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, 1999 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, 1999, there were 41,817,650 outstanding shares of GenCorp Inc.'s
Common Stock, par value $.10.
2
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, 1999 and 1998 -3-
Condensed Consolidated Balance Sheets -
May 31, 1999 and November 30, 1998 -4-
Condensed Consolidated Statements of Cash Flows -
Six Months Ended May 31, 1999 and 1998 -5-
Notes to the Unaudited Condensed Consolidated
Financial Statements -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -14-
Item 3. Quantitative and Qualitative Disclosures About Market Risk -18-
Part II. Other Information
Item 1. Legal Proceedings -19-
Item 6. Exhibits and Reports on Form 8-K -20-
Signatures -21-
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PART I. FINANCIAL INFORMATION
GENCORP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
------------------------------- -------------------------------
May 31, May 31, May 31, May 31,
1999 1998 1999 1998
------------------------------- -------------------------------
NET SALES $ 514.9 $ 431.9 $ 954.5 $ 797.4
COSTS AND EXPENSES
Cost of products sold 401.3 339.5 742.5 630.1
Selling, general and administrative 44.2 37.2 90.3 74.2
Depreciation 18.5 16.0 36.2 31.7
Interest expense 5.5 3.1 10.9 5.2
Other (income) and expense, net 2.3 .7 2.0 (.6)
Unusual items, net (income) (12.0) (.2) (11.5) (.2)
-------- ------- -------- --------
459.8 396.3 870.4 740.4
-------- ------- -------- --------
INCOME BEFORE INCOME TAXES 55.1 35.6 84.1 57.0
Income tax provision 22.6 14.2 34.4 22.8
-------- ------- -------- --------
NET INCOME $ 32.5 $ 21.4 $ 49.7 $ 34.2
======== ======= ======== ========
EARNINGS PER SHARE OF COMMON STOCK
Basic $ .78 $ .51 $ 1.19 $ .83
Diluted $ .77 $ .51 $ 1.18 $ .81
CASH DIVIDENDS PAID PER SHARE OF COMMON STOCK $ .15 $ .15 $ .30 $ .30
See notes to the unaudited condensed consolidated financial statements.
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GENCORP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(Unaudited)
May 31, November 30,
1999 1998
------------------------------------
CURRENT ASSETS:
Cash and equivalents $ 21.1 $ 28.6
Accounts receivable 267.1 275.7
Inventories 180.5 165.3
Prepaid expenses and other 54.6 59.1
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TOTAL CURRENT ASSETS 523.3 528.7
Recoverable from U.S. Government and third parties for
environmental remediation 144.7 149.3
Deferred income taxes 137.4 136.9
Prepaid pension 145.7 127.4
Investments and other assets 307.1 301.4
Property, plant and equipment:
At cost 1,215.2 1,238.3
Accumulated depreciation (720.6) (738.6)
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Net property, plant and equipment 494.6 499.7
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TOTAL ASSETS $ 1,752.8 $ 1,743.4
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable $ 61.2 $ 14.4
Accounts payable - trade 85.5 118.7
Income taxes 47.6 34.0
Other current liabilities 262.1 263.2
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TOTAL CURRENT LIABILITIES 456.4 430.3
Long-term debt 310.9 356.2
Postretirement benefits other than pensions 311.8 318.4
Environmental reserves 243.5 245.7
Other liabilities 52.2 49.3
SHAREHOLDERS' EQUITY
Preference stock - (none outstanding) - -
Common stock - $0.10 par value; 41.8 million shares outstanding 4.2 4.2
Other capital 155.2 150.8
Retained earnings 235.3 198.1
Accumulated other comprehensive loss (16.7) (9.6)
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TOTAL SHAREHOLDERS' EQUITY 378.0 343.5
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,752.8 $ 1,743.4
========== ==========
See notes to the unaudited condensed consolidated financial statements.
