e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended: February 28, 2007
or
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 1-01520
GenCorp Inc.
(Exact name of registrant as specified in its charter)
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Ohio
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34-0244000 |
(State of Incorporation)
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(I.R.S. Employer Identification No.) |
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Highway 50 and Aerojet Road
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95742 |
Rancho Cordova, California
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(Zip Code) |
(Address of Principal Executive Offices) |
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P.O. Box 537012
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95853-7012 |
Sacramento, California
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(Zip Code) |
(Mailing Address) |
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Registrant’s telephone number, including area code (916) 355-4000
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of March 27, 2007, there were 56.1 million outstanding shares of our Common Stock, $0.10
par value.
GenCorp Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended February 28, 2007
Table of Contents
2
Part I – FINANCIAL INFORMATION
Item 1. Financial Statements
GenCorp Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
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Three months ended |
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February 28, |
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February 28, |
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2007 |
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2006 |
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(In millions, except per share amounts) |
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Net Sales |
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$ |
150.8 |
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$ |
128.3 |
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Costs and Expenses |
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Cost of products sold |
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135.0 |
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121.3 |
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Selling, general and administrative |
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3.0 |
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8.0 |
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Depreciation and amortization |
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6.5 |
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6.5 |
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Interest expense |
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7.2 |
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6.3 |
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Other (income) expense, net |
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0.8 |
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(0.1 |
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Loss from continuing operations before income taxes and cumulative effect of
a change in accounting principle |
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(1.7 |
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(13.7 |
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Income tax provision |
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0.4 |
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0.6 |
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Loss from continuing operations before cumulative effect of a change in
accounting principle |
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(2.1 |
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(14.3 |
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Income (loss) from discontinued operations, net of income taxes |
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30.6 |
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(1.0 |
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Income (loss) before the cumulative effect of a change in accounting principle |
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28.5 |
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(15.3 |
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Cumulative effect of a change in accounting principle, net of income taxes |
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— |
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(0.7 |
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Net income (loss) |
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$ |
28.5 |
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$ |
(16.0 |
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Income (Loss) Per Share of Common Stock |
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Basic and Diluted: |
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Loss per share from continuing operations before cumulative effect of a
change in accounting principle |
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$ |
(0.04 |
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$ |
(0.26 |
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Income (loss) per share from discontinued operations, net of income taxes |
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0.55 |
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(0.02 |
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Loss per share from cumulative effect of a change in accounting principle,
net of income taxes |
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— |
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(0.01 |
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Net income (loss) per share |
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$ |
0.51 |
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$ |
(0.29 |
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Weighted average shares of common stock outstanding |
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55.9 |
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55.1 |
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See Notes to Unaudited Condensed Consolidated Financial Statements.
3
GenCorp Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
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February 28, |
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November 30, |
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2007 |
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2006 |
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(In millions, except per share amounts) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
74.1 |
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$ |
61.2 |
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Restricted cash |
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19.8 |
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19.8 |
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Accounts receivable |
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72.6 |
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71.1 |
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Inventories |
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77.9 |
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69.5 |
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Recoverable from the U.S. government and other third parties for environmental remediation
costs and other |
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39.6 |
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37.6 |
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Prepaid expenses and other |
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14.1 |
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23.5 |
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Assets of discontinued operations |
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0.1 |
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0.5 |
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Total Current Assets |
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298.2 |
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283.2 |
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Noncurrent Assets |
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Property, plant and equipment, net |
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137.4 |
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136.8 |
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Recoverable from the U.S. government and other third parties for environmental remediation
costs and other |
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178.2 |
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177.0 |
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Prepaid pension asset |
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182.1 |
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187.3 |
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Goodwill |
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101.3 |
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101.3 |
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Intangible assets |
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24.2 |
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24.6 |
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Other noncurrent assets, net |
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115.3 |
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111.2 |
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Total Noncurrent Assets |
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738.5 |
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738.2 |
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Total Assets |
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$ |
1,036.7 |
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$ |
1,021.4 |
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LIABILITIES AND SHAREHOLDERS’ DEFICIT |
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Current Liabilities |
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Short-term borrowings and current portion of long-term debt |
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$ |
22.0 |
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$ |
21.3 |
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Accounts payable |
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24.0 |
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32.6 |
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Reserves for environmental remediation costs |
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60.9 |
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55.6 |
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Income taxes payable |
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12.5 |
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12.2 |
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Postretirement medical and life benefits |
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9.7 |
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9.7 |
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Advanced payments on contracts |
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57.1 |
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57.1 |
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Other current liabilities |
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79.3 |
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88.9 |
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Liabilities of discontinued operations |
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1.4 |
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1.8 |
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Total Current Liabilities |
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266.9 |
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279.2 |
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Noncurrent Liabilities |
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Convertible subordinated notes |
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271.4 |
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271.4 |
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Senior subordinated notes |
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97.5 |
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97.5 |
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Other long-term debt |
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73.9 |
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72.2 |
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Reserves for environmental remediation costs |
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208.1 |
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210.4 |
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Postretirement medical and life benefits |
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123.9 |
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127.1 |
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Other noncurrent liabilities |
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59.8 |
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59.6 |
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Total Noncurrent Liabilities |
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834.6 |
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838.2 |
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Total Liabilities |
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1,101.5 |
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1,117.4 |
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Commitments and Contingencies (Note 10) |
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Shareholders’ Deficit |
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Preference stock, par value of $1.00; 15 million shares authorized; none issued or outstanding |
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— |
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Common stock, par value of $0.10; 150 million shares authorized; 56.3 million shares issued,
56.0 million shares outstanding as of February 28, 2007; 56.1 million shares issued, 55.8
million outstanding as of November 30, 2006 |
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5.6 |
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5.6 |
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Other capital |
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197.5 |
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194.8 |
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Accumulated deficit |
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(267.9 |
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(296.4 |
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Total Shareholders’ Deficit |
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(64.8 |
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(96.0 |
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Total Liabilities and Shareholders’ Deficit |
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$ |
1,036.7 |
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$ |
1,021.4 |
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See Notes to Unaudited Condensed Consolidated Financial Statements.
4
GenCorp Inc.
Condensed Consolidated Statement of Shareholders’ Deficit
(Unaudited)
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Total |
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Common Stock |
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Other |
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Accumulated |
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Shareholders |
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Shares |
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Amount |
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Capital |
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Deficit |
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Deficit |
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(In millions, except share and per share amounts) |
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November 30, 2006 |
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55,815,828 |
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$ |
5.6 |
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$ |
194.8 |
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$ |
(296.4 |
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$ |
(96.0 |
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Net income |
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— |
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— |
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— |
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28.5 |
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28.5 |
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Shares issued under
stock option and
stock incentive
plans, net of income
taxes |
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210,717 |
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— |
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2.7 |
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— |
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2.7 |
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February 28, 2007 |
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56,026,545 |
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$ |
5.6 |
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$ |
197.5 |
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$ |
(267.9 |
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$ |
(64.8 |
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5
GenCorp Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Three months ended |
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February 28, |
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February 28, |
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2007 |
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2006 |
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(in millions) |
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Operating Activities |
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Net income (loss) |
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$ |
28.5 |
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$ |
(16.0 |
) |
(Income) loss from discontinued operations, net of income taxes |
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(30.6 |
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1.0 |
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Cumulative effect of a change in accounting principle, net of income taxes |
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— |
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0.7 |
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Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Depreciation and amortization |
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6.5 |
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6.5 |
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Stock compensation and savings plan expense |
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2.4 |
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2.8 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(1.5 |
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8.3 |
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Inventories |
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(8.4 |
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(15.7 |
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Prepaid expenses and other |
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7.4 |
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(5.9 |
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Other noncurrent assets |
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(0.7 |
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23.5 |
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Accounts payable |
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(8.6 |
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(25.2 |
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Income taxes payable |
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(0.1 |
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0.6 |
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Postretirement medical and life benefits |
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(3.2 |
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(5.1 |
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Advanced payments on contracts |
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— |
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6.9 |
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Other current liabilities |
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(3.0 |
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6.0 |
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Other noncurrent liabilities |
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(2.1 |
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(21.6 |
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Net cash used in continuing operations |
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(13.4 |
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(33.2 |
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Net cash used in discontinued operations |
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(0.2 |
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(7.3 |
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Net Cash Used In Operating Activities |
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(13.6 |
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(40.5 |
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Investing Activities |
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Capital expenditures |
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(3.2 |
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(2.5 |
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Proceeds from discontinued operation |
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29.7 |
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— |
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Net Cash Provided by (Used In) Investing Activities |
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26.5 |
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(2.5 |
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Financing Activities |
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Debt repayments |
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(0.4 |
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(0.6 |
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Debt issuance costs |
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— |
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(0.6 |
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Tax benefit on equity based compensation |
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0.3 |
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0.3 |
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Proceeds from shares issued under stock option and equity incentive plans |
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0.1 |
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2.6 |
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Net Cash Provided by Financing Activities |
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— |
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1.7 |
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Net Increase (Decrease) in Cash and Cash Equivalents |
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12.9 |
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(41.3 |
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Cash and Cash Equivalents at Beginning of Period |
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61.2 |
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91.7 |
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Cash and Cash Equivalents at End of Period |
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$ |
74.1 |
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$ |
50.4 |
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Supplemental Disclosures of Cash Flow Information |
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Capital expenditure purchased with promissory note |
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$ |
2.8 |
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$ |
— |
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See Notes to Unaudited Condensed Consolidated Financial Statements.
6
GenCorp Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation and Nature of Operations
GenCorp Inc. (GenCorp
or the Company) has prepared the accompanying Unaudited Condensed
Consolidated Financial Statements, including its accounts and the accounts of its wholly owned and
majority-owned subsidiaries, in accordance with the instructions to
Form 10-Q.
The year-end condensed
consolidated balance sheet was derived from audited financial statements, and therefore these
financial statements do not include all of the information and notes required by accounting
principles generally accepted in the United States of America (GAAP). These interim financial
statements should be read in conjunction with the financial statements and accompanying notes
included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2006, as filed
with the Securities and Exchange Commission (SEC).
The Company believes the accompanying Unaudited Condensed Consolidated Financial Statements
reflect all adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of its financial position, results of operations and cash flows for the periods
presented. All significant intercompany balances and transactions have been eliminated in
consolidation. The preparation of the consolidated financial statements in conformity with GAAP
requires the Company to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could differ from those
estimates. In addition, the operating results for interim periods may not be indicative of the
results of operations for a full year.
The Company is a technology-based manufacturer of aerospace and defense products and systems
with a real estate business segment that includes activities related to the re-zoning, entitlement,
sale, and leasing of the Company’s excess real estate assets. The Company’s continuing operations
are organized into two segments:
Aerospace and Defense — includes the operations of Aerojet-General Corporation, or Aerojet,
which develops and manufactures propulsion systems for defense and space applications, armament
systems for precision tactical weapon systems, and munitions applications. The Company is one of
the largest providers of propulsion systems in the United States (U.S.) and the only company that
provides both solid and liquid propellant based systems. Primary customers served include major
prime contractors to the United States government, the Department of Defense, and the National
Aeronautics and Space Administration.
Real Estate — includes activities related to the re-zoning, entitlement, sale, and leasing of
our excess real estate assets. The Company owns approximately 12,600 acres of land adjacent to U.S.
Highway 50 between Rancho Cordova and Folsom, California east of Sacramento (Sacramento Land). The
Company is currently in the process of seeking zoning changes and other governmental approvals on a
portion of the Sacramento Land to optimize its value. The Company has filed applications with and
submitted information to governmental and regulatory authorities for approvals necessary to re-zone
over 6,400 acres of the Sacramento Land.
On August 31, 2004, the Company completed the sale of its GDX Automotive (GDX) business. On
November 30, 2005, the Company completed the sale of its Fine Chemicals business. On November 17,
2006, the Company completed the sale of its Turbo product line. The GDX and Fine Chemicals
businesses and the Turbo product line are classified as discontinued operations in these Unaudited
Condensed Consolidated Financial Statements and Notes to Unaudited Condensed Consolidated Financial
Statements (see Note 13).
A detailed description of the Company’s significant accounting policies can be found in the
Company’s most recent Annual Report on Form 10-K for the fiscal year ended November 30, 2006.
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, to create a single model to
address accounting for uncertainty in tax positions. FIN 48 clarified the accounting for income
taxes by prescribing a minimum recognition threshold a tax position is required to meet before
being recognized in the financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for the Company as of December 1, 2007. The Company has not
determined the effect, if any, the adoption of FIN 48 will have on its results of operations or
financial position.
In September 2006, the FASB issued SFAS No. 158 (SFAS 158), Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements Nos. 87, 88, 106,
and 132(R), which requires companies to recognize the overfunded or underfunded status of a defined
benefit postretirement plan as an asset or liability on its balance sheet and to recognize
7
changes in that funded status in the year in which the changes occur through comprehensive
income. SFAS 158 is effective for the Company as of November 30, 2007. SFAS 158 also requires
companies to measure the funded status of the plan as of the date of its fiscal year-end, with
limited exceptions, which is effective for the Company as of November 30, 2009. Based on the
current discount rate and expected rate of return assumptions, the Company estimates the adoption
of SFAS 158 in the fourth quarter of fiscal 2007 will increase its postretirement liability and
shareholders’ deficit by approximately $53 million to $105 million. Due to the valuation allowance
on the Company’s net deferred tax assets, no net tax benefit would result from this increase to the
postretirement liability.
In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No. 115. SFAS 159
permits entities to choose to measure many financial instruments at fair value that are not
currently required to be measured at fair value. It also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. SFAS 159 is effective as of the beginning
of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently
evaluating the effect that the adoption of SFAS 159 will have on its financial position and results
of operations.
