Aerojet Rocketdyne Holdings Inc (AJRD) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the GenCorp's second-quarter 2005 earnings conference call. At this point, all the participant lines are in a listen-only mode; however, there will be an opportunity for your questions and instructions will be given at that time. If you need any assistance, please press star and then zero. As a reminder, today's call is being recorded.

I would now like to turn the call over to Ms. Linda Cutler. Please go ahead.

Thank you, John. Good morning, everyone. Before we start, I would like to remind you that during this call GenCorp's management team may make forward-looking statements as defined by the Private Litigation Reform Act of 1995. All statements in this conference call and in subsequent discussions, other than historical information, are forward-looking statements. These statements represent management's current judgment on expectations for future operations.

We encourage you to review the cautionary language regarding forward-looking statements and the factors contained in our second-quarter 2005 earnings release, as well as management's discussion and analysis and elsewhere in our most recent Form 10-K and other filings with the SEC. These statements and factors could cause business conditions and actual results to differ materially from those expected by the Company or expressed in our forward-looking statements.

With that, I would now like to turn the call over to Terry Hall.

Thank you, Linda. And good morning to everyone. Today GenCorp reported its second quarter, and we are quite pleased with the performance of the Company. GenCorp's strategy, as most of you know, has been driven by a focus on its Aerospace and Defense business and its Real Estate operation. Our strategy has been to grow Aerojet, our propulsion unit to make it bigger and stronger in order for it to fund the operations of the Company, and also for us to realize the benefit of the global settlement agreement that we have with the government on environmental clean-up.

It's also -- the second focus of our strategy has been to entitle, develop and monetize the large tracts of land that we have and own in California.

Finally, the third focus of our strategy has been to manage and reduce the risk to the Company from legacy liabilities, which are primarily general tire liabilities from the past and Aerojet environmental liabilities.

And the fourth objective that we have been trying to achieve this year is to sell our Aerojet Fine Chemicals business.

We continue to see evidence in this quarter that we are meeting some success. Aerojet's revenues are up 15% from the second quarter of 2004, and 3% from the first quarter of this year. And their revenues have been up sequentially eight of the last nine quarters.

Entitlement for our three projects, the Rio del Oro project, Glenborough, and Westborough in total 5,800 acres or a little over 9 square miles, remains on schedule. We still expect Rio del Oro to get entitlement in '06, Glenborough in '07, and Westborough in '08.

We announced today that we have settled three significant litigation matters. Again, this is managing legacy liabilities. We settled the San Gabriel Valley toxic tort claims, the Chino Hills toxic tort claim, and the Lotus Baumgartner retiring medical cases. These settlements greatly reduce the time it will take you to read our legal proceeding section in the 10-K. It also greatly reduces the risk profile of our Company, and we continue to work our way through legacy liabilities. This was the biggest chunk that we were concerned about.

We have not yet achieved our objective of selling our AFC business, but we are making progress, and I would say we are highly confident that a sale will occur, and when we can tell you about it, we will.

I will give you more color on our operations later in the call, but right now I want to turn it over to Yasmin to go through the financial results of the quarter.

Thank you, Terry. And good morning to everybody. Today, GenCorp reported net income for the second quarter of 4 million or $0.07 per share compared to a net loss of 312 million or $7.06 per share in 2004. I think as all of you well know, the loss in 2004 was a one-time charge driven by the charge associated on the disposition of the GDX business.

Looking at continuing operations on a quarter-over-quarter bases, our net income was 4 million in the second quarter of 2005 compared to a net loss of 48 million for the same period last year. Both periods were heavily influenced by income taxes, favorably in 2005, we recognized a $13 million tax benefit related to ten-year carry-back off net operating losses for which we received cash refunds. Whereas the 2004 second-quarter numbers reflect a tax provision of $36 million related to the uncertainty of realizing tax benefits in the future, and we have talked about this charge in -- in prior calls.

Retirement Benefit Plan expenses, they are included in continuing operations for the quarter, and once again, I'd like to remind you that most -- this charge is mostly noncash. The number for both periods -- both quarters was $12 million.

