ITEM 1. BUSINESS
GenCorp Inc. (hereinafter the "Company" or "GenCorp") was incorporated in Ohio in 1915 as The General Tire & Rubber Company. The Company's operations are grouped into three business segments: its automotive business, its polymer products businesses and its aerospace and defense business, Aerojet-General Corporation ("Aerojet"). Businesses within these segments produce diverse products such as extruded and molded rubber products, vinyl-coated fabrics, vinyl woodgrain laminates, plastic films and laminates, plastic extrusions, decorative wallcoverings, single-ply roofing systems, tennis balls and racquetballs, styrene and butadiene based specialty latices, liquid and solid rocket propulsion systems, defense electronics and custom chemicals. As of November 30, 1996, the Company employed approximately 8,950 persons. (Financial information relating to the Company's business segments appears on pages 30 through 33 of this report.)
The Company and its businesses utilize the Corporate Technology Center in Akron, Ohio to develop new products and to improve existing products and processes. The Center has a key role in the Company's technical activity and supports research and development efforts across the Company. Corporate technology teams with the business units to create technology-enabled business opportunities through leveraging core competencies in cross-cutting application disciplines such as: (i) adhesives, coatings and printing inks; (ii) graphics and information technology; and (iii) materials selection, substitution and fabrication. A number of design and development centers at the segments focus on specific areas of the businesses and each plant has dedicated engineering services. (Information relating to research and development expense is set forth in Note E on page 20 of this report.)
The Company licenses technology and owns patents, which expire at various times, relating to its businesses. The loss or expiration of any one or more of them would not materially affect the business of the Company or any of its segments. Important trademarks of the Company are registered in its major marketing areas.
Although GenCorp's business is not seasonal in the traditional sense, the aerospace and defense business' revenues and earnings have tended to concentrate to some degree in the fourth quarter of each year reflecting delivery schedules associated with that segment's mix of contracts. The automotive business' revenues and earnings have tended to concentrate to some degree in the second and fourth quarters of the Company's fiscal year, generally as a consequence of seasonality in the automotive industry's build schedules and in response to customers' preparation for annual model changes.
Compliance with laws and regulations relating to the discharge of materials into the environment or the protection of the environment continues to affect many of the Company's operating facilities. A discussion of capital and noncapital environmental expenditures incurred in 1996 and forecasted for 1997 and 1998 for environmental compliance is included under the heading Environmental Matters on pages 11 and 12 of this report. Environmental matters discussed on pages 11 and 12 and in Note R beginning on page 28 of this report are incorporated herein by reference.
AUTOMOTIVE
Revenues of the Company's automotive business are principally derived from the development, manufacture and sale of highly engineered polymer products developed for the original equipment automotive market. Applications include extruded and molded rubber products for the vehicle body and window sealing.
The Vehicle Sealing business unit is a leading producer and supplier of extruded and molded rubber products engineered to prevent air, moisture and noise from penetrating windows, doors and other openings. This unit supplies products to the major domestic automotive companies for use in a wide variety of vehicles including the General Motors full-size pickup truck, the Suburban, Tahoe and Yukon, the small pickup truck, Blazer and Jimmy, the Ford Ranger small pickup, the Ford Explorer, the Mercedes-Benz All-Activity Vehicle and the General Motors Achieva, GrandAm and Skylark. The international presence for Vehicle Sealing continues to expand through its German subsidiary, HENNIGES, which produces high quality vehicle sealing
systems, encapsulated glass and molded rubber parts for major European customers including Volkswagen, Opel, BMW, Audi and Mercedes-Benz. The Vehicle Sealing business unit also manages a thermoplastics extrusion unit which is a major producer of gaskets, seals, trim and magnetic rolls for the appliance, automotive and office equipment industries.
On February 15, 1996, the Company completed the sale of its Vibration Control automotive business unit to BTR Antivibration Systems, Inc., a subsidiary of BTR plc. and on March 1, 1996 the sale of the Reinforced Plastics automotive business unit to Cambridge Industries, Inc. was completed.
On June 21, 1996 the Company completed the sale of its Automotive Occupant Sensor (AOS) business to the Robert Bosch Corporation. Consideration for the sale included the right to receive certain future payments based on the performance of the AOS business.
Automotive products are sold directly to Original Equipment Manufacturer (OEM) customers or their suppliers. Automotive customers include the major domestic automobile manufacturers, the loss of one or more of which would have a material adverse effect on this segment. Sales to General Motors in 1996 were at least ten percent of the Company's net sales.
The emergence of foreign vehicle manufacturing facilities in North America has significantly changed the automotive market in recent years. Competition based upon price, quality, service, technology and reputation is intense. Raw materials required by this segment are generally in good supply.
POLYMER PRODUCTS
Revenues of the Company's polymer products businesses are generated through the design, manufacture and sale of specialty polymers and decorative and building products for a variety of industrial, commercial and consumer markets. The polymer products segment has a broad base of commercial and industrial customers, the loss of any one of which would not have a material adverse effect on the segment's business.
Within the polymer products segment, the Decorative and Building Products Group's four businesses are: (i) wallcovering (commercial and residential), (ii) coated fabrics, (iii) films/laminates and (iv) building systems. This business unit is a major supplier of vinyl coated fabrics for the home furnishings and marine industries and for a variety of other industrial and commercial industries. It is also a leading seller of vinyl woodgrain laminates for furniture and consumer electronics and double-polished clear vinyl films for the office products and stationery markets. Decorative and engineered thermoplastic films for use in furniture, ceiling tiles, and other industrial applications are also produced and marketed. In addition, the production of single-ply membrane systems for a wide range of commercial roofing applications is a growing part of this business unit. Decorative and Building Products also offers a full line of brand name wallcoverings for the commercial industry for new construction and refurbishment, as well as residential wallcoverings for home applications.
Manufacturing for Decorative and Building Products is done in three locations: Auburn, Pennsylvania, Columbus, Mississippi and Jeanette, Pennsylvania. These highly efficient manufacturing operations include calendering, lamination, decorative printing and coating.
Specialty Polymers is another key business unit within the polymer products segment, producing and marketing a comprehensive line of specialty latices used as coatings for paper, as binding agents for carpets and nonwoven fabrics and as tire cord adhesives. Specialty Polymers also produces adhesives and in-mold coatings for automotive, truck and marine industries. In August 1996, the Lytron(R) polystyrene latex plastic pigment business was acquired from Morton International and in November 1996 a small, non-strategic urethane adhesives business was divested.
Penn Racquet Sports is the world's largest manufacturer of tennis balls and a leading producer of racquetballs. Tennis and racquetball accessories are purchased for resale under Penn trademarks. The Company also licenses the Penn trademark for use in production of a variety of sportswear products for sale worldwide.
Methods of distribution utilized by units within the polymer products business segment vary widely depending on the nature of the products and the industry or market served, with products being sold either
directly or through distributors. Penn products are marketed worldwide. The Company has an agreement with Head Racquet Sports to distribute Penn(R) tennis balls in France, Italy, Germany, Austria and Switzerland. In addition, the Company has entered into an exclusive distribution agreement with Babolat S. A. France for North American sale of racquet strings, professional stringing equipment and related accessories.
Competition based upon price, quality, service, technology and reputation is intense with respect to virtually all products marketed by this business segment and, to a substantial degree, upon design and styling in the wallcovering and most other coated fabrics and plastic film products. The Company believes that it continues to be a major competitor in the markets served by this segment, and that the raw materials required are generally available. To date, the Company has been successful in mitigating the effects of higher raw material costs through productivity improvements, operating cost reductions and product pricing. Raw material costs are very sensitive to, and dependent on, worldwide demand.
AEROSPACE AND DEFENSE
Aerojet develops, manufactures and markets solid and liquid rocket propulsion systems, smart munitions systems, electronic sensor surveillance systems, earth sensing systems and related defense products and services.
Aerojet has concentrated for the past several years on obtaining contracts that provide a balance between technology development and long-term production, as well as between defense and space programs. More recently, efforts have been focused on plans to expand Aerojet's custom chemicals business.
Aerospace and defense programs have included liquid and solid propulsion systems for Titan, Minuteman, Standard Missile, HAWK and Delta programs; satellite surveillance sensor systems; the Sense and Destroy Armor (SADARM) program; earth sensing systems; armaments; and ground data processing systems. In November 1996 Aerojet, as part of the Lockheed Martin team, received a multi-year cost plus award fee contract for the Space Based Infrared System (SBIRS). This contract could potentially result in $780 million of revenue for Aerojet through the year 2003. Aerojet also received a five year follow-on contract worth approximately $265 million for consolidation of the Defense Support Program (DSP) post production activity. SBIRS is scheduled to replace DSP around the year 2002 as the United States Air Force's next generation satellite surveillance system.
