Aerojet Rocketdyne Holdings
AEROJET ROCKETDYNE HOLDINGS, INC. (Form: 10-K, Received: 02/16/2016 17:34:14)


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, 2015
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from                       to                        
Commission File Number 1-01520
   Aerojet Rocketdyne Holdings, Inc.
( Exact name of registrant as specified in its 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 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.     ý
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, 2015 was approximately $1.3 billion .
As of January 15, 2016 , there were 64.4 million  outstanding shares of the Company’s Common Stock, including redeemable common stock and unvested common shares, $0.10 par value.
Portions of the 2016 Proxy Statement of Aerojet Rocketdyne Holdings, Inc. relating to its annual meeting of stockholders scheduled to be held on April 27, 2016 are incorporated by reference into Part III of this Report.




Aerojet Rocketdyne Holdings, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended November 30, 2015
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,” “2015  Director Compensation Table,” “Compensation Discussion and Analysis,” “Summary Compensation Table,” “2015 Grants of Plan-Based Awards,” “Outstanding Equity Awards at 2015 Fiscal Year End, “2015 Option/SAR Exercises and Stock Vested,” “2015 Pension Benefits,” “2015 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 Aerojet Rocketdyne Holdings, Inc.’s 2016 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 Aerojet Rocketdyne Holdings, Inc. and all of its subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America (“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 which develops and manufactures propulsion systems for defense and space applications, and armaments for precision tactical and long-range weapon systems applications. We also have a real estate segment that includes activities related to the re-zoning, entitlement, sale, and leasing of our excess real estate assets. 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 (“Easton”) related to the re-zoning, entitlement, sale, and leasing of our excess real estate assets. We own approximately 11,500 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 enhance its value.
Sales, segment performance, total assets, and other financial data of our segments for fiscal 2015, 2014, and 2013 are set forth in Note 11 in notes to consolidated financial statements included in Item 8 of this Report. Fiscal 2013 results include 5  1 / 2 months of the 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 potential future acquisition of UTC’s 50% ownership interest of RD Amross, LLC ("RD Amross" a joint venture with NPO Energomash of Khimki, Russia which sells RD-180 engines to RD Amross) and the portion of the UTC business that markets and supports the sale of RD-180 engines (the “RDA Acquisition”). The acquisition of UTC’s 50% ownership interest of RD Amross and UTC’s related business was contingent upon certain conditions including receipt of certain Russian governmental regulatory approvals, which were not obtained. Pursuant to the terms of the Amended and Restated Purchase Agreement, on June 14, 2015, our obligations to consummate the RDA Acquisition expired.

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Our fiscal year ends on November 30 of each year. When we refer to a fiscal year, such as fiscal 2015, 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. On January 20, 2016, our board of directors approved a change in our fiscal year-end from November 30 of each year to December 31 of each year. As a result of the 2013 calendar, we had 53 weeks of operations in fiscal 2013 compared to 52 weeks of operations in fiscal 2015 and 2014. 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.AerojetRocketdyne.com. We have made available through our Internet website, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such materials were electronically filed with, or furnished to, the SEC. We also make available on our Internet 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 develop and manufacture 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. 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 2015, we successfully delivered the first production units of 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 Long Range Precision Fires rocket motor. Insensitive munitions are munitions that minimize hazardous reactions to unplanned mechanical shocks, fire, and impact by shrapnel and can still function as intended to destroy their targets.
A subset of our key tactical missile propulsion systems programs include: Guided Multiple Launch Rocket Systems (“GMLRS”), Javelin, PAC-3, Standard Missile, Tactical Tomahawk and Tube-launched Optically Wire-guided (“TOW”).  
Missile Defense and Strategic 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 develop and manufacture both solid and liquid propulsion systems for the DoD and our propulsion systems are used throughout the world.

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In fiscal 2015, we continued the development of the Standard Missile-3 IIA Throttling Divert and Attitude Control System (“TDACS”) program achieving critical program milestones. We are in full rate production of our Standard Missile-3 IB TDACS and delivered our 100 th unit to Raytheon, for delivery to the MDA. We are in full rate production for our Terminal High Altitude Area Defense (“THAAD”) boost motors and Divert and Attitude Control System (“DACS”) and delivered our 200 th THAAD boost motor and DACS propulsion systems. We also achieved several successful ground and flight test milestones for the Standard Missile-3 IIA, Standard Missile-3 IB, Ground Based Interceptor ("GBI") and THAAD programs, and continue our support of the critical return to flight for the Ground Based Missile Defense (“GMD”) Exoatmospheric Kill Vehicle (“EKV”) program. We completed the successful development of the alternate divert thrusters for the EKV and are progressing towards completing the qualification program and delivery of thrusters. We also completed the critical design review and design development testing of the alternate propellant tanks that will be used on both the EKV and Redesigned Kill Vehicle ("RKV") programs.
A subset of our key missile defense and strategic systems programs include: EKV Liquid DACS, HAWK, Standard Missile, THAAD and Trident II Post Boost.
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 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 breakthroughs in innovative technologies related to variable flow ducted rocket ramjet. We have developed and demonstrated low Mach to hypersonic scramjet propulsion transition using turbine based combined cycle. This technology is critical for transitioning from low speed (subsonic) propulsion to high speed (hypersonic) propulsion in missile systems, applicable to the future SR-72 airplane. In support of Ground Based Strategic Deterrent ("GBSD") systems, which will provide new propulsion systems for all of our nation’s strategic nuclear land-based capability, we are defining the best propulsion options for all four stages by leveraging past successful developments as well as maturing new technologies and capabilities.
The application of innovative solutions across multiple product lines, such as Selective Laser Melting/Additive Manufacturing has resulted in a cost reduction in many of our systems, but especially 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. We are enabling enhanced capabilities in Missile Defense through Multiple Object Kill Vehicle ("MOKV") and RKV propulsion. We successfully completed an advanced mortar arena test, demonstrating the optimized warhead design and precision delivery that increases the range by up to 200 percent while minimizing collateral damage. In addition, two new areas have recently been added to our portfolio: (i) underwater warfare 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 prime contractors and new market entrants, present exciting new opportunities for Aerojet Rocketdyne.
A subset of our key defense advanced programs include: ARDEC Warhead Development, Conventional Prompt Global Strike, GBSD Post Boost Study, High Speed Strike Weapon First Strike Missile Booster, Missile Component Advanced Technology, MOKV, Solid Divert and Attitude Control System Technology Risk Reduction, T3, and Weapon Scale Hypersonic Freejet.
Space Launch Systems. For over half a century, Aerojet Rocketdyne has been a domestic provider of launch vehicle propulsion systems to 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 in 1959. 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. We continue to execute very effectively on production, delivery, and launch support operations for each of the multi-year contracts established in support of the EELV program.
A subset of our key space launch systems programs include: AJ10, AJ60, RL10, RS-27 and RS-68.

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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 fiscal 2015, we achieved a number of significant milestones on the NASA Space Launch System (“SLS”) and Commercial Crew programs. We completed the closeout activities of our J-2X engine which is slated to power the future upper stage of the heavy lift SLS. J-2X is an upgraded and modernized version of the original Apollo moon mission's engine. We also completed the first series of adaptation testing of the RS-25 engine and were awarded the follow-on restart of production activities. The RS-25 (formerly known as the Space Shuttle Main Engine - (“SSME”)) restart will recertify an updated version with higher capabilities and will be produced with modern manufacturing technologies. Finally, we completed final design of the reaction control thrusters for the Orion crew module and the jettison motor for the Launch Abort System and have initiated flight set production. The Orion system combined with SLS will return our nation to deep space flight capability.
In 2015, we finalized the contract with Boeing to develop and qualify propulsion systems for the next generation commercial crew vehicle (Boeing’s CST-100 Starliner) that will provide human transportation to and from the International Space Station ("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. The new high performance AR1 engine completed preliminary design in December 2015 and is on-track to be qualified by 2019. 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.
A subset of our key space advanced programs include: AR1, Advanced Boosters, Commercial Crew Development, Green Propellant Infusion Mission, High Power Solar Electric Vehicles, Hydrocarbon Booster Technology Demonstrator, J-2X, Orion and RS-25.
Space Systems. Aerojet Rocketdyne is a leading supplier of high performance, reliable in-space propulsion products for domestic and international satellite and launch vehicle markets. We are considered an industry leader in the design, development, and production of high performance electric, mono-propellant and bi-propellant rocket engines 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.
For the commercial satellite market, Aerojet Rocketdyne supplies propulsion products to every major U.S., European and Japanese satellite manufacturer, including significant chemical and electric propulsion content on Geostar communication satellite platforms. For the NASA civil space market, Aerojet Rocketdyne has provided in-space propulsion on a significant number of the satellites and spacecraft that NASA has launched, including missions to every planet, all NASA missions to Mars, and commercial crew and cargo missions. For the DoD market, Aerojet Rocketdyne has provided propulsion for numerous DoD missions, including Advanced-EHF, Space-Based InfraRed System, Global Positioning System, and Wideband Global Satcom.
A subset of our key space systems programs include: A2100TR Communications Satellites, Advanced Extremely High Frequency Satellites, Commercial Crew Transportation Capability, Boeing HS702MP Commercial Communications Satellite, Cygnus, Geostar 3 Communications satellite, Geostationary Operational Environmental Satellite R-Series, Global Positioning Systems, Iridium NEXT and Space-Based Infrared System.
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.

