<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended August 31, 1997 Commission File Number 1-1520
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GenCorp Inc.
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(Exact name of registrant as specified in its charter)
Ohio 34-0244000
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(State of Incorporation) (I.R.S. Employer Identification No.)
175 Ghent Road Fairlawn, Ohio 44333-3300
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (330) 869-4200
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
At August 31, 1997, there were 41,100,835 outstanding shares of GenCorp Inc.'s
Common Stock, par value $0.10.
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GenCorp Inc.
<TABLE>
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Table of Contents
Page No.
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<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income -
Three Months and Nine Months Ended August 31, 1997 and 1996 -3-
Condensed Consolidated Balance Sheets -
August 31, 1997 and November 30, 1996 -4-
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended August 31, 1997 and 1996 -5-
Notes to the Unaudited Interim Condensed Consolidated
Financial Statements -6-
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations -12-
Part II. Other Information
Item 1. Legal Proceedings -15-
Item 5. Other Information -16-
Item 6. Exhibits and Reports on Form 8-K -17-
Signatures -18-
</TABLE>
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PART I. FINANCIAL INFORMATION
-----------------------------
GenCorp Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share data)
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Nine Months Ended
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Aug. 31, Aug. 31, Aug. 31, Aug. 31,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
NET SALES $ 393.5 $ 360.9 $ 1,125.0 $ 1,107.2
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COSTS AND EXPENSES
Cost of products sold 319.1 290.0 911.4 909.3
Selling, general and administrative 45.7 38.6 130.8 126.1
Interest expense 1.9 6.0 13.8 20.6
Other (income) and expense, net (8.3) (.1) (12.8) (3.3)
Unusual items (Note C) -- -- -- 24.9
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358.4 334.5 1,043.2 1,077.6
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INCOME BEFORE INCOME TAXES 35.1 26.4 81.8 29.6
Income tax (provision) benefit (Note E) (14.9) (10.5) 33.6 (11.3)
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NET INCOME $ 20.2 $ 15.9 $ 115.4 $ 18.3
========== ========== ========== ==========
EARNINGS PER SHARE OF COMMON STOCK (NOTE B)
Primary $ .50 $ .47 $ 3.16 $ .55
Fully diluted $ .49 $ .42 $ 2.83 $ .55
Average number of shares of common stock
outstanding (in thousands)
Primary 40,263 33,734 36,501 33,622
Fully diluted 42,111 40,893 41,825 40,852
Cash dividends paid per share of common stock $ .15 $ .15 $ .45 $ .45
</TABLE>
The accompanying notes to the unaudited interim condensed consolidated
financial statements are an integral part of these statements.
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GenCorp Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
<TABLE>
<CAPTION>
Unaudited Audited
August 31, November 30,
1997 1996
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CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $ 21.7 $ 22.6
Accounts receivable 257.8 206.7
Inventories (Note F) 167.0 158.4
Prepaid expenses and other 61.6 64.7
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TOTAL CURRENT ASSETS 508.1 452.4
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Recoverable from U.S. government and third
parties for environmental remediation 112.9 118.1
Deferred income taxes 156.5 156.3
Prepaid pension 112.8 103.5
Investments and other assets 102.6 86.8
Property, plant and equipment:
At cost 1,116.6 1,102.3
Accumulated depreciation (709.9) (689.5)
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Net property, plant and equipment 406.7 412.8
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TOTAL ASSETS $1,399.6 $1,329.9
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LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable $ 47.7 $ 42.9
Accounts payable - trade 77.5 80.6
Income taxes 27.1 26.6
Other current liabilities 226.1 219.6
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TOTAL CURRENT LIABILITIES 378.4 369.7
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Long-term debt (Note G) 124.6 263.2
Postretirement benefits other than pensions 339.8 346.1
Environmental reserves (Note H) 227.3 230.3
Other liabilities 65.5 64.9
Contingencies (Note H)
SHAREHOLDERS' EQUITY
Preference stock - (none outstanding) -- --
Common stock - $0.10 par value; 41.1 million shares outstanding 4.1 3.4
Other capital 142.7 22.2
Retained earnings 122.7 23.5
Currency translation adjustment (5.5) 6.6
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TOTAL SHAREHOLDERS' EQUITY 264.0 55.7
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,399.6 $1,329.9
======== ========
</TABLE>
The accompanying notes to the unaudited interim condensed consolidated
financial statements are an integral part of these statements.