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GENCORP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Six Months Ended
May 31,
1999 1998
------------------------------
OPERATING ACTIVITIES
Net income $ 49.7 $ 34.2
Unusual items 4.2 (.2)
Gain on sale of business (15.7) -
Depreciation, amortization and gain/loss on disposal of fixed assets 37.4 33.3
Deferred income taxes (.5) (.5)
Changes in operating assets and liabilities net of effects of acquisitions and
dispositions of businesses:
Current assets (21.2) 23.5
Current liabilities (18.5) (32.0)
Other non-current assets (3.6) (4.6)
Other non-current liabilities (14.7) (19.6)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 17.1 34.1
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INVESTING ACTIVITIES
Capital expenditures (46.7) (32.9)
Proceeds from asset dispositions 52.8 15.3
Acquisitions (11.0) (73.8)
Investments and other; net - (.2)
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NET CASH USED IN INVESTING ACTIVITIES (4.9) (91.6)
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FINANCING ACTIVITIES
Long-term debt incurred 50.0 120.0
Long-term debt paid (95.3) (61.6)
Net short-term debt incurred 40.8 10.4
Dividends (12.5) (12.4)
Other equity transactions (2.7) 3.9
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NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (19.7) 60.3
------- --------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (7.5) 2.8
Cash and equivalents at beginning of year 28.6 18.4
------- --------
Cash and equivalents at end of period $ 21.1 $ 21.2
======= ========
SUPPLEMENTAL DATA (CASH PAID):
Interest $ 11.5 $ 4.9
Income taxes $ 19.4 $ 8.6
See notes to the unaudited condensed consolidated financial statements.
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GENCORP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AS OF MAY 31, 1999
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and therefore do
not include all of the information and footnotes required by generally accepted
accounting principles for 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 six months ended May 31, 1999
and 1998, have been reflected. The results of operations for the six months
ended May 31, 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:
(Dollars in millions, except per share amounts Three Months Ended Six Months Ended
and shares in thousands) May 31, May 31,
1999 1998 1999 1998
----------------------- ----------------------
Numerator
- ---------
Net income $ 32.5 $ 21.4 $ 49.7 $ 34.2
======== ========= ======== =========
Denominator
- -----------
Denominator for basic earnings per share -
weighted average shares 41,748 41,482 41,658 41,416
Effect of dilutive securities:
Employee stock options 437 715 435 635
Other 15 13 15 13
-------- --------- ------- ---------
Dilutive potential common shares 452 728 450 648
-------- --------- ------- ---------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed conversions 42,200 42,210 42,108 42,064
======== ======== ========= ========
Earnings Per Share Of Common Stock
- ----------------------------------
Basic $ .78 $ .51 $ 1.19 $ .83
======== ======== ======== ========
Diluted $ .77 $ .51 $ 1.18 $ .81
======== ======== ======== ========
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Note C - Comprehensive Income
- -----------------------------
As of December 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), which
established standards for reporting and displaying comprehensive income and its
components in the financial statements. The adoption of SFAS 130 had no impact
on the Company's net income or shareholders' equity. SFAS 130 requires that
cumulative translation adjustments and minimum pension liability adjustments and
changes thereto be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
The components of total comprehensive income were as follows:
(Dollars in millions) Three Months Ended Six Months Ended
May 31, May 31,
1999 1998 1999 1998
----------------------- ---------------------
Net income $ 32.5 $ 21.4 $ 49.7 $ 34.2
Adjustments
Foreign currency translation effect (4.0) .8 (7.1) (2.0)
-------- --------- -------- --------
Total comprehensive income $ 28.5 $ 22.2 $ 42.6 $ 32.2
======== ========= ======== ========
Note D - Acquisitions, Divestitures and Other Matters
- -----------------------------------------------------
Acquisitions
On April 27, 1999, the Company acquired the global latex floor care business
of Morton International Inc. for $8 million.
On December 2, 1998, the Company acquired the U.S. acrylic emulsion polymers
business of PolymerLatex, located in Fitchburg, Massachusetts, for $9 million,
consisting of cash of $3 million and a note payable of $6 million due December
1, 1999.
