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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: March 31, 2019
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number 1-01520
  Aerojet Rocketdyne Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
34-0244000
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
222 N. Pacific Coast Highway, Suite 500
El Segundo, California
 
90245
(Address of Principal Executive Offices)
 
(Zip Code)
(310) 252-8100
(Registrant’s telephone number, including area code)
 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
ý
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
¨
Smaller reporting company
 
¨
 
 
 
 
 
Emerging growth company
¨

 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý 
As of April 18, 2019, the Company had 78,653,979 outstanding common shares, including unvested common shares, $0.10 par value.




Aerojet Rocketdyne Holdings, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended March 31, 2019
Table of Contents 
Item
Number
 
Page
1
Financial Statements
2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
3
Quantitative and Qualitative Disclosures About Market Risk
4
Controls and Procedures
1
Legal Proceedings
1A
Risk Factors
2
Unregistered Sales of Equity Securities and Use of Proceeds
3
Defaults Upon Senior Securities
4
Mine Safety Disclosures
5
Other Information
6
Exhibits
 
Signatures





Part I — FINANCIAL INFORMATION
Item 1. Financial Statements
Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited) 
 
Three months ended March 31,
 
2019
 
2018
 
(In millions, except per share amounts)
Net sales
$
491.7

 
$
492.0

Operating costs and expenses:
 
 
 
Cost of sales (exclusive of items shown separately below)
397.6

 
426.8

Selling, general and administrative expense
12.2

 
6.7

Depreciation and amortization
17.5

 
17.7

Other expense, net
1.1

 
1.2

Total operating costs and expenses
428.4

 
452.4

Operating income
63.3

 
39.6

Non-operating (income) expense:
 
 
 
Retirement benefits expense
6.5

 
14.4

Interest income
(4.0
)
 
(1.6
)
Interest expense
9.0

 
8.1

Total non-operating expense, net
11.5

 
20.9

Income before income taxes
51.8

 
18.7

Income tax provision
13.1

 
4.7

Net income
$
38.7

 
$
14.0

Earnings Per Share of Common Stock
 
 
Basic
 
 
 
Basic earnings per share
$
0.49

 
$
0.19

Diluted
 
 
 
Diluted earnings per share
$
0.47

 
$
0.18

Weighted average shares of common stock outstanding, basic
77.1

 
73.7

Weighted average shares of common stock outstanding, diluted
80.6

 
74.7

See Notes to Unaudited Condensed Consolidated Financial Statements.

1



Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three months ended March 31,
 
2019
 
2018
 
(In millions)
Net income
$
38.7

 
$
14.0

Other comprehensive income:
 
 
 
Amortization of actuarial losses and prior service credits, net of income taxes of $2.2 million and $4.2 million for the three months ended March 31, 2019 and 2018, respectively
7.0

 
12.5

Comprehensive income
$
45.7

 
$
26.5

See Notes to Unaudited Condensed Consolidated Financial Statements.

2



Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
March 31,
2019
 
December 31, 2018
 
(In millions, except per share amounts)
ASSETS
Current Assets
 
 
 
Cash and cash equivalents
$
706.6

 
$
735.3

Restricted cash
5.0

 
5.0

Accounts receivable, net
146.2

 
141.2

Contract assets
235.7

 
235.1

Other current assets, net
124.0

 
117.7

Total Current Assets
1,217.5

 
1,234.3

Noncurrent Assets
 
 
 
Right-of-use assets
53.8

 

Property, plant and equipment, net
392.1

 
399.7

Recoverable environmental remediation costs
246.9

 
251.1

Deferred income taxes
133.9

 
116.9

Goodwill
161.3

 
161.3

Intangible assets
68.4

 
71.8

Other noncurrent assets, net
259.3

 
255.0

Total Noncurrent Assets
1,315.7

 
1,255.8

Total Assets
$
2,533.2

 
$
2,490.1

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
 
 
 
Current portion of long-term debt
$
275.8

 
$
273.1

Accounts payable
97.3

 
88.7

Reserves for environmental remediation costs
40.2

 
39.8

Contract liabilities
209.2

 
272.6

Other current liabilities
220.0

 
204.1

Total Current Liabilities
842.5

 
878.3

Noncurrent Liabilities
 
 
 
Long-term debt
367.9

 
352.3

Reserves for environmental remediation costs
283.0

 
288.1

Pension benefits
373.5

 
376.7

Operating lease liabilities
46.4

 

Other noncurrent liabilities
153.7

 
173.4

Total Noncurrent Liabilities
1,224.5

 
1,190.5

Total Liabilities
2,067.0

 
2,068.8

Commitments and contingencies (Note 8)

 

Stockholders’ Equity
 
 
 
Preference stock, par value of $1.00; 15.0 million shares authorized; none issued or outstanding

 

Common stock, par value of $0.10; 150.0 million shares authorized; 77.1 million shares issued and outstanding as of March 31, 2019; 76.8 million shares issued and outstanding as of December 31, 2018
7.7

 
7.7

Other capital
561.0

 
561.8

Treasury stock at cost, 0.8 million shares as of March 31, 2019 and December 31, 2018
(12.7
)
 
(12.7
)
Retained earnings
142.6

 
103.9

Accumulated other comprehensive loss, net of income taxes
(232.4
)
 
(239.4
)
Total Stockholders’ Equity
466.2

 
421.3

Total Liabilities and Stockholders’ Equity
$
2,533.2

 
$
2,490.1

See Notes to Unaudited Condensed Consolidated Financial Statements.

3



Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited) 
 
Common Stock
 
 
 
 
 
(Accumulated Deficit)
 
Accumulated Other
 
Total
 
Shares
 
Amount
 
Other
Capital
 
Treasury
Stock
 
Retained Earnings
 
Comprehensive
Loss
 
Stockholders'
Equity
 
(In millions)
December 31, 2017
73.6

 
$
7.4

 
$
503.1

 
$
(64.5
)
 
$
(71.0
)
 
$
(272.6
)
 
$
102.4

Net income

 

 

 

 
14.0

 

 
14.0

Amortization of actuarial losses and prior service credits, net of income taxes

 

 

 

 

 
12.5

 
12.5

Cumulative effect of change in accounting guidance

 

 

 

 
37.6

 

 
37.6

Repurchase of shares for withholding taxes and option costs under employee equity plans

 

 
(1.6
)
 

 

 

 
(1.6
)
Stock-based compensation and shares issued under equity plans
0.2

 

 
4.3

 

 

 

 
4.3

March 31, 2018
73.8

 
$
7.4

 
$
505.8

 
$
(64.5
)
 
$
(19.4
)
 
$
(260.1
)
 
$
169.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
76.8

 
$
7.7

 
$
561.8

 
$
(12.7
)
 
$
103.9

 
$
(239.4
)
 
$
421.3

Net income

 

 

 

 
38.7

 

 
38.7

Amortization of actuarial losses and prior service credits, net of income taxes

 

 

 

 

 
7.0

 
7.0

Repurchase of shares for withholding taxes and option costs under employee equity plans
(0.3
)
 

 
(6.2
)
 

 

 

 
(6.2
)
Stock-based compensation and shares issued under equity plans
0.6

 

 
5.4

 

 

 

 
5.4

March 31, 2019
77.1

 
$
7.7

 
$
561.0

 
$
(12.7
)
 
$
142.6

 
$
(232.4
)
 
$
466.2

See Notes to Unaudited Condensed Consolidated Financial Statements.

