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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 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
https://cdn.kscope.io/38cb9786018e0ee8c9a1842704d1215d-arholdingsclr15ina51.jpg

  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
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No 
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 
The aggregate market value of the voting common equity held by nonaffiliates of the registrant as of June 30, 2019, was $3.5 billion.
As of February 12, 2020, there were 78,709,885 outstanding shares of the Company’s common stock, including unvested common shares, $0.10 par value.
Portions of the 2020 Proxy Statement of Aerojet Rocketdyne Holdings, Inc. relating to its annual meeting of stockholders scheduled to be held on May 6, 2020, are incorporated by reference into Part III of this Report.





Aerojet Rocketdyne Holdings, Inc.
Annual Report on Form 10-K
For the Year Ended December 31, 2019
Table of Contents 
Item
Number
 
 
PART I
 
1.
Business
1A.
Risk Factors
1B.
Unresolved Staff Comments
2.
Properties
3.
Legal Proceedings
4.
Mine Safety Disclosures
 
 
 
PART  II
 
5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
6.
Selected Financial Data
7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
7A.
Quantitative and Qualitative Disclosures About Market Risk
8.
Financial Statements and Supplementary Data
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
9A.
Controls and Procedures
9B.
Other Information
 
 
PART  III
 
10.
Directors, Executive Officers and Corporate Governance
11.
Executive Compensation
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13.
Certain Relationships and Related Transactions, and Director Independence
14.
Principal Accountant Fees and Services
 
 
PART  IV
 
15.
Exhibits and Financial Statement Schedules
16.
Form 10-K Summary
 
 
 
 
Signatures
 






Part I
Item 1. Business
Unless otherwise indicated or required by the context, as used in this Annual Report on Form 10-K ("Report"), the terms "we," "our," "us," and the "Company" refer to Aerojet Rocketdyne Holdings, Inc. and all of its subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America ("GAAP").
All statements in this Report other than historical information should be considered "forward-looking statements" as defined by Section 21E of the Private Securities Litigation Reform Act of 1995. These statements present (without limitation) the expectations, beliefs, plans, and objectives of management and future financial performance and assumptions underlying, or judgments concerning, the matters discussed in the statements. The words "believe," "estimate," "anticipate," "project," "expect," and "reliable" and similar expressions, are intended to identify forward-looking statements. Forward-looking statements involve certain risks, estimates, assumptions, and uncertainties, including with respect to future sales and activity levels, cash flows, contract performance, the outcome of litigation and contingencies, environmental remediation, availability of capital, and anticipated costs of capital. Important risk factors that could cause actual results or outcomes to differ from those expressed in the forward-looking statements are described in the section "Risk Factors" in Item 1A of this Report. Additional risk factors may be described from time to time in our future filings with the Securities and Exchange Commission ("SEC").
Overview
Our operations are organized into two segments:
Aerospace and Defense — includes the operations of our wholly-owned subsidiary Aerojet Rocketdyne, Inc. ("Aerojet Rocketdyne"), a leading technology-based designer, developer and manufacturer of aerospace and defense products and systems for the 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 our wholly-owned subsidiary Easton Development Company, LLC ("Easton") related to the re-zoning, entitlement, sale, and leasing of our excess real estate assets.
We were incorporated in Ohio in 1915 and reincorporated in the State of Delaware on April 11, 2014. Our principal executive offices are located at 222 N. Pacific Coast Highway, Suite 500, El Segundo, California 90245.
Our Internet website address is www.AerojetRocketdyne.com. We have made available through our Internet website, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such materials were electronically filed with, or furnished to, the SEC. We also make available on our Internet website our corporate governance guidelines and the charters for each of the following committees of our Board of Directors: Audit; Corporate Governance & Nominating; and Organization & Compensation. Copies of the Code of Conduct and the Company’s Corporate Governance Guidelines are available on the Company’s Internet website at www.AerojetRocketdyne.com (copies are available in print to any stockholder or other interested person who requests them by writing to Secretary, Aerojet Rocketdyne Holdings, Inc., 222 N. Pacific Coast Highway, Suite 500, El Segundo, California 90245).
Aerospace and Defense
Aerojet Rocketdyne is a world-recognized technology-based engineering and manufacturing company that develops and produces specialized power and propulsion systems, as well as armament systems. We develop and manufacture liquid and solid rocket propulsion, air-breathing hypersonic engines, and electric power and propulsion for space, defense, civil and commercial applications. Principal customers and end users include the DoD (including the U.S. Air Force ("USAF"), U.S. Army, Missile Defense Agency ("MDA"), and U.S. Navy), NASA, The Boeing Company ("Boeing"), Lockheed Martin Corporation ("Lockheed Martin"), Raytheon Company ("Raytheon"), and United Launch Alliance ("ULA").
We have demonstrated a legacy of successfully meeting the most challenging missions by producing some of the world’s most technologically advanced propulsion systems to meet our nation's critical needs. We believe we maintain a unique competitive position due to our strategic focus on creating and maintaining a broad spectrum of propulsion and energetic products assisted by the growing market demand for our innovative energy management technologies. The highly reliable nature of our revenue comes from the long-term nature of the programs with which we are involved, our attractive contract base and our deep customer relationships. High renewal rates, supported by our market leading technology provide us with a highly stable business base from which to grow. As of December 31, 2019, our remaining performance obligations, also referred to as backlog, totaled $5.4 billion and our funded backlog, which includes only amounts for which funding has been authorized by a customer and a purchase order has been received, totaled $2.1 billion.



1




Primary Markets and Programs
The markets and key programs we serve are:
Aerospace. We specialize in the development and production of propulsion and power systems for space applications. Our products include a broad market offering of both electric and chemical propulsion (liquid propellant engines and solid rocket motors) required for launch vehicle and in-space applications supporting defense, civil and commercial missions.
Our space products have a long, successful flight heritage with the U.S. government and we continue to provide strong support of National Security Space requirements enabling communications, navigation, intelligence, surveillance, and reconnaissance missions. We provide first stage and upper stage liquid propulsion for ULA’s Delta IV launch vehicle as well as the liquid upper stage propulsion for the Atlas V launch vehicle in support of the National Security Space Launch ("NSSL") program. In the commercial market, we provide space propulsion products to all major U.S. commercial satellite manufacturers.
We continue to support the exploration of deep space. During 2019, NASA committed to returning the U.S. to the Moon by 2024 with the Artemis program and we are a critical contributor to multiple elements of this historic endeavor. This year, we completed acceptance testing of all sixteen RS-25 engines and flight controllers needed to support the first four flights of NASA’s Space Launch System ("SLS") and completed core stage integration of the first set of these engines for Artemis I, the first launch of SLS. Also in support of Artemis I, we delivered the jettison motor for Orion’s Launch Abort System and qualified the motor for all future Artemis missions. Hardware deliveries for Artemis II have also begun, including auxiliary engines for integration into Orion’s European Service Module. In addition, Lockheed Martin awarded us a contract to support production of NASA’s Orion spacecraft fleet for Artemis missions three through five with an option to support missions six through eight. Finally, our Advanced Electric Propulsion System thruster for the Power and Propulsion Element of NASA’s Gateway demonstrated operation at full power for the first time; achieving an important program milestone for NASA’s orbiting lunar outpost for robotic and human exploration.
In support of Low Earth Orbit human spaceflight initiatives, astronauts installed new sets of our Lithium-Ion batteries into the International Space Station’s ("ISS") power system in 2019. These batteries will provide twice the kilowatt-hours than their predecessors at a fraction of the mass, and are expected to operate for at least ten years. In addition, we have a major role in Boeing’s CST-100 Starliner spacecraft for NASA, which will usher in a new era of commercial human spaceflight by ferrying astronauts to and from the ISS for NASA. The Starliner Orbital Flight Test ("OFT") demonstration mission launched on December 20, 2019, from Cape Canaveral Air Force Station in Florida; NASA and Boeing are currently reviewing the test results.
Our propulsion hardware supported all phases of the OFT mission, from launch on ULA's Atlas V launch vehicle with two RL10 engines powering the upper stage for orbital maneuvering to atmospheric re-entry with our thrusters. Prior to OFT, Boeing conducted a successful Starliner Pad Abort Test, during which the service module demonstrated its ability to separate itself from a simulated launch vehicle and propel itself and the crew module approximately one mile high and one mile downrange, and then separate from the crew module in a controlled manner using our propulsion.
We continued to mature critical technologies for our nation’s next generation of advanced hydrocarbon engines for future high-performance launch systems. In February 2016, the USAF awarded Aerojet Rocketdyne a Rocket Propulsion System Other Transaction Agreement ("OTA"), a public-private partnership, to develop the AR1 engine. Following the decision by the Launch Services Program competitors not to incorporate the AR1 in their new launch vehicle designs, we signed a modification to the existing OTA to design, build, and assemble only one AR1 engine.
Also in 2019, Aerojet Rocketdyne and Firefly Aerospace, Inc. ("Firefly") announced a cooperative agreement that combines the capabilities of both companies to provide flexible, sustainable and highly competitive space access solutions. This partnership with Firefly creates an opportunity to expand our customer base and represents a new paradigm for engagement with other emerging entrants as well.
In addition, along with NASA, Ball Aerospace and the Air Force Research Laboratory ("AFRL"), we supported the Green Propellant Infusion Mission, which is conducting a thirteen-month demonstration of a "green" propellant developed by the AFRL. The revolutionary mission is examining if this new propellant can improve overall efficiency while reducing the handling concerns associated with traditional spacecraft propellants.
A subset of our key space programs include: (i) RL10 and RS-68 engines/boosters that power the NSSL, (ii) RS-25 main engine for NASA’s SLS for deep space exploration, propulsion for the Orion human space capsule and the Starliner Commercial Crew Transportation Capability capsule, (iii) power systems for ISS and (iv) multiple in-space electric and chemical propulsion systems to provide orbit raising and satellite station positioning.
Defense. We specialize in the development and production of propulsion systems for defense applications including both solid and liquid propellant based systems, along with air-breathing (ramjet) systems for missile applications. The majority of these systems are the primary axial propulsion for missile systems. The breadth of our products includes tactical missiles, missile defense boosters and large solid-propellant boosters for a variety of applications.
We also develop and manufacture liquid and solid divert and attitude control ("DACs") propulsion systems for missile defense applications. These are complex systems that provide multi-directional thrust and variable thrust levels to steer or control an intercept missile. Additionally, we develop and manufacture post-boost propulsion systems for strategic missiles. These systems provide directional control for critical missile defense interceptors and for ground and sea-based strategic missiles.
We also design, develop, and produce warhead/lethality systems for tactical missiles. Our tactical armament products have been successfully fielded on multiple active U.S. and international weapon system platforms.

