<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, 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
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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
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At September 30, 1998, there were 41,526,250 outstanding shares of GenCorp
Inc.'s Common Stock, par value $0.10.
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GENCORP INC.
<TABLE>
<CAPTION>
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, 1998 and 1997 -3-
Condensed Consolidated Balance Sheets -
August 31, 1998 and November 30, 1997 -4-
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended August 31, 1998 and 1997 -5-
Notes to the Unaudited Interim Condensed Consolidated
Financial Statements as of August 31, 1998 -6-
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations -12-
Part II. Other Information
Item 1. Legal Proceedings -16-
Item 5. Other Information -17-
Item 6. Exhibits and Reports on Form 8-K -18-
Signatures -19-
</TABLE>
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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 Unaudited
Three Months Ended Nine Months Ended
------------------------- -------------------------
Aug. 31, Aug. 31, Aug. 31, Aug. 31,
1998 1997 1998 1997
------------------------- -------------------------
<S> <C> <C> <C> <C>
NET SALES $ 461.4 $ 393.5 $ 1,258.8 $ 1,125.0
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COSTS AND EXPENSES
Cost of products sold 375.4 311.6 1,005.5 890.0
Selling, general and administrative 37.5 38.1 111.7 109.2
Depreciation 15.8 15.1 47.5 43.0
Interest expense 3.7 1.9 8.9 13.8
Other (income) and expense, net .2 (8.3) (.4) (12.8)
Unusual items - - (.2) -
---------- ---------- ---------- ----------
432.6 358.4 1,173.0 1,043.2
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INCOME BEFORE INCOME TAXES 28.8 35.1 85.8 81.8
Income tax (provision) benefit (11.5) (14.9) (34.3) 33.6
---------- ---------- ---------- ----------
NET INCOME $ 17.3 $ 20.2 $ 51.5 $ 115.4
========== ========== ========== ==========
EARNINGS PER SHARE OF COMMON STOCK
Basic $ .42 $ .52 $ 1.24 $ 3.23
Diluted $ .41 $ .49 $ 1.22 $ 2.87
Average number of shares of common stock outstanding (in
thousands)
Basic 41,527 39,070 41,450 35,742
Diluted 42,103 41,582 42,077 41,219
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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<PAGE> 4
GENCORP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
<TABLE>
<CAPTION>
Unaudited Audited
August 31, November 30,
1998 1997
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<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 18.6 $ 18.4
Accounts receivable 296.2 252.2
Inventories 145.1 157.2
Prepaid expenses and other 55.5 56.4
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TOTAL CURRENT ASSETS 515.4 484.2
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Recoverable from U.S. government and third
parties for environmental remediation 159.1 167.8
Deferred income taxes 152.8 151.0
Prepaid pension 127.5 116.1
Investments and other assets 229.1 103.3
Property, plant and equipment:
At cost 1,181.3 1,121.1
Accumulated depreciation (732.9) (711.4)
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Net property, plant and equipment 448.4 409.7
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TOTAL ASSETS $1,632.3 $1,432.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable $ 43.2 $ 25.5
Accounts payable - trade 78.0 102.3
Income taxes 30.1 21.3
Other current liabilities 219.2 241.1
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TOTAL CURRENT LIABILITIES 370.5 390.2
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Long-term debt 301.6 83.6
Postretirement benefits other than pensions 322.7 335.3
Environmental reserves 255.3 274.2
Other liabilities 66.5 67.5
SHAREHOLDERS' EQUITY
Preference stock - (none outstanding) - -
Common stock - $0.10 par value; 41.5 million shares outstanding 4.2 4.1
Other capital 150.6 146.4
Retained earnings 172.0 139.2
Cumulative currency translation adjustment (11.1) (8.4)
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TOTAL SHAREHOLDERS' EQUITY 315.7 281.3
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,632.3 $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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<PAGE> 5
GENCORP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
<TABLE>
<CAPTION>
Unaudited
Nine Months Ended
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August 31,
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 51.5 $115.4
Unusual items (.2) -
Depreciation, amortization and gain/loss on disposal of fixed assets 53.1 45.9
Deferred income taxes (1.8) (.2)
Changes in operating assets and liabilities net of effects of acquisitions and
dispositions of businesses and exchange rate changes:
Current assets (2.1) (52.3)
Current liabilities (49.1) 1.0
Other non-current assets (8.7) 9.5
Other non-current liabilities (32.5) (8.7)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 10.2 110.6
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INVESTING ACTIVITIES
Capital expenditures (60.9) (36.4)
Proceeds from asset dispositions 18.9 14.8
Acquisitions (188.5) (46.5)
Investments and other, net (.2) (2.5)
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NET CASH USED IN INVESTING ACTIVITIES (230.7) (70.6)
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FINANCING ACTIVITIES
Long-term debt incurred 310.0 180.0
Long-term debt paid (92.0) (203.6)
Net short-term debt incurred 17.7 4.8
Dividends (18.7) (16.2)
Other equity transactions 3.7 (5.9)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 220.7 (40.9)
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS .2 (.9)
Cash and equivalents at beginning of year 18.4 22.6
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Cash and equivalents at end of period $ 18.6 $ 21.7
====== ======
</TABLE>
Cash paid for interest was $8 million and $15 million for the nine months ended
August 31, 1998 and 1997, respectively. Cash paid for income taxes was $25
million and $64 million for the nine months ended August 31, 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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<PAGE> 6
GENCORP INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AS OF AUGUST 31, 1998
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 nine months ended August 31,
1998 and 1997, have been reflected. The results of operations for the nine
months ended August 31, 1998, are not necessarily indicative, if annualized, of
those to be expected for the full fiscal year.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain reclassifications have been made to conform prior year's data to the
current presentation.
