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 February 28, 1999 Commission File Number 1-1520
----------------- ------
GenCorp Inc.
------------
(Exact name of registrant as specified in its charter)
Ohio 34-0244000
- ------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
175 Ghent Road Fairlawn, Ohio 44333-3300
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (330) 869-4200
--------------
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 March 31, 1999, there were 41,706,560 outstanding shares of GenCorp Inc.'s
Common Stock, par value $0.10.
2
GENCORP INC.
Table of Contents
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Statements of Income -
Three Months Ended February 28, 1999 and 1998 -3-
Condensed Consolidated Balance Sheets -
February 28, 1999 and November 30, 1998 -4-
Condensed Consolidated Statements of Cash Flows -
Three Months Ended February 28, 1999 and 1998 -5-
Notes to the Unaudited Interim Condensed Consolidated
Financial Statements as of February 28, 1999 -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -13-
Item 3. Quantitative and Qualitative Disclosures
About Market Risk -17-
Part II. Other Information
Item 1. Legal Proceedings -17-
Item 4. Submission of Matters to a Vote of Security Holders -18-
Item 6. Exhibits and Reports on Form 8-K -19-
Signatures -20-
-2-
3
PART I. FINANCIAL INFORMATION
GENCORP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share data)
Unaudited
Three Months Ended
------------------------------
February 28, February 28,
1999 1998
------------------------------
NET SALES $439.6 $365.5
------ ------
COSTS AND EXPENSES
Cost of products sold 341.2 290.6
Selling, general and administrative 46.1 37.0
Depreciation 17.7 15.7
Interest expense 5.4 2.1
Other (income) and expense, net (.3) (1.3)
Unusual items .5 -
------ ------
410.6 344.1
------ ------
INCOME BEFORE INCOME TAXES 29.0 21.4
Income tax provision 11.8 8.6
------ ------
NET INCOME $ 17.2 $ 12.8
====== ======
EARNINGS PER SHARE OF COMMON STOCK
Basic $ .41 $ .31
Diluted $ .41 $ .31
Average number of shares of common stock outstanding (in thousands)
Basic 41,582 41,349
Diluted 42,036 41,942
Cash dividends paid per share of common stock $ .15 $ .15
See notes to the unaudited interim condensed consolidated financial statements.
-3-
4
GENCORP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
Unaudited Audited
February 28, November 30,
1999 1998
-------------------------------
CURRENT ASSETS:
Cash and equivalents $ 21.5 $ 28.6
Accounts receivable 272.2 275.7
Inventories 160.0 165.3
Prepaid expenses and other 56.3 59.1
-------- --------
TOTAL CURRENT ASSETS 510.0 528.7
-------- --------
Recoverable from U.S. Government and third parties for
environmental remediation 148.0 149.3
Deferred income taxes 137.1 136.9
Prepaid pension 136.5 127.4
Investments and other assets 299.4 301.4
Property, plant and equipment:
At cost 1,228.8 1,238.3
Accumulated depreciation (731.3) (738.6)
-------- --------
Net property, plant and equipment 497.5 499.7
-------- --------
TOTAL ASSETS $1,728.5 $1,743.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable $ 53.2 $ 14.4
Accounts payable - trade 88.0 118.7
Income taxes 34.3 34.0
Other current liabilities 226.9 263.2
-------- --------
TOTAL CURRENT LIABILITIES 402.4 430.3
-------- --------
Long-term debt 356.1 356.2
Postretirement benefits other than pensions 315.6 318.4
Environmental reserves 248.5 245.7
Other liabilities 51.7 49.3
SHAREHOLDERS' EQUITY
Preference stock - (none outstanding) - -
Common stock - $0.10 par value; 41.7 million shares outstanding 4.2 4.2
Other capital 153.6 150.8
Retained earnings 209.1 198.1
Accumulated other comprehensive loss (12.7) (9.6)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 354.2 343.5
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,728.5 $1,743.4
======== ========
See notes to the unaudited interim condensed consolidated financial statements.
