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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
     
   þ   
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended November 30, 2009
or
o
  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 1-1520
 
GenCorp Inc.
(Exact name of registrant as specified in its charter)
 
     
Ohio   34-0244000
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
Highway 50 and Aerojet Road
Rancho Cordova, California
(Address of principal executive offices)
  95742
(Zip Code)
P.O. Box 537012
Sacramento, California
(Mailing address)
  95853-7012
(Zip Code)
 
Registrant’s telephone number, including area code
(916) 355-4000
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of each class
  Name of each exchange on which registered
 
Common Stock, $0.10 par value per share
  New York Stock Exchange and
Chicago Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
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 o     No þ
 
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 þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o The registrant is not yet subject to this requirement.
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) o Yes þ No
 
The aggregate market value of the voting common equity held by nonaffiliates of the registrant as of May 31, 2009 was approximately $118 million.
 
As of January 20, 2010, there were 58.5 million outstanding shares of the Company’s Common Stock, including redeemable common stock, $0.10 par value.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the 2009 Proxy Statement of GenCorp Inc. relating to its annual meeting of shareholders scheduled to be held on March 24, 2010 are incorporated by reference into Part III of this Report.
 


 

 
GENCORP INC.

Annual Report on Form 10-K
For the Fiscal Year Ended November 30, 2009

Table of Contents
 
 
                 
Item
       
Number
       
 
 
1.
    Business     1  
 
1A.
    Risk Factors     13  
 
1B.
    Unresolved Staff Comments     23  
 
2.
    Properties     23  
 
3.
    Legal Proceedings     23  
 
4.
    Submission of Matters to a Vote of Security Holders     27  
 
 
5.
    Market for Registrant’s Common Equity, Related Stockholders’ Matters, and Issuer Purchases of Equity Securities     28  
 
6.
    Selected Financial Data     30  
 
7.
    Management’s Discussion and Analysis of Financial Condition and Results of Operations     31  
 
7A.
    Quantitative and Qualitative Disclosures about Market Risk     54  
 
8.
    Consolidated Financial Statements and Supplementary Data     55  
 
9.
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     118  
 
9A.
    Controls and Procedures     118  
 
9B.
    Other Information     119  
 
 
10.
    Directors, Executive Officers, and Corporate Governance     119  
 
11.
    Executive Compensation     120  
 
12.
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     120  
 
13.
    Certain Relationships and Related Transactions, and Director Independence     121  
 
14.
    Principal Accountant Fees and Services     121  
 
 
15.
    Exhibits and Financial Statement Schedules     122  
    130  
    131  
 EX-10.21
 EX-10.52
 EX-10.53
 EX-21.1
 EX-23.1
 EX-24.1
 EX-31.1
 EX-31.2
 EX-32.1
 
 
* The information called for by Items 10, 11, 12, 13, and 14, to the extent not included in this Report, is incorporated herein by reference to the information to be included under the captions “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Communication with Directors,” “Board Committees,” “Executive Compensation,” “Director Compensation,” “Organization & Compensation Committee Report” “Compensation Committee Interlocks and Insider Participation,” “Security Ownership of Certain Beneficial Owners,” “Security Ownership of Officers and Directors,” “Employment Agreements and Indemnity Agreements,” “Potential Payments upon Termination of Employment or Change in Control,” “Determination of Independence of Directors,” and “Ratification of the Appointment of Independent Registered Public Accounting Firm,” in GenCorp Inc.’s 2010 Proxy Statement, to be filed within 120 days after the close of our fiscal year.


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PART I
 
Item 1.   Business
 
Unless otherwise indicated or required by the context, as used in this Annual Report on Form 10-K, the terms “we,” “our,” and “us” refer to GenCorp Inc. and all of its subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America.
 
Certain information contained in this Annual Report on Form 10-K should be considered “forward-looking statements” as defined by Section 21E of the Private Securities Litigation Reform Act of 1995. All statements in this report other than historical information may be deemed forward-looking statements. These statements present (without limitation) the expectations, beliefs, plans, and objectives of management and future financial performance and assumptions underlying, or judgments concerning, the matters discussed in the statements. The words “believe,” “estimate,” “anticipate,” “project” and “expect,” and similar expressions, are intended to identify forward-looking statements. Forward-looking statements involve certain risks, estimates, assumptions, and uncertainties, including with respect to future sales and activity levels, cash flows, contract performance, the outcome of litigation and contingencies, environmental remediation, availability of capital, and anticipated costs of capital. A variety of factors could cause actual results or outcomes to differ materially from those expected and expressed in our forward-looking statements. Important risk factors that could cause actual results or outcomes to differ from those expressed in the forward-looking statements are described in the section “Risk Factors” in Item 1A of this Report. Additional risk factors may be described from time to time in our future filings with the Securities and Exchange Commission (“SEC”).
 
We are a manufacturer of aerospace and defense systems with a real estate segment that includes activities related to the entitlement, sale, and leasing of our excess real estate assets. Our continuing operations are organized into two segments:
 
Aerospace and Defense — includes the operations of Aerojet-General Corporation (“Aerojet”) which develops and manufactures propulsion systems for defense and space applications, armament systems for precision tactical weapon systems and munitions applications. We are one of the largest providers of such propulsion systems in the United States (“U.S.”). Primary customers served include major prime contractors to the U.S. government, the Department of Defense (“DoD”), and the National Aeronautics and Space Administration (“NASA”).
 
Real Estate — includes activities related to the entitlement, sale, and leasing of our excess real estate assets. We own approximately 12,200 acres of land adjacent to U.S. Highway 50 between Rancho Cordova and Folsom, California, east of Sacramento (“Sacramento Land”). We are currently in the process of seeking zoning changes, removal of environmental restrictions and other governmental approvals on a portion of the Sacramento Land to optimize its value. We have filed applications with and submitted information to governmental and regulatory authorities for approvals necessary to re-zone approximately 6,000 acres of the Sacramento Land. We also own approximately 580 acres in Chino Hills, California. We are currently seeking removal of environmental restrictions on the Chino Hills property to optimize the value of such land.
 
Our fiscal year ends on November 30 of each year. When we refer to a fiscal year, such as fiscal 2009, we are referring to the fiscal year ended on November 30 of that year. The fiscal year of our subsidiary, Aerojet, ends on the last Saturday of November. As a result of the 2008 calendar, Aerojet had 53 weeks of operations in fiscal 2008 compared to 52 weeks of operations in fiscal 2009 and 2007. The additional week of operations, which occurred in the first quarter of fiscal 2008, accounted for $19.1 million in additional net sales.
 
Sales, segment performance, total assets, and other financial data for each segment for fiscal 2009, 2008, and 2007 are set forth in Note 10 to the Consolidated Financial Statements, included in Item 8 of this Report.
 
We were incorporated in Ohio in 1915 and our principal executive offices are located at Highway 50 and Aerojet Road, Rancho Cordova, CA 95742. Our mailing address is P.O. Box 537012, Sacramento, CA 95853-7012 and our telephone number is 916-355-4000.
 
Our Internet website address is www.GenCorp.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


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amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC. We also make available on our Internet web site our corporate governance guidelines and the charters for each of the following committees of our Board of Directors: Audit; Corporate Governance & Nominating; and Organization & Compensation. Our corporate governance guidelines and such charters are also available in print to anyone who requests them.
 
Aerospace and Defense
 
For over 60 years, Aerojet has been an industry leader and pioneer in the development of critical products and technologies that have strengthened the U.S. military and enabled the exploration of space. Aerojet focuses on developing military, civil, and commercial systems and components that address the needs of the aerospace and defense industry markets. Due to the diversity of its propulsion technologies and the synergy of its product lines, we believe Aerojet is in a unique competitive position to offer its customers the most innovative and advanced solutions available in the domestic propulsion market. Aerojet has been able to capitalize on its strong technical capabilities to become a critical provider of components and systems for major propulsion programs. Aerojet propulsion systems have flown on human and robotic missions for NASA since the inception of the U.S. Space Program, and Aerojet has been a major supplier of propulsion products to the DoD since the founding of Aerojet. Principal customers include the DoD, NASA, Raytheon Company (“Raytheon”), Lockheed Martin Corporation (“Lockheed Martin”), United Launch Alliance (“ULA”), and The Boeing Company (“Boeing”).
 
  •  Defense systems — Our defense system products include liquid, solid, and air-breathing propulsion systems and components. In addition, Aerojet is a supplier of both composite and metallic aerospace structural components, fire suppression systems, armament systems for precision tactical weapon systems and munitions applications. Product applications for our defense systems include strategic, tactical and precision strike missiles, missile defense systems, maneuvering propulsion systems, precision war-fighting systems, and specialty metal products.
 
  •  Space systems — Our space systems products include liquid, solid, and electric propulsion systems and components. Product applications for space systems include expendable and reusable launch vehicles, transatmospheric vehicles and spacecraft, separation and maneuvering systems, upper stage engines, satellites, large solid boosters, and integrated propulsion subsystems.
 
Industry Overview
 
Broad support continues for DoD and NASA funding in the Government Fiscal Year ending September 30 (“GFY”), 2010 and beyond. However, these federal department/agency budgets are under severe pressure due to the cost impacts of military operations in Iraq and Afghanistan, and a rising U.S. federal deficit. As a result, both the DoD and NASA budgets are expected to grow at modest levels through 2012.
 
Department of Defense
 
Overall, U.S. defense appropriations have increased substantially since the attacks of September 11, 2001 and ensuing military actions in Afghanistan and Iraq. Defense appropriations have risen to over $508 billion in GFY 2010 from $487 billion in GFY 2009. The DoD budget continues to increase, the overall real rate of growth is expected to be approximately 2% per year. Although the ultimate distribution of the DoD budget remains uncertain, we believe Aerojet is well positioned to benefit from DoD investment in: high-priority, transformational systems that address current war fighting requirements; the re-capitalization of weapon systems and equipment expended during combat deployments; and systems that meet new threats world-wide.
 
The Obama Administration (“Administration”) has indicated a commitment to maintain adequate funding for the DoD and building defense capabilities for the 21st century. Areas that impact Aerojet products include: fully equipping U.S forces for the missions they face; preserving air supremacy; maintaining at sea; protecting the U.S. in cyberspace; ensuring freedom of space; and a pragmatic and cost-effective development of missile defense. Congress is working closely with the Administration on these focus areas.


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NASA
 
In the Administration’s submitted GFY 2010 budget, the President has indicated that NASA’s GFY 2009 plans for the future of human spaceflight may be modified. A panel of experts, called the Augustine Committee, was commissioned to review current space programs, alternatives and issues for moving forward. The Augustine Committee report indicated that significant additional funding for human spaceflight is needed if the U.S. is to maintain its leadership. The Administration is evaluating the human space flight program based on the Augustine Committee’s report. Until the Administration announces its new plans, the future direction of NASA’s human spaceflight program remains unclear. However, regardless of the future direction, Aerojet is well positioned to succeed because of its diverse offerings, innovative technologies and its existing contracts with both traditional and emerging launch providers.
 
Overall, continued strong support from the Administration for science, particularly Earth science, aeronautics and education programs at NASA is expected. We project steady funding with modest growth for NASA.
 
Competition
 
As the only domestic supplier of all four propulsion types — solid, liquid, air-breathing, and electric — we believe that Aerojet is in a unique competitive position. The basis on which Aerojet competes in the Aerospace and Defense industry varies by program, but generally is based upon technology, quality, service, and price. Although market competition is intense, we believe Aerojet possesses innovative and advanced propulsion solutions, combined with adequate resources to continue to compete successfully.
 
Participation in the defense and space propulsion market can be capital intensive requiring long research and development periods that represent significant barriers to entry. Aerojet may partner on various programs with its major customers or suppliers, some of whom are, from time to time, competitors on other programs.
 
The table below lists primary participants in the propulsion market:
 
             
Company   Parent   Propulsion Type   Propulsion Application
 
Aerojet
  GenCorp Inc.   Solid, liquid, air-
breathing, electric
  Launch, in-space, tactical, strategic, missile defense
Alliant Techsystems
  Alliant Techsystems Inc.   Solid, air-breathing   Launch, tactical, strategic, missile defense
American Pacific Corporation
  American Pacific Corporation   Liquid, electric   In-space
Astrium
  European Aeronautics Defense and Space Company; and BAE Systems   Solid, liquid   In-space, tactical
Northrop Grumman Space Technology
  Northrop Grumman Corporation (“Northrop”)   Liquid   In-space
Pratt & Whitney Rocketdyne
  United Technologies Corporation   Liquid, air-breathing, electric   Launch, in-space, missile defense
SpaceX
  SpaceX   Liquid   Launch, in-space
 
The domestic solid and liquid propulsion markets remained unchanged in fiscal 2009 with Aerojet in the number two position in both markets, second to Alliant Techsystems in solid propulsion (“solids”) and Pratt & Whitney Rocketdyne in liquid propulsion (“liquids”).
 
Major Customers
 
As a merchant supplier to the Aerospace and Defense industry, we do not align ourselves with any single prime contractor except on a project-by-project basis. We believe that our position as a merchant supplier has helped us become a trusted partner to our customers, enabling us to maintain strong long-term relationships with a variety of prime contractors. Under each of our contracts, we act either as a subcontractor, where we sell our products to other prime contractors, or as a prime contractor, where we sell directly to the end user.


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The principal end user customers of our products and technology are agencies of the U.S. government and U.S. prime contractors. Since a majority of Aerojet’s sales are, directly or indirectly, to the U.S. government, funding for the purchase of Aerojet’s products and services generally follows trends in U.S. defense spending. However, individual government agencies, which include the military services, the Defense Advanced Research Projects Agency, NASA, the Missile Defense Agency (“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.
 
Customers that represented more than 10% of net sales for the fiscal years presented are as follows:
 
                         
    Year Ended
    2009   2008   2007
 
Raytheon
    31 %     27 %     28 %
Lockheed Martin
    26       26       28  
 
Direct sales to the U.S. government and its agencies, or government customers, and indirect sales to U.S. government customers via direct sales to prime contractors accounted for a total of approximately 88% of sales, or approximately $701.3 million, in fiscal 2009. The following are percentages of net sales by principal end user in fiscal 2009:
 
         
U.S. Army
    21 %
U.S. Navy
    19  
U.S. Air Force
    19  
MDA
    18  
NASA
    11  
         
Total U.S. government customers
    88  
Other customers
    12  
         
Total
    100 %
         
 
Major Programs
 
Defense Systems — Aerojet maintained a strong position in the defense market segment in fiscal 2009 with key new and follow-on awards. Significant new wins included the propulsion system for the Joint Air to Ground Missile (“JAGM”), the Critical Path Divert and Attitude Control System (“CPDACS”), Patriot #2, Stinger, and other controllable solids programs. Important follow-on awards were received on the propulsion system for the Ground Based Midcourse Defense Exoatmospheric Kill Vehicle Divert and Attitude Controls System (“GMD EKV DACS”), Standard Missile 3, and Standard Missile 3 Throttling Divert Attitude Control System. These successes continue to strengthen our position as a propulsion leader in missile defense and tactical systems. We believe Aerojet is in a unique competitive position due to the diversity of propulsion technologies, complete warhead capabilities, composites and metallic structures expertise, and the synergy of its product lines to offer defense customers the most innovative and advanced solutions available in the domestic market.


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A subset of our key defense systems programs are listed below:
 
                 
    Primary
           
Program   Customer   End Users   Program Description   Program Status
 
Advanced Second and Third Stage Booster
  U.S. Air Force   U.S. Air Force   Solid booster   Development
Army Tactical Missile System
  Lockheed Martin   U.S. Army   Tactical solid rocket motors   Production
F-22 Raptor Aircraft
  Boeing   U.S. Air Force   Advanced electron beam welding for airframe structures   Production
Ground Based Mid-Course
Defense Exoatmospheric Kill Vehicle Liquid Divert and Attitude Control Systems
  Raytheon   MDA   Liquid propulsion divert and attitude control propulsion systems   Development/
Production
Javelin
  Lockheed Martin/Raytheon   U.S. Army   Tactical solid rocket motors   Development/
Production
Joint Air to Ground Missile
  Lockheed Martin   U.S. Army   Tactical solid rocket motors   Development
Large Class Propulsion
Application Program
  U.S. Air Force   U.S. Air Force   Strategic solid rocket motors   Development
Minuteman III
  Northrop   U.S. Air Force   Liquid maneuvering propulsion   Development/
Production
Multiple Launch Rocket System
  Lockheed Martin   U.S. Army   Tactical solid rocket motors   Production
Patriot Advanced Capability -3/ Patriot -2
  Lockheed Martin   U.S. Army   Tactical solid rocket motors   Development/
Production
Specialty Metal Products
  General Dynamics
and Others
  U.S. Army   Specialty metal products   Development/
Production
Standard Missile
  Raytheon   U.S. Navy, MDA   Tactical solid rocket motors, throttling divert and attitude control systems and warheads   Development/
Production
Supersonic Sea Skimming Target
  Orbital Sciences Corporation   U.S. Navy   Variable flow ducted rocket (air-breathing)   Production
Tactical Tomahawk
  Raytheon   U.S. Navy   Tactical solid rocket motors and warheads   Production
Terminal High Altitude Air Defense
  Lockheed Martin   MDA   Tactical solid rocket motors   Development Production
Trident D5
  Lockheed Martin   U.S. Navy   Post boost control system   Production
Tube-launched, Optically-tracked, Wire-guided Missile (“TOW”)
  Raytheon   U.S. Army   Tactical missile warheads   Production
 
Space Systems — In fiscal 2009, Aerojet maintained its strong market position in space systems by continued performance on existing contracts and capturing important new propulsion contracts, the most significant new award was the Taurus 2 program with Orbital Sciences. The current financial crisis adversely impacted some of our programs through restructuring and/or delays.
 
Aerojet’s commitment to quality and excellence in its space systems programs was reflected in success on several space exploration and other critical missions during fiscal 2009 using Aerojet’s products, including Mercury Messenger Flyby; H-2 Transfer Vehicle (“HTV”) successful first mission; and launches of Delta II, Delta IV, Atlas V, and space shuttle.
 
These continued space program successes strengthen our legacy of supplying mission critical propulsion systems to the DoD and NASA as we have since the inception of the U.S. civil and military space programs and support our position as a critical supplier to our space systems customers.


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A subset of our key space system programs is listed below:
 
                 
    Primary
           
Program   Customer   End Users   Program Description   Program Status
 
Advanced Extremely High Frequency MilSatCom
  Lockheed Martin   U.S. Air Force   Electric and liquid spacecraft thrusters   Production
Atlas V
  United Launch Alliance   U.S. Air Force, Commercial   Solid “strap-on” booster motors, upper stage thrusters, and separation motors   Production
Bigelow Sundancer
  Bigelow Aerospace   Commercial   Integrated propulsion systems and controls   Development/ Production
Delta II
  United Launch Alliance   NASA, U.S. Air Force, Commercial   Upper stage pressure-fed liquid rocket engines   Production
Delta IV
  United Launch Alliance   NASA, U.S. Air Force, Commercial   Upper stage thrusters   Production
Geostationary Satellite Systems
  Lockheed Martin, Loral, Boeing, Orbital Sciences Corporation, Astrium   Various   Electric and liquid spacecraft thrusters, propellant tanks and bi-propellant apogee engines   Development/ Production
Global Positioning Systems
  Boeing   U.S. Air Force   Integrated propulsion systems   Development/ Production
HTV
  Mitsubishi Heavy Industries   Japan Aerospace Exploration Agency   Liquid spacecraft thrusters   Production
Hydrocarbon Booster
  Air Force Research Laboratory   U.S. Air Force   Liquid booster   Development
LOX Methane Reaction Control Engine
  NASA   NASA   Ascent main engine   Development
Mars Lander Engine
  Jet Propulsion Lab (“JPL”)   JPL   Liquid spacecraft thrusters   Qualification/ Production
Orion Crew Mode & Service Mode Propulsion
  Lockheed Martin/Orbital Sciences   NASA   Propulsion systems and engines for human spaceflight system   Development/ Qualification
Taurus 2
  Orbital Sciences   NASA, Commercial   Provide booster engines for launch vehicle   Qualification/ Production
Upper Stage Engine Technology
  U.S. Air Force Research Laboratory   NASA, U.S. Air Force   Design tools for future upper stage liquid engines   Development
 
Contract Types
 
Under each of its contracts, Aerojet acts either as a prime contractor, where it sells directly to the end user, or as a subcontractor, selling its products to other prime contractors. Research and development contracts are awarded during the inception stage of a program’s development. Production contracts provide for the production and delivery of mature products for operational use. Aerojet’s contracts are primarily categorized as either “fixed-price” or “cost-reimbursable.” During fiscal 2009, approximately 51% of our net sales were from fixed-price contracts, 37% from cost-reimbursable contracts, and 12% from other sales including commercial contracts and real estate activities.
 
Fixed-price contracts are typically (i) fixed-price, (ii) fixed-price-incentive fee, or (iii) fixed-price level of effort contracts. For fixed-price contracts, Aerojet performs work for a fixed price and realizes all of the profit or loss resulting from variations in costs of performance. For fixed-price-incentive contracts, Aerojet 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 generally receives a structured fixed price per labor hour, dependent


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upon the customer’s labor hour needs. All fixed-price contracts present the risk of unreimbursed cost overruns potentially resulting in 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 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 receives adjustments to the contract fee, within designated limits, based on actual results as compared to contractual targets for factors such as cost, performance, quality, and schedule.
 
Many programs under contract have product life cycles exceeding 10 years, such as the Standard Missile, TOW, and Tomahawk programs. It is typical for U.S. government propulsion contracts to be relatively small during development phases that can last from two to five years, followed by low-rate and then full-rate production, where annual funding can grow as high as approximately $30 million to $60 million per year over many years.
 
Government Contracts and Regulations
 
Our sales are driven by pricing based on costs incurred to produce products or perform services under contracts with the U.S. government. U.S. government contracts generally are subject to Federal Acquisition Regulations (“FAR”), agency-specific regulations that implement or supplement FAR, such as the DoD’s Defense Federal Acquisition Regulations (“DFAR”) and other applicable laws and regulations. These regulations impose a broad range of requirements, many of which are unique to government contracting, including various procurement, import and export, security, contract pricing and cost, contract termination and adjustment, and audit requirements. A contractor’s failure to comply with these regulations and requirements could result in reductions of the value of contracts, contract modifications or termination, and the assessment of penalties and fines and could lead to suspension or debarment from government contracting or subcontracting for a period of time. In addition, government contractors are also subject to routine audits and investigations by U.S. government agencies such as the Defense Contract Audit Agency (“DCAA”). These agencies review a contractor’s performance, cost structure, and compliance with applicable laws, regulations, and standards. The DCAA also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation, and information systems.
 
Backlog
 
A summary of our backlog is as follows:
 
                         
    As of November 30,        
    2009     2008        
    (In millions)  
 
Funded backlog
  $ 811.2     $ 674.3          
Unfunded backlog
    379.6       361.1          
                         
Total contract backlog
  $ 1,190.8     $ 1,035.4          
                         
 
Total backlog includes both funded backlog (the amount for which money has been directly appropriated by the U.S. Congress, or for which a purchase order has been received from a commercial 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. Of our November 30, 2009 total contract backlog, approximately 53% is not expected to be filled within one year.
 
Research and Development
 
We view research and development efforts as critical to maintaining our leadership position in markets in which we compete. We maintain an active research and development effort supported primarily by customer funding. Customer-funded research and development expenditures are funded under contract specifications, typically research and development contracts, several of which we believe may become key programs in the


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future. We believe customer-funded research and development activities are vital to our ability to compete for contracts and to enhance our technology base.
 
Aerojet’s company-funded research and development 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.
 
The following table summarizes Aerojet’s research and development expenditures during the past three fiscal years:
 
                         
    Year Ended  
    2009     2008     2007  
    (In millions)  
 
Customer-funded
  $ 245     $ 252     $ 269  
Company-funded
    15       11       17  
                         
Total research and development expenditures
  $ 260     $ 263     $ 286  
                         
 
Suppliers, Raw Materials and Seasonality
 
The national aerospace supply base continues to consolidate due to economic, environmental, and marketplace circumstances beyond Aerojet’s control. The loss of key qualified suppliers of technologies, components, and materials can cause significant disruption to Aerojet program performance and cost.
 
