1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended May 31, 2000 Commission File Number 1-1520
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GenCorp Inc.
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(Exact name of registrant as specified in its charter)
Ohio 34-0244000
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(State of Incorporation) (I.R.S. Employer Identification No.)
Highway 50 and Aerojet Road Rancho Cordova, California 95670
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(Address of principal executive offices) (Zip Code)
P.O. Box 537012 Sacramento, California 95853
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(Mailing address) (Zip Code)
Registrant's telephone number, including area code (916) 355-4000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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As of June 30, 2000, there were 42,401,313 outstanding shares of GenCorp Inc.'s
Common Stock, par value $0.10.
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GENCORP INC.
Table of Contents
Part I. Financial Information Page No.
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Item 1. Financial Statements
Condensed Consolidated Statements of Income -
Three Months and Six Months Ended May 31, 2000 and 1999 -3-
Condensed Consolidated Balance Sheets -
May 31, 2000 and November 30, 1999 -4-
Condensed Consolidated Statements of Cash Flows -
Six Months Ended May 31, 2000 and 1999 -5-
Notes to the Unaudited Interim Condensed Consolidated Financial
Statements - May 31, 2000 -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -15-
Item 3. Quantitative and Qualitative Disclosures About Market Risk -17-
Part II. Other Information
Item 1. Legal Proceedings -18-
Item 6. Exhibits and Reports on Form 8-K -20-
Signatures -21-
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PART I. FINANCIAL INFORMATION
GENCORP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
----------------------------- --------------------------
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
----------------------------- --------------------------
NET SALES $ 271 $ 304 $ 510 $ 559
COSTS AND EXPENSES
Cost of products sold 215 259 411 474
Selling, general and administrative 10 6 18 19
Depreciation and amortization 13 12 26 24
Interest expense 4 1 7 1
Other (income) expense, net (3) 3 (2) 1
Unusual items - - 1 -
------- ------- ------- -------
239 281 461 519
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 32 23 49 40
Income tax provision 13 8 20 16
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INCOME FROM CONTINUING OPERATIONS 19 15 29 24
Income from discontinued operations, net of taxes - 18 - 26
Cumulative effect of a change in accounting principle, net of taxes
- - 74 -
------- ------- ------- -------
NET INCOME $ 19 $ 33 $ 103 $ 50
======= ====== ======= =======
EARNINGS PER SHARE OF COMMON STOCK
Basic:
Continuing operations $ .45 $ .35 $ .70 $ .57
Discontinued operations - .43 - .62
Cumulative effect of a change in accounting principle - - 1.76 -
------- ------- ------- -------
Total $ .45 $ .78 $ 2.46 $ 1.19
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Diluted:
Continuing operations $ .45 $ .34 $ .70 $ .56
Discontinued operations - .43 - .62
Cumulative effect of a change in accounting principle - - 1.76 -
------- ------- ------- -------
Total $ .45 $ .77 2.46 $ 1.18
======= ======= ======= =======
CASH DIVIDENDS PAID PER SHARE OF COMMON STOCK $ .03 $ .15 $ .06 $ .30
See notes to the unaudited interim condensed consolidated financial statements.
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GENCORP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
Unaudited Audited
May 31, November 30,
2000 1999
-----------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 27 $ 23
Accounts receivable 120 139
Inventories 154 144
Prepaid expenses and other 56 57
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TOTAL CURRENT ASSETS 357 363
Recoverable from U.S. Government and third parties for
Environmental remediation 211 211
Deferred income taxes 88 149
Prepaid pension 269 113
Investments and other assets 55 59
Property, plant and equipment, net 349 335
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TOTAL ASSETS $ 1,329 $ 1,230
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LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable and current portion of long-term debt $ - $ 9
Accounts payable 34 44
Income taxes payable 38 44
Other current liabilities 281 274
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TOTAL CURRENT LIABILITIES 353 371
Long-term debt 190 149
Postretirement benefits other than pensions 241 251
Environmental reserves 340 346
Other liabilities 31 33
SHAREHOLDERS' EQUITY
Preference stock - (none outstanding) - -
Common stock - $0.10 par value; 42.0 million shares outstanding 4 4
Other capital 2 -
Retained earnings 190 93
Accumulated other comprehensive loss (22) (17)
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TOTAL SHAREHOLDERS' EQUITY 174 80
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,329 $ 1,230
========== =========
See notes to the unaudited interim condensed consolidated financial statements.
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GENCORP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Six Months Ended
May 31, May 31,
2000 1999
------------------------------------
OPERATING ACTIVITIES
Income from continuing operations $ 29 $ 24
Depreciation, amortization and gain on disposal of fixed assets 26 24
Deferred income taxes 17 (1)
Changes in operating assets and liabilities net of effects of dispositions
of businesses:
Current assets, net 4 (5)
Current liabilities, net (11) (6)
Other non-current assets, net (34) (10)
Other non-current liabilities, net (17) (2)
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NET CASH PROVIDED BY CONTINUING OPERATIONS 14 24
NET CASH USED IN DISCONTINUED OPERATIONS - (8)
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TOTAL CASH PROVIDED BY OPERATING ACTIVITIES 14 16
INVESTING ACTIVITIES
Capital expenditures (40) (32)
Discontinued operations - 27
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NET CASH USED IN INVESTING ACTIVITIES (40) (5)
FINANCING ACTIVITIES
Net borrowings on long-term revolving credit facility 37 (45)
Net short-term debt (paid) incurred (5) 41
Dividends (3) (13)
Other equity transactions 1 (3)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 30 (20)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4 (9)
Cash and cash equivalents at beginning of period 23 24
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Cash and cash equivalents at end of period $ 27 $ 15
======= ======
SUPPLEMENTAL DATA (CASH PAID FOR):
Interest $ 7 $ 12
Income taxes $ 8 $ 19
See notes to the unaudited interim condensed consolidated financial statements.