-4-
5
GENCORP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
Unaudited
Three Months Ended
February 28,
1999 1998
-----------------------------
OPERATING ACTIVITIES
Net income $ 17.2 $ 12.8
Depreciation, amortization and gain/loss on disposal of fixed assets 19.0 16.4
Deferred income taxes (.2) (.1)
Changes in operating assets and liabilities net of effects of acquisitions and
dispositions of businesses:
Current assets 11.6 26.5
Current liabilities (66.7) (49.2)
Other non-current assets (1.8) (3.2)
Other non-current liabilities .6 (11.2)
------ ------
NET CASH USED IN OPERATING ACTIVITIES (20.3) (8.0)
------ ------
INVESTING ACTIVITIES
Capital expenditures (19.0) (12.9)
Proceeds from asset dispositions 9.0 .3
Acquisitions (9.0) -
------ ------
NET CASH USED IN INVESTING ACTIVITIES (19.0) (12.6)
------ ------
FINANCING ACTIVITIES
Long-term debt incurred 20.0 20.0
Long-term debt paid (20.1) (10.4)
Net short-term debt incurred 38.8 18.0
Dividends (6.2) (6.2)
Other equity transactions (.3) 1.7
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 32.2 23.1
------ ------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (7.1) 2.5
Cash and equivalents at beginning of year 28.6 18.4
------ ------
Cash and equivalents at end of period $ 21.5 $ 20.9
====== ======
Cash paid for interest was $6.1 million and $2.1 million for the three months
ended February 28, 1999 and 1998, respectively. Cash paid for income taxes was
$10.2 million and $2.9 million for the three months ended February 28, 1999 and
1998, respectively.
See notes to the unaudited interim condensed consolidated financial statements.
-5-
6
GENCORP INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AS OF FEBRUARY 28,1999
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, 1998.
All normal recurring accruals and adjustments considered necessary for a
fair presentation of the unaudited results for the three months ended February
28, 1999 and 1998, have been reflected. The results of operations for the three
months ended February 28, 1999, 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
The following table sets forth the computation of basic and diluted earnings
per share:
Unaudited
Three Months Ended
February 28,
(Dollars in millions, except per share amounts and shares in thousands) 1999 1998
--------------------------
Numerator
Net income $17.2 $12.8
===== =====
Denominator
Denominator for basic earnings per share -
weighted average shares 41,582 41,349
Effect of dilutive securities:
Employee stock options 435 578
Other 19 15
----- -----
Dilutive potential common shares 454 593
----- -----
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed conversions 42,036 41,942
====== ======
Earnings Per Share Of Common Stock
Basic earnings per share $.41 $.31
==== ====
Diluted earnings per share $.41 $.31
==== ====
-6-
7
Note C - Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), as of December 1, 1998, which
established standards for reporting and displaying comprehensive income and its
components in the financial statements. The adoption of SFAS 130, which had no
impact on the Company's net income or shareholders' equity, requires cumulative
translation adjustments and minimum pension liability adjustments, which prior
to adoption were reported separately in shareholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
During the quarters ended February 28, 1999 and 1998, total comprehensive
income was $14 million and $10 million, respectively.
Note D - Acquisitions, Divestitures and Other Matters
On December 2, 1998, the Company acquired the U.S. acrylic emulsion polymers
business of PolymerLatex, located in Fitchburg, Massachusetts, for $9 million.
This acquisition was accounted for using the purchase method and was included in
the results of operations for the Company from the date of acquisition.
On December 14, 1998, the Company sold its residential wallcovering business
to Blue Mountain Wallcoverings, Inc. for an aggregate consideration of
approximately $9 million. The loss on the sale of this business was reflected in
the 1998 results of operations.
On December 14, 1998, the Company announced it had initiated the process for
divesting its Penn Racquet Sports division for which the Company expects to
realize a gain.
On December 17, 1998, the Company announced a plan to spin off its
Performance Chemicals and Decorative & Building Products businesses to GenCorp
shareholders as a separate publicly traded polymer products company. Following
the spin-off, GenCorp would continue to operate Aerojet, its aerospace, defense
and fine chemicals segment, and its automotive Vehicle Sealing business unit.