Availability of raw materials and supplies to Aerojet is generally sufficient. Aerojet is sometimes dependent, for a variety of reasons, upon sole-source or flight qualified suppliers and has in some instances in the past experienced difficulties meeting production and delivery obligations because of delays in delivery or reliance on such suppliers. We closely monitor sources of supply to ensure adequate raw materials and other supplies needed in our manufacturing processes are available. As a U.S. government contractor, we are frequently limited to procuring materials and components from sources of supply that meet rigorous customer and/or government specifications or socio-economic criteria. In addition, as business conditions, DoD budgets, and Congressional allocations change, suppliers of specialty chemicals and materials sometimes consider dropping low-volume items from their product lines. This may require us to qualify new suppliers for raw materials on key programs. To date, Aerojet has been successful in mitigating any impacts that could occur through requalifying replacement materials and suppliers. We continue to monitor this situation carefully and in our engineering processes, where we have the opportunity, we are defining materials that are known to be more sustainable and hence, less prone to obsolescence or disruption.
 
We are also impacted, as is the rest of the industry, by increases in the prices and lead-times of raw materials used in production on various fixed-price contracts. Recently, prices and lead times for certain commodity metals, alloy steels, titanium and some aluminum grades have become more competitive due to available production capacity world-wide. Unfortunately, prices and lead times for some chemicals used in solid rocket motor propellants have seen significant increases in recent years. These are highly specialized chemicals such as ammonium perchlorate and LX-14 for example. We have been able to mitigate some of these impacts through the establishment of long term volume agreements that provide for a steady throughput with a corresponding price benefit to Aerojet. In addition, where appropriate, we work closely with suppliers to schedule purchases far enough in advance and in the most economical means possible to minimize program impact.
 
Aerojet’s business is not subject to predictable seasonality. Primary factors affecting the timing of Aerojet’s sales include the timing of government awards, the availability of U.S. government funding, contractual product delivery requirements, customer acceptances, and regulatory issues.
 
Intellectual Property
 
Where appropriate, Aerojet obtains patents in the U.S. and other countries covering various aspects of the design and manufacture of its products. We consider these patents to be important to Aerojet as they illustrate Aerojet’s innovative design ability and product development capabilities. We do not believe the loss or expiration of


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any single patent would have a material adverse effect on the business or financial results of Aerojet or on our business as a whole.
 
Real Estate
 
We own approximately 12,200 acres of land in the Sacramento metropolitan area which we refer to as the Sacramento Land. Acquired in the early 1950s for our aerospace and defense operations, there are large portions used solely to provide safe buffer zones. Modern changes in propulsion technology coupled with the relocation of certain of our propulsion operations led us to determine large portions of the Sacramento Land were no longer needed for operations in Sacramento. Consequently, our plan has been to reposition this excess Sacramento Land to optimize its value.
 
Approximately 6,000 acres have been deemed excess, and is the land we are in the process of entitling for new development opportunities under the brand name Easton.
 
Within Easton, we currently have approximately 1,450 acres entitled, and are seeking entitlements on an additional 4,600 acres. Easton is located 15 miles east of downtown Sacramento, California along U.S. Highway 50, a key growth corridor in the region. We believe Easton has several competitive advantages over other areas, including several miles of freeway accessible frontage, one of the largest single-owner land tracts suitable for development in the Sacramento region, and desirable “in-fill” location surrounded by residential and business properties. The master plan reflects our efforts to make Easton one of the finest master-planned communities in the U.S. Easton will include a broad range of housing, office, industrial, retail, and recreational uses. The broad range of land uses will ensure long-term value enhancement of our excess land.
 
In 2009, we formed a new wholly-owned subsidiary, Easton Development Company, LLC, to continue to execute these entitlement and pre-development activities, and to explore how to maximize value from Easton. Value enhancement may include outright sales, and/or joint ventures with real estate developers, residential builders, and/or other third parties. Those parcels of land that have obtained the necessary entitlements for development or are otherwise suitable for sale were transferred to this new subsidiary. Additional land may be transferred in the future as these or other requirements are achieved.
 
The housing market in the Sacramento region continued to struggle in 2009. However, we believe that this downturn does not change the long-term prospects for the Sacramento region, which we believe still remains an attractive and affordable alternative to the San Francisco Bay Area and other large metropolitan areas of California. We believe the Sacramento area demographic and real estate market supports our objective of creating value through new entitlements and the creation of Easton. The term “entitlements” is generally used to denote the set of regulatory approvals required to allow land to be zoned for requested uses. Required regulatory approvals vary with each land zoning proposal and may include permits, land use master plans, zoning designations, state and federal environmental documentation, and other regulatory approvals unique to the land. The entitlement process in California is long and uncertain with approvals required from various authorities, including local jurisdictions, the U.S. Army Corps of Engineers (“USACE”), and the U.S. Department of Interior, Fish and Wildlife Service (“USFWS”).
 
Our real estate activities are of long-term nature and involve significant risks, including the following: (i) 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; (ii) 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; (iii) we may be unable to obtain sufficient water sources to service our projects, which may prevent us from executing our plans; (iv) our real estate activities require significant capital expenditures and we may not be able to obtain financing on favorable terms, which may render us unable to proceed with our plans; (v) 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; (vi) our property is subject to federal, state, and local regulations and restrictions that may impose significant limitations on our plans; (vii) much of our property is raw land that includes the natural habitats of various endangered or protected wildlife species requiring mitigation; (viii) if our land use plans are approved by the appropriate governmental authorities,


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we may face lawsuits from those who oppose such plans; and (ix) the time frame required for approval of our plans means that we may have to wait years for a significant cash return.
 
The Sacramento Land, including Easton, is summarized below (in acres):
 
                                 
    Environmentally
    Environmentally
             
Easton Projects
  Unrestricted     Restricted(1)     Total     Entitled  
 
Glenborough and Easton Place
    1,043       349       1,392       1,392  
Rio del Oro
    1,818       491       2,309        
Westborough
    1,387       272       1,659        
Hillsborough
    532       97       629        
Office Park and Auto Mall
    47       8       55       55  
                                 
Total Easton acreage
    4,827       1,217       6,044       1,447  
                                 
Operations land(2)
    24       5,179       5,203          
Land available for future entitlement(3)
    676       242       918          
                                 
Total Sacramento Land
    5,527       6,638       12,165          
                                 
 
 
(1) The environmentally restricted acreage described above is subject to restrictions imposed by state and/or federal regulatory agencies because of our historical propulsion system testing and manufacturing activities, even though most of the land was never used for such activities. We are actively working with the various regulatory agencies to have the restrictions removed as early as practicable. See Note 7(c) in Notes to Consolidated Financial Statements for a discussion of the federal and/or state environmental restrictions affecting portions of the Sacramento Land.
 
(2) We believe that the operations land is more than adequate for our long-term needs. As we reassess needs in the future, portions of this land may become available for entitlement.
 
(3) 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 (“County”) and all of it is far from existing infrastructure, making it uneconomical to pursue entitlement for this land at this time.
 
Additional information concerning significant Easton projects is set forth below.
 
Glenborough at Easton and Easton Place
 
In 2004, we filed an application with the County for a general plan amendment and request for re-zoning of an approximate 1,400 acre master-planned community called Glenborough at Easton and Easton Place.
 
In January 2009, the Sacramento County Board of Supervisors (“County”) unanimously approved the Environmental Impact Report (“EIR”), County General Plan Amendments, Large and Small Lot Tentative Subdivision Maps, and the Land Use Master Plans for the Glenborough at Easton and Easton Place project. In 2010, we will continue our efforts to obtain the necessary federal permits under Section 404 of the Clean Water Act and complete the major backbone infrastructure design plans for the first phases of Glenborough at Easton and Easton Place.
 
Approximately 350 acres in Glenborough at Easton are subject to federal environmental restrictions. We believe the timing on removal of these restrictions should not adversely affect the projected phasing of the overall project.
 
Rio Del Oro at Easton
 
In 2002, we filed an application with the County for a general plan amendment and request for re-zoning of a project called Rio del Oro in conjunction with Elliott Homes (“Elliott”). In 2003, this application was transferred to the newly incorporated City of Rancho Cordova (“Rancho Cordova”). Elliott is obligated to pay the costs associated with seeking entitlement for the entire Rio del Oro project, pursuant to our agreement. The Rio del Oro project is


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approximately 3,800 acres, of which Elliott owns approximately 1,500 acres and we own approximately 2,300 acres.
 
The Rancho Cordova staff and its consultants continue work on the EIR and Environmental Impact Statement. We continue to negotiate with Rancho Cordova on total fee burdens, affordable housing obligations, traffic mitigation, and other related items.
 
In 2008, the California Department of Toxic Substance Control (“DTSC”) released approximately 2,300 acres that were formally restricted under the DTSC’s environmental orders regarding soil contamination. The remaining 500 acres remain subject to the DTSC orders and will be released once the soil remediation has been completed. We believe the timing on removal of the remaining restrictions should not adversely affect the projected phasing of the project.
 
Westborough at Easton
 
In 2004, we filed an application with Rancho Cordova for a general plan amendment for an approximate 1,700 acre project named Westborough at Easton. We expect the Westborough project to be completed in two phases. In June 2005, we submitted an updated general plan amendment and a re-zoning application for approximately 1,100 acres as the first phase of Westborough. The second phase consisting of approximately 550 acres lies partially within the jurisdiction of Rancho Cordova and partially within the jurisdiction of the County. Consequently, over the next few years, we will work with Rancho Cordova and the County to reach agreement on the terms and conditions for annexation of the County land by Rancho Cordova. Once an agreement is achieved, we will file a similar application for the second phase with Rancho Cordova.
 
Rancho Cordova continues to work on the various technical studies necessary for the EIR for the first phase of this project. We are also working with the USACE to obtain the necessary permits under Section 404 of the Clean Water Act.
 
In addition, in 2004, we entered into an agreement with Elliott to sell 100 acres of the Westborough property for $3.1 million. This transaction is expected to close in fiscal 2010. The purchase price will be paid at the time of closing.
 
Hillsborough at Easton
 
The Company and other land owners that together control approximately 3,500 acres within the City of Folsom’s Sphere of Influence (“SOI”) are working with the City of Folsom (“Folsom”) to develop a land use plan. Folsom has begun work on the EIR and various related technical studies. Our Hillsborough project is within this acreage. The proposed land uses include residential, office, and retail. The annexation process of the SOI acreage by Folsom is expected to be complex and lengthy. The water source for the entire SOI will be addressed by Folsom as part of the annexation process.
 
Water Supply for Rio del Oro and Westborough
 
In California, all applications for a change in land use must identify a source of water to serve the proposed project. We initially addressed this issue for both the Rio del Oro and Westborough projects with our 2003 water agreement (“Aerojet/SCWA Agreement”) with the Sacramento County Water Agency (“SCWA”). Under the Aerojet/SCWA Agreement, we transferred certain amounts of remediated groundwater from the Sacramento Land to SCWA (“Transferred Water”). Subject to conditions and limitations in the agreement, including all required approvals under the California Environmental Quality Act (“CEQA”), SCWA assumed the responsibility for providing replacement water to those water purveyors who lost wells as a result of groundwater contamination (“Replacement Water”), and committed to supply water to us for development of our Sacramento Land in an amount equal to the difference between the Transferred Water and the Replacement Water. In 2008, SCWA terminated the Aerojet/SCWA Agreement. We are negotiating with SCWA on water supply issues and we believe that these discussions will lead to a resolution and a new agreement. See additional discussion on the Aerojet/SCWA Agreement and the related legal complaint filed against us by SCWA in Note 7(c) in Notes to Consolidated Financial Statements.


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Golden State Water Company (“GSWC”) has filed with the California Public Utilities Commission (“PUC”) seeking approval to provide water service to the Westborough project. Westborough is contiguous to GSWC’s service territory in Eastern Sacramento County. SCWA filed a letter of protest with the PUC with respect to GSWC’s request to serve the Westborough project principally on the basis that the Aerojet/SCWA Agreement had terminated along with an agreement GSWC had entered with SCWA in 2003. We believe that the ongoing discussions between us, GSWC, and SCWA will lead to a resolution and agreement to provide water service to the Westborough project.
 
Leasing & Other Real Estate
 
We currently lease to third parties approximately 300,000 square feet of office space in Sacramento. These leasing activities generated $6.4 million in revenue in fiscal 2009.
 
We own approximately 580 acres of land in Chino Hills, California. This property was used for the manufacture and testing of ordnance. With the sale of our ordnance business in the mid-1990s, we closed this facility and commenced clean-up of the site. We continue to work with state regulators and the City of Chino Hills to complete those efforts. Once the remediation is complete, we will work to maximize the value of the property.
 
Environmental Matters
 
Our current and former business operations are subject to, and affected by, federal, state, local, and foreign environmental laws and regulations relating to the discharge, treatment, storage, disposal, investigation, and remediation of certain materials, substances, and wastes. Our policy is to conduct our business with due regard for the preservation and protection of the environment. We continually assess compliance with these regulations and management of environmental matters. We believe our current operations are in compliance with all applicable environmental laws and regulations.
 
Operation and maintenance costs associated with environmental compliance and management of contaminated sites are a normal, recurring part of our operations. Most of such costs are incurred by our Aerospace and Defense segment and are generally allowable costs under contracts with the U.S. government.
 
Under existing U.S. environmental laws, a Potentially Responsible Party (“PRP”) is jointly and severally liable, and therefore we are potentially liable to the government or 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 a state environmental agency. The nature of environmental investigation and cleanup activities often makes it difficult to determine the timing and amount of any estimated future costs that may be required for remediation measures. However, we review 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 timing of cash payments is not fixed or reliably determinable. See Management’s Discussion and Analysis in Part II, Item 7 of this Report for additional information.
 
Employees
 
As of November 30, 2009, 13% of our 3,071 employees were covered by collective bargaining agreements, which are due to expire in 2011 and 2012. We believe that our relations with our employees are good.


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Item 1A.   Risk Factors
 
We have a substantial amount of debt. Our ability to operate and our financial flexibility 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. As of November 30, 2009, we had $438.6 million of debt. Subject to the limits contained in some of the agreements governing our outstanding debt, we may incur additional debt 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, 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; and
 
  •  increase our vulnerability to general adverse economic and industry conditions.
 
If we are unable to generate sufficient cash flow to service our debt and fund our operating costs, our liquidity may be adversely affected.
 
See Note 15 of the Consolidated Financial Statements for a discussion on recent changes to the Company’s capital structure.
 
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 under our $280.0 million senior credit facility (“Senior Credit Facility”) which would, if not waived by the lenders, accelerate the payment of our debt. A payment default under the Senior Credit Facility could result in cross defaults on our 4% Contingent Convertible Notes (“4% Notes”), 21/4% Convertible Subordinated Debentures (“21/4% Debentures”), and 91/2% Senior Subordinated Notes (“91/2% Notes”).
 
Our debt instruments generally contain various restrictive covenants which include, among others, provisions restricting 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;
 
  •  retain excess cash flow from operations; and
 
  •  consolidate, merge or sell all or substantially all of our assets.


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Our secured debt also contains other customary covenants, including, among others, provisions:
 
  •  relating to the maintenance of the property securing the debt; and
 
  •  restricting our ability to pledge assets or create other liens.
 
In addition, certain covenants in our bank facility require that we maintain certain financial ratios, including a leverage ratio that becomes more restrictive over time.
 
Based on our existing debt agreements, we were in compliance with our financial and non-financial covenants as of November 30, 2009. 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 also result in an event of default that, if not cured or waived, could result in the acceleration of the Senior Credit Facility, 4% Notes, 21/4% Debentures, and 91/2% 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 4% Notes, 21/4% Debentures, and 91/2% Notes. Our indebtedness under the Senior Credit Facility is collateralized by substantially all of our assets, leaving us with limited collateral for additional financing.
 
See Note 15 of the Consolidated Financial Statements for a discussion on recent changes to the Company’s capital structure.
 
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.
 
Our pension plan is currently underfunded and we expect to be required to make cash contributions, which may reduce the cash available for our businesses.
 
The Pension Protection Act (“PPA”), enacted in August 2006, requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the funded status of the plan as of specified measurement dates. Our funded ratio as of November 30, 2008 under the PPA for our defined benefit pension plan was above the ratio required under the PPA, as amended in 2008. The funded ratio as of November 30, 2008, under the PPA for our defined benefit pension plan was 93% which was above the 92% ratio required under the PPA, as amended. The required ratio to be met as of our November 30, 2009 measurement date is 94%. During the fourth quarter of fiscal 2009, we made a voluntary contribution of $4.4 million to improve the plan’s PPA funded status as of November 30, 2009, although there can be no assurance that the amount of this contribution will be sufficient to meet the required ratio. The final calculated PPA funded ratio as of November 30, 2009 is expected to be completed in the second half of 2010. On November 25, 2008, we decided to amend our defined benefit pension and benefits restoration plans to freeze future accruals under such plans. Effective February 1, 2009 and July 31, 2009, future benefit accruals for all current salaried employees and collective bargaining unit employees were discontinued, respectively.
 
The funded status of the pension plan may be adversely affected by the investment experience of the plan’s 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 plan’s assets does not meet our assumptions, if there are changes to the U.S. Internal Revenue Service regulations or other applicable law or if other actuarial assumptions are modified, our future contributions to our underfunded pension plan could be higher than we expect. In addition, changes to the discount rate used to measure pension liabilities could adversely affect the funded status of the plan. Significant cash contribution requirements to our pension plan may adversely affect our ability to meet certain covenants for our Senior Credit Facility which, absent an amendment or


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refinancing, would result in a default under our Senior Credit Facility and cross defaults on our other debt instruments.
 
The level of returns on retirement benefit plan assets, changes in interest rates, changes in legislation, and other factors could affect our financial results.
 
Our earnings may be 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 can result in changes in the assumptions we use. The key assumptions used to estimate retirement benefit plan expense for the following year are: the discount rate and the expected long-term rate of return on plan assets. Our pension expense/income can also be affected by legislation and other government regulatory actions.
 
Economic conditions could materially adversely affect our ability to amend our Senior Credit Facility, and we face the risks of either not being able to do so, or doing so at higher interest expense.
 
We inadvertently failed to register with the SEC the issuance of certain of our common shares under our defined contribution 401(k) employee benefit plan, or the Plan. As a result, certain purchasers of securities pursuant to the Plan may have the right to rescind their purchases for an amount equal to the purchase price paid for the securities (or if such security has been disposed of, to receive damages with respect to any loss on such disposition) plus interest from the date of purchase. We expect to make a registered rescission offer to eligible Plan participants, which could result in our purchase of up to 0.6 million shares of our common stock. Accordingly, we may need to amend our Senior Credit Facility in connection with the rescission offer. There can be no assurance that we will be able to obtain the consent of lenders under our Senior Credit Facility or that, as a condition to consent, the lenders will not require that the terms of the Senior Credit Facility be amended in a manner that is unfavorable to us, including a possible increase in interest, fees, reduction in the amount of the funds available and covenant changes. Furthermore, the current financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of business have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets.
 
Our operations and properties are currently the subject of significant environmental liabilities, and the numerous environmental and other government requirements to which we are subject may become more stringent in the future.
 
We are subject to federal, state and local laws and regulations that, among other things, require us to obtain permits to operate and install pollution control equipment and regulate the generation, storage, handling, transportation, treatment, and disposal of hazardous and solid wastes. These requirements may become more stringent in the future. We may also be subject to fines and penalties relating to the operation of our existing and formerly owned businesses. We 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 major current and former properties is subject to investigation and remediation requirements under the Superfund and other cleanup programs, and the full extent of the required remediation has not yet been determined. Any adverse judgment or cash outlay could have a significant adverse effect on our operating results, financial condition, and/or cash flows.
 
Although some of our environmental costs may be recoverable and we have established reserves, given the many uncertainties involved in assessing liability for environmental claims, our reserves may not be sufficient, which could adversely affect our financial results.
 
As of November 30, 2009, the aggregate range of our environmental costs was $222.7 million to $428.9 million and the accrued amount was $222.7 million, of which $211.1 million relates to Aerojet sites and $11.6 million relates to non-Aerojet sites. We believe the accrued amount for future remediation costs represents the costs that


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could be incurred by us over the contractual term, if any, or the next fifteen years of the estimated remediation, to the extent they are probable and reasonably estimable. However, in many cases the nature and extent of the required remediation has not yet been determined. Given the many uncertainties involved in assessing liability for environmental claims, our reserves may prove to be insufficient. We evaluate the adequacy of those reserves on a quarterly basis, and they could change. In addition, the reserves are based only on known sites and the known contamination at those sites. It is possible that additional sites needing remediation may be identified or that unknown contamination at previously identified sites may be discovered. It is also possible that the regulatory agencies may change clean-up standards for chemicals of concern such as ammonium perchlorate and trichloroethylene. This could lead to additional expenditures for environmental remediation in the future and, given the uncertainties involved in assessing liability for environmental claims, our reserves may prove to be insufficient.
 
Under an agreement with the U.S. government, our environmental expenses related to our Aerojet Sacramento and former Azusa sites are allowable for reimbursement through our government contracts up to 88% of environmental expenses (the “Global Settlement”). Environmental expenses at other Aerojet sites are eligible for reimbursement and treated under the normal rules of cost allowability. Aerojet’s mix of contracts can affect the actual reimbursement made by the U.S. government. Because these costs are recovered through forward pricing arrangements, our ability to continue recovering these costs from the U.S. government depends on Aerojet’s sustained business volume under U.S. government contracts and programs and the relative size of Aerojet’s commercial business. Additionally, in conjunction with the sale of the Electronics and Information Systems business in 2001, Aerojet entered into an agreement with Northrop (“Northrop Agreement”) whereby Aerojet is reimbursed by Northrop for a portion of environmental expenditures eligible for recovery under the Global Settlement subject to annual and cumulative limitations. We believe that we may reach the cumulative limitation under the Northrop Agreement within the next twelve (12) months. While we are seeking an arrangement with the U.S. government to recover environmental expenditures in excess of the current reimbursement ceiling identified in the Northrop Agreement, 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 our operating results, financial condition, and/or cash flows. See Note 7(d) in Notes to Consolidated Financial Statements for additional information.
 
Our environmental expenses related to non-Aerojet sites are generally not recoverable and a significant increase in these estimated environmental expenses could have a significant adverse effect on our operating results, financial condition, and/or cash flows.
 
We are from time to time subject to significant litigation, the outcome of which could adversely affect our financial results.
 
We and our subsidiaries are subject to material litigation. We may be unsuccessful in defending or pursuing these lawsuits or claims. Regardless of the outcome, litigation can be very costly and can divert management’s efforts. Adverse outcomes in litigation, including toxic tort claims pending against Aerojet, product liability claims by former customers of our GDX Automotive business and the appeals of the unfair labor claims brought by former employees of our Snappon SA subsidiary in France, could have a significant 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 88% of our total net sales in fiscal 2009. 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 one or more significant contracts and/or programs could have a material adverse effect on our ability to realize anticipated sales and profits. 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, and our profit would be limited to work completed prior to termination.


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Future reductions or changes in U.S. government spending could adversely affect our financial results.
 
Our primary aerospace and defense customers include the DoD, and its agencies, the government prime contractors that supply products to these customers, and NASA. As a result, we rely on particular levels of U.S. government spending on propulsion systems for defense and space applications 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 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, Congress usually must approve funds for a given program each government fiscal year and may significantly reduce or eliminate funding for a program. A decrease in U.S. DoD and/or NASA expenditures, or the elimination or curtailment of a material program in which we are involved, could have a material adverse effect on our operating results, financial condition, and/or cash flows.
 
If we experience cost overruns on our contracts, we would have to absorb the excess costs which could adversely affect our financial results and our ability to win new contracts.
 
In fiscal 2009, approximately 51% of our net sales were from fixed-price contracts. Under fixed-price contracts, we agree to perform specified work for a fixed price and realize all of the profit or loss resulting from variations in the costs of performing the contract. As a result, all fixed-price contracts involve the inherent risk of unreimbursed cost overruns. To the extent we were to incur unanticipated cost overruns on a program or platform subject to a fixed-price contract, our profitability would be adversely affected. Future profitability is subject to risks including the ability of suppliers to deliver components of acceptable quality on schedule and the successful implementation of automated tooling in production processes.
 
