Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Basis of Presentation and Nature of Operations
Aerojet Rocketdyne Holdings, Inc. ("Aerojet Rocketdyne Holdings" or the "Company") has prepared the accompanying unaudited condensed consolidated financial statements, including the accounts of the Company and its 100% owned and majority owned subsidiaries, in accordance with the instructions to Form 10-Q. The December 31, 2021, 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 year ended December 31, 2021. Certain reclassifications have been made to financial information for prior periods to conform to the current period’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’s operations are organized into two segments:
Aerospace and Defense — includes the operations of the Company’s wholly-owned subsidiary Aerojet Rocketdyne, Inc. ("Aerojet Rocketdyne"), a leading technology-based designer, developer and manufacturer of aerospace and defense products and systems for the United States ("U.S.") government, including the Department of Defense ("DoD"), the National Aeronautics and Space Administration ("NASA"), and major aerospace and defense prime contractors.
Real Estate — includes the activities of the Company’s wholly-owned subsidiary Easton Development Company, LLC ("Easton") related to the re-zoning, entitlement, sale, and leasing of the Company’s excess real estate assets.
The fiscal year of the Company's subsidiary, Aerojet Rocketdyne, ends on the last Saturday in December.
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 year ended December 31, 2021.
Revision of Previously Issued Consolidated Financial Statements
During the three months ended March 31, 2022, the Company identified an error in its accounting for income taxes associated with its 2.25% Convertible Senior Notes ("2¼% Notes"). Upon issuance of the 2¼% Notes in 2016, the Company did not record the applicable deferred tax liability associated with the conversion option that had been recorded in other capital, which resulted in an overstatement of other capital, an understatement of deferred tax liabilities and an error in income tax expense in subsequent periods. The Company evaluated the errors and concluded that the errors were not material, either individually or in aggregate, to its current or previously issued consolidated financial statements.
To correct the immaterial errors, the Company has revised its previously issued consolidated financial statements as of December 31, 2021 and 2020, and for each of the three years ended December 31, 2021, 2020, and 2019, and its unaudited condensed consolidated financial statements as of and for the quarters and year-to-date periods ended June 30, 2021, and September 30, 2021. The revision of the historical consolidated financial statements also includes the correction of an immaterial misclassification in its unaudited condensed consolidated balance sheet as of December 31, 2020.
Accordingly, the accompanying financial statements and relevant footnotes to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q have been revised to correct for such immaterial errors. See Note 12 for additional information. The Company will present the revision of its previously issued consolidated financial statements as of December 31, 2021, and for the years ended December 31, 2021 and 2020, in connection with the future filing of its 2022 Annual Report on Form 10-K. Additionally, the Company will present the revision of its previously issued condensed consolidated financial statements as of and for the three and nine months ended September 30, 2021, in connection with the future filings of its Quarterly Reports on Form 10-Q.
Terminated Merger Agreement
On December 20, 2020, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Lockheed Martin Corporation ("Lockheed Martin") and Mizar Sub, Inc., a wholly-owned subsidiary of Lockheed Martin, pursuant to which each share of common stock of the Company would have been automatically converted into the right to receive cash in an amount equal to $51.00 per share, adjusted from $56.00 following the payment of a one-time cash dividend of $5.00 per share paid in March 2021 and the Company would have become a wholly-owned subsidiary of Lockheed Martin (the "Merger").
On January 25, 2022, the Federal Trade Commission ("FTC") filed a complaint against the Company and Lockheed Martin in the FTC’s administrative court and a complaint in U.S. federal court seeking a preliminary injunction to stop the deal pending an administrative trial. On February 13, 2022, Lockheed Martin notified the Company that it had elected to terminate the Merger
Agreement. On February 14, 2022, pursuant to the parties’ joint motion, the administrative complaint and the U.S. federal court complaint were dismissed.
Coronavirus ("COVID-19") Pandemic
During the three and six months ended June 30, 2022, the Company’s financial results and operations were not materially adversely impacted by the COVID-19 pandemic. The extent to which the Company’s future financial results could be impacted by the COVID-19 pandemic depends on future developments that are highly uncertain and cannot be predicted at this time. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
Recently Issued Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board issued guidance which simplifies the accounting for convertible instruments. This guidance eliminates certain models that require separate accounting for embedded conversion features, in certain cases. Additionally, among other changes, the guidance eliminates certain of the conditions for equity classification for contracts in an entity’s own equity. The guidance also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. The Company adopted the new guidance as of January 1, 2022, using the modified retrospective approach resulting in the following adjustment (i) a decrease of $1.9 million in deferred tax liabilities, (ii) a decrease of $5.6 million in other capital, (iii) a decrease of $1.0 million in retained earnings, and (iv) an increase of $8.5 million in debt.
Note 2. Earnings Per Share ("EPS") of Common Stock
The following table reconciles the numerator and denominator used to calculate basic and diluted EPS of common stock:
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| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In millions, except per share amounts) |
Numerator: | | | | | | | |
| | | | | | | |
| | | | | | | |
Net income | $ | 16.4 | | | $ | 45.0 | | | $ | 44.2 | | | $ | 63.1 | |
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| | | | | | | |
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Income allocated to participating securities | (0.1) | | | (0.3) | | | (0.2) | | | (0.4) | |
Net income for basic EPS | $ | 16.3 | | | $ | 44.7 | | | $ | 44.0 | | | $ | 62.7 | |
Interest on 2¼% Notes | 0.7 | | | — | | | 1.4 | | | — | |
Net income for diluted EPS | $ | 17.0 | | | $ | 44.7 | | | $ | 45.4 | | | $ | 62.7 | |
Denominator: | | | | | | | |
Basic weighted average shares | 80.3 | | | 79.7 | | | 80.2 | | | 78.5 | |
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Effect of: | | | | | | | |
| | | | | | | |
21/4% Notes | 5.6 | | | 2.8 | | | 5.6 | | | 2.8 | |
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Diluted weighted average shares | 85.9 | | | 82.5 | | | 85.8 | | | 81.3 | |
Basic | | | | | | | |
| | | | | | | |
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Basic EPS | $ | 0.20 | | | $ | 0.56 | | | $ | 0.55 | | | $ | 0.80 | |
Diluted | | | | | | | |
| | | | | | | |
| | | | | | | |
Diluted EPS | $ | 0.20 | | | $ | 0.54 | | | $ | 0.53 | | | $ | 0.77 | |
Securities which would have been anti-dilutive are insignificant and are excluded from the computation of diluted earnings per share in all periods presented.
The increase in the dilutive effect of the 2¼% Notes in the three and six months ended June 30, 2022, is the result of the adoption of new accounting guidance. See Note 1.
Note 3. Revenue Recognition
In the Company’s Aerospace and Defense segment, the majority of revenue is earned from long-term contracts to design, develop, and manufacture aerospace and defense products for, and provide related services to, the Company’s customers, including the U.S. government and major aerospace and defense prime contractors.
The Company evaluates the contract value and cost estimates for performance obligations at least quarterly and more frequently when circumstances significantly change. Factors considered in estimating the work to be completed include, but are not limited to: labor productivity, the nature and technical complexity of the work to be performed, availability and cost volatility of materials, subcontractor and vendor performance, warranty costs, volume assumptions, anticipated labor agreements, inflationary trends, schedule and performance delays, availability of funding from the customer, and the recoverability of costs incurred outside the original contract included in any estimates to complete. When the Company’s estimate of total costs to be incurred to satisfy a performance obligation exceeds the expected revenue, the Company recognizes the loss immediately. When the Company determines that a change in estimates has an impact on the associated profit of a performance obligation,
the Company records the cumulative positive or negative adjustment to the statement of operations. Changes in estimates and assumptions related to the status of certain long-term contracts may have a material effect on the Company’s operating results. The following table summarizes the impact of the changes in significant contract accounting estimates on the Company’s Aerospace and Defense segment operating results:
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| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In millions, except per share amounts) |
Net (unfavorable) favorable effect of the changes in contract estimates on net sales | $ | (16.0) | | | $ | 25.7 | | | $ | (16.2) | | | $ | 23.8 | |
Net (unfavorable) favorable effect of the changes in contract estimates on income before income taxes | (29.5) | | | 24.0 | | | (32.2) | | | 21.6 | |
Net (unfavorable) favorable effect of the changes in contract estimates on net income | (21.0) | | | 18.0 | | | (23.0) | | | 16.1 | |
Net (unfavorable) favorable effect of the changes in contract estimates on basic and diluted EPS | (0.26) | | | 0.22 | | | (0.29) | | | 0.20 | |
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For the three and six months ended June 30, 2022, net unfavorable changes in contract estimates were primarily driven by cost growth from supply chain disruptions and necessary technical and manufacturing changes identified in the three months ended June 30, 2022, on a portion of the Standard Missile program. For the six months ended June 30, 2021, net favorable changes in contract estimates were primarily driven by improved performance and risk retirements on the RS-68 and Patriot Advanced Capability-3 ("PAC-3") programs partially offset by cost growth on a portion of the Standard Missile program.
