**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**Quarterly Report Under Section 13or 15(d)**

**of the Securities Exchange Act of1934**

 

**Forthe Quarter Ended January 1, 2006**

 

**CommissionFile No. 1-10348**

 

**Precision Castparts Corp.**

 

**AnOregon Corporation**

**IRSEmployer Identification No. 93-0460598**

**4650S.W. Macadam Avenue**

**Suite 440**

**Portland,Oregon 97239-4254**

 

Telephone:**(503) 417-4800**

 

Indicate by checkmark whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes      o         No      ý

 

Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of "accelerated filer and largeaccelerated filer" in Rule 12b-2 of the Exchange Act.

 
| Large  accelerated filer  ý |   | Accelerated filer  o |   | Non-accelerated filer  o |
|--------------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes      o         No     ý

 

Number of shares of Common Stock, no parvalue, outstanding as of February 1, 2006: 134,058,053

 

 

Note:  This 10-Q was filed electronically via EDGAR with the Securities andExchange Commission.

 

 

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**PART 1:  FINANCIAL INFORMATION**

 

**Item 1. FinancialStatements**

 

**Precision CastpartsCorp. and Subsidiaries**

**Consolidated Statementsof Operations**

**(Unaudited)**

**(In millions, except pershare data)**

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **1/1/06**                       | ** ** | **1/2/05** | ** ** |
| Net sales                                               |       | $                                | 864.4      |   | $ | 743.9 |   |
| Cost of  goods sold                                     |       | 667.8                            |       | 575.8 |   |
| Selling and  administrative expenses                    |       | 58.5                             |       | 58.8 |   |
| Restructuring  and impairment                           |       | 2.3                              |       | — |   |
| Interest  expense, net                                  |       | 10.1                             |       | 14.3 |   |
|                                                    |       |                             |       |   |   |
| Income  before income taxes and minority interest       |       | 125.7                            |       | 95.0 |   |
| Income tax  expense                                     |       | 34.0                             |       | 32.7 |   |
| Minority  interest in earnings of consolidated entities |       | (0.5                             | )          | (0.2 | ) |
|                                                    |       |                             |       |   |   |
| Net income  from continuing operations                  |       | 91.2                             |       | 62.1 |   |
| Net income  (loss) from discontinued operations         |       | 2.5                              |       | (0.4 | ) |
|                                                    |       |                             |       |   |   |
| Net income                                              |       | $                                | 93.7       |   | $ | 61.7 |   |
|                                                    |       |                             |       |   |   |
| Net income  per common share – basic:              |       |                             |       |   |   |
| Net income  from continuing operations                  |       | $                                | 0.68       |   | $ | 0.47 |   |
| Net income  from discontinued operations                |       | 0.02                             |       | — |   |
|                                                    |       |                             |       |   |   |
|                                                    |       | $                                | 0.70       |   | $ | 0.47 |   |
|                                                    |       |                             |       |   |   |
| Net income  (loss) per common share – diluted:     |       |                             |       |   |   |
| Net income  from continuing operations                  |       | $                                | 0.67       |   | $ | 0.47 |   |
| Net income  (loss) from discontinued operations         |       | 0.02                             |       | (0.01 | ) |
|                                                    |       |                             |       |   |   |
|                                                    |       | $                                | 0.69       |   | $ | 0.46 |   |
|                                                    |       |                             |       |   |   |
| Average  common shares outstanding:                     |       |                             |       |   |   |
| Basic                                                   |       | 133.3                            |       | 130.8 |   |
| Diluted                                                 |       | 135.8                            |       | 133.2 |   |

 

*See Notes to the InterimConsolidated Financial Statements on page 6.*

 

2

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**Precision CastpartsCorp. and Subsidiaries**

**Consolidated Statementsof Operations**

**(Unaudited)**

**(In millions, except pershare data)**

 
| ** **                                              | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **1/1/06**                      | ** ** | **1/2/05** | ** ** |
| Net sales                                               |       | $                               | 2,593.8    |   | $ | 2,109.5 |   |
| Cost of  goods sold                                     |       | 2,010.7                         |       | 1,632.1 |   |
| Selling and  administrative expenses                    |       | 187.8                           |       | 176.8 |   |
| Restructuring  and impairment                           |       | 2.3                             |       | — |   |
| Interest  expense, net                                  |       | 31.3                            |       | 43.7 |   |
|                                                    |       |                            |       |   |   |
| Income  before income taxes and minority interest       |       | 361.7                           |       | 256.9 |   |
| Income tax  expense                                     |       | 112.0                           |       | 86.1 |   |
| Minority  interest in earnings of consolidated entities |       | (1.2                            | )          | (1.0 | ) |
|                                                    |       |                            |       |   |   |
| Net income  from continuing operations                  |       | 248.5                           |       | 169.8 |   |
| Net income  (loss) from discontinued operations         |       | 1.7                             |       | (237.5 | ) |
|                                                    |       |                            |       |   |   |
| Net income  (loss)                                      |       | $                               | 250.2      |   | $ | (67.7 | ) |
|                                                    |       |                            |       |   |   |
| Net income  (loss) per common share – basic:       |       |                            |       |   |   |
| Net income  from continuing operations                  |       | $                               | 1.87       |   | $ | 1.31 |   |
| Net income  (loss) from discontinued operations         |       | 0.01                            |       | (1.83 | ) |
|                                                    |       | $                               | 1.88       |   | $ | (0.52 | ) |
|                                                    |       |                            |       |   |   |
| Net income  (loss) per common share – diluted:     |       |                            |       |   |   |
| Net income  from continuing operations                  |       | $                               | 1.83       |   | $ | 1.28 |   |
| Net income  (loss) from discontinued operations         |       | 0.02                            |       | (1.79 | ) |
|                                                    |       | $                               | 1.85       |   | $ | (0.51 | ) |
|                                                    |       |                            |       |   |   |
| Average  common shares outstanding:                     |       |                            |       |   |   |
| Basic                                                   |       | 132.9                           |       | 130.0 |   |
| Diluted                                                 |       | 135.5                           |       | 132.4 |   |

 

*See Notes to the InterimConsolidated Financial Statements on page 6.*

 

3

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**Precision Castparts Corp. andSubsidiaries**

**Consolidated Balance Sheets**

**(Unaudited)**

**(In millions)**

 

 
| ** **                                            | ** ** | **1/1/06** | ** ** | **4/3/05** | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|
| ASSETS                                                |       |       |       |       |       |
| Current  assets:                                      |       |       |       |       |       |
| Cash and  cash equivalents                            |       | $          | 118.8      |       | $          | 153.9 |   |
| Receivables,  net                                     |       | 444.0      |       | 408.2      |       |
| Inventories                                           |       | 546.5      |       | 531.3      |       |
| Prepaid  expenses                                     |       | 21.7       |       | 17.5       |       |
| Income tax  receivable                                |       | —     |       | 9.3        |       |
| Deferred  income taxes                                |       | 59.6       |       | 55.0       |       |
| Discontinued  operations                              |       | 5.0        |       | 37.9       |       |
| Total  current assets                                 |       | 1,195.6    |       | 1,213.1    |       |
|                                                  |       |       |       |       |       |
| Property,  plant and equipment, at cost               |       | 1,308.4    |       | 1,294.4    |       |
| Less -  accumulated depreciation                      |       | (631.7     | )          | (601.9     | )          |
| Net  property, plant and equipment                    |       | 676.7      |       | 692.5      |       |
|                                                  |       |       |       |       |       |
| Goodwill,  net                                        |       | 1,572.6    |       | 1,576.1    |       |
| Acquired  intangible assets, net                      |       | 4.7        |       | 5.2        |       |
| Deferred  income taxes                                |       | —     |       | 16.8       |       |
| Other assets                                          |       | 124.1      |       | 103.2      |       |
| Discontinued  operations                              |       | 7.8        |       | 18.1       |       |
|                                                  |       |       |       |       |       |
|                                                  |       | $          | 3,581.5    |       | $          | 3,625.0 |   |
|                                                  |       |       |       |       |       |
| LIABILITIES  AND SHAREHOLDERS’ INVESTMENT        |       |       |       |       |       |
| Current  liabilities:                                 |       |       |       |       |       |
| Short-term  borrowings                                |       | $          | 26.0       |       | $          | 6.0 |   |
| Long-term  debt currently due                         |       | 23.3       |       | 38.3       |       |
| Accounts  payable                                     |       | 306.9      |       | 312.4      |       |
| Accrued  liabilities                                  |       | 317.7      |       | 320.3      |       |
| Income taxes  payable                                 |       | 29.9       |       | 89.4       |       |
| Discontinued  operations                              |       | 5.0        |       | 13.3       |       |
| Total  current liabilities                            |       | 708.8      |       | 779.7      |       |
|                                                  |       |       |       |       |       |
| Long-term  debt                                       |       | 592.2      |       | 798.7      |       |
| Pension and  other postretirement benefit obligations |       | 184.3      |       | 205.5      |       |
| Deferred tax  liability                               |       | 15.4       |       | —     |       |
| Other  long-term liabilities                          |       | 62.2       |       | 55.7       |       |
| Discontinued  operations                              |       | 3.7        |       | 5.0        |       |
| Total  liabilities                                    |       | 1,566.6    |       | 1,844.6    |       |
|                                                  |       |       |       |       |       |
| Shareholders’  investment:                       |       |       |       |       |       |
| Common stock                                          |       | 133.5      |       | 66.2       |       |
| Paid-in  capital                                      |       | 734.3      |       | 773.4      |       |
| Retained  earnings                                    |       | 1,194.0    |       | 951.8      |       |
| Accumulated  comprehensive loss:                      |       |       |       |       |       |
|  Foreign currency translation                    |       | 38.6       |       | 72.3       |       |
|  Derivatives qualifying as hedges                |       | (1.6       | )          | 0.6        |       |
|  Minimum pension liability                       |       | (83.9      | )          | (83.9      | )          |
| Total  shareholders’ investment                  |       | 2,014.9    |       | 1,780.4    |       |
|                                                  |       |       |       |       |       |
|                                                  |       | $          | 3,581.5    |       | $          | 3,625.0 |   |

 

*See Notes to the InterimConsolidated Financial Statements on page 6.*

 

4

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**Precision Castparts Corp. andSubsidiaries**

**Consolidated Statements of CashFlows**

**(Unaudited)**

**(In millions)**

 
| ** **                                                                                             | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                             | ** ** | **1/1/06**                      | ** ** | **1/2/05** | ** ** |
|                                                                                                   |       | **Revised**                     | ** ** | **Revised** |   |
| Cash flows  from operating activities:                                                                 |       |                            |       |   |   |
| Net income  from continuing operations                                                                 |       | $                               | 248.5      |   | $ | 169.8 |   |
| Income  (loss) from discontinued operations                                                            |       | 1.7                             |       | (237.5 | ) |
| Non-cash  items included in income:                                                                    |       |                            |       |   |   |
| Depreciation  and amortization                                                                         |       | 74.4                            |       | 72.0 |   |
| Impairment  of long-lived assets                                                                       |       | 1.7                             |       | — |   |
| Other  non-cash adjustments                                                                            |       | 1.3                             |       | — |   |
| Deferred  income taxes                                                                                 |       | 35.6                            |       | 17.1 |   |
| Tax benefit  from stock option exercises                                                               |       | 12.6                            |       | 11.8 |   |
| Changes in  assets and liabilities, excluding effects of acquisitions and dispositions of  businesses: |       |                            |       |   |   |
| Receivables                                                                                            |       | (35.4                           | )          | (4.5 | ) |
| Inventories                                                                                            |       | (24.1                           | )          | (48.4 | ) |
| Other  current assets                                                                                  |       | 5.0                             |       | 26.5 |   |
| Payables,  accruals and current taxes                                                                  |       | (75.1                           | )          | 36.0 |   |
| Retirement  benefit obligations                                                                        |       | (28.2                           | )          | (15.3 | ) |
| Other  non-current assets and liabilities                                                              |       | (4.7                            | )          | (12.9 | ) |
| Net cash  (used) provided by operating activities of discontinued operations                           |       | (0.4                            | )          | 225.5 |   |
| Net cash  provided by operating activities                                                             |       | 212.9                           |       | 240.1 |   |
|                                                                                                   |       |                            |       |   |   |
| Cash flows  from investing activities:                                                                 |       |                            |       |   |   |
| Capital  expenditures                                                                                  |       | (67.1                           | )          | (38.6 | ) |
| Acquisitions  of businesses                                                                            |       | (2.5                            | )          | (1.4 | ) |
| Proceeds  from sales of businesses                                                                     |       | 25.4                            |       | 116.0 |   |
| Other                                                                                                  |       | 2.2                             |       | 4.2 |   |
| Net cash  used by investing activities of discontinued operations                                      |       | (0.2                            | )          | (5.8 | ) |
| Net cash  (used) provided by investing activities                                                      |       | (42.2                           | )          | 74.4 |   |
|                                                                                                   |       |                            |       |   |   |
| Cash flows  from financing activities:                                                                 |       |                            |       |   |   |
| Net change  in short-term borrowings                                                                   |       | 20.0                            |       | (5.8 | ) |
| Issuance of  long-term debt                                                                            |       | 93.0                            |       | — |   |
| Repayment of  long-term debt                                                                           |       | (314.5                          | )          | (15.4 | ) |
| Proceeds from  exercise of stock options                                                               |       | 15.6                            |       | 25.2 |   |
| Cash  dividends                                                                                        |       | (8.0                            | )          | (5.8 | ) |
| Other                                                                                                  |       | (2.2                            | )          | 1.9 |   |
| Net cash  used by financing activities of discontinued operations                                      |       | —                          |       | (4.3 | ) |
| Net cash  used by financing activities                                                                 |       | (196.1                          | )          | (4.2 | ) |
|                                                                                                   |       |                            |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                                          |       | (9.7                            | )          | 6.3 |   |
|                                                                                                   |       |                            |       |   |   |
| Net  (decrease) increase in cash and cash equivalents                                                  |       | (35.1                           | )          | 316.6 |   |
| Cash and  cash equivalents at beginning of period                                                      |       | 153.9                           |       | 80.3 |   |
|                                                                                                   |       |                            |       |   |   |
| Cash and  cash equivalents at end of period                                                            |       | $                               | 118.8      |   | $ | 396.9 |   |

 

*See Notes to the InterimConsolidated Financial Statements on page 6.*

 

5

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**Notes to the Interim ConsolidatedFinancial Statements**

(Unaudited)

(In millions, except share and per sharedata)

 

**(1)****                                ****Basis of Presentation**

 

The interim consolidated financialstatements have been prepared by Precision Castparts Corp. (“PCC” or the “Company”),without audit and subject to year-end adjustment, in accordance with generallyaccepted accounting principles, except that certain information and footnotedisclosures made in the latest annual report have been condensed or omitted forthe interim statements. Certain costs are estimated for the full year andallocated in interim periods based on estimates of operating time expired,benefit received, or activity associated with the interim period. Theconsolidated financial statements reflect all adjustments, which are, in theopinion of management, necessary for a fair representation of the results forthe interim periods. All adjustments are of a normal recurring nature. Certainreclassifications have been made to prior year amounts to conform to thecurrent year presentation.