In fiscal 2009, approximately 37% of our net sales were from cost reimbursable contracts. Under cost reimbursable contracts, we agree to be reimbursed for allowable costs and be paid a fee. If our costs are in excess of the final target cost, fees may be adversely affected. If our costs exceed authorized contract funding or they do not qualify as allowable costs under applicable regulations, we will not be reimbursed for those costs. Cost overruns may adversely affect our financial performance and our ability to win new contracts.
 
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 suppliers could result in our customer terminating our contract for default. A termination for default could expose us to liability and adversely affect our financial performance and our ability to win new contracts.
 
Our success and growth in our Aerospace and Defense segment depends on our ability to secure contracts.
 
We encounter intense competition in bidding for contracts. Many of our competitors have financial, technical, production, and other resources substantially greater than ours. Although the downsizing of the defense industry in the early 1990s resulted in a reduction in the aggregate number of competitors, the consolidation has also strengthened the capabilities of some of the remaining competitors resulting in an increasingly competitive environment. 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.


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Our Aerospace and Defense segment is subject to procurement and other related laws and regulations inherent in contracting with the U.S. government, non-compliance with which could adversely affect our financial results.
 
In the performance of contracts with the U.S. government, we are subject to complex and extensive procurement and other related laws and regulations. Possible consequences of a failure to comply, even inadvertently, with these laws and regulations include civil and criminal fines and penalties including, in some cases, double or triple damages, and suspension or debarment from future government contracts and exporting of goods for a specified period of time.
 
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 its 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 government contractor or subcontractor would be impaired.
 
Our inability to adapt to rapid technological changes could impair our ability to remain competitive.
 
The aerospace and defense industry continues to undergo rapid and significant technological development. Our competitors may implement new technologies before us, allowing them to provide more effective products at more competitive prices. Future technological developments could:
 
  •  adversely impact our competitive position if we are unable to react to these developments in a timely or efficient manner;
 
  •  require us to write-down obsolete facilities, equipment, and technology;
 
  •  require us to discontinue production of obsolete products before we can recover any or all of our related research, development and commercialization expenses; or
 
  •  require significant capital expenditures for research, development, and launch of new products or processes.
 
We may experience warranty claims for product failures, schedule delays or other problems with existing or new products and systems.
 
Many of the products we develop and manufacture are technologically advanced systems that must function under demanding operating conditions. Even though we believe that we employ sophisticated and rigorous design, manufacturing and testing processes and practices, we may not be able to successfully launch or manufacture our products on schedule or our products may not perform as intended.
 
If our products fail to perform adequately, some of our contracts require us to forfeit a portion of our expected profit, receive reduced payments, provide a replacement product or service or reduce the price of subsequent sales to the same customer. Performance penalties may also be imposed if we fail to meet delivery schedules or other measures of contract performance. We do not generally insure against potential costs resulting from any required remedial actions or costs or loss of sales due to postponement or cancellation of scheduled operations or product deliveries.
 
The release or explosion of dangerous materials used in our business could disrupt our operations and could adversely affect our financial results.
 
Our business operations involve the handling and production of potentially explosive materials and other dangerous chemicals, including materials used in rocket propulsion and explosive devices. Despite our use of specialized facilities to handle dangerous materials and intensive employee training programs, the handling and production of hazardous materials could result in incidents that temporarily shut down or otherwise disrupt our manufacturing operations and could cause production delays. It is possible that a release of these chemicals or an


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explosion could result in death or significant injuries to employees and others. Material property damage to us and third parties could also occur. The use of these products in applications by our customers could also result in liability if an explosion or fire were to occur. Any release or explosion could expose us to adverse publicity or liability for damages or cause production delays, any of which could have a material adverse effect on our operating results, financial condition, and/or cash flows.
 
Disruptions in the supply of key raw materials, difficulties in the supplier qualification process or increases in prices of raw materials could adversely affect our financial results.
 
We closely monitor sources of supply to assure that adequate raw materials and other supplies needed in our manufacturing processes are available. As a U.S. government contractor, we are frequently limited to procuring materials and components from sources of supply that meet rigorous customer and/or government specifications. In addition, as business conditions, DoD budgets, and Congressional allocations change, suppliers of specialty chemicals and other materials sometimes consider dropping low-volume items from their product lines, which may require us to qualify new suppliers for raw materials on key programs.
 
Current suppliers of some raw materials used in the manufacturing of rocket nozzles, composite cases and explosives have announced plans to relocate, close, and/or discontinue certain product lines. These materials, which include TPB/Flexzone, iron oxide lacquer and other constituents, are used industry-wide and are key to many of our motor and warhead programs. In some situations, increased costs related to new suppliers may not be recoverable under our contracts. In addition, some of these materials may have to be procured from offshore suppliers.
 
The supply of ammonium perchlorate, a principal raw material used in solid propellant, is limited to a single source that supplies the entire domestic solid propellant industry with actual pricing based on the total industry demand. Significant reductions in the total national demand, including as a result of the termination of the space shuttle program, will likely result in significant unit price increases.
 
The industry also currently relies on one primary supplier for carbon fiber, which is used in the production of composite materials. This supplier has multiple manufacturing lines for such material. Although other sources of carbon fiber exist, the addition of a new supplier would require us to qualify the new source for use. The Japanese government has imposed export restrictions on materials that are to be used in offensive weapons systems, which has increased the lead times associated with the product as its export has to be approved by the Japanese Defense Ministry.
 
We are also impacted, as is the rest of the industry, by increases in the prices and lead-times of raw materials used in production on various fixed-price contracts. We continue to experience increases in the price and lead-times of certain commodity metals, primarily steel and aluminum. The schedules and pricing of titanium mill products remain well above historical levels. Additionally, we may not be able to continue to negotiate with our customers economic and/or price adjustment clauses tied to commodity indices to reduce program impact. The DoD has begun to rigorously enforce the provisions of the “Berry Amendment” (DFARS 225-7002, 252.225-7014) which imposes a requirement to procure certain strategic materials critical to national security only from U.S. sources. Due to the limited U.S. supply of these metals and the requirement to use domestic sources, lead times and cost impacts have been significant to our defense programs.
 
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 increase in the prices of raw materials could have a material adverse effect on our operating results, financial condition, and/or cash flows.
 
The real estate market is inherently risky, 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;


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  •  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 require significant capital expenditures and we may not be able to obtain financing on favorable terms, which may render us unable to proceed with our plans;
 
  •  economic and political uncertainties could have an adverse effect on consumer buying habits, construction costs, availability of labor and materials and other factors affecting us and the real estate industry in general;
 
  •  our property is subject to federal, state, and local regulations and restrictions that may impose significant limitations on our plans;
 
  •  much of our property is raw land that includes the natural habitats of various endangered or protected wildlife species requiring mitigation;
 
  •  if our land use plans are approved by the appropriate governmental authorities, we may face lawsuits from those who oppose such plans. Such lawsuits and the costs associated with such opposition could be material and have an adverse effect on our ability to sell property or realize income from our projects; and
 
  •  the time frame required for approval of our plans means that we may 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 occur in the region, our plans and business strategy could be adversely affected.
 
We may expand our operations through acquisitions, which may divert management’s attention and expose us to unanticipated liabilities and 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 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, 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 contingent liabilities. We may also incur costs and divert management attention to acquisitions that are never consummated. Integration of acquired operations may take longer, or be more costly or disruptive to our business, than originally anticipated.
 
Although we undertake a due diligence investigation of each business that we have acquired or may acquire, there may be liabilities of the acquired companies that we fail to, or are unable to, discover during the due diligence investigation and for which we, as a successor owner, may be responsible. In connection with acquisitions, we


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generally seek to minimize the impact of these types of potential liabilities through indemnities and warranties from the seller. However, these indemnities and warranties, if obtained, may not fully cover the liabilities due to limitations in scope, amount or duration, financial limitations of the indemnitor or warrantor, or other reasons.
 
We may incur additional costs related to divestitures, which could adversely affect our financial results.
 
In connection with our divestitures of the Fine Chemicals and GDX Automotive businesses in fiscal 2005 and fiscal 2004, respectively, we have incurred and may incur additional costs, including costs related to the closure of a manufacturing facility in Chartres, France. As part of these and other divestitures, we have provided customary indemnification to the purchasers for such matters as claims arising from the operation of the businesses prior to disposition, including warranty and income tax matters, and liability to investigate and remediate environmental contamination existing prior to disposition. These additional costs and the indemnification of the purchasers of our former businesses may require additional cash expenditures, which could have a material adverse effect on our operating results, financial condition, and/or cash flows.
 
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 November 30, 2009, 13% of our 3,071 employees were covered by collective bargaining agreements, which are due to expire in 2011 and 2012. 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.
 
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.
 
Due to the nature of our business, our sales levels may fluctuate causing our quarterly operating results to fluctuate.
 
Changes in our operating results from quarter to quarter may result in volatility in the market price of our common stock. Our quarterly and annual sales are affected by a variety of factors that may lead to significant variability in our operating results. In our Aerospace and Defense segment, sales earned under long-term contracts are recognized either on a cost basis, when deliveries are made, or when contractually defined performance milestones are achieved. The timing of deliveries or milestones may fluctuate from quarter to quarter. In our Real Estate segment, sales of property may be made from time to time, which may result in variability in our operating results and cash flows.
 
We face certain significant risk exposures and potential liabilities that may not be adequately covered by indemnity or insurance.
 
A significant portion of our business relates to developing and manufacturing propulsion systems for defense and space applications, armament systems for precision tactical weapon systems and munitions applications. New technologies may be untested or unproven. In addition, we may incur significant liabilities that are unique to our products and services. In some, but not all, circumstances, we may receive indemnification from the U.S. government. While we maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and it is not possible to obtain insurance to protect against all operational risks and


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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.
 
We use estimates in accounting for most of our programs. Changes in our estimates could affect our future financial results.
 
Contract accounting requires judgment relative to assessing risks, estimating contract sales and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total sales and cost at completion is complicated and subject to many variables. For example, assumptions have to be made regarding the length of time to complete the contract because costs also include expected increases in wages and prices for materials. Similarly, assumptions have to be made regarding the future impacts of efficiency initiatives and cost reduction efforts. Incentives or penalties related to performance on contracts are considered in estimating sales and profit rates, and are recorded when there is sufficient information for us to assess anticipated performance. Estimates of award and incentive fees are also used in estimating sales and profit rates based on actual and anticipated awards. Because of the significance of the judgments and estimation processes described above, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances, or estimates may adversely affect our future period operating results, financial condition, and/or cash flows.
 
New accounting standards could result in changes to our methods of quantifying and recording accounting transactions, and could affect our financial results.
 
Changes to generally accepted accounting principles in the United States of America arise from new and revised standards, interpretations and other guidance issued by the Financial Accounting Standards Board (“FASB”), the SEC, and others. In addition, the U.S. government may issue new or revised Cost Accounting Standards (“CAS”) or Cost Principles. The effects of such changes may include prescribing an accounting method where none had been previously specified or prescribing a single acceptable method of accounting from among several acceptable methods that currently exist. Such changes could result in unanticipated effects on our operating results, financial condition and/or cash flows. In addition, should legislation and CAS alignment related to the PPA not occur, some of our cash contributions required under the PPA to our defined benefit pension plan may not be immediately recoverable, which could result in material adverse effect on our operating results, financial condition, and/or cash flows. Further, our current Forward Pricing Rates (“FPRs”), did not yet reflect the full effect of the PPA requirements at November 30, 2009. The PPA funding requirements are expected to be incorporated into our FPRs when the CAS Board revises the applicable standards, as is required by the PPA.
 
The accounting method for convertible debt securities that may be settled in cash is the subject of recent changes that could have a material effect on our reported financial results.
 
In May 2008, the FASB issued authoritative guidance which applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. Under this new guidance, an entity must separately account for the liability and equity components of convertible debt securities that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of the new guidance on the accounting for convertible debt securities that are affected is that the equity component would be included in the additional paid-in capital section of shareholders’ deficit on our consolidated balance sheets and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of convertible debt securities. We will adopt this guidance in the first quarter of fiscal 2010. Going forward, we expect to report a significant increase in non-cash interest expense in our financial results because this guidance requires interest to include both the current period’s amortization of the debt discount in addition to the instrument’s coupon interest.
 
Failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act of 2002 could negatively impact the market price of our common stock.
 
If, in the future, we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis


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that we have effective internal controls over financial reporting in accordance with the Sarbanes-Oxley Act of 2002. Failure to achieve and maintain an effective internal control environment could negatively impact the market price of our common stock.
 
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
 
GenCorp Inc.
Highway 50 and Aerojet Road
Rancho Cordova, California 95742
 
Mailing address:
P.O. Box 537012
Sacramento, California 95853-7012
 
Operating/Manufacturing/Research/Design/Marketing Locations
 
         
Aerospace and Defense
Aerojet-General Corporation
Sacramento, California
  Design/Manufacturing Facilities:
Camden, Arkansas*
Clearfield, Utah*
Gainesville, Virginia*
Jonesborough, Tennessee**
Orange, Virginia
Rancho Cordova, California (owned and leased)
Redmond, Washington
Socorro, New Mexico*
Vernon, California*
  Marketing/Sales Offices:
Huntsville, Alabama*
Southfield, Michigan*
Arlington, Virginia*
Real Estate
Folsom, California *
       
 
 
* An asterisk next to a facility listed above indicates that it is a leased property.
 
** This facility is owned and operated by Aerojet Ordnance Tennessee, Inc., a wholly-owned subsidiary of Aerojet.
 
We believe each of the facilities is adequate for the business conducted at that facility. The facilities are suitable and adequate for their intended purpose and taking into account current and planned future needs. A portion of Aerojet’s property in California, and its Redmond, Washington and Orange, Virginia facilities are encumbered by a deed of trust or mortgage. In addition, we own and lease properties (primarily machinery and warehouse and office facilities) in various locations for use in the ordinary course of our business.
 
Item 3.   Legal Proceedings
 
The following information pertains to legal proceedings, including proceedings relating to environmental matters, which are discussed in detail in Notes 7(b) and 7(c) in Notes to Consolidated Financial Statements.


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Groundwater Cases
 
South El Monte Operable Unit (“SEMOU”) Related Cases
 
In October 2002, Aerojet and approximately 65 other individual and corporate defendants were served with four civil suits filed in the U.S. District Court for the Central District of California that seek recovery of costs allegedly incurred or to be incurred in response to the contamination present at the South El Monte Operable Unit of the San Gabriel Valley Superfund site. The cases are denominated as follows:
 
San Gabriel Valley Water Company v. Aerojet-General Corporation, et al., Case No. CV-02-6346 ABC (RCx), U.S. District Court, Central District of CA, served October 30, 2002.
 
San Gabriel Basin Water Quality Authority v. Aerojet-General Corporation, et al., Case No. CV-02-4565 ABC (RCx), U.S. District Court, Central District of CA, served October 30, 2002.
 
Southern California Water Company v. Aerojet-General Corporation, et al., Case No. CV-02-6340 ABC (RCx), U.S. District Court, Central District of CA, served October 30, 2002.
 
The City of Monterey Park v. Aerojet-General Corporation, et al., Case No. CV-02-5909 ABC (RCx), U.S. District Court, Central District of CA, served October 30, 2002.
 
The cases have been coordinated for ease of administration by the court. The plaintiffs’ claims against Aerojet are based upon allegations of discharges from a former site in the El Monte area. The total cost estimate to implement projects under a Unilateral Administrative Order (“UAO”) prepared by the EPA and the water entities is approximately $90 million. Aerojet investigations do not identify a credible connection between the contaminants identified by the plaintiff water entities in the SEMOU and those detected at Aerojet’s former facility located in El Monte, California, near the SEMOU (“East Flair Drive site”). Aerojet has filed third-party complaints against several water entities on the basis that they introduced perchlorate-containing Colorado River water to the basin. Those water entities have filed motions to dismiss Aerojet’s complaints. The motions as well as discovery have been stayed, pending efforts to resolve the litigation through mediation. During the period in which the litigation has been stayed, EPA, the California Department of Toxic Substances Control and the plaintiff water entities have reached settlements through the mediation process with various of the parties sued, which have been brought to the Federal District Court for approval. Certain of the settlements have been challenged by Aerojet and other defendants and are not finally resolved.
 
Aerojet has recently received correspondence from EPA on behalf of itself, the DTSC and the Water Entities regarding settlement. Aerojet intends to try to reach a good faith settlement with EPA, DTSC and the Water Entities to resolve claims. If settlement negotiations fail, the litigation stay is likely to be lifted and EPA may refer the matter to the U.S. Department of Justice for litigation, seeking to hold Aerojet liable for past and future costs, to recover costs of suit and attorneys’ fees, and as to any accrued interest, penalties or statutory damages. Should settlement not be reached, Aerojet intends to vigorously defend itself.
 
Sacramento Cases
 
In December 2007, Aerojet was named as a defendant in a lawsuit brought by six individuals who allegedly resided in the vicinity of Aerojet’s Sacramento facility. The case is entitled Caldwell et al. v. Aerojet-General Corporation, Case No. 34-2000-00884000CU-TT-GDS, Sacramento County (CA) Superior Court and was served April 3, 2008. Plaintiffs allege that Aerojet contaminated groundwater to which plaintiffs were exposed and which caused plaintiffs illness and economic injury. Plaintiffs filed two subsequent amended complaints, naming additional plaintiffs. Aerojet filed a demurrer to the second amended complaint, which was denied by the trial court in December 2008. The court held that the issue as to whether the plaintiffs were on actual notice of the potential source of their injuries is an issue of fact for trial that cannot be resolved on demurrer. Aerojet’s subsequent Petition for a Writ of Mandate filed with the California Court of Appeal Third District, seeking reversal of the court’s ruling on the demurrer was denied without comment. Aerojet will continue to seek dismissal of those claims at the trial court level. On December 29, 2009, plaintiffs served a Third Amended Complaint, adding four additional plaintiffs to the action, which brings the total number of individuals on whose behalf suit has been filed to eighteen.


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Aerojet will file an answer to the third amended complaint, denying liability. Discovery is continuing. The Company is unable to make a reasonable estimate of the future costs of these claims.
 
In August 2003, the County of Sacramento and the Sacramento County Water Agency (collectively, “SCWA”) and Aerojet entered into a water agreement (“Agreement”). Under the Agreement, Aerojet agreed to transfer remediated groundwater to SCWA. This was anticipated to satisfy Aerojet’s water replacement obligations in eastern Sacramento County. Subject to various provisions of the Agreement, including approval under the California Environmental Quality Act, SCWA assumed Aerojet’s responsibility for providing replacement water to American States Water Company and other impacted water purveyors up to the amount of remediated water Aerojet transfers to the County of Sacramento (“County”). Aerojet also agreed to pay SCWA approximately $13 million over several years toward the cost of constructing a replacement water supply project. If the amount of Aerojet’s transferred water was in excess of the replacement water provided to the impacted water purveyors, SCWA committed to make such water available for the entitlement of Aerojet’s land in an amount equal to the excess.
 
In April 2008, SCWA unilaterally terminated the Agreement. Subsequent to this unilateral termination of the Agreement, the Company and The Boeing Company (“Boeing,” successor to the McDonnell Douglas Corporation (“MDC”)), the former owner of the Inactive Rancho Cordova Test Site (“IRCTS”) entered into negotiations with SCWA in an attempt to resolve matters and reach a new agreement. Additionally, SCWA and Aerojet entered into a Tolling Agreement through June 30, 2009 tolling any suits or claims arising from environmental contamination or conditions on the former IRCTS property.
 
On June 30, 2009, SCWA notified Aerojet and Boeing that it was not prepared to extend the tolling period and intended to file suit. On July 1, 2009, the County and SCWA filed a complaint against Aerojet and Boeing in the U.S. District Court for the Eastern District of California, in Sacramento, County of Sacramento; Sacramento County Water Agency v. Aerojet-General Corporation and The Boeing Corporation [sic], Civ. No. 2:09-at-1041. In the complaint, the County and SCWA alleged that because groundwater contamination from various sources including Aerojet, Boeing/MDC, and the former Mather Air Force Base, was continuing, the County and SCWA should be awarded unspecified monetary damages as well as declaratory and equitable relief. The complaint was served, but the parties entered into a joint stipulation on August 27, 2009, to stay all proceedings until May 30, 2010, pending settlement discussions. The Company cannot predict the outcome of this proceeding with any certainty at this time.
 
Vinyl Chloride Litigation
 
Between the early 1950s and 1985, the Company produced polyvinyl chloride (“PVC”) resin at its former Ashtabula, Ohio facility. PVC is one of the most common forms of plastic currently on the market. A building block compound of PVC is vinyl chloride (“VC”), now listed as a known carcinogen by several governmental agencies. The Occupational Safety and Health Administration (“OSHA”) have regulated workplace exposure to VC since 1974.
 
Since the mid-1990s, the Company has been named in numerous cases involving alleged exposure to VC. In the majority of such cases, the Company is alleged to be a “supplier/manufacturer” of PVC and/or a civil co-conspirator with other VC and PVC manufacturers as a result of membership in a trade association. Plaintiffs generally allege that the Company and other defendants suppressed information about the carcinogenic risk of VC to industry workers, and placed VC or PVC into commerce without sufficient warnings. A few of these cases alleged VC exposure through various aerosol consumer products, in that VC had been used as an aerosol propellant during the 1960s. Defendants in these “aerosol” cases included numerous consumer product manufacturers, as well as the more than 30 chemical manufacturers. The Company used VC internally, but never supplied VC for aerosol or any other use.
 
As of November 30, 2009, there was one vinyl chloride case pending against the Company which involved an employee at a facility owned or operated by others.


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The following table sets forth information related to vinyl chloride litigation:
 
                         
    Year Ended  
    2009     2008     2007  
    (Dollars in thousands)  
 
Claims filed
    1             2  
Claims dismissed
    1             1  
Claims settled
          2       6  
Claims pending
    1       1       3  
Aggregate settlement costs
  $     $ 6     $ 849  
Average settlement costs
  $     $ 3     $ 141  
 
Legal and administrative fees for the vinyl chloride cases for fiscal years 2008 and 2007 were $0.3 million and $0.3 million, respectively.
 
Asbestos Litigation
 
The Company has been, and continues to be, named as a defendant in lawsuits alleging personal injury or death due to exposure to asbestos in building materials, products, or in manufacturing operations. The majority of cases have been filed in Madison County, Illinois and San Francisco, California. There were 134 cases pending as of November 30, 2009.
 
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 unable to make a reasonable estimate of the future costs of pending or unasserted claims. Accordingly, no estimate of future liability has been accrued for such contingencies.
 
The following table sets forth information related to asbestos litigation:
 
                         
    Year Ended  
    2009     2008     2007  
    (Dollars in thousands)  
 
Claims filed
    27 *     33 *     57 *
Claims consolidated
    23              
Claims dismissed
    25       31       43  
Claims settled
    2       5       8  
Claims pending
    134       157       160  
Aggregate settlement costs
  $ 35     $ 246     $ 72  
Average settlement costs
  $ 17     $ 49     $ 9  
 
 
* This number is net of two cases tendered to a third party under a contractual indemnity obligation.
 
Legal and administrative fees for the asbestos cases for fiscal years 2009, 2008, and 2007 were $0.4 million, $0.5 million, and $0.9 million, respectively.
 
Snappon SA Wrongful Discharge Claims
 
In November 2003, the Company announced the closing of a manufacturing facility in Chartres, France owned by Snappon SA, a subsidiary of the Company, previously involved in the automotive business. In accordance with French law, Snappon SA negotiated with the local works’ council regarding the implementation of a social plan for the employees. Following the implementation of the social plan, approximately 188 of the 249 former Snappon employees sued Snappon SA in the Chartres Labour Court alleging wrongful discharge. The claims were heard in two groups. On February 19, 2009, the Versailles Court of Appeal issued a decision in favor of Group 2 plaintiffs and based on this, the Court awarded damages of €1.9 million (approximately $2.7 million) plus interest. On April 7, 2009, the Versailles Court of Appeal issued a decision in favor of Group 1 plaintiffs and based on this, the Court awarded damages of €1.0 million (approximately $1.4 million) plus interest. During the second quarter of


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fiscal 2009, Snappon SA filed for declaration of suspensions of payments with the clerk’s office of the Paris Commercial Court, and the claims will likely be discharged through those proceedings.
 
