AEROJET ROCKETDYNE HOLDINGS, INC. - FORM 10-Q - October 10, 2014

Attached files

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EX-10.5 - EX-10.5 - AEROJET ROCKETDYNE HOLDINGS, INC.exhibt105.htm
EX-10.1 - EX-10.1 - AEROJET ROCKETDYNE HOLDINGS, INC.exhibit101.htm
EX-10.6 - EX-10.6 - AEROJET ROCKETDYNE HOLDINGS, INC.exhibit106.htm
EX-10.3 - EX-10.3 - AEROJET ROCKETDYNE HOLDINGS, INC.exhibit103.htm
EX-32.1 - EX-32.1 - AEROJET ROCKETDYNE HOLDINGS, INC.exhibit321.htm
EX-31.1 - EX-31.1 - AEROJET ROCKETDYNE HOLDINGS, INC.exhibit311.htm
EX-31.2 - EX-31.2 - AEROJET ROCKETDYNE HOLDINGS, INC.exhibit312.htm
EX-10.4 - EX-10.4 - AEROJET ROCKETDYNE HOLDINGS, INC.exhibit104.htm
EX-10.2 - EX-10.2 - AEROJET ROCKETDYNE HOLDINGS, INC.exhibit102.htm
EXCEL - IDEA: XBRL DOCUMENT - AEROJET ROCKETDYNE HOLDINGS, INC.Financial_Report.xls


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: August 31, 2014
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
  GenCorp 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 September 30, 2014, there were 58.8 million outstanding shares of our Common Stock, including redeemable common stock and unvested common shares, $0.10 par value.



GenCorp Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended August 31, 2014
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
GenCorp Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three months ended August 31,
 
Nine months ended August 31,
 
2014
 
2013
 
2014
 
2013
 
(In millions, except per share amounts)
Net sales
$
419.5

 
$
367.5

 
$
1,152.3

 
$
897.8

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales (exclusive of items shown separately below)
374.2

 
326.7

 
1,027.2

 
798.6

Selling, general and administrative
9.7

 
14.1

 
28.1

 
39.9

Depreciation and amortization
15.7

 
15.2

 
45.9

 
26.6

Other expense, net:
 
 
 
 
 
 
 
Loss on debt repurchased
9.8

 
—

 
60.6

 
—

Other
6.5

 
8.1

 
11.6

 
24.5

Total operating costs and expenses
415.9

 
364.1

 
1,173.4

 
889.6

Operating income (loss)
3.6

 
3.4

 
(21.1
)
 
8.2

Non-operating (income) expense:
 
 
 
 
 
 
 
Interest income
—

 
—

 
—

 
(0.2
)
Interest expense
14.0

 
12.4

 
39.0

 
36.2

Total non-operating expense, net
14.0

 
12.4

 
39.0

 
36.0

Loss from continuing operations before income taxes
(10.4
)
 
(9.0
)
 
(60.1
)
 
(27.8
)
Income tax (benefit) provision
(0.7
)
 
(206.6
)
 
1.1

 
(199.6
)
(Loss) income from continuing operations
(9.7
)
 
197.6

 
(61.2
)
 
171.8

Income (loss) from discontinued operations, net of income taxes
0.2

 
(0.2
)
 
(0.6
)
 
(0.2
)
Net (loss) income
$
(9.5
)
 
$
197.4

 
$
(61.8
)
 
$
171.6

(Loss) Income Per Share of Common Stock
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
(Loss) income per share from continuing operations
$
(0.17
)
 
$
3.25

 
$
(1.05
)
 
$
2.83

Loss per share from discontinued operations, net of income taxes
—

 
—

 
(0.01
)
 
—

Net (loss) income per share
$
(0.17
)
 
$
3.25

 
$
(1.06
)
 
$
2.83

Diluted
 
 
 
 
 
 
 
(Loss) income per share from continuing operations
$
(0.17
)
 
$
2.39

 
$
(1.05
)
 
$
2.13

Loss per share from discontinued operations, net of income taxes
—

 
—

 
(0.01
)
 
—

Net (loss) income per share
$
(0.17
)
 
$
2.39

 
$
(1.06
)
 
$
2.13

Weighted average shares of common stock outstanding, basic
56.9

 
59.7

 
58.2

 
59.5

Weighted average shares of common stock outstanding, diluted
56.9

 
82.1

 
58.2

 
81.9

See Notes to Unaudited Condensed Consolidated Financial Statements.

2


GenCorp Inc.
Condensed Consolidated Statements of Comprehensive (Loss) Income
(Unaudited)
 
 
Three months ended August 31,
 
Nine months ended August 31,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Net (loss) income
$
(9.5
)
 
$
197.4

 
$
(61.8
)
 
$
171.6

Other comprehensive income:
 
 
 
 
 
 
 
Amortization of actuarial losses and prior service credits, net of income taxes
7.5

 
23.0

 
22.7

 
68.8

Comprehensive (loss) income
$
(2.0
)
 
$
220.4

 
$
(39.1
)
 
$
240.4

See Notes to Unaudited Condensed Consolidated Financial Statements.

3


GenCorp Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
August 31,
2014
 
November 30,
2013
 
(In millions, except per share and share amounts)
ASSETS
Current Assets
 
 
 
Cash and cash equivalents
$
154.9

 
$
197.6

Accounts receivable
214.7

 
214.1

Inventories
132.3

 
105.9

Recoverable from the U.S. government and other third parties for environmental remediation costs
20.1

 
20.4

Receivable from Northrop Grumman Corporation (“Northrop”)
6.0

 
6.0

Other receivables, prepaid expenses and other
26.7

 
22.4

Income taxes
13.4

 
12.6

Deferred income taxes
4.0

 
17.0

Total Current Assets
572.1

 
596.0

Noncurrent Assets
 
 
 
Property, plant and equipment, net
370.6

 
374.7

Real estate held for entitlement and leasing
87.3

 
80.2

Recoverable from the U.S. government and other third parties for environmental remediation costs
83.6

 
88.7

Receivable from Northrop
74.0

 
72.0

Deferred income taxes
180.0

 
175.7

Goodwill
164.4

 
159.6

Intangible assets
125.6

 
135.7

Other noncurrent assets, net
92.1

 
72.7

Total Noncurrent Assets
1,177.6

 
1,159.3

Total Assets
$
1,749.7

 
$
1,755.3

LIABILITIES, REDEEMABLE COMMON STOCK, AND SHAREHOLDERS’ (DEFICIT) EQUITY
Current Liabilities
 
