Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
GY > SEC Filings for GY > Form 10-Q on 8-Apr-2013All Recent SEC Filings

Show all filings for GENCORP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for GENCORP INC


8-Apr-2013

Quarterly Report


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 "the Company,""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, 2012, 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. Our 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 our wholly-owned subsidiary Easton Development Company, LLC ("Easton") related to the re-zoning, entitlement, sale, and leasing of our excess real estate assets. We own approximately 11,900 acres of land adjacent to U.S. Highway 50 between Rancho Cordova and Folsom, California east of Sacramento ("Sacramento Land"). We are currently in the process of seeking zoning changes and other governmental approvals on a portion of the Sacramento Land to optimize its value.

A summary of the significant financial highlights for the first quarter of fiscal 2013 which management uses to evaluate our operating performance and financial condition is presented below.

Net sales for the first quarter of fiscal 2013 totaled $243.7 million compared to $201.9 million for the first quarter of fiscal 2012.

Net loss for the first quarter of fiscal 2013 was $14.0 million, or $0.24 loss per share, compared to a net income of $2.4 million, or $0.04 diluted income per share, for the first quarter of fiscal 2012.

Adjusted EBITDAP (Non-GAAP measure) for the first quarter of fiscal 2013 was $29.8 million or 12.2% of net sales, compared to $26.2 million or 13.0% of net sales, for the first quarter of fiscal 2012.

Segment performance (Non-GAAP measure) before environmental remediation provision adjustments, retirement benefit plan expense, and unusual items was $30.2 million for the first quarter of fiscal 2013, compared to $26.0 million for the first quarter of fiscal 2012.

Cash provided by operating activities in the first quarter of fiscal 2013 totaled $6.9 million, compared to $18.0 million in the first quarter of fiscal 2012.

Free cash flow (Non-GAAP measure) in the first quarter of fiscal 2013 totaled ($2.2) million, compared to $14.4 million in the first quarter of fiscal 2012.

As of February 28, 2013, we had $101.4 million in net debt (Non-GAAP measure) compared to $124.3 million as of February 28, 2012.

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."

In July 2012, we signed a definitive agreement to acquire the Pratt & Whitney Rocketdyne division (the "Rocketdyne Business") from United Technologies Corporation ("UTC") for $550 million (the "Acquisition"). 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, restricted cash on hand related to the issuance of debt in connection with the proposed Acquisition, and future borrowings under our senior credit facility. 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. If the Acquisition is not completed, we will be required to pay a termination fee of up to $20.0 million in the event that the purchase agreement is terminated in certain circumstances.


Table of Contents

The Rocketdyne Business is the largest liquid rocket propulsion designer, developer, and manufacturer in the U.S. 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 transform our business and provide additional growth opportunities as we build upon the complementary capabilities of each legacy company.

On January 28, 2013, we issued $460.0 million in aggregate principal amount of our 7.125% Second-Priority Senior Secured Notes (the "7 1/8% Notes"). The 7 1/8% Notes were sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the U.S. in accordance with Regulation S under the Securities Act. We intend to use the net proceeds of the 7 1/8% Notes offering to fund, in part, the proposed acquisition of the Rocketdyne Business, and to pay related fees and expenses. The proceeds from the 7 1/8% Notes offering were deposited into escrow pending the consummation of the proposed Acquisition. If the Acquisition is not consummated on or prior to July 21, 2013 (subject to a one-month extension upon satisfaction of certain conditions) or upon the occurrence of certain other events, the 7 1/8% Notes will be subject to a special mandatory redemption at a price equal to 100% of the issue price of the 7 1/8% Notes, plus accrued and unpaid interest, if any, to, but not including the date of the special mandatory redemption. See Note 6 in Notes to the Unaudited Condensed Consolidated Financial Statements.

In connection with the financing of the Acquisition, we also intend to borrow the $50 million term loan under our Second Amended and Restated Credit Agreement, as amended, (the "Senior Credit Facility"), which is available in a single draw until August 16, 2013 to fund the Acquisition (or to be deposited in an account held by the administrative agent under our Senior Credit Facility in anticipation of the Acquisition).

