-----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, WK5YnUO+2STtSMRK4wAMWn2KVA5GrqO+/eR9r8BKraWqqs4MIOsMt38LPc4eFFd6 x3KW7ajMqGF2SFjx5bgx1A== 0000950152-98-005821.txt : 19980707 0000950152-98-005821.hdr.sgml : 19980707 ACCESSION NUMBER: 0000950152-98-005821 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980706 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: 98660847 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 May 31, 1998 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 June 30, 1998, there were 41,528,011 outstanding shares of GenCorp Inc.'s Common Stock, par value $.10. 2 GenCorp Inc. Table of Contents
Part I. Financial Information Page No. -------- Item 1. Financial Statements Condensed Consolidated Statements of Income - Three Months and Six Months Ended May 31, 1998 and 1997 -3- Condensed Consolidated Balance Sheets - May 31, 1998 and November 30, 1997 -4- Condensed Consolidated Statements of Cash Flows - Six Months Ended May 31, 1998 and 1997 -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 -16- 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 data)
Unaudited Unaudited Three Months Ended Six Months Ended --------------------------- ---------------------------- May 31, May 31, May 31, May 31, 1998 1997 1998 1997 --------------------------- ---------------------------- NET SALES $ 431.9 $ 403.5 $ 797.4 $ 731.5 ---------- ---------- ---------- ---------- COSTS AND EXPENSES Cost of products sold 339.5 319.3 630.1 578.4 Selling, general and administrative 37.2 36.2 74.2 71.1 Depreciation 16.0 14.5 31.7 27.9 Interest expense 3.1 6.2 5.2 11.9 Other (income) and expense, net .7 (4.3) (.6) (4.5) Unusual items (.2) - (.2) - ---------- ---------- ---------- ---------- 396.3 371.9 740.4 684.8 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 35.6 31.6 57.0 46.7 Income tax provision (benefit) 14.2 (52.5) 22.8 (48.5) ---------- ---------- ---------- ---------- NET INCOME $ 21.4 $ 84.1 $ 34.2 $ 95.2 ========== ========== ========== ========== EARNINGS PER SHARE OF COMMON STOCK Basic $ .51 $ 2.51 $ .83 $ 2.84 Diluted $ .51 $ 2.08 $ .81 $ 2.38 Average number of shares of common stock outstanding (in thousands) Basic 41,482 33,554 41,416 33,529 Diluted 42,210 41,151 42,064 41,114 Cash dividends paid per share of common stock $ .15 $ .15 $ .30 $ .30
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 May 31, November 30, 1998 1997 -------------------------- CURRENT ASSETS: Cash and equivalents $ 21.2 $ 18.4 Accounts receivable 256.2 252.2 Inventories 133.4 157.2 Prepaid expenses and other 57.9 56.4 -------- -------- TOTAL CURRENT ASSETS 468.7 484.2 -------- -------- Recoverable from U.S. Government and third parties for environmental remediation 165.6 167.8 Deferred income taxes 151.5 151.0 Prepaid pension 122.7 116.1 Investments and other assets 158.9 103.3 Property, plant and equipment: At cost 1,157.4 1,121.1 Accumulated depreciation (745.3) (711.4) -------- -------- Net property, plant and equipment 412.1 409.7 -------- -------- TOTAL ASSETS $1,479.5 $1,432.1 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Notes payable $ 35.9 $ 25.5 Accounts payable - trade 75.0 102.3 Income taxes 35.3 21.3 Other current liabilities 228.8 241.1 -------- -------- TOTAL CURRENT LIABILITIES 375.0 390.2 -------- -------- Long-term debt 142.0 83.6 Postretirement benefits other than pensions 326.0 335.3 Environmental reserves 265.7 274.2 Other liabilities 65.8 67.5 SHAREHOLDERS' EQUITY Preference stock - (none outstanding) - - Common stock - $0.10 par value; 41.5 million shares outstanding 4.2 4.1 Other capital 150.2 146.4 Retained earnings 161.0 139.2 Cumulative currency translation adjustments (10.4) (8.4) -------- -------- TOTAL SHAREHOLDERS' EQUITY 305.0 281.3 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,479.5 $1,432.1 ======== ========
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 Six Months Ended May 31, 1998 1997 ------------------- OPERATING ACTIVITIES Net income $ 34.2 $ 95.2 Unusual items (.2) - Depreciation, amortization and gain/loss on disposal of fixed assets 33.3 29.6 Deferred income taxes (.5) (1.3) Changes in operating assets and liabilities net of effects of acquisitions and dispositions of businesses and exchange rate changes: Current assets 23.5 (39.5) Current liabilities (32.0) 8.3 Other non-current assets (4.6) - Other non-current liabilities (19.6) (12.1) ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 34.1 80.2 ------ ------ INVESTING ACTIVITIES Capital expenditures (32.9) (18.6) Proceeds from asset dispositions 15.3 13.1 Acquisitions (73.8) (46.5) Investments and other; net (.2) 2.6 ------ ------ NET CASH USED IN INVESTING ACTIVITIES (91.6) (49.4) ------ ------ FINANCING ACTIVITIES Long-term debt incurred 120.0 100.1 Long-term debt paid (61.6) (102.3) Net short-term debt incurred (paid) 10.4 (14.8) Dividends (12.4) (10.0) Other equity transactions 3.9 (7.7) ------ ------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 60.3 (34.7) ------ ------ NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 2.8 (3.9) Cash and equivalents at beginning of year 18.4 22.6 ------ ------ Cash and equivalents at end of period $ 21.2 $ 18.7 ====== ======
