GENCORP INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)

[X]		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended: May 31, 2003

or

[ ]		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.

(Exact name of registrant as specified in its charter)


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)		95670 (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 x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

As of June 17, 2003, there were 43,747,062 outstanding shares of the Company’s Common Stock, $0.10 par value.

TABLE OF CONTENTS


Part I – FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 10.1
Exhibit 99.1

GenCorp Inc.

Quarterly Report on Form 10-Q
For the Quarterly Period Ended May 31, 2003


Item
Number					Page

			PART I – FINANCIAL INFORMATION
	1	Condensed Consolidated Financial Statements (unaudited)				1
	2	Management’s Discussion and Analysis of Financial Condition and Results of Operations				25
	3	Quantitative and Qualitative Disclosures About Market Risk				34
	4	Controls and Procedures				35
				PART II – OTHER INFORMATION
	1	Legal Proceedings				35
	4	Submission of Matters to a Vote of Security Holders				35
	6	Exhibits and Reports on Form 8-K				36
		Signatures				37
		Certifications Pursuant to Section 302 of the Sarbanes–Oxley Act of 2002				38

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

GenCorp Inc.

Condensed Consolidated Statements of Income
(Unaudited)


	Three months ended				Six months ended
	May 31,				May 31,

	2003		2002		2003			2002

	(Dollars in millions, except per share amounts)
Net Sales	$	315	$	303	$	586		$	552
Costs and Expenses
Cost of products sold		254		244		482			454
Selling, general and administrative		21		15		39			29
Depreciation and amortization		19		16		37			32
Interest expense		6		4		11			7
Other (income) expense, net		—		7		(3	)		6
Unusual items, net		—		7		—			9

Income Before Income Taxes		15		10		20			15
Provision for income taxes		5		4		7			6

Net Income	$	10	$	6	$	13		$	9

Earnings Per Share of Common Stock
Basic	$	0.22	$	0.14	$	0.30		$	0.21

Diluted	$	0.21	$	0.14	$	0.30		$	0.21

Weighted average shares of common stock outstanding		43.2		42.8		43.1			42.7

Weighted average shares of common stock outstanding, assuming dilution		51.4		43.3		43.1			43.2

Dividends Declared Per Share of Common Stock	$	0.03	$	0.03	$	0.06		$	0.06

See Notes to Unaudited Condensed Consolidated Financial Statements.

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GenCorp Inc.
Condensed Consolidated Balance Sheets


		May 31,		November 30,
		2003		2002

		(unaudited)
		(Dollars in millions,
		except per share amounts)
Current Assets
Cash and cash equivalents		$	46	$	48
Accounts receivable			139		139
Inventories, net			184		167
Recoverable from the US government and other third parties for environmental remediation costs			24		24
Prepaid expenses and other			11		5

	Total Current Assets		404		383
Noncurrent Assets
Property, plant and equipment, net			496		481
Recoverable from the U.S. government and other third parties for environmental remediation costs			196		208
Deferred income taxes			—		9
Prepaid pension asset			345		337
Goodwill			138		126
Other noncurrent assets, net			92		92

	Total Noncurrent Assets		1,267		1,253

	Total Assets	$	1,671	$	1,636

Current Liabilities
Short-term borrowings and current portion of long-term debt		$	35	$	22
Accounts payable			87		89
Reserves for environmental remediation costs			39		39
Income taxes payable			11		22
Other current liabilities			197		201

	Total Current Liabilities		369		373
Noncurrent Liabilities
Convertible subordinated notes			150		150
Other long-term debt, net of current portion			213		215
Reserves for environmental remediation costs			285		301
Postretirement benefits other than pensions			169		176
Deferred income taxes			9		—
Other noncurrent liabilities			66		61

	Total Noncurrent Liabilities		892		903

	Total Liabilities		1,261		1,276

Commitments and Contingent Liabilities
Shareholders’ Equity
Preference stock, par value of $1.00 per share; 15 million shares authorized; none issued or outstanding			—		—
Common stock, par value of $0.10 per share; 150 million shares authorized; 43.9 million shares issued, 43.4 million outstanding as of May 31, 2003 (43.5 million shares issued, 43.0 million shares outstanding as of November 30, 2002)			4		4
Other capital			15		13
Retained earnings			366		356
Accumulated other comprehensive income (loss), net of income taxes			25		(13	)

	Total Shareholders’ Equity		410		360

	Total Liabilities and Shareholders’ Equity	$	1,671	$	1,636

See Notes to Unaudited Condensed Consolidated Financial Statements.

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GenCorp Inc.

