Attached files
file | filename |
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8-K - FORM 8-K - AEROJET ROCKETDYNE HOLDINGS, INC. | f55466e8vk.htm |
EX-99.1 - EX-99.1 - AEROJET ROCKETDYNE HOLDINGS, INC. | f55466exv99w1.htm |
EX-99.2 - EX-99.2 - AEROJET ROCKETDYNE HOLDINGS, INC. | f55466exv99w2.htm |
EX-23.1 - EX-23.1 - AEROJET ROCKETDYNE HOLDINGS, INC. | f55466exv23w1.htm |
EX-99.3 - EX-99.3 - AEROJET ROCKETDYNE HOLDINGS, INC. | f55466exv99w3.htm |
EX-99.5 - EX-99.5 - AEROJET ROCKETDYNE HOLDINGS, INC. | f55466exv99w5.htm |
Exhibit 99.4
Item 8. Consolidated Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Shareholders of GenCorp Inc.:
In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a)(1) present fairly, in all material respects, the financial position of GenCorp Inc. and its
subsidiaries at November 30, 2009 and 2008, and the results of their operations and their cash
flows for each of the three years in the period ended November 30, 2009 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)
presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of
November 30, 2009, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial statements and financial statement
schedule, for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in
Managements Report on Internal Control over Financial Reporting (not presented herein) appearing
under Item 9A of GenCorp Inc.s 2009 Annual Report on Form 10-K. Our responsibility is to express
opinions on these financial statements, on the financial statement schedule, and on the Companys
internal control over financial reporting based on our integrated audits. We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company adopted a new
measurement date for pension and retirement plan assets and benefit obligations as of November 30,
2009, new fair value measurements related to non-financial assets and liabilities as of December 1,
2008, new fair value measurement and disclosure accounting principles during the year ended
November 30, 2008, changed its method of accounting for uncertainty in income taxes as of December
1, 2007, and accounting for defined benefit pension and other postretirement plans as of November
30, 2007.
As discussed in Note 1b to the consolidated financial statements, the Company changed the manner in
which it accounts for certain convertible debt instruments effective December 1, 2009.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
32
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Sacramento, California
February 3, 2010, except with respect to our opinions on the consolidated financial statements and
financial statement schedule insofar as they relate to the effects of the changes in accounting for
certain convertible debt instruments as discussed in Note 1b, as to which the date is April
9, 2010
33
GENCORP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
As adjusted (Note 1(b)) | ||||||||||||
(In millions, except per share amounts) | ||||||||||||
Net sales |
$ | 795.4 | $ | 742.3 | $ | 745.4 | ||||||
Operating costs and expenses: |
||||||||||||
Cost of sales (exclusive of items shown separately below) |
674.0 | 645.4 | 657.8 | |||||||||
Selling, general and administrative |
10.2 | 1.9 | 14.4 | |||||||||
Depreciation and amortization |
25.7 | 25.5 | 26.4 | |||||||||
Other expense (income), net |
2.9 | 7.6 | (2.6 | ) | ||||||||
Unusual items |
||||||||||||
Shareholder agreement and related costs |
| 16.8 | | |||||||||
Executive severance agreements |
3.1 | | | |||||||||
Defined benefit pension plan amendment |
| 14.6 | | |||||||||
Legal settlements and estimated loss on legal matters |
1.3 | 2.9 | 3.8 | |||||||||
Customer reimbursement of tax matters |
| | 2.3 | |||||||||
Loss on extinguishment of debt |
0.2 | | 0.6 | |||||||||
Gain on settlement and recoveries |
| (1.2 | ) | (6.0 | ) | |||||||
Total operating costs and expenses |
717.4 | 713.5 | 696.7 | |||||||||
Operating income |
78.0 | 28.8 | 48.7 | |||||||||
Non-operating (income) expense |
||||||||||||
Interest expense |
38.6 | 37.2 | 36.8 | |||||||||
Interest income |
(1.9 | ) | (4.2 | ) | (4.9 | ) | ||||||
Total non-operating expense, net |
36.7 | 33.0 | 31.9 | |||||||||
Income (loss) from continuing operations before income taxes |
41.3 | (4.2 | ) | 16.8 | ||||||||
Income tax (benefit) provision |
(17.6 | ) | 0.9 | (18.1 | ) | |||||||
Income (loss) from continuing operations |
58.9 | (5.1 | ) | 34.9 | ||||||||
(Loss) income from discontinued operations, net of income taxes |
(6.7 | ) | (0.1 | ) | 27.9 | |||||||
Net income (loss) |
$ | 52.2 | $ | (5.2 | ) | $ | 62.8 | |||||
Income (loss) per share of common stock |
||||||||||||
Basic: |
||||||||||||
Income (loss) per share from continuing operations |
$ | 1.00 | $ | (0.09 | ) | $ | 0.62 | |||||
(Loss) income per share from discontinued operations, net of income taxes |
(0.11 | ) | | 0.50 | ||||||||
Net income (loss) per share |
$ | 0.89 | $ | (0.09 | ) | $ | 1.12 | |||||
Diluted: |
||||||||||||
Income (loss) per share from continuing operations |
$ | 0.96 | $ | (0.09 | ) | $ | 0.62 | |||||
(Loss) income per share from discontinued operations, net of income taxes |
(0.10 | ) | | 0.43 | ||||||||
Net income (loss) per share |
$ | 0.86 | $ | (0.09 | ) | $ | 1.05 | |||||
Weighted average shares of common stock outstanding |
58.4 | 57.2 | 56.2 | |||||||||
Weighted average shares of common stock outstanding, assuming dilution |
66.6 | 57.2 | 64.6 | |||||||||
See Notes to Consolidated Financial Statements.
34
GENCORP INC.
CONSOLIDATED BALANCE SHEETS
November 30, | November 30, | |||||||
2009 | 2008 | |||||||
As adjusted (Note 1(b)) | ||||||||
(In millions, except per share | ||||||||
amounts) | ||||||||
ASSETS | ||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 126.3 | $ | 92.7 | ||||
Accounts receivable |
116.3 | 97.3 | ||||||
Inventories |
61.8 | 70.4 | ||||||
Recoverable from the U.S. government and other third parties for
environmental remediation costs and other |
30.6 | 43.7 | ||||||
Grantor trust |
2.4 | 1.6 | ||||||
Other receivables, prepaid expenses and other |
32.8 | 17.6 | ||||||
Income taxes |
2.4 | 10.6 | ||||||
Assets of discontinued operations |
| 0.1 | ||||||
Total Current Assets |
372.6 | 334.0 | ||||||
Noncurrent Assets |
||||||||
Property, plant and equipment, net |
129.9 | 137.9 | ||||||
Real estate held for entitlement and leasing |
55.3 | 49.3 | ||||||
Recoverable from the U.S. government and other third parties for
environmental remediation costs and other |
154.3 | 169.8 | ||||||
Prepaid pension asset |
| 76.5 | ||||||
Grantor trust |
17.8 | 29.3 | ||||||
Goodwill |
94.9 | 94.9 | ||||||
Intangible assets |
18.5 | 20.1 | ||||||
Other noncurrent assets, net |
91.6 | 92.7 | ||||||
Total Noncurrent Assets |
562.3 | 670.5 | ||||||
Total Assets |
$ | 934.9 | $ | 1,004.5 | ||||
LIABILITIES, REDEEMABLE COMMON STOCK, AND SHAREHOLDERS DEFICIT |
||||||||
Current Liabilities |
||||||||
Short-term borrowings and current portion of long-term debt |
$ | 17.8 | $ | 2.0 | ||||
Accounts payable |
18.4 | 32.7 | ||||||
Reserves for environmental remediation costs |
44.5 | 65.2 | ||||||
Postretirement medical and life benefits |
7.2 | 7.1 | ||||||
Advance payments on contracts |
66.0 | 46.7 | ||||||
Other current liabilities |
107.5 | 93.7 | ||||||
Liabilities of discontinued operations |
| 1.0 | ||||||
Total Current Liabilities |
261.4 | 248.4 | ||||||
Noncurrent Liabilities |
||||||||
Senior debt |
51.2 | 68.3 | ||||||
Senior subordinated notes |
97.5 | 97.5 | ||||||
Convertible subordinated notes |
254.4 | 246.9 | ||||||
Other debt |
0.7 | 1.4 | ||||||
Deferred income taxes |
9.6 | 8.3 | ||||||
Reserves for environmental remediation costs |
178.2 | 193.0 | ||||||
Pension benefits |
225.0 | 13.1 | ||||||
Postretirement medical and life benefits |
75.7 | 66.8 | ||||||
Other noncurrent liabilities |
54.1 | 65.0 | ||||||
Total Noncurrent Liabilities |
946.4 | 760.3 | ||||||
Total Liabilities |
1,207.8 | 1,008.7 | ||||||
Commitments and Contingencies (Note 7) |
||||||||
Redeemable common stock, par value of $0.10; 0.6 million shares
issued and outstanding as of November 30, 2009; 0.8 million shares
issued and outstanding as of November 30, 2008 (Note 8) |
6.0 | 7.6 | ||||||
Shareholders Deficit |
||||||||
Preference stock, par value of $1.00; 15.0 million shares
authorized; none issued or outstanding |
| | ||||||
Common stock, par value of $0.10; 150.0 million shares authorized;
57.9 million shares issued and outstanding as of November 30, 2009;
57.3 million shares issued and outstanding as of November 30, 2008 |
5.9 | 5.7 | ||||||
Other capital |
258.0 | 255.0 | ||||||
Accumulated deficit |
(189.0 | ) | (240.8 | ) | ||||
Accumulated other comprehensive loss, net of income taxes |
(353.8 | ) | (31.7 | ) | ||||
Total Shareholders Deficit |
(278.9 | ) | (11.8 | ) | ||||
Total Liabilities, Redeemable Common Stock and Shareholders Deficit |
$ | 934.9 | $ | 1,004.5 | ||||
See Notes to Consolidated Financial Statements.
35
GENCORP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIT AND
COMPREHENSIVE INCOME (LOSS)
COMPREHENSIVE INCOME (LOSS)
Accumulated | ||||||||||||||||||||||||||||
Comprehensive | Other | Total | ||||||||||||||||||||||||||
Income | Common Stock | Other | Accumulated | Comprehensive | Shareholders | |||||||||||||||||||||||
(Loss) | Shares | Amount | Capital | Deficit | Loss | Deficit | ||||||||||||||||||||||
As adjusted (Note 1(b)) | ||||||||||||||||||||||||||||
(In millions, except share amounts) | ||||||||||||||||||||||||||||
November 30, 2006 |
55,815,828 | $ | 5.6 | $ | 242.1 | $ | (307.5 | ) | $ | | $ | (59.8 | ) | |||||||||||||||
Net income |
$ | 62.8 | | | | 62.8 | | 62.8 | ||||||||||||||||||||
New defined benefit pension plan accounting
standards transition amount |
| | | | | (35.5 | ) | (35.5 | ) | |||||||||||||||||||
Stock-based compensation |
| | | 1.0 | | | 1.0 | |||||||||||||||||||||
Shares issued under stock option and stock
incentive plans |
| 770,892 | 0.1 | 9.4 | | | 9.5 | |||||||||||||||||||||
November 30, 2007 |
$ | 62.8 | 56,586,720 | 5.7 | 252.5 | (244.7 | ) | (35.5 | ) | (22.0 | ) | |||||||||||||||||
Net loss |
$ | (5.2 | ) | | | | (5.2 | ) | | (5.2 | ) | |||||||||||||||||
Amortization of net actuarial losses |
7.9 | | | | | 7.9 | 7.9 | |||||||||||||||||||||
Actuarial losses arising during the period, net |
(51.8 | ) | | | | | (51.8 | ) | (51.8 | ) | ||||||||||||||||||
Amortization of prior service costs |
2.1 | | | | | 2.1 | 2.1 | |||||||||||||||||||||
Prior service costs arising during the period, net |
(5.3 | ) | | | | | (5.3 | ) | (5.3 | ) | ||||||||||||||||||
Curtailment (Note 6) |
50.9 | | | | | 50.9 | 50.9 | |||||||||||||||||||||
Cumulative effect adjustment related to the
adoption of new income tax related accounting
standards |
| | | | 9.1 | | 9.1 | |||||||||||||||||||||
Reclassification to redeemable common stock |
| (754,863 | ) | (0.1 | ) | (7.5 | ) | | | (7.6 | ) | |||||||||||||||||
Stock-based compensation |
| | | 1.6 | | | 1.6 | |||||||||||||||||||||
Shares issued under stock option and stock
incentive plans, net |
| 1,421,544 | 0.1 | 8.4 | | | 8.5 | |||||||||||||||||||||
November 30, 2008 |
$ | (1.4 | ) | 57,253,401 | 5.7 | 255.0 | (240.8 | ) | (31.7 | ) | (11.8 | ) | ||||||||||||||||
Net income |
$ | 52.2 | | | | 52.2 | | 52.2 | ||||||||||||||||||||
Amortization of net actuarial gains |
(9.0 | ) | | | | | (9.0 | ) | (9.0 | ) | ||||||||||||||||||
Actuarial losses arising during the period, net |
(313.4 | ) | | | | | (313.4 | ) | (313.4 | ) | ||||||||||||||||||
Amortization of prior service costs |
0.1 | | | | | 0.1 | 0.1 | |||||||||||||||||||||
Reclassification from redeemable common stock |
| 183,105 | 0.1 | 1.5 | | | 1.6 | |||||||||||||||||||||
Stock-based compensation |
| | | 0.1 | | | 0.1 | |||||||||||||||||||||
Cumulative effect adjustment related to the
adoption of defined benefit pension plan
accounting standards |
| | | | (0.4 | ) | 0.2 | (0.2 | ) | |||||||||||||||||||
Shares issued under stock option and stock
incentive plans, net |
| 487,257 | 0.1 | 1.4 | | | 1.5 | |||||||||||||||||||||
November 30, 2009 |
$ | (270.1 | ) | 57,923,763 | $ | 5.9 | $ | 258.0 | $ | (189.0 | ) | $ | (353.8 | ) | $ | (278.9 | ) | |||||||||||
See Notes to Consolidated Financial Statements.
36
GENCORP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
As adjusted (Note 1(b)) | ||||||||||||
(In millions) | ||||||||||||
Operating Activities |
||||||||||||
Net income (loss) |
$ | 52.2 | $ | (5.2 | ) | $ | 62.8 | |||||
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
||||||||||||
Loss (income) from discontinued operations, net of income taxes |
6.7 | 0.1 | (27.9 | ) | ||||||||
Depreciation and amortization |
25.7 | 25.5 | 26.4 | |||||||||
Amortization of debt discount and financing costs |
12.7 | 9.5 | 8.2 | |||||||||
Stock-based compensation |
2.9 | 0.2 | 1.5 | |||||||||
Savings plan expense |
1.5 | 9.2 | 9.1 | |||||||||
Loss on extinguishment of debt |
0.2 | | 0.6 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
(19.0 | ) | 1.9 | (28.1 | ) | |||||||
Inventories |
8.6 | (2.9 | ) | 2.0 | ||||||||
Grantor trust |
10.7 | (30.9 | ) | | ||||||||
Other receivables, prepaid expenses and other |
0.2 | 1.1 | 6.0 | |||||||||
Income tax receivable |
8.2 | (10.5 | ) | | ||||||||
Real estate held for entitlement and leasing |
(5.9 | ) | (8.0 | ) | (7.4 | ) | ||||||
Other noncurrent assets |
10.1 | 7.4 | (22.8 | ) | ||||||||
Accounts payable |
(14.3 | ) | 3.8 | (3.6 | ) | |||||||
Income taxes payable |
| 3.5 | (5.3 | ) | ||||||||
Pension benefits |
(14.3 | ) | 24.0 | 11.2 | ||||||||
Postretirement medical and life benefits |
(10.7 | ) | (9.7 | ) | (8.7 | ) | ||||||
Advance payments on contracts |
19.3 | (2.4 | ) | (8.0 | ) | |||||||
Other current liabilities |
(17.9 | ) | 11.3 | (3.5 | ) | |||||||
Deferred income taxes |
1.3 | 8.0 | 0.3 | |||||||||
Other noncurrent liabilities and other |
(26.7 | ) | (7.1 | ) | 13.4 | |||||||
Net cash provided by continuing operations |
51.5 | 28.8 | 26.2 | |||||||||
Net cash used in discontinued operations |
(1.2 | ) | (0.8 | ) | (2.4 | ) | ||||||
Net Cash Provided by Operating Activities |
50.3 | 28.0 | 23.8 | |||||||||
Investing Activities |
||||||||||||
Capital expenditures |
(14.3 | ) | (21.3 | ) | (21.8 | ) | ||||||
Restricted cash |
| | 19.8 | |||||||||
Proceeds from sale of discontinued operations |
| | 29.7 | |||||||||
Net Cash (Used in) Provided by Investing Activities |
(14.3 | ) | (21.3 | ) | 27.7 | |||||||
Financing Activities |
||||||||||||
Proceeds from the issuance of debt |
| | 75.0 | |||||||||
Repayments on debt |
(2.0 | ) | (6.3 | ) | (93.9 | ) | ||||||
Debt issuance costs |
(0.4 | ) | | (1.9 | ) | |||||||
Proceeds from shares issued under stock option and equity incentive plans |
| | 0.4 | |||||||||
Net Cash Used in Financing Activities |
(2.4 | ) | (6.3 | ) | (20.4 | ) | ||||||
Net increase in cash and cash equivalents |
33.6 | 0.4 | 31.1 | |||||||||
Cash and cash equivalents at beginning of year |
92.7 | 92.3 | 61.2 | |||||||||
Cash and Cash Equivalents at End of Year |
$ | 126.3 | $ | 92.7 | $ | 92.3 | ||||||
Supplemental Disclosures of Cash Flow Information |
||||||||||||
Capital expenditure purchased with a promissory note |
$ | | $ | | $ | 2.8 | ||||||
Financing of an environmental remediation settlement with a promissory note |
| 0.6 | | |||||||||
Cash paid for income taxes |
3.3 | 0.5 | 0.8 | |||||||||
Cash paid for interest |
23.7 | 25.3 | 27.6 |
See Notes to Consolidated Financial Statements.
37
GENCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
a. Basis of Presentation and Nature of Operations
The 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. All
significant intercompany accounts and transactions have been eliminated in consolidation. Certain
reclassifications have been made to financial information for prior years to conform to the current
years presentation.
See Note 15 for a discussion on recent changes to the Companys capital structure.
The Company is a manufacturer of aerospace and defense products and systems with a real estate
segment that includes activities related to the re-zoning, entitlement, sale, and leasing of the
Companys excess real estate assets. The Companys continuing operations are organized into two
segments:
Aerospace and Defense includes the operations of Aerojet-General Corporation (Aerojet)
which develops and manufactures propulsion systems for defense and space applications, armament
systems for precision tactical weapon systems and munitions applications. Aerojet is one of the
largest providers of such propulsion systems in the United States (U.S.). Primary customers
served include major prime contractors to the U.S. government, the Department of Defense (DoD),
and the National Aeronautics and Space Administration.
Real Estate includes activities related to the entitlement, sale, and leasing of the
Companys excess real estate assets. The Company owns approximately 12,200 acres of land adjacent
to U.S. Highway 50 between Rancho Cordova and Folsom, California east of Sacramento (Sacramento
Land). The Company is currently in the process of seeking zoning changes and other governmental
approvals on a portion of the Sacramento Land to optimize its value. The Company has filed
applications with, and submitted information to, governmental and regulatory authorities for
approvals necessary to re-zone approximately 6,000 acres of the Sacramento Land. The Company also
owns approximately 580 acres in Chino Hills, California. The Company is currently seeking removal
of environmental restrictions on the Chino Hills property to optimize the value of such land.
The Companys fiscal year ends on November 30 of each year. The fiscal year of the Companys
subsidiary, Aerojet, ends on the last Saturday of November. As a result of the 2008 calendar,
Aerojet had 53 weeks of operations in fiscal 2008 compared to 52 weeks of operations in fiscal 2009
and 2007. The additional week of operations, which occurred in the first quarter of fiscal 2008,
accounted for $19.1 million in additional net sales.
On August 31, 2004, the Company completed the sale of its GDX Automotive (GDX) business. On
November 30, 2005, the Company completed the sale of its Fine Chemicals business. The remaining
subsidiaries of GDX, including Snappon SA, and the Fine Chemicals business are classified as
discontinued operations (see Note 12).
The preparation of the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) 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.
38
b. Adjustments to Prior Period Financial Statements
As of December 1, 2009, the Company adopted the new accounting standards which apply to
convertible debt securities that, upon conversion, may be settled by the issuer, fully or
partially, in cash. The guidance is effective for fiscal years (and interim periods within those
fiscal years) beginning after December 15, 2008 and is to be applied retrospectively to all past
periods presentedeven if the instrument has matured, converted, or otherwise been extinguished as
of the effective date of this guidance.
The Companys adoption of this guidance affects its 21/4% Convertible Subordinated Debentures
(21/4% Debentures). This guidance requires the issuer of convertible debt instruments to separately
account for the liability (debt) and equity (conversion option) components of such instruments and
retrospectively adjust the financial statements for all periods presented. The fair value of the
liability component was determined based on the market rate for similar debt instruments without
the conversion feature and the residual between the proceeds and the fair value of the liability
component is recorded as equity at the time of issuance. Additionally, the pronouncement requires
transaction costs to be allocated to the liability and equity components on the same relative
percentages.