2. Income (Loss) Per Share of Common Stock
A reconciliation of the numerator and denominator used to calculate basic and diluted income
(loss) per share of common stock (EPS) is presented in the following table:
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|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
February 28, |
|
|
February 28, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions, except per share |
|
|
|
amounts; shares in thousands) |
|
Numerator for Basic and Diluted EPS: |
|
|
|
|
|
|
|
|
Loss from continuing operations before the cumulative effect of a change in accounting
principle |
|
$ |
(2.1 |
) |
|
$ |
(14.3 |
) |
Income (loss) from discontinued operations, net of income taxes |
|
|
30.6 |
|
|
|
(1.0 |
) |
Cumulative effect of a change in accounting principle, net of income taxes |
|
|
— |
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
Net income (loss) available to common shareholders |
|
$ |
28.5 |
|
|
$ |
(16.0 |
) |
|
|
|
|
|
|
|
Denominator for Basic and Diluted EPS: |
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding |
|
|
55,930 |
|
|
|
55,086 |
|
|
|
|
|
|
|
|
Basic and Diluted: |
|
|
|
|
|
|
|
|
Loss per share from continuing operations before the cumulative effect of a change in
accounting principle |
|
$ |
(0.04 |
) |
|
$ |
(0.26 |
) |
Income (loss) per share from discontinued operations, net of income taxes |
|
|
0.55 |
|
|
|
(0.02 |
) |
Loss per share from cumulative effect of a change in accounting principle, net of income taxes |
|
|
— |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
Net income (loss) per share |
|
$ |
0.51 |
|
|
$ |
(0.29 |
) |
|
|
|
|
|
|
|
The following were not included in the computation of diluted income (loss) per share for the
first quarter of fiscal 2007 and fiscal 2006 because the effect would be antidilutive for the
periods:
|
|
|
Description |
|
Conversion Rate |
5 3/4% Convertible Subordinated Notes |
|
54.29 Shares per $1,000 outstanding |
4% Contingent Convertible Subordinated Notes |
|
64.81 Shares per $1,000 outstanding |
2
1/4% Convertible Subordinated Debentures |
|
50.00 Shares per $1,000 outstanding |
Potentially dilutive securities that are not included in the diluted EPS calculation, because
they would be antidilutive, also include 1.6 million and 1.7 million employee stock options as of
February 28, 2007 and 2006, respectively.
8
3. Stock Based Compensation
On December 1, 2005, the first day of fiscal 2006, the Company adopted SFAS No. 123(R),
Share-Based Payment, (SFAS 123(R)), which required the measurement and recognition of compensation
expense for all stock-based payment awards made to employees and directors, including employee
stock options, restricted stock, and stock appreciation rights based on estimated fair values. The
Company adopted SFAS 123(R) using the modified prospective transition method.
The following table details the impact of adopting SFAS 123(R) during the first quarter of
fiscal 2006:
|
|
|
|
|
|
|
Three months |
|
|
|
ended |
|
|
|
February 28, |
|
|
|
2006 |
|
|
|
(in millions, except |
|
|
|
per share amounts) |
|
Effect on loss from continuing operations |
|
$ |
(0.4 |
) |
Cumulative effect of a change in accounting principle, net of income taxes |
|
|
(0.7 |
) |
|
|
|
|
Net loss |
|
$ |
(1.1 |
) |
|
|
|
|
Effect on basic and diluted net loss per share |
|
$ |
(0.02 |
) |
|
|
|
|
Total stock-based compensation expense (income) by type of award for the first quarter of
fiscal 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
February 28, |
|
|
February 28, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions, except |
|
|
|
per share amounts) |
|
Stock appreciation rights |
|
$ |
0.2 |
|
|
$ |
1.0 |
|
Restricted stock, service based |
|
|
0.1 |
|
|
|
0.1 |
|
Restricted stock, performance based |
|
|
(0.1 |
) |
|
|
0.1 |
|
Stock options |
|
|
— |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
|
0.2 |
|
|
|
1.3 |
|
Tax effect on stock based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Net effect on stock-based compensation expense |
|
|
0.2 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
Effect on basic and diluted net loss per share |
|
$ |
— |
|
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
During the first quarter of fiscal 2007, the Company recorded a benefit of $0.1 million on
performance based restricted stock compensation due to the resignation of an executive officer and
changes in estimates on the achievement of operating targets.
4. Accounts Receivable
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Receivables under long-term contracts: |
|
|
|
|
|
|
|
|
Billed |
|
$ |
43.8 |
|
|
$ |
43.7 |
|
Unbilled costs and estimated earnings |
|
|
23.8 |
|
|
|
22.1 |
|
Other receivables, net of $0.1 million of allowance for doubtful accounts as of November 30, 2006 |
|
|
5.0 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
72.6 |
|
|
$ |
71.1 |
|
|
|
|
|
|
|
|
9
5. Inventories
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Raw materials and supplies on commercial products |
|
$ |
0.1 |
|
|
$ |
0.1 |
|
Work in progress on commercial products |
|
|
3.5 |
|
|
|
4.0 |
|
Finished goods on commercial products |
|
|
0.1 |
|
|
|
0.1 |
|
Long-term contracts at average cost |
|
|
181.0 |
|
|
|
155.8 |
|
Progress payments |
|
|
(106.8 |
) |
|
|
(90.5 |
) |
|
|
|
|
|
|
|
Inventories |
|
$ |
77.9 |
|
|
$ |
69.5 |
|
|
|
|
|
|
|
|
6. Property, Plant and Equipment, Net
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Land |
|
$ |
33.6 |
|
|
$ |
29.3 |
|
Buildings and improvements |
|
|
141.0 |
|
|
|
140.3 |
|
Machinery and equipment |
|
|
353.2 |
|
|
|
352.6 |
|
Construction-in-progress |
|
|
9.1 |
|
|
|
9.1 |
|
|
|
|
|
|
|
|
|
|
|
536.9 |
|
|
|
531.3 |
|
Less: accumulated depreciation |
|
|
(399.5 |
) |
|
|
(394.5 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
137.4 |
|
|
$ |
136.8 |
|
|
|
|
|
|
|
|
7. Other Noncurrent Assets, Net
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Note receivable (see Note 13) |
|
$ |
— |
|
|
$ |
25.5 |
|
Receivable from Northrop Grumman Corporation (see Note 10(c)) |
|
|
35.8 |
|
|
|
33.0 |
|
Real estate held for entitlement and leasing |
|
|
39.3 |
|
|
|
38.2 |
|
Deferred financing costs |
|
|
15.7 |
|
|
|
16.2 |
|
Other |
|
|
24.5 |
|
|
|
23.8 |
|
|
|
|
|
|
|
|
|
|
|
115.3 |
|
|
|
136.7 |
|
Less: allowance on note receivable (see Note 13) |
|
|
— |
|
|
|
(25.5 |
) |
|
|
|
|
|
|
|
Other noncurrent assets, net |
|
$ |
115.3 |
|
|
$ |
111.2 |
|
|
|
|
|
|
|
|
8. Other Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Accrued goods and services |
|
$ |
0.4 |
|
|
$ |
0.4 |
|
Contract loss provisions |
|
|
5.3 |
|
|
|
4.9 |
|
Accrued compensation and employee benefits |
|
|
37.9 |
|
|
|
35.4 |
|
Interest payable |
|
|
2.6 |
|
|
|
5.0 |
|
Legal settlements |
|
|
7.1 |
|
|
|
15.2 |
|
Other |
|
|
26.0 |
|
|
|
28.0 |
|
|
|
|
|
|
|
|
Other current liabilities |
|
$ |
79.3 |
|
|
$ |
88.9 |
|
|
|
|
|
|
|
|
10
9. Long-term Debt
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Convertible subordinated notes,
bearing interest at 5.75% per annum,
interest payment and maturity in April
2007 (5 3/4% Notes) |
|
$ |
19.8 |
|
|
$ |
19.8 |
|
Contingent convertible subordinated
notes, bearing interest at 4.00% per
annum, interest payments due in January
and July, maturing in 2024 (4% Notes) |
|
|
125.0 |
|
|
|
125.0 |
|
Convertible subordinated debentures,
bearing interest at 2.25% per annum,
interest payments due in May and
November, maturing in 2024 (2 1/4%
Debentures) |
|
|
146.4 |
|
|
|
146.4 |
|
|
|
|
|
|
|
|
Total convertible subordinated notes |
|
|
291.2 |
|
|
|
291.2 |
|
|
|
|
|
|
|
|
Senior subordinated notes, bearing
interest at 9.50% per annum, interest
payments due in February and August,
maturing in 2013 (9 1/2% Notes) |
|
|
97.5 |
|
|
|
97.5 |
|
|
|
|
|
|
|
|
Total senior subordinated notes |
|
|
97.5 |
|
|
|
97.5 |
|
|
|
|
|
|
|
|
Promissory note, bearing interest at 5%
per annum, payable in annual
installments of $700,000 plus interest,
maturing in 2011 |
|
|
2.8 |
|
|
|
— |
|
Term loan, bearing interest at various
rates (rate of 8.36% as of February 28,
2007), payable in quarterly
installments of $386,250 plus interest,
maturing in 2010 |
|
|
73.3 |
|
|
|
73.7 |
|
|
|
|
|
|
|
|
Total other debt |
|
|
76.1 |
|
|
|
73.7 |
|
|
|
|
|
|
|
|
Total debt |
|
|
464.8 |
|
|
|
462.4 |
|
Less: Amounts due within one year |
|
|
(22.0 |
) |
|
|
(21.3 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
442.8 |
|
|
$ |
441.1 |
|
|
|
|
|
|
|
|
The estimated fair value of the Company’s total debt was $471.2 million as of February 28,
2007 compared to a carrying value of $464.8 million. The fair value of the convertible subordinated
notes and the senior subordinated notes was determined based on quoted market prices as of February
28, 2007. The fair value of the remaining debt approximates the carrying value.
The Company’s credit facility (Senior Credit Facility) provides for an $80.0 million revolving
credit facility (Revolver) and a $154.5 million credit-linked facility, consisting of an $80.0
million letter of credit subfacility and a $74.5 million term loan subfacility. As of February 28,
2007, the borrowing limit under the Revolver was $80.0 million with all of it available.
Additionally, the Company had $73.3 million outstanding under the term loan subfacility and $70.5
million outstanding letters of credit issued under the letter of credit subfacility at February 28,
2007.
In January 2007, the Company purchased, for $4.3 million, approximately 180 acres of land
which had been previously leased by the Company. The purchase was financed with $1.5 million of
cash and a $2.8 million promissory note. The promissory note is payable in four annual
installments, matures in January 2011, and bears interest at a per annum rate of five percent.
The Senior Credit Facility is secured by substantially all of the Company’s assets, including
the stock and assets of our material domestic subsidiaries that are guarantors of this facility.
The Company is subject to certain limitations including the ability to: incur additional debt or
sell assets, with restrictions on the use of proceeds; make certain investments and acquisitions;
grant liens; and make restricted payments. The Company is also subject to financial covenants, as
amended, which are as follows:
|
|
|
|
|
|
|
|
|
Actual Ratios As of |
|
Required Ratios December 1, 2006 |
|
Required Ratios December 1, |
Financial Covenant |
|
February 28, 2007 |
|
Through November 30, 2007 |
|
2007 and thereafter |
Interest coverage ratio |
|
3.48 to 1.00 |
|
Not less than: 2.25 to 1.00 |
|
Not less than: 2.25 to 1.00 |
Fixed charge coverage ratio |
|
9.61 to 1.00 |
|
Not less than: 1.20 to 1.00 |
|
Not less than: 1.20 to 1.00 |
Senior leverage ratio |
|
0.65 to 1.00 |
|
Not greater than: 2.50 to 1.00 |
|
Not greater than: 2.50 to 1.00 |
Leverage ratio |
|
5.44 to 1.00 |
|
Not greater than: 8.50 to 1.00 through February 28, 2007; |
|
Not greater than: 5.50 to 1.00 |
|
|
|
|
Not greater than 8.00 to 1.00 March 1, 2007 — May 31, 2007; |
|
|
|
|
|
|
Not greater than 7.50 to 1.00 June 1, 2007 — August 31, 2007; |
|
|
|
|
|
|
Not greater than 7.00 to 1.00 September 1, 2007 — November 30, 2007 |
|
|
The Company was in compliance with its financial covenants as of February 28, 2007 and is
expecting to be in compliance during the remainder of fiscal 2007. The required maximum leverage
ratio steps down from 8.50 to 1.00 at February 28, 2007 to 7.00 to 1.00 at November 30, 2007. In
fiscal 2008, the leverage ratio decreases further to 5.50 to 1.00. Recognizing the required fiscal
2008 leverage ratio step down, the Company is currently evaluating options including restructuring
its Senior Credit Facility.
11
10. Commitments and Contingencies
a. Legal proceedings
The Company and its subsidiaries are subject to legal proceedings, including litigation in
federal and state courts, which arise out of, and are incidental to, the ordinary course of the
Company’s on-going and historical businesses. The Company is also subject to governmental
investigations by state and federal agencies. The Company cannot predict the outcome of such
proceedings with any degree of certainty. The Company accounts for litigation losses in accordance
with SFAS No. 5 (SFAS 5), Accounting for Contingencies. Under SFAS 5, loss contingency provisions
are recorded for probable losses at management’s best estimate of a loss, or when a best estimate
cannot be made, a minimum loss contingency amount is recorded. These estimates are often initially
developed substantially earlier than when the ultimate loss is known, and the estimates are refined
each quarterly reporting period, as additional information becomes known. Accordingly, the Company
is often initially unable to develop a best estimate of loss, and therefore the minimum amount,
which could be zero, is recorded. As information becomes known, either the minimum loss amount is
increased, resulting in additional loss provisions, or a best estimate can be made, also resulting
in additional loss provisions.
Groundwater Cases
Aerojet and other defendants were sued by the Orange County Water District, a public entity
with jurisdiction over groundwater resources and water supplies in Orange County, California:
Orange County Water District v. Northrop Corporation, et al. Case No. O4CC00715, Orange County (CA)
Superior Court, served December 29, 2004. The plaintiff alleges that groundwater in Orange County,
California is contaminated with chlorinated solvents that were allegedly released to the
environment by Aerojet and other industrial defendants causing it to incur unspecified response
costs and other damages. The plaintiff seeks declaratory relief and recovery of past costs in
connection with investigation and remediation of groundwater resources. Discovery is ongoing and
the trial is scheduled for March 2008. The Company also received a directive under California Water
Code §13267 to investigate the groundwater contamination in and around its former Aerojet
Manufacturing Company facility in Fullerton, CA. That investigation is ongoing.
In October 2002, Aerojet and approximately 65 other individual and corporate defendants, were
served with four civil suits filed in the U.S. District Court for the Central District of
California that seek recovery of costs allegedly incurred or to be incurred in response to the
contamination present at the South El Monte Operable Unit (SEMOU) of the San Gabriel Valley
Superfund site. The cases are denominated as follows: The City of Monterey Park v. Aerojet-General
Corporation, et al., (CV-02-5909 ABC (RCx)); San Gabriel Basin Water Quality Authority v.
Aerojet-General Corporation, et al., (CV-02-4565 ABC (RCx)); San Gabriel Valley Water Company v.
