-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G3Dts2zDx2C2Qlgthj+wO9QufMXv0J/V9pQVLC6d6KUIqNHZ1mcP1P/WSv7WhoHI XeBbFFYarZXRCCLA2zEQaQ== 0000950152-00-002896.txt : 20000417 0000950152-00-002896.hdr.sgml : 20000417 ACCESSION NUMBER: 0000950152-00-002896 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENCORP INC CENTRAL INDEX KEY: 0000040888 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 340244000 STATE OF INCORPORATION: OH FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01520 FILM NUMBER: 602296 BUSINESS ADDRESS: STREET 1: HIGHWAY 50 & AEROJET ROAD CITY: ANCHO CORDOVA STATE: CA ZIP: 95670 BUSINESS PHONE: 9163554000 MAIL ADDRESS: STREET 1: HIGHWAY 50 & AEROJET ROAD CITY: ANCHO CORDOVA STATE: CA ZIP: 95670 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL TIRE & RUBBER CO DATE OF NAME CHANGE: 19840330 10-Q 1 GENCORP INC. QUARTERLY REPORT ON FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended February 29, 2000 Commission File Number 1-1520 ----------------- ------ GenCorp Inc. ----------------------- (Exact name of registrant as specified in its charter) Ohio 34-0244000 (State of Incorporation) (I.R.S. Employer Identification No.) Highway 50 and Aerojet Road Rancho Cordova, California 95670 -------------------------------------------------------------- (Address of principal executive offices) (Zip Code) P.O. Box 537012 Sacramento, California 95853 -------------------------------------------- (Mailing address) (Zip Code) 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 X NO --- --- As of March 31, 2000, there were 41,938,551 outstanding shares of GenCorp Inc.'s Common Stock, par value $0.10. 2 GENCORP INC. Table of Contents
Part I. Financial Information Page No. -------- Item 1. Financial Statements Condensed Consolidated Statements of Income - Three Months Ended February 29, 2000 and February 28, 1999 -3- Condensed Consolidated Balance Sheets - February 29, 2000 and November 30, 1999 -4- Condensed Consolidated Statements of Cash Flows - Three Months Ended February 29, 2000 and February 28, 1999 -5- Notes to the Unaudited Interim Condensed Consolidated Financial Statements - February 29, 2000 -6- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -14- Item 3. Quantitative and Qualitative Disclosures About Market Risk -16- Part II. Other Information Item 1. Legal Proceedings -17- Item 6. Exhibits and Reports on Form 8-K -18- Signatures -19-
-2- 3 PART I. FINANCIAL INFORMATION GENCORP INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in millions, except per share amounts) (Unaudited)
Three Months Ended ------------------ Feb. 29, Feb. 28, 2000 1999 ------- -------- NET SALES $ 239 $ 255 COSTS AND EXPENSES Cost of products sold 196 215 Selling, general and administrative 8 13 Depreciation and amortization 13 12 Interest expense 3 - Other (income) expense, net 1 (2) Unusual items 1 - ----- ----- 222 238 ----- ----- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 17 17 Income tax provision 7 8 ----- ----- INCOME FROM CONTINUING OPERATIONS 10 9 INCOME FROM DISCONTINUED OPERATIONS, NET OF TAXES - 8 CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAXES 74 - ----- ----- NET INCOME $ 84 $ 17 ===== ===== EARNINGS PER SHARE OF COMMON STOCK Basic: Continuing operations $ .25 $ .22 Discontinued operations - .19 Cumulative effect of a change in accounting principle 1.76 - ----- ----- Total $2.01 $ .41 ===== ===== Diluted: Continuing operations $ .25 $ .22 Discontinued operations - .19 Cumulative effect of a change in accounting principle 1.76 - ----- ----- Total $2.01 $ .41 ===== ===== CASH DIVIDENDS PAID PER SHARE OF COMMON STOCK $ .03 $ .15
See notes to the unaudited interim condensed consolidated financial statements. -3- 4 GENCORP INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in millions, except per share amounts)
Unaudited Audited February 29, November 30, 2000 1999 ------------------------- CURRENT ASSETS Cash and cash equivalents $ 16 $ 23 Accounts receivable 128 139 Inventories 167 144 Prepaid expenses and other 53 57 ------- ------- TOTAL CURRENT ASSETS 364 363 Recoverable from U.S. Government and third parties for Environmental remediation 210 211 Deferred income taxes 94 149 Prepaid pension 253 113 Investments and other assets 58 59 Property, plant and equipment, net 342 335 ------- ------- TOTAL ASSETS $ 1,321 $ 1,230 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable and current portion of long-term debt $ 3 $ 9 Accounts payable 42 44 Income taxes payable 32 44 Other current liabilities 255 274 ------- ------- TOTAL CURRENT LIABILITIES 332 371 Long-term debt 208 149 Postretirement benefits other than pensions 245 251 Environmental reserves 344 346 Other liabilities 30 33 SHAREHOLDERS' EQUITY Preference stock - (none outstanding) - - Common stock - $0.10 par value; 41.9 million shares outstanding 4 4 Other capital 1 - Retained earnings 176 93 Accumulated other comprehensive loss (19) (17) ------- ------- TOTAL SHAREHOLDERS' EQUITY 162 80 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,321 $ 1,230 ======= =======
See notes to the unaudited interim condensed consolidated financial statements. -4- 5 GENCORP INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions) (Unaudited)
Three Months Ended Feb. 29, Feb. 28, 2000 1999 ------------------- OPERATING ACTIVITIES Income from continuing operations $ 10 $ 9 Depreciation, amortization and gain on disposal of fixed assets 13 12 Deferred income taxes 12 - Changes in operating assets and liabilities net of effects of dispositions of businesses: Current assets, net (15) 15 Current liabilities, net (33) (48) Other non-current assets, net (18) (8) Other non-current liabilities, net (10) 4 ---- ---- NET CASH USED IN CONTINUING OPERATIONS (41) (16) NET CASH USED IN DISCONTINUED OPERATIONS - (4) ---- ---- TOTAL CASH USED IN OPERATING ACTIVITIES (41) (20) ---- ---- INVESTING ACTIVITIES Capital expenditures (19) (11) Discontinued operations - (2) ---- ---- NET CASH USED IN INVESTING ACTIVITIES (19) (13) ---- ---- FINANCING ACTIVITIES Net borrowings on long-term revolving credit facility 55 - Net short-term debt (paid) incurred (2) 33 Dividends (1) (6) Other equity transactions 1 - ---- ---- NET CASH PROVIDED BY FINANCING ACTIVITIES 53 27 ---- ---- NET DECREASE IN CASH AND CASH EQUIVALENTS (7) (6) Cash and cash equivalents at beginning of period 23 24 ---- ---- Cash and cash equivalents at end of period $ 16 $ 18 ==== ==== SUPPLEMENTAL DATA (CASH PAID FOR): Interest $ 3 $ 6 Income taxes $ 7 $ 10
