Attached files
file | filename |
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EX-31.2 - EX-31.2 - AEROJET ROCKETDYNE HOLDINGS, INC. | f58856exv31w2.htm |
EX-32.1 - EX-32.1 - AEROJET ROCKETDYNE HOLDINGS, INC. | f58856exv32w1.htm |
EX-31.1 - EX-31.1 - AEROJET ROCKETDYNE HOLDINGS, INC. | f58856exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended: February 28, 2011
or
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ______________ to ______________
Commission File Number 1-01520
GenCorp Inc.
(Exact name of registrant as specified in its charter)
Ohio (State of Incorporation) |
34-0244000 (I.R.S. Employer Identification No.) |
|
Highway 50 and Aerojet Road Rancho Cordova, California (Address of Principal Executive Offices) |
95742 (Zip Code) |
|
P.O. Box 537012 Sacramento, California (Mailing Address) |
95853-7012 (Zip Code) |
Registrants telephone number, including area code (916) 355-4000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o The
registrant is not yet subject to this requirement.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of March 31, 2011, there were 58.7 million outstanding shares of our Common Stock,
including redeemable common stock, $0.10 par value.
GenCorp Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended February 28, 2011
For the Quarterly Period Ended February 28, 2011
Table of Contents
Item | ||||||||
Number | Page | |||||||
PART I FINANCIAL INFORMATION | ||||||||
3 | ||||||||
33 | ||||||||
47 | ||||||||
47 | ||||||||
PART II OTHER INFORMATION | ||||||||
48 | ||||||||
48 | ||||||||
48 | ||||||||
48 | ||||||||
48 | ||||||||
48 | ||||||||
SIGNATURES | ||||||||
Signatures |
||||||||
EXHIBIT INDEX | ||||||||
Exhibit Index |
50 | |||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
2
Table of Contents
Part I FINANCIAL INFORMATION
Item 1. | Financial Statements |
GenCorp Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
(In millions, except per share amounts) | ||||||||
Net sales |
$ | 209.8 | $ | 186.8 | ||||
Operating costs and expenses: |
||||||||
Cost of sales (exclusive of items shown separately below) |
180.6 | 169.7 | ||||||
Selling, general and administrative |
10.3 | 5.0 | ||||||
Depreciation and amortization |
5.7 | 6.0 | ||||||
Other expense, net |
1.2 | 0.1 | ||||||
Unusual items: |
||||||||
Legal related matters |
0.2 | 0.2 | ||||||
Gain on debt repurchased |
(0.2 | ) | | |||||
Executive severance agreement |
| 1.4 | ||||||
Total operating costs and expenses |
197.8 | 182.4 | ||||||
Operating income |
12.0 | 4.4 | ||||||
Non-operating (income) and expense: |
||||||||
Interest income |
(0.3 | ) | (0.3 | ) | ||||
Interest expense |
7.8 | 10.4 | ||||||
Total non-operating expenses, net |
7.5 | 10.1 | ||||||
Income (loss) from continuing operations before income taxes |
4.5 | (5.7 | ) | |||||
Income tax provision |
2.6 | 4.2 | ||||||
Income (loss) from continuing operations |
1.9 | (9.9 | ) | |||||
(Loss) income from discontinued operations, net of income taxes |
(0.7 | ) | 1.0 | |||||
Net income (loss) |
$ | 1.2 | $ | (8.9 | ) | |||
Income (Loss) Per Share of Common Stock |
||||||||
Basic: |
||||||||
Income (loss) per share from continuing operations |
$ | 0.03 | $ | (0.17 | ) | |||
(Loss) income per share from discontinued operations, net of income taxes |
(0.01 | ) | 0.02 | |||||
Net income (loss) per share |
$ | 0.02 | $ | (0.15 | ) | |||
Diluted: |
||||||||
Income (loss) per share from continuing operations |
$ | 0.03 | $ | (0.17 | ) | |||
(Loss) income per share from discontinued operations, net of income taxes |
(0.01 | ) | 0.02 | |||||
Net income (loss) per share |
$ | 0.02 | $ | (0.15 | ) | |||
Weighted average shares of common stock outstanding |
58.6 | 58.5 | ||||||
Weighted average shares of common stock outstanding, assuming dilution |
58.6 | 58.5 | ||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
Table of Contents
GenCorp Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
Condensed Consolidated Balance Sheets
(Unaudited)
February 28, | November 30, | |||||||
2011 | 2010 | |||||||
(In millions, except per share amounts) | ||||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 211.6 | $ | 181.5 | ||||
Marketable securities |
5.0 | 26.7 | ||||||
Accounts receivable |
109.8 | 106.7 | ||||||
Inventories |
48.8 | 51.1 | ||||||
Recoverable from the U.S. government and other third parties for environmental remediation costs
and other |
39.5 | 32.0 | ||||||
Grantor trust |
1.8 | 1.8 | ||||||
Other receivables, prepaid expenses and other |
22.7 | 25.3 | ||||||
Income taxes |
5.4 | 7.5 | ||||||
Total Current Assets |
444.6 | 432.6 | ||||||
Noncurrent Assets |
||||||||
Property, plant and equipment, net |
124.0 | 126.4 | ||||||
Real estate held for entitlement and leasing |
60.5 | 59.9 | ||||||
Recoverable from the U.S. government and other third parties for environmental remediation costs
and other |
145.6 | 151.5 | ||||||
Grantor trust |
14.2 | 14.5 | ||||||
Goodwill |
94.9 | 94.9 | ||||||
Intangible assets |
16.5 | 16.9 | ||||||
Other noncurrent assets, net |
89.3 | 94.8 | ||||||
Total Noncurrent Assets |
545.0 | 558.9 | ||||||
Total Assets |
$ | 989.6 | $ | 991.5 | ||||
LIABILITIES, REDEEMABLE COMMON STOCK, AND SHAREHOLDERS DEFICIT |
||||||||
Current Liabilities |
||||||||
Short-term borrowings and current portion of long-term debt |
$ | 60.2 | $ | 66.0 | ||||
Accounts payable |
34.0 | 27.1 | ||||||
Reserves for environmental remediation costs |
50.5 | 40.7 | ||||||
Postretirement medical and life benefits |
7.1 | 7.1 | ||||||
Advance payments on contracts |
112.6 | 110.0 | ||||||
Other current liabilities |
96.4 | 110.3 | ||||||
Total Current Liabilities |
360.8 | 361.2 | ||||||
Noncurrent Liabilities |
||||||||
Senior debt |
50.5 | 50.6 | ||||||
Senior subordinated notes |
75.0 | 75.0 | ||||||
Convertible subordinated notes |
200.0 | 200.0 | ||||||
Other debt |
1.0 | 1.1 | ||||||
Deferred income taxes |
7.8 | 7.6 | ||||||
Reserves for environmental remediation costs |
169.4 | 177.0 | ||||||
Pension benefits |
170.2 | 175.5 | ||||||
Postretirement medical and life benefits |
71.1 | 71.8 | ||||||
Other noncurrent liabilities |
61.5 | 66.8 | ||||||
Total Noncurrent Liabilities |
806.5 | 825.4 | ||||||
Total Liabilities |
1,167.3 | 1,186.6 | ||||||
Commitments and Contingencies (Note 7) |
||||||||
Redeemable common stock, par value of $0.10; 0.5 million shares issued and outstanding as of
February 28, 2011 and November 30, 2010 (Note 8) |
4.9 | 5.1 | ||||||
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; 58.2 million shares issued
and outstanding as of February 28, 2011; 58.1 million shares issued and outstanding as of
November 30, 2010 |
5.9 | 5.9 | ||||||
Other capital |
258.0 | 257.3 | ||||||
Accumulated deficit |
(181.0 | ) | (182.2 | ) | ||||
Accumulated other comprehensive loss, net of income taxes |
(265.5 | ) | (281.2 | ) | ||||
Total Shareholders Deficit |
(182.6 | ) | (200.2 | ) | ||||
Total Liabilities, Redeemable Common Stock and Shareholders Deficit |
$ | 989.6 | $ | 991.5 | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
Table of Contents
GenCorp Inc.
Condensed Consolidated Statement of Shareholders Deficit and Comprehensive Income
(Unaudited)
Condensed Consolidated Statement of Shareholders Deficit and Comprehensive Income
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||
Other | Total | |||||||||||||||||||||||||||
Comprehensive | Common Stock | Other | Accumulated | Comprehensive | Shareholders | |||||||||||||||||||||||
Income | Shares | Amount | Capital | Deficit | Loss | Deficit | ||||||||||||||||||||||
(In millions, except share amounts) | ||||||||||||||||||||||||||||
November 30, 2010 |
58,094,443 | $ | 5.9 | $ | 257.3 | $ | (182.2 | ) | $ | (281.2 | ) | $ | (200.2 | ) | ||||||||||||||
Net income |
$ | 1.2 | | | | 1.2 | | 1.2 | ||||||||||||||||||||
Amortization of actuarial losses, net |
15.7 | | | | | 15.7 | 15.7 | |||||||||||||||||||||
Reclassification from redeemable
common stock |
| 21,619 | | 0.2 | | | 0.2 | |||||||||||||||||||||
Stock-based compensation |
| 57,349 | | 1.0 | | | 1.0 | |||||||||||||||||||||
Repurchase of convertible debt |
| | | (0.5 | ) | | | (0.5 | ) | |||||||||||||||||||
February 28, 2011 |
$ | 16.9 | 58,173,411 | $ | 5.9 | $ | 258.0 | $ | (181.0 | ) | $ | (265.5 | ) | $ | (182.6 | ) | ||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
Table of Contents
GenCorp Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Operating Activities |
||||||||
Net income (loss) |
$ | 1.2 | $ | (8.9 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Loss (income) from discontinued operations, net of income taxes |
0.7 | (1.0 | ) | |||||
Depreciation and amortization |
5.7 | 6.0 | ||||||
Amortization of debt discount and financing costs |
1.7 | 3.2 | ||||||
Stock compensation |
1.2 | (1.5 | ) | |||||
Net recognized loss on marketable securities |
| 0.1 | ||||||
Gain on debt repurchased |
(0.2 | ) | | |||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(3.1 | ) | 20.0 | |||||
Inventories |
2.3 | 8.5 | ||||||
Grantor trust |
0.3 | 1.6 | ||||||
Other receivables, prepaid expenses and other |
(4.7 | ) | 7.3 | |||||
Income tax receivable |
2.1 | 2.4 | ||||||
Real estate held for entitlement and leasing |
(0.7 | ) | (1.1 | ) | ||||
Other noncurrent assets |
10.1 | 4.8 | ||||||
Accounts payable |
6.9 | 5.7 | ||||||
Pension benefits |
11.4 | 10.1 | ||||||
Postretirement medical and life benefits |
(1.5 | ) | (1.5 | ) | ||||
Advance payments on contracts |
2.6 | 23.6 | ||||||
Other current liabilities |
(5.1 | ) | 6.2 | |||||
Deferred income taxes |
0.2 | 1.5 | ||||||
Other noncurrent liabilities |
(13.4 | ) | (9.3 | ) | ||||
Net cash provided by continuing operations |
17.7 | 77.7 | ||||||
Net cash used in discontinued operations |
(0.1 | ) | (0.3 | ) | ||||
Net Cash Provided by Operating Activities |
17.6 | 77.4 | ||||||
Investing Activities |
||||||||
Purchases of investments with restricted cash |
| (195.0 | ) | |||||
Sales of investments with restricted cash |
| 127.7 | ||||||
Purchases of marketable securities |
| (75.9 | ) | |||||
Sales of marketable securities |
21.7 | 30.9 | ||||||
Capital expenditures |
(2.0 | ) | (4.2 | ) | ||||
Net Cash Provided by (Used in) Investing Activities |
19.7 | (116.5 | ) | |||||
Financing Activities |
||||||||
Proceeds from the issuance of debt |
| 200.0 | ||||||
Debt issuance costs |
| (5.9 | ) | |||||
Debt repayments |
(7.2 | ) | (142.2 | ) | ||||
Net Cash (Used in) Provided by Financing Activities |
(7.2 | ) | 51.9 | |||||
Net Increase in Cash and Cash Equivalents |
30.1 | 12.8 | ||||||
Cash and Cash Equivalents at Beginning of Period |
181.5 | 126.3 | ||||||
Cash and Cash Equivalents at End of Period |
$ | 211.6 | $ | 139.1 | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
6
Table of Contents
GenCorp
Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation and Nature of Operations
GenCorp Inc. (GenCorp or the Company) has prepared the accompanying Unaudited Condensed
Consolidated Financial Statements, including its accounts and the accounts of its wholly owned and
majority-owned subsidiaries, in accordance with the instructions to Form 10-Q. The year-end
condensed consolidated balance sheet was derived from audited financial statements but does not
include all of the disclosures required by accounting principles generally accepted in the United
States of America (GAAP). These interim financial statements should be read in conjunction with
the financial statements and accompanying notes included in our Annual Report on Form 10-K for the
fiscal year ended November 30, 2010, as filed with the Securities and Exchange Commission (SEC).
Certain reclassifications have been made to financial information from the prior year to conform
with the current years presentation.
The Company believes the accompanying Unaudited Condensed Consolidated Financial Statements
reflect all adjustments, including normal recurring accruals, necessary for a fair statement of its
financial position, results of operations, and cash flows for the periods presented. All
significant intercompany balances and transactions have been eliminated in consolidation. The
preparation of the consolidated financial statements in conformity with 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. In addition,
the operating results for interim periods may not be indicative of the results of operations for a
full year.
The Companys fiscal year ends on November 30 of each year. The fiscal year of the Companys
wholly owned subsidiary, Aerojet-General Corporation (Aerojet), ends on the last Saturday of
November.
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 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.). Major market segments include space launch and
in-space propulsion systems, missile defense, tactical missile systems, and force projection and
protection systems. Primary customers served include major prime contractors to the U.S.
government, the Department of Defense (DoD), and the National Aeronautics and Space
Administration (NASA).
Real Estate includes the activities of the Companys wholly owned subsidiary Easton
Development Company, LLC 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.
On August 31, 2004, the Company completed the sale of its GDX Automotive (GDX) business.
The remaining subsidiaries of GDX, including Snappon SA, are classified as discontinued operations
in these Unaudited Condensed Consolidated Financial Statements (see Note 11).
A detailed description of the Companys significant accounting policies can be found in the
Companys most recent Annual Report on Form 10-K for the fiscal year ended November 30, 2010.
Recently Adopted Accounting Pronouncements
As of December 1, 2010, the Company adopted the new accounting standards related to the use of
the milestone method of revenue recognition that applies to research or development transactions in
which one or more payments are contingent upon achieving uncertain future events or circumstances.
