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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 February 28, 2001 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 NO X
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As of March 31, 2001, there were 42,699,225 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 Ended February 28, 2001 and February 29, 2000 -3-
Condensed Consolidated Balance Sheets -
February 28, 2001 and November 30, 2000 -4-
Condensed Consolidated Statements of Cash Flows -
Three months Ended February 28, 2001 and February 29, 2000 -5-
Notes to the Unaudited Interim Condensed Consolidated Financial
Statements - February 28, 2001 -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -17-
Item 3. Quantitative and Qualitative Disclosures About Market Risk -19-
Part II. Other Information
Item 1. Legal Proceedings -20-
Item 5. Other Information -20-
Item 6. Exhibits and Reports on Form 8-K -21-
Signatures -22-
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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
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Feb. 28, Feb. 29,
2001 2000
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NET SALES $ 353 $ 239
COSTS AND EXPENSES
Cost of products sold 309 196
Selling, general and administrative 11 8
Depreciation and amortization 18 13
Interest expense 9 3
Other (income) expense, net (1) 1
Foreign exchange gain (11) -
Unusual items, net 6 1
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341 222
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INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 12 17
Income tax benefit (provision) 5 (7)
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INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 17 10
Cumulative effect of a change in accounting principle, net of taxes - 74
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NET INCOME $ 17 $ 84
========= =========
PER SHARE DATA:
Basic and diluted earnings per common share:
Before cumulative effect of a change in accounting principle $ .39 $ .25
Cumulative effect of a change in accounting principle - 1.76
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Total $ .39 $ 2.01
========= =========
Cash dividends declared $ .03 $ .03
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
February 28, November 30,
2001 2000
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CURRENT ASSETS
Cash and cash equivalents $ 42 $ 17
Accounts receivable 239 135
Inventories 214 182
Prepaid expenses and other 15 12
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TOTAL CURRENT ASSETS 510 346
Recoverable from U.S. Government and third parties for
Environmental remediation 199 203
Deferred income taxes 62 76
Prepaid pension 298 281
Investments and other assets 147 53
Property, plant and equipment, net 533 365
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TOTAL ASSETS $ 1,749 $ 1,324
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LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable and current portion of long-term debt $ 30 $ -
Accounts payable 95 47
Income taxes payable 12 8
Other current liabilities 362 273
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TOTAL CURRENT LIABILITIES 499 328
Long-term debt 416 190
Postretirement benefits other than pensions 231 230
Environmental reserves 327 328
Other liabilities 64 53
SHAREHOLDERS' EQUITY
Preference stock - (none outstanding) - -
Common stock - $0.10 par value; 42 million shares outstanding 4 4
Other capital 3 2
Retained earnings 233 217
Accumulated other comprehensive loss (28) (28)
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TOTAL SHAREHOLDERS' EQUITY 212 195
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,749 $ 1,324
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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)
Three months Ended
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Feb. 28 Feb. 29,
2001 2000
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OPERATING ACTIVITIES
Income before change in accounting principle $ 17 $ 10
Depreciation and amortization 18 13
Foreign currency transaction gain (11) -
Deferred income taxes 8 12
Changes in operating assets and liabilities net of effects of acquisitions
of businesses:
Current assets, net (43) (15)
Current liabilities, net 5 (33)
Other non-current assets, net (15) (18)
Other non-current liabilities, net (6) (10)
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NET CASH USED IN OPERATING ACTIVITIES (27) (41)
INVESTING ACTIVITIES
Capital expenditures (6) (19)
Purchase of Draftex International, net of cash acquired (174) -
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NET CASH USED IN INVESTING ACTIVITIES (180) (19)
FINANCING ACTIVITIES
Long-term debt incurred 350 -
Net (repayments) borrowings on long-term revolving credit facilities (144) 55
Net short-term debt (paid) incurred 26 (2)
Dividends (1) (1)
Other equity transactions 1 1
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NET CASH PROVIDED BY FINANCING ACTIVITIES 232 53
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25 (7)
Cash and cash equivalents at beginning of period 17 23
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Cash and cash equivalents at end of period $ 42 $ 16
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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
February 28, 2001
Note A - Basis of Presentation
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The accompanying unaudited interim 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, 2000.
