Aerojet Rocketdyne Holdings
GENCORP INC (Form: 10-K, Received: 02/07/2014 16:09:46)
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

  þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended November 30, 2013

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 1-1520

GenCorp Inc.

(Exact name of registrant as specified in its charter)

 

Ohio    34-0244000

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

2001    Aerojet Road

Rancho Cordova, California

  

95742

(Zip Code)

(Address of principal executive offices)   

Registrant’s telephone number, including area code

(916) 355-4000

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 and

Chicago 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   ¨       No   þ

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   þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   þ       No   ¨

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   þ       No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   þ

 

Accelerated filer   ¨

   Non-accelerated filer   ¨  

Smaller reporting company   ¨

     (Do not check if a smaller reporting company)  

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

The aggregate market value of the voting common equity held by nonaffiliates of the registrant as of May 31, 2013 was approximately $815 million.

As of January 14, 2014, there were 61.3 million outstanding shares of the Company’s Common Stock, including redeemable common stock and unvested common shares, $0.10 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2014 Proxy Statement of GenCorp Inc. relating to its annual meeting of shareholders scheduled to be held on March 20, 2014 are incorporated by reference into Part III of this Report.

 

 

 


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GENCORP INC.

Annual Report on Form 10-K

For the Fiscal Year Ended November 30, 2013

Table of Contents

 

Item

Number

           
PART I   
1.    Business      1   
1A.    Risk Factors      18   
1B.    Unresolved Staff Comments      32   
2.    Properties      32   
3.    Legal Proceedings      33   
4.    Mine Safety Disclosures      35   

PART II

  
5.    Market for Registrant’s Common Equity, Related Stockholders’ Matters, and Issuer Purchases of Equity Securities      36   
6.    Selected Financial Data      38   
7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      39   
7A.    Quantitative and Qualitative Disclosures about Market Risk      72   
8.    Consolidated Financial Statements and Supplementary Data      74   
9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      144   
9A.    Controls and Procedures      144   
9B.    Other Information      145   

PART III

  
10.    Directors, Executive Officers, and Corporate Governance      145   
11.    Executive Compensation      147   
12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      147   
13.    Certain Relationships and Related Transactions, and Director Independence      149   
14.    Principal Accountant Fees and Services      149   

PART IV

  
15.    Exhibits and Financial Statement Schedules      150   

 

Signatures

     160   

 

*

The information called for by Items 10, 11, 12, 13, and 14, to the extent not included in this Report, is incorporated herein by reference to the information to be included under the captions “Proposal 1 — Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Communications with Directors,” “Board Committees,” “Executive Compensation,” “2013 Director Compensation Table,” “Compensation Discussion and Analysis,” “Summary Compensation Table,” “2013 Grants of Plan-Based Awards,” “Outstanding Equity Awards at 2013 Fiscal Year End, “2013 Option/SAR Exercises and Stock Vested,” “2013 Pension Benefits,” “2013 Non-Qualified Deferred Compensation,” “Director Compensation,” “Organization & Compensation Committee Report” “Compensation Committee Interlocks and Insider Participation,” “Security Ownership of Certain Beneficial Owners,” “Security Ownership of Officers and Directors,” “Employment Agreement and Indemnity Agreements,” “Potential Payments upon Termination of Employment or Change in Control,” “Determination of Independence of Directors,” “Related Person Transaction Policy,” “Proposal 4 — Ratification of the Appointment of Independent Auditors,” “Audit Fees,” “Audit-Related Fees,” “Tax Fees,” “All Other Fees” and “Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the Company’s Independent Auditors” in GenCorp Inc.’s 2014 Proxy Statement, to be filed within 120 days after the close of our fiscal year.


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PART I

 

Item 1. Business

Unless otherwise indicated or required by the context, as used in this Annual Report on Form 10-K, the terms “we,” “our,” and “us” refer to GenCorp Inc. and all of its subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America (“U.S.”).

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”).

We are a manufacturer of aerospace and defense products and systems with a real estate segment that includes activities related to the re-zoning, entitlement, sale, and leasing of our excess real estate assets. We develop and manufacture propulsion systems for defense and space applications, and armaments for precision tactical and long range weapon systems applications. Our continuing 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 U.S. government, including the Department of Defense (“DoD”), the National Aeronautics and Space Administration (“NASA”), major aerospace and defense prime contractors as well as portions of the commercial sector. Aerojet Rocketdyne is a world-recognized engineering and manufacturing company that specializes in the development and production of propulsion systems for defense and space applications, armament systems for precision tactical systems and munitions, and is considered a domestic market leader in launch propulsion, in-space propulsion, missile defense propulsion, tactical missile propulsion and hypersonic propulsion systems.

Real Estate — includes the activities of our wholly-owned subsidiary Easton Development Company, LLC related to the re-zoning, entitlement, sale, and leasing of our excess real estate assets. We own approximately 11,900 acres of land adjacent to U.S. Highway 50 between Rancho Cordova and Folsom, California east of Sacramento (“Sacramento Land”). We are currently in the process of seeking zoning changes and other governmental approvals on a portion of the Sacramento Land to optimize its value.

Sales, segment performance, total assets, and other financial data for our segments for fiscal 2013, 2012, and 2011 are set forth in Note 11 in Notes to Consolidated Financial Statements, included in Item 8 of this Report. Fiscal 2013 results include 5  1 / 2 months of the Pratt & Whitney Rocketdyne division (the “Rocketdyne Business”) operating results (see below).

In July 2012, we signed a stock and asset purchase agreement (the “Original Purchase Agreement”) with United Technologies Corporation (“UTC”) to acquire the Pratt & Whitney Rocketdyne division (the “Rocketdyne Business”) from UTC for $550 million (the “Acquisition”). On June 10, 2013, the Federal Trade Commission (“FTC”) announced that it closed its investigation into the Acquisition under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. On June 12, 2013, we entered into an amended and restated stock and asset purchase agreement, (the “Amended and Restated Purchase Agreement”) with UTC, which amended and restated the Original Purchase Agreement, as amended. On June 14, 2013, we completed the

 

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acquisition of substantially all of the Rocketdyne Business pursuant to the Amended and Restated Purchase Agreement. The aggregate consideration to UTC was $411 million, paid in cash, which represents the initial purchase price of $550 million reduced by $55 million relating to the pending future acquisition of UTC’s 50% ownership interest of RD Amross, LLC (“RD Amross” a joint venture with NPO Energomash of Khimki, Russia which sells RD-180 engines to RD Amross), and the portion of the UTC business that markets and supports the sale of RD-180 engines (the “RDA Acquisition”). The acquisition of UTC’s 50% ownership interest of RD Amross and UTC’s related business is contingent upon certain conditions including receipt of certain Russian governmental regulatory approvals, which may not be obtained. Pursuant to the terms of the Amended and Restated Purchase Agreement, either party to such agreement may terminate the obligations to consummate the RDA Acquisition on or after June 12, 2015; provided, however, that such termination date may be extended for up to four additional periods of three months each (with the final termination date extended until June 12, 2016). Subject to the terms of Amended and Restated Purchase Agreement, in order to extend the termination date, either party may request the extension by providing written notice to the other party at least five business days prior to the termination date, provided that the requesting party must have a reasonable belief at the time such notice is given that a certain authorization for completion of the RDA Acquisition from the Russian government will be forthcoming. The purchase price was further adjusted for advance payments on contracts, capital expenditures and other net assets, and is subject further to post-closing adjustments. See Note 4 in Notes to Consolidated Financial Statements.

The Rocketdyne Business was the largest liquid rocket propulsion designer, developer, and manufacturer in the U.S. as the primary propulsion system provider to the U.S. government, specifically NASA and the DoD through United Launch Alliance (“ULA”). ULA is a joint venture of The Boeing Company (“Boeing”) and Lockheed Martin Corporation (“Lockheed Martin”) which provide spacecraft launch services to the U.S. government. The Rocketdyne Business was considered to be a leader in liquid launch propulsion and hypersonic systems. For more than 50 years, the Rocketdyne Business has set the standard in launch propulsion design, development and manufacturing. The Rocketdyne Business has powered nearly all of NASA’s human-rated launch vehicles to date and has recorded more than 1,600 space launches. The Rocketdyne Business propulsion systems have powered missions to nearly every planet in the solar system and have been a cornerstone to the U.S. Space Program since its inception. Additionally, the Rocketdyne Business propulsion systems are vital to the launch of astronauts and cargo required for space exploration and for U.S. military and commercial satellites.

We believe the Rocketdyne Business acquisition provides strategic value for the country, our customers, and our stakeholders. We anticipate that the combined enterprise will be better positioned to compete in a dynamic, highly competitive marketplace, and provide more affordable products for our customers. In addition, this transaction is expected to transform our business and provide additional growth opportunities as we build upon the complementary capabilities of each legacy company.

Our fiscal year ends on November 30 of each year. When we refer to a fiscal year, such as fiscal 2013, we are referring to the fiscal year ended on November 30 of that year. The fiscal year of our subsidiary, Aerojet Rocketdyne, ends on the last Saturday of November. As a result of the 2013 calendar, we had 53 weeks of operations in fiscal 2013 compared to 52 weeks of operations in fiscal 2012 and 2011. The additional week of operations, which occurred in the first quarter of fiscal 2013, accounted for $27.8 million in additional net sales.

We were incorporated in Ohio in 1915 and our principal executive offices are located at 2001 Aerojet Road, Rancho Cordova, CA 95742.

Our Internet website address is www.GenCorp.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 are electronically filed with, or furnished to, the SEC. We also make available on our Internet web site 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.

 

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Aerospace and Defense

Through Aerojet Rocketdyne, we are a leading technology-based designer, developer and manufacturer of aerospace and defense products and systems for the U.S. government, including the DoD and NASA, major aerospace and defense prime contractors and the commercial sector. We believe we are the only domestic provider of all four propulsion types (liquid, solid, air-breathing, and electric) for space and defense applications and we maintain leading positions in a number of the market segments that apply these technologies. Aerojet Rocketdyne is a world-recognized engineering and manufacturing company that develops and produces specialized propulsion systems for defense, space and commercial applications, as well as armament systems for precision tactical systems and munitions, and is considered a leader in liquid launch propulsion, missile defense, in-space, tactical and hypersonics propulsion systems. Through Aerojet Rocketdyne, we design, develop, and produce propulsion systems ranging in thrust size from a few grams to several hundred thousand pounds. We have participated in all of NASA’s manned and NASA Discovery missions to date. Our propulsion systems have powered spacecraft to nearly every planet in the solar system and have been a cornerstone of the U.S. space program since its inception. For more than 70 years, Aerojet Rocketdyne has been a trusted supplier of highly sophisticated products and systems for military, civil and commercial customers and we maintain strong market positions across several product lines that are mission-critical to national defense and U.S. access to space. Our revenues are diversified across multiple programs, prime contractors and end users and we believe we are well positioned to benefit from spending in the DoD priorities of access to space and missile defense. Principal customers include the DoD, NASA, Boeing, Lockheed Martin, Orbital Sciences Corporation (“Orbital”), Raytheon Company (“Raytheon”), and ULA.

Product Lines and Major Programs

Our capabilities and resources are aligned with our customers and markets and position us for long-term growth with improved efficiency. The product lines and key programs we serve are:

Tactical Systems. Aerojet Rocketdyne is a designer, developer, and producer of propulsion and warhead systems for tactical missile systems. Our commitment to researching and developing safe, effective and affordable products enables us to provide our customers with optimal tactical propulsion and warhead solutions. Our tactical products have been successfully fielded on numerous active U.S. and international weapon system platforms.

During fiscal 2013, we were competitively selected to continue production of the Tube-launched Optically Wire-guided (“TOW”) 2A/2B and Tomahawk WDU-36 warhead systems. The year also included achievement of significant production milestones including the delivery of the 2,000 th Patriot Advanced Capability-3 (“PAC-3”) shipset (1 Solid Rocket Motor and 180 Attitude Control Motors) and the 25,000 th Guided Multiple Launch Rocket Systems (“GMLRS”) rocket motor. Key research and development achievements include advances in composite case and propellant technologies that drove successful validation tests of candidate insensitive munitions technology for future upgrades to the GMLRS and Hellfire propulsion systems.

A subset of our key tactical missile propulsion systems programs is listed below:

 

Program

 

Primary

Customer

 

End Users

 

Program Description

 

Program Status

GMLRS

  Lockheed Martin   U.S. Army, U.S. Marines   Tactical solid rocket motors   Production

Javelin

  Javelin Joint Venture   U.S. Army, U.S. Marines   Tactical solid rocket motors   Production

PAC-3

  Lockheed Martin   U.S. Army   Tactical solid rocket motors and lethality enhancers  

Development/

Production

Standard Missile

  Raytheon  

U.S. Navy,

Missile Defense Agency (“MDA”)

  Tactical solid rocket motors   Production

Tactical Tomahawk

  Raytheon   U.S. Navy   Tactical solid rocket motors and warheads   Production

TOW

  Raytheon   U.S. Army, U.S. Marines   Tactical missile warheads   Production

 

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Missile Defense Systems. Aerojet Rocketdyne manufactures divert and attitude control propulsion systems and boosters. These systems power and provide directional control for critical missile defense interceptor applications. Aerojet Rocketdyne manufactures content for two of the three phases of ballistic missile flight (boost, mid-course and terminal) in support of the MDA’s priorities to develop and field an integrated, layered, ballistic missile defense system in defense against all ranges of enemy ballistic missiles in all phases of flight.

We achieved awards on several critical missile defense propulsion systems for fiscal 2013 including boosters and divert and attitude control systems (“DACS”) for the Theater High Altitude Area Defense (“THAAD”) interceptor system; Throttling DACS awards for the Standard Missile — 3 IB (“SM3”) interceptor and SM-3 IIA programs and were awarded the Development and Sustainment Contract (“DSC”) for the Exoatmospheric Kill Vehicle (“EKV”) Liquid DACS system which is part of the Ground-based Missile Defense (“GMD”) system. We also received a significant award to develop the third stage solid rocket motor which will potentially be used for the ground based strategic modernization program.

A subset of our key missile defense systems programs is listed below:

 

Program

 

Primary

Customer

 

End Users

 

Program Description

 

Program Status

EKV Liquid DACS

  Raytheon   MDA   Liquid propulsion divert and attitude control propulsion systems   Development/ Production

Hawk

  U.S. Army   U.S. Army   Solid rocket motors   Production

Standard Missile

  Raytheon   U.S. Navy, MDA   Throttling divert and attitude control systems, solid rocket motors  

Development/

Production

THAAD

  Lockheed Martin   MDA   Solid rocket motors, divert and attitude control systems  

Development/

Production

Trident II Post Boost

  Lockheed Martin   U.S. Navy   Post boost control system   Production

Defense Advanced Programs. Aerojet Rocketdyne’s defense advanced programs activity supports the entire breadth of propulsion and energetic products within the defense products portfolio by developing robust processes and technologies demanded by our customers as well as new capabilities required in next generation weapon systems. Franchise technology demonstration programs and new product development efforts are optimized to effectively transition new products and technologies to full-scale development and production within our core business units. Our capabilities include an expanded highly skilled hypersonic propulsion team with decades of experience pioneering the development of liquid and solid fueled propulsion technologies for supersonic and hypersonic systems. We maintain key positions on ground-breaking government hypersonic propulsion programs such as the Triple Target Terminator (“T3”) program, the Robust Scramjet Program and successfully completed the X-51A program for government customers including the Defense Advanced Research Projects Agency (“DARPA”) and the U.S. Air Force Research Laboratory (“AFRL”). We are also actively developing a low cost propulsion solution to support Operationally Responsive Space applications, leveraging the experience and talent of our workforce to deliver affordable small payload launch solutions to low earth orbit. Additional research and development work continues to advance the next generation of propulsion enablers in tactical, strategic, and adjacent energetic markets.

 

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A subset of our key defense advanced programs is listed below:

 

Program

 

Primary

Customer

 

End Users

 

Program Description

 

Program Status

Large Class II Tech Demo

  Air Force Nuclear Weapons Center   U.S. Air Force   Technology update of PeaceKeeper Upper Stage   Development

Leonidas Flight Motors

  Hawaii Space Flight Laboratory   U.S. Air Force   Provide first flight motors for Leonidas Launch Vehicle   Development

Robust Scramjet

  AFRL   U.S. Air Force   Hydrocarbon fueled supersonic combustion ramjet propulsion system   Development

Medium Class Stage III Tech Demo

  AFRL   U.S. Air Force   Technology update of MinuteMan III Upper Stage   Development

Solid Divert and Attitude Control System Technology Risk Reduction

  MDA   U.S. Navy   Develop solid propulsion technology for advanced kinetic kill vehicles   Development

T3

  Raytheon, Boeing   U.S. Air Force   Variable flow ducted rocket (air-breathing)   Development

Space Launch Systems. For over half a century, Aerojet Rocketdyne has been a domestic provider of launch vehicle propulsion systems to multiple prime contractors providing launch services to the DoD, NASA, and other commercial customers. Our propulsion systems have flown on every manned mission since the inception of the U.S. space program. Products include a broad market offering of both liquid propellant engines and solid rocket motors required for launch vehicle applications in the defense, civil and commercial propulsion markets. Capabilities range across the entire spectrum of product maturation from technology demonstration through development, production, and flight support operations.