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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 most of the liquid upper and boost stage engines/motors 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 $4.1 billion as of November 30, 2015 and our funded backlog, which includes only amounts for which funding has been authorized by a customer and a purchase order has been received, totaled $2.4 billion .
Exceptional Long-Term Industry Relationships - We serve a broad set of customers and are major suppliers of propulsion products to top original equipment manufacturers such as Boeing, Lockheed Martin, Raytheon and ULA, as well as to the DoD, NASA and other U.S. government agencies. We have a long history of partnering with their respective prime contractors and have developed close relationships with key decision-makers 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 competitive dynamics of our multi-faceted marketplace vary by product sector and customer as we experience many of the same influences felt by the broader aerospace and defense industry.  The large majority of products we manufacture are highly complex, technically sophisticated and extremely hazardous to build, demanding rigorous manufacturing procedures and highly specialized manufacturing equipment.  While historically these factors, coupled with the high cost to establish the infrastructure required to meet these needs, posed substantial barriers to entry, modern design tools and manufacturing techniques (additive manufacturing) available to new entrants with the ability to self-fund start-up as well as development costs has led to increased competition in space related markets. To date, the competition has been limited to a few participants who tend to be narrowly focused on products that are sub-elements of our overall product portfolio. For example, entrepreneurs such as SpaceX and Blue Origin, who have been or are in the process of developing liquid fuel propulsion capabilities are primarily focused on the development of space propulsion systems for heavy lift launch vehicles and are not pursuing or participating in the missile defense or tactical propulsion 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.
The table below lists the primary participants in the propulsion market:

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Company
Parent
Propulsion Type
Propulsion Application
Aerojet Rocketdyne
Aerojet Rocketdyne Holdings, Inc.
Solid, liquid, air- breathing, electric
Launch, in-space, tactical, strategic, missile defense
Airbus Defence and Space (formerly Astrium)
Airbus Group
Solid, liquid
In-space
Alliant Techsystems
Orbital ATK, 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, solid
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 Budget Control Act of 2011 established statutory limits on U.S. government discretionary spending, or budgets caps, for both defense and non-defense over the next 10 years.  The Bipartisan Budget Act of 2013 provided temporary relief to the Budget Control Act of 2011 cap levels in 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. Similarly, in November 2015, the U.S. President signed into law the Bipartisan Budget Act of 2015, providing another two years of relief to the Budget Control Act cap numbers.  The Bipartisan Budget Act of 2015 covers both GFY 2016 and 2017 and allows for increased spending levels for DoD and other U.S. government agencies including NASA. This paved the way for the U.S. Congress to pass and the U.S. President to sign into law a $1.1 trillion “Omnibus” appropriations bill for GFY 2016, funding all government agencies.  The defense portion of the bill provides $514.1 billion in base defense funding and $58.6 billion in overseas contingency operations.  The base funding is $12.8 billion below the GFY 2016 budget request while the overseas contingency operations portion is $7.7 billion above the GFY 2016 budget request. The NASA portion contains a top line of $19.3 billion, a $1.3 billion increase over GFY 2015 level.
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 2014 Quadrennial Defense Review (“QDR”) which affirms support for many of our core programs and 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 2016 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, upper stage and Orion vehicle propulsion systems are currently baselined on the new SLS vehicle and both upper stage and booster engines are in development for future SLS variants. Due to the

8



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 a new “space taxi” to ferry astronauts and cargo to the ISS. In 2014, Boeing’s CST-100 Starliner capsule, powered by Aerojet Rocketdyne propulsion, was selected by NASA to transport astronauts to and from the ISS. As Boeing’s teammate, Aerojet Rocketdyne will be providing the propulsion system for this new vehicle, thereby supplementing its work for NASA on the SLS designed for manned deep space exploration. In both instances, we have significant propulsion content and we look forward to supporting these generational programs for NASA.
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
 
2015
 
2014
 
2013
Lockheed Martin
29
%
 
28
%
 
23
%
Raytheon
20

 
17

 
33

ULA
19

 
25

 
18

NASA
11

 
11

 
*

__________
*
Less than 10%.
Our sales to each of the major customers listed above involve several product lines and programs.

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 90% of sales in fiscal 2015 . Sales to our aerospace and defense customers that provide products to international customers continue to grow. The following are percentages of net sales by principal end user in fiscal 2015 :
 
U.S. Air Force
20
%
NASA
25

U.S. Army
18

MDA
17

U.S. Navy
9

Other U.S. government
1

Total U.S. government customers
90

Other customers
10

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 2015 , approximately 61% of our Aerospace and Defense net sales were from fixed-price contracts, 33% from cost-reimbursable contracts, and 6% from other sales including commercial contracts.
 
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-

9



price level of effort contracts, Aerojet Rocketdyne generally receives a structured fixed price per labor hour, dependent upon the customer’s labor hour needs. All fixed-price contracts present the risk of unreimbursed cost overruns potentially resulting in lower than expected contract profit margin and losses.
Cost-reimbursable contracts are typically (i) cost plus fixed fee, (ii) cost plus incentive fee, or (iii) cost plus award fee contracts. For cost plus fixed fee contracts, Aerojet Rocketdyne typically receives reimbursement of its costs, to the extent the costs are allowable under contractual and regulatory provisions, in addition to receiving a fixed fee. For cost plus incentive fee contracts and cost plus award fee contracts, Aerojet Rocketdyne receives adjustments to the contract fee, within designated limits, based on actual results as compared to contractual targets for factors such as cost, performance, quality, and schedule.
Some programs under contract have product life cycles exceeding ten years. It is typical for U.S. government propulsion contracts to be of relatively small contract value during development phases that can last from two to five years, followed by low-rate and then full-rate production, where annual funding can grow significantly.
Government Contracts and Regulations
U.S. government contracts generally are subject to Federal Acquisition Regulations (“FAR”), agency-specific regulations that supplement FAR, such as the DoD’s Defense Federal Acquisition Regulations, and other applicable laws and regulations. These regulations impose a broad range of requirements, many of which are unique to government contracting, including various procurement, import and export, security, contract pricing and cost, contract termination and adjustments, mandatory disclosure, and audit requirements. A contractor’s failure to comply with these regulations and requirements could result in reductions of the value of contracts, contract modifications or termination, inability to bill and collect receivables from customers, and the assessment of penalties and fines that could lead to suspension or debarment from government contracting or subcontracting. In addition, government contractors are also subject to routine audits, reviews, and investigations by the Defense Contract Audit Agency (“DCAA”), the Defense Contract Management Agency, and other similar U.S. government agencies. Such reviews include but are not limited to a contractor’s contract performance, compliance with applicable laws, regulations, and standards as well as the review of the adequacy of a contractor’s accounting systems, purchasing systems, property management systems, estimating systems, earned value management systems, and material management and accounting system.
Regulations for U.S. government contracts provide for the cost of restructuring activities occurring after a business combination as unallowable costs unless we can demonstrate through an external restructure cost and savings proposal that the savings as a result of the business combination will be at least twice the external restructuring costs.
The U.S. government’s ability to unilaterally modify or terminate a contract or to discontinue funding for a particular program at any time could have a material adverse effect on our operating results, financial condition, and/or cash flows. The cancellation of a contract, if terminated for cause, could also subject us to liability for the excess costs incurred by the U.S. government in procuring undelivered items from another source. If terminated for convenience, our recovery of costs would be limited to amounts already incurred or committed (including severance costs for terminated employees), and our profit would be limited based on the work completed prior to termination.
 
Backlog
A summary of our backlog is as follows:
 
As of November 30,
 
2015
 
2014
 
(In billions)
Funded backlog
$
2.4

 
$
2.2

Unfunded backlog
1.7

 
0.9

Total contract backlog
$
4.1

 
$
3.1

Total contract backlog expected to be filled within one year
$
1.6

 
$
1.5

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, 2015 total contract backlog, approximately 39% , or approximately $1.6 billion , is expected to be filled within one year.

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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.
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 our fiscal year and an increase during the second half, which translates 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
 
2015
 
2014
 
2013
 
(In millions)
Customer-funded
$
485.8

 
$
481.2

 
$
335.9

Company-funded (1)
74.4

 
51.9

 
42.9

  Total research and development expenditures
$
560.2

 
$
533.1

 
$
378.8

____
(1) Includes $48.2 million of AR1 research and development costs in fiscal 2015 (see Note 1 in notes to the consolidated financial statements).
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 completion of the Space Shuttle Program reduced demand, resulting in significant unit price increases. In addition, the sole domestic source is evaluating strategic alternatives to its business; accordingly, we are evaluating alternate sources of supply to mitigate risks. 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

11



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 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 11,500  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 5,600 acres have been deemed excess, and we are in the process of entitling this excess land for new development opportunities under the brand name “Easton”. Within Easton, we currently have approximately 1,600 acres that are fully entitled and approximately 2,300 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 continues to execute re-entitlement and pre-development activities, and to explore how to maximize value from Easton. Value creation and monetization 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 2015, we completed key permit requirements regarding open space agreements that better positioned this entitled project for monetization. We continue to have conversations with builders and developers regarding these projects.
Regarding our Hillsborough at Easton project, we finalized the sale of the Hillsborough land in fiscal 2015 for a total purchase price of $57.0 million which was comprised of $46.7 million cash and $10.3 million of promissory notes. The total acreage covered by the Hillsborough land transaction was approximately 700 acres, of which approximately 550 acres was recognized as a sale in the second quarter of fiscal 2015.
During fiscal 2015, we also made important strides in discussions with the City of Rancho Cordova regarding total impact fees and final terms surrounding a final development agreement for the Rio del Oro at Easton project.
The new housing market and local economy in the Sacramento region are in recovery and we expect this trend to continue. We believe the long-term prospect for the Sacramento region represents an attractive and affordable alternative to the San Francisco Bay Area and other large metropolitan areas of California. We believe the Sacramento area demographics and

12



the long-term real estate market fundamentals support our objective of creating value through new entitlements and the creation of Easton.
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 (4)
 
51

 
97

 
148

 
148

 

Office Park and Auto Mall
 
47

 
8

 
55

 
55

 

     Total Easton acreage
 
4,346

 
1,217

 
5,563

 
1,595

 
2,309

Operations land (5)
 
24

 
5,179

 
5,203

 
 

 
 

Land available for future entitlement (6)
 
443

 
242

 
685

 
 

 
 

      Total Sacramento Land
 
4,813

 
6,638

 
11,451

 
 

 
 

_________
(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 9(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) The remaining 148 acres designated in Hillsborough will be transferred, per the completed Purchase and Sale contract, when the required environmental remediation work is completed. See Note 4(h) of the notes to the consolidated financial statements.
(5)
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.
(6)
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 $6.3 million in revenue in fiscal 2015 .
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.