All normal recurring accruals and adjustments considered necessary for a
fair presentation of the unaudited results for the three month periods ended
February 28, 2001 and February 29, 2000 have been reflected. The results of
operations for the three months ended February 28, 2001 are not necessarily
indicative, if annualized, of those to be expected for the full fiscal year.
The preparation of 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 materially 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 before cumulative effect of a change in accounting principle:
(Dollars in millions, except per share data Feb. 28, Feb. 29,
and shares in thousands) 2001 2000
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NUMERATOR
Income before change in accounting principle $ 17 $ 10
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DENOMINATOR
Denominator for basic earnings per share -
Weighted average shares outstanding 42,010 41,864
Effect of dilutive securities:
Employee stock options 230 116
Other 92 -
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Dilutive potential common shares 322 116
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Denominator for diluted earnings per share -
Adjusted weighted average shares and assumed conversions 42,332 41,980
EARNINGS BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE PER SHARE OF COMMON STOCK
Basic earnings per share $ .39 $ .25
Diluted earnings per share $ .39 $ .25
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Note C - Comprehensive Income
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The components of total comprehensive income were as follows:
(Dollars in millions) Three Months Ended
---------------------------------
Feb. 28, Feb. 29,
2001 2000
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Income before cumulative effect of a change in accounting principle $ 17 $ 10
Adjustments:
Effect of foreign currency translation adjustments - (2)
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Total comprehensive income $ 17 $ 8
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Note D - Acquisitions, Divestitures and Other Matters
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On December 29, 2000 the Company acquired all of the outstanding stock of
The Laird Group's Draftex International Car Body Seals Division (Draftex) for
approximately $209 million. The purchase price is preliminary and will be
adjusted as a result of certain working capital adjustments provided for in the
purchase agreement and currently under negotiation with the seller. Draftex is
now part of the Company's GDX Automotive business segment and adds 11
manufacturing plants in six countries including Spain, France, Germany, Czech
Republic, China, and the United States. The acquisition was accounted for under
the purchase method of accounting and the excess of cost over the fair value of
the net assets acquired is being amortized on a straight line basis over a
twenty year period. The final allocation of the purchase price will be made in
late 2001. The Company's results of operations include the operating results of
Draftex since the date of acquisition. In connection with the acquisition, the
Company entered into a new, $500 million credit facility (see Note H).
The pro forma unaudited results of operations for the three months ended
February 28, 2001 and February 29, 2000, assuming consummation of the Draftex
Acquisition and incurrance of additional debt equal to the purchase price as of
December 1, 1999, are as follows:
Three Months Ended
---------------------------------
Feb. 28, Feb. 29,
(Dollars in millions, except per share amounts) 2001 2000
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Net Sales $ 389 $ 359
Income before cumulative effect of a change in accounting principle $ 9 $ 4
Net income $ 9 $ 78
Earnings per common share:
Basic and diluted:
Before cumulative effect of a change in accounting principle $ .21 $ .09
Net income $ .21 $ 1.85
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had the
acquisitions taken place as of December 1, 1999 or the results of future
operations of the Company. Furthermore, the pro forma results do not give effect
to all cost
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savings or incremental costs that may occur as a result of restructuring,
integration and consolidation of the acquisition.
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 fluctuations. 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 11 years). The new method eliminates
the ten-percent corridor and reduces the amortization period to five years.