See notes to the unaudited interim condensed consolidated financial statements. -5- 6 GENCORP INC. NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 29, 2000 Note A - Basis of Presentation - ------------------------------ The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These interim statements should be read in conjunction with the financial statements and notes thereto included or incorporated by reference in the GenCorp Inc. (Company) Annual Report on Form 10-K for the fiscal year ended November 30, 1999. All normal recurring accruals and adjustments considered necessary for a fair presentation of the unaudited results for the three month periods ended February 29, 2000 and February 28, 1999 have been reflected. The results of operations for the three months ended February 29, 2000, are not necessarily indicative, if annualized, of those to be expected for the full fiscal year. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain reclassifications have been made to conform prior periods' data to the current period's presentation. Note B - Earnings Per Share - --------------------------- The following table sets forth the computation of basic and diluted earnings per share from continuing operations:
(Dollars in millions, except per share data Feb. 29, Feb. 28, and shares in thousands) 2000 1999 ------------------- NUMERATOR - --------- Income from continuing operations $ 10 $ 9 ======= ======= DENOMINATOR - ----------- Denominator for basic earnings per share - Weighted average shares outstanding 41,864 41,582 Effect of dilutive securities: Employee stock options 116 435 Other - 19 ------- ------- Dilutive potential common shares 116 454 ------- ------- Denominator for diluted earnings per share - Adjusted weighted average shares and assumed conversions 41,980 42,036 EARNINGS FROM CONTINUING OPERATIONS PER SHARE OF COMMON STOCK - ------------------------- Basic earnings per share $ .25 $ .22 Diluted earnings per share $ .25 $ .22
-6- 7 Note C - Comprehensive Income - ----------------------------- The components of total comprehensive income were as follows: (Dollars in millions) Three Months Ended ---------------------- Feb. 29, Feb. 28, 2000 1999 ---------------------- Income from continuing operations $ 10 $ 9 Adjustments: Foreign currency translation effect (2) (2) ---- ---- Total comprehensive income $ 8 $ 7 ==== ==== Note D - Acquisitions, Divestitures and Other Matters - ----------------------------------------------------- On March 15, 2000, the Company signed an agreement to sell a 20 percent equity interest in Aerojet Fine Chemicals LLC for approximately $25 million in cash and sell an additional 20 percent equity interest for an approximate 35 percent equity interest in a privately held company. The privately held company operates in the United States and Europe focusing on contract process development and manufacturing in the pharmaceutical industry. Following the sale, GenCorp will continue to manage, operate, and consolidate Aerojet Fine Chemicals LLC as majority owners. The pending transaction is expected to be completed during the second quarter of fiscal 2000, subject to government and regulatory approvals. Note E - Unusual Items - ---------------------- During the first three months of fiscal 2000, the Company incurred unusual expenses related to discontinued operations totaling approximately $1 million which included spin related expenses and minor settlements. Note F - Change in Accounting Principle - --------------------------------------- Effective December 1, 1999, the Company changed its methods for determining the market-related value of plan assets used in determining the expected return-on-assets component of annual net pension costs and the amortization of gains and losses for both pension and postretirement benefit costs. Under the previous accounting method, the market-related value of assets was determined by smoothing assets over a five-year period. The new method shortens the smoothing period for determining the market-related value of plan assets from a five-year period to a three-year period. The changes result in a calculated market-related value of plan assets that is closer to current value, while still mitigating the effects of short-term market fluctuation. The new method also reduces the substantial accumulation of unrecognized gains and losses created under the previous method due to the disparity between fair value and market-related value of plan assets. Under the previous accounting method all gains and losses were subject to a ten-percent corridor and amortized over the expected working lifetime of active employees (approximately 12 years). The new method eliminates the ten-percent corridor and reduces the amortization period to five years. The cumulative effect of this accounting change related to periods prior to fiscal year 2000 of $123 million ($74 million after-tax, or $1.76 per basic and diluted share) is a one-time, non-cash credit to fiscal 2000 earnings. For fiscal year 2000, the accounting change is expected to result in additional pretax income from continuing operations as follows:
Fiscal Year (Dollars in millions, except per share amounts) 2000 ---- Continuing business segments $ 30 Other 7 ------ Income from continuing operations $ 37 ====== Net Income $ 22 ====== Earnings per share $ .52 ======
The impact on income from continuing operations is presented below showing the increase to pretax income for the three months ended February 29, 2000 and the pro forma effect on pretax income for the three months ended February 28, 1999 if the accounting change had been applied retroactively:
Three Months Ended Feb. 29, Feb. 28, (Dollars in millions) 2000 1999 ---------------------------------------- Continuing business segments $ 7 $ 7 Other 2 2 ------ ------- Income from continuing operations $ 9 $ 9 ====== ======= Net Income $ 5 $ 5 ====== =======