In the Company’s Aerospace and Defense segment, the timing of revenue recognition, customer invoicing, and collections produces accounts receivable, contract assets, and contract liabilities in the unaudited condensed consolidated balance sheets. The following table summarizes contract assets and liabilities:
| | | | | | | | | | | | | |
| June 30, 2022 | | | | December 31, 2021 |
| (In millions) |
Contract assets | $ | 386.4 | | | | | $ | 359.6 | |
Reserve for overhead rate disallowance | (9.1) | | | | | (5.4) | |
Contract assets, net of reserve | 377.3 | | | | | 354.2 | |
Contract liabilities | 371.5 | | | | | 366.5 | |
Net contract assets (liabilities), net of reserve | $ | 5.8 | | | | | $ | (12.3) | |
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Net contract assets increased by $18.1 million from December 31, 2021, primarily due to an increase in unbilled receivables. During the six months ended June 30, 2022, the Company recognized sales of $225.2 million that were included in the Company's contract liabilities as of December 31, 2021.
As of June 30, 2022, the Company’s total remaining performance obligations, also referred to as backlog, totaled $6.9 billion. The Company expects to recognize approximately 34%, or $2.3 billion, of the remaining performance obligations as sales over the next twelve months, an additional 24% the following twelve months, and 42% thereafter.
The Company's contracts are largely categorized as either "fixed-price" (largely used by the U.S. government for production-type contracts) or "cost-reimbursable" (largely used by the U.S. government for development-type contracts). Fixed-price contracts present the risk of unreimbursed cost overruns, potentially resulting in lower than expected contract profits and margins. This risk is generally lower for cost-reimbursable contracts which, as a result, generally have a lower margin. The following table summarizes the percentages of net sales by contract type:
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| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Fixed-price | 55 | % | | 60 | % | | 56 | % | | 56 | % |
Cost-reimbursable | 45 | | | 40 | | | 44 | | | 44 | |
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The principal end user customers are primarily agencies of the U.S. government as illustrated in the following table:
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| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
U.S. government | 94 | % | | 97 | % | | 95 | % | | 97 | % |
Non U.S. government | 6 | | | 3 | | | 5 | | | 3 | |
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The Company's Real Estate segment represented less than 1% of the Company's net sales for the three and six months ended June 30, 2022 and 2021.
Note 4. Stock-Based Compensation
The following table summarizes stock-based compensation by type of award:
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| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In millions) |
Stock Appreciation Rights | $ | 0.6 | | | $ | 1.4 | | | $ | (4.3) | | | $ | (0.3) | |
| | | | | | | |
Restricted stock and restricted stock units, service based | 1.3 | | | 1.7 | | | 2.7 | | | 3.0 | |
Restricted stock and restricted stock units, performance based | 1.0 | | | 4.0 | | | 3.6 | | | 6.9 | |
Employee stock purchase plan | — | | | 0.2 | | | — | | | 0.5 | |
Total stock-based compensation expense | $ | 2.9 | | | $ | 7.3 | | | $ | 2.0 | | | $ | 10.1 | |
Note 5. Balance Sheet Accounts
a. Fair Value of Financial Instruments
Financial instruments are classified using a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair value measurement as of June 30, 2022 |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| (In millions) |
Money market funds | $ | 364.6 | | | $ | 364.6 | | | $ | — | | | $ | — | |
Registered investment companies | 0.9 | | | 0.9 | | | — | | | — | |
Commercial paper | 119.9 | | | — | | | 119.9 | | | — | |
Equity securities | 9.1 | | | 9.1 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
Total | $ | 494.5 | | | $ | 374.6 | | | $ | 119.9 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair value measurement as of December 31, 2021 |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| (In millions) |
Money market funds | $ | 388.6 | | | $ | 388.6 | | | $ | — | | | $ | — | |
Registered investment companies | 1.3 | | | 1.3 | | | — | | | — | |
Commercial paper | 35.0 | | | — | | | 35.0 | | | — | |
Equity securities | 10.6 | | | 10.6 | | | — | | | — | |
Total | $ | 435.5 | | | $ | 400.5 | | | $ | 35.0 | | | $ | — | |
As of June 30, 2022 and December 31, 2021, the total estimated fair value for commercial paper was classified as cash and cash equivalents as the remaining maturity at date of purchase was less than three months.
The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued compensation, and other accrued liabilities, approximate fair value because of their short maturities.
The following table summarizes the estimated fair value and principal amount for outstanding debt obligations excluding finance lease obligations:
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| Fair Value | | Principal Amount |
| June 30, 2022 | | | | December 31, 2021 | | June 30, 2022 | | | | December 31, 2021 |
| (In millions) |
Term Loan | $ | 263.3 | | | | | $ | 275.8 | | | $ | 269.1 | | | | | $ | 282.2 | |
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21/4% Notes | 227.4 | | | | | 266.1 | | | 145.9 | | | | | 145.9 | |
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Total | $ | 490.7 | | | | | $ | 541.9 | | | $ | 415.0 | | | | | $ | 428.1 | |
The fair value of the 2¼% Notes was determined using broker quotes that are based on open markets for the Company's debt securities (Level 2 securities). The fair value of the Term Loan (as defined below) was estimated based on a third-party model used to derive a relative value price using comparable corporate loans within a similar industry, credit quality, and currency.
b. Accounts Receivable
| | | | | | | | | | | | | |
| June 30, 2022 | | | | December 31, 2021 |
| (In millions) |
Billed receivables under long-term contracts | $ | 170.1 | | | | | $ | 60.3 | |
| | | | | |
Other trade receivables | 0.2 | | | | | 0.3 | |
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Accounts receivable | $ | 170.3 | | | | | $ | 60.6 | |
c. Other Current Assets
| | | | | | | | | | | | | |
| June 30, 2022 | | | | December 31, 2021 |
| (In millions) |
Deferred costs recoverable from the U.S. government | $ | 41.6 | | | | | $ | 37.4 | |
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Income tax receivable | — | | | | | 13.8 | |
Inventories | 11.8 | | | | | 10.0 | |
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Prepaid expenses | 15.9 | | | | | 15.3 | |
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Other | 56.4 | | | | | 23.0 | |
Other current assets | $ | 125.7 | | | | | $ | 99.5 | |
d. Property, Plant and Equipment, net
| | | | | | | | | | | | | |
| June 30, 2022 | | | | December 31, 2021 |
| (In millions) |
Land | $ | 71.1 | | | | | $ | 71.1 | |
Buildings and improvements | 504.7 | | | | | 503.0 | |
Machinery and equipment, including capitalized software | 506.0 | | | | | 499.1 | |
Construction-in-progress | 53.2 | | | | | 50.0 | |
| 1,135.0 | | | | | 1,123.2 | |
Less: accumulated depreciation | (724.0) | | | | | (702.1) | |
Property, plant and equipment, net | $ | 411.0 | | | | | $ | 421.1 | |
e. Other Noncurrent Assets
| | | | | | | | | | | | | |
| June 30, 2022 | | | | December 31, 2021 |
| (In millions) |
Real estate held for entitlement and leasing | $ | 104.4 | | | | | $ | 103.7 | |
Deferred costs recoverable from the U.S. government | 62.1 | | | | | 62.1 | |
Receivable from Northrop Grumman Corporation for environmental remediation costs | 31.5 | | | | | 34.5 | |
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Other | 9.1 | | | | | 43.0 | |
Other noncurrent assets | $ | 207.1 | | | | | $ | 243.3 | |
f. Other Current Liabilities
| | | | | | | | | | | | | |
| June 30, 2022 | | | | December 31, 2021 |
| (In millions) |
| | | | | |
Accrued compensation and employee benefits | $ | 123.6 | | | | | $ | 122.0 | |
Income taxes payable | 66.9 | | | | | — | |
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Other | 64.2 | | | | | 50.7 | |
Other current liabilities | $ | 254.7 | | | | | $ | 172.7 | |
As of June 30, 2022, the income tax payable balance totaled $66.9 million. The increase in the income tax payable balance compared with an income tax receivable balance of $13.8 million as of December 31, 2021, is primarily the result of the elimination of the option for the Company to deduct Research and Development ("R&D") expenditures in the current period and requires the Company to capitalize such costs and amortize the costs over five years when incurred in the U.S.
