipping days in the quarter. Investment Cast Products' commercial OEM aerospace production continued to be robust, although military and regional/business jet demand declined. IGT sales of both OEM components and spares decreased year over year as well. In Forged Products, TIMET was the primary driver behind the year-over-year increase, with stable base sales holding steady until the next aircraft build ramp. The segment also showed good progress in power markets, particularly in interconnect pipe, which established a backlog of nearly one year. Airframe Products sales improved significantly, with critical aerospace fastener and aerostructure shipments closely tracking the base commercial build rates. Fastener 787 shipments continued to close the gap with aircraft production schedules.
Fourth quarter results again demonstrated our ability to derive strong leverage from robust end markets. Investment Cast Products' large commercial aerospace sales were spurred by solid production schedules, with reduced military and regional/business jet shipments tempering overall segment sales. The segment's power business continued to see strong demand, driven by upgrade programs, share gains, and spares sales, despite a decrease in OEM IGT production. Forged Products' large commercial aerospace sales also showed solid improvement, offset by lower military sales; regional/business jet sales were flat. Both IGT and interconnect pipe shipments increased year over year, with a decline in oil and gas sales compared to strong shipping schedules in the same quarter in fiscal 2013. In Airframe Products, fasteners and aerostructures were again closely in sync with base aircraft production, and fastener 787 shipments moved even closer to aircraft build rates.


Going forward, we have established strong, long-term positions in our target markets and have laid out focused strategies to increase those positions. We have won major share on all current-production commercial aircraft programs, with further share gain opportunities at TIMET and our base businesses providing an additional spur to growth based on published build rates from our customers. We have also secured even stronger positions on the new generation of re-engined narrow-body aircraft now under development, with approximately 30-40% more content than the platforms they replace (as previously reported, our estimated dollar content per ship-set may be found on our website at www.precast.com on the Investor Relations page). In addition, we see numerous opportunities to further expand our aerospace positions, both in the near and longer term. On the power side of our business, our content on the major IGT platforms is well-established, with growth coming from new development and retrofit programs as well. The interconnect pipe market has driven a strong recovery, with a backlog holding at approximately one year. In addition, we are winning new oil and gas projects and are pursuing the next set of opportunities. Across the board, factory-by-factory operating performance will continue to be our number one focus.
We continued our strategy of expanding our product lines and markets during fiscal 2014. We acquired seven businesses for a total of approximately $1.0 billion. The largest acquisition, Permaswage SAS ("Permaswage"), is a world-leading designer and manufacturer of aerospace fluid fittings. The acquisition of Permaswage extends our reach into permanent fittings on key current and next-generation commercial aircraft platforms. We also acquired several small businesses during the year which further expand and strengthen our market position, capitalize on our supply chain requirements and deliver additional sales and earnings growth. Subsequent to year-end, we acquired Aerospace Dynamics International ("ADI"), which broadens our large gantry capabilities and provides us with significant additional Airbus A350 share. Going forward, we see solid acquisition opportunities and expect to continue to focus our cash redeployment in this area for the foreseeable future.


                                                 Fiscal Year                       % Increase/(Decrease)
                                        2014         2013         2012      2014 vs. 2013       2013 vs. 2012
Net sales                            $  9,616     $  8,361     $  7,202             15 %                16  %
Costs and expenses:
Cost of goods sold                      6,317        5,669        4,940             11 %                15  %
Selling and administrative expenses       627          535          446             17 %                20  %
Interest expense, net                      71           31            5            129 %               520  %
Total costs and expenses                7,015        6,235        5,391
Income before income tax expense and
equity in earnings of unconsolidated
affiliates                              2,601        2,126        1,811             22 %                17  %
Income tax expense                       (835 )       (694 )       (594 )           20 %                17  %
Equity in earnings of unconsolidated
affiliates                                  1            1           15              - %               (93 )%
Net income from continuing
operations                              1,767        1,433        1,232             23 %                16  %
Net income (loss) from discontinued
operations                                 17           (3 )         (6 )          667 %                50  %
Net income                              1,784        1,430        1,226             25 %                17  %
Net income attributable to
noncontrolling interest                    (7 )         (3 )         (2 )          133 %                50  %
Net income attributable to PCC       $  1,777     $  1,427     $  1,224             25 %                17  %
Net income per common share
attributable to PCC shareholders
(basic):
Net income per share from continuing
operations                           $  12.09     $   9.81     $   8.52             23 %                15  %
Net income (loss) per share from
discontinued operations                  0.11        (0.02 )      (0.04 )          650 %                50  %
Net income per share (basic)         $  12.20     $   9.79     $   8.48             25 %                15  %
Net income per common share
attributable to PCC shareholders
(diluted):
Net income per share from continuing
operations                           $  12.01     $   9.75     $   8.45             23 %                15  %
Net income (loss) per share from
discontinued operations                  0.11        (0.03 )      (0.04 )          467 %                25  %
Net income per share (diluted)       $  12.12     $   9.72     $   8.41             25 %                16  %

