GenCorp Reports 2010 Third Quarter Results

SACRAMENTO, Calif., Sept. 29 /PRNewswire-FirstCall/ -- GenCorp Inc. (NYSE: GY) today reported results for the third quarter of 2010.

Financial Overview

The Company provides 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 included at the end of the release.

• Sales for the third quarter of 2010 increased by 4.6%, and totaled $210.7 million compared to $201.4 million for the third quarter of 2009.
• Adjusted EBITDAP for the third quarter of 2010 was $31.8 million, or 15.1% of net sales, compared to $23.9 million, or 11.9% of net sales, for the third quarter of 2009.  
• Segment performance before environmental remediation provision adjustments, retirement benefit plan expense (benefit), and unusual items was $30.4 million for the third quarter of 2010, compared to $21.3 million for the third quarter of 2009.
• Net income for the third quarter of 2010 was $2.8 million, or $0.05 diluted earnings per share, compared to net income of $10.3 million, or $0.17 diluted earnings per share, for the third quarter of 2009.  
• Cash provided by operating activities in the first nine months of 2010 totaled $127.9 million, compared to $75.3 million in the first nine months of the prior year.
• Free cash flow (defined as cash provided by operating activities less capital expenditures) in the first nine months of 2010 totaled $117.9 million, compared to $67.8 million in the first nine months of the prior year.
• As of August 31, 2010, the Company had $202.0 million in net debt (defined as debt principal less cash and marketable securities).

"Our results for the third quarter of 2010 demonstrated continued improvement in our core operating results," said Scott J. Seymour, GenCorp Inc. President and CEO, and President, Aerojet - General Corporation. "We continue to focus on delivering excellent program performance, driving strong financial performance, and creating long-term value for our shareholders."

Operations Review

Aerospace and Defense Segment

Sales for the third quarter of 2010 increased to $208.8 million from $198.1 million in the third quarter of 2009.  The increase in net sales was primarily due to the following: (i) increased deliveries, and follow-on awards received in fiscal 2009 on the Multiple Launch Rocket System ("MLRS") program generating $5.3 million of additional net sales and (ii) increased deliveries under the Tube-launched, Optically-tracked, Wire-guided missile ("TOW") program generating $5.1 million of additional net sales.  

Sales for the first nine months of 2010 increased to $626.2 million from $548.9 million in the first nine months of 2009.  The increase in net sales was primarily due to the following: (i) the release of NASA funding constraints on the Orion crew module and service module propulsion program generating $27.0 million of additional net sales; (ii) awards received in fiscal 2009 on divert and attitude control system programs generating $25.1 million of additional net sales; and (iii) increased deliveries on the MLRS program generating $14.5 million of additional net sales.  The increase in net sales was partially offset by a decline in deliveries of rocket motors under the Atlas V program in the current period compared to the prior year period.

Segment performance for the third quarter of 2010 was income of $21.6 million compared to income of $20.6 million in the third quarter of 2009. The increase in segment performance in the third quarter of 2010 as compared to the third quarter of 2009 was primarily the result of the following: (i) an increase of $9.8 million in contract gross profit as a result of overall improvement in contract performance in the current period compared to the prior period, and to a lesser extent, higher sales and (ii) a decrease of $2.7 million in environmental remediation costs primarily due to an increase in the estimated future environmental remediation costs recoverable under U.S. government contracts in the third quarter of 2010.  The improvements in segment performance were partially offset by the following: (i) an increase of $9.1 million in non-cash retirement benefit plan expense and (ii) an increase of $1.7 million in unusual items.

Segment performance was income of $51.7 million in the first nine months of 2010 compared to income of $58.5 million in the first nine months of 2009.  The decrease in segment performance was primarily the result of an increase in non-cash retirement benefit plan expense in 2010 partially offset by an increase in contract gross profit as a result of overall improvement in contract performance in the current period compared to the prior period, and to a lesser extent, higher sales.  

