Aerojet Rocketdyne Holdings
AEROJET ROCKETDYNE HOLDINGS, INC. (Form: 10-K, Received: 03/01/2017 16:14:55)


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended: December 31, 2016
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.)
222 N. Sepulveda Blvd, Suite 500
El Segundo, California
 
90245
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code
(310) 252-8100
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
 
Name of each exchange on which registered
 
Common Stock, $0.10 par value per share
 
New York Stock Exchange 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.     ¨
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 June 30, 2016 was approximately $1.2 billion .
As of February 21, 2017 , there were 74.8 million  outstanding shares of the Company’s Common Stock, including redeemable common stock and unvested common shares, $0.10 par value.
Portions of the 2017 Proxy Statement of Aerojet Rocketdyne Holdings, Inc. relating to its annual meeting of stockholders scheduled to be held on May 4, 2017 are incorporated by reference into Part III of this Report.




Aerojet Rocketdyne Holdings, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2016
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,” “2016  Director Compensation Table,” “Compensation Discussion and Analysis,” “Summary Compensation Table,” “2016 Grants of Plan-Based Awards,” “Outstanding Equity Awards at 2016 Fiscal Year End, “2016 Option/SAR Exercises and Stock Vested,” “2016 Pension Benefits,” “2016 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 2017 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 ("Report"), the terms “we,” “our,” “us,” and the "Company" refer to Aerojet Rocketdyne Holdings, Inc. and all of its subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America (“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 an innovative technology-based manufacturer of aerospace and defense products and systems, with a real estate segment that includes activities related to the entitlement, sale, and leasing of our excess real estate assets. Our operations are organized into two segments:
Aerospace and Defense — includes the operations of our wholly-owned subsidiary Aerojet Rocketdyne, Inc. (“Aerojet Rocketdyne”), a leading technology-based designer, developer and manufacturer of aerospace and defense products and systems for the 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.
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 are currently in the process of seeking zoning changes and other governmental approvals on our excess real estate assets to optimize its value.
In June 2013, we acquired the Pratt & Whitney Rocketdyne division (the “Rocketdyne Business”) from United Technologies Corporation (“UTC”).
Sales, segment performance, total assets, and other financial data of our segments for fiscal 2016, 2015, 2014, and one month ended December 31, 2015 are set forth in Note 9 in notes to consolidated financial statements included in Item 8 of this Report.
In January 2016, our board of directors approved a change in our fiscal year-end from November 30 of each year to December 31 of each year. The fiscal year of our subsidiary, Aerojet Rocketdyne, ends on the last Saturday in December. As a result of the change, we had a one month transition period in December 2015. The audited results for the one month ended December 31, 2015 and the unaudited results for the one month ended December 31, 2014 are included in Item 8 of this Report. Further, as a result of the 2016 calendar, Aerojet Rocketdyne had 53 weeks of operations in fiscal 2016 compared to 52 weeks of operations in fiscal 2015 and 2014. The additional week of operations, which occurred in the fourth quarter of fiscal 2016, accounted for $32.2 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 222 N. Sepulveda Blvd, Suite 500, El Segundo, California 90245.
Our Internet website address is www.AerojetRocketdyne.com. We have made available through our Internet website, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such materials were electronically filed with, or furnished to, the SEC. We also make available on our Internet website our corporate governance guidelines and the charters for each of the following committees of our Board of Directors: Audit; Corporate Governance & Nominating; and Organization & Compensation. Our corporate governance guidelines and such charters are also available in print to anyone who requests them.

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Aerospace and Defense
Aerojet Rocketdyne is a world-recognized technology-based engineering and manufacturing company that develops and produces specialized propulsion systems, as well as armament systems. We are considered a domestic market leader in liquid launch propulsion, in-space propulsion, missile defense propulsion, tactical missile propulsion and hypersonic propulsion systems. We develop and manufacture all four propulsion types (liquid, solid, air-breathing, and electric) for defense, civil and commercial applications. Our propulsion systems range in thrust size from a few grams to over half a million pounds. Aerojet Rocketdyne is a trusted supplier of technically 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 sales 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 and end users include the DoD, NASA, The Boeing Company (“Boeing”), Lockheed Martin Corporation (“Lockheed Martin”), Raytheon Company (“Raytheon”), and United Launch Alliance (“ULA”).
Primary Markets and Programs
Our capabilities and resources are aligned with our customers and markets, and position us for long-term growth with improved efficiency. The markets and key programs we serve are:
Aerospace. We specialize in the development and production of propulsion systems for space applications and are considered a domestic market leader in liquid launch and in-space propulsion systems. For over half a century, we have been a domestic provider of launch vehicle propulsion systems to prime contractors providing launch services to the DoD, NASA, and other commercial customers. We have been a cornerstone of the U.S. space program since its inception more than five decades ago. Our propulsion systems have flown on every manned mission since the inception of the U.S. space program in 1959 and have powered spacecraft to every planet in the solar system that has been explored by NASA. Our products include a broad market offering of both chemical (liquid propellant engines and solid rocket motors) and electric propulsion required for launch vehicle and in-space applications in the defense, civil and commercial propulsion markets. 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. We provide booster and upper stage propulsion for ULA’s Delta IV and Atlas V launch vehicles in support of the Evolved Expendable Launch Vehicle (“EELV”) program, as well as a limited number of Delta II vehicles which are supporting commercial customers launching earth observation spacecraft. 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.
During fiscal 2016, we achieved a number of significant milestones on the NASA Space Launch System (“SLS”) and Commercial Crew programs. We completed initial testing of our RS-25 engine to improve its affordability and tailor it for use in the SLS. NASA also awarded us the contract to upgrade and integrate four of our RL10 engines into the new exploration upper stage for the SLS.
We continued to mature critical technologies for our nation’s next generation of advanced hydrocarbon engines for future high-performance booster systems with the ability to eliminate the U.S. dependence on Russian-provided booster systems for National Security Space Launch. The U.S. Air Force awarded us an Other Transaction Agreement (“OTA”) that can provide up to $536 million of U.S. government funding in addition to our investment to qualify our AR1 engine. To date we have been awarded Stages 1 and 2A under the OTA.
NASA also selected us for development of the solar electric advanced propulsion system that will be a key enabling technology for inter-planetary exploration. We started initial delivery of replacement lithium ion batteries to sustain the future operation of the International Space Station (“ISS”).
A subset of our key space programs include: RS-68, RS-27, RL10 and Atlas AJ60 engines/boosters that power EELV launch vehicles, the AR1 large liquid engine for the next generation of launch vehicles, propulsion for the Orion human space capsule and the Starliner Commercial Crew Transportation Capability capsule, and multiple in-space electric and chemical propulsion systems to provide orbit raising and satellite station positioning.
Defense. We specialize in the development and production of propulsion systems for defense applications, armament systems for precision tactical systems and munitions, and are considered a domestic market leader in missile defense propulsion, tactical missile propulsion and hypersonic propulsion systems.
We design, develop, and produce propulsion and warhead systems for tactical missiles. Our commitment to researching and developing safe, effective and affordable products enables us to provide our customers with optimal tactical propulsion and

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warhead solutions. Our tactical products have been successfully fielded on numerous active U.S. and international weapon system platforms.
We also develop and manufacture liquid and solid divert and attitude control ("DAC") propulsion systems and booster motors for missile defense applications. Additionally, we develop and manufacture boost and post-boost rocket motors for strategic missiles. These systems provide launch capability and directional control for critical missile defense interceptors and for ground and sea-based strategic missiles.
During fiscal 2016, we experienced growth in our work in the field of hypersonic propulsion with competitive wins on the Hypersonic Airbreathing Weapons Concept, Advanced Full Range Engine, and Tactical Boost Glide concept development programs. We also extended our position in missile defense DACs propulsion as both the Terminal High Altitude Area Defense ("THAAD") liquid DACs and Standard Missile-3 solid DACs achieved significant production volume in fiscal 2016. In fiscal 2016, we also transitioned to production of the new, more-capable Missile Segment Enhanced boost motor for the Patriot Advanced Capability-3 (“PAC-3”) missile.
A subset of our key defense programs include: Exoatmospheric Kill Vehicle (“EKV”) Liquid DACs, booster and Liquid DACs for THAAD, boosters and solid DACs for the Navy’s Standard Missile family, PAC-3, Guided Multiple Launch Rocket Systems, HAWK, Javelin, Tactical Tomahawk, and Tube-launched Optically-tracked Wire-guided warhead.
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.
Diversified and Well Balanced Portfolio - We have been and continue to be a pioneer in the development of many enabling technologies and products that have strengthened multiple branches of the U.S. military and enabled the exploration of space. We believe Aerojet Rocketdyne maintains a unique competitive position due to a strategic focus on creating and maintaining a broad spectrum of propulsion and energetic products assisted by the growing market demand for its innovative energy management technologies.
High Visibility of Revenue with Multi-year Contracts and Sizable Backlog - 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 competed years ago and others have been sole source contracts since inception. High renewal rates, supported by our market leading technology provide us with a highly stable business base from which to grow. As of December 31, 2016 , our contract backlog (funded and unfunded) was $4.5 billion and our funded backlog, which includes only amounts for which funding has been authorized by a customer and a purchase order has been received, totaled $2.3 billion . We are not subject to predictable seasonality. Primary factors affecting the timing of our sales include the timing of U.S. government awards, the availability of U.S. government funding, contractual product delivery requirements, customer acceptances, and regulatory issues.
Exceptional Long-Term Industry Relationships - We serve a broad set of customers and are major suppliers of propulsion products to top original equipment manufacturers such as Boeing, Lockheed Martin, Raytheon and ULA, as well as to the DoD, NASA and other U.S. government agencies. We have a long history of partnering with their respective prime contractors and have developed close relationships with key decision-makers in the rocket and missile propulsion markets. We are, in many instances, approached by multiple prime contractors early in the bidding process, which is a testament to the strength of our relationships and technological leadership in the industry. 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 line and customer as we experience many of the same influences felt by the broader aerospace and defense industry.  The large majority of products we manufacture are highly complex, technically sophisticated and extremely hazardous to build, demanding rigorous manufacturing procedures and