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GenCorp Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
<TABLE>
<CAPTION>
Unaudited
Nine Months Ended
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August 31,
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $115.4 $ 18.3
Provision for unusual items -- 24.9
Depreciation, amortization and loss on disposal of fixed assets 45.9 51.1
Increase in working capital (51.3) (83.7)
(Increase) decrease in deferred income taxes (.2) 4.7
Other - net .8 (12.3)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 110.6 3.0
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (36.4) (30.3)
Proceeds from asset dispositions 14.8 121.1
Acquisitions (46.5) (3.5)
Investments and other - net (2.5) (12.9)
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NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (70.6) 74.4
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CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term debt incurred 4.8 19.6
Long-term debt incurred 180.0 360.1
Long-term debt paid (203.6) (438.1)
Dividends (16.2) (14.9)
Other equity transactions (5.9) (1.2)
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NET CASH USED IN FINANCING ACTIVITIES (40.9) (74.5)
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NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (.9) 2.9
Cash and equivalents at beginning of year 22.6 17.0
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Cash and equivalents at end of period $ 21.7 $ 19.9
====== ======
</TABLE>
Cash paid for interest was $15 million and $24 million for the nine months ended
August 31, 1997 and 1996, respectively. Cash paid for income taxes was $64
million and $22 million for the nine months ended August 31, 1997 and 1996,
respectively.
The accompanying notes to the unaudited interim condensed consolidated
financial statements are an integral part of these statements.
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GenCorp Inc.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with the instructions to Form 10-Q
and therefore do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
These interim statements should be read in conjunction with the financial
statements and notes thereto included or incorporated by reference in the
GenCorp Inc. (Company) Annual Report on Form 10-K for the fiscal year ended
November 30, 1996.
All normal recurring accruals and adjustments considered necessary for a
fair presentation of the unaudited results for the nine months ended August 31,
1997 and 1996, have been reflected. The results of operations for the nine
months ended August 31, 1997, are not necessarily indicative, if annualized, of
those to be expected for the full fiscal year.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Note B - Net Income Per Share of Common Stock
- ---------------------------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings per Share" (SFAS 128), which is required to be
adopted on November 30, 1998. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The impact
would result in a $0.02 per share increase in primary earnings per share for the
third quarter ended August 31, 1997 and no change in the primary earnings per
share amount reported for the third quarter ended August 31, 1996. The impact of
SFAS 128 on the calculation of fully diluted earnings per share for these
quarters is not expected to be material.
Currently, primary earnings per share of common stock are calculated by
dividing net income by the weighted average number of common shares outstanding
adjusted for the inclusion of stock options and shares to be issued under other
stock based compensation programs. For fully diluted earnings per share, net
income and shares outstanding have also been adjusted as if the Company's
$115,000,000 8% Convertible Subordinated Debentures Due August 1, 2002 had been
converted at the beginning of the period. (See Note G for further information
regarding the debentures.)
Note C - Unusual Items
- ----------------------
During the first nine months of 1996, the Company recognized unusual charges
of $25 million. These charges included a provision of $15 million for the
Voluntary Early Retirement Incentive Program for eligible employees at the
Company's Fairlawn, Ohio headquarters and Corporate Technology Center and a net
loss of $10 million on the sale of the Vibration Control and Reinforced Plastics
Divisions (see Note D).
Note D - Acquisitions and Divestitures
- --------------------------------------
On May 7, 1997, the Company acquired Printworld from Technographics, Inc.
for approximately $47 million in cash. Printworld is a recognized leader in the
transfer printing and paper laminate industry. The acquisition was accounted for
as a purchase in accordance with Accounting Principles Board Opinion No. 16. The
acquisition resulted in goodwill of $26 million which is being amortized over 30
years.
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Note D - Acquisitions and Divestitures (continued)
- --------------------------------------------------
On August 23, 1996, the Company purchased the Lytron(R) polystyrene
latex plastic pigment business from Morton International for approximately $4
million. Under the agreement, the Company acquired the Lytron(R) brand name,
technology, customer base and certain other assets. Lytron(R) plastic
pigments are used primarily in paper and paperboard coatings to improve gloss,
brightness, opacity and printability performance. The acquisition was accounted
for as a purchase in accordance with Accounting Principles Board Opinion No. 16.
The acquisition resulted in goodwill of $3 million which is being amortized over
15 years.
On June 21, 1996, the Company completed the sale of substantially all of the
assets and certain liabilities of its Automotive Occupant Sensor (AOS) business
to the Robert Bosch Corporation for an aggregate consideration of approximately
$3 million paid in cash at the closing and the right to receive certain
additional payments based on the performance of the AOS business.
On March 1, 1996, GenCorp Inc. completed the sale of substantially all of
the assets and certain liabilities of its Reinforced Plastics Division to
Cambridge Industries, Inc. of Madison Heights, Michigan for an aggregate
consideration of approximately $42 million, of which approximately $32 million
has been paid in cash and approximately $10 million of which was paid through
the retention of receivables. The sale was effective as of February 29, 1996.
On February 15, 1996, GenCorp Inc. completed the sale of substantially all
of the assets and certain liabilities of its Vibration Control Division to BTR
Antivibration Systems, Inc., a subsidiary of BTR plc. for an aggregate
consideration of approximately $84 million paid in cash, of which approximately
$80 million was paid in the first quarter of 1996.
Note E - Income Taxes
- ---------------------
The Company received federal income tax refunds resulting from settlement
agreements with the Internal Revenue Service relating to certain prior taxable
years, which reduced the Company's tax provision by $2 million and $65 million
in the first and second quarters of 1997, respectively.
