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AEROJET ROCKETDYNE HOLDINGS, INC. - Quarter Report: 2015 May (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: May 31, 2015
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number 1-01520
  Aerojet Rocketdyne Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
34-0244000
(State of Incorporation)
 
(I.R.S. Employer
Identification No.)
 
 
2001 Aerojet Road
Rancho Cordova, California
 
95742
(Address of Principal Executive Offices)
 
(Zip Code)
 
 
P.O. Box 537012
Sacramento, California
 
95853-7012
(Mailing Address)
 
(Zip Code)
Registrant’s telephone number, including area code (916) 355-4000
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically 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  ý    No  ¨
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
ý
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of June 30, 2015, there were 63.0 million outstanding shares of our Common Stock, including redeemable common stock and unvested common shares, $0.10 par value.



Aerojet Rocketdyne Holdings, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended May 31, 2015
Table of Contents 
Item
Number
 
Page
1
Financial Statements
2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
3
Quantitative and Qualitative Disclosures About Market Risk
4
Controls and Procedures
1
Legal Proceedings
1A
Risk Factors
2
Unregistered Sales of Equity Securities and Use of Proceeds
3
Defaults Upon Senior Securities
4
Mine Safety Disclosures
5
Other Information
6
Exhibits
 
Signatures
 
Exhibit Index




Part I — FINANCIAL INFORMATION
Item 1. Financial Statements
Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions, except per share amounts)
Net sales
$
456.9

 
$
404.5

 
$
775.5

 
$
736.6

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales (exclusive of items shown separately below)
372.5

 
369.4

 
655.3

 
657.9

Selling, general and administrative
12.6

 
9.2

 
28.1

 
18.4

Depreciation and amortization
16.1

 
15.7

 
32.1

 
30.6

Other expense, net:
 
 
 
 
 
 
 
Loss on debt repurchased
0.5

 
45.9

 
0.7

 
50.8

Other
2.3

 
2.4

 
3.8

 
5.1

Total operating costs and expenses
404.0

 
442.6

 
720.0

 
762.8

Operating income (loss)
52.9

 
(38.1
)
 
55.5

 
(26.2
)
Non-operating (income) expense:
 
 
 
 
 
 
 
Interest income
—

 
—

 
(0.1
)
 
—

Interest expense
13.2

 
12.6

 
26.6

 
25.0

Total non-operating expense, net
13.2

 
12.6

 
26.5

 
25.0

Income (loss) from continuing operations before income taxes
39.7

 
(50.7
)
 
29.0

 
(51.2
)
Income tax provision (benefit)
21.3

 
(0.6
)
 
14.7

 
1.2

Income (loss) from continuing operations
18.4

 
(50.1
)
 
14.3

 
(52.4
)
(Loss) income from discontinued operations, net of income taxes
—

 
(0.8
)
 
0.2

 
(0.8
)
Net income (loss)
$
18.4

 
$
(50.9
)
 
$
14.5

 
$
(53.2
)
Income (Loss) Per Share of Common Stock
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Income (loss) per share from continuing operations
$
0.29

 
$
(0.87
)
 
$
0.23

 
$
(0.90
)
Loss per share from discontinued operations, net of income taxes
—

 
(0.01
)
 
—

 
(0.01
)
Net income (loss) per share
$
0.29

 
$
(0.88
)
 
$
0.23

 
$
(0.91
)
Diluted
 
 
 
 
 
 
 
Income (loss) per share from continuing operations
$
0.26

 
$
(0.87
)
 
$
0.22

 
$
(0.90
)
Loss per share from discontinued operations, net of income taxes
—

 
(0.01
)
 
—

 
(0.01
)
Net income (loss) per share
$
0.26

 
$
(0.88
)
 
$
0.22

 
$
(0.91
)
Weighted average shares of common stock outstanding, basic
61.2

 
57.9

 
59.9

 
58.7

Weighted average shares of common stock outstanding, diluted
72.3

 
57.9

 
72.2

 
58.7

See Notes to Unaudited Condensed Consolidated Financial Statements.

2


Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Net income (loss)
$
18.4

 
$
(50.9
)
 
$
14.5

 
$
(53.2
)
Other comprehensive income:
 
 
 
 
 
 
 
Amortization of actuarial losses and prior service credits, net of income taxes
12.2

 
7.7

 
24.4

 
15.2

Comprehensive income (loss)
$
30.6

 
$
(43.2
)
 
$
38.9

 
$
(38.0
)
See Notes to Unaudited Condensed Consolidated Financial Statements.

3


Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
May 31,
2015
 
November 30,
2014
 
(In millions, except per share and share amounts)
ASSETS
Current Assets
 
 
 
Cash and cash equivalents
$
253.5

 
$
265.9

Accounts receivable
173.7

 
172.9

Inventories
150.3

 
139.0

Recoverable from the U.S. government and other third parties for environmental remediation costs
23.7

 
19.4

Receivable from Northrop Grumman Corporation (“Northrop”)
6.0

 
6.0

Other current assets, net
45.4

 
38.0

Deferred income taxes
24.8

 
25.3

Total Current Assets
677.4

 
666.5

Noncurrent Assets
 
 
 
Property, plant and equipment, net
356.3

 
367.5

Real estate held for entitlement and leasing
82.9

 
94.4

Recoverable from the U.S. government and other third parties for environmental remediation costs
76.8

 
81.2

Receivable from Northrop
69.7

 
74.8

Deferred income taxes
245.3

 
259.0

Goodwill
164.4

 
164.4

Intangible assets
115.5

 
122.2

Other noncurrent assets, net
109.8

 
91.6

Total Noncurrent Assets
1,220.7

 
1,255.1

Total Assets
$
1,898.1

 
$
1,921.6

LIABILITIES, REDEEMABLE COMMON STOCK, AND STOCKHOLDERS’ DEFICIT
Current Liabilities
 
 
 
Short-term borrowings and current portion of long-term debt
$
5.3

 
$
5.3

Accounts payable
87.6

 
103.5

Reserves for environmental remediation costs
38.7

 
31.9

Postretirement medical and life insurance benefits
6.4

 
6.4

Advance payments on contracts
197.3

 
198.5

Other current liabilities
198.5

 
221.7

Total Current Liabilities
533.8

 
567.3

Noncurrent Liabilities
 
 
 
Senior debt
91.3

 
93.8

Second-priority senior notes
460.0

 
460.0

Convertible subordinated notes
98.0

 
133.8

Other debt
63.3

 
89.3

Reserves for environmental remediation costs
122.8

 
134.1

Pension benefits
475.4

 
482.8

Postretirement medical and life insurance benefits
50.1

 
51.7

Other noncurrent liabilities
99.0

 
79.7

Total Noncurrent Liabilities
1,459.9

 
1,525.2

Total Liabilities
1,993.7

 
2,092.5

Commitments and contingencies (Note 7)

 

Redeemable common stock, par value of $0.10; less than 0.1 million shares issued and outstanding as of May 31, 2015; 0.1 million shares issued and outstanding as of November 30, 2014
0.1

 
1.6

Stockholders’ 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; 61.3 million shares issued and outstanding as of May 31, 2015; 56.9 million shares issued and outstanding as of November 30, 2014
6.3

 
5.9

Other capital
324.8

 
287.3

Treasury stock at cost, 3.5 million shares as of May 31, 2015 and November 30, 2014
(64.5
)
 
(64.5
)
Accumulated deficit
(52.5
)
 
(67.0
)
Accumulated other comprehensive loss, net of income taxes
(309.8
)
 
(334.2
)
Total Stockholders’ Deficit
(95.7
)
 
(172.5
)
Total Liabilities, Redeemable Common Stock and Stockholders’ Deficit
$
1,898.1

 
$
1,921.6

See Notes to Unaudited Condensed Consolidated Financial Statements.

4


Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Statement of Stockholders’ Deficit
(Unaudited) 
 
Common Stock
 
 
 
 
 
 
 
Accumulated Other
 
Total
 
 
 
Other
Capital
 
Treasury
Stock
 
Accumulated
Deficit
 
Comprehensive
Loss
 
Stockholders'
Deficit
 
Shares
 
Amount
 
 
(In millions)
November 30, 2014
56.9

 
$
5.9

 
$
287.3

 
$
(64.5
)
 
$
(67.0
)
 
$
(334.2
)
 
$
(172.5
)
Net income
—

 
—

 
—

 
—

 
14.5

 
—

 
14.5

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

 
—

 
—

 
—

 
—

 
24.4

 
24.4

Conversion of debt to common stock
4.0

 
0.4

 
35.4

 
—

 
—

 
—

 
35.8

Reclassification from redeemable common stock
(0.1
)
 
—

 
1.5

 
—

 
—

 
—

 
1.5

Tax benefit from shares issued under equity plans
—

 
—

 
1.5

 
—

 
—

 
—

 
1.5

Repurchase of shares to satisfy tax withholding obligations
(0.2
)
 
—

 
(4.4
)
 
—

 
—

 
—

 
(4.4
)
Stock-based compensation and other, net
0.7

 
—

 
3.5

 
—

 
—

 
—

 
3.5

May 31, 2015
61.3

 
$
6.3

 
$
324.8

 
$
(64.5
)
 
$
(52.5
)
 
$
(309.8
)
 
$
(95.7
)
See Notes to Unaudited Condensed Consolidated Financial Statements.

5


Aerojet Rocketdyne Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six months ended May 31,
 
2015
 
2014
 
(In millions)
Operating Activities
 
 
 
Net income (loss)
$
14.5

 
$
(53.2
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
(Income) loss from discontinued operations, net of income taxes
(0.2
)
 
0.8

Depreciation and amortization
32.1

 
30.6

Amortization of financing costs
1.4

 
1.8

Stock-based compensation
7.3

 
3.0

Retirement benefit expense
33.4

 
17.8

Loss on debt repurchased
0.7

 
50.8

Loss on bank amendment
—

 
0.2

Loss on disposal of long-lived assets
0.2

 
—

Tax benefit on stock-based awards
(1.5
)
 
(1.3
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(0.8
)
 
21.5

Inventories
(11.3
)
 
(25.1
)
Other current assets, net
(7.5
)
 
3.7

Income tax receivable
—

 
3.2

Real estate held for entitlement and leasing
(4.0
)
 
(3.6
)
Receivable from Northrop
5.1

 
(1.2
)
Recoverable from the U.S. government and other third parties for environmental remediation costs
0.1

 
6.6

Other noncurrent assets
(9.0
)
 
(15.6
)
Accounts payable
(15.9
)
 
(28.0
)
Postretirement medical and life benefits
(2.6
)
 
(3.2
)
Advance payments on contracts
(1.2
)
 
6.1

Other current liabilities
(25.6
)
 
(27.7
)
Deferred income taxes
(0.9
)
 
(3.6
)
Reserves for environmental remediation costs
(4.5
)
 
(7.6
)
Other noncurrent liabilities
18.6

 
1.8

Net cash provided by (used in) continuing operations
28.4

 
(22.2
)
Net cash used in discontinued operations
—

 
(0.1
)
Net Cash Provided by (Used in) Operating Activities
28.4

 
(22.3
)
Investing Activities
 
 
 
Capital expenditures
(9.4
)
 
(18.5
)
Net Cash Used in Investing Activities
(9.4
)
 
(18.5
)
Financing Activities
 
 
 
Proceeds from issuance of debt
—

 
179.0

Debt issuance costs
—

 
(4.1
)
Debt repayments/repurchases
(28.5
)
 
(145.8
)
Repurchase of shares to satisfy tax withholding obligations
(4.4
)
 
(2.0
)
Purchase of treasury stock
—

 
(64.5
)
Tax benefit on stock-based awards
1.5

 
1.3

Net Cash Used in Financing Activities
(31.4
)
 
(36.1
)
Net Decrease in Cash and Cash Equivalents
(12.4
)
 
(76.9
)
Cash and Cash Equivalents at Beginning of Period
265.9

 
197.6

Cash and Cash Equivalents at End of Period
$
253.5

 
$
120.7

Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
$
25.9

 
$
23.7

Cash paid for income taxes
10.2

 
1.7

Conversion of debt to common stock
35.8

 
—

See Notes to Unaudited Condensed Consolidated Financial Statements.

6


Aerojet Rocketdyne Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Basis of Presentation and Nature of Operations
Aerojet Rocketdyne Holdings, Inc. (“Aerojet Rocketdyne Holdings” or the “Company”) has prepared the accompanying unaudited condensed consolidated financial statements, including its accounts and the accounts of its wholly-owned subsidiaries, in accordance with the instructions to Form 10-Q. The year-end condensed consolidated balance sheet was derived from audited financial statements but does not include all of the disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). These interim financial statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2014, as filed with the Securities and Exchange Commission (“SEC”). Certain reclassifications have been made to financial information for the prior year to conform to the current year’s presentation.
The Company believes the accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring accruals, necessary for a fair statement of its financial position, results of operations, and cash flows for the periods presented. All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In addition, the operating results for interim periods may not be indicative of the results of operations for a full year.
The Company 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 the Company’s wholly-owned subsidiary Aerojet Rocketdyne, Inc. (“Aerojet Rocketdyne”), a leading technology-based designer, developer and manufacturer of aerospace and defense products and systems for the United States (“U.S.”) government, including the Department of Defense (“DoD”), the National Aeronautics and Space Administration (“NASA”), major aerospace and defense prime contractors as well as portions of the commercial sector. Aerojet Rocketdyne is a world-recognized engineering and manufacturing company that specializes in the development and production of propulsion systems for defense and space applications, armament systems for precision tactical systems and munitions, and is considered a domestic market leader in launch propulsion, in-space propulsion, missile defense propulsion, tactical missile propulsion and hypersonic propulsion systems.
Real Estate — includes the activities of the Company’s wholly-owned subsidiary Easton Development Company, LLC (“Easton”) related to the re-zoning, entitlement, sale, and leasing of the Company’s excess real estate assets. The Company owns approximately 11,300 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.
In July 2012, the Company signed a stock and asset purchase agreement (the “Original Purchase Agreement”) with United Technologies Corporation (“UTC”) to acquire the Pratt & Whitney Rocketdyne division (the “Rocketdyne Business”) from UTC for $550 million (the “Acquisition”). On June 12, 2013, the Company and UTC entered into an amended and restated stock and asset purchase agreement (the “Amended and Restated Purchase Agreement”), which amended and restated the Original Purchase Agreement, as amended. On June 14, 2013, the Company completed the acquisition of substantially all of the Rocketdyne Business pursuant to the Amended and Restated Purchase Agreement. The aggregate consideration to UTC was $411 million which represents the initial purchase price of $550 million reduced by $55 million relating to the potential future acquisition of UTC’s 50% ownership interest of RD Amross, LLC (a joint venture with NPO Energomash of Khimki, Russia which sells RD-180 engines to RD Amross) and the portion of the UTC business that markets and supports the sale of RD-180 engines (the “RDA Acquisition”). The acquisition of UTC’s 50% ownership interest of RD Amross and UTC’s related business was contingent upon certain conditions including receipt of certain Russian governmental regulatory approvals, which was not obtained. Pursuant to the terms of the Amended and Restated Purchase Agreement, either party to such agreement could terminate the obligations to consummate the RDA Acquisition on or after June 12, 2014; provided, however, that such termination date may be extended for up to four additional periods of three months each. On June 14, 2015, the Company’s obligations to consummate the RDA Acquisition expired.
On August 31, 2004, the Company completed the sale of its GDX Automotive business. On November 30, 2005, the Company completed the sale of the Fine Chemicals business (see Note 11).
The Company’s fiscal year ends on November 30 of each year. The fiscal year of the Company’s subsidiary, Aerojet Rocketdyne, ends on the last Saturday of November.
See Note 14 for a discussion of the revisions to fiscal 2014 results.

7


Out of Period Adjustments
During the first quarter of fiscal 2015, the Company recorded out of period adjustments to net sales, costs of sales, and depreciation expense and the related balance sheet accounts. The out of period adjustments were associated with the Rocketdyne Business and related to (i) contract accounting and (ii) property, plant, equipment in-service dates and depreciation methods. The out of period adjustments resulted in the Company increasing its loss from continuing operations before income taxes and net loss in the first quarter of fiscal 2015 by an additional $1.1 million and $0.7 million, respectively.  
During the second quarter of fiscal 2015, the Company recorded out of period adjustments to net sales, cost of sales and the related balance sheet accounts. The out of period adjustments were primarily associated with the Rocketdyne Business and related to the (i) timing of recognition of incentive fees, (ii) the recognition of revenue on a segmented contract, and (iii) the overstatement of an accrued vacation balance. The out of period adjustments resulted in the Company increasing income from continuing operations before income taxes and net income in the second quarter of fiscal 2015 by an additional $1.8 million and $1.1 million, respectively.
The net impact of the identified out of period adjustments on the first and second quarters of fiscal 2015, and for the first half of fiscal 2015, resulted in the Company understating (overstating) income from continuing operations before income taxes and net income of approximately $2.1 million and $1.3 million, ($1.8) million and ($1.1) million, and $0.3 million and $0.2 million, respectively.
Management believes that the above amounts are not material to current or previously reported financial statements.
Revenue Recognition
In the Company’s 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. The Company 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 profit, the Company will record a positive or negative adjustment to the statement of operations. Changes in estimates and assumptions related to the status of certain long-term contracts may have a material effect on the Company’s operating results. The following table summarizes the impact from changes in estimates and assumptions on the statements of operations on contracts, representing 92% of the Company’s aerospace and defense segment net sales over the first half of fiscal 2015 and 2014, accounted for under the percentage-of-completion method of accounting:
 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions, except per share amounts)
Favorable (unfavorable) effect of the changes in contract estimates on income (loss) from continuing operations before income taxes
$
7.0

 
$
(5.2
)
 
$
7.2

 
$
(2.9
)
Favorable (unfavorable) effect of the changes in contract estimates on net income (loss)
4.2

 
(3.1
)
 
4.3

 
(1.6
)
Favorable (unfavorable) effect of the changes in contract estimates on basic net income (loss) per share
0.07

 
(0.05
)
 
0.07

 
(0.03
)
Favorable (unfavorable) effect of the changes in contract estimates on diluted net income (loss) per share
0.06

 
(0.05
)
 
0.06

 
(0.03
)
A detailed description of the Company’s significant accounting policies can be found in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended November 30, 2014.
Recently Adopted Accounting Pronouncement
In July 2013, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting guidance related to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carryforward exists and certain criteria are met.

8


The Company adopted this guidance beginning in the first quarter of fiscal 2014. As the accounting standard only impacted presentation, the new standard did not have an impact on the Company’s financial position, results of operations, or cash flows.
In April 2014, the FASB issued authoritative guidance which specifies that only disposals, such as a disposal of a major line of business, representing a strategic shift in operations should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The Company adopted this guidance in the fourth quarter of fiscal 2014. An entity should not apply the amendments in this new guidance to a component of an entity that is classified as held for sale before the effective date even if the component of an entity is disposed of after the effective date. As the accounting standard only impacted presentation, the new standard did not have an impact on the Company’s financial position, results of operations, or cash flows.
Recently Issued Accounting Pronouncement
In May 2014, the FASB amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company is required to adopt the amendments in the first quarter of fiscal 2018. Early adoption is not permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is currently evaluating the impact of these amendments and the transition alternatives on its consolidated financial statements.
In August 2014, the FASB issued an amendment to the accounting guidance related to the evaluation of an entity to continue as a going concern. The amendment establishes management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern in connection with preparing financial statements for each annual and interim reporting period. The update also gives guidance to determine whether to disclose information about relevant conditions and events when there is substantial doubt about an entity’s ability to continue as a going concern. This guidance is effective for the Company as of November 30, 2017. The new guidance is not expected to have an impact on the Company’s financial position, results of operations, or cash flows.
In April 2015, the FASB issued an amendment to the accounting guidance related to the presentation of debt issuance costs. The amendment requires that debt issuance costs related to a debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts or premiums. This guidance is effective for the Company in the first quarter of fiscal 2017. Early adoption is permitted. The Company is currently evaluating the impact of this amendment on its consolidated financial statements.
In May 2015, the FASB issued amended guidance on disclosures for investments in certain entities that calculate net asset value per share (“NAV”) or its equivalent. The new guidance requires the investments for which fair value is measured at NAV (or its equivalent) to be removed from fair value hierarchy.  The Company expects to adopt the new guidance as of  November 30, 2015.  The new guidance will be applied retrospectively to all periods presented.  As the accounting standard only impacts presentation, the new standard will not have an impact on the Company’s financial position, results of operations, or cash flows.