The adoption of the new standards did not have a material impact on the Companys financial
position, results of operations, or cash flows.
7
Table of Contents
New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued updated guidance to
improve disclosures regarding fair value measurements. This update requires entities to (i)
disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair
value measurements and describe the reasons for the transfers and (ii) present separately (i.e., on
a gross basis rather than as one net number), information about purchases, sales, issuances, and
settlements in the roll forward of changes in Level 3 fair value measurements. The update requires
fair value disclosures by class of assets and liabilities rather than by major category or line
item in the statement of financial position. Disclosures regarding the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value measurements for
assets and liabilities in both Level 2 and Level 3 are also required. For all portions of the
update except the gross presentation of activity in the Level 3 roll forward, this standard was
effective for the Company on March 1, 2010. For the gross presentation of activity in the Level 3
roll forward, the new disclosures will be presented in the Companys quarterly financial statements
for the period ending February 28, 2012.
In December 2010, the FASB issued authoritative guidance on application of goodwill impairment
model when a reporting unit has a zero or negative carrying amount. When a reporting unit has a
zero or negative carrying value, Step 2 of the goodwill impairment test should be performed if
qualitative factors indicate that it is more likely than not that a goodwill impairment exists. The
guidance is effective for the Company beginning in the first quarter of fiscal 2012. The Company is
currently evaluating the potential impact, if any, of the adoption of this guidance on its
consolidated financial statements.
In December 2010, the FASB issued authoritative guidance on disclosure of supplementary pro
forma information for business combinations. The new guidance requires that pro forma financial
information should be prepared as if the business combination occurred as of the beginning of the
prior annual period. The guidance is effective for the Company for business combinations with
acquisition dates occurring in and from the first quarter of fiscal 2012.
8
Table of Contents
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:
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 (1) | 2010 | |||||||
(In millions, except per share | ||||||||
amounts; shares in thousands) | ||||||||
Numerator for Basic and Diluted EPS: |
||||||||
Income (loss) from continuing operations |
$ | 1.9 | $ | (9.9 | ) | |||
(Loss) income from discontinued operations, net of income taxes |
(0.7 | ) | 1.0 | |||||
Net income (loss) for basic and diluted earnings per share |
$ | 1.2 | $ | (8.9 | ) | |||
Denominator for Basic and Diluted EPS: |
||||||||
Basic and diluted weighted average shares |
58,607 | 58,495 | ||||||
Basic: |
||||||||
Income (loss) per share from continuing operations |
$ | 0.03 | $ | (0.17 | ) | |||
(Loss) income per share from discontinued operations, net of income taxes |
(0.01 | ) | 0.02 | |||||
Net income (loss) per share |
$ | 0.02 | $ | (0.15 | ) | |||
Diluted: |
||||||||
Income (loss) per share from continuing operations |
$ | 0.03 | $ | (0.17 | ) | |||
(Loss) income per share from discontinued operations, net of income taxes |
(0.01 | ) | 0.02 | |||||
Net income (loss) per share |
$ | 0.02 | $ | (0.15 | ) | |||
(1) | The undistributed income allocated to participating securities was less than $0.1 million. |
The following table sets forth the potentially dilutive securities excluded from the
computation because their effect would have been anti-dilutive:
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
4% Contingent Convertible Subordinated Notes (4% Notes) (1) |
| 4,591 | ||||||
4.0625% Convertible Subordinated Debentures (4 1/16% Debentures) (2) |
22,219 | 17,034 | ||||||
Employee stock options |
1,239 | 1,169 | ||||||
Unvested restricted shares |
620 | 287 | ||||||
Total potentially dilutive securities |
24,078 | 23,081 | ||||||
(1) | In January 2010, the Company redeemed $124.7 million principal amount of the 4% Notes which were presented to the Company for payment. The Company redeemed the remaining $0.3 million of the 4% Notes in March 2010. | |
(2) | In December 2009, the Company issued $200.0 million principal amount of the 4 1/16% Debentures. |
The Companys 21/4% Convertible Subordinated Debentures (21/4% 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.
9
Table of Contents
3. Stock Based Compensation
Total stock-based compensation expense (benefit) by type of award for the first quarter of
fiscal 2011 and 2010 was as follows:
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Stock appreciation rights |
$ | 0.2 | $ | (1.6 | ) | |||
Stock options |
0.3 | | ||||||
Restricted stock, service based |
0.4 | 0.1 | ||||||
Restricted stock, performance based |
0.3 | | ||||||
Total stock-based compensation expense (benefit) |
$ | 1.2 | $ | (1.5 | ) | |||
4. Income Taxes
The income tax provision of $2.6 million in the first quarter of fiscal 2011 is primarily
related to current state taxes of $1.8 million, and net deferred taxes of $0.8 million, which
represents the excess of federal and state deferred taxes from goodwill amortization over
alternative minimum tax credits and research credits.
The income tax provision of $4.2 million in the first quarter of fiscal 2010 is primarily
related to current federal alternative minimum taxes of $1.7 million, current state taxes of $1.1
million, and deferred taxes of $1.4 million related to the amortization of goodwill.
5. Balance Sheet Accounts
a. 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 no market data exists, therefore requiring an entity to develop its own
assumptions. The following are measured at fair value:
Fair value measurement at February 28, 2011 | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets | Other | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(In millions) | ||||||||||||||||
Money market funds |
$ | 203.5 | $ | 203.5 | $ | | $ | | ||||||||
Commercial paper |
24.0 | | 24.0 | | ||||||||||||
Total |
$ | 227.5 | $ | 203.5 | $ | 24.0 | $ | | ||||||||
Fair value measurement at November 30, 2010 | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets | Other | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(In millions) | ||||||||||||||||
Money market funds |
$ | 154.2 | $ | 154.2 | $ | | $ | | ||||||||
Commercial paper |
63.4 | | 63.4 | | ||||||||||||
Total |
$ | 217.6 | $ | 154.2 | $ | 63.4 | $ | | ||||||||
10
Table of Contents
As of February 28, 2011, a summary of cash and cash equivalents, marketable securities, and
grantor trust by investment type is as follows:
Cash and | Money Market | Commercial | ||||||||||||||
Total | Cash Equivalents | Funds | Paper | |||||||||||||
(In millions) | ||||||||||||||||
Cash and cash equivalents |
$ | 211.6 | $ | 5.4 | $ | 187.2 | $ | 19.0 | ||||||||
Marketable securities |
5.0 | | | 5.0 | ||||||||||||
Grantor trust(1) |
16.3 | | 16.3 | | ||||||||||||
$ | 232.9 | $ | 5.4 | $ | 203.5 | $ | 24.0 | |||||||||
(1) | Includes $0.3 million in accrued amounts reimbursable to the Company which are reflected in other current assets. |
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 | |||||||||||||||
February 28, | November 30, | February 28, | November 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Term loan |
$ | 49.7 | $ | 49.8 | $ | 51.0 | $ | 51.1 | ||||||||
91/2% Senior Subordinated Notes (91/2% Notes) |
76.1 | 75.9 | 75.0 | 75.0 | ||||||||||||
21/4% Debentures(1) |
61.5 | 67.6 | 62.1 | 68.6 | ||||||||||||
4 1/16% Debentures |
191.0 | 183.8 | 200.0 | 200.0 | ||||||||||||
Other debt |
1.3 | 2.0 | 1.3 | 2.0 | ||||||||||||
$ | 379.6 | $ | 379.1 | $ | 389.4 | $ | 396.7 | |||||||||
(1) | Excludes the unamortized debt discount of $2.7 million and $4.0 million as of February 28, 2011 and November 30, 2010, respectively. |
The fair values of the term loan, 91/2% Notes, 21/4% Debentures, and 4 1/16% Debentures were
determined using broker quotes that are based on open markets of the Companys debt securities as
of February 28, 2011 and November 30, 2010, respectively. The fair value of the other debt was
determined to approximate carrying value.
b. Marketable Securities
As of February 28, 2011, the Companys short-term available-for-sale investments were as
follows:
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In millions) | ||||||||||||||||
Commercial paper |
$ | 24.0 | $ | | $ | | $ | 24.0 |
As of February 28, 2011, of the total estimated fair value, $19.0 million was classified as
cash and cash equivalents because the remaining maturity at date of purchase was less than three
months and $5.0 million was classified as marketable securities. At February 28, 2011, the
contractual maturities of the Companys available-for-sale marketable securities were less than one
year.
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As of November 30, 2010, the Companys short-term available-for-sale investments were as
follows:
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In millions) | ||||||||||||||||
Commercial paper |
$ | 63.4 | $ | | $ | | $ | 63.4 |
As of November 30, 2010, of the total estimated fair value, $36.7 million was classified as
cash and cash equivalents as the remaining maturity at date of purchase was less than three months
and $26.7 million was classified as marketable securities. At November 30, 2010, the contractual
maturities of the Companys available-for-sale marketable securities were less than one year.
c. Accounts Receivable
February 28, | November 30, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Billed |
$ | 45.9 | $ | 58.0 | ||||
Unbilled |
62.6 | 46.9 | ||||||
Total receivables under long-term contracts |
108.5 | 104.9 | ||||||
Other receivables |
1.3 | 1.8 | ||||||
Accounts receivable |
$ | 109.8 | $ | 106.7 | ||||
d. Inventories
February 28, | November 30, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Long-term contracts at average cost |
$ | 230.4 | $ | 230.3 | ||||
Progress payments |
(182.6 | ) | (180.2 | ) | ||||
Total long-term contract inventories |
47.8 | 50.1 | ||||||
Raw materials |
0.6 | 0.5 | ||||||
Work in progress |
0.2 | 0.5 | ||||||
Finished goods |
0.2 | | ||||||
Total other inventories |
1.0 | 1.0 | ||||||
Inventories |
$ | 48.8 | $ | 51.1 | ||||
e. Property, Plant and Equipment, net
February 28, | November 30, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Land |
$ | 33.1 | $ | 33.2 | ||||
Buildings and improvements |
155.3 | 154.7 | ||||||
Machinery and equipment |
358.6 | 359.3 | ||||||
Construction-in-progress |
12.0 | 11.8 | ||||||
559.0 | 559.0 | |||||||
Less: accumulated depreciation |
(435.0 | ) | (432.6 | ) | ||||
Property, plant and equipment, net |
$ | 124.0 | $ | 126.4 | ||||
f. Other Noncurrent Assets, net
February 28, | November 30, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Receivable from Northrop Grumman Corporation (see Note 7(c)) |
$ | 58.9 | $ | 58.6 | ||||
Deferred financing costs |
7.7 | 8.5 | ||||||
Other |
22.7 | 27.7 | ||||||
Other noncurrent assets, net |
$ | 89.3 | $ | 94.8 | ||||
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g. Other Current Liabilities
February 28, | November 30, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Accrued compensation and employee benefits |
$ | 39.7 | $ | 49.4 | ||||
Legal settlements |
10.8 | 10.6 | ||||||
Interest payable |
4.0 | 7.4 | ||||||
Contract loss provisions |
2.4 | 3.3 | ||||||
Deferred revenue |
1.6 | 1.5 | ||||||
Other |
37.9 | 38.1 | ||||||
Other current liabilities |
$ | 96.4 | $ | 110.3 | ||||
h. Other Noncurrent Liabilities
February 28, | November 30, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Pension benefits, non-qualified |
$ | 15.6 | $ | 15.6 | ||||
Conditional asset retirement obligations |
16.1 | 15.3 | ||||||
Legal settlements |
7.6 | 13.8 | ||||||
Deferred revenue |
9.7 | 9.8 | ||||||
Deferred compensation |
7.4 | 7.0 | ||||||
Other |
5.1 | 5.3 | ||||||
Other noncurrent liabilities |
$ | 61.5 | $ | 66.8 | ||||
i. Accumulated Other Comprehensive Loss, Net of Income Taxes
February 28, | November 30, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Actuarial losses, net |
$ | (270.2 | ) | $ | (285.9 | ) | ||
Prior service credits |
4.7 | 4.7 | ||||||
Accumulated other comprehensive loss, net of income taxes |
$ | (265.5 | ) | $ | (281.2 | ) | ||
During the first quarter of fiscal 2011 and 2010, the Company had comprehensive income of
$16.9 million and $4.8 million, respectively. The components of accumulated other comprehensive
loss related to the Companys retirement benefit plans.
Market conditions and interest rates significantly affect assets and liabilities of the
Companys pension plans. Pension accounting permits market gains and losses to 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 retirement benefit expense, future expenses are impacted by
changes in the market value of pension plan assets and changes in interest rates.
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6. Long-term Debt
February 28, | November 30, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Term loan, bearing interest at variable rates (rate of 3.52% as
of February 28, 2011), payable in quarterly installments of $0.1
million plus interest, maturing in April 2013 |
$ | 51.0 | $ | 51.1 | ||||
Total senior debt |
51.0 | 51.1 | ||||||
Senior subordinated notes, bearing interest at 9.50% per annum,
interest payments due in February and August, maturing in August 2013 |
75.0 | 75.0 | ||||||
Total senior subordinated notes |
75.0 | 75.0 | ||||||
Convertible subordinated debentures, bearing interest at 2.25% per
annum, interest payments due in May and November,
maturing in November 2024, net of debt discount |
59.4 | 64.6 | ||||||
Convertible subordinated debentures, bearing interest at 4.0625% per
annum, interest payments due in June and December, maturing in
December 2034 |
200.0 | 200.0 | ||||||
Total convertible subordinated notes |
259.4 | 264.6 | ||||||
Capital lease, payable in monthly installments, maturing in March 2017 |
1.3 | 1.3 | ||||||
Promissory note, bearing interest at 5% per annum |
| 0.7 | ||||||
Total other debt |
1.3 | 2.0 | ||||||
Total debt |
386.7 | 392.7 | ||||||
Less: Amounts due within one year |
(60.2 | ) | (66.0 | ) | ||||
Total long-term debt |
$ | 326.5 | $ | 326.7 | ||||
Senior Credit Facility
The Companys Senior Credit Facility provides for a $65.0 million revolving credit facility
(Revolver) and a $175.0 million credit-linked facility, consisting of a $100.0 million letter of
credit subfacility and a $75.0 million term loan subfacility. On March 17, 2010, the Company
executed an amendment (the Second Amendment) to the Companys existing Amended and Restated
Credit Agreement, originally entered into as of June 21, 2007, by and among the Company, as
borrower, the subsidiaries of the Company from time to time party thereto, as guarantors, the
lenders from time to time party thereto and Wachovia Bank, National Association, as administrative
agent for the lenders, as amended to date (the Credit Agreement). The Second Amendment, among
other things, (i) permits the Company to repurchase its outstanding convertible subordinated notes
and senior subordinated notes, subject to certain conditions; (ii) permits the Company to incur
additional senior unsecured or subordinated indebtedness, subject to specified limits and other
conditions; (iii) permits the Company to conduct a rescission offer, using stock and/or cash up to
$15.0 million, with respect to certain units issued under the GenCorp Savings Plan; (iv) permits
the Company to repurchase its stock, subject to certain conditions; (v) limits the circumstances
under which the Company would have to mandatorily prepay loans under the Senior Credit Facility
with the proceeds from equity issuances; and (vi) amends the definitions of the leverage ratio and
net cash proceeds from permitted real estate sales. The Second Amendment reduced the Revolver
capacity from $80.0 million to $65.0 million and the letter of credit subfacility capacity from
$125.0 million to $100.0 million. Under the Second Amendment, the interest rate on LIBOR rate
borrowings is LIBOR plus 325 basis points, an increase of 100 basis points, and the letter of
credit subfacility commitment fee has been similarly amended. The Second Amendment also provides
for a commitment fee on the unused portion of the Revolver in the amount of 62.5 basis points, an
increase of 12.5 basis points.