 
 
Short-term borrowings and current portion of long-term debt
$
5.5

 
$
2.9

Accounts payable
115.4

 
122.5

Reserves for environmental remediation costs
35.0

 
36.6

Postretirement medical and life insurance benefits
7.2

 
7.3

Advance payments on contracts
122.4

 
104.4

Other current liabilities
216.4

 
206.0

Total Current Liabilities
501.9

 
479.7

Noncurrent Liabilities
 
 
 
Senior debt
95.0

 
42.5

Second-priority senior notes
460.0

 
460.0

Convertible subordinated notes
133.6

 
193.2

Other debt
89.4

 
0.6

Reserves for environmental remediation costs
133.6

 
134.7

Pension benefits
248.3

 
261.7

Postretirement medical and life insurance benefits
57.1

 
59.3

Other noncurrent liabilities
79.3

 
73.8

Total Noncurrent Liabilities
1,296.3

 
1,225.8

Total Liabilities
1,798.2

 
1,705.5

Commitments and contingencies (Note 8)

 

Redeemable common stock, par value of $0.10; less than 0.1 million shares issued and outstanding as of August 31, 2014 and November 30, 2013
0.2

 
0.2

Shareholders’ (Deficit) Equity
 
 
 
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; 56.9 million shares issued and outstanding as of August 31, 2014; 59.9 million shares issued and outstanding as of November 30, 2013
5.9

 
5.9

Other capital
285.4

 
280.1

Treasury stock at cost, 3.5 million shares as of August 31, 2014
(64.5
)
 
—

Accumulated deficit
(75.8
)
 
(14.0
)
Accumulated other comprehensive loss, net of income taxes
(199.7
)
 
(222.4
)
Total Shareholders’ (Deficit) Equity
(48.7
)
 
49.6

Total Liabilities, Redeemable Common Stock and Shareholders’ (Deficit) Equity
$
1,749.7

 
$
1,755.3

See Notes to Unaudited Condensed Consolidated Financial Statements.

4


GenCorp Inc.
Condensed Consolidated Statement of Shareholders’ Equity (Deficit)
(Unaudited) 
 
Common Stock
 
 
 
 
 
 
 
Accumulated Other
 
Total Shareholders'
 
 
 
Other
Capital
 
Treasury
Stock
 
Accumulated
Deficit
 
Comprehensive
Loss
 
Equity
(Deficit)
 
Shares
 
Amount
 
 
(In millions)
November 30, 2013
59.9

 
$
5.9

 
$
280.1

 
$
—

 
$
(14.0
)
 
$
(222.4
)
 
$
49.6

Net loss
—

 
—

 
—

 
—

 
(61.8
)
 
—

 
(61.8
)
Amortization of actuarial losses and prior service credits, net of income taxes
—

 
—

 
—

 
—

 
—

 
22.7

 
22.7

Tax benefit from shares issued under equity plans
—

 
—

 
1.5

 
—

 
—

 
—

 
1.5

Purchase of treasury stock
(3.5
)
 
—

 
—

 
(64.5
)
 
—

 
—

 
(64.5
)
Stock-based compensation and other, net
0.5

 
—

 
3.8

 
—

 
—

 
—

 
3.8

August 31, 2014
56.9

 
$
5.9

 
$
285.4

 
$
(64.5
)
 
$
(75.8
)
 
$
(199.7
)
 
$
(48.7
)
See Notes to Unaudited Condensed Consolidated Financial Statements.

5


GenCorp Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine months ended August 31,
 
2014
 
2013
 
(In millions)
Operating Activities
 
 
 
Net (loss) income
$
(61.8
)
 
$
171.6

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Loss from discontinued operations, net of income taxes
0.6

 
0.2

Depreciation and amortization
45.9

 
26.6

Amortization of debt discount and financing costs
2.7

 
3.6

Stock-based compensation
4.5

 
9.7

Retirement benefit expense
26.7

 
48.5

Loss on debt repurchased
60.6

 
—

Loss on bank amendment
0.2

 
—

Loss on disposal of long-lived assets
2.5

 
0.1

Tax benefit on stock-based awards
(1.5
)
 
(0.1
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(0.8
)
 
(36.9
)
Inventories
(27.2
)
 
(46.5
)
Other receivables, prepaid expenses and other
(3.5
)
 
5.5

Income tax receivable
1.4

 
(1.8
)
Real estate held for entitlement and leasing
(7.7
)
 
(2.8
)
Receivable from Northrop
(2.0
)
 
(0.8
)
Recoverable from the U.S. government and other third parties for environmental remediation costs
5.4

 
13.7

Other noncurrent assets
(24.0
)
 
(0.9
)
Accounts payable
(7.1
)
 
32.0

Postretirement medical and life benefits
(4.2
)
 
(4.3
)
Advance payments on contracts
18.0

 
(14.5
)
Other current liabilities
10.9

 
42.9

Deferred income taxes
(6.1
)
 
(204.7
)
Reserves for environmental remediation costs
(2.7
)
 
(10.4
)
Other noncurrent liabilities
3.4

 
(4.1
)
Net cash provided by continuing operations
34.2

 
26.6

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

 
26.5

Investing Activities
 
 
 
Purchases of restricted cash investments
—

 
(470.0
)
Sale of restricted cash investments
—

 
470.0

Purchase of Rocketdyne Business
0.2

 
(411.2
)
Purchases of investments
—

 
(0.5
)
Capital expenditures
(31.9
)
 
(38.7
)
Net Cash Used in Investing Activities
(31.7
)
 
(450.4
)
Financing Activities
 
 
 
Proceeds from issuance of debt
189.0

 
460.0

Debt issuance costs
(4.2
)
 
(14.7
)
Debt repayments/repurchases
(165.0
)
 
(2.0
)
Proceeds from shares issued under equity plans, net
(1.9
)
 
0.3

Purchase of treasury stock
(64.5
)
 
—

Tax benefit on stock-based awards
1.5

 
0.1

Net Cash (Used in) Provided by Financing Activities
(45.1
)
 
443.7

Net (Decrease) Increase in Cash and Cash Equivalents
(42.7
)
 
19.8

Cash and Cash Equivalents at Beginning of Period
197.6

 
162.1

Cash and Cash Equivalents at End of Period
$
154.9

 
$
181.9

Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
$
27.8

 
$
16.0

Cash paid for income taxes
4.6

 
6.3

Conversion of debt to common stock
—

 
1.6

See Notes to Unaudited Condensed Consolidated Financial Statements.