Cash paid for interest was $4.9 million and $12.0 million for the six months ended May 31, 1998 and 1997, respectively. Cash paid for income taxes was $8.6 million and $28.5 million for the six months ended May 31, 1998 and 1997, 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, 1997. All normal recurring accruals and adjustments considered necessary for a fair presentation of the unaudited results for the six months ended May 31, 1998 and 1997, have been reflected. The results of operations for the six months ended May 31, 1998, are not necessarily indicative, if annualized, of those to be expected for the full fiscal year. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain reclassifications have been made to conform prior year's data to the current presentation. Note B - Earnings Per Share - --------------------------- In 1997, the Financial Accounting Standards Board issued Statement No. 128 "Earnings per Share" (SFAS 128). SFAS 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts presented have been restated to conform to SFAS 128 requirements. The following table sets forth the computation of basic and diluted earnings per share:
Unaudited Unaudited Three Months Ended Six Months Ended May 31, May 31, (Dollars in millions, shares in thousands) 1998 1997 1998 1997 ------------------ ---------------------- Numerator for basic earnings per share - income available to common shareholders $21.4 $84.1 $34.2 $95.2 Effect of dilutive securities: 8% convertible subordinated debentures - 1.4 - 2.8 ----- ----- ----- ----- Numerator for diluted earnings per share - income available to common shareholders after assumed conversions $21.4 $85.5 $34.2 $98.0 ===== ===== ===== =====
-6- 7 Note B - Earnings Per Share (continued) - ---------------------------------------
Unaudited Unaudited Three Months Ended Six Months Ended May 31, May 31, (Dollars in millions, shares in thousands) 1998 1997 1998 1997 --------------------- ---------------------- Denominator for basic earnings per share - weighted average shares 41,482 33,554 41,416 33,529 Effect of dilutive securities: 8% convertible subordinated debentures - 7,154 - 7,154 Employee stock options 715 424 635 412 Other 13 19 13 19 ------ ------ ------ ------ Dilutive potential common shares 728 7,597 648 7,585 ------ ------ ------ ------ Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 42,210 41,151 42,064 41,114 ====== ====== ====== ====== Basic earnings per share $ 0.51 $ 2.51 $ 0.83 $ 2.84 ====== ====== ====== ====== Diluted earnings per share $ 0.51 $ 2.08 $ 0.81 $ 2.38 ====== ====== ====== ======
Note C - Acquisitions and Divestitures - -------------------------------------- On March 1, 1998, the Company acquired The Goodyear Tire & Rubber Company's Calhoun, Georgia latex facility for an aggregate consideration of $78 million, of which $74 million was paid in cash and $4 million was paid through the retention of receivables. The acquisition was accounted for as a purchase and resulted in goodwill of $58 million which is being amortized over 40 years. On April 7, 1998, the Company announced that an agreement in principle had been reached with United Kingdom based Walker Greenbank PLC to purchase its commercial wallcovering business. The transaction is subject to due diligence, negotiation of definitive agreements, regulatory approvals and approval by Walker Greenbank shareholders. On May 7, 1997, the Company acquired certain net assets of Printworld from Technographics, Inc. for $47 million in cash. The acquisition was accounted for as a purchase and resulted in goodwill of $27 million which is being amortized over 30 years. On June 30, 1998, the Company sold its plastic extrusions appliance gasket business to ILPEA, Inc. for an aggregate consideration of approximately $3 million. Note D - Unusual Items - ---------------------- During the second quarter of 1998, the Company had unusual items resulting in income of $0.2 million. These unusual items included charges of $3.8 million related to exiting the plastic extrusions appliance gasket business and an $8.8 million write-off of excess fixed assets that will no longer be used in a number of polymer products businesses. These charges were offset by a gain of $12.8 million on the sale of surplus land in Nevada by Aerojet. -7- 8 Note E - Income Taxes - --------------------- The Company reduced its tax expense in the first six months of 1997 by $67 million due to the receipt of federal income tax settlements for tax credits, timing of deductions and related interest. 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 May 31, November 30, 1998 1997 ----------------------------------- Raw materials and supplies $ 41.1 $ 42.9 Work-in-process 8.5 8.6 Finished products 57.4 59.1 ------- ------ Approximate replacement cost of LIFO inventories 107.0 110.6 Reserves, primarily LIFO (39.2) (39.1) Long-term contracts at average cost 250.8 199.0 Progress payments (185.2) (113.3) ------- ------ $ 133.4 $157.2 ======= ======
