<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 29, 2000 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.)
Highway 50 and Aerojet Road Rancho Cordova, California 95670
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(Address of principal executive offices) (Zip Code)
P.O. Box 537012 Sacramento, California 95853
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(Mailing address) (Zip Code)
Registrant's telephone number, including area code (916) 355-4000
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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
--- ---
As of March 31, 2000, there were 41,938,551 outstanding shares of GenCorp Inc.'s
Common Stock, par value $0.10.
<PAGE> 2
GENCORP INC.
Table of Contents
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
--------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Income -
Three Months Ended February 29, 2000 and February 28, 1999 -3-
Condensed Consolidated Balance Sheets -
February 29, 2000 and November 30, 1999 -4-
Condensed Consolidated Statements of Cash Flows -
Three Months Ended February 29, 2000 and February 28, 1999 -5-
Notes to the Unaudited Interim Condensed Consolidated Financial
Statements - February 29, 2000 -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -14-
Item 3. Quantitative and Qualitative Disclosures About Market Risk -16-
Part II. Other Information
Item 1. Legal Proceedings -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 amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
Feb. 29, Feb. 28,
2000 1999
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<S> <C> <C>
NET SALES $ 239 $ 255
COSTS AND EXPENSES
Cost of products sold 196 215
Selling, general and administrative 8 13
Depreciation and amortization 13 12
Interest expense 3 -
Other (income) expense, net 1 (2)
Unusual items 1 -
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222 238
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 17 17
Income tax provision 7 8
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INCOME FROM CONTINUING OPERATIONS 10 9
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAXES - 8
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAXES 74 -
----- -----
NET INCOME $ 84 $ 17
===== =====
EARNINGS PER SHARE OF COMMON STOCK
Basic:
Continuing operations $ .25 $ .22
Discontinued operations - .19
Cumulative effect of a change in accounting principle 1.76 -
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Total $2.01 $ .41
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Diluted:
Continuing operations $ .25 $ .22
Discontinued operations - .19
Cumulative effect of a change in accounting principle 1.76 -
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Total $2.01 $ .41
===== =====
CASH DIVIDENDS PAID PER SHARE OF COMMON STOCK $ .03 $ .15
</TABLE>
See notes to the unaudited interim condensed
consolidated financial statements.
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<PAGE> 4
GENCORP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Unaudited Audited
February 29, November 30,
2000 1999
-------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 16 $ 23
Accounts receivable 128 139
Inventories 167 144
Prepaid expenses and other 53 57
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TOTAL CURRENT ASSETS 364 363
Recoverable from U.S. Government and third parties for
Environmental remediation 210 211
Deferred income taxes 94 149
Prepaid pension 253 113
Investments and other assets 58 59
Property, plant and equipment, net 342 335
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TOTAL ASSETS $ 1,321 $ 1,230
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable and current portion of long-term debt $ 3 $ 9
Accounts payable 42 44
Income taxes payable 32 44
Other current liabilities 255 274
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TOTAL CURRENT LIABILITIES 332 371
Long-term debt 208 149
Postretirement benefits other than pensions 245 251
Environmental reserves 344 346
Other liabilities 30 33
SHAREHOLDERS' EQUITY
Preference stock - (none outstanding) - -
Common stock - $0.10 par value; 41.9 million shares outstanding 4 4
Other capital 1 -
Retained earnings 176 93
Accumulated other comprehensive loss (19) (17)
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TOTAL SHAREHOLDERS' EQUITY 162 80
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,321 $ 1,230
======= =======
</TABLE>
See notes to the unaudited interim condensed consolidated financial statements.
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<PAGE> 5
GENCORP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
Feb. 29, Feb. 28,
2000 1999
-------------------
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations $ 10 $ 9
Depreciation, amortization and gain on disposal of fixed assets 13 12
Deferred income taxes 12 -
Changes in operating assets and liabilities net of effects of dispositions
of businesses:
Current assets, net (15) 15
Current liabilities, net (33) (48)
Other non-current assets, net (18) (8)
Other non-current liabilities, net (10) 4
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NET CASH USED IN CONTINUING OPERATIONS (41) (16)
NET CASH USED IN DISCONTINUED OPERATIONS - (4)
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TOTAL CASH USED IN OPERATING ACTIVITIES (41) (20)
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INVESTING ACTIVITIES
Capital expenditures (19) (11)
Discontinued operations - (2)
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NET CASH USED IN INVESTING ACTIVITIES (19) (13)
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FINANCING ACTIVITIES
Net borrowings on long-term revolving credit facility 55 -
Net short-term debt (paid) incurred (2) 33
Dividends (1) (6)
Other equity transactions 1 -
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NET CASH PROVIDED BY FINANCING ACTIVITIES 53 27
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NET DECREASE IN CASH AND CASH EQUIVALENTS (7) (6)
Cash and cash equivalents at beginning of period 23 24
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Cash and cash equivalents at end of period $ 16 $ 18
==== ====
SUPPLEMENTAL DATA (CASH PAID FOR):
Interest $ 3 $ 6
Income taxes $ 7 $ 10
</TABLE>
See notes to the unaudited interim condensed consolidated financial statements.