Aerojet is also active in a variety of new development and advanced programs related to defense and space applications including satellite, launch and armament systems. Aerojet believes that its experience in these areas will enable it to continue to participate in the future funding of these or similar programs. Most of the sales of this business are made directly or indirectly to agencies of the United States government pursuant to contracts or subcontracts which are subject to termination for convenience (with compensation) by the government in accordance with Federal Acquisition Regulations.
Aerojet's direct and indirect sales to the United States government and its agencies (principally the Department of Defense) were approximately $465 million in 1996, $490 million in 1995 and $578 million in 1994. Competition based upon price, technology, quality and service is intense for all products and services in this business segment and has increased with the decline in the national defense budget and the continuing consolidation of the industry. There are several other major companies with the technology and capacity to produce most of the products manufactured and sold by Aerojet, and in some areas, the government has its own manufacturing capabilities. Aerojet believes it remains competitive in its markets.
Backlog orders in the aerospace and defense businesses are commonplace and significant. Aerojet's contract backlog was approximately $2.0 billion at November 30, 1996, compared to $0.9 billion at November 30, 1995. Funded backlog, which includes only the amount of those contracts for which money has been authorized by Congress, totaled approximately $0.6 billion at November 30, 1996, compared with approximately $0.5 billion at November 30, 1995. Raw materials required by this segment are generally in adequate supply.
ITEM 2.
ITEM 2. PROPERTIES
Operating, manufacturing, research, design and/or marketing facilities of the Company and its businesses are set forth below.
FACILITIES
In addition, the Company and its businesses own and lease properties (primarily machinery, warehouse and office facilities) in various sections of the country for use in the ordinary course of its business. Data appearing in Note Q on page 28 of this report with respect to leased properties is incorporated herein by reference.
During 1996 the Company generally made effective use of its productive capacity. The Company believes that the quality and productive capacity of its properties are sufficient to maintain the Company's competitive position.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Information concerning legal proceedings, including proceedings relating to environmental matters, which appears in Note R beginning on page 28 of this report is incorporated herein by reference.
In April 1996, two class action suits were filed, one in Federal and one in state court, collectively alleging: (i) breach of collective bargaining/pension and insurance agreements under Section 301 of the Labor Management Relations Act; (ii) breach of fiduciary duties under ERISA; and (iii) breach of individual contracts, fraud and promissory estoppel under state law. Divine, et al. v. GenCorp Inc., U.S.D.C., N.D. Ind. 3:96CV0296AS; Divine, et al. v. GenCorp Inc., Wabash County, Ind. Cir. Ct. 85C01-9605-CP-201. The suits were filed on behalf of approximately 600 hourly retirees, spouses and surviving spouses from GenCorp's Wabash, Indiana facility who are seeking damages and injunctive relief to prevent proposed modifications to the GenCorp Hourly Retiree Medical Plan. The proposed modifications include increases to retiree co-payments and deductibles, retiree contributions once aggregate costs exceed specified cost caps, and changes to Medicare offsets, drug coverage and maximum benefit provisions. The modifications are being implemented to control escalating health care costs, and to limit liabilities under SFAS 106.
The Complaint filed in state court was removed to Federal court, and consolidated with U.S.D.C., N.D. Ind. 3:96CV0296AS. GenCorp filed a Motion for Summary Judgment and Opposition to Plaintiffs' Motion for Class Certification. On November 26, 1996, the court granted GenCorp's Motion for Summary Judgment on all counts, rendering the class certification issue moot. Plaintiffs have filed a Notice of Appeal to the U.S. Seventh Circuit Court of Appeals. Briefing is scheduled for completion by April 1, 1997.
The U.S. government frequently conducts investigations into allegedly illegal or unethical activity in the performance of defense contracts. Investigations of this nature are common to the aerospace and defense industries in which Aerojet participates and lawsuits may result; possible consequences may include civil and criminal fines and penalties, in some cases, double or treble damages, and suspension or debarment from future government contracting. Aerojet currently is subject to several U.S. government investigations regarding business practices and cost classification from which additional legal or administrative proceedings could result. While it is not possible to predict with certainty the outcome of any such investigation, the Company does not believe, based upon the information available at this time, that final resolution of any such matter will have a material adverse effect on its consolidated financial condition or result in its suspension or debarment as a government contractor.
The Company and its subsidiaries are presently engaged in other litigation, and additional litigation has been threatened. However, based upon information presently available, none of such other litigation is believed to constitute a "material pending legal proceeding" within the meaning of Item 103 of Regulation S-K (17 CFR Reg. 229.103) and the Instructions thereto.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended November 30, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is given as of January 31, 1997, and except as otherwise indicated, each individual has held the same office during the preceding five-year period.
John B. Yasinsky, age 57: Chairman of the Board (since March 1995), Chief Executive Officer and President (since July 1994); formerly President and Chief Operating Officer (since November 1993); previously Group President of Westinghouse Electric Corporation (since February 1993), President, Westinghouse Power Systems (from 1990 to 1993), Executive Vice President, Westinghouse, World Resources and Technology (from 1989 to 1990), and Executive Vice President, Westinghouse International (from 1987 to 1989).
Edward R. Dye, age 55: Secretary (since September 1988) and Assistant General Counsel (since January 1987); formerly Assistant Secretary (from November 1986 until September 1988), Associate General Counsel (from September 1985 until January 1987) and Counsel prior to September 1985.
Samuel W. Harmon, age 46: Senior Vice President, Human Resources (since February 1996); previously Vice President, Human Resources (from October 1995 until February 1996); formerly Vice President, Human Resources, AlliedSignal, Inc. for its European operations (since 1995) and for its Automotive Sector (from 1993 to 1995), and Group Director for the Heavy Duty Brake Division (from 1990 to 1993) and Director, Employee Relations for the Autolite Division (from 1987 to 1990).
Michael E. Hicks, age 38: Treasurer (since September 1994); formerly Director, Treasury for the Company (since 1989) and Manager, Cash and Banking (from 1988 to 1989).
James K. Lambert, age 46: Senior Vice President, Operations and Total Quality (since March 1996); formerly Vice President, Worldwide Manufacturing, AlliedSignal Automotive (since 1995), Vice President, Lean Manufacturing-Truck Brake Systems, North American Operations (from 1991 to 1995) and Director of European Operations, Bristol, England (from 1987 to 1991).
Nathaniel J. Mass, age 46: Senior Vice President, Strategic Growth (since June 1996); formerly Partner and Director of the Business Dynamics Center, McKinsey and Company (from 1994 to June 1996); Chief Executive Officer, Light Sciences Inc. (from 1991 to 1993) and Director of Worldwide Strategic Planning, Exxon Chemical Company (from 1988 to 1991).
Kevin M. McMullen, age 36: Vice President of the Company and President, Decorative and Building Products Group (since September 1996); previously General Manager, General Electric Corporation's Lighting Division (since 1991) and Senior Engagement Manager, McKinsey & Company (from 1985 to 1991).
P. David Mittiga, age 49: Vice President of the Company (since August 1994), and President of Decorative Films and Laminates, Coated Fabrics and Building Systems within Decorative and Building Products Group (since 1993); formerly President and Chief Executive Officer of Reneer Films Corporation (since 1989) and Marketing Manager of The Goodyear Tire & Rubber Company's Film Division (since 1986).
William R. Phillips, age 54: Senior Vice President, Law; General Counsel (since September 1996); previously Vice President, Law of Aerojet (since 1990) and General Counsel, Group Counsel and Manager Legal Operations, General Electric Aircraft Engines (from 1986 to 1989).
Roger I. Ramseier, age 60: Vice President of the Company (since February 1996 and from January 1989 to July 1994) and President of Aerojet (since January 1989); formerly Executive Vice President of the Company (from July 1994 to February 1996) and previously President of Aerojet TechSystems.
Wayne A. Smith, age 49: Vice President of the Company (since August 1994), also President of the Company's Vehicle Sealing business unit (since 1991); formerly General Manager of the Company's Welland, Ontario vehicle sealing plant (from 1986 to 1991) and Vice President-manufacturing (from 1985 to 1986).
