Aerojet Rocketdyne Holdings
GENCORP INC (Form: 10-K, Received: 01/30/2015 17:24:21)


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended: November 30, 2014
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from                       to                        
Commission File Number 1-01520
   GenCorp Inc.
( Exact name of registrant as specified in its charte r)
Delaware
 
34-0244000
(State of Incorporation)
 
(I.R.S. Employer
Identification No.)
2001 Aerojet Road
Rancho Cordova, California
 
95742
(Address of Principal Executive Offices)
 
(Zip Code)
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  ý    No   ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No   ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý       No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   ý       No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 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   ý 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  ý
The aggregate market value of the voting common equity held by nonaffiliates of the registrant as of May 31, 2014 was approximately $1.1 billion.
As of January 15, 2015 , there were 62.6 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 2015 Proxy Statement of GenCorp Inc. relating to its annual meeting of stockholders scheduled to be held on March 31, 2015 are incorporated by reference into Part III of this Report.




GenCorp Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended November 30, 2014
Table of Contents  
Item
Number
 
 
PART I
 
1.
Business
1A.
Risk Factors
1B.
Unresolved Staff Comments
2.
Properties
3.
Legal Proceedings
4.
Mine Safety Disclosures
 
 
 
PART  II
 
5.
Market for Registrant’s Common Equity, Related Stockholders’ Matters, and Issuer Purchases of Equity Securities
6.
Selected Financial Data
7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
7A.
Quantitative and Qualitative Disclosures about Market Risk
8.
Consolidated Financial Statements and Supplementary Data
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
9A.
Controls and Procedures
9B.
Other Information
 
 
PART  III
 
10.
Directors, Executive Officers, and Corporate Governance
11.
Executive Compensation
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13.
Certain Relationships and Related Transactions, and Director Independence
14.
Principal Accountant Fees and Services
 
 
PART  IV
 
15.
Exhibits and Financial Statement Schedules
 
 
 
 
Signatures
 
______________
*      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,” “2014  Director Compensation Table,” “Compensation Discussion and Analysis,” “Summary Compensation Table,” “2014 Grants of Plan-Based Awards,” “Outstanding Equity Awards at 2014 Fiscal Year End, “2014 Option/SAR Exercises and Stock Vested,” “2014 Pension Benefits,” “2014 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 2015 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”).
Overview
We are a manufacturer of aerospace and defense products and systems along 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 12,000 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. In addition, we are currently in the process of completing certain infrastructure improvements to the Sacramento Land to reduce the time a developer would have to hold the Sacramento Land before development could start.
Sales, segment performance, total assets, and other financial data of our segments for fiscal 2014, 2013, and 2012 are set forth in Note 10 in Notes to Consolidated Financial Statements included in Item 8 of this Report. Fiscal 2014 and 2013 results include 12 months and 5  1 / 2 months, respectively, of the acquired 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 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 acquisition of substantially all of the Rocketdyne Business pursuant to the Amended and Restated Purchase Agreement. The aggregate consideration to UTC was $411 million 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 manufactures and sells RD-180 engines to RD Amross for resale), and the portion of the UTC business that markets and supports the resale 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

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Purchase Agreement, either party to such agreement may terminate the obligations to consummate the RDA Acquisition on or after June 12, 2014; provided, however, that such termination date may be extended for up to four additional three-month periods (with the final termination date extended until June 12, 2015).   Subject to the terms of the 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 the Russian government approvals will be forthcoming for completion of the RDA Acquisition. In December 2014, we exercised the third option to extend the terms of the Amended and Restated Purchase Agreement for three months through March 2015.
Our fiscal year ends on November 30 of each year. When we refer to a fiscal year, such as fiscal 2014, 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 2014 and 2012. 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 reincorporated to the State of Delaware on April 11, 2014. 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 were 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.
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 every planet in the solar system that has been explored by NASA and have been a cornerstone of the U.S. space program since its inception more than five decades ago. For over 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 several areas of high priority for the U.S. government including support of the nation’s ability to maintain access to space and a strong missile defense. Principal customers include the DoD, NASA, Boeing Company (“Boeing”), Lockheed Martin Corporation (“Lockheed Martin”), Raytheon Company (“Raytheon”), and United Launch Alliance (“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 2014, we successfully transitioned from development to production the upgraded Patriot Advanced Capability-3 (“PAC-3”) Missile Segment Enhancement Solid Rocket Motor and Lethality Enhancement. We also successfully demonstrated a composite rocket motor case enhanced technology providing improved insensitive munitions for the Guided Multiple Launch Rocket Systems (“GMLRS”) rocket motor. Insensitive munitions are munitions that are chemically stable enough to withstand mechanical shocks, fire, and impact by shrapnel, but that can still explode as intended to destroy their targets.

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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 and warheads
Production
Tactical Tomahawk
Raytheon
U.S. Navy
Tactical solid rocket motors and warheads
Production
Tube-launched Optically Wire-guided (“TOW”)
Raytheon
U.S. Army, U.S. Marines
Tactical missile warheads
Production
 
Missile Defense Systems. Aerojet Rocketdyne develops and manufactures liquid and solid divert and attitude control propulsion systems and booster motors for missile defense applications. We also develop and manufacture boost and post-boost rocket motors for strategic missiles. These systems provide launch capability and directional control for critical missile defense interceptors and for ground and sea-based strategic missiles. We are the only developer and manufacturer of both solid and liquid propulsion systems to the DoD and NASA and our propulsion systems are used throughout the world.
In fiscal 2014, we continued the development of the Standard Missile-3 IIA Throttling Divert and Attitude Control System (“TDACS”) program. We delivered our 50 th Standard Missile-3 IB TDACS and progressed the contract into full rate production. We also delivered our 200 th Theater High Altitude Area Defense (“THAAD”) boost motor and progressed to full rate production for both the THAAD Booster and the THAAD Divert and Attitude Control ("DACS") programs. During fiscal 2014, we achieved several successful ground and flight test milestones for the SM-3IB and THAAD programs, and supported the successful return to flight for the Ground Based Missile Defense (“GMD”) Exoatmospheric Kill Vehicle (“EKV”) program. We continued development of advanced propellant tanks and an alternate thruster in support of the GMD EKV 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
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 support the entire breadth of propulsion and energetic products within the defense products portfolio by developing robust processes and innovative technologies demanded by our customers, as well as new capabilities required in next generation weapon systems. Our capabilities include a hypersonic propulsion team with decades of experience pioneering the development of liquid and solid fueled propulsion technologies for supersonic and hypersonic systems, which ultimately resulted in the selection of the X-51A propulsion program as a finalist for the 2014 Collier Trophy Award. We maintain key positions on ground-breaking government hypersonic propulsion demonstration programs such as the Triple Target Terminator ("T3") program, which successfully demonstrated our variable flow ducted rocket propulsion system in flight through three different missions at the beginning of fiscal 2014. We have developed and ground tested 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. We have also successfully developed and hot-fire tested Large Class stage 2 solid motors and are actively

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developing a solution for the Medium Class stage 3 motor in support of Ground Based Strategic Defense ("GBSD") systems which will provide new propulsion systems for all of our nation’s strategic nuclear land-based capability.
The application of innovative solutions across multiple product lines, such as Selective Laser Melting/Additive Manufacturing has resulted in a cost reduction in our hypersonic systems, removing a significant barrier in creating a major new market for this class of weapon systems. We have achieved significant results in extending the range and operability of next generation TDACS for future missile defense system upgrades. In addition, two new areas have recently been added to our portfolio: (i) maritime systems with a focus on advanced torpedoes, torpedo defense, and unmanned underwater systems, and (ii) unmanned aerial systems (“UAS”) and counter UAS defense solutions. Relentless research, rapid prototyping, and development work continue to advance next generation propulsion enablers in tactical, strategic, and adjacent energetic markets. This combined with a renewed focus on early strategic partnerships with key primes and new market entrants, pose exciting new opportunities for Aerojet Rocketdyne.

A subset of our key defense advanced programs is listed below:
 
Program
Primary
Customer
End Users
Program Description
Program Status
ARDEC Warhead Development
ARDEC Picatinny
U.S. Army
Fabrication Complex Advanced Artillery Hardware
Development
Conventional Prompt Global Strike
Raytheon, Lockheed Martin
U.S. Navy
Hypersonic boost glide technology
Development
High Speed Strike Weapon First Strike Missile
U.S. Air Force Research Laboratory ("AFRL")
U.S. Air Force
Hypersonic technology applied to strike missile
Development
Large Class II Tech Demo
Air Force Nuclear Weapons Center
U.S. Air Force
Technology update of Strategic Missile Upper Stage
Development
Leonidas Flight Motors
Hawaii Space Flight Laboratory
U.S. Air Force
Provide first flight motors for Leonidas Launch Vehicle
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
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 continue to project strong support related to National Security Space requirements enabling communications, navigation, 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, as well as a limited number of Delta II vehicles which are supporting commercial customers launching earth observation spacecraft. Additionally, we have provided booster propulsion for Orbital Sciences Corporation's (“Orbital”) Antares launch vehicle which provides cargo transportation services to the International Space Station (“ISS”) through the NASA Cargo Resupply Services (“CRS”) contract.
During 2014, we completed a total of sixteen successful launches that were comprised of nine Atlas V, one Delta II, four Delta IV, and two Antares missions. These included multiple National Security spacecraft, several commercial spacecraft, ISS cargo resupply via the Antares vehicle, and the EFT-1 mission on a Delta IV Heavy vehicle which represented the inaugural launch of NASA’s Orion spacecraft on a test flight to validate its complex systems for future human deep space exploration as part of the NASA Space Launch System Program. One additional Antares mission did experience a launch failure which continues to be under investigation as to root cause at this time.
 