Condensed Consolidated Statements of Cash Flows
(Unaudited)


				Six months ended
				May 31,

				2003			2002

				(Dollars in millions)
Operating Activities
Net Income				$	13		$	9
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
	Net loss related to reacquisition of minority ownership interest in subsidiary				—			2
	Foreign currency gain				(4	)		—
	Depreciation and amortization and gains on disposition of assets				37			32
	Deferred income taxes				16			27
	Changes in assets and liabilities, net of effects of acquisitions of businesses:
		Current assets			(6	)		25
		Noncurrent assets			1			(1	)
		Current liabilities			(34	)		(89	)
		Noncurrent liabilities			(24	)		(45	)

			Net Cash Provided By (Used In) Operating Activities		(1	)		(40	)
Investing Activities
Capital expenditures					(21	)		(14	)
Proceeds from asset dispositions					7			2
Acquisition of businesses, net of cash acquired					—			(8	)

			Net Cash Used in Investing Activities		(14	)		(20	)
Financing Activities
Proceeds from issuance of subordinated convertible debt					—			150
Repayments on revolving credit facility, net					—			(90	)
Borrowings (repayments) of short-term debt, net					11			(1	)
Net proceeds from the issuance of long-term debt					9			25
Repayments of long-term debt					(11	)		(33	)
Dividends paid					(3	)		(3	)
Other equity transactions					2			3

			Net Cash Provided by Financing Activities		8			51

Effect of exchange rate fluctuations on cash and cash equivalents					5			1

Net Decrease in Cash and Cash Equivalents					(2	)		(8	)
Cash and Cash Equivalents at Beginning of Period					48			44

Cash and Cash Equivalents at End of Period				$	46		$	36

See Notes to Unaudited Condensed Consolidated Financial Statements.

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GenCorp Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation and Nature of Operations

The accompanying Unaudited Condensed Consolidated Financial Statements of GenCorp Inc. (GenCorp or the Company) include the accounts of the parent company and its wholly-owned and majority-owned subsidiaries. These interim financial statements have been prepared 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. These interim financial statements should be read in conjunction with the financial statements and accompanying notes included in the GenCorp Annual Report on Form 10-K for the year ended November 30, 2002, as filed with the United States Securities and Exchange Commission (SEC).

In the opinion of management, the accompanying Unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Company’s 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, operating results for interim periods may not be indicative of the results of operations for a full year.

Certain reclassifications have been made to financial information for prior periods to conform to the current period presentation.

GenCorp is a multinational manufacturing company operating primarily in North America and Europe. The Company’s operations are organized into three segments: GDX Automotive, Aerospace and Defense, and Fine Chemicals. The Company’s GDX Automotive segment is a major automotive supplier, engaged in the design, development and manufacture of highly engineered extruded and molded rubber and plastic sealing systems for automotive original equipment manufacturers. The Aerospace and Defense segment includes the operations of Aerojet-General Corporation (Aerojet or AGC) and significant undeveloped real property located in California. Aerojet designs, develops and manufactures space and strategic rocket propulsion and tactical weapons under contracts with the major prime contractors to the U.S. government the Department of Defense and the National Aeronautics and Space Administration. The Company’s Fine Chemicals segment consists of the operations of Aerojet Fine Chemicals LLC (AFC). AFC manufactures active pharmaceutical ingredients and registered intermediates for pharmaceutical and biotechnology companies. Information on the Company’s operations by segment is provided in Note 12.

In October 2002, Aerojet acquired the assets of the General Dynamics Space Propulsion and Fire Suppression business for $93 million, including transaction costs.

- 4 -

In May 2003, Aerojet entered into an agreement to acquire substantially all of the assets related to the propulsion business of Atlantic Research Corporation (ARC Propulsion), for $133 million. ARC Propulsion is a developer and manufacturer of advanced solid rocket propulsion systems, gas generators and auxiliary rocket motors for both space and defense applications. Completion of the acquisition is subject to standard regulatory and certain other government and lender approvals.

2. Earnings Per Share of Common Stock

A reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share of common stock (EPS) is presented in the following table (dollar figures in millions, except per share amounts; shares in thousands):


		Three months ended May 31,				Six months ended May 31,

		2003		2002		2003		2002

Numerator for Basic EPS
	Income available to common shareholders	$	10	$	6	$	13	$	9

Numerator for Diluted EPS
	Income available to common shareholders	$	10	$	6	$	13	$	9
	Interest on convertible notes, net of income taxes		1		—		—		—

		$	11	$	6	$	13	$	9

Denominator for Basic EPS
	Weighted average shares of common stock outstanding		43,226		42,795		43,115		42,723

Denominator for Diluted EPS
	Weighted average shares of common stock outstanding		43,226		42,795		43,115		42,723
	Employee stock options		21		532		26		443
	Convertible notes		8,143		—		—		—
	Other		1		—		1		—

			51,391		43,327		43,142		43,166

Basic EPS		$	0.22	$	0.14	$	0.30	$	0.21

Diluted EPS		$	0.21	$	0.14	$	0.30	$	0.21

The effect of a conversion of the Company’s $150 million convertible subordinated notes into common stock was not included in the computation of diluted earnings per share for the six months ended May 31, 2003, and the three and six months ended May 31, 2002, as the effect would be antidilutive for these periods. These notes are convertible at an initial conversion rate of 54.29 shares per $1,000 outstanding. Potentially dilutive securities not included in the diluted EPS calculation because they would be antidilutive include employee stock options of 3,249,000 and 537,000 for the three months ended May 31, 2003 and 2002, respectively and 3,209,000 and 660,000 employee stock options for the six months ended May 31, 2003 and 2002, respectively.

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3. Stock Based Compensation

As permitted by Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation and Statement of Financial Accounting Standards No. 148 (SFAS 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 Company’s 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, net income and the effect on net income per share would have been as follows (dollars in millions, except per share amounts):

Three months ended May 31,

Six months ended May 31,

2003

2002

2003

2002

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