-----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, UVumLYmRFWxnZEE6dcI48FPCRVZIgIBeaKlDhNUY/ibqnd+yyOUopql8C/CYEgbd 1gPhZLDu5Q9dDkE1UegrDQ== 0000950152-99-006017.txt : 19990714 0000950152-99-006017.hdr.sgml : 19990714 ACCESSION NUMBER: 0000950152-99-006017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990531 FILED AS OF DATE: 19990713 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: 99663561 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. QUARTERLY REPORT 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, 1999 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, 1999, there were 41,817,650 outstanding shares of GenCorp Inc.'s Common Stock, par value $.10. 2 GENCORP INC. Table of Contents
Part I. Financial Information Page No. -------- Item 1. Financial Statements Condensed Consolidated Statements of Income - Three Months and Six Months Ended May 31, 1999 and 1998 -3- Condensed Consolidated Balance Sheets - May 31, 1999 and November 30, 1998 -4- Condensed Consolidated Statements of Cash Flows - Six Months Ended May 31, 1999 and 1998 -5- Notes to the Unaudited Condensed Consolidated Financial Statements -6- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -14- Item 3. Quantitative and Qualitative Disclosures About Market Risk -18- Part II. Other Information Item 1. Legal Proceedings -19- Item 6. Exhibits and Reports on Form 8-K -20- Signatures -21-
-2- 3 PART I. FINANCIAL INFORMATION GENCORP INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in millions, except per share data) (Unaudited)
Three Months Ended Six Months Ended ------------------------------- ------------------------------- May 31, May 31, May 31, May 31, 1999 1998 1999 1998 ------------------------------- ------------------------------- NET SALES $ 514.9 $ 431.9 $ 954.5 $ 797.4 COSTS AND EXPENSES Cost of products sold 401.3 339.5 742.5 630.1 Selling, general and administrative 44.2 37.2 90.3 74.2 Depreciation 18.5 16.0 36.2 31.7 Interest expense 5.5 3.1 10.9 5.2 Other (income) and expense, net 2.3 .7 2.0 (.6) Unusual items, net (income) (12.0) (.2) (11.5) (.2) -------- ------- -------- -------- 459.8 396.3 870.4 740.4 -------- ------- -------- -------- INCOME BEFORE INCOME TAXES 55.1 35.6 84.1 57.0 Income tax provision 22.6 14.2 34.4 22.8 -------- ------- -------- -------- NET INCOME $ 32.5 $ 21.4 $ 49.7 $ 34.2 ======== ======= ======== ======== EARNINGS PER SHARE OF COMMON STOCK Basic $ .78 $ .51 $ 1.19 $ .83 Diluted $ .77 $ .51 $ 1.18 $ .81 CASH DIVIDENDS PAID PER SHARE OF COMMON STOCK $ .15 $ .15 $ .30 $ .30
See notes to the unaudited condensed consolidated financial statements. -3- 4 GENCORP INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in millions) (Unaudited)
May 31, November 30, 1999 1998 ------------------------------------ CURRENT ASSETS: Cash and equivalents $ 21.1 $ 28.6 Accounts receivable 267.1 275.7 Inventories 180.5 165.3 Prepaid expenses and other 54.6 59.1 ---------- ---------- TOTAL CURRENT ASSETS 523.3 528.7 Recoverable from U.S. Government and third parties for environmental remediation 144.7 149.3 Deferred income taxes 137.4 136.9 Prepaid pension 145.7 127.4 Investments and other assets 307.1 301.4 Property, plant and equipment: At cost 1,215.2 1,238.3 Accumulated depreciation (720.6) (738.6) ---------- ---------- Net property, plant and equipment 494.6 499.7 ---------- ---------- TOTAL ASSETS $ 1,752.8 $ 1,743.4 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Notes payable $ 61.2 $ 14.4 Accounts payable - trade 85.5 118.7 Income taxes 47.6 34.0 Other current liabilities 262.1 263.2 ---------- ---------- TOTAL CURRENT LIABILITIES 456.4 430.3 Long-term debt 310.9 356.2 Postretirement benefits other than pensions 311.8 318.4 Environmental reserves 243.5 245.7 Other liabilities 52.2 49.3 SHAREHOLDERS' EQUITY Preference stock - (none outstanding) - - Common stock - $0.10 par value; 41.8 million shares outstanding 4.2 4.2 Other capital 155.2 150.8 Retained earnings 235.3 198.1 Accumulated other comprehensive loss (16.7) (9.6) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 378.0 343.5 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,752.8 $ 1,743.4 ========== ==========
See notes to the unaudited condensed consolidated financial statements. -4- 5 GENCORP INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions) (Unaudited)
Six Months Ended May 31, 1999 1998 ------------------------------ OPERATING ACTIVITIES Net income $ 49.7 $ 34.2 Unusual items 4.2 (.2) Gain on sale of business (15.7) - Depreciation, amortization and gain/loss on disposal of fixed assets 37.4 33.3 Deferred income taxes (.5) (.5) Changes in operating assets and liabilities net of effects of acquisitions and dispositions of businesses: Current assets (21.2) 23.5 Current liabilities (18.5) (32.0) Other non-current assets (3.6) (4.6) Other non-current liabilities (14.7) (19.6) ------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 17.1 34.1 ------- -------- INVESTING ACTIVITIES Capital expenditures (46.7) (32.9) Proceeds from asset dispositions 52.8 15.3 Acquisitions (11.0) (73.8) Investments and other; net - (.2) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (4.9) (91.6) ------- -------- FINANCING ACTIVITIES Long-term debt incurred 50.0 120.0 Long-term debt paid (95.3) (61.6) Net short-term debt incurred 40.8 10.4 Dividends (12.5) (12.4) Other equity transactions (2.7) 3.9 ------- -------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (19.7) 60.3 ------- -------- NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (7.5) 2.8 Cash and equivalents at beginning of year 28.6 18.4 ------- -------- Cash and equivalents at end of period $ 21.1 $ 21.2 ======= ======== SUPPLEMENTAL DATA (CASH PAID): Interest $ 11.5 $ 4.9 Income taxes $ 19.4 $ 8.6
See notes to the unaudited condensed consolidated financial statements. -5- 6 GENCORP INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF MAY 31, 1999 Note A - Basis of Presentation - ------------------------------ The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These interim statements should be read in conjunction with the financial statements and notes thereto included or incorporated by reference in the GenCorp Inc. (Company) Annual Report on Form 10-K for the fiscal year ended November 30, 1998. All normal recurring accruals and adjustments considered necessary for a fair presentation of the unaudited results for the six months ended May 31, 1999 and 1998, have been reflected. The results of operations for the six months ended May 31, 1999, are not necessarily indicative, if annualized, of those to be expected for the full fiscal year. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain reclassifications have been made to conform prior year's data to the current presentation. Note B - Earnings Per Share - --------------------------- The following table sets forth the computation of basic and diluted earnings per share:
(Dollars in millions, except per share amounts Three Months Ended Six Months Ended and shares in thousands) May 31, May 31, 1999 1998 1999 1998 ----------------------- ---------------------- Numerator - --------- Net income $ 32.5 $ 21.4 $ 49.7 $ 34.2 ======== ========= ======== ========= Denominator - ----------- Denominator for basic earnings per share - weighted average shares 41,748 41,482 41,658 41,416 Effect of dilutive securities: Employee stock options 437 715 435 635 Other 15 13 15 13 -------- --------- ------- --------- Dilutive potential common shares 452 728 450 648 -------- --------- ------- --------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 42,200 42,210 42,108 42,064 ======== ======== ========= ======== Earnings Per Share Of Common Stock - ---------------------------------- Basic $ .78 $ .51 $ 1.19 $ .83 ======== ======== ======== ======== Diluted $ .77 $ .51 $ 1.18 $ .81 ======== ======== ======== ========
-6- 7 Note C - Comprehensive Income - ----------------------------- As of December 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), which established standards for reporting and displaying comprehensive income and its components in the financial statements. The adoption of SFAS 130 had no impact on the Company's net income or shareholders' equity. SFAS 130 requires that cumulative translation adjustments and minimum pension liability adjustments and changes thereto be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. The components of total comprehensive income were as follows:
(Dollars in millions) Three Months Ended Six Months Ended May 31, May 31, 1999 1998 1999 1998 ----------------------- --------------------- Net income $ 32.5 $ 21.4 $ 49.7 $ 34.2 Adjustments Foreign currency translation effect (4.0) .8 (7.1) (2.0) -------- --------- -------- -------- Total comprehensive income $ 28.5 $ 22.2 $ 42.6 $ 32.2 ======== ========= ======== ========
Note D - Acquisitions, Divestitures and Other Matters - ----------------------------------------------------- Acquisitions On April 27, 1999, the Company acquired the global latex floor care business of Morton International Inc. for $8 million. On December 2, 1998, the Company acquired the U.S. acrylic emulsion polymers business of PolymerLatex, located in Fitchburg, Massachusetts, for $9 million, consisting of cash of $3 million and a note payable of $6 million due December 1, 1999. On March 1, 1998, the Company acquired The Goodyear Tire & Rubber Company's Calhoun, Georgia latex facility for an aggregate consideration of $78 million, of which $74 million was paid in cash and $4 million was paid through the retention of receivables. The acquisition resulted in goodwill and other intangible assets of $59 million which are being amortized over periods ranging from 3 to 40 years. All of the above acquisitions were accounted for using the purchase method and were included in the results of operations for the Company from the respective dates of acquisition. Divestitures On May 10, 1999, the Company sold its Penn Racquet Sports division (Penn) to HTM Sports-und Freizeitgerate AG, an Austrian company and HTM USA Holdings Inc., for an aggregate consideration of approximately $42.4 million. The Company recognized a pre-tax gain of $15.7 million on this transaction. On December 14, 1998, the Company sold its residential wallcovering business to Blue Mountain Wallcoverings, Inc. for an aggregate consideration of approximately $9 million. The loss on the sale of this business which was recorded in the second quarter of 1998 was $8 million and was subsequently adjusted to $3.4 million in the fourth quarter of 1998. -7- 8 Note D - Acquisitions, Divestitures and Other Matters (continued) - ----------------------------------------------------------------- Other Matters On December 17, 1998, the Company announced a plan to spin off its Performance Chemicals and Decorative & Building Products businesses to GenCorp shareholders. In a press release dated July 7, 1999 GenCorp announced that it received an Internal Revenue Service ruling that its planned spin-off will be a tax-free transaction. The Company plans to spin off these polymer products businesses into a separate, publicly traded company named OMNOVA Solutions Inc. Following the spin-off, GenCorp would continue to operate Aerojet, its aerospace, defense and fine chemicals segment, and its automotive Vehicle Sealing business unit. The planned spin-off is contingent on shareholder approval as well as market conditions at the time of the proposed spin-off. Shareholders of record as of June 30, 1999 will be asked to approve the spin-off plan and various changes to GenCorp's articles of incorporation and code of regulations, along with new long-term incentive plans for GenCorp and OMNOVA Solutions at a special shareholders meeting set for August 18, 1999. Information regarding proposals to be acted on at the special meeting is set forth in GenCorp's proxy statement dated July 2, 1999. Note E - Unusual Items - ---------------------- During the first six months of fiscal 1999, the Company had unusual items resulting in income of $11.5 million. These unusual items primarily included the $15.7 million gain recognized on the divestiture of Penn offset by expenses of $3.7 million related to the planned spin-off of the Decorative & Building Products and Performance Chemicals business units into a separate publicly traded company. These expenses included professional services such as audit, actuarial and legal fees and severance. During the first six months of fiscal 1998, the Company incurred unusual items which included charges of $12.6 million primarily related to exiting the plastic extrusions appliance gasket and residential wallcovering businesses offset by a gain of $12.8 million from the sale of surplus land in Nevada by Aerojet. Note F - Inventories - -------------------- Inventories are stated at the lower of cost or market value. A portion of the inventories is priced by use of the last-in, first-out (LIFO) method using various dollar value pools. Interim LIFO determinations involve management's judgments of expected year-end inventory levels. Components of inventory are as follows:
(Dollars in millions) May 31, November 30, 1999 1998 ---------------------------------- Raw materials and supplies $ 47.7 $ 48.0 Work-in-process 8.4 8.5 Finished products 66.0 74.6 --------- -------- Approximate replacement cost of inventories 122.1 131.1 Reserves, primarily LIFO (34.4) (40.2) Long-term contracts at average cost 265.4 276.2 Progress payments (172.6) (201.8) - --------- -------- $ 180.5 $ 165.3 ========= ========
-8- 9 Note G - Long-term Debt and Credit Lines - ---------------------------------------- The Company has a five-year unsecured $400 million revolving credit facility (Facility) which expires in May 2001. As of May 31, 1999, unused and available revolving lines of credit totaled $90 million. The Company pays a variable commitment fee, which was 1/5 of one percent, on the unused balance. Interest rates are variable, primarily based on LIBOR, and were at an average rate of 5.5 percent at May 31, 1999. The Facility contains various debt restrictions and provisions relating to net worth, interest coverage and debt to earnings before interest, taxes, depreciation and amortization (Debt/EBITDA) ratios. As of May 31, 1999, the Company was required to maintain consolidated net worth of at least $192 million. On May 10, 1999, the Company paid down and cancelled the $75 million revolving credit facility used for the purchase of certain assets of Sequa Chemicals, the specialty chemicals unit of Sequa Corporation. At May 31, 1999, the Company had unsecured, uncommitted lines of credit with several banks for short-term borrowings aggregating $101 million, of which $55 million was outstanding. Interest rates for these lines of credit are variable and were at an average rate of 5.4 percent on May 31, 1999. Borrowings under such lines are payable on demand. The Company also had outstanding letters of credit totaling $21 million at May 31, 1999. Note H - Contingencies - ---------------------- Spin-off Related Matters - ------------------------ On March 22, 1999, the Company announced a Voluntary Enhanced Retirement Program (VERP) and an Enhanced Involuntary Separation Pay Plan (EISP) which are associated with and contingent upon completion of the Company's plan to spin off its Performance Chemicals and Decorative & Building Products divisions as a separate publicly traded company. The VERP offers enhanced retirement benefits to eligible salaried employees within a number of corporate facilities and divisional headquarters. The majority of the related benefits will be paid from the Company's defined benefit pension and retiree health care plans. The maximum estimated cost of the VERP and EISP could range up to $8 million. The actual cost of both the VERP and the EISP plans will be reflected in the financial statements after the total number of participants is known and the spin-off has occurred. In January 1999, the Company's Board of Directors approved the 1999 GenCorp Key Employee Retention Plan. The plan provided for the issuance of retention agreements to selected key employees with a total maximum payout of up to $3 million that will be payable between 2000 and 2001. Through the six month period ended May 31, 1999, $0.5 million has been expensed. Environmental Matters - --------------------- Sacramento, California In 1989, the United States District Court approved a Partial Consent Decree (Decree) requiring Aerojet to conduct a Remedial Investigation/Feasibility Study (RI/FS) of Aerojet's Sacramento, California site and to prepare a RI/FS report on specific environmental conditions present at the site and alternatives available to remedy such conditions. Aerojet also is required to pay for certain governmental oversight costs associated with compliance with the Decree. The State of California expanded surveillance of perchlorate and nitrosodimethylamine (NDMA) under the RI/FS because these chemicals were detected in public water supply wells near Aerojet's property at previously undetectable levels using new testing protocols. -9- 10 Note H - Contingencies (continued) - ---------------------- Sacramento, California (continued) Aerojet has substantially completed its efforts under the Decree to determine the nature and extent of contamination at the facility. Preliminarily, Aerojet has identified the technologies that will likely be used to remediate the site and estimated costs using generic remedial costs from databases of Superfund remediation costs. Over the next several years, Aerojet will conduct feasibility studies to refine technical approaches and costs to remediate the site. The remediation costs are principally for design, construction, enhancement and operation of groundwater and soil treatment facilities, ongoing project management and regulatory oversight, and are expected to be incurred over a period of approximately 15 years. Aerojet is also addressing groundwater contamination off of its facility through the development of an Operable Unit Feasibility Study. This Study is scheduled to be completed and submitted as a draft to the governmental oversight agencies in December 1999. The Study will enumerate various remedial alternatives by which offsite groundwater can be addressed. It will be subject to both governmental agency and public review and comment before being approved for implementation. San Gabriel Valley Basin, California Aerojet, through its Azusa facility, has been named by the U.S. Environmental Protection Agency (EPA) as a potentially responsible party (PRP) in the portion of the San Gabriel Valley Superfund Site known as the Baldwin Park Operable Unit (BPOU). Regulatory action involves requiring site specific investigation, possible cleanup, issuance of a Record of Decision (ROD) regarding regional groundwater remediation and issuance to Aerojet and 18 other PRPs Special Notice letters requiring groundwater remediation. Aerojet's investigation demonstrated that the groundwater contamination by volatile organic compounds (VOC) is principally upgradient of Aerojet's property and that lower concentrations of VOC contaminants are present in the soils of Aerojet's presently and historically owned properties. The EPA contends that Aerojet is one of the four largest sources of VOC groundwater contamination at the BPOU of the nineteen PRPs identified by the EPA. Aerojet contests the EPA's position regarding the source of contamination and the number of responsible PRPs. Aerojet is participating in a Steering Committee comprised of nineteen of the PRPs. The ROD and Special Notice letters issued by the EPA require groundwater remediation for the BPOU, initially