6


GenCorp Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Basis of Presentation and Nature of Operations
GenCorp Inc. (“GenCorp” 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, 2013, 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 11,900 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”). The Rocketdyne Business was the largest liquid rocket propulsion designer, developer, and manufacturer in the U.S. On June 10, 2013, the Federal Trade Commission (“FTC”) announced that it closed its investigation into the Acquisition under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. 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 pending 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 is contingent upon certain conditions including receipt of certain Russian governmental regulatory approvals, which may not be obtained. Pursuant to the terms of the Amended and Restated Purchase Agreement, either party to such agreement may 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 (with the final termination date extended until June 12, 2015). Subject to the terms of the Amended and Restated Purchase Agreement, in order to extend the termination date, either party may request the extension by providing written notice

7


to the other party at least five business days prior to the termination date, provided that the requesting party must have a reasonable belief at the time such notice is given that a certain authorization for completion of the RDA Acquisition from the Russian government will be forthcoming. On September 2, 2014, the Company elected the second option to extend the terms of the Amended and Restated Purchase Agreement for three months. The final purchase price was further adjusted for changes in advance payments on contracts and capital expenditures (see Note 5).

On August 31, 2004, the Company completed the sale of its GDX Automotive (“GDX”) business. On November 30, 2005, the Company completed the sale of the Fine Chemicals business (see Note 12).
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. As a result of the 2013 calendar, Aerojet Rocketdyne had 13 weeks of operations in the first quarter of fiscal 2014 compared to 14 weeks of operations in the first quarter of fiscal 2013. The additional week of operations in the first quarter of fiscal 2013 accounted for $27.8 million in additional net sales.
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 85% of the Company’s net sales over the first nine months of fiscal 2014 and 2013, accounted for under the percentage-of-completion method of accounting:
 
 
Three months ended August 31,
 
Nine months ended August 31,
 
2014
 
2013
 
2014
 
2013
 
(In millions, except per share amounts)
(Unfavorable) favorable effect of the changes in contract estimates on loss from continuing operations before income taxes
$
(5.3
)
 
$
11.0

 
$
(8.2
)
 
$
20.4

(Unfavorable) favorable effect of the changes in contract estimates on net (loss) income
(2.3
)
 
9.5

 
(3.9
)
 
14.4

(Unfavorable) favorable effect of the changes in contract estimates on basic net (loss) income per share
(0.04
)
 
0.16

 
(0.07
)
 
0.24

(Unfavorable) favorable effect of the changes in contract estimates on diluted net (loss) income per share
(0.04
)
 
0.14

 
(0.07
)
 
0.24

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, 2013.
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. 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.

8


Recently Issued Accounting Pronouncement
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. This guidance is effective for the Company prospectively in the first quarter of fiscal 2016. 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 will only impact presentation, the new standard will not have an impact on the Company’s financial position, results of operations, or cash flows.
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 will not have an impact on the Company’s financial position, results of operations, or cash flows.



9


Note 2. (Loss) Income Per Share of Common Stock
A reconciliation of the numerator and denominator used to calculate basic and diluted (loss) income per share of common stock (“EPS”) is presented in the following table:
 
Three months ended August 31,
 
Nine months ended August 31,
 
2014
 
2013
 
2014
 
2013
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(9.7
)
 
$
197.6

 
$
(61.2
)
 
$
171.8

Income (loss) from discontinued operations, net of income taxes
0.2

 
(0.2
)
 
(0.6
)
 
(0.2
)
Net (loss) income
(9.5
)
 
197.4

 
(61.8
)
 
171.6

Income allocated to participating securities
—

 
(3.4
)
 
—

 
(3.3
)
Net (loss) income for basic earnings per share
(9.5
)
 
194.0

 
(61.8
)
 
168.3

Interest on convertible subordinated debentures
—

 
2.0

 
—

 
6.1

Net (loss) income for diluted earnings per share
(9.5
)
 
196.0

 
(61.8
)
 
174.4

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares
56.9

 
59.7

 
58.2

 
59.5

Effect of:
 
 
 
 
 
 
 
  Convertible subordinated notes
—

 
22.2

 
—

 
22.2

  Employee stock options
—

 
0.2

 
—

 
0.2

Diluted weighted average shares
56.9

 
82.1

 
58.2

 
81.9

Basic
 
 
 
 
 
 
 
(Loss) income per share from continuing operations
$
(0.17
)
 
$
3.25

 
$
(1.05
)
 
$
2.83

Loss per share from discontinued operations, net of income taxes
—

 
—

 
(0.01
)
 
—

Net (loss) income per share
$
(0.17
)
 
$
3.25

 
$
(1.06
)
 
$
2.83

Diluted
 
 
 
 
 
 
 
(Loss) income per share from continuing operations
$
(0.17
)
 
$
2.39

 
$
(1.05
)
 
$
2.13

Loss per share from discontinued operations, net of income taxes
—

 
—

 
(0.01
)
 
—

Net (loss) income per share
$
(0.17
)
 
$
2.39

 
$
(1.06
)
 
$
2.13

The following table sets forth the potentially dilutive securities excluded from the computation because their effect would have been anti-dilutive: 
 
Three months ended August 31,
 
Nine months ended August 31,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
4.0625% Convertible Subordinated Debentures (“4 1/16% Debentures”)
15.4

 
—

 
18.9

 
—

Employee stock options
0.2

 
—

 
0.2

 
—

Unvested restricted shares
1.9

 
1.0

 
1.6

 
1.1

Total potentially dilutive securities
17.5

 
1.0

 
20.7

 
1.1


10


Note 3. Stock-Based Compensation
Total stock-based compensation expense by type of award for the third quarter and first nine months of fiscal 2014 and 2013 was as follows:
 
 
Three months ended August 31,
 
Nine months ended August 31,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Stock appreciation rights
$
(0.6
)
 
$
1.3

 
$
(1.1
)
 
$
6.0

Stock options
0.1

 
0.3

 
0.2

 
0.3

Restricted shares, service based
1.0

 
0.5

 
3.2

 
1.7

Restricted shares, performance based
1.0

 
1.3

 
2.2

 
1.7

Total stock-based compensation expense
$
1.5

 
$
3.4

 
$
4.5

 
$
9.7


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 in 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 August 31, 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
$
147.2

 
$
147.2

 
$
—

 
$
—

 
 
 
Fair value measurement at November 30, 2013
 
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
$
174.4

 
$
174.4

 
$
—

 
$
—

As of August 31, 2014, 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
$
154.9

 
$
19.2

 
$
135.7

Grantor trust (included as a component of other current and noncurrent assets)
11.5

 
—

 
11.5

 
$
166.4

 
$
19.2

 
$
147.2

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.

