-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MXH/NFeSXBOMdkTMQhupbh+i9buHYD29W5OL6h7zcwyyG+ojmHlR7PG3/lHdf//v 3yO9a8jqcJeUEwZgtCbBVQ== 0000950152-98-003152.txt : 19980410 0000950152-98-003152.hdr.sgml : 19980410 ACCESSION NUMBER: 0000950152-98-003152 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980409 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENCORP INC CENTRAL INDEX KEY: 0000040888 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 340244000 STATE OF INCORPORATION: OH FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01520 FILM NUMBER: 98590789 BUSINESS ADDRESS: STREET 1: 175 GHENT RD CITY: FAIRLAWN STATE: OH ZIP: 44333 BUSINESS PHONE: 2168694200 MAIL ADDRESS: STREET 1: 175 GHENT RD CITY: FAIRLAWN STATE: OH ZIP: 44333 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL TIRE & RUBBER CO DATE OF NAME CHANGE: 19840330 10-Q 1 GENCORP INC. FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended February 28, 1998 Commission File Number 1-1520 ----------------- ------ GenCorp Inc. ---------------- (Exact name of registrant as specified in its charter) Ohio 34-0244000 - ------------------------------ ------------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) 175 Ghent Road Fairlawn, Ohio 44333-3300 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (330) 869-4200 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- At March 31, 1998, there were 41,489,100 outstanding shares of GenCorp Inc.'s Common Stock, par value $.10. 2 GenCorp Inc. Table of Contents Part I. Financial Information Page No. -------- Item 1. Financial Statements Condensed Consolidated Statements of Income - Three Months Ended February 28, 1998 and 1997 -3- Condensed Consolidated Balance Sheets - February 28, 1998 and November 30, 1997 -4- Condensed Consolidated Statements of Cash Flows - Three Months Ended February 28, 1998 and 1997 -5- Notes to the Unaudited Interim Condensed Consolidated Financial Statements -6- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -12- Part II. Other Information Item 1. Legal Proceedings -15- Item 4. Submission of Matters to a Vote of Security Holders -16- Item 5. Other Information -16- Item 6. Exhibits and Reports on Form 8-K -17- Signatures -18- -2- 3 PART I. FINANCIAL INFORMATION ----------------------------- GenCorp Inc. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in millions, except per share data)
Unaudited Three Months Ended ------------------------------ February 28, February 28, 1998 1997 ------------------------------ NET SALES $ 365.5 $ 328.0 ---------- ---------- COSTS AND EXPENSES Cost of products sold 290.6 259.1 Selling, general and administrative 37.0 34.9 Depreciation 15.7 13.4 Interest expense 2.1 5.7 Other (income) and expense, net (1.3) (.2) ---------- ---------- 344.1 312.9 ---------- ---------- INCOME BEFORE INCOME TAXES 21.4 15.1 Income tax provision 8.6 4.0 ---------- ---------- NET INCOME $ 12.8 $ 11.1 ========== ========== EARNINGS PER SHARE OF COMMON STOCK Basic $ .31 $ .33 Diluted $ .31 $ .30 Average number of shares of common stock outstanding (in thousands) Basic 41,349 33,509 Diluted 41,942 41,113 Cash dividends paid per share of common stock $ .15 $ .15
The accompanying notes to the unaudited interim condensed consolidated financial statements are an integral part of these statements. -3- 4 GenCorp Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in millions)
Unaudited Audited February 28, November 30, 1998 1997 ----------------------------- CURRENT ASSETS: Cash and equivalents $ 20.9 $ 18.4 Accounts receivable 244.9 252.2 Inventories 134.3 157.2 Prepaid expenses and other 59.1 56.4 -------- -------- TOTAL CURRENT ASSETS 459.2 484.2 -------- -------- Recoverable from U.S. Government and third parties for environmental remediation 166.5 167.8 Deferred income taxes 151.1 151.0 Prepaid pension 119.6 116.1 Investments and other assets 102.9 103.3 Property, plant and equipment: At cost 1,129.3 1,121.1 Accumulated depreciation (724.3) (711.4) -------- -------- Net property, plant and equipment 405.0 409.7 -------- -------- TOTAL ASSETS $1,404.3 $1,432.1 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Notes payable $ 43.5 $ 25.5 Accounts payable - trade 81.3 102.3 Income taxes 27.0 21.3 Other current liabilities 206.8 241.1 -------- -------- TOTAL CURRENT LIABILITIES 358.6 390.2 -------- -------- Long-term debt 93.2 83.6 Postretirement benefits other than pensions 330.0 335.3 Environmental reserves 270.0 274.2 Other liabilities 65.7 67.5 SHAREHOLDERS' EQUITY Preference stock - (none outstanding) - - Common stock - $0.10 par value; 41.4 million shares outstanding 4.1 4.1 Other capital 148.1 146.4 Retained earnings 145.8 139.2 Cumulative currency translation adjustments (11.2) (8.4) -------- -------- TOTAL SHAREHOLDERS' EQUITY 286.8 281.3 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,404.3 $1,432.1 ======== ========
The accompanying notes to the unaudited interim condensed consolidated financial statements are an integral part of these statements. -4- 5 GenCorp Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions)
Unaudited Three Months Ended February 28, 1998 1997 ------------------------------ OPERATING ACTIVITIES Net income $12.8 $11.1 Depreciation, amortization and gain/loss on disposal of fixed assets 16.4 15.0 Deferred income taxes (.1) (2.2) Changes in operating assets and liabilities net of effects of acquisitions and dispositions of businesses and exchange rate changes: Current assets 26.5 (21.0) Current liabilities (49.2) (58.5) Other non-current assets (3.2) 3.8 Other non-current liabilities (11.2) (6.6) ----- ----- NET CASH USED IN OPERATING ACTIVITIES (8.0) (58.4) ----- ----- INVESTING ACTIVITIES Capital expenditures (12.9) (8.2) Proceeds from asset dispositions .3 4.8 ----- ----- NET CASH USED IN INVESTING ACTIVITIES (12.6) (3.4) ----- ----- FINANCING ACTIVITIES Long-term debt incurred 20.0 60.1 Long-term debt paid (10.4) (1.0) Net short-term debt incurred 18.0 2.4 Dividends (6.2) (5.0) Other equity transactions 1.7 (5.9) ----- ----- NET CASH PROVIDED BY FINANCING ACTIVITIES 23.1 50.6 ----- ----- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 2.5 (11.2) Cash and equivalents at beginning of year 18.4 22.6 ----- ----- Cash and equivalents at end of period $20.9 $11.4 ===== =====