estimated to cost $47 million in non-recurring costs and $4 million to $5 million in annual operating expense. Aerojet, as part of the Steering Committee, is participating in an effort to develop an alternative "Watermaster" plan in which certain water supply entities would integrate the remedial requirements into a water supply project. If implemented, the Watermaster plan approach would allow the project to be eligible for federal funding for 25 percent of the non-recurring costs and additional funding from water supply entities receiving benefit from the project, thus reducing the PRPs' costs. The Steering Committee has begun negotiations with the Watermaster over a total settlement to fund an EPA-approved remedy. Aerojet filed a Good Faith Offer with the EPA on Friday, July 2, 1999. Soon after the EPA issued the Special Notice letter, the State of California also detected perchlorate in water wells in Southern California, including the San Gabriel Valley, at previously undetectable levels using new testing protocols. As a result of the recent finding of perchlorate, the EPA has required investigation for and studies regarding treatability of perchlorate contaminated water. More recently, NDMA has been detected in water supply wells, also at previously undetectable levels. The extent of NDMA in the groundwater is being studied. Treatment technology is established. The perchlorate and NDMA investigations and studies are underway, primarily funded by Aerojet. The final perchlorate and NDMA cleanup standards (which have not yet been determined) could impact total cleanup cost, allocation among the PRPs, and implementation of the proposed consensus plan. -10- 11 Note H - Contingencies (continued) - ---------------------- Muskegon, Michigan In a lawsuit filed by the EPA, the United States District Court ruled in 1992 that Aerojet and its two inactive Cordova Chemical subsidiaries (Cordova) are liable for remediation of Cordova's Muskegon, Michigan site, along with a former owner/operator of an earlier chemical plant at the site, who is the other potentially responsible party (PRP). That decision was appealed to the United States Court of Appeals. In May 1997, the United States Court of Appeals for the Sixth Circuit issued an en banc decision reversing Aerojet's and the other PRP's liability under the CERCLA statute. Petitions for certiorari to the United States Supreme Court for its review of the appellate decision were filed on behalf of the State of Michigan and the EPA and were granted in December 1997. On June 8, 1998, the U.S. Supreme Court issued its opinion. The Court held that a parent corporation could be directly liable as an operator under CERCLA if it can be shown that the parent corporation operated the facility. The Supreme Court vacated the Sixth Circuit's 1997 ruling and remanded the case back to the U.S. District Court in Michigan for retrial. Aerojet does not expect that it will be found liable on remand. Aerojet is involved in settlement discussions with the EPA and expects the filing of a proposed consent decree which, if approved by the District Court, would allow Aerojet and Cordova to be dismissed. In a separate action, Aerojet and Cordova won indemnification for the Muskegon site investigation and remediation costs from the State of Michigan in the state Court of Claims. The Michigan Court of Appeals affirmed on appeal, and the Michigan Supreme Court refused to hear the case. Further, the Michigan Supreme Court also denied the State's motion for reconsideration. As a result, the Company believes that most of the $50 million to $100 million in anticipated remediation costs will be paid by the State of Michigan and the former owner/operator of the site. A settlement agreement with the State of Michigan, related to the proposed consent decree discussed above, is also being finalized and will be implemented contingent on the EPA consent decree being approved. In addition, Aerojet believes it has insurance coverage for the site. -11- 12 Note H - Contingencies (continued) - ---------------------- Aerojet's Reserve and Recovery Balances On January 12, 1999, having finally received all necessary Government approvals, Aerojet and the U.S. Government implemented, with effect retroactive to December 1, 1998, the October 1997 Agreement in Principle resolving certain prior environmental and facility disagreements between the parties. Under this Agreement, a "global" settlement covering all environmental contamination (including perchlorate) at the Sacramento and Azusa sites was achieved; the Government/Aerojet environmental cost sharing ratio was raised to 88 percent/12 percent from the previous 65 percent/35 percent (with both Aerojet and the Government retaining the right to opt out of this sharing ratio for Azusa only, after at least $40 million in allowable environmental remediation costs at Azusa have been recognized); the cost allocation base for these costs was expanded to include all of Aerojet (in lieu of the prior limitation to the Sacramento business base); and Aerojet obtained title to all of the remaining Government facilities on its Sacramento property, together with an advance agreement recognizing the allowability of certain facility demolition costs. At May 31, 1999, Aerojet had total reserves of $236 million for costs to remediate the above sites and has recognized $160 million for probable future recoveries. These estimates are subject to change as work progresses, additional experience is gained and environmental standards are revised. Legal proceedings to obtain reimbursements of environmental costs from insurers are continuing. Lawrence, Massachusetts The Company has studied remediation alternatives for its closed Lawrence, Massachusetts facility, which was contaminated with PCBs, and has begun site remediation and off-site disposal of debris. The Company has a reserve of $16 million for estimated decontamination and long-term operating and maintenance costs of this site. The reserve represents the Company's best estimate for the remaining remediation costs. Estimates of future remediation costs could range as high as $37 million depending on the results of future testing and the ultimate remediation alternatives undertaken at the site. The time frame for remediation is currently estimated to range from 5 to 10 years. Other Sites - ----------- The Company is also currently involved, together with other companies, in 34 other Superfund and non-superfund remediation sites. In many instances, the Company's liability and proportionate share of