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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 support the entire breadth of propulsion products within its space propulsion portfolio by developing next generation propulsion solutions, robust processes and advanced technologies demanded by our customers. Franchise technology demonstration programs and new product development efforts are featured to effectively transition our products to our core space markets.
During 2014, we achieved a number of significant milestones on NASA Space Launch System (“SLS”) and Commercial Crew programs. For SLS we completed planned development testing of our J2-X engine which is slated to power the upper stage of the heavy lift SLS version. J2-X is an upgraded and modernized version of the original Apollo moon mission engine. We also expanded our efforts related to SLS’s use of the RS-25 engine (core Space Shuttle Main Engine - SSME) to include both adaptation and integration of repurposed existing SSMEs, and restart/update of RS-25 engine manufacturing for future SLS needs. Finally, we completed qualification testing and delivery of the reaction control thrusters for the Orion crew module and the jettison motor for the Launch Abort System that successfully completed its initial flight test in December 2014. The Orion system will mate with SLS to provide our nation’s return to human space flight capability.
Aerojet Rocketdyne in 2014 was selected by Boeing, who in turn, was selected by NASA to develop and qualify propulsion systems for the next generation crew vehicle (Boeing’s CST-100 spacecraft) that will provide human transportation to and from the ISS and potentially other low Earth orbit missions. Boeing’s CST-100 incorporates our crew module reaction control thrusters, service module propulsion system and tanks.
Space advanced programs continued to mature critical technologies for our nation’s next generation of advanced hydrocarbon engines for future high-performance booster systems with the ability to eliminate the U.S. dependence on Russian-provided booster systems for National Security Space Launch. Other leading edge technology development areas include next generation satellite and spacecraft high-power solar electric propulsion, “green” liquid propellant engines and nuclear space power systems. Finally, we’ve made significant investments in the field of Additive Manufacturing that is expected to provide significant cost and schedule savings over traditional manufacturing techniques with application to nearly all Aerojet Rocketdyne propulsion products.

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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
Development
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
Development
High Power Solar Electric Vehicles
NASA, U.S. Air Force
NASA, DoD, Commercial
High power solar electric propulsion module development
Development
Hydrocarbon Booster Technology Demonstrator
AFRL
U.S. Air Force
On-orbit demonstration of green propellant propulsion Liquid booster
Development
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 launch vehicle attitude control, satellite and spacecraft propulsion products for low thrust engines and systems for domestic and international in-space and launch markets. We are 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, our key satellite and spacecraft propulsion capabilities cover the entire spectrum required by our customers including requirements definition and trade studies, design and development, fabrication and assembly, test and post-delivery support.
In fiscal 2014, we continued to grow our market penetration in the area of electric propulsion for spacecraft buses. We received contract awards for production on the Orbital Sciences Geostar 3 and Lockheed Martin A2100R commercial communications spacecraft.
In the space power business area, our Lithium Ion batteries program is scheduled to deliver the first production unit in 2015 for the ISS.  Our electrical power system has operated the ISS with uninterrupted power for over 13 years and, together with the batteries, will continue to power the ISS to 2024 and beyond. Also in space power, our systems were once again selected by NASA to power the new Mars 2020 Rover spacecraft, the latest in a series of Mars lander vehicles flown by the agency. Our Multi-mission Radioisotope Thermoelectric Generator (“MMRTG”) will continuously provide both heat and electrical power to the rover to allow day and night operations and to provide thermal stability for on-board electronics and mechanical systems.


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A subset of our key space systems programs is listed below:
 
Program
Primary
Customer
End Users
Program Description
Program Status
A2100TR Communications Satellite
Lockheed Martin
Commercial
Electric hall thrusters, arcjets, Monopropellants
Production
Advanced Extremely High Frequency Satellites
Lockheed Martin
U.S. Air Force
Electric and chemical thrusters
Production
Commercial Crew Transportation Capability
Boeing
NASA
Monopropellant thrusters
Development/Production
Boeing HS702MP Commercial Communications Satellite
Boeing
Various
Electric and chemical thrusters
Development/Production
Cygnus
Orbital
Commercial
Monopropellant thrusters
Production
Geostar 3 Communications satellite
Orbital
Commercial
Electric and chemical thrusters
Development/Production
Geostationary Operational Environmental Satellite R-Series
Lockheed Martin
NASA
Electric and chemical 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
Monopropellant 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 enabling technologies and products that have strengthened multiple branches of the U.S. military and enabled the exploration of space. We believe Aerojet Rocketdyne maintains a unique competitive position due to a strategic focus on creating and maintaining a broad spectrum of propulsion and energetic products assisted by the growing market demand for its innovative energy management technologies. 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 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 $3.1 billion as of November 30, 2014 and our funded

9



backlog, which includes only amounts for which funding has been authorized by a customer and a purchase order has been received, totaled $2.2 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 create significant obstacles for potential competitors. As a result, we are the sole provider 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 early in the bidding process, 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
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. 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 to apply this broad range of industry-leading propulsion technology across our entire portfolio of propulsion products. Our position is reinforced by a deep product portfolio of proven products that have flown successfully in some cases for decades, resulting in an unparalleled reputation for mission success.
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 the space launch market, new entrants have recently appeared, offering new propulsion solutions with claims of much lower cost and comparable reliability. Though these proposed products are largely unproven and do not possess the long history of reliability demonstrated by our offerings, the claim of low cost has been viewed by our traditional customers in this area with considerable interest.
In other markets, the dynamics can be different, with more numerous, but smaller awards and a similar number of competitors. Although market competition in some of these sectors can be intense, we believe we possess innovative and cost effective advanced propulsion and armament solutions, combined with adequate resources to continue to compete successfully.
The table below lists the primary participants in the propulsion market:

10



 
Company
 
Parent
 
Propulsion Type
 
Propulsion Application
 
Aerojet Rocketdyne
GenCorp
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 ("ATK")
Alliant Techsystems Inc.
Solid, air-breathing
Launch, tactical, strategic, missile defense
Avio
Avio S.p.A
Solid, liquid
Launch, in-space
Blue Origin
Blue Origin
Liquid
Launch
Electron Technologies, Inc.
L-3 Communications Corporation
Electric
In-space
General Dynamics OTS
General Dynamics
Solid
Tactical
Nammo Talley
Nammo Talley
Solid
Tactical
Northrop Grumman Space Technology
Northrop Grumman Corporation (“Northrop”)
Liquid
In-space
Moog Inc.
Moog Inc.
Liquid, electric
In-space, missile defense
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 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 continue to rely on particular levels of U.S. government spending on propulsion systems for defense, space and armament systems, precision tactical weapon systems and munitions applications, and our backlog depends, in large part, on continued funding by the U.S. government for the programs in which we are involved. These funding levels are not generally correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this type of funding. Moreover, although our contracts often contemplate that our services will be performed over a period of several years, the U.S. Congress must appropriate funds for a given program and the U.S. President must sign government budget legislation each government fiscal year (“GFY”) and may significantly increase, decrease or eliminate, funding for a program. A decrease in DoD and/or NASA expenditures, the elimination or curtailment of a material program in which we are or hope to be involved, or changes in payment patterns of our customers as a result of changes in U.S. government outlays, could have a material adverse effect on our operating results, financial condition, and/or cash flows.
The Bipartisan Budget Act of 2013 set overall discretionary spending levels for GFY 2014 and 2015 and eased sequestration spending cuts to the DoD and other federal agencies (e.g., NASA) for GFY 2014 and 2015, paving the way for eventual agreements on GFY 2014 and 2015 Appropriations for all federal agencies. For GFY 2015, Congress approved a $1.0 trillion “Omnibus” Appropriations bill, averting a U.S. government shutdown and providing a sense of stability for industry.  The omnibus legislation contains 11 full year appropriations bills - including Defense and Commerce, Justice, Science (that includes NASA funding) - and a shorter-term Continuing Resolution ("CR") for the Department of Homeland Security.  The defense portion of the bill provides $490.2 billion in discretionary funding for GFY 2015, which is $3.3 billion above the GFY 2014 amount, and nearly equal to the President’s Budget Request for GFY 2015.  In addition, the bill includes $64.0 billion in Overseas Contingency Operations for the ongoing war efforts abroad.  The NASA portion of the bill includes a top line of $18.0 billion, which is $0.5 billion above the President’s budget request for GFY 2015 and $0.4 billion above the GFY 2014 appropriated amount.  Without Congressional action in 2015 to change or modify the Bipartisan Budget Act of 2013, sequestration will return in January 2016. 
Despite overall U.S. government budget pressures, we believe we are well-positioned to benefit from funding in DoD and NASA priority areas. This view reflects the DoD’s strategic guidance report released in January 2012, and the recently released 2014 Quadrennial Defense Review (“QDR”) 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. The QDR explicitly states Missile Defense, Space, Nuclear Deterrence, and Precision Strike as key capabilities for the DoD to preserve.

