Aerojet Rocketdyne Holdings
GENCORP INC (Form: 10-Q, Received: 04/08/2013 06:02:44)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: February 28, 2013

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File Number 1-01520

 

 

GenCorp Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Ohio   34-0244000
(State of Incorporation)  

(I.R.S. Employer

Identification No.)

2001 Aerojet Road

Rancho Cordova, California

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

P.O. Box 537012

Sacramento, California

  95853-7012
(Mailing Address)   (Zip Code)

Registrant’s telephone number, including area code (916) 355-4000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

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

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

 

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

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

As of March 31, 2013, there were 60.5 million outstanding shares of our Common Stock, including redeemable common stock and unvested common shares, $0.10 par value.

 

 

 


Table of Contents

GenCorp Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended February 28, 2013

Table of Contents

 

Item

Number

       Page  
PART I — FINANCIAL INFORMATION   
1  

Financial Statements

     2   
2  

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

     27   
3  

Quantitative and Qualitative Disclosures About Market Risk

     42   
4  

Controls and Procedures

     42   
PART II — OTHER INFORMATION   
1  

Legal Proceedings

     43   
1A  

Risk Factors

     43   
2  

Unregistered Sales of Equity Securities and Use of Proceeds

     44   
3  

Defaults Upon Senior Securities

     44   
4  

Mine Safety Disclosures

     44   
5  

Other Information

     44   
6  

Exhibits

     44   
SIGNATURES   
 

Signatures

     45   
EXHIBIT INDEX   
 

Exhibit Index

     46   

 

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Table of Contents

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

GenCorp Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

     Three months ended  
     February 28,
2013
    February 28,
2012
 
     (In millions, except per share amounts)  

Net sales

   $ 243.7      $ 201.9   

Operating costs and expenses:

    

Cost of sales (exclusive of items shown separately below)

     217.5        173.9   

Selling, general and administrative

     12.3        10.3   

Depreciation and amortization

     6.1        5.3   

Other expense, net

     5.9        1.9   
  

 

 

   

 

 

 

Total operating costs and expenses

     241.8        191.4   

Operating income

     1.9        10.5   

Non-operating (income) and expense:

    

Interest income

     (0.1     (0.2

Interest expense

     11.2        6.0   
  

 

 

   

 

 

 

Total non-operating expenses, net

     11.1        5.8   
  

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (9.2     4.7   

Income tax provision

     4.9        2.3   
  

 

 

   

 

 

 

(Loss) income from continuing operations

     (14.1     2.4   

Income from discontinued operations, net of income taxes

     0.1        —    
  

 

 

   

 

 

 

Net (loss) income

   $ (14.0   $ 2.4   
  

 

 

   

 

 

 

(Loss) Income Per Share of Common Stock

    

Basic and diluted:

    

(Loss) income per share from continuing operations

   $ (0.24   $ 0.04   

Income per share from discontinued operations, net of income taxes

     —         —    
  

 

 

   

 

 

 

Net (loss) income per share

   $ (0.24   $ 0.04   
  

 

 

   

 

 

 

Weighted average shares of common stock outstanding

     59.3        58.8   
  

 

 

   

 

 

 

Weighted average shares of common stock outstanding, assuming dilution

     59.3        58.9   
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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GenCorp Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Three months ended  
     February 28,
2013
    February 28,
2012
 
     (In millions)  

Net (loss) income

   $ (14.0   $ 2.4   

Other comprehensive income:

    

Amortization of actuarial losses, net

     22.9        14.7   
  

 

 

   

 

 

 

Comprehensive income

   $ 8.9      $ 17.1   
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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GenCorp Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

     February 28,
2013
    November 30,
2012
 
     (In millions, except per share and share amounts)  
ASSETS   

Current Assets

    

Cash and cash equivalents

   $ 140.7      $ 162.1   

Restricted cash

     6.0        —     

Accounts receivable

     120.6        111.5   

Inventories

     58.7        46.9   

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

     23.3        22.3   

Receivable from Northrop Grumman Corporation (“Northrop”)

     6.0        6.0   

Other receivables, prepaid expenses and other

     9.1        16.8   

Income taxes

     —          2.5   
  

 

 

   

 

 

 

Total Current Assets

     364.4        368.1   

Noncurrent Assets

    

Restricted cash

     460.0        —     

Property, plant and equipment, net

     147.8        143.9   

Real estate held for entitlement and leasing

     71.0        70.2   

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

     102.0        107.9   

Receivable from Northrop

     68.8        69.3   

Goodwill

     94.9        94.9   

Intangible assets

     13.5        13.9   

Other noncurrent assets, net

     62.8        51.1   
  

 

 

   

 

 

 

Total Noncurrent Assets

     1,020.8        551.2   
  

 

 

   

 

 

 

Total Assets

   $ 1,385.2      $ 919.3   
  

 

 

   

 

 

 
LIABILITIES, REDEEMABLE COMMON STOCK, AND SHAREHOLDERS’ DEFICIT   

Current Liabilities

    

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

   $ 2.8      $ 2.7   

Accounts payable

     58.6        56.1   

Reserves for environmental remediation costs

     40.9        39.5   

Postretirement medical and life benefits

     7.5        7.5   

Advance payments on contracts

     87.6        100.1   

Income taxes

     0.8        —     

Deferred income taxes

     10.1        9.4   

Other current liabilities

     124.1        103.3   
  

 

 

   

 

 

 

Total Current Liabilities

     332.4        318.6   

Noncurrent Liabilities

    

Senior debt

     44.4        45.0   

Second-priority senior notes

     460.0        —     

Convertible subordinated notes

     200.2        200.2   

Other debt

     0.7        0.8   

Deferred income taxes

     2.4        2.2   

Reserves for environmental remediation costs

     142.9        150.0   

Pension benefits

     446.8        454.5   

Postretirement medical and life benefits

     67.5        68.3   

Other noncurrent liabilities

     67.0        68.5   
  

 

 

   

 

 

 

Total Noncurrent Liabilities

     1,431.9        989.5   
  

 

 

   

 

 

 

Total Liabilities

     1,764.3        1,308.1   

Commitments and contingencies (Note 7)

    

Redeemable common stock, par value of $0.10; 0.3 million shares issued and outstanding as of February 28, 2013; 0.4 million shares issued and outstanding as of November 30, 2012

     3.0        3.9   

Shareholders’ Deficit

    

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

     —          —     

Common stock, par value of $0.10; 150.0 million shares authorized; 59.1 million shares issued and outstanding as of February 28, 2013; 58.9 million shares issued and outstanding as of November 30, 2012

     5.9        5.9   

Other capital

     271.3        269.6   

Accumulated deficit

     (195.9     (181.9

Accumulated other comprehensive loss, net of income taxes

     (463.4     (486.3
  

 

 

   

 

 

 

Total Shareholders’ Deficit

     (382.1     (392.7
  

 

 

   

 

 

 

Total Liabilities, Redeemable Common Stock and Shareholders’ Deficit

   $ 1,385.2      $ 919.3   
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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GenCorp Inc.

Condensed Consolidated Statement of Shareholders’ Deficit

(Unaudited)

 

    

 

Common Stock

     Other
Capital
     Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss
    Total
Shareholders’
Deficit
 
     Shares      Amount            
     (In millions)  

November 30, 2012

     58.9       $ 5.9       $ 269.6       $ (181.9   $ (486.3   $ (392.7

Net loss

     —          —          —          (14.0     —         (14.0

Amortization of actuarial losses, net

     —          —          —          —         22.9        22.9   

Reclassification from redeemable common stock

     0.1         —          0.9         —         —         0.9   

Tax benefit on stock-based awards

     —          —          0.1         —         —         0.1   

Stock-based compensation and other, net

     0.1         —          0.7         —         —         0.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

February 28, 2013

     59.1       $ 5.9       $ 271.3       $ (195.9   $ (463.4   $ (382.1
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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GenCorp Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Three months ended  
     February 28,
2013
    February 28,
2012
 
     (In millions)  

Operating Activities

    

Net (loss) income

   $ (14.0   $ 2.4   

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

    

Income from discontinued operations, net of income taxes

     (0.1 )     —    

Depreciation and amortization

     6.1        5.3   

Amortization of debt discount and financing costs

     1.8        0.6   

Retirement benefit expense

     15.9        10.2   

Stock-based compensation

     3.2        0.9   

Tax benefit on stock-based awards

     (0.1     (0.1

Changes in assets and liabilities:

    

Accounts receivable

     (9.1     2.0   

Inventories

     (11.8     2.8   

Other receivables, prepaid expenses and other

     6.7        2.6   

Income tax receivable

     2.0        4.8   

Real estate held for entitlement and leasing

     (0.9     (0.7

Receivable from Northrop

     0.5        (0.5

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

     4.9        4.3   

Other noncurrent assets

     2.4        4.5   

Accounts payable

     2.5        (0.5

Postretirement medical and life benefits

     (1.4     (1.5

Advance payments on contracts

     (12.5     (3.8

Income taxes payable

     0.8        —     

Other current liabilities

     17.0        (8.3

Deferred income taxes

     0.9        0.9   

Reserves for environmental remediation costs

     (5.7     (3.7

Other noncurrent liabilities

     (2.1     (4.1
  

 

 

   

 

 

 

Net cash provided by continuing operations

     7.0        18.1   

Net cash used in discontinued operations

     (0.1     (0.1
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     6.9        18.0   

Investing Activities

    

Purchases of restricted cash investments

     (466.0     —    

Purchases of investments

     (0.5     —    

Capital expenditures

     (9.1     (3.6
  

 

 

   

 

 

 

Net Cash Used in Investing Activities

     (475.6     (3.6

Financing Activities

    

Proceeds from issuance of debt

     460.0        —    

Debt issuance and amendment costs

     (12.3     —    

Proceeds from shares issued under equity plans

     0.1        —    

Tax benefit on stock-based awards

     0.1        0.1   

Vendor financing repayments

     —          (0.4

Debt repayments

     (0.6     (0.7
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     447.3        (1.0
  

 

 

   

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

     (21.4     13.4   

Cash and Cash Equivalents at Beginning of Period

     162.1        188.0   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 140.7      $ 201.4   
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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GenCorp Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Basis of Presentation and Nature of Operations

GenCorp Inc. (“GenCorp” or the “Company”) has prepared the accompanying Unaudited Condensed Consolidated Financial Statements, including its accounts and the accounts of its wholly owned and majority-owned subsidiaries, in accordance with the instructions to Form 10-Q. The year-end condensed consolidated balance sheet was derived from audited financial statements but does not include all of the disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). These interim financial statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2012, as filed with the Securities and Exchange Commission (“SEC”). Certain reclassifications have been made to financial information for the prior year to conform to the current year’s presentation.

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

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

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

Real Estate — includes the activities of the Company’s wholly-owned subsidiary Easton Development Company, LLC (“Easton”) related to the re-zoning, entitlement, sale, and leasing of the Company’s excess real estate assets. The Company owns approximately 11,900 acres of land adjacent to U.S. Highway 50 between Rancho Cordova and Folsom, California east of Sacramento (“Sacramento Land”). The Company is currently in the process of seeking zoning changes and other governmental approvals on a portion of the Sacramento Land to optimize its value.

