-----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, UAqYRSzWugU05WsnvMUBcbzsKxt50vr/DDhnJuF8d4S8fJlhL4V0uPWnNpGKp3Pb f3+0UDxpNPK8wwRgEmICLw== 0000950152-97-006930.txt : 19971001 0000950152-97-006930.hdr.sgml : 19971001 ACCESSION NUMBER: 0000950152-97-006930 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19970930 SROS: NYSE 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: 97688168 BUSINESS ADDRESS: STREET 1: 175 GHENT RD CITY: FAIRLAWN STATE: OH ZIP: 44333 BUSINESS PHONE: 2168694200 MAIL ADDRESS: STREET 1: 175 GHENT RD CITY: FAIRLAWN STATE: OH ZIP: 44333 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL TIRE & RUBBER CO DATE OF NAME CHANGE: 19840330 10-Q 1 GENCORP INC. 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 August 31, 1997 Commission File Number 1-1520 --------------- ------ GenCorp Inc. ------------------- (Exact name of registrant as specified in its charter) Ohio 34-0244000 - ------------------------ ------------------------------------ (State of Incorporation) (I.R.S. Employer Identification No.) 175 Ghent Road Fairlawn, Ohio 44333-3300 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (330) 869-4200 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- At August 31, 1997, there were 41,100,835 outstanding shares of GenCorp Inc.'s Common Stock, par value $0.10. 2 GenCorp Inc.
Table of Contents Page No. -------- Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Statements of Income - Three Months and Nine Months Ended August 31, 1997 and 1996 -3- Condensed Consolidated Balance Sheets - August 31, 1997 and November 30, 1996 -4- Condensed Consolidated Statements of Cash Flows - Nine Months Ended August 31, 1997 and 1996 -5- Notes to the Unaudited Interim Condensed Consolidated Financial Statements -6- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -12- Part II. Other Information Item 1. Legal Proceedings -15- Item 5. Other Information -16- Item 6. Exhibits and Reports on Form 8-K -17- Signatures -18-
-2- 3 PART I. FINANCIAL INFORMATION ----------------------------- GenCorp Inc. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in millions, except per share data)
Unaudited Unaudited Three Months Ended Nine Months Ended ------------------------ ------------------------ Aug. 31, Aug. 31, Aug. 31, Aug. 31, 1997 1996 1997 1996 ---------- ---------- ---------- ---------- NET SALES $ 393.5 $ 360.9 $ 1,125.0 $ 1,107.2 ---------- ---------- ---------- ---------- COSTS AND EXPENSES Cost of products sold 319.1 290.0 911.4 909.3 Selling, general and administrative 45.7 38.6 130.8 126.1 Interest expense 1.9 6.0 13.8 20.6 Other (income) and expense, net (8.3) (.1) (12.8) (3.3) Unusual items (Note C) -- -- -- 24.9 ---------- ---------- ---------- ---------- 358.4 334.5 1,043.2 1,077.6 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 35.1 26.4 81.8 29.6 Income tax (provision) benefit (Note E) (14.9) (10.5) 33.6 (11.3) ---------- ---------- ---------- ---------- NET INCOME $ 20.2 $ 15.9 $ 115.4 $ 18.3 ========== ========== ========== ========== EARNINGS PER SHARE OF COMMON STOCK (NOTE B) Primary $ .50 $ .47 $ 3.16 $ .55 Fully diluted $ .49 $ .42 $ 2.83 $ .55 Average number of shares of common stock outstanding (in thousands) Primary 40,263 33,734 36,501 33,622 Fully diluted 42,111 40,893 41,825 40,852 Cash dividends paid per share of common stock $ .15 $ .15 $ .45 $ .45
The accompanying notes to the unaudited interim condensed consolidated financial statements are an integral part of these statements. -3- 4 GenCorp Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in millions)
Unaudited Audited August 31, November 30, 1997 1996 -------- ------------ CURRENT ASSETS: Cash and equivalents $ 21.7 $ 22.6 Accounts receivable 257.8 206.7 Inventories (Note F) 167.0 158.4 Prepaid expenses and other 61.6 64.7 -------- -------- TOTAL CURRENT ASSETS 508.1 452.4 -------- -------- Recoverable from U.S. government and third parties for environmental remediation 112.9 118.1 Deferred income taxes 156.5 156.3 Prepaid pension 112.8 103.5 Investments and other assets 102.6 86.8 Property, plant and equipment: At cost 1,116.6 1,102.3 Accumulated depreciation (709.9) (689.5) -------- -------- Net property, plant and equipment 406.7 412.8 -------- -------- TOTAL ASSETS $1,399.6 $1,329.9 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Notes payable $ 47.7 $ 42.9 Accounts payable - trade 77.5 80.6 Income taxes 27.1 26.6 Other current liabilities 226.1 219.6 -------- -------- TOTAL CURRENT LIABILITIES 378.4 369.7 -------- -------- Long-term debt (Note G) 124.6 263.2 Postretirement benefits other than pensions 339.8 346.1 Environmental reserves (Note H) 227.3 230.3 Other liabilities 65.5 64.9 Contingencies (Note H) SHAREHOLDERS' EQUITY Preference stock - (none outstanding) -- -- Common stock - $0.10 par value; 41.1 million shares outstanding 4.1 3.4 Other capital 142.7 22.2 Retained earnings 122.7 23.5 Currency translation adjustment (5.5) 6.6 -------- -------- TOTAL SHAREHOLDERS' EQUITY 264.0 55.7 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,399.6 $1,329.9 ======== ========
The accompanying notes to the unaudited interim condensed consolidated financial statements are an integral part of these statements. -4- 5 GenCorp Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions)