11



The NASA Authorization Act has again identified the SLS program as one of its top priorities in the NASA GFY 2015 budget. The SLS program also has enjoyed wide, bipartisan support in both chambers of Congress. We maintain a strong relationship with NASA and our propulsion systems have been powering NASA launch vehicles and spacecraft since the inception of the U.S. space program. Our booster 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 and from the ISS for the better part of this decade. NASA has been working to re-establish U.S. manned space capability as soon as possible through development of 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 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
 
2014
 
2013
 
2012
Lockheed Martin
28
%
 
23
%
 
32
%
ULA
25

 
18

 
*

Raytheon
17

 
32

 
37

NASA
11

 
*

 
*

__________
*
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 92% of sales in fiscal 2014. 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 2014:
 
U.S. Air Force
27
%
NASA
20

U.S. Army
18

MDA
14

U.S. Navy
13

Total U.S. government customers
92

Other customers
8

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 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” (largely used by the government for production-type contracts) or “cost-reimbursable” (largely used by the government for development-type contracts). During fiscal 2014, approximately 50% of our net sales were from fixed-price contracts, 43% from cost-reimbursable contracts, and 7% from other sales including commercial contracts and real estate activities.
 
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

12



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 ("DCMA"), 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.
 
Backlog
A summary of our backlog is as follows:
 
 
As of November 30,
 
2014
 
2013
 
(In billions)
Funded backlog
$
2.2

 
$
1.7

Unfunded backlog
0.9

 
0.8

Total contract backlog
$
3.1

 
$
2.5


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, 2014 total contract backlog, approximately 48% , or approximately $1.5 billion , is expected to be filled within one year.
Seasonality
Aerojet Rocketdyne’s business is not subject to predictable seasonality. Primary factors affecting the timing of our sales include the timing of government awards, the availability of U.S. government funding, contractual product delivery requirements, customer acceptances, and regulatory issues.

13



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
 
2014
 
2013
 
2012
 
(In millions)
Customer-funded
$
478.0

 
$
339.1

 
$
271.8

Company-funded
51.9

 
42.9

 
30.3

  Total research and development expenditures
$
529.9

 
$
382.0

 
$
302.1

Suppliers and Raw Materials
The national aerospace supply base continues to consolidate due to economic, environmental, and marketplace circumstances beyond our control. The loss of key qualified suppliers of technologies, components, and materials can cause significant disruption to our program performance and cost.
 
Availability of raw materials and supplies has been generally sufficient. We sometimes are dependent, for a variety of reasons, upon sole-source or qualified suppliers and have, in some instances in the past, experienced difficulties meeting production and delivery obligations because of delays in delivery or reliance on such suppliers. 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 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 SLS 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.
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 an unauthorized third party making, using, selling, offering to sell

14



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 in 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 details 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 12,000 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 technology coupled with the relocation of certain of our propulsion operations led us to determine large portions of the Sacramento Land were no longer needed for operations. Consequently, our plan has been to 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 2,156 acres that are fully entitled and approximately 2,309 acres have received “limited entitlements.” Our remaining entitlement and infrastructure 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.
Regarding our Glenborough at Easton and Easton Place projects, in fiscal 2014, we completed key milestones in relocating certain Aerojet Rocketdyne utility facilities which will enable us to start the development of infrastructure in the near-term. These key utility facilities included power, telecommunication, road, and water facilities serving the Aerojet Rocketdyne campus.
In fiscal 2014, we worked with the City of Folsom on completing the balance of the required entitlements for the Hillsborough at Easton project, including the total impact fees and development agreement. The final approvals by the Folsom City Council were completed in early 2014.
During fiscal 2014, 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, and estimate that these agreements will be completed in 2015 and bring that project to full entitlement.
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.


15



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

 
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
 
612

 
97

 
709

 
709

 

Office Park and Auto Mall
 
47

 
8

 
55

 
55

 

     Total Easton acreage
 
4,907

 
1,217

 
6,124

 
2,156

 
2,309

Operations land (4)
 
24

 
5,179

 
5,203

 
 

 
 

Land available for future entitlement (5)
 
447

 
242

 
689

 
 

 
 

      Total Sacramento Land
 
5,378

 
6,638

 
12,016

 
 

 
 

_________
(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 adequate for our long-term needs. As we reassess needs in the future and as propulsion technology continues to advance, 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 0.4 million square feet of office space in Sacramento to various third parties. These leasing activities generated $6.2 million in revenue in fiscal 2014.
We also own approximately 580 acres of land in Chino Hills, California. This property was used for the manufacture and testing of ordnance. With the sale of our ordnance business in the mid-1990s, we closed this facility and commenced clean-up of the site. We continue to work with state regulators and the City of Chino Hills to complete those efforts.
Environmental Matters
Our current and former business operations are subject to, and affected by, federal, state, local, and foreign environmental laws and regulations relating to the discharge, treatment, storage, disposal, investigation, and remediation of certain materials, substances, and wastes. Our policy is to conduct our business with due regard for the preservation and protection of the environment. We continually assess compliance with these regulations and we believe our current operations are materially in compliance with all applicable environmental laws and regulations.
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 amount and timing of cash payments are 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

16



remediation costs only extend through the term of the project agreement for such site, which expires in 2017, since we cannot yet estimate the future cost due to the uncertainty of project definition, participation and approval by numerous third parties and the regulatory agencies, and the length of a project agreement. Therefore no reserve has been established 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 timing of payment for estimated future environmental costs is influenced by a number of factors such as the regulatory approval process and the time required to design, construct, and implement the remedy.
  A summary of our recoverable amounts, environmental reserves, and range of liability, as of November 30, 2014 is presented below:
 
Recoverable
Amount(1)
 
Reserve
 
Estimated Range
of Liability
 
(In millions)
Aerojet Rocketdyne - Sacramento
$
84.1

 
$
130.4

 
$130.4 - $211.3
Aerojet Rocketdyne - BPOU
14.0

 
21.7

 
21.7 - 35.6
Other Aerojet Rocketdyne sites
7.8

 
8.1

 
8.1 - 20.0
Other sites
0.7

 
5.8

 
5.8 - 8.0
Total
$
106.6

 
$
166.0

 
$166.0 - $274.9
_______
(1)
Excludes the long-term receivable from Northrop of $ 74.8 million as of November 30, 2014 related to environmental costs already paid (and therefore not reserved) by the Company in prior years that are expected to be reimbursed by Northrop.
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.
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 likely 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 as to when or if 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. 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 and cash flows in the period received along with future periods.

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The inclusion of such environmental costs in our contracts with the U.S. government impacts our competitive pricing; however, we believe that this impact is mitigated by driving improvements and efficiencies across our operations as well as our ability to deliver innovative and quality products to our customers.

Under existing U.S. environmental laws, 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 amounts and timing of cash payments are not fixed or reliably determinable.
We did not incur material capital expenditures for environmental control facilities in fiscal 2014 nor do we anticipate any material capital expenditures in fiscal 2015 and 2016. 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, 2014 , 14% of our 5,071  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 continue to rely on particular levels of U.S. government spending on propulsion systems for defense, space and armament systems for precision tactical weapon systems and munitions applications, and our backlog depends, in a large part, on continued funding by the U.S. government for the programs in which we are involved. These spending levels are not generally correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this type of spending. Moreover, although our contracts often contemplate that our services will be performed over a period of several years, the U.S. President must propose and Congress must appropriate funds for a given program each GFY and may significantly change, increase, reduce or eliminate, funding for a program.
A decrease in DoD and/or NASA expenditures, the elimination or curtailment of a material program in which we are involved, or changes in payment patterns of our customers as a result of changes in U.S. government spending, could have a material adverse effect on our operating results, financial condition, and/or cash flows.
The cancellation or material modification of one or more significant contracts could adversely affect our financial results.
Sales, directly and indirectly, to the U.S. government and its agencies accounted for approximately 92% of our total net sales in fiscal 2014 . Our contracts typically permit the U.S. government to unilaterally modify or terminate a contract or to discontinue funding for a particular program at any time. The cancellation of a contract, if terminated for cause, could also subject us to liability for the excess costs incurred by the U.S. government in procuring undelivered items from another source. If terminated for convenience, our recovery of costs would be limited to amounts already incurred or committed (including severance costs for terminated employees), and our profit would be limited based on the work completed prior to termination.
In addition, termination or suspension of any of our significant commercial contracts could result in the loss of future sales and unreimbursable expenses that could have a material adverse effect on our operating results, financial condition, and/or cash flows.  Furthermore, the termination of any such contracts for default could also have a material adverse effect on our reputation and ability to obtain new business in the future.