 

**(2)****                                ****Special Investigation**

 

In September and October 2005, the Company received threerelated reports with respect to concerns about employee misconduct and theproper application of generally accepted accounting principles (“GAAP”) tocertain transactions at the Wyman-Gordon Forgings’ Houston plant, a businessunit reported in the Forged Products segment. The matters identified in thereports were referred to the Audit Committee of the Board of Directors (“AuditCommittee”). The Audit Committee, after due consideration, decided to commencean independent investigation. In November 2005, the Audit Committeeexpanded the scope of the investigation to review two similar but unrelatedreports alleging employee misconduct and improper application of GAAP atJ&L Fiber Services, Inc., a business unit reported in the IndustrialProducts segment.

 

In February 2006, the Audit Committee completed its independentinvestigation and determined that the Company accounted for certaintransactions incorrectly at both identified locations, as described below:

 

The investigation at Wyman-Gordon Forgings Houston identified errors inthe Company’s fiscal 2001 through fiscal 2006 financial statements. Theseerrors, which totaled $1.8 million, represented a net overstatement of expensesthrough the second quarter of fiscal 2006. The errors primarily related to thefailure to properly reconcile accounts and the misapplication of GAAP andCompany accounting policies. There were also timing errors related to theimproper recognition of revenue within fiscal 2005 of $0.2 million and betweenthe fourth quarter of fiscal 2005 and the first quarter of fiscal 2006 of $0.2million. The identified errors resulted from both deliberate and inadvertentacts involving non-executive employees.

 

The investigation at J&L Fiber Services, Inc. identifiederrors in the Company’s fiscal 2003 through fiscal 2006 financial statements. Theseerrors, which totaled $5.6 million, represented a net understatement ofexpenses through the second quarter of fiscal 2006. The errors primarilyrelated to the overstatement of inventories resulting from the failure toproperly record excess and obsolete reserves and inadequate cycle countingprocedures, the failure to properly reconcile accounts, and the misapplicationof GAAP and Company accounting policies, which included improper deferral ofexpenses. The identified errors resulted from both deliberate and inadvertentacts involving non-executive employees.

 

The Company’s management concluded, with the concurrence of the AuditCommittee, that the impact of these errors was not material to the Company’sconsolidated financial statements for any interim or annual period in which theerrors were found. As a result, the Company recorded a cumulative adjustment inthe second quarter of fiscal 2006. The net impact of these corrections was adecrease to pre-tax income and net income of $3.8 million and $1.9 million or$0.01 per share (diluted), respectively, for the three months ended October 2,2005.

 

6

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**(3)****                                 Stock-based compensation**

 

The Company accounts for stock-based employee compensation inaccordance with the provisions of APB Opinion No. 25, “Accounting forStock Issued to Employees,” and related interpretations. No stock-basedemployee compensation cost is reflected in net income, as all stock options aregranted with exercise prices equal to the market value of the underlying commonstock on the grant dates. The following table illustrates the effect on netincome and earnings per share as if the Company had elected to recognizecompensation expense based on the fair value of the stock options granted atthe grant dates as prescribed by Statement of Financial Accounting Standards (“SFAS”)Nos. 123 and 148, “Accounting for Stock-Based Compensation.”

 
| ** **                                                                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                 | ** ** | **1/1/06**                       | ** ** | **1/2/05**                      | ** ** | **1/1/06** | ** ** | **1/2/05** | ** ** |
|                                                                                                       |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss) as reported                                                                             |       | $                                | 93.7       |                            | $          | 61.7 |   | $ | 250.2 |   | $ | (67.7 | ) |
| Deduct:  Stock-based compensation, net of tax, as determined under fair value based  method for all awards |       | (3.2                             | )          | (2.4                            | )          | (9.3 | ) | (6.6 | ) |
|                                                                                                       |       |                             |       |                            |       |   |   |   |   |
| Pro forma  net income (loss)                                                                               |       | $                                | 90.5       |                            | $          | 59.3 |   | $ | 240.9 |   | $ | (74.3 | ) |
|                                                                                                       |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss) per share – basic:                                                                 |       |                             |       |                            |       |   |   |   |   |
| Reported                                                                                                   |       | $                                | 0.70       |                            | $          | 0.47 |   | $ | 1.88 |   | $ | (0.52 | ) |
| Pro forma                                                                                                  |       | $                                | 0.68       |                            | $          | 0.45 |   | $ | 1.81 |   | $ | (0.57 | ) |
|                                                                                                       |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss) per share – diluted:                                                               |       |                             |       |                            |       |   |   |   |   |
| Reported                                                                                                   |       | $                                | 0.69       |                            | $          | 0.46 |   | $ | 1.85 |   | $ | (0.51 | ) |
| Pro forma                                                                                                  |       | $                                | 0.67       |                            | $          | 0.45 |   | $ | 1.78 |   | $ | (0.56 | ) |
|                                                                                                            |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

7

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**(4)****                                ****Acquisition**

 

On March 8, 2005, PCC acquired 100 percent of the outstandingshares of common stock of Air Industries Corporation (“AIC”), a leadingmanufacturer of airframe fasteners, which include bolts, pins, and screws madefrom titanium and nickel-based alloys. The results of AIC’s operations havebeen included within the Fastener Products segment in the consolidatedfinancial statements since that date. The acquisition of AIC expanded PCC’smanufacturing capabilities and the range of fastener product families theCompany can offer to its customers. The acquisition was funded with $193.3million of cash on hand, which is subject to final adjustment. Goodwillrelating to this transaction of $152.1 million is assigned to the FastenerProduct segment and is deductible for tax purposes. The impact of thisacquisition was not material to the Company’s results of operations;consequently, pro forma information is not presented.

 

The following table summarizes the estimated fair values of the assetsacquired and liabilities assumed at the date of acquisition. PCC was in theprocess of finalizing the allocation of the purchase price as of January 1,2006; thus, the allocation shown below is preliminary and subject to furtherrefinement.

 
| ** **                                      | ** ** | **3/08/05** | ** ** |
|-------------------------------------------------|------------|-------------|------------|
|                                            |       |        |       |
| Current  assets                                 |       | $           | 30.3       |   |
| Property,  plant and equipment                  |       | 24.8        |       |
| Goodwill                                        |       | 152.1       |       |
| Total assets  acquired                          |       | 207.2       |       |
| Accounts  payable and other current liabilities |       | 3.7         |       |
| Other  long-term liabilities                    |       | 4.6         |       |
| Total  liabilities assumed                      |       | 8.3         |       |
|                                            |       |        |       |
| Net assets  acquired                            |       | $           | 198.9      |   |

 

On August 25,2005, PCC entered into a definitive agreement to acquire Special MetalsCorporation (“SMC”), a world leader in the production of high-performancenickel-based alloys and super alloys. The majority of SMC’s operations will bereported in the Forged Products segment. PCC will pay approximately $540.0million in cash, including the repayment of SMC’s outstanding debt in theamount of approximately $237.0 million and the purchase of approximately 10.5million shares valued at $28.75 per share. PCC will finance the acquisitionwith cash on hand and its existing credit facilities which have undrawncapacity of approximately $1.0 billion. The transaction is subject toregulatory approvals and other customary conditions, includingHart-Scott-Rodino, and is anticipated to close in March or April 2006.

 

**(5)****                                ****Discontinued Operations**

 

In the second quarterof fiscal 2005, the Company decided to sell all of the pumps and valvesbusinesses of PCC Flow Technologies, with the exception of E/One and PCCEurovalves. The businesses held for sale were reclassified from the FluidManagement Products segment to discontinued operations. The E/One business wasretained and is now included in the Industrial Products segment. The sale ofthe pumps and valves businesses of PCC Flow Technologies was completed in thethird quarter of fiscal 2005 and the PCC Eurovalve business, which is locatedin The Netherlands, was completed in the third quarter of fiscal 2006. PCC’sdecision to sell the pumps and valves businesses in the second quarter offiscal 2005 resulted in a charge of $245.0 million, of which $219.1 million wasassociated with the write-down of goodwill. The remainder related to thewrite-down of inventory, other amortizable assets and machinery and equipmentto fair value less cost to sell. Approximately $240.0 million of the charge wasnon-cash. Subsequent to the second quarter of fiscal 2005, the

 

8

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Company recordedadditional write-downs related to the disposition of the pumps and valvesbusinesses, bringing the total net loss on disposal to $247.6 million through January 1,2006.

 

In the third quarterof fiscal 2004, three businesses acquired in the SPS transaction – Magnetics,Mohawk, and Dacar – were classified as held for sale and their results wereincluded in discontinued operations. They were classified as discontinuedoperations because they were deemed to be non-core to the Company. Dacar wassold in the third quarter of fiscal 2005, Magnetics was sold in the fourthquarter of fiscal 2005, and Mohawk was sold in the first quarter of fiscal2006.

 

These businesses meet the criteria as a component of an entity underSFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.” Accordingly, any operating results of these businesses are presentedin the Company’s Consolidated Statements of Operations as discontinuedoperations, net of income tax, and all prior periods have been reclassified.The components of discontinued operations for the periods presented are asfollows:

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                   | ** ** | **1/1/06**                       | ** ** | **1/2/05**                      | ** ** | **1/1/06** | ** ** | **1/2/05** | ** ** |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| Net sales                                                    |       | $                                | 10.1       |                            | $          | 77.0 |   | $ | 33.8 |   | $ | 275.1 |   |
| Cost of  goods sold                                          |       | 7.5                              |       | 60.4                            |       | 27.0 |   | 213.2 |   |
| Selling and  administrative expenses                         |       | 1.1                              |       | 12.7                            |       | 4.5 |   | 44.6 |   |
| Interest  expense                                            |       | —                           |       | 0.4                             |       | — |   | 0.6 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| Net income  from discontinued operations before income taxes |       | 1.5                              |       | 3.5                             |       | 2.3 |   | 16.7 |   |
| Income tax  expense                                          |       | 0.4                              |       | 3.9                             |       | 0.8 |   | 8.7 |   |
| Minority  interest                                           |       | —                           |       | (0.3                            | )          | — |   | (0.3 | ) |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss) from discontinued operations              |       | 1.1                              |       | (0.7                            | )          | 1.5 |   | 7.7 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss) on disposal                               |       | 1.4                              |       | 0.3                             |       | 0.2 |   | (245.2 | ) |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss) from discontinued operations              |       | $                                | 2.5        |                            | $          | (0.4 | ) | $ | 1.7 |   | $ | (237.5 | ) |

 

The following majorclasses of assets and liabilities are included in discontinued operations inthe Consolidated Balance Sheets after adjustment for write-downs to fair valueless cost to sell:

 
| ** **                              | ** ** | **1/1/06** | ** ** | **4/3/05** | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| Assets of  discontinued operations      |       |       |       |       |       |
| Current  assets                         |       | $          | 5.0        |       | $          | 37.9 |   |
| Net property,  plant and equipment      |       | 3.7        |       | 12.9       |       |
| Other assets                            |       | 4.1        |       | 5.2        |       |
|                                    |       |       |       |       |       |
|                                    |       | $          | 12.8       |       | $          | 56.0 |   |
|                                    |       |       |       |       |       |
| Liabilities  of discontinued operations |       |       |       |       |       |
| Other  current liabilities              |       | $          | 5.0        |       | $          | 13.3 |   |
| Other  liabilities                      |       | 3.7        |       | 5.0        |       |
|                                    |       |       |       |       |       |
|                                    |       | $          | 8.7        |       | $          | 18.3 |   |

 

9

----

 

**(6)****                                ****Restructuring and impairment**

 

During the third quarter of fiscal 2006,PCC recorded restructuring and asset impairment charges of $2.3 million, whichincluded $1.7 million primarily due to the write down of a building andequipment to fair value related to consolidation of a machining operation inthe Investment Cast Products segment and $0.6 million for severance costsassociated with headcount reductions related to downsizing the Company’s toolingoperation in Ireland.

 

**(7)****                                ****Inventories**

 

Inventories consistedof the following:

 
| ** **                  | ** ** | **1/1/06** | ** ** | **4/3/05** | ** ** |
|-----------------------------|------------|------------|------------|------------|------------|
|                        |       |       |       |       |       |
| Finished  goods             |       | $          | 140.9      |       | $          | 149.0 |   |
| Work-in-process             |       | 245.7      |       | 243.7      |       |
| Raw  materials and supplies |       | 148.6      |       | 116.4      |       |
|                        |       | 535.2      |       | 509.1      |       |
| LIFO provision              |       | 11.3       |       | 22.2       |       |
|                        |       |       |       |       |       |
| Total  inventory            |       | $          | 546.5      |       | $          | 531.3 |   |

 

**(8)****                                ****Goodwill and Acquired Intangibles**

 

Effective April 1, 2002, the Company adopted SFAS No. 142, “Goodwilland Other Intangible Assets,” under which goodwill is no longer amortized but istested for impairment using a fair value method.

 

The Company completed its annual goodwill assessment test during thesecond quarter of fiscal 2006, and it was determined that the fair value of therelated operations was greater than book value and that there was no impairmentof goodwill.