11


The estimated fair value and principal amount for the Company’s outstanding debt is presented below:
 
Fair Value
 
Principal Amount
 
August 31, 2014
 
November 30, 2013
 
August 31, 2014
 
November 30, 2013
 
(In millions)
Term loan
$
100.0

 
$
45.0

 
$
100.0

 
$
45.0

7.125% Second-Priority Senior Secured Notes due 2021 (the “7 1/8% Notes”)
495.9

 
494.5

 
460.0

 
460.0

4  1/16% Debentures
275.2

 
398.1

 
133.6

 
193.2

Delayed draw term loan
89.0

 
—

 
89.0

 
—

Other debt
0.9

 
1.0

 
0.9

 
1.0

 
$
961.0

 
$
938.6

 
$
783.5

 
$
699.2

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 August 31, 2014 and November 30, 2013 (both Level 2 securities). The fair value of the term loans and other debt was determined to approximate carrying value.

b. Accounts Receivable

August 31, 2014

November 30, 2013
 
(In millions)
Billed
$
78.4


$
96.3

Unbilled
153.3


138.0

Reserve for overhead rate disallowance
(17.4
)

(20.5
)
Total receivables under long-term contracts
214.3


213.8

Other receivables
0.4


0.3

Accounts receivable
$
214.7


$
214.1

c. Inventories

August 31, 2014

November 30, 2013
 
(In millions)
Long-term contracts at average cost
$
426.9


$
347.7

Progress payments
(296.0
)

(242.4
)
Total long-term contract inventories
130.9


105.3

Total other inventories
1.4


0.6

Inventories
$
132.3


$
105.9


12


d. Property, Plant and Equipment, net
 
August 31, 2014
 
November 30, 2013
 
(In millions)
Land
$
67.2


$
67.2

Buildings and improvements
275.4


219.5

Machinery and equipment
474.0


464.7

Construction-in-progress
37.0


76.1


853.6


827.5

Less: accumulated depreciation
(483.0
)

(452.8
)
Property, plant and equipment, net
$
370.6


$
374.7

e. Goodwill
The goodwill balance at August 31, 2014 relates to the Company’s Aerospace and Defense segment. The changes in the carrying amount of goodwill since November 30, 2013 were as follows (in millions):
November 30, 2013
$
159.6

Purchase accounting adjustments related to Rocketdyne Business acquisition
4.8

August 31, 2014
$
164.4

The purchase accounting adjustments recorded during the first nine months of fiscal 2014 were during the measurement period of the assets acquired and liabilities assumed related to the Rocketdyne Business acquisition and had no impact on the Company’s unaudited condensed consolidated statement of operations.

f. Other Noncurrent Assets, net

August 31, 2014

November 30, 2013
 
(In millions)
Recoverable from the U.S. government for restructuring costs
$
34.9


$
13.3

Deferred financing costs
19.3


18.3

Recoverable from the U.S. government for conditional asset retirement obligations
17.1


15.6

Grantor trust
11.6


11.4

Indemnification receivable from UTC
6.8


10.0

Other
2.4


4.1

Other noncurrent assets, net
$
92.1


$
72.7

g. Other Current Liabilities
 
August 31, 2014
 
November 30, 2013
 
(In millions)
Accrued compensation and employee benefits
$
102.4


$
97.4

Payable to UTC primarily for Transition Service Agreements
12.0


20.4

Interest payable
20.3


12.3

Contract loss provisions
15.0


10.5

Other
66.7


65.4

Other current liabilities
$
216.4


$
206.0


13


h. Other Noncurrent Liabilities
 
August 31, 2014
 
November 30, 2013
 
(In millions)
Conditional asset retirement obligations
$
23.9


$
22.9

Pension benefits, non-qualified
17.0


17.2

Deferred compensation
11.7


9.8

Deferred revenue
7.6


8.0

Other
19.1


15.9

Other noncurrent liabilities
$
79.3


$
73.8

i. Accumulated Other Comprehensive Loss, Net of Income Taxes
Changes in accumulated other comprehensive loss by components, net of $14.8 million of income taxes, related to the Company’s retirement benefit plans are as follows:

Actuarial
Losses, Net

Prior Service
Credits, Net

Total
 
(In millions)
November 30, 2013
$
(226.2
)

$
3.8


$
(222.4
)
Amortization of actuarial losses and prior service credits, net of income taxes
23.1


(0.4
)

22.7

August 31, 2014
$
(203.1
)

$
3.4


$
(199.7
)

j. 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 August 31, 2014 and November 30, 2013, the Company has classified less than 0.1 million shares 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 GenCorp Stock Fund in the Plan. During the first nine months of fiscal 2014 and fiscal 2013, the Company recorded $0.2 million and ($0.3) million for realized losses/(gains) and interest associated with this matter, respectively.
k. Treasury Stock
During the first nine months of 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. Acquisition
In July 2012, the Company signed the Original Purchase Agreement with UTC to acquire the Rocketdyne Business from UTC for $550.0 million. On June 10, 2013, the FTC announced that it closed its investigation into the Acquisition under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. On June 12, 2013, the Company entered into an Amended and Restated Purchase Agreement with UTC, 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 $411.0 million which represents the initial purchase price of $550.0 million reduced by $55.0 million relating to the pending future acquisition of UTC’s 50% ownership interest of RD Amross (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 final purchase price was further adjusted for changes in

14


advance payments on contracts and capital expenditures. The components of the purchase price to UTC are as follows (in millions):
 
Purchase Price
$
495.0

Advance payments on contracts adjustment
(55.7
)
Capital expenditures adjustment
(28.3
)
Cash payment to UTC
$
411.0

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):
Current assets
$
105.0

Property, plant and equipment, net
203.8

Other non-current assets
4.2

Total tangible assets acquired
313.0

Intangible assets acquired
128.3

Deferred income taxes
12.9

Total assets acquired
454.2

Liabilities assumed, current
(105.5
)
Liabilities assumed, non-current
(7.2
)
Total identifiable net assets acquired
341.5

Goodwill (Cash payment less total identifiable net assets acquired)
$
69.5

The purchase price allocation resulted in the recognition of $69.5 million in goodwill, all of which is deductible for tax purposes and included within the Company’s Aerospace and Defense segment. Goodwill recognized from the Acquisition primarily relates to the expected contributions of the Rocketdyne Business to the Company’s overall corporate strategy.

