AJRD 10-Q Quarterly Report Feb. 28, 2010

AJRD 10-Q Quarter ended Feb. 28, 2010

Exhibits

Exhibits

AEROJET ROCKETDYNE HOLDINGS, INC.

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10-Q 1 f55356e10vq.htm FORM 10-Q e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended: February 28, 2010


o		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 (State of Incorporation)		34-0244000 (I.R.S. Employer Identification No.)

Highway 50 and 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 þ No o

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 o No o The registrant is not yet subject to this requirement.

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):

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

As of March 23, 2010, there were 58.5 million outstanding shares of our Common Stock, including redeemable common stock, $0.10 par value.

GenCorp Inc.

Quarterly Report on Form 10-Q
For the Quarterly Period Ended February 28, 2010

Table of Contents


Item
Number	Page
PART I — FINANCIAL INFORMATION
1 Financial Statements		3
2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		34
3 Quantitative and Qualitative Disclosures About Market Risk		44
4 Controls and Procedures		45
PART II — OTHER INFORMATION
1 Legal Proceedings		46
1A Risk Factors		46
2 Unregistered Sales of Equity Securities and Use of Proceeds		46
3 Defaults Upon Senior Securities		46
4 Reserved		47
5 Other Information		47
6 Exhibits		47
SIGNATURES
Signatures
EXHIBIT INDEX
Exhibit Index		48
EX-31.1
EX-31.2
EX-32.1

Part I — FINANCIAL INFORMATION


Item 1.		Financial Statements

GenCorp Inc.
Condensed Consolidated Statements of Operations
(Unaudited)


	Three months ended
				February 28,
	February 28,			2009
	2010			As adjusted (Note 1)
	(In millions, except per share amounts)
Net sales	$	186.8		$	170.9
Operating costs and expenses:
Cost of sales (exclusive of items shown separately below)		169.7			148.9
Selling, general and administrative		5.0			2.1
Depreciation and amortization		6.0			6.0
Other expense (income), net		0.1			(0.4	)
Unusual items:
Legal related matters		0.2			0.4
Executive severance agreements		1.4			1.8

Total operating costs and expenses		182.4			158.8
Operating income		4.4			12.1
Non-operating (income) and expense:
Interest income		(0.3	)		(0.5	)
Interest expense		10.4			9.9

Total non-operating expenses, net		10.1			9.4

(Loss) income from continuing operations before income taxes		(5.7	)		2.7
Income tax provision (benefit)		4.2			(20.5	)

(Loss) income from continuing operations		(9.9	)		23.2
Income (loss) from discontinued operations, net of income taxes		1.0			(3.8	)

Net (loss) income	$	(8.9	)	$	19.4

(Loss) Income Per Share of Common Stock
Basic:
(Loss) income per share from continuing operations	$	(0.17	)	$	0.40
Income (loss) per share from discontinued operations, net of income taxes		0.02			(0.07	)

Net (loss) income per share	$	(0.15	)	$	0.33

Diluted:
(Loss) income per share from continuing operations	$	(0.17	)	$	0.37
Income (loss) per share from discontinued operations, net of income taxes		0.02			(0.06	)

Net (loss) income per share	$	(0.15	)	$	0.31

Weighted average shares of common stock outstanding		58.5			58.3

Weighted average shares of common stock outstanding, assuming dilution		58.5			66.4

See Notes to Unaudited Condensed Consolidated Financial Statements.

GenCorp Inc.
Condensed Consolidated Balance Sheets
(Unaudited)


				November 30,
	February 28,			2009
	2010			As adjusted (Note 1)
	(In millions, except per share amounts)
ASSETS
Current Assets
Cash and cash equivalents	$	139.1		$	126.3
Marketable securities		44.9			—
Accounts receivable		96.3			116.3
Inventories		53.3			61.8
Recoverable from the U.S. government and other third parties for environmental remediation costs and other		31.7			30.6
Grantor trust		2.7			2.4
Other receivables, prepaid expenses and other		23.0			32.8
Income taxes		—			2.4

Total Current Assets		391.0			372.6
Noncurrent Assets
Restricted cash		67.3			—
Property, plant and equipment, net		129.2			129.9
Real estate held for entitlement and leasing		56.4			55.3
Recoverable from the U.S. government and other third parties for environmental remediation costs and other		153.1			154.3
Grantor trust		15.9			17.8
Goodwill		94.9			94.9
Intangible assets		18.1			18.5
Other noncurrent assets, net		92.8			91.6

Total Noncurrent Assets		627.7			562.3

Total Assets	$	1,018.7		$	934.9

LIABILITIES, REDEEMABLE COMMON STOCK, AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Short-term borrowings and current portion of long-term debt	$	1.2		$	17.8
Accounts payable		24.1			18.4
Reserves for environmental remediation costs		46.6			44.5
Postretirement medical and life benefits		7.2			7.2
Advance payments on contracts		89.6			66.0
Other current liabilities		107.7			107.5

Total Current Liabilities		276.4			261.4
Noncurrent Liabilities
Senior debt		51.0			51.2
Senior subordinated notes		97.5			97.5
Convertible subordinated notes		331.7			254.4
Other debt		—			0.7
Deferred income taxes		11.1			9.6
Reserves for environmental remediation costs		175.2			178.2
Pension benefits		220.4			225.0
Postretirement medical and life benefits		75.1			75.7
Other noncurrent liabilities		48.3			54.1

Total Noncurrent Liabilities		1,010.3			946.4

Total Liabilities		1,286.7			1,207.8
Commitments and Contingencies (Note 7)
Redeemable common stock, par value of $0.10; 0.5 million shares issued and outstanding as of February 28, 2010; 0.6 million shares issued and outstanding as of November 30, 2009		5.5			6.0
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; 58.0 million shares issued and outstanding as of February 28, 2010; 57.9 million shares issued and outstanding as of November 30, 2009		5.9			5.9
Other capital		258.6			258.0
Accumulated deficit		(197.9	)		(189.0	)
Accumulated other comprehensive loss, net of income taxes		(340.1	)		(353.8	)

Total Shareholders’ Deficit		(273.5	)		(278.9	)

Total Liabilities, Redeemable Common Stock and Shareholders’ Deficit	$	1,018.7		$	934.9

See Notes to Unaudited Condensed Consolidated Financial Statements.

GenCorp Inc.
Condensed Consolidated Statement of Shareholders’ Deficit and Comprehensive Income
(Unaudited)


													Accumulated
													Other			Total
	Comprehensive			Common Stock				Other		Accumulated			Comprehensive			Shareholders’
	Income			Shares		Amount		Capital		Deficit			Loss			Deficit
						(In millions, except share amounts)
November 30, 2009 As adjusted (Note 1)					57,923,763	$	5.9	$	258.0	$	(189.0	)	$	(353.8	)	$	(278.9	)
Net loss	$	(8.9	)		—		—		—		(8.9	)		—			(8.9	)
Amortization of actuarial losses, net		13.7			—		—		—		—			13.7			13.7
Reclassification from redeemable common stock		—			41,236		—		0.5		—			—			0.5
Shares issued under stock option and stock incentive plans		—			—		—		0.1		—			—			0.1

February 28, 2010	$	4.8			57,964,999	$	5.9	$	258.6	$	(197.9	)	$	(340.1	)	$	(273.5	)

See Notes to Unaudited Condensed Consolidated Financial Statements.

GenCorp Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)


	Three months ended
				February 28,
				2009
	February 28,			As adjusted
	2010			(Note 1)
	(In millions)
Operating Activities
Net (loss) income	$	(8.9	)	$	19.4
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
(Income) loss from discontinued operations, net of income taxes		(1.0	)		3.8
Depreciation and amortization		6.0			6.0
Amortization of debt discount and financing costs		3.2			3.2
Stock compensation		(1.5	)		0.1
Savings plan expense		—			1.3
Net recognized loss on marketable securities		0.1			—
Changes in assets and liabilities:
Accounts receivable		20.0			(0.5	)
Inventories		8.5			(1.7	)
Grantor trust		1.6			0.2
Other receivables, prepaid expenses and other		7.3			(3.7	)
Income tax receivable		2.4			(15.0	)
Real estate held for entitlement and leasing		(1.1	)		(1.9	)
Other noncurrent assets		4.8			10.6
Accounts payable		5.7			(2.1	)
Pension benefits		10.1			(0.8	)
Postretirement medical and life benefits		(1.5	)		(2.8	)
Advance payments on contracts		23.6			1.1
Other current liabilities		6.2			(8.8	)
Deferred income taxes		1.5			0.3
Other noncurrent liabilities		(9.3	)		(18.9	)

Net cash provided by (used in) continuing operations		77.7			(10.2	)
Net cash used in discontinued operations		(0.3	)		(0.3	)

Net Cash Provided by (Used in) Operating Activities		77.4			(10.5	)
Investing Activities
Restricted cash		(67.3	)		—
Purchases of marketable securities		(75.9	)		—
Sales of marketable securities		30.9			—
Capital expenditures		(4.2	)		(1.7	)

Net Cash Used in Investing Activities		(116.5	)		(1.7	)
Financing Activities
Proceeds from the issuance of debt		200.0			—
Debt issuance costs		(5.9	)		—
Debt repayments		(142.2	)		(0.9	)

Net Cash Provided by (Used in) Financing Activities		51.9			(0.9	)

Net Increase (Decrease) in Cash and Cash Equivalents		12.8			(13.1	)
Cash and Cash Equivalents at Beginning of Period		126.3			92.7

Cash and Cash Equivalents at End of Period	$	139.1		$	79.6

See Notes to Unaudited Condensed Consolidated Financial Statements.

GenCorp Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

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 our Annual Report on Form 10-K for the fiscal year ended November 30, 2009, as filed with the Securities and Exchange Commission (“SEC”). Certain reclassifications have been made to financial information from the prior year to conform with 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 consolidated financial statements in conformity with GAAP requires the Company 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, the operating results for interim periods may not be indicative of the results of operations for a full year.

The Company’s fiscal year ends on November 30 of each year. The fiscal year of the Company’s subsidiary, Aerojet-General Corporation (“Aerojet”), ends on the last Saturday of November.

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 which develops and manufactures propulsion systems for defense and space applications, armament systems for precision tactical weapon systems and munitions applications. Aerojet is one of the largest providers of such propulsion systems in the United States (“U.S.”). Primary customers served include major prime contractors to the U.S. government, the Department of Defense (“DoD”), and the National Aeronautics and Space Administration.

Real Estate — includes activities related to the entitlement, sale, and leasing of the Company’s excess real estate assets. The Company owns approximately 12,200 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 has filed applications with, and submitted information to, governmental and regulatory authorities for approvals necessary to re-zone approximately 6,000 acres of the Sacramento Land. The Company also owns approximately 580 acres in Chino Hills, California. The Company is currently seeking removal of environmental restrictions on the Chino Hills property to optimize the value of such land.

On August 31, 2004, the Company completed the sale of its GDX Automotive (“GDX”) business. The remaining subsidiaries of GDX, including Snappon SA, are classified as discontinued operations in these 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, 2009.

The Company classifies activities related to the entitlement, sale, and leasing of its excess real estate assets as operating activities on the Unaudited Condensed Consolidated Statements of Cash Flows.

Recently Adopted Accounting Pronouncements

As of December 1, 2009, the Company adopted the accounting standards which require additional disclosures for plan assets of defined benefit pension or other postretirement plans. The required disclosures include a description of the Company’s investment policies and strategies, the fair value of each major category of plan assets, the inputs and valuation techniques used to measure the

fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets, and the significant concentrations of risk within plan assets. The new disclosures will be presented in the Company’s annual financial statements for the fiscal year ended November 30, 2010.

As of December 1, 2009, the Company adopted the new accounting standards which apply 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 2 ¹ / 4 % Convertible Subordinated Debentures (“2 ¹ / 4 % Debentures”). This guidance requires the issuer of convertible debt instruments to separately account for the liability (debt) and equity (conversion option) components of such instruments and retrospectively adjust the financial statements for all periods presented. The fair value of the liability component was determined based on the market rate for similar debt instruments without the conversion feature and the residual between the proceeds and the fair value of the liability component is recorded as equity at the time of issuance. Additionally the pronouncement requires transaction costs to be allocated to the liability and equity components on the same relative percentages.

The Company’s adoption of this guidance results in higher non-cash interest expense for fiscal 2005 through fiscal 2011, assuming the holders will require the Company to repurchase the 2 ¹ / 4 % Debentures at a cash price equal to 100% of the principal amount plus accrued and unpaid interest on November 20, 2011, the earliest date when the holders can exercise such right.