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highly specialized manufacturing equipment.  While historically these factors, coupled with the high cost to establish the infrastructure required to meet these needs, posed substantial barriers to entry, modern design tools and manufacturing techniques (e.g., additive manufacturing) available to new entrants with the ability to self-fund start-up as well as development costs has led to increased competition in space related markets. To date, 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:
Company
Parent
Propulsion Type
Aerojet Rocketdyne
Aerojet Rocketdyne Holdings, Inc.
Solid, liquid, air- breathing, electric
Airbus Defence and Space (formerly Astrium)
Airbus Group
Solid, liquid
Alliant Techsystems
Orbital ATK, Inc.
Solid, air-breathing
Avio
Avio S.p.A
Solid, liquid
Blue Origin LLC
Blue Origin
Liquid
Electron Technologies, Inc.
L-3 Communications Corporation
Electric
General Dynamics OTS
General Dynamics
Solid
Nammo Talley
Nammo Talley
Solid
Northrop Grumman Space Technology
Northrop Grumman Corporation (“Northrop”)
Liquid
Moog Inc.
Moog Inc.
Liquid, electric
Safran
Safran
Liquid, solid
SpaceX
SpaceX
Liquid
Industry Overview
Our primary aerospace and defense customers include the DoD and its agencies, NASA, and the prime contractors that supply products to these customers. We rely on U.S. government spending on 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.
Even with overall budget levels set for GFY 2017, Congress was not able to pass a full year appropriation for either the DoD or NASA prior to the start of GFY 2017 on October 1, 2016.  As a result, Congress passed a short-term Continuing Resolution (“CR”) to fund the U.S. government until December 9, 2016. After the November U.S. presidential election, at the request of the Trump Administration, Congress passed another CR through April 28, 2017 to allow the new Administration to shape federal spending. Although details of the plans to address perceived shortfalls in DoD readiness and modernization remain unsettled, the Trump Administration has signaled strong support for nuclear modernization and missile defense.
The SLS appears to remain a top Congressional priority as the CR included a provision to allow NASA the funding flexibility for SLS and deep exploration to remain on track. The SLS program also has enjoyed wide, bipartisan support in both chambers of Congress. We maintain a strong relationship with NASA and our propulsion systems have been powering NASA launch vehicles and spacecraft since the inception of the U.S. space program. Our booster, upper stage and Orion vehicle propulsion systems are currently baselined on the new SLS vehicle and both upper stage and booster engines are in development for future SLS variants. Due to the retirement of the space shuttle fleet, U.S. astronauts have been dependent on Russian Soyuz flights for access to and from the ISS for the better part of this decade. NASA has been working to re-establish U.S. manned space capability as soon as possible through development of a new “space taxi” to ferry astronauts and cargo to the ISS. In 2014, Boeing’s CST-100 Starliner capsule, powered by Aerojet Rocketdyne propulsion, was selected by NASA to

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transport astronauts to and from the ISS. As Boeing’s teammate, Aerojet Rocketdyne will be providing the propulsion system for this new capsule, thereby supplementing its work for NASA on the SLS designed for manned deep space exploration. In both instances, we have significant propulsion content and we look forward to supporting these 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 primarily agencies of the U.S. government.
Customers that represented more than 10% of net sales for the periods presented were as follows:
 
Year Ended
 
One month ended
 
December 31,
 
November 30,
 
November 30,
 
December 31,
 
2016
 
2015
 
2014
 
2015
Lockheed Martin
27
%
 
29
%
 
28
%
 
24
%
ULA
21

 
19

 
25

 
28

Raytheon
20

 
20

 
17

 
19

NASA
13

 
11

 
11

 
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 91% of net sales in fiscal 2016 . 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 2016 :
 
U.S. Air Force
24
%
NASA
24

U.S. Army
18

Missile Defense Agency
15

U.S. Navy
9

Other U.S. government
1

Total U.S. government customers
91

Other customers
9

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 U.S. government for production-type contracts) or “cost-reimbursable” (largely used by the U.S. government for development-type contracts). During fiscal 2016 , approximately 62% of our net sales were from fixed-price contracts, 32% 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 fee contracts, Aerojet Rocketdyne receives increased or decreased fees or profits based upon actual performance against established targets or other criteria. For fixed-price level of effort contracts, Aerojet Rocketdyne generally receives a structured fixed price per labor hour, dependent upon the customer’s labor hour needs. All fixed-price contracts present the risk of unreimbursed cost overruns potentially resulting in lower than expected contract profit margin and losses.

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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.
In addition, OTA contracts are becoming more prevalent in initial phases of U.S. government procurements, and are anticipated as an integral part of future Aerojet Rocketdyne business. See our discussion below under "Research and Development" on our OTA with the U.S. Air Force in a public-private partnership to jointly develop the AR1 engine.
Some programs under contract have product life cycles exceeding ten years. It is typical for U.S. government propulsion contracts to be of relatively small contract value during development phases that can last from two to five years, followed by low-rate and then full-rate production, where annual funding can grow significantly.
Government Contracts and Regulations
U.S. government contracts generally are subject to Federal Acquisition Regulations (“FAR”), agency-specific regulations that supplement FAR, such as the DoD’s Defense Federal Acquisition Regulations, and other applicable laws and regulations. These regulations impose a broad range of requirements, many of which are unique to U.S. government contracting, including various procurement, import and export, security, contract pricing and cost, contract termination and adjustments, mandatory disclosure, and audit requirements. Our failure to comply with these regulations and requirements could result in reductions of the value of contracts, contract modifications or termination, inability to bill and collect receivables from customers, and the assessment of penalties and fines that could lead to suspension or debarment from U.S. government contracting or subcontracting. In addition, as a U.S. government contractor, we are subject to routine audits, reviews, and investigations by the Defense Contract Audit Agency (“DCAA”), the Defense Contract Management Agency, and other similar U.S. government agencies. Such reviews include but are not limited to our contract performance, compliance with applicable laws, regulations, and standards as well as the review of the adequacy of our accounting systems, purchasing systems, property management systems, estimating systems, earned value management systems, and material management and accounting systems.
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. Restructuring costs that are not related to a business combination (i.e., “internal restructuring”) are generally allowable.
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
Backlog is an estimate of the amount of future net sales that we expect to recognize over the remaining life of existing contracts at a given date. 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. A summary of our backlog:
 
As of December 31,
 
2016
 
2015
 
(In billions)
Funded backlog
$
2.3

 
$
2.4

Unfunded backlog
2.2

 
1.6

Total contract backlog
$
4.5

 
$
4.0

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

 
$
1.6

Our backlog does not include work we have under contracts obligated by the customer under an OTA. The U.S. Air Force awarded us an OTA that can provide up to $536.0 million of U.S. government funding in addition to our investment to qualify our AR1 engine discussed below.

8



Seasonality
Aerojet Rocketdyne’s business is not subject to predictable seasonality. Primary factors affecting the timing of our sales include the timing of U.S. government awards, the availability of U.S. government funding, contractual product delivery requirements, customer acceptances, and regulatory issues.
Appropriations bills for both the 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 ("R&D")
We view R&D efforts as critical to maintaining our leadership position in markets in which we compete. We maintain an active R&D effort supported primarily by customer funding. We believe that some customer-funded R&D expenditures that are subject to contract specifications may become key programs in the future. We believe customer-funded R&D activities are vital to our ability to compete for contracts and to enhance our technology base and future revenue growth.
Our company-funded R&D efforts include expenditures for technical activities that are vital to the development of new products, services, processes or techniques, as well as those expenses for significant improvements to existing products or processes.
Our R&D expenditures for the periods presented were as follows:
 
Year Ended
 
One month ended
 
December 31,
 
November 30,
 
November 30,
 
December 31,
 
2016
 
2015
 
2014
 
2015
 
(In millions)
 
 
Customer-sponsored
$
513.0

 
$
485.8

 
$
481.2

 
$
33.7

Company-sponsored
43.0

 
74.4

 
51.9

 
4.6

  Total R&D expenditures
$
556.0

 
$
560.2

 
$
533.1

 
$
38.3

The Company-sponsored R&D expenditures in fiscal 2016, fiscal 2015, and the one month ended December 31, 2015 included $20.5 million, $48.2 million, and $2.7 million, respectively, of AR1 R&D expenses, see discussion below.
AR1
In February 2016, the U.S. Air Force selected Aerojet Rocketdyne and ULA to share in a public-private partnership to develop jointly the AR1 engine. The total agreement is valued at $804.0 million with the U.S. Air Force investing two-thirds of the funding required to complete development of the AR1 engine by 2019. The work is expected to be completed no later than December 31, 2019. The U.S. Air Force has obligated $115.3 million with Aerojet Rocketdyne contributing $52.7 million and ULA contributing $5.0 million. The total potential U.S. government investment, including all options, is $536.0 million. The total potential investment by Aerojet Rocketdyne and its partners, including all options, is $268.0 million. Under the terms of the AR1 agreement, the U.S. Air Force contributions are recognized proportionately as an offset to R&D expenses.
The AR1 inception to date project costs were as follows (in millions):
AR1 R&D costs incurred
$
169.3

Less amounts funded by the U.S. Air Force
(92.9
)
Less amounts funded by ULA
(5.0
)
AR1 R&D costs net of reimbursements
71.4

AR1 R&D costs expensed and not applied to contracts
(32.1
)
Net AR1 R&D costs applied to contracts
$
39.3

