EL SEGUNDO, Calif., May 01, 2018 (GLOBE NEWSWIRE) -- Aerojet Rocketdyne Holdings, Inc. (NYSE:AJRD) today reported results for the first quarter ended March 31, 2018.
Financial Overview
First quarter of 2018 compared with first quarter of 2017
- Net sales for the three months ended March 31, 2018, totaled $492.0 million compared with $405.3 million for the three months ended March 31, 2017.
- Effective January 1, 2018, the Company adopted the new revenue recognition guidance. Consistent with the standard, net assets increased by $37.6 million and $578.0 million of net sales were recognized in the cumulative effect at January 1, 2018, with a corresponding reduction to backlog.
- Total backlog as of March 31, 2018, was $3.9 billion compared with $4.6 billion as of December 31, 2017.
- Net income for the three months ended March 31, 2018, was $14.0 million, or $0.18 diluted income per share, compared with net income of $5.9 million, or $0.08 diluted income per share, for the three months ended March 31, 2017.
- Adjusted EBITDAP (Non-GAAP measure*) for the three months ended March 31, 2018, was $47.2 million compared with $41.3 million for the three months ended March 31, 2017.
- Segment performance before environmental remediation provision adjustments, retirement benefits, net, and unusual items (Non-GAAP measure*) was $37.2 million for the three months ended March 31, 2018, compared with $39.0 million for the three months ended March 31, 2017.
- Cash used in operating activities for the three months ended March 31, 2018, totaled $95.4 million compared with $3.1 million of cash used in operating activities for the three months ended March 31, 2017, principally driven by timing, including significant early receipts from customers at the end of 2017.
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* The Company provides Non-GAAP measures as a supplement to financial results based on accounting principles generally accepted in the United States (“GAAP”). A reconciliation of the Non-GAAP measures to the most directly comparable GAAP measures is included at the end of the release.
“I’m pleased with the Company’s growth through the first quarter of 2018,” said Eileen Drake, CEO and President of Aerojet Rocketdyne Holdings, Inc. Sales of $492 million grew 21% on a reported basis. Excluding the effects of adopting the new revenue recognition guidance, sales growth was 16% in the first quarter, including 14 points of organic growth after adjusting for the Coleman Aerospace acquisition. This growth was largely driven by increased deliveries on key franchise defense programs such as the Patriot Advanced Capability-3 (“PAC-3”), Terminal High Altitude Area Defense (“THAAD”) and Standard Missile.
“Further, I’m thrilled with the level of recent government appropriations to fund the DoD and NASA for the government fiscal year (“GFY”) 2018 and the growth opportunities this specifically creates for our end-markets,” added Drake. Combined with previous GFY 2018 defense funds appropriated in late 2017, the Omnibus Appropriations bill directs a total of $660 billion to the DoD total for GFY 2018 – a significant increase over GFY 2017 enacted levels – and $21 billion for NASA, more than $1 billion above GFY 2017 levels. “This total funding includes approximately $13.9 billion earmarked for missile defense programs and $2.2 billion for the Space Launch System, a key program for Aerojet Rocketdyne. Continued funding for these areas positions our company well as we look ahead to the next several years.”
Operations Review
Aerospace and Defense Segment
| Three months ended March 31, | |||||||
| 2018 | 2017 | ||||||
| (In millions, except percentage amounts) | |||||||
| Net sales | $ | 490.4 | $ | 403.7 | |||
| Segment performance | 34.3 | 34.7 | |||||
| Segment margin | 7.0 | % | 8.6 | % | |||
| Segment margin before environmental remediation provision adjustments, retirement benefits, net, and unusual items (Non-GAAP measure) | 7.5 | % | 9.5 | % | |||
| Components of segment performance: | |||||||
| Aerospace and Defense | $ | 36.6 | $ | 38.2 | |||
| Environmental remediation provision adjustments | (1.3 | ) | (0.6 | ) | |||
| GAAP/Cost Accounting Standards (“CAS”) retirement benefits expense difference | (1.0 | ) | (3.5 | ) | |||
| Unusual items | — | 0.6 | |||||
| Aerospace and Defense total | $ | 34.3 | $ | 34.7 | |||
First quarter of 2018 compared with first quarter of 2017
The increase in net sales was significantly impacted by the adoption of new revenue recognition guidance effective January 1, 2018, using the modified retrospective method. The primary impact of the new guidance was a change in the timing of revenue recognition on certain long-term contracts. Under this new guidance, the Company discontinued the use of the unit-of-delivery method on certain customer contracts and re-measured the performance obligations using the cost-to-cost method. Net sales in the three months ended March 31, 2018, would have been $467.8 million under the previous revenue recognition guidance which is $64.1 million higher than the net sales reported in the three months ended March 31, 2017, primarily as a result of an increase of $88.5 million in defense programs primarily driven by increased deliveries on the PAC-3, THAAD, and Standard Missile programs. The increase in net sales was partially offset by a decrease of $24.4 million in space programs primarily driven by performance issues on the Commercial Crew Development program and lower deliveries on the Atlas V program.
