Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended: December 31, 2017
or
¨
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
  Aerojet Rocketdyne Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
34-0244000
(State of Incorporation)
 
(I.R.S. Employer
Identification No.)
222 N. Sepulveda Blvd., Suite 500
El Segundo, California
 
90245
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code
(310) 252-8100
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
 
Name of each exchange on which registered
 
Common Stock, $0.10 par value per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ý   No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨   No  ý
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  ý      No  ¨
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  ý      No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company." in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes  ¨      No ý
The aggregate market value of the voting common equity held by nonaffiliates of the registrant as of June 30, 2017 was approximately $1.6 billion.
As of February 15, 2018, there were 75.1 million outstanding shares of the Company’s common stock, including unvested common shares, $0.10 par value.
Portions of the 2018 Proxy Statement of Aerojet Rocketdyne Holdings, Inc. relating to its annual meeting of stockholders scheduled to be held on May 8, 2018 are incorporated by reference into Part III of this Report.




Aerojet Rocketdyne Holdings, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2017
Table of Contents 
Item
Number
 
 
PART I
 
1.
Business
1A.
Risk Factors
1B.
Unresolved Staff Comments
2.
Properties
3.
Legal Proceedings
4.
Mine Safety Disclosures
 
 
 
PART  II
 
5.
Market for Registrant’s Common Equity, Related Stockholders’ Matters, and Issuer Purchases of Equity Securities
6.
Selected Financial Data
7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
7A.
Quantitative and Qualitative Disclosures about Market Risk
8.
Consolidated Financial Statements and Supplementary Data
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
9A.
Controls and Procedures
9B.
Other Information
 
 
PART  III
 
10.
Directors, Executive Officers, and Corporate Governance
11.
Executive Compensation
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13.
Certain Relationships and Related Transactions, and Director Independence
14.
Principal Accountant Fees and Services
 
 
PART  IV
 
15.
Exhibits and Financial Statement Schedules
16.
10-K Summary
 
 
 
 
Signatures
 






Part I
Item 1. Business
Unless otherwise indicated or required by the context, as used in this Annual Report on Form 10-K ("Report"), the terms “we,” “our,” “us,” and the "Company" refer to Aerojet Rocketdyne Holdings, Inc. and all of its subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Certain information contained in this Annual Report on Form 10-K 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, availability of capital, 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 this Report. Additional risk factors may be described from time to time in our future filings with the Securities and Exchange Commission (“SEC”).
Overview
We are a manufacturer of aerospace and defense products and systems with a real estate segment. Our operations are organized into two segments:
Aerospace and Defense — includes the operations of our wholly-owned subsidiary Aerojet Rocketdyne, Inc. (“Aerojet Rocketdyne”), a leading technology-based designer, developer and manufacturer of aerospace and defense products and systems for the United States (“U.S.”) government, including the Department of Defense (“DoD”), the National Aeronautics and Space Administration (“NASA”), and major aerospace and defense prime contractors.
Real Estate — includes the activities of our wholly-owned subsidiary Easton Development Company, LLC (“Easton”) related to the re-zoning, entitlement, sale, and leasing of our excess real estate assets. We currently are in the process of seeking zoning changes and other governmental approvals on our excess real estate assets to optimize their value.
Sales, segment performance, total assets, and other financial data of our segments for fiscal 2017, fiscal 2016, fiscal 2015, and one month ended December 31, 2015 are set forth in Note 10 in notes to consolidated financial statements included in Item 8 of this Report.
In January 2016, our Board of Directors approved a change in our fiscal year-end from November 30 of each year to December 31 of each year. The fiscal year of our subsidiary, Aerojet Rocketdyne, ends on the last Saturday in December. As a result of the change, we had a one month transition period in December 2015. The audited results for the one month ended December 31, 2015 are included in Item 8 of this Report. Further, as a result of the 2016 calendar, Aerojet Rocketdyne had 53 weeks of operations in fiscal 2016 compared with 52 weeks of operations in fiscal 2017 and fiscal 2015. The additional week of operations, which occurred in the fourth quarter of fiscal 2016, accounted for $32.2 million in additional net sales. Financial information for the twelve months ended December 31, 2015 has not been included in this Form 10-K for the following reasons: (i) the twelve months ended November 30, 2015 provide a meaningful comparison for the twelve months ended December 31, 2017 and 2016; (ii) there are no significant factors, seasonal or other, that would impact the comparability of information if the results for the twelve months ended December 31, 2015 were presented in lieu of results for the twelve months ended November 30, 2015; and (iii) it was not practicable or cost justified to prepare this information.
We were incorporated in Ohio in 1915 and reincorporated to the State of Delaware on April 11, 2014. Our principal executive offices are located at 222 N. Sepulveda Blvd., Suite 500, El Segundo, California 90245.
Our Internet website address is www.AerojetRocketdyne.com. We have made available through our Internet website, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such materials were electronically filed with, or furnished to, the SEC. We also make available on our Internet website our corporate governance guidelines and the charters for each of the following committees of our Board of Directors: Audit; Corporate Governance & Nominating; and Organization & Compensation. Our corporate governance guidelines and such charters are also available in print to anyone who requests them.

1




Aerospace and Defense
Aerojet Rocketdyne is a world-recognized technology-based engineering and manufacturing company that develops and produces specialized propulsion systems, as well as armament systems. We develop and manufacture all four propulsion types (liquid, solid, air-breathing, and electric) for space, defense, civil and commercial applications. Principal customers and end users include the DoD, NASA, The Boeing Company (“Boeing”), Lockheed Martin Corporation (“Lockheed Martin”), Raytheon Company (“Raytheon”), and United Launch Alliance (“ULA”).
Primary Markets and Programs
The markets and key programs we serve are:
Aerospace. We specialize in the development and production of propulsion systems for space applications and our products include a broad market offering of both chemical (liquid propellant engines and solid rocket motors) and electric propulsion required for launch vehicle and in-space applications in the defense, civil and commercial propulsion markets.
Our space launch systems have a long, successful history with the DoD where we continue to project strong support related to National Security Space requirements enabling communications, navigation, intelligence, surveillance, and reconnaissance activities. We provide booster and upper stage propulsion for ULA’s Delta IV and Atlas V launch vehicles in support of the Evolved Expendable Launch Vehicle (“EELV”) program, as well as a limited number of Delta II vehicles which are supporting commercial customers launching earth observation spacecraft.
During fiscal 2017, we achieved a number of significant milestones on the NASA Space Launch System (“SLS”) program. We made significant progress on our production restart and affordability activities on the RS-25 engines that will power the first SLS flight. Also, in our NASA business we completed the qualification of and delivered many of the propulsion subsystems for the Boeing Starliner vehicle which will support commercial manned services for NASA. In addition, the Lithium Ion batteries we developed as an upgrade to the International Space Station ("ISS") power system were delivered to the ISS in 2017 and are in full operation.
We continued to mature critical technologies for our nation’s next generation of advanced hydrocarbon engines for future high-performance booster systems with the ability to eliminate the U.S. dependence on Russian-provided booster systems for National Security Space Launch. The U.S. Air Force awarded us an Other Transaction Agreement (“OTA”) that can provide up to $536 million of U.S. government funding in addition to our investment to qualify our AR1 engine. In fiscal 2017, we passed the AR1 Critical Design Review which represented a culmination of hundreds of development tests and manufacturing demonstrations.
A critical new research and development effort secured in 2017 was the propulsion system to power the Boeing XSP advance reusable launcher. We will be adapting our RS-25 engine to this new strategic application that could significantly lower the cost of access to space. In addition, we were awarded several significant follow-on contracts in 2017 in the high power electric propulsion area to support both NASA’s human and scientific exploration goals.
A subset of our key space programs include: RS-68, RS-27, and RL10 engines/boosters that power EELV launch vehicles, the AR1 large liquid engine for the next generation of launch vehicles, propulsion for the Orion human space capsule and the Starliner Commercial Crew Transportation Capability capsule, and multiple in-space electric and chemical propulsion systems to provide orbit raising and satellite station positioning.
Defense. We specialize in the development and production of propulsion systems for defense applications including armament systems for precision tactical systems and missile defense propulsion, tactical missile propulsion and hypersonic propulsion systems.
We develop and manufacture liquid and solid divert and attitude control ("DACs") propulsion systems and booster motors for missile defense applications. These are complex systems that provide multi-directional thrust and variable thrust levels to steer or control an intercept missile. Additionally, we develop and manufacture boost and post-boost rocket motors for strategic missiles. These systems provide launch capability and directional control for critical missile defense interceptors and for ground and sea-based strategic missiles.
We design, develop, and produce propulsion and warhead systems for tactical missiles. Our tactical products have been successfully fielded on numerous active U.S. and international weapon system platforms.
During fiscal 2017, we continued to expand our strong legacy propulsion franchises on the Standard Missile, Patriot Advanced Capability-3 ("PAC-3"), Terminal High Altitude Area Defense ("THAAD") and Guided Multiple Launch Rocket System ("GMLRS") missile propulsion systems. These franchise programs experienced backlog growth during 2017.
As part of our Competitive Improvement Program ("CIP") in 2017, we completed validation of activity to move energetic production of the Standard Missile-3 DACs from our Sacramento, California facility to our Orange County, Virginia, facility. Also, the THAAD Boost Motor program energetic production moved from Sacramento, California, to our Camden, Arkansas production facility. These production consolidation activities in 2017 helped to reduce costs and strengthen competitiveness.

2




In a new and developing business arena, we were awarded a full-scale engineering development project for an advanced air-launched propulsion system that will transition to production. In the hypersonic propulsion technology area, we were awarded a contract for the Advanced Full Range Engine that will demonstrate reusable propulsion that can function from “takeoff” to Mach 5+. Finally, we initiated early development contract work in support of the nation’s future Ground Based Strategic Deterrent missile propulsion program.
Finally, our recently integrated Aerojet Rocketdyne Coleman Aerospace ("Coleman") business successfully delivered and supported flight of our extended-long-range air-launched ballistic missile target that is C-17 aircraft deployed. Coleman also continued to expand its scope on the Missile Defense Agency’s medium-range ballistic missile target program.
A subset of our key defense programs include: Exoatmospheric Kill Vehicle (“EKV”) Liquid DACs, booster and Liquid DACs for THAAD, boosters and solid DACs for the Navy’s Standard Missile family, PAC-3, GMLRS, HAWK, Javelin, Tactical Tomahawk, and Tube-launched Optically-tracked Wire-guided warhead.
Our Competitive Strengths
Leadership in Propulsion - For over 70 years, we have demonstrated a legacy of successfully meeting the most challenging missions by producing some of the world’s most technologically advanced propulsion systems for our customers.
Diversified and Well Balanced Portfolio - We have been and continue to be a pioneer in the development of many enabling technologies and products that have strengthened multiple branches of the U.S. military and enabled the exploration of space. We believe Aerojet Rocketdyne maintains a unique competitive position due to a strategic focus on creating and maintaining a broad spectrum of propulsion and energetic products assisted by the growing market demand for its innovative energy management technologies.
High Visibility of Revenue with Multi-year Contracts and Sizable Backlog - The highly visible nature of our revenue comes from the long-term nature of the programs with which we are involved, our diverse and attractive contract base and our deep customer relationships. A substantial portion of our sales are derived from multi-year contract awards from major aerospace and defense prime contractors. In many cases, we operate under sole source contracts, some of which are follow-on contracts to contracts initially competed years ago and others have been sole source contracts since inception. High renewal rates, supported by our market leading technology provide us with a highly stable business base from which to grow. As of December 31, 2017, our contract backlog (funded and unfunded) was $4.6 billion and our funded backlog, which includes only amounts for which funding has been authorized by a customer and a purchase order has been received, totaled $2.1 billion.
Exceptional Long-Term Industry Relationships - We serve a broad set of customers and are major suppliers of propulsion products to top original equipment manufacturers such as Boeing, Lockheed Martin, Raytheon and ULA, as well as to the DoD, NASA and other U.S. government agencies. We have a long history of partnering with their respective prime contractors and have developed close relationships with key decision-makers in the rocket and missile propulsion markets. We are, in many instances, approached by multiple prime contractors early in the bidding process, which is a testament to the strength of our relationships and technological leadership in the industry.
Competition
The competitive dynamics of our multi-faceted marketplace vary by product line and customer as we experience many of the same influences felt by the broader aerospace and defense industry.  The large majority of products we manufacture are highly complex, technically sophisticated and extremely hazardous to build, demanding rigorous manufacturing procedures and highly specialized manufacturing equipment.  While historically these factors, coupled with the high cost to establish the infrastructure required to meet these needs, posed substantial barriers to entry, modern design tools and manufacturing techniques (e.g., additive manufacturing) available to new entrants with the ability to self-fund start-up as well as development costs has led to increased competition in space related markets. To date, competition has been limited to a few participants who tend to be narrowly focused on products that are sub-elements of our overall product portfolio. For example, entrepreneurs such as SpaceX and Blue Origin, who have been or are in the process of developing liquid fuel propulsion capabilities are primarily focused on the development of space propulsion systems for heavy lift launch vehicles and are not pursuing or participating in the missile defense or tactical propulsion products that make up a substantial portion of our overall business. These new entrepreneurs have signaled their intent to compete primarily on price and are therefore bringing pressure to bear on existing cost paradigms and manufacturing methodologies.

