<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 February 28, 1998 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
- ------------------------------ -------------------------------------
(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 March 31, 1998, there were 41,489,100 outstanding shares of GenCorp Inc.'s
Common Stock, par value $.10.
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GenCorp Inc.
Table of Contents
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Statements of Income -
Three Months Ended February 28, 1998 and 1997 -3-
Condensed Consolidated Balance Sheets -
February 28, 1998 and November 30, 1997 -4-
Condensed Consolidated Statements of Cash Flows -
Three Months Ended February 28, 1998 and 1997 -5-
Notes to the Unaudited Interim Condensed Consolidated
Financial Statements -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -12-
Part II. Other Information
Item 1. Legal Proceedings -15-
Item 4. Submission of Matters to a Vote of Security Holders -16-
Item 5. Other Information -16-
Item 6. Exhibits and Reports on Form 8-K -17-
Signatures -18-
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<PAGE> 3
PART I. FINANCIAL INFORMATION
-----------------------------
GenCorp Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share data)
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
------------------------------
February 28, February 28,
1998 1997
------------------------------
<S> <C> <C>
NET SALES $ 365.5 $ 328.0
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COSTS AND EXPENSES
Cost of products sold 290.6 259.1
Selling, general and administrative 37.0 34.9
Depreciation 15.7 13.4
Interest expense 2.1 5.7
Other (income) and expense, net (1.3) (.2)
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344.1 312.9
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INCOME BEFORE INCOME TAXES 21.4 15.1
Income tax provision 8.6 4.0
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NET INCOME $ 12.8 $ 11.1
========== ==========
EARNINGS PER SHARE OF COMMON STOCK
Basic $ .31 $ .33
Diluted $ .31 $ .30
Average number of shares of common stock outstanding (in
thousands)
Basic 41,349 33,509
Diluted 41,942 41,113
Cash dividends paid per share of common stock $ .15 $ .15
</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
February 28, November 30,
1998 1997
-----------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 20.9 $ 18.4
Accounts receivable 244.9 252.2
Inventories 134.3 157.2
Prepaid expenses and other 59.1 56.4
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TOTAL CURRENT ASSETS 459.2 484.2
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Recoverable from U.S. Government and third
parties for environmental remediation 166.5 167.8
Deferred income taxes 151.1 151.0
Prepaid pension 119.6 116.1
Investments and other assets 102.9 103.3
Property, plant and equipment:
At cost 1,129.3 1,121.1
Accumulated depreciation (724.3) (711.4)
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Net property, plant and equipment 405.0 409.7
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TOTAL ASSETS $1,404.3 $1,432.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable $ 43.5 $ 25.5
Accounts payable - trade 81.3 102.3
Income taxes 27.0 21.3
Other current liabilities 206.8 241.1
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TOTAL CURRENT LIABILITIES 358.6 390.2
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Long-term debt 93.2 83.6
Postretirement benefits other than pensions 330.0 335.3
Environmental reserves 270.0 274.2
Other liabilities 65.7 67.5
SHAREHOLDERS' EQUITY
Preference stock - (none outstanding) - -
Common stock - $0.10 par value; 41.4 million shares outstanding 4.1 4.1
Other capital 148.1 146.4
Retained earnings 145.8 139.2
Cumulative currency translation adjustments (11.2) (8.4)
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TOTAL SHAREHOLDERS' EQUITY 286.8 281.3
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,404.3 $1,432.1
======== ========
</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
Three Months Ended
February 28,
1998 1997
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $12.8 $11.1
Depreciation, amortization and gain/loss on disposal of fixed assets 16.4 15.0
Deferred income taxes (.1) (2.2)
Changes in operating assets and liabilities net of effects of acquisitions and
dispositions of businesses and exchange rate changes:
Current assets 26.5 (21.0)
Current liabilities (49.2) (58.5)
Other non-current assets (3.2) 3.8
Other non-current liabilities (11.2) (6.6)
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NET CASH USED IN OPERATING ACTIVITIES (8.0) (58.4)
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INVESTING ACTIVITIES
Capital expenditures (12.9) (8.2)
Proceeds from asset dispositions .3 4.8
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NET CASH USED IN INVESTING ACTIVITIES (12.6) (3.4)
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FINANCING ACTIVITIES
Long-term debt incurred 20.0 60.1
Long-term debt paid (10.4) (1.0)
Net short-term debt incurred 18.0 2.4
Dividends (6.2) (5.0)
Other equity transactions 1.7 (5.9)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 23.1 50.6
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 2.5 (11.2)
Cash and equivalents at beginning of year 18.4 22.6
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Cash and equivalents at end of period $20.9 $11.4
===== =====
</TABLE>
Cash paid for interest was $2.1 million and $8.1 million for the three months
ended February 28, 1998 and 1997, respectively. Cash paid for income taxes was
$2.9 million and $22.7 million for the three months ended February 28, 1998 and
1997, 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, 1997.