 

The changes in the carrying amount ofgoodwill by reportable segment for the nine months ended January 1, 2006,were as follows:

 
| ** **                | ** ** | ** **          | ** ** | ** **   | ** ** | **Currency**       | ** ** | ** **          | ** ** |
|---------------------------|------------|---------------------|------------|--------------|------------|--------------------|------------|---------------------|------------|
| ** **                | ** ** | **Balance at** | ** ** | ** **   | ** ** | **Translation**    | ** ** | **Balance at** | ** ** |
| ** **                | ** ** | **4/3/05**          | ** ** | **Acquired** | ** ** | **and Other** | ** ** | **1/1/06**          | ** ** |
|                      |       |                |       |         |       |               |       |                |       |
| Investment  Cast Products |       | $                   | 299.5      |         | $          | —             |       | $                   | (1.6       | ) | $ | 297.9 |   |
| Forged  Products          |       | 519.0               |       | —       |       | (11.8              | )          | 507.2               |       |
| Fastener  Products        |       | 586.2               |       | 9.7          |       | —             |       | 595.9               |       |
| Industrial  Products      |       | 171.4               |       | —       |       | 0.2                |       | 171.6               |       |
|                      |       |                |       |         |       |               |       |                |       |
| Total                     |       | $                   | 1,576.1    |         | $          | 9.7                |       | $                   | (13.2      | ) | $ | 1,572.6 |   |

 

10

----

 

The gross carrying amount and accumulatedamortization of the Company’s acquired intangible assets were as follows:

 
| ** **                     | ** ** | **1/1/06**   | ** ** | **4/3/05**       | ** ** |
|--------------------------------|------------|--------------|------------|------------------|------------|
| ** **                     | ** ** | **Gross**    | ** ** | ** **       | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Carrying** | ** ** | **Accumulated**  | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                     | ** ** | **Amount**   | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
|                           |       |         |       |             |       |   |   |   |   |
| Patents                        |       | $            | 3.0        |             | $          | 1.1 |   | $ | 3.0 |   | $ | 0.8 |   |
| Proprietary  technology        |       | 2.4          |       | 0.3              |       | 2.4 |   | 0.2 |   |
| Tradenames                     |       | 0.8          |       | 0.1              |       | 0.8 |   | 0.1 |   |
| Long-term  customer agreements |       | 0.2          |       | 0.2              |       | 0.2 |   | 0.1 |   |
|                           |       |         |       |             |       |   |   |   |   |
|                           |       | $            | 6.4        |             | $          | 1.7 |   | $ | 6.4 |   | $ | 1.2 |   |

 

Amortization expense for acquiredintangible assets for the three and nine months ended January 1, 2006 was$0.2 million and $0.5 million, respectively. Amortization expense related tofinite-lived intangible assets is projected to total $0.7 million for fiscal2006. Projected amortization expense for the succeeding five fiscal years is asfollows:

 
| ** **           | ** ** | **Estimated**    | ** ** |
|----------------------|------------|------------------|------------|
| ** **           | ** ** | **Amortization** | ** ** |
| **Fiscal Year** | ** ** | **Expense**      | ** ** |
| 2007                 |       | $                | 0.6        |   |
| 2008                 |       | $                | 0.5        |   |
| 2009                 |       | $                | 0.4        |   |
| 2010                 |       | $                | 0.4        |   |
| 2011                 |       | $                | 0.3        |   |

 

**(9)****                                ****Guarantees**

 

In the ordinary courseof business, the Company warrants certain of its products against defects indesign, materials and workmanship over various time periods. The warrantyaccrual as of January 1, 2006 and April 3, 2005 is immaterial to thefinancial position of the Company, and the change in the accrual for thecurrent quarter is immaterial to the Company’s results of operations and cashflows.

 

In conjunction withcertain transactions, primarily divestitures, the Company may provideroutine indemnifications (e.g., retention of previously existing environmentaland tax liabilities) with terms that range in duration and often are notexplicitly defined. Where appropriate, an obligation for such indemnificationsis recorded as a liability. Because the obligated amounts of these types ofindemnifications often are not explicitly stated, the overall maximum amount ofthe obligation under such indemnifications cannot be reasonably estimated. Otherthan in relation to obligations recorded as liabilities at the time ofdivestiture, the Company has not historically made significant payments forthese indemnifications.

 

11

----

 

**(10)****                         ****Earnings per share**

 

The weighted average number of shares outstanding used to computeearnings per share were as follows:

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **1/1/06**                       | ** ** | **1/2/05**                      | ** ** | **1/1/06** | ** ** | **1/2/05** | ** ** |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Basic  weighted average shares outstanding    |       | 133.3                            |       | 130.8                           |       | 132.9 |   | 130.0 |   |
| Dilutive  stock options                       |       | 2.5                              |       | 2.4                             |       | 2.6 |   | 2.4 |   |
| Average  shares outstanding assuming dilution |       | 135.8                            |       | 133.2                           |       | 135.5 |   | 132.4 |   |

 

Basic earnings per share are calculatedbased on the weighted average number of shares outstanding. Diluted earningsper share are computed based on that same number of shares plus additionaldilutive shares representing stock distributable under stock option andemployee stock purchase plans computed using the treasury stock method.

 

For the three and nine months ended January 1,2006, stock options to purchase zero and 0.2 million shares of common stock,respectively, were not dilutive. For the three and nine months ended January 2,2005, stock options to purchase zero and 0.3 million shares of common stock,respectively, were not dilutive. These shares were excluded from thecomputation of diluted earnings per share because to do so would have beenantidilutive. These options could be dilutive in the future.

 

**(11)****                         ****Comprehensive Income (Loss)**

 

Comprehensive income (loss) consisted ofthe following:

 
| ** **                                                                                                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                            | ** ** | **1/1/06**                       | ** ** | **1/2/05**                      | ** ** | **1/1/06** | ** ** | **1/2/05** | ** ** |
|                                                                                                                  |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss)                                                                                                    |       | $                                | 93.7       |                            | $          | 61.7 |   | $ | 250.2 |   | $ | (67.7 | ) |
| Other  comprehensive (loss) income, net of tax:                                                                       |       |                             |       |                            |       |   |   |   |   |
| Unrealized translation  adjustments                                                                                   |       | (12.9                            | )          | 34.0                            |       | (33.7 | ) | 33.4 |   |
| Minimum  pension liability                                                                                            |       | 0.5                              |       | —                          |       | — |   | — |   |
| Unrealized  gain (loss) on derivatives:                                                                               |       |                             |       |                            |       |   |   |   |   |
| Periodic  revaluations (net of income tax of $0.3, $0.5, $0.5 and $0.5, respectively)                                 |       | 0.9                              |       | 1.8                             |       | (1.8 | ) | 1.8 |   |
| Reclassification  to net income of previously deferred gains and loss (net of income tax of  $0.2, $0, $0.2 and $0.1) |       | (0.4                             | )          | 0.1                             |       | (0.4 | ) | 0.2 |   |
| Other  comprehensive (loss) income                                                                                    |       | (11.9                            | )          | 35.9                            |       | (35.9 | ) | 35.4 |   |
|                                                                                                                  |       |                             |       |                            |       |   |   |   |   |
| Total  comprehensive income (loss)                                                                                    |       | $                                | 81.8       |                            | $          | 97.6 |   | $ | 214.3 |   | $ | (32.3 | ) |

 

12

----

 

**(12)****                         ****Debt**

 

Long-term debt issummarized as follows:

 
| ** **                                                                | ** ** | **1/1/06** | ** ** | **4/3/05** | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                      |       |       |       |       |       |
| 5.60% Public  notes due fiscal 2014                                       |       | $          | 200.0      |       | $          | 200.0 |   |
| 6.75% Public  notes due fiscal 2008                                       |       | 150.0      |       | 150.0      |       |
| Term loan,  4.1% at April 3, 2005                                    |       | —     |       | 296.3      |       |
| Private  notes, payable annually through fiscal 2015                      |       | 153.7      |       | 169.7      |       |
| Revolving  credit facility due fiscal 2011, 4.91% at January 1, 2006 |       | 93.0       |       | —     |       |
| Other                                                                     |       | 18.8       |       | 21.0       |       |
|                                                                      |       | 615.5      |       | 837.0      |       |
| Less:  Long-term debt currently due                                       |       | 23.3       |       | 38.3       |       |
|                                                                      |       |       |       |       |       |
|                                                                      |       | $          | 592.2      |       | $          | 798.7 |   |

 

Long-term debt maturing in each of the next five fiscal years is asfollows:

 
| **Fiscal Year** | ** ** | **Debt** | ** ** |
|----------------------|------------|----------|------------|
| 2007                 |       | $        | 23.1       |   |
| 2008                 |       | $        | 173.3      |   |
| 2009                 |       | $        | 22.8       |   |
| 2010                 |       | $        | 54.5       |   |
| Thereafter           |       | $        | 336.7      |   |

 

In October 2005, the Company enteredinto an amended and restated bank credit facility with Bank of America, N.A.,as administrative agent, lender, swing line lender and letter of credit issuer,and the other lenders from time to time party thereto. The amended facilityconsists of a five-year, $1.0 billion revolving loan (with a $250 millionincrease option) maturing in October 2010 and includes a swing linefacility and a letter of credit facility. The facility prior to amendmentconsisted of a $300.0 million term loan and a $400.0 million revolving loanwhich matured in December 2008. On the effective date of the amendedfacility, the outstanding principal balance of the term loan was converted to arevolving loan under the amended facility. Borrowings under the amendedfacility bear interest at either LIBOR plus applicable spreads, which rangefrom 0.30% to 1.00% depending on credit ratings received from Moody’s andS&P, or the Base Rate (as defined in the amended facility) at the Company’soption. The amended facility also has a facility fee, which ranges from 0.10%to 0.325% of the aggregate commitments under the facility depending on theCompany’s credit ratings, and a utilization fee of 0.125% on all outstandingloans if the aggregate outstanding loans equal or exceed 50% of the aggregatecommitments under the facility. The amended facility contains various standardrepresentations and warranties, events of default and financial and othercovenants which are substantially the same, but no less favorable to theCompany, as the events of default and covenants contained in the Company’sprevious facility, including maintenance of minimum net worth, interestcoverage ratio and leverage ratio. The amended facility is guaranteed by theCompany’s material domestic subsidiaries.

 

Also available to the Company is a 364-day Credit and SecurityAgreement (“Receivable Facility”), under which allowable borrowings are afunction of the level of eligible trade accounts receivable, which cannotexceed $150.0 million. As of January 1, 2006, $20.0 million wasoutstanding under the Receivable Facility. There was no amount outstandingunder this facility at April 3, 2005.

 

At January 1,2006, the Company was in compliance with all restrictive provisions of its loanagreements.

 

The Company entered intoamendments to its credit and note agreements, which allowed extension ofcertain provisions related to the Company's delay in finalizing its financialstatements on November 25, 2005, December 15, 2005 and January 31, 2006.

 

13

----

 

**(13)****                         ****Pensions and Other Postretirement Benefit Plans**

 

The Company and its subsidiaries sponsor manydomestic and foreign defined benefit pension plans. In addition, the Companyoffers postretirement medical benefits for certain eligible employees. Theseplans are more fully described in the “Notes to the Consolidated FinancialStatements” included in the Company’s Annual Report on Form 10-K for theyear ended April 3, 2005.

 

The net periodic benefit cost for the Company’s pension plans consistedof the following components:

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **1/1/06**                       | ** ** | **1/2/05**                      | ** ** | **1/1/06** | ** ** | **1/2/05** | ** ** |
|                                |       |                             |       |                            |       |   |   |   |   |
| Service cost                        |       | $                                | 6.6        |                            | $          | 8.5 |   | $ | 21.9 |   | $ | 22.5 |   |
| Interest cost                       |       | 13.7                             |       | 16.6                            |       | 44.8 |   | 44.4 |   |
| Expected  return on plan assets     |       | (15.0                            | )          | (16.5                           | )          | (49.2 | ) | (43.9 | ) |
| Recognized  net actuarial loss      |       | 2.9                              |       | 3.0                             |       | 9.4 |   | 8.2 |   |
| Amortization  of prior service cost |       | 0.5                              |       | 0.4                             |       | 1.8 |   | 1.1 |   |
|                                |       |                             |       |                            |       |   |   |   |   |
| Net periodic  benefit cost          |       | $                                | 8.7        |                            | $          | 12.0 |   | $ | 28.7 |   | $ | 32.3 |   |

 

The net periodic benefit cost of postretirement benefits other thanpensions consisted of the following components:

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **1/1/06**                       | ** ** | **1/2/05**                      | ** ** | **1/1/06** | ** ** | **1/2/05** | ** ** |
|                                |       |                             |       |                            |       |   |   |   |   |
| Service cost                        |       | $                                | 0.1        |                            | $          | 0.1 |   | $ | 0.3 |   | $ | 0.3 |   |
| Interest  cost                      |       | 1.2                              |       | 1.1                             |       | 3.4 |   | 3.2 |   |
| Recognized  net actuarial loss      |       | 0.4                              |       | —                          |       | 1.2 |   | — |   |
| Amortization  of prior service cost |       | (0.1                             | )          | —                          |       | (0.3 | ) | — |   |
|                                |       |                             |       |                            |       |   |   |   |   |
| Net periodic  benefit cost          |       | $                                | 1.6        |                            | $          | 1.2 |   | $ | 4.6 |   | $ | 3.5 |   |

 

The Company made contributions to the defined benefit pension plans of$13.7 million and $56.1 million for the three and nine months ended January 1,2006, respectively. Of these total contributions, $11.2 million and $44.3million were voluntary contributions for the three and nine months ended January 1,2006, respectively. Projected contributions are expected to total approximately$82.0 million for fiscal year 2006, of which $67.0 million will be voluntary.

 

**(14)****                         ****Income Taxes**

 

The Company recorded aone-time tax benefit in the third quarter of fiscal 2006 in the amount of $5.3million associated with changes in tax reserves resulting from completed andon-going audits of the Company’s tax returns.

 

14

----

 

**(15)****                         ****New Accounting Pronouncements**

 

In December 2004, the FASB finalized SFAS No. 123 (revised2004) (“123R”), “Share Based Payment.” SFAS No. 123R requires that the compensation cost relating toshare-based payment transactions be recognized in financial statements, withthe cost measured based on the estimated fair value of the equity or liabilityinstruments issued. The Company has decided to use the prospective method ofapplication provided for in the standard. Under this method, the Company willbegin recognizing compensation cost for equity based compensation for all newor modified grants after the date of adoption. In addition, the Company willrecognize the unvested portion of the grant date fair value of awards issuedprior to adoption based on the fair values previously calculated for disclosurepurposes.  The effective date of SFAS No. 123Ris the first quarter of the first fiscal year beginning after June 15,2005, which will be PCC’s first quarter of fiscal 2007.

 

In November 2005, the FASB issued FSP No. 123(R)-3, "TransitionElection Related to Accounting for the Tax Effects of Share-Based PaymentAwards." This pronouncement provides an alternative method of calculatingthe excess tax benefits available to absorb any tax deficiencies recognizedsubsequent to the adoption of SFAS No. 123(R). The Company, which is currentlyevaluating its available transition alternatives, has until November 2006 tomake its one-time election.