3




The table below lists the primary participants in the propulsion market:
Company
Parent
Propulsion Type
Aerojet Rocketdyne
Aerojet Rocketdyne Holdings, Inc.
Solid, liquid, air- breathing, electric
Airbus Defence and Space (formerly Astrium)
Airbus Group
Solid, liquid
Alliant Techsystems
Orbital ATK, Inc.
Solid, air-breathing
Avio
Avio S.p.A
Solid, liquid
Blue Origin LLC
Blue Origin
Liquid
Electron Technologies, Inc.
L-3 Communications Corporation
Electric
General Dynamics OTS
General Dynamics
Solid
Moog Inc.
Moog Inc.
Liquid, electric
Nammo Talley
Nammo Talley
Solid
Northrop Grumman Aerospace Systems
Northrop Grumman Corporation (“Northrop”)
Liquid
Safran
Safran
Liquid, solid
SpaceX
SpaceX
Liquid
Industry Overview
Our primary aerospace and defense customers include the DoD and its agencies, NASA, and the prime contractors that supply products to these customers. We rely on U.S. government spending on aerospace and defense products and systems, and our backlog depends, in large part, on continued funding by the U.S. government for the programs in which we are involved. These funding levels are not generally correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this type of funding. Moreover, although our contracts often contemplate that our services will be performed over a period of several years, the U.S. Congress must appropriate funds for a given program and the U.S. President must sign into law such appropriations legislation each government fiscal year (“GFY”) and may significantly increase, decrease or eliminate, funding for a program. A decrease in DoD and/or NASA expenditures, the elimination or curtailment of a material program in which we are or hope to be involved, or changes in payment patterns of our customers as a result of changes in U.S. government outlays, could have a material adverse effect on our operating results, financial condition, and/or cash flows.
Congress was not able to pass full year appropriations for either DoD or NASA prior to the start of GFY 2017 on October 1, 2016, necessitating a short-term Continuing Resolution (“CR”) into December 2016.  After the 2016 U.S. Presidential Election in November 2016, Congress passed another CR into mid-2017 to allow the new Administration an opportunity to shape federal spending.  On May 5, 2017, President Trump signed into law the Consolidated Appropriations Act of 2017, an omnibus appropriations bill for GFY 2017, including appropriations for DoD and NASA; however, the delayed completion of the GFY2017 spending bills resulted in a delay to the release of the President’s Budget Request for GFY2018.  With a truncated legislative cycle, Congress was unable to pass GFY 2018 appropriation bills before October 1, 2017, culminating in a series of CRs, with the latest through March 23, 2018.
The SLS appears to remain a top Congressional priority as the CR included a provision to allow NASA the funding flexibility for SLS and deep exploration to remain on track. The SLS program also has enjoyed wide, bipartisan support in both chambers of Congress. We maintain a strong relationship with NASA and our propulsion systems have been powering NASA launch vehicles and spacecraft since the inception of the U.S. space program. Our booster, upper stage and Orion vehicle propulsion systems are currently baselined on the new SLS vehicle and both upper stage and booster engines are in development for future SLS variants. Due to the retirement of the space shuttle fleet, U.S. astronauts have been dependent on Russian Soyuz flights for access to and from the ISS for the better part of this decade. NASA has been working to re-establish U.S. manned space capability as soon as possible through development of a new “space taxi” to ferry astronauts and cargo to the ISS. In 2014, Boeing’s CST-100 Starliner capsule, powered by Aerojet Rocketdyne propulsion, was selected by NASA to transport astronauts to and from the ISS. As Boeing’s business partner, Aerojet Rocketdyne will be providing the propulsion system for this new capsule, thereby supplementing its work for NASA on the SLS designed for manned deep space exploration. In both instances, we have significant propulsion content and we look forward to supporting these programs for NASA.
Major Customers
Information concerning major customers appears in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Major Customers.”

4




Contract Types
Research and development contracts are awarded during the inception stage of a program’s development. Production contracts provide for the production and delivery of mature products for operational use. Aerojet Rocketdyne’s contracts are largely categorized as either “fixed-price” (largely used by the U.S. government for production-type contracts) or “cost-reimbursable” (largely used by the U.S. government for development-type contracts). During fiscal 2017, approximately 60% of our net sales were from fixed-price contracts, 36% from cost-reimbursable contracts, and 4% from other sales including commercial contracts.  
Fixed-price contracts are typically (i) firm fixed-price, (ii) fixed-price-incentive fee, or (iii) fixed-price level of effort contracts. For firm fixed-price contracts, Aerojet Rocketdyne performs work for a fixed price and realizes all of the profit or loss resulting from variations in costs during contract performance. For fixed-price-incentive fee contracts, Aerojet Rocketdyne receives increased or decreased fees or profits based upon actual performance against established targets or other criteria. For fixed-price level of effort contracts, Aerojet Rocketdyne generally receives a structured fixed price per labor hour, dependent upon the customer’s labor hour needs. All fixed-price contracts present the risk of unreimbursed cost overruns potentially resulting in lower than expected contract profit margin and losses.
Cost-reimbursable contracts are typically (i) cost plus fixed fee, (ii) cost plus incentive fee, or (iii) cost plus award fee contracts. For cost plus fixed fee contracts, Aerojet Rocketdyne typically receives reimbursement of its costs, to the extent the costs are allowable under contractual and regulatory provisions, in addition to receiving a fixed fee. For cost plus incentive fee contracts and cost plus award fee contracts, Aerojet Rocketdyne receives adjustments to the contract fee, within designated limits, based on actual results as compared with contractual targets for factors such as cost, performance, quality, and schedule.
In addition, OTA contracts are becoming more prevalent in initial phases of U.S. government procurements. An OTA is a special vehicle used by federal agencies for obtaining or advancing research and development or prototypes. The U.S. government's procurement regulations and certain procurement statutes do not apply to OTAs, and accordingly, other transaction authority gives agencies the flexibility necessary to develop agreements tailored to a particular transaction. Our sales and backlog figures do not include work we have under contracts obligated by the customer under an OTA. See our discussion below under "Research and Development" on our OTA with the U.S. Air Force in a public-private partnership to jointly develop the AR1 engine.
Some programs under contract have product life cycles exceeding ten years. It is typical for U.S. government propulsion contracts to be of relatively small contract value during development phases that can last from two to five years, followed by low-rate and then full-rate production, where annual funding can grow significantly.
Government Contracts and Regulations
U.S. government contracts generally are subject to Federal Acquisition Regulations (“FAR”), agency-specific regulations that supplement FAR, such as the DoD’s Defense Federal Acquisition Regulations, and other applicable laws and regulations. These regulations impose a broad range of requirements, many of which are unique to U.S. government contracting, including various procurement, import and export, security, contract pricing and cost, contract termination and adjustments, mandatory disclosure, and audit requirements. Our failure to comply with these regulations and requirements could result in reductions of the value of contracts, contract modifications or termination, inability to bill and collect receivables from customers, and the assessment of penalties and fines that could lead to suspension or debarment from U.S. government contracting or subcontracting. In addition, as a U.S. government contractor, we are subject to routine audits, reviews, and investigations by the Defense Contract Audit Agency (“DCAA”), the Defense Contract Management Agency, and other similar U.S. government agencies. Such reviews include but are not limited to our contract performance, compliance with applicable laws, regulations, and standards as well as the review of the adequacy of our accounting systems, purchasing systems, property management systems, estimating systems, earned value management systems, and material management and accounting systems.
The U.S. government’s ability to unilaterally modify or terminate a contract or to discontinue funding for a particular program at any time could have a material adverse effect on our operating results, financial condition, and/or cash flows. The cancellation of a contract, if terminated for cause, could also subject us to liability for the excess costs incurred by the U.S. government in procuring undelivered items from another source. If terminated for convenience, our recovery of costs would be limited to amounts already incurred or committed (including severance costs for terminated employees), and our profit would be limited based on the work completed prior to termination.
Additional information about the risks relating to government contracts and regulations appears in "Risk Factors" in Item 1A of this Report.
 
Backlog
Information concerning backlog appears in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Operating Segment Information.”

5




Seasonality
Aerojet Rocketdyne’s business is not subject to predictable seasonality. Primary factors affecting the timing of our sales include the timing of U.S. government awards, the availability of U.S. government funding, contractual product delivery requirements, and customer acceptances.
Research and Development ("R&D")
We view R&D efforts as critical to maintaining our leadership position in markets in which we compete. Our R&D is primarily supported by customer funding.
Our company-funded R&D efforts include expenditures for technical activities that are vital to the development of new products, services, processes or techniques, as well as those expenses for significant improvements to existing products or processes.
Our R&D expenditures for the periods presented were as follows:
 
Year Ended
 
One month ended
 
December 31,
 
December 31,
 
November 30,
 
December 31,
 
2017
 
2016
 
2015
 
2015
 
(In millions)
 
 
Customer-sponsored
$
561.1

 
$
513.0

 
$
485.8

 
$
33.7

Company-sponsored
44.6

 
43.0

 
74.4

 
4.6

  Total R&D expenditures
$
605.7

 
$
556.0

 
$
560.2

 
$
38.3

The Company-sponsored R&D expenditures in fiscal 2017, 2016, 2015, and the one month ended December 31, 2015 included $16.8 million, $20.5 million, $48.2 million, and $2.7 million, respectively, of AR1 R&D expenses, see discussion below.
AR1
In February 2016, pursuant to an OTA, the U.S. Air Force selected Aerojet Rocketdyne and ULA to share in a public-private partnership to develop jointly the AR1 engine. The total agreement is valued at $804.0 million with the U.S. Air Force investing two-thirds of the funding required to complete development of the AR1 engine by 2019, and is being conducted in four phases, with each being an option to progress the project at pre-defined decision points. The work is expected to be completed no later than December 31, 2019. Through December 31, 2017, the U.S. Air Force has obligated $174.0 million with Aerojet Rocketdyne contributing $77.3 million and ULA contributing $6.1 million in cash and $3.6 million in "in-kind" R&D expenses. On February 1, 2018, the U.S. Air Force authorized phase two of the program, which obligates the U.S. Air Force to an additional $95.5 million and Aerojet Rocketdyne and ULA to an additional $47.8 million. The total potential investment by Aerojet Rocketdyne and its partners, if all options are exercised, is $268.0 million. The U.S. Air Force contributions are recognized proportionately as an offset to R&D expenses. The AR1 inception to date project costs at December 31, 2017, were as follows (in millions):
AR1 R&D costs incurred
$
245.6

Less amounts funded by the U.S. Air Force
(147.7
)
Less amounts funded by ULA
(9.7
)
AR1 R&D costs net of reimbursements
$
88.2

Of the $88.2 million AR1 investment, $32.1 million was expensed and $56.1 million was applied to our contracts.
Suppliers and Raw Materials
The national aerospace supply base continues to consolidate due to economic, environmental, and marketplace circumstances beyond our control. The loss of key qualified suppliers of technologies, components, and materials can cause significant disruption to our program performance and cost.
 Availability of raw materials and supplies has been generally sufficient. We sometimes are dependent, for a variety of reasons, upon sole-source or qualified suppliers and have, in some instances in the past, experienced difficulties meeting production and delivery obligations because of delays in delivery or reliance on such suppliers. Further, as a U.S. government contractor, we are often required to procure materials from certain suppliers capable of meeting rigorous customer and government specifications.

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The supply of ammonium perchlorate, a principal raw material used in solid propellant, is limited to a domestic independent single source that supplies the majority of the domestic solid propellant industry and actual pricing is based on the total industry demand. In the majority of our contracts, we anticipated this price increase and incorporated abnormal escalation pricing language into our proposals and contracts.
We are also impacted, as is the rest of the industry, by fluctuations in the sustained availability, prices and lead-times of raw materials used in production on various fixed-price contracts, particularly on multi-year programs. We continue to experience volatility in the price and lead-times of certain commodity metals, electronic components, and constituent chemicals. An emerging challenge to the extended supply chain is the regulatory requirements to comply with stringent cyber security regulations that may influence the cost of materials and services on U.S. government contracts. We are actively working to identify these costs to obtain protection in our contracts.
Additional information about the risks relating to suppliers and raw materials appears in "Risk Factors" in Item 1A of this Report.
Intellectual Property
Where appropriate, Aerojet Rocketdyne obtains patents in the U.S. and other countries for new and useful processes, machines, manufactures or compositions of matter, or any new and useful improvements thereof relating to its products and services. We use patents selectively to protect from an unauthorized third party making, using, selling, offering to sell and importing the claimed inventions of the patents. Our patents are maintained through the statutory limit of time, which is typically 20 years from the date of filing of the patent application, where the claimed invention has value in the markets in which we compete. We rely on trade secret protection for financial, technical and personnel information that provides an economic competitive advantage by virtue of not being known by the relevant public. If properly protected, trade secrets can be maintained in perpetuity. Aerojet Rocketdyne takes reasonable steps to prevent disclosure of its trade secrets in order to maintain protection under applicable state and federal laws. As our products and services typically embody complex systems that include many technologies, no single patent or trade secret is material to us.
Real Estate
We own 11,451 acres of land adjacent to U.S. Highway 50 between Rancho Cordova and Folsom, California east of Sacramento (“Sacramento Land”). Acquired in the early 1950s for our aerospace and defense operations, large portions were used solely to provide safe buffer zones around hazardous operations. Modern changes in propulsion technology coupled with the relocation of certain of our propulsion operations led us to determine large portions of the Sacramento Land were no longer needed for operations. Consequently, our plan has been to re-entitle the Sacramento Land for new uses and explore various opportunities to optimize its value.
The Sacramento Land is made up of 5,203 acres used for our aerospace and defense operations, 685 acres available for future entitlement, and 5,563 acres for future development under the brand name “Easton”. Easton has 3,904 acres that are fully entitled. The term “entitlement” is generally used to denote the required set of regulatory approvals required to allow land to be zoned for new requested uses. Required regulatory approvals vary with each jurisdiction and each zoning proposal and may include permits, land use master plans, zoning designations, state and federal environmental documentation, and other regulatory approvals unique to the land. The entitlement and development process in California is long and uncertain with approvals required from various authorities, including local jurisdictions, and in select projects, permits required by federal agencies such as the U.S. Army Corps of Engineers and the U.S. Department of Interior, Fish and Wildlife Service, and others prior to construction.
As Easton continues to execute re-entitlement and pre-development activities, we are pursuing all monetization options and are exploring how to maximize value from Easton. Value creation and monetization may include outright land sales and/or joint ventures with real estate developers, residential builders, and/or other third parties. The new housing market and local economy in the Sacramento region are in recovery, and we expect this trend to continue. We believe the long-term prospect for the Sacramento region represents an attractive and affordable alternative to the San Francisco Bay Area and other large metropolitan areas of California.