The Company has a $7.3 million and $12.0 million indemnification receivable from and payable to UTC, respectively, as of August 31, 2014. Pursuant to the terms of the Amended and Restated Purchase Agreement, the Company is indemnified for certain matters.
The unaudited pro forma information for the periods set forth below gives effect to the Acquisition as if it had occurred at the beginning of fiscal 2013. These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of the Rocketdyne Business to reflect depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied as at the beginning of fiscal 2013, together with the tax effects, as applicable. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the Acquisition been consummated as of that time or that may result in the future. The pro forma information for the third quarter and first nine months of fiscal 2013 is presented below:

15



Three months ended

Nine months ended
 
August 31,
2013

August 31,
2013
 
(In millions, except per share amounts)
Net sales:



As reported
$
367.5


$
897.8

Pro forma
$
367.5


$
1,277.4

Net income:



As reported
$
197.4


$
171.6

Pro forma
$
13.2


$
26.7

Basic income per share



As reported
$
3.25


$
2.83

Pro forma
$
0.22


$
0.44

Diluted income per share



As reported
$
2.39


$
2.13

Pro forma
$
0.18


$
0.39

Note 6. Income Taxes
The income tax provision for the first nine months of fiscal 2014 and 2013 was as follows:
 
Nine months ended August 31,
 
2014
 
2013
 
(In millions)
Federal and state current income tax expense
$
5.4


$
9.6

Net deferred benefit
(5.5
)

(207.2
)
Impact of change in research credit estimates
1.2


(2.0
)
Income tax provision (benefit)
$
1.1


$
(199.6
)
Cash paid for income taxes
$
4.6


$
6.3

The effective tax rate for the first nine months of fiscal 2014 is (1.8)% and differs from the federal statutory rate of 35% primarily due to the significant non-deductible premium on the 4 1/16% Debentures repurchased during the first nine months of fiscal 2014, which the Company has treated for tax purposes as a non-recurring, discrete event due to the inability to accurately estimate an annualized total, as well as the impacts from state income taxes, changes in estimates related to the fiscal 2012 research and development credits, and certain expenditures which are permanently not deductible for tax purposes. The effective benefit tax rate for the first nine months of fiscal 2013 was 718.0% and differs from the federal statutory tax rate of 35% primarily as a result of releasing a valuation allowance of $188.6 million in the third quarter of fiscal 2013 for previously provided for deferred tax assets.     
As of August 31, 2014, the total liability for uncertain income tax positions, including accrued interest and penalties, was $8.0 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. It is reasonably possible that a reduction of up to $0.3 million of unrecognized tax benefits and related interest may occur within the next 12 months as a result of the expiration of certain statute of limitations.


16


Note 7. Long-term Debt
 
August 31, 2014
 
November 30, 2013
 
(In millions)
Term loan, bearing interest at variable rates (rate of 2.74% as of August 31, 2014), payable in quarterly installments of $1.3 million plus interest, maturing in May 2019
$
100.0


$
45.0

Total senior debt
100.0


45.0

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
133.6


193.2

Total convertible subordinated notes
133.8


193.4

Delayed draw term loan, bearing interest at variable rates (rate of 9.50% as of August 31, 2014), maturing in April 2022
89.0


—

Capital lease, payable in monthly installments, maturing in March 2017
0.7


0.8

Total other debt
89.7


0.8

Total debt
783.5


699.2

Less: Amounts due within one year
(5.5
)

(2.9
)
Total long-term debt
$
778.0


$
696.3

Senior Credit Facility
On November 18, 2011, the Company entered into the senior credit facility (the “Senior Credit Facility”) with the lenders identified therein and Wells Fargo Bank, National Association, as administrative agent, which replaced the Company’s prior credit facility.
On May 30, 2012, the Company executed an amendment (the “First Amendment”) to the Senior Credit Facility with the lenders identified therein, and Wells Fargo Bank, National Association, as administrative agent. The First Amendment, among other things, (1) provided for an incremental facility of up to $50.0 million through additional borrowings under the term loan facility and/or increases under the revolving credit facility, (2) provided greater flexibility with respect to the Company’s ability to incur indebtedness to support permitted acquisitions, and (3) increased the aggregate limitation on sale leasebacks from $20.0 million to $30.0 million during the term of the Senior Credit Facility.
On August 16, 2012, the Company executed an amendment (the “Second Amendment”) to the Senior Credit Facility with the lenders identified therein, and Wells Fargo Bank, National Association, as administrative agent. The Second Amendment, among other things, (1) allowed for the incurrence of up to $510 million of second lien indebtedness in connection with the Acquisition, and (2) provided for a committed delayed draw term loan facility of $50 million under which the Company was entitled to draw in connection with the Acquisition or up through August 9, 2013. This delayed draw term loan facility expired undrawn in August 2013.
On January 14, 2013, the Company, executed an amendment (the “Third Amendment”) to 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, GenCorp 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, GenCorp 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

17


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 August 31, 2014, the Company had $58.1 million outstanding letters of credit under the $100.0 million subfacility for standby letters of credit and had $100.0 million outstanding under the term loan facility.
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 fiscal periods 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
August 31, 2014
  
Required Ratios
Interest coverage ratio, as defined under the Senior Credit Facility
3.39 to 1.00
  
Not less than: 2.40 to 1.00
Leverage ratio, as defined under the Senior Credit Facility
3.75 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 August 31, 2014.
Delayed Draw Term Loan
On April 18, 2014, the Company entered into a subordinated delayed draw credit agreement (the “Subordinated Credit Facility”) with the lenders identified therein, and The Bank of New York Mellon, as administrative agent.
The Subordinated Credit Facility provides a term loan facility in an aggregate principal amount of up to $100.0 million. Outstanding indebtedness under the Subordinated Credit Facility may be voluntarily prepaid at any time, in whole or in part, in general without premium or penalty.

