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, 1998 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.)
175 Ghent Road Fairlawn, Ohio 44333-3300
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (330) 869-4200
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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
--- ---
At June 30, 1998, there were 41,528,011 outstanding shares of GenCorp Inc.'s
Common Stock, par value $.10.
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GenCorp Inc.
Table of Contents
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Statements of Income -
Three Months and Six Months Ended May 31, 1998 and 1997 -3-
Condensed Consolidated Balance Sheets -
May 31, 1998 and November 30, 1997 -4-
Condensed Consolidated Statements of Cash Flows -
Six Months Ended May 31, 1998 and 1997 -5-
Notes to the Unaudited Interim Condensed Consolidated
Financial Statements -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -12-
Part II. Other Information
Item 1. Legal Proceedings -16-
Item 6. Exhibits and Reports on Form 8-K -18-
Signatures -19-
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PART I. FINANCIAL INFORMATION
-----------------------------
GenCorp Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share data)
Unaudited Unaudited
Three Months Ended Six Months Ended
--------------------------- ----------------------------
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
--------------------------- ----------------------------
NET SALES $ 431.9 $ 403.5 $ 797.4 $ 731.5
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Cost of products sold 339.5 319.3 630.1 578.4
Selling, general and administrative 37.2 36.2 74.2 71.1
Depreciation 16.0 14.5 31.7 27.9
Interest expense 3.1 6.2 5.2 11.9
Other (income) and expense, net .7 (4.3) (.6) (4.5)
Unusual items (.2) - (.2) -
---------- ---------- ---------- ----------
396.3 371.9 740.4 684.8
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INCOME BEFORE INCOME TAXES 35.6 31.6 57.0 46.7
Income tax provision (benefit) 14.2 (52.5) 22.8 (48.5)
---------- ---------- ---------- ----------
NET INCOME $ 21.4 $ 84.1 $ 34.2 $ 95.2
========== ========== ========== ==========
EARNINGS PER SHARE OF COMMON STOCK
Basic $ .51 $ 2.51 $ .83 $ 2.84
Diluted $ .51 $ 2.08 $ .81 $ 2.38
Average number of shares of common stock
outstanding (in thousands)
Basic 41,482 33,554 41,416 33,529
Diluted 42,210 41,151 42,064 41,114
Cash dividends paid per share of common stock $ .15 $ .15 $ .30 $ .30
The accompanying notes to the unaudited interim condensed consolidated
financial statements are an integral part of these statements.
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GenCorp Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
Unaudited Audited
May 31, November 30,
1998 1997
--------------------------
CURRENT ASSETS:
Cash and equivalents $ 21.2 $ 18.4
Accounts receivable 256.2 252.2
Inventories 133.4 157.2
Prepaid expenses and other 57.9 56.4
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TOTAL CURRENT ASSETS 468.7 484.2
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Recoverable from U.S. Government and third
parties for environmental remediation 165.6 167.8
Deferred income taxes 151.5 151.0
Prepaid pension 122.7 116.1
Investments and other assets 158.9 103.3
Property, plant and equipment:
At cost 1,157.4 1,121.1
Accumulated depreciation (745.3) (711.4)
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Net property, plant and equipment 412.1 409.7
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TOTAL ASSETS $1,479.5 $1,432.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable $ 35.9 $ 25.5
Accounts payable - trade 75.0 102.3
Income taxes 35.3 21.3
Other current liabilities 228.8 241.1
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TOTAL CURRENT LIABILITIES 375.0 390.2
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Long-term debt 142.0 83.6
Postretirement benefits other than pensions 326.0 335.3
Environmental reserves 265.7 274.2
Other liabilities 65.8 67.5
SHAREHOLDERS' EQUITY
Preference stock - (none outstanding) - -
Common stock - $0.10 par value; 41.5 million shares outstanding 4.2 4.1
Other capital 150.2 146.4
Retained earnings 161.0 139.2
Cumulative currency translation adjustments (10.4) (8.4)
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TOTAL SHAREHOLDERS' EQUITY 305.0 281.3
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,479.5 $1,432.1
======== ========
The accompanying notes to the unaudited interim condensed consolidated
financial statements are an integral part of these statements.