The Companys adoption of this guidance results in higher non-cash interest expense for fiscal
2005 through fiscal 2011, assuming the holders will require the Company to repurchase the 21/4%
Debentures at a cash price equal to 100% of the principal amount plus accrued and unpaid interest
on November 20, 2011, the earliest date when the holders can exercise such right. The impact to net
income (loss) from fiscal 2005 through fiscal 2009 is as follows:
Year Ended | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(In millions, except per share amounts) | ||||||||||||||||||||
Net income (loss), as reported |
$ | 59.3 | $ | 1.5 | $ | 69.0 | $ | (38.5 | ) | $ | (230.0 | ) | ||||||||
Increase in non-cash interest expense, net of income taxes |
(7.1 | ) | (6.7 | ) | (6.2 | ) | (5.7 | ) | (5.4 | ) | ||||||||||
Net income (loss), as adjusted |
$ | 52.2 | $ | (5.2 | ) | $ | 62.8 | $ | (44.2 | ) | $ | (235.4 | ) | |||||||
As reported |
||||||||||||||||||||
Basic income (loss) per share of Common Stock |
$ | 1.01 | $ | 0.03 | $ | 1.23 | $ | (0.69 | ) | $ | (4.21 | ) | ||||||||
Diluted income (loss) per share of Common
Stock |
$ | 0.97 | $ | 0.03 | $ | 1.14 | $ | (0.69 | ) | $ | (4.21 | ) | ||||||||
As adjusted |
||||||||||||||||||||
Basic income (loss) per share of Common Stock |
$ | 0.89 | $ | (0.09 | ) | $ | 1.12 | $ | (0.80 | ) | $ | (4.31 | ) | |||||||
Diluted income (loss) per share of Common
Stock |
$ | 0.86 | $ | (0.09 | ) | $ | 1.05 | $ | (0.80 | ) | $ | (4.31 | ) | |||||||
The following tables present the effects of the adoption of this guidance to the consolidated statements of operations for fiscal 2009, 2008, and 2007:
Adjustments | ||||||||||||
related to | ||||||||||||
21/4% | ||||||||||||
As reported | Debentures | As adjusted | ||||||||||
November 30, 2009: | (In millions, except per share amounts) | |||||||||||
Net sales |
$ | 795.4 | $ | | $ | 795.4 | ||||||
Cost of sales (exclusive of items shown separately
below) |
674.0 | | 674.0 | |||||||||
Selling, general and administrative |
10.2 | | 10.2 | |||||||||
Depreciation and amortization |
25.7 | | 25.7 | |||||||||
Interest expense |
31.5 | 7.1 | 38.6 | |||||||||
Other, net |
5.6 | | 5.6 | |||||||||
Income from continuing operations before income taxes |
48.4 | (7.1 | ) | 41.3 | ||||||||
Income tax benefit |
(17.6 | ) | | (17.6 | ) | |||||||
Income from continuing operations |
66.0 | (7.1 | ) | 58.9 | ||||||||
Loss from discontinued operations |
(6.7 | ) | | (6.7 | ) | |||||||
Net income |
$ | 59.3 | $ | (7.1 | ) | $ | 52.2 | |||||
Basic net income per share |
$ | 1.01 | $ | (0.12 | ) | $ | 0.89 | |||||
Diluted net income per share |
$ | 0.97 | $ | (0.11 | ) | $ | 0.86 | |||||
39
Adjustments | ||||||||||||
related to | ||||||||||||
21/4% | ||||||||||||
As reported | Debentures | As adjusted | ||||||||||
November 30, 2008: | (In millions, except per share amounts) | |||||||||||
Net sales |
$ | 742.3 | $ | | $ | 742.3 | ||||||
Cost of sales (exclusive of items shown separately below) |
645.4 | | 645.4 | |||||||||
Selling, general and administrative |
1.9 | | 1.9 | |||||||||
Depreciation and amortization |
25.5 | | 25.5 | |||||||||
Interest expense |
30.5 | 6.7 | 37.2 | |||||||||
Other, net |
36.5 | | 36.5 | |||||||||
Income (loss) from continuing operations before income
taxes |
2.5 | (6.7 | ) | (4.2 | ) | |||||||
Income tax provision |
0.9 | | 0.9 | |||||||||
Income (loss) from continuing operations |
1.6 | (6.7 | ) | (5.1 | ) | |||||||
Loss from discontinued operations |
(0.1 | ) | | (0.1 | ) | |||||||
Net income (loss) |
$ | 1.5 | $ | (6.7 | ) | $ | (5.2 | ) | ||||
Basic net income (loss) per share |
$ | 0.03 | $ | (0.12 | ) | $ | (0.09 | ) | ||||
Diluted net income (loss) per share |
$ | 0.03 | $ | (0.12 | ) | $ | (0.09 | ) | ||||
Adjustments | ||||||||||||
related to | ||||||||||||
21/4% | ||||||||||||
As reported | Debentures | As adjusted | ||||||||||
November 30, 2007: | (In millions, except per share amounts) | |||||||||||
Net sales |
$ | 745.4 | $ | | $ | 745.4 | ||||||
Cost of sales (exclusive of items shown separately below) |
657.8 | | 657.8 | |||||||||
Selling, general and administrative |
14.4 | | 14.4 | |||||||||
Depreciation and amortization |
26.4 | | 26.4 | |||||||||
Interest expense |
30.6 | 6.2 | 36.8 | |||||||||
Other, net |
(6.8 | ) | | (6.8 | ) | |||||||
Income from continuing operations before income taxes |
23.0 | (6.2 | ) | 16.8 | ||||||||
Income tax benefit |
(18.1 | ) | | (18.1 | ) | |||||||
Income from continuing operations |
41.1 | (6.2 | ) | 34.9 | ||||||||
Income from discontinued operations |
27.9 | | 27.9 | |||||||||
Net income |
$ | 69.0 | $ | (6.2 | ) | $ | 62.8 | |||||
Basic net income per share |
$ | 1.23 | $ | (0.11 | ) | $ | 1.12 | |||||
Diluted net income per share |
$ | 1.14 | $ | (0.09 | ) | $ | 1.05 | |||||
40
The following tables present the effects of the adoption of this guidance to the Companys consolidated balance sheets as of November 30, 2009 and 2008:
Adjustments | ||||||||||||
related to | ||||||||||||
21/4% | ||||||||||||
As reported | Debentures | As adjusted | ||||||||||
November 30, 2009: | (In millions) | |||||||||||
Cash and cash equivalents |
$ | 126.3 | $ | | $ | 126.3 | ||||||
Accounts receivable |
116.3 | | 116.3 | |||||||||
Inventories |
61.8 | | 61.8 | |||||||||
Recoverable from the U.S. government and other third parties for
environmental remediation costs and other |
30.6 | | 30.6 | |||||||||
Grantor trust |
2.4 | | 2.4 | |||||||||
Other receivables, prepaid expenses and other |
32.8 | | 32.8 | |||||||||
Income taxes |
2.4 | | 2.4 | |||||||||
Total current assets |
372.6 | | 372.6 | |||||||||
Property, plant and equipment, net |
129.9 | | 129.9 | |||||||||
Recoverable from the U.S. government and other third parties for
environmental remediation costs and other |
154.3 | | 154.3 | |||||||||
Grantor trust |
17.8 | | 17.8 | |||||||||
Goodwill |
94.9 | | 94.9 | |||||||||
Other noncurrent assets and intangibles, net |
166.2 | (0.8 | ) | 165.4 | ||||||||
Total assets |
$ | 935.7 | $ | (0.8 | ) | $ | 934.9 | |||||
Short-term borrowings and current portion of long-term debt |
$ | 17.8 | $ | | $ | 17.8 | ||||||
Accounts payable |
18.4 | | 18.4 | |||||||||
Reserves for environmental remediation costs |
44.5 | | 44.5 | |||||||||
Other current liabilities, advance payments on contracts, and
postretirement medical and life insurance benefits |
180.7 | | 180.7 | |||||||||
Total current liabilities |
261.4 | | 261.4 | |||||||||
Long-term debt |
420.8 | (17.0 | ) | 403.8 | ||||||||
Reserves for environmental remediation costs |
178.2 | | 178.2 | |||||||||
Pension benefits |
225.0 | | 225.0 | |||||||||
Other noncurrent liabilities |
139.4 | | 139.4 | |||||||||
Total liabilities |
1,224.8 | (17.0 | ) | 1,207.8 | ||||||||
Commitments and contingencies |
||||||||||||
Redeemable common stock |
6.0 | | 6.0 | |||||||||
Common stock |
5.9 | 5.9 | ||||||||||
Other capital |
210.7 | 47.3 | 258.0 | |||||||||
Accumulated deficit |
(157.9 | ) | (31.1 | ) | (189.0 | ) | ||||||
Accumulated other comprehensive loss, net of income taxes |
(353.8 | ) | | (353.8 | ) | |||||||
Total shareholders deficit |
(295.1 | ) | 16.2 | (278.9 | ) | |||||||
Total liabilities, redeemable common stock, and shareholders deficit |
$ | 935.7 | $ | (0.8 | ) | $ | 934.9 | |||||
41
Adjustments | ||||||||||||
related to | ||||||||||||
21/4% | ||||||||||||
As reported | Debentures | As adjusted | ||||||||||
November 30, 2008: | (In millions) | |||||||||||
Cash and cash equivalents |
$ | 92.7 | $ | | $ | 92.7 | ||||||
Accounts receivable |
97.3 | | 97.3 | |||||||||
Inventories |
70.4 | | 70.4 | |||||||||
Recoverable from the U.S. government and other third parties for
environmental remediation costs and other |
43.7 | | 43.7 | |||||||||
Grantor trust |
1.6 | | 1.6 | |||||||||
Other receivables, prepaid expenses and other |
17.7 | | 17.7 | |||||||||
Income taxes |
10.6 | | 10.6 | |||||||||
Total current assets |
334.0 | | 334.0 | |||||||||
Property, plant and equipment, net |
137.9 | | 137.9 | |||||||||
Recoverable from the U.S. government and other third parties for
environmental remediation costs and other |
169.8 | | 169.8 | |||||||||
Prepaid pension asset |
76.5 | | 76.5 | |||||||||
Grantor trust |
29.3 | | 29.3 | |||||||||
Goodwill |
94.9 | | 94.9 | |||||||||
Other noncurrent assets and intangibles, net |
163.3 | (1.2 | ) | 162.1 | ||||||||
Total assets |
$ | 1,005.7 | $ | (1.2 | ) | $ | 1,004.5 | |||||
Short-term borrowings and current portion of long-term debt |
$ | 2.0 | $ | | $ | 2.0 | ||||||
Accounts payable |
32.7 | | 32.7 | |||||||||
Reserves for environmental remediation costs |
65.2 | | 65.2 | |||||||||
Other current liabilities, advance payments on contracts, and
postretirement medical and life insurance benefits |
148.5 | | 148.5 | |||||||||
Total current liabilities |
248.4 | | 248.4 | |||||||||
Long-term debt |
438.6 | (24.5 | ) | 414.1 | ||||||||
Reserves for environmental remediation costs |
193.0 | | 193.0 | |||||||||
Other noncurrent liabilities |
153.2 | | 153.2 | |||||||||
Total liabilities |
1,033.2 | (24.5 | ) | 1,008.7 | ||||||||
Commitments and contingencies |
||||||||||||
Redeemable common stock |
7.6 | | 7.6 | |||||||||
Common stock |
5.7 | 5.7 | ||||||||||
Other capital |
207.7 | 47.3 | 255.0 | |||||||||
Accumulated deficit |
(216.8 | ) | (24.0 | ) | (240.8 | ) | ||||||
Accumulated other comprehensive loss, net of income taxes |
(31.7 | ) | | (31.7 | ) | |||||||
Total shareholders deficit |
(35.1 | ) | 23.3 | (11.8 | ) | |||||||
Total liabilities, redeemable common stock, and shareholders deficit |
$ | 1,005.7 | $ | (1.2 | ) | $ | 1,004.5 | |||||
Additionally, the Companys shareholders deficit as of November 30, 2007 and 2006 decreased
by $30.0 million and $36.2 million, respectively.
There are no effects to the Companys total net cash from operating activities, investing
activities, and financing activities for fiscal 2009, 2008, and 2007.
The
Company adjusted Notes 2, 3(e), 4, 5, 10, 11, and 14 appearing herein to reflect the
effects of the matters discussed above.
c. Cash and Cash Equivalents
All highly liquid debt instruments purchased with a remaining maturity at the date of purchase
of three months or less are considered to be cash equivalents. The Company aggregates its cash
balances by bank, and reclassifies any negative balances, if applicable, to accounts payable.
d. Fair Value of Financial Instruments
The accounting standards use a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as
quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active
markets that are either directly or indirectly observable; and Level 3, defined as unobservable
inputs in which little or
42
no market data exists, therefore requiring an entity to develop its own assumptions. As of
November 30, 2009 and 2008, the Companys only financial instruments, other than investments held
by its defined benefit pension plan, were the Companys investments in money market funds. The
estimated fair value and carrying value of the Companys investments in money market funds was
$136.2 million, including $20.2 million net money market funds in the grantor trust, as of November
30, 2009. The estimated fair value and carrying value of the Companys investments in money market
funds was $116.9 million, including $30.9 million net money market funds in the grantor trust, as
of November 30, 2008. The fair value of the money market fund investments was determined based on
quoted market prices. In addition, the Company determined that the money market fund investments
were a Level 1 asset.
The carrying amounts of certain of the Companys financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable, accrued compensation, and other accrued
liabilities, approximate fair value because of their short maturities. The estimated fair value and
principal amount for the Companys long-term debt is presented below:
Fair Value | Principal Amount | |||||||||||||||
As of November 30, | As of November 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions) | ||||||||||||||||
Term loan |
$ | 62.8 | $ | 53.4 | $ | 68.3 | $ | 69.0 | ||||||||
9 1/2% Senior Subordinated Notes (9 1/2% Notes) |
96.0 | 76.1 | 97.5 | 97.5 | ||||||||||||
4% contingent convertible subordinated notes
(4% Notes) |
124.7 | 77.5 | 125.0 | 125.0 | ||||||||||||
2 1/4% Debentures (1) |
131.0 | 82.0 | 146.4 | 146.4 | ||||||||||||
Other debt |
1.4 | 2.7 | 1.4 | 2.7 | ||||||||||||
$ | 415.9 | $ | 291.7 | $ | 438.6 | $ | 440.6 | |||||||||
(1) | Excludes the debt discount of $17.0 million and $24.5 million as of November 30, 2009 and 2008, respectively. |
The fair values of the term loan, 9 1/2% Notes, 4% Notes, and 2 1/4% Debentures were
determined using broker quotes that are based on open markets of the Companys debt securities as
of November 30, 2009. The fair value of the remaining debt was determined to approximate carrying
value.
e. Accounts Receivable
Accounts receivable associated with long-term contracts consist of billed and unbilled
amounts. Billed amounts include invoices presented to customers that have not been paid. Unbilled
amounts relate to revenues that have been recorded and billings that have not been presented to
customers. Amounts for overhead disallowances are reflected in unbilled receivables and primarily
represent estimates of overhead costs which may not be successfully negotiated and collected.
Other receivables represent amounts billed where revenues were not derived from long-term
contracts.
f. Inventories
Inventories are stated at the lower of cost or market, generally using the average cost
method. Costs on long-term contracts and programs in progress represent recoverable costs incurred
for production, contract-specific facilities and equipment, allocable operating overhead, advances
to suppliers, environmental expenses and, in the case of contracts with the U.S. government, bid
and proposal, research and development, and general and administrative expenses. Pursuant to
contract provisions, agencies of the U.S. government and certain other customers have title to, or
a security interest in, inventories related to such contracts as a result of performance-based and
progress payments. Such progress payments are reflected as an offset against the related inventory
balances.
g. Income Taxes
The Company files a consolidated U.S. federal income tax return with its consolidated
wholly-owned subsidiaries. The deferred tax assets and/or liabilities are determined by multiplying
the differences between the financial reporting and tax reporting bases for assets and liabilities
by the enacted tax rates expected to be in effect when such differences are recovered or settled.
The effect on deferred taxes of a change in tax rates is recognized in the period of the enactment
date of the change.
The carrying value of the Companys deferred tax assets is dependent upon its ability to
generate sufficient taxable income in the future. The Company has established a full valuation
allowance against its net deferred tax assets for continuing operations to reflect the uncertainty
of realizing the deferred tax benefits, given historical losses including accumulated other
comprehensive losses. A valuation allowance is required when it is more likely than not that all or
a portion of a deferred tax asset will not be realized. A
43
review of all available positive and negative evidence is considered, including the Companys
past and future performance, the market environment in which it operates, the utilization of tax
attributes in the past, the length of carryback and carryforward periods, and evaluation of
potential tax planning strategies.
Despite the Companys belief that its tax return positions are consistent with applicable tax
laws, the Company believes that certain positions are likely to be challenged by taxing
authorities. Settlement of any challenge can result in no change, a complete disallowance, or some
partial adjustment reached through negotiations or litigation. The Companys tax reserves reflect
the difference between the tax benefit claimed on tax returns and the amount recognized in the
financial statements. The accounting standards provide guidance for the recognition and measurement
in financial statements for uncertain tax positions taken or expected to be taken in a tax return.
The evaluation of a tax position is a two-step process, the first step being recognition. The
Company determines whether it is more-likely-than-not that a tax position will be sustained upon
tax examination, including resolution of any related appeals or litigation, based on only the
technical merits of the position. The technical merits of a tax position are derived from both
statutory and judicial authority (legislation and statutes, legislative intent, regulations,
rulings, and case law) and their applicability to the facts and circumstances of the tax position.
If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that
position is not recognized in the financial statements. The second step is measurement. A tax
position that meets the more-likely-than-not recognition threshold is measured to determine the
amount of benefit to recognize in the financial statements. The tax position is measured as the
largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate
resolution with a taxing authority. As the examination process progresses with tax authorities,
adjustments to tax reserves may be necessary to reflect taxes payable upon settlement. Tax reserve
adjustments related to positions impacting the effective tax rate affect the provision for income
taxes. Tax reserve adjustments related to positions impacting the timing of deductions impact
deferred tax assets and liabilities.
h. Property, Plant and Equipment, net
Property, plant and equipment are recorded at cost. Refurbishment costs are capitalized in the
property accounts, whereas ordinary maintenance and repair costs are expensed as incurred.
Depreciation is computed principally by accelerated methods based on the following useful lives:
Buildings and improvements
|
6 40 years | |
Machinery and equipment
|
3 19 years |
i. Real Estate Held for Entitlement and Leasing
The Company capitalizes all costs associated with the real estate entitlement and leasing
process. The Company classifies activities related to the entitlement, sale, and leasing of its
excess real estate assets as operating activities in the consolidated statements of cash flows.
j. Goodwill
Goodwill represents the excess of the purchase price of an acquired enterprise or assets over
the fair values of the identifiable assets acquired and liabilities assumed. Tests for impairment
of goodwill are performed on an annual basis, or at any other time, if events occur or
circumstances indicate that the carrying amount of goodwill may not be recoverable. The Company
performed the impairment test for goodwill as of September 1, 2009 and determined that goodwill was
not impaired.
Circumstances that could trigger an impairment test include but are not limited to: a
significant adverse change in the business climate or legal factors; adverse cash flow trends; an
adverse action or assessment by a regulator; unanticipated competition; loss of key personnel;
decline in stock price; and results of testing for recoverability of a significant asset group
within a reporting unit. If the carrying amount of the reporting units goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recorded.
All of the Companys recorded goodwill resides in the Aerospace and Defense reporting unit. To
determine the fair value of the Companys Aerospace and Defense reporting unit, the Company
primarily relies upon a discounted cash flow analysis which requires significant assumptions and
estimates about future operations, including judgments about expected revenue growth and operating
margins, and timing and amounts of expected future cash flows. The cash flows employed in the
discounted cash flow analysis are based on ten-year financial forecasts developed internally by
management. The analysis also involves discounting the future cash flows to a present value using a
discount rate that properly accounts for the risk and nature of the reporting unit cash flows and
the rates of return debt and equity holders would require to invest their capital in the Aerospace
and Defense reporting unit. In assessing the reasonableness of the Companys estimated fair value
of the Aerospace and Defense reporting unit, the Company evaluates the results of the discounted
cash flow analysis in light of what investors are paying for similar interests in comparable
aerospace and
44
defense companies as of the valuation date. The Company also ensures that the reporting unit
fair value is reasonable given the market value of the entire Company as of the valuation date.
There can be no assurance that the Companys estimates and assumptions made for purposes of
its goodwill impairment testing as of September 1, 2009 will prove to be accurate predictions of
the future. If the Companys assumptions regarding forecasted revenue or margin growth rates are
not achieved, the Company may be required to record goodwill impairment charges in future periods,
whether in connection with the Companys next annual impairment testing on September 1, 2010 or
prior to that, if any such change constitutes a triggering event outside of the quarter from when
the annual goodwill impairment test is performed. It is not possible at this time to determine if
any such future impairment charge would result or, if it does, whether such charge would be
material.
k. Intangible Assets
Identifiable intangible assets, such as patents, trademarks, and licenses are recorded at cost
or when acquired as part of a business combination at estimated fair value. Identifiable intangible
assets are amortized based on when they provide the Company economic benefit, or using the
straight-line method, over their estimated useful life. Amortization periods for identifiable
intangible assets range from 20 years to 27 years.
l. Environmental Remediation
The Company expenses, on a current basis, recurring costs associated with managing hazardous
substances and contamination in ongoing operations. The Company accrues for costs associated with
the remediation of environmental contamination when it becomes probable that a liability has been
incurred, and the amount can be reasonably estimated. In most cases only a range of reasonably
probable costs can be estimated. In establishing the Companys reserves, the most probable
estimated amount is used when determinable, and the minimum amount is used when no single amount in
the range is more probable. The Companys environmental reserves include the costs of completing
remedial investigation and feasibility studies, remedial and corrective actions, regulatory
oversight costs, the cost of operation and maintenance of the remedial action plan, and employee
compensation costs for employees who are expected to devote a significant amount of time to
remediation efforts. Calculation of environmental reserves is based on the evaluation of currently
available information with respect to each individual environmental site and considers factors such
as existing technology, presently enacted laws and regulations, and prior experience in remediation
of contaminated sites. Such estimates are based on the expected costs of investigation and
remediation and the likelihood that other potentially responsible parties will be able to fulfill
their commitments at sites where the Company may be jointly or severally liable. The Company
recognizes amounts recoverable from insurance carriers, the U.S. government or other third parties,
when the collection of such amounts is probable (see Note 7(c) and (d)).
m. Retirement Benefits
The Company previously had a defined benefit pension plan covering substantially all salaried
and hourly employees (see discussion below). In addition, the Company provides medical and life
insurance benefits (postretirement benefits) to certain eligible retired employees, with varied
coverage by employee group. Annual charges to income are made for the cost of the plans, including
current service costs, interest costs on benefit obligations, and net amortization and deferrals,
increased or reduced by the return on assets.
On November 25, 2008, the Company decided to amend the defined benefit pension and benefits
restoration plans to freeze future accruals under such plans. Effective February 1, 2009 and July
31, 2009, future benefit accruals for all current salaried employees and collective bargaining unit
employees were discontinued, respectively. No employees lost their previously earned pension
benefits. As a result of the amendment and freeze, the Company incurred a curtailment charge of
$14.6 million in the fourth quarter of fiscal 2008 primarily due to the immediate recognition of
unrecognized prior service costs (see Note 6).
n. Conditional Asset Retirement Obligations
Conditional asset retirement obligations (CARO) are legal obligations associated with the
retirement of long-lived assets. These liabilities are initially recorded at fair value and the
related asset retirement costs are capitalized by increasing the carrying amount of the related
assets by the same amount as the liability. Asset retirement costs are subsequently depreciated
over the useful lives of the related assets. Subsequent to initial recognition, the Company records
period-to-period changes in the CARO liability resulting from the passage of time and revisions to
either the timing or the amount of the estimate of the undiscounted cash flows.
The Companys estimate of CAROs associated with owned properties relates to estimated costs
necessary for the legally required removal or remediation of various regulated materials, primarily
asbestos disposal and radiological decontamination of an ordnance
45
manufacturing facility. For CAROs that are not expected to be retired in the next fifteen (15)
years, the Company estimated the retirement date of such asset retirement obligations to be thirty
(30) years from the date of adoption. For leased properties, such obligations relate to the
estimated cost of contractually required property restoration.
The changes in the carrying amount of CAROs since November 30, 2007 were as follows (in
millions):
Balance as of November 30, 2007 |
$ | 13.4 | ||
Additions and other, net |
(0.9 | ) | ||
Accretion |
1.0 | |||
Balance as of November 30, 2008 |
13.5 | |||
Additions and other, net |
(1.0 | ) | ||
Accretion |
1.1 | |||
Balance as of November 30, 2009 |
$ | 13.6 | ||
o. Advance Payments on Contracts
The Company receives advances from customers which may exceed costs incurred on certain
contracts. Such advances, other than those reflected as a reduction of inventories as progress
payments, are classified as current liabilities.
p. Loss Contingencies
The Company is currently involved in certain legal proceedings and, as required, has accrued
its estimate of the probable costs for resolution of these claims. These estimates are based upon
an analysis of potential results, assuming a combination of litigation and settlement strategies.
It is possible, however, that future results of operations or cash flows for any particular period
could be materially affected by changes in estimates or the effectiveness of strategies related to
these proceedings.
q. Warranties
The Company provides product warranties in conjunction with certain product sales. The
majority of the Companys warranties are a one-year standard warranty for parts, workmanship, and
compliance with specifications. On occasion, the Company has made commitments beyond the standard
warranty obligation. While the Company has contracts with warranty provisions, there is not a
history of any significant warranty claims experience. A reserve for warranty exposure is made on a
product by product basis when it is both estimable and probable. These costs are included in the
programs estimate at completion and are expensed in accordance with the Companys revenue
recognition methodology as allowed under GAAP for that particular contract.
r. Revenue Recognition
The Company considers the nature of the individual underlying contract and the type of
products and services provided in determining the proper accounting for a particular contract. Each
method is applied consistently to all contracts having similar characteristics, as described below.
The Company typically accounts for these contracts using the percentage-of-completion method, and
progress is measured on a cost-to-cost or units-of-delivery basis. Sales are recognized using
various measures of progress depending on the contractual terms and scope of work of the contract.
The Company recognizes revenue on a units-of-delivery basis when contracts require unit deliveries
on a frequent and routine basis. Sales using this measure of progress are recognized at the
contractually agreed upon unit price. Where the scope of work on contracts principally relates to
research and/or development efforts, or the contract is predominantly a development effort with few
deliverable units, the Company recognizes revenue on a cost-to-cost basis. In this case, sales are
recognized as costs are incurred and include estimated earned fees or profits calculated on the
basis of the relationship between costs incurred and total estimated costs at completion. Revenue
on service or time and material contracts is recognized when performed. If at any time expected
costs exceed the value of the contract, the loss is recognized immediately.
Certain government contracts contain cost or performance incentive provisions that provide for
increased or decreased fees or profits based upon actual performance against established targets or
other criteria. Incentive and award fees, which are generally awarded at the discretion of the
customer, are included in estimated contract revenue at the time the amounts can be reasonably
determined and are reasonably assured based on historical experience and anticipated performance.
The Company continually evaluates its performance and incorporates any anticipated changes in
penalties and cost incentives into its revenue and earnings calculations. Performance incentives,
which increase or decrease earnings based solely on a single significant event, generally are not
recognized until an event occurs.
Revenue from real estate asset sales is recognized when a sufficient down-payment has been
received, financing has been arranged and title, possession and other attributes of ownership have
been transferred to the buyer. The allocation to cost of sales on real estate
46
asset sales is based on a relative fair market value computation of the land sold which
includes the basis on the Companys book value, capitalized entitlement costs, and an estimate of
the Companys continuing financial commitment.
Revenue that is not derived from long-term development and production contracts, or real
estate asset transactions, is recognized when persuasive evidence of a final agreement exists,
delivery has occurred, the selling price is fixed or determinable and payment from the customer is
reasonably assured. Sales are recorded net of provisions for customer pricing allowances.
s. Research and Development
Company-sponsored research and development (R&D) expenses were $15.4 million in fiscal 2009,
$11.4 million in fiscal 2008, and $17.0 million in fiscal 2007. Company-sponsored R&D expenses
include the costs of technical activities that are useful in developing new products, services,
processes, or techniques, as well as expenses for technical activities that may significantly
improve existing products or processes. These expenses are generally allocated among all contracts
and programs in progress under U.S. government contractual arrangements.
Customer-sponsored R&D expenditures, which are funded under government contracts, totaled
$245.3 million in fiscal 2009, $252.4 million in fiscal 2008, and $269.0 million in fiscal 2007.
Expenditures under customer-sponsored R&D funded government contracts are accounted for as sales
and cost of products sold.
t. Stock-based Compensation
The Company recognizes stock-based compensation in the statement of operations at the
grant-date fair value of stock awards issued to employees and directors. The Company elected to use
the short-cut method for determining the historical pool of windfall tax benefits and the tax law
ordering approach for purposes of determining whether an excess tax benefit has been realized.
u. Impairment or Disposal of Long-Lived Assets
Impairment of long-lived assets is recognized when events or circumstances indicate that the
carrying amount of the asset, or related groups of assets, may not be recoverable. Circumstances
which could trigger a review include, but are not limited to: significant decreases in the market
price of the asset; significant adverse changes in the business climate or legal factors;
accumulation of costs significantly in excess of the amount originally expected for the acquisition
or construction of the asset; current period cash flow or operating losses combined with a history
of losses or a forecast of continuing losses associated with the use of the asset; or a current
expectation that the asset will more likely than not be sold or disposed of significantly before
the end of its estimated useful life. The carrying amount of a long-lived asset is not recoverable
if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset. If the Company determines that an asset is not recoverable, then the
Company would record an impairment charge if the carrying value of the asset exceeds its fair
value.