We expect to incur substantial expenses in connection with the Acquisition and the integration of our operations with the Rocketdyne Business. A summary of the expenses recorded in fiscal 2012 and the first quarter of fiscal 2013, a portion of which may be recoverable in the future through our U.S. government contracts, related to the Acquisition is as follows (in millions):

Impairment charge related to the Liquid Divert and Attitude Control
Systems (the "LDACS") business                                              $  4.0
Incurred costs to divest the LDACS business                                    0.8
Legal expenses                                                                 4.3
Professional fees and consulting                                               3.2
Internal labor                                                                 2.8
Costs incurred by the Rocketdyne Business reimbursable by the Company          1.4
Other                                                                          0.6

                                                                            $ 17.1

In November 2012, we classified our LDACS program as assets held for sale because we expected to be required to divest the LDACS product line in order to consummate the Acquisition. We continue to explore the potential sale of our LDACS business, as well as various other approaches to obtaining clearance from the U.S. Federal Trade Commission and the DoD of the Acquisition pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The net sales associated with the LDACS program totaled $8.6 million and $8.2 million, respectively, in the first quarter of fiscal 2013 and fiscal 2012. (see Note 14 of the Unaudited Condensed Consolidated Financial Statements).

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

Some of the significant challenges we face are as follows: dependence upon government programs and contracts, future reductions or changes in U.S. government spending in our industry, integration of the possible Rocketdyne Business acquisition, environmental matters, capital structure, an underfunded pension plan, and implementation of our enterprise resource planning ("ERP") system. Some of 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, 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.


Table of Contents

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

                                                Three months ended
                                        February 28,          February 28,
                                            2013                  2012
          Raytheon Company                         44 %                  36 %
          Lockheed Martin Corporation              31 %                  28 %

Sales in the first quarter of fiscal 2013 and 2012 directly and indirectly to the U.S. government and its agencies, including sales to our significant customers discussed above, totaled 96% and 95%, respectively, of net sales. The Standard Missile program, which is included in the U.S. government sales, represented 32% and 23% of net sales for the first quarter of fiscal 2013 and 2012, respectively.

Industry Update

Our primary aerospace and defense customers include the DoD and its agencies, and NASA, and the prime contractors that supply products to these customers. As a result, we rely on particular levels of U.S. government spending on propulsion systems for defense and space applications and armament systems for precision tactical weapon systems and munitions applications, and our backlog depends, in a large part, on continued funding by the U.S. government for the programs in which we are involved. These spending levels are not generally correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this type of spending. Moreover, although our contracts often contemplate that our services will be performed over a period of several years, the Executive Branch must propose and Congress must approve funds for a given program each government fiscal year ("GFY") and may significantly change - increase, reduce or eliminate - funding for a program. A decrease in DoD and/or NASA expenditures, the elimination or curtailment of a material program in which we are involved, or changes in payment patterns of our customers as a result of changes in U.S. government spending, could have a material adverse effect on our operating results, financial condition, and/or cash flows.

On March 26, 2013, the President signed into law Public Law 113-6, "The Consolidated and Further Continuing Appropriations Act of 2013." This law contains full-year appropriations for several government departments, including:
Agriculture, Commerce, Justice and Science (which contains NASA funding), Defense, Homeland Security, and Military Construction and Veterans Affairs Appropriations Acts. All other government agencies will operate under a Continuing Resolution ("CR") for the rest of the government fiscal year. Prior to passage of this bill, the government was operating under a CR.

With the delayed final resolution of the GFY13 appropriations, the White House Office of Management and Budget ("OMB") delayed the submission of the GFY 2014 budget request. By law, the President was required to submit his discretionary budget request to Congress no later than the first Monday in February 2013, however OMB has informed Congress that the budget submission will likely be submitted to the Congress on April 10, 2013.

Additionally, on March 1, 2013, sequestration budget cuts officially went into effect. Sequestration, the result of the 2011 Budget Control Act, was originally set to be implemented on January 2, 2013 but congressional leaders agreed to a last minute deal to delay the onset by two months; however, between January and March, there was no real traction on undoing, mitigating or further delaying sequestration and thus it took effect. The final funding amounts contained in P.L. 113-6 for the remainder of GFY13 for both DoD and NASA will be subject to sequestration cuts of 7.8% and 5%, respectively.

Despite overall defense spending pressures, we believe that we are well-positioned to benefit from spending in DoD priority areas. This view reflects the DoD's strategic guidance report released in January 2012. This report affirms support for many of the core programs and points towards continued DoD investment in: space defense - in order to ensure access to this highly congested and contested "global commons"; missile defense - in order to protect the homeland and counter weapons of mass destruction; and power projection - by improving missile defense systems and enhancing space-based capabilities.

This year, Congress will take up a new NASA Authorization Act, authorizing NASA for the next three years, GFYs 2014-2016. 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 believe Aerojet has a strong position of incumbency and is well aligned with the long-term budget priorities of NASA. Aerojet is the main propulsion provider for the multi-purpose crew vehicle.

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.