-7- 8 A comparison of earnings per share from continuing operations for the three months ended February 29, 2000 to pro forma amounts for the three months ended February 28, 1999 is presented below showing the effects if the accounting change were applied retroactively:
Three Months Ended Feb. 29, Feb. 28, 2000 1999 --------------------------- Basic earnings per share from continuing operations $.25 $.35 Diluted earnings per share from continuing operations $.25 $.35
Note G - Inventories - -------------------- Inventories are stated at the lower of cost or market value. A portion of the inventories is priced by use of the last-in, first-out (LIFO) method using various dollar value pools. Interim LIFO determinations involve management's estimates of expected year-end inventory levels. Components of inventory are as follows:
(Dollars in millions) February 29, November 30, 2000 1999 --------------------------- Raw materials and supplies $ 26 $ 23 Work-in-process 7 4 Finished products 9 10 ----- ----- Approximate replacement cost of inventories 42 37 Less: reserves, primarily LIFO (6) (6) ----- ----- 36 31 Long-term contracts at average cost 310 293 Less: progress payments (179) (180) - ----- ----- Sub-total long-term contract inventory 131 113 ----- ----- $ 167 $ 144 ===== =====
-8- 9 Note H - Property, Plant and Equipment - --------------------------------------
(Dollars in millions) February 29, November 30, 2000 1999 --------------------------- Land $ 30 $ 30 Buildings and improvements 243 243 Machinery and equipment 554 555 Construction-in-progress 68 50 ------ ----- 895 878 Less: accumulated depreciation (553) (543) ------ ----- $ 342 $ 335 ====== =====
Note I - Long-term Debt and Credit Lines - ---------------------------------------- The Company has a five year, $250 million Revolving Credit Facility Agreement (Facility) which expires in 2004 and is secured by stock of certain subsidiaries of the Company. Under the terms of the Facility, the Company pays a commitment fee for unused available funds. Interest rates are variable, primarily based on LIBOR, and the Facility includes various covenants. As of February 29, 2000, $208 million was outstanding under the Facility. As of February 29, 2000, outstanding letters of credit totaled $20 million. Note J - Contingencies - ---------------------- Environmental Matters - --------------------- Sacramento, California In 1989, the United States District Court approved a Partial Consent Decree (Decree) requiring Aerojet to conduct a Remedial Investigation/Feasibility Study (RI/FS) of Aerojet's Sacramento, California site and to prepare a RI/FS report on specific environmental conditions present at the site and alternatives available to remedy such conditions. Aerojet also is required to pay for certain governmental oversight costs associated with Decree compliance. The State of California expanded surveillance of perchlorate and nitrosodimethylamine (NDMA) under the RI/FS because these chemicals were detected in public water supply wells near Aerojet's property at previously undetectable levels using new testing protocols. Aerojet has substantially completed its efforts under the Decree to determine the nature and extent of contamination at the facility. Preliminarily, Aerojet has identified the technologies that will likely be used to remediate the site and estimated costs using generic remedial costs from databases of Superfund remediation costs. Over the next several years, Aerojet will conduct feasibility studies to refine technical approaches and costs to remediate the site. The remediation costs are principally for design, construction, enhancement and operation of groundwater and soil treatment facilities, ongoing project management and regulatory oversight, and are expected to be incurred over a period of approximately 15 years. Aerojet is also addressing groundwater contamination off of its facility through the development of an Operable Unit Feasibility Study. This Study was completed and submitted as a draft to the governmental oversight agencies in December 1999. The Study enumerates various remedial alternatives by which offsite groundwater can be addressed. It will be subject to both governmental agency and public review and comment before being approved for implementation. -9- 10 San Gabriel Valley Basin, California Aerojet, through its Azusa facility, has been named by the United States Environmental Protection Agency (EPA) as a potentially responsible party (PRP) in the portion of the San Gabriel Valley Superfund Site known as the Baldwin Park Operable Unit (BPOU). Regulatory action involves requiring site specific investigation, possible cleanup, issuance of a Record of Decision (ROD) regarding regional groundwater remediation and issuance to Aerojet and 18 other PRPs Special Notice letters requiring groundwater remediation. All of the Special Notice PRPs are alleged to have contributed volatile organic compounds (VOCs). Aerojet's investigation demonstrated that the groundwater contamination by VOCs is principally upgradient of Aerojet's property and that lower concentrations of VOC contaminants are present in the soils of Aerojet's presently and historically owned properties. The EPA contends that Aerojet is one of the four largest sources of VOC groundwater contamination at the BPOU of the 19 PRPs identified by the EPA. Aerojet contests the EPA's position regarding the source of contamination and the number of responsible PRPs. Aerojet is participating in a Steering Committee comprised of 14 of the PRPs. Soon after the EPA issued Special Notice letters in May 1997, as a result of the development of more sensitive measuring methods, perchlorate was detected in wells in the BPOU. More recently, NDMA was also detected using newly developed measuring methods. Suspected sources of perchlorate include Aerojet's solid rocket development and manufacturing activities in the 1940s and 1950s, and military ordnance produced by a facility adjacent to the Aerojet facilities in the 1940s. NDMA is a suspected byproduct of liquid rocket fuel activities by Aerojet in the same time period. In addition, new regulatory standards for a chemical known as 1.4 dioxane requires additional treatment. Aerojet may be a minor contributor of this