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 May 31, 1998, unused and available revolving lines of credit totaled $247 million. The Company pays a variable commitment fee, which was 1/5 of one percent, on the unused balance. Interest rates were variable, primarily based on LIBOR, and were at an average rate of 6.2 percent. The Facility contains various debt restrictions and provisions relating to net worth, interest coverage and debt to earnings before interest, taxes, depreciation and amortization (Debt/EBITDA) ratios. As of May 31, 1998, the Company was required to maintain consolidated net worth of at least $150 million. At May 31, 1998, the Company had unsecured, uncommitted lines of credit with several banks for short-term borrowings aggregating $93 million, of which $33 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 $22 million at May 31, 1998 of which $13 million was issued under the Facility. -8- 9 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 to prepare a RI/FS report on specific environmental conditions present at the site and alternatives available to remedy such conditions. Aerojet also is required to pay for certain governmental oversight costs associated with compliance with the Decree. The State of California recently expanded surveillance of perchlorate and nitrosodimethylamine (NDMA) under the RI/FS because these chemicals were detected in public water supply wells near Aerojet's property at previously undetectable levels using new testing protocols. Aerojet has substantially completed its efforts under the Decree to determine the nature and extent of contamination at the facility and to identify the technologies that will likely be used to remediate the site. The remediation costs are principally for design, construction, enhancement and operation of groundwater and soil treatment facilities, ongoing project management and regulatory oversight, and are expected to be incurred over a period of approximately 15 years. 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. Aerojet's investigation demonstrated that the principal groundwater contamination, volatile organic compounds (VOC), is upgradient of Aerojet's property and that only low concentrations of VOC contaminants are present in the soils of Aerojet's presently and historically owned properties. The EPA contends that Aerojet is one of the four largest sources of groundwater contamination at the BPOU of the nineteen PRPs identified by the EPA. Aerojet contests the EPA's position regarding the source of contamination and the number of responsible PRPs. Aerojet 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 a result of the recent finding of perchlorate, the EPA has required investigation for and studies regarding treatability of perchlorate contaminated water. Consequently, the EPA has allowed time extensions for submittal by the PRPs of a good faith offer and negotiation of a consent decree in response to the Special Notice letter. The perchlorate investigations and studies are underway, primarily funded by Aerojet. The final perchlorate cleanup standard (which has not yet been determined) could impact total cleanup cost and implementation of the proposed consensus plan. -9- 10 Note H - Contingencies (continued) - ---------------------- 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 were filed on behalf of the State of Michigan and the EPA. The Supreme Court granted the EPA's petition in December 1997. On June 8, 1998, the U.S. Supreme Court issued its opinion. The Court held that a parent corporation could be directly liable as an operator under CERCLA if it can be shown that the parent corporation operated the facility. The Supreme Court vacated the Sixth Circuit's 1997 ruling that had found neither Aerojet nor the other PRP liable under CERCLA and remanded the case back to the U.S. District Court in Michigan for retrial. Aerojet does not expect that it will be found liable on remand. 