**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

**of the Securities Exchange Act of 1934**

**For the Quarter Ended October 2, 2005**

**Commission File No. 1-10348**

 

**Precision Castparts Corp.**

 

**An Oregon Corporation**

**IRS Employer Identification No. 93-0460598**

**4650 S.W. Macadam Avenue**

**Suite 440**

**Portland, Oregon 97239-4254**

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

 

Indicate by checkmarkwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes    o            No    ý

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

 

Largeaccelerated filer  ý    Acceleratedfiler  o    Non-acceleratedfiler  o

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act). 

 

Yes    o           No    ý

 

Number of shares ofCommon Stock, no par value, outstanding as of February 1, 2006: 134,058,053

 

Note:      This 10-Q was filed electronically viaEDGAR with the Securities and Exchange Commission.

 

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**PART 1:  FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**PrecisionCastparts Corp. and Subsidiaries**

**ConsolidatedStatements of Operations**

**(Unaudited)**

**(Inmillions, except per share data)**

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|
| ** **                                              | ** ** | **10/2/05**            | ** ** | **9/26/04** | ** ** |
|                                                    |       |                   |       |   |   |
| Net sales                                               |       | $                      | 874.8      |   | $ | 697.5 |   |
| Cost of goods sold                                      |       | 680.6                  |       | 537.3 |   |
| Selling and administrative expenses                     |       | 65.5                   |       | 59.4 |   |
| Interest expense, net                                   |       | 10.6                   |       | 14.8 |   |
|                                                    |       |                   |       |   |   |
| Income before income taxes and minority  interest       |       | 118.1                  |       | 86.0 |   |
| Income tax expense                                      |       | 38.1                   |       | 28.5 |   |
| Minority interest in earnings of  consolidated entities |       | (0.4                   | )          | (0.3 | ) |
|                                                    |       |                   |       |   |   |
| Net income from continuing operations                   |       | 79.6                   |       | 57.2 |   |
| Net loss from discontinued operations                   |       | (0.5                   | )          | (240.2 | ) |
|                                                    |       |                   |       |   |   |
| Net income (loss)                                       |       | $                      | 79.1       |   | $ |  (183.0 | ) |
|                                                    |       |                   |       |   |   |
| Net income (loss) per common share – basic:        |       |                   |       |   |   |
| Net income from continuing operations                   |       | $                      |  0.60 |   | $ |  0.44 |   |
| Net loss from discontinued operations                   |       | (0.01                  | )          | (1.85 | ) |
|                                                    |       |                   |       |   |   |
|                                                    |       | $                      |  0.59 |   | $ |  (1.41 | ) |
|                                                    |       |                   |       |   |   |
| Net income (loss) per common share –  diluted:     |       |                   |       |   |   |
| Net income from continuing operations                   |       | $                      | 0.59       |   | $ | 0.43 |   |
| Net loss from discontinued operations                   |       | (0.01                  | )          | (1.81 | ) |
|                                                    |       |                   |       |   |   |
|                                                    |       | $                      |  0.58 |   | $ |  (1.38 | ) |
|                                                    |       |                   |       |   |   |
| Average common shares outstanding:                      |       |                   |       |   |   |
| Basic                                                   |       | 133.0                  |       | 129.8 |   |
| Diluted                                                 |       | 135.5                  |       | 132.4 |   |

 

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

 

2

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**PrecisionCastparts Corp. and Subsidiaries**

**ConsolidatedStatements of Operations**

**(Unaudited)**

**(Inmillions, except per share data)**

 
| ** **                                              | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **10/2/05**          | ** ** | **9/26/04** | ** ** |
|                                                    |       |                 |       |   |   |
| Net sales                                               |       | $                    | 1,729.4    |   | $ | 1,365.6 |   |
| Cost of goods sold                                      |       | 1,342.9              |       | 1,056.3 |   |
| Selling and administrative expenses                     |       | 129.3                |       | 118.0 |   |
| Interest expense, net                                   |       | 21.2                 |       | 29.4 |   |
|                                                    |       |                 |       |   |   |
| Income before income taxes and minority  interest       |       | 236.0                |       | 161.9 |   |
| Income tax expense                                      |       | 78.0                 |       | 53.4 |   |
| Minority interest in earnings of consolidated  entities |       | (0.7                 | )          | (0.8 | ) |
|                                                    |       |                 |       |   |   |
| Net income from continuing operations                   |       | 157.3                |       | 107.7 |   |
| Net loss from discontinued operations                   |       | (0.8                 | )          | (237.1 | ) |
|                                                    |       |                 |       |   |   |
| Net income (loss)                                       |       | $                    | 156.5      |   | $ | (129.4 | ) |
|                                                    |       |                 |       |   |   |
| Net income (loss) per common share – basic:        |       |                 |       |   |   |
| Net income from continuing operations                   |       | $                    | 1.19       |   | $ | 0.83 |   |
| Net loss from discontinued operations                   |       | (0.01                | )          | (1.83 | ) |
|                                                    |       | $                    | 1.18       |   | $ | (1.00 | ) |
|                                                    |       |                 |       |   |   |
| Net income (loss) per common share –  diluted:     |       |                 |       |   |   |
| Net income from continuing operations                   |       | $                    | 1.16       |   | $ | 0.82 |   |
| Net loss from discontinued operations                   |       | —               |       | (1.80 | ) |
|                                                    |       | $                    | 1.16       |   | $ | (0.98 | ) |
|                                                    |       |                 |       |   |   |
| Average common shares outstanding:                      |       |                 |       |   |   |
| Basic                                                   |       | 132.7                |       | 129.6 |   |
| Diluted                                                 |       | 135.2                |       | 132.0 |   |

 

*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)**

 
| ** **                                            | ** ** | **10/2/05** | ** **    | **4/3/05** | ** ** |
|-------------------------------------------------------|------------|-------------|---------------|------------|------------|
| ASSETS                                                |       |        |          |       |       |
| Current assets:                                       |       |        |          |       |       |
| Cash and cash equivalents                             |       | $           | 202.0         |       | $          | 153.9 |   |
| Receivables, net                                      |       | 459.0       |          | 408.2      |       |
| Inventories                                           |       | 542.8       |          | 531.3      |       |
| Prepaid expenses                                      |       | 18.3        |          | 17.5       |       |
| Income tax receivable                                 |       | —      |          | 9.3        |       |
| Deferred income taxes                                 |       | 54.3        |          | 55.0       |       |
| Discontinued operations                               |       | 31.3        |          | 37.9       |       |
| Total current assets                                  |       | 1,307.7     |          | 1,213.1    |       |
|                                                  |       |        |          |       |       |
| Property, plant and equipment, at cost                |       | 1,290.9     |          | 1,294.4    |       |
| Less - accumulated depreciation                       |       | (611.9      | )             | (601.9     | )          |
| Net property, plant and equipment                     |       | 679.0       |          | 692.5      |       |
|                                                  |       |        |          |       |       |
| Goodwill, net                                         |       | 1,577.9     |          | 1,576.1    |       |
| Acquired intangible assets, net                       |       | 4.9         |          | 5.2        |       |
| Deferred income taxes                                 |       | 2.9         |          | 16.8       |       |
| Other assets                                          |       | 113.9       |          | 103.2      |       |
| Discontinued operations                               |       | 15.3        |          | 18.1       |       |
|                                                  |       |        |          |       |       |
|                                                  |       | $           |  3,701.6 |       | $          |  3,625.0 |   |
|                                                  |       |        |          |       |       |
| LIABILITIES AND SHAREHOLDERS’ INVESTMENT         |       |        |          |       |       |
| Current liabilities:                                  |       |        |          |       |       |
| Short-term borrowings                                 |       | $           | 6.0           |       | $          | 6.0 |   |
| Long-term debt currently due                          |       | 38.4        |          | 38.3       |       |
| Accounts payable                                      |       | 324.1       |          | 312.4      |       |
| Accrued liabilities                                   |       | 319.8       |          | 320.3      |       |
| Income taxes payable                                  |       | 40.5        |          | 89.4       |       |
| Discontinued operations                               |       | 11.5        |          | 13.3       |       |
| Total current liabilities                             |       | 740.3       |          | 779.7      |       |
|                                                  |       |        |          |       |       |
| Long-term debt                                        |       | 773.4       |          | 798.7      |       |
| Pension and other postretirement benefit  obligations |       | 191.2       |          | 205.5      |       |
| Other long-term liabilities                           |       | 62.3        |          | 55.7       |       |
| Discontinued operations                               |       | 3.7         |          | 5.0        |       |
| Total liabilities                                     |       | 1,770.9     |          | 1,844.6    |       |
|                                                  |       |        |          |       |       |
| Shareholders’ investment:                        |       |        |          |       |       |
| Common stock                                          |       | 133.2       |          | 66.2       |       |
| Paid-in capital                                       |       | 728.1       |          | 773.4      |       |
| Retained earnings                                     |       | 1,104.4     |          | 951.8      |       |
| Accumulated comprehensive loss:                       |       |        |          |       |       |
| Foreign currency translation                          |       | 51.5        |          | 72.3       |       |
| Derivatives qualifying as hedges                      |       | (2.1        | )             | 0.6        |       |
| Minimum pension liability                             |       | (84.4       | )             | (83.9      | )          |
| Total shareholders’ investment                   |       | 1,930.7     |          | 1,780.4    |       |
|                                                  |       |        |          |       |       |
|                                                  |       | $           | 3,701.6       |       | $          | 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)**

 
| ** **                                                                                            | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                            | ** ** | **10/2/05  Revised** | ** ** | **9/26/04  Revised** | ** ** |
|                                                                                                  |       |                 |       |   |   |
| Cash flows from operating activities:                                                                 |       |                 |       |   |   |
| Net income from continuing operations                                                                 |       | $                    | 157.3      |   | $ | 107.7 |   |
| Loss from discontinued operations                                                                     |       | (0.8                 | )          | (237.1 | ) |
| Non-cash items included in income:                                                                    |       |                 |       |   |   |
| Depreciation and amortization                                                                         |       | 49.7                 |       | 47.0 |   |
| Other non-cash adjustments                                                                            |       | 1.3                  |       | — |   |
| Deferred income taxes                                                                                 |       | 14.6                 |       | 14.1 |   |
| Tax benefit from stock option exercises                                                               |       | 10.3                 |       | 2.8 |   |
| Changes in assets and liabilities,  excluding effects of acquisitions and dispositions of businesses: |       |                 |       |   |   |
| Receivables                                                                                           |       | (50.4                | )          | (37.4 | ) |
| Inventories                                                                                           |       | (20.4                | )          | (28.0 | ) |
| Other current assets                                                                                  |       | 8.4                  |       | 26.8 |   |
| Payables, accruals and current taxes                                                                  |       | (45.5                | )          | 3.8 |   |
| Retirement benefit obligations                                                                        |       | (21.4                | )          | (16.6 | ) |
| Other non-current assets and liabilities                                                              |       | 6.4                  |       | (3.2 | ) |
| Net cash provided by operating activities  of discontinued operations                                 |       | 0.6                  |       | 247.3 |   |
| Net cash provided by operating activities                                                             |       | 110.1                |       | 127.2 |   |
|                                                                                                  |       |                 |       |   |   |
| Cash flows from investing activities:                                                                 |       |                 |       |   |   |
| Capital expenditures                                                                                  |       | (40.2                | )          | (25.4 | ) |
| Acquisitions of businesses                                                                            |       | (2.5                 | )          | (1.4 | ) |
| Proceeds from sales of businesses                                                                     |       | 4.9                  |       | — |   |
| Other                                                                                                 |       | 2.7                  |       | 1.2 |   |
| Net cash used by investing activities of  discontinued operations                                     |       | (0.1                 | )          | (2.5 | ) |
| Net cash used by investing activities                                                                 |       | (35.2                | )          | (28.1 | ) |
|                                                                                                  |       |                 |       |   |   |
| Cash flows from financing activities:                                                                 |       |                 |       |   |   |
| Net change in short-term borrowings                                                                   |       | —               |       | (5.0 | ) |
| Repayment of long-term debt                                                                           |       | (25.2                | )          | (15.0 | ) |
| Proceeds from exercise of stock options                                                               |       | 11.4                 |       | 6.7 |   |
| Cash dividends                                                                                        |       | (3.9                 | )          | (3.8 | ) |
| Other                                                                                                 |       | (3.2                 | )          | 0.2 |   |
| Net cash used by financing activities of  discontinued operations                                     |       | —               |       | (3.4 | ) |
| Net cash used by financing activities                                                                 |       | (20.9                | )          | (20.3 | ) |
|                                                                                                  |       |                 |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                                         |       | (5.9                 | )          | 3.1 |   |
|                                                                                                  |       |                 |       |   |   |
| Net increase in cash and cash equivalents                                                             |       | 48.1                 |       | 81.9 |   |
| Cash and cash equivalents at beginning of  period                                                     |       | 153.9                |       | 80.3 |   |
|                                                                                                  |       |                 |       |   |   |
| Cash and cash equivalents at end of period                                                            |       | $                    | 202.0      |   | $ | 162.2 |   |

 

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

 

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**Notes to the Interim ConsolidatedFinancial Statements**

(Unaudited)

(In millions, except shareand per share data)

 

**(1)           Basis of Presentation**

 

The interim consolidatedfinancial statements have been prepared by Precision Castparts Corp. (“PCC” orthe “Company”), without audit and subject to year-end adjustment, in accordancewith generally accepted accounting principles, except that certain informationand footnote disclosures made in the latest annual report have been condensedor omitted for the interim statements. Certain costs are estimated for the full year and allocated in interimperiods based on estimates of operating time expired, benefit received, oractivity associated with the interim period. The consolidated financial statements reflect all adjustments, whichare, in the opinion of management, necessary for a fair representation of theresults for the interim periods.  Alladjustments are of a normal recurring nature. Certain reclassifications have been made to prior year amounts toconform to the current year presentation.