Unaudited Nine Months Ended ----------------- August 31, 1997 1996 ----------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $115.4 $ 18.3 Provision for unusual items -- 24.9 Depreciation, amortization and loss on disposal of fixed assets 45.9 51.1 Increase in working capital (51.3) (83.7) (Increase) decrease in deferred income taxes (.2) 4.7 Other - net .8 (12.3) ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 110.6 3.0 ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (36.4) (30.3) Proceeds from asset dispositions 14.8 121.1 Acquisitions (46.5) (3.5) Investments and other - net (2.5) (12.9) ------ ------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (70.6) 74.4 ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Net short-term debt incurred 4.8 19.6 Long-term debt incurred 180.0 360.1 Long-term debt paid (203.6) (438.1) Dividends (16.2) (14.9) Other equity transactions (5.9) (1.2) ------ ------ NET CASH USED IN FINANCING ACTIVITIES (40.9) (74.5) ------ ------ NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (.9) 2.9 Cash and equivalents at beginning of year 22.6 17.0 ------ ------ Cash and equivalents at end of period $ 21.7 $ 19.9 ====== ======
Cash paid for interest was $15 million and $24 million for the nine months ended August 31, 1997 and 1996, respectively. Cash paid for income taxes was $64 million and $22 million for the nine months ended August 31, 1997 and 1996, respectively. The accompanying notes to the unaudited interim condensed consolidated financial statements are an integral part of these statements. -5- 6 GenCorp Inc. NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note A - Basis of Presentation - ------------------------------ The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These interim statements should be read in conjunction with the financial statements and notes thereto included or incorporated by reference in the GenCorp Inc. (Company) Annual Report on Form 10-K for the fiscal year ended November 30, 1996. All normal recurring accruals and adjustments considered necessary for a fair presentation of the unaudited results for the nine months ended August 31, 1997 and 1996, have been reflected. The results of operations for the nine months ended August 31, 1997, 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. Note B - Net Income Per Share of Common Stock - --------------------------------------------- In February 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, "Earnings per Share" (SFAS 128), which is required to be adopted on November 30, 1998. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact would result in a $0.02 per share increase in primary earnings per share for the third quarter ended August 31, 1997 and no change in the primary earnings per share amount reported for the third quarter ended August 31, 1996. The impact of SFAS 128 on the calculation of fully diluted earnings per share for these quarters is not expected to be material. Currently, primary earnings per share of common stock are calculated by dividing net income by the weighted average number of common shares outstanding adjusted for the inclusion of stock options and shares to be issued under other stock based compensation programs. For fully diluted earnings per share, net income and shares outstanding have also been adjusted as if the Company's $115,000,000 8% Convertible Subordinated Debentures Due August 1, 2002 had been converted at the beginning of the period. (See Note G for further information regarding the debentures.) Note C - Unusual Items - ---------------------- During the first nine months of 1996, the Company recognized unusual charges of $25 million. These charges included a provision of $15 million for the Voluntary Early Retirement Incentive Program for eligible employees at the Company's Fairlawn, Ohio headquarters and Corporate Technology Center and a net loss of $10 million on the sale of the Vibration Control and Reinforced Plastics Divisions (see Note D). Note D - Acquisitions and Divestitures - -------------------------------------- On May 7, 1997, the Company acquired Printworld from Technographics, Inc. for approximately $47 million in cash. Printworld is a recognized leader in the transfer printing and paper laminate industry. The acquisition was accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. The acquisition resulted in goodwill of $26 million which is being amortized over 30 years. -6- 7 Note D - Acquisitions and Divestitures (continued) - -------------------------------------------------- On August 23, 1996, the Company purchased the Lytron(R) polystyrene latex plastic pigment business from Morton International for approximately $4 million. Under the agreement, the Company acquired the Lytron(R) brand name, technology, customer base and certain other assets. Lytron(R) plastic pigments are used primarily in paper and paperboard coatings to improve gloss, brightness, opacity and printability performance. The acquisition was accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. The acquisition resulted in goodwill of $3 million which is being amortized over 15 years. On June 21, 1996, the Company completed the sale of substantially all of the assets and certain liabilities of its Automotive Occupant Sensor (AOS) business to the Robert Bosch Corporation for an aggregate consideration