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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 17, 2000
PRECISION CASTPARTS CORP.
(Exact name of registrant as specified in its charter)
State of Oregon 1-10348 93-0460598
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(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File No.) Identification No.)
4650 SW Macadam, Suite 440, Portland, Oregon 97201-4254
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(Address of principal executive offices) (Zip Code)
(503) 417-4800
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year, if changed since last
report)
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ITEM 5. OTHER INFORMATION.
Precision Castparts Corp. ("PCC") has prepared a discussion of its
business segments, which reflects certain modifications as a result of PCC's
recent acquisition of Wyman-Gordon Company. This discussion is filed herewith
as Exhibit 99.1. In addition, PCC has prepared a discussion relating to
environmental regulations and related liabilities. This discussion is filed
herewith as Exhibit 99.2. PCC has also prepared unaudited pro forma combined
financial information, including unaudited pro forma combined statements of
income data for the nine months ended December 26, 1999 for PCC and
Wyman-Gordon. This pro forma information is filed herewith as Exhibit 99.3.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
99.1 Discussion of Business Segments.
99.2 Discussion of Environmental Regulations and Related
Liabilities
99.3 Unaudited Pro Forma Combined Financial Information.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: February 17, 2000
PRECISION CASTPARTS CORP.
/s/ William D. Larsson
-----------------------------------
William D. Larsson
Vice President and Chief Financial Officer
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EXHIBIT INDEX
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Exhibit No. Description
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<S> <C>
99.1 Discussion of Business Segments.
99.2 Discussion of Environmental Regulations and Related Liabilities
99.3 Unaudited Pro Forma Combined Financial Information.
</TABLE>
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Following the acquisition of Wyman-Gordon, we integrated Wyman-Gordon's
financial reporting with our financial reporting. We classified Wyman-Gordon's
operations into business segments according to product characteristics and
combined them with our existing business segments. As a result, we added Forged
Products as an additional business segment of our operations, and made certain
modifications to our other segments, including the transfer of a small portion
of our Precision Alloy Products segment to our Industrial Products Segment. In
light of these modifications, we relabeled our "Precision Alloy Products"
segment as "Investment Cast Products" to reflect the primary products produced
by that segment. Therefore, our operations now include four principal business
segments: Investment Cast Products, Forged Products, Fluid Management Products
and Industrial Products. Each of these four business segments is described
below.
INVESTMENT CAST PRODUCTS
Our Investment Cast Products segment includes our subsidiaries PCC
Structurals, Inc., PCC Airfoils, Inc. and Wyman-Gordon Investment
Castings, Inc. These three subsidiaries manufacture investment castings for
aircraft engines, IGT engines, airframes, medical prostheses and other
industrial applications. We primarily sell our Investment Cast Products to the
aerospace market.
Investment Castings
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 available jet aircraft engine program in production or under development
by our key customers. We are leveraging our experience and expertise in large,
complex structural and airfoil investment castings to manufacture castings for
IGT engines used for electric power generation
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and we have expanded into the structural airframe market. In addition, we make
investment castings for use in the automotive, medical prosthesis, satellite
launch vehicle and general industrial markets.
Investment casting technology involves a technical, 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 pathways through
which molten metal flows into the ceramic mold. A ceramic shell is then formed
around the wax pattern followed by removal of the wax from the ceramic shell by
melting and draining the wax. Finally, molten metal is poured into the ceramic
shell, the shell is removed, and the part undergoes final processing and
inspection.
Because of the complexity of the manufacturing process and the application
of proprietary technologies, we believe we currently are the only manufacturer
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 one of the leading suppliers of structural and
airfoil castings for jet aircraft engines, to increase our market share of IGT
castings and to expand into the structural airframe market.
Trends in the commercial aerospace market are a critical determinant of
demand for our precision investment casting products. Beginning in 1995, demand
for investment castings strengthened, primarily due to increased demand from the
commercial aerospace industry, which had been in a cyclical downturn since 1991.
However, during fiscal 1999, demand decreased in the commercial aerospace market
as worldwide aircraft production reached its peak. The decrease in demand was
due in part to the decline in wide-body aircraft orders for the Asian market
where depressed economic conditions have curbed spending for new aircraft.
Large jet aircraft engines are manufactured by a small number of suppliers,
including General Electric, Pratt & Whitney, Rolls-Royce, and several joint
ventures. As a result, we believe a high level of customer service and strong
long-term customer relationships will continue to be important to achieving our
goals. We have been supplying castings for jet engines to GE for more than
25 years, and we have been supplying Pratt & Whitney (a division of United
Technologies) with castings for more than 20 years for its military jet engines
and more than 15 years for its commercial jet engines. In addition, we have
supplied small structural investment castings to Rolls Royce for more than
10 years and we have more recently begun supplying Rolls Royce with large,
structural castings for use in its new Trent series of aircraft jet engines. As
we have been able to cast larger and more complex parts, manufacturers of large
jet aircraft engines have made increasing use of our structural castings.
