XNYS:GY GenCorp Inc Quarterly Report 10-Q Filing - 8/31/2012

Effective Date 8/31/2012

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Table of Contents

 

 

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, 2012

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 1-01520

 

 

GenCorp Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Ohio   34-0244000
(State of Incorporation)   (I.R.S. Employer Identification No.)

2001 Aerojet Road

Rancho Cordova, California

  95742
(Address of Principal Executive Offices)   (Zip Code)

P.O. Box 537012

Sacramento, California

  95853
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of September 30, 2012, there were 60.5 million outstanding shares of our Common Stock, including redeemable common stock and unvested common shares, $0.10 par value.

 

 

 


Table of Contents

GenCorp Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended August 31, 2012

Table of Contents

 

Item
Number

       Page  
  PART I — FINANCIAL INFORMATION   

1

  Financial Statements      3   

2

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      25   

3

  Quantitative and Qualitative Disclosures About Market Risk      39   

4

  Controls and Procedures      40   
  PART II — OTHER INFORMATION   

1

  Legal Proceedings      41   

1A

  Risk Factors      41   

2

  Unregistered Sales of Equity Securities and Use of Proceeds      43   

3

  Defaults Upon Senior Securities      43   

5

  Other Information      43   

6

  Exhibits      43   
  SIGNATURES   
  Signatures      45   
  EXHIBIT INDEX   
  Exhibit Index      46   

 

2


Table of Contents

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

GenCorp Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

     Three months ended August 31,     Nine months ended August 31,  
     2012     2011     2012     2011  
     (In millions, except per share amounts)  

Net Sales

   $ 244.9      $ 226.2      $ 696.7      $ 665.9   

Operating costs and expenses:

        

Cost of sales (exclusive of items shown separately below)

     214.1        197.5        608.3        581.1   

Selling, general and administrative

     10.4        8.7        31.9        30.0   

Depreciation and amortization

     5.3        6.7        16.1        18.2   

Other expense, net

     11.0        4.0        15.5        6.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     240.8        216.9        671.8        636.2   

Operating income

     4.1        9.3        24.9        29.7   

Non-operating (income) expense:

        

Interest income

     (0.2     (0.2     (0.5     (0.8

Interest expense

     4.8        7.9        16.6        23.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating expense, net

     4.6        7.7        16.1        22.6   

(Loss) income from continuing operations before income taxes

     (0.5     1.6        8.8        7.1   

Income tax provision

     8.2        0.3        13.8        3.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (8.7     1.3        (5.0     3.7   

Loss from discontinued operations, net of income taxes

     (0.8     (0.1     (0.4     (1.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (9.5   $ 1.2      $ (5.4   $ 2.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Income Per Share of Common Stock

        

Basic and Diluted

        

(Loss) income per share from continuing operations

   $ (0.15   $ 0.02      $ (0.08   $ 0.06   

Loss per share from discontinued operations, net of income taxes

     (0.01     —          (0.01     (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share

   $ (0.16   $ 0.02      $ (0.09   $ 0.04   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding, basic and diluted

     59.0        58.7        58.9        58.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

3


Table of Contents

GenCorp Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

     August 31,
2012
    November 30,
2011
 
     (In millions, except per share and share
amounts)
 
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 155.7      $ 188.0   

Accounts receivable

     113.1        107.0   

Inventories

     41.3        49.5   

Recoverable from the U.S. government and other third parties for environmental remediation costs

     24.0        23.6   

Receivable from Northrop Grumman Corporation (“Northrop”)

     6.0        6.0   

Other receivables, prepaid expenses and other

     24.3        21.5   

Income taxes

     1.6        5.3   
  

 

 

   

 

 

 

Total Current Assets

     366.0        400.9   

Noncurrent Assets

    

Property, plant and equipment, net

     133.7        126.9   

Real estate held for entitlement and leasing

     65.5        63.3   

Recoverable from the U.S. government and other third parties for environmental remediation costs

     116.1        114.1   

Receivable from Northrop

     66.8        66.3   

Goodwill

     94.9        94.9   

Intangible assets

     14.2        15.4   

Other noncurrent assets, net

     50.9        57.7   
  

 

 

   

 

 

 

Total Noncurrent Assets

     542.1        538.6   
  

 

 

   

 

 

 

Total Assets

   $ 908.1      $ 939.5   
  

 

 

   

 

 

 
LIABILITIES, REDEEMABLE COMMON STOCK, AND SHAREHOLDERS’ DEFICIT     

Current Liabilities

    

Short-term borrowings and current portion of long-term debt

   $ 2.8      $ 2.8   

Accounts payable

     40.7        33.8   

Reserves for environmental remediation costs

     40.8        40.7   

Postretirement medical and life benefits

     6.8        6.8   

Advance payments on contracts

     100.4        108.5   

Deferred income taxes

     10.7        3.1   

Other current liabilities

     115.7        104.1   
  

 

 

   

 

 

 

Total Current Liabilities

     317.9        299.8   

Noncurrent Liabilities

    

Senior debt

     45.6        47.5   

Senior subordinated notes

     —          75.0   

Convertible subordinated notes

     200.2        200.2   

Other debt

     0.8        0.9   

Deferred income taxes

     0.4        4.5   

Reserves for environmental remediation costs

     157.6        149.9   

Pension benefits

     219.9        236.4   

Postretirement medical and life benefits

     66.9        68.4   

Other noncurrent liabilities

     63.1        64.1   
  

 

 

   

 

 

 

Total Noncurrent Liabilities

     754.5        846.9   
  

 

 

   

 

 

 

Total Liabilities

     1,072.4        1,146.7   

Commitments and Contingencies (Note 7)

    

Redeemable common stock, par value of $0.10; 0.4 million shares issued and outstanding as of August 31, 2012 and November 30, 2011

     4.1        4.4   

Shareholders’ Deficit

    

Preference stock, par value of $1.00; 15.0 million shares authorized; none issued or outstanding

     —          —     

Common stock, par value of $0.10; 150.0 million shares authorized; 58.7 million shares issued and outstanding as of August 31, 2012; 58.4 million shares issued and outstanding as of November 30, 2011

     5.9        5.9   

Other capital

     265.7        261.2   

Accumulated deficit

     (184.7     (179.3

Accumulated other comprehensive loss, net of income taxes

     (255.3     (299.4
  

 

 

   

 

 

 

Total Shareholders’ Deficit

     (168.4     (211.6
  

 

 

   

 

 

 

Total Liabilities, Redeemable Common Stock and Shareholders’ Deficit

   $ 908.1      $ 939.5   
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

4


Table of Contents

GenCorp Inc.

Condensed Consolidated Statement of Shareholders’ Deficit and Comprehensive Income

(Unaudited)

 

    

Comprehensive

    Common Stock      Other     

Accumulated

   

Accumulated
Other

Comprehensive

   

Total

Shareholders’

 
   Income     Shares      Amount      Capital      Deficit     Loss     Deficit  
     (In millions)  

November 30, 2011

       58.4       $ 5.9       $ 261.2       $ (179.3   $ (299.4   $ (211.6

Net loss

   $ (5.4     —           —           —           (5.4     —          (5.4

Amortization of actuarial losses, net

     44.1        —           —           —           —          44.1        44.1   

Reclassification from redeemable common stock

     —          —           —           0.3         —          —          0.3   

Tax benefit on stock-based awards

     —          —           —           1.9         —          —          1.9   

Stock-based compensation and other, net

     —          0.3         —           2.3         —          —          2.3   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

August 31, 2012

   $ 38.7        58.7       $ 5.9       $ 265.7       $ (184.7   $ (255.3   $ (168.4
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

5


Table of Contents

GenCorp Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Nine months ended  
     August 31,
2012
    August 31,
2011
 
     (In millions)  

Operating Activities

    

Net (loss) income

   $ (5.4   $ 2.4   

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Loss from discontinued operations, net of income taxes

     0.4       1.3   

Depreciation and amortization

     16.1        18.2   

Amortization of debt discount and financing costs

     1.9        5.1   

Stock-based compensation

     5.1        2.3   

Retirement benefit expense

     30.8        34.8   

Gain on debt repurchased

     —          (0.2

Loss on debt redeemed

     0.4        —     

Tax benefit on stock-based awards

     (1.9     —     

Changes in assets and liabilities:

    

Accounts receivable

     (6.1     (3.1

Inventories

     8.2        5.8   

Other receivables, prepaid expenses and other

     (1.6     3.2   

Income tax receivable

     3.7        0.9   

Real estate held for entitlement and leasing

     (2.4     (2.6

Receivable from Northrop

     (0.5     (1.3

Recoverable from the U.S. government and other third parties for environmental remediation costs

     (2.3     10.3   

Other noncurrent assets

     3.6        2.4   

Accounts payable

     6.9        (2.7

Pension benefits

     —          0.1   

Postretirement medical and life benefits

     (4.0     (4.3

Advance payments on contracts

     (8.1     (2.9

Other current liabilities

     9.8        (7.2

Deferred income taxes

     3.5        0.3   

Reserves for environmental remediation costs

     7.8        (7.1

Other noncurrent liabilities

     (2.7     (4.9
  

 

 

   

 

 

 

Net cash provided by continuing operations

     63.2        50.8   

Net cash used in discontinued operations

     (0.2     (0.4
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     63.0        50.4   

Investing Activities

    

Purchases of marketable securities

     —          (15.0

Sales of marketable securities

     —          41.7   

Proceeds from sale of property

     0.6       —     

Capital expenditures

     (18.8     (12.2
  

 

 

   

 

 

 

Net Cash (Used in) Provided by Investing Activities

     (18.2     14.5   

Financing Activities

    

Tax benefit on stock-based awards

     1.9        —     

Debt issuance costs

     (1.3     —     

Proceeds from shares issued under equity and performance incentive plans

     0.1        —     

Vendor financing repayments

     (0.8     (1.1

Debt repayments

     (77.0     (7.6
  

 

 

   

 

 

 

Net Cash Used in Financing Activities

     (77.1     (8.7
  

 

 

   

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

     (32.3     56.2   

Cash and Cash Equivalents at Beginning of Period

     188.0        181.5   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 155.7      $ 237.7   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Cash paid for interest

   $ 17.3      $ 20.4   

Cash refunds for federal income taxes

     6.0        —     

Cash paid for federal income taxes

     3.4        0.7   

Cash paid for state income taxes

     3.7        1.8   

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

6


Table of Contents

GenCorp Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation and Nature of Operations

GenCorp Inc. (“GenCorp” or the “Company”) has prepared the accompanying Unaudited Condensed Consolidated Financial Statements, including its accounts and the accounts of its wholly owned and majority-owned subsidiaries, in accordance with the instructions to Form 10-Q. The year-end condensed consolidated balance sheet was derived from audited financial statements but does not include all of the disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). These interim financial statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2011, as filed with the Securities and Exchange Commission (“SEC”). Certain reclassifications have been made to financial information for the prior year to conform to the current year’s presentation.

The Company believes the accompanying Unaudited Condensed Consolidated Financial Statements reflect all adjustments, including normal recurring accruals, necessary for a fair statement of its financial position, results of operations, and cash flows for the periods presented. All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In addition, the operating results for interim periods may not be indicative of the results of operations for a full year.

The Company is a manufacturer of aerospace and defense products and systems with a real estate segment that includes activities related to the re-zoning, entitlement, sale, and leasing of the Company’s excess real estate assets. The Company’s continuing operations are organized into two segments:

Aerospace and Defense — includes the operations of Aerojet-General Corporation (“Aerojet”) which develops and manufactures propulsion systems for defense and space applications, and armaments for precision tactical and long range weapon systems applications. Primary customers served include major prime contractors to the United States (“U.S.”) government, the Department of Defense (“DoD”), and the National Aeronautics and Space Administration (“NASA”).

Real Estate — includes the activities of the Company’s wholly owned subsidiary Easton Development Company, LLC (“Easton”) related to the re-zoning, entitlement, sale, and leasing of the Company’s excess real estate assets. The Company owns approximately 12,200 acres of land adjacent to U.S. Highway 50 between Rancho Cordova and Folsom, California east of Sacramento (“Sacramento Land”). The Company is currently in the process of seeking zoning changes and other governmental approvals on a portion of the Sacramento Land to optimize its value.

The Company’s fiscal year ends on November 30 of each year. The fiscal year of the Company’s subsidiary, Aerojet, ends on the last Saturday of November.

On August 31, 2004, the Company completed the sale of its GDX Automotive (“GDX”) business. The remaining subsidiaries of GDX, including Snappon SA, are classified as discontinued operations in these Unaudited Condensed Consolidated Financial Statements (see Note 11).

In July 2012, the Company signed a definitive agreement to acquire Pratt & Whitney Rocketdyne (the “Rocketdyne Business”) from United Technologies Corporation (“UTC”) for $550 million. The purchase price of $550 million, which is subject to adjustment for changes in working capital and other specified items, is expected to be financed with a combination of cash on hand and issuance of debt. The acquisition of the Rocketdyne Business is conditioned upon, among other things, the receipt of required regulatory approvals and other customary closing conditions. Subject to the satisfaction of these conditions, the acquisition is expected to close in the first half of 2013.

A detailed description of the Company’s significant accounting policies can be found in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended November 30, 2011.

 

7


Table of Contents

Recently Adopted Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued updated guidance to improve disclosures regarding fair value measurements. This update requires entities to (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separately (i.e., on a gross basis rather than as one net number), information about purchases, sales, issuances, and settlements in the roll forward of changes in Level 3 fair value measurements. The update requires fair value disclosures by class of assets and liabilities rather than by major category or line item in the statement of financial position. Disclosures regarding the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for assets and liabilities in both Level 2 and Level 3 are also required. For all portions of the update except the gross presentation of activity in the Level 3 roll forward, this standard was effective for the Company on March 1, 2010. For the gross presentation of activity in the Level 3 roll forward, the new disclosures were effective December 1, 2011. As the accounting standard only impacts disclosures, the new standard did not have an impact on the Company’s financial position, results of operations, or cash flows.

As of September 1, 2011, the Company adopted the FASB’s amended guidance on testing goodwill for impairment. Previous guidance required that an entity test for goodwill impairment by comparing the fair value of a reporting unit with its carrying amount including goodwill. If the fair value is less than its carrying amount, then a second step is performed to measure the amount of the impairment loss. Under this new amendment an entity is not required to calculate the fair value of the reporting unit unless the entity determines that it is more likely than not (a likelihood of more than 50%) that its fair value is less than its carrying amount. The adoption of the new standard did not have a material impact on the Company’s financial position or results of operations.

In December 2010, the FASB issued authoritative guidance on disclosure of supplementary pro forma information for business combinations. The new guidance requires that pro forma financial information be prepared as if the business combination occurred as of the beginning of the prior annual period. The guidance was effective for the Company for business combinations subsequent to December 1, 2011.

In May 2011, the FASB issued amended guidance on fair value measurement and related disclosures. The new guidance clarified the concepts applicable for fair value measurement and requires new disclosures, with a particular focus on Level 3 measurements. This guidance was effective for the Company beginning in the second quarter of fiscal 2012, and was applied retrospectively.

New Accounting Pronouncements

In June 2011, the FASB issued amended guidance on the presentation of comprehensive income. The amended guidance eliminates one of the presentation options provided by current GAAP, that is to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, it gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective for the Company beginning in the first quarter of fiscal 2013, and will be applied retrospectively. As the accounting standard only impacts disclosures, the new standard will not have an impact on the Company’s financial position, results of operations, or cash flows.

 

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Table of Contents

2. (Loss) Income Per Share of Common Stock

A reconciliation of the numerator and denominator used to calculate basic and diluted (loss) income per share of common stock (“EPS”) is presented in the following table:

 

     Three months ended August 31,     Nine months ended August 31,  
     2012     2011(1)     2012     2011(1)  
     (In millions, except per share amounts; shares in thousands)  

Numerator:

        

(Loss) income from continuing operations

   $ (8.7   $ 1.3      $ (5.0   $ 3.7   

Loss from discontinued operations, net of income taxes

     (0.8     (0.1     (0.4     (1.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income for basic and diluted earnings per share

   $ (9.5   $ 1.2      $ (5.4   $ 2.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Basic and diluted weighted average shares

     59,027        58,722        58,937        58,666   

Basic and Diluted EPS:

        

(Loss) income per share from continuing operations

   $ (0.15   $ 0.02      $ (0.08   $ 0.06   

Loss from discontinued operations, net of income taxes

     (0.01     —          (0.01     (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share

   $ (0.16   $ 0.02      $ (0.09   $ 0.04   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The undistributed income allocated to participating securities was less than $0.1 million for the fiscal 2011 periods presented. The Company’s outstanding unvested restricted shares contain non-forfeitable rights to dividends. Accordingly, the weighted average share balances treat the unvested restricted shares as participating securities and are included in the computation of EPS pursuant to the two-class method. Application of the two-class method had no impact on EPS for all periods presented.

The following table sets forth the potentially dilutive securities excluded from the computation because their effect would have been anti-dilutive:

 

     Three months ended August 31,      Nine months ended August 31,  
     2012      2011      2012      2011  
     (In thousands)  

4.0625% Convertible Subordinated Debentures (“4 1/16% Debentures”)

     22,219         22,219         22,219         22,219   

Employee stock options

     1,034         1,255         1,034         1,255   

Unvested restricted shares

     1,199         916         1,060         775   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total potentially dilutive securities

     24,452         24,390         24,313         24,249   
  

 

 

    

 

 

    

 

 

    

 

 

 

3. Stock-Based Compensation

Total stock-based compensation expense by type of award for the third quarter and first nine months of fiscal 2012 and 2011 was as follows:

 

     Three months ended August 31,     Nine months ended August 31,  
     2012     2011     2012      2011  
     (In millions)  

Stock appreciation rights

   $ 2.3      $ (1.4   $ 2.7       $ (0.4

Stock options

     (0.1     0.2        0.3         0.7   

Restricted stock, service based

     0.5        0.4        1.6         1.3   

Restricted stock, performance based

     0.2        0.2        0.5         0.7   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total stock-based compensation expense

   $ 2.9      $ (0.6   $ 5.1       $ 2.3   
  

 

 

   

 

 

   

 

 

    

 

 

 

4. Income Taxes

The income tax provision of $13.8 million in the first nine months of fiscal 2012 is primarily related to: (i) federal taxes of $6.1 million; (ii) current state taxes of $2.1 million; and (iii) net deferred taxes of $5.6 million, which represents federal and state deferred taxes from goodwill amortization and utilization of federal alternative minimum tax credits and California research credits.