2




During 2019, we continued to expand our strong legacy propulsion franchises on the Standard Missile, Patriot Advanced Capability-3 ("PAC-3"), Terminal High Altitude Area Defense ("THAAD") and Guided Multiple Launch Rocket System ("GMLRS") missile programs. These franchise programs continue to be globally deployed in support of U.S. and allied armed forces.
As part of our continuing Competitive Improvement Program, we built on the previous transition of the energetic production of the Standard Missile-3 DACs and THAAD Boost Motor from our Sacramento, California facility to our Orange County, Virginia, and Camden, Arkansas, facilities. In 2019, we initiated recurring production activity at our new Advanced Manufacturing Facility in Huntsville, Alabama. This facility is now producing high-value non-energetic sub-assemblies for Standard Missile and THAAD.
In the hypersonic propulsion technology area, we added another competitively selected award for the Axial Upper Stage ("AUS") component technologies program from the MDA, in addition to last year's selection for the Hypersonic Conventional Strike Weapon ("HCSW") with Lockheed Martin and Operational Fires ("OpFires") with the U.S. Defense Advanced Research Projects Agency ("DARPA"). Significant development activity on all three programs occurred during 2019. Our work on complementary air-breathing propulsion (ramjet/scramjet) for hypersonic missiles continued in 2019 with completion of flight-ready engines.
In 2019, we were selected by Northrop Grumman Corporation ("Northrop") as their propulsion supplier for a large solid-propellant stage and the post-boost propulsion system of their Ground Based Strategic Deterrent ("GBSD") offering to the USAF. Northrop submitted the only offer for the USAF GBSD program, and the award is expected during the second half of 2020. The GBSD solid stage win continues our presence in the large solid rocket motor market segment.
Finally, in 2019, our Aerojet Rocketdyne Coleman Aerospace ("Coleman") business successfully completed the first mission of the C-17 aircraft deployed medium-range ballistic missile ("MRBM") target. Coleman also continued to expand its scope on the MRBM missile target program with the development of new subsystems that will allow target simulation of significantly more advanced threats.
A subset of our key defense programs include: Boosters and Solid DACs for the Navy’s Standard Missile family, Booster and Liquid DACs for THAAD, PAC-3, GMLRS, Stinger, Javelin, Tactical Tomahawk, Army Tactical Missile Systems ("ATACMS"), Tube-launched Optically-tracked Wire-guided ("TOW") warhead, and HAWK.
Information concerning the percentage of net sales attributable to our significant programs appears in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption "Major Customers."
Competition
The competitive dynamics of our business vary by product type and customer, but we experience many of the same challenges as the broader aerospace and defense industry. The large majority of products we manufacture are highly complex, technically sophisticated and extremely difficult or hazardous to build, which require rigorous manufacturing systems and highly specialized manufacturing equipment. While historically these factors posed substantial barriers to entry, modern design tools and manufacturing techniques (such as additive manufacturing) are enabling new entrants with the funding to enter this industry, leading to increased competition. To date, competition from new entrants has been limited to a few participants who tend to be narrowly focused on products that are sub-elements of our overall product portfolio. For example, new entrants such as SpaceX and Blue Origin, who have developed liquid fuel propulsion capabilities are primarily focused on the development of space propulsion systems for space launch vehicles and are not pursuing or participating in the missile defense or tactical propulsion products that make up a substantial portion of our overall business. These new competitors have signaled their intent to compete primarily on price and are willing to take on substantial risk exposure on development programs with unproven market potential and are, therefore, disrupting existing cost paradigms and manufacturing methodologies. For the in-space propulsion market, we also see a number of new startups entering the market in both small chemical propulsion and small electric propulsion systems targeted at the rapidly expanding small satellite market.
The following table lists the primary participants in the propulsion market (in alphabetical order):
Company
Parent
Propulsion Type
Aerojet Rocketdyne
Aerojet Rocketdyne Holdings, Inc.
Solid, liquid, air-breathing, electric
Airbus Defence and Space
Airbus
Solid, liquid, electric
Avio
Avio S.p.A
Solid, liquid
Busek
Busek Co. Inc.
Electric
Blue Origin LLC
Blue Origin
Liquid
Electron Technologies, Inc.
L-3 Communications Corporation
Electric
General Dynamics OTS
General Dynamics
Solid
Moog Inc.
Moog Inc.
Liquid
Nammo Talley
Nammo Talley
Solid, liquid
Northrop Grumman Innovation Systems
Northrop Grumman Corporation
Solid, liquid, air-breathing
Safran
Safran
Solid, liquid, electric
SpaceX
SpaceX
Liquid, electric

3




Industry Overview
Our primary aerospace and defense customers include the DoD and its agencies, NASA, and the prime contractors that supply products to these customers. We rely on U.S. government spending on aerospace and defense products and systems and our backlog depends, in large part, on continued funding by the U.S. government for the programs in which we are involved. These funding levels are not generally correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this type of funding. Moreover, although our contracts will be performed over a period of several years, the U.S. Congress must appropriate funds for a given program and the U.S. President must sign into law such appropriations legislation each government fiscal year ("GFY") that may significantly increase, decrease or eliminate, funding for a program. A decrease in DoD and/or NASA expenditures, the elimination or curtailment of a material program in which we are or hope to be involved, or changes in payment patterns of our customers as a result of changes in U.S. government outlays, could have a material adverse effect on our operating results, financial condition, and/or cash flows.
In December of 2019, the U.S. President signed Public Law 116-93, which included full-year appropriations bills for GFY 2020 for the DoD and NASA, and all other government agencies. The bill includes topline funding of $695.6 billion for defense spending, an increase of $20.7 billion above GFY 2019. The NASA portion of the bill includes topline funding of $22.6 billion, $1.1 billion above GFY 2019.
Major Customers
Information concerning major customers appears in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption "Major Customers."
Contract Types
Research and development ("R&D") contracts are awarded during the early stages of a program’s development. Production contracts provide for the production and delivery of mature products for operational use. Aerojet Rocketdyne’s contracts are largely categorized as either "fixed-price" (largely used by the U.S. government for production-type contracts) or "cost-reimbursable" (largely used by the U.S. government for development-type contracts). During 2019, approximately 61% of our net sales were from fixed-price contracts and 39% from cost-reimbursable contracts.  
Fixed-price contracts are typically (i) firm fixed-price, (ii) fixed-price-incentive fee, or (iii) fixed-price level of effort contracts. For firm fixed-price contracts, Aerojet Rocketdyne performs work for a fixed price and realizes all of the profit or loss resulting from variations in costs during contract performance. For fixed-price-incentive fee contracts, Aerojet Rocketdyne receives increased or decreased fees (or profits) based upon actual performance against established targets or other criteria. For fixed-price level of effort contracts, Aerojet Rocketdyne generally receives a structured fixed price per labor hour, dependent upon the customer’s labor hour needs. All fixed-price contracts present the risk of unreimbursed cost overruns potentially resulting in lower than expected contract profit margin and losses.
Cost-reimbursable contracts are typically (i) cost plus fixed fee, (ii) cost plus incentive fee, or (iii) cost plus award fee contracts. For cost plus fixed fee contracts, Aerojet Rocketdyne typically receives reimbursement of its costs, to the extent the costs are allowable under contractual and regulatory provisions, in addition to receiving a fixed fee. For cost plus incentive fee contracts and cost plus award fee contracts, Aerojet Rocketdyne receives adjustments to the contract fee, within designated limits, based on actual results as compared with contractual targets for factors such as cost, performance, quality, and schedule.
In addition, OTA contracts are becoming more prevalent in the developmental stages of U.S. government procurements. An OTA is a special vehicle used by federal agencies for obtaining or advancing R&D or prototypes. The U.S. government's procurement regulations and certain procurement statutes do not apply to OTAs, and accordingly, other transaction authority gives agencies the flexibility necessary to develop agreements tailored to a particular transaction. Generally, our sales and backlog figures do not include work we have under contracts obligated by the customer under an OTA as our share of the contract costs are recognized as company-funded R&D.
Government Contracts and Regulations
U.S. government contracts generally are subject to Federal Acquisition Regulations ("FAR"), agency-specific regulations that supplement FAR, such as the DoD’s Defense Federal Acquisition Regulations, and other applicable laws and regulations. These regulations impose a broad range of requirements, many of which are unique to U.S. government contracting, including various procurement, import and export, security, contract pricing and cost, contract termination and adjustments, mandatory disclosure, and audit requirements. Our failure to comply with these regulations and requirements could result in reductions of the value of contracts, contract modifications or termination, inability to bill and collect receivables from customers, and the assessment of penalties and fines that could lead to suspension or debarment from U.S. government contracting or subcontracting. In addition, as a U.S. government contractor, we are subject to routine audits, reviews, and investigations by the Defense Contract Audit Agency ("DCAA"), the Defense Contract Management Agency, and other similar U.S. government agencies. Such reviews include but are not limited to our contract performance, compliance with applicable laws, regulations, and standards as well as the review of the adequacy of our accounting systems, purchasing systems, property management systems, estimating systems, earned value management systems, and material management and accounting systems.
The U.S. government’s ability to unilaterally modify or terminate a contract or to discontinue funding for a particular program at any time could have a material adverse effect on our operating results, financial condition, and/or cash flows. The cancellation of a contract, if terminated for cause, could also subject us to liability for the excess costs incurred by the U.S. government in procuring undelivered items from another source. If terminated for convenience, our recovery of costs would

4




be limited to amounts already incurred or committed (including severance costs for terminated employees), and our profit would be limited based on the work completed prior to termination.
Additional information about the risks relating to government contracts and regulations appears in "Risk Factors" in Item 1A of this Report.
Backlog
Information concerning backlog appears in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption "Backlog."
Seasonality
Aerojet Rocketdyne’s business is not subject to predictable seasonality. Primary factors affecting the timing of our sales include the timing of U.S. government awards, the availability of U.S. government funding, contractual product delivery requirements, and customer acceptances.
Research and Development
We view R&D efforts as critical to maintaining our leadership position in markets in which we compete. Our R&D is primarily supported by customer funding. Our company-funded R&D efforts include expenditures for technical activities that are vital to the development of new products, services, processes or techniques, as well as those expenses for significant improvements to existing products or processes. See Note 1(s) in the consolidated financial statements in Item 8 of this Report for additional information on R&D expenditures.
Suppliers and Raw Materials
The national aerospace supply base continues to consolidate due to economic, environmental, and marketplace circumstances beyond our control. The loss of key qualified suppliers of technologies, components, and materials can cause significant disruption to our program performance and cost.
 Availability of raw materials and supplies has been generally sufficient. We sometimes are dependent, for a variety of reasons, upon sole-source or qualified suppliers and have, in some instances in the past, experienced difficulties meeting production and delivery obligations because of delays in delivery or reliance on such suppliers. Further, as a U.S. government contractor, we are often limited to procuring materials from certain suppliers capable of meeting rigorous customer and government specifications.
Additional information about the risks relating to suppliers and raw materials appears in "Risk Factors" in Item 1A of this Report.
Intellectual Property
Where appropriate, Aerojet Rocketdyne obtains patents in the U.S. and other countries for new and useful processes, machines, manufactures or compositions of matter, or any new and useful improvements thereof relating to its products and services. Our patents are maintained through the statutory limit of time, which is typically 20 years from the date of filing of the patent application, where the claimed invention has value in the markets in which we compete. We rely on trade secret protection for financial, technical and personnel information that provides an economic competitive advantage by virtue of not being known by the relevant public and ordinarily require employees to sign confidentiality agreements as a condition to employment. If properly protected, trade secrets can be maintained in perpetuity. Aerojet Rocketdyne takes reasonable steps to prevent disclosure of its trade secrets in order to maintain protection under applicable state and federal laws. As our products and services typically embody complex systems that include many technologies, we do not believe any single existing patent, license, or trade secret is material to our success.
Real Estate
We own 11,394 acres of land adjacent to U.S. Highway 50 between Rancho Cordova and Folsom, California east of Sacramento ("Sacramento Land"). Acquired in the early 1950s and historically used for our aerospace and defense operations, large portions were used solely to provide safe buffer zones around hazardous operations. Modern changes in propulsion technology coupled with the relocation of our propulsion operations led us to determine large portions of the Sacramento Land were no longer needed for operations. Consequently, our plan has been to re-entitle the Sacramento Land for new uses and explore various opportunities to optimize its value.
The Sacramento Land is made up of 5,203 acres previously used for our aerospace and defense operations, 628 acres available for future entitlement, and 5,563 acres for future development under the brand name "Easton". Easton has 3,904 acres that are fully entitled. The term "entitlement" is generally used to denote the required set of regulatory approvals required to allow land to be zoned for new requested uses. Required regulatory approvals vary with each jurisdiction and each zoning proposal and may include permits, land use master plans, zoning designations, state and federal environmental documentation, and other regulatory approvals unique to the land. The entitlement and development process in California is long and uncertain with approvals required from various authorities, including local jurisdictions, and in select projects, permits required by federal agencies such as the U.S. Army Corps of Engineers and the U.S. Department of Interior, Fish and Wildlife Service, and others prior to construction.
As Easton continues to execute re-entitlement and pre-development activities, we are pursuing all monetization options and are exploring how to maximize value from Easton. Value creation and monetization may include outright land sales and/or joint ventures with real estate developers, residential builders, and/or other third parties. We believe the long-term prospect for