A summary of our backlog is as follows:

Total backlog includes both funded backlog (the amount for which money has been directly appropriated by the U.S. Congress, or for which a purchase order has been received from a commercial 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 delivery delays or program cancellations which are beyond our control.

Real Estate Segment

Sales and segment performance for the third quarter of 2010 were $1.9 million and $1.5 million, respectively, compared to $3.3 million and $1.5 million for the third quarter of 2009, respectively.  Sales and segment performance for the first nine months of 2010 were $5.4 million and $4.0 million, respectively, compared to $6.4 million and $3.5 million for the first nine months of 2009, respectively.  The decrease in net sales was primarily due to a $1.7 million land sale in the third quarter of 2009 resulting in a gain of $0.5 million.  Net sales and segment performance consist primarily of rental property operations in 2010.

Additional Information

Debt Activity

As of December 1, 2009, the Company adopted a new accounting standard which applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. The guidance is effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2008 and is to be applied retrospectively to all past periods presented—even if the instrument has matured, converted, or otherwise been extinguished as of the effective date of this guidance.  The Company's adoption of this guidance affects its 2¼% Convertible Subordinated Debentures ("2¼% Debentures"). Accordingly, during the third quarter and first nine months of 2010, interest expense includes $1.6 million and $5.5 million, respectively, of non-cash debt discount amortization. Additionally, during the third quarter and first nine months of 2009 interest expense includes $1.9 million and $5.7 million, respectively, of non-cash debt discount amortization.

As of August 31, 2010, the borrowing limit under the revolving credit facility was $65.0 million with all of it available. Also, as of August 31, 2010, the Company had $69.1 million outstanding letters of credit under the $100.0 million letter of credit subfacility and had permanently reduced the amount of its term loan subfacility to the $51.2 million outstanding.  

The Company's borrowing / repayment activity during the first nine months of 2010 was as follows:

Retirement Benefit Plans

Components of retirement benefit expense (benefit) are as follows:

The increase in retirement benefit expense reflects higher actuarial losses recognized in the third quarter and first nine months of 2010 compared to the comparable 2009 periods.  The increase was primarily the result of (i) a decrease in the discount rate, due to lower market interest rates used to determine the Company's retirement benefit obligation, to 5.65% as of November 30, 2009 compared to 7.10% as of August 31, 2008 and (ii) an increase in the impact of amortization of prior years' net investment losses, including the fourth quarter of 2008 which was not previously recognized due to the August 31, 2008 valuation date.

The Pension Protection Act (the "PPA") requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the funded status of the plan as of specified measurement dates.  In general, the PPA requires companies with under-funded plans to make up the shortfall over a 7-year period.  These values are based on assumptions specified by the Internal Revenue Service, and are typically not the same as the amounts used for corporate financial reporting.  Companies may prepay contributions, and use those prepayments to offset otherwise required contributions in future years.  The Company has accumulated such prepayments, and is permitted to use these prepayments to meet minimum funding requirements.  The funded ratio as of November 30, 2009 under the PPA for the Company's tax-qualified defined benefit pension plan was 95.6% which was above the 94.0% ratio required under the PPA. The value of unfunded accrued benefits and the amount of required contribution each year are based on a number of factors, including plan investment experience and interest rate environment, and as such can fluctuate significantly from year to year.

Forward-Looking Statements

This release may contain certain "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. Such statements in this release and in subsequent discussions with the Company's management are based on management's current expectations and are subject to risks, uncertainty and changes in circumstances, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. All statements contained herein and in subsequent discussions with the Company's management that are not clearly historical in nature are forward-looking and the words "anticipate," "believe," "expect," "estimate," "plan," and similar expressions are generally intended to identify forward-looking statements.  A variety of factors could cause actual results or outcomes to differ materially from those expected and expressed in the Company's forward-looking statements. Some important risk factors that could cause actual results or outcomes to differ from those expressed in the forward-looking statements include, but are not limited to, the following:

• the cost of servicing the Company's debt and the Company's ability to comply with the financial and other covenants contained in the Company's debt agreements;
• the earnings and cash flow of the Company's subsidiaries and the distribution of those earnings to the Company;
• the funded status of the Company's defined benefit pension plan and the Company's obligation to make cash contributions in excess of the amount that the Company can recover in its current period overhead rates;
• effects of changes in discount rates, actual returns on plan assets, and government regulations of defined benefit pension plans;
• the possibility that environmental and other government regulations that impact the Company become more stringent or subject the Company to material liability in excess of its established reserves;
• environmental claims related to the Company's current and former businesses and operations;
• changes in the amount recoverable from environmental claims;
• the results of significant litigation;
• cancellation or material modification of one or more significant contracts;
• future reductions or changes in U.S. government spending;
• 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;
• significant competition and the Company's inability to adapt to rapid technological changes;
• product failures, schedule delays or other problems with existing or new products and systems;
• the release or explosion of dangerous materials used in the Company's businesses;
• loss of key qualified suppliers of technologies, components, and materials;
• 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;
• the Company's ability to execute its real estate business plan including our ability to obtain, or caused to be obtained, the necessary final governmental zoning, land use and environmental approvals and building permits;
• costs and time commitment related to potential acquisition activities;
• additional costs related to the Company's divestitures;
• a strike or other work stoppage or the Company's inability to renew collective bargaining agreements on favorable terms;
• the loss of key employees and shortage of available skilled employees to achieve anticipated growth;
• fluctuations in sales levels causing the Company's quarterly operating results and cash flows to fluctuate;
• occurrence of liabilities that are inadequately covered by indemnity or insurance;
• changes in the Company's contract-related accounting estimates;
• new accounting standards that could result in changes to the Company's methods of quantifying and recording accounting transactions;
• failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act; and
• those risks detailed from time to time in the Company's reports filed with the SEC.

About GenCorp

GenCorp is a leading technology-based manufacturer of aerospace and defense products and systems with a real estate segment that includes activities related to the entitlement, sale and leasing of the Company's excess real estate assets. Additional information about the Company can be obtained by visiting the Company's web site at http://www.GenCorp.com.

(Tables to follow)

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 restructuring and unusual items relating to operations. Segment performance excludes corporate income and expenses, income or expenses related to divested businesses, provisions for unusual items not related to the operations, stock-based compensation, interest expense, interest income, and income taxes.  The Company believes that segment performance provides information useful to investors in understanding its underlying operational performance.  Specifically, the Company believes the exclusion of the items listed above permits an evaluation and a comparison of results for on-going business operations. It is on this basis that management internally assesses the financial performance of its segments.

(1) Adjusted due to the adoption of new authoritative accounting guidance related to convertible debt securities

Use of Non-GAAP Financial Measures

In addition to segment performance (discussed earlier in this release), the Company provides Non-GAAP financial measure of the Company's operational performance called Adjusted EBITDAP.  Management uses this metric to further its own understanding of the Company's historical and prospective consolidated core operating performance of its segments, net of expenses incurred by its corporate activities in the ordinary, ongoing and customary course of its operations.  Further, the Company believes 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 of the Company, and items incurred outside the ordinary, ongoing and customary course of its operations.  Accordingly, management defines Adjusted EBITDAP as GAAP income before income taxes adjusted by interest expense, interest income, depreciation and amortization, retirement benefit plan costs (pension and postretirement benefits), and unusual items which management does not believe are reflective of such ordinary, ongoing and customary course activities.

The Company believes that providing this additional information is useful to better understand and assess the Company's operating performance.  The measure allows investors, analysts, lenders, and other parties to better evaluate the Company's financial performance and prospects in the same manner as management.  Because the Company's method for calculating the non-GAAP measure may differ from other companies' methods, the non-GAAP measure presented below may not be comparable to similarly titled measures reported by other companies.  This measure is not recognized in accordance with GAAP, and the Company does not intend for this information to be considered in isolation or as a substitute for GAAP measures.

SOURCE GenCorp Inc.