As of February 28, 2011, the borrowing limit under the Revolver was $65.0 million, of which
$50.0 million can be utilized for letters of credit, with all of it available. Also, as of February
28, 2011, the Company had $68.5 million outstanding letters of credit under the $100.0 million
letter of credit subfacility and had permanently reduced the amount of its term loan subfacility to
the $51.0 million outstanding.
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:
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Actual Ratios as of | Required Ratios | |||
Financial Covenant | February 28, 2011 | December 1, 2010 and thereafter | ||
Interest coverage ratio, as defined under the Credit Agreement
|
5.14 to 1.00 | Not less than: 2.25 to 1.00 | ||
Leverage ratio, as defined under the Credit Agreement(1)
|
1.41 to 1.00 | Not greater than: 5.50 to 1.00 |
(1) | As a result of the March 17, 2010 amendment, the leverage ratio calculation was amended to allow for all cash and cash equivalents to reduce funded debt in the calculation as long as there are no loans outstanding under the Revolver. |
The Company was in compliance with its financial and non-financial covenants as of February
28, 2011.
9 1/2% Senior Subordinated Notes
As of February 28, 2011, the Company had $75.0 million outstanding of principal amount of its
91/2% Notes which mature in August 2013. Interest on the 91/2% Notes accrues at a rate of 9.50% per
annum and is payable in February and August. All or any portion of the 91/2% 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.
If the Company undergoes a change of control (as defined in the 91/2% Notes indenture) or sells
assets, it may be required to offer to purchase the 91/2% Notes from the holders of such notes.
The 91/2% Notes are non-collateralized and subordinated to all of the existing and future senior
indebtedness, including borrowings under its Senior Credit Facility. The 91/2% Notes rank senior to
the 21/4% Debentures and the 4 1/16% Debentures. The 91/2% 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 91/2% 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 91/2% 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.
During the second quarter of fiscal 2010, the Company repurchased $22.5 million principal
amount of its 91/2% Notes at 102% of par, plus accrued and unpaid interest using a portion of the net
proceeds of its 4 1/16% Debentures issued in December 2009.
21/4% Convertible Subordinated Debentures
As of February 28, 2011, the Company had $62.1 million outstanding of principal amount of its
21/4% Debentures. Interest on the 21/4% Debentures accrues at a rate of 2.25% per annum and is payable
in May and November. The 21/4% 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 1/16% Debentures. The 21/4% 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 91/2% Notes. In addition, the 21/4% 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 21/4% 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 21/4% 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 21/4%
Debentures for redemption and redemption has not yet occurred; (iii) subject to certain exceptions,
during the five (5) business days after any five (5) consecutive trading day period in which the
trading price per $1,000 principal amount of the 21/4% 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
15
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common stock and accrued but unpaid interest if the 21/4% 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 21/4% 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 21/4% Debentures, the Company will deliver, in respect of each
$1,000 principal amount of 21/4% Debentures tendered for conversion, (1) an amount in cash
(principal return) equal to the lesser of (a) the principal amount of the converted 21/4%
Debentures and (b) the conversion value (such value equal to the conversion rate multiplied by the
average closing price of common shares over a ten (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 21/4% 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 21/4%
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 21/4% 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.
Each holder may require the Company to repurchase all or part of their 21/4% 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 21/4% 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 21/4% 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.
During the first quarter of fiscal 2011, the Company repurchased $6.5 million principal amount
of its 21/4% Debentures at 99.0% to 99.1% of par, plus accrued and unpaid interest (See Note 13).
As of December 1, 2009 the Company adopted the new accounting standards related 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 21/4% Debentures and 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 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 transaction costs 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 21/4%
Debentures was determined to be $48.9 million. The debt discount is being amortized as a non-cash
charge to interest expense over the period from the issuance date through November 20, 2011 which
is the first date holders can require the Company to repurchase all or part of the 21/4% Debentures.
The $4.9 million of costs incurred in connection with the issuance of the 21/4% 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 February 28, 2011, the unamortized portion of the
deferred financing costs related to the 21/4% Debentures was $0.4 million and was included in other
current assets on the consolidated balance sheets.
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The following table presents the carrying amounts of the liability and equity components:
February 28, | November 30, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Carrying amount of equity component, net of equity issuance costs |
$ | 43.9 | $ | 44.4 | ||||
Principal amount of 21/4% Debentures |
$ | 62.1 | $ | 68.6 | ||||
Unamortized debt discount |
(2.7 | ) | (4.0 | ) | ||||
Carrying amount of liability component |
$ | 59.4 | $ | 64.6 | ||||
The following table presents the interest expense components for the 21/4% Debentures:
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Interest expense-contractual interest |
$ | 0.4 | $ | 0.8 | ||||
Interest expense-amortization of debt discount |
0.9 | 2.0 | ||||||
Interest expense-amortization of deferred financing costs |
0.1 | 0.2 | ||||||
Effective interest rate |
8.9 | % | 8.9 | % |
4.0625% Convertible Subordinated Debentures |
In December 2009, the Company issued $200.0 million in aggregate principal amount of 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, subject to earlier
redemption, repurchase, or conversion. 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, subject to certain conditions.
The 4 1/16% Debentures are general unsecured obligations of the Company and rank equal in
right of payment to all of the Companys other existing and future unsecured subordinated
indebtedness, including the 21/4% 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 91/2% Notes. In addition, the 4 1/16% Debentures
are effectively subordinated to any of the Companys collateralized debt, to the extent of such
collateral, and to any and all debt and liabilities including trade debt of its subsidiaries.
Each holder of the 4 1/16% Debentures may convert its 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 to the Company as described in the indenture, 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.
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Each holder may require the Company to repurchase all or part of its 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 to the Company, 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 its 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 elects to deliver 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 of any interest
payment or any make-whole premium or 2.5% in the case of any optional repurchase, multiplied by the
daily volume weighted average price 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.
Effective December 21, 2010, in accordance with the terms of the indenture, the restrictive
legend on the 4 1/16% Debentures was removed and the 4 1/16% Debentures are freely tradable
pursuant to Rule 144 under the Securities Act of 1933 without volume restrictions by any holder
that is not an affiliate of the Company at the time of sale and has not been an affiliate during
the preceding three months.
Issuance of the 4 1/16% Debentures generated net proceeds of $194.1 million, which were used
to repurchase long-term debt and other debt related costs.
7. Commitments and Contingencies
a. Legal Matters
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 federal and state 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.
Summarized below are the outstanding matters the Company believes have more than a remote
possibility of having a material adverse effect on its operating results, financial condition,
and/or cash flows.
Groundwater Cases
South El Monte Operable Unit (SEMOU) Related 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 of the San Gabriel Valley Superfund site.
The cases served on October 30, 2002 are denominated as follows:
San Gabriel Valley Water Company v. Aerojet-General Corporation, et al., Case No. CV-02-6346
ABC (RCx), U.S. District Court, Central District of CA.
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San Gabriel Basin Water Quality Authority v. Aerojet-General Corporation, et al., Case
No. CV-02-4565 ABC (RCx), U.S. District Court, Central District of CA.
Southern California Water Company v. Aerojet-General Corporation, et al., Case No. CV-02-6340
ABC (RCx), U.S. District Court, Central District of CA.
The City of Monterey Park v. Aerojet-General Corporation, et al., Case No. CV-02-5909 ABC
(RCx), U.S. District Court, Central District of CA.
The cases have been coordinated for ease of administration by the court. The plaintiffs
claims against Aerojet are based upon allegations of discharges from a former site in the El Monte
area. The total cost estimate to implement projects under a Unilateral Administrative Order (UAO)
prepared by the Environmental Protection Agency (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 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 and discovery have been stayed, 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 (DTSC) 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.
During fiscal 2010, Aerojet received correspondence from EPA on behalf of itself, the DTSC and
the water entities regarding settlement. Aerojet participated in mediation with EPA, DTSC and the
water entities to resolve the claims, and reached a tentative settlement with EPA and DTSC in
mid-December 2010 which was accepted by the water entities in January 2011. The settlement now must
be approved by EPA and published for public comment. The Company recorded the financial impact of
the tentative settlement in the fourth quarter of fiscal 2010. Accordingly, the Company does not
believe it has any further material estimated losses related to this matter at this time; however,
if the tentative settlement is not finalized, 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. In such case, Aerojet would vigorously defend
itself.
Sacramento County Water Agency (collectively, SCWA)
In August 2003, the County of Sacramento, 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 joint stipulations staying the proceedings to allow for settlement
negotiations. The current stay is in effect to May 30, 2011. As of February 28, 2011, the estimated
anticipated costs and accrued amount for the SCWA matter was $9.8 million, which is based on
original commitments entered by the Company and included as a component of the Companys
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Sacramento, California site environmental reserves. This is a complex matter involving
multiple parties; accordingly, the Company cannot reasonably estimate the outcome of this
proceeding at this time but it is reasonably possible the eventual outcome could exceed the amount
of the reserves recorded and could have a material adverse effect on the Companys operating
results, financial condition and/or cash flows.
M&H Realty/Fullerton case
On July 7, 2008, Aerojet was served with a complaint brought by the owner of property in
Fullerton, California at which Aerojet had operated for over twenty years. Aerojet sold the
property in 1984 to MDC, also a defendant in the lawsuit, which redeveloped and subsequently sold
the property. The complaint, entitled M&H Realty Partners V, L.P. v Aerojet-General Corporation,
Boeing Realty Corporation and McDonnell Douglas Corporation, et al. Case No.
30-2008-00080378-CU-TT-CXC, is pending in the Superior Court for Orange County, California. The
property owner alleges Aerojet and Boeing, the successor to MDC, are responsible for soil
contamination that has increased the costs of further redevelopment of the property. During the
first quarter of fiscal 2011, the parties entered into a confidential settlement of the litigation.
The Company recorded the financial impact of the confidential settlement in the first quarter of
fiscal 2011. Accordingly, the Company does not believe it has any further estimated losses related
to this matter.
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 are pending in Texas and Pennsylvania. There were 139 asbestos
cases pending as of February 28, 2011.
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.
Subpoenas Duces Tecum
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, working in conjunction
with the Civil Division of the United States Attorneys office in Sacramento, California,
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. On September
23, 2010, the Company received a subpoena duces tecum from the U.S. Army Criminal Investigation
Command, acting on behalf of the Office of the Inspector General of the DoD, requesting that the
Company produce a variety of documents pertaining to the use of certain cost estimating factors
under its contracts with the DoD. The subpoenas are still in the early stages and no financial
demands have been made; accordingly, the Company is currently unable to reasonably estimate what
the outcome of these civil investigations will be or the impact, if any, the investigations may
have on the Companys operating results, financial condition, and/or cash flows. Accordingly, no
estimate of future liability has been accrued for such contingencies. The Company has and continues
to cooperate fully with these investigations and is responding to the subpoenas.
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 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 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. The Company has accrued a loss contingency of
2.9 million ($3.8 million) plus interest for this matter.
GDX Automotive
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. Based on the Companys investigation of the facts and defenses available
under the contract and local law, the Company has denied all liability for
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this claim in November 2008. 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. Accordingly, no estimate of future
liability has been accrued for such contingencies.
b. 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 U.S. EPA and/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 February 28, 2011, the aggregate range of these anticipated environmental costs was
$219.9 million to $379.9 million and the accrued amount was $219.9 million. See Note 7(c) for a
summary of the environmental reserve activity for the first quarter of fiscal 2011. Of these
accrued liabilities, approximately 63% 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). Construction of the remedy specified in the UAO is
anticipated to be completed in fiscal 2011. Aerojet submitted a final RI/FS for the Perimeter
Groundwater Operable Unit in 2008, for which the U.S. EPA issued a record of decision on February
15, 2011. Aerojet submitted a final Remedial Investigation Report for the Boundary Operable Unit in
2010 and anticipates submittal of the final Feasibility Study for this operable unit in 2011. The
remaining operable units are under various stages of investigation.
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 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
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Del Oro property remains subject to the Central Valley RWQCBs orders to investigate and
remediate groundwater environmental contamination emanating offsite from such property. Pursuant to
a settlement agreement entered into in 2009, Aerojet and Boeing have defined responsibilities with
respect to future costs and environmental projects relating to this property. As of February 28,
2011, the estimated range of anticipated costs discussed above for the Sacramento, California site
was $129.1 million to $219.1 million and the accrued amount was $129.1 million included as a
component of the Companys environmental reserves.
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 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. 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 and will terminate May 2017. It is uncertain as to what remedial actions will be
required beyond 2017. However, the Project Agreement stipulates that the Parties agree to negotiate
in good faith in an effort to reach agreement as to the terms and conditions of an extension of the
term in the event that a Final Record of Decision anticipates, or any of the parties desire, the
continued operation of all or a substantial portion of the project facilities. 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.
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.
On June 24, 2010, Aerojet filed a complaint against Chubb Custom Insurance Company in Los
Angeles County Superior Court, Aerojet-General Corporation v. Chubb Custom Insurance Company Case
No. BC440284, seeking declaratory relief and damages regarding Chubbs failure to pay certain
project modification costs and failure to issue an endorsement to add other water sources that may
require treatment as required under insurance policies issued to Aerojet and the other Cooperating
Respondents. Aerojet agreed to dismiss the case without prejudice and settlement negotiations are
ongoing.
