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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: AUGUST 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number 1-1520
GENCORP INC.
(Exact name of registrant as specified in its charter)
OHIO 34-0244000
(State of Incorporation) (I.R.S. Employer Identification No.)
HIGHWAY 50 AND AEROJET ROAD
RANCHO CORDOVA, CALIFORNIA 95670
(Address of Principal Executive Offices) (Zip Code)
P.O. BOX 537012
SACRAMENTO, CALIFORNIA 95853-7012
(Mailing Address) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (916) 355-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of September 30, 2003, there were 43,989,168 outstanding shares of the
Company's Common Stock, $0.10 par value.
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GENCORP INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2003
TABLE OF CONTENTS
ITEM
NUMBER PAGE
PART I - FINANCIAL INFORMATION
1 Financial Statements............................................ 1
2 Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 33
3 Quantitative and Qualitative Disclosures About Market Risk...... 43
4 Controls and Procedures......................................... 43
PART II - OTHER INFORMATION
1 Legal Proceedings............................................... 43
6 Exhibits and Reports on Form 8-K................................ 43
SIGNATURES
Signatures...................................................... 46
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENCORP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------- -------------------
2003 2002 2002 2003
------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NET SALES ...................................... $ 283 $ 266 $ 869 $ 818
COSTS AND EXPENSES
Cost of products sold .......................... 237 216 719 670
Selling, general and administrative ............ 22 16 61 45
Depreciation and amortization .................. 21 18 58 50
Interest expense ............................... 6 4 17 11
Other (income) expense, net .................... 2 -- (1) 6
Unusual items, net ............................. 2 -- 2 9
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES .............. (7) 12 13 27
Income tax provision (benefit) ................. (4) 4 3 10
------ ------ ------ ------
NET INCOME (LOSS) .............................. $ (3) $ 8 $ 10 $ 17
====== ====== ====== ======
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Basic .......................................... $(0.07) $ 0.19 $ 0.23 $ 0.40
====== ====== ====== ======
Diluted ........................................ $(0.07) $ 0.19 $ 0.23 $ 0.40
====== ====== ====== ======
Weighted average shares of common stock
outstanding ................................. 43.5 42.9 43.2 42.8
====== ====== ====== ======
Weighted average shares of common stock
outstanding, assuming dilution .............. 43.5 51.4 43.3 43.2
====== ====== ====== ======
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK ... $ 0.03 $ 0.03 $ 0.09 $ 0.09
====== ====== ====== ======
See Notes to Unaudited Condensed Consolidated Financial Statements.
-1-
GENCORP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AUGUST 31, NOVEMBER 30,
2003 2002
--------- -----------
(DOLLARS IN MILLIONS)
CURRENT ASSETS
Cash and cash equivalents............................................................. $ 61 $ 48
Accounts receivable................................................................... 113 139
Inventories, net...................................................................... 183 167
Recoverable from the U.S. Government and other third parties for
environmental remediation ......................................................... 24 24
Prepaid expenses and other............................................................ 12 5
--------- --------
Total Current Assets.......................................................... 393 383
NONCURRENT ASSETS
Restricted cash....................................................................... 95 -
Property, plant and equipment, net.................................................... 473 481
Recoverable from the U.S. Government and other third parties for
environmental remediation ......................................................... 192 208
Deferred income taxes................................................................. - 9
Prepaid pension asset................................................................. 349 337
Goodwill, net......................................................................... 132 126
Other noncurrent assets, net.......................................................... 103 92
--------- --------
Total Assets.................................................................. $ 1,737 $ 1,636
========= ========
CURRENT LIABILITIES
Short-term borrowings and current portion of long-term debt........................... $ 44 $ 22
Accounts payable...................................................................... 77 89
Reserves for environmental remediation................................................ 39 39
Income taxes payable.................................................................. 15 22
Current deferred income taxes ........................................................ - 1
Other current liabilities............................................................. 200 200
--------- --------
Total Current Liabilities..................................................... 375 373
NONCURRENT LIABILITIES
Other long-term debt, net of current portion.......................................... 161 215
Convertible subordinated notes........................................................ 150 150
Senior subordinated notes............................................................. 150 -
Reserves for environmental remediation................................................ 278 301
Postretirement benefits other than pensions........................................... 165 176
Other noncurrent liabilities.......................................................... 65 61
--------- --------
Total Noncurrent Liabilities.................................................. 969 903
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Preference stock, par value of $1.00 per share; 15.0 million shares authorized;
none issued or outstanding......................................................... - -
Common stock, par value of $0.10 per share; 150.0 million shares authorized;
44.1 million shares issued, 43.6 million shares outstanding as of August 31,
2003 (43.5 million shares issued, 43.0 million shares outstanding as of
November 30, 2002)................................................................. 4 4
Other capital......................................................................... 17 13
Retained earnings..................................................................... 362 356
Accumulated other comprehensive income (loss), net of income taxes.................... 10 (13)
--------- --------
Total Shareholders' Equity.................................................... 393 360
--------- --------
Total Liabilities and Shareholders' Equity.................................... $ 1,737 $ 1,636
========= ========
See Notes to Unaudited Condensed Consolidated Financial Statements.
-2-
GENCORP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
AUGUST 31,
2003 2002
---------- --------
(DOLLARS IN MILLIONS)
OPERATING ACTIVITIES
Net income............................................................................ $ 10 $ 17
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Net loss related to reacquisition of minority ownership interest
in subsidiary................................................................. - 2
Gain on sale of property, plant and equipment................................... (10) -
Foreign exchange gain........................................................... (2) -
Depreciation and amortization................................................... 58 50
Deferred income taxes........................................................... 8 15
Changes in assets and liabilities, net of effects of
acquisitions of businesses:
Current assets............................................................. 12 36
Noncurrent assets.......................................................... (2) (112)
Current liabilities........................................................ (34) (101)
Noncurrent liabilities..................................................... (33) 53
---------- --------
Net Cash Provided by (Used in) Operating Activities.................... 7 (40)
INVESTING ACTIVITIES
Capital expenditures.................................................................. (36) (31)
Restricted cash....................................................................... (95) -
Proceeds from sale of property, plant and equipment................................... 20 4
Acquisition of businesses, net of cash acquired....................................... - (8)
---------- ---------
Net Cash Used in Investing Activities.................................. (111) (35)
FINANCING ACTIVITIES
Proceeds from issuance of subordinated notes.......................................... 150 150
Repayments on revolving credit facility, net.......................................... (45) (60)
Net short-term debt (repaid) incurred................................................. 21 (6)
Proceeds from the issuance of long-term debt.......................................... 6 25
Repayments of long-term debt.......................................................... (14) (37)
Debt issuance costs................................................................... (5) (6)
Dividends paid........................................................................ (4) (4)
Other equity transactions............................................................. 4 4
--------- --------
Net Cash Provided by Financing Activities.............................. 113 66
--------- --------
Effect of exchange rate fluctuations on cash and cash equivalents..................... 4 2
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. 13 (7)
Cash and Cash Equivalents at Beginning of Period...................................... 48 44
--------- --------
Cash and Cash Equivalents at End of Period............................................ $ 61 $ 37
========= ========
See Notes to Unaudited Condensed Consolidated Financial Statements.
-3-
GENCORP INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The accompanying Unaudited Condensed Consolidated Financial Statements of
GenCorp Inc. (GenCorp or the Company) include the accounts of the parent company
and its wholly-owned and majority-owned subsidiaries. These interim financial
statements have been prepared in accordance with the instructions to Form 10-Q
and therefore do not include all of the information and notes required by
accounting principles generally accepted in the United States. These interim
financial statements should be read in conjunction with the financial statements
and accompanying notes included in the GenCorp Annual Report on Form 10-K for
the year ended November 30, 2002, as filed with the United States Securities and
Exchange Commission (SEC).
In the opinion of management, the accompanying Unaudited Condensed
Consolidated Financial Statements reflect all adjustments necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows for the periods presented. During the third quarter of 2003, the Company's
GDX Automotive recorded a $3 million charge related to the correction of
accounting for certain customer pricing allowances and vendor rebates, which
individually and in the aggregate, were not material to the periods in which
they were initially recorded. All significant intercompany balances and
transactions have been eliminated in consolidation. The preparation of the
consolidated financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. In
addition, operating results for interim periods may not be indicative of the
results of operations for a full year.
Certain reclassifications have been made to financial information for prior
periods to conform to the current period presentation.
GenCorp is a multinational manufacturing and engineering company operating
primarily in North America and Europe. The Company's operations are organized
into three segments: GDX Automotive, Aerospace and Defense, and Fine Chemicals.
The Company's GDX Automotive segment is a major automotive supplier, engaged in
the development and manufacture of highly engineered extruded and molded rubber
and plastic sealing systems for automotive original equipment manufacturers.
The Aerospace and Defense segment includes the operations of
Aerojet-General Corporation (Aerojet or AGC) and development activities related
to real property located in California. Aerojet designs, develops and
manufactures space and strategic rocket propulsion and tactical weapons under
contracts with the major prime contractors to the U.S. government, the
Department of Defense and the National Aeronautics and Space Administration. In
October 2002, Aerojet acquired the assets of the General Dynamics Space
Propulsion and Fire Suppression business for $93 million, including transaction
costs.
-4-
In May 2003, Aerojet entered into an agreement to acquire substantially all
of the assets related to the propulsion business of Atlantic Research
Corporation (ARC Propulsion), for $133 million plus transaction costs. ARC
Propulsion is a developer and manufacturer of advanced solid rocket propulsion
systems, gas generators and auxiliary rocket motors for both space and defense
applications. Aerojet expects to receive regulatory approval and complete its
acquisition of ARC Propulsion in October 2003. The acquisition will be funded
with the proceeds of the $150 million senior subordinated notes offering
completed in August 2003 (Note 7), a portion of the proceeds of which were used
to temporarily repay borrowings under the Company's revolving credit facility
pending completion of the acquisition.
The Company's Fine Chemicals segment consists of the operations of Aerojet
Fine Chemicals LLC (AFC). AFC manufactures active pharmaceutical ingredients and
registered intermediates for pharmaceutical and biotechnology companies.
Information on the Company's operations by segment is provided in Note 12.
2. EARNINGS (LOSS) PER SHARE OF COMMON STOCK
A reconciliation of the numerator and denominator used to calculate basic
and diluted earnings per share of common stock (EPS) is presented in the
following table (dollars in millions, except per share amounts; shares in
thousands):
THREE MONTHS ENDED AUGUST 31, NINE MONTHS ENDED AUGUST 31,
2003 2002 2003 2002
-------- -------- -------- --------
NUMERATOR FOR BASIC EPS
Net income (loss) ............................ $ (3) $ 8 $ 10 $ 17
======== ======== ======== ========
NUMERATOR FOR DILUTED EPS
Net income (loss) ............................ $ (3) $ 8 $ 10 $ 17
Interest on convertible notes ................ -- 1 -- --
-------- -------- -------- --------
$ (3) $ 9 $ 10 $ 17
======== ======== ======== ========
DENOMINATOR FOR BASIC EPS
Weighted average shares of common stock
outstanding ............................ 43,478 42,919 43,234 42,788
======== ======== ======== ========
DENOMINATOR FOR DILUTED EPS
Weighted average shares of common stock
outstanding ............................ 43,478 42,919 43,234 42,788
Employee stock options ....................... -- 320 41 410
Convertible notes ............................ -- 8,143 -- --
Other ........................................ -- -- 2 --
-------- -------- -------- --------
43,478 51,382 43,277 43,198
======== ======== ======== ========
BASIC EPS ........................................ $ (0.07) $ 0.19 $ 0.23 $ 0.40
======== ======== ======== ========
DILUTED EPS ...................................... $ (0.07) $ 0.19 $ 0.23 $ 0.40
======== ======== ======== ========
The effect of the conversion of the Company's $150 million convertible
subordinated notes into common stock was not included in the computation of
diluted earnings per share for the nine months ended August 31, 2002 and the
three and nine months ended August 31, 2003 because the effect would be
antidilutive for these periods. These notes are convertible at an initial
conversion rate of 54.29 shares per $1,000 principal amount outstanding.
Potentially dilutive securities not
-5-
included in the diluted EPS calculation because they would be antidilutive
include employee stock options of 3,644,518 and 740,584 for the three months
ended August 31, 2003 and 2002, respectively, and 2,947,089 and 639,614 employee
stock options for the nine months ended August 31, 2003 and 2002, respectively.
3. STOCK BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123 (SFAS
123), Accounting for Stock-Based Compensation and Statement of Financial
Accounting Standards No. 148 (SFAS 148), Accounting for Stock-Based Compensation
- - Transition and Disclosure, the Company applies the existing accounting rules
under APB Opinion No. 25, Accounting for Stock Issued to Employees, which
provides that no compensation expense is charged for options granted at an
exercise price equal to the market value of the underlying common stock on the
date of grant. Had compensation expense for the Company's stock option plans
been determined based upon the fair value at the grant date for awards under
these plans using market-based option valuation models, net income (loss) and
the effect on net income (loss) per share would have been as follows (dollars in
millions, except per share amounts):
THREE MONTHS ENDED AUGUST 31, NINE MONTHS ENDED AUGUST 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income (loss), as reported ..................... $ (3) $ 8 $ 10 $ 17
Add: Stock based compensation expense
reported, net of related tax effects ........... -- 1 -- 1
Deduct: Stock based compensation expense
determined under fair value based method
for all awards, net of related tax effects ..... -- (1) (1) (2)
------------ ------------ ------------ ------------
Net income (loss), pro forma ....................... $ (3) $ 8 $ 9 $ 16
============ ============ ============ ============
As reported
Basic .............................................. $ (0.07) $ 0.19 $ 0.23 $ 0.40
============ ============ ============ ============
Diluted ............................................ $ (0.07) $ 0.19 $ 0.23 $ 0.40
============ ============ ============ ============
Pro forma
Basic .............................................. $ (0.07) $ 0.18 $ 0.21 $ 0.39
============ ============ ============ ============
Diluted ............................................ $ (0.07) $ 0.18 $ 0.21 $ 0.38
============ ============ ============ ============
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options and because changes in the input assumptions can materially affect the
fair value estimate, it is the Company's opinion that the existing models do not
necessarily provide a reliable single measure of the fair value of the employee
stock options.
