UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarterly period ended: February 28, 2005 |
or
o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the transition period from to |
Commission File Number 1-1520
GenCorp Inc.
| Ohio (State of Incorporation) |
34-0244000 (I.R.S. Employer Identification No.) |
|
| Highway 50 and Aerojet Road Rancho Cordova, California (Address of Principal Executive Offices) |
95742 (Zip Code) |
|
| P.O. Box 537012 Sacramento, California (Mailing Address) |
95853-7012 (Zip Code) |
Registrant’s telephone number, including area code (916) 355-4000
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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o
As of March 28, 2005, there were 54,455,731 outstanding shares of our Common Stock, $0.10 par value.
GenCorp Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended February 28, 2005
Table of Contents
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| EXHIBIT 31.1 | ||||||||
| EXHIBIT 31.2 | ||||||||
| EXHIBIT 32.1 | ||||||||
Part I – FINANCIAL INFORMATION
Item 1. Financial Statements
GenCorp Inc.
Condensed Consolidated Statements of Income
(Unaudited)
| Three months ended | ||||||||
| February 28 | February 29 | |||||||
| 2005 | 2004 | |||||||
| (in millions, except per share amounts) | ||||||||
Net Sales |
$ | 142 | $ | 110 | ||||
Costs and Expenses |
||||||||
Cost of products sold |
130 | 98 | ||||||
Selling, general and administrative |
8 | 11 | ||||||
Depreciation and amortization |
7 | 8 | ||||||
Interest expense |
7 | 8 | ||||||
Unusual items, net |
18 | — | ||||||
Loss from continuing operations
before income taxes |
(28 | ) | (15 | ) | ||||
Income tax benefit |
— | 6 | ||||||
Loss from continuing operations |
(28 | ) | (9 | ) | ||||
Loss from discontinued operations, net of tax |
(1 | ) | (10 | ) | ||||
Net loss |
$ | (29 | ) | $ | (19 | ) | ||
Loss Per Share of Common Stock |
||||||||
Basic and Diluted: |
||||||||
Loss per share from continuing operations |
$ | (0.51 | ) | $ | (0.21 | ) | ||
Loss per share from discontinued operations |
(0.03 | ) | (0.22 | ) | ||||
Loss per share |
$ | (0.54 | ) | $ | (0.43 | ) | ||
Weighted average shares of common stock
outstanding |
54.2 | 43.9 | ||||||
Dividends Declared Per Share of Common Stock |
$ | — | $ | 0.03 | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
1
GenCorp Inc.
Condensed Consolidated Balance Sheets
| February 28, | November 30, | |||||||
| 2005 | 2004 | |||||||
| (Unaudited) | ||||||||
| (in millions, except per share amounts) | ||||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 31 | $ | 68 | ||||
Restricted cash |
— | 23 | ||||||
Accounts receivable, net |
103 | 88 | ||||||
Inventories, net |
172 | 159 | ||||||
Recoverable from the U.S. government and other third parties for
environmental remediation costs |
39 | 36 | ||||||
Prepaid expenses and other |
5 | 6 | ||||||
Assets of discontinued operations |
101 | 94 | ||||||
Total Current Assets |
451 | 474 | ||||||
Noncurrent Assets |
||||||||
Restricted cash |
— | 178 | ||||||
Property, plant and equipment, net |
141 | 145 | ||||||
Recoverable from the U.S. government and other third parties for
environmental remediation costs |
191 | 197 | ||||||
Prepaid pension asset |
268 | 278 | ||||||
Goodwill |
103 | 103 | ||||||
Intangible assets |
28 | 28 | ||||||
Other noncurrent assets, net |
90 | 92 | ||||||
Total Noncurrent Assets |
821 | 1,021 | ||||||
Total Assets |
$ | 1,272 | $ | 1,495 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current Liabilities |
||||||||
Short-term borrowings and current portion of long-term debt |
$ | 2 | $ | 23 | ||||
Accounts payable |
35 | 55 | ||||||
Reserves for environmental remediation |
55 | 51 | ||||||
Income taxes payable |
35 | 35 | ||||||
Postretirement benefits other than pensions |
15 | 15 | ||||||
Other current liabilities |
138 | 141 | ||||||
Liabilities of discontinued operations |
18 | 18 | ||||||
Total Current Liabilities |
298 | 338 | ||||||
Noncurrent Liabilities |
||||||||
Convertible subordinated notes |
291 | 285 | ||||||
Senior subordinated notes |
98 | 150 | ||||||
Other long-term debt, net of current portion |
24 | 119 | ||||||
Reserves for environmental remediation |
245 | 253 | ||||||
Postretirement benefits other than pensions |
146 | 149 | ||||||
Other noncurrent liabilities |
55 | 60 | ||||||
Total Noncurrent Liabilities |
859 | 1,016 | ||||||
Total Liabilities |
1,157 | 1,354 | ||||||
Commitments and Contingent Liabilities |
||||||||
Shareholders’ Equity |
||||||||
Preference stock, par value of $1.00; 15 million shares authorized;
none issued or outstanding |
— | — | ||||||
Common stock, par value of $0.10; 150 million shares authorized;
54.9 million shares issued, 54.3 million outstanding as of February 28, 2005;
54.6 million shares issued, 54.0 million shares outstanding as of November 30, 2004 |
5 | 5 | ||||||
Other capital |
170 | 167 | ||||||
Accumulated deficit |
(57 | ) | (28 | ) | ||||
Accumulated other comprehensive loss, net of income taxes |
(3 | ) | (3 | ) | ||||
Total Shareholders’ Equity |
115 | 141 | ||||||
Total Liabilities and Shareholders’ Equity |
$ | 1,272 | $ | 1,495 | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
GenCorp Inc.
