UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||
For the quarterly period ended: March 31, 2023
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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(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 | ||||||||||||
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.
| ☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2023, the Company had 80,758,891 outstanding common shares, including unvested common shares, $0.10 par value.
Aerojet Rocketdyne Holdings, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended March 31, 2023
Table of Contents
| Item Number | Page | |||||||
| 1 | Financial Statements | |||||||
| 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||
| 3 | Quantitative and Qualitative Disclosures About Market Risk | |||||||
| 4 | Controls and Procedures | |||||||
| 1 | Legal Proceedings | |||||||
| 1A | Risk Factors | |||||||
| 2 | Unregistered Sales of Equity Securities and Use of Proceeds | |||||||
| 3 | Defaults Upon Senior Securities | |||||||
| 4 | Mine Safety Disclosures | |||||||
| 5 | Other Information | |||||||
| 6 | Exhibits | |||||||
| Signatures | ||||||||
Part I — FINANCIAL INFORMATION
Item 1. Financial Statements
Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| Three months ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In millions, except per share amounts) | |||||||||||
| Net sales | $ | $ | |||||||||
| Operating costs and expenses: | |||||||||||
| Cost of sales (exclusive of items shown separately below) | |||||||||||
| Selling, general and administrative expense | |||||||||||
| Depreciation and amortization | |||||||||||
| Other expense, net | |||||||||||
| Merger costs | |||||||||||
| Legal matters | |||||||||||
| Other | |||||||||||
| Total operating costs and expenses | |||||||||||
| Operating income | |||||||||||
| Non-operating: | |||||||||||
| Retirement benefits (income) expense | ( | ||||||||||
| Interest income and other | ( | ||||||||||
| Interest expense | |||||||||||
| Total non-operating (income) expense, net | ( | ||||||||||
| Income before income taxes | |||||||||||
| Income tax provision | |||||||||||
| Net income | $ | $ | |||||||||
| Earnings per share of common stock | |||||||||||
Basic earnings per share | $ | $ | |||||||||
Diluted earnings per share | $ | $ | |||||||||
| Weighted average shares of common stock outstanding, basic | |||||||||||
| Weighted average shares of common stock outstanding, diluted | |||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
1
Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
| Three months ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In millions) | |||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive (loss) income: | |||||||||||
Amortization of net actuarial (gains) losses and prior service costs, net of income taxes of $ | ( | ||||||||||
| Comprehensive income | $ | $ | |||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| March 31, 2023 | December 31, 2022 | ||||||||||
| (In millions, except per share amounts) | |||||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Marketable securities | |||||||||||
| Accounts receivable | |||||||||||
| Contract assets | |||||||||||
| Other current assets | |||||||||||
| Total Current Assets | |||||||||||
| Noncurrent Assets | |||||||||||
| Right-of-use assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Recoverable environmental remediation costs | |||||||||||
| Deferred income taxes | |||||||||||
| Goodwill | |||||||||||
| Intangible assets | |||||||||||
| Other noncurrent assets | |||||||||||
| Total Noncurrent Assets | |||||||||||
| Total Assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Reserves for environmental remediation costs | |||||||||||
| Contract liabilities | |||||||||||
| Other current liabilities | |||||||||||
| Total Current Liabilities | |||||||||||
| Noncurrent Liabilities | |||||||||||
| Long-term debt | |||||||||||
| Reserves for environmental remediation costs | |||||||||||
| Pension benefits | |||||||||||
| Operating lease liabilities | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Total Noncurrent Liabilities | |||||||||||
| Total Liabilities | |||||||||||
| Commitments and contingencies (Note 8) | |||||||||||
| Stockholders’ Equity | |||||||||||
Preferred stock, par value of $ | |||||||||||
Common stock, par value of $ | |||||||||||
| Other capital | |||||||||||
Treasury stock at cost, | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss, net of income taxes | ( | ( | |||||||||
| Total Stockholders’ Equity | |||||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | |||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| Common Stock | Accumulated Other | Total | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Other Capital | Treasury Stock | Retained Earnings | Comprehensive Loss | Stockholders' Equity | |||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Amortization of net actuarial losses and prior service costs, net of income taxes | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
| Repurchase of shares for withholding taxes under equity plans | ( | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation and shares issued under equity plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| March 31, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Amortization of net actuarial gains and prior service costs, net of income taxes | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Adjustment to dividends | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Repurchase of shares for withholding taxes under equity plans | ( | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation and shares issued under equity plans | — | — | — | ||||||||||||||||||||||||||||||||||||||
| March 31, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Three months ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In millions) | |||||||||||
| Operating Activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation | ( | ||||||||||
| Retirement benefits, net | ( | ( | |||||||||
| Other, net | ( | ||||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Contract assets | ( | ||||||||||
| Other current assets | |||||||||||
