| PRECISION CASTPARTS CORP ITEM 1A RISK FACTORS We may encounter difficulties associated with integration of acquired businesses and fail to realize anticipated benefits |
| In January 2006, we completed the acquisition of the Shur-Lok Group, a leading manufacturer of highly engineered, critical aerospace fasteners, including inserts, barrel nuts, adjustable diameter bolts, fluid fittings and lock nuts |
| In May 2006, we acquired Special Metals Corporation (“SMC”) |
| The success of those and prior 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 many new employees and to implement reporting, monitoring and forecasting procedures |
| Our failure to adequately address these acquisition risks could cause us to fail to realize the benefits we anticipated from the transactions |
| Recent and future acquisitions could subject us to a number of operational risks |
| We have completed several recent acquisitions and expect that we will continue to make acquisitions of, investments in, and strategic alliances with complementary businesses, products and technologies to enable us to add products and services for our core customer base and for related markets, and to expand each of our businesses geographically |
| Implementation of this strategy entails a number of risks, including: • inaccurate assessment of undisclosed liabilities; • entry into markets in which we may have limited or no experience; 14 ______________________________________________________________________ [57]Table of Contents • diversion of management’s attention from our core businesses; • potential loss of key employees or customers of the acquired businesses; • difficulties in realizing projected efficiencies, synergies and cost savings; and • increase in our indebtedness and a limitation in our ability to access additional capital when needed |
| 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 59 percent of our total sales in fiscal 2006, 55 percent in fiscal 2005 and 62 percent in fiscal 2004 |
| Our power generation sales constituted 18 percent of our total sales in fiscal 2006, 18 percent of total sales in fiscal 2005 and 17 percent in fiscal 2004 |
| The commercial aerospace industry is historically driven by the demand from commercial airlines for new aircraft |
| The US commercial aviation industry continues to face challenges arising from competitive pressures and increased fuel costs |
| Demand for commercial aircraft is further influenced by airline industry profitability, trends in airline passenger traffic, by the state of US and world economies and numerous other factors including the effects of terrorism and health and safety concerns |
| The military aerospace cycle is highly dependent on US and foreign government funding; however, it is also driven by the effects of terrorism, a changing global political environment, US foreign policy and the level of activity in regulatory changes, the retirement of older aircraft and technological improvements to new engines that increase reliability |
| Accordingly, the timing, duration and severity of cyclical upturns and downturns cannot be forecast with certainty |
| While we enjoyed both strong commercial and military aerospace markets in fiscal 2006 and we anticipate that they will continue through fiscal 2007, a future downturn or reduction in demand could have a material adverse effect on the Company’s 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 US and world economies and the political environments of numerous countries |
| The availability of fuels and related prices also have a large impact on demand |
| Reductions in demand for the Company’s industrial gas turbine products could have a material adverse effect on the Company’s business |
| In addition to the aerospace and power generation markets, we sell products and services to customers in the pulp and paper, and general industrial and other markets (including the automotive market) |
| Customer demand for the Company’s products or services in these markets may fluctuate widely depending upon US and world economic conditions and industry-specific factors |
| Cyclical declines or sustained weakness in any of these markets could have a material adverse effect on the Company’s business |
| Our business is dependent on a small number of customers |
| A substantial portion of our business is conducted with a relatively small number of large customers, including General Electric Company, United Technologies Corporation and Rolls Royce plc |
| General Electric accounted for approximately 16dtta7 percent, 16dtta5 percent and 22dtta2 percent of our total sales for fiscal 2006, 2005 and 2004, respectively |
| No other customer accounted for more than 10 percent of total sales; however, United Technologies and Rolls Royce are also considered our key customers |
| A financial hardship experienced by any one of these three customers, the loss of any of them, or a further reduction in or substantial delay of orders from any of them, could have a material adverse effect on our business |
| 15 ______________________________________________________________________ [58]Table of Contents Sales to the military sector constituted approximately 17dtta5 percent, 18dtta5 percent and 22dtta3 percent of our fiscal 2006, 2005 and 2004 sales, respectively |
| US defense spending is subject to US Congressional appropriations and to political pressures that influence the programs that are funded and those that are cancelled |
| Reductions in defense budgets or military aircraft procurement or delays in funding could adversely affect the Company’s business |
| The competitive nature of our business results in significant 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 in recent years, and we expect customer pressure for price concessions to continue |
| Maintenance of our profitability 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, or if we are unable to continue to compete effectively, our business will suffer |
| Our effectiveness in managing our cost structure will be a key determinator 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 cobalt, titanium, nickel, tantalum and molybdenum, which are found in only a few parts of the world and are available from a limited number of suppliers |
| The availability and costs of these metals may be influenced by private or government cartels, changes in world politics, and unstable governments in exporting nations and inflation |
| These metals are required for the alloys used in our investment castings, forged products and fasteners |
| In fiscal 2006, we and other industry participants experienced periods of increased delivery times and increased prices for nickel-based and titanium alloys, tool-grade steel and certain other raw materials critical to our business |
| 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 able to fully offset the effects of higher raw material costs |
| The ability of key metal suppliers to meet quality and delivery requirements can also impact our ability to meet commitments to customers |
| Future shortages or price fluctuations in raw materials could result in decreased 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 US 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 |