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<PAGE> 6
GENCORP INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and therefore do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. These interim
statements should be read in conjunction with the financial statements and notes
thereto included or incorporated by reference in the GenCorp Inc. (Company)
Annual Report on Form 10-K for the fiscal year ended November 30, 1999.
All normal recurring accruals and adjustments considered necessary for a
fair presentation of the unaudited results for the three month periods ended
February 29, 2000 and February 28, 1999 have been reflected. The results of
operations for the three months ended February 29, 2000, 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 periods' data to
the current period's presentation.
Note B - Earnings Per Share
- ---------------------------
The following table sets forth the computation of basic and diluted earnings
per share from continuing operations:
<TABLE>
<CAPTION>
(Dollars in millions, except per share data Feb. 29, Feb. 28,
and shares in thousands) 2000 1999
-------------------
<S> <C> <C>
NUMERATOR
- ---------
Income from continuing operations $ 10 $ 9
======= =======
DENOMINATOR
- -----------
Denominator for basic earnings per share -
Weighted average shares outstanding 41,864 41,582
Effect of dilutive securities:
Employee stock options 116 435
Other - 19
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Dilutive potential common shares 116 454
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Denominator for diluted earnings per share -
Adjusted weighted average shares and assumed conversions 41,980 42,036
EARNINGS FROM CONTINUING OPERATIONS
PER SHARE OF COMMON STOCK
- -------------------------
Basic earnings per share $ .25 $ .22
Diluted earnings per share $ .25 $ .22
</TABLE>
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<PAGE> 7
Note C - Comprehensive Income
- -----------------------------
The components of total comprehensive income were as follows:
(Dollars in millions) Three Months Ended
----------------------
Feb. 29, Feb. 28,
2000 1999
----------------------
Income from continuing operations $ 10 $ 9
Adjustments:
Foreign currency translation effect (2) (2)
---- ----
Total comprehensive income $ 8 $ 7
==== ====
Note D - Acquisitions, Divestitures and Other Matters
- -----------------------------------------------------
On March 15, 2000, the Company signed an agreement to sell a 20 percent
equity interest in Aerojet Fine Chemicals LLC for approximately $25 million in
cash and sell an additional 20 percent equity interest for an approximate 35
percent equity interest in a privately held company. The privately held company
operates in the United States and Europe focusing on contract process
development and manufacturing in the pharmaceutical industry. Following the
sale, GenCorp will continue to manage, operate, and consolidate Aerojet Fine
Chemicals LLC as majority owners. The pending transaction is expected to be
completed during the second quarter of fiscal 2000, subject to government and
regulatory approvals.
Note E - Unusual Items
- ----------------------
During the first three months of fiscal 2000, the Company incurred unusual
expenses related to discontinued operations totaling approximately $1 million
which included spin related expenses and minor settlements.
Note F - Change in Accounting Principle
- ---------------------------------------
Effective December 1, 1999, the Company changed its methods for determining
the market-related value of plan assets used in determining the expected
return-on-assets component of annual net pension costs and the amortization of
gains and losses for both pension and postretirement benefit costs. Under the
previous accounting method, the market-related value of assets was determined by
smoothing assets over a five-year period. The new method shortens the smoothing
period for determining the market-related value of plan assets from a five-year
period to a three-year period. The changes result in a calculated market-related
value of plan assets that is closer to current value, while still mitigating the
effects of short-term market fluctuation. The new method also reduces the
substantial accumulation of unrecognized gains and losses created under the
previous method due to the disparity between fair value and market-related value
of plan assets. Under the previous accounting method all gains and losses were
subject to a ten-percent corridor and amortized over the expected working
lifetime of active employees (approximately 12 years). The new method eliminates
the ten-percent corridor and reduces the amortization period to five years.