Our space launch systems have a long, successful history with the DoD where we currently project strong support related to National Security Space requirements for communications, navigation, and intelligence, surveillance, and reconnaissance activities. Aerojet Rocketdyne provides 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. Additionally, we provide booster propulsion for Orbital’s Antares launch vehicle which is now providing cargo transportation services to the International Space Station (“ISS”) through the NASA Cargo Resupply Services (“CRS”) contract.

During fiscal 2013, we completed price negotiations for five major multiyear contracts with ULA supporting the EELV program, securing significant contract backlog which will be conducted over the next five plus years. This provides significant program stability during that time period. Additionally, the Antares program achieved multiple milestones including a successful vehicle Flight Readiness Firing at the Wallops Island Launch facility, a successful first launch, and a second successful demonstration cargo launch that capped Orbital Sciences Commercial Orbital Transportation Systems program, all paving the way to regular cargo transfer missions as part of NASA’s CRS contract.

 

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A subset of our key space launch systems programs is listed below:

 

Program

 

Primary

Customer

 

End Users

 

Program Description

 

Program Status

AJ-10

  ULA   Commercial   Upper stage pressure-fed liquid propellant rocket engine for ULA’s Delta II launch vehicle   Production

AJ-26

  Orbital   NASA, Commercial   Liquid propellant first stage engine for Orbital’s Antares launch vehicle   Production

AJ-62

  ULA   U.S. Air Force, Commercial, and NASA   Solid propellant thrust augmentation strap on booster for ULA’s Atlas V launch vehicle   Production

RL-10

  ULA   U.S. Air Force, Commercial, and NASA   Liquid propellant upper stage engine for ULA’s Atlas V and Delta IV launch vehicles   Production

RS-27

  ULA   Commercial   Liquid propellant first stage engine for ULA’s Delta II launch vehicle   Production

RS-68

  ULA   U.S. Air Force, Commercial, and NASA   Liquid propellant first stage engine for ULA’s Delta IV Launch Vehicle   Production

Space Advanced Programs. Aerojet Rocketdyne’s space advanced programs activity supports the entire breadth of propulsion products within its space propulsion portfolio by developing next generation propulsion solutions, robust processes and technologies demanded by our customers. Franchise technology demonstration programs and new product development efforts are featured to transition effectively our products to our core markets.

NASA Human Exploration — Aerojet Rocketdyne was awarded a contract modification for the development of the J-2X upper stage engine and for adaptation and integration of the RS-25 core stage engine to power the heavy lift Space Launch System (“SLS”). The J-2X, an upgraded and modernized version of the original Apollo moon mission engine, progressed into hot fire testing of the third development engine and continues to meet technical and performance objectives. The RS-25 core stage engines are reusable engines repurposed from the Space Shuttle program to provide a highly reliable, low cost solution for the initial SLS missions. RS-25 adaptation and integration activities met and supported the completion of the SLS preliminary design review, a key decision gate for NASA. Aerojet Rocketdyne also continued early engineering development and risk reduction for advance boosters which may replace the current SLS boosters with increased performance and payload capability. Aerojet Rocketdyne completed qualification and delivery of the reaction control thrusters for the Orion crew module, planned to be flown on a SLS program-related test flight in 2014.

NASA Commercial Crew — Aerojet Rocketdyne continued the development of propulsion and power systems for the next generation of crew vehicles that will provide human transportation to and from the ISS. Boeing’s CST-100 incorporates Aerojet Rocketdyne’s reaction control thrusters, propulsion system and propellant tanks. Sierra Nevada’s Dreamchaser utilizes Aerojet Rocketdyne’s non-hypergolic reaction control engines and the electric power subsystem. Implementation of commercial crew providers is envisioned to lower the cost of crew transportation for NASA as well as stimulate the commercial market for access to low earth orbit.

Advanced In-Space Propulsion and Power — Next generation satellites and spacecraft for commercial, NASA, and DoD missions will require higher performance and lower cost propulsion and power systems. Aerojet Rocketdyne is developing high power solar electric propulsion, green monopropellant and bi-propellant engines and systems, lower cost modular propulsion systems, and advanced solar and nuclear space power systems to support these growing markets.

 

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Additive Manufacturing — Aerojet Rocketdyne’s investment into this manufacturing technology has progressed to demonstrations for system level rocket engine tests, complex geometry performance validation during component tests, and laboratory tests to refine design safety margins. Maturation of this technology is expected to provide significant cost and schedule savings over traditional manufacturing techniques with application to all Aerojet Rocketdyne products.

A subset of our key space advanced programs is listed below:

 

Program

 

Primary

Customer

 

End Users

 

Program Description

 

Program Status

Advanced Boosters

  Dynetics, NASA   NASA   Liquid booster propulsion for NASA’s SLS   Technology

Commercial Crew Development

  Boeing, Sierra Nevada   NASA   Propulsion/Engines/Power for commercial crew vehicles   Development/ Qualification

Green Propellant Infusion Mission

  NASA   NASA   On-orbit demonstration of green propellant propulsion   Technology

High Power Solar Electric Vehicles

  NASA, U.S. Air Force   NASA, DoD, Commercial   High power solar electric propulsion module development   Technology

Hydrocarbon Booster Technology Demonstrator

  AFRL   U.S. Air Force   On-orbit demonstration of green propellant propulsion Liquid booster   Technology

J-2X

  NASA   NASA   Second stage engine for NASA’s SLS   Development

Orion

  Lockheed Martin   NASA   Propulsion systems and engines for human spaceflight system   Development/ Qualification

RS-25

  NASA   NASA   Core stage engine for NASA’s SLS   Development/ Qualification

Space Systems. Aerojet Rocketdyne is a supplier of high performance, highly reliable satellite and spacecraft propulsion products for low thrust engines and systems for domestic and international markets. Aerojet Rocketdyne is considered an industry leader in the design, development, and production of high performance electric, monopropellant and bi-propellant components, and systems. As with space launch vehicle systems, Aerojet Rocketdyne’s key satellite and spacecraft propulsion capabilities cover the entire spectrum required by its customers including requirements definition and trade studies, design and development, fabrication and assembly, test and post-delivery support.

In fiscal 2013, we received a contract award to provide arcjet electric propulsion systems to a major communications satellite provider. This represented the start of a large movement in both commercial and military satellites toward the expanded use of electric propulsion. It is anticipated that in the coming year, additional prime contractors in both the U.S. and Europe will seek to take advantage of the operational advantages of electric propulsion for their satellite bus upgrades.

We launched a new international subsidiary, European Space Propulsion (“ESP”), which is located in Belfast, Northern Ireland. This subsidiary produces monopropellant thrusters and will expand into other propulsion technologies to enable penetration into the European satellite and spacecraft propulsion market. The European market is highly geo-political and requires European country geo-return as a prerequisite for contract awards. ESP also leverages significant political support from the United Kingdom government and European Space Agency. ESP received its first contract in fiscal 2013 for 19 MR-103 monopropellant thrusters for the Formosat 7 satellite from Surrey Satellite Technology Limited.

 

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A subset of our key space systems programs is listed below:

 

Program

 

Primary

Customer

 

End Users

 

Program Description

 

Program Status

Advanced Extremely High Frequency Satellites

  Lockheed Martin   U.S. Air Force   Electric and chemical thrusters   Production

Boeing HS702MP Commercial Communications Satellite

  Boeing   Various   Electric arcjet thrusters   Development/Production

Cygnus

  Orbital   Commercial   Monopropellant thrusters   Production

Geostationary Operational Environmental Satellite R-Series

  Lockheed-Martin   NASA   Arcjet electric thrusters   Production

Global Positioning Systems

  Boeing/Lockheed Martin   U.S. Air Force   Integrated propulsion systems and thrusters   Development/ Production

Iridium NEXT

  Thales Alenia Space   Commercial   Monopropellant thrusters   Production

Space-Based Infrared System

  Lockheed-Martin   U.S. Air Force   Thrusters and tanks   Production

Our Competitive Strengths

Leadership in Propulsion — Our success is due in part to our ability to focus on the design, development and manufacture of products utilizing innovative, mission-enabling technology. 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. For example, our propulsion systems have flown on every NASA Discovery mission as well as every manned space mission since the inception of the U.S. Space Program. We also have powered nearly all of NASA’s human-rated launch vehicles to date and powered space probes to nearly every planet in the solar system and have been a cornerstone to the U.S. space program since its inception. In addition, we have been a major supplier of a wide range of propulsion products to the DoD since the 1940s when we successfully developed and produced the first jet-assisted take off rockets for U.S. aircraft during World War II. We believe that Aerojet Rocketdyne is the only domestic provider of all four propulsion types (liquid, solid, air-breathing, and electric) for space, defense and commercial applications.

Diversified and Well Balanced Portfolio — We have been and continue to be a pioneer in the development of many crucial 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. Our propulsion systems power almost all of today’s medium and large payload rocket systems. We are the sole provider of both the liquid upper and boost stage engines on the SLS, Delta IV, and Atlas V launch vehicle systems. We have further capitalized on this foundation by bringing together “solid” and “liquid” propulsion teams and “cross-pollinating” critical product features and capabilities, thus exploiting potential product line synergies that enable us to offer our customers innovative, highly advanced solutions.

High Visibility of Revenue with Multi-year Contracts and Sizable Backlog — A strong focus on our customers’ highest priorities has been a critical factor in maintaining an enduring portfolio of products throughout major market cycles. 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 completed years ago and others have been sole source contracts since inception. High renewal

 

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rates, supported by our market leading technology provide us with a highly stable business base from which to grow. Our contract backlog (funded and unfunded) was $2.5 billion as of November 30, 2013 and our funded backlog, which includes only amounts for which money has been directly appropriated by the U.S. Congress or for which a purchase order has been received from a commercial customer, totaled $1.7 billion.

Significant Barriers to Entry — Our business is characterized by significant barriers to entry including highly specialized technologies, customer emphasis on risk avoidance and a resulting reliance on existing, proven products, highly skilled workforces, the necessary infrastructure for potentially hazardous and technically sensitive work, long research and development periods, and considerable capital cost expense for necessary facilities and equipment. In conjunction with these barriers to entry, the long-term nature of government programs and associated requalification costs and/or incurred termination costs if a program is moved to another supplier limit the government’s ability to change suppliers easily.

Additionally, we benefit from significant customer funding of research and development activities, which helps us position for future long-term production contracts on government products. A substantial portion of our business, including many of our contracts with major prime contractors to the U.S. government, the DoD and NASA, also require lengthy customer certification and qualification processes, which creates significant obstacles for potential competitors. As a result, we are the sole providers on the majority of our contracts. In addition, the capture of new programs and platforms favor suppliers that have extensive industry experience and a reputation for superior performance.

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, Orbital, 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 while working for a combined total of more than a century in the rocket and missile propulsion markets. We are, in many instances, approached by multiple prime contractors in bidding processes, which is a testament to the strength of our relationships and technological leadership in the industry. We believe these long-term relationships and our reputation for performance enhance customer loyalty and provide us with key competitive advantages in winning new contracts for new programs as well as follow-on and derivative contracts for existing programs.

Competition

As a well-diversified supplier of all four propulsion types — liquid, solid, air-breathing, and electric — we believe that we are in a unique competitive position.

The nature of the markets in which we operate varies. In some market segments, the market is characterized by a few large, long-term programs, intermittent new program starts (with new buys spread further out in periods of declining budgets) and, therefore, relatively few new competitive awards. In these markets there tend to be few participants each with long-standing legacy positions. Thus, as noted above, the majority of our revenues are derived from sole source contracts where we are the long-term provider.

In other markets, the dynamics can be different, with more numerous, but smaller awards and a larger number of competitors. The basis on which we compete in the Aerospace and Defense industry varies by program, but generally is based upon technology, quality, service, and price. Although market competition in certain sectors can be intense, we believe we possess innovative and advanced propulsion and armament solutions, combined with adequate resources to continue to compete successfully.

 

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The table below lists primary participants in the propulsion market:

 

Company

 

Parent

 

Propulsion Type

 

Propulsion Application

Aerojet Rocketdyne

  GenCorp Inc.   Solid, liquid, air- breathing, electric   Launch, in-space, tactical, strategic, missile defense

Airbus Defence and Space (formerly Astrium)

  Airbus Group   Solid, liquid   In-space

Alliant Techsystems

  Alliant Techsystems Inc.   Solid, air-breathing   Launch, tactical, strategic, missile defense

Avio

  Avio S.p.A   Solid, liquid   Launch, in-space

Electron Technologies, Inc.

  L-3 Communications Corporation   Electric   In-space

Nammo Talley

  Nammo Talley   Solid   Tactical

Moog Inc.

  Moog Inc.   Liquid, electric   In-space, missile defense

Northrop Grumman Space Technology

  Northrop Grumman Corporation (“Northrop”)   Liquid   In-space

Safran

  Safran   Liquid   Launch, tactical

SpaceX

  SpaceX   Liquid   Launch, in-space

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 are seeing more opportunities for commercial in-launch and in-space business. In addition, sales to our aerospace and defense customers that provide products to international customers continue to grow. However, 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 government fiscal year (“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 Bipartisan Budget Act of 2013 set overall discretionary spending levels for GFY 2014 and eased sequestration cuts to the DoD and other federal agencies (e.g., NASA) for GFY 2014 and 2015, paving the way for an eventual agreement on GFY 2014 Appropriations for all federal agencies. In relatively short order, Congress was able to pass the Consolidated (so-called “Omnibus”) Appropriation bill for GFY 2014. The Defense portion of the bill was below the President’s requested level of funding for GFY 2014 but roughly the same as the post-sequester GFY 2013 DoD Appropriation levels. Funding for NASA was also below the President’s Budget Request for GFY 2014 but up from the post-sequester GFY 2013 NASA Appropriation level.

Despite overall U.S. government budget spending pressures, we believe we are well-positioned to benefit from spending in DoD and NASA priority areas. This view reflects the DoD’s strategic guidance report released in January 2012 which affirms support for many of our core programs and points toward continued DoD investment in: access to space — in order to ensure access to this highly congested and contested “global commons”; missile defense — in order to protect the homeland, counter weapons of mass destruction and enhance space-based capabilities; and power projection by tactical missile systems.

During 2013, Congress began consideration of a new NASA Authorization Act, authorizing NASA funding for the next several years, starting with GFY 2014. Ultimately, Congress did not complete action on a new NASA Authorization in 2013, but will likely resume consideration in 2014. In 2010, the NASA Authorization

 

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Act, which remains in effect, impacted GFYs 2011-2013. NASA has identified the SLS program as one of its top priorities in the NASA portion of the GFY 2014 President’s Budget Request. The SLS program also enjoys 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 and upper stage 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 are now dependent on Russian Soyuz flights for access to the ISS for the better part of this decade. NASA has indicated that it is working to re-establish U.S. manned space capability as soon as possible through development of the commercial cargo and crew ISS resupply capability and the heavy lift SLS designed for manned deep space exploration. In both instances, we have significant propulsion content.

Major Customers

As a supplier to the Aerospace and Defense industry, we align ourselves with prime contractors on a project-by-project basis. We believe that our position as a merchant supplier has helped us become a trusted partner to our customers, enabling us to maintain strong, long-term relationships with a variety of prime contractors. Under each of our contracts, we act either as a prime contractor, where we sell directly to the end user, or as a subcontractor, where we sell our products to other prime contractors. The principal end user customers of our products and technologies are agencies of the U.S. government.

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

 

     Year Ended  
     2013     2012     2011  

Raytheon

     32     37     36

Lockheed Martin

     23        32        28   

ULA

     18        *        *   

 

 

*

Less than 10%.

Direct sales to the U.S. government and its agencies, or government customers, and indirect sales to U.S. government customers via direct sales to prime contractors accounted for a total of approximately 95% of sales in fiscal 2013. Sales to our aerospace and defense customers that provide to international customers continue to grow. The following are percentages of net sales by principal end user in fiscal 2013:

 

U.S. Air Force

     21

MDA

     20   

NASA

     19   

U.S. Army

     18   

U.S. Navy

     15   

Other U.S. government

     2   
  

 

 

 

Total U.S. government customers

     95   

Other customers

     5   
  

 

 

 

Total

     100
  

 

 

 

Contract Types

Under each of its contracts, Aerojet Rocketdyne acts either as a prime contractor, where it sells directly to the end user, or as a subcontractor, selling its products to other prime contractors. 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” or “cost-reimbursable.” During fiscal 2013, approximately 46% of our net sales were from fixed-price contracts, 49% from cost-reimbursable contracts, and 5% from other sales including commercial contracts and real estate activities.

 

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Fixed-price contracts are typically (i) fixed-price, (ii) fixed-price-incentive fee, or (iii) fixed-price level of effort contracts. For 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 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 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 to contractual targets for factors such as cost, performance, quality, and schedule.

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 government contracting, including various procurement, import and export, security, contract pricing and cost, contract termination and adjustments, mandatory disclosure, and audit requirements. A contractor’s 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 government contracting or subcontracting. In addition, government contractors are also 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 a contractor’s contract performance, compliance with applicable laws, regulations, and standards as well as the review of the adequacy of a contractor’s accounting systems, purchasing systems, property management systems, estimating systems, earned value management systems, and material management and accounting system.

Regulations for U.S. government contracts provide for the cost of restructuring activities occurring after a business combination as unallowable costs unless, we can demonstrate through an external restructure cost and savings proposal that the savings as a result of the business combination will be at least twice the external restructuring costs.