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GENCORP INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and therefore do
not include all of the information and footnotes required by generally accepted
accounting principles for a complete set of financial statements. These interim
statements should be read in conjunction with the financial statements and notes
thereto included or incorporated by reference in the GenCorp Inc. (Company)
Annual Report on Form 10-K for the fiscal year ended November 30, 1999.
All normal recurring accruals and adjustments considered necessary for a
fair presentation of the unaudited results for the three month and six month
periods ended May 31, 2000 and 1999 have been reflected. The results of
operations for the six months ended May 31, 2000 are not necessarily indicative,
if annualized, of those to be expected for the full fiscal year.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain reclassifications have been made to conform prior periods' data to
the current period's presentation.
Note B - Earnings Per Share
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The following table sets forth the computation of basic and diluted earnings
per share from continuing operations:
Three Months Ended Six Months Ended
May 31, May 31,
(Dollars in millions, except per share data ----------------------------- --------------------------------
and shares in thousands) 2000 1999 2000 1999
----------------------------- --------------------------------
NUMERATOR
Income from continuing operations $ 19 $ 15 $ 29 $ 24
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DENOMINATOR
Denominator for basic earnings per share -
Weighted average shares outstanding 41,933 41,748 41,903 41,658
Effect of dilutive securities:
Employee stock options 127 437 118 435
Other - 15 - 15
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Dilutive potential common shares 127 452 118 450
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Denominator for diluted earnings per share -
Adjusted weighted average shares and assumed conversions 42,060 42,200 42,021 42,108
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Three Months Ended Six Months Ended
May 31, May 31,
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2000 1999 2000 1999
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EARNINGS FROM CONTINUING OPERATIONS
PER SHARE OF COMMON STOCK
Basic earnings per share $ .45 $ .35 $ .70 $ .57
Diluted earnings per share $ .45 $ .34 $ .70 $ .56
Note C - Comprehensive Income
- -----------------------------
The components of total comprehensive income were as follows:
(Dollars in millions) Three Months Ended Six Months Ended
May 31, May 31,
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2000 1999 2000 1999
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Income from continuing operations $ 19 $ 15 $ 29 $ 24
Adjustments:
Foreign currency translation effect (3) (2) (5) (4)
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Total comprehensive income $ 16 $ 13 $ 24 $ 20
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Note D - Acquisitions, Divestitures and Other Matters
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On June 5, 2000, the Company finalized an agreement with NextPharma
Technologies ("NextPharma", formerly known as Pharbil Technologies) to sell a 20
percent equity interest in Aerojet Fine Chemicals LLC for approximately $25
million in cash and exchange an additional 20 percent equity interest for an
approximate 35 percent equity interest in NextPharma. NextPharma, a privately
held company, operates in the United States and Europe, focusing on contract
process development and manufacturing in the pharmaceutical industry. GenCorp
continues to manage, operate, and consolidate Aerojet Fine Chemicals LLC as
majority owner.
Note E - Change in Accounting Principle
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Effective December 1, 1999, the Company changed its methods for determining
the market-related value of plan assets used in determining the expected
return-on-assets component of annual net pension costs and the amortization of
gains and losses for both pension and postretirement benefit costs. Under the
previous accounting method, the market-related value of assets was determined by
smoothing assets over a five-year period. The new method shortens the smoothing
period for determining the market-related value of plan assets from a five-year
period to a three-year period. The changes result in a calculated market-related
value of plan assets that is closer to current value, while still mitigating the
effects of short-term market fluctuation. The new method also reduces the
substantial accumulation of unrecognized gains and losses created under the
previous method due to the disparity between fair value and market-related value
of plan assets. Under the previous accounting method all gains and losses were
subject to a ten-percent corridor and amortized over the expected working
lifetime of active employees (approximately 12 years). The new method eliminates
the ten-percent corridor and reduces the amortization period to five years.
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The estimated cumulative effect of this accounting change related to periods
prior to fiscal year 2000 of $123 million ($74 million after-tax, or $1.76 per
basic and diluted share) is a one-time, non-cash credit to fiscal 2000 earnings.