-6-
4. INVENTORIES
AUGUST 31, NOVEMBER 30,
2003 2002
--------- -----------
(MILLIONS)
Raw materials and supplies..................... $ 32 $ 32
Work-in-process................................ 19 16
Finished goods................................. 13 15
--------- --------
Approximate replacement cost of inventories.... 64 63
LIFO reserves.................................. (4) (4)
--------- --------
60 59
Long-term contracts at average cost............ 180 164
Progress payments.............................. (57) (56)
--------- --------
Inventories................................ $ 183 $ 167
========= ========
5. PROPERTY, PLANT AND EQUIPMENT
AUGUST 31, NOVEMBER 30,
2003 2002
--------- -----------
(MILLIONS)
Land........................................... $ 50 $ 50
Buildings and improvements..................... 281 299
Machinery and equipment........................ 744 708
Construction-in-progress....................... 43 23
--------- --------
1,118 1,080
Less: accumulated depreciation................. (645) (599)
--------- --------
Total property, plant and equipment, net... $ 473 $ 481
========= ========
6. OTHER CURRENT LIABILITIES
AUGUST 31, NOVEMBER 30,
2003 2002
--------- -----------
(MILLIONS)
Accrued liabilities for goods and services..... $ 83 $ 95
Advanced payments on contracts................. 8 6
Accrued compensation and employee benefits..... 34 37
Other postretirement benefits.................. 29 29
Other.......................................... 46 33
--------- --------
Total other current liabilities............ $ 200 $ 200
========= ========
-7-
7. LONG-TERM DEBT
AUGUST 31, NOVEMBER 30,
2003 2002
---- ----
(MILLIONS)
Senior credit facility:
Revolving credit facility ............. $ -- $ 45
Term loan A ........................... 57 71
Term loan B ........................... 114 115
Senior subordinated notes ................. 150 --
Convertible subordinated notes ............ 150 150
Other ..................................... 34 6
----- -----
Total debt ........................... 505 387
Less: amounts due within one year ......... (44) (22)
----- -----
Long-term debt ........................ $ 461 $ 365
===== =====
As of August 31, 2003, the borrowing limit under the revolving credit
facility was $137 million. As of August 31, 2003, the Company had no borrowings
outstanding and had letters of credit outstanding of $55 million. The Company
has borrowing capability totaling $34 million on additional credit facilities in
Europe and Canada, under which $19 million was outstanding as of August 31, 2003
(included in other debt in the table above). Availability under the Company's
various credit facilities totaled $97 million as of August 31, 2003.
The average interest rate on the outstanding balance of long-term debt was
6.6 percent. As of August 31, 2003, the Company was in compliance with its debt
covenants.
On August 11, 2003, the Company sold $150 million aggregate principal
amount of senior subordinated notes due August 2013 in a private placement
pursuant to Rule 144A under the Securities Act of 1933. Interest on the senior
subordinated notes accrues at a rate of 9-1/2% per annum and is payable on
August 15 and February 15, beginning February 15, 2004. All or any portion of
the senior subordinated notes may be redeemed by the Company on or after August
15, 2008 at redemption prices beginning at 104.75% and reducing to 100.00% by
2011. The senior subordinated notes are unsecured and subordinated to all of the
Company's existing and future senior indebtedness, including borrowings under
its senior credit facility. The terms of the senior subordinated notes include
certain restrictive covenants, that, among other things, limit the incurrence of
additional indebtedness, certain restricted payments, asset sales, stock
dividends, investments and mergers and consolidations. The senior subordinated
notes are fully and unconditionally guaranteed on a senior subordinated
unsecured basis by the Company's material domestic subsidiaries.
In connection with the issuance of the senior subordinated notes and the
ARC Propulsion acquisition, the Company obtained the consent of lenders to an
amendment and waiver under its senior credit facility. The amendment and waiver,
among other things, permitted the issuance of the senior subordinated notes and,
subject to certain limitations, provides for use of the proceeds to finance the
purchase price of the ARC acquisition. The amendment and waiver also amended
certain of the financial and other covenants contained in the senior credit
facility to account for the ARC Propulsion acquisition and the additional
indebtedness represented by the senior subordinated notes issued in connection
with this acquisition. After the issuance of the senior subordinated notes, the
Company obtained the consent of the lenders under its senior credit
-8-
facility to another amendment under those facilities, which further amended
certain financial ratios contained in the senior credit facility and modified
the limitations on our use of the net proceeds from the offering pending the
completion of the ARC propulsion acquisition.
Issuance of the senior subordinated notes generated net proceeds of $145
million after deduction of underwriting discounts and expenses. The Company used
approximately $50 million of the net proceeds to repay all of the outstanding
indebtedness under the revolving credit facility, which amount may be
reborrowed, and intends to use the balance of the net proceeds to finance a
portion of the purchase price of the ARC Propulsion acquisition and to pay
related fees and expenses. The remainder of the purchase price for the ARC
Propulsion acquisition will be financed with borrowings under the revolving
credit facility at the time the acquisition closes. Pending completion of the
ARC Propulsion acquisition, the remaining net proceeds of $95 million are held
in a designated cash account and classified as restricted cash on the Company's
balance sheet.
Under the terms of the amendment and waiver to the senior credit facility
obtained in connection with the issuance of the senior subordinated notes, if
the Company does not complete the ARC Propulsion acquisition by December 31,
2003, the Company will be required to use the balance of the net proceeds ($95
million after repayment of the revolving credit facility) to repay in full
outstanding indebtedness under term loan A, plus accrued and unpaid interest,
with the remainder to be used to repay outstanding indebtedness under term loan
B, plus accrued and unpaid interest. Once repaid, the term loan A and term loan
B indebtedness may not be reborrowed.
Interest Rate Hedging
The Company entered into interest rate swap agreements effective January
10, 2003 on $100 million of its variable rate term loan debt for a two-year
period. Under the swap agreements, the Company makes payments based on a fixed
rate of 6.02 percent and receives a London InterBank Offered Rate (LIBOR) based
variable rate (4.86 percent as of August 31, 2003). The interest rate swaps are
accounted for as cash flow hedges pursuant to Statement of Financial Accounting
Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging
Activities, and there was no material ineffectiveness recognized in earnings. As
of August 31, 2003, the fair value of these swaps was a liability of $1 million
included in other noncurrent liabilities with an offsetting amount recorded as
an unrealized loss in other comprehensive income.
8. COMMITMENTS AND CONTINGENCIES
A. LEGAL PROCEEDINGS
Groundwater Cases
Along with other industrial Potentially Responsible Parties (PRPs) and area
water purveyors, Aerojet was sued in 17 cases by approximately 1,500 private
plaintiffs residing in the vicinity of the defendants' facilities in Sacramento,
California, and the Company's former facility in Azusa, California. The
individual plaintiffs generally seek damages for illness, death, and economic
injury allegedly caused by their ingestion of groundwater contaminated or served
by defendants, without specifying actual damages. Aerojet and other industrial
defendants involved in the
-9-
litigation are the subject of certain investigations under the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA) and the
Resource Conservation and Recovery Act (RCRA).
The Azusa cases, coordinated for trial in Los Angeles, California, are
proceeding under two master complaints and pretrial discovery is in process.
Because California Public Utilities Commission (PUC) regulated water purveyors
cannot be held liable if the water consumed met state and federal quality
standards, the Company expects the trial court in Los Angeles will hold an
evidentiary hearing to determine whether the PUC regulated water entity
defendants served water in violation of state or federal drinking water
standards. If it is determined that the regulated water purveyors served water
not in violation of drinking water standards, the water purveyor defendants will
be dismissed from the litigation, potentially leaving the Company and other
defendants as remaining parties to assert their defenses.
The long-standing stay in the Sacramento cases has been lifted and the
parties are addressing preliminary pleading issues. Discovery is likely to
commence in earnest in 2004.
Aerojet has notified its insurers, retained outside counsel and intends to
conduct a vigorous defense against all claims.
McDonnell Douglas Environmental Remediation Cost Recovery Dispute
Aerojet and McDonnell Douglas Corporation (MDC), an operating unit of The
Boeing Company, are engaged in a dispute in the U.S. District Court for the
Eastern District of California regarding the environmental contamination of the
Inactive Rancho Cordova Test Site (IRCTS). In 1961, IRCTS was transferred by
Aerojet to a predecessor of MDC and was subsequently reacquired by Aerojet in
1984. An initial federal lawsuit filed by Aerojet against MDC in 1994 was
settled in 1999 (1999 Settlement Agreement). Pursuant to the 1999 Settlement
Agreement, Aerojet agreed to participate with MDC in the interim funding of
certain remediation efforts at IRCTS, subject to a final cost allocation.
In 2001, there was a disagreement between Aerojet and MDC regarding the
interpretation of the 1999 Settlement Agreement. In December 2001, MDC filed a
second lawsuit in federal court alleging that Aerojet breached the 1999
Settlement Agreement, McDonnell Douglas Corporation v. Aerojet-General
Corporation, Case No. CIV-01-2245, U.S. District Court, E.D. CA. Under that
lawsuit, MDC sought to have Aerojet bear a 50 percent interim share (rather than
the 10 percent interim share accepted by Aerojet) of the costs of investigating
and remediating offsite perchlorate groundwater contamination, allegedly
associated with activities on IRCTS.
In November 2002, Aerojet and MDC entered into discussions to settle the
second lawsuit by renegotiating the temporary allocation of certain costs
associated with the environmental contamination at IRCTS. The parties reached an
agreement in principle to settle the allocation dispute relating to costs
associated with the environmental contamination at IRCTS. However, a formal and
complete written agreement resolving the dispute has not yet been completed.
-10-
Air Pollution Toxic Tort Cases
Aerojet and several other defendants have been sued by private homeowners
residing in the vicinity of Chino and Chino Hills, California. The cases have
been consolidated and are pending in the U.S. District Court for the Central
District of California -- Baier, et al. v. Aerojet-General Corporation, et al.,
Case No. EDCV 00 618VAP (RNBx) CA; Kerr, et al. v. Aerojet-General Corporation,
Case No. EDCV 01-19VAP (SGLx), and Taylor, et al. v. Aerojet-General
Corporation, et al., Case No. EDCV 01-106 VAP (RNBx). Plaintiffs generally
allege that defendants released hazardous chemicals into the air at their
manufacturing facilities, which allegedly caused illness, death, and economic
injury. Various motions have reduced the number of plaintiffs from 80 to 48.
Discovery is proceeding in the cases. Aerojet has notified its insurers and is
vigorously defending the actions.
Water Entity Cases
In October 1999, Aerojet was sued by American States Water Company (ASWC),
a local water purveyor, for damages, including unspecified past costs,
replacement water for contaminated drinking water wells near Aerojet's
Sacramento, California, manufacturing facility and other future damages.
American States Water Company, et al. v. Aerojet-General Corporation, et al.,
Case No. 99AS05949, Sacramento County Superior Court. The plaintiffs also sued
the State of California for inverse condemnation. While both cases were
consolidated in 2001, American States Water Company and the State of California
recently entered into two separate settlement agreements to resolve the dispute.
The trial court approved the settlements with the California State Water
Resources Control Board and the Central Valley Regional Water Quality Control
Board (Central Valley RWQCB). Aerojet unsuccessfully opposed the settlement and
filed petitions to the Third District Court of Appeals and California Supreme
Court seeking to overturn the settlement, claiming the settlement was not in
good faith. The appellate courts denied review of the settlement. The trial date
scheduled for October 2003 has been deferred to November 2003 to permit recently
initiated settlement discussions between Aerojet and ASWC to proceed (Note 15).
Of significance to the case is Aerojet's recent agreement with the Sacramento
County Water Agency (the County) in which Aerojet agreed to transfer all
remediated groundwater from its Sacramento California site to the County.
Subject to various provisions of the County agreement including approval under
California Environmental Quality Act (CEQA), the County will assume
responsibility for providing replacement water to ASWC and other impacted water
purveyors up to the amount of remediated water Aerojet transferred to the
County. Aerojet has also agreed to pay the County approximately $13 million over
several years toward the cost of constructing a replacement water supply
project. If the amount of Aerojet's transferred water is in excess of the
replacement water provided to the impacted water purveyors, the County has
committed to make water available for the development of Aerojet's land in an
amount equal to the excess.
Separately, between April 2000 and October 2001, six local water agencies
and water purveyors sued Aerojet and other defendants to recover damages
relating to alleged contamination of drinking water wells in the Baldwin Park
Operable Unit (BPOU) of the San Gabriel Basin Superfund site (BPOU drinking
water well lawsuits). The plaintiffs included the San Gabriel Basin Water
Quality Authority, the Upper San Gabriel Valley Municipal Water District, the
Valley County Water District (Valley), the California Domestic Water Co. and San
Gabriel Valley Water Company who were seeking, among other things, funding for a
water treatment plant at the La Puente Valley County Water District (La Puente)
well field. In January 2001, Aerojet and certain other cooperating potentially
responsible parties (PRPs) reimbursed
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these plaintiffs and one other funding agency $4 million for the cost of the
treatment plant. Since that time, Aerojet and the cooperating PRPs have
continued to pay all operating and related costs for treatment at the La Puente
site. The plaintiffs also sued to recover past costs in placing treatment
facilities at the Big Dalton well site in the San Gabriel Basin. Plaintiffs
claimed that Aerojet was responsible for contamination of their drinking water
wells. While Aerojet was served in the case filed by Valley, the case has been
inactive. The primary claim in these cases is for the recovery of past and
future CERCLA response costs for treatment plants at plaintiffs' well sites.