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) February 28, November 30,
2001 2000
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Raw materials and supplies $ 36 $ 28
Work-in-process 33 12
Finished products 20 9
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Approximate replacement cost of inventories 89 49
Less: reserves, primarily LIFO (11) (7)
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78 42
Long-term contracts at average cost 295 310
Less: progress payments (159) (170)
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Sub-total long-term contract inventory 136 140
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$ 214 $ 182
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Note G - Property, Plant and Equipment
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(Dollars in millions) February 28, November 30,
2001 2000
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Land $ 34 $ 30
Buildings and improvements 314 261
Machinery and equipment 722 599
Construction-in-progress 52 49
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1,122 939
Less: accumulated depreciation (589) (574)
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$ 533 $ 365
========= =========
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Note H - Long-term Debt and Credit Lines
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On December 28, 2000, the Company entered into a new, five year, $500
million senior credit facility (New Facility). The New Facility was used to
finance the acquisition of the Draftex business (see Note D) and replaced the
previous Credit Facility. The New Facility consists of a $150 million revolving
loan, a $200 million term loan and a $150 million term loan. The term loans
include quarterly installment payment provisions. The Company pays a commitment
fee for unused available funds. Interest rates are variable, primarily based on
LIBOR. The New Facility contains certain restrictive covenants that require the
Company to meet specified financial ratios and restricts dividend payments,
capital expenditures, incurrance of additional debt and other transactions.
As of February 28, 2001, outstanding letters of credit totaled $9 million.
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. The governmental agencies are in the process of selecting the
remedial action alternative to be implemented and will develop a Record of
Decision that will be subject to Aerojet and public review and comment before
the proposed remediation is approved. A discussion of Aerojet's efforts to
estimate these costs is contained under the heading Aerojet's Reserve and
Recovery Balances.
In September 2000, Aerojet filed a motion with the U.S. District Court
seeking court approval of a modification to the Decree carving out approximately
3,000 acres from the site. The agencies opposed the motion. In November 2000,
the court denied Aerojet's motion on the basis that Aerojet knew that the
carve-out property was not contaminated at the time it was included in the
Decree. Aerojet has appealed this
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decision but the appeal has been stayed while Aerojet and the agencies meet in
an effort to reach a negotiated agreement removing the "carve-out" property from
the Decree and from the National Priorities List.
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,
military ordnance produced by a facility adjacent to the Aerojet facilities in
the 1940s, and fertilizer used in agriculture. 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 known as 1.4 dioxane require 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 a Consent Decree. 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. Aerojet's low
pressure UV/OX process, which drastically reduces the energy requirements to
treat NDMA and 1.4 dioxane, was recently accepted by the California Department
of Health Services for use in drinking water systems.
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 certain additional soil and groundwater sampling with
respect to new chemicals found in the groundwater since completion of an earlier
site investigation. That study, completed in 1994, concluded that no site
remediation was required. At this time, the State Regional Water Quality Control
Board (Regional Board) has ordered site remediation involving certain limited
soil gas extraction which Aerojet is in the process of implementing. It is too
early to know whether any further remediation will be required. The Regional
Board Order also
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indicated that at some future time it may attempt to order Aerojet to pay
certain past and future costs of private and public purveyors who have been
affected by contamination. However, there is a substantial legal question as to
the Regional Board's legal authority to consider such action, but, if the
current agreements described below are finalized with the local water entities,
this issue may be moot.
On April 4, 2000, Aerojet was sued by the San Gabriel Basin Water Quality
Authority (WQA) in the United States District Court for the Central District of
California, Case No. 00-03579. The action, which was served on Aerojet on April
18, 2000, seeks to recover $1,560,000 for funds contributed by the WQA 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 informed the WQA that if an
agreement is reached with the Watermaster on the structure and financing of the
project, the WQA 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 purveyor
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 (Upper District) in the United States District Court for the
Central District of California, Case No. 00-05284. The action, which was served
on Aerojet on May 19, 2000, seeks to recover the Upper District's contribution
to the same treatment plant of the La Puente Valley Water District as is the
subject matter of the WQA 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 WQA action.