Note F - Inventories
- --------------------
Inventories are stated at the lower of cost or market value. A portion of
the inventories is priced by use of the last-in, first-out (LIFO) method using
various dollar value pools. Interim LIFO determinations involve management's
judgments of expected year-end inventory levels. Components of inventory are as
follows:
<TABLE>
<CAPTION>
Unaudited Audited
August 31, November 30,
1997 1996
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<S> <C> <C>
Raw materials and supplies $ 42.0 $ 37.4
Work-in-process 10.1 8.8
Finished products 56.7 62.4
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Approximate replacement cost of LIFO inventories 108.8 108.6
Reserves, primarily LIFO (38.8) (39.5)
Long-term contracts at average cost 195.9 172.0
Progress payments (98.9) (82.7)
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$167.0 $158.4
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</TABLE>
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Note G - Long-term Debt and Credit Lines
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On May 17, 1996, the Company entered into a new five-year unsecured $400
million revolving credit facility (Facility) which expires in May 2001. As of
August 31, 1997, unused revolving lines of credit totaled $267 million. The
Company pays a variable commitment fee, which is currently 1/4 of one percent,
on the unused balance. Interest rates are variable, primarily based on LIBOR,
and are currently at an average rate of 6.4 percent. The Facility contains
various debt restrictions and provisions relating to net worth, interest
coverage and debt to earnings before interest, taxes, depreciation and
amortization (Debt/EBITDA) ratios. The Company is required to maintain
consolidated net worth of at least $23.5 million.
During the second quarter of 1997, the Company called for redemption its
$115,000,000 8% Convertible Subordinated Debentures Due August 1, 2002
(Debentures). In the third quarter of 1997, substantially all of the Debentures
were tendered for conversion into GenCorp common stock at a conversion price of
$16.065 per share (equivalent to a conversion rate of approximately 62.247
shares of common stock per $1,000 principal amount of Debentures).
At August 31, 1997, the Company had unsecured, uncommitted lines of credit
with several banks for short-term borrowings aggregating $84 million, of which
$44 million was outstanding. Borrowings under such lines generally bear interest
at money market rates and are payable on demand. The Company also had
outstanding letters of credit totaling $29 million at August 31, 1997.
Note H - Contingencies
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Environmental Matters
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Sacramento, California
In June 1989, the United States District Court approved a Partial Consent
Decree (Decree) requiring Aerojet to conduct a Remedial Investigation/
Feasibility Study (RI/FS) of Aerojet's Sacramento, California site and prepare
an RI/FS report on specific environmental conditions present at the site and
alternatives available to remedy such conditions. Aerojet also is required to
pay for certain government oversight costs associated with compliance with the
Decree. During the second quarter of 1997, the State of California expanded
surveillance of perchlorate under the RI/FS when this chemical was detected at
previously undetectable levels using new testing protocols in water wells near
Aerojet's property.
In September 1993, Aerojet reached a settlement with the U.S. government
whereby Aerojet recovered approximately $18 million for costs incurred at the
site from July 1989 through November 1992. The settlement also provides that 65
percent of covered costs incurred after November 1992, net of insurance
recoveries, will be added to the pricing of government contracts. Aerojet is
negotiating with the U.S. government to recover all environmental costs
associated with perchlorate as part of the 1993 settlement.
Aerojet is continuing its efforts under the Decree to determine the nature
and extent of contamination at the facility and to identify the technologies
that will likely be used to remediate the site. Based on available facts,
existing technology and current environmental laws and regulations, Aerojet
recorded a net $68 million charge in 1994 to remediate the site. These
remediation costs are principally for design, construction and enhancement of
groundwater and soil treatment facilities, ongoing project management and
regulatory oversight, and are expected to be incurred over a period of
approximately 20 years. This estimate will be subject to change as work
progresses, additional experience is gained and environmental standards are
revised.
-8-
<PAGE> 9
Note H - Contingencies (continued)
- ----------------------------------
At August 31, 1997, Aerojet had a reserve of $193 million for costs to
complete the original RI/FS and remediate the site and has recognized $113
million for probable future recoveries under the 1993 settlement agreement with
the U.S. government.
Legal proceedings to obtain reimbursements of environmental costs from
insurers are continuing.
Lawrence, Massachusetts
The Company has studied remediation alternatives for its closed Lawrence,
Massachusetts facility, which was contaminated with PCBs, and has begun site
remediation and off-site disposal of debris. The Company has a reserve of $29
million for estimated decontamination and long-term operating and maintenance
costs of this site. The reserve represents the Company's best estimate for the
remaining remediation costs. Estimates of future remediation costs could range
as high as $50 million depending on the results of future testing and the
ultimate remediation alternatives undertaken at the site. The time frame for
remediation is currently estimated to range from 7 to 12 years.