 

**(2)           Special Investigation**

 

In September and October 2005, the Companyreceived three related reports with respect to concerns about employeemisconduct and the proper application of generally accepted accountingprinciples (“GAAP”) to certain transactions at the Wyman-Gordon Forgings’Houston plant, a business unit reported in the Forged Products segment.  The matters identified in the reports werereferred to the Audit Committee of the Board of Directors (“Audit Committee”).  The Audit Committee, after due consideration,decided to commence an 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 Committeecompleted its independent investigation and determined that the Companyaccounted for certain transactions incorrectly at both identified locations, asdescribed below:

 

The investigation at Wyman-Gordon ForgingsHouston identified errors in the Company’s fiscal 2001 through fiscal 2006financial statements.  These errors,which totaled $1.8 million, represented a net overstatement of expenses throughthe second quarter of fiscal 2006.  The errorsprimarily related to the failure to properly reconcile accounts and themisapplication of GAAP and Company 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 resultedfrom both deliberate and inadvertent acts involving non-executive employees.

 

The investigation at J&L Fiber Services,Inc. identified errors in the Company’s fiscal 2003 through fiscal 2006financial statements.  These errors,which totaled $5.6 million, represented a net understatement of expensesthrough the second quarter of fiscal 2006. The errors primarily related to the overstatement of inventoriesresulting from the failure to properly record excess and obsolete reserves andinadequate cycle counting procedures, the failure to properly reconcileaccounts, and the misapplication of GAAP and Company accounting policies, whichincluded improper deferral of expenses. The identified errors resulted 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. As a result, the Company recorded a cumulative adjustment in the secondquarter of fiscal 2006.  The net impactof these corrections was a decrease to pre-tax income and net income of 

 

6

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$3.8 million and $1.9 million or $0.01 pershare (diluted), respectively, for the three months ended October 2, 2005.

 

**(3)          Common Stock Split**

 

On August 17, 2005, the Company’s Board ofDirectors declared a two-for-one stock split effected in the form of a 100%stock dividend paid at the close of business on September 8, 2005 toshareholders of record on August 29, 2005. The Board also set September 16, 2005 as the record date for thequarterly dividend, paid on October 3, 2005, in the amount of $0.03 pershare.  The decision to retain thedividend at $0.03 per share on a post-split basis effectively doubled PCC’sdividend payout.  All earnings per shareamounts, references to common stock, and shareholders’ investment amounts havebeen restated as if the stock dividend had occurred as of the earliest periodpresented.

 

**(4)****                                ****Stock-basedcompensation**

 

The Company accounts for stock-based employeecompensation in accordance with the provisions of APB Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations.  No stock-based employee compensation cost isreflected in net income, as all stock options are granted with exercise pricesequal to the market value of the underlying common stock on the grantdates.  The following table illustratesthe effect on net income and earnings per share as if the Company had electedto recognize compensation expense based on the fair value of the stock optionsgranted at the grant dates as prescribed by Statement of Financial AccountingStandards (“SFAS”) Nos. 123 and 148, “Accounting for Stock-Based Compensation.”

 
| ** **                                                                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                | ** ** | **10/2/05**            | ** ** | **9/26/04**          | ** ** | **10/2/05** | ** ** | **9/26/04** | ** ** |
|                                                                                                      |       |                   |       |                 |       |   |   |   |   |
| Net income (loss) as reported                                                                             |       | $                      | 79.1       |                 | $          | (183.0 | ) | $ | 156.5 |   | $ | (129.4 | ) |
| Deduct: Stock-based compensation, net of  tax, as determined under fair value based method for all awards |       | (2.7                   | )          | (2.1                 | )          | (5.4 | ) | (4.2 | ) |
|                                                                                                      |       |                   |       |                 |       |   |   |   |   |
| Pro forma net income (loss)                                                                               |       | $                      | 76.4       |                 | $          | (185.1 | ) | $ | 151.1 |   | $ | (133.6 | ) |
|                                                                                                      |       |                   |       |                 |       |   |   |   |   |
| Net income (loss) per share – basic:                                                                 |       |                   |       |                 |       |   |   |   |   |
| Reported                                                                                                  |       | $                      | 0.59       |                 | $          | (1.41 | ) | $ | 1.18 |   | $ | (1.00 | ) |
| Pro forma                                                                                                 |       | $                      | 0.57       |                 | $          | (1.43 | ) | $ | 1.14 |   | $ | (1.03 | ) |
|                                                                                                      |       |                   |       |                 |       |   |   |   |   |
| Net income (loss) per share – diluted:                                                               |       |                   |       |                 |       |   |   |   |   |
| Reported                                                                                                  |       | $                      | 0.58       |                 | $          | (1.38 | ) | $ | 1.16 |   | $ | (0.98 | ) |
| Pro forma                                                                                                 |       | $                      | 0.56       |                 | $          | (1.40 | ) | $ | 1.12 |   | $ | (1.01 | ) |

 

7

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**(5)****                             ****Acquisition**

 

OnMarch 8, 2005, PCC acquired 100 percent of the outstanding shares of commonstock of Air Industries Corporation (“AIC”), a leading manufacturer of airframefasteners, which include bolts, pins, and screws made from titanium andnickel-based alloys.  The results of AIC’soperations have been included within the Fastener Products segment in theconsolidated financial statements since that date.  The acquisition of AIC is expected to expandPCC’s manufacturing capabilities and the range of fastener product families theCompany can offer to its customers.  Theacquisition was funded with $193.3 million of cash on hand, which is subject tofinal adjustment.  Goodwill relating tothis transaction of $152.7 million is assigned to the Fastener Products segmentand is deductible for tax purposes.  Theimpact of this acquisition was not material to the Company’s results ofoperations; consequently, pro forma information is not presented.

 

Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed at the date of acquisition. PCC was in the process of finalizing the allocation of the purchaseprice as of October 2, 2005; thus, the allocation shown below is preliminaryand subject to further refinement.

 
| ** **                                      | ** ** | **3/08/05** | ** ** |
|-------------------------------------------------|------------|-------------|------------|
|                                            |       |        |       |
| Current assets                                  |       | $           | 30.3       |   |
| Property, plant and equipment                   |       | 24.8        |       |
| Goodwill                                        |       | 152.7       |       |
| Total assets acquired                           |       | 207.8       |       |
| Accounts payable and other current  liabilities |       | 4.3         |       |
| Other long-term liabilities                     |       | 4.6         |       |
| Total liabilities assumed                       |       | 8.9         |       |
|                                            |       |        |       |
| Net assets acquired                             |       | $           | 198.9      |   |

 

On August 25, 2005, PCC entered into a definitive agreementto acquire Special Metals Corporation (“SMC”), a world leader in the productionof high-performance nickel-based alloys and super alloys.  The majority of SMC’s operations will bereported in the Forged Products segment. PCC will pay approximately $540.0 million in cash, including therepayment of SMC’s outstanding debt in the amount of approximately $237.9million and the purchase of approximately 10.5 million shares valued at $28.75per share.  PCC will finance the acquisitionwith cash on hand and its existing credit facilities which, subsequent to theOctober 2005 amendment discussed in Note 15, have undrawn capacity ofapproximately $1.0 billion.  Thetransaction is subject to regulatory approvals and other customary conditions,including Hart-Scott-Rodino, and is anticipated to close in March or April2006.

 

**(6)****                             ****Discontinued Operations**

 

Inthe second quarter of fiscal 2005, the Company decided to sell all of the pumpsand valves businesses of PCC Flow Technologies, with the exception ofE/One.  The businesses held for sale werereclassified from the Fluid Management Products segment to discontinuedoperations.  The E/One business wasretained and is now included in the Industrial Products segment.  With the exception of PCC Eurovalves, thesale of the pumps and valves businesses of PCC Flow Technologies was completedin the third quarter of fiscal 2005.  PCCEurovalves, which is located in The Netherlands, was sold in the third quarterof fiscal 2006.  PCC’s decision to sellthe pumps and valves businesses in the second quarter of fiscal 2005 resultedin a charge of $245.0 million, of which $219.1 million was associated with thewrite-down of goodwill.  The remainderrelated to the write-down of inventory, other amortizable assets and machineryand equipment to fair value less cost to sell. Approximately $240.0 million of the charge was non-cash.  Subsequent to the second quarter of fiscal 2005,the Company recorded additional write-downs related to the disposition of thepumps and valves businesses, bringing the total net loss on disposal to $248.9million through October 2, 2005.

 

Inthe third quarter of fiscal 2004, three businesses acquired in the SPStransaction – Magnetics, Mohawk, and Dacar – were classified as held for saleand their results were included in discontinued operations.  They were classified as discontinuedoperations because they were deemed to be non-core to the Company.  Dacar was 

 

8

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soldin the third quarter of fiscal 2005, Magnetics was sold in the fourth quarterof fiscal 2005, and Mohawk was sold in the first quarter of fiscal 2006.

 

Thesebusinesses meet the criteria as a component of an entity under SFASNo. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”Accordingly, any operating results of these businesses are presented in theCompany’s Consolidated Statements of Operations as discontinued operations, netof income tax, and all prior periods have been reclassified. The components ofdiscontinued operations for the periods presented are as follows:

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                   | ** ** | **10/2/05**            | ** ** | **9/26/04**          | ** ** | **10/2/05** | ** ** | **9/26/04** | ** ** |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| Net sales                                                    |       | $                      | 10.4       |                 | $          | 98.6 |   | $ | 23.7 |   | $ | 198.1 |   |
| Cost of goods sold                                           |       | 8.8                    |       | 75.5                 |       | 19.5 |   | 152.8 |   |
| Selling and administrative expenses                          |       | 1.3                    |       | 15.3                 |       | 3.4 |   | 31.9 |   |
| Interest expense                                             |       | —                 |       | 0.1                  |       | — |   | 0.2 |   |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| Net income from discontinued operations before  income taxes |       | 0.3                    |       | 7.7                  |       | 0.8 |   | 13.2 |   |
| Income tax expense                                           |       | 0.2                    |       | 2.8                  |       | 0.4 |   | 4.8 |   |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| Net income from discontinued operations                      |       | 0.1                    |       | 4.9                  |       | 0.4 |   | 8.4 |   |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| Net loss on disposal                                         |       | (0.6                   | )          | (245.1               | )          | (1.2 | ) | (245.5 | ) |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| Net loss from discontinued operations                        |       | $                      | (0.5       | )                    | $          | (240.2 | ) | $ | (0.8 | ) | $ | (237.1 | ) |

 

Thefollowing major classes of assets and liabilities are included in discontinuedoperations in the Consolidated Balance Sheets after adjustment for write-downsto fair value less cost to sell:

 
| ** **                             | ** ** | **10/2/05** | ** ** | **4/3/05** | ** ** |
|----------------------------------------|------------|-------------|------------|------------|------------|
| Assets of discontinued operations      |       |        |       |       |       |
| Current assets                         |       | $           | 31.3       |       | $          | 37.9 |   |
| Net property, plant and equipment      |       | 10.0        |       | 12.9       |       |
| Other assets                           |       | 5.3         |       | 5.2        |       |
|                                   |       |        |       |       |       |
|                                   |       | $           | 46.6       |       | $          | 56.0 |   |
|                                   |       |        |       |       |       |
| Liabilities of discontinued operations |       |        |       |       |       |
| Other current liabilities              |       | $           | 11.5       |       | $          | 13.3 |   |
| Other liabilities                      |       | 3.7         |       | 5.0        |       |
|                                   |       |        |       |       |       |
|                                   |       | $           | 15.2       |       | $          | 18.3 |   |

 

9

----

 

**(7)           Inventories**

 

Inventories consisted ofthe following:

 
| ** **                 | ** ** | **10/2/05** | ** ** | **4/3/05** | ** ** |
|----------------------------|------------|-------------|------------|------------|------------|
|                       |       |        |       |       |       |
| Finished goods             |       | $           | 141.5      |       | $          | 149.0 |   |
| Work-in-process            |       | 249.2       |       | 243.7      |       |
| Raw materials and supplies |       | 132.1       |       | 116.4      |       |
|                       |       | 522.8       |       | 509.1      |       |
| LIFO provision             |       | 20.0        |       | 22.2       |       |
|                       |       |        |       |       |       |
| Total inventory            |       | $           | 542.8      |       | $          | 531.3 |   |

 

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

 

EffectiveApril 1, 2002, the Company adopted Statement of Financial Accounting Standards(“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” under which goodwillis no longer amortized but is tested for impairment using a fair value method.