 

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes andError Corrections, a replacement of APB Opinion No. 20 and FASB Statement No.3. SFAS No. 154 requires retrospective application to prior periods' financialstatements of a voluntary change in accounting principle unless it isimpracticable. APB Opinion No. 20 "Accounting Changes," previouslyrequired that most voluntary changes in accounting principle be recognized byincluding in net income of the period of the change the cumulative effect ofchanging to the new accounting principle. SFAS No. 154 is effective foraccounting changes and corrections of errors made in fiscal years beginningafter Deecember  15, 2005; however,earlier adoption is permitted for accounting changes and corrections of errorsmade in fiscal years beginning after the date of issuance of SFAS No. 154.

 

**(16)****                         ****Segment Information**

 

The Company’s operations are classifiedinto four reportable business segments: Investment Cast Products, ForgedProducts, Fastener Products and Industrial Products. The Company’s fourreportable business segments are identified separately based on fundamentaldifferences in their operations.

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **1/1/06**                       | ** ** | **1/2/05** | ** ** |
| Net sales:                                        |       |                             |       |   |   |
| Investment  Cast Products                         |       | $                                | 399.3      |   | $ | 350.7 |   |
| Forged  Products                                  |       | 210.9                            |       | 155.7 |   |
| Fastener  Products                                |       | 199.8                            |       | 175.3 |   |
| Industrial  Products                              |       | 54.4                             |       | 62.2 |   |
| Total net  sales                                  |       | $                                | 864.4      |   | $ | 743.9 |   |
|                                              |       |                             |       |   |   |
| Operating  income (loss):                         |       |                             |       |   |   |
| Investment  Cast Products                         |       | $                                | 81.2       |   | $ | 67.1 |   |
| Forged  Products                                  |       | 22.1                             |       | 18.2 |   |
| Fastener  Products                                |       | 36.4                             |       | 23.8 |   |
| Industrial  Products                              |       | 7.6                              |       | 11.5 |   |
| Corporate  expense                                |       | (9.2                             | )          | (11.3 | ) |
|                                              |       |                             |       |   |   |
| Total  operating income                           |       | 138.1                            |       | 109.3 |   |
|                                              |       |                             |       |   |   |
| Restructuring  and impairment                     |       | 2.3                              |       | — |   |
|                                              |       |                             |       |   |   |
| Interest  expense, net                            |       | 10.1                             |       | 14.3 |   |
|                                              |       |                             |       |   |   |
| Income  before income taxes and minority interest |       | $                                | 125.7      |   | $ | 95.0 |   |

 

15

----

 
| ** **                                        | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **1/1/06**                      | ** ** | **1/2/05** | ** ** |
| Net sales:                                        |       |                            |       |   |   |
| Investment  Cast Products                         |       | $                               | 1,188.9    |   | $ | 980.4 |   |
| Forged  Products                                  |       | 628.8                           |       | 448.1 |   |
| Fastener  Products                                |       | 603.0                           |       | 504.5 |   |
| Industrial  Products                              |       | 173.1                           |       | 176.5 |   |
| Total net  sales                                  |       | $                               | 2,593.8    |   | $ | 2,109.5 |   |
|                                              |       |                            |       |   |   |
| Operating  income (loss):                         |       |                            |       |   |   |
| Investment  Cast Products                         |       | $                               | 234.7      |   | $ | 183.1 |   |
| Forged  Products                                  |       | 72.1                            |       | 55.3 |   |
| Fastener  Products                                |       | 99.8                            |       | 61.8 |   |
| Industrial  Products                              |       | 24.0                            |       | 31.5 |   |
| Corporate  expense                                |       | (35.3                           | )          | (31.1 | ) |
|                                              |       |                            |       |   |   |
| Total  operating income                           |       | 395.3                           |       | 300.6 |   |
|                                              |       |                            |       |   |   |
| Restructuring  and impairment                     |       | 2.3                             |       | — |   |
|                                              |       |                            |       |   |   |
| Interest  expense, net                            |       | 31.3                            |       | 43.7 |   |
|                                              |       |                            |       |   |   |
| Income  before income taxes and minority interest |       | $                               | 361.7      |   | $ | 256.9 |   |

 

**(17)         Change in Presentation of Cash Flows**

** **

In fiscal 2006, the Company hasseparately disclosed the operating, investing and financing portions of thecash flows attributable to its discontinued operations, which in prior periodswere reported on a combined basis as a single amount.

** **

**(18)****                         ****Subsequent Events**

 

On January 6, 2006, Precision Castparts Corp. completed theacquisition of the Shur-Lok Group for $109.2 million, which includes theShur-Lok Corporation of Irvine, California, and Shur-Lok International ofPetit-Rechain, Belgium. Shur-Lok is a leading manufacturer of highlyengineered, critical aerospace fasteners, including inserts, barrel nuts,adjustable diameter bolts, fluid fittings, and lock nuts. The transaction wasfunded with borrowings under existing lines of credit and cash on hand. Thefinancial results of Shur-Lok will be reported in PCC’s Fastener Productssegment.

 

**(19)****                         ****Condensed Consolidating Financial Statements**

 

Certain of the Company’ssubsidiaries guarantee the Company’s registered securities consisting of $200million 5.6% Senior Notes due 2013 and $150 million 6.75% Senior Notes due 2007.The following condensed consolidating financial statements present, in separatecolumns, financial information for (i) Precision Castparts Corp. (on aparent only basis) with its investment in its subsidiaries recorded under theequity method, (ii) guarantor subsidiaries that guarantee the Company’spublic and private notes and bank credit facilities, on a combined basis, withany investments in non-guarantor subsidiaries recorded under the equity method,(iii) direct and indirect non-guarantor subsidiaries on a combined basis, (iv) theeliminations necessary to arrive at the information for the Company and itssubsidiaries on a consolidated basis, and (v) the Company on aconsolidated basis, in each case as of January 1, 2006 and April 3,2005 and for the three and nine months ended January 1, 2006 and January 2,2005. The Notes are fully and unconditionally guaranteed on a joint and severalbasis by each guarantor subsidiary. The guarantor subsidiaries include theCompany’s domestic subsidiaries within the Investment Cast Products, ForgedProducts, Fastener Products and Industrial Products segments that are 100%owned, directly or indirectly, by the Company within the meaning of Rule 3-10(h)(1) ofRegulation S-X. There are no contractual restrictions limiting transfers ofcash from guarantor and non- guarantor subsidiaries to the Company. Thecondensed consolidating financial statements are presented herein, rather thanseparate financial statements for each of the guarantor subsidiaries, because guarantorsare wholly-owned and the guarantees are full and unconditional, joint andseveral.

 

16

----

 

Condensed Consolidating Statements ofIncome

Three Months Ended January 1, 2006

(Unaudited)

 
| ** **                                             | ** ** | **Precision** | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                             | ** ** | **Castparts** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **Corp.**     | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
|                                                   |       |          |       |             |       |             |       |             |       |       |       |
| Net sales                                              |       | $             | —     |             | $          | 698.4            |       | $                | 169.7      |       | $          | (3.7 | ) | $ | 864.4 |   |
| Cost of  goods sold                                    |       | —        |       | 538.3            |       | 133.2            |       | (3.7             | )          | 667.8      |       |
| Selling and  administrative expenses                   |       | 9.3           |       | 34.9             |       | 14.3             |       | —           |       | 58.5       |       |
| Restructuring  and impairment                          |       | —        |       | —           |       | 2.3              |       | —           |       | 2.3        |       |
| Other  (income) expense                                |       | (0.3          | )          | 1.5              |       | (1.2             | )          | —           |       | —     |       |
| Interest  (income) expense, net                        |       | (4.2          | )          | 18.9             |       | (4.6             | )          | —           |       | 10.1       |       |
| Equity in  earnings of subsidiaries                    |       | 89.9          |       | (1.4             | )          | —           |       | (88.5            | )          | —     |       |
|                                                   |       |          |       |             |       |             |       |             |       |       |       |
| Income  (loss) before income tax and minority interest |       | 85.1          |       | 103.4            |       | 25.7             |       | (88.5            | )          | 125.7      |       |
| Income tax  (benefit) expense                          |       | (8.6          | )          | 36.9             |       | 5.7              |       | —           |       | 34.0       |       |
| Minority  interest                                     |       | —        |       | —           |       | (0.5             | )          | —           |       | (0.5       | )          |
|                                                   |       |          |       |             |       |             |       |             |       |       |       |
| Net income  (loss) from continuing operations          |       | 93.7          |       | 66.5             |       | 19.5             |       | (88.5            | )          | 91.2       |       |
|                                                   |       |          |       |             |       |             |       |             |       |       |       |
| Net income  from discontinued operations               |       | —        |       | —           |       | 2.5              |       | —           |       | 2.5        |       |
|                                                   |       |          |       |             |       |             |       |             |       |       |       |
| Net income  (loss)                                     |       | $             | 93.7       |             | $          | 66.5             |       | $                | 22.0       |       | $          | (88.5 | ) | $ | 93.7 |   |

 

17

----

 

Condensed Consolidating Statements ofIncome

Three Months Ended January 2, 2005

(Unaudited)

 
| ** **                                             | ** ** | **Precision** | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                             | ** ** | **Castparts** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **Corp.**     | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
|                                                   |       |          |       |             |       |             |       |             |       |       |       |
| Net sales                                              |       | $             | —     |             | $          | 585.2            |       | $                | 178.2      |       | $          | (19.5 | ) | $ | 743.9 |   |
| Cost of  goods sold                                    |       | —        |       | 448.7            |       | 146.6            |       | (19.5            | )          | 575.8      |       |
| Selling and  administrative expenses                   |       | 11.2          |       | 35.3             |       | 12.3             |       | —           |       | 58.8       |       |
| Provision  for restructuring                           |       | —        |       | 0.1              |       | (0.1             | )          | —           |       | —     |       |
| Other  (income) expense                                |       | (2.9          | )          | (0.2             | )          | 3.1              |       | —           |       | —     |       |
| Interest  expense (income), net                        |       | 4.1           |       | 13.3             |       | (3.1             | )          | —           |       | 14.3       |       |
| Equity in  earnings of subsidiaries                    |       | 62.1          |       | (4.7             | )          | —           |       | (57.4            | )          | —     |       |
|                                                   |       |          |       |             |       |             |       |             |       |       |       |
| Income  (loss) before income tax and minority interest |       | 49.7          |       | 83.3             |       | 19.4             |       | (57.4            | )          | 95.0       |       |
| Income tax  (benefit) expense                          |       | (12.0         | )          | 27.0             |       | 17.7             |       | —           |       | 32.7       |       |
| Minority  interest                                     |       | —        |       | —           |       | (0.2             | )          | —           |       | (0.2       | )          |
|                                                   |       |          |       |             |       |             |       |             |       |       |       |
| Net income  (loss) from continuing operations          |       | 61.7          |       | 56.3             |       | 1.5              |       | (57.4            | )          | 62.1       |       |
|                                                   |       |          |       |             |       |             |       |             |       |       |       |
| Net loss  from discontinued operations                 |       | —        |       | —           |       | (0.4             | )          | —           |       | (0.4       | )          |
|                                                   |       |          |       |             |       |             |       |             |       |       |       |
| Net income  (loss)                                     |       | $             | 61.7       |             | $          | 56.3             |       | $                | 1.1        |       | $          | (57.4 | ) | $ | 61.7 |   |

 

18

----

 

Condensed Consolidating Statements ofIncome

Nine Months Ended January 1, 2006

(Unaudited)

 
| ** **                                             | ** ** | **Precision** | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                             | ** ** | **Castparts** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **Corp.**     | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
|                                                   |       |          |       |             |       |             |       |             |       |       |       |
| Net sales                                              |       | $             | —     |             | $          | 2,082.3          |       | $                | 552.6      |       | $          | (41.1 | ) | $ | 2,593.8 |   |
| Cost of  goods sold                                    |       | —        |       | 1,605.8          |       | 446.0            |       | (41.1            | )          | 2,010.7    |       |
| Selling and  administrative expenses                   |       | 35.0          |       | 111.3            |       | 41.5             |       | —           |       | 187.8      |       |
| Restructuring  and impairment                          |       | —        |       | —           |       | 2.3              |       | —           |       | 2.3        |       |
| Other  (income) expense                                |       | (1.2          | )          | 1.5              |       | (0.3             | )          | —           |       | —     |       |
| Interest  (income) expense, net                        |       | (7.8          | )          | 53.3             |       | (14.2            | )          | —           |       | 31.3       |       |
| Equity in  earnings of subsidiaries                    |       | 261.1         |       | (5.8             | )          | —           |       | (255.3           | )          | —     |       |
|                                                   |       |          |       |             |       |             |       |             |       |       |       |
| Income  (loss) before income tax and minority interest |       | 235.1         |       | 304.6            |       | 77.3             |       | (255.3           | )          | 361.7      |       |
| Income tax  (benefit) expense                          |       | (15.1         | )          | 106.7            |       | 20.4             |       | —           |       | 112.0      |       |
| Minority  interest                                     |       | —        |       | —           |       | (1.2             | )          | —           |       | (1.2       | )          |
|                                                   |       |          |       |             |       |             |       |             |       |       |       |
| Net income  (loss) from continuing operations          |       | 250.2         |       | 197.9            |       | 55.7             |       | (255.3           | )          | 248.5      |       |
|                                                   |       |          |       |             |       |             |       |             |       |       |       |
| Net income  from discontinued operations               |       | —        |       | —           |       | 1.7              |       | —           |       | 1.7        |       |
|                                                   |       |          |       |             |       |             |       |             |       |       |       |
| Net income  (loss)                                     |       | $             | 250.2      |             | $          | 197.9            |       | $                | 57.4       |       | $          | (255.3 | ) | $ | 250.2 |   |

 

19

----

 