Aerojet-General Corporation, et al., (CV-02-6346 ABC (RCx)), and Southern California Water Company
v. Aerojet-General Corporation, et al., (CV-02-6340 ABC (RCx)). The cases have been coordinated for
ease of administration by the court. The plaintiffs’ claims against Aerojet are based upon
allegations of discharges from a former site in the El Monte area, as more fully discussed below
under the headings “San Gabriel Valley Basin, California Site” — “South El Monte Operable Unit
(SEMOU).” The total cost estimate to implement projects under the Unilateral Administrative Order
(UAO) prepared by the EPA and the water entities is approximately $90 million. Aerojet
investigations do not identify a credible connection between the contaminants identified by the
water entities in the SEMOU and those detected at Aerojet’s former facility located in El Monte,
California, near the SEMOU (East Flair Drive site). Aerojet has filed third-party complaints
against several water entities on the basis that they introduced perchlorate-containing Colorado
River water to the basin. Those water entities have filed motions to dismiss Aerojet’s complaints.
The motions as well as discovery have been stayed pending efforts to resolve the litigation through
mediation.
In December 2006, Aerojet was sued by eleven individual plaintiffs residing in the vicinity of
Aerojet’s facilities near Sacramento, California. Haynes et al. v. Aerojet-General Corporation,
Case No. O6AS04555, Sacramento County (CA) Superior Court (the Sacramento litigation). Additional
claims added to the case bring the total number of plaintiffs to fifteen. The plaintiffs allege
that Aerojet contaminated groundwater, which plaintiffs consumed causing illness, death and
economic injury. Plaintiffs seek judgment against Aerojet for unspecified general, special and
punitive damages.
In 2004, Aerojet and McDonnell Douglas Corporation (MDC) settled litigation entitled McDonnell
Douglas Corporation v. Aerojet-General Corporation pertaining to contaminated groundwater at and
emanating from Aerojet owned property identified as the Inactive Rancho Cordova Test Sites
(“IRCTS”). Pursuant to the 2004 Settlement Agreement and the 1999 Partial Settlement Agreement,
either party is entitled to commence an arbitration proceeding for the reallocation of costs
expended toward the investigation and remediation of the groundwater contamination. By letter of
October 26, 2006, The Boeing Company (Boeing), the parent of MDC, purported to trigger the
arbitration.
12
Vinyl Chloride Litigation
Between the early 1950s and 1985, the Company produced polyvinyl chloride (PVC) resin at its
former Ashtabula, Ohio facility. PVC is one of the most common forms of plastic currently on the
market. A building block compound of PVC is vinyl chloride (VC), now listed as a known carcinogen
by several governmental agencies. The Occupational Safety and Health Administration (OSHA) have
regulated workplace exposure to VC since 1974.
Since the mid-1990s, the Company has been named in numerous cases involving alleged exposure
to VC. In the majority of such cases, the Company is alleged to be a “supplier/manufacturer” of PVC
and/or a civil co-conspirator with other VC and PVC manufacturers as a result of membership in a
trade association. Plaintiffs generally allege that the Company and other defendants suppressed
information about the carcinogenic risk of VC to industry workers, and placed VC or PVC into
commerce without sufficient warnings. A few of these cases alleged VC exposure through various
aerosol consumer products, in that VC had been used as an aerosol propellant during the 1960s.
Defendants in these “aerosol” cases included numerous consumer product manufacturers, as well as
the more than 30 chemical manufacturers. The Company used VC internally, but never supplied VC for
aerosol or any other use.
Of the cases that have been filed, the majority have been dismissed or settled on terms
favorable to the Company. The eight pending cases involve employees at VC or PVC facilities owned
or operated by others. One of the pending cases is an action seeking class action certification and
which is seeking a medical monitoring program for former employees at a PVC facility in New Jersey.
Given the lack of any significant consistency to claims (i.e., as to product, operational
site, or other relevant assertions) filed against the Company, the Company is unable to make a
reasonable estimate of the future costs of pending claims or unasserted claims. Accordingly, no
estimate of future liability has been accrued for such contingencies.
Asbestos Litigation
The Company has been, and continues to be, named as a defendant in lawsuits alleging personal
injury or death due to exposure to asbestos in building materials, products or in manufacturing
operations. The majority of cases have been filed in Madison County, Illinois and San Francisco,
California. Since 1998, more than 200 of these asbestos lawsuits have been resolved with the
majority being dismissed. There were 161 asbestos cases pending as of February 28, 2007.
Given the lack of any significant consistency to claims (i.e., as to product, operational
site, or other relevant assertions) filed against the Company, the Company is unable to make a
reasonable estimate of the future costs of pending claims or unasserted claims. Accordingly, no
estimate of future liability has been accrued for such contingencies.
Snappon SA Wrongful Discharge Claims
In November 2003, the Company announced the closing of a GDX Automotive manufacturing facility
in Chartres, France owned by Snappon SA, a subsidiary of the Company. The decision resulted
primarily from declining sales volumes with French automobile manufacturers. In accordance with
French law, Snappon SA negotiated with the local works’ council regarding the implementation of a
social plan for the employees. Following the implementation of the social plan, approximately 188
of the 249 former Snappon employees sued Snappon SA in the Chartres Labour Court alleging wrongful
discharge. Snappon SA is vigorously defending these claims. The claims were heard in two groups. On
April 11, 2006, the Labour Court rejected most of the claims of the first group of 44 former
employees and held Snappon SA responsible for €12,000 (approximately $16,000) as damages. This
first group of former employees has appealed this decision. After two hearings, the Labour Court
dismissed the claims filed by the second group of 136 former employees, which group had claimed
damages in excess of €12.7 million (approximately $16.9 million). No hearing date has been set
for the remaining eight former employees who have brought wrongful discharge claims.
Other Legal Matters
The Company is subject to other legal actions, governmental investigations, and proceedings
relating to a wide range of matters in addition to those discussed above. While there can be no
certainty regarding the outcome of any litigation, investigation or proceeding, after reviewing the
information that is currently available with respect to such matters, any liability that may
ultimately be incurred with respect to these matters is not expected to materially affect the
Company’s consolidated financial condition. It is possible that amounts could be significant to the
statement of operations in any particular reporting period.
13
b. Environmental Matters
The Company is involved in a number of environmental responses under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA), the Resource Conservation Recovery
Act (RCRA), and other federal, state, local, and foreign laws relating to soil and groundwater
contamination, hazardous waste management activities, and other environmental matters at some of
its current and former facilities. The Company is also involved in a number of remedial activities
at third party sites, not owned by the Company, where it is designated a potentially responsible
party (PRP) by either the United States Environmental Protection Agency (US EPA) or a state agency.
Anticipated costs associated with environmental remediation that are probable and estimable are
accrued. In cases where a date to complete remedial activities at a particular site cannot be
determined by reference to agreements or otherwise, the Company projects costs over an appropriate
time period not exceeding fifteen years; in such cases, generally the Company does not have the
ability to reasonably estimate environmental remediation costs that are beyond this fifteen year
period. Factors that could result in changes to the Company’s estimates include completion of
current and future soil and groundwater investigations, new claims, future agency demands,
discovery of more contamination than expected, modification of planned remedial actions, changes in
estimated time required to remediate, new technologies, changes in laws and regulations, and the
discovery of new contaminants.
As of February 28, 2007, the aggregate range of these anticipated environmental costs was $266
million to $475 million and the accrued amount was $269.0 million. See Note 10(c) for a summary of
the environmental reserve activity for the first quarter of fiscal 2007. Of these accrued
liabilities, approximately 62% relates to the Sacramento, California site and approximately 27% to
the Baldwin Park Operable Unit of the San Gabriel Valley, California site. Each of those two sites
is discussed below. The balance of the accrued liabilities relates to other sites for which the
Company’s obligations are probable and estimable.
Sacramento, California Site
In 1989, a federal district court in California approved a Partial Consent Decree (PCD)
requiring Aerojet, among other things, to conduct a Remedial Investigation and Feasibility Study
(RI/FS) to determine the nature and extent of impacts due to the release of chemicals from the
site, monitor the American River and offsite public water supply wells, operate Groundwater
Extraction and Treatment facilities (GETs) that collect groundwater at the site perimeter, and pay
certain government oversight costs. The primary chemicals of concern for both on-site and off-site
groundwater are trichloroethylene (TCE), perchlorate, and n-nitrosodimethylamine (NDMA). The PCD
has been revised several times, most recently in 2002. The 2002 PCD revision (a) separated the
Sacramento site into multiple operable units to allow quicker implementation of remedy for critical
areas; (b) required the Company to guarantee up to $75 million (in addition to a prior $20 million
guarantee) to assure that Aerojet’s Sacramento remediation activities are fully funded; and (c)
removed approximately 2,600 acres of non-contaminated land from the US EPA superfund designation.
Aerojet is involved in various stages of soil and groundwater investigation, remedy selection,
design, and remedy construction associated with the operable units. In 2002, the US EPA issued a
unilateral administrative order (UAO) requiring Aerojet to implement the US EPA-approved remedial
action in the Western Groundwater Operable Unit. An identical order was issued by the California
Regional Water Quality Control Board, Central Valley (Central Valley RWQCB). Aerojet submitted its
Final Draft Remedial Investigation/Feasibility Study for the Perimeter Groundwater Operable Unit to
the US EPA and, because of additional sampling requirements, expects that a Final RI/FS will be
submitted in late 2007 with a Record of Decision anticipated in 2008. The remaining operable units
are under various stages of investigation.
The southern portion of the property known as Rio Del Oro is under state orders issued in the
1990s by the California Department of Toxic Control (DTSC) and the Central Valley RWQCB to
investigate and remediate environmental contamination. Aerojet leased this property to Douglas
Aircraft for rocket assembly and testing from 1957 to 1961 and sold approximately 3,500 acres,
including the formerly leased portion, to Douglas Aircraft in 1961. Aerojet reacquired the property
from MDC, the successor to Douglas Aircraft in 1984. As a result, the state orders referenced above
were issued to both MDC and Aerojet. Aerojet and MDC’s parent, Boeing, have entered into an
allocation agreement, some of which is subject to reallocation, that establishes lead roles and
payment obligations. Aerojet and Boeing are actively remediating soil on portions of the property
as well as on-site and off-site groundwater contamination. Aerojet is currently working to release
a significant portion of the property from the DTSC order.
14
San Gabriel Valley Basin, California Site
Baldwin Park Operable Unit (BPOU)
As a result of its former Azusa, California operations, in 1994 Aerojet was named a PRP by the
US EPA, primarily due to volatile organic compound (VOC) contamination in the area of the San
Gabriel Valley Basin superfund site known as BPOU.
Between 1995 and 1997, the US EPA issued Special Notice Letters to Aerojet and eighteen other
companies requesting that they implement a groundwater remedy. Subsequently, additional
contaminates were identified, namely: perchlorate, NDMA, and 1,4-dioxane. On June 30, 2000, the US
EPA issued a UAO ordering the PRPs to implement a remedy consistent with the 1994 Record of
Decision (ROD). Aerojet, along with seven other PRPs (the Cooperating Respondents) signed a Project
Agreement in late March 2002 with the San Gabriel Basin Water Quality Authority (WQA), the Main San
Gabriel Basin Watermaster, and five water companies. The Project Agreement, which has a term of
fifteen years, became effective on May 9, 2002. Pursuant to the Project Agreement, the Cooperating
Respondents fund through an escrow account, the capital, operational, maintenance, and
administrative costs of certain treatment and water distribution facilities to be owned and
operated by the Water companies. There are also provisions in the Project Agreement for maintaining
financial assurance in the form of cash or letters of credit. Aerojet and the other Cooperating
Respondents have entered into an interim allocation agreement that establishes the interim payment
obligations of the Cooperating Respondents for the costs incurred pursuant to the Project
Agreement. Under the interim allocation, Aerojet is responsible for approximately two-thirds of all
project costs, including government oversight costs. A significant amount of public funding is
available to offset project costs. To date, Congress has appropriated approximately $71 million (so
called Title 16 and Dreier funds), which is potentially available for payment of project costs.
Approximately $40 million of the funding has been allocated to costs associated with the Project
Agreement and additional funds may follow in later years. All project costs are subject to
reallocation among the Cooperating Respondents. Aerojet intends to continue to defend itself
vigorously to assure that it is appropriately treated with other PRPs and that costs of any
remediation are properly allocated among all PRPs.
As part of Aerojet’s sale of its Electronics and Information Systems (EIS) business to
Northrop Grumman Corporation (Northrop) in October 2001, the US EPA approved a Prospective
Purchaser Agreement with Northrop to absolve it of pre-closing liability for contamination caused
by the Azusa, California operations, which liability remains with Aerojet. As part of that
agreement, the Company agreed to provide a $25 million guarantee of Aerojet’s obligations under the
Project Agreement.
South El Monte Operable Unit (SEMOU)
Aerojet previously owned and operated manufacturing facilities located on East Flair Drive in
El Monte, California. On December 21, 2000, Aerojet received an order from the Los Angeles RWQCB
requiring a work plan for investigation of this former site. On January 22, 2001, Aerojet filed an
appeal of the order with the Los Angeles RWQCB asserting selective enforcement. The appeal had been
held in abeyance pending negotiations with the Los Angeles RWQCB, but due to a two-year limitation
on the abeyance period, the appeal was dismissed without prejudice. In September 2001, Aerojet
submitted a limited work plan to the Los Angeles RWQCB.
On February 21, 2001, Aerojet received a General Notice Letter from the US EPA naming Aerojet
as a PRP with regard to the SEMOU of the San Gabriel Valley Basin, California Superfund site. On
April 1, 2002, Aerojet received a Special Notice Letter from the US EPA that requested Aerojet
enter into negotiations with it regarding the performance of a remedial design and remedial action
for the SEMOU. In light of this letter, Aerojet performed a limited site investigation of the East
Flair Drive site. The data collected and summarized in the report showed that chemicals including
TCE and PCE were present in the soil and groundwater at, and near, the El Monte location. Site
investigations are ongoing.
On August 29, 2003, the US EPA issued a UAO against Aerojet and approximately 40 other parties
requiring them to conduct the remedial design and remedial action in the SEMOU. The impact of the
UAO on the recipients is not clear as much of the remedy is already being implemented by the water
entities. The cost estimate to implement projects under the UAO prepared by the US EPA and the
water entities is approximately $90 million. The Company is working diligently with the US EPA and
the other PRPs to resolve this matter and ensure compliance with the UAO. The Company’s share of
responsibility has not yet been determined.