Implementation of the plan is subject to approval by GenCorp shareholders, the
receipt of a favorable ruling from the Internal Revenue Service, as well as
market conditions at the time of the proposed spin-off.
Note E - 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
February 28, November 30,
(Dollars in millions) 1999 1998
---------------------------------
Raw materials and supplies $ 49.1 $ 48.0
Work-in-process 8.6 8.5
Finished products 75.4 74.6
------- -------
Approximate replacement cost of inventories 133.1 131.1
Reserves, primarily LIFO (40.2) (40.2)
Long-term contracts at average cost 274.4 276.2
Progress payments (207.3) (201.8)
- ------- -------
$ 160.0 $ 165.3
======= =======
-7-
8
Note F - Long-term Debt and Credit Lines
The Company has a five-year unsecured $400 million revolving credit facility
(Facility) which expires in May 2001. As of February 28, 1999, unused and
available revolving lines of credit totaled $120 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 5.6 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
February 28, 1999, the Company was required to maintain consolidated net worth
of at least $192 million.
On September 30, 1998, the Company entered into a $75 million revolving
credit facility for the purchase of certain assets of Sequa Chemicals, the
specialty chemicals unit of Sequa Corporation. This facility is available
through April 29, 1999 and contains various debt restrictions and other
provisions which are the same as those in the Facility described above. The rate
is 75 basis points over LIBOR. The Company pays a commitment fee of
approximately 1/4 of one percent on the unused balance. The Company intends to
convert the $75 million revolving credit facility into the Facility at or before
the date of expiration. At that time, the unused available revolving lines of
credit on the Facility will be reduced accordingly.
At February 28, 1999, the Company had unsecured, uncommitted lines of credit
with several banks for short-term borrowings aggregating $92 million, of which
$50 million was outstanding. Interest rates for these lines of credit were
variable and were at an average rate of 5.3 percent on February 28, 1999.
Borrowings under such lines are payable on demand. The Company also had
outstanding letters of credit totaling $23 million at February 28, 1999.
Note G - Contingencies
Spin-off Related Matters
On March 22, 1999, the Company announced a Voluntary Enhanced Retirement
Program (VERP) and an Enhanced Involuntary Separation Pay Plan (EISP) which are
associated with and contingent upon completion of the Company's plan to spin-off
its Performance Chemicals and Decorative & Building Products divisions as a
separate publicly traded company.
The VERP offers enhanced retirement benefits to eligible salaried employees
within a number of corporate facilities and divisional headquarters. The
majority of the related benefits will be paid from the Company's defined benefit
pension and retiree healthcare plans. The maximum estimated cost of the VERP
could range up to $7.6 million. The actual cost of both the VERP and the EISP
plans will be reflected in the financial statements after the total number of
participants is known and the spin-off has occurred.
In January 1999, the Company's Board of Directors approved the 1999 GenCorp
Key Employee Retention Plan. This plan provides for the issuance of retention
agreements to selected key employees with a total maximum payout of up to $3.2
million payable before March 2001.
-8-
9
Note G - Contingencies (continued)
Environmental Matters
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 compliance with the Decree. 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 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. Aerojet is also addressing groundwater contamination off
of its facility.
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 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.
Aerojet's investigation demonstrated that the principal groundwater
contamination, volatile organic compounds (VOC), is 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 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 is participating in a Steering Committee comprised of nineteen of
the PRPs.
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
"watermaster" plan in which certain water supply entities would integrate the
remedial requirements into a water supply project. If implemented, the
watermaster 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.
-9-
10
Note G - Contingencies (continued)
San Gabriel Valley Basin, California (continued)
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. More recently, NDMA has been detected
in water supply wells, also at previously undetectable levels. The extent of
NDMA in the groundwater is being studied. Treatment technology is established.
The perchlorate and NDMA investigations and studies are underway, primarily
funded by Aerojet. The final perchlorate and NDMA cleanup standards (which have
not yet been determined) could impact total cleanup cost, allocation among the
PRPs, and implementation of the proposed consensus plan.