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The following table summarizes the Sacramento Land (in acres):  
 
 
Environmentally
Unrestricted 
 
Environmentally
Restricted (1)
 
Total
 
Entitled
Glenborough and Easton Place
 
1,043

 
349

 
1,392

 
1,392

Rio del Oro
 
1,818

 
491

 
2,309

 
2,309

Westborough
 
1,387

 
272

 
1,659

 

Hillsborough (2)
 
51

 
97

 
148

 
148

Office Park and Auto Mall
 
47

 
8

 
55

 
55

     Total Easton acreage
 
4,346

 
1,217

 
5,563

 
3,904

Operations land (3)
 
24

 
5,179

 
5,203

 
 

Land available for future entitlement (4)
 
443

 
242

 
685

 
 

      Total Sacramento Land
 
4,813

 
6,638

 
11,451

 
 

_________
(1)
Indicates land subject to restrictions imposed by state and/or federal regulatory agencies because of our historical propulsion system testing and manufacturing activities. We are actively working with the various regulatory agencies to have the restrictions removed as early as practicable, and the solutions to use these lands within Easton have been accounted for in the various land use plans and granted entitlements. See Note 8(c) in notes to consolidated financial statements for a discussion of the federal and/or state environmental restrictions affecting portions of the Sacramento Land.
(2) The remaining 148 acres designated in Hillsborough will be transferred, per the completed purchase and sale contract, when the required environmental remediation work is completed. See Note 1(t) of the notes to the consolidated financial statements.
(3)
We believe that the operations land is adequate for our long-term needs.
(4)
We believe it will be several years before any of this excess Sacramento Land is available for future change in entitlement. Some of this excess land is outside the current Urban Services Boundary established by the County of Sacramento and all of it is far from existing infrastructure, making it uneconomical to pursue entitlement for this land at this time.
Leasing & Other Real Estate
We currently lease approximately 0.4 million square feet of office space in Sacramento to various third parties. These leasing activities generated $6.4 million in revenue in fiscal 2017.
We also own approximately 580 acres of land in Chino Hills, California. This property was used for the manufacture and testing of ordnance. With the sale of our ordnance business in the mid-1990s, we closed this facility and commenced clean-up of the site. We continue to work with state regulators and the City of Chino Hills to complete those efforts.
Environmental Matters
Our current and former business operations are subject to, and affected by, federal, state, local, and foreign environmental laws and regulations relating to the discharge, treatment, storage, disposal, investigation, and remediation of certain materials, substances, and wastes. Our policy is to conduct our business with due regard for the preservation and protection of the environment. We continually assess compliance with these regulations, and we believe our current operations are materially in compliance with all applicable environmental laws and regulations.
On January 12, 1999, Aerojet Rocketdyne and the U.S. government reached a settlement agreement (“Global Settlement”) which established a cost-sharing ratio with respect to the cleanup costs of prior environmental contamination. Additionally, in conjunction with the sale of our Electronics and Information Systems ("EIS") business in 2001, we entered into an agreement with Northrop (the “Northrop Agreement”) whereby Aerojet Rocketdyne is reimbursed by Northrop for a portion of environmental expenditures eligible for recovery under the Global Settlement, subject to an annual and a cumulative limitation.
Operation and maintenance costs associated with environmental compliance and management of contaminated sites are a normal, recurring part of operations. Most of our environmental costs are incurred by our Aerospace and Defense segment, and certain of these future costs are allowed to be included in our contracts with the U.S. government.
Allowable environmental costs are charged to our contracts as the costs are incurred. Because these costs are recovered through forward-pricing arrangements, the ability of Aerojet Rocketdyne to continue recovering these costs from the U.S. government depends on Aerojet Rocketdyne’s sustained business volume from U.S. government contracts and programs.

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The inclusion of environmental costs in our contracts with the U.S. government impacts our competitive pricing; however, we believe that this impact is mitigated by driving improvements and efficiencies across our operations as well as our ability to deliver innovative and quality products to our customers.
Under existing U.S. environmental laws, Potentially Responsible Parties (“PRPs”), are jointly and severally liable, and therefore we are potentially liable to the U.S. government or other third parties for the full cost of remediating the contamination at our facilities or former facilities or at third-party sites where we have been designated as a PRP by the EPA or state environmental agencies. The nature of environmental investigation and cleanup activities requires significant management judgment to determine the timing and amount of any estimated future costs that may be required for remediation measures. Further, environmental standards change from time to time. However, we perform quarterly reviews of these matters and accrue for costs associated with environmental remediation when it becomes probable that a liability has been incurred and the amount of the liability, usually based on proportionate sharing, can be reasonably estimated. These liabilities have not been discounted to their present value as the amounts and timing of cash payments are not fixed or reliably determinable.
We did not incur material capital expenditures for environmental control facilities in fiscal 2017 nor do we anticipate any material capital expenditures in fiscal 2018 and 2019. See Management’s Discussion and Analysis in Part II, Item 7 “Environmental Matters” of this Report for additional information.
Additional information on the risks related to environmental matters can be found under “Risk Factors” in Item 1A of this Report, including the material effects on compliance with environmental regulations that may impact our competitive position and operating results.
Employees
As of December 31, 2017, 14% of our 5,157 employees were covered by collective bargaining agreements. Significant collective bargaining agreements are due to expire in the fall of 2018. We believe that our relations with our employees and unions are good.
Item 1A. Risk Factors
Future reductions or changes in U.S. government spending could adversely affect our financial results.
Our primary aerospace and defense customers include the DoD and its agencies, NASA, and the prime contractors that supply products to these customers. We rely on particular levels of U.S. government spending on propulsion systems for defense, space and armament systems for precision tactical weapon systems and munitions applications, and our backlog depends, in a large part, on continued funding by the U.S. government for the programs in which we are involved. These spending levels are not generally correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this type of spending. Moreover, although our contracts often contemplate that our services will be performed over a period of several years, the U.S. President must propose and Congress must appropriate funds for a given program each GFY and may significantly change, increase, reduce or eliminate, funding for a program.
A decrease in DoD and/or NASA expenditures, the elimination or curtailment of a material program in which we are involved, or changes in payment patterns of our customers as a result of changes in U.S. government spending, could have a material adverse effect on our operating results, financial condition, and/or cash flows.
The cancellation or material modification of one or more significant contracts could adversely affect our financial results.
Sales, directly and indirectly, to the U.S. government and its agencies accounted for approximately 92% of our total net sales in fiscal 2017. Our contracts typically permit the U.S. government to unilaterally modify or terminate a contract or to discontinue funding for a particular program at any time. The cancellation of a contract, if terminated for cause, could also subject us to liability for the excess costs incurred by the U.S. government in procuring undelivered items from another source. If terminated for convenience, our recovery of costs would be limited to amounts already incurred or committed (including severance costs for terminated employees), and our profit would be limited based on the work completed prior to termination.
In addition, termination or suspension of any of our significant commercial contracts could result in the loss of future sales and unreimbursable expenses that could have a material adverse effect on our operating results, financial condition, and/or cash flows.  Furthermore, the termination of any such contracts for default could also have a material adverse effect on our reputation and ability to obtain new business in the future.
If we experience cost overruns on our contracts, we would have to absorb the excess costs which could adversely affect our financial results and our ability to win new contracts.
In fiscal 2017, approximately 60% of our net sales were from fixed-price contracts, most of which are in mature production mode. Under fixed-price contracts, we agree to perform specified work for a fixed price and realize all of the profit or loss resulting from variations in the costs of performing the contract. As a result, all fixed-price contracts involve the inherent risk of unreimbursed cost overruns. To the extent we were to incur unanticipated cost overruns on a program or

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platform subject to a fixed-price contract, our profitability would be adversely affected. Future profitability is subject to risks including the ability of suppliers to deliver components of acceptable quality on schedule and the successful implementation of automated tooling in production processes.
In fiscal 2017, approximately 36% of our net sales were from cost reimbursable contracts. Under cost reimbursable contracts, we agree to be reimbursed for allowable costs and be paid a fee. If our costs are in excess of the final target cost, fees and our margin may be adversely affected. If our costs exceed authorized contract funding or they do not qualify as allowable costs under applicable regulations, those costs are expensed, and we will not be reimbursed for those costs. Cost overruns may adversely affect our financial performance and our ability to win new contracts.
Also, certain costs such as those related to charitable contributions, advertising, interest expense, and public relations are generally not allowable, and therefore not recoverable through U.S. government contracts. Unexpected variances in unallowable costs may adversely affect our financial performance.
If our subcontractors or suppliers fail to perform their contractual obligations, our contract performance and our ability to win new contracts may be adversely affected.
We rely on subcontractors to perform a portion of the services we agree to provide our customers, and on suppliers to provide raw materials and component parts for our contract performance. A failure by one or more of our subcontractors or suppliers to satisfactorily provide on a timely basis the agreed-upon services or supplies may affect our ability to perform our contractual obligations. Deficiencies in the performance of our subcontractors and/or suppliers could result in liquidated damages or our customer terminating our contract for default. A termination for default could expose us to liability and adversely affect our financial performance and our ability to win new contracts.
Our success and growth in our Aerospace and Defense segment depends on our ability to execute long-standing programs and periodically secure new contracts in a competitive environment.
Aerojet Rocketdyne’s revenue is primarily derived from long-standing contracts (often sole source) where Aerojet Rocketdyne is the long-term incumbent. The challenge for Aerojet Rocketdyne is to successfully utilize its technical, engineering, manufacturing, and management skills to execute these programs for the customer, to continue to innovate and refine its solutions, and to offer the customer increasing affordability in an era of fiscal restraint. If Aerojet Rocketdyne is unable to successfully execute these long-standing programs, our ability to retain existing customers and attract new customers may be impaired.
In addition, in sectors where there is competition, it can be intense. For example, we face increasing competition from entrepreneurs such as SpaceX and Blue Origin, who have been or are in the process of developing liquid fuel propulsion capabilities which are primarily focused on the development of space propulsion systems for heavy lift launch vehicles. These new entrepreneurs have signaled their intent to compete primarily on price and are therefore bringing pressure to bear on existing cost paradigms and our manufacturing methodologies. The U.S. government also has its own manufacturing capabilities in some areas. We may be unable to compete successfully with our competitors and our inability to do so could result in a decrease in sales, profits, and cash flows that we historically have generated from certain contracts. Further, the U.S. government may open to competition programs on which we are currently the sole supplier, which could have a material adverse effect on our operating results, financial condition, and/or cash flows.
Our Aerospace and Defense segment is subject to procurement and other related laws and regulations inherent in contracting with the U.S. government, non-compliance with which could adversely affect our financial results.
In the performance of contracts with the U.S. government, we operate in a highly regulated environment and are routinely audited and reviewed by the U.S. government and its agencies, such as the DCAA. These agencies review performance under our contracts, our cost structure and our compliance with applicable laws, regulations and standards, as well as the adequacy of, and our compliance with, our internal control systems and policies. Systems that are subject to review include, but are not limited to, our accounting systems, purchasing systems, property management systems, estimating systems, earned value management systems, and material management and accounting system. Any costs ultimately found to be unallowable or improperly allocated to a specific contract will not be reimbursed or must be refunded if already reimbursed. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties, sanctions or suspension or debarment from doing business with the U.S. government. Whether or not illegal activities are alleged, the U.S. government also has the ability to decrease or withhold certain payments when it deems systems subject to its review to be inadequate. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. If such actions were to result in suspension or debarment, this could have a material adverse effect on our business.
These laws and regulations provide for ongoing audits and reviews of incurred costs as well as contract procurement, performance and administration. The U.S. government may, if it deems appropriate, conduct an investigation into possible illegal or unethical activity in connection with these contracts. Investigations of this nature are common in the aerospace and defense industry, and lawsuits may result. In addition, the U.S. government and its principal prime contractors periodically investigate the financial viability of their contractors and subcontractors as part of its risk assessment process associated with

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the award of new contracts. If the U.S. government or one or more prime contractors were to determine that we were not financially viable, our ability to continue to act as a U.S. government contractor or subcontractor would be impaired.
 
Our competitive improvement program (“CIP”) may not be successful in aligning our operations to current market conditions.
During fiscal 2015, we initiated the first phase ("Phase I") of the CIP comprised of activities and initiatives aimed at reducing costs in order for us to continue to compete successfully. Phase I is composed of three major components: (i) facilities optimization and footprint reduction; (ii) product affordability; and (iii) reduced administrative and overhead costs. On April 6, 2017, the Board of Directors approved the second phase (“Phase II”) of our previously announced CIP. Pursuant to Phase II, we expanded CIP and further consolidated our Sacramento, California, and Gainesville, Virginia sites, while centralizing and expanding our existing presence in Huntsville, Alabama. We have incurred and will continue to incur significant expenditures to implement the CIP, and we expect to realize significant future cost savings as a result. The cost savings will be realized by the U.S government in the form of more competitive pricing. The CIP may not be successful in achieving these cost savings and other benefits within the expected timeframes, may be insufficient to successfully restructure our operations through, among other ways, the relocation of programs or the inability to transition institutional program knowledge, to conform with the changes affecting our industry, may disrupt our operations, or may be more costly than currently anticipated. See additional information in Note 11 in notes to the consolidated financial statements.
We may expand our operations through acquisitions, which may divert management’s attention and expose us to unanticipated liabilities and costs. Also, acquisitions may increase our non-reimbursable costs. We may experience difficulties integrating any acquired operations, and we may incur costs relating to acquisitions that are never consummated.
Our business strategy may lead us to expand our Aerospace and Defense segment through acquisitions. However, our ability to consummate any future acquisitions on terms that are favorable to us may be limited by U.S. government regulations, the number of attractive acquisition targets, internal demands on our resources, and our ability to obtain financing. Our success in integrating newly acquired businesses will depend upon our ability to retain key personnel, avoid diversion of management’s attention from operational matters, implement internal controls, integrate general and administrative services and key information processing systems and, where necessary, re-qualify our customer programs. In addition, future acquisitions could result in the incurrence of additional debt, costs, and/or contingent liabilities. We may also incur costs and divert management attention to acquisitions that are never consummated. Integration of acquired operations may take longer, or be more costly or disruptive to our business, than originally anticipated.
Although we undertake a due diligence investigation of each business that we have acquired or may acquire, there may be liabilities of the acquired companies that we fail to, or were unable to, discover during the due diligence investigation and for which we, as a successor owner, may be responsible. In connection with acquisitions, we generally seek to minimize the impact of these types of potential liabilities through indemnities and warranties from the seller. However, these indemnities and warranties, if obtained, may not fully cover the liabilities due to limitations in scope, amount or duration, financial limitations of the indemnitor or warrantor, or other reasons.
Our inability to adapt to rapid technological changes could impair our ability to remain competitive.
The aerospace and defense industry continues to undergo rapid and significant technological development. Our competitors may implement new technologies before us, allowing them to provide more effective products at more competitive prices. Future technological developments could:
adversely impact our competitive position if we are unable to react to these developments in a timely or efficient manner;
require us to write-down obsolete facilities, equipment, and technology;
require us to discontinue production of obsolete products before we can recover any or all of our related research, development and commercialization expenses; or
require significant capital expenditures for research, development, and launch of new products or processes.
Our business and operations could be adversely impacted in the event of a failure of our information technology infrastructure or adversely impacted by a successful cyber-attack.
As a U.S. defense contractor, we face cyber threats, insider threats, threats to the physical security of our facilities and employees, and terrorist acts, as well as the potential for business disruptions associated with information technology failures, natural disasters, or public health crises.
We routinely experience cyber security threats, threats to our information technology infrastructure and unauthorized attempts to gain access to our sensitive information, as do our customers, suppliers, subcontractors, and other partners. We may experience similar security threats at customer sites that we operate and manage as a contractual requirement.