Cash paid for interest was $2.1 million and $8.1 million for the three months ended February 28, 1998 and 1997, respectively. Cash paid for income taxes was $2.9 million and $22.7 million for the three months ended February 28, 1998 and 1997, respectively. The accompanying notes to the unaudited interim condensed consolidated financial statements are an integral part of these statements. -5- 6 GenCorp Inc. NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note A - Basis of Presentation - ------------------------------ The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These interim statements should be read in conjunction with the financial statements and notes thereto included or incorporated by reference in the GenCorp Inc. (Company) Annual Report on Form 10-K for the fiscal year ended November 30, 1997. All normal recurring accruals and adjustments considered necessary for a fair presentation of the unaudited results for the three months ended February 28, 1998 and 1997, have been reflected. The results of operations for the three months ended February 28, 1998, are not necessarily indicative, if annualized, of those to be expected for the full fiscal year. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Note B - Earnings Per Share - --------------------------- 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:
Unaudited Three Months Ended February 28, (Dollars in millions, shares in thousands) 1998 1997 --------------------------- Numerator for basic earnings per share - income available to common stockholders $12.8 $11.1 Effect of dilutive securities: Interest on 8% convertible subordinated debentures, net of tax - 1.4 ----- ----- Numerator for diluted earnings per share - income available to common stockholders after assumed conversions $12.8 $12.5 ===== =====
-6- 7 Note B - Earnings Per Share (continued) - ---------------------------
Unaudited Three Months Ended February 28, 1998 1997 --------------------- Denominator for basic earnings per share - weighted average shares 41,349 33,509 Effect of dilutive securities: 8% convertible subordinated debentures - 7,158 Employee stock options 578 415 Other 15 31 ------ ------ Dilutive potential common shares 593 7,604 ------ ------ Denominator for diluted earnings per share - weighted average shares and assumed conversions 41,942 41,113 ====== ====== Basic earnings per share $ 0.31 $ 0.33 ====== ====== Diluted earnings per share $ 0.31 $ 0.30 ====== ======
Note C - Acquisitions - --------------------- On March 1, 1998, the Company acquired The Goodyear Tire & Rubber Company's Calhoun, Georgia latex facility for $74 million in cash subject to a working capital adjustment. The acquisition will be accounted for as a purchase and will result in goodwill of approximately $60 million which will be amortized over 40 years. On April 7, 1998, the Company announced that an agreement in principle had been reached with United Kingdom based Walker Greenbank PLC to purchase its commercial wallcovering business. The transaction is subject to due diligence, negotiation of definitive agreement, regulatory approvals and approval by Walker Greenbank shareholders. Note D - Income Taxes - --------------------- The Company reduced its tax expense in the first quarter of 1997 by $2 million due to the receipt of a federal income tax settlement for tax credits, timing of deductions and related interest. Note E - Inventories - -------------------- Inventories are stated at the lower of cost or market value. A portion of the inventories is priced by use of the last-in, first-out (LIFO) method using various dollar value pools. Interim LIFO determinations involve management's judgments of expected year-end inventory levels. Components of inventory are as follows:
Unaudited Audited February 28, November 30, (Dollars in millions) 1998 1997 -------------------------------- Raw materials and supplies $ 37.6 $ 42.9 Work-in-process 7.7 8.6 Finished products 58.6 59.1 --------- --------- Approximate replacement cost of inventories 103.9 110.6 Reserves, primarily LIFO (39.3) (39.1) Long-term contracts at average cost 229.5 199.0 Progress payments (159.8) (113.3) --------- --------- $ 134.3 $ 157.2 ========= =========
-7- 8 Note F - Long-term Debt and Credit Lines - ---------------------------------------- On May 17, 1996, the Company entered into a new five-year unsecured $400 million revolving credit facility (Facility) which expires in May 2001. As of February 28, 1998, unused and available revolving lines of credit totaled $297 million. The Company paid a variable commitment fee, which was 1/5 of one percent, on the unused balance. Interest rates were variable, primarily based on LIBOR, and were at an average rate of 6.3 percent. The Facility contains various debt restrictions and provisions relating to net worth, interest coverage and debt to earnings before interest, taxes, depreciation and amortization (Debt/EBITDA) ratios. As of February 28, 1998, the Company was required to maintain consolidated net worth of at least $150 million. At February 28, 1998, the Company had unsecured, uncommitted lines of credit with several banks for short-term borrowings aggregating $101 million, of which $40 million was outstanding. Borrowings under such lines generally bear interest at money market rates and are payable on demand. The Company also had outstanding letters of credit totaling $23 million at February 28, 1998 of which $13 million was issued under the Facility. Note G - Contingencies - ---------------------- 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. During the second quarter of 1997, the State of California expanded surveillance of perchlorate under the RI/FS when this chemical was detected at previously undetectable levels using new testing protocols in public water supply wells near Aerojet's property. Aerojet has substantially completed its efforts under the Decree to determine the nature and extent of contamination at the facility and to identify the technologies that will likely be used to remediate the site. The remediation costs are principally for design, construction, enhancement and operation of groundwater and soil treatment facilities, ongoing project management and regulatory oversight, and are expected to be incurred over a period of approximately 15 years. San Gabriel Valley Basin, California Aerojet, through its Azusa facility, has been named by the U.S. Environmental Protection Agency (EPA) as a potentially responsible party (PRP) in the portion of the