| Recoverable environmental remediation costs | |||||||||||
| Other noncurrent assets | |||||||||||
| Accounts payable | ( | ( | |||||||||
| Contract liabilities | ( | ||||||||||
| Other current liabilities | ( | ||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Reserves for environmental remediation costs | ( | ( | |||||||||
| Other noncurrent liabilities | ( | ||||||||||
| Net Cash Used in Operating Activities | ( | ( | |||||||||
| Investing Activities | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Net Cash Used in Investing Activities | ( | ( | |||||||||
| Financing Activities | |||||||||||
| Dividend payments | ( | ( | |||||||||
| Debt repayments | ( | ( | |||||||||
| Repurchase of shares for withholding taxes under equity plans | ( | ( | |||||||||
| Proceeds from shares issued under equity plans | |||||||||||
| Net Cash Used in Financing Activities | ( | ( | |||||||||
| Net Decrease in Cash, Cash Equivalents and Restricted Cash | ( | ( | |||||||||
| Cash, Cash Equivalents and Restricted Cash at Beginning of Period | |||||||||||
| Cash, Cash Equivalents and Restricted Cash at End of Period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
Aerojet Rocketdyne Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Basis of Presentation and Nature of Operations
The Company believes the accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring accruals, necessary for a fair statement of its financial position, results of operations, and cash flows for the periods presented. All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In addition, the operating results for interim periods may not be indicative of the results of operations for a full year.
The Company’s operations are organized into two segments:
Aerospace and Defense — includes the operations of the Company’s wholly-owned subsidiary Aerojet Rocketdyne, Inc. ("Aerojet Rocketdyne"), a leading technology-based designer, developer and manufacturer of aerospace and defense products and systems for the United States ("U.S.") government, including the Department of Defense ("DoD"), the National Aeronautics and Space Administration ("NASA"), and major aerospace and defense prime contractors.
Real Estate — includes the activities of the Company’s wholly-owned subsidiary Easton Development Company, LLC ("Easton") related to the re-zoning, entitlement, sale, and leasing of the Company’s excess real estate assets.
A detailed description of the Company’s significant accounting policies can be found in the Company’s Annual Report on Form 10-K/A No. 2 for the year ended December 31, 2022.
Out of Period Adjustment
During the three months ended March 31, 2023, the Company recorded an out of period adjustment related to the completeness and accuracy of its accounting for excess costs on fixed-price contracts in nearly complete or inactive status. The out of period adjustment resulted in a decrease in net sales of $6.0 million, an increase in cost of sales of $0.5 million, and a decrease in the income tax provision of $1.7 million in the three months ended March 31, 2023. The Company has evaluated the effects of this error, both qualitatively and quantitatively, and does not believe the correction was material to any current or prior interim or annual periods that were affected.
L3Harris Technologies, Inc. ("L3Harris") Merger Agreement
On December 17, 2022, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), with L3Harris and Aquila Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of L3Harris ("Merger Sub"), pursuant to which, subject to the terms and conditions thereof, Merger Sub will merge with and into the Company (the "Merger") with the Company being the surviving corporation and a wholly-owned subsidiary of L3Harris.
Subject to the terms and conditions set forth in the Merger Agreement, each share of the Company's common stock outstanding as of immediately prior to the effective time of the Merger will be canceled and converted into the right to receive $58.00 in cash, without interest, plus, if the closing occurs after September 17, 2023, $0.0025 for each calendar day elapsed after such date up to and including the closing date.
On March 15, 2023, the Company received a request for additional information from the Federal Trade Commission as part of the regulatory review process for the acquisition of the Company by L3Harris.
On March 16, 2023, the stockholders of the Company voted in favor of approving the Merger Agreement at a special meeting.
Closing of the Merger is anticipated to occur in 2023, subject to various customary conditions, including regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
Recently Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board issued guidance which simplifies the accounting for convertible instruments. This guidance eliminates certain models that require separate accounting for embedded conversion features, in certain cases. Additionally, among other changes, the guidance eliminates certain of the conditions for equity classification for contracts in an entity’s own equity. The guidance also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. The Company adopted the new
6
Note 2. Earnings Per Share ("EPS") of Common Stock
The following table reconciles the numerator and denominator used to calculate basic and diluted EPS of common stock:
| Three months ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In millions, except per share amounts) | |||||||||||
| Numerator: | |||||||||||
| Net income | $ | $ | |||||||||
| Income allocated to participating securities | ( | ( | |||||||||
| Net income for basic EPS | $ | $ | |||||||||
Interest on convertible debt (see Note 1) | |||||||||||
| Net income for diluted EPS | $ | $ | |||||||||
| Denominator: | |||||||||||
| Basic weighted average shares | |||||||||||
| Effect of: | |||||||||||
| Awards issued under equity plans | |||||||||||
Convertible debt (See Note 1) | |||||||||||
| Diluted weighted average shares | |||||||||||
| Basic | |||||||||||
| Basic EPS | $ | $ | |||||||||
| Diluted | |||||||||||
| Diluted EPS | $ | $ | |||||||||
Securities which would have been anti-dilutive are insignificant and are excluded from the computation of diluted earnings per share in all periods presented.