 

TheCompany completed its annual goodwill assessment test during the second quarterof fiscal 2006, and it was determined that the fair value of the relatedoperations was greater than book value and that there was no impairment ofgoodwill.

 

The changes in thecarrying amount of goodwill by reportable segment for the six months endedOctober 2, 2005, were as follows:

 
| ** **               | ** ** | **Balance at  4/3/05** | ** ** | **Acquired** | ** ** | **Currency  Translation  and Other** | ** ** | **Balance at  10/2/05** | ** ** |
|--------------------------|------------|------------------------|------------|--------------|------------|--------------------------------------|------------|-------------------------|------------|
|                     |       |                   |       |         |       |                                 |       |                    |       |
| Investment Cast Products |       | $                      | 299.5      |         | $          | —                               |       | $                       | (1.1       | ) | $ | 298.4 |   |
| Forged Products          |       | 519.0                  |       | —       |       | (7.6                                 | )          | 511.4                   |       |
| Fastener Products        |       | 586.2                  |       | 10.3         |       | —                               |       | 596.5                   |       |
| Industrial Products      |       | 171.4                  |       | —       |       | 0.2                                  |       | 171.6                   |       |
|                     |       |                   |       |         |       |                                 |       |                    |       |
| Total                    |       | $                      | 1,576.1    |         | $          | 10.3                                 |       | $                       | (8.5       | ) | $ | 1,577.9 |   |
|                          |            |                        |            |              |            |                                      |            |                         |            |  |  |  |  |  |

 

10

----

 

Thegross carrying amount and accumulated amortization of the Company’s acquiredintangible assets were as follows:

 
| ** **                     | ** ** | **10/2/05**                 | ** ** | **4/3/05**                    | ** ** |
|--------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|                           |       |                        |       |                          |       |   |   |   |   |
| Patents                        |       | $                           | 3.0        |                          | $          | 1.0 |   | $ | 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                         |       | 0.1                           |       | 0.2 |   | 0.1 |   |
|                           |       |                        |       |                          |       |   |   |   |   |
|                           |       | $                           | 6.4        |                          | $          | 1.5 |   | $ | 6.4 |   | $ | 1.2 |   |

 

Amortizationexpense for acquired intangible assets for the three and six months endedOctober 2, 2005 was $0.1 million and $0.3 million, respectively.  Amortization expense related to finite-livedintangible assets is projected to total $0.7 million for fiscal 2006.  Projected amortization expense for thesucceeding five fiscal years is as follows:

 
| **Fiscal Year** | ** ** | **Estimated  Amortization  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 warranty accrual as of October 2, 2005and April 3, 2005 is immaterial to the financial position of the Company, andthe change in the accrual for the current quarter is immaterial to the Company’sresults of operations and cash flows.

 

In conjunction withcertain transactions, primarily divestitures, the Company may provide routineindemnifications (e.g., retention of previously existing environmental and taxliabilities) with terms that range in duration and often are not explicitlydefined.  Where appropriate, anobligation for such indemnifications is recorded as a liability.  Because the obligated amounts of these typesof indemnifications often are not explicitly stated, the overall maximum amountof the obligation under such indemnifications cannot be reasonablyestimated.  Other than in relation toobligations recorded as liabilities at the time of divestiture, the Company hasnot historically made significant payments for these indemnifications.

 

11

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**(10)         Earnings per share**

 

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

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                    | ** ** | **10/2/05**            | ** ** | **9/26/04**          | ** ** | **10/2/05** | ** ** | **9/26/04** | ** ** |
|                                          |       |                   |       |                 |       |   |   |   |   |
| Basic weighted average shares outstanding     |       | 133.0                  |       | 129.8                |       | 132.7 |   | 129.6 |   |
| Dilutive stock options                        |       | 2.5                    |       | 2.6                  |       | 2.5 |   | 2.4 |   |
| Average shares outstanding assuming  dilution |       | 135.5                  |       | 132.4                |       | 135.2 |   | 132.0 |   |

 

Basicearnings per share are calculated based on the weighted average number ofshares outstanding.  Diluted earnings pershare are computed based on that same number of shares plus additional dilutiveshares representing stock distributable under stock option and employee stockpurchase plans computed using the treasury stock method.

 

Forthe three and six months ended September 26, 2004, stock options to purchase0.2 million shares and 0.9 million shares of common stock, respectively, wereexcluded from the computation of diluted earnings per share because to do sowould have been antidilutive.  Theseoptions could be dilutive in the future.

 

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

 

Comprehensiveincome (loss) consisted of the following:

 
| ** **                                                                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                       | ** ** | **10/2/05**            | ** ** | **9/26/04**          | ** ** | **10/2/05** | ** ** | **9/26/04** | ** ** |
|                                                                                                             |       |                   |       |                 |       |   |   |   |   |
| Net income (loss)                                                                                                |       | $                      | 79.1       |                 | $          | (183.0 | ) | $ | 156.5 |   | $ | (129.4 | ) |
| Other comprehensive (loss) income, net of  tax:                                                                  |       |                   |       |                 |       |   |   |   |   |
| Unrealized translation adjustments                                                                               |       | (3.5                   | )          | (0.3                 | )          | (20.8 | ) | (0.6 | ) |
| Minimum pension liability                                                                                        |       | 0.2                    |       | —               |       | (0.5 | ) | — |   |
| Unrealized gain (loss) on derivatives:                                                                           |       |                   |       |                 |       |   |   |   |   |
| Periodic revaluations (net of income tax of  $0.2, $0, $0.9 and $0, respectively)                                |       | 0.4                    |       | —               |       | (2.7 | ) | — |   |
| Reclassification to net income of  previously deferred gains and loss (net of income tax of $0.2, $0, $0 and $0) |       | (0.5                   | )          | (0.1                 | )          | — |   | (0.1 | ) |
| Other comprehensive loss                                                                                         |       | (3.4                   | )          | (0.4                 | )          | (24.0 | ) | (0.7 | ) |
|                                                                                                             |       |                   |       |                 |       |   |   |   |   |
| Total comprehensive income (loss)                                                                                |       | $                      | 75.7       |                 | $          | (183.4 | ) | $ | 132.5 |   | $ | (130.1 | ) |

 

12

----

 

**(12)         Pensionsand Other Postretirement Benefit Plans**

 

The Company and itssubsidiaries sponsor many domestic and foreign defined benefit pensionplans.  In addition, the Company offerspostretirement medical benefits for certain eligible employees. These plans aremore fully described in the “Notes to the Consolidated Financial Statements”included in the Company’s Annual Report on Form 10-K for the year ended April3, 2005.

 

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

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **10/2/05**            | ** ** | **9/26/04**          | ** ** | **10/2/05** | ** ** | **9/26/04** | ** ** |
|                               |       |                   |       |                 |       |   |   |   |   |
| Service cost                       |       | $                      | 7.1        |                 | $          | 6.3 |   | $ | 15.3 |   | $ | 14.0 |   |
| Interest cost                      |       | 14.8                   |       | 13.0                 |       | 31.1 |   | 27.8 |   |
| Expected return on plan assets     |       | (16.2                  | )          | (12.8                | )          | (34.2 | ) | (27.4 | ) |
| Recognized net actuarial loss      |       | 3.1                    |       | 2.5                  |       | 6.5 |   | 5.2 |   |
| Amortization of prior service cost |       | 0.6                    |       | 0.3                  |       | 1.3 |   | 0.7 |   |
|                               |       |                   |       |                 |       |   |   |   |   |
| Net periodic benefit cost          |       | $                      | 9.4        |                 | $          | 9.3 |   | $ | 20.0 |   | $ | 20.3 |   |

 

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

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **10/2/05**            | ** ** | **9/26/04**          | ** ** | **10/2/05** | ** ** | **9/26/04** | ** ** |
|                               |       |                   |       |                 |       |   |   |   |   |
| Service cost                       |       | $                      | 0.1        |                 | $          | 0.1 |   | $ | 0.2 |   | $ | 0.2 |   |
| Interest cost                      |       | 1.2                    |       | 0.9                  |       | 2.2 |   | 2.1 |   |
| Recognized net actuarial loss      |       | 0.5                    |       | —               |       | 0.8 |   | — |   |
| Amortization of prior service cost |       | (0.1                   | )          | —               |       | (0.2 | ) | — |   |
|                               |       |                   |       |                 |       |   |   |   |   |
| Net periodic benefit cost          |       | $                      | 1.7        |                 | $          | 1.0 |   | $ | 3.0 |   | $ | 2.3 |   |

 

The Company made contributions to the defined benefit pension plans of$19.4 million and $42.4 million for the three and six months ended October 2,2005, respectively.  Of these totalcontributions, $16.7 million and $33.1 million were voluntary contributions forthe three and six months ended October 2, 2005, respectively.  Projected contributions are expected to totalapproximately $82.0 million for fiscal year 2006, of which $67.0 million willbe voluntary.

 

**(13)         New Accounting Pronouncements**

 

In December 2004, the FASBfinalized SFAS No. 123 (revised 2004) (“123R”), “Share Based Payment.”  SFAS No. 123R requires that the compensationcost relating to share-based payment transactions be recognized in financialstatements, with the cost measured based on the estimated fair value of theequity or liability instruments issued. The Company has decided to use the prospective method of applicationprovided for in the standard.  Under thismethod, the Company will begin recognizing compensation cost for equity basedcompensation for all new or modified grants after the date of adoption. Inaddition, the Company will recognize the unvested portion of the grant datefair value of awards issued prior to adoption based on the fair valuespreviously calculated for disclosure purposes.  The effective date of SFAS No. 123R is thefirst quarter of the first fiscal year beginning after June 15, 2005, whichwill be PCC’s first quarter of fiscal 2007.

 

In November 2005, the FASBissued FSP No. 123(R)-3, “Transition Election Related to Accounting for the TaxEffects of Share-Based Payment Awards.” This pronouncement provides an alternative method of calculating theexcess tax benefits available to absorb any tax deficiencies recognizedsubsequent to the adoption of SFAS No. 123(R). The Company, which is currently evaluating its available transitionalternatives, has until November 2006 to make its one-time election.

 

In May 2005, the FASB issuedSFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APBOpinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospectiveapplication to prior periods’ financial statements of a voluntary change inaccounting principle unless it is impracticable.  APB Opinion No. 20 “Accounting Changes,”previously required that most voluntary changes in accounting principle berecognized by including in net income of the period of the change thecumulative effect of changing to the new accounting principle. SFAS No. 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005; however, earlier adoption is permitted foraccounting changes and corrections of errors made in fiscal years beginningafter the date of issuance of SFAS No. 154.

 

**(14)         SegmentInformation**

 

The Company’s operationsare classified into four reportable business segments: Investment CastProducts, Forged Products, Fastener Products and Industrial Products.  The Company’s four reportable businesssegments are identified separately based on fundamental differences in theiroperations.