Philip A. Spanninger, age 53: Vice President, International of the Company (since July 1994); formerly Vice President, International of the Company's automotive business (since 1988) and previously Director of Technology and Venture Management for The Goodyear Tire & Rubber Company.
D. Michael Steuert, age 48: Senior Vice President and Chief Financial Officer (since August 1994); formerly Vice President and Chief Financial Officer (since June 1990) and Treasurer (since May 1986), previously Vice President -- Finance and Planning (from May 1987 to June 1990) and Treasurer.
James W. Ward, age 54: Vice President of the Company (since August 1994), also President of Wallcovering within Decorative and Building Products Group (since 1989); formerly Vice President of contract sales/marketing of the Wallcovering Division (from 1986 to 1989).
Gregg R. Weida, age 49: Vice President of the Company (since August 1994), also President of Penn Racquet Sports (since 1991); formerly President of the Company's Plastic Films Division (from 1987 to 1991) and General Manager of the rigid plastics business (from 1986 to 1987).
Dalton I. Windham, age 51: Vice President of the Company (since August 1994), also President of the Company's Decorative and Building Products Manufacturing operations (since 1993); formerly Plant Manager of the Company's Columbus, Mississippi vinyl coated fabrics plant (from 1987 to 1993) and Technical Director (from 1980 to 1987).
Rosemary Younts, age 41: Senior Vice President, Communications (since February 1996); previously Vice President, Communications (since January 1995), Director of Communications (from 1993 to 1995) and various communications positions with Aerojet (from 1984 to 1993).
Marvin W. Zima, age 59: Vice President of the Company (since August 1994), also President of the Company's Specialty Polymers business unit (since 1991); formerly President and Chief Executive Officer of Uniroyal Engineered Products (from 1987 to 1991) and various other management positions with Uniroyal (from 1982 to 1987).
The Company's executive officers generally hold terms of office of one year and/or until their successors are elected.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York and Chicago Stock Exchanges. At December 31, 1996, there were approximately 13,800 holders of record of the Company's common stock. During 1996, 1995 and 1994, the Company paid quarterly cash dividends on common stock of $.15 per share. Information regarding the high and low quarterly sales prices of common stock for the past two years is contained in the Quarterly Financial Data (Unaudited) which appears on page 34 of this report and is incorporated herein by reference.
Information concerning long-term debt, including restrictions and provisions relating to distributions and cash dividends on the Company's common stock, appears in Note L beginning on page 25 of this report and is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Financial data required under this section appears on page 35 of this report and is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sales for continuing operations in 1996 totaled $1.5 billion, essentially flat with 1995. Segment operating profit for continuing operations, excluding unusual items in both 1996 and 1995, improved to $139 million from $109 million, a 28 percent improvement over 1995 performance. Net income for continuing operations, excluding unusual items in both 1996 and 1995, improved to $54 million from $39 million, a 38 percent improvement over 1995 performance. Earnings per share for continuing operations, excluding unusual items, improved to $1.44 in 1996 from $1.11 in 1995, on a fully diluted basis.
Total sales for GenCorp in 1996 decreased to $1.5 billion from $1.8 billion in 1995 primarily due to the divestiture of the Vibration Control and Reinforced Plastics business units. Total segment operating profit, including unusual items, increased to $120 million in 1996 from $117 million in 1995, a 3 percent improvement. Net income improved to $42 million in 1996 compared to $38 million in 1995 or $1.15 per share compared to $1.10 per share for fully diluted earnings per share in 1996 and 1995, respectively.
Interest expense in 1996 was $27 million compared to $34 million in 1995. Interest expense was lower due to lower average interest rates and a lower average level of debt outstanding throughout the year.
The Company recorded net corporate other expense of $7 million in 1996 as compared to net corporate other income of $6 million in 1995. The $13 million variance is primarily due to continuing pension and medical costs of divested business units, litigation costs related to environmental matters and provision for long-term incentive programs.
UNUSUAL ITEMS
During 1996, the Company recognized net unusual charges of $42 million. These charges included a provision of $15 million for the Voluntary Early Retirement Incentive Program for eligible employees at the Company's Fairlawn, Ohio headquarters and Corporate Technology Center, the net loss on the sale of divested businesses of $10 million (see Note D), a provision for environmental remediation costs associated with the Company's Lawrence, Massachusetts facility of $8 million (see Note R), a restructuring charge of $3 million for the Company's Plastic Extrusions business unit, a charge of $2 million to reduce fixed assets to net realizable value and a provision of $4 million for pension and other related matters.
During 1995, the Company recognized a net charge of $5 million for unusual items. This charge included $10 million for the settlement of a lawsuit and other matters related to discontinued businesses partially offset by gains of $5 million from the divestitures of the Company's Rigid Plastics business and a resort property.
BUSINESS ACQUISITIONS AND DIVESTITURES
On February 15, 1996, the Company completed the sale of substantially all of the assets and certain liabilities of its Vibration Control business unit to BTR Antivibration Systems, Inc., a subsidiary of BTR plc. for an aggregate consideration of approximately $84 million paid in cash.
On March 1, 1996, the Company completed the sale of substantially all of the assets and certain liabilities of its Reinforced Plastics business unit to Cambridge Industries, Inc. of Madison Heights, Michigan for an aggregate consideration of approximately $42 million, of which approximately $18 million was paid in cash at the closing, approximately $14 million of which was covered by delivery of a Subordinated Promissory Note of Cambridge Industries Holdings, Inc. and approximately $10 million of which was collected through the retention of receivables. The sale was effective as of February 29, 1996.
On June 21, 1996, the Company completed the sale of substantially all of the assets and certain liabilities of its Automotive Occupant Sensor (AOS) business to Robert Bosch Corporation for an aggregate consideration of approximately $3 million paid in cash at the closing and the right to receive certain additional payments based on the future performance of the AOS business.
On November 19, 1996, the Company completed the sale of substantially all of the assets and certain liabilities of its structural urethane adhesives business to Ashland Inc. for an aggregate consideration of approximately $4 million paid in cash at the closing.
On August 23, 1996, the Company purchased the Lytron(R) polystyrene latex plastic pigment business from Morton International for approximately $4 million. Under the agreement, the Company acquired the Lytron(R) brand name, technology, customer base and certain other assets. Lytron(R) plastic pigments are used primarily in paper and paperboard coatings to improve gloss, brightness, opacity and printability performance.
In 1995, the Company sold its Westward Look Resort and Rigid Plastics business for $21 million which resulted in gains of $5 million.
FINANCIAL RESOURCES AND CAPITAL SPENDING
Cash flow provided from operating activities for fiscal 1996 was $59 million compared to $83 million in 1995 and $133 million in 1994. The decrease in 1996 was primarily due to taxes paid for divested business units, an increase in government contract inventories, payment of a discontinued operations lawsuit settlement and expenditures related to environmental matters and restructuring and early retirement programs. The decrease was partially offset by a federal income tax refund. The decrease in 1995 was primarily due to reductions of long-term liabilities for environmental and restructuring matters.
At November 30,1996, the Company's total debt was $306 million compared to $404 million at the end of 1995. The decrease in debt resulted from the 1996 divestiture proceeds and tax refund.
Capital expenditures were made principally for capacity expansion and asset replacement, cost reduction, safety and productivity improvements and environmental protection. Capital expenditures totaled $47 million in 1996 and $63 million in 1995 and 1994.
Management believes that funds generated from operations and existing borrowing capacity are adequate to finance planned capital expenditures, company-sponsored research and development programs and dividend payments to shareholders.
AEROSPACE AND DEFENSE
Sales in 1996 for Aerojet were $494 million, a decrease of 5 percent from 1995 sales of $520 million. The decrease was due to lower volume in the Titan and Standard Missile propulsion programs and Tube-Fired Optically Tracked Wire (TOW 2B) warhead program. The lower volume was partially offset by increased activity in the Advanced Meteorological Sounding Unit (AMSU), Space Based Infrared System (SBIRS) and Minuteman programs and in the Custom Chemicals product line. Also included in sales for 1995 was the final settlement of the Small ICBM contract.
During the fourth quarter of 1996, Aerojet received a multi-year cost plus award fee contract which could potentially generate $780 million of sales through the year 2003 for the SBIRS program. Aerojet also received a five year follow-on contract worth approximately $265 million for consolidation of Defense Support Program (DSP) post production activity. SBIRS is scheduled to replace DSP around the year 2002 as the U.S. Air Force's next generation satellite surveillance system.