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the Sacramento region represents an attractive and affordable alternative to the San Francisco Bay Area and other large metropolitan areas of California.
The following table summarizes the Sacramento Land (in acres):  
 
 
Environmentally
Unrestricted 
 
Environmentally
Restricted (1)
 
Total
 
Entitled
Glenborough and Easton Place
 
1,043

 
349

 
1,392

 
1,392

Rio del Oro
 
1,818

 
491

 
2,309

 
2,309

Westborough
 
1,387

 
272

 
1,659

 

Hillsborough (2)
 
51

 
97

 
148

 
148

Office Park and Auto Mall
 
47

 
8

 
55

 
55

     Total Easton acreage
 
4,346

 
1,217

 
5,563

 
3,904

Former operations land (3)
 
24

 
5,179

 
5,203

 
 

Land available for future entitlement (4)
 
386

 
242

 
628

 
 

      Total Sacramento Land
 
4,756

 
6,638

 
11,394

 
 

_________
(1)
Indicates land subject to restrictions imposed by state and/or federal regulatory agencies because of our historical propulsion system testing and manufacturing activities. We are actively working with the various regulatory agencies to have the restrictions removed as early as practicable, and the solutions to use these lands within Easton have been accounted for in the various land use plans and granted entitlements. See Note 9(b) in the consolidated financial statements in Item 8 of this Report for a discussion of the federal and/or state environmental restrictions affecting portions of the Sacramento Land.
(2) The remaining 148 acres designated in Hillsborough will be transferred, per the completed purchase and sale contract from 2015, when the required environmental remediation work is completed.
(3)
In 2019, we completed our manufacturing commitments in our Sacramento, California facility and transitioned the Sacramento site to host our shared services function. See additional information in Note 12 in the consolidated financial statements in Item 8 of this Report.
(4)
We believe it will be several years before any of this excess Sacramento Land is available for future change in entitlement. Some of this excess land is outside the current Urban Services Boundary established by the County of Sacramento and all of it is far from existing infrastructure, making it uneconomical to pursue entitlement for this land at this time.
Leasing 
We currently lease office space in Sacramento to various third parties that generated $7.5 million in revenue in 2019.
Environmental Matters
Our current and former business operations are subject to, and affected by, federal, state, and local environmental laws and regulations relating to the discharge, treatment, storage, disposal, investigation, and remediation of certain materials, substances, and wastes. Our policy is to conduct our business with due regard for the preservation and protection of the environment. We continually assess compliance with these regulations, and we believe our current operations are materially in compliance with all applicable environmental laws and regulations.
Under existing U.S. environmental laws, Potentially Responsible Parties ("PRPs"), are jointly and severally liable, and therefore we are potentially liable to the U.S. government or other third parties for the full cost of remediating the contamination at our facilities or former facilities or at third-party sites where we have been designated as a PRP by the Environmental Protection Agency or state environmental agencies. The nature of environmental investigation and cleanup activities requires significant management judgment to determine the timing and amount of any estimated future costs that may be required for remediation measures. Further, environmental standards change from time to time. However, we perform quarterly reviews of these matters and accrue for costs associated with environmental remediation when it becomes probable that a liability has been incurred and the amount of the liability, usually based on proportionate sharing, can be reasonably estimated. These liabilities have not been discounted to their present value as the amounts and timing of cash payments are not fixed or reliably determinable.
On January 12, 1999, we reached a settlement agreement ("Global Settlement") with the U.S. government covering environmental costs associated with our Sacramento site and our former Azusa site. Pursuant to the Global Settlement, we can recover up to 88% of our 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 Electronics and Information Systems 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.

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Operation and maintenance costs associated with environmental compliance and management of contaminated sites are a normal, recurring part of operations. Most of our environmental costs are incurred by our Aerospace and Defense segment, and certain of these future costs are allowed to be included in our contracts with the U.S. government.
The inclusion of environmental costs in our contracts with the U.S. government impacts our competitive pricing; however, we believe that this impact is mitigated by driving improvements and efficiencies across our operations as well as our ability to deliver innovative and quality products to our customers.
We did not incur material capital expenditures for environmental control facilities in 2019 nor do we anticipate any material capital expenditures in 2020 and 2021. See Management’s Discussion and Analysis in Part II, Item 7 "Environmental Matters" of this Report for additional information.
Additional information on the risks related to environmental matters can be found under "Risk Factors" in Item 1A of this Report, including the material effects on compliance with environmental regulations that may impact our competitive position and operating results.
Employees
As of December 31, 2019, 9% of our 4,814 employees were covered by collective bargaining agreements. We believe that our relations with our employees and unions are good.
Item 1A. Risk Factors
Reductions, delays or changes in U.S. government spending, including failure to timely appropriate funding, may reduce, delay or cancel certain programs in which we participate and as a result adversely affect our financial results.
Our primary aerospace and defense customers include the DoD and its agencies, NASA, and the prime contractors that supply products to these customers. We rely on particular levels of U.S. government spending on propulsion systems for defense, space and armament systems for precision tactical weapon systems and munitions applications, and our backlog depends, in a large part, on continued funding by the U.S. government for the programs in which we are involved. These spending levels are not generally correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this type of spending. Moreover, although our contracts often contemplate that our services will be performed over a period of several years, the U.S. President must propose and Congress must appropriate funds for a given program each GFY and may significantly change, increase, reduce or eliminate, funding for a program. The failure by Congress to approve future budgets on a timely basis could delay procurement of our products and services and cause us to lose future sales. If a prolonged government shutdown were to occur, it could result in program cancellations, disruptions and/or stop work orders and could limit the U.S. government’s ability to make timely payments, and our ability to perform on our U.S. government contracts.
In addition, a decrease in the DoD and/or NASA expenditures, the elimination or curtailment of a material program in which we are involved, or changes in payment patterns of our customers as a result of changes in U.S. government spending, could have a material adverse effect on our operating results, financial condition, and/or cash flows.
The cancellation or material modification of one or more significant contracts could adversely affect our financial results.
Sales, directly and indirectly, to the U.S. government and its agencies accounted for approximately 96% of our total net sales in 2019. Our contracts typically permit the U.S. government to unilaterally modify or terminate a contract or to discontinue funding for a particular program at any time. The cancellation of a contract, if terminated for cause, could also subject us to liability for the excess costs incurred by the U.S. government in procuring undelivered items from another source. If terminated for convenience, our recovery of costs would be limited to amounts already incurred or committed (including severance costs for terminated employees), and our profit would be limited based on the work completed prior to termination.
In addition, termination or suspension of any of our significant commercial contracts could result in the loss of future sales and unreimbursable expenses that could have a material adverse effect on our operating results, financial condition, and/or cash flows. Furthermore, the termination of any such contracts for default could also have a material adverse effect on our reputation and ability to obtain new business in the future.
If we experience cost overruns on our contracts, we would have to absorb the excess costs which could adversely affect our financial results and our ability to win new contracts.
In 2019, approximately 61% of our net sales were from fixed-price contracts, most of which are in mature production mode. Under fixed-price contracts, we agree to perform specified work for a fixed price and realize all of the profit or loss resulting from variations in the costs of performing the contract. As a result, all fixed-price contracts involve the inherent risk of unreimbursed cost overruns. To the extent we incur unanticipated cost overruns on a program or platform subject to a fixed-price contract, our profitability would be adversely affected. Future profitability is subject to risks including the ability of suppliers to deliver components of acceptable quality on schedule and the successful implementation of automated tooling in production processes.
In 2019, approximately 39% of our net sales were from cost reimbursable contracts. Under cost reimbursable contracts, we agree to be reimbursed for allowable costs and paid a fee. When our costs are in excess of the final target cost, fees and our margin may be adversely affected. If our costs exceed authorized contract funding or do not qualify as allowable costs under

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applicable regulations, those costs are expensed, and we will not be reimbursed for those costs. Cost overruns may adversely affect our financial performance and our ability to win new contracts.
Also, certain costs such as those related to charitable contributions, advertising, interest expense, and public relations are generally not allowable, and therefore not recoverable through U.S. government contracts. Unexpected variances in unallowable costs may adversely affect our financial performance.
We use estimates when accounting for certain contracts and changes in these estimates may have a significant impact on our financial results.
Our quarterly and annual sales are affected by a variety of factors that may lead to significant variability in our operating results. In our Aerospace and Defense segment, sales earned under long-term contracts are recognized either on a cost basis, when deliveries are made, or when contractually defined performance milestones are achieved. The timing of deliveries or milestones may fluctuate from quarter to quarter. We evaluate the contract value and cost estimates for performance obligations at least quarterly, and more frequently when circumstances change significantly which is described in more detail in Note 1(r) in the consolidated financial statements in Item 8 of this Report. Changes in estimates and assumptions related to the status of certain long-term contracts which could have a material adverse effect on our operating results, financial condition, and/or cash flows.
Our success and growth depends on our ability to execute long-standing programs and periodically secure new contracts in a competitive environment.
Our sales are primarily derived from long-standing contracts (often sole source) where we are the long-term incumbent. The challenge is to successfully utilize our technical, engineering, manufacturing, and management skills to execute these programs for the customer, to continue to innovate and refine our solutions, and to offer the customer increasing affordability in an era of fiscal restraint. If we are unable to successfully execute these long-standing programs, our ability to retain existing customers and attract new customers may be impaired.
In addition, we continue to be subject to intense competition in certain sectors. For example, we face increasing competition from emerging spaceflight companies such as SpaceX and Blue Origin, who have developed liquid fuel propulsion capabilities which are primarily focused on the development of space propulsion systems for heavy lift launch vehicles. For the in-space propulsion market, we also see a number of new startups entering the market in both small chemical propulsion and small electric propulsion systems targeted at the rapidly expanding small satellite market. The U.S. government also has its own manufacturing capabilities in some areas. We may be unable to compete successfully with our competitors and our inability to do so could result in a decrease in sales, profits, and cash flows that we historically have generated from certain contracts. Further, the U.S. government may open to competition programs on which we are currently the sole supplier, which could have a material adverse effect on our operating results, financial condition, and/or cash flows.
If our subcontractors or suppliers fail to perform their contractual obligations, our contract performance and our ability to win new contracts may be adversely affected.
We rely on subcontractors to perform a portion of the services we agree to provide our customers, and on suppliers to provide raw materials and component parts for our contract performance. A failure by one or more of our subcontractors or suppliers to satisfactorily provide on a timely basis the agreed-upon services or supplies may affect our ability to perform our contractual obligations. Deficiencies in the performance of our subcontractors and/or suppliers could result in liquidated damages or our customers terminating their contract with us for default. A termination for default could expose us to liability and adversely affect our financial performance and our ability to win new contracts.
Our Aerospace and Defense segment is subject to procurement and other related laws and regulations inherent in contracting with the U.S. government, and non-compliance could adversely affect our financial results.
In the performance of contracts with the U.S. government, we operate in a highly regulated environment and are routinely audited and reviewed by the U.S. government and its agencies, such as the DCAA. These agencies review performance under our contracts, our cost structure and our compliance with applicable laws, regulations and standards, as well as the adequacy of, and our compliance with, our internal control systems and policies. Systems that are subject to review include, but are not limited to, our accounting systems, purchasing systems, property management systems, estimating systems, earned value management systems, and material management and accounting system. Any costs ultimately found to be unallowable or improperly allocated to a specific contract will not be reimbursed or must be refunded if already reimbursed. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties, sanctions or suspension or debarment from doing business with the U.S. government. Whether or not illegal activities are alleged, the U.S. government also has the ability to decrease or withhold certain payments when it deems systems subject to its review to be inadequate. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. If such actions were to result in suspension or debarment, this could have a material adverse effect on our business.
These laws and regulations provide for ongoing audits and reviews of incurred costs as well as contract procurement, performance and administration. The U.S. government may, if it deems appropriate, conduct an investigation into possible illegal or unethical activity in connection with these contracts. Investigations of this nature are common in the aerospace and defense industry, and lawsuits may result. In addition, the U.S. government and its principal prime contractors periodically investigate the financial viability of their contractors and subcontractors as part of its risk assessment process associated with the award of new contracts. If the U.S. government or one or more prime contractors were to determine that we were not financially viable, our ability to continue to act as a U.S. government contractor or subcontractor would be impaired.  