of approximately $3 million paid in cash at the closing and the right to receive certain additional payments based on the performance of the AOS business. On March 1, 1996, GenCorp Inc. completed the sale of substantially all of the assets and certain liabilities of its Reinforced Plastics Division to Cambridge Industries, Inc. of Madison Heights, Michigan for an aggregate consideration of approximately $42 million, of which approximately $32 million has been paid in cash and approximately $10 million of which was paid through the retention of receivables. The sale was effective as of February 29, 1996. On February 15, 1996, GenCorp Inc. completed the sale of substantially all of the assets and certain liabilities of its Vibration Control Division to BTR Antivibration Systems, Inc., a subsidiary of BTR plc. for an aggregate consideration of approximately $84 million paid in cash, of which approximately $80 million was paid in the first quarter of 1996. Note E - Income Taxes - --------------------- The Company received federal income tax refunds resulting from settlement agreements with the Internal Revenue Service relating to certain prior taxable years, which reduced the Company's tax provision by $2 million and $65 million in the first and second quarters of 1997, respectively. Note F - Inventories - -------------------- Inventories are stated at the lower of cost or market value. A portion of the inventories is priced by use of the last-in, first-out (LIFO) method using various dollar value pools. Interim LIFO determinations involve management's judgments of expected year-end inventory levels. Components of inventory are as follows:
Unaudited Audited August 31, November 30, 1997 1996 ------------------------ Raw materials and supplies $ 42.0 $ 37.4 Work-in-process 10.1 8.8 Finished products 56.7 62.4 ------ ------ Approximate replacement cost of LIFO inventories 108.8 108.6 Reserves, primarily LIFO (38.8) (39.5) Long-term contracts at average cost 195.9 172.0 Progress payments (98.9) (82.7) ------ ------ $167.0 $158.4 ====== ======
-7- 8 Note G - Long-term Debt and Credit Lines - ---------------------------------------- On May 17, 1996, the Company entered into a new five-year unsecured $400 million revolving credit facility (Facility) which expires in May 2001. As of August 31, 1997, unused revolving lines of credit totaled $267 million. The Company pays a variable commitment fee, which is currently 1/4 of one percent, on the unused balance. Interest rates are variable, primarily based on LIBOR, and are currently at an average rate of 6.4 percent. The Facility contains various debt restrictions and provisions relating to net worth, interest coverage and debt to earnings before interest, taxes, depreciation and amortization (Debt/EBITDA) ratios. The Company is required to maintain consolidated net worth of at least $23.5 million. During the second quarter of 1997, the Company called for redemption its $115,000,000 8% Convertible Subordinated Debentures Due August 1, 2002 (Debentures). In the third quarter of 1997, substantially all of the Debentures were tendered for conversion into GenCorp common stock at a conversion price of $16.065 per share (equivalent to a conversion rate of approximately 62.247 shares of common stock per $1,000 principal amount of Debentures). At August 31, 1997, the Company had unsecured, uncommitted lines of credit with several banks for short-term borrowings aggregating $84 million, of which $44 million was outstanding. Borrowings under such lines generally bear interest at money market rates and are payable on demand. The Company also had outstanding letters of credit totaling $29 million at August 31, 1997. Note H - Contingencies - ---------------------- Environmental Matters - --------------------- Sacramento, California In June 1989, the United States District Court approved a Partial Consent Decree (Decree) requiring Aerojet to conduct a Remedial Investigation/ Feasibility Study (RI/FS) of Aerojet's Sacramento, California site and prepare an 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 government oversight costs associated with compliance with the Decree. During the second quarter of 1997, the State of California expanded surveillance of perchlorate under the RI/FS when this chemical was detected at previously undetectable levels using new testing protocols in water wells near Aerojet's property. In September 1993, Aerojet reached a settlement with the U.S. government whereby Aerojet recovered approximately $18 million for costs incurred at the site from July 1989 through November 1992. The settlement also provides that 65 percent of covered costs incurred after November 1992, net of insurance recoveries, will be added to the pricing of government contracts. Aerojet is negotiating with the U.S. government to recover all environmental costs associated with perchlorate as part of the 1993 settlement. Aerojet is continuing its efforts under the Decree to determine the nature and extent of contamination at the facility and to identify the technologies that will likely be used to remediate the site. Based on available facts, existing technology and current environmental laws and regulations, Aerojet recorded a net $68 million charge in 1994 to remediate the site. These remediation costs are principally for design, construction and enhancement of groundwater and soil treatment facilities, ongoing project management and regulatory oversight, and are expected to be incurred over a period of approximately 20 years. This estimate will be subject to change as work progresses, additional experience is gained and environmental standards are revised. -8- 9 Note H - Contingencies (continued) - ---------------------------------- At August 31, 1997, Aerojet had a reserve of $193 million for costs to complete the original RI/FS and remediate the site and has recognized $113 million for probable future recoveries under the 1993 settlement agreement with the U.S. government. 