Muskegon, Michigan
In a lawsuit filed by the EPA, the United States District Court ruled in
1992 that Aerojet and its two inactive Cordova Chemical subsidiaries (Cordova)
are liable for remediation of Cordova's Muskegon, Michigan site, along with a
former owner/operator of an earlier chemical plant at the site, who is the other
potentially responsible party (PRP). That decision was appealed to the United
States Court of Appeals.
In May 1997, the United States Court of Appeals for the Sixth Circuit issued
an en banc decision reversing Aerojet's and the other PRP's liability under the
CERCLA statute. Petitions for certiorari to the United States Supreme Court for
its review of the appellate decision were filed on behalf of the State of
Michigan and the EPA and were granted in December 1997. On June 8, 1998, the
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 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. Aerojet is involved in settlement discussions with the EPA and expects
the filing of a proposed consent decree which, if approved by the District
Court, would allow Aerojet and Cordova to be dismissed.
In a separate action, Aerojet and Cordova won indemnification for the
Muskegon site investigation and remediation costs from the State of Michigan in
the state Court of Claims. The Michigan Court of Appeals affirmed on appeal, and
the Michigan Supreme Court refused to hear the case. Further, the Michigan
Supreme Court also denied the State's motion for reconsideration. As a result,
the Company believes that most of the $50 million to $100 million in anticipated
remediation costs will be paid by the State of Michigan and the former
owner/operator of the site. A settlement agreement with the State of Michigan,
related to the proposed consent decree discussed above, is also being finalized
and will be executed contingent on the U.S. consent decree being approved. In
addition, Aerojet believes it has insurance coverage for the site.
-10-
11
Note G - Contingencies (continued)
Aerojet's Reserve and Recovery Balances
On January 12, 1999, having finally received all necessary Government
approvals, Aerojet and the U.S. 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.
At February 28, 1999, Aerojet had total reserves of $239 million for costs
to remediate the above sites and has recognized $164 million for probable future
recoveries. These estimates are 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 $17
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 $38 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 5 to 10 years.
Other Sites
The Company is also currently involved, together with other companies, in 35
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 $20 million as of
February 28, 1999 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.
-11-
12
Note G - Contingencies (continued)
Other Legal Matters
Olin Corporation
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. 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, at its request, in 1998, it
received an additional briefing regarding the impact of the recent Best Foods
Supreme Court decision which the Company believes definitively addresses many
issues in this case in its favor. Another hearing relative to liability and
allocation was held on January 11, 1999. The parties argued their respective
positions based on recent case law. The judge indicated that a decision may be
forthcoming in the next several months. If the Court finds GenCorp is liable,
subsequent trial phases will address damages.
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.
-12-
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Material Changes in Financial Condition
Cash flow used in operating activities for the first three months of fiscal
1999 was $20.3 million as compared to $8.0 million in the first three months of
1998. The increase in cash flow used by operating activities primarily reflects
a higher working capital requirement.
For the three month period ending February 28, 1999, $19.0 million was used
for investing activities, including the acquisition of the Fitchburg,
Massachusetts facility for $9.0 million and capital expenditures of $19.0
million, offset by proceeds of $9.0 million from asset dispositions. This is
compared to $12.6 million used for investing activities in the first three
months of 1998, which was mainly for capital expenditures.
Cash flow provided from financing activities in the first three months of
1999 primarily reflects a $38.7 million net increase in debt offset by payments
of $6.2 million in dividends. The net increase in debt from November 30, 1998 to
February 28, 1999 was mainly due to the acquisition of the Fitchburg facility
and capital expenditures. Cash flow provided from financing activities in the
first three months of 1998 reflected a $27.6 million net increase in debt and
payments of $6.2 million in dividends.
Interest expense increased to $5.4 million in the first quarter of 1999
versus $2.1 million in the same period a year ago due to the higher debt levels.