A long-lived asset classified as held for sale is initially measured at the lower of its
carrying amount or fair value less costs to sell. In the period that the held for sale criteria
are met, the Company recognizes an impairment charge for any initial adjustment of the long-lived
asset amount. Gains or losses not previously recognized resulting from the sale of a long-lived
asset is recognized on the date of sale.
v. Foreign Currency Transactions
Foreign currency transaction (losses) and gains were ($1.6) million in fiscal 2009, $0.6
million in fiscal 2008, and ($0.1) million in fiscal 2007 which are reported as a component of
discontinued operations. The Companys foreign currency transactions were associated with the
Companys former GDX business, including Snappon SA, which is classified as a discontinued
operations in these consolidated financial statements and notes to consolidated financial
statements.
47
w. Concentrations
Dependence upon government programs and contracts
Sales in fiscal 2009, 2008, and 2007 directly and indirectly to the U.S. government and its
agencies, including sales to the Companys significant customers discussed below, totaled $701.3
million, $641.7 million, and $665.9 million, respectively. The demand for certain of the Companys
services and products is directly related to the level of funding of government programs.
Major customers
Customers that represented more than 10% of net sales for the fiscal years presented are as
follows:
Year Ended | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Raytheon |
31 | % | 27 | % | 28 | % | ||||||
Lockheed Martin |
26 | 26 | 28 |
Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk
consist primarily of cash equivalents and trade receivables. The Companys cash and cash
equivalents are held and managed by recognized financial institutions that follow the Companys
investment policy. The investment policy limits the amount of credit exposure to any one security
issue or issuer and the Company does not believe significant concentration of credit risk exists
with respect to these investments. The Company performs ongoing credit evaluations of its
customers financial condition and maintains an appropriate allowance for uncollectible accounts
receivable based upon the expected collectiblity of all accounts receivable. The Companys accounts
receivables are generally unsecured and are not backed by collateral from its customers. Customers
that represented more than 10% of accounts receivable for the periods presented are as follows:
As of November 30, | ||||||||
2009 | 2008 | |||||||
Lockheed Martin |
38 | % | 35 | % | ||||
Raytheon |
29 | 26 |
Dependence on Single Source and Other Third Party Suppliers
The Company depends on a single or limited number of outside suppliers for raw materials. The
Company closely monitors sources of supply to assure that adequate raw materials and other supplies
needed in the manufacturing processes are available. As a U.S. government contractor, the Company
is frequently limited to procuring materials and components from sources of supply that meet
rigorous customer and/or government specifications. In addition, as business conditions, DoD
budgets, and Congressional allocations change, suppliers of specialty chemicals and other materials
sometime consider dropping low-volume items from their product lines, which may require us to
qualify new suppliers for raw materials on key programs. Current suppliers of some raw materials
used in the manufacturing of rocket nozzles, composite cases and explosives have announced plans to
relocate, close, and/or discontinue certain product lines. These materials, which include
TPB/Flexzone, Iron Oxide lacquer and other constituents, are used industry-wide and are key to many
of the Companys motor and warhead programs. The Company continues its efforts at qualifying new
suppliers and products for these materials and expects that materials will be available in time to
meet future production needs. In some situations, increased costs related to new suppliers may not
be recoverable under government contracts. In addition, some of these materials may have to be
procured from offshore suppliers.
The supply of ammonium perchlorate, a principal raw material used in solid propellant, is
limited to a single source that supplies the entire domestic solid propellant industry with actual
pricing based on the total industry demand. Significant reductions in the total national demand
will likely result in significant unit price increases. Where possible, Aerojet has protective
price re-determinable language incorporated into contracts with its customers. The industry also
currently relies on one primary supplier for carbon fiber, which is used in the production of
composite materials. This supplier has multiple manufacturing lines for such material. Although
other sources of carbon fiber exist, the addition of a new supplier would require the Company to
qualify the new source for use. The Japanese government has imposed export restrictions on
materials that are to be used in offensive weapons systems. To date, this has not impacted
production but has increased the lead times associated with the product as its export has to be
approved by the Japanese Defense Ministry. Characterization of domestic sources of carbon fiber is
underway by the extended aerospace industry.
The Company is also impacted, as is the rest of the industry, by increases in the prices and
lead-times of raw materials used in production on various fixed-price contracts. Additionally,
where possible, the Company has negotiated with its customers economic
48
and/or price adjustment clauses tied to commodity indices. The Companys past success in
negotiating these terms is no indication of its ability to continue to do so. The U.S. DoD has
begun to rigorously enforce the provisions of the Berry Amendment (Defense Federal Acquisition
Regulations 225-7002, 252.225-7014) which imposes a requirement to procure only certain strategic
materials critical to national security from U.S. sources. Due to limited U.S. supply of these
materials and the requirement to use domestic sources, lead times and cost impacts have been
significant.
Prolonged disruptions in the supply of any of the Companys key raw materials, difficulty
qualifying new sources of supply, implementing use of replacement materials or new sources of
supply, and/or a continuing increase in the prices of raw materials could have a material adverse
effect on the Companys operating results, financial condition, and/or cash flows.
Workforce
As of November 30, 2009, 13% of the Companys 3,071 employees were covered by collective
bargaining agreements which are due to expire in 2011 and 2012.
x. Recently Adopted Accounting Pronouncements
On December 1, 2007, the Company adopted the new standards that specified the accounting for
uncertainty in income taxes. As of December 1, 2007, the Company had $3.2 million of unrecognized
tax benefits, $3.0 million of which would impact their effective tax rate if recognized. The
adoption resulted in a reclassification of certain tax liabilities from current to non-current, a
reclassification of certain tax indemnification liabilities from income taxes payable to other
current liabilities, and a cumulative effect adjustment benefit of $9.1 million that was recorded
directly to the accumulated deficit. The Company recognizes interest and penalties related to
uncertain tax positions in income tax expense. Interest and penalties are immaterial at the date of
adoption and are included in unrecognized tax benefits. As of November 30, 2009, the Company had
approximately $0.2 million of accrued interest and penalties related to uncertain tax positions.
The tax years ended November 30, 2006 through November 30, 2009 remain open to examination for U.S.
federal income tax purposes. For the Companys other major taxing jurisdictions, the tax years
ended November 30, 2005 through November 30, 2009 remain open to examination.
On December 1, 2007, the Company adopted new standards that specified fair value measurements
for financial instruments. Although the adoption of the new standards did not materially impact the
Companys financial condition, results of operations, or cash flows, the Company is now required to
provide additional disclosures in the notes to consolidated financial statements.
On December 1, 2007, the Company adopted the new standards related to accounting for the fair
value option for financial assets and liabilities. At the date of adoption, the Company did not
elect to use the fair value option for any of its outstanding financial assets or liabilities.
Accordingly, the adoption of the new standards did not have an impact on the Companys financial
position, results of operations, or cash flows.
As of December 1, 2008, the Company adopted the new standards related to accounting for
non-refundable advance payments for goods or services to be used in future research and development
activities. The new standards provides guidance on whether non-refundable advance payments for
goods that will be used or services that will be performed in future research and development
activities should be accounted for as research and development costs or deferred and capitalized
until the goods have been delivered or the related services have been rendered. The adoption of the
new standards did not have a material impact on the Companys financial position, results of
operations, or cash flows.
As of December 1, 2008, the Company adopted new standards that specified fair value
measurements as it relates to non-financial assets and liabilities.
As of August 31, 2009, the Company adopted new standards which provide authoritative
accounting literature related to subsequent events, which was previously addressed only in the
auditing literature. The new guidance is largely similar to the current guidance in the auditing
literature with some exceptions that are not intended to result in significant changes in practice.
The adoption of the new standards did not have a material impact on the Companys financial
position, results of operations, or cash flows.
As of November 30, 2009, the Company adopted Financial Accounting Standards Board (FASB)
Accounting Standards Codification (Codification) which became the single source of authoritative
non-governmental GAAP, superseding various existing authoritative accounting pronouncements. The
Codification establishes one level of authoritative GAAP. All other literature is considered
non-authoritative. There were no changes to the Companys consolidated financial statements due to
the implementation of the Codification other than changes in reference to various authoritative
accounting pronouncements in the consolidated financial statements.
49
As of November 30, 2009, the Company adopted the accounting standards which require the
measurement of the pension and postretirement plans assets and benefit obligations at the Companys
fiscal year end. Previously, the Company performed the measurement as of August 31 of each fiscal
year. As a result of implementing the measurement date provision, the Company recorded an
additional quarter of pension and other postretirement benefit costs as of November 30, 2009 as a
$0.4 million increase to accumulated deficit and a $0.2 million decrease to accumulated other
comprehensive loss.
y. New Accounting Pronouncements
In December 2008, the FASB issued additional disclosure requirements for plan assets of
defined benefit pension or other postretirement plans. The required disclosures include a
description of the Companys investment policies and strategies, the fair value of each major
category of plan assets, the inputs and valuation techniques used to measure the fair value of plan
assets, the effect of fair value measurements using significant unobservable inputs on changes in
plan assets, and the significant concentrations of risk within plan assets. The disclosures are
required for fiscal years ending after December 15, 2009. The Company is currently evaluating the
impact of this guidance on its reporting requirements.
z. Subsequent Events
The Company evaluates events or transactions that occur after the balance sheet date but
before financial statements are issued for potential recognition or disclosure in the financial
statements. The issuance of financial statements is the earlier of when the financial statements
are widely distributed to all shareholders and other financial statements users or filed with the
Securities Exchange Commission (SEC). See Note 15.
50
2. Income (Loss) Per Share of Common Stock
A reconciliation of the numerator and denominator used to calculate basic and diluted income
(loss) per share of common stock (EPS) is presented in the following table:
Year Ended | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
As adjusted (Note 1(b)) | ||||||||||||
(In millions, except per share amounts; shares in thousands) | ||||||||||||
Numerator for Basic and Diluted EPS |
||||||||||||
Income (loss) from continuing operations |
$ | 58.9 | $ | (5.1 | ) | $ | 34.9 | |||||
(Loss) income from discontinued operations, net of income taxes |
(6.7 | ) | (0.1 | ) | 27.9 | |||||||
Net income (loss) for basic earnings per share |
52.2 | (5.2 | ) | 62.8 | ||||||||
Interest on contingent convertible subordinated notes |
5.0 | | 5.0 | |||||||||
Net income (loss) available to common shareholders, as
adjusted for diluted earnings per share |
$ | 57.2 | $ | (5.2 | ) | $ | 67.8 | |||||
Denominator |
||||||||||||
Basic weighted average shares |
58,429 | 57,230 | 56,213 | |||||||||
Effect of: |
||||||||||||
Contingent convertible subordinated notes |
8,101 | | 8,101 | |||||||||
Employee stock options |
| | 190 | |||||||||
Restricted stock awards |
20 | | 120 | |||||||||
Diluted weighted average shares |
66,550 | 57,230 | 64,624 | |||||||||
Basic EPS: |
||||||||||||
Income (loss) per share from continuing operations |
$ | 1.00 | $ | (0.09 | ) | $ | 0.62 | |||||
(Loss) income per share from discontinued operations, net of
income taxes |
(0.11 | ) | | 0.50 | ||||||||
Net income (loss) per share |
$ | 0.89 | $ | (0.09 | ) | $ | 1.12 | |||||
Diluted EPS: |
||||||||||||
Income (loss) per share from continuing operations |
$ | 0.96 | $ | (0.09 | ) | $ | 0.62 | |||||
(Loss) income per share from discontinued operations, net of
income taxes |
(0.10 | ) | | 0.43 | ||||||||
Net income (loss) per share |
$ | 0.86 | $ | (0.09 | ) | $ | 1.05 | |||||
The following table sets forth the potentially dilutive securities excluded from the
computation because their effect would have been anti-dilutive:
Year Ended | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
As adjusted (Note 1(b)) (In thousands) |
||||||||||||
4% Notes(1) |
| 8,101 | | |||||||||
5 3/4% convertible subordinated notes (5 3/4%Notes)(2) |
| | 449 | |||||||||
Employee stock options |
1,291 | 1,326 | 329 | |||||||||
Restricted stock awards |
16 | 15 | | |||||||||
Total potentially dilutive securities |
1,307 | 9,442 | 778 | |||||||||
(1) | In January 2010, the Company redeemed $124.7 million principal amount of 4% Notes which were presented to the Company for payment (see Note 15). | |
(2) | The 5 3/4% Notes matured in April 2007. | |
The Companys 2 1/4% Debentures were not included in the computation of diluted earnings per share because the market price of the common stock did not exceed the conversion price and only the conversion premium for these debentures is settled in common shares. |
51
3. Balance Sheet Accounts and Supplemental Disclosures
a. Accounts Receivable
As of November 30, | ||||||||
2009 | 2008 | |||||||
(In millions) | ||||||||
Billed |
$ | 83.0 | $ | 49.3 | ||||
Unbilled |
29.9 | 45.8 | ||||||
Total receivables under long-term contracts |
112.9 | 95.1 | ||||||
Other receivables |
3.4 | 2.2 | ||||||
Accounts receivable |
$ | 116.3 | $ | 97.3 | ||||
The unbilled receivable amounts as of November 30, 2009 expected to be collected after one
year is $3.0 million. Such amounts are billed either upon delivery of completed units or settlement
of contracts.
b. Inventories
As of November 30, | ||||||||
2009 | 2008 | |||||||
(In millions) | ||||||||
Long-term contracts at average cost |
$ | 212.2 | $ | 214.4 | ||||
Progress payments |
(153.6 | ) | (147.3 | ) | ||||
Total long-term contract inventories |
58.6 | 67.1 | ||||||
Raw materials |
0.3 | 0.2 | ||||||
Work in progress |
2.9 | 2.7 | ||||||
Finished goods |
| 0.4 | ||||||
Total other inventories |
3.2 | 3.3 | ||||||
Inventories |
$ | 61.8 | $ | 70.4 | ||||
As of November 30, 2009 and 2008, long-term contract inventories include $8.7 million and $9.6
million, respectively, of deferred qualification costs. Realization of the deferred costs at
November 30, 2009 is dependent upon receipt of future firm orders. The Company believes recovery of
these costs to be probable and specifically identifiable to future contracts. In addition,
long-term contract inventories included an allocation of general and administrative costs incurred
throughout fiscal 2009 and fiscal 2008 estimated to be $110.3 million and $113.4 million,
respectively, and the cumulative amount of general and administrative costs in long-term contract
inventories is estimated to be $6.6 million and $8.4 million at November 30, 2009 and 2008,
respectively.
c. Property, Plant and Equipment, net
As of November 30, | ||||||||
2009 | 2008 | |||||||
(In millions) | ||||||||
Land |
$ | 33.2 | $ | 33.2 | ||||
Buildings and improvements |
148.9 | 146.2 | ||||||
Machinery and equipment |
376.6 | 364.8 | ||||||
Construction-in-progress |
7.4 | 14.0 | ||||||
566.1 | 558.2 | |||||||
Less: accumulated depreciation |
(436.2 | ) | (420.3 | ) | ||||
Property, plant and equipment, net |
$ | 129.9 | $ | 137.9 | ||||
Depreciation expense for fiscal 2009, 2008, and 2007 was $23.0 million, $22.9 million, and
$23.9 million, respectively.
52
d. Intangible Assets
Gross | ||||||||||||
Carrying | Accumulated | Net Carrying | ||||||||||
As of November 30, 2009 | Amount | Amortization | Amount | |||||||||
(In millions) | ||||||||||||
Customer related |
$ | 10.7 | $ | 3.6 | $ | 7.1 | ||||||
Acquired technology |
18.3 | 6.9 | 11.4 | |||||||||
Intangible assets |
$ | 29.0 | $ | 10.5 | $ | 18.5 | ||||||
Gross | ||||||||||||
Carrying | Accumulated | Net Carrying | ||||||||||
As of November 30, 2008 | Amount | Amortization | Amount | |||||||||
(In millions) | ||||||||||||
Customer related |
$ | 10.7 | $ | 3.1 | $ | 7.6 | ||||||
Acquired technology |
18.3 | 5.8 | 12.5 | |||||||||
Intangible assets |
$ | 29.0 | $ | 8.9 | $ | 20.1 | ||||||
Amortization expense related to intangible assets was $1.6 million in fiscal 2009, 2008, and
2007. Amortization expense for fiscal 2010 related to intangible assets is estimated to be
approximately $1.6 million annually. Amortization expense for fiscal 2011 through 2014 related to
intangible assets is estimated to be approximately $1.5 million annually.
e. Other Noncurrent Assets, net
As of November 30, | ||||||||
2009 | 2008 | |||||||
As adjusted (Note 1(b)) | ||||||||
(In millions) | ||||||||
Receivable from Northrop Grumman Corporation (Northrop) |
$ | 53.4 | $ | 45.7 | ||||
Deferred financing costs |
6.1 | 11.6 | ||||||
Other |
32.1 | 35.4 | ||||||
Other noncurrent assets, net |
$ | 91.6 | $ | 92.7 | ||||
During the first quarter of fiscal 2010, the Company began classifying the amortization of deferred financing costs as a component of
interest expense and all prior periods have been conformed to the current presentation.
Amortization of deferred financing costs was previously reported as a component of amortization
expense. The Company amortizes deferred financing costs over the estimated life of the
related debt. Amortization of financing costs was $5.2 million, $2.6 million, and $1.9 million in
fiscal 2009, 2008, and 2007, respectively.
f. Other Current Liabilities
As of November 30, | ||||||||
2009 | 2008 | |||||||
(In millions) | ||||||||
Accrued compensation and employee benefits |
$ | 47.8 | $ | 43.8 | ||||
Legal settlements |
11.4 | 6.3 | ||||||
Interest payable |
6.1 | 5.6 | ||||||
Contract loss provisions |
3.0 | 4.3 | ||||||
Deferred revenue |
2.2 | 2.1 | ||||||
Other |
37.0 | 31.6 | ||||||
Other current liabilities |
$ | 107.5 | $ | 93.7 | ||||
g. Other Noncurrent Liabilities
As of November 30, | ||||||||
2009 | 2008 | |||||||
(In millions) | ||||||||
Legal settlements |
$ | 18.9 | $ | 26.6 | ||||
Conditional asset retirement obligations |
13.6 | 13.5 | ||||||
Deferred revenue |
10.4 | 11.2 | ||||||
Deferred compensation |
7.1 | 6.2 | ||||||
Other |
4.1 | 7.5 | ||||||
Other noncurrent liabilities |
$ | 54.1 | $ | 65.0 | ||||
53
h. Accumulated Other Comprehensive Loss, Net of Income Taxes
The components of accumulated other comprehensive loss related to the Companys retirement
benefit plans and the related income tax effects are presented in the following table:
As of November 30, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(In millions) | ||||||||||||
Actuarial losses, net |
$ | (358.4 | ) | $ | (35.7 | ) | $ | (27.6 | ) | |||
Prior service credits (costs) |
4.6 | 4.0 | (7.9 | ) | ||||||||
Accumulated other comprehensive loss |
$ | (353.8 | ) | $ | (31.7 | ) | $ | (35.5 | ) | |||
The estimated amounts that will be amortized from accumulated other comprehensive loss into
net periodic benefit (income) expense in fiscal 2010 are as follows:
Pension | Medical and | |||||||
Benefits | Life Benefits | |||||||
(In millions) | ||||||||
Recognized actuarial losses (gains), net |
$ | 58.8 | $ | (3.9 | ) | |||
Amortization of prior service costs |
| 0.1 | ||||||
$ | 58.8 | $ | (3.8 | ) | ||||
4. Income Taxes
The Company files a consolidated U.S. federal income tax return with its wholly-owned
subsidiaries. The components of the Companys income tax (benefit) provision from continuing
operations are as follows:
As of November 30, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(In millions) | ||||||||||||
Current |
||||||||||||
U.S. federal |
$ | (21.3 | ) | $ | (7.3 | ) | $ | (13.3 | ) | |||
State and local |
2.4 | 0.2 | (5.1 | ) | ||||||||
(18.9 | ) | (7.1 | ) | (18.4 | ) | |||||||
Deferred |
||||||||||||
U.S. federal |
1.1 | 6.5 | 0.3 | |||||||||
State and local |
0.2 | 1.5 | | |||||||||
1.3 | 8.0 | 0.3 | ||||||||||
Income tax (benefit) provision |
$ | (17.6 | ) | $ | 0.9 | $ | (18.1 | ) | ||||
A reconciliation of the U.S. federal statutory income tax rate to the Companys effective
income tax rate on earnings from continuing operations is as follows:
Year Ended | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
As adjusted (Note 1(b)) | ||||||||||||
Statutory U.S. federal income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State and local income taxes, net of U.S. federal income tax effect |
2.3 | (3.1 | ) | 13.7 | ||||||||
Tax settlements and refund claims, including interest |
(41.3 | ) | 9.1 | (35.0 | ) | |||||||
Reserve adjustments |
(10.0 | ) | (59.4 | ) | (40.0 | ) | ||||||
Valuation allowance adjustments |
(32.9 | ) | 22.0 | (79.1 | ) | |||||||
Unregistered stock rescission |
1.1 | (13.7 | ) | | ||||||||
Other, net |
3.3 | (9.9 | ) | (3.4 | ) | |||||||
Effective income tax rate |
(42.5 | )% | (20.0 | )% | (108.8 | )% | ||||||
The income tax benefit of $17.6 million in fiscal 2009 is primarily related to new guidance
that was published by the Chief Counsels Office of the Internal Revenue Service (IRS) in
December 2008 clarifying which costs qualify for ten-year carryback of tax net operating losses for
refund of prior years taxes. As a result of the clarifying language, the Company recorded during
the first quarter of fiscal 2009 an income tax benefit of $19.7 million, of which $14.5 million was
for the release of the valuation allowance associated with the utilization of the qualifying tax net operating losses and $5.2 million
was for the recognition of affirmative claims related to previous uncertain tax positions
associated with prior years refund claims related to the qualifying costs.
54
In fiscal 2008, although the Company generated $2.5 million in income from continuing
operations, the Company had a tax loss primarily related to the impact of the fiscal 2008 change in
tax method of accounting adopted for unbilled receivables. The new tax method of accounting adopted
in fiscal 2008 in accordance with guidance published by the IRS defers such revenue until the all
events test is met for tax purposes. The fiscal 2008 tax net operating loss from continuing
operations resulted in an income tax benefit of $9.5 million for carryback to prior years and a
refund of previously paid taxes. Due to the tightening of the credit market in the fourth quarter
of fiscal 2008, a tax planning strategy relied on for realizability of a portion of the deferred
tax assets ceased to be prudent and feasible, resulting in a charge to deferred income tax expense
of $8.0 million and a corresponding increase to the valuation allowance.
The income tax benefit in fiscal 2007 reflects a $6.3 million benefit from continuing
operations for the carryback of current and prior year losses resulting in refunds of previously
paid taxes and a $12.2 million benefit primarily from U.S. federal and state income tax settlements
including research and development credit claim benefits, manufacturers investment credit claim
benefits, and certain statute expirations, which is partially offset by $0.4 million of current
state tax expense.
A valuation allowance has been recorded to offset the net deferred tax assets at November 30,
2009 and 2008 to reflect the uncertainty of realization. A valuation allowance is required when it
is more-likely-than-not that all or a portion of net deferred tax assets may not be realized. A
review of all available positive and negative evidence is considered, including past and future
performance, the market environment in which the Company operates, utilization of tax attributes in
the past, length of carryback and carryforward periods, and evaluation of potential tax planning
strategies when evaluating the realizability of deferred tax assets.
Forming a conclusion that a valuation allowance is not required is difficult when there is
negative evidence such as cumulative losses in recent years. The Company determines cumulative
losses on a rolling twelve-quarter basis and the analysis includes the retirement benefit plan
losses in accumulated other comprehensive loss. Accordingly, the Company has maintained a full
valuation allowance on all of its net deferred tax assets.
The Company is routinely examined by domestic and foreign tax authorities. While it is
difficult to predict the outcome or timing of a particular tax matter, the Company believes it has
adequately provided reserves for any reasonable foreseeable outcome related to these matters.
A reconciliation of the change in unrecognized tax benefits from December 1, 2007 to November
30, 2009 is as follows (in millions):
Unrecognized tax benefits at December 1, 2007 |
$ | 3.2 | ||
Gross increases for tax positions taken during the year |
2.7 | |||
Lapse of statue of limitations |
(0.1 | ) | ||
Unrecognized tax benefits at November 30, 2008 |
5.8 | |||
Gross increases for tax positions taken during the year |
1.9 | |||
Gross decreases for resolved tax controversies during the year |
(5.2 | ) | ||
Unrecognized tax benefits at November 30, 2009 |
$ | 2.5 | ||
The increase in reserves during fiscal 2009 is primarily related to potential for double taxed
income in certain states; and state deferred tax liabilities, the current period recognition of
which is uncertain. The decrease in the reserve balance is the result of new guidance published by
the IRS clarifying which costs qualify for ten-year carryback. The reserve was reduced by $5.2
million for the recognition of affirmative claims related to uncertain tax positions associated
with prior years refund claims related to such qualifying costs. Due to the high degree of
uncertainty regarding the timing of potential future cash flows associated with these liabilities,
the Company is unable to make a reasonably reliable estimate of the amount and period in which
these liabilities might be paid.
The increase in reserves during fiscal 2008 is primarily related to affirmative claims under
ten-year carryback provisions of the Internal Revenue Code.