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 resulted in goodwill and other
intangible assets of $59 million which are being amortized over periods ranging
from 3 to 40 years.
All of the above acquisitions were accounted for using the purchase method
and were included in the results of operations for the Company from the
respective dates of acquisition.
Divestitures
On May 10, 1999, the Company sold its Penn Racquet Sports division (Penn) to
HTM Sports-und Freizeitgerate AG, an Austrian company and HTM USA Holdings Inc.,
for an aggregate consideration of approximately $42.4 million. The Company
recognized a pre-tax gain of $15.7 million on this transaction.
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 which was
recorded in the second quarter of 1998 was $8 million and was subsequently
adjusted to $3.4 million in the fourth quarter of 1998.
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Note D - Acquisitions, Divestitures and Other Matters (continued)
- -----------------------------------------------------------------
Other Matters
On December 17, 1998, the Company announced a plan to spin off its
Performance Chemicals and Decorative & Building Products businesses to GenCorp
shareholders. In a press release dated July 7, 1999 GenCorp announced that it
received an Internal Revenue Service ruling that its planned spin-off will be a
tax-free transaction. The Company plans to spin off these polymer products
businesses into a separate, publicly traded company named OMNOVA Solutions Inc.
Following the spin-off, GenCorp would continue to operate Aerojet, its
aerospace, defense and fine chemicals segment, and its automotive Vehicle
Sealing business unit. The planned spin-off is contingent on shareholder
approval as well as market conditions at the time of the proposed spin-off.
Shareholders of record as of June 30, 1999 will be asked to approve the spin-off
plan and various changes to GenCorp's articles of incorporation and code of
regulations, along with new long-term incentive plans for GenCorp and OMNOVA
Solutions at a special shareholders meeting set for August 18, 1999. Information
regarding proposals to be acted on at the special meeting is set forth in
GenCorp's proxy statement dated July 2, 1999.
Note E - Unusual Items
- ----------------------
During the first six months of fiscal 1999, the Company had unusual items
resulting in income of $11.5 million. These unusual items primarily included the
$15.7 million gain recognized on the divestiture of Penn offset by expenses of
$3.7 million related to the planned spin-off of the Decorative & Building
Products and Performance Chemicals business units into a separate publicly
traded company. These expenses included professional services such as audit,
actuarial and legal fees and severance.
During the first six months of fiscal 1998, the Company incurred unusual
items which included charges of $12.6 million primarily related to exiting the
plastic extrusions appliance gasket and residential wallcovering businesses
offset by a gain of $12.8 million from the sale of surplus land in Nevada by
Aerojet.
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:
(Dollars in millions) May 31, November 30,
1999 1998
----------------------------------
Raw materials and supplies $ 47.7 $ 48.0
Work-in-process 8.4 8.5
Finished products 66.0 74.6
--------- --------
Approximate replacement cost of inventories 122.1 131.1
Reserves, primarily LIFO (34.4) (40.2)
Long-term contracts at average cost 265.4 276.2
Progress payments (172.6) (201.8)
- --------- --------
$ 180.5 $ 165.3
========= ========
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Note G - 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 May 31, 1999, unused and available
revolving lines of credit totaled $90 million. The Company pays a variable
commitment fee, which was 1/5 of one percent, on the unused balance. Interest
rates are variable, primarily based on LIBOR, and were at an average rate of 5.5
percent at May 31, 1999. 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, 1999, the Company was required to maintain consolidated net worth of at
least $192 million.
On May 10, 1999, the Company paid down and cancelled the $75 million
revolving credit facility used for the purchase of certain assets of Sequa
Chemicals, the specialty chemicals unit of Sequa Corporation.
At May 31, 1999, the Company had unsecured, uncommitted lines of credit with
several banks for short-term borrowings aggregating $101 million, of which $55
million was outstanding. Interest rates for these lines of credit are variable
and were at an average rate of 5.4 percent on May 31, 1999. Borrowings under
such lines are payable on demand. The Company also had outstanding letters of
credit totaling $21 million at May 31, 1999.