4



Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three months ended March 31,
 
2019
 
2018
 
(In millions)
Operating Activities
 
 
 
Net income
$
38.7

 
$
14.0

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
17.5

 
17.7

Amortization of debt discount and deferred financing costs
2.3

 
2.1

Stock-based compensation
5.3

 
1.5

Retirement benefits, net
5.4

 
3.3

Other, net
0.2

 
(1.9
)
Changes in assets and liabilities, net of effects from acquisition in 2019:
 
 
 
Accounts receivable, net
(4.9
)
 
(76.2
)
Contract assets
(0.6
)
 
(20.4
)
Other current assets, net
(6.1
)
 
(17.4
)
Recoverable environmental remediation costs
4.2

 
3.0

Other noncurrent assets
(5.6
)
 
(3.9
)
Accounts payable
6.2

 
29.8

Contract liabilities
(63.4
)
 
(30.8
)
Other current liabilities
1.6

 
(21.9
)
Deferred income taxes
(19.3
)
 
9.0

Reserves for environmental remediation costs
(4.7
)
 
(3.0
)
Other noncurrent liabilities and other
5.5

 
(0.3
)
Net Cash Used in Operating Activities
(17.7
)
 
(95.4
)
Investing Activities
 
 
 
Insurance proceeds

 
1.9

Capital expenditures
(1.5
)
 
(4.1
)
Net Cash Used in Investing Activities
(1.5
)
 
(2.2
)
Financing Activities
 
 
 
Debt repayments
(5.5
)
 
(5.1
)
Repurchase of shares for withholding taxes and option costs under employee equity plans
(6.2
)
 
(1.6
)
Proceeds from shares issued under equity plans
2.2

 
2.1

Net Cash Used in Financing Activities
(9.5
)
 
(4.6
)
Net Decrease in Cash, Cash Equivalents and Restricted Cash
(28.7
)
 
(102.2
)
Cash, Cash Equivalents and Restricted Cash at Beginning of Year
740.3

 
535.0

Cash, Cash Equivalents and Restricted Cash at End of Year
$
711.6

 
$
432.8

Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
$
5.3

 
$
4.1

Cash paid for income taxes

 
0.1

See Notes to Unaudited Condensed Consolidated Financial Statements.

5



Aerojet Rocketdyne Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Basis of Presentation and Nature of Operations
Aerojet Rocketdyne Holdings, Inc. ("Aerojet Rocketdyne Holdings" or the "Company") has prepared the accompanying unaudited condensed consolidated financial statements, including the accounts of the Company and its 100% owned and majority owned subsidiaries, in accordance with the instructions to Form 10-Q. The December 31, 2018, condensed consolidated balance sheet was derived from audited financial statements, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). These interim financial statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Certain reclassifications have been made to financial information for the prior year to conform to the current year’s presentation.
The Company believes the accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring accruals, necessary for a fair statement of its financial position, results of operations, and cash flows for the periods presented. All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In addition, the operating results for interim periods may not be indicative of the results of operations for a full year.
The Company’s operations are organized into two segments:
Aerospace and Defense — includes the operations of the Company’s wholly-owned subsidiary Aerojet Rocketdyne, Inc. ("Aerojet Rocketdyne"), a leading technology-based designer, developer and manufacturer of aerospace and defense products and systems for the United States ("U.S.") government, including the Department of Defense ("DoD"), the National Aeronautics and Space Administration ("NASA"), and major aerospace and defense prime contractors.
Real Estate — includes the activities of the Company’s wholly-owned subsidiary Easton Development Company, LLC ("Easton") related to the re-zoning, entitlement, sale, and leasing of the Company’s excess real estate assets. The Company is currently in the process of seeking zoning changes and other governmental approvals on its excess real estate assets to optimize their value.
A detailed description of the Company’s significant accounting policies can be found in the Company’s most recent Annual Report on Form 10-K for the year ended December 31, 2018.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued guidance requiring lessees to recognize a right-of-use ("ROU") asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. The new standard allows for application of the standard on the adoption date without restatement of prior comparative periods presented or a modified retrospective transition method which requires application of the new guidance at the beginning of the earliest comparative period presented. The Company adopted this new standard as of January 1, 2019, without restating prior comparative periods, and elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, does not require reassessment of lease classification. The Company recorded a ROU asset and lease liability for operating leases at adoption of $51.7 million and $56.3 million, respectively (see Note 13). The difference between the ROU asset and lease liability for operating leases was primarily due to previously recorded deferred rents relating to periods prior to January 1, 2019. The Company’s accounting for finance leases remains substantially unchanged. The standard had no impact on the Company's results of operations or cash flows.
In February 2018, the FASB issued guidance that permits the reclassification of the income tax effects of the Tax Cuts and Jobs Act ("Tax Act") on items within accumulated other comprehensive loss to retained earnings. The guidance refers to these amounts as "stranded tax effects." The Company has elected to retain the income tax effects of the Tax Act as a component of accumulated other comprehensive income. Given this election, the adoption of this guidance did not have a material impact on the Company's financial position, results of operations, or cash flows.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued guidance that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The new guidance is effective for financial statements issued for fiscal years ending after December 15, 2020. Early adoption is permitted and requires adoption on a retrospective basis to all periods presented. As the new guidance only impacts presentation, the Company does not expect the guidance to have an impact on its financial position, results of operations, or cash flows.