Muskegon, Michigan
In a lawsuit filed by the U.S. Environmental Protection Agency (EPA), the
United States District Court ruled in 1992 that Aerojet and its two inactive
Cordova Chemical subsidiaries (Cordova) are liable for remediation of Cordova's
Muskegon, Michigan site, along with a former owner/operator potentially
responsible party (PRP) of an earlier chemical plant at the site. That decision
was appealed to the United States Court of Appeals.
In May 1997, the United States Court of Appeals for the Sixth Circuit issued
an en banc decision reversing Aerojet's and the other PRP's liability under the
CERCLA statute. Petitions for certiorari to the United States Supreme Court for
its review of the appellate decision have been filed on the behalf of the State
of Michigan and the EPA. Depending on the results of these petitions, the case
will be remanded to the Federal District Court for further fact finding
determinations affecting the Cordova Chemical subsidiaries.
In a separate action, Aerojet and Cordova won indemnification for the
Muskegon site investigation and remediation costs from the State of Michigan in
the state court of claims. The Michigan Court of Appeals affirmed on appeal, and
the Michigan Supreme Court refused to hear the case. On December 23, 1996, the
Michigan Supreme Court denied the State's motion for reconsideration. As a
result, the Company believes that most of the $50 million to $100 million in
anticipated remediation costs will be paid by the State of Michigan and the
former owner/operator of the site. In addition, Aerojet believes it has
insurance coverage for the site.
San Gabriel Valley Basin, California
Aerojet, through its Azusa facility, has been named by the U.S.
Environmental Protection Agency (EPA) as a potentially responsible party (PRP)
in the portion of the San Gabriel Valley Superfund Site known as the Baldwin
Park Operable Unit (BPOU). Regulatory action involves issuance of a Record of
Decision (ROD) regarding regional groundwater remediation, issuing Aerojet and
18 other PRPs Special Notice letters requiring groundwater remediation and site
specific investigation and possible cleanup.
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Note H - Contingencies (continued)
- ----------------------------------
Aerojet's investigation demonstrated that the principal groundwater
contamination is upgradient of Aerojet's property and that only low
concentrations of contaminants are present in the soils of Aerojet's presently
and historically owned properties. The EPA contends that Aerojet is one of the
four largest sources of groundwater contamination at the BPOU of the nineteen
PRPs identified by the EPA. Aerojet contests the EPA's position regarding the
source of contamination and the number of responsible PRPs. Aerojet has joined a
Steering Committee comprised of eleven of the PRPs identified by the EPA.
The ROD and Special Notice letters issued by the EPA require groundwater
remediation for the BPOU, estimated to cost $47 million in non-recurring costs
and $4 million to $5 million in annual operating expense. Aerojet, as part of
the Steering Committee, is participating in an effort to develop an alternative
"consensus" plan in which certain water supply entities would integrate the
remedial requirements into a water supply project. If implemented, the consensus
plan approach would allow the project to be eligible for federal funding for 25
percent of the non-recurring costs and additional funding from water supply
entities receiving benefit from the project, thus reducing the PRPs' costs.
Soon after the EPA issued the Special Notice letter, the State of California
also detected perchlorate in water wells in Southern California, including the
San Gabriel Valley, at previously undetectable levels using new testing
protocols. As the result of the recent finding of perchlorate, the EPA has
required investigation for and studies regarding treatability of perchlorate
contaminated water. Consequently, the EPA has allowed time extensions until
February 1998 for submittal by the PRPs of a good faith offer and negotiation of
a consent decree in response to the Special Notice letter. The perchlorate
investigations and studies are underway. The final perchlorate cleanup standard
(which has not yet been determined) could impact total cleanup cost and
implementation of the proposed consensus plan.
Aerojet's cost exposure cannot be estimated at this time. However,
management believes, on the basis of presently available information, that
resolution of this matter will not materially affect the consolidated financial
condition of the Company. Among the factors considered by management are the
following: the number of other viable PRPs; the potential for federal funding or
cost sharing with water supply interests; Aerojet's site-specific investigation;
and the fact that, to date, Aerojet's San Gabriel Valley costs are being
recovered from the government in the pricing of Aerojet's contracts.
Additionally, Aerojet has filed suit against its insurers for recovery of such
costs.
Other Sites
The Company is also currently involved, together with other companies, in 28
other Superfund and non-superfund remediation sites. In many instances, the
Company's liability and proportionate share of costs have not been determined
largely due to uncertainties as to the nature and extent of site conditions and
the Company's involvement. While government agencies frequently claim PRPs are
jointly and severally liable at such sites, in the Company's experience, interim
and final allocations of liability costs are generally made based on relative
contributions of waste. Based on the Company's previous experience, its
allocated share has frequently been minimal, in many instances less than 1
percent. The Company has reserves of approximately $25 million as of August 31,
1997 which it believes are sufficient to cover its best estimate of its share of
the environmental remediation costs at these other sites. Also, the Company is
seeking recovery of its costs from its insurers.