Material Changes in Results of Operations
Sales during the first quarter of 1999 of $439.6 million were up 20 percent,
compared to sales of $365.5 million in the first quarter of 1998. Segment
operating profit for the first quarter of 1999 of $38.0 million increased 28
percent versus $29.6 million for the first quarter of 1998, and was up in all
three GenCorp reporting segments, aerospace and defense, polymer products and
automotive. Consolidated segment operating profit margins rose to 8.6 percent in
the first quarter of 1999 versus 8.1 percent for the same period of 1998.
The Company announced on December 17, 1998, that it plans to spin off its
Performance Chemicals and Decorative & Building Products businesses to GenCorp
shareholders as a separate publicly traded polymer products company. Under the
plan, GenCorp would continue to operate Aerojet's aerospace, defense and fine
chemicals businesses, and the Vehicle Sealing automotive business unit.
The Company expects to complete the spin-off in the second half of 1999, a
plan that is contingent upon a tax-free ruling from the IRS, shareholder
approval and market conditions at the time of the spin-off. During the quarter,
the Company expensed $0.5 million of spin-off related activities.
Within the Company's polymer products segment, net sales increased for the
first quarter of 1999 by 26 percent to $185.5 million compared to $147.5 million
in the first quarter of 1998. Performance Chemicals and Decorative & Building
Products both posted double-digit sales gains during the quarter. Higher sales
and improved operating performance were also posted by Penn Racquet Sports,
which the Company is in the process of divesting.
Operating profit for the polymer products segment during the first quarter
of 1999 improved 15 percent to $16.8 million versus $14.6 million in the first
quarter of 1998. Segment operating profit margins declined to 9.1 percent versus
9.9 percent last year, primarily due to lower pricing in several markets and
integration costs related to acquisition activity in the latter half of 1998.
-13-
14
Material Changes in Results of Operations (continued)
During the quarter, Decorative & Building Products continued its integration
of GenCorp U.K. Wallcoverings Inc. This August 1998 acquisition elevated the
Company to the worldwide market share leader in commercial wallcovering. In the
North American market, introduction of new wallcovering designs in late 1998 has
resulted in encouraging growth of new orders in the past several months.
Synergies realized from the 1997 Printworld acquisition have led to
double-digit sales growth in the decorative laminates business from new
coordinated paper and vinyl product lines.
During the quarter, Decorative & Building Products also increased market
share across all of its Building Systems product lines.
Performance Chemicals completed the acquisition of PolymerLatex's U.S.
acrylics business located in Fitchburg, Massachusetts in the first quarter of
1999, further diversifying its product lines and technology and expanding
geographic reach into the Northeastern United States.
Aerojet's 1999 first quarter operating profits improved to $18.4 million
versus $14.2 million in the first quarter of 1998. Operating margins grew to
12.2 percent in the current quarter versus 10.5 percent last year, primarily as
a result of strong performance in the Strategic and Space Propulsion and Space
Surveillance businesses. Sales in the first quarter of 1999 increased 11 percent
to $150.3 million, versus $135.4 million during the first quarter of 1998.
Higher revenues were achieved from the Titan, Space Based Infrared System (SBIRS
High), and tactical programs.
Highlights during the quarter included three Delta II launches, one of which
marked the 200th consecutive successful launch of Aerojet's second-stage engine.
Also during the quarter, Aerojet booked new contract awards of $223 million,
increasing contract backlog to $1.8 billion.
One major contract awarded by Lockheed Martin calls for Aerojet to build a
new generation solid rocket motor for the Atlas V medium-to-heavy lift launch
vehicle for the commercial satellite market and government missions. This new
contract, with potential to exceed one half billion dollars of sales over the
next decade, fits with Aerojet's continuing strategy of aggressively pursuing
work in the commercial space arena.
Aerojet also won an $8.5 million contract from the Boeing Company to provide
altitude control systems for the National Missile Defense (NMD) first stage
booster rocket. Aerojet expects to deliver a flight-qualified system in less
than six months, with additional units to be supplied over the next year to
support the flight test program.
Also during the quarter, Aerojet finalized an important agreement with the
U.S. Air Force, which significantly enhances Aerojet's environmental cost
recovery from 65 percent to 88 percent.