6



Note 2. Earnings Per Share ("EPS") of Common Stock
The following table reconciles the numerator and denominator used to calculate basic and diluted EPS of common stock:
 
Three months ended March 31,
 
2019
 
2018
 
(In millions, except per share amounts)
Numerator:
 
 
 
Net income
$
38.7

 
$
14.0

Income allocated to participating securities
(0.7
)
 
(0.3
)
Net income for basic and diluted EPS
38.0

 
13.7

Denominator:
 
 
 
Basic weighted average shares
77.1

 
73.7

Effect of:
 
 
 
2.25% Convertible Senior Notes ("21/4% Notes")
3.4

 
0.9

Employee stock options and stock purchase plan
0.1

 
0.1

Diluted weighted average shares
80.6

 
74.7

Basic
 
 
 
Basic EPS
$
0.49

 
$
0.19

Diluted
 
 
 
Diluted EPS
$
0.47

 
$
0.18


The following table sets forth the potentially dilutive securities excluded from the computation because their effect would have been anti-dilutive: 
 
Three months ended March 31,
 
2019
 
2018
 
(In millions)
Unvested restricted shares
1.4

 
1.5

Total potentially dilutive securities
1.4

 
1.5


Note 3. Revenue Recognition
In the Company’s Aerospace and Defense segment, the majority of revenue is earned from long-term contracts to design, develop, and manufacture aerospace and defense products, and provide related services, for the Company’s customers, including the U.S. government, major aerospace and defense prime contractors.
The Company evaluates the contract value and cost estimates for performance obligations at least quarterly and more frequently when circumstances significantly change. Factors considered in estimating the work to be completed include, but are not limited to: labor productivity, the nature and technical complexity of the work to be performed, availability and cost volatility of materials, subcontractor and vendor performance, warranty costs, volume assumptions, anticipated labor agreements, inflationary trends, schedule and performance delays, availability of funding from the customer, and the recoverability of costs incurred outside the original contract included in any estimates to complete. When the Company’s estimate of total costs to be incurred to satisfy a performance obligation exceeds the expected revenue, the Company recognizes the loss immediately. When the Company determines that a change in estimates has an impact on the associated profit of a performance obligation, the Company records the cumulative positive or negative adjustment to the statement of operations. Changes in estimates and assumptions related to the status of certain long-term contracts may have a material effect on the Company’s operating results. The following table summarizes the impact of the changes in significant contract accounting estimates on the Company’s Aerospace and Defense segment operating results:

7



 
Three months ended March 31,
 
2019
 
2018
 
(In millions, except per share amounts)
Net favorable (unfavorable) effect of the changes in contract estimates on net sales
$
13.0

 
$
(7.4
)
Net favorable (unfavorable) effect of the changes in contract estimates on income before income taxes
13.4

 
(7.9
)
Net favorable (unfavorable) effect of the changes in contract estimates on net income
9.7

 
(5.9
)
Net favorable (unfavorable) effect of the changes in contract estimates on basic and diluted EPS
0.12

 
(0.08
)

The three months ended March 31, 2019, favorable changes in contract estimates were primarily driven by improved performance on the Terminal High Altitude Area Defense ("THAAD"), AJ-60, and RL-10 programs. The three months ended March 31, 2018, unfavorable changes in contract estimates were primarily driven by performance issues on the Commercial Crew Development program partially offset by improved performance on the THAAD, RS-68, and RL-10 programs.
In the Company’s Aerospace and Defense segment, the timing of revenue recognition, customer invoicing, and collections produces accounts receivable, contract assets, and contract liabilities in the unaudited condensed consolidated balance sheets. The following table summarizes contract assets and liabilities:
 
March 31, 2019
 
December 31, 2018
 
(In millions)
Contract assets
$
279.0

 
$
278.0

Reserve for overhead rate disallowance
(43.3
)
 
(42.9
)
Contract assets, net of reserve
235.7

 
235.1

Contract liabilities
209.2

 
272.6

Net contract assets (liabilities), net of reserve
$
26.5

 
$
(37.5
)

Net contract assets (liabilities) increased by $64.0 million, primarily due to a decrease in cash advances on long-term contracts as of March 31, 2019. During the three months ended March 31, 2019, the Company recognized sales of $139.1 million that were included in the Company's contract liabilities as of January 1, 2019.
As of March 31, 2019, the Company’s total remaining performance obligations, also referred to as backlog, totaled $3.8 billion. The Company expects to recognize approximately 48%, or $1.8 billion, of the remaining performance obligations as sales over the next twelve months, an additional 26% the following twelve months, and 26% thereafter.
The Company'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). Fixed-price contracts present the risk of unreimbursed cost overruns, potentially resulting in lower than expected contract profits and margins. This risk is generally lower for cost-reimbursable contracts which, as a result, generally have a lower margin. The following table summarizes the percentages of net sales by contract type:
 
Three months ended March 31,
 
2019
 
2018
Fixed-price
62
%
 
61
%
Cost-reimbursable
37

 
38

Other
1

 
1

The following table summarizes the percentages of net sales by principal end user:
 
Three months ended March 31,
 
2019
 
2018
U.S. government
95
%
 
92
%
Non U.S. government customers
5

 
8


The Company's Real Estate segment represented less than 1% of the Company's net sales for the three months ended March 31, 2019 and 2018.

8



Note 4. Stock-Based Compensation
The following table summarizes stock-based compensation expense by type of award:
 
Three months ended March 31,
 
2019
 
2018
 
(In millions)
Stock appreciation rights
$
1.7

 
$
(0.9
)
Stock options

 
0.1

Restricted stock, service based
1.2

 
1.0

Restricted stock, performance based
2.2

 
1.1

Employee stock purchase plan
0.2

 
0.2

Total stock-based compensation expense
$
5.3

 
$
1.5


Note 5. Balance Sheet Accounts
a. Fair Value of Financial Instruments
Financial instruments are classified using a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
 
 
Fair value measurement as of March 31, 2019
 
Total
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 

Other
Observable
Inputs
(Level 2)
 

Unobservable
Inputs
(Level 3)
 
(In millions)
Money market funds
$
224.0

 
$
224.0

 
$

 
$

Registered investment companies
4.7

 
4.7

 

 

Commercial paper
94.8

 

 
94.8

 

Total
$
323.5

 
$
228.7

 
$
94.8

 
$

 
 
 
Fair value measurement as of December 31, 2018
 
Total
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 

Other
Observable
Inputs
(Level 2)
 

Unobservable
Inputs
(Level 3)
 
(In millions)
Money market funds
$
186.3

 
$
186.3

 
$

 
$

Commercial paper
154.7

 

 
154.7

 