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

9



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 certain 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 domestic independent single source that supplies the majority of the domestic solid propellant industry and actual pricing is based on the total industry demand. The completion of the Space Shuttle Program reduced demand, resulting in significant unit price increases. In the majority of our contracts, we anticipated this price increase and incorporated abnormal escalation pricing language into our proposals and contracts.
We are also impacted, as is the rest of the industry, by fluctuations in the sustained availability, prices and lead-times of raw materials used in production on various fixed-price contracts, particularly on multi-year programs. We continue to experience volatility in the price and lead-times of certain commodity metals, electronic components, and constituent chemicals. Additionally, we may not be able to continue to negotiate with our customers for economic and/or price adjustment clauses tied to obsolete materials and commodity indices to reduce program impact. The DoD also continues to rigorously enforce the provisions of the “Berry Amendment” which imposes a requirement to procure certain strategic materials critical to national security only from U.S. sources. While availability has not been a significant issue, cost remains a concern as this industry continues to quote “price in effect” at time of shipment terms, increasing the cost risk to our programs. An emerging challenge to the extended supply chain is the NASA/FAR requirements to comply with stringent cyber security regulations that may influence the cost of materials and services on U.S. government contracts. We are actively working to identify these costs to obtain protection in our contracts.
Intellectual Property
Where appropriate, Aerojet Rocketdyne obtains patents in the U.S. and other countries for new and useful processes, machines, manufactures or compositions of matter, or any new and useful improvements thereof relating to its products and services. We use patents selectively to protect from an unauthorized third party making, using, selling, offering to sell and importing the claimed inventions of the patents. Our patents are maintained through the statutory limit of time, which is typically 20 years from the date of filing of the patent application, where the claimed invention has value in the markets in which we compete. We rely on trade secret protection for financial, technical and personnel information that provides an economic competitive advantage by virtue of not being known by the relevant public. If properly protected, trade secrets can be maintained in perpetuity. Aerojet Rocketdyne takes reasonable steps to prevent disclosure of its trade secrets in order to maintain protection under applicable state and federal laws. As our products and services typically embody complex systems that include many technologies, no single patent or trade secret is material to us.
Real Estate
We own 11,451  acres of land adjacent to U.S. Highway 50 between Rancho Cordova and Folsom, California east of Sacramento (“Sacramento Land”). Acquired in the early 1950s for our aerospace and defense operations, 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 re-entitle the Sacramento Land for new uses and explore various opportunities to optimize its value.
The Sacramento Land is made up of 5,203 acres used for our aerospace and defense operations, 685 acres available for future entitlement, and 5,563 acres for future development under the brand name “Easton”. Within Easton, we currently have  3,904 acres that are fully entitled. The term “entitlements” is generally used to denote the required set of regulatory approvals required to allow land to be zoned for new requested uses. Required regulatory approvals vary with each jurisdiction and each zoning proposal and may include permits, land use master plans, zoning designations, state and federal environmental documentation, and other regulatory approvals unique to the land.
As Easton continues to execute re-entitlement and pre-development activities, we are pursuing all monetization options and are exploring how to maximize value from Easton. Value creation and monetization may include outright land sales and/or joint ventures with real estate developers, residential builders, and/or other third parties. The new housing market and local economy in the Sacramento region are in recovery and we expect this trend to continue. We believe the long-term prospect for the Sacramento region represents an attractive and affordable alternative to the San Francisco Bay Area and other large metropolitan areas of California. We believe the Sacramento area demographics and the long-term real estate market fundamentals support our objective of creating value through new entitlements and the creation of Easton.

10



The following table summarizes the Sacramento Land (in acres):  
 
 
Environmentally
Unrestricted 
 
Environmentally
Restricted (1)
 
Total
 
Entitled (2)
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 (3)
 
51

 
97

 
148

 
148

Office Park and Auto Mall
 
47

 
8

 
55

 
55

     Total Easton acreage
 
4,346

 
1,217

 
5,563

 
3,904

Operations land (4)
 
24

 
5,179

 
5,203

 
 

Land available for future entitlement (5)
 
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 7(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, and others prior to construction.
(3) 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 3(g) of the notes to the consolidated financial statements.
(4)
We believe that the operations land is adequate for our long-term needs. As we reassess needs in the future and as propulsion technology continues to advance, portions of this land may become available for entitlement.
(5)
We believe it will be several years before any of this excess Sacramento Land is available for future change in entitlement. Some of this excess land is outside the current Urban Services Boundary established by the County of Sacramento and all of it is far from existing infrastructure, making it uneconomical to pursue entitlement for this land at this time.
Leasing & Other Real Estate
We currently lease approximately 0.4 million square feet of office space in Sacramento to various third parties. These leasing activities generated $6.5 million in revenue in fiscal 2016 .
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, and local environmental laws and regulations relating to the discharge, treatment, storage, disposal, investigation, and remediation of certain materials, substances, and wastes. Our policy is to conduct our business with due regard for the preservation and protection of the environment. We continually assess compliance with these regulations and we believe our current operations are materially in compliance with all applicable environmental laws and regulations.
We review on a quarterly basis estimated future remediation costs 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 term of a new project agreement as proposed by Aerojet Rocketdyne, which San Gabriel Basin Water Quality Authority, the Main San Gabriel Basin Watermaster, and five water companies (the "Water Entities") and the U.S. Environmental Protection

11



Agency ("EPA") have rejected. There can be no assurance that the term of the new project agreement will not be longer than the term we estimated and/or broader in scope and, if so, we may be required to make an additional accrual to reflect the longer term and/or broader scope.
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 to design, construct, and implement the remedy.
  The following table summarizes our recoverable amounts, environmental reserves, and range of liability, as of December 31, 2016 :
 
Recoverable
Amount (1)
 
Reserve
 
Estimated Range
of Liability
 
(In millions)
Aerojet Rocketdyne - Sacramento
$
159.6

 
$
210.1

 
$210.1 - $326.0
Aerojet Rocketdyne - BPOU
96.3

 
126.8

 
126.8 - 178.3
Other Aerojet Rocketdyne sites
8.5

 
8.5

 
8.5 - 14.4
  Total Aerojet Rocketdyne
264.4

 
345.4

 
345.4 - 518.7
Other sites
0.6

 
4.3

 
4.3 - 6.3
  Total
$
265.0

 
$
349.7

 
$349.7 - $525.0
_____
(1)
Excludes the receivable from Northrop of $68.0 million as of December 31, 2016 related to environmental costs already paid (and therefore not reserved) 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. The current annual billing limitation to Northrop is $6.0 million . See Note 7(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. 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 our Electronics and Information Systems ("EIS") business in 2001, we entered into an agreement with Northrop (the “Northrop Agreement”) whereby Aerojet Rocketdyne is reimbursed by Northrop for a portion of environmental expenditures eligible for recovery under the Global Settlement, subject to an annual and a cumulative limitation.
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. Excluding the receivable from Northrop of $68.0 million discussed in Note 7(d) in notes to consolidated financial statements in Item 8 of this Report, we currently estimate approximately 24% of our future Aerospace and Defense segment environmental costs will not likely be reimbursable.
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.
The inclusion of environmental costs in our contracts with the U.S. government impacts our competitive pricing; however, we believe that this impact is mitigated by driving improvements and efficiencies across our operations as well as our ability to deliver innovative and quality products to our customers.
Under existing U.S. environmental laws, Potentially Responsible Parties (“PRPs”), are jointly and severally liable, and therefore we are potentially liable to the U.S. government or other third parties for the full cost of remediating the contamination at our facilities or former facilities or at third-party sites where we have been designated as a PRP by the EPA or state environmental agencies. The nature of environmental investigation and cleanup activities requires significant management

12



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 2016 nor do we anticipate any material capital expenditures in fiscal 2017 and 2018. See Management’s Discussion and Analysis in Part II, Item 7 “Environmental Matters” of this Report for additional information.
Additional information on the risks related to environmental matters can be found under “Risk Factors” in Item 1A of this Report, including the material effects on compliance with environmental regulations that may impact our competitive position and operating results.
Employees
As of December 31, 2016 , 15% of our 4,965  employees were covered by collective bargaining agreements. Significant collective bargaining agreements are due to expire in the summer of 2017 and fall of 2018. We believe that our relations with our employees and unions are good.
Item 1A. Risk Factors
Future reductions or changes in U.S. government spending could adversely affect our financial results.
Our primary aerospace and defense customers include the DoD and its agencies, NASA, and the prime contractors that supply products to these customers. We 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 91% of our total net sales in fiscal 2016 . 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.
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.

13



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 U.S. 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, retirement benefits, 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.
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 2016 , approximately 62% of our net sales were from fixed-price contracts, most of which are in mature production mode. Under fixed-price contracts, we agree to perform specified work for a fixed price and realize all of the profit or loss resulting from variations in the costs of performing the contract. As a result, all fixed-price contracts involve the inherent risk of unreimbursed cost overruns. To the extent we were to incur unanticipated cost overruns on a program or platform subject to a fixed-price contract, our profitability would be adversely affected. Future profitability is subject to risks including the ability of suppliers to deliver components of acceptable quality on schedule and the successful implementation of automated tooling in production processes.
In fiscal 2016 , approximately 32% of our net sales were from cost reimbursable contracts. Under cost reimbursable contracts, we agree to be reimbursed for allowable costs and be paid a fee. If our costs are in excess of the final target cost, fees and our margin may be adversely affected. If our costs exceed authorized contract funding or they do not qualify as allowable costs under applicable regulations, those costs are expensed and we will not be reimbursed for those costs. Cost overruns may adversely affect our financial performance and our ability to win new contracts.
Also, certain costs such as those related to charitable contributions, advertising, interest expense, and public relations are generally not allowable, and therefore not recoverable through U.S. government contracts. Unexpected variances in unallowable costs may adversely affect our financial performance.
If our subcontractors or suppliers fail to perform their contractual obligations, our contract performance and our ability to win new contracts may be adversely affected.
We rely on subcontractors to perform a portion of the services we agree to provide our customers, and on suppliers to provide raw materials and component parts for our contract performance. A failure by one or more of our subcontractors or suppliers to satisfactorily provide on a timely basis the agreed-upon services or supplies may affect our ability to perform our contractual obligations. Deficiencies in the performance of our subcontractors and/or suppliers could result in liquidated damages or our customer terminating our contract for default. A termination for default could expose us to liability and adversely affect our financial performance and our ability to win new contracts.
Our success and growth in our Aerospace and Defense segment depends on our ability to execute long-standing programs and periodically secure new contracts in a competitive environment.
Aerojet Rocketdyne’s revenue is primarily derived from long-standing contracts (often sole source) where Aerojet Rocketdyne is the long-term incumbent. The challenge for Aerojet Rocketdyne is to successfully utilize its technical, engineering, manufacturing, and management skills to execute these programs for the customer, to continue to innovate and refine its solutions, and to offer the customer increasing affordability in an era of fiscal restraint. If Aerojet Rocketdyne is unable to successfully execute these long-standing programs, our ability to retain existing customers and attract new customers may be impaired.
In addition, in sectors where there is competition, it can be intense. For example, we face increasing competition from entrepreneurs such as SpaceX and Blue Origin, who have been or are in the process of developing liquid fuel propulsion capabilities which are primarily focused on the development of space propulsion systems for heavy lift launch vehicles. These new entrepreneurs have signaled their intent to compete primarily on price and are therefore bringing pressure to bear on existing cost paradigms and our manufacturing methodologies. The U.S. government also has its own manufacturing capabilities in some areas. We may be unable to compete successfully with our competitors and our inability to do so could result in a decrease in sales, profits, and cash flows that we historically have generated from certain contracts. Further, the U.S. government may open to competition programs on which we are currently the sole supplier, which could have a material adverse effect on our operating results, financial condition, and/or cash flows.

14



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 U.S. government contractor or subcontractor would be impaired.
 