The cumulative effect of this accounting change related to periods prior to
fiscal year 2000 of $123 million ($74 million after-tax, or $1.76 per basic and
diluted share) is a one-time, non-cash credit to fiscal 2000 earnings. For
fiscal year 2000, the accounting change is expected to result in additional
pretax income from continuing operations as follows:
<TABLE>
<CAPTION>
Fiscal Year
(Dollars in millions, except per share amounts) 2000
----
<S> <C>
Continuing business segments $ 30
Other 7
------
Income from continuing operations $ 37
======
Net Income $ 22
======
Earnings per share $ .52
======
</TABLE>
The impact on income from continuing operations is presented below showing
the increase to pretax income for the three months ended February 29, 2000 and
the pro forma effect on pretax income for the three months ended February 28,
1999 if the accounting change had been applied retroactively:
<TABLE>
<CAPTION>
Three Months Ended
Feb. 29, Feb. 28,
(Dollars in millions) 2000 1999
----------------------------------------
<S> <C> <C>
Continuing business segments $ 7 $ 7
Other 2 2
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Income from continuing operations $ 9 $ 9
====== =======
Net Income $ 5 $ 5
====== =======
</TABLE>
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<PAGE> 8
A comparison of earnings per share from continuing operations for the three
months ended February 29, 2000 to pro forma amounts for the three months
ended February 28, 1999 is presented below showing the effects if the accounting
change were applied retroactively:
<TABLE>
<CAPTION>
Three Months Ended
Feb. 29, Feb. 28,
2000 1999
---------------------------
<S> <C> <C>
Basic earnings per share from continuing operations $.25 $.35
Diluted earnings per share from continuing operations $.25 $.35
</TABLE>
Note G - 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
estimates of expected year-end inventory levels. Components of inventory are as
follows:
<TABLE>
<CAPTION>
(Dollars in millions) February 29, November 30,
2000 1999
---------------------------
<S> <C> <C>
Raw materials and supplies $ 26 $ 23
Work-in-process 7 4
Finished products 9 10
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Approximate replacement cost of inventories 42 37
Less: reserves, primarily LIFO (6) (6)
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36 31
Long-term contracts at average cost 310 293
Less: progress payments (179) (180)
- ----- -----
Sub-total long-term contract inventory 131 113
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$ 167 $ 144
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</TABLE>
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<PAGE> 9
Note H - Property, Plant and Equipment
- --------------------------------------
<TABLE>
<CAPTION>
(Dollars in millions) February 29, November 30,
2000 1999
---------------------------
<S> <C> <C>
Land $ 30 $ 30
Buildings and improvements 243 243
Machinery and equipment 554 555
Construction-in-progress 68 50
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895 878
Less: accumulated depreciation (553) (543)
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$ 342 $ 335
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</TABLE>
Note I - Long-term Debt and Credit Lines
- ----------------------------------------
The Company has a five year, $250 million Revolving Credit Facility
Agreement (Facility) which expires in 2004 and is secured by stock of certain
subsidiaries of the Company. Under the terms of the Facility, the Company pays
a commitment fee for unused available funds. Interest rates are variable,
primarily based on LIBOR, and the Facility includes various covenants. As of
February 29, 2000, $208 million was outstanding under the Facility.
As of February 29, 2000, outstanding letters of credit totaled $20 million.
Note J - Contingencies
- ----------------------
Environmental Matters
- ---------------------
Sacramento, California
In 1989, the United States District Court approved a Partial Consent Decree
(Decree) requiring Aerojet to conduct a Remedial Investigation/Feasibility Study
(RI/FS) of Aerojet's Sacramento, California site and to prepare a RI/FS report
on specific environmental conditions present at the site and alternatives
available to remedy such conditions. Aerojet also is required to pay for certain
governmental oversight costs associated with Decree compliance. The State of
California expanded surveillance of perchlorate and nitrosodimethylamine (NDMA)
under the RI/FS because these chemicals were detected in public water supply
wells near Aerojet's property at previously undetectable levels using new
testing protocols.
Aerojet has substantially completed its efforts under the Decree to
determine the nature and extent of contamination at the facility. Preliminarily,
Aerojet has identified the technologies that will likely be used to remediate
the site and estimated costs using generic remedial costs from databases of
Superfund remediation costs. Over the next several years, Aerojet will conduct
feasibility studies to refine technical approaches and costs to remediate the
site. The remediation costs are principally for design, construction,
enhancement and operation of groundwater and soil treatment facilities, ongoing
project management and regulatory oversight, and are expected to be incurred
over a period of approximately 15 years. Aerojet is also addressing groundwater
contamination off of its facility through the development of an Operable Unit
Feasibility Study. This Study was completed and submitted as a draft to the
governmental oversight agencies in December 1999. The Study enumerates various
remedial alternatives by which offsite groundwater can be addressed. It will be
subject to both governmental agency and public review and comment before being
approved for implementation.
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<PAGE> 10
San Gabriel Valley Basin, California
Aerojet, through its Azusa facility, has been named by the United States
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.