55
The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities for continuing operations are as follows:
As of November 30, | ||||||||
2009 | 2008 | |||||||
As adjusted (Note 1(b)) | ||||||||
(In millions) | ||||||||
Deferred Tax Assets |
||||||||
Accrued estimated costs |
$ | 55.4 | $ | 30.8 | ||||
Tax losses and credit carryforwards |
94.8 | 178.8 | ||||||
Net cumulative defined benefit pension plan losses |
89.2 | | ||||||
Retiree medical and life benefits |
33.9 | 31.0 | ||||||
Valuation allowance |
(245.1 | ) | (187.7 | ) | ||||
Total deferred tax assets |
28.2 | 52.9 | ||||||
Deferred Tax Liabilities |
||||||||
Net cumulative defined benefit pension plan gains |
| 32.4 | ||||||
Basis difference in assets and liabilities |
8.5 | 8.0 | ||||||
U.S. federal effect of state deferred taxes |
17.9 | 11.6 | ||||||
Other |
11.4 | 9.2 | ||||||
Total deferred tax liabilities |
37.8 | 61.2 | ||||||
Total net deferred tax liabilities |
(9.6 | ) | (8.3 | ) | ||||
Less: deferred tax assets (liabilities) expected to be realized within one year |
| | ||||||
Total long-term deferred tax liabilities |
$ | (9.6 | ) | $ | (8.3 | ) | ||
The year of expiration for the Companys state and U.S. federal net operating loss
carryforwards as of November 30, 2009 were as follows:
Year Ended November 30, | State | Federal | ||||||
(In millions) | ||||||||
2016 |
$ | 35.8 | $ | | ||||
2017 |
130.3 | | ||||||
2018 |
28.9 | | ||||||
2019 |
15.1 | | ||||||
2020 |
19.9 | | ||||||
2024 |
| 28.5 | ||||||
2025 |
| 122.3 | ||||||
$ | 230.0 | $ | 150.8 | |||||
Approximately $9.2 million of the net operating loss carryforwards relate to the exercise of
stock options, the benefit of which will be credited to equity when realized. In addition, the
Company has U.S. federal and state capital loss carryforwards of approximately $7.8 million and
$0.2 million, respectively, which begins expiring in fiscal 2010. The decrease in capital loss
carryforwards from the previous fiscal year is the result of:
State | Federal | |||||||
(In millions) | ||||||||
Utilization |
$ | 44.7 | $ | 41.8 | ||||
Expiration |
18.0 | 110.2 | ||||||
$ | 62.7 | $ | 152.0 | |||||
The Company also has a U.S. federal research credit carryforward of $7.2 million which begins
expiring in fiscal 2021, and a California research credit carryforward of $4.1 million which has an
indefinite carryforward period. Additionally, the Company has a California manufacturing investment
credit carryforward of $0.6 million which begins expiring in fiscal 2011; and a foreign tax credit
carryforward of $5.9 million which begins expiring in fiscal 2010, if not utilized. These tax
carryforwards are subject to examination by the tax authorities.
56
5. Long-Term Debt
As of November 30, | ||||||||
2009 | 2008 | |||||||
As adjusted (Note 1(b)) | ||||||||
(In millions) | ||||||||
Senior debt |
$ | 68.3 | $ | 69.0 | ||||
Senior subordinated notes |
97.5 | 97.5 | ||||||
Convertible subordinated notes |
254.4 | 246.9 | ||||||
Other debt |
1.4 | 2.7 | ||||||
Total debt, carrying amount |
421.6 | 416.1 | ||||||
Less: Amounts due within one year |
||||||||
Senior debt |
17.1 | 0.6 | ||||||
Other debt |
0.7 | 1.4 | ||||||
Total long-term debt, carrying amount |
$ | 403.8 | $ | 414.1 | ||||
See Note 15 for a discussion on recent changes to the Companys capital structure.
As of November 30, 2009, the Companys annual fiscal year debt contractual maturities are
summarized as follows (in millions):
2010(1) |
$ | 142.8 | ||
2011(2) |
147.7 | |||
2012 |
0.5 | |||
2013 |
147.6 | |||
Total debt |
$ | 438.6 | ||
(1) | Includes the $125.0 million 4% Notes due January 2024 that can be put to the Company in January 2010 at a price equal to 100% of the principal amount, plus accrued and unpaid interest, including contingent interest and liquidated damages, if any. The 4% Notes are classified as non-current on the consolidated balance sheet as of November 30, 2009 since the Company refinanced the 4% Notes with the issuance of new debt instruments in December 2009 (see Note 15). | |
(2) | Excludes the $17.0 million debt discount on the $146.4 million principal amount 2 1/4% Debentures due November 2024 that can be put to the Company in November 2011 at a price equal to 100% of the principal amount plus accrued and unpaid interest, including liquidated damages, if any, payable in cash, to but not including the repurchase date, plus, in certain circumstances, a make-whole premium, payable in common stock. |
a. Senior Debt:
As of | ||||||||
November 30, | ||||||||
2009 | 2008 | |||||||
(In millions) | ||||||||
Term loan, bearing interest at various rates (rate of 2.51% as
of November 30, 2009), payable in quarterly installments of $175,019 plus interest, maturing in 2013 |
$ | 68.3 | $ | 69.0 | ||||
$280 million senior credit facility (Senior Credit Facility)
In June 2007, the Company entered into an amended and restated Senior Credit Facility with
Wachovia Bank, National Association as administrative agent (the Administrative Agent), JP Morgan
Chase Bank, N.A. as Syndication Agent, the subsidiaries of the Company from time to time party
thereto, as guarantors, and a syndicate of lenders from time to time party thereto for an $80.0
million revolving credit facility (Revolver) maturing in June 2012, and a $200.0 million
credit-linked facility maturing in April 2013, which comprises the Senior Credit Facility. The
credit-linked facility consists of a $75.0 million term loan subfacility and a $125.0 million
letter of credit subfacility.
On May 1, 2009, the Company entered into the First Amendment and Consent (the Amendment) to
the Companys existing Credit Agreement. Snappon SA, a French subsidiary of the Company, that is
neither a Credit Party nor Significant Subsidiary (as defined under the Credit Agreement) and has
no operations, has had legal judgments rendered against it under French law, aggregating 2.9
million plus interest related to wrongful discharge claims by certain former employees of Snappon
SA. Under the Amendment, the Required Lenders (as defined under the Credit Agreement) agreed (i)
that an event of default will not be triggered with respect to the legal judgments rendered against Snappon SA, unless the judgments equal or exceed $10.0
million and shall not have been paid
57
and satisfied, vacated, discharged, stayed or bonded pending
appeal within thirty (30) days from the entry thereof and (ii) to consent to the commencement of
voluntary or involuntary bankruptcy, insolvency or similar proceedings with respect to Snappon SA
and that any such proceeding would not constitute an Event of Default under the Credit Agreement.
Additionally, the Company agreed to temporarily reduce its borrowing availability under the
Revolving Loan (as defined therein) from $80.0 million to $60.0 million commencing on May 1, 2009
and ending on the earlier of (i) the date on which an amendment that permits the renewal,
refinancing, or extension of the 4% Notes (as defined therein) has been approved by the Required
Lenders and (ii) the date on which the Company redeems the 4% Notes in accordance with the terms of
the Credit Agreement.
On November 24, 2009, the Company entered into a joinder agreement to add Easton Development
Company, LLC as a guarantor party to the indenture.
The interest rate on LIBOR rate borrowings under the Revolver is LIBOR plus 225 basis points,
subject to downward adjustment if the leverage ratio, as defined, is less than 4.00 to 1.00, and
the interest rate on the term loan is LIBOR plus 225 basis points. The Company is charged a fee on
the total letter of credit subfacility in the amount of 225 basis points per annum plus a fronting
fee of 10 basis points per annum on outstanding letters of credit and other customary charges
applicable to facilities of this type. The Company is also charged a commitment fee on the unused
portion of the Revolver in the amount of 50 basis points per annum, subject to downward adjustment
after fiscal 2007 if the leverage ratio, as defined, is less than 4.00 to 1.00.
As of November 30, 2009, the borrowing limit under the Revolver was $60.0 million with $59.2
million available due to an outstanding letter of credit in the amount of $0.8 million. Also as of
November 30, 2009, the Company had $84.5 million outstanding letters of credit under the $125.0
million letter of credit subfacility and had permanently reduced the amount of its term loan
subfacility to the $68.3 million outstanding.
During fiscal 2010, the Company will be required to make a principal payment of $16.6 million
on the term loan subfacility due to the excess cash flow provisions of the Credit Agreement. The
principal payment must be made within 110 days of November 30, 2009. In the event that the leverage
ratio is less than or equal to 3.0 to 1.0, as defined, at the end of any fiscal year during the
term of the Senior Credit Facility, no excess cash flow pre-payment would be required under this
provision.
The Senior Credit Facility is collateralized by a substantial portion of the Companys real
property holdings and substantially all of the Companys other assets, including the stock and
assets of its material domestic subsidiaries that are guarantors of the facility. The Company is
subject to certain limitations including the ability to: incur additional senior debt, release
collateral, retain proceeds from asset sales and issuances of debt or equity, make certain
investments and acquisitions, grant additional liens, and make restricted payments, including stock
repurchases and dividends. In addition, the Credit Agreement contains certain restrictions
surrounding the ability of the Company to refinance its subordinated debt, including provisions
that, except on terms no less favorable to the Credit Agreement, the Companys subordinated debt
cannot be refinanced prior to maturity. Furthermore, provided that the Company has cash and cash
equivalents of at least $25.0 million after giving effect thereto, the Company may redeem (with
funds other than Senior Credit Facility proceeds) the subordinated notes to the extent required by
the mandatory redemption provisions of the subordinated note indenture. The Company is also subject
to the following financial covenants:
Actual Ratios as of | Required Ratios | Required Ratios | ||||
Financial Covenant | November 30, 2009 | Through November 30, 2009 | December 1, 2009 and thereafter | |||
Interest coverage ratio
|
3.97 to 1.00 | Not less than: 2.25 to 1.00 | Not less than: 2.25 to 1.00 | |||
Leverage ratio
|
3.56 to 1.00 | Not greater than: 5.75 to 1.00 | Not greater than: 5.50 to 1.00 |
The Company was in compliance with its financial and non-financial covenants as of November
30, 2009.
b. Senior Subordinated Notes:
As of | ||||||||
November 30, | ||||||||
2009 | 2008 | |||||||
(In millions) | ||||||||
Senior subordinated notes, bearing interest at
9.50% per annum, interest payments due in February
and August, maturing in 2013
|
$ | 97.5 | $ | 97.5 | ||||
58
9 1/2% Senior Subordinated Notes
In August 2003, the Company issued $150.0 million aggregate principal amount of its 9 1/2%
Notes due 2013 in a private placement pursuant to Section 4(2) and Rule 144A under the Securities
Act of 1933. The 9 1/2% Notes have been exchanged for registered, publicly tradable notes with
substantially identical terms. The 9 1/2% Notes mature in August 2013. All or any portion of the 9
1/2% Notes may be redeemed by the Company at any time on or after August 15, 2008 at redemption
prices beginning at 104.75% of the principal amount and reducing to 100% of the principal amount by
August 15, 2011.
In February 2005, the Company redeemed $52.5 million principal amount of its 9 1/2% 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 9
1/2% Notes redeemed, plus accrued and unpaid interest.
If the Company undergoes a change of control (as defined in the 9 1/2% Notes indenture) or
sells assets, it may be required to offer to purchase the 9 1/2% Notes from the holders of such
notes.
The 9 1/2% Notes are non-collateralized and subordinated to all of the Companys existing and
future senior indebtedness, including borrowings under its Senior Credit Facility. The 9 1/2% Notes
rank senior to the 4% Notes and the 2 1/4% Debentures. The 9 1/2% Notes are guaranteed by the
Companys material domestic subsidiaries. Each subsidiary guarantee is non-collateralized and
subordinated to the respective subsidiarys existing and future senior indebtedness, including
guarantees of borrowings under the Senior Credit Facility. The 9 1/2% Notes and related guarantees
are effectively subordinated to the Companys and the subsidiary guarantors collateralized debt
and to any and all debt and liabilities, including trade debt of the Companys non-guarantor
subsidiaries.
The indenture governing the 9 1/2% Notes limits the Companys ability and the ability of the
Companys restricted subsidiaries, as defined in the indenture, to incur or guarantee additional
indebtedness, make restricted payments, pay dividends or distributions on, or redeem or repurchase,
its capital stock, make investments, issue or sell capital stock of restricted subsidiaries, create
liens on assets to secure indebtedness, enter into transactions with affiliates and consolidate,
merge or transfer all or substantially all of the assets of the Company. The indenture also
contains customary events of default, including failure to pay principal or interest when due,
cross-acceleration to other specified indebtedness, failure of any of the guarantees to be in full
force and effect, failure to comply with covenants and certain events of bankruptcy, insolvency,
and reorganization, subject in some cases to notice and applicable grace periods.
Issuance of the 9 1/2% Notes generated net proceeds of approximately $145.0 million. The
Company used a portion of the net proceeds to repay outstanding revolving loans under the Companys
prior credit facility, and the balance of the net proceeds to finance a portion of the purchase
price of the acquisition of substantially all of the assets of the propulsion business of Atlantic
Research Corporation and to pay related fees and expenses.
In October 2004, the Company entered into a supplemental indenture to amend the indenture
dated August 11, 2003 to (i) permit the refinancing of its outstanding 5 3/4% Notes with new
subordinated debt having a final maturity or redemption date later than the final maturity or
redemption date of the 5 3/4% Notes being refinanced, and (ii) provide that the Company will have
up to ten (10) business days to apply the proceeds of refinancing indebtedness toward the
redemption or repurchase of outstanding indebtedness. The supplemental indenture also amended the
definition of refinancing indebtedness to include indebtedness, the proceeds of which are used to
pay a premium necessary to accomplish a refinancing.
In June 2006, the Company entered into a second supplemental indenture for the 9 1/2% Notes to
amend the indenture dated August 11, 2003, as amended October 2004, to permit the Company to incur
additional indebtedness under its previous credit facility.
On November 24, 2009, the Company entered into a third supplemental indenture for the 9 1/2%
Notes to amend the indenture dated August 11, 2003, as amended October 2004 and June 2006, to add
Easton Development Company, LLC as a guarantor party to the indenture.
59
c. Convertible Subordinated Notes:
As of November 30, | ||||||||
2009 | 2008 | |||||||
As adjusted (Note 1(b)) | ||||||||
(In millions) | ||||||||
Convertible subordinated debentures,
bearing interest at 2.25% per annum, interest
payments due in May and November, maturing in
2024, net of debt discount |
$ | 129.4 | $ | 121.9 | ||||
Contingent convertible subordinated notes,
bearing interest at 4.00% per annum, interest
payments due in January and July, maturing in
2024 |
125.0 | 125.0 | ||||||
Total convertible subordinated notes |
$ | 254.4 | $ | 246.9 | ||||
2 1/4% Convertible Subordinated Debentures
In November 2004, the Company issued $80.0 million in aggregate principal amount of its 2 1/4%
Debentures in a private placement pursuant to Section 4(2) and Rule 144A under the Securities Act
of 1933. In December 2004, an initial purchaser exercised its option to purchase additional 2 1/4%
Debentures totaling $66.4 million aggregate principal amount. The 2 1/4% Debentures have been
registered for resale for the purchasers who requested registration. The 2 1/4% Debentures mature
in November 2024. Interest on the 2 1/4% Debentures accrues at a rate of 2.25% per annum and is
payable on May 15 and November 15, beginning May 15, 2005.
The 2 1/4% Debentures are general unsecured obligations and rank equal in right of payment to
all of the Companys other existing and future subordinated indebtedness, including the 4% Notes.
The 2 1/4% Debentures rank junior in right of payment to all of the Companys existing and future
senior indebtedness, including all of its obligations under its Senior Credit Facility and all of
its existing and future senior subordinated indebtedness, including the Companys outstanding 9
1/2% Notes. In addition, the 2 1/4% Debentures are effectively subordinated to any of the Companys
collateralized debt and to any and all debt and liabilities, including trade debt of its
subsidiaries.
Each $1,000 principal of the 2 1/4% Debentures is convertible at each holders option, into
cash and, if applicable, the Companys common stock at an initial conversion price of $20 per share
(subject to adjustment as provided in the indenture governing the 2 1/4% Debentures) only if: (i)
during any fiscal quarter the closing price of the common stock for at least twenty (20) trading
days in the thirty (30) consecutive trading day period ending on the last trading day of the
preceding fiscal quarter exceeds 130% of the conversion price; (ii) the Company has called the 2
1/4% Debentures for redemption and redemption has not yet occurred; (iii) subject to certain
exceptions, during the five (5) business days after any five consecutive trading day period in
which the trading price per $1,000 principal amount of the 2 1/4% Debentures for each day of such
period is less than 95% of the product of the common stock price on that day multiplied by the
conversion rate then in effect; (iv) specified corporate transactions have occurred; or (v)
occurrence of a transaction or event constituting a designated event. The Company may be required
to pay a make-whole premium in shares of common stock and accrued but unpaid interest if the 2 1/4%
Debentures are converted in connection with certain specified designated events occurring on or
prior to November 20, 2011. The initial conversion rate of 50 shares for each $1,000 principal
amount of the 2 1/4% Debentures is equivalent to a conversion price of $20 per share, subject to
certain adjustments. None of these events has occurred subsequent to the issuance of the
debentures.
In the event of conversion of the 2 1/4% Debentures, the Company will deliver, in respect of
each $1,000 principal amount of 2 1/4% Debentures tendered for conversion, (1) an amount in cash
(principal return) equal to the lesser of (a) the principal amount of the converted 2 1/4%
Debentures and (b) the conversion value (such value equal to the conversion rate multiplied by the
average closing price of common shares over a 10 consecutive-day trading period beginning on the
second trading day following the day the Debentures are tendered) and (2) if the conversion value
is greater than the principal return, an amount in common shares, with a value equal to the
difference between the conversion value and the principal return. Fractional shares will be paid in
cash.
The Company may, at its option, redeem some or all of its 2 1/4% Debentures for cash on or
after November 15, 2014, at a redemption price equal to 100% of the principal amount to be
redeemed, plus accrued and unpaid interest, including liquidated damages, if any, to but not
including the redemption date. In addition, the Company may, at its option, redeem some or all of
its 2 1/4% Debentures on or after November 20, 2011 and prior to November 15, 2014, if the closing
price of its common stock for at least twenty (20) trading days in any thirty (30) consecutive
trading-day period is more than 140% of the conversion price, at a redemption price equal to 100%
of the principal amount to be redeemed, plus accrued and unpaid interest, including liquidated
damages, if any, payable in cash. If the Company so redeems the 2 1/4% Debentures, it will make an
additional payment in cash, Company common stock or a combination thereof, at its option, equal to
the present value of all remaining scheduled payments of interest on the redeemed debentures
through November 15, 2014.
60
Each holder may require the Company to repurchase all or part of their 2 1/4% Debentures
on November 20, 2011, November 15, 2014 and November 15, 2019, or upon the occurrence of certain
events, at a price equal to 100% of the principal amount of the 2 1/4% Debentures plus accrued and
unpaid interest, including liquidated damages, if any, payable in cash, to but not including the
repurchase date, plus, in certain circumstances, a make-whole premium, payable in Company common
stock.
The indenture governing the 2 1/4% Debentures limits the Companys ability to, among other
things, consolidate with or merge into any other person, or convey, transfer or lease its
properties and assets substantially as an entirety to any other person unless certain conditions
are satisfied. The indenture also contains customary events of default, including failure to pay
principal or interest when due, cross-acceleration to other specified indebtedness, failure to
deliver cash or shares of common stock as required, failure to comply with covenants and certain
events of bankruptcy, insolvency and reorganization, subject in some cases to notice and applicable
grace periods.
Issuance of the 2 1/4% Debentures during fiscal 2004 generated net proceeds of approximately
$77.0 million, which were used to repurchase $70.3 million of the 5 3/4% Notes. During fiscal 2005,
the initial purchaser exercised its option to purchase an additional $66.4 million of 2 1/4%
Debentures; net cash proceeds of approximately $64.0 million were generated which were used to
repurchase $59.9 million of the 5 3/4% Notes.
As of December 1, 2009, the Company adopted the new accounting standards which applies to
convertible debt securities that, upon conversion, may be settled by the issuer fully or partially
in cash. The Companys adoption of this guidance affects its 2 1/4% Debentures and required the
issuer of convertible debt instruments to separately account for the liability (debt) and equity
(conversion option) components of such instruments and retrospectively adjust the financial
statements for all periods presented. The fair value of the liability component shall be determined
based on the market rate for similar debt instruments without the conversion feature and the
residual between the proceeds and the fair value of the liability component is recorded as equity
at the time of issuance. Additionally, the pronouncement requires transactions cost to be allocated
on the same percentage as the liability and equity components.
The Company calculated the carrying value of the liability component at issuance as the
present value of its cash flows using a discount rate of 8.86%. The carrying value of the liability
component was determined to be $97.5 million. The equity component, or debt discount, of the notes
was determined to be $48.9 million. The debt discount is being amortized over the period from the
issuance date through November 20, 2011 as a non-cash charge to interest expense.
The $4.9 million of costs incurred in connection with the issuance of the 2 1/4% Debentures were
capitalized and bifurcated into deferred financing costs of $3.3 million and equity issuance costs
of $1.6 million. The deferred financing costs are being amortized to interest expense from the
issuance date through November 20, 2011. As of November 30, 2009, the unamortized portion of the
deferred financing costs related to the 2 1/4% Debentures was $1.6 million and was included in other
non-current assets on the consolidated balance sheets.
The following table presents the carrying amounts of the liability and equity components:
As of November 30, | ||||||||
2009 | 2008 | |||||||
(In millions) | ||||||||
Carrying amount of equity component, net of equity issuance costs |
$ | 47.3 | $ | 47.3 | ||||
Principal amount of 2 1/4% Debentures |
$ | 146.4 | $ | 146.4 | ||||
Unamortized debt discount |
(17.0 | ) | (24.5 | ) | ||||
Carrying amount of liability component |
$ | 129.4 | $ | 121.9 | ||||
The following table presents the interest expense components for the 2 1/4% Debentures:
Year Ended | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(In millions) | ||||||||||||
Interest expense-contractual interest |
$ | 3.3 | $ | 3.3 | $ | 3.3 | ||||||
Interest expense-amortization of debt discount |
7.5 | 6.9 | 6.3 | |||||||||
Interest expense-amortization of deferred financing costs |
0.8 | 0.4 | 0.1 | |||||||||
Effective interest rate |
8.9 | % | 8.9 | % | 8.9 | % |
61
4% Contingent Convertible Subordinated Notes
In January 2004, the Company issued $125.0 million aggregate principal amount of its 4% Notes
in a private placement pursuant to Section 4(2) and Rule 144A under the Securities Act of 1933. The
4% Notes have been registered for resale for the purchasers who requested registration. The 4%
Notes mature in January 2024. Interest on the 4% Notes accrues at a rate of 4.00% per annum and is
payable on January 16 and July 16, beginning July 16, 2004. In addition, contingent interest is
payable during any six-month period, commencing with the six-month period beginning January 16,
2008, if the average market price of a 4% Note for the five (5) trading days ending on the third
trading day immediately preceding the relevant six-month period equals 120% or more of the
principal amount of the notes. Contingent interest has not been payable subsequent to the issuance
of the 4% Notes nor will it be payable during the six-month period beginning January 16, 2009.
In January 2010, the Company redeemed $124.7 million principal amount of its 4% Notes which
were presented to the Company for payment (See Note 15).
The 4% Notes are general unsecured obligations and rank equal in right of payment to all of
the Companys other existing and future subordinated indebtedness, including the 2 1/4% Debentures.
The 4% Notes rank junior in right of payment to all of the Companys existing and future senior
indebtedness, including all of its obligations under its Senior Credit Facility, and all of its
existing and future senior subordinated indebtedness, including the Companys outstanding 9 1/2%
Notes. In addition, the 4% Notes are effectively subordinated to any of the Companys
collateralized debt and to any and all debt and liabilities, including trade debt of its
subsidiaries.
Each $1,000 principal amount of the 4% Notes is convertible at each holders option into 64.81
shares of the Companys common stock (subject to adjustment as provided in the indenture governing
the 4% Notes) only if: (i) during any calendar quarter the closing price of the common stock for at
least twenty (20) trading days in the thirty (30) trading-day period ending on the last trading day
of the preceding calendar quarter exceeds 120% of the conversion price; (ii) the Company has called
the 4% Notes for redemption and redemption has not yet occurred; (iii) during the five trading day
period after any five consecutive trading day period in which the average trading price of the 4%
Notes for each day of such period is less than 95% of the product of the common stock price on that
day multiplied by the number of shares of common stock issuable upon conversion of $1,000 principal
amount of the 4% Notes; or (iv) certain corporate events have occurred. The initial conversion rate
of 64.81 shares for each $1,000 principal amount of the 4% Notes is equivalent to a conversion
price of $15.43 per share subject to certain adjustments.
The Company may redeem, at its option, some or all of its 4% Notes for cash on or after
January 19, 2010, subject to the consent of the Administrative Agent of the Senior Credit Facility.
In addition, the Company may, at its option, redeem some or all of its 4% Notes for cash on or
after January 19, 2008 and prior to January 19, 2010, if the closing price of its common stock for
at least twenty (20) trading days in the thirty (30) trading-day period ending on the last trading
day of the preceding calendar month is more than 125% of the conversion price. Each holder may
require the Company to repurchase for cash all or a portion of its 4% Notes on January 16, 2010,
2014, and 2019, or, subject to certain exceptions, upon a change of control (as defined in the 4%
Notes indenture). In all cases for either redemption of the 4% Notes or repurchase of the 4% Notes
at the option of the holder, the price is equal to 100% of the principal amount of the 4% Notes,
plus accrued and unpaid interest, including contingent interest and liquidated damages, if any.
The indenture governing the 4% Notes limits the Companys ability to, among other things,
consolidate with or merge into any other person, or convey, transfer or lease its properties and
assets substantially as an entirety to any other person unless certain conditions are satisfied.
The indenture also contains customary events of default, including failure to pay principal or
interest when due, cross-acceleration to other specified indebtedness, failure to deliver shares of
common stock as required, failure to comply with covenants and certain events of bankruptcy,
insolvency, and reorganization, subject in some cases to notice and applicable grace periods.