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.

 

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Backlog

A summary of our backlog is as follows:

 

     As of November 30,  
         2013              2012      
     (In millions)  

Funded backlog

   $ 1,664       $ 1,018   

Unfunded backlog

     859         508   
  

 

 

    

 

 

 

Total contract backlog

   $ 2,523       $ 1,526   
  

 

 

    

 

 

 

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. Of our November 30, 2013 total contract backlog, approximately 51%, or approximately $1,293 million, is expected to be filled within one year.

Seasonality

Appropriations bills for both DoD and NASA have become increasingly difficult for Congress to pass by the start of the GFY resulting in funding delays to many of our customers and, in turn, delays in contract awards received by us. This generally leads to a decrease in the number of new and follow-on awards in the first half of the fiscal year and an increase during the second half, which translate to varying levels of uncertainty in the timing of annual awards received by Aerojet Rocketdyne.

Research and Development

We view research and development efforts as critical to maintaining our leadership position in markets in which we compete. We maintain an active research and development effort supported primarily by customer funding. We believe that some customer-funded research and development expenditures that are subject to contract specifications may become key programs in the future. We believe customer-funded research and development activities are vital to our ability to compete for contracts and to enhance our technology base and future revenue growth.

Our company-funded research and development 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.

The following table summarizes our research and development expenditures during the past three fiscal years:

 

     Year Ended  
     2013      2012      2011  
     (In millions)  

Customer-funded

   $ 339       $ 272       $ 276   

Company-funded

     43         30         27   
  

 

 

    

 

 

    

 

 

 

Total research and development expenditures

   $ 382       $ 302       $ 303   
  

 

 

    

 

 

    

 

 

 

Suppliers, Raw Materials and Seasonality

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.

 

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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. We closely monitor sources of supply to ensure adequate raw materials and other supplies needed in our manufacturing processes are available. 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 single source that supplies the entire domestic solid propellant industry and actual pricing is based on the total industry demand. The slowdown and final close out of the Space Shuttle Program has reduced the total national demand, resulting in significant unit price increases. Pricing has stabilized with recent decisions from NASA to continue the Space Launch System Heavy Lift Vehicle program and the DoD to require the use of domestic ammonium perchlorate. 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 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, primarily steel and aluminum. The pricing of titanium mill products have reduced recently but remain well above historical levels. Additionally, we may not be able to continue to negotiate with our customers for economic and/or price adjustment clauses tied to 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.

Aerojet Rocketdyne’s business is not subject to predictable seasonality. Primary factors affecting the timing of Aerojet Rocketdyne’s sales include the timing of government awards, the availability of U.S. government funding, contractual product delivery requirements, customer acceptances, and regulatory issues.

Intellectual Property

Where appropriate, Aerojet Rocketdyne obtains patents in the U.S. and other countries for new and useful processes, machines, manufacture or composition of matter, or any new and useful improvements thereof relating to its products and services. We use patents selectively both (i) to protect from unauthorized third party making, using, selling, offering to sell and importing the claimed inventions of the patents, where the inventions might be accessible to competitors, such as mechanical designs or structures and (ii) to establish that we have made inventions in particular areas of relevant technologies and thus can prevent competitors from successfully claiming exclusive rights in the claimed inventions. A patent is maintained as long as the underlying invention has value in the market which we compete. A patented invention incorporated into a product sold will typically be maintained to its expiration, which typically is approximately 20 years. We also rely on trade secret protection for financial, technical and personnel information that provides an economic competitive advantage in the markets in which we compete. Trade secrets that are protected under applicable state and federal laws are maintained in perpetuity. We rely more extensively on trade secrets to protect specific information whose detail are not readily accessible to competitors, such as business strategies, manufacturing procedures, and personnel information. 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 approximately 11,900 acres of land in the Sacramento metropolitan area which we refer to as the Sacramento Land. Acquired in the early 1950s for our aerospace and defense operations, there were large portions used solely to provide safe buffer zones around hazardous operations. Modern changes in propulsion tech-

 

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nology 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 reposition this excess Sacramento Land, re-entitle it for new uses, and explore various opportunities to optimize its value.

Approximately 6,000 acres have been deemed excess, and we are in the process of entitling this excess land for new development opportunities under the brand name “Easton”. Within Easton, we currently have approximately 1,450 acres that are fully entitled and approximately 2,940 acres have received “limited entitlements.” Our entitlement efforts are expected to increase the land value over its current value. The term “entitlements” is generally used to denote the 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.

Easton Development Company, LLC continues to execute entitlement and pre-development activities, and to explore how to maximize value from Easton. Value enhancement may include outright sales, and/or joint ventures with real estate developers, residential builders, and/or other third parties. Those parcels of land that have obtained the necessary entitlements for development or are otherwise suitable for sale were transferred to this subsidiary. Additional land may be transferred in the future as these or other requirements are achieved.

Easton is located 15 miles east of downtown Sacramento, California along U.S. Highway 50, a key growth corridor in the region. We believe Easton has several competitive advantages over other areas, including several miles of freeway accessible frontage, one of the largest single-owner land tracts suitable for development in the Sacramento region, and desirable “in-fill” location surrounded by residential and business properties. The master plan reflects our efforts to make Easton one of the finest master-planned communities in the country. Easton will include a broad range of housing, office, industrial, retail, and recreational uses. This broad range of land uses will ensure long-term value enhancement of our excess land.

We are continuing to work with the City of Folsom on completing the balance of the required entitlements for the Hillsborough at Easton project, including the final finance program, total impact fees and development agreement. These efforts were substantially completed in 2013, and the finance plan and total impact fees were approved by the Folsom City Council in late January 2014. These terms will be incorporated in final approvals by the Folsom City Council and are expected in early 2014.

In 2013, we also continued our efforts to entitle our remaining Easton project with the City of Rancho Cordova, Westborough at Easton, which comprises 1,659 acres. These efforts will continue in 2014. During 2013, we also made important strides in discussions with the City of Rancho Cordova regarding total impact fees and final terms surrounding a final development agreement for the Rio del Oro at Easton project.

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. We believe the Sacramento area demographics and the long-term real estate market fundamentals support our objective of creating value through new entitlements and the creation of Easton.

 

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The Sacramento Land, including Easton, is summarized below (in acres):

 

Easton Projects

  Environmentally
Unrestricted
    Environmentally
Restricted(1)
    Total     Entitled(2)     Limited
Entitlements(3)
 

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

    532        97        629               629   

Office Park and Auto Mall

    47        8        55        55          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Easton acreage

    4,827        1,217        6,044        1,447        2,938   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operations land(4)

    24        5,179        5,203       

Land available for future entitlement(5)

    447        242        689       
 

 

 

   

 

 

   

 

 

     

Total Sacramento Land

    5,298        6,638        11,936       
 

 

 

   

 

 

   

 

 

     

 

 

(1)

The environmentally restricted acreage described above is 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 term “entitled” is generally used to denote the set of local regulatory approvals required to allow land to be zoned for requested uses. Required regulatory approvals vary with each land zoning proposal and may include permits, general plan amendments, 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 (“USFWS”), and others prior to construction.

 

(3)

The term “limited entitlements” is generally used to denote when a project receives a portion, but not all of the set of regulatory approvals required to allow land to be zoned for requested uses, as described in Item 2 above.

 

(4)

We believe that the operations land is more than adequate for our long-term needs. As we reassess needs in the future, portions of this land may become available for entitlement.

 

(5)

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 370,000 square feet of office space in Sacramento to various third parties. These leasing activities generated $5.7 million in revenue in fiscal 2013.

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

 

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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 in compliance with all applicable environmental laws and regulations.

A summary of our environmental reserves, recoverable amounts, and range of liability as of November 30, 2013 is presented below:

 

     Reserve      Recoverable Amount      Estimated Range
of Liability
 
     (In millions)  

Sacramento

   $ 128.0       $ 88.2       $ 128.0 – $199.5   

Baldwin Park Operable Unit

     26.9         18.5         26.9 – 57.3   

Other Aerojet Rocketdyne sites

     8.2         7.6         8.2 – 23.2   

Other sites

     8.2         0.8         8.2 – 9.8   
  

 

 

    

 

 

    

 

 

 

Total

   $ 171.3       $ 115.1       $ 171.3 – $289.8   
  

 

 

    

 

 

    

 

 

 

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 costs are allowable and allocable as reimbursable general and administrative costs allocated to our contracts with the U.S. government or reimbursable by Northrop, subject to annual and cumulative limitations. See Note 8(d) in Notes to Consolidated Financial Statements for additional information.

On January 12, 1999, Aerojet Rocketdyne and the U.S. government implemented the October 1997 Agreement in Principle (“Global Settlement”) resolving certain prior environmental and facility disagreements, with retroactive effect to December 1, 1998. Under the Global Settlement, Aerojet Rocketdyne and the U.S. government resolved disagreements about an appropriate cost-sharing ratio with respect to the cleanup costs of the environmental contamination at the Sacramento and Azusa sites. The Global Settlement cost-sharing ratio does not have a defined term over which costs will be recovered. Additionally, in conjunction with the sale of the EIS business in 2001, Aerojet Rocketdyne 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 annual and cumulative limitations. As of November 30, 2013, $72.0 million remained for future cost reimbursements from Northrop and the current annual billing limitation to Northrop is $6.0 million.

Pursuant to the Global Settlement, prior to the third quarter of fiscal 2010, approximately 12% of environmental costs related to Aerojet Rocketdyne’s Sacramento site and its former Azusa site were charged to the consolidated statements of operations. Subsequent to the third quarter of fiscal 2010, because our estimated environmental costs have reached the reimbursement ceiling under the Northrop Agreement, approximately 37% of such costs will not be reimbursable and were therefore directly charged to the consolidated statements of operations. However, we are seeking to amend our agreement with the U.S. government to increase the amount allocable to U.S. government contracts. There can be no assurances that we will be successful in this pursuit.

Allowable environmental costs are charged to our contracts as the costs are incurred. Aerojet Rocketdyne’s mix of contracts can affect the actual reimbursement made by the U.S. government. Because these costs are recovered through forward-pricing arrangements, the ability of Aerojet Rocketdyne to continue recovering these costs from the U.S. government depends on Aerojet Rocketdyne’s sustained business volume under U.S. government contracts and programs and the relative size of Aerojet Rocketdyne’s commercial business. Under the Global Settlement agreement, environmental costs are allocable to the newly acquired business. Additionally, we are reviewing the percentage of Global Settlement environmental costs allocable to our Aerojet Rocketdyne business and Northrop. Any change in the percentage allocable will require approval from the U.S. government and if received, this change may materially and favorably affect our results of operations in the period received along with future periods.

The inclusion of such environmental costs in our contracts with the U.S. government does impact our competitive pricing and earnings. We believe that this impact is partially mitigated by driving improvements and efficiencies across our operations and growing our manufacturing base as well as our ability to deliver innovative and quality products to our customers.

 

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Under existing U.S. environmental laws, a Potentially Responsible Party (“PRP”) is jointly and severally liable, and therefore we are potentially liable to the 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 Environmental Protection Agency 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 timing of cash payments is not fixed or reliably determinable.

We did not incur material capital expenditures for environmental control facilities in fiscal 2013 nor do we anticipate any material capital expenditures in fiscal 2014 and 2015. 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 November 30, 2013, 14% of our 5,386 employees were covered by collective bargaining agreements. 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 are seeing more opportunities for commercial in-launch and in-space business. In addition, sales to our aerospace and defense customers that provide products to international customers continue to grow. However, 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.

The Bipartisan Budget Act of 2013 set overall discretionary spending levels for GFY 2014 and eased sequestration cuts to the DoD and other federal agencies (e.g., NASA) for GFY 2014 and 2015, paving the way for an eventual agreement on GFY 2014 Appropriations for all federal agencies. In relatively short order, Congress was able to pass the Consolidated (so-called “Omnibus”) Appropriation bill for GFY 2014. The Defense portion of the bill was below the President’s requested level of funding for GFY 2014 but roughly the same as the post-sequester GFY 2013 DoD Appropriation levels. Funding for NASA was also below the President’s Budget Request for GFY 2014 but up from the post-sequester GFY 2013 NASA Appropriation level.

Despite overall U.S. government budget spending pressures, we believe we are well-positioned to benefit from spending in DoD and NASA priority areas. This view reflects the DoD’s strategic guidance report released in January 2012 which affirms support for many of our core programs and points toward continued DoD investment in: access to space — in order to ensure access to this highly congested and contested “global commons”; missile defense — in order to protect the homeland, counter weapons of mass destruction and enhance space-based capabilities; and power projection by tactical missile systems.

During 2013, Congress began consideration of a new NASA Authorization Act, authorizing NASA funding for the next several years, starting with GFY 2014. Ultimately, Congress did not complete action on a new

 

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NASA Authorization in 2013, but will likely resume consideration in 2014. In 2010, the NASA Authorization Act, which remains in effect, impacted GFYs 2011-2013. NASA has identified the SLS program as one of its top priorities in the NASA portion of the GFY 2014 President’s Budget Request. The SLS program also enjoys 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 and upper stage 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 are now dependent on Russian Soyuz flights for access to the ISS for the better part of this decade. NASA has indicated that it is working to re-establish U.S. manned space capability as soon as possible through development of the commercial cargo and crew ISS resupply capability and the heavy lift SLS designed for manned deep space exploration. In both instances, we have significant propulsion content.

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 95% of our total net sales in fiscal 2013. 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.

Our business could be adversely affected by a negative audit by the U.S. government.

U.S. government agencies, including the DCAA and various agency Inspectors General, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure, and compliance with applicable laws, regulations, and standards. The U.S. government also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s accounting systems, purchasing systems, property management systems, estimating systems, earned value management systems, and material management system. Any costs found to be misclassified may be subject to repayment. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or prohibition from doing business with the U.S. government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.

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 2013, approximately 46% 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 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 2013, approximately 49% 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, we will not be reimbursed for those costs. Cost overruns may adversely affect our financial performance and our ability to win new contracts.

 

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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 suppliers could result in 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. Many of our competitors have financial, technical, production, and other resources substantially greater than ours. Although the downsizing of the defense industry in the early 1990s resulted in a reduction in the aggregate number of competitors, the consolidation has also strengthened the capabilities of some of the remaining competitors. 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 its contractors and subcontractors as part of its risk assessment process associated with 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 government contractor or subcontractor would be impaired.

 

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Aerojet Rocketdyne’s international sales are subject to applicable laws relating to export controls, the violation of which could adversely affect its operations.

A portion of the Aerojet Rocketdyne activities are subject to export control regulation by the U.S. Department of State under the U.S. Arms Export Control Act and International Traffic in Arms Regulations (“ITAR”). The export of certain defense-related products, hardware, software, services and technical data is regulated by the State Department’s Office of Defense Trade Controls Compliance (“DTCC”) under ITAR. DTCC administers the State Department’s authority under ITAR to impose civil penalties and other administrative sanctions for violations, including debarment from engaging in the export of defense articles or defense services. Violations of ITAR could result in significant sanctions including fines, more onerous compliance requirements, debarments from export privileges or loss of authorizations needed to conduct aspects of the Aerojet Rocketdyne’s international business.

In November 2011, DTCC informed UTC that it considers certain of UTC’s voluntary disclosures filed since 2005 to reflect deficiencies warranting penalties and sanctions. On June 28, 2012, UTC entered into a Consent Agreement (the “UTC Consent Agreement”) with DTCC to resolve a Proposed Charging Letter that references approximately 45 of UTC’s previous disclosures. The UTC Consent Agreement, which applies to the Rocketdyne Business, has a four-year term, and provides that UTC will: (1) pay a civil penalty of up to $55 million; (2) appoint, subject to DTCC approval, an outside special compliance official to oversee the compliance by UTC and its subsidiaries and divisions, including the Rocketdyne Business, with the UTC Consent Agreement and ITAR; (3) continue and undertake additional remedial actions to strengthen ITAR compliance, with emphasis on human resources and organization, training, automation, and security of electronic data; and (4) sponsor two outside ITAR compliance audits for UTC and its subsidiaries and divisions, including the Rocketdyne Business, during the term of the UTC Consent Agreement.

In connection with the Acquisition, the DTCC agreed to release the Rocketdyne Business from the UTC Consent Agreement upon consummation of the Acquisition on the condition that we agreed to provide to the DTCC (i) our plan to integrate the Rocketdyne Business into our ITAR compliance program and (ii) an audit of the integration one year after closing the Acquisition. Further, UTC has agreed to reimburse us for any and all costs we incur to comply with these requirements. In connection with the closing of the Acquisition, we provided to the DTCC a letter committing to the DTCC’s conditions. However, there can be no assurance that we will be successful in integrating the Rocketdyne Business into our ITAR compliance program or to prevent any further ITAR violations. A future violation of ITAR could materially adversely affect our business, financial condition and results of operations.

The acquisition of the 50% ownership of RD Amross is subject to a number of conditions which could delay or materially adversely affect the timing of its completion, or prevent it from occurring.