All of the Special Notice PRPs are alleged to have contributed volatile
organic compounds (VOCs). Aerojet's investigation demonstrated that the
groundwater contamination by VOCs is principally upgradient of Aerojet's
property and that lower concentrations of VOC contaminants are present in the
soils of Aerojet's presently and historically owned properties. The EPA contends
that Aerojet is one of the four largest sources of VOC groundwater contamination
at the BPOU of the 19 PRPs identified by the EPA. Aerojet contests the EPA's
position regarding the source of contamination and the number of responsible
PRPs. Aerojet is participating in a Steering Committee comprised of 14 of the
PRPs.
Soon after the EPA issued Special Notice letters in May 1997, as a result of
the development of more sensitive measuring methods, perchlorate was detected
in wells in the BPOU. More recently, NDMA was also detected using newly
developed measuring methods. Suspected sources of perchlorate include
Aerojet's solid rocket development and manufacturing activities in the 1940s
and 1950s, and military ordnance produced by a facility adjacent to the Aerojet
facilities in the 1940s. NDMA is a suspected byproduct of liquid rocket fuel
activities by Aerojet in the same time period. In addition, new regulatory
standards for a chemical known as 1.4 dioxane requires additional treatment.
Aerojet may be a minor contributor of this chemical. Aerojet is in the process
of developing new, low cost technologies for the treatment of perchlorate, NDMA
and 1.4 dioxane.
On September 10, 1999, eleven of the nineteen Special Notice PRP's,
including Aerojet (the Offering Parties), submitted a Good Faith Offer to the
EPA to implement an EPA-approved remedy, which was accepted by the agency as a
basis for negotiating an Administrative Consent Order. The remedy, as currently
proposed, would employ low cost treatment technologies being developed by
Aerojet to treat perchlorate, NDMA, and 1.4 dioxane, as well as traditional
treatment for VOCs.
Since submitting the Good Faith Offer, Aerojet has continued negotiations
with the other Offering Parties regarding final cost allocations, and the
Offering Parties have continued negotiations with the court-appointed
Watermaster and local water purveyors regarding an agreement that would provide
for use of the remediation project's treated water. A discussion of Aerojet's
efforts to estimate these costs is contained under the heading Aerojet's Reserve
and Recovery Balances.
On November 23, 1999, the Regional Board issued an order to Aerojet and
other PRPs to conduct additional environmental investigations at their
facilities. Aerojet is seeking review of this order while proceeding to comply.
On April 4, 2000, Aerojet was sued by the San Gabriel Basin Water Quality
Authority in the United States District Court for the Central District of
California, Case No. 00-03579. The action seeks to recover $1,560,000 for funds
contributed by the Water Quality Authority to the cost of the La Puente Valley
Water District treatment plant constructed in 1999 and 2000, plus potential
operation and maintenance costs of approximately $150,000 per year. It is filed
pursuant to CERCLA section 107(a) and the Water Quality Authority Act section
407(c). Aerojet has not been served at this time. Aerojet has informed the Water
Quality Authority that if an agreement is reached with the Watermaster on the
structure and financing of the project, the Water Quality Authority costs will
be paid out of the funds that Aerojet and the other Offering Parties put up for
the total project since La Puente is part of the Watermaster remedial project.
If no agreement is reached with the Watermaster, then the costs of the La Puente
treatment plant would likely not be part of the remedial project and the La
Puente costs are likely to be considered purveor past costs which will be
addressed by the Offering Parties (including Aerojet) outside of the Offering
Party settlement agreement.
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<PAGE> 11
Muskegon, Michigan
In a lawsuit filed by the EPA, the United States District Court ruled in
1992 that Aerojet and its two inactive Cordova Chemical subsidiaries (Cordova)
are liable for remediation of Cordova's Muskegon, Michigan site, along with a
former owner/operator of an earlier chemical plant at the site, who is the other
potentially responsible party (PRP). That decision was appealed to the United
States Court of Appeals.
In May 1997, the United States Court of Appeals for the Sixth Circuit issued
an en banc decision reversing Aerojet's and the other PRP's liability under the
CERCLA statute. Petitions for certiorari to the United States Supreme Court for
its review of the appellate decision were filed on behalf of the State of
Michigan and the EPA and were granted in December 1997. On June 8, 1998, the
United States 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 United
States District Court in Michigan for retrial. Aerojet does not expect that it
will be found liable on remand. Aerojet has been involved in settlement
discussions with the EPA and a proposed consent decree was filed with the
District Court in July 1999. If approved by the District Court, Aerojet and
Cordova will be dismissed. A May 8, 2000 hearing date has been set by the court.
In a separate action, Aerojet and Cordova won indemnification for the
Muskegon site investigation and remediation costs from the State of Michigan in
the state Court of Claims. The Michigan Court of Appeals affirmed on appeal,
and the Michigan Supreme Court refused to hear the case. Further, the Michigan
Supreme Court also denied the State's motion for reconsideration. As a result,
the Company believes that most of the $50 million to $100 million in
anticipated remediation costs will be paid by the State of Michigan and the
former owner/operator of the site. A settlement agreement with the State of
Michigan, related to the proposed consent decree discussed above, has been
finalized and will be implemented contingent on the EPA consent decree being
approved. In addition, Aerojet settled with one of its two insurers in August
1999 for $4 million.