Total
$
341.0

 
$
186.3

 
$
154.7

 
$


As of March 31, 2019 and December 31, 2018, the total estimated fair value for commercial paper was classified as cash and cash equivalents as the remaining maturity at date of purchase was less than three months.
The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued compensation, and other accrued liabilities, approximate fair value because of their short maturities.
The following table summarizes the estimated fair value and principal amount for outstanding debt obligations excluding finance lease obligations:
 
Fair Value
 
Principal Amount
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
 
(In millions)
Term loan
$
341.3

 
$
345.6

 
$
341.3

 
$
345.6

21/4% Notes
445.7

 
441.1

 
300.0

 
300.0

 
$
787.0

 
$
786.7

 
$
641.3

 
$
645.6



9



The fair value of the 2¼% Notes was determined using broker quotes that are based on open markets for the Company’s debt securities (Level 2 securities). The term loan bore interest at variable rates, which adjusted based on market conditions, and its carrying value approximates fair value.
b. Accounts Receivable, net

March 31, 2019

December 31, 2018
 
(In millions)
Billed receivables under long-term contracts
$
153.7


$
147.3

Reserve on billed trade receivables
(7.8
)
 
(6.6
)
Other trade receivables
0.3


0.5

Accounts receivable, net
$
146.2


$
141.2


c. Other Current Assets, net
 
March 31, 2019
 
December 31, 2018
 
(In millions)
Deferred costs recoverable from the U.S. government
$
52.3

 
$
52.6

Inventories
23.1

 
14.9

Prepaid expenses
13.4

 
14.4

Other
35.2

 
35.8

Other current assets, net
$
124.0

 
$
117.7


d. Property, Plant and Equipment, net
 
March 31, 2019
 
December 31, 2018
 
(In millions)
Land
$
71.2


$
71.2

Buildings and improvements
431.7


408.6

Machinery and equipment, including capitalized software
497.6


499.5

Construction-in-progress
33.4


63.1


1,033.9


1,042.4

Less: accumulated depreciation
(641.8
)

(642.7
)
Property, plant and equipment, net
$
392.1


$
399.7


e. Other Noncurrent Assets, net

March 31, 2019

December 31, 2018
 
(In millions)
Real estate held for entitlement and leasing
$
97.6

 
$
96.3

Deferred costs recoverable from the U.S. government
60.1

 
56.4

Receivable from Northrop for environmental remediation costs
51.0

 
52.5

Other
50.6


49.8

Other noncurrent assets, net
$
259.3


$
255.0


f. Other Current Liabilities
 
March 31, 2019
 
December 31, 2018
 
(In millions)
Accrued compensation and employee benefits
$
90.5


$
116.4

Income taxes payable
49.6

 
19.8

Other
79.9


67.9

Other current liabilities
$
220.0


$
204.1



10



Note 6. Income Taxes
 
Three months ended March 31,
 
2019
 
2018
 
(In millions)
Income tax provision
$
13.1

 
$
4.7


In the three months ended March 31, 2019, the income tax provision was $13.1 million for an effective tax rate of 25.3%. The Company’s effective tax rate differed from the 21% statutory federal income tax rate primarily due to state income taxes and certain expenditures which are permanently not deductible for tax purposes, partially offset by the impact of Research and Development ("R&D") credits.
In the three months ended March 31, 2018, the income tax provision was $4.7 million for an effective tax rate of 25.1%. The Company’s effective tax rate differed from the 21% statutory federal income tax rate primarily due to state income taxes and certain expenditures which are permanently not deductible for tax purposes, offset by the impact of R&D credits.
A valuation allowance is required when it is more-likely-than-not that all or a portion of deferred tax assets may not be realized. Assessing the need for a valuation allowance requires management to evaluate, on a quarterly basis, all available evidence, both positive and negative. As of March 31, 2019, the Company continues to believe that the weight of the positive evidence outweighed the negative evidence regarding the realization of its net deferred tax assets.
Note 7. Long-term Debt
 
March 31, 2019
 
December 31, 2018
 
(In millions)
Term loan, bearing interest at variable rates (rate of 4.50% as of March 31, 2019), maturing in September 2023
$
341.3


$
345.6

Unamortized deferred financing costs
(2.2
)
 
(2.3
)
Total senior debt
339.1


343.3

Senior convertible notes, bearing interest at 2.25% per annum, interest payments due in June and December, maturing in December 2023
300.0


300.0

Unamortized discount and deferred financing costs
(43.1
)
 
(45.1
)
Total convertible senior notes
256.9


254.9

Finance leases (see Note 13)
47.7


27.2

Total other debt
47.7


27.2

Total debt, net of unamortized discount and deferred financing costs
643.7


625.4

Less: Amounts due within one year
(275.8
)

(273.1
)
Total long-term debt, net of unamortized discount and deferred financing costs
$
367.9


$
352.3


Senior Credit Facility
On September 20, 2018, the Company amended the senior secured Senior Credit Facility (the "Senior Credit Facility") to a $1.0 billion commitment. The Senior Credit Facility matures on September 20, 2023, and consists of (i) a $650.0 million revolving line of credit (the "Revolver") and (ii) a $350.0 million term loan (the "Term Loan"). The Senior Credit Facility amended the prior $750.0 million credit facility which was set to mature in June 2021 and is intended to provide available funds for the Company’s short-term liquidity needs from time to time.
As of March 31, 2019, the Company had zero borrowings under the Revolver and issued $29.6 million letters of credit.
The Term Loan and any borrowings under the Revolver bear interest at LIBOR plus an applicable margin ranging from 175 to 250 basis points based on the Company's leverage ratio measured at the end of each fiscal quarter. In addition to interest, the Company must pay certain fees including (i) letter of credit fees ranging from 175 to 250 basis points per annum on the amount of issued but undrawn letters of credit and eurocurrency rate loans and (ii) commitment fees ranging from 30 to 45 basis points per annum on the unused portion of the Revolver. 
The Term Loan amortizes at a rate of 5.0% per annum of the original drawn amount starting on December 31, 2018, increasing to 7.5% per annum on December 31, 2020, and increasing to 10.0% per annum from December 31, 2022, to be paid in equal quarterly installments with any remaining amounts, along with outstanding borrowings under the Revolver, due on the maturity date. Outstanding borrowings under the Revolver and the Term Loan may be voluntarily repaid at any time, in whole or in part, without premium or penalty.
Subject to certain restrictions, all the obligations under the Senior Credit Facility will be guaranteed by the Company and the existing and future material domestic subsidiaries, other than Easton.  
The Senior Credit Facility contains financial covenants requiring the Company to (i) maintain an interest coverage ratio of