Issuance of the 4% Notes generated net proceeds of approximately $120.0 million, which were
first used to repay outstanding revolving loans and prepay twelve (12) months of scheduled term
loan principal amortization under the Companys prior credit facility. The remaining net proceeds
were available to be used for general corporate purposes.
62
d. Other Debt:
As of | ||||||||
November 30, | ||||||||
2009 | 2008 | |||||||
(In millions) | ||||||||
Promissory note, bearing interest at 5.00% per annum,
payable in annual installments of $700,000 plus interest,
maturing in 2011 |
$ | 1.4 | $ | 2.1 | ||||
Promissory note, bearing no interest through maturity in 2009 |
| 0.6 | ||||||
Total other debt |
$ | 1.4 | $ | 2.7 | ||||
In January 2007, the Company purchased, for $4.3 million, approximately 180 acres of land
which had been previously leased by the Company. The purchase was financed with $1.5 million of
cash and a $2.8 million promissory note. The promissory note is payable in four equal annual
installments, matures in January 2011, and bears interest at a per annum rate of 5.00%.
In March 2008, the Company settled an environmental remediation matter for $1.2 million. Under
the terms of the settlement, the Company paid half of the settlement in cash in the second quarter
of fiscal 2008 and the remaining amount, collateralized by a promissory note, was paid in the
second quarter of fiscal 2009.
6. Retirement Benefits
a. Plan Descriptions
Pension Benefits On November 25, 2008, the Company decided to amend the defined benefit
pension and benefits restoration plans to freeze future accruals under such plans. Effective
February 1, 2009 and July 31, 2009, future benefit accruals for all current salaried employees and
collective bargaining unit employees were discontinued, respectively. No employees lost their
previously earned pension benefits. As a result of the amendment and freeze, the Company incurred a
curtailment charge of $14.6 million in the fourth quarter of fiscal 2008 primarily due to the
immediate recognition of unrecognized prior service costs.
Normal retirement age is 65, but certain plan provisions allow for earlier retirement. Pension
benefits are calculated under formulas based on average earnings and length of service for salaried
employees and under negotiated non-wage based formulas for hourly employees. The Company also
sponsors a non-qualified Benefit Restoration Plan (BRP), which restores benefits that cannot be
paid under the qualified pension plan due to IRS limitations. Effective February 1, 2009, future
pension benefit accruals for BRP participants were discontinued. As a result of the second amended
and restated shareholder agreement (Shareholder Agreement), the Company was required to fund into
a grantor trust during fiscal 2008 an amount equal to $35.2 million which includes the
non-qualified BRP pension liabilities.
The Pension Protection Act (PPA), enacted in August 2006, requires underfunded pension plans
to improve their funding ratios within prescribed intervals based on the funded status of the plan
as of specified measurement dates. The funded ratio as of November 30, 2008 under the PPA for the
Companys defined benefit pension plan was above the ratio required under the PPA, as amended in
2008. The required ratio to be met as of the Companys November 30, 2009 measurement date is 94%.
During the fourth quarter of fiscal 2009, the Company made a voluntary contribution of $4.4 million
to improve the plans PPA funded status as of November 30, 2009, although there can be no assurance
that the amount of this contribution will be sufficient to meet the required ratio. The final
calculated PPA funded ratio as of November 30, 2009 is expected to be completed in the second half
of 2010.
The funded status of the pension plan may be adversely affected by the investment experience
of the plans assets, by any changes in U.S. law, and by changes in the statutory interest rates
used by tax-qualified pension plans in the U.S. to calculate funding requirements. Accordingly,
if the performance of the Companys plans assets does not meet our assumptions, if there are
changes to the IRS regulations or other applicable law or if other actuarial assumptions are
modified, our future contributions to our underfunded pension plan could be higher than we expect.
In addition, changes to the discount rate used to measure pension liabilities could adversely
affect the funded status of the plan. Significant cash contribution requirements to the Companys
pension plan may adversely affect the Companys ability to meet certain covenants under its Senior
Credit Facility which, absent an amendment or refinancing, would result in a default under the
Senior Credit Facility and cross defaults on other debt instruments.
Medical and Life Benefits The Company provides postretirement benefits to certain eligible
retired employees, with varied coverage by employee group. Medical and life benefit obligations are
unfunded.
63
Defined Contribution 401(k) Benefits The Company sponsors a defined contribution 401(k)
plan and participation in the plan is available to all employees. Company contributions to the plan
generally have been based on a percentage of employee contributions and, prior to April 15, 2009,
the Companys contributions to the plan had been directed entirely in the GenCorp Stock Fund.
Effective January 15, 2009, the Company discontinued the employer matching component to the defined
contribution 401(k) plan for non-union employees. Effective March 15, 2009, exchanges into the
GenCorp Stock Fund were no longer permitted. Effective April 15, 2009, all future contribution
investment elections directed into the GenCorp Stock Fund were redirected to other investment
options and the Companys union employee matching contributions are being made in cash. The cost of
the 401(k) plan was $2.0 million in fiscal 2009, $9.2 million in fiscal 2008, and $9.1 million in
fiscal 2007. The Company also sponsors a BRP defined contribution plan designed to enable
participants to continue to defer their compensation on a pre-tax basis when such compensation or
the participants deferrals to tax-qualified plans exceed applicable Internal Revenue Code of 1986,
as amended (IRC) limits. Under the BRP defined contribution plan, employees who are projected to
be impacted by the IRC limits may, on an annual basis, elect to defer compensation earned in the
current year such as salary and certain other incentive compensation. Any amounts that are deferred
are recorded as liabilities. As a result of the Shareholder Agreement, the Company was required to
fund into a grantor trust during fiscal 2008 an amount equal to $35.2 million which includes the
BRP defined contribution plan liabilities.
64
b. Plan Results
Summarized below is the balance sheet impact of the Companys pension benefits and medical and
life benefits. Pension benefits include the consolidated qualified plan, and the unfunded
non-qualified plan for benefits provided to employees beyond those provided by the Companys
qualified plans. Plan assets, benefit obligations, and the funded status of the plans were
determined at November 30, 2009 and August 31, 2008 for fiscal 2009 and 2008, respectively.
Medical and | ||||||||||||||||
Pension Benefits | Life Benefits | |||||||||||||||
As of November 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions) | ||||||||||||||||
Change in fair value of plan assets: |
||||||||||||||||
Fair value beginning of year |
$ | 1,543.3 | $ | 1,712.2 | $ | | $ | | ||||||||
Loss on plan assets |
(46.6 | ) | (29.5 | ) | | | ||||||||||
Employer contributions(1) |
5.8 | 1.7 | 10.1 | 7.9 | ||||||||||||
Benefits paid |
(167.0 | ) | (141.1 | ) | (10.1 | ) | (7.9 | ) | ||||||||
Fair Value end of year |
$ | 1,335.5 | $ | 1,543.3 | $ | | $ | | ||||||||
Change in benefit obligation: |
||||||||||||||||
Benefit obligation beginning of year |
$ | 1,481.7 | $ | 1,623.2 | $ | 76.1 | $ | 88.8 | ||||||||
Service cost |
10.8 | 19.7 | 0.2 | 0.3 | ||||||||||||
Interest cost |
113.1 | 96.5 | 6.2 | 5.3 | ||||||||||||
Actuarial losses (gains) |
123.0 | (88.6 | ) | 10.5 | (12.7 | ) | ||||||||||
Plan amendments |
| 3.0 | | 2.3 | ||||||||||||
Curtailment(2) |
| (36.3 | ) | | | |||||||||||
Impact of Shareholder Agreement (Note 13) |
| 5.3 | | | ||||||||||||
Benefits paid |
(167.0 | ) | (141.1 | ) | (10.1 | ) | (7.9 | ) | ||||||||
Benefit obligation end of year(3) |
$ | 1,561.6 | $ | 1,481.7 | $ | 82.9 | $ | 76.1 | ||||||||
Funded status of the plans |
$ | (226.1 | ) | $ | 61.6 | $ | (82.9 | ) | $ | (76.1 | ) | |||||
Employer contributions/benefit payments from August 31 to November 30 |
| 0.6 | | 2.2 | ||||||||||||
Net (Liability) Asset Recognized in the Consolidated Balance Sheets(4) |
$ | (226.1 | ) | $ | 62.2 | $ | (82.9 | ) | $ | (73.9 | ) | |||||
Amounts Recognized in the Consolidated Balance Sheets: |
||||||||||||||||
Prepaid pension asset |
$ | | $ | 76.5 | $ | | $ | | ||||||||
Pension liability, current (component of other current liabilities) |
(1.1 | ) | (1.2 | ) | | | ||||||||||
Postretirement medical and life benefits, current |
| | (7.2 | ) | (7.1 | ) | ||||||||||
Postretirement medical and life benefits, noncurrent |
| | (75.7 | ) | (66.8 | ) | ||||||||||
Pension benefits, noncurrent |
(225.0 | ) | (13.1 | ) | | | ||||||||||
Net (Liability) Asset Recognized in the Consolidated Balance Sheets |
$ | (226.1 | ) | $ | 62.2 | $ | (82.9 | ) | $ | (73.9 | ) | |||||
(1) | During the fourth quarter of fiscal 2009, the Company made a voluntary contribution of $4.4 million. | |
(2) | On November 25, 2008, the Company decided to amend and freeze its defined benefit pension plan effective February 1, 2009 for all current salaried employees and July 31, 2009 for collective bargaining unit employees. | |
(3) | Pension amounts include $15.8 million in fiscal 2009 and $14.9 million in fiscal 2008 for unfunded plans. | |
(4) | Pension amounts include $15.8 million in fiscal 2009 and $14.3 million in fiscal 2008 for unfunded plans. |
The accumulated benefit obligation for the defined benefit pension plans was $1,561.6 million
and $1,480.4 million as of the November 30, 2009 and August 31, 2008 measurement dates,
respectively.
65
Components of net periodic benefit expense (income) for continuing operations are as follows:
Medical and | ||||||||||||||||||||||||
Pension Benefits | Life Benefits | |||||||||||||||||||||||
Year Ended | ||||||||||||||||||||||||
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Service cost(1) |
$ | 6.3 | $ | 19.7 | $ | 17.2 | $ | 0.2 | $ | 0.3 | $ | 0.3 | ||||||||||||
Interest cost on benefit obligation |
89.3 | 96.5 | 96.2 | 5.0 | 5.3 | 5.5 | ||||||||||||||||||
Assumed return on plan assets(2) |
(103.8 | ) | (123.8 | ) | (122.8 | ) | | | | |||||||||||||||
Amortization of prior service (credits) costs |
| 2.0 | 2.0 | 0.1 | 0.1 | (0.1 | ) | |||||||||||||||||
Amortization of net (gains) losses |
(1.0 | ) | 14.7 | 29.8 | (8.0 | ) | (6.8 | ) | (6.5 | ) | ||||||||||||||
Net periodic benefit (income) expense |
$ | (9.2 | ) | $ | 9.1 | $ | 22.4 | $ | (2.7 | ) | $ | (1.1 | ) | $ | (0.8 | ) | ||||||||
(1) | Service cost for pension benefits is the actuarial present value of benefits attributed by the defined benefit pension plans benefit formulas for services rendered by participants during the period, including the administrative costs. For fiscal 2009, service cost for pension benefits include administrative costs and service cost for all current salaried employees until February 1, 2009 and collective bargaining unit employees until July 31, 2009. | |
(2) | The actual (loss) return on plan assets was $(46.6) million in fiscal 2009, $(29.5) million in fiscal 2008, and $145.5 million in fiscal 2007. |
Market conditions and interest rates significantly affect assets and liabilities of the
pension plans. Pension accounting requires that market gains and losses be deferred and recognized
over a period of years. This smoothing results in the creation of other accumulated income or
loss which will be amortized to pension costs in future years. The accounting method the Company
utilizes recognizes one-fifth of the unamortized gains and losses in the market-related value of
pension assets and all other gains and losses including changes in the discount rate used to
calculate benefit costs each year. Investment gains or losses for this purpose are the difference
between the expected return and the actual return on the market-related value of assets which
smoothes asset values over three years. Although the smoothing period mitigates some volatility in
the calculation of annual pension costs, future pension costs are impacted by changes in the market
value of pension plan assets and changes in interest rates.
c. Plan Assumptions
The Company used the following assumptions, calculated based on a weighted-average, to
determine the benefit obligations and net periodic benefit expense for the applicable fiscal year.
Pension | Medical and | |||||||||||||||
Benefits | Life Benefits | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Discount rate (benefit obligations) |
5.65 | % | 7.10 | % | 5.09 | % | 6.85 | % | ||||||||
Discount rate (benefit restoration plan benefit obligations) |
5.60 | % | 7.05 | % | * | * | ||||||||||
Discount rate (net periodic benefit expense) |
7.60 | % | 6.40 | % | 6.85 | % | 6.25 | % | ||||||||
Expected long-term rate of return on plan assets |
8.00 | % | 8.75 | % | * | * | ||||||||||
Rate of compensation increase |
* | 4.50 | % | * | * | |||||||||||
Ultimate healthcare trend rate |
* | * | 4.50 | % | 5.00 | % | ||||||||||
Initial healthcare trend rate (pre-65) |
* | * | 10.60 | % | 9.00 | % | ||||||||||
Year ultimate rate attained (pre-65) |
* | * | 2028 | 2016 | ||||||||||||
Initial healthcare trend rate (post 65) |
* | * | 9.00 | % | 10.00 | % | ||||||||||
Year ultimate rate attained (post 65) |
* | * | 2028 | 2016 |
* | Not applicable. |
Certain actuarial assumptions, such as assumed discount rate, long-term rate of return, rate
of compensation increase, and assumed healthcare cost trend rates can have a significant effect on
amounts reported for periodic cost of pension benefits and medical and life benefits, as well as
respective benefit obligation amounts. The assumed discount rate represents the market rate
available for investments in high-quality fixed income instruments with maturities matched to the
expected benefit payments for pension and medical and life benefit plans.
The expected long-term rate of return on plan assets represents the rate of earnings expected
in the funds invested to provide for anticipated benefit payments. With input from the Companys
investment advisors and actuaries, the Company has analyzed the
66
expected rates of return on assets and determined that a long term rate of 8.00% is reasonable
based on the current and expected asset allocations and on the plans historical investment
performance and best estimates for future investment performance. The Companys asset managers
regularly review actual asset allocations and periodically rebalance investments to targeted
allocations when considered appropriate.
The Company reviews external data and its own historical trends for healthcare costs to
determine the healthcare cost trend rates for the medical benefit plans. For fiscal 2009 medical
benefit obligations, the Company assumed a 10.60% annual rate of increase for pre 65 participants
and a 9.00% annual rate of increase for post 65 participants in the per capita cost of covered
healthcare claims with the rate decreasing over 19 years until reaching 4.50%.
A one percentage point change in the key assumptions would have the following effects on the
projected benefit obligations as of November 30, 2009 and on expense for fiscal 2010:
Pension Benefits and | ||||||||||||||||||||
Medical and Life Benefits | Assumed Healthcare | |||||||||||||||||||
Discount Rate | Expected Long-term | Cost Trend Rate | ||||||||||||||||||
Projected | Rate of Return | Net Periodic | Accumulated | |||||||||||||||||
Net Periodic | Benefit | Net Periodic Pension | Medical and Life | Benefit | ||||||||||||||||
Benefit Expense | Obligation | Benefit Expense | Benefit Expense | Obligation | ||||||||||||||||
(In millions) | ||||||||||||||||||||
1% decrease |
$ | 18.5 | $ | 116.0 | $ | 13.4 | $ | (0.1 | ) | $ | (1.9 | ) | ||||||||
1% increase |
(15.7 | ) | (96.8 | ) | (13.4 | ) | 0.1 | 2.1 |
d. Plan Assets and Investment Policy
The Companys pension plans weighted average asset allocation and the investment policy asset
allocation targets at November 30, 2009 and August 31, 2008, by asset category, are as follows:
2009 | 2008 | |||||||||||||||
Actual | Target(1) | Actual | Target(1) | |||||||||||||
Domestic equity securities |
17 | % | 21 | % | 18 | % | 21 | % | ||||||||
International equity securities |
10 | 11 | 10 | 11 | ||||||||||||
Fixed income |
28 | 50 | 49 | 50 | ||||||||||||
Real estate |
2 | 2 | 2 | 2 | ||||||||||||
Alternative investments(2) |
43 | 16 | 21 | 16 | ||||||||||||
100 | % | 100 | % | 100 | % | 100 | % | |||||||||
(1) | Assets rebalanced periodically to remain within a reasonable range of the target. During the fourth quarter of fiscal 2009, the Company was in the process of evaluating and updating its overall investment strategy. | |
(2) | As of November 30, 2009, alternative investments included an asset allocation of approximately 14% of interest only government mortgage-backed securities, 6% of interest only non-government backed collateralized mortgage obligations, and 8% of investments with an investment firm that invests in securities using a long/short equity strategy, which is an investment strategy generally associated with hedge funds. |
The Companys investment strategy consists of a long-term, risk-controlled approach using
diversified investment options. Plan assets are invested in asset classes that are expected to
produce a sufficient level of diversification and investment return over the long term. The
investment goals are to achieve the long term rate of return within reasonable and prudent levels
of risk and to preserve the value of assets to meet future obligations. Alternative investments
include hedge funds, venture capital funds, private equity investments, and other investments.
Within each type of investment the allocation may change as a result of changing market conditions
and dynamic tactical investment opportunities.
67
e. Benefit Payments
The following presents estimated future benefit payments:
Pension | Medical and Life Benefits | |||||||||||||||
Benefit | Gross Benefit | Medicare D | Net Benefit | |||||||||||||
Year Ended November 30, | Payments | Payments | Subsidy | Payments | ||||||||||||
(In millions) | ||||||||||||||||
2010 |
$ | 133.8 | $ | 8.0 | $ | 0.8 | $ | 7.2 | ||||||||
2011 |
132.9 | 8.0 | 0.3 | 7.7 | ||||||||||||
2012 |
131.6 | 7.8 | 0.3 | 7.5 | ||||||||||||
2013 |
129.9 | 8.7 | 0.3 | 8.4 | ||||||||||||
2014 |
127.8 | 8.5 | 0.3 | 8.2 | ||||||||||||
Years 2015 2019 |
599.0 | 36.8 | 1.2 | 35.6 |
7. Commitments and Contingencies
a. Lease Commitments and Income
The Company and its subsidiaries lease certain facilities, machinery and equipment, and office
buildings under long-term, non-cancelable operating leases. The leases generally provide for
renewal options ranging from one to ten years and require the Company to pay for utilities,
insurance, taxes, and maintenance. Rent expense was $11.6 million in fiscal 2009, $10.3 million in
fiscal 2008, and $8.7 million in fiscal 2007.
The Company also leases certain surplus facilities to third parties. The Company recorded
lease income of $6.4 million in fiscal 2009, $6.1 million in fiscal 2008, and $6.3 million in
fiscal 2007 related to these arrangements, which have been included in net sales.
The future minimum rental commitments under non-cancelable operating leases with initial or
remaining terms of one year or more and lease revenue in effect as of November 30, 2009 were as
follows:
Future Minimum | Future Minimum | |||||||
Year Ended November 30, | Rental Commitments | Rental Income | ||||||
(In millions) | ||||||||
2010 |
$ | 8.3 | $ | 6.0 | ||||
2011 |
6.1 | 2.3 | ||||||
2012 |
3.9 | 0.2 | ||||||
2013 |
1.3 | | ||||||
2014 |
0.5 | | ||||||
Thereafter |
4.0 | | ||||||
$ | 24.1 | $ | 8.5 | |||||
b. Legal Proceedings
The Company and its subsidiaries are subject to legal proceedings, including litigation in
U.S. federal and state courts, which arise out of, and are incidental to, the ordinary course of
the Companys on-going and historical businesses. The Company is also subject from time to time to
governmental investigations by state and federal agencies. The Company cannot predict the outcome
of such proceedings with any degree of certainty. Loss contingency provisions are recorded for
probable losses at managements best estimate of a loss, or when a best estimate cannot be made, a
minimum loss contingency amount is recorded. These estimates are often initially developed
substantially earlier than when the ultimate loss is known, and are refined each quarterly
reporting period as additional information becomes known. For legal settlements where there is no
stated amount for interest, the Company will estimate an interest factor and discount the liability
accordingly.
Groundwater Cases
In October 2002, Aerojet and approximately 65 other individual and corporate defendants were
served with four civil suits filed in the U.S. District Court for the Central District of
California that seek recovery of costs allegedly incurred or to be incurred in response to the
contamination present at the South El Monte Operable Unit (SEMOU) of the San Gabriel Valley
Superfund site. The cases are denominated as follows: The City of Monterey Park v. Aerojet-General
Corporation, et al., (CV-02-5909 ABC (RCx)); San Gabriel Basin Water Quality Authority v.
Aerojet-General Corporation, et al., (CV-02-4565 ABC (RCx)); San Gabriel Valley Water Company v.
Aerojet-General Corporation, et al., (CV-02-6346 ABC (RCx)); and Southern California Water Company
v. Aerojet-General Corporation, et al., (CV-02-6340 ABC (RCx)). The cases have been coordinated for ease of
administration by the
68
court. The plaintiffs claims against Aerojet are based upon allegations of
discharges from a former site in the El Monte area, as more fully discussed below under the
headings San Gabriel Valley Basin, California Site South El Monte Operable Unit. The total
cost estimate to implement projects under the Unilateral Administrative Order (UAO) prepared by
the EPA and the water entities is approximately $90 million. Aerojet investigations do not identify
a credible connection between the contaminants identified by the plaintiff water entities in the
SEMOU and those detected at Aerojets former facility located in El Monte, California, near the
SEMOU (East Flair Drive site). Aerojet has filed third-party complaints against several water
entities on the basis that they introduced perchlorate-containing Colorado River water to the
basin. Those water entities have filed motions to dismiss Aerojets complaints. The motions as well
as discovery have been stayed until April 12, 2010, pending efforts to resolve the litigation
through mediation. During the period in which the litigation has been stayed, EPA, the California
Department of Toxic Substances Control and the plaintiff water entities have reached settlements
through the mediation process with various of the parties sued, which have been brought to the
Federal District Court for approval. Certain of the settlements have been challenged by Aerojet and
other defendants and are not finally resolved.
Aerojet has recently received correspondence from EPA on behalf of itself, the DTSC and the
Water Entities regarding settlement. Aerojet intends to try to reach a good faith settlement with
EPA, DTSC and the Water Entities to resolve claims. If settlement negotiations fail, the litigation
stay is likely to be lifted and EPA may refer the matter to the U.S. Department of Justice for
litigation, seeking to hold Aerojet liable for past and future costs, to recover costs of suit and
attorneys fees, and as to any accrued interest, penalties or statutory damages. Should settlement
not be reached, Aerojet intends to vigorously defend itself.
In December 2007, Aerojet was named as a defendant in a lawsuit brought by six individuals who
allegedly resided in the vicinity of Aerojets Sacramento facility. The case is entitled Caldwell
et al. v. Aerojet-General Corporation, Case No. 34-2000-00884000CU-TT-GDS, Sacramento County (CA)
Superior Court and was served April 3, 2008. Plaintiffs allege that Aerojet contaminated
groundwater to which plaintiffs were exposed and which caused plaintiffs illness and economic
injury. Plaintiffs filed two subsequent amended complaints, naming additional plaintiffs. Aerojet
filed a demurrer to the second amended complaint, which was denied by the trial court in December
2008. The court held that the issue as to whether the plaintiffs were on actual notice of the
potential source of their injuries is an issue of fact for trial that cannot be resolved on
demurrer. Aerojets subsequent Petition for a Writ of Mandate filed with the California Court of
Appeal Third District, seeking reversal of the courts ruling on the demurrer was denied without
comment. Aerojet will continue to seek dismissal of those claims at the trial court level. On
December 29, 2009, plaintiffs served a Third Amended Complaint, adding four additional plaintiffs
to the action, which brings the total number of individuals on whose behalf suit has been filed to
eighteen. Aerojet will file an answer to the third amended complaint, denying liability. Discovery
is continuing. The Company is unable to make a reasonable estimate of the future costs of these
claims.
In August 2003, the County of Sacramento and the Sacramento County Water Agency (collectively,
SCWA) and Aerojet entered into a water agreement (Agreement). Under the Agreement, Aerojet
agreed to transfer remediated groundwater to SCWA. This was anticipated to satisfy Aerojets water
replacement obligations in eastern Sacramento County. Subject to various provisions of the
Agreement, including approval under the California Environmental Quality Act, SCWA assumed
Aerojets responsibility for providing replacement water to American States Water Company and other
impacted water purveyors up to the amount of remediated water Aerojet transfers to the County of
Sacramento (County). Aerojet also agreed to pay SCWA approximately $13 million over several years
toward the cost of constructing a replacement water supply project. If the amount of Aerojets
transferred water was in excess of the replacement water provided to the impacted water purveyors,
SCWA committed to make such water available for the entitlement of Aerojets land in an amount
equal to the excess.
In April 2008, SCWA unilaterally terminated the Agreement. Subsequent to this unilateral
termination of the Agreement, the Company and The Boeing Company (Boeing, successor to the
McDonnell Douglas Corporation (MDC)), the former owner of the Inactive Rancho Cordova Test Site
(IRCTS) entered into negotiations with SCWA in an attempt to resolve matters and reach a new
agreement. Additionally, SCWA and Aerojet entered into a Tolling Agreement through June 30, 2009
tolling any suits or claims arising from environmental contamination or conditions on the former
IRCTS property.