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Prior cyber attacks directed at us have not had a material impact on our financial results, however this may not continue to be the case in the future. Cyber security assessment analyses undertaken by us identified and prioritized steps to enhance our cyber security safeguards. We are in the process of implementing these recommendations to enhance our threat detection and mitigation processes and procedures. Despite the implementation of these new safeguards, there can be no assurance that we will adequately protect our information or that we will not experience any future successful attacks. The threats we face vary from attacks common to most industries to more advanced and persistent, highly organized adversaries who target us because we protect national security information. If we are unable to protect sensitive information, our customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures. Due to the evolving nature of these security threats, however, the impact of any future incident cannot be predicted.
We recently outsourced certain information technology and cyber security functions to third-party contractors in order to take advantage of advanced cyber security technologies. The transition may present unexpected security vulnerabilities, additional costs, and result in our having less control over the performance and delivery of such services.
Although we work cooperatively with our customers, suppliers, and subcontractors to seek to minimize the impact of cyber threats, other security threats or business disruptions, we must rely on the safeguards put in place by these entities, which may affect the security of our information. These entities have varying levels of cyber security expertise and safeguards and their relationships with U.S. government contractors, such as Aerojet Rocketdyne, may increase the likelihood that they are targeted by the same cyber threats we face.
The DoD and NASA have contract provisions that require contractors at the prime and subcontract level to comply with Safeguarding Covered Defense Information and Cyber Incident Reporting and Security Requirements for Unclassified Information Technology Resources in accordance with their agency guidelines.  These clauses are being inserted in or made applicable to U.S. government contracts and non-compliance may impact our ability to receive contracts if we cannot comply or use alternative approaches to comply with the contract information security requirements.
We may be required to expend significant additional resources to modify our cyber security protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications, and we may be subject to litigation and financial losses. These costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means. Occurrence of any of these events could adversely affect our internal operations, the services we provide to our customers, our future financial results, our reputation or our stock price; or such events could result in the loss of competitive advantages derived from our research and development efforts or other intellectual property, early obsolescence of our products and services, or contractual penalties.
 We may experience warranty claims for product failures, schedule delays or other problems with existing or new products and systems.
Many of the products we develop and manufacture are technologically advanced systems that must function under demanding operating conditions. Even though we believe that we employ sophisticated and rigorous design, manufacturing and testing processes and practices, we may not be able to successfully launch or manufacture our products on schedule or our products may not perform as intended.
If our products fail to perform adequately, some of our contracts require us to forfeit a portion of our expected profit, receive reduced payments, provide a replacement product or service or reduce the price of subsequent sales to the same customer. Performance penalties may also be imposed if we fail to meet delivery schedules or other measures of contract performance. We do not generally insure against potential costs resulting from any required remedial actions or costs or loss of sales due to postponement or cancellation of scheduled operations or product deliveries.
The release, unplanned ignition, explosion, or improper handling of dangerous materials used in our business could disrupt our operations and could adversely affect our financial results.
Our business operations involve the handling, production, and disposition of potentially explosive and ignitable energetic materials and other dangerous chemicals, including motors and other materials used in rocket propulsion. Despite our use of specialized facilities to handle dangerous materials and intensive employee training programs, the handling, production, transport, and disposition of hazardous materials could result in incidents that temporarily shut down or otherwise disrupt our manufacturing operations and could cause production delays. It is possible that a release of these chemicals or an unplanned ignition or explosion could result in death or significant injuries to employees and others. Material property damage to us and third parties could also occur. The use of these products in applications by our customers could also result in liability if an explosion, unplanned ignition or fire were to occur. Extensive regulations apply to the handling of explosive and energetic materials, including but not limited to, regulations governing hazardous substances and hazardous waste. The failure to properly store and ultimately dispose of such materials could create significant liability and/or result in regulatory sanctions. Any release, unplanned ignition or explosion could expose us to adverse publicity or liability for damages or cause production delays, any of which could have a material adverse effect on our operating results, financial condition, and/or cash flows.

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Disruptions in the supply of key raw materials, difficulties in the supplier qualification process or increases in prices of raw materials could adversely affect our financial results.
We use a significant quantity of raw materials that are subject to market fluctuations and government regulations. Further, as a U.S. government contractor, we are often required to procure materials from suppliers capable of meeting rigorous customer and government specifications. As market conditions change for these companies, they often discontinue materials with low sales volumes or profit margins. We are often forced to either qualify new materials or pay higher prices to maintain the supply. Although to-date we have been successful in establishing replacement materials and securing customer funding to address specific qualification needs of the programs, we may be unable to continue to do so.
The supply of ammonium perchlorate, a principal raw material used in solid propellant, is limited to a domestic independent single source that supplies the majority of the domestic solid propellant industry and actual pricing is based on the total industry demand. The completion of the Space Shuttle Program reduced demand, resulting in significant unit price increases. In the majority of our contracts, we anticipated this price increase and incorporated abnormal escalation pricing language into our proposals and contracts.
We are also impacted, as is the rest of the industry, by fluctuations in the sustained availability, prices and lead-times of raw materials used in production on various fixed-price contracts, particularly on multi-year programs. We continue to experience volatility in the price and lead-times of certain commodity metals, electronic components, and constituent chemicals. Additionally, we may not be able to continue to negotiate with our customers for economic and/or price adjustment clauses tied to obsolete materials and commodity indices to reduce program impact. The DoD also continues to rigorously enforce the provisions of the “Berry Amendment” which imposes a requirement to procure certain strategic materials critical to national security only from U.S. sources. While availability has not been a significant issue, cost remains a concern as this industry continues to quote “price in effect” at time of shipment terms, increasing the cost risk to our programs. An emerging challenge to the extended supply chain is the U.S. government contracting regulations to comply with stringent cyber security regulations that may influence the cost of material and services on U.S. government contracts. We are actively working to identify these costs to obtain protection in our contracts. Further, a relatively recent Missile Defense Agency ("MDA") requirement to pre-approve supplier background screening processes of personnel that will have access to “controlled unclassified information” and separately approve any supplier personnel with dual citizenship has been challenging due to delays at MDA in approving requests which will potentially impact the award of subcontracts while approval is pending. 
Prolonged disruptions in the supply of any of our key raw materials, difficulty qualifying new sources of supply, implementing use of replacement materials or new sources of supply, and/or a continuing volatility in the prices of raw materials could have a material adverse effect on our operating results, financial condition, and/or cash flows.
Our pension plans are currently underfunded and we expect to be required to make cash contributions in future periods, which may reduce the cash available for our businesses.
As of the last measurement date at December 31, 2017, the assets, projected benefit obligations, and unfunded pension obligation were $931.2 million, $1,442.9 million, and $511.7 million, respectively. We expect to make cash contributions of approximately $42.0 million to our tax-qualified defined benefit pension plan in fiscal 2018 of which $37.5 million is expected to be recoverable from our U.S. government contracts in fiscal 2018 with the remaining $4.5 million being potentially recoverable from our U.S. government contracts in the future. During fiscal 2017, we made cash contributions of $75.8 million to our tax-qualified defined benefit pension plan of which $33.7 million was recoverable from our U.S. government contracts in fiscal 2017 with the remaining $42.1 million expected to be recoverable from our U.S. government contracts in the future. We generally are able to recover cash contributions related to our tax-qualified defined benefit pension plan as allowable costs on our U.S. government contracts, but there can be differences between when we contribute cash to our tax-qualified defined benefit pension plan under pension funding rules and recover it under Cost Accounting Standards ("CAS").
The funded status of our pension plans may be adversely affected by the investment experience of the plans' 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 our plans' assets does not meet our assumptions, if there are changes to the Internal Revenue Service ("IRS") regulations or other applicable law or if other actuarial assumptions are modified, our future contributions to our underfunded pension plans could be higher than we expect.
Additionally, the level of returns on retirement benefit assets, changes in interest rates, increases in Pension Benefit Guaranty Corporations premiums, changes in regulations, changes in mortality rate assumptions, and other factors affect our financial results. The timing of recognition of retirement benefit expense or income in our financial statements differs from the timing of the required funding under the Pension Protection Act ("PPA") or the amount of funding that can be recorded in our overhead rates through our U.S. government contracting business. Significant cash contributions in future periods could materially adversely affect our business, operating results, financial condition, and/or cash flows.

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The level of returns on retirement benefit assets, changes in interest rates, changes in legislation, and other factors affect our financial results.
Our earnings are positively or negatively impacted by the amount of expense or income we record for our employee retirement benefit plans. We calculate the expense for the plans based on actuarial valuations. These valuations are based on assumptions that we make relating to financial market and other economic conditions. Changes in key economic indicators result in changes in the assumptions we use. The key assumptions used to estimate retirement benefit expense for the following year are the discount rate and expected long-term rate of return on assets. Our pension expense or income can also be affected by legislation and other government regulatory actions.
Our operations and properties are currently the subject of significant environmental liabilities, and the numerous environmental and other government requirements to which we are subject may become more stringent in the future.
We are subject to federal, state, local, and foreign environmental laws and regulations that, among other things, require us to obtain permits to operate and install pollution control equipment and regulate the generation, storage, handling, transportation, treatment, and disposal of hazardous and solid wastes. These requirements may become more stringent in the future. Additional regulations dictate how and to what level we remediate contaminated soils and the level to which we are required to clean contaminated groundwater. These requirements may also become more stringent in the future. We may also be subject to fines and penalties relating to the operation of our existing and formerly owned businesses. We have been and are subject to toxic tort and asbestos lawsuits as well as other third-party lawsuits, due to either our past or present use of hazardous substances or the alleged on-site or off-site contamination of the environment through past or present operations. We may incur material costs in defending these claims and lawsuits and any similar claims and lawsuits that may arise in the future. Contamination at our current and former properties is subject to investigation and remediation requirements under federal, state and local laws and regulations, and the full extent of the required remediation has not yet been determined. Any adverse judgment or cash outlay could have a significant adverse effect on our operating results, financial condition, and/or cash flows.
Although some of our environmental expenditures may be recoverable and we have established reserves, given the many uncertainties involved in assessing liability for environmental claims, our reserves may not be sufficient, which could adversely affect our financial results and cash flows.
As of December 31, 2017, the aggregate range of our estimated future environmental obligations was $341.4 million to $503.4 million and the accrued amount was $341.4 million. We believe the accrued amount for future remediation costs represents the costs that could be incurred by us over the contractual term, if any, or the next fifteen years of the estimated remediation, to the extent they are probable and reasonably estimable. However, in many cases the nature and extent of the required remediation has not yet been determined. Given the many uncertainties involved in assessing liability for environmental claims, our reserves may prove to be insufficient. For example, in fiscal 2016, we reached a decision with the U.S. government on the treatment of certain utility costs related to the Sacramento site resulting in a reserve increase of $59.4 million. We evaluate the adequacy of those reserves on a quarterly basis, and adjust them as appropriate. In addition, the reserves are based only on known sites and the known contamination at those sites. It is possible that additional sites needing remediation may be identified or that unknown contamination at previously identified sites may be discovered. It is also possible that the regulatory agencies may change clean-up standards for chemicals of concern such as ammonium perchlorate and trichloroethylene. This could lead to additional expenditures for environmental remediation in the future and, given the uncertainties involved in assessing liability for environmental claims, our reserves may prove to be insufficient.
Most of our environmental costs are incurred by our Aerospace and Defense segment, and certain of these future costs are allowable to be included in our contracts with the U.S. government. We currently estimate approximately 24% of our Aerospace and Defense segment environmental costs will not likely be reimbursable.
Our environmental expenses related to non-Aerojet Rocketdyne sites are generally not recoverable and a significant increase in these estimated environmental expenses could have a significant adverse effect on our operating results, financial condition, and/or cash flows.
We face certain significant risk exposures and potential liabilities that may not be adequately covered by indemnity or insurance.
A significant portion of our business relates to developing and manufacturing propulsion systems for defense and space applications, armament systems for precision tactical weapon systems, and munitions applications. New technologies may be untested or unproven. In addition, we may incur significant liabilities that are unique to our products and services. In some, but not all, circumstances, we may receive indemnification from the U.S. government. While we maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and it is not possible to obtain insurance to protect against all operational risks and liabilities. Accordingly, we may be forced to bear substantial costs resulting from risks and uncertainties of our business, which could have a material adverse effect on our operating results, financial condition, and/or cash flows.

14




Our inability to protect our patents and proprietary rights could adversely affect our businesses’ prospects and competitive positions.
We seek to protect proprietary technology and inventions through patents and other proprietary-right protection. If we are unable to obtain or maintain these protections, we may not be able to prevent third parties from using our proprietary rights. In addition, we may incur significant expense in protecting our intellectual property.
We also rely on trade secrets, proprietary know-how and continuing technological innovation to remain competitive. We have taken measures to protect our trade secrets and know-how, including the use of confidentiality agreements with our employees, consultants and advisors. These agreements may be breached and remedies for a breach may not be sufficient to compensate us for damages incurred. We generally control and limit access to our product documentation and other proprietary information. Other parties may independently develop our know-how or otherwise obtain access to our technology.
Business disruptions could seriously affect us.
Our business may be affected by disruptions including, but not limited to: threats to physical security of our facilities and employees, including senior executives; terrorist acts; information technology attacks or failures; damaging weather or other acts of nature; and pandemics or other public health crises. The costs related to these events may not be fully mitigated by insurance or other means. Disruptions could affect our internal operations or services provided to customers, which could have a material adverse effect on our operating results, financial condition, and/or cash flows.
If our operating subsidiaries do not generate sufficient cash flow or if they are not able to pay dividends or otherwise distribute their cash to us, or if we have insufficient funds on hand, we may not be able to service our debt.
All of the operations of our Aerospace and Defense and Real Estate segments are conducted through subsidiaries. Consequently, our cash flow and ability to service our debt obligations will be largely dependent upon the earnings and cash flows of our operating subsidiaries and the distribution of those earnings to us, or upon loans, advances or other payments made by these subsidiaries to us. The ability of our subsidiaries to pay dividends or make other payments or advances to us will depend upon their operating results and cash flows and will be subject to applicable laws and any contractual restrictions contained in the agreements governing their debt, if any.
 
We have a substantial amount of debt. Our ability to operate is limited by the agreements governing our debt.
We have a substantial amount of debt for which we are required to make interest and principal payments. Interest on long-term financing is not a recoverable cost under our U.S. government contracts. As of December 31, 2017, we had $670.9 million of debt principal. Subject to the limits contained in some of the agreements governing our outstanding debt, we may incur additional debt in the future. Our maintenance of higher levels of indebtedness could have adverse consequences including impairing our ability to obtain additional financing in the future.
Our level of debt places significant demands on our cash resources, which could:
make it more difficult to satisfy our outstanding debt obligations;
require us to dedicate a substantial portion of our cash for payments related to our debt, reducing the amount of cash flow available for working capital, capital expenditures, entitlement of our real estate assets, contributions to our tax-qualified pension plan, and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in the industries in which we compete;
place us at a competitive disadvantage with respect to our competitors, some of which have lower debt service obligations and greater financial resources than we do;
limit our ability to borrow additional funds;
limit our ability to expand our operations through acquisitions; and
increase our vulnerability to general adverse economic and industry conditions.
If we are unable to generate sufficient cash flow to service our debt and fund our operating costs, our liquidity may be adversely affected.
We are obligated to comply with financial and other covenants outlined in our debt indentures and agreements that could restrict our operating activities. A failure to comply could result in a default which would, if not waived by the lenders, likely would come with substantial cost and accelerate the payment of our debt.
Our debt instruments generally contain various restrictive covenants which include, among others, provisions which may restrict our ability to:
access the full amount of our revolving credit facility and/or incur additional debt;
enter into certain leases;

15




make certain distributions, investments, and other restricted payments;
cause our restricted subsidiaries to make payments to us;
enter into transactions with affiliates;
create certain liens;
purchase assets or businesses;
sell assets and, if sold, retain excess cash flow from these sales; and
consolidate, merge or sell all or substantially all of our assets.
Our secured debt also contains other customary covenants, including, among others, provisions:
relating to the maintenance of the property collateralizing the debt; and
restricting our ability to pledge assets or create other liens.
 