Note H - 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 health care plans. The maximum estimated cost of the VERP
and EISP could range up to $8 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. The plan provided for the issuance of retention
agreements to selected key employees with a total maximum payout of up to $3
million that will be payable between 2000 and 2001. Through the six month period
ended May 31, 1999, $0.5 million has been expensed.
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.
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Note H - Contingencies (continued)
- ----------------------
Sacramento, California (continued)
Aerojet has substantially completed its efforts under the Decree to
determine the nature and extent of contamination at the facility. Preliminarily,
Aerojet has identified the technologies that will likely be used to remediate
the site and estimated costs using generic remedial costs from databases of
Superfund remediation costs. Over the next several years, Aerojet will conduct
feasibility studies to refine technical approaches and costs to remediate the
site. The remediation costs are principally for design, construction,
enhancement and operation of groundwater and soil treatment facilities, ongoing
project management and regulatory oversight, and are expected to be incurred
over a period of approximately 15 years. Aerojet is also addressing groundwater
contamination off of its facility through the development of an Operable Unit
Feasibility Study. This Study is scheduled to be completed and submitted as a
draft to the governmental oversight agencies in December 1999. The Study will
enumerate various remedial alternatives by which offsite groundwater can be
addressed. It will be subject to both governmental agency and public review and
comment before being approved for implementation.
San Gabriel Valley Basin, California
Aerojet, through its Azusa facility, has been named by the 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 groundwater contamination by
volatile organic compounds (VOC) is principally upgradient of Aerojet's property
and that lower concentrations of VOC contaminants are present in the soils of
Aerojet's presently and historically owned properties. The EPA contends that
Aerojet is one of the four largest sources of VOC groundwater contamination at
the BPOU of the 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, initially 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. The Steering Committee has begun
negotiations with the Watermaster over a total settlement to fund an
EPA-approved remedy. Aerojet filed a Good Faith Offer with the EPA on Friday,
July 2, 1999.
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. 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.
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Note H - Contingencies (continued)
- ----------------------
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 implemented contingent on the EPA consent decree being approved. In
addition, Aerojet believes it has insurance coverage for the site.
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Note H - 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 May 31, 1999, Aerojet had total reserves of $236 million for costs to
remediate the above sites and has recognized $160 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 $16
million for estimated decontamination and long-term operating and maintenance
costs of this site. The reserve represents the Company's best estimate for the
remaining remediation costs. Estimates of future remediation costs could range
as high as $37 million depending on the results of future testing and the
ultimate remediation alternatives undertaken at the site. The time frame for
remediation is currently estimated to range from 5 to 10 years.
Other Sites
- -----------
The Company is also currently involved, together with other companies, in 34
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 $19 million as of
May 31, 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.
-12-
13
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.
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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 1999 was $17.1 million as compared to $34.1 million for 1998. The
decrease in cash flow provided by operating activities primarily reflects a
higher working capital requirement.
For the first six months of 1999, $4.9 million was used for investing
activities, including the acquisitions of the global latex floor care business
of Morton International Inc. for $8 million and the U.S. acrylics emulsion
business of PolymerLatex for $9 million, consisting of cash of $3 million and a
note payable for $6 million, and capital expenditures of $46.7 million, offset
by proceeds of $52.8 million primarily from the sale of the Penn Racquet Sports
division (Penn) and the residential wallcovering business. This is compared to
$91.6 million used for investing activities in the first six months of 1998,
including the acquisition of The Goodyear Tire & Rubber Company's Calhoun,
Georgia latex facility for $73.8 million and capital expenditures of $32.9
million, offset by proceeds of $15.3 million from asset dispositions.
Financing activities used $19.7 million of cash during the six month period
ended May 31, 1999. This primarily reflects dividend payments of $12.5 million
and a net decrease in total debt of $4.5 million during this period. Cash flow
provided by financing activities of $60.3 million in the first six months of
1998 reflected a $68.8 million net increase in debt, relating primarily to the
acquisition of the Calhoun facility, offset by payments of $12.4 million in
dividends.
