1998 Annual Report - Letter to Shareholders
Annual Report ContentsOur Long-Term Objectives
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Message to our shareholders
Like best machines, best companies are often those that consist of fewer, more powerful parts. Such is the case for GenCorp, a fact that has become increasingly evident as we progress along our ongoing journey of change and renewal to grow and deliver enhanced value to our shareholders.
Since my arrival at GenCorp, our strategy has been directed at becoming more focused - a stronger player in fewer businesses - businesses with the greatest potential to generate value from continuing improved performance and expansion in existing markets, and through enhanced growth by entering attractive new, related markets.
We have remained steadfast on this strategic course, which began with an in-depth process of self-examination to determine who we want to be, and to clearly define our long-term objectives and priorities of operational excellence and value-creating growth that continue today to serve as our drivers for success.
We have worked hard to eliminate barriers to achieving our objectives. We have continued to strengthen our leadership team, improve our management processes and cost structures, and evolve a new GenCorp culture based on key behavioral expectations that demand excellence, accountability, and a seamless partnership environment across the corporation.
We have divested a number of non-strategic businesses, and at the same time have aggressively accelerated growth in our fewer key core businesses, both essential elements of our strategy to achieve heightened expectations.
The result of our efforts has led to a very solid trend of continuing positive performance improvement. Our 1998 fiscal year capped the third consecutive year of significant operational improvement and earnings per share growth in our multi-year transformation, and marked another year of substantial value-enhancing growth as a result of our targeted acquisition strategy and evolving organic growth campaign.
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Earnings per share from operations in 1998 were up 9%, despite a $0.10 per share setback in the third quarter from the strike at General Motors. |
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Total sales in 1998 increased ll%. Our non-automotive businesses recorded outstanding performance with an operating profit increase of 28%, and expanded margins of 11.5% versus 10.3% last year, while our Vehicle Sealing automotive business was impacted by the strike at General Motors and higher than expected costs for launching numerous new product lines. However, with major launch costs subsiding and production volumes building, Vehicle Sealing's profitability is expected to increase throughout 1999 as new programs mature, and we expect profit margins to approach historical levels by year-end. |
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Through continued strong management of our balance sheet in 1998, we ended the year with positive cash flow of $34 million from operations, excluding acquisitions. Debt-to-total-capital ratio at year-end was a healthy 52%, even after expenditures of $294 million for acquisitions, and $88 million in capital investments. |
Consistent with our priority of value-creating growth, the execution of key growth strategies in 1998 was outstanding. Aerojet, again this year, was a major contributor, capturing significant new program wins in all of its important product segments, including the rapidly growing fine chemicals business, space surveillance and propulsion.
Within the polymer products segment, substantial value-added growth came in large part from highly successful acquisitions made by our Decorative & Building Products and Performance Chemicals businesses. During the year, Decorative & Building Products completed the purchase of the UK-based commercial wallcovering business from Walker Greenbank, establishing a crucial market leadership foothold in Europe.
Acquisition successes by Performance Chemicals in 1998 included Goodyear's latex operations in Calhoun, Georgia, and Sequa's U.S. specialty chemicals business, with plants in Chester, South Carolina, and Greensboro, North Carolina. Performance Chemicals also got off to an excellent start early in 1999 by completing the purchase of the PolymerLatex U.S. acrylic emulsion polymers business, located in Fitchburg, Massachusetts.
These targeted acquisitions are a perfect fit with our core technologies, products and processes, and very strategic to the plans by our business units to add new capacity, gain market share, broaden customer and distribution bases domestically and internationally, and diversify into new related markets. We are ahead of schedule for integrating them into our fold. You will read more about the synergies and benefits they provide, along with highlights from Aerojet, later in this annual report. The bottom line, however, is that collectively, acquisitions in our polymer segment and new aerospace, defense and fine chemicals programs at Aerojet will generate more than $300 million in new annualized sales moving forward, with strong double-digit operating profit margins.