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GenCorp Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
Unaudited
Six Months Ended
May 31,
1998 1997
-------------------
OPERATING ACTIVITIES
Net income $ 34.2 $ 95.2
Unusual items (.2) -
Depreciation, amortization and gain/loss on disposal of fixed assets 33.3 29.6
Deferred income taxes (.5) (1.3)
Changes in operating assets and liabilities net of effects of acquisitions and
dispositions of businesses and exchange rate changes:
Current assets 23.5 (39.5)
Current liabilities (32.0) 8.3
Other non-current assets (4.6) -
Other non-current liabilities (19.6) (12.1)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 34.1 80.2
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INVESTING ACTIVITIES
Capital expenditures (32.9) (18.6)
Proceeds from asset dispositions 15.3 13.1
Acquisitions (73.8) (46.5)
Investments and other; net (.2) 2.6
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NET CASH USED IN INVESTING ACTIVITIES (91.6) (49.4)
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FINANCING ACTIVITIES
Long-term debt incurred 120.0 100.1
Long-term debt paid (61.6) (102.3)
Net short-term debt incurred (paid) 10.4 (14.8)
Dividends (12.4) (10.0)
Other equity transactions 3.9 (7.7)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 60.3 (34.7)
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 2.8 (3.9)
Cash and equivalents at beginning of year 18.4 22.6
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Cash and equivalents at end of period $ 21.2 $ 18.7
====== ======
Cash paid for interest was $4.9 million and $12.0 million for the six months
ended May 31, 1998 and 1997, respectively. Cash paid for income taxes was $8.6
million and $28.5 million for the six months ended May 31, 1998 and 1997,
respectively.
The accompanying notes to the unaudited interim condensed consolidated
financial statements are an integral part of these statements.
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GenCorp Inc.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note A - Basis of Presentation
- ------------------------------
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 complete 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, 1997.
All normal recurring accruals and adjustments considered necessary for a
fair presentation of the unaudited results for the six months ended May 31, 1998
and 1997, have been reflected. The results of operations for the six months
ended May 31, 1998, 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 year's data to the
current presentation.
Note B - Earnings Per Share
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In 1997, the Financial Accounting Standards Board issued Statement No. 128
"Earnings per Share" (SFAS 128). SFAS 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts presented have been restated
to conform to SFAS 128 requirements.
The following table sets forth the computation of basic and diluted earnings
per share:
Unaudited Unaudited
Three Months Ended Six Months Ended
May 31, May 31,
(Dollars in millions, shares in thousands) 1998 1997 1998 1997
------------------ ----------------------
Numerator for basic earnings per share -
income available to common shareholders $21.4 $84.1 $34.2 $95.2
Effect of dilutive securities:
8% convertible subordinated debentures - 1.4 - 2.8
----- ----- ----- -----
Numerator for diluted earnings per share -
income available to common shareholders
after assumed conversions $21.4 $85.5 $34.2 $98.0
===== ===== ===== =====
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Note B - Earnings Per Share (continued)
- ---------------------------------------
Unaudited Unaudited
Three Months Ended Six Months Ended
May 31, May 31,
(Dollars in millions, shares in thousands) 1998 1997 1998 1997
--------------------- ----------------------
Denominator for basic earnings per share -
weighted average shares 41,482 33,554 41,416 33,529
Effect of dilutive securities:
8% convertible subordinated debentures - 7,154 - 7,154
Employee stock options 715 424 635 412
Other 13 19 13 19
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Dilutive potential common shares 728 7,597 648 7,585
------ ------ ------ ------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 42,210 41,151 42,064 41,114
====== ====== ====== ======
Basic earnings per share $ 0.51 $ 2.51 $ 0.83 $ 2.84
====== ====== ====== ======
Diluted earnings per share $ 0.51 $ 2.08 $ 0.81 $ 2.38
====== ====== ====== ======
Note C - Acquisitions and Divestitures
- --------------------------------------
On March 1, 1998, the Company acquired The Goodyear Tire & Rubber Company's
Calhoun, Georgia latex facility for an aggregate consideration of $78 million,
of which $74 million was paid in cash and $4 million was paid through the
retention of receivables. The acquisition was accounted for as a purchase and
resulted in goodwill of $58 million which is being amortized over 40 years.