All normal recurring accruals and adjustments considered necessary for a
fair presentation of the unaudited results for the three months ended February
28, 1998 and 1997, have been reflected. The results of operations for the three
months ended February 28, 1998, are not necessarily indicative, if annualized,
of those to be expected for the full fiscal year.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Note B - Earnings Per Share
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In 1997, the Financial Accounting Standards Board issued Statement No. 128
"Earnings per Share" (SFAS 128). SFAS 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts presented have been restated
to conform to SFAS 128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
February 28,
(Dollars in millions, shares in thousands) 1998 1997
---------------------------
<S> <C> <C>
Numerator for basic earnings per share - income available
to common stockholders $12.8 $11.1
Effect of dilutive securities:
Interest on 8% convertible subordinated debentures, net of tax - 1.4
----- -----
Numerator for diluted earnings per share - income available
to common stockholders after assumed conversions $12.8 $12.5
===== =====
</TABLE>
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Note B - Earnings Per Share (continued)
- ---------------------------
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
February 28,
1998 1997
---------------------
<S> <C> <C>
Denominator for basic earnings per share -
weighted average shares 41,349 33,509
Effect of dilutive securities:
8% convertible subordinated debentures - 7,158
Employee stock options 578 415
Other 15 31
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Dilutive potential common shares 593 7,604
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Denominator for diluted earnings per share -
weighted average shares and assumed conversions 41,942 41,113
====== ======
Basic earnings per share $ 0.31 $ 0.33
====== ======
Diluted earnings per share $ 0.31 $ 0.30
====== ======
</TABLE>
Note C - Acquisitions
- ---------------------
On March 1, 1998, the Company acquired The Goodyear Tire & Rubber Company's
Calhoun, Georgia latex facility for $74 million in cash subject to a working
capital adjustment. The acquisition will be accounted for as a purchase and will
result in goodwill of approximately $60 million which will be amortized over 40
years.
On April 7, 1998, the Company announced that an agreement in principle had
been reached with United Kingdom based Walker Greenbank PLC to purchase its
commercial wallcovering business. The transaction is subject to due diligence,
negotiation of definitive agreement, regulatory approvals and approval by Walker
Greenbank shareholders.
Note D - Income Taxes
- ---------------------
The Company reduced its tax expense in the first quarter of 1997 by $2
million due to the receipt of a federal income tax settlement for tax credits,
timing of deductions and related interest.
Note E - 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
February 28, November 30,
(Dollars in millions) 1998 1997
--------------------------------
<S> <C> <C>
Raw materials and supplies $ 37.6 $ 42.9
Work-in-process 7.7 8.6
Finished products 58.6 59.1
--------- ---------
Approximate replacement cost of inventories 103.9 110.6
Reserves, primarily LIFO (39.3) (39.1)
Long-term contracts at average cost 229.5 199.0
Progress payments (159.8) (113.3)
--------- ---------
$ 134.3 $ 157.2
========= =========
</TABLE>
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Note F - Long-term Debt and Credit Lines
- ----------------------------------------
On May 17, 1996, the Company entered into a new five-year unsecured $400
million revolving credit facility (Facility) which expires in May 2001. As of
February 28, 1998, unused and available revolving lines of credit totaled $297
million. The Company paid a variable commitment fee, which was 1/5 of one
percent, on the unused balance. Interest rates were variable, primarily based on
LIBOR, and were at an average rate of 6.3 percent. The Facility contains various
debt restrictions and provisions relating to net worth, interest coverage and
debt to earnings before interest, taxes, depreciation and amortization
(Debt/EBITDA) ratios. As of February 28, 1998, the Company was required to
maintain consolidated net worth of at least $150 million.
At February 28, 1998, the Company had unsecured, uncommitted lines of credit
with several banks for short-term borrowings aggregating $101 million, of which
$40 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 $23 million at February 28, 1998 of which
$13 million was issued under the Facility.
Note G - 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 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. 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 public water supply wells near Aerojet's property.
Aerojet has substantially completed its efforts under the Decree to
determine the nature and extent of contamination at the facility and to identify
the technologies that will likely be used to remediate the site. The remediation
costs are principally for design, construction, enhancement and operation of
groundwater and soil treatment facilities, ongoing project management and
regulatory oversight, and are expected to be incurred over a period of
approximately 15 years.
San Gabriel Valley Basin, California
Aerojet, through its Azusa facility, has been named by the U.S.
Environmental Protection Agency (EPA) as a potentially responsible party (PRP)
in the portion of the San Gabriel Valley Superfund Site known as the Baldwin
Park Operable Unit (BPOU). Regulatory action involves issuance of a Record of
Decision (ROD) regarding regional groundwater remediation, issuing Aerojet and
18 other PRPs Special Notice letters requiring groundwater remediation and site
specific investigation and possible cleanup.