Note 3. Revenue Recognition
The Company evaluates the contract value and cost estimates for performance obligations at least quarterly and more frequently when circumstances significantly change. Factors considered in estimating the work to be completed include, but are not limited to: labor productivity, the nature and technical complexity of the work to be performed, availability and cost volatility of materials, subcontractor and vendor performance, warranty costs, volume assumptions, anticipated labor agreements, inflationary trends, schedule and performance delays, availability of funding from the customer, and the recoverability of costs incurred outside the original contract included in any estimates to complete. When the Company’s estimate of total costs to be incurred to satisfy a performance obligation exceeds the expected revenue, the Company recognizes the loss immediately. When the Company determines that a change in estimates has an impact on the associated profit of a performance obligation, the Company records the cumulative positive or negative adjustment to the statement of operations. Changes in estimates and assumptions related to the status of certain long-term contracts may have a material effect on the Company’s operating results. The following table summarizes the impact of the changes in significant contract accounting estimates on the Company’s Aerospace and Defense segment operating results:
| Three months ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In millions, except per share amounts) | |||||||||||
| Net unfavorable effect of the changes in contract estimates on net sales | $ | ( | $ | ( | |||||||
| Net unfavorable effect of the changes in contract estimates on income before income taxes | ( | ( | |||||||||
| Net unfavorable effect of the changes in contract estimates on net income | ( | ( | |||||||||
| Net unfavorable effect of the changes in contract estimates on basic and diluted EPS | ( | ( | |||||||||
For the three months ended March 31, 2023, net unfavorable changes in contract estimates were primarily driven by (i) out of period adjustment of $6.5 million related to the completeness and accuracy of our accounting for excess costs on fixed-price contracts in nearly complete or inactive status and (ii) cost growth on the Guided Multiple Launch Rocket System ("GMLRS") program.
7
| March 31, 2023 | December 31, 2022 | ||||||||||
| (In millions) | |||||||||||
| Contract assets | $ | $ | |||||||||
| Reserve for overhead rate disallowance | ( | ( | |||||||||
| Contract assets, net of reserve | |||||||||||
| Contract liabilities | |||||||||||
| Net contract assets, net of reserve | $ | $ | |||||||||
Net contract assets decreased by $7.0 million from December 31, 2022. During the three months ended March 31, 2023, the Company recognized sales of $123.1 million that were included in the Company's contract liabilities as of December 31, 2022.
As of March 31, 2023, the Company’s total remaining performance obligations, also referred to as backlog, totaled $6.8 billion. The Company expects to recognize approximately 35 %, or $2.4 billion, of the remaining performance obligations as sales over the next twelve months , an additional 27 % the following twelve months , and 38 % thereafter.
The Company's contracts are largely categorized as either "fixed-price" (largely used by the U.S. government for production-type contracts) or "cost-reimbursable" (largely used by the U.S. government for development-type contracts). Fixed-price contracts present the risk of unreimbursed cost overruns, potentially resulting in lower than expected contract profits and margins. This risk is generally lower for cost-reimbursable contracts which, as a result, generally have a lower margin. The following table summarizes the percentages of net sales by contract type:
| Three months ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Fixed-price | % | % | |||||||||
| Cost-reimbursable | |||||||||||
The principal end user customers are primarily agencies of the U.S. government as illustrated in the following table:
| Three months ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| U.S. government | % | % | |||||||||
| Non U.S. government | |||||||||||
The Company's Real Estate segment represented less than 1
Note 4. Stock-Based Compensation
The following table summarizes stock-based compensation by type of award:
| Three months ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In millions) | |||||||||||
Stock Appreciation Rights | $ | ( | $ | ( | |||||||
| Restricted stock and restricted stock units, service based | |||||||||||
| Restricted stock and restricted stock units, performance based | |||||||||||
| Total stock-based compensation expense | $ | $ | ( | ||||||||
Note 5. Balance Sheet Accounts
a. Fair Value of Financial Instruments
Financial instruments are classified using a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
8
| Fair value measurement as of March 31, 2023 | |||||||||||||||||||||||
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Registered investment companies | |||||||||||||||||||||||
| Equity securities | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Fair value measurement as of December 31, 2022 | |||||||||||||||||||||||
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Registered investment companies | |||||||||||||||||||||||
| Equity securities | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
As of March 31, 2023 and December 31, 2022, the total estimated fair value for commercial paper was classified as cash and cash equivalents as the remaining maturity at date of purchase was less than three months.