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Note H - Contingencies (continued)
- ----------------------------------
Environmental Summary
- ---------------------
In regard to the sites discussed above, management believes, on the basis of
presently available information, that resolution of these matters will not
materially affect liquidity, capital resources or the consolidated financial
condition of the Company. The effect of resolution of these matters on results
of operations cannot be predicted due to the uncertainty concerning both the
amount and timing of future expenditures and future results of operations.
Other Legal Matters
- -------------------
In August 1991, Olin Corporation (Olin) advised GenCorp that Olin believed
GenCorp to be jointly and severally liable for certain Superfund remediation
costs, estimated by Olin to be $70 million, associated with a former Olin
manufacturing facility and waste disposal sites in Ashtabula County, Ohio.
In 1993, GenCorp sought declaratory judgment in the United States District
Court for the Northern District of Ohio that the Company is not responsible for
environmental remediation costs associated with the former Olin facility and
Superfund sites. Olin counterclaimed seeking a judgment that GenCorp is jointly
and severally liable for a share of remediation costs.
In late 1995, the Court hearing on the issue of joint and several liability
was completed, and in August 1996 the Court held hearings relative to
allocation. The Court has not yet rendered a decision. If the Court finds
GenCorp is liable, subsequent trial phases will address damages.
The Company is vigorously litigating this matter and believes that it has
meritorious defenses to Olin's claims. While there can be no certainty regarding
the outcome of any litigation, in the opinion of management, after reviewing the
information currently available with respect to this matter and consulting with
the Company's counsel, any liability which may ultimately be incurred will not
materially affect the consolidated financial condition of the Company.
The Company and its subsidiaries are subject to various other legal actions,
governmental investigations, and proceedings relating to a wide range of matters
in addition to those discussed above. In the opinion of management, after
reviewing the information which is currently available with respect to such
matters and consulting with the Company's counsel, any liability which may
ultimately be incurred with respect to these additional matters will not
materially affect the consolidated financial condition of the Company. The
effect of resolution of these matters on results of operations cannot be
predicted because any such effect depends on both future results of operations
and the amount and timing of the resolution of such matters.
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<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Material Changes in Financial Condition
- ---------------------------------------
Cash flow provided from operating activities for the nine months ended
August 31, 1997 was $110.6 million as compared to $3.0 million for the first
nine months of 1996. The increase in cash flow from operating activities
reflected receipt of the tax refunds (see Note E - Income Taxes) and
reimbursement of expenses related to an environmental settlement.
For the nine month period ended August 31, 1997, $70.6 million was used for
investing activities, including the acquisition of Printworld in the second
quarter for approximately $46.5 million and capital expenditures of $36.4
million, offset by proceeds of $14.8 million from asset dispositions. This is
compared to cash flow provided from investing activities of $74.4 million for
the nine month period ended August 31, 1996 resulting from asset dispositions of
$121.1 million mostly from the sales of the Vibration Control and Reinforced
Plastics divisions, reduced mainly by capital expenditures of $30.3 million.
Financing activities in the first nine months of 1997 and 1996 primarily
reflect a decrease in debt and the payment of dividends.
During the second quarter of 1997, the Company called for redemption its
$115,000,000 8% Convertible Subordinated Debentures Due August 1, 2002
(Debentures). In the third quarter of 1997, nearly 100 percent of the Debentures
were tendered for conversion into GenCorp common stock (see Note G - Long-term
Debt and Credit Lines).
At August 31, 1997, GenCorp's total debt was $172 million, down $134 million
from November 30, 1996 and the lowest level in over ten years. Interest expense
decreased to $1.9 million from $6.0 million in the comparable third quarter in
1996 due to lower average debt levels, and the conversion of the Debentures into
common stock. The conversion of the Debentures was also primarily responsible
for the $131 million increase in shareholders' equity from $133 million in the
second quarter of 1997 to $264 million in the third quarter of 1997.
Material Changes in Results of Operations
- -----------------------------------------
The third quarter results reflect improvements in the Company's sales
growth, operating performance and financial condition. At the beginning of the
third quarter of 1997 the Company's debt to total capital ratio was 68 percent.
With the conversion of the Debentures and profitable operations, the Company's
financial position improved with a debt to total capital ratio of 39 percent.
This has created greater financial flexibility for the Company to pursue its
growth strategies.
Sales for the third quarter of 1997 totaled $393.5 million, an increase of 9
percent over $360.9 million during the third quarter of 1996. Sales increases
were achieved at the Company's aerospace and defense and polymer products
segments, while the automotive segment experienced an expected decline in
revenues. For the nine months ended August 31, 1997, sales from continuing
operations increased 6 percent to $1.12 billion as compared to $1.06 billion
during the first nine months of 1996.
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<PAGE> 13
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
Operating profit improved to $38.9 million for the third quarter of 1997,
versus $37.2 million for the third quarter of 1996, an increase of 5 percent.
Operating margins were 9.9 percent in the third quarter of 1997, compared to
10.3 percent for the third quarter of 1996. For the first nine months of 1997,
operating profit from continuing operations has improved 15 percent to $108.3
million versus $94.3 million for the same period of 1996.