9


Note 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:

 
Three Months Ended May 31,
 
Six Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
18.4

 
$
(50.1
)
 
$
14.3

 
$
(52.4
)
(Loss) income from discontinued operations, net of income taxes
—

 
(0.8
)
 
0.2

 
(0.8
)
Net income (loss)
18.4

 
(50.9
)
 
14.5

 
(53.2
)
Income allocated to participating securities
(0.5
)
 
—

 
(0.4
)
 
—

Net income (loss) for basic earnings per share
17.9

 
(50.9
)
 
14.1

 
(53.2
)
Interest on convertible subordinated debentures
1.0

 
—

 
2.2

 
—

Net income (loss) for diluted earnings per share
18.9

 
(50.9
)
 
16.3

 
(53.2
)
Denominator:
 
 
 
 
 
 
 
Basic weighted average shares
61.2

 
57.9

 
59.9

 
58.7

Effect of:
 
 
 
 
 
 
 
4 1/16% Convertible Subordinated Debentures (“4 1/16% Debentures”)
10.9

 
—

 
12.0

 
—

  Employee stock options and stock purchase plan
0.2

 
—

 
0.3

 
—

Diluted weighted average shares
72.3

 
57.9

 
72.2

 
58.7

Basic
 
 
 
 
 
 
 
Income (loss) per share from continuing operations
$
0.29

 
$
(0.87
)
 
$
0.23

 
$
(0.90
)
Loss per share from discontinued operations, net of income taxes
—

 
(0.01
)
 
—

 
(0.01
)
Net income (loss) per share
$
0.29

 
$
(0.88
)
 
$
0.23

 
$
(0.91
)
Diluted
 
 
 
 
 
 
 
Income (loss) per share from continuing operations
$
0.26

 
$
(0.87
)
 
$
0.22

 
$
(0.90
)
Loss per share from discontinued operations, net of income taxes
—

 
(0.01
)
 
—

 
(0.01
)
Net income (loss) per share
$
0.26

 
$
(0.88
)
 
$
0.22

 
$
(0.91
)
The following table sets forth the potentially dilutive securities excluded from the computation because their effect would have been anti-dilutive: 
 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
4 1/16% Debentures
—

 
19.7

 
—

 
20.4

Employee stock options and stock purchase plan
—

 
0.7

 
—

 
0.7

Unvested restricted shares
—

 
1.5

 
—

 
1.5

Total potentially dilutive securities
—

 
21.9

 
—

 
22.6


10


Note 3. Stock-Based Compensation
Total stock-based compensation expense by type of award for the second quarter and first half of fiscal 2015 and 2014 was as follows:
 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Stock appreciation rights
$
1.3

 
$
(0.4
)
 
$
3.8

 
$
(0.5
)
Stock options
0.2

 
0.1

 
0.3

 
0.1

Restricted shares, service based
0.9

 
1.3

 
2.6

 
2.2

Restricted shares, performance based
(0.4
)
 
0.6

 
0.6

 
1.2

Total stock-based compensation expense
$
2.0

 
$
1.6

 
$
7.3

 
$
3.0


In February 2015, the Company began offering an Employee Stock Purchase Plan ("ESPP") to employees. The stock-based compensation expense related to the ESPP was $0.1 million in the first half of fiscal 2015.
Note 4. Balance Sheet Accounts
a. 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; 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 for which little or no market data exists, therefore requiring an entity to develop its own assumptions. The following are measured at fair value:
 
 
 
Fair value measurement at May 31, 2015
 
Total
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(In millions)
Money market funds
$
203.4

 
$
203.4

 
$
—

 
$
—

 
 
 
Fair value measurement at November 30, 2014
 
Total
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(In millions)
Money market funds
$
233.4

 
$
233.4

 
$
—

 
$
—

As of May 31, 2015, a summary of cash and cash equivalents and the grantor trust by investment type is as follows:
 
Total
 
Cash and
Cash Equivalents
 
Money Market
Funds
 
(In millions)
Cash and cash equivalents
$
253.5

 
$
60.6

 
$
192.9

Grantor trust (included as a component of other current and noncurrent assets)
10.5

 
—

 
10.5

 
$
264.0

 
$
60.6

 
$
203.4

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 principal amount for the Company’s outstanding debt is presented below:

11


 
Fair Value
 
Principal Amount
 
May 31, 2015
 
November 30, 2014
 
May 31, 2015
 
November 30, 2014
 
(In millions)
Term loan
$
96.3

 
$
98.8

 
$
96.3

 
$
98.8

7.125% Second-Priority Senior Secured Notes (“7 1/8% Notes”)
494.5

 
483.6

 
460.0

 
460.0

4 1/16% Debentures
224.5

 
248.2

 
97.8

 
133.6

Delayed draw term loan
63.0

 
89.0

 
63.0

 
89.0

Other debt
0.7

 
0.8

 
0.8

 
0.8

 
$
879.0

 
$
920.4

 
$
717.9

 
$
782.2

The fair values of the 7 1/8% Notes and 4 1/16% Debentures were determined using broker quotes that are based on open markets for the Company’s debt securities as of May 31, 2015, and November 30, 2014 (both Level 2 securities). The fair value of the term loans and other debt was determined to approximate carrying value.
b. Accounts Receivable

May 31, 2015

November 30, 2014
 
(In millions)
Billed
$
94.7


$
69.3

Unbilled
109.9


126.1

Reserve for overhead rate disallowance
(31.6
)

(22.9
)
Total receivables under long-term contracts
173.0


172.5

Other receivables
0.7


0.4

Accounts receivable
$
173.7


$
172.9

c. Inventories

May 31, 2015

November 30, 2014
 
(In millions)
Long-term contracts at average cost
$
527.1


$
434.6

Progress payments
(378.0
)

(296.9
)
Total long-term contract inventories
149.1


137.7

Total other inventories
1.2


1.3

Inventories
$
150.3


$
139.0

d. Other Current Assets, net

May 31, 2015
 
November 30, 2014
 
(In millions)
Recoverable from the U.S. government for Rocketdyne Business integration costs (see Note 4(f))
$
10.5

 
$
10.5

Prepaid expenses
9.5

 
11.3

Recoverable from the U.S. government for Competitive Improvement Program severance obligations (see Note 9)
1.1

 
—

Receivables, net
15.5

 
4.5

Income taxes
1.4

 
2.1

Indemnification receivable from UTC
0.7

 
0.9

Other
6.7

 
8.7

Other current assets, net
$
45.4

 
$
38.0


12


e. Property, Plant and Equipment, net
 
May 31, 2015
 
November 30, 2014
 
(In millions)
Land
$
67.2


$
67.2

Buildings and improvements
285.4


276.9

Machinery and equipment
500.7


474.7

Construction-in-progress
17.1


41.2


870.4


860.0

Less: accumulated depreciation
(514.1
)

(492.5
)
Property, plant and equipment, net
$
356.3


$
367.5

f. Other Noncurrent Assets, net

May 31, 2015

November 30, 2014
 
(In millions)
Recoverable from the U.S. government for Rocketdyne Business integration costs
$
31.3


$
28.0

Deferred financing costs
16.4


18.5

Recoverable from the U.S. government for Competitive Improvement Program severance obligations (see Note 9)
9.6

 
—

Recoverable from the U.S. government for conditional asset retirement obligations
15.9


17.7

Grantor trust
11.8


11.2

Indemnification receivable from UTC, net
7.0


7.5

Notes receivable, net
9.0

 
—

Other
8.8


8.7

Other noncurrent assets, net
$
109.8


$
91.6

The current and noncurrent Rocketdyne Business integration costs capitalized as of May 31, 2015 and November 30, 2014 totaled $41.8 million and $38.5 million, respectively. These integration costs are reimbursable by the U.S. government upon its audit and approval that the Company's planned integration savings will exceed its restructuring costs by a factor of at least two to one. In December 2014, the Company was informed that the Defense Contract Audit Agency had completed its audit of the Company’s restructuring proposal and indicated that the Company had achieved the required minimum two to one savings to restructuring cost ratio.  Actual recovery of the previously deferred integration costs will take place after the final execution of an Advance Agreement with the Defense Contract Management Agency and determination from the Under Secretary of Defense that the audited restructuring savings exceed the costs by a factor of two to one.  The Company believes these final two actions will be completed in fiscal 2015. The Company reviews on a quarterly basis the probability of recovery of these costs.
g. Assets Held for Sale
As of February 28, 2015, the Company classified approximately 550 acres of its Sacramento Land, known as Hillsborough and representing a portion of the 6,000 acre Easton Master Plan, as assets held for sale as a result of its plans to sell the Hillsborough land. The Hillsborough land was reported as real estate held for entitlement and leasing as of November 30, 2014. For operating segment reporting, the Hillsborough land has been reported as a part of the Real Estate segment.
During the second quarter of fiscal 2015, the Company finalized the sale of the Hillsborough land for a total purchase price of $57.0 million which was comprised of $46.7 million cash and $10.3 million of promissory notes. The total acreage covered by the Hillsborough land transaction was approximately 700 acres, of which approximately 550 acres was recognized as a sale in the second quarter of fiscal 2015. At the initial closing, the buyer paid $40.0 million cash and executed a $9.0 million promissory note secured by a first lien Deed of Trust on a portion of the sale property which resulted in a gain of $30.6 million in the second quarter of fiscal 2015. The $9.0 million promissory note secured by a first lien Deed of Trust is divided into two components: (i) a $3.0 million 7% promissory note payable 7 years after close of escrow, which includes a possible $1.0 million reduction in principal if the Company is unable to obtain the necessary road and utility approvals, and (ii) a $6.0 million 7% promissory note payable 7 years after close of escrow and only payable after certain environmental clearances associated with "Area 40" (discussed below) are obtained by the Company. The sale also included a $1.3 million non-interest bearing promissory note secured by a first lien Deed of Trust on a portion of the sale property associated with the location of future city roads. In addition, approximately 150 acres of this land, including a 50-acre portion known as “Area 40,” was held

13


back from the initial closing. Upon receipt of regulatory approvals, a closing will take place for the sale of the developable portions of such holdback acreage for a purchase price of $6.7 million in cash. A summary of the impact of the land sale on the unaudited condensed consolidated statement of operations for the second quarter and first half of fiscal 2015 is as follows (in millions):
Net sales from land sale
$
42.0

Cost of sales from land sale
11.4

Income from continuing operations before income taxes from land sale
30.6

Income tax provision related to land sale
12.7

Net income from land sale
$
17.9

In November 2014, the Company classified its energy business (the "Energy Business") as assets held for sale as a result of its plans to sell the business. The assets and liabilities of the Energy Business as of May 31, 2015 and November 30, 2014 were insignificant. The plan was a result of management’s decision to focus its capital and resources on its Aerospace and Defense and Real Estate operating segments.  The net sales associated with the Energy Business totaled $0.4 million in the first half of fiscal 2015; net sales associated with the Energy Business totaled $0.6 million in fiscal 2014. For operating segment reporting, the Energy Business has been reported as a part of the Aerospace and Defense segment.  In March 2015, the Company entered into an Asset Purchase Agreement (the "Agreement") to sell its Energy Business to TerraDyne Energy Technology Inc. (“TerraDyne").  TerraDyne was unable to meet the closing conditions and the Agreement was terminated. The Company divested the Energy Business in July 2015 for an insignificant amount of proceeds. The Company incurred approximately $2.5 million of expenses to divest its Energy Business.
h. Other Current Liabilities
 
May 31, 2015
 
November 30, 2014
 
(In millions)
Accrued compensation and employee benefits
$
94.6


$
96.1

Income taxes
16.0

 
14.1

Payable to UTC primarily for Transition Service Agreements
1.3


11.9

Interest payable
12.8


14.6

Contract loss provisions
14.1


13.4

Other
59.7


71.6

Other current liabilities
$
198.5


$
221.7

i. Other Noncurrent Liabilities
 
May 31, 2015
 
November 30, 2014
 
(In millions)
Conditional asset retirement obligations
$
27.7


$
24.4

Pension benefits, non-qualified
18.9


19.1

Deferred compensation
12.5


11.1

Deferred revenue
14.1


7.4

Competitive improvement program obligations (see Note 9)
9.6

 
—

Other
16.2


17.7

Other noncurrent liabilities
$
99.0


$
79.7

j. Accumulated Other Comprehensive Loss, Net of Income Taxes
Changes in accumulated other comprehensive loss by components, net of $15.1 million of income taxes, related to the Company’s retirement benefit plans are as follows:

14



Actuarial
Losses, Net

Prior Service
Credits, Net

Total
 
(In millions)
November 30, 2014
$
(337.5
)

$
3.3


$
(334.2
)
Amortization of actuarial losses and prior service credits, net of income taxes
24.7


(0.3
)

24.4

May 31, 2015
$
(312.8
)

$
3.0


$
(309.8
)
k. Redeemable Common Stock
The Company inadvertently failed to register with the SEC the issuance of certain of its common shares in its defined contribution 401(k) employee benefit plan (the “Plan”). As a result, certain Plan participants who purchased such securities pursuant to the Plan may have the right to rescind certain of their purchases for consideration equal to the purchase price paid for the securities (or if such security has been sold, to receive consideration with respect to any loss incurred on such sale) plus interest from the date of purchase. As of May 31, 2015 and November 30, 2014, the Company has classified less than 0.1 million and 0.1 million shares, respectively, as redeemable common stock because the redemption features are not within the control of the Company. The Company may also be subject to civil and other penalties by regulatory authorities as a result of the failure to register these shares. These shares have always been treated as outstanding for financial reporting purposes. In June 2008, the Company filed a registration statement on Form S-8 to register future transactions in the Company's stock fund in the Plan. During the first half of fiscal 2015, the Company recorded $0.7 million for realized gains and interest associated with this matter.
l. Treasury Stock
During fiscal 2014, the Company repurchased 3.5 million of its common shares at a cost of $64.5 million. The Company reflects stock repurchases in its financial statements on a “settlement” basis.
Note 5. Income Taxes
The income tax provision for the first half of fiscal 2015 and 2014 was as follows:
 
Six months ended May 31,
 
2015
 
2014
 
(In millions)
Federal and state current income tax expense
$
16.8


$
4.2

Net deferred benefit
(0.6
)

(4.1
)
Research and development credits
(1.5
)

1.1

Income tax provision
$
14.7


$
1.2

Cash paid for income taxes
$
10.2


$
1.7

In the first half of fiscal 2015, the income tax provision recorded differs from the expected tax that would be calculated by applying the federal statutory rate to the Company's income before income taxes primarily due to the re-enactment of the federal research and development credit in December 2014 for calendar year 2014 which has been treated as a discrete event in the first half of fiscal 2015, as well as the impacts from state income taxes and certain expenditures which are permanently not deductible for tax purposes. In the first half of fiscal 2014, the income tax provision recorded differs from the expected tax that would be calculated by applying the federal statutory rate to the Company's loss before income taxes due to the significant non-deductible premium on the 4 1/16% Debentures repurchased in the first half of fiscal 2014, which the Company has treated as a discrete event, as well as the impacts from state income taxes and certain expenditures which are permanently not deductible for tax purposes.
As of May 31, 2015, the total liability for uncertain income tax positions, including accrued interest and penalties, was $7.5 million. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with the respective liabilities, the Company is unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.

15


Note 6. Long-term Debt
 
May 31, 2015
 
November 30, 2014
 
(In millions)
Term loan, bearing interest at variable rates (rate of 2.52% as of May 31, 2015), payable in quarterly installments of $1.3 million plus interest, maturing in May 2019
$
96.3


$
98.8

Total senior debt
96.3


98.8

Senior secured notes, bearing interest at 7.125% per annum, interest payments due in March and September, maturing in March 2021
460.0


460.0

Total senior secured notes
460.0


460.0

Convertible subordinated debentures, bearing interest at 2.25% per annum, interest payments due in May and November, maturing in November 2024
0.2


0.2

Convertible subordinated debentures, bearing interest at 4.0625% per annum, interest payments due in June and December, maturing in December 2039
97.8


133.6

Total convertible subordinated notes
98.0


133.8

Delayed draw term loan, bearing interest at variable rates (rate of 9.50% as of May 31, 2015), maturing in April 2022
63.0


89.0

Capital lease, payable in monthly installments, maturing in March 2017
0.6


0.6

Total other debt
63.6


89.6

Total debt
717.9


782.2

Less: Amounts due within one year
(5.3
)

(5.3
)
Total long-term debt
$
712.6


$
776.9

Senior Credit Facility
On January 14, 2013, the Company, executed an amendment (the “Third Amendment”) to the senior credit facility (the “Senior Credit Facility”) with the lenders identified therein, and Wells Fargo Bank, National Association, as administrative agent. The Third Amendment, among other things, allowed for the 7 1/8% Notes to be secured by a first priority security interest in the escrow account into which the proceeds of the 7 1/8% Notes offering were deposited pending the consummation of the Acquisition.
In connection with the consummation of the Acquisition, the Company added Pratt & Whitney Rocketdyne, Inc. (“PWR”), Arde, Inc. (“Arde”) and Arde-Barinco, Inc. (“Arde-Barinco”) as subsidiary guarantors under its Senior Credit Facility pursuant to that certain Joinder Agreement, dated as of June 14, 2013, by and among PWR, Arde, Arde-Barinco, the Company and Wells Fargo Bank, National Association, as administrative agent. In connection with the consummation of the Acquisition, the name of PWR was changed to Aerojet Rocketdyne of DE, Inc. and the name of Aerojet-General Corporation, an existing subsidiary guarantor at the time of the Acquisition, was changed to Aerojet Rocketdyne, Inc.
On May 30, 2014, the Company, with its wholly-owned subsidiaries Aerojet Rocketdyne, Inc., Aerojet Rocketdyne of DE, Inc., Arde, and Arde-Barinco as guarantors, executed an amendment to the Senior Credit Facility with the lenders identified therein, and Wells Fargo Bank, National Association, as administrative agent. This amendment to the Senior Credit Facility replaces the Company’s prior credit facility and, among other things, (i) extends the maturity date to May 30, 2019 (which date may be accelerated in certain cases); and (ii) replaces the existing revolving credit facility and credit-linked facility with (x) a revolving credit facility in an aggregate principal amount of up to $200.0 million (with a $100.0 million subfacility for standby letters of credit and a $5.0 million subfacility for swingline loans) and (y) a term loan facility in an aggregate principal amount of up to $100.0 million. The term loan facility will amortize at a rate of 5.0% of the original principal amount per annum to be paid in equal quarterly installments with any remaining amounts due on the maturity date. Outstanding indebtedness under the Senior Credit Facility may be voluntarily prepaid at any time, in whole or in part, in general without premium or penalty.
The Company and the guarantors (collectively, the “Loan Parties”) guarantee the payment obligations of the Company under the Senior Credit Facility. Any borrowings are further secured by (i) certain equity interests owned or held by the Loan Parties and 65% of the voting stock (and 100% of the non-voting stock) of all present and future first-tier foreign subsidiaries of the Loan Parties; (ii) substantially all of the tangible and intangible personal property and assets of the Loan Parties; and (iii) certain real property owned by the Loan Parties located in Culpeper, Virginia, Redmond, Washington and Canoga Park, California. All of the Company’s other real property is excluded from collateralization under the Senior Credit Facility.
As of May 31, 2015, the Company had $46.4 million outstanding letters of credit under the $100.0 million subfacility for standby letters of credit and had $96.3 million outstanding under the term loan facility.

16


In general, borrowings under the Senior Credit Facility bear interest at a rate equal to LIBOR plus 250 basis points (subject to downward adjustment), or the base rate as it is defined in the credit agreement governing the Senior Credit Facility. In addition, the Company is charged a commitment fee of 50 basis points per annum on unused amounts of the revolving credit facility (subject to downward adjustment) and 250 basis points per annum (subject to downward adjustment), along with a fronting fee of 25 basis points per annum, on the undrawn amount of all outstanding letters of credit.
The Company is subject to certain limitations including the ability to incur additional debt, make certain investments and acquisitions, and make certain restricted payments, including stock repurchases and dividends. The Senior Credit Facility includes events of default usual and customary for facilities of this nature, the occurrence of which could lead to an acceleration of the Company’s obligations thereunder. Additionally, the Senior Credit Facility includes certain financial covenants, including that the Company maintain (i) a maximum total leverage ratio, calculated net of cash up to a maximum of $150.0 million, of 4.50 to 1.00 through the fiscal period ending November 30, 2015, 4.25 to 1.00 through fiscal periods ending November 30, 2017, and 4.00 to 1.00 thereafter; and (ii) a minimum interest coverage ratio of 2.40 to 1.00.
Financial Covenant
Actual Ratios as of
May 31, 2015
  
Required Ratios
Interest coverage ratio, as defined under the Senior Credit Facility
4.36 to 1.00
  
Not less than: 2.40 to 1.00
Leverage ratio, as defined under the Senior Credit Facility
2.55 to 1.00
  
Not greater than: 4.50 to 1.00
The Company was in compliance with its financial and non-financial covenants as of May 31, 2015.
4.0625% Convertible Subordinated Debentures
As of May 31, 2015, the Company had $97.8 million outstanding principal of its 4 1/16% Debentures, convertible into 10.9 million of shares of common stock. During the first half of fiscal 2015, $35.8 million of 4 1/16% Debentures were converted to 4.0 million shares of common stock.
During the first half of fiscal 2014, the Company repurchased $50.2 million principal amount of its 4 1/16% Debentures at various prices ranging from 195% of par to 212% of par. A summary of the Company’s 4 1/16% Debentures repurchased during the first half of fiscal 2014 is as follows (in millions):    
Principal amount repurchased
$
50.2

Cash repurchase price
(100.8
)
Write-off of deferred financing costs
(0.2
)
Loss on 4 1/16% Debentures repurchased
$
(50.8
)
Delayed Draw Term Loan
As of May 31, 2015, the Company had $63.0 million outstanding under the delayed draw term loan facility. During the first half of fiscal 2015, the Company retired $26.0 million principal amount of its delayed draw term loan. See Note 16 for recent activity.
Note 7. Commitments and Contingencies
a. Legal Matters
The Company and its subsidiaries are subject to legal proceedings, including litigation in U.S. federal and state courts, which arise out of, and are incidental to, the ordinary course of the Company’s on-going and historical businesses. The Company is also subject from time to time to governmental investigations by federal and state agencies. The Company cannot predict the outcome of such proceedings with any degree of certainty. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. These estimates are often initially developed substantially earlier than when the ultimate loss is known, and are refined each quarterly reporting period as additional information becomes available. For legal settlements where there is no stated amount for interest, the Company will estimate an interest factor and discount the liability accordingly.
Asbestos Litigation
The Company has been, and continues to be, named as a defendant in lawsuits alleging personal injury or death due to exposure to asbestos in building materials, products, or in manufacturing operations. The majority of cases are pending in Texas and Illinois. There were 83 asbestos cases brought by individual plaintiffs pending as of May 31, 2015.