The following table presents the effects of the adoption of this guidance to the Company’s condensed consolidated statement of operations for the three months ended February 28, 2009:


				Adjustments
				related to
				2 ¹ / 4 %
	As reported			Debentures			As Adjusted
	(In millions, except per share amounts)
Net sales	$	170.9		$	—		$	170.9
Cost of sales (exclusive of items shown separately below)		148.9			—			148.9
Selling, general and administrative		2.1			—			2.1
Depreciation and amortization		6.0			—			6.0
Interest expense		8.1			1.8			9.9
Other, net		1.3			—			1.3

Income from continuing operations before income taxes		4.5			(1.8	)		2.7
Income tax benefit		(20.5	)		—			(20.5	)

Income from continuing operations		25.0			(1.8	)		23.2
Loss from discontinued operations		(3.8	)		—			(3.8	)

Net income	$	21.2		$	(1.8	)	$	19.4

Basic net income per share	$	0.36		$	(0.03	)	$	0.33

Diluted net income per share	$	0.34		$	(0.03	)	$	0.31

The following table presents the effects of the adoption of this guidance to the Company’s condensed consolidated balance sheet as of November 30, 2009:


				Adjustments
				related to
				2 ¹ / 4 %
	As reported			Debentures			As Adjusted
	(In millions)
Cash and cash equivalents	$	126.3		$	—		$	126.3
Accounts receivable		116.3			—			116.3
Inventories		61.8			—			61.8
Recoverable from the U.S. government and other third parties for environmental remediation costs and other		30.6			—			30.6
Grantor trust		2.4			—			2.4
Other receivables, prepaid expenses and other		32.8			—			32.8
Income taxes		2.4			—			2.4

Total current assets		372.6			—			372.6
Property, plant and equipment, net		129.9			—			129.9
Recoverable from the U.S. government and other third parties for environmental remediation costs and other		154.3			—			154.3
Grantor trust		17.8			—			17.8
Goodwill		94.9			—			94.9
Other noncurrent assets and intangibles, net		166.2			(0.8	)		165.4

Total assets	$	935.7		$	(0.8	)	$	934.9

Short-term borrowings and current portion of long-term debt	$	17.8		$	—		$	17.8
Accounts payable		18.4			—			18.4
Reserves for environmental remediation costs		44.5			—			44.5
Other current liabilities, advance payments on contracts, and postretirement medical and life insurance benefits		180.7			—			180.7

Total current liabilities		261.4			—			261.4
Long-term debt		420.8			(17.0	)		403.8
Reserves for environmental remediation costs		178.2			—			178.2
Pension benefits		225.0			—			225.0
Other noncurrent liabilities		139.4			—			139.4

Total liabilities		1,224.8			(17.0	)		1,207.8
Commitments and contingencies
Redeemable common stock		6.0			—			6.0
Common stock		5.9						5.9
Other capital		210.7			47.3			258.0
Accumulated deficit		(157.9	)		(31.1	)		(189.0	)
Accumulated other comprehensive loss, net of income taxes		(353.8	)		—			(353.8	)

Total shareholders’ deficit		(295.1	)		16.2			(278.9	)

Total liabilities, redeemable common stock, and shareholders’ deficit	$	935.7		$	(0.8	)	$	934.9

There are no effects to the Company’s total net cash from operating activities, investing activities, and financing activities for the three months ended February 28, 2009.

New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board issued updated guidance to improve disclosures regarding fair value measurements. This update requires entities to (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separately (i.e., on a gross basis rather than as one net number), information about purchases, sales, issuances, and settlements in the roll forward of changes in Level 3 fair value measurements. The update requires fair value disclosures by class of assets and liabilities rather than by major category or line item in the statement of financial position. Disclosures regarding the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for assets and liabilities in both Level 2 and Level 3 are also required. For all portions of the update except the gross presentation of activity in the Level 3 roll forward, this standard is effective for interim and annual reporting periods beginning after December 15, 2009. For the gross presentation of activity in the Level 3 roll forward, this guidance is effective for fiscal years beginning after December 15, 2010. As this guidance is only disclosure-related, it will not have an impact on the Company’s consolidated financial statements.

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,
	2010			2009
	(In millions, except per share
	amounts; shares in thousands)
Numerator for Basic and Diluted EPS:
(Loss) income from continuing operations	$	(9.9	)	$	23.2
Income (loss) from discontinued operations, net of income taxes		1.0			(3.8	)

Net (loss) income for basic earnings per share		(8.9	)		19.4
Interest on 4% Notes		—			1.3

Net (loss) income available to common shareholders, as adjusted for diluted earnings per share	$	(8.9	)	$	20.7


Denominator for Basic and Diluted EPS:
Basic weighted average shares		58,495			58,284
Effect of:
4% Notes		—			8,101

Diluted weighted average shares		58,495			66,385


Basic:
(Loss) income per share from continuing operations	$	(0.17	)	$	0.40
Income (loss) per share from discontinued operations, net of income taxes		0.02			(0.07	)

Net (loss) income per share	$	(0.15	)	$	0.33

Diluted:
(Loss) income per share from continuing operations	$	(0.17	)	$	0.37
Income (loss) per share from discontinued operations, net of income taxes		0.02			(0.06	)

Net (loss) income per share	$	(0.15	)	$	0.31

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,
	2010		2009
	(In thousands)
4% Contingent Convertible Subordinated Notes (“4% Notes”) (1)		4,591		—
4.0625% Convertible Subordinated Debentures (“4 1/16% Debentures”) (2)		17,034		—
Employee stock options		1,169		1,325
Restricted stock awards		287		15

Total potentially dilutive securities		23,081		1,340


(1)		In January 2010, the Company redeemed $124.7 million principal amount of 4% Notes which were presented to the Company for payment (see Note 6).

(2)		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 (see Note 6).

The Company’s 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.

3. Stock Based Compensation

Total stock-based compensation (benefit) expense by type of award for the first quarter of fiscal 2010 and 2009 was as follows:


	Three months ended February 28
	2010			2009
	(In millions)
Stock appreciation rights	$	(1.6	)	$	0.1
Stock options		—			—
Restricted stock, service based		0.1			—
Restricted stock, performance based		—			—

Total stock-based compensation (benefit) expense	$	(1.5	)	$	0.1

The Company’s common stock market price declined from November 30, 2009 resulting in a reduction in the fair value of the stock appreciation rights as of February 28, 2010.

4. Income Taxes

The income tax provision of $4.2 million in the first quarter of fiscal 2010 is primarily related to current federal alternative minimum taxes of $1.7 million, current state taxes of $1.1 million, and deferred taxes of $1.4 million related to the amortization of goodwill.

The income tax benefit of $20.5 million in the first quarter of fiscal 2009 is primarily related to new guidance that was published by the Chief Counsel’s Office of the Internal Revenue Service in December 2008 clarifying which costs qualify for ten-year carryback of tax net operating losses for refund of prior years’ taxes. As a result of the clarifying language, the Company recorded an income tax benefit of $19.7 million, of which $14.5 million is for the release of the valuation allowance associated with the utilization of the qualifying tax net operating losses and $5.2 million is for the recognition of affirmative claims related to previous uncertain tax positions associated with prior years refund claims related to the qualifying costs. An additional $0.6 million benefit was recorded in the first quarter of fiscal 2009 to reflect the tax benefit of unusual items.

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:


			Fair value measurement at February 28, 2010
			Quoted Prices in		Significant		Quoted Prices in
			Active Markets		Other		Active Markets
			for Identical		Observable		for Identical
			Assets		Inputs		Assets
	Total		(Level 1)		(Level 2)		(Level 3)
	(In millions)
Money market funds	$	144.0	$	144.0	$	—	$	—
Commercial paper		54.9		—		54.9		—

Total	$	198.9	$	144.0	$	54.9	$	—

As of November 30, 2009, the Company’s only financial instruments, other than investments held by its defined benefit pension plan, were the Company’s investments in Level 1 money market funds. The estimated fair value and carrying value of the Company’s investments in money market funds was $136.2 million, including $20.2 million net money market funds in the grantor trust, as of November 30, 2009.

As of February 28, 2010, a summary of cash and cash equivalents, restricted cash, marketable securities, and grantor trust by financial instrument was as follows:


			Cash and		Money Market		Commercial
	Total		Cash Equivalents		Funds		Paper
	(In millions)
Cash and cash equivalents	$	139.1	$	5.3	$	123.8	$	10.0
Restricted cash. (1)		67.3		67.3		—		—
Marketable securities		44.9		—		—		44.9
Grantor trust (2)		20.2		—		20.2		—


(1)		As of February 28, 2010, the Company had $67.3 million of restricted cash related to the proceeds from the 4 1/16% Debentures that will be used to repurchase a portion of its outstanding convertible subordinated notes and senior subordinated notes, subject to certain conditions.

(2)		Includes $1.6 million in accrued amounts reimbursable to the Company.

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 long-term debt is presented below:


	Fair Value				Principal Amount
	February 28,		November 30,		February 28,		November 30,
	2010		2009		2010		2009
	(In millions)
Term loan	$	49.2	$	62.8	$	51.5	$	68.3
9 ¹ / 2 % Senior Subordinated Notes (“9 ¹ / 2 % Notes”)		98.9		96.0		97.5		97.5
4% Notes		0.3		124.7		0.3		125.0
2 ¹ / 4 % Debentures (1)		125.2		131.0		146.4		146.4
4 1/16% Debentures		160.0		—		200.0		—
Other debt		0.7		1.4		0.7		1.4

	$	434.3	$	415.9	$	496.4	$	438.6


(1)		Excludes the debt discount of $15.0 million and $17.0 million as of February 28, 2010 and November 30, 2009, respectively.

The fair values of the term loan, 9 ¹ / 2 % Notes, 4% Notes, 2 ¹ / 4 % Debentures, 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, 2010 and November 30, 2009, respectively. The fair value of the remaining debt was determined to approximate carrying value.

b. Marketable Securities

As of February 28, 2010, the Company’s short-term available-for-sale investments were as follows:

Gross

Estimated

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

(In millions)

Commercial paper

54.9

—

54.9

As of February 28, 2010, of the total estimated fair value, $10.0 million was classified as cash and cash equivalents because the remaining maturity at date of purchase was less than three months and $44.9 million was classified as marketable securities. At February 28, 2010, the contractual maturities of the Company’s available-for-sale marketable securities were less than one year.

c. Accounts Receivable


	February 28,		November 30,
	2010		2009
	(In millions)
Billed	$	59.7	$	83.0
Unbilled		35.9		29.9

Total receivables under long-term contracts		95.6		112.9
Other receivables		0.7		3.4

Accounts receivable	$	96.3	$	116.3

d. Inventories


	February 28,			November 30,
	2010			2009
	(In millions)
Long-term contracts at average cost	$	213.2		$	212.2
Progress payments		(162.7	)		(153.6	)

Total long-term contract inventories		50.5			58.6

Raw materials		0.3			0.3
Work in progress		1.8			2.9
Finished goods		0.7			—

Total other inventories		2.8			3.2

Inventories	$	53.3		$	61.8

e. Property, Plant and Equipment, net


	February 28,			November 30,
	2010			2009
	(In millions)
Land	$	33.2		$	33.2
Buildings and improvements		149.6			148.9
Machinery and equipment		377.8			376.6
Construction-in-progress		9.7			7.4

		570.3			566.1
Less: accumulated depreciation		(441.1	)		(436.2	)

Property, plant and equipment, net	$	129.2		$	129.9

f. Other Noncurrent Assets, net


	February 28,		November 30,
	2010		2009
	(In millions)
Receivable from Northrop Grumman Corporation (see Note 7(c))	$	53.9	$	53.4
Deferred financing costs		11.2		6.1
Other		27.7		32.1

Other noncurrent assets, net	$	92.8	$	91.6

During the first quarter of fiscal 2010, the Company began classifying the amortization of deferred financing costs as a component of interest expense and the prior period has been conformed to current year’s presentation. Amortization of deferred financing costs was previously reported as a component of amortization expense. Accordingly, during the first quarter of fiscal 2010 and 2009, interest expense includes $1.2 million and $1.3 million, respectively, of non-cash amortization of deferred financing costs.

g. Other Current Liabilities


	February 28,		November 30,
	2010		2009
	(In millions)
Accrued compensation and employee benefits	$	50.2	$	47.8
Legal settlements		10.8		11.4
Interest payable		4.4		6.1
Contract loss provisions		4.6		3.0
Deferred revenue		1.9		2.2
Income tax payable		0.1		—
Other		35.7		37.0

Other current liabilities	$	107.7	$	107.5

h. Other Noncurrent Liabilities


	February 28,		November 30,
	2010		2009
	(In millions)
Legal settlements	$	12.7	$	18.9
Conditional asset retirement obligations		14.2		13.6
Deferred revenue		10.3		10.4
Deferred compensation		6.6		7.1
Other		4.5		4.1

Other noncurrent liabilities	$	48.3	$	54.1

i. Accumulated Other Comprehensive Loss, Net of Income Taxes


	February 28,			November 30,
	2010			2009
	(In millions)
Actuarial losses, net	$	(344.7	)	$	(358.4	)
Prior service credits		4.6			4.6

Accumulated other comprehensive loss, net of income taxes	$	(340.1	)	$	(353.8	)

During the first quarter of fiscal 2010 and 2009, the Company had comprehensive income of $4.8 million and $19.0 million, respectively.

Market conditions and interest rates significantly affect assets and liabilities of the pension plans. Pension accounting requires that market gains and losses be deferred and recognized over a period of years. This “smoothing” results in the creation of other accumulated income or loss which will be amortized to pension costs in future years. The accounting method the Company utilizes 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 pension costs, future pension costs are impacted by changes in the market value of pension plan assets and changes in interest rates.

6. Long-term Debt


	February 28,			November 30,
	2010			2009
	(In millions)
Term loan, bearing interest at variable rates (rate of 2.51% as of February 28, 2010), payable in quarterly installments of $0.1 million plus interest, maturing in April 2013	$	51.5		$	68.3

Total senior debt		51.5			68.3

Senior subordinated notes, bearing interest at 9.50% per annum, interest payments due in February and August, maturing in August 2013		97.5			97.5

Total senior subordinated notes		97.5			97.5

Convertible subordinated debentures, bearing interest at 2.25% per annum, interest payments due in May and November, maturing in November 2024, net of debt discount		131.4			129.4
Contingent convertible subordinated notes, bearing interest at 4.00% per annum, interest payments due in January and July, maturing in January 2024		0.3			125.0
Convertible subordinated debentures, bearing interest at 4.0625% per annum, interest payments due in June and December, maturing in December 2034		200.0			—

Total convertible subordinated notes		331.7			254.4

Promissory note, bearing interest at 5% per annum, payable in annual installments of $0.7 million plus interest, maturing in January 2011		0.7			1.4

Total other debt		0.7			1.4

Total debt		481.4			421.6
Less: Amounts due within one year		(1.2	)		(17.8	)

Total long-term debt	$	480.2		$	403.8

See Note 15 for recent changes to the Company’s capital structure.