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We review on a quarterly basis estimated future remediation costs and have an established practice of estimating environmental remediation costs over a fifteen year period, except for those environmental remediation costs with a specific contractual term. Environmental liabilities at the Baldwin Park Operable Unit (“BPOU”) site are currently estimated through the anticipated term of a new project agreement (the "Project Agreement"). There can be no assurance that the term of the new Project Agreement will not be longer than the term we estimated and, if so, we may be required to make an additional accrual to reflect the longer term. As the period for which estimated environmental remediation costs lengthens, the reliability of such estimates decreases. These estimates consider the investigative work and analysis of engineers, outside environmental consultants, and the advice of legal staff regarding the status and anticipated results of various administrative and legal proceedings. In most cases, only a range of reasonably possible costs can be estimated. In establishing our reserves, the most probable estimate is used when determinable; otherwise, the minimum amount is used when no single amount in the range is more probable. Accordingly, such estimates can change as we periodically evaluate and revise these estimates as new information becomes available. We cannot predict whether new information gained as projects progress will affect the estimated liability accrued. The timing of payment for estimated future environmental costs is influenced by a number of factors such as the regulatory approval process, and the time required for designing, constructing, and implementing the remedy.
  A summary of our recoverable amounts, environmental reserves, and range of liability, as of November 30, 2015 is presented below:
 
Recoverable
Amount (1)
 
Reserve
 
Estimated Range
of Liability
 
(In millions)
Aerojet Rocketdyne - Sacramento
$
118.0

 
$
153.0

 
$153.0 - $253.0
Aerojet Rocketdyne - BPOU
108.1

 
140.1

 
140.1 - 183.9
Other Aerojet Rocketdyne sites
7.6

 
7.8

 
7.8 - 13.6
Other sites
0.7

 
5.2

 
5.2 - 6.9
Total
$
234.4

 
$
306.1

 
$306.1 - $457.4
_____
(1)
Excludes the receivable from Northrop of $68.7 million as of November 30, 2015 related to environmental costs already paid (and therefore not reserved) by the Company in prior years and reimbursable under the Northrop Agreement (see below).
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 an annual and a cumulative limitation. See Note 9(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 an annual and a cumulative limitation.
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 had reached the reimbursement ceiling under the Northrop Agreement, approximately 37% of such costs were expensed to the consolidated statements of operations. In the fourth quarter of fiscal 2015, Aerojet Rocketdyne and the U.S. government executed an advance agreement revising the percent allocable to Northrop and the U.S. government (the "Advance Agreement"). As a result of this agreement, we increased the percent of recoverable environmental costs and allocated additional environmental costs to our Aerojet Rocketdyne business retroactive to December 1, 2013. We currently estimate approximately 24% of such costs will not likely be reimbursable and are expensed to the consolidated statements of operations. We are seeking to further 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.
Allowable environmental costs are charged to our contracts as the costs are incurred. Because these costs are recovered through forward-pricing arrangements, the ability of Aerojet Rocketdyne to continue recovering these costs from the U.S. government depends on Aerojet Rocketdyne’s sustained business volume under U.S. government contracts and programs.

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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.
The inclusion of environmental costs in our contracts with the U.S. government impacts our competitive pricing; however, we believe that this impact is mitigated by driving improvements and efficiencies across our operations as well as our ability to deliver innovative and quality products to our customers.
Under existing U.S. environmental laws, a Potentially Responsible Parties (“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 2015 nor do we anticipate any material capital expenditures in fiscal 2016 and 2017. 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, 2015 , 15% of our 4,823  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 90% of our total net sales in fiscal 2015 . 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.
We have restated our previously issued consolidated financial statements, which may lead to additional risks and uncertainties.
As described in greater detail in Note 2 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, we restated our consolidated financial statements for each of the fiscal years ended November 30, 2013 and 2014 and our unaudited quarterly financial information for the first three quarters in fiscal 2015 and each of the quarters in fiscal 2014 (collectively, the “Restated Periods”). Management concluded that, as a result of the identified material weaknesses, our internal controls over financial reporting were ineffective as of November 30, 2015. The determination to restate the financial statements for the Restated Periods was made by our Audit Committee and management after discussions with the Company’s independent public accounting firm, PricewaterhouseCoopers LLP. Our Audit Committee concluded that our previously issued financial statements for the Restated Periods should no longer be relied upon. This Annual Report on Form 10-K includes the restatement of our financial statements for the Restated Periods (the “Restatement”).
As a result of these events, we have become subject to a number of additional costs and risks, including unanticipated costs for accounting and legal fees in connection with or related to the Restatement and the remediation of our material weaknesses in internal control over financial reporting. In addition, the attention of our management team has been diverted by these efforts. As further described in Item 3 - “Legal Proceedings”, the Company and certain of our officers and a former officer have been named as defendants in a lawsuit as a result of the Restatement. Other plaintiffs may bring additional actions with other claims based on the Restatement and we could be subject to additional stockholder, governmental, or other actions in connection with the Restatement or other matters. Any such proceedings will, regardless of the outcome, consume management’s time and attention and may result in additional legal, accounting, insurance and other costs. If we do not prevail in the pending litigation or any other proceedings, we could be required to pay substantial damages or settlement costs. In addition, the Restatement and related matters and the pending litigation could impair our reputation or could cause a loss of investor confidence. Each of these occurrences could have a material adverse effect on our business, operating results, financial condition, cash flows and/or stock price.
The estimates and judgments we make, or the assumptions on which we rely, in preparing our consolidated financial statements could prove inaccurate.
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses. Such estimates and judgments include those related to revenue recognition, accrued expenses, purchase accounting, assumptions in the valuation of stock-based compensation and income taxes. We base our estimates and judgments on historical experience, facts and circumstances known to us and on various assumptions that we believe to be reasonable under the circumstances. These estimates and judgments, or the assumptions underlying them, may change over time or prove inaccurate. If the estimates or judgments we make, or the assumptions on which we rely, in preparing our consolidated financial statements prove inaccurate, our actual results may vary materially from those reflected in our consolidated financial statements, which may subject us to a number of additional costs and risks.
For example, in February 2016, we restated our consolidated financial statements for certain prior periods. For a further discussion of this restatement, see the foregoing discussion in the risk factor captioned “We have restated our previously issued consolidated financial statements, which may lead to additional risks and uncertainties.”
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 2015 , approximately 61% of our Aerospace and Defense 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

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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 2015 , approximately 33% of our Aerospace and Defense 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.
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.
Our success and growth in our Aerospace and Defense segment depends on our ability to execute long-standing programs and periodically secure new contracts in a competitive environment.
Aerojet Rocketdyne’s revenue is primarily derived from long-standing contracts (often sole source) where Aerojet Rocketdyne is the long-term incumbent. The challenge for Aerojet Rocketdyne is to successfully utilize its technical, engineering, manufacturing, and management skills to execute these programs for the customer, to continue to innovate and refine its solutions, and to offer the customer increasing affordability in an era of fiscal restraint. If Aerojet Rocketdyne is unable to successfully execute these long-standing programs, our ability to retain existing customers and attract new customers may be impaired.
In addition, in sectors where there is competition, it can be intense. For example, we face increasing competition from entrepreneurs such as SpaceX and Blue Origin, who have been or are in the process of developing liquid fuel propulsion capabilities which are primarily focused on the development of space propulsion systems for heavy lift launch vehicles. These new entrepreneurs have signaled their intent to compete primarily on price and are therefore bringing pressure to bear on existing cost paradigms and our manufacturing methodologies. The U.S. government also has its own manufacturing capabilities in some areas. We may be unable to compete successfully with our competitors and our inability to do so could result in a decrease in sales, profits, and cash flows that we historically have generated from certain contracts. Further, the U.S. government may open to competition programs on which we are currently the sole supplier, which could have a material adverse effect on our operating results, financial condition, and/or cash flows.
Our Aerospace and Defense segment is subject to procurement and other related laws and regulations inherent in contracting with the U.S. government, non-compliance with which could adversely affect our financial results.
In the performance of contracts with the U.S. government, we operate in a highly regulated environment and are routinely audited and reviewed by the U.S. government and its agencies, such as the DCAA. These agencies review performance under our contracts, our cost structure and our compliance with applicable laws, regulations and standards, as well as the adequacy of, and our compliance with, our internal control systems and policies. Systems that are subject to review include, but are not limited to, our accounting systems, purchasing systems, property management systems, estimating systems, earned value management systems, and material management and accounting system. Any costs ultimately found to be unallowable or improperly allocated to a specific contract will not be reimbursed or must be refunded if already reimbursed. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties, sanctions or suspension or debarment from doing business with the U.S. government. Whether or not illegal activities are alleged, the U.S. government also has the ability to decrease or withhold certain payments when it deems systems subject to its review to be inadequate. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. If such actions were to result in suspension or debarment, this could have a material adverse effect on our business.
These laws and regulations provide for ongoing audits and reviews of incurred costs as well as contract procurement, performance and administration. The U.S. government may, if it deems appropriate, conduct an investigation into possible illegal or unethical activity in connection with these contracts. Investigations of this nature are common in the aerospace and defense industry, and lawsuits may result. In addition, the U.S. government and its principal prime contractors periodically investigate the financial viability of their contractors and subcontractors as part of its risk assessment process associated with the award of new contracts. If the U.S. government or one or more prime contractors were to determine that we were not financially viable, our ability to continue to act as a government contractor or subcontractor would be impaired.
 

