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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: June 30, 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common stock, $0.10 par value
 
AJRD
 
New York Stock Exchange
 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  ☒   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  ☒  No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
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  ☒ 
As of July 22, 2019, the Company had 78,676,102 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 June 30, 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 June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions, except per share amounts)
Net sales
$
485.0

 
$
467.2

 
$
976.7

 
$
959.2

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales (exclusive of items shown separately below)
379.6

 
369.5

 
777.2

 
796.3

Selling, general and administrative expense
16.9

 
11.1

 
29.1

 
17.8

Depreciation and amortization
17.5

 
17.7

 
35.0

 
35.4

Other (income) expense, net
(0.1
)
 
0.9

 
1.0

 
2.1

Total operating costs and expenses
413.9

 
399.2

 
842.3

 
851.6

Operating income
71.1

 
68.0

 
134.4

 
107.6

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

 
14.4

 
13.0

 
28.8

Interest income
(4.0
)
 
(2.0
)
 
(8.0
)
 
(3.6
)
Interest expense
9.2

 
8.3

 
18.2

 
16.4

Total non-operating expense, net
11.7

 
20.7

 
23.2

 
41.6

Income before income taxes
59.4

 
47.3

 
111.2

 
66.0

Income tax provision
15.3

 
12.5

 
28.4

 
17.2

Net income
$
44.1

 
$
34.8

 
$
82.8

 
$
48.8

Earnings per share of common stock
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Basic earnings per share
$
0.56

 
$
0.46

 
$
1.05

 
$
0.65

Diluted
 
 
 
 
 
 
 
Diluted earnings per share
$
0.54

 
$
0.45

 
$
1.01

 
$
0.64

Weighted average shares of common stock outstanding, basic
77.1

 
73.9

 
77.1

 
73.8

Weighted average shares of common stock outstanding, diluted
80.7

 
75.1

 
80.6

 
75.0

See Notes to Unaudited Condensed Consolidated Financial Statements.

1



Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions)
Net income
$
44.1

 
$
34.8

 
$
82.8

 
$
48.8

Other comprehensive income:
 
 
 
 
 
 
 
Amortization of net actuarial losses and prior service credits, net of income taxes of $2.4 million, $4.2 million, $4.6 million, and $8.4 million
7.0

 
12.5

 
14.0

 
25.0

Comprehensive income
$
51.1

 
$
47.3

 
$
96.8

 
$
73.8

See Notes to Unaudited Condensed Consolidated Financial Statements.

2



Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
June 30,
2019
 
December 31, 2018
 
(In millions, except per share amounts)
ASSETS
Current Assets
 
 
 
Cash and cash equivalents
$
744.3

 
$
735.3

Restricted cash
5.0

 
5.0

Accounts receivable, net
127.5

 
141.2

Contract assets
246.4

 
235.1

Other current assets, net
118.0

 
117.7

Total Current Assets
1,241.2

 
1,234.3

Noncurrent Assets
 
 
 
Right-of-use assets
51.9

 

Property, plant and equipment, net
385.6

 
399.7

Recoverable environmental remediation costs
242.7

 
251.1

Deferred income taxes
131.6

 
116.9

Goodwill
161.4

 
161.3

Intangible assets
65.0

 
71.8

Other noncurrent assets, net
269.6

 
255.0

Total Noncurrent Assets
1,307.8

 
1,255.8

Total Assets
$
2,549.0

 
$
2,490.1

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
 
 
 
Current portion of long-term debt
$
278.1

 
$
273.1

Accounts payable
81.7

 
88.7

Reserves for environmental remediation costs
42.1

 
39.8

Contract liabilities
213.0

 
272.6

Other current liabilities
196.7

 
204.1

Total Current Liabilities
811.6

 
878.3

Noncurrent Liabilities
 
 
 
Long-term debt
363.7

 
352.3

Reserves for environmental remediation costs
278.1

 
288.1

Pension benefits
370.3

 
376.7

Operating lease liabilities
44.1

 

Other noncurrent liabilities
160.2

 
173.4

Total Noncurrent Liabilities
1,216.4

 
1,190.5

Total Liabilities
2,028.0

 
2,068.8

Commitments and contingencies (Note 8)

 

Stockholders’ Equity
 
 
 
Preferred 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 June 30, 2019; 76.8 million shares issued and outstanding as of December 31, 2018
7.7

 
7.7

Other capital
564.7

 
561.8

Treasury stock at cost, 0.8 million shares as of June 30, 2019 and December 31, 2018
(12.7
)
 