Aerojet's segment operating profit in 1996 was $42 million, an increase of 40 percent compared to $30 million in 1995. The increase was due to improved contract performance and lower health care costs. Aerojet's operating margin improved to 8.5 percent in 1996 from 5.8 percent in 1995.
Contract backlog for Aerojet was $2.0 billion at the end of 1996, compared to $0.9 billion at the end of 1995 and $1.1 billion in 1994. The significant increase in contract backlog was due to the award of the SBIRS and DSP contracts from the U.S. Air Force. Funded backlog, which includes only the amount of those contracts for which money has been directly authorized by Congress, totaled $0.6 billion at the end of 1996 compared to $0.5 billion at the end of 1995 and $0.6 billion in 1994.
Outlook
Aerojet's contract base has continued to stabilize as the overall business climate has improved. The SBIRS and DSP awards and other program developments and awards in the last year will favorably affect all major product areas in 1997 and beyond.
1995 Results
Sales in 1995 were $520 million, a decrease of 12 percent from 1994 sales of $594 million. The decrease was due to the 1994 sale of the medium caliber ammunition and air dispensed munition businesses and the termination of the Advanced Solid Rocket Motor (ASRM) program in 1994.
Segment operating profit in 1995 was $30 million as compared to $25 million in 1994, excluding an unusual charge of $68 million in 1994 for environmental matters at the Sacramento, California facility. The increase was due to the effect of charges taken in 1994 for cost growth associated with a meteorological sensor program, a tactical rocket propulsion program and the projected loss on the disposal of a small business, net of a gain on the settlement of the early termination of the ASRM program.
AUTOMOTIVE
Sales and segment operating profit for the continuing automotive business segment in 1996 totaled $400 million and $25 million, respectively, compared to $410 million and $23 million in 1995. Sales and operating profit for the Vehicle Sealing group were adversely affected by the 17 day General Motors strike in March 1996 as well as the General Motors Canada strike in October 1996. Sales volume and operating profit for the Plastic Extrusions business were affected by lower volume and competitive pricing pressure in the refrigerator gasket business.
Total sales and operating profit, excluding unusual items in 1996, were $448 million and $19 million, respectively, compared to $662 million and $25 million in 1995. The decrease in sales and operating profit was primarily due to the divestiture of the Vibration Control and Reinforced Plastics business units in the first quarter of 1996.
Outlook
Sales in 1997 will be dependent on the level of vehicle production in North American and European markets and segment operating profit should be favorably affected by continued aggressive cost reduction programs. During 1996, the Vehicle Sealing business received awards for future programs including the GM large truck and passenger car programs, the 1998 Honda Accord, the Ford Explorer replacement program, selected glass encapsulation applications for Volkswagen as well as the Company's first award from Saturn. These new awards are expected to favorably impact sales and segment operating profit in 1998 and beyond.
1995 Results
Sales totaled $662 million for 1995, an increase of 9 percent over 1994 sales of $605 million. The increase was due primarily to the inclusion of a full year of sales from HENNIGES. Segment operating profit in 1995 was $25 million, a decrease of $12 million from 1994 operating profit of $37 million, excluding an unusual charge of $4 million in 1994. The decrease was primarily due to declining domestic sales volume and increased raw material pricing.
POLYMER PRODUCTS
Sales decreased 3 percent to $573 million in 1996 from $590 million in 1995 due primarily to the sale of the Company's Rigid Plastics business. Continuing sales for Polymer Products were $573 million in 1996 compared to $569 million in 1995. Sales growth in the roofing and contract wallcovering product lines at Decorative and Building Products offset a sales volume decline at Specialty Polymers attributed to the softness of the paper industry and competitive pricing pressure. Penn Racquet Sports' sales were essentially even with last year.
Segment operating profit in 1996 was $72 million, a 24 percent increase over 1995 segment operating profit of $58 million, excluding an unusual gain of $4 million in 1995. Continuing segment operating profit was $56 million in 1995. The Specialty Polymers and Decorative and Building Products businesses led the earnings improvement. Specialty Polymers' operating profit increased due to cost reduction programs and lower raw material costs. At Decorative and Building Products, earnings improved due to aggressive manufacturing and operating cost reduction programs, favorable raw material costs and bad debt reduction. The earnings improvement at Decorative and Building Products and Specialty Polymers was partially offset by lower earnings at Penn Racquet Sports due to higher manufacturing expenses and lower tennis ball volume and prices in North America. Polymer Products' continuing operating margin improved to 12.6 percent in 1996 from 9.8 percent in 1995.
Outlook
Polymer Products should continue to maintain strong market positions in each of its businesses. Sales growth in 1997 will be dependent on the economic conditions of the market and the Company's progress toward its growth initiatives for the Polymer Products segment.
1995 Results
Sales for 1995 were $590 million, a 9 percent increase over 1994 sales of $541 million. Each business unit contributed to the increase in sales growth. Segment operating profit in 1995 was $58 million, excluding an unusual gain of $4 million, a 16 percent increase over 1994 segment operating profit of $50 million, excluding an unusual charge of $8 million. The earnings improvement was led by the Specialty Polymers and Penn Racquet Sports business units.
ENVIRONMENTAL MATTERS
GenCorp's policy is to conduct its businesses with due regard for the preservation and protection of the environment. The Company devotes a significant amount of resources and management attention to environmental matters and actively manages its ongoing processes to comply with extensive environmental laws and regulations. The Company is involved in the remediation of environmental conditions which resulted from previously accepted manufacturing and disposal practices that date back to the 1950s and 1960s at certain of its own plants. In addition, the Company has been designated a potentially responsible party, with other companies, at sites undergoing investigation and remediation.
In 1996, capital expenditures for projects related to the environment were approximately $11 million, compared to $5 million in 1995 and $6 million in 1994. The Company currently forecasts that capital expenditures for environmental projects will approximate $6 million and $4 million in 1997 and 1998, respectively. During 1996, noncapital expenditures for environmental compliance and protection totaled
$29 million of which $10 million was for recurring costs associated with managing hazardous substances and pollution abatement in ongoing operations and $19 million was for investigation and remediation efforts at other sites. Similar noncapital expenditures were $30 million and $33 million in 1995 and 1994, respectively. It is presently expected that noncapital environmental expenditures will increase slightly for the next several years.
The nature of environmental investigation and cleanup activities often makes it difficult to determine the timing and amount of any estimated future costs that may be required for remedial measures. However, the Company reviews these matters and accrues for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred and its proportionate share of the amount can be reasonably estimated. The Company's Consolidated Balance Sheet at November 30, 1996 reflects accruals of $260 million and amounts recoverable of $123 million from the U.S. government and other third parties for such costs.
The effect of resolution of environmental matters on results of operations cannot be predicted due to the uncertainty concerning both the amount and timing of future expenditures and future results of operations. However, management believes, on the basis of presently available information, that resolution of these matters will not materially affect liquidity, capital resources or the consolidated financial condition of the Company. The Company will continue its efforts to mitigate past and future costs through pursuit of claims for insurance coverage and continued investigation of new remediation alternatives and associated technologies. For additional discussion of environmental matters, refer to Note R -- Contingencies.
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information called for by this item is set forth beginning on the next page (page 13) of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in accountants or disagreements with the Company's independent accountants on accounting and financial disclosure matters during the Company's two most recent fiscal years or during any period subsequent to the date of the Company's most recent financial statements.
GENCORP INC.
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes to consolidated financial statements are an integral part of these statements.
GENCORP INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes to consolidated financial statements are an integral part of these statements.
GENCORP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes to consolidated financial statements are an integral part of these statements.
GENCORP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The accompanying notes to consolidated financial statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- The Company is a multinational manufacturing company operating primarily in the United States. Information on the Company's operations by segment and geographic area is provided in Note S.
CONSOLIDATION -- The consolidated financial statements of the Company include the accounts of the parent company and its majority-owned subsidiaries.
REVENUE RECOGNITION -- Generally, sales are recorded when products are shipped or services are rendered. Sales and income under most government fixed-price and fixed-price-incentive production type contracts are recorded as deliveries are made. For contracts where relatively few deliverable units are produced over a period of more than two years, revenue and income are recognized at the completion of measurable tasks rather than upon delivery of the individual units. Sales under cost reimbursement contracts are recorded as costs are incurred and include estimated earned fees in the proportion that costs incurred to date bear to total estimated costs. Certain government contracts contain cost or performance incentive provisions which provide for increased or decreased fees or profits based upon actual performance against established targets or other criteria. Penalties and cost incentives are considered in estimated sales and profit rates. Performance incentives are recorded when measurable or when awards are made and provisions for estimated losses on contracts are recorded when such losses become evident.