Aerospace Structural Castings
Our structural castings business includes the largest diameter stainless
steel, nickel-based superalloys and titanium investment castings in the world,
as well as a variety of smaller structural castings. These castings are
stationary components that form portions of the fan, compressor, combustion and
turbine sections of the jet aircraft engine, where strength and structural
integrity are critical. Structural investment castings are sold primarily as
original equipment to jet aircraft engine manufacturers.
We believe that trends in the manufacturing of aircraft jet engines will
continue to increase our revenues 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 in all but
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the hottest parts of the engine because of its considerable weight savings.
Titanium is an exceptionally difficult metal to cast because of its
reactivity to other elements. However, we have developed the necessary
technology and manufacturing processes to cast large, complex investment
castings in 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 prior engine designs. We manufacture structural
investment castings for all three jet aircraft engines used on the Boeing 777
aircraft, and we are the sole supplier of structural investment castings for
the GE90 jet engine. We also manufacture the intermediate case and the tail
bearing housing for the new Rolls Royce Trent series of engines. These are
the largest structural investment castings for jet aircraft engines in the
world.
We have also expanded into the structural airframes market. These airframe
components are manufactured primarily from titanium and aluminum alloys.
Aircraft manufacturers have begun to show substantial interest in using
investment castings for airframe applications such as aileron and flap hinges,
pylons (engine mounts) and wing spars and wing ribs.
Aerospace Airfoil Castings
We manufacture precision cast airfoils, which include the stationary vanes
and rotating blades used in the turbine section of aircraft jet engines. This
engine section is considered the "hot" section, where temperatures may exceed
2,400 degrees Fahrenheit. These conditions require use of superalloys and
special casting techniques to manufacture airfoil castings with internal cooling
passageways that provide both high performance and longer engine life.
We use various casting technologies to produce turbine airfoils. We employ
conventional casting processes 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 large
superalloy crystal without grain boundaries. SX castings provide greater
strength and performance characteristics than either equiaxed or DS castings, as
well as longer engine life.
As engine sizes grow to generate greater thrust for larger aircraft, the
turbine sections of these engines must work harder and burn hotter. As a result,
the major aircraft engine manufacturers have increasingly been designing their
engines with DS and SX blades. The DS and SX cast airfoils we build, with their
complex cooling passages, have been instrumental in enabling these engines to
operate at higher temperatures. SX cast airfoils are used both in new and
redesigned engines, particularly in jet engines used in military applications
where performance requirements are higher, and blade life is shorter than in
commercial engines.
The demand for aerospace airfoil castings is determined primarily by the
number and type of engines required for new jet aircraft, the frequency of
engine repairs and the inventory levels of replacement parts maintained by the
principal jet aircraft engine manufacturers and repair centers. 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 the
engine's time in service and the expected life of the airfoil casting. Based
upon information from our major customers, we believe that approximately
50 percent of our sales of cast airfoils are used as replacement parts.
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IGT Castings
In fiscal 1994, we began to focus on the manufacture of airfoil castings
for IGT engines. We targeted this market because we believe (1) the
performance and reliability standards we have developed in the manufacture of
aerospace airfoil castings are applicable to the manufacture of IGT airfoils,
(2) the worldwide market for IGT airfoils is large (approximately $500
million) and growing, and (3) there are a small number of suppliers in this
market. Our IGT products consist of airfoil castings and high-temperature
combustion hardware used in large, land-based gas turbines designed for
electrical power generation. In addition, we manufacture structural and
airfoil castings for aircraft-derivative gas turbine engines which are also
used for power generation as well as other industrial and military land and
marine-based applications.
IGT manufacturers have significantly improved the efficiency and reduced the
pollution profiles of industrial gas turbines, principally by incorporating
component-level advances that are included not only in new engines but also in
the refurbishing and upgrading of existing turbines. 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 generally larger, than blades and
vanes manufactured by us for the aerospace market. Because of their size, IGT
airfoils are 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 demand for replacement parts depends on the size
and usage rate of the installed base. Gas turbine power generation has several
advantages over other power-generation methods, such as coal and nuclear-
powered facilities, including lower average capital cost, shorter installation
and regulatory approval time, ease of adding a new industrial gas turbine engine
to an existing power plant to increase output and the clean-burning
characteristics of natural gas. We believe these advantages have led to
increased demand for gas turbine engines.
Other Investment Casting Products
Our strategy for profitable growth also includes the pursuit of new
opportunities for our existing investment casting technology. We have been
expanding the application of our investment casting technology in the
automotive, medical prosthesis, satellite and general industrial markets by
manufacturing such products as turbocharger wheels, artificial hips and knees,
parts for satellite launch vehicles and impellers for pumps and compressors.
FORGED PRODUCTS
We are among the leading manufacturers of forged products for the aerospace,
industrial gas turbine, and energy markets. Our Forged Products segment was
added as a result of our acquisition of Wyman-Gordon and consists of the forging
operations of Wyman-Gordon. Forged Products' aerospace and IGT sales primarily
derive from the same large engine customers served by the Investment Cast
Products segment, with additional aerospace sales going to manufacturers of
landing gear and other airframe components. Similarly, the dynamics of the
aerospace and IGT markets, as described in the Investment Cast Products section,
above, are virtually the same for Forged Products.