Other income and expense was favorably impacted in the third quarter of 1997
by the collection of a note receivable and interest from a 1996 divestiture and
reimbursement of expenses related to an environmental settlement.
The Company reported improved net income of $20.2 million, or $0.49 per
fully diluted share, for the third quarter of 1997 compared to net income of
$15.9 million, or $0.42 per share for the third quarter of 1996. Earnings from
continuing operations for the third quarter of 1997 totaled $0.44 per share
excluding a benefit of $2.3 million, or $0.05 per share from previously
discontinued operations.
The Company's net income for the nine months ended August 31, 1997 was
$115.4 million, or $2.83 per fully diluted share, compared to $18.3 million, or
$0.55 per share for the same period in 1996. The increase was primarily due to
the tax refunds received in the second quarter of 1997 and charges the Company
took in early 1996 relating to the divestitures of two business units and the
Voluntary Early Retirement Incentive Program.
Net sales for the polymer products businesses in the third quarter of 1997
increased 10 percent to $161.9 million compared to $147.0 million in the third
quarter of 1996. Sales increases in the segment's Decorative & Building Products
and Specialty Polymers business units were partially offset by a decline at Penn
Racquet Sports. Sales improvements were realized in commercial wallcovering,
building systems, specialty latices for paper coatings and textiles, as well as
in transfer printing and paper laminates at Printworld, which was acquired in
the second quarter of 1997.
During the quarter, Specialty Polymers' volumes increased at a double-digit
rate versus last year and the business unit continued to gain new customers for
its paper, nonwoven and specialty latex applications. Decorative & Building
Products won initial orders from important customers through coordination of
existing vinyl woodgrain laminates with newly acquired Printworld paper
laminates. The ability to offer superior color and pattern matches for the
Company's customers in these product lines represents a significant market
opportunity.
Operating profit for the polymer products businesses increased to $19.4
million for the third quarter of 1997 versus $18.8 million in the third quarter
of 1996. Operating profit for the third quarter of 1997 included reimbursement
of expenses related to an environmental settlement, and expenses related to
business realignment in Specialty Polymers and Decorative & Building Products.
Operating margins declined slightly to 12.0 percent in the third quarter of 1997
compared to 12.8 percent in the third quarter of 1996 due to higher raw material
costs in Decorative & Building Products, and slightly lower average selling
prices in Specialty Polymers.
Automotive sales totaled $82.1 million in the third quarter of 1997 versus
$93.7 million in the third quarter of 1996 due to timing related to GenCorp
launches of new customer programs, customer related strikes and production
problems, and lower appliance gasket orders.
The Company's automotive operations earned $5.6 million for the third
quarter of 1997, versus $7.5 million in the third quarter of 1996. Operating
profit for the third quarter of 1997 included expenses related to plant
consolidation and manpower reductions, and recoveries of environmental expenses.
Operating profit for the third quarter of 1996 included $2.6 million from the
sale of the segment's Automotive Occupant Sensor business.
-13-
<PAGE> 14
Material Changes in Results of Operations (continued)
- -----------------------------------------
Vehicle Sealing was awarded new contracts from Saturn with production slated
to begin in late 1997, and achieved QS9000 quality certification at three
additional manufacturing facilities.
At Aerojet, net sales increased 24 percent to $149.5 million in the third
quarter of 1997 versus $120.2 million in the third quarter of 1996. Higher
volumes on the Space Based Infrared System (SBIRS), Defense Support Program
(DSP), and Special Sensor Microwave Imager/Sounder (SSMIS) were partially offset
by lower volumes on Titan and Joint Tactical Ground Station (JTAGS).
Aerojet's operating profit for the third quarter of 1997 was $13.9 million,
up 28 percent compared to $10.9 million in the third quarter of 1996. Operating
margins during the quarter were 9.3 percent, up slightly from last year's 9.1
percent third quarter margins.
During the quarter, Aerojet's Sense and Destroy Armor (SADARM), the Army's
first artillery fire and forget weapon available for use in precision strikes
against artillery and other armored targets, successfully performed against
offensive and defensive countermeasures during Initial Production Test firing at
Fort Greely, Alaska. Aerojet's liquid engines performed in four successful Delta
II launches, including missions which placed into orbit Iridium and Air Force
GPS satellites. Contract awards totaled $114 million during the quarter. At
August 31, 1997, Aerojet's contract backlog was $1.9 billion, up $900 million
from the third quarter of 1996.
Environmental Matters
- ---------------------
GenCorp's policy is to conduct its businesses with due regard for the
preservation and protection of the environment. The Company devotes a
significant amount of resources and management attention to environmental
matters and actively manages its ongoing processes to comply with extensive
environmental laws and regulations. The Company is involved in the remediation
of environmental conditions which resulted from previously accepted
manufacturing and disposal practices that date back to the 1950s and 1960s at
certain of its plants. In addition, the Company has been designated a
potentially responsible party, with other companies, at sites undergoing
investigation and remediation.