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 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.
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As of February 28, 2011, the estimated range of anticipated costs through the term of the
agreement for the BPOU site was $46.9 million to $98.2 million and the accrued amount was $46.9
million included as a component of the Companys environmental reserves.
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. During fiscal
2010, Aerojet received correspondence from EPA on behalf of itself, the DTSC and the water entities
regarding settlement. Aerojet participated in mediation with EPA, DTSC and the water entities to
resolve the claims, and reached a tentative settlement with EPA and DTSC in mid-December 2010 which
was accepted by the water entities in January 2011. The settlement now must be approved by EPA and
published for public comment. Aerojet recorded the impact of the tentative settlement in the fourth
quarter of fiscal 2010. The status of the negotiations with the U.S. EPA is further described in
Note 7(a).
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 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 restoration project to be performed by the group
consists of river dredging and land-filling river sediments with a total project cost in the range
of approximately $47 to $49 million, one half of which is being funded through the Great Lakes
Legacy Act and the net project costs to the PRP group is estimated at $23.5 to $24.5 million. The
actual dredging of the river, begun in December 2009, has been completed. In February 2011, the
parties reached an agreement on allocation. As of February 28, 2011, the estimated range of the
Companys share of anticipated costs for the NRD matter was $4.1 million to $5.9 million and the
accrued amount was $4.1 million included as a component of the Companys environmental reserves.
Still unresolved at this time is the actual NRD 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 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. On May 5, 2010, the District
Court granted the Companys Motion for Summary Judgment, thereby dismissing the claims in the
initial action. Textileather has appealed to the Sixth Circuit Court of Appeal and the briefing
schedule has been extended. There are no District Court ordered dates in the
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second Textileather
suit, but the parties are conducting informal discovery. As of February 28, 2011, the estimated
anticipated costs
and accrued amount for the Textileather matter was $2.1 million which is included as a
component of the Companys environmental reserves.
c. Environmental Reserves and Estimated Recoveries
Environmental 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 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:
November 30, | 2011 | 2011 | February 28, | |||||||||||||
2010 | Additions | Expenditures | 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Aerojet |
||||||||||||||||
Sacramento |
$ | 139.8 | $ | 1.5 | $ | (2.4 | ) | $ | 138.9 | |||||||
BPOU |
46.1 | 0.9 | (0.1 | ) | 46.9 | |||||||||||
Other Aerojet sites |
20.1 | 2.6 | (0.3 | ) | 22.4 | |||||||||||
206.0 | 5.0 | (2.8 | ) | 208.2 | ||||||||||||
Other Sites |
11.7 | 0.1 | (0.1 | ) | 11.7 | |||||||||||
Environmental Reserve |
$ | 217.7 | $ | 5.1 | $ | (2.9 | ) | $ | 219.9 | |||||||
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 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 February 28, 2011 |
(10.7 | ) | ||
Amount included as a component of reserves for environmental
remediation costs in the unaudited condensed consolidated balance
sheet as of February 28, 2011 |
(1.2 | ) | ||
Remaining Pre-Close Environmental Costs |
$ | 8.1 | ||
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
cleanup costs of the environmental contamination at the Sacramento and Azusa sites. The Global
Settlement cost-sharing ratio does not have a defined term over which costs will be recovered.
Additionally, in conjunction with the sale of the EIS business in 2001,
24
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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 limitation to Northrop is
$6.0 million.
Pursuant to the Global Settlement covering environmental costs associated with Aerojets
Sacramento site and its former Azusa site, prior to the third quarter of fiscal 2010, approximately
88% of such costs related to the Sacramento site and the former Azusa site were included in U.S.
government contracts or reimbursed by Northrop. Subsequent to the third quarter of fiscal 2010,
because the Company had reached the reimbursement ceiling under the Northrop Agreement,
approximately 63% of such costs are included in U.S. government contracts. See additional
information below.
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 and the total reimbursements are limited to a ceiling of $189.7 million. 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 February 28, 2011 |
(84.2 | ) | ||
Potential future cost reimbursements available |
105.5 | |||
Receivable from Northrop in excess of the annual limitation included as a
component of other noncurrent assets in the unaudited condensed
consolidated balance sheet as of February 28, 2011 |
(58.9 | ) | ||
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 unaudited condensed
consolidated balance sheet as of February 28, 2011 |
(46.6 | ) | ||
Potential future recoverable amounts available under the Northrop Agreement |
$ | | ||
The Companys applicable cost estimates reached the cumulative limitation under the Northrop
Agreement during the third quarter of fiscal 2010. Accordingly, in future periods, the Company will
incur a higher percentage of expense related to additions to the Sacramento site and BPOU site
environmental reserve until an arrangement is reached with the U.S. government. While the Company
is currently seeking an arrangement with the U.S. government to recover environmental expenditures
in excess of the 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 unaudited condensed consolidated
statement of operations
The expenses and benefits associated with adjustments to the environmental reserves are
recorded as a component of other expense, net in the unaudited condensed consolidated statements of
operations. Summarized financial information for the impact of environmental reserves and
recoveries to the unaudited condensed consolidated statements of operations is set forth below:
Total | Charge to | |||||||||||||||||||
Estimated | Unaudited | |||||||||||||||||||
Estimated | Estimated | Recoverable | Condensed | 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) | ||||||||||||||||||||
Three months ended February 28, 2011 |
$ | | $ | 4.0 | $ | 4.0 | $ | 1.1 | $ | 5.1 | ||||||||||
Three months ended February 28, 2010 |
0.8 | 2.5 | 3.3 | 0.4 | 3.7 |
25
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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 February 28, 2011 and
November 30, 2010, the Company has classified 0.5 million shares 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. During the first quarter of fiscal 2011 and 2010, the
Company recorded a charge of $0.2 million for realized losses and interest associated with this
matter.
9. Arrangements with Off-Balance Sheet Risk
As of February 28, 2011, arrangements with off-balance sheet risk consisted of:
$68.5 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 (See Note 7(b) for additional
information).
Guarantees, jointly and severally, by the Companys material domestic subsidiaries of its
obligations under its Senior Credit Facility and its 91/2% 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.
The Company also issues purchase orders and makes other commitments to suppliers for
equipment, materials, and supplies in the normal course of business. These purchase commitments are
generally for volumes consistent with anticipated requirements to fulfill purchase orders or
contracts for product deliveries received, or expected to be received, from customers and would be
subject to reimbursement if a cost-plus contract is terminated.
10. Retirement Benefits
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 of November 30, 2010, the Companys defined benefit pension plan assets and projected
benefit obligations were approximately $1.4 billion and $1.6 billion, respectively. The Pension
Protection Act (the PPA) 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, 2009 under the PPA for our tax-qualified defined benefit
pension plan was 95.6% which was above the 94.0% ratio required under the PPA. The required ratio
to be met as of the November 30, 2010 measurement date is 96%. The final calculated PPA funded
ratio as of November 30, 2010 is expected to be completed in the second half of 2011.
In general, the PPA requires companies with underfunded plans to make up the shortfall over a
seven year period. These values are based on assumptions specified by the IRS, and are typically
not the same as the amounts used for corporate financial reporting. On June 25, 2010, the president
signed the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010
(Pension Relief Act) into law. The Pension Relief Act will allow pension plan sponsors to extend
the shortfall amortization period from the seven years required under the PPA to either nine years
(with interest-only payments for the first two years) or 15 years for shortfall amortization bases
created during the years for which relief is elected. This election could be made for any two plan
years
26
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during the period 2008-2011. The Company expects to elect the funding relief for plan years
beginning 2010 and 2011 using the 15-year alternative amortization.
The value of the unfunded accrued benefits and amount of required contribution each year are
based on a number of factors, including plan investment experience and interest rate environment
and, as such, can fluctuate significantly from year to year. Companies may prepay contributions
and, under certain circumstances, use those prepayment credits to satisfy the required funding of
the pension plans annual required contribution thereby allowing the Company to defer cash payments
into the pension plan. The Company has accumulated $61.4 million in such prepayment credits as of
March 15, 2011. For fiscal 2011, the Company is not expecting to make a cash contribution to the
pension plan.
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 or other plan
experience. Accordingly, if the performance of the Companys plan 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, the future contributions to the Companys underfunded pension
plan could be higher.
Medical and Life Benefits The Company provides medical and life insurance benefits to
certain eligible retired employees, with varied coverage by employee group. Generally, employees
hired after January 1, 1997 are not eligible for medical and life insurance benefits. The medical
benefit plan provides for cost sharing between the Company and its retirees in the form of retiree
contributions, deductibles, and coinsurance. Medical and life benefit obligations are unfunded.
Components of retirement benefit expense are:
Pension Benefits | Postretirement Benefits | |||||||||||||||
Three months ended | ||||||||||||||||
February 28, | February 28, | February 28, | February 28, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Service cost |
$ | 1.0 | $ | 1.1 | $ | | $ | 0.1 | ||||||||
Interest cost on benefit obligation |
19.6 | 21.5 | 0.9 | 1.0 | ||||||||||||
Assumed return on plan assets |
(25.6 | ) | (26.9 | ) | | | ||||||||||
Recognized net actuarial losses (gains) |
16.6 | 14.7 | (0.9 | ) | (1.0 | ) | ||||||||||
Retirement benefit expense |
$ | 11.6 | $ | 10.4 | $ | | $ | 0.1 | ||||||||
11. Discontinued Operations
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. During the first quarter of
fiscal 2009, Snappon SA 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. 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(a)).
Summarized financial information for discontinued operations is set forth below:
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Net sales |
$ | | $ | | ||||
(Loss) income before income taxes(1) |
(0.7 | ) | 1.0 | |||||
Income tax benefit |
| | ||||||
(Loss) income from discontinued operations, net of income taxes |
(0.7 | ) | 1.0 |
(1) | Includes foreign currency (losses) and gains of ($0.6) million and $1.3 million in the first quarter of fiscal 2011 and 2010, respectively. |
12. 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.
27
Table of Contents
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.
Customers that represented more than 10% of net sales for the periods presented are as
follows:
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
Raytheon Company |
39 | % | 38 | % | ||||
Lockheed Martin Corporation |
26 | % | 28 | % |
Sales in the first quarter of fiscal 2011 and 2010 directly and indirectly to the U.S.
government and its agencies, including sales to the Companys significant customers discussed
above, totaled 92% and 93%, respectively, of net sales.
Selected financial information for each reportable segment is as follows:
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Net Sales: |
||||||||
Aerospace and Defense |
$ | 208.1 | $ | 185.1 | ||||
Real Estate |
1.7 | 1.7 | ||||||
Total |
$ | 209.8 | $ | 186.8 | ||||
Segment Performance: |
||||||||
Aerospace and Defense |
$ | 27.3 | $ | 17.3 | ||||
Environmental remediation provision adjustments |
(1.0 | ) | (0.3 | ) | ||||
Retirement benefit plan expense |
(5.2 | ) | (7.3 | ) | ||||
Unusual items (see Note 13) |
(0.2 | ) | (0.2 | ) | ||||
Aerospace and Defense Total |
20.9 | 9.5 | ||||||
Real Estate |
1.2 | 1.2 | ||||||
Total |
$ | 22.1 | $ | 10.7 | ||||
Reconciliation of segment performance to income (loss) from
continuing operations before income taxes: |
||||||||
Segment Performance |
$ | 22.1 | $ | 10.7 | ||||
Interest expense |
(7.8 | ) | (10.4 | ) | ||||
Interest income |
0.3 | 0.3 | ||||||
Stock-based compensation (expense) benefit |
(1.2 | ) | 1.5 | |||||
Corporate retirement benefit plan expense |
(6.4 | ) | (3.2 | ) | ||||
Corporate and other expenses |
(2.7 | ) | (3.2 | ) | ||||
Unusual items (see Note 13) |
0.2 | (1.4 | ) | |||||
Income (loss) from continuing operations before income taxes |
$ | 4.5 | $ | (5.7 | ) | |||
13. Unusual Items
In the first quarter of fiscal 2010, the Company recorded $1.4 million associated with
executive severance.
During the first quarter of fiscal 2011 and 2010, the Company recorded $0.2 million for
realized losses and interest associated with the failure to register with the SEC the issuance of
certain of our common shares under the defined contribution 401(k) employee benefit plan.
A summary of the Companys gain on the debt repurchased during the first quarter of fiscal
2011 is as follows (in millions):
Principal amount repurchased |
$ | 6.5 | ||
Cash repurchase price |
(6.4 | ) | ||
0.1 | ||||
Write-off of the associated debt discount |
(0.4 | ) | ||
Portion of the 21/4% Convertible Subordinated Debentures (21/4%
Debentures) repurchased attributed to the equity component |
0.5 | |||
Gain on 21/4% Debentures repurchased |
$ | 0.2 | ||
28
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14. Condensed Consolidating Financial Information
The Company is providing condensed consolidating financial information for its material
domestic subsidiaries that have guaranteed the 91/2% Notes, and for those subsidiaries that have not
guaranteed the 91/2% Notes. These 100% owned subsidiary guarantors have, jointly and severally, fully
and unconditionally guaranteed the 91/2% 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 91/2% 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.