We manufacture components from sophisticated titanium and nickel alloys for
jet engines 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 spans, engine mounts, struts, wing hinges, wing and rail flaps and
housings. These parts may be made of titanium, steel, aluminum or other alloys.
We provide products for use in power plants worldwide as well as in oil and gas
industry applications. We produce rotating components, such as
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discs and spacers, and valve components for land-based steam turbine and gas
turbine generators, and in addition, also manufacture shafts, cases, and
compressor and turbine discs for marine gas engines. We produce a variety of
mechanical and structural tubular forged products, primarily in the form of
extruded seamless pipe, for the domestic and international energy markets,
which include nuclear and fossil-fueled power-plants, cogeneration projects
and retrofit and life extension applications. For naval defense applications,
we supply components for propulsion systems for nuclear submarines and
aircraft carriers as well as pump, valve, structural and non-nuclear
propulsion forgings.
The forging process involves heating metal and shaping it through pressing
or extrusion. These forged products can be produced from titanium, steel, or
high-temperature nickel alloys. Forging is conducted on hydraulic presses with
capacities ranging up to 55,000 tons.
We believe that we are the world leader in producing forged rotating
components for use in jet aircraft engines. These parts are forged from
purchased ingots that are converted to billets in our cogging presses and from
metal powders (primarily nickel alloys) that are produced, consolidated, and
extruded into billet entirely in our own facilities.
Forging comprises one of five different manufacturing processes, depending
on the raw materials and the product application. In open die forging, 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
closed-die forging. Closed-die forging involves pressing heated metal into
required shapes and sizes determined by machined impressions in specially
prepared dies that completely surround the metal. This process allows the metal
to flow more easily within the die cavity and, thus, produces forgings with
superior surface finish and tighter tolerances, with enhanced repeatability of
the part shape.
The conventional, closed die, multi-ram process, which is employed on our
20,000 and 30,000 ton presses, 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, as well as reducing
machining requirements.
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
termperatures, the forging process is done in a vacuum or inert gas atmosphere.
Our isothermal press produces near-net shape components, requiring less
machining by our customers.
Finally, the extrusion process is capable of producing thick-wall, seamless
pipe, with outside diameters of up to 48 inches and wall thicknesses from 0.5
inches up to seven inches for applications in the oil and gas industry,
including tension leg platforms, riser systems, and production manifolds. Our
35,000-ton vertical extrusion press is one of the largest and most advanced in
the world. In addition to solid metals, powdered materials can be compacted and
extruded into forging billets with this press.
FLUID MANAGEMENT PRODUCTS
The Fluid Management Products segment includes all of the businesses within
PCC Flow Technologies, Inc. We entered the fluid management market in July 1996
with the acquisition of the NEWFLO Corporation. Subsequent acquisitions, which
included Crown Pumps, OIC Valves, Baronshire Engineering, Environment/One, TBV,
Sterom, Reiss Engineering and Valtaco have enabled PCC Flow Technologies to
further expand its product lines and markets. Our Fluid Management products are
sold primarily to the general industrial and energy markets.
We design, manufacture, market and service a broad range of high-quality
fluid-handling industrial valves and pumps. Our finished fluid management
products are manufactured primarily from castings,
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forgings and fabricated steel parts. We sell these products worldwide to a
wide range of end-user markets under well-established brand names.
The manufacturing process for fluid management products requires knowledge
of multiple metalforming and processing technologies, including casting,
machining, welding, heat treating, assembly and processing of metal components.
Testing procedures, materials management and traceability, and quality control
are also important aspects of our operations.
We use our substantial knowledge of fluid management technologies, complex
metal component manufacturing techniques and our end-user markets to develop,
produce and sell engineered valves and pumps that we believe provide customer
benefits superior to those of other manufacturers. Many of the products we offer
are customized to end-user requirements or designed for specialized
applications. Our maintenance, repair and service centers, extensive
distribution network and inventory of products enable us to provide responsive
service and timely deliveries to customers, thereby enhancing the marketability
of our products. We believe our brand names, quality products and responsive
service network also lead to repeat orders, stable demand and customer loyalty.
Valves
We manufacture and market specialty industrial and general purpose valves,
fittings and flanges, principally for the chemical, refining, energy, pulp and
paper, and marine markets. Our valve products consist primarily of multi-turn
industrial valves, check valves, quarter-turn industrial ball and plug valves,
double block and bleed dual expanding plug valves, four-way diverter valves and
valve operators, stainless steel butterfly valves and corrosion-resistant
titanium ball valves. We believe our General Valve positive shut-off, double
block and bleed valve and our Technocheck hinged check valves are among the most
technologically advanced products of these types sold in the fluid control
market.