Aerojet Rocketdyne’s international sales are subject to applicable laws relating to export controls, the violation of which could adversely affect its operations.
A portion of the Aerojet Rocketdyne activities is subject to export control regulation by the U.S. Department of State under the U.S. Arms Export Control Act and International Traffic in Arms Regulations (“ITAR”). The export of certain defense-related products, hardware, software, services and technical data is regulated by the State Department’s Office of Defense Trade Controls Compliance (“DTCC”) under ITAR. DTCC administers the State Department’s authority under ITAR to impose civil penalties and other administrative sanctions for violations, including debarment from engaging in the export of defense articles or defense services. Violations of ITAR could result in significant sanctions including fines, more onerous compliance requirements, debarments from export privileges or loss of authorizations needed to conduct aspects of the Aerojet Rocketdyne’s international business.
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 connection with the acquisition of the Rocketdyne Business, DTCC levied certain conditions regarding integration of the two companies' ITAR compliance programs. These conditions were required in order to release the Rocketdyne Business from a Consent Agreement between DTCC and UTC.

A future violation of ITAR or EAR could materially adversely affect our business, operating results, financial condition, and/or cash flows.
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 cost savings will be realized by the U.S government in the form of more competitive pricing. The CIP may not be successful in achieving these cost savings and other benefits within the expected timeframes, may be

15



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 Notes 3(f) and 10 in notes to the consolidated financial statements.
We may expand our operations through acquisitions, which may divert management’s attention and expose us to unanticipated liabilities and costs. Also, acquisitions may increase our non-reimbursable costs. We may experience difficulties integrating any acquired operations, and we may incur costs relating to acquisitions that are never consummated.
Our business strategy may lead us to expand our Aerospace and Defense segment through acquisitions. However, our ability to consummate any future acquisitions on terms that are favorable to us may be limited by U.S. government regulations, the number of attractive acquisition targets, internal demands on our resources, and our ability to obtain financing. Our success in integrating newly acquired businesses will depend upon our ability to retain key personnel, avoid diversion of management’s attention from operational matters, implement internal controls, integrate general and administrative services and key information processing systems and, where necessary, re-qualify our customer programs. In addition, future acquisitions could result in the incurrence of additional debt, costs, and/or contingent liabilities. We may also incur costs and divert management attention to acquisitions that are never consummated. Integration of acquired operations may take longer, or be more costly or disruptive to our business, than originally anticipated.
Although we undertake a due diligence investigation of each business that we have acquired or may acquire, there may be liabilities of the acquired companies that we fail to, or were unable to, discover during the due diligence investigation and for which we, as a successor owner, may be responsible. In connection with acquisitions, we generally seek to minimize the impact of these types of potential liabilities through indemnities and warranties from the seller. However, these indemnities and warranties, if obtained, may not fully cover the liabilities due to limitations in scope, amount or duration, financial limitations of the indemnitor or warrantor, or other reasons.
Our inability to adapt to rapid technological changes could impair our ability to remain competitive.
The aerospace and defense industry continues to undergo rapid and significant technological development. Our competitors may implement new technologies before us, allowing them to provide more effective products at more competitive prices. Future technological developments could:
adversely impact our competitive position if we are unable to react to these developments in a timely or efficient manner;
require us to write-down obsolete facilities, equipment, and technology;
require us to discontinue production of obsolete products before we can recover any or all of our related research, development and commercialization expenses; or
require significant capital expenditures for research, development, and launch of new products or processes.
Our business and operations could be adversely impacted in the event of a failure of our information technology infrastructure or adversely impacted by a successful cyber-attack.
As a U.S. defense contractor, we face cyber threats, insider threats, threats to the physical security of our facilities and employees, and terrorist acts, as well as the potential for business disruptions associated with information technology failures, natural disasters, or public health crises.
We routinely experience cyber security threats, threats to our information technology infrastructure and unauthorized attempts to gain access to our sensitive information, as do our customers, suppliers, 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.
We are also currently anticipating outsourcing certain information technology and cyber security functions to third-party contractors in order to take advantage of advanced cyber security technologies. While we have engaged in extensive processes

16



and planning in preparation for the migration, the transition may present unexpected security vulnerabilities, additional costs, and result in our having less control over the performance and delivery of such services.
Although we work cooperatively with our customers, suppliers, and subcontractors to seek to minimize the impact of cyber threats, other security threats or business disruptions, we must rely on the safeguards put in place by these entities, which may affect the security of our information. These entities have varying levels of cyber security expertise and safeguards and their relationships with U.S. government contractors, such as Aerojet Rocketdyne, may increase the likelihood that they are targeted by the same cyber threats we face.
The DoD and NASA have contract provisions that require contractors at the prime and subcontract level to comply with Safeguarding Covered Defense Information and Cyber Incident Reporting and Security Requirements for Unclassified Information Technology Resources in accordance with their agency guidelines.  These clauses are being inserted in or made applicable to U.S. government contracts and non-compliance may impact our ability to receive contracts if we cannot comply or use alternative approaches to comply with the contract information security requirements.
We may be required to expend significant additional resources to modify our cyber security protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications, and we may be subject to litigation and financial losses. These costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means. Occurrence of any of these events could adversely affect our internal operations, the services we provide to our customers, our future financial results, our reputation or our stock price; or such events could result in the loss of competitive advantages derived from our research and development efforts or other intellectual property, early obsolescence of our products and services, or contractual penalties.
  We may experience warranty claims for product failures, schedule delays or other problems with existing or new products and systems.
Many of the products we develop and manufacture are technologically advanced systems that must function under demanding operating conditions. Even though we believe that we employ sophisticated and rigorous design, manufacturing and testing processes and practices, we may not be able to successfully launch or manufacture our products on schedule or our products may not perform as intended.
If our products fail to perform adequately, some of our contracts require us to forfeit a portion of our expected profit, receive reduced payments, provide a replacement product or service or reduce the price of subsequent sales to the same customer. Performance penalties may also be imposed if we fail to meet delivery schedules or other measures of contract performance. We do not generally insure against potential costs resulting from any required remedial actions or costs or loss of sales due to postponement or cancellation of scheduled operations or product deliveries.
The release 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 domestic independent single source that supplies the majority of the domestic solid propellant industry and actual pricing is based on the total industry demand. The completion of the Space Shuttle Program reduced demand, resulting in significant unit price increases. In the majority of our contracts, we anticipated this price increase and incorporated abnormal escalation pricing language into our proposals and contracts.

17



We are also impacted, as is the rest of the industry, by fluctuations in the sustained availability, prices and lead-times of raw materials used in production on various fixed-price contracts, particularly on multi-year programs. We continue to experience volatility in the price and lead-times of certain commodity metals, electronic components, and constituent chemicals. Additionally, we may not be able to continue to negotiate with our customers for economic and/or price adjustment clauses tied to obsolete materials and commodity indices to reduce program impact. The DoD also continues to rigorously enforce the provisions of the “Berry Amendment” which imposes a requirement to procure certain strategic materials critical to national security only from U.S. sources. While availability has not been a significant issue, cost remains a concern as this industry continues to quote “price in effect” at time of shipment terms, increasing the cost risk to our programs. An emerging challenge to the extended supply chain is the U.S. government contracting regulations to comply with stringent cyber security regulations that may influence the cost of material and services on U.S. government contracts. We are actively working to identify these costs to obtain protection in our contracts.
Prolonged disruptions in the supply of any of our key raw materials, difficulty qualifying new sources of supply, implementing use of replacement materials or new sources of supply, and/or a continuing volatility in the prices of raw materials could have a material adverse effect on our operating results, financial condition, and/or cash flows.
Our pension plans are currently underfunded and we expect to be required to make cash contributions in future periods, which may reduce the cash available for our businesses.
As of the last measurement date at December 31, 2016 , the assets, projected benefit obligations, and unfunded pension obligation for the tax-qualified pension plan were approximately $925.1 million , $1,492.1 million , and $548.2 million , respectively. We generally are able to recover cash contributions related to our tax-qualified defined benefit pension plan as allowable costs on our U.S. government contracts, but there is a lag between when we contribute cash to our tax-qualified defined benefit pension plan under pension funding rules and recover it under the U.S. government Cost Accounting Standards ("CAS"). We expect to make cash contributions of approximately $72.0 million to our tax-qualified defined benefit pension plan in fiscal 2017 of which $37.0 million is expected to be recoverable in our U.S. government contracts in fiscal 2017 with the remaining $35.0 million being potentially recoverable in our U.S. government contracts in the future. During fiscal 2016, we made cash contributions of $32.8 million to our tax-qualified defined benefit pension plan of which $27.5 million was recoverable in our U.S. government contracts in fiscal 2016 with the remaining $5.3 million being potentially recoverable in our U.S. government contracts in the future.
The funded status of our pension plans may be adversely affected by the investment experience of the plans' assets, by any changes in U.S. law and by changes in the statutory interest rates used by tax-qualified pension plans in the U.S. to calculate funding requirements. Accordingly, if the performance of our plans' assets does not meet our assumptions, if there are changes to the Internal Revenue Service ("IRS") regulations or other applicable law or if other actuarial assumptions are modified, our future contributions to our underfunded pension plans could be higher than we expect.
Additionally, the level of returns on retirement benefit assets, changes in interest rates, increases in Pension Benefit Guaranty Corporations premiums, changes in regulations, changes in mortality rate assumptions, and other factors affect our financial results. The timing of recognition of retirement benefit expense or income in our financial statements differs from the timing of the required funding under the Pension Protection Act ("PPA") or the amount of funding that can be recorded in our overhead rates through our U.S. government contracting business. Significant cash contributions in future periods could materially adversely affect our business, operating results, financial condition, and/or cash flows.
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 assets. Our pension expense or income can also be affected by legislation and other government regulatory actions.
Our operations and properties are currently the subject of significant environmental liabilities, and the numerous environmental and other government requirements to which we are subject may become more stringent in the future.
We are subject to federal, state 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

18



or off-site contamination of the environment through past or present operations. We may incur material costs in defending these claims and lawsuits and any similar claims and lawsuits that may arise in the future. Contamination at our current and former properties is subject to investigation and remediation requirements under federal, state and local laws and regulations, and the full extent of the required remediation has not yet been determined. Any adverse judgment or cash outlay could have a significant adverse effect on our operating results, financial condition, and/or cash flows.
Although some of our environmental expenditures may be recoverable and we have established reserves, given the many uncertainties involved in assessing liability for environmental claims, our reserves may not be sufficient, which could adversely affect our financial results and cash flows.
As of December 31, 2016 , the aggregate range of our estimated future environmental obligations was $349.7 million to $525.0 million and the accrued amount was $349.7 million . We believe the accrued amount for future remediation costs represents the costs that could be incurred by us over the contractual term, if any, or the next fifteen years of the estimated remediation, to the extent they are probable and reasonably estimable. However, in many cases the nature and extent of the required remediation has not yet been determined. Given the many uncertainties involved in assessing liability for environmental claims, our reserves may prove to be insufficient. For example, in fiscal 2016, we reached a decision with the U.S. government on the treatment of certain utility costs related to the Sacramento site resulting in a reserve increase of $59.4 million. We evaluate the adequacy of those reserves on a quarterly basis, and adjust them as appropriate. In addition, the reserves are based only on known sites and the known contamination at those sites. It is possible that additional sites needing remediation may be identified or that unknown contamination at previously identified sites may be discovered. It is also possible that the regulatory agencies may change clean-up standards for chemicals of concern such as ammonium perchlorate and trichloroethylene. This could lead to additional expenditures for environmental remediation in the future and, given the uncertainties involved in assessing liability for environmental claims, our reserves may prove to be insufficient.
Most of our environmental costs are incurred by our Aerospace and Defense segment, and certain of these future costs are allowable to be included in our contracts with the U.S. government, 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.
Our environmental expenses related to non-Aerojet Rocketdyne sites are generally not recoverable and a significant increase in these estimated environmental expenses could have a significant adverse effect on our operating results, financial condition, and/or cash flows.
We 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.