costs have not been determined largely due to uncertainties as to the nature and extent of site conditions and the Company's involvement. While government agencies frequently claim PRPs are jointly and severally liable at such sites, in the Company's experience, interim and final allocations of liability costs are generally made based on relative contributions of waste. Based on the Company's previous experience, its allocated share has frequently been minimal, and in many instances, has been less than 1 percent. The Company has reserves of approximately $19 million as of May 31, 1999 which it believes are sufficient to cover its best estimate of its share of the environmental remediation costs at these other sites. Also, the Company is seeking recovery of its costs from its insurers. Environmental Summary - --------------------- In regard to the sites discussed above, management believes, on the basis of presently available information, that resolution of these matters will not materially affect liquidity, capital resources or the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted due to the uncertainty concerning both the amount and timing of future expenditures and future results of operations. -12- 13 Other Legal Matters - ------------------- Olin Corporation In August 1991, Olin Corporation (Olin) advised GenCorp that Olin believed GenCorp to be jointly and severally liable for certain Superfund remediation costs, estimated by Olin to be $70 million, associated with a former Olin manufacturing facility and waste disposal sites in Ashtabula County, Ohio. In 1993, GenCorp sought declaratory judgment in the United States District Court for the Northern District of Ohio that the Company is not responsible for environmental remediation costs. Olin counterclaimed seeking a judgment that GenCorp is jointly and severally liable for a share of remediation costs. In late 1995, the Court hearing on the issue of joint and several liability was completed, and in August 1996 the Court held hearings relative to allocation. The Court has not yet rendered a decision and, at its request, in 1998, it received an additional briefing regarding the impact of the recent BEST FOODS Supreme Court decision which the Company believes definitively addresses many issues in this case in its favor. Another hearing relative to liability and allocation was held on January 11, 1999. The parties argued their respective positions based on recent case law. The judge indicated that a decision may be forthcoming in the next several months. If the Court finds GenCorp is liable, subsequent trial phases will address damages. The Company continues to vigorously litigate this matter and believes that it has meritorious defenses to Olin's claims. While there can be no certainty regarding the outcome of any litigation, in the opinion of management, after reviewing the information currently available with respect to this matter and consulting with the Company's counsel, any liability which may ultimately be incurred will not materially affect the consolidated financial condition of the Company. Other Matters The Company and its subsidiaries are subject to various other legal actions, governmental investigations, and proceedings relating to a wide range of matters in addition to those discussed above. In the opinion of management, after reviewing the information which is currently available with respect to such matters and consulting with the Company's counsel, any liability which may ultimately be incurred with respect to these additional matters will not materially affect the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted because any such effect depends on both future results of operations and the amount and timing of the resolution of such matters. -13- 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Material Changes in Financial Condition - --------------------------------------- Cash flow provided from operating activities for the first six months of fiscal 1999 was $17.1 million as compared to $34.1 million for 1998. The decrease in cash flow provided by operating activities primarily reflects a higher working capital requirement. For the first six months of 1999, $4.9 million was used for investing activities, including the acquisitions of the global latex floor care business of Morton International Inc. for $8 million and the U.S. acrylics emulsion business of PolymerLatex for $9 million, consisting of cash of $3 million and a note payable for $6 million, and capital expenditures of $46.7 million, offset by proceeds of $52.8 million primarily from the sale of the Penn Racquet Sports division (Penn) and the residential wallcovering business. This is compared to $91.6 million used for investing activities in the first six months of 1998, including the acquisition of The Goodyear Tire & Rubber Company's Calhoun, Georgia latex facility for $73.8 million and capital expenditures of $32.9 million, offset by proceeds of $15.3 million from asset dispositions. Financing activities used $19.7 million of cash during the six month period ended May 31, 1999. This primarily reflects dividend payments of $12.5 million and a net decrease in total debt of $4.5 million during this period. Cash flow provided by financing activities of $60.3 million in the first six months of 1998 reflected a $68.8 million net increase in debt, relating primarily to the acquisition of the Calhoun facility, offset by payments of $12.4 million in dividends. Material Changes in Results of Operations - ----------------------------------------- Sales totaled $514.9 million for the second quarter of 1999, an increase of 19 percent compared to $431.9 million during the second quarter of 1998, with all three business segments reflecting revenue increases. For the six months ended May 31, 1999, sales increased 20 percent to $954.5 million as compared to $797.4 million during the first six months of 1998. Segment operating profit totaled $66.6 million for the second quarter of 1999. Excluding unusual items, primarily the pre-tax gain of $15.7 million from the divestiture of Penn, segment operating profit for the current quarter improved 19 percent to $51.4 million versus $43.1 million for the second quarter of 1998. For the six months ended May 31, 1999, segment operating profit, excluding unusual items, increased to $89.4 million as compared to $72.7 million during last year's period, a 23 percent improvement. As part of a focused cost reduction program to prepare for the planned spin-off, GenCorp continued to decrease corporate