11



not less than 3.00 to 1.00 and (ii) maintain a consolidated net leverage ratio not to exceed (a) 4.00 to 1.00 through September 30, 2020; (b) 3.75 to 1.00 from October 1, 2020, through September 30, 2021; and (c) 3.50 to 1.00 from October 1, 2021, thereafter, provided that the maximum leverage ratio for all periods shall be increased by 0.50 to 1.00 for two consecutive quarters after consummation of a qualified acquisition. 
The Company may generally make certain investments, redeem debt subordinated to the Senior Credit Facility and make certain restricted payments (such as stock repurchases and dividends) if the Company's Consolidated Net Leverage Ratio does not exceed 3.25 to 1.00 pro forma for such transaction. The Company is otherwise subject to customary covenants including limitations on asset sales, incurrence of additional debt, and limitations on certain investments and restricted payments.    
The Company was in compliance with its financial and non-financial covenants under the Senior Credit Facility as of March 31, 2019.
2¼% Convertible Senior Notes
The Company issued $300.0 million aggregate principal amount of 2¼% Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.
Holders may convert their 2¼% Notes at their option from April 1, 2019, through June 30, 2019, because the Company's closing stock price exceeded $33.80 for at least 20 days in the 30 day period prior to March 31, 2019. The Company has a stated intention to cash settle the principal amount of the 2¼% Notes with the conversion premium to be settled in common shares. Accordingly, the net balance of the 2¼% Notes of $256.9 million is classified as a current liability as of March 31, 2019. The classification of the 2¼% Notes as current or noncurrent on the balance sheet is evaluated at each reporting date and may change depending on whether the sale price contingency (discussed below) has been met.
As more fully described in the indenture governing the 2¼% Notes, the holders of the 2¼% Notes may surrender all or any portion of their 2¼% Notes for conversion at any time during any calendar quarter commencing after the calendar quarter ending on March 31, 2017, (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% ($33.80) of the conversion price on each applicable trading day.
The Company separately accounted for the liability and equity components of the 2¼% Notes. The initial liability component of the 2¼% Notes was valued based on the present value of the future cash flows using an estimated borrowing rate at the date of the issuance for similar debt instruments without the conversion feature, which equals the effective interest rate of 5.8% on the liability component. The equity component, or debt discount, was initially valued equal to the principal value of the 2¼% Notes, less the liability component. The debt discount is being amortized as a non-cash charge to interest expense over the period from the issuance date through December 15, 2023.
The debt issuance costs of $5.8 million incurred in connection with the issuance of the 2¼% Notes were capitalized and bifurcated into deferred financing costs of $4.7 million and equity issuance costs of $1.1 million. The deferred financing costs are being amortized to interest expense from the issuance date through December 15, 2023.
The following table summarizes the 2¼% Notes information (in millions, except years, percentages, conversion rate, and conversion price):
 
March 31, 2019
 
December 31, 2018
Carrying value
$
256.9

 
$
254.9

Unamortized discount and deferred financing costs
43.1

 
45.1

Principal amount
$
300.0

 
$
300.0

Carrying amount of equity component, net of equity issuance costs
$
54.5

 
$
54.5

Remaining amortization period (years)
4.75

 
5.0

Effective interest rate
5.8
%
 
5.8
%
Conversion rate (shares of common stock per $1,000 principal amount)
38.4615

 
38.4615

Conversion price (per share of common stock)
$
26.00

 
$
26.00


Based on the Company's closing stock price of $35.53 on March 31, 2019, the if-converted value of the 2¼% Notes exceeded the aggregate principal amount of the 2¼% Notes by $110.0 million.

12



The following table presents the interest expense components for the 2¼% Notes:
 
Three months ended March 31,
 
2019
 
2018
 
(In millions)
Interest expense-contractual interest
$
1.7

 
$
1.7

Interest expense-amortization of debt discount
1.8

 
1.7

Interest expense-amortization of deferred financing costs
0.2

 
0.1


Note 8. Commitments and Contingencies
a. Legal Matters
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 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. When only a range of amounts can be reasonably estimated and no amount within the range is more likely than another, the low end of the range is recorded. These estimates are often initially developed substantially earlier than when the ultimate loss is known, and are refined each quarterly reporting period as additional information becomes available.
Asbestos Litigation
The Company has been, and continues to be, named as a defendant in lawsuits alleging personal injury or death due to exposure to asbestos in building materials, products, or in manufacturing operations. The majority of cases are pending in Illinois state courts. There were 59 asbestos cases pending as of March 31, 2019.
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 March 31, 2019, the Company has accrued an immaterial amount related to pending claims.
United States ex. rel. Markus vs. Aerojet Rocketdyne Holdings
In the case captioned United States ex. rel. Markus vs. Aerojet Rocketdyne Holdings, Inc. et al., Case No. 2:15-CV-02245- WBS-AC, the Department of Justice completed its review of the case and declined to intervene in June 2018. The case was originally filed under seal in the U.S. District Court, Eastern District of California in September 2017 and alleged causes of action against the Company based on false claims, retaliation, and wrongful termination of employment seeking injunctive relief, civil penalties, and compensatory and punitive damages.
In February 2019, the Company filed a Motion to Dismiss the False Claims Act counts of the complaint and a Motion to Compel Arbitration on the employment based claims. The Company has not recorded any liability for this matter as of March 31, 2019.
b. Environmental Matters
The Company is involved in approximately forty environmental matters under the Comprehensive Environmental Response Compensation and Liability Act, the Resource Conservation Recovery Act, and other federal, state, local, and foreign laws relating to soil and groundwater contamination, hazardous waste management activities, and other environmental matters at some of its current and former facilities. The Company is also involved in a number of remedial activities at third party sites, not owned by the Company, where it is designated a potentially responsible party ("PRP") by either the U.S. Environmental Protection Agency ("EPA") and/or a state agency. In many of these matters, the Company is involved with other PRPs. In some instances, the Company’s liability and proportionate share of costs have not been determined largely due to uncertainties as to the nature and extent of site conditions and the Company’s involvement. While government agencies frequently claim PRPs are jointly and severally liable at such sites, in the Company’s experience, interim and final allocations of liability and costs are generally made based on relative contributions of waste or contamination. Anticipated costs associated with environmental remediation that are probable and estimable are accrued. In cases where a date to complete remedial activities at a particular site cannot be determined by reference to agreements or otherwise, the Company projects costs over an appropriate time period not exceeding fifteen years. In such cases, generally the Company does not have the ability to reasonably estimate environmental remediation costs that are beyond this period. Factors that could result in changes to the Company’s estimates include completion of current and future soil and groundwater investigations, new claims, future agency demands, discovery of more or less contamination than expected, discovery of new contaminants, modification of planned remedial actions, changes in estimated time required to remediate, new technologies, and changes in laws and regulations.
As of March 31, 2019, the aggregate range of these anticipated environmental costs was $323.2 million to $469.0 million and the accrued amount was $323.2 million. See Note 8(c) for a summary of the environmental reserve activity. Of these accrued liabilities, approximately 99% relates to the Company’s U.S. government contracting business, and a portion of this liability is recoverable. The significant environmental sites are discussed below. The balance of the accrued liabilities, which are not recoverable from the U.S. government, relate to other sites for which the Company’s obligations are probable and estimable.