I would like to comment here a little bit briefly on discontinued operations, which consists of our GDX business that we sold last year and the Fine Chemicals business that we are currently, actively, in the process of selling. We reported a break-even position in the second quarter of 2005 for these discontinued operations, and the second quarter activity reflects income generated actually by the Fine Chemicals business, and it was offset by certain costs incurred in connection with the closure of some foreign GDX facilities that we obtained when the Company sold the GDX operations. We anticipate that these closure activities will be completed later on this year and they will be behind us soon with regard to the GDX operations.

Looking at our sales, our continuing operations generated 145 million of sales in the second quarter, compared to 122 -- 124 million in 2004. Needless to say, Aerojet is driving that increase. And Terry, I am sure in his comments to follow will elaborate on the drivers of growth that we are seeing in the Aerojet business right now, and I am very excited about. Aerojet sales were 144 million in the second quarter of 2004 -- '05 compared to 125 million in 2004, representing a 15% increase.

Operational performance, excluding Retirement Benefit Plan expense was 14 million, compared to 15 million in 2004. If you look at these amounts and express as a percentage of sales, the margin in 2005 was 9.7%. A reduction as compared to 2004, which was -- which was 12%. But I think as we have talked about in the past, Aerojet's margins are somewhat lower this year compared to prior year, driven in part by the mix of the contracts where we're doing a lot of R&D work. Whereas in 2004, you saw contract a little more production happening and also some pickup generated on award fees, et cetera.

Looking at Aerojet, I would like to comment a little bit about Atlas revenues included in the revenue number. We did not make any deliveries of Atlas motors in the second quarter. We delivered three motors in the first -- first quarter. We anticipate delivering another three motors in the third quarter, one a month here and four more production motors in -- in the fourth quarter of this year. We also will be working on a couple of qualification motors and some design work on the Atlas contract too to be completed later on this year.

The Aerojet numbers include an unusual charge of 2 million for the settlement of the toxic tort lawsuits that Terry discussed. We view this settlement as a very positive development for the Company, as it resolves some of its major legacy litigation and certainly a step in the right direction as we go forward.

Commenting on our other Real Estate business or our other core operation. As you can see in the numbers, we did not report any Real Estate transactions. Its segment performance was 1 million in fourth quarter reflecting the leasing activity.

We are proceeding towards our entitlement goals for Easton. We are currently, as Terry spoke about, we anticipate entitlement for Rio in 2006 to be followed by Glenborough and Westborough in 2007 and 2008, and continue to make steady progress towards these goals.

Looking at corporate and other expenses, I am happy to see a favorable trend there, and to report back to you. We reported 4 million in expense in the second quarter compared to 8 million in 2004, continuing our trend of reduction of corporate expense that we initiated at the beginning of 2005. The decrease reflects the reduction in our corporate expense and the fact that today we are a more focused Company than we were a year ago.

Corporate expense also included a legal settlement charge of less than $1 million related to the settlement of our retiree medical benefit claims with a group of GenCorp retirees, and that is a case that has been ongoing for a number of years now, and we are happy to announce that we reached settlement in that case, too, and again, a step forward in resolving some of our major legacy liabilities. The remaining costs associated to this retiree medical settlement case will be recognized over a period -- number of years as we talk about in the release and amortized in -- over quite a few years.

Interest expense declined to 6 million in the second quarter of 2005 from 8 million 2004. This improvement is a consequence of our recapitalization activities that we undertook late last year and completed earlier this year.

And lastly, from an income statement perspective, we reported this $13 million tax benefit in the second quarter of 2005, relating to a carry back of net operating losses. And I think as we go forward and the Company returns to profitability and returns to a taxable income position, we would expect to utilize the benefits of the charge that we took related to deferred taxes in 2004 and reinstatement of those assets.

Next, I think I want to turn my comments to debt and cash flow, a topic near and dear to everyone on this call. And certainly, a very important factor to Terry and me. Our debt position -- our total debt less cash as of May 31, 2005 was 300 -- was 408 million, compared to 384 million earlier on. This represents a cash usage of 24 million during the second quarter. Of this amount, 11 million was related to our discontinued operations, and it was associated with capital expenditures in support of our Fine Chemicals business and also across certain costs incurred in connection with the closure of the GDX [inaudible].