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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 and accounting systems. 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 2014 , approximately 50% 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 2014 , approximately 43% 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.
  Antares ORB-3 launch failure may result in the termination of our AJ-26 supply contract and we may face significant damage claims
On October 28, 2014, an Antares launch vehicle carrying the Cygnus ORB-3 capsule (“ORB-3”) suffered a catastrophic failure approximately 15 seconds after liftoff. No individuals were injured in the incident but the ORB-3 launch vehicle and its payload were destroyed and the launch facility incurred damage. The ORB-3 launch was one of the flights under Orbital’s Commercial Resupply Contract with NASA. The Antares launch vehicle was powered by two AJ-26 liquid rocket engines supplied by us. An Accident Investigation Board (“AIB”) was formed promptly following the incident by the Federal Aviation Authority (“FAA”), which delegated leadership of the AIB to Orbital, to conduct an inquiry into the cause of the launch failure. NASA has separately established an Independent Review Team (“IRT”) to review, among other matters, the cause of the launch failure. We are conducting a detailed investigation into the performance of the AJ-26 engines in addition to and in support of the AIB and IRT efforts. One of the focuses of the investigations is the root cause of the failure of the turbopump in one of the AJ-26 engines. No conclusions have yet been reached by either the AIB or the IRT as to the root cause of the failure. In the event that the AIB or the IRT determine either that the root cause of the launch failure was one of the AJ-26 engines or is not determinable, Orbital may attempt to terminate the AJ-26 supply contract for default and we may face significant claims for damages from Orbital which, if determined adversely to us, could have a material adverse effect on our operating results, financial condition, and/or cash flows.
Orbital has announced plans to replace the AJ-26 engines on all future launches and to contract with other launch providers to fulfill its remaining commitments with NASA. By letter dated November 4, 2014, Orbital directed us to stop work on the AJ-26 supply contract, indicating at that time a complete or partial termination for convenience could be issued within 90 days.
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 liquidated damages or our customer terminating our contract for default. A termination for default could expose us to liability and adversely affect our financial performance and our ability to win new contracts.

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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. The U.S. government also has its own manufacturing capabilities in some areas. We may be unable to compete successfully with our competitors and our inability to do so could result in a decrease in sales, profits, and cash flows that we historically have generated from certain contracts. Further, the U.S. government may open to competition programs on which we are currently the sole supplier, which could have a material adverse effect on our operating results, financial condition, and/or cash flows.
Our Aerospace and Defense segment is subject to procurement and other related laws and regulations inherent in contracting with the U.S. government, non-compliance with which could adversely affect our financial results.
In the performance of contracts with the U.S. government, we operate in a highly regulated environment and are routinely audited and reviewed by the U.S. government and its agencies, such as the DCAA. These agencies review performance under our contracts, our cost structure and our compliance with applicable laws, regulations and standards, as well as the adequacy of, and our compliance with, our internal control systems and policies. Systems that are subject to review include, but are not limited to, our accounting systems, purchasing systems, property management systems, estimating systems, earned value management systems, and material management and accounting system. Any costs ultimately found to be unallowable or improperly allocated to a specific contract will not be reimbursed or must be refunded if already reimbursed. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties, sanctions or suspension or debarment from doing business with the U.S. government. Whether or not illegal activities are alleged, the U.S. government also has the ability to decrease or withhold certain payments when it deems systems subject to its review to be inadequate. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. If such actions were to result in suspension or debarment, this could have a material adverse effect on our business.
These laws and regulations provide for ongoing audits and reviews of incurred costs as well as contract procurement, performance and administration. The U.S. government may, if it deems appropriate, conduct an investigation into possible illegal or unethical activity in connection with these contracts. Investigations of this nature are common in the aerospace and defense industry, and lawsuits may result. In addition, the U.S. government and its principal prime contractors periodically investigate the financial viability of their contractors and subcontractors as part of its risk assessment process associated with 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.
 
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 is 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.

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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, 2014; provided, however, that such termination date may be extended for up to four additional three-month periods (with the final termination date extended until June 12, 2015). 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 from the Russian government will be forthcoming for completion of the RDA Acquisition. In December 2014, we elected the third option to extend the terms of the Amended and Restated Purchase Agreement for three months.
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 effectively our new enterprise resource planning (“ERP”) system with respect to the Rocketdyne Business;
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 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

21



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 fiscal 2015 related to the integration of the Rocketdyne Business.
We have already incurred substantial expenses in connection with the Acquisition of the Rocketdyne Business. We incurred $31.6 million of expenses related to the Acquisition through November 30, 2013.
In addition, we have incurred and capitalized $38.5 million , which we believe will be allocated to our U.S. government contracts, of Rocketdyne Business integration costs through November 30, 2014. These integration costs are reimbursable by the U.S. government upon its audit and approval that our planned integration savings will exceed our restructuring costs by a factor of at least two to one. In December 2014, we were informed that the DCAA had completed its audit of our restructuring proposal and found that we had achieved the required two to one savings to restructuring cost ratio. Actual recovery of the previously deferred integration costs will take place after the final execution of an Advance Agreement with the DCMA and determination from the Under Secretary of Defense that the audited restructuring savings exceed the costs by a factor of two to one.  We believe these final two actions will be completed in fiscal 2015. We review on a quarterly basis the probability of recovery of these costs.
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.
The increase in our leverage and debt service obligations as a result of the Acquisition and to refinance our convertible debentures 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. In addition, in fiscal 2014, we repurchased $59.6 million principal amount of our 4.0625% Convertible Subordinated Debentures (“4  1 / 16 % Debentures”) at various prices ranging from 195% of par to 212% of par with proceeds from the subordinated credit facility. See Note 6 in Notes to Consolidated Financial Statements.
We have $ 782.2 million of outstanding indebtedness as of November 30, 2014. 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.
 
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

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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.
As a U.S. defense contractor, we face cyber threats, insider threats, threats to the physical security of our facilities and employees, and terrorist acts, as well as the potential for business disruptions associated with information technology failures, natural disasters, or public health crises.
We routinely experience cyber security threats, threats to our information technology infrastructure and unauthorized attempts to gain access to our sensitive information, as do our customers, suppliers, and subcontractors. We may experience similar security threats at customer sites that we operate and manage as a contractual requirement.
Prior cyber attacks directed at us have not had a material impact on our financial results, and we believe our threat detection and mitigation processes and procedures are adequate. The threats we face vary from attacks common to most industries to more advanced and persistent, highly organized adversaries who target us because we protect national security information. If we are unable to protect sensitive information, our customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures. Due to the evolving nature of these security threats, however, the impact of any future incident cannot be predicted.
Although we work cooperatively with our customers, suppliers, and subcontractors to seek to minimize the impact of cyber threats, other security threats or business disruptions, we must rely on the safeguards put in place by these entities, which may affect the security of our information. These entities have varying levels of cyber security expertise and safeguards and their relationships with U.S. government contractors, such as Aerojet Rocketdyne, may increase the likelihood that they are targeted by the same cyber threats we face.
The costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means. Occurrence of any of these events could adversely affect our internal operations, the services we provide to our customers, our future financial results, our reputation or our stock price; or such events could result in the loss of competitive advantages derived from our research and development efforts or other intellectual property, early obsolescence of our products and services, or contractual penalties.
 
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 Rocketdyne Business into our 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. We integrated the Rocketdyne Business into our ERP system on January 1, 2015, but have not yet completed our data validation process.
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.

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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 SLS 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 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.
As of the last measurement date at November 30, 2014 , our total defined benefit pension plan assets, total projected benefit obligations, and unfunded pension obligation for the tax-qualified pension plans were approximately $1,163.1 million , $1,666.3 million , and $482.8 million , respectively. We do not expect to make any significant cash contributions to our tax-qualified defined benefit pension plan until fiscal 2016. We estimate that approximately 86% of our unfunded pension obligation as of November 30, 2014 is related to Aerojet Rocketdyne which will be recoverable through our U.S. government contracts.
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

24



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.
Additionally, the level of returns on retirement benefit assets, changes in interest rates, changes in legislation such as the new mortality tables, 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 the Pension Protection Act ("PPA") or the amount of funding that can be recorded in our overhead rates through our U.S. government contracting business. Our earnings are positively or negatively impacted by the amount of expense or income we record for our employee retirement benefit plans.
The level of returns on retirement benefit assets, changes in interest rates, changes in legislation, and other factors affects our financial results.
Our earnings are positively or negatively impacted by the amount of expense or income we record for our employee retirement benefit plans. We calculate the expense for the plans based on actuarial valuations. These valuations are based on assumptions that we make relating to financial market and other economic conditions. Changes in key economic indicators result in changes in the assumptions we use. The key assumptions used to estimate retirement benefit expense for the following year are the discount rate and expected long-term rate of return on 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, 2014, the aggregate range of our estimated future environmental obligations was $166.0 million to $274.9 million and the accrued amount was $166.0 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 are 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 local laws and regulations, and the

25



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.
 