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Aerojet Rocketdyne’s international sales are subject to applicable laws relating to export controls, the violation of which could adversely affect its operations.
A portion of the Aerojet Rocketdyne activities 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.
By virtue of recent U.S. export control reform, certain Aerojet Rocketdyne international sales that were under Department of State jurisdiction are now regulated by the U.S. Department of Commerce Bureau of Industry and Security (“BIS”) under the Export Administration Act and the Export Administration Regulations (“EAR”), specifically those sales involving controlled U.S.-origin commodities with restrictions as to certain end uses, end users or destinations.  BIS addresses administrative or criminal enforcement of EAR violations.  Similar to penalties and sanctions in violation of ITAR, BIS evaluates violations based upon factors which include destination of the export, degree of willfulness involved in the violation and specific factors of mitigation or aggravation.  The range of penalties is similar to those discussed above with regard to ITAR violations.
In November 2011, DTCC informed UTC that it considers certain of UTC’s voluntary disclosures filed since 2005 to reflect deficiencies warranting penalties and sanctions. On June 28, 2012, UTC entered into a Consent Agreement (the “UTC Consent Agreement”) with DTCC to resolve a Proposed Charging Letter that references approximately 45 of UTC’s previous disclosures. The UTC Consent Agreement, which applies to the Rocketdyne Business, has a four-year term, and provides that UTC will: (1) pay a civil penalty of up to $55 million; (2) appoint, subject to DTCC approval, an outside special compliance official to oversee the compliance by UTC and its subsidiaries and divisions, including the Rocketdyne Business, with the UTC Consent Agreement and ITAR; (3) continue and undertake additional remedial actions to strengthen ITAR compliance, with emphasis on human resources and organization, training, automation, and security of electronic data; and (4) sponsor two outside ITAR compliance audits for UTC and its subsidiaries and divisions, including the Rocketdyne Business, during the term of the UTC Consent Agreement.
In connection with the Acquisition, the DTCC agreed to release the Rocketdyne Business from the UTC Consent Agreement upon consummation of the Acquisition on the condition that we agreed to provide to the DTCC (i) our plan to integrate the Rocketdyne Business into our ITAR compliance program and (ii) an audit of the integration one year after closing the Acquisition. Further, UTC has agreed to reimburse us for any and all costs we incur to comply with these requirements. In connection with the closing of the Acquisition, we provided to the DTCC a letter committing to the DTCC’s conditions. However, there can be no assurance that we will be successful in integrating the Rocketdyne Business into our ITAR and EAR compliance programs or to prevent any further ITAR violations. Therefore, a future violation of ITAR or EAR could materially adversely affect our business, financial condition and results of operations.
Our competitive improvement program (“CIP”) may not be successful in aligning our operations to current market conditions.
In March 2015, we initiated the CIP comprised of activities and initiatives aimed at reducing costs in order for us to continue to compete successfully. The company-wide initiative is being undertaken after a comprehensive assessment of our product portfolio to underpin Aerojet Rocketdyne’s technological and competitive leadership in our markets through continued research and development. The CIP is composed of three major components: (i) facilities optimization and footprint reduction; (ii) product affordability; and (iii) reduced administrative and overhead costs. Implementation of the CIP involves reductions in our workforce and facilities and, in certain instances, the relocation of products, technologies and personnel. We have incurred and will continue to incur significant expenditures to implement the CIP and we expect to realize significant future cost savings as a result. The CIP may not be successful in achieving these cost savings and other benefits within the expected timeframes, may be insufficient to successfully restructure our operations through, among other ways, the relocation of programs or the inability to transition institutional program knowledge, to conform with the changes affecting our industry, may disrupt our operations, or may be more costly than currently anticipated. See additional information in Note 12 in notes to the consolidated financial statements.
We may expand our operations through acquisitions, which may divert management’s attention and expose us to unanticipated liabilities and costs. Also, acquisitions may increase our non-reimbursable costs. We may experience difficulties integrating any acquired operations, and we may incur costs relating to acquisitions that are never consummated.
Our business strategy may lead us to expand our Aerospace and Defense segment through acquisitions. However, our ability to consummate any future acquisitions on terms that are favorable to us may be limited by government regulations, the number of attractive acquisition targets, internal demands on our resources, and our ability to obtain financing. Our success in

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integrating newly acquired businesses will depend upon our ability to retain key personnel, avoid diversion of management’s attention from operational matters, integrate general and administrative services and key information processing systems and, where necessary, re-qualify our customer programs. In addition, future acquisitions could result in the incurrence of additional debt, costs, and/or contingent liabilities. We may also incur costs and divert management attention to acquisitions that are never consummated. Integration of acquired operations may take longer, or be more costly or disruptive to our business, than originally anticipated.
Although we undertake a due diligence investigation of each business that we have acquired or may acquire, there may be liabilities of the acquired companies that we fail to, or were unable to, discover during the due diligence investigation and for which we, as a successor owner, may be responsible. In connection with acquisitions, we generally seek to minimize the impact of these types of potential liabilities through indemnities and warranties from the seller. However, these indemnities and warranties, if obtained, may not fully cover the liabilities due to limitations in scope, amount or duration, financial limitations of the indemnitor or warrantor, or other reasons.
Our inability to adapt to rapid technological changes could impair our ability to remain competitive.
The aerospace and defense industry continues to undergo rapid and significant technological development. Our competitors may implement new technologies before us, allowing them to provide more effective products at more competitive prices. Future technological developments could:
adversely impact our competitive position if we are unable to react to these developments in a timely or efficient manner;
require us to write-down obsolete facilities, equipment, and technology;
require us to discontinue production of obsolete products before we can recover any or all of our related research, development and commercialization expenses; or
require significant capital expenditures for research, development, and launch of new products or processes.
Our business and operations could be adversely impacted in the event of a failure of our information technology infrastructure or adversely impacted by a successful cyber-attack.
As a U.S. defense contractor, we face cyber threats, insider threats, threats to the physical security of our facilities and employees, and terrorist acts, as well as the potential for business disruptions associated with information technology failures, natural disasters, or public health crises.
We routinely experience cyber security threats, threats to our information technology infrastructure and unauthorized attempts to gain access to our sensitive information, as do our customers, suppliers, 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, however this may not continue to be the case in the future. Cyber security assessment analyses undertaken by us identified and prioritized steps to enhance our cyber security safeguards. We are in the process of implementing these recommendations to enhance our threat detection and mitigation processes and procedures. Despite the implementation of these new safeguards, there can be no assurance that we will be adequately protecting our information or that we will not experience any future successful attacks. The threats we face vary from attacks common to most industries to more advanced and persistent, highly organized adversaries who target us because we protect national security information. If we are unable to protect sensitive information, our customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures. Due to the evolving nature of these security threats, however, the impact of any future incident cannot be predicted.
Although we work cooperatively with our customers, suppliers, and subcontractors to seek to minimize the impact of cyber threats, other security threats or business disruptions, we must rely on the safeguards put in place by these entities, which may affect the security of our information. These entities have varying levels of cyber security expertise and safeguards and their relationships with U.S. government contractors, such as Aerojet Rocketdyne, may increase the likelihood that they are targeted by the same cyber threats we face.
The DoD and NASA have contract provisions that require contractors at the prime and subcontract level to comply with Safeguarding of Unclassified Controlled Technical Information in accordance with their agency guidelines.  These clauses are being inserted in or made applicable to government contracts and non-compliance may impact our ability to receive contracts if we cannot comply or use alternative approaches to comply with the contract information security requirements.
We may be required to expend significant additional resources to modify our cyber security protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications, and we may be subject to litigation and financial losses. These costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means. Occurrence of any of these events could adversely affect our internal operations, the services we provide to our customers, our future financial results, our reputation or our stock price; or such events could result in the loss of

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competitive advantages derived from our research and development efforts or other intellectual property, early obsolescence of our products and services, or contractual penalties.
  We may experience warranty claims for product failures, schedule delays or other problems with existing or new products and systems.
Many of the products we develop and manufacture are technologically advanced systems that must function under demanding operating conditions. Even though we believe that we employ sophisticated and rigorous design, manufacturing and testing processes and practices, we may not be able to successfully launch or manufacture our products on schedule or our products may not perform as intended.
If our products fail to perform adequately, some of our contracts require us to forfeit a portion of our expected profit, receive reduced payments, provide a replacement product or service or reduce the price of subsequent sales to the same customer. Performance penalties may also be imposed if we fail to meet delivery schedules or other measures of contract performance. We do not generally insure against potential costs resulting from any required remedial actions or costs or loss of sales due to postponement or cancellation of scheduled operations or product deliveries.
The release 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 completion of the Space Shuttle Program reduced demand, resulting in significant unit price increases. In addition, the sole domestic source is evaluating strategic alternatives to its business; accordingly, we are evaluating alternate sources of supply to mitigate risks. 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, 2015 , our total defined benefit pension plan assets, total projected benefit obligations, and unfunded pension obligation for the tax-qualified pension plans were approximately $964.1 million ,

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$1,549.5 million , and $566.2 million , respectively. We expect to make cash contributions of approximately $23 million to our tax-qualified defined benefit pension plan in fiscal 2016. We estimate that approximately 83% of our unfunded pension obligation as of November 30, 2015 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 ("IRS") regulations or other applicable law or if other actuarial assumptions are modified, our future contributions to our underfunded pension plans could be higher than we expect.
Additionally, the level of returns on retirement benefit assets, changes in interest rates, 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, 2015, the aggregate range of our estimated future environmental obligations was $306.1 million to $457.4 million and the accrued amount was $306.1 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 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. We currently estimate approximately 24% of our Aerospace and Defense segment environmental costs will not likely be reimbursable and are expensed to the consolidated statements of operations.
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

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claims and lawsuits and any similar claims and lawsuits that may arise in the future. Contamination at our current and former properties is subject to investigation and remediation requirements under federal, state and local laws and regulations, and the full extent of the required remediation has not yet been determined. Any adverse judgment or cash outlay could have a significant adverse effect on our operating results, financial condition, and/or cash flows.
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, 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, 2015, we had $ 652.0 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;

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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, 2015. 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;

23



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, 2015 , 15% of our 4,823 employees were covered by collective bargaining agreements. In the future, if we are unable to negotiate acceptable new agreements with the unions, upon expiration of the existing contracts, we could experience a strike or work stoppage. Even if we are successful in negotiating new agreements, the new agreements could call for higher wages or benefits paid to union members, which would increase our operating costs and could adversely affect our profitability. If our unionized workers were to engage in a strike or other work stoppage, or other non-unionized operations were to become unionized, we could experience a significant disruption of operations at our facilities or higher ongoing labor

24



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.
  Failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act of 2002 could negatively impact the market price of our common stock.
We identified material weaknesses in our internal controls due to the following matters: (i) we did not adequately design controls related to purchase accounting considerations for long-term customer contracts acquired as part of a business combination and (ii) we did not maintain effective controls over the integration of the Company’s accounting policies, practices and controls applicable to the acquired Rocketdyne Business, including those over the segmentation criteria applicable to long-term contracts. As a result of these material weaknesses, errors occurred in several significant accounts in fiscal 2015, 2014 and 2013 consolidated financial statements that were not detected. The areas most affected by these deficiencies include net sales, costs of sales, depreciation expense, inventory, accounts receivable, goodwill, property, plant and equipment, net and income taxes. Due to these material weaknesses, management believes that as of November 30, 2015, our internal control over financial reporting was not effective based on the Committee of Sponsoring Organizations of the Treadway Commission criteria. We have and will continue to implement various initiatives in fiscal 2016 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 a material 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 consolidated financial statements.  In making such adjustments we apply the analytical framework of SEC Staff Accounting Bulletin No. 99, “Materiality” (“SAB 99”), to determine whether the effect of any adjustment to our consolidated financial statements is material and whether such adjustments, individually or in the aggregate, would require us to restate our consolidated financial statements for previous periods.  Under SAB 99, companies are required to apply quantitative and qualitative factors to determine the “materiality” of particular adjustments.  We have previously revised our quarterly financial information in fiscal 2014 and recorded out of period items in other prior periods.  In the future, we may identify further errors impacting our interim or annual consolidated financial statements.  Depending upon the complete qualitative and quantitative analysis, this could result in us restating previously issued consolidated financial statements.
Item 1B.
Unresolved Staff Comments
None.