On June 28, 2000, Aerojet was sued in a second action filed by the San
Gabriel Basin Water Quality Authority (WQA) in the United States District Court
for the Central District of California, Case No. 00-CU-07042. The suit, which
was served on Aerojet on October 12, 2000, seeks to recover $2,000,000 for funds
contributed by the WQA to the cost of the Suburban Water System's Big Dalton
treatment project. This action is not related to the La Puente actions discussed
above and will be litigated even if the La Puente actions are part of a BPOU
remedy settlement. The expenditures claimed in the lawsuit relate primarily to
VOC contamination that ultimately should be borne by other PRPs. Aerojet will
vigorously defend itself in this action and plans to bring those other PRPs into
the lawsuit.
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 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.
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On October 10, 2000, Aerojet was sued by the Valley County Water District
(Valley) in the United States District Court for the Central District of
California, Case No. 00-10803. The action, which was served on Aerojet on
October 12, 2000, seeks to recover under CERCLA and state causes of action for
past, present, and future costs relating to treatment of groundwater allegedly
contaminated by Aerojet. If the current agreements described below with the
local water entities are completed, these claims would be subsumed by the terms
of these agreements
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 became effective July 10, 2000, and all the PRPs
responded that they would comply with all lawful requirements of the Order. The
Order required the PRPs to proceed with the proposed cleanup plan but further
ordered that the PRPs negotiate with the San Gabriel Basin Watermaster
(Watermaster) and local water purveyors to modify the project to meet the water
supply needs of the BPOU.
Under the auspices of EPA oversight and an EPA financed mediator, certain
of the PRPs have continued to negotiate with the Watermaster and local water
purveyors. On January 12, 2001, a Memorandum of Understanding (MOU) was executed
between seven of the Special Notice PRPs, including Aerojet, and the Watermaster
and certain local purveyors under which these PRPs would finance the
implementation by the Watermaster and these purveyors of an EPA approved remedy
for the BPOU. Pursuant to the MOU, Aerojet and the other six PRPs have provided
a total of $4 million in immediate funding to cover expenses of the three public
agencies that financed the new treatment plant at La Puente Valley County Water
District. The MOU provided for a stay of all the water entity litigation pending
the negotiation of a Definitive Agreement on the principles set forth in the
MOU. The financial terms have now been agreed to include the settlement of
various purveyors' past cost claims, and the PRPs have submitted a final
schedule to the Water Entities to reach a Definitive Agreement by the end of
April 2001. The Water Quality Authority, however, has withdrawn from the
negotiations to pursue its litigation against Aerojet. As a result, this
litigation may proceed while the other water entities continue to negotiate.
Under the anticipated Definitive Agreement, the seven PRPs, (who have now been
joined by an eighth PRP), including Aerojet, will provide one hundred percent of
the resources for construction and operation of the remaining extraction and
treatment facilities required to complete the EPA cleanup program, after credits
for contributions from the United States Bureau of Reclamation under existing
legislation and other available government funds. At the same time, the eight
PRPs have reached an agreement to mediate, and, if necessary, litigate the final
allocation of costs among themselves. This agreement contains an allocation of
interim financing costs pending completion of the final allocation.
Aerojet intends to defend itself vigorously to assure that it is
appropriately treated with other PRPs and that costs of any remediation are
properly spread over all users of the San Gabriel Valley aquifer. In addition,
Aerojet is also pursuing its insurance remedies. On the basis of information
presently available, management believes that established environmental reserves
for San Gabriel Valley groundwater remediation efforts are adequate.
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
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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 did not expect that it would be found liable on remand. Aerojet entered
into settlement discussions with the EPA and a proposed consent decree was filed
with the District Court in July 1999. After a May 8, 2000 hearing, the court
requested additional briefing by all parties to occur by July 2000. On August
24, 2000 the court approved the consent decree effectively dismissing the action
as against Aerojet and Cordova. It is expected that the remaining PRP will
appeal the approval of the Consent Decree if it is found liable.