On November 17, 2005, Aerojet notified the Los Angeles RWQCB and the US EPA that Aerojet was
involved in research and development at the East Flair Drive site that included the use of
1,4-dioxane. Aerojet’s investigation of that issue is continuing.
15
Other Sites
The Company is currently involved in approximately 37 other environmental remediation actions
or claims. In many of these matters, the Company is involved with other PRPs. 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 and costs are generally made based
on relative contributions of waste or contamination.
c. Environmental Reserves and Estimated Recoveries
Reserves
The Company reviews on a quarterly basis estimated future remediation costs that could be
incurred over the contractual term or next fifteen years of the expected remediation. The Company
has an established practice of estimating environmental remediation costs over a fifteen year
period; except for those environmental remediation costs whose contractual terms are sufficiently
specific to allow reasonable costs estimates to be developed beyond a fifteen year period. As the
period for which estimated environmental remediation costs increases, the reliability of such
estimates decrease. These estimates consider the investigative work and analysis of engineers,
outside environmental consultants, and the advice of legal staff regarding the status and
anticipated results of various administrative and legal proceedings. In most cases, only a range of
reasonably possible costs can be estimated. In establishing our reserves, the most probable
estimate is used when determinable; otherwise, the minimum is used. The timing of payment for
estimated future environmental costs depends on the timing of regulatory approvals for planned
remedies and the construction and completion of the remedies.
A summary of the Company’s environmental reserve activity is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, |
|
|
2007 |
|
|
2007 |
|
|
February 28, |
|
|
|
2006 |
|
|
Additions |
|
|
Expenditures |
|
|
2007 |
|
|
|
(in millions) |
|
Aerojet |
|
$ |
256.5 |
|
|
$ |
10.8 |
|
|
$ |
(7.7 |
) |
|
$ |
259.6 |
|
Other Sites |
|
|
9.5 |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Reserve |
|
$ |
266.0 |
|
|
$ |
10.8 |
|
|
$ |
(7.8 |
) |
|
$ |
269.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2007, the Aerojet reserves include $165.7 million for the Sacramento site,
$73.7 million for BPOU, and $20.2 million for other Aerojet sites.
The effect of the final resolution of environmental matters and the Company’s obligations for
environmental remediation and compliance cannot be accurately predicted due to the uncertainty
concerning both the amount and timing of future expenditures and due to regulatory or technological
changes. The Company believes, on the basis of presently available information, that the resolution
of environmental matters and the Company’s obligations for environmental remediation and compliance
will not have a material adverse effect on the Company’s results of operations, liquidity or
financial condition. The Company will continue its efforts to mitigate past and future costs
through pursuit of claims for recoveries from insurance coverage and other PRPs and continued
investigation of new and more cost effective remediation alternatives and associated technologies.
Estimated Recoveries
On January 12, 1999, Aerojet and the U.S. government implemented the October 1997 Agreement in
Principle (Global Settlement) resolving certain prior environmental and facility disagreements,
with retroactive effect to December 1, 1998. The Global Settlement covered all environmental
contamination at the Sacramento and Azusa sites. Under the Global Settlement, Aerojet and the U.S.
government resolved disagreements about an appropriate cost-sharing ratio. The Global Settlement
provides that the cost-sharing ratio will continue for a number of years.
Pursuant to the Global Settlement covering environmental costs associated with Aerojet’s
Sacramento site and its former Azusa site, the Company can recover up to 88% of its environmental
remediation costs for these sites through the establishment of prices for Aerojet’s products and
services sold to the U.S. government. Allowable environmental costs are charged to these contracts
as the costs are incurred. Aerojet’s mix of contracts can affect the actual reimbursement made by
the U.S. government. Because these costs are recovered through forward-pricing arrangements, the
ability of Aerojet to continue recovering these costs from the U.S. government
16
depends on Aerojet’s sustained business volume under U.S. government contracts and programs
and the relative size of Aerojet’s commercial business.
In conjunction with the sale of EIS, Aerojet entered into an agreement with Northrop whereby
Aerojet is reimbursed by Northrop for a portion of environmental expenditures eligible for recovery
under the Global Settlement. Amounts reimbursed are subject to annual limitations, with excess
amounts carried over to subsequent periods, the total of which will not exceed $190 million over
the term of the agreement, which ends in 2028. As of February 28, 2007, $137.5 million in potential
future reimbursements were available over the remaining life of the agreement.
As part of the acquisition of the Atlantic Research Corporation (ARC) propulsion business,
Aerojet entered into an agreement with ARC pursuant to which Aerojet is responsible for up to $20
million of costs (Pre-Close Environmental Costs) associated with environmental issues that arose
prior to Aerojet’s acquisition of the ARC propulsion business, of which $16.1 million remains as of
February 28, 2007. Pursuant to a separate agreement with the U.S. government which was entered into
prior to the closing of the ARC acquisition, these Pre-Close Environmental Costs are treated under
the normal rules of cost allowability and are not subject to the 88% limitation under the Global
Settlement, and are recovered through the establishment of prices for Aerojet’s products and
services sold to the U.S. government.
As a result of the ARC acquisition, Aerojet signed a Memorandum of Understanding with the U.S.
government agreeing to key assumptions and conditions that preserved the original methodology used
in recalculating the percentage split between Aerojet and Northrop. Aerojet presented a proposal to
the U.S. government based on the Memorandum of Understanding and expects to complete an agreement
in the near term.
In conjunction with the review of its environmental reserves discussed above, the Company
revised its estimate of costs that will be recovered under the Global Settlement based on business
expected to be conducted under contracts with the U.S. government and its agencies in the future.
In the first quarter of fiscal 2007, the increase to the reserve of $10.8 million resulted in a
corresponding increase to the receivable and a charge to operations of $1.2 million. The expenses
and benefits associated with adjustments to the environmental reserves are recorded as a component
of other (income) expense, net in the Unaudited Condensed Consolidated Statements of Operations.
d. Conditional Asset Retirement Obligations
Effective November 30, 2006, the Company adopted FASB Interpretation No. 47 (FIN 47),
Accounting for Conditional Asset Retirement Obligations, an interpretation of SFAS No. 143,
Accounting for Asset Retirement Obligations. FIN 47 requires that the fair value of a liability for
a conditional asset retirement obligation be recognized in the period in which it is incurred and
the settlement date is estimable, and is capitalized as part of the carrying amount of the related
tangible long-lived asset.
The Company performed an analysis of such obligations associated with all real property owned
or leased, including plants, warehouses, and offices. The Company’s estimate of conditional asset
retirement obligations associated with owned properties relate to costs estimated to be necessary
for the legally required removal or remediation of various regulated materials, primarily asbestos
disposal and radiological decontamination of an ordnance manufacturing facility. For conditional
asset retirement obligations that are not expected to be retired in the next fifteen years, the
Company estimated the retirement date of such asset retirement obligations to be thirty years from
the date of adoption. For leased properties, such obligations relate to the estimated cost of
contractually required property restoration.
The initial application of FIN 47 as of November 30, 2006 resulted in the Company recording
conditional asset retirement obligations in the amount of $10.2 million, which is a component of
other noncurrent liabilities on the Unaudited Condensed Consolidated Balance Sheet. Of this amount,
$1.4 million was recorded as an incremental cost of the underlying property, plant and equipment,
less $0.8 million of accumulated depreciation. The Company also recorded an asset of $8.4 million
which represents the amount of the conditional asset retirement obligation that is estimated to be
recoverable under U.S. government contracts. As of November 30, 2006, the cumulative effect related
to the accretion of the liability and depreciation of the asset net of the amount recoverable under
U.S. government contracts was $1.2 million, all attributable to the Aerospace and Defense segment.
The impact to the Unaudited Condensed Consolidated Statement of Operations for the first
quarter of fiscal 2006 adjusted for the adoption of FIN 47 would have been less than $0.1 million.
17
The changes in the carrying amount of asset retirement obligations since November 30, 2006
were as follows (in millions):
|
|
|
|
|
Balance as of November 30, 2006 |
|
$ |
10.2 |
|
Accretion |
|
|
0.3 |
|
|
|
|
|
Balance as of February 28, 2007 |
|
$ |
10.5 |
|
|
|
|
|
11. Arrangements with Off-Balance Sheet Risk
As of February 28, 2007, obligations required to be disclosed in accordance with FASB
Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of the Indebtedness of Others consisted of:
— $70.5 million in outstanding commercial letters of credit expiring in 2007, the majority
of which may be renewed, and securing obligations for environmental remediation and insurance
coverage.
— Up to $120.0 million aggregate in guarantees by GenCorp of Aerojet’s obligations to U.S.
government agencies for environmental remediation activities.
— Guarantees, jointly and severally, by the Company’s material domestic subsidiaries of its
obligations under its Senior Credit Facility and its 9 1/2% Notes.
In addition to the items discussed above, the Company from time to time enters into certain
types of contracts that require the Company to indemnify parties against third-party and other
claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company
may provide customary indemnification to purchasers of the Company’s businesses or assets
including, for example, claims arising from the operation of the businesses prior to disposition,
liability to investigate and remediate environmental contamination existing prior to disposition;
(ii) certain real estate leases, under which the Company may be required to indemnify property
owners for other claims arising from the Company’s use of the applicable premises; and, (iii)
certain agreements with the Company’s officers and directors, under which the Company may be
required to indemnify such persons for liabilities arising out of their relationship with the
Company. The terms of such obligations vary. Generally, a maximum obligation is not explicitly
stated. Because the obligated amounts of these types of agreements often are not explicitly stated,
the overall maximum amount of the obligations cannot be reasonably estimated.
Warranties
The Company provides product warranties in conjunction with certain product sales. The
majority of the Company’s warranties are a one-year standard warranty for parts, workmanship, and
compliance with specifications. On occasion, the Company has made commitments beyond the standard
warranty obligation. While the Company has contracts with warranty provisions, there is not a
history of any significant warranty claims experience. A reserve for warranty exposure is made on a
product by product basis when it is both estimable and probable in accordance with SFAS 5. These
costs are included in the program’s estimate at completion and are expensed in accordance with the
Company’s revenue recognition methodology as allowed under American Institute of Certified Public
Accountants Statement of Position No. 81-1, Accounting for Performance of Construction-Type and
Certain Production Type Contracts, for that particular contract.
18
12. Retirement Benefits
Pension Benefits — As of February 28, 2007, the Company has a defined benefit pension plan
covering substantially all salaried and hourly employees. Normal retirement age is 65, but certain
plan provisions allow for earlier retirement. Pension benefits are calculated under formulas based
on average earnings and length of service for salaried employees and under negotiated non-wage
based formulas for hourly employees.
Postretirement Medical and Life Benefits — The Company provides medical and life insurance
benefits (postretirement benefits) to certain eligible retired employees, with varied coverage by
employee group. Medical and life benefit obligations are unfunded.
Components of net periodic benefit (income) expense for continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Postretirement Benefits |
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
February 28, |
|
|
February 28, |
|
|
February 28, |
|
|
February 28, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Service cost |
|
$ |
4.3 |
|
|
$ |
4.5 |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
Interest cost on benefit obligation |
|
|
24.1 |
|
|
|
28.3 |
|
|
|
1.4 |
|
|
|
1.4 |
|
Assumed return on plan assets |
|
|
(30.7 |
) |
|
|
(34.7 |
) |
|
|
— |
|
|
|
— |
|
Amortization of unrecognized prior service cost |
|
|
0.5 |
|
|
|
0.6 |
|
|
|
(0.1 |
) |
|
|
(0.8 |
) |
Amortization of unrecognized net (gains) losses |
|
|
7.4 |
|
|
|
13.2 |
|
|
|
(1.7 |
) |
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit (income) expense |
|
$ |
5.6 |
|
|
$ |
11.9 |
|
|
$ |
(0.3 |
) |
|
$ |
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Discontinued Operations
Turbo Product Line
During the third quarter of fiscal 2006, the Company classified its Turbo product line as a
discontinued operation as a result of its plans to sell the product line. The product line was not
core to the Aerospace and Defense segment and required increased management oversight and costs
because of increased competition and investments for on-going maintenance of the product line. On
November 17, 2006, the Company completed the sale of its Turbo product line to Aerosource Inc. for
$1.1 million, subject to adjustment. The loss on the sale of the Turbo product line during fiscal
2006 was $0.4 million. An additional loss of $0.1 million was recorded in the first quarter of
fiscal 2007 to reflect the net assets of the Turbo product line and management’s estimate of the
net proceeds from the sale. For operating segment reporting, the Turbo product line was previously
reported as a part of the Aerospace and Defense segment.
Fine Chemicals business
On November 30, 2005, the Company sold its Fine Chemicals business to American Pacific
Corporation (AMPAC) for $88.5 million of cash paid at closing, an unsecured subordinated seller
note of $25.5 million delivered at closing, an earn-out provision of up to $6.0 million contingent
upon the business’ achieving certain earnings targets, and the assumption by the buyer of certain
liabilities. The Company recorded a full allowance on both the $25.5 million unsecured
subordinated seller note in fiscal 2005 and $6.0 million earnings targets receivable in fiscal
2006. During the first quarter of fiscal 2007, the Company entered into an earn-out and seller note
repayment agreement (Repayment Agreement) with AMPAC under which AMPAC was required to
pay $29.7 million in consideration for the early retirement of the seller note (including interest
due thereunder), the full payment of the earn-out amount and the release of the Company from
certain liabilities. During the first quarter of fiscal 2007, the Company recorded a gain of $31.2
million as a result of receiving $29.7 million of cash from AMPAC and being released from certain
liabilities in accordance with the Repayment Agreement.
GDX Automotive business
In November 2003, the Company announced the closing of a GDX manufacturing facility in
Chartres, France. The decision resulted primarily from declining sales volumes with French
automobile manufacturers. In June 2004, the Company completed the legal process for closing the
facility and establishing a social plan. In fiscal 2004, an expense of approximately $14.0 million
related to employee social costs was recorded in accordance with SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. An expense of $1.0 million was recorded during fiscal
2005 primarily related to employee social costs that became estimable in fiscal 2005. The Company
has not yet recorded expenses associated with other social benefits due to the uncertainty of these
costs which could total up to a pre-tax expense of $2.0 million and may be incurred within the next
few years.