Note 6. Income Taxes
| | | | | | | | | | | | | |
| Six months ended June 30, | | |
| 2022 | | 2021 | | |
| (In millions) |
| | | | | |
| | | | | |
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Income tax provision | $ | 17.8 | | | $ | 21.6 | | | |
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In the six months ended June 30, 2022, the income tax provision was $17.8 million for an effective tax rate of 28.7%. The Company’s effective tax rate differed from the 21% statutory federal income tax rate primarily due to state income taxes and certain expenditures which are permanently not deductible for tax purposes, partially offset by the impact of R&D credits and original issue discount on convertible debt.
In the six months ended June 30, 2021, the income tax provision was $21.6 million for an effective tax rate of 25.5%. The Company’s effective tax rate differed from the 21% statutory federal income tax rate primarily due to state income taxes and certain expenditures which are permanently not deductible for tax purposes, partially offset by the impact of R&D credits.
A valuation allowance is required when it is more-likely-than-not that all or a portion of deferred tax assets may not be realized. Assessing the need for a valuation allowance requires management to evaluate, on a quarterly basis, all available evidence, both positive and negative. As of June 30, 2022, the Company continues to believe that the weight of the positive evidence outweighed the negative evidence regarding the realization of its net deferred tax assets.
Note 7. Long-term Debt
| | | | | | | | | | | | | |
| June 30, 2022 | | | | December 31, 2021 |
| (In millions) |
Term Loan, bearing interest at variable rates (rate of 3.42% as of June 30, 2022), maturing in September 2023 | $ | 269.1 | | | | | $ | 282.2 | |
| | | | | |
Unamortized deferred financing costs | (0.6) | | | | | (0.8) | |
Total senior debt | 268.5 | | | | | 281.4 | |
Convertible senior notes, bearing interest at 2.25% per annum, interest payments due in June and December, maturing in December 2023 | 145.9 | | | | | 145.9 | |
Unamortized discount and deferred financing costs | (0.6) | | | | | (9.4) | |
Total convertible senior notes | 145.3 | | | | | 136.5 | |
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Finance leases | 42.2 | | | | | 43.4 | |
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Total other debt | 42.2 | | | | | 43.4 | |
Total debt, net of unamortized discount and deferred financing costs | 456.0 | | | | | 461.3 | |
Less: Amounts due within one year | (179.3) | | | | | (166.7) | |
Total long-term debt, net of unamortized discount and deferred financing costs | $ | 276.7 | | | | | $ | 294.6 | |
Senior Credit Facility
The senior secured senior credit facility (the "Senior Credit Facility") matures on September 20, 2023, and consists of (i) a $650.0 million revolving line of credit (the "Revolver") and (ii) a $350.0 million term loan (the "Term Loan").
As of June 30, 2022, the Company had zero borrowings under the Revolver and issued $27.8 million in letters of credit.
The Term Loan and any borrowings under the Revolver bear interest at LIBOR plus an applicable margin ranging from 175 to 250 basis points based on the Company's leverage ratio (the "Consolidated Net Leverage Ratio") measured at the end of each quarter. In addition to interest, the Company must pay certain fees including (i) letter of credit fees ranging from 175 to 250 basis
points per annum on the amount of issued but undrawn letters of credit and eurocurrency rate loans and (ii) commitment fees ranging from 30 to 45 basis points per annum on the unused portion of the Revolver.
The Term Loan amortized at a rate of 7.5% per annum as of June 30, 2022, and increasing to 10.0% per annum from December 31, 2022, to be paid in equal quarterly installments with any remaining amounts, along with outstanding borrowings under the Revolver, due on the maturity date. Outstanding borrowings under the Revolver and the Term Loan may be voluntarily repaid at any time, in whole or in part, without premium or penalty.
The Senior Credit Facility is secured by a first priority security interest in the Company’s assets, subject to certain customary exceptions, as well as pledges of its equity interests in certain subsidiaries.
The Senior Credit Facility contains financial covenants requiring the Company to (i) maintain an interest coverage ratio (the "Consolidated Interest Coverage Ratio") of not less than 3.00 to 1.00 and (ii) maintain a Consolidated Net Leverage Ratio not to exceed 3.50 to 1.00 provided that the maximum leverage ratio for all periods shall be increased by 0.50 to 1.00 for two consecutive quarters after consummation of a qualified acquisition.
The Company may generally make certain investments, redeem debt subordinated to the Senior Credit Facility and make certain restricted payments (such as stock repurchases and dividends) if the Company's Consolidated Net Leverage Ratio does not exceed 3.25 to 1.00 pro forma for such transaction. The Company is otherwise subject to customary covenants including limitations on asset sales, incurrence of additional debt, and limitations on certain investments and restricted payments.
The Company was in compliance with its financial and non-financial covenants as of June 30, 2022.
2¼% Convertible Senior Notes (see Note 13)
The Company adopted the new accounting guidance for convertible instruments effective January 1, 2022, using the modified retrospective method, with the cumulative effect recognized as of January 1, 2022. The primary impact of the new guidance was removing the requirement for the Company to account for beneficial conversion features and cash conversion features in equity, separately from the 2¼% Notes and requires the Company to use the if-converted method for the 2¼% Notes in the diluted earnings per share calculation. See Notes 1 and 2 for additional information.
On December 14, 2016, the Company issued $300.0 million aggregate principal amount of 2¼% Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.
Holders may convert their 2¼% Notes at their option from July 1, 2022, through September 30, 2022, because the Company's closing stock price exceeded $33.80 for at least 20 days in the 30 day period prior to June 30, 2022.
As more fully described in the indenture governing the 2¼% Notes, the holders of the 2¼% Notes may surrender all or any portion of their 2¼% Notes for conversion at any time during any calendar quarter, (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% ($33.80) of the conversion price on each applicable trading day.
The following table summarizes information regarding the 2¼% Notes (in millions, except years, percentages, conversion rate, and conversion price):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| | | |
| | | |
| | | |
| | | |
Remaining amortization period (years) | 1.5 | | 2.0 |
Effective interest rate | 2.6 | % | | 5.8 | % |
Conversion rate (shares of common stock per $1,000 principal amount) | 38.4615 | | 38.4615 |
Conversion price (per share of common stock) | $ | 26.00 | | | $ | 26.00 | |
Based on the Company's closing stock price of $40.60 on June 30, 2022, the if-converted value of the 2¼% Notes exceeded the aggregate principal amount of the 2¼% Notes by $81.9 million.