$280 million senior credit facility (“Senior Credit Facility”)

The Company’s Senior Credit Facility provides for an $80.0 million revolving credit facility (“Revolver”) and a $200.0 million credit-linked facility, consisting of a $125.0 million letter of credit subfacility and a $75.0 million term loan subfacility. On May 1, 2009, the Company entered into the First Amendment and Consent (the “Amendment”) to the Company’s existing Amended and Restated Credit Agreement, originally entered into as of June 21, 2007, by and among the Company, as borrower, the subsidiaries of the Company from time to time party thereto, as guarantors, the lenders from time to time party thereto and Wachovia Bank, National Association, as administrative agent for the lenders, as amended to date (the “Credit Agreement”). Snappon SA, a French subsidiary of the Company, that is neither a Credit Party nor Significant Subsidiary (as defined under the Credit Agreement) and has no operations, has had legal judgments rendered against it under French law, aggregating €2.9 million plus interest related to wrongful discharge claims by certain former employees of Snappon SA. Under the Amendment, the Required Lenders (as defined under the Credit Agreement) agreed (i) that an event of default will not be triggered with respect to the legal judgments rendered against Snappon SA, unless the judgments equal or exceed $10.0 million and shall not have been paid and satisfied, vacated, discharged, stayed or bonded pending appeal within thirty (30) days from the entry thereof and (ii) to consent to the commencement of voluntary or involuntary bankruptcy, insolvency or similar proceedings with respect to Snappon SA and that any such proceeding would not constitute an Event of Default under the Credit Agreement. Additionally, the Company agreed to temporarily reduce its borrowing availability under the Revolver from $80.0 million to $60.0 million commencing on May 1, 2009 and ending on the earlier of (i) the date on which an amendment that permits the renewal, refinancing, or extension of the 4% Notes has been approved by the Required Lenders or (ii) the date on which the Company redeems the 4% Notes in accordance with the terms of the Credit Agreement.

As of February 28, 2010, the borrowing limit under the Revolver was $80.0 million with all of it available. Also as of February 28, 2010, the Company had $84.8 million outstanding letters of credit under the $125.0 million letter of credit subfacility and had permanently reduced the amount of its term loan subfacility to the $51.5 million outstanding.

During the first quarter of fiscal 2010, the Company made a required principal payment of $16.6 million on the term loan subfacility due to the excess cash flow prepayment provisions of the Credit Agreement. In the event that the leverage ratio is less than or equal to 3.0 to 1.0, as defined, at the end of any fiscal year during the term of the Senior Credit Facility, no excess cash flow pre-payment would be required under this provision.

The Senior Credit Facility is collateralized by a substantial portion of the Company’s real property holdings and substantially all of the Company’s other assets, including the stock and assets of its material domestic subsidiaries that are guarantors of the facility. The Company is subject to certain limitations including the ability to: incur additional senior debt, release collateral, retain proceeds from

asset sales and issuances of debt or equity, make certain investments and acquisitions, grant additional liens, and make restricted payments, including stock repurchases and dividends. In addition, the Credit Agreement contains certain restrictions surrounding the ability of the Company to refinance its subordinated debt, including provisions that, except on terms no less favorable to the Credit Agreement, the Company’s subordinated debt cannot be refinanced prior to maturity. Furthermore, provided that the Company has cash and cash equivalents of at least $25.0 million after giving effect thereto, the Company may redeem (with funds other than Senior Credit Facility proceeds) the subordinated notes to the extent required by the mandatory redemption provisions of the subordinated note indenture. The Company is also subject to the following financial covenants:


	Actual Ratios as of	Required Ratios
Financial Covenant	February 28, 2010	December 1, 2009 and thereafter
Interest coverage ratio	3.90 to 1.00	Not less than: 2.25 to 1.00
Leverage ratio	4.13 to 1.00	Not greater than: 5.50 to 1.00

The Company was in compliance with its financial and non-financial covenants as of February 28, 2010.

9 ¹ / 2 % Senior Subordinated Notes

As of February 28, 2010, the Company had $97.5 million outstanding of principal amount of its 9 ¹ / 2 % Notes which mature in August 2013. Interest on the 9 ¹ / 2 % Notes accrues at a rate of 9.50% per annum and is payable in February and August. All or any portion of the 9 ¹ / 2 % Notes may be redeemed by the Company at any time on or after August 15, 2008 at redemption prices beginning at 104.75% of the principal amount and reducing to 100% of the principal amount by August 15, 2011.

If the Company undergoes a change of control (as defined in the 9 ¹ / 2 % Notes indenture) or sells assets, it may be required to offer to purchase the 9 ¹ / 2 % Notes from the holders of such notes.

The 9 ¹ / 2 % Notes are non-collateralized and subordinated to all of the existing and future senior indebtedness, including borrowings under its Senior Credit Facility. The 9 ¹ / 2 % Notes rank senior to the 4% Notes, 2 ¹ / 4 % Debentures, and the 4 1/16% Debentures. The 9 ¹ / 2 % Notes are guaranteed by the Company’s material domestic subsidiaries. Each subsidiary guarantee is non-collateralized and subordinated to the respective subsidiary’s existing and future senior indebtedness, including guarantees of borrowings under the Senior Credit Facility. The 9 ¹ / 2 % Notes and related guarantees are effectively subordinated to the Company’s and the subsidiary guarantors’ collateralized debt and to any and all debt and liabilities, including trade debt of the Company’s non-guarantor subsidiaries.

The indenture governing the 9 ¹ / 2 % Notes limits the Company’s ability and the ability of the Company’s restricted subsidiaries, as defined in the indenture, to incur or guarantee additional indebtedness, make restricted payments, pay dividends or distributions on, or redeem or repurchase, its capital stock, make investments, issue or sell capital stock of restricted subsidiaries, create liens on assets to secure indebtedness, enter into transactions with affiliates and consolidate, merge or transfer all or substantially all of the assets of the Company. The indenture also contains customary events of default, including failure to pay principal or interest when due, cross-acceleration to other specified indebtedness, failure of any of the guarantees to be in full force and effect, failure to comply with covenants and certain events of bankruptcy, insolvency, and reorganization, subject in some cases to notice and applicable grace periods.

2 ¹ / 4 % Convertible Subordinated Debentures

As of February 28, 2010, the Company had $146.4 million outstanding of principal amount of its 2 ¹ / 4 % Debentures. Interest on the 2 ¹ / 4 % Debentures accrues at a rate of 2.25% per annum and is payable in May and November. The 2 ¹ / 4 % Debentures are general unsecured obligations and rank equal in right of payment to all of the Company’s other existing and future subordinated indebtedness, including the 4 1/16% Debentures and 4% Notes. The 2 ¹ / 4 % 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 2 ¹ / 4 % Debentures are effectively subordinated to any of the Company’s collateralized debt and to any and all debt and liabilities, including trade debt of its subsidiaries.

Each $1,000 principal of the 2 ¹ / 4 % Debentures is convertible at each holder’s option, into cash and, if applicable, the Company’s common stock at an initial conversion price of $20 per share (subject to adjustment as provided in the indenture governing the 2 ¹ / 4 % Debentures) only if: (i) during any fiscal quarter the closing price of the common stock for at least twenty (20) trading days in the thirty (30) consecutive trading day period ending on the last trading day of the preceding fiscal quarter exceeds 130% of the conversion price; (ii) the Company has called the 2 ¹ / 4 % Debentures for redemption and redemption has not yet occurred; (iii) subject to certain exceptions, during the five (5) business days after any five (5) consecutive trading day period in which the trading price per

$1,000 principal amount of the 2 ¹ / 4 % Debentures for each day of such period is less than 95% of the product of the common stock price on that day multiplied by the conversion rate then in effect; (iv) specified corporate transactions have occurred; or (v) occurrence of a transaction or event constituting a designated event. The Company may be required to pay a make-whole premium in shares of common stock and accrued but unpaid interest if the 2 ¹ / 4 % Debentures are converted in connection with certain specified designated events occurring on or prior to November 20, 2011. The initial conversion rate of 50 shares for each $1,000 principal amount of the 2 ¹ / 4 % Debentures is equivalent to a conversion price of $20 per share, subject to certain adjustments. None of these events has occurred subsequent to the issuance of the debentures.

In the event of conversion of the 2 ¹ / 4 % Debentures, the Company will deliver, in respect of each $1,000 principal amount of 2 ¹ / 4 % Debentures tendered for conversion, (1) an amount in cash (“principal return”) equal to the lesser of (a) the principal amount of the converted 2 ¹ / 4 % Debentures and (b) the conversion value (such value equal to the conversion rate multiplied by the average closing price of common shares over a ten (10) consecutive-day trading period beginning on the second trading day following the day the Debentures are tendered) and (2) if the conversion value is greater than the principal return, an amount in common shares, with a value equal to the difference between the conversion value and the principal return. Fractional shares will be paid in cash.

The Company may, at its option, redeem some or all of its 2 ¹ / 4 % Debentures for cash on or after November 15, 2014, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued and unpaid interest, including liquidated damages, if any, to but not including the redemption date. In addition, the Company may, at its option, redeem some or all of its 2 ¹ / 4 % Debentures on or after November 20, 2011 and prior to November 15, 2014, if the closing price of its common stock for at least twenty (20) trading days in any thirty (30) consecutive trading-day period is more than 140% of the conversion price, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued and unpaid interest, including liquidated damages, if any, payable in cash. If the Company so redeems the 2 ¹ / 4 % Debentures, it will make an additional payment in cash, Company common stock or a combination thereof, at its option, equal to the present value of all remaining scheduled payments of interest on the redeemed debentures through November 15, 2014.

Each holder may require the Company to repurchase all or part of their 2 ¹ / 4 % Debentures on November 20, 2011, November 15, 2014 and November 15, 2019, or upon the occurrence of certain events, at a price equal to 100% of the principal amount of the 2 ¹ / 4 % Debentures plus accrued and unpaid interest, including liquidated damages, if any, payable in cash, to but not including the repurchase date, plus, in certain circumstances, a make-whole premium, payable in Company common stock.

The indenture governing the 2 ¹ / 4 % Debentures limits the Company’s ability to, among other things, consolidate with or merge into any other person, or convey, transfer or lease its properties and assets substantially as an entirety to any other person unless certain conditions are satisfied. The indenture also contains customary events of default, including failure to pay principal or interest when due, cross-acceleration to other specified indebtedness, failure to deliver cash or shares of common stock as required, failure to comply with covenants and certain events of bankruptcy, insolvency and reorganization, subject in some cases to notice and applicable grace periods.

As of December 1, 2009 the Company adopted the new accounting standards which applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. The Company’s adoption of this guidance affects its 2 ¹ / 4 % Debentures and requires the issuer of convertible debt instruments to separately account for the liability (debt) and equity (conversion option) components of such instruments and retrospectively adjust the financial statements for all periods presented. The fair value of the liability component shall be determined based on the market rate for similar debt instruments without the conversion feature and the residual between the proceeds and the fair value of the liability component is recorded as equity at the time of issuance. Additionally, the pronouncement requires transactions cost to be allocated on the same percentage as the liability and equity components.

The Company calculated the carrying value of the liability component at issuance as the present value of its cash flows using a discount rate of 8.86%. The carrying value of the liability component was determined to be $97.5 million. The equity component, or debt discount, of the notes was determined to be $48.9 million. The debt discount is being amortized over the period from the issuance date through November 20, 2011 as a non-cash charge to interest expense. As of February 28, 2010, the remaining term of the 2 ¹ / 4 % Debentures is 1.9 years.

The $4.9 million of costs incurred in connection with the issuance of the 2 ¹ / 4 % Debentures were capitalized and bifurcated into deferred financing costs of $3.3 million and equity issuance costs of $1.6 million. The deferred financing costs are being amortized to interest expense from the issuance date through November 20, 2011. As of February 28, 2010, the unamortized portion of the deferred financing costs related to the 2 ¹ / 4 % Debentures was $1.4 million and was included in other non-current assets on the unaudited condensed consolidated balance sheets.

The following table presents the carrying amounts of the liability and equity components:


	February 28,			November 30,
	2010			2009
	(In millions)
Carrying amount of equity component, net of equity issuance costs	$	47.3		$	47.3

Principal amount of 2 ¹ / 4 % Debentures	$	146.4		$	146.4
Unamortized debt discount		(15.0	)		(17.0	)

Carrying amount of liability component	$	131.4		$	129.4

The following table presents the interest expense components for the 2 ¹ / 4 % Debentures:


	Three months ended February 28,
	2010			2009
	(In millions)
Interest expense-contractual interest	$	0.8		$	0.8
Interest expense-amortization of debt discount		2.0			1.9
Interest expense-amortization of deferred financing costs		0.2			0.2
Effective interest rate		8.9	%		8.9	%

4% Contingent Convertible Subordinated Notes

As of February 28, 2010, the Company had $0.3 million outstanding of principal amount of its 4% Notes which mature in November 2024. Interest on the 4% Notes accrues at a rate of 4.00% per annum and is payable on January 16 and July 16, beginning July 16, 2004. In addition, contingent interest is payable during any six-month period, commencing with the six-month period beginning January 16, 2008, if the average market price of a 4% Note for the five (5) trading days ending on the third trading day immediately preceding the relevant six-month period equals 120% or more of the principal amount of the notes. Contingent interest has not been payable subsequent to the issuance of the 4% Notes.