The income tax provision of $3.4 million in the first nine months of fiscal 2011 is primarily related to current state taxes of $2.3 million, and net deferred taxes of $1.2 million, which represents the excess of deferred tax expense from goodwill amortization over deferred tax benefit from research credits.

A valuation allowance has been recorded to offset a substantial portion of the Company’s net deferred tax assets at August 31, 2012 to reflect the uncertainty of realization. A valuation allowance is required when it is more likely than not that all or a portion of deferred tax assets may not be realized. Establishment and removal of a valuation allowance requires management to consider all positive and negative evidence and make a judgmental decision regarding the amount of valuation allowance required as of a reporting date. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed. Additionally, in accordance with accounting standards, the effect of the Company’s proposed acquisition of the Rocketdyne Business has not been considered in its evaluation of the valuation allowance.

In this evaluation, management has considered all available evidence, both positive and negative, including the following:

 

   

The Company’s recent history of generating taxable income which has allowed for the utilization of net operating loss credits and tax credit carryfowards;

 

   

The Company’s expectation of generating taxable income for fiscal 2012;

 

   

The existence of a three year cumulative comprehensive loss related to the Company’s defined benefit pension plan in the current and recent prior periods;

 

   

Projections of the Company’s future results which reflect uncertainty over its ability to generate taxable income principally due to: (i) anticipated increased periodic pension expense due to a decline in the discount rate utilized to value the pension obligation associated with the Company’s defined benefit pension plan and (ii) the lack of objective, verifiable evidence to predict future aerospace and defense spending associated with the Budget Control Act of 2011, including which governmental spending accounts may be subject to sequestration, the percentage reduction with respect thereto, and the latitude agencies will have in selecting specific expenditures to cut.

As of August 31, 2012, the weight of the negative evidence, principally associated with the above uncertainties, outweighed the historical positive evidence regarding the likelihood that a substantial portion of the net deferred tax assets was realizable. Depending on the Company’s ability to continue to generate taxable income and the resolution of the above uncertainties favorably, it is possible that the valuation allowance could be released during fiscal 2013, which would materially and favorably affect the Company’s results of operations in the period of the reversal. Management will continue to evaluate the ability to realize its net deferred tax assets and related valuation allowance on a quarterly basis.

 

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5. Balance Sheet Accounts

a. Fair Value of Financial Instruments

The accounting standards use a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The following are measured at fair value:

 

                                                                           
     Total      Fair value measurement at August 31, 2012  
        Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
     (In millions)  

Money market funds

   $ 164.7       $ 164.7       $ —         $ —     

 

                                                                           
     Total      Fair value measurement at November 30, 2011  
        Quoted Prices in
Active  Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
     (In millions)  

Money market funds

   $ 194.8       $ 194.8       $ —         $ —     

As of August 31, 2012, a summary of cash and cash equivalents and grantor trust by investment type is as follows:

 

     Total      Cash and
Cash Equivalents
     Money Market
Funds
 
     (In millions)  

Cash and cash equivalents

   $ 155.7       $ 4.9       $ 150.8   

Grantor trust

     13.9         —           13.9   
  

 

 

    

 

 

    

 

 

 
   $ 169.6       $ 4.9       $ 164.7   
  

 

 

    

 

 

    

 

 

 

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued compensation, and other accrued liabilities, approximate fair value because of their short maturities.

The estimated fair value and principal amount for the Company’s long-term debt is presented below:

 

     Fair Value      Principal Amount  
     August 31,
2012
     November 30,
2011
     August 31,
2012
     November 30,
2011
 
     (In millions)  

Term loan

   $ 48.1       $ 49.5       $ 48.1       $ 50.0   

9 1/2% Senior Subordinated Notes (“9 1/2% Notes”)

     —           75.1         —           75.0   

4 1/16% Debentures

     245.0         184.0         200.0         200.0   

Other debt

     1.3         1.4         1.3         1.4   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 294.4       $ 310.0       $ 249.4       $ 326.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair values of the term loan, 9 1/2% Notes, and 4 1/16% Debentures were determined using broker quotes that are based on open markets of the Company’s debt securities as of August 31, 2012 and November 30, 2011, respectively. The fair value of the other debt was determined to approximate carrying value.

 

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b. Accounts Receivable

 

     August 31,
2012
     November 30,
2011
 
     (In millions)  

Billed

   $ 50.0       $ 58.1   

Unbilled

     62.6         48.8   
  

 

 

    

 

 

 

Total receivables under long-term contracts

     112.6         106.9   

Other receivables

     0.5         0.1   
  

 

 

    

 

 

 

Accounts receivable

   $ 113.1       $ 107.0   
  

 

 

    

 

 

 

c. Inventories

 

     August 31,
2012
    November 30,
2011
 
     (In millions)  

Long-term contracts at average cost

   $ 269.7      $ 262.4   

Progress payments

     (228.5     (213.1
  

 

 

   

 

 

 

Total long-term contract inventories

     41.2        49.3   

Work in progress

     0.1        0.2   
  

 

 

   

 

 

 

Total other inventories

     0.1        0.2   
  

 

 

   

 

 

 

Inventories

   $ 41.3      $ 49.5   
  

 

 

   

 

 

 

d. Property, Plant and Equipment, net

 

     August 31,
2012
    November 30,
2011
 
     (In millions)  

Land

   $ 32.2      $ 32.8   

Buildings and improvements

     155.7        153.9   

Machinery and equipment

     341.1        349.0   

Construction-in-progress

     27.5        17.4   
  

 

 

   

 

 

 
     556.5        553.1   

Less: accumulated depreciation

     (422.8     (426.2
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 133.7      $ 126.9   
  

 

 

   

 

 

 

e. Other Noncurrent Assets, net

 

     August 31,
2012
     November 30,
2011
 
     (In millions)  

Grantor trust

   $ 12.5       $ 13.3   

Recoverable from the U.S. government for conditional asset retirement obligations

     13.3         12.3   

Deferred financing costs

     7.6         8.4   

Other

     17.5         23.7   
  

 

 

    

 

 

 

Other noncurrent assets, net

   $ 50.9       $ 57.7   
  

 

 

    

 

 

 

f. Other Current Liabilities

 

     August 31,
2012
     November 30,
2011
 
     (In millions)  

Accrued compensation and employee benefits

   $ 50.2       $ 44.0   

Legal settlements

     10.5         10.7   

Interest payable

     4.0         7.9   

Contract loss provisions

     6.0         4.7   

Other

     45.0         36.8   
  

 

 

    

 

 

 

Other current liabilities

   $ 115.7       $ 104.1   
  

 

 

    

 

 

 

 

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g. Other Noncurrent Liabilities

 

     August 31,
2012
     November 30,
2011
 
     (In millions)  

Pension benefits, non-qualified

   $ 15.8       $ 16.1   

Conditional asset retirement obligations

     20.7         17.8   

Legal settlements

     2.2         8.3   

Deferred revenue

     8.8         9.2   

Deferred compensation

     7.9         7.8   

Other

     7.7         4.9   
  

 

 

    

 

 

 

Other noncurrent liabilities

   $ 63.1       $ 64.1   
  

 

 

    

 

 

 

h. Accumulated Other Comprehensive Loss, net of Income Taxes

 

     August 31,
2012
    November 30,
2011
 
     (In millions)  

Actuarial losses, net

   $ (260.1   $ (304.2

Prior service credits

     4.8        4.8   
  

 

 

   

 

 

 

Accumulated other comprehensive loss, net of income taxes

   $ (255.3   $ (299.4
  

 

 

   

 

 

 

During the third quarter and first nine months of fiscal 2012, the Company had comprehensive income of $5.1 million and $38.7 million, respectively. During the third quarter and first nine months of fiscal 2011, the Company had comprehensive income of $16.9 million and $49.5 million, respectively. The components of accumulated other comprehensive loss related to the Company’s retirement benefit plans.

Market conditions and interest rates significantly affect assets and liabilities of the Company’s pension plans. Pension accounting permits market gains and losses to be deferred and recognized over a period of years. This “smoothing” results in the creation of other accumulated income or loss which will be amortized to pension costs in future years. The accounting method the Company utilizes recognizes one-fifth of the unamortized gains and losses in the market-related value of pension assets and all other gains and losses including changes in the discount rate used to calculate benefit costs each year. Investment gains or losses for this purpose are the difference between the expected return and the actual return on the market-related value of assets which smoothes asset values over three years. Although the smoothing period mitigates some volatility in the calculation of annual retirement benefit expense, future expenses are impacted by changes in the market value of pension plan assets and changes in interest rates.

6. Long-term Debt

 

     August 31,
2012
    November 30,
2011
 
     (In millions)  

Term loan, bearing interest at variable rates (rate of 3.74% as of August 31, 2012), payable in quarterly installments of $0.6 million plus interest, maturing in November 2016

   $ 48.1      $ 50.0   
  

 

 

   

 

 

 

Total senior debt

     48.1        50.0   
  

 

 

   

 

 

 

Senior subordinated notes, bearing interest at 9.50% per annum, redeemed May 2012

     —          75.0   
  

 

 

   

 

 

 

Total senior subordinated notes

     —          75.0   
  

 

 

   

 

 

 

Convertible subordinated debentures, bearing interest at 2.25% per annum, interest payments due in May and November, maturing in November 2024, net of debt discount

     0.2        0.2   

Convertible subordinated debentures, bearing interest at 4.0625% per annum, interest payments due in June and December, maturing in December 2034

     200.0        200.0   
  

 

 

   

 

 

 

Total convertible subordinated notes

     200.2        200.2   
  

 

 

   

 

 

 

Capital lease, payable in monthly installments, maturing in March 2017

     1.1        1.2   
  

 

 

   

 

 

 

Total other debt

     1.1        1.2   
  

 

 

   

 

 

 

Total debt

     249.4        326.4   

Less: Amounts due within one year

     (2.8     (2.8
  

 

 

   

 

 

 

Total long-term debt

   $ 246.6      $ 323.6   
  

 

 

   

 

 

 

 

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Senior Credit Facility

On August 16, 2012, the Company, with its wholly-owned subsidiary Aerojet as guarantor, executed an amendment (the “Second Amendment”) to the Second Amended and Restated Credit Agreement, as amended, (the “Senior Credit Facility”) with the lenders identified therein, and Wells Fargo Bank, National Association, as administrative agent. On May 30, 2012, the Company, with its wholly-owned subsidiary Aerojet as guarantor, executed an amendment (the “First Amendment”) to the Senior Credit Facility with the lenders identified therein, and Wells Fargo Bank, National Association, as administrative agent.

The Second Amendment, among other things, (1) allows for the incurrence of up to $510 million of second lien indebtedness in connection with the acquisition by the Company of the business of UTC’s Pratt & Whitney Rocketdyne division pursuant to the terms of that certain Stock and Asset Purchase Agreement by and between UTC and the Company dated as of July 22, 2012 (the “Acquisition”), and (2) allows for a delayed draw term loan to the Company in an amount of up to $50 million in connection with the Acquisition or, in certain circumstances, for general corporate purposes.

The First Amendment, among other things, (i) increases the amount available under the Senior Credit Facility from (a) a revolving credit facility in an aggregate principal amount of up to $150.0 million (with a $100.0 million subfacility for standby letters of credit and a $5.0 million subfacility for swingline loans) and (b) a term loan facility in an aggregate principal amount of up to $50.0 million by $50.0 million through a combination of increased borrowings under the revolving credit facility and/or one or more term loans, (ii) increases certain restricted payment limits from (a) $25.0 million in any 12 month calculation period and $50.0 million during the term of the Senior Credit Facility to $75.0 million and $125.0 million, respectively and (b) following an Approved Issuance, as defined in the Senior Credit Facility, from $50.0 million in any 12 month calculation period and $100 million during the term of the Senior Credit Facility to $75.0 million and $125.0 million, respectively, (iii) provides greater flexibility with respect to the Company’s ability to incur indebtedness to support permitted acquisitions, and (iv) increases the aggregate limitation on sale leasebacks from $20.0 million to $30.0 million during the term of the Senior Credit Facility. The term loan facility will amortize at a rate of 5.0% of the original principal amount per annum to be paid in equal quarterly installments with any remaining amounts due on the maturity date. Outstanding indebtedness under the Senior Credit Facility may be voluntarily prepaid at any time, in whole or in part, in general without premium or penalty.

As of August 31, 2012, the Company had $44.8 million outstanding letters of credit under the $100.0 million subfacility for standby letters of credit and had $48.1 million outstanding under the term loan facility.

In general, borrowings under the Senior Credit Facility bear interest at a rate equal to the LIBOR plus 350 basis points (subject to downward adjustment), or the base rate as it is defined in the credit agreement governing the Senior Credit Facility. In addition, the Company is charged a commitment fee of 50 basis points per annum on unused amounts of the revolving credit facility and 350 basis points per annum (subject to downward adjustment), along with a fronting fee of 25 basis points per annum, on the undrawn amount of all outstanding letters of credit.

Aerojet guarantees the payment obligations under the Senior Credit Facility. Any borrowings are further secured by (i) all equity interests owned or held by the loan parties, including interests in the Company’s Aerojet and Easton subsidiaries and 66% of the voting stock (and 100% of the non-voting stock) of all present and future first-tier foreign subsidiaries of the loan parties; (ii) substantially all of the tangible and intangible personal property and assets of the loan parties; and (iii) certain real property owned by the loan parties located in Orange, Virginia and Redmond, Washington. All of the Company’s real property located in California, including the real estate holdings of Easton, are excluded from collateralization under the Senior Credit Facility.

The Company is subject to certain limitations including the ability to incur additional debt, make certain investments and acquisitions, and make certain restricted payments, including stock repurchases and dividends. The Senior Credit Facility includes events of default usual and customary for facilities of this nature, the occurrence of which could lead to an acceleration of our obligations thereunder. Additionally, the Senior Credit Facility includes certain financial covenants, including that the Company maintain (i) a maximum total leverage ratio of 3.50 to 1.00 (subject to upward adjustment in certain cases), calculated net of cash up to a maximum of $100.0 million; and (ii) a minimum interest coverage ratio of 2.40 to 1.00.

 

Financial Covenant

   Actual Ratios as of
August 31, 2012
   Required Ratios

Interest coverage ratio, as defined under the Senior Credit Facility

   5.64 to 1.00    Not less than: 2.40 to 1.00

Leverage ratio, as defined under the Senior Credit Facility

   1.32 to 1.00    Not greater than: 3.50 to 1.00

The Company was in compliance with its financial and non-financial covenants as of August 31, 2012.

 

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9 1/2% Senior Subordinated Notes

During the second quarter of fiscal 2012, the Company redeemed $75.0 million of its 9 1/2% Notes at a redemption price of 100% of the principal amount.

2 1/4% Convertible Subordinated Debentures (“2 1/4% Debentures”)

As of August 31, 2012 and November 30, 2011, the Company had $0.2 million outstanding principal amount of its 2 1/4% Debentures.

The initial carrying value of the liability component at issuance of the 2 1/4% Debentures was the present value of its cash flows using a discount rate of 8.86%. The carrying value of the liability component was determined to be $97.5 million. The equity component, or debt discount, of the 2 1/4% Debentures was determined to be $48.9 million. The debt discount was amortized as a non-cash charge to interest expense over the period from the issuance date through November 20, 2011 which was the date holders required the Company to repurchase substantially all of the 2 1/4% Debentures.

The $4.9 million of costs incurred in connection with the issuance of the 2 1/4% Debentures were capitalized and bifurcated into deferred financing costs of $3.3 million and equity issuance costs of $1.6 million. The deferred financing costs were being amortized to interest expense from the issuance date through November 20, 2011.

The following table presents the interest expense components for the 2 1/4% Debentures for fiscal 2011:

 

     Three months ended
August 31,

2011
    Nine months ended
August 31,

2011
 
     (In millions)  

Interest expense-contractual interest

   $ 0.4      $ 1.1   

Interest expense-amortization of debt discount

     0.9        2.7   

Interest expense-amortization of deferred financing costs

     0.1        0.3   

Effective interest rate

     8.86     8.86

4.0625% Convertible Subordinated Debentures

In December 2009, the Company issued $200.0 million in aggregate principal amount of 4 1/16% Debentures in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The 4 1/16% Debentures mature on December 31, 2039, subject to earlier redemption, repurchase, or conversion. Interest on the 4 1/16% Debentures accrues at 4.0625% per annum and is payable semiannually in arrears on June 30 and December 31 of each year, beginning June 30, 2010 (or if any such day is not a business day, payable on the following business day), and the Company may elect to pay interest in cash or, generally on any interest payment that is at least one year after the original issuance date of the 4 1/16% Debentures, in shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s option, subject to certain conditions.

The 4 1/16% Debentures are general unsecured obligations of the Company and rank equal in right of payment to all of the Company’s other existing and future unsecured subordinated indebtedness, including the 2 1/4% Debentures. The 4 1/16% Debentures rank junior in right of payment to all of the Company’s existing and future senior indebtedness, including all of its obligations under its Senior Credit Facility and all of its existing and future senior subordinated indebtedness. In addition, the 4 1/16% Debentures are effectively subordinated to any of the Company’s collateralized debt, to the extent of such collateral, and to any and all debt and liabilities including trade debt of its subsidiaries.