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The release, unplanned ignition, explosion, or improper handling of dangerous materials used in our business could disrupt our operations and adversely affect our financial results.
Our business operations involve the handling, production, and disposition of potentially explosive and ignitable energetic materials and other dangerous chemicals, including motors and other materials used in rocket propulsion. The handling, production, transport, and disposition of hazardous materials could result in incidents that temporarily shut down or otherwise disrupt our manufacturing operations and could cause production delays. A release of these chemicals or an unplanned ignition or explosion could result in death or significant injuries to employees and others. Material property damage to us and third parties could also occur. The use of these products in applications by our customers could also result in liability if an explosion, unplanned ignition or fire were to occur. Extensive regulations apply to the handling of explosive and energetic materials, including but not limited to, regulations governing hazardous substances and hazardous waste. The failure to properly store and ultimately dispose of such materials could create significant liability and/or result in regulatory sanctions. Any release, unplanned ignition or explosion could expose us to adverse publicity or liability for damages or cause production delays, any of which could have a material adverse effect on our operating results, financial condition, and/or cash flows.
Disruptions in the supply of key raw materials, difficulties in the supplier qualification process or increases in prices of raw materials could adversely affect our financial results.
We use a significant quantity of raw materials that are subject to market fluctuations and government regulations. Further, as a U.S. government contractor, we are often required to procure materials from suppliers capable of meeting rigorous customer and government specifications. As market conditions change for these companies, they often discontinue materials with low sales volumes or profit margins. We are often forced to either qualify new materials or pay higher prices to maintain the supply. We may be unable to establish replacement materials and secure customer funding to address specific qualification needs of the programs.
The supply of ammonium perchlorate, a principal raw material used in solid propellant for many years, has been limited to a domestic independent single source that supplies the majority of the domestic solid propellant industry, and actual pricing is based on the total industry demand. The completion of the Space Shuttle Program reduced demand, resulting in significant unit price increases. The abnormal escalation pricing language in our contracts and proposals may not be successful in passing the entire price increase on to the customer or may have a reduced profit margin as a result of any such price increase. Efforts to minimize impacts through contracting levers may not be successful.
We are also impacted, as is the rest of the industry, by fluctuations in the sustained availability, prices and lead-times of raw materials used in production on various fixed-price contracts, particularly on multi-year programs. We continue to experience volatility in the price and lead-times of certain commodity metals, electronic components, and constituent chemicals. Additionally, we may not be able to continue to negotiate with our customers for economic and/or price adjustment clauses tied to obsolete materials and commodity indices to reduce program impact. The DoD also continues to rigorously enforce the provisions of the "Berry Amendment" which imposes a requirement to procure certain strategic materials critical to national security only from U.S. sources. Similarly, European laws and regulations that apply to our business have additional strategic material sourcing requirements. Cost remains a concern as this industry continues to quote "price in effect" at time of shipment terms, increasing the cost risk to our programs.
An emerging challenge to the extended supply chain is U.S. government contracting regulations to comply with stringent cyber security regulations that may influence the cost of material and services on U.S. government contracts. Further, a relatively recent MDA requirement to pre-approve supplier background screening processes of personnel that will have access to "controlled unclassified information" and separately approve any supplier personnel with dual citizenship has been challenging due to delays at MDA in approving requests which will potentially impact the award of subcontracts while approval is pending. Cyber security requirements will prove to be a continuing challenge as some small key/critical suppliers do not have the capability or infrastructure to support the requirements.
We are monitoring for significant changes across our supply chain due to increased tariffs on materials imported directly, or significant effects tariffs had on domestic materials indirectly.
Prolonged disruptions in the supply of any of our key raw materials, difficulty qualifying new sources of supply, implementing use of replacement materials or new sources of supply, and/or a continuing volatility in the prices of raw materials could have a material adverse effect on our operating results, financial condition, and/or cash flows.
Cyber security incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.
We routinely defend against various cyber and other security threats against our defenses to protect the confidentiality, integrity and availability of our information technology infrastructure, supply chain, business or customer information and other threats. We are also subject to similar security threats at customer sites that we operate and manage as a contractual requirement.
The threats we face range from attacks common to most industries to more advanced and persistent, highly organized adversaries, insider threats and other threat vectors targeting us and other defense and aerospace companies; because we protect national security information. In addition, cyber threats are evolving, growing in their frequency and include, but are not limited to, malicious software, destructive malware, attempts to gain unauthorized access to data, disruption or denial of service attacks, and other electronic security breaches that could lead to disruptions in mission critical systems, unauthorized release of confidential, personal or otherwise protected information (ours or that of our employees, customers or partners), and corruption

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of data, networks or systems. We also could be impacted by cyber threats or other disruptions or vulnerabilities found in products we use or in our partners’ or customers’ systems that are used in connection with our business.
If we are unable to protect sensitive information or the integrity of our systems, our customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures. There can be no assurance that the variety of efforts, procedures and controls we deploy to monitor and minimize the likelihood and impact of adverse cyber security incidents will be sufficient. The costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means. The occurrence of any of these events could adversely affect our internal operations, the services we provide to our customers, our future financial results, or our reputation. Such events could also result in the loss of competitive advantages derived from our R&D efforts or other intellectual property, early obsolescence of our products and services, or contractual penalties. Moreover, we may be required to expend significant additional resources to modify our cyber security protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications, and we may be subject to litigation and financial losses.
Tax changes could affect our effective tax rate and future profitability
Our effective tax rate for 2019 was 26.5% compared with 27.2% for 2018. Changes in applicable U.S. tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, could affect our tax expense and profitability. In December 2017, the Tax Cuts and Jobs Act of 2017 ("Tax Act") was signed into law and the U.S. Department of Treasury continues to release new and clarifying guidance on certain provisions of the Tax Act, which we continue to evaluate during the period of enactment. This new guidance could require us to make adjustments to amounts we have previously recorded, which could have a material adverse effect on our operating results, financial condition, and/or cash flows.  
Our Competitive Improvement Program ("CIP") may not be successful in aligning our operations to current market conditions.
During 2015, we initiated the first phase ("Phase I") of our CIP comprised of activities and initiatives aimed at reducing costs in order for us to continue to compete successfully. Phase I was comprised of three major components: (i) facilities optimization and footprint reduction; (ii) product affordability; and (iii) reduced administrative and overhead costs. On April 6, 2017, the Board of Directors approved the second phase ("Phase II") of our previously announced CIP. Pursuant to Phase II, we expanded CIP and further consolidated our Sacramento, California, and Gainesville, Virginia sites, while we centralized and expanded our existing presence in Huntsville, Alabama. We have incurred and will continue to incur significant expenditures to implement the CIP. The CIP may be insufficient to successfully restructure our operations through, among other ways, the relocation of programs or the inability to transition institutional program knowledge, to conform with the changes affecting our industry, and may disrupt our operations. See additional information in Note 12 in the consolidated financial statements in Item 8 of this Report.
Our pension plans are currently underfunded and we expect to be required to make cash contributions in future periods, which may reduce the cash available for our businesses.
As of December 31, 2019, the pension assets, projected benefit obligations, and unfunded pension obligation were $932.5 million, $1,349.8 million, and $417.3 million, respectively. In 2020, we expect to make contributions of approximately $46.0 million to our tax-qualified defined benefit pension plan, including $13.9 million of cash and $32.1 million of prepayment credits. During 2019, we used $38.9 million of prepayment credits to fund our tax-qualified defined benefit pension plan. We generally are able to recover contributions related to our tax-qualified defined benefit pension plan as allowable costs on our U.S. government contracts, but there are differences between when we contribute to our tax-qualified defined benefit pension plan under pension funding rules and when it is recoverable under Cost Accounting Standards ("CAS").
The funded status of our pension plans may be adversely affected by the investment experience of the plans' assets, by any changes in U.S. law and by changes in the statutory interest rates used by tax-qualified pension plans in the U.S. to calculate funding requirements. Accordingly, if the performance of our plans' assets does not meet our assumptions, if there are changes to the Internal Revenue Service ("IRS") regulations or other applicable law or if other actuarial assumptions are modified, our future contributions to our underfunded pension plans could be higher than we expect.
Additionally, the level of returns on retirement benefit assets, changes in interest rates, increases in Pension Benefit Guaranty Corporations premiums, changes in regulations, changes in mortality rate assumptions, and other factors affect our financial results. The timing of recognition of retirement benefits expense or income in our financial statements differs from the timing of the required funding under the Pension Protection Act or the amount of funding that can be recorded in our overhead rates through our U.S. government contracting business. Significant cash contributions in future periods could materially adversely affect our business, operating results, financial condition, and/or cash flows.
The level of returns on retirement benefit assets, changes in interest rates, changes in legislation, and other factors affect our financial results.
Our earnings are positively or negatively impacted by the amount of expense or income we record for our employee retirement benefit plans. We calculate the expense for the plans based on actuarial valuations. These valuations are based on assumptions that we make relating to financial market and other economic conditions. Changes in key economic indicators result in changes in the assumptions we use. The key assumptions used to estimate retirement benefits expense for the following year are the discount rate and expected long-term rate of return on assets. Our pension expense or income can also be affected by legislation and other government regulatory actions.