The following table presents the interest expense components for the 2¼% Notes:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In millions) |
Interest expense-contractual interest | $ | 0.8 | | | $ | 0.8 | | | $ | 1.6 | | | $ | 1.6 | |
Interest expense-amortization of debt discount (see discussion above) | — | | | 1.1 | | | — | | | 2.2 | |
Interest expense-amortization of deferred financing costs | 0.1 | | | 0.1 | | | 0.2 | | | 0.2 | |
Note 8. Commitments and Contingencies
a. Legal Matters
The Company and its subsidiaries are subject to legal proceedings, including litigation in U.S. federal and state courts, which arise out of, and are incidental to, the ordinary course of the Company’s on-going and historical businesses. The Company is also subject from time to time to governmental investigations by federal and state agencies. The Company cannot predict the outcome of such proceedings with any degree of certainty. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss. When only a range of amounts can be reasonably estimated and no amount within the range is more likely than another, the low end of the range is recorded. These estimates are often initially developed substantially earlier than when the ultimate loss is known, and are refined each quarterly reporting period as additional information becomes available.
Proxy Contest Litigation
In early 2022, disagreements relating to the election of directors to the Company’s Board of Directors ("Board") at the Company’s 2022 Annual Meeting of Stockholders (the “Annual Meeting”) developed among the Company’s directors. The Company’s eight-member Board was evenly divided between former directors Warren G. Lichtenstein, James R. Henderson, Audrey A. McNiff, and Martin Turchin (the “LHMT Directors”) and Thomas Corcoran, General Kevin P. Chilton USAF (Ret.), Eileen P. Drake, and General Lance W. Lord, USAF (Ret.) (the “CCDL Directors”). On January 28, 2022, SPH Group Holdings LLC (“SPH”), a company affiliated with Mr. Lichtenstein, nominated a slate of seven directors, including the LHMT Directors, for election. The directors then filed two separate lawsuits in the Court of Chancery of the State of Delaware. On February 7, 2022, the LHMT Directors filed C.A. No. 2022-0127-LWW (the “LHMT Complaint”) and on February 11, 2022, the CCDL Directors filed C.A. No. 2022-0146-LWW (the “CCDL Complaint”).
The LHMT Complaint
The LHMT Directors filed suit against the CCDL Directors and named the Company as a nominal party to the lawsuit. The LHMT Directors sought, among other things:
•A declaratory judgment that no CCDL Director nor Company officer, director, employee, or anyone else acting or purporting to act on the Company’s behalf may speak on behalf of the Company or take any action on behalf of the Company without proper authorization from the Board or a duly authorized committee of the Board under Delaware law;
•A declaratory judgment that, so long as the Board was evenly divided regarding the election at the Annual Meeting, no officer, employee, advisor, or agent of the Company shall take action on behalf of the Company for the purpose of directly or indirectly supporting either the LHMT Directors or the CCDL Directors in connection with the election at the Annual Meeting. Instead, so long as the Board was evenly divided in connection with the election, the Company must remain neutral on the subject;
•A declaration that alleged actions purportedly taken by the CCDL Directors on behalf of the Company without proper authorization were unauthorized, invalid, and void;
•A permanent injunction prohibiting the CCDL Directors from taking any action or purporting to take any action on behalf of the Company without proper authorization; and
•A permanent injunction specifying that the Company and its officers, employees, agents, and advisors, in their capacity as such, shall remain neutral in any electoral dispute between the LHMT Directors and the CCDL Directors.
The LHMT Directors also moved for a temporary restraining order, which the CCDL Directors opposed.
The CCDL Complaint
The CCDL Directors filed suit against the LHMT Directors and SPH, and named the Company as a plaintiff and a nominal defendant in the lawsuit. The LHMT Directors disputed that the CCDL Directors were authorized to name the Company as a plaintiff.
The CCDL Directors sought, among other things:
•The appointment of a special committee of Gen. Chilton, Mr. Corcoran, and Gen. Lord to manage the Company’s response to the alleged proxy contest launched by the LHMT Directors, or, in the alternative, appointment of a custodian pursuant to 8 Del. C. § 226(a)(2);
•A declaration that the LHMT Directors were interested with respect to the alleged proxy contest by virtue of their inclusion in SPH’s nominated slate;
•A declaration that the LHMT Directors breached their fiduciary duties by allegedly engaging in unauthorized communications regarding the Lockheed Martin merger and by allegedly participating in discussions regarding, and voting on, matters in which they are self-interested;
•A declaration that the LHMT Directors breached their fiduciary duties by allegedly failing to disclose material information about Mr. Lichtenstein’s alleged machinations to take control of the Company in their filing with the Securities and Exchange Commission regarding SPH’s nomination of directors and a declaration that the notice on that topic had violated the Company’s advance-notice bylaw for the same reason; and
•The removal of Mr. Lichtenstein as a director as a consequence for alleged breaches of his fiduciary duty of loyalty, pursuant to 8 Del. C. § 225(c).
Consolidation and Development of the LHMT and CCDL Actions
On February 23, 2022, the Court of Chancery entered a temporary restraining order that provided, among other things, that:
•No party to the action, no officer, director, employee, advisor, or agent of the Company, no person or entity purporting to have authority over the Company, and no person or entity acting in concert with any of the foregoing who had notice of the order, shall, absent prior written Board approval (i) make any public statement, issue any press release, or make any disclosure on behalf of or in the name of the Company in support of the election efforts of any candidate for election at the Company’s 2022 Annual Meeting, or (ii) take action on behalf of or in the name of the Company or use or otherwise deploy Company funds or other Company resources in support of the election efforts of any candidate for election at the Annual Meeting; and
•The Company shall retain independent counsel agreed upon and authorized by at least five members of the Board in connection with the two actions filed by the directors.
On February 25, 2022, the Court of Chancery entered an order consolidating the foregoing actions into one action, captioned In Re Aerojet Rocketdyne Holdings, Inc. (Consolidated C.A. No. 2022-0127-LWW).
On March 1, 2022, the CCDL Directors issued a press release announcing that Ms. Drake had nominated a slate of directors for election to the Company’s Board.
On March 7, 2022, the CCDL Directors dismissed without prejudice the claims they had asserted in the CCDL Complaint, though the claims that were purportedly asserted by the Company in the CCDL Complaint remained pending.
On March 22, 2022, the Court of Chancery held a hearing on the CCDL Directors’ motion for entry of a final order and judgment and the LHMT Directors’ motions for leave to supplement their complaint and to enforce the Court’s temporary restraining order. The Court denied the CCDL Directors’ motion and granted the LHMT Directors’ motions, ordering that neutral counsel to represent the Company shall be retained, by the agreement of at least five members of the Company’s Board. The Company retained neutral counsel in accordance with the Court’s order.
From May 23-25, 2022, the Court of Chancery held a trial on the LHMT Directors’ claims. The Court of Chancery then heard closing arguments on June 6, 2022. On June 16, 2022, the Court issued a post-trial memorandum opinion (the “Opinion”) finding in favor of the LHMT Directors on their claims for declaratory judgment, finding that the LHMT Directors were entitled to an injunction enforcing the declaratory judgment through the next election of directors by the stockholders of the Company, and holding that certain corrective disclosures must issue in the form of a press release and a corresponding Form 8-K. The Court declined to find that there were any meaningful violations of the temporary restraining order; to hold any of the CCDL Directors in contempt; to invalidate any stockholder consents and proxies obtained to date; or to award the LHMT Directors any fees.
On June 21, 2022 the Court of Chancery issued an order reflecting the relief granted to the LHMT Directors in its Opinion, including approving the Company’s corrective disclosures, which were issued in a press release on June 20, 2022 and filed under cover of Form 8-K on June 21, 2022. The order also extended the requirements of the temporary restraining order through a special meeting of stockholders, requiring all parties to the action, as well as officers, directors, employees, and advisors of the Company to refrain from making public statements in the name of the Company in support of the election and to refrain from deploying Company funds or resources in support of the election. The order specifically noted that this limitation would not affect the right of any person to act in their individual capacity in support of any candidate for election.