13



Sacramento, California Site
In 1989, a federal district court in California approved a Partial Consent Decree ("PCD") requiring Aerojet Rocketdyne, among other things, to conduct a Remedial Investigation and Feasibility Study to determine the nature and extent of impacts due to the release of chemicals from the Sacramento, California site, monitor the American River and offsite public water supply wells, operate Groundwater Extraction and Treatment facilities that collect groundwater at the site perimeter, and pay certain government oversight costs. The primary chemicals of concern for both on-site and off-site groundwater are trichloroethylene, perchlorate, and n-nitrosodimethylamine. The 2002 PCD revision (a) separated the Sacramento site into multiple operable units to allow quicker implementation of remedy for critical areas; (b) required the Company to guarantee up to $75 million (in addition to a prior $20 million guarantee) to assure that Aerojet Rocketdyne’s Sacramento remediation activities are fully funded; and (c) removed approximately 2,600 acres of non-contaminated land from the EPA superfund designation.
Aerojet Rocketdyne is involved in various stages of soil and groundwater investigation, remedy selection, design, construction, operation and maintenance associated with the operable units, all of which are conducted under the direction and oversight of the EPA, including unilateral administrative orders, and the California Department of Toxic Substances Control ("DTSC") and Regional Water Quality Control Board, Central Valley Region ("RWQCB"). On September 22, 2016, the EPA completed its first five-year remedy review of the Sacramento superfund site. The five-year review required by statute and regulation applies to all remedial actions which result in hazardous substances above levels that allow unlimited use and unrestricted exposure. The Company is working with the EPA to address the findings of the five-year remedy review.
The entire southern portion of the site known as Rio Del Oro was under state orders issued in the 1990s from DTSC and the RWQCB to investigate and remediate soil and groundwater contamination. In 2008, the DTSC released all but approximately 400 acres of the Rio Del Oro property from DTSC’s environmental orders regarding soil contamination although the property remains subject to the RWQCB’s orders to investigate and remediate groundwater environmental contamination emanating offsite from the property.
As of March 31, 2019, the estimated range of anticipated costs discussed above for the Sacramento, California site was $207.6 million to $314.4 million and the accrued amount was $207.6 million included as a component of the Company’s environmental reserves. Expenditures associated with this matter are partially recoverable. See Note 8(c) below for further discussion on recoverability.
Baldwin Park Operable Unit ("BPOU")
As a result of its former Azusa, California operations, in 1994 Aerojet Rocketdyne was named a PRP by the EPA in the area of the San Gabriel Valley Basin superfund site known as the BPOU. In 2002, Aerojet Rocketdyne, along with seven other PRPs (the "Cooperating Respondents") signed a project agreement in late March 2002 with the San Gabriel Basin Water Quality Authority, the Main San Gabriel Basin Watermaster, and five water companies. The 2002 project agreement terminated in 2017 and the parties executed a project agreement which became operational on May 9, 2017. The agreement has a ten-year term and requires the Cooperating Respondents to fund through an escrow account the ongoing operation, maintenance, and administrative costs of certain treatment and water distribution facilities owned and operated by the water companies. There are also provisions in the project agreement for maintaining financial assurance.
Pursuant to an agreement with the remaining Cooperating Respondents, Aerojet Rocketdyne's current share of future BPOU costs will be approximately 74%.
As part of Aerojet Rocketdyne’s sale of its Electronics and Information Systems ("EIS") business to Northrop in October 2001, the EPA approved a prospective purchaser agreement with Northrop to absolve it of pre-closing liability for contamination caused by the Azusa, California operations, which liability remains with Aerojet Rocketdyne. As part of that agreement, the Company agreed to provide a $25 million guarantee of its obligations under the project agreement.
As of March 31, 2019, the estimated range of anticipated costs was $100.0 million to $127.8 million and the accrued amount was $100.0 million included as a component of the Company’s environmental reserves. Expenditures associated with this matter are partially recoverable. See Note 8(c) below for further discussion on recoverability.
c. Environmental Reserves and Estimated Recoveries
Environmental Reserves
The Company reviews on a quarterly basis estimated future remediation costs and has an established practice of estimating environmental remediation costs over a fifteen year period, except for those environmental remediation costs with a specific contractual term. Environmental liabilities at the BPOU site are currently estimated through the term of the project agreement, which expires in May 2027. As the period for which estimated environmental remediation costs lengthens, the reliability of such estimates decreases. These estimates consider the investigative work and analysis of engineers, outside environmental consultants, and the advice of legal staff regarding the status and anticipated results of various administrative and legal proceedings. In most cases, only a range of reasonably possible costs can be estimated. In establishing the Company’s 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 the Company periodically evaluates and revises these estimates as new information becomes available. The Company cannot predict whether new information gained as projects progress will affect the estimated liability accrued. The timing of payment for estimated future environmental costs is influenced by a number of factors, such as the regulatory approval process and the time required designing, constructing, and implementing the remedy.