Condensed Consolidating Statements ofIncome

Nine Months Ended January 2, 2005

(Unaudited)

 
| ** **                                                 | ** ** | **Precision** | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                                 | ** ** | **Castparts** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Corp.**     | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
|                                                       |       |          |       |             |       |             |       |             |       |       |       |
| Net sales                                                  |       | $             | —     |             | $          | 1,669.5          |       | $                | 486.8      |       | $          | (46.8 | ) | $ | 2,109.5 |   |
| Cost of  goods sold                                        |       | —        |       | 1,281.6          |       | 397.3            |       | (46.8            | )          | 1,632.1    |       |
| Selling and  administrative expenses                       |       | 31.0          |       | 106.8            |       | 39.0             |       | —           |       | 176.8      |       |
| Provision  for restructuring                               |       | —        |       | 0.1              |       | (0.1             | )          | —           |       | —     |       |
| Other  (income) expense                                    |       | (8.2          | )          | (0.2             | )          | 8.4              |       | —           |       | —     |       |
| Interest  expense (income), net                            |       | 17.4          |       | 33.3             |       | (7.0             | )          | —           |       | 43.7       |       |
| Equity in  earnings of subsidiaries                        |       | (51.8         | )          | (11.1            | )          | —           |       | 62.9             |       | —     |       |
|                                                       |       |          |       |             |       |             |       |             |       |       |       |
| Net (loss)  income before income tax and minority interest |       | (92.0         | )          | 236.8            |       | 49.2             |       | 62.9             |       | 256.9      |       |
| Income tax  (benefit) expense                              |       | (24.3         | )          | 86.4             |       | 24.0             |       | —           |       | 86.1       |       |
| Minority  interest                                         |       | —        |       | —           |       | (1.0             | )          | —           |       | (1.0       | )          |
|                                                       |       |          |       |             |       |             |       |             |       |       |       |
| Net (loss)  income from continuing operations              |       | (67.7         | )          | 150.4            |       | 24.2             |       | 62.9             |       | 169.8      |       |
|                                                       |       |          |       |             |       |             |       |             |       |       |       |
| Net loss  from discontinued operations                     |       | —        |       | (0.1             | )          | (237.4           | )          | —           |       | (237.5     | )          |
|                                                       |       |          |       |             |       |             |       |             |       |       |       |
| Net (loss)  income                                         |       | $             | (67.7      | )                | $          | 150.3            |       | $                | (213.2     | )          | $          | 62.9 |   | $ | (67.7 | ) |

 

20

----

 

CondensedConsolidating Balance Sheets

January 1, 2006

(Unaudited)

 
| ** **                                            | ** ** | **Precision** | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                            | ** ** | **Castparts** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Corp.**     | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
| **Assets**                                            | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| Current  assets:                                      |       |          |       |             |       |             |       |             |       |       |       |
| Cash and  cash equivalents                            |       | $             | 4.9        |             | $          | 3.3              |       | $                | 110.6      |       | $          | — |   | $ | 118.8 |   |
| Receivables                                           |       | 0.2           |       | 479.3            |       | 345.6            |       | (381.1           | )          | 444.0      |       |
| Inventories                                           |       | —        |       | 405.5            |       | 141.0            |       | —           |       | 546.5      |       |
| Prepaid  expenses                                     |       | 4.7           |       | 5.7              |       | 11.3             |       | —           |       | 21.7       |       |
| Income tax  receivable                                |       | —        |       | —           |       | —           |       | —           |       | —     |       |
| Deferred  income taxes                                |       | 0.6           |       | 47.6             |       | 11.4             |       | —           |       | 59.6       |       |
| Discontinued  operations                              |       | —        |       | 13.9             |       | 22.7             |       | (31.6            | )          | 5.0        |       |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
| Total  current assets                                 |       | 10.4          |       | 955.3            |       | 642.6            |       | (412.7           | )          | 1,195.6    |       |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
| Property,  plant and equipment, net                   |       | 7.8           |       | 454.6            |       | 214.3            |       | —           |       | 676.7      |       |
| Goodwill,  net                                        |       | —        |       | 1,158.9          |       | 413.7            |       | —           |       | 1,572.6    |       |
| Deferred  income taxes                                |       | 12.2          |       | —           |       | 15.1             |       | (27.3            | )          | —     |       |
| Investments  in subsidiaries                          |       | 2,847.7       |       | 282.2            |       | —           |       | (3,129.9         | )          | —     |       |
| Other assets                                          |       | 101.5         |       | 17.6             |       | 9.1              |       | 0.6              |       | 128.8      |       |
| Discontinued  operations                              |       | —        |       | —           |       | 7.8              |       | —           |       | 7.8        |       |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
|                                                  |       | $             | 2,979.6    |             | $          | 2,868.6          |       | $                | 1,302.6    |       | $          | (3,569.3 | ) | $ | 3,581.5 |   |
| **Liabilities  and Shareholders Investment**          | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| Current  liabilities:                                 |       |          |       |             |       |             |       |             |       |       |       |
| Short-term  borrowings                                |       | $             | —     |             | $          | —           |       | $                | 26.0       |       | $          | — |   | $ | 26.0 |   |
| Long-term  debt currently due                         |       | 20.0          |       | 1.2              |       | 2.1              |       | —           |       | 23.3       |       |
| Accounts  payable                                     |       | 268.8         |       | 339.4            |       | 111.4            |       | (412.7           | )          | 306.9      |       |
| Accrued  liabilities                                  |       | 23.1          |       | 235.1            |       | 60.6             |       | (1.1             | )          | 317.7      |       |
| Income taxes  payable                                 |       | 10.6          |       | —           |       | 19.3             |       | —           |       | 29.9       |       |
| Discontinued  operations                              |       | —        |       | 1.9              |       | 3.1              |       | —           |       | 5.0        |       |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
| Total  current liabilities                            |       | 322.5         |       | 577.6            |       | 222.5            |       | (413.8           | )          | 708.8      |       |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
| Long-term  debt                                       |       | 576.8         |       | 8.8              |       | 6.6              |       | —           |       | 592.2      |       |
| Pension and  other postretirement benefit obligations |       | 65.4          |       | 64.1             |       | 54.8             |       | —           |       | 184.3      |       |
| Deferred tax  liability                               |       | —        |       | 51.1             |       | (8.4             | )          | (27.3            | )          | 15.4       |       |
| Other  long-term liabilities                          |       | —        |       | 38.8             |       | 23.4             |       | —           |       | 62.2       |       |
| Discontinued  operations                              |       | —        |       | 0.7              |       | 3.0              |       | —           |       | 3.7        |       |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
| Shareholders’  investment:                       |       |          |       |             |       |             |       |             |       |       |       |
| Common stock  and paid-in capital                     |       | 867.8         |       | 1,838.7          |       | 977.4            |       | (2,816.1         | )          | 867.8      |       |
| Retained  earnings                                    |       | 1,194.0       |       | 343.3            |       | 11.0             |       | (354.3           | )          | 1,194.0    |       |
| Accumulated  other comprehensive loss                 |       | (46.9         | )          | (54.5            | )          | 12.3             |       | 42.2             |       | (46.9      | )          |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
| Total shareholders’  investment                  |       | 2,014.9       |       | 2,127.5          |       | 1,000.7          |       | (3,128.2         | )          | 2,014.9    |       |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
|                                                  |       | $             | 2,979.6    |             | $          | 2,868.6          |       | $                | 1,302.6    |       | $          | (3,569.3 | ) | $ | 3,581.5 |   |

 

21

----

 

Condensed Consolidating Balance Sheets

April 3, 2005

 
| ** **                                            | ** ** | **Precision** | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                            | ** ** | **Castparts** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Corp.**     | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
| ** **                                            | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| **Assets**                                            | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| Current  assets:                                      |       |          |       |             |       |             |       |             |       |       |       |
| Cash and  cash equivalents                            |       | $             | 84.4       |             | $          | 2.5              |       | $                | 67.0       |       | $          | — |   | $ | 153.9 |   |
| Receivables                                           |       | 0.1           |       | 293.3            |       | 358.0            |       | (243.2           | )          | 408.2      |       |
| Inventories                                           |       | —        |       | 381.6            |       | 149.7            |       | —           |       | 531.3      |       |
| Prepaid  expenses                                     |       | 4.1           |       | 3.4              |       | 10.0             |       | —           |       | 17.5       |       |
| Income tax  receivable                                |       | 9.3           |       | —           |       | 0.2              |       | (0.2             | )          | 9.3        |       |
| Deferred  income taxes                                |       | —        |       | 45.2             |       | 10.2             |       | (0.4             | )          | 55.0       |       |
| Discontinued  operations                              |       | —        |       | 13.6             |       | 49.9             |       | (25.6            | )          | 37.9       |       |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
| Total  current assets                                 |       | 97.9          |       | 739.6            |       | 645.0            |       | (269.4           | )          | 1,213.1    |       |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
| Property,  plant and equipment, net                   |       | 2.5           |       | 472.7            |       | 217.3            |       | —           |       | 692.5      |       |
| Goodwill,  net                                        |       | —        |       | 1,152.1          |       | 424.0            |       | —           |       | 1,576.1    |       |
| Deferred  income taxes                                |       | 20.2          |       | —           |       | 23.9             |       | (27.3            | )          | 16.8       |       |
| Investments  in subsidiaries                          |       | 2,620.1       |       | 287.4            |       | —           |       | (2,907.5         | )          | —     |       |
| Other assets                                          |       | 79.2          |       | 20.4             |       | 8.8              |       | —           |       | 108.4      |       |
| Discontinued  operations                              |       | —        |       | —           |       | 18.1             |       | —           |       | 18.1       |       |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
|                                                  |       | $             | 2,819.9    |             | $          | 2,672.2          |       | $                | 1,337.1    |       | $          | (3,204.2 | ) | $ | 3,625.0 |   |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
| **Liabilities  and Shareholders Investment**          | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| Current  liabilities:                                 |       |          |       |             |       |             |       |             |       |       |       |
| Short-term  borrowings                                |       | $             | —     |             | $          | —           |       | $                | 6.0        |       | $          | — |   | $ | 6.0 |   |
| Long-term  debt currently due                         |       | 35.3          |       | 1.1              |       | 1.9              |       | —           |       | 38.3       |       |
| Accounts  payable                                     |       | 71.1          |       | 348.9            |       | 161.2            |       | (268.8           | )          | 312.4      |       |
| Accrued  liabilities                                  |       | 32.6          |       | 211.7            |       | 77.1             |       | (1.1             | )          | 320.3      |       |
| Income taxes  payable                                 |       | 69.6          |       | —           |       | 20.0             |       | (0.2             | )          | 89.4       |       |
| Deferred  income taxes                                |       | 0.4           |       | —           |       | —           |       | (0.4             | )          | —     |       |
| Discontinued  operations                              |       | —        |       | —           |       | 13.3             |       | —           |       | 13.3       |       |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
| Total  current liabilities                            |       | 209.0         |       | 561.7            |       | 279.5            |       | (270.5           | )          | 779.7      |       |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
| Long-term  debt                                       |       | 780.6         |       | 10.0             |       | 8.1              |       | —           |       | 798.7      |       |
| Deferred  income taxes                                |       | —        |       | 27.3             |       | —           |       | (27.3            | )          | —     |       |
| Pension and  other postretirement benefit obligations |       | 49.9          |       | 109.5            |       | 46.1             |       | —           |       | 205.5      |       |
| Other  long-term liabilities                          |       | —        |       | 36.4             |       | 19.3             |       | —           |       | 55.7       |       |
| Discontinued  operations                              |       | —        |       | —           |       | 5.0              |       | —           |       | 5.0        |       |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
| Shareholders’  investment:                       |       |          |       |             |       |             |       |             |       |       |       |
| Common stock  and paid-in capital                     |       | 839.6         |       | 1,836.9          |       | 978.7            |       | (2,815.6         | )          | 839.6      |       |
| Retained  earnings                                    |       | 951.8         |       | 144.9            |       | (45.9            | )          | (99.0            | )          | 951.8      |       |
| Accumulated  other                                    |       |          |       |             |       |             |       |             |       |       |       |
| comprehensive  loss                                   |       | (11.0         | )          | (54.5            | )          | 46.3             |       | 8.2              |       | (11.0      | )          |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
| Total  shareholders investment                        |       | 1,780.4       |       | 1,927.3          |       | 979.1            |       | (2,906.4         | )          | 1,780.4    |       |
|                                                  |       |          |       |             |       |             |       |             |       |       |       |
|                                                  |       | $             | 2,819.9    |             | $          | 2,672.2          |       | $                | 1,337.1    |       | $          | (3,204.2 | ) | $ | 3,625.0 |   |
|                                                       |            |               |            |                  |            |                  |            |                  |            |            |            |  |  |  |  |  |  |

 

22

----

 

Condensed Consolidating Statements ofCash Flows

Nine Months Ended January 1, 2006

(Unaudited)

 
| ** **                                                        | ** ** | **Precision** | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                                        | ** ** | **Castparts** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                                        | ** ** | **Corp.**     | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
| ** **                                                        | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| Net cash  provided (used) by operating activities                 |       | $             | 141.8      |             | $          | 31.0             |       | $                | 71.1       |       | $          | (31.0 | ) | $ | 212.9 |   |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Capital  expenditures                                             |       | (6.0          | )          | (37.6            | )          | (23.5            | )          | —           |       | (67.1      | )          |
| Acquisitions  of businesses                                       |       | (2.5          | )          | —           |       | —           |       | —           |       | (2.5       | )          |
| Disposition  of businesses and other                              |       | 25.4          |       | 4.4              |       | (2.2             | )          | —           |       | 27.6       |       |
| Net cash  used by investing activities of discontinued operations |       | —        |       | —           |       | (0.2             | )          | —           |       | (0.2       | )          |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Net cash  provided (used) by investing activities                 |       | 16.9          |       | (33.2            | )          | (25.9            | )          | —           |       | (42.2      | )          |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Net change  in short-term borrowings                              |       | —        |       | —           |       | 20.0             |       | —           |       | 20.0       |       |
| Issuance of  long-term debt                                       |       | 93.0          |       | —           |       | —           |       | —           |       | 93.0       |       |
| Repayment of  long-term debt                                      |       | (312.1        | )          | (1.1             | )          | (1.3             | )          | —           |       | (314.5     | )          |
| Proceeds  from exercise of stock options                          |       | 15.6          |       | —           |       | —           |       | —           |       | 15.6       |       |
| Cash  dividends                                                   |       | (8.0          | )          | —           |       | (0.5             | )          | 0.5              |       | (8.0       | )          |
| Other  financing activities, net                                  |       | (26.7         | )          | 4.1              |       | (10.1            | )          | 30.5             |       | (2.2       | )     |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Net cash  (used) provided by financing activities                 |       | (238.2        | )          | 3.0              |       | 8.1              |       | 31.0             |       | (196.1     | )          |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Effect of  exchange rate changes on cash and cash equivalents     |       | —        |       | —           |       | (9.7             | )          | —           |       | (9.7       | )          |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Net  (decrease) increase in cash and cash equivalents             |       | (79.5         | )          | 0.8              |       | 43.6             |       | —           |       | (35.1      | )          |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Cash and  cash equivalents at beginning of year                   |       | 84.4          |       | 2.5              |       | 67.0             |       | —           |       | 153.9      |       |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Cash and  cash equivalents at end of year                         |       | $             | 4.9        |             | $          | 3.3              |       | $                | 110.6      |       | $          | — |   | $ | 118.8 |   |