Each holder of the 4 1/16% Debentures may convert its 4 1/16% Debentures into shares of the Company’s common stock at a conversion rate of 111.0926 shares per $1,000 principal amount, representing a conversion price of approximately $9.00 per share, subject to adjustment. In addition, if the holders elect to convert their 4 1/16% Debentures in connection with the occurrence of certain fundamental changes to the Company as described in the indenture, the holders will be entitled to receive additional shares of common stock upon conversion in some circumstances. Upon any conversion of the 4 1/16% Debentures, subject to certain exceptions, the holders will not receive any cash payment representing accrued and unpaid interest.

The Company may at any time redeem any 4 1/16% Debentures for cash (except as described below with respect to any make-whole premium that may be payable) if the last reported sale price of the Company’s common stock has been at least 150% of the conversion price then in effect for at least twenty (20) trading days during any thirty (30) consecutive trading day period ending within five (5) trading days prior to the date on which the Company provides the notice of redemption.

 

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Table of Contents

The Company may redeem the 4 1/16% Debentures either in whole or in part at a redemption price equal to (i) 100% of the principal amount of the 4 1/16% Debentures to be redeemed, plus (ii) accrued and unpaid interest, if any, up to, but excluding, the redemption date, plus (iii) if the Company redeems the 4 1/16% Debentures prior to December 31, 2014, a “make-whole premium” equal to the present value of the remaining scheduled payments of interest that would have been made on the 4 1/16% Debentures to be redeemed had such 4 1/16% Debentures remained outstanding from the redemption date to December 31, 2014. Any make-whole premium is payable in cash, shares of the Company’s common stock or a combination of cash and shares, at the Company’s option, subject to certain conditions.

Each holder may require the Company to repurchase all or part of its 4 1/16% Debentures on December 31, 2014, 2019, 2024, 2029 and 2034 (each, an “optional repurchase date”) at an optional repurchase price equal to (1) 100% of their principal amount plus (2) accrued and unpaid interest, if any, up to, but excluding, the date of repurchase. The Company may elect to pay the optional repurchase price in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s option, subject to certain conditions.

If a fundamental change to the Company, as described in the indenture governing the 4 1/16% Debentures, occurs prior to maturity, each holder will have the right to require the Company to purchase all or part of its 4 1/16% Debentures for cash at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, if any, up to, but excluding, the repurchase date.

If the Company elects to deliver shares of its common stock as all or part of any interest payment, any make-whole premium or any optional repurchase price, such shares will be valued at the product of (x) the price per share of the Company’s common stock determined during: (i) in the case of any interest payment, the twenty (20) consecutive trading days ending on the second trading day immediately preceding the record date for such interest payment; (ii) in the case of any make-whole premium payable as part of the redemption price, the twenty (20) consecutive trading days ending on the second trading day immediately preceding the redemption date; and (iii) in the case of any optional repurchase price, the forty (40) consecutive trading days ending on the second trading day immediately preceding the optional repurchase date; (in each case, the “averaging period” with respect to such date) using the sum of the daily price fractions (where “daily price fraction” means, for each trading day during the relevant averaging period, 5% in the case of any interest payment or any make-whole premium or 2.5% in the case of any optional repurchase, multiplied by the daily volume weighted average price per share of the Company’s common stock for such day), multiplied by (y) 97.5%. The Company will notify holders at least five (5) business days prior to the start of the relevant averaging period of the extent to which the Company will pay any portion of the related payment using shares of common stock.

Effective December 21, 2010, in accordance with the terms of the indenture, the restrictive legend on the 4 1/16% Debentures was removed and the 4 1/16% Debentures are freely tradable pursuant to Rule 144 under the Securities Act of 1933 without volume restrictions by any holder that is not an affiliate of the Company at the time of sale and has not been an affiliate during the preceding three months.

Issuance of the 4 1/16% Debentures generated net proceeds of $194.1 million, which were used to repurchase long-term debt and other debt related costs.

7. Commitments and Contingencies

a. Legal Matters

The Company and its subsidiaries are subject to legal proceedings, including litigation in U.S. federal and state courts, which arise out of, and are incidental to, the ordinary course of the Company’s on-going and historical businesses. The Company is also subject from time to time to governmental investigations by federal and state agencies. The Company cannot predict the outcome of such proceedings with any degree of certainty. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. These estimates are often initially developed substantially earlier than when the ultimate loss is known, and are refined each quarterly reporting period as additional information becomes available. For legal settlements where there is no stated amount for interest, the Company will estimate an interest factor and discount the liability accordingly.

Groundwater Litigation

In December 2011, Aerojet received notice of a lawsuit, Sun Ridge LLC, et al. v. Aerojet-General Corporation, et al., Case No. 34-2011-00114675, filed in Sacramento County Superior Court. The complaint, which also names McDonnell Douglas Corporation (now Boeing Corporation), was filed by owners of properties adjacent to the Aerojet property in Rancho Cordova, California and alleges damages attributable to contamination of groundwater including diminution of property value and increased costs associated with ensuring water supplies in connection with real estate development. That matter was dismissed without prejudice and the parties entered into settlement discussions. Although settlement discussions are ongoing, the property owners re-filed their

 

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complaint in Sacramento County Superior Court on September 14, 2012. Since this matter is in the early stages, the Company is currently unable to reasonably estimate what the outcome of this complaint will be. Accordingly, no estimate of liability has been accrued for this matter at August 31, 2012.

Asbestos Litigation

The Company has been, and continues to be, named as a defendant in lawsuits alleging personal injury or death due to exposure to asbestos in building materials, products, or in manufacturing operations. The majority of cases are pending in Texas and Pennsylvania. There were 146 asbestos cases pending as of August 31, 2012.

Given the lack of any significant consistency to claims (i.e., as to product, operational site, or other relevant assertions) filed against the Company, the Company is unable to make a reasonable estimate of the future costs of pending claims or unasserted claims. Accordingly, no estimate of future liability has been accrued.

In 2011, Aerojet received a letter demand from AMEC, plc, the successor entity to the 1981 purchaser of the business assets of Barnard & Burk, Inc., a former Aerojet subsidiary, for Aerojet to assume the defense of twenty-one asbestos cases, involving 264 plaintiffs, pending in Louisiana and reimbursement of over $1.0 million in past legal fees and expenses. AMEC is asserting that Aerojet retained those liabilities when it sold the Barnard & Burk assets and agreed to indemnify the purchaser therefor. Under the relevant purchase agreement, the purchaser assumed only certain, specified liabilities relating to the operation of Barnard & Burk before the sale, with Barnard & Burk retaining all unassumed pre-closing liabilities, and Aerojet agreed to indemnify the purchaser against unassumed liabilities that are asserted against it. Aerojet has requested information from AMEC pertaining to the basis of the demand and discussions are ongoing. Accordingly, no estimate of liability has been accrued for this matter as of August 31, 2012.

Subpoena Duces Tecum

On September 23, 2010, the Company received a subpoena duces tecum from the U.S. Army Criminal Investigation Command, acting on behalf of the Office of the Inspector General of the DoD, requesting that the Company produce a variety of documents pertaining to the use of certain cost estimating factors under its contracts with the DoD. The Company has completed its response to the subpoena through multiple document productions, and met with the investigators on September 27, 2012, to discuss next steps, including possible resolution of the matter. The investigators requested and the Company agreed to provide further analysis regarding the use of factors on certain contracts compared to incurred material costs. The investigation continues but no financial demand has been made; accordingly, the Company is currently unable to reasonably estimate what the outcome of this civil investigation will be or the impact, if any, the investigation may have on the Company’s operating results, financial condition, and/or cash flows. Accordingly, no estimate of future liability has been accrued for at August 31, 2012. The Company has and continues to cooperate fully with the investigation.

Snappon SA Wrongful Discharge Claims

In November 2003, the Company announced the closing of a manufacturing facility in Chartres, France owned by Snappon SA, a subsidiary of the Company, previously involved in the automotive business. In accordance with French law, Snappon SA negotiated with the local workers’ council regarding the implementation of a social plan for the employees. Following the implementation of the social plan, approximately 188 of the 249 former Snappon employees sued Snappon SA in the Chartres Labour Court alleging wrongful discharge. The claims were heard in two groups. On February 19, 2009, the Versailles Court of Appeal issued a decision in favor of Group 2 plaintiffs and based on this, the Court awarded €1.9 million plus interest. On April 7, 2009, the Versailles Court of Appeal issued a decision in favor of Group 1 plaintiffs and based on this, the Court awarded €1.0 million plus interest. During the second quarter of fiscal 2009, Snappon SA filed for declaration of suspensions of payments with the clerk’s office of the Paris Commercial Court, and the claims will likely be discharged through those proceedings. During fiscal 2009, the Company accrued a loss contingency of €2.9 million plus interest for this matter.

b. Environmental Matters

The Company is involved in over forty environmental matters under the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”), the Resource Conservation Recovery Act (“RCRA”), and other federal, state, local, and foreign laws relating to soil and groundwater contamination, hazardous waste management activities, and other environmental matters at some of its current and former facilities. The Company is also involved in a number of remedial activities at third party sites, not owned by the Company, where it is designated a potentially responsible party (“PRP”) by either the U.S. Environmental Protection Agency (“EPA”) and/or a state agency. In many of these matters, the Company is involved with other PRPs. 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 and costs are generally made based on relative contributions of waste or contamination. Anticipated costs associated with environmental remediation that are probable and estimable are accrued. In cases where a date to complete remedial activities at a particular site cannot be determined by

 

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reference to agreements or otherwise, the Company projects costs over an appropriate time period not exceeding fifteen years; in such cases, generally the Company does not have the ability to reasonably estimate environmental remediation costs that are beyond this period. Factors that could result in changes to the Company’s estimates include completion of current and future soil and groundwater investigations, new claims, future agency demands, discovery of more or less contamination than expected, discovery of new contaminants, modification of planned remedial actions, changes in estimated time required to remediate, new technologies, and changes in laws and regulations.

As of August 31, 2012, the aggregate range of these anticipated environmental costs was $198.4 million to $331.0 million and the accrued amount was $198.4 million. See Note 7(c) for a summary of the environmental reserve activity for the first nine months of fiscal 2012. Of these accrued liabilities, approximately 97% relates to the Company’s U.S. government contracting business and a portion of this liability is recoverable. The significant environmental sites are discussed below. The balance of the accrued liabilities relates to other sites for which the Company’s obligations are probable and estimable.

Sacramento, California Site

In 1989, a federal district court in California approved a Partial Consent Decree (“PCD”) requiring Aerojet, among other things, to conduct a Remedial Investigation and Feasibility Study (“RI/FS”) to determine the nature and extent of impacts due to the release of chemicals from the Sacramento, California site, monitor the American River and offsite public water supply wells, operate Groundwater Extraction and Treatment facilities (“GETs”) that collect groundwater at the site perimeter, and pay certain government oversight costs. The primary chemicals of concern for both on-site and off-site groundwater are trichloroethylene (“TCE”), perchlorate, and n-nitrosodimethylamine (“NDMA”). The PCD has been revised several times, most recently in 2002. The 2002 PCD revision (a) separated the Sacramento site into multiple operable units to allow quicker implementation of remedy for critical areas; (b) required the Company to guarantee up to $75 million (in addition to a prior $20 million guarantee) to assure that Aerojet’s Sacramento remediation activities are fully funded; and (c) removed approximately 2,600 acres of non-contaminated land from the U.S. EPA superfund designation.

Aerojet is involved in various stages of soil and groundwater investigation, remedy selection, design, and remedy construction associated with the operable units. In 2002, the U.S. EPA issued a Unilateral Administrative Order (“UAO”) requiring Aerojet to implement the U.S. EPA-approved remedial action in the Western Groundwater Operable Unit. An identical order was issued by the California Regional Water Quality Control Board, Central Valley (“Central Valley RWQCB”). On July 7, 2011, EPA issued Aerojet its Approval of Remedial Action Construction Completion Report for Western Groundwater Operable Unit and its Determination of Remedy as Operational and Functional. On September 20, 2011, the EPA issued two UAOs to Aerojet to complete a remedial design and implement remedial action for the Perimeter Groundwater Operable Unit. One UAO addresses groundwater and the other addresses soils within the Perimeter Groundwater Operable Unit. Issuance of the UAOs is the next step in the superfund process for the Perimeter Groundwater Operable Unit. Aerojet submitted a final Remedial Investigation Report for the Boundary Operable Unit in 2010 and the final Feasibility Study for the Boundary Operable Unit in 2011. The remaining operable units are under various stages of investigation.

The entire southern portion of the site known as Rio Del Oro was under state orders issued in the 1990s from the Department of Toxic Substances Control (“DTSC”) to investigate and remediate environmental contamination in the soils and the Central Valley RWQCB to investigate and remediate groundwater environmental contamination. On March 14, 2008, the DTSC released all but approximately 400 acres of the Rio Del Oro property from DTSC’s environmental orders regarding soil contamination. Aerojet expects the approximately 400 acres of Rio Del Oro property that remain subject to the DTSC orders to be released once the soil remediation has been completed. The Rio Del Oro property remains subject to the Central Valley RWQCB’s orders to investigate and remediate groundwater environmental contamination emanating offsite from such property. Pursuant to a settlement agreement entered into in 2009, Aerojet and Boeing have defined responsibilities with respect to future costs and environmental projects relating to this property.

As of August 31, 2012, the estimated range of anticipated costs discussed above for the Sacramento, California site was $144.6 million to $225.2 million and the accrued amount was $144.6 million included as a component of the Company’s environmental reserves. Expenditures associated with this matter are partially recoverable. See Note 7(c) below for further discussion on recoverability.

Baldwin Park Operable Unit (“BPOU”)

As a result of its former Azusa, California operations, in 1994 Aerojet was named a PRP by the EPA in the area of the San Gabriel Valley Basin superfund site known as the BPOU. Between 1995 and 1997, the EPA issued Special Notice Letters to Aerojet and eighteen other companies requesting that they implement a groundwater remedy. On June 30, 2000, the EPA issued a UAO ordering the PRPs to implement a remedy consistent with the 1994 record of decision. Aerojet, along with seven other PRPs (“the Cooperating Respondents”) signed a Project Agreement in late March 2002 with the San Gabriel Basin Water Quality Authority, the Main San Gabriel Basin Watermaster, and five water companies. The Project Agreement, which has a term of fifteen years, became

 

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effective May 9, 2002 and will terminate in May 2017. It is uncertain as to what remedial actions will be required beyond 2017. However, the Project Agreement stipulates that the Parties agree to negotiate in good faith in an effort to reach agreement as to the terms and conditions of an extension of the term in the event that a Final Record of Decision anticipates, or any of the parties desire, the continued operation of all or a substantial portion of the project facilities. Pursuant to the Project Agreement, the Cooperating Respondents fund through an escrow account: the capital, operational, maintenance, and administrative costs of certain treatment and water distribution facilities to be owned and operated by the water companies. There are also provisions in the Project Agreement for maintaining financial assurance.

Aerojet and the other Cooperating Respondents entered into an interim allocation agreement that establishes the interim payment obligations of the Cooperating Respondents for the costs incurred pursuant to the Project Agreement. Under the interim allocation, Aerojet is responsible for approximately two-thirds of all project costs, including government oversight costs. All project costs are subject to reallocation among the Cooperating Respondents. Since entering into the Project Agreement, two of the cooperating respondents, Huffy Corporation and Fairchild Corporation (“Fairchild”), have filed for bankruptcy. Aerojet and the other cooperating respondents have assumed Fairchild’s financial obligations. Prior to filing for bankruptcy, Fairchild filed suit against the other Cooperating Respondents, but there has been little action in that litigation to date. The interim allocation agreement expired, but until recently all Cooperating Respondents were paying in accordance with their interim allocations.

On June 24, 2010, Aerojet filed a complaint against Chubb Custom Insurance Company in Los Angeles County Superior Court, Aerojet-General Corporation v. Chubb Custom Insurance Company Case No. BC440284, seeking declaratory relief and damages regarding Chubb’s failure to pay certain project modification costs and failure to issue an endorsement to add other water sources that may require treatment as required under insurance policies issued to Aerojet and the other Cooperating Respondents. Aerojet agreed to dismiss the case without prejudice and settlement negotiations are ongoing.

As part of Aerojet’s sale of its Electronics and Information Systems (“EIS”) business 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, California operations, which liability remains with Aerojet. As part of that agreement, the Company agreed to provide a $25 million guarantee of Aerojet’s obligations under the Project Agreement.

As of August 31, 2012, the estimated range of anticipated costs through the term of the Project agreement for the BPOU site, which expires in 2017, was $35.9 million to $68.7 million and the accrued amount was $35.9 million included as a component of the Company’s environmental reserves. Expenditures associated with this matter are partially recoverable. See Note 7(c) below for further discussion on recoverability.

Toledo, Ohio Site

The Company previously manufactured products for the automotive industry at a Toledo, Ohio site, which was adjacent to the Ottawa River. This facility was divested in 1990 and the Company indemnified the buyer for claims and liabilities arising out of certain pre-divestiture environmental matters. In August 2007, the Company, along with numerous other companies, received from the United States Department of Interior Fish and Wildlife Service a notice of a Natural Resource Damage (“NRD”) Assessment Plan for the Ottawa River and Northern Maumee Bay. A group of PRPs, including the Company, was formed to respond to the NRD assessment and to pursue funding from the Great Lakes Legacy Act for primary restoration. The restoration project performed by the group consisted of river dredging and land-filling river sediments with a total project cost in the range of approximately $47 to $49 million, one half of which was funded through the Great Lakes Legacy Act and the net project costs to the PRP group was estimated at $23.5 to $24.5 million. The dredging of the river that began in December 2009 has been completed. In February 2011, the parties reached an agreement on allocation. As of August 31, 2012, the estimated range of the Company’s share of anticipated costs for the NRD matter was zero to $0.4 million. None of the expenditures related to this matter are recoverable. Still unresolved at this time is the actual NRD Assessment itself. Negotiations with the State and Federal Trustees are ongoing.