Note B - Earnings Per Share
- ---------------------------
In 1997, the Financial Accounting Standards Board issued Statement No. 128
"Earnings per Share" (SFAS 128). SFAS 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts presented have been restated
to conform to SFAS 128 requirements.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Nine Months Ended
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August 31, August 31,
(Dollars in millions, shares in thousands) 1998 1997 1998 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
Numerator for basic earnings per share -
income available to common shareholders $ 17.3 $ 20.2 $ 51.5 $ 115.4
Effect of dilutive securities:
8% convertible subordinated debentures - .3 - 3.1
------- ------- ------- -------
Numerator for diluted earnings per share -
income available to common shareholders
after assumed conversions $ 17.3 $ 20.5 $ 51.5 $ 118.5
======= ======= ======= =======
</TABLE>
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<PAGE> 7
Note B - Earnings Per Share (continued)
- ---------------------------
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Nine Months Ended
-------------------- --------------------
August 31, August 31,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Denominator for basic earnings per share -
weighted average shares 41,527 39,070 41,450 35,742
Effect of dilutive securities:
8% convertible subordinated debentures - 1,790 - 5,010
Employee stock options 558 707 608 452
Other 18 15 19 15
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Dilutive potential common shares 576 2,512 627 5,477
------ ------ ------ ------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 42,103 41,582 42,077 41,219
====== ====== ====== ======
Basic earnings per share $ .42 $ .52 $ 1.24 $ 3.23
====== ====== ====== ======
Diluted earnings per share $ .41 $ .49 $ 1.22 $ 2.87
====== ====== ====== ======
</TABLE>
Note C - Acquisitions and Divestitures
- --------------------------------------
On August 14, 1998, the Company acquired the commercial wallcovering
business of Walker Greenbank PLC, which is based in the United Kingdom, for
$115 million in cash. The acquisition was accounted for as a purchase and
resulted in goodwill and other intangible assets of $73 million which are being
amortized over periods ranging from 5 to 40 years.
On July 21, 1998, the Company announced that a letter of intent had been
signed to purchase Sequa Chemicals, the specialty chemicals unit of Sequa
Corporation. The transaction is expected to close in the fourth quarter of 1998.
On June 30, 1998, the Company sold its plastic extrusions appliance gasket
business to ILPEA, Inc. for an aggregate consideration of approximately $3
million.
On March 1, 1998, the Company acquired The Goodyear Tire & Rubber Company's
Calhoun, Georgia latex facility for an aggregate consideration of $78 million,
of which $74 million was paid in cash and $4 million was paid through the
retention of receivables. The acquisition was accounted for as a purchase and
resulted in goodwill and other intangible assets of $58 million which are being
amortized over periods ranging from 3 to 40 years.
On May 7, 1997, the Company acquired certain net assets of Printworld from
Technographics, Inc. for $47 million in cash. The acquisition was accounted for
as a purchase and resulted in goodwill and other intangible assets of $31
million which are being amortized over periods ranging from 3 to 30 years.
Note D - Unusual Items
- ----------------------
During the first nine months of 1998, the Company had unusual items
resulting in income of $0.2 million. These unusual items included charges of
$3.8 million related to exiting the plastic extrusions appliance gasket business
and an $8.8 million write-off of excess fixed assets that will no longer be used
in a number of polymer products businesses. These charges were offset by a gain
of $12.8 million on the sale of surplus land in Nevada by Aerojet.
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<PAGE> 8
Note E - Income Taxes
- ---------------------
The Company reduced its tax expense in the first nine months of 1997 by $67
million due to the receipt of federal income tax settlements for tax credits,
timing of deductions and related interest.