19
Summarized financial information for discontinued operations is set forth below:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
February 28, |
|
February 28, |
|
|
2007 |
|
2006 |
|
|
(in millions) |
Net sales |
|
$ |
— |
|
|
$ |
— |
|
Income (loss) before income taxes |
|
|
30.9 |
|
|
|
(1.0 |
) |
Income tax provision |
|
|
0.3 |
|
|
|
— |
|
Income (loss) from discontinued operations, net of income taxes |
|
|
30.6 |
|
|
|
(1.0 |
) |
As of February 28, 2007 and November 30, 2006, the components of assets and liabilities of
discontinued operations in the consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Assets of discontinued operations, consisting of other assets |
|
$ |
0.1 |
|
|
$ |
0.5 |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
0.5 |
|
|
$ |
0.6 |
|
Other liabilities |
|
|
0.9 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
Liabilities of discontinued operations |
|
$ |
1.4 |
|
|
$ |
1.8 |
|
|
|
|
|
|
|
|
14. Operating Segments and Related Disclosures
The Company’s operations are organized into two operating segments based on different products
and customer bases: Aerospace and Defense, and Real Estate.
The Company evaluates it operating segments based on several factors, of which the primary
financial measure is segment performance. Segment performance represents net sales from continuing
operations less applicable costs, expenses and provisions for unusual items relating to the segment
operations. Segment performance excludes corporate income and expenses, legacy income or expenses,
provisions for unusual items not related to the segment operations, interest expense, and income
taxes.
Customers that represented more than 10% of net sales for the periods presented are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months ended |
|
|
February 28, |
|
February 28, |
|
|
2007 |
|
2006 |
Lockheed Martin |
|
|
38 |
% |
|
|
39 |
% |
Raytheon |
|
|
21 |
% |
|
|
17 |
% |
Sales in the first quarter of fiscal 2007 and fiscal 2006 directly and indirectly to the U.S.
government and its agencies, including sales to the Company’s significant customers discussed
above, totaled 90% and 82%, respectively, of net sales.
20
Selected financial information for each reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months ended |
|
|
|
February 28, |
|
|
February 28, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Net Sales: |
|
|
|
|
|
|
|
|
Aerospace and Defense |
|
$ |
149.1 |
|
|
$ |
126.8 |
|
Real Estate |
|
|
1.7 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
Total |
|
$ |
150.8 |
|
|
$ |
128.3 |
|
|
|
|
|
|
|
|
Segment Performance: |
|
|
|
|
|
|
|
|
Aerospace and Defense |
|
$ |
14.3 |
|
|
$ |
8.3 |
|
Environmental remediation provision adjustments |
|
|
(1.2 |
) |
|
|
(0.2 |
) |
Retirement benefit plan expense |
|
|
(5.9 |
) |
|
|
(8.7 |
) |
|
|
|
|
|
|
|
Aerospace and Defense Total |
|
|
7.2 |
|
|
|
(0.6 |
) |
|
|
|
|
|
|
|
Real Estate |
|
|
0.8 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
Total |
|
$ |
8.0 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
Reconciliation of segment performance to loss
from continuing operations before income taxes
and cumulative effect of a change in accounting
principle: |
|
|
|
|
|
|
|
|
Segment Performance |
|
$ |
8.0 |
|
|
$ |
0.2 |
|
Interest expense |
|
|
(7.2 |
) |
|
|
(6.3 |
) |
Corporate retirement benefit plan income (expense) |
|
|
0.6 |
|
|
|
(2.3 |
) |
Corporate and other expenses |
|
|
(3.1 |
) |
|
|
(5.3 |
) |
|
|
|
|
|
|
|
Loss from continuing operations before income
taxes and cumulative effect of a change in
accounting principle |
|
$ |
(1.7 |
) |
|
$ |
(13.7 |
) |
|
|
|
|
|
|
|
15. Condensed Consolidating Financial Information
The Company is providing condensed consolidating financial information for its material
domestic subsidiaries that have guaranteed the Senior Subordinated Notes, and for those
subsidiaries that have not guaranteed the Senior Subordinated Notes. These wholly owned subsidiary
guarantors have, jointly and severally, fully and unconditionally guaranteed the Senior
Subordinated Notes. The subsidiary guarantees are senior subordinated obligations of each
subsidiary guarantor and rank (i) junior in right of payment with all senior indebtedness, (ii)
equal in right of payment with all senior subordinated indebtedness, and (iii) senior in right of
payment to all subordinated indebtedness, in each case, of that subsidiary guarantor. The
subsidiary guarantees will also be effectively subordinated to any secured indebtedness of the
subsidiary guarantor with respect to the assets securing that indebtedness. Absent both default and
notice as specified in the Company’s Senior Credit Facility and agreements governing the Company’s
outstanding convertible notes and the Senior Subordinated Notes, there are no restrictions on the
Company’s ability to obtain funds from its wholly owned subsidiary guarantors by dividend or loan.
The Company has not presented separate financial and narrative information for each of the
subsidiary guarantors, because it believes that such financial and narrative information would not
provide investors with any additional information that would be material in evaluating the
sufficiency of the guarantees. Therefore, the following condensed consolidating financial
information summarizes the financial position, results of operations, and cash flows for the
Company’s guarantor and non-guarantor subsidiaries.
21
Condensed Consolidating Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-guarantor |
|
|
|
|
|
|
|
Three Months Ended February 28, 2007 (in millions) |
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net sales |
|
$ |
— |
|
|
$ |
150.8 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
150.8 |
|
Cost of products sold |
|
|
— |
|
|
|
135.0 |
|
|
|
— |
|
|
|
— |
|
|
|
135.0 |
|
Selling, general and administrative |
|
|
0.6 |
|
|
|
2.4 |
|
|
|
— |
|
|
|
— |
|
|
|
3.0 |
|
Depreciation and amortization |
|
|
0.6 |
|
|
|
5.9 |
|
|
|
— |
|
|
|
— |
|
|
|
6.5 |
|
Interest expense |
|
|
6.5 |
|
|
|
0.7 |
|
|
|
— |
|
|
|
— |
|
|
|
7.2 |
|
Other, net |
|
|
(1.1 |
) |
|
|
1.9 |
|
|
|
— |
|
|
|
— |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes |
|
|
(6.6 |
) |
|
|
4.9 |
|
|
|
— |
|
|
|
— |
|
|
|
(1.7 |
) |
Income tax (benefit) provision |
|
|
(0.2 |
) |
|
|
0.6 |
|
|
|
— |
|
|
|
— |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(6.4 |
) |
|
|
4.3 |
|
|
|
— |
|
|
|
— |
|
|
|
(2.1 |
) |
Income from discontinued operations |
|
|
30.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
30.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity income of subsidiaries |
|
|
24.2 |
|
|
|
4.3 |
|
|
|
— |
|
|
|
— |
|
|
|
28.5 |
|
Equity income of subsidiaries |
|
|
4.3 |
|
|
|
— |
|
|
|
— |
|
|
|
(4.3 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
28.5 |
|
|
$ |
4.3 |
|
|
$ |
— |
|
|
$ |
(4.3 |
) |
|
$ |
28.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-guarantor |
|
|
|
|
|
|
|
Three Months Ended February 28, 2006 (in millions) |
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net sales |
|
$ |
— |
|
|
$ |
128.3 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
128.3 |
|
Cost of products sold |
|
|
— |
|
|
|
121.3 |
|
|
|
— |
|
|
|
— |
|
|
|
121.3 |
|
Selling, general and administrative |
|
|
5.6 |
|
|
|
2.4 |
|
|
|
— |
|
|
|
— |
|
|
|
8.0 |
|
Depreciation and amortization |
|
|
0.5 |
|
|
|
6.0 |
|
|
|
— |
|
|
|
— |
|
|
|
6.5 |
|
Interest expense |
|
|
5.3 |
|
|
|
1.0 |
|
|
|
— |
|
|
|
— |
|
|
|
6.3 |
|
Other, net |
|
|
(0.6 |
) |
|
|
0.5 |
|
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
and cumulative effect of a change in accounting
principle |
|
|
(10.8 |
) |
|
|
(2.9 |
) |
|
|
— |
|
|
|
— |
|
|
|
(13.7 |
) |
Income tax (benefit) provision |
|
|
(5.2 |
) |
|
|
5.8 |
|
|
|
— |
|
|
|
— |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before the cumulative
effect of a change in accounting principle |
|
|
(5.6 |
) |
|
|
(8.7 |
) |
|
|
— |
|
|
|
— |
|
|
|
(14.3 |
) |
Loss from discontinued operations |
|
|
(0.8 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
— |
|
|
|
(1.0 |
) |
Cumulative effect of a change in accounting
principle, net of income taxes |
|
|
(0.7 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity losses of subsidiaries |
|
|
(7.1 |
) |
|
|
(8.8 |
) |
|
|
(0.1 |
) |
|
|
— |
|
|
|
(16.0 |
) |
Equity losses of subsidiaries |
|
|
(8.9 |
) |
|
|
— |
|
|
|
— |
|
|
|
8.9 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(16.0 |
) |
|
$ |
(8.8 |
) |
|
$ |
(0.1 |
) |
|
$ |
8.9 |
|
|
$ |
(16.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Condensed Consolidating Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-guarantor |
|
|
|
|
|
|
|
February 28, 2007 (In millions): |
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Cash and cash equivalents |
|
$ |
83.8 |
|
|
$ |
(10.2 |
) |
|
$ |
0.5 |
|
|
$ |
— |
|
|
$ |
74.1 |
|
Restricted cash |
|
|
19.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19.8 |
|
Accounts receivable |
|
|
— |
|
|
|
72.6 |
|
|
|
— |
|
|
|
— |
|
|
|
72.6 |
|
Inventories |
|
|
— |
|
|
|
77.9 |
|
|
|
— |
|
|
|
— |
|
|
|
77.9 |
|
Recoverable from the U.S. government and other third
parties for environmental remediation costs and other |
|
|
— |
|
|
|
39.6 |
|
|
|
— |
|
|
|
— |
|
|
|
39.6 |
|
Prepaid expenses and other |
|
|
1.4 |
|
|
|
12.3 |
|
|
|
0.4 |
|
|
|
— |
|
|
|
14.1 |
|
Assets of discontinued operations |
|
|
0.4 |
|
|
|
— |
|
|
|
(0.3 |
) |
|
|
— |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
105.4 |
|
|
|
192.2 |
|
|
|
0.6 |
|
|
|
— |
|
|
|
298.2 |
|
Property, plant and equipment, net |
|
|
0.5 |
|
|
|
136.9 |
|
|
|
— |
|
|
|
— |
|
|
|
137.4 |
|
Recoverable from the U.S. government and other third
parties for environmental remediation costs and other |
|
|
— |
|
|
|
178.2 |
|
|
|
— |
|
|
|
— |
|
|
|
178.2 |
|
Prepaid pension asset |
|
|
116.7 |
|
|
|
65.4 |
|
|
|
— |
|
|
|
— |
|
|
|
182.1 |
|
Goodwill |
|
|
— |
|
|
|
101.3 |
|
|
|
— |
|
|
|
— |
|
|
|
101.3 |
|
Intercompany (payable) receivable, net |
|
|
(424.4 |
) |
|
|
438.8 |
|
|
|
(14.4 |
) |
|
|
— |
|
|
|
— |
|
Other noncurrent assets and intangibles, net |
|
|
717.5 |
|
|
|
124.3 |
|
|
|
9.7 |
|
|
|
(712.0 |
) |
|
|
139.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
515.7 |
|
|
$ |
1,237.1 |
|
|
$ |
(4.1 |
) |
|
$ |
(712.0 |
) |
|
$ |
1,036.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings and current portion of long-term debt |
|
$ |
22.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
22.0 |
|
Accounts payable |
|
|
(0.1 |
) |
|
|
24.1 |
|
|
|
— |
|
|
|
— |
|
|
|
24.0 |
|
Reserves for environmental remediation costs |
|
|
5.3 |
|
|
|
55.6 |
|
|
|
— |
|
|
|
— |
|
|
|
60.9 |
|
Income taxes payable |
|
|
(4.5 |
) |
|
|
17.0 |
|
|
|
— |
|
|
|
— |
|
|
|
12.5 |
|
Other current liabilities, advanced payments on contracts,
and postretirement medical and life benefits |
|
|
22.9 |
|
|
|
123.2 |
|
|
|
— |
|
|
|
— |
|
|
|
146.1 |
|
Liabilities of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
1.4 |
|
|
|
— |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
45.6 |
|
|
|
219.9 |
|
|
|
1.4 |
|
|
|
— |
|
|
|
266.9 |
|
Long-term debt |
|
|
442.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
442.8 |
|
Reserves for environmental remediation costs |
|
|
4.1 |
|
|
|
204.0 |
|
|
|
— |
|
|
|
— |
|
|
|
208.1 |
|
Other noncurrent liabilities |
|
|
88.0 |
|
|
|
95.7 |
|
|
|
— |
|
|
|
— |
|
|
|
183.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
580.5 |
|
|
|
519.6 |
|
|
|
1.4 |
|
|
|
— |
|
|
|
1,101.5 |
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ (deficit) equity |
|
|
(64.8 |
) |
|
|
717.5 |
|
|
|
(5.5 |
) |
|
|
(712.0 |
) |
|
|
(64.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ (deficit) equity |
|
$ |
515.7 |
|
|
$ |
1,237.1 |
|
|
$ |
(4.1 |
) |
|
$ |
(712.0 |
) |
|
$ |
1,036.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-guarantor |
|
|
|
|
|
|
|
November 30, 2006 (In millions): |
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Cash and cash equivalents |
|
$ |
70.5 |
|
|
$ |
(9.8 |
) |
|
$ |
0.5 |
|
|
$ |
— |
|
|
$ |
61.2 |
|
Restricted cash |
|
|
19.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19.8 |
|
Accounts receivable |
|
|
— |
|
|
|
71.1 |
|
|
|
— |
|
|
|
— |
|
|
|
71.1 |
|
Inventories |
|
|
— |
|
|
|
69.5 |
|
|
|
— |
|
|
|
— |
|
|
|
69.5 |
|
Recoverable from the U.S. government and other third
parties for environmental remediation costs and other |
|
|
— |
|
|
|
37.6 |
|
|
|
— |
|
|
|
— |
|
|
|
37.6 |
|
Prepaid expenses and other |
|
|
3.7 |
|
|
|
19.6 |
|
|
|
0.2 |
|
|
|
— |
|
|
|
23.5 |
|
Assets of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
0.5 |
|
|
|
— |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
94.0 |
|
|
|
188.0 |
|
|
|
1.2 |
|
|
|
— |
|
|
|
283.2 |
|
Property, plant and equipment, net |
|
|
0.5 |
|
|
|
136.3 |
|
|
|
— |
|
|
|
— |
|
|
|
136.8 |
|
Recoverable from the U.S. government and other third
parties for environmental remediation costs and other |
|
|
— |
|
|
|
177.0 |
|
|
|
— |
|
|
|
— |
|
|
|
177.0 |
|
Prepaid pension asset |
|
|
116.6 |
|
|
|
70.7 |
|
|
|
— |
|
|
|
— |
|
|
|
187.3 |
|
Goodwill |
|
|
— |
|
|
|
101.3 |
|
|
|
— |
|
|
|
— |
|
|
|
101.3 |
|
Intercompany (payable) receivable, net |
|
|
(434.2 |
) |
|
|
448.7 |
|
|
|
(14.5 |
) |
|
|
— |
|
|
|
— |
|
Other noncurrent assets and intangibles, net |
|
|
713.6 |
|
|
|
126.0 |
|
|
|
9.8 |
|
|
|
(713.6 |
) |
|
|
135.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
490.5 |
|
|
$ |
1,248.0 |
|
|
$ |
(3.5 |
) |
|
$ |
(713.6 |
) |
|
$ |
1,021.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings and current portion of long-term debt |
|
$ |
21.3 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
21.3 |
|
Accounts payable |
|
|
0.6 |
|
|
|
32.0 |
|
|
|
— |
|
|
|
— |
|
|
|
32.6 |
|
Reserves for environmental remediation costs |
|
|
4.9 |
|
|
|
50.7 |
|
|
|
— |
|
|
|
— |
|
|
|
55.6 |
|
Income taxes payable |
|
|
(4.4 |
) |
|
|
16.6 |
|
|
|
— |
|
|
|
— |
|
|
|
12.2 |
|
Other current liabilities, advanced payments on contracts,
and postretirement medical and life benefits |
|
|
27.2 |
|
|
|
128.5 |
|
|
|
— |
|
|
|
— |
|
|
|
155.7 |
|
Liabilities of discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
1.8 |
|
|
|
— |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
49.6 |
|
|
|
227.8 |
|
|
|
1.8 |
|
|
|
— |