overhead, reducing corporate expenses by $1.8 million for the second quarter of 1999 as compared to the second quarter of 1998. Also during the quarter, the Company incurred costs of $3.2 million for spin-off related activities and reflected a tax provision that was $0.6 million higher than normal because of certain spin-off costs that will not be deductible for income tax purposes. Earnings per share for the second quarter of 1999 improved to $0.77 per diluted share compared to $0.51 per diluted share during the second quarter of 1998. Earnings per share before unusual items, primarily the gain on sale of Penn and spin-off related costs, totaled $0.61 per diluted share during the quarter, an improvement of 20 percent over the second quarter of 1998. Net income in the second quarter of 1999 improved 52 percent to $32.5 million compared to second quarter 1998 net income of $21.4 million. For the six months ended May 31, 1999 net income improved 45 percent to $49.7 million as compared to net income of $34.2 million during the first six months of 1998. -14- 15 Material Changes in Results of Operations (continued) - ------------------------------------------ Net sales for the polymer products segment in the second quarter of 1999 increased 20 percent to $210.0 million compared to $174.9 million in the second quarter of 1998. Sales increased in both Decorative & Building Products and Performance Chemicals, primarily from sales attributable to acquisitions. Improved sales in European wallcovering, paper laminates, building systems, paper coatings and specialty chemicals led the increase. Operating profit for the polymer products businesses increased to $24.9 million for the second quarter of 1999 versus $23.5 million in the second quarter of 1998. Operating margins decreased to 11.9 percent in the second quarter of 1999 compared to 13.4 percent in the second quarter of 1998, due primarily to lower average unit selling prices across certain Performance Chemicals product lines, and increased new product development spending. Performance Chemicals completed the acquisition of Morton International's global latex floor care business, adding a complementary product line and customer base, and expanding presence in Europe and the Far East. The Morton products will be produced at Performance Chemicals' Fitchburg, Massachusetts; Chester, South Carolina; and Greensboro, North Carolina plants. Within the Decorative & Building Products business unit, performance improvement for the Building Systems (roofing) sector continued in the second quarter with a 20 percent increase in sales. Sales were also up by 30 percent in the first half of 1999 within Coated Fabrics' residential upholstery business. In early May, the Company divested Penn and recognized a pre-tax gain of $15.7 million on the transaction. Sales and operating profit of Penn for the second quarter of 1999 were $14.1 million and $1.4 million, respectively. Vehicle Sealing's sales improved 23 percent to $123.3 million in the second quarter of 1999, versus $100.6 million in the second quarter of 1998. The sales gain was due to higher volumes in North America on the General Motors C/K pickup and Grand AM and the Ford Explorer platforms. Vehicle Sealing's operating profit rose 58 percent, to $9.3 million in the second quarter of 1999 as compared to $5.9 million for the second quarter of 1998. Operating profit margins improved to 7.5 percent in the second quarter of 1999 compared to 5.9 percent in the second quarter of 1998 as a result of higher volumes, lower launch costs, improved operating efficiencies, and the absence of losses from the Plastic Extrusions division which was sold in 1998. At Aerojet, net sales increased 16 percent to $181.6 million in the second quarter of 1999 as compared to $156.4 million in the second quarter of 1998. Higher volumes in Fine Chemicals, the Space-Based Infrared System (SBIRS), Special Sensor Microwave Imager/Sounder (SSMIS) and Sense and Destroy Armor (SADARM) were partially offset by lower volumes on the Defense Support Program (DSP) and Titan. Aerojet's operating profit for the second quarter of 1999 was $17.2 million, compared to $13.7 million in the second quarter of 1998. Operating margins improved during the quarter to 9.5 percent from 8.8 percent in the second quarter of 1998, due to higher Fine Chemicals volumes and contract performance in strategic and space propulsion. Aerojet's contract backlog at May 31, 1999 stood at $1.7 billion. -15- 16 Environmental Matters - --------------------- GenCorp's policy is to conduct its businesses with due regard for the preservation and protection of the environment. The Company devotes a significant amount of resources and management attention to environmental matters and actively manages its ongoing processes to comply with extensive environmental laws and regulations. The Company is involved in the remediation of environmental conditions which resulted from generally accepted manufacturing and disposal practices in the 1950's and 1960's which were followed at certain GenCorp plants. In addition, the Company has been designated a potentially responsible party, with other companies, at sites undergoing investigation and remediation. The nature of environmental investigation and cleanup activities often makes it difficult to determine the timing and amount of any estimated future costs that may be required for remedial measures. However, the Company reviews these matters and accrues for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred and the amount of the liability (usually based upon proportionate sharing) can be reasonably estimated. The Company's Condensed Consolidated Balance Sheet at May 31, 1999 reflects accruals of $271 million and amounts recoverable of $160 million from the U.S. Government and other third parties for such costs. The effect of resolution of environmental matters on results of operations cannot be predicted due to the uncertainty concerning both the amount and timing of future expenditures and future results of operations. However, management believes, on the basis of presently available information, that resolution of these matters will not materially affect liquidity, capital resources or the consolidated financial condition of the Company. The Company will continue its efforts to mitigate past and future costs through pursuit of claims for insurance coverage and continued investigation of new and more cost effective remediation alternatives and associated technologies. For additional discussion of environmental