Note F - Inventories
- --------------------
Inventories are stated at the lower of cost or market value. A portion of
the inventories is priced by use of the last-in, first-out (LIFO) method using
various dollar value pools. Interim LIFO determinations involve management's
judgments of expected year-end inventory levels. Components of inventory are as
follows:
<TABLE>
<CAPTION>
Unaudited Audited
August 31, November 30,
1998 1997
-------------------------------
<S> <C> <C>
Raw materials and supplies $ 41.1 $ 42.9
Work-in-process 6.5 8.6
Finished products 71.0 59.1
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Approximate replacement cost of LIFO inventories 118.6 110.6
Reserves, primarily LIFO (37.8) (39.1)
Long-term contracts at average cost 232.0 199.0
Progress payments (167.7) (113.3)
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$ 145.1 $ 157.2
========== ==========
</TABLE>
Note G - Long-term Debt and Credit Lines
- ----------------------------------------
On May 17, 1996, the Company entered into a new five-year unsecured $400
million revolving credit facility (Facility) which expires in May 2001. As of
August 31, 1998, unused and available revolving lines of credit totaled $100
million. The Company pays a variable commitment fee, which was 1/5 of one
percent, on the unused balance. Interest rates were variable, primarily based on
LIBOR, and were at an average rate of 6.2 percent. The Facility contains various
debt restrictions and provisions relating to net worth, interest coverage and
debt to earnings before interest, taxes, depreciation and amortization
(Debt/EBITDA) ratios. As of August 31, 1998, the Company was required to
maintain consolidated net worth of at least $150 million.
At August 31, 1998, the Company had unsecured, uncommitted lines of credit
with several banks for short-term borrowings aggregating $67 million, of which
$41 million was outstanding. Interest rates for these lines of credit were
variable and were at an average rate of 5.6 percent on August 31, 1998.
Borrowings under such lines are payable on demand. The Company also had
outstanding letters of credit totaling $22 million at August 31, 1998.
On September 30, 1998, the Company entered into a new $75 million revolving
credit facility for the purchase of certain assets of Sequa Chemicals, the
specialty chemicals unit of Sequa Corporation. This facility is available
through October 30, 1998 or for 3 months after the closing of the acquisition
and contains various debt restrictions and other provisions which are the same
as those in the Facility described above. The rate is 75 basis points over
LIBOR. The Company will pay, after the initial draw, a commitment fee of
approximately 1/5 of one percent on the unused balance.
-8-
<PAGE> 9
Note H - Contingencies
- ----------------------
Environmental Matters
- ---------------------
Sacramento, California
In June 1989, the United States District Court approved a Partial Consent
Decree (Decree) requiring Aerojet to conduct a Remedial
Investigation/Feasibility Study (RI/FS) of Aerojet's Sacramento, California site
and to prepare a RI/FS report on specific environmental conditions present at
the site and alternatives available to remedy such conditions. Aerojet also is
required to pay for certain governmental oversight costs associated with
compliance with the Decree. The State of California recently expanded
surveillance of perchlorate and nitrosodimethylamine (NDMA) under the RI/FS
because these chemicals were detected in public water supply wells near
Aerojet's property at previously undetectable levels using new testing
protocols.
Aerojet has substantially completed its efforts under the Decree to
determine the nature and extent of contamination at the facility and to identify
the technologies that will likely be used to remediate the site. The remediation
costs are principally for design, construction, enhancement and operation of
groundwater and soil treatment facilities, ongoing project management and
regulatory oversight, and are expected to be incurred over a period of
approximately 15 years.
San Gabriel Valley Basin, California
Aerojet, through its Azusa facility, has been named by the U.S.
Environmental Protection Agency (EPA) as a potentially responsible party (PRP)
in the portion of the San Gabriel Valley Superfund Site known as the Baldwin
Park Operable Unit (BPOU). Regulatory action involves requiring site specific
investigation, possible cleanup, issuance of a Record of Decision (ROD)
regarding regional groundwater remediation and issuance to Aerojet and 18 other
PRPs Special Notice letters requiring groundwater remediation.
Aerojet's investigation demonstrated that the principal groundwater
contamination, volatile organic compounds (VOC), is upgradient of Aerojet's
property and that lower concentrations of VOC contaminants are present in the
soils of Aerojet's presently and historically owned properties. The EPA contends
that Aerojet is one of the four largest sources of 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 composed of fourteen of the PRPs
identified by the EPA.
The ROD and Special Notice letters issued by the EPA require groundwater
remediation for the BPOU, estimated to cost $47 million in non-recurring costs
and $4 million to $5 million in annual operating expense. Aerojet, as part of
the Steering Committee, is participating in an effort to develop an alternative
"consensus" plan in which certain water supply entities would integrate the
remedial requirements into a water supply project. If implemented, the consensus
plan approach would allow the project to be eligible for federal funding for 25
percent of the non-recurring costs and additional funding from water supply
entities receiving benefit from the project, thus reducing the PRPs' costs.
Soon after the EPA issued the Special Notice letter, the State of California
also detected perchlorate in water wells in Southern California, including the
San Gabriel Valley, at previously undetectable levels using new testing
protocols. As a result of the recent finding of perchlorate, the EPA has
required investigation for and studies regarding treatability of perchlorate
contaminated water. Consequently, the EPA has allowed time extensions for
submittal by the PRPs of a good faith offer and negotiation of a consent decree
in response to the Special Notice letter. More recently, NDMA has been detected
in water supply wells, also at previously undetectable levels. The extent of
NDMA in the groundwater is being studied. Treatment technology is established.