Condensed Consolidating Statements of Operations
(Unaudited)
(Unaudited)
Guarantor | Non-guarantor | |||||||||||||||||||
Three months ended February 28, 2011 (In millions) | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net sales |
$ | | $ | 209.8 | $ | | $ | | $ | 209.8 | ||||||||||
Cost of sales (exclusive of items shown separately below) |
| 180.6 | | | 180.6 | |||||||||||||||
Selling, general and administrative |
6.8 | 3.5 | | | 10.3 | |||||||||||||||
Depreciation and amortization |
| 5.7 | | | 5.7 | |||||||||||||||
Interest expense |
6.5 | 1.3 | | | 7.8 | |||||||||||||||
Other, net |
2.6 | (1.7 | ) | | | 0.9 | ||||||||||||||
(Loss) income from continuing operations before income taxes |
(15.9 | ) | 20.4 | | | 4.5 | ||||||||||||||
Income tax provision |
2.0 | 0.6 | | | 2.6 | |||||||||||||||
(Loss) income from continuing operations |
(17.9 | ) | 19.8 | | | 1.9 | ||||||||||||||
Loss from discontinued operations |
(0.7 | ) | | | | (0.7 | ) | |||||||||||||
(Loss) income before equity income of subsidiaries |
(18.6 | ) | 19.8 | | | 1.2 | ||||||||||||||
Equity income of subsidiaries |
19.8 | | | (19.8 | ) | | ||||||||||||||
Net income |
$ | 1.2 | $ | 19.8 | $ | | $ | (19.8 | ) | $ | 1.2 | |||||||||
Guarantor | Non-guarantor | |||||||||||||||||||
Three months ended February 28, 2010 (In millions) | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net sales |
$ | | $ | 186.8 | $ | | $ | | $ | 186.8 | ||||||||||
Cost of sales (exclusive of items shown separately below) |
| 169.7 | | | 169.7 | |||||||||||||||
Selling, general and administrative |
1.8 | 3.2 | | | 5.0 | |||||||||||||||
Depreciation and amortization |
| 6.0 | | | 6.0 | |||||||||||||||
Interest expense |
9.2 | 1.2 | | | 10.4 | |||||||||||||||
Other, net |
1.5 | (0.1 | ) | | | 1.4 | ||||||||||||||
(Loss) income from continuing operations before income taxes |
(12.5 | ) | 6.8 | | | (5.7 | ) | |||||||||||||
Income tax (benefit) provision |
(0.3 | ) | 4.5 | | | 4.2 | ||||||||||||||
(Loss) income from continuing operations |
(12.2 | ) | 2.3 | | | (9.9 | ) | |||||||||||||
Income from discontinued operations |
1.0 | | | | 1.0 | |||||||||||||||
(Loss) income before equity income of subsidiaries |
(11.2 | ) | 2.3 | | | (8.9 | ) | |||||||||||||
Equity income of subsidiaries |
2.3 | | | (2.3 | ) | | ||||||||||||||
Net (loss) income |
$ | (8.9 | ) | $ | 2.3 | $ | | $ | (2.3 | ) | $ | (8.9 | ) | |||||||
29
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Condensed Consolidating Balance Sheets
(Unaudited)
(Unaudited)
Guarantor | Non-guarantor | |||||||||||||||||||
February 28, 2011 (In millions): | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Cash and cash equivalents |
$ | 215.0 | $ | (3.4 | ) | $ | | $ | | $ | 211.6 | |||||||||
Marketable securities |
5.0 | | | | 5.0 | |||||||||||||||
Accounts receivable |
| 109.8 | | | 109.8 | |||||||||||||||
Inventories |
| 48.8 | | | 48.8 | |||||||||||||||
Recoverable from the U.S. government and other third
parties for environmental remediation costs and other |
0.1 | 39.4 | | | 39.5 | |||||||||||||||
Grantor trust |
1.5 | 0.3 | | | 1.8 | |||||||||||||||
Other receivables, prepaid expenses and other |
10.8 | 11.9 | | | 22.7 | |||||||||||||||
Income taxes |
7.6 | (2.2 | ) | | | 5.4 | ||||||||||||||
Total current assets |
240.0 | 204.6 | | | 444.6 | |||||||||||||||
Property, plant and equipment, net |
0.4 | 123.6 | | | 124.0 | |||||||||||||||
Recoverable from the U.S. government and other third
parties for environmental remediation costs and other |
0.2 | 145.4 | | | 145.6 | |||||||||||||||
Grantor trust |
9.8 | 4.4 | | | 14.2 | |||||||||||||||
Goodwill |
| 94.9 | | | 94.9 | |||||||||||||||
Intercompany (payable) receivable, net |
(188.3 | ) | 208.0 | (19.7 | ) | | | |||||||||||||
Other noncurrent assets and intangibles, net |
269.5 | 158.6 | 9.9 | (271.7 | ) | 166.3 | ||||||||||||||
Total assets |
$ | 331.6 | $ | 939.5 | $ | (9.8 | ) | $ | (271.7 | ) | $ | 989.6 | ||||||||
Short-term borrowings and current portion of long-term debt |
$ | 60.0 | $ | 0.2 | $ | | $ | | $ | 60.2 | ||||||||||
Accounts payable |
0.5 | 33.5 | | | 34.0 | |||||||||||||||
Reserves for environmental remediation costs |
4.1 | 46.4 | | | 50.5 | |||||||||||||||
Other current liabilities, advance payments on contracts,
and postretirement medical and life insurance benefits |
33.9 | 182.2 | | | 216.1 | |||||||||||||||
Total current liabilities |
98.5 | 262.3 | | | 360.8 | |||||||||||||||
Long-term debt |
325.5 | 1.0 | | | 326.5 | |||||||||||||||
Reserves for environmental remediation costs |
7.6 | 161.8 | | | 169.4 | |||||||||||||||
Pension benefits |
15.6 | 154.6 | | | 170.2 | |||||||||||||||
Other noncurrent liabilities |
62.1 | 78.3 | | | 140.4 | |||||||||||||||
Total liabilities |
509.3 | 658.0 | | | 1,167.3 | |||||||||||||||
Commitments and contingencies (Note 7) |
||||||||||||||||||||
Redeemable common stock (Note 8) |
4.9 | | | | 4.9 | |||||||||||||||
Total shareholders (deficit) equity |
(182.6 | ) | 281.5 | (9.8 | ) | (271.7 | ) | (182.6 | ) | |||||||||||
Total liabilities, redeemable common stock, and
shareholders equity (deficit) |
$ | 331.6 | $ | 939.5 | $ | (9.8 | ) | $ | (271.7 | ) | $ | 989.6 | ||||||||
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Guarantor | Non-guarantor | |||||||||||||||||||
November 30, 2010 (In millions): | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Cash and cash equivalents |
$ | 197.3 | $ | (15.8 | ) | $ | | $ | | $ | 181.5 | |||||||||
Marketable securities |
26.7 | | | | 26.7 | |||||||||||||||
Accounts receivable |
| 106.7 | | | 106.7 | |||||||||||||||
Inventories |
| 51.1 | | | 51.1 | |||||||||||||||
Recoverable from the U.S. government and other third
parties for environmental remediation costs and other |
0.1 | 31.9 | | | 32.0 | |||||||||||||||
Grantor trust |
1.4 | 0.4 | | | 1.8 | |||||||||||||||
Other receivables, prepaid expenses and other |
11.5 | 13.8 | | | 25.3 | |||||||||||||||
Income taxes |
9.9 | (2.4 | ) | | | 7.5 | ||||||||||||||
Total current assets |
246.9 | 185.7 | | | 432.6 | |||||||||||||||
Property, plant and equipment, net |
4.8 | 121.6 | | | 126.4 | |||||||||||||||
Recoverable from the U.S. government and other third
parties for environmental remediation costs and other |
0.2 | 151.3 | | | 151.5 | |||||||||||||||
Grantor trust |
10.1 | 4.4 | | | 14.5 | |||||||||||||||
Goodwill |
| 94.9 | | | 94.9 | |||||||||||||||
Intercompany (payable) receivable, net |
(178.5 | ) | 198.2 | (19.7 | ) | | | |||||||||||||
Other noncurrent assets and intangibles, net |
242.0 | 162.9 | 9.9 | (243.2 | ) | 171.6 | ||||||||||||||
Total assets |
$ | 325.5 | $ | 919.0 | $ | (9.8 | ) | $ | (243.2 | ) | $ | 991.5 | ||||||||
Short-term borrowings and current portion of long-term debt |
$ | 65.8 | $ | 0.2 | $ | | $ | | $ | 66.0 | ||||||||||
Accounts payable |
0.6 | 26.5 | | | 27.1 | |||||||||||||||
Reserves for environmental remediation costs |
3.3 | 37.4 | | | 40.7 | |||||||||||||||
Other current liabilities, advance payments on contracts,
and postretirement medical and life insurance benefits |
36.8 | 190.6 | | | 227.4 | |||||||||||||||
Total current liabilities |
106.5 | 254.7 | | | 361.2 | |||||||||||||||
Long-term debt |
325.6 | 1.1 | | | 326.7 | |||||||||||||||
Reserves for environmental remediation costs |
8.3 | 168.7 | | | 177.0 | |||||||||||||||
Pension benefits |
17.0 | 158.5 | | | 175.5 | |||||||||||||||
Other noncurrent liabilities |
63.2 | 83.0 | | | 146.2 | |||||||||||||||
Total liabilities |
520.6 | 666.0 | | | 1,186.6 | |||||||||||||||
Commitments and contingencies (Note 7) |
||||||||||||||||||||
Redeemable common stock (Note 8) |
5.1 | | | | 5.1 | |||||||||||||||
Total shareholders (deficit) equity |
(200.2 | ) | 253.0 | (9.8 | ) | (243.2 | ) | (200.2 | ) | |||||||||||
Total liabilities, redeemable common stock, and
shareholders equity (deficit) |
$ | 325.5 | $ | 919.0 | $ | (9.8 | ) | $ | (243.2 | ) | $ | 991.5 | ||||||||
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Condensed Consolidating Statements of Cash Flows
(Unaudited)
(Unaudited)
Guarantor | Non-guarantor | |||||||||||||||||||
Three months ended February 28, 2011 (In millions): | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net cash (used in) provided by operating activities |
$ | (6.6 | ) | $ | 24.2 | $ | | $ | | $ | 17.6 | |||||||||
Net transfers (to) from parent |
9.8 | (9.8 | ) | | | | ||||||||||||||
Net cash provided by operating activities |
3.2 | 14.4 | | | 17.6 | |||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Capital expenditures |
| (2.0 | ) | | | (2.0 | ) | |||||||||||||
Other investing activities |
21.7 | | | | 21.7 | |||||||||||||||
Net cash provided by (used in) investing activities |
21.7 | (2.0 | ) | | | 19.7 | ||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Debt repayments |
(7.2 | ) | | | | (7.2 | ) | |||||||||||||
Net cash used in financing activities |
(7.2 | ) | | | | (7.2 | ) | |||||||||||||
Net increase in cash and cash equivalents |
17.7 | 12.4 | | | 30.1 | |||||||||||||||
Cash and cash equivalents at beginning of year |
197.3 | (15.8 | ) | | | 181.5 | ||||||||||||||
Cash and cash equivalents at end of period |
$ | 215.0 | $ | (3.4 | ) | $ | | $ | | $ | 211.6 | |||||||||
Guarantor | Non-guarantor | |||||||||||||||||||
Three months ended February 28, 2010 (In millions): | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net cash (used in) provided by operating activities |
$ | (10.1 | ) | $ | 87.5 | $ | | $ | | $ | 77.4 | |||||||||
Net transfers (to) from parent |
57.4 | (57.4 | ) | | | | ||||||||||||||
Net cash provided by operating activities |
47.3 | 30.1 | | | 77.4 | |||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Capital expenditures |
| (4.2 | ) | | | (4.2 | ) | |||||||||||||
Other investing activities |
(112.3 | ) | | | | (112.3 | ) | |||||||||||||
Net cash used in investing activities |
(112.3 | ) | (4.2 | ) | | | (116.5 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Debt repayments |
(142.2 | ) | | | | (142.2 | ) | |||||||||||||
Proceeds from issuance of debt, net of issuance costs |
194.1 | | | | 194.1 | |||||||||||||||
Net cash provided by financing activities |
51.9 | | | | 51.9 | |||||||||||||||
Net (decrease) increase in cash and cash equivalents |
(13.1 | ) | 25.9 | | | 12.8 | ||||||||||||||
Cash and cash equivalents at beginning of year |
166.0 | (39.8 | ) | 0.1 | | 126.3 | ||||||||||||||
Cash and cash equivalents at end of period |
$ | 152.9 | $ | (13.9 | ) | $ | 0.1 | $ | | $ | 139.1 | |||||||||
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated or required by the context, as used in this Quarterly Report on
Form 10-Q, the terms we, our and us refer to GenCorp Inc. and all of its subsidiaries that
are consolidated in conformity with accounting principles generally accepted in the United States
of America (GAAP).
The preparation of the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. In addition, our operating
results for interim periods may not be indicative of the results of operations for a full year.
This section contains a number of forward-looking statements, all of which are based on current
expectations and are subject to risks and uncertainties including those described in this Quarterly
Report under the heading Forward-Looking Statements. Actual results may differ materially. This
section should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended
November 30, 2010, and periodic reports subsequently filed with the Securities and Exchange
Commission (SEC).
Overview
We are 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 our excess
real estate assets. We develop and manufacture propulsion systems for defense and space
applications, armament systems for precision tactical weapon systems and munitions applications.
Major market segments include space launch and in-space propulsion systems, missile defense,
tactical missile systems, and force projection and protection systems.
A summary of the significant financial highlights which management uses to evaluate our
operating performance and financial condition is presented below.
| Net sales for the first quarter of 2011 increased to $209.8 million compared to $186.8 million for the first quarter of 2010. |
| Net income for the first quarter of 2011 was $1.2 million, or $0.02 diluted income per share, compared to a net loss of $8.9 million, or $0.15 loss per share, for the first quarter of 2010. |
| Adjusted EBITDAP for the first quarter of 2011 was $29.3 million or 14.0% of net sales, compared to $22.5 million or 12.0% of net sales, for the first quarter of 2010. |
| Segment performance before environmental remediation provision adjustments, retirement benefit plan expense, and unusual items was $28.5 million for the first quarter of 2011, compared to $18.5 million for the first quarter of 2010. |
| Cash provided by operating activities in the first quarter of 2011 totaled $17.6 million, compared to $77.4 million in the first quarter of 2010. |
| Free cash flow in the first quarter of 2011 totaled $15.6 million, compared to $73.2 million in the first quarter of 2010. |
| As of February 28, 2011, we had $172.8 million in net debt compared to $245.1 million in net debt as of February 28, 2010. |
We provide Non-GAAP measures as a supplement to financial results based on GAAP. A
reconciliation of the Non-GAAP measures to the most directly comparable GAAP measures is presented
later in the Managements Discussion and Analysis under the heading Operating Segment Information
and Use of Non-GAAP Financial Measures.
We are operating in an environment that is characterized by both increasing complexity in the
global security environment, as well as continuing worldwide economic pressures. A significant
component of our strategy in this environment is to focus on delivering excellent performance to
our customers, driving improvements and efficiencies across our operations, and creating value
through the enhancement and expansion of our business.
Some of the significant challenges we face are as follows: dependence upon government programs
and contracts, future reductions or changes in U.S. government spending in our industry, highly
leveraged capital structure, and an underfunded pension plan. These matters are discussed in more
detail below.
Major Customers
The principal end user customers of our products and technology are agencies of the U.S.
government. Since a majority of our sales are, directly or indirectly, to the U.S. government,
funding for the purchase of our products and services generally follows trends in U.S. aerospace
and defense spending.