In general, borrowings under the Subordinated Credit Facility bear interest at a rate equal to the sum of (x) the greater of LIBOR and 1.00% per annum plus (y) 8.50%, or in the case of base rate loans, the base rate as it is defined in the credit agreement governing the Subordinated Credit Facility plus 7.50%.
The Company is subject to certain limitations under the Subordinated Credit Facility including the ability to incur additional debt, make certain investments and acquisitions, and make certain restricted payments, including stock repurchases

18


and dividends. The Subordinated Credit Facility does not have any financial maintenance covenants. The Subordinated 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.
As of August 31, 2014, the Company had $89.0 million outstanding under the term loan facility. The proceeds from the term loan facility were used to repurchase a portion of the outstanding 4  1/16% Debentures (see below).
4.0625% Convertible Subordinated Debentures
During the first nine months of fiscal 2014, the Company repurchased $59.6 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 nine months of fiscal 2014 is as follows (in millions):    
Principal amount repurchased
$
59.6

Cash repurchase price
(119.9
)
Write-off of deferred financing costs
(0.3
)
Loss on 4 1/16% Debentures repurchased
$
(60.6
)
As of August 31, 2014, the Company had $133.6 million outstanding principal of its 4  1/16% Debentures, convertible into 14.8 million of shares of common stock.
As of August 31, 2014, the Company classified the 4  1/16% Debentures as noncurrent liabilities. The Company had the unilateral option to pay the 4  1/16% Debentures holders in equity and has the intent and ability to settle the 4  1/16% Debentures in equity rather than the use of current assets or short term funding as of August 31, 2014.
Note 8. Commitments and Contingencies
a. Legal Matters
The Company and its subsidiaries are subject to legal proceedings, including litigation in U.S. federal and state courts, which arise out of, and are incidental to, the ordinary course of the Company’s on-going and historical businesses. The Company is also subject from time to time to governmental investigations by federal and state agencies. The Company cannot predict the outcome of such proceedings with any degree of certainty. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, 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 Pennsylvania. There were 125 asbestos cases pending as of August 31, 2014.
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 271 plaintiffs, 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. Aerojet Rocketdyne filed its answer to the

19


complaint denying AMEC’s allegations and discovery is ongoing. As of August 31, 2014, AMEC contends it has incurred approximately $2.7 million in past legal fees and expenses. The court has scheduled a trial date for May 18, 2015. No estimate of liability has been accrued for this matter as of August 31, 2014.
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 August 31, 2014, the aggregate range of these anticipated environmental costs was $168.6 million to $276.1 million and the accrued amount was $168.6 million. See Note 8(c) for a summary of the environmental reserve activity. Of these accrued liabilities, approximately 96% 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 relates 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 EPA by the end of 2014. A draft Remedial Investigation Report for the Island Operable Unit was submitted in January 2013 and Final Remedial Investigation Report is anticipated for fall 2014. The remaining operable units are under various stages of investigation.

20


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 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 August 31, 2014, the estimated range of anticipated costs discussed above for the Sacramento, California site was $130.2 million to $211.7 million and the accrued amount was $130.2 million included as a component of the Company’s environmental reserves. Expenditures associated with this matter are partially recoverable. See Note 8(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 period 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. 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. At this time, Reichhold has not indicated whether it intends to discontinue funding its interim allocation of Project Costs. If Reichhold stops paying, Aerojet Rocketdyne and the remaining Cooperating Respondents will be required to make up the Reichhold share. 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. On October 2, 2014, the parties reached an agreement in principle that would resolve disputes between Fairchild and the remaining Cooperating Respondents (including Aerojet Rocketdyne). The settlement, when final, will require Fairchild to consent to the Chubb settlement and receive payment of a portion of the Chubb settlement, will provide for the filing of a consolidated proof of claim on behalf of the Cooperating Respondents in the

21


Fairchild Liquidating Trust and would resolve the Fairchild Litigation. This agreement is subject to execution of final agreements, which, among other matters, will require approval of the bankruptcy court overseeing the Reichhold bankruptcy.
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 August 31, 2014, the estimated range of anticipated costs through the term of the Project Agreement for the BPOU site, which expires in 2017, was $23.8 million to $35.7 million and the accrued amount was $23.8 million included as a component of the Company’s environmental reserves. As the Company is unable to reasonably estimate the costs and expenses of this matter after the expiration of the Project Agreement, no reserve has been accrued for this matter for the period after such expiration. 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. Expenditures associated with this matter are partially recoverable. See Note 8(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. The restoration project performed by the group consisted of river dredging and land-filling river sediments with a total project cost in the range of approximately $47 million to $49 million, one half of which was funded through the Great Lakes Legacy Act and the net project costs to the PRP group was estimated at $23.5 million to $24.5 million. The dredging of the river that began in December 2009 has been completed. In February 2011, the parties reached an agreement on allocation. Still unresolved at this time is the actual NRD Assessment itself. In August 2013, the PRPs voted to accept the State and Federal Trustees’ proposal resolving the NRD Assessment and other claims which increased the Company’s share by $0.1 million. A Consent Decree must be negotiated and approved before the settlement becomes final. As of August 31, 2014, the estimated range of the Company’s share of anticipated costs for the NRD matter was $0.2 million to $0.5 million and the accrued amount was $0.2 million. 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. The Company intends to conduct further investigations of the site in accordance with the IDEM request. 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 August 31, 2014, the estimated range of the Company's share of anticipated costs for the Wabash, Indiana site was $0.8 million to $1.2 million and the accrued amount was $0.8 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

22


range is more probable. Accordingly, such estimates can change as the Company periodically evaluates and revises these estimates as new information becomes available. The Company cannot predict whether new information gained as projects progress will affect the estimated liability accrued. The timing of payment for estimated future environmental costs is influenced by a number of factors such as the regulatory approval process, and the time required 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, 2013
$
128.0


$
26.9


$
8.2

 
$
163.1

 
$
8.2

 
$
171.3

Additions
17.6


3.7


2.6

 
23.9

 
1.6

 
25.5

Expenditures
(15.4
)

(6.8
)

(2.8
)
 
(25.0
)
 
(3.2
)
 
(28.2
)
August 31, 2014
$
130.2


$
23.8


$
8.0


$
162.0


$
6.6


$
168.6

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 August 31, 2014
(16.9
)
Amount included as a component of reserves for environmental remediation costs in the unaudited condensed consolidated balance sheet as of August 31, 2014
(3.1
)
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 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 were therefore directly charged to the 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