On June 30, 2009, SCWA notified Aerojet and Boeing that it was not prepared to extend the
tolling period and intended to file suit. On July 1, 2009, the County and SCWA filed a complaint
against Aerojet and Boeing in the U.S. District Court for the Eastern District of California, in
Sacramento, County of Sacramento; Sacramento County Water Agency v. Aerojet-General Corporation and
The Boeing Corporation [sic], Civ. No. 2:09-at-1041. In the complaint, the County and SCWA alleged
that because groundwater contamination from various sources including Aerojet, Boeing/MDC, and the
former Mather Air Force Base, was continuing, the County and SCWA should be awarded unspecified
monetary damages as well as declaratory and equitable relief. The complaint was served, but the
parties entered into a joint stipulation on August 27, 2009, to stay all proceedings until May 30,
2010, pending settlement discussions. The Company cannot predict the outcome of this proceeding
with any certainty at this time.
69
Vinyl Chloride Litigation
Between the early 1950s and 1985, the Company produced polyvinyl chloride (PVC) resin at its
former Ashtabula, Ohio facility. PVC is one of the most common forms of plastic currently on the
market. A building block compound of PVC is vinyl chloride (VC), now listed as a known carcinogen
by several governmental agencies. The Occupational Safety and Health Administration (OSHA) has
regulated workplace exposure to VC since 1974.
Since the mid-1990s, the Company has been named in numerous cases involving alleged exposure
to VC. In the majority of such cases, the Company is alleged to be a supplier/manufacturer of PVC
and/or a civil co-conspirator with other VC and PVC manufacturers as a result of membership in a
trade association. Plaintiffs generally allege that the Company and other defendants suppressed
information about the carcinogenic risk of VC to industry workers, and placed VC or PVC into
commerce without sufficient warnings. A few of these cases alleged VC exposure through various
aerosol consumer products, in that VC had been used as an aerosol propellant during the 1960s.
Defendants in these aerosol cases included numerous consumer product manufacturers, as well as
the more than 30 chemical manufacturers. The Company used VC internally, but never supplied VC for
aerosol or any other use.
As of November 30, 2009, there was one vinyl chloride case pending against the Company which
involves an employee at a facility owned or operated by others. The Company is unable to make a
reasonable estimate of the future cost of the pending claim. Accordingly, no estimate of future
liability has been accrued.
Asbestos Litigation
The Company has been, and continues to be, named as a defendant in lawsuits alleging personal
injury or death due to exposure to asbestos in building materials, products, or in manufacturing
operations. The majority of cases have been filed in Madison County, Illinois and San Francisco,
California. There were 134 asbestos cases pending as of November 30, 2009.
Given the lack of any significant consistency to claims (i.e., as to product, operational
site, or other relevant assertions) filed against the Company, the Company is unable to make a
reasonable estimate of the future costs of pending claims or unasserted claims. Accordingly, no
estimate of future liability has been accrued for such contingencies.
Snappon SA Wrongful Discharge Claims
In November 2003, the Company announced the closing of a manufacturing facility in Chartres,
France owned by Snappon SA, a subsidiary of the Company, previously involved in the automotive
business. In accordance with French law, Snappon SA negotiated with the local works council
regarding the implementation of a social plan for the employees. Following the implementation of
the social plan, approximately 188 of the 249 former Snappon employees sued Snappon SA in the
Chartres Labour Court alleging wrongful discharge. The claims were heard in two groups. On February
19, 2009, the Versailles Court of Appeal issued a decision in favor of Group 2 plaintiffs and based
on this, the Court awarded 1.9 million (approximately $2.7 million) plus interest. On April 7,
2009, the Versailles Court of Appeal issued a decision in favor of Group 1 plaintiffs and based on
this, the Court awarded 1.0 million (approximately $1.4 million) plus interest. During the second
quarter of fiscal 2009, Snappon SA filed for declaration of suspensions of payments with the
clerks office of the Paris Commercial Court, and the claims will likely be discharged through
those proceedings.
Other Legal Matters
On August 31, 2004, the Company completed the sale of its GDX business to an affiliate of
Cerberus Capital Management, L.P. (Cerberus). In accordance with the divestiture agreement, the
Company provided customary indemnification to Cerberus for certain liabilities accruing prior to
the closing of the transaction (the Closing). Cerberus notified the Company of a claim by a GDX
customer that alleges that certain parts manufactured by GDX prior to the Closing failed to meet
customer specifications. The Company has assumed the defense of this matter and based on its
investigation of the facts and defenses available under the contract and local law, and in November
2008 denied all liability for this claim. On January 23, 2009, GenCorp received correspondence from
the GDX customer requesting that the Company provide it with a settlement proposal by February 6,
2009, threatening that it would initiate legal proceedings otherwise. GenCorp neither responded nor
otherwise tolled the statute of limitations with negotiations. Nothing further has been received
since then and no legal proceedings have been initiated.
On January 6, 2010, the Company received a subpoena duces tecum from the Defense Criminal
Investigative Service of the Office of the Inspector General of the DoD requesting that the Company
produce a variety of documents pertaining to the allowability of certain costs under its contracts
with the DoD from October 1, 2003 to the present. The Company is currently unable to predict what
70
the outcome of the investigation will be or the impact, if any, the investigation may have on
the Companys operating results, financial condition, and/or cash flows. The Company intends to
cooperate fully with the investigation and is preparing its response to the subpoena.
The Company and its subsidiaries are subject to other legal actions, governmental
investigations, and proceedings relating to a wide range of matters in addition to those discussed
above. While there can be no certainty regarding the outcome of any litigation, investigation or
proceeding, after reviewing the information that is currently available with respect to such
matters, any liability that may ultimately be incurred with respect to these matters is not
expected to materially affect the Companys consolidated financial condition. It is possible that
amounts could be significant to the Companys results of operations or cash flows in any particular
reporting period.
c. Environmental Matters
The Company is involved in over forty environmental matters under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA), the Resource Conservation
Recovery Act (RCRA), and other federal, state, local, and foreign laws relating to soil and
groundwater contamination, hazardous waste management activities, and other environmental matters
at some of its current and former facilities. The Company is also involved in a number of remedial
activities at third party sites, not owned by the Company, where it is designated a potentially
responsible party (PRP) by either the United States Environmental Protection Agency (U.S. EPA)
or a state agency. In many of these matters, the Company is involved with other PRPs. In many
instances, the Companys 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 Companys
involvement. While government agencies frequently claim PRPs are jointly and severally liable at
such sites, in the Companys experience, interim and final allocations of liability and costs are
generally made based on relative contributions of waste or contamination. Anticipated costs
associated with environmental remediation that are probable and estimable are accrued. In cases
where a date to complete remedial activities at a particular site cannot be determined by reference
to agreements or otherwise, the Company projects costs over an appropriate time period not
exceeding fifteen years; in such cases, generally the Company does not have the ability to
reasonably estimate environmental remediation costs that are beyond this period. Factors that could
result in changes to the Companys estimates include completion of current and future soil and
groundwater investigations, new claims, future agency demands, discovery of more or less
contamination than expected, discovery of new contaminants, modification of planned remedial
actions, changes in estimated time required to remediate, new technologies, and changes in laws and
regulations.
As of November 30, 2009, the aggregate range of these anticipated environmental costs was
$222.7 million to $428.9 million and the accrued amount was $222.7 million. See Note 7(d) for a
summary of the environmental reserve activity for fiscal 2009. Of these accrued liabilities,
approximately 68% relates to the Sacramento, California site and approximately 21% to the Baldwin
Park Operable Unit of the San Gabriel Valley, California site. Each of those two sites is discussed
below. The balance of the accrued liabilities relates to other sites for which the Companys
obligations are probable and estimable.
Sacramento, California Site
In 1989, a federal district court in California approved a Partial Consent Decree (PCD)
requiring Aerojet, among other things, to conduct a Remedial Investigation and Feasibility Study
(RI/FS) to determine the nature and extent of impacts due to the release of chemicals from the
Sacramento, California site, monitor the American River and offsite public water supply wells,
operate Groundwater Extraction and Treatment facilities (GETs) that collect groundwater at the
site perimeter, and pay certain government oversight costs. The primary chemicals of concern for
both on-site and off-site groundwater are trichloroethylene (TCE), perchlorate, and
n-nitrosodimethylamine (NDMA). The PCD has been revised several times, most recently in 2002. The
2002 PCD revision (a) separated the Sacramento site into multiple operable units to allow quicker
implementation of remedy for critical areas; (b) required the Company to guarantee up to $75
million (in addition to a prior $20 million guarantee) to assure that Aerojets Sacramento
remediation activities are fully funded; and (c) removed approximately 2,600 acres of
non-contaminated land from the U.S. EPA superfund designation.
Aerojet is involved in various stages of soil and groundwater investigation, remedy selection,
design, and remedy construction associated with the operable units. In 2002, the U.S. EPA issued a
UAO requiring Aerojet to implement the U.S. EPA-approved remedial action in the Western Groundwater
Operable Unit. An identical order was issued by the California Regional Water Quality Control
Board, Central Valley (Central Valley RWQCB). Aerojet submitted a final Remedial
Investigation/Feasibility Study for the Perimeter Groundwater Operable Unit in 2008, for which the
U.S. EPA will issue a record of decision sometime in the future. Aerojet submitted a draft Remedial
Investigation/Feasibility Study for the Boundary Operable Unit in 2008. The remaining operable
units are under various stages of investigation.
71
Until March 2008, the entire southern portion of the site known as Rio Del Oro was under state
orders issued in the 1990s from the California Department of Toxic Substances Control (DTSC) to
investigate and remediate environmental contamination in the soils and the Central Valley RWQCB to
investigate and remediate groundwater environmental contamination. On March 14, 2008, the DTSC
released all but approximately 400 acres of the Rio Del Oro property from DTSCs environmental
orders regarding soil contamination. Aerojet expects the approximately 400 acres of Rio Del Oro
property that remain subject to the DTSC orders to be released once the soil remediation has been
completed. The Rio Del Oro property remains subject to the Central Valley RWQCBs orders to
investigate and remediate groundwater environmental contamination emanating offsite from such
property. Aerojet leased the Rio Del Oro property to Douglas Aircraft for rocket assembly and
testing from 1957 to 1961 and sold approximately 4,000 acres, including the formerly leased
portion, to Douglas Aircraft in 1961. Aerojet reacquired the property in 1984 from MDC, the
successor to Douglas Aircraft. As a result, the state orders referenced above were issued to both
MDC and Aerojet. Aerojet and MDCs parent, Boeing, have entered into an allocation agreement, some
of which is subject to reallocation that establishes lead roles and payment obligations. Aerojet
and Boeing are actively remediating soil on portions of the property as well as on-site and
off-site groundwater contamination. Following lengthy settlement negotiations, Aerojet and Boeing
executed a confidential Partial Settlement and Mutual Release on August 13, 2009 which established
final cost allocations with respect to environmental projects associated with the site, and also
defined responsibilities with respect to future costs and environmental projects.
San Gabriel Valley Basin, California Site
Baldwin Park Operable Unit (BPOU)
As a result of its former Azusa, California operations, in 1994 Aerojet was named a PRP by the
U.S. EPA, primarily due to volatile organic compound (VOC) contamination in the area of the San
Gabriel Valley Basin superfund site known as the BPOU. Between 1995 and 1997, the U.S. EPA issued
Special Notice Letters to Aerojet and eighteen other companies requesting that they implement a
groundwater remedy. Subsequently, additional contaminates were identified, namely: perchlorate,
NDMA, and 1,4-dioxane. On June 30, 2000, the U.S. EPA issued a UAO ordering the PRPs to implement a
remedy consistent with the 1994 record of decision. Aerojet, along with seven other PRPs (the
Cooperating Respondents) signed a Project Agreement in late March 2002 with the San Gabriel Basin
Water Quality Authority, the Main San Gabriel Basin Watermaster, and five water companies. The
Project Agreement, which has a term of fifteen years, became effective May 9, 2002. Pursuant to the
Project Agreement, the Cooperating Respondents fund through an escrow account: the capital,
operational, maintenance, and administrative costs of certain treatment and water distribution
facilities to be owned and operated by the water companies. There are also provisions in the
Project Agreement for maintaining financial assurance in the form of cash or letters of credit. A
significant amount of public funding is available to offset project costs. To date, Congress has
appropriated approximately $77 million (so called Title 16 and Dreier funds), a portion of which is
potentially available for payment of project costs. Approximately $41 million of the funding has
been allocated to costs associated with the Project Agreement and additional funds may follow in
later years.
Aerojet and the other Cooperating Respondents entered into an interim allocation agreement
that establishes the interim payment obligations of the Cooperating Respondents for the costs
incurred pursuant to the Project Agreement. Under the interim allocation, Aerojet is responsible
for approximately two-thirds of all project costs, including government oversight costs. All
project costs are subject to reallocation among the Cooperating Respondents. The interim allocation
agreement expired, but until recently all Cooperating Respondents were paying in accordance with
their interim allocations. In July 2008, Fairchild Holding Corporation sued Aerojet and the other
Cooperating Respondents in Federal District Court in Los Angeles in the action Fairchild Holding
Corp et al v. Aerojet-General Corp, et al SA 08CV 722-ABC claiming that it did not have any
liability and that it should recover amounts paid of approximately $2.6 million and should as
between the Cooperating Respondents have no further obligation to pay project costs. Fairchild
stopped making payments to the escrow account under the Project Agreement and claimed that it would
not do so in the future unless ordered to do so by a court. Fairchild had been paying approximately
2.5% of the project costs as its allocation until it stopped paying. At the request of one of the
Cooperating Respondents, the Court stayed all actions until mid-December 2008 to allow the parties
an opportunity to participate in mediation. The mediation occurred in December 2008 and was not
successful. Aerojet and the other Cooperating Respondents answered Fairchilds complaint and many
(including Aerojet) filed counterclaims against Fairchild Holding and third-party complaints
against entities affiliated with Fairchild. Fairchild subsequently filed a First Amended Complaint
adding the third-party affiliated entities as Plaintiffs in the litigation and Aerojet answered and
filed counterclaims. To date, no other Cooperating Respondent has filed a claim against any
non-Fairchild Cooperating Respondents to seek a reallocation. On March 18th, 2009, Fairchild filed
for voluntary chapter 11 bankruptcy reorganization in the District of Delaware and as a result, the
Federal District Court in Los Angeles has stayed the Fairchild litigation. In light of Fairchilds
insolvency, the other Cooperating Respondents, including Aerojet, must make up Fairchilds share of
Project costs and its interim share of financial assurances required by the Project Agreement,
although the amounts each Cooperating Respondent would be required to fund or pay has not been
resolved.
As part of Aerojets sale of its Electronics and Information Systems (EIS) business to
Northrop in October 2001, the U.S. EPA approved a Prospective Purchaser Agreement with Northrop to
absolve it of pre-closing liability for contamination caused by the
72
Azusa, California operations, which liability remains with Aerojet. As part of that agreement,
the Company agreed to provide a $25 million guarantee of Aerojets obligations under the Project
Agreement.
South El Monte Operable Unit
Aerojet previously owned and operated manufacturing facilities located on East Flair Drive in
El Monte, California. On December 21, 2000, Aerojet received an order from the Los Angeles RWQCB
requiring a work plan for investigation of this former site. On January 22, 2001, Aerojet filed an
appeal of the order with the Los Angeles RWQCB asserting selective enforcement. The appeal had been
held in abeyance pending negotiations with the Los Angeles RWQCB, but due to a two-year limitation
on the abeyance period, the appeal was dismissed without prejudice. In September 2001, Aerojet
submitted a limited work plan to the Los Angeles RWQCB.
On February 21, 2001, Aerojet received a General Notice Letter from the U.S. EPA naming
Aerojet as a PRP with regard to the SEMOU of the San Gabriel Valley Basin, California Superfund
site. On April 1, 2002, Aerojet received a Special Notice Letter from the U.S. EPA that requested
Aerojet enter into negotiations with it regarding the performance of a remedial design and remedial
action for the SEMOU. In light of this letter, Aerojet performed a limited site investigation of
the East Flair Drive site. The data collected and summarized in the report showed that chemicals
including TCE and PCE were present in the soil and groundwater at, and near, the El Monte location.
Site investigations are ongoing.
On August 29, 2003, the U.S. EPA issued a UAO against Aerojet and approximately 40 other
parties requiring them to conduct the remedial design and remedial action in the SEMOU. The impact
of the UAO on the recipients is not clear as much of the remedy is already being implemented by the
water entities. The cost estimate to implement projects under the UAO prepared by the U.S. EPA and
the water entities is approximately $90 million. The Company is working diligently with the U.S.
EPA and the other PRPs to resolve this matter and ensure compliance with the UAO. The Companys
share of responsibility has not yet been determined. The status of the negotiations with the U.S.
EPA is further described in Note 7(b).
On November 17, 2005, Aerojet notified the Los Angeles RWQCB and the U.S. EPA that Aerojet was
involved in research and development at the East Flair Drive site that included the use of
1,4-dioxane. Aerojets investigation of that issue is continuing. Oversight of the East Flair Drive
site was transferred from the RWQCB to the DTSC in 2007 and Aerojet has entered into a Voluntary
Cleanup Agreement with DTSC.
Toledo, Ohio Site
In August 2007, the Company, along with numerous other companies, received from the United
States Department of Interior Fish and Wildlife Service (USFWS) a notice of a Natural Resource
Damage (NRD) Assessment Plan for the Ottawa River and Northern Maumee Bay. The Company previously
manufactured products for the automotive industry at a Toledo, Ohio site, which was adjacent to the
Ottawa River. This facility was divested in 1990 and the Company indemnified the buyer for claims
and liabilities arising out of certain pre-divestiture environmental matters. A group of PRPs,
including GenCorp, was formed to respond to the NRD assessment and to pursue funding from the Great
Lakes Legacy Act for primary restoration. The group has undertaken a restoration scoping study.
Early data collection indicates that the primary restoration project total cost may be in the range
of $47 to $49 million. The group has received a commitment for matching federal funds for the
restoration project, which will consist of river dredging and land-filling river sediments. Based
on a review of the current facts and circumstances with counsel, management has provided for what
is believed to be a reasonable estimate of the loss exposure for this matter. Still unresolved at
this time is the actual Natural Resource Damage Assessment itself. It is not possible to predict
the outcome or timing of these types of assessments, which are typically lengthy processes lasting
several years, or the amounts of or responsibility for these damages.
In 2008, Textileather, Inc. (Textileather), the current owner of the former Toledo, Ohio
site, filed a lawsuit against the Company claiming, among other things, that the Company failed to
indemnify and defend Textileather for certain contractual environmental obligations. A second suit
related to past and future RCRA closure costs was filed in late 2009. A trial is scheduled for
spring 2010. The Company is vigorously defending against both actions.
d. Environmental Reserves and Estimated Recoveries
Reserves
The Company reviews on a quarterly basis estimated future remediation costs that could be
incurred over the contractual term or next fifteen years of the expected remediation. The Company
has an established practice of estimating environmental remediation costs over a fifteen year
period, except for those environmental remediation costs with a specific contractual term. As the
period for
73
which estimated environmental remediation costs increases, the reliability of such
estimates decrease. These estimates consider the
investigative work and analysis of engineers, outside environmental consultants, and the
advice of legal staff regarding the status and anticipated results of various administrative and
legal proceedings. In most cases, only a range of reasonably possible costs can be estimated. In
establishing the Companys reserves, the most probable estimate is used when determinable;
otherwise, the minimum amount is used when no single amount in the range is more probable.
Accordingly, such estimates can change as the Company periodically evaluates and revises such
estimates as new information becomes available. The Company cannot predict whether new information
gained as projects progress will affect the estimated liability accrued. The timing of payment for
estimated future environmental costs is influenced by a number of factors such as the regulatory
approval process, the time required to design the process, the time to construct the process, and
the time required to conduct the remedy itself.
A summary of the Companys environmental reserve activity is shown below:
Total | ||||||||||||
Environmental | ||||||||||||
Aerojet | Other | Reserve | ||||||||||
(In millions) | ||||||||||||
November 30, 2006 |
$ | 256.5 | $ | 9.5 | $ | 266.0 | ||||||
Fiscal 2007 additions |
57.9 | 2.5 | 60.4 | |||||||||
Fiscal 2007 expenditures |
(54.9 | ) | (1.5 | ) | (56.4 | ) | ||||||
November 30, 2007 |
259.5 | 10.5 | 270.0 | |||||||||
Fiscal 2008 additions |
39.8 | 5.8 | 45.6 | |||||||||
Fiscal 2008 expenditures |
(54.1 | ) | (3.3 | ) | (57.4 | ) | ||||||
November 30, 2008 |
245.2 | 13.0 | 258.2 | |||||||||
Fiscal 2009 additions |
19.9 | 3.6 | 23.5 | |||||||||
Fiscal 2009 expenditures |
(54.0 | ) | (5.0 | ) | (59.0 | ) | ||||||
November 30, 2009 |
$ | 211.1 | $ | 11.6 | $ | 222.7 | ||||||
As of November 30, 2009, the Aerojet reserves include $152.5 million for the Sacramento site,
$47.8 million for BPOU, and $10.8 million for other Aerojet reserves.
The effect of the final resolution of environmental matters and the Companys obligations for
environmental remediation and compliance cannot be accurately predicted due to the uncertainty
concerning both the amount and timing of future expenditures and due to regulatory or technological
changes. The Company believes, on the basis of presently available information, that the resolution
of environmental matters and the Companys obligations for environmental remediation and compliance
will not have a material adverse effect on the Companys results of operations, liquidity or
financial condition. The Company will continue its efforts to mitigate past and future costs
through pursuit of claims for recoveries from insurance coverage and other PRPs and continued
investigation of new and more cost effective remediation alternatives and associated technologies.
As part of the acquisition of the Atlantic Research Corporation (ARC) propulsion business,
Aerojet entered into an agreement with ARC pursuant to which Aerojet is responsible for up to $20.0
million of costs (Pre-Close Environmental Costs) associated with environmental issues that arose
prior to Aerojets acquisition of the ARC propulsion business. Pursuant to a separate agreement
with the U.S. government which was entered into prior to the completion of the ARC acquisition,
these Pre-Close Environmental Costs are not subject to the 88% limitation under the Global
Settlement, and are recovered through the establishment of prices for Aerojets products and
services sold to the U.S. government. A summary of the Pre-Close Environmental Costs is shown below
(in millions):
Pre-Close Environmental Costs |
$ | 20.0 | ||
Amount spent through November 30, 2009 |
(9.5 | ) | ||
Amount included as a component of reserves for environmental
remediation costs in the consolidated balance sheet as of November
30, 2009 |
(0.9 | ) | ||
Remaining Pre-Close Environmental Costs |
$ | 9.6 | ||
Estimated Recoveries
On January 12, 1999, Aerojet and the U.S. government implemented the October 1997 Agreement in
Principle (Global Settlement) resolving certain prior environmental and facility disagreements,
with retroactive effect to December 1, 1998. Under the Global Settlement, Aerojet and the U.S.
government resolved disagreements about an appropriate cost-sharing ratio with respect to the clean
up costs of the environmental contamination at the Sacramento and Azusa sites. The Global
Settlement provides that the cost-sharing ratio will continue for a number of years. Additionally,
in conjunction with the sale of the EIS business in 2001, Aerojet entered into an agreement with
Northrop (the Northrop Agreement) whereby Aerojet is reimbursed by Northrop for a portion of
environmental expenditures eligible for recovery under the Global Settlement, subject to annual and
cumulative limitations. The current annual billing limitations to Northrop is $8.0 million, which
is reduced to $6.0 million beginning in fiscal 2011.
74
Pursuant to the Global Settlement covering environmental costs associated with Aerojets
Sacramento site and its former Azusa site, the Company can recover up to 88% of its environmental
remediation costs for these sites through the establishment of prices for Aerojets products and
services sold to the U.S. government. Allowable environmental costs are charged to these contracts
as the costs are incurred. Aerojets mix of contracts can affect the actual reimbursement made by
the U.S. government. Because these costs are recovered through forward-pricing arrangements, the
ability of Aerojet to continue recovering these costs from the U.S. government depends on Aerojets
sustained business volume under U.S. government contracts and programs and the relative size of
Aerojets commercial business. Annually, the Company evaluates Aerojets forecasted business volume
under U.S. government contracts and programs and the relative size of Aerojets commercial business
as part of its long-term business review.
Pursuant to the Northrop Agreement, environmental expenditures to be reimbursed are subject to
annual limitations, with excess reimbursable amounts carried forward to subsequent periods, and the
total reimbursements are limited to a ceiling of $189.7 million over the term of the agreement,
which ends in 2028. A summary of the Northrop Agreement activity is shown below (in millions):
Total reimbursable costs under the Northrop Agreement |
$ | 189.7 | ||
Amount reimbursed to the Company through November 30, 2009 |
(74.2 | ) | ||
Potential future cost reimbursements available |
115.5 | |||
Receivable from Northrop in excess of the annual limitation included as a
component of other noncurrent assets in the Consolidated Balance Sheet as
of November 30, 2009 |
(53.4 | ) | ||
Amounts recoverable from Northrop in future periods included as a
component of recoverable from the U.S. government and other third parties
for environmental remediation costs in the Consolidated Balance Sheet as
of November 30, 2009 |
(55.7 | ) | ||
Potential future recoverable amounts available under the Northrop Agreement |
$ | 6.4 | ||
The Company believes it may reach the cumulative limitation under the Northrop Agreement
within the next twelve (12) months. While the Company is seeking an arrangement with the U.S.
government to recover environmental expenditures in excess of the current reimbursement ceiling
identified in the Northrop Agreement, there can be no assurances that such a recovery will be
obtained, or if not obtained, that such unreimbursed environmental expenditures will not have a
materially adverse effect on the Companys operating results, financial condition, and/or cash
flows.