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Customers that represented more than 10% of net sales for the periods presented are as
follows:
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
Raytheon Company |
39 | % | 38 | % | ||||
Lockheed Martin Corporation |
26 | % | 28 | % |
Sales in the first quarter of fiscal 2011 and 2010 directly and indirectly to the U.S.
government and its agencies, including sales to our significant customers discussed above, totaled
92% and 93%, respectively, of net sales. The Standard Missile program, which is included in the
U.S. government sales, represented 29% and 26% of net sales for the first quarter of fiscal 2011
and 2010, respectively.
Industry Overview
Broad support continues for Department of Defense (DoD) and NASA funding in the Government
Fiscal Year (GFY) ending September 30, 2011 and beyond. However, these federal department/agency
budgets are under severe pressure due to the financial impacts from ongoing military operations and
the cumulative effects of annual federal budget deficits and rising U.S. federal debt. As a result,
the DoD budget is projected to grow at very modest levels in the Obama Administration
(Administration) GFY 2012 budget request. During the same time period the NASA budget was
authorized by Congress in late 2010 to grow modestly. However, the Administrations budget request
projections are for the NASA budget to remain flat.
Department of Defense
While U.S. defense appropriations have increased substantially since the terrorist attacks of
September 11, 2001 and ensuing military actions in Afghanistan and Iraq, the rate of increase is
projected to slow and then flatten over the course of GFY 2012 2016. The total GFY 2012 request
of $671 billion includes $553 billion for the base budget which is $4 billion above the GFY 2011
requested amount. The request also includes $118 billion for Overseas Contingency Operations, down
from $163 billion budget in GFY 2010. Out-year projections for the base budget in the GFY 2012
request shift real growth downward to an average of 0.5% per year across GFY 2011 2016. Real
growth in the DoD budget flat-lines in GFYs 2015 and 2016. Although the ultimate distribution of
the GFY 2011 DoD budget remains to be finalized by Congress, at this time, we believe we are well
positioned to benefit from DoD investment in: high-priority transformational systems that address
current war fighting requirements; the re-capitalization of weapon systems and equipment expended
during combat operations; and systems that meet new threats world-wide.
The Administration has indicated a commitment to maintain adequate funding for the DoD and
building defense capabilities for the 21st century. Areas that impact our products
include: fully equipping U.S. forces for the missions they face; preserving air supremacy;
maintaining forces at sea; protecting the U.S. in cyberspace; ensuring freedom of space; and a
pragmatic and cost-effective development of missile defense.
NASA
In 2010, a new NASA Authorization Act (the Authorization Act) took effect impacting GFY
2011-2013. The Authorization Act aims to: safely retire the Space Shuttle; extend the
International Space Station through 2020; continue the development of the multipurpose crew
exploration vehicle; build a new heavy lift launch vehicle; invest in new space technologies; and
sustain and grow the science and aeronautics programs at NASA. We are well positioned to succeed
due to our diverse offerings, innovative technologies, and existing contracts with both traditional
and emerging launch providers. Additionally, we are the main propulsion provider for the
multipurpose crew capsule.
While the Authorization Act provides modest growth for NASA, the Administrations GFY 2012
budget request for NASA sets a top line spending level of $18.7 billion, which is equivalent to GFY
2010 levels. Officially, NASAs budget is flat lined at $18.7 billion for GFY 2012 2016. The
Office of Management and Budget however is suggesting out-year funding levels could fall closer to
$18.0 billion per year, $0.7 billion below the 2010 Authorization Act level for GFY 2012.
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Capital Structure
We have a substantial amount of debt for which we are required to make interest and principal
payments. Interest on long-term financing is not a recoverable cost under our U.S. government
contracts. As of February 28, 2011, we had $386.7 million of debt. We continue to focus on
reducing our net debt position by generating cash from operations through growing our business and
driving improvements and efficiencies across our operations. As of November 30, 2010, we had
$188.5 million in net debt compared to $312.3 million in net debt as of November 30, 2009.
Retirement Benefits
Our pension plan is currently underfunded and we may be required to make cash contributions in
future periods, which may reduce the cash available for our businesses. As of November 30, 2010,
our defined benefit pension plan assets and projected benefit obligations were approximately $1.4
billion and $1.6 billion, respectively. The Pension Protection Act (PPA) 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, 2009
under the PPA for our tax-qualified defined benefit pension plan was 95.6% which was above the
94.0% ratio required under the PPA. The required ratio to be met as of the November 30, 2010
measurement date is 96%. The final calculated PPA funded ratio as of November 30, 2010 is expected
to be completed in the second half of 2011.
The value of the unfunded accrued benefits and amount of required contribution each year are
based on a number of factors, including plan investment experience and interest rate environment
and, as such, can fluctuate significantly from year to year. Companies may prepay contributions
and, under certain circumstances, use those prepayment credits to satisfy the required funding of
the pension plans annual required contribution thereby allowing the company to defer cash payments
into the pension plan. We have accumulated $61.4 million in such prepayment credits as of March
15, 2011. For 2011, we are not expecting to make a cash contribution to the pension plan.
U.S. Cost Accounting Standards (CAS) Pension Recovery Rules
On May 10, 2010, the CAS Board published a Notice of Proposed Rulemaking (NPRM) that if
adopted would provide a framework to partially harmonize the CAS rules with the PPA funding
requirements. The NPRM would harmonize by mitigating the mismatch between CAS costs and
PPA-amended Employee Retirement Income Security Act (ERISA) minimum funding requirements. Until
the final rule is published, and to the extent that the final rule does not completely eliminate
mismatches between ERISA funding requirements and CAS pension costs, government contractors
maintaining defined benefit pension plans will continue to experience a timing mismatch between
required contributions and pension expenses recoverable under CAS. The final rule is expected to be
issued in 2011 and to apply to contracts starting the year following the award of the first CAS
covered contract after the effective date of the new rule.
Results of Operations
Net Sales:
Three months ended | ||||||||||||
February 28, | February 28, | |||||||||||
2011 | 2010 | Change* | ||||||||||
(In millions) | ||||||||||||
Net Sales: |
$ | 209.8 | $ | 186.8 | $ | 23.0 |
* | Primary reason for change. The increase in net sales was primarily due to the following: (i) an increase of $12.9 million in the various Standard Missile programs primarily related to the divert and attitude control system contracts; (ii) awards received in fiscal 2010 on the Hawk program resulting in $6.9 million of additional net sales; (iii) additional deliveries of rocket motors under the Atlas V program in the current period increasing net sales by $6.5 million; and (iv) increased deliveries on the Guided Multiple Launch Rocket System (GMLRS) program generating $5.9 million of additional net sales. The increase in net sales was partially offset by a decrease of $10.5 million on the Orion program due to NASA funding constraints. |
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Table of Contents
Operating Income:
Three months ended | ||||||||||||
February 28, | February 28, | |||||||||||
2011 | 2010 | Change* | ||||||||||
(In millions, except percentage amounts) | ||||||||||||
Operating income: |
$ | 12.0 | $ | 4.4 | $ | 7.6 | ||||||
Percentage of net sales |
5.7 | % | 2.4 | % |
* | Primary reason for change. The increase in the first quarter of fiscal 2011 operating income margin of 3.3 percentage points, compared to the comparable prior year period, was primarily due to the following: |
| Improved contract performance contributed 4.8 percentage points to the operating margin. |
| Decrease of $1.6 million in unusual items which contributed 0.8 percentage point of improvement to the operating margin. The decrease in unusual items was primarily due to the executive severance agreement charge of $1.4 million in the first quarter of fiscal 2010. |
These increases were partially offset by the following:
| Increase of $2.7 million in stock-based compensation in the current period resulting in a 1.3 percentage point decline in operating margin. |
| Increases in retirement benefit expense and environmental remediation costs that each represented 0.5 percentage point decrease in the operating margin. |
Cost of sales (exclusive of items shown separately below):
Three months ended | ||||||||||||
February 28, | February 28 | |||||||||||
2011 | 2010 | Change* | ||||||||||
(In millions, except percentage amounts) | ||||||||||||
Cost of sales (exclusive of items shown separately below): |
$ | 180.6 | $ | 169.7 | $ | 10.9 | ||||||
Percentage of net sales |
86.1 | % | 90.8 | % |
* | Primary reason for change. The decrease in costs of sales as a percentage of net sales was primarily driven by improved contract performance on Atlas V and various tactical and in-space propulsion programs as a result of manufacturing efficiencies and lower overhead rates. In addition, non-cash aerospace and defense retirement benefit plan expense decreased by $2.1 million. See discussion of Retirement Benefit Plans below. |
Selling, General and Administrative (SG&A):
Three months ended | ||||||||||||
February 28, | February 28, | |||||||||||
2011 | 2010 | Change* | ||||||||||
(In millions, except percentage amounts) | ||||||||||||
Selling, General and Administrative: |
$ | 10.3 | $ | 5.0 | $ | 5.3 | ||||||
Percentage of net sales |
4.9 | % | 2.7 | % |
* | Primary reason for change. The increase in SG&A expense is primarily due to an increase of $3.2 million of non-cash corporate retirement benefit plan expenses. See discussion of Retirement Benefit Plans below. Additionally, stock-based compensation increased by $2.7 million in the current period compared to the prior period primarily due to changes in the fair value of the stock appreciation rights and stock awards granted in fiscal 2010. See Note 3 of the Unaudited Condensed Consolidated Financial Statements for additional information about the components of stock-based compensation. |
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Table of Contents
Depreciation and Amortization:
Three months ended | ||||||||||||
February 28, | February 28, | |||||||||||
2011 | 2010 | Change* | ||||||||||
(In millions) | ||||||||||||
Depreciation and amortization: |
$ | 5.7 | $ | 6.0 | $ | (0.3 | ) |
* | Primary reason for change. Depreciation and amortization expense was essentially unchanged for the periods presented. |
Other expense, net:
Three months ended | ||||||||||||
February 28, | February 28, | |||||||||||
2011 | 2010 | Change* | ||||||||||
(In millions) | ||||||||||||
Other expense, net |
$ | 1.2 | $ | 0.1 | $ | 1.1 |
* | Primary reason for change. The increase in other expense, net was primarily due to higher environmental remediation costs in the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. |
Unusual items:
Three months ended | ||||||||||||
February 28, | February 28, | |||||||||||
2011 | 2010 | Change* | ||||||||||
(In millions) | ||||||||||||
Unusual items |
$ | | $ | 1.6 | $ | (1.6 | ) |
* | Primary reason for change. During the first quarter of fiscal 2011 and 2010, we recorded $0.2 million for realized losses and interest associated with the failure to register with the SEC the issuance of certain of our common shares under the defined contribution 401(k) employee benefit plan. |
A summary of our gains on the debt repurchased during the first quarter of fiscal 2011 is as
follows (in millions):
Principal amount repurchased |
$ | 6.5 | ||
Cash repurchase price |
(6.4 | ) | ||
0.1 | ||||
Write-off of the associated debt discount |
(0.4 | ) | ||
Portion of the 21/4% Convertible Subordinated Debentures (21/4%
Debentures) repurchased attributed to the equity component |
0.5 | |||
Gain on 21/4% Debentures repurchased |
$ | 0.2 | ||
In the first quarter of fiscal 2010, we recorded $1.4 million associated with executive
severance.
Interest Expense:
Three months ended | ||||||||||||
February 28, | February 28, | |||||||||||
2011 | 2010 | Change* | ||||||||||
(In millions) | ||||||||||||
Interest expense |
$ | 7.8 | $ | 10.4 | $ | (2.6 | ) | |||||
Components of interest expense: |
||||||||||||
Contractual interest and other |
6.1 | 7.2 | (1.1 | ) | ||||||||
Debt discount amortization |
0.9 | 2.0 | (1.1 | ) | ||||||||
Amortization of deferred financing costs |
0.8 | 1.2 | (0.4 | ) |
* | Primary reason for change. The decrease in interest expense was primarily due to lower average debt balances during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010, including the retirement of $22.5 million and $77.8 million of principal on the 91/2% Senior Subordinated Notes (91/2% Notes) and 21/4% Debentures, respectively, in fiscal 2010. |
37
Table of Contents
Interest Income:
Three months ended | ||||||||||||
February 28, | February 28, | |||||||||||
2011 | 2010 | Change* | ||||||||||
(In millions) | ||||||||||||
Interest income |
$ | (0.3 | ) | $ | (0.3 | ) | $ | |
* | Primary reason for change. Interest income was unchanged for the periods presented. |
Income Tax Provision:
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Income tax provision |
$ | 2.6 | $ | 4.2 |
The income tax provision of $2.6 million in the first quarter of fiscal 2011 is primarily
related to current state taxes of $1.8 million, and net deferred taxes of $0.8 million, which
represents the excess of federal and state deferred taxes from goodwill amortization over
alternative minimum tax credits and research credits.
The difference between operating results at the statutory rate and the income tax provision
recorded was primarily due to the separate state tax expense in the first quarter of fiscal 2011
and the change in the valuation allowance which increased in the first quarter of fiscal 2010.
The income tax provision of $4.2 million in the first quarter of fiscal 2010 was primarily
related to current federal alternative minimum taxes of $1.7 million, current state taxes of $1.1
million, and deferred taxes of $1.4 million related to the amortization of goodwill.
As of February 28, 2011, the liability for uncertain income tax positions was $1.6 million.
Due to the high degree of uncertainty regarding the timing of potential future cash flows
associated with these liabilities, we are unable to make a reasonably reliable estimate of the
amount and period in which these liabilities might be paid.
Discontinued Operations:
In November 2003, we 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, we completed the legal process
for closing the facility and establishing a social plan. During the first quarter of fiscal 2009,
Snappon SA 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. 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(a) of the Unaudited Condensed Consolidated
Financial Statements).
Summarized financial information for discontinued operations is set forth below:
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Net sales |
$ | | $ | | ||||
(Loss) income before income taxes(1) |
(0.7 | ) | 1.0 | |||||
Income tax benefit |
| | ||||||
(Loss) income from discontinued operations, net of income taxes |
(0.7 | ) | 1.0 |
(1) | Includes foreign currency (losses) and gains of ($0.6) million and $1.3 million in the first quarter of fiscal 2011 and 2010, respectively. |
38
Table of Contents
Retirement Benefit Plans:
Components of retirement benefit expense are:
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Service cost |
$ | 1.0 | $ | 1.2 | ||||
Interest cost on benefit obligation |
20.5 | 22.5 | ||||||
Assumed return on plan assets |
(25.6 | ) | (26.9 | ) | ||||
Recognized net actuarial losses |
15.7 | 13.7 | ||||||
Retirement benefit expense |
$ | 11.6 | $ | 10.5 | ||||
The increase in retirement benefit expense was primarily due to higher actuarial losses
recognized in the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. The
increase in actuarial losses was primarily the result of a decrease in the discount rate due to
lower market interest rates used to determine our retirement benefit obligation. The discount rate
was 5.21% as of November 30, 2010 compared to 5.65% as of November 30, 2009.