17


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 claims or unasserted claims. Accordingly, no estimate of future liability has been accrued.
In 2011, Aerojet Rocketdyne received a letter demand from AMEC, plc, (“AMEC”) the successor entity to the 1981 purchaser of the business assets of Barnard & Burk, Inc., a former Aerojet Rocketdyne subsidiary, for Aerojet Rocketdyne to assume the defense of sixteen asbestos cases, involving 271plaintiffs, pending in Louisiana, and reimbursement of over $1.7 million in past legal fees and expenses. AMEC is asserting that Aerojet Rocketdyne retained those liabilities when it sold the Barnard & Burk assets and agreed to indemnify the purchaser therefor. Under the relevant purchase agreement, the purchaser assumed only certain, specified liabilities relating to the operation of Barnard & Burk before the sale, with Barnard & Burk retaining all unassumed pre-closing liabilities, and Aerojet Rocketdyne agreed to indemnify the purchaser against unassumed liabilities that are asserted against it. Based on the information provided, Aerojet Rocketdyne declined to accept the liability and requested additional information from AMEC pertaining to the basis of the demand. On April 3, 2013, AMEC filed a complaint for breach of contract against Aerojet Rocketdyne in Sacramento County Superior Court, AMEC Construction Management, Inc. v. Aerojet-General Corporation, Case No. 342013001424718. AMEC contends it has incurred approximately $3.0 million in past legal fees and expenses. Aerojet Rocketdyne filed its answer to the complaint denying AMEC’s allegations as well as a cross-complaint against AMEC for breach of its obligations under the purchase agreement in addition to other claims for relief. Discovery is ongoing. The parties attended a mediation session on December 9, 2014 and negotiations are ongoing. Aerojet Rocketdyne filed a Motion for Summary Judgment which is scheduled for hearing on August 20, 2015. Trial date is scheduled to commence on October 19, 2015. As of May 31, 2015, the Company has accrued $0.2 million related to this matter. None of the expenditures related to this matter are recoverable from the U.S. government.
Inflective, Inc. (“Inflective”) Litigation
On December 18, 2014, Inflective filed a complaint against Aerojet Rocketdyne and Kathleen E. Redd, individually, in the Superior Court of the State of California, Sacramento County, Inflective, Inc. v Aerojet Rocketdyne, Inc., Kathleen E. Redd, et al, Case No. T4358. Inflective asserts in the complaint causes for breach of contract, breach of implied contract, false promise, inducing breach of contract, intentional interference with contractual relations, negligent interference with prospective economic relations, and intentional interference with prospective economic relations and is seeking damages in excess of $3.0 million, punitive damages, interest and attorney’s costs. The complaint arises out of the Company’s implementation of ProjectOne, a company-wide enterprise resource planning (“ERP”) system, for which Inflective had been a consultant to the Company. The Company believes the allegations are without merit and intends to contest this matter vigorously. On February 6, 2015, Aerojet Rocketdyne and Ms. Redd filed a demurrer to the complaint seeking to have the complaint dismissed for failure to allege facts sufficient to support the causes of action therein. On June 9, 2015, the Court sustained the demurrer in part and overruled the demurrer in part, with leave to amend.  On June 18, 2015, Inflective filed an amended complaint in which it reiterated all the causes of action dismissed by the Court.  On June 30, 2015, Aerojet Rocketdyne and Ms. Redd filed a demurrer and motion to strike seeking to have (a) all claims and references to a purported “finder’s fee” stricken from the case and (b) the causes of action against Ms. Redd for intentional and negligent interference with prospective business relations dismissed with prejudice.  The hearing for the demurrer and motion is scheduled for September 30, 2015. The Company has not recorded any liability for this matter as of May 31, 2015.
Socorro
On May 12, 2015, a complaint for personal injuries, loss of consortium and punitive damages was filed by James Chavez, Andrew Baca, and their respective spouses, against Aerojet Rocketdyne and the Board of Regents of New Mexico Tech in the Seventh Judicial District, County of Socorro, New Mexico, James Chavez, et al., vs. Aerojet Rocketdyne, Inc., et al., Case No. D725CV201500047. Messrs. Chavez and Baca were employees of Aerotek, a contractor to Aerojet Rocketdyne, who were injured when excess energetic materials being managed by the Energetic Materials Research and Testing Center, a research division of New Mexico Tech, ignited in an unplanned manner. The complaint alleges causes of action based on negligence and negligence per se, strict liability, and willful, reckless and wanton conduct against Aerojet Rocketdyne, and seeks unspecified compensatory and punitive damages. The Company will defend this action vigorously. The Company has alerted its insurance carriers of this action. No liability for this matter has been recorded by the Company as of May 31, 2015.
Occupational Safety
On January 16, 2015, the Company received a notice that the State of California, Division of Occupational Safety & Health (“Cal\OSHA”), Bureau of Investigation (“BOI”) is conducting an investigation into an accident that occurred at the Rancho Cordova facility in November 2013.  The accident involved the deflagration of solid rocket propellant following a remote cutting operation and resulted in injuries to two employees, one of whom ultimately died from his injuries.  Cal\OSHA issued nine citations relating to the accident with penalties of approximately $0.1 million, all of which the Company has appealed. The BOI is the criminal investigatory arm of Cal\OSHA and is required by law to investigate any occupational

18


fatality to determine if criminal charges will be recommended. The Company does not believe that circumstances in this matter warrant a criminal recommendation although there can be no assurance on how the BOI will conclude.  
b. Environmental Matters
The Company is involved in over forty environmental matters under the Comprehensive Environmental Response Compensation and Liability Act, the Resource Conservation Recovery Act, and other federal, state, local, and foreign laws relating to soil and groundwater contamination, hazardous waste management activities, and other environmental matters at some of its current and former facilities. The Company is also involved in a number of remedial activities at third party sites, not owned by the Company, where it is designated a potentially responsible party (“PRP”) by either the U.S. Environmental Protection Agency (“EPA”) and/or a state agency. In many of these matters, the Company is involved with other PRPs. In many instances, the Company’s liability and proportionate share of costs have not been determined largely due to uncertainties as to the nature and extent of site conditions and the Company’s involvement. While government agencies frequently claim PRPs are jointly and severally liable at such sites, in the Company’s experience, interim and final allocations of liability and costs are generally made based on relative contributions of waste or contamination. Anticipated costs associated with environmental remediation that are probable and estimable are accrued. In cases where a date to complete remedial activities at a particular site cannot be determined by reference to agreements or otherwise, the Company projects costs over an appropriate time period not exceeding fifteen years; in such cases, generally the Company does not have the ability to reasonably estimate environmental remediation costs that are beyond this period. Factors that could result in changes to the Company’s estimates include completion of current and future soil and groundwater investigations, new claims, future agency demands, discovery of more or less contamination than expected, discovery of new contaminants, modification of planned remedial actions, changes in estimated time required to remediate, new technologies, and changes in laws and regulations.
As of May 31, 2015, the aggregate range of these anticipated environmental costs was $161.5 million to $276.3 million and the accrued amount was $161.5 million. See Note 7(c) for a summary of the environmental reserve activity. Of these accrued liabilities, approximately 97% relates to the Company’s U.S. government contracting business and a portion of this liability is recoverable. The significant environmental sites are discussed below. The balance of the accrued liabilities, which are not recoverable from the U.S. government, relate to other sites for which the Company’s obligations are probable and estimable.
Sacramento, California Site
In 1989, a federal district court in California approved a Partial Consent Decree (“PCD”) requiring Aerojet Rocketdyne, among other things, to conduct a Remedial Investigation and Feasibility Study (“RI/FS”) to determine the nature and extent of impacts due to the release of chemicals from the Sacramento, California site, monitor the American River and offsite public water supply wells, operate Groundwater Extraction and Treatment facilities that collect groundwater at the site perimeter, and pay certain government oversight costs. The primary chemicals of concern for both on-site and off-site groundwater are trichloroethylene, perchlorate, and n-nitrosodimethylamine. The PCD has been revised several times, most recently in 2002. The 2002 PCD revision (a) separated the Sacramento site into multiple operable units to allow quicker implementation of remedy for critical areas; (b) required the Company to guarantee up to $75 million (in addition to a prior $20 million guarantee) to assure that Aerojet Rocketdyne’s Sacramento remediation activities are fully funded; and (c) removed approximately 2,600 acres of non-contaminated land from the EPA superfund designation.
Aerojet Rocketdyne is involved in various stages of soil and groundwater investigation, remedy selection, design, and remedy construction associated with the operable units. In 2002, the EPA issued a Unilateral Administrative Order (“UAO”) requiring Aerojet Rocketdyne to implement the EPA-approved remedial action in the Western Groundwater Operable Unit. An identical order was issued by the California Regional Water Quality Control Board, Central Valley (“Central Valley RWQCB”). On July 7, 2011, the EPA issued Aerojet Rocketdyne its Approval of Remedial Action Construction Completion Report for Western Groundwater Operable Unit and its Determination of Remedy as Operational and Functional. On September 20, 2011, the EPA issued two UAOs to Aerojet Rocketdyne to complete a remedial design and implement remedial action for the Perimeter Groundwater Operable Unit. One UAO addresses groundwater and the other addresses soils within the Perimeter Groundwater Operable Unit. Issuance of the UAOs is the next step in the superfund process for the Perimeter Groundwater Operable Unit. Aerojet Rocketdyne submitted a final Remedial Investigation Report for the Boundary Operable Unit in 2010 and a revised Feasibility Study for the Boundary Operable Unit in 2012. A Record of Decision is anticipated to be issued by the EPA by mid-2015. A draft Remedial Investigation Report for the Island Operable Unit was submitted in January 2013 and a Final Remedial Investigation Report is anticipated after issuance of the Boundary Operable Unit Record of Decision. The remaining operable units are under various stages of investigation.
The entire southern portion of the site known as Rio Del Oro was under state orders issued in the 1990s from the Department of Toxic Substances Control (“DTSC”) to investigate and remediate environmental contamination in the soils and the Central Valley RWQCB to investigate and remediate groundwater environmental contamination. On March 14, 2008, the DTSC released all but approximately 400 acres of the Rio Del Oro property from DTSC’s environmental orders regarding soil contamination. Aerojet Rocketdyne expects the approximately 400 acres of Rio Del Oro property that remain subject to the

19


DTSC orders to be released once the soil remediation has been completed. The Rio Del Oro property remains subject to the Central Valley RWQCB’s orders to investigate and remediate groundwater environmental contamination emanating offsite from such property. Pursuant to a settlement agreement entered into in 2009, Aerojet Rocketdyne and Boeing have defined responsibilities with respect to future costs and environmental projects relating to this property.
As of May 31, 2015, the estimated range of anticipated costs discussed above for the Sacramento, California site was $133.2 million to $215.8 million and the accrued amount was $133.2 million included as a component of the Company’s environmental reserves. Expenditures associated with this matter are partially recoverable. See Note 7(c) below for further discussion on recoverability.
Baldwin Park Operable Unit (“BPOU”)
As a result of its former Azusa, California operations, in 1994 Aerojet Rocketdyne was named a PRP by the EPA in the area of the San Gabriel Valley Basin superfund site known as the BPOU. Between 1995 and 1997, the EPA issued Special Notice Letters to Aerojet Rocketdyne and eighteen other companies requesting that they implement a groundwater remedy. On June 30, 2000, the EPA issued a UAO ordering the PRPs to implement a remedy consistent with the 1994 record of decision. Aerojet Rocketdyne, along with seven other PRPs (the "Cooperating Respondents”) signed a Project Agreement in late March 2002 with the San Gabriel Basin Water Quality Authority, the Main San Gabriel Basin Watermaster, and five water companies. The Project Agreement, which has a term of fifteen years, became effective May 9, 2002 and will terminate in May 2017. It is uncertain as to what remedial actions will be required beyond May 2017. However, the Project Agreement stipulates that the parties agree to negotiate in good faith in an effort to reach agreement as to the terms and conditions of an extension of the term in the event that a Final Record of Decision anticipates, or any of the parties desire, the continued operation of all or a substantial portion of the project facilities. In November 2014, the EPA met with representatives from the Cooperating Respondents regarding the end of the Project Agreement and plans for discussions with the water entities. The EPA, the water entities that are parties to the Project Agreement and the Cooperating Respondents have begun settlement discussions regarding the expiration of the Project Agreement and the path forward. Pursuant to the Project Agreement, the Cooperating Respondents fund through an escrow account the capital, operational, maintenance, and administrative costs of certain treatment and water distribution facilities to be owned and operated by the water companies. There are also provisions in the Project Agreement for maintaining financial assurance.
Aerojet Rocketdyne and the other Cooperating Respondents entered into an interim allocation agreement, which was renewed effective March 28, 2014, that establishes the interim payment obligations, subject to final reallocation, of the Cooperating Respondents for the costs incurred pursuant to the Project Agreement. Under the interim allocation, Aerojet Rocketdyne is responsible for approximately 70% (increased from approximately 68%) of all project costs. Since entering into the Project Agreement, two of the Cooperating Respondents, Huffy Corporation (“Huffy”) and Fairchild Corporation (“Fairchild”), have filed for bankruptcy and are no longer participating in the Project Agreement. The interim allocation has been adjusted to account for their shares. On September 30, 2014, another of the Cooperating Respondents, Reichhold, Inc., filed for bankruptcy under Chapter 11. Reichhold has not accepted or rejected the Project Agreement, but did not provide its share of additional funding required in December 2014 under the Project Agreement.   The financial assurance Reichhold previously provided to the Trust under the Project Agreement is being accessed by the Trust to fund Reichhold’s share.  If Reichhold stops paying, Aerojet Rocketdyne and the remaining Cooperating Respondents will be required to make up the Reichhold share once its security is deemed insufficient or has otherwise been exhausted. Prior to filing for bankruptcy, Fairchild filed suit against the other Cooperating Respondents (the “Fairchild Litigation”), but the litigation is dormant under a bankruptcy court stay, and has been the subject of the mediation and tentative settlement discussed below.
On June 24, 2010, Aerojet Rocketdyne filed a complaint against Chubb Custom Insurance Company in Los Angeles County Superior Court, Aerojet-General Corporation v. Chubb Custom Insurance Company Case No. BC440284, seeking declaratory relief and damages regarding Chubb’s failure to pay certain project modification costs and failure to issue an endorsement to add other water sources that may require treatment as required under insurance policies issued to Aerojet Rocketdyne and the other Cooperating Respondents. Aerojet Rocketdyne agreed to dismiss the case without prejudice and a settlement was reached with Chubb, but required Fairchild’s agreement. Attempts to obtain Fairchild’s agreement included a motion before the Fairchild Bankruptcy Court by the Cooperating Respondents (including Aerojet Rocketdyne) seeking approval of the settlement with Chubb. That motion was denied without prejudice, and the Court directed the parties to mediation in an effort to resolve the claims between the Cooperating Respondents and Fairchild over responsibility for the remediation costs previously paid by Fairchild and the Cooperating Respondents (involved in the Fairchild Litigation) and
approval by Fairchild of the Chubb settlement. Following a mediation and negotiations over language, settlement agreements were reached (1) as between The Fairchild Liquidating Trust, on the one hand, and the Cooperating Respondents (including Reichhold), on the other hand, resolving the Fairchild Litigation and (2) as between Chubb, on the one hand, and the insureds under the Chubb Policy (including Reichhold and the other Cooperating Respondents ) and the Fairchild Liquidating Trust, on the other hand. The settlements provide for (1) payment by Chubb of $2 million, of which Fairchild would receive $0.3 million and the remainder would be payable to Aerojet Rocketdyne and the other Cooperating Respondents on the basis of their interim allocations; (2) the replacement of bankruptcy claims filed by individual Cooperating Respondents with a single allowed

20


General Unsecured Claim on behalf of all the Cooperating Respondents in the amount of $3.3 million; and (3) mutual dismissals with prejudice in the Fairchild Litigation. The settlements are effective. If Chubb does not fund the settlement by September 21, 2015 (and the settlement requires it to fund by July 23, 2015), Fairchild retains the right to terminate its settlement with the other Cooperating Respondents.
As part of Aerojet Rocketdyne’s sale of its Electronics and Information Systems (“EIS”) business to Northrop in October 2001, the EPA approved a Prospective Purchaser Agreement with Northrop to absolve it of pre-closing liability for contamination caused by the Azusa, California operations, which liability remains with Aerojet Rocketdyne. As part of that agreement, the Company agreed to provide a $25 million guarantee of Aerojet Rocketdyne’s obligations under the Project Agreement.
As of May 31, 2015, the estimated range of anticipated costs through the term of the Project Agreement for the BPOU site, which expires in 2017, was $15.5 million to $33.5 million and the accrued amount was $15.5 million included as a component of the Company’s environmental reserves. As of May 31, 2015, no reserve has been accrued for this matter for the period after expiration of the Project Agreement. The Company cannot yet estimate the future cost due to the uncertainty of project definition, participation and approval by numerous third parties and the regulatory agencies, and the length of a Project Agreement. When the Company is able to estimate such costs, which may result this fiscal year from the ongoing settlement discussions among the parties, a reserve for periods after the expiration of the Project Agreement will be established, which could potentially be for a period of up to 15 years. Expenditures associated with this matter are partially recoverable. See Note 7(c) below for further discussion on recoverability.
Toledo, Ohio Site
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. In August 2007, the Company, along with numerous other companies, received from the United States Department of Interior Fish and Wildlife Service a notice of a Natural Resource Damage (“NRD”) Assessment Plan for the Ottawa River and Northern Maumee Bay. A group of PRPs, including the Company, was formed to respond to the NRD assessment and to pursue funding from the Great Lakes Legacy Act for primary restoration. In August 2013, the PRPs voted to accept the State and Federal Trustees’ proposal resolving the NRD Assessment and other claims. A Consent Decree must be negotiated and approved before the settlement becomes final. As of May 31, 2015, the estimated range of the Company’s share of anticipated costs for the NRD matter was zero to $0.2 million and the Company does not have a liability recorded. None of the expenditures related to this matter are recoverable from the U.S. government.
Wabash, Indiana Site
The Company owned and operated a former rubber processing plant in Wabash, Indiana from 1937 to 2004. Pursuant to a request from the Indiana Department of Environmental Management (“IDEM”), the Company conducted an initial site investigation of the soil and groundwater at the site and a report was submitted to IDEM. By letter of June 11, 2014, IDEM directed the Company to conduct additional investigation of the site, including a vapor intrusion investigation in areas in and around the site where trichloroethene levels in groundwater were found to exceed screening levels for vapor intrusion. Vapor mitigation systems were installed in one residence and one business where indoor air screening levels were exceeded and efforts are ongoing to install mitigation systems at a third location.  During investigation of potential vapor mitigation systems at the third location, a currently unoccupied residence, a previously unknown water well was discovered under the residence.  Closure of the well and ongoing dewatering of the basement may be necessary in addition to installation of a vapor mitigation system. The Company is conducting further investigations of the site in accordance with the IDEM request and approved work plan. The Company sent demands to other former owners/operators of the site to participate in the site work, but no party has agreed to participate as of yet. As of May 31, 2015, the estimated range of the Company's share of anticipated costs for the Wabash, Indiana site was $0.7 million to $1.1 million and the accrued amount was $0.7 million. None of the expenditures related to this matter are recoverable from the U.S. government.
c. Environmental Reserves and Estimated Recoveries
Environmental Reserves
The Company reviews on a quarterly basis estimated future remediation costs and has an established practice of estimating environmental remediation costs over a fifteen year period, except for those environmental remediation costs with a specific contractual term. Environmental liabilities at the BPOU site are estimated through the term of the Project Agreement, which expires in May 2017. As the period for which estimated environmental remediation costs increases, the reliability of such estimates decreases. These estimates consider the investigative work and analysis of engineers, outside environmental consultants, and the advice of legal staff regarding the status and anticipated results of various administrative and legal proceedings. In most cases, only a range of reasonably possible costs can be estimated. In establishing the Company’s reserves, the most probable estimate is used when determinable; otherwise, the minimum amount is used when no single amount in the range is more probable. Accordingly, such estimates can change as the Company periodically evaluates and revises these

21


estimates as new information becomes available. The Company cannot predict whether new information gained as projects progress will affect the estimated liability accrued. The timing of payment for estimated future environmental costs is influenced by a number of factors such as the regulatory approval process, and the time required to design, construct, and implement the remedy.
A summary of the Company’s environmental reserve activity is shown below:

Aerojet
Rocketdyne-
Sacramento

Aerojet
Rocketdyne-
BPOU

Other
Aerojet
Rocketdyne
Sites

Total
Aerojet
Rocketdyne

Other

Total
Environmental
Reserve
 
(In millions)
November 30, 2014
$
130.4


$
21.7


$
8.1

 
$
160.2

 
$
5.8

 
$
166.0

Additions
11.8


(0.7
)

0.3

 
11.4

 
0.2

 
11.6

Expenditures
(9.0
)

(5.5
)

(1.1
)
 
(15.6
)
 
(0.5
)
 
(16.1
)
May 31, 2015
$
133.2


$
15.5


$
7.3


$
156.0


$
5.5


$
161.5

The effect of the final resolution of environmental matters and the Company’s obligations for environmental remediation and compliance cannot be accurately predicted due to the uncertainty concerning both the amount and timing of future expenditures and due to regulatory or technological changes. The Company continues its efforts to mitigate past and future costs through pursuit of claims for recoveries from insurance coverage and other PRPs and continued investigation of new and more cost effective remediation alternatives and associated technologies.
As part of the acquisition of the Atlantic Research Corporation (“ARC”) propulsion business in 2003, Aerojet Rocketdyne entered into an agreement with ARC pursuant to which Aerojet Rocketdyne is responsible for up to $20.0 million of costs (“Pre-Close Environmental Costs”) associated with environmental issues that arose prior to Aerojet Rocketdyne’s acquisition of the ARC propulsion business. ARC is responsible for any cleanup costs relating to the ARC acquired businesses in excess of $20.0 million. Pursuant to a separate agreement with the U.S. government which was entered into prior to the completion of the ARC acquisition, these costs are recovered through the establishment of prices for Aerojet Rocketdyne’s products and services sold to the U.S. government. A summary of the Pre-Close Environmental Costs is shown below (in millions):
Pre-Close Environmental Costs
$
20.0

Amount spent through May 31, 2015
(17.9
)
Amount included as a component of reserves for environmental remediation costs in the unaudited condensed consolidated balance sheet as of May 31, 2015
(2.1
)
Remaining Pre-Close Environmental Costs
$
—

Estimated Recoveries
On January 12, 1999, Aerojet Rocketdyne 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 Rocketdyne 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 the former Azusa sites. The Global Settlement cost-sharing ratio does not have a defined term over which costs will be recovered. Additionally, in conjunction with the sale of the EIS business in 2001, Aerojet Rocketdyne entered into an agreement with Northrop (the “Northrop Agreement”) whereby Aerojet Rocketdyne is reimbursed by Northrop for a portion of environmental expenditures eligible for recovery under the Global Settlement, subject to annual and cumulative limitations. The current annual billing limitation to Northrop is $6.0 million.
Pursuant to the Global Settlement, prior to the third quarter of fiscal 2010, approximately 12% of environmental costs related to Aerojet Rocketdyne’s Sacramento site and its former Azusa site were charged to the condensed consolidated statements of operations. Subsequent to the third quarter of fiscal 2010, because the Company’s estimated environmental costs reached the reimbursement ceiling under the Northrop Agreement, approximately 37% of such costs will not be reimbursable and are therefore directly charged to the condensed consolidated statements of operations.
Allowable environmental costs are charged to the Company’s contracts as the costs are incurred. Aerojet Rocketdyne’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 Rocketdyne to continue recovering these costs from the U.S. government depends on Aerojet Rocketdyne’s sustained business volume under U.S. government contracts and programs.