For fiscal year 2000, the accounting change is expected to result in additional
income from continuing operations as follows:
Fiscal Year
(Dollars in millions, except per share amounts) 2000
----
Continuing business segments $ 30
Other 7
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Income from continuing operations $ 37
======
Net Income $ 22
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Earnings per share $ .52
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The impact on income from continuing operations is presented below showing
the increase to income for the three months and six months ended May 31, 2000
and the pro forma effect on income for the three months and six months ended May
31, 1999, as if the accounting change had been applied retroactively:
(Dollars in millions) Three Months Ended Six Months Ended
May 31, May 31,
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2000 1999 2000 1999
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Continuing business segments $ 7 $ 7 $ 15 $ 15
Other 2 2 4 3
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Income from continuing operations $ 9 $ 9 $ 19 $ 18
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Net income $ 5 $ 5 $ 11 $ 11
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A comparison of earnings per share from continuing operations for the three
months and six months ended May 31, 2000 to pro forma amounts for the three
months and six months ended May 31, 1999 is presented below showing the effects
as if the accounting change were applied retroactively:
(Dollars in millions) Three Months Ended Six Months Ended
May 31, May 31,
----------------------------- -------------------------------
2000 1999 2000 1999
----------------------------- -------------------------------
Basic earnings per share from continuing operations $ .45 $ .48 $ .70 $ .84
Diluted earnings per share from continuing operations $ .45 $ .47 $ .70 $ .83
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Note F - Inventories
- --------------------
Inventories are stated at the lower of cost or market value. A portion of
the inventories is priced by use of the last-in, first-out (LIFO) method using
various dollar value pools. Interim LIFO determinations involve management's
estimates of expected year-end inventory levels. Components of inventory are as
follows:
(Dollars in millions) May 31, November 30,
2000 1999
-------------------------------------
Raw materials and supplies $ 23 $ 23
Work-in-process 7 4
Finished products 8 10
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Approximate replacement cost of inventories 38 37
Less: reserves, primarily LIFO (7) (6)
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31 31
Long-term contracts at average cost 304 293
Less: progress payments (181) (180)
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Sub-total long-term contract inventory 123 113
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$ 154 $ 144
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Note G - Property, Plant and Equipment
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(Dollars in millions) May 31, November 30,
2000 1999
------------------------------------
Land $ 30 $ 30
Buildings and improvements 243 243
Machinery and equipment 552 555
Construction-in-progress 88 50
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913 878
Less: accumulated depreciation (564) (543)
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$ 349 $ 335
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Note H - Long-term Debt and Credit Lines
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The Company has a five year, $250 million Revolving Credit Facility
Agreement (Facility) which expires in 2004 and is secured by stock of certain
subsidiaries of the Company. Under the terms of the Facility, the Company pays a
commitment fee for unused available funds. Interest rates are variable,
primarily based on LIBOR, and the Facility includes various covenants. As of May
31, 2000, $190 million was outstanding under the Facility.
As of May 31, 2000, outstanding letters of credit totaled $10 million.
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Note I - Contingencies
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Environmental Matters
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Sacramento, California
In 1989, the United States District Court approved a Partial Consent Decree
(Decree) requiring Aerojet to conduct a Remedial Investigation/Feasibility Study
(RI/FS) of Aerojet's Sacramento, California site and to prepare a RI/FS report
on specific environmental conditions present at the site and alternatives
available to remedy such conditions. Aerojet also is required to pay for certain
governmental oversight costs associated with Decree compliance. The State of
California expanded surveillance of perchlorate and nitrosodimethylamine (NDMA)
under the RI/FS because these chemicals were detected in public water supply
wells near Aerojet's property at previously undetectable levels using new
testing protocols.
Aerojet has substantially completed its efforts under the Decree to determine
the nature and extent of contamination at the facility. Preliminarily, Aerojet
has identified the technologies that will likely be used to remediate the site
and estimated costs using generic remedial costs from databases of Superfund
remediation costs. Over the next several years, Aerojet will conduct feasibility
studies to refine technical approaches and costs to remediate the site. The
remediation costs are principally for design, construction, enhancement and
operation of groundwater and soil treatment facilities, ongoing project
management and regulatory oversight, and are expected to be incurred over a
period of approximately 15 years. Aerojet is also addressing groundwater
contamination off of its facility through the development of an Operable Unit
Feasibility Study. This Study was completed and submitted as a draft to the
governmental oversight agencies in November 1999. In response to governmental
agency comments, Aerojet revised the draft report and it was resubmitted in May
2000. The agencies have now accepted the report as complete. The Study
enumerates various remedial alternatives by which offsite groundwater can be
addressed. It will be subject to both governmental agency and public review and
comment before being approved for implementation.
San Gabriel Valley Basin, California
Aerojet, through its Azusa facility, has been named by the United States
Environmental Protection Agency (EPA) as a potentially responsible party (PRP)
in the portion of the San Gabriel Valley Superfund Site known as the Baldwin
Park Operable Unit (BPOU). Regulatory action involves requiring site specific
investigation, possible cleanup, issuance of a Record of Decision (ROD)
regarding regional groundwater remediation and issuance to Aerojet and 18 other
PRPs Special Notice letters requiring groundwater remediation.
All of the Special Notice PRPs are alleged to have contributed volatile
organic compounds (VOCs). Aerojet's investigation demonstrated that the
groundwater contamination by VOCs is principally upgradient of Aerojet's
property and that lower concentrations of VOC contaminants are present in the
soils of Aerojet's presently and historically owned properties. The EPA contends
that Aerojet is one of the four largest sources of VOC groundwater contamination
at the BPOU of the 19 PRPs identified by the EPA. Aerojet contests the EPA's
position regarding the source of contamination and the number of responsible
PRPs. Aerojet is participating in a Steering Committee comprised of 14 of the
PRPs.
Soon after the EPA issued Special Notice letters in May 1997, as a result of
the development of more sensitive measuring methods, perchlorate was detected in
wells in the BPOU. More recently, NDMA was also detected using newly developed
measuring methods. Suspected sources of perchlorate include Aerojet's solid
rocket development and manufacturing activities in the 1940s and 1950s, and
military ordnance produced by a facility adjacent to the Aerojet facilities in
the 1940s. NDMA is a suspected byproduct of liquid rocket fuel activities by
Aerojet in the same time period. In addition, new regulatory standards for a
chemical
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known as 1.4 dioxane requires additional treatment. Aerojet may be a minor
contributor of this chemical. Aerojet is in the process of developing new, low
cost technologies for the treatment of perchlorate, NDMA and 1.4 dioxane.
On September 10, 1999, eleven of the nineteen Special Notice PRP's,
including Aerojet (the Offering Parties), submitted a Good Faith Offer to the
EPA to implement an EPA-approved remedy, which was accepted by the agency as a
basis for negotiating an Administrative Consent Order. The remedy, as proposed,
would employ low cost treatment technologies being developed by Aerojet to treat
perchlorate, NDMA, and 1.4 dioxane, as well as traditional treatment for VOCs.