The perchlorate and NDMA investigations and studies are underway, primarily
funded by Aerojet. The final perchlorate and NDMA cleanup standards (which have
not yet been determined) could impact total cleanup cost and implementation of
the proposed consensus plan.
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<PAGE> 10
Note H - Contingencies (continued)
- ----------------------
Muskegon, Michigan
In a lawsuit filed by the U.S. Environmental Protection Agency (EPA), the
United States District Court ruled in 1992 that Aerojet and its two inactive
Cordova Chemical subsidiaries (Cordova) are liable for remediation of Cordova's
Muskegon, Michigan site, along with a former owner/operator of an earlier
chemical plant at the site, who is the other potentially responsible party
(PRP). That decision was appealed to the United States Court of Appeals.
In May 1997, the United States Court of Appeals for the Sixth Circuit issued
an en banc decision reversing Aerojet's and the other PRP's liability under the
CERCLA statute. Petitions for certiorari to the United States Supreme Court for
its review of the appellate decision were filed on behalf of the State of
Michigan and the EPA and were granted in December 1997. On June 8, 1998, the
U.S. Supreme Court issued its opinion. The Court held that a parent corporation
could be directly liable as an operator under CERCLA if it can be shown that the
parent corporation operated the facility. The Supreme Court vacated the Sixth
Circuit's 1997 ruling and remanded the case back to the U.S. District Court in
Michigan for retrial. Aerojet does not expect that it will be found liable on
remand. Aerojet is involved in settlement discussions with the EPA which, if
approved by the district court, would allow Aerojet and Cordova to be dismissed.
In a separate action, Aerojet and Cordova won indemnification for the
Muskegon site investigation and remediation costs from the State of Michigan in
the state court of claims. The Michigan Court of Appeals affirmed on appeal, and
the Michigan Supreme Court refused to hear the case. 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 August 31, 1998, Aerojet had total reserves of $248 million for costs to
remediate the above sites and has recognized $172 million for probable future
recoveries. These estimates will be subject to change as work progresses,
additional experience is gained and environmental standards are revised. Legal
proceedings to obtain reimbursements of environmental costs from insurers are
continuing.
Lawrence, Massachusetts
The Company has studied remediation alternatives for its closed Lawrence,
Massachusetts facility, which was contaminated with PCBs, and has begun site
remediation and off-site disposal of debris. The Company has a reserve of $19
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 $40 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.
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<PAGE> 11
Note H - Contingencies (continued)
- ----------------------
Other Sites
- -----------
The Company is also currently involved, together with other companies, in 37
other Superfund and non-superfund remediation sites. In many instances, the
Company's liability and proportionate share of costs have not been determined
largely due to uncertainties as to the nature and extent of site conditions and
the Company's involvement. While government agencies frequently claim PRPs are
jointly and severally liable at such sites, in the Company's experience, interim
and final allocations of liability costs are generally made based on relative
contributions of waste. Based on the Company's previous experience, its
allocated share has frequently been minimal, and in many instances, has been
less than 1 percent. The Company has reserves of approximately $21 million as of
August 31, 1998 which it believes are sufficient to cover its best estimate of
its share of the environmental remediation costs at these other sites. Also, the
Company is seeking recovery of its costs from its insurers.
Environmental Summary
- ---------------------
In regard to the sites discussed above, management believes, on the basis of
presently available information, that resolution of these matters will not
materially affect liquidity, capital resources or the consolidated financial
condition of the Company. The effect of resolution of these matters on results
of operations cannot be predicted due to the uncertainty concerning both the
amount and timing of future expenditures and future results of operations.
Other Legal Matters
- -------------------
In August 1991, Olin Corporation (Olin) advised GenCorp that Olin believed
GenCorp to be jointly and severally liable for certain Superfund remediation
costs, estimated by Olin to be $70 million, associated with a former Olin
manufacturing facility and waste disposal sites in Ashtabula County, Ohio.
In 1993, GenCorp sought declaratory judgment in the United States District
Court for the Northern District of Ohio that the Company is not responsible for
environmental remediation costs associated with the former Olin facility and
Superfund sites. Olin counterclaimed seeking a judgment that GenCorp is jointly
and severally liable for a share of remediation costs.
In late 1995, the Court hearing on the issue of joint and several liability
was completed, and in August 1996 the Court held hearings relative to
allocation. The Court has not yet rendered a decision and, at its request,
received an additional briefing regarding the impact of the recent BEST FOODS
Supreme Court decision which the Company believes is dispositive of many
issues in this case in its favor. 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 first nine months of
1998 was $10.2 million as compared to $110.6 million in the first nine months of
1997. The difference reflects the receipt of the federal income tax settlements
(see Note E - Income Taxes) and reimbursement of expenses related to an
environmental settlement in the first nine months of 1997 offset by
environmental spending in fiscal 1998.