Automotive segment sales were $103.8 million in the first quarter of 1999,
versus $82.6 million in the same quarter of 1998. The 26 percent sales increase
came from higher volumes on the Ford F-150 and Explorer, Mercedes AAV, and
General Motors C/K pickup programs.
The automotive segment operating profit improved, as expected, to $2.8
million during the first quarter of 1999, compared to operating profit of $0.8
million during the first quarter of 1998, due to the completion of launch
activities for several new programs in 1998. Improvements were offset slightly
by some launch costs on several new 1999 passenger car programs, and currency
exchange rates from Canadian operations. Henniges, the business unit's European
operation, had positive operating profit during the quarter.
The automotive segment continues to focus on light trucks and sport utility
vehicles, the most profitable and fastest growing segment of the market.
Profitability is expected to gradually increase during the year as programs
launched in 1998 and early 1999 mature.
-14-
15
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
February 28, 1999 reflects accruals of $276 million and amounts recoverable of
$164 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 G - Contingencies.
Year 2000
The Company is currently engaged in a comprehensive project to upgrade its
information, technology, and manufacturing and facilities computer hardware and
software programs to address the Year 2000 issue at its domestic and
international businesses. Many of the Company's systems include new hardware and
updated software packages purchased from established vendors who have
represented that these systems are Year 2000 ready. The Company does not have
large centralized systems, a factor, which the Company believes, reduces the
risk of a single point of failure having widespread impact on the Company.
As part of this project, the Company has formally communicated with all of
its significant suppliers, vendors and large customers to determine the extent
to which the Company is vulnerable to those parties' failures to correct their
own Year 2000 issues. As of February 28, 1999, the Company has received
approximately 95 percent of the responses, and those responses generally
indicate that these parties will be Year 2000 ready.
The Company has completed an inventory and assessment of its information
technology systems. Both internal and external resources are being utilized to
test the Company's software for Year 2000 readiness and, where necessary, the
systems are being remediated through upgrading, replacement or reprogramming.
Also, the Company has completed an inventory and assessment of its
non-information technology (embedded) systems, prioritizing the impact of each
of these systems on the Company's ability to conduct its operations and, as
necessary, obtaining vendor verification and/or remediation of those systems.
The process of analyzing, prioritizing, remediating and testing will be an
iterative process until all critical systems are Year 2000 ready.
-15-
16
Year 2000 (continued)
The estimated cost for this project is projected to range between $6 million
and $8 million, which is being funded through operating cash flows. The Company
has spent approximately $2 million as of February 28, 1999 on this project and
expects to spend the remaining budget by the third quarter of 1999. Excluding
recent acquisitions, the Company believes that approximately 70 percent of its
systems are Year 2000 ready as of February 28, 1999 and the remaining systems
will be Year 2000 ready by mid-year 1999. Recent acquisitions are targeted for
completion by the end of the third quarter of 1999.
Based upon currently available information and considering the Company's
diversified business base, decentralized systems and Year 2000 efforts,
management believes that the most reasonably likely worst case scenario could
result in minor short-term business interruptions. The Company is preparing
contingency plans which include alternative sourcing to minimize any disruptions
to its businesses resulting from a vendor or supplier not being Year 2000 ready.
However, failure by the Company and/or vendors and customers to complete Year
2000 readiness work in a timely manner could have a material adverse effect on
certain of the Company's operations. The Company's exposure could increase or
its timetable for Year 2000 readiness could be delayed as a result of any new
acquisitions.
Adoption of the Euro
Based upon a preliminary evaluation, management believes that the adoption
of the Euro by the European Economic Community will not have a material impact
on the Company's international businesses. The Company's foreign operations
currently are small and each operation conducts the majority of its business in
a single currency with minimal price variations between countries.
Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risk from changes in interest rates on
long-term debt obligations. The Company's policy is to manage its interest
rate exposures through the use of a combination of fixed and variable rate
debt. Currently, the Company does not use derivative financial instruments to
manage its interest rate risk. Substantially all of the Company's long-term debt
of $359 million which matures in the year 2001 is variable and had an average
variable interest rate of 5.6 percent at February 28, 1999. The Company's
long-term debt bears interest at market rates and therefore, the carrying value
approximates fair value.