Aerojet's Reserve and Recovery Balances
On January 12, 1999, having finally received all necessary Government
approvals, Aerojet and the United States Government implemented, with effect
retroactive to December 1, 1998, the October 1997 Agreement in Principle
resolving certain prior environmental and facility disagreements between the
parties. Under this Agreement, a "global" settlement covering all environmental
contamination (including perchlorate) at the Sacramento and Azusa sites was
achieved; the Government/Aerojet environmental cost sharing ratio was raised to
88 percent/12 percent from the previous 65 percent/35 percent (with both Aerojet
and the Government retaining the right to opt out of this sharing ratio for
Azusa only, after at least $40 million in allowable environmental remediation
costs at Azusa have been recognized); the cost allocation base for these costs
was expanded to include all of Aerojet (in lieu of the prior limitation to the
Sacramento business base); and Aerojet obtained title to all of the remaining
Government facilities on its Sacramento property, together with an advance
agreement recognizing the allowability of certain facility demolition costs.
During the year ended November 30, 1999, Aerojet entered into a settlement
agreement covering certain environmental claims with certain of its insurance
carriers and received settlement proceeds of approximately $92 million. Under
the terms of its agreements with the United States Government, Aerojet is
obliged to credit the Government a portion of the insurance recoveries for past
costs paid by the Government. Pending finalization of an agreement with the
Government, Aerojet has estimated the amount of the credit and recorded a
liability of $33 million for the Government portion of insurance recoveries,
including applicable interest.
In the fourth quarter of 1999, Aerojet obtained sufficient information to
provide a reasonable basis for estimating the costs to address groundwater
contamination off its Sacramento facility and its probable share of the San
Gabriel Valley BPOU, and recorded those estimates in its reserve and recovery
balances. Estimates regarding the Sacramento Western Groundwater Remediation
were based on the Operable Unit Feasibility Study previous references and
Aerojet's opinion as to which remediation alternative proposed by
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<PAGE> 12
the study will be approved by the EPA and the State. Estimates regarding the
San Gabriel Valley BPOU remediation were based on the Good Faith
Offer/Administrative Consent Order and Watermaster/purveyor negotiations
referenced previously. Not resolved at this time are whether Aerojet will have
any additional liability for its possible share of water purveyor past cost
claims, as well as the EPA's past and future costs. In regard to the matter
discussed above, management believes, on the basis of presently available
information, that resolution of this matter would not materially affect
liquidity, capital resources, or the consolidated financial condition of the
Company.
As of February 29, 2000, Aerojet had total reserves of $329 million for
costs to remediate the above sites and has recognized $222 million for probable
future recoveries. These estimates are subject to change as work progresses,
additional experience is gained and environmental standards are revised. In
addition, 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 $37 million depending on the results of
future testing, and the ultimate remediation alternatives undertaken at the
site. The time frame for remediation is currently estimated to range from five
to ten years.
Other Sites
- -----------
The Company is also currently involved, together with other companies, in 27
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 one percent. The Company has reserves of approximately $18 million as
of February 29, 2000 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 consolidated financial
condition. 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
- -------------------
Olin Corporation
In August 1991, Olin Corporation (Olin) advised GenCorp that it believed
GenCorp to be jointly and severally liable for certain Superfund remediation
costs, estimated by Olin to be $70 million, associated with a former Olin
manufacturing facility and waste disposal sites in Ashtabula County, Ohio. In
1993, GenCorp sought declaratory judgment in the United States District Court
for the Northern District of Ohio that the Company is not responsible for
environmental remediation costs. Olin counterclaimed seeking a judgment that
GenCorp is jointly and severally liable for a share of remediation costs. In
late 1995, the Court hearing on the issue of joint and several liability was
completed, and in August 1996 the Court held hearings relative to allocation. At
its request, in 1998, the Court received an additional briefing regarding the
impact of the recent Best Foods Supreme Court decision which the Company
believes definitively addresses many issues in this case in its favor. Another
hearing relative to liability and allocation was held on January 11, 1999. The
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<PAGE> 13
Court rendered its interim decision on liability on August 16, 1999, finding
GenCorp 30 percent liable for remediation costs at "Big D Campground" landfill
and 40 percent liable for remediation costs attributable to the Olin TDI
facility with regard to the Fieldsbrook site. Subsequent trial phases will
address damages, likely to be scheduled for late 2000.