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 $29 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 $50 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 7 to 12 years. Muskegon, Michigan In a lawsuit filed by the U.S. Environmental Protection Agency (EPA), the United States District Court ruled in 1992 that Aerojet and its two inactive Cordova Chemical subsidiaries (Cordova) are liable for remediation of Cordova's Muskegon, Michigan site, along with a former owner/operator potentially responsible party (PRP) of an earlier chemical plant at the site. That decision was appealed to the United States Court of Appeals. In May 1997, the United States Court of Appeals for the Sixth Circuit issued an en banc decision reversing Aerojet's and the other PRP's liability under the CERCLA statute. Petitions for certiorari to the United States Supreme Court for its review of the appellate decision have been filed on the behalf of the State of Michigan and the EPA. Depending on the results of these petitions, the case will be remanded to the Federal District Court for further fact finding determinations affecting the Cordova Chemical subsidiaries. In a separate action, Aerojet and Cordova won indemnification for the Muskegon site investigation and remediation costs from the State of Michigan in the state court of claims. The Michigan Court of Appeals affirmed on appeal, and the Michigan Supreme Court refused to hear the case. On December 23, 1996, the Michigan Supreme Court denied the State's motion for reconsideration. As a result, the Company believes that most of the $50 million to $100 million in anticipated remediation costs will be paid by the State of Michigan and the former owner/operator of the site. In addition, Aerojet believes it has insurance coverage for the site. San Gabriel Valley Basin, California Aerojet, through its Azusa facility, has been named by the U.S. Environmental Protection Agency (EPA) as a potentially responsible party (PRP) in the portion of the San Gabriel Valley Superfund Site known as the Baldwin Park Operable Unit (BPOU). Regulatory action involves issuance of a Record of Decision (ROD) regarding regional groundwater remediation, issuing Aerojet and 18 other PRPs Special Notice letters requiring groundwater remediation and site specific investigation and possible cleanup. -9- 10 Note H - Contingencies (continued) - ---------------------------------- Aerojet's investigation demonstrated that the principal groundwater contamination is upgradient of Aerojet's property and that only low concentrations of contaminants are present in the soils of Aerojet's presently and historically owned properties. The EPA contends that Aerojet is one of the four largest sources of groundwater contamination at the BPOU of the nineteen PRPs identified by the EPA. Aerojet contests the EPA's position regarding the source of contamination and the number of responsible PRPs. Aerojet has joined a Steering Committee comprised of eleven of the PRPs identified by the EPA. The ROD and Special Notice letters issued by the EPA require groundwater remediation for the BPOU, estimated to cost $47 million in non-recurring costs and $4 million to $5 million in annual operating expense. Aerojet, as part of the Steering Committee, is participating in an effort to develop an alternative "consensus" plan in which certain water supply entities would integrate the remedial requirements into a water supply project. If implemented, the consensus plan approach would allow the project to be eligible for federal funding for 25 percent of the non-recurring costs and additional funding from water supply entities receiving benefit from the project, thus reducing the PRPs' costs. Soon after the EPA issued the Special Notice letter, the State of California also detected perchlorate in water wells in Southern California, including the San Gabriel Valley, at previously undetectable levels using new testing protocols. As the result of the recent finding of perchlorate, the EPA has required investigation for and studies regarding treatability of perchlorate contaminated water. Consequently, the EPA has allowed time extensions until February 1998 for submittal by the PRPs of a good faith offer and negotiation of a consent decree in response to the Special Notice letter. The perchlorate investigations and studies are underway. The final perchlorate cleanup standard (which has not yet been determined) could impact total cleanup cost and implementation of the proposed consensus plan. Aerojet's cost exposure cannot be estimated at this time. However, management believes, on the basis of presently available