 

13

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| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **10/2/05**            | ** ** | **9/26/04** | ** ** |
| Net sales:                                        |       |                   |       |   |   |
| Investment Cast Products                          |       | $                      | 402.3      |   | $ | 326.3 |   |
| Forged Products                                   |       | 213.9                  |       | 147.3 |   |
| Fastener Products                                 |       | 200.6                  |       | 165.1 |   |
| Industrial Products                               |       | 58.0                   |       | 58.8 |   |
| Total net sales                                   |       | $                      | 874.8      |   | $ | 697.5 |   |
|                                              |       |                   |       |   |   |
| Operating income (loss):                          |       |                   |       |   |   |
| Investment Cast Products                          |       | $                      | 78.9       |   | $ | 61.0 |   |
| Forged Products                                   |       | 27.2                   |       | 18.7 |   |
| Fastener Products                                 |       | 32.3                   |       | 21.4 |   |
| Industrial Products                               |       | 4.7                    |       | 10.7 |   |
| Corporate expense                                 |       | (14.4                  | )          | (11.0 | ) |
| Total operating income                            |       | 128.7                  |       | 100.8 |   |
|                                              |       |                   |       |   |   |
| Interest expense, net                             |       | 10.6                   |       | 14.8 |   |
|                                              |       |                   |       |   |   |
| Income before income taxes and minority  interest |       | $                      | 118.1      |   | $ | 86.0 |   |

 
| ** **                                        | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|
| ** **                                        | ** ** | **10/2/05**          | ** ** | **9/26/04** | ** ** |
| Net sales:                                        |       |                 |       |   |   |
| Investment Cast Products                          |       | $                    | 789.6      |   | $ | 629.7 |   |
| Forged Products                                   |       | 417.9                |       | 292.4 |   |
| Fastener Products                                 |       | 403.2                |       | 329.2 |   |
| Industrial Products                               |       | 118.7                |       | 114.3 |   |
| Total net sales                                   |       | $                    | 1,729.4    |   | $ | 1,365.6 |   |
|                                              |       |                 |       |   |   |
| Operating income (loss):                          |       |                 |       |   |   |
| Investment Cast Products                          |       | $                    | 153.5      |   | $ | 116.0 |   |
| Forged Products                                   |       | 50.0                 |       | 37.1 |   |
| Fastener Products                                 |       | 63.4                 |       | 38.0 |   |
| Industrial Products                               |       | 16.4                 |       | 20.0 |   |
| Corporate expense                                 |       | (26.1                | )          | (19.8 | ) |
|                                              |       |                 |       |   |   |
| Total operating income                            |       | 257.2                |       | 191.3 |   |
|                                              |       |                 |       |   |   |
| Interest expense, net                             |       | 21.2                 |       | 29.4 |   |
|                                              |       |                 |       |   |   |
| Income before income taxes and minority  interest |       | $                    | 236.0      |   | $ | 161.9 |   |

 

**(15)  Changein Presentation of Cash Flows**

 

Infiscal 2006, the Company has separately disclosed the operating, investing andfinancing portions of the cash flows attributable to its discontinuedoperations, which in prior periods were reported on a combined basis as asingle amount.

 

**(16) Subsequent Events**

 

On October 13, 2005, PCC enteredinto definitive agreements to acquire Shur-Lok Group for $109.2 million, whichincludes the Shur-Lok Corporation of Irvine, California, and Shur-LokInternational of Petit-Rechain, Belgium. On January 6, 2006, Precision Castparts Corp. completed theacquisition.  Shur-Lok is a leadingmanufacturer of highly engineered, critical aerospace fasteners, includinginserts, barrel nuts, adjustable diameter bolts, fluid fittings, and locknuts.  The transaction was funded withborrowings under existing lines of credit and cash on hand.  The financial results of Shur-Lok will bereported in PCC’s Fastener Products segment.

 

14

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On October 14,2005, the Company entered into an amended and restated bank credit facilitywith Bank of America, N.A., as administrative agent, lender, swing line lenderand letter of credit issuer, and the other lenders from time to time partythereto.  The amended facility consistsof a five-year, $1.0 billion revolving loan (with a $250 million increaseoption) maturing in October 2010 and includes a swing line facility and a letterof credit facility.  The facility priorto amendment consisted of a $300.0 million term loan and a $400.0 millionrevolving loan which matured in December 2008. At October 2, 2005, the term loan had outstanding borrowings of $288.8million and there were no outstanding borrowings under the revolving loan.  On the effective date of the amended facilitythe outstanding principal balance of the term loan was converted to a revolvingloan under the amended facility. Borrowings under the amended facility bear interest at either LIBOR plusapplicable spreads, which range from 0.30% to 1.00% depending on credit ratingsreceived from Moody’s and S&P, or the Base Rate (as defined in the amendedfacility) at the Company’s option.  Theamended facility also has a facility fee, which ranges from 0.10% to 0.325% ofthe aggregate commitments under the facility depending on the Company’s creditratings, and a utilization fee of 0.125% on all outstanding loans if theaggregate outstanding loans equal or exceed 50% of the aggregate commitmentsunder the facility.  The amended facilitycontains various standard representations and warranties, events of default andfinancial and other covenants which are substantially the same, but no lessfavorable to the Company, as the events of default and covenants contained inthe Company’s previous facility, including maintenance of minimum net worth,interest coverage ratio and leverage ratio. The amended facility is guaranteed by the Company’s material domesticsubsidiaries.  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 andJanuary 31, 2006.

 

During the third quarterof fiscal 2006, PCC recorded restructuring and asset impairment charges of $2.3million, which included $1.7 million to write down a building and equipment tofair value related to consolidation of a machining operation in the InvestmentCast Products segment and $0.6 million for severance costs associated withheadcount reductions related to downsizing the Company’s tooling operation inIreland.

 

15

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**(17)         CondensedConsolidating 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 due2007.  The following condensedconsolidating financial statements present, in separate columns, financialinformation for (i) Precision Castparts Corp. (on a parent only basis) with itsinvestment in its subsidiaries recorded under the equity method, (ii) guarantorsubsidiaries that guarantee the Company’s public and private notes and bankcredit facilities, on a combined basis, with any investments in non-guarantorsubsidiaries recorded under the equity method, (iii) direct and indirectnon-guarantor subsidiaries on a combined basis, (iv) the eliminations necessaryto arrive at the information for the Company and its subsidiaries on aconsolidated basis, and (v) the Company on a consolidated basis, in each caseas of October 2, 2005 and April 3, 2005 and for the three and six months endedOctober 2, 2005 and September 26, 2004.  The Notes are fully andunconditionally guaranteed on a joint and several basis by each guarantorsubsidiary.  The guarantor subsidiaries include the Company’s domesticsubsidiaries within the Investment Cast Products, Forged Products, FastenerProducts and Industrial Products segments that are 100% owned, directly orindirectly, by the Company within the meaning of Rule 3-10(h)(1) ofRegulation S-X.  There are no contractual restrictions limiting transfersof cash from guarantor and non- guarantor subsidiaries to the Company. The condensed consolidating financial statements are presented herein, ratherthan separate financial statements for each of the guarantor subsidiaries,because guarantors are wholly-owned and the guarantees are full andunconditional, joint and several.

 

16

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CondensedConsolidating Statements of Income

ThreeMonths Ended October 2, 2005

(Unaudited)

 
| ** **                                             | ** ** | **Precision  Castparts  Corp.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|-----------|------------|
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net sales                                              |       | $                               | —     |                        | $          | 701.9                             |       | $                | 189.4      |      | $          | (16.5 | ) | $ | 874.8 |   |
| Cost of goods sold                                     |       | —                          |       | 542.7                       |       | 154.4                             |       | (16.5            | )          | 680.6     |       |
| Selling and administrative expenses                    |       | 14.0                            |       | 38.5                        |       | 13.0                              |       | —           |       | 65.5      |       |
| Other (income) expense                                 |       | (0.3                            | )          | —                      |       | 0.3                               |       | —           |       | —    |       |
| Interest expense (income), net                         |       | (1.9                            | )          | 17.3                        |       | (4.8                              | )          | —           |       | 10.6      |       |
| Equity in earnings of subsidiaries                |       | 85.0                            |       | (1.9                        | )          | —                            |       | (83.1            | )          | —    |       |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Income (loss) before income tax and minority  interest |       | 73.2                            |       | 101.5                       |       | 26.5                              |       | (83.1            | )          | 118.1     |       |
| Income tax (benefit) expense                           |       | (5.9                            | )          | 39.5                        |       | 4.5                               |       | —           |       | 38.1      |       |
| Minority interest                                      |       | —                          |       | —                      |       | (0.4                              | )          | —           |       | (0.4      | )          |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net income (loss) from continuing  operations          |       | 79.1                            |       | 62.0                        |       | 21.6                              |       | (83.1            | )          | 79.6      |       |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net loss from discontinued operations                  |       | —                          |       | —                      |       | (0.5                              | )          | —           |       | (0.5      | )          |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net income (loss)                                      |       | $                               | 79.1       |                        | $          | 62.0                              |       | $                | 21.1       |      | $          | (83.1 | ) | $ | 79.1 |   |

 

17

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CondensedConsolidating Statements of Income

ThreeMonths Ended September 26, 2004

(Unaudited)

 
| ** **                                             | ** ** | **Precision  Castparts  Corp.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|-----------|------------|
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net sales                                              |       | $                               | —     |                        | $          | 554.6                             |       | $                | 155.8      |      | $          | (12.9 | ) | $ | 697.5 |   |
| Cost of goods sold                                     |       | —                          |       | 423.6                       |       | 126.6                             |       | (12.9            | )          | 537.3     |       |
| Selling and administrative expenses                    |       | 10.9                            |       | 35.1                        |       | 13.4                              |       | —           |       | 59.4      |       |
| Other (income) expense                                 |       | (2.5                            | )          | —                      |       | 2.5                               |       | —           |       | —    |       |
| Interest expense (income), net                         |       | 6.6                             |       | 10.3                        |       | (2.1                              | )          | —           |       | 14.8      |       |
| Equity in earnings of subsidiaries                |       | (171.6                          | )          | (4.3                        | )          | —                            |       | 175.9            |       | —    |       |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| (Loss) income before income tax and minority  interest |       | (186.6                          | )          | 81.3                        |       | 15.4                              |       | 175.9            |       | 86.0      |       |
| Income tax (benefit) expense                           |       | (3.6                            | )          | 30.1                        |       | 2.0                               |       | —           |       | 28.5      |       |
| Minority interest                                      |       | —                          |       | —                      |       | (0.3                              | )          | —           |       | (0.3      | )          |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net (loss) income from continuing  operations          |       | (183.0                          | )          | 51.2                        |       | 13.1                              |       | 175.9            |       | 57.2      |       |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net loss from discontinued operations                  |       | —                          |       | (0.1                        | )          | (240.1                            | )          | —           |       | (240.2    | )          |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net (loss) income                                      |       | $                               | (183.0     | )                           | $          | 51.1                              |       | $                | (227.0     | )         | $          | 175.9 |   | $ | (183.0 | ) |

 

18

----

 

CondensedConsolidating Statements of Income

SixMonths Ended October 2, 2005

(Unaudited)

 
| ** **                                             | ** ** | **Precision  Castparts  Corp.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|-----------|------------|
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net sales                                              |       | $                               | —     |                        | $          | 1,383.9                           |       | $                | 382.9      |      | $          | (37.4 | )  | $ | 1,729.4 |   |
| Cost of goods sold                                     |       | —                          |       | 1,067.5                     |       | 312.8                             |       | (37.4            | )          | 1,342.9   |       |
| Selling and administrative expenses                    |       | 25.7                            |       | 76.4                        |       | 27.2                              |       | —           |       | 129.3     |       |
| Other (income) expense                                 |       | (0.9                            | )          | —                      |       | 0.9                               |       | —           |       | —    |       |
| Interest expense (income), net                         |       | (3.6                            | )          | 34.4                        |       | (9.6                              | )          | —           |       | 21.2      |       |
| Equity in earnings of subsidiaries                     |       | 171.2                           |       | (4.4                        | )          | —                            |       | (166.8           | )          | —    |       |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Income (loss) before income tax and minority  interest |       | 150.0                           |       | 201.2                       |       | 51.6                              |       | (166.8           | )          | 236.0     |       |
| Income tax (benefit) expense                           |       | (6.5                            | )          | 69.8                        |       | 14.7                              |       | —           |       | 78.0      |       |
| Minority interest                                      |       | —                          |       | —                      |       | (0.7                              | )          | —           |       | (0.7      | )          |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net income (loss) from continuing  operations          |       | 156.5                           |       | 131.4                       |       | 36.2                              |       | (166.8           | )          | 157.3     |       |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net loss from discontinued operations                  |       | —                          |       | —                      |       | (0.8                              | )          | —           |       | (0.8      | )          |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net income (loss)                                      |       | $                               | 156.5      |                        | $          | 131.4                             |       | $                | 35.4       |      | $          | (166.8 | ) | $ | 156.5 |   |

 

19

----

 