The Company continues to vigorously litigate this matter and believes that
it has meritorious defenses to Olin's claims. While there can be no certainty
regarding the outcome of any litigation, in the opinion of management, after
reviewing the information currently available with respect to this matter and
consulting with the Company's counsel, any liability which may ultimately be
incurred will not materially affect the consolidated financial condition of the
Company.
Other Matters
The Company and its subsidiaries are subject to various other legal actions,
governmental investigations, and proceedings relating to a wide range of matters
in addition to those discussed above. In the opinion of management, after
reviewing the information which is currently available with respect to such
matters and consulting with the Company's counsel, any liability which may
ultimately be incurred with respect to these additional matters will not
materially affect the consolidated financial condition of the Company. The
effect of resolution of these matters on results of operations cannot be
predicted because any such effect depends on both future results of operations
and the amount and timing of the resolution of such matters.
-13-
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the fourth quarter of fiscal 1999, the Company completed a spin-off
of its Performance Chemicals and Decorative & Building Products businesses
(OMNOVA Solutions Inc.) to GenCorp Shareholders. As such, the results of the
discontinued operations during the first quarter of 1999 are shown separately in
the Company's financial statements.
Material Changes in Financial Condition
- ---------------------------------------
Cash flow used in continuing operating activities for the first three months
of fiscal 2000 was $41 million as compared to $16 million for 1999. The increase
in cash flow used in continuing operating activities primarily reflects
inventory build up on production contracts, payment for commercial inventory,
and overall higher working capital requirements.
For the first three months of 2000, cash used in investing activities of
continuing operations included capital expenditures of $19 million compared to
$11 million in the same period in 1999. Capital expenditures during the first
quarter of fiscal 2000 included investments in Aerojet's Space Based Infrared
System (SBIRS) Payload Satellite Facility, Vehicle Sealing's new product
launches, and infrastructure expansion for Aerojet Fine Chemicals.
Financing activities provided $53 million of cash during the three month
period ended February 29, 2000. This primarily reflects a net increase in total
debt during this period. Cash flow provided by financing activities of $27
million in the first three months of 1999 reflected a $33 million net increase
in debt offset by a $6 million dividend payment. Debt increased overall to fund
approved capital projects, acquire contract and commercial inventory, and meet
higher working capital requirements.
Material Changes in Results of Operations
- -----------------------------------------
Sales from continuing operations totaled $239 million for the first quarter
of 2000, a decrease of six percent compared to $255 million during the first
quarter of 1999. Operating profit from continuing businesses totaled $24 million
for the first quarter of 2000, an improvement of 14 percent versus $21 million
for the first quarter of 1999. First quarter 2000 earnings from continuing
businesses of $.25 per diluted share compared to $.22 per diluted share during
the first quarter of 1999, an increase of 14 percent.
During the quarter, the Company entered into an agreement in which it will
sell a 20 percent equity interest in Aerojet Fine Chemicals LLC for
approximately $25 million in cash and sell an additional 20 percent equity
interest for an approximate 35 percent equity interest in a privately held
company. The privately held company operates in the United States and Europe
focusing on becoming the leading contract process development and manufacturing
in the pharmaceutical industry through acquisitions, strategic alliances, and
investments. Following the sale, GenCorp will continue to manage and operate
Aerojet Fine Chemicals from its Sacramento location, retaining a 60% majority
ownership. The pending transaction is expected to be completed during the second
quarter of fiscal 2000, subject to government and regulatory approvals.
Effective December 1, 1999, the Company implemented a change in accounting
principle affecting the calculation of its net pension assets and postretirement
benefit liabilities. The change was implemented to reflect a calculated
market-related value of plan assets that is closer to current value, while still
mitigating the effects of short-term market fluctuations. The new method also
reduces the substantial accumulation of unrecognized gains and losses created
under the previous method due to the disparity between fair value and
market-related value of plan assets. The changes resulted in a one-time after
tax gain of approximately $74 million ($1.76 per basic and diluted share). The
changes have no effect on the funded status of the pension or other
postretirement benefit plans, and the employee and retiree benefit plans remain
unchanged.
-14-
<PAGE> 15
Aerospace, Defense and Fine Chemicals
Sales at Aerojet were $126.8 million in the first quarter of 2000 compared
to $150.3 million in the same quarter of 1999. Lower revenues on the Space Based
Infrared Program (SBIRS), Space Defense Support Program (DSP), Integrated
Advanced Microwave Sounding Unit (AMSU) programs, and in Fine Chemicals
contributed to the decline, partially offset by higher volume on the Sense and
Destroy Armor (SADARM).