In 2008, Textileather, the current owner of the former Toledo, Ohio site, filed a lawsuit against the Company claiming, among other things, that the Company failed to indemnify and defend Textileather for certain contractual environmental obligations. A second suit related to past and future RCRA, closure costs was filed in late 2009. On May 5, 2010, the District Court granted the Company’s Motion for Summary Judgment, thereby dismissing the claims in the initial action. Textileather appealed to the Sixth Circuit Court of Appeals. On September 11, 2012, the Court of Appeals affirmed the District Court’s decision with respect to Textileather’s CERCLA cost recovery claims, but reversed the decision to dismiss its breach of contract claims. The case was remanded to the District Court for further proceedings consistent with the opinion of the Court of Appeals. The District Court is likely to address such issues as allocation of costs subject to GenCorp’s indemnification obligations as well as significant defenses raised by GenCorp in its Motion for Summary Judgment, which were not ruled on by the Court when it granted GenCorp’s Summary Judgment Motion. There are no District Court ordered dates in the second Textileather suit, but the Court is likely to meet with the parties later this year and establish a schedule for future proceedings. As of August 31, 2012, the estimated anticipated costs and accrued amount for the Textileather matter was $2.1 million which is included as a component of the Company’s environmental reserves. None of the expenditures related to this matter are recoverable.

 

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c. Environmental Reserves and Estimated Recoveries

Environmental Reserves

The Company reviews on a quarterly basis estimated future remediation costs that could be incurred over the contractual term or next fifteen years of the expected remediation. The Company has an established practice of estimating environmental remediation costs over a fifteen year period, except for those environmental remediation costs with a specific contractual term. As the period for which estimated environmental remediation costs increases, the reliability of such estimates decreases. These estimates consider the investigative work and analysis of engineers, outside environmental consultants, and the advice of legal staff regarding the status and anticipated results of various administrative and legal proceedings. In most cases, only a range of reasonably possible costs can be estimated. In establishing the Company’s reserves, the most probable estimate is used when determinable; otherwise, the minimum amount is used when no single amount in the range is more probable. Accordingly, such estimates can change as the Company periodically evaluates and revises these estimates as new information becomes available. The Company cannot predict whether new information gained as projects progress will affect the estimated liability accrued. The timing of payment for estimated future environmental costs is influenced by a number of factors such as the regulatory approval process, the time required to design, construct, and implement the remedy.

A summary of the Company’s environmental reserve activity is shown below:

 

     Aerojet  -
Sacramento
    Aerojet -
BPOU
    Other
Aerojet
Sites
    Total
Aerojet
    Other     Total
Environmental
Reserve
 
     (In millions)  

November 30, 2011

   $ 130.7      $ 38.6      $ 12.1      $ 181.4      $ 9.2      $ 190.6   

Additions

     21.4        2.7        3.8        27.9        (0.4     27.5   

Expenditures

     (7.5     (5.4     (4.3     (17.2     (2.5     (19.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

August 31, 2012

   $ 144.6      $ 35.9      $ 11.6      $ 192.1      $ 6.3      $ 198.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 and due to regulatory or technological changes. The Company continues its efforts to mitigate past and future costs through pursuit of claims for recoveries from insurance coverage and other PRPs and continued investigation of new and more cost effective remediation alternatives and associated technologies.

As part of the acquisition of the Atlantic Research Corporation (“ARC”) propulsion business, Aerojet entered into an agreement with ARC pursuant to which Aerojet is responsible for up to $20.0 million of costs (“Pre-Close Environmental Costs”) associated with environmental issues that arose prior to Aerojet’s acquisition of the ARC propulsion business. Pursuant to a separate agreement with the U.S. government which was entered into prior to the completion of the ARC acquisition, these costs are recovered through the establishment of prices for Aerojet’s products and services sold to the U.S. government. A summary of the Pre-Close Environmental Costs is shown below (in millions):

 

Pre-Close Environmental Costs

   $ 20.0   

Amount spent through August 31, 2012

     (13.3

Amount included as a component of reserves for environmental remediation costs in the unaudited condensed consolidated balance sheet as of August 31, 2012

     (5.1
  

 

 

 

Remaining Pre-Close Environmental Costs

   $ 1.6   
  

 

 

 

Estimated Recoveries

On January 12, 1999, Aerojet and the U.S. government implemented the October 1997 Agreement in Principle (“Global Settlement”) resolving certain prior environmental and facility disagreements, with retroactive effect to December 1, 1998. Under the Global Settlement, Aerojet and the U.S. government resolved disagreements about an appropriate cost-sharing ratio with respect to the clean-up costs of the environmental contamination at the Sacramento and the former Azusa sites. The Global Settlement cost-sharing ratio does not have a defined term over which costs will be recovered. Additionally, in conjunction with the sale of the EIS business in 2001, Aerojet entered into an agreement with Northrop (the “Northrop Agreement”) whereby Aerojet is reimbursed by Northrop for a portion of environmental expenditures eligible for recovery under the Global Settlement, subject to annual and cumulative limitations. The current annual billing limitation to Northrop is $6.0 million.

Pursuant to the Global Settlement covering environmental costs associated with Aerojet’s Sacramento site and its former Azusa site, prior to the third quarter of fiscal 2010, approximately 12% of such costs related to the Sacramento site and former Azusa site

 

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were charged to the consolidated statements of operations. Subsequent to the third quarter of fiscal 2010, because the Company reached the reimbursement ceiling under the Northrop Agreement, approximately 37% of such costs are expensed to the consolidated statements of operations.

Allowable environmental costs are charged to the Company’s contracts as the costs are incurred. Aerojet’s mix of contracts can affect the actual reimbursement made by the U.S. government. Because these costs are recovered through forward-pricing arrangements, the ability of Aerojet to continue recovering these costs from the U.S. government depends on Aerojet’s sustained business volume under U.S. government contracts and programs and the relative size of Aerojet’s commercial business. Annually, the Company evaluates Aerojet’s forecasted business volume under U.S. government contracts and programs and the relative size of Aerojet’s commercial business as part of its long-term business review.

Pursuant to the Northrop Agreement, environmental expenditures to be reimbursed are subject to annual limitations and the total reimbursements are limited to a ceiling of $189.7 million. A summary of the Northrop Agreement activity is shown below (in millions):

 

Total reimbursable costs under the Northrop Agreement

   $ 189.7   

Amount reimbursed to the Company through August 31, 2012

     (92.2
  

 

 

 

Potential future cost reimbursements available (1)

     97.5   

Long-term receivable from Northrop in excess of the annual limitation included in the unaudited condensed consolidated balance sheet as of August 31, 2012

     (66.8

Amounts recoverable from Northrop in future periods included as a component of recoverable from the U.S. government and other third parties for environmental remediation costs in the unaudited condensed consolidated balance sheet as of August 31, 2012

     (30.7
  

 

 

 

Potential future recoverable amounts available under the Northrop Agreement

   $ —     
  

 

 

 

 

(1) Includes the short-term receivable from Northrop of $6.0 million as of August 31, 2012.

The Company’s applicable cost estimates reached the cumulative limitation under the Northrop Agreement during the third quarter of fiscal 2010. The Company has accumulated $16.4 million of environmental remediation provision adjustments above the cumulative limitation under the Northrop Agreement through August 31, 2012. Accordingly, subsequent to the third quarter of fiscal 2010, the Company has incurred a higher percentage of expense related to additions to the Sacramento site and BPOU site environmental reserve until an arrangement is reached with the U.S. government. While the Company is currently seeking an arrangement with the U.S. government to recover environmental expenditures in excess of the reimbursement ceiling identified in the Northrop Agreement, there can be no assurances that such a recovery will be obtained, or if not obtained, that such unreimbursed environmental expenditures will not have a materially adverse effect on the Company’s operating results, financial condition, and/or cash flows.

Environmental reserves and estimated recoveries impact to unaudited condensed consolidated statements of operations

The expenses associated with adjustments to the environmental reserves are recorded as a component of other expense, net in the unaudited condensed consolidated statements of operations. Summarized financial information for the impact of environmental reserves and recoveries to the unaudited condensed consolidated statements of operations is set forth below:

 

     Estimated
Recoverable
Amounts Under
U.S. Government
Contracts
     Charge to
Unaudited
Condensed
Consolidated
Statement of
Operations
     Total
Environmental
Reserve
Additions
 
     (In millions)  

Three months ended August 31, 2012

   $ 13.3       $ 6.4       $ 19.7   

Three months ended August 31, 2011

     11.2         4.7         15.9   

Nine months ended August 31, 2012

     18.6         8.9         27.5   

Nine months ended August 31, 2011

     18.2         6.7         24.9   

8. Redeemable Common Stock

Prior to June 2008, the Company inadvertently failed to register with the SEC the issuance of certain of its common shares in its defined contribution 401(k) employee benefit plan (the “Plan”). As a result, certain Plan participants who purchased such securities pursuant to the Plan may have the right to rescind certain of their purchases for consideration equal to the purchase price paid for the

 

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securities (or if such security has been sold, to receive consideration with respect to any loss incurred on such sale) plus interest from the date of purchase. As of August 31, 2012 and November 30, 2011, the Company has classified 0.4 million shares as redeemable common stock because the redemption features are not within the control of the Company. The Company may also be subject to civil and other penalties by regulatory authorities as a result of the failure to register these shares. These shares have always been treated as outstanding for financial reporting purposes. In June 2008, the Company filed a registration statement on Form S-8 to register future transactions in the GenCorp Stock Fund in the Plan. During the first nine months of fiscal 2012 and 2011, the Company recorded a charges of $0.6 million for realized losses and interest associated with this matter.

9. Arrangements with Off-Balance Sheet Risk

As of August 31, 2012, arrangements with off-balance sheet risk consisted of:

 

   

$44.8 million in outstanding commercial letters of credit expiring within the next twelve months, the majority of which may be renewed by either a letter of credit, or in some cases, a surety bond, primarily to collateralize obligations for environmental remediation and insurance coverage.

 

   

Up to $120.0 million aggregate in guarantees by GenCorp of Aerojet’s obligations to U.S. government agencies for environmental remediation activities (See Note 7(b) for additional information).

 

   

Guarantees, jointly and severally, by the Company’s material domestic subsidiaries of its obligations under its Senior Credit Facility.

In addition to the items discussed above, the Company has and will from time to time enter into certain types of contracts that require the Company to indemnify parties against potential third-party and other claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnification to purchasers of its businesses or assets including, for example, claims arising from the operation of the businesses prior to disposition, liability to investigate and remediate environmental contamination existing prior to disposition; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for claims arising from the use of the applicable premises; and (iii) certain agreements with officers and directors, under which the Company may be required to indemnify such persons for liabilities arising out of their relationship with the Company. The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated.

The Company also uses surety bonds to satisfy indemnification agreements for environmental remediation, other financial commitments, and insurance coverage. As of August 31, 2012, the Company had $35.3 million in outstanding surety bonds to satisfy indemnification obligations for environmental remediation coverage. Additionally, the Company issues purchase orders and makes other commitments to suppliers for equipment, materials, and supplies in the normal course of business. These purchase commitments are generally for volumes consistent with anticipated requirements to fulfill purchase orders or contracts for product deliveries received, or expected to be received, from customers and would be subject to reimbursement if a cost-plus contract is terminated.

10. Retirement Benefits

Pension Benefits — On November 25, 2008, the Company decided to amend the defined benefit pension and benefits restoration plans to freeze future accruals under such plans. Effective February 1, 2009 and July 31, 2009, future benefit accruals for non-collective bargaining-unit employees and collective bargaining-unit employees were discontinued, respectively. No employees lost their previously earned pension benefits.

As of the last measurement date at November 30, 2011, the Company’s total defined benefit pension plan assets, total projected benefit obligations, and unfunded pension obligation for the qualified pension plan were approximately $1,296.8 million, $1,550.4 million, and $236.4 million, respectively. The total defined benefit pension assets were estimated to be $1,264.2 million as of August 31, 2012.

The Company does not expect to make any cash contributions to the tax-qualified defined benefit pension plan through fiscal 2015. The Pension Protection Act (the “PPA”) requires underfunded pension plans to improve their funding ratios based on the funded status of the plan as of specified measurement dates through contributions or application of prepayment credits. As of November 30, 2011, the Company has accumulated $59.5 million in prepayment credits as a result of advanced funding.

Further, with the Office of Federal Procurement Policy issuance of the final rule harmonizing Cost Accounting Standard (“CAS”) 412, Composition and Measurement of Pension Cost, and CAS 413, Adjustment and Allocation of Pension Cost, with the PPA, the Company will recover portions of any required pension funding through its government contracts. Approximately 86% of the Company’s unfunded pension benefit obligation as of November 30, 2011 is related to its government contracting business segment, Aerojet. Accordingly, the Company believes a significant portion of any future contributions to its tax-qualified defined benefit pension plan would be recoverable through its government contracts.

 

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On July 6, 2012, the Moving Ahead for Progress in the 21st Century Act (“MAP-21”) was signed into law by the U.S. government. MAP-21, in part, provides temporary relief for employers who sponsor defined benefit pension plans related to funding contributions under the Employee Retirement Income Security Act of 1974. Specifically, MAP-21 implemented a 25-year average interest rate corridor around the 24 month interest rate used for purposes of determining minimum funding obligations. This relief is expected to defer minimum required pension funding through fiscal 2015.

The funded status of the pension plan is affected by the investment experience of the plan’s assets, by any changes in U.S. law, and by changes in the statutory interest rates used by “tax-qualified” pension plans in the U.S. to calculate funding requirements or other plan experience. Accordingly, if the performance of the Company’s plan assets does not meet the assumptions, if there are changes to the Internal Revenue Service regulations or other applicable law or if other actuarial assumptions are modified, the future contributions to the Company’s underfunded pension plan could be significant in future periods.

Medical and Life Benefits — The Company provides medical and life insurance benefits to certain eligible retired employees, with varied coverage by employee group. Generally, employees hired after January 1, 1997 are not eligible for retiree medical and life insurance benefits. The medical benefit plan provides for cost sharing between the Company and its retirees in the form of retiree contributions, deductibles, and coinsurance. Medical and life benefit obligations are unfunded. Medical and life benefit cash payments for eligible retired Aerojet and GenCorp employees are recoverable under the Company’s U.S. government contracts.

Components of retirement benefit expense are:

 

     Pension Benefits     Postretirement Benefits  
     Three months ended  
     August 31,
2012
    August 31,
2011
    August 31,
2012
    August 31,
2011
 
     (In millions)  

Service cost

   $ 1.2      $ 0.9      $ —        $ —     

Interest cost on benefit obligation

     18.4        19.7        0.9        0.9   

Assumed return on plan assets

     (24.8     (25.6     —          —     

Recognized net actuarial losses (gains)

     15.5        16.6        (0.9     (0.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Retirement benefit expense

   $ 10.3      $ 11.6      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Pension Benefits     Postretirement Benefits  
     Nine months ended  
     August 31,
2012
    August 31,
2011
    August 31,
2012
    August 31,
2011
 
     (In millions)  

Service cost

   $ 3.4      $ 2.9      $ 0.1     $ 0.1  

Interest cost on benefit obligation

     55.2        58.8        2.4        2.7   

Assumed return on plan assets

     (74.4     (76.8     —          —     

Recognized net actuarial losses (gains)

     46.5        49.8        (2.4     (2.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Retirement benefit expense

   $ 30.7      $ 34.7      $ 0.1      $ 0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

11. Discontinued Operations

In November 2003, the Company announced the closing of a GDX manufacturing facility in Chartres, France owned by Snappon SA, a subsidiary of the Company. The decision resulted primarily from declining sales volumes with French automobile manufacturers. During the first quarter of fiscal 2009, Snappon SA had legal judgments rendered against it under French law, aggregating €2.9 million plus interest related to wrongful discharge claims by certain former employees of Snappon SA. During the second quarter of fiscal 2009, Snappon SA filed for declaration of suspensions of payments with the clerk’s office of the Paris Commercial Court (See Note 7(a)).

 

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Table of Contents

Summarized financial information for discontinued operations is set forth below:

 

     Three months ended August 31,     Nine months ended August 31,  
     2012     2011     2012     2011  
     (In millions)  

Net sales

   $ —        $ —        $ —        $ —     

Loss before income taxes (1)

     (0.8     (0.1     (0.5     (1.3

Income tax benefit

     —          —          0.1        —     

Net loss from discontinued operations

     (0.8     (0.1     (0.4     (1.3

 

(1) Includes foreign currency losses of $0.1 million in the third quarter of fiscal 2012. Additionally, loss before income taxes includes foreign currency gains and (losses) of $0.8 million and $(1.1) million in the first nine months of fiscal 2012 and 2011, respectively.

12. Operating Segments and Related Disclosures

The Company’s operations are organized into two operating segments based on different products and customer bases: Aerospace and Defense, and Real Estate.

The Company evaluates its operating segments based on several factors, of which the primary financial measure is segment performance. Segment performance represents net sales from continuing operations less applicable costs, expenses and provisions for unusual items relating to the segment operations. Segment performance excludes corporate income and expenses, legacy income or expenses, provisions for unusual items not related to the segment operations, interest expense, interest income, and income taxes.

Customers that represented more than 10% of net sales for the periods presented are as follows:

 

     Three months ended August 31,     Nine months ended August 31,  
     2012     2011     2012     2011  

Raytheon

     35     33     36     36

Lockheed Martin

     35     30     32     29

United Launch Alliance

     10     *        *        *   

 

* Less than 10% of net sales

Sales during the three and nine months ended August 31, 2012 directly and indirectly to the U.S. government and its agencies, including sales to the Company’s significant customers discussed above, totaled 94% and 95% of net sales, respectively. Sales during the three and nine months ended August 31, 2011 directly and indirectly to the U.S. government and its agencies, including sales to the Company’s significant customers discussed above, totaled 94% and 93% of net sales, respectively.