The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued compensation, and other accrued liabilities, approximate fair value because of their short maturities.
The following table summarizes the estimated fair value and principal amount for outstanding debt obligations excluding finance lease obligations:
| Fair Value | Principal Amount | ||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2023 | December 31, 2022 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Term Loan | $ | $ | $ | $ | |||||||||||||||||||
The fair value of the Term Loan (as defined below) was estimated based on a third-party model used to derive a relative value price using comparable corporate loans within a similar industry, credit quality, and currency.
b. Accounts Receivable
| March 31, 2023 | December 31, 2022 | ||||||||||
| (In millions) | |||||||||||
| Billed receivables under long-term contracts | $ | $ | |||||||||
| Other trade receivables | |||||||||||
| Accounts receivable | $ | $ | |||||||||
c. Other Current Assets
| March 31, 2023 | December 31, 2022 | ||||||||||
| (In millions) | |||||||||||
| Deferred costs recoverable from the U.S. government | $ | $ | |||||||||
| Income tax receivable | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses | |||||||||||
| Other | |||||||||||
| Other current assets | $ | $ | |||||||||
9
d. Property, Plant and Equipment, net
| March 31, 2023 | December 31, 2022 | ||||||||||
| (In millions) | |||||||||||
| Land | $ | $ | |||||||||
| Buildings and improvements | |||||||||||
| Machinery and equipment, including capitalized software | |||||||||||
| Construction-in-progress | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment, net | $ | $ | |||||||||
e. Other Noncurrent Assets
| March 31, 2023 | December 31, 2022 | ||||||||||
| (In millions) | |||||||||||
| Real estate held for entitlement and leasing | $ | $ | |||||||||
| Deferred costs recoverable from the U.S. government | |||||||||||
| Receivable from Northrop Grumman Corporation ("Northrop") for environmental remediation costs | |||||||||||
| Other | |||||||||||
| Other noncurrent assets | $ | $ | |||||||||
f. Other Current Liabilities
| March 31, 2023 | December 31, 2022 | ||||||||||
| (In millions) | |||||||||||
| Accrued compensation and employee benefits | $ | $ | |||||||||
| Other | |||||||||||
| Other current liabilities | $ | $ | |||||||||
g. Other Noncurrent Liabilities
| March 31, 2023 | December 31, 2022 | ||||||||||
| (In millions) | |||||||||||
| Uncertain income tax positions | $ | $ | |||||||||
| Other | |||||||||||
| Other current liabilities | $ | $ | |||||||||
Note 6. Income Taxes
| Three months ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In millions) | |||||||||||
| Income tax provision | $ | $ | |||||||||
In the three months ended March 31, 2023, the income tax provision was $6.0 million for an effective tax rate of 17.8 %. The Company’s effective tax rate differed from the 21.0% statutory federal income tax rate primarily due to (i) windfall deductions from stock-based compensation; (ii) Research and Development ("R&D") credits; and (iii) state income taxes, partially offset by certain expenditures that are permanently not deductible for tax purposes.
In the three months ended March 31, 2022, the income tax provision was $10.5 million for an effective tax rate of 27.4 %. The Company’s effective tax rate differed from the 21.0% statutory federal income tax rate primarily due to state income taxes and certain expenditures that are permanently not deductible for tax purposes, partially offset by the impact of R&D credits and original issue discount on convertible debt.
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Note 7. Long-term Debt
| March 31, 2023 | December 31, 2022 | ||||||||||
| (In millions) | |||||||||||
Term Loan, bearing interest at variable rates (rate of | $ | $ | |||||||||
| Unamortized deferred financing costs | ( | ( | |||||||||
| Total senior debt | |||||||||||
| Finance leases | |||||||||||
| Total other debt | |||||||||||
| Total debt, net of unamortized discount and deferred financing costs | |||||||||||
| Less: Amounts due within one year | ( | ( | |||||||||
| Total long-term debt, net of unamortized discount and deferred financing costs | $ | $ | |||||||||
Senior Credit Facility
On September 28, 2022, the senior secured credit facility (the "Senior Credit Facility") was amended and consists of (i) a $650.0 million revolving line of credit (the "Revolver") and (ii) a $269.1 million term loan (the "Term Loan"). The Term Loan facility decreased from an aggregate principal amount of up to $350.0 million to $269.1 million and the amendment extended the maturity date from September 20, 2023, to September 20, 2025, amortized at a rate of 5.0 % per annum. The amended Senior Credit Facility also changed the interest rate benchmark for loans from the London Inter-Bank Offered Rate ("LIBOR") to the Secured Overnight Financing Rate ("SOFR"). Other than the changes mentioned above, the amended Senior Credit Facility has substantially similar terms as the original facility.