23


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.
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 August 31, 2014
(105.7
)
Potential future cost reimbursements available (1)
84.0

Long-term receivable from Northrop in excess of the annual limitation included in the unaudited condensed consolidated balance sheet as of August 31, 2014
(74.0
)
Amounts recoverable from Northrop in future periods included as a component of recoverable from the U.S. government and other third parties for environmental remediation costs in the unaudited condensed consolidated balance sheet as of August 31, 2014
(10.0
)
Potential future recoverable amounts available under the Northrop Agreement
$
—

 
(1)
Includes the short-term receivable from Northrop of $6.0 million as of August 31, 2014.
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 $28.6 million of environmental remediation provision adjustments above the cumulative limitation under the Northrop Agreement through August 31, 2014. 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:
 
 
Estimated
Recoverable
Amounts Under
U.S. Government
Contracts
 
Expense
to
Unaudited
Condensed
Consolidated
Statement of
Operations
 
Total
Environmental
Reserve
Adjustments
 
(In millions)
Three months ended August 31, 2014
$
9.8

 
$
5.4

 
$
15.2

Three months ended August 31, 2013
3.7

 
1.9

 
5.6

Nine months ended August 31, 2014
17.5

 
8.0

 
25.5

Nine months ended August 31, 2013
5.3

 
5.4

 
10.7

Note 9. Arrangements with Off-Balance Sheet Risk
As of August 31, 2014, arrangements with off-balance sheet risk consisted of:
 
•
$58.1 million in outstanding commercial letters of credit expiring through September 2015, the majority of which may be renewed, primarily to collateralize obligations for environmental remediation and insurance coverage.
•
$43.7 million in outstanding surety bonds to satisfy indemnification obligations for environmental remediation coverage.
•
Up to $120.0 million aggregate in guarantees by GenCorp 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.

24


•
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: (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 10. Cost Reduction Plan
On January 30, 2014, the Company announced a cost reduction plan (the “Restructuring Plan”) which resulted in the reduction of the Company’s overall headcount by approximately 260 employees. In connection with the Restructuring Plan, 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 remaining liability as of August 31, 2014 is $0.6 million, which includes $0.4 million in payments to be made related to ongoing business volume and $0.2 million in payments to be made related to the acquisition of the Rocketdyne Business.
The costs of the Restructuring Plan related to ongoing business volume of $6.1 million were recovered as a component of overhead in the first nine months of fiscal 2014. These restructuring costs 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 related to the acquisition of the Rocketdyne Business, $3.0 million as of August 31, 2014, have been capitalized and recorded in other noncurrent assets in the unaudited condensed consolidated balance sheet. Such costs are reimbursable costs and will be allocated to the Company’s U.S. government contracts based on the Company’s planned integration savings exceeding its restructuring costs by a factor of at least two to one. The Company believes that the anticipated restructuring savings will exceed restructuring costs by a factor of at least two to one; therefore, the costs were deferred as the Company believes that subsequent recovery of said costs through the pricing of the Company’s products and services to the U.S. government is probable. The Company reviews on a quarterly basis the probability of recovery of these costs.
Note 11. Retirement Benefits
Pension Benefits
As of the last measurement date at November 30, 2013, the Company’s total defined benefit pension plan assets, total projected benefit obligations, and unfunded pension obligation for the tax-qualified pension plans were approximately $1,258.4 million, $1,538.6 million, and $261.7 million, respectively. The discount rate to value the pension benefits as of November 30, 2013 was 4.54%.
The Company does not expect to make any significant cash contributions to its U.S. government contractor business segment, Aerojet Rocketdyne, tax-qualified defined benefit pension plan until fiscal 2015, which are recoverable through the

25


Company’s U.S. government contracts. Additionally, the Company does not expect to make any significant cash contributions to the GenCorp tax-qualified defined benefit pension plan until fiscal 2018 or later, which are not recoverable through the Company’s U.S. government contracts. The Company estimates that approximately 91% of its unfunded pension obligation as of November 30, 2013 is related to Aerojet Rocketdyne which will be recoverable through its U.S. government contracts.

On July 6, 2012, the Moving Ahead for Progress in the 21st Century Act (“MAP-21”) was signed into law by the U.S. government. MAP-21, in part, provides temporary relief for employers who sponsor defined benefit pension plans related to funding contributions under the Employee Retirement Income Security Act of 1974. Specifically, MAP-21 implemented a 25-year average interest rate corridor around the 24-month interest rate used for purposes of determining minimum funding obligations. This relief deferred minimum required pension funding. On August 8, 2014, the Highway and Transportation Funding Act was signed into law, which enacts the pension provision that delays the widening of the interest corridor under MAP-21. This law is expected to increase the interest rates for the plan year beginning December 1, 2013 and decrease the minimum funding requirement for Pension Protection Act ("PPA").
The PPA requires underfunded pension plans to improve their funding ratios based on the funded status of the plan as of specified measurement dates through contributions or application of prepayment credits. As of the last measurement date at November 30, 2013, the Company has accumulated $30.6 million in prepayment credits as a result of advanced funding.
The funded status of the pension plans may be adversely affected by the investment experience of the plans’ assets, by any changes in U.S. law and by changes in the statutory interest rates used by tax-qualified pension plans in the U.S. to calculate funding requirements. Accordingly, if the performance of the Company’s plans’ 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 Aerojet Rocketdyne and GenCorp 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 August 31,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Service cost
$
2.2

 
$
1.7

 
$
0.1

 
$
—

Interest cost on benefit obligation
16.8

 
15.3

 
0.6

 
0.6

Assumed return on plan assets
(23.3
)
 
(24.1
)
 
—

 
—

Amortization of prior service credits
—

 
—

 
(0.2
)
 
(0.2
)
Recognized net actuarial losses (gains)
13.5

 
23.7

 
(0.8
)
 
(0.5
)
Retirement benefit expense (income)
$
9.2

 
$
16.6

 
$
(0.3
)
 
$
(0.1
)
 
Pension Benefits
 
Postretirement Medical and Life
Insurance Benefits
 
Nine months ended August 31,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Service cost
$
6.6

 
$
4.4

 
$
0.1

 
$
0.1

Interest cost on benefit obligation
50.3

 
45.7

 
1.9

 
1.8

Assumed return on plan assets
(69.7
)
 
(72.3
)
 