On June 12, 2013, GenCorp and UTC entered into the Amended and Restated Purchase Agreement, which amended and restated the Original Purchase Agreement, pursuant to which GenCorp and UTC agreed to the Acquisition, subject to the terms and conditions therein. The Amended and Restated Purchase Agreement modified the Original Purchase Agreement to provide, among other things, that (i) GenCorp is not obligated to acquire the 50% membership interest of RD Amross, a Delaware limited liability company owned by UTC or the portion of the UTC business that markets and supports the sale of RD 180 engines (the “RDA Acquisition”) until certain conditions have been met, and (ii) $55 million of the Acquisition purchase price shall be payable to UTC upon such time as the RDA Acquisition may occur. Pursuant to the terms of the Amended and Restated Purchase Agreement, either party to such agreement may terminate the obligations to consummate the RDA Acquisition on or after June 12, 2015; provided, however, that such termination date may be extended for up to four additional periods of three months each (with the final termination date extended until June 12, 2016). Subject to the terms of Amended and Restated Purchase Agreement, in order to extend the termination date, either party may request the extension by providing written notice to the other party at least five business days prior to the termination date, provided that the requesting party must have a reasonable belief at the time such notice is given that a certain authorization for completion of the RDA Acquisition from the Russian government will be forthcoming.

In addition, RD Amross is the subject of an investigation by the FTC into the exclusivity arrangements relating to the sales and purchases of the RD180 engine between RD Amross and its customer, ULA. Orbital has also

 

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sued RD Amross and ULA in the Eastern District of Virginia, Orbital Sciences Corporation v. United Launch Alliance, LLC and RD Amross, LLC, Case No. 1:13CV753-LMB, alleging unfair competition and restraint of trade based on those exclusivity arrangements. Orbital seeks a permanent injunction against the exclusivity arrangements and alleges damages of at least $515 million, which it is seeking to treble up to $1.5 billion. Under the Amended and Restated Purchase Agreement, we have received a limited indemnity from UTC for the FTC investigation and Orbital lawsuit. If GenCorp completes the acquisition of RD Amross, an adverse outcome in either or both of these proceedings that results in liability in excess of the indemnification coverage under the Amended and Restated Purchase Agreement could have a material adverse effect on our operating results, financial condition, and/or cash flows.

There are a number of risks and uncertainties relating to the RDA Acquisition. The RDA Acquisition may not be consummated in the time frame or manner currently anticipated, if at all, including the receipt of certain Russian governmental regulatory approvals. There can be no assurance that such approvals will be obtained.

We may face integration difficulties and may be unable to integrate the Rocketdyne Business into our existing operations successfully or realize the anticipated benefits of the Acquisition.

We have devoted and will continue to devote significant management attention and resources to integrating the operations and business practices of the Rocketdyne Business with our existing operations and business practices. Potential difficulties we may encounter as part of the integration process include the following:

 

   

the inability to successfully integrate the Rocketdyne Business in a manner that permits us to achieve the full revenue and other benefits anticipated to result from the Acquisition;

 

   

complexities associated with managing the businesses, including difficulty addressing possible differences in corporate cultures and management philosophies and the challenge of integrating complex systems, technology, networks and other assets of each of the companies in a seamless manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies;

 

   

potential unknown liabilities not covered by indemnifications and unforeseen increased expenses or delays associated with the Acquisition;

 

   

the inability to implement effective internal controls, procedures and policies for the Rocketdyne Business as required by the Sarbanes-Oxley Act of 2002 within the time periods prescribed thereby;

 

   

the inability to implement effectively our new enterprise resource planning (“ERP”) system with respect to the Rocketdyne Business;

 

   

negotiations concerning possible modifications to the Rocketdyne Business’s contracts as a result of the Acquisition;

 

   

diversion of the attention of our management and the management of the Rocketdyne Business; and

 

   

the disruption of, or the loss of momentum in, ongoing operations or inconsistencies in standards, controls, procedures and policies.

These potential difficulties could adversely affect our ability to maintain relationships with customers, suppliers, employees and other constituencies and the ability to achieve the anticipated benefits of the Acquisition, and could reduce our earnings or otherwise adversely affect our operations and our financial results.

Our ability to operate our business effectively may suffer if we do not in a timely and cost effective manner establish our own financial, administrative, and other support functions, related to the acquisition of the Rocketdyne Business and we cannot assure you that the transitional services UTC agreed to provide us will be sufficient for our needs.

In connection with the acquisition of the Rocketdyne Business, we have entered into a transition services agreement with UTC under which UTC is providing certain transitional services to us, including supply chain, information technology, accounting, human resources, treasury, and other services for a period of time. These services may not be sufficient to meet our needs. After our agreement with UTC expires, if we have not established our own support services related to the Acquisition, we may not be able to obtain these services at as favorable prices or on as favorable terms, if at all.

 

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Any failure or significant downtime in UTC’s financial, administrative, or other support systems during the transitional period could negatively impact our results of operations or prevent us from paying our suppliers and employees, or performing administrative or other services on a timely basis, which could negatively affect our results of operations.

Our future results could suffer if we cannot effectively manage our expanded operations as a result of the Acquisition.

The size of our operations has increased significantly following the Acquisition. Our future success depends, in part, upon our ability to manage the expanded operations, which will pose substantial challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurance that we will be successful or that we will realize any operating efficiencies, cost savings, revenue enhancements or other benefits currently anticipated from the Acquisition.

We have incurred substantial expenses related to the Acquisition and may incur significant expenses in the future related to the integration of the Rocketdyne Business.

We have already incurred substantial expenses in connection with the Acquisition of the Rocketdyne Business. We have incurred $31.6 million of expenses related to the Acquisition through November 30, 2013. There are a large number of processes, policies, procedures, operations, technologies and systems that must be integrated, including purchasing, accounting and finance, sales, payroll, pricing, marketing and benefits. While we have assumed that a certain level of expenses will be incurred, there are many factors beyond our control that could affect the total amount or the timing of the integration expenses. Moreover, many of the expenses that will be incurred are, by their nature, difficult to estimate. These integration expenses may result in us taking significant charges against earnings in future periods related to the Acquisition, and the amount and timing of such charges are uncertain at present.

The increase in our leverage and debt service obligations as a result of the Acquisition may adversely affect our financial condition and results of operations.

We have incurred additional indebtedness in order to finance the Acquisition. On January 28, 2013, we issued $460.0 million in aggregate principal amount of our 7.125% Second-Priority Senior Secured Notes (“7  1 / 8 % Notes”). The 7  1 / 8 % Notes were sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and outside the U.S. in accordance with Regulation S under the Securities Act. We used the net proceeds of the 7  1 / 8 % Notes offering to fund, in part, the Acquisition, and to pay related fees and expenses. See Note 6 in Notes to Consolidated Financial Statements.

Following the Acquisition, we have $699.2 million of outstanding indebtedness as of November 30, 2013, an increase of $450.5 million as compared with our level of outstanding indebtedness as of November 30, 2012. Our maintenance of higher levels of indebtedness could have adverse consequences including impairing our ability to obtain additional financing in the future.

Our ability to meet our expenses and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. Furthermore, our operations may not generate sufficient cash flows to enable us to meet our expenses and service our debt. As a result, we may need to enter into new financing arrangements to obtain the necessary funds. If we determine that it is necessary to seek additional funding for any reason, we may not be able to obtain such funding or, if funding is available, obtain it on acceptable terms. If we fail to make a payment on our debt, we could be in default on such debt, and this default could cause us to be in default on our other outstanding indebtedness.

 

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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 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, 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 would be adversely impacted in the event of a failure of our information technology infrastructure or adversely impacted by a successful cyber-attack.

We rely upon the capacity, reliability and security of our information technology hardware and software infrastructure and our ability to expand and update this infrastructure in response to our changing needs. We are constantly updating our information technology infrastructure. Any failure to manage, expand and update our information technology infrastructure or any failure in the operation of this infrastructure could harm our business.

Despite our implementation of security measures, our systems are vulnerable to damages from cyber-attacks, computer viruses, natural disasters, unauthorized access and other similar disruptions. Any system failure, successful cyber-attack, accident or security breach could result in disruptions to our operations. To the extent that any disruptions or security breach results in a loss or damage to our data, inappropriate disclosure of confidential information, or negative publicity, it could harm our business. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

 

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The integration of the Rocketdyne Business into our ERP system may adversely affect our business and results of operations or the effectiveness of internal control over financial reporting.

ERP integrations are complex and very time-consuming projects that involve substantial expenditures on system software and activities. If we do not effectively integrate the ERP system or if the system does not operate as intended, it could adversely affect financial reporting systems, our ability to produce financial reports, and/or the effectiveness of our internal controls over financial reporting. The integration of the Rocketdyne Business into our ERP solution is scheduled to be complete by January 1, 2015. Any extension beyond January 1, 2015 will result in us incurring additional implementation costs and require fees be paid to UTC for additional transitional services costs.

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 or explosion of dangerous materials used in our business could disrupt our operations and could adversely affect our financial results.

Our business operations involve the handling and production of potentially explosive materials and other dangerous chemicals, including materials used in rocket propulsion and explosive devices. Despite our use of specialized facilities to handle dangerous materials and intensive employee training programs, the handling and production 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 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 or fire were to occur. Any release 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.

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 single source that supplies the entire domestic solid propellant industry and actual pricing is based on the total industry demand. The slowdown and final close out of the Space Shuttle Program has reduced the total national demand, resulting in significant unit price increases. Pricing has stabilized with recent decisions from NASA to continue the Space Launch System Heavy Lift Vehicle program and the DoD to require the use of domestic ammonium perchlorate. In the majority of our contracts, we anticipated this price increase and incorporated abnormal escalation pricing language into our proposals and contracts.

 

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We are also impacted, as is the rest of the industry, by fluctuations in the 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, primarily steel and aluminum. The schedules and pricing of titanium mill products have reduced recently but remain well above historical levels. Additionally, we may not be able to continue to negotiate with our customers for economic and/or price adjustment clauses tied to 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.

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.

In November 2008, we decided to amend the defined benefit pension and benefits restoration plans to freeze future accruals under such plans. Effective February 1, 2009 and July 31, 2009, future benefit accruals for non-collective bargaining-unit employees and collective bargaining-unit employees were discontinued, respectively.

As of the last measurement date at November 30, 2013, our total defined benefit pension plan assets and unfunded pension obligation for our tax-qualified pension plan were approximately $1,258.4 million and $261.7 million, respectively. We do not expect to make any significant cash contributions to our government contractor business segment tax-qualified defined benefit pension plan until fiscal 2015, which are recoverable through our U.S government contracts (see below). Additionally, we do not expect to make any significant cash contributions to the GenCorp tax-qualified defined benefit pension plan until fiscal 2018 or later, which are not recoverable through our U.S. government contracts.

Further, with the Office of Federal Procurement Policy issuance of the final rule harmonizing Cost Accounting Standard (“CAS”) 412, Composition and Measurement of Pension Cost , and CAS 413, Adjustment and Allocation of Pension Cost , with the Pension Protection Act (the “PPA”), we will recover portions of any required pension funding through our government contracts. Approximately 91% of our unfunded pension benefit obligation as of November 30, 2013 is related to our government contracting Aerospace and Defense segment.

The PPA requires underfunded pension plans to improve their funding ratios based on the funded status of the plan as of specified measurement dates through contributions or application of prepayment credits. As of November 30, 2013, we have accumulated $30.6 million in prepayment credits as a result of advanced funding.

On July 6, 2012, the Moving Ahead for Progress in the 21st Century Act (“MAP-21”) was signed into law by the U.S. government. MAP-21, in part, provides temporary relief for employers who sponsor defined benefit pension plans related to funding contributions under the Employee Retirement Income Security Act of 1974. Specifically, MAP-21 implemented a 25-year average interest rate corridor around the 24 month interest rate used for purposes of determining minimum funding obligations. This relief is expected to defer cash contributions until fiscal 2015.

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 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.

The level of returns on retirement benefit plan assets, changes in interest rates, changes in legislation, and other factors affects our financial results.

The timing of recognition of pension expense or income in our financial statements differs from the timing of the required pension funding under PPA or the amount of funding that can be recorded in our overhead rates

 

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through our government contracting business. 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 plan expense for the following year are the discount rate and expected long-term rate of return on plan assets. Our pension expense or income can also be affected by legislation and other government regulatory actions.

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 November 30, 2013, the aggregate range of our estimated future environmental obligations was $171.3 million to $289.8 million and the accrued amount was $171.3 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. 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 costs are allowed to be included in our contracts with the U.S. government or reimbursable by Northrop. Prior to the third quarter of fiscal 2010, approximately 12% of environmental reserve adjustments related to our Sacramento site and our former Azusa site were charged to the consolidated statements of operations. Subsequent to the third quarter of fiscal 2010, because we reached the reimbursement ceiling under the Northrop Agreement on an accrual basis, approximately 37% of environmental reserve adjustments are expensed to the consolidated statements of operations. We are seeking to amend our agreement with the U.S. government to increase the amount allocable to our U.S. government contracts; however, there can be no assurances that we will be successful in this pursuit.

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.

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 and local 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

 

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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.

We are from time to time subject to significant litigation, the outcome of which could adversely affect our financial results.

We and our subsidiaries are subject to material litigation. We may be unsuccessful in defending or pursuing these lawsuits or claims. Regardless of the outcome, litigation can be very costly and can divert management’s efforts. Adverse outcomes in litigation could have a material 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, and 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.

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.

 

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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 November 30, 2013, we had $699.2 million of debt. 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, 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 under our senior credit facility entered into on November 18, 2011 (the “Senior Credit Facility”) with the lenders identified therein and Wells Fargo Bank, National Association, as administrative agent, which would, if not waived by the lenders which likely would come with substantial cost, accelerate the payment of our debt. A payment default under the Senior Credit Facility could result in cross defaults on our 7  1 / 8 % Notes and our 4.0625% Convertible Subordinated Debentures (“4  1 / 16 % Debentures”).

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;

 

   

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.

 

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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 November 30, 2013. 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 also result in an event of default that, if not cured or waived, could result in the acceleration of the Senior Credit Facility, the 7  1 / 8 % Notes, and the 4  1 / 16 % Debentures. 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 7  1 / 8 % Notes and 4  1 / 16 % Debentures. We have limited collateral available for additional financing due to the fact that our indebtedness under the Senior Credit Facility is secured by (i) all equity interests owned or held by the Company, including interests in Easton and 66% of the voting stock (and 100% of the non-voting stock) of all present and future first-tier foreign subsidiaries of the Company and Aerojet Rocketdyne and (ii) substantially all of the tangible and intangible personal property and assets of the Company. In addition, our indebtedness under the Senior Credit Facility is secured by certain real property owned by the Company located in Orange, Virginia and Redmond, Washington. Except for certain real property located in Canoga Park, California acquired in connection with the Acquisition, the Company’s real property located in California, including the real estate holdings of Easton, is excluded from the collateral securing the Senior Credit Facility.

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;

 

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local real estate market conditions;

 

   

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 of the Fine Chemicals and GDX Automotive businesses in fiscal 2005 and fiscal 2004, respectively, we have incurred and may incur additional costs, including costs related to the closure of a manufacturing facility in Chartres, France. As part of these and other 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 November 30, 2013, 14% of our 5,386 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 property may be made from time to time, which may result in variability in our operating results and cash flows.

 

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Failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act of 2002 could negatively impact the market price of our common stock. “Out of period” adjustments could require us to restate or revise previously issued financial statements.

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 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, out of period adjustments to our 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 out of period adjustment to our financial statements is material and whether such adjustments, individually or in the aggregate, would require us to restate or revise our financial statements for previous periods. Under SAB 99, companies are required to apply quantitative and qualitative factors to determine the “materiality” of particular adjustments. We recorded out of period adjustments in fiscal 2013 and other prior periods, and in each instance determined that the adjustments were not material to the period in which the error originated or was corrected. In the future we may identify further out of period adjustments impacting our interim or annual financial statements. Depending upon the complete qualitative and quantitative analysis, this could result in us restating or revising previously issued 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

GenCorp Inc.

2001 Aerojet Road

Rancho Cordova, California 95742

 

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Operating/Manufacturing/Research/Design/Marketing Locations

 

Aerospace and Defense

Aerojet Rocketdyne

Sacramento, California

  

Design/Manufacturing Facilities:

Camden, Arkansas*

Canoga Park, California*

Carlstadt, New Jersey*

Chatsworth, California

Clearfield, Utah*

Gainesville, Virginia*

Huntsville, Alabama*

Jonesborough, Tennessee**

Orange, Virginia

Rancho Cordova, California (owned and leased)

Redmond, Washington

Socorro, New Mexico*

Vernon, California*

West Palm Beach, Florida*

Woodland Hills, California*

  

Marketing/Sales Offices:

Arlington, Virginia*

Huntsville, Alabama*

Washington, DC*

Real Estate

Folsom, California

     

 

 

  *

An asterisk next to a facility listed above indicates that it is a leased property.

 

**

This facility is owned and operated by Aerojet Ordnance Tennessee, Inc., a 100% owned subsidiary of Aerojet Rocketdyne.

We believe each of the facilities is adequate for the business conducted at that facility. The facilities are suitable and adequate for their intended purpose and taking into account current and planned future needs.

 

Item 3. Legal Proceedings

Groundwater Litigation

In December 2011, Aerojet Rocketdyne received notice of a lawsuit, Sun Ridge LLC, et al. v. Aerojet-General Corporation, et al., Case No. 34-2011-00114675, filed in Sacramento County Superior Court. The complaint, which also names McDonnell Douglas Corporation (now Boeing), was filed by owners of properties adjacent to the Aerojet Rocketdyne property in Rancho Cordova, California and alleges damages attributable to contamination of groundwater including diminution of property value and increased costs associated with ensuring water supplies in connection with real estate development. That matter was dismissed without prejudice and the parties entered into settlement discussions through which a settlement was reached. As of November 30, 2013, the Company has accrued $0.2 million, which represents its share of the settlement. Expenditures associated with this matter are partially recoverable.