22


Pursuant to the Northrop Agreement, environmental expenditures to be reimbursed are subject to annual limitations and the total reimbursements are limited to a ceiling of $189.7 million. A summary of the Northrop Agreement activity is shown below (in millions):
Total reimbursable costs under the Northrop Agreement
$
189.7

Amount reimbursed to the Company through May 31, 2015
(110.2
)
Potential future cost reimbursements available
79.5

Less: Long-term receivable from Northrop included in the unaudited condensed consolidated balance sheet as of May 31, 2015
(69.7
)
Less: Short-term receivable from Northrop included in the unaudited condensed consolidated balance sheet as of May 31, 2015
(6.0
)
Less: Amounts recoverable from Northrop included in recoverable from the U.S. government and other third parties for environmental remediation costs in the unaudited condensed consolidated balance sheet as of May 31, 2015
(3.8
)
Potential future recoverable amounts available under the Northrop Agreement
$
—

The Company’s applicable cost estimates reached the cumulative limitation under the Northrop Agreement during the third quarter of fiscal 2010. The Company has expensed $33.4 million of environmental remediation provision adjustments above the cumulative limitation under the Northrop Agreement through May 31, 2015. Accordingly, subsequent to the third quarter of fiscal 2010, the Company has incurred a higher percentage of expense related to additions to the Sacramento site and BPOU site environmental reserve until, and if, an arrangement is reached with the U.S. government. While the Company is currently seeking an arrangement with the U.S. government to recover environmental expenditures in excess of the reimbursement ceiling identified in the 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 the Company’s operating results, financial condition, and/or cash flows.
Environmental reserves and estimated recoveries impact to unaudited condensed consolidated statements of operations
The expenses associated with adjustments to the environmental reserves are recorded as a component of other expense, net in the unaudited condensed consolidated statements of operations. Summarized financial information for the impact of environmental reserves and recoveries to the unaudited condensed consolidated statements of operations is set forth below:
 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Estimated recoverable amounts under U.S. government contracts
$
4.5

 
$
2.6

 
$
7.9

 
$
7.7

Expense to unaudited condensed consolidated statement of operations
2.1

 
0.5

 
3.7

 
2.6

Total environmental reserve adjustments
$
6.6

 
$
3.1

 
$
11.6

 
$
10.3

Note 8. Arrangements with Off-Balance Sheet Risk
As of May 31, 2015, arrangements with off-balance sheet risk consisted of:
•
$46.4 million in outstanding commercial letters of credit expiring through April 2016, the majority of which may be renewed, primarily to collateralize obligations for environmental remediation and insurance coverage.
•
$43.3 million in outstanding surety bonds to satisfy indemnification obligations for environmental remediation coverage.
•
Up to $120.0 million aggregate in guarantees by the Company of Aerojet Rocketdyne’s obligations to U.S. government agencies for environmental remediation activities.
•
$55.0 million related to the pending future acquisition of UTC’s 50% ownership interest of RD Amross. On June 14, 2015, the Company’s obligations to consummate the RDA Acquisition expired.
•
Guarantees, jointly and severally, by the Company’s material domestic subsidiaries of their obligations under the Senior Credit Facility and 7 1/8% Notes.
In addition to the items discussed above, the Company has and will from time to time enter into certain types of contracts that require the Company to indemnify parties against potential third-party and other claims. These contracts primarily relate to:

23


(i) divestiture agreements, under which the Company may provide customary indemnification to purchasers of its businesses or assets including, for example, claims arising from the operation of the businesses prior to disposition, and liability to investigate and remediate environmental contamination existing prior to disposition; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for claims arising from the use of the applicable premises; and (iii) certain agreements with officers and directors, under which the Company may be required to indemnify such persons for liabilities arising out of their relationship with the Company. The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated.
Additionally, the Company issues purchase orders to suppliers for equipment, materials, and supplies in the normal course of business. These purchase commitments are generally for volumes consistent with 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 is terminated.
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.
Note 9. Cost Reduction Plan
On January 30, 2014, the Company announced a cost reduction plan (the “Restructuring Plan - Phase I”) which resulted in the reduction of the Company’s overall headcount by approximately 260 employees. In connection with the Restructuring Plan - Phase I, the Company recorded a liability of $10.0 million in the first quarter of fiscal 2014, consisting of costs for severance, employee-related benefits and other associated expenses.
The costs of the Restructuring Plan - Phase I of $6.3 million related to ongoing business volume were a component of the Company’s fiscal 2014 U.S. government forward pricing rates, and therefore, were recovered through the pricing of the Company’s products and services to the U.S. government.
The costs of the Restructuring Plan - Phase I of $3.0 million related to the integration of the Rocketdyne Business, as of November 30, 2014, have been capitalized and recorded in other noncurrent assets in the unaudited condensed consolidated balance sheet. See Note 4(f) for a discussion of the capitalization of such costs.
As part of the Company's on-going efforts to optimize business resources, during the fourth quarter of fiscal 2014, the Company determined a cost reduction plan (the “Restructuring Plan - Phase II”) was necessary which resulted in the accrual for the reduction of the Company's overall headcount by approximately 90 employees and the closing of a facility. In connection with the Restructuring Plan - Phase II, the Company recorded a liability of $4.3 million in the fourth quarter of fiscal 2014, consisting of costs for severance, employee-related benefits and other associated expenses. Additionally, in the first quarter of fiscal 2015, the Company determined that the overall headcount should be reduced by approximately an additional 60 employees which resulted in the Company recording a liability of $4.1 million. In the second quarter of fiscal 2015, the Company recorded a reduction to the liability of $5.1 million for payments made under the cost reduction plan and changes to the expected headcount reduction. These costs are a component of the Company’s fiscal 2015 U.S. government forward pricing rates, and therefore, will be recovered through the pricing of the Company’s products and services to the U.S. government.
During the second quarter of fiscal 2015, the Company initiated a competitive improvement program (the “CIP”) comprised of activities and initiatives aimed at reducing costs in order for the Company to continue to compete successfully. The CIP is composed of three major components: (i) facilities optimization and footprint reduction; (ii) product affordability; and (iii) reduced administrative and overhead costs. Under the CIP, the Company expects an estimated 500 headcount reduction in its total employee population. The Company currently estimates that it will incur restructuring and related costs over the next four years totaling approximately $110 million. A summary of the Company's CIP reserve activity for the second quarter of fiscal 2015 is shown below:
 
Severance
 
Retention
 
Total
 
(In millions)
February 28, 2015
$
—

 
$
—

 
$
—

      Accrual established
10.7

 
0.5

 
11.2

May 31, 2015
$
10.7

 
$
0.5

 
$
11.2

The costs associated with the CIP will be a component of the Company’s U.S. government forward pricing rates, and therefore, will be recovered through the pricing of the Company’s products and services to the U.S. government. In addition to

24


the employee-related CIP obligations, the Company incurred non-cash accelerated depreciation expense of $0.1 million in the second quarter of fiscal 2015 associated with changes in the estimated useful life of long-lived assets impacted by the CIP.
Note 10. Retirement Benefits
Pension Benefits
The Company's defined benefit pension plan future benefit accrual was discontinued in fiscal 2009. As of the last measurement date at November 30, 2014, the Company’s total defined benefit pension plan assets, total projected benefit obligations, and unfunded pension obligation for the tax-qualified pension plan were approximately $1,163.1 million, $1,666.3 million, and $482.8 million, respectively.
The Company does not expect to make any significant cash contributions to its tax-qualified defined benefit pension plan until fiscal 2016. The Company estimates that approximately 86% of its unfunded pension obligation as of November 30, 2014 is related to Aerojet Rocketdyne which will be recoverable through its U.S. government contracts.
The funded status of the Company's tax-qualified 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 the Company’s plan's assets does not meet assumptions, if there are changes to the Internal Revenue Service regulations or other applicable law or if other actuarial assumptions are modified, future contributions to the underfunded pension plans could be higher than the Company expects.
Medical and Life Insurance Benefits
The Company provides medical and life insurance benefits to certain eligible retired employees, with varied coverage by employee group. Generally, employees hired after January 1, 1997 are not eligible for retiree medical and life insurance benefits. The medical benefit plan provides for cost sharing between the Company and its retirees in the form of retiree contributions, deductibles, and coinsurance. Medical and life insurance benefit obligations are unfunded. Medical and life insurance benefit cash payments for eligible retired employees are recoverable under the Company’s U.S. government contracts.
Components of retirement benefit expense (income) are: 
 
Pension Benefits
 
Postretirement Medical and Life
Insurance Benefits
 
Three months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Service cost
$
2.7

 
$
2.2

 
$
—

 
$
—

Interest cost on benefit obligation
15.9

 
16.7

 
0.5

 
0.7

Assumed return on plan assets
(22.1
)
 
(23.2
)
 
—

 
—

Amortization of prior service credits
—

 
—

 
(0.2
)
 
(0.2
)
Recognized net actuarial losses (gains)
20.9

 
13.5

 
(0.9
)
 
(0.8
)
Retirement benefit expense (income)
$
17.4

 
$
9.2

 
$
(0.6
)
 
$
(0.3
)

 
Pension Benefits
 
Postretirement Medical and Life
Insurance Benefits
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Service cost
$
5.4

 
$
4.4

 
$
—

 
$
—

Interest cost on benefit obligation
31.8

 
33.5

 
1.0

 
1.3

Assumed return on plan assets
(44.2
)
 
(46.4
)
 
—

 
—

Amortization of prior service credits
—

 
—

 
(0.5
)
 
(0.4
)
Recognized net actuarial losses (gains)
41.7

 
26.9

 
(1.8
)
 
(1.5
)
Retirement benefit expense (income)
$
34.7

 
$
18.4

 
$
(1.3
)
 
$
(0.6
)

25


Note 11. Discontinued Operations
On August 31, 2004, the Company completed the sale of its GDX Automotive business. On November 30, 2005, the Company completed the sale of the Fine Chemicals business. The remaining subsidiaries after the sale of GDX Automotive and the Fine Chemicals business are classified as discontinued operations.
Summarized financial information for discontinued operations is set forth below:
 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Net sales
$
—

 
$
—

 
$
—

 
$
—

(Loss) income before income taxes (1)
—

 
(1.4
)
 
0.3

 
(1.4
)
Income tax provision
—

 
0.6

 
0.1

 
0.6

Net (loss) income from discontinued operations
—

 
(0.8
)
 
0.2

 
(0.8
)
_______
(1) Includes foreign currency transaction gains of $0.2 million in the first half of fiscal 2015.
Note 12. Operating Segments and Related Disclosures
The Company’s operations are organized into two operating segments based on different products and customer bases: Aerospace and Defense, and Real Estate.
The Company evaluates its operating segments based on several factors, of which the primary financial measure is segment performance. Segment performance represents net sales from continuing operations less applicable costs, expenses and unusual items relating to the segment operations. Segment performance excludes corporate income and expenses, legacy income or expenses, unusual items not related to the segment operations, interest expense, interest income, and income taxes.
Customers that represented more than 10% of net sales for the periods presented are as follows:
 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
Lockheed Martin Corporation
26
%
 
30
%
 
27
%
 
25
%
United Launch Alliance
19
%
 
25
%
 
18
%
 
26
%
Raytheon Company
20
%
 
18
%
 
21
%
 
18
%
NASA
11
%
 
11
%
 
12
%
 
13
%
Sales to the U.S. government and its agencies, including sales to the Company’s significant customers discussed above, were as follows (dollars in millions):
 
U.S. Government
Sales
 
Percentage of Net
Sales
Three months ended May 31, 2015
$
396.1

 
87
%
Three months ended May 31, 2014
386.5

 
96
%
Six months ended May 31, 2015
692.1

 
89
%
Six months ended May 31, 2014
698.1

 
95
%
Selected financial information for each reportable segment is as follows:

26


 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Net Sales:
 
 
 
 
 
 
 
Aerospace and Defense
$
413.4

 
$
402.9

 
$
730.4

 
$
733.5

Real Estate
43.5

 
1.6

 
45.1

 
3.1

Total Net Sales
$
456.9

 
$
404.5

 
$
775.5

 
$
736.6

Segment Performance:
 
 
 
 
 
 
 
Aerospace and Defense
$
48.4

 
$
22.5

 
$
78.7

 
$
55.5

Environmental remediation provision adjustments
(1.9
)
 
(0.3
)
 
(3.3
)
 
(1.9
)
Retirement benefit plan expense
(12.4
)
 
(6.1
)
 
(24.8
)
 
(12.2
)
Unusual items
—

 
(0.1
)
 
0.7

 
(0.1
)
Aerospace and Defense Total
34.1

 
16.0

 
51.3

 
41.3

Real Estate
31.6

 
0.9

 
32.5

 
1.8

Total Segment Performance
$
65.7

 
$
16.9

 
$
83.8

 
$
43.1

Reconciliation of segment performance to income (loss) from continuing operations before income taxes:
 
 
 
 
 
 
 
Segment performance
$
65.7

 
$
16.9

 
$
83.8

 
$
43.1

Interest expense
(13.2
)
 
(12.6
)
 
(26.6
)
 
(25.0
)
Interest income
—

 
—

 
0.1

 
—

Stock-based compensation expense
(2.0
)
 
(1.6
)
 
(7.3
)
 
(3.0
)
Corporate retirement benefit plan expense
(4.4
)
 
(2.8
)
 
(8.6
)
 
(5.6
)
Corporate and other expense, net
(5.9
)
 
(4.5
)
 
(11.7
)
 
(9.7
)
Unusual items
(0.5
)
 
(46.1
)
 
(0.7
)
 
(51.0
)
Income (loss) from continuing operations before income taxes
$
39.7

 
$
(50.7
)
 
$
29.0

 
$
(51.2
)
Note 13. Unusual Items
Total unusual items expense, a component of other expense, net in the unaudited condensed consolidated statements of operations, for the second quarter and first half of fiscal 2015 and 2014 was as follows:
 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Unusual items
 
 
 
 
 
 
 
Legal related matters
$
—

 
$
0.1

 
$
(0.7
)
 
$
0.1

Loss on debt repurchased
0.5

 
45.9

 
0.7

 
50.8

Loss on bank amendment
—

 
0.2

 
—

 
0.2

 
$
0.5

 
$
46.2

 
$
—

 
$
51.1

 First half of fiscal 2015 Activity:
The Company recorded $0.7 million for realized gains net of interest expense associated with the failure to register with the SEC the issuance of certain of the Company’s common shares under the defined contribution 401(k) employee benefit plan.
The Company retired $26.0 million principal amount of its delayed draw term loan resulting in $0.7 million of losses associated with the write-off of deferred financing fees.
First half of fiscal 2014 Activity:
The Company recorded $0.1 million for realized losses and interest expense associated with the failure to register with the SEC the issuance of certain of the Company’s common shares under the defined contribution 401(k) employee benefit plan.
A summary of the Company’s loss on the 4 1/16% Debentures repurchased during the second quarter and first half of fiscal 2014 is as follows:

27


 
Three months ended May 31,
 
Six months ended May 31,
 
2014
 
2014
 
(In millions)
Principal amount repurchased
$
45.7

 
$
50.2

Cash repurchase price
(91.4
)
 
(100.8
)
Write-off of deferred financing costs
(0.2
)
 
(0.2
)
Loss on 4 1/16% Debentures repurchased
$
(45.9
)
 
$
(50.8
)
Note 14. Revisions
During the fourth quarter of fiscal 2014, the Company identified errors that resulted in the Company revising each reporting period during fiscal 2014, as disclosed in the fiscal 2014 Form 10-K, which impacted net sales, cost of sales, and depreciation expense and the related balance sheet accounts. The errors relate to the following matters: (i) contract accounting; (ii) property, plant and equipment in-service dates; and (iii) accounting for a collaboration agreement. Management concluded that the errors are not material to the financial statements for those periods. Below is the impact of the errors to the fiscal 2014 unaudited condensed consolidated statement of operations and unaudited condensed consolidated statement of cash flows.
 
Fiscal 2014
 
Previously Reported
 
Revised
 
Previously Reported
 
Revised
 
Previously Reported
 
Revised
 
First
Quarter 
 
First
Quarter 
 
Second
Quarter 
 
Second
Quarter 
 
Third
Quarter 
 
Third
Quarter 
 
(In millions, except per share amounts)
Statement of Operations (1):
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
329.7

 
$
332.1

 
$
403.1

 
$
404.5

 
$
419.5

 
$
421.2

Cost of sales (exclusive of items shown separately on Statement of Operations)
286.0

 
288.5

 
367.0

 
369.4

 
374.2

 
376.5

Selling, general and administrative
9.2

 
9.2

 
9.2

 
9.2

 
9.7

 
9.7

Depreciation and amortization
14.8

 
14.9

 
15.4

 
15.7

 
15.7

 
15.8

Other expense, net
7.4

 
7.6

 
48.5

 
48.3

 
16.3

 
16.3

Operating income (loss)
12.3

 
11.9

 
(37.0
)
 
(38.1
)
 
3.6

 
2.9

Total non-operating expenses, net
12.4

 
12.4

 
12.6

 
12.6

 
14.0

 
14.0

Loss from continuing operations before income taxes
(0.1
)
 
(0.5
)
 
(49.6
)
 
(50.7
)
 
(10.4
)
 
(11.1
)
Loss from continuing operations
(2.1
)
 
(2.3
)
 
(49.4
)
 
(50.1
)
 
(9.7
)
 
(10.1
)
(Loss) income from discontinued operations, net of income taxes
—

 
—

 
(0.8
)
 
(0.8
)
 
0.2

 
0.2

Net loss
(2.1
)
 
(2.3
)
 
(50.2
)
 
(50.9
)
 
(9.5
)
 
(9.9
)
Basic and diluted loss per share:
 
 
 
 
 
 
 
 
 
 
 
Loss per share from continuing operations
(0.03
)
 
(0.04
)
 
(0.86
)
 
(0.87
)
 
(0.17
)
 
(0.18
)
Loss per share from discontinued operations, net of income taxes
—

 
—

 
(0.01
)
 
(0.01
)
 
—

 
—

Net loss per share
$
(0.03
)
 
$
(0.04
)
 
$
(0.87
)
 
$
(0.88
)
 
$
(0.17
)
 
$
(0.18
)
_____
(1) The revised year-to-date amounts can be derived from the reporting periods presented above.