CondensedConsolidating Statements of Income

SixMonths Ended September 26, 2004

(Unaudited)

 
| ** **                                             | ** ** | **Precision  Castparts  Corp.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|-----------|------------|
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net sales                                              |       | $                               | —     |                        | $          | 1,084.3                           |       | $                | 308.6      |      | $          | (27.3 | ) | $ | 1,365.6 |   |
| Cost of goods sold                                     |       | —                          |       | 832.9                       |       | 250.7                             |       | (27.3            | )          | 1,056.3   |       |
| Selling and administrative expenses                    |       | 19.8                            |       | 71.5                        |       | 26.7                              |       | —           |       | 118.0     |       |
| Other (income) expense                                 |       | (5.3                            | )          | —                      |       | 5.3                               |       | —           |       | —    |       |
| Interest expense (income), net                         |       | 13.3                            |       | 20.0                        |       | (3.9                              | )          | —           |       | 29.4      |       |
| Equity in earnings of subsidiaries                     |       | (113.9                          | )          | (6.4                        | )          | —                            |       | 120.3            |       | —    |       |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| (Loss) income before income tax and minority  interest |       | (141.7                          | )          | 153.5                       |       | 29.8                              |       | 120.3            |       | 161.9     |       |
| Income tax (benefit) expense                           |       | (12.3                           | )          | 59.4                        |       | 6.3                               |       | —           |       | 53.4      |       |
| Minority interest                                      |       | —                          |       | —                      |       | (0.8                              | )          | —           |       | (0.8      | )          |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net (loss) income from continuing operations           |       | (129.4                          | )          | 94.1                        |       | 22.7                              |       | 120.3            |       | 107.7     |       |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net loss from discontinued operations                  |       | —                          |       | (0.1                        | )          | (237.0                            | )          | —           |       | (237.1    | )          |
|                                                   |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net (loss) income                                      |       | $                               | (129.4     | )                           | $          | 94.0                              |       | $                | (214.3     | )         | $          | 120.3 |   | $ | (129.4 | ) |

 

20

----

 

CondensedConsolidating Balance Sheets

October2, 2005

(Unaudited)

 
| ** **                                           | ** ** | **Precision  Castparts  Corp.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|-----------|------------|
| **Assets**                                           |       |                            |       |                        |       |                              |       |             |       |      |       |
| Current  assets:                                     |       |                            |       |                        |       |                              |       |             |       |      |       |
| Cash and cash equivalents                            |       | $                               | 118.5      |                        | $          | —                            |       | $                | 83.5       |      | $          | — |   | $ | 202.0 |   |
| Receivables                                          |       | 0.6                             |       | 420.2                       |       | 343.8                             |       | (305.6           | )          | 459.0     |       |
| Inventories                                          |       | —                          |       | 397.7                       |       | 145.1                             |       | —           |       | 542.8     |       |
| Prepaid expenses                                     |       | 2.8                             |       | 6.7                         |       | 8.8                               |       | —           |       | 18.3      |       |
| Income tax receivable                                |       | —                          |       | —                      |       | —                            |       | —           |       | —    |       |
| Deferred income taxes                                |       | —                          |       | 42.6                        |       | 12.1                              |       | (0.4             | )          | 54.3      |       |
| Discontinued operations                              |       | —                          |       | 13.9                        |       | 51.9                              |       | (34.5            | )          | 31.3      |       |
|                                                 |       |                            |       |                        |       |                              |       |             |       |      |       |
| Total current assets                                 |       | 121.9                           |       | 881.1                       |       | 645.2                             |       | (340.5           | )          | 1,307.7   |       |
|                                                 |       |                            |       |                        |       |                              |       |             |       |      |       |
| Property,  plant and equipment, net                  |       | 2.3                             |       | 461.6                       |       | 215.1                             |       | —           |       | 679.0     |       |
| Goodwill,  net                                       |       | —                          |       | 1,159.4                     |       | 418.5                             |       | —           |       | 1,577.9   |       |
| Deferred  income taxes                               |       | 15.8                            |       | —                      |       | 14.4                              |       | (27.3            | )          | 2.9       |       |
| Investments  in subsidiaries                         |       | 2,769.8                         |       | 283.7                       |       | —                            |       | (3,053.5         | )          | —    |       |
| Other assets                                         |       | 90.7                            |       | 17.8                        |       | 9.6                               |       | 0.7              |       | 118.8     |       |
| Discontinued  operations                             |       | —                          |       | —                      |       | 15.3                              |       | —           |       | 15.3      |       |
|                                                 |       |                            |       |                        |       |                              |       |             |       |      |       |
|                                                 |       | $                               | 3,000.5    |                        | $          | 2,803.6                           |       | $                | 1,318.1    |      | $          | (3,420.6 | ) | $ |  3,701.6 |   |
| **Liabilities and Shareholders Investment**          |       |                            |       |                        |       |                              |       |             |       |      |       |
| Current liabilities:                                 |       |                            |       |                        |       |                              |       |             |       |      |       |
| Short-term borrowings                                |       | $                               | —     |                        | $          | —                            |       | $                | 6.0        |      | $          | — |   | $ | 6.0 |   |
| Long-term debt currently due                         |       | 35.1                            |       | 0.9                         |       | 2.4                               |       | —           |       | 38.4      |       |
| Accounts payable                                     |       | 162.3                           |       | 352.7                       |       | 149.2                             |       | (340.1           | )          | 324.1     |       |
| Accrued liabilities                                  |       | 26.7                            |       | 234.5                       |       | 59.7                              |       | (1.1             | )          | 319.8     |       |
| Income taxes payable                                 |       | 22.0                            |       | —                      |       | 18.5                              |       | —           |       | 40.5      |       |
| Deferred income taxes                                |       | 0.4                             |       | —                      |       | —                            |       | (0.4             | )          | —    |       |
| Discontinued operations                              |       | —                          |       | 1.9                         |       | 9.6                               |       | —           |       | 11.5      |       |
|                                                 |       |                            |       |                        |       |                              |       |             |       |      |       |
| Total current liabilities                            |       | 246.5                           |       | 590.0                       |       | 245.4                             |       | (341.6           | )          | 740.3     |       |
|                                                 |       |                            |       |                        |       |                              |       |             |       |      |       |
| Long-term debt                                       |       | 757.4                           |       | 9.4                         |       | 6.6                               |       | —           |       | 773.4     |       |
| Pension and other postretirement benefit obligations |       | 65.9                            |       | 68.8                        |       | 56.5                              |       | —           |       | 191.2     |       |
| Deferred tax  liability                              |       | —                          |       | 34.5                        |       | (7.2                              | )          | (27.3            | )          | —    |       |
| Other  long-term liabilities                         |       | —                          |       | 39.3                        |       | 23.0                              |       | —           |       | 62.3      |       |
| Discontinued  operations                             |       | —                          |       | 0.6                         |       | 3.1                               |       | —           |       | 3.7       |       |
|                                                 |       |                            |       |                        |       |                              |       |             |       |      |       |
| Shareholders’  investment:                      |       |                            |       |                        |       |                              |       |             |       |      |       |
| Common stock and paid-in capital                     |       | 861.3                           |       | 1,838.7                     |       | 977.4                             |       | (2,816.1         | )          | 861.3     |       |
| Retained  earnings                                   |       | 1,104.4                         |       | 276.8                       |       | (11.0                             | )          | (265.8           | )          | 1,104.4   |       |
| Accumulated other comprehensive loss                 |       | (35.0                           | )          | (54.5                       | )          | 24.3                              |       | 30.2             |       | (35.0     | )          |
|                                                 |       |                            |       |                        |       |                              |       |             |       |      |       |
| Total shareholders’ investment                  |       | 1,930.7                         |       | 2,061.0                     |       | 990.7                             |       | (3,051.7         | )          | 1,930.7   |       |
|                                                 |       |                            |       |                        |       |                              |       |             |       |      |       |
|                                                 |       | $                               | 3,000.5    |                        | $          | 2,803.6                           |       | $                | 1,318.1    |      | $          | (3,420.6 | ) | $ | 3,701.6 |   |

 

21

----

 

CondensedConsolidating Balance Sheets

April3, 2005

 
| ** **                                           | ** ** | **Precision  Castparts  Corp.** | ** **    | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  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

----

 

CondensedConsolidating Statements of Cash Flows

SixMonths Ended October 2, 2005

(Unaudited)

 
| ** **                                                        | ** ** | **Precision  Castparts  Corp.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|-----------|------------|
| Net cash provided (used) by operating  activities                 |       | $                               | 54.0       |                        | $          | 17.5                              |       | $                | 43.8       |      | $          | (5.2 | ) | $ | 110.1 |   |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Capital  expenditures                                             |       | (0.3                            | )          | (24.5                       | )          | (15.4                             | )          | —           |       | (40.2     | )          |
| Acquisitions  of businesses                                       |       | (2.5                            | )          | —                      |       | —                            |       | —           |       | (2.5      | )          |
| Disposition  of businesses and other                              |       | 5.0                             |       | 1.0                         |       | 1.6                               |       | —           |       | 7.6       |       |
| Net cash used by investing activities of  discontinued operations |       | —                          |       | —                      |       | (0.1                              | )          | —           |       | (0.1      | )          |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net cash provided (used) by investing  activities                 |       | 2.2                             |       | (23.5                       | )          | (13.9                             | )          | —           |       | (35.2     | )          |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Repayment of  long-term debt                                      |       | (23.4                           | )          | (0.8                        | )          | (1.0                              | )          | —           |       | (25.2     | )          |
| Proceeds from exercise of stock options                           |       | 11.4                            |       | —                      |       | —                            |       | —           |       | 11.4      |       |
| Cash  dividends                                                   |       | (3.9                            | )          | —                      |       | (0.5                              | )          | 0.5              |       | (3.9      | )          |
| Other  financing activities, net                                  |       | (6.2                            | )          | 4.3                         |       | (6.0                              | )          | 4.7              |       | (3.2      | )          |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net cash (used) provided by financing  activities                 |       | (22.1                           | )          | 3.5                         |       | (7.5                              | )          | 5.2              |       | (20.9     | )          |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Effect of exchange rate changes on cash and  cash equivalents     |       | —                          |       | —                      |       | (5.9                              | )          | —           |       | (5.9      | )          |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net increase (decrease) in cash and cash  equivalents             |       | 34.1                            |       | (2.5                        | )          | 16.5                              |       | —           |       | 48.1      |       |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Cash and cash equivalents at beginning of  year                   |       | 84.4                            |       | 2.5                         |       | 67.0                              |       | —           |       | 153.9     |       |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Cash and cash equivalents at end of year                          |       | $                               | 118.5      |                        | $          | —                            |       | $                | 83.5       |      | $          | — |   | $ | 202.0 |   |

 

23

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CondensedConsolidating Statements of Cash Flows

SixMonths Ended September 26, 2004

(Unaudited)

 
| ** **                                                        | ** ** | **Precision  Castparts  Corp.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|-----------|------------|
| Net cash provided (used) by operating  activities                 |       | $                               | 61.5       |                        | $          | 36.3                              |       | $                | 41.9       |      | $          | (12.5 | ) | $ | 127.2 |   |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Capital  expenditures                                             |       | (0.5                            | )          | (17.8                       | )          | (7.1                              | )          | —           |       | (25.4     | )          |
| Acquisitions  of businesses                                       |       | —                          |       | —                      |       | (1.4                              | )          | —           |       | (1.4      | )          |
| Investments  in subsidiaries                                      |       | (1.9                            | )          | (17.0                       | )          | 18.9                              |       | —           |       | —    |       |
| Other  investing activities, net                                  |       | —                          |       | (1.7                        | )          | 2.9                               |       | —           |       | 1.2       |       |
| Net cash used by investing activities of  discontinued operations |       | —                          |       | —                      |       | (2.5                              | )          | —           |       | (2.5      | )          |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net cash (used) provided by investing  activities                 |       | (2.4                            | )          | (36.5                       | )          | 10.8                              |       | —           |       | (28.1     | )          |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net change  in short-term borrowings                              |       | —                          |       | —                      |       | (5.0                              | )          | —           |       | (5.0      | )          |
| Repayment of  long-term debt                                      |       | (12.6                           | )          | (0.5                        | )          | (1.9                              | )          | —           |       | (15.0     | )          |
| Proceeds from exercise of stock options                           |       | 6.7                             |       | —                      |       | —                            |       | —           |       | 6.7       |       |
| Cash  dividends                                                   |       | (3.8                            | )          | —                      |       | —                            |       | —           |       | (3.8      | )          |
| Other  financing activities, net                                  |       | 0.2                             |       | 4.1                         |       | (16.6                             | )          | 12.5             |       | 0.2       |       |
| Net cash used by financing activities of  discontinued operations |       | —                          |       | —                      |       | (3.4                              | )          | —           |       | (3.4      | )          |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net cash (used) provided by financing  activities                 |       | (9.5                            | )          | 3.6                         |       | (26.9                             | )          | 12.5             |       | (20.3     | )          |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Effect of exchange rate changes on cash and  cash equivalents     |       | —                          |       | —                      |       | 3.1                               |       | —           |       | 3.1       |       |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Net increase in cash and cash equivalents                         |       | 49.6                            |       | 3.4                         |       | 28.9                              |       | —           |       | 81.9      |       |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Cash and cash equivalents at beginning of  year                   |       | 33.2                            |       | —                      |       | 47.1                              |       | —           |       | 80.3      |       |
|                                                              |       |                            |       |                        |       |                              |       |             |       |      |       |
| Cash and cash equivalents at end of year                          |       | $                               | 82.8       |                        | $          | 3.4                               |       | $                | 76.0       |      | $          | — |   | $ | 162.2 |   |