information, that resolution of this matter will not materially affect the consolidated financial condition of the Company. Among the factors considered by management are the following: the number of other viable PRPs; the potential for federal funding or cost sharing with water supply interests; Aerojet's site-specific investigation; and the fact that, to date, Aerojet's San Gabriel Valley costs are being recovered from the government in the pricing of Aerojet's contracts. Additionally, Aerojet has filed suit against its insurers for recovery of such costs. Other Sites The Company is also currently involved, together with other companies, in 28 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, in many instances less than 1 percent. The Company has reserves of approximately $25 million as of August 31, 1997 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. -10- 11 Note H - Contingencies (continued) - ---------------------------------- Environmental Summary - --------------------- In regard to the sites discussed above, management believes, on the basis of presently available information, that resolution of these matters will not materially affect liquidity, capital resources or the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted due to the uncertainty concerning both the amount and timing of future expenditures and future results of operations. Other Legal Matters - ------------------- In August 1991, Olin Corporation (Olin) advised GenCorp that Olin believed GenCorp to be jointly and severally liable for certain Superfund remediation costs, estimated by Olin to be $70 million, associated with a former Olin manufacturing facility and waste disposal sites in Ashtabula County, Ohio. In 1993, GenCorp sought declaratory judgment in the United States District Court for the Northern District of Ohio that the Company is not responsible for environmental remediation costs associated with the former Olin facility and Superfund sites. Olin counterclaimed seeking a judgment that GenCorp is jointly and severally liable for a share of remediation costs. In late 1995, the Court hearing on the issue of joint and several liability was completed, and in August 1996 the Court held hearings relative to allocation. The Court has not yet rendered a decision. If the Court finds GenCorp is liable, subsequent trial phases will address damages. The Company is vigorously litigating this matter and believes that it has meritorious defenses to Olin's claims. While there can be no certainty regarding the outcome of any litigation, in the opinion of management, after reviewing the information currently available with respect to this matter and consulting with the Company's counsel, any liability which may ultimately be incurred will not materially affect the consolidated financial condition of the Company. The Company and its subsidiaries are subject to various other legal actions, governmental investigations, and proceedings relating to a wide range of matters in addition to those discussed above. In the opinion of management, after reviewing the information which is currently available with respect to such matters and consulting with the Company's counsel, any liability which may ultimately be incurred with respect to these additional matters will not materially affect the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted because any such effect depends on both future results of operations and the amount and timing of the resolution of such matters. -11- 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Material Changes in Financial Condition - --------------------------------------- Cash flow provided from operating activities for the nine months ended August 31, 1997 was $110.6 million as compared to $3.0 million for the first nine months of 1996. The increase in cash flow from operating activities reflected receipt of the tax refunds (see Note E - Income Taxes) and reimbursement of expenses related to an environmental settlement. For the nine month period ended August 31, 1997, $70.6 million was used for investing activities, including the acquisition of Printworld in the second quarter for approximately $46.5 million and capital expenditures of $36.4 million, offset by proceeds of $14.8 million from asset dispositions. This is compared to cash flow provided from investing activities of $74.4 million for the nine month period ended August 31, 1996 resulting from asset dispositions of $121.1 million mostly from the sales of the Vibration Control and Reinforced Plastics divisions, reduced mainly by capital expenditures of $30.3 million. Financing activities in the first nine months of 1997 and 1996 primarily reflect a decrease in debt and the payment of dividends. During the second quarter of 1997, the Company called for redemption its $115,000,000 8% Convertible Subordinated Debentures Due August 1, 2002 (Debentures). In the third quarter of 1997, nearly 100 percent of the Debentures were tendered for conversion into GenCorp common stock (see Note G - Long-term Debt and Credit Lines). At August 31, 1997, GenCorp's total debt was $172 million, down $134 million from November 30, 1996 and the lowest level in over ten years. Interest expense decreased to $1.9 million from $6.0 million in the comparable third quarter in 1996 due to lower average