 

23

----

 

Condensed Consolidating Statements ofCash Flows

Nine Months Ended January 2, 2005

(Unaudited)

 
| ** **                                                        | ** ** | **Precision** | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                                        | ** ** | **Castparts** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                                        | ** ** | **Corp.**     | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
| ** **                                                        | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| Net cash  provided (used) by operating activities                 |       | $             | 158.8      |             | $          | 43.1             |       | $                | 45.0       |       | $          | (6.8 | ) | $ | 240.1 |   |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Capital  expenditures                                             |       | (0.8          | )          | (26.5            | )          | (11.3            | )          | —           |       | (38.6      | )          |
| Acquisitions  of businesses                                       |       | —        |       | —           |       | (1.4             | )          | —           |       | (1.4       | )          |
| Proceeds  from sale of business                                   |       | 116.0         |       | —           |       | —           |       | —           |       | 116.0      |       |
| Other  investing activities, net                                  |       | (1.8          | )          | (14.9            | )          | 3.4              |       | 17.5             |       | 4.2        |       |
| Net cash  used by investing activities of discontinued operations |       | —        |       | —           |       | (5.8             | )          | —           |       | (5.8       | )          |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Net cash  provided (used) by investing activities                 |       | 113.4         |       | (41.4            | )          | (15.1            | )          | 17.5             |       | 74.4       |       |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Net change  in short-term borrowings                              |       | —        |       | —           |       | (5.8             | )          | —           |       | (5.8       | )          |
| Repayment of  long-term debt                                      |       | (12.6         | )          | (0.6             | )          | (2.2             | )          | —           |       | (15.4      | )          |
| Proceeds  from exercise of stock options                          |       | 25.2          |       | —           |       | —           |       | —           |       | 25.2       |       |
| Cash  dividends                                                   |       | (5.8          | )          | —           |       | —           |       | —           |       | (5.8       | )          |
| Other  financing activities, net                                  |       | 2.2           |       | 2.1              |       | 8.3              |       | (10.7            | )          | 1.9        |       |
| Net cash  used by financing activities of discontinued operations |       | —        |       | —           |       | (4.3             | )          | —           |       | (4.3       | )          |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Net cash  provided (used) by financing activities                 |       | 9.0           |       | 1.5              |       | (4.0             | )          | (10.7            | )          | (4.2       | )          |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Effect of  exchange rate changes on cash and cash equivalents     |       | —        |       | —           |       | 6.3              |       | —           |       | 6.3        |       |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Net increase  in cash and cash equivalents                        |       | 281.2         |       | 3.2              |       | 32.2             |       | —           |       | 316.6      |       |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Cash and  cash equivalents at beginning of year                   |       | 33.2          |       | —           |       | 47.1             |       | —           |       | 80.3       |       |
|                                                              |       |          |       |             |       |             |       |             |       |       |       |
| Cash and  cash equivalents at end of year                         |       | $             | 314.4      |             | $          | 3.2              |       | $                | 79.3       |       | $          | — |   | $ | 396.9 |   |

 

24

----

 

**Item 2.       Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**Consolidated Results ofOperations - Comparison Between Three Months Ended January 1, 2006 and January 2,2005**

 
| ** **                                                      | ** ** | **Three Months Ended** | ** ** | **Inc/(Dec)** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|---------------|------------|
| ** **                                                      | ** ** | **1/1/06**                       | ** ** | **1/2/05**    | ** ** | **$** | ** ** | **%** | ** ** |
|                                                            |       |                             |       |          |       |   |   |   |   |
| Net sales                                                       |       | $                                | 864.4      |          | $          | 743.9 |   | $ | 120.5 |   | 16.2 | % |
| Cost of  goods sold                                             |       | 667.8                            |       | 575.8         |       | 92.0 |   | 16.0 |   |
| Selling and  administrative expenses                            |       | 58.5                             |       | 58.8          |       | (0.3 | ) | (0.5 | ) |
| Restructuring  and impairment                                   |       | 2.3                              |       | —        |       | 2.3 |   | — |   |
| Interest  expense, net                                          |       | 10.1                             |       | 14.3          |       | (4.2 | ) | (29.4 | ) |
| Income  before income taxes and minority interest               |       | 125.7                            |       | 95.0          |       | 30.7 |   | 32.3 |   |
| Income tax  expense                                             |       | 34.0                             |       | 32.7          |       | 1.3 |   | 4.0 |   |
| *Effective  tax rate*                                           | * *   | *27.0*                           | *%*        | *34.4*        | *%*        | * * | * * | * * | * * |
| Minority  interest                                              |       | (0.5                             | )          | (0.2          | )          | (0.3 | ) | (150.0 | ) |
| Net income  from continuing operations                          |       | 91.2                             |       | 62.1          |       | 29.1 |   | 47.0 |   |
| Net loss  from discontinued operations                          |       | 2.5                              |       | (0.4          | )          | 2.9 |   | 725.0 |   |
| Net income  (loss)                                              |       | $                                | 93.7       |          | $          | 61.7 |   | $ | 32.0 |   | 51.9 | % |
| Net income  per share from continuing operations – diluted |       | $                                | 0.67       |          | $          | 0.47 |   | $ | 0.20 |   | 42.6 | % |
| Net loss per  share from discontinued operations – diluted |       | 0.02                             |       | (0.01         | )          | 0.03 |   | 300.0 |   |
| Net income  (loss) per share - diluted                          |       | $                                | 0.69       |          | $          | 0.46 |   | $ | 0.23 |   | 50.0 | % |

 

Sales for the third quarter of fiscal2006 were $864.4 million, up $120.5 million, or 16.2 percent from $743.9million in the same quarter last year. The year-over-year increase in sales wasprincipally driven by improving conditions in the aerospace and powergeneration markets, as well as the impact of material pass-through pricing,which increased sales approximately $48 million in the third quarter of fiscal2006 compared with $19 million in the same quarter a year ago. The addition ofAir Industries Corp., which was acquired in the fourth quarter of last year,also contributed to the sales increase. According to JSA Research as of December 2005,commercial aircraft deliveries were forecast to increase approximately 10percent in calendar year 2005 from calendar year 2004 and are forecast tocontinue to increase approximately 21 percent in calendar year 2006. Because ofmanufacturing lead times required to support aircraft deliveries, PCC beganrealizing these forecasted increases in the second and third quarters of fiscal2005. In addition, continued growth in the seamless pipe market contributed toincreased sales in the Forged Products segment.

 

Net income from continuing operations forthe third quarter of fiscal 2006 was $91.2 million, or $0.67 per share(diluted), which included restructuring and impairment charges totaling $0.02per share (diluted) and a non-recurring tax benefit of $0.04 per share(diluted). By comparison, net income from continuing operations for the thirdquarter of fiscal 2005 was $62.1 million, or $0.47 per share (diluted). Netincome (after discontinued operations) for the third quarter of fiscal 2006 was$93.7 million, or $0.69 per share (diluted), compared with net income of $61.7million, or $0.46 per share (diluted), in the same period last year.

 

***Interestand Income Tax***

 

Net interest expense for the thirdquarter of fiscal 2006 was $10.1 million, compared with $14.3 million for thethird quarter last year. The lower expense is primarily due to reduced debtlevels, partially offset by higher interest rates, compared to the same quarterlast year.

 

The effective tax rate for the thirdquarter of fiscal 2006 was 27.0 percent, 7.4 percentage points lower than the34.4 percent effective rate in the same quarter last year. The decrease in thetax rate was principally driven by a one-time tax benefit in the currentquarter of $5.3 million associated with changes in tax reserves resulting fromcompleted and on-going audits of the Company’s tax returns, revisions inestimates of the Extraterritorial Income Exclusion tax benefit for fiscal 2005,and increased earnings from foreign jurisdictions with lower tax rates.

 

25

----

 

***Restructuring and AssetImpairment***

 

During the third quarter of fiscal 2006, PCC recorded restructuring andasset impairment charges of $2.3 million, or $0.02 per share (diluted), whichincluded $1.7 million, primarily due to the write down of a building andequipment to fair value related to consolidation of a machining operation inthe Investment Cast Products segment and $0.6 million for severance costsassociated with headcount reductions related to downsizing the Company’stooling operation in Ireland.

 

Taking into consideration current and forecasted conditions in marketsserved by the Company, PCC regularly assesses its cost structure to ensure thatoperations are properly sized for prevailing market conditions. Based on theCompany’s most recent assessment, there are no current plans to restructureoperations in the fourth quarter of fiscal 2006.

 

***DiscontinuedOperations***

 

In the second quarterof fiscal 2005, the Company entered into agreements to sell all of the pumpsand valves businesses of PCC Flow Technologies with the exception of E/One andPCC Eurovalves. The businesses held for sale were reclassified from the FluidManagement Products segment to discontinued operations. The E/One business wasretained and is now included in the Industrial Products segment. The sale ofthe pumps and valves businesses of PCC Flow Technologies was completed in thethird quarter of fiscal 2005, and PCC Eurovalves, which is located in TheNetherlands, was sold in the third quarter of fiscal 2006.

 

In connection with theSPS acquisition in the third quarter of fiscal 2004, three businesses –Magnetics, Mohawk, and Dacar – were classified as held for sale. Dacar was soldin late September 2004, Magnetics was sold in January 2005, andMohawk was sold in April 2005.

 

The net income from discontinuedoperations was $2.5 million in the third quarter of fiscal 2006 compared withnet loss of $0.4 million, or $0.01 per share (diluted), in the same quarterlast year. The net income from discontinued operations for the third quarter offiscal 2006 consists of a revision in estimated tax benefits related to theshutdown of the pumps and valves businesses of PCC Flow Technologies, operatingincome from PCC Eurovalves, and a gain on the sale of PCC Eurovalves, partiallyoffset by continued costs associated with the shutdown of the PCC FlowTechnologies businesses. The net loss from discontinued operations for thethird quarter of fiscal 2005 consists primarily of operating results from PCCEurovalves and shutdown expenses associated with the sale of the other pumpsand valves businesses.

 

26

----

 

**Results of Operations by Segment –Comparison Between Three Months Ended January 1, 2006 and January 2,2005**

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Inc/(Dec)** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|---------------|------------|
| ** **                                        | ** ** | **1/1/06**                       | ** ** | **1/2/05**    | ** ** | **$** | ** ** | **%** | ** ** |
|                                              |       |                             |       |          |       |   |   |   |   |
| Net sales:                                        |       |                             |       |          |       |   |   |   |   |
| Investment  Cast Products                         |       | $                                | 399.3      |          | $          | 350.7 |   | $ | 48.6 |   | 13.9 | % |
| Forged  Products                                  |       | 210.9                            |       | 155.7         |       | 55.2 |   | 35.5 |   |
| Fastener  Products                                |       | 199.8                            |       | 175.3         |       | 24.5 |   | 14.0 |   |
| Industrial  Products                              |       | 54.4                             |       | 62.2          |       | (7.8 | ) | (12.5 | ) |
| Consolidated  net sales                           |       | $                                | 864.4      |          | $          | 743.9 |   | $ | 120.5 |   | 16.2 | % |
| Operating  income (loss):                         |       |                             |       |          |       |   |   |   |   |
| Investment  Cast Products                         |       | $                                | 81.2       |          | $          | 67.1 |   | $ | 14.1 |   | 21.0 | % |
| * % of sales*                                | * *   | *20.3*                           | *%*        | *19.1*        | *%*        | * * | * * | * * | * * |
| Forged  Products                                  |       | 22.1                             |       | 18.2          |       | 3.9 |   | 21.4 |   |
| * % of sales*                                | * *   | *10.5*                           | *%*        | *11.7*        | *%*        | * * | * * | * * | * * |
| Fastener  Products                                |       | 36.4                             |       | 23.8          |       | 12.6 |   | 52.9 |   |
| * % of sales*                                | * *   | *18.2*                           | *%*        | *13.6*        | *%*        | * * | * * | * * | * * |
| Industrial  Products                              |       | 7.6                              |       | 11.5          |       | (3.9 | ) | (33.9 | ) |
| * % of sales*                                | * *   | *14.0*                           | *%*        | *18.5*        | *%*        | * * | * * | * * | * * |
| Corporate  expense                                |       | (9.2                             | )          | (11.3         | )          | 2.1 |   | 18.6 |   |
| Consolidated  segment operating income            |       | 138.1                            |       | 109.3         |       | 28.8 |   | 26.3 | % |
| * % of sales*                                | * *   | *16.0*                           | *%*        | *14.7*        | *%*        | * * | * * | * * | * * |
| Restructuring  and impairment                     |       | 2.3                              |       | —        |       |   |   |   |   |
| Interest  expense, net                            |       | 10.1                             |       | 14.3          |       |   |   |   |   |
| Income  before income taxes and minority interest |       | $                                | 125.7      |          | $          | 95.0 |   |   |   |   |   |

 

***InvestmentCast Products***

 

Investment Cast Products’ sales increased13.9 percent from $350.7 million in the third quarter of fiscal 2005 to $399.3million this year. Operating income increased 21.0 percent from $67.1 millionin the third quarter of fiscal 2005 to $81.2 million in the same quarter thisyear, and operating income as a percent of sales increased from 19.1 percent to20.3 percent of sales. The increase in sales was driven by continued strengthin the commercial aerospace and power generation markets, resulting fromincreased commercial build rates, solid aftermarket growth, and market sharegains. The increase in operating income reflected the impact of the highersales volume and operating improvements, partially offset by higher rawmaterial costs, mainly titanium, which has increased approximately 117 percenton the TI 6-4 Bulk Weldables Index (metalprices.com) compared to the samequarter last year. The improvement in operating margins as a percentage ofsales was mainly due to leverage from the higher sales volumes and improvedmanufacturing performance, partially offset by the impact of higher rawmaterial costs and pass-through pricing.

 

Sales within this segment are expected to continue to benefit fromimproved conditions in the aerospace and power generation markets through theremainder of fiscal 2006. Operating margins as a percent of sales are alsoexpected to remain strong through the remainder of fiscal 2006 as a result ofleverage from higher sales volume and continued improvements in operatingefficiencies.