Table of Contents

A summary of our environmental reserves, range of liability, and recoverable amounts as of February 28, 2013 is presented below:

                                                                       Estimated Range
                                 Reserve       Recoverable Amount       of Liability
                                                     (In millions)
    Sacramento                     $136.2                    $99.0     $136.2 - $216.9
    Baldwin Park Operable Unit       31.4                     22.8       31.4 - 63.2
    Other Aerojet sites               9.2                      8.7       9.2 - 24.3
    Other sites                       7.0                      0.8       7.0 - 11.5

    Total                          $183.8                   $131.3     $183.8 - $315.9

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 not reimbursable and were therefore directly charged to the unaudited condensed consolidated statements of operations. Subsequent to the third quarter of fiscal 2010, because our estimated environmental costs have reached the reimbursement ceiling under the Northrop Agreement, approximately 37% of such costs will not be reimbursable and were therefore directly charged to the unaudited condensed 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 impacts 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

We have a substantial amount of debt for which we are required to make interest and principal payments. Interest on long-term financing is not a recoverable cost under our U.S. government contracts. As of February 28, 2013, we had $708.1 million of debt principal outstanding.

Retirement Benefits

We do not expect to make any cash contributions to our tax-qualified defined benefit pension plan until fiscal 2015 or later. In addition, under the Office of Federal Procurement Policy rules, we will recover portions of any required pension funding through our government contracts and we estimate that approximately 85% of our unfunded pension obligation as of February 28, 2013 is related to our government contracting business.

The funded status of the pension plan may be adversely 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 software supplier 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 approximately $45 million to $47 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 February 2013, we have expended $38.7 million of our implementation costs of which $30.7 million represents capital expenditures.


Table of Contents

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
                             February 28,       February 28,
                                 2013               2012           Change*
                                             (In millions)
               Net sales:   $        243.7      $       201.9     $    41.8

* Primary reason for change. The increase in net sales was primarily due to
(i) an increase of $32.6 million in the various Standard Missile programs primarily from increased deliveries on the Standard Missile-1 Regrain program and increased development activities for the Throttling Divert and Attitude Control System for the Standard Missile-3 Block IIA program and (ii) increased deliveries on the Terminal High Altitude Area Defense ("THAAD") program generating $14.1 million in additional net sales.

Our fiscal year ends on November 30 of each year. The fiscal year of our subsidiary, Aerojet, ends on the last Saturday of November. As a result of the 2013 calendar, Aerojet had 14 weeks of operation in the first quarter of fiscal 2013 compared to 13 weeks of operations in the first quarter of fiscal 2012. The additional week of operation in the first quarter of fiscal 2013 accounted for $27.8 million in additional net sales.

Sales in the first quarter of fiscal 2013 and 2012 directly and indirectly to the U.S. government and its agencies, including sales to our significant customers discussed above, totaled 96% and 95%, respectively, of net sales. The Standard Missile program, which is included in the U.S. government sales, represented 32% and 23% of net sales, respectively, for the first quarter of fiscal 2013 and 2012.

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



                                                       Three months ended
                                              February 28,            February 28,
                                                  2013                    2012               Change*
                                                     (In millions, except percentage amounts)
Cost of sales:                               $         217.5          $       173.9         $    43.6
Percentage of net sales                                 89.2 %                 86.1 %
Percentage of net sales excluding
retirement benefit expense                              84.9 %                 83.8 %
Components of cost of sales:
Cost of sales excluding retirement
benefit expense                              $         206.8          $       169.2         $    37.6
Retirement benefit expense                              10.7                    4.7               6.0

Cost of sales                                $         217.5          $       173.9         $    43.6

* Primary reason for change. The increase in costs of sales as a percentage of net sales was primarily driven by the following: (i) higher non-cash aerospace and defense retirement benefit plan expense (see discussion of "Retirement Benefit Plans" below); (ii) sales growth on lower margin missile defense programs; and (iii) cost growth on in-space propulsion programs.


Table of Contents

Selling, General and Administrative ("SG&A"):

                                                      Three months ended
                                             February 28,             February 28,
                                                 2013                     2012                Change*
                                                     (In millions, except percentage amounts)
SG&A:                                       $         12.3           $         10.3          $     2.0
Percentage of net sales                                5.0 %                    5.1 %
Components of SG&A:
SG&A excluding retirement benefit
expense and stock-based compensation                   3.9                      3.9                 -
Stock-based compensation                               3.2                      0.9                2.3
Retirement benefit expense                             5.2                      5.5               (0.3 )

SG&A                                        $         12.3           $         10.3          $     2.0

* Primary reason for change. The increase in SG&A expense was primarily due to an increase of $2.3 million in stock-based compensation as a result of increases in the fair value of the stock appreciation rights.

Depreciation and Amortization:



. . .
  Add GY to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for GY - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.