Material Changes in Results of Operations
- -----------------------------------------
Sales totaled $514.9 million for the second quarter of 1999, an increase of
19 percent compared to $431.9 million during the second quarter of 1998, with
all three business segments reflecting revenue increases. For the six months
ended May 31, 1999, sales increased 20 percent to $954.5 million as compared to
$797.4 million during the first six months of 1998.
Segment operating profit totaled $66.6 million for the second quarter of
1999. Excluding unusual items, primarily the pre-tax gain of $15.7 million from
the divestiture of Penn, segment operating profit for the current quarter
improved 19 percent to $51.4 million versus $43.1 million for the second quarter
of 1998. For the six months ended May 31, 1999, segment operating profit,
excluding unusual items, increased to $89.4 million as compared to $72.7 million
during last year's period, a 23 percent improvement.
As part of a focused cost reduction program to prepare for the planned
spin-off, GenCorp continued to decrease corporate overhead, reducing corporate
expenses by $1.8 million for the second quarter of 1999 as compared to the
second quarter of 1998. Also during the quarter, the Company incurred costs of
$3.2 million for spin-off related activities and reflected a tax provision that
was $0.6 million higher than normal because of certain spin-off costs that will
not be deductible for income tax purposes.
Earnings per share for the second quarter of 1999 improved to $0.77 per
diluted share compared to $0.51 per diluted share during the second quarter of
1998. Earnings per share before unusual items, primarily the gain on sale of
Penn and spin-off related costs, totaled $0.61 per diluted share during the
quarter, an improvement of 20 percent over the second quarter of 1998. Net
income in the second quarter of 1999 improved 52 percent to $32.5 million
compared to second quarter 1998 net income of $21.4 million. For the six months
ended May 31, 1999 net income improved 45 percent to $49.7 million as compared
to net income of $34.2 million during the first six months of 1998.
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15
Material Changes in Results of Operations (continued)
- ------------------------------------------
Net sales for the polymer products segment in the second quarter of 1999
increased 20 percent to $210.0 million compared to $174.9 million in the second
quarter of 1998. Sales increased in both Decorative & Building Products and
Performance Chemicals, primarily from sales attributable to acquisitions.
Improved sales in European wallcovering, paper laminates, building systems,
paper coatings and specialty chemicals led the increase. Operating profit for
the polymer products businesses increased to $24.9 million for the second
quarter of 1999 versus $23.5 million in the second quarter of 1998. Operating
margins decreased to 11.9 percent in the second quarter of 1999 compared to 13.4
percent in the second quarter of 1998, due primarily to lower average unit
selling prices across certain Performance Chemicals product lines, and increased
new product development spending.
Performance Chemicals completed the acquisition of Morton International's
global latex floor care business, adding a complementary product line and
customer base, and expanding presence in Europe and the Far East. The Morton
products will be produced at Performance Chemicals' Fitchburg, Massachusetts;
Chester, South Carolina; and Greensboro, North Carolina plants.
Within the Decorative & Building Products business unit, performance
improvement for the Building Systems (roofing) sector continued in the second
quarter with a 20 percent increase in sales. Sales were also up by 30 percent in
the first half of 1999 within Coated Fabrics' residential upholstery business.
In early May, the Company divested Penn and recognized a pre-tax gain of
$15.7 million on the transaction. Sales and operating profit of Penn for the
second quarter of 1999 were $14.1 million and $1.4 million, respectively.
Vehicle Sealing's sales improved 23 percent to $123.3 million in the second
quarter of 1999, versus $100.6 million in the second quarter of 1998. The sales
gain was due to higher volumes in North America on the General Motors C/K pickup
and Grand AM and the Ford Explorer platforms.
Vehicle Sealing's operating profit rose 58 percent, to $9.3 million in the
second quarter of 1999 as compared to $5.9 million for the second quarter of
1998. Operating profit margins improved to 7.5 percent in the second quarter of
1999 compared to 5.9 percent in the second quarter of 1998 as a result of higher
volumes, lower launch costs, improved operating efficiencies, and the absence of
losses from the Plastic Extrusions division which was sold in 1998.