Since submitting the Good Faith Offer, Aerojet has continued negotiations
with the other Offering Parties regarding final cost allocations, and the
Offering Parties have continued negotiations with the court-appointed
Watermaster and local water purveyors regarding an agreement that would provide
for use of the remediation project's treated water. A discussion of Aerojet's
efforts to estimate these costs is contained under the heading Aerojet's Reserve
and Recovery Balances.
On November 23, 1999, the Regional Board issued an order to Aerojet and
other PRPs to conduct additional environmental investigations at their
facilities. Aerojet is seeking review of this order while proceeding to comply.
The Regional Board recently held a hearing on the outstanding order and may be
amending its terms in the near future.
On April 4, 2000, Aerojet was sued by the San Gabriel Basin Water Quality
Authority in the United States District Court for the Central District of
California, Case No. 00-03579. The action seeks to recover $1,560,000 for funds
contributed by the Water Quality Authority to the cost of the La Puente Valley
Water District treatment plant constructed in 1999 and 2000, plus potential
operation and maintenance costs of approximately $150,000 per year. It is filed
pursuant to CERCLA section 107(a) and the Water Quality Authority Act section
407(c). Aerojet has not been served at this time. Aerojet has informed the Water
Quality Authority that if an agreement is reached with the Watermaster on the
structure and financing of the project, the Water Quality Authority costs will
be paid out of the funds that Aerojet and the other Offering Parties put up for
the total project since La Puente is part of the Watermaster remedial project.
If no agreement is reached with the Watermaster, then the costs of the La Puente
treatment plant would likely not be part of the remedial project and the La
Puente costs are likely to be considered purveor past costs which will be
addressed by the Offering Parties (including Aerojet) outside of the Offering
Party settlement agreement.
On May 16, 2000, Aerojet was sued by the Upper San Gabriel Valley Municipal
Water District in the United States District Court for the Central District of
California, Case No. 00-05284. The claim is for its contribution to the same
treatment plant of the La Puente Valley Water District as is the subject matter
of the San Gabriel Basin Water Quality Authority suit discussed above. The claim
is for an amount in excess of $1,686,000 for costs incurred or committed to be
paid in connection with that project. The same considerations apply to this
action as are described in the Water Quality Authority action.
On June 28, 2000, Aerojet was sued in a second action filed by the San
Gabriel Basin Water Quality Authority in the United States District Court for
the Central District of California, Case No. 00-CU-7042. The suit seeks to
recover $2,000,000 for funds contributed by the Water Quality Authority to the
cost of the suburban Water Systems Big Dalton treatment project. The same
considerations apply to this action as are described in the first Water Quality
Authority action.
During June 2000, Aerojet entered into agreements with several local
purveyors to toll the statute of limitations with respect to purveyor claims for
past costs related to remediating or costs related to alternative water sources
as a result of the contamination in their groundwater production wells allegedly
caused by Aerojet and other industrial companies in the San Gabriel Basin. The
parties have discussed
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methods of alternative dispute resolution to handle these claims. Aerojet has
received from one of these purveyors, San Gabriel Valley Water Company, a
statutory 90 day notice that it may bring a citizen suit under the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq.
On June 30, 2000, the EPA issued a Unilateral Administrative Order (No.
2000-13) to Aerojet and 18 other PRPs requiring them to carry out the BPOU
groundwater cleanup. The Order is effective July 10, 2000 and a response is due
shortly thereafter. Aerojet is evaluating its response to the Order. The EPA is
continuing to urge the PRPs to negotiate with the Watermaster regarding
implementation of its remedial project and has indicated its willingness to
negotiate a Consent Decree which would supercede the Order.
Muskegon, Michigan
In a lawsuit filed by the EPA, the United States District Court ruled in
1992 that Aerojet and its two inactive Cordova Chemical subsidiaries (Cordova)
are liable for remediation of Cordova's Muskegon, Michigan site, along with a
former owner/operator of an earlier chemical plant at the site, who is the other
potentially responsible party (PRP). That decision was appealed to the United
States Court of Appeals.
In May 1997, the United States Court of Appeals for the Sixth Circuit issued
an en banc decision reversing Aerojet's and the other PRP's liability under the
CERCLA statute. Petitions for certiorari to the United States Supreme Court for
its review of the appellate decision were filed on behalf of the State of
Michigan and the EPA and were granted in December 1997. On June 8, 1998, the
United States Supreme Court issued its opinion. The Court held that a parent
corporation could be directly liable as an operator under CERCLA if it can be
shown that the parent corporation operated the facility. The Supreme Court
vacated the Sixth Circuit's 1997 ruling and remanded the case back to the United
States District Court in Michigan for retrial. Aerojet does not expect that it
will be found liable on remand. Aerojet has been involved in settlement
discussions with the EPA and a proposed consent decree was filed with the
District Court in July 1999. If approved by the District Court, Aerojet and
Cordova will be dismissed. After a May 8, 2000 hearing, the court requested
additional briefing by all parties to occur by July 2000.
In a separate action, Aerojet and Cordova won indemnification for the
Muskegon site investigation and remediation costs from the State of Michigan in
the state Court of Claims. The Michigan Court of Appeals affirmed on appeal, and
the Michigan Supreme Court refused to hear the case. Further, the Michigan
Supreme Court also denied the State's motion for reconsideration. As a result,
the Company believes that most of the $50 million to $100 million in anticipated
remediation costs will be paid by the State of Michigan and the former
owner/operator of the site. A settlement agreement with the State of Michigan,
related to the proposed consent decree discussed above, has been finalized and
will be implemented contingent on the EPA consent decree being approved. In
addition, Aerojet settled with one of its two insurers in August 1999 for $4
million.