14



The following table summarizes the Company’s environmental reserve activity:

Aerojet
Rocketdyne-
Sacramento

Aerojet
Rocketdyne-
BPOU

Other
Aerojet
Rocketdyne
Sites

Total
Aerojet
Rocketdyne

Other

Total
Environmental
Reserve
 
(In millions)
December 31, 2018
$
207.4


$
103.8


$
12.4

 
$
323.6

 
$
4.3

 
$
327.9

Additions/Adjustments
3.0


(0.4
)

(0.8
)
 
1.8

 

 
1.8

Expenditures
(2.8
)

(3.4
)

(0.3
)
 
(6.5
)
 

 
(6.5
)
March 31, 2019
$
207.6


$
100.0


$
11.3


$
318.9


$
4.3


$
323.2


The effect of the final resolution of environmental matters and the Company’s obligations for environmental remediation and compliance cannot be accurately predicted due to the uncertainty concerning both the amount and timing of future expenditures and due to regulatory or technological changes. The Company continues its efforts to mitigate past and future costs through pursuit of claims for recoveries from insurance coverage and other PRPs and continued investigation of new and more cost effective remediation alternatives and associated technologies.
As part of the acquisition of the Atlantic Research Corporation ("ARC") propulsion business in 2003, Aerojet Rocketdyne entered into an agreement with ARC pursuant to which Aerojet Rocketdyne is responsible for up to $20.0 million of costs ("Pre-Close Environmental Costs") associated with environmental issues that arose prior to Aerojet Rocketdyne’s acquisition of the ARC propulsion business. ARC is responsible for any cleanup costs relating to the ARC acquired businesses in excess of $20.0 million. Pursuant to a separate agreement with the U.S. government which was entered into prior to the completion of the ARC acquisition, these costs are recovered through the establishment of prices for Aerojet Rocketdyne’s products and services sold to the U.S. government. The Company reached the $20.0 million cap on cleanup costs in the three months ended March 31, 2017, and expects that additional costs will be incurred due to contamination existing at the time of the acquisition and still requiring remediation and monitoring. On May 6, 2016, ARC informed Aerojet Rocketdyne that it was disputing certain costs that Aerojet Rocketdyne attributed to the $20.0 million Pre-Close Environmental Costs ("ARC Claim"). The Company responded to the ARC Claim on June 23, 2017, and subsequently continues to communicate with ARC. Final settlement of the Pre–Close Environmental Costs will be determined in conjunction with the Company's evaluation and ultimate resolution of the ARC Claim.
Estimated Recoveries
On January 12, 1999, Aerojet Rocketdyne and the U.S. government reached a settlement agreement ("Global Settlement") covering environmental costs associated with the Company's Sacramento site and its former Azusa site. Pursuant to the Global Settlement, the Company can recover up to 88% of its environmental remediation costs through the establishment of prices for Aerojet Rocketdyne's products and services sold to the U.S. government. Additionally, in conjunction with the sale of the EIS business in 2001, Aerojet Rocketdyne entered into an agreement with Northrop (the "Northrop Agreement") whereby Aerojet Rocketdyne is reimbursed by Northrop for a portion of environmental expenditures eligible for recovery under the Global Settlement, subject to an annual billing limitation of $6.0 million and a cumulative limitation of $189.7 million. The following table summarizes the Northrop Agreement activity (in millions):
Total reimbursable costs under the Northrop Agreement
$
189.7

Amount reimbursed to the Company through March 31, 2019
(132.7
)
Receivable from Northrop included in the unaudited balance sheet at March 31, 2019
$
57.0


The cumulative expenditure limitation of $189.7 million under the Northrop Agreement was reached in June 2017. At that time, the Company was uncertain of the allowability and allocability of additional expenditures above that cumulative limitation and therefore did not recognize a recoverable asset for such amounts. In the third quarter of 2018, the Company and the U.S. government reached a determination that these expenditures are reimbursable under the Global Settlement and therefore recorded a one-time benefit of $43.0 million to recognize the recoverability of environmental expenditures at a rate of 88%.
Environmental remediation costs are primarily incurred by the Company's Aerospace and Defense segment, and certain of these costs are recoverable from the Company's contracts with the U.S. government. The Company currently estimates approximately 12% of its future Aerospace and Defense segment environmental remediation costs will not likely be reimbursable and are expensed. Allowable environmental remediation costs are charged to the Company’s contracts with the U.S. government as the costs are incurred. Because these costs are recovered through forward-pricing arrangements, the ability of Aerojet Rocketdyne to continue recovering these costs from the U.S. government depends on Aerojet Rocketdyne’s sustained business volume from U.S. government contracts and programs.
While the Company is currently seeking an arrangement with the U.S. government to recover environmental expenditures in excess of the reimbursement ceiling identified in the Global Settlement, there can be no assurances that such a recovery will be obtained, or if not obtained, that such unreimbursed environmental expenditures will not have a materially adverse effect on the Company’s operating results, financial condition, and/or cash flows.

15



Environmental reserves and estimated recoveries impact to unaudited condensed consolidated statements of operations
The following table summarizes the financial information for the impact of environmental reserves and recoveries to the unaudited condensed consolidated statements of operations were as follows:
 
Three months ended March 31,
 
2019
 
2018
 
(In millions)
Expense to unaudited condensed consolidated statements of operations
$
0.3

 
$
1.4


d. Arrangements with Off-Balance Sheet Risk
As of March 31, 2019, arrangements with off-balance sheet risk consisted of:
$29.6 million in outstanding commercial letters of credit, the majority of which may be renewed, primarily to collateralize obligations for environmental remediation and insurance coverage.
$53.2 million in outstanding surety bonds to primarily satisfy indemnification obligations for environmental remediation coverage.
$120.0 million aggregate in guarantees by the Company of Aerojet Rocketdyne’s obligations to U.S. government agencies for environmental remediation activities.
Guarantees, jointly and severally, by the Company’s material domestic subsidiaries of their obligations under the Senior Credit Facility.
In addition to the items discussed above, the Company has and will from time to time enter into certain types of contracts that require the Company to indemnify parties against potential third-party and other claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnification to purchasers of its businesses or assets including, for example, claims arising from the operation of the businesses prior to disposition, and liability to investigate and remediate environmental contamination existing prior to disposition; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for claims arising from the use of the applicable premises; and (iii) certain agreements with officers and directors, under which the Company may be required to indemnify such persons for liabilities arising out of their relationship with the Company. The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated.
Additionally, the Company has open purchase orders and other commitments to suppliers, subcontractors, and other outsourcing partners for equipment, materials, and supplies in the normal course of business. These amounts are based on volumes consistent with anticipated requirements to fulfill purchase orders or contracts for product deliveries received, or expected to be received, from customers. A substantial portion of these amounts are recoverable through the Company's contracts with the U.S. government.
The Company provides product warranties in conjunction with certain product sales. The majority of the Company’s warranties are a one-year standard warranty for parts, workmanship, and compliance with specifications. On occasion, the Company has made commitments beyond the standard warranty obligation. While the Company has contracts with warranty provisions, there is not a history of any significant warranty claims experience. A reserve for warranty exposure is made on a product by product basis when it is both estimable and probable. These costs are included in the program’s estimate at completion and are expensed in accordance with the Company’s revenue recognition methodology as allowed under GAAP for that particular contract.