25



Item  2.
Properties
Significant operating, manufacturing, research, design, and/or marketing locations are set forth below.
Facilities
Corporate Headquarters
Aerojet Rocketdyne Holdings, Inc.
2001 Aerojet Road
Rancho Cordova, California 95742
Operating/Manufacturing/Research/Design/Marketing Locations
 
Aerospace and Defense
Aerojet Rocketdyne
Sacramento, California
Design/Manufacturing Facilities:  Camden, Arkansas*; Carlstadt, New Jersey*; Chatsworth, California; Gainesville, Virginia*; Hancock County, Mississippi*; 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.

26



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 83 asbestos cases pending as of November 30, 2015 .
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.
The following table sets forth information related to our historical product liability costs associated with our asbestos litigation (dollars in millions):
 
Year Ended
 
 
2015
 
2014
 
2013
 
Claims filed
16

 
14

**
18

*
Claims dismissed
50

 
23

 
25

 
Claims settled

 
3

 
5

 
Claims pending
83

 
117

 
129

 
Aggregate settlement costs
$

 
$
0.3

 
$
0.6

 
Average settlement costs
$

 
$
0.1

 
$
0.1

 
_______
* 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 were $0.2 million in fiscal 2015 and $0.4 million in fiscal 2014 and 2013.
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 . AMEC contends it has incurred approximately $3.0 million in past legal fees and expenses. Aerojet Rocketdyne filed its answer to the complaint denying AMEC’s allegations as well as a cross-complaint against AMEC for breach of its obligations under the purchase agreement in addition to other claims for relief. Discovery is ongoing. Aerojet Rocketdyne’s motion for summary judgment heard on August 20, 2015 was granted, but the court also granted AMEC leave to amend its complaint. AMEC filed its amended complaint and Aerojet Rocketdyne re-filed its motion for summary judgment which is scheduled for hearing on March 9, 2016.  The trial date has been rescheduled to April 11, 2016. As of November 30, 2015 , 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.
Securities Class Action
On February 11, 2016, a complaint was filed in the United States District Court, Central District of California, by Juliann Travis, purporting to represent a class of purchasers of the Company’s securities during the period from October 15, 2013 through February 1, 2016, against the Company, Eileen Drake, Kathleen Redd and Scott Seymour, Juliann Travis, Individually and on Behalf of All Others Similarly Situated, v. Aerojet Rocketdyne Holdings, Inc., Eileen P. Drake, Kathleen E. Redd, and Scott J. Seymour, Case No. 2:16-cv-00961 . The complaint arises out of the announcement of the Restatement by the Company on February 1, 2016. The complaint asserts that the Company's securities traded at artificially inflated prices as a result of such misstatements and alleges a violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by all defendants, and a violation of Section 20(a) of the Exchange Act by the individual defendants, Drake, Redd and Seymour. The complaint seeks a determination that this matter is a proper class action and designating the plaintiff as the lead plaintiff and class representative, an award of compensatory damages in an amount to be determined at trial, an award of reasonable costs

27



and expenses of trial, including counsel and expert fees, an award of rescission or a rescissory measure of damages and an award of such equitable/injunctive or other relief as deemed appropriate by the Court. The Company believes this action is without merit and intends to contest it vigorously.
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. 34-2014-00173068.   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 $3.0 million, punitive damages, interest and attorney’s costs.  The complaint arises out of the Company’s implementation of ProjectOne, a company-wide enterprise resource planning (“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.  On February 6, 2015, Aerojet Rocketdyne and Ms. Redd filed a demurrer to the complaint seeking to have the complaint dismissed for failure to allege facts sufficient to support the causes of action therein.  On June 9, 2015, the Court sustained the demurrer in part and overruled the demurrer in part, with leave to amend.  On June 18, 2015, Inflective filed an amended complaint in which it reiterated all the causes of action dismissed by the Court.  On June 30, 2015, Aerojet Rocketdyne and Ms. Redd filed a demurrer and motion to strike seeking to have (a) all claims and references to a purported “finder’s fee” stricken from the case and (b) the causes of action against Ms. Redd for intentional and negligent interference with prospective business relations dismissed with prejudice.  On October 16, 2015, the Court sustained Aerojet Rocketdyne’s demurrer and motion to strike with respect to the “finder’s fee” claims, dismissing those claims with prejudice, but overruled Ms. Redd’s demurrer with respect to the causes of action asserted against her.  On October 26, 2015, Aerojet Rocketdyne and Ms. Redd answered the amended complaint and denied all material allegations therein.  At the same time, Aerojet Rocketdyne filed a Cross-Complaint against Plaintiff and its principal, Thomas Hensler, for breach of contract, intentional misrepresentation, negligent misrepresentation and negligence.  Inflective and Hensler have filed a demurrer to the intentional misrepresentation, negligent misrepresentation and negligence causes of action, leaving the breach of contract cause of action unchallenged.  Hearing on Inflective and Hensler’s demurrer is set for February 18, 2016.  Aerojet Rocketdyne believes its causes of action have merit and will prevail on the demurrer.
Separately, Satish Rachaiah, a former consultant on ProjectOne (working for Inflective), attempted to intervene in the action and assert claims against Aerojet Rocketdyne arising out of Aerojet Rocketdyne’s alleged interference with his employment with Inflective.  Mr. Rachaiah sought to assert claims against Aerojet Rocketdyne for intentional interference with contractual relations, intentional and negligent interference with prospective economic advantage, inducing breach of contract, intentional and negligent misrepresentation, and declaratory relief.  Aerojet Rocketdyne opposed intervention, and the Court ultimately denied Mr. Rachaiah’s motion to intervene.  After the Court denied Rachaiah’s motion to intervene, on December 30, 2015, Rachaiah filed a separate lawsuit in the Superior Court of the State of California, Sacramento County, Satish Rachaiah v. Aerojet Rocketdyne, Inc. , Case No. 34-2015-00188516 .  Rachaiah asserts the same claims in his separate lawsuit as he attempted to when he tried to intervene.  The Company believes Rachaiah’s allegations are without merit, and the Company intends to contest the matter vigorously.
The Company has not recorded any liability for either of these matters as of November 30, 2015 .
Occupational Safety Litigation
On May 12, 2015, a complaint for personal injuries, loss of consortium and punitive damages was filed by James Chavez, Andrew Baca, and their respective spouses, against Aerojet Rocketdyne and the Board of Regents of New Mexico Tech in the Seventh Judicial District, County of Socorro, New Mexico, James Chavez, et al., vs. Aerojet Rocketdyne, Inc., et al., Case No. D725CV201500047 . Messrs. Chavez and Baca were employees of Aerotek, a contractor to Aerojet Rocketdyne, who were injured when excess energetic materials being managed by the Energetic Materials Research and Testing Center, a research division of New Mexico Tech, ignited in an unplanned manner. The complaint alleges causes of action based on negligence and negligence per se, strict liability, and willful, reckless and wanton conduct against Aerojet Rocketdyne, and seeks unspecified compensatory and punitive damages. The Company has filed its answer and discovery has commenced. The Company has alerted its insurance carriers of this action and on September 23, 2015, the Company tendered the defense of the case to Aerotek pursuant to Aerotek’s contract for services with Aerojet Rocketdyne. Aerotek has not provided its response to the tender. No liability for this matter has been recorded by the Company as of November 30, 2015 .
Item 4.
Mine Safety Disclosures
None.

28



PART II
Item  5.
Market for Registrant’s Common Equity, Related Stockholders’ Matters and Issuer Purchases of Equity Securities
As of January 15, 2016, there were 6,750 holders of record of the common stock. On January 15, 2016, the last reported sale price of our common stock on the New York Stock Exchange was $15.03 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 7 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 “AJRD.” The following table lists, on a per share basis for the periods indicated, the high and low sale prices for the common stock as reported by the New York Stock Exchange:
 
Common Stock
Price
 
Year Ended November 30,
High 
 
Low 
2015
 
 
 
  First Quarter
$
19.44

 
$
16.20

  Second Quarter
$
23.39

 
$
19.10

  Third Quarter
$
24.35

 
$
19.47

  Fourth Quarter
$
23.46

 
$
14.86

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






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 2010 with the cumulative total return of (i) the Standard & Poor’s 500 Composite Stock Price Index (“S&P 500 Index”), and (ii) the Standard & Poor’s 500 Aerospace & Defense Index. The stock price performance shown on the graph is not necessarily indicative of future performance.
Comparison of Cumulative Total Stockholder Return Among
Aerojet Rocketdyne, S&P 500 Index, and the S&P 500 Aerospace & Defense Index,
November 2010 through November 2015

Company/Index
Base
Period
2010
As of November 30,
2011
2012
2013
2014
2015
 
Aerojet Rocketdyne Holdings, Inc.
$
100.00

$
110.79

$
187.37

$
373.52

$
340.12

$
357.23

S&P 500 Index
100.00

107.83

125.23

163.17

190.68

195.92

S&P 500 Aerospace & Defense
100.00

108.65

122.89

188.85

216.24

230.56


30



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
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
 
As Restated
 
As Restated
 
 
 
 
 
(In millions, except per share amounts)
Net sales
$
1,708.3

 
$
1,602.2

 
$
1,378.1

 
$
994.9

 
$
918.1

Net (loss) income:
 
 
 

 
 

 
 

 
 

 (Loss) income from continuing operations, net of income taxes
$
(17.1
)
 
$
(49.3
)
 
$
162.7

 
$
(5.7
)
 
$
2.9

 Income (loss) from discontinued operations, net of income taxes
0.9

 
(0.7
)
 
0.2

 
3.1

 

   Net (loss) income
$
(16.2
)
 
$
(50.0
)
 
$
162.9

 
$
(2.6
)
 
$
2.9

Basic (loss) income per share of Common Stock
 
 
 

 
 

 
 

 
 

 (Loss) income from continuing operations, net of income taxes
$
(0.28
)
 
$
(0.85
)
 