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, 2014, we had $ 782.2 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;

26



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 amended senior credit facility entered into on May 30, 2014 (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, 4  1 / 16 % Debentures and subordinated credit facility.
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.
 
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, 2014. Any of the covenants described in this risk factor may restrict our operations and our ability to pursue potentially advantageous business opportunities. Our failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in the acceleration of the Senior Credit Facility, the Subordinated 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 subordinated credit facility, 7  1 / 8 % Notes and 4  1 / 16 % Debentures.
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;

27



we may be unable to obtain sufficient water sources to service our projects, which may prevent us from executing our plans;
our real estate activities may require significant expenditures and we may not be able to obtain financing on favorable terms, which may render us unable to proceed with our plans;
economic and political uncertainties could have an adverse effect on consumer buying habits, construction costs, availability of labor and materials and other factors affecting us and the real estate industry in general;
our property is subject to federal, state, and local regulations and restrictions that may impose significant limitations on our plans;
much of our property is raw land that includes the natural habitats of various endangered or protected wildlife species requiring mitigation;
if our land use plans are approved by the appropriate governmental authorities, we may face lawsuits from those who oppose such plans. Such lawsuits and the costs associated with such opposition could be material and have an adverse effect on our ability to sell property or realize income from our projects; and
the time frame required for approval of our plans means that we will have to wait years for a significant cash return.
Substantially all of our excess real estate, that we are in the process of entitling for new opportunities, is located in Sacramento County, California making us vulnerable to changes in economic and other conditions in that particular market.
As a result of the geographic concentration of our properties, our long-term real estate performance and the value of our properties will depend upon conditions in the Sacramento region, including:
the sustainability and growth of industries located in the Sacramento region;
the financial strength and spending of the State of California;
 
local real estate market conditions;
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 we have incurred and may incur additional costs. 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, 2014, 14% of our 5,071 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

28



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.
 
If we are unable to effectively and efficiently implement the necessary initiatives to eliminate the material weaknesses identified in our internal controls and procedures, there could be an adverse effect on our operations or financial results. “Out of period” adjustments could require us to restate previously issued financial statements.
We identified material weaknesses in the Information and Communication component of internal control due to the following matters: (i) we did not maintain effective controls over information and communications between the Aerojet Rocketdyne parent, the Rocketdyne Business and other third parties performing services for us under Transition Service Agreements associated with the acquisition of the Rocketdyne Business; (ii) we did not maintain effective controls over the integration of our policies, practices and controls applicable to the acquired Rocketdyne Business; and (iii) we did not maintain effective controls over the timely capitalization and depreciation of assets placed into service at the acquired Rocketdyne Business. As a result of these material weaknesses, errors occurred in several significant accounts in fiscal 2014 interim consolidated financial statements that were not detected. The areas most affected by this deficiency include net sales, costs of sales, depreciation expense, inventory, accounts receivable, and property, plant and equipment, net . Due to these material weaknesses, management believes that as of November 30, 2014, our internal control over financial reporting was not effective based on the Committee of Sponsoring Organizations of the Treadway Commission criteria. We have and continue to implement various initiatives in fiscal 2015 to improve our internal controls over financial reporting and address the matters discussed in Management’s Report on Internal Control over Financial Reporting. The implementation of the initiatives and the consideration of additional necessary improvements are among our highest priorities. Management will continually assess the progress of the initiatives and the improvements, and take further actions as deemed necessary. In addition, management will report such progress to the Board of Directors, under the direction of the Audit Committee. Until the identified material weaknesses are eliminated, there is a risk of an adverse effect on our operations or financial results.
In addition, we have in the past recorded, and may in the future record, revisions or 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 adjustment to our financial statements is material and whether such adjustments, individually or in the aggregate, would require us to restate 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 revised our quarterly financial information in fiscal 2014 and recorded out of period adjustments in other prior periods. In the future we may identify further revisions or 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 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

29



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; 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*
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
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 117 asbestos cases pending as of November 30, 2014 .
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.
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 . Aerojet Rocketdyne filed its answer to the complaint denying AMEC’s allegations and discovery is ongoing. As of November 30, 2014, AMEC contends it has incurred approximately $3.0 million in past legal fees and expenses. The court has scheduled a trial date for May 18, 2015. The parties attended a mediation session on December 9, 2014 and negotiations are ongoing. As of November 30, 2014, the Company has accrued $0.2 million related to this matter. None of the expenditures related to this matter are recoverable from the U.S. government.
The following table sets forth information related to our historical product liability costs associated with our asbestos litigation (dollars in millions):

30



 
Year Ended
 
 
2014
 
2013
 
2012
 
Claims filed
14

***
18

**
19

*
Claims dismissed
23

 
25

 
21

 
Claims settled
3

 
5

 
3

 
Claims pending
117

 
129

 
141

 
Aggregate settlement costs
$
0.3

 
$
0.6

 
$
0.1

 
Average settlement costs
$
0.1

 
$
0.1

 
$

 
_______
* 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.
*** This number is net of two cases tendered to a third party under a contractual indemnity obligation.
Legal and administrative fees for the asbestos cases for fiscal 2014, 2013, and 2012 were $0.4 million for all years presented.
Inflective, Inc. (“Inflective”) Litigation
On December 18, 2014, Inflective filed a complaint against Aerojet Rocketdyne and Kathleen E. Redd, individually, in the Superior Court of the State of California, Sacramento County, Inflective, Inc. v Aerojet Rocketdyne, Inc., Kathleen E. Redd, et al, Case No. T4358. Inflective asserts in the complaint causes for breach of contract, breach of implied contract, false promise, inducing breach of contract, intentional interference with contractual relations, negligent interference with prospective economic relations and intentional interference with prospective economic relations and is seeking damages in excess of $3 million, punitive damages, interest and attorney’s costs. The complaint arises out of the Company’s implementation of ProjectOne, a company-wide ERP system, for which Inflective had been a consultant to the Company. The Company believes the allegations are without merit and intends to contest this matter vigorously. No estimate of liability has been accrued for this matter as of November 30, 2014.
Groundwater Litigation
The Company owned and operated a former rubber processing plant in Wabash, Indiana from 1937 to 2004. Pursuant to a request from the Indiana Department of Environmental Management (“IDEM”), the Company conducted an initial site investigation of the soil and groundwater at the site and a report was submitted to IDEM. By letter of June 11, 2014, IDEM directed the Company to conduct additional investigation of the site, including a vapor intrusion investigation in areas in and around the site where trichloroethene levels in groundwater were found to exceed screening levels for vapor intrusion. A vapor mitigation system was installed in one residence where indoor air screening levels were exceeded and efforts are ongoing to install mitigation systems at two other locations. The Company intends to conduct further investigations of the site in accordance with the IDEM request. The Company sent demands to other former owners/operators of the site to participate in the site work, but no party has agreed to participate as of yet. As of November 30, 2014 , the estimated range of the Company's share of anticipated remaining costs for the Wabash, Indiana site was $0.7 million to $1.2 million and the accrued amount was $0.7 million . None of the expenditures related to this matter are recoverable from the U.S. government.
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 Natural Resource Damage (“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. In August 2013, the PRPs voted to accept the State and Federal Trustees’ proposal resolving the NRD Assessment and other claims. A Consent Decree must be negotiated and approved before the settlement becomes final. As of November 30, 2014 , the estimated range of the Company’s share of anticipated costs for the NRD matter was $0.2 million to $0.5 million and the accrued amount was $0.2 million . None of the expenditures related to this matter are recoverable from the U.S. government.
In November 2014, the Company entered into a tentative settlement agreement with Textileather and the City of Toledo (the “City”) whereby the City would purchase the Textileather site and relieve the Company and Textileather of any responsibility for remediation of on-site contamination. The agreement is contingent on the City’s due diligence investigation

31



and U.S. Environmental Protection Agency transferring remediation obligations from Textileather to the City by way of Administrative Order.
Item 4.
Mine Safety Disclosures
None.