In addition, certain covenants in our bank facility require that we maintain certain financial ratios.
Based on our existing debt agreements, we were in compliance with our financial and non-financial covenants as of December 31, 2017. Any of the covenants described in this risk factor may restrict our operations and our ability to pursue potentially advantageous business opportunities. Our failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in the acceleration of our amended and restated senior credit facility entered into on June 17, 2016 (the “Senior Credit Facility”) with the lenders identified therein and Bank of America, N.A., as administrative agent and the 2.25% Convertible Senior Notes ("2 1/4% Notes"). In addition, our failure to pay principal and interest when due is a default under the Senior Credit Facility, and in certain cases, would cause cross defaults on the 2 1/4% Notes.
The real estate market involves significant risk, which could adversely affect our financial results.
Our real estate activities involve significant risks, which could adversely affect our financial results. We are subject to various risks, including the following:
we may be unable to obtain, or suffer delays in obtaining, necessary re-zoning, land use, building, occupancy, and other required governmental permits and authorizations, which could result in increased costs or our abandonment of these projects;
we may be unable to complete environmental remediation or to have state and federal environmental restrictions on our property lifted, which could cause a delay or abandonment of these projects;
we may be unable to obtain sufficient water sources to service our projects, which may prevent us from executing our plans;
our real estate activities may require significant expenditures and we may not be able to obtain financing on favorable terms, which may render us unable to proceed with our plans;
economic and political uncertainties could have an adverse effect on consumer buying habits, construction costs, availability of labor and materials and other factors affecting us and the real estate industry in general;
our property is subject to federal, state, and local regulations and restrictions that may impose significant limitations on our plans;
much of our property is raw land that includes the natural habitats of various endangered or protected wildlife species requiring mitigation;
if our land use plans are approved by the appropriate governmental authorities, we may face lawsuits from those who oppose such plans (such lawsuits and the costs associated with such opposition could be material and have an adverse effect on our ability to sell property or realize income from our projects); and
the time frame required for approval of our plans means that we will have to wait years for a significant cash return.
Substantially all of our excess real estate, that we are in the process of entitling for new opportunities, is located in Sacramento County, California, making us vulnerable to changes in economic and other conditions in that particular market.
As a result of the geographic concentration of our properties, our long-term real estate performance and the value of our properties will depend upon conditions in the Sacramento region, including:
the sustainability and growth of industries located in the Sacramento region;
the financial strength and spending of the State of California;
 local real estate market conditions;

16




changes in neighborhood characteristics;
changes in interest rates; and
real estate tax rates.
If unfavorable economic or other conditions continue in the region, our plans and business strategy could be adversely affected.
We may incur additional costs related to past or future divestitures, which could adversely affect our financial results.
In connection with our divestitures in prior periods, we have incurred and may incur additional costs. As part of our divestitures, we have provided customary indemnification to the purchasers for such matters as claims arising from the operation of the businesses prior to disposition, including income tax matters and the liability to investigate and remediate certain environmental contamination existing prior to disposition. These additional costs and the indemnification of the purchasers of our former or current businesses may require additional cash expenditures, which could have a material adverse effect on our operating results, financial condition, and/or cash flows.
In order to be successful, we must attract and retain key employees.
Our business has a continuing need to attract large numbers of skilled personnel, including personnel holding security clearances, to support the growth of the enterprise and to replace individuals who have terminated employment due to retirement or for other reasons. To the extent that the demand for qualified personnel exceeds supply, we could experience higher labor, recruiting, or training costs in order to attract and retain such employees, or could experience difficulties in performing under our contracts if our needs for such employees were unmet. In addition, our inability to appropriately plan for the transfer or replacement of appropriate intellectual capital and skill sets critical to us could result in business disruptions and impair our ability to achieve business objectives.
A strike or other work stoppage, or our inability to renew collective bargaining agreements on favorable terms, could adversely affect our financial results.
As of December 31, 2017, 14% of our 5,157 employees were covered by collective bargaining agreements. In the future, if we are unable to negotiate acceptable new agreements with the unions, upon expiration of the existing contracts, we could experience a strike or work stoppage. Even if we are successful in negotiating new agreements, the new agreements could call for higher wages or benefits paid to union members, which would increase our operating costs and could adversely affect our profitability. If our unionized workers were to engage in a strike or other work stoppage, or other non-unionized operations were to become unionized, we could experience a significant disruption of operations at our facilities or higher ongoing labor costs. A strike or other work stoppage in the facilities of any of our major customers or suppliers could also have similar effects on us.
Due to the nature of our business, our sales levels may fluctuate causing our quarterly operating results to fluctuate.
Our quarterly and annual sales are affected by a variety of factors that may lead to significant variability in our operating results. In our Aerospace and Defense segment, sales earned under long-term contracts are recognized either on a cost basis, when deliveries are made, or when contractually defined performance milestones are achieved. The timing of deliveries or milestones may fluctuate from quarter to quarter. In our Real Estate segment, sales of land may be made from time to time, which may result in variability in our operating results and cash flows.
The restatement of our previously issued financial statements has been time-consuming, expensive and could expose us to additional risks that could materially adversely affect our financial position, results of operations and cash flows.
We have incurred expenses, including audit, legal, consulting and other professional fees, in connection with the restatement of our previously issued financial statements and the remediation of weaknesses in our internal control over financial reporting. We have taken a number of steps, including adding significant internal resources and implemented a number of additional procedures, in order to strengthen our accounting function and attempt to reduce the risk of additional misstatements in our financial statements. To the extent these steps are not successful, we could be forced to incur additional time and expense. Our management’s attention has also been diverted from the operation of our business in connection with the restatements and remediation of material weaknesses in our internal controls.
In addition, any stockholder, U.S. governmental or other actions brought based on the restatement of our previously issued financial statements could, regardless of the outcome, consume management’s time and attention and result in additional legal, accounting, insurance and other costs.
 Failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act could negatively impact the market price of our common stock.
Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. We rely on numerous manual processes to manage our business, which increases our risk of having an internal control failure. The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a

17




report by management on the effectiveness of our internal control over financial reporting in our Annual Reports on Form 10-K. In addition, our independent registered public accounting firm must report on the effectiveness of the internal control over financial reporting. Although we review our internal control over financial reporting in order to ensure compliance with the Section 404 requirements, if we or our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which these controls are documented, designed, operated or reviewed, or if our independent registered public accounting firm interprets the requirements, rules and/or regulations differently from our interpretation, then they may issue a report that is qualified. This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could negatively impact our stock price.
In addition, we have in the past recorded, and may in the future record, revisions or out of period adjustments to our consolidated financial statements.  In making such adjustments we apply the analytical framework of SEC Staff Accounting Bulletin No. 99, “Materiality” (“SAB 99”), to determine whether the effect of any adjustment to our consolidated financial statements is material and whether such adjustments, individually or in the aggregate, would require us to restate our consolidated financial statements for previous periods.  Under SAB 99, companies are required to apply quantitative and qualitative factors to determine the “materiality” of particular adjustments.  In the future, we may identify further errors impacting our interim or annual consolidated financial statements.  Depending upon the complete qualitative and quantitative analysis, this could result in us restating previously issued consolidated financial statements.
Item 1B. Unresolved Staff Comments
None.
Item  2. Properties
Significant operating, manufacturing, research, design, and/or marketing locations are set forth below.
Facilities
Corporate Headquarters
Aerojet Rocketdyne Holdings, Inc.
222 N. Sepulveda Blvd., Suite 500
El Segundo, California 90245
Operating/Manufacturing/Research/Design/Marketing Locations
 
Aerospace and Defense
El Segundo, California*
Design/Manufacturing Facilities: Camden, Arkansas (owned and leased); Carlstadt, New Jersey*; Chatsworth, California; Gainesville, Virginia*; Hancock County, Mississippi*; Huntsville, Alabama*; Jonesborough, Tennessee**; Orange, Virginia; Orlando, Florida*; Rancho Cordova, California; Redmond, Washington; Socorro, New Mexico; West Palm Beach, Florida*
Marketing/Sales Offices: Arlington, Virginia*
Real Estate
 
 
Rancho Cordova, California
 
 
__________
  *
Indicates a leased property.
**
Owned and operated by Aerojet Ordnance Tennessee, Inc., a 100% owned subsidiary of Aerojet Rocketdyne.
We believe each of the facilities is suitable and adequate for the business conducted at that facility taking into account current and planned future needs.

18




Item 3. 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 suits under the federal False Claims Act, known as “qui tam” actions, and 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 available.
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 are pending in Texas and Illinois. There were 59 asbestos cases pending as of December 31, 2017.
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 generally unable to make a reasonable estimate of the future costs of pending claims or unasserted claims.
The aggregate settlement costs and legal and administrative fees associated with asbestos cases were immaterial for fiscal 2017, 2016, 2015, and the one month ended December 31, 2015.
Socorro
On May 12, 2015, a complaint for personal injuries, loss of consortium and punitive damages was filed by James Chavez, Andrew Baca, and their respective spouses, against Aerojet Rocketdyne and the Board of Regents of New Mexico Tech in the Seventh Judicial District, County of Socorro, New Mexico, James Chavez, et al., vs. Aerojet Rocketdyne, Inc., et al., Case No. D725CV201500047. Messrs. Chavez and Baca were employees of Aerotek, a contractor to Aerojet Rocketdyne, who were injured when excess energetic materials being managed by the Energetic Materials Research and Testing Center, a research division of New Mexico Tech, ignited in an unplanned manner. The complaint alleges causes of action based on negligence and negligence per se, strict liability, and willful, reckless and wanton conduct against Aerojet Rocketdyne, and seeks unspecified compensatory and punitive damages. Trial is scheduled for June 18, 2018. No liability for this matter has been recorded by the Company as of December 31, 2017.
Department of Justice ("DOJ") Investigation
The Company is responding to a civil investigative demand issued by the DOJ in the first quarter of fiscal 2017 requesting information relating to allegations under the False Claims Act that the Company may have previously made false representations to the U.S. government regarding the Company’s compliance with certain regulatory cybersecurity requirements.  The Company is cooperating with the DOJ in its investigation of the false claim allegations.
Item 4. Mine Safety Disclosures
None.

19




PART II
Item  5.
Market for Registrant’s Common Equity, Related Stockholders’ Matters and Issuer Purchases of Equity Securities
As of February 15, 2018, there were 6,070 holders of record of our common stock. On February 15, 2018, the last reported sale price of our common stock on the New York Stock Exchange was $27.59 per share.
Information concerning long-term debt appears in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Liquidity and Capital Resources” and in Part II, Item 8. Consolidated Financial Statements and Supplementary Data at Note 6 in notes to consolidated financial statements. Our Senior Credit Facility restricts the payment of dividends, and we do not anticipate paying cash dividends in the foreseeable future.
Information concerning securities authorized for issuance under our equity compensation plans appears in Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters under the caption “Equity Compensation Plan Information.”
Common Stock
Our common stock is listed on the New York Stock Exchange under the trading symbol “AJRD.” The following table lists, on a per share basis for the periods indicated, the high and low sale prices for the common stock as reported by the New York Stock Exchange:
 
Common Stock Price
 
High 
 
Low 
Fiscal 2017
 
 
 
  First Quarter
$
22.99

 
$
17.69

  Second Quarter
$
23.27

 
$
20.06

  Third Quarter
$
36.25

 
$
20.77

  Fourth Quarter
$
35.91

 
$
27.66

Fiscal 2016
 
 
 
  First Quarter
$
17.20

 
$
13.98

  Second Quarter
$
18.86

 
$
15.52

  Third Quarter
$
19.16

 
$
16.80

  Fourth Quarter
$
21.40

 
$
16.04



20




Stock Performance Graph
The following graph compares the cumulative total stockholder returns, calculated on a dividend reinvested basis, on $100 invested in our common stock in November 2012 with the cumulative total return of (i) the Standard & Poor’s 500 Composite Stock Price Index (“S&P 500 Index”), and (ii) the Standard & Poor’s 500 Aerospace & Defense Index. The stock price performance shown on the graph is not necessarily indicative of future performance.
Comparison of Cumulative Total Stockholder Return Among
Aerojet Rocketdyne, S&P 500 Index, and the S&P 500 Aerospace & Defense Index,
November 2012 through December 2017
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12073453&doc=14
Company/Index
 
Base
Period
2012
 
Year ended
 
November 30,
 
November 30,
 
November 30,
 
December 31,
 
December 31,
 
2013
 
2014
 
2015
 
2016
 
2017
 
Aerojet Rocketdyne Holdings, Inc.
 
