Precision Castparts
Precision Castparts by just completing another of its many strategic deals is outpacing its competitors¡¯ growth and reach by its acquisition drive and is filling remaining capability gaps upstream and downstream, while increasing its operating margins from an average 14.5% in 2005 to 26.8% in the latest June 2009 quarter. We may expect more of the same with future bolt-on acquisitions in alloys (possibly something in titanium), investment castings, forgings and fasteners.
Analysis
Once again Precision Castparts has exercised its well-honed capability in using its free cash flow for making strategic acquisitions with its recent purchase of Carleton Forge and Arcturus Manufacturing, both located in California, for a combined $850 million. Not so long from now, there may not be too many niche suppliers of specialized metal components used in aerospace and energy markets that are not owned under the Precision Castparts umbrella.Both Carleton Forge and Arcturus bring specialized niches in forged metal products focused on the aerospace market primarily, with Carleton being strong in large ring roll products used in jet engine structures and Arcturus strong in hammer forgings for internal components for jet engines and aircraft structures.Being one of the two major domestic suppliers of investment cast turbine blades and vanes, forgings and fasteners used in jet engines and industrial gas turbines, the other being Alcoa¡¯s Engineered Products Group including Alcoa Power and Propulsion, Forged Products and Fasteners business units.
Precision Castparts¡¯ and Alcoa¡¯s businesses are in many ways mirror images of each other and roughly the same in revenues. Other smaller but still significant players in investment castings are Ladish Company¡¯s Pacific Cast Technologies unit and Doncasters, based in the United Kingdom, with some facilities in the U.S.Since the late 1990¡¯s, Precision Castparts has been on a continual tear of acquisitions, gobbling up Wyman Gordon in aerospace forgings, SPS in fasteners, Special Metals in alloys, several small fastener companies, and additional smaller forging and alloy processing companies. Just when Wall Street analysts were prognosticating that due to antitrust limitations, they would be highly unlikely to be able to acquire any further casting or forging companies, the company announced a closely spaced string of acquisitions across each of their key businesses in late 2006 and early 2007¨C GSC Foundries, McWilliams Forge, and Cherry Fasteners.Under CEO Mark Donegan, a former General Electric executive, the company has become highly shareholder-centric and very manufacturing performance driven with strong incentive alignment for all employees, a fervent focus on market share growth and a relentless cost reduction goal of 10% per year. They desire to be ¡°the best technical company out there¡±, according to their public pronouncements, with emphasis on process more than on product, and to leverage their low cost manufacturing base to secure long term contracts to drive greater market share gains.
They have achieved very clear alignment of the whole organization driven by incentives consisting of quarterly bonus payouts to all employees based on plant and overall company performance. Since each of their businesses serves similar customers in the aerospace and energy markets, they try to leverage these customers across all their business to both gain share, and procure long term contracts. Their share gain strategy typically puts focus on one dominant customer to initially achieve scale, then expands their share by being the low cost supplier.Donegan¡¯s explanations of their strategy on their quarterly conference calls puts their focus in acquisitions on leveraging their operational excellence disciplines across an ever larger production platform in order to achieve ever larger economies of scale and efficiencies and thus lower cost. For example, they have been doing this in upstream metal supply through purchasing the previously underperforming Special Metals Company, the largest supplier of nickel based superalloys used in aerospace applications, which was ripe for the kind of operating turnaround that Precision Castparts could provide. With this acquisition they also now have the leading position in the supply of advanced nickel powder alloys being increasingly used in the isothermal forging of turbine disks for the most advanced jet engines.Acquisition targets typically must have a large percentage of sales in aerospace with common customers with their existing businesses, produce complex non-commodity metal components, offer nice turnaround opportunities for them to deploy their operating disciplines to significantly free up cash flow through reducing working capital and greater efficiencies, and be businesses that are not likely to migrate to China within five years.
They also will be companies with lucrative contracts on critical aircraft programs that add to the company¡¯s existing programs, for example, Carlton Forge has a major contract with Volvo Aerospace on the large fan housing for the Rolls Royce Trent 1000 engine going on the Boeing 787, worth $154 million over 15 to 20 years.Precision Castparts screens their targets mainly for greater operating leverage and scale, cost reduction opportunity, and offering product line expansion enabling market share gains across its existing customer base (consisting of major players like GE, Pratt & Whitney, Rolls Royce, Siemens, Alstom and the like). Their main competitor Alcoa, notwithstanding its focus on reducing waste and improving efficiency in its processes through deployment of the Toyota Production System for over thirteen years, tends to focus more on what acquisitions can bring in terms of their leading edge process and product technologies, and how these might augment and enhance what they already possess. Alcoa tends to have the greater strength in new product development and advanced process technologies, while Precision Castparts¡¯ strength is in greater process and cost efficiencies evidenced by its continual improvement in average operating margins from 14.5% in 2005 to 26.8% in the quarter ending June 2009.The company has been moving offshore to take advantage of lower cost opportunities in raw materials sourcing, finishing and some new initiatives: Australia - Nickel forging and ingot supply
Czech Republic - Forge machining, Vacuum Arc Melting alloys
Hungary - Metal injection molding, Fasteners
Mexico - Airfoil finishing China - Fluid pumps, Fasteners, acquisition or greenfield As far as the major growth markets are concerned, in the last few years the company has been expanding its presence in the energy market for seamless forged steel drill pipe and components for coal fired and nuclear power plants, along with their existing business in industrial gas turbines. The build rate for IGTs has declined from its peak in 2001, but major overhauls of the installed base is creating increased aftermarket demand for replacement parts these days and another round of growth is anticipated with major infrastructure builds in China, India and the Middle East (a 30% increase by 2018). The Aerospace market is projected to turn back up as the 787 program finally gets on track with total aircraft build rates expected to return to pre-recession levels by 2012 ¨C 13. Military fuel tanker and Joint Strike Fighter programs will provide further impetus to growth for a twenty year period into the future.Based on their clearly stated core competencies in producing complex metal components for aerospace and other high performance industrial applications, it is unlikely to expect that Precision Castparts will move into the sub-assembly business nor into carbon fiber composites. One remaining gap to fill in upstream alloy supply could be in titanium. What we will be looking for going forward is this highly disciplined company continuing their due diligence on their short list of acquisition targets and doing more bolt-on deals in alloy suppliers, fasteners, forgings and specialty castings, particularly as valuations remain attractive.