$
2.68

 
$
(0.09
)
 
$
0.05

 Income (loss) from discontinued operations, net of income taxes
0.01

 
(0.01
)
 

 
0.05

 

   Total
$
(0.27
)
 
$
(0.86
)
 
$
2.68

 
$
(0.04
)
 
$
0.05

Diluted (loss) income per share of Common Stock
 
 
 

 
 

 
 

 
 

 (Loss) income from continuing operations, net of income taxes
$
(0.28
)
 
$
(0.85
)
 
$
2.05

 
$
(0.09
)
 
$
0.05

 Income (loss) from discontinued operations, net of income taxes
0.01

 
(0.01
)
 

 
0.05

 

   Total
$
(0.27
)
 
$
(0.86
)
 
$
2.05

 
$
(0.04
)
 
$
0.05

Supplemental statement of operations information:
 
 
 

 
 

 
 

 
 

 (Loss) income from continuing operations before income taxes
$
(16.8
)
 
$
(33.0
)
 
$
(35.7
)
 
$
13.2

 
$
9.0

 Interest expense
50.4

 
52.7

 
48.7

 
22.3

 
30.8

 Interest income
(0.3
)
 
(0.1
)
 
(0.2
)
 
(0.6
)
 
(1.0
)
 Depreciation and amortization
65.1

 
63.7

 
43.5

 
22.3

 
24.6

 Retirement benefit expense
67.6

 
36.5

 
65.0

 
41.0

 
46.4

 Unusual items in continuing operations:
 
 
 

 
 

 
 

 
 

     Rocketdyne Business acquisition related costs

 

 
20.0

 
11.6

 

     Loss (gain) on legal matters and settlements
50.0

 
0.9

 
(0.5
)
 
0.7

 
4.1

     Loss on bank amendment

 
0.2

 

 

 
1.3

     Loss on debt repurchased/redeemed
1.9

 
60.6

 
5.0

 
0.4

 
0.2

Adjusted EBITDAP (Non-GAAP measure)
$
217.9

 
$
181.5

 
$
145.8

 
$
110.9

 
$
115.4

Adjusted EBITDAP (Non-GAAP measure) as a percentage of net sales
12.8
%
 
11.3
%
 
10.6
%
 
11.1
%
 
12.6
%
Additional statement of operations information:
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
$
8.6

 
$
5.7

 
$
14.1

 
$
6.5

 
$
3.7

Environmental remediation provision adjustments
17.3

 
10.8

 
8.4

 
11.6

 
8.6

Cash flow information:
 
 
 

 
 

 
 

 
 

 Cash flow provided by operating activities
$
65.1

 
$
150.6

 
$
77.4

 
$
86.2

 
$
76.8

 Cash flow (used in) provided by investing activities
(35.8
)
 
(35.7
)
 
(474.9
)
 
(36.6
)
 
5.6

 Cash flow (used in) provided by financing activities
(84.1
)
 
(46.6
)
 
433.0

 
(75.5
)
 
(75.9
)
Balance Sheet information:
 
 
 

 
 

 
 

 
 

 Total assets
$
2,034.9

 
$
1,918.6

 
$
1,752.1

 
$
919.3

 
$
939.5

 Long-term debt, including current maturities
652.0

 
782.2

 
699.2

 
248.7

 
326.4


31



  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 Form 10-K, the terms “we,” “our” and “us” refer to Aerojet Rocketdyne Holdings, Inc. and all of its subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
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.
Restatement
As indicated in Note 2 to our consolidated financial statements included in Part II, Item 8, of this Form 10-K, we corrected errors in our previously issued consolidated financial statements for the Restated Periods primarily related to the following matters: (i) purchase accounting associated with contracts acquired as part of the acquisition of the Rocketdyne Business; (ii) contract accounting related to subsequent modifications to one significant acquired contract; (iii) contract accounting related to the improper recognition of sales associated with incentives; and (iv) other individually immaterial items. A summary of the impact to pretax income (loss) from continuing operations by reporting period is presented below (in millions):
 
 
Income (loss) before income taxes
Reporting Period
 
First nine months of fiscal 2015
 
Fiscal 2014
 
Fiscal 2013
Purchase accounting for contracts acquired as part of the acquisition of the Rocketdyne Business (1)
 
$
(0.5
)
 
$
3.1

 
$
(7.8
)
Contract accounting related to subsequent modifications to one significant acquired Rocketdyne Business contract (2)
 
1.3

 
2.9

 

Contract accounting related to improper recognition of sales incentives (3)
 

 
1.9

 
(2.0
)
Other individually immaterial items
 
(1.2
)
 
(1.5
)
 
0.3

___________
(1) Our errors associated with purchase accounting primarily related to the following: (i) fair value assessment of Rocketdyne Business acquired customer contracts at the acquisition date following the close of the transaction. The Company failed to fair value three acquired contracts in purchase accounting; and (ii) the estimates of the Rocketdyne Business contracts' percentage of completion used to recognize net sales should have been based on its estimate of remaining effort on such contracts at the acquisition date instead of the inception date of the contract.
(2) We did not appropriately account for one significant Rocketdyne Business contract amendment. Instead of being accounted for as a modification, the amendment was accounted for as a new contract.
(3) We immediately recognized incentives as sales based on the full amount received rather than on the percentage of completion of the related contract.
The correction of the matters described above resulted in the following adjustments to the previously issued consolidated financial statements: (i) an increase of $0.3 million , or $0.00 loss per share, to net loss for the first nine months of fiscal 2015; (ii) a decrease of $3.0 million , or $0.06 loss per share, to net loss for fiscal 2014; and (iii) a decrease of $5.0 million , or $0.06 diluted income per share, to net income for fiscal 2013. A summary of the impact to net (loss) income on the consolidated statements of operations by reporting period is presented below (in millions):
Reporting Period
 
Net (Loss) Income
First nine months of fiscal 2015
 
$
(0.3
)
Fiscal 2014
 
3.0

Fiscal 2013
 
(5.0
)
Overview
We are a manufacturer of aerospace and defense products and systems which develops and manufactures propulsion systems for defense and space applications, and armaments for precision tactical and long-range weapon systems applications. We also have a real estate segment that includes activities related to the re-zoning, entitlement, sale, and leasing of our excess real estate assets. Our continuing operations are organized into two segments:

32



Aerospace and Defense — includes the operations of our wholly-owned subsidiary Aerojet Rocketdyne, a leading technology-based designer, developer and manufacturer of aerospace and defense products and systems for the U.S. government, including the DoD, NASA, major aerospace and defense prime contractors as well as portions of the commercial sector. Aerojet Rocketdyne is a world-recognized engineering and manufacturing company that specializes in the development and production of propulsion systems for defense and space applications, armament systems for precision tactical systems and munitions, and is considered a domestic market leader in launch propulsion, in-space propulsion, missile defense propulsion, tactical missile propulsion and hypersonic propulsion systems.
Real Estate — includes the activities of our wholly-owned subsidiary Easton related to the re-zoning, entitlement, sale, and leasing of our excess real estate assets. We own approximately 11,500 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 enhance its value.
A summary of the significant financial highlights for fiscal 2015 which management uses to evaluate our operating performance and financial condition is presented below.
 
Net sales for fiscal 2015 totaled $1,708.3 million compared to $1,602.2 million for fiscal 2014 .
Net loss for fiscal 2015 was $(16.2) million , or $(0.27) loss per share, compared to net loss of $(50.0) million , or $(0.86) loss per share, for fiscal 2014 .
Adjusted EBITDAP (Non-GAAP measure*) for fiscal 2015 was $217.9 million , or 12.8% of net sales, compared to $181.5 million , or 11.3% of net sales, for fiscal 2014 .
Segment performance (Non-GAAP measure*) before environmental remediation provision adjustments, retirement benefit expense, and unusual items was $200.1 million for fiscal 2015 , compared to $152.8 million for fiscal 2014 .
Cash provided by operating activities in fiscal 2015 totaled $65.1 million , compared to $150.6 million in fiscal 2014 .
Free cash flow (Non-GAAP measure*) in fiscal 2015 totaled $28.3 million , compared to $107.2 million in fiscal 2014 .
As of November 30, 2015 , we had $2.4 billion of total funded contract backlog compared to $2.2 billion as of November 30, 2014 .
As of November 30, 2015 , we had $4.1 billion of total contract backlog (total funded and unfunded backlog) compared to $3.1 billion as of November 30, 2014 .
As of November 30, 2015 , we had $440.9 million in net debt (Non-GAAP measure*) compared to $516.3 million as of November 30, 2014 .
_________
* 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 2015 and 2014. The additional week of operations in the first quarter of fiscal 2013 accounted for $27.8 million in additional net sales.
On January 20, 2016, our board of directors approved a change in our fiscal year-end from November 30 of each year to December 31 of each year.
In July 2012, we signed the Original Purchase Agreement with UTC to acquire the Rocketdyne Business from UTC for $550 million. 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 potential future acquisition of UTC’s 50% ownership interest of RD Amross (a joint venture with NPO Energomash of Khimki, Russia which sells RD-180 engines to RD Amross) and the portion of the UTC business that markets and supports the sale of RD-180 engines. The acquisition of UTC’s 50% ownership interest of RD Amross and UTC’s related business was contingent upon certain conditions including receipt of certain Russian governmental regulatory approvals, which was not obtained. Pursuant to the terms of the Amended and Restated Purchase Agreement, on June 14, 2015, our obligations to consummate the RDA Acquisition expired.
The unaudited pro forma information for fiscal 2013 set forth below gives effect to the Acquisition as if it had occurred at the beginning of the 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

33



adjustments to property, plant and equipment and intangible assets had been applied as at the beginning of the 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
 
(In millions, except per share amounts)
Net sales:

As reported
$
1,378.1

Pro forma
$
1,757.7

Net income:
 
As reported
$
162.9

Pro forma
$
25.7

Basic income per share
 
As reported
$
2.68

Pro forma
$
0.42

Diluted income per share
 
As reported
$
2.05

Pro forma
$
0.41

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 markets, implementation of our CIP, environmental matters, capital structure, and underfunded pension plan.