San Gabriel Valley Superfund Site known as the Baldwin Park Operable Unit (BPOU). Regulatory action involves issuance of a Record of Decision (ROD) regarding regional groundwater remediation, issuing Aerojet and 18 other PRPs Special Notice letters requiring groundwater remediation and site specific investigation and possible cleanup. Aerojet's investigation demonstrated that the principal groundwater contamination, volatile organic compounds (VOC), is upgradient of Aerojet's property and that only low concentrations of VOC contaminants are present in the soils of Aerojet's presently and historically owned properties. The EPA contends that Aerojet is one of the four largest sources of groundwater contamination at the BPOU of the nineteen PRPs identified by the EPA. Aerojet contests the EPA's position regarding the source of contamination and the number of responsible PRPs. Aerojet has joined a Steering Committee comprised of eleven of the PRPs identified by the EPA. -8- 9 Note G - Contingencies (continued) - ---------------------- The ROD and Special Notice letters issued by the EPA require groundwater remediation for the BPOU, estimated to cost $47 million in non-recurring costs and $4 million to $5 million in annual operating expense. Aerojet, as part of the Steering Committee, is participating in an effort to develop an alternative "consensus" plan in which certain water supply entities would integrate the remedial requirements into a water supply project. If implemented, the consensus plan approach would allow the project to be eligible for federal funding for 25 percent of the non-recurring costs and additional funding from water supply entities receiving benefit from the project, thus reducing the PRPs' costs. Soon after the EPA issued the Special Notice letter, the State of California also detected perchlorate in water wells in Southern California, including the San Gabriel Valley, at previously undetectable levels using new testing protocols. As a result of the recent finding of perchlorate, the EPA has required investigation for and studies regarding treatability of perchlorate contaminated water. Consequently, the EPA has allowed time extensions for submittal by the PRPs of a good faith offer and negotiation of a consent decree in response to the Special Notice letter. The perchlorate investigations and studies are underway, primarily funded by Aerojet. The final perchlorate cleanup standard (which has not yet been determined) could impact total cleanup cost and implementation of the proposed consensus plan. Muskegon, Michigan In a lawsuit filed by the U.S. Environmental Protection Agency (EPA), the United States District Court ruled in 1992 that Aerojet and its two inactive Cordova Chemical subsidiaries (Cordova) are liable for remediation of Cordova's Muskegon, Michigan site, along with a former owner/operator potentially responsible party (PRP) of an earlier chemical plant at the site. That decision was appealed to the United States Court of Appeals. In May 1997, the United States Court of Appeals for the Sixth Circuit issued an en banc decision reversing Aerojet's and the other PRP's liability under the CERCLA statute. Petitions for certiorari to the United States Supreme Court for its review of the appellate decision have been filed on behalf of the State of Michigan and the EPA. The Supreme Court granted the EPA's petition in December 1997. Depending on the opinion of the Supreme Court, the case may be remanded to the Federal District Court for further fact finding determinations affecting the Cordova Chemical subsidiaries. In a separate action, Aerojet and Cordova won indemnification for the Muskegon site investigation and remediation costs from the State of Michigan in the state court of claims. The Michigan Court of Appeals affirmed on appeal, and the Michigan Supreme Court refused to hear the case. On December 23, 1996, the Michigan Supreme Court denied the State's motion for reconsideration. As a result, the Company believes that most of the $50 million to $100 million in anticipated remediation costs will be paid by the State of Michigan and the former owner/operator of the site. In addition, Aerojet believes it has insurance coverage for the site. Aerojet's Reserve and Recovery Balances On October 30, 1997, Aerojet executed an Agreement in Principle with the U.S. Government that, when implemented after final U.S. Government approval, will establish the cost sharing ratio and resolve certain other environmental and facility issues at the Aerojet sites in Sacramento and Azusa, California. At February 28, 1998, Aerojet had total reserves of $257 million for costs to remediate the above sites and has recognized $179 million for probable future recoveries. These estimates will be subject to change as work progresses, additional experience is gained and environmental standards are revised. Legal proceedings to obtain reimbursements of environmental costs from insurers are continuing. -9- 10 Note G - Contingencies (continued) - ---------------------- Lawrence, Massachusetts The Company has studied remediation alternatives for its closed Lawrence, Massachusetts facility, which was contaminated with PCBs, and has begun site remediation and off-site disposal of debris. The Company has a reserve of $21 million for estimated decontamination and long-term operating and maintenance costs of this site. The reserve represents the Company's best estimate for the remaining remediation costs. Estimates of future remediation costs could range as high as $42 million depending on the results of future testing and the ultimate remediation alternatives undertaken at the site. The time frame for remediation is currently estimated to range from 6 to 11 years. Other Sites The Company is also currently involved, together with other companies, in 28 other Superfund and non-superfund remediation sites. In many instances, the Company's liability and proportionate share of costs have not been determined largely due to uncertainties as to the nature and extent of site conditions and the Company's involvement. While government agencies frequently claim PRPs are jointly and severally liable at such sites, in the Company's experience, interim and final allocations of liability costs are generally made based on relative contributions of waste. Based on the Company's previous experience, its allocated share has frequently