Aerojet's investigation demonstrated that the principal groundwater
contamination, volatile organic compounds (VOC), is upgradient of Aerojet's
property and that only low concentrations of VOC contaminants are present in the
soils of Aerojet's presently and historically owned properties. The EPA contends
that Aerojet is one of the four largest sources of groundwater contamination at
the BPOU of the nineteen PRPs identified by the EPA. Aerojet contests the EPA's
position regarding the source of contamination and the number of responsible
PRPs. Aerojet has joined a Steering Committee comprised of eleven of the PRPs
identified by the EPA.
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<PAGE> 9
Note G - Contingencies (continued)
- ----------------------
The ROD and Special Notice letters issued by the EPA require groundwater
remediation for the BPOU, estimated to cost $47 million in non-recurring costs
and $4 million to $5 million in annual operating expense. Aerojet, as part of
the Steering Committee, is participating in an effort to develop an alternative
"consensus" plan in which certain water supply entities would integrate the
remedial requirements into a water supply project. If implemented, the consensus
plan approach would allow the project to be eligible for federal funding for 25
percent of the non-recurring costs and additional funding from water supply
entities receiving benefit from the project, thus reducing the PRPs' costs.
Soon after the EPA issued the Special Notice letter, the State of California
also detected perchlorate in water wells in Southern California, including the
San Gabriel Valley, at previously undetectable levels using new testing
protocols. As a result of the recent finding of perchlorate, the EPA has
required investigation for and studies regarding treatability of perchlorate
contaminated water. Consequently, the EPA has allowed time extensions for
submittal by the PRPs of a good faith offer and negotiation of a consent decree
in response to the Special Notice letter. The perchlorate investigations and
studies are underway, primarily funded by Aerojet. The final perchlorate cleanup
standard (which has not yet been determined) could impact total cleanup cost and
implementation of the proposed consensus plan.
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 behalf of the State of
Michigan and the EPA. The Supreme Court granted the EPA's petition in December
1997. Depending on the opinion of the Supreme Court, the case may 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.
Aerojet's Reserve and Recovery Balances
On October 30, 1997, Aerojet executed an Agreement in Principle with the
U.S. Government that, when implemented after final U.S. Government approval,
will establish the cost sharing ratio and resolve certain other environmental
and facility issues at the Aerojet sites in Sacramento and Azusa, California.
At February 28, 1998, Aerojet had total reserves of $257 million for costs
to remediate the above sites and has recognized $179 million for probable future
recoveries. These estimates will be subject to change as work progresses,
additional experience is gained and environmental standards are revised. Legal
proceedings to obtain reimbursements of environmental costs from insurers are
continuing.
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<PAGE> 10
Note G - Contingencies (continued)
- ----------------------
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 $21
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 $42 million depending on the results of future testing and the
ultimate remediation alternatives undertaken at the site. The time frame for
remediation is currently estimated to range from 6 to 11 years.
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 $26 million as of February
28, 1998 which it believes are sufficient to cover its best estimate of its
share of the environmental remediation costs at these other sites. Also, the
Company is seeking recovery of its costs from its insurers.
Environmental Summary
- ---------------------
In regard to the sites discussed above, management believes, on the basis of
presently available information, that resolution of these matters will not
materially affect liquidity, capital resources or the consolidated financial
condition of the Company. The effect of resolution of these matters on results
of operations cannot be predicted due to the uncertainty concerning both the
amount and timing of future expenditures and future results of operations.
Other Legal Matters
- -------------------
In August 1991, Olin Corporation (Olin) advised GenCorp that Olin believed
GenCorp to be jointly and severally liable for certain Superfund remediation
costs, estimated by Olin to be $70 million, associated with a former Olin
manufacturing facility and waste disposal sites in Ashtabula County, Ohio.
In 1993, GenCorp sought declaratory judgment in the United States District
Court for the Northern District of Ohio that the Company is not responsible for
environmental remediation costs associated with the former Olin facility and
Superfund sites. Olin counterclaimed seeking a judgment that GenCorp is jointly
and severally liable for a share of remediation costs.
In late 1995, the Court hearing on the issue of joint and several liability
was completed, and in August 1996 the Court held hearings relative to
allocation. The Court has not yet rendered a decision. 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.
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<PAGE> 11
Note G - Contingencies (continued)
- ----------------------
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 used in operating activities for the first quarter of 1998 was $8
million as compared to $58 million for the first quarter of 1997. This decrease
was due to reduced working capital requirements.
At February 28, 1998, GenCorp's total debt was $137 million versus $359
million a year ago. The decrease in debt resulted from the conversion of
debentures and the use of proceeds from the collection of a tax settlement in
the third quarter of 1997. Interest expense decreased to $2.1 million in the
first quarter of 1998 versus $5.7 million in the comparable period a year ago,
primarily due to lower debt levels. Equity increased to $287 million, and the
debt to total capital ratio was 32 percent at the end of the first quarter of
1998.