On April 7, 1998, the Company announced that an agreement in principle had
been reached with United Kingdom based Walker Greenbank PLC to purchase its
commercial wallcovering business. The transaction is subject to due diligence,
negotiation of definitive agreements, regulatory approvals and approval by
Walker Greenbank shareholders.
On May 7, 1997, the Company acquired certain net assets of Printworld from
Technographics, Inc. for $47 million in cash. The acquisition was accounted for
as a purchase and resulted in goodwill of $27 million which is being amortized
over 30 years.
On June 30, 1998, the Company sold its plastic extrusions appliance gasket
business to ILPEA, Inc. for an aggregate consideration of approximately $3
million.
Note D - Unusual Items
- ----------------------
During the second quarter of 1998, the Company had unusual items resulting
in income of $0.2 million. These unusual items included charges of $3.8 million
related to exiting the plastic extrusions appliance gasket business and an $8.8
million write-off of excess fixed assets that will no longer be used in a number
of polymer products businesses. These charges were offset by a gain of $12.8
million on the sale of surplus land in Nevada by Aerojet.
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Note E - Income Taxes
- ---------------------
The Company reduced its tax expense in the first six months of 1997 by $67
million due to the receipt of federal income tax settlements for tax credits,
timing of deductions and related interest.
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
judgments of expected year-end inventory levels. Components of inventory are as
follows:
Unaudited Audited
May 31, November 30,
1998 1997
-----------------------------------
Raw materials and supplies $ 41.1 $ 42.9
Work-in-process 8.5 8.6
Finished products 57.4 59.1
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Approximate replacement cost of LIFO inventories 107.0 110.6
Reserves, primarily LIFO (39.2) (39.1)
Long-term contracts at average cost 250.8 199.0
Progress payments (185.2) (113.3)
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$ 133.4 $157.2
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Note G - Long-term Debt and Credit Lines
- ----------------------------------------
On May 17, 1996, the Company entered into a new five-year unsecured $400
million revolving credit facility (Facility) which expires in May 2001. As of
May 31, 1998, unused and available revolving lines of credit totaled $247
million. The Company pays a variable commitment fee, which was 1/5 of one
percent, on the unused balance. Interest rates were variable, primarily based on
LIBOR, and were at an average rate of 6.2 percent. The Facility contains various
debt restrictions and provisions relating to net worth, interest coverage and
debt to earnings before interest, taxes, depreciation and amortization
(Debt/EBITDA) ratios. As of May 31, 1998, the Company was required to maintain
consolidated net worth of at least $150 million.
At May 31, 1998, the Company had unsecured, uncommitted lines of credit with
several banks for short-term borrowings aggregating $93 million, of which $33
million was outstanding. Borrowings under such lines generally bear interest at
money market rates and are payable on demand. The Company also had outstanding
letters of credit totaling $22 million at May 31, 1998 of which $13 million was
issued under the Facility.
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Note H - Contingencies
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Environmental Matters
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Sacramento, California
In June 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
compliance with the Decree. The State of California recently 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 and to identify
the technologies that will likely be used 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.
San Gabriel Valley Basin, California
Aerojet, through its Azusa facility, has been named by the U.S.
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 issuance of a Record of
Decision (ROD) regarding regional groundwater remediation, issuing Aerojet and
18 other PRPs Special Notice letters requiring groundwater remediation and site
specific investigation and possible cleanup.
Aerojet's investigation demonstrated that the principal groundwater
contamination, volatile organic compounds (VOC), is upgradient of Aerojet's
property and that only low 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 groundwater contamination at
the BPOU of the nineteen PRPs identified by the EPA. Aerojet contests the EPA's
position regarding the source of contamination and the number of responsible
PRPs. Aerojet has joined a Steering Committee comprised of eleven of the PRPs
identified by the EPA.