been minimal, in many instances less than 1 percent. The Company has reserves of approximately $26 million as of February 28, 1998 which it believes are sufficient to cover its best estimate of its share of the environmental remediation costs at these other sites. Also, the Company is seeking recovery of its costs from its insurers. Environmental Summary - --------------------- In regard to the sites discussed above, management believes, on the basis of presently available information, that resolution of these matters will not materially affect liquidity, capital resources or the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted due to the uncertainty concerning both the amount and timing of future expenditures and future results of operations. Other Legal Matters - ------------------- In August 1991, Olin Corporation (Olin) advised GenCorp that Olin believed GenCorp to be jointly and severally liable for certain Superfund remediation costs, estimated by Olin to be $70 million, associated with a former Olin manufacturing facility and waste disposal sites in Ashtabula County, Ohio. In 1993, GenCorp sought declaratory judgment in the United States District Court for the Northern District of Ohio that the Company is not responsible for environmental remediation costs associated with the former Olin facility and Superfund sites. Olin counterclaimed seeking a judgment that GenCorp is jointly and severally liable for a share of remediation costs. In late 1995, the Court hearing on the issue of joint and several liability was completed, and in August 1996 the Court held hearings relative to allocation. The Court has not yet rendered a decision. If the Court finds GenCorp is liable, subsequent trial phases will address damages. The Company is vigorously litigating this matter and believes that it has meritorious defenses to Olin's claims. While there can be no certainty regarding the outcome of any litigation, in the opinion of management, after reviewing the information currently available with respect to this matter and consulting with the Company's counsel, any liability which may ultimately be incurred will not materially affect the consolidated financial condition of the Company. -10- 11 Note G - Contingencies (continued) - ---------------------- The Company and its subsidiaries are subject to various other legal actions, governmental investigations, and proceedings relating to a wide range of matters in addition to those discussed above. In the opinion of management, after reviewing the information which is currently available with respect to such matters and consulting with the Company's counsel, any liability which may ultimately be incurred with respect to these additional matters will not materially affect the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted because any such effect depends on both future results of operations and the amount and timing of the resolution of such matters. -11- 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Material Changes in Financial Condition - --------------------------------------- Cash flow used in operating activities for the first quarter of 1998 was $8 million as compared to $58 million for the first quarter of 1997. This decrease was due to reduced working capital requirements. At February 28, 1998, GenCorp's total debt was $137 million versus $359 million a year ago. The decrease in debt resulted from the conversion of debentures and the use of proceeds from the collection of a tax settlement in the third quarter of 1997. Interest expense decreased to $2.1 million in the first quarter of 1998 versus $5.7 million in the comparable period a year ago, primarily due to lower debt levels. Equity increased to $287 million, and the debt to total capital ratio was 32 percent at the end of the first quarter of 1998. Material Changes in Results of Operations - ----------------------------------------- Sales increased 11 percent during the first quarter of 1998 to $365.5 million as compared to $328.0 million during the first quarter of 1997. Segment operating profit for the first quarter of 1998 improved 14 percent to $29.6 million, versus $26.0 million for the first quarter of 1997. Corresponding operating profit margins improved to 8.1 percent in the first quarter of 1998, compared to 7.9 percent for the same period of 1997. Within the Company's polymer products segment, net sales increased 10 percent to $147.5 million compared to $134.0 million in the first quarter of 1997. Specialty Polymers and Decorative & Building Products recorded double-digit sales increases, while Penn Racquet Sports experienced slightly lower volumes. Specialty Polymers generated higher latex shipments in its major product lines, while Decorative & Building Products' sales improved in paper laminates, heat transfer printing, commercial wallcovering, building systems, and coated fabrics. The polymer products segment achieved a 43 percent increase in operating profit during the first quarter of 1998 to $14.6 million, compared to $10.2 million in the first quarter of 1997. Similarly, polymer products' operating profit margins improved to 9.9 percent from 7.6 percent. Lower raw material prices, reduced quality costs, and cost reduction programs led the margin expansion. The segment also continues to invest in technology to support value-creating growth initiatives. On March 1, 1998, the Company acquired The Goodyear Tire & Rubber Company's Calhoun, Georgia latex facility. This acquisition is expected to add over $50 million in annualized sales for Specialty Polymers and provide a strategic southeastern geographic access to important carpet customers. Decorative & Building Products' continuing investment in the development of new coating technologies and equipment will enhance performance characteristics on a wide range of decorative laminates and film products. On April 7, 1998, the Company announced that an agreement in principle had been reached with United Kingdom based Walker Greenbank PLC to purchase its commercial wallcovering business. The transaction is subject to due diligence, negotiation of definitive agreement, regulatory approvals and approval by Walker Greenbank shareholders. In the first quarter of 1998, Aerojet's sales increased 30 percent to $135.4 million as compared to $104.4 million in the first quarter of 1997. Higher sales on the Space-Based Infrared System (SBIRS) and growth in Custom Chemicals were major contributors to the sales increase. -12- 13 Material Changes in Results of Operations (continued) - ----------------------------------------- Aerojet's operating profit for the first quarter of 1998 was up 38 percent to $14.2 million, compared to $10.3 million in the first quarter of 1997. Contract mix and higher Custom Chemicals shipments contributed to the improvement. Operating profit margins expanded to 10.5 percent versus 9.9 percent during the same period last year. During the quarter, new funded contract awards for Aerojet totaled $96 million, including a $15 million six year Active Protection System contract from the U.S. Army Research, Development and Engineering Center to design, develop and deliver five warhead systems, and $9 million for warhead production on the TOW-2A. Contract backlog totaled $1.8 billion at the end of the quarter. Also, Aerojet's liquid propulsion systems performed successfully on four Delta II launches carrying military and commercial communication satellite payloads. Aerojet continues to make progress on its efforts to realize value on surplus real estate, including its land adjacent to its propulsion manufacturing facility near Sacramento, California. Breakthrough negotiations with state regulators to delete an initial 1,100 acres of Sacramento real estate from a state investigation order now allow for future development. Aerojet is moving forward with plans for entitlement of the property, a process estimated to take two to three years to complete. Land sales could commence now for unentitled land, or after the completion of the entitlement process for maximum value, and reach significant levels over a three to six year period. Automotive segment sales were $82.6 million in the first quarter of 1998, versus $89.6 million in the same 1997 quarter. The anticipated sales decline resulted from customer shutdown of several older platforms, partially offset by accelerated launches of new replacement platforms. Operating profit declined to $0.8 million versus $5.5 million in the first quarter of 1997. The operating profit decline, which was largely anticipated, was due to accelerated launch costs on several new major platforms, slower than anticipated labor reductions in Europe, and negative exchange rate variances from the segment's foreign operations. Value-Creating Growth Strategy - ------------------------------ As part of GenCorp's announced value-creating growth strategy, management expects that the Company will become more focused as a stronger player in fewer businesses with higher value enhancing growth potential. To execute this strategy, the Company may exit non-strategic businesses and will aggressively focus on organic growth in all remaining businesses and seek out vehicles for "new but related" growth to expand its strongest businesses which have been identified as GenCorp's growth platforms. Growth platform businesses include Specialty Polymers, Decorative & Building Products, and Space Surveillance and Smart Munitions sectors of Aerojet. Attractive related markets, products and programs will be targeted in these areas, along with organic growth and opportunities for acquisition or alliance strategies. Environmental Matters - --------------------- GenCorp's policy is to conduct its businesses with due regard for the preservation and protection of the environment. The Company devotes a significant amount of resources and management attention to environmental matters and actively manages its ongoing processes to comply with extensive environmental laws and regulations. The Company is involved in the remediation of environmental conditions which resulted from generally accepted manufacturing and disposal practices in the 1950s and 1960s which were followed at certain GenCorp plants. In addition, the Company has been designated a potentially responsible party, with other companies, at sites undergoing investigation and remediation. -13- 14 Environmental Matters (continued) - --------------------- The nature of environmental investigation and cleanup activities often makes it difficult to determine the timing and amount of any estimated future costs that may be required for remedial measures. However, the Company reviews these matters and accrues for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred and the amount of the liability (usually based upon proportionate sharing) can be reasonably estimated. The Company's Condensed Consolidated Balance Sheet at February 28, 1998 reflects accruals of $304 million and amounts recoverable of $179 million from the U.S. Government and other third parties for such costs. The effect of resolution of environmental matters on results of operations cannot be predicted due to the uncertainty concerning both the amount and timing of future expenditures and future results of operations. However, management believes, on the basis of presently available information, that resolution of these matters will not materially affect liquidity, capital resources or the consolidated financial condition of the Company. The Company will continue its efforts to mitigate past and future costs through pursuit of claims for insurance coverage and continued investigation of new and more cost effective remediation alternatives and associated technologies. For additional discussion of environmental matters, refer to Note G - Contingencies. Information Systems and the Year 2000 - ------------------------------------- The Company is currently engaged in a comprehensive project to upgrade its information, technology, manufacturing and facilities computer software programs to address the Year 2000 issue. Many of the Company's systems include new hardware and packaged software recently purchased from large vendors who have represented that these systems are already Year 2000 compliant. The Company is in the process of obtaining assurances from vendors that timely updates will be made available to make all remaining purchased software Year 2000 compliant. The Company will utilize both internal and external resources to reprogram or replace and test all of its software for Year 2000 compliance, and the Company expects to complete the project in early 1999. The estimated cost for this project could range as high as $15 million, excluding the cost of new systems which will be capitalized. This cost is being