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

The first quarter of fiscal 2012 ended on February 29, 2012. For comparative presentation purposes, all accompanying financial statements and footnotes thereto have been shown as ended on February 28, 2012.

In July 2012, the Company 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 Rocketdyne Business is the largest liquid rocket propulsion designer, developer, and manufacturer in the U.S. 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 the Company’s senior credit facility (see Note 6). The Acquisition 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, the Company 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.

 

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The Company expects to incur substantial expenses in connection with the Acquisition and the integration of the 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 the Company’s 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   
  

 

 

 

As of November 30, 2012, the Company classified its LDACS program as assets held for sale (see Note 14).

On August 31, 2004, the Company completed the sale of its GDX Automotive (“GDX”) business. On November 30, 2005, the Company completed the sale of the Fine Chemicals business. The remaining subsidiaries after the sale of GDX Automotive, including Snappon SA, and the Fine Chemicals business are classified as discontinued operations in the Unaudited Condensed Consolidated Financial Statements (see Note 11).

A detailed description of the Company’s significant accounting policies can be found in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended November 30, 2012.

Recently Adopted Accounting Pronouncement

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

New Accounting Pronouncement

In February 2013, the FASB issued guidance on reporting of amounts reclassified out of accumulated other comprehensive income (“AOCI”). The guidance requires an entity to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. This guidance is applicable for the Company in the second quarter of fiscal 2013 prospectively, although early adoption is permitted. As the accounting standard will only impact disclosures, the new standard will not have an impact on the Company’s financial position, results of operations, or cash flows.

 

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Note 2. (Loss) Income Per Share of Common Stock

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

 

     Three months ended  
     February 28,
2013
    February 28,
2012 (1)
 
     (Dollars in millions, except per
share amounts; shares in thousands)
 

Numerator for Basic and Diluted EPS:

    

(Loss) income from continuing operations

   $ (14.1   $ 2.4   

Income from discontinued operations, net of income taxes

     0.1        —    
  

 

 

   

 

 

 

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

   $ (14.0   $ 2.4   
  

 

 

   

 

 

 

Denominator:

    

Basic weighted average shares

     59,292        58,831   

Effect of:

    

Employee stock options

     —         20   
  

 

 

   

 

 

 

Diluted weighted average shares

     59,292        58,851   
  

 

 

   

 

 

 

Basic and Diluted:

    

(Loss) income per share from continuing operations

   $ (0.24   $ 0.04   

Income per share from discontinued operations, net of income taxes

     —          —    
  

 

 

   

 

 

 

Net (loss) income per share

   $ (0.24   $ 0.04   
  

 

 

   

 

 

 

 

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

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

 

     Three months ended  
     February 28,
2013
     February 28,
2012
 
     (In thousands)  

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

     22,219         22,219   

Employee stock options

     714         1,055   

Unvested restricted shares

     1,246         735   
  

 

 

    

 

 

 

Total potentially dilutive securities

     24,179         24,009   
  

 

 

    

 

 

 

The Company’s 2  1 / 4 % Convertible Subordinated Debentures (the “2  1 / 4 % Debentures”) were not included in the computation of diluted earnings per share because the market price of the common stock did not exceed the conversion price and only the conversion premium for these debentures is settled in common shares.

 

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Note 3. Stock-Based Compensation

Total stock-based compensation expense by type of award for the first quarter of fiscal 2013 and 2012 was as follows:

 

     Three months ended  
     February 28,
2013
     February 28,
2012
 
     (In millions)  

Stock appreciation rights

   $ 2.5       $ 0.3   

Stock options

     —          0.1   

Restricted shares, service based

     0.5         0.4   

Restricted shares, performance based

     0.2         0.1   
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 3.2       $ 0.9   
  

 

 

    

 

 

 

Note 4. Income Taxes

The income tax provision for the first quarter of fiscal 2013 and 2012 was as follows:

 

     Three months ended  
     February 28,
2013
    February 28,
2012
 
     (In millions)  

Federal current expense

   $ 4.6      $ 0.9   

State current expense

     1.2        0.5   

Net deferred expense

     1.1        0.9   

Benefit of fiscal 2012 research credits

     (2.0     —    
  

 

 

   

 

 

 

Total income tax provision

   $ 4.9      $ 2.3   
  

 

 

   

 

 

 

A valuation allowance has been recorded to offset a substantial portion of the Company’s net deferred tax assets at February 28, 2013 and November 30, 2012 to reflect the uncertainty of realization (see discussion below). As of November 30, 2012, the valuation allowance was $288.1 million. Deferred tax assets and liabilities arise due to temporary differences in the basis of assets and liabilities between financial statement accounting and income tax based accounting. Changes in these temporary differences cause an increase or decrease to income taxes payable; however, net deferred tax balances do not change in direct proportion to the changes in the income tax payable due to the valuation allowance. This causes income tax expense to be higher than the expected federal statutory rate of 35%.

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

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

 

   

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

 

   

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

 

   

Projections of the Company’s future results which reflect uncertainty over its ability to generate taxable income principally due to: (i) increased periodic pension expense in fiscal 2013 due to a decline in the discount rate utilized to value the pension obligation associated with the Company’s defined benefit pension plan and (ii) the lack of objective, verifiable evidence to predict future aerospace and defense spending associated with the Budget Control Act of 2011, including which governmental spending accounts may be subject to sequestration, the percentage reduction with respect thereto, and the latitude agencies will have in selecting specific expenditures to cut.

As of February 28, 2013, the weight of the negative evidence, principally associated with the above uncertainties, outweighed the recent historical positive evidence regarding the likelihood that a substantial portion of the net deferred tax assets was realizable.

 

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Depending on the Company’s ability to continue to generate taxable income and the resolution of the above uncertainties favorably, it is possible that the valuation allowance could be released during fiscal 2013, which would materially and favorably affect the Company’s results of operations in the period of the reversal. Management will continue to evaluate the ability to realize the Company’s net deferred tax assets and the related valuation allowance on a quarterly basis.

Note 5. Balance Sheet Accounts

a. Fair Value of Financial Instruments

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

 

     Total      Fair value measurement at February 28, 2013  
        Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
     (In millions)  

Money market funds

   $ 615.6       $ 615.6       $ —        $ —    

 

     Total      Fair value measurement at November 30, 2012  
        Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
     (In millions)  

Money market funds

   $ 166.0       $ 166.0       $ —        $ —    

As of February 28, 2013, a summary of cash and cash equivalents and the grantor trust by investment type is as follows:

 

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

Cash and cash equivalents

   $ 140.7       $ 4.4       $ 136.3   

Restricted cash(1)

     466.0         —          466.0   

Grantor trust (included as a component of other current and noncurrent assets)

     13.3         —          13.3   
  

 

 

    

 

 

    

 

 

 
   $ 620.0       $ 4.4       $ 615.6   
  

 

 

    

 

 

    

 

 

 

 

(1)

As of February 28, 2013, the Company designated $466.0 million as restricted cash related to the cash collateralization of the 7  1 / 8 % Notes issued in January 2013 and related interest costs. See Note 6 for additional information.

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

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

 

     Fair Value      Principal Amount  
     February 28,
2013
     November 30,
2012
     February 28,
2013
     November 30,
2012
 
     (In millions)  

Term loan

   $ 46.9       $ 47.5       $ 46.9       $ 47.5   

7.125% Second-Priority Senior Secured Notes due 2021 (the “7   1 / 8 % Notes”)

     480.4         —           460.0         —     

4  1 / 16 % Debentures

     291.3         246.0         200.0         200.0   

Other debt

     1.2         1.2         1.2         1.2   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 819.8       $ 294.7       $ 708.1       $ 248.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The fair values of the 7  1 / 8 % Notes and 4  1 / 16 % Debentures were determined using broker quotes that are based on open markets of the Company’s debt securities as of February 28, 2013 and November 30, 2012 (both Level 2 securities). The fair value of the term loan and other debt was determined to approximate carrying value.

b. Accounts Receivable

 

     February 28,
2013
     November 30,
2012
 
     (In millions)  

Billed

   $ 63.4       $ 49.4   

Unbilled

     56.8         62.0   
  

 

 

    

 

 

 

Total receivables under long-term contracts

     120.2         111.4   

Other receivables

     0.4         0.1   
  

 

 

    

 

 

 

Accounts receivable

   $ 120.6       $ 111.5   
  

 

 

    

 

 

 

c. Inventories

 

     February 28,
2013
    November 30,
2012
 
     (In millions)  

Long-term contracts at average cost

   $ 281.9      $ 256.4   

Progress payments

     (223.5     (209.9
  

 

 

   

 

 

 

Total long-term contract inventories

     58.4        46.5   

Work in progress

     0.3        0.4   
  

 

 

   

 

 

 

Total other inventories

     0.3        0.4   
  

 

 

   

 

 

 

Inventories

   $ 58.7      $ 46.9   
  

 

 

   

 

 

 

d. Property, Plant and Equipment, net

 

     February 28,
2013
    November 30,
2012
 
     (In millions)  

Land

   $ 29.6      $ 29.6   

Buildings and improvements

     159.4        158.5   

Machinery and equipment

     345.0        343.5   

Construction-in-progress including capitalized enterprise resource planning expenditures of $30.7 million and $23.4 million as of February 28, 2013 and November 30, 2012

     42.0        36.9   
  

 

 

   

 

 

 
     576.0        568.5   

Less: accumulated depreciation

     (428.2     (424.6
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 147.8      $ 143.9   
  

 

 

   

 

 

 

e. Other Noncurrent Assets, net

 

     February 28,
2013
     November 30,
2012
 
     (In millions)  

Grantor trust

   $ 11.8       $ 12.1   

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

     14.2         13.8   

Deferred financing costs

     20.5         7.0   

Other

     16.3         18.2   
  

 

 

    

 

 

 

Other noncurrent assets, net

   $ 62.8       $ 51.1   
  

 

 

    

 

 

 

 

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Table of Contents

f. Other Current Liabilities

 

     February 28,
2013
     November 30,
2012
 
     (In millions)  

Accrued compensation and employee benefits

   $ 67.3       $ 49.6   

Legal settlements

     2.6         7.0   

Interest payable

     7.1         6.3   

Contract loss provisions

     5.9         5.7   

Other

     41.2         34.7   
  

 

 

    

 

 

 

Other current liabilities

   $ 124.1       $ 103.3   
  

 

 

    

 

 

 

g. Other Noncurrent Liabilities

 

     February 28,
2013
     November 30,
2012
 
     (In millions)  

Pension benefits, non-qualified

   $ 18.8       $ 18.9   

Conditional asset retirement obligations

     21.3         20.8   

Legal settlements

     0.3         2.3   

Deferred revenue

     8.5         8.6   

Deferred compensation

     8.8         8.4   

Other

     9.3         9.5   
  

 

 

    

 

 

 

Other noncurrent liabilities

   $ 67.0       $ 68.5   
  

 

 