|
|
|
279.2 |
|
Long-term debt |
|
|
441.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
441.1 |
|
Reserves for environmental remediation costs |
|
|
4.6 |
|
|
|
205.8 |
|
|
|
— |
|
|
|
— |
|
|
|
210.4 |
|
Other noncurrent liabilities |
|
|
91.2 |
|
|
|
95.5 |
|
|
|
— |
|
|
|
— |
|
|
|
186.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
586.5 |
|
|
|
529.1 |
|
|
|
1.8 |
|
|
|
— |
|
|
|
1,117.4 |
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ (deficit) equity |
|
|
(96.0 |
) |
|
|
718.9 |
|
|
|
(5.3 |
) |
|
|
(713.6 |
) |
|
|
(96.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ (deficit) equity |
|
$ |
490.5 |
|
|
$ |
1,248.0 |
|
|
$ |
(3.5 |
) |
|
$ |
(713.6 |
) |
|
$ |
1,021.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Condensed Consolidating Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-guarantor |
|
|
|
|
|
|
|
Three months ended February 28, 2007 (in millions): |
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net cash used in operating activities |
|
$ |
(2.1 |
) |
|
$ |
(0.1 |
) |
|
$ |
(11.4 |
) |
|
$ |
— |
|
|
$ |
(13.6 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from business disposition |
|
|
— |
|
|
|
— |
|
|
|
29.7 |
|
|
|
— |
|
|
|
29.7 |
|
Capital expenditures |
|
|
(3.2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(3.2 |
) |
|
|
— |
|
|
|
29.7 |
|
|
|
— |
|
|
|
26.5 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transfers (to) from parent |
|
|
4.9 |
|
|
|
0.1 |
|
|
|
(5.0 |
) |
|
|
— |
|
|
|
— |
|
Repayments on notes payable and long-term debt, net |
|
|
— |
|
|
|
— |
|
|
|
(0.4 |
) |
|
|
— |
|
|
|
(0.4 |
) |
Other financing activities |
|
|
— |
|
|
|
— |
|
|
|
0.4 |
|
|
|
— |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
4.9 |
|
|
|
0.1 |
|
|
|
(5.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(0.4 |
) |
|
|
— |
|
|
|
13.3 |
|
|
|
— |
|
|
|
12.9 |
|
Cash and cash equivalents at beginning of year |
|
|
(9.8 |
) |
|
|
0.5 |
|
|
|
70.5 |
|
|
|
— |
|
|
|
61.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
(10.2 |
) |
|
$ |
0.5 |
|
|
$ |
83.8 |
|
|
$ |
— |
|
|
$ |
74.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-guarantor |
|
|
|
|
|
|
|
Three months ended February 28, 2006 (in millions): |
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net cash used in operating activities |
|
$ |
(21.6 |
) |
|
$ |
(18.4 |
) |
|
$ |
(0.5 |
) |
|
$ |
— |
|
|
$ |
(40.5 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
— |
|
|
|
(2.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
— |
|
|
|
(2.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2.5 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transfers (to) from parent |
|
|
(19.9 |
) |
|
|
21.7 |
|
|
|
(1.8 |
) |
|
|
— |
|
|
|
— |
|
Repayments on notes payable and long-term debt, net |
|
|
(1.2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1.2 |
) |
Other financing activities |
|
|
2.2 |
|
|
|
0.7 |
|
|
|
— |
|
|
|
— |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(18.9 |
) |
|
|
22.4 |
|
|
|
(1.8 |
) |
|
|
— |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(40.5 |
) |
|
|
1.5 |
|
|
|
(2.3 |
) |
|
|
— |
|
|
|
(41.3 |
) |
Cash and cash equivalents at beginning of year |
|
|
97.4 |
|
|
|
(8.5 |
) |
|
|
2.8 |
|
|
|
— |
|
|
|
91.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
56.9 |
|
|
$ |
(7.0 |
) |
|
$ |
0.5 |
|
|
$ |
— |
|
|
$ |
50.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated or required by the context, as used in this Quarterly Report on
Form 10-Q, the terms “we,” “our” and “us” refer to GenCorp Inc. and all of its subsidiaries that
are consolidated in conformity with accounting principles generally accepted in the United States
of America.
The preparation of the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. In addition, our operating
results for interim periods may not be indicative of the results of operations for a full year.
This section contains a number of forward-looking statements, all of which are based on current
expectations and are subject to risks and uncertainties including those described in this Quarterly
Report under the heading “Forward-Looking Statements.” Actual results may differ materially. This
section should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended
November 30, 2006, and periodic reports subsequently filed with the U.S. Securities and Exchange
Commission (SEC).
Overview
We are a technology-based manufacturer of aerospace and defense products and systems with a
real estate business segment that includes activities related to the re-zoning, entitlement, sale,
and leasing of our excess real estate assets. Our continuing operations are organized into two
segments:
Aerospace and Defense — includes the operations of Aerojet-General Corporation, or Aerojet,
which develops and manufactures propulsion systems for defense and space applications, armament
systems for precision tactical weapon systems and munitions applications. We are one of the largest
providers of propulsion systems in the United States and the only company that provides both Solid
and Liquid propellant based systems. Primary customers served include major prime contractors to
the United States (U.S.) government, the Department of Defense, and the National Aeronautics and
Space Administration.
Real Estate — includes activities related to the re-zoning, entitlement, sale, and leasing of
our excess real estate assets. Through our Aerojet subsidiary, we own approximately 12,600 acres of
land adjacent to U.S. Highway 50 between Rancho Cordova and Folsom, California just east of
Sacramento (Sacramento Land). We are currently in the process of seeking zoning changes and other
governmental approvals on a portion of the Sacramento Land to optimize its value. We have filed
applications with and submitted information to governmental and regulatory authorities for
approvals necessary to re-zone over 6,400 acres of the Sacramento Land.
On August 31, 2004, we completed the sale of our GDX Automotive (GDX) business. On November
30, 2005, we completed the sale of our Fine Chemicals business. On November 17, 2006, we completed
the sale of our Turbo product line. The GDX and Fine Chemicals businesses and the Turbo product
line are classified as discontinued operations in these Unaudited Condensed Consolidated Financial
Statements and Notes to Unaudited Condensed Consolidated Financial Statements (see Note 13 of the
Unaudited Condensed Consolidated Financial Statements).
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, to create a single model to
address accounting for uncertainty in tax positions. FIN 48 clarified the accounting for income
taxes by prescribing a minimum recognition threshold a tax position is required to meet before
being recognized in the financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for us as of December 1, 2007. We have not determined the effect,
if any, the adoption of FIN 48 will have on our results of operations or financial position.
In September 2006, the FASB issued SFAS No. 158 (SFAS 158), Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements Nos. 87, 88, 106,
and 132(R), which requires companies to recognize the overfunded or underfunded status of a defined
benefit postretirement plan as an asset or liability on its balance sheet and to recognize changes
in that funded status in the year in which the changes occur through comprehensive income. SFAS
158 is effective as of November 30, 2007. SFAS 158 also requires companies to measure the funded
status of the plan as of the date of its fiscal year-end, with limited exceptions, which is
effective as of November 30, 2009. Based on the current discount rate and expected rate of return
assumptions, we estimate the adoption of SFAS 158 in the fourth quarter of fiscal 2007 will
increase our postretirement liability and
26
shareholders’ deficit by approximately $53 million to $105 million. Due to the valuation
allowance on our net deferred tax assets, no net tax benefit would result from this increase to the
postretirement liability.
In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No. 115. SFAS 159
permits entities to choose to measure many financial instruments at fair value that are not
currently required to be measured at fair value. It also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. SFAS 159 is effective as of the beginning
of an entity’s first fiscal year that begins after November 15, 2007. We are currently evaluating
the effect that the adoption of SFAS 159 will have on our financial position and results of
operations.
Business Outlook
Aerospace and Defense — Overall, sales are anticipated to grow during the rest of fiscal 2007
compared to fiscal 2006, with awards in space exploration and solid booster motors for missile
defense and tactical missiles leading the way. Sales on the Atlas V contract are expected to remain
at fiscal 2006 levels, with Titan sales rebounding as final close-out activities are conducted.
Real Estate — We continue to work with governmental authorities to effect entitlement changes
and to lift environmental restrictions for approximately 6,400 acres of the Sacramento Land as soon
as practicable. In conjunction with these efforts, we will continue to explore real estate
structures (or transactions) that may further enhance the value of our real estate assets,
including outright sales, and/or joint ventures with real estate developers, residential builders
or other third parties.
Results of Operations
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
February 28, |
|
February 28, |
|
|
|
|
2007 |
|
2006 |
|
Change* |
|
|
(in millions) |
Net Sales |
|
$ |
150.8 |
|
|
$ |
128.3 |
|
|
$ |
22.5 |
|
|
|
|
* |
|
Primary reason for change. The increase reflects higher sales on numerous space and defense
programs including Standard Missile, Orion, and Titan. |
Customers that represented more than 10% of net sales for the periods presented are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months ended |
|
|
February 28, |
|
February 28, |
|
|
2007 |
|
2006 |
Lockheed Martin |
|
|
38 |
% |
|
|
39 |
% |
Raytheon |
|
|
21 |
% |
|
|
17 |
% |
Sales in the first quarter of fiscal 2007 and fiscal 2006 directly and indirectly to the U.S.
government and its agencies, including sales to our significant customers discussed above, totaled
90% and 82%, respectively, of net sales.
Cost of Products Sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
February 28, |
|
February 28, |
|
|
|
|
2007 |
|
2006 |
|
Change* |
|
|
(in millions, except percentage amounts) |
Costs of products sold: |
|
$ |
135.0 |
|
|
$ |
121.3 |
|
|
$ |
13.7 |
|
Percentage of net sales |
|
|
90 |
% |
|
|
95 |
% |
|
|
|
|
|
|
|
* |
|
Primary reason for change. The decrease in costs of products sold as a percentage of net
sales was primarily due to the following: (i) improved margin on the Titan program as the
result of favorable performance on close-out activities; and (ii) a decrease of $2.8 million
in retirement benefit plan expense as a result of an increase in the discount rate used to
determine benefit obligations, due to higher market interest rates, and a reduction in the
impact of amortizing prior year actuarial losses. |
27
Selling, General and Administrative (SG&A):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
February 28, |
|
February 28, |
|
|
|
|
2007 |
|
2006 |
|
Change* |
|
|
(in millions, except percentage amounts) |
Selling, General and Administrative: |
|
$ |
3.0 |
|
|
$ |
8.0 |
|
|
$ |
(5.0 |
) |
Percentage of net sales |
|
|
2 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
* |
|
Primary reason for change. The decrease in SG&A spending is primarily due to the following:
(i) a decrease of $2.9 million in retirement benefit plan expense as a result of an increase
in the discount rate used to determine benefit obligations, due to higher market interest
rates, and a reduction in the impact of amortizing prior year actuarial losses; and (ii)
higher expenses associated with the annual election of the Board of Directors in fiscal 2006. |
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
February 28, |
|
February 28, |
|
|
|
|
2007 |
|
2006 |
|
Change* |
|
|
(in millions, except percentage amounts) |
Depreciation and amortization: |
|
$ |
6.5 |
|
|
$ |
6.5 |
|
|
$ |
— |
|
Percentage of net sales |
|
|
4 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
* |
|
Primary reason for change. Depreciation and amortization expense was essentially unchanged
for the periods presented. |
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
February 28, |
|
February 28, |
|
|
|
|
2007 |
|
2006 |
|
Change* |
|
|
(in millions) |
Interest expense |
|
$ |
7.2 |
|
|
$ |
6.3 |
|
|
$ |
0.9 |
|
|
|
|
* |
|
Primary reason for change. The increase is primarily due to higher average debt and letters
of credit levels during fiscal 2007 compared to fiscal 2006. |
Income Tax Provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
February 28, |
|
February 28, |
|
|
|
|
2007 |
|
2006 |
|
Change* |
|
|
(in millions) |
Income tax provision |
|
$ |
0.4 |
|
|
$ |
0.6 |
|
|
$ |
(0.2 |
) |
|
|
|
* |
|
Primary reason for change. The income tax provision in the first quarter of fiscal 2007 is
primarily related to state tax expenses. The income tax provision in the first quarter of
fiscal 2006 is primarily the result of establishing a valuation allowance against the
quarter’s alternative minimum tax credit carryforward and the adoption of SFAS No.123(R),
Share-Based Payment (SFAS 123(R)). |
Discontinued Operations:
Turbo Product Line
During the third quarter of fiscal 2006, we classified our Turbo product line as a
discontinued operation as a result of our plans to sell the product line. The product line was not
core to the Aerospace and Defense segment and required increased management oversight and costs
because of increased competition and investments for on-going maintenance of the product line. On
November 17, 2006, we completed the sale of our Turbo product line to Aerosource Inc. for $1.1
million, subject to adjustment. The loss on the sale
28
of the Turbo product line during fiscal 2006 was $0.4 million. An additional loss of $0.1
million was recorded in the first quarter of fiscal 2007 to reflect the net assets of the Turbo
product line and management’s estimate of the net proceeds from the sale.