                                                 Fiscal Year                       % Increase/(Decrease)
Sales by Market                         2014         2013         2012      2014 vs. 2013       2013 vs. 2012
Aerospace                            $  6,557     $  5,472     $  4,468             20 %                22  %
% of total                                 68 %         65 %         62 %
Power                                   1,690        1,639        1,510              3 %                 9  %
% of total                                 18 %         20 %         21 %
General Industrial & Other              1,369        1,250        1,224             10 %                 2  %
% of total                                 14 %         15 %         17 %
Total Sales                          $  9,616     $  8,361     $  7,202             15 %                16  %
% of total                                100 %        100 %        100 %


Average market price of             Fiscal Year                           Increase/(Decrease)
key metals
 (per pound)               2014        2013        2012          2014 vs. 2013           2013 vs. 2012
                                                               $           %           $           %
Nickel                   $  6.54     $  7.71     $  9.54     $ (1.17 )      (15 )%   $ (1.83 )      (19 )%
London Metals Exchange
(1)
Titanium                 $  1.98     $  2.82     $  4.71     $ (0.84 )      (30 )%   $ (1.89 )      (40 )%
Ti 6-4 bulk,
Metalprices.com
Cobalt                   $ 13.63     $ 13.33     $ 16.40     $  0.30          2  %   $ (3.07 )      (19 )%
Metal Bulletin COFM.8
Index (1)



(1) Source: Bloomberg

Fiscal 2014 compared with fiscal 2013
Total sales for fiscal 2014 were $9,616 million, an increase of $1,255 million, or 15 percent, from fiscal 2013 sales of $8,361 million. Fiscal 2014 sales include the contribution from eleven businesses acquired after the beginning of fiscal 2013 and seven businesses acquired in fiscal 2014 that were not fully included in the prior year. These acquisitions contributed more than $1.2 billion of additional sales in fiscal 2014 compared to fiscal 2013. Contractual pass-through pricing and other changes in metal/revert pricing offset organic growth by approximately 3 percent year over year. Nickel prices decreased 15 percent, as reported on the London Metal Exchange (LME) compared to the same period last year. Lower external selling prices of nickel alloy from the Forged Products segment's three primary nickel conversion mills reduced top-line revenues by approximately $142 million in fiscal 2014 versus fiscal 2013 and the falling price of revert and other alloys negatively impacted sales by approximately $55 million. Contractual material pass-through pricing increased sales by approximately $265 million in fiscal 2014 versus approximately $279 million in fiscal 2013, a decrease of $14 million. Contractual material pass-through pricing adjustments are calculated based on market prices such as those shown in the above table in trailing periods from one to twelve months. Including the impact of acquisitions, aerospace sales increased approximately $1,085 million, or 20 percent, over fiscal 2013, primarily within our Forged Products and Airframe Products segments. Commercial aircraft production rates continue to drive steady demand for airframe and engine components. The increase in commercial aerospace sales was partially offset by a decline in regional/business jet sales, while military aerospace sales were relatively flat. Aerospace sales increased from 65 percent of total sales in fiscal 2013 to 68 percent of total sales in fiscal 2014. Sales to our power markets increased approximately $51 million, or 3 percent, over the prior year, primarily as a result of higher seamless interconnect pipe sales, improved oil and gas shipments, and solid IGT sales performance. Sales to our power markets decreased from 20 percent of total sales in fiscal 2013 to 18 percent of total sales in fiscal 2014. General industrial and other sales increased approximately $119 million, or 10 percent, over the prior year, primarily due to the contribution from TIMET, which was acquired in the third quarter of fiscal 2013. General industrial and other sales decreased from 15 percent of total sales in fiscal 2013 to 14 percent of total sales in fiscal 2014.
Based on data from The Airline Monitor as of January 2014, Boeing and Airbus aircraft deliveries are expected to moderately increase through calendar year 2014 as compared to 2013. Due to manufacturing lead times and scheduled build rates, our production volumes are approximately three to six months ahead of aircraft deliveries for mature programs. The Airline Monitor is projecting further growth in aircraft deliveries in calendar year 2015, and therefore we anticipate that our aerospace sales will increase in fiscal 2015 compared to fiscal 2014.
Cost of goods sold was $6,317 million, or 66 percent of sales, in fiscal 2014 as compared to $5,669 million, or 68 percent of sales, in fiscal 2013. The improvement in the year-over-year percentage reflects the impact of lower raw material costs due to lower metal/revert pricing, and operational efficiencies, most notably at our TIMET facilities. Contractual material pass-through pricing diluted gross margin by 1.0 percentage point in fiscal 2014 compared to 1.1 percentage points last year.
Selling and administrative expenses were $627 million, or 7 percent of sales, in fiscal 2014 compared to $535 million, or 6 percent of sales, in fiscal 2013. The higher year-over-year percentage was primarily due to higher stock-based compensation expense.
Net income from continuing operations attributable to PCC for fiscal 2014 was $1,760 million, or $12.01 per share (diluted). By comparison, net income from continuing operations attributable to PCC for fiscal 2013 was $1,430 million, or $9.75 per share (diluted). Fiscal 2014 net income attributable to PCC including discontinued operations was $1,777 million,


or $12.12 per share (diluted), compared with net income of $1,427 million, or $9.72 per share (diluted) in fiscal 2013. Fiscal 2014 results include net income of $17 million, or $0.11 per share (diluted), from discontinued operations, compared to a net loss of $3 million, or $0.03 per share (diluted), in the prior year.