Natural Resource Damage (“NRD”) Assessment Claim

The Company previously manufactured products for the automotive industry at a Toledo, Ohio site, which was adjacent to the Ottawa River. This facility was divested in 1990 and the Company indemnified the buyer for claims and liabilities arising out of certain pre-divestiture environmental matters. In August 2007, the Company, along with numerous other companies, received from the United States Department of Interior Fish and Wildlife Service a notice of a NRD Assessment Plan for the Ottawa River and Northern Maumee Bay. A group of PRPs, including the Company, was formed to respond to the NRD assessment and to pursue funding from the Great Lakes Legacy Act for primary restoration. The restoration project performed by the group consisted of river dredging and land-filling river sediments with a total project cost in the range of approximately $47 million to $49 million, one half of which was funded through the Great Lakes Legacy Act and the net project costs to the PRP group was estimated at $23.5 million to $24.5 million. The dredging of the river that began in December 2009 has been completed. In February 2011, the parties reached an agreement on allocation. Still unresolved at

 

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this time is the actual NRD Assessment itself. In August 2013, the PRPs voted to accept the State and Federal Trustees’ proposal resolving the NRD Assessment and other claims which increased the Company’s share by $0.1 million. A Consent Decree must be negotiated and approved before the settlement becomes final. As of November 30, 2013, the estimated range of the Company’s share of anticipated costs for the NRD matter was $0.2 million to $0.5 million. None of the expenditures related to this matter are recoverable.

Textileather, Inc. (“Textileather”)

In 2008, Textileather, the current owner of the former Toledo, Ohio site, filed a lawsuit against the Company claiming, among other things, that the Company failed to indemnify and defend Textileather for certain contractual environmental obligations. A second suit related to past and future Resource Conservation Recovery Act (“RCRA”) closure costs was filed in late 2009. On May 5, 2010, the District Court granted the Company’s Motion for Summary Judgment, thereby dismissing the claims in the initial action. Textileather appealed to the Sixth Circuit Court of Appeals. On September 11, 2012, the Court of Appeals affirmed the District Court’s decision with respect to Textileather’s Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”) cost recovery claims, but reversed the decision to dismiss its breach of contract claims. The case was remanded to the District Court for further proceedings consistent with the opinion of the Court of Appeals. On September 10, 2013, the parties executed the definitive settlement agreement resolving the dispute for a release for all non-polychlorinated biphenyl (“PCB”) related environmental issues for $4.3 million to be paid in two payments in the 2013 calendar year. The Company has a reserve of $2.7 million for the settlement and PCB related environmental issues as of November 30, 2013. None of the expenditures related to this matter are recoverable.

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 Pennsylvania. There were 129 asbestos cases pending as of November 30, 2013.

Given the lack of any significant consistency to claims (i.e., as to product, operational site, or other relevant assertions) filed against the Company, the Company is unable to make a reasonable estimate of the future costs of pending claims or unasserted claims. Accordingly, no estimate of future liability has been accrued for such contingencies.

In 2011, Aerojet Rocketdyne received a letter demand from AMEC, plc, (“AMEC”) the successor entity to the 1981 purchaser of the business assets of Barnard & Burk, Inc., a former Aerojet Rocketdyne subsidiary, for Aerojet Rocketdyne to assume the defense of sixteen asbestos cases, involving 271 plaintiffs, pending in Louisiana, and reimbursement of over $1.7 million in past legal fees and expenses. AMEC is asserting that Aerojet Rocketdyne retained those liabilities when it sold the Barnard & Burk assets and agreed to indemnify the purchaser therefor. Under the relevant purchase agreement, the purchaser assumed only certain, specified liabilities relating to the operation of Barnard & Burk before the sale, with Barnard & Burk retaining all unassumed pre-closing liabilities, and Aerojet Rocketdyne agreed to indemnify the purchaser against unassumed liabilities that are asserted against it. Based on the information provided, Aerojet Rocketdyne declined to accept the liability and requested additional information from AMEC pertaining to the basis of the demand. On April 3, 2013, AMEC filed a complaint for breach of contract against Aerojet Rocketdyne in Sacramento County Superior Court, AMEC Construction Management, Inc. v. Aerojet-General Corporation, Case No. 342013001424718 . Although AMEC served the complaint on Aerojet Rocketdyne, Aerojet Rocketdyne was granted an open extension of time in which to file a response in order to facilitate additional sharing of information and potential settlement negotiations. No estimate of liability has been accrued for this matter as of November 30, 2013.

 

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The following table sets forth information related to asbestos litigation:

 

     Year Ended  
     2013     2012     2011  
     (Dollars in thousands)  

Claims filed

     18 ***      19 **      28

Claims dismissed

     25        21        20   

Claims settled

     5        3        3   

Claims pending

     129        141        146   

Aggregate settlement costs

   $ 640      $ 53      $ 70   

Average settlement costs

   $ 128      $ 18      $ 23   

 

 

    *

This number is net of one case tendered to a third party under a contractual indemnity obligation.

 

  **

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

 

***

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

Legal and administrative fees for the asbestos cases for fiscal 2013, 2012 and 2011 was $0.4 million for all years presented.

 

Item 4. Mine Safety Disclosures

None.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholders’ Matters and Issuer Purchases of Equity Securities

As of January 14, 2014, there were 7,567 holders of record of the common stock. On January 14, 2014, the last reported sale price of our common stock on the New York Stock Exchange was $17.93 per share.

Our Senior Credit Facility (described in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Liquidity and Capital Resources”) restricts the payment of dividends and we do not anticipate paying cash dividends in the foreseeable future.

Information concerning long-term debt, including material restrictions relating to payment of dividends on our common stock 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. 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 “GY.” 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
 

Year Ended November 30,

   High      Low  

2013

     

First Quarter

   $ 12.36       $ 8.70   

Second Quarter

   $ 13.98       $ 11.82   

Third Quarter

   $ 17.76       $ 13.40   

Fourth Quarter

   $ 18.50       $ 15.01   

2012

     

First Quarter

   $ 6.15       $ 5.20   

Second Quarter

   $ 7.27       $ 5.75   

Third Quarter

   $ 9.25       $ 5.69   

Fourth Quarter

   $ 10.38       $ 8.05   

 

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Stock Performance Graph

The following graph compares the cumulative total shareholder returns, calculated on a dividend reinvested basis, on $100 invested in our Common Stock in November 2008 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 Shareholder Return

Among GenCorp, S&P 500 Index, and the S&P 500 Aerospace & Defense Index,

November 2008 through November 2013

Comparison of Cumulative Five Year Total Return

 

LOGO

 

Company/Index   

Base
Period

2008

     As of November 30,  
      2009      2010      2011      2012      2013  

 

 

GenCorp Inc.

   $ 100.00         273.08         171.68         190.21         321.68         641.26   

S&P 500 Index

     100.00         125.39         137.85         148.65         172.63         224.93   

S&P 500 Aerospace & Defense

     100.00         131.63         149.25         162.17         183.42         281.87   

 

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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 Ended  
    2013     2012     2011     2010     2009  
    (In millions, except per share amounts)  

Net sales

  $ 1,383.1      $ 994.9      $ 918.1      $ 857.9      $ 795.4   

Net income (loss):

         

Income (loss) from continuing operations, net of income taxes

  $ 167.7      $ (5.7   $ 2.9      $ 6.0      $ 58.9   

Income (loss) from discontinued operations, net of income taxes

    0.2        3.1               0.8        (6.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 167.9      $ (2.6   $ 2.9      $ 6.8      $ 52.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per share of Common Stock

         

Income (loss) from continuing operations, net of income taxes

  $ 2.76      $ (0.09   $ 0.05      $ 0.11      $ 1.00   

Income (loss) from discontinued operations, net of income taxes

           0.05               0.01        (0.11
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2.76      $ (0.04   $ 0.05      $ 0.12      $ 0.89   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per share of Common Stock

         

Income (loss) from continuing operations, net of income taxes

  $ 2.11      $ (0.09   $ 0.05      $ 0.11      $ 0.96   

Income (loss) from discontinued operations, net of income taxes

           0.05               0.01        (0.10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2.11      $ (0.04   $ 0.05      $ 0.12      $ 0.86   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental statement of operations information:

         

(Loss) income from continuing operations before income taxes

  $ (26.2   $ 13.2      $ 9.0      $ 2.1      $ 41.3   

Interest expense

    48.7        22.3        30.8        37.0        38.6   

Interest income

    (0.2     (0.6     (1.0     (1.6     (1.9

Depreciation and amortization

    43.8        22.3        24.6        27.9        25.7   

Retirement benefit expense (benefit)

    65.0        41.0        46.4        41.9        (11.9

Unusual items in continuing operations

         

Executive severance agreements

                         1.4        3.1   

Rocketdyne Business acquisition related costs

    20.0        11.6                        

(Gain) loss on legal matters and settlements

    (0.5     0.7        4.1        2.8        1.3   

Loss on bank amendment

                  1.3        0.7        0.2   

Loss on debt repurchased

    5.0        0.4        0.2        1.2          

Gain on legal settlement and insurance recoveries

                         (2.7       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDAP (Non-GAAP measure)

  $ 155.6      $ 110.9      $ 115.4      $ 110.7      $ 96.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDAP (Non-GAAP measure) as a percentage of net sales

    11.3     11.1     12.6     12.9     12.1

Cash flow information:

         

Cash flow provided by operating activities

  $ 77.6      $ 86.2      $ 76.8      $ 148.1      $ 50.3   

Cash flow (used in) provided by investing activities

    (474.9     (36.6     5.6        (43.5     (14.3

Cash flow provided by (used in) financing activities

    432.8        (75.5     (75.9     (49.4     (2.4

Balance Sheet information:

         

Total assets

  $ 1,755.3      $ 919.3      $ 939.5      $ 991.5      $ 934.9   

Long-term debt, including current maturities

    699.2        248.7        326.4        392.7        421.6   

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated or required by the context, as used in this Annual Report on Form 10-K, the terms “we,” “our” and “us” refer to GenCorp Inc. and all of its subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations with an overview of our business and operations, followed by a discussion of our results of operations, including results of our operating segments, for the past three fiscal years. We then provide an analysis of our liquidity and capital resources, including discussions of our cash flows, debt arrangements, sources of capital, and contractual obligations. In the next section, we discuss the critical accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.

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

We are a manufacturer of aerospace and defense products and systems with a real estate segment that includes activities related to the re-zoning, entitlement, sale, and leasing of our excess real estate assets. We develop and manufacture propulsion systems for defense and space applications, and armaments for precision tactical and long range weapon systems applications. Our continuing operations are organized into two segments:

Aerospace and Defense — includes the operations of our wholly-owned subsidiary Aerojet Rocketdyne, a leading technology-based designer, developer and manufacturer of aerospace and defense products and systems for the U.S. government, including the DoD, NASA, major aerospace and defense prime contractors as well as portions of the commercial sector. Aerojet Rocketdyne is a world-recognized engineering and manufacturing company that specializes in the development and production of propulsion systems for defense and space applications, armament systems for precision tactical systems and munitions, and is considered a domestic market leader in launch propulsion, in-space propulsion, missile defense propulsion, tactical missile propulsion and hypersonic propulsion systems.

Real Estate — includes the activities of our wholly-owned subsidiary Easton related to the re-zoning, entitlement, sale, and leasing of our excess real estate assets. We own approximately 11,900 acres of land adjacent to U.S. Highway 50 between Rancho Cordova and Folsom, California east of Sacramento. We are currently in the process of seeking zoning changes and other governmental approvals on a portion of the Sacramento Land to optimize its value.

A summary of the significant financial highlights for fiscal 2013 which management uses to evaluate our operating performance and financial condition is presented below.

 

   

Net sales for fiscal 2013 increased to $1,383.1 million from $994.9 million for fiscal 2012.

 

   

Net income for fiscal 2013 was $167.9 million, or $2.11 diluted income per share, compared to a net loss of ($2.6) million, or ($0.04) loss per share, for fiscal 2012.

 

   

Adjusted EBITDAP (Non-GAAP measure) for fiscal 2013 was $155.6 million or 11.3% of net sales, compared to $110.9 million or 11.1% of net sales, for fiscal 2012.

 

   

Segment performance (Non-GAAP measure) before environmental remediation provision adjustments, retirement benefit plan expense, and unusual items was $151.4 million for fiscal 2013, compared to $119.2 million for fiscal 2012.

 

   

Cash provided by operating activities in fiscal 2013 totaled $77.6 million, compared to $86.2 million in fiscal 2012.

 

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Free cash flow (Non-GAAP measure) in fiscal 2013 totaled $14.4 million, compared to $49.0 million in fiscal 2012.

 

   

As of November 30, 2013, we had $501.6 million in net debt (Non-GAAP measure) compared to $86.6 million as of November 30, 2012.

 

   

Funded backlog was $1,664 million as of November 30, 2013 compared to $1,018 million as of November 30, 2012.

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 this Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Operating Segment Information” and “Use of Non-GAAP Financial Measures.”

In July 2012, we signed the Original Purchase Agreement with UTC to acquire the Rocketdyne Business from UTC for $550 million. On June 10, 2013, the FTC announced that it closed its investigation into the Acquisition under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. On June 12, 2013, we entered into the Amended and Restated Purchase Agreement with UTC, which amended and restated the Original Purchase Agreement, as amended. On June 14, 2013, we completed the acquisition of substantially all of the Rocketdyne Business pursuant to the Amended and Restated Purchase Agreement. The aggregate consideration to UTC was $411 million, paid in cash, which represents the initial purchase price of $550 million reduced by $55 million relating to the pending future acquisition of UTC’s 50% ownership interest of RD Amross (a joint venture with NPO Energomash of Khimki, Russia which sells RD-180 engines to RD Amross), and the portion of the UTC business that markets and supports the sale of RD-180 engines. The acquisition of UTC’s 50% ownership interest of RD Amross and UTC’s related business is contingent upon certain conditions including receipt of certain Russian governmental regulatory approvals, which may not be obtained. The purchase price was further adjusted for advance payments on contracts, capital expenditures and other net assets, and is subject further to post-closing adjustments. See Note 4 in Notes to Consolidated Financial Statements.

The Rocketdyne Business was the largest liquid rocket propulsion designer, developer, and manufacturer in the United States. As the primary propulsion system provider to the U.S. government, specifically NASA and the DoD through ULA, Rocketdyne was considered to be a leader in liquid launch propulsion and hypersonic systems. For more than 50 years, Rocketdyne has set the standard in space propulsion design, development and manufacturing. Rocketdyne has powered nearly all of NASA’s human-rated launch vehicles to date and has recorded more than 1,600 space launches. Rocketdyne propulsion systems have powered missions to nearly every planet in the solar system and have been a cornerstone to the U.S. Space Program since its inception. Additionally, Rocketdyne propulsion systems are vital to the launch of astronauts and cargo required for space exploration and for U.S. military and commercial satellites.

We believe the Rocketdyne Business acquisition provides strategic value for the country, our customers, and our stakeholders. We anticipate that the combined enterprise will be better positioned to compete in a dynamic, highly competitive marketplace, and provide more affordable products for our customers. In addition, this transaction is expected to transform our business and provide additional growth opportunities as we build upon the complementary capabilities of each legacy company.

 

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The unaudited pro forma information for the periods set forth below gives effect to the Acquisition as if it had occurred at the beginning of each respective fiscal year. These amounts have been calculated after applying our accounting policies and adjusting the results of the Rocketdyne Business to reflect depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied as at the beginning of each respective year, together with the tax effects, as applicable. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the Acquisition been consummated as of that time or that may result in the future.

 

     Year Ended  
     2013      2012     2011  
     (In millions, except per share amounts)  

Net sales:

       

As reported

   $ 1,383.1       $ 994.9      $ 918.1   

Pro forma

   $ 1,762.7       $ 1,694.0      $ 1,572.7   

Net income (loss):

       

As reported

   $ 167.9       $ (2.6   $ 2.9   

Pro forma

   $ 30.7       $ 38.2      $ (142.1

Basic EPS:

       

Income (loss) per share:

       

As reported

   $ 2.76       $ (0.04   $ 0.05   

Pro forma

   $ 0.50       $ 0.64      $ (2.42

Diluted EPS:

       

Income (loss) per share:

       

As reported

   $ 2.11       $ (0.04   $ 0.05   

Pro forma

   $ 0.47       $ 0.56      $ (2.42

On January 28, 2013, we issued $460.0 million in aggregate principal amount of our 7  1 / 8 % Notes. The 7  1 / 8 % Notes were sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the U.S. in accordance with Regulation S under the Securities Act. The net proceeds of the 7  1 / 8 % Notes offering were used to fund, in part, the acquisition of the Rocketdyne Business, and to pay related fees and expenses in June 2013. In November 2013, the 7   1 / 8 % Notes were registered under the Securities Act.