Aerojet's Reserve and Recovery Balances
On January 12, 1999, having finally received all necessary Government
approvals, Aerojet and the United States Government implemented, with effect
retroactive to December 1, 1998, the October 1997 Agreement in Principle
resolving certain prior environmental and facility disagreements between the
parties. Under this Agreement, a "global" settlement covering all environmental
contamination (including perchlorate) at the Sacramento and Azusa sites was
achieved; the Government/Aerojet environmental cost sharing ratio was raised to
88 percent/12 percent from the previous 65 percent/35 percent (with both Aerojet
and the Government retaining the right to opt out of this sharing ratio for
Azusa only, after at least $40 million in allowable environmental remediation
costs at Azusa have been recognized); the cost allocation base for
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these costs was expanded to include all of Aerojet (in lieu of the prior
limitation to the Sacramento business base); and Aerojet obtained title to all
of the remaining Government facilities on its Sacramento property, together with
an advance agreement recognizing the allowability of certain facility demolition
costs.
During the year ended November 30, 1999, Aerojet entered into a settlement
agreement covering certain environmental claims with certain of its insurance
carriers and received settlement proceeds of approximately $92 million. Under
the terms of its agreements with the United States Government, Aerojet is
obliged to credit the Government a portion of the insurance recoveries for past
costs paid by the Government. Pending finalization of an agreement with the
Government, Aerojet has estimated the amount of the credit and recorded a
liability of $33 million for the Government portion of insurance recoveries,
including applicable interest.
In the fourth quarter of 1999, Aerojet obtained sufficient information to
provide a reasonable basis for estimating the costs to address groundwater
contamination off its Sacramento facility and its probable share of the San
Gabriel Valley BPOU, and recorded those estimates in its reserve and recovery
balances. Estimates regarding the Sacramento Western Groundwater Remediation
were based on the Operable Unit Feasibility Study previous references and
Aerojet's opinion as to which remediation alternative proposed by the study will
be approved by the EPA and the State. Estimates regarding the San Gabriel Valley
BPOU remediation were based on the Good Faith Offer/Administrative Consent Order
and Watermaster/purveyor negotiations referenced previously. Not resolved at
this time are whether Aerojet will have any additional liability for its
possible share of water purveyor past cost claims, as well as the EPA's past and
future costs. In regard to the matter discussed above, management believes, on
the basis of presently available information, that resolution of this matter
would not materially affect liquidity, capital resources, or the consolidated
financial condition of the Company.
As of May 31, 2000, Aerojet had total reserves of $327 million for costs to
remediate the above sites and has recognized $219 million for probable future
recoveries. These estimates are subject to change as work progresses, additional
experience is gained and environmental standards are revised. In addition, legal
proceedings to obtain reimbursements of environmental costs from insurers are
continuing.
Lawrence, Massachusetts -- The Company has studied remediation alternatives
for its closed Lawrence, Massachusetts facility, which was contaminated with
PCBs, and has begun site remediation and off-site disposal of debris. The
Company has a reserve of $19 million for estimated decontamination and long-term
operating and maintenance costs of this site. The reserve represents the
Company's best estimate for the remaining remediation costs. Estimates of future
remediation costs could range as high as $37 million depending on the results of
future testing, and the ultimate remediation alternatives undertaken at the
site. The time frame for remediation is currently estimated to range from five
to ten years.
Other Sites
- -----------
The Company is also currently involved, together with other companies, in 25
other Superfund and non-superfund remediation sites. In many instances, the
Company's liability and proportionate share of costs have not been determined
largely due to uncertainties as to the nature and extent of site conditions and
the Company's involvement. While government agencies frequently claim PRPs are
jointly and severally liable at such sites, in the Company's experience, interim
and final allocations of liability costs are generally made based on relative
contributions of waste. Based on the Company's previous experience, its
allocated share has frequently been minimal, and in many instances, has been
less than one percent. The Company has reserves of approximately $16 million as
of May 31, 2000 which it believes are sufficient to cover its best estimate of
its share of the environmental remediation costs at these other sites. Also, the
Company is seeking recovery of its costs from its insurers.
-13-
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Environmental Summary
- ---------------------
In regard to the sites discussed above, management believes, on the basis of
presently available information, that resolution of these matters will not
materially affect liquidity, capital resources or consolidated financial
condition. The effect of resolution of these matters on results of operations
cannot be predicted due to the uncertainty concerning both the amount and timing
of future expenditures and future results of operations.
Other Legal Matters
- -------------------
Olin Corporation
In August 1991, Olin Corporation (Olin) advised GenCorp that it believed
GenCorp to be jointly and severally liable for certain Superfund remediation
costs, estimated by Olin to be $70 million, associated with a former Olin
manufacturing facility and waste disposal sites in Ashtabula County, Ohio. In
1993, GenCorp sought declaratory judgment in the United States District Court
for the Northern District of Ohio that the Company is not responsible for
environmental remediation costs. Olin counterclaimed seeking a judgment that
GenCorp is jointly and severally liable for a share of remediation costs. In
late 1995, the Court hearing on the issue of joint and several liability was
completed, and in August 1996 the Court held hearings relative to allocation. At
its request, in 1998, the Court received an additional briefing regarding the
impact of the recent Best Foods Supreme Court decision which the Company
believes definitively addresses many issues in this case in its favor. Another
hearing relative to liability and allocation was held on January 11, 1999. The
Court rendered its interim decision on liability on August 16, 1999, finding
GenCorp 30 percent liable for remediation costs at "Big D Campground" landfill
and 40 percent liable for remediation costs attributable to the Olin TDI
facility with regard to the Fieldsbrook site. Gencorp is currently engaged in
Phase III discovery relating to remediation costs, with a trial on the
allowability of those costs scheduled for November 27, 2000. Upon completion of
the Phase III trial, a final order will be issued, and the matter will be ripe
for appeal.