Pumps
We manufacture and market a complete line of general purpose and specialty
pumps for power, cogeneration, geothermal, municipal, residential and industrial
(including petroleum, chemical, mining, marine, and pulp and paper)
applications. We also supply repair parts and service for pumps. Our pump
products consist primarily of single-suction and double-suction centrifugal
pumps, submersible and non-clog pumps, booster pump systems, vertical turbine,
mixed-flow and axial-flow pumps and grinder pumps. We believe our Johnston
vertical turbine pumps, our PACO booster systems and "Smart Pumps" and our E/One
low-pressure sewer systems are among the leading products sold in the fluid-
handling market.
Services
We maintain a number of service and repair facilities as well as stocking
warehouses in the U.S. and Canada which provide aftermarket maintenance, repair,
pre-sale modification services and inventory availability for our large
installed base of fluid management products, as well as repair and replacement
of fluid management products of other manufacturers. The market for replacement
units, repair parts and repair services generally offers us higher margins and
is less dependent on industry economic conditions than the market for equipment
for new industrial facilities. We believe approximately 43 percent of our sales
of fluid management products are derived from after-market service and repair
activities.
INDUSTRIAL PRODUCTS
The Industrial Products segment includes our subsidiaries PCC Specialty
Products, Inc., J&L Fiber Services, Inc. and Advanced Forming Technology, Inc.
("AFT"). PCC Specialty Products manufactures a broad range of cold-forming
header and threader tools and gundrills, and manufactures machines for
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vertical and horizontal boring, fastener production and gundrilling,
principally for automotive and other machine tool applications. Our tooling
business includes product lines manufactured by Reed-Rico-Registered
Trademark-, Astro Punch-Registered Trademark- and Eldorado. Our machines
business includes product lines manufactured by Olofsson, PCC Pittler,
Reed-Rico-Registered Trademark- and Eldorado. J&L Fiber Services produces
refiner plates and screen cylinders for use in the pulp and paper industry.
AFT manufactures metal-injection-molded, metal-matrix-composite, and
ThixoFormed-TM-components for numerous industrial applications. Our
Industrial Products are sold primarily to the general industrial, automotive
and pulp and paper markets.
We maintain the number one or two position in our served markets for
industrial metalworking tools, and we have strong market positions in the
manufacture of metalworking machines for general industrial markets. We entered
these markets in March 1995 with the acquisition of Quamco, Inc. Since that
time, we have increased our presence in the industrial metalworking tools and
machines markets with three additional acquisitions. The acquisitions of
Olofsson and Astro Punch-Registered Trademark-, both acquired in fiscal 1997,
and PCC Pittler, acquired in fiscal 1998, complemented our capabilities as a
leading manufacturer of highly engineered industrial metalworking tools and
machines. In fiscal 1998, we acquired J&L Fiber Services, Inc., a manufacturer
of metal refiner plates and screen cylinders for the pulp and paper industry.
We believe we have been able to maintain our leading market positions due to
the quality of our products, the continued development of new technologies,
brand name recognition and customer service.
Metalworking Tools
We design, manufacture and distribute a wide variety of precision
metalworking tools to industrial companies that serve the automotive, appliance,
construction, farm equipment, medical and aerospace industries. Our industrial
metalworking tools consist primarily of heading, threading and gundrilling
tools. Our gundrilling tools are used to drill precision holes to very close
tolerances in such products as turbine engines, engine blocks, cylinder heads,
transmission shafts, connecting rods and medical prostheses.
Metalworking Machines
We design, manufacture and distribute several types of metalworking machines
primarily for the automotive industry. Our industrial metalworking machines
include threading machines and attachments, gundrilling machines and
computer-controlled specialized machine systems for boring and turning
applications. Our threading machines and attachments are used to form a variety
of threaded parts and fasteners.
Refiner Plates and Screen Cylinders
We are the world leader in the design, manufacture and sale of refiner
plates to the pulp and paper production markets. Refiner plates, which are
highly engineered metal castings, are an integral part of the wood pulping
process. Refiner plates separate wood chips into component fibers as pulp is
transported through the system, and affect the ultimate quality of the paper
produced. In addition, we manufacture conventional and rebuildable screen
cylinders which are metal filtering devices inside pressure vessels that
separate the usable wood fiber from undesirable elements in the pulp slurry mix.
More than 90 percent of J&L Fiber Services' sales are used as replacement parts.
Metal-Injection-Molded, Metal-Matrix-Composite, and Thixoformed-TM- Components
We are the largest producer of powdered metal parts manufactured by a
metal-injection-molding ("MIM") process. We are also a leading supplier of
tungsten carbide cutting tools and wear parts manufactured by a powdered metal
press and sinter process. In addition, we manufacture advanced
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technology, lightweight, net-shape, metal-matrix- composite parts that are
made by combining aluminum and silicon carbide ("AlSiC," a registered
trademark of the Company) using a patented
pressure-infiltration-casting-process. We have also expanded into
ThixoForming-TM-, an advanced technology alternative to conventional die
casting in which materials such as magnesium, aluminum or zinc are injected
in a semi-solid (thixotropic) state into a mold under vacuum conditions. The
result is a high-density, complex component with superior materials
properties and precise dimensional tolerances as compared to a die-cast part.
We believe these businesses have the potential for rapid growth and
complement our core competencies in metals, precision metalworking and the
management of complex manufacturing processes.