Material Changes in Results of Operations
- -----------------------------------------
Sales increased 11 percent during the first quarter of 1998 to $365.5
million as compared to $328.0 million during the first quarter of 1997. Segment
operating profit for the first quarter of 1998 improved 14 percent to $29.6
million, versus $26.0 million for the first quarter of 1997. Corresponding
operating profit margins improved to 8.1 percent in the first quarter of 1998,
compared to 7.9 percent for the same period of 1997.
Within the Company's polymer products segment, net sales increased 10
percent to $147.5 million compared to $134.0 million in the first quarter of
1997. Specialty Polymers and Decorative & Building Products recorded
double-digit sales increases, while Penn Racquet Sports experienced slightly
lower volumes. Specialty Polymers generated higher latex shipments in its major
product lines, while Decorative & Building Products' sales improved in paper
laminates, heat transfer printing, commercial wallcovering, building systems,
and coated fabrics.
The polymer products segment achieved a 43 percent increase in operating
profit during the first quarter of 1998 to $14.6 million, compared to $10.2
million in the first quarter of 1997. Similarly, polymer products' operating
profit margins improved to 9.9 percent from 7.6 percent. Lower raw material
prices, reduced quality costs, and cost reduction programs led the margin
expansion. The segment also continues to invest in technology to support
value-creating growth initiatives.
On March 1, 1998, the Company acquired The Goodyear Tire & Rubber Company's
Calhoun, Georgia latex facility. This acquisition is expected to add over $50
million in annualized sales for Specialty Polymers and provide a strategic
southeastern geographic access to important carpet customers. Decorative &
Building Products' continuing investment in the development of new coating
technologies and equipment will enhance performance characteristics on a wide
range of decorative laminates and film products.
On April 7, 1998, the Company announced that an agreement in principle had
been reached with United Kingdom based Walker Greenbank PLC to purchase its
commercial wallcovering business. The transaction is subject to due diligence,
negotiation of definitive agreement, regulatory approvals and approval by Walker
Greenbank shareholders.
In the first quarter of 1998, Aerojet's sales increased 30 percent to $135.4
million as compared to $104.4 million in the first quarter of 1997. Higher sales
on the Space-Based Infrared System (SBIRS) and growth in Custom Chemicals were
major contributors to the sales increase.
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<PAGE> 13
Material Changes in Results of Operations (continued)
- -----------------------------------------
Aerojet's operating profit for the first quarter of 1998 was up 38 percent
to $14.2 million, compared to $10.3 million in the first quarter of 1997.
Contract mix and higher Custom Chemicals shipments contributed to the
improvement. Operating profit margins expanded to 10.5 percent versus 9.9
percent during the same period last year.
During the quarter, new funded contract awards for Aerojet totaled $96
million, including a $15 million six year Active Protection System contract from
the U.S. Army Research, Development and Engineering Center to design, develop
and deliver five warhead systems, and $9 million for warhead production on the
TOW-2A. Contract backlog totaled $1.8 billion at the end of the quarter. Also,
Aerojet's liquid propulsion systems performed successfully on four Delta II
launches carrying military and commercial communication satellite payloads.
Aerojet continues to make progress on its efforts to realize value on
surplus real estate, including its land adjacent to its propulsion manufacturing
facility near Sacramento, California. Breakthrough negotiations with state
regulators to delete an initial 1,100 acres of Sacramento real estate from a
state investigation order now allow for future development. Aerojet is moving
forward with plans for entitlement of the property, a process estimated to take
two to three years to complete. Land sales could commence now for unentitled
land, or after the completion of the entitlement process for maximum value, and
reach significant levels over a three to six year period.
Automotive segment sales were $82.6 million in the first quarter of 1998,
versus $89.6 million in the same 1997 quarter. The anticipated sales decline
resulted from customer shutdown of several older platforms, partially offset by
accelerated launches of new replacement platforms. Operating profit declined to
$0.8 million versus $5.5 million in the first quarter of 1997. The operating
profit decline, which was largely anticipated, was due to accelerated launch
costs on several new major platforms, slower than anticipated labor reductions
in Europe, and negative exchange rate variances from the segment's foreign
operations.
Value-Creating Growth Strategy
- ------------------------------
As part of GenCorp's announced value-creating growth strategy, management
expects that the Company will become more focused as a stronger player in fewer
businesses with higher value enhancing growth potential. To execute this
strategy, the Company may exit non-strategic businesses and will aggressively
focus on organic growth in all remaining businesses and seek out vehicles for
"new but related" growth to expand its strongest businesses which have been
identified as GenCorp's growth platforms. Growth platform businesses include
Specialty Polymers, Decorative & Building Products, and Space Surveillance and
Smart Munitions sectors of Aerojet. Attractive related markets, products and
programs will be targeted in these areas, along with organic growth and
opportunities for acquisition or alliance strategies.