All of the BPOU drinking water well lawsuits were settled and dismissed by
the plaintiffs without prejudice on or about September 16, 2002 in accordance
with a settlement described as the Project Agreement and more fully discussed
below under the heading "San Gabriel Valley Basin, California." The settlement
of plaintiffs' claims was approved by the United States Environmental Protection
Agency (EPA). The settlement agreement requires the cooperating PRPs to fund the
construction, maintenance and operation of certain water treatment facilities
and to reimburse certain costs of the various water purveyors. As a consequence,
all the past cost claims in those actions were settled and released. Aerojet and
other cooperating PRPs intend to seek recovery from those PRPs who did not
participate in the settlement.
In October 2002, Aerojet, along with approximately 60 other individual and
corporate defendants, was 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 in response to the contamination present at the South
El Monte Operable Unit (SEMOU) of the San Gabriel Valley Superfund site. The
cases are denominated as follows: The City of Monterey Park v. Aerojet-General
Corporation, et al., (CV-02-5909 ABC (RCx)); San Gabriel Basin Water Quality
Authority v. Aerojet-General Corporation, et al., (CV-02-4565 ABC (RCx)); San
Gabriel Valley Water Company v. Aerojet-General Corporation, et al., (CV-02-6346
ABC (RCx)) and Southern California Water Company v. Aerojet-General Corporation,
et al., (CV-02-6340 ABC (RCx)). The cases have been coordinated for ease of
administration by the court. Aerojet filed its answer to the complaint filed by
the San Gabriel Valley Water Quality Authority and motions to dismiss the other
three complaints. The court ruled on Aerojet's motions to dismiss, and dismissed
several alleged causes of action in such complaints. The remaining claims are
based upon allegations of discharges from a former site in the El Monte area, as
more fully discussed below under the heading "San Gabriel Valley Basin,
California - South El Monte Operable Unit." Aerojet is vigorously defending the
actions as its investigations do not identify a credible connection between the
contaminants identified by the water entities in the SEMOU and those detected at
Aerojet's former facility located in El Monte, California, near the SEMOU (East
Flair Drive site). Aerojet has notified its insurers of these claims.
Vinyl Chloride Toxic Tort Cases
Between the early 1950's and 1985, GenCorp produced polyvinyl chloride
(PVC) resin at its former Ashtabula, Ohio facility. PVC is the most common form
of plastic currently on the market. A building block compound of PVC is vinyl
chloride (VC), now listed as a known carcinogen by several governmental
agencies. OSHA has strictly regulated workplace exposure to VC since 1974.
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Since the mid-1990's, GenCorp has been named in 28 toxic tort cases
involving alleged exposure to VC. With the exception of one case brought by the
family of a former Ashtabula employee, GenCorp is alleged to be a
"supplier/manufacturer" of PVC and/or a civil co-conspirator with other VC and
PVC manufacturers. Plaintiffs generally allege that GenCorp suppressed
information about the carcinogenic risk of VC to industry workers, and placed VC
or PVC into commerce without sufficient warnings. Of these 28 cases, 14 have
been settled or dismissed on terms favorable to the Company, including the case
where GenCorp was the employer. During 2003, one case was dismissed against
GenCorp and other alleged co-conspirators because the plaintiff could not
establish any evidence of fraud or conspiracy to commit fraud, and since the
case is still pending against the VC suppliers, no appeal has been taken.
Another case was dismissed in 2003 on statute of limitations grounds and the
appeal by the plaintiff in that case was later dismissed.
Of the remaining 14 pending cases, there are 2 cases which allege VC
exposure through various aerosol consumer products. In these cases, VC is
alleged to have been used as an aerosol propellant during the 1960's, and the
suits name numerous consumer product manufacturers, in addition to more than 30
chemical manufacturers. GenCorp used VC internally, but never supplied VC for
aerosol or any other use. The other 12 cases involve employees at VC or PVC
facilities which had no connection to GenCorp, one of which is a class action
seeking a medical monitoring program for former employees at a PVC facility in
New Jersey. The complaints in each of these cases assert GenCorp's involvement
in the alleged conspiracy stems from GenCorp's membership in trade associations.
GenCorp is vigorously defending against all claims in these cases.
Asbestos Litigation
Over the years, both GenCorp and Aerojet have from time to time been named
as defendants in lawsuits alleging personal injury or death due to exposure to
asbestos in building materials or in manufacturing operations. The lawsuits have
been filed throughout the country, with the majority filed in Northern
California. Since 1998, more than 50 of these asbestos lawsuits have been
resolved, with the majority being dismissed and many being settled for less than
$30 thousand each. Approximately 35 asbestos cases are currently pending.
In November 2002, a jury verdict against Aerojet in the amount of
approximately $5 million in the Circuit Court of the City of St. Louis,
Missouri, led to a judgment of approximately $2 million after setoff. Goede et
al. v. Chesterton Inc., Case No. 012-9428, Circuit Court, City of St. Louis, MO.
The $3 million setoff was based on plaintiffs' settlements with other
defendants. Post-trial motions filed by Aerojet and the plaintiffs were denied
by the trial court. Aerojet has filed a notice of appeal and will be asking the
appellate court to vacate the judgment and order a new trial based on, among
other things, the trial court's actions during trial that denied Aerojet the
opportunity to introduce testimony from certain witnesses and certain evidence
at trial. Aerojet filed its opening brief with the appellate court on September
2, 2003.
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Wotus, et al. v. GenCorp Inc. and OMNOVA Solutions Inc.
In October 2000, a group of hourly retirees filed a federal lawsuit against
GenCorp and OMNOVA Solutions Inc. (OMNOVA) disputing certain retiree medical
benefits. Wotus, et al. v. GenCorp Inc., et al., U.S.D.C., N.D. OH (Cleveland,
OH), Case No. 5:00-CV-2604. The retirees seek rescission of the then current
Hourly Retiree Medical Plan established in the Spring of 1994, and the
reinstatement of the prior plan terms. The crux of the dispute relates to union
and GenCorp negotiated modifications to retiree benefits that, in exchange for
other consideration, now require retirees to make benefit contributions as a
result of caps on Company-paid retiree medical costs implemented in the Fall of
1993. A retiree's failure to pay contributions results in a termination of
benefits.
The plaintiffs are seeking class action certification by motion and the
briefs have been filed before the trial court. The trial court has not yet ruled
on the plaintiffs' motion for class action certification; however, a decision by
the court is expected before the end of the second quarter 2004. The putative
class representatives currently consist of four hourly retirees from the
Jeannette, Pennsylvania facility of OMNOVA, the company spun-off from GenCorp on
October 1, 1999, two hourly retirees from OMNOVA's former Newcomerstown, Ohio
facility, and three hourly retirees from GenCorp's former tire plants in Akron,
Ohio, Mayfield, Kentucky, and Waco, Texas. The putative class encompasses all
eligible hourly retirees formerly represented by the unions URW or USWA. The
unions, however, are not party to the suit and have agreed not to support such
litigation pursuant to an agreement negotiated with GenCorp. GenCorp prevailed
in a similar class action filed in 1995 involving salaried employees and arising
at its Wabash, Indiana location. Divine, et al. v. GenCorp Inc., U.S.D.C., N.D.
IN (South Bend, IN), Case No. 96-CV-0394-AS.
Plaintiff retirees and the defendants filed cross-motions for summary
judgment which were denied on December 20, 2002. In February 2003, the court
approved a case management plan and discovery will proceed throughout most of
2003.
GenCorp has given notice to its insurance carriers and intends to
vigorously defend against the retirees' claims. OMNOVA has requested defense and
indemnification from GenCorp regarding this matter. GenCorp has denied this
request and the party-defendants are now engaged in alternative dispute
resolution (ADR) proceedings under their agreements entered into during the
GenCorp-OMNOVA spin-off in 1999. GenCorp initiated the arbitration and the
parties are in the process of meeting with the selected arbitrator to
determining briefing and hearing procedures. Under the ADR process, it is
expected that the dispute will be resolved by a ruling of the arbitrator before
the end of the second quarter 2004.
Olin Corporation v. GenCorp Inc.
In August 1991, Olin Corporation (Olin) advised GenCorp that under a 1962
manufacturing agreement with Olin (1962 Agreement), it believed GenCorp to be
jointly and severally liable for certain Superfund remediation costs, estimated
by Olin to be $70 million. The costs are associated with a former Olin
manufacturing facility and its waste disposal sites in Ashtabula County, Ohio.
In 1993, GenCorp sought a declaratory judgment in federal court (Ohio Court)
that the Company is not responsible for such environmental remediation costs.
Olin counterclaimed seeking a judgment that GenCorp is jointly and severally
liable for a share of remediation costs. Olin v. GenCorp Inc., Case No.
5:93CV2269, U.S. District Court, N.D. Ohio.
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GenCorp argued and asserted as a defense to Olin's counterclaim that under the
terms of the 1962 Agreement Olin had a contractual obligation to insure against
environmental and other risks and that its failure to protect such insurance
payments under these policies precluded Olin from recovery against GenCorp for
these remediation costs. Further, GenCorp argued that any failure on Olin's part
to comply with the terms of such insurance policies would result in GenCorp
being entitled to breach of contract remedies resulting in a reduction in any
CERCLA liability amounts determined to be owed to Olin that would have otherwise
been recovered from Olin's insurance carriers (Reduction Claims).
In 1999, the Ohio Court rendered an interim decision on CERCLA liability.
The Ohio Court found GenCorp 30 percent liable and Olin 70 percent liable for
remediation costs at "Big D Campground" landfill (Big D site). The Ohio Court
also found GenCorp 40 percent liable and Olin 60 percent liable for remediation
costs, including costs for off-site disposal (other than the Big D site) and
costs attributable to contamination at the Olin TDI facility, a plant built and
operated by Olin on GenCorp property near the Big D site. On May 9, 2002, the
Ohio Court issued a memorandum opinion stating that it intended to enter a
judgment in Olin's favor in the amount of approximately $19 million, plus
prejudgment interest against GenCorp, for CERCLA contribution liability. In that
same opinion, the Ohio Court deferred concluding whether and to what extent
GenCorp would be entitled to receive a credit against its CERCLA contribution
liability based on the Company's Reduction Claims against Olin, pending the
outcome of Olin's litigation against its insurance carriers for coverage under
Olin's insurance policies.
The Company has appealed its CERCLA contribution liability. The Company
believes that it is not directly or indirectly liable as an arranger for Olin's
waste disposal at the Big D site and that it did not either actively control
Olin's waste disposal choices or operate the plant on a day-to-day basis.
Outside counsel have advised the Company that many aspects of the Company's
appeal of its CERCLA liability have considerable merit. Management believes it
will prevail on appeal.
Irrespective of the outcome of its appeal, the Company believes it has
contractual protection against Olin's claims by virtue of Olin's obligations to
procure and protect insurance. The Ohio Court had previously resolved that
pursuant to the terms of the 1962 Agreement, it was Olin's contractual
obligation to obtain insurance coverage, and the evidence adduced during the
litigation showed that Olin had in place insurance coverage during the period in
question in the amount of $40 million to $50 million.
On September 5, 2002, Olin advised the Ohio Court and GenCorp that on
August 27, 2002, the U.S. District Court for the Southern District of New York
(NY Court) had ruled Olin failed to protect its right to payments under its
insurance policies for the Big D site. The NY Court based its ruling on the fact
that Olin had failed to timely notify its insurance carriers of its claims. Olin
also informed the Ohio Court it would appeal the NY Court decision and pressed
the Ohio Court to enter judgment.
If the NY Court decision is affirmed on Olin's appeal, the Ohio Court could
rule in GenCorp v. Olin Corporation in one of two ways: (a) it could find that
Olin's late notice constituted a breach of its obligation under the 1962
Agreement to protect the insurance; or (b) it could conclude that Olin's conduct
does not fully reduce GenCorp's liability. If the Ohio Court rules that Olin's
late notice is a breach of the 1962 Agreement, the question will become a
determination of the damages suffered by GenCorp as a result of the breach.
GenCorp has
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argued that the proper measure of damages is the coverage limits of the policies
that Olin forfeited -- an amount in this case that is more than sufficient to
cover GenCorp's entire liability.
On September 13, 2002, GenCorp filed a motion asking the Ohio Court to
reconsider its decision to enter judgment for Olin, or in the alternative, to
consider GenCorp's Reduction Claims that could result in a ruling in favor of
GenCorp. The parties exchanged briefs on these issues.
The Ohio Court issued a memorandum opinion and judgment order on November
21, 2002 entering "final" judgment in favor of Olin in the amount of
approximately $19 million plus prejudgment interest in the amount of
approximately $10 million. However, the Ohio Court did not decide GenCorp's
Reduction Claims against Olin, but did state that two matters related to the
Company's Reduction Claims were "pivotal" to the ultimate determination of this
case: (i) whether there was an insurable event upon which Olin could recover had
Olin complied with the applicable contract provisions and (ii) whether GenCorp
is entitled to receive a credit based on Olin's failure to provide timely notice
that foreclosed insurance recovery. The Ohio Court further determined that
GenCorp's Reduction Claims "are held in abeyance pending the resolution of
[Olin's] appeal in the New York insurance litigation." Management has been
advised by outside counsel that GenCorp's recovery on its Reduction Claims could
range from a nominal amount to an amount sufficient to reduce the judgment
against GenCorp in its entirety.
Outside counsel to the Company advised that because the Ohio Court's
opinion and judgment was based on the 1962 Agreement and because the Ohio Court
failed to resolve GenCorp's Reduction Claims against Olin, it was likely that
the decision and order issued by the Ohio Court on November 21, 2002 would not
be considered a final judgment. Consequently, and in reliance upon its outside
counsel, the Company believed that it was not likely that a final judgment
giving rise to liability had actually occurred. The Company filed its notice of
appeal, in any event, to preserve its appellate rights. Given Olin's contractual
obligation to have obtained and complied with the terms of its insurance
policies and the NY Court's finding that Olin failed to give proper notice of a
claim under these insurance policies, neither management nor outside counsel
could then, or at this time, estimate the possible amount of liability arising
from this case, if any.