Condensed Consolidated Statements of Cash Flows
| Three months ended | ||||||||
| February 28, | February 29, | |||||||
| 2005 | 2004 | |||||||
| (in millions) | ||||||||
Operating Activities |
||||||||
Loss from continuing operations |
$ | (28 | ) | $ | (9 | ) | ||
Adjustments to reconcile loss to net cash used
in continuing operations: |
||||||||
Depreciation and amortization |
7 | 8 | ||||||
Stock compensation and savings plan expense |
2 | 2 | ||||||
Loss on repayment of debt |
18 | — | ||||||
Changes in assets and liabilities: |
||||||||
Current assets |
(30 | ) | (7 | ) | ||||
Noncurrent assets |
14 | 32 | ||||||
Current liabilities |
(19 | ) | (42 | ) | ||||
Noncurrent liabilities |
(16 | ) | (2 | ) | ||||
Net cash used in continuing operations |
(52 | ) | (18 | ) | ||||
Net cash used in discontinued operations |
(1 | ) | (24 | ) | ||||
Net Cash Used in Operating Activities |
(53 | ) | (42 | ) | ||||
Investing Activities |
||||||||
Capital expenditures |
(2 | ) | (2 | ) | ||||
Restricted cash |
201 | — | ||||||
Investing activities of discontinued operations |
(7 | ) | (12 | ) | ||||
Net Cash (Used in) Provided by Investing Activities |
192 | (14 | ) | |||||
Financing Activities |
||||||||
Proceeds from issuance of convertible notes |
66 | 125 | ||||||
Repayment of convertible and senior subordinated notes |
(122 | ) | — | |||||
Repayments on revolving credit facility |
— | (30 | ) | |||||
Borrowings (repayments) of short-term debt |
— | (6 | ) | |||||
Proceeds from the issuance of other long-term debt |
25 | 2 | ||||||
Repayments of other long-term debt |
(141 | ) | (26 | ) | ||||
Debt issuance costs |
(6 | ) | (5 | ) | ||||
Dividends paid |
— | (1 | ) | |||||
Other equity transactions |
2 | 1 | ||||||
Net Cash (Used In) Provided by Financing Activities |
(176 | ) | 60 | |||||
Effect of exchange rate fluctuations on cash and cash equivalents |
— | 1 | ||||||
Net (Decrease) Increase in Cash and Cash Equivalents |
(37 | ) | 5 | |||||
Cash and Cash Equivalents at Beginning of Period |
68 | 64 | ||||||
Cash and Cash Equivalents at End of Period |
$ | 31 | $ | 69 | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
GenCorp Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation and Nature of Operations
GenCorp Inc. (GenCorp or the Company) has prepared the accompanying Unaudited Condensed Consolidated Financial Statements, including its accounts and the accounts of its wholly owned and majority-owned subsidiaries, in accordance with the instructions to Form 10-Q and therefore do not include all of the information and notes required by accounting principles generally accepted in the United States (GAAP). These interim financial statements should be read in conjunction with the financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended November 30, 2004, as filed with the Securities and Exchange Commission (SEC).
The Company believes the accompanying Unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of its financial position, results of operations and cash flows for the periods presented. All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In addition, the operating results for interim periods may not be indicative of the results of operations for a full year.