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. Aerojet's Reserve and Recovery Balances On October 30, 1997, Aerojet executed an Agreement in Principle with the U.S. Government that, when implemented after final U.S. Government approval, will establish the cost sharing ratio and resolve certain other environmental and facility issues at the Aerojet sites in Sacramento and Azusa, California. At May 31, 1998, Aerojet had total reserves of $255 million for costs to remediate the above sites and has recognized $178 million for probable future recoveries. These estimates will be subject to change as work progresses, additional experience is gained and environmental standards are revised. Legal proceedings to obtain reimbursements of environmental costs from insurers are continuing. Lawrence, Massachusetts The Company has studied remediation alternatives for its closed Lawrence, Massachusetts facility, which was contaminated with PCBs, and has begun site remediation and off-site disposal of debris. The Company has a reserve of $20 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 $41 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 6 to 11 years. -10- 11 Note H - Contingencies (continued) - ---------------------- Other Sites - ----------- The Company is also currently involved, together with other companies, in 31 other Superfund and non-superfund remediation sites. In many instances, the Company's liability and proportionate share of costs have not been determined largely due to uncertainties as to the nature and extent of site conditions and the Company's involvement. While government agencies frequently claim PRPs are jointly and severally liable at such sites, in the Company's experience, interim and final allocations of liability costs are generally made based on relative contributions of waste. Based on the Company's previous experience, its allocated share has frequently been minimal, and in many instances, has been less than 1 percent. The Company has reserves of approximately $23 million as of May 31, 1998 which it believes are sufficient to cover its best estimate of its share of the environmental remediation costs at these other sites. Also, the Company is seeking recovery of its costs from its insurers. Environmental Summary - --------------------- In regard to the sites discussed above, management believes, on the basis of presently available information, that resolution of these matters will not materially affect liquidity, capital resources or the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted due to the uncertainty concerning both the amount and timing of future expenditures and future results of operations. 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 and recently requested additional briefing due July 13, 1998. 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 first six months of fiscal 1998 was $34.1 million as compared to $80.2 million in the first six months of 1997. The decrease in cash flow from operating activities primarily reflects the receipt of the federal income tax settlements in 1997 (see Note E - Income Taxes), offset by a lower working capital requirement. For the six month period ending May 31, 1998, $91.6 million was used for investing activities, including the acquisition of the Calhoun facility for $73.8 million and capital expenditures of $32.9 million, which relates to the custom chemical and automotive businesses, offset by proceeds of $15.3 million from asset dispositions. This is compared to $49.4 million used for investing activities in the first six months of 1997, which included the acquisition of Printworld for $46.5 million and capital expenditures of $18.6 million, offset by proceeds of $13.1 million from asset dispositions. Cash flow provided from financing activities in the first six months of 1998 primarily reflects a $68.8 million net increase in debt offset by payments of $12.4 million in dividends. The net increase in debt from November 30, 1997 to May 31, 1998 was mainly due to the acquisition of the Calhoun facility. The use of cash flow in financing activities in the first half of 1997 reflected a $17.0 million net decrease in debt and payments of $10.0 million in dividends. Material Changes in Results of Operations - ----------------------------------------- Sales totaled $431.9 million for the second quarter of 1998, an increase of 7 percent as compared to $403.5 million during the second quarter of 1997. All three GenCorp segments, aerospace and defense, polymer products, and automotive, posted revenue increases during the current quarter as compared to the second quarter of 1997. For the six months ended May 31, 1998, sales increased 9 percent to $797.4 million as compared to $731.5 million during the first six months of 1997. Operating profit before unusual items totaled $43.1 million for the second quarter of 1998, versus $43.4 million for the second quarter of 1997. Operating margins declined slightly to 10.0 percent compared to 10.8 percent in the second quarter of 1997. Unusual items totaling $0.2 million in the current quarter resulted from charges of $3.8 million related to exiting the plastic extrusions appliance gasket business and an $8.8 million write-off of excess fixed assets that will no longer be used in a number of polymer products businesses. These charges were offset by a gain of $12.8 million on the sale of surplus land in Nevada by Aerojet, the Company's aerospace and defense segment. For the first six months of 1998, operating profit before unusual items