Continuing operations used 13 million during the quarter, which included capital expenditures for Aerojet, a build in the Atlas inventory, and as I commented on earlier on in the year -- earlier on in my comments, we expect to see Atlas deliveries occurring later on in the year. There was cash used for the Real Estate entitlement cost, corporate expense, legacy retiree, and also the cash interest expense.

If you look at the cash flow usage for the Company, for the year, for the first six months, we used a lot of cash in the first quarter, which I spoke about in my first quarter comments, but as I mentioned in the fourth quarter call, and first quarter call, the -- a big part of the use in the first quarter was, in fact, delivered -- driven by timing -- about 35 million of that was driven by timing of payables and receivables from the fourth -- from the fourth quarter of 2004 to the first quarter of 2005.

Our outlook for cash usage in the full year hasn't changed from the expectations I presented before. We indicated that absent any Real Estate transactions and absent the sale of proceeds from Fine Chemicals business, we expect cash usage for the Corporation in total for the year to be somewhere between 95 million to 110 million. As you can see, most of that is behind us now. We still think this is an achievable range, and are certainly working toward improving that.

As we've talked about before, Aerojet cash flow needs have been driven by investments that we have made in the Atlas program, and also certain program repayment, which we are beginning to see turning as Atlas goes into production now.

Lastly, I would like to comment on Fine Chemicals and say that we are making good progress toward a sale. We have a robust process going on right now, and we look forward to giving you some good news on it.

With that, I would like to turn the call back over to Terry.

Thanks, Yasmin. I am going to take you through what we are seeing occurring in our operations. Let's talk about Aerojet first. Obviously at Aerojet, we continue to see strong demand across its entire product line. There are several things driving that, and we talked about them in the past. Obviously, on the DOD side, what is driving it, unfortunately, is the war against terrorism, and obviously the news today out of London reinforces, unfortunately, the need for our products.

The DOD is in the process of doing defense transformation. And the transformation is really to address terrorism or what they refer to as asymmetrical threats and regional conflicts. What's driving our business there is kind of a combination of defensive weapons, national missile defense, tactical missiles, upgrades to tactical missile programs, and hypersonics. Aerojet has won the last two new tactical missile programs that were bid out and was a joint common missile.

The reason we won those are, we've had the ability to -- both do low-cost production at our Camden ARC facility. Plus, we bring a lot of technology out of our Redmond and Sacramento facilities that the government needs to make better and more tactical and surgical strike missiles. At the same time on national missile defense, there our position is driven by deferred attitude control systems that we have put on those programs which allows the Kill-Vehicle to maneuver and to actually strike and destroy an enemy missile.

On tactical missiles, we are on a great many of existing programs, and there is a fair amount of demand. Its names like Stinger, Hawk, Tomahawk, TOW, Javelin, MLRS, Standard Missle. And so we are on a majority of the programs there and there is demand for that, those products.

At the same time, what we are seeing from the government, and I think, in part, due to the look that are the critical look on the Defense budget is the upgrade to existing platforms. We are doing upgrades currently to PAC3, which is the Patriot and to Standard Missle and we are in discussions with the government and with the primes on a couple of other programs to upgrade existing systems to give, again, the government a more surgical strike capability and a faster strike capability with tactical missiles.

And finally, the last area we are seeing a great deal of interest from the government on the DOD is hypersonics. There we've got several programs, High-Fly [ph], SSST, the Falcon program, all of which seem to be driving up our tactical missile numbers in that segment or subsegment of our business.

At the same time, we've got demands coming out of NASA, driven primarily by the new space initiative of President Bush. Manned space. It is -- the big news is the shuttle replacement and what's called the CEV, the crew exploration vehicle. The shuttle is the largest single propulsion program in the world. NASA spends about 800 million a year on the propulsion for the shuttle, and the government has decided that the shuttle will be replaced in 2010 if not -- or 2011.