For the nine months ended August 31, 1998, $230.7 million was used for
investing activities, including the acquisitions of the Calhoun facility for
$73.8 million and Walker Greenbank's commercial wallcovering business for $114.7
million and capital expenditures of $60.9 million, which mainly relate to the
Custom Chemicals and Automotive businesses, offset by proceeds of $18.9 million
from asset dispositions. This is compared to $70.6 million used for investing
activities for the nine months ended August 31, 1997, which included the
acquisition of Printworld for $46.5 million and capital expenditures of $36.4
million, offset by proceeds of $14.8 million from asset dispositions.
Cash flow provided from financing activities in the first nine months of
1998 primarily reflects a $235.7 million net increase in debt offset by payments
of $18.7 million in dividends. The net increase in debt from November 30, 1997
to August 31, 1998 was mainly due to the acquisitions of the Calhoun facility
and Walker Greenbank's commercial wallcovering business. The use of cash in
financing activities in the first nine months of 1997 reflected a net decrease
of $18.8 million in debt and payments of $16.2 million in dividends.
Interest expense increased to $3.7 million from $1.9 million in the
comparable third quarter period a year ago due to higher debt levels caused by
the current year acquisitions. However, interest expense decreased to $8.9
million from $13.8 million in the comparable first nine months due to the
conversion of $115 million in debentures and the federal income tax settlements
in 1997. Other income and expense was favorably impacted in the first nine
months of 1997 by the collection of a note receivable and interest from a 1996
divestiture and reimbursement of expenses related to an environmental
settlement.
On September 30, 1998, the Company entered into a new $75 million revolving
credit facility for the purchase of certain assets of Sequa Chemicals, the
specialty chemicals unit of Sequa Corporation. This facility is available
through October 30, 1998 or for 3 months after the closing of the acquisition.
(Refer to Note G - Long-term Debt and Credit Lines.)
Material Changes in Results of Operations
- -----------------------------------------
Sales totaled $461.4 million for the third quarter of 1998, an increase of
17 percent as compared to $393.5 million during the third quarter of 1997.
Aerojet led all businesses with a 37 percent revenue increase while the polymer
products segment posted a revenue increase of 10 percent during the current
quarter as compared to the third quarter of 1997. For the nine months ended
August 31, 1998, sales increased 12 percent to $1.26 billion as compared to
$1.13 billion during the first nine months of 1997.
Operating profit, which was negatively impacted by $(7.1) million due to the
strike at General Motors (GM), totaled $36.1 million for the third quarter of
1998, versus $38.9 million for the third quarter of 1997. Operating margins
declined to 7.8 percent compared to 9.9 percent in the third quarter of 1997 due
to the impact of the strike at GM and launch costs at the automotive segment.
For the first nine months of 1998, operating profit improved to $109.0 million
versus $108.3 million for the same period in 1997.
-12-
<PAGE> 13
Material Changes in Results of Operations (continued)
- -----------------------------------------
Earnings for the third quarter of 1998 were $0.41 per diluted share compared
to $0.49 per diluted share in the third quarter of 1997, which included a
benefit of $0.05 per share from a previously divested business. Net income in
the third quarter of 1998 totaled $17.3 million compared to third quarter 1997
net income of $20.2 million. The Company's 1998 third quarter earnings were
impacted by $(0.10) per share because of the 54 day strike at GM. For the nine
months ended August 31, 1998, net income improved 7 percent to $51.5 million as
compared to net income before tax settlements of $48.2 million during the first
nine months of 1997.
Strategically, the businesses GenCorp has targeted as growth platforms have
made significant progress. The Specialty Polymers business unit has successfully
integrated the recently acquired Calhoun, Georgia specialty latex plant, and
expects to complete the acquisition of Sequa Corporation's U.S. specialty
chemicals business in the fourth quarter. Sequa will provide entry into new but
related markets such as textiles, graphic arts and construction, and will enable
the Specialty Polymers unit to further diversify its product lines and customer
base.
Decorative & Building Products completed the acquisition of Walker
Greenbank's commercial wallcovering business in August, which is a major step
towards globalization. This new U.K.-based business is expected to add
approximately $70 million in high margin annualized revenues and provide a key
platform in Europe to distribute other product lines.
Net sales for the polymer products businesses in the third quarter of 1998
were $177.7 million compared to $161.9 million in the third quarter of 1997.
Improved sales in specialty latices for paper coatings and textiles, paper
laminates, building systems and tennis products led the increase.
Operating profit for the polymer products businesses increased 19 percent to
$23.1 million for the third quarter of 1998 versus $19.4 million in the third
quarter of 1997. Operating margins increased to 13.0 percent in the third
quarter of 1998 compared to 12.0 percent in the third quarter of 1997 due to
product mix, cost reduction programs and lower raw material prices for styrene,
butadiene and PVC resins.
Sales for the automotive businesses in the third quarter of 1998 totaled
$78.3 million versus $82.1 million in the third quarter of 1997. The decrease in
sales was due to the strike at GM, which resulted in lost revenues of $16.0
million during the quarter.