As of March 31, 2023, the Company had zero borrowings under the Revolver and issued $22.6 million in letters of credit.
The Term Loan and any borrowings under the Revolver bear interest at SOFR plus a SOFR adjustment of 10 basis points for all terms and an applicable margin ranging from 175 to 250 basis points based on the Company's leverage ratio (the "Consolidated Net Leverage Ratio") measured at the end of each quarter. In addition to interest, the Company must pay certain fees including (i) letter of credit fees ranging from 175 to 250 basis points per annum on the amount of issued but undrawn letters of credit; (ii) alternative currency rate loans ranging from 175 to 250 basis points per annum; and (iii) commitment fees ranging from 30 to 45 basis points per annum on the unused portion of the Revolver.
Outstanding borrowings under the Revolver and the Term Loan may be voluntarily repaid at any time, in whole or in part, without premium or penalty.
The Senior Credit Facility is secured by a first priority security interest in the Company’s assets, subject to certain customary exceptions, as well as pledges of its equity interests in certain subsidiaries.
The Senior Credit Facility contains financial covenants requiring the Company to (i) maintain an interest coverage ratio of not less than 3.00 to 1.00 and (ii) maintain a Consolidated Net Leverage Ratio not to exceed 3.50 to 1.00 provided that the maximum leverage ratio for all periods shall be increased by 0.50 to 1.00 for two consecutive quarters after consummation of a qualified acquisition.
The Company was in compliance with its financial and non-financial covenants as of March 31, 2023.
Note 8. Commitments and Contingencies
a. Legal Matters
The Company and its subsidiaries are subject to legal proceedings, including litigation in U.S. federal and state courts, which arise out of, and are incidental to, the ordinary course of the Company’s on-going and historical businesses. The Company is also subject from time to time to governmental investigations by federal and state agencies. The Company cannot predict the outcome of such proceedings with any degree of certainty. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss. When only a range of amounts can be reasonably estimated and no amount within the range is more likely than another, the low end of the range is recorded. These estimates are often initially developed substantially earlier than when the ultimate loss is known, and are refined each quarterly reporting period as additional information becomes available.
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Asbestos Litigation
The Company has been, and continues to be, named as a defendant in lawsuits alleging personal injury or death and seeking various monetary damages due to exposure to asbestos in building materials, products, or in manufacturing operations. The majority of cases are pending in Illinois state courts. There were 187 asbestos cases pending as of March 31, 2023.
Given the lack of any significant consistency to claims (i.e., as to product, operational site, or other relevant assertions) filed against the Company, the Company is generally unable to make a reasonable estimate of the future costs of pending claims or unasserted claims. The aggregate settlement costs and legal and administrative fees associated with the Company’s asbestos litigation has been immaterial for the last three years. As of March 31, 2023, the Company has accrued an immaterial amount related to pending claims.
U.S. Securities and Exchange Commission ("SEC") Subpoena
The Company received a subpoena from the SEC in November 2022 seeking documents related to securities filings and other public disclosures issued in connection with the 2022 election of directors. The Company is cooperating fully with the SEC and its staff.
Civil Investigative Demand
The Company is responding to a civil investigative demand issued by the Department of Justice ("DOJ") in December 2022 pursuant to the False Claims Act ("FCA") requesting documents and information relating to the Company’s compliance with certain regulatory cybersecurity requirements. The Company is cooperating fully with the DOJ.
City of Wabash, Indiana v. Aerojet Rocketdyne Holdings
On November 15, 2021, a lawsuit entitled City of Wabash, Indiana v. Aerojet Rocketdyne Holdings, Inc., Case No. 3:21-cv-878 was filed in the United States District Court for the Northern District of Indiana against the Company alleging causes of action under the Comprehensive Environmental Response Compensation and Liability Act and the Indiana Environmental Legal Action Statute and seeking damages, reasonable attorneys’ fees and costs. The action was served on the Company on January 11, 2022. The Company will vigorously contest the complaint’s allegations and has not recorded any liability for this matter as of March 31, 2023.