(12.7
)
Retained earnings
186.7

 
103.9

Accumulated other comprehensive loss, net of income taxes
(225.4
)
 
(239.4
)
Total Stockholders’ Equity
521.0

 
421.3

Total Liabilities and Stockholders’ Equity
$
2,549.0

 
$
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)
March 31, 2018
73.8

 
$
7.4

 
$
505.8

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

Net income

 

 

 

 
34.8

 

 
34.8

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

 

 

 

 

 
12.5

 
12.5

Repurchase of shares for withholding taxes and option costs under employee equity plans
(0.1
)
 

 
(0.5
)
 

 

 

 
(0.5
)
Stock-based compensation and shares issued under equity plans
0.2

 

 
4.1

 

 

 

 
4.1

June 30, 2018
73.9

 
$
7.4

 
$
509.4

 
$
(64.5
)
 
$
15.4

 
$
(247.6
)
 
$
220.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
73.6

 
$
7.4

 
$
503.1

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

Net income

 

 

 

 
48.8

 

 
48.8

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

 

 

 

 

 
25.0

 
25.0

Cumulative effect of change in accounting guidance

 

 

 

 
37.6

 

 
37.6

Repurchase of shares for withholding taxes and option costs under employee equity plans
(0.1
)
 

 
(2.1
)
 

 

 

 
(2.1
)
Stock-based compensation and shares issued under equity plans
0.4

 

 
8.4

 

 

 

 
8.4

June 30, 2018
73.9

 
$
7.4

 
$
509.4

 
$
(64.5
)
 
$
15.4

 
$
(247.6
)
 
$
220.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
77.1

 
$
7.7

 
$
561.0

 
$
(12.7
)
 
$
142.6

 
$
(232.4
)
 
$
466.2

Net income

 

 

 

 
44.1

 

 
44.1

Amortization of net 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

 

 
(0.5
)
 

 

 

 
(0.5
)
Stock-based compensation and shares issued under equity plans

 

 
4.2

 

 

 

 
4.2

June 30, 2019
77.1

 
$
7.7

 
$
564.7

 
$
(12.7
)
 
$
186.7

 
$
(225.4
)
 
$
521.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
76.8

 
$
7.7

 
$
561.8

 
$
(12.7
)
 
$
103.9

 
$
(239.4
)
 
$
421.3

Net income

 

 

 

 
82.8

 

 
82.8

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

 

 

 

 

 
14.0

 
14.0

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

 
(6.7
)
 

 

 

 
(6.7
)
Stock-based compensation and shares issued under equity plans
0.6

 

 
9.6

 

 

 

 
9.6

June 30, 2019
77.1

 
$
7.7

 
$
564.7

 
$
(12.7
)
 
$
186.7

 
$
(225.4
)
 
$
521.0

See Notes to Unaudited Condensed Consolidated Financial Statements.

4



Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six months ended June 30,
 
2019
 
2018
 
(In millions)
Operating Activities
 
 
 
Net income
$
82.8

 
$
48.8

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
35.0

 
35.4

Amortization of debt discount and deferred financing costs
4.6

 
4.4

Stock-based compensation
15.5

 
6.7

Retirement benefits, net
10.8

 
6.7

Other, net
0.4

 
(2.0
)
Changes in assets and liabilities, net of effects from acquisition in 2019:
 
 
 
Accounts receivable, net
13.8

 
(40.7
)
Contract assets
(11.3
)
 
(7.5
)
Other current assets, net
(0.1
)
 
16.3

Recoverable environmental remediation costs
8.4

 
5.3

Other noncurrent assets, net
(15.6
)
 
(1.5
)
Accounts payable
(10.8
)
 
(9.7
)
Contract liabilities
(59.6
)
 
(58.1
)
Other current liabilities
(27.6
)
 
21.8

Deferred income taxes
(19.3
)
 
2.3

Reserves for environmental remediation costs
(7.7
)
 
(7.7
)
Other noncurrent liabilities and other
11.9

 
4.0

Net Cash Provided by Operating Activities
31.2

 
24.5

Investing Activities
 
 
 
Purchases of marketable securities

 
(44.7
)
Sales of marketable securities

 
20.1

Insurance proceeds

 
1.9

Capital expenditures
(6.9
)
 
(12.2
)
Net Cash Used in Investing Activities
(6.9
)
 
(34.9
)
Financing Activities
 
 
 
Debt repayments
(10.8
)
 
(10.3
)
Repurchase of shares for withholding taxes and option costs under employee equity plans
(6.7
)
 
(2.1
)
Proceeds from shares issued under equity plans
2.2

 
2.5

Net Cash Used in Financing Activities
(15.3
)
 