Other Legal Proceedings
 
On August 31, 2004, the Company completed the sale of its GDX business to an affiliate of Cerberus Capital Management, L.P. (“Cerberus”). In accordance with the divestiture agreement, the Company provided customary indemnification to Cerberus for certain liabilities accruing prior to the closing of the transaction (“the Closing”). Cerberus notified the Company of a claim by a GDX customer that alleges that certain parts manufactured by GDX prior to the Closing failed to meet customer specifications. The Company has assumed the defense of this matter and based on its investigation of the facts and defenses available under the contract and local law, and in November 2008 denied all liability for this claim. On January 23, 2009, GenCorp received correspondence from the GDX customer requesting that the Company provide it with a settlement proposal by February 6, 2009, threatening that it would initiate legal proceedings otherwise. GenCorp neither responded nor otherwise tolled the statute of limitations with negotiations. Nothing further has been received since then and no legal proceedings have been initiated.
 
In August 2007, the Company, along with numerous other companies, received from the USFWS a notice of a Natural Resource Damage (“NRD”) Assessment Plan for the Ottawa River and Northern Maumee Bay. The Company previously manufactured products for the automotive industry at a Toledo, Ohio site, which was adjacent to the Ottawa River. This facility was divested in 1990 and the Company indemnified the buyer for claims and liabilities arising out of certain pre-divestiture environmental matters. A group of PRPs, including GenCorp, was formed to respond to the NRD assessment and to pursue funding from the Great Lakes Legacy Act for primary restoration. The group has undertaken a restoration scoping study. Early data collection indicates that the primary restoration project total cost may be in the range of $47 to $49 million. The group has received a commitment for matching federal funds for the restoration project, which will consist of river dredging and land-filling river sediments. Based on a review of the current facts and circumstances with counsel, management has provided for what is believed to be a reasonable estimate of the loss exposure for this matter. Still unresolved at this time is the actual Natural Resource Damage Assessment itself. It is not possible to predict the outcome or timing of these types of assessments, which are typically lengthy processes lasting several years, or the amounts of or responsibility for these damages.
 
In 2008, Textileather, Inc. (“Textileather”), the current owner of the former Toledo, Ohio site, filed a lawsuit against the Company claiming, among other things, that the Company failed to indemnify and defend Textileather for certain contractual environmental obligations. A second suit related to past and future RCRA closure costs was filed in late 2009. A trial is scheduled for spring 2010. The Company is vigorously defending against both actions.
 
On January 6, 2010, the Company received a subpoena duces tecum from the Defense Criminal Investigative Service of the Office of the Inspector General of the DoD requesting that the Company produce a variety of documents pertaining to the allowability of certain costs under its contracts with the DoD from October 1, 2003 to the present. The Company is currently unable to predict what the outcome of the investigation will be or the impact, if any, the investigation may have on the Company’s operating results, financial condition, and/or cash flows. The Company intends to cooperate fully with the investigation and is preparing its response to the subpoena.
 
The Company and its subsidiaries are subject to other legal actions, governmental investigations, and proceedings relating to a wide range of matters in addition to those discussed above. While there can be no certainty regarding the outcome of any litigation, investigation, or proceeding, after reviewing the information that is currently available with respect to such matters, we believe that any liability that may ultimately be incurred with respect to these matters is not expected to materially affect our consolidated financial condition. It is possible that amounts incurred could be significant to our results of operations or cash flows in any particular reporting period.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
None.


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PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholders’ Matters and Issuer Purchases of Equity Securities
 
As of January 20, 2010, there were 8,325 holders of record of the common stock. On January 20, 2010, the last reported sale price of our common stock on the New York Stock Exchange was $6.39 per share.
 
Our Senior Credit Facility and 91/2% Notes (described in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Liquidity and Capital Resources”) restricts the payment of dividends and we do not anticipate paying cash dividends in the foreseeable future.
 
Information concerning long-term debt, including material restrictions relating to payment of dividends on our common stock appears in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Liquidity and Capital Resources” and in Part II, Item 8. Consolidated Financial Statements and Supplementary Data at Note 5 in Notes to Consolidated Financial Statements, which is incorporated herein by reference. 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,” which is incorporated herein by reference.
 
Common Stock
 
Our common stock is quoted on the New York Stock Exchange under the trading symbol “GY.” The following table lists, on a per share basis for the periods indicated, the high and low closing sale prices for the common stock as reported by the New York Stock Exchange:
 
                 
    Common Stock
 
    Price  
Fiscal Year Ended November 30,
  High     Low  
 
2008
               
First Quarter
  $ 12.29     $ 9.92  
Second Quarter
  $ 11.50     $ 7.91  
Third Quarter
  $ 8.79     $ 6.90  
Fourth Quarter
  $ 8.85     $ 1.98  
2009
               
First Quarter
  $ 3.84     $ 2.39  
Second Quarter
  $ 2.91     $ 1.88  
Third Quarter
  $ 4.69     $ 1.84  
Fourth Quarter
  $ 8.99     $ 4.29  


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Stock Performance Graph
 
The following graph compares the cumulative total shareholder returns on $100 invested in November 2004 assuming reinvestment of dividends of our Common Stock with the cumulative total return, assuming reinvestment of dividends, 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 Shareholder Return
Among GenCorp, S&P 500 Index, and the S&P 500 Aerospace & Defense Index,
November 2004 through November 2009
 
(PERFORMANCE GRAPH)
 
                                                             
      Base
                             
      Period
    As of November 30,
Company/Index     2004     2005     2006     2007     2008     2009
GenCorp Inc. 
    $ 100.00       $ 108.63       $ 82.15       $ 71.98       $ 17.01       $ 46.46  
S&P 500 Index
      100.00         108.44         123.88         133.44         82.61         103.58  
S&P 500 Aerospace & Defense
      100.00         110.93         142.22         172.11         100.04         131.69  


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Item 6.   Selected Financial Data
 
The following selected financial data is qualified by reference to and should be read in conjunction with the Consolidated Financial Statements, including the Notes thereto in Item 8. Consolidated Financial Statements and Supplementary Data, and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
                                         
    Year Ended November 30,  
    2009     2008     2007     2006     2005  
    (In millions, except per share amounts)  
 
Net sales
  $ 795.4     $ 742.3     $ 745.4     $ 621.1     $ 622.4  
Net income (loss):
                                       
Income (loss) from continuing operations, net of income taxes
  $ 66.0     $ 1.6     $ 41.1     $ (39.0 )   $ (206.4 )
(Loss) income from discontinued operations, net of income taxes
    (6.7 )     (0.1 )     27.9       2.4       (23.6 )
Cumulative effect of changes in accounting principles, net of income taxes
                      (1.9 )      
                                         
Net income (loss)
  $ 59.3     $ 1.5     $ 69.0     $ (38.5 )   $ (230.0 )
                                         
Basic earnings (loss) per share of Common Stock
                                       
Income (loss) from continuing operations, net of income taxes
  $ 1.12     $ 0.03     $ 0.73     $ (0.70 )   $ (3.78 )
(Loss) income from discontinued operations, net of income taxes
    (0.11 )           0.50       0.04       (0.43 )
Cumulative effect of changes in accounting principles, net of income taxes
                      (0.03 )      
                                         
Total
  $ 1.01     $ 0.03     $ 1.23     $ (0.69 )   $ (4.21 )
                                         
Diluted earnings (loss) per share of Common Stock
                                       
Income (loss) from continuing operations, net of income taxes
  $ 1.07     $ 0.03     $ 0.71     $ (0.70 )   $ (3.78 )
(Loss) income from discontinued operations, net of income taxes
    (0.10 )           0.43       0.04       (0.43 )
Cumulative effect of changes in accounting principles, net of income taxes
                      (0.03 )      
                                         
Total
  $ 0.97     $ 0.03     $ 1.14     $ (0.69 )   $ (4.21 )
                                         
Other financial data:
                                       
Total assets
  $ 935.7     $ 1,005.7     $ 995.2     $ 1,021.4     $ 1,057.4  
Long-term debt, including current maturities
  $ 438.6     $ 440.6     $ 446.3     $ 462.4     $ 443.9  


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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Unless otherwise indicated or required by the context, as used in this Annual Report on Form 10-K, the terms “we,” “our” and “us” refer to GenCorp Inc. and all of its subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
 
We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations with an overview of our business and operations, followed by a discussion of our business outlook and results of operations, including results of our operating segments, for the past two fiscal years. We then provide an analysis of our liquidity and capital resources, including discussions of our cash flows, debt arrangements, sources of capital, and financial commitments. In the next section, we discuss the critical accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.
 
The following discussion should be read in conjunction with the other sections of this Report, including the Consolidated Financial Statements and Notes thereto appearing in Item 8. Consolidated Financial Statements and Supplementary Data of this Report, the risk factors appearing in Item 1A. Risk Factors of this Report and the disclaimer regarding forward-looking statements appearing at the beginning of Item 1. Business of this Report. Historical results set forth in Item 6. Selected Financial Data and Item 8. Consolidated Financial Statements and Supplementary Data of this Report should not be taken as indicative of our future operations.
 
Overview
 
We are a manufacturer of aerospace and defense systems with a real estate segment that includes activities related to the entitlement, sale, and leasing of our excess real estate assets. Our continuing operations are organized into two segments:
 
Aerospace and Defense — includes the operations of Aerojet which develops and manufactures propulsion systems for defense and space applications, armament systems for precision tactical weapon systems and munitions applications. We are one of the largest providers of such propulsion systems in the U.S. Primary customers served include major prime contractors to the U.S. government, the DoD, and NASA.
 
Real Estate — includes activities related to the entitlement, sale, and leasing of our excess real estate assets. We own approximately 12,200 acres of Sacramento Land. We are currently in the process of seeking zoning changes, removal of environmental restrictions and other governmental approvals on a portion of the Sacramento Land to optimize its value. We have filed applications with and submitted information to governmental and regulatory authorities for approvals necessary to re-zone approximately 6,000 acres of the Sacramento Land. We also own approximately 580 acres in Chino Hills, California. We are currently seeking removal of environmental restrictions on the Chino Hills property to optimize the value of such land.
 
On August 31, 2004, we completed the sale of our GDX Automotive business. On November 30, 2005, we completed the sale of our Fine Chemicals business. The remaining subsidiaries after the sale of GDX Automotive, including Snappon SA, and the Fine Chemicals business are classified as discontinued operations in the Notes to Consolidated Financial Statements.
 
Business Outlook
 
Retirement Benefits — We estimate that our non-cash net periodic benefit expense will be approximately $42 million in fiscal 2010 compared to income of $11.9 million in fiscal 2009. The significant increase in net periodic benefit expense is primarily due to a higher benefit obligation at November 30, 2009 and lower investment returns. The increased retirement benefit obligation was primarily related to a decrease in the discount rate used to determine that liability.
 
New Accounting Guidance on Convertible Debt Securities — During the first quarter of fiscal 2010, we will adopt new authoritative guidance which applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. Under this new guidance, an entity must separately account for the liability and equity components of convertible debt securities that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of the new guidance on the


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accounting for convertible debt securities that are affected is that the equity component would be included in the additional paid-in capital section of shareholders’ deficit on our consolidated balance sheets and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of convertible debt securities. We expect to report a significant increase in non-cash interest expense beginning in the first quarter of fiscal 2010 because this guidance requires interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest.
 
Results of Operations
 
                         
    Year Ended  
    2009     2008     2007  
    (In millions)  
 
Net sales
  $ 795.4     $ 742.3     $ 745.4  
Operating costs and expenses:
                       
Cost of sales (exclusive of items shown separately below)
    674.0       645.4       657.8  
Selling, general and administrative
    10.2       1.9       14.4  
Depreciation and amortization
    31.3       28.3       28.4  
Other expense (income), net
    2.9       7.6       (2.6 )
Unusual items
                       
Shareholder agreement and related costs
          16.8        
Executive severance agreements
    3.1              
Defined benefit pension plan amendment
          14.6        
Legal settlements and estimated loss on legal matters
    1.3       2.9       3.8  
Customer reimbursement of tax matters
                2.3  
Loss on extinguishment of debt
    0.2             0.6  
Gain on settlement and recoveries
          (1.2 )     (6.0 )
                         
Total operating costs and expenses
    723.0       716.3       698.7  
Operating income
    72.4       26.0       46.7  
Non-operating (income) expense
                       
Interest expense
    25.9       27.7       28.6  
Interest income
    (1.9 )     (4.2 )     (4.9 )
                         
Total non-operating expense, net
    24.0       23.5       23.7  
Income from continuing operations before income taxes
    48.4       2.5       23.0  
Income tax (benefit) provision
    (17.6 )     0.9       (18.1 )
                         
Income from continuing operations
    66.0       1.6       41.1  
(Loss) income from discontinued operations, net of income taxes
    (6.7 )     (0.1 )     27.9  
                         
Net income
  $ 59.3     $ 1.5     $ 69.0  
                         
 
Net Sales
 
                                                 
    Year Ended       Year Ended    
    2009   2008   Change*   2008   2007   Change**
            (In millions)        
 
Net sales
  $ 795.4     $ 742.3     $ 53.1     $ 742.3     $ 745.4     $ (3.1 )
 
 
* Primary reason for change.  The increase in net sales volume in fiscal 2009 compared to fiscal 2008 was primarily the result of growth in the various Standard Missile programs and increased deliveries on the Patriot Advanced Capability — 3 program, partially offset by lower sales volume on the Orion program as a result of NASA funding constraints, sale of our Sacramento Land for $10.0 million in the second quarter of fiscal 2008, and an additional week of operations in the first quarter of fiscal 2008 resulting in $19.1 million in sales (see Note 1 in Notes to Consolidated Financial Statements).
 
** Primary reason for change.  The decrease in net sales volume for fiscal 2008 compared to fiscal 2007 was primarily the result of the close-out activities of the Titan program in fiscal 2007 partially offset by the sale of


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our Sacramento Land for $10.0 million in the second quarter of fiscal 2008. In addition, fiscal 2008 includes an additional week of operations in the first quarter of fiscal 2008 resulting in $19.1 million in sales.
 
Customers that represented more than 10% of net sales for the fiscal years presented are as follows:
 
                         
    Year Ended
    2009   2008   2007
 
Raytheon
    31 %     27 %     28 %
Lockheed Martin
    26       26       28  
 
Sales in fiscal 2009, 2008, and 2007 directly and indirectly to the U.S. government and its agencies, including sales to our significant customers discussed above, totaled $701.3 million, $641.7 million, and $665.9 million, respectively. The demand for certain of our services and products is directly related to the level of funding of government programs.
 
During fiscal 2009, approximately 51% of our net sales were from fixed-price contracts, 37% from cost reimbursable contracts, and 12% from other sales including commercial contracts and real estate activities.
 
Operating Income
 
                                                 
    Year Ended       Year Ended    
    2009   2008   Change*   2008   2007   Change**
            (In millions)        
 
Operating income
  $ 72.4     $ 26.0     $ 46.4     $ 26.0     $ 46.7     $ (20.7 )
Percentage of net sales
    9.1 %     3.5 %             3.5 %     6.3 %        
 
 
* Primary reason for change.  The improved operating income for fiscal 2009 compared to fiscal 2008 was due to the following:
 
  •  Decrease of $28.5 million in unusual charges. See discussion of “Unusual Items” below.
 
  •  Decrease of $19.9 million in retirement benefit expense primarily due to the freeze of the defined benefit pension and benefit restoration plans as well as the increase in the discount rate used to determine benefit obligations, partially offset by lower expected investment returns.
 
  •  Decrease of $6.6 million in environmental remediation costs primarily due to the following: (i) an increase of $2.4 million of environmental remediation obligations in fiscal 2008 related to our legacy divested businesses and (ii) an increase in unrecoverable environmental remediation obligations at our Sacramento site primarily related to higher water remediation obligations recognized in fiscal 2008.
 
  •  Higher net sales and favorable contract performance on numerous programs as a result of lower non-reimbursable overhead spending in fiscal 2009 compared to fiscal 2008 and other resulting in a $1.0 million increase in operating income.
 
The factors discussed above were partially offset by the following:
 
  •  The sale of 400 acres of our Sacramento Land in the second quarter of fiscal 2008 resulting in a gain of $6.8 million.
 
  •  Increase of $2.8 million in amortization due to the change in the fourth quarter of fiscal 2008 in the estimated life of the deferred financing costs for the 4% Notes and 21/4% Debentures.
 
**  Primary reason for change.  The decline in operating income in fiscal 2008 compared to fiscal 2007 was primarily due to the following:
 
  •  Increase of $32.4 million in unusual charges. See discussion of “Unusual Items” below.
 
  •  Increase of $8.6 million in environmental remediation costs primarily due to the following: (i) an increase of $3.3 million of environmental remediation obligations in fiscal 2008 related to our legacy divested businesses and (ii) an increase in unrecoverable environmental remediation obligations at our Sacramento site primarily


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  related to higher water remediation obligations in fiscal 2008. In addition, $0.1 million of other costs decreased operating performance in fiscal 2008 compared to fiscal 2007.
 
The factors discussed above were partially offset by the following:
 
  •  Decrease of $13.6 million related to employee retirement benefit expense primarily related to an increase in the discount rate used to determine benefit obligations and a reduction in the impact of amortizing prior years’ actuarial losses.
 
  •  The sale of 400 acres of our Sacramento Land in the second quarter of fiscal 2008 resulting in a gain of $6.8 million.
 
Cost of Sales (exclusive of items shown separately below)
 
                                                 
    Year Ended       Year Ended    
    2009   2008   Change*   2008   2007   Change**
    (In millions)
 
Cost of sales (exclusive of items shown separately below)
  $ 674.0     $ 645.4     $ 28.6     $ 645.4     $ 657.8     $ (12.4 )
Percentage of net sales
    84.7 %     86.9 %             86.9 %     88.2 %        
 
 
* Primary reason for change.  The decrease in the cost of sales as a percentage of net sales in fiscal 2009 compared to fiscal 2008 was primarily due to the following: (i) a decrease of $23.6 million of non-cash aerospace and defense retirement benefit plan expense and (ii) favorable contract performance and lower non-reimbursable overhead spending in fiscal 2009 compared to fiscal 2008, partially offset by the recognition of a $6.8 million gain on the sale of 400 acres of our Sacramento Land in the second quarter of fiscal 2008.
 
** Primary reason for change.  The decrease in the cost of sales as a percentage of net sales in fiscal 2008 compared to fiscal 2007 was primarily due to the following: (i) a decrease of $8.1 million of non-cash aerospace and defense retirement benefit plan expense and (ii) the recognition of a $6.8 million gain on the sale of 400 acres of our Sacramento Land in the second quarter of fiscal 2008; offset by the favorable performance on the close-out of the Titan program in fiscal 2007. Additionally, the cost of sales in fiscal 2008 included favorable contract performance on the Atlas V program offset by declines in other programs.
 
Selling, general and administrative (“SG&A”)
 
                                                 
    Year Ended       Year Ended    
    2009   2008   Change*   2008   2007   Change**
    (In millions)
 
Selling, general and administrative
  $ 10.2     $ 1.9     $ 8.3     $ 1.9     $ 14.4     $ (12.5 )
Percentage of net sales
    1.3 %     0.3 %             0.3 %     1.9 %        
 
 
* Primary reason for change.  The increase in SG&A expense in fiscal 2009 compared to fiscal 2008 was primarily the result of the following: (i) an increase of $5.1 million in stock-based compensation due to the increase in the fair value of stock appreciation rights in 2009 and (ii) an increase of $3.7 million in non-cash corporate retirement benefit plan expense, partially offset by a decrease of $0.5 million in other net SG&A costs.
 
** Primary reason for change.  The decrease in SG&A expense in fiscal 2008 compared to fiscal 2007 was primarily the result of the following: (i) decrease of $5.7 million in personnel related costs including a $3.7 million decrease primarily related to the reversal of previously recognized stock-based compensation expense due to the lower fair value of the stock appreciation rights, decrease of $1.3 million in salaries and management incentives, and decrease of $0.7 million in workers’ compensation costs; (ii) decrease of $5.5 million in non-cash corporate retirement benefit plan expenses; and (iii) decrease of $1.3 million in other SG&A costs including a decrease of $1.1 million in legal related costs primarily related to vinyl chloride legal settlements in fiscal 2007 and a $0.2 million net decrease in other costs.


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Depreciation and amortization
 
                                                 
    Year Ended       Year Ended    
    2009   2008   Change*   2008   2007   Change**
    (In millions)
 
Depreciation and amortization
  $ 31.3     $ 28.3     $ 3.0     $ 28.3     $ 28.4     $ (0.1 )
Percentage of net sales
    3.9 %     3.8 %             3.8 %     3.8 %        
 
 
* Primary reason for change.  The increase in depreciation and amortization expense was primarily due to a reduction in the estimated life of the deferred financing costs for the 4% Notes and 21/4% Debentures.
 
** Primary reason for change.  Depreciation and amortization expense was essentially unchanged for fiscal 2008 and 2007.
 
Other expense (income), net
 
                                                 
    Year Ended       Year Ended    
    2009   2008   Change*   2008   2007   Change**
    (In millions)
 
Other expense (income), net
  $ 2.9     $ 7.6     $ (4.7 )   $ 7.6     $ (2.6 )   $ 10.2  
 
 
* Primary reason for change.  The decrease in other expense (income), net was primarily due to lower estimated future environmental remediation obligations in fiscal 2009 compared to fiscal 2008. See additional information of environmental remediation provision adjustments under the caption “Environmental Matters” below.
 
** Primary reason for change.  The increase in other expense (income), net was primarily due to higher estimated future environmental remediation obligations in fiscal 2008 compared to fiscal 2007. See additional information of environmental remediation provision adjustments under the caption “Environmental Matters” below.
 
Unusual Items
 
                                                 
    Year Ended       Year Ended    
    2009   2008   Change*   2008   2007   Change**
    (In millions)
 
Unusual items
  $ 4.6     $ 33.1     $ (28.5 )   $ 33.1     $ 0.7     $ 32.4  
 
 
* Primary reason for change. A summary of the unusual item charges is shown below:
 
                         
    Year Ended  
    2009     2008     2007  
    (In millions)  
 
Aerospace and Defense:
                       
Legal settlements and estimated loss on legal matters
  $ 1.3     $ 2.9     $ 3.8  
Customer reimbursements of tax recoveries
                2.3  
Defined benefit pension plan amendment
          13.6        
Gain on recoveries
                (6.0 )
                         
Aerospace and defense unusual items
    1.3       16.5       0.1  
                         
Corporate:
                       
Executive severance agreements
    3.1              
Loss on extinguishment of debt
    0.2             0.6  
Gain on settlement
          (1.2 )      
Defined benefit pension plan amendment
          1.0        
Shareholder agreement and related costs
          16.8        
                         
Corporate unusual items
    3.3       16.6       0.6  
                         
Total unusual items
  $ 4.6     $ 33.1     $ 0.7  
                         


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In fiscal 2009, we recorded a charge of $1.3 million for realized losses and interest associated with our failure to register with the SEC the issuance of certain of our common shares under our defined contribution 401(k) employee benefit plan. During fiscal 2009, we also incurred a charge of $3.1 million associated with executive severance agreements. Additionally, we recorded costs of $0.2 million related to a bank amendment.
 
On November 25, 2008, we decided to amend our defined benefit pension and benefits restoration plans to freeze future accruals under such plans. Effective February 1, 2009, we discontinued future benefit accruals for all current salaried employees. No employees lost their previously earned pension benefit. As a result of the defined benefit pension plan amendment and freeze, we incurred a curtailment charge of $14.6 million in the fourth quarter of fiscal 2008 primarily due to the immediate recognition of unrecognized prior service costs.
 