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Business disruptions could seriously affect us.
Our business may be affected by disruptions including, but not limited to: threats to physical security of our facilities and employees, including senior executives; terrorist acts; information technology attacks or failures; damaging weather or other acts of nature; and pandemics or other public health crises. The costs related to these events may not be fully mitigated by insurance or other means. Disruptions could affect our internal operations or services provided to customers, which could have a material adverse effect on our operating results, financial condition, and/or cash flows.
If our operating subsidiaries do not generate sufficient cash flow or if they are not able to pay dividends or otherwise distribute their cash to us, or if we have insufficient funds on hand, we may not be able to service our debt.
All of the operations of our Aerospace and Defense and Real Estate segments are conducted through subsidiaries. Consequently, our cash flow and ability to service our debt obligations will be largely dependent upon the earnings and cash flows of our operating subsidiaries and the distribution of those earnings to us, or upon loans, advances or other payments made by these subsidiaries to us. The ability of our subsidiaries to pay dividends or make other payments or advances to us will depend upon their operating results and cash flows and will be subject to applicable laws and any contractual restrictions contained in the agreements governing their debt, if any.
 
We have a substantial amount of debt. Our ability to operate is limited by the agreements governing our debt.
We have a substantial amount of debt for which we are required to make interest and principal payments. Interest on long-term financing is not a recoverable cost under our U.S. government contracts. As of December 31, 2016 , we had $ 725.6 million of debt principal. Subject to the limits contained in some of the agreements governing our outstanding debt, we may incur additional debt in the future. Our maintenance of higher levels of indebtedness could have adverse consequences including impairing our ability to obtain additional financing in the future.
Our level of debt places significant demands on our cash resources, which could:
make it more difficult to satisfy our outstanding debt obligations;
require us to dedicate a substantial portion of our cash for payments related to our debt, reducing the amount of cash flow available for working capital, capital expenditures, entitlement of our real estate assets, contributions to our tax-qualified pension plan, and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in the industries in which we compete;
place us at a competitive disadvantage with respect to our competitors, some of which have lower debt service obligations and greater financial resources than we do;
limit our ability to borrow additional funds;
limit our ability to expand our operations through acquisitions; and
increase our vulnerability to general adverse economic and industry conditions.
If we are unable to generate sufficient cash flow to service our debt and fund our operating costs, our liquidity may be adversely affected.
We are obligated to comply with financial and other covenants outlined in our debt indentures and agreements that could restrict our operating activities. A failure to comply could result in a default which would, if not waived by the lenders, likely would come with substantial cost and accelerate the payment of our debt.
Our debt instruments generally contain various restrictive covenants which include, among others, provisions which may restrict our ability to:
access the full amount of our revolving credit facility and/or incur additional debt;
enter into certain leases;
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.

20



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

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We may incur additional costs related to past or future divestitures, which could adversely affect our financial results.
In connection with our divestitures in prior periods, we have incurred and may incur additional costs. As part of our divestitures, we have provided customary indemnification to the purchasers for such matters as claims arising from the operation of the businesses prior to disposition, including income tax matters and the liability to investigate and remediate certain environmental contamination existing prior to disposition. These additional costs and the indemnification of the purchasers of our former or current businesses may require additional cash expenditures, which could have a material adverse effect on our operating results, financial condition, and/or cash flows.
In order to be successful, we must attract and retain key employees.
Our business has a continuing need to attract large numbers of skilled personnel, including personnel holding security clearances, to support the growth of the enterprise and to replace individuals who have terminated employment due to retirement or for other reasons. To the extent that the demand for qualified personnel exceeds supply, we could experience higher labor, recruiting, or training costs in order to attract and retain such employees, or could experience difficulties in performing under our contracts if our needs for such employees were unmet. In addition, our inability to appropriately plan for the transfer or replacement of appropriate intellectual capital and skill sets critical to us could result in business disruptions and impair our ability to achieve business objectives.
A strike or other work stoppage, or our inability to renew collective bargaining agreements on favorable terms, could adversely affect our financial results.
As of December 31, 2016 , 15% of our 4,965 employees were covered by collective bargaining agreements. In the future, if we are unable to negotiate acceptable new agreements with the unions, upon expiration of the existing contracts, we could experience a strike or work stoppage. Even if we are successful in negotiating new agreements, the new agreements could call for higher wages or benefits paid to union members, which would increase our operating costs and could adversely affect our profitability. If our unionized workers were to engage in a strike or other work stoppage, or other non-unionized operations were to become unionized, we could experience a significant disruption of operations at our facilities or higher ongoing labor costs. A strike or other work stoppage in the facilities of any of our major customers or suppliers could also have similar effects on us.
Due to the nature of our business, our sales levels may fluctuate causing our quarterly operating results to fluctuate.
Our quarterly and annual sales are affected by a variety of factors that may lead to significant variability in our operating results. In our Aerospace and Defense segment, sales earned under long-term contracts are recognized either on a cost basis, when deliveries are made, or when contractually defined performance milestones are achieved. The timing of deliveries or milestones may fluctuate from quarter to quarter. In our Real Estate segment, sales of land may be made from time to time, which may result in variability in our operating results and cash flows.
The restatement of our previously issued financial statements has been time-consuming, expensive and could expose us to additional risks that could materially adversely affect our financial position, results of operations and cash flows.
We have incurred expenses, including audit, legal, consulting and other professional fees, in connection with the restatement of our previously issued financial statements and the remediation of weaknesses in our internal control over financial reporting. We have taken a number of steps, including adding significant internal resources and implemented a number of additional procedures, in order to strengthen our accounting function and attempt to reduce the risk of additional misstatements in our financial statements. To the extent these steps are not successful, we could be forced to incur additional time and expense. Our management’s attention has also been diverted from the operation of our business in connection with the restatements and remediation of material weaknesses in our internal controls.
In addition, any stockholder, U.S. governmental or other actions brought based on the restatement of our previously issued financial statements could, regardless of the outcome, consume management’s time and attention and result in additional legal, accounting, insurance and other costs.
  Failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act could negatively impact the market price of our common stock.
We identified a material weakness in our internal controls associated with the completeness and accuracy of our accounting for income taxes, including the income tax provision and related tax assets and liabilities. As a result of this material weakness, errors occurred in several significant accounts in fiscal 2016 and 2015 consolidated financial statements that were not timely detected. This material weakness resulted in errors to deferred tax assets, income taxes payable, uncertain tax positions and income tax expense accounts in the consolidated financial statements for the year ended December 31, 2016. Due to the material weakness, management believes that as of December 31, 2016, 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 2017 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

22



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 weakness is eliminated, there is a risk of a material adverse effect on our 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.  In the future, we may identify further errors impacting our interim or annual consolidated financial statements.  Depending upon the complete qualitative and quantitative analysis, this could result in us restating previously issued consolidated financial statements.
Item 1B. Unresolved Staff Comments
None.
Item  2. Properties
Significant operating, manufacturing, research, design, and/or marketing locations are set forth below.
Facilities
Corporate Headquarters
Aerojet Rocketdyne Holdings, Inc.
222 N. Sepulveda Blvd, Suite 500
El Segundo, California 90245
Operating/Manufacturing/Research/Design/Marketing Locations
 
Aerospace and Defense
Aerojet Rocketdyne
El Segundo, California*
Design/Manufacturing Facilities:  Camden, Arkansas (owned and leased); Carlstadt, New Jersey*; Chatsworth, California; Gainesville, Virginia*; Hancock County, Mississippi*; Huntsville, Alabama*; Jonesborough, Tennessee**; Orange, Virginia; Rancho Cordova, California (owned); Redmond, Washington; Socorro, New Mexico; Vernon, California*; West Palm Beach, Florida*
Marketing/Sales Offices:  Arlington, Virginia*
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.

23



Item 3. Legal Proceedings
The Company and its subsidiaries are subject to legal proceedings, including litigation in U.S. federal and state courts, which arise out of, and are incidental to, the ordinary course of the Company’s on-going and historical businesses. The Company is also subject from time to time to suits under the federal False Claims Act, known as “ qui tam ” actions, and to governmental investigations by federal and state agencies. The Company cannot predict the outcome of such proceedings with any degree of certainty. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. These estimates are often initially developed substantially earlier than when the ultimate loss is known, and are refined each quarterly reporting period as additional information becomes available. For legal settlements where the cash payments are fixed and determinable, the Company will estimate an interest factor and discount the liability accordingly.
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 64 asbestos cases pending as of December 31, 2016 .
Given the lack of any significant consistency to claims (i.e., as to product, operational site, or other relevant assertions) filed against the Company, the Company is generally unable to make a reasonable estimate of the future costs of pending claims or unasserted claims. As of December 31, 2016, t he estimated range of the Company's loss on a pending claim was $0.2 million to $0.6 million and the accrued amount was $0.2 million .
The following table sets forth information related to our historical product liability costs associated with our asbestos litigation (dollars in millions):
 
Year Ended
 
One Month ended
 
 
December 31,
 
November 30,
 
November 30,
 
December 31,
 
 
2016
 
2015
 
2014
 
2015
 
Claims filed
17

(1)
16

 
14

(3)
1
 
Claims dismissed
30

 
50

 
23

 
3
 
Claims settled
4

 