On June 30, 2022, the Company held a special meeting of stockholders, where stockholders approved the removal, without cause, of all eight members of the Company’s previous Board (Gen. Chilton (Ret.), Mr. Corcoran, Ms. Drake, Mr. Henderson, Mr. Lichtenstein, Gen. Lord (Ret.), Ms. McNiff, and Mr. Turchin) and elected a new eight-member Board consisting of Gail Baker, Marion C. Blakey, Maj. Gen. Charles F. Bolden (Ret.), Gen. Chilton (Ret.), Mr. Corcoran, Ms. Drake, Deborah Lee James and Gen. Lord (Ret.).
Asbestos Litigation
The Company has been, and continues to be, named as a defendant in lawsuits alleging personal injury or death and seeking various monetary damages due to exposure to asbestos in building materials, products, or in manufacturing operations. The majority of cases are pending in Illinois state courts. There were 141 asbestos cases pending as of June 30, 2022.
Given the lack of any significant consistency to claims (i.e., as to product, operational site, or other relevant assertions) filed against the Company, the Company is generally unable to make a reasonable estimate of the future costs of pending claims or unasserted claims. The aggregate settlement costs and legal and administrative fees associated with the Company’s asbestos litigation has been immaterial for the last three years. As of June 30, 2022, the Company has accrued an immaterial amount related to pending claims.
United States ex. rel. Markus vs. Aerojet Rocketdyne Holdings
In the case captioned United States ex. rel. Markus vs. Aerojet Rocketdyne Holdings, Inc. et al., Case No. 2:15-CV-02245- WBS-AC, the Department of Justice completed its review of the case and declined to intervene in June 2018. The case was originally filed under seal in the U.S. District Court, Eastern District of California in September 2017 and alleged causes of action against the Company based on false claims, retaliation, and wrongful termination of employment seeking injunctive relief, civil penalties, and compensatory and punitive damages. In February 2019, the Company filed a Motion to Dismiss the False Claims Act ("FCA") counts of the complaint and a Motion to Compel Arbitration on the employment based claims. In May 2019, the court dismissed one count of the FCA claim, denied the motion to dismiss the remaining FCA counts, and moved the employment based claims to arbitration. In September 2021, each party filed a motion for summary judgment. In February 2022, the Court
denied Relator’s motion for summary judgment in full and granted the Company’s motion for summary judgment in part. Specifically, the Court rejected Relator’s false certification allegations in their entirety while also significantly diminishing the number of U.S. government contracts at issue in the litigation, which number excludes both the majority of contracts specified in Relator’s Second Amended Complaint ("SAC") as well as numerous contracts regarding which Relator purported to make claims but that were not specified in the SAC. The Court found disputed issues of material fact with regard to the remaining contracts. Trial in this matter commenced on April 26, 2022. On April 27, 2022, the Company agreed to a settlement in principle as to Relator’s remaining FCA claims in the amount of $9.0 million, as well as an attorney’s fee award of $3.0 million. The U.S. Department of Justice approved the settlement on June 30, 2022, and the Court approved the settlement on July 1, 2022.
City of Wabash, Indiana v. Aerojet Rocketdyne Holdings
On November 15, 2021, a lawsuit entitled City of Wabash, Indiana v. Aerojet Rocketdyne Holdings, Inc., Case No. 3:21-cv-878 was filed in the United States District Court for the Northern District of Indiana against the Company alleging causes of action under the Comprehensive Environmental Response Compensation and Liability Act and the Indiana Environmental Legal Action Statute and seeking damages, reasonable attorneys’ fees and costs. The action was served on the Company on January 11, 2022. The Company will vigorously contest the complaint’s allegations and has not recorded any liability for this matter as of June 30, 2022.
b. Environmental Matters
The Company is involved in approximately 40 environmental matters under the Comprehensive Environmental Response Compensation and Liability Act, the Resource Conservation Recovery Act, and other federal, state, and local laws relating to soil and groundwater contamination, hazardous waste management activities, and other environmental matters at some of its current and former facilities. The Company is also involved in a number of remedial activities at third party sites, not owned by the Company, where it is designated a potentially responsible party ("PRP") by either the U.S. Environmental Protection Agency ("EPA") and/or a state agency. In many of these matters, the Company is involved with other PRPs. In some instances, the Company’s liability and proportionate share of costs have not been determined largely due to uncertainties as to the nature and extent of site conditions and the Company’s involvement. While government agencies frequently claim PRPs are jointly and severally liable at such sites, in the Company’s experience, interim and final allocations of liability and costs are generally made based on relative contributions of waste or contamination. Anticipated costs associated with environmental remediation that are probable and estimable are accrued. In cases where a date to complete remedial activities at a particular site cannot be determined by reference to agreements or otherwise, the Company projects costs over an appropriate time period not exceeding 15 years. In such cases, generally the Company does not have the ability to reasonably estimate environmental remediation costs that are beyond this period. Factors that could result in changes to the Company’s estimates include completion of current and future soil and groundwater investigations, new claims, future agency demands, discovery of more or less contamination than expected, discovery of new contaminants, modification of planned remedial actions, changes in estimated time required to remediate, new technologies, and changes in laws and regulations.
As of June 30, 2022, the aggregate range of these anticipated environmental costs was $291.5 million to $449.4 million and the accrued amount was $291.5 million. See Note 8(c) for a summary of the environmental reserve activity. Of these accrued liabilities, approximately 98% relates to the Company’s U.S. government contracting business, and a portion of this liability is recoverable. The significant environmental sites are discussed below. The balance of the accrued liabilities, which are not recoverable from the U.S. government, relate to other sites for which the Company’s obligations are probable and estimable.
Sacramento, California Site
In 1989, a federal district court in California approved a Partial Consent Decree ("PCD") requiring Aerojet Rocketdyne, among other things, to conduct a Remedial Investigation and Feasibility Study to determine the nature and extent of impacts due to the release of chemicals from the Sacramento, California site, monitor the American River and offsite public water supply wells, operate Groundwater Extraction and Treatment facilities that collect groundwater at the site perimeter, and pay certain government oversight costs. The primary chemicals of concern for both on-site and off-site groundwater are trichloroethylene, perchlorate, and n-nitrosodimethylamine. A 2002 PCD revision (a) separated the Sacramento site into multiple operable units to allow quicker implementation of remedies for critical areas; (b) required the Company to guarantee up to $75 million (in addition to a prior $20 million guarantee) to assure that Aerojet Rocketdyne’s Sacramento remediation activities are fully funded; and (c) removed approximately 2,600 acres of non-contaminated land from the EPA superfund designation. Obligations under the $75 million aggregate guarantee are limited to $10 million in any year. Both the $75 million aggregate guarantee and the $10 million annual limitation are subject to adjustment annually for inflation.
Aerojet Rocketdyne is involved in various stages of soil and groundwater investigation, remedy selection, design, construction, operation and maintenance associated with the operable units, all of which are conducted under the direction and oversight of the EPA, including unilateral administrative orders, and the California Department of Toxic Substances Control ("DTSC") and Regional Water Quality Control Board, Central Valley Region ("RWQCB"). On September 22, 2016, the EPA completed its first five-year remedy review of the Sacramento superfund site. The five-year review required by statute and regulation applies to all remedial actions which result in hazardous substances above levels that allow unlimited use and unrestricted exposure. The Company worked with the EPA to address and remedy the findings of the 2016 five-year remedy review. On September 15, 2021, the EPA issued its second five-year remedy review and concluded that the remedies are functioning as intended for the soil and groundwater contamination and that the vapor intrusion investigation and mitigation activities are protective against vapor intrusion risks. The Company is working with the EPA, DTSC, and RWQCB on the implementation of required onsite land use restrictions.
The entire southern portion of the site known as Rio Del Oro was under state orders issued in the 1990s from DTSC and the RWQCB to investigate and remediate soil and groundwater contamination. In 2008, the DTSC released all but approximately 400 acres of the Rio Del Oro property from DTSC’s environmental orders regarding soil contamination although the property remains subject to the RWQCB’s orders to investigate and remediate groundwater environmental contamination emanating offsite from the property.