On March 5, 2008, we entered into a second amended and restated shareholder agreement (“Shareholder Agreement”) with respect to the election of Directors for the 2008 Annual Meeting and certain other related matters which resulted in a charge of $13.8 million in the first half of fiscal 2008. Additionally, during the fourth quarter of fiscal 2008, we incurred a charge of $3.0 million associated with two executive severance agreements. The charges were comprised of the following (in millions):
 
         
Increases in pension benefits primarily for certain of our officers
  $ 5.3  
Executive severance charges
    7.1  
Accelerated vesting of stock appreciation rights
    1.1  
Accelerated vesting of restricted stock, service-based
    0.6  
Accelerated vesting of restricted stock, performance-based
    0.7  
Professional fees and other
    2.0  
         
    $ 16.8  
         
 
As a result of the Shareholder Agreement, the executive severance agreements required us to fund into a grantor trust on March 12, 2008, an amount equal to $34.8 million, which represents liabilities associated with the Benefits Restoration Plan Pension and Savings Plans (“BRP”) and amounts payable to certain officers party to executive severance agreements in the event of qualifying terminations of employment following a change in control (as defined in the BRP and the executive severance agreements). In addition, as a result of the resignation of three additional Board members on May 16, 2008, we were required to fund $0.4 million into a grantor trust on May 22, 2008, which primarily represents the amount payable to an officer party to an executive severance agreement in the event of a qualifying termination of employment.
 
In fiscal 2008, we recorded a charge of $2.9 million related to the estimated unrecoverable costs of legal matters, including $1.7 million associated with the failure to register with the SEC the issuance of certain of our common shares under our defined contribution 401(k) employee benefit plan and $1.2 million related to a legal settlement and other legal matters. We also recorded a $1.2 million gain related to an insurance settlement for an environmental claim.
 
In fiscal 2007, we recorded an expense of $3.8 million related to estimated costs associated with environmental toxic tort legal matters. We recorded an expense of $2.3 million for tax refunds that were repaid to our defense customers. We also recorded a gain of $6.0 million related to an adjustment of reserves for the allocation of pension benefit costs to U.S. government contracts. We incurred a charge of $0.6 million associated with the replacement of the previous credit facility.
 
Interest expense
 
                                                 
    Year Ended       Year Ended    
    2009   2008   Change*   2008   2007   Change*
    (In millions)
 
Interest expense
  $ 25.9     $ 27.7     $ (1.8 )   $ 27.7     $ 28.6     $ (0.9 )
 
 
* Primary reason for change.  The decrease in interest expense was primarily due to lower average interest rates on variable rate debt.


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Interest income
 
                                                 
    Year Ended       Year Ended    
    2009   2008   Change*   2008   2007   Change**
    (In millions)
 
Interest income
  $ 1.9     $ 4.2     $ (2.3 )   $ 4.2     $ 4.9     $ (0.7 )
 
 
* Primary reason for change.  The decline in interest income was primarily due to lower average rates partially offset by higher average cash balances in fiscal 2009 compared to fiscal 2008.
 
** Primary reason for change.  The decline in interest income was primarily due to lower average cash balances and rates in fiscal 2008 compared to fiscal 2007.
 
Income tax (benefit) provision
 
                         
    Year Ended
    2009   2008   2007
        (In millions)    
 
Income tax (benefit) provision
  $ (17.6 )   $ 0.9     $ (18.1 )
 
The income tax benefit of $17.6 million in fiscal 2009 was primarily related to new guidance that was published by the Chief Counsel’s Office of the Internal Revenue Service (“IRS”) in December 2008 clarifying which costs qualify for ten-year carryback of tax net operating losses for refund of prior years’ taxes. As a result of the clarifying language, during the first quarter of fiscal 2009, we recorded an income tax benefit of $19.7 million, of which $14.5 million was for the release of the valuation allowance associated with the utilization of the qualifying tax net operating losses and $5.2 million was for the recognition of affirmative claims related to previous uncertain tax positions associated with prior years refund claims related to the qualifying costs.
 
In fiscal 2008, although we generated $2.5 million in income from continuing operations, we had a tax loss primarily related to the impact of a fiscal 2008 change in tax method of accounting adopted for unbilled receivables. The new tax method of accounting adopted in fiscal 2008 in accordance with guidance published by the IRS defers such revenue until the all events test is met for tax purposes. The fiscal 2008 tax net operating loss from continuing operations resulted in an income tax benefit of $9.5 million for carryback to prior years and a refund of previously paid taxes. Due to the tightening of the credit market in the fourth quarter of fiscal 2008, a tax planning strategy relied on for realizability of a portion of the deferred tax assets ceased to be prudent and feasible, resulting in a charge to deferred income tax expense of $8.0 million and a corresponding increase to the valuation allowance.
 
Our income tax benefit in fiscal 2007 reflects a $6.3 million benefit from continuing operations for the carryback of current and prior year losses resulting in refunds of previously paid taxes and a $12.2 million benefit primarily from U.S. federal and state income tax settlements including research and development credit claim benefits, manufacturer’s investment credit claim benefits, and certain statute expirations, which was partially offset by $0.4 million of current state tax expense.
 
The year of expiration for our state and U.S. federal net operating loss carryforwards as of November 30, 2009 is as follows:
 
                 
Year Ended November 30,
  State     Federal  
    (In millions)  
 
2016
  $ 35.8     $  
2017
    130.3        
2018
    28.9        
2019
    15.1        
2020
    19.9        
2024
          28.5  
2025
          122.3  
                 
    $ 230.0     $ 150.8  
                 


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Approximately $9.2 million of the net operating loss carryforward relates to the exercise of stock options, the benefit of which will be credited to equity when realized. In addition, we also have U.S. federal and state capital loss carryforwards of approximately $7.8 million and $0.2 million, respectively, which will begin to expire in fiscal 2010. The decrease in capital loss carryforwards from the previous fiscal year was the result of:
 
                 
    State     Federal  
    (In millions)  
 
Utilization
  $ 44.7     $ 41.8  
Expiration
    18.0       110.2  
                 
    $ 62.7     $ 152.0  
                 
 
We also have a U.S. federal research credit carryforward of $7.2 million which begins expiring in fiscal 2021, and a California research credit carryforward of $4.1 million which has an indefinite carryforward period. Additionally, we have a California manufacturing investment credit carryforward of $0.6 million which will begin to expire in fiscal 2011; and a foreign tax credit carryforward of $5.9 million which will begin to expire in fiscal 2010, if not utilized. These tax carryforwards are subject to examination by the tax authorities.
 
Discontinued Operations:
 
In November 2003, we announced the closing of a GDX manufacturing facility in Chartres, France owned by Snappon SA, a subsidiary of the Company. The decision resulted primarily from declining sales volumes with French automobile manufacturers. In June 2004, we completed the legal process for closing the facility and establishing a social plan. In fiscal 2004, an expense of approximately $14.0 million related to employee social costs was recorded. An expense of $1.0 million was recorded during fiscal 2005 primarily related to employee social costs that became estimable in fiscal 2005. During fiscal 2009, an expense of approximately $4.1 million (€2.9 million) was recorded related to legal judgments rendered against Snappon SA under French law, related to wrongful discharge claims by certain former employees of Snappon SA. During the second quarter of fiscal 2009, Snappon SA filed for declaration of suspensions of payments with the clerk’s office of the Paris Commercial Court (see Note 7(b) in Notes to Consolidated Financial Statements).
 
During the first quarter of fiscal 2007, we entered into an earn-out and seller note repayment agreement (“Repayment Agreement”) with American Pacific Corporation (“AMPAC”) under which AMPAC was required to pay $29.7 million in consideration for the early retirement of the seller note (including interest due thereunder), the full payment of the earn-out amount and the release of certain liabilities related to the sale of our Fine Chemicals business on November 30, 2005. During the first quarter of fiscal 2007, we recorded a gain from discontinued operations of $31.2 million as a result of receiving $29.7 million of cash from AMPAC and being released from certain liabilities in accordance with the Repayment Agreement.
 
Summarized financial information for discontinued operations is set forth below:
 
                         
    Year Ended
    2009   2008   2007
    (In millions)
 
Net sales
  $     $     $  
(Loss) income before income taxes
    (6.7 )     (0.2 )     28.9  
Income tax (benefit) provision
          (0.1 )     1.0  
(Loss) income from discontinued operations
    (6.7 )     (0.1 )     27.9  
 
Operating Segment Information:
 
We evaluate our operating segments based on several factors, of which the primary financial measure is segment performance. Segment performance, which is a non-GAAP financial measure, represents net sales from continuing operations 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, legacy income or expenses, and provisions for unusual items not related to the segment. We believe that segment performance provides information useful to investors in understanding our underlying operational


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performance. Specifically, we believe the exclusion of the items listed above permits an evaluation and a comparison of results for ongoing business operations, and it is on this basis that management internally assesses operational performance.
 
Aerospace and Defense Segment
 
                                                 
    Year Ended       Year Ended    
    2009   2008   Change*   2008   2007   Change**
    (In millions)
 
Net Sales
  $ 787.2     $ 725.5     $ 61.7     $ 725.5     $ 739.1     $ (13.6 )
Segment Performance
    90.3       40.8       49.5       40.8       61.3       (20.5 )
 
 
* Primary reason for change.  The increase in net sales volume in fiscal 2009 compared to fiscal 2008 was primarily the result of growth in the various Standard Missile programs and increased deliveries on the Patriot Advanced Capability — 3 program, partially offset by lower sales volume on the Orion program as a result of NASA funding constraints and an additional week of operations in the first quarter of fiscal 2008 resulting in $19.1 million in sales.
 
The increase in segment performance in fiscal 2009 as compared to fiscal 2008 was primarily the result of: (i) a decrease of $23.6 million in non-cash retirement benefit plan expense in fiscal 2009; (ii) decrease of $15.2 million in unusual charges in fiscal 2009 primarily related to the freeze of the defined benefit pension plan in fiscal 2008; (iii) a decrease of $4.3 million for estimated future environmental remediation obligations in fiscal 2009; and (iv) favorable contract performance on higher net sales and other in fiscal 2009 resulting in a $6.4 million increase in segment performance.
 
** Primary reason for change.  Aerojet reports its fiscal year sales and income under a 52/53 week accounting convention. Fiscal 2008 was a 53 week year with the extra week accounted for in the first quarter of fiscal 2008, or one more week than as reported in fiscal 2007. Sales of $725.5 million for fiscal 2008 decreased from $739.1 million in fiscal 2007, reflecting decreases in various programs, including the Titan program, partially offset by the additional week of net sales of $19.1 million in fiscal 2008.
 
The decrease in segment performance in fiscal 2008 compared to fiscal 2007 was primarily the result of: (i) the favorable performance on the close-out of the Titan program in fiscal 2007; (ii) an unusual charge in fiscal 2008 related to the freeze of the defined benefit pension plan; and (iii) higher estimated environmental remediation costs in fiscal 2008; partially offset by decreased retirement benefit plan expense in fiscal 2008.
 
Real Estate Segment
 
                                                 
    Year Ended       Year Ended    
    2009   2008   Change*   2008   2007   Change**
    (In millions)
 
Net Sales
  $ 8.2     $ 16.8     $ (8.6 )   $ 16.8     $ 6.3     $ 10.5  
Segment Performance
    4.4       10.3       (5.9 )     10.3       3.5       6.8  
 
 
* Primary reason for change.  The decreases in sales and segment performance in fiscal 2009 compared to fiscal 2008 were primarily due to the sale of 400 acres of our Sacramento Land for $10.0 million in fiscal 2008 resulting in a gain of $6.8 million, partially offset by a $1.8 million land sale in fiscal 2009 resulting in a gain of $0.6 million.
 
** Primary reason for change.  The increases in sales and segment performance were primarily due to the sale of 400 acres of the Sacramento Land for $10.0 million in cash during fiscal 2008.
 
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


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remediation of environmental conditions that resulted from generally accepted manufacturing and disposal practices at certain plants in the 1950s and 1960s. In addition, we have been designated a potentially responsible party 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. In some cases, only a range of reasonably possible costs can be estimated. In establishing our reserves, the most probable estimate is used when determinable and the minimum estimate is used when no single amount is more probable; 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 $8.4 million in fiscal 2009, $13.5 million in fiscal 2008, and $6.3 million in fiscal 2007.
 
Reserves
 
We review on a quarterly basis estimated future remediation costs that could be incurred over the contractual term or next fifteen years of the expected remediation. We 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. As the period for which estimated environmental remediation costs increases, the reliability of such estimates decrease. 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 such 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, the time required to design the process, the time to construct the process, and the time required to conduct the remedy itself.
 
A summary of our environmental reserve activity is shown below:
 
                         
                Total
 
                Environmental
 
    Aerojet     Other     Reserve  
    (In millions)  
 
November 30, 2006
  $ 256.5     $ 9.5     $ 266.0  
Fiscal 2007 additions
    57.9       2.5       60.4  
Fiscal 2007 expenditures
    (54.9 )     (1.5 )     (56.4 )
                         
November 30, 2007
    259.5       10.5       270.0  
Fiscal 2008 additions
    39.8       5.8       45.6  
Fiscal 2008 expenditures
    (54.1 )     (3.3 )     (57.4 )
                         
November 30, 2008
    245.2       13.0       258.2  
Fiscal 2009 additions
    19.9       3.6       23.5  
Fiscal 2009 expenditures
    (54.0 )     (5.0 )     (59.0 )
                         
November 30, 2009
  $ 211.1     $ 11.6     $ 222.7  
                         


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As of November 30, 2009, the Aerojet reserves include $152.5 million for the Sacramento site, $47.8 million for the Baldwin Park Operable Unit, and $10.8 million for other Aerojet reserves.
 
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 believe, on the basis of presently available information, that the resolution of environmental matters and our obligations for environmental remediation and compliance will not have a material adverse effect on our results of operations, liquidity or financial condition. We will continue our efforts to mitigate past and future costs through pursuit of claims for recoveries from insurance coverage and other PRPs and continued investigation of new and more cost effective remediation alternatives and associated technologies.
 
As part of the acquisition of the Atlantic Research Corporation (“ARC”) propulsion business, Aerojet entered into an agreement with ARC pursuant to which Aerojet is responsible for up to $20.0 million of costs (“Pre-Close Environmental Costs”) associated with environmental issues that arose prior to Aerojet’s acquisition of the ARC propulsion business. Pursuant to a separate agreement with the U.S. government which was entered into prior to the completion of the ARC acquisition, these Pre-Close Environmental Costs are not subject to the 88% limitation under the Global Settlement, and are recovered through the establishment of prices for Aerojet’s products and services sold to the U.S. government. A summary of the Pre-Close Environmental Costs is shown below (in millions):
 
         
Pre-Close Environmental Costs
  $ 20.0  
Amount spent through November 30, 2009
    (9.5 )
Amount included as a component of reserves for environmental remediation costs in the consolidated balance sheet as of November 30, 2009
    (0.9 )
         
Remaining Pre-Close Environmental Costs
  $ 9.6  
         
 
Estimated Recoveries
 
On January 12, 1999, Aerojet and the U.S. government implemented the October 1997 Agreement in Principle (“Global Settlement”) resolving certain prior environmental and facility disagreements, with retroactive effect to December 1, 1998. Under the Global Settlement, Aerojet and the U.S. government resolved disagreements about an appropriate cost-sharing ratio with respect to the clean up costs of the environmental contamination at the Sacramento and Azusa sites. The Global Settlement provides that the cost-sharing ratio will continue until further modified by Aerojet and the U.S. government. Additionally, in conjunction with the sale of the EIS business in 2001 to Northrop, Aerojet entered into an agreement with Northrop (“Northrop Agreement”) whereby Aerojet is reimbursed by Northrop for a portion of environmental expenditures eligible for recovery under the Global Settlement, subject to annual and cumulative limitations. The current annual billing limitation to Northrop is $8.0 million, which is reduced to $6.0 million beginning in fiscal 2011.
 
Pursuant to the Global Settlement covering environmental costs associated with Aerojet’s Sacramento site and its former Azusa site, we can recover up to 88% of our environmental remediation costs for these sites through the establishment of prices for Aerojet’s products and services sold to the U.S. government. Allowable environmental costs are charged to these contracts as the costs are incurred. Aerojet’s mix of contracts can affect the actual reimbursement made by the U.S. government. Because these costs are recovered through forward-pricing arrangements, the ability of Aerojet to continue recovering these costs from the U.S. government depends on Aerojet’s sustained business volume under U.S. government contracts and programs and the relative size of Aerojet’s commercial business. Annually, we evaluate Aerojet’s forecasted business volume under U.S. government contracts and programs and the relative size of Aerojet’s commercial business as part of our long-term business review. In fiscal 2007, as a result of a forecasted increase in U.S government contracts and programs volume, future recoverable amounts from the U.S. government increased; accordingly, we recorded a benefit of $8.6 million in fiscal 2007.
 
Pursuant to the Northrop Agreement, environmental expenditures to be reimbursed are subject to annual limitations, with excess amounts carried over to subsequent periods, the total reimbursements are limited to a


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ceiling of $189.7 million over the term of the agreement, which ends in 2028. A summary of the Northrop Agreement activity is shown below (in millions):
 
         
Total reimbursable costs under the Northrop Agreement
  $ 189.7  
Amount reimbursed to us through November 30, 2009
    (74.2 )
         
Potential future cost reimbursements available
    115.5  
Receivable from Northrop in excess of the annual limitation included as a component of other noncurrent assets in the Consolidated Balance Sheet as of November 30, 2009
    (53.4 )
Amounts recoverable from Northrop in future periods included as a component of recoverable from the U.S. government and other third parties for environmental remediation costs in the Consolidated Balance Sheet as of November 30, 2009
    (55.7 )
         
Potential future recoverable amounts available under the Northrop Agreement
  $ 6.4  
         
 
We believe that we may reach the cumulative limitation under the Northrop Agreement within the next twelve (12) months. While we are seeking an arrangement with the U.S. government to recover environmental expenditures in excess of the current reimbursement ceiling identified in the Northrop Agreement, 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 our operating results, financial condition, and/or cash flows.
 
Environmental reserves and recoveries impact to Consolidated Statement of Operations
 
The expenses and benefits associated with adjustments to the environmental reserves are recorded as a component of other (income) expense, net in the Consolidated Statements of Operations. Summarized financial information for the impact of environmental reserves and recoveries to the Consolidated Statements of Operations is set forth below:
 
                                         
            Total
       
            Estimated
       
    Estimated
  Estimated
  Recoverable
  Charge to
  Total
    Recoverable
  Recoverable
  Amounts Under
  Consolidated
  Environmental
    Amounts from
  Amounts from
  U.S. Government
  Statement of
  Reserve
    Northrop   U.S. Government   Contracts   Operations   Additions
            (In millions)        
 
Fiscal 2009
  $ 4.8     $ 14.6     $ 19.4     $ 4.1     $ 23.5  
Fiscal 2008
    9.7       25.2       34.9       10.7       45.6  
Fiscal 2007(1)
    12.0       46.3       58.3       2.1       60.4  
 
 
(1) In fiscal 2007, the net charge of $2.1 million includes a benefit of $8.6 million due to a decrease in the forecasted commercial business base.
 
Adoption of New Accounting Principles
 
On December 1, 2007, we adopted the new standards that specified the accounting for uncertainty in income taxes. As of December 1, 2007, we had $3.2 million of unrecognized tax benefits, $3.0 million of which would impact our effective tax rate if recognized. The adoption resulted in a reclassification of certain tax liabilities from current to non-current, a reclassification of certain tax indemnification liabilities from income taxes payable to other current liabilities, and a cumulative effect adjustment benefit of $9.1 million that was recorded directly to our accumulated deficit. We recognize interest and penalties related to uncertain tax positions in income tax expense. Interest and penalties are immaterial at the date of adoption and are included in unrecognized tax benefits.
 
On December 1, 2007, we adopted new standards that specified fair value measurements for financial instruments. Although the adoption of the new standards did not materially impact our financial condition, results of operations, or cash flows, we are now required to provide additional disclosures in the notes to our financial statements.
 
On December 1, 2007, we adopted the new standards related to accounting for the fair value option for financial assets and liabilities. At the date of adoption, we did not elect to use the fair value option for any of our


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outstanding financial assets or liabilities. Accordingly, the adoption of the new standards did not have an impact on our financial position, results of operations, or cash flows.
 
As of December 1, 2008, we adopted the new standards related to accounting for non-refundable advance payments for goods or services to be used in future research and development activities. The new standards provides guidance on whether non-refundable advance payments for goods that will be used or services that will be performed in future research and development activities should be accounted for as research and development costs or deferred and capitalized until the goods have been delivered or the related services have been rendered. The adoption of the new standards did not have a material impact on our financial position, results of operations, or cash flows.
 
As of December 1, 2008, we adopted the new standards that specified fair value measurements as it relates to non-financial assets and liabilities.
 
As of August 31, 2009, we adopted new standards which provides authoritative accounting literature related to subsequent events, which was previously addressed only in the auditing literature. The new guidance largely is similar to the current guidance in the auditing literature with some exceptions that are not intended to result in significant changes in practice. The adoption of the new standards did not have a material impact on our financial position, results of operations, or cash flows.
 
As of November 30, 2009, we adopted the FASB Accounting Standards Codification (“Codification”) which became the single source of authoritative non-governmental GAAP, superseding various existing authoritative accounting pronouncements. The Codification establishes one level of authoritative GAAP. All other literature is considered non-authoritative. There were no changes to our consolidated financial statements due to the implementation of the Codification other than changes in reference to various authoritative accounting pronouncements in the consolidated financial statements.
 
As of November 30, 2009, we adopted the accounting standards which require the measurement of the pension and postretirement plans assets and benefit obligations at our fiscal year end. We performed this measurement as of August 31 in prior years. As a result of implementing the measurement date provision, we recorded an additional quarter of pension and other postretirement benefit costs as of November 30, 2009 as a $0.4 million increase to accumulated deficit and a $0.2 million decrease to accumulated other comprehensive loss.
 
Liquidity and Capital Resources
 
Liquidity Requirements
 
Short-term liquidity requirements consist primarily of recurring operating expenses; costs related to divested businesses, including but not limited to costs related to our retirement benefit plans; capital expenditures; debt service requirements; and rescission obligations on certain shares sold under our defined contribution 401(k) employee benefit plan. We expect to meet these requirements through available cash, generation of cash from our operations, and our $60.0 million revolving credit facility (“Revolver”) of which $59.2 million was available as of November 30, 2009.
 
Net Cash Provided by (Used in) Operating, Investing, and Financing Activities
 
Cash and cash equivalents increased by $33.6 million during the year ended November 30, 2009. The change in cash and cash equivalents is summarized as follows:
 
                         
    Year Ended  
    2009     2008     2007  
    (In millions)  
 
Net Cash Provided by Operating Activities
  $ 50.3     $ 28.0     $ 23.8  
Net Cash (Used in) Provided by Investing Activities
    (14.3 )     (21.3 )     27.7  
Net Cash Used in Financing Activities
    (2.4 )     (6.3 )     (20.4 )
                         
Increase in cash and cash equivalents
  $ 33.6     $ 0.4     $ 31.1  
                         


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Net Cash Provided by Operating Activities
 
Operating activities generated cash of $50.3 million in fiscal 2009 compared to cash generated of $28.0 million in fiscal 2008. The improvement in cash from operations is primarily due to the following: (i) $30.9 million of net funding of a grantor trust during fiscal 2008, which represents the liabilities associated with our BRP and the amounts that would be payable to officers who are party to executive severance agreements in the event of qualifying terminations of employment; (ii) receipt of $26.3 million in tax refunds in fiscal 2009; and (iii) receipt of $10.7 million from the grantor trust in fiscal 2009; partially offset by the sale of 400 acres of our Sacramento Land for a cash price of $10.0 million in the second quarter of fiscal 2008 and $35.6 million of net cash used from other changes in our working capital, including an increase of $19.0 million in accounts receivable and a $14.3 million decrease in accounts payable from November 30, 2008.
 
Operating activities generated cash of $28.0 million in fiscal 2008 compared to $23.8 million in fiscal 2007. The cash generated from continuing operations in fiscal 2008 is primarily due to the sale of 400 acres of our Sacramento Land for a cash price of $10.0 million in fiscal 2008 and $48.9 million change in working capital. The change in working capital was primarily due to a decrease in our prepaid pension asset of $24.0 million, $11.3 million increase in other current liabilities, and a $8.0 million increase in deferred income taxes from November 30, 2007. These improvements were partially offset by the net funding of $30.9 million in fiscal 2008, which represents the liabilities associated with our BRP and the amounts that would be payable to officers who are party to executive severance agreements in the event of qualifying terminations of employment (as defined in the BRP and the executive severance agreements).
 