    

 

 

 

h. Accumulated Other Comprehensive Loss, Net of Income Taxes

 

     February 28,
2013
    November 30,
2012
 
     (In millions)  

Actuarial losses, net

   $ (467.9   $ (491.0

Prior service credits

     4.5        4.7   
  

 

 

   

 

 

 

Accumulated other comprehensive loss, net of income taxes

   $ (463.4   $ (486.3
  

 

 

   

 

 

 

Note 6. Long-term Debt

 

     February 28,
2013
    November 30,
2012
 
     (In millions)  

Term loan, bearing interest at variable rates (rate of 3.71% as of February 28, 2013), payable in quarterly installments of $0.6 million plus interest, maturing in November 2016

   $ 46.9      $ 47.5   
  

 

 

   

 

 

 

Total senior debt

     46.9        47.5   
  

 

 

   

 

 

 

Senior secured notes, bearing interest at 7.125% per annum, interest payments due in March and September, maturing in March 2021

     460.0        —     
  

 

 

   

 

 

 

Total senior secured notes

     460.0        —     
  

 

 

   

 

 

 

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

     0.2        0.2   

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

     200.0        200.0   
  

 

 

   

 

 

 

Total convertible subordinated notes

     200.2        200.2   
  

 

 

   

 

 

 

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

     1.0        1.0   
  

 

 

   

 

 

 

Total other debt

     1.0        1.0   
  

 

 

   

 

 

 

Total debt

     708.1        248.7   

Less: Amounts due within one year

     (2.8     (2.7
  

 

 

   

 

 

 

Total long-term debt

   $ 705.3      $ 246.0   
  

 

 

   

 

 

 

 

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Senior Credit Facility

On November 18, 2011, the Company entered into the senior credit facility (the “Senior Credit Facility”) with the lenders identified therein and Wells Fargo Bank, National Association, as administrative agent, which replaced the Company’s prior credit facility.

On May 30, 2012, the Company, along with Aerojet as guarantor, executed an amendment (the “First Amendment”) to the Senior Credit Facility with the lenders identified therein, and Wells Fargo Bank, National Association, as administrative agent. The First Amendment, among other things, (1) provided for an incremental facility of up to $50.0 million through additional borrowings under the term loan facility and/or increases under the revolving credit facility (2) provided greater flexibility with respect to the Company’s ability to incur indebtedness to support permitted acquisitions, and (3) increased the aggregate limitation on sale leasebacks from $20.0 million to $30.0 million during the term of the Senior Credit Facility.

On August 16, 2012, the Company, along with Aerojet as guarantor, executed an amendment (the “Second Amendment”) to the Senior Credit Facility with the lenders identified therein, and Wells Fargo Bank, National Association, as administrative agent. The Second Amendment, among other things, (1) allowed for the incurrence of up to $510 million of second lien indebtedness in connection with the Acquisition, and (2) provided for a new delayed draw term loan in an amount of up to $50 million in connection with the Acquisition or, in certain circumstances, for general corporate purposes.

On January 14, 2013, the Company, along with Aerojet as guarantor, executed an amendment (the “Third Amendment”) to the Senior Credit Facility with the lenders identified therein, and Wells Fargo Bank, National Association, as administrative agent. The Third Amendment, among other things, allowed for the 7  1 / 8 % Notes to be secured by a first priority security interest in the escrow account into which the proceeds of the 7   1 / 8 % Notes offering were deposited pending the consummation of the Acquisition.

The Senior Credit Facility, as amended, provides for credit of up to $300.0 million in aggregate principal amount of senior secured financing, consisting of:

 

   

a 5-year $50.0 million term loan facility;

 

   

a 5-year $150.0 million revolving credit facility;

 

   

an incremental facility under which the Company is entitled to incur, subject to certain conditions, up to $50.0 million of additional borrowings under the term loan facility and/or increases under the revolving credit facility; and

 

   

a delayed draw term loan of up to $50 million.

The revolving credit facility includes a $100.0 million sublimit for the issuance of letters of credit and a $5.0 million sublimit for swingline loans. The term loan facility amortizes in quarterly installments at a rate of 5.0% of the original principal amount per annum, with the balance due on the maturity date. Outstanding indebtedness under the Senior Credit Facility may be voluntarily prepaid at any time, in whole or in part, in general without premium or penalty (subject to customary breakage costs).

As of February 28, 2013, the Company had $44.8 million outstanding letters of credit under the $100.0 million subfacility for standby letters of credit and had $46.9 million outstanding under the term loan facility.

In general, borrowings under the Senior Credit Facility bear interest at a rate equal to the LIBOR plus 350 basis points (subject to downward adjustment), or the base rate as it is defined in the credit agreement governing the Senior Credit Facility plus 250 basis points (subject to downward adjustment). In addition, the Company is charged a commitment fee of 50 basis points per annum on unused amounts of the revolving credit facility and 350 basis points per annum (subject to downward adjustment), along with a fronting fee of 25 basis points per annum, on the undrawn amount of all outstanding letters of credit.

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

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

 

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Financial Covenant

   Actual Ratios as of
February 28, 2013
   Required Ratios

Interest coverage ratio, as defined under the Senior Credit Facility

   5.05 to 1.00    Not less than: 2.4 to 1.00

Leverage ratio, as defined under the Senior Credit Facility

   1.27 to 1.00    Not greater than: 3.5 to 1.00

The Company was in compliance with its financial and non-financial covenants as of February 28, 2013.

7.125% Second-Priority Senior Secured Notes

On January 28, 2013, the Company issued $460.0 million in aggregate principal amount of its 7  1 / 8 % Notes. The 7  1 / 8 % Notes were sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and outside the U.S. in accordance with Regulation S under the Securities Act. The 7  1 / 8 % Notes mature on March 15, 2021, subject to early redemption described below. The 7   1 / 8 % Notes will pay interest semi-annually in cash in arrears on March 15, and September 15, of each year, beginning on March 15, 2013.

The gross proceeds from the sale of the 7  1 / 8 % Notes (after deducting underwriting discounts), plus an amount sufficient to fund a Special Mandatory Redemption (as defined below) on February 28, 2013, including accrued interest on the 7  1 / 8 % Notes, were deposited into escrow pending the consummation of the proposed acquisition of the Rocketdyne Business pursuant to an escrow agreement (the “Escrow Agreement”) by and among the Company and U.S. Bank National Association, as trustee for the 7   1 / 8 % Notes, as escrow agent and as bank and securities intermediary. Pursuant to the Escrow Agreement, the Company will continue to deposit accrued interest on the 7  1 / 8 % Notes on a monthly basis until the satisfaction of the conditions to release the proceeds from escrow. If the conditions to the release of the escrow, including the consummation of the acquisition of the Rocketdyne Business, are not satisfied 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 (the “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.

The 7   1 / 8 % Notes will be redeemable at the Company’s option, in whole or in part, at any time prior to March 15, 2016 at a price equal to 100% of the principal amount, plus any accrued and unpaid interest to the date of redemption, plus an applicable premium (as defined in the 7  1 / 8 % Notes indenture). Thereafter, the Company may redeem the 7  1 / 8 % Notes, at any time on or after March 15, 2016, at redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and additional interest, if any, thereon, to the applicable redemption date, if redeemed during the twelve-month period beginning March 15 of the years indicated below:

 

Year

   Redemption Price  

2016

     105.344

2017

     103.563

2018

     101.781

2019 and thereafter

     100.000

In addition, before March 15, 2016, the Company may redeem up to 35% of the original aggregate principal amount of the 7  1 / 8 % Notes at a redemption price equal to 107.125% of the aggregate principal amount of the 7  1 / 8 % Notes, plus accrued interest, with the proceeds from certain types of public equity offerings.

The 7  1 / 8 % Notes are guaranteed by Aerojet. Following the consummation of the proposed Acquisition, the 7  1 / 8 % Notes will be fully and unconditionally guaranteed on a second-priority senior secured basis by each of the Company’s existing and future subsidiaries that guarantee its obligations under the Company’s existing Senior Credit Facility. Prior to the consummation of the Acquisition, the 7  1 / 8 % Notes will be secured by a first priority security interest in the escrow account and all deposits and investment property therein. Following the consummation of the Acquisition, the 7  1 / 8 % Notes will be secured on a second-priority basis by the assets (other than real property) that secure the Company’s and its guarantors’ obligations under the Senior Credit Facility, subject to certain exceptions and permitted liens.

Upon the occurrence of a change of control (as defined in the 7  1 / 8 % Notes indenture), if the Company has not previously exercised its right to redeem all of the outstanding 7  1 / 8 % Notes pursuant to the Special Mandatory Redemption or an optional redemption as described in the indenture, the Company must offer to repurchase the 7  1 / 8 % Notes at 101% of the principal amount of the 7  1 / 8 % Notes, plus accrued and unpaid interest to the date of repurchase.

The 7  1 / 8 % Notes indenture contains certain covenants limiting the Company’s ability and the ability of its restricted subsidiaries (as defined in the 7  1 / 8 % Notes indenture) to, subject to certain exceptions and qualifications: (i) incur additional indebtedness; (ii) pay dividends or make other distributions on, redeem or repurchase, capital stock; (iii) make investments or other restricted payments; (iv) create or incur certain liens; (v) incur restrictions on the payment of dividends or other distributions from its restricted subsidiaries; (vi) enter into transactions with affiliates; (vii) sell assets; or (viii) effect a consolidation or merger.

The 7  1 / 8 % Notes indenture also contains customary events of default, including, among other things, failure to pay interest, failure to comply with certain repurchase provisions, breach of certain covenants, failure to pay at maturity or acceleration of other indebtedness, failure to pay certain judgments, and certain events of insolvency or bankruptcy. Generally, if any event of default

 

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occurs, the 7  1 / 8 % Notes trustee or the holders of at least 25% in principal amount of the 7  1 / 8 % Notes may declare the 7  1 / 8 % Notes due and payable by providing notice to the Company. In case of default arising from certain events of bankruptcy or insolvency, the 7  1 / 8 % Notes will become immediately due and payable.

In connection with the issuance of the 7  1 / 8 % Notes, the Company entered into a registration rights agreement dated as of January 28, 2013 (the “Registration Rights Agreement”), by and among the Company, Aerojet, as guarantor, and Morgan Stanley & Co. LLC, Citigroup Global Markets Inc., Wells Fargo Securities, LLC and SunTrust Robinson Humphrey, Inc., as initial purchasers of the 7  1 / 8 % Notes. Pursuant to the Registration Rights Agreement, the Company has agreed to: (i) file a registration statement within 180 days after January 28, 2013, with respect to an offer to exchange the 7  1 / 8 % Notes for freely tradable notes that have substantially identical terms as the 7  1 / 8 % Notes and are registered under the Securities Act; (ii) use reasonable best efforts to cause such registration statement to become effective within 270 days after January 28, 2013; (iii) use reasonable best efforts to consummate the exchange offer within 300 days after January 28, 2013; and (iv) file a shelf registration statement for the resale of the 7  1 / 8 % Notes if the Company cannot effect an exchange offer within the time periods listed above and in certain other circumstances. If the Company does not comply with its registration obligations under the Registration Rights Agreement (each, a “Registration Default”), the annual interest rate on the 7  1 / 8 % Notes will increase by 0.25% per annum and thereafter by an additional 0.25% per annum for any subsequent 90-day period during which a Registration Default continues, up to a maximum additional interest rate of 1.0% per annum. If the Company corrects the Registration Default, the interest rate on the 7  1 / 8 % Notes will revert immediately to the original rate.