With the new administrator at NASA, he has moved up the schedule for the CEV. He wants to now select a prime early next year, which has resulted in a great deal of proposal activity for our Aerojet group, simply because the CEV will require a lot of propulsion hardware and systems that we make. It will be smaller than the shuttle. It won't carry cargo. And it will require our in-space and smaller maneuvering propulsion systems. And so we look forward to getting a market share opportunity.

We currently do less than $5 million a year on the shuttle. We are certain that the CEV will result in greater revenues to us as that goes forward. I think we won't know our exact content until there's a down select of the primes. It will either be Lockheed or Boeing. But again, it's a great opportunity for us.

Unmanned space, for those of you who were able to see it, Deep Impact was a program that we had quite a few engines on. And that was the one that ran into the Comet on the 4th of July. We have obviously been on Cassini and the Mars Rover. And we have been on every manned and unmanned launch and mission that NASA has ever done.

We continue to see a lot more opportunities in the unmanned exploration of NASA, and, in fact, we announced during the quarter a new contract to develop a larger electric propulsion engine for NASA for future use in space. I believe that was a $32 million or $34 million contract.

In terms of other drivers, industry consolidation, obviously, most of you know that we have been in the process and have over the last three years acquired two other propulsion houses. There was an announcement sometime back that UTC's -- Pratt & Whitney propulsion unit was attempting and was going to acquire Rockadyne which would then complete the consolidation of propulsion in the United States. That deal has not yet been approved, but if it is -- if it is approved, that will end consolidation in the United States and will leave really only three players left in propulsion, ATK, which does only solids, Pratt & Whitney Rockadyne that does only large liquids, and Aerojet, which does both solids and liquids. We will have achieved our goal of making sure that Aerojet is one the survivors of the consolidation, and a necessity to supply the government with propulsion products.

And the final thing that has been driving our market is what we have described as a recovery in the satellite market. Where we are seeing it mostly is in the government and military side. There's a lot of military satellites, either communication or surveillance satellites that are being planned, that will be launched. I think I told you last time we had 11 or 12 orders for satellites already this year, where last year we did three.

At the same time, we are seeing a modest recovery in the commercial side of the satellites, with the high-definition television being one of the drivers. And we continue to see a very strong demand across the entire spectrum of products that Aerojet does. We are in the process of increasing our headcount so far this year. I think we have hired around 300 new employees, and we have a couple hundred more to go this year and we expect similar increases going forward next year.

I think what it tells us is we have been on the right track. We are in the areas that the government will spend money on, whether the budget is increased or reduced. We think that where we are is certainly a necessity to the defense and safety of the United States.

I would say that the two acquisitions that we have done, the Redmond operation that we acquired from General Dynamics, and the ARC operation that we acquired from Sequa have performed better than we anticipated. We have positioned ourself where we have the right technology, the right platforms, and the right people to see continued growth in this area given the state of the world as it is right now.

In terms of Real Estate, really what we are doing is we are reclaiming property that was -- had two prior industrial uses, neither one which were that pretty. Hydraulic gold mining and then rocket testing. It is a process that takes time, and it is not a -- this business is not one where a quarter is a significant time measure as to what is occurring.

In terms of where we are, we are on schedule. We believe that Rio del Oro, the 2,700 acres in Rancho Cordova. The City of Rancho Cordova will be entitled next year. Glenborough, which is in the county of Sacramento will be entitled, we believe, in '07, and Westborough in '08. On Rio del Oro where we are, we are told that drafts of the EIR are circulating within the city. The public draft are expected to be released this fall.

Where they are is new cities in California have a law which requires them to have a general plan approved by the City, the City Council within 30 months of the day they become a new city. Recently, the City has requested from the State a six-month extension of that requirement to June 2006. We expect our environmental review to continue to go through its process.

The only impact of them not having a general plan is that we expect that they will not approve any development until after their general plan is approved by their City Council, which means we expect that our application for entitlement for Rio del Oro will not be approved until probably that is approved, which would be June '06. We still expect then approval and the process will go on in parallel while they are looking at their general plan. The approval for the general plan is the City Council of Rancho Cordova. The approval for our EIR is the City Council of Rancho Cordova. And so we still expect that to happen in '06.