Environmental Matters
- ---------------------
GenCorp's policy is to conduct its businesses with due regard for the
preservation and protection of the environment. The Company devotes a
significant amount of resources and management attention to environmental
matters and actively manages its ongoing processes to comply with extensive
environmental laws and regulations. The Company is involved in the remediation
of environmental conditions which resulted from generally accepted manufacturing
and disposal practices in the 1950s and 1960s which were followed at certain
GenCorp plants. In addition, the Company has been designated a potentially
responsible party, with other companies, at sites undergoing investigation and
remediation.
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<PAGE> 14
Environmental Matters (continued)
- ---------------------
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
February 28, 1998 reflects accruals of $304 million and amounts recoverable of
$179 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 G - Contingencies.
Information Systems and the Year 2000
- -------------------------------------
The Company is currently engaged in a comprehensive project to upgrade its
information, technology, manufacturing and facilities computer software
programs to address the Year 2000 issue. Many of the Company's systems include
new hardware and packaged software recently purchased from large vendors who
have represented that these systems are already Year 2000 compliant. The Company
is in the process of obtaining assurances from vendors that timely updates will
be made available to make all remaining purchased software Year 2000 compliant.
The Company will utilize both internal and external resources to reprogram
or replace and test all of its software for Year 2000 compliance, and the
Company expects to complete the project in early 1999. The estimated cost for
this project could range as high as $15 million, excluding the cost of new
systems which will be capitalized. This cost is being funded through operating
cash flows. Failure by the Company and/or vendors and customers to complete Year
2000 compliance work in a timely manner could have a material adverse effect on
certain of the Company's operations.
Forward-Looking Statements
- --------------------------
This report on Form 10-Q contains forward-looking statements as defined by
the Private Securities Litigation Reform Act of 1995. These statements may
present (without limitation) management's expectations, beliefs, plans and
objectives, future financial performance, and assumptions or judgments
concerning such matters. Any discussions contained in this report, except to the
extent that they contain historical facts, are forward-looking and accordingly
involve estimates, assumptions, judgments and uncertainties. There are a number
of factors that could cause actual results or outcomes to differ materially from
those addressed in the forward-looking statements. Such factors are detailed in
the Company's Annual Report on Form 10-K for the fiscal year ended November 30,
1997 filed with the Securities and Exchange Commission.
-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 G beginning on page 8 of this
report is incorporated herein by reference.
Santamaria v. Suburban Water Systems
- ------------------------------------
On July 2, 1997, a "toxic tort" lawsuit was filed in the Los Angeles County
Superior Court, SANTAMARIA V. SUBURBAN WATER SYSTEMS, Docket No. KC 025995,
naming as defendants 19 manufacturing companies, (including Aerojet), and 5
water companies. The complaint was subsequently amended to add additional
plaintiffs and two additional defendant public water companies and has been
served on the private water companies but not on the industrial PRPs. On January
15, 1998, the plaintiffs represented to the Court that Aerojet and the other
manufacturing defendants would be served within the next sixty days. We
understand that most have now been served, although Aerojet is still awaiting
service. On March 30, 1998, the Court granted a motion for change of venue and
transferred the case to Ventura County which is immediately northwest of Los
Angeles. Further activity will not take place in the case until it has been
assigned to a new judge. The several hundred plaintiffs, all of whom reside or
resided in the San Gabriel Valley of Los Angeles (SGV), alleged that the
defendants placed hazardous chemicals in the soil, groundwater and air in the
SGV and provided contaminated well water to the plaintiffs for many years. The
causes of action alleged are negligence, wrongful death, strict liability,
trespass, nuisance, negligence per se, ultrahazardous activity and fraudulent
concealment, and the plaintiffs seek personal injury and property damages in an
unspecified amount and punitive damages. They also seek a court order to stop
the allegedly tortious activity, but no preliminary injunctive relief is sought.
Aerojet has notified its insurers and will vigorously defend this action.
Allen, et al. v. Aerojet, MDC, Southern California Water Company, et al.
- ------------------------------------------------------------------------
Adams, et al. v. Aerojet, MDC, Southern California Water Company, et al.
- ------------------------------------------------------------------------
On December 8, 1997 and March 2, 1998, similar but unrelated "toxic tort"
complaints were filed in Sacramento Superior Court. The plaintiffs seek
compensation for damages for alleged personal injuries and property damages
related to exposure to groundwater contamination in eastern Sacramento County,
California. Aerojet was served on January 14, 1998 in ALLEN and is not yet
served in ADAMS. Aerojet will vigorously defend these matters. In addition to
Aerojet, McDonnell-Douglas Corporation (now Boeing) and two Sacramento water
purveyors are defendants. Aerojet has also notified its insurers of these
actions.