 

27

----

 

***ForgedProducts***

 

Forged Products’ sales were $210.9million for the quarter, an increase of 35.5 percent, compared to sales of$155.7 million in the third quarter of fiscal 2005. Operating income increased21.4 percent from $18.2 million in the third quarter of fiscal 2005 to $22.1million in the same quarter this year, while operating income as a percent ofsales decreased from 11.7 percent to 10.5 percent of sales. While the increasein sales includes approximately $21 million of higher prices related topass-through of higher material costs, the remaining volume increase isprincipally due to increased demand for aerospace products, market share gainsand aftermarket growth, as well as continued penetration into the Chinese powergeneration market with higher sales of extruded pipe. Operating income as apercent of sales benefited in the current quarter from the higher volume, butwas lower than last year due to higher material costs, mainly nickel andtitanium, which will not be recovered until next quarter when finished partsship under contracts that provide for increased pass-through pricing. Dilutionresulting from pass-through pricing also negatively impacted operating incomeas a percent of sales for the quarter. Titanium prices have increasedapproximately 117 percent on the TI 6-4 Bulk Weldables Index (metalprices.com)since the third quarter of fiscal 2005. While nickel prices have decreasedapproximately 10 percent on the London Metal Exchange (LME) since the thirdquarter of fiscal 2005, new contractual pricing arrangements during the quarterresulted in increased nickel prices for the segment compared to the same periodlast year.

 

Sales and operating income for the remainder of fiscal 2006 within theForged Products segment are expected to benefit from continued growth in theaerospace and industrial gas turbine markets, as well as continued growth inextruded pipe sales. Operating margins in the fourth quarter of fiscal 2006 areexpected to increase versus the third quarter as the higher cost of materialpurchases in the third quarter of fiscal 2006 will be recovered throughcontractual pass-through pricing in the fourth quarter as finished parts ship.

 

***FastenerProducts***

 

The Fastener Products segment reported $199.8 million of sales withoperating income of $36.4 million, or 18.2 percent of sales, in the thirdquarter of fiscal 2006, compared to sales of $175.3 million and operatingincome of $23.8 million, or 13.6 percent of sales, in the third quarter offiscal 2005. The increase in sales was due to the addition of Air IndustriesCorp., which was acquired in March 2005, and the favorable impact ofstrong aerospace sales, partially offset by significant weakness in theautomotive market. Operatingincome as a percent of sales benefited from the higher sales volume and theimpact of continued cost take-outs and improved manufacturing processes.

 

Sales within this segment are expected to increase during the remainderof fiscal 2006 as a result of improved conditions in the aerospace industry andmarket share gains, partially offset by softness in the automotive market. Operatingincome as a percentage of sales should alsoimprove due to continuing realization of synergies, cost take-outs and leveragefrom higher sales.

 

***IndustrialProducts***

 

Industrial Products’ sales of $54.4million for the third quarter of fiscal 2006 decreased 12.5 percent from $62.2million in the same period last year. Operating income decreased to $7.6million in the third quarter of fiscal 2006 compared with $11.5 million in thesame period last year. Operating income as a percent of sales decreased to 14.0percent in the third quarter of fiscal 2006 from 18.5 percent in the sameperiod last year. The decrease in sales compared to last year reflects anegative downturn in the automotive industry, as well as weakness in the pulpand paper market. The decline in operating margin as a percent of salescompared to the third quarter of fiscal 2005 is primarily due to thedeleveraging affect of the lower sales volume, write-off of excess inventorydue to weak automotive demand and additional reserves required for workers’compensation claims.

 

The Industrial Products segment is expected to continue to benegatively impacted by the downturn in the automotive industry for theremainder of fiscal 2006. Over the next few quarters, PCC will take astrategic, measured, long-term approach to assessing the trends in theautomotive industry and will take appropriate actions to deal with thechallenges presented by this declining market.

 

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**Consolidated Results ofOperations - Comparison Between Nine Months Ended January 1, 2006 and January 2,2005**

 
| ** **                                                      | ** ** | **Nine Months Ended** | ** ** | **Inc/(Dec)** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------|------------|---------------|------------|
| ** **                                                      | ** ** | **1/1/06**                      | ** ** | **1/2/05**    | ** ** | **$** | ** ** | **%** | ** ** |
|                                                            |       |                            |       |          |       |   |   |   |   |
| Net sales                                                       |       | $                               | 2,593.8    |          | $          | 2,109.5 |   | $ | 484.3 |   | 23.0 | % |
| Cost of  goods sold                                             |       | 2,010.7                         |       | 1,632.1       |       | 378.6 |   | 23.2 |   |
| Selling and  administrative expenses                            |       | 187.8                           |       | 176.8         |       | 11.0 |   | 6.2 |   |
| Restructuring  and impairment                                   |       | 2.3                             |       | —        |       | 2.3 |   | — |   |
| Interest  expense, net                                          |       | 31.3                            |       | 43.7          |       | (12.4 | ) | (28.4 | ) |
| Income  before income taxes and minority interest               |       | 361.7                           |       | 256.9         |       | 104.8 |   | 40.8 |   |
| Income tax  expense                                             |       | 112.0                           |       | 86.1          |       | 25.9 |   | 30.1 |   |
| *Effective  tax rate*                                           | * *   | *31.0*                          | *%*        | *33.5*        | *%*        | * * | * * | * * | * * |
| Minority  interest                                              |       | (1.2                            | )          | (1.0          | )          | (0.2 | ) | (20.0 | ) |
| Net income  from continuing operations                          |       | 248.5                           |       | 169.8         |       | 78.7 |   | 46.3 |   |
| Net loss  from discontinued operations                          |       | 1.7                             |       | (237.5        | )          | 239.2 |   | 100.7 |   |
| Net income  (loss)                                              |       | $                               | 250.2      |          | $          | (67.7 | ) | $ | 317.9 |   | 469.6 | % |
| Net income  per share from continuing operations – diluted |       | $                               | 1.83       |          | 1.28       |   | $ | 0.55 |   | 43.0 | % |
| Net loss per  share from discontinued operations – diluted |       | 0.02                            |       | (1.79         | )          | 1.81 |   | 101.1 |   |
| Net income  (loss) per share - diluted                          |       | $                               | 1.85       |          | $          | (0.51 | ) | $ | 2.36 |   | 462.7 | % |

 

Sales for the first nine months of fiscal2006 were $2,593.8 million, an increase of 23.0 percent from $2,109.5 millionin the same period last year. The year-over-year increase in sales wasprincipally driven by improving conditions in the aerospace and powergeneration markets, as well as the impact of material pass-through pricingwhich increased sales approximately $138 million through the first nine monthsof fiscal 2006 compared with $38 million in the same period a year ago. Theaddition of Air Industries Corp., which was acquired in the fourth quarter oflast year, also contributed to the sales increase. According to JSA Research asof December 2005, commercial aircraft deliveries were forecast to increaseapproximately 10 percent in calendar year 2005 from calendar year 2004 and areforecast to continue to increase approximately 21 percent in calendar year 2006.In addition, continued growth in the seamless pipe market contributed toincreased sales in the Forged Products segment.

 

Net income from continuing operations forthe first nine months of fiscal 2006 was $248.5 million, or $1.83 per share(diluted), which included restructuring and impairment charges totaling $0.02per share (diluted) and a non-recurring tax benefit of $0.04 per share (diluted),both occurring in the third quarter. The current year also includes acumulative charge of $2.2 million, net of tax, or $0.02 per share (diluted),related to correction of accounting errors in the Company’s financialstatements from fiscal 2001 through the first half of fiscal 2006. See “CumulativeAdjustment” discussion below. By comparison, net income from continuingoperations for the first nine months of fiscal 2005 was $169.8 million, or$1.28 per share (diluted). Net income for the first nine months of fiscal 2006was $250.2 million, or $1.85 per share (diluted), compared with net loss of$67.7 million, or $0.51 per share (diluted), in the same period last year. Thenet loss for the prior period included a charge of $245.0 million, or $1.85 pershare (diluted), in connection with the Company’s decision to sell the pumpsand valves businesses of PCC Flow Technologies.

 

***Interestand Income Tax***

 

Net interest expense for the nine monthsended January 1, 2006 was $31.3 million, as compared with $43.7 millionfor the same period last year. The lower expense is primarily due to reduceddebt levels, partially offset by higher interest rates, compared to the sameperiod last year.

 

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The effective tax rate for the first ninemonths of fiscal 2006 was 31.0 percent compared with 33.5 percent for the firstnine months of fiscal 2005. The decrease in the tax rate was principally drivenby a one-time tax benefit in the third quarter of the current year of $5.3 million,revisions in estimates of the Extraterritorial Income Exclusion tax benefit forfiscal 2005, and increased earnings from foreign jurisdictions with lower taxrates.

 

***Restructuring and AssetImpairment***

 

During the third quarter of fiscal 2006, PCC recorded restructuring andasset impairment charges of $2.3 million, or $0.02 per share (diluted), whichincluded $1.7 million to write down a building and equipment to fair valuerelated to consolidation of a machining operation in the Investment Cast Productssegment and $0.6 million for severance costs associated with headcountreductions related to downsizing the Company’s tooling operation in Ireland.

 

Taking into consideration current and forecasted conditions in marketsserved by the Company, PCC regularly assesses its cost structure to ensure thatoperations are properly sized for prevailing market conditions. Based on theCompany’s most recent assessment, there are no current plans to restructureoperations in the fourth quarter of fiscal 2006.

 

***DiscontinuedOperations***

 

In the second quarter of fiscal 2005, theCompany entered into agreements to sell all of the pumps and valves businessesof PCC Flow Technologies with the exception of E/One and PCC Eurovalves. Thebusinesses held for sale were reclassified from the Fluid Management Productssegment to discontinued operations. The E/One business was retained and is nowincluded in the Industrial Products segment. The sale of the pumps and valvesbusinesses of PCC Flow Technologies was completed in the third quarter offiscal 2005, and PCC Eurovalves, which is located in The Netherlands, was soldin the third quarter of fiscal 2006.

 

In connection with theSPS acquisition in the third quarter of fiscal 2004, three businesses –Magnetics, Mohawk, and Dacar – were classified as held for sale. Dacar was soldin late September 2004, Magnetics was sold in January 2005, andMohawk was sold in April 2005.

 

The net income from discontinuedoperations was $1.7 million, or $0.02 per share (diluted), for the nine monthsended January 1, 2006 compared with a net loss of $237.5 million, or $1.79per share (diluted), in the same period last year. The net income fromdiscontinued operations in the first nine months of fiscal 2006 consistsprimarily of a revision in estimated tax benefits related to the shutdown ofthe pumps and valves businesses of PCC Flow Technologies, a gain on the sale ofPCC Eurovalves and operating results from PCC Eurovalves, partially offset bycontinued costs associated with the shutdown of these businesses.

 

***SpecialInvestigation***

 

In September and October 2005, the Company received threerelated reports with respect to concerns about employee misconduct and theproper application of generally accepted accounting principles (“GAAP”) tocertain transactions at the Wyman-Gordon Forgings’ Houston plant, a businessunit reported in the Forged Products segment. The matters identified in thereports were referred to the Audit Committee of the Board of Directors (“AuditCommittee”). The Audit Committee, after due consideration, decided to commencean independent investigation. In November 2005, the Audit Committeeexpanded the scope of the investigation to review two similar but unrelatedreports alleging employee misconduct and improper application of GAAP atJ&L Fiber Services, Inc., a business unit reported in the IndustrialProducts segment.

 

In February 2006, the Audit Committee completed its independentinvestigation and determined that the Company accounted for certaintransactions incorrectly at both identified locations, as described below:

 

The investigation at Wyman-Gordon Forgings Houston identified errors inthe Company’s fiscal 2001 through fiscal 2006 financial statements. Theseerrors, which totaled $1.8 million, represented a net overstatement of expensesthrough the second quarter of fiscal 2006. The errors primarily related to thefailure to properly reconcile accounts and the misapplication of GAAP andCompany accounting policies. There were also timing errors related to theimproper recognition of revenue within fiscal 2005 of $0.2 million and betweenthe fourth quarter of fiscal 2005 and the first quarter of fiscal 2006 of $0.2million. The identified errors resulted from both deliberate and inadvertentacts involving non-executive employees.

 

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The investigation at J&L Fiber Services, Inc. identifiederrors in the Company’s fiscal 2003 through fiscal 2006 financial statements. Theseerrors, which totaled $5.6 million, represented a net understatement ofexpenses through the second quarter of fiscal 2006. The errors primarilyrelated to the overstatement of inventories resulting from the failure toproperly record excess and obsolete reserves and inadequate cycle countingprocedures, the failure to properly reconcile accounts, and the misapplicationof GAAP and Company accounting policies, which included improper deferral ofexpenses. The identified errors resulted from both deliberate and inadvertentacts involving non-executive employees.

 

The Company’s management concluded, with the concurrence of the AuditCommittee, that the impact of these errors was not material to the Company’sconsolidated financial statements for any interim or annual period in which theerrors were found. In reaching this conclusion, the Company reviewed andanalyzed the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”)No. 99, “Materiality,” Accounting Principles Board Opinion No. 28, “InterimFinancial Reporting,” paragraph 29 and SAB Topic 5F, “Accounting Changes NotRetroactively Applied Due to Immateriality,” in order to determine that themisstatements were not material on a quantitative or qualitative basis. As aresult, the Company recorded a cumulative adjustment in the second quarter offiscal 2006. The net impact of these corrections was a decrease to pre-taxincome and net income of $3.8 million and $1.9 million or $0.01 per share(diluted), respectively, for the three months ended October 2, 2005.

 

The Company has taken immediate action to address the cause of theseerrors, including termination of certain involved individuals, the developmentof improved policies and procedures, and enhancement of internal controls. Inaddition, high-level reviews at nine additional locations were performed as part ofthe independent investigation. The findings did not result in identification ofany issues that required further investigation. Management has completed anassessment of the effectiveness of its internal controls in relation to thesefindings. See *Item 4. Controls and Procedures*for further discussion.