In addition to several procedural motions pending before the Ohio Court
since early December 2002, GenCorp asked the Ohio Court to waive the standard
bond requirement and stay any attempt to execute on the Ohio Court's judgment
pending appeal. Olin opposed the stay, but stated it would not oppose a stay if
GenCorp posted the normal supersedeas bond. On January 22, 2003, the Ohio Court
denied all pending motions and issued a Judgment Order stating the case was
"terminated" on the Ohio Court's docket. However, in its Memorandum Opinion and
Order of the same date, the Ohio Court stated "[w]hether there was an insurable
event upon which Olin would have been entitled to recovery had it provided its
insurers with timely notice ... and... whether GenCorp is entitled to credit
based upon Olin's omission which foreclosed insurance recovery for Big D, remain
unresolved."
GenCorp filed its notice of appeal on December 20, 2002. In light of the
Ohio Court's January 22, 2003 judgment and the accompanying opinion, on January
27, 2003, GenCorp filed a motion to dismiss its appeal on the grounds that the
November 21, 2002 and January 22, 2003 orders and judgments were not final. The
Company sought an appellate ruling that in effect would have directed the Ohio
Court to address GenCorp's Reduction Claims before entering any final judgment.
In addition, GenCorp had motions pending which asked: (i) the appellate court to
stay
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execution without bond pending action on GenCorp's appeal; and (ii) the Ohio
Court to accept a letter of credit in lieu of bond should a bond be required.
Olin opposed both. GenCorp's motions were denied by the Sixth Circuit Court of
Appeals on February 13, 2003. GenCorp posted a bond and initiated an appeal of
the Ohio Court's partial judgment in the Sixth Circuit, rather than seek further
review of the finality issue at that time. The parties have submitted their
briefs to the Court and have requested oral argument, which is expected to be
set, if granted, later this year. GenCorp's Reduction Claims portion of the case
is on hold pending action by the Second Circuit Court of Appeals on Olin's
appeal of the August 27, 2002 judgment in favor of its insurance carriers as
described above and the appeal of the Ohio Court rulings.
In summary, while the Ohio Court has found the Company liable to Olin for a
CERCLA contribution payment, the Company has concluded it is not currently
appropriate to accrue any additional amount related to that finding because: (a)
the Company previously accrued the entire amount of its estimated potential
liability for contamination at the Olin TDI facility and related offsite
contamination, except for disposal at the Big D site; (b) the Company believes
it will prevail on appeal on the basis that it is not derivatively or directly
liable as an arranger for disposal at the Big D site, both as a matter of fact
and law; and (c) irrespective of whether, upon exhausting all avenues of appeal,
there is a finding of CERCLA liability, the Company believes that: (i) if Olin
prevails in its appeal of the NY Court ruling, the Company will make no payment
to Olin; or (ii) if Olin fails in its appeal, that Olin's breach of its
contractual obligations to provide insurance will result in a reduction in or
elimination of some or all of such liability, and for all these reasons, the
possible amount of additional liability arising from this case, if any, cannot
be established at this time.
Other Legal Matters
The Company and its affiliated companies are subject to other legal
actions, governmental investigations, and proceedings relating to a wide range
of matters in addition to those discussed above. In the opinion of the Company,
after reviewing the information that is currently available with respect to such
matters and consulting with the Company's counsel, any liability which may
ultimately be incurred with respect to these other matters is not expected to
materially affect the consolidated financial condition of the Company. The
effect of the resolution of these matters on results of operations cannot be
predicted because any such effect depends on both future results of operations
and the amount and timing of the resolution of such matters.
B. ENVIRONMENTAL MATTERS
Sacramento, California
In 1989, a federal district court in California approved a Partial Consent
Decree (Decree) requiring Aerojet to conduct a Remedial
Investigation/Feasibility Study (RI/FS) of Aerojet's Sacramento, California
site. The Decree required Aerojet to prepare a RI/FS report on specific
environmental conditions present at the site and alternatives available to
remediate such conditions. Aerojet also is required to pay for certain
governmental oversight costs associated with Decree compliance. Beginning in the
mid 1990's, the State of California expanded its surveillance of perchlorate and
nitrosodimethylamine (NDMA). Under the RI/FS, traces of these chemicals were
detected using new testing protocols in public water supply wells near Aerojet's
Sacramento site.
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Aerojet has substantially completed its efforts under the Decree to
determine the nature and extent of contamination at the Sacramento facility.
Aerojet has preliminarily identified the technologies that will likely be used
to remediate the site and has estimated costs using generic remedial costs from
Superfund remediation databases. Aerojet will continue to conduct feasibility
studies to refine technical approaches and costs to remediate the site. The
remediation costs are principally for design, construction, enhancement and
operation of groundwater and soil treatment facilities, ongoing project
management and regulatory oversight, and are expected to be incurred over a
period of approximately 15 years. Aerojet is also addressing groundwater
contamination both on and off its facilities through the development of operable
unit feasibility studies. On August 19, 2002, the U.S. Environmental Protection
Agency (EPA) issued an administrative order requiring Aerojet to implement the
EPA approved remedial action for the Western Groundwater Operable Unit. A nearly
identical order was issued by the California Regional Water Quality Control
Board, Central Valley (Central Valley RWQCB). A discussion of Aerojet's efforts
to estimate these costs is contained below under the heading "Environmental
Reserves and Estimated Recoveries."
During the third quarter, Aerojet entered into an agreement with the
Sacramento County Water Agency (the County) whereby it agreed to transfer all
remediated groundwater from its Sacramento California site to the County.
Subject to various provisions of the County agreement including approval under
California Environmental Quality Act (CEQA), the County will assume
responsibility for providing replacement water to ASWC and other impacted water
purveyors up to the amount of remediated water Aerojet transferred to the
County. Aerojet has also agreed to pay to the County over several years
approximately $13 million toward the cost of constructing a replacement water
supply project. If the amount of Aerojet's transferred water is in excess of the
replacement water provided to the impacted water purveyors, the County has
committed to make water available for the development of Aerojet's land in an
amount equal to the excess. The liability for these payments is included in the
Company's reserves for environmental remediation.
On April 15, 2002, the United States District Court approved and entered a
Stipulation and Order Modifying the Partial Consent Decree (Stipulation and
Order). Among other things, the Stipulation and Order removed approximately
2,600 acres of Aerojet's property from the requirements of the Decree and from
the Superfund site designation, enabling the Company to put the 2,600 acres to
more productive use. The Stipulation and Order (i) requires GenCorp to provide a
guarantee of up to $75 million (in addition to a prior $20 million guarantee) to
assure that remediation activities at the Sacramento site are fully funded; (ii)
requires Aerojet to provide a short-term and long-term plan to replace lost
water supplies; and (iii) divides the Superfund site into "Operable Units" to
allow Aerojet and the regulatory agencies to more efficiently address and
restore priority areas. For the first three years of the Stipulation and Order,
the new guarantee is partially offset by financial assurances provided in
conjunction with the Baldwin Park Operable Unit (BPOU) agreement (discussed
below). Obligations under the $75 million aggregate guarantee are limited to $10
million in any fiscal year. Both the $75 million aggregate guarantee and the $10
million annual limitation are subject to adjustment annually for inflation.
Aerojet leased a portion of its Sacramento facility to Douglas Aircraft
for rocket assembly and testing from 1957 to 1961 and sold approximately 3,800
acres, including the formerly leased portion, to Douglas Aircraft in 1961.
Aerojet reacquired the property known as IRCTS from MDC, the successor to
Douglas Aircraft and now an operating unit of The Boeing Company, in 1984. Both
MDC and Aerojet were ordered to investigate and remediate environmental
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contamination by certain orders issued in 1991 and 1994 by the California
Department of Toxic Substance Control (DTSC) and a similar 1997 order of the
Central Valley RWQCB. Aerojet filed suit against MDC to recover costs Aerojet
incurred resulting from compliance with the orders. Aerojet-General Corporation
v. McDonnell Douglas Corporation, et al., Case No. CVS 94-1862 WBS JFM. In 1999,
Aerojet and MDC entered into a settlement agreement to allocate responsibility
for a portion of the costs incurred under the orders and to negotiate
responsibility for the remaining costs. On December 7, 2001, MDC brought suit
against Aerojet in the U.S. District Court for the Eastern District of
California alleging breach of the settlement agreement and seeking specific
performance and declaratory relief. McDonnell Douglas Corporation v.
Aerojet-General Corporation, Civ.S-01-2245. The alleged breach involves
interpretation of the 1999 settlement agreement and subsequent cost sharing
agreement between MDC and Aerojet pertaining to contribution by each company
toward investigation and remediation costs ordered by the DTSC and the Central
Valley RWQCB. DTSC and the Central Valley RWQCB issued their orders alleging
both companies were responsible for environmental contamination allegedly
existing at and migrating onto and from the IRCTS site, an approximately 3,800
acre portion of Aerojet's approximately 12,000 acre Sacramento facility.
In November 2002, Aerojet and MDC entered into discussions to settle the
second lawsuit by renegotiating the temporary allocation of certain costs
associated with the environmental contamination at IRCTS. The parties reached an
agreement in principle to settle the allocation dispute relating to costs
associated with the environmental contamination at IRCTS. However, a formal and
complete written agreement resolving the dispute has not yet been completed.
San Gabriel Valley Basin, California
BALDWIN PARK OPERABLE UNIT
Aerojet, through its former Azusa, California site, was named by the EPA
as a PRP in the portion of the San Gabriel Valley Superfund Site known as the
Baldwin Park Operable Unit. A Record of Decision (ROD) regarding regional
groundwater remediation was issued and Aerojet and 18 other PRPs received
Special Notice Letters requiring groundwater remediation. All of the Special
Notice Letter PRPs are alleged to have been a source of volatile organic
compounds (VOCs). Aerojet's investigation demonstrated that the groundwater
contamination by VOCs is principally upgradient of Aerojet's former property and
that lower concentrations of VOC contaminants are present in the soils of
Aerojet's former property. The EPA contends that of the 19 PRPs identified by
the EPA, Aerojet is one of the four largest sources of VOC groundwater
contamination at the BPOU. Aerojet contests the EPA's position regarding the
source of contamination and the number of responsible PRPs.
In May 1997, as a result of the development of more sensitive measuring
methods, perchlorate was detected in wells in the BPOU. NDMA was also detected
using newly developed measuring methods. Suspected sources of perchlorate
include Aerojet's solid rocket development and manufacturing activities in the
1940's and 1950's, military ordnance produced by another company at a facility
adjacent to the Aerojet facilities in the 1940's, the burning of confiscated
fireworks by local fire departments, and fertilizer used in agriculture. NDMA is
a suspected byproduct of liquid rocket fuel activities by Aerojet in the same
time period. NDMA is also a contaminant in cutting oils used by many businesses
and is found in many foods. In addition, a chemical known as 1,4 dioxane is
present and is being treated at the BPOU. Aerojet may be a
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minor contributor of this chemical.
On June 30, 2000, the EPA issued a Unilateral Administrative Order (UAO)
ordering the PRPs to implement a remedy consistent with the ROD, but still
encouraging the PRPs to attempt to negotiate an agreement with the local
purveyors. The PRPs agreed to comply.
On November 23, 1999, the California Regional Water Quality Control Board,
Los Angeles Region (Los Angeles RWQCB) issued orders to Aerojet and other PRPs
to conduct groundwater investigations on their respective sites. As a result,
the Los Angeles RWQCB ordered Aerojet to conduct limited soil gas extraction,
which Aerojet is implementing, and to evaluate remedies for perchlorate
contamination in soils.
Following extended negotiations, Aerojet, along with seven other PRPs
(collectively, the "Cooperating Respondents") signed a Project Agreement in late
March 2002 with Water Quality Authority, Watermaster, Valley County Water
District, La Puente Valley Water District, San Gabriel Valley Water Company,
Suburban Water Systems and California Domestic Water Company (collectively, the
"Water Entities"). The Project Agreement became effective on May 9, 2002,
following approval by a California Superior Court and the finalization of policy
language on the $100 million Baldwin Park Operable Unit Manuscript Environmental
Site Liability Policy from Chubb Custom Insurance Company covering certain
Project risks.
The basic structure of the Project Agreement is for the Cooperating
Respondents to fund and financially assure (in the form of cash or letters of
credit) the cost of certain treatment and water distribution facilities to be
owned and operated by the Water Entities. Actual funding would be provided by
funds placed in escrow at the start of each three-month period to cover
anticipated costs for the succeeding quarter.
The Cooperating Respondents will also fund operation and maintenance of
treatment facilities (not including ordinary operating expenses of the Water
Entities, certain costs for replacement water that may be incurred by such Water
Entities and related administrative costs, (collectively, "O&M Costs")). The
Cooperating Respondents are required to maintain sufficient financial assurance
to cover the estimated O&M Costs for two years. Actual payments for O&M Costs
would be made at the start of each three-month period to cover anticipated costs
for the succeeding six-month period. When fully constructed, six treatment
facilities will be treating in excess of 25,000 gallons per minute for the
purposes of ROD implementation and providing a potable water supply. The Project
Agreement has a term of 15 years. The Project Agreement also settles the past
environmental claims of the Water Entities.
Aerojet and the other Cooperating Respondents have entered into an interim
allocation agreement that establishes the interim payment obligations of Aerojet
and the remaining Cooperating Respondents for the costs of the Project
Agreement. Aerojet anticipates that the Cooperating Respondents may seek to
mediate final allocation, but, if unsuccessful, litigation could occur. Under
the interim allocation, Aerojet is responsible for approximately two-thirds of
all project costs, pending completion of any allocation proceeding. All project
costs are subject to reallocation among the Cooperating Respondents.
A significant amount of public funding is available to offset project
costs. To date, Congress has appropriated approximately $47 million (so called
Title 16 and Dreier funds), which is potentially available for payment of
project costs. All such funding will require Water Quality
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Authority (WQA) action to allocate funds to the project, which the WQA is
currently considering. Based upon WQA preliminary actions to date, Aerojet
anticipates that approximately $28 million of the funding will have been
allocated to the project by the end of 2003 and that additional funds may follow
in later years.