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We may expand our operations through acquisitions, which may divert management’s attention and expose us to unanticipated liabilities and costs. Also, acquisitions may increase our non-reimbursable costs. We may experience difficulties integrating any acquired operations, and we may incur costs relating to acquisitions that are never consummated.
Our business strategy may lead us to expand our Aerospace and Defense segment through acquisitions. However, our ability to consummate any future acquisitions on terms that are favorable to us may be limited by U.S. government regulations, the number of attractive acquisition targets, internal demands on our resources, and our ability to obtain financing. Our success in integrating newly acquired businesses will depend upon our ability to retain key personnel, avoid diversion of management’s attention from operational matters, implement internal controls, integrate general and administrative services and key information processing systems and, where necessary, re-qualify our customer programs. In addition, future acquisitions could result in the incurrence of additional debt, costs, and/or contingent liabilities. We may also incur costs and divert management attention to acquisitions that are never consummated. Integration of acquired operations may take longer, or be more costly or disruptive to our business, than originally anticipated.
There may be liabilities of the acquired companies that we fail to, or were unable to, discover during our due diligence investigation of each business that we have acquired or may acquire and for which we, as a successor owner, may be responsible. Our efforts to minimize the impact of these types of potential liabilities through indemnities and warranties from sellers in connection with acquisitions may not fully cover the liabilities due to limitations in scope, amount or duration, financial limitations of the indemnitor or warrantor, or other reasons.
Our business and operations could be adversely impacted in the event of a failure of our information technology infrastructure or failure to perform by our third party service providers.
We are dependent on various critical information technologies, including cyber security functions, administered and supported by third party service providers. The use of third party service providers can cause unexpected security vulnerabilities, loss of control and additional costs in the delivery of information services and data storage. Any disruption of our information technology infrastructure may cause operational stoppages, fines, penalties, diminished competitive advantages through reputational damages and increased operational costs. Additionally, we may incur additional costs to comply with our customers', including the U.S. government's, increased cyber security protections and standards in our products.
 We may experience warranty claims for product failures, schedule delays or other problems with existing or new products and systems.
Many of the products we develop and manufacture are technologically advanced systems that must function under demanding operating conditions. The sophisticated and rigorous design, manufacturing and testing processes and practices we employ do not entirely prevent the risk that we may not be able to successfully launch or manufacture our products on schedule or that our products may not perform as intended.
When our products fail to perform adequately, some of our contracts require us to forfeit a portion of our expected profit, receive reduced payments, provide a replacement product or service or reduce the price of subsequent sales to the same customer. Performance penalties may also be imposed when we fail to meet delivery schedules or other measures of contract performance. We do not generally insure against potential costs resulting from any required remedial actions or costs or loss of sales due to postponement or cancellation of scheduled operations or product deliveries.
Our operations and properties are currently the subject of significant environmental liabilities, and the numerous environmental and other government requirements to which we are subject may become more stringent in the future.
We are subject to federal, state, and local environmental laws and regulations that, among other things, require us to obtain permits to operate and install pollution control equipment and regulate the generation, storage, handling, transportation, treatment, and disposal of hazardous and solid wastes. These requirements may become more stringent in the future. Additional regulations dictate how and to what level we remediate contaminated soils and the level to which we are required to clean contaminated groundwater. These requirements may also become more stringent in the future. We may also be subject to fines and penalties relating to the operation of our existing and formerly owned businesses. We have been and are subject to toxic tort and asbestos lawsuits as well as other third-party lawsuits, due to either our past or present use of hazardous substances or the alleged on-site or off-site contamination of the environment through past or present operations. We may incur material costs in defending these claims and lawsuits and any similar claims and lawsuits that may arise in the future. Contamination at our current and former properties is subject to investigation and remediation requirements under federal, state and local laws and regulations, and the full extent of the required remediation has not yet been determined. Any adverse judgment or cash outlay could have a significant adverse effect on our operating results, financial condition, and/or cash flows.
Given the many uncertainties involved in assessing liability for environmental claims, our established reserves may not be sufficient, which could adversely affect our financial results and cash flows.
As of December 31, 2019, the aggregate range of our estimated future environmental obligations was $309.2 million to $459.8 million and the accrued amount was $309.2 million. In many cases the nature and extent of the required remediation has not yet been determined. Given the many uncertainties involved in assessing liability for environmental claims, our reserves may prove to be insufficient. The reserves are based only on known sites and the known contamination at those sites. It is possible that additional sites needing remediation may be identified or that unknown contamination at previously identified sites may be discovered. It is also possible that the regulatory agencies may change clean-up standards for chemicals of concern such as ammonium perchlorate and trichloroethylene. This could lead to additional expenditures for environmental remediation in the

11




future and, given the uncertainties involved in assessing liability for environmental claims, our reserves may prove to be insufficient.
Most of our environmental costs are incurred by our Aerospace and Defense segment, and certain of these future costs are allowed to be included in our U.S. government contracts. We currently estimate approximately 12% of our Aerospace and Defense segment environmental costs will not likely be reimbursable.
Our environmental expenses related to non-Aerojet Rocketdyne sites are generally not recoverable and a significant increase in these estimated environmental expenses could have a significant adverse effect on our operating results, financial condition, and/or cash flows.
We face certain significant risk exposures and potential liabilities that may not be adequately covered by insurance.
A significant portion of our business relates to developing and manufacturing propulsion systems for defense and space applications, armament systems for precision tactical weapon systems, and munitions applications. New technologies may be untested or unproven. In addition, we may incur significant liabilities that are unique to our products and services. While we maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and it is not possible to obtain insurance to protect against all operational risks and liabilities. Accordingly, we may be forced to bear substantial costs resulting from risks and uncertainties of our business, which could have a material adverse effect on our operating results, financial condition, and/or cash flows.
Our inability to protect our trade secrets, patents and proprietary rights could adversely affect our businesses’ prospects and competitive positions.
If we are unable to obtain or maintain protections for proprietary technology and inventions through patents and other proprietary rights protections, we may not be able to prevent third parties from using our proprietary rights. In addition, we may incur significant expense in protecting our intellectual property.
We also rely on trade secrets, proprietary know-how and continuing technological innovation to remain competitive. We have taken measures to protect our trade secrets and know-how, including the use of confidentiality agreements with our employees, consultants and advisors. These agreements may be breached and remedies for a breach may not be sufficient to compensate us for damages incurred. Other parties may independently develop our know-how or otherwise obtain access to our technology.
Business disruptions could seriously affect us.
Our business may be affected by disruptions including, but not limited to: threats to physical security of our facilities and employees, including senior executives; terrorist acts; information technology attacks or failures; damaging weather or other acts of nature; and pandemics or other public health crises. The costs related to these events may not be fully mitigated by insurance or other means. Disruptions could affect our internal operations or services provided to customers, which could have a material adverse effect on our operating results, financial condition, and/or cash flows.
If our operating subsidiaries do not generate sufficient cash flow or if they are not able to pay dividends or otherwise distribute their cash to us, or if we have insufficient funds on hand, we may not be able to service our debt.
All of the operations of our Aerospace and Defense and Real Estate segments are conducted through subsidiaries. Consequently, our cash flow and ability to service our debt obligations will be largely dependent upon the earnings and cash flows of our operating subsidiaries and the distribution of those earnings to us, or upon loans, advances or other payments made by these subsidiaries to us. The ability of our subsidiaries to pay dividends or make other payments or advances to us will depend upon their operating results and cash flows and will be subject to applicable laws and any contractual restrictions contained in the agreements governing their debt, if any.
 We have a substantial amount of debt. Our ability to operate is limited by the agreements governing our debt.
We have a substantial amount of debt for which we are required to make interest and principal payments. Interest on long-term financing is not a recoverable cost under our U.S. government contracts. As of December 31, 2019, we had $675.8 million of debt principal. Subject to the limits contained in some of the agreements governing our outstanding debt, we may incur additional debt in the future. Our maintenance of higher levels of indebtedness could have adverse consequences including impairing our ability to obtain additional financing in the future.
Our level of debt places significant demands on our cash resources, which could:
make it more difficult to satisfy our outstanding debt obligations;
require us to dedicate a substantial portion of our cash for payments related to our debt, reducing the amount of cash flow available for working capital, capital expenditures, entitlement of our real estate assets, contributions to our tax-qualified pension plan, and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in the industries in which we compete;
place us at a competitive disadvantage with respect to our competitors, some of which have lower debt service obligations and greater financial resources than we do;
limit our ability to borrow additional funds;
limit our ability to expand our operations through acquisitions; and

12




increase our vulnerability to general adverse economic and industry conditions.
If we are unable to generate sufficient cash flow to service our debt and fund our operating costs, our liquidity may be adversely affected.
We are obligated to comply with financial and other covenants outlined in our debt indentures and agreements that could restrict our operating activities. A failure to comply could result in a default which would, if not waived by the lenders, likely come with substantial cost and accelerate the payment of our debt.
Our debt instruments generally contain various restrictive covenants which include, among others, provisions which may restrict our ability to:
access the full amount of our revolving credit facility and/or incur additional debt;
enter into certain leases;
make certain distributions, investments, and other restricted payments;
cause our restricted subsidiaries to make payments to us;
enter into transactions with affiliates;
create certain liens;
purchase assets or businesses;
sell assets and, if sold, retain excess cash flow from these sales; and
consolidate, merge or sell all or substantially all of our assets.
Our secured debt also contains other customary covenants, including, among others, provisions restricting our ability to pledge assets or create other liens. In addition, certain covenants in our bank facility require that we maintain certain financial ratios.
Based on our existing debt agreements, we were in compliance with our financial and non-financial covenants as of December 31, 2019. Any of the covenants described in this risk factor may restrict our operations and our ability to pursue potentially advantageous business opportunities. Our failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in the acceleration of our amended and restated senior credit facility entered into on September 20, 2018, (the "Senior Credit Facility") with the lenders identified therein and Bank of America, N.A., as administrative agent and the 2.25% Convertible Senior Notes ("2¼% Notes"). In addition, our failure to pay principal and interest when due is a default under the Senior Credit Facility, and in certain cases, would cause cross defaults on the 2¼% Notes.
We may be adversely affected by changes in London Inter-Bank Offered Rate ("LIBOR") reporting practices or the method by which LIBOR is determined.
In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates the LIBOR, announced that it intends to phase out LIBOR by the end of 2021. After 2021, it is unclear whether banks will continue to provide LIBOR submissions to the administrator of LIBOR, and no consensus currently exists as to what benchmark rate or rates may become accepted alternatives to LIBOR. In the U.S., efforts to identify a set of alternative U.S. dollar reference interest rates include proposals by the Alternative Reference Rates Committee ("ARRC") that has been convened by the Federal Reserve Board and the Federal Reserve Bank of New York. We cannot currently predict the effect of the discontinuation of, or other changes to, LIBOR or any establishment of alternative reference rates in the U.S., the European Union or elsewhere on the global capital markets. The uncertainty regarding the future of LIBOR, as well as the transition from LIBOR to any alternative reference rate or rates, could have adverse impacts on floating rate obligations, loans, deposits, derivatives and other financial instruments that currently use LIBOR as a benchmark rate. Borrowings under our Senior Credit Facility, which consists of a revolver and term loan, constitute our most significant exposure to this transition and there is no guarantee that a shift from LIBOR to a new reference rate will not result in increases to our borrowing costs.
The real estate market involves significant risk, which could adversely affect our financial results.
Our real estate activities involve significant risks, which could adversely affect our financial results. We are subject to various risks, including the following:
we may be unable to obtain, or suffer delays in obtaining, necessary re-zoning, land use, building, occupancy, and other required governmental permits and authorizations, which could result in increased costs or our abandonment of these projects;
we may be unable to complete environmental remediation or to have state and federal environmental restrictions on our property lifted, which could cause a delay or abandonment of these projects;
we may be unable to obtain sufficient water sources to service our projects, which may prevent us from executing our plans;
our real estate activities may require significant expenditures and we may not be able to obtain financing on favorable terms, which may render us unable to proceed with our plans;
economic and political uncertainties could have an adverse effect on consumer buying habits, construction costs, availability of labor and materials and other factors affecting us and the real estate industry in general;