The Company intends 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.

2  1 / 4 % Convertible Subordinated Debentures

As of February 28, 2013, the Company had $0.2 million outstanding principal amount of its 2  1 / 4 % Debentures.

4.0625% Convertible Subordinated Debentures

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

The 4  1 / 16 % Debentures are general unsecured obligations of the Company and rank equal in right of payment to all of the Company’s other existing and future unsecured subordinated indebtedness, including the 2  1 / 4 % Debentures. The 4  1 / 16 % Debentures rank junior in right of payment to all of the Company’s existing and future senior indebtedness, including all of its obligations under its Senior Credit Facility and all of its existing and future senior subordinated indebtedness, including the Company’s outstanding 9  1 / 2 % Notes. In addition, the 4  1 / 16 % Debentures are effectively subordinated to any of the Company’s collateralized debt, to the extent of such collateral, and to any and all debt and liabilities including trade debt of its subsidiaries.

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

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

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

 

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

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

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

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

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

Note 7. Commitments and Contingencies

a. Legal Matters

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

Groundwater Litigation

In December 2011, Aerojet received notice of a lawsuit, Sun Ridge LLC, et al. v. Aerojet-General Corporation, et al., Case No. 34-2011-00114675, filed in Sacramento County Superior Court. The complaint, which also names McDonnell Douglas Corporation (now Boeing Corporation), was filed by owners of properties adjacent to the Aerojet property in Rancho Cordova, California and alleges damages attributable to contamination of groundwater including diminution of property value and increased costs associated with ensuring water supplies in connection with real estate development. That matter was dismissed without prejudice and the parties entered into settlement discussions. The parties participated in mediation in February 2013 and negotiations are continuing.

Asbestos Litigation

The Company has been, and continues to be, named as a defendant in lawsuits alleging personal injury or death due to exposure to asbestos in building materials, products, or in manufacturing operations. The majority of cases are pending in Texas and Pennsylvania. There were 140 asbestos cases pending as of February 28, 2013.

 

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

In 2011, Aerojet received a letter demand from AMEC, plc, the successor entity to the 1981 purchaser of the business assets of Barnard & Burk, Inc., a former Aerojet subsidiary, for Aerojet to assume the defense of sixteen asbestos cases, involving 271 plaintiffs, pending in Louisiana and reimbursement of over $1.7 million in past legal fees and expenses. AMEC is asserting that Aerojet retained those liabilities when it sold the Barnard & Burk assets and agreed to indemnify the purchaser therefor. Under the relevant purchase agreement, the purchaser assumed only certain, specified liabilities relating to the operation of Barnard & Burk before the sale, with Barnard & Burk retaining all unassumed pre-closing liabilities, and Aerojet agreed to indemnify the purchaser against unassumed liabilities that are asserted against it. Based on the information provided, Aerojet declined to accept the liability and requested additional information from AMEC pertaining to the basis of the demand. In response to Aerojet’s request, AMEC provided additional information regarding its claims which Aerojet is reviewing. In the event that this matter is not resolved consensually, AMEC may take legal action to enforce its position. No estimate of liability has been accrued for this matter as of February 28, 2013.

Subpoena Duces Tecum

On September 23, 2010, the Company received a subpoena duces tecum from the U.S. Army Criminal Investigation Command, acting on behalf of the Office of the Inspector General of the DoD, requesting that the Company produce a variety of documents pertaining to the use of certain cost estimating factors under its contracts with the DoD. The Company has completed its response to the subpoena through multiple document productions, and met with the investigators on September 27, 2012 and February 1, 2013 and provided further analysis regarding the use of factors on certain contracts compared to incurred material costs. The tolling agreement between the parties lapsed without further action on March 31, 2013 and the Company has been informed by the Assistant United States Attorney that the matter has been closed without further action.

b. Environmental Matters

The Company is involved in over forty environmental matters under the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”), the Resource Conservation Recovery Act (“RCRA”), and other federal, state, local, and foreign laws relating to soil and groundwater contamination, hazardous waste management activities, and other environmental matters at some of its current and former facilities. The Company is also involved in a number of remedial activities at third party sites, not owned by the Company, where it is designated a potentially responsible party (“PRP”) by either the U.S. Environmental Protection Agency (“EPA”) and/or a state agency. In many of these matters, the Company is involved with other PRPs. In many instances, the Company’s liability and proportionate share of costs have not been determined largely due to uncertainties as to the nature and extent of site conditions and the Company’s involvement. While government agencies frequently claim PRPs are jointly and severally liable at such sites, in the Company’s experience, interim and final allocations of liability and costs are generally made based on relative contributions of waste or contamination. Anticipated costs associated with environmental remediation that are probable and estimable are accrued. In cases where a date to complete remedial activities at a particular site cannot be determined by reference to agreements or otherwise, the Company projects costs over an appropriate time period not exceeding fifteen years; in such cases, generally the Company does not have the ability to reasonably estimate environmental remediation costs that are beyond this period. Factors that could result in changes to the Company’s estimates include completion of current and future soil and groundwater investigations, new claims, future agency demands, discovery of more or less contamination than expected, discovery of new contaminants, modification of planned remedial actions, changes in estimated time required to remediate, new technologies, and changes in laws and regulations.

As of February 28, 2013, the aggregate range of these anticipated environmental costs was $183.8 million to $315.9 million and the accrued amount was $183.8 million. See Note 7(c) for a summary of the environmental reserve activity. Of these accrued liabilities, approximately 96% relates to the Company’s U.S. government contracting business and a portion of this liability is recoverable. The significant environmental sites are discussed below. The balance of the accrued liabilities relates to other sites for which the Company’s obligations are probable and estimable.

Sacramento, California Site

In 1989, a federal district court in California approved a Partial Consent Decree (“PCD”) requiring Aerojet, among other things, to conduct a Remedial Investigation and Feasibility Study (“RI/FS”) to determine the nature and extent of impacts due to the release of chemicals from the Sacramento, California site, monitor the American River and offsite public water supply wells, operate Groundwater Extraction and Treatment facilities (“GETs”) that collect groundwater at the site perimeter, and pay certain government oversight costs. The primary chemicals of concern for both on-site and off-site groundwater are trichloroethylene (“TCE”), perchlorate, and n-nitrosodimethylamine (“NDMA”). The PCD has been revised several times, most recently in 2002. The 2002 PCD revision (a) separated the Sacramento site into multiple operable units to allow quicker implementation of remedy for critical areas;

 

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(b) required the Company to guarantee up to $75 million (in addition to a prior $20 million guarantee) to assure that Aerojet’s Sacramento remediation activities are fully funded; and (c) removed approximately 2,600 acres of non-contaminated land from the U.S. EPA superfund designation.

Aerojet is involved in various stages of soil and groundwater investigation, remedy selection, design, and remedy construction associated with the operable units. In 2002, the U.S. EPA issued a Unilateral Administrative Order (“UAO”) requiring Aerojet to implement the U.S. EPA-approved remedial action in the Western Groundwater Operable Unit. An identical order was issued by the California Regional Water Quality Control Board, Central Valley (“Central Valley RWQCB”). On July 7, 2011, the EPA issued Aerojet its Approval of Remedial Action Construction Completion Report for Western Groundwater Operable Unit and its Determination of Remedy as Operational and Functional. On September 20, 2011, the EPA issued two UAOs to Aerojet to complete a remedial design and implement remedial action for the Perimeter Groundwater Operable Unit. One UAO addresses groundwater and the other addresses soils within the Perimeter Groundwater Operable Unit. Issuance of the UAOs is the next step in the superfund process for the Perimeter Groundwater Operable Unit. Aerojet submitted a final Remedial Investigation Report for the Boundary Operable Unit in 2010 and a revised Feasibility Study for the Boundary Operable Unit in 2012. A draft Remedial Investigation Report for the Island Operable Unit was submitted in January 2013. The remaining operable units are under various stages of investigation.

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

As of February 28, 2013, the estimated range of anticipated costs discussed above for the Sacramento, California site was $136.2 million to $216.9 million and the accrued amount was $136.2 million included as a component of the Company’s environmental reserves. Expenditures associated with this matter are partially recoverable. See Note 7(c) below for further discussion on recoverability.

Baldwin Park Operable Unit (“BPOU”)

As a result of its former Azusa, California operations, in 1994 Aerojet was named a PRP by the EPA in the area of the San Gabriel Valley Basin superfund site known as the BPOU. Between 1995 and 1997, the EPA issued Special Notice Letters to Aerojet and eighteen other companies requesting that they implement a groundwater remedy. On June 30, 2000, the EPA issued a UAO ordering the PRPs to implement a remedy consistent with the 1994 record of decision. Aerojet, along with seven other PRPs (“the Cooperating Respondents”) signed a Project Agreement in late March 2002 with the San Gabriel Basin Water Quality Authority, the Main San Gabriel Basin Watermaster, and five water companies. The Project Agreement, which has a term of fifteen years, became effective May 9, 2002 and will terminate in May 2017. It is uncertain as to what remedial actions will be required beyond 2017. However, the Project Agreement stipulates that the parties agree to negotiate in good faith in an effort to reach agreement as to the terms and conditions of an extension of the term in the event that a Final Record of Decision anticipates, or any of the parties desire, the continued operation of all or a substantial portion of the project facilities. Pursuant to the Project Agreement, the Cooperating Respondents fund through an escrow account: the capital, operational, maintenance, and administrative costs of certain treatment and water distribution facilities to be owned and operated by the water companies. There are also provisions in the Project Agreement for maintaining financial assurance.

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

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

 

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As part of Aerojet’s sale of its Electronics and Information Systems (“EIS”) business to Northrop in October 2001, the EPA approved a Prospective Purchaser Agreement with Northrop to absolve it of pre-closing liability for contamination caused by the Azusa, California operations, which liability remains with Aerojet. As part of that agreement, the Company agreed to provide a $25 million guarantee of Aerojet’s obligations under the Project Agreement.

As of February 28, 2013, the estimated range of anticipated costs through the term of the Project Agreement for the BPOU site, which expires in 2017, was $31.4 million to $63.2 million and the accrued amount was $31.4 million included as a component of the Company’s environmental reserves. As the Company is unable to reasonably estimate the costs and expenses of this matter after the expiration of the Project Agreement, no reserve has been accrued for this matter for the period after such expiration. Expenditures associated with this matter are partially recoverable. See Note 7(c) below for further discussion on recoverability.