b. Environmental Matters
The Company is involved in approximately 40 environmental matters under the Comprehensive Environmental Response Compensation and Liability Act, the Resource Conservation Recovery Act, and other federal, state, and local laws relating to soil and groundwater contamination, hazardous waste management activities, and other environmental matters at some of its current and former facilities. The Company is also involved in a number of remedial activities at third party sites, not owned by the Company, where it is designated a potentially responsible party ("PRP") by either the U.S. Environmental Protection Agency ("EPA") and/or a state agency. In many of these matters, the Company is involved with other PRPs. In some instances, the Company’s liability and proportionate share of costs have not been determined largely due to uncertainties as to the nature and extent of site conditions and the Company’s involvement. While government agencies frequently claim PRPs are jointly and severally liable at such sites, in the Company’s experience, interim and final allocations of liability and costs are generally made based on relative contributions of waste or contamination. Anticipated costs associated with environmental remediation that are probable and estimable are accrued. In cases where a date to complete remedial activities at a particular site cannot be determined by reference to agreements or otherwise, the Company projects costs over an appropriate time period not exceeding 15 years. In such cases, generally the Company does not have the ability to reasonably estimate environmental remediation costs that are beyond this period. Factors that could result in changes to the Company’s estimates include completion of current and future soil and groundwater investigations, new claims, future agency demands, discovery of more or less contamination than expected, discovery of new contaminants, modification of planned remedial actions, changes in estimated time required to remediate, new technologies, and changes in laws and regulations.
As of March 31, 2023, the aggregate range of these anticipated environmental costs was $285.3 million to $441.4 million and the accrued amount was $285.3 million. See Note 8(c) for a summary of the environmental reserve activity. Of these accrued liabilities, approximately 98 % relates to the Company’s U.S. government contracting business, and a portion of this liability is recoverable. The significant environmental sites are discussed below. The balance of the accrued liabilities, which are not recoverable from the U.S. government, relate to other sites for which the Company’s obligations are probable and estimable.
Sacramento, California Site
In 1989, a federal district court in California approved a Partial Consent Decree ("PCD") requiring Aerojet Rocketdyne, among other things, to conduct a Remedial Investigation and Feasibility Study to determine the nature and extent of impacts due to the release of chemicals from the Sacramento, California site, monitor the American River and offsite public water supply wells, operate Groundwater Extraction and Treatment facilities that collect groundwater at the site perimeter, and pay certain government oversight costs. The primary chemicals of concern for both on-site and off-site groundwater are trichloroethylene, perchlorate, and n-nitrosodimethylamine. A 2002 PCD revision (a) separated the Sacramento site into multiple operable units to allow quicker implementation of remedies for critical areas; (b) required the Company to guarantee up to $75 million (in addition to a prior $20 million guarantee) to assure that Aerojet Rocketdyne’s Sacramento remediation activities are fully funded; and (c) removed approximately 2,600 acres of non-contaminated land from the EPA superfund designation. Obligations under the $75 million aggregate guarantee are limited to $10 million in any year. Both the $75 million aggregate guarantee and the $10 million annual limitation are subject to adjustment annually for inflation.
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Aerojet Rocketdyne is involved in various stages of soil and groundwater investigation, remedy selection, design, construction, operation and maintenance associated with the operable units, all of which are conducted under the direction and oversight of the EPA, including unilateral administrative orders, and the California Department of Toxic Substances Control ("DTSC") and Regional Water Quality Control Board, Central Valley Region ("RWQCB"). On September 22, 2016, the EPA completed its first five-year remedy review of the Sacramento superfund site. The five-year review required by statute and regulation applies to all remedial actions which result in hazardous substances above levels that allow unlimited use and unrestricted exposure. The Company worked with the EPA to address and remedy the findings of the 2016 five-year remedy review. On September 15, 2021, the EPA issued its second five-year remedy review and concluded that the remedies are functioning as intended for the soil and groundwater contamination and that the vapor intrusion investigation and mitigation activities are protective against vapor intrusion risks. The Company is working with the EPA, DTSC, and RWQCB on the implementation of required onsite land use restrictions.
The entire southern portion of the site known as Rio Del Oro was under state orders issued in the 1990s from DTSC and the RWQCB to investigate and remediate soil and groundwater contamination. In 2008, the DTSC released all but approximately 400 acres of the Rio Del Oro property from DTSC’s environmental orders regarding soil contamination although the property remains subject to the RWQCB’s orders to investigate and remediate groundwater environmental contamination emanating offsite from the property.
As of March 31, 2023, the estimated range of anticipated costs discussed above for the Sacramento, California site was $224.1 million to $358.5 million and the accrued amount was $224.1 million included as a component of the Company’s environmental reserves. Expenditures associated with this matter are partially recoverable. See Note 8(c) for further discussion on recoverability.