Environmental reserves and estimated recoveries impact to Statements of Operations
The expenses and benefits associated with adjustments to the environmental reserves are
recorded as a component of other expense (income), net in the consolidated statements of
operations. Summarized financial information for the impact of environmental reserves and
recoveries to the consolidated statements of operations is set forth below:
Total | ||||||||||||||||||||
Estimated | ||||||||||||||||||||
Estimated | Estimated | Recoverable | Charge to | Total | ||||||||||||||||
Recoverable | Recoverable | Amounts Under | Consolidated | Environmental | ||||||||||||||||
Amounts from | Amounts from | U.S. Government | Statement of | Reserve | ||||||||||||||||
Northrop | U.S. Government | Contracts | Operations | Additions | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Fiscal 2009 |
$ | 4.8 | $ | 14.6 | $ | 19.4 | $ | 4.1 | $ | 23.5 | ||||||||||
Fiscal 2008 |
9.7 | 25.2 | 34.9 | 10.7 | 45.6 | |||||||||||||||
Fiscal 2007(1) |
12.0 | 46.3 | 58.3 | 2.1 | 60.4 |
(1) | In fiscal 2007, the net charge of $2.1 million includes a benefit of $8.6 million due to changes in the forecasted commercial business base. |
e. Arrangements with Off-Balance Sheet Risk
As of November 30, 2009, arrangements with off-balance sheet risk consisted of:
$85.3 million in outstanding commercial letters of credit expiring within the next twelve
months, the majority of which may be renewed, primarily to collateralize obligations for
environmental remediation and insurance coverage.
Up to $120.0 million aggregate in guarantees by GenCorp of Aerojets obligations to U.S.
government agencies for environmental remediation activities.
Up to $1.5 million of reimbursements to Granite Construction Company (Granite) if the
Company requests Granite to cease mining operations on certain portions of the Sacramento Land.
75
Guarantees, jointly and severally, by the Companys material domestic subsidiaries of its
obligations under its Senior Credit Facility and its 9 1/2% Notes.
In addition to the items discussed above, the Company will from time to time enter into
certain types of contracts that require us to indemnify parties against potential third-party and
other claims. These contracts primarily relate to: (i) divestiture agreements, under which the
Company may provide customary indemnification to purchasers of its businesses or assets including,
for example, claims arising from the operation of the businesses prior to disposition, liability to
investigate and remediate environmental contamination existing prior to disposition; (ii) certain
real estate leases, under which the Company may be required to indemnify property owners for claims
arising from the use of the applicable premises; and (iii) certain agreements with officers and
directors, under which the Company may be required to indemnify such persons for liabilities
arising out of their relationship with the Company. The terms of such obligations vary. Generally,
a maximum obligation is not explicitly stated.
8. Redeemable Common Stock
The Company inadvertently failed to register with the SEC the issuance of certain of its
common shares in its defined contribution 401(k) employee benefit plan (the Plan). As a result,
certain Plan participants who purchased such securities pursuant to the Plan may have the right to
rescind certain of their purchases for consideration equal to the purchase price paid for the
securities (or if such security has been sold, to receive consideration with respect to any loss
incurred on such sale) plus interest from the date of purchase. As of November 30, 2009 and 2008,
the Company has classified 0.6 million and 0.8 million shares, respectively, as redeemable common
stock because the redemption features are not within the control of the Company. The Company may
also be subject to civil and other penalties by regulatory authorities as a result of the failure
to register these shares. These shares have always been treated as outstanding for financial
reporting purposes. In June 2008, the Company filed a registration statement on Form S-8 to
register future transactions in the GenCorp Stock Fund in the Plan. The Company intends to make a
registered rescission offer to eligible plan participants which will require an amendment to the
Companys Senior Credit Facility. The Company is seeking an amendment to the Senior Credit
Facility. During fiscal 2009 and 2008, the Company recorded a charge of $1.3 million and $1.7
million, respectively, for realized losses and interest associated with this matter.
9. Shareholders Deficit
a. Preference Stock
As of November 30, 2009 and 2008, 15.0 million shares of preferred stock were authorized and
none were issued or outstanding.
b. Common Stock
As of November 30, 2009, the Company had 150.0 million authorized shares of common stock, par
value $0.10 per share, of which 57.9 million shares were issued and outstanding, and 24.7 million
shares were reserved for future issuance for discretionary payments of the Companys portion of
retirement savings plan contributions, exercise of stock options (ten year contractual life) and
restricted stock (no maximum contractual life), payment of awards under stock-based compensation
plans, and conversion of the Companys Notes. See Note 8 for information about the Companys
redeemable common stock.
c. Stock-based Compensation
Total stock-based compensation expense by type of award was as follows:
Year Ended | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(In millions) | ||||||||||||
Stock appreciation rights (SARS) |
$ | 2.8 | $ | (1.4 | ) | $ | 0.5 | |||||
Restricted stock, service-based |
0.1 | 0.7 | 0.3 | |||||||||
Restricted stock, performance-based |
| 0.9 | 0.7 | |||||||||
Total stock-based compensation expense |
$ | 2.9 | $ | 0.2 | $ | 1.5 | ||||||
The Company recorded an unusual charge of $2.4 million in the second quarter of fiscal 2008
related to the accelerated vesting of outstanding stock-based payment awards as a result of the
Shareholder Agreement (see Note 13).
Stock Appreciation Rights: As of November 30, 2009, a total of 1,054,158 SARS was outstanding
under the 1999 Equity and Performance Incentive Plan (1999 Plan) and 2009 Equity and Performance
Incentive Plan (2009 Plan). SARS granted to employees are generally exercisable in one-third increments at one year, two years, and three
years from the date of grant and have a
76
ten year contractual life under the 1999 Plan and a seven
year contractual life under the 2009 Plan. SARS granted to directors of the Company typically vest
over a one year service period (half after six months and half after one year) and have a ten year
contractual life under the 1999 Plan and a seven year contractual life under the 2009 Plan. These
awards are similar to the Companys employee stock options, but are settled in cash rather than in
shares of common stock, and are classified as liability awards. Compensation cost for these awards
is determined using a fair-value method and remeasured at each reporting date until the date of
settlement. Stock-based compensation expense recognized is based on SARS ultimately expected to
vest, and therefore it has been reduced for estimated forfeitures.
A summary of the status of the Companys SARS as of November 30, 2009 and changes during
fiscal 2009 is presented below:
Weighted | ||||||||||||||||
Weighted | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
SARS | Exercise | Contractual | Value | |||||||||||||
(000s) | Price | Life (years) | (In millions) | |||||||||||||
Outstanding at November 30, 2008 |
936 | $ | 15.76 | |||||||||||||
Granted |
162 | 4.09 | ||||||||||||||
Canceled |
(44 | ) | 15.89 | |||||||||||||
Outstanding at November 30, 2009 |
1,054 | $ | 13.03 | 7.0 | $ | 0.7 | ||||||||||
Exercisable at November 30, 2009 |
909 | $ | 14.40 | 6.9 | $ | 0.2 | ||||||||||
Expected to vest at November 30, 2009 |
143 | $ | 4.39 | 7.9 | $ | 0.5 | ||||||||||
The weighted average grant date fair value for SARS granted in fiscal 2009, 2008, and 2007 was
$3.85, $5.20, and $7.57, respectively. None of the SARS were exercised in fiscal 2009, 2008, and
2007. As of November 30, 2009, there was $0.7 million of total stock-based compensation related to
nonvested SARS. That cost is expected to be recognized over an estimated weighted-average
amortization period of eleven (11) months.
Restricted Stock, service-based: As of November 30, 2009, a total of 29,625 shares of
service-based restricted stock was outstanding which vest based on years of service under the 1999
Plan and 2009 Plan. Restricted shares are granted to key employees and directors of the Company.
The fair value of the restricted stock awards was based on the closing market price of the
Companys common stock on the date of award and is being amortized on a straight line basis over
the service period. Stock-based compensation expense recognized is based on service-based
restricted stock ultimately expected to vest, and therefore it has been reduced for estimated
forfeitures.
The following is summary of the status of the Companys service-based restricted stock as of
November 30, 2009 and changes during fiscal 2009:
Service | ||||||||
Based | Weighted | |||||||
Restricted | Average | |||||||
Stock | Grant Date | |||||||
(000s) | Fair Value | |||||||
Outstanding at November 30, 2008 |
16 | $ | 10.51 | |||||
Granted |
14 | 2.39 | ||||||
Outstanding and expected to vest at November 30, 2009 |
30 | $ | 6.55 | |||||
As of November 30, 2009, there was $0.1 million of total stock-based compensation related to
nonvested service-based restricted stock. That cost is expected to be recognized over an estimated
weighted-average amortization period of twenty (20) months. The intrinsic value of the
service-based restricted stock outstanding and expected to vest at November 30, 2009 was $0.2
million. Additionally, the intrinsic value of the service-based restricted stock vested during
fiscal 2008 and 2007 was $1.1 million and $0.1 million, respectively. The weighted average grant
date fair values for service-based restricted stock granted in fiscal 2008 and 2007 was $10.84 and
$13.66, respectively.
Restricted Stock, performance-based: As of November 30, 2009, a total of 137,334 shares of
performance-based restricted shares was outstanding under the 1999 Plan and 2009 Plan. The
performance-based restricted stock vest if the Company meets various operations and earnings
targets set by the Organization & Compensation Committee of the Board. The fair value of the
performance-based restricted stock awards was based on the closing market price of the Companys
common stock on the date of award and is being amortized over the estimated service period to
achieve the operations and earnings targets. If certain operations and earnings targets are
exceeded, additional restricted stock may be required to be granted to individuals up to a maximum
additional grant of 25% of the initial grant. Stock-based compensation expense recognized for all
years presented is based on performance-based restricted stock ultimately expected to vest, and
therefore it has been reduced for estimated forfeitures.
77
The following is a summary of the status of the Companys performance-based restricted stock
as of November 30, 2009 and changes during fiscal 2009:
Performance | ||||||||
Based | Weighted | |||||||
Restricted | Average | |||||||
Stock | Grant Date | |||||||
(000s) | Fair Value | |||||||
Outstanding at November 30, 2008 |
| $ | | |||||
Granted |
137 | 4.54 | ||||||
Outstanding at November 30, 2009 |
137 | $ | 4.54 | |||||
Expected to vest at November 30, 2009 |
62 | $ | 4.54 | |||||
As of November 30, 2009, there was $0.6 million of total stock-based compensation related to
nonvested performance-based restricted stock. That cost is expected to be recognized over an
estimated weighted-average amortization period of twenty-seven (27) months. The intrinsic value of
the performance-based restricted stock outstanding and expected to vest at November 30, 2009 was
$1.1 million and $0.5 million, respectively. The intrinsic value of the performance-based
restricted stock vested during fiscal 2008 and 2007 was $1.4 million and $0.6 million,
respectively. The weighted average grant date fair value for performance-based restricted stock
granted in fiscal 2007 was $13.73.
Stock Options: As of November 30, 2009, a total of 1,290,859 stock options was outstanding
under the 1999 Plan and 2009 Plan. The 2009 stock option grants are performance-based and vest if
the Company meets various operations and earnings targets set by the Organization & Compensation
Committee of the Board. The fair value is being amortized over the estimated service period to
achieve the operations and earnings targets. If certain operations and earnings targets are
exceeded, additional stock options may be required to be granted to individuals up to a maximum
additional grant of 25% of the initial grant.
A summary of the status of the Companys stock options as of November 30, 2009 and changes
during fiscal 2009 is presented below:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Stock | Average | Remaining | Intrinsic | |||||||||||||
Options | Exercise | Contractual | Value | |||||||||||||
(000s) | Price | Life | (In millions) | |||||||||||||
Outstanding at November 30, 2008 |
1,326 | $ | 10.11 | |||||||||||||
Granted |
196 | 4.54 | ||||||||||||||
Canceled |
(231 | ) | 10.03 | |||||||||||||
Outstanding at November 30, 2009 |
1,291 | $ | 9.28 | 3.0 | $ | 0.6 | ||||||||||
Exercisable at November 30, 2009 |
1,095 | $ | 10.13 | 1.8 | $ | | ||||||||||
Expected to vest at November 30, 2009 |
88 | $ | 4.54 | 9.7 | $ | 0.3 | ||||||||||
As of November 30, 2009, there was $0.5 million of total stock-based compensation related to
stock options. That cost is expected to be recognized over an estimated weighted-average
amortization period of twenty-seven (27) months. The total intrinsic value of options exercised
during fiscal 2007 was $0.2 million. The weighted average grant date fair value for stock options
granted in fiscal 2009 was $2.77.
The following table summarizes the range of exercise prices and weighted-average exercise
prices for options outstanding as of November 30, 2009 under the Companys stock option plans:
Outstanding | ||||||||||||||||
Year in | Weighted | |||||||||||||||
Which Stock | Stock | Weighted | Average | |||||||||||||
Options | Options | Average | Remaining | |||||||||||||
Were | Range of Exercise | Outstanding | Exercise | Contractual | ||||||||||||
Granted | Prices | (000s) | Price | Life (years) | ||||||||||||
2000 |
$ | 8.19 $10.13 | 261 | $ | 9.49 | 0.1 | ||||||||||
2001 |
$ | 10.44 $12.30 | 322 | $ | 10.85 | 1.2 | ||||||||||
2002 |
$ | 9.77 $15.43 | 201 | $ | 12.62 | 2.5 | ||||||||||
2003 |
$ | 6.53 $9.29 | 282 | $ | 8.04 | 3.3 | ||||||||||
2004 |
$ | 10.92 | 29 | $ | 10.92 | 4.2 | ||||||||||
2009 |
$ | 4.54 | 196 | $ | 4.54 | 9.7 | ||||||||||
1,291 | ||||||||||||||||
78
Valuation Assumptions
The fair value of the stock options granted during fiscal 2009 were estimated using a
Black-Scholes Model with the following weighted average assumptions:
Expected life (in years) |
8.0 | |||
Volatility |
53.93 | % | ||
Risk-free interest rate |
3.24 | % | ||
Dividend yield |
0.00 | % |
The fair value of SARS were estimated using a Black-Scholes Model with the following weighted
average assumptions:
Year Ended | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Expected life (in years) |
6.1 | 5.9 | 5.7 | |||||||||
Volatility |
58.83 | % | 43.25 | % | 34.96 | % | ||||||
Risk-free interest rate |
2.47 | % | 2.44 | % | 3.56 | % | ||||||
Dividend yield |
0.00 | % | 0.00 | % | 0.00 | % |
Expected Term: The Companys expected term represents the period that the Companys
stock-based awards are expected to be outstanding and was determined based on historical experience
of similar awards, giving consideration to the contractual terms of the stock-based awards and
vesting schedules.
Expected Volatility: The fair value of stock-based payments were valued using the
Black-Scholes Model with a volatility factor based on the Companys historical stock prices. The
range of expected volatility used in the Black-Scholes Model was 54% to 71% in fiscal 2009.
Expected Dividend: The Black-Scholes Model requires a single expected dividend yield as an
input. The Senior Credit Facility and 9 1/2% Notes restrict the payment of dividends and the
Company does not anticipate paying cash dividends in the foreseeable future.
Risk-Free Interest Rate: The Company bases the risk-free interest rate used in the
Black-Scholes Model on the implied yield currently available on U.S. Treasury zero-coupon issues
with an equivalent remaining term. The range of risk-free interest rates used in the Black-Scholes
Model was 1.24% to 3.80% in fiscal 2009.
Estimated Pre-vesting Forfeitures: When estimating forfeitures, the Company considers
historical terminations as well as anticipated retirements.
10. Operating Segments and Related Disclosures
The Companys operations are organized into two operating segments based on different products
and customer bases: Aerospace and Defense, and Real Estate. The accounting policies of the
operating segments are the same as those described in the summary of significant accounting
policies (see Note 1).
The Company evaluates its operating segments based on several factors, of which the primary
financial measure is segment performance. Segment performance represents net sales from continuing
operations less applicable costs, expenses and provisions for unusual items relating to the segment
operations. Segment performance excludes corporate income and expenses, legacy income or expenses,
provisions for unusual items not related to the segment operations, interest expense, interest
income, and income taxes.
79
Selected financial information for each reportable segment is as follows:
Year Ended | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
As adjusted (Note 1(b)) | ||||||||||||
(In millions) | ||||||||||||
Net Sales: |
||||||||||||
Aerospace and Defense |
$ | 787.2 | $ | 725.5 | $ | 739.1 | ||||||
Real Estate |
8.2 | 16.8 | 6.3 | |||||||||
Total |
$ | 795.4 | $ | 742.3 | $ | 745.4 | ||||||
Segment Performance: |
||||||||||||
Aerospace and Defense |
$ | 84.4 | $ | 78.0 | $ | 84.8 | ||||||
Environmental remediation provision adjustments |
(0.7 | ) | (5.0 | ) | 0.4 | |||||||
Retirement benefit plan income (expense) |
7.9 | (15.7 | ) | (23.8 | ) | |||||||
Unusual items (see Note 13) |
(1.3 | ) | (16.5 | ) | (0.1 | ) | ||||||
Aerospace and Defense Total |
90.3 | 40.8 | 61.3 | |||||||||
Real Estate |
4.4 | 10.3 | 3.5 | |||||||||
Total |
$ | 94.7 | $ | 51.1 | $ | 64.8 | ||||||
Reconciliation of segment performance to income (loss) from
continuing operations before income taxes: |
||||||||||||
Segment Performance |
$ | 94.7 | $ | 51.1 | $ | 64.8 | ||||||
Interest expense |
(38.6 | ) | (37.2 | ) | (36.8 | ) | ||||||
Interest income |
1.9 | 4.2 | 4.9 | |||||||||
Corporate retirement benefit plan income |
4.0 | 7.7 | 2.2 | |||||||||
Corporate and other expenses |
(17.4 | ) | (13.4 | ) | (17.7 | ) | ||||||
Corporate unusual items (see Note 13) |
(3.3 | ) | (16.6 | ) | (0.6 | ) | ||||||
Income (loss) from continuing operations before income taxes |
$ | 41.3 | $ | (4.2 | ) | $ | 16.8 | |||||
Aerospace and Defense |
$ | 14.3 | $ | 21.3 | $ | 20.3 | ||||||
Real Estate |
| | 1.5 | |||||||||
Corporate |
| | | |||||||||
Capital Expenditures |
$ | 14.3 | $ | 21.3 | $ | 21.8 | ||||||
Aerospace and Defense |
$ | 25.1 | $ | 24.7 | $ | 25.4 | ||||||
Real Estate |
0.6 | 0.8 | 0.9 | |||||||||
Corporate |
| | 0.1 | |||||||||
Depreciation and Amortization |
$ | 25.7 | $ | 25.5 | $ | 26.4 | ||||||
As of November 30, | ||||||||
2009 | 2008 | |||||||
As adjusted (Note 1(b)) (In millions) |
||||||||
Aerospace and Defense |
$ | 663.0 | $ | 709.3 | ||||
Real Estate |
70.9 | 62.6 | ||||||
Identifiable assets |
733.9 | 771.9 | ||||||
Corporate |
201.0 | 232.5 | ||||||
Discontinued operations |
| 0.1 | ||||||
Assets |
$ | 934.9 | $ | 1,004.5 | ||||
The Companys continuing operations are located in the United States. Inter-area sales are not
significant to the total sales of any geographic area. Unusual items included in segment
performance pertained only to the United States.
80
11. Quarterly Financial Data (Unaudited)
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
As adjusted (Note 1(b)) | ||||||||||||||||
(In millions, except per share amounts) | ||||||||||||||||
2009 |
||||||||||||||||
Net sales |
$ | 170.9 | $ | 183.0 | $ | 201.4 | $ | 240.1 | ||||||||
Cost of sales (exclusive of items shown separately on Statement of Operations) |
148.9 | 152.7 | 172.2 | 200.2 | ||||||||||||
Unusual items |
2.2 | 0.4 | 1.8 | 0.2 | ||||||||||||
Income from continuing operations before income taxes |
2.7 | 12.1 | 10.1 | 16.4 | ||||||||||||
Income from continuing operations |
23.2 | 10.6 | 10.8 | 14.3 | ||||||||||||
Loss from discontinued operations, net of income taxes |
(3.8 | ) | (1.4 | ) | (0.5 | ) | (1.0 | ) | ||||||||
Net income |
19.4 | 9.2 | 10.3 | 13.3 | ||||||||||||
Basic income per share from continuing operations |
0.40 | 0.18 | 0.18 | 0.24 | ||||||||||||
Basic loss per share from discontinued operations, net of income taxes |
(0.07 | ) | (0.02 | ) | (0.01 | ) | (0.01 | ) | ||||||||
Basic net income per share |
0.33 | 0.16 | 0.17 | 0.23 | ||||||||||||
Diluted income per share from continuing operations |
0.37 | 0.18 | 0.18 | 0.23 | ||||||||||||
Diluted loss per share from discontinued operations, net of income taxes |
(0.06 | ) | (0.02 | ) | (0.01 | ) | (0.01 | ) | ||||||||
Diluted net income per share |
$ | 0.31 | $ | 0.16 | $ | 0.17 | $ | 0.22 |
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
As adjusted (Note 1(b)) | ||||||||||||||||
(In millions, except per share amounts) | ||||||||||||||||
2008 |
||||||||||||||||
Net sales |
$ | 176.6 | $ | 194.7 | $ | 172.5 | $ | 198.5 | ||||||||
Cost of sales (exclusive of items shown separately on Statement of Operations) |
158.8 | 161.7 | 153.2 | 171.7 | ||||||||||||
Unusual items |
1.1 | 13.8 | 1.0 | 17.2 | ||||||||||||
Income (loss) from continuing operations before income taxes |
1.4 | 4.8 | (3.6 | ) | (6.8 | ) | ||||||||||
Income (loss) from continuing operations |
1.6 | 5.2 | (4.6 | ) | (7.3 | ) | ||||||||||
(Loss) income from discontinued operations, net of income taxes |
(0.3 | ) | | 0.2 | | |||||||||||
Net income (loss) |
1.3 | 5.2 | (4.4 | ) | (7.3 | ) | ||||||||||
Basic and diluted income (loss) per share from continuing operations |
0.03 | 0.09 | (0.08 | ) | (0.13 | ) | ||||||||||
Basic and diluted loss per share from discontinued operations, net of income taxes |
(0.01 | ) | | | | |||||||||||
Basic and diluted net income (loss) per share |
$ | 0.02 | $ | 0.09 | $ | (0.08 | ) | $ | (0.13 | ) |
12. Discontinued Operations
During the first quarter of fiscal 2007, the Company entered into an earn-out and seller note
repayment agreement (Repayment Agreement) related to the sale of the Fine Chemicals business to
American Pacific Corporation (AMPAC) under which AMPAC was required to pay $29.7 million in
consideration for the early retirement of a seller note (including interest due thereunder), the
full payment of the earn-out amount and the release of the Company from certain liabilities.
Accordingly, during the first quarter of fiscal 2007, the Company recorded a gain from discontinued
operations of $31.2 million as a result of receiving $29.7 million of cash from AMPAC and being
released from certain liabilities in accordance with the Repayment Agreement. For operating segment
reporting, the Fine Chemicals business was previously reported as a separate operating segment.
In November 2003, the Company announced the closing of a GDX manufacturing facility in
Chartres, France owned by Snappon SA, a subsidiary of the Company. The decision resulted primarily
from declining sales volumes with French automobile manufacturers. In June 2004, the Company
completed the legal process for closing the facility and establishing a social plan. In fiscal
2004, an expense of approximately $14.0 million related to employee social costs was recorded. An
expense of $1.0 million was recorded during fiscal 2005 primarily related to employee social costs
that became estimable in fiscal 2005. During fiscal 2009, Snappon SA had legal judgments rendered
against it under French law, aggregating 2.9 million plus interest (approximately $4.1 million)
related to wrongful discharge claims by certain former employees of Snappon SA. During the second
quarter of fiscal 2009, Snappon SA filed for declaration of suspensions of payments with the
clerks office of the Paris Commercial Court (see Note 7(b)).
81
Summarized financial information for discontinued operations is set forth below:
Year Ended | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(In millions) | ||||||||||||
Net sales |
$ | | $ | | $ | | ||||||
(Loss) income before income taxes |
(6.7 | ) | (0.2 | ) | 28.9 | |||||||
Income tax (benefit) provision |
| (0.1 | ) | 1.0 | ||||||||
(Loss) income from discontinued operations |
(6.7 | ) | (0.1 | ) | 27.9 |
As of November 30, 2008, the components of assets and liabilities of discontinued operations
in the consolidated balance sheets are as follows:
November 30, | ||||
2008 | ||||
(In millions) | ||||
Assets of discontinued operations, consisting of other assets |
$ | 0.1 | ||
Accounts payable |
$ | 0.3 | ||
Other liabilities |
0.7 | |||
Liabilities of discontinued operations |
$ | 1.0 | ||
13. Unusual Items
Charges and gains associated with unusual items are summarized as follows:
Year Ended | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(In millions) | ||||||||||||
Aerospace and Defense: |
||||||||||||
Legal settlements and estimated loss on legal matters |
$ | 1.3 | $ | 2.9 | $ | 3.8 | ||||||
Customer reimbursements of tax recoveries |
| | 2.3 | |||||||||
Defined benefit pension plan amendment |
| 13.6 | | |||||||||
Gain on recoveries |
| | (6.0 | ) | ||||||||
Aerospace and defense unusual items |
1.3 | 16.5 | 0.1 | |||||||||
Corporate: |
||||||||||||
Executive severance agreements |
3.1 | | | |||||||||
Loss on extinguishment of debt |
0.2 | | 0.6 | |||||||||
Gain on settlement |
| (1.2 | ) | | ||||||||
Defined benefit pension plan amendment |
| 1.0 | | |||||||||
Shareholder agreement and related costs |
| 16.8 | | |||||||||
Corporate unusual items |
3.3 | 16.6 | 0.6 | |||||||||
Total unusual items |
$ | 4.6 | $ | 33.1 | $ | 0.7 | ||||||
In fiscal 2009, the Company recorded a charge of $1.3 million for realized losses and interest
associated with its failure to register with the SEC the issuance of certain of the Companys
common shares under its defined contribution 401(k) employee benefit plan. During fiscal 2009, the
Company also incurred a charge of $3.1 million associated with executive severance agreements.