The Company continues to vigorously litigate this matter and believes that
it has meritorious defenses to Olin's claims. While there can be no certainty
regarding the outcome of any litigation, in the opinion of management, after
reviewing the information currently available with respect to this matter and
consulting with the Company's counsel, any liability which may ultimately be
incurred will not materially affect the consolidated financial condition of the
Company.
Other Matters
The Company and its subsidiaries are subject to various other legal actions,
governmental investigations, and proceedings relating to a wide range of matters
in addition to those discussed above. In the opinion of management, after
reviewing the information which is currently available with respect to such
matters and consulting with the Company's counsel, any liability which may
ultimately be incurred with respect to these additional matters will not
materially affect the consolidated financial condition of the Company. The
effect of resolution of these matters on results of operations cannot be
predicted because any such effect depends on both future results of operations
and the amount and timing of the resolution of such matters.
-14-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the fourth quarter of fiscal 1999, the Company completed a spin-off
of its Performance Chemicals and Decorative & Building Products businesses
(OMNOVA Solutions Inc.) to GenCorp Shareholders. As such, the results of the
discontinued operations during the first six months of 1999 are shown separately
in the Company's financial statements.
Material Changes in Financial Condition
- ---------------------------------------
Cash flow provided by continuing operating activities for the first six
months of fiscal 2000 was $14 million as compared to $24 million for 1999. The
decrease in cash flow provided by continuing operating activities primarily
reflects inventory build up on production contracts, payment for commercial
inventory, and overall higher working capital requirements.
For the first six months of 2000, cash used in investing activities of
continuing operations included capital expenditures of $40 million compared to
$32 million in the same period in 1999. Capital expenditures during the second
quarter of fiscal 2000 included investments in Aerojet's Space Based Infrared
System (SBIRS) Payload Satellite Facility, Vehicle Sealing's new product
launches, and infrastructure expansion for Aerojet Fine Chemicals LLC.
Financing activities provided $30 million of cash during the six month
period ended May 31, 2000. This primarily reflects a net increase in total debt
during this period. Cash flow used in financing activities of $20 million in the
first six months of 1999 primarily included a $4 million net decrease in debt
and $13 million in dividend payments. Debt increased overall to fund approved
capital projects, acquire contract and commercial inventory, and meet higher
working capital requirements.
Material Changes in Results of Operations
- -----------------------------------------
Operating profit from continuing businesses totaled $37 million for the
second quarter of 2000, an improvement of 37 percent versus $27 million for the
second quarter of 1999. In the second quarter of fiscal 2000, GenCorp recognized
approximately $7.7 million of operating income due to the residual effect of the
accounting change it adopted in the first quarter of fiscal 2000 relating to
pension and post retirement benefits. Excluding income from this accounting
change, operating income for the second quarter of fiscal 2000 was up 9 percent
as compared to the second quarter of 1999. For the six month period ended May
31, 2000, operating profit from continuing businesses increased 25 percent to
$60 million, compared to $48 million in the first six months of fiscal 1999.
Sales from continuing operations totaled $271 million for the second quarter
of 2000, a decrease of 11 percent compared to $304 million during the second
quarter of 1999. Vehicle Sealing segment revenues increased by 5 percent over
revenues in the same period in 1999. Revenues at Aerojet declined as expected,
primarily due to the completion of the Special Sensor Microwave Imager/Sounder
(SSMIS) program and final deliveries that occurred during the same quarter last
year. For the six month period ended May 31, 2000, sales from continuing
businesses decreased nine percent to $510 million, compared to $559 million in
the first six months of fiscal 1999.
Second quarter 2000 earnings from continuing businesses of $0.45 per diluted
share compared to $0.34 per diluted share during the second quarter of 1999, an
increase of 32 percent. Earnings from continuing businesses per diluted share
increased to $0.70 for the first six months of fiscal 2000 compared to $0.56 for
the first six months of fiscal 1999.
-15-
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On June 5, 2000, GenCorp finalized a transaction with NextPharma
Technologies (formerly Pharbil Technologies) to sell a 20 percent equity
interest in Aerojet Fine Chemicals for approximately $25 million and exchange an
additional 20 percent for an approximate 35 percent equity interest in
NextPharma Technologies.
The Company recently received regulatory agency approvals for the technical
studies that declare approximately 3,100 acres of the Sacramento site clean of
contamination.
Aerospace, Defense and Fine Chemicals
Operating profit increased to $37 million in the second quarter of 2000
versus $27 million in the second quarter of 1999. Operating margins increased to
17 percent from nine percent. For the six months ended May 31, 2000, operating
profit increased to $44 million from $37 million, an increase of 19 percent.
Margins were favorably impacted by Delta contract performance, Titan deliveries
and launch incentives, award fees on the Atlas V program, 100 percent award fees
recognized on the AMSU program, and added profit for performance on the U.S.
Army's tactical missile TOW 2A/2B program. Additionally, Aerojet Fine Chemicals
LLC returned to profitability in the second quarter of 2000 and is gearing up
for significantly greater volumes during the second half of fiscal 2000.
Sales for the aerospace, defense and fine chemicals segment were $142
million in the second quarter of 2000 compared to $182 million in the same
quarter of 1999. For the six months ended May 31, 2000, sales decreased to $269
million from $332 million in the first six months of 1999. Lower revenues on the
Space Based Infrared Program (SBIRS), Space Defense Support Program (DSP),
Integrated Advanced Microwave Sounding Unit (AMSU) programs, and in Aerojet Fine
Chemicals LLC contributed to the decline, partially offset by higher volume on
the Sense and Destroy Armor (SADARM). Additionally, the second quarter of 1999
included the shipment of the final SSMIS unit.