The Company's Vehicle Sealing operations had operating losses of $(6.9)
million in the third quarter of 1998 as compared to income of $5.6 million for
the third quarter of 1997. Operating income was negatively impacted by $(7.1)
million from the strike at GM, operating losses of $(0.5) million in plastic
extrusions, which was divested during the quarter, negative foreign exchange
variances of $(0.6) million, and higher than planned launch costs.
At Aerojet, net sales surged 37 percent to $205.4 million in the third
quarter of 1998 as compared to $149.5 million in the third quarter of 1997.
Higher volumes on the Special Sensor Microwave Imager/Sounder (SSMIS), Space
Based Infrared System (SBIRS), Defense Support Program (DSP), Sense and Destroy
Armor (SADARM) and Custom Chemicals were slightly offset by lower volumes on the
Titan and Delta programs.
Aerojet's operating profit for the third quarter of 1998 was $19.9 million,
compared to $13.9 million in the third quarter of 1997, an increase of 43
percent. Operating margins increased during the quarter to 9.7 percent from 9.3
percent in the third quarter of 1997. The increase was primarily due to higher
profits on the SBIRS program and the delivery of the final infrared sensor for
DSP. Aerojet will continue work on DSP, which is slated to be replaced by the
SBIRS High program, under a post-production support contract worth $265 million
through 2001.
-13-
<PAGE> 14
Material Changes in Results of Operations (continued)
- -----------------------------------------
During the quarter, Aerojet contract awards totaled $121 million, including
an advanced propulsion system award from Boeing, a $16.4 million contract from
NASA to provide a deorbit propulsion stage for the X-38 demonstrator flight
vehicle and a contract from Lockheed Martin for warhead production of Phase II
EMD of the U.S. Army Multi-Purpose Individual Munition/Short Range Assault
Weapon. Contract backlog totaled $1.6 billion at the end of the third quarter.
Value-Creating Growth Strategy
- ------------------------------
As part of GenCorp's announced value-creating growth strategy, management
expects that the Company will become more focused as a stronger player in fewer
businesses with higher value enhancing growth potential. To execute this
strategy, the Company may exit non-strategic businesses and will aggressively
focus on organic growth in all remaining businesses and seek out vehicles for
"new but related" growth to expand its strongest businesses which have been
identified as GenCorp's growth platforms. Growth platform businesses include
Specialty Polymers, Decorative & Building Products and the Custom Chemicals and
Space Surveillance sectors of Aerojet. Attractive related markets, products and
programs will be targeted in these areas, along with organic growth and
opportunities for acquisition or alliance strategies.
Environmental Matters
- ---------------------
GenCorp's policy is to conduct its businesses with due regard for the
preservation and protection of the environment. The Company devotes a
significant amount of resources and management attention to environmental
matters and actively manages its ongoing processes to comply with extensive
environmental laws and regulations. The Company is involved in the remediation
of environmental conditions which resulted from generally accepted manufacturing
and disposal practices in the 1950s and 1960s which were followed at certain
GenCorp plants. In addition, the Company has been designated a potentially
responsible party, with other companies, at sites undergoing investigation and
remediation.
The nature of environmental investigation and cleanup activities often makes
it difficult to determine the timing and amount of any estimated future costs
that may be required for remedial measures. However, the Company reviews these
matters and accrues for costs associated with the remediation of environmental
pollution when it becomes probable that a liability has been incurred and the
amount of the liability (usually based upon proportionate sharing) can be
reasonably estimated. The Company's Condensed Consolidated Balance Sheet at
August 31, 1998 reflects accruals of $288 million and amounts recoverable of
$172 million from the U.S. Government and other third parties for such costs.
The effect of resolution of environmental matters on results of operations
cannot be predicted due to the uncertainty concerning both the amount and timing
of future expenditures and future results of operations. However, management
believes, on the basis of presently available information, that resolution of
these matters will not materially affect liquidity, capital resources or the
consolidated financial condition of the Company. The Company will continue its
efforts to mitigate past and future costs through pursuit of claims for
insurance coverage and continued investigation of new and more cost effective
remediation alternatives and associated technologies. For additional discussion
of environmental matters, refer to Note H - Contingencies.
Year 2000
- ---------
The Company is currently engaged in a comprehensive project to upgrade its
information, technology, manufacturing and facilities computer hardware and
software programs to address the Year 2000 issue at its domestic and
international businesses. Many of the Company's systems include new hardware and
packaged software recently purchased from large vendors who have represented
that these systems are already Year 2000 compliant. The Company does not have
large centralized systems, a factor, which the Company believes, reduces the
risk of a single point of failure having wide-spread impact on the Company.
-14-
<PAGE> 15
Year 2000 (continued)
- ---------
As part of this project, the Company has formally communicated with its
significant suppliers, vendors and large customers to determine the extent to
which the Company is vulnerable to those parties' failures to correct their own
Year 2000 issues. As of August 31, 1998, the Company has received approximately
two-thirds of the responses, and those responses generally indicate that these
parties will be Year 2000 compliant.