USE OF ESTIMATES -- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
ENVIRONMENTAL COSTS -- The Company expenses, on a current basis, recurring costs associated with managing hazardous substances and pollution in ongoing operations. The Company also accrues for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred and its proportionate share of the amount can be reasonably estimated. The Company recognizes amounts recoverable from insurance carriers, the U.S. government or other third parties, when the collection of such amounts becomes probable. Pursuant to U.S. government agreements or regulations, the Company will recover a substantial portion of its environmental costs for its aerospace and defense business segment through the establishment of prices of the Company's products and services sold to the U.S. government. With the exception of applicable amounts representing current assets and liabilities, recoverable amounts and accrued costs are included in other assets and other long-term liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The Company's cash and cash equivalents and short and long-term bank debt bear interest at market rates and therefore their carrying values approximate their fair values. The fair value of the Company's debentures is based on the closing market price of such debt at November 30, 1996.
INVENTORIES -- Inventories are stated at the lower of cost or market. The automotive and polymer products segments use the last-in, first-out method. The aerospace and defense segment uses the average cost method. Foreign operations use the first-in, first-out method.
Work-in-process on fixed-price contracts includes direct costs and overhead less the estimated average cost of deliveries. Appropriate general and administrative costs are allocated to government and certain other contracts.
PROPERTY, PLANT AND EQUIPMENT -- Refurbishment costs are capitalized in the property accounts whereas ordinary maintenance and repair costs are expensed as incurred. Depreciation for financial reporting is computed principally by accelerated methods for the aerospace and defense business segment and by the straight-line method for the remainder of the Company.
GOODWILL -- The excess of purchase price over the value of net assets acquired is included in other assets and is amortized on a straight-line basis over a 35 year period or less.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
INCOME TAXES -- Deferred income taxes are provided for temporary differences between the carrying amount of assets and liabilities for financial reporting and income tax purposes.
STATEMENTS OF CASH FLOWS -- For the purposes of the statements of cash flows, all highly liquid debt instruments purchased with an original maturity of three months or less are considered to be cash equivalents.
EARNINGS PER SHARE -- Primary earnings per share of common stock are calculated by dividing net income by the weighted average number of common shares outstanding adjusted for the inclusion of stock options and shares to be issued under other stock-based compensation programs. For fully diluted earnings per share, net income and shares outstanding have also been adjusted as if the Company's $115,000,000 8% Convertible Subordinated Debentures Due August 1, 2002 had been converted. (See Note L for further information regarding the debentures.)
STOCK OPTIONS -- The Company accounts for stock options (see Note O) in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and the Company intends to continue using this method.
RECLASSIFICATIONS -- Certain reclassifications have been made to conform prior year's data to the current presentation.
NOTE B -- UNUSUAL ITEMS
During 1996, the Company recognized net unusual charges of $42 million. These charges included a provision of $15 million for the Voluntary Early Retirement Incentive Program for eligible employees at the Company's Fairlawn, Ohio headquarters and Corporate Technology Center, the net loss on the sale of divested businesses of $10 million (see Note D), a provision for environmental remediation costs associated with the Company's Lawrence, Massachusetts facility of $8 million (see Note R), a restructuring charge of $3 million for the Company's Plastic Extrusions business unit, a charge of $2 million to reduce fixed assets to net realizable value and a provision of $4 million related to pension and other related matters.
During 1995, the Company recognized a net charge of $5 million for unusual items. This charge included $10 million for the settlement of a lawsuit and other matters related to discontinued businesses partially offset by gains of $5 million from the divestitures of the Company's Rigid Plastics business and a resort property.
During 1994, the Company recognized net unusual charges of $83 million. These charges included provisions for environmental remediation costs at Aerojet's Sacramento, California facility of $68 million, environmental costs associated with other sites of $15 million, warranty costs related to discontinued products of $6 million, estimated costs for pending litigation of $5 million, write-downs of $8 million of fixed assets and investments to net realizable value and restructuring charges of $12 million. These provisions are net of $31 million of cash collected from insurers for recoveries of environmental costs incurred by the automotive and polymer products segments and a settlement of claims against an investment banking firm arising out of such firm's participation in a 1987 unsolicited tender offer for GenCorp's stock.
NOTE C -- ACCOUNTING CHANGES/NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The Company is not required to adopt SFAS 121 until fiscal 1997 and does not expect the implementation of this Statement to have a material impact on the consolidated financial statements of the Company.
During October 1996, the American Institute of Certified Public Accountants issued Statement of Position No. 96-1 "Environmental Remediation Liabilities" (SOP 96-1). The Statement provides authorita-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
tive guidance on the recognition, measurement, display and disclosure of environmental remediation liabilities. The Company is not required to implement the Statement until fiscal year 1998. Given that this Statement was recently issued in October 1996 and the number of environmental sites with which the Company is involved, the financial statement impact of its implementation has not yet been determined.
Effective December 1, 1993, the Company adopted the provisions of Statements of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106) and SFAS No. 109, "Accounting for Income Taxes" (SFAS 109).
Under SFAS 106, the Company elected to recognize immediately the transition obligation as a cumulative effect of an accounting change. This resulted in a charge of $196 million or $6.16 per share (after a reduction for income taxes of $131 million) in 1994. The cumulative effect of adopting SFAS 109 in 1994 was a charge of $17 million or $.53 per share.
NOTE D -- ACQUISITIONS AND DIVESTITURES
On February 15, 1996, the Company completed the sale of substantially all of the assets and certain liabilities of its Vibration Control business unit to BTR Antivibration Systems, Inc., a subsidiary of BTR plc. for an aggregate consideration of approximately $84 million paid in cash.
On March 1, 1996, the Company completed the sale of substantially all of the assets and certain liabilities of its Reinforced Plastics business unit to Cambridge Industries, Inc. of Madison Heights, Michigan for an aggregate consideration of approximately $42 million, of which approximately $18 million was paid in cash at the closing, approximately $14 million of which was covered by delivery of a Subordinated Promissory Note of Cambridge Industries Holdings, Inc. and approximately $10 million of which was collected through the retention of receivables. The sale was effective as of February 29, 1996.
On June 21, 1996, the Company completed the sale of substantially all of the assets and certain liabilities of its Automotive Occupant Sensor (AOS) business to the Robert Bosch Corporation for an aggregate consideration of approximately $3 million paid in cash at the closing and the right to receive certain additional payments based on the performance of the AOS business.
On November 19, 1996, the Company completed the sale of substantially all of the assets and certain liabilities of its structural urethane adhesive business to Ashland Inc. for an aggregate consideration of approximately $4 million paid in cash at the closing.
On August 23, 1996, the Company purchased the Lytron(R) polystyrene latex plastic pigment business from Morton International for approximately $4 million. Under the agreement, the Company acquired the Lytron(R) brand name, technology, customer base and certain other assets. Lytron(R) plastic pigments are used primarily in paper and paperboard coatings to improve gloss, brightness, opacity and printability performance. The acquisition was accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16.
In 1995, the Company sold its Westward Look Resort and Rigid Plastics business for $21 million which resulted in gains of $5 million.
The Company purchased an initial 24.5 percent equity interest in HENNIGES Elastomer- und Kunststofftechnik GmbH & Co. KG (HENNIGES) in July 1993. During 1994, the Company completed its acquisition of HENNIGES through two additional purchases of 24.5 percent in July 1994 and 51 percent in September 1994. The combined purchase price of the remaining 75.5 percent equity interest was approximately $22 million. The total acquisition cost for HENNIGES was approximately $40 million. The acquisition was accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16 and the investment was accounted for under the equity method until the Company acquired a majority equity interest. The financial statements of HENNIGES have been consolidated subsequent to such date. The acquisition resulted in goodwill of $19 million which is being amortized over 35 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In 1994, the Company sold its Aerojet Ordnance business' medium caliber ammunition and air dispensed munition business for $25 million which approximated net book value.
NOTE E -- RESEARCH AND DEVELOPMENT EXPENSE
Research and development (R&D) expense was $31 million in 1996, $38 million in 1995 and $42 million in 1994. R&D expense includes the costs of technical activities that are useful in developing new products, services, processes or techniques, as well as those expenses that may significantly improve existing products or processes.