At Aerojet, net sales increased 16 percent to $181.6 million in the second
quarter of 1999 as compared to $156.4 million in the second quarter of 1998.
Higher volumes in Fine Chemicals, the Space-Based Infrared System (SBIRS),
Special Sensor Microwave Imager/Sounder (SSMIS) and Sense and Destroy Armor
(SADARM) were partially offset by lower volumes on the Defense Support Program
(DSP) and Titan.
Aerojet's operating profit for the second quarter of 1999 was $17.2 million,
compared to $13.7 million in the second quarter of 1998. Operating margins
improved during the quarter to 9.5 percent from 8.8 percent in the second
quarter of 1998, due to higher Fine Chemicals volumes and contract performance
in strategic and space propulsion. Aerojet's contract backlog at May 31, 1999
stood at $1.7 billion.
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16
Environmental Matters
- ---------------------
GenCorp's policy is to conduct its businesses with due regard for the
preservation and protection of the environment. The Company devotes a
significant amount of resources and management attention to environmental
matters and actively manages its ongoing processes to comply with extensive
environmental laws and regulations. The Company is involved in the remediation
of environmental conditions which resulted from generally accepted manufacturing
and disposal practices in the 1950's and 1960's which were followed at certain
GenCorp plants. In addition, the Company has been designated a potentially
responsible party, with other companies, at sites undergoing investigation and
remediation.
The nature of environmental investigation and cleanup activities often makes
it difficult to determine the timing and amount of any estimated future costs
that may be required for remedial measures. However, the Company reviews these
matters and accrues for costs associated with the remediation of environmental
pollution when it becomes probable that a liability has been incurred and the
amount of the liability (usually based upon proportionate sharing) can be
reasonably estimated. The Company's Condensed Consolidated Balance Sheet at May
31, 1999 reflects accruals of $271 million and amounts recoverable of $160
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.
-16-
17
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 May 31, 1999, the Company has received approximately
97 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.
The estimated cost for this project is projected to range between $5 million
and $7 million, which is being funded through operating cash flows. The Company
has spent approximately $4 million as of May 31, 1999 on this project and
expects to spend the remaining budget by the end of the third quarter of 1999.
Excluding recent acquisitions, the Company believes that approximately 95
percent of its systems are Year 2000 ready as of May 31, 1999 and it is in the
control and monitoring phase of the project. Late 1998 acquisitions are
approximately 60 percent complete and are targeted for completion by October 31,
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 has prepared
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.
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18
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
$310.9 million which matures in the year 2001 is variable and had an average
variable interest rate of 5.5 percent at May 31, 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 May 31, 1999. Additionally, foreign
currency transaction gains and losses were not material to the Company's results
of operations for the six months ended May 31, 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.
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."
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19
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.
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. On May 12, 1999, the U.S.
District Court denied Aerojet's motion for judgment on the pleadings and
remanded the case to State Court. However, the Court's Order does find that the
private party's requested relief would interfere with Aerojet's ongoing CERCLA
activities at the Sacramento facility.
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.
The above 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.
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20
Item 1. Legal Proceedings (continued)
- -------------------------
McKinley, et al. v. GenCorp Inc., et al. (continued)
- ----------------------------------------
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.
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 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
-------------------
The Company filed a report on Form 8-K on July 7, 1999 incorporating
its press release dated July 7, 1999 regarding receipt of a
favorable IRS ruling for its planned spin-off of its Decorative &
Building Products and Performance Chemicals businesses into a
separate, publicly traded company named OMNOVA Solutions Inc.
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21
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 12, 1999 By /s/ M. E. Hicks
------------------------------------ -------------------------------------------------
M. E. Hicks
Senior Vice President and Chief Financial Officer
Date July 12, 1999 By /s/ W. R. Phillips
------------------------------------ -------------------------------------------------
W. R. Phillips
Senior Vice President, Law; General Counsel
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