In January 2010, the Company redeemed $124.7 million principal amount of its 4% Notes which were presented to the Company for payment.

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. 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 4% Notes and 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.

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.

Issuance of the 4 1/16% Debentures generated net proceeds of $194.1 million, which were used to repurchase $124.7 million of the 4% Notes and $2.1 million of other debt related costs. The remaining $67.3 million of proceeds is legally restricted by the indenture of the 4 1/16% Debentures to be used to repurchase a portion of the Company’s outstanding convertible subordinated notes and senior subordinated notes, subject to certain conditions, and other debt related costs.

7. Commitments and Contingencies

a. Legal Proceedings

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 known. For legal settlements where there is no stated amount for interest, the Company will estimate an interest factor and discount the liability accordingly.

Groundwater Cases

In October 2002, Aerojet and approximately 65 other individual and corporate defendants were served with four civil suits filed in the U.S. District Court for the Central District of California that seek recovery of costs allegedly incurred or to be incurred in response to the contamination present at the South El Monte Operable Unit (“SEMOU”) of the San Gabriel Valley Superfund site. The cases

are denominated as follows: The City of Monterey Park v. Aerojet-General Corporation, et al. , (CV-02-5909 ABC (RCx)); San Gabriel Basin Water Quality Authority v. Aerojet-General Corporation, et al. , (CV-02-4565 ABC (RCx)); San Gabriel Valley Water Company v. Aerojet-General Corporation, et al. , (CV-02-6346 ABC (RCx)); and Southern California Water Company v. Aerojet-General Corporation, et al. , (CV-02-6340 ABC (RCx)). The cases have been coordinated for ease of administration by the court. The plaintiffs’ claims against Aerojet are based upon allegations of discharges from a former site in the El Monte area, as more fully discussed below under the headings “San Gabriel Valley Basin, California Site” — “South El Monte Operable Unit.” The total cost estimate to implement projects under the Unilateral Administrative Order (“UAO”) prepared by the EPA and the water entities is approximately $90 million. Aerojet investigations do not identify a credible connection between the contaminants identified by the plaintiff water entities in the SEMOU and those detected at Aerojet’s former facility located in El Monte, California, near the SEMOU (“East Flair Drive site”). Aerojet has filed third-party complaints against several water entities on the basis that they introduced perchlorate-containing Colorado River water into the basin. Those water entities have filed motions to dismiss Aerojet’s complaints. The motions as well as discovery have been stayed until April 12, 2010, pending efforts to resolve the litigation through mediation. During the period in which the litigation has been stayed, EPA, the California Department of Toxic Substances Control (“DTSC”) and the plaintiff water entities have reached settlements through the mediation process with various of the parties sued, which have been brought to the Federal District Court for approval. Certain of the settlements have been challenged by Aerojet and other defendants and are not finally resolved.

Aerojet has recently received correspondence from EPA on behalf of itself, the DTSC and the Water Entities regarding settlement. Aerojet intends to try to reach a good faith settlement with EPA, DTSC and the Water Entities to resolve claims. If settlement negotiations fail, the litigation stay is likely to be lifted and EPA may refer the matter to the U.S. Department of Justice for litigation, seeking to hold Aerojet liable for past and future costs, to recover costs of suit and attorneys’ fees, and as to any accrued interest, penalties or statutory damages. Should settlement not be reached, Aerojet intends to vigorously defend itself.

In December 2007, Aerojet was named as a defendant in a lawsuit brought by six individuals who allegedly resided in the vicinity of Aerojet’s Sacramento facility. The case is entitled Caldwell et al. v. Aerojet-General Corporation , Case No. 34-2000-00884000CU-TT-GDS, Sacramento County (CA) Superior Court and was served on April 3, 2008. Plaintiffs allege that Aerojet contaminated groundwater to which plaintiffs were exposed and which caused plaintiffs illness and economic injury. Plaintiffs filed two subsequent amended complaints, naming additional plaintiffs. Aerojet filed a demurrer to the second amended complaint, which was denied by the trial court in December 2008. The court held that the issue as to whether the plaintiffs were on actual notice of the potential source of their injuries is an issue of fact that cannot be resolved on demurrer. Aerojet’s subsequent Petition for a Writ of Mandate filed with the California Court of Appeal Third District, seeking reversal of the court’s ruling on the demurrer was denied without comment. Aerojet will continue to seek dismissal of those claims at the trial court level. On December 29, 2009, plaintiffs served a Third Amended Complaint, adding four additional plaintiffs to the action, which brings the total number of individuals on whose behalf suit has been filed to eighteen. Aerojet filed an answer to the third amended complaint, denying liability. Discovery is continuing. The Company is unable to make a reasonable estimate of the future costs of these claims.

In August 2003, the County of Sacramento and the Sacramento County Water Agency (collectively, “SCWA”) and Aerojet entered into a water agreement (“Agreement”). Under the Agreement, Aerojet agreed to transfer remediated groundwater to SCWA. This was anticipated to satisfy Aerojet’s water replacement obligations in eastern Sacramento County. Subject to various provisions of the Agreement, including approval under the California Environmental Quality Act, SCWA assumed Aerojet’s responsibility for providing replacement water to American States Water Company and other impacted water purveyors up to the amount of remediated water Aerojet transfers to the County of Sacramento (“County”). Aerojet also agreed to pay SCWA approximately $13 million over several years toward the cost of constructing a replacement water supply project. If the amount of Aerojet’s transferred water was in excess of the replacement water provided to the impacted water purveyors, SCWA committed to make such water available for the entitlement of Aerojet’s land in an amount equal to the excess.

In April 2008, SCWA unilaterally terminated the Agreement. Subsequent to this unilateral termination of the Agreement, the Company and The Boeing Company (“Boeing,” successor to the McDonnell Douglas Corporation (“MDC”)), the former owner of the Inactive Rancho Cordova Test Site (“IRCTS”), entered into negotiations with SCWA in an attempt to resolve matters and reach a new agreement. Additionally, SCWA and Aerojet entered into a tolling agreement through June 30, 2009 tolling any suits or claims arising from environmental contamination or conditions on the former IRCTS property.

On June 30, 2009, SCWA notified Aerojet and Boeing that it was not prepared to extend the tolling period and intended to file suit. On July 1, 2009, the County and SCWA filed a complaint against Aerojet and Boeing in the U.S. District Court for the Eastern District of California, in Sacramento, County of Sacramento; Sacramento County Water Agency v. Aerojet-General Corporation and The Boeing Corporation [sic], Civ. No. 2:09-at-1041. In the complaint, the County and SCWA alleged that because groundwater contamination from various sources including Aerojet, Boeing/MDC, and the former Mather Air Force Base, was continuing, the

County and SCWA should be awarded unspecified monetary damages as well as declaratory and equitable relief. The complaint was served, but the parties entered into a joint stipulation on August 27, 2009, to stay all proceedings until May 30, 2010, pending settlement discussions. The Company cannot predict the outcome of this proceeding with any certainty at this time.

Vinyl Chloride Litigation

Between the early 1950s and 1985, the Company produced polyvinyl chloride (“PVC”) resin at its former Ashtabula, Ohio facility. PVC is one of the most common forms of plastic currently on the market. A building block compound of PVC is vinyl chloride (“VC”), now listed as a known carcinogen by several governmental agencies. The Occupational Safety and Health Administration (“OSHA”) has regulated workplace exposure to VC since 1974.

Since the mid-1990s, the Company has been named in numerous cases involving alleged exposure to VC. In the majority of such cases, the Company is alleged to be a “supplier/manufacturer” of PVC and/or a civil co-conspirator with other VC and PVC manufacturers as a result of membership in a trade association. Plaintiffs generally allege that the Company and other defendants suppressed information about the carcinogenic risk of VC to industry workers, and placed VC or PVC into commerce without sufficient warnings. A few of these cases alleged VC exposure through various aerosol consumer products, in that VC had been used as an aerosol propellant during the 1960s. Defendants in these “aerosol” cases included numerous consumer product manufacturers, as well as the more than 30 chemical manufacturers. The Company used VC internally, but never supplied VC for aerosol or any other use.

As of February 28, 2010, there was one vinyl chloride case pending against the Company which involves an employee at a facility owned or operated by others. The Company is unable to make a reasonable estimate of the future cost of the pending claim. Accordingly, no estimate of future liability has been accrued.

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 have been filed in Madison County, Illinois and San Francisco, California. There were 136 asbestos cases pending as of February 28, 2010.

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 for such contingencies.

Snappon SA Wrongful Discharge Claims

In November 2003, the Company announced the closing of a manufacturing facility in Chartres, France owned by Snappon SA, a subsidiary of the Company, previously involved in the automotive business. In accordance with French law, Snappon SA negotiated with the local works’ council regarding the implementation of a social plan for the employees. Following the implementation of the social plan, approximately 188 of the 249 former Snappon employees sued Snappon SA in the Chartres Labour Court alleging wrongful discharge. The claims were heard in two groups. On February 19, 2009, the Versailles Court of Appeal issued a decision in favor of Group 2 plaintiffs and based on this, the Court awarded €1.9 million plus interest. On April 7, 2009, the Versailles Court of Appeal issued a decision in favor of Group 1 plaintiffs and based on this, the Court awarded €1.0 million plus interest. During the second quarter of fiscal 2009, Snappon SA filed for declaration of suspensions of payments with the clerk’s office of the Paris Commercial Court, and the claims will likely be discharged through those proceedings.

Other Legal Matters

On August 31, 2004, the Company completed the sale of its GDX business to an affiliate of Cerberus Capital Management, L.P. (“Cerberus”). In accordance with the divestiture agreement, the Company provided customary indemnification to Cerberus for certain liabilities accruing prior to the closing of the transaction (“the Closing”). Cerberus notified the Company of a claim by a GDX customer that alleges that certain parts manufactured by GDX prior to the Closing failed to meet customer specifications. The Company has assumed the defense of this matter and based on its investigation of the facts and defenses available under the contract and local law, and in November 2008 denied all liability for this claim. On January 23, 2009, GenCorp received correspondence from the GDX customer requesting that the Company provide it with a settlement proposal by February 6, 2009, threatening that it would initiate legal proceedings otherwise. GenCorp neither responded nor otherwise tolled the statute of limitations with negotiations. Nothing further has been received since then and no legal proceedings have been initiated.

On January 6, 2010, the Company received a subpoena duces tecum from the Defense Criminal Investigative Service of the Office of the Inspector General of the DoD requesting that the Company produce a variety of documents pertaining to the allowability of certain costs under its contracts with the DoD from October 1, 2003 to the present. The Company is currently unable to predict what the outcome of the investigation will be or the impact, if any, the investigation may have on the Company’s operating results, financial condition, and/or cash flows. The Company intends to cooperate fully with the investigation and is responding to the subpoena.

The Company and its subsidiaries are subject to other legal actions, governmental investigations, and proceedings relating to a wide range of matters in addition to those discussed above. While there can be no certainty regarding the outcome of any litigation, investigation or proceeding, after reviewing the information that is currently available with respect to such matters, any liability that may ultimately be incurred with respect to these matters is not expected to materially affect the Company’s consolidated financial condition. It is possible that amounts could be significant to the Company’s results of operations or cash flows in any particular reporting period.

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 United States Environmental Protection Agency (“U.S. EPA”) 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, 2010, the aggregate range of these anticipated environmental costs was $221.8 million to $428.3 million and the accrued amount was $221.8 million. See Note 7(c) for a summary of the environmental reserve activity for the first quarter of fiscal 2010. Of these accrued liabilities, approximately 68% relates to the Sacramento, California site and approximately 22% to the Baldwin Park Operable Unit of the San Gabriel Valley, California site. Each of those two sites is 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; (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 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”). Construction of the remedy specified in the UAO is anticipated to be completed in fiscal 2010. Aerojet submitted a final Remedial Investigation/Feasibility Study for the Perimeter Groundwater Operable

Unit in 2008, for which the U.S. EPA will issue a record of decision sometime in the future. Aerojet submitted a draft Remedial Investigation/Feasibility Study for the Boundary Operable Unit in 2008. The remaining operable units are under various stages of investigation.

Until March 2008, the entire southern portion of the site known as Rio Del Oro was under state orders issued in the 1990s from the 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. Aerojet leased the Rio Del Oro property to Douglas Aircraft for rocket assembly and testing from 1957 to 1961 and sold approximately 4,000 acres, including the formerly leased portion, to Douglas Aircraft in 1961. Aerojet reacquired the property in 1984 from MDC, the successor to Douglas Aircraft. As a result, the state orders referenced above were issued to both MDC and Aerojet. Aerojet and Boeing are actively remediating soil on portions of the property as well as on-site and off-site groundwater contamination. Following lengthy settlement negotiations, Aerojet and Boeing executed a confidential Partial Settlement and Mutual Release on August 13, 2009 which established final cost allocations with respect to environmental projects associated with the site, and also defined responsibilities with respect to future costs and environmental projects.