Toledo, Ohio Site

The Company previously manufactured products for the automotive industry at a Toledo, Ohio site, which was adjacent to the Ottawa River. This facility was divested in 1990 and the Company indemnified the buyer for claims and liabilities arising out of certain pre-divestiture environmental matters. In August 2007, the Company, along with numerous other companies, received from the United States Department of Interior Fish and Wildlife Service a notice of a Natural Resource Damage (“NRD”) Assessment Plan for the Ottawa River and Northern Maumee Bay. A group of PRPs, including the Company, was formed to respond to the NRD assessment and to pursue funding from the Great Lakes Legacy Act for primary restoration. The restoration project performed by the group consisted of river dredging and land-filling river sediments with a total project cost in the range of approximately $47 million to $49 million, one half of which was funded through the Great Lakes Legacy Act and the net project costs to the PRP group was estimated at $23.5 million to $24.5 million. The dredging of the river that began in December 2009 has been completed. In February 2011, the parties reached an agreement on allocation. As of February 28, 2013, the estimated range of the Company’s share of anticipated costs for the NRD matter was zero to $0.4 million. None of the expenditures related to this matter are recoverable. Still unresolved at this time is the actual NRD Assessment itself. Negotiations with the State and Federal Trustees are ongoing.

In 2008, Textileather, the current owner of the former Toledo, Ohio site, filed a lawsuit against the Company claiming, among other things, that the Company failed to indemnify and defend Textileather for certain contractual environmental obligations. A second suit related to past and future RCRA closure costs was filed in late 2009. On May 5, 2010, the District Court granted the Company’s Motion for Summary Judgment, thereby dismissing the claims in the initial action. Textileather appealed to the Sixth Circuit Court of Appeals. On September 11, 2012, the Court of Appeals affirmed the District Court’s decision with respect to Textileather’s CERCLA cost recovery claims, but reversed the decision to dismiss its breach of contract claims. The case was remanded to the District Court for further proceedings consistent with the opinion of the Court of Appeals. The District Court is likely to address such issues as allocation of costs subject to GenCorp’s indemnification obligations as well as significant defenses raised by GenCorp in its Motion for Summary Judgment, which was not ruled on by the Court when it granted GenCorp’s Summary Judgment Motion. At the direction of the District Court, the principals commenced informal settlement negotiations. The settlement negotiations were unsuccessful and the Court issued a Case Management Order setting a trial date in December of 2013. As of February 28, 2013, the estimated anticipated costs and accrued amount for the Textileather matter was $2.6 million which is included as a component of the Company’s environmental reserves. None of the expenditures related to this matter are recoverable.

c. Environmental Reserves and Estimated Recoveries

Environmental Reserves

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

 

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

 

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

November 30, 2012

   $ 140.5      $ 31.2       $ 10.8      $ 182.5      $ 7.0      $ 189.5   

Adjustments

     (1.0     0.2         (0.9     (1.7     0.1        (1.6

Expenditures

     (3.3     —          (0.7     (4.0     (0.1     (4.1
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

February 28, 2013

   $ 136.2      $ 31.4       $ 9.2      $ 176.8      $ 7.0      $ 183.8   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The effect of the final resolution of environmental matters and the Company’s obligations for environmental remediation and compliance cannot be accurately predicted due to the uncertainty concerning both the amount and timing of future expenditures and due to regulatory or technological changes. The Company continues its efforts to mitigate past and future costs through pursuit of claims for recoveries from insurance coverage and other PRPs and continued investigation of new and more cost effective remediation alternatives and associated technologies.

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

 

Pre-Close Environmental Costs

   $ 20.0   

Amount spent through February 28, 2013

     (14.3

Amount included as a component of reserves for environmental remediation costs in the unaudited condensed consolidated balance sheet as of February 28, 2013

     (4.1
  

 

 

 

Remaining Pre-Close Environmental Costs

   $ 1.6   
  

 

 

 

Estimated Recoveries

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

Pursuant to the Global Settlement covering environmental costs associated with Aerojet’s Sacramento site and its former Azusa site, prior to the third quarter of fiscal 2010, approximately 12% of such costs related to the Sacramento site and former Azusa site were charged to the unaudited condensed consolidated statements of operations. Subsequent to the third quarter of fiscal 2010, because the Company’s estimated environmental costs 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.

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

 

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

 

Total reimbursable costs under the Northrop Agreement

   $ 189.7   

Amount reimbursed to the Company through February 28, 2013

     (96.7
  

 

 

 

Potential future cost reimbursements available (1)

     93.0   

Long-term receivable from Northrop in excess of the annual limitation included in the unaudited condensed consolidated balance sheet as of February 28, 2013

     (68.8

Amounts recoverable from Northrop in future periods included as a component of recoverable from the U.S. government and other third parties for environmental remediation costs in the unaudited condensed consolidated balance sheet as of February 28, 2013

     (24.2
  

 

 

 

Potential future recoverable amounts available under the Northrop Agreement

   $ —    
  

 

 

 

 

(1) Includes the short-term receivable from Northrop of $6.0 million as of February 28, 2013.

The Company’s applicable cost estimates reached the cumulative limitation under the Northrop Agreement during the third quarter of fiscal 2010. The Company has accumulated $18.2 million of environmental remediation provision adjustments above the cumulative limitation under the Northrop Agreement through February 28, 2013. Accordingly, subsequent to the third quarter of fiscal 2010, the Company has incurred a higher percentage of expense related to additions to the Sacramento site and BPOU site environmental reserve until an arrangement is reached with the U.S. government. While the Company is currently seeking an arrangement with the U.S. government to recover environmental expenditures in excess of the reimbursement ceiling identified in the Northrop Agreement, there can be no assurances that such a recovery will be obtained, or if not obtained, that such unreimbursed environmental expenditures will not have a materially adverse effect on the Company’s operating results, financial condition, and/or cash flows.

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

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

 

     Estimated
Recoverable
Amounts Under
U.S. Government
Contracts
    (Benefit)
Charge  to

Unaudited
Condensed
Consolidated
Statement of
Operations
    Total
Environmental
Reserve
Adjustments
 
     (In millions)  

Three months ended February 28, 2013

   $ (1.1   $ (0.5   $ (1.6

Three months ended February 28, 2012

     0.9        0.5        1.4   

Note 8. Redeemable Common Stock

The Company inadvertently failed to register with the SEC the issuance of certain of its common shares in its defined contribution 401(k) employee benefit plan (the “Plan”). As a result, certain Plan participants who purchased such securities pursuant to the Plan may have the right to rescind certain of their purchases for consideration equal to the purchase price paid for the securities (or if such security has been sold, to receive consideration with respect to any loss incurred on such sale) plus interest from the date of purchase. As of February 28, 2013 and November 30, 2012, the Company has classified 0.3 million and 0.4 million shares, respectively, as redeemable common stock because the redemption features are not within the control of the Company. The Company may also be subject to civil and other penalties by regulatory authorities as a result of the failure to register these shares. These shares have always been treated as outstanding for financial reporting purposes. In June 2008, the Company filed a registration statement on Form S-8 to register future transactions in the GenCorp Stock Fund in the Plan. During the first quarter of fiscal 2013 and 2012, the Company recorded ($0.1) million and $0.2 million, respectively, for realized (gains)/losses and interest associated with this matter.

Note 9. Arrangements with Off-Balance Sheet Risk

As of February 28, 2013, arrangements with off-balance sheet risk consisted of:

 

   

$44.8 million in outstanding commercial letters of credit expiring within the next twelve months, the majority of which may be renewed, primarily to collateralize obligations for environmental remediation and insurance coverage.

 

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$39.3 million in outstanding surety bonds to satisfy indemnification obligations for environmental remediation coverage.

 

   

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

 

   

Guarantees, jointly and severally, by the Company’s material domestic subsidiaries of its obligations under its Senior Credit Facility and 7  1 / 8 % Notes.

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

Additionally, the Company issues purchase orders to suppliers for equipment, materials, and supplies in the normal course of business. These purchase commitments are generally for volumes consistent with anticipated requirements to fulfill purchase orders or contracts for product deliveries received, or expected to be received, from customers and would be subject to reimbursement if a cost-plus contract is terminated.

Note 10. Retirement Benefits

Pension Benefits — Effective February 1, 2009 and July 31, 2009, future benefit accruals for non-collective bargaining-unit employees and collective bargaining-unit employees were discontinued, respectively. No employees lost their previously earned pension benefits.

As of the last measurement date at November 30, 2012, the Company’s total defined benefit pension plan assets, total projected benefit obligations, and unfunded pension obligation for the tax-qualified pension plan were approximately $1,243.1 million, $1,717.7 million, and $454.5 million, respectively.

The Company does not expect to make any cash contributions to the tax-qualified defined benefit pension plan until fiscal 2015 or later.

Further, with the Office of Federal Procurement Policy issuance of the final rule harmonizing Cost Accounting Standard (“CAS”) 412, Composition and Measurement of Pension Cost , and CAS 413, Adjustment and Allocation of Pension Cost, with the Pension Protection Act (the “PPA”), the Company will recover portions of any required pension funding through its government contracts. Approximately 85% of the Company’s unfunded pension benefit obligation for tax-qualified pension plan as of February 28, 2013 is related to its government contracting business segment, Aerojet. Accordingly, the Company believes a significant portion of any future contributions to its tax-qualified defined benefit pension plan would be recoverable through its government contracts.

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

The PPA requires underfunded pension plans to improve their funding ratios based on the funded status of the plan as of specified measurement dates through contributions or application of prepayment credits. As of November 30, 2012, the Company has accumulated $32.5 million in prepayment credits as a result of advanced funding.

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

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

 

23


Table of Contents

Components of retirement benefit expense are:

 

     Pension Benefits     Postretirement Benefits  
     Three months ended  
     February 28,
2013
    February 28,
2012
    February 28,
2013
    February 28,
2012
 
     (In millions)  

Service cost

   $ 1.3      $ 1.1      $ —       $ —    

Interest cost on benefit obligation

     15.2        18.4        0.6        0.8   

Assumed return on plan assets

     (24.1     (24.8     —         —    

Amortization of prior service credits

     —         —         (0.2     —    

Recognized net actuarial losses (gains)

     23.6        15.5        (0.5     (0.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Retirement benefit expense

   $ 16.0      $ 10.2      $ (0.1 )   $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 11. Discontinued Operations

On August 31, 2004, the Company completed the sale of its GDX Automotive (“GDX”) business. On November 30, 2005, the Company completed the sale of the Fine Chemicals business. The remaining subsidiaries after the sale of GDX Automotive, including Snappon SA, and the Fine Chemicals business are classified as discontinued operations. Summarized financial information for discontinued operations is set forth below:

 

     Three months ended  
     February 28,
2013
    February 28,
2012
 
     (In millions)  

Net sales

   $ —       $ —    

Loss before income taxes

     (0.1     —    

Income tax benefit

     0.2        —    

Income from discontinued operations, net of income taxes

     0.1        —    

Note 12. Operating Segments and Related Disclosures

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

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

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

 

     Three months ended  
     February 28,
2013
    February 28,
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 the Company’s significant customers discussed above, totaled 96% and 95%, respectively, of net sales.