 

24

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**Item 2.    Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

**Consolidated Results ofOperations - Comparison Between Three Months Ended October 2, 2005 andSeptember 26, 2004**

 
| ** **                                                      | ** **  | **Three Months Ended** | ** **  | **Inc/(Dec)** | ** ** |
|-----------------------------------------------------------------|-------------|------------------------|-------------|---------------|------------|
| ** **                                                      | **10/2/05** | ** **             | **9/26/04** | ** **    | **$**      | ** ** | **%** | ** ** |
|                                                            |        |                   |        |          |       |   |   |   |   |
| Net sales                                                       |        | $                      | 874.8       |          | $          | 697.5 |   | $ | 177.3 |   | 25.4 | % |
| Cost of  goods sold                                             |        | 680.6                  |        | 537.3         |       | 143.3 |   | 26.7 |   |
| Selling and  administrative expenses                            |        | 65.5                   |        | 59.4          |       | 6.1 |   | 10.3 |   |
| Interest  expense, net                                          |        | 10.6                   |        | 14.8          |       | (4.2 | ) | (28.4 | ) |
| Income before income taxes and minority  interest               |        | 118.1                  |        | 86.0          |       | 32.1 |   | 37.3 |   |
| Income tax  expense                                             |        | 38.1                   |        | 28.5          |       | 9.6 |   | 33.7 |   |
| *Effective tax rate*                                            | * *    | *32.3*                 | *%*         | *33.1*        | *%*        |   |   |   |   |
| Minority  interest                                              |        | (0.4                   | )           | (0.3          | )          | (0.1 | ) | (33.3 | ) |
| Net income  from continuing operations                          |        | 79.6                   |        | 57.2          |       | 22.4 |   | 39.2 |   |
| Net loss  from discontinued operations                          |        | (0.5                   | )           | (240.2        | )          | 239.7 |   | 99.8 |   |
| Net income  (loss)                                              |        | $                      | 79.1        |          | $          | (183.0 | ) | $ | 262.1 |   | 143.2 | % |
| Net income per share from continuing  operations – diluted |        | $                      | 0.59        |          | $          | 0.43 |   | $ | 0.16 |   | 37.2 | % |
| Net loss per share from discontinued  operations – diluted |        | (0.01                  | )           | (1.81         | )          | 1.80 |   | 99.4 |   |
| Net income  (loss) per share - diluted                          |        | $                      |  0.58  |          | $          |  (1.38 | ) | $ |  1.96 |   | 142.0 | % |

 

Sales for the secondquarter of fiscal 2006 were $874.8 million, up $177.3 million, or 25.4 percentfrom $697.5 million 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 andthe addition of Air Industries Corp., which was acquired in Q4 of lastyear.  According to JSA Research as ofDecember 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 year2006.  Because of manufacturing leadtimes required to support aircraft deliveries, PCC began realizing theseforecasted increases in the second and third quarters of fiscal 2005.  In addition, continued growth in the seamlesspipe market contributed to increased sales in the Forged Products segment.

 

Net income fromcontinuing operations for the second quarter of fiscal 2006 was $79.6 million,or $0.59 per share (diluted), which included a cumulative charge of $1.9million, net of tax, or $0.01 per share (diluted), related to the correction ofaccounting errors in the Company’s financial statements from fiscal 2001through the second quarter of fiscal 2006. See “Special Investigation” discussion below.  By comparison, net income from continuingoperations for the second quarter of fiscal 2005 was $57.2 million, or $0.43per share (diluted).  Net income (afterdiscontinued operations) for the second quarter of fiscal 2006 was $79.1million, or $0.58 per share (diluted), compared with a net loss of $183.0million, or $1.38 per share (diluted), in the same period last year.  The prior year net loss included a charge of$245.0 million, or $1.85 per share (diluted), related to the sale of theCompany’s pumps and valves businesses.

 

***Interest and Income Tax***

 

Net interest expense forthe second quarter of fiscal 2006 was $10.6 million, compared with $14.8million for the second quarter last year. The lower expense is primarily due toreduced debt levels, partially offset by higher interest rates, compared to thesame quarter last year.

 

The effective tax ratefor the second quarter of fiscal 2006 was 32.3 percent, 0.8 percentage pointslower than the 33.1 percent effective rate in the same quarter last year.  The decrease in the tax rate was driven bychanges in Oregon state tax law, a new U.S. manufacturing deduction andincreased earnings from foreign jurisdictions with lower tax rates.

 

25

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***Restructuring***

 

Taking into consideration current andforecasted conditions in markets served by the Company, PCC regularly assessesits cost structure to ensure that operations are properly sized for prevailingmarket conditions.  During the thirdquarter of fiscal 2006, the Company consolidated a machining operation in theInvestment Cast Products segment and downsized a tooling operation in Ireland,resulting in restructuring and asset impairment charges of approximately $2.3million.

 

***Discontinued Operations***

 

Inthe second quarter of fiscal 2005, the Company entered into agreements to sellall of the pumps and valves businesses of PCC Flow Technologies with theexception of E/One and PCC Eurovalves. The businesses held for sale were reclassified from the Fluid ManagementProducts segment to discontinued operations. The E/One business was retained and is now included in the IndustrialProducts segment.  With the exception ofPCC Eurovalves, the sale of the pumps and valves businesses of PCC FlowTechnologies was completed in the third quarter of fiscal 2005.  PCC Eurovalves, which is located in TheNetherlands, was sold in the third quarter of fiscal 2006.

 

Inconnection with the SPS acquisition in the third quarter of fiscal 2004, threebusinesses – Magnetics, Mohawk, and Dacar – were classified as held forsale.  Dacar was sold in late September2004, Magnetics was sold in January 2005, and Mohawk was sold in April 2005.

 

The net loss fromdiscontinued operations was $0.5 million in the second quarter of fiscal 2006compared with net loss of $240.2 million, or $1.81 per share (diluted), in thesame quarter last year.  The net lossfrom discontinued operations in the current quarter consists primarily ofoperating results from PCC Eurovalves and shutdown expenses associated with thesale of the other pumps and valves businesses. The net loss from discontinued operations in the second quarter of lastyear included a charge of $245.0 million, or $1.85 per share (diluted), inconnection with the Company’s decision to sell the pumps and valves businessesof PCC Flow Technologies.

 

***SpecialInvestigation***

 

In September and October 2005, the Companyreceived three related reports with respect to concerns about employeemisconduct and the proper application of generally accepted accountingprinciples (“GAAP”) to certain transactions at the Wyman-Gordon Forgings’Houston plant, a business unit reported in the Forged Products segment.  The matters identified in the reports werereferred to the Audit Committee of the Board of Directors (“Audit Committee”).  The Audit Committee, after due consideration,decided to commence an 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 Committeecompleted its independent investigation and determined that the Companyaccounted for certain transactions incorrectly at both identified locations, asdescribed below:

 

The investigation at Wyman-Gordon ForgingsHouston identified errors in the Company’s fiscal 2001 through fiscal 2006financial statements.  These errors,which totaled $1.8 million, represented a net overstatement of expenses throughthe second quarter of fiscal 2006.  Theerrors primarily related to the failure to properly reconcile accounts and themisapplication of GAAP and Company 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 resultedfrom both deliberate and inadvertent acts involving non-executive employees.

 

The investigation at J&L Fiber Services,Inc. identified errors in the Company’s fiscal 2003 through fiscal 2006financial statements.  These errors,which totaled $5.6 million, represented a net understatement of expensesthrough the second quarter of fiscal 2006. The errors were primarily related to the overstatement of inventoriesresulting from the failure to properly record excess and obsolete reserves andinadequate cycle counting procedures, the failure to properly reconcile

 

26

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accounts, and the misapplication of GAAP andCompany accounting policies, which included improper deferral of expenses.  The identified errors resulted from bothdeliberate and inadvertent acts involving 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, the Company reviewed and analyzed theSecurities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 99, “Materiality,”Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,”paragraph 29 and SAB Topic 5F, “Accounting Changes Not Retroactively Applied Dueto Immateriality,” in order to determine that the misstatements were notmaterial on a quantitative or qualitative basis.  As a result, the Company recorded acumulative adjustment in the 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.

 

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.  Inaddition, high-level reviews at nine additional locations were performed aspart of the independent investigation. The findings did not result in identification of any issues thatrequired further investigation. Management has completed an assessment of the effectiveness of itsinternal controls in relation to these findings.  See *Item 4. Controls andProcedures* for further discussion.

 

27

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**Results of Operations by Segment –Comparison Between Three Months Ended October 2, 2005 and September 26, 2004**

 
| ** **                                        | ** **  | **Three Months Ended** | *** *** | **Inc/(Dec)** | ** ** |
|---------------------------------------------------|-------------|------------------------|--------------|---------------|------------|
| ** **                                        | **10/2/05** | ** **             | **9/26/04**  | *** ***  | **$**      | ** ** | **%** | ** ** |
|                                              |        |                   |         |          | * *   |   |   |   |   |
| Net sales:                                        |        |                   |         |          | * *   |   |   |   |   |
| Investment Cast Products                          |        | $                      | 402.3        |          | $          | 326.3 | * * | $ | 76.0 |   | 23.3 | % |
| Forged Products                                   |        | 213.9                  |         | 147.3         | * *   | 66.6 |   | 45.2 |   |
| Fastener Products                                 |        | 200.6                  |         | 165.1         | * *   | 35.5 |   | 21.5 |   |
| Industrial Products                               |        | 58.0                   |         | 58.8          | * *   | (0.8 | ) | (1.4 | ) |
| Consolidated  net sales                           |        | $                      | 874.8        |          | $          | 697.5 | * * | $ | 177.3 |   | 25.4 | % |
| Operating  income (loss):                         |        |                   |         |          | * *   |   |   |   |   |
| Investment Cast Products                          |        | $                      | 78.9         |          | $          | 61.0 | * * | $ | 17.9 |   | 29.3 | % |
| *% of sales*                                      | * *    | *19.6*                 | *%*          | *18.7*        | *%*        |   |   |   |   |
| Forged Products                                   |        | 27.2                   |         | 18.7          | * *   | 8.5 |   | 45.5 |   |
| *% of sales*                                      | * *    | *12.7*                 | *%*          | *12.7*        | *%*        |   |   |   |   |
| Fastener Products                                 |        | 32.3                   |         | 21.4          | * *   | 10.9 |   | 50.9 |   |
| *% of sales*                                      | * *    | *16.1*                 | *%*          | *13.0*        | *%*        |   |   |   |   |
| Industrial Products                               |        | 4.7                    |         | 10.7          | * *   | (6.0 | ) | (56.1 | ) |
| *% of sales*                                      | * *    | *8.1*                  | *%*          | *18.2*        | *%*        |   |   |   |   |
| Corporate expense                                 |        | (14.4                  | )            | (11.0         | )          | (3.4 | ) | (30.9 | ) |
| Consolidated  segment operating income            |        | 128.7                  |         | 100.8         | * *   | 27.9 |   | 27.7 | % |
| *% of sales*                                      | * *    | *14.7*                 | *%*          | *14.5*        | *%*        |   |   |   |   |
| Interest  expense, net                            |        | 10.6                   |         | 14.8          | * *   |   |   |   |   |
| Income before income taxes and minority  interest |        | $                      | 118.1        |          | $          | 86.0 | * * |   |   |   |   |

 

***Investment Cast Products***

 

Investment Cast Products’sales increased 23.3 percent from $326.3 million in the second quarter offiscal 2005 to $402.3 million this year. Operating income increased 29.3 percent from $61.0 million in the secondquarter of fiscal 2005 to $78.9 million in the same quarter this year, whileoperating income as a percent of sales increased from 18.7 percent to 19.6percent of sales.  The increase in saleswas driven by continued strength in the commercial aerospace and powergeneration markets, with increased commercial build rates, solid aftermarketgrowth as well as market share gains. The increase in operating income reflected the impact of the highersales volume and operating improvements, partially offset by higher rawmaterial costs, mainly nickel and titanium, which have increased approximately4 percent and 85 percent, respectively, on the London Metal Exchange (LME) andTI 6-4 Bulk Weldables Index (metalprices.com) compared to the same quarter lastyear.  The improvement in operatingmargins as a percentage of sales was mainly due to the leverage from highersales volumes and improved manufacturing performance, partially offset by theimpact of higher raw material costs and pass-through pricing.