The Company is a technology-based manufacturer operating primarily in the United States. The Company’s continuing operations are organized into two operating segments: Aerospace and Defense and Real Estate. The Aerospace and Defense segment includes the operations of Aerojet-General Corporation (Aerojet), which develops and manufactures propulsion systems for space and defense applications, armament systems for precision tactical weapon systems and munitions applications, and advanced airframe structures. Primary customers served include major prime contractors to the U.S. government, the Department of Defense (DoD) and the National Aeronautics and Space Administration (NASA). The Real Estate segment includes activities related to the development, sale and leasing of the Company’s real estate assets.
On August 31, 2004, the Company completed the sale of its GDX Automotive (GDX) business. Also in fiscal 2004, management committed to a plan to sell the Company’s Fine Chemicals business. The GDX and Fine Chemicals businesses are classified as discontinued operations in these Unaudited Condensed Consolidated Financial Statements and Notes to Unaudited Condensed Consolidated Financial Statements (see Note 13).
4
2. Loss Per Share of Common Stock
A reconciliation of the numerator and denominator used to calculate basic and diluted loss per share of common stock (EPS) is presented in the following table:
| Three months ended | ||||||||
| February 28, | February 29, | |||||||
| 2005 | 2004 | |||||||
| (in millions, except per share | ||||||||
| amounts; shares in thousands) | ||||||||
Numerator for Basic and Diluted EPS: |
||||||||
Loss from continuing operations |
$ | (28 | ) | $ | (9 | ) | ||
Loss from discontinued operations, net of tax |
(1 | ) | (10 | ) | ||||
Net loss available to common shareholders |
$ | (29 | ) | $ | (19 | ) | ||
Denominator for Basic and Diluted EPS: |
||||||||
Weighted average shares of common stock outstanding |
54,180 | 43,878 | ||||||
Basic and Diluted: |
||||||||
Loss per basic share from continuing operations |
$ | (0.51 | ) | $ | (0.21 | ) | ||
Loss per basic share from discontinued operations |
(0.03 | ) | (0.22 | ) | ||||
Net loss per share |
$ | (0.54 | ) | $ | (0.43 | ) | ||
The following were not included in the computation of diluted loss per share for the quarter ended February 28, 2005 or February 29, 2004 because the effect would be antidilutive for the periods:
| Description | Conversion Rate | |
53/4% Convertible Subordinated Notes
|
54.29 shares per $1,000 outstanding | |
4% Contingent Convertible Subordinated Notes
|
64.81 Shares per $1,000 outstanding | |
21/4% Convertible Subordinated Debentures
|
50.00 Shares per $1,000 outstanding |
Potentially dilutive securities that are not included in the diluted EPS calculation, because they would be antidilutive, also include 2.2 million and 3.3 million employee stock options as of February 28, 2005 and February 29, 2004, respectively.
5
3. Stock Based Compensation
The Financial Accounting Standards Board (FASB) issued Statement No. 123(R), Share-Based Payment, in December 2004. Statement No. 123(R) will require the Company to measure all employee stock-based compensation awards using a fair value method and record such expense in our consolidated financial statements. Until the Company adopts SFAS No. 123(R) in the fourth quarter of fiscal 2005, the Company will continue to account for its stock compensation in accordance with Accounting Principles Board (APB) No. 25.
As permitted by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, the Company applies the existing accounting rules under APB Opinion No. 25, Accounting for Stock Issued to Employees, which provides that no compensation expense is charged for options granted at an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation expense for the stock option plans been determined based upon the fair value at the grant date for awards under these plans using market-based option valuation models, the net loss and the effect on net loss per share would have been as follows:
| Three months ended | ||||||||
| February 28, | February 29, | |||||||
| 2005 | 2004 | |||||||
| (in millions, except | ||||||||
| per share amounts) | ||||||||
Net loss, as reported |
$ | (29 | ) | $ | (19 | ) | ||
Add: Stock based compensation expense reported, net of related tax effects |
— | — | ||||||
Deduct: Stock based compensation expense determined under fair value
based method for all awards, net of related tax effects |
— | — | ||||||
Net loss, pro forma |
$ | (29 | ) | $ | (19 | ) | ||
As reported |
||||||||
Basic and diluted |
$ | (0.54 | ) | $ | (0.43 | ) | ||
Pro forma |
||||||||
Basic and diluted |
$ | (0.54 | ) | $ | (0.43 | ) | ||
The fair value of options granted was estimated at the date of grant using a Black-Scholes stock option pricing model with the following weighted average assumptions:
| Three months ended | ||||
| February 29, | ||||
| 2004 | ||||
Expected life (in years) |
5.00 | |||
Volatility |
42.00 | % | ||
Risk-free interest rate |
3.07 | % | ||
Dividend yield |
0.00 | % | ||
During the first quarter of fiscal 2005, the Company did not issue any stock options to employees. Discontinued operations loss per share would not have changed as a result of stock based compensation expense.