 

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Table of Contents

Selected financial information for each reportable segment is as follows:

 

     Three months ended  
     February 28,
2013
    February 28,
2012
 
     (In millions)  

Net Sales:

    

Aerospace and Defense

   $ 242.3      $ 200.3   

Real Estate

     1.4        1.6   
  

 

 

   

 

 

 

Total

   $ 243.7      $ 201.9   
  

 

 

   

 

 

 

Segment Performance:

    

Aerospace and Defense

   $ 29.2      $ 24.9   

Environmental remediation provision adjustments

     0.6        (0.5

Retirement benefit plan expense

     (10.7     (4.7

Unusual items

     0.1        (0.2
  

 

 

   

 

 

 

Aerospace and Defense Total

     19.2        19.5   
  

 

 

   

 

 

 

Real Estate

     1.0        1.1   
  

 

 

   

 

 

 

Total

   $ 20.2      $ 20.6   
  

 

 

   

 

 

 

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

    

Segment Performance

   $ 20.2      $ 20.6   

Interest expense

     (11.2     (6.0

Interest income

     0.1        0.2   

Corporate retirement benefit plan expense

     (5.2     (5.5

Stock-based compensation expense

     (3.2     (0.9

Corporate and other expenses

     (3.9     (3.7

Unusual items

     (6.0 )     —    
  

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

   $ (9.2   $ 4.7   
  

 

 

   

 

 

 

Note 13. Unusual Items

During the first quarter of fiscal 2013, the Company recorded a charge of $0.5 million related to a legal settlement. During the first quarter of fiscal 2013 and 2012, the Company recorded ($0.1) million and $0.2 million, respectively, for realized (gains)/losses and interest associated with the failure to register with the SEC the issuance of certain of the Company’s common shares under the defined contribution 401(k) employee benefit plan.

The Company incurred expenses of $5.5 million, including internal labor costs of $0.8 million, related to the proposed Rocketdyne Business acquisition announced in July 2012 in the first quarter of fiscal 2013.

Unusual items are recorded as a component of other expense, net in the unaudited condensed consolidated statements of operations.

 

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Table of Contents

Note 14. Assets Held for Sale

In November 2012, the Company classified its LDACS program as assets held for sale because the Company expected that it will be required to divest the LDACS product line in order to consummate the Acquisition. 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. For operating segment reporting, the LDACS program has been reported as a part of the Aerospace and Defense segment. The components of assets and liabilities held for sale in the unaudited condensed consolidated balance sheets are as follows:

 

     February 28,
2013
    November 30,
2012
 
     (In millions)  

Accounts receivable

   $ 3.9      $ 3.5   

Equipment

     0.1        0.1   

Estimated costs to divest, recorded as part of unusual items

     (4.0     (3.6
  

 

 

   

 

 

 

Assets held for sale

   $ —        $ —     
  

 

 

   

 

 

 

Accounts payable

   $ 0.1      $ 0.1   

Other liabilities

     0.6        1.0   
  

 

 

   

 

 

 

Liabilities held for sale

   $ 0.7      $ 1.1   
  

 

 

   

 

 

 

 

26


Table of Contents

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

Unless otherwise indicated or required by the context, as used in this Quarterly Report on Form 10-Q, the terms “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.

 

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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.

 

28


Table of Contents

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

 

     Three months ended  
     February 28,
2013
    February 28,
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.

 

29


Table of Contents

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

 

     Reserve      Recoverable Amount      Estimated Range
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.

 

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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,
2013
     February 28,
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,
2013
    February 28,
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.

 

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Table of Contents

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

 

     Three months ended        
     February 28,
2013
    February 28,
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:

 

     Three months ended         
     February 28,
2013
     February 28,
2012
     Change*  
     (In millions)  

Depreciation and amortization:

   $ 6.1       $ 5.3       $ 0.8   

 

* Primary reason for change. Depreciation and amortization increased primarily due to a change in the estimated useful life of tangible assets related to certain space programs.

Other Expense, net:

 

     Three months ended         
     February 28,
2013
     February 28,
2012
     Change*  
     (In millions)  

Other expense, net

   $ 5.9       $ 1.9       $ 4.0   

 

* Primary reason for change. The increase in other expense, net was primarily due an increase in unusual item charges of $5.7 million partially offset by a $1.5 million contribution made in the first quarter of fiscal 2012 to support space science education and lower environmental remediation costs of $1.0 million. See discussion of unusual items below.

Total unusual items (income)/expense, a component of other expense, net in the unaudited condensed consolidated statements of operations, was as follows:

 

     Three months ended         
     February 28,
2013
    February 28,
2012
     Change  
     (In millions)  

Aerospace and Defense:

       

(Gain) loss on legal matters

   $ (0.1   $ 0.2       $ (0.3

Corporate:

       

Loss on legal settlements

     0.5        —          0.5   

Rocketdyne Business acquisition related costs

     5.5        —          5.5   

During the first quarter of fiscal 2013, we recorded a charge of $0.5 million related to a legal settlement. During the first quarter of fiscal 2013 and 2012, we recorded ($0.1) million and $0.2 million, respectively, for realized (gains)/losses and interest associated with the failure to register with the SEC the issuance of certain of our common shares under the defined contribution 401(k) employee benefit plan.

 

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We incurred expenses of $5.5 million, including internal labor costs of $0.8 million, related to the proposed Rocketdyne Business acquisition announced in July 2012 in the first quarter of fiscal 2013.

Interest Expense:

 

     Three months ended         
     February 28,
2013
     February 28,
2012
     Change*  
     (In millions)  

Interest expense

   $ 11.2       $ 6.0       $ 5.2   

Components of interest expense:

        

Contractual interest and other

     9.4         5.4         4.0   

Amortization of deferred financing costs

     1.8         0.6         1.2   

 

*

Primary reason for change. The increase in interest expense was due to the amortization of the commitment fee related to the $510 million debt commitment from Morgan Stanley Senior Funding, Inc. and Citigroup Global Markets Inc. entered into in July 2012 and the issuance of the 7  1 / 8 % Notes in January 2013.

Interest Income:

 

     Three months ended        
     February 28,
2013
    February 28,
2012
    Change*  
     (In millions)  

Interest income

   $ (0.1   $ (0.2   $ 0.1   

 

* Primary reason for change. Interest income was essentially unchanged for the periods presented.

Income Tax Provision:

 

     Three months ended  
     February 28,
2013
    February 28,
2012
 
     (In millions)  

Income tax provision

   $ 4.9      $ 2.3   

Components of income tax provision:

    

Federal current expense

   $ 4.6      $ 0.9   

State current expense

     1.2        0.5   

Net deferred expense

     1.1        0.9   

Benefit of fiscal 2012 research credits

     (2.0     —    

A valuation allowance has been recorded to offset a substantial portion of our net deferred tax assets at February 28, 2013 and November 30, 2012 to reflect the uncertainty of realization (see discussion below). As of November 30, 2012, the valuation allowance was $288.1 million. Deferred tax assets and liabilities arise due to temporary differences in the basis of our assets and liabilities between financial statement accounting and income tax based accounting. Changes in these temporary differences cause an increase or decrease to income taxes payable; however, our net deferred tax balances do not change in direct proportion to the changes in the income tax payable due to the valuation allowance. This causes our income tax expense to be higher than the expected federal statutory rate of 35%.

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

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

 

   

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

 

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

 

   

Projections of our future results which reflect uncertainty over our ability to generate taxable income principally due to: (i) increased periodic pension expense in fiscal 2013 due to a decline in the discount rate utilized to value the pension obligation associated with our defined benefit pension plan and (ii) the lack of objective, verifiable evidence to predict future aerospace and defense spending associated with the Budget Control Act of 2011, including which governmental spending accounts may be subject to sequestration, the percentage reduction with respect thereto, and the latitude agencies will have in selecting specific expenditures to cut.

As of February 28, 2013, the weight of the negative evidence, principally associated with the above uncertainties, outweighed the recent historical positive evidence regarding the likelihood that a substantial portion of the net deferred tax assets was realizable. Depending upon our ability to generate taxable income and the favorable resolution of the above uncertainties, it is possible that the valuation allowance could be released during fiscal 2013, which would materially and favorably affect our results of operations in the period of the reversal. Management will continue to evaluate the ability to realize our net deferred tax assets and the related valuation allowance on a quarterly basis.

As of February 28, 2013, the liability for uncertain income tax positions was $4.5 million. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with the respective liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid. It is reasonably possible that a reduction of up to $1.3 million of unrecognized tax benefits and related interest may occur within the next 12 months as a result of the expiration of certain statute of limitations.

Discontinued Operations:

On August 31, 2004, we completed the sale of our GDX Automotive (“GDX”) business. On November 30, 2005, we completed the sale of the Fine Chemicals business. The remaining subsidiaries after the sale of GDX Automotive, including Snappon SA, and the Fine Chemicals business are classified as discontinued operations. Summarized financial information for discontinued operations is set forth below:

 

     Three months ended  
     February 28,
2013
    February 28,
2012
 
     (In millions)  

Net sales

   $ —       $ —    

Loss before income taxes

     (0.1     —    

Income tax benefit

     0.2        —    

Income from discontinued operations, net of income taxes

     0.1        —    

Retirement Benefit Plans:

Components of retirement benefit expense are:

 

     Three months ended  
     February 28,
2013
    February 28,
2012
 
     (In millions)  

Service cost

   $ 1.3      $ 1.1   

Interest cost on benefit obligation

     15.8        19.2   

Assumed return on plan assets

     (24.1     (24.8

Amortization of prior service credits

     (0.2     —     

Recognized net actuarial losses

     23.1        14.7   
  

 

 

   

 

 

 

Retirement benefit expense

   $ 15.9      $ 10.2   
  

 

 

   

 

 

 

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

 

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Additionally, we sponsor a defined contribution 401(k) plan and participation in the plan is available to all employees. The cost of the 401(k) plan was $2.9 million and $2.3 million, respectively, in the first quarter of fiscal 2013 and 2012.

Operating Segment Information:

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

Aerospace and Defense Segment

 

     Three months ended        
     February 28,
2013
    February 28,
2012
    Change*  
     (In millions, except percentage amounts)  

Net sales

   $ 242.3      $ 200.3      $ 42.0   

Segment performance

     19.2        19.5        (0.3

Segment margin

     7.9     9.7  

Segment margin before environmental remediation provision adjustments, retirement benefit plan expense and unusual items (Non-GAAP measure)

     12.1     12.4  

Components of segment performance:

      

Aerospace and Defense

   $ 29.2      $ 24.9      $ 4.3   

Environmental remediation provision adjustments

     0.6        (0.5     1.1   

Retirement benefit plan expense

     (10.7     (4.7     (6.0

Unusual items — legal related matters

     0.1        (0.2     0.3   
  

 

 

   

 

 

   

 

 

 

Aerospace and Defense total

   $ 19.2      $ 19.5      $ (0.3
  

 

 

   

 

 

   

 

 

 

 

* 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 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.