Net Cash (Used In) Provided by Investing Activities
 
During fiscal 2009, 2008, and 2007, we had capital expenditures of $14.3 million, $21.3 million, and $21.8 million, respectively. The majority of our capital expenditures directly supports our contract and customer requirements and is primarily made for asset replacement, capacity expansion, development of new projects, and safety and productivity improvements.
 
As of November 30, 2006, we designated $19.8 million as restricted cash related to the cash collateralization of the 53/4% Convertible Subordinated Notes (“53/4% Notes”). In April 2007, the $19.8 million of restricted cash was used to repay the 53/4% Notes.
 
During fiscal 2007, we received $29.7 million from AMPAC in consideration for the cancellation and termination of a non-collateralized subordinated note receivable from AMPAC, including any interest due thereunder, and AMPAC’s obligation to make an earnings target payment associated with the sale of the Fine Chemicals business.
 
Net Cash Used in Financing Activities
 
During fiscal 2009, net cash used for debt principal payments were $2.0 million (see table below). Additionally, we incurred $0.4 million in debt issuance costs in fiscal 2009.
 
During fiscal 2008, cash of $6.3 million was used for debt principal payments, $5.0 million of which was required to be repaid in conjunction with a real estate sale. Under the terms of the Senior Credit Facility, we were required to use 50% of the net cash proceeds, as defined, from the $10.0 million sale of 400 acres of our Sacramento Land in the second quarter of fiscal 2008, or $5.0 million, to repay outstanding principal on the term loan subfacilty.
 
Cash of $20.4 million was used in fiscal 2007 primarily for the net retirements of approximately $18.9 million of debt.


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Borrowing Activity and Senior Credit Facility:
 
Our borrowing activity in fiscal 2009 and our debt balances as of November 30, 2008 and 2009 were as follows:
 
                                 
    November 30,
                November 30,
 
    2008     Additions     Payments     2009  
    (In millions)  
 
Term loan
  $ 69.0     $     $ (0.7 )   $ 68.3  
91/2% Notes
    97.5                   97.5  
4% Notes
    125.0                   125.0  
21/4% Debentures
    146.4                   146.4  
Promissory notes
    2.7             (1.3 )     1.4  
                                 
Total Debt and Borrowing Activity
  $ 440.6     $     $ (2.0 )   $ 438.6  
                                 
 
Our Senior Credit Facility provided for an $80.0 million Revolver and a $200.0 million credit-linked facility, consisting of a $125.0 million letter of credit subfacility and a $75.0 million term loan subfacility. On May 1, 2009, we entered into the First Amendment and Consent to Credit Agreement (the “Amendment”) to our existing Amended and Restated Credit Agreement (the “Credit Agreement”), originally entered into as of June 21, 2007, by and among us, as borrower, the subsidiaries from time to time party thereto, as guarantors, the lenders from time to time party thereto (the “Lenders”) and Wachovia Bank, National Association, as administrative agent for the Lenders (the “Administrative Agent”), which comprises our Senior Credit Facility. Snappon SA, a French subsidiary of the Company (“Snappon”), that is neither a Credit Party nor Significant Subsidiary under the Credit Agreement and has no operations, has had legal judgments rendered against it under French law, aggregating €2.9 million related to wrongful discharge claims by certain former employees of Snappon (see Note 7(b) of Notes to Consolidated Financial Statements). The Amendment provides for, among other things, the consent of the Required Lenders (as defined therein) in order to allow Snappon to commence voluntary bankruptcy, insolvency or similar proceedings or to allow for an involuntary bankruptcy, insolvency or similar proceedings against Snappon.
 
Under the Amendment, the Required Lenders agreed (i) that an event of default will not be triggered with respect to the legal judgments rendered against Snappon, unless the judgments equal or exceed $10.0 million and shall not have been paid and satisfied, vacated, discharged, stayed or bonded pending appeal within thirty (30) days from the entry thereof and (ii) to consent to the commencement of voluntary or involuntary bankruptcy, insolvency or similar proceedings with respect to Snappon and that any such proceeding would not constitute an Event of Default under the Credit Agreement. Additionally, we agreed to temporarily reduce our borrowing availability under the Revolving Loan (as defined therein) from $80.0 million to $60.0 million commencing on May 1, 2009 and ending on the earlier of (i) the date on which an amendment that permits the renewal, refinancing, or extension of the 4% Notes (as defined therein) has been approved by the Required Lenders and (ii) the date on which we redeem the 4% Notes in accordance with the terms of the Credit Agreement.
 
As of November 30, 2009, the borrowing limit under the Revolver was $60.0 million with $59.2 million available due to an outstanding letter of credit in the amount of $0.8 million. Also as of November 30, 2009, we had $84.5 million outstanding letters of credit under the $125.0 million letter of credit subfacility and had permanently reduced the amount of our term loan subfacility to the $68.3 million outstanding.
 
During fiscal 2010, we will be required to make a principal payment of $16.6 million on the term loan subfacility due to the excess cash flow provisions of the Credit Agreement. The principal payment must be made within 110 days of November 30, 2009. In the event that the leverage ratio is less than or equal to 3.0 to 1.0, as defined, at the end of any fiscal year during the term of the Senior Credit Facility, no excess cash flow pre-payment would be required under this provision.
 
The Senior Credit Facility is collateralized by a substantial portion of our real property holdings and substantially all of our other assets, including the stock and assets of our material domestic subsidiaries that are guarantors of the facility. We are subject to certain limitations including the ability to: incur additional senior debt; release collateral, retain proceeds from asset sales, retain proceeds from operations and issuances of debt or equity, make certain investments and acquisitions, grant additional liens, and make restricted payments, including


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stock repurchases and dividends. In addition, the Credit Agreement contains certain restrictions surrounding the ability to refinance our subordinated debt, including provisions that, except on terms no less favorable to the Credit Agreement, our subordinated debt cannot be refinanced prior to maturity. Furthermore, provided that we have cash and cash equivalents of at least $25.0 million after giving effect thereto, we may redeem (with funds other than Senior Credit Facility proceeds) the subordinated notes to the extent required by the mandatory redemption provisions of the subordinated note indenture. We are also subject to the following financial covenants:
 
                 
    Actual Ratios as of
  Required Ratios
  Required Ratios
    November 30,
  Through November 30,
  December 1,
Financial Covenant
  2009   2009   2009 and thereafter
 
Interest coverage ratio
    3.97 to 1.00     Not less than: 2.25 to 1.00   Not less than: 2.25 to 1.00
Leverage ratio
    3.56 to 1.00     Not greater than: 5.75 to 1.00   Not greater than: 5.50 to 1.00
 
We were in compliance with our financial and non-financial covenants as of November 30, 2009.
 
Outlook
 
Short-term liquidity requirements consist primarily of recurring operating expenses; costs related to divested businesses, including but not limited to costs related to our retirement benefit plans, capital expenditures, and debt service requirements. We believe that our existing cash and cash equivalents and existing credit facilities will provide sufficient funds to meet our operating plan for the next twelve (12) months. The operating plan for this period provides for full operation of our businesses, and interest and principal payments on our debt.
 
In December 2009, we issued $200.0 million in aggregate principal amount of 4.0625% Convertible Subordinated Debentures (“41/16% Debentures”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. Issuance of the 41/16% Debentures generated net proceeds of approximately $195.0 million, which were used to repurchase $124.7 million of the 4% Notes and will be used to redeem a portion of the 91/2% Notes; pay accrued interest on the 4% Notes and 91/2% Notes; and pay other debt issuance costs. See additional information in Note 15 in Notes to Consolidated Financial Statements, included in Item 8 in this Report.
 
The PPA requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the funded status of the plan as of specified measurement dates. Our funded ratio as of November 30, 2008 under the PPA for our defined benefit pension plan was above the ratio required under the PPA, as amended in 2008. The required ratio to be met as of our November 30, 2009 measurement date is 94%. During the fourth quarter of fiscal 2009, we made a voluntary contribution of $4.4 million to improve the plan’s PPA funded status as of November 30, 2009, although there can be no assurance that the amount of this contribution will be sufficient to meet the required ratio. The final calculated PPA funded ratio as of November 30, 2009 is expected to be completed in the second half of 2010. On November 25, 2008, we decided to amend our defined benefit pension and benefits restoration plans to freeze future accruals under such plans. Effective February 1, 2009 and July 31, 2009, future benefit accruals for all current salaried employees and collective bargaining unit employees were discontinued, respectively.
 
We inadvertently failed to register with the SEC the issuance of certain of our common shares under our defined contribution 401(k) employee benefit plan (“the Plan”). As a result, certain purchasers of securities pursuant to the Plan may have the right to rescind their purchases for an amount equal to the purchase price paid for the securities (or if such security has been disposed of, to receive consideration with respect to any loss on such disposition) plus interest from the date of purchase. Subject to an amendment to our Senior Credit Facility, we intend to make a registered rescission offer to eligible Plan participants which could result in the purchase of up to 0.6 million shares of common stock (see Note 8 in Notes to Consolidated Financial Statements).
 
As disclosed in Notes 7(b) and 7(c) of Notes to Consolidated Financial Statements, we have exposure for certain legal and environmental matters. We believe that it is currently not possible to estimate the impact, if any, that the ultimate resolution of certain of these matters will have on our financial position, results of operations, and/or cash flows.
 
Major factors that could adversely impact our forecasted operating cash flows and our financial condition are described in Part I, Item 1A. Risk Factors. In addition, our liquidity and financial condition will continue to be affected by changes in prevailing interest rates on the portion of debt that bears interest at variable interest rates.


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Contractual Obligations
 
We have contractual obligations and commitments in the form of debt obligations, operating leases, certain other liabilities, and purchase commitments. The following table summarizes our contractual obligations as of November 30, 2009 and their expected effect on our liquidity and cash flows in future periods:
 
                                         
    Payments due by Period  
          Less than
    1-3
    3-5
    After
 
    Total     1 year     years     years     5 years  
    (In millions)  
 
Contractual Obligations:
                                       
Long-term debt:
                                       
Term Loans
  $ 68.3     $ 17.1     $ 1.1     $ 50.1     $  
91/2% Notes
    97.5                   97.5        
4% Notes(1)
    125.0       125.0                    
21/4% Debentures(2)
    146.4             146.4              
Promissory Notes
    1.4       0.7       0.7              
Interest on long-term debt(3)
    61.7       19.8       30.9       11.0        
Postretirement medical and life benefits(4)
    74.6       7.2       15.2       16.6       35.6  
Operating leases
    24.1       8.3       10.0       1.8       4.0  
Conditional asset retirement obligations
    13.6                   1.4       12.2  
Liabilities associated with legal settlements
    30.3       11.3       12.4       6.6        
                                         
Total
  $ 642.9     $ 189.4     $ 216.7     $ 185.0     $ 51.8  
                                         
 
 
(1) Represents the $125.0 million 4% Notes due January 2024 that can be put to us in January 2010 at a price equal to 100% of the principal amount, plus accrued and unpaid interest, including contingent interest and liquidated damages, if any. The 4% Notes are classified as non-current on the consolidated balance sheet as of November 30, 2009 since we refinanced the 4% Notes in January 2010 with the proceeds from the issuance of the 4 1/16% Debentures in December 2009 (see Note 5 and 15 to Notes to the Consolidated Financial Statements).
 
(2) Represents the $146.4 million 21/4% Debentures due November 2024 that can be put to us in November 2011 at a price equal to 100% of the principal amount plus accrued and unpaid interest, including liquidated damages, if any, payable in cash, to but not including the repurchase date, plus, in certain circumstances, a make-whole premium, payable in common stock.
 
(3) Includes interest on variable debt calculated based on interest rates at November 30, 2009.
 
(4) The payments presented above are expected payments for the next 10 years. The payments for postretirement medical and life benefits reflect the estimated benefit payments of the plans using the provisions currently in effect. The obligation related to postretirement medical and life benefits is actuarially determined on an annual basis. The estimated payments have been reduced to reflect the provisions of the Medicare Prescription Drug, Improvement and Modernization Act of 2003.
 
As of November 30, 2009, the liability for uncertain income tax positions was $1.5 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.
 
The PPA, as discussed above, will require underfunded pension plans to improve their funding ratios within prescribed intervals based on the level of their underfunding. We may be required to make significant cash contributions in the future to fund our defined benefit pension plan, a portion of which we may not be able to immediately recover from our government contracts.
 
We also issue purchase orders and make other commitments to suppliers for equipment, materials, and supplies in the normal course of business. These purchase commitments are generally for volumes consistent with


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anticipated requirements to fulfill purchase orders or contracts for product deliveries received, or expected to be received, from customers and would be subject to reimbursement if a cost-plus contract were terminated.
 
Arrangements with Off-Balance Sheet Risk
 
As of November 30, 2009, arrangements with off-balance sheet risk, consisted of:
 
— $85.3 million in outstanding commercial letters of credit expiring within the next twelve months, the majority of which may be renewed, primarily to collateralize obligations for environmental remediation and insurance coverage.
 
— Up to $120.0 million aggregate in guarantees by GenCorp of Aerojet’s obligations to U.S. government agencies for environmental remediation activities.
 
— Up to $1.5 million of reimbursements to Granite Construction Company (“Granite”) if we request Granite to cease mining operations on certain portions of the Sacramento Land.
 
— Guarantees, jointly and severally, by our material domestic subsidiaries of its obligations under its Senior Credit Facility and its 91/2% Notes.
 
In addition to the items discussed above, we will from time to time enter into certain types of contracts that require us to indemnify parties against potential third-party and other claims. These contracts primarily relate to: (i) divestiture agreements, under which we may provide customary indemnification to purchasers of our businesses or assets including, for example, claims arising from the operation of the businesses prior to disposition, liability to investigate and remediate environmental contamination existing prior to disposition; (ii) certain real estate leases, under which we 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 we may be required to indemnify such persons for liabilities arising out of their relationship with us. The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated.
 
Warranties
 
We provide product warranties in conjunction with certain product sales. The majority of our warranties are a one-year standard warranty for parts, workmanship, and compliance with specifications. On occasion, we have made commitments beyond the standard warranty obligation. While we have contracts with warranty provisions, there is not a history of any significant warranty claims experience. A reserve for warranty exposure is made on a product by product basis when it is both estimable and probable. These costs are included in the program’s estimate at completion and are expensed in accordance with our revenue recognition methodology.
 
Critical Accounting Policies
 
Our financial statements are prepared in accordance with GAAP that offer acceptable alternative methods for accounting for certain items affecting our financial results, such as determining inventory cost, depreciating long-lived assets, and recognizing revenues.
 
The preparation of financial statements requires the use of estimates, assumptions, judgments, and interpretations that can affect the reported amounts of assets, liabilities, revenues, and expenses, the disclosure of contingent assets and liabilities and other supplemental disclosures. The development of accounting estimates is the responsibility of our management. Management discusses those areas that require significant judgment with the audit committee of our board of directors. All of our financial disclosures in our filings with the SEC have been reviewed with the audit committee. Although we believe that the positions we have taken with regard to uncertainties are reasonable, others might reach different conclusions and our positions can change over time as more information becomes available. If an accounting estimate changes, its effects are accounted for prospectively and, if significant, disclosed in the Notes to Consolidated Financial Statements.
 
The areas most affected by our accounting policies and estimates are revenue recognition, other contract considerations, goodwill, retirement benefit plans, litigation, environmental remediation costs and recoveries, and


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income taxes. Except for income taxes and litigation matters related to discontinued operations, which are not allocated to our operating segments, these areas affect the financial results of our business segments.
 
For a discussion of all of our accounting policies, including the accounting policies discussed below, see Note 1 in Notes to Consolidated Financial Statements.
 
Revenue Recognition
 
In our Aerospace and Defense segment, recognition of profit on long-term contracts requires the use of assumptions and estimates related to the contract value or total contract revenue, the total cost at completion and the measurement of progress towards completion. Due to the nature of the programs, developing the estimated total cost at completion requires the use of significant judgment. Estimates are continually evaluated as work progresses and are revised as necessary. Factors that must be considered in estimating the work to be completed include 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 and 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. Aerojet reviews contract performance and cost estimates for some contracts at least monthly and for others at least quarterly and more frequently when circumstances significantly change. When a change in estimate is determined to have an impact on contract earnings, Aerojet records a positive or negative adjustment to earnings when identified. Changes in estimates and assumptions related to the status of certain long-term contracts may have a material effect on the amounts reported for net sales and segment performance.
 
We consider the nature of the individual underlying contract and the type of products and services provided in determining the proper accounting for a particular contract. Each method is applied consistently to all contracts having similar characteristics, as described below. We typically account for these contracts using the percentage-of-completion method, and progress is measured on a cost-to-cost or units-of-delivery basis. Sales are recognized using various measures of progress depending on the contractual terms and scope of work of the contract. We recognize revenue on a units-of-delivery basis when contracts require unit deliveries on a frequent and routine basis. Sales using this measure of progress are recognized at the contractually agreed upon unit price. Where the scope of work on contracts principally relates to research and/or development efforts, or the contract is predominantly a development effort with few deliverable units, we recognize revenue on a cost-to-cost basis. In this case, sales are recognized as costs are incurred and include estimated earned fees or profits calculated on the basis of the relationship between costs incurred and total estimated costs at completion. Revenue on service or time and material contracts is recognized when performed. If at any time expected costs exceed the value of the contract, the loss is recognized immediately.
 
Certain government contracts contain cost or performance incentive provisions that provide for increased or decreased fees or profits based upon actual performance against established targets or other criteria. Incentive and award fees, which are generally awarded at the discretion of the customer, are considered in estimating profit rates at the time the amounts can be reasonably determined and are reasonably assured based on historical experience and anticipated performance. Aerojet continually evaluates its performance and incorporates any anticipated changes in penalties and cost incentives into its revenue and earnings calculations. Performance incentives, which increase or decrease earnings based solely on a single significant event, generally are not recognized until an event occurs.
 
Revenue from real estate asset sales is recognized when a sufficient down-payment has been received, financing has been arranged and title, possession and other attributes of ownership have been transferred to the buyer. The allocation to cost of sales on real estate asset sales is based on a relative fair market value computation of the land sold which includes the basis on our books, capitalized entitlement costs, and an estimate of our continuing financial commitment.
 
Revenue that is not derived from long-term development and production contracts, or real estate asset transactions, is recognized when persuasive evidence of a final agreement exists, delivery has occurred, the selling price is fixed or determinable and payment from the customer is reasonably assured. Sales are recorded net of provisions for customer pricing allowances.


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Other Contract Accounting Considerations
 
Our sales are driven by pricing based on costs incurred to produce products or perform services under contracts with the U.S. government. Cost-based pricing is determined under the FAR and CAS. The FAR and CAS provide guidance on the types of costs that are allowable and allocable in establishing prices for goods and services under U.S. government contracts. For example, costs such as those related to pension contributions in accordance with PPA that are in excess of CAS allowable pension costs, charitable contributions, advertising, interest expense, and public relations are unallowable, and therefore not recoverable through sales. In addition, we may enter into agreements with the U.S. government that address the subjects of allowability and allocability of costs to contracts for specific matters.
 
We closely monitor compliance with and the consistent application of our critical accounting policies related to contract accounting. We review the status of contracts through periodic contract status and performance reviews. Also, regular and recurring evaluations of contract cost, scheduling and technical matters are performed by management personnel independent from the business segment performing work under the contract. Costs incurred and allocated to contracts with the U.S. government are reviewed for compliance with regulatory standards by our personnel, and are subject to audit by the Defense Contract Audit Agency.
 
Goodwill
 
Goodwill represents the excess of the purchase price of an acquired enterprise or assets over the fair values of the identifiable assets acquired and liabilities assumed. Tests for impairment of goodwill are performed on an annual basis, or at any other time, if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. We performed the impairment test for goodwill as of September 1, 2009 and determined that goodwill was not impaired.
 
Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the business climate or legal factors; adverse cash flow trends; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel; decline in stock price; and results of testing for recoverability of a significant asset group within a reporting unit. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recorded.
 
All of our recorded goodwill resides in the Aerospace and Defense reporting unit. To determine the fair value of our Aerospace and Defense reporting unit, we primarily relied upon a discounted cash flow analysis which requires significant assumptions and estimates about future operations, including judgments about expected revenue growth and operating margins, and timing and amounts of expected future cash flows. The cash flows employed in the discounted cash flow analysis are based on ten-year financial forecasts developed internally by management. The analysis also involves discounting the future cash flows to a present value using a discount rate that properly accounts for the risk and nature of the reporting unit cash flows and the rates of return debt and equity holders would require to invest their capital in the Aerospace and Defense reporting unit. In assessing the reasonableness of our estimated fair value of the Aerospace and Defense reporting unit, we evaluate the results of the discounted cash flow analysis in light of what investors are paying for similar interests in comparable aerospace and defense companies as of the valuation date. We also ensure that the reporting unit fair value is reasonable given the market value of the entire Company as of the valuation date.
 
There can be no assurance that our estimates and assumptions made for purposes of our goodwill impairment testing as of September 1, 2009 will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or margin growth rates are not achieved, we may be required to record goodwill impairment charges in future periods, whether in connection with our next annual impairment testing on September 1, 2010 or prior to that, if any such change constitutes a triggering event outside of the quarter from when the annual goodwill impairment test is performed. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.


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Retirement Benefit Plans
 
Retirement benefit plans include defined benefit pension plans and postretirement benefit plans (“medical and life benefits”). Retirement benefits are a significant cost of doing business and represent obligations that will be ultimately settled far in the future and therefore are subject to estimates. Our pension and medical and life benefit obligations and related costs are calculated using actuarial concepts in accordance with GAAP. We are required to make assumptions regarding such variables as the expected long-term rate of return on assets and the discount rate applied to determine service cost and interest cost to arrive at pension income or expense for the year.
 
The discount rate represents the current market interest rate used to determine the present value of future cash flows currently expected to be required to settle pension obligations. Based on market conditions discount rates can experience significant variability. Changes in discount rates can significantly change the liability and accordingly the funded status of the pension plan. The discount rate was determined at November 30, 2009 for our pension plans, and is subject to change each year based on changes in overall market interest rates. The assumed discount rate represents the market rate available for investments in high-quality fixed income instruments with maturities matched to the expected benefit payments for pension and medical and life benefit plans. For fiscal 2009 pension benefit obligations, the discount rate was decreased by 145 basis points to 5.65% for the qualified pension plan and decreased by 145 basis points to 5.60% for the non qualified BRP, and for medical and life benefit obligations the discount rate was decreased by 176 basis points to 5.09%.
 
The expected long-term rate of return on plan assets represents the rate of earnings expected in the funds invested to provide for anticipated benefit payments. With input from our investment advisors and actuaries, we analyzed the expected rates of return on assets and determined that a long term rate of 8.00% is reasonable based on the current and expected asset allocations and on the plans’ historical investment performance and best estimates for future investment performance. Our asset managers regularly review actual asset allocations and periodically rebalance investments to targeted allocations when considered appropriate.
 
Market conditions and interest rates significantly affect assets and liabilities of our pension plans. Pension accounting requires that market gains and losses be deferred and recognized over a period of years. This “smoothing” results in the creation of other accumulated income or loss which will be amortized to pension costs in future years. The accounting method we utilize recognizes one-fifth of the unamortized gains and losses in the market-related value of pension assets and all other gains and losses including changes in the discount rate used to calculate benefit costs each year. Investment gains or losses for this purpose are the difference between the expected return and the actual return on the market-related value of assets which smoothes asset values over three years. Although the smoothing period mitigates some volatility in the calculation of annual pension costs, future pension costs are impacted by changes in the market value of pension plan assets and changes in interest rates.
 
In addition, we maintain medical and life benefits other than pensions that are not funded.
 