debt levels, and the conversion of the Debentures into common stock. The conversion of the Debentures was also primarily responsible for the $131 million increase in shareholders' equity from $133 million in the second quarter of 1997 to $264 million in the third quarter of 1997. Material Changes in Results of Operations - ----------------------------------------- The third quarter results reflect improvements in the Company's sales growth, operating performance and financial condition. At the beginning of the third quarter of 1997 the Company's debt to total capital ratio was 68 percent. With the conversion of the Debentures and profitable operations, the Company's financial position improved with a debt to total capital ratio of 39 percent. This has created greater financial flexibility for the Company to pursue its growth strategies. Sales for the third quarter of 1997 totaled $393.5 million, an increase of 9 percent over $360.9 million during the third quarter of 1996. Sales increases were achieved at the Company's aerospace and defense and polymer products segments, while the automotive segment experienced an expected decline in revenues. For the nine months ended August 31, 1997, sales from continuing operations increased 6 percent to $1.12 billion as compared to $1.06 billion during the first nine months of 1996. -12- 13 Material Changes in Results of Operations (continued) - ----------------------------------------------------- Operating profit improved to $38.9 million for the third quarter of 1997, versus $37.2 million for the third quarter of 1996, an increase of 5 percent. Operating margins were 9.9 percent in the third quarter of 1997, compared to 10.3 percent for the third quarter of 1996. For the first nine months of 1997, operating profit from continuing operations has improved 15 percent to $108.3 million versus $94.3 million for the same period of 1996. Other income and expense was favorably impacted in the third quarter of 1997 by the collection of a note receivable and interest from a 1996 divestiture and reimbursement of expenses related to an environmental settlement. The Company reported improved net income of $20.2 million, or $0.49 per fully diluted share, for the third quarter of 1997 compared to net income of $15.9 million, or $0.42 per share for the third quarter of 1996. Earnings from continuing operations for the third quarter of 1997 totaled $0.44 per share excluding a benefit of $2.3 million, or $0.05 per share from previously discontinued operations. The Company's net income for the nine months ended August 31, 1997 was $115.4 million, or $2.83 per fully diluted share, compared to $18.3 million, or $0.55 per share for the same period in 1996. The increase was primarily due to the tax refunds received in the second quarter of 1997 and charges the Company took in early 1996 relating to the divestitures of two business units and the Voluntary Early Retirement Incentive Program. Net sales for the polymer products businesses in the third quarter of 1997 increased 10 percent to $161.9 million compared to $147.0 million in the third quarter of 1996. Sales increases in the segment's Decorative & Building Products and Specialty Polymers business units were partially offset by a decline at Penn Racquet Sports. Sales improvements were realized in commercial wallcovering, building systems, specialty latices for paper coatings and textiles, as well as in transfer printing and paper laminates at Printworld, which was acquired in the second quarter of 1997. During the quarter, Specialty Polymers' volumes increased at a double-digit rate versus last year and the business unit continued to gain new customers for its paper, nonwoven and specialty latex applications. Decorative & Building Products won initial orders from important customers through coordination of existing vinyl woodgrain laminates with newly acquired Printworld paper laminates. The ability to offer superior color and pattern matches for the Company's customers in these product lines represents a significant market opportunity. Operating profit for the polymer products businesses increased to $19.4 million for the third quarter of 1997 versus $18.8 million in the third quarter of 1996. Operating profit for the third quarter of 1997 included reimbursement of expenses related to an environmental settlement, and expenses related to business realignment in Specialty Polymers and Decorative & Building Products. Operating margins declined slightly to 12.0 percent in the third quarter of 1997 compared to 12.8 percent in the third quarter of 1996 due to higher raw material costs in Decorative & Building Products, and slightly lower average selling prices in Specialty Polymers. Automotive sales totaled $82.1 million in the third quarter of 1997 versus $93.7 million in the third quarter of 1996 due to timing related to GenCorp launches of new customer programs, customer related strikes and production problems, and lower appliance gasket orders. The Company's automotive operations earned $5.6 million for the third quarter of 1997, versus $7.5 million in the third quarter of 1996. Operating profit for the third quarter of 1997 included expenses related to plant consolidation and manpower reductions, and recoveries of environmental expenses. Operating profit for the third