Glenborough, which is in the County of Sacramento as opposed to the City of Rancho Cordova. There the County has started the EIR process. They issued the Notice of Preparation for the EIR in June. We anticipate approval in 2007 of our entitlement application for that project.

In Westborough, we still expect -- which is in the City of Rancho Cordova. We expect preparation of the EIR to commence in 2006 and final approval in 2008. So we are still on schedule.

I have had some questions about the wording of our press release, which says -- where we are talking about rezoning application. We say approval is expected on Rio del Oro in or after late 2006. We still expect that to be 2006, the wording is actually taken directly out of the 10-K, but we have no change in our expectations of timing right now for any of our development projects. So we believe we are on schedule.

We believe, as I said earlier, that AFC will happen. We are highly confident that it will, and so we -- we believe this year we will have significantly achieved most of the goals that we set out. Obviously, we will continue to have work to do, but we are -- I am pleased with the progress that we've made so far, and we expect to continue to see that kind of progress going forward.

With that, I would open it up for any questions that you may have.

[OPERATOR INSTRUCTIONS] We'll first go to the line of Joe Nadol with J.P. Morgan. Please go ahead.

Thanks. Good morning, Terry and Yasmin. I guess my first question is on AFC. Is there any other color you can give us on timing? I understand the process takes time, and you are very confident that a deal will happen. Can you say that you are confident it will happen in calendar 2005?

Yes, we can say that.

Okay. Okay, secondly, on the top-line outlook for -- I guess for Aerojet or the Company overall, you are now almost at 300 million for the first half of the year. I think we have been targeting in the low 500s earlier for '05. Is it fair to say that you will end up closer to 600 do you think this year?

I think that's the trend, yes. And we don't see any reason that it is going to change.

Okay. And is it too early to say or can you say you would anticipate growth on that number in 2006?

I think we -- we anticipate growth. How robust it will be depends on a couple of issues. CEV, how big we are going to do. We don't know until probably early calendar '06. I think the second thing is, we do have a program that we won't have much revenues on Titan next year because we will have the launches will be done and then we have clean-up that occurs in '07 and '08. So it is a question of how much those two will offset each other. Having said that, what we are seeing right now is growth, and we are going to have to continue to add employees in 2006. So we are still relatively bullish on the future.

Okay. Still on Aerojet, any progress on the Atlas renegotiations?

Slow. Again, I think what we won't know for sure where we are on that until probably October, November time frame. We are still told by the government and by the primes that they expect something to be done this fiscal -- this government fiscal year which ends in October, and so it will be some time around there. We are engaged in the process, particularly with Lockheed on Atlas V, and have given them a bunch of information, but it is still a process that has a way to go.

Is it possible that not only there can be an earnings impact, but also a cash flow impact when you finally reach a deal?

We are sure it will be a cash flow impact simply because on a cash flow basis, we will get more cash flow coming in than our costs are on each of the motors that we deliver. We are unsure what the impact is going to be on earnings. Simply because we are not sure what happens or whether we will recover this on costs.

Okay. And then final question and I will let someone else go. On the sort of continued CapEx that you are spending on the AFC business, can you give us a sense as to what it is going toward and what our coverability might be in the event of a sale?

I think, Joe, when you are looking at the CapEx, the continued requirements with the investment of the business, adding value to the business today in our hands and certainly as an asset that is going to be sold as to what our discussions are on the CapEx and how that factors into the purchase price or adjustments. They're off, I can't comment on given where we are in negotiations or discussions with potential buyers right now. But suffice it to say, the CapEx that is being spent is adding value to it.

Okay. Thank you. I had a bunch of questions on the Real Estate, but Terry, you answered them all during your detailed presentation. I will let someone else go.

Thanks

Next go to Tom Giovine with Giovine Capital Group

Yes, hi, it's actually Garrett Stephens from Giovine. I just had a couple quick follow ups. First on AFC, is there any updates in terms of your range -- in terms of expectations for the purchase price for the business?

We are still at the same place that we've been.

And that's roughly six to ten times EBITDA.

It was 100 million to 120 million.