Fine Chemicals business
On November 30, 2005, we sold our Fine Chemicals business to American Pacific Corporation
(AMPAC) for $88.5 million of cash paid at closing, an unsecured subordinated seller note of $25.5
million delivered at closing, an earn-out provision of up to $6.0 million contingent upon the
business’ achieving certain earnings targets, and the assumption by the buyer of certain
liabilities. We recorded a full allowance on both the $25.5 million unsecured subordinated seller
note in fiscal 2005 and $6.0 million earnings targets receivable in fiscal 2006. During the first
quarter of fiscal 2007, we entered into an earn-out and seller note repayment agreement (Repayment
Agreement) with AMPAC under which AMPAC was required to pay $29.7 million in consideration for the
early retirement of the seller note (including interest due thereunder), the full payment of the
earn-out amount and the release of the Company from certain liabilities. During the first quarter
of fiscal 2007, we recorded a gain of $31.2 million as a result of receiving $29.7 million of cash
from AMPAC and being released from certain liabilities in accordance with the Repayment Agreement.
GDX Automotive business
In November 2003, we announced the closing of a GDX manufacturing facility in Chartres,
France. The decision resulted primarily from declining sales volumes with French automobile
manufacturers. In June 2004, we completed the legal process for closing the facility and
establishing a social plan. In fiscal 2004, an expense of approximately $14.0 million related to
employee social costs was recorded in accordance with SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. An expense of $1.0 million was recorded during fiscal 2005
primarily related to employee social costs that became estimable in fiscal 2005. We have not yet
recorded expenses associated with other social benefits due to the uncertainty of these costs which
could total up to a pre-tax expense of $2.0 million and may be incurred within the next few years.
Summarized financial information for discontinued operations is set forth below:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
February 28, |
|
February 28, |
|
|
2007 |
|
2006 |
|
|
(in millions) |
Net sales |
|
$ |
— |
|
|
$ |
— |
|
Income (loss) before income taxes |
|
|
30.9 |
|
|
|
(1.0 |
) |
Income tax provision |
|
|
0.3 |
|
|
|
— |
|
Income (loss) from discontinued operations, net of income taxes |
|
|
30.6 |
|
|
|
(1.0 |
) |
Cumulative Effect of a Change in Accounting Principle:
As of December 1, 2005, we adopted SFAS 123(R), which requires companies to recognize in the
statement of operations the grant-date fair value of stock awards issued to employees and
directors. We adopted SFAS 123(R) using the modified prospective transition method. In accordance
with the modified prospective transition method, our prior periods have not been restated to
reflect the impact of SFAS 123(R). As a result of applying SFAS 123(R), the loss from continuing
operations before cumulative effect of a change in accounting principle for the first quarter of
fiscal 2006 was increased by $0.4 million (see Note 3 of the Unaudited Condensed Consolidated
Financial Statements).
Operating Segment Information:
We evaluate our operating segments based on several factors, of which the primary financial
measure is segment performance. Segment performance, which is a non-GAAP financial measure,
represents net sales from continuing operations less applicable costs, expenses and provisions for
unusual items relating to the segment operations. Segment performance excludes corporate income and
expenses, legacy income or expenses, provisions for unusual items not related to the segment
operations, interest expense, and income taxes. We believe that segment performance provides
information useful to investors in understanding our underlying operational performance.
Specifically, we believe the exclusion of the items listed above permits an evaluation and a
comparison of results for ongoing business operations, and it is on this basis that management
internally assesses operational performance.
29
Aerospace and Defense Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
February 28, |
|
February 28, |
|
|
|
|
2007 |
|
2006 |
|
Change* |
|
|
(in millions) |
Net Sales |
|
$ |
149.1 |
|
|
$ |
126.8 |
|
|
$ |
22.3 |
|
Segment performance – Income (Loss) |
|
$ |
7.2 |
|
|
$ |
(0.6 |
) |
|
$ |
7.8 |
|
|
|
|
* |
|
Primary reason for change. Higher sales volume on a variety space and defense system programs
generated the improvement during the current period. Individual programs with increases of
greater than $5.0 million were Standard Missile, Orion, and Titan. |
Segment performance was income of $7.2 million in the first quarter of fiscal 2007 compared to
a loss of $0.6 million in the first quarter of fiscal 2006. The improved segment performance during
the first quarter of fiscal 2007 as compared to the comparable fiscal 2006 period is the result of
the following: (i) higher sales volume; (ii) improved margin on the Titan program as the result of
favorable performance on close-out activities; and (iii) lower retirement benefit plan expenses.
As of February 28, 2007, contract backlog was $882 million as compared to $718 million as of
November 30, 2006. The increase in contract backlog reflects a $109 million award in a multiyear
new liquid engine technology demonstration program for military launch systems and continued growth
in solid booster motors for missile defense and tactical missiles. Funded backlog, which includes
only those contracts for which money has been directly authorized by the U.S. Congress, or for
which a firm purchase order has been received by a commercial customer, was $632 million at
February 28, 2007 compared to $565 million as of November 30, 2006.
Real Estate Segment
Our actions continued to move us forward on the entitlement process for Rio Del Oro,
Glenborough and Easton Place, Westborough, and Folsom Sphere of Influence. The actions covered such
items as environmental remediation, land planning, traffic, wetlands, endangered species
mitigation, and water supplies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
February 28, |
|
February 28, |
|
|
|
|
2007 |
|
2006 |
|
Change* |
|
|
(in millions) |
Net Sales |
|
$ |
1.7 |
|
|
$ |
1.5 |
|
|
$ |
0.2 |
|
Segment performance |
|
$ |
0.8 |
|
|
$ |
0.8 |
|
|
$ |
— |
|
|
|
|
* |
|
Primary reason for change. There were no real asset sales during the first quarter of fiscal
2007 or fiscal 2006. Net sales for the first quarter of fiscal 2007 and fiscal 2006 consist of
rental property operations. |
Other Information
Key Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America that offers acceptable alternative methods for accounting
for certain items affecting our financial results, such as determining inventory cost, deferring
certain costs, depreciating long-lived assets, and recognizing revenues.
The preparation of financial statements requires the use of estimates, assumptions, judgments,
and interpretations that can affect the reported amounts of assets, liabilities, revenues, and
expenses, the disclosure of contingent assets and liabilities and other supplemental disclosures.
The development of accounting estimates is the responsibility of our management. Management
discusses those areas that require significant judgment with the audit committee of our board of
directors. The audit committee has reviewed all financial disclosures in our filings with the SEC.
Although we believe the positions we have taken with regard to uncertainties are reasonable, others
might reach different conclusions and our positions can change over time as more information
becomes available. If an accounting estimate changes, its effects are accounted for prospectively
and, if significant, disclosed in the Notes to Unaudited Condensed Consolidated Financial
Statements.
30
The areas most affected by our accounting policies and estimates are revenue recognition for
long-term contracts, other contract considerations, goodwill, retirement benefit plans, litigation
reserves, environmental remediation costs and recoveries, and income taxes. Except for income
taxes, which are not allocated to our operating segments, these areas affect the financial results
of our business segments.
A detailed description of our significant accounting policies can be found in our most recent
Annual Report on Form 10-K for the fiscal year ended November 30, 2006.
Arrangements with Off-Balance Sheet Risk
As of February 28, 2007, obligations required to be disclosed in accordance with FASB
Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of the Indebtedness of Others, consisted of:
— $70.5 million in outstanding commercial letters of credit expiring in 2007, the majority
of which may be renewed, and securing obligations for environmental remediation closure and
insurance coverage.
— Up to $120.0 million aggregate in guarantees by GenCorp of Aerojet’s obligations to U.S.
government agencies for environmental remediation activities.
— Guarantees, jointly and severally, by the Company’s material domestic subsidiaries of its
obligations under the Senior Credit Facility and its 9 1/2% Notes.
In addition to the items discussed above, we will from time to time enter into certain types
of contracts that require us to indemnify parties against potential third-party and other claims.
These contracts primarily relate to: (i) divestiture agreements, under which we may provide
customary indemnification to purchasers of our businesses or assets including, for example, claims
arising from the operation of the businesses prior to disposition, liability to investigate and
remediate environmental contamination existing prior to disposition; (ii) certain real estate
leases, under which we may be required to indemnify property owners for other claims arising from
the use of the applicable premises; and, (iii) certain agreements with officers and directors,
under which we may be required to indemnify such persons for liabilities arising out of their
relationship with the Company. The terms of such obligations vary. Generally, a maximum obligation
is not explicitly stated. Because the obligated amounts of these types of agreements often are not
explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated.
Warranties
We provide product warranties in conjunction with certain product sales. The majority of our
warranties are a one-year standard warranty for parts, workmanship and compliance with
specifications. On occasion, we have made commitments beyond the standard warranty obligation.
While we have contracts with warranty provisions, there is not a history of any significant
warranty claims experience. A reserve for warranty exposure is made on a product by product basis
when it is both estimable and probable in accordance with SFAS No. 5, Accounting for Contingencies.
These costs are included in the program’s estimate at completion and are expensed in accordance
with our revenue recognition methodology as allowed under American Institute of Certified Public
Accountants Statement of Position 81-1, Accounting for Performance Construction-Type and Certain
Production-Type Contracts, for that particular contract.
Liquidity and Capital Resources
Liquidity Requirements
Short-term liquidity requirements consist primarily of recurring operating expenses; costs
associated with legacy business matters, including costs related to our retirement benefit plans;
capital expenditures; and debt service requirements. We expect to meet these requirements through
available cash, generation of cash from our Aerospace and Defense segment, and our Senior Credit
Facility.
As of February 28, 2007, long-term liquidity requirements consist primarily of our long-term
debt obligations. We expect to meet long-term liquidity requirements through cash provided from
operations and, if necessary, with long-term borrowings and other financing alternatives. The
availability and terms of any such financing will depend upon market and other conditions at the
time.
31
Net Cash Provided by (Used in) Operating, Investing, and Financing Activities
Cash and cash equivalents increased by $12.9 million during the first quarter of fiscal 2007.
The change in cash and cash equivalents is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
February 28, |
|
|
February 28, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Net Cash Used in Operating Activities |
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(13.4 |
) |
|
$ |
(33.2 |
) |
Discontinued operations |
|
|
(0.2 |
) |
|
|
(7.3 |
) |
|
|
|
|
|
|
|
Total |
|
|
(13.6 |
) |
|
|
(40.5 |
) |
Net Cash Provided by (Used in) Investing Activities |
|
|
26.5 |
|
|
|
(2.5 |
) |
Net Cash Provided by Financing Activities |
|
|
— |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
$ |
12.9 |
|
|
$ |
(41.3 |
) |
|
|
|
|
|
|
|
Net Cash Used In Operating Activities
Continuing Operations
First Quarter Fiscal 2007 versus First Quarter Fiscal 2006 — Continuing operations used cash
of $13.4 million in the first quarter of fiscal 2007 compared to cash usage of $33.2 million in the
first quarter of fiscal 2006. The improvement is primarily due to (i) improved operating
performance and net working capital from the Aerospace and Defense segment; and (ii) lower costs
associated with legacy business matters.
Discontinued Operations
Discontinued operations used $7.3 million of cash in the first quarter of fiscal 2006
primarily for the payment of liabilities accrued as of November 30, 2005 related to the sale of the
Fine Chemicals business.
Net Cash Provided by (Used In) Investing Activities
During the first quarter of fiscal 2007, we received $29.7 million from AMPAC in consideration
for the cancellation and termination of an unsecured subordinated note receivable from AMPAC,
including any interest due thereunder, and AMPAC’s obligation to make an earnings target payment
associated with the sale of the Fine Chemicals business. During the first quarter of fiscal 2007
and fiscal 2006, we invested $3.2 million and $2.5 million, respectively, in capital expenditures.
The increase quarter over quarter in capital expenditures is primarily due to the purchase of 180
acres of land which had been previously leased. The majority of our capital expenditures directly
supports our contract and customer requirements and are primarily made for asset replacement,
capacity expansion, development of new projects, and safety and productivity improvements.
Net Cash Provided by Financing Activities
During the first quarter of fiscal 2006, net cash of $1.7 million was generated. Shares
issued under our employee stock option plans generated cash, partially offset by activities related
to our borrowings, including debt repayments.
32
Borrowing Activity and Senior Credit Facility:
Our borrowing activity during the first quarter of fiscal 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, |
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
|
2006 |
|
|
Additions |
|
|
(Payments) |
|
|
2007 |
|
|
|
(In millions) |
|
5 3/4% Convertible Subordinated Notes |
|
$ |
19.8 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
19.8 |
|
4% Contingent Convertible Subordinated Notes |
|
|
125.0 |
|
|
|
— |
|
|
|
— |
|
|
|
125.0 |
|
2 1/4% Convertible Subordinated Debentures |
|
|
146.4 |
|
|
|
— |
|
|
|
— |
|
|
|
146.4 |
|
9 1/2% Senior Subordinated Notes |
|
|
97.5 |
|
|
|
— |
|
|
|
— |
|
|
|
97.5 |
|
Term loan |
|
|
73.7 |
|
|
|
— |
|
|
|
(0.4 |
) |
|
|
73.3 |
|
Promissory note |
|
|
— |
|
|
|
2.8 |
|
|
|
— |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt and Borrowing Activity |
|
$ |
462.4 |
|
|
$ |
2.8 |
|
|
$ |
(0.4 |
) |
|
$ |
464.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our credit facility (Senior Credit Facility) provides for an $80.0 million revolving credit
facility (Revolver) and a $154.5 million credit-linked facility, consisting of an $80.0 million
letter of credit subfacility and a $74.5 million term loan subfacility. As of February 28, 2007,
the borrowing limit under the Revolver was $80.0 million with all of it available. We had $73.3
million outstanding under the term loan subfacility and $70.5 million outstanding letters of credit
issued under the letter of credit subfacility at February 28, 2007.