The ROD and Special Notice letters issued by the EPA require groundwater
remediation for the BPOU, estimated to cost $47 million in non-recurring costs
and $4 million to $5 million in annual operating expense. Aerojet, as part of
the Steering Committee, is participating in an effort to develop an alternative
"consensus" plan in which certain water supply entities would integrate the
remedial requirements into a water supply project. If implemented, the consensus
plan approach would allow the project to be eligible for federal funding for 25
percent of the non-recurring costs and additional funding from water supply
entities receiving benefit from the project, thus reducing the PRPs' costs.
Soon after the EPA issued the Special Notice letter, the State of California
also detected perchlorate in water wells in Southern California, including the
San Gabriel Valley, at previously undetectable levels using new testing
protocols. As a result of the recent finding of perchlorate, the EPA has
required investigation for and studies regarding treatability of perchlorate
contaminated water. Consequently, the EPA has allowed time extensions for
submittal by the PRPs of a good faith offer and negotiation of a consent decree
in response to the Special Notice letter. The perchlorate investigations and
studies are underway, primarily funded by Aerojet. The final perchlorate cleanup
standard (which has not yet been determined) could impact total cleanup cost and
implementation of the proposed consensus plan.
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Note H - Contingencies (continued)
- ----------------------
Muskegon, Michigan
In a lawsuit filed by the U.S. Environmental Protection Agency (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 potentially
responsible party (PRP) of an earlier chemical plant at the site. 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. The Supreme Court granted the EPA's petition in December
1997. On June 8, 1998, the U.S. 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 that had found neither
Aerojet nor the other PRP liable under CERCLA and remanded the case back to the
U.S. District Court in Michigan for retrial. Aerojet does not expect that it
will be found liable on remand.
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. On December 23, 1996, the
Michigan Supreme Court 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. In addition, Aerojet believes it has
insurance coverage for the site.
Aerojet's Reserve and Recovery Balances
On October 30, 1997, Aerojet executed an Agreement in Principle with the
U.S. Government that, when implemented after final U.S. Government approval,
will establish the cost sharing ratio and resolve certain other environmental
and facility issues at the Aerojet sites in Sacramento and Azusa, California.
At May 31, 1998, Aerojet had total reserves of $255 million for costs to
remediate the above sites and has recognized $178 million for probable future
recoveries. These estimates will be subject to change as work progresses,
additional experience is gained and environmental standards are revised. 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 $20
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 $41 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 6 to 11 years.
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Note H - Contingencies (continued)
- ----------------------
Other Sites
- -----------
The Company is also currently involved, together with other companies, in 31
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 1 percent. The Company has reserves of approximately $23 million as of
May 31, 1998 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.
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 the consolidated financial
condition of the Company. 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
- -------------------
In August 1991, Olin Corporation (Olin) advised GenCorp that Olin 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 associated with the former Olin facility and
Superfund sites. 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. The Court has not yet rendered a decision and recently requested
additional briefing due July 13, 1998. If the Court finds GenCorp is liable,
subsequent trial phases will address damages.
The Company is vigorously litigating 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.
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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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Material Changes in Financial Condition
- ---------------------------------------
Cash flow provided from operating activities for the first six months of
fiscal 1998 was $34.1 million as compared to $80.2 million in the first six
months of 1997. The decrease in cash flow from operating activities primarily
reflects the receipt of the federal income tax settlements in 1997 (see Note E -
Income Taxes), offset by a lower working capital requirement.
For the six month period ending May 31, 1998, $91.6 million was used for
investing activities, including the acquisition of the Calhoun facility for
$73.8 million and capital expenditures of $32.9 million, which relates to the
custom chemical and automotive businesses, offset by proceeds of $15.3 million
from asset dispositions. This is compared to $49.4 million used for investing
activities in the first six months of 1997, which included the acquisition of
Printworld for $46.5 million and capital expenditures of $18.6 million, offset
by proceeds of $13.1 million from asset dispositions.