As of June 30, 2022, the estimated range of anticipated costs discussed above for the Sacramento, California site was $216.2 million to $351.1 million and the accrued amount was $216.2 million included as a component of the Company’s environmental reserves. Expenditures associated with this matter are partially recoverable. See Note 8(c) for further discussion on recoverability.
Baldwin Park Operable Unit ("BPOU")
As a result of its former Azusa, California operations, in 1994, Aerojet Rocketdyne was named a PRP by the EPA in the area of the San Gabriel Valley Basin superfund site known as the BPOU. In 2002, Aerojet Rocketdyne, along with seven other PRPs (the "Cooperating Respondents") signed a project agreement with the San Gabriel Basin Water Quality Authority, the Main San Gabriel Basin Watermaster, and five water companies. The 2002 project agreement terminated in 2017 and the parties executed a project agreement which became operational on May 9, 2017. The agreement has a ten-year term and requires the Cooperating Respondents to fund through an escrow account the ongoing operation, maintenance, and administrative costs of certain treatment and water distribution facilities owned and operated by the water companies. There are also provisions in the project agreement for maintaining financial assurance.
Pursuant to the 2017 agreement with the remaining Cooperating Respondents, Aerojet Rocketdyne's current share of future BPOU costs will be approximately 74%.
As part of Aerojet Rocketdyne’s sale of its Electronics and Information Systems ("EIS") business to Northrop Grumman Corporation ("Northrop") in October 2001, the EPA approved a prospective purchaser agreement with Northrop to absolve it of a pre-closing liability for contamination caused by the Azusa, California operations, which liability remains with Aerojet Rocketdyne. As part of that agreement, the Company agreed to provide a $25 million guarantee of its obligations under the project agreement.
As of June 30, 2022, the estimated range of anticipated costs was $58.7 million to $70.3 million and the accrued amount was $58.7 million included as a component of the Company’s environmental reserves. Expenditures associated with this matter are partially recoverable. See Note 8(c) for further discussion on recoverability.
c. Environmental Reserves and Estimated Recoveries
Environmental Reserves
The Company reviews on a quarterly basis estimated future remediation costs and has an established practice of estimating environmental remediation costs over a fifteen year period, except for those environmental remediation costs with a specific contractual term. Environmental liabilities at the BPOU site are currently estimated through the term of the project agreement, which expires in May 2027. As the period for which estimated environmental remediation costs lengthens, the reliability of such estimates decreases. These estimates consider the investigative work and analysis of engineers, outside environmental consultants, and the advice of legal staff regarding the status and anticipated results of various administrative and legal proceedings. In most cases, only a range of reasonably possible costs can be estimated. In establishing the Company’s reserves, the most probable estimate is used when determinable; otherwise, the minimum amount is used when no single amount in the range is more probable. Accordingly, such estimates can change as the Company periodically evaluates and revises these estimates as new information becomes available. The Company cannot predict whether new information gained as projects progress will affect the estimated liability accrued. The timing of payment for estimated future environmental costs is influenced by a number of factors, such as the regulatory approval process and the time required designing, constructing, and implementing the remedy.
The following table summarizes the Company’s environmental reserve activity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Aerojet Rocketdyne- Sacramento | | Aerojet Rocketdyne- BPOU | | Other Aerojet Rocketdyne Sites | | Total Aerojet Rocketdyne | | Other | | Total Environmental Reserve |
| (In millions) |
December 31, 2021 | $ | 214.7 | | | $ | 64.7 | | | $ | 11.8 | | | $ | 291.2 | | | $ | 5.2 | | | $ | 296.4 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Additions/Adjustments | 9.4 | | | (1.3) | | | 0.4 | | | 8.5 | | | 0.1 | | | 8.6 | |
Expenditures | (7.9) | | | (4.7) | | | (0.8) | | | (13.4) | | | (0.1) | | | (13.5) | |
June 30, 2022 | $ | 216.2 | | | $ | 58.7 | | | $ | 11.4 | | | $ | 286.3 | | | $ | 5.2 | | | $ | 291.5 | |
The effect of the final resolution of environmental matters and the Company’s obligations for environmental remediation and compliance cannot be accurately predicted due to the uncertainty concerning both the amount and timing of future expenditures and due to regulatory or technological changes. The Company continues its efforts to mitigate past and future costs through pursuit of claims for recoveries from insurance coverage and other PRPs and continued investigation of new and more cost effective remediation alternatives and associated technologies.
Estimated Recoveries
On January 12, 1999, Aerojet Rocketdyne and the U.S. government reached a settlement agreement ("Global Settlement") covering environmental costs associated with the Company's Sacramento site and its former Azusa site. Pursuant to the Global Settlement, the Company can recover 88% of its environmental remediation costs through the establishment of prices for Aerojet Rocketdyne's products and services sold to the U.S. government. Additionally, in conjunction with the sale of the EIS business in 2001, Aerojet Rocketdyne entered into an agreement with Northrop (the "Northrop Agreement") whereby Aerojet Rocketdyne is reimbursed by Northrop for a portion of environmental expenditures eligible for recovery under the Global Settlement, subject to an annual billing limitation of $6.0 million and a cumulative limitation of $189.7 million which was reached in June 2017. The following table summarizes the Northrop Agreement activity (in millions):
| | | | | |
Total reimbursable costs under the Northrop Agreement | $ | 189.7 | |
Amount reimbursed to the Company through June 30, 2022 | (152.2) | |
Receivable from Northrop included in the unaudited balance sheet at June 30, 2022 | $ | 37.5 | |
| |
| |
| |
| |
Environmental remediation costs are primarily incurred by the Company's Aerospace and Defense segment, and certain of these costs are recoverable from the Company's contracts with the U.S. government. The Company currently estimates approximately 12% of its future Aerospace and Defense segment environmental remediation costs will not likely be reimbursable and are expensed. Allowable environmental remediation costs are charged to the Company’s contracts with the U.S. government as the costs are incurred. Because these costs are recovered through forward-pricing arrangements, the ability of Aerojet Rocketdyne to continue recovering these costs from the U.S. government depends on Aerojet Rocketdyne’s sustained business volume from U.S. government contracts and programs.
While the Company continues to seek an arrangement with the U.S. government to recover environmental expenditures in excess of the reimbursement ceiling identified in the Global Settlement, there can be no assurances that such a recovery will be obtained, or if not obtained, that such unreimbursed environmental expenditures will not have a materially adverse effect on the Company’s operating results, financial condition, and/or cash flows.
Environmental reserves and estimated recoveries impact to unaudited condensed consolidated statements of operations
The following table summarizes the financial information for the impact of environmental reserves and recoveries to the unaudited condensed consolidated statements of operations: | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In millions) |
| | | | | | | |
| | | | | | | |
Expense to unaudited condensed consolidated statements of operations | $ | 0.7 | | | $ | 0.6 | | | $ | 1.1 | | | $ | 1.1 | |
| | | | | | | |
| | | | | | | |
d. Arrangements with Off-Balance Sheet Risk
As of June 30, 2022, arrangements with off-balance sheet risk consisted of:
•$27.8 million in outstanding commercial letters of credit, the majority of which may be renewed, primarily to collateralize obligations for environmental remediation and insurance coverage.
•$56.8 million in outstanding surety bonds to primarily satisfy indemnification obligations for environmental remediation coverage.
•$120.0 million aggregate in guarantees by the Company of Aerojet Rocketdyne’s obligations to U.S. government agencies for environmental remediation activities.
•Guarantees, jointly and severally, by the Company’s material domestic subsidiaries of their obligations under the Senior Credit Facility.
In addition to the items discussed above, the Company has and will from time to time enter into certain types of contracts that require the Company to indemnify parties against potential third-party and other claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnification to purchasers of its businesses or assets including, for example, claims arising from the operation of the businesses prior to disposition, and liability to investigate and remediate environmental contamination existing prior to disposition; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for claims arising from the use of the applicable premises; and (iii) certain agreements with officers and directors, under which the Company may be required to indemnify such persons for liabilities arising out of their relationship with the Company. The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated.