The MIM process is particularly well-suited to high volume production of
small, complicated metal parts for numerous industries, including computer
peripherals, medical instruments, electronics, automotive, power tools and
firearms. We sell tungsten carbide parts to various industrial markets and we
use these parts internally in our gundrilling operations. Metal-matrix-composite
parts, which have high thermal conductivity and tightly controlled thermal
expansion characteristics, are used in electronic applications that require heat
dissipation and are used in automotive, telecommunication, aerospace and
computer products. ThixoFormed-TM- components are used in automotive, electronic
and other consumer products. We believe our broad range of products and highest
standards of craftsmanship offer growth opportunities in numerous industry
applications.
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ENVIRONMENTAL REGULATIONS AND RELATED LIABILITIES.
We are subject to federal, state and local environmental laws and
regulations concerning, among other things, wastewater, air emissions, toxic use
reduction and hazardous materials disposal. We conduct our operations at
industrial sites where hazardous materials have been managed for many years,
including periods before careful management of these materials was required or
generally believed to be necessary. Consequently, we are subject to various
environmental laws that impose compliance obligations and can create liability
for historical releases of hazardous substances. Environmental legislation and
regulations and related administrative policies have changed rapidly in recent
years. It is likely that we will be subject to increasingly stringent
environmental standards in the
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future (including those under the Clean Air Act Amendments of 1990, the Clean
Water Act Amendments of 1990, stormwater permit program and toxic use reduction
programs) and that we will be required to make additional expenditures, which
could be significant, relating to environmental matters on an ongoing basis. We
own properties or conduct or have conducted operations at properties, including
properties acquired in recent acquisitions, which have been contaminated with
hazardous substances and for which further investigation and remediation is
likely to be necessary.
Our financial statements include reserves for future costs arising from
environmental issues relating to these properties and our operations. Our actual
future expenditures, however, for installation of and improvements to
environmental control facilities, remediation of environmental conditions at our
properties and other similar matters cannot be conclusively determined. At
December 26, 1999, we had accrued aggregate environmental reserves of
$38.9 million, which included reserves for Wyman-Gordon environmental matters,
as well as our other subsidiaries. Although we have recorded these reserves for
environmental matters, we cannot assure you that these reserves are adequate to
cover the cost of remedial measures that may eventually be required by
environmental authorities with respect to known environmental matters or related
liabilities and the cost of claims that may be asserted by such authorities or
private parties in the future with respect to matters about which we are not yet
aware. Accordingly, the costs of environmental claims may exceed the amounts
reserved.
Our environmental reserves of $38.9 million at December 26, 1999 include
approximately $29.9 million of reserves accrued by Wyman-Gordon for cleanup
expenses and other costs associated with environmental issues. These reserves
include amounts for expected cleanup expenses for Wyman-Gordon's Worcester,
Massachusetts, facility which is substantially closed and is expected to be
sold, remediation projects at Wyman-Gordon's facilities in Houston, Texas, North
Grafton/Millbury, Massachusetts, Groton, Connecticut and Buffalo, New York, and
various Superfund sites. We cannot assure you that the actual costs of
remediation for Wyman-Gordon's environmental liabilities will not exceed the
amount presently accrued. The following paragraphs discuss the more significant
matters for which we have established reserves.
Pursuant to an agreement between Wyman-Gordon and the U.S. Air Force in
connection with Wyman-Gordon's acquisition of the North Grafton facility in
1982, Wyman-Gordon agreed to make expenditures totaling $20.8 million for
environmental management and remediation at that site, of which $3.3 million
remained as of May 31, 1999. Approximately one-half of the remaining Air Force
projects are capital in nature. These expenditures will not resolve all of
Wyman-Gordon's obligations to federal and state regulatory authorities, who are
not parties to the agreement. We expect to incur an additional amount to comply
with federal and state environmental requirements in connection with the
investigation and remediation of contamination at the North Grafton facility.
The North Grafton site is located in an area where regional groundwater has been
impacted with a number of contaminants, including chlorinated solvents. The
Massachusetts Department of Environmental Protection ("MADEP") also has asked
Wyman-Gordon to investigate contamination in a brook and pond near the facility.
Pursuant to a license from the Atomic Energy Commission, Wyman Gordon disposed
of magnesium thorium alloys, which are low-level radioactive waste, at the North
Grafton facility. At some point, further controls or remediation may be
necessary with respect to these wastes.
Wyman Gordon's Houston facility has used onsite landfills for the disposal
of various industrial wastes. It also operates a system of wastewater management
lagoons. As a result of onsite waste management and historic operations of the
facility, contamination has occurred in the soil and groundwater. We anticipate
substantial expenditures for remediation of contamination at the Houston
facility.
In 1998, we purchased Sterom, S.A., from the Romanian government. As part of
this acquisition, we committed to invest up to $3.6 million over five years to
investigate and cleanup contamination at the Sterom facility and to improve
environmental controls at the facility. We obtained a purchase price adjustment
to fund a substantial portion of these commitments.