We incurred substantial expenses in connection with the Acquisition. A summary of the expenses related to the Acquisition recorded in fiscal 2012 ($11.6 million) and fiscal 2013 ($20.0 million) is as follows (in millions):

 

Legal expenses

   $ 16.4   

Professional fees and consulting

     8.9   

Internal labor

     3.4   

Costs related to the previously planned divestiture of the Liquid Divert and Attitude Control Systems (the “LDACS”) business, including $0.3 million of internal labor

     1.7   

Other

     1.2   
  

 

 

 
   $ 31.6   
  

 

 

 

As of November 30, 2012, we classified our LDACS program as assets held for sale because we expected that we would be required to divest the LDACS product line in order to consummate the Acquisition. However, as of May 31, 2013, we believed that we would not be required to divest the LDACS product line in order to consummate the Acquisition based on conversations with the FTC. On June 10, 2013, the FTC announced that it closed its investigation into the Acquisition under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and we were not required to divest our LDACS business (see Note 14 in Notes to Consolidated Financial Statements).

We are operating in an environment that is characterized by both increasing complexity in the global security environment, as well as continuing worldwide economic pressures. A significant component of our strategy

 

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in this environment is to focus on delivering excellent performance to our customers, driving improvements and efficiencies across our operations, and creating value through the enhancement and expansion of our business.

Some of the significant challenges we face are as follows: dependence upon government programs and contracts, future reductions or changes in U.S. government spending in our industry, integration of the Rocketdyne Business, environmental matters, capital structure, an underfunded pension plan, stabilization of our ERP system, and the future integration of the recently acquired Rocketdyne Business into our ERP system. Some of these matters are discussed in more detail below.

Major Customers

The principal end user customers of our products and technology are 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.

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

 

     Year Ended  
     2013     2012     2011  

Raytheon

     32     37     36

Lockheed Martin

     23        32        28   

ULA

     18        *        *   

 

 

*

Less than 10%.

Sales to the U.S. government and its agencies, including sales to our significant customers discussed above, were as follows (dollars in millions):

 

     U.S. Government
Sales
     Percentage of Net
Sales
 

Fiscal 2013

   $ 1,311.0         95

Fiscal 2012

     936.9         94   

Fiscal 2011

     855.8         93   

The Standard Missile program, which is included in the U.S. government sales, represented 22%, 25%, and 24% of net sales for fiscal 2013, 2012, and 2011, respectively.

Industry Update

Our primary aerospace and defense customers include the DoD and its agencies, NASA, and the prime contractors that supply products to these customers. We are seeing more opportunities for commercial in-launch and in-space business. In addition, sales to our aerospace and defense customers that provide products to international customers continue to grow. However, 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 Bipartisan Budget Act of 2013 set overall discretionary spending levels for GFY 2014 and eased sequestration cuts to the DoD and other federal agencies (e.g., NASA) for GFY 2014 and 2015, paving the way for an

 

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eventual agreement on GFY 2014 Appropriations for all federal agencies. In relatively short order, Congress was able to pass the Consolidated (so-called “Omnibus”) Appropriation bill for GFY 2014. The Defense portion of the bill was below the President’s requested level of funding for GFY 2014 but roughly the same as the post-sequester GFY13 DoD Appropriation levels. Funding for NASA was also below the President’s Budget Request for GFY 2014 but up from the post-sequester GFY13 NASA Appropriation level.

Despite overall U.S. government budget spending pressures, we believe we are well-positioned to benefit from spending in DoD and NASA priority areas. This view reflects the DoD’s strategic guidance report released in January 2012 which affirms support for many of our core programs and points toward continued DoD investment in: access to space — in order to ensure access to this highly congested and contested “global commons”; missile defense — in order to protect the homeland, counter weapons of mass destruction and enhance space-based capabilities; and power projection by tactical missile systems.

During 2013, Congress began consideration of a new NASA Authorization Act, authorizing NASA funding for the next several years, starting with GFY 2014. Ultimately, Congress did not complete action on a new NASA Authorization in 2013, but will likely resume consideration in 2014. In 2010, the NASA Authorization Act, which remains in effect, impacted GFYs 2011-2013. NASA has identified the SLS program as one of its top priorities in the NASA portion of the GFY 2014 President’s Budget Request. The SLS program also enjoys 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 and upper stage 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 are now dependent on Russian Soyuz flights for access to the ISS for the better part of this decade. NASA has indicated that it is working to re-establish U.S. manned space capability as soon as possible through development of the commercial cargo and crew ISS resupply capability and the heavy lift SLS designed for manned deep space exploration. In both instances, we have significant propulsion content.

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.

We review on a quarterly basis estimated future remediation costs that could be incurred over the contractual term or the next fifteen years of the expected remediation. These liabilities have not been discounted to their present value as the timing of cash payments is not fixed or reliably determinable. We 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. With respect to the Baldwin Park Operable Unit (“BPOU”) site, our estimates of anticipated environmental remediation costs only extend through the term of the project agreement for such site, which expires in 2017, since we are unable to reasonably estimate the related costs after the expiration of such agreement. Therefore no reserve has been accrued for this site for the period after the expiration of the project agreement and we will reevaluate the environmental reserves related to the BPOU site once the terms of a new agreement related to the site are available and we are able to reasonably estimate the related environmental remediation costs. At that time, the amount of reserves accrued following such reevaluation may be significant. As the period for which estimated environmental remediation costs increase, the reliability of such estimates decrease. These estimates consider the investigative work and analysis of engineers, outside environmental consultants, and the advice of legal staff regarding the status and anticipated results of various administrative and legal proceedings. In most cases, only a range of reasonably possible costs can be estimated. In establishing 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 such estimates as new information becomes available. We cannot predict whether new information gained as projects progress will affect the estimated liability accrued. The tim-

 

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ing of payment for estimated future environmental costs is influenced by a number of factors such as the regulatory approval process and the time required to design, construct, and implement the remedy. A summary of our environmental reserves, recoverable amounts, and range of liability as of November 30, 2013 is presented below:

 

     Reserve      Recoverable
Amount
     Estimated
Range of Liability
 
     (In millions)  

Sacramento

   $ 128.0       $ 88.2       $ 128.0 – $199.5   

Baldwin Park Operable Unit

     26.9         18.5         26.9 – 57.3   

Other Aerojet Rocketdyne sites

     8.2         7.6         8.2 – 23.2   

Other sites

     8.2         0.8         8.2 – 9.8   
  

 

 

    

 

 

    

 

 

 

Total

   $ 171.3       $ 115.1       $ 171.3 – $289.8   
  

 

 

    

 

 

    

 

 

 

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 and allocable to Northrop until the cumulative expenditure limitation is reached (discussed below).

On January 12, 1999, Aerojet Rocketdyne and the U.S. government implemented the Global Settlement resolving certain prior environmental and facility disagreements, with retroactive effect to December 1, 1998. Under the Global Settlement, Aerojet Rocketdyne and the U.S. government resolved disagreements about an appropriate cost-sharing ratio with respect to the cleanup costs of the environmental contamination at the Sacramento and Azusa sites. The Global Settlement cost-sharing ratio does not have a defined term over which costs will be recovered. Additionally, in conjunction with the sale of the EIS business in 2001, Aerojet Rocketdyne entered into 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 annual and cumulative limitations.

Pursuant to the Global Settlement, prior to the third quarter of fiscal 2010, approximately 12% of environmental costs related to Aerojet Rocketdyne’s Sacramento site and its former Azusa site were charged to the consolidated statements of operations. Subsequent to the third quarter of fiscal 2010, because our estimated environmental costs have reached the reimbursement ceiling under the Northrop Agreement, approximately 37% of such costs will not be reimbursable and were therefore directly charged to the consolidated statements of operations. However, we are seeking to amend our agreement with the U.S. government to increase the amount allocable to U.S. government contracts. There can be no assurances that we will be successful in this pursuit.

Allowable environmental costs are charged to our contracts as the costs are incurred. Aerojet Rocketdyne’s mix of contracts can affect the actual reimbursement made by the U.S. government. Because these costs are recovered through forward-pricing arrangements, the ability of Aerojet Rocketdyne to continue recovering these costs from the U.S. government depends on Aerojet Rocketdyne’s sustained business volume under U.S. government contracts and programs and the relative size of Aerojet Rocketdyne’s commercial business. Annually, we evaluate Aerojet Rocketdyne’s forecasted business volume under U.S. government contracts and programs and the relative size of Aerojet Rocketdyne’s commercial business as part of its long-term business review. Since the acquisition of the Rocketdyne Business closed in the third quarter of fiscal 2013, the prospective mix of contracts may affect the actual reimbursement made by the U.S. government. Under the Global Settlement agreement, environmental costs are allocable to the newly acquired business. Additionally, we are reviewing the percentage of Global Settlement environmental costs allocable to our Aerojet Rocketdyne business and Northrop. Any change in the percentage allocable will require approval from the U.S. government and if received, this change may materially and favorably affect our results of operations in the period received along with future periods.

The inclusion of such environmental costs in our contracts with the U.S. government impacts our competitive pricing and earnings; 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.

 

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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 November 30, 2013, we had $699.2 million of debt principal outstanding. The fair value of the debt outstanding at November 30, 2013 was $938.6 million.

Retirement Benefits

We do not expect to make any significant cash contributions to our government contractor business segment, Aerojet Rocketdyne, tax-qualified defined benefit pension plan until fiscal 2015, which will be recoverable through our U.S government contracts. Additionally, we do not expect to make any significant cash contributions to the GenCorp tax-qualified defined benefit pension plan until fiscal 2018 or later, which will not be recoverable through our U.S. government contracts.

In addition, under the Office of Federal Procurement Policy rules, we will recover portions of any required pension funding through our government contracts and we estimate that approximately 91% of our unfunded pension obligation as of November 30, 2013 is related to our government contracting business.

We estimate that our retirement benefit expense will be approximately $36 million in fiscal 2014.

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 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.

Implementation of ERP System

During fiscal 2010, we conducted a thorough review of our business to assess the effectiveness of our current business processes and supporting information systems. After extensive study and analysis, we determined that there are many potential benefits from the investment in a state-of-the-art ERP system. The benefits will be achieved through the integration of our data and processes into one single system based upon industry best business practices.

We selected the Oracle Business Suite as our ERP solution. Work began on the project in fiscal 2011 and we implemented the ERP system in June 2013. The one-time cost through the date of the implementation, both capital and expense, was $52.4 million, consisting primarily of software and hardware costs, system integrator costs, labor costs, and data migration.

The integration of the Rocketdyne Business into our ERP solution is scheduled to be complete by January 1, 2015. Any extension beyond January 1, 2015 will result in us incurring additional implementation costs and require fees be paid to UTC for additional transitional services costs.

We expect that the new ERP system will provide reliable, transparent, and real-time data access providing us with the opportunity to make better and faster business decisions. We expect the integration among various functional areas will lead to improved communication, productivity and efficiency. These improvements should enhance our ability to respond to our customers’ needs and lead to increased customer satisfaction. Other advantages we expect to realize by centralization of our current systems into an ERP system are to eliminate difficulties in synchronizing changes between multiple systems, improve coordination of business processes that cross functional boundaries and provide a top-down view of the enterprise.

 

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Results of Operations

 

     Year Ended  
     2013     2012     2011  
     (In millions)  

Net sales

   $ 1,383.1      $ 994.9      $ 918.1   

Operating costs and expenses:

      

Cost of sales (exclusive of items shown separately below)

     1,229.6        869.6        799.3   

Selling, general and administrative

     53.6        41.9        40.9   

Depreciation and amortization

     43.8        22.3        24.6   

Other expense, net

     33.8        26.2        14.5   
  

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     1,360.8        960.0        879.3   

Operating income

     22.3        34.9        38.8   

Non-operating (income) expense

      

Interest expense

     48.7        22.3        30.8   

Interest income

     (0.2     (0.6     (1.0
  

 

 

   

 

 

   

 

 

 

Total non-operating expense, net

     48.5        21.7        29.8   

(Loss) income from continuing operations before income taxes

     (26.2     13.2        9.0   

Income tax (benefit) provision

     (193.9     18.9        6.1   
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     167.7        (5.7     2.9   

Income from discontinued operations, net of income taxes

     0.2        3.1         
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 167.9      $ (2.6   $ 2.9   
  

 

 

   

 

 

   

 

 

 

Net sales

 

     Year Ended             Year Ended         
     2013      2012      Change*      2012      2011      Change**  
     (In millions)  

Net sales

   $ 1,383.1       $ 994.9       $ 388.2       $ 994.9       $ 918.1       $ 76.8   

 

 

 *

Primary reason for change.     The increase in net sales was primarily due to the following: (i) sales from the Rocketdyne Business contributed $319.4 million of net sales from the acquisition date of June 14, 2013; (ii) an increase of $53.7 million in the various Standard Missile programs primarily from increased development activities for the Throttling Divert and Attitude Control System for the Standard Missile-3 Block IIA program and increased deliveries on the Standard Missile-1 Regrain program; and (iii) increased deliveries on the Atlas V program generating additional sales of $21.0 million. The increase in net sales was partially offset by a reduction of $16.1 million on the Bomb Live Unit — 129B (“BLU-129B”) composite case program due to completion of the contract in fiscal 2012 and the timing of the follow-on BLU-129B contract which is valued at $16.0 million.

Our fiscal year ends on November 30 of each year. The fiscal year of our subsidiary, Aerojet Rocketdyne, ends on the last Saturday of November. As a result of the 2013 calendar, we had 53 weeks of operations in fiscal 2013 compared to 52 weeks of operations in the fiscal 2012. The additional week of operations in fiscal 2013 accounted for $27.8 million in additional net sales.

 

**

Primary reason for change.     The increase in net sales was primarily due to (i) increased deliveries on the THAAD program generating $39.6 million in additional net sales; (ii) an increase of $34.5 million in the various Standard Missile programs primarily from the timing of deliveries; and (iii) increased engineering technology activities on the T3 development contracts resulting in $17.7 million of additional net sales. The increase in net sales was partially offset by a reduction of $24.9 million on the Hawk program due to the completion of the production contract in the first quarter of fiscal 2012.

 

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Sales by contract type were as follows:

 

     Year Ended  
     2013     2012     2011  

Fixed-price contracts

     46     52     53

Cost reimbursable contracts

     49        42        41   

Other sales including commercial contracts and real estate activities

     5        6        6   
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

Cost of sales (exclusive of items shown separately below)

 

     Year Ended            Year Ended        
     2013     2012     Change*      2012     2011     Change*  
     (In millions, except percentage amounts)  

Cost of sales (exclusive of items shown separately below)

   $ 1,229.6      $ 869.6      $ 360.0       $ 869.6      $ 799.3      $ 70.3   

Percentage of net sales

     88.9     87.4        87.4     87.1  

Percentage of net sales excluding retirement benefit expense and step-up in fair value of inventory

     85.5     85.5        85.5     84.8  

Components of cost of sales:

             

Cost of sales excluding retirement benefit expense and step-up in fair value of inventory

   $ 1,183.2      $ 850.7      $ 332.5       $ 850.7      $ 778.3      $ 72.4   

Cost of sales associated with the Acquisition step-up in fair value of inventory not allocable to our U.S. government contracts

     2.2               2.2                         

Retirement benefit plan expense

     44.2        18.9        25.3         18.9        21.0        (2.1
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Cost of sales

   $ 1,229.6      $ 869.6      $ 360.0       $ 869.6      $ 799.3      $ 70.3   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

 

*

Primary reason for change.     Cost of sales as a percentage of net sales excluding retirement benefit expense and step-up in fair value of inventory was essentially unchanged.

Selling, general and administrative (“SG&A”)

 

     Year Ended           Year Ended        
     2013     2012     Change*     2012     2011     Change**  
     (In millions, except percentage amounts)  

SG&A

   $ 53.6      $ 41.9      $ 11.7      $ 41.9      $ 40.9      $ 1.0   

Percentage of net sales

     3.9     4.2       4.2     4.5  

Components of SG&A:

            

SG&A excluding retirement benefit expense and stock based compensation

   $ 18.7      $ 13.3      $ 5.4      $ 13.3      $ 11.8      $ 1.5   

Retirement benefit plan expense

     20.8        22.1        (1.3     22.1        25.4        (3.3

Stock-based compensation

     14.1        6.5        7.6        6.5        3.7        2.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SG&A

   $ 53.6      $ 41.9      $ 11.7      $ 41.9      $ 40.9      $ 1.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 *

Primary reason for change.     The increase in SG&A expense was primarily due to (i) an increase of $7.6 million in stock-based compensation primarily as a result of increases in the fair value of the stock appreciation rights and (ii) an increase in legal and consulting expenses related to various corporate activities.

 

**

Primary reason for change.     The increase in SG&A expense is primarily related to (i) an increase of $2.8 million in stock-based compensation primarily due to changes in the fair value of the stock appreciation

 

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rights and (ii) an increase in professional and consulting fees of $1.1 million related to our continuing evaluation of our corporate strategy. The increase in SG&A was partially offset by a decrease of $3.3 million of non-cash corporate retirement benefit plan expenses. See discussion of “Retirement Benefit Plans” below.

Depreciation and amortization

 

     Year Ended             Year Ended         
     2013      2012      Change*      2012      2011      Change**  
     (In millions)  

Depreciation and amortization

   $ 43.8       $ 22.3       $ 21.5       $ 22.3       $ 24.6       $ (2.3

 

 

  *

Primary reason for change.     The increase in depreciation and amortization is primarily related to the following: (i) $15.2 million of depreciation expense related to the Rocketdyne Business since the acquisition of which $10.3 million was associated with the step-up in fair value of the tangible assets not allocable to our U.S. government contracts and (ii) $5.0 million of amortization of intangibles associated with the Rocketdyne Business since the acquisition.