Additional R&D expenditures which are funded under government contracts totaled $102 million in 1996, $76 million in 1995 and $72 million in 1994.
NOTE F -- INCOME TAXES
The income tax provision (benefit) consists of the following:
The difference between the statutory federal income tax rate and the effective tax rate is attributable to the following:
The Company reduced its 1996 income tax expense by $16 million due to the receipt of a federal income tax refund related primarily to interest on the timing of certain deductions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The table below is a summary of the significant components of the Company's deferred tax assets and liabilities as of November 30:
The balance sheets reflect deferred income taxes of $52 million and $30 million in prepaid expenses and other at November 30, 1996 and 1995, respectively. Included in other long-term assets for 1996 and 1995 are deferred income taxes of $156 million and $148 million, respectively. The majority of net operating losses (NOLs) and tax credit carryforwards have an indefinite carryforward period with the remaining portion expiring in years through 2007. Pretax income of foreign subsidiaries was $18 million in 1996 and $17 million in 1995 and 1994. Cash paid during the year for income taxes was $29 million in 1996, $28 million in 1995 and $23 million in 1994.
NOTE G -- ACCOUNTS RECEIVABLE
Unbilled receivables of $22 million and $24 million at November 30, 1996 and 1995, respectively, relating to long-term government contracts are included in accounts receivable from the U.S. government. Such amounts are billed either upon delivery of completed units or settlement of contracts. The unbilled receivables amount at November 30, 1996 includes $9 million expected to be collected in fiscal year 1997, and $13 million expected to be collected in subsequent years.
At year-end, the amount of commercial receivables was $132 million and $165 million for 1996 and 1995, respectively. Receivables for the automotive segment of $47 million and $81 million in 1996 and 1995, are due primarily from General Motors, Ford and Chrysler. The amount of U.S. government receivables was $75 million and $77 million for 1996 and 1995, respectively. Included in the 1996 and 1995 U.S. government receivable is $5 million and $7 million, respectively, for environmental remediation recovery (see Note R). The Company's receivables are generally unsecured and are not backed by collateral from its customers.
NOTE H -- INVENTORIES
Components of inventories are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Aerojet's inventories applicable to government and other contracts include general and administrative costs. The total of such costs incurred in 1996 and 1995 was $66 million and $61 million, respectively, and the amounts in inventory at the end of those years are estimated at $24 million and $21 million, respectively. These estimates are based on costs being removed from inventories on a basis proportional to the amounts of each cost element projected through completion of the contract.
Inventories using the LIFO method represented 73 percent of consolidated inventories at replacement cost at November 30, 1996 and 1995.
At November 30, 1996, Aerojet's contract accounting positions reflect the expected recovery of approximately $72 million in pending claims on numerous contracts with the U.S. government. These claims are in varying stages of negotiation, and relate principally to requests for price adjustments related to customer-caused issues or contracts terminated or canceled at the customer's convenience. Management believes that the resolution of these claims, in the aggregate, will not have a material effect on the consolidated financial condition of the Company.
NOTE I -- EMPLOYEE BENEFIT PLANS
Pension Plans
The Company has a number of defined benefit pension plans which cover substantially all salaried and hourly employees. Normal retirement age generally is 65, but certain plan provisions allow for earlier retirement. The Company's funding policy is consistent with the funding requirements of federal law. The pension plans provide for pension benefits, the amounts of which are calculated under formulas principally based on average earnings and length of service for salaried employees and under negotiated non-wage based formulas for hourly employees. The majority of the Company's plan assets are invested in short-term investments, listed stocks and bonds.
The components of net pension costs (income) are as follows:
During 1996, a special retirement program was offered to encourage early retirements among certain salaried employees. Also during 1996, the Company sold its Reinforced Plastics and Vibration Control business units. These events resulted in a curtailment charge of $15 million during the year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
ACTUARIAL ASSUMPTIONS
The Company also sponsors a number of defined contribution pension plans. Participation in these plans is available to substantially all salaried employees and to certain groups of hourly employees. Company contributions to these plans are based on either a percentage of employee contributions or on a specified amount per hour based on the provisions of each plan. The cost of these plans was $10 million in 1996, $11 million in 1995 and $12 million in 1994. The Company funds its contribution to the salaried plan with either GenCorp common stock or cash.
Health Care Plans
In addition to providing pension benefits, the Company currently provides certain health care and life insurance benefits to most retired employees in the United States with varied coverage by employee groups. The health care plans generally provide for cost sharing in the form of employee contributions, deductibles and coinsurance between the Company and its retirees. Retirees in certain other countries are provided similar benefits by plans sponsored by their governments. Effective December 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106) (see Note C).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The table below sets forth the components of the net periodic cost and benefit obligation for postretirement benefits other than pensions:
The projected benefit obligation and related benefit cost are determined by the application of relevant actuarial assumptions. The Company utilized a discount rate of 7.75 percent in 1996, 7.5 percent in 1995 and 8 percent in 1994. The effect of changing the discount rate was to increase the projected benefit obligation by $6 million. The Company anticipates that its health care cost trend rate will decline from 9 percent in 1996 to 6 percent in 2003, after which the trend rate is expected to stabilize. The effect of a one percentage point increase in the assumed health care cost trend rate for each future year would increase the benefit obligation at November 30, 1996 by $2 million and increase the aggregate of the service and interest cost components of net periodic cost by $0.2 million. Plan design changes decreased the projected benefit obligation by $9 million in 1996 and $69 million in 1995. Plan amendments are being amortized over the average remaining service of the affected active employees. A curtailment gain of $15 million and $5 million was included in the gain on the sale of the Company's various business units during 1996 and 1995, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE J -- INVESTMENTS AND OTHER ASSETS
The components of investments and other assets are as follows:
NOTE K -- ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIES
The components of accrued expenses are as follows:
The components of other long-term liabilities are as follows:
NOTE L -- LONG-TERM DEBT AND CREDIT LINES
Long-term debt and credit lines consist of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
On May 17, 1996, the Company entered into a new five-year unsecured $400 million revolving credit facility (Facility) which expires in May 2001. As of November 30, 1996, unused revolving lines of credit totaled $260 million. The Company pays a variable commitment fee, which is currently 1/4 of one percent, on the unused balance. Interest rates are variable, primarily based on LIBOR, and are currently at an average rate of 6.2 percent. The Facility contains various debt restrictions and provisions relating to net worth, interest coverage and debt to earnings before interest, taxes, depreciation and amortization (Debt/EBITDA) ratios. The Company is required to maintain consolidated net worth of at least $23.5 million. Proceeds from divested business units in 1996 were used to reduce outstanding debt.
The $115,000,000 8% Convertible Subordinated Debentures Due August 1, 2002 (Debentures) are redeemable at the option of the Company, in whole or in part, at any time on or after August 10, 1996. The Debentures are convertible at any time prior to maturity, unless previously redeemed, into shares of common stock at a conversion price of $16.065 per share (equivalent to a conversion rate of approximately 62.247 shares of common stock per $1,000 principal amount of Debentures) subject to adjustment in certain circumstances. The fair market value of the Debentures was $133 million at November 30, 1996.
At November 30, 1996, the Company had unsecured, uncommitted lines of credit with several banks for short-term borrowings aggregating $81 million, of which $22 million was outstanding. Borrowings under such lines generally bear interest at money market rates and are payable on demand. The Company also had outstanding letters of credit totaling $21 million at November 30, 1996.
The maturities of other debt decline from $4 million in 1997 to zero by 2001.
Cash paid during the year for interest was $28 million in 1996, $36 million in 1995 and $31 million in 1994.
NOTE M -- DISCONTINUED OPERATIONS
The consolidated balance sheets include various current and long-term reserves relating to operations discontinued in prior years. Those reserves include estimates for postretirement benefits, environmental matters and other accrued liabilities.