Operating profit increased to $19.9 million in the first quarter of 2000
versus $18.4 million in the first quarter of 1999. Operating margins increased
to 15.7% from 12.2%. First quarter 2000 margins were favorably impacted by Titan
deliveries, which slipped from the fourth quarter of 1999, 100% award fees
recognized on the AMSU program, and added profit for performance on the U.S.
Army's tactical missile TOW 2A/2B program.
Highlights at Aerojet during the quarter included:
- A $49 million five-year follow-on contract award for up to 75 thrust
vector system modifications to matured Minuteman II Stage 2 rocket
motors. This new contract expands the original 1995 contract of 54
units.
- A $10 million contract award for the purchase of 236 units of HAWK
rocket motors for the countries of Korea and Taiwan. This award is for
the first year of a five-year requirement that will total approximately
1,045 motors.
- Successful completion of another round of intensive U.S. Army
Reliability Tests where Aerojet's SADARM smart munition exceeded all
critical requirements and objectives at the Yuma Proving Ground test
facility in Arizona. Twelve SADARM 155mm projectiles were fired
resulting in 16 target hits. The test continued SADARM's record of
greater than one hit per projectile, similar to the last tests conducted
in September 1999 that resulted in 35 direct hits out of 30 rounds
fired.
- Progress from corrective actions at Aerojet Fine Chemicals resulted in
recovery during the quarter through the addition of new customers and
products to fill backlog completely for the remainder of the year.
During the quarter, Aerojet booked contract award funding of $173 million
with contract backlog as of February 29, 2000 totaling $1.6 billion.
Vehicle Sealing
Net sales from continuing businesses for the Vehicle Sealing segment
improved 8% to $112.0 million in the first quarter of 2000, versus $103.8
million in the first quarter of 1999. The sales gain was due to higher
production volumes on Ford Explorer, General Motors' Full Size pickup and Ford's
F-150 platforms. Operating profit in the first quarter of 2000 was $3.7 million
compared to $2.8 million for the first quarter 1999. Operating profit margins
improved to 3.3% in the first quarter of 2000 versus 2.7% in the first quarter
of 1999. Operating margins are expected to steadily improve throughout 2000 as
model run rates are achieved and volume is increased, and as launch support
efforts subside.
Vehicle Sealing continues to lead the most popular Sport Utility Vehicle
(SUV) and light truck segment of the market. A new award for the complete
sealing systems for General Motors GMT-800 series (Suburban, Tahoe and Yukon)
elevates Vehicle Sealing to the market share leader in this most popular and
fastest selling automotive segment. In addition to this new award, Vehicle
Sealing has significant existing SUV and light truck platforms that include GM's
CK pickup and numerous programs with Ford such as the F-series pickup, Ranger,
and Explorer.
-15-
<PAGE> 16
Environmental Matters
- ---------------------
GenCorp's policy is to conduct its businesses with due regard for the
preservation and protection of the environment. The Company devotes a
significant amount of resources and management attention to environmental
matters and actively manages its ongoing processes to comply with extensive
environmental laws and regulations. The Company is involved in the remediation
of environmental conditions which resulted from generally accepted manufacturing
and disposal practices in the 1950's and 1960's which were followed at certain
GenCorp plants. In addition, the Company has been designated a potentially
responsible party, with other companies, at sites undergoing investigation and
remediation.
The nature of environmental investigation and cleanup activities often makes
it difficult to determine the timing and amount of any estimated future costs
that may be required for remedial measures. However, the Company reviews these
matters and accrues for costs associated with the remediation of environmental
pollution when it becomes probable that a liability has been incurred and the
amount of the liability (usually based upon proportionate sharing) can be
reasonably estimated. The Company's Condensed Consolidated Balance Sheet as of
February 29, 2000 reflects accruals of $366 million and amounts recoverable of
$222 million from the United States 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 J- Contingencies.
Adoption of the Euro
- --------------------
Based upon a preliminary evaluation, management believes that the adoption
of the Euro by the European Economic Community will not have a material impact
on the Company's international businesses. The Company's foreign operations
currently are small and each operation conducts the majority of its business in
a single currency with minimal price variations between countries.
Quantitative and Qualitative Disclosure About Market Risk
- ---------------------------------------------------------
The Company is exposed to market risk from changes in interest rates on
long-term debt obligations. The Company's policy is to manage its interest rate
exposures through the use of a combination of fixed and variable rate debt.
Currently, the Company does not use derivative financial instruments to manage
its interest rate risk. Substantially all of the Company's long-term debt of
$208 million maturing in the year 2004 had an average variable interest rate of
7.38 percent as of February 29, 2000. A one percentage point change in the
interest rate on the Company's long term debt would not have materially affected
interest expense in the first quarter of 2000.