improved 5 percent to $72.7 million versus $69.4 million for the first half of 1997. Earnings for the second quarter of 1998 improved to $0.51 per diluted share compared to $0.50 per diluted share before a tax settlement during the second quarter of 1997. Net income in the second quarter of 1998 totaled $21.4 million compared to second quarter 1997 net income of $19.1 million before the tax settlement. Reported net income in the second quarter of 1997 was $2.08 per diluted share, including a tax benefit of $65 million or $1.58 per share. For the six months ended May 31, 1998, net income improved 22 percent to $34.2 million as compared to net income before tax settlements of $28.0 million during the first six months of 1997. Net sales for the polymer products businesses in the second quarter of 1998 increased 9 percent to $174.9 million compared to $160.9 million in the second quarter of 1997. Sales increased in both Decorative & Building Products and Specialty Polymers. Improved sales in paper laminates, building systems, and specialty latices for paper coatings and textiles led the increase. Penn Racquet Sports experienced a slight sales decline. -12- 13 Material Changes in Results of Operations (continued) - ----------------------------------------- Operating profit for the polymer products businesses increased to $23.5 million for the second quarter of 1998 versus $20.9 million in the second quarter of 1997. Operating margins increased to 13.4 percent in the second quarter of 1998 compared to 13.0 percent in the second quarter of 1997 due to lower raw material prices for styrene, butadiene and PVC resins, partially offset by higher prices of other raw materials in Decorative & Building Products and slightly lower average unit selling prices in Specialty Polymers. During the quarter, the Specialty Polymers business unit completed the acquisition and the successful integration of the Calhoun, Georgia latex polymer plant. This acquisition expands GenCorp's emulsion polymer production capacity by 30 percent, provides a strategic southeastern U.S. platform for new customers, and increases the Company's market share in the styrene butadiene latex market. Penn Racquet Sports signed two new U.S. licensing agreements for marketing of the Penn brand name and won a new promotion for tennis balls with a national retailer. Decorative & Building Products' tentative agreement with U.K. based Walker Greenbank would add approximately $70 million in annualized revenues. Net sales for the automotive business totaled $100.6 million in the second quarter of 1998 versus $96.7 million in the second quarter of 1997. The 4 percent sales increase was led by higher volumes in North America, primarily on the Mercedes sport utility vehicle, and on full-size pickups for Ford and General Motors. The Company's automotive operations earned $5.9 million in the second quarter of 1998 as compared to $8.7 million for the second quarter of 1997. Operating profit margins dropped to 5.9 percent compared to 9.0 percent in the second quarter of 1997. Higher than planned launch costs, operating losses of over $1 million in plastic extrusions, and negative foreign exchange variances led to the margin decline. Performance, however, improved significantly from the first quarter of 1998. Vehicle Sealing's German subsidiary, Henniges, was profitable during the quarter. Also during the quarter, Vehicle Sealing announced the decision to exit the plastic extrusions appliance gasket business line, which should be completed in the third quarter of 1998. The UAW strikes at General Motors could adversely affect the automotive operations in the second half of the year, however, due to the uncertainty concerning the length of the strikes, no estimate can be made at this time to quantify the strikes' impact on the automotive operations. At Aerojet, net sales increased 7 percent to $156.4 million in the second quarter of 1998 as compared to $145.9 million in the second quarter of 1997. Higher volumes on the Space Based Infrared System (SBIRS), Special Sensor Microwave Imager/Sounder (SSMIS) and Delta liquid rocket engines, were partially offset by lower volumes on the Defense Support Program (DSP), Titan, Sense and Destroy Armor (SADARM), and Custom Chemicals. Aerojet's operating profit for the second quarter of 1998 was $13.7 million, compared to $13.8 million in the second quarter of 1997. As expected, operating margins declined during the quarter to 8.8 percent from 9.5 percent in the second quarter of 1997. The decrease was primarily due to the delivery of a second SSMIS satellite sensor at no profit. During the quarter, Aerojet liquid engines performed successfully on two Delta II launches and on two Titan launches. The launch payloads included Iridium and Globalstar commercial communication satellites, a classified military payload, and a NOAA/NASA weather satellite. Contract awards totaled $160 