 
3

 
0
 
Claims pending
64

 
83

 
117

 
81
 
Aggregate settlement costs
$
0.1

 
$

 
$
0.3

 
$

 
Average settlement costs
$

(2)
$

 
$
0.1

 
$

 
Legal and administrative fees associated with asbestos cases
$
0.4

 
$
0.2

 
$
0.4

 
$

(2)
_______
(1) This number is net of three cases tendered to a third party under a contractual indemnity obligation.
(2) Less than $0.1 million.
(3) This number is net of two cases tendered to a third party under a contractual indemnity obligation.
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 asserted 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 compensatory damages in excess of $3.0 million , punitive damages, interest and attorney’s costs. The complaint arose 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. On February 6, 2015, Aerojet Rocketdyne and Ms. Redd filed a demurrer to the complaint. 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.  On October 26, 2015, Aerojet Rocketdyne and Ms. Redd answered the

24



amended complaint and filed a Cross-Complaint against Plaintiff and its principal for breach of contract, intentional misrepresentation, negligent misrepresentation and negligence. Inflective filed a demurrer to the intentional misrepresentation, negligent misrepresentation and negligence causes of action, leaving the breach of contract cause of action unchallenged. After a hearing on the demurrer on February 18, 2016, the court granted the plaintiffs’ request to strike the claim for punitive damages on the negligence count, but denied the plaintiffs’ demurrer and allowed the Company’s claims for intentional misrepresentation, negligent misrepresentation, and negligence causes of action to remain along with the breach of contract claim.  On August 10, 2016, Aerojet Rocketdyne filed a Motion for Summary Judgment on the claims brought against Ms. Redd individually, arguing that as an agent for Aerojet Rocketdyne, Ms. Redd cannot be held personally liable for any alleged interference of economic advantage between Inflective and Aerojet Rocketdyne. On December 2, 2016, the Court granted Aerojet Rocketdyne’s Motion for Summary Judgment on the claims brought against Ms. Redd. 
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.  Aerojet Rocketdyne opposed intervention, and the Court ultimately denied Mr. 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 . The Company received the complaint on April 7, 2016 and an amended complaint was served on June 17, 2016.   Rachaiah asserted the same claims in the complaint as attempted when he tried to intervene.  On June 3, 2016, the court granted Rachaiah’s motion to consolidate the case with the Inflective litigation, finding that two cases involve common parties, witnesses, legal issues and facts.  Aerojet Rocketdyne filed a demurrer to Rachaiah’s first amended complaint on July 22, 2016.  On September 26, 2016, the Court granted the demurrer in part and overruled it in part, dismissing the plaintiff’s claims for intentional and negligent interference with prospective economic relations with leave to amend.  On October 6, 2016, Rachaiah filed a second amended complaint, once again asserting claims for intentional and negligent interference with prospective economic relations. Aerojet Rocketdyne filed its Answer to the second amended complaint on November 11, 2016.
Now that the issues to be tried have been set, discovery has commenced.  No trial date for either case has been established. The Company has not recorded any liability for either of these matters as of December 31, 2016.
Occupational Safety
On January 16, 2015, the Company received a notice that the State of California, Division of Occupational Safety & Health (“Cal\OSHA”), Bureau of Investigation (“BOI”) is conducting an investigation into an accident that occurred at the Rancho Cordova facility in November 2013.  The accident involved the deflagration of solid rocket propellant following a remote cutting operation and resulted in injuries to two employees, one of whom ultimately died from his injuries.  Cal\OSHA issued nine citations relating to the accident with penalties of approximately $0.1 million , all of which the Company has appealed. The BOI is the criminal investigatory arm of Cal\OSHA and is required by law to investigate any occupational fatality to determine if criminal charges will be recommended. In August 2016, the BOI advised that it had completed its investigation and the criminal aspect of the case was closed. A pre-hearing conference on the Company’s appeal of the citations was originally scheduled for January 9, 2017, but was postponed and will be rescheduled.
Item 4. Mine Safety Disclosures
None.

25



PART II
Item  5.
Market for Registrant’s Common Equity, Related Stockholders’ Matters and Issuer Purchases of Equity Securities
As of February 21, 2017, there were 6,523 holders of record of the common stock. On February 21, 2017, the last reported sale price of our common stock on the New York Stock Exchange was $19.33 per share.
Our Senior Credit Facility (described in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Liquidity and Capital Resources”) restricts the payment of dividends and we do not anticipate paying cash dividends in the foreseeable future.
Information concerning long-term debt, including material restrictions relating to payment of dividends on our common stock, appears in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Liquidity and Capital Resources” and in Part II, Item 8. Consolidated Financial Statements and Supplementary Data at Note 5 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.” In January 2016, the Board of Directors approved a change in our fiscal year-end from November 30 of each year to December 31 of each year. The following table lists, on a per share basis for the periods indicated, the high and low sale prices for the common stock as reported by the New York Stock Exchange:
 
Common Stock Price
 
High 
 
Low 
Year ended December 31, 2016
 
 
 
  First Quarter
$
17.20

 
$
13.98

  Second Quarter
$
18.86

 
$
15.52

  Third Quarter
$
19.16

 
$
16.80

  Fourth Quarter
$
21.40

 
$
16.04

Month ended December 31, 2015
$
18.87

 
$
15.50

Year ended November 30, 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






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 2011 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 2011 through December 2016
STOCKCHARTA07.JPG
Company/Index
 
Base
Period
2011
 
Year ended
 
November 30,
 
November 30,
 
November 30,
 
November 30,
 
December 31,
 
2012
 
2013
 
2014
 
2015
 
2016
 
Aerojet Rocketdyne Holdings, Inc.
 
$
100.00

 
$
169.12

 
$
337.13

 
$
306.99

 
$
322.43

 
$
329.96

S&P 500 Index
 
100.00

 
116.13

 
151.32

 
176.83

 
181.69

 
200.21

S&P 500 Aerospace & Defense
 
100.00

 
113.10

 
173.81

 
199.01

 
212.19

 
250.32


27



Item 6. Selected Financial Data
The following selected financial data is qualified by reference to and should be read in conjunction with the consolidated financial statements, including the notes thereto in Item 8. Consolidated Financial Statements and Supplementary Data, and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Year end
 
One month ended
 
December 31,
 
November 30,
 
November 30,
 
November 30,
 
November 30,
 
December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
2015
 
(In millions, except per share amounts)
 
 
Net sales
$
1,761.3

 
$
1,708.3

 
$
1,602.2

 
$
1,378.1

 
$
994.9

 
$
96.3

Net income (loss):
 
 
 
 
 

 
 

 
 

 
 
 Income (loss) from continuing operations, net of income taxes
$
18.1

 
$
(17.1
)
 
$
(49.3
)
 
$
162.7

 
$
(5.7
)
 
$
7.0

 (Loss) income from discontinued operations, net of income taxes
(0.1
)
 
0.9

 
(0.7
)
 
0.2

 
3.1

 

   Net income (loss)
$
18.0

 
$
(16.2
)
 
$
(50.0
)
 
$
162.9

 
$
(2.6
)
 
$
7.0

Basic income (loss) per share of Common Stock
 
 
 
 
 

 
 

 
 

 
 
 Income (loss) from continuing operations, net of income taxes
$
0.27

 
$
(0.28
)
 
$
(0.85
)
 
$
2.68

 
$
(0.09
)
 
$
0.11

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

 
0.01

 
(0.01
)
 

 
0.05

 

   Total
$
0.27

 
$
(0.27
)
 
$
(0.86
)
 
$
2.68

 
$
(0.04
)
 
$
0.11

Diluted income (loss) per share of Common Stock
 
 
 
 
 

 
 

 
 

 
 
 Income (loss) from continuing operations, net of income taxes
$
0.27

 
$
(0.28
)
 
$
(0.85
)
 
$
2.05

 
$
(0.09
)
 
$
0.10

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

 
0.01

 
(0.01
)
 

 
0.05

 

   Total
$
0.27

 
$
(0.27
)
 
$
(0.86
)
 
$
2.05

 
$
(0.04
)
 
$
0.10

Supplemental statement of operations information:
 
 
 
 
 

 
 

 
 

 
 
 Income (loss) from continuing operations before income taxes
$
29.3

 
$
(16.8
)
 
$
(33.0
)
 
$
(35.7
)
 
$
13.2

 
$
9.0

 Interest expense
32.5

 
50.4

 
52.7

 
48.7

 
22.3

 
3.8

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

 Depreciation and amortization
64.9

 
65.1

 
63.7

 
43.5

 
22.3

 
5.1

 Retirement benefit expense, net (1)
41.4

 
67.6

 
36.5

 
65.0

 
41.0

 
5.6

 Unusual items in continuing operations:
 
 
 
 
 

 
 

 
 

 
 
     Rocketdyne Business acquisition costs

 

 

 
20.0

 
11.6

 

     Loss (gain) on legal matters and settlements

 
50.0

 
0.9

 
(0.5
)
 
0.7

 
0.4

     Loss on bank amendment
0.1

 

 
0.2

 

 

 

     Loss on debt repurchased/redeemed
34.4

 
1.9

 
60.6

 
5.0

 
0.4

 

Adjusted EBITDAP (Non-GAAP measure)
$
202.0

 
$
217.9

 
$
181.5

 
$
145.8

 
$
110.9

 
$
23.9

Adjusted EBITDAP (Non-GAAP measure) as a percentage of net sales
11.5
%
 
12.8
%
 
11.3
%
 
10.6
%
 
11.1
%
 
24.8
%
Additional statement of operations information:
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense (benefit)
$
12.9

 
$
8.6

 
$
5.7

 
$
14.1

 
$
6.5

 
$
(0.4
)
Environmental remediation provision adjustments
18.3

 
17.3

 
10.8

 
8.4

 
11.6

 
(0.1
)
Cash flow information:
 
 
 
 
 

 
 

 
 

 
 
 Cash flow provided by (used in) operating activities
$
158.4

 
$
65.1

 
$
150.6

 
$
77.4

 
$
86.2

 
$
(2.3
)
 Cash flow used in investing activities
(47.1
)
 
(35.8
)
 
(35.7
)
 
(474.9
)
 
(36.6
)
 
(1.2
)
 Cash flow provided by (used in) financing activities
90.5

 
(84.1
)
 
(46.6
)
 
433.0

 
(75.5
)
 
0.9

Balance Sheet information:
 
 
 
 
 

 
 

 
 

 
 
 Total assets
$
2,249.5

 
$
2,034.9

 
$
1,918.6

 
$
1,752.1

 
$
919.3

 
$
2,023.3

 Outstanding debt principal
725.6

 
652.0

 
782.2

 
699.2

 
248.7

 
650.6

________
(1) Retirement benefit expense is net of cash funding to our tax-qualified defined benefit pension plan which are recoverable costs under our U.S. government contracts. We funded $27.5 million to our tax-qualified defined benefit pension plan in fiscal 2016 that was recoverable in our fiscal 2016 U.S. government contracts.