Cash flow provided from financing activities in the first six months of 1998
primarily reflects a $68.8 million net increase in debt offset by payments of
$12.4 million in dividends. The net increase in debt from November 30, 1997 to
May 31, 1998 was mainly due to the acquisition of the Calhoun facility. The use
of cash flow in financing activities in the first half of 1997 reflected a $17.0
million net decrease in debt and payments of $10.0 million in dividends.
Material Changes in Results of Operations
- -----------------------------------------
Sales totaled $431.9 million for the second quarter of 1998, an increase of
7 percent as compared to $403.5 million during the second quarter of 1997. All
three GenCorp segments, aerospace and defense, polymer products, and automotive,
posted revenue increases during the current quarter as compared to the second
quarter of 1997. For the six months ended May 31, 1998, sales increased 9
percent to $797.4 million as compared to $731.5 million during the first six
months of 1997.
Operating profit before unusual items totaled $43.1 million for the second
quarter of 1998, versus $43.4 million for the second quarter of 1997. Operating
margins declined slightly to 10.0 percent compared to 10.8 percent in the second
quarter of 1997. Unusual items totaling $0.2 million in the current quarter
resulted from charges of $3.8 million related to exiting the plastic extrusions
appliance gasket business and an $8.8 million write-off of excess fixed assets
that will no longer be used in a number of polymer products businesses. These
charges were offset by a gain of $12.8 million on the sale of surplus land in
Nevada by Aerojet, the Company's aerospace and defense segment. For the first
six months of 1998, operating profit before unusual items improved 5 percent to
$72.7 million versus $69.4 million for the first half of 1997.
Earnings for the second quarter of 1998 improved to $0.51 per diluted share
compared to $0.50 per diluted share before a tax settlement during the second
quarter of 1997. Net income in the second quarter of 1998 totaled $21.4 million
compared to second quarter 1997 net income of $19.1 million before the tax
settlement. Reported net income in the second quarter of 1997 was $2.08 per
diluted share, including a tax benefit of $65 million or $1.58 per share. For
the six months ended May 31, 1998, net income improved 22 percent to $34.2
million as compared to net income before tax settlements of $28.0 million during
the first six months of 1997.
Net sales for the polymer products businesses in the second quarter of 1998
increased 9 percent to $174.9 million compared to $160.9 million in the second
quarter of 1997. Sales increased in both Decorative & Building Products and
Specialty Polymers. Improved sales in paper laminates, building systems, and
specialty latices for paper coatings and textiles led the increase. Penn Racquet
Sports experienced a slight sales decline.
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Material Changes in Results of Operations (continued)
- -----------------------------------------
Operating profit for the polymer products businesses increased to $23.5
million for the second quarter of 1998 versus $20.9 million in the second
quarter of 1997. Operating margins increased to 13.4 percent in the second
quarter of 1998 compared to 13.0 percent in the second quarter of 1997 due to
lower raw material prices for styrene, butadiene and PVC resins, partially
offset by higher prices of other raw materials in Decorative & Building Products
and slightly lower average unit selling prices in Specialty Polymers.
During the quarter, the Specialty Polymers business unit completed the
acquisition and the successful integration of the Calhoun, Georgia latex polymer
plant. This acquisition expands GenCorp's emulsion polymer production capacity
by 30 percent, provides a strategic southeastern U.S. platform for new
customers, and increases the Company's market share in the styrene butadiene
latex market. Penn Racquet Sports signed two new U.S. licensing agreements for
marketing of the Penn brand name and won a new promotion for tennis balls with a
national retailer. Decorative & Building Products' tentative agreement with U.K.
based Walker Greenbank would add approximately $70 million in annualized
revenues.
Net sales for the automotive business totaled $100.6 million in the second
quarter of 1998 versus $96.7 million in the second quarter of 1997. The 4
percent sales increase was led by higher volumes in North America, primarily on
the Mercedes sport utility vehicle, and on full-size pickups for Ford and
General Motors.