San Gabriel Valley Basin, California Site

Baldwin Park Operable Unit (“BPOU”)

As a result of its former Azusa, California operations, in 1994 Aerojet was named a PRP by the U.S. EPA, primarily due to volatile organic compound (“VOC”) contamination in the area of the San Gabriel Valley Basin superfund site known as the BPOU. Between 1995 and 1997, the U.S. EPA issued Special Notice Letters to Aerojet and eighteen other companies requesting that they implement a groundwater remedy. Subsequently, additional contaminates were identified, namely: perchlorate, NDMA, and 1,4-dioxane. On June 30, 2000, the U.S. 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. 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 in the form of cash or letters of credit. A significant amount of public funding is available to offset project costs. To date, Congress has appropriated approximately $77 million (so called Title 16 and Dreier funds), a portion of which is potentially available for payment of project costs. Approximately $41 million of the funding has been allocated to costs associated with the Project Agreement and additional funds may follow in later years.

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. The interim allocation agreement expired, but until recently all Cooperating Respondents were paying in accordance with their interim allocations. In July 2008, Fairchild Holding Corporation sued Aerojet and the other Cooperating Respondents in Federal District Court in Los Angeles in the action Fairchild Holding Corp et al v. Aerojet-General Corp, et al SA 08CV 722-ABC claiming that it did not have any liability and that it should recover amounts paid of approximately $2.6 million and should — as between the Cooperating Respondents — have no further obligation to pay project costs. Fairchild stopped making payments to the escrow account under the Project Agreement and claimed that it would not do so in the future unless ordered to do so by a court. Fairchild had been paying approximately 2.5% of the project costs as its allocation until it stopped paying. At the request of one of the Cooperating Respondents, the Court stayed all actions until mid-December 2008 to allow the parties an opportunity to participate in mediation. The mediation occurred in December 2008 and was not successful. Aerojet and the other Cooperating Respondents answered Fairchild’s complaint and many (including Aerojet) filed counterclaims against Fairchild Holding and third-party complaints against entities affiliated with Fairchild. Fairchild subsequently filed a First Amended Complaint adding the third-party affiliated entities as Plaintiffs in the litigation and Aerojet answered and filed counterclaims. To date, no other Cooperating Respondent has filed a claim against any non-Fairchild Cooperating Respondents to seek a reallocation. On March 18th, 2009, Fairchild filed for voluntary chapter 11 bankruptcy reorganization in the District of Delaware and as a result, the Federal District Court in Los Angeles has stayed the Fairchild litigation. In light of Fairchild’s insolvency, the other Cooperating Respondents, including Aerojet, must make up Fairchild’s share of Project costs and its interim share of financial assurances required by the Project Agreement, although the amounts each Cooperating Respondent would be required to fund or pay has not been resolved.

As part of Aerojet’s sale of its Electronics and Information Systems (“EIS”) business to Northrop in October 2001, the U.S. 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.

South El Monte Operable Unit

Aerojet previously owned and operated manufacturing facilities located on East Flair Drive in El Monte, California. On December 21, 2000, Aerojet received an order from the Los Angeles RWQCB requiring a work plan for investigation of this former site. On January 22, 2001, Aerojet filed an appeal of the order with the Los Angeles RWQCB asserting selective enforcement. The appeal had been held in abeyance pending negotiations with the Los Angeles RWQCB, but due to a two-year limitation on the abeyance period, the appeal was dismissed without prejudice. In September 2001, Aerojet submitted a limited work plan to the Los Angeles RWQCB.

On February 21, 2001, Aerojet received a General Notice Letter from the U.S. EPA naming Aerojet as a PRP with regard to the SEMOU of the San Gabriel Valley Basin, California Superfund site. On April 1, 2002, Aerojet received a Special Notice Letter from the U.S. EPA that requested Aerojet enter into negotiations with it regarding the performance of a remedial design and remedial action for the SEMOU. In light of this letter, Aerojet performed a limited site investigation of the East Flair Drive site. The data collected and summarized in the report showed that chemicals including TCE and PCE were present in the soil and groundwater at, and near, the El Monte location. Site investigations are ongoing.

On August 29, 2003, the U.S. EPA issued a UAO against Aerojet and approximately 40 other parties requiring them to conduct the remedial design and remedial action in the SEMOU. The impact of the UAO on the recipients is not clear as much of the remedy is already being implemented by the water entities. The cost estimate to implement projects under the UAO prepared by the U.S. EPA and the water entities is approximately $90 million. The Company is working diligently with the U.S. EPA and the other PRPs to resolve this matter and ensure compliance with the UAO. The Company’s share of responsibility has not yet been determined. The status of the negotiations with the U.S. EPA is further described in Note 7(a).

On November 17, 2005, Aerojet notified the Los Angeles RWQCB and the U.S. EPA that Aerojet was involved in research and development at the East Flair Drive site that included the use of 1,4-dioxane. Aerojet’s investigation of that issue is continuing. Oversight of the East Flair Drive site was transferred from the RWQCB to the DTSC in 2007 and Aerojet has entered into a Voluntary Cleanup Agreement with DTSC.

Toledo, Ohio Site

In August 2007, the Company, along with numerous other companies, received from the United States Department of Interior Fish and Wildlife Service (“USFWS”) a notice of a Natural Resource Damage (“NRD”) Assessment Plan for the Ottawa River and Northern Maumee Bay. 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. A group of PRPs, including GenCorp, was formed to respond to the NRD assessment and to pursue funding from the Great Lakes Legacy Act for primary restoration. The group has undertaken a restoration scoping study. Early data collection indicates that the primary restoration project total cost may be in the range of $47 to $49 million. The group has received a commitment for matching federal funds for the restoration project, which will consist of river dredging and land-filling river sediments. Based on a review of the current facts and circumstances with counsel, management has provided for what is believed to be a reasonable estimate of the loss exposure for this matter. Still unresolved at this time is the actual Natural Resource Damage Assessment itself. It is not possible to predict the outcome or timing of these types of assessments, which are typically lengthy processes lasting several years, or the amounts of or responsibility for these damages.

In 2008, Textileather, Inc. (“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. A trial is scheduled for spring 2010. The Company is vigorously defending against both actions.

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 decrease. 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 such 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, the time required to design the process, the time to construct the process, and the time required to conduct the remedy itself.

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


	November 30,		2010		2010			February 28,
	2009		Additions		Expenditures			2010
	(In millions)
Aerojet
Sacramento	$	152.5	$	2.6	$	(3.3	)	$	151.8
BPOU		47.8		0.5		(0.3	)		48.0
Other Aerojet sites		10.8		0.4		(0.3	)		10.9

		211.1		3.5		(3.9	)		210.7

Other Sites		11.6		0.2		(0.7	)		11.1

Environmental Reserve	$	222.7	$	3.7	$	(4.6	)	$	221.8

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 believes, on the basis of presently available information, that the resolution of environmental matters and the Company’s obligations for environmental remediation and compliance will not have a material adverse effect on the Company’s results of operations, liquidity, or financial condition. The Company will continue 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 Pre-Close Environmental Costs are not subject to the 88% limitation under the Global Settlement, and 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, 2010		(9.8	)
Amount included as a component of reserves for environmental remediation costs in the unaudited condensed consolidated balance sheet as of February 28, 2010		(1.0	)

Remaining Pre-Close Environmental Costs	$	9.2

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 Azusa sites. The Global Settlement provides that the cost-sharing ratio will continue for a number of years. 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 $8.0 million, which is reduced to $6.0 million beginning in fiscal 2011.

Pursuant to the Global Settlement covering environmental costs associated with Aerojet’s Sacramento site and its former Azusa site, the Company can recover up to 88% of its environmental remediation costs for these sites through the establishment of prices for Aerojet’s products and services sold to the U.S. government. Allowable environmental costs are charged to these 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.

Pursuant to the Northrop Agreement, environmental expenditures to be reimbursed are subject to annual limitations, with excess reimbursable amounts carried forward to subsequent periods, and the total reimbursements are limited to a ceiling of $189.7 million over the term of the agreement, which ends in 2028. 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, 2010		(76.2	)

Potential future cost reimbursements available		113.5
Receivable from Northrop in excess of the annual limitation included as a component of other noncurrent assets in the unaudited condensed consolidated balance sheet as of February 28, 2010		(53.9	)
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, 2010		(54.2	)

Potential future recoverable amounts available under the Northrop Agreement	$	5.4

The Company believes it may reach the cumulative limitation under the Northrop Agreement during fiscal 2010. While the Company is seeking an arrangement with the U.S. government to recover environmental expenditures in excess of the current 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 Statement of Operations

The expenses and benefits 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:

Total

Charge to

Estimated

Unaudited

Estimated

Recoverable

Condensed

Total

Recoverable

Amounts Under

Consolidated

Environmental

Amounts from

U.S. Government

Statement of

Reserve

Northrop

U.S. Government

Contracts

Operations

Additions

(In millions)

Three months ended February 28, 2010

0.8

2.5

3.3

0.4

3.7

Three months ended February 28, 2009

1.2

3.5

4.7

0.2

4.9

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, 2010 and November 30, 2009, the Company has classified 0.5 million and 0.6 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. The Company intends to make a registered rescission offer to

eligible plan participants. During the first quarter of fiscal 2010 and 2009, the Company recorded a charge of $0.2 million and $0.4 million, respectively, for realized losses and interest associated with this matter.

9. Arrangements with Off-Balance Sheet Risk

As of February 28, 2010, arrangements with off-balance sheet risk consisted of:

— $84.8 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.

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

— Up to $1.4 million of reimbursements to Granite Construction Company (“Granite”) if the Company requests Granite to cease mining operations on certain portions of the Sacramento Land.

— Guarantees, jointly and severally, by the Company’s material domestic subsidiaries of its obligations under its Senior Credit Facility and its 9 ¹ / 2 % Notes.

In addition to the items discussed above, the Company 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 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.

The Company also issues 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 were terminated.

10. Retirement Benefits

Pension Benefits — On November 25, 2008, the Company decided to amend the defined benefit pension and benefits restoration plans to freeze future accruals under such plans. Effective February 1, 2009 and July 31, 2009, future benefit accruals for all current salaried employees and collective bargaining unit employees were discontinued, respectively. No employees lost their previously earned pension benefits.

The Pension Protection Act (“PPA”), enacted in August 2006, 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. The funded ratio as of November 30, 2008 under the PPA for the Company’s defined benefit pension plan was 93% which was above the 92% ratio required under the PPA, as amended. The required ratio to be met as of the Company’s November 30, 2009 measurement date is 94%. During the fourth quarter of fiscal 2009, the Company made a voluntary contribution of $4.4 million to improve the plan’s PPA funded status as of November 30, 2009, although there can be no assurance that the amount of this contribution will be sufficient to meet the required ratio. The final calculated PPA funded ratio as of November 30, 2009 is expected to be completed in the second half of fiscal 2010.

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 the Company’s plan’s assets does not meet our assumptions, if there are changes to the IRS regulations or other applicable law or if other actuarial assumptions are modified, the future contributions to the Company’s underfunded pension plan could be higher than the Company expects. In addition, changes to the discount rate used to measure pension liabilities could adversely affect the funded status of the plan. Significant cash contribution requirements to the Company’s pension plan may adversely affect the Company’s ability to meet certain covenants under its Credit Agreement which, absent an amendment or refinancing, would result in a default under the Credit Agreement and cross defaults on other debt instruments.

Medical and Life Benefits — The Company provides medical and life insurance benefits (“postretirement benefits”) to certain eligible retired employees, with varied coverage by employee group. Medical and life benefit obligations are unfunded.

Components of retirement benefit expense (benefit) are:


	Pension Benefits						Postretirement Benefits
				Three months ended
	February 28,			February 28,			February 28,			February 28,
	2010			2009			2010			2009
	(In millions)
Service cost	$	1.1		$	3.1		$	0.1		$	0.1
Interest cost on benefit obligation		21.5			22.3			1.0			1.2
Assumed return on plan assets		(26.9	)		(25.9	)		—			—
Recognized net actuarial losses (gains)		14.7			(0.2	)		(1.0	)		(2.0	)

Retirement benefit expense (benefit)	$	10.4		$	(0.7	)	$	0.1		$	(0.7	)

11. Discontinued Operations

In November 2003, the Company announced the closing of a GDX manufacturing facility in Chartres, France owned by Snappon SA, a subsidiary of the Company. The decision resulted primarily from declining sales volumes with French automobile manufacturers. During the first quarter of fiscal 2009, Snappon SA had legal judgments rendered against it under French law, aggregating €2.9 million plus interest related to wrongful discharge claims by certain former employees of Snappon SA. During the second quarter of fiscal 2009, Snappon SA filed for declaration of suspensions of payments with the clerk’s office of the Paris Commercial Court.

Summarized financial information for discontinued operations is set forth below:


	Three months ended
	February 28,		February 28,
	2010		2009
	(In millions)
Net sales	$	—	$	—
Foreign currency gains		1.3		—
Income (loss) before income taxes		1.0		(3.9	)
Income tax benefit		—		(0.1	)
Income (loss) from discontinued operations, net of income taxes		1.0		(3.8	)

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 all non-segment related items such as corporate income and expenses, stock compensation, income or expenses related to divested businesses, 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,			February 28,
	2010			2009
Raytheon Company		38	%		34	%
Lockheed Martin Corporation		28	%		22	%
United Launch Alliance			*		11	%


*		Less than 10% of net sales

Sales in the first quarter of fiscal 2010 and 2009 directly and indirectly to the U.S. government and its agencies, including sales to the Company’s significant customers discussed above, totaled 93% and 90%, respectively, of net sales.