100 to 120. Great. And then on the CEV revenue opportunity, I believe in past calls you had indicated that that could be kind of 50 x your current shuttle revenue, which is roughly 5 million per year; is that correct?

We basically said, look, it can be ten times, it can be 20 times, we don't know yet, until we know what exactly the scope is. Will it be more? Yes. Will it be significantly more? Yes. How much? We don't know.

And presumably would be better for you if Lockheed was chosen versus Boeing; is that correct?

We have gotten bids out to both of them. I would say we have had more discussions with Lockheed than we have had with Boeing. But either will need our product.

And when will the prime be chosen for that business?

January is what I am told.

January. And then finally, do you think the margin on that business would be better or worse than your current Aerojet margin, roughly?

I think initially it will be mostly development, which means it will be margins in 7%, 8% kind of range. Once you get production, then I think you would see higher margin.

Okay. Great. Thank you.

Next go to the line of Hillel Olshin with Deutsche Bank. Please go ahead.

Hi, good morning. First, Yasmin, what was the CapEx for the quarter and sort of what is the expectation for the full year?

If you are looking at CapEx for continuing operations for Aerojet. Aerojet spent, like, $5 million in CapEx so far, running relatively low so far for the year. We obviously are watching their CapEx very carefully. I think if you look at the full year, probably looking somewhere between 20 to 25, and you still expect CapEx for Aerojet to be less than their [inaudible].

And in terms of Fine Chemicals, Yasmin, you mentioned that the business generated income. Can you give us some color on how their performance in Fine Chemicals was relative to last year's similar period.

I think if you are looking at it overall, Fine Chemicals performance is doing well. When you look at it quarter to quarter, it is difficult to say there is a definite trend to it because it depends on what product is being shipped out, et cetera. But overall, from an overall perspective compared to last year, Fine Chemicals is doing very well.

Okay. And then finally, on margins in the Aerojet business. Obviously, margins are down. If you look sort of over the first half of the year, it's sort of 9.4% and I think Yasmin gave some details before on the reasons for the lower margins relative to the prior year. But maybe you can just give some color on what is the appropriate margin levels out of that segment for '05, and into '06 as well. Thank you.

I think right now when we are looking at Aerojet's margins, Aerojet has got a lot of development contracts in its current cycle, and when you are looking at development contracts mixed in with production contracts, we are probably in average looking at margins somewhere in the 9 to 11% range on an overall basis, and I think when we are in good production years and finally, late stages production and it's heavily loaded towards that, you are probably generally looking at somewhere between 12 to 14%. I think in the next couple of years as we embark on this space development contract and hopefully receive some of those. They're probably going to be loaded more towards the development side when we look at our margins.

And when do you expect the pendulum to switch more to the production side?

Probably in the '07 time frame.

Okay. Thank you.

Our next is from Eric Stephenson with Contract Global Investors. Please go ahead.

Hello, Yasmin.

Hi, Eric.

Let's touch on the EIR process. You mentioned -- Terry mentioned that the draft has been circulating around Rancho Cordova planning committee. Have you guys seen the draft and how does it look?

We have seen portions of the draft and it looks pretty good. We don't see anything right now that would suggest that we are going to run into unexpected pitfalls. It's going about as we expect. We didn't -- I think the only news is this general plan extension. Other than that, our project looks like it is going about as we expected.

Okay. And what is the process after the 45-day public comment period?

It will come down to how many public hearings does the city want to have, and that's generally a direct relationship to how many people show up and how loud are the public hearings. I think the issue will be -- they may even be done with the public hearings, but I think they will wait to approve it until they approve their own general plan.

Okay. Will approval of the general plan at Rancho Cordova facilitate or at least help the process for the Westborough application?

Yes, it will be done, it will be out of the way, so it won't affect Westborough as it is or appears to be affecting Rio.

Regarding the Real Estate strategy, you made a new addition to the Real Estate team this past quarter.

Yes.

Could you comment on how the Real Estate strategy development is going with the new team?