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 PRP
owner/operator of the site. A settlement agreement with the State of Michigan,
related to the proposed consent decree discussed above, has been finalized
effective upon the August 24, 2000 approval of the EPA consent decree. In
September 2000, Cordova received a settlement payment of $1.5 million from the
State of Michigan. 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 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 was
obliged to credit the Government a portion of the insurance recoveries for past
costs paid by the Government. On March 8, 2001, Aerojet entered into a
settlement agreement with the United States Government that resolved Aerojet's
obligation to allocate a portion of the insurance recoveries to the Government.
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
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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 oversight 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 February 28, 2001, Aerojet had total reserves of $314 million for
costs to remediate the Sacramento and San Gabriel Valley Basin sites and has
recognized $209 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 remaining reserve
of $16 million as of February 28, 2001 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.
El Monte, California
On December 21, 2000, Aerojet received an order from the Los Angeles Region
office of the California Regional Water Quality Control Board requiring a work
plan for investigation of Aerojet's former El Monte facility. On January 22,
2001, Aerojet filed an appeal of the order with the Board asserting selective
enforcement. The appeal is in abeyance pending negotiations with the Board. In
March 2001, Aerojet submitted a limited work plan to the Board in light of the
Board's failure to adequately seek similar investigations by lessees and owners
of the facility following Aerojet's ownership. On February 21, 2001, Aerojet
received a general notice letter from U.S. EPA Region IX naming Aerojet as a PRP
to the South El Monte Operable Unit of the San Gabriel Valley Superfund site.
Other Sites
- -----------
The Company is also currently involved, together with other companies, in
approximately 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 $22 million as of February 28, 2001 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.
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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 U.S. Supreme Court's decision in Best Foods 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 Fields Brook site. Phase III proceedings on the
allowability of those remediation costs were recently completed, and a final
order is expected in 2001. Upon issuance of the final order, 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.
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Note J - Segment Information
- ----------------------------
(Dollars in millions) Three Months Ended
------------------
Feb. 28, Feb. 29,
2001 2000
--------------------------
Net Sales:
Aerospace, defense and fine chemicals $ 172 $ 127
GDX Automotive 181 112
------- --------
Total 353 239
Income:
Aerospace, defense and fine chemicals 23 20
GDX Automotive (3) 4
Unusual items (7) -
-------- --------
Segment Operating Profit 13 24
Interest expense (9) (3)
Corporate other income (expense) (1) (1)
Corporate expenses (3) (2)
Foreign currency transaction gain 11 -
Unusual items 1 (1)
------- --------
Income before income taxes and cumulative effect of an accounting change $ 12 $ 17
====== ========
GDX Automotive's segment assets increased by more than $300 million versus
the amount reported in the November 30, 2000 annual report due to the
acquisition of Draftex (Note D).
During the quarter, the Company reached a settlement with the State of
California on an outstanding tax claim. The portion of the settlement that will
be repaid to the Company's defense customers is reflected as an unusual expense
item of $7 million in segment income. The benefit retained by the Company, $4.9
million on an after tax basis, is in the income tax provision for the quarter.
Note K - Derivative Financial Instruments
- -----------------------------------------
In June 1998, the FASB issued Statement of Financial Accounting Standard
No.133, Accounting for Derivative Instruments and Hedging Activities, (SFAS 133)
which, for the Company, was effective December 1, 2000. This statement
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The adoption of SFAS 133 did not have a material
effect on the financial statements, since the Company currently does not
generally invest in derivative instruments or routinely engage in hedging
activities.
-16-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Material Changes in Financial Condition
- ---------------------------------------
Net cash used in operating activities for the first three months of fiscal
2001 was $27 million as compared to $41 million for 2000. The decreased use of
cash primarily reflects improved working capital management.
For the first three months of 2001, cash used in investing activities of
continuing operations included $174 million cash paid, net of cash acquired for
the Draftex Acquisition and capital expenditures of $6 million compared to
capital expenditures of $19 million in the same period in 2000. The significant
reduction in capital expenditures reflects the completion of major
infrastructure expansion at Aerojet Fine Chemicals, completion of the Space
Based Infrared Satellite (SBIRS) Payload Test Facility and management
initiatives to reduce capital expenditures.