As part of the EIS sale to Northrop in October 2001, the EPA approved a
Prospective Purchaser Agreement with Northrop to absolve it of pre-closing
liability for contamination caused by the Azusa facility, which liability will
remain with Aerojet. As part of that agreement, Aerojet agreed to put $40
million into an irrevocable escrow for the BPOU project to fund Aerojet's
obligations under the Project Agreement. In addition, GenCorp agreed to provide
a $25 million guarantee of Aerojet's obligations under the Project Agreement.
During the first three years of the Project Agreement, the GenCorp guarantee is
partially offset by other financial assurances provided in conjunction with the
Project Agreement.
As part of the agreement to sell the EIS business to Northrop, Aerojet
paid the EPA $9 million to be offset against Aerojet's share of the EPA's total
claimed past costs (EPA now claims past costs are approximately $28 million). A
very substantial share of the EPA's past costs related to the period prior to
1997 when the sole contamination being considered involved VOCs. Aerojet
believes that it is responsible for less than ten percent of these costs. As a
result, in the allocation with the other PRPs, Aerojet will seek to recover a
significant portion of the $9 million paid to the EPA from the other PRPs.
Unresolved at this time is the issue of California's past costs which were last
estimated at approximately $4 million.
Aerojet intends to defend itself vigorously to assure that it is
appropriately treated with other PRPs and that costs of any remediation are
properly allocated among all PRPs. Aerojet has notified its insurers and is
pursuing claims under its insurance policies.
On November 9, 2001, GenCorp received a General Notice Letter from the EPA
asserting that GenCorp is a PRP for the BPOU. This General Notice Letter was
received more than ten years after the General Notice given to GenCorp's
subsidiary, Aerojet. The EPA alleged that in the 1940's and early 1950's
GenCorp, then known as The General Tire & Rubber Company, participated in a
joint venture with Aerojet Engineering Corporation, now known as Aerojet-General
Corporation, sharing 50 percent of the profits on certain U.S. Navy contracts
for JATO rockets and that it had some role in managing the joint venture at the
Azusa facility. The EPA is factually incorrect; at all times, Aerojet was the
sole party that owned or operated the Azusa site during the early production of
the JATO rockets. GenCorp strongly disagrees with the EPA's PRP designation and
plans to resist the designation at every level possible.
On February 28, 2002, the EPA issued a unilateral First Amended
Administrative Order For Remedial Design and Remedial Action (Amended Order) for
the BPOU. The Amended Order does not materially alter the obligations of Aerojet
under the earlier UAO; however, the Amended Order names GenCorp as a Respondent
on the basis of the allegations made in the General Notice Letter. The Amended
Order does not require GenCorp to undertake any action unless Aerojet fails to
perform its obligations under the UAO. It states that GenCorp is being added to
the Amended Order "as a backup" to Aerojet's performance, and it provides that
GenCorp is deemed to be in compliance with the Amended Order on the effective
date of the Amended Order. The EPA has not claimed since the effective date that
GenCorp has any current obligation under the order. Because GenCorp does not
believe it was properly designated a PRP at the site, the Company would contest
should the EPA claim action is required.
-21-
SOUTH EL MONTE OPERABLE UNIT
On December 21, 2000, Aerojet received an order from the Los Angeles RWQCB
requiring a work plan for investigation of Aerojet's former El Monte facility.
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 March 2001, Aerojet submitted a limited work plan to the Los Angeles RWQCB.
On February 21, 2001, Aerojet received a General Notice Letter from the EPA
Region IX naming Aerojet as a PRP to the SEMOU of the San Gabriel Valley
Superfund site. Aerojet continues to negotiate with the Los Angeles RWQCB for a
limited investigation of this former facility. Aerojet has begun the process of
obtaining access agreements should the Los Angeles RWQCB approve Aerojet's work
plan. Because its appeal was dismissed without prejudice, Aerojet may refile its
appeal if negotiations with the Los Angeles RWQCB are unsuccessful.
On April 1, 2002, Aerojet received a special notice letter from the EPA
(dated March 28, 2002) that requested Aerojet to enter into negotiations with
the EPA 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 Field Investigation Report showed that chemicals including TCE and PCE were
present in the soil and groundwater at and near the East Flair Drive Site. The
Field Investigation Report also showed that the hydraulic gradient at the East
Flair Drive Site is oriented toward the northeast. This finding indicates that
the site is not a likely source of contamination at the SEMOU, as the ground
water flow at the site is away from the SEMOU and not toward it. Given the data
indicating that the East Flair Drive Site is not a source of the contamination
at the SEMOU, Aerojet requested that the EPA reconsider its issuance of the
SEMOU special notice letter.
To date, Aerojet has not received a response to the Field Investigation
Report from the EPA. In early May 2003, Aerojet received a response from the Los
Angeles RWQCB and has subsequently held several meetings with the Los Angeles
RWQCB regarding the work plan. Aerojet also continues to work cooperatively with
the EPA regarding the SEMOU.
On August 29, 2003, the USEPA issued a Unilateral Administrative Order
(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 the remedy is already being implemented by
the water entities.
Aerojet has been served with civil suits filed in the U.S. District Court
for the Central District of California by four public and private water
companies. The suits seek recovery of costs allegedly incurred in response to
the contamination present in the SEMOU. Plaintiffs allege that groundwater in
the SEMOU is contaminated with chlorinated solvents that were released into the
environment by Aerojet and other parties causing plaintiffs to incur unspecified
response costs and other damages. Aerojet's investigations to date have not
identified a credible connection between the contaminants identified by the
water entities in the SEMOU and those detected at Aerojet's former facility
located at 9100 & 9200 East Flair Drive, El Monte, California, which lies in or
near the SEMOU.
-22-
Aerojet was successful in its efforts to eliminate several of the claims
initially raised by the water entities. However, other claims remain. Initial
discovery requests have been served on the plaintiffs.
Other Sites
The Company has studied remediation alternatives for its closed Lawrence,
Massachusetts facility, which was primarily contaminated with PCBs, and has
begun site remediation and off-site disposal of debris. As part of these
remediation efforts, the Company is working with local, state and federal
officials and regulatory agencies to return the property to a beneficial use.
The time frame for the remediation and redevelopment project is currently
estimated to range from two to four years.
The Company is also currently involved, together with other companies, in
approximately 22 other Superfund and non-Superfund remediation sites. In many
instances, the Company's liability and proportionate share of costs have not
been determined largely due to uncertainties as to the nature and extent of site
conditions and the Company's involvement. While government agencies frequently
claim PRPs are jointly and severally liable at such sites, in the Company's
experience, interim and final allocations of liability costs are generally made
based on relative contributions of waste. Based on the Company's previous
experience, its allocated share has frequently been minimal, and in many
instances, has been less than one percent. Also, the Company is seeking recovery
of its costs from its insurers.
ENVIRONMENTAL RESERVES AND ESTIMATED RECOVERIES
(i) Reserves
The Company periodically conducts complete reexaminations of estimated
future remediation costs that could be incurred by the Company. These periodic
reexaminations take into consideration the investigative work and analysis of
the Company's engineers, engineering studies performed by outside consultants,
and the advice of its legal staff and outside attorneys 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 Company's reserves, the most probable estimated amount is used
when determinable and the minimum is used when no single amount is more
probable.
-23-
A summary of the Company's environmental reserve activity for the nine
months ended August 31, 2003, is shown below (in millions):
NOVEMBER 30, AUGUST 31,
2002 EXPENDITURES 2003
---- ------------ ----
Aerojet $ 318 $ 21 $ 297
Other sites 22 2 20
-------------- ------------ ------------
Total $ 340 $ 23 $ 317
============== ============ ============
(ii) Estimated Recoveries
Pursuant to a 1997 Agreement in Principle with the U.S. government which
was implemented in 1999 (Global Settlement), up to 88 percent of the
environmental costs associated with Aerojet's Sacramento site and its former
Azusa site, can be recovered through the establishment of prices for Aerojet's
products and services sold to the U.S. government. The Global Settlement
contemplates that the cost sharing ratio will continue for a number of years.
The ability of Aerojet to continue recovering these costs from the U.S.
government depends on Aerojet's sustained business volume under U.S. government
contracts.
In conjunction with the sale of a business by Aerojet to Northrop Grumman
Corporation (Northrop) in 2001, Northrop will reimburse Aerojet for 50 percent
of environmental expenditures eligible for recovery under the Global Settlement.
Amounts reimbursed are subject to annual limitations, with excess amounts
carrying over to subsequent periods. As of August 31, 2003, $171 million in
potential future reimbursements was available over the remaining life of the
agreement.
Estimated recoveries from the U.S. government and others for environmental
remediation costs totaled $216 million at August 31, 2003 and $232 million at
November 30, 2002
The effect of the final resolution of environmental matters and the
Company's obligations for environmental remediation and compliance cannot be
accurately predicted due to the uncertainty concerning both the amount and
timing of future expenditures. The Company believes, on the basis of presently
available information, that the resolution of environmental matters and the
Company's obligations for environmental remediation and compliance will not have
a material adverse effect on the Company's results of operations, liquidity or
financial condition. The Company will continue its efforts to mitigate past and
future costs through pursuit of claims for recoveries from insurance coverage
and other PRPs and continued investigation of new and more cost effective
remediation alternatives and associated technologies.
9. ARRANGEMENTS WITH OFF-BALANCE SHEET RISK
As of August 31, 2003, obligations required to be disclosed in accordance
with FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness
of Others consisted of:
-24-
- - $55 million in outstanding commercial letters of credit expiring in 2003
and 2004 and securing obligations for environmental remediation, insurance
coverage and litigation.
- - Up to $120 million aggregate in guarantees by GenCorp of Aerojet's
obligations to government agencies for environmental remediation
activities, subject to partial offsets for other financial assurances
provided in conjunction with these obligations. (See Note 8(b).)
- - $36 million in guarantees by GenCorp of bank loans and lines of credit of
its subsidiaries.
- - Guarantees, jointly and severally, by its material domestic subsidiaries,
of GenCorp's obligations under its bank credit agreements and its $150
million senior subordinated notes due August 2013. (See Note 7 and Note
13)
10. SHAREHOLDERS' EQUITY
On July 11, 2003, the Company's Board of Directors declared a quarterly
dividend of $0.03 per share on the Company's $0.10 par value common stock. The
dividend was paid on August 29, 2003.
11. ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES
Comprehensive income encompasses net income and other comprehensive income
items, which includes all other non-owner transactions and events that change
shareholders' equity. The Company's other comprehensive income includes the
effects of foreign currency translation adjustments and the change in the fair
value of interest rate swaps (See Note 7). The components of other comprehensive
income and the related income tax effects are presented in the following table:
THREE MONTHS ENDED AUGUST 31, NINE MONTHS ENDED AUGUST 31,
2003 2002 2003 2002
---- ---- ---- ----
(MILLIONS) (MILLIONS)
Net income (loss) .................................. $ (3) $ 8 $ 10 $ 17
Other comprehensive income (loss), net of
income taxes:
Effects of foreign currency translation
adjustments ............................ (16) 9 24 19
Change in fair value of interest rate swaps 1 -- (1) --
---- ---- ---- ----
Total comprehensive income (loss) .................. $(18) $ 17 $ 33 $ 36
==== ==== ==== ====
12. OPERATING SEGMENTS AND RELATED DISCLOSURES
The Company's continuing operations are organized into three segments
based on different products and customer bases: GDX Automotive, Aerospace and
Defense, and Fine Chemicals. (See Note 1)
The Company evaluates segment performance based on several factors, of
which the primary financial measure is segment operating profit. Segment
operating profit represents net sales from continuing operations less applicable
costs, expenses and provisions for restructuring and unusual items relating to
operations. Segment operating profit excludes corporate income and expenses,
provisions for unusual items not related to operations, interest expense, income
taxes and any minority interest.
-25-
In August 2003, the Company completed the sale of an office complex
located in Sacramento County, California for $15 million, resulting in a pre-tax
gain of $10 million. The Company's real estate activities are included in the
Aerospace and Defense segment.
During the third quarter of 2003, the Aerospace and Defense segment
recorded intersegment sales to the GDX Automotive segment of $2 million. Profit
on these sales was not significant.
THREE MONTHS ENDED AUGUST 31, NINE MONTHS ENDED AUGUST 31,
2003 2002 2003 2002
---- ---- ---- ----
(MILLIONS) (MILLIONS)
NET SALES
GDX Automotive ...................... $ 174 $ 190 $ 579 $ 589
Aerospace and Defense ............... 99 63 246 201
Fine Chemicals ...................... 12 13 46 28
Intersegment sales elimination ...... (2) -- (2) --
----- ----- ----- -----
$ 283 $ 266 $ 869 $ 818
===== ===== ===== =====
INCOME (LOSS) BEFORE INCOME TAXES
GDX Automotive ...................... $ (14) $ 5 $ 7 $ 25
Aerospace and Defense ............... 21 14 41 44
Fine Chemicals ...................... 2 3 8 (1)
Unusual items ....................... (2) -- (2) (6)
----- ----- ----- -----
Segment operating profit ........ 7 22 54 62
Interest expense .................... (6) (4) (17) (11)
Corporate, other expenses and foreign
exchange gains and losses ....... (8) (6) (24) (21)
Unusual items ....................... -- -- -- (3)
----- ----- ----- -----
$ (7) $ 12 $ 13 $ 27
===== ===== ===== =====
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In connection with the offer and sale of the senior subordinated notes due 2013,
the Company is providing condensed consolidating financial information for its
material domestic subsidiaries that have guaranteed the senior subordinated
notes and for those subsidiaries that have not guaranteed the senior
subordinated notes. These wholly owned subsidiary guarantors (principally,
Aerojet and AFC) have, jointly and severally, fully and unconditionally
guaranteed the senior subordinated notes.