The decrease in the segment margin before environmental remediation provision adjustments, retirement benefit plan expense and unusual items compared to the comparable prior year period, was primarily due to sales growth on lower margin missile defense programs and cost growth on fixed price in-space propulsion programs.

 

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A summary of our backlog is as follows:

 

     February 28,
2013
     November 30,
2012
 
     (In millions)  

Funded backlog

   $ 1,061       $ 1,018   

Unfunded backlog

     518         508   
  

 

 

    

 

 

 

Total contract backlog

   $ 1,579       $ 1,526   
  

 

 

    

 

 

 

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

Real Estate Segment

 

     Three months ended         
     February 28,
2013
     February 28,
2012
     Change*  
     (In millions)  

Net sales

   $ 1.4       $ 1.6       $ (0.2

Segment performance

   $ 1.0       $ 1.1       $ (0.1

 

* Primary reason for change. Net sales and segment performance consist primarily of rental property operations.

Use of Non-GAAP Financial Measures

In addition to segment performance (discussed above), we provide the Non-GAAP financial measure of our operational performance called Adjusted EBITDAP. We use this metric to further our understanding of the historical and prospective consolidated core operating performance of our segments, net of expenses incurred by our corporate activities in the ordinary, on-going and customary course of our operations. Further, we believe that to effectively compare the core operating performance metric from period to period on a historical and prospective basis, the metric should exclude items relating to retirement benefits (pension and postretirement benefits), significant non-cash expenses, the impacts of financing decisions on the earnings, and items incurred outside the ordinary, on-going and customary course of our operations. Accordingly, we define Adjusted EBITDAP as GAAP income (loss) from continuing operations before income taxes adjusted by interest expense, interest income, depreciation and amortization, retirement benefit expense, and unusual items which we do not believe are reflective of such ordinary, on-going and customary course activities. Adjusted EBITDAP does not represent, and should not be considered an alternative to, net (loss) income, as determined in accordance with GAAP.

 

     Three months ended  
     February 28,
2013
    February 28,
2012
 
     (In millions, except percentage amounts)  

(Loss) income from continuing operations before income taxes

   $ (9.2   $ 4.7   

Interest expense

     11.2        6.0   

Interest income

     (0.1     (0.2

Depreciation and amortization

     6.1        5.3   

Retirement benefit expense

     15.9        10.2   

Unusual items

     5.9        0.2   
  

 

 

   

 

 

 

Adjusted EBITDAP

   $ 29.8      $ 26.2   
  

 

 

   

 

 

 

Adjusted EBITDAP as a percentage of net sales

     12.2     13.0

 

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

 

     Three months ended  
     February 28,
2013
    February 28,
2012
 
     (In millions)  

Cash provided by operating activities

   $ 6.9      $ 18.0   

Capital expenditures

     (9.1     (3.6
  

 

 

   

 

 

 

Free cash flow

   $ (2.2   $ 14.4   
  

 

 

   

 

 

 

 

     February 28,
2013
    February 28,
2012
 
     (In millions)  

Debt principal

   $ 708.1      $ 325.7   

Cash and cash equivalents

     (140.7     (201.4

Restricted cash

     (466.0     —    
  

 

 

   

 

 

 

Net debt

   $ 101.4      $ 124.3   
  

 

 

   

 

 

 

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

Other Information

Recently Adopted Accounting Pronouncement

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

New Accounting Pronouncement

In February 2013, the FASB issued guidance on reporting of amounts reclassified out of accumulated other comprehensive income (“AOCI”). The guidance requires an entity to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. This guidance is applicable for us in the second quarter of fiscal 2013 prospectively, although early adoption is permitted. As the accounting standard will only impact disclosures, the new standard will not have an impact on our financial position, results of operations, or cash flows.

Critical Accounting Policies and Estimates

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

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

 

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

A detailed description of our significant accounting policies can be found in our most recent Annual Report on Form 10-K for the fiscal year ended November 30, 2012.

Arrangements with Off-Balance Sheet Risk

As of February 28, 2013, arrangements with off-balance sheet risk consisted of:

 

   

$44.8 million in outstanding commercial letters of credit expiring within the next twelve months, the majority of which may be renewed, primarily to collateralize obligations for environmental remediation and insurance coverage.

 

   

$39.3 million in outstanding surety bonds to satisfy indemnification obligations for environmental remediation coverage.

 

   

Up to $120.0 million aggregate in guarantees by GenCorp of Aerojet’s obligations to U.S. government agencies for environmental remediation activities.

 

   

Guarantees, jointly and severally, by our material domestic subsidiaries of our obligations under our Senior Credit Facility and 7  1 / 8 % Notes.

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

Additionally, we issue purchase orders and make other commitments to suppliers for equipment, materials, and supplies in the normal course of business. These purchase commitments are generally for volumes consistent with anticipated requirements to fulfill purchase orders or contracts for product deliveries received, or expected to be received, from customers and would be subject to reimbursement if a cost-plus contract is terminated.

We provide product warranties in conjunction with certain product sales. The majority of our warranties are a one-year standard warranty for parts, workmanship, and compliance with specifications. On occasion, we have made commitments beyond the standard warranty obligation. While we have contracts with warranty provisions, there is not a history of any significant warranty claims experience. A reserve for warranty exposure is made on a product by product basis when it is both estimable and probable . These costs are included in the program’s estimate at completion and are expensed in accordance with our revenue recognition methodology.

Liquidity and Capital Resources

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

The change in cash and cash equivalents was as follows:

 

     Three months ended  
     February 28,
2013
    February 28,
2012
 
     (In millions)  

Net Cash Provided by Operating Activities

   $ 6.9      $ 18.0   

Net Cash Used in Investing Activities

     (475.6     (3.6

Net Cash Provided by (Used in) Financing Activities

     447.3        (1.0
  

 

 

   

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

   $ (21.4   $ 13.4   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

The $6.9 million of cash provided by operating activities in the first quarter of fiscal 2013 was primarily the result of loss before income taxes adjusted for non-cash adjustments which generated $17.6 million. This amount was partially offset by cash used to fund

 

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working capital (defined as accounts receivables, inventories, accounts payable, contract advances, and other current assets and liabilities) of $7.2 million. The funding of working capital is due the following (i) a decrease in contract advances from prior year related to the timing of contract payments; (ii) an increase in accounts receivables due to timing of sales during the quarter; (iii) an increase in inventories due to growth in capitalized overhead and to a lesser extent the timing of deliveries under the Atlas V program. These factors were partially offset by an increase in other current liabilities from the prior year primarily related to the timing of payments associated to employee compensation and benefits.

The $18.0 million of cash provided by operating activities in the first quarter of fiscal 2012 was primarily the result of income before income taxes adjusted for non-cash adjustments which generated $21.6 million. The income before income taxes adjusted for non-cash expenses was partially offset by cash used to fund working capital (defined as accounts receivables, inventories, accounts payable, contract advances, and other current assets and liabilities) of $5.2 million. In addition, we received $6.0 million in tax refunds during the first quarter of fiscal 2012.

Net Cash Used In Investing Activities

During the first quarter of fiscal 2013 and 2012, we had capital expenditures of $9.1 million and $3.6 million, respectively. During the first quarter of fiscal 2013 and 2012, the capital expenditures totals included $7.3 million and $1.8 million, respectively, related to our ERP implementation.

As of February 28, 2013, we designated $466.0 million as restricted cash related to the cash collateralization of the 7  1 / 8 % Notes issued in January 2013 and related interest costs. See Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information.

Net Cash Provided by (Used in) Financing Activities

During the first quarter of fiscal 2013, we issued $460.0 million of debt and had $0.6 million in debt repayments (see below). In addition, we incurred $12.3 million debt issuance costs.

During the first quarter of fiscal 2012, we had $0.7 million in debt repayments. In addition, we had $0.4 million in vendor financing repayments.

Debt Activity and Senior Credit Facility

Our debt activity during the first quarter of fiscal 2013 was as follows:

 

     November 30,
2012
     Additions      Cash
Payments
    February 28,
2013
 
     (In millions)  

Term loan

   $ 47.5       $ —         $ (0.6   $ 46.9   

7  1 / 8 % Notes

     —          460.0         —         460.0   

4  1 / 16 % Debentures

     200.0         —           —         200.0   

2  1 / 4 % Debentures

     0.2         —           —         0.2   

Other debt

     1.0         —           —         1.0   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Debt and Borrowing Activity

   $ 248.7         460.0       $ (0.6   $ 708.1   
  

 

 

    

 

 

    

 

 

   

 

 

 

On November 18, 2011, we entered into the Senior Credit Facility with the lenders identified therein and Wells Fargo Bank, National Association, as administrative agent, which replaced our prior credit facility.

On May 30, 2012, we, along with Aerojet as guarantor, executed an amendment (the “First Amendment”) to the Senior Credit Facility with the lenders identified therein, and Wells Fargo Bank, National Association, as administrative agent. The First Amendment, among other things, (1) provided for an incremental facility of up to $50.0 million through a additional borrowings under the term loan facility and/or increases under the revolving credit facility (2) provided greater flexibility with respect to our ability to incur indebtedness to support permitted acquisitions, and (3) increased the aggregate limitation on sale leasebacks from $20.0 million to $30.0 million during the term of the Senior Credit Facility.

On August 16, 2012, we, along with Aerojet as guarantor, executed an amendment (the “Second Amendment”) to the Senior Credit Facility with the lenders identified therein, and Wells Fargo Bank, National Association, as administrative agent. The Second Amendment, among other things, (1) allowed for the incurrence of up to $510 million of second lien indebtedness in connection with the Acquisition, and (2) provided for a new delayed draw term loan in an amount of up to $50 million in connection with the Acquisition or, in certain circumstances, for general corporate purposes.

On January 14, 2013, we, along with Aerojet as guarantor, executed an amendment (the “Third Amendment”) to the Senior Credit Facility with the lenders identified therein, and Wells Fargo Bank, National Association, as administrative agent. The Third Amendment, among other things, allowed for the 7  1 / 8 % Notes to be secured by a first priority security interest in the escrow account into which the proceeds of the 7   1 / 8 % Notes offering were deposited pending the consummation of the Acquisition.

 

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The Senior Credit Facility, as amended, provides for credit of up to $300.0 million in aggregate principal amount of senior secured financing, consisting of:

 

   

a 5-year $50.0 million term loan facility;

 

   

a 5-year $150.0 million revolving credit facility;

 

   

an incremental facility under which we are entitled to incur, subject to certain conditions, up to $50.0 million of additional borrowings under the term loan facility and/or increases under the revolving credit facility; and

 

   

a delayed draw term loan of up to $50 million.

The revolving credit facility includes a $100.0 million sublimit for the issuance of letters of credit and a $5.0 million sublimit for swingline loans. The term loan facility amortizes in quarterly installments at a rate of 5.0% of the original principal amount per annum, with the balance due on the maturity date. Outstanding indebtedness under the Senior Credit Facility may be voluntarily prepaid at any time, in whole or in part, in general without premium or penalty (subject to customary breakage costs).

As of February 28, 2013, we had $44.8 million outstanding letters of credit under the $100.0 million subfacility for standby letters of credit and had $46.9 million outstanding under the term loan facility.