Because of these (and other similar recent) "toxic tort" lawsuits which
named California water purveyors as defendants, on March 12, 1998, the
California Public Utilities Commission (PUC) announced a wide ranging
investigation of drinking water quality in California. The PUC's General Counsel
has publicly stated that he believes under the California Constitution the PUC's
jurisdiction overrides that of the Courts in this area. Accordingly, Aerojet is
also preparing to defend its interests before the PUC.
-15-
<PAGE> 16
Item 1. Legal Proceedings (continued)
- --------------------------
In re: Proposition 65 Notices
- ------------------------------
Aerojet was served in November and December 1997 with notices from a private
group alleging that it has released chemicals into air and groundwater from its
Sacramento facility in violation of California's Proposition 65 and without
filing sufficiently detailed public notifications as required by Proposition 65.
Following collection and review of all of its Proposition 65 records, air
release reports and groundwater reports, Aerojet believes it is in compliance
with Proposition 65 and has so advised the California Attorney General's office.
While compliance with Proposition 65 is a defense, private litigation may still
be filed. Aerojet's insurance carriers have been notified of these claims.
The Company and its subsidiaries are subject to various legal actions,
governmental investigations, and proceedings relating to a wide range of matters
in addition to those discussed above and in Part I of this report. In the
opinion of management, after reviewing the information which is currently
available with respect to such matters and consulting with the Company's
counsel, any liability which may ultimately be incurred with respect to these
additional matters will not materially affect the consolidated financial
condition of the Company. The effect of resolution of these matters on results
of operations cannot be predicted because any such effect depends on both future
results of operations and the amount and timing of the resolution of such
matter.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At the Company's Annual Meeting of Shareholders held on March 25, 1998,
holders of GenCorp Common Stock elected General Paul X. Kelley, Diane E.
McGarry, Dr. R. Byron Pipes and Steven W. Percy as directors to serve a three
year term expiring in 2001. Shareholders also ratified the Board of Directors'
appointment of Ernst & Young LLP as the Company's independent auditors for 1998.
Following is the final result of the Common votes cast:
A) Election of Directors:
<TABLE>
<CAPTION>
Broker
For Withheld Nonvotes
<S> <C> <C> <C>
General Paul X. Kelley 36,532,160 339,616 -0-
------------- ------------- --------
Diane E. McGarry 36,566,587 305,189 -0-
------------- ------------- --------
Dr. R. Byron Pipes 36,561,437 310,339 -0-
------------- ------------- --------
Steven W. Percy 36,569,056 302,720 -0-
------------- ------------- --------
</TABLE>
B) Ratification of the Board of Directors' appointment of Ernst & Young LLP as
independent auditors:
<TABLE>
<S> <C> <C> <C>
Broker
For: 36,685,089 Against: 105,862 Abstain: 80,825 Nonvotes: -0-
------------ ----------- ---------- --------
</TABLE>
Item 5. Other Information
- --------------------------
Effective January 30, 1998, Ambassador J. Gary Cooper, Chairman and Chief
Executive Officer of Commonwealth National Bank, Mobile, Alabama, and former
United States Ambassador to Jamaica, was elected a director of the Company. At
the annual meeting of shareholders held on March 25, 1998, Paul J. Phoenix
retired from service on the Board of Directors, bringing the number of directors
to eleven.
-16-
<PAGE> 17
Part II. Other Information (continued)
- --------------------------
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
Form of Restricted Stock Agreement between 10.1
the Company and Nonemployee Directors
providing for payment of part of
Directors' compensation for service on the
Board of Directors in Company Stock
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
February 28, 1998.
-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.
GENCORP INC.
Date April 9, 1998 By /s/ D. M. Steuert
------------------------ ------------------------------
D. M. Steuert
Senior Vice President and
Chief Financial Officer
Date April 9, 1998 By /s/ W. R. Phillips
------------------------ ------------------------------
W. R. Phillips
Senior Vice President, Law;
General Counsel
-18-
<PAGE> 1
Exhibit 10.1
RESTRICTED STOCK AGREEMENT
GENCORP INC.
March 1998
AGREEMENT, Made in Fairlawn, Ohio as of March 25, 1998 between GenCorp
Inc., an Ohio corporation ("Company") and the undersigned non-employee director
of the Company ("Director").
WHEREAS, the Company desires to increase Director's identification with
the interests of its shareholders and to increase Director's compensation for
service on the Board of Directors of the Company ("Board") by granting to
Director Two Hundred (200) shares of GenCorp Inc. Common Stock, $0.10 par value
per share ("Shares"), subject to the conditions and restrictions set forth in
this Restricted Stock Agreement ("Agreement").
NOW, THEREFORE, In consideration of the premises and the mutual
covenants set forth in this Agreement and for other good and valuable
consideration, the parties hereto agree as follows:
1. GRANT OF SHARES. As consideration for services to be rendered as a
member of the Board, the Company will issue in the name of the Director Two
Hundred (200) Shares which shall be subject to restrictions described below and
shall be legended as having been issued in a private transaction not registered
with the Securities and Exchange Commission.