The Company's automotive operations earned $5.9 million in the second
quarter of 1998 as compared to $8.7 million for the second quarter of 1997.
Operating profit margins dropped to 5.9 percent compared to 9.0 percent in the
second quarter of 1997. Higher than planned launch costs, operating losses of
over $1 million in plastic extrusions, and negative foreign exchange variances
led to the margin decline. Performance, however, improved significantly from the
first quarter of 1998. Vehicle Sealing's German subsidiary, Henniges, was
profitable during the quarter. Also during the quarter, Vehicle Sealing
announced the decision to exit the plastic extrusions appliance gasket business
line, which should be completed in the third quarter of 1998. The UAW strikes at
General Motors could adversely affect the automotive operations in the second
half of the year, however, due to the uncertainty concerning the length of the
strikes, no estimate can be made at this time to quantify the strikes' impact on
the automotive operations.
At Aerojet, net sales increased 7 percent to $156.4 million in the second
quarter of 1998 as compared to $145.9 million in the second quarter of 1997.
Higher volumes on the Space Based Infrared System (SBIRS), Special Sensor
Microwave Imager/Sounder (SSMIS) and Delta liquid rocket engines, were partially
offset by lower volumes on the Defense Support Program (DSP), Titan, Sense and
Destroy Armor (SADARM), and Custom Chemicals.
Aerojet's operating profit for the second quarter of 1998 was $13.7 million,
compared to $13.8 million in the second quarter of 1997. As expected, operating
margins declined during the quarter to 8.8 percent from 9.5 percent in the
second quarter of 1997. The decrease was primarily due to the delivery of a
second SSMIS satellite sensor at no profit.
During the quarter, Aerojet liquid engines performed successfully on two
Delta II launches and on two Titan launches. The launch payloads included
Iridium and Globalstar commercial communication satellites, a classified
military payload, and a NOAA/NASA weather satellite. Contract awards totaled
$160 million during the quarter, with the contract backlog totaling $1.8 billion
at the end of the second quarter.
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14
Value-Creating Growth Strategy
- ------------------------------
As part of GenCorp's announced value-creating growth strategy, management
expects that the Company will become more focused as a stronger player in fewer
businesses with higher value enhancing growth potential. To execute this
strategy, the Company may exit non-strategic businesses and will aggressively
focus on organic growth in all remaining businesses and seek out vehicles for
"new but related" growth to expand its strongest businesses which have been
identified as GenCorp's growth platforms. Growth platform businesses include
Specialty Polymers, Decorative & Building Products, and the Custom Chemicals and
Space Surveillance sectors of Aerojet. Attractive related markets, products and
programs will be targeted in these areas, along with organic growth and
opportunities for acquisition or alliance strategies.
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 1950s and 1960s 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 at May
31, 1998 reflects accruals of $298 million and amounts recoverable of $178
million from the U.S. 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 H - Contingencies.
Information Systems and the Year 2000
- -------------------------------------
The Company is currently engaged in a comprehensive project to upgrade its
information, technology, manufacturing and facilities computer software programs
to address the Year 2000 issue. Many of the Company's systems include new
hardware and packaged software recently purchased from large vendors who have
represented that these systems are already Year 2000 compliant. The Company is
in the process of obtaining assurances from vendors that timely updates will be
made available to make all remaining purchased software Year 2000 compliant.
The Company will utilize both internal and external resources to reprogram
or replace and test all of its software for Year 2000 compliance, and the
Company expects to complete the project in early 1999. The estimated cost for
this project could range as high as $15 million, excluding the cost of new
systems which will be capitalized. This cost is being funded through operating
cash flows. Failure by the Company and/or vendors and customers to complete Year
2000 compliance work in a timely manner could have a material adverse effect on
certain of the Company's operations.
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15
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,
1997 filed with the Securities and Exchange Commission.
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16
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
- --------------------------
Information concerning legal proceedings, including proceedings relating to
environmental matters, which appears in Note H beginning on page 9 of this
report is incorporated herein by reference.