The nature of environmental investigation and cleanup activities often makes
it difficult to determine the timing and amount of any estimated future costs
that may be required for remedial measures. However, the Company reviews these
matters and accrues for costs associated with the remediation of environmental
pollution when it becomes probable that a liability has been incurred and its
proportionate share of the amount can be reasonably estimated. The Company's
Condensed Consolidated Balance Sheet at August 31, 1997 reflects accruals of
$258 million and amounts recoverable of $122 million from the U.S. government
and third parties for such costs.
The effect of resolution of environmental matters on results of operations
cannot be predicted due to the uncertainty concerning both the amount and timing
of future expenditures and future results of operations. However, management
believes, on the basis of presently available information, that resolution of
these matters will not materially affect liquidity, capital resources or the
consolidated financial condition of the Company. The Company will continue its
efforts to mitigate past and future costs through pursuit of claims for
insurance coverage and continued investigation of new remediation alternatives
and associated technologies. For additional discussion of environmental matters,
refer to Note H - Contingencies.
-14-
<PAGE> 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Information concerning legal proceedings, including proceedings relating to
environmental matters, which appears in Note H beginning on page 8 of this
report is incorporated herein by reference.
Divine, et al. v. GenCorp Inc.
- ------------------------------
In April 1996, two class action suits were filed, one in Federal and one in
state court, collectively alleging: (i) breach of collective bargaining/pension
and insurance agreements under Section 301 of the Labor Management Relations
Act; (ii) breach of fiduciary duties under ERISA; and (iii) breach of individual
contracts, fraud and promissory estoppel under state law. DIVINE, ET AL. V.
GENCORP INC., U.S.D.C., N.D. Ind. 3:96CV0296AS; DIVINE, ET AL. V. GENCORP INC.,
Wabash County, Ind. Cir. Ct., 85C01-9605-CP-201. The suits were filed on behalf
of approximately 600 hourly retirees, spouses and surviving spouses from
GenCorp's Wabash, Indiana facility who are seeking damages and injunctive relief
to prevent proposed modifications to the GenCorp Hourly Retiree Medical Plan.
The proposed modifications include increases to retiree co-payments and
deductibles, retiree contributions once aggregate costs exceed specified cost
caps, and changes to Medicare offsets, drug coverage and maximum benefit
provisions. The modifications are being implemented to control escalating health
care costs, and to limit liabilities under SFAS 106.
The Complaint filed in state court was removed to Federal court, and
consolidated with U.S.D.C., N.D. Ind. 3:96CV0296AS. GenCorp filed a Motion for
Summary Judgment and Opposition to Plaintiffs' Motion for Class Certification.
On November 26, 1996, the court granted GenCorp's Motion for Summary Judgment on
all counts, rendering the class certification issue moot. Plaintiffs have filed
a Notice of Appeal to the U.S. Seventh Circuit Court of Appeals and briefing is
complete. Subsequently, the parties negotiated settlement of all issues, pending
conditional class certification and court approval. A fairness hearing is
currently scheduled for November 26, 1997 and the parties remain optimistic that
the conditional settlement will be approved. If settlement is not approved, the
case will revert to its active status on appeal.
Santamaria v. Suburban Water Systems
- ------------------------------------
On July 29, 1997, another Southern California "toxic tort" lawsuit was filed
in the Los Angeles County Superior Court, SANTAMARIA V. SUBURBAN WATER SYSTEMS,
Docket No. KC 025995, naming as defendants 19 manufacturing companies,
(including Aerojet), and 5 water companies. The complaint was amended to add
numerous plaintiffs and another defendant water company on September 2, 1997,
but none of the defendants have yet been served in the lawsuit. The several
hundred plaintiffs, all of whom reside or resided in the San Gabriel Valley of
Los Angeles (SGV), alleged that the defendants placed hazardous chemicals in the
soil, groundwater and air in the SGV or provided contaminated well water to the
plaintiffs for many years. The causes of action alleged are negligence, wrongful
death, strict liability, trespass, nuisance, negligence per se, ultrahazardous
activity and fraudulent concealment, and the plaintiffs seek personal injury and
property damages in an unspecified amount and punitive damages. They also seek a
court order to stop the allegedly tortious activity, but no preliminary
injunctive relief is sought. Aerojet has notified its insurers and will
vigorously defend this apparently frivolous action.
-15-
<PAGE> 16
Part II. Other Information (continued)
- --------------------------------------
While there can be no certainty regarding the outcome of any litigation, in
the opinion of management, after reviewing the information currently available
with respect to the matters discussed above and consulting with the Company's
counsel, any liability which may ultimately be incurred will not materially
affect the consolidated financial condition of the Company. The effect of
resolution of these matters on results of operations cannot be predicted because
any such effect depends on both future results of operations and the amount and
timing of the resolution of such matter.