chemical. Aerojet is in the process of developing new, low cost technologies for the treatment of perchlorate, NDMA and 1.4 dioxane. On September 10, 1999, eleven of the nineteen Special Notice PRP's, including Aerojet (the Offering Parties), submitted a Good Faith Offer to the EPA to implement an EPA-approved remedy, which was accepted by the agency as a basis for negotiating an Administrative Consent Order. The remedy, as currently proposed, would employ low cost treatment technologies being developed by Aerojet to treat perchlorate, NDMA, and 1.4 dioxane, as well as traditional treatment for VOCs. Since submitting the Good Faith Offer, Aerojet has continued negotiations with the other Offering Parties regarding final cost allocations, and the Offering Parties have continued negotiations with the court-appointed Watermaster and local water purveyors regarding an agreement that would provide for use of the remediation project's treated water. A discussion of Aerojet's efforts to estimate these costs is contained under the heading Aerojet's Reserve and Recovery Balances. On November 23, 1999, the Regional Board issued an order to Aerojet and other PRPs to conduct additional environmental investigations at their facilities. Aerojet is seeking review of this order while proceeding to comply. On April 4, 2000, Aerojet was sued by the San Gabriel Basin Water Quality Authority in the United States District Court for the Central District of California, Case No. 00-03579. The action seeks to recover $1,560,000 for funds contributed by the Water Quality Authority to the cost of the La Puente Valley Water District treatment plant constructed in 1999 and 2000, plus potential operation and maintenance costs of approximately $150,000 per year. It is filed pursuant to CERCLA section 107(a) and the Water Quality Authority Act section 407(c). Aerojet has not been served at this time. Aerojet has informed the Water Quality Authority that if an agreement is reached with the Watermaster on the structure and financing of the project, the Water Quality Authority costs will be paid out of the funds that Aerojet and the other Offering Parties put up for the total project since La Puente is part of the Watermaster remedial project. If no agreement is reached with the Watermaster, then the costs of the La Puente treatment plant would likely not be part of the remedial project and the La Puente costs are likely to be considered purveor past costs which will be addressed by the Offering Parties (including Aerojet) outside of the Offering Party settlement agreement. -10- 11 Muskegon, Michigan In a lawsuit filed by the EPA, the United States District Court ruled in 1992 that Aerojet and its two inactive Cordova Chemical subsidiaries (Cordova) are liable for remediation of Cordova's Muskegon, Michigan site, along with a former owner/operator of an earlier chemical plant at the site, who is the other potentially responsible party (PRP). That decision was appealed to the United States Court of Appeals. In May 1997, the United States Court of Appeals for the Sixth Circuit issued an en banc decision reversing Aerojet's and the other PRP's liability under the CERCLA statute. Petitions for certiorari to the United States Supreme Court for its review of the appellate decision were filed on behalf of the State of Michigan and the EPA and were granted in December 1997. On June 8, 1998, the United States Supreme Court issued its opinion. The Court held that a parent corporation could be directly liable as an operator under CERCLA if it can be shown that the parent corporation operated the facility. The Supreme Court vacated the Sixth Circuit's 1997 ruling and remanded the case back to the United States District Court in Michigan for retrial. Aerojet does not expect that it will be found liable on remand. Aerojet has been involved in settlement discussions with the EPA and a proposed consent decree was filed with the District Court in July 1999. If approved by the District Court, Aerojet and Cordova will be dismissed. A May 8, 2000 hearing date has been set by the court. In a separate action, Aerojet and Cordova won indemnification for the Muskegon site investigation and remediation costs from the State of Michigan in the state Court of Claims. The Michigan Court of Appeals affirmed on appeal, and the Michigan Supreme Court refused to hear the case. Further, the Michigan Supreme Court also denied the State's motion for reconsideration. As a result, the Company believes that most of the $50 million to $100 million in anticipated remediation costs will be paid by the State of Michigan and the former owner/operator of the site. A settlement agreement with the State of Michigan, related to the proposed consent decree discussed above, has been finalized and will be implemented contingent on the EPA consent decree being approved. In addition, Aerojet settled with one of its two insurers in August 1999 for $4 million. Aerojet's Reserve and Recovery Balances On January 12, 1999, having finally received all necessary Government approvals, Aerojet and the United States Government implemented, with effect retroactive to December 1, 1998, the October 1997 Agreement in Principle resolving certain prior environmental and facility disagreements between the parties. Under this Agreement, a "global" settlement covering all environmental contamination (including perchlorate) at the Sacramento and Azusa sites was achieved; the Government/Aerojet environmental cost sharing ratio was raised to 88 percent/12 percent from the previous 65 percent/35 percent (with both Aerojet and the Government retaining the right to opt out of this sharing ratio for Azusa only, after at least $40 million in allowable environmental remediation costs at Azusa have been recognized); the cost allocation base for these costs was expanded to include all of Aerojet (in lieu of the prior limitation to the Sacramento business base); and Aerojet obtained title to all of the remaining Government facilities on its Sacramento property, together with an advance agreement recognizing the allowability of certain facility demolition costs. During the year ended November 30, 1999, Aerojet entered into a settlement agreement