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Carmet Company is investigating the extent of chlorinated solvents
contamination discovered in the soil and groundwater at its plant in Bad Axe,
Michigan. Whether or not remediation will be necessary is not yet determined,
and Carmet may have defenses to liability for the contamination. We have
asserted an indemnity claim against the former shareholders of Carmet for
recovery from an escrow account of all or a portion of the costs associated with
this and certain other environmental matters. The former shareholders have
disputed this indemnity claim and the claim is unresolved.
In 1989, the Oregon Health Division (OHD) alleged that our facility in
Portland, Oregon, discharged low level radioactive material to the Portland city
sewer in violation of our radioactive materials license. The City of Portland
also has alleged that the discharges violated our wastewater discharge permit.
Although we contested the alleged violations, we undertook extensive cleaning of
portions of the sewer system under a consent agreement with the City and OHD.
The extent to which other investigation or remedial work may be necessary,
however, is unknown.
On January 10, 2000, the State of Connecticut filed a complaint against
Wyman-Gordon Investment Casting, Inc. in the Superior Court Judicial District of
Hartford, Connecticut. The complaint alleges various violations by the
Wyman-Gordon's Groton, Connecticut, facility of its wastewater discharge permit
during the years 1995 through 1998. The complaint does not allege any violations
after 1998 or that any of the violations are ongoing. The state has indicated
that it will propose a civil penalty of $200,000.
We, together with numerous other parties, have been named a potentially
responsible party under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA") for the cleanup of the following Superfund sites:
Salco Disposal Site, Monroe, Michigan; Operating Industries, Monterey Park,
California; PSC Resources, Palmer, Massachusetts; Pasco County Landfill, Pasco,
Washington (for which our insurers have been paying defense costs); the Western
Processing Site, Kent, Washington; and the Gemme/Fournier site, Leicester,
Massachusetts (for which Wyman Gordon's insurers have been paying defense
costs). We have asserted indemnity and insurance claims for some of these sites
and expects to recover some portion of its losses for these sites. Except for
sites for which its insurer has acknowledged responsibility, we have not
recorded an asset for potential recoveries.
We or our subsidiaries also have potential liability associated with former
facilities. The Environmental Protection Agency has asserted a claim against
Wyman-Gordon for remedial action the agency has conducted at the former
Wyman-Gordon facility in Harvey, Illinois; EPA has proposed settlement of this
claim for $300,000. The current owner of a former Arwood facility in Rockleigh,
New Jersey has asserted claims for contamination at that property; Wyman-Gordon
is entitled to indemnity of one half the amount of this claim from an escrow
account established by Arwood Corporation from which Wyman-Gordon acquired
certain operations. In 1999, PCC Specialty Products, Inc. sold its former
Merriman facility in Hingham, Massachusetts. PCC Specialty Products, Inc. made
commitments to the new owner and the MADEP to undertake certain remedial action
with respect to contamination at this facility. In February, 2000, PCC Flow
Technologies, Inc. sold its Penberthy operations in Prophetstown, Illinois.
During the course of the transaction, Penberthy, Inc. discovered contamination
in the soil and groundwater. PCC Flow Technologies, Inc. is obligated to the
landlord and the new owner of the Penberthy business to undertake certain
investigation and remedial action at this former facility. We or our
subsidiaries also have potential liability for contamination at other former
facilities where we do not believe our liability will be material.
We have recorded reserves for each of the environmental matters described
above, as well as other less significant matters. Nevertheless, we cannot assure
you that these reserves are adequate to cover the cost of remedial measures that
may eventually be required by environmental authorities with respect to known
environmental matters or related liabilities and the cost of claims that may be
asserted by such authorities or private parties in the future with respect to
matters about which we are not yet aware. Accordingly, the costs of
environmental claims may exceed the amounts reserved.
<PAGE>
Wyman-Gordon has notified its insurer of potential liabilities at its
Grafton and Worcester facilities and has asserted that it is entitled to recover
its costs under various historic insurance policies. We also have notified our
insurers of potential liabilities associated with the PCC Structurals facility
in Portland, Oregon. Although we believe we are entitled to coverage for a
substantial portion of our remediation costs at these sites, we do not yet know
whether or to what extent our insurer will contest the claims.
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information,
including the notes thereto, give effect to (1) the acquisition of
Wyman-Gordon, (2) the purchase of Wyman-Gordon's outstanding 8% notes due
2007, and (3) financing referenced in Note 4(a) to the unaudited pro forma
combined financial information, and are qualified in their entirety by
reference to, and should be read in conjunction with, our historical
consolidated financial statements and Wyman-Gordon's historical consolidated
financial statements. We report on the basis of a 52-53 week fiscal year
ending the Sunday closest to March 31, while Wyman-Gordon reported on the
basis of a 52-53 week fiscal year ending on the Saturday closest to May 31.