 

Sales within this segment are expected tocontinue to benefit from improved conditions in the aerospace and powergeneration markets through the remainder of fiscal 2006.  Operating margins as a percent of sales arealso expected to continue to improve in fiscal 2006 as a result of leveragefrom higher sales volume and continued improvements in operating efficiencies,partially offset by the impact of pass-through pricing.

 

28

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***Forged Products***

 

Forged Products’ saleswere $213.9 million for the quarter, an increase of 45.2 percent, compared tosales of $147.3 million in the second quarter of fiscal 2005.  Operating income increased 45.5 percent from$18.7 million in the second quarter of fiscal 2005 to $27.2 million in the samequarter this year, while operating income as a percent of sales remained unchangedat 12.7 percent of sales.  Operatingincome for the second quarter of fiscal 2006 includes a cumulative adjustmentof $1.8 million, net of tax, to correct an overstatement of expenses fromfiscal 2001 through the second quarter of fiscal 2006.  See “Special Investigation” discussionabove.  While the increase in salesincludes approximately $21 million of higher prices related to pass-through ofhigher material costs, the remaining volume increase is principally due toincreased demand for aerospace products and continued penetration into theChinese power generation market with higher sales of extruded pipe.  Operating income as a percent of salesbenefited in the current quarter from the higher volume and the cumulativeadjustments, but was lower than last year due to higher material costs, mainlynickel and titanium, which have increased approximately 4 percent and 85percent, respectively, on the London Metal Exchange (LME) and TI 6-4 BulkWeldables Index (metalprices.com) since the second quarter of fiscal 2005, andby dilution resulting from pass-through pricing.

 

Sales and operating income for the remainderof fiscal 2006 within the Forged Products segment are expected to benefit fromcontinued growth in the aerospace and industrial gas turbine markets, as wellas continued growth in extruded pipe sales.

 

***Fastener Products***

 

The Fastener Products segment reported $200.6million of sales with operating income of $32.3 million, or 16.1 percent ofsales, in the second quarter of fiscal 2006, compared to sales of $165.1million and operating income of $21.4 million, or 13.0 percent of sales, in thesecond quarter of fiscal 2005.  Theincrease in sales was due to the addition of Air Industries Corp., which wasacquired in March 2005, and the favorable impact of strong aerospacesales.  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 havemodest growth during the remainder of fiscal 2006 as a result of improvedconditions in the aerospace industry and market share gains partially offset bysoftness in the automotive market. Operating income as a percentage of sales should alsoimprove due to continuing realization of synergies, cost take-outs and leveragefrom higher sales.

 

***Industrial Products***

 

Industrial Products’sales of $58.0 million for the second quarter of fiscal 2006 decreased 1.4percent from $58.8 million in the same period last year.  Operating income declined to $4.7 million inthe second quarter of fiscal 2006 compared with $10.7 million in the sameperiod last year, principally due to a cumulative adjustment of $5.6 million inthe current quarter to correct an understatement of expenses from fiscal 2003through the second quarter of fiscal 2006. See “Special Investigation” discussion above.  Operating income as a percent of salesdecreased to 8.1 percent in the second quarter of fiscal 2006 from 18.2 percentin the same period last year.  The decreasein sales compared to last year reflects weak demand in the automotive and pulpand paper markets, partially offset by market share gains in the electric powergeneration market.  The decrease inoperating margin as a percent of sales compared to the second quarter of fiscal2005 is primarily due to the cumulative adjustment, partially offset byincreased sales of high margin products and benefits realized from increasedproduction at low-cost manufacturing facilities in Hungary and India.

 

The Industrial Products segment is expectedto continue to be negatively impacted by the downturn in the automotiveindustry for the remainder of fiscal 2006. Over the next few quarters, PCC will take a strategic, measured,long-term approach to assessing the trends in the automotive industry and willtake appropriate actions to deal with the challenges presented by thisdeclining market.

 

29

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**Consolidated Results ofOperations - Comparison Between Six Months Ended October 2, 2005 and September26, 2004**

 
| ** **                                                      | ** **  | **Six Months Ended** | ** **  | **Inc/(Dec)** | ** ** |
|-----------------------------------------------------------------|-------------|----------------------|-------------|---------------|------------|
| ** **                                                      | **10/2/05** | ** **           | **9/26/04** | ** **    | **$**      | ** ** | **%** | ** ** |
|                                                            |        |                 |        |          |       |   |   |   |   |
| Net sales                                                       |        | $                    | 1,729.4     |          | $          | 1,365.6 |   | $ | 363.8 |   | 26.6 | % |
| Cost of  goods sold                                             |        | 1,342.9              |        | 1,056.3       |       | 286.6 |   | 27.1 |   |
| Selling and  administrative expenses                            |        | 129.3                |        | 118.0         |       | 11.3 |   | 9.6 |   |
| Interest  expense, net                                          |        | 21.2                 |        | 29.4          |       | (8.2 | ) | (27.9 | ) |
| Income before income taxes and minority  interest               |        | 236.0                |        | 161.9         |       | 74.1 |   | 45.8 |   |
| Income tax  expense                                             |        | 78.0                 |        | 53.4          |       | 24.6 |   | 46.1 |   |
| *Effective tax rate*                                            | * *    | *33.1*               | *%*         | *33.0*        | *%*        |   |   |   |   |
| Minority  interest                                              |        | (0.7                 | )           | (0.8          | )          | 0.1 |   | 12.5 |   |
| Net income  from continuing operations                          |        | 157.3                |        | 107.7         |       | 49.6 |   | 46.1 |   |
| Net loss  from discontinued operations                          |        | (0.8                 | )           | (237.1        | )          | 236.3 |   | 99.7 |   |
| Net income  (loss)                                              |        | $                    | 156.5       |          | $          | (129.4 | ) | $ | 285.9 |   | 220.9 | % |
| Net income per share from continuing  operations – diluted |        | $                    | 1.16        |          | 0.82       |   | $ | 0.34 |   | 41.5 | % |
| Net loss per share from discontinued  operations – diluted |        | —               |        | (1.80         | )          | 1.80 |   | 100.0 |   |
| Net income  (loss) per share - diluted                          |        | $                    | 1.16        |          | $          | (0.98 | ) | $ | 2.14 |   | 218.4 | % |

 

Sales for the first sixmonths of fiscal 2006 were $1,729.4 million, an increase of 26.6 percent from$1,365.6 million in the same period last year. The year-over-year increase in sales was principally driven by improvingconditions in the aerospace and power generation markets, as well as the impactof material pass-through pricing and the addition of Air Industries Corp.,which was acquired in Q4 of last year. According to JSA Research as of December 2005, commercial aircraftdeliveries were forecast to increase approximately 10 percent in calendar year2005 from calendar year 2004 and are forecast to continue to increaseapproximately 21 percent in calendar year 2006.

 

Net income fromcontinuing operations for the first six months of fiscal 2006 was $157.3 million,or $1.16 per share (diluted), which included a cumulative charge of $1.9million, net of tax, or $0.02 per share (diluted), related to the correction ofaccounting errors in the Company’s financial statements from fiscal 2001through the first half of fiscal 2006. See “Special Investigation” discussion above.  By comparison, net income from continuingoperations for the first six months of fiscal 2005 was $107.7 million, or $0.82per share (diluted).  Net income for thefirst six months of fiscal 2006 was $156.5 million, or $1.16 per share(diluted), compared with net loss of $129.4 million, or $0.98 per share(diluted), in the same period last year. The net loss for the prior period included a charge of $245.0 million,or $1.85 per share (diluted), in connection with the Company’s decision to sellthe pumps and valves businesses of PCC Flow Technologies.

 

***Interest and Income Tax***

 

Net interest expense forthe six months ended October 2, 2005 was $21.2 million, as compared with $29.4million for the same period last year. The lower expense is primarily due to reduced debt levels, partiallyoffset by higher interest rates, compared to the same period last year.

 

The effective tax ratefor the first six months of fiscal 2006 was 33.1 percent, as compared with 33.0percent for the six months ended September 26, 2004.  The prior year effective rate was lower dueto tax benefits associated with the write-off of intercompany loans, while thecurrent year benefited from changes in Oregon state tax law, a new U.S.manufacturing deduction and increased earnings from foreign jurisdictions.

 

30

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***Restructuring***

 

Taking into consideration current andforecasted conditions in markets served by the Company, PCC regularly assessesits cost structure to ensure that operations are properly sized for prevailingmarket conditions.  During the thirdquarter of fiscal 2006, the Company consolidated a machining operation in theInvestment Cast Products segment and downsized a tooling operation in Ireland,resulting in restructuring and asset impairment charges of approximately $2.3million.

 

***Discontinued Operations***

 

In the second quarter offiscal 2005, the Company entered into agreements to sell all of the pumps andvalves businesses of PCC Flow Technologies with the exception of E/One and PCCEurovalves.  The businesses held for salewere reclassified from the Fluid Management Products segment to discontinuedoperations.  The E/One business wasretained and is now included in the Industrial Products segment.  With the exception of PCC Eurovalves, thesale of the pumps and valves businesses of PCC Flow Technologies was completedin the third quarter of fiscal 2005.  PCCEurovalves, which is located in The Netherlands, was sold in the third quarterof fiscal 2006.

 

Inconnection with the SPS acquisition in the third quarter of fiscal 2004, threebusinesses – Magnetics, Mohawk, and Dacar – were classified as held forsale.  Dacar was sold in late September2004, Magnetics was sold in January 2005, and Mohawk was sold in April 2005.

 

The net loss fromdiscontinued operations was $0.8 million, or $0.01 per share (diluted), for thesix months ended October 2, 2005 compared with a net loss of $237.1 million, or$1.80 per share diluted), in the same period last year.  The net loss from discontinued operations inthe first six months of fiscal 2006 consists primarily of operating resultsfrom PCC Eurovalves, Magnetics and Mohawk.