6
4. Inventories, Net
| February 28, | November 30, | |||||||
| 2005 | 2004 | |||||||
| (in millions) | ||||||||
Long-term contracts at average cost |
$ | 242 | $ | 235 | ||||
Raw materials and supplies |
8 | 2 | ||||||
Progress payments |
(78 | ) | (78 | ) | ||||
Inventories, net |
$ | 172 | $ | 159 | ||||
During fiscal 2004, Aerojet recorded an inventory write-down of $16 million on a contract to design, develop and produce a solid rocket motor for Lockheed Martin’s Atlas® V program. This write-down relates to unanticipated transition costs from the development phase to the production phase of the contract and the value of materials rendered obsolete by a decision to proceed with qualification and production of an enhanced motor configuration. In management’s judgment, these costs will not be recoverable on the contract.
The current contract with Lockheed provides for production of 44 motors over a number of years and for the order of an additional 52 motors at Lockheed Martin’s option. At February 28, 2005, the Atlas V inventory balance was $136 million. Full recovery of this investment is subject to uncertainties, including: (i) Aerojet’s ability to produce motors at its estimated average unit price, (ii) final pricing of the enhanced motor configuration, and (iii) a satisfactory renegotiation of contract terms with Lockheed Martin. Aerojet believes its Atlas V contract will be restructured during fiscal 2005 when launch services contracts between launch vehicle manufacturers and the U.S. government are modified to reflect cost pressures resulting from continued low commercial launch activity. Details of the form and terms of the anticipated changes are unknown at this time. Aerojet Management believes that continued improvements in operational efficiency and renegotiation of contract terms will permit recovery of inventoried development and production costs. However, if management’s efforts are unsuccessful, Aerojet may be required to recognize additional material losses.
5. Property, Plant and Equipment, Net
| February 28, | November 30, | |||||||
| 2005 | 2004 | |||||||
| (in millions) | ||||||||
Land |
$ | 29 | $ | 29 | ||||
Buildings and improvements |
132 | 128 | ||||||
Machinery and equipment |
335 | 333 | ||||||
Construction-in-progress |
10 | 15 | ||||||
| 506 | 505 | |||||||
Less: accumulated depreciation |
(365 | ) | (360 | ) | ||||
Property, plant and equipment, net |
$ | 141 | $ | 145 | ||||
7
6. Other Noncurrent Assets, Net
| February 28, | November 30, | |||||||
| 2005 | 2004 | |||||||
| (in millions) | ||||||||
Real estate held for development and leasing |
$ | 28 | $ | 27 | ||||
Other receivables |
23 | 23 | ||||||
Deferred financing costs |
17 | 21 | ||||||
Other |
22 | 21 | ||||||
Other noncurrent assets |
$ | 90 | $ | 92 | ||||
As of February 28, 2005 and November 30, 2004, the Company had a receivable of $23 million from Northrop Grumman Corporation related to environmental remediation (See Note 9(c)). The Company amortizes deferred financing costs over the term of the related debt.