 

**

Primary reason for change.     The decrease in depreciation and amortization is primarily related to the following (i) a reduction in the estimated useful life of tangible assets related to our fire suppression programs in the third quarter of fiscal 2011 and (ii) a decrease in the capital expenditures put into service in fiscal 2012.

Other expense, net

 

     Year Ended             Year Ended         
     2013      2012      Change*      2012      2011      Change**  
     (In millions)  

Other expense, net

   $ 33.8       $ 26.2       $ 7.6       $ 26.2       $ 14.5       $ 11.7   

 

 

  *

Primary reason for change.     The increase in other expense, net was primarily due to an increase in unusual item charges of $11.8 million partially offset by a decrease of $3.2 million in environmental remediation expenses and a $1.5 million contribution pledged in fiscal 2012 to support space science education. See Notes 8(c) and 8(d) in Notes to Consolidated Financial Statements for additional discussion of environmental remediation matters. See discussion of unusual items below.

 

**

Primary reason for change.     The increase in other expense, net was primarily due to the following: (i) an increase in unusual item charges of $7.1 million; (ii) higher non-reimbursable environmental remediation costs of $3.0 million; and (iii) a $1.5 million contribution pledged in fiscal 2012 to support space science education. See discussion of unusual items below.

Total unusual items expense, a component of other expense, net in the consolidated statements of operations, was as follows:

 

     Year Ended  
     2013     2012      2011  
     (In millions)  

Aerospace and Defense:

       

(Gain) loss on legal matters and settlements

   $ (1.0   $ 0.7       $ 4.1   

Rocketdyne Business acquisition related costs

     2.6                 
  

 

 

   

 

 

    

 

 

 

Aerospace and defense unusual items

     1.6        0.7         4.1   
  

 

 

   

 

 

    

 

 

 

Corporate:

       

Rocketdyne Business acquisition related costs

     17.4        11.6          

Loss on debt repurchased

     5.0        0.4         0.2   

Loss on legal settlement

     0.5                

Loss on bank amendment

                  1.3   
  

 

 

   

 

 

    

 

 

 

Corporate unusual items

     22.9        12.0         1.5   
  

 

 

   

 

 

    

 

 

 

Total unusual items

   $ 24.5      $ 12.7       $ 5.6   
  

 

 

   

 

 

    

 

 

 

 

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Fiscal 2013 Activity:

We recorded a charge of $0.5 million related to a legal settlement.

We recorded ($1.0) million in gains 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.

We incurred expenses of $20.0 million, including internal labor costs of $1.4 million, related to the Rocketdyne Business acquisition.

A summary of our losses on the 4  1 / 16 % Debentures repurchased during fiscal 2013 is as follows (in millions):

 

Principal amount repurchased

   $ 5.2   

Cash repurchase price

     (10.1

Write-off of the deferred financing costs

     (0.1
  

 

 

 

Loss on 4  1 / 16 % Debentures repurchased

   $ (5.0
  

 

 

 

The $5.2 million principal of 4   1 / 16 % Debentures repurchased were convertible into 0.6 million shares of common stock.

Fiscal 2012 Activity

We recorded $0.7 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.

We incurred expenses of $11.6 million, including internal labor costs of $2.0 million, related to the Rocketdyne Business acquisition announced in July 2012.

We redeemed $75.0 million of our 9  1 / 2 % Senior Subordinated Notes (“9  1 / 2 % Notes”) at a redemption price of 100% of the principal amount. The redemption resulted in a charge of $0.4 million associated with the write-off of the 9  1 / 2 % Notes deferred financing costs.

Fiscal 2011 Activity

We recorded a charge of $3.3 million related to a legal settlement and $0.8 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.

During fiscal 2011, we repurchased $22.0 million principal amount of our 2   1 / 4 % Convertible Subordinated Debentures (“2   1 / 4 % Debentures”) at various prices ranging from 99.0% of par to 99.6% of par resulting in a loss of $0.2 million.

In addition, during fiscal 2011, we recorded $1.3 million of losses related to an amendment to the Senior Credit Facility.

Interest expense

 

     Year Ended             Year Ended         
     2013      2012      Change*      2012      2011      Change**  
     (In millions)  

Interest expense

   $ 48.7       $ 22.3       $ 26.4       $ 22.3       $ 30.8       $ (8.5

Components of interest expense:

                 

Contractual interest and other

     44.2         19.4         24.8         19.4         24.1         (4.7

Debt discount amortization

                                     3.5         (3.5

Amortization of deferred financing costs

     4.5         2.9         1.6         2.9         3.2         (0.3

 

 

  *

Primary reason for change.     The increase in interest expense was primarily due to the issuance of the 7   1 / 8 % Notes in January 2013 related to the acquisition of the Rocketdyne Business.

 

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**

Primary reason for change.     The decrease in interest expense was primarily due to the repurchase of debt in fiscal 2012 and 2011. We repurchased $68.4 million of the outstanding 2   1 / 4 % Debentures in fiscal 2011 and repurchased $75.0 million of the outstanding 9  1 / 2 % Notes in fiscal 2012.

Interest income

 

     Year Ended            Year Ended         
     2013      2012      Change*     2012      2011      Change*  
     (In millions)  

Interest income

   $ 0.2       $ 0.6       $ (0.4   $ 0.6       $ 1.0       $ (0.4

 

 

*

Primary reason for change.     Interest income was essentially unchanged for the periods presented.

Income tax (benefit) provision

 

     Year Ended  
     2013     2012      2011  
     (In millions)  

Income tax (benefit) provision

   $ (193.9   $ 18.9       $ 6.1   

The following table shows the reconciling items between the income tax (benefit) provision using the federal statutory rate and our reported income tax (benefit) provision.

 

     Year Ended  
     2013     2012     2011  
     (In millions)  

Statutory U.S. federal income tax rate

   $ (9.2   $ 4.6      $ 3.2   

State and local income taxes, net of U.S. federal income tax effect

     (1.9     2.7        2.7   

Changes in state income tax rates

     (7.7              

Tax settlements and refund claims, including interest

                   0.3   

Reserve adjustments

     1.5        2.8        0.1   

Valuation allowance adjustments

     (178.4     13.0        (4.0

Rescindable common stock interest and realized (gains) losses

     (0.4     0.2        0.3   

Non-deductible convertible subordinated notes interest

     4.5        2.8        2.8   

Deferred net operating loss to additional paid in capital

            3.1        0.2   

Research credits

     (1.2     (10.0       

Benefit of manufacturing deductions

            (1.3       

Retroactive change in federal tax law

     (1.4              

Other, net

     0.3        1.0        0.5   
  

 

 

   

 

 

   

 

 

 

Income tax (benefit) provision

   $ (193.9   $ 18.9      $ 6.1   
  

 

 

   

 

 

   

 

 

 

In fiscal 2013, our effective tax rate was an income tax benefit of 740.1% on a pre-tax loss of $26.2 million. Our effective tax rate differed from the 35% statutory federal income tax rate due largely to the release of a significant portion of the valuation allowance previously recorded against deferred tax assets, the impact of state income taxes, and certain non-deductible interest expense. We released $282.4 million of the valuation allowance that existed at the beginning of the year, of which approximately $178.7 million was recorded as an income tax benefit to continuing operations, $1.1 million to discontinued operations, and $102.6 million was recorded in other comprehensive income.

The timing of recording or releasing a valuation allowance requires significant management judgment. The amount of the valuation allowance released by us represents a portion of deferred tax assets that was deemed more-likely-than-not that we will realize the benefits based on the analysis in which the positive evidence outweighed the negative evidence.

 

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A valuation allowance is required when it is more-likely-than-not that all or a portion of deferred tax assets may not be realized. Establishment and removal of a valuation allowance requires management to consider all positive and negative evidence and make a judgmental decision regarding the amount of valuation allowance required as of a reporting date. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. In the evaluation as of November 30, 2013, management has considered all available evidence, both positive and negative, including but not limited to the following:

Positive evidence

 

   

The three year other comprehensive cumulative income position as of the end of fiscal 2013;

 

   

The improved pro forma historical operating results when combined with that of the Rocketdyne Business, continued growth in contract backlog, and the anticipated impact of the Rocketdyne Business financial results on our forecasted financial performance;

 

   

The decrease in the projected pension obligation at November 30, 2013 due to the upward trend in the discount rate during fiscal 2013, which lowered future projected pension expense;

 

   

Our recent history of generating taxable income which has allowed for the utilization of tax credit carryforwards; and

 

   

Favorable trends with respect to Congressional action regarding sequestration from the Budget Control Act of 2011.

Negative evidence

 

   

The lack of objective, verifiable evidence to predict future aerospace and defense spending associated with the Budget Control Act of 2011, including which governmental spending accounts may be subject to sequestration, the percentage reduction with respect thereto, and the latitude agencies will have in selecting specific expenditures to cut;

 

   

The significance of our defined benefit pension obligation and related impact it could have in future years; and

 

   

The additional indebtedness incurred in fiscal 2013 related to the acquisition of the Rocketdyne Business.

During fiscal 2013, we concluded the positive evidence supporting the release of the valuation allowance previously recorded against substantially all of our net deferred tax assets outweighed the negative evidence supporting retention of the reserve. The evidence included the improved expected operating profits as a result of the Rocketdyne Business acquisition in the third quarter of fiscal 2013 and significant improvements surrounding the measurement of our defined benefit pension plan liability as of November 30, 2013. Accordingly, the valuation allowance that relates to expected future operating income was released in the third quarter of fiscal 2013 and allocated to continuing operations. The valuation allowance that was related to the gain in other comprehensive income, due to significant improvements surrounding the measurement of our defined benefit pension plan liability, was released through other comprehensive income in the fourth quarter of fiscal 2013 when the defined benefit pension plan gain was recognized. We will continue to evaluate the ability to realize our net deferred tax assets and the remaining valuation allowance on a quarterly basis.

Discontinued Operations:

On August 31, 2004, we completed the sale of our GDX Automotive business. On November 30, 2005, we completed the sale of our Fine Chemicals business. The remaining subsidiaries after the sale of GDX Automotive, including Snappon SA, and the Fine Chemicals business are classified as discontinued operations in our Consolidated Financial Statements.

In November 2003, we announced the closing of a GDX manufacturing facility in Chartres, France owned by Snappon SA, a subsidiary of the Company. The decision resulted primarily from declining sales volumes with French automobile manufacturers. In June 2004, we completed the legal process for closing the facility and establishing a social plan. During fiscal 2009, an expense of approximately €2.9 million ($3.8 million) was

 

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recorded related to legal judgments rendered against Snappon SA under French law, related to wrongful discharge claims by certain former employees of Snappon SA. During fiscal 2009, Snappon SA filed for declaration of suspensions of payments with the clerk’s office of the Paris Commercial Court. During fiscal 2012, we released a $3.8 million loss contingency reserve for discharged employee claims.

During fiscal 2012, we recorded a charge of $1.0 million for environmental obligations related to our former Fine Chemicals business.

Summarized financial information for discontinued operations is set forth below:

 

     Year Ended  
     2013     2012      2011  
     (In millions)  

Net sales

   $     $      $   

(Loss) income before income taxes(1)

     (0.9     2.6          

Income tax benefit

     1.1        0.5          

Income from discontinued operations

     0.2        3.1          

 

 

(1)

Includes foreign currency transaction (losses) and gains of ($0.2) million in fiscal 2013, $0.4 million in fiscal 2012, and ($0.3) million in fiscal 2011.

Retirement Benefit Plans:

Components of retirement benefit expense are:

 

     Year Ended  
     2013     2012     2011  
     (In millions)  

Service cost(1)

   $ 6.4      $ 4.6      $ 4.0   

Interest cost on benefit obligation

     63.4        76.8        81.9   

Assumed return on plan assets(2)

     (96.4     (99.2     (102.4

Amortization of prior service (credits) costs

     (0.9     (0.1     0.1   

Amortization of net losses

     92.5        58.9        62.8   
  

 

 

   

 

 

   

 

 

 

Net retirement benefit expense

   $ 65.0      $ 41.0      $ 46.4   
  

 

 

   

 

 

   

 

 

 

 

 

(1)

Service cost for pension benefits represents the administrative costs of the tax-qualified pension plan and the service cost for Rocketdyne’s bargaining unit employees from the acquisition date of June 14, 2013 to November 30, 2013.

 

(2)

The actual return and rate of return on plan assets are as follows:

 

     Year Ended  
         2013             2012         2011  
     (In millions, except rate of return)  

Actual return on plan assets

   $ 150.2      $ 81.2      $ 54.5   

Actual rate of return on plan assets

     12.5     6.5     3.8

We estimate that our non-cash retirement benefit expense will be approximately $36 million in fiscal 2014 compared to $65.0 million in fiscal 2013. The timing of recognition of pension expense in our financial statements differs from the timing of the required pension funding under PPA or the amount of funding that can be recorded in our overhead rates through our government contracting business.

Market conditions and interest rates significantly affect the assets and liabilities of our pension plans. Pension accounting permits market gains and losses to be deferred and recognized over a period of years. This “smoothing” results in the creation of other accumulated income or losses which will be amortized to retirement benefit expense in future years. The accounting method we utilize recognizes one-fifth of the unamortized gains and losses in the market-related value of pension assets and all other gains and losses, including changes in the

 

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discount rate used to calculate benefit costs each year. Investment gains or losses for this purpose are the difference between the expected return and the actual return on the market-related value of assets which smoothes asset values over three years. Although the smoothing period mitigates some volatility in the calculation of annual retirement benefit expense, future expenses are impacted by changes in the market value of pension plan assets and changes in interest rates.

Additionally, we sponsor a defined contribution 401(k) plan and participation in the plan is available to all employees. Our contributions to the 401(k) plan were $14.7 million in fiscal 2013, $10.8 million in fiscal 2012, and $9.9 million in fiscal 2011. The cost is recoverable through our overhead rates on our U.S. government contracts.

Operating Segment Information:

We evaluate our operating segments based on several factors, of which the primary financial measure is segment performance. Segment performance, which is a non-GAAP financial measure, represents net sales from continuing operations less applicable costs, expenses and provisions for unusual items relating to the segment. Excluded from segment performance are: corporate income and expenses, interest expense, interest income, income taxes, and provisions for unusual items not related to the segment. We believe that segment performance provides information useful to investors in understanding our underlying operational performance. In addition, we provide the non-GAAP financial measures of our operational performance called segment performance before environmental remediation provision adjustments, retirement benefit plan expense and 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.

Aerospace and Defense Segment

 

    Year Ended           Year Ended        
    2013     2012     Change*     2012     2011     Change**  
    (In millions, except percentage amounts)  

Net Sales

  $ 1,377.4      $ 986.1      $ 391.3      $ 986.1      $ 909.7      $ 76.4   

Segment Performance(1)

    97.2        84.5        12.7        84.5        74.6        9.9   

Segment margin

    7.1     8.6       8.6     8.2  

Segment margin before environmental remediation provision adjustments, retirement benefit plan expense, and unusual items (Non-GAAP measure)(1)

    10.7     11.7       11.7     11.9  

Components of segment performance:

           

Aerospace and Defense(1)

  $ 147.6      $ 115.5      $ 32.1      $ 115.5      $ 108.6      $ 6.9   

Environmental remediation provision adjustments

    (4.6     (11.4     6.8        (11.4     (8.9     (2.5

Retirement benefit plan expense

    (44.2     (18.9     (25.3     (18.9     (21.0     2.1   

Unusual items

    (1.6     (0.7     (0.9     (0.7     (4.1     3.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Aerospace and Defense total(1)

  $ 97.2      $ 84.5      $ 12.7      $ 84.5      $ 74.6      $ 9.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1)

Includes expenses of $17.5 million, 1.3% of net sales, in fiscal 2013 related to the following (i) depreciation associated with the step-up in fair value of tangible assets not allocable to our U.S. government contracts; (ii) amortization of intangible assets associated with the Rocketdyne Business acquisition; and (iii) cost of sales associated with the step-up in fair value of inventory not allocable to our U.S. government contracts.

 

*

Primary reason for change.     The increase in net sales was primarily due to the following: (i) sales from the Rocketdyne Business contributed $319.4 million of net sales from the acquisition date of June 14, 2013; (ii) an increase of $53.7 million in the various Standard Missile programs primarily from increased development activities for the Throttling Divert and Attitude Control System for the Standard Missile-3 Block IIA program and increased deliveries on the Standard Missile-1 Regrain program; and (iii) increased deliveries on the Atlas V program generating additional sales of $21.0 million. The increase in net sales was partially offset by a reduction of $16.1 million on the BLU-129B composite case program due to completion

 

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of the contract in fiscal 2012 and the timing of the follow-on BLU-129B contract which is valued at $16.0 million.

 

    

Our fiscal year ends on November 30 of each year. The fiscal year of our subsidiary, Aerojet Rocketdyne, ends on the last Saturday of November. As a result of the 2013 calendar, Aerojet Rocketdyne had 53 weeks of operations in fiscal 2013 compared to 52 weeks of operations in fiscal 2012 and 2011. The additional week of operations, which occurred in the first quarter of fiscal 2013, accounted for $27.8 million in additional net sales.