Although the Company conducts business in foreign countries, international
operations were not material to the Company's consolidated financial position,
results of operations or cash flows as of February 29, 2000. Additionally,
foreign currency transaction gains and losses were not material to the Company's
results of operations for the three months ended February 29, 2000. Accordingly,
the Company should not be subject to material foreign currency exchange rate
risk with respect to future costs or cash flows from its foreign subsidiaries.
To date, the Company has not entered into any significant foreign currency
forward exchange contracts or other derivative financial instruments to hedge
the effects of adverse fluctuations in foreign currency exchange rates. The
Company is evaluating the future use of such financial instruments.
-16-
<PAGE> 17
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,
1999 filed with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
- -----------------------------------------------------------------
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Quantitative and Qualitative Disclosure About Market Risk."
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
- -------------------------
Information concerning legal proceedings, including proceedings relating to
environmental matters, which appears in Note J beginning on page 9 of this
report is incorporated herein by reference.
Baier, et al. v. Aerojet-General Corporation, et al.
On March 1, 2000, a complaint was filed against Aerojet and other defendants
in San Bernardino County Superior Court, Case No. RCV046045. The plaintiffs are
residents of the cities of Chino and Chino Hills near Aerojet's former Ordnance
Division facility. This "toxic tort" action seeks damages for personal injury
and property damage allegedly caused by defendants' nuisance and fraud. Aerojet
has not been served. Aerojet has notified its insurers and plans to vigorously
defend this action.
While there can be no certainty regarding the outcome of any litigation, in
the opinion of management, after reviewing the information currently available
with respect to the matters discussed above and consulting with the Company's
counsel, any liability which may ultimately be incurred will not materially
affect the consolidated financial condition of the Company. The effect of
resolution of these matters on results of operations cannot be predicted because
any such effect depends on both future results of operations and the amount and
timing of the resolution of such matter.
The United States government frequently conducts investigations into
allegedly illegal or unethical activity in the performance of defense contracts.
Investigations of this nature are common to the aerospace and defense industries
in which Aerojet participates and lawsuits may result; possible consequences may
include civil and criminal fines and penalties, in some cases, double or treble
damages, and suspension or debarment from future government contracting. Aerojet
currently is subject to several United States government investigations
regarding business practices and cost classification from which additional legal
or administrative proceedings could result. While it is not possible to predict
with certainty the outcome of any such investigation, the Company does not
believe, based upon the information available at this time, that final
resolution of any such matter will have a material adverse effect on its
consolidated financial condition or result in its suspension or debarment as a
government contractor.
-17-
<PAGE> 18
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
--------
Table Exhibit
Item No. Exhibit Description Number
---------------------------------------------------------------------
18 Preferability letter on Accounting Change from
Ernst & Young LLP 18
27 Financial Data Schedule 27
(Filed for EDGAR only)
b) Reports on Form 8-K
-------------------
There have been no reports on Form 8-K filed during the quarter
ended February 29, 2000.
-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.
Date April 14, 2000 By /s/ T. L. Hall
--------------- --------------
T. L. Hall
Senior Vice President and Chief Financial
Officer; Treasurer (Principal Financial Officer)
Date April 14, 2000 By /s/ W. R. Phillips
--------------- ------------------
W. R. Phillips
Senior Vice President, Law; General Counsel and
Secretary (Duly Authorized Officer)
-19-
<PAGE> 1
EXHIBIT 18
PREFERABILITY LETTER ON ACCOUNTING CHANGE FROM ERNST & YOUNG LLP
March 30, 2000
Terry L. Hall
Senior Vice President and
Chief Financial Officer
GenCorp Inc.
Highway 50 and Aerojet Road
Rancho Cordova, California 95670
Dear Sir:
Note F of Notes to the unaudited interim condensed consolidated financial
statements of GenCorp Inc. ("the Company") included in its Form 10-Q for the
three months ended February 29, 2000 describes a change in its methods for
determining the market-related value of plan assets used in determining the
expected return-on-assets component of annual net pension costs and the
amortization of gains and losses for both pension and postretirement benefit
costs. The new accounting method includes changing the smoothing period from
five years to three years, changing the amortization period from approximately
12 years to five years, and the elimination of a ten percent corridor.
There are no authoritative criteria for determining a `preferable' method of
accounting for the manner in which realized and unrealized gains and losses are
included in the calculation of the market-related values of the Company's
pension and postretirement plan assets based on the particular circumstances;
however, we conclude that the change in the method of accounting described above
is to an acceptable alternative method which, based on your business judgment to
make this change for the reason cited above, is preferable in your
circumstances. We have not conducted an audit in accordance with auditing
standards generally accepted in the United States of any consolidated financial
statements of the Company for any period subsequent to November 30, 1999, and
therefore we do not express any opinion on any financial statements of GenCorp
Inc. subsequent to that date.
Very truly yours,
Ernst & Young LLP
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