covering certain environmental claims with certain of its insurance carriers and received settlement proceeds of approximately $92 million. Under the terms of its agreements with the United States Government, Aerojet is obliged to credit the Government a portion of the insurance recoveries for past costs paid by the Government. Pending finalization of an agreement with the Government, Aerojet has estimated the amount of the credit and recorded a liability of $33 million for the Government portion of insurance recoveries, including applicable interest. In the fourth quarter of 1999, Aerojet obtained sufficient information to provide a reasonable basis for estimating the costs to address groundwater contamination off its Sacramento facility and its probable share of the San Gabriel Valley BPOU, and recorded those estimates in its reserve and recovery balances. Estimates regarding the Sacramento Western Groundwater Remediation were based on the Operable Unit Feasibility Study previous references and Aerojet's opinion as to which remediation alternative proposed by -11- 12 the study will be approved by the EPA and the State. Estimates regarding the San Gabriel Valley BPOU remediation were based on the Good Faith Offer/Administrative Consent Order and Watermaster/purveyor negotiations referenced previously. Not resolved at this time are whether Aerojet will have any additional liability for its possible share of water purveyor past cost claims, as well as the EPA's past and future costs. In regard to the matter discussed above, management believes, on the basis of presently available information, that resolution of this matter would not materially affect liquidity, capital resources, or the consolidated financial condition of the Company. As of February 29, 2000, Aerojet had total reserves of $329 million for costs to remediate the above sites and has recognized $222 million for probable future recoveries. These estimates are subject to change as work progresses, additional experience is gained and environmental standards are revised. In addition, legal proceedings to obtain reimbursements of environmental costs from insurers are continuing. Lawrence, Massachusetts -- The Company has studied remediation alternatives for its closed Lawrence, Massachusetts facility, which was contaminated with PCBs, and has begun site remediation and off-site disposal of debris. The Company has a reserve of $19 million for estimated decontamination and long-term operating and maintenance costs of this site. The reserve represents the Company's best estimate for the remaining remediation costs. Estimates of future remediation costs could range as high as $37 million depending on the results of future testing, and the ultimate remediation alternatives undertaken at the site. The time frame for remediation is currently estimated to range from five to ten years. Other Sites - ----------- The Company is also currently involved, together with other companies, in 27 other Superfund and non-superfund remediation sites. In many instances, the Company's liability and proportionate share of costs have not been determined largely due to uncertainties as to the nature and extent of site conditions and the Company's involvement. While government agencies frequently claim PRPs are jointly and severally liable at such sites, in the Company's experience, interim and final allocations of liability costs are generally made based on relative contributions of waste. Based on the Company's previous experience, its allocated share has frequently been minimal, and in many instances, has been less than one percent. The Company has reserves of approximately $18 million as of February 29, 2000 which it believes are sufficient to cover its best estimate of its share of the environmental remediation costs at these other sites. Also, the Company is seeking recovery of its costs from its insurers. Environmental Summary - --------------------- In regard to the sites discussed above, management believes, on the basis of presently available information, that resolution of these matters will not materially affect liquidity, capital resources or consolidated financial condition. The effect of resolution of these matters on results of operations cannot be predicted due to the uncertainty concerning both the amount and timing of future expenditures and future results of operations. Other Legal Matters - ------------------- Olin Corporation In August 1991, Olin Corporation (Olin) advised GenCorp that it believed GenCorp to be jointly and severally liable for certain Superfund remediation costs, estimated by Olin to be $70 million, associated with a former Olin manufacturing facility and waste disposal sites in Ashtabula County, Ohio. In 1993, GenCorp sought declaratory judgment in the United States District Court for the Northern District of Ohio that the Company is not responsible for environmental remediation costs. Olin counterclaimed seeking a judgment that GenCorp is jointly and severally liable for a share of remediation costs. In late 1995, the Court hearing on the issue of joint and several liability was completed, and in August 1996 the Court held hearings relative to allocation. At its request, in 1998, the Court received an additional briefing regarding the impact of the recent Best Foods Supreme Court decision which the Company believes definitively addresses many issues in this case in its favor. Another hearing relative to liability and allocation was held on January 11, 1999. The -12- 13 Court rendered its interim decision on liability on August 16, 1999, finding GenCorp 30 percent liable for remediation costs at "Big D Campground" landfill and 40 percent liable for remediation costs attributable to the Olin TDI facility with regard to the Fieldsbrook site. Subsequent trial phases will address damages, likely to be scheduled for late 2000. The Company continues to vigorously litigate this matter and believes that it has meritorious defenses to Olin's claims. While there can be no certainty regarding the outcome of any litigation, in the opinion of management, after reviewing the information currently available with respect to this matter and consulting with the Company's counsel, any