 

    

The decrease in the segment margin before environmental remediation provision adjustments, retirement benefit plan expense and unusual items compared to the comparable prior year period was driven by higher depreciation and amortization expense of $21.4 million or 1.6% of net sales, primarily related to the valuation of the assets acquired from the Rocketdyne Business.

 

**

Primary reason for change.     The increase in net sales was primarily due to (i) increased deliveries on the THAAD program generating $39.6 million in additional net sales; (ii) an increase of $34.5 million in the various Standard Missile programs primarily from the timing of deliveries; and (iii) increased engineering technology activities on the T3 contracts resulting in $17.7 million of additional net sales. The increase in net sales was partially offset by a reduction of $24.9 million on the Hawk program due to the completion of the production contract in the first quarter of fiscal 2012.

 

    

Segment margin before environmental remediation provision adjustments, retirement benefit plan expense, and unusual items (Non-GAAP measure) was 11.7% for fiscal 2012, compared to 11.9% for fiscal 2011.

Real Estate Segment

 

     Year Ended            Year Ended         
     2013      2012      Change*     2012      2011      Change**  
     (In millions)  

Net Sales

   $ 5.7       $ 8.8       $ (3.1   $ 8.8       $ 8.4       $ 0.4   

Segment Performance

     3.8         3.7         0.1        3.7         5.6         (1.9

 

 

*

Primary reason for change.     Net sales and segment performance consist primarily of rental property operations. Fiscal 2012 results included $3.7 million in land sales resulting in a gain of $0.2 million.

**

Primary reason for change.     Net sales and segment performance consist primarily of rental property operations. Fiscal 2012 results included $3.7 million in land sales resulting in a gain of $0.2 million. The decrease in segment performance is primarily due to gains on land sales in fiscal 2011 and higher rental operation costs in fiscal 2012.

 

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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 further our understanding of the historical and prospective consolidated core operating performance of our segments, net of expenses incurred by our corporate activities in the ordinary, ongoing and customary course of our operations. Further, we believe that to effectively compare the core operating performance metric from period to period on a historical and prospective basis, 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, ongoing and customary course of our operations. Accordingly, we define Adjusted EBITDAP as GAAP income from continuing operations before income taxes adjusted by interest expense, interest income, depreciation and amortization, retirement benefit expense, and unusual items which we do not believe are reflective of such ordinary, ongoing and customary course activities. Adjusted EBITDAP does not represent, and should not be considered an alternative to, net income (loss), as determined in accordance with GAAP.

 

     Year Ended  
     2013(1)(2)     2012(1)     2011(1)  
     (In millions)  

(Loss) income from continuing operations before income taxes

   $ (26.2   $ 13.2      $ 9.0   

Interest expense

     48.7        22.3        30.8   

Interest income

     (0.2     (0.6     (1.0

Depreciation and amortization

     43.8        22.3        24.6   

Retirement benefit expense

     65.0        41.0        46.4   

Unusual items

      

Rocketdyne Business acquisition related costs

     20.0        11.6          

(Gain) loss on legal matters and settlements

     (0.5     0.7        4.1   

Loss on bank amendment

                   1.3   

Loss on debt repurchased

     5.0        0.4        0.2   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDAP

   $ 155.6      $ 110.9      $ 115.4   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDAP as a percentage of net sales

     11.3     11.1     12.6

 

 

(1)

Stock-based compensation expense was $14.1 million, or 1.0% of net sales, $6.5 million, or 0.7% of net sales, and $3.7 million, 0.4% of net sales, for fiscal 2013, fiscal 2012, and fiscal 2011, respectively.

 

(2)

Cost of sales associated with the step-up in fair value of inventory not allocable to our U.S. government contracts was $2.2 million, or 0.2% of net sales, in fiscal 2013.

In addition to segment performance and Adjusted EBITDAP, we provide the Non-GAAP financial measures of free cash flow and net debt. We use these financial measures, both in presenting our results to stockholders and the investment community, and in our internal evaluation and management of the business. Management believes that these financial measures are useful to investors because they permit investors to view our business using the same tools that management uses to gauge progress in achieving our goals.

 

     Year Ended  
     2013(1)     2012(2)     2011  
     (In millions)  

Cash provided by operating activities

   $ 77.6      $ 86.2      $ 76.8   

Capital expenditures

     (63.2     (37.2     (21.1
  

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 14.4      $ 49.0      $ 55.7   
  

 

 

   

 

 

   

 

 

 

 

 

(1)

Capital expenditures in fiscal 2013 related to the consolidation of the Rocketdyne facilities and ERP implementation were $41.8 million.

 

(2)

Capital expenditures in fiscal 2012 related to the implementation of the ERP system was $14.9 million.

 

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     As of November 30,  
     2013     2012     2011  
     (In millions)  

Debt principal

   $ 699.2      $ 248.7      $ 326.4   

Cash and cash equivalents

     (197.6     (162.1     (188.0
  

 

 

   

 

 

   

 

 

 

Net debt

   $ 501.6      $ 86.6      $ 138.4   
  

 

 

   

 

 

   

 

 

 

Because our method for calculating the 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 totaled $4.9 million in fiscal 2013, $6.3 million in fiscal 2012, and $7.1 million in fiscal 2011.

Reserves

We review on a quarterly basis estimated future remediation costs that could be incurred over the contractual term or next fifteen years of the expected remediation. These liabilities have not been discounted to their present value as the timing of cash payments is not fixed or reliably determinable. We 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. With respect to the BPOU site, our estimates of anticipated environmental remediation costs only extend through the term of the project agreement for such site, which expires in 2017, since we are unable to reasonably estimate the related costs after the expiration of such agreement. Therefore no reserve has been accrued for this site for the period after the expiration of the project agreement and we will reevaluate the environmental reserves related to the BPOU site once the terms of a new agreement related to the site are available and we are able to reasonably estimate the related environmental remediation costs. At that time, the amount of reserves accrued following such reevaluation may be significant. As the period for which estimated environmental remediation costs increase, the reliability of such estimates decrease. These estimates consider the investigative work and analysis of engineers, outside environmental consultants, and the advice of legal staff regarding the status and anticipated results of various administrative and legal proceedings. In most cases, only a range of reasonably possible costs can be estimated. In establishing 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 such estimates as new information becomes available. We cannot predict whether new

 

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information gained as projects progress will affect the estimated liability accrued. The timing of payment for estimated future environmental costs is influenced by a number of factors such as the regulatory approval process, the time required to design, construct, and implement the remedy.

A summary of our environmental reserve activity is shown below:

 

     Aerojet
Rocketdyne
Sacramento
    Aerojet
Rocketdyne
BPOU
    Other
Aerojet

Rocketdyne
Sites
    Total
Aerojet

Rocketdyne
    Other     Total
Environmental
Reserve
 
     (In millions)  

November 30, 2010

   $ 139.8      $ 46.1      $ 20.1      $ 206.0      $ 11.7      $ 217.7   

Additions

     21.2        5.9        5.9        33.0        (0.1     32.9   

Expenditures

     (30.3     (13.4     (13.9     (57.6     (2.4     (60.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

November 30, 2011

     130.7        38.6        12.1        181.4        9.2        190.6   

Additions

     24.5        5.9        3.8        34.2        0.5        34.7   

Expenditures

     (14.7     (13.3     (5.1     (33.1     (2.7     (35.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

November 30, 2012

     140.5        31.2        10.8        182.5        7.0        189.5   

Additions

     9.8        5.1        0.1        15.0        3.8        18.8   

Expenditures

     (22.3     (9.4     (2.7     (34.4     (2.6     (37.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

November 30, 2013

   $ 128.0      $ 26.9      $ 8.2      $ 163.1      $ 8.2      $ 171.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The $18.8 million of environmental reserve additions in fiscal 2013 was primarily due to the following items: (i) $6.6 million of additional operations and maintenance for treatment facilities; (ii) $4.4 million of remediation related to operable treatment units; (iii) $2.3 million of additional estimated costs related to the former Toledo, Ohio site; (iv) $1.5 million associated with water replacement; and (v) $4.0 million related to other environmental clean-up matters.

The $34.7 million of environmental reserve additions in fiscal 2012 was primarily due to the following items: (i) $15.3 million of additional operations and maintenance for treatment facilities; (ii) $6.7 million of remediation related to operable treatment units; (iii) $3.5 million of additional estimated costs related to the Camden, Arkansas site; (iv) $1.4 million associated with water replacement; and (v) $7.8 million related to other environmental clean-up matters.

The $32.9 million of environmental reserve additions in fiscal 2011 was primarily due to the following items: (i) $9.0 million associated with water replacement; (ii) $7.6 million of additional operations and maintenance for treatment facilities; (iii) $2.6 million of additional estimated costs related to the Fullerton, California site; (iv) $2.5 million of remediation related to operable treatment units; (v) $2.4 million of additional estimated costs related to the Camden, Arkansas site; and (vi) $8.8 million related to other environmental clean-up matters.

The effect of the final resolution of environmental matters and our obligations for environmental remediation and compliance cannot be predicted with complete certainty due to changes in both the amount and timing of future expenditures as well as regulatory or technological changes. We believe, on the basis of presently available information, that the resolution of environmental matters and our obligations for environmental remediation and compliance will not have a material adverse effect on our business, liquidity and/or financial condition. We will continue our efforts to mitigate past and future costs through pursuit of claims for recoveries from insurance coverage and other PRPs and continued investigation of new and more cost effective remediation alternatives and associated technologies.

As part of the acquisition of the Atlantic Research Corporation (“ARC”) propulsion business in October 2003, Aerojet Rocketdyne entered into an agreement with ARC pursuant to which Aerojet Rocketdyne is responsible for up to $20.0 million of costs (“Pre-Close Environmental Costs”) associated with environmental issues that arose prior to Aerojet Rocketdyne’s acquisition of the ARC propulsion business. Pursuant to a separate agreement with the U.S. government which was entered into prior to the completion of the ARC acquisition, these Pre-Close Environmental Costs are not subject to limitations under the Global Settlement, and are recovered through the establishment of prices for Aerojet Rocketdyne’s products and services sold to the U.S. government.

 

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A summary of the Pre-Close Environmental Costs is shown below (in millions):

 

Pre-Close Environmental Costs

   $ 20.0   

Amount spent through November 30, 2013

     (15.6

Amount included as a component of reserves for environmental remediation costs in the consolidated balance sheet as of November 30, 2013

     (2.9
  

 

 

 

Remaining Pre-Close Environmental Costs

   $ 1.5   
  

 

 

 

Estimated Recoveries

On January 12, 1999, Aerojet Rocketdyne and the U.S. government implemented the Global Settlement resolving certain prior environmental and facility disagreements, with retroactive effect to December 1, 1998. Under the Global Settlement, Aerojet Rocketdyne and the U.S. government resolved disagreements about an appropriate cost-sharing ratio with respect to the cleanup costs of the environmental contamination at the Sacramento and Azusa sites. The Global Settlement cost-sharing ratio does not have a defined term over which costs will be recovered. Additionally, in conjunction with the sale of the EIS business in 2001, Aerojet Rocketdyne entered into 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 annual and cumulative limitations.

A summary of our environmental reserves, recoverable amounts, and range of liability as of November 30, 2013 is presented below:

 

     Reserve      Recoverable Amount      Estimated Range
of Liability
 
     (In millions)  

Sacramento

   $ 128.0       $ 88.2       $ 128.0 – $199.5   

Baldwin Park Operable Unit

     26.9         18.5         26.9 – 57.3   

Other Aerojet Rocketdyne sites

     8.2         7.6         8.2 – 23.2   

Other sites

     8.2         0.8         8.2 – 9.8   
  

 

 

    

 

 

    

 

 

 

Total

   $ 171.3       $ 115.1       $ 171.3 – $289.8   
  

 

 

    

 

 

    

 

 

 

Pursuant to the Global Settlement, prior to the third quarter of fiscal 2010, approximately 12% of environmental costs related to Aerojet Rocketdyne’s Sacramento site and its former Azusa site were charged to the consolidated statements of operations. Subsequent to the third quarter of fiscal 2010, because our estimated environmental costs have reached the reimbursement ceiling under the Northrop Agreement, approximately 37% of such costs will not be reimbursable and were therefore directly charged to the consolidated statements of operations. However, we are seeking to amend our agreement with the U.S. government to increase the amount allocable to U.S. government contracts. There can be no assurances that we will be successful in this pursuit.

Allowable environmental costs are charged to our contracts as the costs are incurred. Aerojet Rocketdyne’s mix of contracts can affect the actual reimbursement made by the U.S. government. Because these costs are recovered through forward-pricing arrangements, the ability of Aerojet Rocketdyne to continue recovering these costs from the U.S. government depends on Aerojet Rocketdyne’s sustained business volume under U.S. government contracts and programs and the relative size of Aerojet Rocketdyne’s commercial business. Annually, we evaluate Aerojet Rocketdyne’s forecasted business volume under U.S. government contracts and programs and the relative size of Aerojet Rocketdyne’s commercial business as part of its long-term business review. Since the acquisition of the Rocketdyne Business closed in the third quarter of fiscal 2013, the prospective mix of contracts may affect the actual reimbursement made by the U.S. government. Under the Global Settlement agreement, environmental costs are allocable to the newly acquired business. Additionally, we are reviewing the percentage of Global Settlement environmental costs allocable to our Aerojet Rocketdyne business and Northrop Grumman. Any change in the percentage allocable will require approval from the U.S. government and if received, this change may materially and favorably affect our results of operations in the period received along with future periods.

 

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Pursuant to the Northrop Agreement, environmental expenditures to be reimbursed are subject to annual limitations and the total reimbursements are limited to a ceiling of $189.7 million. A summary of the Northrop Agreement activity is shown below (in millions):

 

Total reimbursable costs under the Northrop Agreement

   $ 189.7   

Amount reimbursed through November 30, 2013

     (101.2
  

 

 

 

Potential future cost reimbursements available(1)

     88.5   

Long-term receivable from Northrop in excess of the annual limitation included in the Consolidated Balance Sheet as of November 30, 2013

     (72.0

Amounts recoverable from Northrop in future periods included as a component of recoverable from the U.S. government and other third parties for environmental remediation costs in the Consolidated Balance Sheet as of November 30, 2013

     (16.5
  

 

 

 

Potential future recoverable amounts available under the Northrop Agreement

   $   
  

 

 

 

 

 

(1)

Includes the short-term receivable from Northrop of $6.0 million as of November 30, 2013.

Our applicable cost estimates reached the cumulative limitation under the Northrop Agreement during the third quarter of fiscal 2010. We have accumulated $22.8 million of environmental remediation provision adjustments above the cumulative limitation under the Northrop Agreement through November 30, 2013. Accordingly, subsequent to the third quarter of fiscal 2010, we had incurred a higher percentage of expense related to additions to the Sacramento site and BPOU site environmental reserve until an arrangement is reached with the U.S. government. While we are currently seeking an arrangement with the U.S. government to recover environmental expenditures in excess of the reimbursement ceiling identified in the Northrop Agreement, there can be no assurances that such a recovery will be obtained, or if not obtained, that such unreimbursed environmental expenditures will not have a materially adverse effect on our operating results, financial condition, and/or cash flows.

A summary of the current and non-current recoverable amounts from Northrop and the U.S government is shown below:

 

    Recoverable
Environmental
Remediation -
U.S. Government
    Recoverable
Environmental
Remediation -
Northrop
    Total
Recoverable
- U.S
Government
and
Northrop
 
    (In millions)  

November 30, 2010

  $ 128.4      $ 103.0      $ 231.4   

Additions

    21.5               21.5   

Reimbursements

    (41.4     (10.9     (52.3

Other adjustments

    2.7        (1.0     1.7   

Change in Northrop noncurrent receivable (see discussion above)

           7.7        7.7   
 

 

 

   

 

 

   

 

 

 

November 30, 2011

    111.2        98.8        210.0   

Additions

    21.7               21.7   

Reimbursements

    (22.7     (7.0     (29.7

Other adjustments

    1.3        (0.8     0.5   

Change in Northrop noncurrent receivable (see discussion above)

           3.0        3.0   
 

 

 

   

 

 

   

 

 

 

November 30, 2012

    111.5        94.0        205.5   

Additions

    8.7               8.7   

Reimbursements

    (22.6     (7.9     (30.5

Other adjustments

    1.6        (0.9     0.7   

Change in Northrop noncurrent receivable (see discussion above)

           2.7        2.7   
 

 

 

   

 

 

   

 

 

 

November 30, 2013

  $ 99.2      $ 87.9      $ 187.1   
 

 

 

   

 

 

   

 

 

 

 

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Fiscal 2013 Activity

Fiscal 2013 additions — The $8.7 million of additions to the environmental recoverable asset was primarily due to the following items: (i) $3.9 million of additional operations and maintenance for treatment facilities; (ii) $2.6 million of remediation related to operable treatment units; (iii) $0.9 million associated with water replacement; and (iv) $1.3 million related to other environmental clean-up matters.

Fiscal 2013 reimbursements — The $30.5 million of environmental expenditures that were reimbursed related to the following items: (i) $11.5 million for operations and maintenance of treatment facilities; (ii) $9.3 million of remediation related to operable treatment units; (iii) $2.1 million associated with water supply replacement; (iv) $1.6 million of additional estimated costs related to the Camden, Arkansas site; and (v) $6.0 million related to other environmental clean-up matters.

Fiscal 2013 other adjustments — reflects changes in the amount re