28


 
Previously Reported
 
Revised
 
Previously Reported
 
Revised
 
Six months ended May 31, 2014
 
Six months ended May 31, 2014
 
Nine months ended August 31, 2014
 
Nine months ended August 31, 2014
 
(In millions)
Statement of Cash Flows (1)
 
 
 
 
 
 
 
Net loss
$
(52.3
)
 
$
(53.2
)
 
$
(61.8
)
 
$
(63.1
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
 
 
Loss from discontinued operations, net of income taxes
0.8

 
0.8

 
0.6

 
0.6

Depreciation and amortization
30.2

 
30.6

 
45.9

 
46.4

Amortization of debt discount and financing costs
1.8

 
1.8

 
2.7

 
2.7

Stock-based compensation
3.0

 
3.0

 
4.5

 
4.5

Retirement benefit expense
17.8

 
17.8

 
26.7

 
26.7

Loss on debt repurchased
50.8

 
50.8

 
60.6

 
60.6

Loss on bank amendment
0.2

 
0.2

 
0.2

 
0.2

Loss on disposal of long-lived assets
—

 
—

 
2.5

 
2.5

Tax benefit on stock-based awards
(1.3
)
 
(1.3
)
 
(1.5
)
 
(1.5
)
Changes in assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
22.1

 
21.5

 
(0.8
)
 
(0.8
)
Inventories
(26.8
)
 
(25.1
)
 
(27.2
)
 
(25.5
)
Other current assets, net
3.7

 
3.7

 
(3.5
)
 
(3.5
)
Income tax receivable
3.8

 
3.2

 
1.4

 
0.5

Real estate held for entitlement and leasing
(3.6
)
 
(3.6
)
 
(7.7
)
 
(7.7
)
Receivable from Northrop
(1.2
)
 
(1.2
)
 
(2.0
)
 
(2.0
)
Recoverable from the U.S. government and other third parties for environmental remediation costs
6.6

 
6.6

 
5.4

 
5.4

Other noncurrent assets
(15.6
)
 
(15.6
)
 
(24.0
)
 
(24.0
)
Accounts payable
(28.0
)
 
(28.0
)
 
(7.1
)
 
(7.1
)
Postretirement medical and life benefits
(3.2
)
 
(3.2
)
 
(4.2
)
 
(4.2
)
Advance payments on contracts
6.1

 
6.1

 
18.0

 
18.0

Other current liabilities
(27.7
)
 
(27.7
)
 
10.9

 
10.9

Deferred income taxes
(3.6
)
 
(3.6
)
 
(6.1
)
 
(6.1
)
Reserves for environmental remediation costs
(7.6
)
 
(7.6
)
 
(2.7
)
 
(2.7
)
Other noncurrent liabilities
1.8

 
1.8

 
3.4

 
3.4

Net cash (used in) provided by continuing operations
(22.2
)
 
(22.2
)
 
34.2

 
34.2

Net cash used in discontinued operations
(0.1
)
 
(0.1
)
 
(0.1
)
 
(0.1
)
Net Cash (Used in) Provided by Operating Activities
$
(22.3
)
 
$
(22.3
)
 
$
34.1

 
$
34.1

_____
(1) The revisions did not change the cash flows from investing or financing activities.
Note 15. Condensed Consolidating Financial Information
The Company is providing unaudited condensed consolidating financial information for its domestic subsidiaries that have guaranteed the 7 1/8% Notes, and for those subsidiaries that have not guaranteed the 7 1/8% Notes. These 100% owned subsidiary guarantors (Aerojet Rocketdyne, Aerojet Rocketdyne of DE, Inc. (formerly PWR), Arde and Arde-Barinco) have, jointly and severally, fully and unconditionally guaranteed the 7 1/8% Notes subject to release under the following circumstances: (i) to enable the disposition of such property or assets to a party that is not the Company or a subsidiary guarantor to the extent permitted by and consummated in compliance with the indenture governing the 7 1/8% Notes; (ii) in case of a subsidiary guarantor that is released from its subsidiary guarantee, the release of the property and assets of such subsidiary guarantor; (iii) as permitted or required by the intercreditor agreement; (iv) with the consent of the holder of at least a majority

29


in principal amount of the outstanding 7 1/8% Notes; or (v) when permitted or required by the indenture governing the 7 1/8% Notes. Prior to the consummation of the Acquisition and escrow release date, the 7 1/8% Notes were secured by a first priority security interest in the escrow account and all deposits and investment property therein. Following the consummation of the Acquisition and escrow release date on June 14, 2013, the subsidiary guarantees are a senior secured obligation of each subsidiary guarantor and rank (i) effectively junior to all of existing and future first-priority senior secured debt, including borrowings under the Senior Credit Facility, to the extent of the value of the assets securing such debt; (ii) effectively senior to all of the Company’s existing and future unsecured senior debt; (iii) senior in right of payment to all of the Company’s existing and future subordinated debt; and (iv) structurally subordinated to all existing and future liabilities of non-guarantor subsidiaries.
The Company has not presented separate financial and narrative information for each of the subsidiary guarantors because it believes that such financial and narrative information would not provide investors with any additional information that would be material in evaluating the sufficiency of the guarantees. Therefore, the following unaudited condensed consolidating financial information summarizes the financial position, results of operations, and cash flows for the Company’s guarantor and non-guarantor subsidiaries.
The Company revised its unaudited condensed consolidating statement of cash flows for six months ended May 31, 2014 to correct for the misclassification of intercompany transactions between the Parent and the Guarantor Subsidiaries columns. The adjustments had no impact on the consolidated amounts previously reported.
The revision on the unaudited condensed consolidating statement of cash flows resulted in a decrease of $143.7 million to “net cash provided by operating activities” to the Parent column for the six months ended May 31, 2014, with a corresponding increase to “net cash provided by financing activities.” The Company also revised the Guarantor Subsidiaries column in the unaudited condensed consolidating statement of cash flows to increase “net cash provided by operating activities” by $143.7 million for the six months ended May 31, 2014, with a corresponding decrease to “net cash provided by financing activities.”
These revisions, which the Company determined are not material to any period presented, had no impact on any financial statements or footnotes, except for the Parent and Guarantor Subsidiaries columns of the unaudited condensed consolidating statement of cash flows for the six months ended May 31, 2014.







30


Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
Three months ended May 31, 2015
Parent
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In millions)
Net sales
$
—

 
$
442.2

 
$
14.7

 
$
—

 
$
456.9

Cost of sales (exclusive of items shown separately below)
—

 
363.9

 
8.8

 
(0.2
)
 
372.5

Selling, general and administrative
5.4

 
6.7

 
0.5

 
—

 
12.6

Depreciation and amortization
—

 
15.9

 
0.2

 
—

 
16.1

Interest expense
12.7

 
0.5

 
—

 
—

 
13.2

Other, net
6.4

 
(3.2
)
 
(0.6
)
 
0.2

 
2.8

(Loss) income from continuing operations before income taxes
(24.5
)
 
58.4

 
5.8

 
—

 
39.7

Income tax (benefit) provision
(6.8
)
 
24.5

 
3.6

 
—

 
21.3

(Loss) income before equity income of subsidiaries
(17.7
)
 
33.9

 
2.2

 
—

 
18.4

Equity income of subsidiaries
36.1

 
—

 
—

 
(36.1
)
 
—

Net income
$
18.4

 
$
33.9

 
$
2.2

 
$
(36.1
)
 
$
18.4

Comprehensive income
$
30.6

 
$
43.0

 
$
2.2

 
$
(45.2
)
 
$
30.6

 
Three months ended May 31, 2014
Parent
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In millions)
Net sales
$
—

 
$
397.7

 
$
6.8

 
$
—

 
$
404.5

Cost of sales (exclusive of items shown separately below)
—

 
362.3

 
7.2

 
(0.1
)
 
369.4

Selling, general and administrative
3.4

 
5.5

 
0.3

 
—

 
9.2

Depreciation and amortization
0.1

 
15.3

 
0.3

 
—

 
15.7

Interest expense
11.9

 
0.7

 
—

 
—

 
12.6

Other, net
44.6

 
4.0

 
(0.4
)
 
0.1

 
48.3

(Loss) income from continuing operations before income taxes
(60.0
)
 
9.9

 
(0.6
)
 
—

 
(50.7
)
Income tax (benefit) provision
(5.0
)
 
4.7

 
(0.3
)
 
—

 
(0.6
)
(Loss) income from continuing operations
(55.0
)
 
5.2

 
(0.3
)
 
—

 
(50.1
)
Loss from discontinued operations
(0.8
)
 
—

 
—

 
—

 
(0.8
)
(Loss) income before equity income of subsidiaries
(55.8
)
 
5.2

 
(0.3
)
 
—

 
(50.9
)
Equity income of subsidiaries
4.9

 
—

 
—

 
(4.9
)
 
—

Net (loss) income
$
(50.9
)
 
$
5.2

 
$
(0.3
)
 
$
(4.9
)
 
$
(50.9
)
Comprehensive (loss) income
$
(43.2
)
 
$
10.4

 
$
(0.3
)
 
$
(10.1
)
 
$
(43.2
)

 

31


Six months ended May 31, 2015
Parent
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In millions)
Net sales
$
—

 
$
755.5

 
$
20.0

 
$
—

 
$
775.5

Cost of sales (exclusive of items shown separately below)
—

 
643.0

 
12.6

 
(0.3
)
 
655.3

Selling, general and administrative
14.6

 
12.5

 
1.0

 
—

 
28.1

Depreciation and amortization
—

 
31.6

 
0.5

 
—

 
32.1

Interest expense
25.6

 
1.0

 
—

 
—

 
26.6

Other, net
8.4

 
(3.0
)
 
(1.3
)
 
0.3

 
4.4

(Loss) income from continuing operations before income taxes
(48.6
)
 
70.4

 
7.2

 
—

 
29.0

Income tax (benefit) provision
(16.0
)
 
26.9

 
3.8

 
—

 
14.7

(Loss) income from continuing operations
(32.6
)
 
43.5

 
3.4

 
—

 
14.3

Income from discontinued operations
0.2

 
—

 
—

 
—

 
0.2

(Loss) income before equity income of subsidiaries
(32.4
)
 
43.5

 
3.4

 
—

 
14.5

Equity income of subsidiaries
46.9

 


 


 
(46.9
)
 
—

Net income
$
14.5

 
$
43.5

 
$
3.4

 
$
(46.9
)
 
$
14.5

Comprehensive income
$
38.9

 
$
61.7

 
$
3.4

 
$
(65.1
)
 
$
38.9


Six months ended May 31, 2014
Parent
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In millions)
Net sales
$
—

 
$
723.2

 
$
13.4

 
$
—

 
$
736.6

Cost of sales (exclusive of items shown separately below)
—

 
645.3

 
12.9

 
(0.3
)
 
657.9

Selling, general and administrative
5.6

 
12.0

 
0.8

 
—

 
18.4

Depreciation and amortization
0.1

 
30.0

 
0.5

 
—

 
30.6

Interest expense
23.6

 
1.4

 
—

 
—

 
25.0

Other, net
49.5

 
7.2

 
(1.1
)
 
0.3

 
55.9

(Loss) income from continuing operations before income taxes
(78.8
)
 
27.3

 
0.3

 
—

 
(51.2
)
Income tax (benefit) provision
(9.8
)
 
10.9

 
0.1

 
—

 
1.2

(Loss) income from continuing operations
(69.0
)
 
16.4

 
0.2

 
—

 
(52.4
)
Loss from discontinued operations
(0.8
)
 
—

 
—

 
—

 
(0.8
)
(Loss) income before equity income of subsidiaries
(69.8
)
 
16.4

 
0.2

 
—

 
(53.2
)
Equity income of subsidiaries
16.6

 
—

 
—

 
(16.6
)
 
—

Net (loss) income
$
(53.2
)
 
$
16.4

 
$
0.2

 
$
(16.6
)
 
$
(53.2
)
Comprehensive (loss) income
$
(38.0
)
 
$
26.7

 
$
0.2

 
$
(26.9
)
 
$
(38.0
)



32


Condensed Consolidating Balance Sheets
(Unaudited)
May 31, 2015
Parent
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In millions)
Cash and cash equivalents
$
255.8

 
$
—

 
$
0.7

 
$
(3.0
)
 
$
253.5

Accounts receivable
—

 
169.8

 
3.9

 
—

 
173.7

Inventories
—

 
144.0

 
6.3

 
—

 
150.3

Recoverable from the U.S. government, Northrop, and other third parties for environmental remediation costs
0.1

 
29.6

 
—

 
—

 
29.7

Other current assets, net
20.7

 
40.4

 
1.2

 
(16.9
)
 
45.4

Deferred income taxes
5.6

 
18.4

 
0.8

 
—

 
24.8

Total current assets
282.2

 
402.2

 
12.9

 
(19.9
)
 
677.4

Property, plant and equipment, net
4.7

 
346.0

 
5.6

 
—

 
356.3

Recoverable from the U.S. government and other third parties for environmental remediation costs
0.7

 
76.1

 
—

 
—

 
76.8

Deferred income taxes
59.5

 
169.1

 
16.7

 
—

 
245.3

Goodwill
—

 
164.4

 
—

 
—

 
164.4

Intercompany receivable
—

 
115.7

 
32.6

 
(148.3
)
 
—

Investments in subsidiaries
568.2

 
—

 
—

 
(568.2
)
 
—

Other noncurrent assets and intangibles, net
26.8

 
294.0

 
57.1

 
—

 
377.9

Total assets
$
942.1

 
$
1,567.5

 
$
124.9

 
$
(736.4
)
 
$
1,898.1

Short-term borrowings and current portion of long-term debt
$
5.0

 
$
0.3

 
$
—

 
$
—

 
$
5.3

Accounts payable
1.6

 
85.0

 
4.0

 
(3.0
)
 
87.6

Reserves for environmental remediation costs
1.2

 
37.5

 
—

 
—

 
38.7

Other current liabilities and advance payments on contracts
32.6

 
373.8

 
6.3

 
(16.9
)
 
395.8

Postretirement medical and life insurance benefits
5.0

 
1.4

 
—

 
—

 
6.4

Total current liabilities
45.4

 
498.0

 
10.3

 
(19.9
)
 
533.8

Long-term debt
712.4

 
0.2

 
—

 
—

 
712.6

Reserves for environmental remediation costs
4.3

 
118.5

 
—

 
—

 
122.8

Pension benefits
69.7

 
405.7

 
—

 
—

 
475.4

Intercompany payable
148.3

 
—

 
—

 
(148.3
)
 
—

Postretirement medical and life insurance benefits
36.3

 
13.8

 
—

 
—

 
50.1

Other noncurrent liabilities
21.3

 
66.0

 
11.7

 
—

 
99.0

Total liabilities
1,037.7

 
1,102.2

 
22.0

 
(168.2
)
 
1,993.7

Commitments and contingencies (Note 7)

 

 

 

 

Redeemable common stock
0.1

 
—

 
—

 
—

 
0.1

Total stockholders’ (deficit) equity
(95.7
)
 
465.3

 
102.9

 
(568.2
)
 
(95.7
)
Total liabilities, redeemable common stock, and stockholders’ (deficit) equity
$
942.1

 
$
1,567.5

 
$
124.9

 
$
(736.4
)
 
$
1,898.1



33


November 30, 2014
Parent
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In millions)
Cash and cash equivalents
$
271.6

 
$
—

 
$
—

 
$
(5.7
)
 
$
265.9

Accounts receivable
—

 
170.4

 
2.5

 
—

 
172.9

Inventories
—

 
133.6

 
5.4

 
—

 
139.0

Recoverable from the U.S. government, Northrop, and other third parties for environmental remediation costs
0.1

 
25.3

 
—

 
—

 
25.4

Other current assets, net
3.5

 
31.6

 
0.8

 
—

 
35.9

Income taxes
31.0

 
1.8

 
—

 
(30.7
)
 
2.1

Deferred income taxes
5.6

 
18.8

 
0.9

 
—

 
25.3

Total current assets
311.8

 
381.5

 
9.6

 
(36.4
)
 
666.5

Property, plant and equipment, net
4.7

 
356.9

 
5.9

 
—

 
367.5

Recoverable from the U.S. government and other third parties for environmental remediation costs
0.7

 
80.5

 
—

 
—

 
81.2

Deferred income taxes
57.7

 
183.4

 
17.9

 
—

 
259.0

Goodwill
—

 
164.4

 
—

 
—

 
164.4

Intercompany receivable
—

 
97.7

 
29.2

 
(126.9
)
 
—

Investments in subsidiaries
503.0

 
—

 
—

 
(503.0
)
 
—

Other noncurrent assets and intangibles, net
28.1

 
298.9

 
56.0

 
—

 
383.0

Total assets
$
906.0

 
$
1,563.3

 
$
118.6

 
$
(666.3
)
 
$
1,921.6

Short-term borrowings and current portion of long-term debt
$
5.0

 
$
0.3

 
$
—

 
$
—

 
$
5.3

Accounts payable
1.5

 
103.1

 
4.6

 
(5.7
)
 
103.5

Reserves for environmental remediation costs
1.0

 
30.9

 
—

 
—

 
31.9

Other current liabilities and advance payments on contracts
31.5

 
415.9

 
3.5

 
(30.7
)
 
420.2

Postretirement medical and life insurance benefits
5.0

 
1.4

 
—

 
—

 
6.4

Total current liabilities
44.0

 
551.6

 
8.1

 
(36.4
)
 
567.3

Long-term debt
776.6

 
0.3

 
—

 
—

 
776.9

Reserves for environmental remediation costs
4.8

 
129.3

 
—

 
—

 
134.1

Pension benefits
67.0

 
415.8

 
—

 
—

 
482.8

Intercompany payable
126.9

 
—

 
—

 
(126.9
)
 
—

Postretirement medical and life insurance benefits
37.7

 
14.0

 
—

 
—

 
51.7

Other noncurrent liabilities
19.9

 
48.2

 
11.6

 
—

 
79.7

Total liabilities
1,076.9

 
1,159.2

 
19.7

 
(163.3
)
 
2,092.5

Commitments and contingencies (Note 7)

 

 

 

 

Redeemable common stock
1.6

 
—

 
—

 
—

 
1.6

Total stockholders’ (deficit) equity
(172.5
)
 
404.1

 
98.9

 
(503.0
)
 
(172.5
)
Total liabilities, redeemable common stock, and stockholders’ (deficit) equity
$
906.0

 
$
1,563.3

 
$
118.6

 
$
(666.3
)
 
$
1,921.6



34


Condensed Consolidating Statements of Cash Flows
(Unaudited)
Six months ended May 31, 2015
Parent
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In millions)
Net cash (used in) provided by operating activities
$
(5.9
)
 
$
27.4

 
$
4.2

 
$
2.7

 
$
28.4

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(9.3
)
 
(0.1
)
 
—

 
(9.4
)
Net cash used in investing activities
—

 
(9.3
)
 
(0.1
)
 
—

 
(9.4
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Debt repayments / repurchases
(28.4
)
 
(0.1
)
 
—

 
—

 
(28.5
)
Net transfers from (to) parent
21.4

 
(18.0
)
 
(3.4
)
 
—

 
—

Other financing activities
(2.9
)
 
—

 
—

 
—

 
(2.9
)
Net cash used in financing activities
(9.9
)
 
(18.1
)
 
(3.4
)
 
—

 
(31.4
)
Net (decrease) increase in cash and cash equivalents
(15.8
)
 
—

 
0.7

 
2.7

 
(12.4
)
Cash and cash equivalents at beginning of year
271.6

 
—

 
—

 
(5.7
)
 
265.9

Cash and cash equivalents at end of period
$
255.8

 
$
—

 
$
0.7

 
$
(3.0
)
 
$
253.5

 
Six months ended May 31, 2014
Parent
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In millions)
Net cash used in operating activities
$
(12.5
)
 
$
(4.7
)
 
$
(0.5
)
 
$
(4.6
)
 
$
(22.3
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures
(0.1
)
 
(18.0
)
 
(0.4
)
 
—

 
(18.5
)
Net cash used in investing activities
(0.1
)
 
(18.0
)
 
(0.4
)
 
—

 
(18.5
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Debt repayments / repurchases
(145.8
)
 
—

 
—

 
—

 
(145.8
)
Proceeds from issuance of debt
179.0

 
—

 
—

 
—

 
179.0

Debt issuance costs
(4.1
)
 
—

 
—

 
—

 
(4.1
)
Net transfers (to) from parent
(19.0
)
 
17.8

 
1.2

 
—

 
—

Other financing activities
(65.2
)
 
—

 
—

 
—

 
(65.2
)
Net cash (used in) provided by financing activities
(55.1
)
 
17.8

 
1.2

 
—

 
(36.1
)
Net (decrease) increase in cash and cash equivalents
(67.7
)
 
(4.9
)
 
0.3

 
(4.6
)
 
(76.9
)
Cash and cash equivalents at beginning of year
192.7

 
4.9

 
—

 
—

 
197.6

Cash and cash equivalents at end of period
$
125.0

 
$
—

 
$
0.3

 
$
(4.6
)
 
$
120.7




35


Note 16. Subsequent Events
In June 2015, the Company retired $25.0 million principal amount of its delayed draw term loan.






36


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated or required by the context, as used in this Quarterly Report on Form 10-Q, the terms “the Company,” “we,” “our” and “us” refer to Aerojet Rocketdyne Holdings, Inc. and all of its subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
The preparation of the consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In addition, our operating results for interim periods may not be indicative of the results of operations for a full year. This section contains a number of forward-looking statements, all of which are based on current expectations and are subject to risks and uncertainties including those described in this Quarterly Report under the heading “Forward-Looking Statements.” Actual results may differ materially. This section should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended November 30, 2014, and periodic reports subsequently filed with the Securities and Exchange Commission (“SEC”).
Overview
We are 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 our excess real estate assets. We develop and manufacture propulsion systems for defense and space applications, and armaments for precision tactical and long-range weapon systems applications. Our continuing operations are organized into two segments:
Aerospace and Defense — includes the operations of our wholly-owned subsidiary Aerojet Rocketdyne, Inc. (“Aerojet Rocketdyne”), a leading technology-based designer, developer and manufacturer of aerospace and defense products and systems for the United States (“U.S.”) government, including the Department of Defense (“DoD”), the National Aeronautics and Space Administration (“NASA”), major aerospace and defense prime contractors as well as portions of the commercial sector. Aerojet Rocketdyne is a world-recognized engineering and manufacturing company that specializes in the development and production of propulsion systems for defense and space applications, armament systems for precision tactical systems and munitions, and is considered a domestic market leader in launch propulsion, in-space propulsion, missile defense propulsion, tactical missile propulsion and hypersonic propulsion systems.
Real Estate — includes the activities of our wholly-owned subsidiary Easton Development Company, LLC (“Easton”) related to the re-zoning, entitlement, sale, and leasing of our excess real estate assets. We own approximately 11,300 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 and other governmental approvals on a portion of the Sacramento Land to optimize its value. In addition, we are currently in the process of completing certain infrastructure improvements to the Sacramento Land to reduce the time a developer would have to hold the Sacramento Land before development could start.
A summary of the significant financial highlights for the second quarter of fiscal 2015 which management uses to evaluate our operating performance and financial condition is presented below. 
•
Net sales for the second quarter of fiscal 2015 totaled $456.9 million compared to $404.5 million for the second quarter of fiscal 2014. Sales for the second quarter of fiscal 2015 included $42.0 million related to the sale of 550 acres of land.
•
Net income for the second quarter of fiscal 2015 was $18.4 million, or $0.26 diluted income per share, compared to a net loss of $(50.9) million, or $(0.88) loss per share, for the second quarter of fiscal 2014. Net income for the second quarter of fiscal 2015 included an after-tax gain of $17.9 million related to the sale of 550 acres of land.
•
Adjusted EBITDAP (Non-GAAP measure*) for the second quarter of fiscal 2015 was $86.3 million, or 18.9% of net sales, compared to $32.7 million, or 8.1% of net sales, for the second quarter of fiscal 2014.
•
Segment performance (Non-GAAP measure*) before environmental remediation provision adjustments, retirement benefit plan expense, and unusual items was $80.0 million for the second quarter of fiscal 2015, compared to $23.4 million for the second quarter of fiscal 2014.
•
Cash provided by operating activities in the second quarter of fiscal 2015 totaled $64.0 million, compared to $3.0 million in the second quarter of fiscal 2014. Cash provided by operating activities in the second quarter of fiscal 2015 included $40.0 million of proceeds related to the sale of 550 acres of land.
•
Free cash flow (Non-GAAP measure*) in the second quarter of fiscal 2015 totaled $58.9 million, compared to $(6.2) million in the second quarter of fiscal 2014.
•
As of May 31, 2015, we had $2.3 billion of funded backlog compared to $2.2 billion as of November 30, 2014.
•
As of May 31, 2015, we had $464.4 million in net debt (Non-GAAP measure) compared to $516.3 million as of November 30, 2014.