liability which may ultimately be incurred will not materially affect the consolidated financial condition of the Company. Other Matters The Company and its subsidiaries are subject to various other legal actions, governmental investigations, and proceedings relating to a wide range of matters in addition to those discussed above. In the opinion of management, after reviewing the information which is currently available with respect to such matters and consulting with the Company's counsel, any liability which may ultimately be incurred with respect to these additional matters will not materially affect the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted because any such effect depends on both future results of operations and the amount and timing of the resolution of such matters. -13- 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During the fourth quarter of fiscal 1999, the Company completed a spin-off of its Performance Chemicals and Decorative & Building Products businesses (OMNOVA Solutions Inc.) to GenCorp Shareholders. As such, the results of the discontinued operations during the first quarter of 1999 are shown separately in the Company's financial statements. Material Changes in Financial Condition - --------------------------------------- Cash flow used in continuing operating activities for the first three months of fiscal 2000 was $41 million as compared to $16 million for 1999. The increase in cash flow used in continuing operating activities primarily reflects inventory build up on production contracts, payment for commercial inventory, and overall higher working capital requirements. For the first three months of 2000, cash used in investing activities of continuing operations included capital expenditures of $19 million compared to $11 million in the same period in 1999. Capital expenditures during the first quarter of fiscal 2000 included investments in Aerojet's Space Based Infrared System (SBIRS) Payload Satellite Facility, Vehicle Sealing's new product launches, and infrastructure expansion for Aerojet Fine Chemicals. Financing activities provided $53 million of cash during the three month period ended February 29, 2000. This primarily reflects a net increase in total debt during this period. Cash flow provided by financing activities of $27 million in the first three months of 1999 reflected a $33 million net increase in debt offset by a $6 million dividend payment. Debt increased overall to fund approved capital projects, acquire contract and commercial inventory, and meet higher working capital requirements. Material Changes in Results of Operations - ----------------------------------------- Sales from continuing operations totaled $239 million for the first quarter of 2000, a decrease of six percent compared to $255 million during the first quarter of 1999. Operating profit from continuing businesses totaled $24 million for the first quarter of 2000, an improvement of 14 percent versus $21 million for the first quarter of 1999. First quarter 2000 earnings from continuing businesses of $.25 per diluted share compared to $.22 per diluted share during the first quarter of 1999, an increase of 14 percent. During the quarter, the Company entered into an agreement in which it will sell a 20 percent equity interest in Aerojet Fine Chemicals LLC for approximately $25 million in cash and sell an additional 20 percent equity interest for an approximate 35 percent equity interest in a privately held company. The privately held company operates in the United States and Europe focusing on becoming the leading contract process development and manufacturing in the pharmaceutical industry through acquisitions, strategic alliances, and investments. Following the sale, GenCorp will continue to manage and operate Aerojet Fine Chemicals from its Sacramento location, retaining a 60% majority ownership. The pending transaction is expected to be completed during the second quarter of fiscal 2000, subject to government and regulatory approvals. Effective December 1, 1999, the Company implemented a change in accounting principle affecting the calculation of its net pension assets and postretirement benefit liabilities. The change was implemented to reflect a calculated market-related value of plan assets that is closer to current value, while still mitigating the effects of short-term market fluctuations. The new method also reduces the substantial accumulation of unrecognized gains and losses created under the previous method due to the disparity between fair value and market-related value of plan assets. The changes resulted in a one-time after tax gain of approximately $74 million ($1.76 per basic and diluted share). The changes have no effect on the funded status of the pension or other postretirement benefit plans, and the employee and retiree benefit plans remain unchanged. -14- 15 Aerospace, Defense and Fine Chemicals Sales at Aerojet were $126.8 million in the first quarter of 2000 compared to $150.3 million in the same quarter of 1999. Lower revenues on the Space Based Infrared Program (SBIRS), Space Defense Support Program (DSP), Integrated Advanced Microwave Sounding Unit (AMSU) programs, and in Fine Chemicals contributed to the decline, partially offset by higher volume on the Sense and Destroy Armor (SADARM). Operating profit increased to $19.9 million in the first quarter of 2000 versus $18.4 million in the first quarter of 1999. Operating margins increased to 15.7% from 12.2%. First quarter 2000 margins were favorably impacted by Titan deliveries, which slipped from the fourth quarter of 1999, 100% award fees recognized on the AMSU program, and added profit for performance on the U.S. Army's tactical missile TOW 2A/2B program. Highlights at Aerojet during the quarter included: - A $49 million five-year follow-on contract award for up to 75 thrust vector system modifications to matured Minuteman II Stage 2 rocket motors. This new contract expands the original 1995 contract of 54 units. - A $10 million contract award for the purchase of 236 units of HAWK rocket motors for the countries of Korea and Taiwan. This award is for the first year of a five-year requirement that will total approximately 1,045 