The Company has completed an inventory and assessment of its information
technology systems. Both internal and external resources are being utilized to
test the Company's software for Year 2000 compliance and, where necessary, the
systems are being remediated through upgrading, replacement or reprogramming.
Also, the Company is taking an inventory of its non-information technology
(embedded) systems, prioritizing the impact of each of these systems on the
Company's ability to conduct its operations and, as necessary, is obtaining
vendor verification and/or remediation of those systems. The process of
analyzing, prioritizing, remediating and testing will be an iterative process
until all systems are Year 2000 compliant.
The estimated cost for this project is projected to range between $7
million and $10 million, which is being funded through operating cash flows. The
Company has spent approximately $1 million as of August 31, 1998 on this
project, most of which has been for internal remediation efforts and expects to
spend a significant amount in the fourth quarter of 1998. The Company believes
that 40 percent of its systems will be Year 2000 compliant by December 31, 1998,
another 30 percent by the end of first quarter 1999 with the remainder by
mid-year 1999. For example, the Company has undergone an assessment by the
Automotive Industry Action Group (AIAG) and General Motors and has received a
"green" rating indicating that the Company's Automotive systems are on target to
become Year 2000 compliant.
Based upon currently available information and considering the Company's
diversified business base, decentralized systems and Year 2000 efforts,
management believes that the most reasonably likely worst case scenario could
result in minor short-term business interruptions. The Company is preparing
contingency plans which include alternative sourcing to minimize any disruptions
to its businesses resulting from a vendor or supplier not being Year 2000
compliant. However, 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. The Company's exposure
could increase or its timetable for Year 2000 compliance could be delayed as a
result of any new acquisitions.
Adoption of the Euro
- --------------------
Based upon its preliminary evaluation, management believes that the adoption
of the Euro by the European Economic Community will not have a material impact
on the Company's international businesses. The Company's foreign operations are
small, conduct the majority of their business in a single currency and have
minimal price variations between countries.
Forward-Looking Statements
- --------------------------
This report on Form 10-Q contains forward-looking statements as defined by
the Private Securities Litigation Reform Act of 1995. These statements may
present (without limitation) management's expectations, beliefs, plans and
objectives, future financial performance, and assumptions or judgments
concerning such matters. Any discussions contained in this report, except to the
extent that they contain historical facts, are forward-looking and accordingly
involve estimates, assumptions, judgments and uncertainties. There are a number
of factors that could cause actual results or outcomes to differ materially from
those addressed in the forward-looking statements. Such factors are detailed in
the Company's Annual Report on Form 10-K for the fiscal year ended November 30,
1997 filed with the Securities and Exchange Commission.
-15-
<PAGE> 16
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
- --------------------------
Information concerning legal proceedings, including proceedings relating to
environmental matters, which appears in Note H beginning on page 9 of this
report is incorporated herein by reference.
Santamaria v. Suburban Water Systems
- ------------------------------------
On July 2, 1997, a "toxic tort" lawsuit was filed in the Los Angeles County
Superior Court, Santamaria v. Suburban Water Systems, Docket No. KC025995,
naming as defendants 19 manufacturing companies (including Aerojet), and 5 water
companies. The complaint was subsequently amended to add additional plaintiffs
and two additional defendant public water companies. On February 24, 1998, the
plaintiffs served Aerojet and the other manufacturing defendants. On March 30,
1998, the Court granted a motion for change of venue and transferred the case to
Ventura County which is immediately northwest of Los Angeles. Further activity
will not take place in the case until it has been assigned to a new judge. The
several hundred plaintiffs, all of whom reside or resided in the San Gabriel
Valley of Los Angeles (SGV), alleged that the defendants placed hazardous
chemicals in the soil, groundwater and air in the SGV and provided contaminated
well water to the plaintiffs for many years. The causes of action alleged are
negligence, wrongful death, strict liability, trespass, nuisance, negligence per
se, ultrahazardous activity and fraudulent concealment, and the plaintiffs seek
personal injury and property damages in an unspecified amount and punitive
damages. They also seek a court order to stop the allegedly tortious activity,
but no preliminary injunctive relief is sought. Aerojet has notified its
insurers and will vigorously defend this action. In June 1998, three recently
filed, related matters containing similar allegations (ADLER, Docket No.
BC169892; BOSWELL, Docket No. KC027318; and CELI, Docket No. GC020622) were
stayed for at least one year by their respective judges pending a California
Public Utilities Commission (PUC) investigation of the plaintiffs' allegations.
The SANTAMARIA matter has now also been similarly stayed. Aerojet has notified
its insurers and will vigorously defend these actions.
Mike Demciuc, et al v. Suburban Water Co., et al.
- -------------------------------------------------
Georgianna Dominguez, et al. v. Southern California Water Co., et al.