In January 2007, we purchased, for $4.3 million, approximately 180 acres of land which had
been previously leased. The purchase was financed with $1.5 million of cash and a $2.8 million
promissory note. The promissory note is payable in four annual installments, matures in January
2011, and bears interest at a per annum rate of five percent.
The Senior Credit Facility is secured by substantially all of our assets, including the stock
and assets of our material domestic subsidiaries that are guarantors of this facility. We are
subject to certain limitations including the ability to: incur additional debt or sell assets, with
restrictions on the use of proceeds; make certain investments and acquisitions; grant liens; and
make restricted payments. We are also subject to financial covenants, as amended, which are as
follows:
|
|
|
|
|
|
|
|
|
Actual Ratios As of |
|
Required Ratios December 1, 2006 |
|
Required Ratios December 1, |
Financial Covenant |
|
February 28, 2007 |
|
Through November 30, 2007 |
|
2007 and thereafter |
Interest coverage ratio |
|
3.48 to 1.00 |
|
Not less than: 2.25 to 1.00 |
|
Not less than: 2.25 to 1.00 |
Fixed charge coverage ratio |
|
9.61 to 1.00 |
|
Not less than: 1.20 to 1.00 |
|
Not less than: 1.20 to 1.00 |
Senior leverage ratio |
|
0.65 to 1.00 |
|
Not greater than: 2.50 to 1.00 |
|
Not greater than: 2.50 to 1.00 |
Leverage ratio |
|
5.44 to 1.00 |
|
Not greater than: 8.50 to 1.00 through February 28, 2007; |
|
Not greater than: 5.50 to 1.00 |
|
|
|
|
Not greater than 8.0 to 1.00 March 1, 2007 — May 31, 2007; |
|
|
|
|
|
|
Not greater than 7.50 to 1.00 June 1, 2007 — August 31, 2007; |
|
|
|
|
|
|
Not greater than 7.00 to 1.00 September 1, 2007 — November 30, 2007 |
|
|
We were in compliance with our financial covenants as of February 28, 2007 and are
expecting to be in compliance during the remainder of fiscal 2007. The required maximum leverage
ratio steps down from 8.50 to 1.00 at February 28, 2007 to 7.00 to 1.00 at November 30, 2007. In
fiscal 2008, the leverage ratio decreases further to 5.50 to 1.00. Recognizing the required fiscal
2008 leverage ratio step down, we are currently evaluating options including restructuring our
Senior Credit Facility.
In June 2002, we filed a $300 million shelf registration statement with the SEC of which
approximately $162 million remains available for issuance. We may use the shelf to issue debt
securities, shares of common stock, or preferred stock.
Outlook
As disclosed in Notes 10(a) and 10(b) of the Notes to Unaudited Condensed Consolidated
Financial Statements, we have exposure for certain legal and environmental matters. We believe that
it is currently not possible to estimate the impact, if any, that the ultimate resolution of
certain of these matters will have on our financial position, results of operations, or cash flows.
We believe that our existing cash and cash equivalents and existing credit facilities will
provide sufficient funds to meet our operating plan for the next twelve months. The operating plan
for this period provides for full operation of our businesses, and interest and projected principal
payments on our debt. The $19.8 million designated as restricted cash as of February 28, 2007 will
be used to repay our 5 3/4% Convertible Subordinated Notes (5 3/4% Notes) due April 15, 2007 upon
maturity, or, to the extent the 5 3/4% Notes are converted into common stock prior to maturity, will
be used to repay a portion of our term loan.
33
We may also access capital markets to raise debt or equity financing to fund required debt
payments and for acquisitions or partnerships that make both strategic and economic sense. The
timing, terms, size, and pricing of any such financing will depend on investor interest and market
conditions, and there can be no assurance that we will be able to obtain any such financing.
Major factors that could adversely impact our forecasted operating cash and our financial
condition are described in the section “Risk Factors” in Item 1A of our Annual Report to the SEC on
Form 10-K for the fiscal year ended November 30, 2006.
Forward-Looking Statements
Certain information contained in this report should be considered “forward-looking statements”
as defined by Section 21E of the Private Securities Litigation Reform Act of 1995. All statements
in this report other than historical information may be deemed forward-looking statements. These
statements present (without limitation) the expectations, beliefs, plans and objectives of
management and future financial performance and assumptions underlying, or judgments concerning,
the matters discussed in the statements. The words “believe,” “estimate,” “anticipate,” “project”
and “expect,” and similar expressions, are intended to identify forward-looking statements.
Forward-looking statements involve certain risks, estimates, assumptions and uncertainties,
including with respect to future sales and activity levels, cash flows, contract performance, the
outcome of litigation and contingencies, environmental remediation and anticipated costs of
capital. A variety of factors could cause actual results or outcomes to differ materially from
those expected and expressed in our forward-looking statements. Some important risk factors that
could cause actual results or outcomes to differ from those expressed in the forward-looking
statements are described in the section “Risk Factors” in Item 1A of our Annual Report to the SEC
on Form 10-K for the fiscal year ended November 30, 2006 include, but are not limited to, the
following:
• |
|
cancellation or material modification of one or more significant contracts; |
|
• |
|
future reductions or changes in U.S. government spending; |
|
• |
|
failure to comply with regulations applicable to contracts with the U.S. government; |
|
• |
|
significant competition and the Company’s inability to adapt to rapid technological changes; |
|
• |
|
product failures, schedule delays or other problems with existing or new products and
systems or cost-overruns on the Company’s fixed-price contracts; |
|
• |
|
the possibility that environmental and other government regulations that impact the Company
become more stringent or subject the Company to material liability in excess of its
established reserves; |
|
• |
|
requirements to provide guarantees and/or letters of credit to financially assure the Company’s environmental obligations; |
|
• |
|
environmental claims related to the Company’s current and former businesses and operations; |
|
• |
|
the release or explosion of dangerous materials used in the Company’s businesses; |
|
• |
|
reduction in airbag propellant volume; |
|
• |
|
disruptions in the supply of key raw materials and difficulties in the supplier
qualification process, as well as raw materials price increases; |
|
• |
|
changes in economic and other conditions in the Sacramento metropolitan area, California
real estate market or changes in interest rates affecting real estate values in that market; |
|
• |
|
the Company’s limited experience in real estate activities and the ability to execute its
real estate business plan, including the Company’s ability to obtain or caused to be
obtained, the necessary final governmental zoning, land use and environmental approvals and
building permits; |
34
• |
|
the Company’s property being subject to federal, state and local regulations and
restrictions that may impose significant limitations on the Company’s plans, with much of the
Company’s property being raw land located in areas that include the natural habitats of
various endangered or protected wildlife species; |
|
• |
|
the cost of servicing the Company’s debt and compliance with financial and other covenants; |
|
• |
|
the results of significant litigation; |
|
• |
|
costs and time commitment related to acquisition and partnership activities; |
|
• |
|
additional costs related to the Company’s recent divestitures; |
|
• |
|
a strike or other work stoppage or the Company’s inability to renew collective bargaining agreements on favorable terms; |
|
• |
|
fluctuations in sales levels causing the Company’s quarterly operating results to fluctuate; |
|
• |
|
effects of changes in discount rates and returns on plan assets of defined benefit pension
plans that may require the Company to increase its shareholders’ deficit; |
|
• |
|
the loss of key employees and shortage of available skilled employees to achieve anticipated growth; |
|
• |
|
failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act; and |
|
• |
|
those risks detailed from time to time in the Company’s reports filed with the SEC. |
This list of factors that may affect future performance and the accuracy of forward-looking
statements is illustrative, but by no means exhaustive. Additional risk factors may be described
from time to time in our future filings with the SEC. Accordingly, all forward-looking statements
should be evaluated with the understanding of their inherent uncertainty. All such risk factors are
difficult to predict, contain material uncertainties that may affect actual results and may be
beyond our control.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our disclosures related to certain market risks as
reported under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in
our Annual Report to the SEC on Form 10-K for the fiscal year ended November 30, 2006, except as
noted below.
Interest Rate Risk
We are exposed to market risk principally due to changes in domestic interest rates. Debt with
interest rate risk includes borrowings under our Senior Credit Facility. Other than pension assets,
we do not have any significant exposure to interest rate risk related to our investments.
As of February 28, 2007, our debt totaled $464.8 million: $391.5 million, or 84% was at an
average fixed rate of 4.81%; and $73.3 million or 16% was at a variable rate of 8.36%.
The estimated fair value of our total debt was $471.2 million as of February 28, 2007 compared
to a carrying value of $464.8 million. The fair value of the convertible subordinated notes and the
senior subordinated notes was determined based on quoted market prices as of February 28, 2007. The
fair value of the remaining debt was determined to approximate carrying value as the interest rates
are generally variable, based on market interest rates, and reflect current market rates available
to us.
35
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Based on our management’s evaluation
(with the participation of our principal executive officer and principal financial officer), as of
the end of the period covered by this report, our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act))
are effective to ensure that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms and is accumulated and
communicated to our management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There was no change in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during our first quarter of fiscal 2007 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
36
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Except as disclosed in Note 10 of the Notes to Unaudited Condensed Consolidated Financial
Statements, which is incorporated herein by reference, there have been no significant developments
in the pending legal proceedings as previously reported in Part 1 Item 3, Legal Proceedings in our
Annual Report on Form 10-K for the fiscal year ended November 30, 2006.
Vinyl Chloride Cases. The following table sets forth information related to our historical
product liability costs associated with our vinyl chloride litigation cases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Year |
|
Year |
|
|
Ended |
|
Ended, |
|
Ended |
|
|
Feb. 28, |
|
Nov. 30, |
|
Nov. 30, |
|
|
2007 |
|
2006 |
|
2005 |
|
|
(dollars in thousands) |
Claims filed |
|
|
1 |
|
|
|
1 |
|
|
|
4 |
|
Claims dismissed |
|
|
— |
|
|
|
1 |
|
|
|
9 |
|
Claims settled |
|
|
1 |
|
|
|
2 |
|
|
|
9 |
|
Claims pending |
|
|
8 |
|
|
|
8 |
|
|
|
10 |
|
Aggregate settlement costs |
|
$ |
26 |
|
|
$ |
76 |
|
|
$ |
18 |
|
Average settlement costs |
|
$ |
26 |
|
|
$ |
38 |
|
|
$ |
2 |
|
Legal and administrative fees for the vinyl chloride cases for the first quarter of fiscal
2007 were $0.1 million. Legal and administrative fees for the vinyl chloride cases for fiscal 2006
and fiscal 2005 were $0.4 million for each period.
Asbestos Cases. The following table sets forth information related to our historical product
liability costs associated with our asbestos litigation cases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Year |
|
Year |
|
|
Ended |
|
Ended, |
|
Ended |
|
|
Feb. 28, |
|
Nov. 30, |
|
Nov. 30, |
|
|
2007 |
|
2006 |
|
2005 |
|
|
(dollars in thousands) |
Claims filed |
|
|
19 |
|
|
|
62 |
|
|
|
149 |
* |
Claims dismissed |
|
|
11 |
** |
|
|
55 |
|
|
|
65 |
|
Claims settled |
|
|
1 |
|
|
|
5 |
|
|
|
2 |
|
Claims pending |
|
|
161 |
|
|
|
154 |
|
|
|
152 |
|
Aggregate settlement costs |
|
$ |
3 |
|
|
$ |
67 |
|
|
$ |
50 |
|
Average settlement costs |
|
$ |
3 |
|
|
$ |
14 |
|
|
$ |
25 |
|
|
|
|
* |
|
Includes 30 cases tendered to the Company by PCC Flow Technologies, Inc. and its affiliates
(PCC). PCC had originally tendered 57 cases, but 27 of these cases were dismissed prior to the
Company’s and PCC’s August 31, 2005 settlement agreement. |
|
** |
|
Includes one case originally tendered to the Company by PCC that was tendered back to PCC. |
Legal and administrative fees for the asbestos cases for the first quarter of fiscal 2007 were
$0.1 million. Legal and administrative fees for the asbestos cases for fiscal 2006 and fiscal 2005
were $0.5 million for each period.
Item 1A. Risk Factors.
There have been no material changes from our risk factors as previously reported in our Annual
Report to the SEC on Form 10-K for the fiscal year ended November 30, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities
37
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
|
|
|
No. |
|
Description |
10.1*†
|
|
Agreement and Release by and between GenCorp Inc. and William A. Purdy Jr. dated January 29, 2007. |
|
|
|
10.2
|
|
Amended and Restated Shareholder Agreement dated as of February 16, 2007, by and between GenCorp
Inc. and Steel Partners II L.P. was filed as Exhibit 10.1 to GenCorp Inc.’s Current Report on
Form 8-K dated February 17, 2007 (File No. 1-1520) and is incorporated herein by reference. |
|
|
|
31.1
|
|
Certification of Principal Executive Officer pursuant to Rule 13a – 14 (a) of the Securities
Exchange Act of 1934, as amended. |
|
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to Rule 13a – 14 (a) of the Securities
Exchange Act of 1934, as amended. |
|
|
|
32.1
|
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a
–14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Filed herewith. All other exhibits have been previously filed. |
|
† |
|
Management contract or compensatory plan or arrangement. |
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: March 28, 2007
|
|
By:
|
|
/s/ Yasmin R. Seyal
Yasmin R. Seyal
|
|
|
|
|
|
|
Senior Vice President, Chief Financial Officer |
|
|
|
|
|
|
(Principal Financial Officer) |
|
|
|
|
|
|
|
|
|
Date: March 28, 2007
|
|
By:
|
|
/s/ Terry L. Hall
Terry L. Hall
|
|
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
Date: March 28, 2007
|
|
By:
|
|
/s/ R. Leon Blackburn
R. Leon Blackburn
|
|
|
|
|
|
|
Vice President and Controller |
|
|
|
|
|
|
(Principal Accounting Officer) |
|
|
38
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Exhibit Description |
10.1
|
|
Agreement and Release by and between GenCorp Inc. and William A. Purdy Jr. dated January 29, 2007. |
|
|
|
31.1
|
|
Certification of Principal Executive Officer pursuant to Rule 13a – 14 (a) of the Securities
Exchange Act of 1934, as amended. |
|
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to Rule 13a – 14 (a) of the Securities
Exchange Act of 1934, as amended |
|
|
|
32.1
|
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a
– 14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
39