The subsidiary guarantees are senior subordinated obligations of each
subsidiary guarantor and rank (i) prior 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 are effectively subordinated to any secured indebtedness of the
subsidiary guarantor with respect to the assets securing that indebtedness.
Absent both default and notice as specified in the Company's senior credit
facility and agreements governing the Company's outstanding convertible notes
and the senior subordinated notes, there are no restrictions on the Company's
ability to obtain funds from its subsidiary guarantors by dividend or loan.
-26-
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 Company's guarantor and non-guarantor subsidiaries.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME:
Guarantor Non-guarantor
THREE MONTHS ENDED AUGUST 31, 2003 Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------- ------ ------------ ------------ ------------ ------------
Net sales $ 46 $ 125 $ 114 $ (2) $ 283
Cost of products sold 43 95 101 (2) 237
Selling, general and administrative 14 2 6 -- 22
Depreciation and amortization 4 9 8 -- 21
Other (income) expense, net -- 4 -- -- 4
Interest expense 3 1 2 -- 6
----- ----- ----- ----- -----
Income (loss) before income taxes (18) 14 (3) -- (7)
Income tax provision (benefit) (6) 3 (1) -- (4)
----- ----- ----- ----- -----
Income (loss) before equity earnings (12) 11 (2) -- (3)
Equity earnings of subsidiaries 9 -- -- (9) --
----- ----- ----- ----- -----
Net Income (Loss) $ (3) $ 11 $ (2) $ (9) $ (3)
===== ===== ===== ===== =====
Guarantor Non-guarantor
THREE MONTHS ENDED AUGUST 31, 2002 Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------- ------ ------------ ------------ ------------ ------------
Net sales $ 53 $ 95 $118 $-- $266
Cost of products sold 50 67 99 -- 216
Selling, general and administrative 10 1 5 -- 16
Depreciation and amortization 5 6 7 -- 18
Other (income) expense, net (4) 4 -- -- --
Interest expense 1 1 2 -- 4
---- ---- ---- ---- ----
Income (loss) before income taxes (9) 16 5 -- 12
Income tax provision (benefit) (1) 4 1 -- 4
---- ---- ---- ---- ----
Income (loss) before equity earnings (8) 12 4 -- 8
Equity earnings of subsidiaries 16 -- -- (16) --
---- ---- ---- ---- ----
Net Income $ 8 $ 12 $ 4 $(16) $ 8
==== ==== ==== ==== ====
<
-27-
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (CONT):
Guarantor Non-guarantor
NINE MONTHS ENDED AUGUST 31, 2003 Parent Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------- ------ ------------ ------------ ------------ ------------
Net sales $ 156 $ 342 $ 373 $ (2) $ 869
Cost of products sold 140 265 316 (2) 719
Selling, general and administrative 42 6 13 -- 61
Depreciation and amortization 13 25 20 -- 58
Other (income) expense, net (9) 7 3 -- 1
Interest expense 8 3 6 -- 17
----- ----- ----- ----- -----
Income (loss) before income taxes (38) 36 15 -- 13
Income tax provision (benefit) (12) 9 6 -- 3
----- ----- ----- ----- -----
Income (loss) before equity earnings (26) 27 9 -- 10
Equity earnings of subsidiaries 36 -- -- (36) --
----- ----- ----- ----- -----
Net Income $ 10 $ 27 $ 9 $ (36) $ 10
===== ===== ===== ===== =====
Guarantor Non-guarantor
NINE MONTHS ENDED AUGUST 31, 2002 Parent Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------- ------ ------------ ------------ ------------ ------------
Net sales $ 175 $ 293 $ 350 $-- $ 818
Cost of products sold 156 219 295 -- 670
Selling, general and administrative 27 5 13 -- 45
Depreciation and amortization 14 20 16 -- 50
Other (income) expense, net 5 10 -- -- 15
Interest expense 2 3 6 -- 11
----- ----- ----- ----- -----
Income (loss) before income taxes (29) 36 20 -- 27
Income tax provision (benefit) (10) 14 6 -- 10
----- ----- ----- ----- -----
Income (loss) before equity earnings (19) 22 14 -- 17
Equity earnings of subsidiaries 36 -- -- (36) --
----- ----- ----- ----- -----
Net Income $ 17 $ 22 $ 14 $ (36) $ 17
===== ===== ===== ===== =====
-28-
CONDENSED CONSOLIDATING BALANCE SHEETS:
Guarantor Non-guarantor
AUGUST 31, 2003 Parent Subsidiaries Subsidiaries Eliminations Consolidated
- --------------- ------ ------------ ------------ ------------ ------------
Cash ........................................ $ 18 $ 6 $ 37 $-- $ 61
Accounts receivable ......................... 8 49 56 -- 113
Inventories ................................. 4 149 30 -- 183
Recoverable from the U.S. government and
other third parties for environmental
remediation costs ........................ -- 24 -- -- 24
Prepaid expenses and other .................. 2 9 1 -- 12
------- ------ ----- ------- ------
Total current assets ..................... 32 237 124 -- 393
Restricted cash ............................. 95 -- -- -- 95
Property, plant and equipment, net .......... 62 225 186 -- 473
Recoverable from the U.S. government and
other third parties for environmental
remediation costs ........................ -- 192 -- -- 192
Prepaid pension asset ....................... 145 202 2 -- 349
Goodwill .................................... 22 40 70 -- 132
Intercompany, net ........................... (415) 573 (158) -- --
Other noncurrent assets, net ................ 1,086 85 53 (1,121) 103
------- ------ ----- ------- ------
Total assets ............................. $ 1,027 $1,554 $ 277 $(1,121) $1,737
======= ====== ===== ======= ======
Short-term borrowings and current portion of
long-term debt ........................... $ 24 $ -- $ 20 $ -- $ 44
Accounts payable ............................ 15 20 42 -- 77
Reserves for environmental remediation ...... 7 32 -- -- 39
Other current liabilities ................... (13) 189 39 -- 215
------- ------ ----- ------- ------
Total current liabilities ................ 33 241 101 -- 375
Long-term debt, net of current portion ...... 455 -- 6 -- 461
Reserves for environmental remediation ...... 13 265 -- -- 278
Postretirement benefits other than pensions . 100 56 9 -- 165
Other noncurrent liabilities ................ 32 28 5 -- 65
------- ------ ----- ------- ------
Total liabilities ........................ 633 590 121 -- 1,344
Total shareholders' equity ............... 394 964 156 (1,121) 393
------- ------ ----- ------- ------
Total liabilities and shareholders' equity $ 1,027 $1,554 $ 277 $(1,121) $1,737
======= ====== ===== ======= ======
-29-
CONDENSED CONSOLIDATING BALANCE SHEETS (CONT):
Guarantor Non-guarantor
NOVEMBER 30, 2002 Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------- ------ ------------ ------------ ------------ ------------
Cash ........................................ $ -- $ 13 $ 35 $-- $ 48
Accounts receivable ......................... 12 64 63 -- 139
Inventories ................................. 5 131 31 -- 167
Recoverable from the U.S. government and
other third parties for environmental
remediation costs ........................ -- 24 -- -- 24
Prepaid expenses and other .................. 2 1 2 -- 5
------- ------ ----- ------- ------
Total current assets ..................... 19 233 131 -- 383
Property, plant and equipment, net .......... 64 242 175 -- 481
Recoverable from the U.S. government and
other third parties for environmental
remediation costs ........................ -- 208 -- -- 208
Prepaid pension asset ....................... 139 199 (1) -- 337
Goodwill .................................... 22 41 63 -- 126
Intercompany, net ........................... (367) 535 (168) -- --
Other noncurrent assets, net ................ 1,047 82 43 (1,071) 101
------- ------ ----- ------- ------
Total assets ............................. $ 924 $1,540 $ 243 $(1,071) $1,636
======= ====== ===== ======= ======
Short-term borrowings and current portion of
long-term debt ........................... $ 20 $ -- $ 2 $ -- $ 22
Accounts payable ............................ 17 27 45 -- 89
Reserves for environmental remediation ...... 7 32 -- -- 39
Other current liabilities ................... (1) 176 48 -- 223
------- ------ ----- ------- ------
Total current liabilities ................ 43 235 95 -- 373
Long-term debt, net of current portion ...... 361 -- 4 -- 365
Reserves for environmental remediation ...... 15 286 -- -- 301
Postretirement benefits other than pensions . 108 60 8 -- 176
Other noncurrent liabilities ................ 37 22 2 -- 61
------- ------ ----- ------- ------
Total liabilities ........................ 564 603 109 -- 1,276
Total shareholders' equity ............... 360 937 134 (1,071) 360
------- ------ ----- ------- ------
Total liabilities and shareholders' equity $ 924 $1,540 $ 243 $(1,071) $1,636
======= ====== ===== ======= ======
-30-
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS:
Guarantor Non-guarantor
NINE MONTHS ENDED AUGUST 31, 2003 Parent Subsidiaries Subsidiaries Eliminations Consolidated
Net cash provided by (used in) operating
activities $ (22) $ 25 $ 4 $ -- $ 7
Cash flows from investing activities:
Capital expenditures (7) (9) (20) -- (36)
Other investing activities (95) 13 7 -- (75)
----- ---- ---- ---- -----
Net cash provided by (used in) investing
activities (102) 4 (13) -- (111)
Cash flows from financing activities:
Net transfers (to) from parent 49 (36) (13) -- --
Borrowings (repayments) on notes payable and
long-term debt 93 -- 20 -- 113
Other financing activities -- -- -- -- --
----- ---- ---- ---- -----
Net cash provided by (used in) financing
activities 142 (36) 7 -- 113
Effect of exchange rate fluctuations on cash
and cash equivalents -- -- 4 -- 4
----- ---- ---- ---- -----
Net increase (decrease) in cash and cash
equivalents 18 (7) 2 -- 13
Cash and cash equivalents at beginning of period -- 13 35 -- 48
----- ---- ---- ---- -----
Cash and cash equivalents at end of period $ 18 $ 6 $ 37 $ -- $ 61
===== ==== ==== ===== =====
-31-
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONT):
Guarantor Non-guarantor
NINE MONTHS ENDED AUGUST 31, 2002 Parent Subsidiaries Subsidiaries Eliminations Consolidated
Net cash provided by (used in) operating
activities $(30) $(27) $ 17 $-- $(40)
Cash flows from investing activities:
Capital expenditures (10) (13) (8) -- (31)
Acquisitions of businesses, net of cash acquired -- -- -- -- --
Other investing activities (8) -- 4 -- (4)
---- ---- ---- ---- ----
Net cash provided by (used in) investing
activities (18) (13) (4) -- (35)
Cash flows from financing activities:
Net transfers (to) from parent (33) 39 (6) -- --
Borrowings (repayments) on notes payable and
long-term debt 66 -- -- -- 66
Other financing activities 14 -- (14) -- --
---- ---- ---- ---- ----
Net cash provided by (used in) financing activities 47 39 (20) -- 66
Effect of exchange rate fluctuations on cash and
cash equivalents -- -- 2 -- 2
---- ---- ---- ---- ----
Net decrease in cash and cash equivalents (1) (1) (5) -- (7)
Cash and cash equivalents at beginning of period 1 3 40 -- 44
---- ---- ---- ---- ----
Cash and cash equivalents at end of period $ -- $ 2 $ 35 $ -- $ 37
==== ==== ==== ==== ====
14. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The
-32-
adoption of FIN 46 did not have a material effect on the Company's results of
operations, liquidity, or financial condition.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS 149 is intended to result in more consistent reporting
of contracts as either freestanding derivative instruments subject to Statement
133 in its entirely, or as hybrid instruments with debt host contracts and
embedded derivative features. SFAS 149 is effective for contracts entered into
or modified after June 30, 2003. The adoption of SFAS 149 did not have a
material effect on the Company's results of operations, liquidity, or financial
condition.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (SFAS 150), Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS 150 requires certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity to be classified as liabilities.
Many of these instruments previously were classified as equity or temporary
equity and, as such, SFAS 150 represents a significant change in practice in the
accounting for a number of mandatorily redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003, and to other instruments at the beginning of the
first interim period beginning after June 15, 2003. The adoption of SFAS 150 did
not have a material effect on the Company's results of operations, liquidity, or
financial condition.
15. SUBSEQUENT EVENT
As discussed in Note 8(a), Aerojet is involved in litigation with ASWC, a
local water purveyor who is seeking damages, including unspecified past costs,
replacement water for contaminated drinking water wells near Aerojet's
Sacramento, California, manufacturing facility and other future damages. The
trial date scheduled for October 2003 has been deferred to November 2003 to
permit recently initiated settlement discussions to proceed. On October 10,
2003, Aerojet and ASWC entered into a memorandum of understanding that provides
an outline for a potential settlement agreement. A final settlement agreement
incorporating the terms of the memorandum of understanding is subject to further
review and negotiation, regulatory and other approvals and reaching satisfactory
agreements with other affected water purveyors. The Company recorded an
additional liability of $10 million in the third quarter 2003 for this matter,
which represents management's current estimate of the Company's probable
liability arising from the potential settlement. The Company also recorded in
other current and non-current assets a total of $8 million for the estimated
settlement costs recoverable under Aerojet's agreements with the U.S. government
and other third parties. The net expense of $2 million has been classified as an
unusual charge in the Company's results of operations for the third quarter
2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires the Company to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates. In addition, 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 -
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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 "Risk Factors." Actual results may differ materially.
This section should be read in conjunction with the GenCorp Annual Report on
Form 10-K for the year ended November 30, 2002, and periodic reports
subsequently filed with the United States Securities and Exchange Commission
(SEC).