PART II
Item  5.
Market for Registrant’s Common Equity, Related Stockholders’ Matters and Issuer Purchases of Equity Securities
As of January 15, 2015, there were 7,129 holders of record of the common stock. On January 15, 2015, the last reported sale price of our common stock on the New York Stock Exchange was $17.17 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”) and our 7  1 / 8 % Notes restrict 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 
2014
 
 
 
  First Quarter
$
19.21

 
$
16.25

  Second Quarter
$
19.69

 
$
16.32

  Third Quarter
$
19.77

 
$
17.47

  Fourth Quarter
$
18.53

 
$
15.11

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



32



Stock Performance Graph
The following graph compares the cumulative total stockholder returns, calculated on a dividend reinvested basis, on $100 invested in our Common Stock in November 2009 with the cumulative total return of (i) the Standard & Poor’s 500 Composite Stock Price Index (“S&P 500 Index”), and (ii) the Standard & Poor’s 500 Aerospace & Defense Index. The stock price performance shown on the graph is not necessarily indicative of future performance.
Comparison of Cumulative Total Stockholder Return
Among GenCorp, S&P 500 Index, and the S&P 500 Aerospace & Defense Index,
November 2009 through November 2014
Comparison of Cumulative Five Year Total Return


Company/Index
Base
Period
2009
As of November 30,
2010
2011
2012
2013
2014
 
GenCorp Inc.
$
100.00

$
62.87

$
69.65

$
117.80

$
234.83

$
213.83

S&P 500 Index
100.00

109.94

118.55

137.68

179.39

209.63

S&P 500 Aerospace & Defense
100.00

113.39

123.20

139.35

214.14

245.19



33



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
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
(In millions, except per share amounts)
Net sales
$
1,597.4

 
$
1,383.1

 
$
994.9

 
$
918.1

 
$
857.9

Net (loss) income:
 
 
 

 
 

 
 

 
 

 (Loss) income from continuing operations, net of income taxes
$
(52.3
)
 
$
167.7

 
$
(5.7
)
 
$
2.9

 
$
6.0

 (Loss) income from discontinued operations, net of income taxes
(0.7
)
 
0.2

 
3.1

 

 
0.8

   Net (loss) income
$
(53.0
)
 
$
167.9

 
$
(2.6
)
 
$
2.9

 
$
6.8

Basic earnings (loss) per share of Common Stock
 
 
 

 
 

 
 

 
 

 (Loss) income from continuing operations, net of income taxes
$
(0.91
)
 
$
2.76

 
$
(0.09
)
 
$
0.05

 
$
0.11

 (Loss) income from discontinued operations, net of income taxes
(0.01
)
 

 
0.05

 

 
0.01

   Total
$
(0.92
)
 
$
2.76

 
$
(0.04
)
 
$
0.05

 
$
0.12

Diluted earnings (loss) per share of Common Stock
 
 
 

 
 

 
 

 
 

 (Loss) income from continuing operations, net of income taxes
$
(0.91
)
 
$
2.11

 
$
(0.09
)
 
$
0.05

 
$
0.11

 (Loss) income from discontinued operations, net of income taxes
(0.01
)
 

 
0.05

 

 
0.01

   Total
$
(0.92
)
 
$
2.11

 
$
(0.04
)
 
$
0.05

 
$
0.12

Supplemental statement of operations information:
 
 
 

 
 

 
 

 
 

 (Loss) income from continuing operations before income taxes
$
(39.4
)
 
$
(26.2
)
 
$
13.2

 
$
9.0

 
$
2.1

 Interest expense
52.7

 
48.7

 
22.3

 
30.8

 
37.0

 Interest income
(0.1
)
 
(0.2
)
 
(0.6
)
 
(1.0
)
 
(1.6
)
 Depreciation and amortization
63.7

 
43.8

 
22.3

 
24.6

 
27.9

 Retirement benefit expense
35.6

 
65.0

 
41.0

 
46.4

 
41.9

 Unusual items in continuing operations:
 
 
 

 
 

 
 

 
 

     Executive severance agreements

 

 

 

 
1.4

     Rocketdyne Business acquisition related costs

 
20.0

 
11.6

 

 

     Loss (gain) on legal matters and settlements
0.9

 
(0.5
)
 
0.7

 
4.1

 
0.1

     Loss on bank amendment
0.2

 

 

 
1.3

 
0.7

     Loss on debt repurchased/redeemed
60.6

 
5.0

 
0.4

 
0.2

 
1.2

Adjusted EBITDAP (Non-GAAP measure)
$
174.2

 
$
155.6

 
$
110.9

 
$
115.4

 
$
110.7

Adjusted EBITDAP (Non-GAAP measure) as a percentage of net sales
10.9
%
 
11.3
%
 
11.1
%
 
12.6
%
 
12.9
%
Cash flow information:
 
 
 

 
 

 
 

 
 

 Cash flow provided by operating activities
$
150.4

 
$
77.6

 
$
86.2

 
$
76.8

 
$
148.1

 Cash flow (used in) provided by investing activities
(35.7
)
 
(474.9
)
 
(36.6
)
 
5.6

 
(43.5
)
 Cash flow (used in) provided by financing activities
(46.4
)
 
432.8

 
(75.5
)
 
(75.9
)
 
(49.4
)
Balance Sheet information:
 
 
 

 
 

 
 

 
 

 Total assets
$
1,921.6

 
$
1,755.3

 
$
919.3

 
$
939.5

 
$
991.5

 Long-term debt, including current maturities
782.2

 
699.2

 
248.7

 
326.4

 
392.7




34




  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”).
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 Development Company, LLC related to the re-zoning, entitlement, sale, and leasing of our excess real estate assets. We own approximately 12,000 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. In addition, we are currently in the process of completing certain infrastructure improvements to the Sacramento Land to reduce the time a developer would have to hold the Sacramento Land before development could start.
A summary of the significant financial highlights for fiscal 2014 which management uses to evaluate our operating performance and financial condition is presented below.
 
Net sales for fiscal 2014 totaled $1,597.4 million compared to $1,383.1 million for fiscal 2013. Fiscal 2014 and 2013 results include 12 months and 5  1 / 2 months, respectively, of the Rocketdyne Business operating results (see below).
Net loss for fiscal 2014 was $(53.0) million , or $(0.92) loss per share, compared to net income of $167.9 million, or $2.11 diluted income per share, for fiscal 2013. The net loss for fiscal 2014 included pre-tax cost growth of $23.6 million on the Antares AJ-26 program and a pre-tax charge of $60.6 million related to the repurchase of $59.6 million of principal of our 4  1 / 16 % Debentures. The net income for fiscal 2013 included a $193.9 million income tax benefit primarily associated with the release of deferred tax asset valuation allowance reserves.
Adjusted EBITDAP (Non-GAAP measure*) for fiscal 2014 was $174.2 million , or 10.9% of net sales, compared to $155.6 million, or 11.3% of net sales, for fiscal 2013.
Segment performance (Non-GAAP measure*) before environmental remediation provision adjustments, retirement benefit expense, and unusual items was $145.5 million for fiscal 2014, compared to $151.4 million for fiscal 2013.
Cash provided by operating activities in fiscal 2014 totaled $150.4 million , compared to $77.6 million in fiscal 2013. The cash generated from operating activities in fiscal 2014 included an increase of $94.1 million cash advances on long-term contracts.
Free cash flow (Non-GAAP measure*) in fiscal 2014 totaled $107.0 million , compared to $14.4 million in fiscal 2013.
As of November 30, 2014 , we had $2.2 billion of funded backlog compared to $1.7 billion as of November 30, 2013 .
As of November 30, 2014 , we had $516.3 million in net debt (Non-GAAP measure*) compared to $501.6 million as of November 30, 2013 .

35



_________
* We provide Non-GAAP measures as a supplement to financial results based on GAAP. A reconciliation of the Non-GAAP measures to the most directly comparable GAAP measures is presented later in the Management’s Discussion and Analysis under the heading “Operating Segment Information” and “Use of Non-GAAP Financial Measures.”
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 14 weeks of operations in the first quarter of fiscal 2013 compared to 13 weeks of operations in the first quarter of fiscal 2014. The additional week of operations in the first quarter of fiscal 2013 accounted for $27.8 million in additional net sales.
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 an 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 which represents the initial purchase price of $550 million reduced by $55 million relating to the pending future 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, 2014; provided, however, that such termination date may be extended for up to four additional three-month periods (with the final termination date extended until June 12, 2015).  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 the Russian government approvals will be forthcoming for completion of the RDA Acquisition. In December 2014, we exercised the third option to extend the terms of the Amended and Restated Purchase Agreement for three months through March 2015.
The Rocketdyne Business integration costs incurred and capitalized through November 30, 2014 totaled $38.5 million . These integration costs are reimbursable by the U.S. government upon its audit and approval that our planned integration savings will exceed our restructuring costs by a factor of at least two to one. In December 2014, we were informed that the DCAA had completed its audit of our restructuring proposal and found that we had achieved the required minimum two to one savings to restructuring cost ratio. Actual recovery of the previously deferred integration costs will take place after the final execution of an Advance Agreement with the DCMA and determination from the Under Secretary of Defense that the audited restructuring savings exceed the costs by a factor of two to one.  We believe these final two actions will be completed in fiscal 2015. We review on a quarterly basis the probability of recovery of these costs.
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
 
(In millions, except per share amounts)
Net sales:
 
 
 
As reported
$
1,383.1

 
$
994.9

Pro forma
$
1,762.7

 
$
1,694.0

Net income:
 
 
 
As reported
$
167.9

 
$
(2.6
)
Pro forma
$
30.7

 
$
38.2

Basic income (loss) per share
 
 
 
As reported
$
2.76

 
$
(0.04
)
Pro forma
$
0.50

 
$
0.64

Diluted income (loss) per share
 
 
 