funded through operating cash flows. Failure by the Company and/or vendors and customers to complete Year 2000 compliance work in a timely manner could have a material adverse effect on certain of the Company's operations. Forward-Looking Statements - -------------------------- This report on Form 10-Q contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements may present (without limitation) management's expectations, beliefs, plans and objectives, future financial performance, and assumptions or judgments concerning such matters. Any discussions contained in this report, except to the extent that they contain historical facts, are forward-looking and accordingly involve estimates, assumptions, judgments and uncertainties. There are a number of factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking statements. Such factors are detailed in the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997 filed with the Securities and Exchange Commission. -14- 15 PART II. OTHER INFORMATION -------------------------- Item 1. Legal Proceedings - ------------------------- Information concerning legal proceedings, including proceedings relating to environmental matters, which appears in Note G beginning on page 8 of this report is incorporated herein by reference. Santamaria v. Suburban Water Systems - ------------------------------------ On July 2, 1997, a "toxic tort" lawsuit was filed in the Los Angeles County Superior Court, SANTAMARIA V. SUBURBAN WATER SYSTEMS, Docket No. KC 025995, naming as defendants 19 manufacturing companies, (including Aerojet), and 5 water companies. The complaint was subsequently amended to add additional plaintiffs and two additional defendant public water companies and has been served on the private water companies but not on the industrial PRPs. On January 15, 1998, the plaintiffs represented to the Court that Aerojet and the other manufacturing defendants would be served within the next sixty days. We understand that most have now been served, although Aerojet is still awaiting service. On March 30, 1998, the Court granted a motion for change of venue and transferred the case to Ventura County which is immediately northwest of Los Angeles. Further activity will not take place in the case until it has been assigned to a new judge. The several hundred plaintiffs, all of whom reside or resided in the San Gabriel Valley of Los Angeles (SGV), alleged that the defendants placed hazardous chemicals in the soil, groundwater and air in the SGV and provided contaminated well water to the plaintiffs for many years. The causes of action alleged are negligence, wrongful death, strict liability, trespass, nuisance, negligence per se, ultrahazardous activity and fraudulent concealment, and the plaintiffs seek personal injury and property damages in an unspecified amount and punitive damages. They also seek a court order to stop the allegedly tortious activity, but no preliminary injunctive relief is sought. Aerojet has notified its insurers and will vigorously defend this action. Allen, et al. v. Aerojet, MDC, Southern California Water Company, et al. - ------------------------------------------------------------------------ Adams, et al. v. Aerojet, MDC, Southern California Water Company, et al. - ------------------------------------------------------------------------ On December 8, 1997 and March 2, 1998, similar but unrelated "toxic tort" complaints were filed in Sacramento Superior Court. The plaintiffs seek compensation for damages for alleged personal injuries and property damages related to exposure to groundwater contamination in eastern Sacramento County, California. Aerojet was served on January 14, 1998 in ALLEN and is not yet served in ADAMS. Aerojet will vigorously defend these matters. In addition to Aerojet, McDonnell-Douglas Corporation (now Boeing) and two Sacramento water purveyors are defendants. Aerojet has also notified its insurers of these actions. Because of these (and other similar recent) "toxic tort" lawsuits which named California water purveyors as defendants, on March 12, 1998, the California Public Utilities Commission (PUC) announced a wide ranging investigation of drinking water quality in California. The PUC's General Counsel has publicly stated that he believes under the California Constitution the PUC's jurisdiction overrides that of the Courts in this area. Accordingly, Aerojet is also preparing to defend its interests before the PUC. -15- 16 Item 1. Legal Proceedings (continued) - -------------------------- In re: Proposition 65 Notices - ------------------------------ Aerojet was served in November and December 1997 with notices from a private group alleging that it has released chemicals into air and groundwater from its Sacramento facility in violation of California's Proposition 65 and without filing sufficiently detailed public notifications as required by Proposition 65. Following collection and review of all of its Proposition 65 records, air release reports and groundwater reports, Aerojet believes it is in compliance with Proposition 65 and has so advised the California Attorney General's office. While compliance with Proposition 65 is a defense, private litigation may still be filed. Aerojet's insurance carriers have been notified of these claims. The Company and its subsidiaries are subject to various legal actions, governmental investigations, and proceedings relating to a wide range of matters in addition to those discussed above and in Part I of this report. In the opinion of management, after reviewing the information which is currently available with respect to such matters and consulting with the Company's counsel, any liability which may ultimately be incurred with respect to these additional matters will not materially affect the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted because any such effect depends on both future results of operations and the amount and timing of the resolution of such matter. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ At the Company's Annual Meeting of Shareholders held on March 25, 1998, holders of GenCorp Common Stock elected General Paul X. Kelley, Diane E. McGarry, Dr. R. Byron Pipes and Steven W. Percy as directors to serve a three year term expiring in 2001. Shareholders also ratified the Board of Directors' appointment of Ernst & Young LLP as the Company's independent auditors for 1998. Following is the final result of the Common votes cast: A) Election of Directors:
Broker For Withheld Nonvotes General Paul X. Kelley 36,532,160 339,616 -0- ------------- ------------- -------- Diane E. McGarry 36,566,587 305,189 -0- ------------- ------------- -------- Dr. R. Byron Pipes 36,561,437 310,339 -0- ------------- ------------- -------- Steven W. Percy 36,569,056 302,720 -0- ------------- ------------- --------
B) Ratification of the Board of Directors' appointment of Ernst & Young LLP as independent auditors: Broker For: 36,685,089 Against: 105,862 Abstain: 80,825 Nonvotes: -0- ------------ ----------- ---------- --------
Item 5. Other Information - -------------------------- Effective January 30, 1998, Ambassador J. Gary Cooper, Chairman and Chief Executive Officer of Commonwealth National Bank, Mobile, Alabama, and former United States Ambassador to Jamaica, was elected a director of the Company. At the annual meeting of shareholders held on March 25, 1998, Paul J. Phoenix retired from service on the Board of Directors, bringing the number of directors to eleven. -16- 17 Part II. Other Information (continued) - -------------------------- Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- a) Exhibits --------
Table Exhibit Item No. Exhibit Description Number -------------------------------------------------------------------------------------------------------- 10 Material Contracts 10.(iii)(A) Management contracts, compensatory plans or arrangements Form of Restricted Stock Agreement between 10.1 the Company and Nonemployee Directors providing for payment of part of Directors' compensation for service on the Board of Directors in Company Stock 27 Financial Data Schedule 27 (Filed for EDGAR only)
b) Reports on Form 8-K ------------------- There have been no reports on Form 8-K filed during the quarter ended February 28, 1998. -17- 18 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENCORP INC. Date April 9, 1998 By /s/ D. M. Steuert ------------------------ ------------------------------ D. M. Steuert Senior Vice President and Chief Financial Officer Date April 9, 1998 By /s/ W. R. Phillips ------------------------ ------------------------------ W. R. Phillips Senior Vice President, Law; General Counsel -18- EX-10.1 2 EXHIBIT 10.1 1 Exhibit 10.1 RESTRICTED STOCK AGREEMENT GENCORP INC. March 1998 AGREEMENT, Made in Fairlawn, Ohio as of March 25, 1998 between GenCorp Inc., an Ohio corporation ("Company") and the undersigned non-employee director of the Company ("Director"). WHEREAS, the Company desires to increase Director's identification with the interests of its shareholders and to increase Director's compensation for service on the Board of Directors of the Company ("Board") by granting to Director Two Hundred (200) shares of GenCorp Inc. Common Stock, $0.10 par value per share ("Shares"), subject to the conditions and restrictions set forth in this Restricted Stock Agreement ("Agreement"). NOW, THEREFORE, In consideration of the premises and the mutual covenants set forth in this Agreement and for other good and valuable consideration, the parties hereto agree as follows: 1. GRANT OF SHARES. As consideration for services to be rendered as a member of the Board, the Company will issue in the name of the Director Two Hundred (200) Shares which shall be subject to restrictions described below and shall be legended as having been issued in a private transaction not registered with the Securities and Exchange Commission. 2. ESCROW OF SHARES DURING RESTRICTION PERIOD. In aid of the restrictions to which the Shares shall be subject pursuant to this Agreement, the Shares shall be deposited in the name of the Director with the Shareholder Services Department of the Company and shall be so held by the Company during the period of Director's service on the Board ("Restriction Period"). 3. SHAREHOLDER RIGHTS. Director shall, during the Restriction Period, have the right to vote all Shares deposited hereunder and to receive all dividends and other distributions paid with respect to such Shares. 4. AUTOMATIC DIVIDEND REINVESTMENT. As to the Shares deposited hereunder, Director shall be automatically enrolled in GenCorp's dividend reinvestment program, pursuant to the standard terms and conditions of participation. Additional shares of GenCorp common stock accumulated pursuant to the dividend reinvestment feature shall not be subject to the Restriction Period. Director may decline to participate in such program by so indicating below his or her signature on this Agreement. 5. ADJUSTMENTS. Shares issued pursuant to this Agreement and held by the Company during the Restriction Period will be subject to the same adjustment, if any, accorded to all other outstanding shares in the event of (i) any change in the total number of shares of common stock of the Company outstanding or the number or kind of securities into which shares have been changed, (ii) any reorganization or change in the Company's capital structure, or (iii) any other transaction or event having an effect similar to the foregoing. 6. VESTING. Unless vesting is accelerated pursuant to paragraphs 7 or 10 hereof, ownership of the Shares deposited hereunder shall vest irrevocably in the Director on March 25, 2000, subject to the other terms and restrictions of this Agreement. 2 -2- 7. Change in Control. ------------------ (a) Notwithstanding paragraph 6 above, the ownership of the Shares granted hereby shall automatically vest, the Restriction Period shall terminate, all restrictions shall lapse and delivery to Director of certificate(s) representing such Shares shall occur immediately, if at any time during the Restriction Period a Change in Control (as defined herein) shall occur. (b) For purposes of this Agreement, "Change in Control" shall mean the occurrence during the term of this Agreement of any of the following events, subject to the provisions of Section (7)(b)(vi) hereof: (i) All or substantially all of the assets of the Company are sold or transferred to another corporation or entity, or the Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than 51% of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity are owned directly or indirectly, by the shareholders of the Company generally prior to the transaction; or (ii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act (a "Person")) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act (a "Beneficial Owner")) of securities representing 20% or more of the combined voting power of the then-outstanding voting securities of the Company; or (iii) The individuals who, at the beginning of any period of two consecutive calendar years, constituted the Directors of the Company cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's stockholders of each new Director of the Company was approved by a vote of at least two-thirds of the Directors of the Company still in office who were Directors of the Company at the beginning of any such period; or (iv) There shall be an announcement of the intent of any Person to commence a tender offer or exchange offer to acquire (when added to any shares as to which such Person is the beneficial owner immediately prior to such tender or exchange offer) beneficial ownership of 30% or more of the combined voting power of the then-outstanding voting securities of the Company; or (v) The Board determines that (A) any particular actual or proposed merger, consolidation, reorganization, sale or transfer of assets, accumulation of shares or tender offer for shares of the Company or other transaction or event or series of transactions or events will, or is likely to, if carried out, result in a Change in Control falling within Subsections (i), (ii), (iii) or (iv) and (B) it is in the best interests of the Company and its shareholders, and will serve the intended purposes of this Agreement, if the provisions of paragraph 7(a) of this Agreement shall thereupon become immediately operative. 3 -3- (vi) Notwithstanding the foregoing provisions of this Section (7)(b): (A) If any such merger, consolidation, reorganization, sale or transfer of assets, or tender offer or other transaction or event or series of transactions or events mentioned in Section (7)(b)(v) shall be abandoned, or any such accumulations of shares shall be dispersed or otherwise resolved, the Board may, by notice to the Director, reinstate such restrictions on transfer of Shares under this Agreement as were previously in effect, but without prejudice to any action that may have been taken prior to such reinstatement. (B) Unless otherwise determined in a specific case by the Board of Directors, a "Change in Control" shall not be deemed to have occurred for purposes of Section (7)(b)(ii) or 7(b)(iv) solely because (X) the Company, (Y) a Subsidiary, or (Z) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company or any Subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing beneficial ownership by it of shares of the then-outstanding voting securities of the Company, whether in excess of 20% or otherwise, or because the Company reports that a change in control of the Company has occurred or will occur in the future by reason of such beneficial ownership. 8. RESTRICTIONS ON TRANSFER. During the Restriction Period, the Shares may not be sold, transferred, pledged, assigned, alienated or hypothecated, or otherwise transferred to another person whether by operation of law or otherwise, except by will, the laws of descent and distribution or a qualified domestic relations order. 9. BENEFICIARY DESIGNATION. Director may designate any beneficiary or beneficiaries (contingently or successively) to whom Shares are to be paid if Director dies during the Restriction Period, and may at any time revoke or change any such designation. Absent such designation, any Shares which are due to Director under this Agreement upon Director's death will be payable to Director's estate. The designation of a Beneficiary will be effective only when Director has delivered a completed Designation of Beneficiary form to the Company's Secretary. A successive designation of Beneficiary will revoke a prior designation. 10. TERMINATION DUE TO DEATH, DISABILITY, OR RETIREMENT. If Director's service on the Board terminates by reason of his or her death, disability or retirement under the Non-Employee Directors' Retirement Plan, Shares not already vested, if any, shall automatically vest, the Restriction Period shall terminate and all restrictions shall lapse. 11. TERMINATION DUE TO OTHER REASONS. If Director's service on the Board terminates for any reason other than a reason set forth in paragraphs 7 or 10 above, Shares which have not vested prior to such date of termination will be forfeited and cancelled as of such date. Notwithstanding the foregoing, by a majority vote of the directors then in office (with the terminating director abstaining), the Board shall have the right, in its sole discretion, to waive the forfeiture of all or any portion of such Shares subject to such terms as it deems appropriate. 12. DISPUTES. The Board shall have full and exclusive authority to determine all disputes and controversies concerning the interpretation of this Agreement by a majority vote of the directors then in office (with any disputing director abstaining). 13. NOTICES. All written notices and communications directed to the Company pursuant to this Agreement must be addressed to GenCorp Inc., 175 Ghent Road, Fairlawn, Ohio 44333-3300; Attention: Secretary. All communications directed to Director pursuant to this Agreement will be mailed to the Director's current address as recorded on the payroll records of the Company. 4 -4- 14. GOVERNING LAW. To the extent not preempted by federal law, this Agreement will be governed by and interpreted in accordance with the laws of the State of Ohio. IN WITNESS WHEREOF, this Agreement has been executed by a duly authorized officer of the Company and by the Director as of the 25th day of March, 1998. GENCORP INC. By: ------------------------------------ J. B. Yasinsky Chairman and Chief Executive Officer Agreed to and accepted: - ---------------------------------- Director Signature* TO OPT OUT OF PARTICIPATION IN THE COMPANY'S DIVIDEND REINVESTMENT PROGRAM, INITIAL THE STATEMENT BELOW: I DO NOT ELECT TO PARTICIPATE IN THE DIVIDEND REINVESTMENT PROGRAM - ----- *Sign and return one copy by May 1, 1998 to GenCorp Inc., 175 Ghent Road, Fairlawn, Ohio 44333-3300; Attention: Secretary. EX-27 3 EXHIBIT 27
5 1,000 3-MOS NOV-30-1998 FEB-28-1998 12,900 8,000 244,900 0 134,300 459,200 1,129,300 724,300 1,404,300 358,600 0 0 0 4,100 282,700 1,404,300 365,500 365,500 290,600 343,300 (1,300) 0 2,100 21,400 8,600 12,800 0 0 0 12,800 .31 .31
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