Although the Company conducts business in foreign countries, international
operations were not material to the Company's consolidated financial position,
results of operations or cash flows as of February 28, 1999. Additionally,
foreign currency transaction gains and losses were not material to the Company's
results of operations for the three months ended February 28, 1999. Accordingly,
the Company should not be subject to material foreign currency exchange rate
risk with respect to future costs or cash flows from its foreign subsidiaries.
To date, the Company has not entered into any significant foreign currency
forward exchange contracts or other derivative financial instruments to hedge
the effects of adverse fluctuations in foreign currency exchange rates. The
Company is evaluating the future use of such financial instruments.
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,
1998 filed with the Securities and Exchange Commission.
-16-
17
Item 3. Quantitative and Qualitative Disclosure About Market Risk
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations-Quantitative and Qualitative Disclosure About Market Risk."
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information concerning legal proceedings, including proceedings relating to
environmental matters, which appears in Note G beginning on page 8 of this
report is incorporated herein by reference.
PUC Investigation
Because of recent "toxic tort" lawsuits which named California water
purveyors as defendants, on March 12, 1998, the PUC announced a wide ranging
investigation of drinking water quality in California. The PUC's General Counsel
has publicly stated that he believes that 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. Aerojet's
intervention petition to allow Aerojet to participate in the PUC's proceedings
has been granted. The PUC's investigation is expected to be completed by fall
1999, at which point the stays in the toxic tort cases (as discussed in the
Company's 1998 annual report on Form 10-K) may be lifted, unless the Court of
Appeal so orders earlier.
In re: Proposition 65 Notices
Aerojet was served in February 1999 with a notice from a private party
alleging that it had released chemicals into air and groundwater at and near its
Azusa, California facility above state limits in violation of California's
Proposition 65 and/or without filing sufficiently detailed public notifications
as required by Proposition 65. Following collection and review of all of its
Proposition 65 records, air release reports and groundwater reports, Aerojet
believes it is in compliance with Proposition 65 and will vigorously defend a
Proposition 65 lawsuit if such a lawsuit is initiated.
McKinley, et al. v. GenCorp Inc., et al.
Following an "investigative" report published in the Houston Chronicle on
November 29, 1998 (which was reprinted by other newspapers and may well generate
further media coverage), a "toxic tort" lawsuit was filed against 40 chemical
companies and trade association co-defendants in Common Pleas Court for
Ashtabula County, Ohio, Case No. 98CV00797. The complaint was filed by the heirs
of a former production employee at GenCorp's former polyvinyl chloride ("PVC")
resin facility in Ashtabula, Ohio and GenCorp was served on December 21, 1998.
GenCorp, as the former employer, is alleged to have intentionally exposed the
decedent to vinyl chloride ("VC"), a building block compound for PVC that is
listed as a carcinogen by certain government agencies. The alleged exposure is
claimed to have resulted in fatal liver damage. Plaintiffs also allege that all
of the co-defendants engaged in a conspiracy to suppress information regarding
the carcinogenic risk of VC to industry workers, despite the fact that OSHA has
strictly regulated workplace exposure to VC since 1974. GenCorp has notified its
insurers and will vigorously defend this and any future actions which may be
generated.
This lawsuit is apparently an outgrowth of three similar but unrelated
"toxic tort" civil conspiracy cases brought in 14th Judicial District Court,
Calcasieu Parish, Louisiana by the heirs of deceased former employees of two
chemical plants in Lake Charles, Louisiana Ross, et ux. v. Conoco, Inc., et al.
(Case No. 90-4837); Landon, et ux. v. Conoco, Inc., et al. (Case No. 97-7949);
Tousaint, et ux. v. Insurance Co. of North America, et al. (Case No. 92-6172).
GenCorp was named as a "conspiring" co-defendant in all three cases, along with
most of the same co-defendants in the McKinley case.