 

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Table of Contents

Selected financial information for each reportable segment is as follows:

 

     Three months ended August 31,     Nine months ended August 31,  
     2012     2011     2012     2011  
     (In millions)  

Net Sales:

        

Aerospace and Defense

   $ 243.6      $ 224.3      $ 691.6      $ 660.7   

Real Estate

     1.3        1.9        5.1        5.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Sales

   $ 244.9      $ 226.2      $ 696.7      $ 665.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Performance:

        

Aerospace and Defense

   $ 28.9      $ 26.6      $ 81.4      $ 78.4   

Environmental remediation provision adjustments

     (6.5     (5.2     (9.3     (7.0

Retirement benefit plan expense

     (4.8     (5.2     (14.2     (15.7

Unusual items (see Note 13)

     (0.1     (0.2     (0.5     (0.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Aerospace and Defense Total

     17.5        16.0        57.4        55.1   

Real Estate

     0.9        1.2        2.9        3.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Performance

   $ 18.4      $ 17.2      $ 60.3      $ 58.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of segment performance to (loss) income from continuing operations before income taxes:

        

Segment performance

   $ 18.4      $ 17.2      $ 60.3      $ 58.6   

Interest expense

     (4.8     (7.9     (16.6     (23.4

Interest income

     0.2        0.2        0.5        0.8   

Stock-based compensation expense

     (2.9     0.6        (5.1     (2.3

Corporate retirement benefit plan expense

     (5.5     (6.4     (16.6     (19.1

Corporate and other

     (1.7     (2.1     (9.1     (7.7

Unusual items (see Note 13)

     (4.2     —          (4.6     0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

   $ (0.5   $ 1.6      $ 8.8      $ 7.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

13. Unusual Items

Total unusual items expense, a component of other expense, net in the unaudited condensed consolidated statements of operations, for the third quarter and first nine months of fiscal 2012 and 2011 was as follows:

 

     Three months ended August 31,      Nine months ended August 31,  
     2012      2011      2012      2011  
     (In millions)  

Unusual items

           

Legal related matters

   $ 0.2       $ 0.2       $ 0.6       $ 0.6   

Rocketdyne Business acquisition related costs

     4.1         —           4.1         —     

Loss on 9 1/2% Notes Redemption

     —           —           0.4         —     

Gain on debt repurchased

     —           —           —           (0.2
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4.3       $ 0.2       $ 5.1       $ 0.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the first nine months of fiscal 2012 and 2011, the Company recorded $0.6 million for realized losses and interest associated with the failure to register with the SEC the issuance of certain of the Company’s common shares under the defined contribution 401(k) employee benefit plan.

During the second quarter of fiscal 2012, the Company redeemed $75.0 million of its 9 1/2% Notes at a redemption price of 100% of the principal amount. The redemption resulted in a charge of $0.4 million associated with the write-off of the 9 1/2% Notes deferred financing costs. Additionally, during the first quarter of fiscal 2011, the Company repurchased $6.5 million principal amount of its 2 1/4% Debentures at various prices ranging from 99.0% of par to 99.1% of par resulting in a gain of $0.2 million.

During the first nine months of fiscal 2012, the Company incurred expenses of $4.1 million, including internal labor costs of $1.2 million, related to the proposed Rocketdyne Business acquisition announced in July 2012.

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated or required by the context, as used in this Quarterly Report on Form 10-Q, the terms “we,” “our” and “us” refer to GenCorp Inc. and all of its subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

The preparation of the consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In addition, our operating results for interim periods may not be indicative of the results of operations for a full year. This section contains a number of forward-looking statements, all of which are based on current expectations and are subject to risks and uncertainties including those described in this Quarterly Report under the heading “Forward-Looking Statements.” Actual results may differ materially. This section should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended November 30, 2011, and periodic reports subsequently filed with the Securities and Exchange Commission (“SEC”).

Overview

We are a manufacturer of aerospace and defense products and systems with a real estate segment that includes activities related to the re-zoning, entitlement, sale, and leasing of our excess real estate assets. We develop and manufacture propulsion systems for defense and space applications, and armaments for precision tactical and long range weapon systems applications.

A summary of the significant financial highlights for the third quarter of fiscal 2012 which management uses to evaluate our operating performance and financial condition is presented below.

 

   

Net sales for the third quarter of fiscal 2012 totaled $244.9 million compared to $ 226.2 million for the third quarter of fiscal 2011.

 

   

Net loss for the third quarter of fiscal 2012 was $9.5 million, or $0.16 loss per share, compared to a net income of $1.2 million, or $0.02 diluted income per share, for the third quarter of fiscal 2011.

 

   

Adjusted EBITDAP (Non-GAAP measure) for the third quarter of fiscal 2012 was $24.0 million or 9.8% of net sales, compared to $27.8 million or 12.3% of net sales, for the third quarter of fiscal 2011.

 

   

Segment performance (Non-GAAP measure) before environmental remediation provision adjustments, retirement benefit plan expense, and unusual items was $29.8 million for the third quarter of fiscal 2012, compared to $27.8 million for the third quarter of fiscal 2011.

 

   

Cash provided by operating activities in the third quarter of fiscal 2012 totaled $15.7 million, compared to $18.2 million in the third quarter of fiscal 2011.

 

   

Free cash flow (Non-GAAP measure) in the third quarter of fiscal 2012 totaled $6.2 million, compared to $12.7 million in the third quarter of fiscal 2011.

 

   

Net debt (Non-GAAP measure) was $93.7 million as of August 31, 2012 compared to $151.3 million as of August 31, 2011.

We provide Non-GAAP measures as a supplement to financial results based on GAAP. A reconciliation of the Non-GAAP measures to the most directly comparable GAAP measures is presented later in the Management’s Discussion and Analysis under the heading “Operating Segment Information” and “Use of Non-GAAP Financial Measures.”

We are operating in an environment that is characterized by both increasing complexity in the global security environment, as well as continuing worldwide economic pressures. A significant component of our strategy in this environment is to focus on delivering excellent performance to our customers, driving improvements and efficiencies across our operations, and creating value through the enhancement and expansion of our business.

In July 2012, we signed a definitive agreement to acquire Pratt & Whitney Rocketdyne division (the “Rocketdyne Business”) from United Technologies Corporation (“UTC”) for $550 million. The purchase price of $550 million, which is subject to adjustment for changes in working capital and other specified items, is expected to be financed with a combination of cash on hand and issuance of debt. The acquisition of the Rocketdyne Business is conditioned upon, among other things, the receipt of required regulatory approvals and other customary closing conditions. Subject to the satisfaction of these conditions, the acquisition is expected to close in the first half of 2013.

We believe the Rocketdyne Business acquisition will provide strategic value for the country, our customers, and our stakeholders. The combined enterprise will be better positioned to compete in a dynamic, highly competitive marketplace, and provide more affordable products for our customers. In addition, this transaction is expected to almost double our size and provide additional growth opportunities as we build upon the complementary capabilities of each legacy company.

 

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Table of Contents

Some of the significant challenges we face include dependence upon government programs and contracts, future reductions or changes in U.S. government spending in our industry, environmental matters, capital structure, an underfunded pension plan, and implementation of our enterprise resource planning (“ERP”) system. These matters are discussed in more detail below.

Major Customers

The principal end user customers of our products and technology are agencies of the U.S. government. Since a majority of our sales are, directly or indirectly, to the U.S. government, funding for the purchase of our products and services generally follows trends in U.S. aerospace and defense spending. However, individual government agencies, which include the military services, National Aeronautics and Space Administration (“NASA”), the Missile Defense Agency, and the prime contractors that serve these agencies, exercise independent purchasing power within “budget top-line” limits. Therefore, sales to the U.S. government are not regarded as sales to one customer, but rather each contracting agency is viewed as a separate customer.

Customers that represented more than 10% of net sales for the periods presented are as follows:

 

     Three months ended August 31,     Nine months ended August 31,  
     2012     2011     2012     2011  

Raytheon

     35     33     36     36

Lockheed Martin

     35     30     32     29

United Launch Alliance

     10     *        *        *   

 

* Less than 10% of net sales

Sales during the three and nine months ended August 31, 2012 directly and indirectly to the U.S. government and its agencies, including sales to our significant customers discussed above, totaled 94% and 95% of net sales, respectively. Sales during the three and nine months ended August 31, 2011 directly and indirectly to the U.S. government and its agencies, including sales to our significant customers discussed above, totaled 94% and 93% of net sales, respectively. The Standard Missile program, which is included in the U.S. government sales, represented 25% and 22% of net sales for the third quarter of fiscal 2012 and 2011, respectively. The Standard Missile program, which is included in the U.S. government sales, represented 24% and 25% of net sales for the first nine months of fiscal 2012 and 2011, respectively.

Industry Update

For the Government Fiscal Year (“GFY”) ending September 30, 2012 and beyond, federal department/agency budgets are expected to remain under severe pressure due to the financial impacts from spending cap agreements contained in the Budget Control Act of 2011, as well as from on-going military operations and the cumulative effects of annual federal budget deficits and rising U.S. federal debt. As a result, the Department of Defense (“DoD”) GFY 2013 budget request submitted to Congress on February 13, 2012 is $525.4 billion for the base budget, $45 billion below the amount planned for GFY 2013 a year ago and $5.2 billion below the final GFY 2012 appropriated amount. The DoD budget request includes cuts and other initiatives that will reduce DoD spending by $259 billion over the next five years and $487 billion over ten years, consistent with the Budget Control Act of 2011 or, the “Act” (Public Law 112-25) (the debt-ceiling and deficit-reduction compromise agreement signed into law on August 2, 2011). The NASA GFY 2013 budget request is $17.7 billion.

Nevertheless, we believe we are well-positioned to benefit from continued DoD investment in high priority transformational systems that address current war fighting requirements, the recapitalization of weapon systems and equipment expended during combat operations in the Middle East, and systems that meet worldwide threats. The Administration has indicated a commitment to maintain adequate, albeit lower levels of funding for the DoD than those experienced during the height of conflicts in the Middle East, while building defense capabilities for the 21st century. Priority areas that impact our products include: fully equipping U.S. forces for the missions they face; maintaining situational awareness; preserving air supremacy; maintaining forces at sea; ensuring access to and freedom of space; and developing pragmatic and cost effective missile defense systems.

In 2010, the NASA Authorization Act took effect impacting GFYs 2011-2013. The Authorization Act aimed to: safely retire the Space Shuttle; extend the International Space Station through 2020; continue the development of the multipurpose crew exploration vehicle; build a new heavy lift launch vehicle; invest in new space technologies; and sustain and grow the science and aeronautics programs at NASA. We are well-positioned to succeed among our competitors due to our diverse offerings, innovative technologies, and existing contracts with both traditional and emerging launch providers. Additionally, we are the main propulsion provider for the multipurpose crew vehicle and plan to compete for elements of the newly announced heavy lift launch vehicle.

Since the bicameral and bipartisan Congressional Joint Select Committee on Deficit Reduction created by the Act and charged with reducing the deficit by an additional $1.2 to $1.5 trillion over the ten years beginning with GFY 2013 fail to reach a compromise, additional mandatory spending caps will be triggered beginning in January 2013 if Congress and the Administration do not reach agreement on means to reduce the deficit by $1.2 trillion. There remains a significant level of uncertainty and lack of detail available to predict specific future aerospace and defense spending.

 

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Table of Contents

Environmental Matters

Our current and former business operations are subject to, and affected by, federal, state, local, and foreign environmental laws and regulations relating to the discharge, treatment, storage, disposal, investigation, and remediation of certain materials, substances, and wastes. Our policy is to conduct our business with due regard for the preservation and protection of the environment. We continually assess compliance with these regulations and we believe our current operations are materially in compliance with all applicable environmental laws and regulations.

Summary of our environmental reserves, range of liability, and recoverable amounts as of August 31, 2012 is presented below:

 

     Reserve      Recoverable Amount (1)      Range of Reserve  
     (In millions)  

Sacramento

   $ 144.6       $ 107.7       $ 144.6 – $225.2   

Baldwin Park Operable Unit

     35.9         26.8         35.9 – 68.7   

Other Aerojet-General Corporation (“Aerojet”) sites

     11.6         11.0         11.6 – 26.6   

Other sites

     6.3         0.6         6.3 – 10.5   
  

 

 

    

 

 

    

 

 

 

Total

   $ 198.4       $ 146.1       $ 198.4 – $331.0   
  

 

 

    

 

 

    

 

 

 

 

(1) Excludes the long-term receivable from Northrop Grumman Corporation (“Northrop”) of $66.8 million as of August 31, 2012.

Most of our environmental costs are incurred by our Aerospace and Defense segment, and certain of these future costs are allowable to be included in our contracts with the U.S. government and allocable to Northrop until the cumulative expenditure limitation is reached. Prior to the third quarter of fiscal 2010, approximately 12% of such costs related to our Sacramento site and our former Azusa site were charged to the consolidated statements of operations. Subsequent to the third quarter of fiscal 2010, because we reached the reimbursement ceiling under the Northrop Agreement, approximately 37% of such costs are expensed to the consolidated statements of operations. However, we are seeking to amend our agreement with the U.S. government to increase the amount allocable to U.S. government contracts. There can be no assurances that we will be successful in this pursuit.

The inclusion of such environmental costs in our contracts with the U.S. government does impact our competitive pricing and earnings; however, we believe that this impact is mitigated by driving improvements and efficiencies across our operations as well as our ability to deliver innovative and quality products to our customers.

Capital Structure

Although we have substantially reduced our debt levels, improved our maturity profile, increased liquidity, and increased our credit ratings, we still have a substantial amount of debt for which we are required to make interest and principal payments. Interest on long-term financing is not a recoverable cost under our U.S. government contracts. As of August 31, 2012, we had $249.4 million of debt principal outstanding.

Retirement Benefits

As of the last measurement date at November 30, 2011, our total defined benefit pension plan assets, total projected benefit obligations, and unfunded pension obligation for our qualified pension plan were approximately $1,296.8 million, $1,550.4 million, and $236.4 million, respectively. The total defined benefit pension assets were estimated to be $1,264.2 million as of August 31, 2012.

We do not expect to make any cash contributions to the tax-qualified defined benefit pension plan through fiscal 2015. The Pension Protection Act (the “PPA”) requires underfunded pension plans to improve their funding ratios based on the funded status of the plan as of specified measurement dates through contributions or application of prepayment credits. As of November 30, 2011, we have accumulated $59.5 million in prepayment credits as a result of advanced funding and we expect to apply these to satisfy any funding requirements.

Further, with the Office of Federal Procurement Policy issuance of the final rule harmonizing Cost Accounting Standard (“CAS”) 412, Composition and Measurement of Pension Cost, and CAS 413, Adjustment and Allocation of Pension Cost, with the PPA, we will recover portions of any required pension funding through our government contracts. Approximately 86% of our unfunded pension benefit obligation as of November 30, 2011 is related to our government contracting business segment, Aerojet. Accordingly, we believe a significant portion of any future contributions to our tax-qualified defined benefit pension plan would be recoverable through our government contracts.

 

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On July 6, 2012, the Moving Ahead for Progress in the 21st Century Act (“MAP-21”) was signed into law by the U.S. government. MAP-21, in part, provides temporary relief for employers who sponsor defined benefit pension plans related to funding contributions under the Employee Retirement Income Security Act of 1974. Specifically, MAP-21 implemented a 25-year average interest rate corridor around the 24 month interest rate used for purposes of determining minimum funding obligations. This relief is expected to defer minimum required pension funding through fiscal 2015.

The funded status of the pension plan is affected by the investment experience of the plan’s assets, by any changes in U.S. law and by changes in the statutory interest rates used by “tax-qualified” pension plans in the U.S. to calculate funding requirements. Accordingly, if the performance of our plan’s assets does not meet our assumptions, if there are changes to the Internal Revenue Service regulations or other applicable law or if other actuarial assumptions are modified, our future contributions to our underfunded pension plan could be higher than we expect.

Implementation of ERP System

During fiscal 2010, we conducted a thorough review of our business to assess the effectiveness of our current business processes and supporting information systems. After extensive study and analysis, we determined that there are many potential benefits from the investment in a state-of-the-art ERP system. The benefits will be achieved through the integration of our data and processes into one single system based upon industry best business practices.

We selected the Oracle Business Suite as our ERP solution and work began on the project in fiscal 2011. We have committed a full-time cross-functional team of employees to work with our ERP partner and our systems integrator. This team is responsible for ensuring that the system configuration is consistent with our business requirements and best business practices, coordinating data migration, addressing change management issues, testing controls, resolving implementation issues and developing a user training program. We anticipate the one-time cost of implementation, both capital and expense, will range from $28 million to $32 million, consisting primarily of software and hardware costs, system integrator costs, labor costs, and data migration. We anticipate completing the ERP project in fiscal 2013. Through August 2012, we have expended $22.3 million of our one-time implementation costs of which $19.0 million represents capital expenditures.

We expect that the new ERP system will provide reliable, transparent, and real-time data access providing us with the opportunity to make better and faster business decisions. We expect the integration among various functional areas will lead to improved communication, productivity and efficiency. These improvements should enhance our ability to respond to our customers’ needs and lead to increased customer satisfaction. Other advantages we expect to realize by centralization of our current systems into an ERP system are to eliminate difficulties in synchronizing changes between multiple systems, improve coordination of business processes that cross functional boundaries and provide a top-down view of the enterprise.