Baldwin Park Operable Unit ("BPOU")
As a result of its former Azusa, California operations, in 1994, Aerojet Rocketdyne was named a PRP by the EPA in the area of the San Gabriel Valley Basin superfund site known as the BPOU. In 2002, Aerojet Rocketdyne, along with seven other PRPs (the "Cooperating Respondents") signed a project agreement with the San Gabriel Basin Water Quality Authority, the Main San Gabriel Basin Watermaster, and five water companies. The 2002 project agreement terminated in 2017 and the parties executed a project agreement which became operational on May 9, 2017. The agreement has a ten-year term and requires the Cooperating Respondents to fund through an escrow account the ongoing operation, maintenance, and administrative costs of certain treatment and water distribution facilities owned and operated by the water companies. There are also provisions in the project agreement for maintaining financial assurance.
Pursuant to the 2017 agreement with the remaining Cooperating Respondents, Aerojet Rocketdyne's current share of future BPOU costs will be approximately 74 %.
As part of Aerojet Rocketdyne’s sale of its Electronics and Information Systems ("EIS") business to Northrop in October 2001, the EPA approved a prospective purchaser agreement with Northrop to absolve it of a pre-closing liability for contamination caused by the Azusa, California operations, which liability remains with Aerojet Rocketdyne. As part of that agreement, the Company agreed to provide a $25 million guarantee of its obligations under the project agreement.
As of March 31, 2023, the estimated range of anticipated costs was $45.2 million to $55.4 million and the accrued amount was $45.2 million included as a component of the Company’s environmental reserves. Expenditures associated with this matter are partially recoverable. See Note 8(c) for further discussion on recoverability.
c. Environmental Reserves and Estimated Recoveries
Environmental Reserves
The Company reviews on a quarterly basis estimated future remediation costs and has an established practice of estimating environmental remediation costs over a fifteen year period, except for those environmental remediation costs with a specific contractual term. Environmental liabilities at the BPOU site are currently estimated through the term of the project agreement, which expires in May 2027. As the period for which estimated environmental remediation costs lengthens, the reliability of such estimates decreases. These estimates consider the investigative work and analysis of engineers, outside environmental consultants, and the advice of legal staff regarding the status and anticipated results of various administrative and legal proceedings. In most cases, only a range of reasonably possible costs can be estimated. In establishing the Company’s reserves, the most probable estimate is used when determinable; otherwise, the minimum amount is used when no single amount in the range is more probable. Accordingly, such estimates can change as the Company periodically evaluates and revises these estimates as new information becomes available. The Company cannot predict whether new information gained as projects progress will affect the estimated liability accrued. The timing of payment for estimated future environmental costs is influenced by a number of factors, such as the regulatory approval process and the time required designing, constructing, and implementing the remedy.
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| Aerojet Rocketdyne- Sacramento | Aerojet Rocketdyne- BPOU | Other Aerojet Rocketdyne Sites | Total Aerojet Rocketdyne | Other | Total Environmental Reserve | ||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Additions/Adjustments | ( | ||||||||||||||||||||||||||||||||||
| Expenditures | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||
| March 31, 2023 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
The effect of the final resolution of environmental matters and the Company’s obligations for environmental remediation and compliance cannot be accurately predicted due to the uncertainty concerning both the amount and timing of future expenditures and due to regulatory or technological changes. The Company continues its efforts to mitigate past and future costs through pursuit of claims for recoveries from insurance coverage and other PRPs and continued investigation of new and more cost effective remediation alternatives and associated technologies.
Estimated Recoveries
On January 12, 1999, Aerojet Rocketdyne and the U.S. government reached a settlement agreement ("Global Settlement") covering environmental costs associated with the Company's Sacramento site and its former Azusa site. Pursuant to the Global Settlement, the Company can recover 88 % of its environmental remediation costs through the establishment of prices for Aerojet Rocketdyne's products and services sold to the U.S. government. Additionally, in conjunction with the sale of the EIS business in 2001, Aerojet Rocketdyne entered into an agreement with Northrop (the "Northrop Agreement") whereby Aerojet Rocketdyne is reimbursed by Northrop for a portion of environmental expenditures eligible for recovery under the Global Settlement, subject to an annual billing limitation of $6.0 million and a cumulative limitation of $189.7 million, which was reached in June 2017. The following table summarizes the Northrop Agreement activity (in millions):
| Total reimbursable costs under the Northrop Agreement | $ | ||||
| Amount reimbursed to the Company through March 31, 2023 | ( | ||||
| Receivable from Northrop included in the unaudited balance sheet at March 31, 2023 | $ | ||||
Environmental remediation costs are primarily incurred by the Company's Aerospace and Defense segment, and certain of these costs are recoverable from the Company's contracts with the U.S. government. The Company currently estimates approximately 12 % of its future Aerospace and Defense segment environmental remediation costs will not likely be reimbursable and are expensed. Allowable environmental remediation costs are charged to the Company’s contracts with the U.S. government as the costs are incurred. Because these costs are recovered through forward-pricing arrangements, the ability of Aerojet Rocketdyne to continue recovering these costs from the U.S. government depends on Aerojet Rocketdyne’s sustained business volume from U.S. government contracts and programs.