13




our property is subject to federal, state, and local regulations and restrictions that may impose significant limitations on our plans;
much of our property is raw land that includes the natural habitats of various endangered or protected wildlife species requiring mitigation;
if our land use plans are approved by the appropriate governmental authorities, we may face lawsuits from those who oppose such plans (such lawsuits and the costs associated with such opposition could be material and have an adverse effect on our ability to sell property or realize income from our projects); and
the time frame required for approval of our plans means that we will have to wait years for a significant cash return.
Substantially all of our excess real estate, that we are in the process of entitling for new opportunities, is located in Sacramento County, California, making us vulnerable to changes in economic and other conditions in that particular market.
As a result of the geographic concentration of our properties, our long-term real estate performance and the value of our properties will depend upon conditions in the Sacramento region, including:
the sustainability and growth of industries located in the Sacramento region;
the financial strength and spending of the State of California;
local real estate market conditions;
changes in neighborhood characteristics;
changes in interest rates; and
real estate tax rates.
If unfavorable economic or other conditions affect the region, our plans and business strategy could be adversely affected.
In order to be successful, we must attract and retain key employees.
Our business has a continuing need to attract large numbers of skilled personnel, including personnel holding security clearances, to support the growth of the enterprise and to replace individuals who have terminated employment due to retirement or for other reasons. To the extent that the demand for qualified personnel exceeds supply, we could experience higher labor, recruiting, or training costs in order to attract and retain such employees, or could experience difficulties in performing under our contracts if our needs for such employees were unmet. In addition, our inability to appropriately plan for the transfer or replacement of appropriate intellectual capital and skill sets critical to us could result in business disruptions and impair our ability to achieve business objectives.
A strike or other work stoppage, or our inability to renew collective bargaining agreements on favorable terms, could adversely affect our financial results.
As of December 31, 2019, 9% of our employees were covered by collective bargaining agreements. In the future, if we are unable to negotiate acceptable new agreements with the unions, upon expiration of the existing contracts, we could experience a strike or work stoppage. Even if we are successful in negotiating new agreements, the new agreements could call for higher wages or benefits paid to union members, which would increase our operating costs and could adversely affect our profitability. If our unionized workers were to engage in a strike or other work stoppage, or other non-unionized operations were to become unionized, we could experience a significant disruption of operations at our facilities or higher ongoing labor costs. A strike or other work stoppage in the facilities of any of our major customers or suppliers could also have similar effects on us.
Item 1B. Unresolved Staff Comments
None.
Item  2. Properties
Significant operating, manufacturing, research, design, and/or marketing locations are set forth below.
Facilities
Corporate Headquarters
Aerojet Rocketdyne Holdings, Inc.
222 N. Pacific Coast Highway, Suite 500
El Segundo, California 90245

14




Aerospace and Defense
 
Operating/Design/Manufacturing Facilities:  Camden, Arkansas (owned and leased); Carlstadt, New Jersey*; Chatsworth, California (owned and leased); Hancock County, Mississippi*; Huntsville, Alabama*; Jonesborough, Tennessee**; Orange, Virginia; Orlando, Florida*; Redmond, Washington; West Palm Beach, Florida*
Marketing/Sales Offices:     Arlington, Virginia*
Real Estate
 
Rancho Cordova, California
 
_____
  *
Indicates a leased property.
**
Owned and operated by Aerojet Ordnance Tennessee, Inc., a 100% owned subsidiary of Aerojet Rocketdyne.
We believe each of the facilities is suitable and adequate for the business conducted at that facility taking into account current and planned future needs.
Item 3. Legal Proceedings
See Note 9(a) in the consolidated financial statements in Item 8 of this Report for information relating to our legal proceedings.
Item 4. Mine Safety Disclosures
None.
PART II
Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As of February 12, 2020, there were 5,556 holders of record of our common stock. Our common stock is listed on the New York Stock Exchange under the trading symbol "AJRD." On February 12, 2020, the last reported sale price of our common stock on the New York Stock Exchange was $54.90 per share.
We do not currently have a share repurchase program. The table below provides information about shares surrendered to us to pay employee withholding taxes due upon the vesting of restricted stock.
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased under the Plans or Programs
October 1, 2019 through October 31, 2019
 
922

 
$
47.68

 

 

November 1, 2019 through November 30, 2019
 
14,777

 
$
43.77

 

 

December 1, 2019 through December 31, 2019
 
6,966

 
$
45.69

 

 

Total
 
22,665

 
$
44.52

 

 

Information concerning long-term debt appears in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption "Liquidity and Capital Resources" and in Part II, Item 8. Financial Statements and Supplementary Data at Note 7 in the consolidated financial statements.
Information concerning securities authorized for issuance under our equity compensation plans appears in Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters under the caption "Equity Compensation Plan Information."

15




Stock Performance Graph
The following graph compares the cumulative total stockholder returns, calculated on a dividend reinvested basis, on $100 invested in our common stock in November 2014 with the cumulative total return of (i) the Standard & Poor’s 500 Composite Stock Price Index ("S&P 500 Index"), and (ii) the Standard & Poor’s 500 Aerospace & Defense Index. The stock price performance shown on the graph is not necessarily indicative of future performance.
Comparison of Cumulative Total Stockholder Return Among
Aerojet Rocketdyne, S&P 500 Index, and the S&P 500 Aerospace & Defense Index,
November 2014 through December 2019
https://cdn.kscope.io/38cb9786018e0ee8c9a1842704d1215d-stockcharta27.jpg
Company/Index
 
Base
Year
2014
 
Year Ended
 
November 30,
 
December 31,
 
December 31,
 
December 31,
 
December 31,
 
2015
 
2016
 
2017
 
2018
 
2019
 
Aerojet Rocketdyne Holdings, Inc.
 
$
100.00

 
$
105.03

 
$
107.49

 
$
186.83

 
$
210.96

 
$
273.41

S&P 500 Index
 
100.00

 
102.75

 
113.22

 
137.94

 
131.89

 
173.42

S&P 500 Aerospace & Defense
 
100.00

 
106.62

 
125.78

 
177.83

 
163.47

 
213.06



16




Item 6. Selected Financial Data
The following selected financial data is qualified by reference to and should be read in conjunction with the consolidated financial statements, including the notes thereto in Item 8. Financial Statements and Supplementary Data and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Year Ended
 
One Month Ended
 
December 31,
 
December 31,
 
December 31,
 
December 31,
 
November 30,
 
December 31,
 
2019
 
2018
 
2017
 
2016
 
2015
 
2015
 
(In millions, except per share amounts)
 
 
Net sales
$
1,981.5

 
$
1,895.9

 
$
1,877.2

 
$
1,761.3

 
$
1,708.3

 
$
96.3

Net income (loss)
141.0

 
137.3

 
(9.2
)
 
18.0

 
(16.2
)
 
7.0

Basic earnings (loss) per share of common stock ("EPS")
1.79

 
1.80

 
(0.13
)
 
0.27

 
(0.27
)
 
0.11

Diluted EPS
1.69

 
1.75

 
(0.13
)
 
0.27

 
(0.27
)
 
0.10

Supplemental statement of operations information:
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
141.0

 
$
137.3

 
$
(9.2
)
 
$
18.0

 
$
(16.2
)
 
$
7.0

Interest expense
35.7

 
34.4

 
30.9

 
32.5

 
50.4

 
3.8

Interest income
(15.5
)
 
(10.0
)
 
(3.5
)
 
(0.6
)
 
(0.3
)
 

Income tax provision
50.9

 
51.3

 
96.1

 
11.2

 
0.3

 
2.0

Depreciation and amortization
74.5

 
72.3

 
72.6

 
64.9

 
65.1

 
5.1

GAAP retirement benefits expense
26.1

 
57.6

 
73.2

 
68.9

 
67.6

 
5.6

CAS recoverable retirement benefits expense
(41.3
)
 
(38.2
)
 
(36.2
)
 
(29.5
)
 
(17.9
)
 
(2.6
)
Unusual items
0.3

 
0.2

 
(1.0
)
 
34.5

 
51.9

 
0.4

Adjusted EBITDAP (Non-GAAP measure)*
$
271.7

 
$
304.9

 
$
222.9

 
$
199.9

 
$
200.9

 
$
21.3

Net income (loss) as percentage of net sales
7.1
%
 
7.2
%
 
(0.5
)%
 
1.0
%
 
(0.9
)%
 
7.3
%
Adjusted EBITDAP (Non-GAAP measure) as a percentage of net sales
13.7
%
 
16.1
%
 
11.9
 %
 
11.3
%
 
11.8
 %
 
22.1
%
Cash flow information:
 
 
 
 
 

 
 
 
 
 
 
   Cash flow provided by operating activities
$
261.2

 
$
252.7

 
$
212.8

 
$
158.7

 
$
67.6

 
$
0.1

   Capital Expenditures
(42.9
)
 
(43.2
)
 
(29.4
)
 
(47.6
)
 
(36.8
)
 
(1.2
)
   Free Cash Flow*
$
218.3

 
$
209.5

 
$
183.4

 
$
111.1

 
$
30.8

 
$
(1.1
)
Balance Sheet information:
 
 
 
 
 
 
 
 
 
 
 
   Total assets
$
2,707.8

 
$
2,490.1

 
$
2,258.7

 
$
2,249.5

 
$
2,034.9

 
$
2,023.3

   Total debt principal
675.8

 
672.8

 
670.9

 
725.6

 
652.0

 
650.6

_________
* We provide Non-GAAP measures as a supplement to financial results presented in accordance with GAAP. A reconciliation of the Non-GAAP measures to the most directly comparable GAAP measures is presented later in the Management’s Discussion and Analysis under the heading "Use of Non-GAAP Financial Measures."