16



Note 9. Cost Reduction Plans
During 2015, the Company initiated the first phase ("Phase I") of the competitive improvement program (the "CIP") comprised of activities and initiatives aimed at reducing costs in order for the Company to continue to compete successfully. Phase I is comprised of three major components: (i) facilities optimization and footprint reduction; (ii) product affordability; and (iii) reduced administrative and overhead costs. In 2017, the Board of Directors approved the second phase ("Phase II") of the Company’s previously announced CIP. Pursuant to Phase II, the Company expanded its CIP and further consolidated its Sacramento, California, and Gainesville, Virginia sites, while centralizing and expanding its existing presence in Huntsville, Alabama. The Company currently estimates that it will incur restructuring and related costs of the Phase I and II programs of approximately $210.0 million (including approximately $60.5 million of capital expenditures). The Company has incurred $141.3 million of such costs through March 31, 2019, including $48.8 million in capital expenditures. The following table summarizes the Company's severance and retention liabilities related to Phase I and II activity:
 
Severance
 
Retention
 
Total
 
(In millions)
December 31, 2018
$
18.1

 
$
5.1

 
$
23.2

Accrual
1.4

 
1.4

 
2.8

Payments
(5.1
)
 
(1.7
)
 
(6.8
)
March 31, 2019
$
14.4

 
$
4.8

 
$
19.2


The costs associated with Phase I and II are included as a component of the Company’s U.S. government forward-pricing rates, and therefore, are recovered through the pricing of the Company’s products and services to the U.S. government. In addition to the employee-related CIP obligations, the Company incurred non-cash accelerated depreciation expense of $0.2 million and $0.4 million in the three months ended March 31, 2019 and 2018, respectively, associated with changes in the estimated useful lives of long-lived assets.
Note 10. Retirement Benefits
The following table presents the components of retirement benefits expense (income): 
 
Pension Benefits
 
Postretirement Medical and Life
Insurance Benefits
 
Three months ended March 31,
 
2019
 
2018
 
2019
 
2018
 
(In millions)
Interest cost on benefit obligation
$
13.2

 
$
12.4

 
$
0.3

 
$
0.3

Expected return on assets
(16.2
)
 
(15.0
)
 

 

Amortization of prior service costs

 

 
(0.1
)
 
(0.1
)
Amortization of net losses (gains)
10.2

 
17.7

 
(0.9
)
 
(0.9
)
Retirement benefits expense (income)
$
7.2

 
$
15.1

 
$
(0.7
)
 
$
(0.7
)


17



Note 11. Operating Segments and Related Disclosures
The Company’s operations are organized into two operating segments based on different products and customer bases: Aerospace and Defense, and Real Estate.
The following table presents selected financial information for each reportable segment:
 
Three months ended March 31,
 
2019
 
2018
 
(In millions)
Net Sales:
 
 
 
Aerospace and Defense
$
490.0

 
$
490.4

Real Estate
1.7

 
1.6

Total Net Sales
$
491.7

 
$
492.0

Segment Performance:
 
 
 
Aerospace and Defense
$
64.9

 
$
36.6

Environmental remediation provision adjustments
(0.3
)
 
(1.3
)
GAAP/Cost Accounting Standards retirement benefits expense difference
5.4

 
(1.0
)
Unusual items
(0.3
)
 

Aerospace and Defense Total
69.7

 
34.3

Real Estate
0.5

 
0.6

Total Segment Performance
$
70.2

 
$
34.9

Reconciliation of segment performance to income before income taxes:
 
 
 
Segment performance
$
70.2

 
$
34.9

Interest expense
(9.0
)
 
(8.1
)
Interest income
4.0

 
1.6

Stock-based compensation
(5.3
)
 
(1.5
)
Corporate retirement benefits
(1.8
)
 
(3.3
)
Corporate and other
(6.3
)
 
(4.9
)
Income before income taxes
$
51.8

 
$
18.7


The following table summarizes customers that represented more than 10% of net sales, each of which involves sales of several product lines and programs:
 
Three months ended March 31,
 
2019
 
2018
Lockheed Martin Corporation
30
%
 
29
%
NASA
20

 
17

Raytheon Company
18

 
21

United Launch Alliance
12

 
20


Note 12. Unusual Items
The following table presents total unusual items, comprised of a component of other expense, net in the unaudited condensed consolidated statements of operations:
 
Three months ended March 31,
 
2019
 
2018
 
(In millions)
Unusual items
 
 
 
Acquisition costs
$
0.3

 
$

 
$
0.3

 
$


On March 29, 2019, the Company acquired certain assets of 3D Material Technologies ("3DMT") from ARC Group Worldwide, Inc. 3DMT is a provider of additive manufacturing (3-D printing) services to the aerospace, defense, medical and industrial markets. The net assets acquired of approximately $1.0 million are immaterial to the Company’s unaudited condensed consolidated financial statements. The preliminary purchase price allocation has been developed based on preliminary estimates of the fair value of the assets and liabilities.

18



Note 13. Leases
The Company adopted the new leasing guidance effective January 1, 2019. The new guidance requires lessees to recognize a ROU asset and a lease liability on the balance sheet for all leases with the exception of short-term leases.
Operating leases are included in operating lease ROU assets, other current liabilities, and operating lease liabilities. Finance leases are included in property, plant and equipment and debt. Operating ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Finance leases are recorded as an asset and an obligation at an amount equal to the present value of the minimum lease payments during the lease term. Amortization expense related to finance leases is included in depreciation and amortization expense.
The Company determines if an arrangement is a lease at inception. For certain technology equipment leases, the Company accounts for lease and nonlease (service) components separately based on a relative fair market value basis. For all other leases, the Company accounts for the lease and nonlease components (e.g., common area maintenance) on a combined basis.
The discount rate used for leases is the Company's incremental borrowing rate for collateralized debt based on information available at the lease commencement date. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Leases with a term of twelve months or less and that do not include a purchase option that is likely to be exercised are treated as short-term leases and are not reflected on the balance sheet. The Company leases certain facilities, machinery and equipment (including information technology equipment), and office buildings under long-term, non-cancelable operating and finance leases.
The following table summarizes the Company's lease costs:
 
Three months ended March 31, 2019
 
(In millions)
Operating lease cost
$
3.2

Finance lease cost:
 
Amortization
0.5

Interest on lease liabilities
0.7

Short-term lease cost