Fitch Rates GenCorp's New Convertibles; Rtg Outlook Positive.
NEW YORK--(BUSINESS WIRE)--April 1, 2002
Fitch Ratings has assigned a 'B+' rating to GenCorp's new subordinated convertible notes, which the company intends to issue under Rule 144A, and has affirmed its 'BB' rating on GenCorp Inc.'s (GY) senior debt. The Rating Outlook is changed to Positive from Stable. The ratings and outlook reflect GenCorp's position in the favorable defense market, particularly in missile defense; the decrease in debt levels since the Draftex acquisition; progress in monetizing substantial real estate holdings; and indications of successful restructurings at GDX and AFC. Concerns center on the ongoing integration of the Draftex acquisition; a competitive automotive market; environmental liabilities; and potential acquisitions.
As of February 28, 2002, GenCorp's financial flexibility included cash of $54 million and availability of $22 million under its credit facility, offset by $26 million in current maturities and short-term debt. Total debt reached high levels earlier in fiscal year 2001 ($481 million at 8/31/01 after the Draftex acquisition), but since then GenCorp has reduced debt nearly by half with proceeds from the sale of its EIS division for $315 million. Debt at 2/28/02 was $246 million and total debt to capital was 44%. For fiscal year 2001 leverage, as defined by Debt-to-EBITDA, was 2.1x, and interest coverage was 3.1x. Paying down the debt in late 2001 will lead to materially lower interest expense in 2002, as well as a marked improvement in credit statistics even if operations remain stable. The company recently announced its intention to issue $100 million of convertible subordinated notes due in 2007. This offering should lower GY's interest payments as well as supporting potential acquisition activity. The company will use the proceeds to pay down the balance of Term Loan C and to reduce the amount outstanding under the revolver. Total maturities are $17 million in FY2002 and $22 million in FY2003, assuming Term Loan C is paid down with the proceeds from the subordinated convertible offering.
In October 2001, GenCorp closed the sale of its Aerojet Electronic & Information Systems (EIS) business to Northrop Grumman for $315 million, generating a pretax gain of $206 million. The transaction significantly improved GenCorp's capital structure as the gain increased equity and cash proceeds reduced debt. Fitch considers the transaction a prudent strategic move since it allows Aerojet to focus on its propulsion business, which has a better competitive position than the EIS business, and to focus its operation geographically in the Sacramento area. However, the transaction materially lowered GenCorp's footprint in the aerospace & defense industry since EIS accounted for the bulk of GenCorp's A&D revenues. Excluding the $398 million in revenues EIS contributed in 2001, GenCorp's A&D sales were only $207 million, excluding real estate sales. Fitch expects GenCorp to explore acquisition opportunities to increase its size in the A&D industry. Excluding the effects of the EIS transaction, Fitch believes sales will increase approximately 30% in 2002 on the back of strong contract wins in 2001. Fitch expects margins on a reported basis to decline due to lower pension income, but excluding this non-cash item, margins should be steady. The company should do well in the favorable defense spending environment, particularly as a result of its involvement in missile defense. Two contingencies remain with GenCorp following the EIS sale: environmental liabilities related to the EIS facilities and a purchase price dispute with Northrop. Northrop has proposed a purchase price reduction of $42 million, which GenCorp disputes. An arbitrator will most likely decide the issue.
The GDX Automotive segment faced a challenging year in 2001 due to competitive auto market conditions and integration efforts related to the acquisition on Draftex, which GenCorp purchased in December 2000 for $205 million. The acquisition gave GDX a broader customer and geographic base. In 2001 GenCorp initiated restructuring programs at both GDX and Draftex. The restructuring has included closing three manufacturing facilities; consolidating some facilities; and reducing headcount by 1500. The aggressive restructuring lowered the segment's cost structure by approximately $60 million, which Fitch expects should allow GDX to achieve 5% margin levels for 2002, with the improvement weighted toward the second half. However, 2002 operating margins will remain lower than the segment's potential. First quarter results illustrated the initial benefits of the restructuring. Operating income improved $13 million versus 1Q01, generating a 3.2% operating margin. GDX's first quarter performance was encouraging and it is a key consideration in changing the Rating Outlook to Positive.
AFC has a much-improved outlook for 2002. In December AFC became a wholly owned subsidiary of GenCorp when the parent repurchased NextPharma's 40% stake in AFC. As a result of the repurchase, AFC is now a separate reporting segment of GenCorp. AFC also embarked on a restructuring program in 2001, reducing headcount by more than 40%. With these cost reductions and several new products in the market, AFC appears to be on sounder footing in 2002. Fitch expects AFC's sales to increase to the $45-$50 million range in 2001. Fitch believes AFC should achieve positive operating income in 2002 because of the cost savings from the workforce reductions, marketing cost savings from the termination of the NextPharma relationship, lower start-up costs, and higher volumes. Sales and operating income will be weighted toward the second half.
GenCorp has extensive real estate holdings, although environmental obligations slow the realization of the value associated with these holdings. During 2001 GenCorp took several steps toward monetizing some of its real estate assets. First, in September it reached an agreement with the EPA to remove 2600 acres in Sacramento from Superfund site designation. The EPA subsequently filed the agreement in court, and final approval is expected in April. Second, GenCorp sold 1100 acres in November for $28 million generating a pre-tax gain of $23 million. This acreage is outside the Superfund site, and is unrelated to the 2600 acres under the EPA agreement. Real estate sales during 2001 totaled $36 million and pre-tax profits were $26 million, significant increases from the $6 million in sales and $3 million in profit in 2000. The company announced that it has hired an executive to head its real estate operations.
On January 22, GenCorp announced it would investigate the accounting practices at two GDX plants, and the company delayed the release of earnings and the 10-K by several weeks. The results of the investigation indicated that accounting errors occurred primarily at one plant and consisted of erroneous accounting for customer-owned tooling, inventory, and liability recognition. As a result of the investigation, GenCorp restated financial results for 1999, 2000, and the first nine months of 2001. Fitch believes the accounting review was comprehensive and the results have not materially affected the company's credit quality.
Headquartered in Sacramento, GenCorp is a technology-based manufacturing company that operates in three business segments: GDX Automotive (54% of 2001 sales), Aerospace and Defense (43%) and Fine Chemicals (3%). Aerospace & Defense (Aerojet) contract and funded backlogs at year-end were approximately $603 million and $366 million, respectively.
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|Date:||Apr 1, 2002|
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