Results of Operations

Net Sales:

 

     Three months ended             Nine months ended         
     August 31,
2012
     August 31,
2011
     Change*      August 31,
2012
     August 31,
2011
     Change**  
     (In millions)  

Net sales

   $ 244.9       $ 226.2       $ 18.7       $ 696.7       $ 665.9       $ 30.8   

 

* Primary reason for change. The increase in net sales was primarily due to (i) increased deliveries on the Terminal High Altitude Area Defense (“THAAD”) program generating $13.5 million in additional net sales and (ii) increase of $10.2 million in the various Standard Missile programs primarily from the timing of deliveries. The increase in net sales was partially offset by a reduction of $7.2 million on the Hawk program due to the completion of the production contract in the first quarter of fiscal 2012.
** Primary reason for change. The increase in net sales was primarily due to the following: (i) increased deliveries on the THAAD program generating $23.9 million in additional net sales; (ii) increased engineering technology activities on the Triple Target Terminator (“T3”) contracts resulting in $12.7 million of additional net sales; and (iii) increased deliveries on the Atlas V program generating $10.2 million in additional net sales. The increase in net sales was partially offset by a reduction of $16.6 million on the Hawk program due to the completion of the production contract in the first quarter of fiscal 2012.

 

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Table of Contents

Cost of Sales (exclusive of items shown separately below):

 

     Three months ended           Nine months ended        
     August 31,
2012
    August 31,
2011
    Change*     August 31,
2012
    August 31,
2011
    Change*  
     (In millions, except percentage amounts)  

Cost of sales:

   $ 214.1      $ 197.5      $ 16.6      $ 608.3      $ 581.1      $ 27.2   

Cost of sales as a percentage of net sales

     87.4     87.3       87.3     87.3  

Components of cost of sales:

            

Cost of sales excluding retirement benefit expense

   $ 209.3      $ 192.3      $ 17.0      $ 594.1      $ 565.4      $ 28.7   

Retirement benefit expense

     4.8        5.2        (0.4     14.2        15.7        (1.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales

   $ 214.1      $ 197.5      $ 16.6      $ 608.3      $ 581.1      $ 27.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Primary reason for change. Cost of sales as a percentage of net sales was essentially unchanged.

Selling, General and Administrative (“SG&A”):

 

     Three months ended           Nine months ended        
     August 31,
2012
    August 31,
2011
    Change*     August 31,
2012
    August 31,
2011
    Change**  
     (In millions, except percentage amounts)  

SG&A:

   $ 10.4      $ 8.7      $ 1.7      $ 31.9      $ 30.0      $ 1.9   

Percentage of net sales

     4.2     3.8       4.6     4.5  

Components of SG&A:

            

SG&A excluding retirement benefit expense and stock-based compensation expense (benefit)

   $ 2.0      $ 2.9      $ (0.9   $ 10.2      $ 8.6      $ 1.6   

Stock-based compensation expense (benefit)

     2.9        (0.6     3.5        5.1        2.3        2.8   

Retirement benefit expense

     5.5        6.4        (0.9     16.6        19.1        (2.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SG&A

   $ 10.4      $ 8.7      $ 1.7      $ 31.9      $ 30.0      $ 1.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Primary reason for change. The increase in SG&A expense is primarily related to an increase of $3.5 million in stock-based compensation primarily due to changes in the fair value of the stock appreciation rights. The increase in SG&A was partially offset by a decrease of $0.9 million of non-cash corporate retirement benefit plan expenses. See discussion of “Retirement Benefit Plans” below.
** Primary reason for change. The increase in SG&A expense is primarily related to (i) an increase of $2.8 million in stock-based compensation primarily due to changes in the fair value of the stock appreciation rights and (ii) an increase in professional and consulting fees of $1.8 million related to our continuing evaluation of our corporate strategy and capital structure. The increase in SG&A was partially offset by a decrease of $2.5 million of non-cash corporate retirement benefit plan expenses. See discussion of “Retirement Benefit Plans” below.

Depreciation and Amortization:

 

     Three months ended            Nine months ended         
     August 31,
2012
     August 31,
2011
     Change*     August 31,
2012
     August 31,
2011
     Change*  
     (In millions)  

Depreciation and amortization:

   $ 5.3       $ 6.7       $ (1.4   $ 16.1       $ 18.2       $ (2.1

 

* Primary reason for change. The decrease in depreciation and amortization is primarily related to a reduction in the estimated useful life of tangible assets related to our fire suppression programs in the third quarter of fiscal 2011.

 

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Table of Contents

Other Expense, net:

 

     Three months ended             Nine months ended         
     August 31,
2012
     August 31,
2011
     Change*      August 31,
2012
     August 31,
2011
     Change**  
     (In millions)  

Other expense, net:

   $ 11.0       $ 4.0       $ 7.0       $ 15.5       $ 6.9       $ 8.6   

 

* Primary reason for change. The increase in other expense, net was primarily due to an increase in unusual item charges of $4.1 million and higher non-reimbursable environmental remediation costs of $1.7 million. See discussion of unusual items below.
** Primary reason for change. The increase in other expense, net was primarily due to the following: (i) an increase in unusual item charges of $4.7 million; (ii) higher non-reimbursable environmental remediation costs of $2.2 million; and (iii) a $1.5 million contribution made in the first quarter of fiscal 2012 to support space science education. See discussion of unusual items below.

Total unusual items expense, a component of other expense, net in the unaudited condensed consolidated statements of operations, for the third quarter and first nine months of fiscal 2012 and 2011 was as follows:

 

     Three months ended August 31,      Nine months ended August 31,  
     2012      2011      2012      2011  
     (In millions)  

Unusual items

           

Legal related matters

   $ 0.2       $ 0.2       $ 0.6       $ 0.6   

Rocketdyne Business acquisition related costs

     4.1         —           4.1         —     

Loss on 9 1/2% Notes Redemption

     —           —           0.4         —     

Gain on debt repurchased

     —           —           —           (0.2
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4.3       $ 0.2       $ 5.1       $ 0.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the first nine months of fiscal 2012 and 2011, we recorded $0.6 million for realized losses and interest associated with the failure to register with the SEC the issuance of certain of our common shares under the defined contribution 401(k) employee benefit plan.

During the second quarter of fiscal 2012, we redeemed $75.0 million of our 9 1/2% Senior Subordinated Notes (“9 1/2% Notes”) at a redemption price of 100% of the principal amount. The redemption resulted in a charge of $0.4 million associated with the write-off of the 9 1/2% Notes deferred financing costs. Additionally, during the first quarter of fiscal 2011, we repurchased $6.5 million principal amount of our 2 1/4% Convertible Subordinated Debentures (“2 1/4% Debentures”) at various prices ranging from 99.0% of par to 99.1% of par resulting in a gain of $0.2 million.

During the first nine months of fiscal 2012, we incurred expenses of $4.1 million, including internal labor costs of $1.2 million, related to the proposed Rocketdyne Business acquisition announced in July 2012.

Interest Expense:

 

     Three months ended            Nine months ended         
     August 31,
2012
     August 31,
2011
     Change*     August 31,
2012
     August 31,
2011
     Change*  
     (In millions)  

Interest expense:

   $ 4.8       $ 7.9       $ (3.1   $ 16.6       $ 23.4       $ (6.8

Components of interest expense:

                

Contractual interest and other

     4.1         6.2         (2.1     14.7         18.3         (3.6

Debt discount amortization

     —           0.9         (0.9     —           2.7         (2.7

Amortization of deferred financing costs

     0.7         0.8         (0.1     1.9         2.4         (0.5
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Interest expense

   $ 4.8       $ 7.9       $ (3.1   $ 16.6       $ 23.4       $ (6.8
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

*

Primary reason for change. The decrease in interest expense was primarily due to the repurchase of debt in fiscal 2011 and 2012. We repurchased $68.4 million of the outstanding 2 1/4% Debentures in fiscal 2011 and repurchased $75.0 million of the outstanding 9 1/2% Notes in the second quarter of fiscal 2012.

 

30


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Interest Income:

 

     Three months ended             Nine months ended         
     August  31,
2012
     August  31,
2011
     Change      August  31,
2012
     August  31,
2011
     Change*  
     (In millions)  

Interest income:

   $ 0.2       $ 0.2       $ —         $ 0.5       $ 0.8       $ (0.3

 

* Primary reason for change. The decrease in interest income was primarily due to lower average interest rates and cash balances in fiscal 2012 compared to fiscal 2011.

Income Tax Provision:

 

     Three months ended             Nine months ended         
     August  31,
2012
     August  31,
2011
     Change*      August  31,
2012
     August  31,
2011
     Change**  
     (In millions)  

Income tax provision:

   $ 8.2       $ 0.3       $ 7.9       $ 13.8       $ 3.4       $ 10.4   

The income tax provision of $13.8 million in the first nine months of fiscal 2012 is primarily related to: (i) federal taxes of $6.1 million; (ii) state taxes of $2.1 million; and (iii) net deferred taxes of $5.6 million, which represents federal and state deferred taxes from goodwill amortization and utilization of federal alternative minimum tax credits and California research credits.

The income tax provision of $3.4 million in the first nine months of fiscal 2011 is primarily related to state taxes of $2.3 million, and net deferred taxes of $1.2 million, which represents the excess of deferred tax expense from goodwill amortization over deferred tax benefit from research credits.

The difference between operating results at the statutory rate and the income tax provision recorded was primarily due to current state tax expense and deferred taxes related to goodwill and the utilization of tax credits offset by the reduction to the valuation allowance related to net deferred tax assets in the first nine months of fiscal 2012; and the state tax expense in the first nine months of fiscal 2011.

As of August 31, 2012, the liability for uncertain income tax positions was $3.1 million. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.

A valuation allowance has been recorded to offset a substantial portion of our net deferred tax assets at August 31, 2012 to reflect the uncertainty of realization. A valuation allowance is required when it is more likely than not that all or a portion of deferred tax assets may not be realized. Establishment and removal of a valuation allowance requires management to consider all positive and negative evidence and make a judgmental decision regarding the amount of valuation allowance required as of a reporting date. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed. Additionally, in accordance with accounting standards, the effect of our proposed acquisition of the Rocketdyne Business has not been considered in our evaluation of the valuation allowance.

In this evaluation, management has considered all available evidence, both positive and negative, including the following:

 

   

Our recent history of generating taxable income which has allowed for the utilization of net operating loss credits and tax credit carryforwards;

 

   

Our expectation of generating taxable income for fiscal 2012;

 

   

The existence of a three year cumulative comprehensive loss related to our defined benefit pension plan in the current and recent prior periods;

 

   

Projections of our future results which reflect uncertainty over our ability to generate taxable income principally due to: (i) anticipated increased periodic pension expense due to a decline in the discount rate utilized to value our pension obligation associated with our defined benefit pension plan and (ii) the lack of objective, verifiable evidence to predict future aerospace and defense spending associated with the Budget Control Act of 2011, including which governmental spending accounts may be subject to sequestration, the percentage reduction with respect thereto, and the latitude agencies will have in selecting specific expenditures to cut.

As of August 31, 2012, the weight of the negative evidence, principally associated with the above uncertainties, outweighed the historical positive evidence regarding the likelihood that a substantial portion of the net deferred tax assets was realizable. Depending on our ability to continue to generate taxable income and the resolution of the above uncertainties favorably, it is possible that the valuation allowance could be released during fiscal 2013, which would materially and favorably affect our results of operations in the period of the reversal. Management will continue to evaluate the ability to realize its net deferred tax assets and related valuation allowance on a quarterly basis.

 

31


Table of Contents

Discontinued Operations:

In November 2003, we announced the closing of a GDX manufacturing facility in Chartres, France owned by Snappon SA, a subsidiary of the Company. The decision resulted primarily from declining sales volumes with French automobile manufacturers. In June 2004, we completed the legal process for closing the facility and establishing a social plan. During the first quarter of fiscal 2009, Snappon SA had legal judgments rendered against it under French law, aggregating €2.9 million plus interest related to wrongful discharge claims by certain former employees of Snappon SA. During the second quarter of fiscal 2009, Snappon SA filed for declaration of suspensions of payments with the clerk’s office of the Paris Commercial Court (see Note 7(a) of the Unaudited Condensed Consolidated Financial Statements).

Summarized financial information for discontinued operations is set forth below:

 

     Three months ended August 31,     Nine months ended August 31,  
     2012     2011     2012     2011  
     (In millions)  

Net sales

   $ —        $ —        $ —        $ —     

Loss before income taxes (1)

     (0.8     (0.1     (0.5     (1.3

Income tax benefit

     —          —          0.1        —     

Net loss from discontinued operations

     (0.8     (0.1     (0.4     (1.3

 

(1) Includes foreign currency losses of $0.1 million in the third quarter of fiscal 2012. Additionally, loss before income taxes includes foreign currency gains and (losses) of $0.8 million and $(1.1) million in the first nine months of fiscal 2012 and 2011, respectively.

Retirement Benefit Plans:

Components of retirement benefit expense are:

 

     Three months ended August 31,     Nine months ended August 31,  
     2012     2011     2012     2011  
     (In millions)  

Service cost

   $ 1.2      $ 0.9      $ 3.5      $ 3.0   

Interest cost on benefit obligation

     19.3        20.6        57.6        61.5   

Assumed return on plan assets

     (24.8     (25.6     (74.4     (76.8

Recognized net actuarial losses

     14.6        15.7        44.1        47.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Retirement benefit expense

   $ 10.3      $ 11.6      $ 30.8      $ 34.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Market conditions and interest rates significantly affect assets and liabilities of our pension plans. Pension accounting permits market gains and losses to be deferred and recognized over a period of years. This “smoothing” results in the creation of other accumulated income or losses which will be amortized to retirement benefit expense or benefit in future years. The accounting method we utilize recognizes one-fifth of the unamortized gains and losses in the market-related value of pension assets and all other gains and losses, including changes in the discount rate used to calculate benefit costs each year. Investment gains or losses for this purpose are the difference between the expected return and the actual return on the market-related value of assets which smoothes asset values over three years. Although the smoothing period mitigates some volatility in the calculation of annual retirement benefit expense, future expenses are impacted by changes in the market value of pension plan assets and changes in interest rates.

Additionally, we sponsor a defined contribution 401(k) plan and participation in the plan is available to all employees. The cost of the 401(k) plan was $8.0 million and $7.3 million, respectively, in the first nine months of fiscal 2012 and 2011 which are recoverable under our U.S. government contracts.

Operating Segment Information:

We evaluate our operating segments based on several factors, of which the primary financial measure is segment performance. Segment performance, which is a non-GAAP financial measure, represents net sales from continuing operations less applicable costs, expenses and provisions for unusual items relating to the segment. Excluded from segment performance are: corporate income and expenses, interest expense, interest income, income taxes, legacy income or expenses, and provisions for unusual items not related to the segment. We believe that segment performance provides information useful to investors in understanding our underlying operational performance. Specifically, we believe the exclusion of the items listed above permits an evaluation and a comparison of results for ongoing business operations, and it is on this basis that management internally assesses operational performance.

 

32


Table of Contents

Aerospace and Defense Segment

 

     Three months ended           Nine months ended        
     August  31,
2012
    August  31,
2011
    Change*     August  31,
2012
    August  31,
2011
    Change**  
     (In millions, except percentage amounts)  

Net sales

   $ 243.6      $ 224.3      $ 19.3      $ 691.6      $ 660.7      $ 30.9   

Segment performance

     17.5        16.0        1.5        57.4        55.1        2.3   

Segment performance as a percentage of net sales

     7.2     7.1       8.3     8.3  

Components of segment performance:

            

Aerospace and Defense

   $ 28.9      $ 26.6      $ 2.3      $ 81.4      $ 78.4      $ 3.0   

Environmental remediation provision adjustments

     (6.5     (5.2     (1.3     (9.3     (7.0     (2.3

Retirement benefit plan expense

     (4.8     (5.2     0.4        (14.2     (15.7     1.5   

Unusual items

     (0.1     (0.2     0.1        (0.5     (0.6     0.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Aerospace and Defense total

   $ 17.5      $ 16.0      $ 1.5      $ 57.4      $ 55.1      $ 2.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Primary reason for change. The increase in net sales was primarily due to (i) increased deliveries on the THAAD program generating $13.5 million in additional net sales and (ii) increase of $10.2 million in the various Standard Missile programs primarily from the timing of deliveries. The increase in net sales was partially offset by a reduction of $7.2 million on the Hawk program due to the completion of the production contract in the first quarter of fiscal 2012. Segment margin benefited from higher sales volume and favorable contract performance on space and missile defense programs during the current period. These favorable factors were partially offset by an increase of $1.3 million in environmental related costs in the current period.
** Primary reason for change. The increase in net sales was primarily due to the following: (i) increased deliveries on the THAAD program generating $23.9 million in additional net sales; (ii) increased engineering technology activities on the T3 contracts resulting in $12.7 million of additional net sales; and (iii) increased deliveries on the Atlas V program generating $10.2 million in additional net sales. The increase in net sales was partially offset by a reduction of $16.6 million on the Hawk program due to the completion of the production contract in the first quarter of fiscal 2012. Segment margin was unchanged for both periods presented.

A summary of our backlog is as follows:

 

     August 31,
2012
     November 30,
2011
 
     (In millions)  

Funded backlog

   $ 1,033       $ 902   

Unfunded backlog

     430         520   
  

 

 

    

 

 

 

Total contract backlog

   $ 1,463       $ 1,422   
  

 

 

    

 

 

 

Total backlog includes both funded backlog (unfilled orders for which funding is authorized, appropriated and contractually obligated by the customer) and unfunded backlog (firm orders for which funding has not been appropriated). Indefinite delivery and quantity contracts and unexercised options are not reported in total backlog. Backlog is subject to funding delays or program restructurings/cancellations which are beyond our control.

Real Estate Segment

 

     Three months ended            Nine months ended         
     August  31,
2012
     August  31,
2011
     Change*     August  31,
2012
     August  31,
2011
     Change*  
     (In millions)  

Net sales

   $ 1.3       $ 1.9       $ (0.6   $ 5.1       $ 5.2       $ (0.1

Segment performance

     0.9         1.2         (0.3     2.9         3.5         (0.6

 

* Primary reason for change. Net sales and segment performance consist primarily of rental property operations. Fiscal 2012 results included $0.6 million in land sales.