Additionally, the Company has open purchase orders and other commitments to suppliers, subcontractors, and other outsourcing partners for equipment, materials, and supplies in the normal course of business. These amounts are based on volumes consistent with anticipated requirements to fulfill purchase orders or contracts for product deliveries received, or expected to be received, from customers. A substantial portion of these amounts are recoverable through the Company's contracts with the U.S. government.
The Company provides product warranties in conjunction with certain product sales. The majority of the Company’s warranties are a one-year standard warranty for parts, workmanship, and compliance with specifications. On occasion, the
Company has made commitments beyond the standard warranty obligation. While the Company has contracts with warranty provisions, there is not a history of any significant warranty claims experience. A reserve for warranty exposure is made on a product by product basis when it is both estimable and probable. These costs are included in the program’s estimate at completion and are expensed in accordance with the Company’s revenue recognition methodology as allowed under GAAP for that particular contract.
Note 9. Retirement Benefits
The following table presents the components of retirement benefits expense (income):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Postretirement Medical and Life Insurance Benefits |
| | | |
| | | | | | | | | | | |
| Three months ended June 30, | | |
| 2022 | | 2021 | | | | 2022 | | 2021 | | |
| (In millions) | | |
| | | | | | | | | | | |
Interest cost on benefit obligation | $ | 8.9 | | | $ | 8.3 | | | | | $ | 0.1 | | | $ | 0.2 | | | |
Expected return on assets | (15.8) | | | (15.4) | | | | | — | | | — | | | |
Amortization of prior service costs | 0.1 | | | 0.1 | | | | | — | | | — | | | |
Amortization of net losses (gains) | 7.6 | | | 16.0 | | | | | (0.7) | | | (0.8) | | | |
Retirement benefits expense (income) | $ | 0.8 | | | $ | 9.0 | | | | | $ | (0.6) | | | $ | (0.6) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Postretirement Medical and Life Insurance Benefits |
| |
| | | | | | | | | |
| Six months ended June 30, |
| 2022 | | 2021 | | | | 2022 | | 2021 |
| (In millions) |
| | | | | | | | | |
Interest cost on benefit obligation | $ | 17.8 | | | $ | 16.7 | | | | | $ | 0.2 | | | $ | 0.3 | |
Expected return on assets | (31.5) | | | (30.7) | | | | | — | | | — | |
Amortization of prior service costs | 0.1 | | | 0.1 | | | | | — | | | — | |
Amortization of net losses (gains) | 15.3 | | | 31.9 | | | | | (1.4) | | | (1.4) | |
Retirement benefits expense (income) | $ | 1.7 | | | $ | 18.0 | | | | | $ | (1.2) | | | $ | (1.1) | |
Note 10. Operating Segments and Related Disclosures
The Company’s operations are organized into two operating segments based on different products and customer bases: Aerospace and Defense, and Real Estate. The following table presents selected financial information for each reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In millions) |
Net Sales: | | | | | | | |
Aerospace and Defense | $ | 527.9 | | | $ | 556.0 | | | $ | 1,038.4 | | | $ | 1,051.5 | |
Real Estate | 0.6 | | | 0.9 | | | 1.2 | | | 1.5 | |
Total Net Sales | $ | 528.5 | | | $ | 556.9 | | | $ | 1,039.6 | | | $ | 1,053.0 | |
Segment Performance: | | | | | | | |
Aerospace and Defense | $ | 37.5 | | | $ | 84.9 | | | $ | 100.2 | | | $ | 137.3 | |
Environmental remediation provision adjustments | (0.6) | | | (0.6) | | | (1.0) | | | (1.0) | |
GAAP/Cost Accounting Standards retirement benefits expense difference | 9.1 | | | 2.7 | | | 18.3 | | | 5.9 | |
Unusual items (see Note 11) | — | | | (2.9) | | | (16.3) | | | (4.6) | |
Aerospace and Defense Total | 46.0 | | | 84.1 | | | 101.2 | | | 137.6 | |
Real Estate | (0.2) | | | (0.3) | | | (0.3) | | | (0.6) | |
Total Segment Performance | $ | 45.8 | | | $ | 83.8 | | | $ | 100.9 | | | $ | 137.0 | |
Reconciliation of segment performance to income before income taxes: | | | | | | | |
Segment performance | $ | 45.8 | | | $ | 83.8 | | | $ | 100.9 | | | $ | 137.0 | |
Interest expense | (4.3) | | | (5.1) | | | (8.2) | | | (10.2) | |
Interest income and other | — | | | 0.7 | | | (0.2) | | | 1.3 | |
Stock-based compensation | (2.9) | | | (7.3) | | | (2.0) | | | (10.1) | |
Corporate retirement benefits | 0.1 | | | (1.6) | | | 0.1 | | | (3.3) | |
Corporate and other | (6.1) | | | (5.8) | | | (14.3) | | | (11.4) | |
Unusual items (see Note 11) | (8.9) | | | (3.7) | | | (14.3) | | | (18.6) | |
Income before income taxes | $ | 23.7 | | | $ | 61.0 | | | $ | 62.0 | | | $ | 84.7 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The following table summarizes customers that represented more than 10% of net sales:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Lockheed Martin | 33 | % | | 31 | % | | 34 | % | | 29 | % |
Raytheon Technologies Corporation | 19 | | | 18 | | | 18 | | | 17 | |
NASA | 17 | | | 19 | | | 18 | | | 22 | |
| | | | | | | |
| | | | | | | |
Note 11. Unusual Items
The following table presents total unusual items in the unaudited condensed consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In millions) |
Unusual items | | | | | | | |
Legal matters (component of other expense, net) | $ | — | | | $ | — | | | $ | 16.1 | | | $ | — | |
Proxy contest and related litigation costs (component of other expense, net) | 8.9 | | | — | | | 12.0 | | | — | |
Terminated merger costs (component of other expense, net) | — | | | 6.1 | | | 2.5 | | | 13.6 | |
Loss on debt | — | | | 0.5 | | | — | | | 9.6 | |
| | | | | | | |
| $ | 8.9 | | | $ | 6.6 | | | $ | 30.6 | | | $ | 23.2 | |
In the six months ended June 30, 2022, the Company incurred $16.1 million associated with legal matters. See Note 8(a) for additional information.
In the six months ended June 30, 2022, the Company incurred $12.0 million of costs associated with the proxy contest and related litigation costs. See Note 8(a) for additional information.
In the six months ended June 30, 2022 and 2021, the Company incurred terminated merger costs of $2.5 million and $13.6 million, respectively. See Note 1 for additional information. The components of the terminated merger costs are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In millions) |
Legal | $ | — | | | $ | 2.8 | | | $ | 1.8 | | | $ | 7.4 | |
Employee compensation | — | | | 3.2 | | | 0.3 | | | 5.3 | |
Consulting and other professional costs | — | | | 0.1 | | | 0.4 | | | 0.9 | |
| $ | — | | | $ | 6.1 | | | $ | 2.5 | | | $ | 13.6 | |
In the six months ended June 30, 2021, the Company settled $141.8 million of its 2¼% Notes as a result of receiving conversion notices from the holders of the 2¼% Notes. The principal amount of $141.8 million was settled in cash and the conversion premium was settled in 2.7 million common shares. The Company incurred a pre-tax charge of $9.6 million in the six months ended June 30, 2021, associated with the settlement of the 2¼% Notes.
Note 12. Revision of Previously Issued Financial Statements
As disclosed in Note 1, during the three months ended March 31, 2022, the Company identified an immaterial error in its accounting for income taxes associated with its 2¼% Notes. Upon issuance of the 2¼% Notes in 2016, the Company did not record the applicable deferred tax liability associated with the conversion option that had been recorded in other capital, which resulted in an overstatement of other capital, an overstatement of deferred income taxes, an overstatement of other current assets, net and an error in income tax expense in subsequent periods. The Company evaluated the errors and concluded that the errors were not material, either individually or in aggregate, to its current or previously issued consolidated financial statements.