2. ESCROW OF SHARES DURING RESTRICTION PERIOD. In aid of the
restrictions to which the Shares shall be subject pursuant to this Agreement,
the Shares shall be deposited in the name of the Director with the Shareholder
Services Department of the Company and shall be so held by the Company during
the period of Director's service on the Board ("Restriction Period").
3. SHAREHOLDER RIGHTS. Director shall, during the Restriction Period,
have the right to vote all Shares deposited hereunder and to receive all
dividends and other distributions paid with respect to such Shares.
4. AUTOMATIC DIVIDEND REINVESTMENT. As to the Shares deposited
hereunder, Director shall be automatically enrolled in GenCorp's dividend
reinvestment program, pursuant to the standard terms and conditions of
participation. Additional shares of GenCorp common stock accumulated pursuant to
the dividend reinvestment feature shall not be subject to the Restriction
Period. Director may decline to participate in such program by so indicating
below his or her signature on this Agreement.
5. ADJUSTMENTS. Shares issued pursuant to this Agreement and held by
the Company during the Restriction Period will be subject to the same
adjustment, if any, accorded to all other outstanding shares in the event of (i)
any change in the total number of shares of common stock of the Company
outstanding or the number or kind of securities into which shares have been
changed, (ii) any reorganization or change in the Company's capital structure,
or (iii) any other transaction or event having an effect similar to the
foregoing.
6. VESTING. Unless vesting is accelerated pursuant to paragraphs 7 or
10 hereof, ownership of the Shares deposited hereunder shall vest irrevocably in
the Director on March 25, 2000, subject to the other terms and restrictions of
this Agreement.
<PAGE> 2
-2-
7. Change in Control.
------------------
(a) Notwithstanding paragraph 6 above, the ownership of the Shares
granted hereby shall automatically vest, the Restriction Period shall terminate,
all restrictions shall lapse and delivery to Director of certificate(s)
representing such Shares shall occur immediately, if at any time during the
Restriction Period a Change in Control (as defined herein) shall occur.
(b) For purposes of this Agreement, "Change in Control" shall mean the
occurrence during the term of this Agreement of any of the following events,
subject to the provisions of Section (7)(b)(vi) hereof:
(i) All or substantially all of the assets of the
Company are sold or transferred to another corporation or entity, or the Company
is merged, consolidated or reorganized into or with another corporation or
entity, with the result that upon conclusion of the transaction less than 51% of
the outstanding securities entitled to vote generally in the election of
directors or other capital interests of the acquiring corporation or entity are
owned directly or indirectly, by the shareholders of the Company generally prior
to the transaction; or
(ii) There is a report filed on Schedule 13D or
Schedule 14D-1 (or any successor schedule, form or report), each as promulgated
pursuant to the Exchange Act, disclosing that any person (as the term "person"
is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act (a
"Person")) has become the beneficial owner (as the term "beneficial owner" is
defined under Rule 13d-3 or any successor rule or regulation promulgated under
the Exchange Act (a "Beneficial Owner")) of securities representing 20% or more
of the combined voting power of the then-outstanding voting securities of the
Company; or
(iii) The individuals who, at the beginning of any
period of two consecutive calendar years, constituted the Directors of the
Company cease for any reason to constitute at least a majority thereof unless
the nomination for election by the Company's stockholders of each new Director
of the Company was approved by a vote of at least two-thirds of the Directors of
the Company still in office who were Directors of the Company at the beginning
of any such period; or
(iv) There shall be an announcement of the intent of
any Person to commence a tender offer or exchange offer to acquire (when added
to any shares as to which such Person is the beneficial owner immediately prior
to such tender or exchange offer) beneficial ownership of 30% or more of the
combined voting power of the then-outstanding voting securities of the Company;
or
(v) The Board determines that (A) any particular
actual or proposed merger, consolidation, reorganization, sale or transfer of
assets, accumulation of shares or tender offer for shares of the Company or
other transaction or event or series of transactions or events will, or is
likely to, if carried out, result in a Change in Control falling within
Subsections (i), (ii), (iii) or (iv) and (B) it is in the best interests of the
Company and its shareholders, and will serve the intended purposes of this
Agreement, if the provisions of paragraph 7(a) of this Agreement shall thereupon
become immediately operative.
<PAGE> 3
-3-
(vi) Notwithstanding the foregoing provisions of this
Section (7)(b):
(A) If any such merger, consolidation,
reorganization, sale or transfer of assets, or tender offer or other transaction
or event or series of transactions or events mentioned in Section (7)(b)(v)
shall be abandoned, or any such accumulations of shares shall be dispersed or
otherwise resolved, the Board may, by notice to the Director, reinstate such
restrictions on transfer of Shares under this Agreement as were previously in
effect, but without prejudice to any action that may have been taken prior to
such reinstatement.