During the quarter, Aerojet booked contract award funding of $179 million
with contract backlog as of May 31, 2000 totaling approximately $1.6 billion.
Vehicle Sealing
Net sales from continuing businesses for the Vehicle Sealing segment
improved five percent to $129 million in the second quarter of 2000, versus $123
million in the second quarter of 1999. The sales gain was due to higher
production volumes on Ford Explorer, General Motors' Full Size pickup and Ford's
F-150 platforms. Operating profit in the second quarter of 2000 was $12 million
compared to $9 million for the second quarter 1999. Operating profit margins
improved to 10 percent in the second quarter of 2000 versus eight percent in the
second quarter of 1999. Operating results included increased pension income
offset by launch support and coordination costs for the Ford P-207 platform
(Explorer Pickup) and the Ford U-203 platform (Escape). Operating margins are
expected to continue to improve throughout the remainder of 2000 as model run
rates are achieved and vehicle platforms transfer from launch support into full
production.
Vehicle Sealing continues to lead the most popular Sport Utility Vehicle
(SUV) and light truck segment of the market. A new award for the complete
sealing systems for General Motors GMT-800 series (Suburban, Tahoe and Yukon)
elevates Vehicle Sealing to the market share leader in this most popular and
fastest selling automotive segment. In addition to this new award, Vehicle
Sealing has significant existing SUV and light truck platforms that include GM's
CK pickup and numerous programs with Ford such as the F-series pickup, Ranger,
and Explorer.
-16-
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Environmental Matters
- ---------------------
GenCorp's policy is to conduct its businesses with due regard for the
preservation and protection of the environment. The Company devotes a
significant amount of resources and management attention to environmental
matters and actively manages its ongoing processes to comply with extensive
environmental laws and regulations. The Company is involved in the remediation
of environmental conditions which resulted from generally accepted manufacturing
and disposal practices in the 1950's and 1960's which were followed at certain
GenCorp plants. In addition, the Company has been designated a potentially
responsible party, with other companies, at sites undergoing investigation and
remediation.
The nature of environmental investigation and cleanup activities often makes
it difficult to determine the timing and amount of any estimated future costs
that may be required for remedial measures. However, the Company reviews these
matters and accrues for costs associated with the remediation of environmental
pollution when it becomes probable that a liability has been incurred and the
amount of the liability (usually based upon proportionate sharing) can be
reasonably estimated. The Company's Condensed Consolidated Balance Sheet as of
May 31, 2000 reflects accruals of $362 million and amounts recoverable of $219
million from the United States Government and other third parties for such
costs.
The effect of resolution of environmental matters on results of operations
cannot be predicted due to the uncertainty concerning both the amount and timing
of future expenditures and future results of operations. However, management
believes, on the basis of presently available information, that resolution of
these matters will not materially affect liquidity, capital resources or the
consolidated financial condition of the Company. The Company will continue its
efforts to mitigate past and future costs through pursuit of claims for
insurance coverage and continued investigation of new and more cost effective
remediation alternatives and associated technologies. For additional discussion
of environmental matters, refer to Note I- Contingencies.
Adoption of the Euro
- --------------------
Based upon a preliminary evaluation, management believes that the adoption
of the Euro by the European Economic Community will not have a material impact
on the Company's international businesses. The Company's foreign operations
currently are small and each operation conducts the majority of its business in
a single currency with minimal price variations between countries.
Forward-Looking Statements
- --------------------------
This report on Form 10-Q contains forward-looking statements as defined by
the Private Securities Litigation Reform Act of 1995. These statements may
present (without limitation) management's expectations, beliefs, plans and
objectives, future financial performance, and assumptions or judgments
concerning such matters. Any discussions contained in this report, except to the
extent that they contain historical facts, are forward-looking and accordingly
involve estimates, assumptions, judgments and uncertainties. There are a number
of factors that could cause actual results or outcomes to differ materially from
those addressed in the forward-looking statements. Such factors are detailed in
the Company's Annual Report on Form 10-K for the fiscal year ended November 30,
1999 filed with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
- -----------------------------------------------------------------
The Company is exposed to market risk from changes in interest rates on
long-term debt obligations. The Company's policy is to manage its interest rate
exposures through the use of a combination of fixed and variable rate debt.
Currently, the Company does not use derivative financial instruments to manage
its interest rate risk. Substantially all of the Company's long-term debt of
$190 million matures in the year 2004
-17-
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and had an average variable interest rate of 7.43 percent as of May 31, 2000. A
one percentage point change in the interest rate on the Company's long term debt
would not have materially affected interest expense in the first six months of
fiscal 2000.
Although the Company conducts business in foreign countries, international
operations were not material to the Company's consolidated financial position,
results of operations or cash flows as of May 31, 2000. Additionally, foreign
currency transaction gains and losses were not material to the Company's results
of operations for the six months ended May 31, 2000. Accordingly, the Company
should not be subject to material foreign currency exchange rate risk with
respect to future costs or cash flows from its foreign subsidiaries. To date,
the Company has not entered into any significant foreign currency forward
exchange contracts or other derivative financial instruments to hedge the
effects of adverse fluctuations in foreign currency exchange rates. The Company
is evaluating the future use of such financial instruments.
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
- -------------------------
Information concerning legal proceedings, including proceedings relating to
environmental matters, which appears in Note I beginning on page 10 of this
report is incorporated herein by reference.
Baier, et al. v. Aerojet-General Corporation, et al.
On March 1, 2000, a complaint was filed against Aerojet and other defendants
in San Bernardino County Superior Court, Case No. RCV046045. The plaintiffs are
residents of the cities of Chino and Chino Hills near Aerojet's former Ordnance
Division facility. This "toxic tort" action seeks damages for personal injury
and property damage allegedly caused by defendants' nuisance and fraud. Aerojet
was served on June 29, 2000. Aerojet has notified its insurers and plans to
vigorously defend this action.