million during the quarter, with the contract backlog totaling $1.8 billion at the end of the second quarter. -13- 14 Value-Creating Growth Strategy - ------------------------------ As part of GenCorp's announced value-creating growth strategy, management expects that the Company will become more focused as a stronger player in fewer businesses with higher value enhancing growth potential. To execute this strategy, the Company may exit non-strategic businesses and will aggressively focus on organic growth in all remaining businesses and seek out vehicles for "new but related" growth to expand its strongest businesses which have been identified as GenCorp's growth platforms. Growth platform businesses include Specialty Polymers, Decorative & Building Products, and the Custom Chemicals and Space Surveillance sectors of Aerojet. Attractive related markets, products and programs will be targeted in these areas, along with organic growth and opportunities for acquisition or alliance strategies. Environmental Matters - --------------------- GenCorp's policy is to conduct its businesses with due regard for the preservation and protection of the environment. The Company devotes a significant amount of resources and management attention to environmental matters and actively manages its ongoing processes to comply with extensive environmental laws and regulations. The Company is involved in the remediation of environmental conditions which resulted from generally accepted manufacturing and disposal practices in the 1950s and 1960s which were followed at certain GenCorp plants. In addition, the Company has been designated a potentially responsible party, with other companies, at sites undergoing investigation and remediation. The nature of environmental investigation and cleanup activities often makes it difficult to determine the timing and amount of any estimated future costs that may be required for remedial measures. However, the Company reviews these matters and accrues for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred and the amount of the liability (usually based upon proportionate sharing) can be reasonably estimated. The Company's Condensed Consolidated Balance Sheet at May 31, 1998 reflects accruals of $298 million and amounts recoverable of $178 million from the U.S. Government and other third parties for such costs. The effect of resolution of environmental matters on results of operations cannot be predicted due to the uncertainty concerning both the amount and timing of future expenditures and future results of operations. However, management believes, on the basis of presently available information, that resolution of these matters will not materially affect liquidity, capital resources or the consolidated financial condition of the Company. The Company will continue its efforts to mitigate past and future costs through pursuit of claims for insurance coverage and continued investigation of new and more cost effective remediation alternatives and associated technologies. For additional discussion of environmental matters, refer to Note H - Contingencies. Information Systems and the Year 2000 - ------------------------------------- The Company is currently engaged in a comprehensive project to upgrade its information, technology, manufacturing and facilities computer software programs to address the Year 2000 issue. Many of the Company's systems include new hardware and packaged software recently purchased from large vendors who have represented that these systems are already Year 2000 compliant. The Company is in the process of obtaining assurances from vendors that timely updates will be made available to make all remaining purchased software Year 2000 compliant. The Company will utilize both internal and external resources to reprogram or replace and test all of its software for Year 2000 compliance, and the Company expects to complete the project in early 1999. The estimated cost for this project could range as high as $15 million, excluding the cost of new systems which will be capitalized. This cost is being funded through operating cash flows. Failure by the Company and/or vendors and customers to complete Year 2000 compliance work in a timely manner could have a material adverse effect on certain of the Company's operations. -14- 15 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, 1997 filed with the Securities and Exchange Commission. -15- 16 PART II. OTHER INFORMATION -------------------------- Item 1. Legal Proceedings - -------------------------- Information concerning legal proceedings, including proceedings relating to environmental matters, which appears in Note H beginning on page 9 of this report is incorporated herein by reference. Santamaria v. Suburban Water Systems - ------------------------------------ On July 2, 1997, a "toxic tort" lawsuit was filed in the Los Angeles County Superior Court, Santamaria v. Suburban Water Systems, Docket No. KC025995, naming as defendants 19 manufacturing companies (including Aerojet), and 5 water companies. The complaint was subsequently amended to add additional plaintiffs and two additional defendant public water companies. On February 24, 1998, the plaintiffs served Aerojet and the other manufacturing defendants. On March 30, 1998, the Court granted a motion for change of venue and transferred the case to Ventura County which is immediately northwest of Los Angeles. Further activity will not take place in the case until it has been assigned to a new judge. 