Fiscal 2013 compared with fiscal 2012
Total sales for fiscal 2013 were $8,361 million, an increase of $1,159 million, or 16 percent, from fiscal 2012 sales of $7,202 million. The increase in sales was driven by solid aerospace growth of approximately $1,004 million, or 22 percent, over fiscal 2012 levels, within all three of our segments. The inclusion of a full quarter of TIMET was the largest driver of the sales growth. Excluding the impact of fiscal 2013 and 2012 acquisitions, the increase in sales was 6 percent. Base commercial aircraft and Boeing 787 production rates continued to increase, driving steady demand for airframe and engine components, and aerospace aftermarket sales trended upward. Aerospace sales increased from 62 percent of total sales in fiscal 2012 to 65 percent of total sales in fiscal 2013. Sales within our power markets, which includes IGT, oil and gas, and interconnect pipe, increased approximately $129 million, or 9 percent, over fiscal 2012, driven by acquisitions. Other factors contributing to this increase included solid IGT sales performance, driven by continued high spares demand, and growth in oil and gas sales due to accelerating shipments of downhole casings. Sales to the power markets decreased from 21 percent of total sales in fiscal 2012 to 20 percent of total sales in fiscal 2013. General industrial sales increased approximately $26 million, or 2 percent, over fiscal 2012 primarily due to acquisitions. General industrial and other sales decreased from 17 percent of total sales in fiscal 2012 to 15 percent of total sales in fiscal 2013. We acquired twelve businesses during fiscal 2013, which contributed approximately $900 million to sales (also included in market changes discussed above).
Lower external selling prices of nickel alloy from the Forged Products segment's three primary mills reduced top-line revenues by approximately $42 million in fiscal 2013 versus fiscal 2012. Nickel prices decreased 19 percent, as reported on the London Metal Exchange (LME) compared to fiscal 2012. Contractual material pass-through pricing increased sales by approximately $279 million in fiscal 2013 versus approximately $301 million in fiscal 2012, a decrease of $22 million. Contractual material pass-through pricing adjustments are calculated based on market prices such as those shown in the above table in trailing periods from one to twelve months.
Cost of goods sold was $5,669 million, or 68 percent of sales, in fiscal 2013 as compared to $4,940 million, or 69 percent of sales, in fiscal 2012. Cost of goods sold as a percent of sales was positively impacted by effective leverage on increased sales volume, increased internal metal sourcing in an effort to reduce costs, and other operational improvements. These improvements were partially offset by the inclusion of lower-margin sales from the acquisitions in the Forged Products and Airframe Products segments. Contractual material pass-through pricing diluted gross margin by 1.1 percentage points in fiscal 2013 compared to 1.4 percentage points in fiscal 2012.
Selling and administrative expenses were $535 million, or 6 percent of sales, in fiscal 2013 compared to $446 million, or 6 percent of sales, in fiscal 2012. The largest increase in selling and administrative expenses over fiscal 2012 is attributable to additional expenses from a full year of the fiscal 2012 acquisitions and the additional fiscal 2013 acquisitions as well as increased acquisition-related expenses.
Net income from continuing operations attributable to PCC for fiscal 2013 was $1,430 million, or $9.75 per share (diluted). By comparison, net income from continuing operations attributable to PCC for fiscal 2012 was $1,230 million, or $8.45 per share (diluted). Fiscal 2013 net income attributable to PCC including discontinued operations was $1,427 million, or $9.72 per share (diluted), compared with net income of $1,224 million, or $8.41 per share (diluted) in fiscal 2012. Fiscal 2013 results include a net loss of $3 million, or $0.03 per share (diluted), from discontinued operations, compared to a net loss of $6 million, or $0.04 per share (diluted), in fiscal 2012.

Acquisitions
Fiscal 2014
During the second quarter of fiscal 2014, we completed two small acquisitions in the Airframe Products segment.
On October 31, 2013, we acquired Permaswage, a world-leading designer and manufacturer of aerospace fluid fittings, for approximately $600 million in cash, funded by commercial paper borrowings. Permaswage's primary focus is the design and manufacture of permanent fittings used in fluid conveyance systems for airframe applications, as well as related installation tooling. The company operates manufacturing locations in Gardena, California; Paris, France; and Suzhou, China, and employs approximately 680 people. The Permaswage acquisition was a stock purchase for tax purposes and operates as part of the Airframe Products segment.
During the third quarter of fiscal 2014, we also completed two small acquisitions in the Forged Products segment.


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


Fiscal 2012 . . .

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