(9.9
)
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash
9.0

 
(20.3
)
Cash, Cash Equivalents and Restricted Cash at Beginning of Year
740.3

 
535.0

Cash, Cash Equivalents and Restricted Cash at End of Year
$
749.3

 
$
514.7

Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
$
13.7

 
$
11.9

Cash paid for income taxes
33.9

 
15.2

Cash refund for income taxes
1.0

 
4.6

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, did 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 loss. 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 June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income
$
44.1

 
$
34.8

 
$
82.8

 
$
48.8

Income allocated to participating securities
(0.9
)
 
(0.8
)
 
(1.6
)
 
(1.0
)
Net income for basic and diluted EPS
$
43.2

 
$
34.0

 
$
81.2

 
$
47.8

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares
77.1

 
73.9

 
77.1

 
73.8

Effect of:
 
 
 
 
 
 
 
2.25% Convertible Senior Notes ("21/4% Notes")
3.5

 
1.1

 
3.4

 
1.1

Employee stock options and stock purchase plan
0.1

 
0.1

 
0.1

 
0.1

Diluted weighted average shares
80.7

 
75.1

 
80.6

 
75.0

Basic
 
 
 
 
 
 
 
Basic EPS
$
0.56

 
$
0.46

 
$
1.05

 
$
0.65

Diluted
 
 
 
 
 
 
 
Diluted EPS
$
0.54

 
$
0.45

 
$
1.01

 
$
0.64


The following table sets forth the potentially dilutive securities excluded from the computation because their effect would have been anti-dilutive: 
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions)
Unvested restricted shares
1.5

 
1.7

 
1.5

 
1.6

Total potentially dilutive securities
1.5

 
1.7

 
1.5

 
1.6


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, and 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 June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions, except per share amounts)
Net favorable effect of the changes in contract estimates on net sales
$
25.8

 
$
26.2

 
$
38.8

 
$
18.8

Net favorable effect of the changes in contract estimates on income before income taxes
25.6

 
22.0

 
39.0

 
14.1

Net favorable effect of the changes in contract estimates on net income
19.0

 
16.3

 
28.7

 
10.4

Net favorable effect of the changes in contract estimates on basic EPS
0.24

 
0.22

 
0.37

 
0.14

Net favorable effect of the changes in contract estimates on diluted EPS
0.23

 
0.21

 
0.35

 
0.14


The three and six months ended June 30, 2019, favorable changes in contract estimates were primarily driven by improved performance and risk retirements on the Terminal High Altitude Area Defense ("THAAD"), Patriot Advanced Capability-3 ("PAC-3"), AJ-60, and RL-10 programs. The three and six months ended June 30, 2018, net favorable changes in contract estimates on income before income taxes were primarily driven by improved performance and risk retirements on the THAAD, RS-68, RL-10, and RS-25 programs and better than expected overhead rate performance, partially offset by performance issues on the Commercial Crew Development program.
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:
 
June 30, 2019
 
December 31, 2018
 
(In millions)
Contract assets
$
287.8

 
$
278.0

Reserve for overhead rate disallowance
(41.4
)
 
(42.9
)
Contract assets, net of reserve
246.4

 
235.1

Contract liabilities
213.0

 
272.6

Net contract assets (liabilities), net of reserve
$
33.4

 
$
(37.5
)

Net contract assets (liabilities) increased by $70.9 million, primarily due to a decrease in cash advances on long-term contracts as of June 30, 2019. During the three and six months ended June 30, 2019, the Company recognized sales of $66.8 million and $205.9 million that were included in the Company's contract liabilities as of January 1, 2019.
As of June 30, 2019, the Company’s total remaining performance obligations, also referred to as backlog, totaled $4.6 billion. The Company expects to recognize approximately 42%, or $2.0 billion, of the remaining performance obligations as sales over the next twelve months, an additional 25% the following twelve months, and 33% 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 June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Fixed-price
59
%
 
62
%
 
61
%
 
62
%
Cost-reimbursable
41

 
38

 
39

 
38

The following table summarizes the percentages of net sales by principal end user:
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
U.S. government
94
%
 
93
%
 
94
%
 
93
%
Non U.S. government customers
6

 
7

 
6


7


The Company's Real Estate segment represented less than 1% of the Company's net sales for the three and six months ended June 30, 2019 and 2018.