- ---------------------------------------------------------------------
Shamille A. Criner, et al. v. San Gabriel Valley Water Co., et al.
- ------------------------------------------------------------------
Three new related "toxic tort" suits containing allegations similar to the
SANTAMARIA matter were filed on July 30, 1998 and served on Aerojet on September
16, 1998, as follows: (i) MIKE DEMCIUC, ET AL V. SUBURBAN WATER CO., ET AL. Case
No. KC 028732, Superior Court of Los Angeles County, CA; (ii) GEORGIANNA
DOMINGUEZ, ET AL. V. SOUTHERN CALIFORNIA WATER CO., ET AL. Case No. GC 021657,
Superior Court of Los Angeles County, CA; and (iii) SHAMILLE A. CRINER, ET AL.
V. SAN GABRIEL VALLEY WATER CO., ET AL. Case No. GC 021658, Superior Court of
Los Angeles County, CA.
Allen, et al. v. Aerojet, MDC, Southern California Water Company, et al.
- ------------------------------------------------------------------------
Adams, et al. v. Aerojet, MDC, Southern California Water Company, et al.
- ------------------------------------------------------------------------
On December 8, 1997 and March 2, 1998, similar but unrelated "toxic tort"
complaints were filed in Sacramento Superior Court. The plaintiffs seek
compensation for damages for alleged personal injuries and property damages
related to exposure to groundwater contamination in eastern Sacramento County,
California. Aerojet was served on January 14, 1998 in ALLEN and on April 30,
1998 in ADAMS. Aerojet will vigorously defend these matters. In addition to
Aerojet, McDonnell-Douglas Corporation (now Boeing) and two Sacramento water
purveyors are defendants. Aerojet has also notified its insurers of these
actions. Aerojet's motions for stays in these matters were granted pending the
PUC investigation discussed below.
-16-
<PAGE> 17
Part II. Other Information (continued)
- --------------------------
Because of these (and other similar recent) "toxic tort" lawsuits which
named California water purveyors as defendants, on March 12, 1998, the PUC
announced a wide ranging investigation of drinking water quality in California.
The PUC's General Counsel has publicly stated that he believes that under the
California Constitution, the PUC's jurisdiction overrides that of the Courts in
this area. Accordingly, Aerojet is also preparing to defend its interests before
the PUC.
In re: Proposition 65 Notices
- ------------------------------
Aerojet was served in November and December 1997 with notices from a private
group alleging that it has released chemicals into air and groundwater from its
Sacramento facility in violation of California's Proposition 65 and without
filing sufficiently detailed public notifications as required by Proposition 65.
Following collection and review of all of its Proposition 65 records, air
release reports and groundwater reports, Aerojet believes it is in compliance
with Proposition 65 and has so advised the California Attorney General's office.
On June 4, 1998, Aerojet was served with a Proposition 65 lawsuit filed by the
Communities For A Better Environment in Sacramento Superior Court. The complaint
alleges past and present violations of Proposition 65. Aerojet's insurance
carriers have been notified of these claims. Aerojet plans a vigorous defense.
On July 6, 1998, Aerojet removed the case to U.S. District Court based on that
court's jurisdiction over the CERCLA Partial Consent Decree for the Sacramento
site. Plaintiffs have moved to remand the case to the Sacramento Superior Court;
Aerojet will oppose the remand motion.
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 5. Other Information
- -------------------------
The following information is based upon revised Securities and Exchange
Commission regulations Sec. 240.14a-4 and Sec. 240.14a-5 which became effective
June 29, 1998:
A stockholder proposal submitted outside the Rule 14a-8 process for
consideration at the Company's 1999 Annual Meeting will be
considered untimely for purposes of Proxy Rules 14a-4 and 14a-5 if
notice of the proposal is received by the Company after December
30, 1998.
-17-
<PAGE> 18
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits
--------
<TABLE>
<CAPTION>
Table Exhibit
Item No. Exhibit Description Number
---------------------------------------------------------------------------------
<S> <C> <C> <C>
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, 1998.
-18-
<PAGE> 19
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENCORP INC.
<TABLE>
<S> <C>
Date October 14, 1998 By /s/ D. M. Steuert
------------------------------- -------------------------------------------------
D. M. Steuert
Senior Vice President and Chief Financial Officer
Date October 14, 1998 By /s/ W. R. Phillips
------------------------------- -------------------------------------------------
W. R. Phillips
Senior Vice President, Law; General Counsel
</TABLE>
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> AUG-31-1998
<CASH> 17,300
<SECURITIES> 1,300
<RECEIVABLES> 296,200
<ALLOWANCES> 0
<INVENTORY> 145,100
<CURRENT-ASSETS> 515,400
<PP&E> 1,181,300
<DEPRECIATION> 732,900
<TOTAL-ASSETS> 1,632,300
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0
0
<COMMON> 4,200
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<TOTAL-LIABILITY-AND-EQUITY> 1,632,300
<SALES> 1,258,800
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<CGS> 1,005,500
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