Our business portfolio was further fine-tuned and strengthened in 1998 with the divestitures of the Plastic Extrusions, Residential Wallcovering and General Wallcoverings Distribution businesses, all non-strategic to GenCorp. These divestitures eliminated a negative operating profit drain of $7 million in 1998. Since 1994 we have successfully divested non-value-adding businesses that had annual combined sales of about $560 million, but essentially zero profits. With these divestitures, we have eliminated the need to divert management attention and focus away from our value-enhancing core operations, and provided resources for acquisitions.
This past December, we also announced our intent to divest the Penn Racquet Sports division, and are moving ahead in discussions with potential strategic and financial buyers. While Penn, as an established worldwide leader in its marketplace, has been a good GenCorp business for many years, it does not fit with our strategy to become more focused in fewer core businesses. For this reason, we believe Penn will have a greater opportunity to capitalize on its brand name equity by operating independently, perhaps as part of a consumer product or sporting goods parent.
1998 was a year of significant milestones on a number of other fronts. Under our Operational Excellence initiatives, Six-Sigma Quality training reached 1,000 people, with over 800 managers and more than 100 black belts now certified. Six-Sigma driven projects met cost reduction targets of about $15 million, supported by additional inventory and cycle time improvements through our Supply Chain Management initiatives.
Emphasis during the year has remained on strengthening our people resources and institutionalizing our behavior driven culture and seamless partnership approach to management. Our efforts in these areas were highlighted in 1998 by the implementation of a new Performance Management Process across the Company, and a higher degree of management training and development offered through the GenCorp Institute.
1998 represents a major step forward on our journey toward the long-term objectives that we introduced on these pages several years ago. Ours is a journey that involves a passionate commitment to excellence, openness and willingness to remain flexible and adaptive to change, and a relentless dedication to create the conditions that enable flawless execution. We now have renewed confidence in our ability to create enhanced shareholder value, and we have begun to experience a taste of what our full potential can be.
The successful implementation of our multi-year strategy, and our resulting continuing improvement has confirmed our belief that to be stronger and more focused on fewer businesses in attractive markets is best. It is this knowledge and our continuous search for additional ways to accelerate value-creating growth that has brought us to another major crossroad in our journey, a journey that is far from complete. We announced in December a plan to spin off our polymer products businesses as a separately traded public company. This was a decision reached by GenCorp's Board of Directors after a rigorous and systematic examination of long-term strategic alternatives that began 18 months ago. And, it marks one of the most important and challenging opportunities ever in the 83-year history of GenCorp.
Under the plan, the new company, as yet unnamed, will consist of our Decorative & Building Products and Performance Chemicals businesses. GenCorp will continue to operate Aerojet's aerospace, defense and fine chemicals businesses, and the automotive Vehicle Sealing business.
At the time the spin-off is completed, all shares of the new polymer products company will be distributed to GenCorp shareholders. We are seeking a ruling from the Internal Revenue Service that the transaction is tax-free to the Company and its shareholders. The spin-off also requires approval by GenCorp shareholders, which we will bring before you in a special meeting scheduled subsequent to our regular annual meeting on March 31, 1999.
The spin-off will provide renewed vitality and opportunity by creating two strong, focused and growing companies with enhanced potential to generate even greater value in the future. It provides a winning solution for some of the issues we face with our current structure as a diversified corporation.
As we currently exist, it is increasingly difficult to optimize growth strategies and fully fund acquisitions and other growth investments for all of our businesses. It is also more and more clear that Aerojet and Vehicle Sealing, with their long-term contracts, large backlogs, and program management culture, must be managed for success very differently from Performance Chemicals and Decorative & Building Products. The separation into two individual companies, with independent management and efficient corporate structures, is a step that will enable both companies to increase focus on their key core businesses. Operating independently will allow GenCorp and the new company to be more cost effective, better tailor capital investments and resources to particular business needs and requirements, enhance competitiveness in their separately served markets, and more aggressively pursue their own growth strategies.