8



Note 4. Stock-Based Compensation
The following table summarizes stock-based compensation expense by type of award:
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions)
Stock Appreciation Rights ("SARs")
$
5.9

 
$
1.4

 
$
7.6

 
$
0.5

Stock options
0.1

 

 
0.1

 
0.1

Restricted stock, service based
1.5

 
1.2

 
2.7

 
2.2

Restricted stock, performance based
2.5

 
2.5

 
4.7

 
3.6

Employee stock purchase plan
0.2

 
0.1

 
0.4

 
0.3

Total stock-based compensation expense
$
10.2

 
$
5.2

 
$
15.5

 
$
6.7


Stock-based compensation in the three and six months ended June 30, 2019, includes a significant increase in the fair value of the SARs primarily as a result of an increase in the market price of the Company's common stock as reported on the New York Stock Exchange.
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 June 30, 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
$
342.9

 
$
342.9

 
$

 
$

Registered investment companies
4.4

 
4.4

 

 

Commercial paper
99.9

 

 
99.9

 

Total
$
447.2

 
$
347.3

 
$
99.9

 
$

 
 
 
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 June 30, 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.

9



The following table summarizes the estimated fair value and principal amount for outstanding debt obligations excluding finance lease obligations:
 
Fair Value
 
Principal Amount
 
June 30, 2019
 
December 31, 2018
 
June 30, 2019
 
December 31, 2018
 
(In millions)
Term loan
$
336.9

 
$
345.6

 
$
336.9

 
$
345.6

21/4% Notes
535.3

 
441.1

 
300.0

 
300.0

 
$
872.2

 
$
786.7

 
$
636.9

 
$
645.6


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

June 30, 2019

December 31, 2018
 
(In millions)
Billed receivables under long-term contracts
$
135.8


$
147.3

Reserve on billed trade receivables
(8.5
)
 
(6.6
)
Other trade receivables
0.2


0.5

Accounts receivable, net
$
127.5


$
141.2


c. Other Current Assets, net
 
June 30, 2019
 
December 31, 2018
 
(In millions)
Deferred costs recoverable from the U.S. government
$
49.8

 
$
52.6

Inventories
21.7

 
14.9

Prepaid expenses
13.5

 
14.4

Other
33.0

 
35.8

Other current assets, net
$
118.0

 
$
117.7


d. Property, Plant and Equipment, net
 
June 30, 2019
 
December 31, 2018
 
(In millions)
Land
$
71.2


$
71.2

Buildings and improvements
432.9


408.6

Machinery and equipment, including capitalized software
496.9


499.5

Construction-in-progress
34.1


63.1


1,035.1


1,042.4

Less: accumulated depreciation
(649.5
)

(642.7
)
Property, plant and equipment, net
$
385.6


$
399.7


e. Other Noncurrent Assets, net

June 30, 2019

December 31, 2018
 
(In millions)
Real estate held for entitlement and leasing
$
98.2

 
$
96.3

Deferred costs recoverable from the U.S. government
65.7

 
56.4

Receivable from Northrop Grumman Corporation ("Northrop") for environmental remediation costs
49.5

 
52.5

Other
56.2


49.8

Other noncurrent assets, net
$
269.6


$
255.0



10



f. Other Current Liabilities
 
June 30, 2019
 
December 31, 2018
 
(In millions)
Accrued compensation and employee benefits
$
110.1


$
116.4

Income taxes payable
30.6

 
19.8

Other
56.0


67.9

Other current liabilities
$
196.7


$
204.1


Note 6. Income Taxes
 
Six months ended June 30,
 
2019
 
2018
 
(In millions)
Income tax provision
$
28.4

 
$
17.2


In the six months ended June 30, 2019, the income tax provision was $28.4 million for an effective tax rate of 25.5%. 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 six months ended June 30, 2018, the income tax provision was $17.2 million for an effective tax rate of 26.1%. 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, partially 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 June 30, 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
 
June 30, 2019
 
December 31, 2018
 
(In millions)
Term loan, bearing interest at variable rates (rate of 4.15% as of June 30, 2019), maturing in September 2023
$
336.9


$
345.6

Unamortized deferred financing costs
(2.0
)
 
(2.3
)
Total senior debt
334.9


343.3

Convertible senior 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
(41.1
)
 
(45.1
)
Total convertible senior notes
258.9


254.9

Finance leases (see Note 13)
48.0


27.2

Total other debt
48.0


27.2

Total debt, net of unamortized discount and deferred financing costs
641.8


625.4

Less: Amounts due within one year
(278.1
)

(273.1
)
Total long-term debt, net of unamortized discount and deferred financing costs
$
363.7


$
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 June 30, 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

11



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, increasing to 7.5% per annum on December 31, 2020, and increasing to