quarter of 1996 included $2.6 million from the sale of the segment's Automotive Occupant Sensor business. -13- 14 Material Changes in Results of Operations (continued) - ----------------------------------------- Vehicle Sealing was awarded new contracts from Saturn with production slated to begin in late 1997, and achieved QS9000 quality certification at three additional manufacturing facilities. At Aerojet, net sales increased 24 percent to $149.5 million in the third quarter of 1997 versus $120.2 million in the third quarter of 1996. Higher volumes on the Space Based Infrared System (SBIRS), Defense Support Program (DSP), and Special Sensor Microwave Imager/Sounder (SSMIS) were partially offset by lower volumes on Titan and Joint Tactical Ground Station (JTAGS). Aerojet's operating profit for the third quarter of 1997 was $13.9 million, up 28 percent compared to $10.9 million in the third quarter of 1996. Operating margins during the quarter were 9.3 percent, up slightly from last year's 9.1 percent third quarter margins. During the quarter, Aerojet's Sense and Destroy Armor (SADARM), the Army's first artillery fire and forget weapon available for use in precision strikes against artillery and other armored targets, successfully performed against offensive and defensive countermeasures during Initial Production Test firing at Fort Greely, Alaska. Aerojet's liquid engines performed in four successful Delta II launches, including missions which placed into orbit Iridium and Air Force GPS satellites. Contract awards totaled $114 million during the quarter. At August 31, 1997, Aerojet's contract backlog was $1.9 billion, up $900 million from the third quarter of 1996. 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 previously accepted manufacturing and disposal practices that date back to the 1950s and 1960s at certain of its 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 its proportionate share of the amount can be reasonably estimated. The Company's Condensed Consolidated Balance Sheet at August 31, 1997 reflects accruals of $258 million and amounts recoverable of $122 million from the U.S. government and 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 remediation alternatives and associated technologies. For additional discussion of environmental matters, refer to Note H - Contingencies. -14- 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- Information concerning legal proceedings, including proceedings relating to environmental matters, which appears in Note H beginning on page 8 of this report is incorporated herein by reference. Divine, et al. v. GenCorp Inc. - ------------------------------ In April 1996, two class action suits were filed, one in Federal and one in state court, collectively alleging: (i) breach of collective bargaining/pension and insurance agreements under Section 301 of the Labor Management Relations Act; (ii) breach of fiduciary duties under ERISA; and (iii) breach of individual contracts, fraud and promissory estoppel under state law. DIVINE, ET AL. V. GENCORP INC., U.S.D.C., N.D. Ind. 3:96CV0296AS; DIVINE, ET AL. V. GENCORP INC., Wabash County, Ind. Cir. Ct., 85C01-9605-CP-201. The suits were filed on behalf of approximately 600 hourly retirees, spouses and surviving spouses from GenCorp's Wabash, Indiana facility who are seeking damages and injunctive relief to prevent proposed modifications to the GenCorp Hourly Retiree Medical Plan. The proposed modifications include increases to retiree co-payments and deductibles, retiree contributions once aggregate costs exceed specified cost caps, and changes to Medicare offsets, drug coverage and maximum benefit provisions. The modifications are being implemented to control escalating health care costs, and to limit liabilities under SFAS 106. The Complaint filed in state court was removed to Federal court, and consolidated with U.S.D.C., N.D. Ind. 3:96CV0296AS. GenCorp filed a Motion for Summary Judgment and Opposition to Plaintiffs' Motion for Class Certification. On November 26, 1996, the court granted GenCorp's Motion for Summary Judgment on all counts, rendering the class certification issue moot. Plaintiffs have filed a Notice of Appeal to the U.S. Seventh Circuit Court of Appeals and briefing is complete. Subsequently, the parties negotiated settlement of all issues, pending conditional class certification and court approval. A fairness hearing is currently scheduled for November 26, 1997 and the parties remain optimistic that the conditional settlement will be approved. If settlement is not approved, the case will revert to its active status on appeal. Santamaria v. Suburban Water Systems - ------------------------------------ On July 29, 1997, another Southern California "toxic tort" lawsuit was filed in the Los Angeles County Superior Court, SANTAMARIA V. SUBURBAN WATER SYSTEMS, Docket No. KC 025995, naming as defendants 19 manufacturing companies, (including Aerojet), and 5 water companies. The complaint was amended to add numerous plaintiffs and another defendant water company on September 2, 1997, but none of the defendants have yet been served in the lawsuit. The several hundred plaintiffs, all of whom reside or resided in the San Gabriel Valley of Los Angeles (SGV), alleged that the defendants placed hazardous chemicals in the