34



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
 
2015
 
2014
 
2013
Lockheed Martin
29
%
 
28
%
 
23
%
Raytheon
20
%
 
17
%
 
33
%
ULA
19
%
 
25
%
 
18
%
NASA
11
%
 
11
%
 
*

__________
*
Less than 10%.
Our sales to each of the major customers listed above involve several product lines and programs.
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 2015
$
1,529.2

 
90
%
Fiscal 2014
1,478.6

 
92
%
Fiscal 2013
1,305.9

 
95
%
The Standard Missile program, which is comprised of several contracts and is included in U.S. government sales, represented 14% , 12%, and 22% of net sales for fiscal 2015, 2014, and 2013, respectively. In addition, the THAAD program, which is comprised of several contracts and is included in U.S. government sales, represented 13% , 12%, and 3% of net sales for fiscal 2015, 2014, and 2013, 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.
The Budget Control Act of 2011 established statutory limits on U.S. government discretionary spending, or budgets caps, for both defense and non-defense over the next 10 years.  The Bipartisan Budget Act of 2013 provided temporary relief to the Budget Control Act of 2011 cap levels in 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. Similarly, in November 2015, the U.S. President signed into law the Bipartisan Budget Act of 2015, providing another two years of relief to the Budget Control Act cap numbers.  The Bipartisan Budget Act of 2015 covers both GFY 2016 and 2017 and allows for increased spending levels for DoD and other U.S. government agencies including NASA. This paved the way for the U.S. Congress to pass and the U.S. President to sign into law a $1.1 trillion “Omnibus” appropriations bill for GFY 2016, funding all government agencies.  The defense portion of the bill provides $514.1

35



billion in base defense funding and $58.6 billion in overseas contingency operations.  The base funding level is $12.8 billion below the GFY 2016 budget request while the overseas contingency operations portion is $7.7 billion above the GFY 2016 budget request. The NASA portion contains a top line of $19.3 billion, a $1.3 billion increase over GFY 2015 level.
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 2014 QDR which affirms support for many of our core programs and 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 2016 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, upper stage and Orion vehicle propulsion systems are currently baselined on the new SLS vehicle and both upper stage and booster engines are in development for future SLS variants. Due to the retirement of the space shuttle fleet, U.S. astronauts 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 a new “space taxi” to ferry astronauts and cargo to the ISS. In 2014, Boeing’s CST-100 Starliner capsule, powered by Aerojet Rocketdyne propulsion, was selected by NASA to transport astronauts to and from the ISS. As Boeing’s teammate, Aerojet Rocketdyne will be providing the propulsion system for this new vehicle, thereby supplementing its work for NASA on the SLS designed for manned deep space exploration. In both instances, we have significant propulsion content and we look forward to supporting these generational programs for NASA.
The competitive dynamics of our multi-faceted marketplace vary by product sector and customer as we experience many of the same influences felt by the broader aerospace and defense industry.  The large majority of products we manufacture are highly complex, technically sophisticated and extremely hazardous to build, demanding rigorous manufacturing procedures and highly specialized manufacturing equipment.  While historically these factors, coupled with the high cost to establish the infrastructure required to meet these needs, posed substantial barriers to entry, modern design tools and manufacturing techniques (additive manufacturing) available to new entrants with the ability to self-fund start-up as well as development costs has led to increased competition in space related markets. To date, the competition has been limited to a few participants who tend to be narrowly focused on products that are sub-elements of our overall product portfolio. For example, entrepreneurs such as SpaceX and Blue Origin, who have been or are in the process of developing liquid fuel propulsion capabilities are primarily focused on the development of space propulsion systems for heavy lift launch vehicles and are not pursuing or participating in the missile defense or tactical propulsion 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.
Competitive Improvement Program
In March 2015, we initiated the CIP comprised of activities and initiatives aimed at reducing costs in order for us to continue to compete successfully. The company-wide initiative is being undertaken after a comprehensive assessment of our product portfolio to underpin Aerojet Rocketdyne’s technological and competitive leadership in our markets through continued research and development. The CIP is composed of three major components: (i) facilities optimization and footprint reduction; (ii) product affordability; and (iii) reduced administrative and overhead costs. Under the CIP, we expect an estimated 500 headcount reduction in our total employee population. We currently estimate that we will incur restructuring and related costs over the next four years totaling approximately $110 million. When fully implemented, we anticipate that the CIP will result in annual cost savings of approximately $145 million beginning in fiscal 2019. As a result of this effort, we will be better positioned to deliver our innovative, high quality and reliable products at a lower cost to our customers. The CIP costs will consist primarily of severance and other employee related costs totaling approximately $43 million, operating facility costs totaling approximately $27 million, and $40 million for other costs relating to product re-qualification, knowledge transfer and other CIP implementation costs. A summary of our CIP reserve activity in fiscal 2015 is shown below:
 
Severance
 
Retention
 
Total
 
(In millions)
February 28, 2015
$

 
$

 
$

      Accrual established
12.9

 
2.7

 
15.6

      Payments
(1.8
)
 

 
(1.8
)
November 30, 2015
$
11.1

 
$
2.7

 
$
13.8

The costs associated with the CIP will be a component of our U.S. government forward pricing rates, and therefore, will be recovered through the pricing of our products and services to the U.S. government. In addition to the employee-related CIP

36



obligations, we incurred non-cash accelerated depreciation expense of $0.8 million in fiscal 2015 associated with changes in the estimated useful life of long-lived assets impacted by the CIP.
As part of our ongoing effort to optimize business resources and achieve headcount reduction goals established through the CIP, we offered a Voluntary Reduction in Force ("VRIF") in July 2015 to our employees. In connection with the VRIF, we recorded a liability of $2.6 million in the third quarter of fiscal 2015, consisting of costs for severance, employee-related benefits and other associated expenses. These costs will be a component of our U.S. government forward pricing rates, and therefore, will be recovered through the pricing of our products and services to the U.S. government.
Successful implementation of the CIP initiative will directly benefit our ability to win important, new development work thereby advancing our wide range of next generation propulsion solutions including our newest liquid booster engine, the AR1. Here we plan to supplement the benefits from the CIP by continuing to invest in significant company-funded research and development activities toward the successful development of this engine to meet current and future U.S. space launch needs.
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.
A summary of our recoverable amounts, environmental reserves, and range of liability, as of November 30, 2015 is presented below:
 
Recoverable
Amount (1)
 
Reserve
 
Estimated Range
of Liability
 
(In millions)
Aerojet Rocketdyne - Sacramento
$
118.0

 
$
153.0

 
$153.0 - $253.0
Aerojet Rocketdyne - BPOU
108.1

 
140.1

 
140.1 - 183.9
Other Aerojet Rocketdyne sites
7.6

 
7.8

 
7.8 - 13.6
Other sites
0.7

 
5.2

 
5.2 - 6.9
Total
$
234.4

 
$
306.1

 
$306.1 - $457.4
_____
(1)
Excludes the receivable from Northrop of $ 68.7 million as of November 30, 2015 related to environmental costs already paid (and therefore not reserved) by the Company in prior years and reimbursable under the Northrop Agreement.
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 9(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, 2015 , we had $ 652.0 million of debt principal outstanding. The fair value of the debt outstanding at November 30, 2015 was $751.5 million .
Retirement Benefits
We expect to make cash contributions of approximately $23 million to our tax-qualified defined benefit pension plan in fiscal 2016. We estimate that approximately 83% of our unfunded pension obligation as of November 30, 2015 is related to Aerojet Rocketdyne which will be recoverable through our U.S. government contracts.
The funded status of our tax-qualified defined benefit pension plan may be adversely affected by the investment experience of the plan's assets, by any changes in U.S. law and by changes in the statutory interest rates used by tax-qualified pension plans in the U.S. to calculate funding requirements. Accordingly, if the performance of our plan's assets does not meet our assumptions, if there are changes to the IRS regulations or other applicable law or if other actuarial assumptions are modified, 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

37



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.
Results of Operations
 
Year Ended
 
2015
 
2014
 
2013
 
 
 
As Restated
 
As Restated
 
(In millions)
Net sales
$
1,708.3

 
$
1,602.2

 
$
1,378.1

Operating costs and expenses:
 
 
 
 
 
Cost of sales (exclusive of items shown separately below)
1,459.5

 
1,406.2

 
1,234.3

AR1 research and development (see Note 1 of the consolidated financial statements)
32.1

 

 

Selling, general and administrative
49.0

 
38.2

 
53.6

Depreciation and amortization
65.1

 
63.7

 
43.5

Other expense, net:
 
 
 
 
 
Loss on debt repurchased
1.9

 
60.6

 
5.0

Legal settlement
50.0

 

 

Other
17.4

 
13.9

 
28.9

Total operating costs and expenses
1,675.0

 
1,582.6

 
1,365.3

Operating income
33.3

 
19.6

 
12.8

Non-operating (income) expense:
 
 
 
 
 
Interest income
(0.3
)
 
(0.1
)
 
(0.2
)
Interest expense
50.4

 
52.7

 
48.7

Total non-operating expense, net
50.1

 
52.6

 
48.5

Loss from continuing operations before income taxes
(16.8
)
 
(33.0
)
 
(35.7
)
Income tax provision (benefit)
0.3

 
16.3

 
(198.4
)
(Loss) income from continuing operations
(17.1
)
 
(49.3
)
 
162.7

Income (loss) from discontinued operations, net of income taxes
0.9

 
(0.7
)
 
0.2

Net (loss) income
$
(16.2
)
 
$
(50.0
)
 
$
162.9

Net Sales:
 
Year Ended
 
 
 
Year Ended
 
 
 
2015
 
2014
 
Change*
 
2014
 
2013
 
Change**
 
 
 
As Restated
 
 
 
As Restated
 
As Restated
 
 
 
(In millions)
Net sales:
$
1,708.3

 
$
1,602.2

 
$
106.1

 
$
1,602.2

 
$
1,378.1

 
$
224.1

  * Primary reason for change. The increase in net sales was primarily due to the following: (i) an increase of $84.3 million in space advanced programs primarily driven by the RS-25 program which is currently engaged in a significant development and integration effort in support of the SLS development program and increased development work on the Orion program partially offset by the successful completion of current J-2X program; (ii) an increase of $80.3 million in missile defense and strategic systems programs primarily driven by the increased deliveries on the THAAD and Standard Missile programs; and (iii) sale of approximately 550 acres of our Sacramento Land for $42.0 million. The increase in net sales was partially offset by a decrease of $109.7 million in space launch programs primarily associated with the RL10 and RS-68 programs as a result of the timing of deliveries and costs incurred on these multi-year contracts and lower sales related to the Antares AJ-26 program close-out (see discussion below).
** Primary reason for change. The increase in net sales was primarily due to the net sales from the acquired Rocketdyne Business. The Rocketdyne Business generated sales of $681.9 million in fiscal 2014 compared to $311.8 million in fiscal 2013. 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 AJ60, THAAD, and Orion programs totaling $71.9 million. The increase in net sales was partially offset by (i) a decrease 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