Selected financial information for each reportable segment is as follows:


	Three Months ended
	February 28,			February 28,
	2010			2009
	(In millions)
Net Sales:
Aerospace and Defense	$	185.1		$	169.3
Real Estate		1.7			1.6

Total	$	186.8		$	170.9

Segment Performance:
Aerospace and Defense	$	17.3		$	14.6
Environmental remediation provision adjustments		(0.3	)		(0.3	)
Retirement benefit plan (expense) benefit		(7.3	)		0.7
Unusual items (see Note 13)		(0.2	)		(0.4	)

Aerospace and Defense Total		9.5			14.6

Real Estate		1.2			1.0

Total	$	10.7		$	15.6

Reconciliation of segment performance to (loss) income from continuing operations before income taxes:
Segment Performance	$	10.7		$	15.6
Interest expense		(10.4	)		(9.9	)
Interest income		0.3			0.5
Stock-based compensation benefit (expense)		1.5			(0.1	)
Corporate retirement benefit plan (expense) benefit		(3.2	)		0.7
Corporate and other expenses		(3.2	)		(2.3	)
Unusual items (see Note 13)		(1.4	)		(1.8	)

(Loss) income from continuing operations before income taxes	$	(5.7	)	$	2.7

13. Unusual Items

In the first quarter of fiscal 2010 and 2009, the Company recorded $1.4 million and $1.8 million, respectively, associated with executive severance. Additionally, during the first quarter of fiscal 2010 and 2009, the Company recorded $0.2 million and $0.4 million, respectively, for realized 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.

14. Condensed Consolidating Financial Information

The Company is providing condensed consolidating financial information for its material domestic subsidiaries that have guaranteed the 9 1/2% Notes, and for those subsidiaries that have not guaranteed the 9 1/2% Notes. These 100% owned subsidiary guarantors have, jointly and severally, fully and unconditionally guaranteed the 9 1/2% Notes. The subsidiary guarantees are senior subordinated obligations of each subsidiary guarantor and rank (i) junior in right of payment with all senior indebtedness, (ii) equal in right of payment with all senior subordinated indebtedness, and (iii) senior in right of payment to all subordinated indebtedness, in each case, of that subsidiary guarantor. The subsidiary guarantees will also be effectively subordinated to any collateralized indebtedness of the subsidiary guarantor with respect to the assets collateralizing that indebtedness. Absent both default and notice as specified in the Company’s Senior Credit Facility and agreements governing the Company’s outstanding convertible notes and the 9 1/2% Notes, there are no restrictions on the Company’s ability to obtain funds from its 100% owned subsidiary guarantors by dividend or loan.

The Company has not presented separate financial and narrative information for each of the subsidiary guarantors, because it believes that such financial and narrative information would not provide investors with any additional information that would be material in evaluating the sufficiency of the guarantees. Therefore, the following condensed consolidating financial information summarizes the financial position, results of operations, and cash flows for the Company’s guarantor and non-guarantor subsidiaries.

Condensed Consolidating Statements of Operations
(Unaudited)


				Guarantor			Non-guarantor
Three Months Ended February 28, 2010 (In millions)	Parent			Subsidiaries			Subsidiaries		Eliminations			Consolidated
Net sales	$	—		$	186.8		$	—	$	—		$	186.8
Cost of sales (exclusive of items shown separately below)		—			169.7			—		—			169.7
Selling, general and administrative		1.8			3.2			—		—			5.0
Depreciation and amortization		—			6.0			—		—			6.0
Interest expense		9.2			1.2			—		—			10.4
Other, net		1.5			(0.1	)		—		—			1.4

(Loss) income from continuing operations before income taxes		(12.5	)		6.8			—		—			(5.7	)
Income tax (benefit) provision		(0.3	)		4.5			—		—			4.2

(Loss) income from continuing operations		(12.2	)		2.3			—		—			(9.9	)
Income from discontinued operations		1.0			—			—		—			1.0

(Loss) income before equity income of subsidiaries		(11.2	)		2.3			—		—			(8.9	)
Equity income of subsidiaries		2.3			—			—		(2.3	)		—

Net (loss) income	$	(8.9	)	$	2.3		$	—	$	(2.3	)	$	(8.9	)


				Guarantor			Non-guarantor
Three Months Ended February 28, 2009 (In millions)	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	170.9		$	—		$	—		$	170.9
Cost of sales (exclusive of items shown separately below)		—			148.9			—			—			148.9
Selling, general and administrative		(0.9	)		3.0			—			—			2.1
Depreciation and amortization		—			6.0			—			—			6.0
Interest expense		8.4			1.5			—			—			9.9
Other, net		1.5			(0.2	)		—			—			1.3

(Loss) income from continuing operations before income taxes		(9.0	)		11.7			—			—			2.7
Income tax (benefit) provision		(23.3	)		2.8			—			—			(20.5	)

Income from continuing operations		14.3			8.9			—			—			23.2
Loss from discontinued operations		(0.1	)		—			(3.7	)		—			(3.8	)

Income (loss) before equity income (losses) of subsidiaries		14.2			8.9			(3.7	)		—			19.4
Equity income (losses) of subsidiaries		5.2			—			—			(5.2	)		—

Net income (loss)	$	19.4		$	8.9		$	(3.7	)	$	(5.2	)	$	19.4

Condensed Consolidating Balance Sheets
(Unaudited)


				Guarantor			Non-guarantor
February 28, 2010 (In millions):	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash and cash equivalents	$	152.9		$	(13.9	)	$	0.1		$	—		$	139.1
Marketable securities		44.9			—			—			—			44.9
Accounts receivable		—			96.3			—			—			96.3
Inventories		—			53.3			—			—			53.3
Recoverable from the U.S. government and other third parties for environmental remediation costs and other		0.1			31.6			—			—			31.7
Grantor trust		2.0			0.7			—			—			2.7
Other receivables, prepaid expenses and other		10.6			12.4			—			—			23.0

Total current assets		210.5			180.4			0.1			—			391.0
Restricted cash		67.3			—			—			—			67.3
Property, plant and equipment, net		0.4			128.8			—			—			129.2
Recoverable from the U.S. government and other third parties for environmental remediation costs and other		0.2			152.9			—			—			153.1
Grantor trust		10.1			5.8			—			—			15.9
Goodwill		—			94.9			—			—			94.9
Intercompany (payable) receivable, net		(134.8	)		154.5			(19.7	)		—			—
Other noncurrent assets and intangibles, net		134.0			155.6			9.9			(132.2	)		167.3

Total assets	$	287.7		$	872.9		$	(9.7	)	$	(132.2	)	$	1,018.7

Short-term borrowings and current portion of long-term debt	$	1.2		$	—		$	—		$	—		$	1.2
Accounts payable		0.6			23.5			—			—			24.1
Reserves for environmental remediation costs		6.1			40.5			—			—			46.6
Other current liabilities, advance payments on contracts, and postretirement medical and life insurance benefits		(10.1	)		214.6			—			—			204.5

Total current liabilities		(2.2	)		278.6			—			—			276.4
Long-term debt		480.2			—			—			—			480.2
Reserves for environmental remediation costs		5.0			170.2			—			—			175.2
Pension benefits		19.9			200.5			—			—			220.4
Other noncurrent liabilities		52.8			81.7			—			—			134.5

Total liabilities		555.7			731.0			—			—			1,286.7
Commitments and contingencies (Note 7)
Redeemable common stock		5.5			—			—			—			5.5
Total shareholders’ (deficit) equity		(273.5	)		141.9			(9.7	)		(132.2	)		(273.5	)

Total liabilities, redeemable common stock, and shareholders’ (deficit) equity	$	287.7		$	872.9		$	(9.7	)	$	(132.2	)	$	1,018.7


				Guarantor			Non-guarantor
November 30, 2009 (In millions):	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash and cash equivalents	$	166.0		$	(39.8	)	$	0.1		$	—		$	126.3
Accounts receivable		—			116.3			—			—			116.3
Inventories		—			61.8			—			—			61.8
Recoverable from the U.S. government and other third parties for environmental remediation costs and other		0.1			30.5			—			—			30.6
Grantor trust		1.5			0.9			—			—			2.4
Other receivables, prepaid expenses and other		12.7			20.1			—			—			32.8
Income taxes		43.2			(40.8	)		—			—			2.4

Total current assets		223.5			149.0			0.1			—			372.6
Property, plant and equipment, net		0.4			129.5			—			—			129.9
Recoverable from the U.S. government and other third parties for environmental remediation costs and other		0.2			154.1			—			—			154.3
Grantor trust		11.6			6.2			—			—			17.8
Goodwill		—			94.9			—			—			94.9
Intercompany (payable) receivable, net		(77.4	)		97.1			(19.7	)		—			—
Other noncurrent assets and intangibles, net		116.9			159.3			9.9			(120.7	)		165.4

Total assets	$	275.2		$	790.1		$	(9.7	)	$	(120.7	)	$	934.9

Short-term borrowings and current portion of long-term debt	$	17.8		$	—		$	—		$	—		$	17.8
Accounts payable		0.4			18.0			—			—			18.4
Reserves for environmental remediation costs		7.2			37.3			—			—			44.5
Other current liabilities, advance payments on contracts, and postretirement medical and life insurance benefits		38.9			141.8			—			—			180.7

Total current liabilities		64.3			197.1			—			—			261.4
Long-term debt		403.8			—			—			—			403.8
Reserves for environmental remediation costs		4.4			173.8			—			—			178.2
Pension benefits		22.1			202.9			—			—			225.0
Other noncurrent liabilities		53.5			85.9			—			—			139.4

Total liabilities		548.1			659.7			—			—			1,207.8
Commitments and contingencies (Note 7)
Redeemable common stock		6.0			—			—			—			6.0
Total shareholders’ (deficit) equity		(278.9	)		130.4			(9.7	)		(120.7	)		(278.9	)

Total liabilities, redeemable common stock, and shareholders’ (deficit) equity	$	275.2		$	790.1		$	(9.7	)	$	(120.7	)	$	934.9

Condensed Consolidating Statements of Cash Flows
(Unaudited)


				Guarantor			Non-guarantor
Three months ended February 28, 2010 (In millions):	Parent			Subsidiaries			Subsidiaries		Eliminations		Consolidated
Net cash (used in) provided by operating activities	$	(10.1	)	$	87.5		$	—	$	—	$	77.4
Net transfers (to) from parent		57.4			(57.4	)		—		—		—

Net cash (used in) provided by operating activities		47.3			30.1			—		—		77.4
Cash flows from investing activities:
Capital expenditures		—			(4.2	)		—		—		(4.2	)
Other investing activities		(112.3	)		—			—		—		(112.3	)

Net cash used in investing activities		(112.3	)		(4.2	)		—		—		(116.5	)
Cash flows from financing activities:
Debt repayments		(142.2	)		—			—		—		(142.2	)
Proceeds from issuance of debt, net of issuance costs		194.1			—			—		—		194.1

Net cash provided by financing activities		51.9			—			—		—		51.9

Net (decrease) increase in cash and cash equivalents		(13.1	)		25.9			—		—		12.8
Cash and cash equivalents at beginning of year		166.0			(39.8	)		0.1		—		126.3

Cash and cash equivalents at end of period	$	152.9		$	(13.9	)	$	0.1	$	—	$	139.1


				Guarantor			Non-guarantor
Three months ended February 28, 2009 (In millions):	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
Net cash (used in) provided by operating activities	$	(10.6	)	$	0.3		$	(0.2	)	$	—	$	(10.5	)
Net transfers (to) from parent		(3.0	)		2.9			0.1			—		—

Net cash (used in) provided by operating activities		(13.6	)		3.2			(0.1	)		—		(10.5	)
Cash flows from investing activities:
Capital expenditures		—			(1.7	)		—			—		(1.7	)

Net cash used in investing activities		—			(1.7	)		—			—		(1.7	)
Cash flows from financing activities:
Repayments on notes payable and long-term debt, net		(0.9	)		—			—			—		(0.9	)

Net cash used in financing activities		(0.9	)		—			—			—		(0.9	)

Net (decrease) increase in cash and cash equivalents		(14.5	)		1.5			(0.1	)		—		(13.1	)
Cash and cash equivalents at beginning of year		103.7			(11.2	)		0.2			—		92.7

Cash and cash equivalents at end of period	$	89.2			(9.7	)	$	0.1		$	—	$	79.6

15. Subsequent Events

On March 17, 2010, the Company executed an amendment (the “Second Amendment”) to its $280.0 million Senior Credit Facility. The Second Amendment, among other things, (i) permits the Company to repurchase its outstanding convertible subordinated notes and senior subordinated notes, subject to certain conditions; (ii) permits the Company to incur additional senior unsecured or subordinated indebtedness, subject to specified limits and other conditions; (iii) permits the Company to conduct a rescission offer, using stock and/or cash up to $15.0 million, with respect to certain units issued under the GenCorp Savings Plan; (iv) permits the Company to repurchase its stock, subject to certain conditions; (v) limits the circumstances under which the Company would have to mandatorily prepay loans under the Senior Credit Facility with the proceeds from equity issuances; and (vi) amends the definitions of the leverage ratio and net cash proceeds from permitted real estate sales. The Second Amendment reduces the Revolver capacity from $80.0 million to $65.0 million and the letter of credit subfacility capacity from $125.0 million to $100.0 million, and also removes an additional term loan facility of up to $75.0 million. Under the Second Amendment, the interest rate on LIBOR rate borrowings is LIBOR plus 325 basis points, an increase of 100 basis points, and the letter of credit subfacility commitment fee has been similarly amended. The Second Amendment also provides for a commitment fee on the unused portion of the Revolver in the amount of 62.5 basis points, an increase of 12.5 basis points.