 

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**Results of Operations by Segment –Comparison Between Nine Months Ended January 1, 2006 and January 2,2005**

 
| ** **                                        | ** ** | **Nine Months Ended** | ** ** | **Inc/(Dec)** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|---------------|------------|
| ** **                                        | ** ** | **1/1/06**                      | ** ** | **1/2/05**    | ** ** | **$** | ** ** | **%** | ** ** |
|                                              |       |                            |       |          |       |   |   |   |   |
| Net sales:                                        |       |                            |       |          |       |   |   |   |   |
| Investment  Cast Products                         |       | $                               | 1,188.9    |          | $          | 980.4 |   | $ | 208.5 |   | 21.3 | % |
| Forged  Products                                  |       | 628.8                           |       | 448.1         |       | 180.7 |   | 40.3 |   |
| Fastener  Products                                |       | 603.0                           |       | 504.5         |       | 98.5 |   | 19.5 |   |
| Industrial  Products                              |       | 173.1                           |       | 176.5         |       | (3.4 | ) | (1.9 | ) |
| Consolidated  net sales                           |       | $                               | 2,593.8    |          | $          | 2,109.5 |   | $ | 484.3 |   | 23.0 | % |
| Operating  income (loss):                         |       |                            |       |          |       |   |   |   |   |
| Investment  Cast Products                         |       | $                               | 234.7      |          | $          | 183.1 |   | $ | 51.6 |   | 28.2 | % |
| * % of sales*                                | * *   | *19.7*                          | *%*        | *18.7*        | *%*        | * * | * * | * * | * * |
| Forged  Products                                  |       | 72.1                            |       | 55.3          |       | 16.8 |   | 30.4 |   |
| * % of sales*                                | * *   | *11.5*                          | *%*        | *12.3*        | *%*        | * * | * * | * * | * * |
| Fastener  Products                                |       | 99.8                            |       | 61.8          |       | 38.0 |   | 61.5 |   |
| * % of sales*                                | * *   | *16.6*                          | *%*        | *12.2*        | *%*        | * * | * * | * * | * * |
| Industrial  Products                              |       | 24.0                            |       | 31.5          |       | (7.5 | ) | (23.8 | ) |
| * % of sales*                                | * *   | *13.8*                          | *%*        | *17.8*        | *%*        | * * | * * | * * | * * |
| Corporate  expense                                |       | (35.3                           | )          | (31.1         | )          | (4.2 | ) | (13.5 | ) |
| Consolidated  segment operating income            |       | 395.3                           |       | 300.6         |       | 94.7 |   | 31.5 | % |
| * % of sales*                                | * *   | *15.2*                          | *%*        | *14.2*        | *%*        | * * | * * | * * | * * |
| Restructuring  and impairment                     |       | 2.3                             |       | —        |       |   |   |   |   |
| Interest  expense, net                            |       | 31.3                            |       | 43.7          |       |   |   |   |   |
| Income  before income taxes and minority interest |       | $                               | 361.7      |          | $          | 256.9 |   |   |   |   |   |

 

***Investment Cast Products***

 

Investment Cast Products’ sales increased21.3 percent from $980.4 million in the first nine months of fiscal 2005 to$1,188.9 million this year. Operating income for the segment increased 28.2 percent,from $183.1 million, or 18.7 percent of sales, a year ago to $234.7 million, or19.7 percent of sales, in the first nine months of fiscal 2006. The increase insales was driven by continued strength in the aerospace and power generationmarkets resulting from improved commercial aerospace build rates, solidaftermarket growth, and market share gains. The increase in operating incomereflected the impact of the higher sales volume and operating improvements,partially offset by higher raw material costs, mainly nickel and titanium,which have increased approximately 6 percent and 108 percent, respectively, onthe LME and TI 6-4 Bulk Weldables Index (metalprices.com) compared to the sameperiod last year. The improvement in operating margins as a percentage of saleswas mainly due to the leverage from higher sales volume and improvedmanufacturing performance, partially offset by the impact of higher rawmaterial costs and pass-through pricing.

 

***Forged Products***

 

Forged Products’ sales were $628.8million for the first nine months of fiscal 2006, an increase of 40.3 percent,compared to sales of $448.1 million in the same period last year. Operatingincome increased 30.4 percent from $55.3 million, or 12.3 percent of sales, inthe first nine months of fiscal 2005 to $72.1 million, or 11.5 percent ofsales, this year. Operating income for the first nine months of fiscal 2006includes a cumulative adjustment of $1.8 million taken in the second quarter tocorrect an overstatement of expenses from fiscal 2001 through the first half offiscal 2006. See “Special Investigation” discussion above. While the increasein sales includes approximately $63 million of higher prices related topass-through of higher material costs, the remaining volume increase wasprincipally due to increased demand for aerospace products, market share gainsand aftermarket growth, as well as higher sales of extruded pipe related tocontinued penetration into the Chinese power generation market. Operatingincome as a percent of sales benefited in the current period from the highervolume and the cumulative adjustment, but was lower than last year due tohigher material costs, mainly nickel and titanium, which have increasedapproximately 6 percent and 108 percent, respectively, on

 

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the LME and TI 6-4 Bulk Weldables Index(metalprices.com) since the first nine months of fiscal 2005. Dilutionresulting from pass-through pricing also negatively impacted operating incomeas a percent of sales for the period.

 

***FastenerProducts***

 

The Fastener Products segment reported $603.0 million of sales withoperating income of $99.8 million, or 16.6 percent of sales, in the first halfof fiscal 2006, compared to sales of $504.5 million and operating income of $61.8million, or 12.2 percent of sales in the same period last year. The increase insales was due to the addition of Air Industries Corp., which was acquired in March 2005,and the favorable impact of strong aerospace sales, partially offset bysignificant weakness in the automotive market. Operatingincome as a percent of sales benefited from the higher sales volume and theimpact of continued cost take-outs and improved manufacturing processes.

 

***Industrial Products***

 

Industrial Products’ sales of $173.1 millionfor the first nine months of fiscal 2006 decreased $3.4 million, or 1.9percent, from $176.5 million in the comparable prior year period. Operatingincome was $24.0 million, or 13.8 percent of sales, in the first nine months offiscal 2006, compared to operating income of $31.5 million, or 17.8 percent ofsales, in the same period last year. The decrease in sales compared to lastyear reflects a negative downturn in the automotive industry, as well asweakness in the pulp and paper market. The decline in operating margin as apercent of sales compared to the first nine months of fiscal 2005 is primarilydue to the impact of a cumulative charge of $5.6 million taken in the secondquarter of fiscal 2006 to correct an understatement of expenses from fiscal2003 through the first half of fiscal 2006 (see “Special Investigation”discussion above), the deleveraging affect of the lower sales volume, write-offof excess inventory due to weak automotive demand and additional reservesrequired for workers’ compensation claims.

 

**Changes in Financial Conditionand Liquidity**

 

Total assets of $3,581.5 million at January 1,2006 represented a $43.5 million decrease from the $3,625.0 million balance at April 3,2005. Total capitalization at January 1, 2006 was $2,656.4 million,consisting of $641.5 million of debt and $2,014.9 million of equity. Thedebt-to-capitalization ratio improved to 24.1 percent from 32.1 percent at theend of fiscal 2005.

 

Cash as of January 1, 2006 was$118.8 million, down $35.1 million from the end of fiscal 2005, and total debtwas $641.5 million, down $201.5 million since the end of fiscal 2005, togetherreflecting positive cash flow of $166.4 million during the first nine months offiscal 2006. In addition to the $201.5 million of net debt payments, cashrequirements for the first nine months of fiscal 2006 included $67.1 millionfor capital expenditures, $131.1 million for increased working capital, $8.0million for dividends, and $56.1 million of pension contributions ($44.3million were voluntary). These requirements were principally funded from $248.5million of net income from continuing operations adjusted for $74.4 million ofdepreciation and amortization and $48.2 million of deferred taxes, $1.7 millionasset impairment and $1.3 million related to the correction of prior yearaccounting errors, $15.6 million from the sale of common stock through stockoption exercises, $25.4 million of proceeds from the sale of assets held forsale and $13.6 million from other activities.

 

Capital spending during fiscal 2006,which is expected to exceed fiscal 2005 capital spending by approximately $40.0million, will principally provide for equipment maintenance and upgrades,capacity expansion, safety, and cost reduction projects. Company contributionsto its defined benefit pension plans are expected to be approximately $82.0million during fiscal 2006, of which $67.0 million will be voluntary.

 

On October 14, 2005, the Companyamended its bank credit facility in a syndication involving 20 banks. The amendedfacility consists of a five-year, $1.0 billion revolving loan (with a $250.0million increase option) maturing in October 2010. The previous bankcredit facility consisted of a $300.0 million term loan and a $400.0 millionrevolving loan maturing in December 2008. Borrowings under the amendedfacility, based on current credit ratings from Moody’s and S&P, will bearinterest at LIBOR plus 50 basis points if outstanding loans under the facilityare less than $500.0 million or LIBOR plus 62.5 basis points if outstandingloans under the facility are greater than $500.0 million. The interest rateunder the previous credit facility was LIBOR plus 100 basis points.

 

At January 1, 2006, the Companywas in compliance with all restrictive provisions of its loan agreements.

 

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Management believes that the Company canfund requirements for working capital, pension and other postretirement benefitobligations, capital spending, cash dividends, scheduled repayment of debt andpotential acquisitions from cash generated from operations, borrowing fromexisting or new bank credit facilities, issuance of public or privately placeddebt securities, or the issuance of equity instruments.

 

**Forward-LookingStatements**

 

Information included within this Form 10-Q describing theprojected growth and future results and events constitutes forward-lookingstatements, within the meaning of the Private Securities Litigation Reform Actof 1995. Actual results in future periods may differ materially from theforward-looking statements because of a number of risks and uncertainties,including but not limited to fluctuations in the aerospace, power generation,automotive, and other general industrial cycles; the relative success of theCompany’s entry into new markets; competitive pricing; the financial viabilityof the Company’s significant customers; the availability and cost of energy,materials, supplies, and insurance, the cost of pension and postretirementmedical benefits; equipment failures; relations with the Company’s employees;the Company’s ability to manage its operating costs and to integrate acquiredbusinesses in an effective manner; governmental regulations and environmentalmatters; risks associated with international operations and world economies;the relative stability of certain foreign currencies; and implementation of newtechnologies and process improvements. Any forward-looking statements should beconsidered in light of these factors. The Company undertakes no obligation topublicly release any forward-looking information to reflect anticipated orunanticipated events or circumstances after the date of this document.

 

**Item 3. Quantitative andQualitative Disclosures About Market Risk**

 

There have been no material changes tothe Company’s market risk exposure since April 3, 2005.

 

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**Item 4. Controls and Procedures**

 

**Evaluation of disclosure controlsand procedures**

 

PCC Management, including the ChiefExecutive Officer and Chief Financial Officer, have conducted an evaluation ofthe effectiveness of disclosure controls and procedures as of the end of theperiod covered by this report pursuant to Exchange Act Rule 13a-15(b). Basedon that evaluation, the Chief Executive Officer and Chief Financial Officerhave concluded that the disclosure controls and procedures are effective toensure that information required to be disclosed by the Company in reportsfiled with the Securities and Exchange Commission is recorded, processed,summarized and reported on a timely basis and to ensure that information isaccumulated and communicated to management, including the Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosures.

 

During the third quarter of fiscal 2006, an independent investigationconducted by the Audit Committee of the Board of Directors identified errorsthat represented an understatement of expenses related to the failure toproperly reconcile accounts, the misapplication of GAAP and Company policies,overstatement of inventories, improper deferral of expenses and improperrevenue recognition, resulting from both deliberate and inadvertent actsinvolving non-executive employees. The Company’s management concluded, with theconcurrence of the Audit Committee, that the impact of these errors was notmaterial to the Company’s consolidated financial statements for any interim orannual period in which the errors were found. In reaching this conclusion, theCompany reviewed and analyzed the Securities and Exchange Commission’s StaffAccounting Bulletin (“SAB”) No. 99, “Materiality,” Accounting PrinciplesBoard Opinion No. 28, “Interim Financial Reporting,” paragraph 29 and SABTopic 5F, “Accounting Changes Not Retroactively Applied Due to Immateriality,”in order to determine that the misstatements were not material on aquantitative or qualitative level. As a result, the Company recorded acumulative adjustment in the second quarter of fiscal 2006. The net impact ofthese corrections was a decrease to pre-tax income and net income of $3.8million and $1.9 million, respectively, for the three months ended October 2,2005.

 

The Company has taken immediate action toaddress the cause of these errors, including termination of certain involvedindividuals, the development of improved policies and procedures, andenhancement of internal controls. In addition, high-level reviews at nineadditional locations were performed as part of the independentinvestigation. The findings did not result in identification of any issues thatrequired further investigation. Based on management’s review and analysis, itwas concluded that the control deficiencies that resulted in the errors to theprior period financial statements discussed above were not independentlymaterial weaknesses and that when aggregated with other deficiencies also didnot constitute a material weakness in the Company’s internal control overfinancial reporting.

 

**Changes in internal control over financialreporting**

 

During the quarter ended January 1, 2006, there were no changes inthe Company’s internal control over financial reporting that materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

**Limitations on effectiveness of controls andprocedures**

 

PCC management, including our Chief Executive Officer and ChiefFinancial Officer, does not expect that the Company’s disclosure controls andprocedures or its internal controls will prevent all error and all fraud. Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Further, the design of a control system must reflect the fact thatthere are resource constraints and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within PCC have been detected.These inherent limitations include, but are not limited to, the realities thatjudgments in decision–making can be faulty and that breakdowns can occurbecause of simple error or mistake. Additionally, controls can be circumventedby the individual acts of some persons, by collusion of two or more people, orby management override of the control. The design of any system of controlsalso is based in part upon certain assumptions about the likelihood offuture events and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions; over time,control may become inadequate because of changes in conditions, or thedegree of compliance with the policies or procedures may deteriorate.Because of the inherent limitations in a cost–effective control system,misstatements due to error or fraud may occur and not be detected.

 

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**PART II. OTHERINFORMATION**

 

**Item 1. LegalProceedings**

 

None.

 

**Item 2. UnregisteredSale of Equity Securities and Use of Proceeds**

 

None.

 

**Item 3. Defaults UponSenior Securities**

 

None.

 

**Item4.****          ****Submission of Matters to a Vote of Security Holders andIssuer Purchases of Securities**

 

None.

 

**Item 5. OtherInformation**

 

None.

 

**Item 6. Exhibits**

 

31.1                           Certificationof the Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

31.2                           Certificationof the Chief Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1                           Certificationof the Chief Executive Officer pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

32.2                           Certificationof the Chief Financial Officer pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

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SIGNATURE

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                                | PRECISION CASTPARTS CORP.                     |
|-------------------------------------|-----------------------------------------------|
|                                | Registrant                                    |
|                                |                                          |
|                                |                                          |
| DATE:   February 17, 2006 | /s/ William D. Larsson                        |   |
|                                | William D. Larsson                            |
|                                | Senior Vice President and                     |
|                                | Chief Financial Officer                       |
|                                | (Principal Financial and Accounting  Officer) |

 

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