matters, refer to Note H - Contingencies. -16- 17 Year 2000 - --------- The Company is currently engaged in a comprehensive project to upgrade its information, technology, and manufacturing and facilities computer hardware and software programs to address the Year 2000 issue at its domestic and international businesses. Many of the Company's systems include new hardware and updated software packages purchased from established vendors who have represented that these systems are Year 2000 ready. The Company does not have large centralized systems, a factor, which the Company believes, reduces the risk of a single point of failure having widespread impact on the Company. As part of this project, the Company has formally communicated with all of its significant suppliers, vendors and large customers to determine the extent to which the Company is vulnerable to those parties' failures to correct their own Year 2000 issues. As of May 31, 1999, the Company has received approximately 97 percent of the responses, and those responses generally indicate that these parties will be Year 2000 ready. The Company has completed an inventory and assessment of its information technology systems. Both internal and external resources are being utilized to test the Company's software for Year 2000 readiness and, where necessary, the systems are being remediated through upgrading, replacement or reprogramming. Also, the Company has completed an inventory and assessment of its non-information technology (embedded) systems, prioritizing the impact of each of these systems on the Company's ability to conduct its operations and, as necessary, obtaining vendor verification and/or remediation of those systems. The process of analyzing, prioritizing, remediating and testing will be an iterative process until all critical systems are Year 2000 ready. The estimated cost for this project is projected to range between $5 million and $7 million, which is being funded through operating cash flows. The Company has spent approximately $4 million as of May 31, 1999 on this project and expects to spend the remaining budget by the end of the third quarter of 1999. Excluding recent acquisitions, the Company believes that approximately 95 percent of its systems are Year 2000 ready as of May 31, 1999 and it is in the control and monitoring phase of the project. Late 1998 acquisitions are approximately 60 percent complete and are targeted for completion by October 31, 1999. Based upon currently available information and considering the Company's diversified business base, decentralized systems and Year 2000 efforts, management believes that the most reasonably likely worst case scenario could result in minor short-term business interruptions. The Company has prepared contingency plans which include alternative sourcing to minimize any disruptions to its businesses resulting from a vendor or supplier not being Year 2000 ready. However, failure by the Company and/or vendors and customers to complete Year 2000 readiness work in a timely manner could have a material adverse effect on certain of the Company's operations. The Company's exposure could increase or its timetable for Year 2000 readiness could be delayed as a result of any new acquisitions. -17- 18 Adoption of the Euro - -------------------- Based upon a preliminary evaluation, management believes that the adoption of the Euro by the European Economic Community will not have a material impact on the Company's international businesses. The Company's foreign operations currently are small and each operation conducts the majority of its business in a single currency with minimal price variations between countries. Quantitative and Qualitative Disclosure About Market Risk - --------------------------------------------------------- The Company is exposed to market risk from changes in interest rates on long-term debt obligations. The Company's policy is to manage its interest rate exposures through the use of a combination of fixed and variable rate debt. Currently, the Company does not use derivative financial instruments to manage its interest rate risk. Substantially all of the Company's long-term debt of $310.9 million which matures in the year 2001 is variable and had an average variable interest rate of 5.5 percent at May 31, 1999. The Company's long-term debt bears interest at market rates and therefore, the carrying value approximates fair value. Although the Company conducts business in foreign countries, international operations were not material to the Company's consolidated financial position, results of operations or cash flows as of May 31, 1999. Additionally, foreign currency transaction gains and losses were not material to the Company's results of operations for the six months ended May 31, 1999. Accordingly, the Company should not be subject to material foreign currency exchange rate risk with respect to future costs or cash flows from its foreign subsidiaries. To date, the Company has not entered into any significant foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. The Company is evaluating the future use of such financial instruments. Forward-Looking Statements - -------------------------- This report on Form 10-Q contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements may present (without limitation) management's expectations, beliefs, plans and objectives, future financial performance, and assumptions or judgments concerning such matters. Any discussions contained in this report, except to the extent that they contain historical facts, are forward-looking and accordingly involve estimates, assumptions, judgments and uncertainties. There are a number of factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking statements. Such factors are detailed in the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1998 filed with the Securities and Exchange Commission. Item 3. Quantitative and Qualitative Disclosure About Market Risk - ----------------------------------------------------------------- See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure About Market Risk." -18- 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings - ------------------------- Information concerning legal proceedings, including proceedings relating to environmental matters, which appears in Note H beginning on page 9 of this report is incorporated herein by reference. PUC Investigation - ----------------- Because of recent "toxic tort" lawsuits which named California water purveyors as defendants, on March 12, 1998, the PUC announced a