OVERVIEW
GenCorp's operations are organized into three segments: GDX Automotive,
Aerospace and Defense, and Fine Chemicals. The Company's GDX Automotive segment
is a major automotive supplier, engaged in the development and manufacture of
highly engineered extruded and molded rubber and plastic sealing systems for
automotive original equipment manufacturers. The Aerospace and Defense segment
includes the operations of Aerojet-General Corporation (Aerojet or AGC) and
development activities related to real property located in California. Aerojet
designs, develops and manufactures space and strategic rocket propulsion and
tactical weapons under contracts with the major prime contractors to the U.S.
government, the Department of Defense and the National Aeronautics and Space
Administration. The segment also includes the Company's real estate development
activities. The Company's Fine Chemicals segment consists of the operations of
Aerojet Fine Chemicals LLC (AFC). AFC manufactures active pharmaceutical
ingredients and registered intermediates for pharmaceutical and biotechnology
companies.
In October 2002, Aerojet acquired the assets of the General Dynamics Space
Propulsion and Fire Suppression business (Redmond, Washington operations) for
$93 million, including transaction costs.
In May 2003, Aerojet entered into an agreement to acquire substantially
all of the assets related to the propulsion business of Atlantic Research
Corporation (ARC Propulsion) for $133 million plus transaction costs. ARC
Propulsion is a developer and manufacturer of advanced solid rocket propulsion
systems, gas generators and auxiliary rocket motors for both space and defense
applications. Aerojet expects to receive regulatory approval to complete its
acquisition of ARC Propulsion in October 2003. The acquisition will be funded
from the proceeds of the $150 million senior subordinated notes offering
completed in August 2003. A portion of the proceeds of the senior subordinated
notes offering were used to temporarily repay borrowings under the Company's
revolving credit facility pending completion of the ARC Propulsion acquisition.
RESULTS OF OPERATIONS
The following discussion pertains to activity included in the Company's
Unaudited Condensed Consolidated Statements of Income, which are contained in
Part I, Item 1 of this report. See Note 12 to the Unaudited Condensed
Consolidated Financial Statements for financial results for each of the
Company's operating segments.
Sales for the third quarter 2003 were $283 million compared to $266
million for the third quarter 2002. Sales for the first nine months of 2003 were
$869 million compared to $818 million for the first nine months of 2002. These
increases reflect Aerojet's acquisition of the Redmond, Washington operations in
October 2002, a $15 million real estate sale in August 2003 and favorable
currency exchange rates primarily at GDX Automotive. The increases were
partially offset by increased customer pricing allowances and lower sales volume
at GDX Automotive.
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The Company recorded a net loss of $3 million, or $0.07 per share, in the
third quarter 2003 compared to net income of $8 million, or $0.19 per share, in
the third quarter 2002. Net income was $10 million, or $0.23 per share for the
first nine months of 2003 compared to $17 million, or $0.40 per share, for the
first nine months of 2002. The earnings decline is primarily the result of
reduced income from employee retirement benefit plans and a decline in the
operating results of GDX Automotive.
RESULTS OF OPERATING SEGMENTS
GDX AUTOMOTIVE
GDX Automotive sales for the third quarter 2003 were $174 million compared
to $190 million in the third quarter 2002. Sales for the first nine months of
2003 were $579 million compared to $589 million in the first nine months of
2002. The decreases reflect lower volumes due to major vehicle platform
transitions and increased pricing allowances to major customers. The decreases
were partially offset by the effect of favorable currency exchange rates of $15
million in the third quarter 2003 and $54 million for the first nine months of
2003.
GDX Automotive reported an operating loss of $14 million for the third
quarter 2003 compared to operating income of $5 million in the third quarter
2002. The unfavorable third quarter operating results reflect lower sales
volumes and increased pricing allowances, increased costs associated with the
launch of new vehicle platforms, unscheduled shutdowns due to original equipment
manufacturers labor issues in Europe, lower income from employee retirement
benefit plans of $2 million, and a $2 million charge for personnel actions taken
at GDX Automotive headquarters. In addition, during the third quarter 2003, GDX
Automotive recorded a $3 million charge related to the correction of accounting
for certain customer pricing allowances and vendor rebates, which individually
and in the aggregate, were not material to the periods in which they were
initially recorded.
Operating profit for the first nine months of 2003 was $7 million compared
to $25 million in the first nine months of 2002. The decline in profitability
reflected lower sales volumes, increased pricing allowances, the unfavorable
third quarter operating results discussed above, and lower income from employee
retirement benefit plans of $6 million. However, favorable foreign currency rate
effects contributed $2 million in the first nine months of 2003.
AEROSPACE AND DEFENSE
Aerospace and Defense sales for the third quarter 2003 were $99 million,
compared to $63 million in the third quarter 2002. Sales for the first nine
months of 2003 were $246 million compared to $201 million for the first nine
months of 2002. Contributing to the increase were sales from the Redmond,
Washington operations of $16 million for the third quarter 2003 and $42 million
for the first nine months of 2003, increased volumes on programs for liquid and
solid systems for Missile Defense applications, the Boeing HyFly program and
deliveries under the Atlas V program. Third quarter 2003 results also include a
$15 million sale of a building complex located in Sacramento County, California.
These increases were offset by the timing of various program deliveries,
completion of the NASA X-38 De-Orbit Propulsion Stage in the second quarter of
2002, cancellation of the COBRA booster engine program in 2002, and lower sales
volumes on various other programs.
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Operating profit was $21 million for the third quarter 2003 compared to
$14 million in the third quarter 2002. For the first nine months of 2003,
operating profit was $41 million compared to $44 million for the first nine
months of 2002. Results for 2003 reflect a pre-tax gain of $10 million on the
sale of a building complex in the third quarter, contributions from the Redmond,
Washington operations of $2 million in the third quarter and $5 million in the
first nine months, increased sales volumes on programs for liquid and solid
systems for Missile Defense applications and lower profit contributions from
other programs. Lower income from employee retirement benefit plans also reduced
operating profits by $5 million in the third quarter and $15 million in the
first nine months of 2003.
In the third quarter 2003, Aerojet recorded an unusual charge of $2
million representing the unrecoverable portion of estimated legal settlement
costs. See Note 15 of Notes to Unaudited Condensed Consolidated Financial
Statements. Aerojet recorded an unusual charge of $6 million in the second
quarter 2002 representing the final purchase price adjustment on the 2001 sale
of its EIS business.
Contract backlog was $696 million as of August 31, 2003, compared to $773
million as of November 30, 2002. Funded backlog, which includes only those
contracts for which money has been directly authorized by the U.S. Congress, or
for which a firm purchase order has been received by a commercial customer, was
$343 million as of August 31, 2003 compared to $416 million as of November 30,
2002. Funding for the Titan program was restructured in the first quarter of
2003, reducing funded backlog by $58 million. Aerojet expects this funding to be
incrementally restored in future years.
FINE CHEMICALS
Fine Chemicals sales for the third quarter 2003 were $12 million compared
to $13 million in the third quarter 2002. Sales for the first nine months of
2003 were $46 million compared to $28 million in the first nine months of 2002.
As a contract manufacturer and ingredient supplier to pharmaceutical and
biotechnology companies, AFC's sales trends reflect, to a certain extent,
increasing demand for its customers' end products.
Operating profit for the third quarter 2003 was $2 million, compared to $3
million in the third quarter 2002. The decline in third quarter operating profit
as compared to the prior year reflects sales volume decreases and changes in
product mix. Operating profit for the third quarter 2003 includes $1 million
relating to fees paid by a customer for not meeting minimum purchase commitments
during the period. For the first nine months of 2003, operating profit was $8
million, compared to a loss of $1 million in the first nine months of 2002. The
improvement in operating profit for the first nine months of 2003 reflects
higher sales volume and operational improvements.
INTEREST AND OTHER EXPENSES
Interest expense increased to $6 million in the third quarter 2003 from $4
million in the third quarter 2002. Interest expense for the first nine months of
2003 increased to $17 million from $11 million in the first nine months of 2002.
The increase is due primarily to additional debt incurred for the acquisition of
the Redmond, Washington operations in October 2002.
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Corporate and other expenses increased to $8 million in the third quarter
2003 from $6 million in the third quarter 2002. The increase reflects lower
income from employee retirement benefit plans of $3 million and a foreign
currency loss of $1 million, offset in part by reduced incentive compensation
plan accruals. Corporate and other expenses increased to $24 million in the
first nine months of 2003 from $21 million in the first nine months of 2002. The
increase reflects lower income from employee retirement benefit plans of $7
million and increases in professional services, offset by foreign currency gains
of $3 million. Corporate and other expenses in 2002 included $6 million for a
special accounting review.
The third quarter 2003 income tax benefit includes $1 million in
settlements and reductions of prior estimates based on final tax filings in the
quarter.
ENVIRONMENTAL MATTERS
GenCorp's policy is to conduct its businesses with due regard for the
preservation and protection of the environment. The Company devotes a
significant amount of resources and management attention to environmental
matters and actively manages its ongoing processes to comply with extensive
environmental laws and regulations. GenCorp is involved in the remediation of
environmental conditions that resulted from generally accepted manufacturing and
disposal practices in the 1950's and 1960's followed at certain of the Company's
plants. In addition, the Company has been designated a Potentially Responsible
Party (PRP) with other companies at third party sites undergoing investigation
and remediation.
The nature of environmental investigation and cleanup activities often
makes it difficult to determine the timing and amount of any estimated future
costs that may be required for remediation measures. These matters are reviewed
and costs associated with the environmental remediation are accrued when it
becomes probable that a liability has been incurred and the amount of the
Company's liability can be reasonably estimated. The Company's Unaudited
Condensed Consolidated Balance Sheet (which is included in Part I, Item 1 of
this report) as of August 31, 2003, reflects accrued liabilities of $317 million
and amounts recoverable of $216 million from the U.S. government and other third
parties for such costs. Pursuant to U.S. government procurement regulations and
an agreement with the U.S. government covering environmental contamination at
Aerojet's Sacramento and former Azusa, California sites, Aerojet can recover a
substantial portion of its environmental remediation costs through the
establishment of prices for Aerojet's products and services sold to the U.S.
government. The ability of Aerojet to continue recovering these costs from the
U.S. government depends on Aerojet's sustained business volume under U.S.
government contracts and programs and, to a certain extent, the availability of
reimbursements under the agreement with Northrop.
The effect of the final resolution of environmental matters and the
Company's obligations for environmental remediation and compliance cannot be
predicted due to the uncertainty concerning both the amount and timing of future
expenditures due to regulatory or technological changes. However, the Company
believes, on the basis of presently available information, that the resolution
of environmental matters and the Company's obligations for environmental
remediation and compliance will not have a material adverse effect on the
Company's results of operations, liquidity or financial condition. The Company
will continue its efforts to mitigate past and future costs through pursuit of
claims for recoveries from insurance coverage and other PRPs and continued
investigation of new and more cost effective remediation alternatives and
associated technologies.
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For additional discussion of environmental and related legal matters, see
Notes 8(a) and 8(b) in Notes to Unaudited Condensed Consolidated Financial
Statements.
KEY ACCOUNTING POLICIES AND ESTIMATES
The Company prepares its financial statements in accordance with
accounting principles generally accepted in the U.S. (GAAP). The preparation of
financial statements in accordance with GAAP 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. Estimates have been
prepared on the basis of the most current and best available information, and
actual results could differ materially from those estimates. The areas most
affected by the Company's accounting policies and estimates are revenue
recognition/long-term contracts, goodwill and intangible assets, employee
retirement and post retirement benefit plans, litigation, environmental
remediation costs and income taxes. These areas are discussed in more detail in
the Company's Annual Report on Form 10-K for the year ended November 30, 2002.
There have been no significant changes in the Company's key accounting policies
during the first nine months of 2003.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The adoption of FIN 46 did not
have a material effect on the Company's results of operations, liquidity, or
financial condition.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS 149 is intended to result in more consistent reporting
of contracts as either freestanding derivative instruments subject to Statement
133 in its entirely, or as hybrid instruments with debt host contracts and
embedded derivative features. SFAS 149 is effective for contracts entered into
or modified after June 30, 2003. The adoption of SFAS 49 did not have a material
effect on the Company's results of operations, liquidity, or financial
condition.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (SFAS 150), Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS 150 requires certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity to be classified as liabilities.
Many of these instruments previously were classified as equity or temporary
equity and as such, SFAS 150 represents a significant change in practice in the
accounting for a number of mandatorily redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003, and to other instruments at the beginning of the
first interim period
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beginning after June 15, 2003. The adoption of SFAS 150 did not have a material
effect on the Company's results of operations, liquidity, or financial
condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company broadly defines liquidity as its ability to generate
sufficient operating cash flows, as well as its ability to obtain debt and
equity financing and to convert to cash those assets that are no longer required
to meet its strategic and financial objectives. Changes in net cash provided by
operating activities generally reflect earnings plus depreciation and
amortization and other non-cash charges and the effect of changes in working
capital. Changes in working capital generally are the result of timing
differences between the collection of customer receivables and payment for
materials and operating expenses
Net cash provided by (used in) operating activities
Operating activities provided net cash of $7 million for the first nine
months of 2003 compared to a $40 million use of cash in the first nine months of
2002. The increase in operating cash flow in 2003 reflects improved operating
results for the Aerospace and Defense and Fine Chemical segments (after
adjusting for the non-cash impact of employee retirement benefit plans) offset
in part by reduced profits for the GDX Automotive segment. Operating cash flows
in 2003 also reflect a reduction in working capital usage, primarily in the
Aerospace and Defense segment, as compared to the same period in 2002. Net cash
used in operating activities for the first nine months of fiscal 2002 was
negatively affected by working capital requirements, including needs for
Aerojet's fixed-price production contracts such as the Atlas V program.
Net cash used in investing activities
The Company used $111 million in cash for investing activities for the
first nine months of 2003 compared to $35 million used for the comparable period
in 2002. Included in cash used in investing activities in 2003 is $95 million of
restricted cash from the net proceeds of the senior subordinated notes issued in
August 2003. Capital expenditures totaled $36 million for the first nine months
of 2003 and $31 million for the first nine months of 2002. The Company's capital
expenditures directly support the Company's contract and customer requirements
and are primarily made for asset replacement and capacity expansion, cost
reduction initiatives and safety and productivity improvements. Investing
activities in the first nine months of 2003 included a cash inflow of $7 million
from the sale of GDX Automotive assets and operations in Germany and $13 million
from the sale of a building complex (after transaction costs and tenant
improvement obligations). Investing activities for the first nine months of 2002
included a net cash outflow of approximately $8 million related to the Company's
reacquisition of the minority interest in AFC.