Market conditions and interest rates significantly affect assets and liabilities of our
pension plans. Pension accounting permits market gains and losses to be deferred and recognized
over a period of years. This smoothing results in the creation of other accumulated income or
losses which will be amortized to retirement benefit expense or benefit in future years. The
accounting method we utilize 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 retirement benefit expense, future expenses
are impacted by changes in the market value of pension plan assets and changes in interest rates.
Additionally, we sponsor a defined contribution 401(k) plan and participation in the plan is
available to all employees. Effective January 15, 2009, we discontinued the employer matching
component to the defined contribution 401(k) plan for non-union employees. Effective April 15,
2009, all future contribution investment elections directed into the GenCorp Stock Fund were
redirected to other investment options and our union employee matching contributions are being made
in cash. Effective the first full payroll commencing in July 2010, for non-union employees,
matching contributions were reinstated in cash at the same level in effect prior to January 15,
2009 and invested according to participants investment elections in effect at the time of
contribution. The cost of the 401(k) plan was $2.4 million and $0.2 million, respectively, in the
first quarter of fiscal 2011 and 2010.
Operating Segment Information:
We evaluate our operating segments based on several factors, of which the primary financial
measure is segment performance. Segment performance, which is a non-GAAP financial measure,
represents net sales from continuing operations less applicable costs, expenses and provisions for
unusual items relating to the segment. Excluded from segment performance are: corporate income and
expenses, interest expense, interest income, income taxes, legacy income or expenses, and
provisions for unusual items not related to the segment. We believe that segment performance
provides information useful to investors in understanding our underlying operational performance.
Specifically, we believe the exclusion of the items listed above permits an evaluation and a
comparison of results for ongoing business operations, and it is on this basis that management
internally assesses operational performance.
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Aerospace and Defense Segment
Three months ended | ||||||||||||
February 28, | February 28, | |||||||||||
2011 | 2010 | Change* | ||||||||||
(In millions, except percentage amounts) | ||||||||||||
Net Sales |
$ | 208.1 | $ | 185.1 | $ | 23.0 | ||||||
Segment performance |
20.9 | 9.5 | 11.4 | |||||||||
Segment performance as a percentage of net sales |
10.0 | % | 5.1 | % | ||||||||
Components of segment performance: |
||||||||||||
Aerospace and Defense |
$ | 27.3 | $ | 17.3 | $ | 10.0 | ||||||
Environmental remediation provision adjustments |
(1.0 | ) | (0.3 | ) | (0.7 | ) | ||||||
Retirement benefit plan expense |
(5.2 | ) | (7.3 | ) | 2.1 | |||||||
Unusual items |
(0.2 | ) | (0.2 | ) | | |||||||
Aerospace and Defense total |
$ | 20.9 | $ | 9.5 | $ | 11.4 | ||||||
* | Primary reason for change. The increase in net sales was primarily due to the following: (i) an increase of $12.9 million in the various Standard Missile programs primarily related to the divert and attitude control system contracts; (ii) awards received in fiscal 2010 on the Hawk program resulting in $6.9 million of additional net sales; (iii) additional deliveries of rocket motors under the Atlas V program in the current period increasing net sales by $6.5 million; and (iv) increased deliveries on the GMLRS program generating $5.9 million of additional net sales. The increase in net sales was partially offset by a decrease of $10.5 million on the Orion program due to NASA funding constraints. | |
The increase in the segment margin of 4.9 percentage points, compared to the comparable prior year period, was primarily driven by improved contract performance on Atlas V and various tactical and in-space propulsion programs as a result of manufacturing efficiencies and lower overhead rates. In addition, retirement benefit expense decreased by $2.1 million in the current period. See discussion of Retirement Benefit Plans above. These factors were partially offset by an increase in environmental related costs. |
A summary of our backlog is as follows:
February 28, | November 30, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Funded backlog |
$ | 772.9 | $ | 804.4 | ||||
Unfunded backlog |
584.7 | 572.9 | ||||||
Total contract backlog |
$ | 1,357.6 | $ | 1,377.3 | ||||
Total backlog includes both funded backlog (the amount for which money has been directly
appropriated by the U.S. Congress, or for which a purchase order has been received from a
commercial customer) and unfunded backlog (firm orders for which funding has not been
appropriated). Indefinite delivery and quantity contracts and unexercised options are not reported
in total backlog. Backlog is subject to funding delays or program restructurings/cancellations
which are beyond our control.
Real Estate Segment
Three months ended | ||||||||||||
February 28, | February 28, | |||||||||||
2011 | 2010 | Change* | ||||||||||
(In millions) | ||||||||||||
Net Sales |
$ | 1.7 | $ | 1.7 | $ | | ||||||
Segment performance |
$ | 1.2 | $ | 1.2 | $ | |
* | Primary reason for change. Net sales and segment performance consist primarily of rental property operations. |
Use of Non-GAAP Financial Measures
In addition to segment performance (discussed above), we provide the Non-GAAP financial
measure of our operational performance called Adjusted EBITDAP. We use this metric to further our
understanding of the historical and prospective consolidated core operating performance of our
segments, net of expenses incurred by our corporate activities in the ordinary, ongoing and
customary course of our operations. Further, we believe that to effectively compare the core
operating performance metric from period to period on a historical and prospective basis, the
metric should exclude items relating to retirement benefits (pension and postretirement benefits),
significant non-cash expenses, the impacts of financing decisions on the earnings, and items
incurred outside
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the ordinary, ongoing and customary course of our operations. Accordingly, we define Adjusted
EBITDAP as GAAP income from continuing operations before income taxes adjusted by interest expense,
interest income, depreciation and amortization, retirement benefit expense, and unusual items which
we do not believe are reflective of such ordinary, ongoing and customary course activities.
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
(In millions, except percentage amounts) | ||||||||
Income (loss) from continuing operations before income taxes |
$ | 4.5 | $ | (5.7 | ) | |||
Interest expense |
7.8 | 10.4 | ||||||
Interest income |
(0.3 | ) | (0.3 | ) | ||||
Depreciation and amortization |
5.7 | 6.0 | ||||||
Retirement benefit expense |
11.6 | 10.5 | ||||||
Unusual items |
||||||||
Legal related matters |
0.2 | 0.2 | ||||||
Gain on debt repurchased |
(0.2 | ) | | |||||
Executive severance agreement |
| 1.4 | ||||||
Adjusted EBITDAP |
$ | 29.3 | $ | 22.5 | ||||
Adjusted EBITDAP as a percentage of net sales |
14.0 | % | 12.0 | % |
In addition to segment performance and Adjusted EBITDAP, we provide the Non-GAAP financial
measures of free cash flow and net debt.
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Cash provided by operating activities |
$ | 17.6 | $ | 77.4 | ||||
Capital expenditures |
(2.0 | ) | (4.2 | ) | ||||
Free cash flow |
$ | 15.6 | $ | 73.2 | ||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Debt principal |
$ | 389.4 | $ | 496.4 | ||||
Cash and cash equivalents |
(211.6 | ) | (139.1 | ) | ||||
Restricted cash |
| (67.3 | ) | |||||
Marketable securities |
(5.0 | ) | (44.9 | ) | ||||
Net debt |
$ | 172.8 | $ | 245.1 | ||||
We believe that providing this additional information is useful to better understand and
assess our operating performance. These measures allow investors, analysts, lenders, and other
parties to better evaluate our financial performance and prospects in the same manner as
management. Because our method for calculating the Non-GAAP measures may differ from other
companies methods, the Non-GAAP measures presented above may not be comparable to similarly titled
measures reported by other companies. These measures are not recognized in accordance with GAAP,
and we do not intend for this information to be considered in isolation or as a substitute for GAAP
measures.
Other Information
Recently Adopted Accounting Pronouncements
As of December 1, 2010, we adopted the new accounting standards related to the use of the
milestone method of revenue recognition that applies to research or development transactions in
which one or more payments are contingent upon achieving uncertain future events or circumstances.
The adoption of the new standards did not have a material impact on our financial position, results
of operations, or cash flows.
New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued updated guidance to
improve disclosures regarding fair value measurements. This update requires entities to (i)
disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair
value measurements and describe the reasons for the transfers and (ii) present separately (i.e., on
a gross basis
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rather than as one net number), information about purchases, sales, issuances, and settlements in the
roll forward of changes in Level 3 fair value measurements. The update requires fair value
disclosures by class of assets and liabilities rather than by major category or line item in the
statement of financial position. Disclosures regarding the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements for assets and
liabilities in both Level 2 and Level 3 are also required. For all portions of the update except
the gross presentation of activity in the Level 3 roll forward, this standard was effective for us
on March 1, 2010. For the gross presentation of activity in the Level 3 roll forward, the new
disclosures will be presented in our quarterly financial statements for the period ending February
28, 2012.
In December 2010, the FASB issued authoritative guidance on application of goodwill impairment
model when a reporting unit has a zero or negative carrying amount. When a reporting unit has a
zero or negative carrying value, Step 2 of the goodwill impairment test should be performed if
qualitative factors indicate that it is more likely than not that a goodwill impairment exists. The
guidance is effective for us beginning in the first quarter of fiscal 2012. We are currently
evaluating the potential impact, if any, of the adoption of this guidance on our consolidated
financial statements.
In December 2010, the FASB issued authoritative guidance on disclosure of supplementary pro
forma information for business combinations. The new guidance requires that pro forma financial
information should be prepared as if the business combination occurred as of the beginning of the
prior annual period. The guidance is effective for us on business combinations with acquisition
dates occurring in and from the first quarter of fiscal 2012.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America that offer acceptable alternative methods for accounting
for certain items affecting our financial results, such as determining inventory cost, deferring
certain costs, depreciating long-lived assets, recognizing pension benefits, and recognizing
revenues.
The preparation of financial statements requires the use of estimates, assumptions, judgments,
and interpretations that can affect the reported amounts of assets, liabilities, revenues, and
expenses, the disclosure of contingent assets and liabilities and other supplemental disclosures.
The development of accounting estimates is the responsibility of our management. Management
discusses those areas that require significant judgment with the audit committee of our board of
directors. The audit committee has reviewed all financial disclosures in our filings with the SEC.
Although we believe the positions we have taken with regard to uncertainties are reasonable, others
might reach different conclusions and our positions can change over time as more information
becomes available. If an accounting estimate changes, its effects are accounted for prospectively
and, if significant, disclosed in the Notes to Unaudited Condensed Consolidated Financial
Statements.
The areas that are most affected by our accounting policies and estimates are revenue
recognition for long-term contracts, other contract considerations, goodwill, retirement benefit
plans, litigation reserves, environmental remediation costs and recoveries, and income taxes.
Except for income taxes, which are not allocated to our operating segments, these areas affect the
financial results of our business segments.
A detailed description of our significant accounting policies can be found in our most recent
Annual Report on Form 10-K for the fiscal year ended November 30, 2010.
Arrangements with Off-Balance Sheet Risk
As of February 28, 2011, arrangements with off-balance sheet risk, consisted of:
$68.5 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.
Guarantees, jointly and severally, by our material domestic subsidiaries of our
obligations under our Senior Credit Facility and our 91/2% Notes.
In addition to the items discussed above, we 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 we
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may provide customary indemnification to purchasers of our 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 we 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 we may be required to indemnify such persons for liabilities arising out of their
relationship with us. The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated.
We also issue purchase orders and make other commitments to suppliers for equipment,
materials, and supplies in the normal course of business. These purchase commitments are generally
for volumes consistent with anticipated requirements to fulfill purchase orders or contracts for
product deliveries received, or expected to be received, from customers and would be subject to
reimbursement if a cost-plus contract is terminated.
Liquidity and Capital Resources
Net Cash Provided by (Used in) Operating, Investing, and Financing Activities
Cash and cash equivalents increased by $30.1 million during the first quarter of fiscal 2011.
The change in cash and cash equivalents was as follows:
Three months ended | ||||||||
February 28, | February 28, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Net Cash Provided by Operating Activities |
$ | 17.6 | $ | 77.4 | ||||
Net Cash Provided by (Used in) Investing Activities |
19.7 | (116.5 | ) | |||||
Net Cash (Used in) Provided by Financing Activities |
(7.2 | ) | 51.9 | |||||
Net Increase in Cash and Cash Equivalents |
$ | 30.1 | $ | 12.8 | ||||
Net Cash Provided by Operating Activities
The $17.6 million of cash provided by operating activities in the first quarter of fiscal 2011
was primarily the result of net income adjusted for non-cash expenses (defined as depreciation,
amortization, stock compensation, gain on debt repurchased, and retirement benefits expense) which
generated $21.2 million in the first quarter of fiscal 2011. The net income adjusted for non-cash
expenses was partially offset by cash used to fund working capital (defined as accounts
receivables, inventories, accounts payable, contract advances, and other current assets and
liabilities) and real estate activities of $2.0 million.
The $77.4 million of cash provided by operating activities in the first quarter of fiscal 2010
was primarily due to $64.0 million of cash provided by working capital. The increase from working
capital was primarily due to the following (i) an increase in contract advances of $23.6 million
from the prior year related to the timing of contract payments; (ii) a decrease of $20.0 million in
accounts receivables; (iii) a decrease of $8.5 million in inventories due to higher sales,
resulting in increased inventory turnover; and (iv) higher accounts payable of $5.7 million in
connection with higher sales and timing of payments to vendors.
Net Cash Provided by (Used In) Investing Activities
During the first quarter of fiscal 2011, we sold $21.7 million of marketable securities.
During the first quarter of fiscal 2010, we invested net cash of $45.0 million in marketable
securities.
During the first quarter of fiscal 2011 and 2010, we had capital expenditures of $2.0 million
and $4.2 million, respectively. The majority of our capital expenditures directly supports our
contract and customer requirements and are primarily incurred for asset replacement, capacity
expansion, development of new projects, and safety and productivity improvements.
As of February 28, 2010, we had $67.3 million of restricted cash related to the proceeds from
the 4.0625% Convertible Subordinated Debentures (4 1/16% Debentures) that was used to repurchase
a portion of our outstanding convertible subordinated notes and senior subordinated notes in fiscal
2010.
Net Cash (Used in) Provided by Financing Activities
During the first quarter of fiscal 2011, we had $7.2 million in debt repayments (see below).