Use of Non-GAAP Financial Measures

In addition to segment performance (discussed above), we provide the Non-GAAP financial measure of our operational performance called Adjusted EBITDAP. We use this metric to further our understanding of the historical and prospective consolidated core operating performance of our segments, net of expenses incurred by our corporate activities in the ordinary, on-going and customary course of our operations. Further, we believe that to effectively compare the core operating performance metric from period to period on a historical and prospective basis, the metric should exclude items relating to retirement benefits (pension and postretirement benefits), significant non-cash expenses, the impacts of financing decisions on the earnings, and items incurred outside

 

33


Table of Contents

the ordinary, on-going and customary course of our operations. Accordingly, we define Adjusted EBITDAP as GAAP (loss) income from continuing operations before income taxes adjusted by interest expense, interest income, depreciation and amortization, retirement benefit expense, and unusual items which we do not believe are reflective of such ordinary, on-going and customary activities. Adjusted EBITDAP does not represent, and should not be considered an alternative to, net income, as determined in accordance with GAAP.

 

     Three months ended     Nine months ended  
     August  31,
2012
    August  31,
2011
    August  31,
2012
    August  31,
2011
 
     (In millions, except percentage amounts)  

(Loss) income from continuing operations before income taxes

   $ (0.5   $ 1.6      $ 8.8      $ 7.1   

Interest expense

     4.8        7.9        16.6        23.4   

Interest income

     (0.2     (0.2     (0.5     (0.8

Depreciation and amortization

     5.3        6.7        16.1        18.2   

Retirement benefit expense

     10.3        11.6        30.8        34.8   

Unusual items

        

Legal related matters

     0.2        0.2        0.6        0.6   

Rocketdyne business acquisition related costs

     4.1        —          4.1        —     

9 1/2% notes redemption

     —          —          0.4        —     

Gain on debt repurchased

     —          —          —          (0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDAP

   $ 24.0      $ 27.8      $ 76.9      $ 83.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDAP as a percentage of net sales

     9.8     12.3     11.0     12.5

In addition to segment performance and Adjusted EBITDAP, we provide the Non-GAAP financial measures of free cash flow and net debt. We use these financial measures, both in presenting our results to stockholders and the investment community, and in our internal evaluation and management of the business. Management believes that these financial measures are useful to investors because they permit investors to view our business using the same tools that management uses to gauge progress in achieving our goals.

 

     Three months ended     Nine months ended  
     August  31,
2012
    August  31,
2011
    August  31,
2012
    August  31,
2011
 
     (In millions)  

Cash provided by operating activities

   $ 15.7      $ 18.2      $ 63.0      $ 50.4   

Capital expenditures

     (9.5     (5.5     (18.8     (12.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 6.2      $ 12.7      $ 44.2      $ 38.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     August 31,
2012
    August 31,
2011
 
     (In millions)  

Debt principal

   $ 249.4      $ 389.0   

Cash and cash equivalents

     (155.7     (237.7
  

 

 

   

 

 

 

Net debt

   $ 93.7      $ 151.3   
  

 

 

   

 

 

 

Because our method for calculating the Non-GAAP measures may differ from other companies’ methods, the Non-GAAP measures presented above may not be comparable to similarly titled measures reported by other companies. These measures are not recognized in accordance with GAAP, and we do not intend for this information to be considered in isolation or as a substitute for GAAP measures.

Other Information

Recently Adopted Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued updated guidance to improve disclosures regarding fair value measurements. This update requires entities to (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separately (i.e., on a gross basis rather than as one net number), information about purchases, sales, issuances, and settlements in the roll forward of changes in Level 3 fair value measurements. The update requires fair value disclosures by class of assets and liabilities rather than by major category or line item in the statement of financial position. Disclosures regarding the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for assets and liabilities in both Level 2 and Level 3 are also required. For all portions of the update except the gross presentation of activity in the Level 3 roll forward, this standard was effective for us on March 1, 2010. For the gross presentation of activity in the Level 3 roll forward, the new disclosures were effective December 1, 2011. As the accounting standard only impacts disclosures, the new standard did not have an impact on our financial position, results of operations, or cash flows.

 

34


Table of Contents

As of September 1, 2011, we adopted FASB’s amended guidance on testing goodwill for impairment. Previous guidance required that an entity test for goodwill impairment by comparing the fair value of a reporting unit with its carrying amount including goodwill. If the fair value is less than its carrying amount, then a second step is performed to measure the amount of the impairment loss. Under this new amendment an entity is not required to calculate the fair value of the reporting unit unless the entity determines that it is more likely than not (a likelihood of more than 50%) that its fair value is less than its carrying amount. The adoption of the new standard did not have a material impact on our financial position or results of operations.

In December 2010, the FASB issued authoritative guidance on disclosure of supplementary pro forma information for business combinations. The new guidance requires that pro forma financial information be prepared as if the business combination occurred as of the beginning of the prior annual period. The guidance was effective for business combinations subsequent to December 1, 2011.

In May 2011, the FASB issued amended guidance on fair value measurement and related disclosures. The new guidance clarified the concepts applicable for fair value measurement and requires new disclosures, with a particular focus on Level 3 measurements. This guidance was effective for us in the second quarter of fiscal 2012, and was applied retrospectively.

New Accounting Pronouncements

In June 2011, the FASB issued amended guidance on the presentation of comprehensive income. The amended guidance eliminates one of the presentation options provided by current U.S. GAAP, that is to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, it gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective for us beginning in the first quarter of fiscal 2013, and will be applied retrospectively. As the accounting standard only impacts disclosures, the new standard will not have an impact on our financial position, results of operations, or cash flows.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America that offer acceptable alternative methods for accounting for certain items affecting our financial results, such as determining inventory cost, deferring certain costs, depreciating long-lived assets, recognizing pension benefits, and recognizing revenues.

The preparation of financial statements requires the use of estimates, assumptions, judgments, and interpretations that can affect the reported amounts of assets, liabilities, revenues, and expenses, the disclosure of contingent assets and liabilities and other supplemental disclosures. The development of accounting estimates is the responsibility of our management. Management discusses those areas that require significant judgment with the audit committee of our board of directors. The audit committee has reviewed all financial disclosures in our filings with the SEC. Although we believe the positions we have taken with regard to uncertainties are reasonable, others might reach different conclusions and our positions can change over time as more information becomes available. If an accounting estimate changes, its effects are accounted for prospectively and, if significant, disclosed in the Notes to Unaudited Condensed Consolidated Financial Statements.

The areas that are most affected by our accounting policies and estimates are revenue recognition for long-term contracts, other contract considerations, goodwill, retirement benefit plans, litigation reserves, environmental remediation costs and recoveries, and income taxes. Except for income taxes, which are not allocated to our operating segments, these areas affect the financial results of our business segments.

A detailed description of our significant accounting policies can be found in our most recent Annual Report on Form 10-K for the fiscal year ended November 30, 2011.

Arrangements with Off-Balance Sheet Risk

As of August 31, 2012, arrangements with off-balance sheet risk consisted of:

 

   

$44.8 million in outstanding commercial letters of credit expiring within the next twelve months, the majority of which may be renewed by either a letter of credit, or in some cases, a surety bond, primarily to collateralize obligations for environmental remediation and insurance coverage.

 

   

Up to $120.0 million aggregate in guarantees by GenCorp of Aerojet’s obligations to U.S. government agencies for environmental remediation activities (See Note 7(b) of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information).

 

35


Table of Contents
   

Guarantees, jointly and severally, by our material domestic subsidiaries of our obligations under our Senior Credit Facility.

In addition to the items discussed above, we have and will from time to time enter into certain types of contracts that require us to indemnify parties against potential third-party and other claims. These contracts primarily relate to: (i) divestiture agreements, under which we may provide customary indemnification to purchasers of our businesses or assets including, for example, claims arising from the operation of the businesses prior to disposition, liability to investigate and remediate environmental contamination existing prior to disposition; (ii) certain real estate leases, under which we may be required to indemnify property owners for claims arising from the use of the applicable premises; and (iii) certain agreements with officers and directors, under which we may be required to indemnify such persons for liabilities arising out of their relationship with us. The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated.

We also use surety bonds to satisfy indemnification agreements for environmental remediation, other financial commitments, and insurance coverage. As of August 31, 2012, we had $35.3 million in outstanding surety bonds to satisfy indemnification obligations for environmental remediation coverage. Additionally, we issue purchase orders and make other commitments to suppliers for equipment, materials, and supplies in the normal course of business. These purchase commitments are generally for volumes consistent with anticipated requirements to fulfill purchase orders or contracts for product deliveries received, or expected to be received, from customers and would be subject to reimbursement if a cost-plus contract is terminated.

Liquidity and Capital Resources

Net Cash Provided by (Used in) Operating, Investing, and Financing Activities

The change in cash and cash equivalents was as follows:

 

     Nine months ended  
     August 31,
2012
    August 31,
2011
 
     (In millions)  

Net Cash Provided by Operating Activities

   $ 63.0      $ 50.4   

Net Cash (Used in) Provided by Investing Activities

     (18.2     14.5   

Net Cash Used in Financing Activities

     (77.1     (8.7
  

 

 

   

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

   $ (32.3   $ 56.2   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

The $63.0 million of cash provided by operating activities in the first nine months of fiscal 2012 was primarily the result of income from continuing operations before income taxes adjusted for non-cash expenses (defined as depreciation, amortization, stock-based compensation, loss on debt redeemed, and retirement benefit expense) which generated $63.1 million.

The $50.4 million of cash provided by operating activities in the first nine months of fiscal 2011 was primarily the result of income from continuing operations before income taxes adjusted for non-cash expenses (defined as depreciation, amortization, stock-based compensation, loss on debt redeemed, and retirement benefit expense) which generated $67.3 million in the first nine months of fiscal 2011. These factors were partially offset by a net cash usage of $12.1 million in current and noncurrent liabilities primarily related to changes in accrued compensation and legal settlements.

Net Cash (Used In) Provided by Investing Activities

During the first nine months of fiscal 2012, we had capital expenditures of $18.8 million of which $10.5 million was related to our ERP implementation. In addition, we had generated proceeds of $0.6 million from the sale of a property.

During the first nine months of fiscal 2011, we generated $26.7 million of net cash from the sale of marketable securities which was offset by $12.2 million of capital expenditures.

Net Cash Used in Financing Activities

During the first nine months of fiscal 2012, we had $77.0 million in debt repayments (see below) and $0.8 million in vendor financing payments.

During the first nine months of fiscal 2011, we had $7.6 million in debt repayments and $1.1 million in vendor financing payments.

 

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Table of Contents

Debt Activity and Senior Credit Facility

Our debt activity during the first nine months of fiscal 2012 was as follows:

 

    November 30,
2011
    Cash
Payments
    August 31,
2012
 
    (In millions)  

Term loan

  $ 50.0      $ (1.9   $ 48.1   

9 1/2% Notes

    75.0        (75.0 )     —     

4.0625% Convertible Subordinated Debentures (“4 1/16% Debentures”)

    200.0        —          200.0   

2 1/4% Debentures

    0.2        —          0.2   

Other debt

    1.2        (0.1     1.1   
 

 

 

   

 

 

   

 

 

 

Total Debt and Borrowing Activity

  $ 326.4      $ (77.0   $ 249.4   
 

 

 

   

 

 

   

 

 

 

On August 16, 2012, we, along with our wholly-owned subsidiary Aerojet as guarantor, executed an amendment (the “Second Amendment”) to the Second Amended and Restated Credit Agreement, as amended, (the “Senior Credit Facility”) with the lenders identified therein, and Wells Fargo Bank, National Association, as administrative agent. On May 30, 2012, we, along with our wholly-owned subsidiary Aerojet as guarantor, executed an amendment (the “First Amendment”) to the Senior Credit Facility with the lenders identified therein, and Wells Fargo Bank, National Association, as administrative agent.

The Second Amendment, among other things, (1) allows for the incurrence of up to $510 million of second lien indebtedness in connection with the acquisition by the Company of the business of UTC’s Pratt & Whitney Rocketdyne division pursuant to the terms of that certain Stock and Asset Purchase Agreement by and between UTC and the Company dated as of July 22, 2012 (the “Acquisition”), and (2) allows for a delayed draw term loan to the Company in an amount of up to $50 million in connection with the Acquisition or, in certain circumstances, for general corporate purposes.

The First Amendment, among other things, (i) increases the amount available under the Senior Credit Facility from (a) a revolving credit facility in an aggregate principal amount of up to $150.0 million (with a $100.0 million subfacility for standby letters of credit and a $5.0 million subfacility for swingline loans) and (b) a term loan facility in an aggregate principal amount of up to $50.0 million by $50.0 million through a combination of increased borrowings under the revolving credit facility and/or one or more term loans, (ii) increases certain restricted payment limits from (a) $25.0 million in any 12 month calculation period and $50.0 million during the term of the Senior Credit Facility to $75.0 million and $125.0 million, respectively and (b) following an Approved Issuance, as defined in the Senior Credit Facility, from $50.0 million in any 12 month calculation period and $100 million during the term of the Senior Credit Facility to $75.0 million and $125.0 million, respectively, (iii) provides greater flexibility with respect to the Company’s ability to incur indebtedness to support permitted acquisitions, and (iv) increases the aggregate limitation on sale leasebacks from $20.0 million to $30.0 million during the term of the Senior Credit Facility. The term loan facility will amortize at a rate of 5.0% of the original principal amount per annum to be paid in equal quarterly installments with any remaining amounts due on the maturity date. Outstanding indebtedness under the Senior Credit Facility may be voluntarily prepaid at any time, in whole or in part, in general without premium or penalty.

In general, borrowings under the Senior Credit Facility bear interest at a rate equal to the LIBOR plus 350 basis points (subject to downward adjustment), or the base rate as it is defined in the credit agreement governing the Senior Credit Facility. In addition, we are charged a commitment fee of 50 basis points per annum on unused amounts of the revolving credit facility and 350 basis points per annum (subject to downward adjustment), along with a fronting fee of 25 basis points per annum, on the undrawn amount of all outstanding letters of credit.

We guarantee the payment obligations under the Senior Credit Facility. Any borrowings are further secured by (i) all equity interests owned or held by the loan parties, including interests in our Easton subsidiary and 66% of the voting stock (and 100% of the non-voting stock) of all present and future first-tier foreign subsidiaries of the loan parties; (ii) substantially all of the tangible and intangible personal property and assets of the loan parties; and (iii) certain real property owned by the loan parties located in Orange, Virginia and Redmond, Washington. Our real property located in California, including the real estate holdings of Easton, are excluded from collateralization under the Senior Credit Facility.

We are subject to certain limitations including the ability to incur additional debt, make certain investments and acquisitions, and make certain restricted payments, including stock repurchases and dividends. The Senior Credit Facility includes events of default usual and customary for facilities of this nature, the occurrence of which could lead to an acceleration of our obligations thereunder. Additionally, the Senior Credit Facility includes certain financial covenants, including that the Borrower maintain (i) a maximum total leverage ratio of 3.50 to 1.00 (subject to upward adjustment in certain cases), calculated net of cash up to a maximum of $100.0 million; and (ii) a minimum interest coverage ratio of 2.40 to 1.00.

 

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Financial Covenant

   Actual Ratios as of
August 31, 2012
   Required Ratios

Interest coverage ratio, as defined under the Senior Credit Facility

   5.64 to 1.00    Not less than: 2.40 to 1.00

Leverage ratio, as defined under the Senior Credit Facility

   1.32 to 1.00    Not greater than: 3.50 to 1.00

We were in compliance with our financial and non-financial covenants as of August 31, 2012.

Outlook

Short-term liquidity requirements consist primarily of recurring operating expenses, including but not limited to costs related to our retirement benefit plans, capital and environmental expenditures, and debt service requirements. We believe that our existing cash and cash equivalents and existing credit facilities will provide sufficient funds to meet our operating plan for the next twelve months. The operating plan for this period provides for full operation of our businesses, and interest and principal payments on our debt.

In July 2012, we signed a definitive agreement to acquire the Rocketdyne Business from UTC for $550 million. The purchase price of $550 million, which is subject to adjustment for changes in working capital and other specified items, is expected to be financed with a combination of cash on hand and issuance of debt. The acquisition of the Rocketdyne Business is conditioned upon, among other things, the receipt of required regulatory approvals and other customary closing conditions. Subject to the satisfaction of these conditions, the acquisition is expected to close in the first half of 2013.

As disclosed in Notes 7(a) and 7(b) of the Notes to Unaudited Condensed Consolidated Financial Statements, we have exposure for certain legal and environmental matters. We believe that it is currently not possible to estimate the impact, if any, that the ultimate resolution of certain of these matters will have on our financial position, results of operations, or cash flows.

Major factors that could adversely impact our forecasted operating cash and our financial condition are described in the section “Risk Factors” in Item 1A of our Annual Report to the SEC on Form 10-K for the fiscal year ended November 30, 2011 and Item 1A of this Quarterly Report on Form 10-Q. In addition, our liquidity and financial condition will continue to be affected by changes in prevailing interest rates on the portion of debt that bears interest at variable interest rates.