Due to the immaterial error related to the accounting for income taxes associated with the 2¼% Notes, the opening other capital balance as of January 1, 2019, 2020, and 2021 was overstated by $20.9 million. Additionally, the opening retained earnings balance as of January 1, 2019 and 2020, was understated by $7.9 million and $8.0 million, respectively, and the opening accumulated deficit as of January 1, 2021, was overstated by $7.8 million. During 2021, income tax expense was overstated by $2.9 million resulting in a cumulative understatement of retained earnings of $10.7 million as of December 31, 2021.
There were no changes to the unaudited condensed consolidated statement of operations and condensed consolidated statement of comprehensive income for the three and six months ended June 30, 2021. The revision to the accompanying unaudited condensed consolidated balance sheet, condensed consolidated statement of stockholders’ equity, and condensed consolidated statement of cash flows are as follows.
Condensed Consolidated Balance Sheet | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| As Reported | | | | Adjustments | | As Revised |
| (In millions) |
ASSETS | | | | | | | |
Current Assets | | | | | | | |
Cash and cash equivalents | $ | 700.4 | | | | | $ | — | | | $ | 700.4 | |
Restricted cash | 3.0 | | | | | — | | | 3.0 | |
Marketable securities | 10.6 | | | | | — | | | 10.6 | |
Accounts receivable, net | 60.6 | | | | | — | | | 60.6 | |
| | | | | | | |
Contract assets | 354.2 | | | | | — | | | 354.2 | |
| | | | | | | |
Other current assets, net | 107.8 | | | | | (8.3) | | | 99.5 | |
| | | | | | | |
| | | | | | | |
Total Current Assets | 1,236.6 | | | | | (8.3) | | | 1,228.3 | |
Noncurrent Assets | | | | | | | |
Right-of-use assets | 52.6 | | | | | — | | | 52.6 | |
Property, plant and equipment, net | 421.1 | | | | | — | | | 421.1 | |
| | | | | | | |
Recoverable environmental remediation costs | 226.2 | | | | | — | | | 226.2 | |
| | | | | | | |
Deferred income taxes | 57.5 | | | | | (1.9) | | | 55.6 | |
Goodwill | 161.4 | | | | | — | | | 161.4 | |
Intangible assets | 34.9 | | | | | — | | | 34.9 | |
Other noncurrent assets, net | 243.3 | | | | | — | | | 243.3 | |
| | | | | | | |
Total Noncurrent Assets | 1,197.0 | | | | | (1.9) | | | 1,195.1 | |
Total Assets | $ | 2,433.6 | | | | | $ | (10.2) | | | $ | 2,423.4 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
Current Liabilities | | | | | | | |
Current portion of long-term debt | $ | 166.7 | | | | | $ | — | | | $ | 166.7 | |
Accounts payable | 132.2 | | | | | — | | | 132.2 | |
Reserves for environmental remediation costs | 37.7 | | | | | — | | | 37.7 | |
Contract liabilities | 366.5 | | | | | — | | | 366.5 | |
| | | | | | | |
Other current liabilities | 172.7 | | | | | — | | | 172.7 | |
Total Current Liabilities | 875.8 | | | | | — | | | 875.8 | |
Noncurrent Liabilities | | | | | | | |
Long-term debt | 294.6 | | | | | — | | | 294.6 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Reserves for environmental remediation costs | 258.7 | | | | | — | | | 258.7 | |
Pension benefits | 255.9 | | | | | — | | | 255.9 | |
Operating lease liabilities | 41.3 | | | | | — | | | 41.3 | |
Other noncurrent liabilities | 173.8 | | | | | — | | | 173.8 | |
Total Noncurrent Liabilities | 1,024.3 | | | | | — | | | 1,024.3 | |
Total Liabilities | 1,900.1 | | | | | — | | | 1,900.1 | |
Commitments and contingencies (Note 8) | | | | | | | |
| | | | | | | |
Stockholders’ Equity | | | | | | | |
| | | | | | | |
Common stock | 8.0 | | | | | — | | | 8.0 | |
Other capital | 599.0 | | | | | (20.9) | | | 578.1 | |
Treasury stock at cost | (64.4) | | | | | — | | | (64.4) | |
Retained earnings | 91.9 | | | | | 10.7 | | | 102.6 | |
Accumulated other comprehensive loss, net of income taxes | (101.0) | | | | | — | | | (101.0) | |
Total Stockholders’ Equity | 533.5 | | | | | (10.2) | | | 523.3 | |
Total Liabilities and Stockholders’ Equity | $ | 2,433.6 | | | | | $ | (10.2) | | | $ | 2,423.4 | |
Condensed Consolidated Statements of Stockholders’ Equity
| | | | | | | | | | | | | | | | | |
| Three and Six Months Ended June 30, 2021 |
| As Reported | | Adjustments | | As Revised |
| | | | | |
| (In millions) |
Common stock | $ | 8.0 | | | $ | — | | | $ | 8.0 | |
Other capital | 588.9 | | | (20.9) | | | 568.0 | |
Treasury stock | (64.4) | | | — | | | (64.4) | |
Retained earnings | 11.2 | | | 7.8 | | | 19.0 | |
Accumulated other comprehensive loss | (204.6) | | | — | | | (204.6) | |
Total stockholders' equity | $ | 339.1 | | | $ | (13.1) | | | $ | 326.0 | |
Condensed Consolidated Statement of Cash Flows
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| As Reported | | Adjustments | | As Revised |
| | | | | |
| (In millions) |
Operating Activities | | | | | |
Net income | $ | 63.1 | | | $ | — | | | $ | 63.1 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 30.9 | | | — | | | 30.9 | |
Amortization of debt discount and deferred financing costs | 3.0 | | | — | | | 3.0 | |
Stock-based compensation | 10.1 | | | — | | | 10.1 | |
Retirement benefits, net | 2.8 | | | — | | | 2.8 | |
Loss on debt | 9.6 | | | — | | | 9.6 | |
Other, net | (0.8) | | | — | | | (0.8) | |
Changes in assets and liabilities: | | | | | |
Accounts receivable, net | (91.5) | | | — | | | (91.5) | |
| | | | | |
Contract assets | (1.9) | | | — | | | (1.9) | |
Other current assets, net | (1.0) | | | 3.3 | | | 2.3 | |
| | | | | |
| | | | | |
Recoverable environmental remediation costs | 7.3 | | | — | | | 7.3 | |
Other noncurrent assets | 12.3 | | | — | | | 12.3 | |
Accounts payable | (0.9) | | | — | | | (0.9) | |
Contract liabilities | (17.4) | | | — | | | (17.4) | |
Other current liabilities | 6.6 | | | — | | | 6.6 | |
Deferred income taxes | — | | | (3.3) | | | (3.3) | |
Reserves for environmental remediation costs | (6.8) | | | — | | | (6.8) | |
Other noncurrent liabilities and other | (5.2) | | | | | (5.2) | |
Net Cash Provided by Operating Activities | 20.2 | | | — | | | 20.2 | |
Investing Activities | | | | | |
Net Cash Used in Investing Activities | (14.2) | | | — | | | (14.2) | |
Financing Activities | | | | | |
Net Cash Used in Financing Activities | (584.2) | | | — | | | (584.2) | |
Net Decrease in Cash, Cash Equivalents and Restricted Cash | (578.2) | | | — | | | (578.2) | |
Cash, Cash Equivalents and Restricted Cash at Beginning of Year | 1,152.5 | | | — | | | 1,152.5 | |
Cash, Cash Equivalents and Restricted Cash at End of Year | $ | 574.3 | | | $ | — | | | $ | 574.3 | |
Note 13. Subsequent Event
On July 15, 2022, the Company announced that it issued a notice of redemption to holders of its outstanding 2¼% Notes stating its intention to redeem all outstanding 2¼% Notes in full on September 19, 2022, in accordance with the terms of the indenture governing the 2¼% Notes. The Company is electing to settle conversions of the 2¼% Notes using Cash Settlement, as defined in the indenture for the 2¼% Notes.