As reported
$
2.11

 
$
(0.04
)
Pro forma
$
0.47

 
$
0.56


36



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 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.
We continuously evaluate a broad range of options that could be implemented to increase operational efficiency across all sites, and improve our overall market competitiveness.  Our decisions will be focused on moving us forward to solidify our leadership in the propulsion markets.
Some of the significant challenges we face are as follows: dependence upon U.S. government programs and contracts, future reductions or changes in U.S. government spending in our industry, integration of the Rocketdyne Business (including integration into our ERP system), environmental matters, capital structure and an underfunded pension plan.
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. However, individual U.S. government agencies, which include the military services, NASA, the Missile Defense Agency, and the prime contractors that serve these agencies, exercise independent purchasing power within “budget top-line” limits. Therefore, sales to the U.S. government are not regarded as sales to one customer, but rather each contracting agency is viewed as a separate customer.
Customers that represented more than 10% of net sales for the periods presented are as follows:
 
Year Ended
 
2014
 
2013
 
2012
Lockheed Martin
28
%
 
23
%
 
32
%
ULA
25
%
 
18
%
 
*

Raytheon
17
%
 
32
%
 
37
%
NASA
11
%
 
*

 
*

__________
*
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 2014
$
1,473.8

 
92
%
Fiscal 2013
1,311.0

 
95
%
Fiscal 2012
936.9

 
94
%
The Standard Missile program, which is comprised of several contracts and is included in U.S. government sales, represented 12% , 22%, and 25% of net sales for fiscal 2014, 2013, and 2012, respectively. In addition, the THAAD program, which is comprised of several contracts and is included in U.S. government sales, represented 12% , 4%, and 5% of net sales for fiscal 2014, 2013, and 2012, 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 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 continue to rely on particular levels of U.S. government spending on propulsion systems for defense, space and armament systems, precision tactical weapon systems and munitions applications, and our backlog depends, in large part, on continued funding by the U.S. government for the programs in which we are involved. These funding levels are not generally correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this type of funding. Moreover, although our contracts often contemplate that our services will be performed over a period of several years, the U.S. Congress must appropriate funds for a given program and the U.S. President must sign government budget legislation each GFY and may significantly increase, decrease or eliminate, funding for a program. A decrease in DoD and/or NASA expenditures, the elimination or curtailment of a material program in which we are or hope to be involved, or changes in payment patterns of our customers as a result of changes in U.S. government outlays, could have a material adverse effect on our operating results, financial condition, and/or cash flows.

37



The Bipartisan Budget Act of 2013 set overall discretionary spending levels for GFY 2014 and 2015 and eased sequestration spending cuts to the DoD and other federal agencies (e.g., NASA) for GFY 2014 and 2015, paving the way for eventual agreements on GFY 2014 and 2015 Appropriations for all federal agencies. For GFY 2015, Congress approved a $1.0 trillion “Omnibus” Appropriations bill, averting a U.S. government shutdown and providing a sense of stability for industry.  The omnibus legislation contains 11 full year appropriations bills - including Defense and Commerce, Justice, Science (that includes NASA funding) - and a shorter-term CR for the Department of Homeland Security.  The defense portion of the bill provides $490.2 billion in discretionary funding for GFY 2015, which is $3.3 billion above the GFY 2014 amount, and nearly equal to the President’s Budget Request for GFY 2015.  In addition, the bill includes $64.0 billion in Overseas Contingency Operations for the ongoing war efforts abroad.  The NASA portion of the bill includes a top line of $18.0 billion, which is $0.5 billion above the President’s budget request for GFY 2015 and $0.4 billion above the GFY 2014 appropriated amount.  Without Congressional action in 2015 to change or modify the Bipartisan Budget Act of 2013, sequestration will return in January 2016. 
Despite overall U.S. government budget pressures, we believe we are well-positioned to benefit from funding in DoD and NASA priority areas. This view reflects the DoD’s strategic guidance report released in January 2012, and the recently released 2014 QDR 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. The QDR explicitly states Missile Defense, Space, Nuclear Deterrence, and Precision Strike as key capabilities for the DoD to preserve.
The NASA Authorization Act has again identified the SLS program as one of its top priorities in the NASA GFY 2015 budget. The SLS program also has enjoyed wide, bipartisan support in both chambers of Congress. We maintain a strong relationship with NASA and our propulsion systems have been powering NASA launch vehicles and spacecraft since the inception of the U.S. space program. Our booster 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 and from the ISS for the better part of this decade. NASA has been working to re-establish U.S. manned space capability as soon as possible through development of 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.
The competitive dynamics of our multi-faceted marketplace vary by product sector and customer and see many of the same influences felt by the larger Aerospace and Defense sector.  The large majority of products we manufacture are highly complex, technically sophisticated and extremely hazardous to build, demanding rigorous manufacturing procedures and highly specialized manufacturing equipment.  These factors, coupled with the very high cost to establish the infrastructure required to meet these needs, pose substantial barriers to entry.  As a result, the number of qualified competitors has been, and will likely continue to be, limited to a small handful of participants who tend to be narrowly focused on products that are sub-elements of our overall propulsion product portfolio. For example, competitor ATK manufactures solid rocket motors but does not develop or produce liquid engines.  There are a number of small liquid engine manufacturers that neither develop or produce liquid-fueled propulsion systems.  There has been a recent emergence of propulsion entrepreneurs such as SpaceX and Blue Origin who have or are in the process of developing liquid fuel propulsion capabilities, but these potential competitors are primarily focused on the development of space propulsion systems for heavy lift launch vehicles and are not pursuing or participating in the missile defense or tactical propulsion business segments that make up a substantial portion of our overall business.  These new entrepreneurs have signaled their intent to compete primarily on price and are therefore bringing pressure to bear on existing cost paradigms and manufacturing methodologies.
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.

38



A summary of our recoverable amounts, environmental reserves, and range of liability, as of November 30, 2014 is presented below:
 
Recoverable
Amount (1)
 
Reserve
 
Estimated Range
of Liability
 
(In millions)
Aerojet Rocketdyne - Sacramento
$
84.1

 
$
130.4

 
$130.4 - $211.3
Aerojet Rocketdyne - BPOU
14.0

 
21.7

 
21.7 - 35.6
Other Aerojet Rocketdyne sites
7.8

 
8.1

 
8.1 - 20.0
Other sites
0.7

 
5.8

 
5.8 - 8.0
Total
$
106.6

 
$
166.0

 
$166.0 - $274.9
 _____
(1)
Excludes the long-term receivable from Northrop of $ 74.8 million as of November 30, 2014 related to environmental costs already paid (and therefore not reserved) by the Company in prior years that are expected to be reimbursed by Northrop.
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. See Note 8(c) and (d) of the Notes to Consolidated Financial Statements and "Environmental Matters" below for summary of our environmental reserve activity.
Capital Structure
We have a substantial amount of debt for which we are required to make interest and principal payments. Interest on long-term financing is not a recoverable cost under our U.S. government contracts. As of November 30, 2014 , we had $ 782.2 million of debt principal outstanding. The fair value of the debt outstanding at November 30, 2014 was $920.4 million .
Retirement Benefits
We do not expect to make any significant cash contributions to our tax-qualified defined benefit pension plan until fiscal 2016. We estimate that approximately 86% of our unfunded pension obligation as of November 30, 2014 is related to Aerojet Rocketdyne which will be recoverable through our U.S. government contracts.
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.
Additionally, the level of returns on retirement benefit assets, changes in interest rates, changes in legislation, and other factors affect our financial results. The timing of recognition of 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 through our U.S. 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.
Rocketdyne Business ERP Integration
We integrated the Rocketdyne Business into our ERP system on January 1, 2015, but have not yet completed our data validation process.


39



Results of Operations
 
Year Ended
 
2014
 
2013
 
2012
 
(In millions)
Net sales
$
1,597.4

 
$
1,383.1

 
$
994.9

Operating costs and expenses:
 
 
 
 
 
Cost of sales (exclusive of items shown separately below)
1,408.1

 
1,229.6

 
869.6

Selling, general and administrative
37.9

 
53.6

 
41.9

Depreciation and amortization
63.7

 
43.8

 
22.3

Other expense, net:
 
 
 
 
 
Loss on debt repurchased/redeemed
60.6

 
5.0

 
0.4

Other
13.9

 
28.8

 
25.8

Total operating costs and expenses
1,584.2

 
1,360.8

 
960.0

Operating income
13.2

 
22.3

 
34.9

Non-operating (income) expense:
 
 
 
 
 
Interest income
(0.1
)
 
(0.2
)
 
(0.6
)
Interest expense
52.7

 
48.7

 
22.3

Total non-operating expense, net
52.6

 
48.5

 
21.7

(Loss) income from continuing operations before income taxes
(39.4
)
 
(26.2
)
 
13.2

Income tax provision (benefit)
12.9

 
(193.9
)
 
18.9

(Loss) income from continuing operations
(52.3
)
 
167.7

 
(5.7
)
(Loss) income from discontinued operations, net of income taxes
(0.7
)
 
0.2

 
3.1

Net (loss) income
$
(53.0
)
 
$
167.9

 
$
(2.6
)
Net Sales:
 
Year Ended
 
 
 
Year Ended
 
 
 