37


_________
* We provide Non-GAAP measures as a supplement to financial results based on GAAP. A reconciliation of the Non-GAAP measures to the most directly comparable GAAP measures is presented later in the Management’s Discussion and Analysis under the heading “Operating Segment Information” and “Use of Non-GAAP Financial Measures.”
Our fiscal year ends on November 30 of each year. The fiscal year of our subsidiary, Aerojet Rocketdyne, ends on the last Saturday of November. During the first quarter of fiscal 2015, our business activities were constrained for two weeks as a result of the implementation of the Pratt & Whitney Rocketdyne division (the “Rocketdyne Business”) enterprise resource planning (“ERP”) system. 
We are operating in an environment that is characterized by both increasing complexity in the global security environment, as well as continuing worldwide economic pressures. A significant component of our strategy in this environment is to focus on delivering excellent performance to our customers, driving improvements and efficiencies across our operations, and creating value through the enhancement and expansion of our business.
We continuously evaluate a broad range of options that could be implemented to increase operational efficiency across all sites, and improve our overall market competitiveness.  Our decisions will be focused on moving us forward to solidify our leadership in the propulsion markets.
Some of the significant challenges we face are as follows: dependence upon U.S. government programs and contracts, future reductions or changes in U.S. government spending in our markets, implementation of our Competitive Improvement Program ("CIP"), environmental matters, capital structure, underfunded pension plan, and integration of the Rocketdyne Business (including integration into our ERP).
Major Customers
The principal end user customers of our products and technology are agencies of the U.S. government. Since a majority of our sales are, directly or indirectly, to the U.S. government, funding for the purchase of our products and services generally follows trends in U.S. aerospace and defense spending. However, individual U.S. government agencies, which include the military services, NASA, the Missile Defense Agency, 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 periods presented are as follows:
 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
Lockheed Martin Corporation
26
%
 
30
%
 
27
%
 
25
%
United Launch Alliance
19
%
 
25
%
 
18
%
 
26
%
Raytheon Company
20
%
 
18
%
 
21
%
 
18
%
NASA
11
%
 
11
%
 
12
%
 
13
%
Sales to the U.S. government and its agencies, including sales to our significant customers discussed above, were as follows (dollars in millions):
 
U.S. Government
Sales
 
Percentage of Net
Sales
Three months ended May 31, 2015
$
396.1

 
87
%
Three months ended May 31, 2014
386.5

 
96
%
Six months ended May 31, 2015
692.1

 
89
%
Six months ended May 31, 2014
698.1

 
95
%
The Standard Missile program, which is comprised of several contracts and is included in U.S. government sales, represented 15% and 12% of net sales for the second quarter of fiscal 2015 and 2014, respectively. The Standard Missile program represented 14% and 12% of net sales for the first half of fiscal 2015 and 2014, respectively. In addition, the Terminal High Altitude Area Defense (“THAAD”) program, which is comprised of several contracts and is included in U.S. government sales, represented 12% of net sales for both the second quarter of fiscal 2015 and 2014. In addition, the THAAD program represented 13% and 10% of net sales for the first half of fiscal 2015 and 2014, respectively.
Industry Update
Our primary aerospace and defense customers include the DoD and its agencies, NASA, and the prime contractors that supply products to these customers. We are seeing more opportunities for commercial launch and in-space business. In

38


addition, sales to our aerospace and defense customers that provide products to international customers continue to grow. However, we continue to rely on particular levels of U.S. government spending on propulsion systems for defense, space and armament systems, precision tactical weapon systems and munitions applications, and our backlog depends, in large part, on continued funding by the U.S. government for the programs in which we are involved. These funding levels are not generally correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this type of funding. Moreover, although our contracts often contemplate that our services will be performed over a period of several years, the U.S. Congress must appropriate funds for a given program and the U.S. President must sign government budget legislation each government fiscal year (“GFY”) and may significantly increase, decrease or eliminate, funding for a program. A decrease in DoD and/or NASA expenditures, the elimination or curtailment of a material program in which we are or hope to be involved, or changes in payment patterns of our customers as a result of changes in U.S. government outlays, could have a material adverse effect on our operating results, financial condition, and/or cash flows.
The Budget Control Act of 2011 ("BCA") established statutory limits on U.S. government discretionary spending, or budgets caps, for both defense and non-defense over the next 10 years.  The Bipartisan Budget Act of 2013 provided temporary relief to the BCA cap levels in GFY 2014 and 2015 and eased sequestration spending cuts to the DoD and other federal agencies (e.g., NASA) for GFY 2014 and 2015, paving the way for eventual agreements on GFY 2014 and 2015 appropriations for all federal agencies. For GFY 2015, Congress approved a $1.0 trillion “Omnibus” Appropriations bill, averting a U.S. government shutdown and providing a sense of stability for the industry.  The omnibus legislation contains 11 full year appropriations bills - including Defense and Commerce, Justice, Science (that includes NASA funding) - and a shorter-term Continuing Resolution ("CR") for the Department of Homeland Security.  The defense portion of the bill provides $490.2 billion in discretionary funding for GFY 2015, which is $3.3 billion above the GFY 2014 amount, and nearly equal to the President’s Budget Request for GFY 2015.  In addition, the bill includes $64.0 billion in Overseas Contingency Operations for the ongoing war efforts abroad.  The NASA portion of the bill includes a top line of $18.0 billion, which is $0.5 billion above the President’s budget request for GFY 2015 and $0.4 billion above the GFY 2014 appropriated amount. 
The budget cap for defense spending for GFY 2016 is $498 billion, while the President’s Budget Request for GFY 2016 base defense spending is $534 billion. Earlier this year, Congress passed the Concurrent Budget Resolution for GFY 2016, which sets overall spending levels for government agencies, including defense.  While the budget agreement did not directly raise the BCA cap restriction on DoD’s base budget, it did allow for an additional $38.3 billion in overseas contingency operations funding.  Whether or not the higher level of spending will remain throughout the appropriations process and ultimately become signed into law remains in question.
Despite overall U.S. government budget pressures, we believe we are well-positioned to benefit from funding in DoD and NASA priority areas. This view reflects the DoD’s strategic guidance report released in January 2012, and the recently released 2014 Quadrennial Defense Review (“QDR”) which affirms support for many of our core programs and points toward continued DoD investment in: access to space - in order to ensure access to this highly congested and contested “global commons” missile defense - in order to protect the homeland, counter weapons of mass destruction and enhance space-based capabilities; and power projection by tactical missile systems. The QDR explicitly states Missile Defense, Space, Nuclear Deterrence, and Precision Strike as key capabilities for the DoD to preserve.
The NASA Authorization Act has again identified the Space Launch System ("SLS") program as one of its top priorities in the NASA GFY 2016 budget. The SLS program also has enjoyed wide, bipartisan support in both chambers of Congress. We maintain a strong relationship with NASA and our propulsion systems have been powering NASA launch vehicles and spacecraft since the inception of the U.S. space program. Our booster, upper stage and Orion vehicle propulsion systems are currently baselined on the new SLS vehicle and both upper stage and booster engines are in development for future SLS variants. Due to the retirement of the space shuttle fleet, U.S. astronauts are now dependent on Russian Soyuz flights for access to and from the International Space Station ("ISS") for the better part of this decade. NASA has been working to re-establish U.S. manned space capability as soon as possible through development of a new “space taxi” to ferry astronauts and cargo to the ISS. In 2014, Boeing was selected by NASA to develop one of two vehicles to be used for this purpose. As Boeing’s teammate, Aerojet Rocketdyne will be providing the propulsion system for this new vehicle, thereby supplementing its work for NASA on the SLS designed for manned deep space exploration. In both instances, we have significant propulsion content and we look forward to supporting these generational programs for NASA.
The competitive dynamics of our multi-faceted marketplace vary by product sector and customer as we see many of the same influences felt by the larger Aerospace and Defense sector.  The large majority of products we manufacture are highly complex, technically sophisticated and extremely hazardous to build, demanding rigorous manufacturing procedures and highly specialized manufacturing equipment.  These factors, coupled with the high cost to establish the infrastructure required to meet these needs, pose substantial barriers to entry.  As a result, the number of qualified competitors has been, and will likely continue to be, limited to a few participants who tend to be narrowly focused on products that are sub-elements of our overall propulsion product portfolio. For example, competitor Orbital ATK, Inc. manufactures solid rocket motors but does not develop or produce liquid engines or electric propulsion systems.  Similarly, there are a number of small liquid engine manufacturers

39


that neither develop or produce solid-fueled propulsion systems.  In addition, there has been a recent emergence of propulsion entrepreneurs such as SpaceX and Blue Origin who have been or are in the process of developing liquid fuel propulsion capabilities, but these potential competitors are primarily focused on the development of space propulsion systems for heavy lift launch vehicles and are not pursuing or participating in the missile defense or tactical propulsion business segments that make up a substantial portion of our overall business.  These new entrepreneurs have signaled their intent to compete primarily on price and are therefore bringing pressure to bear on existing cost paradigms and manufacturing methodologies.
Competitive Improvement Program
In March 2015, we initiated the CIP comprised of activities and initiatives aimed at reducing costs in order for us to continue to compete successfully. The company-wide initiative is being undertaken after a comprehensive assessment of our product portfolio to underpin Aerojet Rocketdyne’s technological and competitive leadership in our markets through continued research and development. The CIP is composed of three major components: (i) facilities optimization and footprint reduction; (ii) product affordability; and (iii) reduced administrative and overhead costs. Under the CIP, we expect an estimated 500 headcount reduction in our total employee population. We currently estimate that we will incur restructuring and related costs over the next four years totaling approximately $110 million. When fully implemented, we anticipate that the CIP will result in annual cost savings of approximately $145 million beginning in fiscal 2019. As a result of this effort, we will be better positioned to deliver our innovative, high quality and reliable products at a lower cost to our customers. The CIP costs will consist primarily of severance and other employee related costs totaling approximately $43 million, operating facility costs totaling approximately $27 million, and $40 million for other costs relating to product re-qualification, knowledge transfer and other CIP implementation costs. A summary of our CIP reserve activity for the second quarter of fiscal 2015 is shown below:
 
Severance
 
Retention
 
Total
 
(In millions)
February 28, 2015
$
—

 
$
—

 
$
—

      Accrual established
10.7

 
0.5

 
11.2

May 31, 2015
$
10.7

 
$
0.5

 
$
11.2

The costs associated with the CIP will be a component of our U.S. government forward pricing rates, and therefore, will be recovered through the pricing of our products and services to the U.S. government. In addition to the employee-related CIP obligations, we incurred non-cash accelerated depreciation expense of $0.1 million in the second quarter of fiscal 2015 associated with changes in the estimated useful life of long-lived assets impacted by the CIP.
Successful implementation of the CIP initiative will directly benefit our ability to win important, new development work thereby advancing our wide range of next generation propulsion solutions including our newest liquid booster engine, the AR1. Here we plan to supplement the benefits from the CIP by investing significant company-funded research and development expenditures this year toward the successful development of this engine to meet current and future U.S. space launch needs.
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 we believe our current operations are materially in compliance with all applicable environmental laws and regulations.
A summary of our recoverable amounts, environmental reserves, and estimated range of liability as of May 31, 2015 is presented below:
 
Recoverable
Amounts
 
Environmental Reserves
 
Estimated Range
of Liability
 
(In millions)
Sacramento
$
82.9

 
$
133.2

 
$133.2 -215.8
Baldwin Park Operable Unit
9.7

 
15.5

 
15.5 -33.5
Other Aerojet Rocketdyne sites
7.1

 
7.3

 
7.3 - 19.2
Other sites
0.8

 
5.5

 
5.5 - 7.8
Total
$
100.5

 
$
161.5

 
$161.5 - 276.3
Most of our environmental costs are incurred by our Aerospace and Defense segment, and certain of these future costs are allowable to be included in our contracts with the U.S. government and allocable to Northrop Grumman Corporation (“Northrop”) until the cumulative expenditure limitation is reached (discussed below).

40


On January 12, 1999, Aerojet Rocketdyne 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 Rocketdyne and the U.S. government resolved disagreements about an appropriate cost-sharing ratio with respect to the cleanup costs of the environmental contamination at the Sacramento and Azusa sites. The Global Settlement cost-sharing ratio does not have a defined term over which costs will be recovered. Additionally, in conjunction with the sale of the Electronics and Information Systems business in 2001, Aerojet Rocketdyne entered into an agreement with Northrop (the “Northrop Agreement”) whereby Aerojet Rocketdyne is reimbursed by Northrop for a portion of environmental expenditures eligible for recovery under the Global Settlement, subject to annual and cumulative limitations.
Pursuant to the Global Settlement, prior to the third quarter of fiscal 2010, approximately 12% of environmental costs related to Aerojet Rocketdyne’s Sacramento site and its former Azusa site were charged to the condensed consolidated statements of operations. Subsequent to the third quarter of fiscal 2010, because our estimated environmental costs have reached the reimbursement ceiling under the Northrop Agreement, approximately 37% of such costs will not be reimbursable and are therefore directly charged to the condensed consolidated statements of operations. However, we are seeking to amend our agreement with the U.S. government to increase the amount allocable to U.S. government contracts. There can be no assurances as to when or if we will be successful in this pursuit.
Allowable environmental costs are charged to our contracts as the costs are incurred. Aerojet Rocketdyne’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 Rocketdyne to continue recovering these costs from the U.S. government depends on Aerojet Rocketdyne’s sustained business volume under U.S. government contracts and programs. Additionally, we are reviewing the percentage of Global Settlement environmental costs allocable to our Aerojet Rocketdyne business and Northrop. Any change in the percentage allocable will require approval from the U.S. government and if received, this change may materially and favorably affect our results of operations and cash flows in the period received along with future periods.
The inclusion of such environmental costs in our contracts with the U.S. government impacts our competitive pricing and earnings; however, we believe that this impact is mitigated by driving improvements and efficiencies across our operations as well as our ability to deliver innovative and quality products to our customers.
Capital Structure
We have a substantial amount of debt for which we are required to make interest and principal payments. Interest on long-term financing is not a recoverable cost under our U.S. government contracts. As of May 31, 2015, we had $717.9 million of debt principal outstanding. The fair value of the debt outstanding at May 31, 2015 was $879.0 million.
Retirement Benefits
We do not expect to make any significant cash contributions to our tax-qualified defined benefit pension plan until fiscal 2016. We estimate that approximately 86% of our unfunded pension obligation as of November 30, 2014 is related to Aerojet Rocketdyne which will be recoverable through our U.S. government contracts.
The funded status of our tax-qualified defined benefit 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 Internal Revenue Service regulations or other applicable law or if other actuarial assumptions are modified, our future contributions to our underfunded pension plans could be higher than we expect.
Additionally, the level of returns on retirement benefit assets, changes in interest rates, changes in legislation, and other factors affect our financial results. The timing of recognition of pension expense or income in our financial statements differs from the timing of the required pension funding under Pension Protection Act or the amount of funding that can be recorded in our overhead rates through our U.S. government contracting business. Our earnings are positively or negatively impacted by the amount of expense or income we record for our employee retirement benefit plans.
Rocketdyne Business ERP Implementation
We implemented our ERP system for our Rocketdyne Business on January 1, 2015.

41


Results of Operations
Net Sales:
 
Three months ended May 31,
 
 
 
Six months ended May 31,
 
 
 
2015
 
2014
 
Change*
 
2015
 
2014
 
Change**
 
(In millions)
Net sales:
$
456.9

 
$
404.5

 
$
52.4

 
$
775.5

 
$
736.6

 
$
38.9

 
* Primary reason for change. The increase in net sales was primarily due to the following: (i) sale of approximately 550 acres of our Sacramento Land for $42.0 million; (ii) an increase of $20.2 million in the various Standard Missile contracts primarily from increased deliveries as a result of transitioning the Standard Missile-3 Block IB contract from low-rate initial production to full-rate production; and (iii) an increase of $17.2 million on the RS-25 program which is currently in the middle of a large development and integration effort in support of the SLS development schedule. The increase in net sales was partially offset by (i) a decrease of $14.3 million in the RL-10 and RS-68 programs as a result of the timing of deliveries on these multi-year contracts and (ii) a decrease of $16.3 million on the J-2X program due to the successful completion of current J-2X development requirements. See net sales information below:
 
Three months ended May 31,
 
 
 
2015
 
2014
 
Change
 
(In millions)
Net sales:
 
 
 
 
 
Standard Missile
$
69.9

 
$
49.7

 
$
20.2

THAAD
53.5

 
48.7

 
4.8

RS-25
44.3

 
27.1

 
17.2

RL-10
28.5

 
32.8

 
(4.3
)
RS-68
27.1

 
37.1

 
(10.0
)
Orion
17.0

 
9.3

 
7.7

J-2X
1.0

 
17.3

 
(16.3
)
All other Aerospace and Defense programs
172.1

 
180.9

 
(8.8
)
Real estate
43.5

 
1.6

 
41.9

 
$
456.9

 
$
404.5

 
$
52.4

** Primary reason for change. The increase in net sales was primarily due to the following: (i) sale of approximately 550 acres of our Sacramento Land for $42.0 million; (ii) an increase of $32.1 million on the RS-25 program which is currently in the middle of a large development and integration effort in support of the SLS development schedule; (iii) increased development work on the Orion program which generated $20.0 million in additional net sales; (iv) increased deliveries on the THAAD program which generated $21.5 million in additional net sales; and (v) an increase of $19.7 million in the various Standard Missile contracts primarily from increased deliveries as a result of transitioning the Standard Missile-3 Block IB contract from low-rate initial production to full-rate production. The increase in net sales was partially offset by (i) a decrease of $45.6 million in the RL-10 and RS-68 programs as a result of the timing of deliveries on these multi-year contracts and (ii) a decrease of $38.0 million on the J-2X program due to the successful completion of current J-2X development requirements. See net sales information below:
 
Six months ended May 31,
 
 
 
2015
 
2014
 
Change
 
(In millions)
Net sales:
 
 
 
 
 
Standard Missile
$
110.0

 
$
90.3

 
$
19.7

THAAD
97.0

 
75.5

 
21.5

RS-25
81.1

 
49.0

 
32.1

RS-68
51.4

 
72.5

 
(21.1
)
RL-10
45.0

 
69.5

 
(24.5
)
Orion
32.4

 
12.4

 
20.0

J-2X
3.3

 
41.3

 
(38.0
)
All other Aerospace and Defense programs
310.2

 
323.0

 
(12.8
)
Real estate
45.1

 
3.1

 
42.0

 
$
775.5

 
$
736.6

 
$
38.9


42



Cost of Sales (exclusive of items shown separately below):
 
Three months ended May 31,
 
 
 
Six months ended May 31,
 
 
 
2015
 
2014
 
Change*
 
2015
 
2014
 
Change**
 
(In millions, except percentage amounts)
Cost of sales:
$
372.5

 
$
369.4

 
$
3.1

 
$
655.3

 
$
657.9

 
$
(2.6
)
Percentage of net sales
81.5
%
 
91.3
%
 
 
 
84.5
%
 
89.3
%
 
 
Percentage of net sales excluding retirement benefit expense and step-up in fair value of inventory
78.8
%
 
89.6
%
 
 
 
81.3
%
 
87.4
%
 
 
Components of cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales excluding retirement benefit expense and step-up in fair value of inventory
$
360.0

 
$
362.4

 
$
(2.4
)
 
$
630.3

 
$
643.8

 
$
(13.5
)
Cost of sales associated with the Acquisition step-up in fair value of inventory not allocable to our U.S. government contracts
0.1

 
0.9

 
(0.8
)
 
0.2

 
1.9

 
(1.7
)
Retirement benefit expense
12.4

 
6.1

 
6.3

 
24.8

 
12.2

 
12.6

Cost of sales
$
372.5

 
$
369.4

 
$
3.1

 
$
655.3

 
$
657.9

 
$
(2.6
)

* Primary reason for change. The decrease in cost of sales as a percentage of net sales excluding retirement benefit expense and the step-up in fair value of inventory is primarily due to the gross profit of $30.6 million, 6.7% of net sales, on the sale of approximately 550 acres of Sacramento Land. In addition, the second quarter of fiscal 2014 included $13.7 million, 3.4% of net sales, of losses on the Antares AJ-26 program associated with the previously reported engine test failures and inspection costs.
** Primary reason for change. The decrease in cost of sales as a percentage of net sales excluding retirement benefit expense and the step-up in fair value of inventory is primarily due to the gross profit of $30.6 million, 3.9% of net sales, on the sale of approximately 550 acres of Sacramento Land. In addition, the first half of fiscal 2014 included $13.9 million, 1.9% of net sales, of losses on the Antares AJ-26 program associated with the previously reported engine test failures and inspection costs.
Selling, General and Administrative (“SG&A”):
 
Three months ended May 31,
 
 
 
Six months ended May 31,
 
 
 
2015
 
2014
 
Change*
 
2015
 
2014
 
Change**
 
(In millions, except percentage amounts)
SG&A:
$
12.6

 
$
9.2

 
$
3.4

 
$
28.1

 
$
18.4

 
$
9.7

Percentage of net sales
2.8
%
 
2.3
%
 
 
 
3.6
%
 
2.5
%
 
 
Components of SG&A:
 
 
 
 
 
 
 
 
 
 
 
SG&A excluding retirement benefit expense and stock-based compensation
$
6.2

 
$
4.8

 
$
1.4

 
$
12.2

 
$
9.8

 
$
2.4

Stock-based compensation
2.0

 
1.6

 
0.4

 
7.3

 
3.0

 
4.3

Retirement benefit expense
4.4

 
2.8

 
1.6

 
8.6

 
5.6

 
3.0

SG&A
$
12.6

 
$
9.2

 
$
3.4

 
$
28.1

 
$
18.4

 
$
9.7

 * Primary reason for change. The increase in SG&A expense was primarily driven by (i) an increase of $1.6 million in non-cash retirement benefit plan expense (see discussion of “Retirement Benefit Plans” below) and (ii) an increase in consulting and legal expenses associated with various corporate activities.
 * Primary reason for change. The increase in SG&A expense was primarily driven by: (i) an increase of $4.3 million in stock-based compensation primarily as a result of increases in the fair value of the stock appreciation rights; (ii) an increase of $3.0 million in non-cash retirement benefit plan expense (see discussion of “Retirement Benefit Plans” below); and (iii) an increase in consulting and legal expenses associated with various corporate activities.
Depreciation and Amortization:

43


 
Three months ended May 31,
 
 
 
Six months ended May 31,
 
 
 
2015
 
2014
 
Change*
 
2015
 
2014
 
Change*
 
(In millions)
Depreciation and amortization:
$
16.1

 
$
15.7

 
$
0.4

 
$
32.1

 
$
30.6

 
$
1.5

Components of depreciation and amortization:
 
 
 
 
 
 
 
 
 
 
 
Depreciation
$
12.8

 
$
12.4

 
$
0.4

 
$
25.4

 
$
23.9

 
$
1.5

Amortization
3.3

 
3.3

 
—

 
6.7

 
6.7

 
—

* Primary reason for change. The increase in depreciation and amortization was primarily due to the long-lived assets associated with the consolidation of the Rocketdyne facilities that were placed into service in August 2014.
Other Expense, net:
 
Three months ended May 31,
 
 
 
Six months ended May 31,
 
 
 
2015
 
2014
 
Change*
 
2015
 
2014
 
Change**
 
(In millions)
Other expense, net:
$
2.8

 
$
48.3

 
$
(45.5
)
 
$
4.5

 
$
55.9

 
$
(51.4
)
 * Primary reason for change. The decrease in other expense, net was primarily due to a decrease of $45.7 million in unusual items charges. See discussion of unusual items below.
 ** Primary reason for change. The decrease in other expense, net was primarily due to a decrease of $51.1 million in unusual items charges. See discussion of unusual items below.
Total unusual items expense, a component of other expense, net in the unaudited condensed consolidated statements of operations, for the second quarter and first half of fiscal 2015 and 2014 was as follows:
 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Unusual items
 
 
 
 
 
 
 
Legal related matters
$
—

 
$
0.1

 
$
(0.7
)
 
$
0.1

Loss on debt repurchased
0.5

 
45.9

 
0.7

 
50.8

Loss on bank amendment
—

 
0.2

 
—

 
0.2

 
$
0.5

 
$
46.2

 
$
—

 
$
51.1

First half of fiscal 2015 Activity:
We retired $26.0 million principal amount of our delayed draw term loan resulting in $0.7 million of losses associated with the write-off of deferred financing fees.
We recorded $0.7 million for realized gains net of interest expense associated with the failure to register with the SEC the issuance of certain of the Company’s common shares under the defined contribution 401(k) employee benefit plan.
First half of fiscal 2014 Activity:
A summary of the loss on the 4 1/16% Debentures repurchased during the second quarter and first half of fiscal 2014 is as follows:
 
Three months ended May 31,
 
Six months ended May 31,
 
2014
 
2014
 
(In millions)
Principal amount repurchased
$
45.7

 
$
50.2

Cash repurchase price
(91.4
)
 
(100.8
)
Write-off of deferred financing costs
(0.2
)
 
(0.2
)
Loss on 4 1/16% Debentures repurchased
$
(45.9
)
 
$
(50.8
)

44


Interest Income:
 
Three months ended May 31,
 
 
 
Six months ended May 31,
 
 
 
2015
 
2014
 
Change*
 
2015
 
2014
 
Change*
 
(In millions)
Interest income:
$
—

 
$
—

 
$
—

 
$
0.1

 
$
—

 
$
0.1

 * Primary reason for change. Interest income was essentially unchanged for the periods presented.
Interest Expense:
 
Three months ended May 31,
 
 
 
Six months ended May 31,
 
 
 
2015
 
2014
 
Change*
 
2015
 
2014
 
Change*
 
(In millions)
Interest expense:
$
13.2

 
$
12.6

 
$
0.6

 
$
26.6

 
$
25.0

 
$
1.6

Components of interest expense:
 
 
 
 
 
 
 
 
 
 
 
Contractual interest and other
12.5

 
11.7

 
0.8

 
25.2

 
23.2

 
2.0

Amortization of deferred financing costs
0.7

 
0.9

 
(0.2
)
 
1.4

 
1.8

 
(0.4
)
Interest expense
$
13.2

 
$
12.6

 
$
0.6

 
$
26.6

 
$
25.0

 
$
1.6

* Primary reason for change. The increase in interest expense was primarily due to the issuance of $89.0 million under the subordinated delayed draw term loan facility in fiscal 2014 partially offset by the 4 1/16% Convertible Subordinated Debentures (“4 1/16% Debentures”) repurchased during fiscal 2014.
Income Tax Provision:
The income tax provision for the first half of fiscal 2015 and 2014 was as follows:
 
Six months ended May 31,
 
2015
 
2014
 
(In millions)
Federal and state current income tax expense
$
16.8

 
$
4.2

Net deferred benefit
(0.6
)
 
(4.1
)
Research and development credits
(1.5
)
 
1.1

Income tax provision
$
14.7

 
$
1.2

Cash paid for income taxes
$
10.2

 
$
1.7

In the first half of fiscal 2015, the income tax provision recorded differs from the expected tax that would be calculated by applying the federal statutory rate to our income before income taxes primarily due to the re-enactment of the federal research and development credit in December 2014 for calendar year 2014 which has been treated as a discrete event in the first half of fiscal 2015, as well as the impacts from state income taxes and certain expenditures which are permanently not deductible for tax purposes. In the first half of fiscal 2014, the income tax provision recorded differs from the expected tax that would be calculated by applying the federal statutory rate to our loss before income taxes due to the significant non-deductible premium on the 4 1/16% Debentures repurchased in the first half of fiscal 2014, which we have treated as a discrete event, as well as the impacts from state income taxes and certain expenditures which are permanently not deductible for tax purposes.
As of May 31, 2015, the total liability for uncertain income tax positions, including accrued interest and penalties, was $7.5 million. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with the respective liabilities, the Company is unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.
Discontinued Operations:
On August 31, 2004, we completed the sale of our GDX Automotive business. On November 30, 2005, we completed the sale of the Fine Chemicals business. Summarized financial information for discontinued operations is set forth below:

45


 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Net sales
$
—

 
$
—

 
$
—

 
$
—

(Loss) income before income taxes (1)
—

 
(1.4
)
 
0.3

 
(1.4
)
Income tax provision
—

 
0.6

 
0.1

 
0.6

Net (loss) income from discontinued operations
—

 
(0.8
)
 
0.2

 
(0.8
)
_______
(1) Includes foreign currency transaction gains of $0.2 million in the first half of fiscal 2015.
Retirement Benefit Plans:
Components of retirement benefit expense are:
 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Service cost
$
2.7

 
$
2.2

 
$
5.4

 
$
4.4

Interest cost on benefit obligation
16.4

 
17.4

 
32.8

 
34.8

Assumed return on plan assets
(22.1
)
 
(23.2
)
 
(44.2
)
 
(46.4
)
Amortization of prior service credits
(0.2
)
 
(0.2
)
 
(0.5
)
 
(0.4
)
Recognized net actuarial losses
20.0

 
12.7

 
39.9

 
25.4

Retirement benefit expense
$
16.8

 
$
8.9

 
$
33.4

 
$
17.8

The increase in retirement benefit expense is primarily due to higher actuarial losses arising from the November 30, 2014 measurement associated with the updated mortality assumption and a decrease in the discount rate used to determine our retirement benefit plans' obligations at November 30, 2014. The discount rate was 3.96% as of November 30, 2014 compared to 4.54% as of November 30, 2013.
Market conditions and interest rates significantly affect the assets and liabilities of our pension plans. Pension accounting permits market gains and losses to be deferred and recognized over a period of years. This “smoothing” results in the creation of other accumulated income or losses which will be amortized to retirement benefit expense or benefit in future years. The accounting method we utilize recognizes one-fifth of the unamortized gains and losses associated with 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 retirement benefit expense, future expenses are impacted by changes in the market value of pension plan assets and changes in interest rates.
Additionally, we sponsor a defined contribution 401(k) plan and participation in the plan is available to substantially all employees. The cost of the 401(k) plan was $14.4 million and $10.3 million, respectively, in the first half of fiscal 2015 and 2014. The cost is recoverable through our U.S. government contracts.
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 unusual items not related to the segment. We believe that segment performance provides information useful to investors in understanding our underlying operational performance. In addition, we provide the Non-GAAP financial measure of our operational performance called segment performance before environmental remediation provision adjustments, retirement benefit expense, Rocketdyne purchase accounting adjustments, and unusual items. 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.

46


Aerospace and Defense Segment
 
Three months ended May 31,
 
 
 
Six months ended May 31,
 
 
 
2015
 
2014
 
Change*
 
2015
 
2014
 
Change**
 
(In millions, except percentage amounts)
Net sales
$
413.4

 
$
402.9

 
$
10.5

 
$
730.4

 
$
733.5

 
$
(3.1
)
Segment performance (Non-GAAP measure)
34.1

 
16.0

 
18.1

 
51.3

 
41.3

 
10.0

Segment margin (Non-GAAP measure)
8.2
%
 
4.0
%
 
 
 
7.0
%
 
5.6
%
 
 
Segment margin before environmental remediation provision adjustments, retirement benefit plan expense, Rocketdyne purchase accounting adjustments, and unusual items (Non-GAAP measure)
13.2
%
 
7.3
%
 
 
 
12.4
%
 
9.4
%
 
 
Components of segment performance:
 
 
 
 
 
 
 
 
 
 
 
Aerospace and Defense
$
54.6

 
$
29.4

 
$
25.2

 
$
90.5

 
$
69.1

 
$
21.4

Environmental remediation provision adjustments
(1.9
)
 
(0.3
)
 
(1.6
)
 
(3.3
)
 
(1.9
)
 
(1.4
)
Retirement benefit plan expense
(12.4
)
 
(6.1
)
 
(6.3
)
 
(24.8
)
 
(12.2
)
 
(12.6
)
Unusual items
—

 
(0.1
)
 
0.1

 
0.7

 
(0.1
)
 
0.8

Rocketdyne purchase accounting adjustments not allocable to our U.S. government contracts:
 
 
 
 
 
 
 
 
 
 
 
Amortization of the Rocketdyne Business’ intangible assets
(3.0
)
 
(3.0
)
 
—

 
(6.0
)
 
(6.0
)
 
—

Depreciation associated with the step-up in the fair value of the Rocketdyne Business’ tangible assets
(3.1
)
 
(3.0
)
 
(0.1
)
 
(5.6
)
 
(5.7
)
 
0.1

Cost of sales associated with the step-up in the fair value of the Rocketdyne Business’ inventory
(0.1
)
 
(0.9
)
 
0.8

 
(0.2
)
 
(1.9
)
 
1.7

Aerospace and Defense total
$
34.1

 
$
16.0

 
$
18.1

 
$
51.3

 
$
41.3

 
$
10.0

 * Primary reason for change. The increase in net sales was primarily due to the following: (i) an increase of $20.2 million in the various Standard Missile contracts primarily from increased deliveries as a result of transitioning the Standard Missile-3 Block IB contract from low-rate initial production to full-rate production and (ii) an increase of $17.2 million on the RS-25 program which is currently in the middle of a large development and integration effort in support of the SLS development schedule. The increase in net sales was partially offset by (i) a decrease of $14.3 million in the RL-10 and RS-68 programs as a result of the timing of deliveries on these multi-year contracts and (ii) a decrease of $16.3 million on the J-2X program due to the successful completion of current J-2X development requirements. See net sales information below:

47


 
Three months ended May 31,
 
 
 
2015
 
2014
 
Change
 
(In millions)
Net sales:
 
 
 
 
 
Standard Missile
$
69.9

 
$
49.7

 
$
20.2

THAAD
53.5

 
48.7

 
4.8

RS-25
44.3

 
27.1

 
17.2

RL-10
28.5

 
32.8

 
(4.3
)
RS-68
27.1

 
37.1

 
(10.0
)
Orion
17.0

 
9.3

 
7.7

J-2X
1.0

 
17.3

 
(16.3
)
All other Aerospace and Defense programs
172.1

 
180.9

 
(8.8
)
 
$
413.4

 
$
402.9

 
$
10.5

The increase in the segment margin before environmental remediation provision adjustments, retirement benefit plan expense, Rocketdyne purchase accounting adjustments, and unusual items in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014 was primarily due to (i) contract losses of $13.7 million, 3.4% of net sales, on the Antares AJ-26 program incurred in the second quarter of fiscal 2014 associated with the previously reported engine test failures and inspection costs and (ii) improved contract performance on the Standard Missile program due to increased volume and cost saving initiatives on the RS-68 program.
** Primary reason for change. The decrease in net sales was primarily due to (i) a decrease of $45.6 million in the RL-10 and RS-68 programs as a result of the timing of deliveries on these multi-year contracts and (ii) a decrease of $38.0 million on the J-2X program due to the successful completion of current J-2X development requirements. The decrease in net sales was offset by the following: (i) an increase of $32.1 million on the RS-25 program which is currently in the middle of a large development and integration effort in support of the SLS development schedule; (ii) increased development work on the Orion program which generated $20.0 million in additional net sales; (iii) increased deliveries on the THAAD program which generated $21.5 million in additional net sales; and (iv) an increase of $19.7 million in the various Standard Missile contracts primarily from increased deliveries as a result of transitioning the Standard Missile-3 Block IB contract from low-rate initial production to full-rate production. See net sales information below:
 
Six months ended May 31,
 
 
 
2015
 
2014
 
Change
 
(In millions)
Net sales:
 
 
 
 
 
Standard Missile
$
110.0

 
$
90.3

 
$
19.7

THAAD
97.0

 
75.5

 
21.5

RS-25
81.1

 
49.0

 
32.1

RS-68
51.4

 
72.5

 
(21.1
)
RL-10
45.0

 
69.5

 
(24.5
)
Orion
32.4

 
12.4

 
20.0

J-2X
3.3

 
41.3

 
(38.0
)
All other Aerospace and Defense programs
310.2

 
323.0

 
(12.8
)
 
$
730.4

 
$
733.5

 
$
(3.1
)
The increase in the segment margin before environmental remediation provision adjustments, retirement benefit plan expense, Rocketdyne purchase accounting adjustments, and unusual items in the first half of fiscal 2015 compared to the first half of fiscal 2014 was primarily due to (i) contract losses of $13.9 million, 1.9% of net sales, on the Antares AJ-26 program incurred in the second quarter of fiscal 2014 associated with the previously reported engine test failures and inspection costs and (ii) improved contract performance on the Standard Missile program due to increased volume and cost saving initiatives on the RS-68 program.
A summary of our backlog is as follows:

48


 
May 31, 2015
 
November 30,
2014
 
(In billions)
Funded backlog
$
2.3

 
$
2.2

Unfunded backlog
0.7

 
0.9

Total contract backlog
$
3.0

 
$
3.1

Total backlog includes both funded backlog (unfilled orders for which funding is authorized, appropriated and contractually obligated by the customer) and unfunded backlog (firm orders for which funding has not been appropriated). Indefinite delivery and quantity contracts and unexercised options are not reported in total backlog. Backlog is subject to funding delays or program restructurings/cancellations which are beyond our control. Of our May 31, 2015 total contract backlog, approximately 50%, or $1.5 billion, is expected to be filled within one year.
Real Estate Segment
 
Three months ended May 31,
 
 
 
Six months ended May 31,
 
 
 
2015
 
2014
 
Change*
 
2015
 
2014
 
Change*
 
(In millions)
Net sales
$
43.5

 
$
1.6

 
$
41.9

 
$
45.1

 
$
3.1

 
$
42.0

Segment performance
31.6

 
0.9

 
30.7

 
32.5

 
1.8

 
30.7

 * Primary reason for change. During the second quarter of fiscal 2015, we finalized the sale of the Hillsborough land for a total purchase price of $57.0 million which was comprised of $46.7 million cash and $10.3 million of promissory notes. The total acreage covered by the Hillsborough land transaction was approximately 700 acres, of which approximately 550 acres was recognized as a sale in the second quarter of fiscal 2015. At the initial closing, the buyer paid $40.0 million cash and executed a $9.0 million promissory note secured by a first lien Deed of Trust on a portion of the sale property which resulted in a gain of $30.6 million in the second quarter of fiscal 2015. The $9.0 million promissory note secured by a first lien Deed of Trust is divided into two components: (i) a $3.0 million 7% promissory note payable 7 years after close of escrow, which includes a possible $1.0 million reduction in principal if we are unable to obtain the necessary road and utility approvals, and (ii) a $6.0 million 7% promissory note payable 7 years after close of escrow and only payable after certain environmental clearances associated with "Area 40" (discussed below) are obtained by us. The sale also included a $1.3 million non-interest bearing promissory note secured by a first lien Deed of Trust on a portion of the sale property associated with the location of future city roads. In addition, approximately 150 acres of this land, including a 50-acre portion known as “Area 40,” was held back from the initial closing. Upon receipt of regulatory approvals, a closing will take place for the sale of the developable portions of such holdback acreage for a purchase price of $6.7 million in cash.
Use of Non-GAAP Financial Measures
In addition to segment performance (discussed above), we provide the Non-GAAP financial measure of our operational performance called Adjusted EBITDAP. We use this metric to further our understanding of the historical and prospective consolidated core operating performance of our segments, net of expenses resulting from our corporate activities in the ordinary, on-going and customary course of our operations. Further, we believe that to effectively compare the core operating performance metric from period to period on a historical and prospective basis, the metric should exclude items relating to retirement benefits (pension and postretirement benefits), significant non-cash expenses, the impacts of financing decisions on earnings, and items incurred outside the ordinary, on-going and customary course of our operations. Accordingly, we define Adjusted EBITDAP as GAAP income (loss) from continuing operations before income taxes adjusted by interest expense, interest income, depreciation and amortization, retirement benefit expense, and unusual items which we do not believe are reflective of such ordinary, on-going and customary course activities. Adjusted EBITDAP does not represent, and should not be considered an alternative to, net income (loss), as determined in accordance with GAAP.

49


 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions, except percentage amounts)
Income (loss) from continuing operations before income taxes
$
39.7

 
$
(50.7
)
 
$
29.0

 
$
(51.2
)
Interest expense
13.2

 
12.6

 
26.6

 
25.0

Interest income
—

 
—

 
(0.1
)
 
—

Depreciation and amortization
16.1

 
15.7

 
32.1

 
30.6

Retirement benefit expense
16.8

 
8.9

 
33.4

 
17.8

Unusual items
0.5

 
46.2

 
—

 
51.1

Adjusted EBITDAP
$
86.3

 
$
32.7

 
$
121.0

 
$
73.3

Adjusted EBITDAP as a percentage of net sales
18.9
%
 
8.1
%
 
15.6
%
 
10.0
%
In addition to segment performance and Adjusted EBITDAP, we provide the Non-GAAP financial measures of free cash flow and net debt. We use these financial measures, both in presenting our results to stakeholders and the investment community, and in our internal evaluation and management of the business. Management believes that these financial measures are useful because it presents our business using the same tools that management uses to evaluate progress in achieving our goals.
 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Cash provided by (used in) operating activities
$
64.0

 
$
3.0

 
$
28.4

 
$
(22.3
)
Capital expenditures
(5.1
)
 
(9.2
)
 
(9.4
)
 
(18.5
)
Free cash flow(1)
$
58.9

 
$
(6.2
)
 
$
19.0

 
$
(40.8
)
 _____________
(1)
Free Cash Flow, a Non-GAAP financial measure, is defined as cash flow from operating activities less capital expenditures. Free Cash Flow excludes any mandatory debt service requirements and other non-discretionary expenditures. Free Cash Flow should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to cash flows from operations presented in accordance with GAAP. The Company believes Free Cash Flow is useful as it provides supplemental information to assist investors in viewing the business using the same tools that management uses to evaluate progress in achieving the Company’s goals.
 