Discontinued operations reserves consist of the following:
NOTE N -- PREFERRED SHARE PURCHASE RIGHTS
During January 1997, the Board of Directors extended for ten additional years GenCorp's Shareholder Rights Plan, as amended (Plan). When the Plan was originally adopted in 1987, the Directors declared a dividend of one Preferred Share Purchase Right (Right) on each outstanding share of common stock, payable to shareholders of record on February 27, 1987. Rights outstanding at November 30, 1996 and 1995 were 33,479,647 and 33,402,449, respectively. The Plan, as amended effective December 1987 and extended in January 1997, provides that under certain circumstances each Right will entitle shareholders to buy one one- hundredth of a share of a new Series A Cumulative Preference Stock at an exercise price of $100. The Rights will be exercisable only if a person or group acquires 20 percent or more of GenCorp's common stock or announces a tender or exchange offer that will result in such person or group acquiring 30 percent or more of the common stock. GenCorp will be entitled to redeem the Rights at two cents per Right at any time until ten
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
days after a 20 percent position has been acquired (unless the Board elects to extend such time period, which in no event may exceed thirty days). If the Company is involved in certain transactions after the Rights become exercisable, a holder of Rights (other than Rights beneficially owned by a shareholder who has acquired 20 percent or more of GenCorp's common stock, which Rights become void) is entitled to buy a number of the acquiring company's common shares, or GenCorp's common stock, as the case may be, having a market value of twice the exercise price of each Right. A potential dilutive effect may exist upon the exercise of the Rights. The Rights under the extended Plan will expire February 18, 2007. Until a Right is exercised, the holder will have no rights as a stockholder of the Company including, without limitation, the right to vote as a stockholder or to receive dividends.
At November 30, 1996, 575,000 shares of $1 par value Series A Cumulative Preference Stock were reserved for issuance upon exercise of Preferred Share Purchase Rights.
NOTE O -- STOCK-BASED COMPENSATION PLANS
The GenCorp Inc. 1993 Stock Option Plan provides for an aggregate of 2,500,000 shares of the Company's common stock to be purchased pursuant to stock options or to be subject to stock appreciation rights (SARs) which may be granted to selected officers and key employees at prices equal to the market value of a share of common stock on the date of grant. In general, the options are exercisable in 25 percent increments at six months, one year, two years and three years from date of grant. No stock appreciation rights have been granted.
Information regarding this option plan is as follows:
The Stock Incentive Compensation Plan (SIC Plan) adopted in 1983 is based on a formula which values incentive awards payable in cash or stock based upon changes in the market value of the Company's common stock. The SIC Plan is compensatory, and compensation (income)/expense attributable to the SIC Plan was $(0.2) million in 1996, $(4) million in 1995 and $2 million in 1994. The liability for accrued stock incentive compensation was $2 million and $3 million at November 30, 1996 and 1995, respectively. During 1995, the Company converted certain interests under the SIC Plan from phantom shares payable in cash or stock into shares of common stock to be held in trust until payment pursuant to elections made at the time of grant. The conversion of this Plan resulted in a $5 million increase in shareholders' equity. No awards may be granted under the SIC Plan after March 1, 1993.
NOTE P -- COMMON STOCK
At November 30, 1996, 13,875,000 shares of $.10 par value common stock were reserved for future issuance for conversion of the 8% Convertible Subordinated Debentures, payments of the Retirement Savings Plan contributions and exercise of options or payments of awards under stock-based compensation plans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE Q -- LEASE COMMITMENTS
The Company and its subsidiaries lease certain manufacturing plant facilities, machinery and equipment and office buildings under long-term, noncancelable leases. The leases generally provide for renewal options ranging from five to ten years and require the Company to pay for utilities, insurance, taxes and maintenance. Rent expense was $9 million in 1996, $11 million in 1995 and $10 million in 1994. Future minimum commitments at November 30, 1996 for existing operating leases were $29 million with annual amounts declining from $7 million in 1997 to $3 million in 2000. The Company's current obligation for leases after 2000 is $9 million.
NOTE R -- CONTINGENCIES
ENVIRONMENTAL MATTERS
Sacramento, California -- In June 1989, the United States District Court approved a Partial Consent Decree (Decree) requiring Aerojet to conduct a Remedial Investigation/Feasibility Study (RI/FS) of Aerojet's Sacramento, California site and prepare an RI/FS report on specific environmental conditions present at the site and alternatives available to remedy such conditions. Aerojet also is required to pay for certain government oversight costs associated with compliance with the Decree.
In September 1993, Aerojet reached a settlement with the U.S. government whereby Aerojet recovered approximately $18 million for costs incurred at the site from July 1989 through November 1992. The settlement also provides that 65 percent of covered costs incurred after November 1992, net of insurance recoveries, will be added to the pricing of government contracts.
Aerojet has substantially completed its efforts under the Decree to determine the nature and extent of contamination at the facility and to identify the technologies that will likely be used to remediate the site. Based on available facts, existing technology and current environmental laws and regulations, Aerojet recorded a net $68 million charge in 1994 to remediate the site. These remediation costs are principally for design, construction and enhancement of groundwater and soil treatment facilities, ongoing project management and regulatory oversight, and are expected to be incurred over a period of approximately 20 years. This estimate will be subject to change as work progresses, additional experience is gained and environmental standards are revised.
At November 30, 1996, Aerojet had a reserve of $196 million for costs to complete the RI/FS and remediate the site and has recognized $114 million for probable future recoveries under the 1993 settlement agreement with the U.S. government.
Legal proceedings to obtain reimbursements of environmental costs from insurers are continuing.
Lawrence, Massachusetts -- The Company has studied remediation alternatives for its closed Lawrence, Massachusetts facility, which was contaminated with PCBs, and has begun site remediation and off-site disposal of debris. The Company has a reserve of $35 million for estimated decontamination and long-term operating and maintenance costs of this site. The reserve represents the Company's best estimate for the remaining remediation costs. Estimates of future remediation costs could range as high as $56 million depending on the results of future testing and the ultimate remediation alternatives undertaken at the site. The time frame for remediation is currently estimated to range from 7 to 12 years.
Muskegon, Michigan -- In a lawsuit filed by the U.S. Environmental Protection Agency (EPA), the United States District Court ruled in 1992 that Aerojet and its two inactive Cordova Chemical subsidiaries (Cordova) are liable for remediation of Cordova's Muskegon, Michigan site, along with a former owner/operator of an earlier chemical plant at the site. That decision has been appealed to the United States Court of Appeals.
In a separate action, Aerojet and Cordova won indemnification for the Muskegon site investigation and remediation costs from the State of Michigan in the state court of claims. The Michigan Court of Appeals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
affirmed on appeal, and the Michigan Supreme Court refused to hear the case. On December 23, 1996, the Michigan Supreme Court denied the State's motion for reconsideration. As a result, the Company believes that most of the $50 million to $100 million in anticipated remediation costs will be paid by the State of Michigan and the former owner/operator of the site. In addition, Aerojet believes it has insurance coverage for the site.
San Gabriel Valley Basin, California -- Aerojet, through its Azusa facility, is considered to be a potentially responsible party (PRP) in the portion of the San Gabriel Valley Superfund Site known as the Baldwin Park Operable Unit (BPOU). Regulatory action involves possible regional groundwater remediation, site specific investigation and possible site cleanup.
Aerojet's investigation concluded that the principal groundwater contamination is upgradient of Aerojet's property and that only low concentrations of contaminants are present in the soils of Aerojet's presently and historically owned properties. The EPA contends that Aerojet is one of the four largest sources of groundwater contamination at the BPOU of the sixteen PRPs presently identified by the EPA. Aerojet contests the EPA's position regarding the source of contamination and the number of responsible PRPs.
The EPA has issued a Record of Decision requiring groundwater remediation for the BPOU, estimated to cost $47 million in non-recurring costs and $4 million to $5 million in annual operating expense. Aerojet is participating in an effort to develop an alternative "consensus" plan in which certain water supply entities would integrate the remedial requirements into a water supply project. If implemented, the consensus plan will provide federal funding for 25 percent of the non-recurring costs and additional funding from water supply entities receiving benefit from the project, thus reducing the PRPs' costs.
Aerojet's cost exposure cannot be estimated at this time. However, management believes, on the basis of presently available information, that resolution of this matter will not materially affect the consolidated financial condition of the Company. Among the factors considered by management are the following: the number of other viable PRPs; the potential for federal funding or cost sharing with water supply interests; Aerojet's site-specific investigation; and the fact that, to date, Aerojet's San Gabriel Valley costs are being recovered from the government in the pricing of Aerojet's contracts. Additionally, Aerojet has filed suit against its insurers for recovery of such costs.