The Company and its subsidiaries are subject to various legal actions,
governmental investigations, and proceedings relating to a wide range of matters
in addition to those discussed above and in Part I of this report. In the
opinion of management, after reviewing such matters and consulting with the
Company's counsel, any liability which may ultimately be incurred with respect
to these additional matters will not materially affect the consolidated
financial position of the Company.
Item 5. Other Information
- --------------------------
On August 14, 1997, the Company announced the appointment of Robert A. Wolfe
to the position of President of Aerojet, its aerospace and defense business unit
effective September 1, 1997. On September 12, 1997, Mr. Wolfe was elected Vice
President of the Company by the Board of Directors.
Effective September 12, 1997, Steven W. Percy, Chairman and Chief Executive
Officer of BP America Inc., was elected a director of the Company, bringing the
number of directors to eleven.
-16-
<PAGE> 17
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits
--------
<TABLE>
<CAPTION>
Table Exhibit
Item No. Exhibit Description Number
--------------------------------------------------------------------------------------------
<S> <C> <C>
10 Material Contracts
10.(iii)(A) Management contracts, compensatory
plans or arrangements
GenCorp Inc. 1997 Stock Option Plan effective
March 26, 1997 was filed as Exhibit 4.1 to Form S-8
Registration Statement No. 333-35621 dated
September 15, 1997 and is incorporated herein
by reference. (10 pages)
Restricted Stock Agreement between the Company and
Steven W. Percy, Nonemployee Director, providing for
payment of 600 shares of restricted common stock as
part of Director's compensation for service on the
Board of Directors in Company Stock; the Form of
Restricted Stock Agreement between the Company and
Nonemployee Directors was filed as Exhibit 10.1 to
the Company's quarterly report on Form 10-Q for the
quarter ended May 31, 1997 (File No. 1-1520), and is
incorporated herein by reference. (3 pages)
11 Statement re computation of per share earnings 11
27 Financial Data Schedule 27
(Filed for EDGAR only)
</TABLE>
b) Reports on Form 8-K
-------------------
There have been no reports on Form 8-K filed during the quarter
ended August 31, 1997.
-17-
<PAGE> 18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
GENCORP INC.
<S> <C>
Date September 29, 1997 By /s/ D. M. Steuert
------------------------------ ---------------------
D. M. Steuert
Senior Vice President and Chief Financial Officer
Date September 29, 1997 By /s/ W. R. Phillips
------------------------------ ----------------------
W. R. Phillips
Senior Vice President, Law; General Counsel
</TABLE>
-18-
<PAGE> 1
EXHIBIT 11
GenCorp Inc.
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Nine Months Ended
---------------------- -----------------------
Aug. 31, Aug. 31, Aug. 31, Aug. 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
EARNINGS (Dollars in Millions)
Net Income for Primary Earnings
Per Share $ 20.2 $ 15.9 $ 115.4 $ 18.3
Tax Affected Interest Expense
Applicable to 8% Convertible
Subordinated Debentures .3 1.4 3.1 4.1
---------- ---------- ---------- ----------
Net Income for Fully Diluted Earnings
Per Share $ 20.5 $ 17.3 $ 118.5 $ 22.4
========== ========== ========== ==========
SHARES (In Thousands)
Weighted Average Number of Common
Shares Outstanding for Primary
Earnings Per Share (see Note B) 40,263 33,734 36,501 33,622
Additional Shares Issuable Under Stock
Options for Fully Diluted Earnings Per
Share 58 1 314 72
Additional Shares Due to Assuming the
Conversion of the 8% Convertible
Subordinated Debentures Occurred
at the Beginning of the Period 1,790 7,158 5,010 7,158
---------- ---------- ---------- ----------
Weighted Average Number of Common
Shares Outstanding for Fully Diluted
Earnings Per Share 42,111 40,893 41,825 40,852
========== ========== ========== ==========
EARNINGS PER SHARE
Primary: $ .50 $ .47 $ 3.16 $ .55
========== ========== ========== ==========
Fully Diluted: $ .49 $ .42 $ 2.83 $ .55
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> AUG-31-1997
<CASH> 13,700
<SECURITIES> 8,000
<RECEIVABLES> 257,800
<ALLOWANCES> 0
<INVENTORY> 167,000
<CURRENT-ASSETS> 508,100
<PP&E> 1,116,600
<DEPRECIATION> 709,800
<TOTAL-ASSETS> 1,399,600
<CURRENT-LIABILITIES> 378,400
<BONDS> 0
<COMMON> 4,100
0
0
<OTHER-SE> 259,900
<TOTAL-LIABILITY-AND-EQUITY> 1,399,600
<SALES> 1,125,000
<TOTAL-REVENUES> 1,125,000
<CGS> 911,400
<TOTAL-COSTS> 1,042,200
<OTHER-EXPENSES> (12,800)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,800
<INCOME-PRETAX> 81,800
<INCOME-TAX> (33,600)
<INCOME-CONTINUING> 115,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115,400
<EPS-PRIMARY> 3.16
<EPS-DILUTED> 2.83
</TABLE>