Forward-Looking Statements

Certain information contained in this report should be considered “forward-looking statements” as defined by Section 21E of the Private Securities Litigation Reform Act of 1995. All statements in this report other than historical information may be deemed forward-looking statements. These statements present (without limitation) the expectations, beliefs, plans and objectives of management and future financial performance and assumptions underlying, or judgments concerning, the matters discussed in the statements. The words “believe,” “estimate,” “anticipate,” “project” and “expect,” and similar expressions, are intended to identify forward-looking statements. Forward-looking statements involve certain risks, estimates, assumptions and uncertainties, including with respect to future sales and activity levels, cash flows, contract performance, the outcome of litigation and contingencies, environmental remediation and anticipated costs of capital. A variety of factors could cause actual results or outcomes to differ materially from those expected and expressed in our forward-looking statements. Important risk factors that could cause actual results or outcomes to differ from those expressed in the forward-looking statements are described in the section “Risk Factors” in Item 1A of our Annual Report to the SEC on Form 10-K for the fiscal year ended November 30, 2011and Item 1A of this Quarterly Report on Form 10-Q include the following:

 

   

cancellation or material modification of one or more significant contracts;

 

   

future reductions or changes in U.S. government spending;

 

   

negative audit of the Company’s business by the U.S. government;

 

   

conditions relating to the acquisition of the Rocketdyne Business which could delay or materially adversely affect the timing of its completion, or prevent it from occurring;

 

   

inability to satisfy the conditions or obtain the approvals required to complete the Acquisition or material restrictions or conditions on such approvals;

 

   

failure to complete the Acquisition;

 

   

following the Acquisition, if consummated, integration difficulties or inability to integrate the Rocketdyne Business into the Company’s existing operations successfully or to realize the anticipated benefits of the Acquisition;

 

   

ability to effectively manage the Company’s expanded operations following the Acquisition;

 

   

expenses related to the Acquisition and the integration of our operations with the Rocketdyne Business if the Acquisition is consummated;

 

   

the increase in the Company’s leverage and debt service obligations as a result of the Acquisition;

 

   

cost overruns on the Company’s contracts that require the Company to absorb excess costs;

 

   

failure of the Company’s subcontractors or suppliers to perform their contractual obligations;

 

   

failure to secure contracts;

 

   

failure to comply with regulations applicable to contracts with the U.S. government;

 

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costs and time commitment related to potential acquisition activities;

 

   

the Company’s inability to adapt to rapid technological changes;

 

   

failure of the Company’s information technology infrastructure;

 

   

failure to effectively implement the Company’s enterprise resource planning system;

 

   

product failures, schedule delays or other problems with existing or new products and systems;

 

   

the release or explosion of dangerous materials used in the Company’s businesses;

 

   

loss of key qualified suppliers of technologies, components, and materials;

 

   

the funded status of the Company’s defined benefit pension plan and the Company’s obligation to make cash contributions in excess of the amount that the Company can recover in its current period overhead rates;

 

   

effects of changes in discount rates, actual returns on plan assets, and government regulations of defined benefit pension plans;

 

   

the possibility that environmental and other government regulations that impact the Company become more stringent or subject the Company to material liability in excess of its established reserves;

 

   

environmental claims related to the Company’s current and former businesses and operations;

 

   

reductions in the amount recoverable from environmental claims;

 

   

the results of significant litigation;

 

   

occurrence of liabilities that are inadequately covered by indemnity or insurance;

 

   

inability to protect the Company’s patents and proprietary rights;

 

   

business disruptions;

 

   

the earnings and cash flow of the Company’s subsidiaries and the distribution of those earnings to the Company;

 

   

the substantial amount of debt which places significant demands on the Company’s cash resources and could limit the Company’s ability to borrow additional funds or expand its operations;

 

   

the Company’s ability to comply with the financial and other covenants contained in the Company’s debt agreements;

 

   

risks inherent to the real estate market;

 

   

changes in economic and other conditions in the Sacramento, California metropolitan area real estate market or changes in interest rates affecting real estate values in that market;

 

   

additional costs related to the Company’s divestitures;

 

   

the loss of key employees and shortage of available skilled employees to achieve anticipated growth;

 

   

a strike or other work stoppage or the Company’s inability to renew collective bargaining agreements on favorable terms;

 

   

fluctuations in sales levels causing the Company’s quarterly operating results and cash flows to fluctuate;

 

   

changes in the Company’s contract-related accounting estimates;

 

   

new accounting standards that could result in changes to the Company’s methods of quantifying and recording accounting transactions;

 

   

failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act; and

 

   

those risks detailed from time to time in the Company’s reports filed with the SEC.

Additional risk factors may be described from time to time in our future filings with the SEC. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. All such risk factors are difficult to predict, contain material uncertainties that may affect actual results and may be beyond our control.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our disclosures related to certain market risks as reported under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report to the SEC on Form 10-K for the fiscal year ended November 30, 2011, except as noted below.

Interest Rate Risk

We are exposed to market risk principally due to changes in interest rates. Debt with interest rate risk includes borrowings under our Senior Credit Facility. Other than pension assets and liabilities, we do not have any significant exposure to interest rate risk related to our investments.

As of August 31, 2012, our debt totaled $249.4 million: $201.3 million, or 81%, was at an average fixed rate of 4.04%; and $48.1 million, or 19%, was at a variable rate of 3.74%.

 

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The estimated fair value and principal amount for the Company’s long-term debt is presented below:

 

     Fair Value      Principal Amount  
     August 31,
2012
     November 30,
2011
     August 31,
2012
     November 30,
2011
 
     (In millions)  

Term loan

   $ 48.1       $ 49.5       $ 48.1       $ 50.0   

9 1/2% Notes

     —           75.1         —           75.0   

4 1/16% Debentures

     245.0         184.0         200.0         200.0   

Other debt

     1.3         1.4         1.3         1.4   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 294.4       $ 310.0       $ 249.4       $ 326.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair values of the term loan, 9 1/2% Notes, and 4 1/16% Debentures were determined using broker quotes that are based on open markets as of August 31, 2012 and November  30, 2011, respectively. The fair value of the other debt was determined to approximate carrying value.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our third quarter of fiscal 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Except as disclosed in Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements, which is incorporated herein by reference, there have been no significant developments in the pending legal proceedings as previously reported in Part 1, Item 3, Legal Proceedings in our Annual Report on Form 10-K for the fiscal year ended November 30, 2011.

Asbestos Cases. The following table sets forth information related to our historical product liability costs associated with our asbestos litigation cases for the first nine months of fiscal 2012:

 

Claims filed as of November 30, 2011

     146   

Claims filed

     18   

Claims tendered

     2   

Claim settled

     1   

Claims dismissed

     15   
  

 

 

 

Claims pending as of August 31, 2012

     146   

The claim settled in the first nine months of fiscal 2012 was less than $0.1 million. Legal and administrative fees for the asbestos cases for the first nine months of fiscal 2012 were $0.3 million.

Item 1A. Risk Factors.

The information presented below sets forth what we reasonably believe represent material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended November 30, 2011, and should be read in conjunction with the risk factors therein and the information described in this report.

The acquisition of the business of UTC’s Pratt & Whitney Rocketdyne division is subject to a number of conditions which could delay or materially adversely affect the timing of its completion, or prevent it from occurring.

On July 22, 2012, we entered into a Stock and Asset Purchase Agreement (the “Purchase Agreement”) with UTC pursuant to which we agreed to purchase the Rocketdyne Business, subject to certain conditions. There are a number of risks and uncertainties relating to the Acquisition. For example, the Acquisition may not be consummated in the timeframe or manner currently anticipated as a result of several factors, including, among other things, the failure of one or more of the Purchase Agreement’s closing conditions, the failure to obtain sufficient financing to complete the Acquisition pursuant to the Debt Commitment Letter, or litigation relating to the Acquisition.

We may be unable to satisfy the conditions or obtain the approvals required to complete the Acquisition or such approvals may contain material restrictions or conditions.

The Acquisition is subject to numerous conditions, including the approval of government agencies and the expiration or termination of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, waiting period. Governmental agencies may not approve the Acquisition or such approvals may impose conditions on the completion, or require changes to the terms of the Acquisition, including restrictions on our business, operations or financial performance following the Acquisition, which could be adverse to our interests. These conditions or changes could also delay or increase the cost of the Acquisition and limit our earnings and financial prospects following the Acquisition.

Failure to complete the Acquisition could negatively impact our stock price and our future business and financial results.

If the Acquisition is not completed, our ongoing business may be adversely affected, and we will be subject to several risks, including the following:

 

   

being required to pay a termination fee of up to $20.0 million in the event that the Purchase Agreement is terminated in certain circumstances;

 

   

having to pay certain costs relating to the Acquisition, such as legal, accounting and financial advisor fees;

 

   

having had the focus of our management on the Acquisition instead of on pursuing other opportunities that could have been beneficial to us; and

 

   

having had the potential benefits of the Acquisition reflected in our stock price, which could lead to stock price volatility and declines if the Acquisition is not completed.

 

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If the Acquisition is not completed, we cannot assure that these risks will not materialize and will not materially adversely affect our business, financial results and stock price.

Following the Acquisition, if consummated, we may face integration difficulties and may be unable to integrate the Rocketdyne Business into our existing operations successfully or realize the anticipated benefits of the Acquisition.

We will be required to devote significant management attention and resources to integrating the operations and business practices of the Rocketydne Business with our existing operations and business practices. Potential difficulties we may encounter as part of the integration process include the following:

 

   

the inability to successfully integrate the Rocketdyne Business in a manner that permits us to achieve the full revenue and other benefits anticipated to result from the Acquisition;

 

   

complexities associated with managing the businesses, including difficulty addressing possible differences in corporate cultures and management philosophies and the challenge of integrating complex systems, technology, networks and other assets of each of the companies in a seamless manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies;

 

   

potential unknown liabilities and unforeseen increased expenses or delays associated with the Acquisition;

 

   

diversion of the attention of our management and the management of the Rocketydyne Business; and

 

   

the disruption of, or the loss of momentum in, ongoing operations or inconsistencies in standards, controls, procedures and policies.

These potential difficulties could adversely affect our and the managers of the Rocketydne Business’ ability to maintain relationships with customers, suppliers, employees and other constituencies and the ability to achieve the anticipated benefits of the Acquisition, and could reduce the earnings or otherwise adversely affect our operations and the Rocketdyne Business and our financial results following the Acquisition.

Our future results could suffer if we cannot effectively manage our expanded operations following the Acquisition.

Following the Acquisition, the size of our operations will be significantly increased. Our future success depends, in part, upon our ability to manage the expanded operations, which will pose substantial challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurance that we will be successful or that we will realize any operating efficiencies, cost savings, revenue enhancements or other benefits currently anticipated from the Acquisition.

We expect to incur substantial expenses related to the Acquisition and the integration of our operations with the Rocketdyne Business if the Acquisition is consummated.

We expect to incur substantial expenses in connection with the Acquisition and the integration of our operations with the Rocketdyne Business. There are a large number of processes, policies, procedures, operations, technologies and systems that must be integrated, including purchasing, accounting and finance, sales, payroll, pricing, marketing and benefits. While we have assumed that a certain level of expenses will be incurred, there are many factors beyond our control that could affect the total amount or the timing of the integration expenses. Moreover, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. These integration expenses may result in us taking significant charges against earnings following the consummation of the Acquisition, and the amount and timing of such charges are uncertain at present.

The increase in our leverage and debt service obligations as a result of the Acquisition may adversely affect our financial condition and results of operations.

We will incur additional indebtedness in order to finance the Acquisition. On July 22, 2012, in connection with entering into the Purchase Agreement, we entered into the Debt Commitment Letter with Morgan Stanley Senior Funding, Inc. (“MSSF”) and Citigroup Global Markets Inc. (“CGMI” and together with MSSF and certain affiliates of CGMI, the “Commitment Parties”), pursuant to which, subject to the terms and conditions set forth therein, the Commitment Parties have committed to provide senior unsecured loans under a senior bridge loan facility in an aggregate principal amount of up to $510 million (the “Senior Bridge Facility”) to finance a portion of the purchase price of the Acquisition and to pay certain fees and expenses in connection therewith. Under the terms of the Debt Commitment Letter, we may incur up to $50 million in additional term loans under our Senior Credit Facility which would reduce the Senior Bridge Facility commitment by such amount. In lieu of the Senior Bridge Facility, we may issue senior or subordinated notes (“Notes”) either by private placement or an underwritten public sale, subject to certain terms and conditions. We may also issue convertible debt securities in an aggregate principal amount up to $160 million, subject to certain conditions, in lieu of issuance of a portion of the Notes.

 

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If the Notes have not been issued on or prior to the time of the consummation of the Acquisition (the “Closing Date”), pursuant to the Debt Commitment Letter and subject to the terms and conditions thereof, the Commitment Parties will be obligated to provide senior unsecured loans under the Senior Bridge Facility (the “Bridge Loans”) to finance the Acquisition. The Bridge Loans would be guaranteed by all of our subsidiaries that guarantee our Senior Credit Facility and initially bear interest at a rate of LIBOR plus 7.50% per annum. The Bridge Loans would mature twelve months following the Closing Date. Any unpaid principal relating to the Bridge Loans existing more than twelve months after the Closing Date would automatically convert to a term loan on terms and conditions that are likely to be significantly less favorable to us.

Following the Acquisition, it is anticipated that we will have approximately $760 million of outstanding indebtedness, an increase of approximately $510 million as compared with our level of outstanding indebtedness as of August 31, 2012. Our maintenance of higher levels of indebtedness could have adverse consequences including impairing our ability to obtain additional financing in the future.

Our ability to meet our expenses and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. Furthermore, our operations may not generate sufficient cash flows to enable us to meet our expenses and service our debt. As a result, we may need to enter into new financing arrangements to obtain the necessary funds. If we determine that it is necessary to seek additional funding for any reason, we may not be able to obtain such funding or, if funding is available, obtain it on acceptable terms. If we fail to make a payment on our debt, we could be in default on such debt, and this default could cause us to be in default on our other outstanding indebtedness.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults upon Senior Securities

None.

Item 5. Other Information

None.

Item 6. Exhibits

 

No.

  

Description

    2.1

   Stock and Asset Purchase Agreement, dated July 22, 2012, by and between United Technologies Corporation and GenCorp Inc. was filed as Exhibit 2.1 to GenCorp Inc.’s Current Report on Form 8-K filed on July 26, 2012 (File No. 1-1520) and incorporated herein by reference.

  10.1

   Employment Offer Letter, dated May 21, 2012, by and between Aerojet-General Corporation and Warren M. Boley, Jr. was filed as Exhibit 10.1 to GenCorp Inc.’s Current Report on Form 8-K filed on July 23, 2012 (File No. 1-1520) and incorporated herein by reference.

  10.2

   Commitment Letter, dated July 22, 2012, by and among GenCorp Inc., Morgan Stanley Senior Funding, Inc., and Citigroup Global Markets Inc. was filed as Exhibit 10.1 to GenCorp Inc.’s Current Report on Form 8-K filed on July 26, 2012 (File No. 1-1520) and incorporated herein by reference.

  10.3

   Second Amendment to Second Amended and Restated Credit Agreement, as amended, dated as of August 16, 2012, by and among GenCorp Inc., as Borrower, the Material Domestic Subsidiaries of the Borrower party thereto, the Lenders party thereto, and Wells Fargo Bank, National Association, as Administrative Agent was filed as Exhibit 10.1 to GenCorp Inc.’s Current Report on Form 8-K filed on August 21, 2012 (File No. 1-1520) and incorporated herein by reference.

  31.1*

   Certification of Principal Executive Officer pursuant to Rule 13a — 14 (a) of the Securities Exchange Act of 1934, as amended.

  31.2*

   Certification of Principal Financial Officer pursuant to Rule 13a — 14 (a) of the Securities Exchange Act of 1934, as amended.

  32.1*

   Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a — 14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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No.

  

Description

101.INS**

   XBRL Instance Document

101.SCH**

   XBRL Taxonomy Extension Schema

101.CAL**

   XBRL Taxonomy Extension Calculation Linkbase

101.DEF**

   XBRL Taxonomy Extension Definition Linkbase

101.LAB**

   XBRL Taxonomy Extension Label Linkbase

101.PRE**

   XBRL Taxonomy Extension Presentation Linkbase

 

* Filed herewith. All other exhibits have been previously filed.
** Furnished and not filed herewith.

 

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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 10, 2012     By:  

/s/ Scott J. Seymour

     

Scott J. Seymour

President and Chief Executive Officer

(Principal Executive Officer)

Date: October 10, 2012     By:  

/s/ Kathleen E. Redd

      Kathleen E. Redd
     

Vice President, Chief Financial Officer and Assistant

Secretary (Principal Financial Officer and

Principal Accounting Officer)

 

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EXHIBIT INDEX

 

No.

 

Description

    2.1   Stock and Asset Purchase Agreement, dated July 22, 2012, by and between United Technologies Corporation and GenCorp Inc. was filed as Exhibit 2.1 to GenCorp Inc.’s Current Report on Form 8-K filed on July 26, 2012 (File No. 1-1520) and incorporated herein by reference.
  10.1   Employment Offer Letter, dated May 21, 2012, by and between Aerojet-General Corporation and Warren M. Boley, Jr. was filed as Exhibit 10.1 to GenCorp Inc.’s Current Report on Form 8-K filed on July 23, 2012 (File No. 1-1520) and incorporated herein by reference.
  10.2   Commitment Letter, dated July 22, 2012, by and among GenCorp Inc., Morgan Stanley Senior Funding, Inc., and Citigroup Global Markets Inc. was filed as Exhibit 10.1 to GenCorp Inc.’s Current Report on Form 8-K filed on July 26, 2012 (File No. 1-1520) and incorporated herein by reference.
  10.3   Second Amendment to Second Amended and Restated Credit Agreement, as amended, dated as of August 16, 2012, by and among GenCorp Inc., as Borrower, the Material Domestic Subsidiaries of the Borrower party thereto, the Lenders party thereto, and Wells Fargo Bank, National Association, as Administrative Agent was filed as Exhibit 10.1 to GenCorp Inc.’s Current Report on Form 8-K filed on August 21, 2012 (File No. 1-1520) and incorporated herein by reference.
  31.1*   Certification of Principal Executive Officer pursuant to Rule 13a — 14 (a) of the Securities Exchange Act of 1934, as amended.
  31.2*   Certification of Principal Financial Officer pursuant to Rule 13a — 14 (a) of the Securities Exchange Act of 1934, as amended.
  32.1*   Certification of Principal Executive Officer and Principa