Santamaria v. Suburban Water Systems
- ------------------------------------
On July 2, 1997, a "toxic tort" lawsuit was filed in the Los Angeles County
Superior Court, Santamaria v. Suburban Water Systems, Docket No. KC025995,
naming as defendants 19 manufacturing companies (including Aerojet), and 5 water
companies. The complaint was subsequently amended to add additional plaintiffs
and two additional defendant public water companies. On February 24, 1998, the
plaintiffs served Aerojet and the other manufacturing defendants. On March 30,
1998, the Court granted a motion for change of venue and transferred the case to
Ventura County which is immediately northwest of Los Angeles. Further activity
will not take place in the case until it has been assigned to a new judge. The
several hundred plaintiffs, all of whom reside or resided in the San Gabriel
Valley of Los Angeles (SGV), alleged that the defendants placed hazardous
chemicals in the soil, groundwater and air in the SGV and provided contaminated
well water to the plaintiffs for many years. The causes of action alleged are
negligence, wrongful death, strict liability, trespass, nuisance, negligence per
se, ultrahazardous activity and fraudulent concealment, and the plaintiffs seek
personal injury and property damages in an unspecified amount and punitive
damages. They also seek a court order to stop the allegedly tortious activity,
but no preliminary injunctive relief is sought. Aerojet has notified its
insurers and will vigorously defend this action. In June 1998, three recently
filed, related matters containing similar allegations (ADLER, Docket No.
BC169892; BOSWELL, Docket No. KC027318; and CELI, Docket No. GC020622) were
stayed for at least one year by their respective judges pending a Public
Utilities Commission investigation of the plaintiffs' allegations. Aerojet has
filed a motion for a similar stay in the SANTAMARIA matter which it expects to
be granted also.
Allen, et al. v. Aerojet, MDC, Southern California Water Company, et al.
- ------------------------------------------------------------------------
Adams, et al. v. Aerojet, MDC, Southern California Water Company, et al.
- ------------------------------------------------------------------------
On December 8, 1997 and March 2, 1998, similar but unrelated "toxic tort"
complaints were filed in Sacramento Superior Court. The plaintiffs seek
compensation for damages for alleged personal injuries and property damages
related to exposure to groundwater contamination in eastern Sacramento County,
California. Aerojet was served on January 14, 1998 in ALLEN and on April 30,
1998 in ADAMS. Aerojet will vigorously defend these matters. In addition to
Aerojet, McDonnell-Douglas Corporation (now Boeing) and two Sacramento water
purveyors are defendants. Aerojet has also notified its insurers of these
actions. Aerojet has filed a motion for a stay in this matter which it expects
to be granted.
Because of these (and other similar recent) "toxic tort" lawsuits which
named California water purveyors as defendants, on March 12, 1998, the
California Public Utilities Commission (PUC) announced a wide ranging
investigation of drinking water quality in California. The PUC's General Counsel
has publicly stated that he believes under the California Constitution the PUC's
jurisdiction overrides that of the Courts in this area. Accordingly, Aerojet is
also preparing to defend its interests before the PUC.
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17
Part II. Other Information (continued)
- --------------------------------------
In re: Proposition 65 Notices
- ------ ----------------------
Aerojet was served in November and December 1997 with notices from a private
group alleging that it has released chemicals into air and groundwater from its
Sacramento facility in violation of California's Proposition 65 and 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 June 4, 1998, Aerojet was served with a Proposition 65 lawsuit filed by the
Communities For A Better Environment 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.
The Company and its subsidiaries are subject to various legal actions,
governmental investigations, and proceedings relating to a wide range of matters
in addition to those discussed above and in Part I of this report. 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
matter.
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18
Part II. Other Information (continued)
- --------------------------------------
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, 1998.
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19
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 6, 1998 By /s/ D. M. Steuert
--------------------------- -------------------------------
D. M. Steuert
Senior Vice President and Chief
Financial Officer
Date July 6, 1998 By /s/ W. R. Phillips
--------------------------- -------------------------------
W. R. Phillips
Senior Vice President, Law;
General Counsel
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