Alexander, et al. v. Suburban Water Systems, et al.
This action was filed on August 4, 1999 in Los Angeles County Superior
Court, Case No. KC031130, by the same plaintiff's counsel as in the SANTAMARIA
and ANDERSON cases described in the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1999. It alleges the same causes of action. This
action was finally served on Aerojet on June 22, 2000. The action involves
approximately 146 plaintiffs. Plaintiffs' counsel has filed a motion with the
court to permit it to apply to the Judicial Council to coordinate all of the
related "toxic tort" actions before one judge. This motion is being opposed by
Aerojet and the other defendants.
Brooks et al. v. Suburban Water Systems, et al.
This action was filed on April 13, 2000 in the Los Angeles Superior Court,
Case No. KC032915, by the same plaintiffs' counsel as are involved in the
SANTAMARIA, ANDERSON and ALEXANDER cases. It alleges the same causes of action
on behalf of 10 new plaintiffs. It has not yet been served.
Pennington v. Aerojet, MDC, Southern California Water Co., et al.
This action was filed on June 19, 2000 in Sacramento Superior Court, Case
No. 00AS02622. It alleges basically the same causes of action as are involved in
the ALLEN and ADAMS cases, described in the Company's Annual Report on Form 10-K
for the fiscal year ended November 30, 1999, on behalf of one new plaintiff.
Aerojet was served on May 16, 2000. The case has been stayed by stipulation of
the parties pending resolution of the stays previously granted in the ALLEN and
ADAMS cases.
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In re: Proposition 65 Notices
Aerojet was served in November and December 1997 with notices from a
private group alleging that it had released chemicals into air and groundwater
near its Sacramento facility above state limits in violation of California's
Proposition 65 and/or without filing sufficiently detailed public notifications
as required by Proposition 65. Following collection and review of all of its
Proposition 65 records, air release reports and groundwater reports, Aerojet
believes it is in compliance with Proposition 65 and has so advised the
California Attorney General's office. On May 19, 2000, Aerojet was served with a
similar Prop 65 notice for alleged releases near its Azusa facility. On June 4,
1998, Aerojet was served with a Proposition 65 lawsuit filed by the Communities
For A Better Environment (CBE) in Sacramento Superior Court. The complaint
alleges past and present violations of Proposition 65. Aerojet's insurance
carriers have been notified of these claims. Aerojet plans a vigorous defense.
On July 6, 1998, the case was removed to U.S. District court based on that
court's jurisdiction over the CERCLA Partial Consent Decree for the Sacramento
site. Plaintiffs then moved to remand the case to the Sacramento Superior Court.
The remand motion was denied by U.S. District Court in November 1998. The
federal court in early 1999 transferred the case to Sacramento Superior Court
due to its finding of lack of jurisdiction, and discovery in the case began.
Aerojet and CBE reached a settlement agreement in February 2000, which if
ultimately agreed to and approved by the State and court, will lead to dismissal
of the action with prejudice.
Alliant Techsystems Inc. v. Aerojet-General Corp.
This action was filed on May 30, 2000 in the United States District Court
for the District of Utah, No. 2: 00CV-0442B. It was served upon Aerojet on July
10, 2000. The plaintiff, Alliant Techsystems Inc. (ATK) is, like Aerojet, a
manufacturer of solid propellant rocket motors with composite case structures.
In this patent infringement action, ATK alleges that Aerojet has infringed on a
utility patent held by ATK relating to the process for lining and winding
composite rocket motor cases in the performance of Aerojet's contract to
manufacture the Atlas V solid rocket motor for Lockheed-Martin Corp. ATK has
demanded a jury trial and unspecified damages.
While there can be no certainty regarding the outcome of any litigation, in
the opinion of management, after reviewing the information currently available
with respect to the matters discussed above and consulting with the Company's
counsel, any liability which may ultimately be incurred will not materially
affect the consolidated financial condition of the Company. The effect of
resolution of these matters on results of operations cannot be predicted because
any such effect depends on both future results of operations and the amount and
timing of the resolution of such matter.
The United States government frequently conducts investigations into
allegedly illegal or unethical activity in the performance of defense contracts.
Investigations of this nature are common to the aerospace and defense industries
in which Aerojet participates and lawsuits may result; possible consequences may
include civil and criminal fines and penalties, in some cases, double or treble
damages, and suspension or debarment from future government contracting. Aerojet
currently is subject to several United States government investigations
regarding business practices and cost classification from which additional legal
or administrative proceedings could result. While it is not possible to predict
with certainty the outcome of any such investigation, the Company does not
believe, based upon the information available at this time, that final
resolution of any such matter will have a material adverse effect on its
consolidated financial condition or results of operations, or result in its
suspension or debarment as a government contractor.
-19-
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Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
--------
Table Exhibit
Item No. Exhibit Description Number
---------------------------------------------------------------------------------------------
27 Financial Data Schedule 27
(Filed for EDGAR only)
b) Reports on Form 8-K
-------------------
There have been no reports on Form 8-K filed during the quarter
ended May 31, 2000.
-20-
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENCORP INC.
Date July 13, 2000 By /s/ T. L. Hall
---------------------------------- -----------------------------------------------
T. L. Hall
Senior Vice President and Chief Financial Officer;
Treasurer (Principal Financial Officer)
Date July 13, 2000 By /s/ W. R. Phillips
---------------------------------- -----------------------------------------------
W. R. Phillips
Senior Vice President, Law; General Counsel and
Secretary (Duly Authorized Officer)