2014
 
2013
 
Change*
 
2013
 
2012
 
Change**
 
(In millions)
Net sales:
$
1,597.4

 
$
1,383.1

 
$
214.3

 
$
1,383.1

 
$
994.9

 
$
388.2

 
* Primary reason for change. The increase in net sales was primarily due to an increase of $360.0 million of net sales from the acquired Rocketdyne Business. Fiscal 2014 and 2013 results include 12 months and 5 1 / 2 months, respectively, of the acquired Rocketdyne Business. The increase in net sales also included increased deliveries on the Atlas V, THAAD, and Orion programs totaling $71.9 million . The increase in net sales was partially offset by (i) a decrease of $113.9 million in the various Standard Missile contracts primarily from the transitioning of the Standard Missile-3 Block IB contract from development activities to low-rate initial production, decreased development activities for the TDACS for the Standard Missile-3 Block IIA contract, and the cessation of deliveries on the Standard Missile-1 Regrain contract in fiscal 2014 as a result of contract completion; (ii) an additional week of operations in the first quarter of fiscal 2013 resulting in $27.8 million in net sales; (iii) a decrease of $21.7 million as a result of the completion of the T3 IIA and IIB contracts as the program enters the next development phase; (iv) a decrease of $26.4 million from lower deliveries and changes in the estimated measurement of progress toward completion on the Antares program; and (v) a decrease of $24.6 million as a result of lower deliveries on the Guidance Enhanced Missile TBM ("GEM-T") program. See net sales information below:


40



 
Year Ended
 
 
 
2014
 
2013
 
Change
 
(In millions)
 
 
Aerojet
 
 
 
 
 
Standard Missile
$
192.7

 
$
306.6

 
$
(113.9
)
Atlas V
114.3

 
95.4

 
18.9

THAAD
69.4

 
41.7

 
27.7

Orion
43.1

 
17.8

 
25.3

T3 IIA and IIB
18.2

 
39.9

 
(21.7
)
Antares
7.9

 
34.3

 
(26.4
)
GEM-T
0.6

 
25.2

 
(24.6
)
Extra week of sales in fiscal 2013

 
27.8

 
(27.8
)
All other Aerojet programs
465.6

 
469.3

 
(3.7
)
Rocketdyne (1)
679.4

 
319.4

 
360.0

Real estate
6.2

 
5.7

 
0.5

 
$
1,597.4

 
$
1,383.1

 
$
214.3

______
(1) Includes net sales beginning June 14, 2013 from the Rocketdyne Business (acquisition date).

** 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 TDACS 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.
Sales by contract type were as follows:
 
Year Ended
 
2014
 
2013
 
2012
Fixed-price contracts
50
%
 
46
%
 
52
%
Cost reimbursable contracts
43

 
49

 
42

Other sales including commercial contracts and real estate activities
7

 
5

 
6

Total
100
%
 
100
%
 
100
%



41



Cost of Sales (exclusive of items shown separately below):
 
Year Ended
 
 
 
Year Ended
 
 
 
2014
 
2013
 
Change*
 
2013
 
2012
 
Change**
 
(In millions, except percentage amounts)
Cost of sales:
$
1,408.1

 
$
1,229.6

 
$
178.5

 
$
1,229.6

 
$
869.6

 
$
360.0

Percentage of net sales
88.1
%
 
88.9
%
 
 
 
88.9
%
 
87.4
%
 
 
Percentage of net sales excluding retirement benefit expense and step-up in fair value of inventory
86.4
%
 
85.5
%
 
 
 
85.5
%
 
85.5
%
 
 
Components of cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales excluding retirement benefit expense and step-up in fair value of inventory
$
1,380.4

 
$
1,183.2

 
$
197.2

 
$
1,183.2

 
$
850.7

 
$
332.5

Cost of sales associated with the Acquisition step-up in fair value of inventory not allocable to our U.S. government contracts
3.2

 
2.2

 
1.0

 
2.2

 

 
2.2

Retirement benefit expense
24.5

 
44.2

 
(19.7
)
 
44.2

 
18.9

 
25.3

Cost of sales
$
1,408.1

 
$
1,229.6

 
$
178.5

 
$
1,229.6

 
$
869.6

 
$
360.0


* Primary reason for change. The increase in cost of sales excluding retirement benefit expense and step-up in fair value of inventory as a percentage of net sales was primarily due to $23.6 million , 1.5% of net sales, of cost growth on the Antares AJ-26 program, including the cost to repair or replace engines as necessary in light of the previously reported engine test failures, an associated increase in hardware inspections and corrective actions on remaining engines, costs to repair the damaged test stand, and costs resulting from delayed deliveries.

** 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
 
 
 
2014
 
2013
 
Change*
 
2013
 
2012
 
Change**
 
(In millions, except percentage amounts)
SG&A:
$
37.9

 
$
53.6

 
$
(15.7
)
 
$
53.6

 
$
41.9

 
$
11.7

Percentage of net sales
2.4
%
 
3.9
%
 
 
 
3.9
%
 
4.2
%
 
 
Percentage of net sales excluding retirement benefit expense and stock-based compensation
1.3
%
 
1.4
%
 
 
 
1.4
%
 
1.3
%
 
 
Components of SG&A:
 
 
 
 
 
 
 
 
 
 
 
SG&A excluding retirement benefit expense and stock-based compensation
$
21.1

 
$
18.7

 
$
2.4

 
$
18.7

 
$
13.3

 
$
5.4

Stock-based compensation
5.7

 
14.1

 
(8.4
)
 
14.1

 
6.5

 
7.6

Retirement benefit expense
11.1

 
20.8

 
(9.7
)
 
20.8

 
22.1

 
(1.3
)
SG&A
$
37.9

 
$
53.6

 
$
(15.7
)
 
$
53.6

 
$
41.9

 
$
11.7

 
* Primary reason for change. The decrease in SG&A expense was primarily driven by (i) lower non-cash retirement benefit expense (see discussion of “Retirement Benefit Plans” below) and (ii) a decrease of $8.4 million in stock-based compensation primarily as a result of decreases in the fair value of the stock appreciation rights.


42



** 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.

Depreciation and Amortization:
 
Year Ended
 
 
 
Year Ended
 
 
 
2014
 
2013
 
Change*
 
2013
 
2012
 
Change**
 
(In millions)
Depreciation and amortization:
$
63.7

 
$
43.8

 
$
19.9

 
$
43.8

 
$
22.3

 
$
21.5

Components of depreciation and amortization:
 
 
 
 
 
 
 
 
 
 
 
Depreciation
$
48.5

 
$
35.8

 
$
12.7

 
$
35.8

 
$
19.3

 
$
16.5

Amortization
13.5

 
6.5

 
7.0

 
6.5

 
1.5

 
5.0

Accretion
1.7

 
1.5

 
0.2

 
1.5

 
1.5

 


 * Primary reason for change. The increase in depreciation and amortization is primarily due to (i) an increase of $10.4 million of depreciation expense related to the Rocketdyne Business since the acquisition; (ii) an increase $7.0 million of amortization of intangible assets associated with the Rocketdyne Business which is not allocable to our U.S. government contracts; and (iii) an increase of $3.1 million of depreciation expense associated with the ERP system which was placed into service in June 2013.

** 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 which is not allocable to our U.S. government contracts.
Other Expense, net:
 
Year Ended
 
 
 
Year Ended
 
 
 
2014
 
2013
 
Change*
 
2013
 
2012
 
Change**
 
(In millions)
Other expense, net:
$
74.5

 
$
33.8

 
$
40.7

 
$
33.8

 
$
26.2

 
$
7.6

* Primary reason for change. The increase in other expense, net was primarily due to (i) an increase of $37.2 million in unusual item charges; (ii) an increase of $2.8 million in losses on the disposal of long-lived assets; and (iii) an increase of $2.4 million in environmental remediation expenses. 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 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.

43



Total unusual items expense, a component of other expense, net in the consolidated statements of operations, was as follows:
 
Year Ended
 
2014
 
2013
 
2012
 
(In millions)
Aerospace and Defense:
 
 
 
 
 
        Loss (gain) on legal matters and settlements
$
0.9

 
$
(1.0
)
 
$
0.7

        Rocketdyne Business acquisition related costs

 
2.6

 

        Aerospace and defense unusual items
0.9

 
1.6

 
0.7

Corporate:
 
 
 
 
 
        Rocketdyne Business acquisition related costs

 
17.4

 
11.6

        Loss on debt repurchased
60.6

 
5.0

 
0.4

        Loss on legal settlement

 
0.5

 

        Loss on bank amendment
0.2

 

 

        Corporate unusual items
60.8

 
22.9

 
12.0

            Total unusual items
$
61.7

 
$
24.5

 
$
12.7


Fiscal 2014 Activity:
A summary of the loss on the 4  1 / 16 % Debentures repurchased during fiscal 2014 is as follows (in millions):
Principal amount repurchased
$
59.6

Cash repurchase price
(119.9
)
Write-off of deferred financing costs
(0.3
)
Loss on 4  1 / 16 % Debentures repurchased
$
(60.6
)
We recorded a charge of $0.2 million related to an amendment to the Senior Credit Facility.
We recorded $0.9 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.
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):