On March 22, 1999, GenCorp was served with a similar conspiracy suit
alleging VC exposure from various aerosol products, including hairspray. Bland,
et al. v. Air Products & Chemicals, Inc., et al., Jefferson County (Beaumont),
Texas, (Case No. D-160,599). VC was used as an aerosol propellant in the 1960's.
Again, the same co-defendants are named, with the addition of various consumer
products and personal care manufacturers.
-17-
18
Item 1. Legal Proceedings (continued)
McKinley, et al. v. GenCorp Inc., et al. (continued)
Unlike McKinley, in none of these cases was GenCorp alleged to be an
employer, manufacturer or VC supplier. Nonetheless, GenCorp notified its
insurers and has vigorously defended these actions since served.
While there can be no certainty regarding the outcome of any litigation, in
the opinion of management, after reviewing the information currently available
with respect to the matters discussed above and consulting with the Company's
counsel, any liability which may ultimately be incurred will not materially
affect the consolidated financial condition of the Company. The effect of
resolution of these matters on results of operations cannot be predicted because
any such effect depends on both future results of operations and the amount and
timing of the resolution of such matter.
The Company and its subsidiaries are presently engaged in other litigation,
and additional litigation has been threatened. However, based upon information
presently available, none of such other litigation is believed to constitute a
"material pending legal proceeding" within the meaning of Item 103 of Regulation
S-K (17 CFR Reg. 229.103) and the Instructions thereto.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on March 31, 1999,
holders of GenCorp Common Stock elected C. A. Corry, W. K. Hall, R. K.
Jaedicke, and D. M. Steuert as directors to serve a three year term expiring in
2002. Previously, J.M. Osterhoff, J.G. Cooper and J.B. Yasinsky were elected as
directors to serve three year terms which continue until March 2000 and D.E.
McGarry, Dr. R.B. Pipes and S.W. Percy were elected as directors to serve three
year terms which continue until March 2001. Shareholders also ratified the Board
of Directors' appointment of Ernst & Young LLP as the Company's independent
auditors for 1999.
Following is the final result of the Common votes cast:
A) Election of Directors:
For Withheld Broker Nonvotes
C. A. Corry 37,490,658 461,637 -0-
---------- ------- ---
W. K. Hall 37,515,913 436,382 -0-
---------- ------- ---
R. K. Jaedicke 37,480,773 471,522 -0-
---------- ------- ---
D. M. Steuert 37,383,225 569,070 -0-
---------- ------- ---
B) Ratification of the Board of Directors' appointment of Ernst & Young LLP as
independent auditors:
For: 37,685,399 Against: 151,229 Abstain: 115,667 Broker Nonvotes: -0-
---------- ------- ------- ---
-18-
19
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Table Exhibit
Item No. Exhibit Description Number
------------------------------------------------------------------------------------------------------
10 Material Contracts
10.(iii)(A) Management contracts, compensatory
plans or arrangements
Form of Restricted Stock Agreement between the 10.1
Company and Non employee Directors providing for
payment of part of Directors' compensation for
service on the Board of Directors in Company Stock
1999 GenCorp Key Employee Retention Plan 10.2
providing for payment of up to two
annual cash retention payments to Eligible
Employees who satisfactorily continue
their employment with GenCorp, attain
specified performance objectives
(including the spin-off of the GenCorp
Performance Chemicals and Decorative and
Building Products Divisions), and meet all
plan provisions. To date, 14 key employees
have received Key Employee Retention
Letter Agreements pursuant to the Plan,
providing for individual total retention
payments ranging from $75,000 to $800,000.
27 Financial Data Schedule 27
(Filed for EDGAR only)
b) Reports on Form 8-K
The Company filed a Report on Form 8-K on December 22, 1998
incorporating its press release dated December 17, 1998 regarding its
proposed plan to spin off its Performance Chemicals and Decorative &
Building Products businesses.
-19-
20
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 12, 1999 By /s/ Michael E. Hicks
---------------- --------------------------------------------
M. E. Hicks
Senior Vice President and Chief Financial
Officer
Date April 12, 1999 By /s/ William R. Phillips
---------------- -------------------------------------------
W. R. Phillips
Senior Vice President, Law; General Counsel
-20-