7. Other Current Liabilities
| February 28, | November 30, | |||||||
| 2005 | 2004 | |||||||
| (in millions) | ||||||||
Accrued compensation and employee
benefits |
$ | 42 | $ | 37 | ||||
Advanced payments on contracts |
28 | 22 | ||||||
Contract loss provisions |
14 | 15 | ||||||
Accrued goods and services |
7 | 11 | ||||||
Interest payable |
2 | 8 | ||||||
Other |
45 | 48 | ||||||
Other current liabilities |
$ | 138 | $ | 141 | ||||
8
8. Long-term Debt
| February 28, | November 30, | |||||||
| 2005 | 2004 | |||||||
| (in millions) | ||||||||
Convertible subordinated notes, bearing interest at 5.75%
per annum, interest payments due in April and
October, maturing in 2007 (53/4% Notes) |
$ | 20 | $ | 80 | ||||
Contingent convertible subordinated notes, bearing
interest at 4.00% per annum, interest payments due
in January and July, maturing in 2024 (4% Notes) |
125 | 125 | ||||||
Convertible subordinated debentures, bearing interest at 2.25%
per annum, interest payments due in May and November,
maturing in 2024 (21/4
% Debentures) |
146 | 80 | ||||||
Total convertible subordinated notes |
291 | 285 | ||||||
Senior subordinated notes, bearing interest at 9.50%
per annum, interest payments due in February and August,
maturing in 2013 (91/2% Notes) |
98 | 150 | ||||||
Total senior subordinated notes |
98 | 150 | ||||||
Term loan A, bearing interest at various rates (5.1%
as of November 30, 2004) |
— | 28 | ||||||
Term loan B, bearing interest at various rates (6.02%
as of November 30, 2004) |
— | 113 | ||||||
Term loan, bearing interest at various rates (rate
of 5.89% as of February 28, 2005), payable in
quarterly installments of approximately $250,000 plus
interest, maturing in 2010 |
25 | — | ||||||
Other |
1 | 1 | ||||||
Total other debt, including current portion |
26 | 142 | ||||||
Total debt |
415 | 577 | ||||||
Less: Amounts due within one year |
(2 | ) | (23 | ) | ||||
Total long-term debt |
$ | 413 | $ | 554 | ||||
The estimated fair value of the Company’s total debt was $488 million as of February 28, 2005 compared to a carrying value of $415 million. The fair value of the convertible subordinated notes and the senior subordinated notes was determined based on quoted market prices as of February 28, 2005. The fair value of the remaining debt approximates the carrying value. The interest rates are generally variable, based on market interest rates, and reflect market rates currently available to the Company.
a. Convertible Subordinated Notes
In December 2004, an initial purchaser exercised its option to purchase additional 21/4% Debentures totaling $66 million aggregate principal amount. Cash proceeds, net of underwriting discounts and transaction costs, were $64 million and were used to repurchase $60 million of the 53/4% Notes, plus premium, accrued interest, and transaction costs. The repurchase of the 53/4% Notes resulted in an unusual charge of $5 million during the first quarter of fiscal 2005, including the write-off of deferred financing costs associated with the repurchased 53/4% Notes.
b. Senior Subordinated Notes
In February 2005, the Company redeemed $52 million principal amount of its 91/2% Notes, representing 35% of the $150 million aggregate principal outstanding. In accordance with the indenture governing the notes, the redemption price was 109.5% of the principal amount of the 91/2% Notes redeemed, plus accrued and unpaid interest. The Company paid the redemption price using a portion of the restricted cash from the proceeds of the equity offering completed in November 2004, and recorded an unusual charge of $7 million in the first quarter of fiscal 2005, including the write-off of deferred financing costs associated with the redeemed 91/2% Notes.
9
c. Other Debt
In December 2004, the Company entered into a new $180 million credit facility (New Credit Facility) with a syndicate of lenders. The New Credit Facility provides for an $80 million revolving credit facility (Revolver) maturing in December 2009, and a $100 million credit-linked facility maturing in December 2010. The credit-linked facility consists of a $25 million term loan subfacility, and a $75 million letter of credit subfacility. The interest rate on the revolving credit facility is LIBOR plus 275 basis points, subject to adjustment based on the Company’s senior leverage ratio, with a minimum of 225 basis points and a maximum of 300 basis points. The interest rate on the term loan is LIBOR plus 300 basis points. The fees on the letter of credit subfacility are 300 basis points plus any shortfall from LIBOR earned on the credit-linked deposits. The Revolver commitment fee is .5% per annum on the unused balance of the Revolver. As of February 28, 2005, the Company had a $25 million term loan and $60 million of letters of credit outstanding under the New Credit Facility. Cash proceeds from the $25 million term loan, net of underwriting fees and expenses associated with the New Credit Facility, were $21 million and will be used for general corporate purposes.
The New Credit Facility is secured by substantially all of the Company’s assets, including the stock and assets of its material domestic subsidiaries who are guarantors of this facility. The Company is subject to certain limitations including the ability to: incur additional debt or sell assets, with restrictions on the use of proceeds; make certain investments and acquisitions; grant liens; and make restricted payments. The Company is also subject to financial covenants effective for the period ended February 28, 2005, which include an interest coverage ratio, a leverage ratio, a senior leverage ratio, and a fixed charge coverage ratio. The fiscal 2005 financial covenants are as follows:
| Financial Covenant | Through May 31, 2005 | June 1 through November 30, 2005 | ||||||
Minimum interest coverage ratio |
2.00 to 1.00 | 2.00 to 1.00 | ||||||
Maximum leverage ratio |
8.25 to 1.00 | 7.50 to 1.00 | ||||||
Maximum senior leverage ratio |
3.00 to 1.00 | 2.50 to 1.00 | ||||||
Minimum fixed charge coverage ratio | ||||||||