On March 18, 2010, the Company also entered into an agreement with certain holders to repurchase $22.5 million principal amount of its 9 ¹ / 2 % Notes at 102% of par, plus accrued and unpaid interest, and $14.3 million principal amount of its 2 ¹ / 4 % Debentures at 93% of par, plus accrued and unpaid interest. The Company repurchased the debt using a portion of the net proceeds of its 4 1/16% Debentures issued in December 2009, and will record a charge of approximately $0.2 million in the second quarter of fiscal 2010, including the write-off of deferred financing costs associated with the retired debt.

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 “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.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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, 2009, and periodic reports subsequently filed with the Securities and Exchange Commission (“SEC”).

Overview

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

On August 31, 2004, we completed the sale of our GDX Automotive (“GDX”) business which is classified as discontinued operations in these Unaudited Condensed Consolidated Financial Statements and Notes to Unaudited Condensed Consolidated Financial Statements (see Note 11 of the Unaudited Condensed Consolidated Financial Statements).

Results of Operations

Net Sales:


	Three months ended
	February 28,		February 28,
	2010		2009		Change*
	(In millions)
Net Sales:	$	186.8	$	170.9	$	15.9


*		Primary reason for change. The increase was primarily due to the following: (i) the release of NASA funding constraints on the Orion program generating $11.4 million of additional net sales; (ii) awards received in fiscal 2009 on divert and attitude control system programs generating $8.7 million of additional net sales; (iii) a new award on the Patriot 2 (GEM-T) program resulting in $3.4 million of additional net sales; and (iv) $2.2 million of higher sales under the Taurus 2 program with Orbital Sciences related to a new award in fiscal 2009. 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.

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


	Three Months ended
	February 28,			February 28,
	2010			2009
Raytheon Company		38	%		34	%
Lockheed Martin Corporation		28	%		22	%
United Launch Alliance		*			11	%


*		Less than 10% of net sales

Sales in the first quarter of fiscal 2010 and 2009 directly and indirectly to the U.S. government and its agencies, including sales to our significant customers discussed above, totaled 93% and 90%, respectively, of net sales.

Operating Income:


	Three months ended
	February 28,			February 28,
	2010			2009			Change*
	(In millions, except percentage amounts)
Operating income:	$	4.4		$	12.1		$	(7.7	)
Percentage of net sales		2.4	%		7.1	%


*		Primary reason for change. The decrease in operating income was primarily due to the following:

	•		An increase of $11.9 million in retirement benefit expense. See discussion of “Retirement Benefit Plans” below.

	•		An increase of $3.1 million in gross profit (defined as net sales less costs of sales excluding the impact of retirement benefit expenses) on net sales as a result of higher sales in the current period compared to the prior period and, to a lesser extent, an overall improvement in contract performance.

	•		A decrease of $1.6 million in stock-based compensation due to the lower fair value of the stock appreciation rights at February 28, 2010.

Cost of sales:


	Three months ended
	February 28,			February 28
	2010			2009			Change*
	(In millions, except percentage amounts)
Cost of sales:	$	169.7		$	148.9		$	20.8
Percentage of net sales		90.8	%		87.1	%


*		Primary reason for change. The increase in costs of sales as a percentage of net sales was primarily due to an increase of $8.0 million of non-cash aerospace and defense retirement benefit plan expense in the first quarter of fiscal 2010. See discussion of “Retirement Benefit Plans” below.

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


	Three months ended
	February 28,			February 28,
	2010			2009			Change*
	(In millions, except percentage amounts)
Selling, General and Administrative:	$	5.0		$	2.1		$	2.9
Percentage of net sales		2.7	%		1.2	%


*		Primary reason for change. The increase in SG&A expense is primarily due to an increase of $3.9 million of non-cash corporate retirement benefit plan expenses. See discussion of “Retirement Benefit Plans” below. The increase in retirement benefit expense was partially offset by a $1.6 million decrease in stock-based compensation due to the lower fair value of the stock appreciation rights at February 28, 2010.

Depreciation and Amortization:


	Three months ended
	February 28,			February 28,
	2010			2009			Change*
	(In millions, except percentage amounts)
Depreciation and amortization:	$	6.0		$	6.0		$	—
Percentage of net sales		3.2	%		3.5	%


*		Primary reason for change. Depreciation and amortization expense was unchanged for the periods presented.

Other expense (income), net:


	Three months ended
	February 28,		February 28,
	2010		2009			Change*
	(In millions)
Other expense (income), net	$	0.1	$	(0.4	)	$	0.5


*		Primary reason for change. The increase in other expense (income), net was primarily due to higher environmental remediation costs in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009.

Unusual items:


	Three months ended
	February 28,		February 28,
	2010		2009		Change*
	(In millions)
Unusual items	$	1.6	$	2.2	$	(0.6	)


*		Primary reason for change. In the first quarter of fiscal 2010 and 2009, we recorded $1.4 million and $1.8 million, respectively, associated with executive severance. Additionally, during the first quarter of fiscal 2010 and 2009, we recorded $0.2 million and $0.4 million, respectively, for realized 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.

Interest Expense:


	Three months ended
	February 28,		February 28,
	2010		2009		Change*
	(In millions)
Interest expense	$	10.4	$	9.9	$	0.5


*		Primary reason for change. The increase in interest expense was primarily due to higher average debt balances during the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. During the first quarter of fiscal 2010 and 2009, interest expense includes $2.0 million and $1.9 million, respectively, of non-cash debt discount amortization (see Note 1 and 6 of the Notes to Unaudited Condensed Consolidated Financial Statements). Additionally, during the first quarter of fiscal 2010 and 2009, interest expense includes $1.2 million and $1.3 million, respectively, of non-cash amortization of deferred financing costs.

Interest Income:


	Three months ended
	February 28,			February 28,
	2010			2009			Change*
	(In millions)
Interest income	$	(0.3	)	$	(0.5	)	$	0.2


*		Primary reason for change. The decline in interest income was primarily due to lower average rates in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 partially offset by higher cash balances in fiscal 2010.

Income Tax Provision (Benefit):


	Three months ended
	February 28,		February 28,
	2010		2009
	(In millions)
Income tax provision (benefit)	$	4.2	$	(20.5	)

The income tax provision of $4.2 million in the first quarter of fiscal 2010 was primarily related to current federal alternative minimum taxes of $1.7 million, current state taxes of $1.1 million, and deferred taxes of $1.4 million related to the amortization of goodwill.

The income tax benefit of $20.5 million in the first quarter of fiscal 2009 is primarily related to new guidance that was published by the Chief Counsel’s Office of the Internal Revenue Service in December 2008 clarifying which costs qualify for ten-year carryback of tax net operating losses for refund of prior years’ taxes. As a result of the clarifying language, we recorded an income tax benefit of $19.7 million, of which $14.5 million is for the release of the valuation allowance associated with the utilization of the qualifying tax net operating losses and $5.2 million is for the recognition of affirmative claims related to previous uncertain tax positions associated with prior years refund claims related to the qualifying costs. An additional $0.6 million benefit was recorded in the first quarter of fiscal 2009 to reflect the tax benefit of unusual items.

The difference between operating results at the statutory rate and the income tax provision recorded was primarily due to the change in the valuation allowance which increased in first quarter of fiscal 2010 and decreased in first quarter of fiscal 2009.

As of February 28, 2010, the liability for uncertain income tax positions was $1.5 million. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.

Discontinued Operations:

In November 2003, we announced the closing of a GDX manufacturing facility in Chartres, France owned by Snappon SA, a subsidiary of the Company. The decision resulted primarily from declining sales volumes with French automobile manufacturers. In June 2004, we completed the legal process for closing the facility and establishing a social plan. During the first quarter of fiscal 2009, Snappon SA had legal judgments rendered against it under French law, aggregating €2.9 million plus interest related to wrongful discharge claims by certain former employees of Snappon SA. During the second quarter of fiscal 2009, Snappon SA filed for declaration of suspensions of payments with the clerk’s office of the Paris Commercial Court (see Note 7(a) of the Unaudited Condensed Consolidated Financial Statements).

Summarized financial information for discontinued operations is set forth below:


	Three months ended
	February 28,		February 28,
	2010		2009
	(In millions)
Net sales	$	—	$	—
Foreign currency gains		1.3		—
Income (loss) before income taxes		1.0		(3.9	)
Income tax benefit		—		(0.1	)
Income (loss) from discontinued operations, net of income taxes		1.0		(3.8	)

Retirement Benefit Plans:

Components of retirement benefit expense (benefit) are:


	Three months ended
	February 28,			February 28,
	2010			2009
	(In millions)
Service cost	$	1.2		$	3.2
Interest cost on benefit obligation		22.5			23.5
Assumed return on plan assets		(26.9	)		(25.9	)
Recognized net actuarial losses (gains)		13.7			(2.2	)

Retirement benefit expense (benefit)	$	10.5		$	(1.4	)

The increase in retirement benefit expense was primarily due to higher actuarial losses recognized in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. The increase in actuarial losses 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.

Market conditions and interest rates significantly affect assets and liabilities of our pension plans. Pension accounting requires that market gains and losses be deferred and recognized over a period of years. This “smoothing” results in the creation of other accumulated income or loss 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 expenses, future expenses are impacted by changes in the market value of pension plan assets and changes in interest rates.

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. Specifically, 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,		February 28,
	2010		2009		Change*
	(In millions)
Net Sales	$	185.1	$	169.3	$	15.8
Segment performance	$	9.5	$	14.6	$	(5.1	)


*		Primary reason for change. The increase was primarily due to the following: (i) the release of NASA funding constraints on the Orion program generating $11.4 million of additional net sales; (ii) awards received in fiscal 2009 on divert and attitude control system programs generating $8.7 million of additional net sales; (iii) a new award on the Patriot 2 (GEM-T) program resulting in $3.4 million of additional net sales; and (iv) $2.2 million of higher sales under the Taurus 2 program with Orbital Sciences related to a new award in fiscal 2009. 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.

		The decrease in segment performance in the first quarter of fiscal 2010 as compared to the first quarter of fiscal 2009 was primarily the result of an increase of $8.0 million in non-cash retirement benefit plan expense in fiscal 2010 partially offset by higher net sales.

A summary of our backlog is as follows:


	February 28,		November 30,
	2010		2009
	(In millions)
Funded backlog	$	801.3	$	811.2
Unfunded backlog		442.9		379.6

Total contract backlog	$	1,244.2	$	1,190.8

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 funding delays or program restructurings/cancellations which are beyond our control.

Real Estate Segment


	Three months ended
	February 28,		February 28,
	2010		2009		Change*
	(In millions)
Net Sales	$	1.7	$	1.6	$	0.1
Segment performance	$	1.2	$	1.0	$	0.2


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

Other Information

Recently Adopted Accounting Pronouncements

As of December 1, 2009, we adopted the accounting standards which require additional disclosures for plan assets of defined benefit pension or other postretirement plans. The required disclosures include a description of our investment policies and strategies, the fair value of each major category of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets, and the significant concentrations of risk within plan assets. The new disclosures will be presented in our annual financial statements for the year ended November 30, 2010.

As of December 1, 2009, we adopted the new accounting standards which apply 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 adoption of this guidance affects our 2 ¹ / 4 % Convertible Subordinated Debentures (“2 ¹ / 4 % Debentures”). This guidance requires the issuer of convertible debt instruments to separately account for the liability (debt) and equity (conversion option) components of such instruments and retrospectively adjust the financial statements for all periods presented. The fair value of the liability component shall be determined based on the market rate for similar debt instruments without the conversion feature and the residual between the proceeds and the fair value of the liability component is recorded as equity at the time of issuance. Additionally the pronouncement requires transaction costs to be allocated to the liability and equity components on the same relative percentages.

The adoption of this guidance results in higher non-cash interest expense for fiscal 2005 through fiscal 2011, assuming the holders will require us to repurchase the 2 ¹ / 4 % Debentures at a cash price equal to 100% of the principal amount plus accrued and unpaid interest on November 20, 2011, the earliest date when the holders can exercise such right (see Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements).

New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board issued updated guidance to improve disclosures regarding fair value measurements. This update requires entities to (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separately (i.e. on a gross basis rather than as one net number), information about purchases, sales, issuances, and settlements in the roll forward of changes in Level 3 fair value measurements. The update requires fair value disclosures by class of assets and liabilities rather than by major category or line item in the statement of financial position. Disclosures regarding the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for assets and liabilities in both Level 2 and Level 3 are also required. For all portions of the update except the gross presentation of activity in the Level 3 roll forward, this standard is effective for interim and annual reporting periods beginning after December 15, 2009. For the gross presentation of activity in the Level 3 roll forward, this guidance is effective for fiscal years beginning after December 15, 2010. As this guidance is only disclosure-related, it will not have an impact on our consolidated financial statements.

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.

The areas 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, 2009.

Arrangements with Off-Balance Sheet Risk

As of February 28, 2010, arrangements with off-balance sheet risk, consisted of:

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

— Up to $1.4 million of reimbursements to Granite Construction Company (“Granite”) if we request Granite to cease mining operations on certain portions of the Sacramento Land.

— Guarantees, jointly and severally, by our material domestic subsidiaries of its obligations under its Senior Credit Facility and its 9 1/2% Notes.