In general, borrowings under the Senior Credit Facility bear interest at a rate equal to the LIBOR plus 350 basis points (subject to downward adjustment), or the base rate as it is defined in the credit agreement governing the Senior Credit Facility plus 250 basis points (subject to downward adjustment). In addition, we are charged a commitment fee of 50 basis points per annum on unused amounts of the revolving credit facility and 350 basis points per annum (subject to downward adjustment), along with a fronting fee of 25 basis points per annum, on the undrawn amount of all outstanding letters of credit.

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

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

 

Financial Covenant

  

Actual Ratios as of
February 28, 2013

  

Required Ratios

Interest coverage ratio, as defined under the Senior Credit Facility

   5.05 to 1.00    Not less than: 2.4 to 1.00

Leverage ratio, as defined under the Senior Credit Facility

   1.27 to 1.00    Not greater than: 3.5 to 1.00

We were in compliance with our financial and non-financial covenants as of February 28, 2013.

Outlook

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

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

On January 28, 2013, we issued $460.0 million in aggregate principal amount of our 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

 

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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.

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

Major factors that could adversely impact our forecasted operating cash and our financial condition are described in the section “Risk Factors” in Item 1A of our Annual Report to the SEC on Form 10-K for the fiscal year ended November 30, 2012. In addition, our liquidity and financial condition will continue to be affected by changes in prevailing interest rates on the portion of debt that bears interest at variable interest rates.

Forward-Looking Statements

Certain information contained in this report should be considered “forward-looking statements” as defined by Section 21E of the Private Securities Litigation Reform Act of 1995. All statements in this report other than historical information may be deemed forward-looking statements. These statements present (without limitation) the expectations, beliefs, plans and objectives of management and future financial performance and assumptions underlying, or judgments concerning, the matters discussed in the statements. The words “believe,” “estimate,” “anticipate,” “project” and “expect,” and similar expressions, are intended to identify forward-looking statements. Forward-looking statements involve certain risks, estimates, assumptions and uncertainties, including with respect to future sales and activity levels, cash flows, contract performance, the outcome of litigation and contingencies, environmental remediation and anticipated costs of capital. A variety of factors could cause actual results or outcomes to differ materially from those expected and expressed in our forward-looking statements. Important risk factors that could cause actual results or outcomes to differ from those expressed in the forward-looking statements are described in the section “Risk Factors” in Item 1A of our Annual Report to the SEC on Form 10-K for the fiscal year ended November 30, 2012 include the following:

 

   

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

 

   

cancellation or material modification of one or more significant contracts;

 

   

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

 

   

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

 

   

inability to satisfy the conditions or obtain the approvals required to complete the acquisition of the Rocketdyne Business or material restrictions or conditions on such approvals;

 

   

failure to complete the acquisition of the Rocketdyne Business;

 

   

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

 

   

ability to effectively manage the Company’s expanded operations following the acquisition of the Rocketdyne Business;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

failure to secure contracts;

 

   

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

 

   

failure to comply with applicable laws relating to export controls;

 

   

costs and time commitment related to potential acquisition activities;

 

   

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

 

   

failure of the Company’s information technology infrastructure;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

   

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

 

   

reductions in the amount recoverable from environmental claims;

 

   

the results of significant litigation;

 

   

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

 

   

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

 

   

business disruptions;

 

   

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

 

   

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

 

   

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

 

   

risks inherent to the real estate market;

 

   

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

 

   

additional costs related to the Company’s divestitures;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our disclosures related to certain market risks as reported under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report to the SEC on Form 10-K for the fiscal year ended November 30, 2012, except as noted below.

Interest Rate Risk

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

As of February 28, 2013, our debt totaled $708.1 million: $661.2 million, or 93%, was at an average fixed rate of 6.20%; and $46.9 million, or 7%, was at a variable rate of 3.71%.

The estimated fair value and principal amount our outstanding debt is presented below:

 

     Fair Value      Principal Amount  
     February 28,
2013
     November 30,
2012
     February 28,
2013
     November 30,
2012
 
     (In millions)  

Term loan

   $ 46.9       $ 47.5       $ 46.9       $ 47.5   

7  1 / 8 % Notes

     480.4         —           460.0         —     

4  1 / 16 % Debentures

     291.3         246.0         200.0         200.0   

Other debt

     1.2         1.2         1.2         1.2   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 819.8       $ 294.7       $ 708.1       $ 248.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair values of the 7  1 / 8 % Notes and 4  1 / 16 % Debentures were determined using broker quotes that are based on open markets of our debt securities as of February 28, 2013 and November 30, 2012. The fair value of the term loan and other debt was determined to approximate carrying value.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as

 

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amended (“the Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our first quarter of fiscal 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Except as disclosed in Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements, which is incorporated herein by reference, there have been no significant developments in the pending legal proceedings as previously reported in Part 1, Item 3, Legal Proceedings in our Annual Report on Form 10-K for the fiscal year ended November 30, 2012.

Asbestos Cases. The following table sets forth information related to our historical product liability costs associated with our asbestos litigation cases for the first quarter of fiscal 2013:

 

Claims filed as of November 30, 2012

     141   

Claims filed

     5   

Claims tendered

     1   

Claims dismissed

     5   
  

 

 

 

Claims pending as of February 28, 2013

     140   

Legal and administrative fees for the asbestos cases for the first quarter of fiscal 2013 were $0.1 million.

Item 1A. Risk Factors

The information presented below sets forth what we reasonably believe represent material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended November 30, 2012, and should be read in conjunction with the risk factors therein and the information described in this report.

Future reductions or changes in U.S. government spending could adversely affect our financial results.

Our primary aerospace and defense customers include the DoD, and its agencies, the government prime contractors that supply products to these customers, and NASA. 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 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.

 

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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.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine safety disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

 

No.

  

Description

  10.1*    Amendment, dated as of February 12, 2013, to the retention agreement by and between Aerojet-General Corporation and Richard W. Bregard.
  31.1*    Certification of Principal Executive Officer pursuant to Rule 13a — 14 (a) of the Securities Exchange Act of 1934, as amended.
  31.2*    Certification of Principal Financial Officer pursuant to Rule 13a — 14 (a) of the Securities Exchange Act of 1934, as amended.
  32.1*    Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a — 14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statement of Shareholders’ Deficit, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.**

 

* Filed herewith.
** Furnished and not filed herewith.

 

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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    GenCorp Inc.
Date: April 5, 2013     By:  

/s/ Scott J. Seymour

     

Scott J. Seymour

President and Chief Executive Officer

(Principal Executive Officer)

Date: April 5, 2013     By:  

/s/ Kathleen E. Redd

      Kathleen E. Redd
     

Vice President, Chief Financial Officer and Assistant Secretary (Principal Financial Officer and

Principal Accounting Officer)

 

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EXHIBIT INDEX

 

No.

  

Description

  10.1*    Amendment, dated as of February 12, 2013, to the retention agreement by and between Aerojet-General Corporation and Richard W. Bregard.
  31.1*    Certification of Principal Executive Officer pursuant to Rule 13a — 14 (a) of the Securities Exchange Act of 1934, as amended.
  31.2*    Certification of Principal Financial Officer pursuant to Rule 13a — 14 (a) of the Securities Exchange Act of 1934, as amended.
  32.1*    Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a — 14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statement of Shareholders’ Deficit, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.**

 

* Filed herewith.
** Furnished and not filed herewith.

 

46

Exhibit 10.1

AMENDMENT TO RETENTION AGREEMENT

This Amendment to Retention Agreement (the “Amendment”) is made and entered by and between Aerojet-General Corporation, its parents, subsidiaries and affiliates (the “Company”) and Richard W. Bregard (the “Executive”) as of February 12, 2013 (the “Effective Date”).

The parties previously entered into a Retention Agreement dated February 6, 2012 (“Retention Agreement”) for the purposes of retaining Executive during a period of transition for the Company through at least November 30, 2012. Since then, additional circumstances have arisen for which Executive’s unique skill, expertise and talents are required, resulting in the need to amend some of the terms of the February 6, 2012, Retention Agreement to extend the retention period and continue to employ the Executive until at least May 31, 2013.

In consideration of the covenants set forth in this Amendment and the Company’s agreement to pay additional compensation as outlined below, Company and Executive, each intending to be legally bound, hereby agree to amend the Retention Agreement as follows:

 

  1. Paragraphs 1 (a), 4(a), 5, 6, 8, and 9(d) are all amended to delete the references to November 30, 2012 and replace with the date May 31, 2013. All other terms of these paragraphs are unchanged.

 

  2. Paragraph 3 is deleted in its entirety and replaced with the following Paragraph 3:

3. Duties and Title . Executive’s title shall remain the same as it was as of the Effective Date. Executive’s specific duties during the retention period include (i.) continuing as Steering Committee Chair for the Company’s Oracle ERP implementation, accomplishing a successful go-live and continuing to provide leadership to the implementation team as it transitions from implementation to on-going system support ; (ii.) performing as leader of the Aerojet-Rocketdyne integration to achieve successful Day 1 operations as well as appropriate near-term follow-on activities in preparation for stand-up of integrated organization; and (iii.) providing continuing leadership to the Program Management Center of Excellence.

 

  3. Paragraph 4(b) is deleted in its entirety and replaced by the following:

4. (b) The Retention Bonus shall consist of a lump sum payment equal to two hundred thousand dollars ($200,000), less applicable withholdings and deductions.

4. To the extent not specifically amended herein, all other terms, conditions, and covenants, in the Retention Agreement shall remain the same and in effect to the extent not specifically amended by this Amendment and are incorporated herein by reference.

 

INITIALS
Executive: /s/ RWB
Company: /s/ EAZ    

 

Page 1 of 1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott J. Seymour, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of GenCorp Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a — 15(f) and 15d — 15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 5, 2013

 

/s/ Scott J. Seymour

Scott J. Seymour
President and Chief Executive Officer
(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kathleen E. Redd, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of GenCorp Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a — 15(f) and 15d — 15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 5, 2013

 

/s/ Kathleen E. Redd

Kathleen E. Redd
Vice President, Chief Financial Officer and Assistant Secretary
(Principal Financial Officer and Principal Accounting Officer)

Exhibit 32.1

CERTIFICATIONS

PURSUANT TO 18 UNITED STATES CODE §1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies that to his knowledge the quarterly report on Form 10-Q of GenCorp Inc. for the period ended February 28, 2013 (the Report), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the Company, as of the dates and the periods expressed in the Report.

 

/s/ Scott J. Seymour

Scott J. Seymour
President and Chief Executive Officer
(Principal Executive Officer)
Date: April 5, 2013

The undersigned hereby certifies that to her knowledge the quarterly report on Form 10-Q of GenCorp Inc. for the period ended February 28, 2013 (the Report), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the Company, as of the dates and the periods expressed in the Report.

 

/s/ Kathleen E. Redd

Kathleen E. Redd
Vice President, Chief Financial Officer and Assistant Secretary
(Principal Financial Officer and Principal Accounting Officer)
Date: April 5, 2013