$
100.00

 
$
199.35

 
$
181.52

 
$
190.65

 
$
195.11

 
$
339.13

S&P 500 Index
 
100.00

 
130.30

 
152.27

 
156.45

 
172.40

 
210.04

S&P 500 Aerospace & Defense
 
100.00

 
153.67

 
175.96

 
187.61

 
221.31

 
312.90



21




Item 6. Selected Financial Data
The following selected financial data is qualified by reference to and should be read in conjunction with the consolidated financial statements, including the notes thereto in Item 8. Consolidated Financial Statements and Supplementary Data and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Year end
 
One month ended
 
December 31,
 
December 31,
 
November 30,
 
November 30,
 
November 30,
 
December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
2015
 
(In millions, except per share amounts)
 
 
Net sales
$
1,877.2

 
$
1,761.3

 
$
1,708.3

 
$
1,602.2

 
$
1,378.1

 
$
96.3

Net (loss) income
(9.2
)
 
18.0

 
(16.2
)
 
(50.0
)
 
162.9

 
7.0

Basic (loss) income per share of common stock
(0.13
)
 
0.27

 
(0.27
)
 
(0.86
)
 
2.68

 
0.11

Diluted (loss) income per share of common stock
(0.13
)
 
0.27

 
(0.27
)
 
(0.86
)
 
2.05

 
0.10

Supplemental statement of operations information:
 
 
 
 
 
 
 

 
 

 
 
Net (loss) income
$
(9.2
)
 
$
18.0

 
$
(16.2
)
 
$
(50.0
)
 
$
162.9

 
$
7.0

Income tax provision (benefit)
96.1

 
11.2

 
0.3

 
16.3

 
(198.4
)
 
2.0

Interest expense
30.9

 
32.5

 
50.4

 
52.7

 
48.7

 
3.8

Interest income
(3.5
)
 
(0.6
)
 
(0.3
)
 
(0.1
)
 
(0.2
)
 

Depreciation and amortization
72.6

 
64.9

 
65.1

 
63.7

 
43.5

 
5.1

Retirement benefits, net (1)
39.5

 
41.4

 
67.6

 
36.5

 
65.0

 
5.6

Unusual items:
 
 
 
 
 
 
 

 
 

 
 
     Acquisition costs
1.0

 

 

 

 
20.0

 

     (Gain) loss on legal matters and settlements
(2.0
)
 

 
50.0

 
0.9

 
(0.5
)
 
0.4

     Loss on bank amendment

 
0.1

 

 
0.2

 

 

     Loss on debt repurchased/redeemed

 
34.4

 
1.9

 
60.6

 
5.0

 

Adjusted EBITDAP (Non-GAAP measure)
$
225.4

 
$
201.9

 
$
218.8

 
$
180.8

 
$
146.0

 
$
23.9

Adjusted EBITDAP (Non-GAAP measure) as a percentage of net sales
12.0
 %
 
11.5
%
 
12.8
 %
 
11.3
 %
 
10.6
%
 
24.8
%
Net (loss) income as percentage of net sales
(0.5
)%
 
1.0
%
 
(0.9
)%
 
(3.1
)%
 
11.8
%
 
7.3
%
Stock-based compensation expense (benefit)
$
22.0

 
$
12.9

 
$
8.6

 
$
5.7

 
$
14.1

 
$
(0.4
)
Environmental remediation provision adjustments
8.2

 
18.3

 
17.3

 
10.8

 
8.4

 
(0.1
)
Cash flow information:
 
 
 
 
 
 
 

 
 

 
 
   Cash flow provided by operating activities
$
212.8

 
$
158.7

 
$
67.6

 
$
151.9

 
$
77.6

 
$
0.1

   Cash flow used in investing activities
(66.4
)
 
(47.1
)
 
(35.8
)
 
(35.7
)
 
(474.9
)
 
(1.2
)
   Cash flow (used in) provided by financing activities
(21.7
)
 
90.2

 
(86.6
)
 
(47.9
)
 
432.8

 
(1.5
)
Balance Sheet information:
 
 
 
 
 
 
 

 
 

 
 
   Total assets
$
2,258.7

 
$
2,249.5

 
$
2,034.9

 
$
1,918.6

 
$
1,752.1

 
$
2,023.3

   Total debt principal
670.9

 
725.6

 
652.0

 
782.2

 
699.2

 
650.6

________
(1) Retirement benefits are net of cash funding to our tax-qualified defined benefit pension plan which are recoverable costs under our U.S. government contracts. Our recoverable tax-qualified pension costs in fiscal 2017 and 2016 totaled $33.7 million and $27.5 million, respectively.


22




 Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the other sections of this Report, including the consolidated financial statements and notes thereto appearing in Item 8. Consolidated Financial Statements and Supplementary Data of this Report, the risk factors appearing in Item 1A. Risk Factors of this Report, and the disclaimer regarding forward-looking statements appearing at the beginning of Item 1. Business of this Report. Historical results set forth in Item 6. Selected Financial Data and Item 8. Consolidated Financial Statements and Supplementary Data of this Report should not be taken as indicative of our future operations.
Overview
A summary of the significant financial highlights for fiscal 2017 which management uses to evaluate our operating performance and financial condition is presented below.
 
Net sales for fiscal 2017 totaled $1,877.2 million compared with $1,761.3 million for fiscal 2016.
Net loss for fiscal 2017 was $(9.2) million, or $(0.13) loss per share, compared with net income of $18.0 million, or $0.27 diluted income per share, for fiscal 2016.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code. Among other provisions, the Tax Act reduced the federal corporate statutory income tax rate from 35% to 21% beginning in 2018. In accordance with the rate reduction, we wrote down our net deferred tax assets by $64.6 million which unfavorably affected our effective tax rate by 74.4%. We expect the tax rate in future years to be between 27% and 29%.
Adjusted EBITDAP (Non-GAAP measure*) for fiscal 2017 was $225.4 million, compared with $201.9 million for fiscal 2016.
Segment performance before environmental remediation provision adjustments, retirement benefits, net, and unusual items (Non-GAAP measure*) was $205.4 million for fiscal 2017, compared with $188.4 million for fiscal 2016.
Cash provided by operating activities in fiscal 2017 totaled $212.8 million, compared with $158.7 million in fiscal 2016.
Free cash flow (Non-GAAP measure*) in fiscal 2017 totaled $183.4 million, compared with $111.1 million in fiscal 2016.
Total contract backlog as of December 31, 2017 was $4.6 billion compared with $4.5 billion as of December 31, 2016.
Total funded backlog as of December 31, 2017 was $2.1 billion compared with $2.3 billion as of December 31, 2016.
_________
* We provide Non-GAAP measures as a supplement to financial results based on GAAP. A reconciliation of the Non-GAAP measures to the most directly comparable GAAP measures is presented later in the Management’s Discussion and Analysis under the heading “Operating Segment Information” and “Use of Non-GAAP Financial Measures.”
We have a long-term view on value creation and may take initiatives that we believe offer substantial future prospects even if they may dampen near term performance. In addition, our portfolio of contracts includes programs which last for decades and range from lower margin cost-plus development programs to higher margin fixed-price production programs.  Further, the mix of those programs can vary substantially. We intend to strengthen our competitive advantage by continuously improving operational excellence through our CIP programs and continue to invest in R&D initiatives. We also intend to grow our business and plan to work with our customers to expand markets for current products, develop upgrades to extend product life, and develop the requirements for future systems. We plan to maintain a diversified and broad business mix, a favorable balance of cost-reimbursable and fixed-price type contracts, a significant follow-on business and an attractive customer profile. Finally, we intend to complement our growth strategy through select acquisitions that broaden our product and service offerings, deepen our capabilities, and provide entry into new markets.
Some of the significant challenges we face are dependence upon U.S. government programs and contracts, future reductions or changes in U.S. government spending in our markets, implementation of the CIP, environmental matters, capital structure, and our underfunded retirement benefit plans.
Major Customers
The principal end user customers of our products and technology are primarily agencies of the U.S. government. Since a majority of our sales are, directly or indirectly, to the U.S. government, funding for the purchase of our products and services generally follows trends in U.S. aerospace and defense spending. However, individual U.S. government agencies, which include the military services, NASA, the Missile Defense Agency, and the prime contractors that serve these agencies, exercise independent purchasing power within “budget top-line” limits. Therefore, sales to the U.S. government are not regarded as sales to one customer, but rather each contracting agency is viewed as a separate customer.

23




Sales to the U.S. government and its agencies, including sales to our significant customers disclosed below, were as follows:
 
Percentage of Net
Sales
Fiscal 2017
92
%
Fiscal 2016
91
%
Fiscal 2015
90
%
One month ended December 31, 2015
85
%
The following are percentages of net sales by principal end user in fiscal 2017:
NASA
30
%
U.S. Air Force
23

U.S. Army
16

Missile Defense Agency
12

U.S. Navy
9

Other U.S. government
2

Total U.S. government customers
92

Other customers
8

Total
100
%
The following are percentages of net sales for significant programs, all of which are included in the U.S. government sales and are comprised of multiple contracts.
 
Year Ended
 
One month ended
 
December 31,
 
December 31,
 
November 30,
 
December 31,
 
2017
 
2016
 
2015
 
2015
RS-25 program
14
%
 
12
%
 
12
%
 
10
%
Standard Missile program
9

 
12

 
14

 
12

THAAD program
9

 
13

 
13

 
13

The demand for certain of our services and products is directly related to the level of funding of U.S. government programs.
Customers that represented more than 10% of net sales for the periods presented were as follows:
 
Year Ended
 
One month ended
 
December 31,
 
December 31,
 
November 30,
 
December 31,
 
2017
 
2016
 
2015
 
2015
Lockheed Martin
24
%
 
27
%
 
29
%
 
24
%
ULA
22

 
21

 
19

 
28

Raytheon
17

 
20

 
20

 
19

NASA
17

 
13

 
11

 
10

Our sales to each of the major customers listed above involve several product lines and programs.
Industry Update
Information concerning our industry appears in Part I, Item 1. Business under the caption “Industry Overview.”
Competitive Improvement Program
During fiscal 2015, we initiated Phase I of the CIP comprised of activities and initiatives aimed at reducing costs in order for us to continue to compete successfully. Phase I is composed of three major components: (i) facilities optimization and

24




footprint reduction; (ii) product affordability; and (iii) reduced administrative and overhead costs. On April 6, 2017, the Board of Directors approved Phase II of our previously announced CIP. Pursuant to Phase II, our plans are to expand CIP and further consolidate our Sacramento, California, and Gainesville, Virginia sites, while centralizing and expanding our existing presence in Huntsville, Alabama. When fully implemented, we anticipate that the CIP will result in annual cost reductions of $230 million.
We currently estimate that we will incur restructuring and related costs of the Phase I and II programs of approximately $235.1 million (including approximately $60.5 million of capital expenditures). We incurred $79.5 million of such costs through December 31, 2017, including $32.5 million in capital expenditures.
Environmental Matters
Our current and former business operations are subject to, and affected by, federal, state, local, and foreign environmental laws and regulations relating to the discharge, treatment, storage, disposal, investigation, and remediation of certain materials, substances, and wastes. See Notes 8(c) and 8(d) of the notes to consolidated financial statements and "Environmental Matters" below for summary of our environmental reserve activity.
Capital Structure
We have a substantial amount of debt for which we are required to make interest and principal payments. Interest on long-term financing is not a recoverable cost under our U.S. government contracts. As of December 31, 2017, we had $670.9 million of debt principal outstanding.
Retirement Benefits
We expect to make cash contributions of approximately $42.0 million to our tax-qualified defined benefit pension plan in fiscal 2018 of which $37.5 million is expected to be recoverable from our U.S. government contracts in fiscal 2018 with the remaining $4.5 million being potentially recoverable from our U.S. government contracts in the future. During fiscal 2017, we made cash contributions of $75.8 million to our tax-qualified defined benefit pension plan of which $33.7 million was recoverable from our U.S. government contracts in fiscal 2017 with the remaining $42.1 million expected to be recoverable from our U.S. government contracts in the future. We generally are able to recover cash contributions related to our tax-qualified defined benefit pension plan as allowable costs on our U.S. government contracts, but there can be differences between when we contribute cash to our tax-qualified defined benefit pension plan under pension funding rules and recover it under CAS.
The funded status of our retirement benefit plans may be adversely affected by investment experience, 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 our retirement benefit 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, our future contributions to our underfunded retirement benefit plans could be higher than we expect.
Additionally, the level of returns on retirement benefit assets, changes in interest rates, changes in legislation, and other factors affect our financial results. The timing of recognition of retirement benefit expense or income in our financial statements differs from the timing of the required funding under the PPA or the amount of funding that can be recorded in our overhead rates through our U.S. government contracting business.
Results of Operations:
Net Sales:
 
Year Ended
 
 
 
Year Ended
 
 
 
December 31,
 
December 31,
 
 
 
December 31,
 
November 30,
 
 
 
2017
 
2016
 
Change*
 
2016
 
2015
 
Change**
 
(In millions)
Net sales:
$
1,877.2

 
$
1,761.3

 
$
115.9

 
$
1,761.3

 
$
1,708.3

 
$
53.0

 * Primary reason for change. The increase in net sales was primarily due to an increase of $158.0 million in space programs primarily driven by the following (i) the RS-25 program development and integration effort in support of the SLS development program; (ii) increased development effort and volume on the Commercial Crew Development program; and (iii) increased deliveries on the Atlas V program. The increase in net sales was partially offset by a decrease of $36.5 million in defense programs primarily driven by the timing of deliveries on the THAAD and Standard Missile programs partially offset by the net sales generated from the Coleman Aerospace acquisition. Further, as a result of the 2016 calendar, Aerojet Rocketdyne had 53 weeks of operations in fiscal 2016 compared with 52 weeks of operations in fiscal 2017. The additional week of operations, which occurred in the fourth quarter of fiscal 2016 and accounted for $32.2 million in additional net sales, is included in the above discussion of program changes.

25




** Primary reason for change. The increase in net sales was primarily due to the following (i) an increase of $95.0 million on space launch programs primarily driven by increased deliveries on the RL10 program and the transition of the Commercial Crew Development program from development activities to initial production and (ii) an increase of $37.2 million on air defense programs primarily driven by the transition of the PAC-3 contracts to full-rate production. These factors were partially offset by (i) the sale of approximately 550 acres of our Sacramento Land for $42.0 million in fiscal 2015 and (ii) a decrease of $36.8 million in the various Standard Missile contracts primarily from the timing of deliveries on the Standard Missile-3 Block IB contract and Standard Missile MK72 booster contract. Further, as a result of the 2016 calendar, Aerojet Rocketdyne had 53 weeks of operations in fiscal 2016 compared with 52 weeks of operations in fiscal 2015. The additional week of operations, which occurred in the fourth quarter of fiscal 2016 and accounted for $32.2 million in additional net sales, is included in the above discussion of program changes.
 
One month ended December 31,
 
2015
 
(In millions)
Net sales:
$
96.3

Net sales for the month ended December 31, 2015 was primarily comprised of the following: (i) sales of $32.4 million in missile defense and strategic systems programs primarily driven by the deliveries on the THAAD and Standard Missile programs; (ii) sales of $26.4 million in our space launch programs primarily associated with the RL10 program as a result of deliveries on this multi-year contract and deliveries on the Atlas V program; and (iii) sales of $26.1 million in space advanced programs primarily driven by work on the Commercial Crew Development program and the RS-25 program which is currently engaged in a significant development and integration effort in support of the SLS program.
Cost of Sales (exclusive of items shown separately below):
 
Year Ended
 
 
 
Year Ended
 
 
 
December 31,
 
December 31,
 
 
 
December 31,
 
November 30,
 
 
 
2017
 
2016
 
Change*
 
2016
 
2015
 
Change**
 
(In millions, except percentage amounts)
Components of cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales excluding retirement benefits
$
1,562.2

 
$
1,477.4

 
$
84.8

 
$
1,477.4

 
$
1,409.3

 
$
68.1

Retirement benefits
53.2

 
50.0

 
3.2

 
50.0

 
50.2

 
(0.2
)
Cost of sales
$
1,615.4

 
$
1,527.4

 
$
88.0

 
$
1,527.4

 
$
1,459.5

 
$
67.9

Percentage of net sales
86.1
%
 
86.7
%
 
 
 
86.7
%
 
85.4
%
 
 
Percentage of net sales excluding retirement benefits
83.2
%
 
83.9
%
 
 
 
83.9
%
 
82.5
%
 
 
* Primary reason for change. The decrease in cost of sales as a percentage of net sales excluding retirement benefits was primarily due to favorable contract performance on numerous programs as a result of overhead cost reductions and reduced program risks, most notably on the THAAD program, partially offset by cost growth and manufacturing inefficiencies in fiscal 2017 on electric propulsion contracts.
** Primary reason for change. The increase in cost of sales as a percentage of net sales excluding retirement benefits was primarily due to the fiscal 2015 land sale of approximately 550 acres of Sacramento Land resulting in gross profit of $30.6 million.