A one percentage point change in the key assumptions would have the following effects on the projected benefit obligations as of November 30, 2009 and on expense for fiscal 2010:
 
                                         
    Pension Benefits and
       
    Medical and Life Benefits
  Expected Long-term
  Assumed Healthcare
    Discount Rate   Rate of Return   Cost Trend Rate
        Projected
      Net Periodic
  Accumulated
    Net Periodic
  Benefit
  Net Periodic Pension
  Medical and Life
  Benefit
    Benefit Expense   Obligation   Benefit Expense   Benefit Expense   Obligation
            (In millions)        
 
1% decrease
  $ 18.5     $ 116.0     $ 13.4     $ (0.1 )   $ (1.9 )
1% increase
    (15.7 )     (96.8 )     (13.4 )     0.1       2.1  
 
Contingencies and Litigation
 
We are currently involved in certain legal proceedings and, as required, have accrued our estimate of the probable costs for resolution of these claims. These estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in assumptions or


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the effectiveness of strategies related to these proceedings. See Note 7(b) in Notes to Consolidated Financial Statements for more detailed information on litigation exposure.
 
Reserves for Environmental Remediation and Recoverable from the U.S. Government and Other Third Parties for Environmental Remediation Costs
 
For a discussion of our accounting for environmental remediation obligations and costs and related legal matters, see “Environmental Matters” above and Note 7(c) in Notes to Consolidated Financial Statements.
 
We accrue for costs associated with the remediation of environmental contamination when it becomes probable that a liability has been incurred, and when our costs can be reasonably estimated. Management has a well-established process in place to identify and monitor our environmental exposures. In most cases, only a range of reasonably probable costs can be estimated. In establishing the reserves, the most probable estimated amount is used when determinable, and the minimum amount is used when no single amount in the range is more probable. Environmental reserves include the costs of completing remedial investigation and feasibility studies, remedial and corrective actions, regulatory oversight costs, the cost of operation and maintenance of the remedial action plan, and employee compensation costs for employees who are expected to devote a significant amount of time to remediation efforts. Calculation of environmental reserves is based on the evaluation of currently available information with respect to each individual environmental site and considers factors such as existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. Such estimates are based on the expected costs of investigation and remediation and the likelihood that other potentially responsible parties will be able to fulfill their commitments at sites where we may be jointly or severally liable.
 
As of November 30, 2009, the aggregate range of our environmental costs was $222.7 million to $428.9 million and the accrued amount was $222.7 million, of which $211.1 million relates to Aerojet sites and $11.6 million relates to non-Aerojet sites. Environmental remediation cost estimation involves significant uncertainties, including the extent of the remediation required, changing governmental regulations and legal standards regarding liability, evolving technologies and the long periods of time over which most remediation efforts take place. A number of factors could substantially change environmental remediation cost estimates, examples of which include: regulatory changes reducing the allowable levels of contaminants such as perchlorate, nitrosodimethylamine or others; enhanced monitoring and testing technology or protocols which could result in the discovery of previously undetected contaminants; and the implementation of new remediation technologies which could reduce future remediation costs.
 
On January 12, 1999, Aerojet and the U.S. government implemented the Global Settlement resolving certain prior environmental and facility disagreements, with retroactive effect to December 1, 1998. The Global Settlement covered all environmental contamination at the Sacramento and Azusa sites. Under the Global Settlement, Aerojet and the U.S. government resolved disagreements about an appropriate cost-sharing ratio. The Global Settlement provides that the cost-sharing ratio will continue for a number of years.
 
Pursuant to the Global Settlement covering environmental costs associated with Aerojet’s Sacramento site and its former Azusa site, Aerojet can recover up to 88% of its environmental remediation costs for these sites through the establishment of prices for Aerojet’s products and services sold to the U.S. government. Allowable environmental costs are charged to these contracts as the costs are incurred. Aerojet’s mix of contracts can affect the actual reimbursement made by the U.S. government. Because these costs are recovered through forward-pricing arrangements, the ability to continue recovering these costs depends on Aerojet’s sustained business volume under U.S. government contracts and programs and the relative size of Aerojet’s commercial business.
 
Based on Aerojet’s projected business volume and the proportion of its business expected to be covered by the Global Settlement, Aerojet currently believes that, as of November 30, 2009, approximately $184.9 million of its estimated recorded future environmental costs will be recoverable. Significant estimates and assumptions that could affect the future recovery of environmental remediation costs include: the proportion of Aerojet’s future business base and total business volume which will be subject to the Global Settlement; limitations on the amount of recoveries available under the Northrop Agreement; the ability of Aerojet to competitively bid and win future government contracts if estimated environmental costs significantly increase; the relative size of Aerojet’s


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commercial business base; the timing of environmental expenditures; and uncertainties inherent in long-term cost projections of environmental remediation projects.
 
Our environmental expenses related to non-Aerojet sites are generally not recoverable and a significant increase in the estimated environmental expenses for our non-Aerojet sites could have a material adverse effect on our operating results, financial condition, and/or cash flows.
 
Income Taxes
 
We file a consolidated U.S. federal income tax return for the Company and our wholly-owned consolidated subsidiaries. The deferred tax assets and/or liabilities are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in the period of the enactment date of the change.
 
The carrying value of our deferred tax assets is dependent upon our ability to generate sufficient taxable income in the future. We have established a full valuation allowance against our net deferred tax assets for continuing operations to reflect the uncertainty of realizing the deferred tax benefits, given historical losses including accumulated other comprehensive losses. A valuation allowance is required when it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized. A review of all available positive and negative evidence is considered, including our past and future performance, the market environment in which we operate, the utilization of tax attributes in the past, the length of carryback and carryforward periods, and evaluation of potential tax planning strategies.
 
Despite our belief that our tax return positions are consistent with applicable tax laws, we believe that certain positions are likely to be challenged by taxing authorities. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation. Our tax reserves reflect the difference between the tax benefit claimed on tax returns and the amount recognized in the financial statements. The accounting standards provide guidance for the recognition and measurement in financial statements for uncertain tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process, the first step being recognition. We determine whether it is more-likely-than-not that a tax position will be sustained upon tax examination, including resolution of any related appeals or litigation, based on only the technical merits of the position. The technical merits of a tax position are derived from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate resolution with a taxing authority. As the examination process progresses with tax authorities, adjustments to tax reserves may be necessary to reflect taxes payable upon settlement. Tax reserve adjustments related to positions impacting the effective tax rate affect the provision for income taxes. Tax reserve adjustments related to positions impacting the timing of deductions impact deferred tax assets and liabilities.
 
Recently Issued Accounting Standards
 
In May 2008, the FASB issued authoritative guidance which applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. Under this new guidance, an entity must separately account for the liability and equity components of convertible debt securities that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of the new guidance on the accounting for convertible debt securities that are affected is that the equity component would be included in the additional paid-in capital section of shareholders’ deficit on our consolidated balance sheets and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of convertible debt securities. We will adopt this guidance in the first quarter of fiscal 2010. Going forward, we expect


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to report a significant increase in non-cash interest expense in our financial results because this guidance requires interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest.
 
In December 2008, the FASB issued additional disclosure requirements for plan assets of defined benefit pension or other postretirement plans. The required disclosures include a description of our investment policies and strategies, the fair value of each major category of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets, and the significant concentrations of risk within plan assets. The disclosures are required for fiscal years ending after December 15, 2009. We are currently evaluating the impact of this guidance on our reporting requirements.
 
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk
 
Policies and Procedures
 
As an element of our normal business practice, we have established policies and procedures for managing our exposure to changes in interest rates.
 
The objective in managing exposure to interest rate changes is to limit the impact of interest rate changes on earnings and cash flow and to make overall borrowing costs more predictable. To achieve this objective, we may use interest rate hedge transactions or other interest rate hedge instruments to manage the net exposure to interest rate changes related to our portfolio of borrowings and to balance our fixed rate compared to floating rate debt. We did not enter into any interest rate hedge transactions or instruments during the past three fiscal years.
 
Interest Rate Risk
 
We are exposed to market risk principally due to changes in interest rates. Debt with interest rate risk includes borrowings under our Senior Credit Facility. Other than pension assets, we do not have any significant exposure to interest rate risk related to our investments.
 
As of November 30, 2009, our debt totaled $438.6 million: $370.3 million, or 84%, was at an average fixed rate of 4.76%; and $68.3 million, or 16%, was at a variable rate of 2.51%.
 
The estimated fair value of our total debt was $415.9 million as of November 30, 2009 compared to a carrying value of $438.6 million. The fair values of the term loan, convertible subordinated notes, senior subordinated notes, and convertible subordinated debentures were determined using broker quotes that are based on open markets of our debt securities as of November 30, 2009. The fair value of the remaining debt was determined to approximate carrying value.


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Item 8.   Consolidated Financial Statements and Supplementary Data
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To The Board of Directors and Shareholders of GenCorp Inc.:
 
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of GenCorp Inc. and its subsidiaries at November 30, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the years ended November 30, 2009, 2008 and 2007 listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of November 30, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
As discussed in Note 1 to the consolidated financial statements, the Company adopted a new measurement date for pension and retirement plan assets and benefit obligations as of November 30, 2009, new fair value measurements related to non-financial assets and liabilities as of December 1, 2008, new fair value measurement and disclosure accounting principles during the year ended November 30, 2008, and changed its method of accounting for uncertainty in income taxes as of December 1, 2007, and accounting for defined benefit pension and other postretirement plans as of November 30, 2007.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
/s/ PricewaterhouseCoopers LLP
 
Sacramento, California
February 3, 2010


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GENCORP INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
                         
    Year Ended  
    2009     2008     2007  
    (In millions, except per share amounts)  
 
Net sales
  $ 795.4     $ 742.3     $ 745.4  
Operating costs and expenses:
                       
Cost of sales (exclusive of items shown separately below)
    674.0       645.4       657.8  
Selling, general and administrative
    10.2       1.9       14.4  
Depreciation and amortization
    31.3       28.3       28.4  
Other expense (income), net
    2.9       7.6       (2.6 )
Unusual items
                       
Shareholder agreement and related costs
          16.8        
Executive severance agreements
    3.1              
Defined benefit pension plan amendment
          14.6        
Legal settlements and estimated loss on legal matters
    1.3       2.9       3.8  
Customer reimbursement of tax matters
                2.3  
Loss on extinguishment of debt
    0.2             0.6  
Gain on settlement and recoveries
          (1.2 )     (6.0 )
                         
Total operating costs and expenses
    723.0       716.3       698.7  
Operating income
    72.4       26.0       46.7  
Non-operating (income) expense
                       
Interest expense
    25.9       27.7       28.6  
Interest income
    (1.9 )     (4.2 )     (4.9 )
                         
Total non-operating expense, net
    24.0       23.5       23.7  
Income from continuing operations before income taxes
    48.4       2.5       23.0  
Income tax (benefit) provision
    (17.6 )     0.9       (18.1 )
                         
Income from continuing operations
    66.0       1.6       41.1  
(Loss) income from discontinued operations, net of income taxes
    (6.7 )     (0.1 )     27.9  
                         
Net income
  $ 59.3     $ 1.5     $ 69.0  
                         
Income (loss) per share of common stock
                       
Basic:
                       
Income per share from continuing operations
  $ 1.12     $ 0.03     $ 0.73  
(Loss) income per share from discontinued operations, net of income taxes
    (0.11 )           0.50  
                         
Net income per share
  $ 1.01     $ 0.03     $ 1.23  
                         
Diluted:
                       
Income per share from continuing operations
  $ 1.07     $ 0.03     $ 0.71  
(Loss) income per share from discontinued operations, net of income taxes
    (0.10 )           0.43  
                         
Net income per share
  $ 0.97     $ 0.03     $ 1.14  
                         
Weighted average shares of common stock outstanding
    58.4       57.2       56.2  
                         
Weighted average shares of common stock outstanding, assuming dilution
    66.6       57.2       64.6  
                         
 
See Notes to Consolidated Financial Statements.


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GENCORP INC.
 
CONSOLIDATED BALANCE SHEETS
 
                 
    November 30,
    November 30,
 
    2009     2008  
    (In millions, except per share amounts)  
 
ASSETS
Current Assets
               
Cash and cash equivalents
  $ 126.3     $ 92.7  
Accounts receivable
    116.3       97.3  
Inventories
    61.8       70.4  
Recoverable from the U.S. government and other third parties for environmental remediation costs and other
    30.6       43.7  
Grantor trust
    2.4       1.6  
Other receivables, prepaid expenses and other
    32.8       17.6  
Income taxes
    2.4       10.6  
Assets of discontinued operations
          0.1  
                 
Total Current Assets
    372.6       334.0  
Noncurrent Assets
               
Property, plant and equipment, net
    129.9       137.9  
Real estate held for entitlement and leasing
    55.3       49.3  
Recoverable from the U.S. government and other third parties for environmental remediation costs and other
    154.3       169.8  
Prepaid pension asset
          76.5  
Grantor trust
    17.8       29.3  
Goodwill
    94.9       94.9  
Intangible assets
    18.5       20.1  
Other noncurrent assets, net
    92.4       93.9  
                 
Total Noncurrent Assets
    563.1       671.7  
                 
Total Assets
  $ 935.7     $ 1,005.7  
                 
 
LIABILITIES, REDEEMABLE COMMON STOCK, AND SHAREHOLDERS’ DEFICIT
Current Liabilities
               
Short-term borrowings and current portion of long-term debt
  $ 17.8     $ 2.0  
Accounts payable
    18.4       32.7  
Reserves for environmental remediation costs
    44.5       65.2  
Postretirement medical and life benefits
    7.2       7.1  
Advance payments on contracts
    66.0       46.7  
Other current liabilities
    107.5       93.7  
Liabilities of discontinued operations
          1.0  
                 
Total Current Liabilities
    261.4       248.4  
Noncurrent Liabilities
               
Senior debt
    51.2       68.3  
Senior subordinated notes
    97.5       97.5  
Convertible subordinated notes
    271.4       271.4  
Other debt
    0.7       1.4  
Deferred income taxes
    9.6       8.3  
Reserves for environmental remediation costs
    178.2       193.0  
Pension benefits
    225.0       13.1  
Postretirement medical and life benefits
    75.7       66.8  
Other noncurrent liabilities
    54.1       65.0  
                 
Total Noncurrent Liabilities
    963.4       784.8  
                 
Total Liabilities
    1,224.8       1,033.2  
Commitments and Contingencies (Note 7)
               
Redeemable common stock, par value of $0.10; 0.6 million shares issued and outstanding as of November 30, 2009; 0.8 million shares issued and outstanding as of November 30, 2008 (Note 8)
    6.0       7.6  
Shareholders’ Deficit
               
Preference stock, par value of $1.00; 15.0 million shares authorized; none issued or outstanding
           
Common stock, par value of $0.10; 150.0 million shares authorized; 57.9 million shares issued and outstanding as of November 30, 2009; 57.3 million shares issued and outstanding as of November 30, 2008
    5.9       5.7  
Other capital
    210.7       207.7  
Accumulated deficit
    (157.9 )     (216.8 )
Accumulated other comprehensive loss, net of income taxes
    (353.8 )     (31.7 )
                 
Total Shareholders’ Deficit
    (295.1 )     (35.1 )
                 
Total Liabilities, Redeemable Common Stock and Shareholders’ Deficit
  $ 935.7     $ 1,005.7  
                 
 
See Notes to Consolidated Financial Statements.


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GENCORP INC.
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT AND
COMPREHENSIVE INCOME (LOSS)
 
                                                         
                                  Accumulated
       
    Comprehensive
                            Other
    Total
 
    Income
    Common Stock     Other
    Accumulated
    Comprehensive
    Shareholders’
 
    (Loss)     Shares     Amount     Capital     Deficit     Loss     Deficit  
    (In millions, except share amounts)  
 
November 30, 2006
            55,815,828     $ 5.6     $ 194.8     $ (296.4 )   $     $ (96.0 )
Net income
  $ 69.0                         69.0             69.0  
New defined benefit pension plan accounting standards transition amount
                                  (35.5 )     (35.5 )
Stock-based compensation
                      1.0                   1.0  
Shares issued under stock option and stock incentive plans
          770,892       0.1       9.4                   9.5  
                                                         
November 30, 2007
  $ 69.0       56,586,720       5.7       205.2       (227.4 )     (35.5 )     (52.0 )
                                                         
Net income
  $ 1.5                         1.5             1.5  
Amortization of net actuarial losses
    7.9                               7.9       7.9  
Actuarial losses arising during the period, net
    (51.8 )                             (51.8 )     (51.8 )
Amortization of prior service costs
    2.1                               2.1       2.1  
Prior service costs arising during the period, net
    (5.3 )                             (5.3 )     (5.3 )
Curtailment (Note 6)
    50.9                               50.9       50.9  
Cumulative effect adjustment related to the adoption of new income tax related accounting standards
                            9.1             9.1  
Reclassification to redeemable common stock
          (754,863 )     (0.1 )     (7.5 )                 (7.6 )
Stock-based compensation
                      1.6                   1.6  
Shares issued under stock option and stock incentive plans, net
          1,421,544       0.1       8.4                   8.5  
                                                         
November 30, 2008
  $ 5.3       57,253,401       5.7       207.7       (216.8 )     (31.7 )     (35.1 )
                                                         
Net income
  $ 59.3                         59.3             59.3  
Amortization of net actuarial gains
    (9.0 )                             (9.0 )     (9.0 )
Actuarial losses arising during the period, net
    (313.4 )                             (313.4 )     (313.4 )
Amortization of prior service costs
    0.1                               0.1       0.1  
Reclassification from redeemable common stock
          183,105       0.1       1.5                   1.6  
Stock-based compensation
                      0.1                   0.1  
Cumulative effect adjustment related to the adoption of defined benefit pension plan accounting standards
                            (0.4 )     0.2       (0.2 )
Shares issued under stock option and stock incentive plans, net
          487,257       0.1       1.4                   1.5  
                                                         
November 30, 2009
  $ (263.0 )     57,923,763     $ 5.9     $ 210.7     $ (157.9 )   $ (353.8 )   $ (295.1 )
                                                         
 
See Notes to Consolidated Financial Statements.


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GENCORP INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Year Ended  
    2009     2008     2007  
    (In millions)  
 
Operating Activities
                       
Net income
  $ 59.3     $ 1.5     $ 69.0  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Loss (income) from discontinued operations, net of income taxes
    6.7       0.1       (27.9 )
Depreciation and amortization
    31.3       28.3       28.4  
Stock-based compensation
    2.9       0.2       1.5  
Savings plan expense
    1.5       9.2       9.1  
Loss on extinguishment of debt
    0.2             0.6  
Changes in operating assets and liabilities:
                       
Accounts receivable
    (19.0 )     1.9       (28.1 )
Inventories
    8.6       (2.9 )     2.0  
Grantor trust
    10.7       (30.9 )      
Other receivables, prepaid expenses and other
    0.2       1.1       6.0  
Income tax receivable
    8.2       (10.5 )      
Real estate held for entitlement and leasing
    (5.9 )     (8.0 )     (7.4 )
Other noncurrent assets
    10.1       7.4       (22.8 )
Accounts payable
    (14.3 )     3.8       (3.6 )
Income taxes payable
          3.5       (5.3 )
Pension benefits
    (14.3 )     24.0       11.2  
Postretirement medical and life benefits
    (10.7 )     (9.7 )     (8.7 )
Advance payments on contracts
    19.3       (2.4 )     (8.0 )
Other current liabilities
    (17.9 )     11.3       (3.5 )
Deferred income taxes
    1.3       8.0       0.3  
Other noncurrent liabilities and other
    (26.7 )     (7.1 )     13.4  
                         
Net cash provided by continuing operations
    51.5       28.8       26.2  
Net cash used in discontinued operations
    (1.2 )     (0.8 )     (2.4 )
                         
Net Cash Provided by Operating Activities
    50.3       28.0       23.8  
Investing Activities
                       
Capital expenditures
    (14.3 )     (21.3 )     (21.8 )
Restricted cash
                19.8  
Proceeds from sale of discontinued operations
                29.7  
                         
Net Cash (Used in) Provided by Investing Activities
    (14.3 )     (21.3 )     27.7  
Financing Activities
                       
Proceeds from the issuance of debt
                75.0  
Repayments on debt
    (2.0 )     (6.3 )     (93.9 )
Debt issuance costs
    (0.4 )           (1.9 )
Proceeds from shares issued under stock option and equity incentive plans
                0.4  
                         
Net Cash Used in Financing Activities
    (2.4 )     (6.3 )     (20.4 )
                         
Net increase in cash and cash equivalents
    33.6       0.4       31.1  
Cash and cash equivalents at beginning of year
    92.7       92.3       61.2  
                         
Cash and Cash Equivalents at End of Year
  $ 126.3     $ 92.7     $ 92.3  
                         
Supplemental Disclosures of Cash Flow Information
                       
Capital expenditure purchased with a promissory note
  $     $     $ 2.8  
Financing of an environmental remediation settlement with a promissory note
          0.6        
Cash paid for income taxes
    3.3       0.5       0.8  
Cash paid for interest
    23.7       25.3       27.6  
 
See Notes to Consolidated Financial Statements.


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GENCORP INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.   Summary of Significant Accounting Policies
 
a. Basis of Presentation and Nature of Operations
 
The consolidated financial statements of GenCorp Inc. (GenCorp or the Company) include the accounts of the parent company and its wholly owned and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to financial information for prior years to conform to the current year’s presentation.
 
See Note 15 for a discussion on recent changes to the Company’s capital structure.
 
The Company is a manufacturer of aerospace and defense products and systems with a real estate segment that includes activities related to the re-zoning, entitlement, sale, and leasing of the Company’s excess real estate assets. The Company’s continuing operations are organized into two segments:
 
Aerospace and Defense — includes the operations of Aerojet-General Corporation (“Aerojet”) which develops and manufactures propulsion systems for defense and space applications, armament systems for precision tactical weapon systems and munitions applications. Aerojet is one of the largest providers of such propulsion systems in the United States (“U.S.”). Primary customers served include major prime contractors to the U.S. government, the Department of Defense (“DoD”), and the National Aeronautics and Space Administration.
 
Real Estate — includes activities related to the entitlement, sale, and leasing of the Company’s excess real estate assets. The Company owns approximately 12,200 acres of land adjacent to U.S. Highway 50 between Rancho Cordova and Folsom, California east of Sacramento (“Sacramento Land”). The Company is currently in the process of seeking zoning changes and other governmental approvals on a portion of the Sacramento Land to optimize its value. The Company has filed applications with, and submitted information to, governmental and regulatory authorities for approvals necessary to re-zone approximately 6,000 acres of the Sacramento Land. The Company also owns approximately 580 acres in Chino Hills, California. The Company is currently seeking removal of environmental restrictions on the Chino Hills property to optimize the value of such land.
 
The Company’s fiscal year ends on November 30 of each year. The fiscal year of the Company’s subsidiary, Aerojet, ends on the last Saturday of November. As a result of the 2008 calendar, Aerojet had 53 weeks of operations in fiscal 2008 compared to 52 weeks of operations in fiscal 2009 and 2007. The additional week of operations, which occurred in the first quarter of fiscal 2008, accounted for $19.1 million in additional net sales.
 
On August 31, 2004, the Company completed the sale of its GDX Automotive (“GDX”) business. On November 30, 2005, the Company completed the sale of its Fine Chemicals business. The remaining subsidiaries of GDX, including Snappon SA, and the Fine Chemicals business are classified as discontinued operations (see Note 12).
 
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
 
b. Cash and Cash Equivalents
 
All highly liquid debt instruments purchased with a remaining maturity at the date of purchase of three months or less are considered to be cash equivalents. The Company aggregates its cash balances by bank, and reclassifies any negative balances, if applicable, to accounts payable.
 
c. Fair Value of Financial Instruments
 
The accounting standards use a three-tier 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;


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GENCORP INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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. As of November 30, 2009 and 2008, the Company’s only financial instruments, other than investments held by its defined benefit pension plan, were the Company’s investments in money market funds. The estimated fair value and carrying value of the Company’s investments in money market funds was $136.2 million, including $20.2 million net money market funds in the grantor trust, as of November 30, 2009. The estimated fair value and carrying value of the Company’s investments in money market funds was $116.9 million, including $30.9 million net money market funds in the grantor trust, as of November 30, 2008. The fair value of the money market fund investments was determined based on quoted market prices. In addition, the Company determined that the money market fund investments were a Level 1 asset.
 
