Common use of Notes to Consolidated Financial Statements Clause in Contracts

Notes to Consolidated Financial Statements. Summary of significant accounting policies (continued) The Company reviews its long-term assets for impairment in accordance with the guidelines of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," (SFAS 121). SFAS 121 requires that, when changes in circumstances indicate that the carrying amount of an asset may not be recoverable, the Company should determine if impairment of value exists. Impairment is measured as the amount by which the carrying amount of the asset exceeds the expected future undiscounted cash flows from the use and eventual disposal of the assets under review. Any write-downs are treated as a permanent reduction in the carrying value of the assets. Cash equivalents--For purposes of reporting cash flows, the Company considers ---------------- all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Intangible assets and costs in excess of fair value of assets purchased-- ----------------------------------------------------------------------- Intangible assets include purchased intangibles (customer lists, engineering drawings, noncompete agreements, and sales backlog). Such intangible assets and costs in excess of fair value of assets purchased are being amortized over the estimated useful lives of the assets ranging from 5 to 40 years. Income taxes--Deferred income taxes are recognized using the liability ------------ method. Under this method of accounting, deferred income taxes are recorded for the difference between the financial reporting and income tax bases of assets and liabilities using enacted tax rates and laws. Stock-based compensation--The Company generally grants stock options for a ------------------------ fixed number of shares to employees and directors with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and accordingly, recognizes no compensation expense for the stock option grants in which the exercise price is equal to the fair value of the shares granted. Earnings per share--Effective February 28, 1998, the Company adopted ------------------ Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which established new standards for computing and disclosing earnings per share. SFAS No. 128 requires dual presentation of "basic" and "diluted" earnings per share, each as defined therein, which replaced primary and fully diluted earnings per share, respectively, required under previous guidance. The new standard had no effect on previously reported earnings per share amounts. Fair value of financial investments--The following methods and assumptions ----------------------------------- were used by the Company in estimating its fair value disclosures for financial instruments as of February 28, 1999: Cash and cash equivalents: The carrying amount reported in the consolidated balance sheet for cash and cash equivalents approximates fair value. Accounts receivable and accounts payable: The recorded amounts of the Company's accounts receivable and accounts payable approximate fair value.

Notes to Consolidated Financial Statements. Summary CONTINUED Goodwill represents the excess of significant accounting policies (continued) The Company reviews its purchase price over the estimated fair value of net assets acquired and is amortized on a straight-line basis over periods ranging from 15 to 20 years. Identifiable intangible assets, such as patents, trademarks and licenses, are recorded at cost or when acquired as part of a business combination at estimated fair value. Identifiable intangible assets are amortized over their estimated useful life using the straight-line method over periods ranging from 3 to 15 years. Accumulated amortization of goodwill and identifiable intangible assets was $4 million as of both November 30, 2000 and 1999. Impairment of long-term lived assets for impairment in accordance with the guidelines of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," (SFAS 121). SFAS 121 requires that, is recognized when events or changes in circumstances indicate that the carrying amount of an asset the asset, or related groups of assets, may not be recoverable, the Company should determine if impairment . Measurement of value exists. Impairment is measured as the amount by which of impairment may be based on appraisal, market values of similar assets or estimated discounted future cash flows resulting from the use and ultimate disposition of the asset. INCOME TAXES -- Deferred income taxes are provided for temporary differences between the carrying amount of the asset exceeds the expected future undiscounted cash flows from the use assets and eventual disposal of the assets under reviewliabilities for financial reporting and income tax purposes. Any write-downs are treated as a permanent reduction in the carrying value of the assets. Cash equivalents--STATEMENTS OF CASH FLOWS -- For purposes of reporting the statements of cash flows, the Company considers ---------------- all highly liquid debt