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 and 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 action. In June 1998, three recently filed, related matters containing similar allegations (ADLER, Docket No. BC169892; BOSWELL, Docket No. KC027318; and CELI, Docket No. GC020622) were stayed for at least one year by their respective judges pending a Public Utilities Commission investigation of the plaintiffs' allegations. Aerojet has filed a motion for a similar stay in the SANTAMARIA matter which it expects to be granted also. Allen, et al. v. Aerojet, MDC, Southern California Water Company, et al. - ------------------------------------------------------------------------ Adams, et al. v. Aerojet, MDC, Southern California Water Company, et al. - ------------------------------------------------------------------------ On December 8, 1997 and March 2, 1998, similar but unrelated "toxic tort" complaints were filed in Sacramento Superior Court. The plaintiffs seek compensation for damages for alleged personal injuries and property damages related to exposure to groundwater contamination in eastern Sacramento County, California. Aerojet was served on January 14, 1998 in ALLEN and on April 30, 1998 in ADAMS. Aerojet will vigorously defend these matters. In addition to Aerojet, McDonnell-Douglas Corporation (now Boeing) and two Sacramento water purveyors are defendants. Aerojet has also notified its insurers of these actions. Aerojet has filed a motion for a stay in this matter which it expects to be granted. Because of these (and other similar recent) "toxic tort" lawsuits which named California water purveyors as defendants, on March 12, 1998, the California Public Utilities Commission (PUC) announced a wide ranging investigation of drinking water quality in California. The PUC's General Counsel has publicly stated that he believes under the California Constitution the PUC's jurisdiction overrides that of the Courts in this area. Accordingly, Aerojet is also preparing to defend its interests before the PUC. -16- 17 Part II. Other Information (continued) - -------------------------------------- In re: Proposition 65 Notices - ------ ---------------------- Aerojet was served in November and December 1997 with notices from a private group alleging that it has released chemicals into air and groundwater from its Sacramento facility in violation of California's Proposition 65 and without filing sufficiently detailed public notifications as required by Proposition 65. Following collection and review of all of its Proposition 65 records, air release reports and groundwater reports, Aerojet believes it is in compliance with Proposition 65 and has so advised the California Attorney General's office. On June 4, 1998, Aerojet was served with a Proposition 65 lawsuit filed by the Communities For A Better Environment in Sacramento Superior Court. The complaint alleges past and present violations of Proposition 65. Aerojet's insurance carriers have been notified of these claims. Aerojet plans a vigorous defense. 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 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 matter. -17- 18 Part II. Other Information (continued) - -------------------------------------- Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- a) Exhibits --------
Table Exhibit Item No. Exhibit Description Number ----------------------------------------------------------------------------------------------- 27 Financial Data Schedule 27 (Filed for EDGAR only)
b) Reports on Form 8-K ------------------- There have been no reports on Form 8-K filed during the quarter ended May 31, 1998. -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 July 6, 1998 By /s/ D. M. Steuert --------------------------- ------------------------------- D. M. Steuert Senior Vice President and Chief Financial Officer Date July 6, 1998 By /s/ W. R. Phillips --------------------------- ------------------------------- W. R. Phillips Senior Vice President, Law; General Counsel -19- EX-27 2 EXHIBIT 27
5 1,000 6-MOS NOV-30-1998 MAY-31-1998 13,200 8,000 256,200 0 133,400 468,700 1,157,400 745,300 1,479,500 375,000 0 0 0 4,200 300,800 1,479,500 797,400 797,400 630,100 736,000 (600) 0 5,200 57,000 22,800 34,200 0 0 0 34,200 .83 .81
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