| 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 and state 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 16 ______________________________________________________________________ [59]Table of Contents subject to increasingly stringent environmental standards in the future (particularly under air quality and water quality laws) |
| We are required to comply with environmental laws and the terms and conditions of multiple environmental permits |
| Failure to comply with these laws or permits could result in fines and penalties 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 reserves for future costs arising from environmental issues relating to our properties and operations |
| Our actual future expenditures, however, relating to compliance and cleanup of environmental conditions at our properties cannot be conclusively determined |
| We cannot ensure that our reserves 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 claims may exceed the amounts reserved |
| We have been named as a “potentially responsible party” at sites identified by the Environmental Protection Agency and state regulatory agencies for investigation and remediation under the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, and similar state statutes |
| Under CERCLA, and under similar state statutes, potentially responsible parties are jointly and severally liable, and therefore, the Company will continue to be potentially liable to the government or third parties for the full cost of remediating contamination at our facilities or former facilities or at third-party sites where we have been designated a potentially responsible party |
| In estimating our current reserves for environmental matters, we have assumed that we will not bear the entire cost of remediation of every site to the exclusion of other PRP’s, who may be jointly and severally liable |
| In the unlikely event that we are required to fully fund the remediation of a site, the statutory framework would allow us to pursue rights of contribution from other potentially responsible parties |
| It is also possible that we will be designated a potentially responsible party 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 causing serious harm to 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 United States |
| We also have significant operations located outside the United States |
| In fiscal 2006, approximately 16 percent of our total sales were attributable to our non-US subsidiaries, in 2005, approximately 16 percent and in 2004, approximately 14 percent |
| A number of risks inherent in international operations could have a material adverse effect on our international operations and, consequently, on our results of operations, including: • currency fluctuations; • difficulties in staffing and managing multi-national operations; • general economic and political uncertainties and potential for social unrest in countries in which we operate; • limitations on our ability to enforce legal rights and remedies; 17 ______________________________________________________________________ [60]Table of Contents • restrictions on the repatriation of funds; • changes in trade policies; • tariff regulations; • difficulties in obtaining export and import licenses; and • the risk of government financed competition |
| Any lower than expected rating of our bank debt and debt securities may adversely affect our business |
| Two rating agencies, Moody’s and Standard & Poor’s (S&P), rate our debt securities |
| However, if the rating agencies were to reduce their current ratings, our interest expense would increase and the instruments governing our indebtedness could impose additional restrictions on our ability to make capital expenditures or otherwise limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate or our ability to take advantage of potential business opportunities |
| These modifications also could require us to meet more stringent financial ratios and tests or could require us to grant a security interest in our assets to secure the indebtedness |
| Our ability to comply with covenants contained in the instruments governing our existing and future indebtedness may be affected by events and circumstances beyond our control |
| If we breach any of these covenants, one or more events of default, including cross-defaults between multiple components of our indebtedness, could result |
| These events of default could permit our creditors to declare all amounts owing to be immediately due and payable, and terminate any commitments to make further extensions of credit |
| Our 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 may result in production delays, revenue loss and significant repair costs |
| In addition, equipment failures could result in injuries to our employees |
| Moreover, the competitive nature of our businesses requires us continuously to implement process changes intended to achieve product improvements and manufacturing efficiencies |
| These process changes may at times result in production delays, quality concerns and increased costs |
| Any disruption of operations at our facilities due to equipment failures or process interruptions could have a material adverse effect on our business |
| If our relations with our union employees were to deteriorate, we may be faced with labor shortages, disruptions or stoppages, which could adversely affect our business and reduce our operating margins and income |
| Our operations rely heavily on maintaining good relations with our employees, and any labor shortage, disruption or stoppage caused by any deterioration in employee relations or difficulties in the renegotiation of labor contracts could reduce our operating margins and income |
| Approximately 20prca of our employees are affiliated with unions or covered by collective bargaining agreements |
| We expect to negotiate four collective bargaining agreements affecting less than 2 percent of the workforce during fiscal 2007 |
| 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 |
| 18 ______________________________________________________________________ [61]Table of Contents We are subject to litigation including product warranty and product liability risks that could adversely affect our operating results |
| We produce many critical parts for commercial and military aircraft |
| Failure of our parts could give rise to substantial product liability claims |
| We maintain insurance addressing this risk, 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 our parts to strict contractually-established standards and tolerances using complex manufacturing processes |
| If we fail to meet the contractual requirements for a product we may be subject to product warranty costs and claims |
| These costs are generally not insured |
| We are parties to legal proceedings and other contingencies, the outcome of which cannot be predicted with certainty |
| We estimate material loss contingencies and establish reserves based on our analysis of the contingencies in accordance with GAAP Developments in the legal proceedings may affect our assessment and estimates recorded as a liability or reserve and could result in an adverse effect on our results of operations in the period in which a liability would |