Precision Castparts forges profits out of metal

The 2000s were an era of rapid and far-reaching technological change, a decade in which iPhones and YouTube, Facebook and Twitter changed the way we work, play and communicate. So how is it that the decade's best-performing Northwest company was an old-line manufacturer whose core technology literally dates back to the Bronze Age?

Indeed, Portland-based Precision Castparts, a company few outside its industry and customer base have even heard of, rewarded its shareholders far more richly than any other regional company over the past decade.

If you had had the foresight to buy 100 shares of Precision at the beginning of 2000, they would have cost you $2,625. Had you held onto the shares (through two 2-for-1 splits) and reinvested the dividends, you'd have had $44,218 by the end of 2009 — an eye-popping 33.4 percent average annual return.

As its name implies, Precision makes complex metal parts for a wide variety of uses. It does so using two main processes which, though highly developed, would in their essentials have been familiar to an ancient blacksmith: forging and casting.

Forging essentially means heating metal until it's soft and banging it into shape; casting means melting the metal, pouring it into a mold and letting it cool. Precision uses both techniques, and its expertise in working with difficult metals such as titanium, to make a wide array of products: components for aircraft engines and gas-fired power-plant turbines, pipe, howitzer parts, even artificial hips and knees.

Such complicated parts need to be held together, so in 2003 Precision bought a maker of highly engineered metal fasteners. It's since grown that into a third major business unit, serving mainly aerospace customers. The company also sells high-performance, nickel-based alloys designed to hold up under extreme conditions.

That's about as far as Precision is likely to get from its core business, said J.B. Groh, who follows the company for D.A. Davidson in suburban Portland.

"They've really stuck with the things they're good at, and they're very, very good at complex metal parts that other people can't do," Groh said. "Relentless pursuit of operational improvement — that's really what sets them apart."

Precision Castparts is itself something of a castoff. The company grew out of Oregon Saw Co., where in the 1950s a group of employees developed a process for making large cast pieces that were both strong and relatively cheap.

After Oregon Saw was sold in 1953, two successive owners didn't see much future in the castings business. In 1956, it was spun off as Precision Castparts. Two years later, the fledgling company landed its first aerospace customer.

At today's Precision, just over half of sales still go into aerospace. The company has benefited greatly from the push by Boeing and Airbus to build big, complicated new planes. (Each 787 contains about $5.6 million of Precision-made components.)

Another quarter or so of Precision's sales go to the power-generation business, mainly seamless extruded pipe and parts for gas turbines.

Through both internal growth and a stream of acquisitions, Precision has grown its sales from $1.7 billion in fiscal 2000 to $5.5 billion in fiscal 2010, which ended in March. Profit over that time has risen from $85.3 million to $922.6 million.

But that growth hasn't always been smooth. Sales last year were down 19.3 percent from fiscal 2009, as the global recession hit Precision's main customer bases. In response, the company worked aggressively to squeeze costs out of its operations wherever it could, and cut payroll by 800 jobs.

"That's the kind of challenge we had: to get people to focus on what they could control, not what kind of was out there from the economic environment," CEO Mark Donegan said last month in a conference call with analysts. "This took a significant effort by every employee in this company to take that challenge on and kind of do what was required."

But, Donegan continued, the company has begun to see signs of a slow recovery in its aerospace shipments, and he said a leaner, more efficient Precision will benefit if, as he expects, sales across its main business lines rebound later this year and into 2011.

That doesn't mean all 800 jobs will come back, he said: "Certainly we will not need the number of people that we would have needed two years ago."

And those who do return should expect some changes.

"We've got a lot of trained people on the streets that we can draw back on, but it's getting them in, getting them back up to speed," Donegan said on the call. "Things have changed. So if you've been out of this facility a year, year and a half, you're going to come back, it's different. The pace that we run, the way we run, the way we look at things is different."