38



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) lower sales a result of the completion of the T3 IIA and IIB contracts as the program entered the next development phase; and (iv) decreased deliveries and changes in the estimated measurement of progress toward completion on the Antares program.
Cost of Sales (exclusive of items shown separately below):
 
Year Ended
 
 
 
Year Ended
 
 
 
2015
 
2014
 
Change*
 
2014
 
2013
 
Change**
 
 
 
As Restated
 
 
 
As Restated
 
As Restated
 
 
 
(In millions, except percentage amounts)
Cost of sales:
$
1,459.5

 
$
1,406.2

 
$
53.3

 
$
1,406.2

 
$
1,234.3

 
$
171.9

Percentage of net sales
85.4
%
 
87.8
%
 
 
 
87.8
%
 
89.6
%
 
 
Percentage of net sales excluding retirement benefit expense and step-up in fair value of inventory
82.5
%
 
86.0
%
 
 
 
86.0
%
 
86.2
%
 
 
Components of cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales excluding retirement benefit expense and step-up in fair value of inventory
$
1,409.0

 
$
1,377.8

 
$
31.2

 
$
1,377.8

 
$
1,187.9

 
$
189.9

Cost of sales associated with the Acquisition step-up in fair value of inventory not allocable to our U.S. government contracts
0.3

 
3.2

 
(2.9
)
 
3.2

 
2.2

 
1.0

Retirement benefit expense
50.2

 
25.2

 
25.0

 
25.2

 
44.2

 
(19.0
)
Cost of sales
$
1,459.5

 
$
1,406.2

 
$
53.3

 
$
1,406.2

 
$
1,234.3

 
$
171.9

* Primary reason for change. The decrease in cost of sales as a percentage of net sales excluding retirement benefit expense and the step-up in fair value of inventory is primarily due to (i) land sale of approximately 550 acres of Sacramento Land resulting in gross profit of $30.6 million , 1.8% of net sales, and (ii) the close-out of the Antares AJ-26 program. Aerojet Rocketdyne entered into a Settlement and Mutual Release Agreement (the “Agreement”) with Orbital Sciences Corporation (“Orbital”) pursuant to which the parties mutually agreed to a termination for convenience of the contract relating to the provision by Aerojet Rocketdyne of 20 AJ-26 liquid propulsion rocket engines to Orbital for the Antares program (the “Contract”). The Agreement also settles all claims the parties may have had against one another arising out of the Contract and the launch failure that occurred on October 28, 2014 of an Antares launch vehicle carrying the Cygnus ORB-3 service and cargo module. We incurred a $50.0 million legal settlement charge reported as an unusual item and not included in cost of sales related to the legal settlement. See table below and Note 9(b) of the notes to consolidated financial statements.
 
Year Ended
 
 
 
2015
 
2014
 
Change
 
(In millions, except percentage amounts)
Antares AJ-26 program:
 
 
 
 
 
Net sales
$
(2.2
)
 
$
7.9

 
$
(10.1
)
Cost of sales - (benefit) expense
(10.3
)
 
40.2

 
(50.5
)
Gross contract profit (loss)
$
8.1

 
$
(32.3
)
 
$
40.4

Gross contract profit (loss) as a percentage of net sales
0.5
%
 
(2.0
)%
 
 
** 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 of cost growth in fiscal 2014 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.

39



AR1 Research and Development ("R&D"):
 
Year Ended
 
 
 
Year Ended
 
 
 
2015
 
2014
 
Change*
 
2014
 
2013
 
Change**
 
(In millions, except percentage amounts)
AR1 R&D:
$
32.1

 
$

 
$
32.1

 
$

 
$

 
$

Percentage of net sales
1.9
%
 
%
 
 
 
%
 
%
 
 
  * Primary reason for change. During the third quarter of fiscal 2015, we began separately reporting the portion of the engine development expenses associated with our newest liquid booster engine, the AR1, which are currently not allocated across all contracts and programs in progress under U.S. governmental contractual arrangements. See additional discussion in Note 1 of the notes to consolidated financial statements.
Selling, General and Administrative (“SG&A”):
 
Year Ended
 
 
 
Year Ended
 
 
 
2015
 
2014
 
Change*
 
2014
 
2013
 
Change**
 
 
 
As Restated
 
 
 
As Restated
 
 
 
 
 
(In millions, except percentage amounts)
SG&A:
$
49.0

 
$
38.2

 
$
10.8

 
$
38.2

 
$
53.6

 
$
(15.4
)
Percentage of net sales
2.9
%
 
2.4
%
 
 
 
2.4
%
 
3.9
%
 
 
Percentage of net sales excluding retirement benefit expense and stock-based compensation
1.3
%
 
1.3
%
 
 
 
1.3
%
 
1.4
%
 
 
Components of SG&A:
 
 
 
 
 
 
 
 
 
 
 
SG&A excluding retirement benefit expense and stock-based compensation
$
23.0

 
$
21.2

 
$
1.8

 
$
21.2

 
$
18.7

 
$
2.5

Stock-based compensation
8.6

 
5.7

 
2.9

 
5.7

 
14.1

 
(8.4
)
Retirement benefit expense
17.4

 
11.3

 
6.1

 
11.3

 
20.8

 
(9.5
)
SG&A
$
49.0

 
$
38.2

 
$
10.8

 
$
38.2

 
$
53.6

 
$
(15.4
)
 * Primary reason for change. The increase in SG&A expense was primarily driven by: (i) an increase of $ 6.1 million in non-cash retirement benefit plan expense (see discussion of “Retirement Benefit Plans” below) and (ii) an increase of $2.9 million in stock-based compensation primarily as a result of increases in the fair value of the stock appreciation rights.
** 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.
Depreciation and Amortization:
 
Year Ended
 
 
 
Year Ended
 
 
 
2015
 
2014
 
Change*
 
2014
 
2013
 
Change**
 
 
 
 
 
 
 
 
 
As Restated
 
 
 
(In millions)
Depreciation and amortization:
$
65.1

 
$
63.7

 
$
1.4

 
$
63.7

 
$
43.5

 
$
20.2

Components of depreciation and amortization:
 
 
 
 
 
 
 
 
 
 
 
Depreciation
$
49.8

 
$
48.5

 
$
1.3

 
$
48.5

 
$
35.5

 
$
13.0

Amortization
13.4

 
13.5

 
(0.1
)
 
13.5

 
6.5

 
7.0

Accretion
1.9

 
1.7

 
0.2

 
1.7

 
1.5

 
0.2

Depreciation and amortization
$
65.1

 
$
63.7

 
$
1.4

 
$
63.7

 
$
43.5

 
$
20.2

 * Primary reason for change. The increase in depreciation and amortization is primarily due to the non-cash accelerated depreciation expense of $0.8 million in fiscal 2015 associated with changes in the estimated useful life of long-lived assets impacted by the CIP.

40



** Primary reason for change. The increase in depreciation and amortization is primarily due to (i) an increase in depreciation expense related to the Rocketdyne Business since the acquisition; (ii) an increase of $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.
Other Expense, net:
 
Year Ended
 
 
 
Year Ended
 
 
 
2015
 
2014
 
Change*
 
2014
 
2013
 
Change**
 
 
 
 
 
 
 
 
 
As Restated
 
 
 
(In millions)
Other expense, net:
$
69.3

 
$
74.5

 
$
(5.2
)
 
$
74.5

 
$
33.9

 
$
40.6

* Primary reason for change. The decrease in other expense, net was primarily due to a decrease of $9.8 million in unusual items charges (see discussion of unusual items below). The decrease in unusual items was partially offset by an increase of $6.5 million in environmental remediation expense primarily associated with higher reserve requirements at the BPOU site offset by the Advance Agreement with the U.S. government entered into in the fourth quarter of fiscal 2015 (see discussion of “Environmental Matters” below).
** 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 (see discussion of unusual items below); (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 discussion of “Environmental Matters” below).
Total unusual items expense, a component of other expense, net in the consolidated statements of operations, was as follows:
 
Year Ended
 
2015
 
2014
 
2013
 
(In millions)
Aerospace and Defense:
 
 
 
 
 
        Loss (gain) on legal matters and settlements
$
50.0

 
$
0.9

 
$
(1.0
)
        Rocketdyne Business acquisition related costs

 

 
2.6

        Aerospace and defense unusual items
50.0

 
0.9

 
1.6

Corporate:
 
 
 
 
 
        Rocketdyne Business acquisition related costs

 

 
17.4

        Loss on debt repurchased
1.9

 
60.6

 
5.0

        Loss on legal settlement

 

 
0.5

        Loss on bank amendment

 
0.2

 

        Corporate unusual items
1.9

 
60.8

 
22.9

            Total unusual items
$
51.9

 
$
61.7

 
$
24.5

Fiscal 2015 Activity:
We recorded an expense of $50.0 million associated with a legal settlement. See Note 9(b) of the notes to consolidated financial statements.
We retired $76.0 million principal amount of our delayed draw term loan resulting in $1.9 million of losses associated with the write-off of deferred financing fees.
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.

41



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 net of interest associated with the failure to register with the SEC the issuance of certain of our common shares under the defined contribution 401(k) employee benefit plan.
We incurred expenses of $20.0 million, including internal labor costs of $1.4 million, related to the Rocketdyne Business acquisition.
A summary of our losses on the 4  1 / 16 % Debentures repurchased during fiscal 2013 is as follows (in millions):
 
Principal amount repurchased
$
5.2

Cash repurchase price
(10.1
)
Write-off of deferred financing costs
(0.1
)
Loss on 4  1 / 16 % Debentures repurchased
$
(5.0
)
Interest Income:
 
Year Ended
 
 
 
Year Ended
 
 
 
2015
 
2014
 
Change*
 
2014
 
2013
 
Change*
 
(In millions)
Interest income:
$
0.3

 
$
0.1

 
$
0.2

 
$
0.1

 
$
0.2

 
$
(0.1
)
 * Primary reason for change. Interest income was essentially unchanged for the periods presented.
Interest Expense:
 
Year Ended