 

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**Results of Operations by Segment –Comparison Between Six Months Ended October 2, 2005 and September 26, 2004**

 
| ** **                                        | ** **  | **Six Months Ended** | *** *** | **Inc/(Dec)** | ** ** |
|---------------------------------------------------|-------------|----------------------|--------------|---------------|------------|
| ** **                                        | **10/2/05** | ** **           | **9/26/04**  | *** ***  | **$**      | ** ** | **%** | ** ** |
|                                              |        |                 |         |          | * *   |   |   |   |   |
| Net sales:                                        |        |                 |         |          | * *   |   |   |   |   |
| Investment Cast Products                          |        | $                    | 789.6        |          | $          | 629.7 | * * | $ | 159.9 |   | 25.4 | % |
| Forged Products                                   |        | 417.9                |         | 292.4         | * *   | 125.5 |   | 42.9 |   |
| Fastener Products                                 |        | 403.2                |         | 329.2         | * *   | 74.0 |   | 22.5 |   |
| Industrial Products                               |        | 118.7                |         | 114.3         | * *   | 4.4 |   | 3.8 |   |
| Consolidated  net sales                           |        | $                    | 1,729.4      |          | $          | 1,365.6 | * * | $ | 363.8 |   | 26.6 | % |
| Operating  income (loss):                         |        |                 |         |          | * *   |   |   |   |   |
| Investment Cast Products                          |        | $                    | 153.5        |          | $          | 116.0 | * * | $ | 37.5 |   | 32.3 | % |
| *% of sales*                                      | * *    | *19.4*               | *%*          | *18.4*        | *%*        |   |   |   |   |
| Forged Products                                   |        | 50.0                 |         | 37.1          | * *   | 12.9 |   | 34.8 |   |
| *% of sales*                                      | * *    | *12.0*               | *%*          | *12.7*        | *%*        |   |   |   |   |
| Fastener Products                                 |        | 63.4                 |         | 38.0          | * *   | 25.4 |   | 66.8 |   |
| *% of sales*                                      | * *    | *15.7*               | *%*          | *11.5*        | *%*        |   |   |   |   |
| Industrial Products                               |        | 16.4                 |         | 20.0          | * *   | (3.6 | ) | (18.0 | ) |
| *% of sales*                                      | * *    | *13.8*               | *%*          | *17.5*        | *%*        |   |   |   |   |
| Corporate expense                                 |        | (26.1                | )            | (19.8         | )          | (6.3 | ) | (31.8 | ) |
| Consolidated  segment operating income            |        | 257.2                |         | 191.3         | * *   | 65.9 |   | 34.4 | % |
| *% of sales*                                      | * *    | *14.9*               | *%*          | *14.0*        | *%*        |   |   |   |   |
| Provision  for restructuring                      |        | —               |         | —        | * *   |   |   |   |   |
| Interest  expense, net                            |        | 21.2                 |         | 29.4          | * *   |   |   |   |   |
| Income before income taxes and minority  interest |        | $                    | 236.0        |          | $          | 161.9 | * * |   |   |   |   |

 

***Investment Cast Products***

 

Investment Cast Products’sales increased 25.4 percent from $629.7 million in the first six months offiscal 2005 to $789.6 million this year. Operating income for the segment increased 32.3 percent, from $116.0million, or 18.4 percent of sales, a year ago to $153.5 million, or 19.4percent of sales, in the first six months of fiscal 2006.  The increase in sales was driven by continuedstrength in the aerospace and power generation markets, with improvedcommercial aerospace build rates and solid aftermarket growth as well as marketshare gains.  The increase in operatingincome reflected the impact of the higher sales volume and operatingimprovements, partially offset by higher raw material costs, mainly nickel andtitanium, which have increased approximately 15 percent and 100 percent,respectively, on the London Metal Exchange (LME) and TI 6-4 Bulk WeldablesIndex (metalprices.com) compared to the same period last year.  The improvement in operating margins as apercentage of sales was mainly due to the leverage from higher sales volume andimproved manufacturing performance, partially offset by the impact of higherraw material costs and pass-through pricing.

 

***Forged Products***

 

Forged Products’ saleswere $417.9 million for the first six months of fiscal 2006, an increase of42.9 percent, compared to sales of $292.4 million in the same period lastyear.  Operating income increased 34.8percent from $37.1 million, or 12.7 percent of sales, in the first six monthsof fiscal 2005 to $50.0 million, or 12.0 percent of sales, this year.  Operating income for the first six months offiscal 2006 includes income of $1.8 million to correct an overstatement ofexpenses from fiscal 2001 through the first quarter of fiscal 2006.  See “Special Investigation” discussionabove.  While the increase in salesincludes approximately $42 million of higher prices related to pass-through ofhigher material costs, the remaining volume increase was principally due toincreased demand for aerospace products and continued penetration into theChinese power generation market with higher sales of extruded pipe.  Operating income as a percent of salesbenefited in the current quarter from the higher volume and the cumulativeadjustment, but was lower than last year due to higher material costs, mainlynickel and titanium, which have increased approximately 15 percent and 100percent,

 

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respectively, on the LMEand TI 6-4 Bulk Weldables Index (metalprices.com) since the first half offiscal 2005, and by dilution resulting from pass-through pricing.

 

***Fastener Products***

 

The Fastener Products segment reported $403.2million of sales with operating income of $63.4 million, or 15.7 percent ofsales, in the first half of fiscal 2006, compared to sales of $329.2 millionand operating income of $38.0 million, or 11.5 percent of sales in the sameperiod last year.  The increase in saleswas due to the addition of Air Industries Corp., which was acquired in March2005, and the favorable impact of strong aerospace sales.  Operating income as a percent of salesbenefited from the higher sales volume and the impact of continued costtake-outs and improved manufacturing processes.

 

***Industrial Products***

 

Industrial Products’sales of $118.7 million for the first six months of fiscal 2006 increased $4.4million, or 3.8 percent, from $114.3 million in the comparable prior yearperiod.  Operating income was $16.4million, or 13.8 percent of sales, in the first six months of fiscal 2006,compared to operating income of $20.0 million, or 17.5 percent of sales, in thesame period last year.  The increase insales compared to last year reflects improved conditions in the pulp and papermarket and market share gains in the electric power generation market,partially offset by softness in the automotive market.  The decline in operating margin as a percentof sales compared to the first half of fiscal 2005 is primarily due to theimpact of a cumulative charge of $5.6 million in the first half of fiscal 2006to correct an understatement of expenses from fiscal 2003 through the first quarterof fiscal 2006.  See “SpecialInvestigation” discussion above.  Thisdecline was partially offset by leverage from the higher sales volume, as wellas increased sales of high margin products and benefits realized from increasedproduction at low-cost manufacturing facilities in Hungary and India.

 

**Changes in Financial Conditionand Liquidity**

 

Total assets of $3,701.6million at October 2, 2005 represented a $76.6 million increase from the$3,625.0 million balance at April 3, 2005. Total capitalization at October 2, 2005 was $2,748.5 million, consistingof $817.8 million of debt and $1,930.7 million of equity. Thedebt-to-capitalization ratio improved to 29.8 percent from 32.1 percent at theend of fiscal 2005.  The balance sheet asof October 2, 2005 has been adjusted to include the effect of the cumulativeadjustments.  See “Special Investigation”discussion above.

 

Cash as of October 2,2005 was $202.0 million, up $48.1 million from the end of fiscal 2005, andtotal debt was $817.8 million, down $25.2 million since the end of fiscal 2005,together reflecting positive cash flow of $73.3 million during the first sixmonths of fiscal 2006.  In addition to$25.2 million of debt payments, cash requirements for the first six months offiscal 2006 included $40.2 million for capital expenditures, $109.5 million forincreased working capital, $3.9 million for dividends, and $42.4 million ofpension contributions ($33.1 million were voluntary).  These requirements were principally fundedfrom $157.3 million of net income from continuing operations adjusted for $49.7million of depreciation and amortization, $24.9 million of deferred taxes, a$1.3 million related to the correction of prior year accounting errors, and$11.4 million from the sale of common stock through stock option exercises and$24.7 million from other activities.

 

Capital spending duringfiscal 2006, which is expected to exceed fiscal 2005 capital spending byapproximately $40.0 million, will principally provide for equipment maintenanceand upgrades, capacity expansion, safety, and cost reduction projects.  Company contributions to its defined benefitpension plans are expected to be approximately $82.0 million during fiscal2006, of which $67.0 million will be voluntary.

 

On October 14, 2005, theCompany amended its bank credit facility in a syndication involving 20banks.  The amended facility consists ofa five-year, $1.0 billion revolving loan (with a $250.0 million increaseoption) maturing in October 2010.  Theprevious bank credit facility consisted of a $300.0 million term loan and a$400.0 million revolving loan maturing in December 2008.  Borrowings under the amended facility, basedon current credit ratings from Moody’s and S&P, will bear interest at LIBORplus 50 basis points if outstanding loans under the facility are less than$500.0 million or LIBOR plus 62.5 basis points if outstanding loans under thefacility are greater than $500.0 million. The interest rate under the previous credit facility was LIBOR plus 100basis points.

 

At October 2, 2005,the Company was in compliance with all restrictive provisions of its loanagreements.

 

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Management believes thatthe Company can fund requirements for working capital, pension and otherpostretirement benefit obligations, capital spending, cash dividends, scheduledrepayment of debt and potential acquisitions from cash generated fromoperations, borrowing from existing or new bank credit facilities, issuance ofpublic or privately placed debt securities, or the issuance of equityinstruments.

 

**Forward-LookingStatements**

 

Informationincluded within this Form 10-Q describing the projected growth and futureresults and events constitutes forward-looking statements, within themeaning of the Private Securities Litigation Reform Act of 1995. Actual resultsin future periods may differ materially from the forward-lookingstatements because of a number of risks and uncertainties, including but notlimited to fluctuations in the aerospace, power generation, automotive, andother general industrial cycles; the relative success of the Company’s entryinto new markets; competitive pricing; the financial viability of the Company’ssignificant customers; the availability and cost of energy, materials,supplies, and insurance, the cost of pension and postretirement medicalbenefits; equipment failures; relations with the Company’s employees; theCompany’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 statementsshould be considered in light of these factors. The Company undertakes noobligation to publicly release any forward-looking information to reflectanticipated or unanticipated events or circumstances after the date of thisdocument.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

There have been nomaterial changes to the 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 Chief Executive Officer and Chief Financial Officer, haveconducted an evaluation of the effectiveness of disclosure controls andprocedures as of the end of the period covered by this report pursuant to ExchangeAct Rule 13a-15(b).  Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that the disclosure controls and procedures are effective to ensurethat information required to be disclosed by the Company in reports filed withthe Securities and Exchange Commission is recorded, processed, summarized andreported on a timely basis and to ensure that information is accumulated andcommunicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosures.

 

During the third quarter of fiscal 2006, anindependent investigation conducted by the Audit Committee of the Board ofDirectors identified errors that represented an understatement of expensesrelated to the failure to properly reconcile accounts, the misapplication ofGAAP and Company policies, overstatement of inventories, improper deferral ofexpenses and improper revenue recognition, resulting from both deliberate andinadvertent acts involving 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, the Company reviewed and analyzed theSecurities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 99, “Materiality,”Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,”paragraph 29 and SAB Topic 5F, “Accounting Changes Not Retroactively AppliedDue to Immateriality,” in order to determine that the misstatements were notmaterial on a quantitative or qualitative level.  As a result, the Company recorded acumulative adjustment in the 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,respectively, for the three months ended October 2, 2005.

 

The Company has takenimmediate action to address the cause of these errors, including termination ofcertain involved individuals, the development of improved policies andprocedures, and enhancement of internal controls.  In addition, high-level reviews at nine additionallocations were performed as part of the independent investigation.  The findings did not result in identificationof any issues that required 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 ininternal control over financial reporting**

 

During the quarter ended October 2, 2005,there were no changes in the Company’s internal control over financialreporting that materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**Limitationson effectiveness of controls and procedures**

 

PCC management, including our Chief ExecutiveOfficer and Chief Financial Officer, does not expect that the Company’sdisclosure controls and procedures or its internal controls will prevent allerror and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within PCC have been detected. These inherent limitations include, but arenot limited to, the realities that judgments in decision–making can be faultyand that breakdowns can occur because of simple error or mistake. Additionally,controls can be circumvented by the individual acts of some persons, bycollusion of two or more people, or by management override of the control. Thedesign of any system of controls also is based in part upon certain assumptionsabout the likelihood of future events and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions; over time, control may become inadequate because of changes inconditions, or the degree of compliance with the policies or procedures maydeteriorate. Because of the inherent limitations in a cost–effective controlsystem, misstatements due to error or fraud may occur and not be detected.

 

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**PARTII.  OTHER INFORMATION**

 

**Item1.  Legal Proceedings**

 

None.

 

**Item2.  Unregistered Sale of EquitySecurities and Use of Proceeds**

 

None.

 

**Item3.  Defaults Upon Senior Securities**

 

None.

 

**Item 4.    Submission ofMatters to a Vote of Security Holders and Issuer Purchases of Securities**

 

(a)          The Companyheld its Annual Meeting of Shareholders on August 17, 2005.

 

(b)         TheShareholders voted as follows on the following matters:

 

1.     Election of Directors.  The voting results for each nominee is asfollows:

 
| **Nominee**         | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|---------------------|------------|---------------|------------|--------------------|------------|
| Dean T.  DuCray     |       | 61,051,330    |       | 283,011            |       |
| Don R.  Graber      |       | 59,405,053    |       | 1,929,288          |       |
| Byron O.  Pond, Jr. |       | 60,912,797    |       | 421,544            |       |

 

Mr.DuCray, Mr. Graber and Mr. Pond were elected to serve three-year terms.

 

2                  Ratificationof the appointment of Pricewaterhouse Coopers LLP as IndependentAccountants.  The voting result is asfollows:

 
| **Votes For** | ** ** | **Votes Withheld** | ** ** |
|---------------|------------|--------------------|------------|
| 61,176,306    |       | 158,035            |       |

 

**Item5.  Other Information**

 

None.

 

**Item6.  Exhibits**

 

31.1                           Certificationof the Chief Executive Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

 

31.2                           Certificationof the Chief Financial Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

 

32.1                           Certificationof the Chief Executive Officer pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.

 

32.2                           Certificationof the Chief Financial Officer pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.

 

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SIGNATURE

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                     | 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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