The unaudited pro forma combined statements of income data includes the
fiscal year ended March 28, 1999 for us and the fiscal year ended May 31,
1999 for Wyman-Gordon and includes the nine months ended December 26, 1999
for us and Wyman-Gordon. For the statements of income, the acquisition of
Wyman-Gordon and debt incurrences are treated as if they had taken place on
the first day of the periods presented. In combining the financial
information, we have made certain reclassifications to Wyman-Gordon's
historical financial statements to conform to our presentation. The unaudited
pro forma combined statements of income data do not reflect any adjustments
for cost savings that may be realized as a result of combining our operations
with Wyman-Gordon's operations following the acquisition of Wyman-Gordon.
We have prepared the unaudited pro forma combined financial statements based
upon currently available information and assumptions that we have deemed
appropriate. This pro forma information may not be indicative of what actual
results would have been, nor does such data purport to represent the combined
financial results of us and Wyman-Gordon for future periods. In addition, the
pro forma adjustments set forth in the following unaudited pro forma combined
financial information are estimated and may differ from final adjustments.
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 28, 1999 FOR PCC
AND YEAR ENDED MAY 31, 1999 FOR WYMAN-GORDON
-----------------------------------------------------------
HISTORICAL PRO FORMA
--------------------- -----------------------------------
ADJUSTMENTS
WYMAN- INCREASE
PCC GORDON (DECREASE) NOTES COMBINED
---------- -------- ----------- -------- ----------
(DOLLARS AND SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................... $1,471,900 $849,300 $(61,900) (1) (2) $2,259,300
Cost of goods sold...................... 1,134,000 715,900 (39,800) (1) (3) 1,810,100
Provision for restructuring charges and
other................................. 13,100 13,800 (2,000) (1) 24,900
Selling and administrative expenses..... 146,400 57,900 (8,500) (1) 195,800
Interest expense, net................... 27,600 14,200 48,300 (2) (4) 90,100
---------- -------- -------- ----------
Income before provision for income
taxes................................. 150,800 47,500 (59,900) 138,400
Provision for income taxes.............. 47,500 10,500 (9,400) (5) 48,600
---------- -------- -------- ----------
Net income.............................. $ 103,300 $ 37,000 $(50,500) $ 89,800
========== ======== ======== ==========
Net income per share (basic)............ $ 4.23 $ 3.68
Net income per share (diluted).......... $ 4.22 $ 3.67
Weighted average shares outstanding
(basic)............................... 24,400 24,400
Weighted average shares outstanding
(diluted)............................. 24,500 24,500
OTHER FINANCIAL DATA:
EBIT.................................... $ 178,400 $ 61,700 $(11,600) (6) $ 228,500
EBITDA.................................. $ 232,500 $ 89,300 $ 900 (6) $ 322,700
Adjusted EBIT........................... $ 191,500 $ 75,500 $(13,600) $ 253,400
Adjusted EBITDA......................... $ 245,600 $103,100 $ (1,100) $ 347,600
</TABLE>
<PAGE>
The following unaudited pro forma combined statements of income data for the
nine months ended December 26, 1999 includes the nine months ended December 26,
1999 for us and Wyman-Gordon. Because Wyman-Gordon's fiscal year ended on
May 31, 1999, two months of this nine-month period are also reflected in the
unaudited pro forma combined statements of income data for the companies' fiscal
years above. Wyman-Gordon's net sales and net income for this two-month period
were $142,900 and $13,500, respectively.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 26, 1999 FOR PCC AND NINE MONTHS
ENDED DECEMBER 26, 1999 FOR WYMAN-GORDON
---------------------------------------------------------------
HISTORICAL PRO FORMA
----------------------- -------------------------------------
ADJUSTMENTS
WYMAN- INCREASE
PCC GORDON (DECREASE) NOTES COMBINED
----------- --------- ----------- --------- -----------
(DOLLARS AND SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................... $1,064,300 $510,500 $(39,500) (1) (2) $1,535,300
Cost of goods sold...................... 825,600 432,800 (20,900) (1) (3) 1,237,500
Provisions for restructuring charges and
other................................. 11,000 (1,400) -- 9,600
Environmental charges................... -- 14,700 -- 14,700
Selling and administrative expenses..... 114,800 38,600 (4,800) (1) 148,600
Interest expense, net................... 19,300 9,800 38,500 (2) (4) 67,600
---------- -------- -------- ----------
Income before provision for income
taxes................................. 93,600 16,000 (52,300) 57,300
Provision for income taxes.............. 34,600 700 (10,300) (5) 25,000
---------- -------- -------- ----------
Net income.............................. $ 59,000 $ 15,300 $(42,000) $ 32,300
========== ======== ======== ==========
Net income per share (basic)............ $ 2.41 $ 1.32
Net income per share (diluted).......... $ 2.40 $ 1.31
Weighted average shares outstanding
(basic)............................... 24,500 24,500
Weighted average shares outstanding
(diluted)............................. 24,600 24,600
OTHER FINANCIAL DATA:
EBIT.................................... $ 112,900 $ 25,800 $(13,800) (6) $ 124,900
EBITDA.................................. $ 158,400 $ 48,300 $ (4,900) $ 201,800
Adjusted EBIT........................... $ 123,900 $ 39,100 $(13,800) $ 149,200
Adjusted EBITDA......................... $ 169,400 $ 61,600 $ (4,900) $ 226,100
</TABLE>
<PAGE>
PRECISION CASTPARTS CORP.