Other Sites -- The Company is also currently involved, together with other companies, in 28 other Superfund and non-superfund remediation sites. In many instances, the Company's liability and proportionate share of costs have not been determined largely due to uncertainties as to the nature and extent of site conditions and the Company's involvement. While government agencies frequently claim PRPs are jointly and severally liable at such sites, in the Company's experience, interim and final allocations of liability costs are generally made based on relative contributions of waste. Based on the Company's previous experience, its allocated share has frequently been minimal, in many instances less than 1 percent. The Company has reserves of approximately $16 million as of November 30, 1996 which it believes are sufficient to cover its best estimate of its share of the environmental remediation costs at these other sites. Also, the Company is seeking recovery of its costs from its insurers.
ENVIRONMENTAL SUMMARY
In regard to the sites discussed above, management believes, on the basis of presently available information, that resolution of these matters will not materially affect liquidity, capital resources or the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted due to the uncertainty concerning both the amount and timing of future expenditures and future results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
OTHER LEGAL MATTERS
In August 1991, Olin Corporation (Olin) advised GenCorp that Olin believed GenCorp to be jointly and severally liable for certain Superfund remediation costs, estimated by Olin to be $70 million, associated with a former Olin manufacturing facility and waste disposal sites in Ashtabula County, Ohio.
In 1993, GenCorp sought declaratory judgment in the United States District Court for the Northern District of Ohio that the Company is not responsible for environmental remediation costs associated with the former Olin facility and Superfund sites. Olin counterclaimed seeking a judgment that GenCorp is jointly and severally liable for a share of remediation costs.
In late 1995, the Court hearing on the issue of joint and several liability was completed, and in August 1996 the Court held hearings relative to allocation. The Court has not yet rendered a decision. If the Court finds GenCorp is liable, subsequent trial phases will address damages.
The Company is vigorously litigating this matter and believes that it has meritorious defenses to Olin's claims. While there can be no certainty regarding the outcome of any litigation, in the opinion of management, after reviewing the information currently available with respect to this matter and consulting with the Company's counsel, any liability which may ultimately be incurred will not materially affect the consolidated financial condition of the Company.
The Company and its subsidiaries are subject to various other legal actions, governmental investigations, and proceedings relating to a wide range of matters in addition to those discussed above. In the opinion of management, after reviewing the information which is currently available with respect to such matters and consulting with the Company's counsel, any liability which may ultimately be incurred with respect to these additional matters will not materially affect the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted because any such effect depends on both future results of operations and the amount and timing of the resolution of such matters.
NOTE S -- BUSINESS SEGMENT INFORMATION
The aerospace and defense business segment designs, develops and manufactures propulsion systems and electronic sensor systems for the Department of Defense and National Aeronautics and Space Administration. Its primary businesses are Propulsion and Electronic Systems.
The automotive business segment designs and produces extruded rubber for vehicle body and window sealing systems for the domestic, transplant and foreign automotive manufacturers.
The polymer products business segment designs and manufactures specialty polymers and decorative and building products for consumers and industry. The segment is a leading producer of polymer-based products and operates three businesses: Decorative and Building Products, Penn Racquet Sports and Specialty Polymers. The principal markets include the paper industry, residential and commercial construction and the sporting goods industry, as well as varied consumer and industrial markets that demand a broad range of thermoplastic products.
GenCorp sales in 1996, 1995 and 1994 to the U.S. government and its agencies (principally the Department of Defense) totaled $466 million, $490 million and $578 million, respectively, and were generated almost entirely by the aerospace and defense business segment. Sales to General Motors, primarily by the automotive business segment, of $170 million in 1996, $286 million in 1995 and $281 million in 1994 were at least 10 percent of the Company's net sales. Intersegment sales were not material.
Segment operating profit represents net sales less applicable costs, expenses and provisions for restructuring and unusual items relating to operations. Segment operating profit excludes corporate income and expenses, provisions for unusual items, interest expense and income taxes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In 1996, the Company recognized an unusual loss of $13 million. The loss consisted of $14 million from the divestiture of its Vibration Control and Reinforced Plastics businesses and a provision of $3 million for the restructuring of its Plastic Extrusions business unit offset by a gain of $4 million from the sale of its structural urethane business. The Vibration Control and Reinforced Plastics businesses were part of the automotive business segment. The Plastic Extrusions business unit is currently part of the automotive business segment. The structural urethane business was part of the polymer products business segment.
In 1995, the Company recognized a net unusual gain of $4 million from the divestiture of its Rigid Plastics business. The Rigid Plastics unit was part of the polymer products business segment.
In 1994, the Company recognized net unusual charges of $83 million, of which $80 million related to the Company's three business segments as follows:
Identifiable assets are those assets that are used by the business segments and exclude corporate assets consisting principally of cash and marketable securities, certain investments and headquarters' fixed assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
GEOGRAPHIC SEGMENTS
GenCorp's operations are located primarily in Canada, Europe and the United States. Inter-area sales are not significant to the total revenue of any geographic area. Unusual items included in operating profit pertained to United States operations.
GENCORP INC.
BUSINESS SEGMENT INFORMATION
GENCORP INC.
QUARTERLY FINANCIAL DATA (UNAUDITED)
CAPITAL STOCK
The Company's common stock is listed on the New York and Chicago Stock Exchanges. At November 30, 1996 and December 31, 1996, there were approximately 13,800 holders of record of the Company's common stock. During 1996, 1995 and 1994, the Company paid quarterly cash dividends on common stock of $.15 per share.
GENCORP INC.
SUMMARY OF SELECTED FINANCIAL DATA
* Prior to 1993, the Company recorded environmental liabilities net of probable future recoveries from third parties.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of GenCorp Inc.:
We have audited the accompanying consolidated balance sheets of GenCorp Inc. as of November 30, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended November 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of GenCorp Inc. at November 30, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 1996, in conformity with generally accepted accounting principles.
As discussed in Note C to the consolidated financial statements, in 1994 the Company changed its method of accounting for postretirement benefits other than pensions and income taxes.
Ernst & Young LLP
Akron, Ohio January 9, 1997
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to nominees who will stand for election as a director of the Company at the March 26, 1997 Annual Meeting of Shareholders is set forth on pages 2 and 3 of the Company's 1997 Proxy Statement and is incorporated herein by reference. Information with respect to directors of the Company whose terms extend beyond the March 26, 1997 Annual Meeting of Shareholders is set forth on pages 3 and 4 of the Company's 1997 Proxy Statement and is incorporated herein by reference.
Also, see Executive Officers of the Registrant on pages 6 and 7 of this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is set forth on pages 9 through 19 of the Company's 1997 Proxy Statement and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of certain beneficial owners and management is set forth on pages 5 and 6 of the Company's 1997 Proxy Statement and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain transactions and employment arrangements with management is set forth on pages 14 and 15 of the Company's 1997 Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
A list of financial statements and financial statement schedules is set forth in a separate section of this report beginning on page GC-1.
(a)(3) LISTING OF EXHIBITS
An index of exhibits begins on page -i- of this report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended November 30, 1996.
(c) EXHIBITS
The response to this portion of Item 14 is set forth in a separate section of this report immediately following the Exhibit Index.
(d) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted because they are inapplicable, not required by the instructions or the information is included in the consolidated financial statements or notes thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
February 13, 1997 By /s/ W. R. PHILLIPS ------------------------------- W. R. Phillips Senior Vice President, Law; General Counsel
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1)(2) AND (3), (c) AND (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT INDEX
CERTAIN EXHIBITS
FISCAL YEAR ENDED NOVEMBER 30, 1996
GENCORP INC.
FAIRLAWN, OHIO 44333-3300
GENCORP INC.
ITEM 14(a)(1) AND (2) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(2) FINANCIAL STATEMENT SCHEDULES:
All consolidated financial statement schedules are omitted because they are inapplicable, not required by the instructions or the information is included in the consolidated financial statements or notes thereto.
GC-1
CONSENT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors GenCorp Inc.
We consent to the incorporation by reference in the Prospectuses constituting part of GenCorp Inc.'s Registration Statements No. 33-61928, 33-28056 and 2-98730 on Form S-8, Post Effective Amendment No. 1 to Registration Statements No. 2-80440 and 2-83133 on Form S-8, and Post Effective Amendment No. 4 to Registration Statement No. 2-66840 on Form S-8 of our report dated January 9, 1997, with respect to the consolidated financial statements of GenCorp Inc. included in this Annual Report (Form 10-K) for the year ended November 30, 1996.
Ernst & Young LLP
Akron, Ohio February 13, 1997
GC-2
EXHIBIT INDEX
i
ii
iii