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During the first quarter of fiscal 2010, cash of $51.9 million was generated reflecting
the issuance of $200.0 million in 4 1/16% Debentures in December 2009, offset by $142.2 million in
debt repayments. In addition, we incurred $5.9 million in debt issuance costs.
Debt Activity and Senior Credit Facility:
Our debt activity during the first quarter of fiscal 2011 was as follows:
Debt | Non-cash | |||||||||||||||||||
November 30, | Discount | Cash | Repurchase | February 28, | ||||||||||||||||
2010 | Amortization | Payments | Activity | 2011 | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Term loan |
$ | 51.1 | $ | | $ | (0.1 | ) | $ | | $ | 51.0 | |||||||||
91/2% Notes |
75.0 | | | | 75.0 | |||||||||||||||
4 1/16% Debentures |
200.0 | | | | 200.0 | |||||||||||||||
21/4% Debentures |
68.6 | | (6.4 | ) | (0.1 | ) | 62.1 | |||||||||||||
Debt discount on 21/4% Debentures |
(4.0 | ) | 0.9 | | 0.4 | (2.7 | ) | |||||||||||||
Other debt |
2.0 | | (0.7 | ) | | 1.3 | ||||||||||||||
Total Debt and Borrowing Activity |
$ | 392.7 | $ | 0.9 | $ | (7.2 | ) | $ | 0.3 | $ | 386.7 | |||||||||
On March 17, 2010, we executed an amendment (the Second Amendment) to our existing Amended
and Restated Credit Agreement, originally entered into as of June 21, 2007, by and among the
Company, as borrower, the subsidiaries of the Company from time to time party thereto, as
guarantors, the lenders from time to time party thereto and Wachovia Bank, National Association, as
administrative agent for the lenders, as amended to date (the Credit Agreement). The Second
Amendment, among other things, (i) permits us to repurchase our outstanding convertible
subordinated notes and senior subordinated notes, subject to certain conditions; (ii) permits us to
incur additional senior unsecured or subordinated indebtedness, subject to specified limits and
other conditions; (iii) permits us to conduct a rescission offer, using stock and/or cash up to
$15.0 million, with respect to certain units issued under the GenCorp Savings Plan; (iv) permits us
to repurchase our stock, subject to certain conditions; (v) limits the circumstances under which we
would have to mandatorily prepay loans under the Senior Credit Facility with the proceeds from
equity issuances; and (vi) amends the definitions of the leverage ratio and net cash proceeds from
permitted real estate sales. The Second Amendment reduces the Revolver capacity from $80.0 million
to $65.0 million and the letter of credit subfacility capacity from $125.0 million to $100.0
million. Under the Second Amendment, the interest rate on LIBOR rate borrowings is LIBOR plus 325
basis points, an increase of 100 basis points, and the letter of credit subfacility commitment fee
has been similarly amended. The Second Amendment also provides for a commitment fee on the unused
portion of the Revolver in the amount of 62.5 basis points, an increase of 12.5 basis points.
As of February 28, 2011, the borrowing limit under the Revolver was $65.0 million with all of
it available. Also as of February 28, 2011, we had $68.5 million outstanding letters of credit
under the $100.0 million letter of credit subfacility and had permanently reduced the amount of our
term loan subfacility to the $51.0 million outstanding.
The Senior Credit Facility is collateralized by a substantial portion of our real property
holdings and substantially all of our other assets, including the stock and assets of our material
domestic subsidiaries that are guarantors of the facility. We are subject to certain limitations
including the ability to: incur additional senior debt; release collateral, retain proceeds from
asset sales, retain proceeds from operations 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 to refinance our subordinated debt, including provisions that, except on
terms no less favorable to the Credit Agreement, our subordinated debt cannot be refinanced prior
to maturity. Furthermore, provided that we have cash and cash equivalents of at least $25.0 million
after giving effect thereto, we 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. We are also subject to the following financial covenants:
Actual Ratios as of | Required Ratios | |||
Financial Covenant | February 28, 2011 | December 1, 2010 and thereafter | ||
Interest coverage ratio, as defined under the Credit Agreement
|
5.14 to 1.00 | Not less than: 2.25 to 1.00 | ||
Leverage ratio, as defined under the Credit Agreement(1)
|
1.41 to 1.00 | Not greater than: 5.50 to 1.00 |
(1) | As a result of the March 17, 2010 amendment, the leverage ratio calculation was amended to allow for all cash and cash equivalents to reduce funded debt as long as there are no loans outstanding under the Revolver. |
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We were in compliance with our financial and non-financial covenants as of February 28, 2011.
Liquidity and Outlook
Short-term liquidity requirements consist primarily of recurring operating expenses, including
but not limited to costs related to our retirement benefit plans, capital and environmental
expenditures, and debt service requirements. We believe that our existing cash and cash
equivalents, marketable securities, and existing credit facilities will provide sufficient funds to
meet our operating plan for the next twelve months. The operating plan for this period provides for
full operation of our businesses, and interest and principal payments on our debt.
As of November 30, 2010, our defined benefit pension plan assets and projected benefit
obligations were approximately $1.4 billion and $1.6 billion, respectively. The PPA 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,
2009 under the PPA for our tax-qualified defined benefit pension plan was 95.6% which was above the
94.0% ratio required under the PPA. The required ratio to be met as of the November 30, 2010
measurement date is 96%. The final calculated PPA funded ratio as of November 30, 2010 is expected
to be completed in the second half of 2011. In general, the PPA requires companies with underfunded
plans to make up the shortfall over a seven year period. These values are based on assumptions
specified by the Internal Revenue Service, and are typically not the same as the amounts used for
corporate financial reporting. Companies may prepay contributions and, under certain circumstances,
use those prepayment credits to satisfy the required funding of the pension plans annual required
contribution thereby allowing the company to defer cash payments into the pension plan. We have
accumulated $61.4 million in such prepayment credits as of March 15, 2011. For fiscal 2011, we are
not expecting to make a cash contribution to our pension plan. The value of the unfunded accrued
benefits and amount of required contribution each year are based on a number of factors, including
plan investment experience and interest rate environment, and as such can fluctuate significantly
from year to year.
As disclosed in Notes 7(a) and 7(b) of the Notes to Unaudited Condensed Consolidated Financial
Statements, we have exposure for certain legal and environmental matters. We believe that it is
currently not possible to estimate the impact, if any, that the ultimate resolution of certain of
these matters will have on our financial position, results of operations, or cash flows.
Major factors that could adversely impact our forecasted operating cash and our financial
condition are described in the section Risk Factors in Item 1A of our Annual Report to the SEC on
Form 10-K for the fiscal year ended November 30, 2010. In addition, our liquidity and financial
condition will continue to be affected by changes in prevailing interest rates on the portion of
debt that bears interest at variable interest rates.
Forward-Looking Statements
Certain information contained in this report should be considered forward-looking statements
as defined by Section 21E of the Private Securities Litigation Reform Act of 1995. All statements
in this report other than historical information may be deemed forward-looking statements. These
statements present (without limitation) the expectations, beliefs, plans and objectives of
management and future financial performance and assumptions underlying, or judgments concerning,
the matters discussed in the statements. The words believe, estimate, anticipate, project
and expect, and similar expressions, are intended to identify forward-looking statements.
Forward-looking statements involve certain risks, estimates, assumptions and uncertainties,
including with respect to future sales and activity levels, cash flows, contract performance, the
outcome of litigation and contingencies, environmental remediation and anticipated costs of
capital. A variety of factors could cause actual results or outcomes to differ materially from
those expected and expressed in our forward-looking statements. Important risk factors that could
cause actual results or outcomes to differ from those expressed in the forward-looking statements
are described in the section Risk Factors in Item 1A of our Annual Report to the SEC on Form 10-K
for the fiscal year ended November 30, 2010 include the following:
| the earnings and cash flow of the Companys subsidiaries and the distribution of those earnings to the Company; | ||
| cancellation or material modification of one or more significant contracts; | ||
| future reductions or changes in U.S. government spending; | ||
| negative audit of the Companys business by the U.S. government; | ||
| cost overruns on the Companys contracts that require the Company to absorb excess costs; | ||
| failure of the Companys subcontractors or suppliers to perform their contractual obligations; | ||
| failure to secure contracts; | ||
| failure to comply with regulations applicable to contracts with the U.S. government; | ||
| costs and time commitment related to potential acquisition activities; | ||
| significant competition and the Companys inability to adapt to rapid technological changes; |
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| failure of the Companys information technology infrastructure; | ||
| product failures, schedule delays or other problems with existing or new products and systems; | ||
| the release or explosion of dangerous materials used in the Companys businesses; | ||
| loss of key qualified suppliers of technologies, components, and materials; | ||
| the funded status of the Companys defined benefit pension plan and the Companys obligation to make cash contributions in excess of the amount that the Company can recover in its current period overhead rates; | ||
| effects of changes in discount rates, actual returns on plan assets, and government regulations of defined benefit pension plans; | ||
| the possibility that environmental and other government regulations that impact the Company become more stringent or subject the Company to material liability in excess of its established reserves; | ||
| environmental claims related to the Companys current and former businesses and operations; | ||
| changes in the amount recoverable from environmental claims; | ||
| the results of significant litigation; | ||
| occurrence of liabilities that are inadequately covered by indemnity or insurance; | ||
| the cost of servicing the Companys debt and the Companys ability to comply with the financial and other covenants contained in the Companys debt agreements; | ||
| risks inherent to the real estate market; | ||
| changes in economic and other conditions in the Sacramento, California metropolitan area real estate market or changes in interest rates affecting real estate values in that market; | ||
| the Companys ability to execute its real estate business plan including our ability to obtain, or cause to be obtained, the necessary final governmental zoning, land use and environmental approvals and building permits; | ||
| additional costs related to the Companys divestitures; | ||
| a strike or other work stoppage or the Companys inability to renew collective bargaining agreements on favorable terms; | ||
| the loss of key employees and shortage of available skilled employees to achieve anticipated growth; | ||
| fluctuations in sales levels causing the Companys quarterly operating results and cash flows to fluctuate; | ||
| changes in the Companys contract-related accounting estimates; | ||
| new accounting standards that could result in changes to the Companys methods of quantifying and recording accounting transactions; | ||
| failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act; and | ||
| those risks detailed from time to time in the Companys reports filed with the SEC. |
Additional risk factors may be described from time to time in our future filings with the SEC.
Accordingly, all forward-looking statements should be evaluated with the understanding of their
inherent uncertainty. All such risk factors are difficult to predict, contain material
uncertainties that may affect actual results and may be beyond our control.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our disclosures related to certain market risks as
reported under Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in
our Annual Report to the SEC on Form 10-K for the fiscal year ended November 30, 2010, except as
noted below.
Interest Rate Risk
We are exposed to market risk principally due to changes in interest rates. Debt with interest
rate risk includes borrowings under our Senior Credit Facility. Other than pension assets and
liabilities, we do not have any significant exposure to interest rate risk related to our
investments.
As of February 28, 2011, our debt totaled $386.7 million: $335.7 million, or 87%, was at an
average fixed rate of 4.93%; and $51.0 million, or 13%, was at a variable rate of 3.52%.
The estimated fair value and principal amount for our debt is presented below:
Fair Value | Principal Amount | |||||||||||||||
February 28, | November 30, | February 28, | November 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Term loan |
$ | 49.7 | $ | 49.8 | $ | 51.0 | $ | 51.1 | ||||||||
91/2% Notes |
76.1 | 75.9 | 75.0 | 75.0 | ||||||||||||
21/4% Debentures(1) |
61.5 | 67.6 | 62.1 | 68.6 | ||||||||||||
4 1/16% Debentures |
191.0 | 183.8 | 200.0 | 200.0 | ||||||||||||
Other debt |
1.3 | 2.0 | 1.3 | 2.0 | ||||||||||||
$ | 379.6 | $ | 379.1 | $ | 389.4 | $ | 396.7 | |||||||||
(1) | Excludes the unamortized debt discount of $2.7 million and $4.0 million as of February 28, 2011 and November 30, 2010, respectively. |
The fair values of the term loan, 91/2% Notes, 21/4% Debentures, and 4 1/16% Debentures were
determined using broker quotes that are based on open markets of our debt securities as of February
28, 2011 and November 30, 2010, respectively. The fair value of the other debt was determined to
approximate carrying value.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Based on our managements evaluation (with the participation of our principal executive
officer and principal financial officer), as of the end of the period covered by this report, our
principal executive officer and principal financial officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) are effective to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission
rules and forms and is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Changes in internal control over financial reporting
There was no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during our first quarter of fiscal 2011 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
Except as disclosed in Note 7 of the Notes to Unaudited Condensed Consolidated Financial
Statements, which is incorporated herein by reference, there have been no significant developments
in the pending legal proceedings as previously reported in Part, 1 Item 3, Legal Proceedings in our
Annual Report on Form 10-K for the fiscal year ended November 30, 2010.
Asbestos Cases. The following table sets forth information related to our historical product
liability costs associated with our asbestos litigation cases for the first quarter of fiscal 2011:
Claims filed as of November 30, 2010 |
141 | |||
Claims filed |
4 | |||
Claims dismissed |
6 | |||
Claims pending as of February 28, 2011 |
139 |
Legal and administrative fees for the asbestos cases for the first quarter of fiscal 2011 were
$0.1 million.
Item 1A. Risk Factors.
There have been no material changes from our risk factors as previously reported in our Annual
Report to the SEC on Form 10-K for the fiscal year ended November 30, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities
None.
Item 5. Other Information
None.
Item 6. Exhibits
No. | Description | |
31.1*
|
Certification of Principal Executive Officer pursuant to Rule 13a 14 (a) of the Securities Exchange Act of 1934, as amended. | |
31.2*
|
Certification of Principal Financial Officer pursuant to Rule 13a 14 (a) of the Securities Exchange Act of 1934, as amended. | |
32.1*
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a 14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. All other exhibits have been previously filed. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GenCorp Inc. |
||||
Date: April 8, 2011 | By: | /s/ Scott J. Seymour | ||
Scott J. Seymour | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Date: April 8, 2011 | By: | /s/ Kathleen E. Redd | ||
Kathleen E. Redd | ||||
Vice President, Chief Financial Officer
and Secretary (Principal Financial Officer and Principal Accounting Officer) |
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EXHIBIT INDEX
Exhibit No. | Exhibit Description | |
31.1
|
Certification of Principal Executive Officer pursuant to Rule 13a 14 (a) of the Securities Exchange Act of 1934, as amended. | |
31.2
|
Certification of Principal Financial Officer pursuant to Rule 13a 14 (a) of the Securities Exchange Act of 1934, as amended | |
32.1
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a 14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
50