Aerojet Rocketdyne Soldiers on Despite AR1 Loss
(Source: Forecast International; issued Oct 23, 2018)
NEWTOWN, Conn. -- After a difficult few years, Aerojet Rocketdyne is getting back on track. Backlog and sales have been steadily improving, and past difficulties have been addressed.

For 2017, Aerojet Holdings' sales rose 6.6 percent to $1.88 billion, compared to sales of $1.76 billion in 2016. The company posted a loss of $9 million for the year, compared to net income of $18 million in 2016. The loss in 2017 included a net one-time charge related to the estimated impacts of the Tax Cuts and Jobs Act, which changed the federal statutory tax rate from 35 percent to 21 percent.

In accordance with the rate reduction, the company wrote down its net deferred tax assets by $64.6 million. Backlog continued to move upward year over year, rising to $4.6 billion in 2017. Employment is also on the rise, growing to 5,160 from 4,970 a year ago.

Major Aerojet customers (accounting for more than 10 percent of sales each) continued to be Lockheed Martin, ULA, Raytheon, and NASA. During FY17, Lockheed Martin, ULA, Raytheon, and NASA accounted for approximately 22 percent, 20 percent, 17 percent, and 17 percent of sales, respectively. In order to keep its momentum, the company has initiated the next phase of what it calls its Competitive Improvement Program (CIP).

This latest effort is a follow-up to an earlier CIP, which began in 2015. As with the earlier effort, the current consolidation aims to optimize operations around the key markets of Defense and Space, which could result in annual savings of $230 million.

Key to this effort will be a footprint reduction, as sites in Sacramento and Vernon, California and Gainesville, Virginia will be consolidated. Meanwhile, the Huntsville site in Alabama will be expanded with a new defense- oriented facility, which would also produce the AR1 engine.

This latest effort is no doubt a countermove following the failed 2015 bid to acquire ULA, which is owned by Boeing and Lockheed Martin. The $2 billion offer was rejected in short order by the partners. For a while now, Aerojet has been trying to gain access to ULA data that would enable the company to put its developmental AR1 engine on the Atlas V as a new option under the Evolved Expendable Launch Vehicle program. The move would have also shut out rival Blue Origin, which, as anticipated, won the booster engine contract over the AR1 in September 2018.

While a bitter loss, Aerojet Rocketdyne did score a position on the Vulcan program, powering the upper stage with its RL10-CX. The company plans to continue on with the AR1 engine, with hot fire testing slated for 2019. However, in mid-2018, the USAF restructured the contract, lowering its value from $804 million to $353.8 million, with Aerojet now tasked with building a single prototype engine.

According to a Space News report, Aerojet Rocketdyne said that the company is still interested in developing the AR1, arguing that the engine could instead be used to power medium-class launch vehicles. However, the outlook for the AR1's success looks grim, as market dynamics are currently favoring light launch systems such as Rocket Lab Electron or heavy rockets such as the Vulcan.

Despite this high-profile loss, the firm's foundation is built on its position as a key supplier of military rocket and missile propulsion systems. Global instability is increasingly becoming the new normal and, as such, launch and missile systems will remain strongly funded. The company has key positions on the Ground-Based Strategic Deterrent effort as well as work on several next-generation hypersonic propulsion systems. In addition, NASA's current program priorities, such as the Space Launch System and the Orion, pose strong growth opportunities for the firm.

The company is also open to acquisitions for maintaining growth. While an outright company buy is unlikely given the high prices any purchase would probably fetch in today's economy, Aerojet may look for niche product lines that complement or expand its existing operations.

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