(B) Unless otherwise determined in a
specific case by the Board of Directors, a "Change in Control" shall not be
deemed to have occurred for purposes of Section (7)(b)(ii) or 7(b)(iv) solely
because (X) the Company, (Y) a Subsidiary, or (Z) any Company-sponsored employee
stock ownership plan or any other employee benefit plan of the Company or any
Subsidiary either files or becomes obligated to file a report or a proxy
statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or
Schedule 14A (or any successor schedule, form or report or item therein) under
the Exchange Act disclosing beneficial ownership by it of shares of the
then-outstanding voting securities of the Company, whether in excess of 20% or
otherwise, or because the Company reports that a change in control of the
Company has occurred or will occur in the future by reason of such beneficial
ownership.
8. RESTRICTIONS ON TRANSFER. During the Restriction Period, the Shares
may not be sold, transferred, pledged, assigned, alienated or hypothecated, or
otherwise transferred to another person whether by operation of law or
otherwise, except by will, the laws of descent and distribution or a qualified
domestic relations order.
9. BENEFICIARY DESIGNATION. Director may designate any beneficiary or
beneficiaries (contingently or successively) to whom Shares are to be paid if
Director dies during the Restriction Period, and may at any time revoke or
change any such designation. Absent such designation, any Shares which are due
to Director under this Agreement upon Director's death will be payable to
Director's estate. The designation of a Beneficiary will be effective only when
Director has delivered a completed Designation of Beneficiary form to the
Company's Secretary. A successive designation of Beneficiary will revoke a prior
designation.
10. TERMINATION DUE TO DEATH, DISABILITY, OR RETIREMENT. If Director's
service on the Board terminates by reason of his or her death, disability or
retirement under the Non-Employee Directors' Retirement Plan, Shares not already
vested, if any, shall automatically vest, the Restriction Period shall terminate
and all restrictions shall lapse.
11. TERMINATION DUE TO OTHER REASONS. If Director's service on the
Board terminates for any reason other than a reason set forth in paragraphs 7 or
10 above, Shares which have not vested prior to such date of termination will be
forfeited and cancelled as of such date. Notwithstanding the foregoing, by a
majority vote of the directors then in office (with the terminating director
abstaining), the Board shall have the right, in its sole discretion, to waive
the forfeiture of all or any portion of such Shares subject to such terms as it
deems appropriate.
12. DISPUTES. The Board shall have full and exclusive authority to
determine all disputes and controversies concerning the interpretation of this
Agreement by a majority vote of the directors then in office (with any disputing
director abstaining).
13. NOTICES. All written notices and communications directed to the
Company pursuant to this Agreement must be addressed to GenCorp Inc., 175 Ghent
Road, Fairlawn, Ohio 44333-3300; Attention: Secretary. All communications
directed to Director pursuant to this Agreement will be mailed to the Director's
current address as recorded on the payroll records of the Company.
<PAGE> 4
-4-
14. GOVERNING LAW. To the extent not preempted by federal law, this
Agreement will be governed by and interpreted in accordance with the laws of the
State of Ohio.
IN WITNESS WHEREOF, this Agreement has been executed by a duly
authorized officer of the Company and by the Director as of the 25th day of
March, 1998.
GENCORP INC.
By:
------------------------------------
J. B. Yasinsky
Chairman and Chief Executive Officer
Agreed to and accepted:
- ----------------------------------
Director Signature*
TO OPT OUT OF PARTICIPATION IN THE COMPANY'S DIVIDEND REINVESTMENT PROGRAM,
INITIAL THE STATEMENT BELOW:
I DO NOT ELECT TO PARTICIPATE IN THE DIVIDEND REINVESTMENT PROGRAM
- -----
*Sign and return one copy by May 1, 1998 to GenCorp Inc., 175 Ghent Road,
Fairlawn, Ohio 44333-3300; Attention: Secretary.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> FEB-28-1998
<CASH> 12,900
<SECURITIES> 8,000
<RECEIVABLES> 244,900
<ALLOWANCES> 0
<INVENTORY> 134,300
<CURRENT-ASSETS> 459,200
<PP&E> 1,129,300
<DEPRECIATION> 724,300
<TOTAL-ASSETS> 1,404,300
<CURRENT-LIABILITIES> 358,600
<BONDS> 0
0
0
<COMMON> 4,100
<OTHER-SE> 282,700
<TOTAL-LIABILITY-AND-EQUITY> 1,404,300
<SALES> 365,500
<TOTAL-REVENUES> 365,500
<CGS> 290,600
<TOTAL-COSTS> 343,300
<OTHER-EXPENSES> (1,300)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,100
<INCOME-PRETAX> 21,400
<INCOME-TAX> 8,600
<INCOME-CONTINUING> 12,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,800
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
</TABLE>