17




 Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the other sections of this Report, including the consolidated financial statements and notes thereto appearing in Item 8 of this Report, the risk factors appearing in Item 1A of this Report, and the disclaimer regarding forward-looking statements appearing at the beginning of Item 1 of this Report. We have elected to omit discussion of the earliest of the three years covered by the consolidated financial statements presented. Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations located in our Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 19, 2019, for the discussion of the year ended December 31, 2017, the earliest of the three fiscal years presented.
Overview
A summary of the significant financial highlights for 2019, which management uses to evaluate our operating performance and financial condition, is presented below. 
Net sales for 2019 totaled $1,981.5 million compared with $1,895.9 million for 2018.
Net income for 2019 was $141.0 million, or $1.69 diluted EPS, compared with $137.3 million, or $1.75 diluted EPS for 2018.
Adjusted Net Income (Non-GAAP measure*) for 2019 was $130.1 million, or $1.56 Adjusted EPS (Non-GAAP measure*), compared with $151.5 million, or $1.93 Adjusted EPS for 2018.
Adjusted EBITDAP (Non-GAAP measure*) for 2019 was $271.7 million compared with $304.9 million for 2018.
Cash provided by operating activities in 2019 totaled $261.2 million compared with $252.7 million in 2018.
Free cash flow (Non-GAAP measure*) in 2019 totaled $218.3 million compared with $209.5 million in 2018.
Total backlog as of December 31, 2019, was $5.4 billion compared with $4.1 billion as of December 31, 2018.
_________
* We provide Non-GAAP measures as a supplement to financial results presented in accordance with GAAP. A reconciliation of the Non-GAAP measures to the most directly comparable GAAP measures is presented later in the Management’s Discussion and Analysis under the heading "Use of Non-GAAP Financial Measures."
Our business outlook is affected by both increasing complexity in the global security environment and continuing worldwide economic pressures. A significant component of our strategy in this environment is to focus on delivering excellent performance to our customers, driving improvements and efficiencies across our operations, and creating value through the enhancement and expansion of our business.
Some of the significant challenges we face are as follows: dependence upon U.S. government programs and contracts, future reductions or changes in U.S. government spending in our markets, successful implementation of our cost reduction plans, environmental matters, capital structure, underfunded retirement benefit plans, and information technology and cyber security.
Major Customers
The principal end user customers of our products and technology are primarily agencies of the U.S. government. Since a majority of our sales are, directly or indirectly, to the U.S. government, funding for the purchase of our products and services generally follows trends in U.S. aerospace and defense spending. However, individual U.S. government agencies, which include the military services, NASA, MDA, and the prime contractors that serve these agencies, exercise independent purchasing power within "budget top-line" limits. Therefore, sales to the U.S. government are not regarded as sales to one customer, but rather each contracting agency is viewed as a separate customer.
The following table summarizes net sales to the U.S. government and its agencies, including net sales to significant customers disclosed below:
Year Ended December 31,
Percentage of Net
Sales
2019
96
%
2018
94


18




The following table summarizes net sales by principal end user in 2019:
NASA
27
%
U.S. Air Force
14

U.S. Army
19

MDA
23

U.S. Navy
6

Other U.S. government
7

Total U.S. government customers
96

Other customers
4

Total
100
%
The following table summarizes the percentages of net sales for significant programs, all of which are included in the U.S. government sales and are comprised of multiple contracts:
 
Year Ended December 31,
 
2019
 
2018
RS-25 program
17
%
 
14
%
Standard Missile program
13

 
13

THAAD program
10

 
11

PAC-3 program
10

 
8

The following table summarizes customers that represented more than 10% of net sales, each of which involves sales of several product lines and programs:
 
Year Ended December 31,
 
2019
 
2018
Lockheed Martin
33
%
 
30
%
NASA
21

 
18

Raytheon
17

 
19

ULA
10

 
17

Industry Update
Information concerning our industry appears in Part I, Item 1. Business under the caption "Industry Overview."
Competitive Improvement Program
During 2015, we initiated Phase I of our CIP comprised of activities and initiatives aimed at reducing costs in order for us to continue to compete successfully. Phase I was comprised of three major components: (i) facilities optimization and footprint reduction; (ii) product affordability; and (iii) reduced administrative and overhead costs. On April 6, 2017, the Board of Directors approved Phase II of our previously announced CIP. Pursuant to Phase II, we expanded CIP and further consolidated our Sacramento, California, and Gainesville, Virginia sites, while we centralized and expanded our existing presence in Huntsville, Alabama. When fully implemented, we anticipate that the CIP will result in annual costs that are $230.0 million below levels anticipated prior to the CIP.
We currently estimate that we will incur restructuring and related costs of the Phase I and II programs of approximately $197.0 million (including approximately $60.5 million of capital expenditures), which is down $38.0 million compared with our initial cost estimate of $235.0 million. Our current estimate of $197.0 million has decreased from the prior year primarily due to continued efficiencies in program transitions and lower than expected employee costs. We have incurred $170.4 million of such costs through December 31, 2019, including $53.5 million in capital expenditures.

19




Environmental Matters
Our current and former business operations are subject to, and affected by, federal, state, and local environmental laws and regulations relating to the discharge, treatment, storage, disposal, investigation, and remediation of certain materials, substances, and wastes. See Notes 9(b) and 9(c) in the consolidated financial statements in Item 8 of this Report and "Environmental Matters" below for summary of our environmental reserve activity.
Capital Structure
We have a substantial amount of debt for which we are required to make interest and principal payments. Interest on long-term financing is not a recoverable cost under our U.S. government contracts. As of December 31, 2019, we had $637.0 million of debt outstanding.
Retirement Benefits
As of the last measurement date at December 31, 2019, the pension assets, projected benefit obligations, and unfunded pension obligation were $932.5 million, $1,349.8 million, and $417.3 million, respectively. We estimate that 83% of our unfunded pension obligation as of December 31, 2019, is related to our U.S. government contracting business, Aerojet Rocketdyne.
We expect to make contributions of approximately $46.0 million to our tax-qualified defined benefit pension plan in 2020, including $13.9 million of cash and $32.1 million of prepayment credits. We generally are able to recover contributions related to our tax-qualified defined benefit pension plan as allowable costs on our U.S. government contracts, but there are differences between when we contribute to our tax-qualified defined benefit pension plan under pension funding rules and when it is recoverable under CAS.
Information Technology and Cyber Security
We routinely defend against various cyber and other security threats against our defenses to protect the confidentiality, integrity and availability of our information technology infrastructure, supply chain, business or customer information and other threats. We are also subject to similar security threats at customer sites that we operate and manage as a contractual requirement.
The threats we face range from attacks common to most industries to more advanced and persistent, highly organized adversaries, insider threats and other threat vectors targeting us and other defense and aerospace companies; because we protect national security information. In addition, cyber threats are evolving, growing in their frequency and include, but are not limited to, malicious software, destructive malware, attempts to gain unauthorized access to data, disruption or denial of service attacks, and other electronic security breaches that could lead to disruptions in mission critical systems, unauthorized release of confidential, personal or otherwise protected information (ours or that of our employees, customers or partners), and corruption of data, networks or systems. We also could be impacted by cyber threats or other disruptions or vulnerabilities found in products we use or in our partners’ or customers’ systems that are used in connection with our business.
We continue to assess our information technology systems and are engaged in cooperative efforts with our customers, suppliers, and subcontractors to seek to minimize the impact of cyber threats, other security threats or business disruptions.
Results of Operations:
Net Sales:
 
Year Ended December 31,
 
 
 
2019
 
2018
 
Change
 
(In millions)
Net sales:
$
1,981.5

 
$
1,895.9

 
$
85.6

Primary reason for change. The increase in net sales was primarily due to an increase of $120.6 million in defense program sales primarily driven by the PAC-3, GMLRS, and hypersonic booster programs. The increase in net sales was partially offset by a decrease of $34.7 million in space program sales primarily driven by lower sales in the RS-68 program and the anticipated wind-down of the AJ-60 solid rocket motor program partially offset by growth in the RS-25 program.
Cost of Sales (exclusive of items shown separately below):
 
Year Ended December 31,
 
 
 
2019
 
2018
 
Change
 
(In millions, except percentage amounts)
Cost of sales (exclusive of items shown separately below)
$
1,613.6

 
$
1,549.4

 
$
64.2

Percentage of net sales
81.4
%
 
81.7
%
 
 
Primary reason for change. The decrease in cost of sales as a percentage of net sales was primarily driven by improved performance on the Commercial Crew Development program partially offset by lower risk retirements in 2019 on the RS-68, RL10, and THAAD programs.

20




Selling, General and Administrative Expense ("SG&A"):
 
Year Ended December 31,
 
 
 
2019
 
2018
 
Change
 
(In millions, except percentage amounts)
Components of SG&A:
 
 
 
 
 
SG&A excluding stock-based compensation
$
26.3

 
$
23.3

 
$
3.0

Stock-based compensation
27.3

 
20.5

 
6.8

SG&A
$
53.6

 
$
43.8

 
$
9.8

Percentage of net sales
2.7
%
 
2.3
%
 
 
Percentage of net sales excluding stock-based compensation
1.3
%
 
1.2
%
 
 
Primary reason for change. The increase in SG&A expense was primarily driven by stock-based compensation as a result of increases in the fair value of the stock appreciation rights in the current period. See Note 10(d) in the consolidated financial statements in Item 8 of this Report for additional information.
Depreciation and Amortization:
 
Year Ended December 31,
 
 
 
2019
 
2018
 
Change
 
(In millions)
Components of depreciation and amortization:
 
 
 
 
 
Depreciation
$
58.1

 
$
56.1

 
$
2.0

Amortization
13.6

 
13.7

 
(0.1
)
Accretion
2.8

 
2.5

 
0.3

Depreciation and amortization
$
74.5

 
$
72.3

 
$
2.2

Primary reason for change. The increase in depreciation expense was primarily due to the completion of the facilities located in Huntsville, Alabama in early 2019.
Other Expense (Income), Net:
 
Year Ended December 31,
 
 
 
2019
 
2018
 
Change
 
(In millions)
Other expense (income), net:
$
1.6

 
$
(40.2
)
 
$
41.8

Primary reason for change. The change in other expense (income), net was primarily due to a one-time benefit of $43.0 million during 2018 in environmental remediation provision adjustments as a result of reaching a determination with the U.S. government that certain environmental expenditures are reimbursable under the Global Settlement (see discussion of "Environmental Matters" below).
Interest Income:
 
Year Ended December 31,
 
 
 
2019
 
2018
 
Change
 
(In millions)
Interest income:
$
15.5

 
$
10.0

 
$
5.5

Primary reason for change. The increase in interest income was due to higher average cash balances and interest rates.
Interest Expense:
 
Year Ended December 31,
 
 
 
2019
 
2018
 
Change
 
(In millions)
Components of interest expense:
 
 
 
 
 
Contractual interest and other
$
26.3

 
$
25.5

 
$
0.8

Amortization of debt discount and deferred financing costs
9.4

 
8.9

 
0.5

Interest expense
$
35.7

 
$
34.4

 
$
1.3


21




Primary reason for change. The increase in interest expense was primarily due to higher finance lease obligations associated with the Huntsville, Alabama facilities in the current period partially offset by lower average obligations and variable interest rates on our Senior Credit Facility.
Income Tax Provision:
 
Year Ended December 31,
 
2019
 
2018
 
(In millions)
Income tax provision
$
50.9

 
$
51.3

In 2019, our effective tax rate was 26.5%. Our effective tax rate is higher than the 21% statutory federal income tax rate primarily due to state income taxes and uncertain tax positions, offset by R&D credits and excess tax benefits related to our stock-based compensation.
In 2018, our effective tax rate was 27.2%. Our effective tax rate differed from the 21% statutory federal income tax rate primarily due to an increase from state income taxes and unfavorable adjustments to uncertain tax positions partially offset by R&D credits.
As of December 31, 2019, the liability for uncertain income tax positions was $49.1 million. Due to the uncertainty regarding the timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.
Retirement Benefits Expense:
 
Year Ended December 31,
 
 
 
2019
 
2018
 
Change
 
(In millions)
Components of retirement benefits expense:
 
 
 
 
 
Interest cost on benefit obligation
$
53.9

 
$
50.9

 
$
3.0

Assumed return on assets
(64.8
)
 
(60.1
)
 
(4.7
)
Amortization of prior service credits
(0.1
)
 
(0.1
)
 

Amortization of net losses
37.1

 
66.9

 
(29.8
)
Retirement benefits expense
$
26.1

 
$
57.6

 
$
(31.5
)
Primary reason for change. The decrease in retirement benefits expense was primarily due to a decrease in the amortization of net actuarial losses in 2019 primarily as a result of an increase in the discount rate used to determine our pension obligation at December 31, 2018.
We estimate that our retirement benefits expense will be approximately $37 million in 2020. Additionally, we estimate the CAS recoverable amounts related to the Company's retirement benefits plans to be approximately $48 million in 2020. See "Critical Accounting Policies - Retirement Benefit Plans" for more information about our accounting practices with respect to retirement benefits.
Operating Segment Information:
We evaluate our operating segments based on several factors, of which the primary financial measure is segment performance. Segment performance represents net sales less applicable costs, expenses and provisions for unusual items relating to the segment. Excluded from segment performance are: corporate income and expenses, interest expense, interest income, income taxes, and unusual items not related to the segment. We believe that segment performance provides information useful to investors in understanding our operational performance.
Aerospace and Defense Segment
 
Year Ended December 31,
 
 
 
2019
 
2018
 
Change
 
(In millions, except percentage amounts)
Net sales
$
1,974.0

 
$
1,888.1

 
$
85.9

Segment performance
269.3

 
264.6

 
4.7

Segment margin
13.6
%
 
14.0
%
 
 
Primary reason for change. The increase in net sales was primarily due to an increase of $120.6 million in defense program sales primarily driven by the PAC-3, GMLRS, and hypersonic booster programs. The increase in net sales was partially offset by a decrease of $34.7 million in space program sales primarily driven by lower sales in the RS-68 program and the anticipated wind-down of the AJ-60 solid rocket motor program partially offset by growth in the RS-25 program.