28



  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.
In January 2016, our board of directors approved a change in our fiscal year-end from November 30 of each year to December 31 of each year. The fiscal year of our subsidiary, Aerojet Rocketdyne, ends on the last Saturday in December. As a result of the change, we had a one month transition period in December 2015. The audited results for the one month ended December 31, 2015 and the unaudited results for the one month ended December 31, 2014 are included in Item 8 of this Report. Further, as a result of the 2016 calendar, Aerojet Rocketdyne had 53 weeks of operations in the twelve months ended December 31, 2016 compared to 52 weeks of operations in the twelve months ended November 30, 2015 and 2014. The additional week of operations, which occurred in the fourth quarter of fiscal 2016, accounted for $32.2 million in additional net sales. Financial information for twelve months ended December 31, 2015 has not been included in this Form 10-K for the following reasons: (i) the twelve months ended November 30, 2015 provide a meaningful comparison for the twelve months ended December 31, 2016; (ii) there are no significant factors, seasonal or other, that would impact the comparability of information if the results for the twelve months ended December 31, 2015 were presented in lieu of results for twelve months ended November 30, 2015; and (iii) it was not practicable or cost justified to prepare this information.
Overview
We are a manufacturer of aerospace and defense products and systems with a real estate segment. Our operations are organized into two segments:
Aerospace and Defense — includes the operations of our wholly-owned subsidiary Aerojet Rocketdyne, 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.
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 are currently in the process of seeking zoning changes and other governmental approvals on our excess real estate assets to optimize its value.
A summary of the significant financial highlights for fiscal 2016 which management uses to evaluate our operating performance and financial condition is presented below.
 
Net sales for fiscal 2016 totaled $1,761.3 million compared to $1,708.3 million for fiscal 2015 .
Net income for fiscal 2016 was $18.0 million , or $0.27 diluted income per share, compared to net loss of $(16.2) million , or $(0.27) loss per share, for fiscal 2015 .
Adjusted EBITDAP (Non-GAAP measure*) for fiscal 2016 was $202.0 million , or 11.5% of net sales, compared to $217.9 million , or 12.8% of net sales, for fiscal 2015 .
Segment performance before environmental remediation provision adjustments, retirement benefit expense, and unusual items was $188.4 million for fiscal 2016 , compared to $200.1 million for fiscal 2015 .
Cash provided by operating activities in fiscal 2016 totaled $158.4 million , compared to $65.1 million in fiscal 2015 .
Free cash flow (Non-GAAP measure*) in fiscal 2016 totaled $110.8 million , compared to $28.3 million in fiscal 2015 .
Funded contract backlog as of December 31, 2016 was $2.3 billion compared to $2.4 billion as of December 31, 2015 .
Total contract backlog as of December 31, 2016 was $4.5 billion compared to $4.0 billion as of December 31, 2015 .
Net debt (Non-GAAP measure*) as of December 31, 2016 was $315.3 million compared to $442.1 million as of December 31, 2015 .
_________
* 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.”

29



We are operating in an environment that is characterized by both increasing complexity in the global security environment and 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 the CIP, environmental matters, capital structure, and our underfunded retirement benefit plans.
Major Customers
The principal end user customers of our products and technology are primarily agencies of the U.S. government. Since a majority of our sales are, directly or indirectly, to the U.S. government, funding for the purchase of our products and services generally follows trends in U.S. aerospace and defense spending. However, individual U.S. government agencies, which include the military services, NASA, the Missile Defense Agency, and the prime contractors that serve these agencies, exercise independent purchasing power within “budget top-line” limits. Therefore, sales to the U.S. government are not regarded as sales to one customer, but rather each contracting agency is viewed as a separate customer.
Sales to the U.S. government and its agencies, including sales to our significant customers disclosed below, were as follows:
 
Percentage of Net
Sales
Fiscal 2016
91
%
Fiscal 2015
90
%
Fiscal 2014
92
%
One month ended December 31, 2015
85
%
The Standard Missile program, which is included in the U.S. government sales and is comprised of multiple contracts, represented 12% , 14% , 12% , and 12% of net sales for fiscal 2016, fiscal 2015, fiscal 2014, and the one month ended December 31, 2015, respectively. The THAAD program, which is included in the U.S. government sales and is comprised of multiple contracts, represented 13% , 13% , 12% , and 13% of net sales for fiscal 2016, fiscal 2015, fiscal 2014, and the one month ended December 31, 2015, respectively. The demand for certain of our services and products is directly related to the level of funding of U.S. government programs.
Customers that represented more than 10% of net sales for the periods presented were as follows:
 
Year Ended
 
One month ended
 
December 31,
 
November 30,
 
November 30,
 
December 31,
 
2016
 
2015
 
2014
 
2015
Lockheed Martin
27
%
 
29
%
 
28
%
 
24
%
ULA
21

 
19

 
25

 
28

Raytheon
20

 
20

 
17

 
19

NASA
13

 
11

 
11

 
10

Our sales to each of the major customers listed above involve several product lines and programs.
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 rely on 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

30



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.
Even with overall budget levels set for GFY 2017, Congress was not able to pass a full year appropriation for either the DoD or NASA prior to the start of GFY 2017 on October 1, 2016.  As a result, Congress passed a short-term CR to fund the U.S. government until December 9, 2016. After the November U.S. presidential election, at the request of the incoming Trump Administration, Congress passed another CR through April 28, 2017 to allow the new Administration to shape federal spending. Although details of the plans to address perceived shortfalls in DoD readiness and modernization remain unsettled, the Trump Administration has signaled strong support for nuclear modernization and missile defense.
The SLS appears to remain a top Congressional priority as the CR included a provision to allow NASA the funding flexibility for SLS and deep exploration to remain on track. The SLS program also has enjoyed wide, bipartisan support in both chambers of Congress. We maintain a strong relationship with NASA and our propulsion systems have been powering NASA launch vehicles and spacecraft since the inception of the U.S. space program. Our booster, upper stage and Orion vehicle propulsion systems are currently baselined on the new SLS vehicle and both upper stage and booster engines are in development for future SLS variants. Due to the retirement of the space shuttle fleet, U.S. astronauts 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 capsule, thereby supplementing its work for NASA on the SLS designed for manned deep space exploration. In both instances, we have significant propulsion content and we look forward to supporting these 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 (e.g., additive manufacturing) available to new entrants with the ability to self-fund start-up as well as development costs has led to increased competition in space related markets. To date, 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. We currently estimate that we will incur restructuring and related costs over the four-year CIP program of approximately $82 million (excluding approximately $31 million of capital expenditures). The revisions to the estimated costs of the CIP in fiscal 2016 were primarily driven by reduced severance costs as employees left voluntarily at a higher rate than anticipated. 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 cost savings will be realized by the U.S. government in the form of more competitive pricing. The CIP costs will consist primarily of severance and other employee related costs totaling approximately $25 million, operating facility costs totaling approximately $19 million, and $38 million for other costs relating to product re-qualification, knowledge transfer and other CIP implementation costs. We have incurred $18.4 million related to the CIP program through December 31, 2016 and additionally we have incurred $28.9 million in capital expenditures to support the CIP. 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.
Environmental Matters

31



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.
The following table summarizes our recoverable amounts, environmental reserves, and range of liability, as of December 31, 2016 :
 
Recoverable
Amount (1)
 
Reserve
 
Estimated Range
of Liability
 
(In millions)
Aerojet Rocketdyne - Sacramento
$
159.6

 
$
210.1

 
$210.1 - $326.0
Aerojet Rocketdyne - BPOU
96.3

 
126.8

 
126.8 - 178.3
Other Aerojet Rocketdyne sites
8.5

 
8.5

 
8.5 - 14.4
  Total Aerojet Rocketdyne
264.4

 
345.4

 
345.4 - 518.7
Other sites
0.6

 
4.3

 
4.3 - 6.3
Total
$
265.0

 
$
349.7

 
$349.7 - $525.0
_____
(1)
Excludes the receivable from Northrop of $ 68.0 million as of December 31, 2016 related to environmental costs already paid (and therefore not reserved) 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 7(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 December 31, 2016 , we had $ 725.6 million of debt principal outstanding.
Retirement Benefits
We expect to make cash contributions of approximately $72.0 million to our tax-qualified defined benefit pension plan in fiscal 2017 of which $37.0 million is expected to be recoverable in our U.S. government contracts in fiscal 2017 with the remaining $35.0 million being potentially recoverable in our U.S. government contracts in the future. We generally are able to recover cash contributions related to our tax-qualified defined benefit pension plan as allowable costs on our U.S. government contracts, but there is a lag between when we contribute cash to our tax-qualified defined benefit pension plan under pension funding rules and recover it under the CAS. During fiscal 2016, we made cash contributions of $32.8 million to our tax-qualified defined benefit pension plan of which $27.5 million was recoverable in our U.S. government contracts in fiscal 2016 with the remaining $5.3 million being potentially recoverable in our U.S. government contracts in the future.
The funded status of our retirement benefit plans may be adversely affected by investment experience, by any changes in U.S. law and by changes in the statutory interest rates used by tax-qualified pension plans in the U.S. to calculate funding requirements. Accordingly, if the performance of our retirement benefit assets does not meet our assumptions, if there are changes to the IRS regulations or other applicable law or if other actuarial assumptions are modified, our future contributions to our underfunded retirement benefit plans could be higher than we expect.
Additionally, the level of returns on retirement benefit assets, changes in interest rates, changes in legislation, and other factors affect our financial results. The timing of recognition of retirement benefit expense or income in our financial statements differs from the timing of the required funding under the PPA or the amount of funding that can be recorded in our overhead rates through our U.S. government contracting business.