instruments purchased with an original maturity of three months or less less, are considered to be cash equivalents. Intangible assets and costs in excess of fair value of assets purchased-- ----------------------------------------------------------------------- Intangible assets include purchased intangibles (customer lists, engineering drawings, noncompete agreements, and sales backlog). Such intangible assets and costs in excess of fair value of assets purchased are being amortized over the estimated useful lives of the assets ranging from 5 RECLASSIFICATIONS -- Certain reclassifications have been made to 40 years. Income taxes--Deferred income taxes are recognized using the liability ------------ method. Under this method of accounting, deferred income taxes are recorded for the difference between the conform prior year's financial reporting and income tax bases of assets and liabilities using enacted tax rates and laws. Stock-based compensation--The Company generally grants stock options for a ------------------------ fixed number of shares to employees and directors with an exercise price equal information to the fair value of the shares at the date of grantcurrent year's presentation. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and accordingly, recognizes no compensation expense for the stock option grants in which the exercise price is equal to the fair value of the shares granted. Earnings per share--Effective February 28NOTE B -- DISCONTINUED OPERATIONS On December 17, 1998, the Company adopted ------------------ Statement announced a plan to spin off its Performance Chemicals and Decorative & Building Products businesses (OMNOVA Solutions Inc.) to GenCorp shareholders as a separate, publicly traded company. During the third fiscal quarter of Financial Accounting Standards (SFAS) No1999, the Internal Revenue Service issued a favorable ruling that GenCorp's planned spin-off would be a tax-free transaction. 128Shareholders voted to approve the transaction at a special shareholder meeting on September 8, "Earnings per Share," which established new standards 1999. GenCorp's Board of Directors gave final approval of the plan on September 17, 1999 and declared a dividend of one share of OMNOVA Solutions Inc. common stock for computing and disclosing earnings per share. SFAS No. 128 requires dual presentation each share of "basic" and "diluted" earnings per shareGenCorp common stock held on the September 27, each as defined therein, which replaced primary and fully diluted earnings per share, respectively, required under previous guidance1999 record date for the dividend. The new standard had no effect dividend distribution was made on previously reported earnings per share amountsOctober 1, 1999. Fair value of financial investments--The following methods GenCorp continues to operate Aerojet, its existing aerospace, defense and assumptions ----------------------------------- were used by fine chemicals segment, and its vehicle sealing segment. On April 30, 1999, the Company in estimating sold its fair value disclosures Penn Racquet Sports division (Penn) to HTM Sports-und Freizeitgerate AG, an Austrian company and HTM USA Holdings Inc., for aggregate consideration of approximately $42 million. The Company recognized a pre-tax gain of $16 million on this transaction. GenCorp has effectively disposed of its Polymer Products segment as a result of the spin-off and sale of Penn, and the Company's financial instruments statements now reflect OMNOVA Solutions Inc. and Penn as of February 28, 1999: Cash and cash equivalents: The carrying amount reported in the consolidated balance sheet for cash and cash equivalents approximates fair valuediscontinued operations. Accounts receivable and accounts payable: The recorded amounts Discontinued operations also include certain other operations of the Company's Polymer Products segment which were previously sold and expenses related to the spin-off totaling approximately $25 million. Interest expense allocated to the business segments by GenCorp management, based on the use of the borrowings, amounted to $14 million and $8 million in 1999 and 1998, respectively. The table below presents results for these discontinued operations during fiscal 1999 and 1998: ---------------------- 1999 1998 -------- -------- (DOLLARS IN MILLIONS) Net Sales................................................... $666 $689 Income before income taxes.................................. $ 50 $ 76 Income tax provision........................................ (24) (30) Income from discontinued operations, net of taxes........... $ 26 $ 46 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE C -- UNUSUAL ITEMS During 2000, the Company incurred unusual items resulting in a loss before taxes of $4 million. Unusual items included a gain of $5 million from the sale of an equity interest in Aerojet Fine Chemicals to NextPharma Technologies; a $3 million gain from an environmental settlement related to a discontinued operation, offset by an $8 million charge related to a foreign currency hedge transaction associated with the acquisition of Draftex International Car Body Seals; a $3 million charge related to the pension settlement of a discontinued Canadian operation; and a $1 million loss on the disposition of property related to a discontinued operation. During 1999, the Company incurred unusual items resulting in income before taxes of $12 million. Unusual items included a gain of $59 million on settlements covering certain environmental claims with certain of the Company's insurance carriers (see Note S -- Contingencies); a provision of $33 million for environmental remediation costs associated principally with the Company's initial estimate of its probable share, as a Potentially Responsible Party (PRP), in the portion of the San ▇▇▇▇▇▇▇ Valley Basin Superfund Site known as the ▇▇▇▇▇▇▇ Park Operable Unit (BPOU) (see Note S -- Contingencies); a provision for environmental remediation costs at the Company's Lawrence, Massachusetts site of $6 million (see Note S -- Contingencies); a provision for environmental remediation costs associated with other Company sites of $2 million (see Note S -- Contingencies); a charge of $4 million related to a pricing dispute with a major vehicle sealing customer; a charge of $1 million for the write-down of certain vehicle sealing assets to net realizable value; and a charge of $1 million related to relocation/retention costs associated with the spin-off. During 1998, the Company incurred unusual items resulting in income of $9 million. Unusual items included charges of $4 million primarily related to exiting the Plastic Extrusions appliance gasket business offset by a gain of $13 million from the sale of surplus land in Nevada by Aerojet. NOTE D -- NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which is required to be adopted in years beginning after June 15, 2000. Because of the Company's historically minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. However, the Company is evaluating future transactions that may be subject to the provisions of the new Statement. NOTE E -- ACQUISITIONS, DIVESTITURES AND OTHER MATTERS On June 5, 2000, the Company finalized an agreement with NextPharma Technologies (NextPharma) to sell a 20 percent equity interest in Aerojet Fine Chemicals for approximately $25 million in cash and exchange an additional 20 percent equity interest for an approximate 35 percent equity interest in NextPharma. NextPharma, a privately held company, operates in the United States and Europe, focusing on contract process development and manufacturing in the pharmaceutical industry. GenCorp continues to manage, operate, and consolidate Aerojet Fine Chemicals as majority owner. In connection with the transaction, the Company recorded a gain on the sale of a minority interest in a subsidiary of approximately $5 million. In addition, the Company initially recorded minority interest of approximately $26 million, included in other long-term liabilities, and an investment in NextPharma of approximately $6 million. On December 29, 2000 the Company acquired The ▇▇▇▇▇ Group's Draftex International Car Body Seals Division (Draftex) at an estimated purchase price of approximately $208 million. The final purchase price will reflect certain working capital adjustments. Draftex is now part of the Company's Vehicle Sealing business segment and adds 11 manufacturing plants in six countries including Spain, France, Germany, Czech Republic, China, and the United States. The acquisition will be accounted for under the purchase method of accounting. The purchase price allocation will be made in the first quarter of 2001. In connection with the acquisition, the Company entered into a new, $500 million credit facility (see Note N). NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE F -- EARNINGS PER SHARE A reconciliation of the numerator and denominator used in the basic and diluted earnings per share from continuing operations computations is as follows: YEARS ENDED NOVEMBER 30 2000 1999 1998 (DOLLARS IN MILLIONS) NUMERATOR FOR BASIC AND DILUTED EARNINGS PER SHARE Income from continuing operations available to common shareholders.............................................. $ 55 $ 46 $ 38 ====== ====== ====== (SHARES IN THOUSANDS) DENOMINATOR shares outstanding........................................ 41,933 41,741 41,468 Effect of dilutive securities: Dilutive potential common shares............................ 119 407 565 Denominator for diluted earnings per share -- adjusted EARNINGS FROM CONTINUING OPERATIONS PER SHARE OF COMMON STOCK Basic earnings per share.................................... $ 1.31 $ 1.11 $ 0.91 Diluted earnings per share.................................. $ 1.31 $ 1.09 $ 0.90 NOTE G -- RESEARCH AND DEVELOPMENT EXPENSE Company-sponsored Research and Development (R&D) expense was $26 million in 2000 and 1999, and $20 million in 1998. Company-sponsored R&D expense includes the costs of technical activities that are useful in developing new products, services, processes or techniques, as well as those expenses for technical activities that may significantly improve existing products or processes. Customer-sponsored R&D expenditures, which are funded under government contracts, totaled $162 million in 2000, $230 million in 1999 and $207 million in 1998. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE H -- INCOME TAXES YEARS ENDED NOVEMBER 30 2000 1999 1998 (DOLLARS IN MILLIONS) INCOME TAX PROVISION FROM CONTINUING OPERATIONS CURRENT U.S. federal................................................ $(28) $ 30 $ 6 State and local............................................. (8) 10 -- Foreign..................................................... 8 2 4 (28) 42 10 DEFERRED U.S. federal................................................ 51 (12) 11 State and local............................................. 13 (4) 3 Foreign..................................................... 1 4 (2) 65 (12) 12 Income Tax Provision.............................. $ 37 $ 30 $ 22 ==== ==== ==== EFFECTIVE INCOME TAX RATE Statutory federal income tax rate........................... 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit................................................... 4.1 3.4 3.7 Tax settlements, including interest......................... -- -- (3.0) Earnings of subsidiaries taxed at other than U.S. statutory rate...................................................... 0.7 0.2 -- Others, net................................................. 0.2 0.7 1.5 Effective Income Tax Rate......................... 40.0% 39.3% 37.2% ==== ==== ==== The Company reduced its 1998 income tax expense by $2 million, due to the receipt of federal income tax settlements for tax credits and related interest. ---------------------------------------------- 2000 1999 --------------------- --------------------- ASSETS LIABILITIES ASSETS LIABILITIES ----------- ------ ----------- (DOLLARS IN MILLIONS) Accrued estimated costs................................ $ 91 $ -- $116 $ -- Long-term contract method.............................. 6 -- 8 -- Depreciation........................................... -- 12 -- 9 Pensions............................................... -- 109 -- 36 NOLs and tax credit carryforwards...................... 3 -- 5 -- Other postretirement/employee benefits................. 108 -- 117 -- ---- The consolidated balance sheets reflect net deferred income taxes of $11 million and $52 million in prepaid expenses and other as of November 30, 2000 and 1999, respectively. Included in other long-term assets as of November 30, 2000 and 1999 are net deferred income taxes of $76 million and $149 million, respectively. The majority of net operating loss (NOLs) and tax credit carryforwards have an indefinite carryforward period with the remaining portion expiring in years through 2007. Pre-tax income from continuing operations of foreign subsidiaries was $24 million in fiscal 2000, $17 million in 1999 and $8 million in 1998. Cash paid during the year for income taxes of continuing and discontinued operations was $10 million in 2000, $58 million in 1999 and $33 million in 1998. Deferred taxes as of November 30, 2000 have been reduced by $49 million as a result of the cumulative effect of a change in accounting principle related to employee benefit plans as discussed in Note K. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE I -- ACCOUNTS RECEIVABLE As of November 30, the amount of commercial receivables was $82 million and $79 million for 2000 and 1999, respectively. Receivables for the vehicle sealing segment of $63 million in both 2000 and 1999, are due primarily from General Motors and Ford. The amount of United States Government receivables was $53 million and $60 million for 2000 and 1999, respectively. Included in the 2000 and ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇ Government receivables is $10 million and $12 million, respectively, for environmental remediation recovery (see Note S -- Contingencies). The Company's receivables are generally unsecured and are not backed by collateral from its customers. Also included in accounts receivable from the United States Government are unbilled receivables of $3 million and accounts payable approximate fair value.$10 million as of November 30, 2000 and 1999, respectively, relating to long-term government contracts. Such amounts are billed either upon delivery of completed units or settlements of contracts. The unbilled receivables amount as of November 30, 2000 includes $2 million expected to be collected in fiscal year 2001, and $1 million expected to be collected in subsequent years. NOTE J -- INVENTORIES 2000 -------- (DOLLARS IN 1999 -------- MILLIONS) Raw materials and supplies.................................. $ 28 $ 23 Work-in-process............................................. 12 4 Finished products........................................... Approximate replacement cost of inventories................. 9 ----- 49 10 ----- 37 Reserves, primarily LIFO.................................... (7) (6)