—

 
—

Amortization of prior service credits
—

 
—

 
(0.6
)
 
(0.6
)
Recognized net actuarial losses (gains)
40.4

 
71.0

 
(2.3
)
 
(1.6
)
Retirement benefit expense (income)
$
27.6

 
$
48.8

 
$
(0.9
)
 
$
(0.3
)

26


Note 12. Discontinued Operations
On August 31, 2004, the Company completed the sale of its GDX business. On November 30, 2005, the Company completed the sale of the Fine Chemicals business. Summarized financial information for discontinued operations is set forth below:
 
Three months ended August 31,
 
Nine months ended August 31,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Net sales
$
—

 
$
—

 
$
—

 
$
—

Income (loss) before income taxes
0.1

 
(0.2
)
 
(1.3
)
 
(0.3
)
Income tax benefit
0.1

 
—

 
0.7

 
0.1

Net income (loss) from discontinued operations
0.2

 
(0.2
)
 
(0.6
)
 
(0.2
)
Note 13. 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 August 31,
 
Nine months ended August 31,
 
2014
 
2013
 
2014
 
2013
Lockheed Martin
28
%
 
19
%
 
26
%
 
26
%
United Launch Alliance
27
%
 
20
%
 
26
%
 
14
%
Raytheon
15
%
 
27
%
 
17
%
 
36
%
NASA
11
%
 
12
%
 
12
%
 
*

________
 * Less than 10%
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 August 31, 2014
$
395.8

 
94
%
Three months ended August 31, 2013
353.2

 
96
%
Nine months ended August 31, 2014
1,090.1

 
95
%
Nine months ended August 31, 2013
859.8

 
96
%


27


Selected financial information for each reportable segment is as follows:
 
Three months ended August 31,
 
Nine months ended August 31,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Net Sales:
 
 
 
 
 
 
 
Aerospace and Defense
$
418.0

 
$
365.9

 
$
1,147.7

 
$
893.6

Real Estate
1.5

 
1.6

 
4.6

 
4.2

Total Net Sales
$
419.5

 
$
367.5

 
$
1,152.3

 
$
897.8

Segment Performance:
 
 
 
 
 
 
 
Aerospace and Defense
$
33.6

 
$
35.9

 
$
90.6

 
$
101.5

Environmental remediation provision adjustments
(4.7
)
 
(1.7
)
 
(6.6
)
 
(2.3
)
Retirement benefit plan expense
(6.1
)
 
(11.3
)
 
(18.3
)
 
(32.8
)
Unusual items
(0.1
)
 
(0.2
)
 
(0.2
)
 
(1.8
)
Aerospace and Defense Total
22.7

 
22.7

 
65.5

 
64.6

Real Estate
0.8

 
0.9

 
2.6

 
2.9

Total Segment Performance
$
23.5

 
$
23.6

 
$
68.1

 
$
67.5

Reconciliation of segment performance to loss from continuing operations before income taxes:
 
 
 
 
 
 
 
Segment performance
$
23.5

 
$
23.6

 
$
68.1

 
$
67.5

Interest expense
(14.0
)
 
(12.4
)
 
(39.0
)
 
(36.2
)
Interest income
—

 
—

 
—

 
0.2

Stock-based compensation expense
(1.5
)
 
(3.4
)
 
(4.5
)
 
(9.7
)
Corporate retirement benefit plan expense
(2.8
)
 
(5.2
)
 
(8.4
)
 
(15.7
)
Corporate and other
(5.8
)
 
(5.0
)
 
(15.5
)
 
(16.7
)
Unusual items
(9.8
)
 
(6.6
)
 
(60.8
)
 
(17.2
)
Loss from continuing operations before income taxes
$
(10.4
)
 
$
(9.0
)
 
$
(60.1
)
 
$
(27.8
)
Note 14. Unusual Items
Total unusual items expense, a component of other expense, net in the unaudited condensed consolidated statements of operations, for the third quarter and first nine months of fiscal 2014 and 2013 was as follows:
 
Three months ended August 31,
 
Nine months ended August 31,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Unusual items
 
 
 
 
 
 
 
Legal related matters
$
0.1

 
$
(0.2
)
 
$
0.2

 
$
0.2

Loss on debt repurchased
9.8

 
—

 
60.6

 
—

Loss on bank amendment
—

 
—

 
0.2

 
—

Rocketdyne Business acquisition related costs(1)
—

 
7.0

 
—

 
18.8

 
$
9.9

 
$
6.8

 
$
61.0

 
$
19.0

 ________
(1)
Includes a benefit of $3.6 million for the nine months ended August 31, 2013 related to the Company not being required to divest the Liquid Divert and Attitude Control Systems program.


28


First nine months of fiscal 2014 Activity:
A summary of the Company’s loss on the 4 1/16% Debentures repurchased during the first nine months of fiscal 2014 is as follows (in millions):
Principal amount repurchased
$
59.6

Cash repurchase price
(119.9
)
Write-off of deferred financing costs
(0.3
)
Loss on 4 1/16% Debentures repurchased
$
(60.6
)
During the first nine months of fiscal 2014, the Company recorded $0.2 million of losses related to an amendment to the Senior Credit Facility.
During the first nine months of fiscal 2014, the Company recorded $0.2 million for realized losses and interest 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 nine months of fiscal 2013 Activity:
During the first nine months of fiscal 2013, the Company recorded ($0.3) million for realized gains and interest 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. During the first quarter of fiscal 2013, the Company recorded a charge of $0.5 million related to a legal settlement.
The Company incurred expenses of $18.8 million, including internal labor costs of $1.7 million, related to the Rocketdyne Business acquisition in the first nine months of fiscal 2013.

29


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 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 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 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 balance sheet as of November 30, 2013 and statement of cash flows for the nine months ended August 31, 2013 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 balance sheet as of November 30, 2013 resulted in the following: (i) a decrease of $38.0 million in intercompany receivable to the Parent column and a corresponding decrease of $38.0 million in intercompany payable to the Guarantor Subsidiaries column; and (ii) a decrease of $38.0 million in other current liabilities to the Parent column and a corresponding increase of $38.0 million in other current liabilities to the Guarantor Subsidiaries column.
In addition, the revision on the unaudited condensed consolidating statement of cash flows resulted in a decrease of $9.4 million to “net cash provided by operating activities” to the Parent column for the nine months ended August 31, 2013, 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 $9.4 million