26




 
One month ended December 31,
 
2015
 
(In millions, except percentage amounts)
Components of cost of sales:
 
Cost of sales excluding retirement benefits
$
71.3

Retirement benefits
4.1

Cost of sales
$
75.4

Percentage of net sales
78.3
%
Percentage of net sales excluding retirement benefits
73.9
%
Cost of sales as a percentage of net sales excluding retirement benefits for the month ended December 31, 2015 included favorable changes in contract estimates due to better than expected performance primarily on the Standard Missile and THAAD programs as a result of manufacturing efficiencies and risk mitigation. These favorable factors were partially offset by contract losses on an electric propulsion contract.
AR1 Research and Development:
 
Year Ended
 
 
 
Year Ended
 
 
 
December 31,
 
December 31,
 
 
 
December 31,
 
November 30,
 
 
 
2017
 
2016
 
Change
 
2016
 
2015
 
Change*
 
(In millions, except percentage amounts)
AR1 R&D:
$

 
$

 
$

 
$

 
$
32.1

 
$
32.1

Percentage of net sales
%
 
%
 
 
 
%
 
1.9
%
 
 
 * Primary reason for change. Our company-sponsored R&D expenses (reported as a component of cost of sales) are generally allocated among all contracts and programs in progress under U.S. government contractual arrangements. From time to time, we believe it is in our best interests to self-fund and not allocate costs for certain R&D activities to the U.S. government contracts.  In fiscal 2015, we self-funded $32.1 million of engine development expenses associated with our newest liquid booster engine, the AR1, and did not allocate these costs to the U.S. government. The table below summarizes total AR1 R&D costs net of reimbursements:
 
Year Ended
 
One month ended
 
December 31,
 
December 31,
 
November 30,
 
December 31,
 
2017
 
2016
 
2015
 
2015
 
 
 
(In millions)
AR1 R&D costs allocated to U.S. government contracts
$
16.8

 
$
20.5

 
$
16.1

 
$
2.7

AR1 R&D costs not allocated to U.S. government contracts

 

 
32.1

 

Total
$
16.8

 
$
20.5

 
$
48.2

 
$
2.7


27




Selling, General and Administrative Expense (“SG&A”):
 
Year Ended
 
 
 
Year Ended
 
 
 
December 31,
 
December 31,
 
 
 
December 31,
 
November 30,
 
 
 
2017
 
2016
 
Change*
 
2016
 
2015
 
Change**
 
(In millions, except percentage amounts)
Components of SG&A:
 
 
 
 
 
 
 
 
 
 
 
SG&A excluding retirement benefits and stock-based compensation
$
25.0

 
$
21.8

 
$
3.2

 
$
21.8

 
$
23.0

 
$
(1.2
)
Stock-based compensation
22.0

 
12.9

 
9.1

 
12.9

 
8.6

 
4.3

Retirement benefits
20.0

 
18.9

 
1.1

 
18.9

 
17.4

 
1.5

SG&A
$
67.0

 
$
53.6

 
$
13.4

 
$
53.6

 
$
49.0

 
$
4.6

Percentage of net sales
3.6
%
 
3.0
%
 
 
 
3.0
%
 
2.9
%
 
 
Percentage of net sales excluding retirement benefits and stock-based compensation
1.3
%
 
1.2
%
 
 
 
1.2
%
 
1.3
%
 
 
 * Primary reason for change. The increase in SG&A expense was primarily driven by an increase of $9.1 million in stock-based compensation primarily as a result of increases in the fair value of stock appreciation rights, the accelerated vesting of stock awards to a former executive officer, and the August 2016 stock award granted to the Executive Chairman that vested according to the attainment of share prices ranging from $22 per share to $27 per share of our common stock.
** Primary reason for change. The increase in SG&A expense was primarily driven by an increase of $4.3 million in stock-based compensation which was primarily a result of an increase in performance based stock compensation.
 
One month ended December 31,
 
2015
 
(In millions, except percentage amounts)
Components of SG&A:
 
SG&A excluding retirement benefits and stock-based compensation
$
1.7

Stock-based compensation
(0.4
)
Retirement benefits
1.5

SG&A
$
2.8

Percentage of net sales
2.9
%
SG&A expense as a percentage of net sales for the month ended December 31, 2015 was relatively proportional to the first quarter of fiscal 2016.

28




Depreciation and Amortization:
 
Year Ended
 
 
 
Year Ended
 
 
 
December 31,
 
December 31,
 
 
 
December 31,
 
November 30,
 
 
 
2017
 
2016
 
Change*
 
2016
 
2015
 
Change**
 
(In millions)
Components of depreciation and amortization:
 
 
 
 
 
 
 
 
 
 
 
Depreciation
$
56.7

 
$
49.6

 
$
7.1

 
$
49.6

 
$
49.8

 
$
(0.2
)
Amortization
13.7

 
13.3

 
0.4

 
13.3

 
13.4

 
(0.1
)
Accretion
2.2

 
2.0

 
0.2

 
2.0

 
1.9

 
0.1

Depreciation and amortization
$
72.6

 
$
64.9

 
$
7.7

 
$
64.9

 
$
65.1

 
$
(0.2
)
 * Primary reason for change. The increase in depreciation expense was primarily the result of increased accelerated depreciation associated with changes in the estimated useful lives of long-lived assets and capital projects being placed in service to support the cost saving initiatives of the CIP.
** Primary reason for change. Depreciation and amortization expense was essentially unchanged for the period.
 
One month ended December 31,
 
2015
 
(In millions)
Components of depreciation and amortization:
 
Depreciation
$
3.8

Amortization
1.1

Accretion
0.2

Depreciation and amortization
$
5.1

Depreciation and amortization expense for the month ended December 31, 2015 was relatively proportional to the first quarter of fiscal 2016.
Other Expense, Net and Loss On Debt:
 
Year Ended
 
 
 
Year Ended
 
 
 
December 31,
 
December 31,
 
 
 
December 31,
 
November 30,
 
 
 
2017
 
2016
 
Change*
 
2016
 
2015
 
Change**
 
(In millions)
Other expense, net and loss on debt:
$
7.9

 
$
54.3

 
$
(46.4
)
 
$
54.3

 
$
68.4

 
$
(14.1
)
* Primary reason for change. The decrease was primarily due to a decrease of $35.5 million in unusual items (discussed below) and a decrease of $10.1 million in environmental remediation expenses (see discussion of "Environmental Matters" below).
** Primary reason for change. The decrease in other expense, net was primarily due to a decrease of $17.4 million in unusual items charges (see discussion of unusual items below).
 
One month ended December 31,
 
2015
 
(In millions)
Other expense, net:
$
0.2

The $0.2 million of other expense, net for the month ended December 31, 2015 was insignificant.

29




Total unusual items, comprised of a component of other expense, net and loss on debt in the consolidated statements of operations, was as follows:
 
Year Ended
 
One month ended
 
December 31,
 
December 31,
 
November 30,
 
December 31,
 
2017
 
2016
 
2015
 
2015
 
(In millions)
Aerospace and Defense:
 
 
 
 
 
 
 
        (Gain) loss on legal matters and settlements (1)
$
(2.0
)
 
$

 
$
50.0

 
$
0.4

        Aerospace and defense unusual items
(2.0
)
 

 
50.0

 
0.4

Corporate:
 
 
 
 
 
 
 
        Loss on debt repurchased (2)

 
34.4

 
1.9

 

        Acquisition costs (1)
1.0

 

 

 
 
        Loss on bank amendment (1)

 
0.1

 

 

        Corporate unusual items
1.0

 
34.5

 
1.9

 

            Total unusual items
$
(1.0
)
 
$
34.5

 
$
51.9

 
$
0.4

________
(1) Operating (income) expense
(2) Non-operating expense
Fiscal 2017 Activity:
We recorded $2.0 million of realized gains, net of 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. On May 30, 2017, we made a registered rescission offer to buy back unregistered shares from eligible Plan participants at the original purchase price plus interest, or to reimburse eligible Plan participants for losses they may have incurred if their shares had been sold. The actual cost of the registered rescission offer was less than the previously estimated costs. The registered rescission offer expired on June 30, 2017 and settlement payments of $3.5 million under the offer have been completed in the third quarter of fiscal 2017.
We recorded $1.0 million of costs related to the acquisition of Coleman Aerospace from L3 Technologies, Inc.
Fiscal 2016 Activity:
On July 18, 2016, we redeemed $460.0 million principal amount of our 7.125% Second-Priority Senior Secured Notes (“7 1/8% Notes”), representing all of the outstanding 7 1/8% Notes, at a redemption price equal to 105.344% of the principal amount, plus accrued and unpaid interest. We incurred a pre-tax charge of $34.1 million in fiscal 2016 associated with the extinguishment of the 7 1/8% Notes. The $34.1 million pre-tax charge was the result of the $24.6 million paid in excess of the par value and $9.5 million associated with the write-off of unamortized deferred financing costs.
We retired $13.0 million principal amount of our delayed draw term loan resulting in a loss of $0.3 million.
We recorded a charge of $0.1 million associated with an amendment to the Senior Credit Facility.
Fiscal 2015 Activity:
We recorded an expense of $50.0 million associated with a legal settlement. Aerojet Rocketdyne entered into a Settlement and Mutual Release Agreement (the “Agreement”) with Orbital Sciences Corporation (“Orbital”) pursuant to which the parties mutually agreed to a termination for convenience of the contract relating to the provision by Aerojet Rocketdyne of 20 AJ-26 liquid propulsion rocket engines to Orbital for the Antares program (the “Contract”). The Agreement also settles all claims the parties may have had against one another arising out of the Contract and the launch failure that occurred on October 28, 2014 of an Antares launch vehicle carrying the Cygnus ORB-3 service and cargo module.
We retired $76.0 million principal amount of our delayed draw term loan resulting in $1.9 million of losses associated with the write-off of deferred financing fees.
December 2015 Activity:
We recorded $0.4 million 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.

30




Interest Income:
 
Year Ended
 
 
 
Year Ended
 
 
 
December 31,
 
December 31,
 
 
 
December 31,
 
November 30,
 
 
 
2017
 
2016
 
Change*
 
2016
 
2015
 
Change**
 
(In millions)
Interest income:
$
3.5

 
$
0.6

 
$
2.9

 
$
0.6

 
$
0.3

 
$
0.3

 * Primary reason for change. The increase in interest income was primarily due to higher average cash balances and interest rates.
**  Primary reason for change. Interest income was immaterial for the period presented.
Interest Expense:
 
Year Ended
 
 
 
Year Ended
 
 
 
December 31,
 
December 31,
 
 
 
December 31,
 
November 30,
 
 
 
2017
 
2016
 
Change*
 
2016
 
2015
 
Change**
 
(In millions)
Components of interest expense:
 
 
 
 
 
 
 
 
 
 
 
Contractual interest and other
$
22.4

 
$
30.2

 
$
(7.8
)
 
$
30.2

 
$
47.7

 
$
(17.5
)
Amortization of debt discount and deferred financing costs
8.5

 
2.3

 
6.2

 
2.3

 
2.7

 
(0.4
)
Interest expense
$
30.9

 
$
32.5

 
$
(1.6
)
 
$
32.5

 
$
50.4

 
$
(17.9
)
* Primary reason for change. The decrease in interest expense was primarily due to the retirement of the principal amount of our delayed draw term loan in the first quarter of fiscal 2016, the redemption of the 7 1/8% Senior Secured Notes in the third quarter of fiscal 2016, and the conversion of 4 1/16% Convertible Subordinated Debentures (“4 1/16% Debentures”) to common shares. The decrease was partially offset by interest expense on the debt incurred on the Senior Credit Facility at a variable interest rate of 3.82% as of December 31, 2017 and the issuance of the 2 1/4% Notes in December 2016 at an effective interest rate of 5.8%.
**  Primary reason for change. The decrease in interest expense was primarily due to the retirement of the principal amount of our delayed draw term loan in the first quarter of fiscal 2016 and the redemption of the 7 1/8% Notes in the third quarter of fiscal 2016. The decrease was partially offset by interest expense on the debt incurred on the Senior Credit Facility at a lower variable interest rate (3.02% as of December 31, 2016).
 
One month ended December 31,
 
2015
 
(In millions)
Components of interest expense:
 
Contractual interest and other
$
3.6

Amortization of deferred financing costs
0.2

Interest expense
$
3.8

Interest expense for the month ended December 31, 2015 was proportional to our interest expense for the first quarter of fiscal 2016.
Income Tax Provision:
 
Year Ended
 
One month ended
 
December 31,
 
December 31,
 
November 30,
 
December 31,
 
2017
 
2016
 
2015
 
2015
 
(In millions)
Income tax provision
$
96.1

 
$
11.2

 
$
0.3

 
$
2.0

In fiscal 2017, our effective tax rate was an income tax expense of 110.6% on pre-tax income of $86.9 million. Our effective tax rate differed from the 35.0% statutory federal income tax rate primarily due to the change in the federal statutory tax rate from 35% to 21% under the Tax Act of 2017. The one time reduction to deferred tax assets due to the Tax Act was

31




$64.6 million or a 74.4% increase to the effective tax rate. Before applying the effects of the Tax Act, the effective tax rate was 36.2%. This rate differs from the 35% federal income tax rate due to an increase from state income taxes partially offset by R&D credits and favorable adjustments to uncertain tax positions. We expect the tax rate in future years to be between 27% and 29%.
In fiscal 2016, the income tax provision recorded differs from the expected tax that would be calculated by applying the federal statutory rate to our income before income taxes primarily due to the impacts from state income taxes, and certain expenditures which are permanently not deductible for tax purposes, partially offset by the impact of R&D credits.
In fiscal 2015, the income tax provision recorded differs from the expected tax that would be calculated by applying the federal statutory rate to our loss before income taxes primarily due to state income taxes and certain non-deductible interest expense, partially offset by the retroactive reinstatement of the federal R&D credit and benefits allowed by Section 199 of the IRS code allowed to manufacturers.
In the month ended December 31, 2015, the income tax provision recorded differs from the expected tax that would be calculated by applying the federal statutory rate to our income before income taxes primarily due to the re-enactment of the federal R&D credit in December 2015 for calendar year 2015 which has been treated as a discrete event for the December 2015 one-month period, as well as impacts from state income taxes, benefits allowed by Section 199 of the IRS code allowed to manufacturers, and R&D credits.
The carrying value of our deferred tax assets is dependent on our ability to generate sufficient taxable income in the future. Our valuation allowance of $1.7 million remained unchanged from prior year.
As of December 31, 2017, the liability for uncertain income tax positions was $2.8 million. Due to the 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.
Retirement Benefit Plans:
Components of retirement benefits are:
 
Year Ended
 
One month ended
 
December 31,
 
December 31,
 
November 30,
 
December 31,
 
2017
 
2016
 
2015
 
2015
 
(In millions)
 
 
Service cost
$
15.0

 
$
14.0

 
$
10.8

 
$
1.1

Interest cost on benefit obligation
59.1

 
66.0

 
65.5

 
5.5

Assumed return on assets
(64.5
)
 
(70.1
)
 
(88.1
)
 
(6.0
)
Amortization of prior service credits
(0.1
)
 
(1.1
)
 
(1.1
)
 
(0.1
)
Amortization of net losses
63.7

 
60.1

 
80.5

 
5.1

 
$
73.2

 
$
68.9

 
$
67.6

 
$
5.6

We estimate that our retirement benefits expense will be approximately $60 million in fiscal 2018.
See “Critical Accounting Policies - Retirement Benefit Plans” for more information about our accounting practices with respect to retirement benefits.
Operating Segment Information:
We evaluate our operating segments based on several factors, of which the primary financial measure is segment performance. Segment performance represents net sales 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 unusual items not related to the segment. We believe that segment performance provides information useful to investors in understanding our underlying operational performance. In addition, we provide the Non-GAAP financial measure of our operational performance called segment performance before environmental remediation provision adjustments, retirement benefits, and segment unusual items. 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.