soil, groundwater and air in the SGV or provided contaminated well water to the plaintiffs for many years. The causes of action alleged are negligence, wrongful death, strict liability, trespass, nuisance, negligence per se, ultrahazardous activity and fraudulent concealment, and the plaintiffs seek personal injury and property damages in an unspecified amount and punitive damages. They also seek a court order to stop the allegedly tortious activity, but no preliminary injunctive relief is sought. Aerojet has notified its insurers and will vigorously defend this apparently frivolous action. -15- 16 Part II. Other Information (continued) - -------------------------------------- While there can be no certainty regarding the outcome of any litigation, in the opinion of management, after reviewing the information currently available with respect to the matters discussed above and consulting with the Company's counsel, any liability which may ultimately be incurred will not materially affect the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted because any such effect depends on both future results of operations and the amount and timing of the resolution of such matter. The Company and its subsidiaries are subject to various legal actions, governmental investigations, and proceedings relating to a wide range of matters in addition to those discussed above and in Part I of this report. In the opinion of management, after reviewing 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 position of the Company. Item 5. Other Information - -------------------------- On August 14, 1997, the Company announced the appointment of Robert A. Wolfe to the position of President of Aerojet, its aerospace and defense business unit effective September 1, 1997. On September 12, 1997, Mr. Wolfe was elected Vice President of the Company by the Board of Directors. Effective September 12, 1997, Steven W. Percy, Chairman and Chief Executive Officer of BP America Inc., was elected a director of the Company, bringing the number of directors to eleven. -16- 17 Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- a) Exhibits --------
Table Exhibit Item No. Exhibit Description Number -------------------------------------------------------------------------------------------- 10 Material Contracts 10.(iii)(A) Management contracts, compensatory plans or arrangements GenCorp Inc. 1997 Stock Option Plan effective March 26, 1997 was filed as Exhibit 4.1 to Form S-8 Registration Statement No. 333-35621 dated September 15, 1997 and is incorporated herein by reference. (10 pages) Restricted Stock Agreement between the Company and Steven W. Percy, Nonemployee Director, providing for payment of 600 shares of restricted common stock as part of Director's compensation for service on the Board of Directors in Company Stock; the Form of Restricted Stock Agreement between the Company and Nonemployee Directors was filed as Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended May 31, 1997 (File No. 1-1520), and is incorporated herein by reference. (3 pages) 11 Statement re computation of per share earnings 11 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 August 31, 1997. -17- 18 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 September 29, 1997 By /s/ D. M. Steuert ------------------------------ --------------------- D. M. Steuert Senior Vice President and Chief Financial Officer Date September 29, 1997 By /s/ W. R. Phillips ------------------------------ ---------------------- W. R. Phillips Senior Vice President, Law; General Counsel
-18- EX-11 2 EXHIBIT 11 1 EXHIBIT 11 GenCorp Inc. COMPUTATION OF EARNINGS PER COMMON SHARE
Unaudited Unaudited Three Months Ended Nine Months Ended ---------------------- ----------------------- Aug. 31, Aug. 31, Aug. 31, Aug. 31, 1997 1996 1997 1996 ---------- ---------- ---------- ---------- EARNINGS (Dollars in Millions) Net Income for Primary Earnings Per Share $ 20.2 $ 15.9 $ 115.4 $ 18.3 Tax Affected Interest Expense Applicable to 8% Convertible Subordinated Debentures .3 1.4 3.1 4.1 ---------- ---------- ---------- ---------- Net Income for Fully Diluted Earnings Per Share $ 20.5 $ 17.3 $ 118.5 $ 22.4 ========== ========== ========== ========== SHARES (In Thousands) Weighted Average Number of Common Shares Outstanding for Primary Earnings Per Share (see Note B) 40,263 33,734 36,501 33,622 Additional Shares Issuable Under Stock Options for Fully Diluted Earnings Per Share 58 1 314 72 Additional Shares Due to Assuming the Conversion of the 8% Convertible Subordinated Debentures Occurred at the Beginning of the Period 1,790 7,158 5,010 7,158 ---------- ---------- ---------- ---------- Weighted Average Number of Common Shares Outstanding for Fully Diluted Earnings Per Share 42,111 40,893 41,825 40,852 ========== ========== ========== ========== EARNINGS PER SHARE Primary: $ .50 $ .47 $ 3.16 $ .55 ========== ========== ========== ========== Fully Diluted: $ .49 $ .42 $ 2.83 $ .55 ========== ========== ========== ==========
EX-27 3 EXHIBIT 27
5 1,000 9-MOS NOV-30-1997 AUG-31-1997 13,700 8,000 257,800 0 167,000 508,100 1,116,600 709,800 1,399,600 378,400 0 4,100 0 0 259,900 1,399,600 1,125,000 1,125,000 911,400 1,042,200 (12,800) 0 13,800 81,800 (33,600) 115,400 0 0 0 115,400 3.16 2.83
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