Additionally, the Company recorded costs of $0.2 million related to a bank amendment.
On November 25, 2008, the Company decided to amend the defined benefit pension and benefits
restoration plans to freeze future accruals under such plans. Effective February 1, 2009 and
July 31, 2009, future benefit accruals for all current salaried employees and collective bargaining
unit employees were discontinued, respectively. No employees lost their previously earned pension
benefits. As a result of the amendment and freeze, the Company incurred a curtailment charge of
$14.6 million in the fourth quarter of fiscal 2008 primarily due to the immediate recognition of
unrecognized prior service costs.
82
On March 5, 2008, the Company entered the Shareholder Agreement with respect to the election
of Directors for the 2008 Annual Meeting and certain other related matters which resulted in a
charge of $16.8 million in fiscal 2008 comprised of the following (in millions):
Increases in pension benefits primarily for certain of the Companys officers |
$ | 5.3 | ||
Executive severance charges |
7.1 | |||
Accelerated vesting of stock appreciation rights |
1.1 | |||
Accelerated vesting of restricted stock, service-based |
0.6 | |||
Accelerated vesting of restricted stock, performance-based |
0.7 | |||
Professional fees and other |
2.0 | |||
$ | 16.8 | |||
As a result of the Shareholder Agreement, the executive severance agreements required the
Company to fund into a grantor trust on March 12, 2008, an amount equal to $34.8 million, which
represents liabilities associated with the BRP and amounts payable to certain officers of the
Company party to executive severance agreements in the event of qualifying terminations of
employment following a change in control (as defined in the BRP and the executive severance
agreements) of the Company. In addition, as a result of the resignation of three additional Board
members on May 16, 2008, the Company was required to fund $0.4 million into a grantor trust on
May 22, 2008, which primarily represents the amount payable to an officer party to an executive
severance agreement in the event of a qualifying termination of employment.
In fiscal 2008, the Company recorded a charge of $2.9 million related to the estimated
unrecoverable costs of legal matters, including $1.7 million associated with the failure to
register with the SEC the issuance of certain of its common shares under its defined contribution
401(k) employee benefit plan and $1.2 million related to a legal settlement and other legal
matters. The Company recorded a $1.2 million gain related to an insurance settlement for an
environmental claim.
In fiscal 2007, the Company recorded an expense of $3.8 million related to estimated costs
associated with environmental toxic tort legal matters. The Company recorded an expense of
$2.3 million for tax refunds that were repaid to the Companys defense customers. The Company also
recorded an unusual gain of $6.0 million related to an adjustment of reserves for the allocation of
pension benefit costs to U.S. government contracts. The Company incurred a charge of $0.6 million
associated with the replacement of the previous credit facility.
14. Condensed Consolidating Financial Information
The Company is providing condensed consolidating financial information for its material
domestic subsidiaries that have guaranteed the 9 1/2% Notes, and for those subsidiaries that have
not guaranteed the 9 1/2% Notes. These 100% owned subsidiary guarantors have, jointly and
severally, fully and unconditionally guaranteed the 9 1/2% Notes. The subsidiary guarantees are
senior subordinated obligations of each subsidiary guarantor and rank (i) junior in right of
payment with all senior indebtedness, (ii) equal in right of payment with all senior subordinated
indebtedness, and (iii) senior in right of payment to all subordinated indebtedness, in each case,
of that subsidiary guarantor. The subsidiary guarantees will also be effectively subordinated to
any collateralized indebtedness of the subsidiary guarantor with respect to the assets
collateralizing that indebtedness. Absent both default and notice as specified in the Companys
Senior Credit Facility and agreements governing the Companys outstanding convertible notes and the
9 1/2% Notes, there are no restrictions on the Companys ability to obtain funds from its 100%
owned subsidiary guarantors by dividend or loan.
The Company has not presented separate financial and narrative information for each of the
subsidiary guarantors, because it believes that such financial and narrative information would not
provide investors with any additional information that would be material in evaluating the
sufficiency of the guarantees. Therefore, the following condensed consolidating financial
information summarizes the financial position, results of operations, and cash flows for the
Companys guarantor and non-guarantor subsidiaries.
83
Condensed Consolidating Statements of Operations
Guarantor | Non-guarantor | |||||||||||||||||||
November 30, 2009 (In millions): | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
As adjusted (Note 1(b)) | ||||||||||||||||||||
Net sales |
$ | | $ | 795.4 | $ | | $ | | $ | 795.4 | ||||||||||
Cost of sales (exclusive of items shown separately below) |
| 674.0 | | | 674.0 | |||||||||||||||
Selling, general and administrative |
(2.2 | ) | 12.4 | | | 10.2 | ||||||||||||||
Depreciation and amortization |
| 25.7 | | | 25.7 | |||||||||||||||
Interest expense |
33.1 | 5.5 | | | 38.6 | |||||||||||||||
Other, net |
7.2 | (1.6 | ) | | | 5.6 | ||||||||||||||
(Loss) income from continuing operations before income taxes |
(38.1 | ) | 79.4 | | | 41.3 | ||||||||||||||
Income tax (benefit) provision |
(63.0 | ) | 45.4 | | | (17.6 | ) | |||||||||||||
Income from continuing operations |
24.9 | 34.0 | | | 58.9 | |||||||||||||||
Loss from discontinued operations |
(2.9 | ) | | (3.8 | ) | | (6.7 | ) | ||||||||||||
Income (loss) before equity earnings (losses) of subsidiaries |
22.0 | 34.0 | (3.8 | ) | | 52.2 | ||||||||||||||
Equity earnings (losses) of subsidiaries |
30.2 | | | (30.2 | ) | | ||||||||||||||
Net income (loss) |
$ | 52.2 | $ | 34.0 | $ | (3.8 | ) | $ | (30.2 | ) | $ | 52.2 | ||||||||
Guarantor | Non-guarantor | |||||||||||||||||||
November 30, 2008 (In millions): | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
As adjusted (Note 1(b)) | ||||||||||||||||||||
Net sales |
$ | | $ | 742.3 | $ | | $ | | $ | 742.3 | ||||||||||
Cost of sales (exclusive of items shown separately below) |
| 645.4 | | | 645.4 | |||||||||||||||
Selling, general and administrative |
(19.8 | ) | 21.7 | | | 1.9 | ||||||||||||||
Depreciation and amortization |
| 25.5 | | | 25.5 | |||||||||||||||
Interest expense |
31.7 | 5.5 | | | 37.2 | |||||||||||||||
Other, net |
18.7 | 17.8 | | | 36.5 | |||||||||||||||
(Loss) income from continuing operations before income taxes |
(30.6 | ) | 26.4 | | | (4.2 | ) | |||||||||||||
Income tax (benefit) provision |
(8.6 | ) | 9.5 | | | 0.9 | ||||||||||||||
(Loss) income from continuing operations |
(22.0 | ) | 16.9 | | | (5.1 | ) | |||||||||||||
Income (loss) from discontinued operations |
0.2 | | (0.3 | ) | | (0.1 | ) | |||||||||||||
(Loss) income before equity earnings (losses) of subsidiaries |
(21.8 | ) | 16.9 | (0.3 | ) | | (5.2 | ) | ||||||||||||
Equity earnings (losses) of subsidiaries |
16.6 | | | (16.6 | ) | | ||||||||||||||
Net (loss) income |
$ | (5.2 | ) | $ | 16.9 | $ | (0.3 | ) | $ | (16.6 | ) | $ | (5.2 | ) | ||||||
Guarantor | Non-guarantor | |||||||||||||||||||
November 30, 2007 (In millions): | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
As adjusted (Note 1(b)) | ||||||||||||||||||||
Net sales |
$ | | $ | 745.4 | $ | | $ | | $ | 745.4 | ||||||||||
Cost of sales (exclusive of items shown separately below) |
| 657.8 | | | 657.8 | |||||||||||||||
Selling, general and administrative |
1.4 | 13.0 | | | 14.4 | |||||||||||||||
Depreciation and amortization |
0.1 | 26.3 | | | 26.4 | |||||||||||||||
Interest expense |
32.9 | 3.9 | | | 36.8 | |||||||||||||||
Other, net |
(1.9 | ) | (4.9 | ) | | | (6.8 | ) | ||||||||||||
(Loss) income from continuing operations before income taxes |
(32.5 | ) | 49.3 | | | 16.8 | ||||||||||||||
Income tax (benefit) provision |
(25.2 | ) | 7.1 | | | (18.1 | ) | |||||||||||||
(Loss) income from continuing operations |
(7.3 | ) | 42.2 | | | 34.9 | ||||||||||||||
Income (loss) from discontinued operations |
28.8 | | (0.9 | ) | | 27.9 | ||||||||||||||
Income (loss) before equity earnings (losses) of subsidiaries |
21.5 | 42.2 | (0.9 | ) | | 62.8 | ||||||||||||||
Equity earnings (losses) of subsidiaries |
41.3 | | | (41.3 | ) | | ||||||||||||||
Net income (loss) |
$ | 62.8 | $ | 42.2 | $ | (0.9 | ) | $ | (41.3 | ) | $ | 62.8 | ||||||||
84
Condensed Consolidating Balance Sheets
Guarantor | Non-guarantor | |||||||||||||||||||
November 30, 2009 (In millions): | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
As adjusted (Note 1(b)) | ||||||||||||||||||||
Cash and cash equivalents |
$ | 166.0 | $ | (39.8 | ) | $ | 0.1 | $ | | $ | 126.3 | |||||||||
Accounts receivable |
| 116.3 | | | 116.3 | |||||||||||||||
Inventories |
| 61.8 | | | 61.8 | |||||||||||||||
Recoverable from the U.S. government and other third
parties for environmental remediation costs and other |
0.1 | 30.5 | | | 30.6 | |||||||||||||||
Grantor trust |
1.5 | 0.9 | | | 2.4 | |||||||||||||||
Other receivables, prepaid expenses and other |
12.7 | 20.1 | | | 32.8 | |||||||||||||||
Income taxes |
43.2 | (40.8 | ) | | | 2.4 | ||||||||||||||
Total current assets |
223.5 | 149.0 | 0.1 | | 372.6 | |||||||||||||||
Property, plant and equipment, net |
0.4 | 129.5 | | | 129.9 | |||||||||||||||
Recoverable from the U.S. government and other third
parties for environmental remediation costs and other |
0.2 | 154.1 | | | 154.3 | |||||||||||||||
Grantor trust |
11.6 | 6.2 | | | 17.8 | |||||||||||||||
Goodwill |
| 94.9 | | | 94.9 | |||||||||||||||
Intercompany (payable) receivable, net |
(77.4 | ) | 97.1 | (19.7 | ) | | | |||||||||||||
Other noncurrent assets and intangibles, net |
116.9 | 159.3 | 9.9 | (120.7 | ) | 165.4 | ||||||||||||||
Total assets |
$ | 275.2 | $ | 790.1 | $ | (9.7 | ) | $ | (120.7 | ) | $ | 934.9 | ||||||||
Short-term borrowings and current portion of long-term debt |
$ | 17.8 | $ | | $ | | $ | | $ | 17.8 | ||||||||||
Accounts payable |
0.4 | 18.0 | | | 18.4 | |||||||||||||||
Reserves for environmental remediation costs |
7.2 | 37.3 | | | 44.5 | |||||||||||||||
Other current liabilities, advance payments on contracts,
and postretirement medical and life insurance benefits |
38.9 | 141.8 | | | 180.7 | |||||||||||||||
Total current liabilities |
64.3 | 197.1 | | | 261.4 | |||||||||||||||
Long-term debt |
403.8 | | | | 403.8 | |||||||||||||||
Reserves for environmental remediation costs |
4.4 | 173.8 | | | 178.2 | |||||||||||||||
Pension benefits |
22.1 | 202.9 | | | 225.0 | |||||||||||||||
Other noncurrent liabilities |
53.5 | 85.9 | | | 139.4 | |||||||||||||||
Total liabilities |
548.1 | 659.7 | | | 1,207.8 | |||||||||||||||
Commitments and contingencies (Note 7) |
||||||||||||||||||||
Redeemable common stock (Note 8) |
6.0 | | | | 6.0 | |||||||||||||||
Total shareholders (deficit) equity |
(278.9 | ) | 130.4 | (9.7 | ) | (120.7 | ) | (278.9 | ) | |||||||||||
Total liabilities, redeemable common stock, and
shareholders equity (deficit) |
$ | 275.2 | $ | 790.1 | $ | (9.7 | ) | $ | (120.7 | ) | $ | 934.9 | ||||||||
85
Guarantor | Non-guarantor | |||||||||||||||||||
November 30, 2008 (In millions): | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
As adjusted (Note 1(b)) | ||||||||||||||||||||
Cash and cash equivalents |
$ | 103.7 | $ | (11.2 | ) | $ | 0.2 | $ | | $ | 92.7 | |||||||||
Accounts receivable |
| 97.3 | | | 97.3 | |||||||||||||||
Inventories |
| 70.4 | | | 70.4 | |||||||||||||||
Recoverable from the U.S. government and other third
parties for environmental remediation costs and other |
| 43.7 | | | 43.7 | |||||||||||||||
Grantor trust |
1.3 | 0.3 | | | 1.6 | |||||||||||||||
Other receivables, prepaid expenses and other |
8.3 | 9.3 | | | 17.6 | |||||||||||||||
Income taxes |
11.5 | (0.9 | ) | | | 10.6 | ||||||||||||||
Assets of discontinued operations |
| | 0.1 | | 0.1 | |||||||||||||||
Total current assets |
124.8 | 208.9 | 0.3 | | 334.0 | |||||||||||||||
Property, plant and equipment, net |
0.4 | 137.5 | | | 137.9 | |||||||||||||||
Recoverable from the U.S. government and other third
parties for environmental remediation costs and other |
| 169.8 | | | 169.8 | |||||||||||||||
Prepaid pension asset |
76.8 | (0.3 | ) | | | 76.5 | ||||||||||||||
Grantor trust |
19.8 | 9.5 | | | 29.3 | |||||||||||||||
Goodwill |
| 94.9 | | | 94.9 | |||||||||||||||
Intercompany (payable) receivable, net |
(14.5 | ) | 29.6 | (15.1 | ) | | | |||||||||||||
Other noncurrent assets and intangibles, net |
308.6 | 150.5 | 9.9 | (306.9 | ) | 162.1 | ||||||||||||||
Total assets |
$ | 515.9 | $ | 800.4 | $ | (4.9 | ) | $ | (306.9 | ) | $ | 1,004.5 | ||||||||
Short-term borrowings and current portion of long-term debt |
$ | 1.4 | $ | 0.6 | $ | | $ | | $ | 2.0 | ||||||||||
Accounts payable |
0.7 | 32.0 | | | 32.7 | |||||||||||||||
Reserves for environmental remediation costs |
6.4 | 58.8 | | | 65.2 | |||||||||||||||
Other current liabilities, advance payments on contracts,
and postretirement medical and life insurance benefits |
28.9 | 118.6 | | | 147.5 | |||||||||||||||
Liabilities of discontinued operations |
| | 1.0 | | 1.0 | |||||||||||||||
Total current liabilities |
37.4 | 210.0 | 1.0 | | 248.4 | |||||||||||||||
Long-term debt |
414.1 | | | | 414.1 | |||||||||||||||
Reserves for environmental remediation costs |
6.6 | 186.4 | | | 193.0 | |||||||||||||||
Other noncurrent liabilities |
62.0 | 91.2 | | | 153.2 | |||||||||||||||
Total liabilities |
520.1 | 487.6 | 1.0 | | 1,008.7 | |||||||||||||||
Commitments and contingencies (Note 7) |
||||||||||||||||||||
Redeemable common stock (Note 8) |
7.6 | | | | 7.6 | |||||||||||||||
Total shareholders (deficit) equity |
(11.8 | ) | 312.8 | (5.9 | ) | (306.9 | ) | (11.8 | ) | |||||||||||
Total liabilities, redeemable common stock, and
shareholders equity (deficit) |
$ | 515.9 | $ | 800.4 | $ | (4.9 | ) | $ | (306.9 | ) | $ | 1,004.5 | ||||||||
86
Condensed Consolidating Statements of Cash Flows
Guarantor | Non-guarantor | |||||||||||||||||||
November 30, 2009 (In millions): | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net cash (used in) provided by operating activities |
$ | (0.2 | ) | $ | 55.3 | $ | (4.8 | ) | $ | | $ | 50.3 | ||||||||
Net transfers from (to) parent |
64.3 | (69.0 | ) | 4.7 | | | ||||||||||||||
Net cash (used in) provided by operating activities |
64.1 | (13.7 | ) | (0.1 | ) | | 50.3 | |||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Capital expenditures |
| (14.3 | ) | | | (14.3 | ) | |||||||||||||
Net cash used in investing activities |
| (14.3 | ) | | | (14.3 | ) | |||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Repayments on debt |
(1.4 | ) | (0.6 | ) | | | (2.0 | ) | ||||||||||||
Other financing activities |
(0.4 | ) | | | | (0.4 | ) | |||||||||||||
Net cash used in financing activities |
(1.8 | ) | (0.6 | ) | | | (2.4 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
62.3 | (28.6 | ) | (0.1 | ) | | 33.6 | |||||||||||||
Cash and cash equivalents at beginning of year |
103.7 | (11.2 | ) | 0.2 | | 92.7 | ||||||||||||||
Cash and cash equivalents at end of year |
$ | 166.0 | $ | (39.8 | ) | $ | 0.1 | $ | | $ | 126.3 | |||||||||
Guarantor | Non-guarantor | |||||||||||||||||||
November 30, 2008 (In millions): | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net cash (used in) provided by operating activities |
$ | (36.1 | ) | $ | 63.7 | $ | 0.4 | $ | | $ | 28.0 | |||||||||
Net transfers from (to) parent |
47.7 | (46.9 | ) | (0.8 | ) | | | |||||||||||||
Net cash (used in) provided by operating activities |
11.6 | 16.8 | (0.4 | ) | | 28.0 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Capital expenditures |
| (21.3 | ) | | | (21.3 | ) | |||||||||||||
Net cash used in investing activities |
| (21.3 | ) | | | (21.3 | ) | |||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Repayments on debt |
(6.3 | ) | | | | (6.3 | ) | |||||||||||||
Net cash used in financing activities |
(6.3 | ) | | | | (6.3 | ) | |||||||||||||
Net increase (decrease) in cash and cash equivalents |
5.3 | (4.5 | ) | (0.4 | ) | | 0.4 | |||||||||||||
Cash and cash equivalents at beginning of year |
98.4 | (6.7 | ) | 0.6 | | 92.3 | ||||||||||||||
Cash and cash equivalents at end of year |
$ | 103.7 | $ | (11.2 | ) | $ | 0.2 | $ | | $ | 92.7 | |||||||||
Guarantor | Non-guarantor | |||||||||||||||||||
November 30, 2007 (In millions): | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net cash (used in) provided by operating activities |
$ | (4.8 | ) | $ | 30.0 | $ | (1.4 | ) | $ | | $ | 23.8 | ||||||||
Net transfers from (to) parent |
3.6 | (5.1 | ) | 1.5 | | | ||||||||||||||
Net cash (used in) provided by operating activities |
(1.2 | ) | 24.9 | 0.1 | | 23.8 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Capital expenditures |
| (21.8 | ) | | | (21.8 | ) | |||||||||||||
Proceeds from business disposition |
29.7 | | | | 29.7 | |||||||||||||||
Other investing activities |
19.8 | | | | 19.8 | |||||||||||||||
Net cash provided by (used in) investing activities |
49.5 | (21.8 | ) | | | 27.7 | ||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Repayments on debt, net |
(20.8 | ) | | | | (20.8 | ) | |||||||||||||
Other financing activities |
0.4 | | | | 0.4 | |||||||||||||||
Net cash used in financing activities |
(20.4 | ) | | | | (20.4 | ) | |||||||||||||
Net increase in cash and cash equivalents |
27.9 | 3.1 | 0.1 | | 31.1 | |||||||||||||||
Cash and cash equivalents at beginning of year |
70.5 | (9.8 | ) | 0.5 | | 61.2 | ||||||||||||||
Cash and cash equivalents at end of year |
$ | 98.4 | $ | (6.7 | ) | $ | 0.6 | $ | | $ | 92.3 | |||||||||
87
15. Subsequent Events
In December 2009, the Company issued $200.0 million in aggregate principal amount of 4.0625%
Convertible Subordinated Debentures (4 1/16% Debentures) in a private placement to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The 4 1/16% Debentures
mature on December 31, 2039. Interest on the 4 1/16% Debentures accrues at 4.0625% per annum and is
payable semiannually in arrears on June 30 and December 31 of each year, beginning June 30, 2010
(or if any such day is not a business day, payable on the following business day), and the Company
may elect to pay interest in cash or, generally on any interest payment that is at least one year
after the original issuance date of the 4 1/16% Debentures, in shares of the Companys common stock
or a combination of cash and shares of the Companys common stock, at the Companys option. The
valuation methodology the Company will use in determining the value of any shares to be so
delivered is discussed in the indenture governing the 4 1/16% Debentures.
The 4 1/16% Debentures are general unsecured obligations and rank equal in right of payment to
all of the Companys other existing and future unsecured subordinated indebtedness, including the
4% Notes and 2 1/4% Debentures. The 4 1/16% Debentures rank junior in right of payment to all of
the Companys existing and future senior indebtedness, including all of its obligations under its
Senior Credit Facility and all of its existing and future senior subordinated indebtedness,
including the Companys outstanding 9 1/2% Notes. In addition, the 4 1/16% Debentures are
effectively subordinated to any of the Companys collateralized debt and to any and all debt and
liabilities, including trade debt of its subsidiaries.
Each holder of the 4 1/16% Debentures may convert their 4 1/16% Debentures into shares of the
Companys common stock at a conversion rate of 111.0926 shares per $1,000 principal amount,
representing a conversion price of approximately $9.00 per share, subject to adjustment. In
addition, if the holders elect to convert their 4 1/16% Debentures in connection with the
occurrence of certain fundamental changes, the holders will be entitled to receive additional
shares of common stock upon conversion in some circumstances. Upon any conversion of the 4 1/16%
Debentures, subject to certain exceptions, the holders will not receive any cash payment
representing accrued and unpaid interest.
The Company may at any time redeem any 4 1/16% Debentures for cash (except as described below
with respect to any make-whole premium that may be payable) if the last reported sale price of the
Companys common stock has been at least 150% of the conversion price then in effect for at least
twenty (20) trading days during any thirty (30) consecutive trading day period ending within five
(5) trading days prior to the date on which the Company provides the notice of redemption.
The Company may redeem the 4 1/16% Debentures either in whole or in part at a redemption price
equal to (i) 100% of the principal amount of the 4 1/16% Debentures to be redeemed, plus (ii)
accrued and unpaid interest, if any, up to, but excluding, the redemption date, plus (iii) if the
Company redeems the 4 1/16% Debentures prior to December 31, 2014, a make-whole premium equal to
the present value of the remaining scheduled payments of interest that would have been made on the
4 1/16% Debentures to be redeemed had such 4 1/16% Debentures remained outstanding from the
redemption date to December 31, 2014. Any make-whole premium is payable in cash, shares of the
Companys common stock or a combination of cash and shares, at the Companys option, subject to
certain conditions.
Each holder may require the Company to repurchase all or part of their 4 1/16% Debentures on
December 31, 2014, 2019, 2024, 2029 and 2034 (each, an optional repurchase date) at an optional
repurchase price equal to (1) 100% of their principal amount plus (2) accrued and unpaid interest,
if any, up to, but excluding, the date of repurchase. The Company may elect to pay the optional
repurchase price in cash, shares of the Companys common stock, or a combination of cash and shares
of the Companys common stock, at the Companys option, subject to certain conditions.
If a fundamental change, as described in the indenture governing the 4 1/16% Debentures,
occurs prior to maturity, each holder will have the right to require the Company to purchase all or
part of their 4 1/16% Debentures for cash at a repurchase price equal to 100% of their principal
amount, plus accrued and unpaid interest, if any, up to, but excluding, the repurchase date.
If the Company delivers shares of its common stock as all or part of any interest payment, any
make-whole premium or any optional repurchase price, such shares will be valued at the product of
(x) the price per share of the Companys common stock determined during: (i) in the case of any
interest payment, the twenty (20) consecutive trading days ending on the second trading day
immediately preceding the record date for such interest payment; (ii) in the case of any make-whole
premium payable as part of the redemption price, the twenty (20) consecutive trading days ending on
the second trading day immediately preceding the redemption date; and (iii) in the case of any
optional repurchase price, the forty (40) consecutive trading days ending on the second trading day
immediately preceding the optional repurchase date; (in each case, the averaging period with
respect to such date) using the sum of the daily price fractions (where daily price fraction
means, for each trading day during the relevant averaging period, 5% in the case
88
of any interest payment or any make-whole premium or 2.5% in the case of any optional
repurchase, multiplied by the daily VWAP (VWAP as defined by the indenture), per share of the
Companys common stock for such day), multiplied by (y) 97.5%. The Company will notify holders at
least five (5) business days prior to the start of the relevant averaging period of the extent to
which the Company will pay any portion of the related payment using shares of common stock.
Issuance of the 4 1/16% Debentures generated net proceeds of $194.1 million, which were used
to repurchase $124.7 million of the 4% Notes and will be used to redeem a portion of the 9 1/2%
Notes; pay accrued interest on the 4% Notes and 9 1/2% Notes; and pay other debt issuance costs.
89