32




Aerospace and Defense Segment
 
Year Ended
 
 
 
Year Ended
 
 
 
December 31,
 
December 31,
 
 
 
December 31,
 
November 30,
 
 
 
2017
 
2016
 
Change*
 
2016
 
2015
 
Change**
 
(In millions, except percentage amounts)
Net sales
$
1,870.8

 
$
1,753.9

 
$
116.9

 
$
1,753.9

 
$
1,660.0

 
$
93.9

Segment performance
177.9

 
143.3

 
34.6

 
143.3

 
48.9

 
94.4

Segment margin
9.5
%
 
8.2
%
 
 
 
8.2
%
 
2.9
%
 
 
Segment margin before environmental remediation provision adjustments, retirement benefits, net, and unusual items (Non-GAAP measure)
10.8
%
 
10.5
%
 
 
 
10.5
%
 
10.0
%
 
 
Components of segment performance:
 
 
 
 
 
 
 
 
 
 
 
Aerospace and Defense before environmental remediation provision adjustments, retirement benefits, net, and unusual items (Non-GAAP measure)
$
202.9

 
$
184.1

 
$
18.8

 
$
184.1

 
$
165.7

 
$
18.4

Environmental remediation provision adjustments
(7.5
)
 
(18.3
)
 
10.8

 
(18.3
)
 
(16.6
)
 
(1.7
)
Retirement benefits, net (1)
(19.5
)
 
(22.5
)
 
3.0

 
(22.5
)
 
(50.2
)
 
27.7

Unusual items
2.0

 

 
2.0

 

 
(50.0
)
 
50.0

Aerospace and Defense total
$
177.9

 
$
143.3

 
$
34.6

 
$
143.3

 
$
48.9

 
$
94.4

________
(1) Retirement benefits are net of cash funding to our tax-qualified defined benefit pension plan which are recoverable costs under our U.S. government contracts. Our recoverable tax-qualified pension costs in fiscal 2017 and 2016 totaled $33.7 million and $27.5 million, respectively.     
 * Primary reason for change. The increase in net sales was primarily due to an increase of $158.0 million in space programs primarily driven by the following (i) the RS-25 program development and integration effort in support of the SLS development program; (ii) increased development effort and volume on the Commercial Crew Development program; and (iii) increased deliveries on the Atlas V program. The increase in net sales was partially offset by a decrease of $36.5 million in defense programs primarily driven by the timing of deliveries on the THAAD and Standard Missile programs partially offset by the net sales generated from the Coleman Aerospace acquisition. Further, as a result of the 2016 calendar, Aerojet Rocketdyne had 53 weeks of operations in fiscal 2016 compared with 52 weeks of operations in fiscal 2017. The additional week of operations, which occurred in the fourth quarter of fiscal 2016 and accounted for $32.2 million in additional net sales, is included in the above discussion of program changes.
Segment margin before environmental remediation provision adjustments, retirement benefits, net, and unusual items in fiscal 2017 compared with fiscal 2016 was up 30 basis points. Items that had a significant impact were favorable contract performance on numerous programs as a result of overhead cost reductions and reduced program risks, most notably on the THAAD program, partially offset by cost growth and manufacturing inefficiencies in fiscal 2017 on electric propulsion contracts.
** Primary reason for change. The increase in net sales was primarily due to the following (i) an increase of $95.0 million on space launch programs primarily driven by increased deliveries on the RL10 program, and the transition of the Commercial Crew Development program from development activities to initial production and (ii) an increase of $37.2 million on air defense programs primarily driven by the transition of the PAC-3 contracts to full-rate production. These factors were partially offset by a decrease of $36.8 million in the various Standard Missile contracts primarily from the timing of deliveries on the Standard Missile-3 Block IB contract and Standard Missile MK72 booster contract. Further, as a result of the 2016 calendar, Aerojet Rocketdyne had 53 weeks of operations in fiscal 2016 compared with 52 weeks of operations in fiscal 2015. The additional week of operations, which occurred in the fourth quarter of fiscal 2016 and accounted for $32.2 million in additional net sales, is included in the above discussion of program changes.
Segment margin before environmental remediation provision adjustments, retirement benefits, net, and unusual items in fiscal 2016 compared with fiscal 2015 was up 50 basis points. Items that had a significant impact include the following: (i) favorable contract performance on the THAAD program as a result of operating performance and lower overhead costs; (ii) a gross contract benefit of $8.1 million in fiscal 2015 associated with the Antares AJ-26 Settlement Agreement; and (iii) cost growth and manufacturing inefficiencies in the current period on electric propulsion contracts.

33




 
One month ended December 31,
 
2015
 
(In millions, except percentage amounts)
Net sales
$
95.8

Segment performance
15.2

Segment margin
15.9
%
Segment margin before environmental remediation provision adjustments, retirement benefits, net, and unusual items (Non-GAAP measure)
20.5
%
Components of segment performance:
 
Aerospace and Defense before environmental remediation provision adjustments, retirement benefits, net, and unusual items (Non-GAAP measure)
$
19.6

Environmental remediation provision adjustments
0.1

Retirement benefits, net
(4.1
)
Unusual items
(0.4
)
Aerospace and Defense total
$
15.2

Net sales for the month ended December 31, 2015 was primarily comprised of the following: (i) sales of $32.4 million in missile defense and strategic systems programs primarily driven by the deliveries on the THAAD and Standard Missile programs; (ii) sales of $26.4 million in our space launch programs primarily associated with the RL10 program as a result of deliveries on this multi-year contract and deliveries on the Atlas V program; and (iii) sales of $26.1 million in space advanced programs primarily driven by development work on the Commercial Crew Development program and the RS-25 program which is currently engaged in a significant development and integration effort in support of the SLS program.
The segment margin before environmental remediation provision adjustments, retirement benefits, net and unusual items included (i) favorable changes in contract estimates due to better than expected performance on the Standard Missile and THAAD programs as a result of manufacturing efficiencies and risk mitigation and (ii) costs recoveries on retirement benefit plan contributions. These favorable factors were partially offset by contract losses on an electric propulsion contract.
The following table summarizes our backlog:
 
As of December 31,
 
2017
 
2016
 
(In billions)
Funded backlog
$
2.1

 
$
2.3

Unfunded backlog
2.5

 
2.2

Total contract backlog
$
4.6

 
$
4.5

Total contract backlog expected to be filled within one year
$
1.7

 
$
1.7

Total backlog includes both funded backlog (unfilled orders for which funding is authorized, appropriated and contractually obligated by the 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
 
Year Ended
 
 
 
Year Ended
 
 
 
December 31,
 
December 31,
 
 
 
December 31,
 
November 30,
 
 
 
2017
 
2016
 
Change*
 
2016
 
2015
 
Change*
 
(In millions)
Net sales
$
6.4

 
$
7.4

 
$
(1.0
)
 
$
7.4

 
$
48.3

 
$
(40.9
)
Segment performance
2.5

 
4.3

 
(1.8
)
 
4.3

 
34.4

 
(30.1
)
* Primary reason for change. During fiscal 2017 and 2016, net sales and segment performance consisted primarily of rental property operations. During fiscal 2015, we recognized net sales of $42.0 million associated with a land sale of approximately 550 acres which resulted in a pre-tax gain of $30.6 million.  

34




 
One month ended December 31,
 
2015
 
(In millions)
Net sales
$
0.5

Segment performance
0.2

Net sales and segment performance consisted primarily of rental property operations.
Use of Non-GAAP Financial Measures:
In addition to segment performance (discussed above), we provide the Non-GAAP financial measure of our operational performance called Adjusted EBITDAP. We use this metric to measure our operating performance. We believe that to effectively compare core operating performance from period to period, the metric should exclude items relating to retirement benefits (pension and postretirement benefits), significant non-cash expenses, the impacts of financing decisions on earnings, and items incurred outside the ordinary, on-going and customary course of our operations. Accordingly, we define Adjusted EBITDAP as GAAP net (loss) income adjusted to exclude income taxes, interest expense, interest income, depreciation and amortization, retirement benefits net of cash funding to our tax-qualified defined benefit pension plan that are recoverable under our U.S. government contracts, and unusual items which we do not believe are reflective of such ordinary, on-going and customary activities. Adjusted EBITDAP does not represent, and should not be considered an alternative to, net (loss) income, as determined in accordance with GAAP.
 
Year Ended
 
One month ended
 
December 31,
 
December 31,
 
November 30,
 
December 31,
 
2017
 
2016
 
2015
 
2015
 
(In millions)
 
 
Net (loss) income
$
(9.2
)
 
$
18.0

 
$
(16.2
)
 
$
7.0

Income tax provision
96.1

 
11.2

 
0.3

 
2.0

Interest expense
30.9

 
32.5

 
50.4

 
3.8

Interest income
(3.5
)
 
(0.6
)
 
(0.3
)
 

Depreciation and amortization
72.6

 
64.9

 
65.1

 
5.1

Retirement benefits, net (1)
39.5

 
41.4

 
67.6

 
5.6

Unusual items
(1.0
)
 
34.5

 
51.9

 
0.4

Adjusted EBITDAP
$
225.4

 
$
201.9

 
$
218.8

 
$
23.9

Adjusted EBITDAP as a percentage of net sales
12.0
 %
 
11.5
%
 
12.8
 %
 
24.8
%
Net (loss) income as a percentage of net sales
(0.5
)%
 
1.0
%
 
(0.9
)%
 
7.3
%
________
(1) Retirement benefits are net of cash funding to our tax-qualified defined benefit pension plan which are recoverable costs under our U.S. government contracts. Our recoverable tax-qualified pension costs in fiscal 2017 and 2016 totaled $33.7 million and $27.5 million, respectively.
In addition to segment performance and Adjusted EBITDAP, we provide the Non-GAAP financial measure of free cash flow. We use this financial measure, both in presenting our results to stakeholders and the investment community, and in our internal evaluation and management of the business. Management believes that this financial measure is useful because it provides supplemental information to assist investors in viewing the business using the same tools that management uses to evaluate progress in achieving our goals (including under our annual cash and long-term compensation incentive plans).
 
Year Ended
 
One month ended
 
December 31,
 
December 31,
 
November 30,
 
December 31,
 
2017
 
2016
 
2015
 
2015
 
(In millions)
 
 
Net cash provided by operating activities
$
212.8

 
$
158.7

 
$
67.6

 
$
0.1

Capital expenditures
(29.4
)
 
(47.6
)
 
(36.8
)
 
(1.2
)
Free cash flow(1)
$
183.4

 
$
111.1

 
$
30.8

 
$
(1.1
)
 _________

35




(1) Free Cash Flow, a Non-GAAP financial measure, is defined as cash flow from operating activities less capital expenditures. Free Cash Flow should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to cash flows from operations presented in accordance with GAAP.
Because our method for calculating these Non-GAAP measures may differ from other companies’ methods, the Non-GAAP measures presented above may not be comparable to similarly titled measures reported by other companies. These measures are not recognized in accordance with GAAP, and we do not intend for this information to be considered in isolation or as a substitute for GAAP measures.
Environmental Matters:
Our policy is to conduct our businesses with due regard for the preservation and protection of the environment. We devote a significant amount of resources and management attention to environmental matters and actively manage our ongoing processes to comply with environmental laws and regulations. We are involved in the remediation of environmental conditions that resulted from generally accepted manufacturing and disposal practices at certain plants in the 1950s and 1960s. In addition, we have been designated a PRP with other companies at third party sites undergoing investigation and remediation.
Estimating environmental remediation costs is difficult due to the significant uncertainties inherent in these activities, including the extent of remediation required, changing governmental regulations and legal standards regarding liability, evolving technologies and the long period of time over which most remediation efforts take place. We:
accrue for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred and when our proportionate share of the costs can be reasonably estimated; and
record related estimated recoveries when such recoveries are deemed probable.
In addition to the costs associated with environmental remediation discussed above, we incur expenditures for recurring costs associated with managing hazardous substances or pollutants in ongoing operations which were immaterial for fiscal 2017, 2016, 2015, and the one month ended December 31, 2015.
The following table summarizes our recoverable amounts, environmental reserves, and range of liability, as of December 31, 2017:
 
Recoverable
Amount (1)
 
Reserve
 
Estimated Range
of Liability
 
(In millions)
Aerojet Rocketdyne - Sacramento
$
156.6

 
$
206.5

 
$206.5 - $325.2
Aerojet Rocketdyne - Baldwin Park Operable Unit ("BPOU")
88.2

 
116.4

 
116.4 - 152.5
Other Aerojet Rocketdyne sites
11.2

 
13.7

 
13.7 - 19.2
Other sites
0.7

 
4.8

 
4.8 - 6.5
Total
$
256.7

 
$
341.4

 
$341.4 - $503.4
_____
(1)
Excludes the receivable from Northrop of $64.5 million as of December 31, 2017 related to environmental costs already paid (and therefore not reserved) by us in prior years and reimbursable under our agreement with Northrop. The cumulative limitation under our agreement with Northrop was reached in the second quarter of fiscal 2017. See Notes 8(c) and 8(d) of the Notes to Consolidated Financial Statements for additional information.
Environmental Reserves
On a quarterly basis, we review estimated future remediation costs and have an established practice of estimating environmental remediation costs over a fifteen year period, except for those environmental remediation costs with a specific contractual term. Environmental liabilities at the BPOU site are currently estimated through the term of the new project agreement which expires in May 2027. As the period for which estimated environmental remediation costs lengthens, the reliability of such estimates decreases. 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 our 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 we periodically evaluate and revise these estimates as new information becomes available. We 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, and the time required designing, constructing, and implementing the remedy.
A summary of our environmental reserve activity:


36




 
Year ended
 
One month ended
 
December 31, 2017
 
December 31, 2016
 
November 30, 2015
 
December 31, 2015
 
(In millions)
Opening balance