Net cash provided by financing activities
Net cash provided by financing activities for the first nine months of
2003 was $113 million compared with $66 million for the first nine months of
2002. Cash flow from financing activities in both periods relates primarily to
activities involving the Company's borrowings, net of repayments. The Company
paid dividends of $4 million in both periods presented.
On August 11, 2003, GenCorp sold $150 million aggregate principal amount
of its 9-1/2% the senior subordinated notes due August 2013. Issuance of the
senior subordinated notes generated
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net proceeds of $145 million. The Company used approximately $50 million of the
net proceeds to repay the then existing balance of the revolving credit
facility. Amounts repaid under the revolving credit facility may be reborrowed.
The remaining net proceeds of $95 million are held in a restricted cash account
to be used for the ARC Propulsion acquisition. Under an amendment and waiver to
the senior credit facility, if the Company does not complete the ARC Propulsion
acquisition by December 31, 2003, GenCorp will be required to use the balance of
the net proceeds to repay in full outstanding indebtedness under term loan A,
plus accrued and unpaid interest, with the remainder to be used to repay
outstanding indebtedness under term loan B, plus accrued and unpaid interest,
subject to modification in accordance with the terms of the amendment and
waiver. Once repaid, term loan A and term loan B indebtedness may not be
reborrowed.
In April 2002, GenCorp sold $150 million aggregate principal amount of its
convertible subordinated notes due 2007 in a private placement. The net proceeds
of the offering were approximately $144 million. The Company used approximately
$25 million of the net proceeds to repay in full term loan C and does not have
the ability to reborrow these funds. The Company also used approximately $119
million to repay outstanding debt under the revolving credit facility. Amounts
repaid against the outstanding debt under the revolving credit facility may be
reborrowed at any time or from time to time and may be used for any purpose,
subject to the limits contained in the senior credit facility.
Liquidity
At August 31, 2003 and November 30, 2002, unrestricted cash and cash
equivalents totaled $61 million and $48 million, respectively, and availability
under the Company's credit facilities totaled $97 million and $75 million,
respectively. Restricted cash of $95 million at August 31, 2003, must be used
either to fund the acquisition of ARC Propulsion or, in the event the
acquisition does not close by December 31, 2003, to repay term loans.
The Company currently believes that its existing cash and cash
equivalents, forecasted cash flows from operations and asset sales and
borrowings available under its credit facilities will provide sufficient funds
to meet its operating plan for the next twelve months. The operating plan for
this period provides for full operation of the Company's business, interest and
principal payments on the Company's debt and anticipated dividend payments.
If the Company experiences adverse economic developments and is not able
to raise debt or equity financing in the capital markets or to obtain bank
borrowings, the Company believes that it can generate additional funds to meet
its liquidity requirements for the next twelve months by reducing working
capital requirements, deferring capital expenditures, implementing cost
reduction initiatives in addition to those already included in the Company's
operating plan, selling assets, or through a combination of these means.
Major factors that could adversely impact the Company's forecasted
operating cash and its financial condition are described in "Forward-Looking
Statements" and "Risk Factors" below. In addition, the Company's 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.
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FORWARD-LOOKING STATEMENTS
Certain information contained in this report should be considered
"forward-looking statements" as defined by the Private Securities Litigation
Reform Act of 1995. These statements present (without limitation) the
expectations, beliefs, plans and objectives of management and future financial
performance and/or assumptions underlying or judgments concerning matters
discussed in this document. 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 with respect to future sales and
activity levels, cash flows, contract performance, the outcome of contingencies
including environmental remediation, and anticipated costs of capital some of
which are described in "Risk Factors."
RISK FACTORS
A variety of factors could cause actual results or outcomes to differ
materially from those expected by the Company and expressed in the Company's
forward-looking statements. Some important risk factors that could cause actual
results or outcomes to differ from those expressed in the forward-looking
statements include, but are not limited to, the following:
- Legal and regulatory developments that may have an adverse impact on the
Company or its segments. For example: 1) the judgment order in the amount of
approximately $29 million entered November 21, 2002 against GenCorp in GenCorp
Inc. v Olin Corporation (U.S. District Court for the Northern District of Ohio,
Eastern Division), if it is upheld on appeal and the reductions to which the
Company believes it is entitled are not realized; 2) restrictions on real estate
development that could delay the Company's proposed real estate development
activities; 3) a change in toxic tort or asbestos litigation trends that is
adverse to the Company; and 4) changes in international tax laws or currency
controls.
- Changes in Company-wide or business segment strategies, which may result
in changes in the types or mix of business in which the Company is involved or
chooses to invest.
- Changes in U.S., global or regional economic conditions, which may
affect, among other things, 1) consumer spending on new vehicles which could
reduce demand for products from the GDX Automotive segment, 2) customer funding
for the purchase of Aerospace and Defense products which may impact the
segment's business base and, as a result, impact its ability to recover
environmental costs, 3) health care spending and demand for the pharmaceutical
ingredients produced by Fine Chemicals, 4) the Company's ability to successfully
complete its real estate activities, and 5) the funded status and costs related
to employee retirement benefit plans.
- Changes in U.S. and global financial markets, including market
disruptions, and significant currency or interest rate fluctuations, which may
impede the Company's access to, or increase the cost of, external financing for
its operations and investments and/or materially affect results of operations
and cash flows.
- Risks associated with the Company's Aerospace and Defense segment's
being a defense contractor including: 1) the right of the U.S. government to
terminate any contract for convenience; 2) modification or termination of U.S.
government contracts due to lack of congressional funding; and 3) the lack of
assurance that bids for new programs will be
-41-
successful, contract options will be exercised or follow-on contracts will be
awarded in light of the competitive bidding atmosphere under which most
contracts are awarded.
- Increased competitive pressures both domestically and internationally
which may, among other things, affect the performance of the Company's
businesses. For example, the automotive industry is increasingly outsourcing the
production of key vehicle sub-assemblies. Accordingly, industry suppliers, such
as the Company's GDX Automotive segment, will need to demonstrate the ability to
be a reliable supplier of integrated components to maintain and expand their
market share.
- Labor disputes, which may lead to increased costs or disruption of
operations in the Company's GDX Automotive, Aerospace and Defense and Fine
Chemicals segments.
- Changes in product mix, which may affect automotive vehicle preferences
and demand for the Company's GDX Automotive segment's products.
- Technological developments or patent infringement claims which may
impact the use of critical technologies in the Company's GDX Automotive,
Aerospace and Defense and Fine Chemicals segments leading to reduced sales
and/or increased costs.
- An unexpected adverse result or required cash outlay in the toxic tort
cases, environmental proceedings or other litigation, or change in proceedings
or investigations pending against the Company.
These and other factors are described in more detail in the Company's
Annual Report on Form 10-K for the year ended November 30, 2002 and its
subsequent filings with the Securities and Exchange Commission. Additional risks
may be described from time-to-time in future filings with the U.S. Securities
and Exchange Commission. All such risk factors are difficult to predict, contain
material uncertainties that may affect actual results, and may be beyond the
Company's control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's disclosures related
to certain market risks as reported under Part II, Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk," in the Annual Report of GenCorp to
the U.S. Securities and Exchange Commission on Form 10-K for the year ended
November 30, 2002, except as noted below.
INTEREST RATE RISK
The Company uses interest rate swaps and a combination of fixed and
variable rate debt to reduce its exposures to interest rate risk. The Company
entered into interest rate swap agreements, effective January 10, 2003, on $100
million of its variable-rate debt (see Note 7 in Notes to Unaudited Condensed
Consolidated Financial Statements). The remaining variable-rate debt under the
Company's bank credit agreements of approximately $92 million is subject to
fluctuations in market interest rates. A one-percentage point increase in
interest rates on the unhedged variable-rate debt as of August 31, 2003, would
decrease annual pretax income by $1 million.
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FOREIGN CURRENCY EXCHANGE RISK
The Company periodically uses foreign currency forward contracts to reduce
its exposure to exchange rate fluctuations on intercompany loans denominated in
foreign currencies. In the second quarter of 2003, the Company entered into
three foreign currency forward contracts. Two of the contracts totaling 15
million Euro matured in April. As of August 31, 2003, the Company has one
forward contract outstanding totaling 7 million Euro which matures November 28,
2003. Forward contracts are marked-to-market each period and unrealized gains or
losses are included in other income and expense. The unrealized loss on the
outstanding forward contract was not material to the Company's consolidated
financial statements. The remaining foreign currency denominated debt is not
material to the Company's consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's
principal executive officer and its principal financial and
accounting officer, based on their evaluation of the Company's
disclosure controls and procedures, as defined in Exchange Act Rules
13a - 14(c), as of August 31, 2003, have concluded that the
Company's disclosure controls and procedures are adequate and
effective for the purposes set forth in the definition in Exchange
Act rules.
(b) Changes in internal controls. There were no significant changes in
the Company's internal controls or in other factors that could
significantly affect the Company's internal controls subsequent to
the date of their evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as disclosed in Note 8(a), Note 8(b) and Note 15 in Part I and
incorporated herein by reference, there have been no material developments in
the pending legal proceedings as previously reported in the Annual Report of
GenCorp Inc. to the SEC on Form 10-K for the year ended November 30, 2002 and
subsequent periodic reports filed with the SEC. Reference is made to Item 3,
Legal Proceedings in the Company's Annual Report on Form 10-K for the year ended
November 30, 2002 and to Part II, Item 1, Legal Proceedings in our Quarterly
Report on Form 10-Q for the quarters ended May 31, 2003 and February 28, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
No. Description
--- -----------
2.1 First Amendment to Purchase Agreement, dated August 29, 2003,
between Aerojet-General Corporation and Atlantic Research
Corporation (filed as Exhibit 2.2 to GenCorp's Registration
Statement on Form S-4 (File No. 333-109518) and incorporated
herein by reference)
2.2 Second Amendment to Purchase Agreement, dated September 30,
2002, between Aerojet-General Corporation and Atlantic
Research Corporation.
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3.1 Amended Articles of Incorporation of GenCorp Inc. filed with
the Secretary of State of Ohio on August 7, 2003 (filed as
Exhibit 3.1 to GenCorp's Registration Statement on Form S-4
(File No. 333-109518) and incorporated herein by reference)
4.1 Indenture, dated as of August 11, 2003, between GenCorp Inc.,
the Guarantors named therein and The Bank of New York, as
trustee (filed as Exhibit 4.1 to GenCorp's Registration
Statement on Form S-4 (File No. 333-109518) and incorporated
herein by reference)
4.2 Registration Rights Agreement, dated as of August 11, 2003,
among GenCorp Inc., the Guarantors named therein and the
Initial Purchasers named therein (filed as Exhibit 4.2 to
GenCorp's Registration Statement on Form S-4 (File No.
333-109518) and incorporated herein by reference)
4.3 Form of Initial Notes (included in Exhibit 4.1)
4.4 Form of Exchange Notes (including in Exhibit 4.1)
10.1 Amendment No. 1 to Amended and Restated Credit Agreement and
Limited Waiver and consent, dated July 29, 2003, among GenCorp
Inc., Deutsche Bank Trust Company Americas (f/k/a Bankers
Trust Company), for itself, as a Lender, and as Administrative
Agent for the Lenders, and the other Lenders signatory thereto
(Filed as Exhibit 10.1 to GenCorp's Registration statement on
Form S-4 (File No. 333-109518) and incorporated herein by
reference.)
10.2 Amendment No. 2 to Amended and Restated Credit dated August
25, 2003, among GenCorp Inc., Deutsche Bank Trust Company
Americas (f/k/a Bankers Trust Company), for itself, as a
Lender, and as Administrative Agent for the Lenders, and the
other Lenders signatory thereto (Filed as Exhibit 10.2 to
GenCorp's Registration statement on Form S-4 (File No.
333-109518) and incorporated herein by reference.)
31.1 Certification of Chief Executive Officer required by Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended.
31.2 Certification of Chief Financial Officer required by Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
B) Reports on Form 8-K
On July 28, 2003, the Company filed an 8-K under Item 5 thereof with
respect to its press release dated July 24, 2003 in which the Company
announced that its Aerojet subsidiary is selling a 96,000 square foot
office complex on approximately 11 acres in Sacramento County for $14.9
million and its press release dated July 25, 2003 in which the Company
announced that it is planning to issue $175 million senior subordinated
notes due 2013 in a private placement to institutional investors.
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On August 8, 2003, the Company filed an 8-K under Item 5 thereof
with respect to its press release dated August 6, 2003 in which the
Company announced that it has agreed to sell $150 million aggregate
principal amount of senior subordinated notes due 2013 in a private
placement to institutional investors.
On September 8, 2003, the Company filed an 8-K under Item 9 and Item
12 thereof with respect to its press release dated September 4, 2003
revising previously issued earnings guidance for the third quarter and
fiscal year 2003 and announcing several personnel actions that have been
taken or will be taken at the GDX executive level.
On October 6, 2003, the Company filed a Form 8-K under Item 9 and
Item 12 thereof with respect to its press release dated October 6, 2003 in
which the Company announced a third quarter of 2003 loss of $2 million, or
$0.05 per share, compared to $10 million or $0.19 per share for the third
quarter of 2002.
On October 9, 2003, the Company filed a Form 8-K under Item 5
thereof with respect to its press release dated October 6, 2003 announcing
the resignation of Michael Bryant from his positions as President of GDX
Automotive and Vice President of GenCorp Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GenCorp Inc.
Date: October 15, 2003 By: /s/ Terry L. Hall
-----------------------------------
Terry L. Hall
President and Chief Executive
Officer
Date: October 15, 2003 By: /s/ Yasmin R. Seyal
-----------------------------------
Yasmin R. Seyal
Senior Vice President, Chief
Financial Officer and Principal
Accounting Officer
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