The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued compensation, and other accrued liabilities, approximate fair value because of their short maturities. The estimated fair value and carrying value for the Company’s long-term debt is presented below:
 
                                 
    Fair Value
    Carrying Value
 
    As of November 30,     As of November 30,  
    2009     2008     2009     2008  
    (In millions)  
 
Term loan
  $ 62.8     $ 53.4     $ 68.3     $ 69.0  
91/2% Senior Subordinated Notes (“91/2% Notes”)
    96.0       76.1       97.5       97.5  
4% contingent convertible subordinated notes (“4% Notes”)
    124.7       77.5       125.0       125.0  
21/4% Convertible Subordinated Debentures (“21/4% Debentures”)
    131.0       82.0       146.4       146.4  
Other debt
    1.4       2.7       1.4       2.7  
                                 
    $ 415.9     $ 291.7     $ 438.6     $ 440.6  
                                 
 
The fair values of the term loan, 91/2% Notes, 4% Notes, and 21/4% Debentures were determined using broker quotes that are based on open markets of the Company’s debt securities as of November 30, 2009. The fair value of the remaining debt was determined to approximate carrying value.
 
d. Accounts Receivable
 
Accounts receivable associated with long-term contracts consist of billed and unbilled amounts. Billed amounts include invoices presented to customers that have not been paid. Unbilled amounts relate to revenues that have been recorded and billings that have not been presented to customers. Amounts for overhead disallowances are reflected in unbilled receivables and primarily represent estimates of overhead costs which may not be successfully negotiated and collected.
 
Other receivables represent amounts billed where revenues were not derived from long-term contracts.
 
e. Inventories
 
Inventories are stated at the lower of cost or market, generally using the average cost method. Costs on long-term contracts and programs in progress represent recoverable costs incurred for production, contract-specific facilities and equipment, allocable operating overhead, advances to suppliers, environmental expenses and, in the case of contracts with the U.S. government, bid and proposal, research and development, and general and administrative expenses. Pursuant to contract provisions, agencies of the U.S. government and certain other customers have title to, or a security interest in, inventories related to such contracts as a result of performance-based and progress payments. Such progress payments are reflected as an offset against the related inventory balances.


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GENCORP INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
f. Income Taxes
 
The Company files a consolidated U.S. federal income tax return with its consolidated wholly-owned subsidiaries. The deferred tax assets and/or liabilities are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in the period of the enactment date of the change.
 
The carrying value of the Company’s deferred tax assets is dependent upon its ability to generate sufficient taxable income in the future. The Company has established a full valuation allowance against its net deferred tax assets for continuing operations to reflect the uncertainty of realizing the deferred tax benefits, given historical losses including accumulated other comprehensive losses. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. A review of all available positive and negative evidence is considered, including the Company’s past and future performance, the market environment in which it operates, the utilization of tax attributes in the past, the length of carryback and carryforward periods, and evaluation of potential tax planning strategies.
 
Despite the Company’s belief that its tax return positions are consistent with applicable tax laws, the Company believes that certain positions are likely to be challenged by taxing authorities. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation. The Company’s tax reserves reflect the difference between the tax benefit claimed on tax returns and the amount recognized in the financial statements. The accounting standards provide guidance for the recognition and measurement in financial statements for uncertain tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process, the first step being recognition. The Company determines whether it is more-likely-than-not that a tax position will be sustained upon tax examination, including resolution of any related appeals or litigation, based on only the technical merits of the position. The technical merits of a tax position are derived from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate resolution with a taxing authority. As the examination process progresses with tax authorities, adjustments to tax reserves may be necessary to reflect taxes payable upon settlement. Tax reserve adjustments related to positions impacting the effective tax rate affect the provision for income taxes. Tax reserve adjustments related to positions impacting the timing of deductions impact deferred tax assets and liabilities.
 
g. Property, Plant and Equipment, net
 
Property, plant and equipment are recorded at cost. Refurbishment costs are capitalized in the property accounts, whereas ordinary maintenance and repair costs are expensed as incurred. Depreciation is computed principally by accelerated methods based on the following useful lives:
 
         
Buildings and improvements
    6 — 40 years  
Machinery and equipment
    3 — 19 years  
 
h. Real Estate Held for Entitlement and Leasing
 
The Company capitalizes all costs associated with the real estate entitlement and leasing process. The Company classifies activities related to the entitlement, sale, and leasing of its excess real estate assets as operating activities in the consolidated statements of cash flows.


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GENCORP INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
i. Goodwill
 
Goodwill represents the excess of the purchase price of an acquired enterprise or assets over the fair values of the identifiable assets acquired and liabilities assumed. Tests for impairment of goodwill are performed on an annual basis, or at any other time, if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. The Company performed the impairment test for goodwill as of September 1, 2009 and determined that goodwill was not impaired.
 
Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the business climate or legal factors; adverse cash flow trends; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel; decline in stock price; and results of testing for recoverability of a significant asset group within a reporting unit. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recorded.
 
All of the Company’s recorded goodwill resides in the Aerospace and Defense reporting unit. To determine the fair value of the Company’s Aerospace and Defense reporting unit, the Company primarily relies upon a discounted cash flow analysis which requires significant assumptions and estimates about future operations, including judgments about expected revenue growth and operating margins, and timing and amounts of expected future cash flows. The cash flows employed in the discounted cash flow analysis are based on ten-year financial forecasts developed internally by management. The analysis also involves discounting the future cash flows to a present value using a discount rate that properly accounts for the risk and nature of the reporting unit cash flows and the rates of return debt and equity holders would require to invest their capital in the Aerospace and Defense reporting unit. In assessing the reasonableness of the Company’s estimated fair value of the Aerospace and Defense reporting unit, the Company evaluates the results of the discounted cash flow analysis in light of what investors are paying for similar interests in comparable aerospace and defense companies as of the valuation date. The Company also ensures that the reporting unit fair value is reasonable given the market value of the entire Company as of the valuation date.
 
There can be no assurance that the Company’s estimates and assumptions made for purposes of its goodwill impairment testing as of September 1, 2009 will prove to be accurate predictions of the future. If the Company’s assumptions regarding forecasted revenue or margin growth rates are not achieved, the Company may be required to record goodwill impairment charges in future periods, whether in connection with the Company’s next annual impairment testing on September 1, 2010 or prior to that, if any such change constitutes a triggering event outside of the quarter from when the annual goodwill impairment test is performed. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.
 
j. Intangible Assets
 
Identifiable intangible assets, such as patents, trademarks, and licenses are recorded at cost or when acquired as part of a business combination at estimated fair value. Identifiable intangible assets are amortized based on when they provide the Company economic benefit, or using the straight-line method, over their estimated useful life. Amortization periods for identifiable intangible assets range from 20 years to 27 years.
 
k. Environmental Remediation
 
The Company expenses, on a current basis, recurring costs associated with managing hazardous substances and contamination in ongoing operations. The Company accrues for costs associated with the remediation of environmental contamination when it becomes probable that a liability has been incurred, and the amount can be reasonably estimated. In most cases only a range of reasonably probable costs can be estimated. In establishing the Company’s reserves, the most probable estimated amount is used when determinable, and the minimum amount is used when no single amount in the range is more probable. The Company’s environmental reserves include the costs of completing remedial investigation and feasibility studies, remedial and corrective actions, regulatory oversight


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GENCORP INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
costs, the cost of operation and maintenance of the remedial action plan, and employee compensation costs for employees who are expected to devote a significant amount of time to remediation efforts. Calculation of environmental reserves is based on the evaluation of currently available information with respect to each individual environmental site and considers factors such as existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. Such estimates are based on the expected costs of investigation and remediation and the likelihood that other potentially responsible parties will be able to fulfill their commitments at sites where the Company may be jointly or severally liable. The Company recognizes amounts recoverable from insurance carriers, the U.S. government or other third parties, when the collection of such amounts is probable (see Note 7(c) and (d)).
 
l. Retirement Benefits
 
The Company previously had a defined benefit pension plan covering substantially all salaried and hourly employees (see discussion below). In addition, the Company provides medical and life insurance benefits (“postretirement benefits”) to certain eligible retired employees, with varied coverage by employee group. Annual charges to income are made for the cost of the plans, including current service costs, interest costs on benefit obligations, and net amortization and deferrals, increased or reduced by the return on assets.
 
On November 25, 2008, the Company decided to amend the defined benefit pension and benefits restoration plans to freeze future accruals under such plans. Effective February 1, 2009 and July 31, 2009, future benefit accruals for all current salaried employees and collective bargaining unit employees were discontinued, respectively. No employees lost their previously earned pension benefits. As a result of the amendment and freeze, the Company incurred a curtailment charge of $14.6 million in the fourth quarter of fiscal 2008 primarily due to the immediate recognition of unrecognized prior service costs (see Note 6).
 
m. Conditional Asset Retirement Obligations
 
Conditional asset retirement obligations (“CARO”) are legal obligations associated with the retirement of long-lived assets. These liabilities are initially recorded at fair value and the related asset retirement costs are capitalized by increasing the carrying amount of the related assets by the same amount as the liability. Asset retirement costs are subsequently depreciated over the useful lives of the related assets. Subsequent to initial recognition, the Company records period-to-period changes in the CARO liability resulting from the passage of time and revisions to either the timing or the amount of the estimate of the undiscounted cash flows.
 
The Company’s estimate of CAROs associated with owned properties relates to estimated costs necessary for the legally required removal or remediation of various regulated materials, primarily asbestos disposal and radiological decontamination of an ordnance manufacturing facility. For CAROs that are not expected to be retired in the next fifteen (15) years, the Company estimated the retirement date of such asset retirement obligations to be thirty (30) years from the date of adoption. For leased properties, such obligations relate to the estimated cost of contractually required property restoration.
 
The changes in the carrying amount of CAROs since November 30, 2007 were as follows (in millions):
 
         
Balance as of November 30, 2007
  $ 13.4  
Additions and other, net
    (0.9 )
Accretion
    1.0  
         
Balance as of November 30, 2008
    13.5  
Additions and other, net
    (1.0 )
Accretion
    1.1  
         
Balance as of November 30, 2009
  $ 13.6  
         


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GENCORP INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
n. Advance Payments on Contracts
 
The Company receives advances from customers which may exceed costs incurred on certain contracts. Such advances, other than those reflected as a reduction of inventories as progress payments, are classified as current liabilities.
 
o. Loss Contingencies
 
The Company is currently involved in certain legal proceedings and, as required, has accrued its estimate of the probable costs for resolution of these claims. These estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations or cash flows for any particular period could be materially affected by changes in estimates or the effectiveness of strategies related to these proceedings.
 
p. Warranties
 
The Company provides product warranties in conjunction with certain product sales. The majority of the Company’s warranties are a one-year standard warranty for parts, workmanship, and compliance with specifications. On occasion, the Company has made commitments beyond the standard warranty obligation. While the Company has contracts with warranty provisions, there is not a history of any significant warranty claims experience. A reserve for warranty exposure is made on a product by product basis when it is both estimable and probable. These costs are included in the program’s estimate at completion and are expensed in accordance with the Company’s revenue recognition methodology as allowed under GAAP for that particular contract.
 
q. Revenue Recognition
 
The Company considers the nature of the individual underlying contract and the type of products and services provided in determining the proper accounting for a particular contract. Each method is applied consistently to all contracts having similar characteristics, as described below. The Company typically accounts for these contracts using the percentage-of-completion method, and progress is measured on a cost-to-cost or units-of-delivery basis. Sales are recognized using various measures of progress depending on the contractual terms and scope of work of the contract. The Company recognizes revenue on a units-of-delivery basis when contracts require unit deliveries on a frequent and routine basis. Sales using this measure of progress are recognized at the contractually agreed upon unit price. Where the scope of work on contracts principally relates to research and/or development efforts, or the contract is predominantly a development effort with few deliverable units, the Company recognizes revenue on a cost-to-cost basis. In this case, sales are recognized as costs are incurred and include estimated earned fees or profits calculated on the basis of the relationship between costs incurred and total estimated costs at completion. Revenue on service or time and material contracts is recognized when performed. If at any time expected costs exceed the value of the contract, the loss is recognized immediately.
 
Certain government contracts contain cost or performance incentive provisions that provide for increased or decreased fees or profits based upon actual performance against established targets or other criteria. Incentive and award fees, which are generally awarded at the discretion of the customer, are included in estimated contract revenue at the time the amounts can be reasonably determined and are reasonably assured based on historical experience and anticipated performance. The Company continually evaluates its performance and incorporates any anticipated changes in penalties and cost incentives into its revenue and earnings calculations. Performance incentives, which increase or decrease earnings based solely on a single significant event, generally are not recognized until an event occurs.
 
Revenue from real estate asset sales is recognized when a sufficient down-payment has been received, financing has been arranged and title, possession and other attributes of ownership have been transferred to the buyer. The allocation to cost of sales on real estate asset sales is based on a relative fair market value computation of


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GENCORP INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
the land sold which includes the basis on the Company’s book value, capitalized entitlement costs, and an estimate of the Company’s continuing financial commitment.
 
Revenue that is not derived from long-term development and production contracts, or real estate asset transactions, is recognized when persuasive evidence of a final agreement exists, delivery has occurred, the selling price is fixed or determinable and payment from the customer is reasonably assured. Sales are recorded net of provisions for customer pricing allowances.
 
r. Research and Development
 
Company-sponsored research and development (“R&D”) expenses were $15.4 million in fiscal 2009, $11.4 million in fiscal 2008, and $17.0 million in fiscal 2007. Company-sponsored R&D expenses include the costs of technical activities that are useful in developing new products, services, processes, or techniques, as well as expenses for technical activities that may significantly improve existing products or processes. These expenses are generally allocated among all contracts and programs in progress under U.S. government contractual arrangements.
 
Customer-sponsored R&D expenditures, which are funded under government contracts, totaled $245.3 million in fiscal 2009, $252.4 million in fiscal 2008, and $269.0 million in fiscal 2007. Expenditures under customer-sponsored R&D funded government contracts are accounted for as sales and cost of products sold.
 
s. Stock-based Compensation
 
The Company recognizes stock-based compensation in the statement of operations at the grant-date fair value of stock awards issued to employees and directors. The Company elected to use the short-cut method for determining the historical pool of windfall tax benefits and the tax law ordering approach for purposes of determining whether an excess tax benefit has been realized.
 
t. Impairment or Disposal of Long-Lived Assets
 
Impairment of long-lived assets is recognized when events or circumstances indicate that the carrying amount of the asset, or related groups of assets, may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; or a current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the Company determines that an asset is not recoverable, then the Company would record an impairment charge if the carrying value of the asset exceeds its fair value.
 
A long-lived asset classified as “held for sale” is initially measured at the lower of its carrying amount or fair value less costs to sell. In the period that the “held for sale” criteria are met, the Company recognizes an impairment charge for any initial adjustment of the long-lived asset amount. Gains or losses not previously recognized resulting from the sale of a long-lived asset is recognized on the date of sale.
 
u. Foreign Currency Transactions
 
Foreign currency transaction (losses) and gains were ($1.6) million in fiscal 2009, $0.6 million in fiscal 2008, and ($0.1) million in fiscal 2007 which are reported as a component of discontinued operations. The Company’s foreign currency transactions were associated with the Company’s former GDX business, including Snappon SA, which is classified as a discontinued operations in these consolidated financial statements and notes to consolidated financial statements.


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GENCORP INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
v. Concentrations
 
Dependence upon government programs and contracts
 
Sales in fiscal 2009, 2008, and 2007 directly and indirectly to the U.S. government and its agencies, including sales to the Company’s significant customers discussed below, totaled $701.3 million, $641.7 million, and $665.9 million, respectively. The demand for certain of the Company’s services and products is directly related to the level of funding of government programs.
 
Major customers
 
Customers that represented more than 10% of net sales for the fiscal years presented are as follows:
 
                         
    Year Ended
    2009   2008   2007
 
Raytheon
    31 %     27 %     28 %
Lockheed Martin
    26       26       28  
 
Credit Risk
 
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash equivalents and trade receivables. The Company’s cash and cash equivalents are held and managed by recognized financial institutions that follow the Company’s investment policy. The investment policy limits the amount of credit exposure to any one security issue or issuer and the Company does not believe significant concentration of credit risk exists with respect to these investments. The Company performs ongoing credit evaluations of its customers’ financial condition and maintains an appropriate allowance for uncollectible accounts receivable based upon the expected collectiblity of all accounts receivable. The Company’s accounts receivables are generally unsecured and are not backed by collateral from its customers. Customers that represented more than 10% of accounts receivable for the periods presented are as follows:
 
                 
    As of November 30,
    2009   2008
 
Lockheed Martin
    38 %     35 %
Raytheon
    29       26  
 
Dependence on Single Source and Other Third Party Suppliers
 
The Company depends on a single or limited number of outside suppliers for raw materials. The Company closely monitors sources of supply to assure that adequate raw materials and other supplies needed in the manufacturing processes are available. As a U.S. government contractor, the Company is frequently limited to procuring materials and components from sources of supply that meet rigorous customer and/or government specifications. In addition, as business conditions, DoD budgets, and Congressional allocations change, suppliers of specialty chemicals and other materials sometime consider dropping low-volume items from their product lines, which may require us to qualify new suppliers for raw materials on key programs. Current suppliers of some raw materials used in the manufacturing of rocket nozzles, composite cases and explosives have announced plans to relocate, close, and/or discontinue certain product lines. These materials, which include TPB/Flexzone, Iron Oxide lacquer and other constituents, are used industry-wide and are key to many of the Company’s motor and warhead programs. The Company continues its efforts at qualifying new suppliers and products for these materials and expects that materials will be available in time to meet future production needs. In some situations, increased costs related to new suppliers may not be recoverable under government contracts. In addition, some of these materials may have to be procured from offshore suppliers.


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GENCORP INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The supply of ammonium perchlorate, a principal raw material used in solid propellant, is limited to a single source that supplies the entire domestic solid propellant industry with actual pricing based on the total industry demand. Significant reductions in the total national demand will likely result in significant unit price increases. Where possible, Aerojet has protective price re-determinable language incorporated into contracts with its customers. The industry also currently relies on one primary supplier for carbon fiber, which is used in the production of composite materials. This supplier has multiple manufacturing lines for such material. Although other sources of carbon fiber exist, the addition of a new supplier would require the Company to qualify the new source for use. The Japanese government has imposed export restrictions on materials that are to be used in offensive weapons systems. To date, this has not impacted production but has increased the lead times associated with the product as its export has to be approved by the Japanese Defense Ministry. Characterization of domestic sources of carbon fiber is underway by the extended aerospace industry.
 
The Company is also impacted, as is the rest of the industry, by increases in the prices and lead-times of raw materials used in production on various fixed-price contracts. Additionally, where possible, the Company has negotiated with its customers economic and/or price adjustment clauses tied to commodity indices. The Company’s past success in negotiating these terms is no indication of its ability to continue to do so. The U.S. DoD has begun to rigorously enforce the provisions of the “Berry Amendment” (Defense Federal Acquisition Regulations 225-7002, 252.225-7014) which imposes a requirement to procure only certain strategic materials critical to national security from U.S. sources. Due to limited U.S. supply of these materials and the requirement to use domestic sources, lead times and cost impacts have been significant.
 
Prolonged disruptions in the supply of any of the Company’s key raw materials, difficulty qualifying new sources of supply, implementing use of replacement materials or new sources of supply, and/or a continuing increase in the prices of raw materials could have a material adverse effect on the Company’s operating results, financial condition, and/or cash flows.
 
Workforce
 
As of November 30, 2009, 13% of the Company’s 3,071 employees were covered by collective bargaining agreements which are due to expire in 2011 and 2012.
 
w. Recently Adopted Accounting Pronouncements
 
On December 1, 2007, the Company adopted the new standards that specified the accounting for uncertainty in income taxes. As of December 1, 2007, the Company had $3.2 million of unrecognized tax benefits, $3.0 million of which would impact their effective tax rate if recognized. The adoption resulted in a reclassification of certain tax liabilities from current to non-current, a reclassification of certain tax indemnification liabilities from income taxes payable to other current liabilities, and a cumulative effect adjustment benefit of $9.1 million that was recorded directly to the accumulated deficit. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Interest and penalties are immaterial at the date of adoption and are included in unrecognized tax benefits. As of November 30, 2009, the Company had approximately $0.2 million of accrued interest and penalties related to uncertain tax positions. The tax years ended November 30, 2006 through November 30, 2009 remain open to examination for U.S. federal income tax purposes. For the Company’s other major taxing jurisdictions, the tax years ended November 30, 2005 through November 30, 2009 remain open to examination.
 
On December 1, 2007, the Company adopted new standards that specified fair value measurements for financial instruments. Although the adoption of the new standards did not materially impact the Company’s financial condition, results of operations, or cash flows, the Company is now required to provide additional disclosures in the notes to consolidated financial statements.
 
On December 1, 2007, the Company adopted the new standards related to accounting for the fair value option for financial assets and liabilities. At the date of adoption, the Company did not elect to use the fair value option for


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GENCORP INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
any of its outstanding financial assets or liabilities. Accordingly, the adoption of the new standards did not have an impact on the Company’s financial position, results of operations, or cash flows.
 
As of December 1, 2008, the Company adopted the new standards related to accounting for non-refundable advance payments for goods or services to be used in future research and development activities. The new standards provides guidance on whether non-refundable advance payments for goods that will be used or services that will be performed in future research and development activities should be accounted for as research and development costs or deferred and capitalized until the goods have been delivered or the related services have been rendered. The adoption of the new standards did not have a material impact on the Company’s financial position, results of operations, or cash flows.
 
As of December 1, 2008, the Company adopted new standards that specified fair value measurements as it relates to non-financial assets and liabilities.
 
As of August 31, 2009, the Company adopted new standards which provides authoritative accounting literature related to subsequent events, which was previously addressed only in the auditing literature. The new guidance is largely similar to the current guidance in the auditing literature with some exceptions that are not intended to result in significant changes in practice. The adoption of the new standards did not have a material impact on the Company’s financial position, results of operations, or cash flows.
 
As of November 30, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“Codification”) which became the single source of authoritative non-governmental GAAP, superseding various existing authoritative accounting pronouncements. The Codification establishes one level of authoritative GAAP. All other literature is considered non-authoritative. There were no changes to the Company’s consolidated financial statements due to the implementation of the Codification other than changes in reference to various authoritative accounting pronouncements in the consolidated financial statements.
 
As of November 30, 2009, the Company adopted the accounting standards which require the measurement of the pension and postretirement plans assets and benefit obligations at the Company’s fiscal year end. Previously, the Company performed the measurement as of August 31 of each fiscal year. As a result of implementing the measurement date provision, the Company recorded an additional quarter of pension and other postretirement benefit costs as of November 30, 2009 as a $0.4 million increase to accumulated deficit and a $0.2 million decrease to accumulated other comprehensive loss.
 
x. New Accounting Pronouncements
 
In May 2008, the FASB issued authoritative guidance which applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. Under this new guidance, an entity must separately account for the liability and equity components of convertible debt securities that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of the new guidance on the accounting for convertible debt securities that are affected is that the equity component would be included in the additional paid-in capital section of shareholders’ deficit on the Company’s consolidated balance sheets and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of convertible debt securities. The Company will adopt this guidance in the first quarter of fiscal 2010. Going forward, the Company expects to report a significant increase in non-cash interest expense in its financial results because this guidance requires interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest.
 
In December 2008, the FASB issued additional disclosure requirements for plan assets of defined benefit pension or other postretirement plans. The required disclosures include a description of the Company’s investment policies and strategies, the fair value of each major category of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets, and the significant concentrations of risk within plan assets. The disclosures are required


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GENCORP INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
for fiscal years ending after December 15, 2009. The Company is currently evaluating the impact of this guidance on its reporting requirements.
 
y. Subsequent Events
 
The Company evaluates events or transactions that occur after the balance sheet date but before financial statements are issued for potential recognition or disclosure in the financial statements. The issuance of financial statements is the earlier of when the financial statements are widely distributed to all shareholders and other financial statements users or filed with the Securities Exchange Commission (“SEC”). The Company has evaluated all subsequent events through February 3, 2010, the date the financial statements were issued. See Note 15.
 
2.   Income (Loss) Per Share of Common Stock
 
A reconciliation of the numerator and denominator used to calculate basic and diluted income (loss) per share of common stock (“EPS”) is presented in the following table:
 
                         
    Year Ended  
    2009     2008     2007  
    (In millions, except per share amounts; shares in thousands)  
 
Numerator for Basic and Diluted EPS