In addition to the items discussed above, we 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.

We also 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 were terminated.

Liquidity and Capital Resources

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

Cash and cash equivalents increased by $12.8 million during the first quarter of fiscal 2010. The change in cash and cash equivalents was as follows:


	Three Months Ended
	February 28,			February 28,
	2010			2009
	(In millions)
Net Cash Provided by (Used in) Operating Activities	$	77.4		$	(10.5	)
Net Cash Used in Investing Activities		(116.5	)		(1.7	)
Net Cash Provided by (Used in) Financing Activities		51.9			(0.9	)

Net Increase (Decrease) in Cash and Cash Equivalents	$	12.8		$	(13.1	)

Net Cash Provided by (Used In) Operating Activities

The $77.4 million of cash provided by operating activities in the first quarter of fiscal 2010 was primarily due to $64.0 million of cash provided by working capital (defined as accounts receivables, inventories, accounts payable, contract advances, and other current liabilities). The increase in working capital is due the following (i) an increase in contract advances from prior year related to the timing of contract payments; (ii) an increase in collections on billed accounts receivables, resulting in a decrease in receivables days outstanding; (iii) a decrease in inventories due to higher sales, resulting in increased inventory turnover; and (iv) higher accounts payable in connection with higher sales and timing of payments to vendors. The cash generated from operations was partially offset by a decrease in net income primarily due to an income tax benefit of $20.5 million in the first quarter of 2009 as a result of new guidance clarifying which costs qualify for ten-year carryback of tax net operating losses for refund of prior years’ taxes.

The $10.5 million of cash used by operating activities in the first quarter of fiscal 2009 was primarily related to interest payments, contractual payments under legal settlements, and payments to fund our postretirement benefit obligations, partially offset by cash generated from our Aerospace and Defense operations.

Net Cash Used In Investing Activities

During the first quarter of fiscal 2010 and fiscal 2009, we had capital expenditures of $4.2 million and $1.7 million, respectively. The majority of our capital expenditures directly supports our contract and customer requirements and are primarily incurred for asset replacement, capacity expansion, development of new projects, and safety and productivity improvements.

As of February 28, 2010, we had $67.3 million of restricted cash related to the proceeds from the 4.0625% Convertible Subordinated Debentures (“4 1/16% Debentures”) that will be used to repurchase a portion of our outstanding convertible subordinated notes and senior subordinated notes, subject to certain conditions.

During the first quarter of fiscal 2010, we invested net cash of $45.0 million in marketable securities.

Net Cash Provided by (Used in) Financing Activities

During the first quarter of fiscal 2010, cash of $51.9 million was generated reflecting the issuance of $200.0 million in 4 1/16% Debentures in December 2009, offset by $142.2 million in debt repayments (see table below). In addition, we incurred $5.9 million in debt issuance costs.

During the first quarter of fiscal 2009, net cash used for debt principal payments was $0.9 million.

Borrowing Activity and $280 million Senior Credit Facility (“Senior Credit Facility”):

Our borrowing activity during the first quarter of fiscal 2010 was as follows:


					Debt
	November 30,				Discount					February 28,
	2009		Additions		Amortization		Payments			2010
	(In millions)
Term loan	$	68.3	$	—	$	—	$	(16.8	)	$	51.5
9 ¹ / 2 % Notes		97.5		—		—		—			97.5
4% Contingent Convertible Subordinated Notes (“4% Notes”)		125.0		—		—		(124.7	)		0.3
4 1/16% Debentures		—		200.0		—		—			200.0
2 ¹ / 4 % Debentures		129.4		—		2.0		—			131.4
Promissory note		1.4		—		—		(0.7	)		0.7

Total Debt and Borrowing Activity	$	421.6	$	200.0	$	2.0	$	(142.2	)	$	481.4

The Senior Credit Facility provides for an $80.0 million revolving credit facility (“Revolver”) and a $200.0 million credit-linked facility, consisting of a $125.0 million letter of credit subfacility and a $75.0 million term loan subfacility. As of February 28, 2010, the borrowing limit under the Revolver was $80.0 million with all of it available. Also as of February 28, 2010, we had $84.8 million outstanding letters of credit under the $125.0 million letter of credit subfacility and had permanently reduced the amount of our term loan subfacility to the $51.5 million outstanding.

During the first quarter of fiscal 2010, we made a required principal payment of $16.6 million on the term loan subfacility due to the excess cash flow prepayment provisions of the in the existing Amended and Restated Credit Agreement, originally entered into as of June 21, 2007, by and among the Company, as borrower, the subsidiaries of the Company from time to time party thereto, as guarantors, the lenders from time to time party thereto and Wachovia Bank, National Association, as administrative agent for the lenders, as amended to date (the “Credit Agreement”). In the event that the leverage ratio is less than or equal to 3.0 to 1.0, as defined, at the end of any fiscal year during the term of the Senior Credit Facility, no excess cash flow pre-payment would be required under this provision.

The Senior Credit Facility is collateralized by a substantial portion of our real property holdings and substantially all of our other assets, including the stock and assets of our material domestic subsidiaries that are guarantors of the facility. We are subject to certain limitations including the ability to: incur additional senior debt; release collateral, retain proceeds from asset sales, retain proceeds from operations and issuances of debt or equity, make certain investments and acquisitions, grant additional liens, and make restricted payments, including stock repurchases and dividends. In addition, the Credit Agreement contains certain restrictions surrounding the ability to refinance our subordinated debt, including provisions that, except on terms no less favorable to the Credit Agreement, our subordinated debt cannot be refinanced prior to maturity. Furthermore, provided that we have cash and cash equivalents of at least $25.0 million after giving effect thereto, we may redeem (with funds other than Senior Credit Facility proceeds) the subordinated notes to the extent required by the mandatory redemption provisions of the subordinated note indenture. We are also subject to the following financial covenants:


	Actual Ratios as of	Required Ratios
Financial Covenant	February 28, 2010	December 1, 2009 and thereafter
Interest coverage ratio	3.90 to 1.00	Not less than: 2.25 to 1.00
Leverage ratio	4.13 to 1.00	Not greater than: 5.50 to 1.00

We were in compliance with our financial and non-financial covenants as of February 28, 2010.

On March 17, 2010, we executed an amendment (the “Second Amendment”) to our $280.0 million Senior Credit Facility. The Second Amendment, among other things, (i) permits us to repurchase our outstanding convertible subordinated notes and senior subordinated notes, subject to certain conditions; (ii) permits us to incur additional senior unsecured or subordinated indebtedness, subject to specified limits and other conditions; (iii) permits us to conduct a rescission offer, using stock and/or cash up to $15.0 million, with respect to certain units issued under the GenCorp Savings Plan; (iv) permits us to repurchase our stock, subject to certain conditions; (v) limits the circumstances under which we would have to mandatorily prepay loans under the Senior Credit Facility with the proceeds from equity issuances; and (vi) amends the definitions of the leverage ratio and net cash proceeds from permitted real estate sales. The Second Amendment reduces the Revolver capacity from $80.0 million to $65.0 million and the letter of credit subfacility capacity from $125.0 million to $100.0 million, and also removes an additional term loan facility of up to $75.0 million. Under the Second Amendment, the interest rate on LIBOR rate borrowings is LIBOR plus 325 basis points, an increase of 100 basis

points, and the letter of credit subfacility commitment fee has been similarly amended. The Second Amendment also provides for a commitment fee on the unused portion of the Revolver in the amount of 62.5 basis points, an increase of 12.5 basis points.

In December 2009, we 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. Issuance of the 4 1/16% Debentures generated net proceeds of approximately $194.1 million, which were used to repurchase $124.7 million of the 4% Notes and $2.1 million of other debt related costs. The remaining proceeds of $67.3 million is legally restricted by the 4 1/16% Debentures indenture to be used to repurchase a portion of our outstanding convertible subordinated notes and senior subordinated notes, subject to certain conditions, and other debt related costs.

On March 18, 2010, we entered into an agreement with certain holders pursuant to which we repurchased $22.5 million principal amount of our 9 ¹ / 2 % Notes at 102% of par for an aggregate purchase price of $23.0 million, plus accrued but unpaid interest, and $14.3 million principal amount of our 2 ¹ / 4 % Debentures at 93% of par for an aggregate purchase price of $13.3 million, plus accrued but unpaid interest. We repurchased the debt using a portion of the net proceeds of our 4 1/16% Debentures, and will record a charge of approximately $0.2 million in the second quarter of fiscal 2010, including the write-off of deferred financing costs associated with the retired debt.

Liquidity and 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, and debt service requirements. We believe that our existing cash and cash equivalents, marketable securities, and existing credit facilities will provide sufficient funds to meet our operating plan for the next twelve (12) months. The operating plan for this period provides for full operation of our businesses, and interest and principal payments on our debt.

As of February 28, 2010, our defined benefit pension plan assets were approximately $1.3 billion. The Pension Protection Act (“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. Our funded ratio as of November 30, 2008 under the PPA for our defined benefit pension plan was above the ratio required under the PPA, as amended in 2008. The required ratio to be met as of our November 30, 2009 measurement date is 94%. During the fourth quarter of fiscal 2009, we made a voluntary contribution of $4.4 million to improve the plan’s PPA funded status as of November 30, 2009, although there can be no assurance that the amount of this contribution will be sufficient to meet the required ratio. The final calculated PPA funded ratio as of November 30, 2009 is expected to be completed in the second half of fiscal 2010.

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, 2009. 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, 2009 include 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.

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, 2009, 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, we do not have any significant exposure to interest rate risk related to our investments.

As of February 28, 2010, our debt totaled $481.4 million: $429.9 million, or 89%, was at an average fixed rate of 6.76%; and $51.5 million, or 11%, was at a variable rate of 2.51%.

The estimated fair value and principal amount for our long-term debt is presented below:


	Fair Value				Principal Amount
	February 28,		November 30,		February 28,		November 30,
	2010		2009		2010		2009
	(In millions)
Term loan	$	49.2	$	62.8	$	51.5	$	68.3
9 ¹ / 2 % Notes		98.9		96.0		97.5		97.5
4% Notes		0.3		124.7		0.3		125.0
2 ¹ / 4 % Debentures (1)		125.2		131.0		146.4		146.4
4 1/16% Debentures		160.0		—		200.0		—
Other debt		0.7		1.4		0.7		1.4

	$	434.3	$	415.9	$	496.4	$	438.6


(1)		Excludes the debt discount of $15.0 million and $17.0 million as of February 28, 2010 and November 30, 2009, respectively.

The fair values of the term loan, 9 ¹ / 2 % Notes, 4% Notes, 2 ¹ / 4 % Debentures, and 4 1/16% Debentures were determined using broker quotes that are based on open markets of our debt securities as of February 28, 2010 and November 30, 2009, respectively. The fair value of the remaining 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 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 2010 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, 2009.

Vinyl Chloride Cases. The following table sets forth information related to our historical product liability costs associated with our vinyl chloride litigation cases.


	Three Months		Year		Year
	Ended		Ended,		Ended
	February 28,		Nov. 30,		Nov. 30,
	2010		2009		2008
	(dollars in thousands)
Claims filed		—		1		—
Claims dismissed		—		1		—
Claims settled		—		—		2
Claims pending		1		1		1
Aggregate settlement costs	$	—	$	—	$	6
Average settlement costs	$	—	$	—	$	3

Legal and administrative fees for the vinyl chloride cases in fiscal 2008 were $0.3 million.

Asbestos Cases. The following table sets forth information related to our historical product liability costs associated with our asbestos litigation cases.


	Three Months		Year			Year
	Ended		Ended,			Ended
	February 28,		Nov. 30,			Nov. 30,
	2010		2009			2008
	(dollars in thousands)
Claims filed		6		27	*		33	*
Claims consolidated		—		23			—
Claims dismissed		4		25			31
Claims settled		—		2			5
Claims pending		136		134			157
Aggregate settlement costs	$	—	$	35		$	246
Average settlement costs	$	—	$	17		$	49


*		This number is net of two cases tendered to a third party under a contractual indemnity obligation.

Legal and administrative fees for the asbestos cases for the first three months of fiscal 2010 were $0.1 million. Legal and administrative fees for the asbestos cases for fiscal years 2009 and 2008 were $0.4 million and $0.5 million, respectively.

Item 1A. Risk Factors.

There have been no material changes from our risk factors as previously reported in our Annual Report to the SEC on Form 10-K for the fiscal year ended November 30, 2009.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Reserved

Item 5. Other Information

None.

Item 6. Exhibits


No.		Description
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.


*		Filed herewith. All other exhibits have been previously filed.

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: March 26, 2010	By:	/s/ Scott J. Seymour
		Scott J. Seymour
		President and Chief Executive Officer (Principal Executive Officer)


Date: March 26, 2010	By:	/s/ Kathleen E. Redd
		Kathleen E. Redd
		Vice President, Chief Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX


Exhibit No.		Exhibit Description
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.

TABLE OF CONTENTS

Part I Financial Informationprint Item 1. Financial Statementsprint Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operationsprint Item 3. Quantitative and Qualitative Disclosures About Market Riskprint Item 4. Controls and Proceduresprint Part II Other Informationprint Item 1. Legal Proceedingsprint Item 1A. Risk Factorsprint Item 2. Unregistered Sales Of Equity Securities and Use Of Proceedsprint Item 3. Defaults Upon Senior Securitiesprint Item 4. Reservedprint Item 5. Other Informationprint Item 6. Exhibitsprint

EX-31.1 EX-31.2 EX-32.1

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