wide ranging investigation of drinking water quality in California. The PUC's General Counsel has publicly stated that he believes that under the California Constitution, the PUC's jurisdiction overrides that of the Courts in this area. Accordingly, Aerojet is also preparing to defend its interests before the PUC. Aerojet's intervention petition to allow Aerojet to participate in the PUC's proceedings has been granted. The PUC's investigation is expected to be completed by fall 1999, at which point the stays in the toxic tort cases (as discussed in the Company's 1998 annual report on Form 10-K) may be lifted, unless the Court of Appeal so orders earlier. In re: Proposition 65 Notices - ----------------------------- Aerojet was served in February 1999 with a notice from a private party alleging that it had released chemicals into air and groundwater at and near its Azusa, California facility above state limits in violation of California's Proposition 65 and/or without filing sufficiently detailed public notifications as required by Proposition 65. Following collection and review of all of its Proposition 65 records, air release reports and groundwater reports, Aerojet believes it is in compliance with Proposition 65 and will vigorously defend a Proposition 65 lawsuit if such a lawsuit is initiated. On May 12, 1999, the U.S. District Court denied Aerojet's motion for judgment on the pleadings and remanded the case to State Court. However, the Court's Order does find that the private party's requested relief would interfere with Aerojet's ongoing CERCLA activities at the Sacramento facility. McKinley, et al. v. GenCorp Inc., et al. - ---------------------------------------- Following an "investigative" report published in the Houston Chronicle on November 29, 1998 (which was reprinted by other newspapers and may well generate further media coverage), a "toxic tort" lawsuit was filed against 40 chemical companies and trade association co-defendants in Common Pleas Court for Ashtabula County, Ohio, Case No. 98CV00797. The complaint was filed by the heirs of a former production employee at GenCorp's former polyvinyl chloride ("PVC") resin facility in Ashtabula, Ohio and GenCorp was served on December 21, 1998. GenCorp, as the former employer, is alleged to have intentionally exposed the decedent to vinyl chloride ("VC"), a building block compound for PVC that is listed as a carcinogen by certain government agencies. The alleged exposure is claimed to have resulted in fatal liver damage. Plaintiffs also allege that all of the co-defendants engaged in a conspiracy to suppress information regarding the carcinogenic risk of VC to industry workers, despite the fact that OSHA has strictly regulated workplace exposure to VC since 1974. GenCorp has notified its insurers and will vigorously defend this and any future actions which may be generated. The above lawsuit is apparently an outgrowth of three similar but unrelated "toxic tort" civil conspiracy cases brought in 14th Judicial District Court, Calcasieu Parish, Louisiana by the heirs of deceased former employees of two chemical plants in Lake Charles, Louisiana ROSS, ET UX. V. CONOCO, INC., ET AL. (Case No. 90-4837); LANDON, ET UX. V. CONOCO, INC., ET AL. (Case No. 97-7949); TOUSAINT, ET UX. V. INSURANCE CO. OF NORTH AMERICA, ET AL. (Case No. 92-6172). GenCorp was named as a "conspiring" co-defendant in all three cases, along with most of the same co-defendants in the MCKINLEY case. -19- 20 Item 1. Legal Proceedings (continued) - ------------------------- McKinley, et al. v. GenCorp Inc., et al. (continued) - ---------------------------------------- On March 22, 1999, GenCorp was served with a similar conspiracy suit alleging VC exposure from various aerosol products, including hairspray. BLAND, ET AL. V. AIR PRODUCTS & CHEMICALS, INC., ET AL., Jefferson County (Beaumont), Texas, (Case No. D-160,599). VC was used as an aerosol propellant in the 1960's. Again, the same co-defendants are named, with the addition of various consumer products and personal care manufacturers. Unlike MCKINLEY, in none of these cases was GenCorp alleged to be an employer, manufacturer or VC supplier. Nonetheless, GenCorp notified its insurers and has vigorously defended these actions since served. While there can be no certainty regarding the outcome of any litigation, in the opinion of management, after reviewing the information currently available with respect to the matters discussed above and consulting with the Company's counsel, any liability which may ultimately be incurred will not materially affect the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted because any such effect depends on both future results of operations and the amount and timing of the resolution of such matter. The Company and its subsidiaries are presently engaged in other litigation, and additional litigation has been threatened. However, based upon information presently available, none of such other litigation is believed to constitute a "material pending legal proceeding" within the meaning of Item 103 of Regulation S-K (17 CFR Reg. 229.103) and the Instructions thereto. Item 6. Exhibits and Reports on Form 8-K - ---------------------------------------- a) Exhibits --------
Table Exhibit Item No. Exhibit Description Number -------------------------------------------------------------------------------------------- 27 Financial Data Schedule 27 (Filed for EDGAR only)
b) Reports on Form 8-K ------------------- The Company filed a report on Form 8-K on July 7, 1999 incorporating its press release dated July 7, 1999 regarding receipt of a favorable IRS ruling for its planned spin-off of its Decorative & Building Products and Performance Chemicals businesses into a separate, publicly traded company named OMNOVA Solutions Inc. -20- 21 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GENCORP INC. Date July 12, 1999 By /s/ M. E. Hicks ------------------------------------ ------------------------------------------------- M. E. Hicks Senior Vice President and Chief Financial Officer Date July 12, 1999 By /s/ W. R. Phillips ------------------------------------ ------------------------------------------------- W. R. Phillips Senior Vice President, Law; General Counsel
-21- EX-27 2 EXHIBIT 27
5 1,000 6-MOS NOV-30-1999 MAY-31-1999 21,100 6,900 267,100 0 180,500 523,300 1,215,200 720,600 1,752,800 456,400 0 4,200 0 0 373,800 1,752,800 954,500 954,500 742,500 869,000 (9,500) 0 10,900 84,100 34,400 49,700 0 0 0 49,700 1.19 1.18
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