32



Results of Operations:
 
Year Ended
 
One month ended
 
December 31,
 
November 30,
 
November 30,
 
December 31,
 
2016
 
2015
 
2014
 
2015
 
(In millions, except per share amounts)
Net sales
$
1,761.3

 
$
1,708.3

 
$
1,602.2

 
$
96.3

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales (exclusive of items shown separately below)
1,527.4

 
1,459.5

 
1,406.2

 
75.4

AR1 research and development

 
32.1

 

 

Selling, general and administrative
53.6

 
49.0

 
38.2

 
2.8

Depreciation and amortization
64.9

 
65.1

 
63.7

 
5.1

Other expense, net:
 
 
 
 
 
 
 
Loss on debt
34.5

 
1.9

 
60.8

 

Legal settlement

 
50.0

 

 

Other
19.7

 
17.4

 
13.7

 
0.2

Total operating costs and expenses
1,700.1

 
1,675.0

 
1,582.6

 
83.5

Operating income
61.2

 
33.3

 
19.6

 
12.8

Non-operating (income) expense:
 
 
 
 
 
 
 
Interest income
(0.6
)
 
(0.3
)
 
(0.1
)
 

Interest expense
32.5

 
50.4

 
52.7

 
3.8

Total non-operating expense, net
31.9

 
50.1

 
52.6

 
3.8

Income (loss) from continuing operations before income taxes
29.3

 
(16.8
)
 
(33.0
)
 
9.0

Income tax provision
11.2

 
0.3

 
16.3

 
2.0

Income (loss) from continuing operations
18.1

 
(17.1
)
 
(49.3
)
 
7.0

(Loss) income from discontinued operations, net of income taxes
(0.1
)
 
0.9

 
(0.7
)
 

Net income (loss)
$
18.0

 
$
(16.2
)
 
$
(50.0
)
 
$
7.0

Income (loss) per share of common stock
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.27

 
$
(0.28
)
 
$
(0.85
)
 
$
0.11

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

 
0.01

 
(0.01
)
 

Net income (loss) per share
$
0.27

 
$
(0.27
)
 
$
(0.86
)
 
$
0.11

Diluted:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.27

 
$
(0.28
)
 
$
(0.85
)
 
$
0.10

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

 
0.01

 
(0.01
)
 

Net income (loss) per share
$
0.27

 
$
(0.27
)
 
$
(0.86
)
 
$
0.10

Weighted average shares of common stock outstanding, basic
65.6

 
61.1

 
57.9

 
62.9

Weighted average shares of common stock outstanding, diluted
65.7

 
61.1

 
57.9

 
72.5

Net Sales:
 
Year Ended
 
 
 
Year Ended
 
 
 
December 31,
 
November 30,
 
 
 
November 30,
 
November 30,
 
 
 
2016
 
2015
 
Change*
 
2015
 
2014
 
Change**
 
(In millions)
Net sales:
$
1,761.3

 
$
1,708.3

 
$
53.0

 
$
1,708.3

 
$
1,602.2

 
$
106.1

  * Primary reason for change. The increase in net sales was primarily due to the following (i) an increase of $95.0 million on space launch programs primarily driven by increased deliveries on the RL10 program, and the transition of the Commercial Crew Development program from development activities to initial production and (ii) an increase of $37.2 million on air defense programs primarily driven by the transition of the PAC-3 contracts to full-rate production. These factors were partially

33



offset by (i) the sale of approximately 550 acres of our Sacramento Land for $42.0 million in fiscal 2015 and (ii) a decrease of $36.8 million in the various Standard Missile contracts primarily from the timing of deliveries on the Standard Missile-3 Block IB contract and Standard Missile MK72 booster contract. Further, as a result of the 2016 calendar, Aerojet Rocketdyne had 53 weeks of operations in fiscal 2016 compared to 52 weeks of operations in fiscal 2015. The additional week of operations, which occurred in the fourth quarter of fiscal 2016 and accounted for $32.2 million in additional net sales, is included in the above discussion of program changes.
** 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).
 
One month ended December 31,
 
2015
 
(In millions)
Net sales:
$
96.3

Net sales for the month ended December 31, 2015 was primarily comprised of the following: (i) sales of $32.4 million in missile defense and strategic systems programs primarily driven by the deliveries on the THAAD and Standard Missile programs; (ii) sales of $26.4 million in our space launch programs primarily associated with the RL10 program as a result of deliveries on this multi-year contract and deliveries on the Atlas V program; and (iii) sales of $26.1 million in space advanced programs primarily driven by work on the Commercial Crew Development program and the RS-25 program which is currently engaged in a significant development and integration effort in support of the SLS program.
Cost of Sales (exclusive of items shown separately below):
 
Year Ended
 
 
 
Year Ended
 
 
 
December 31,
 
November 30,
 
 
 
November 30,
 
November 30,
 
 
 
2016
 
2015
 
Change*
 
2015
 
2014
 
Change**
 
(In millions, except percentage amounts)
Cost of sales:
$
1,527.4

 
$
1,459.5

 
$
67.9

 
$
1,459.5

 
$
1,406.2

 
$
53.3

Percentage of net sales
86.7
%
 
85.4
%
 
 
 
85.4
%
 
87.8
%
 
 
Percentage of net sales excluding retirement benefit expense and step-up in fair value of inventory
83.9
%
 
82.5
%
 
 
 
82.5
%
 
86.0
%
 
 
Components of cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales excluding retirement benefit expense and step-up in fair value of inventory
$
1,477.2

 
$
1,409.0

 
$
68.2

 
$
1,409.0

 
$
1,377.8

 
$
31.2

Cost of sales associated with the Acquisition step-up in fair value of inventory not allocable to our U.S. government contracts
0.2

 
0.3

 
(0.1
)
 
0.3

 
3.2

 
(2.9
)
Retirement benefit expense
50.0

 
50.2

 
(0.2
)
 
50.2

 
25.2

 
25.0

Cost of sales
$
1,527.4

 
$
1,459.5

 
$
67.9

 
$
1,459.5

 
$
1,406.2

 
$
53.3

* Primary reason for change. The increase in cost of sales as a percentage of net sales excluding retirement benefit expense and the step-up in fair value of inventory was primarily due to the fiscal 2015 land sale of approximately 550 acres of Sacramento Land resulting in gross profit of $30.6 million.
** 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 was primarily due to (i) land sale of approximately 550 acres of Sacramento Land resulting in gross profit of $30.6 million and (ii) the close-out of the Antares AJ-26 program. Aerojet Rocketdyne entered into a

34



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.
 
Year Ended
 
 
 
November 30,
 
November 30,
 
 
 
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
)%
 
 
 
One month ended December 31,
 
2015
 
(In millions, except percentage amounts)
Cost of sales (exclusive of items shown separately below):
$
75.4

Percentage of net sales
78.3
%
Percentage of net sales excluding retirement benefit expense and step-up in fair value of inventory
73.9
%
Components of cost of sales:
 
Cost of sales excluding retirement benefit expense and step-up in fair value of inventory
$
71.2

Cost of sales associated with the Rocketdyne acquisition step-up in fair value of inventory not allocable to our U.S. government contracts
0.1

Retirement benefit expense
4.1

Cost of sales
$
75.4

Cost of sales as a percentage of net sales excluding retirement benefit expense and the step-up in fair value of inventory for the month ended December 31, 2015 included favorable changes in contract estimates due to better than expected performance primarily on the Standard Missile and THAAD programs as a result of manufacturing efficiencies and risk mitigation. These favorable factors were partially offset by contract losses on an electric propulsion contract.
AR1 Research and Development:
 
Year Ended
 
 
 
Year Ended
 
 
 
December 31,
 
November 30,
 
 
 
November 30,
 
November 30,
 
 
 
2016
 
2015
 
Change*
 
2015
 
2014
 
Change*
 
(In millions, except percentage amounts)
AR1 R&D:
$

 
$
32.1

 
$
(32.1
)
 
$
32.1

 
$

 
$
32.1

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


35



 
Year Ended
 
One month ended
 
December 31,
 
November 30,
 
December 31,
 
2016
 
2015
 
2015
 
(In millions)
AR1 R&D costs allocated to U.S. government contracts
$
20.5

 
$
16.1

 
$
2.7

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

 
32.1

 

Total
$
20.5

 
$
48.2

 
$
2.7

Selling, General and Administrative (“SG&A”):
 
Year Ended
 
 
 
Year Ended
 
 
 
December 31,
 
November 30,
 
 
 
November 30,
 
November 30,
 
 
 
2016
 
2015
 
Change*
 
2015
 
2014
 
Change**
 
(In millions, except percentage amounts)
SG&A:
$
53.6

 
$
49.0

 
$
4.6

 
$
49.0

 
$
38.2

 
$
10.8

Percentage of net sales
3.0
%
 
2.9
%
 
 
 
2.9
%
 
2.4
%
 
 
Percentage of net sales excluding retirement benefit expense and stock-based compensation
1.2
%
 
1.3
%
 
 
 
1.3
%
 
1.3
%
 
 
Components of SG&A:
 
 
 
 
 
 
 
 
 
 
 
SG&A excluding retirement benefit expense and stock-based compensation
$
21.8

 
$
23.0

 
$
(1.2
)
 
$
23.0

 
$
21.2

 
$
1.8

Stock-based compensation
12.9

 
8.6

 
4.3

 
8.6

 
5.7

 
2.9

Retirement benefit expense
18.9

 
17.4

 
1.5

 
17.4

 
11.3

 
6.1

SG&A
$
53.6

 
$
49.0

 
$
4.6

 
$
49.0

 
$
38.2

 
$
10.8

 * Primary reason for change. The increase in SG&A expense was primarily driven by an increase of $4.3 million in stock-based compensation which was primarily a result of an increase in performance based stock compensation.
** 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.
 
One month ended December 31,
 
2015
 
(In millions, except percentage amounts)
SG&A:
$
2.8

Percentage of net sales
2.9
%
Components of SG&A:
 
SG&A excluding retirement benefit expense and stock-based compensation
$
1.7

Stock-based compensation
(0.4
)
Retirement benefit expense
1.5

SG&A
$
2.8

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

36



Depreciation and Amortization:
 
Year Ended
 
 
 
Year Ended
 
 
 
December 31,
 
November 30,
 
 
 
November 30,
 
November 30,
 
 
 
2016
 
2015
 
Change*
 
2015
 
2014
 
Change**
 
(In millions)
Depreciation and amortization:
$
64.9

 
$
65.1

 
$
(0.2
)
 
$
65.1

 
$
63.7

 
$
1.4

Components of depreciation and amortization:
 
 
 
 
 
 
 
 
 
 
 
Depreciation
$
49.6

 
$
49.8

 
$
(0.2
)
 
$
49.8

 
$
48.5

 
$
1.3

Amortization
13.3

 
13.4

 
(0.1
)
 
13.4

 
13.5

 
(0.1
)
Accretion
2.0

 
1.9

 
0.1

 
1.9

 
1.7

 
0.2

Depreciation and amortization
$
64.9

 
$
65.1

 
$
(0.2
)
 
$
65.1

 
$
63.7

 
$
1.4

 * Primary reason for change. Depreciation and amortization expense was essentially unchanged for the period.
** Primary reason for change. The increase in depreciation and amortization was 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.
 
One month ended December 31,