NOTES TO PRO FORMA COMBINED STATEMENTS OF INCOME
(1) Adjustments to reflect only the ongoing operating results of Wyman-Gordon,
primarily as a result of the Agreement Containing Consent Orders requiring
divestiture of certain Wyman-Gordon operations:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MAY 31, 1999 DECEMBER 26, 1999
------------ -----------------
<S> <C> <C>
Net sales.............................................. $(58,900) $(36,900)
Cost of goods sold..................................... (53,600) (31,300)
Provision for restructuring and other.................. (2,000) --
Selling and administrative expenses.................... (8,500) (4,800)
</TABLE>
(2) Reclassification to Wyman-Gordon's historical financial statements to
conform to PCC's presentation:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MAY 31, 1999 DECEMBER 26, 1999
------------ -----------------
<S> <C> <C>
Net sales.............................................. $(3,000) $(2,600)
Interest expense, net.................................. (3,000) (2,600)
</TABLE>
(3) Adjusted to eliminate Wyman-Gordon's historical goodwill amortization and to
include amortization of new goodwill over a period of 40 years.
(4) Interest expense was adjusted to reflect the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MAY 31, 1999 DECEMBER 26, 1999
------------ -----------------
<S> <C> <C>
Interest expense on new debt(a)........................ $ 76,400 $ 56,200
Commitment and other fees.............................. 1,700 1,300
Amortization of financing costs........................ 1,500 1,200
Elimination of Wyman-Gordon interest income............ 3,000 2,600
Elimination of interest expense on debt under PCC's
prior credit agreement............................... (17,100) (9,700)
Elimination of interest expense on Wyman-Gordon debt... (14,200) (10,500)
-------- --------
Total................................................ $ 51,300 $ 41,100
-------- --------
</TABLE>
(a) Interest expense on new debt as follows:
<TABLE>
<CAPTION>
AVERAGE AVERAGE YEAR ENDED
DEBT INSTRUMENT PRINCIPAL RATE MAY 29, 1999
- --------------- --------- -------- ------------
<S> <C> <C> <C>
Bridge Loan........................................... $300,000 6.9% $20,800
Term Loan............................................. 400,000 7.2% 28,700
Receivables Securitization............................ 150,000 6.2% 9,300
Commercial Paper...................................... 276,100 6.4% 17,600
-------
Total............................................... $76,400
-------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AVERAGE AVERAGE NINE MONTHS ENDED
DEBT INSTRUMENT PRINCIPAL RATE DECEMBER 26, 1999
- --------------- --------- -------- -----------------
<S> <C> <C> <C>
Bridge Loan...................................... $300,000 7.0% $15,800
Term Loan........................................ 400,000 7.3% 21,800
Receivables Securitization....................... 150,000 6.3% 7,000
Commercial Paper................................. 238,600 6.5% 11,600
-------
Total.......................................... $56,200
-------
</TABLE>
The average interest rates were computed using average LIBOR rates for the
appropriate periods plus applicable spreads ranging from 25 to 125 basis
points, depending on the debt instruments. Additionally, two swaps were in
place to partially fix the interest rates of the debt. The first swap has an
annual average notional balance of $412,500 swapped at a fixed rate of 6.5%,
while the second swap has an annual average notional balance of $225,000
swapped at a fixed rate of 6.1%. The costs of these swaps were allocated to
the applicable debt instruments, thereby increasing the average interest
rates.
For the year ended March 28, 1999, a 1/8 of 1 percent change in the interest
rate would result in a change in interest expense of approximately $600.
Additionally, for the nine months ended December 26, 1999, a 1/8 of
1 percent change in the interest rate would result in a change in interest
expense of approximately $300.
(5) Income tax expense was adjusted to reflect the expected statutory tax rates
of PCC as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MAY 29, 1999 DECEMBER 29, 1999
------------ -----------------
<S> <C> <C>
Effective tax rates.................................... 35.1% 43.6%
</TABLE>
(6) EBIT represents earnings before interest and income taxes. EBITDA represents
earnings before interest, income taxes, depreciation and amortization. Other
companies in our industry may calculate EBIT and EBITDA differently than we
do. Neither EBIT nor EBITDA is intended to represent cash flow or any other
measure of performance reported in accordance with generally accepted
accounting principles. We have included EBIT and EBITDA because we
understand that EBIT and EBITDA are used by certain investors as measures of
a company's ability to service debt. However, EBIT and EBITDA should not be
considered as an alternative to income from operations or to cash flows from
operating activities (as determined with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity.
Pro forma adjustments to EBIT represents the adjustments described in
Notes (1), (2) and (3). Pro forma adjustments to EBITDA represent the
adjustments described in Notes (1) and (2), the amortization of financing
costs described in Note (4) and the elimination of depreciation expense on
divested Wyman-Gordon operations.
Adjusted EBIT and adjusted EBITDA are calculated by adding to EBIT and
EBITDA the restructuring and other charges that we believe are non-recurring
and are not indicative of our future operating performance.