motors. - Successful completion of another round of intensive U.S. Army Reliability Tests where Aerojet's SADARM smart munition exceeded all critical requirements and objectives at the Yuma Proving Ground test facility in Arizona. Twelve SADARM 155mm projectiles were fired resulting in 16 target hits. The test continued SADARM's record of greater than one hit per projectile, similar to the last tests conducted in September 1999 that resulted in 35 direct hits out of 30 rounds fired. - Progress from corrective actions at Aerojet Fine Chemicals resulted in recovery during the quarter through the addition of new customers and products to fill backlog completely for the remainder of the year. During the quarter, Aerojet booked contract award funding of $173 million with contract backlog as of February 29, 2000 totaling $1.6 billion. Vehicle Sealing Net sales from continuing businesses for the Vehicle Sealing segment improved 8% to $112.0 million in the first quarter of 2000, versus $103.8 million in the first quarter of 1999. The sales gain was due to higher production volumes on Ford Explorer, General Motors' Full Size pickup and Ford's F-150 platforms. Operating profit in the first quarter of 2000 was $3.7 million compared to $2.8 million for the first quarter 1999. Operating profit margins improved to 3.3% in the first quarter of 2000 versus 2.7% in the first quarter of 1999. Operating margins are expected to steadily improve throughout 2000 as model run rates are achieved and volume is increased, and as launch support efforts subside. Vehicle Sealing continues to lead the most popular Sport Utility Vehicle (SUV) and light truck segment of the market. A new award for the complete sealing systems for General Motors GMT-800 series (Suburban, Tahoe and Yukon) elevates Vehicle Sealing to the market share leader in this most popular and fastest selling automotive segment. In addition to this new award, Vehicle Sealing has significant existing SUV and light truck platforms that include GM's CK pickup and numerous programs with Ford such as the F-series pickup, Ranger, and Explorer. -15- 16 Environmental Matters - --------------------- GenCorp's policy is to conduct its businesses with due regard for the preservation and protection of the environment. The Company devotes a significant amount of resources and management attention to environmental matters and actively manages its ongoing processes to comply with extensive environmental laws and regulations. The Company is involved in the remediation of environmental conditions which resulted from generally accepted manufacturing and disposal practices in the 1950's and 1960's which were followed at certain GenCorp plants. In addition, the Company has been designated a potentially responsible party, with other companies, at sites undergoing investigation and remediation. The nature of environmental investigation and cleanup activities often makes it difficult to determine the timing and amount of any estimated future costs that may be required for remedial measures. However, the Company reviews these matters and accrues for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred and the amount of the liability (usually based upon proportionate sharing) can be reasonably estimated. The Company's Condensed Consolidated Balance Sheet as of February 29, 2000 reflects accruals of $366 million and amounts recoverable of $222 million from the United States Government and other third parties for such costs. The effect of resolution of environmental matters on results of operations cannot be predicted due to the uncertainty concerning both the amount and timing of future expenditures and future results of operations. However, management believes, on the basis of presently available information, that resolution of these matters will not materially affect liquidity, capital resources or the consolidated financial condition of the Company. The Company will continue its efforts to mitigate past and future costs through pursuit of claims for insurance coverage and continued investigation of new and more cost effective remediation alternatives and associated technologies. For additional discussion of environmental matters, refer to Note J- Contingencies. Adoption of the Euro - -------------------- Based upon a preliminary evaluation, management believes that the adoption of the Euro by the European Economic Community will not have a material impact on the Company's international businesses. The Company's foreign operations currently are small and each operation conducts the majority of its business in a single currency with minimal price variations between countries. Quantitative and Qualitative Disclosure About Market Risk - --------------------------------------------------------- The Company is exposed to market risk from changes in interest rates on long-term debt obligations. The Company's policy is to manage its interest rate exposures through the use of a combination of fixed and variable rate debt. Currently, the Company does not use derivative financial instruments to manage its interest rate risk. Substantially all of the Company's long-term debt of $208 million maturing in the year 2004 had an average variable interest rate of 7.38 percent as of February 29, 2000. A one percentage point change in the interest rate on the Company's long term debt would not have materially affected interest expense in the first quarter of 2000. Although the Company conducts business in foreign countries, international operations were not material to the Company's consolidated financial position, results of operations or cash flows as of February 29, 2000. Additionally, foreign currency transaction gains and losses were not material to the Company's results of operations for the three months ended February 29, 2000. Accordingly, the Company should not be subject to material foreign currency exchange rate risk with respect to future costs or cash flows from its foreign subsidiaries. To date, the Company has not entered into any significant foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. The Company is evaluating the future use of such financial instruments. -16- 17 Forward-Looking Statements - -------------------------- This report on Form 10-Q contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements may present (without limitation) management's expectations, beliefs, plans and objectives, future financial performance, and assumptions or judgments concerning such matters. Any discussions contained in this report, except to the extent that they contain historical facts, are forward-looking and accordingly involve estimates, assumptions, judgments and uncertainties. There are a number of factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking statements. Such factors are detailed in the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1999 filed with the Securities and Exchange Commission. Item 3. Quantitative and Qualitative Disclosure About Market Risk - ----------------------------------------------------------------- See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure About Market Risk." PART II. OTHER INFORMATION - -------------------------- Item 1. Legal Proceedings - ------------------------- Information concerning legal proceedings, including proceedings relating to environmental matters, which appears in Note J beginning on page 9 of this report is incorporated herein by reference. Baier, et al. v. Aerojet-General Corporation, et al. On March 1, 2000, a complaint was filed against Aerojet and other defendants in San Bernardino County Superior Court, Case No. RCV046045. The plaintiffs are residents of the cities of Chino and Chino Hills near Aerojet's former Ordnance Division facility. This "toxic tort" action seeks damages for personal injury and property damage allegedly caused by defendants' nuisance and fraud. Aerojet has not been served. Aerojet has notified its insurers and plans to vigorously defend this action. While there can be no certainty regarding the outcome of any litigation, in the opinion of management, after reviewing the information currently available with respect to the matters discussed above and consulting with the Company's counsel, any liability which may ultimately be incurred will not materially affect the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted because any such effect depends on both future results of operations and the amount and timing of the resolution of such matter. The United States government frequently conducts investigations into allegedly illegal or unethical activity in the performance of defense contracts. Investigations of this nature are common to the aerospace and defense industries in which Aerojet participates and lawsuits may result; possible consequences may include civil and criminal fines and penalties, in some cases, double or treble damages, and suspension or debarment from future government contracting. Aerojet currently is subject to several United States government investigations regarding business practices and cost classification from which additional legal or administrative proceedings could result. While it is not possible to predict with certainty the outcome of any such investigation, the Company does not believe, based upon the information available at this time, that final resolution of any such matter will have a material adverse effect on its consolidated financial condition or result in its suspension or debarment as a government contractor. -17- 18 Item 6. Exhibits and Reports on Form 8-K a) Exhibits -------- Table Exhibit Item No. Exhibit Description Number --------------------------------------------------------------------- 18 Preferability letter on Accounting Change from Ernst & Young LLP 18 27 Financial Data Schedule 27 (Filed for EDGAR only) b) Reports on Form 8-K ------------------- There have been no reports on Form 8-K filed during the quarter ended February 29, 2000. -18- 19 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENCORP INC. Date April 14, 2000 By /s/ T. L. Hall --------------- -------------- T. L. Hall Senior Vice President and Chief Financial Officer; Treasurer (Principal Financial Officer) Date April 14, 2000 By /s/ W. R. Phillips --------------- ------------------ W. R. Phillips Senior Vice President, Law; General Counsel and Secretary (Duly Authorized Officer) -19- EX-18 2 EXHIBIT 18 1 EXHIBIT 18 PREFERABILITY LETTER ON ACCOUNTING CHANGE FROM ERNST & YOUNG LLP March 30, 2000 Terry L. Hall Senior Vice President and Chief Financial Officer GenCorp Inc. Highway 50 and Aerojet Road Rancho Cordova, California 95670 Dear Sir: Note F of Notes to the unaudited interim condensed consolidated financial statements of GenCorp Inc. ("the Company") included in its Form 10-Q for the three months ended February 29, 2000 describes a change in its methods for determining the market-related value of plan assets used in determining the expected return-on-assets component of annual net pension costs and the amortization of gains and losses for both pension and postretirement benefit costs. The new accounting method includes changing the smoothing period from five years to three years, changing the amortization period from approximately 12 years to five years, and the elimination of a ten percent corridor. There are no authoritative criteria for determining a `preferable' method of accounting for the manner in which realized and unrealized gains and losses are included in the calculation of the market-related values of the Company's pension and postretirement plan assets based on the particular circumstances; however, we conclude that the change in the method of accounting described above is to an acceptable alternative method which, based on your business judgment to make this change for the reason cited above, is preferable in your circumstances. We have not conducted an audit in accordance with auditing standards generally accepted in the United States of any consolidated financial statements of the Company for any period subsequent to November 30, 1999, and therefore we do not express any opinion on any financial statements of GenCorp Inc. subsequent to that date. Very truly yours, Ernst & Young LLP EX-27 3 EXHIBIT 27
5 1,000,000 3-MOS NOV-30-2000 FEB-29-2000 16 6 128 0 167 364 895 553 1,321 332 0 0 0 4 158 1,321 239 239 196 217 2 0 3 17 7 10 0 0 74 84 2.01 2.01
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