While the Company continues to seek an arrangement with the U.S. government to recover environmental expenditures in excess of the reimbursement ceiling identified in the Global Settlement, there can be no assurances that such a recovery will be obtained, or if not obtained, that such unreimbursed environmental expenditures will not have a materially adverse effect on the Company’s operating results, financial condition, and/or cash flows.
Environmental reserves and estimated recoveries impact to unaudited condensed consolidated statements of operations
| Three months ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In millions) | |||||||||||
| Expense to unaudited condensed consolidated statements of operations | $ | $ | |||||||||
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d. Arrangements with Off-Balance Sheet Risk
As of March 31, 2023, arrangements with off-balance sheet risk consisted of:
•$22.6 million in outstanding commercial letters of credit, the majority of which may be renewed, primarily to collateralize obligations for environmental remediation and insurance coverage.
•$76.6 million in outstanding surety bonds to primarily satisfy indemnification obligations for environmental remediation coverage.
•$31.5 million in commitments associated with professional consulting services related to the Merger with L3Harris.
•$120.0 million aggregate in guarantees by the Company of Aerojet Rocketdyne’s obligations to U.S. government agencies for environmental remediation activities.
•Guarantees, jointly and severally, by the Company’s material domestic subsidiaries of their obligations under the Senior Credit Facility.
In addition to the items discussed above, the Company has and will from time to time enter into certain types of contracts that require the Company to indemnify parties against potential third-party and other claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnification to purchasers of its businesses or assets including, for example, claims arising from the operation of the businesses prior to disposition, and liability to investigate and remediate environmental contamination existing prior to disposition; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for claims arising from the use of the applicable premises; and (iii) certain agreements with officers and directors, under which the Company may be required to indemnify such persons for liabilities arising out of their relationship with the Company. The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated.
Additionally, the Company has open purchase orders and other commitments to suppliers, subcontractors, and other outsourcing partners for equipment, materials, and supplies in the normal course of business. These amounts are based on volumes consistent with anticipated requirements to fulfill purchase orders or contracts for product deliveries received, or expected to be received, from customers. A substantial portion of these amounts are recoverable through the Company's contracts with the U.S. government.
Note 9. Retirement Benefits
The following table presents the components of retirement benefits (income) expense:
| Pension Benefits | Postretirement Medical and Life Insurance Benefits | ||||||||||||||||||||||
| Three months ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Interest cost on benefit obligation | $ | $ | $ | $ | |||||||||||||||||||
| Expected return on assets | ( | ( | |||||||||||||||||||||
| Amortization of net losses (gains) | ( | ( | |||||||||||||||||||||
| Retirement benefits (income) expense | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
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Note 10. Operating Segments and Related Disclosures
The Company’s operations are organized into two operating segments based on different products and customer bases: Aerospace and Defense, and Real Estate. The following table presents selected financial information for each reportable segment:
| Three months ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In millions) | |||||||||||
| Net Sales: | |||||||||||
| Aerospace and Defense | $ | $ | |||||||||
| Real Estate | |||||||||||
| Total Net Sales | $ | $ | |||||||||
| Segment Performance: | |||||||||||
| Aerospace and Defense | $ | $ | |||||||||
| Environmental remediation provision adjustments | ( | ( | |||||||||
| GAAP/Cost Accounting Standards retirement benefits expense difference | |||||||||||
| Unusual items (see Note 11) | ( | ( | |||||||||
| Aerospace and Defense Total | |||||||||||
| Real Estate | ( | ( | |||||||||
| Total Segment Performance | $ | $ | |||||||||
| Reconciliation of segment performance to income before income taxes: | |||||||||||
| Segment performance | $ | $ | |||||||||
| Interest expense | ( | ( | |||||||||
| Interest income and other | ( | ||||||||||
| Stock-based compensation | ( | ||||||||||
| Corporate retirement benefits | |||||||||||
| Corporate and other | ( | ( | |||||||||
| Unusual items (see Note 11) | ( | ( | |||||||||
| Income before income taxes | $ | $ | |||||||||
The following table summarizes customers that represented more than 10% of net sales:
| Three months ended March 31, | |||||||||||
| 2023 | |||||||||||