22




After adjusting for a one-time benefit of $43.0 million in 2018 as a result of reaching a determination with the U.S. government that certain environmental expenditures are reimbursable under the Global Settlement, segment margin increased 1.9 percentage points to 13.6% primarily due to improved performance on the Commercial Crew Development program in 2019 and lower retirement benefits expense.
Despite a $4.6 million headwind in the fourth quarter of 2019 primarily from overhead rate adjustments, we realized $38.4 million of net favorable changes in contract estimates on income before income taxes for the full year 2019 compared with favorable changes of $59.1 million during 2018. The overhead rate adjustments were driven by a combination of minor downward revisions to base from small program cancellations and schedule shifts, and more cost associated with facility investments in support of future work. The 2019 net favorable changes in contract estimates on income before income taxes were primarily driven by improved performance and risk retirements on the THAAD and PAC-3 programs and are net of the impact of overhead rate adjustments made in the fourth quarter of 2019. The 2018 net favorable changes in contract estimates on income before income taxes were primarily driven by risk retirements on the THAAD, RS-68, and RL10 programs and favorable overhead rate performance, partially offset by cost growth and performance issues on the Commercial Crew Development program.
Real Estate Segment
 
Year Ended December 31,
 
 
 
2019
 
2018
 
Change
 
(In millions)
Net sales
$
7.5

 
$
7.8

 
$
(0.3
)
Segment performance
2.1

 
2.8

 
(0.7
)
During 2019, net sales and segment performance consisted primarily of rental property operations. In 2018, we recognized net sales of $1.4 million from a land sale of 57 acres of the Sacramento Land.
Backlog:
As of December 31, 2019, our total remaining performance obligations, also referred to as backlog, totaled $5.4 billion, compared with $4.1 billion as of December 31, 2018. The increase in backlog was primarily due to large multi-year awards on the Standard Missile and THAAD programs. We expect to recognize approximately 36%, or $2.0 billion, of the remaining performance obligations as sales over the next twelve months, an additional 23% the following twelve months, and 41% thereafter. The following table summarizes backlog:
 
As of December 31,
 
2019
 
2018
 
(In billions)
Funded backlog
$
2.1

 
$
1.9

Unfunded backlog
3.3

 
2.2

Total backlog
$
5.4

 
$
4.1

Total backlog includes both funded backlog (unfilled orders for which funding is authorized, appropriated and contractually obligated by the customer) and unfunded backlog (firm orders for which funding has not been appropriated). Indefinite delivery and quantity contracts and unexercised options are not reported in total backlog. Backlog is subject to funding delays or program restructurings/cancellations which are beyond our control.
Use of Non-GAAP Financial Measures:
Adjusted EBITDAP, Adjusted Net Income, and Adjusted EPS
We provide the Non-GAAP financial measures of our performance called Adjusted EBITDAP, Adjusted Net Income, and Adjusted EPS. We use these metrics to measure our operating and total Company performance. We believe that for management and investors to effectively compare core performance from period to period, the metrics should exclude items that are not indicative of, or are unrelated to, results from our ongoing business operations such as retirement benefits (pension and postretirement benefits), significant non-cash expenses, the impacts of financing decisions on earnings, and items incurred outside the ordinary, ongoing and customary course of our business. Accordingly, we define Adjusted EBITDAP as GAAP net income adjusted to exclude interest expense, interest income, income taxes, depreciation and amortization, retirement benefits net of amounts that are recoverable under our U.S. government contracts, and unusual items which we do not believe are reflective of such ordinary, ongoing and customary activities. Adjusted Net Income and Adjusted EPS exclude retirement benefits net of amounts that are recoverable under our U.S. government contracts and unusual items which we do not believe are reflective of such ordinary, ongoing and customary activities. Adjusted Net Income and Adjusted EPS do not represent, and should not be considered an alternative to, net income or diluted EPS as determined in accordance with GAAP.

23




 
Year Ended December 31,
 
2019
 
2018
 
(In millions, except per share and percentage amounts)
Net income
$
141.0

 
$
137.3

Interest expense
35.7

 
34.4

Interest income
(15.5
)
 
(10.0
)
Income tax provision
50.9

 
51.3

Depreciation and amortization
74.5

 
72.3

GAAP retirement benefits expense
26.1

 
57.6

CAS recoverable retirement benefits expense
(41.3
)
 
(38.2
)
Unusual items
0.3

 
0.2

Adjusted EBITDAP
$
271.7

 
$
304.9

Net income as a percentage of net sales
7.1
%
 
7.2
%
Adjusted EBITDAP as a percentage of net sales
13.7
%
 
16.1
%
 
 
 
 
Net income
$
141.0

 
$
137.3

GAAP retirement benefits expense
26.1

 
57.6

CAS recoverable retirement benefits expense
(41.3
)
 
(38.2
)
Unusual items
0.3

 
0.2

Income tax impact of adjustments (1)
4.0

 
(5.4
)
Adjusted Net Income
$
130.1

 
$
151.5

 
 
 
 
Diluted EPS
$
1.69

 
$
1.75

Adjustments
(0.13
)
 
0.18

Adjusted EPS
$
1.56

 
$
1.93

 
 
 
 
Diluted weighted average shares, as reported and as adjusted
81.7

 
76.8

_________
(1) The income tax impact is calculated using the federal and state statutory rates in the corresponding year.
Free Cash Flow
We also provide the Non-GAAP financial measure of Free Cash Flow. Free Cash Flow is defined as cash flow from operating activities less capital expenditures. Free Cash Flow should not be considered in isolation as a measure of residual cash flow available for discretionary purposes or as an alternative to cash flows from operations presented in accordance with GAAP. We use Free Cash Flow, both in presenting our results to stakeholders and the investment community, and in our internal evaluation and management of the business. Management believes that this financial measure is useful because it provides supplemental information to assist investors in viewing the business using the same tools that management uses to evaluate progress in achieving our goals. The following table summarizes Free Cash Flow:
 
Year Ended December 31,
 
2019
 
2018
 
(In millions)
Net cash provided by operating activities
$
261.2

 
$
252.7

Capital expenditures
(42.9
)
 
(43.2
)
Free Cash Flow
$
218.3

 
$
209.5

Because our method for calculating these Non-GAAP measures may differ from other companies’ methods, the Non-GAAP measures presented above may not be comparable to similarly titled measures reported by other companies. These measures are not recognized in accordance with GAAP, and we do not intend for this information to be considered in isolation or as a substitute for GAAP measures.
Environmental Matters:
Our policy is to conduct our businesses with due regard for the preservation and protection of the environment. We devote a significant amount of resources and management attention to environmental matters and actively manage our ongoing processes to comply with environmental laws and regulations. We are involved in the remediation of environmental conditions

24




that resulted from generally accepted manufacturing and disposal practices at certain plants in the 1950s and 1960s. In addition, we have been designated a PRP with other companies at third party sites undergoing investigation and remediation.
Estimating environmental remediation costs is difficult due to the significant uncertainties inherent in these activities, including the extent of remediation required, changing governmental regulations and legal standards regarding liability, evolving technologies and the long period of time over which most remediation efforts take place. We:
accrue for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred and when our proportionate share of the costs can be reasonably estimated; and
record related estimated recoveries when such recoveries are deemed probable.
In addition to the costs associated with environmental remediation discussed above, we incur expenditures for recurring costs associated with managing hazardous substances or pollutants in ongoing operations which totaled $5.3 million and $5.9 million in 2019 and 2018, respectively.
The following table summarizes our recoverable amounts, environmental reserves, and range of liability, as of December 31, 2019:
 
Recoverable
Amount (1)
 
Reserve
 
Estimated Range
of Liability
 
(In millions)
Aerojet Rocketdyne - Sacramento
$
179.2

 
$
203.6

 
$203.6 - $325.8
Aerojet Rocketdyne - Baldwin Park Operable Unit ("BPOU")
78.8

 
89.6

 
89.6 - 106.1
Other Aerojet Rocketdyne sites
10.8

 
11.8

 
11.8 - 22.3
Other sites
0.7

 
4.2

 
4.2 - 5.6
Total
$
269.5

 
$
309.2

 
$309.2 - $459.8
_____
(1)
Excludes the receivable from Northrop of $52.5 million as of December 31, 2019, related to environmental costs already paid (and therefore not reserved) by us in prior years and reimbursable under our agreement with Northrop.
Environmental Reserves
We review on a quarterly basis estimated future remediation costs and have an established practice of estimating environmental remediation costs over a fifteen year period, except for those environmental remediation costs with a specific contractual term. Environmental liabilities at the 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 our reserves, the most probable estimate is used when determinable; otherwise, the minimum amount is used when no single amount in the range is more probable. Accordingly, such estimates can change as we periodically evaluate and revise these estimates as new information becomes available. We cannot predict whether new information gained as projects progress will affect the estimated liability accrued. The timing of payment for estimated future environmental costs is influenced by a number of factors, such as the regulatory approval process and the time required designing, constructing, and implementing the remedy.
The following table summarizes our environmental reserve activity:
 
Year Ended December 31,
 
2019
 
2018
 
(In millions)
Balance at beginning of year
$
327.9

 
$
341.4

Additions
16.7

 
23.3

Expenditures
(35.4
)
 
(36.8
)
Balance at end of year
$
309.2

 
$
327.9

The $16.7 million of environmental reserve additions in 2019 was primarily due to the following items: (i) $10.0 million of additional operations and maintenance for treatment facilities; (ii) $4.1 million of remediation related to operable treatment units; (iii) $1.9 million of sampling analysis costs; and (iv) $0.7 million related to other environmental clean-up matters.
The $23.3 million of environmental reserve additions in 2018 was primarily due to the following items: (i) $8.8 million of additional operations and maintenance for treatment facilities; (ii) $4.6 million of regulatory oversight costs and fees; (iii) $3.8 million of remediation related to operable treatment units; (iv) $2.2 million of sampling analysis costs; and (v) $3.9 million related to other environmental clean-up matters.
The effect of the final resolution of environmental matters and our 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. We continue our efforts to mitigate past and future costs through pursuit of

25




claims for recoveries from our insurance carriers and other PRPs and continued investigation of new and more cost effective remediation alternatives and associated technologies.