Financing activities provided $232 million of cash during the three month
period ended February 28, 2001 compared to $53 million during the same period in
2000. The increase was due primarily to borrowings under the new debt agreement
used to finance the purchase of Draftex.
Material Changes in Results of Operations
- -----------------------------------------
First quarter 2001 earnings before a change in an accounting principle
increased to $0.39 per diluted share compared to $0.25 per diluted share during
the first quarter of 2000. Operating profit before unusual items totaled $20
million for the first quarter of 2001 versus $24 million for the first quarter
of 2000. Sales totaled $353 million for the first quarter of 2001, a 48 percent
increase compared to $239 million during the first quarter of 2000. GDX
Automotive segment revenues increased by more than 60 percent over revenues in
the same period in 2000. Revenues at Aerojet increased 35 percent.
Aerospace, Defense and Fine Chemicals
Sales for the aerospace, defense and fine chemicals segment were $172
million in the first quarter of 2001 compared to $127 million in the same
quarter of 2000. Higher revenues on the Space Based Infrared Program (SBIRS),
Search and Destroy Armor (SADARM), and the Defense Support Program (DSP) Post
Production contributed to the increased sales, partially offset by lower volume
on the Titan, Atlas V, and AMRAAM programs. Aerojet booked contract award
funding of $145 million during the first quarter of 2001 with contract backlog
at February 28, 2001 totaling $1.2 billion versus $1.6 billion at February 29,
2000.
Operating profit before unusual items in the aerospace, defense and fine
chemicals segment increased to $23 million in the first quarter of 2001 versus
$20 million in the first quarter of 2000. Operating margins decreased to 13
percent from 16 percent primarily related to the mix of contract revenues and
timing and amount of award fees. Margins in the first quarter of 2000 were
favorably impacted by higher Titan deliveries, added profit recognized on the
U.S. Army's tactical missile TOW 2A/2B program, and 100% award fees recognized
on the AMSU program.
Aerojet Fine Chemicals continues to make progress towards becoming
profitable after key management changes were made during the latter part of
2000. Backlog for Aerojet Fine Chemicals totaled $80 million at February 28,
2001.
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GDX Automotive
Net sales for the GDX Automotive segment increased more than 60 percent to
$181 million in the first quarter of 2001, versus $112 million in the first
quarter of 2000. The sales increase was due to inclusion of two months of
results from the Draftex acquisition in late December 2000 partially offset by
marginally lower volumes at previously existing North American facilities.
GDX Automotive experienced an operating loss in the first quarter of 2001
of $3 million compared to operating profit of $4 million for the first quarter
2000. The operating loss was primarily caused by (i) a 40% decline in production
at the Berger, Missouri plant due to OEM reductions in the production of sedans,
(ii) launch costs relating to the new 2002 Ford Explorer and; (iii) higher
utility costs. Overall, volumes for truck and sport utility vehicles remained
strong in North America.
On March 28, 2001, the Company announced that it would implement a
restructuring and consolidation of its GDX Automotive business, estimated to
cost between $18 million and $22 million. Implementation of the restructuring
will begin in the second quarter of 2001. The restructuring includes the
intended closure of GDX Automotive's Marion, Indiana and Ballina, Ireland
manufacturing facilities.
Unusual Items
- -------------
During the quarter, the Company reached a settlement with the State of
California on an outstanding tax claim. The portion of the settlement that will
be repaid to the Company's defense customers is reflected as an unusual expense
item of $7 million in segment income. The benefit retained by the Company, $5
million on an after tax basis, is in the income tax provision for the quarter.
The Company also recognized a $1 million pretax unusual gain below segment
operations as compared to a pretax unusual loss of $1 million in the same
reporting period of fiscal year 2000.
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
February 28, 2001 reflects accruals of $352 million and amounts recoverable of
$209 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
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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
- --------------------
The Company is currently evaluating the potential impact of the adoption of
the Euro on its existing and newly acquired foreign subsidiaries. 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.