The spin-off will occur at an opportune time, when businesses within each company are experiencing continued solid performance. Each has created exceptional momentum for growth going forward. Combined sales for Decorative & Building Products and Performance Chemicals from 1995 through 1998 have increased by 24%, with an operating profit increase of 68% and margin growth from 10.2% to 13.9%. We expect continued strong improvement in 1999 through realization of the full value from our recent acquisitions and expanding organic growth.
During this same period, Aerojet's sales have climbed in excess of 29%, operating profits have soared by 127%, and operating profit margins have expanded from 5.8% to 10.1%. Our 1999 expectations at Aerojet are for continued strong sales and operating profit growth.
We are looking forward to profit recovery and strong double digit sales growth in 1999 from Vehicle Sealing, stemming from volume increases on new platform launches - the majority of these among the top 10 best selling lightweight truck and sport utility vehicles.
We've highlighted the 1998 accomplishments and future opportunities for each of these businesses on the following pages.
With this strong momentum, both companies will benefit further from separate growth strategies, driven by focused management. The large majority of our employees will benefit as well, through improved opportunities for meaningful long-term employment and career advancement within two healthy, growing companies. Our customers will also reap substantial benefits resulting from increased focus and attention to their unique needs.
Importantly, GenCorp shareholders will share the benefits. We believe that GenCorp as it is currently structured is significantly undervalued, trading at a sizeable discount compared to its industry peers, despite substantial improvements and annual earnings per share growth of more than 20% over the past three years. I have been told quite often that GenCorp, as currently structured, is too complex and difficult to understand with its diverse businesses, and as a result, some potential investors avoid our stock. By creating two more focused, easy to understand companies, and by better positioning both GenCorp and the new company to independently and more effectively pursue strategic growth initiatives, the spin-off should narrow the substantial value gap that exists and unlock additional shareholder value.
We expect the spin-off to be finalized in the second half of 1999. While there are many details yet to be determined, GenCorp expects to refinance its debt with approximately one-half assigned to the new company. The resulting debt level and cash flow for both companies will allow each to continue to invest in the future.
Headquarters for the new polymer products company and the corporate technology center, will remain in the Akron, Ohio area, where headquarters already exist for Decorative & Building Products and Performance Chemicals. Headquarters for the new GenCorp will ultimately move closer to its primary aerospace, defense and fine chemicals businesses located in Sacramento, California. Co-location of corporate and business unit headquarters will provide both companies with significant cost reduction opportunities.
GenCorp's Board of Directors has determined that when the spin-off is complete, I will head the new polymer products company as Chairman and CEO, and Bob Wolfe, currently President of Aerojet, will become Chairman and CEO of GenCorp. I will continue to drive the new polymer products company to execute the growth strategies we initiated three years ago that have led to continuing performance improvement, market share gains, and successful growth and expansion internally and through synergistic acquisitions. Bob will have enhanced capability independently to do the same for GenCorp, with strategies that are individualized for his specific businesses, and with maximum, dedicated resources.
Bob is a seasoned and successful veteran in the aerospace and defense industry, where he has served in numerous executive leadership positions. Since joining GenCorp in 1997 from Pratt and Whitney, where he headed their commercial engines business and earlier their government and space propulsion businesses, Aerojet's performance has been outstanding. We are fortunate to have his leadership capability.
As we move through the spin-off process, our existing objectives and priorities have not changed. We have set the bar for performance even higher in 1999, and will approach it even more passionately and intensely than we have in the past. This year, our Six-Sigma driven operational excellence initiative is accelerating, new marketing strategies will strengthen competitive positions, synergies from recent acquisitions will be realized, and a major new commitment to organic growth will complement continuing efforts to complete key global strategic alliances and joint ventures. And, we will continue our disciplined search for targeted acquisitions that strengthen and expand our strongest core businesses.
The ultimate success of the spin-off plan is dependent upon our performance, accountability and credibility. This is earned only through flawless execution, which continues to be our commitment to you, our shareholders.
John B. Yasinsky
Chairman and Chief Executive Officer
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