May 31, 2015
 
November 30, 2014
 
(In millions)
Debt principal
$
717.9

 
$
782.2

Cash and cash equivalents
(253.5
)
 
(265.9
)
Net debt
$
464.4

 
$
516.3

Because our method for calculating the Non-GAAP measures may differ from other companies’ methods, the Non-GAAP measures presented above may not be comparable to similarly titled measures reported by other companies. These measures are not recognized in accordance with GAAP, and we do not intend for this information to be considered in isolation or as a substitute for GAAP measures.
Other Information
Recently Adopted Accounting Pronouncement
In July 2013, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting guidance related to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carryforward exists and certain criteria are met. We adopted this guidance beginning in the first quarter of fiscal 2014. As the accounting standard only impacted presentation, the new standard did not have an impact on our financial position, results of operations, or cash flows.
In April 2014, the FASB issued authoritative guidance which specifies that only disposals, such as a disposal of a major line of business, representing a strategic shift in operations should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more

50


information about the assets, liabilities, income, and expenses of discontinued operations. We adopted this guidance in the fourth quarter of fiscal 2014. An entity should not apply the amendments in this new guidance to a component of an entity that is classified as held for sale before the effective date even if the component of an entity is disposed of after the effective date. As the accounting standard only impacted presentation, the new standard did not have an impact on our financial position, results of operations, or cash flows.
New Accounting Pronouncements
In May 2014, the FASB amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. We are required to adopt the amendments in the first quarter of fiscal 2018. Early adoption is not permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. We are currently evaluating the impact of these amendments and the transition alternatives on our consolidated financial statements.
In August 2014, the FASB issued an amendment to the accounting guidance related to the evaluation of an entity to continue as a going concern. The amendment establishes management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern in connection with preparing financial statements for each annual and interim reporting period. The update also gives guidance to determine whether to disclose information about relevant conditions and events when there is substantial doubt about an entity’s ability to continue as a going concern. This guidance is effective for us as of November 30, 2017. The new guidance is not expected to have an impact on our financial position, results of operations, or cash flows.
In April 2015, the FASB issued an amendment to the accounting guidance related to the presentation of debt issuance costs. The amendment requires that debt issuance costs related to a debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts or premiums. This guidance is effective for us in the first quarter of fiscal 2017. Early adoption is permitted. We are currently evaluating the impact of this amendment on our consolidated financial statements.
In May 2015, the FASB issued amended guidance on disclosures for investments in certain entities that calculate net asset value per share (“NAV”) or its equivalent. The new guidance requires the investments for which fair value is measured at NAV (or its equivalent) to be removed from fair value hierarchy. We expect to adopt the new guidance as of  November 30, 2015.  The new guidance will be applied retrospectively to all periods presented.  As the accounting standard only impacts presentation, the new standard will not have an impact on our financial position, results of operations, or cash flows.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America that offer acceptable alternative methods for accounting for certain items affecting our financial results, such as determining inventory cost, deferring certain costs, depreciating long-lived assets, recognizing pension benefits, 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. The audit committee has reviewed all financial disclosures in our filings with the SEC. Although we believe 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 Unaudited Condensed Consolidated Financial Statements.
The areas that are most affected by our accounting policies and estimates are revenue recognition for long-term contracts, other contract considerations, goodwill, retirement benefit plans, litigation reserves, environmental remediation costs and recoveries, and income taxes. Except for income taxes, which are not allocated to our operating segments, these areas affect the financial results of our business segments.
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

51


from the customer, and the recoverability of costs incurred outside the original contract included in any estimates to complete. We review 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 profit, we will record a positive or negative adjustment to the statement of operations. Changes in estimates and assumptions related to the status of certain long-term contracts may have a material effect on our operating results. The following table summarizes the impact from changes in estimates and assumptions on the statements of operations on contracts, representing 92% of the Company’s net sales over the first half of fiscal 2015 and 2014, accounted for under the percentage-of-completion method of accounting:
 
Three months ended May 31,
 
Six months ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(In millions, except per share amounts)
Favorable (unfavorable) effect of the changes in contract estimates on income (loss) from continuing operations before income taxes
$
7.0

 
$
(5.2
)
 
$
7.2

 
$
(2.9
)
Favorable (unfavorable) effect of the changes in contract estimates on net income (loss)
4.2

 
(3.1
)
 
4.3

 
(1.6
)
Favorable (unfavorable) effect of the changes in contract estimates on basic net income (loss) per share
0.07

 
(0.05
)
 
0.07

 
(0.03
)
Favorable (unfavorable) effect of the changes in contract estimates on diluted net income (loss) per share
0.06

 
(0.05
)
 
0.06

 
(0.03
)
A detailed description of our significant accounting policies can be found in our most recent Annual Report on Form 10-K for the fiscal year ended November 30, 2014.
Arrangements with Off-Balance Sheet Risk
As of May 31, 2015, arrangements with off-balance sheet risk consisted of: 
•
$46.4 million in outstanding commercial letters of credit expiring through April 2016, the majority of which may be renewed, primarily to collateralize obligations for environmental remediation and insurance coverage.
•
$43.3 million in outstanding surety bonds to primarily satisfy indemnification obligations for environmental remediation coverage.
•
Up to $120.0 million aggregate in guarantees by us of Aerojet Rocketdyne’s obligations to U.S. government agencies for environmental remediation activities.
•
$55.0 million related to the pending future acquisition of United Technology Corporation's 50% ownership interest of RD Amross. On June 14, 2015, our obligations to consummate the RDA Acquisition expired.
•
Guarantees, jointly and severally, by our material domestic subsidiaries of their obligations under our Senior Credit Facility and 7.125% Second-Priority Senior Secured Notes (“7 1/8% Notes”).
In addition to the items discussed above, we have and 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.
Additionally, we 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 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 contract is terminated.
We provide product warranties in conjunction with certain product sales. The majority of our warranties are one-year standard warranties 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 as allowed under GAAP for that particular contract.

52


Liquidity and Capital Resources
Net Cash Provided by (Used in) Operating, Investing, and Financing Activities
The change in cash and cash equivalents was as follows:
 
Six months ended May 31,
 
2015
 
2014
 
(In millions)
Net Cash Provided by (Used in) Operating Activities
$
28.4

 
$
(22.3
)
Net Cash Used in Investing Activities
(9.4
)
 
(18.5
)
Net Cash Used in Financing Activities
(31.4
)
 
(36.1
)
Net Decrease in Cash and Cash Equivalents
$
(12.4
)
 
$
(76.9
)
Net Cash Provided by (Used in) Operating Activities
The $28.4 million of cash provided by operating activities in the first half of fiscal 2015 was primarily the result of cash provided by income from continuing operations before income taxes adjusted for non-cash items which generated $102.4 million which was offset by cash used to fund working capital (defined as accounts receivables, inventories, accounts payable, contract advances, and other current assets and liabilities). The funding of working capital is primarily due to the following: (i) a decrease of $25.6 million in other current liabilities related to the expiration of most of the liabilities associated with the UTC Transition Services Agreement, lower income and sales taxes liabilities, and working capital utilization; (ii) a decrease of $15.9 million in accounts payable due to the timing of payments; and (iii) an increase of $11.3 million in inventories primarily due to growth in overhead and the timing of deliveries.
The $22.3 million of cash used by operating activities in the first half of fiscal 2014 was primarily the result of cash used to fund working capital (defined as accounts receivables, inventories, accounts payable, contract advances, and other current assets and liabilities) including our real estate activities. The cash used in operating activities in fiscal 2014 compared to the first half of fiscal 2013 was impacted by the following: (i) cash expenditures to fund contract losses on the Antares and Standard Missile programs; (ii) increased overhead expenditures including the $13.7 million related to future recoverable restructuring costs and $4.8 million related to the cost reduction plan for ongoing business volume in fiscal 2014; and (iii) delays in the rate negotiations and approvals with the U.S. government for certain billing matters.
Net Cash Used In Investing Activities
During the first half of fiscal 2015 and 2014, we had capital expenditures of $9.4 million and $18.5 million, respectively. Capital expenditures in the first half of fiscal 2014 included expenditures of $8.8 million related to the consolidation activities of the former Rocketdyne Business from leased facilities to owned facilities.
Net Cash Used in Financing Activities
During the first half of fiscal 2015, we had debt repayments of $28.5 million. During the first half of fiscal 2014, we repurchased 3.5 million of our common shares at a cost of $64.5 million. We also issued $179.0 million of debt and had debt repayments of $145.8 million.
Debt Activity and Covenants
Our debt activity during the first half of fiscal 2015 was as follows:
 
November 30,
2014
 
Cash
Payments
 
Non-cash
Activity
 
May 31, 2015
 
(In millions)
Term loan
$
98.8

 
$
(2.5
)
 
$
—

 
$
96.3

7 1/8% Notes
460.0

 
—

 
—

 
460.0

4 1/16% Debentures
133.6

 
—

 
(35.8
)
 
97.8

2 1/4% Convertible Subordinated Debentures
0.2

 
—

 
—

 
0.2

Delayed draw term loan (1)
89.0

 
(26.0
)
 
—

 
63.0

Other debt
0.6

 
—

 
—

 
0.6

Total Debt and Borrowing Activity
$
782.2

 
$
(28.5
)
 
$
(35.8
)
 
$
717.9

_______
(1) In June 2015, we retired $25.0 million principal amount of the delayed draw term loan.
We are subject to certain limitations including the ability to incur additional debt, make certain investments and acquisitions, and make certain restricted payments, including stock repurchases and dividends. The Senior Credit Facility includes events of default usual and customary for facilities of this nature, the occurrence of which could lead to an acceleration

53


of our obligations thereunder. Additionally, the Senior Credit Facility includes certain financial covenants, including that we maintain (i) a maximum total leverage ratio, calculated net of cash up to a maximum of $150.0 million, of 4.50 to 1.00 through the fiscal period ending November 30, 2015, 4.25 to 1.00 through fiscal periods ending November 30, 2017, and 4.00 to 1.00 thereafter; and (ii) a minimum interest coverage ratio of 2.40 to 1.00.
Financial Covenant
  
Actual Ratios as of
May 31, 2015
  
Required Ratios
Interest coverage ratio, as defined under the Senior Credit Facility
  
4.36 to 1.00
  
Not less than: 2.40 to 1.00
Leverage ratio, as defined under the Senior Credit Facility
  
2.55 to 1.00
  
Not greater than: 4.50 to 1.00
We were in compliance with our financial and non-financial covenants as of May 31, 2015.
Outlook
Short-term liquidity requirements consist primarily of recurring operating expenses, including but not limited to costs related to our capital and environmental expenditures, integration costs of the Rocketdyne Business, company-funded research and development expenditures, debt service requirements, and retirement benefit plans. We believe that our existing cash and cash equivalents and availability under our revolving credit facility will provide sufficient funds to meet our operating plan, which includes our CIP, for the next twelve months. The operating plan for this period provides for full operation of our businesses, and interest and principal payments on our debt. As of May 31, 2015, we had $153.6 million of available borrowings under our Senior Credit Facility. Based on our existing debt agreements, we were in compliance with our financial and non-financial covenants as of May 31, 2015. Our failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in the acceleration of the Senior Credit Facility, the Subordinated Credit Facility, the 7 1/8% Notes, and the 4 1/16% Debentures. 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 Subordinated Credit Facility, 7 1/8% Notes and 4 1/16% Debentures.
We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business, our growth strategy and to withstand unanticipated business volatility. We believe that cash generated from operations, together with our current levels of cash and investments as well as availability under our revolving credit facility, should be sufficient to maintain our ongoing operations, support working capital requirements, fund the CIP, and fund anticipated capital expenditures related to projected business growth. Our cash management strategy includes maintaining the flexibility to pay down debt and/or repurchase shares depending on economic and other conditions. In connection with the implementation of our cash management strategy, our management may seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise if we believe that it is in our best interests. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
As disclosed in Notes 7(a) and 7(b) of the Notes to Unaudited Condensed 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, or cash flows.
Major factors that could adversely impact our forecasted operating cash and our financial condition are described in the section “Risk Factors” in Item 1A of our Annual Report to the SEC on Form 10-K for the fiscal year ended November 30, 2014. 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.
Forward-Looking Statements
Certain information contained in this report 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 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 our Annual Report to the SEC on Form 10-K for the fiscal year ended November 30, 2014 include the following:

54


•
    future reductions or changes in U.S. government spending;
•
cancellation or material modification of one or more significant contracts;
•
negative audit of the Company's business by the U.S. government;
•
the difficulties to integrate the Rocketdyne Business into the Company's existing operations successfully or to realize the anticipated benefits of the acquisition including successful execution of the CIP plan;
•
ability to manage effectively the Company's expanded operations;
•
ability to manage effectively the Company's leverage and debt service obligations;
•
the Company's international sales are subject to applicable laws relating to export controls, the violation of which could adversely affect its operations;
•
cost overruns on the Company's contracts that require the Company to absorb excess costs;
•
Antares ORB-3 launch failure may result in the termination of the AJ-26 supply contract and the Company may face significant damage claims;
•
failure of the Company's subcontractors or suppliers to perform their contractual obligations;
•
failure to secure contracts;
•
failure to comply with regulations applicable to contracts with the U.S. government;
•
failure to comply with applicable laws, including laws relating to export controls and anti-corruption or bribery laws;
•
costs and time commitment related to potential acquisition activities;
•
the Company's inability to adapt to rapid technological changes;
•
failure of the Company's information technology infrastructure including a successful cyber-attack, accident or security breach that could result in disruptions to the Company's operations;
•
product failures, schedule delays or other problems with existing or new products and systems;
•
the release, or explosion, or unplanned ignition of dangerous materials used in the Company's businesses;
•
loss of key qualified suppliers of technologies, components, and materials;
•
the funded status of the Company's defined benefit pension plan and the Company's obligation to make cash contributions in excess of the amount that the Company can recover in its current period overhead rates;
•
effects of changes in discount rates and actuarial estimates, actual returns on plan assets, and government regulations on defined benefit pension plans;
•
the possibility that environmental and other government regulations that impact the Company become more stringent or subject the Company to material liability in excess of its established reserves;
•
environmental claims related to the Company's current and former businesses and operations including the inability to protect or enforce previously executed environmental agreements;
•
reductions in the amount recoverable from environmental claims;
•
the results of significant litigation;
•
occurrence of liabilities that are inadequately covered by indemnity or insurance;
•
inability to protect the Company's patents and proprietary rights;
•
business disruptions to the extent not covered by insurance;
•
the earnings and cash flows of the Company's subsidiaries and the distribution of those earnings to the Company;
•
the substantial amount of debt which places significant demands on the Company's cash resources and could limit the Company's ability to borrow additional funds or expand its operations;
•
the Company's ability to comply with the financial and other covenants contained in the Company's debt agreements;
•
risks inherent to the real estate market;
•
changes in economic and other conditions in the Sacramento, California metropolitan area real estate market or changes in interest rates affecting real estate values in that market;
•
additional costs related to the Company's discontinued operations;
•
the loss of key employees and shortage of available skilled employees to achieve anticipated growth;
•
a strike or other work stoppage or the Company's inability to renew collective bargaining agreements on favorable terms;
•
fluctuations in sales levels causing the Company's quarterly operating results and cash flows to fluctuate;
•
failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act; and
•
those risks detailed in the Company's reports filed with the SEC.

55


Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our disclosures related to certain market risks as reported under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report to the SEC on Form 10-K for the fiscal year ended November 30, 2014.
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 and Subordinated Credit Facility. Other than pension assets and liabilities, we do not have any significant exposure to interest rate risk related to our investments.
As of May 31, 2015, our debt totaled $717.9 million: $558.6 million, or 78%, was at an average fixed rate of 6.59%; and $159.3 million, or 22%, was at a variable rate of 5.28%.
The estimated fair value and principal amount of our outstanding debt is presented below:
 
Fair Value
 
Principal Amount
 
May 31, 2015
 
November 30, 2014
 
May 31, 2015
 
November 30, 2014
 
(In millions)
Term loan
$
96.3

 
$
98.8

 
$
96.3

 
$
98.8

7 1/8% Notes
494.5

 
483.6

 
460.0

 
460.0

4 1/16% Debentures
224.5

 
248.2

 
97.8

 
133.6

Delayed draw term loan
63.0

 
89.0

 
63.0

 
89.0

Other debt
0.7

 
0.8

 
0.8

 
0.8

 
$
879.0

 
$
920.4

 
$
717.9

 
$
782.2

The fair values of the 7 1/8% Notes and 4 1/16% Debentures were determined using broker quotes that are based on open markets of our debt securities as of May 31, 2015 and November 30, 2014. The fair value of the term loans and other debt was determined to approximate carrying value.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Management has conducted an evaluation (with the participation of our Chief Executive Officer and Chief Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of May 31, 2015. The Company previously reported material weaknesses in internal control over financial reporting related to the incomplete integration of the Rocketdyne Business into the Company’s primary accounting system and internal control framework. As a result of these material weaknesses in the Company’s internal control over financial reporting, which were not remediated as of May 31, 2015, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of May 31, 2015.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure as of the end of the period covered by this report.
Remediation of Material Weaknesses
Management is in the process of improving and strengthening the internal controls related to the above matter, including: (i) effective January 1, 2015, the Company transitioned its Rocketdyne Business from a third party hosted enterprise resource planning (“ERP”) system and third party transition services agreement (“TSA”) to the Company’s Oracle ERP system and internal shared services business processes; (ii) began an examination and modification, where necessary, of existing policies and procedures to identify areas where more explicit guidance is required to clearly define roles and responsibilities between the Aerojet Rocketdyne parent and the Rocketdyne Business; and, (iii) began an assessment of existing policies and practices and related internal controls with respect to the extent and precision of controls impacting contractual balance sheet accounts. Notwithstanding the above process, the identified material weaknesses in our internal control over financial reporting will not

56


be considered remediated until the new controls are fully implemented, in operation for a sufficient period of time, tested and concluded by management to be designed and operating effectively.
Changes in internal control over financial reporting
The Rocketdyne Business was integrated into the Company’s Oracle ERP system and internal shared services business processes effective January 1, 2015. As a result, the Rocketdyne Business operated with internal controls applicable to the third party hosting and TSA arrangement for the first month of the first quarter of fiscal 2015 and under the integrated shared services control structure for the remaining five months of the first half of fiscal 2015.
Other than the changes associated with the integration of the Rocketdyne Business, there were no material changes in internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially, or is reasonably likely to materially affect, the effectiveness of our internal controls over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Except as disclosed in Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements, which is incorporated herein by reference, there have been no significant developments in the pending legal proceedings as previously reported in Part 1, Item 3, Legal Proceedings in our Annual Report on Form 10-K for the fiscal year ended November 30, 2014.

Asbestos Cases. The following table sets forth information related to our historical product liability costs associated with our asbestos litigation cases for the first half of fiscal 2015:
Claims filed as of November 30, 2014
117

Claims filed
4

Claims dismissed
38

Claims pending as of May 31, 2015
83

Item 1A. Risk Factors
The information presented below sets forth what we reasonably believe represent material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended November 30, 2014, and should be read in conjunction with the risk factors therein and the information described in this Quarterly Report.
Our business and operations would be adversely impacted in the event of a failure of our information technology infrastructure or adversely impacted by a successful cyber-attack.
As a U.S. defense contractor, we face cyber threats, insider threats, threats to the physical security of our facilities and employees, and terrorist acts, as well as the potential for business disruptions associated with information technology failures, natural disasters, or public health crises.
We routinely experience cyber security threats, threats to our information technology infrastructure and unauthorized attempts to gain access to our sensitive information, as do our customers, suppliers, and subcontractors. We may experience similar security threats at customer sites that we operate and manage as a contractual requirement.
Prior cyber attacks directed at us have not had a material impact on our financial results, however this may not continue to be the case in the future. In June 2015, a cyber security assessment analysis undertaken by us identified and prioritized steps to enhance our cyber security safeguards. We are in the process of implementing these recommendations to enhance our threat detection and mitigation processes and procedures. Despite the implementation of these new safeguards, there can be no assurance that we will be adequately protecting our information or that we will not experience any future successful attacks. The threats we face vary from attacks common to most industries to more advanced and persistent, highly organized adversaries who target us because we protect national security information. If we are unable to protect sensitive information, our customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures. Due to the evolving nature of these security threats, however, the impact of any future incident cannot be predicted.
Although we work cooperatively with our customers, suppliers, and subcontractors to seek to minimize the impact of cyber threats, other security threats or business disruptions, we must rely on the safeguards put in place by these entities, which may affect the security of our information. These entities have varying levels of cyber security expertise and safeguards and their relationships with U.S. government contractors, such as Aerojet Rocketdyne, may increase the likelihood that they are targeted by the same cyber threats we face.
The DoD and NASA have contract provisions that require contractors at the prime and subcontract level to comply with Safeguarding of Unclassified Controlled Technical Information in accordance with their agency guidelines.  These clauses are

57


being inserted in or made applicable to government contracts and non-compliance may impact our ability to receive contracts if we cannot comply or use alternative approaches to comply with the contract information security requirements.
We may be required to expend significant additional resources to modify our cyber security protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications, and we may be subject to litigation and financial losses. These costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means. Occurrence of any of these events could adversely affect our internal operations, the services we provide to our customers, our future financial results, our reputation or our stock price; or such events could result in the loss of competitive advantages derived from our research and development efforts or other intellectual property, early obsolescence of our products and services, or contractual penalties.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Between March 11, 2015 and March 30, 2015, the Company issued an aggregate of 0.2 million shares of the Company’s common stock, par value $0.10 (the “Common Stock”), in connection with the conversion of $1.5 million aggregate principal amount of the 4 1/16% Debentures, which 4 1/16% Debentures were surrendered for conversion pursuant to the terms of the indenture governing the 4 1/16% Debentures. The conversion rate provided under the terms of the 4 1/16% Debentures was 111.0926 shares of Common Stock per $1,000 principal amount of the 4 1/16% Debentures, equivalent to a conversion price of approximately $9.00 per share of Common Stock.

The issuance of Common Stock was made pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), provided by Section 3(a)(9) of the Securities Act.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine safety disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
No.
  
Description
 
 
31.1*
  
Certification of Principal Executive Officer pursuant to Rule 13a — 14 (a) of the Securities Exchange Act of 1934, as amended.
31.2*
  
Certification of Principal Financial Officer pursuant to Rule 13a — 14 (a) of the Securities Exchange Act of 1934, as amended.
32.1*
  
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a — 14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  101*
  
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) Unaudited Condensed Consolidated Statements of Operations, (ii) Unaudited Condensed Consolidated Statements of Comprehensive Income, (iii) Unaudited Condensed Consolidated Balance Sheets, (iv) Unaudited Condensed Consolidated Statement of Stockholders’ Deficit, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Unaudited Notes to Unaudited Condensed Consolidated Financial Statements.
* Filed herewith.

58


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
Aerojet Rocketdyne Holdings, Inc.
 
 
 
 
Date:
July 10, 2015
By:
 
/s/ Eileen P. Drake
 
 
 
 
Eileen P. Drake
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
Date:
July 10, 2015
By:
 
/s/ Kathleen E. Redd
 
 
 
 
Kathleen E. Redd Vice President, Chief Financial Officer and Assistant Secretary (Principal Financial Officer and
Principal Accounting Officer)


59


EXHIBIT INDEX
No.
  
Description
 
 
31.1*
  
Certification of Principal Executive Officer pursuant to Rule 13a — 14 (a) of the Securities Exchange Act of 1934, as amended.
31.2*
  
Certification of Principal Financial Officer pursuant to Rule 13a — 14 (a) of the Securities Exchange Act of 1934, as amended.
32.1*
  
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a — 14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  101*
  
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) Unaudited Condensed Consolidated Statements of Operations, (ii) Unaudited Condensed Consolidated Statements of Comprehensive Income, (iii) Unaudited Condensed Consolidated Balance Sheets, (iv) Unaudited Condensed Consolidated Statement of Stockholders’ Deficit, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Unaudited Notes to Unaudited Condensed Consolidated Financial Statements.
_______
* Filed herewith.



60