I think, we -- we supplemented our team. We still have the old team and a new guy. Obviously, we are looking at what we can do to more rapidly achieve monetization or realization of value on our property. We also obviously need to add people because it is clear that we are going to go from the let's get entitlement phase to, we've got to do development or we've got to sell lots, and so what that means is we are considering whether we do that by adding staff or whether we bring in partners to help us do that. And that's really what is on the front burner right now. Yes, we are working hard on entitlement, but it's really planning for the next step, because we know entitlement is coming.

And how would you characterize the interest that you have received regarding the land?

It only gets more intense and broader in terms of people who want to talk to us about the land. People recognize what we have, which in perhaps the hottest or best market, Real Estate market in the world, and so all I can say is we get calls every day, and Yasmin is one of the most popular people in Sacramento right now.

I am sure she is. All right, thank you.

You're welcome.

Our next question from the line of Jim Fung with Cavelli & Company. Please go ahead.

Good morning, Terry and Yasmin. I guess just starting with Aerojet, with the deliveries of the Atlas motors in the second half of this year. So should we look at margins to be down sequentially in that segment versus the second quarter?

No, I don't think so. I think we have got some things that should offset the fact that we are not booking any margin on the Atlas V. So to the extent I have any of my Aerojet people listening, I will tell them I expect margins to go up and I think they expect to see some improvement in the margins in the latter half of the year.

Okay. And I guess just -- and then shifting to Fine Chemicals. Would you say that your -- on an operational basis, your run rate is about $10 million a year in Fine Chemicals, and are you still kind of hitting that kind of rate?

We are seeing the same kind of margins. I think what we are seeing actually is a firming up in the backlog for next year.

Okay.

And their business looks pretty good.

All right. So there is no deterioration in the margin that won't reduce the selling price of this?

No, we are not seeing anything that would suggest that.

Okay. Any -- can you just kind of touch upon your settlement, the legal settlement, can you just kind of highlight that a little more. No one has really asked you that yet. Just kind of give some color in terms of how significant these two legal settlements were.

Sure. Some things I can't talk about because the settlement is confidential, but I can tell you from the viewpoint of the Company, and, Jim, you have been following us for a long time, the toxic tort cases. The Azusa and toxic tort cases or the San Gabriel Valley as we described them in the K. And the Chino Hills toxic tort cases were combined about 550, 540 plaintiffs, and it is one of those things where you never know what your liabilities are going to be.

Fortunately, there didn't seem much nexus between our chemicals and any injuries, and we were able to settle that with taking a net charge of about $2 million. So it turned out not to be a big issue to the shareholders. There is some costs that's being paid by insurance, and there are some costs that are being paid through the global settlement agreement and through government charges -- charge backs to the government for us.

Having said that, that wipes out most of our toxic tort liabilities. The only thing left is about 20 plaintiffs in Northern California who have similar claims to the ones in Southern California or similar type of claims. So for us that was a big deal because it was an unknown. And it takes away a couple of pages out our legal proceedings description. But it reduces the risk of the Company dramatically.

The other case, or the Lotus Baumgartner cases which are the old general retirees who were suing us out of Ohio, suing us and were saying that we couldn't limit the retiree medical there. Again, we were able to reach a settlement that we believe is in the best interest of the shareholders and it wasn't a large amount.

Okay. So -- and then regards to the -- the remaining cost of $12 million to $18 million. That's your cost? Or is that the reimbursement from insurance and government?

That's the cost, at least the actuaries believe will be incurred going forward over a long period of time.

Okay. But it is entirely your cost, GenCorp's cost?

Yes.

In what period of time is that, ten years or something?

Yes.

Great, thanks much.

You're welcome.

[OPERATOR INSTRUCTIONS]

All right, if we don't have any further questions, I guess we will thank all of you for being on the call. And we will talk to you again in a few months on the third-quarter call. So have a good day.

Ladies and gentlemen, this conference is available for replay. It starts today at 11:30 a.m. Pacific time, will last until July 21st at midnight. You may access the replay at any time by dialing 1-800-475-6701. International parties, please dial 320-365-3844. The access code is 788617. Those numbers again, 1-800-475-6701. Or 320-365-3844, and the access code, 788617. That does conclude your conference for today. Thank you for your participation, and you may now disconnect.