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,
2000 filed with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures 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 notes payable and
long-term debt of $446 million matures in the year 2005 and had an average
variable interest rate of 8.98 percent as of February 28, 2001. A one percentage
point change in the interest rate on the Company's long term debt would have
impacted interest expense in the first three months of fiscal 2001 by
approximately $1 million.
With the addition of Draftex in 2001, the Company conducts significant
business in foreign countries. However, foreign currency transaction gains and
losses were not material to the Company's results of operations for the three
months ended February 28, 2001. 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. The Company entered into forward
currency exchange contracts in connection with the Draftex acquisition in the
first quarter of 2000, resulting in foreign currency transaction gains of
approximately $11 million. As of February 28, 2001, there are no significant
foreign currency forward exchange contracts or other derivative financial
instruments to hedge the effects of adverse fluctuations in foreign currency
exchange rates outstanding. The Company is evaluating the future use of such
financial instruments.
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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 nine of this
report is incorporated herein by reference.
Taylor, et al. v. Aerojet-General Corporation, et al.
On January 10, 2001, a Complaint was filed against Aerojet and other
defendants in U.S. District Court, Central District, California. The plaintiffs
are residents of the cities of Chino Hills and Chino near Aerojet's former
Ordnance Division facility. This tort action seeks damages for personal injury
and property damage allegedly caused by defendants' negligence and nuisance.
Aerojet's counsel agreed to waive service in exchange for an extension of time
to respond.
Alvarado v. Suburban Water Systems, et al.
On January 23, 2001, a toxic tort lawsuit was filed in the Los Angeles
Superior Court, Alvarado v. Suburban Water Systems, et al., Case No. KC034953,
by the same counsel as in Santamaria, naming seven water companies, Aerojet and
more than 19 other companies or businesses. The case was filed on behalf of four
plaintiffs. The same allegations were made as were made in Santamaria. This
action has not been served on Aerojet.
Bild v. McDonnell Douglas Corporation (including Aerojet-General
Corporation, et al.)
On March 23, 2001, plaintiff sued McDonald Douglas Corporation (now Boeing)
and Aerojet in U.S. District Court, Eastern District of California, Case No.
CIV.S 01-0515 FCD JFM, alleging that historical releases of PCBs at the Security
Park area of the former McDonnell Douglas Corporation site (now owned by
Aerojet) damaged the soils on its property. Plaintiff also alleges it has
expended remediation costs to address the contamination. On April 2, 2001,
Aerojet tendered the defense of this matter to Boeing. Aerojet has notified its
insurers.
Item 5. Other Information
- --------------------------
On February 12, 2001, the Company announced the appointment of a new
Director on the Board, J. Robert Anderson, bringing the number of Directors to
eight.
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Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits
--------
none
b) Reports on Form 8-K
-------------------
On January 2, 2001, the Company filed an 8-K incorporating its
press release dated December 29, 2000, announcing that the Company had
completed the purchase of the Draftex International Car Body Seals
Division, the automotive vehicle sealing unit of the Laird Group.
On January 12, 2001, the Company filed an 8-K describing the
December 29, 2000 acquisition of all of the outstanding capital stock
of various companies comprising the Draftex International Car Body
Seals Division of the Laird Group Public Limited Company.
On January 16, 2001, the Company filed an 8-K incorporating its
press release dated January 12, 2001 announcing that it has joined six
other companies in signing an agreement with the Main San Gabriel Basin
Watermaster, San Gabriel Basin Water Quality Authority, and certain
other water purveyors to implement a groundwater cleanup project in the
Baldwin Park Superfund Operable Unit of San Gabriel Valley in Southern
California.
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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 April 13, 2001 By /s/ T. L. Hall
---------------------- -------------------------------------------------
T. L. Hall
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date April 13, 2001 By /s/ W. R. Phillips
---------------------- ----------------------------------------------------
W. R. Phillips
Senior Vice President, Law; General Counsel and
Secretary (Duly Authorized Officer)