The decrease in segment margin before environmental remediation provision adjustments, retirement benefits, net and unusual items was primarily due to cost growth and performance issues in the current period on the Commercial Crew Development program partially offset by improved performance in the current period on the RS-68 program and electric propulsion contracts.
During the three months ended March 31, 2018, the Company had $7.9 million of unfavorable changes in contract estimates on operating results before income taxes compared with favorable changes of $3.4 million during the three months ended March 31, 2017.
Backlog
As of March 31, 2018, the Company’s total remaining performance obligations, which are also referred to as backlog, were $3.9 billion. The Company expects to recognize approximately 47%, or $1.8 billion, of the remaining performance obligations as net sales over the next twelve months. A summary of the Company’s backlog is as follows:
| March 31, 2018 | December 31, 2017 | ||||||
| (In billions) | |||||||
| Funded backlog | $ | 1.6 | $ | 2.1 | |||
| Unfunded backlog | 2.3 | 2.5 | |||||
| Total backlog | $ | 3.9 | $ | 4.6 | |||
The Company’s adoption of the new revenue recognition guidance impacts the timing of revenue recognition. The adoption resulted in a $0.6 billion reduction in total backlog. Total backlog includes both funded backlog (unfilled orders for which funding is authorized, appropriated and contractually obligated by the customer) and unfunded backlog (firm orders for which funding has not been appropriated). Indefinite delivery and quantity contracts and unexercised options are not reported in total backlog. Backlog is subject to funding delays or program restructurings/cancellations which are beyond the Company’s control.
Real Estate Segment
| Three months ended March 31, | |||||||
| 2018 | 2017 | ||||||
| (In millions) | |||||||
| Net sales | $ | 1.6 | $ | 1.6 | |||
| Segment performance | 0.6 | 0.8 | |||||
Net sales and segment performance consist primarily of rental property operations.
Income Taxes
In the three months ended March 31, 2018, the income tax provision was $4.7 million for an effective tax rate of 25.1%. 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 research and development credits.
The current income tax payable as of March 31, 2018, was $127.7 million compared with $0.8 million as of December 31, 2017. The significant increase in the current income tax payable during this reporting period relates to the impact of the Company’s adoption of the new revenue recognition guidance on January 1, 2018. In anticipation of this impact, the Company filed a non-automatic accounting method change request, Form 3115 Application for Change in Accounting Method, with the Internal Revenue Service (“IRS”) during the three months ended March 31, 2018. The change in accounting method for tax purposes will provide for consistent recognition of costs of sales for both book and tax purposes, under certain circumstances. To the extent that the Company receives IRS consent, the Company expects that the current income tax payable and the corresponding deferred tax asset would decrease by approximately $105 million to $115 million. The Company believes that the increase in the current income tax payable is an unintended consequence of the new revenue recognition guidance and is optimistic that IRS consent will be received; however, no assurance can be given.
Forward-Looking Statements
This release may contain certain “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. Such statements in this release and in subsequent discussions with the Company’s management are based on management’s current expectations and are subject to risks, uncertainty and changes in circumstances, which could cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. All statements contained herein and in subsequent discussions with the Company’s management that are not clearly historical in nature are forward-looking and the words “anticipate,” “believe,” “expect,” “estimate,” “plan,” and similar expressions are generally intended to identify forward-looking statements. A variety of factors could cause actual results or outcomes to differ materially from those expected and expressed in the Company’s forward-looking statements. Some important risk factors that could cause actual results or outcomes to differ from those expressed in the forward-looking statements include, but are not limited to, the following:
- future reductions or changes in U.S. government spending;
- cancellation or material modification of one or more significant contracts;
- cost overruns on the Company’s contracts that require the Company to absorb excess costs;
- failure of the Company’s subcontractors or suppliers to perform their contractual obligations;
- failure to secure contracts;
- failure to comply with regulations applicable to contracts with the U.S. government;
- failure to comply with applicable laws, including laws relating to export controls and anti-corruption or bribery laws;
- the Company’s Competitive Improvement Program may not be successful in aligning the Company’s operations to current market conditions or in achieving the anticipated costs savings and other benefits within the expected timeframes;
- costs and time commitment related to potential and/or actual acquisition activities may exceed expectations;
- the Company’s inability to adapt to rapid technological changes;
- failure of the Company’s information technology infrastructure including a successful cyber-attack, accident, unsuccessful outsourcing of certain information technology and cyber security functions, or security breach that could result in disruptions to the Company’s operations;
- product failures, schedule delays or other problems with existing or new products and systems;
- the release, unplanned ignition, explosion, or improper handling of dangerous materials used in the Company’s businesses;
- loss of key qualified suppliers of technologies, components, and materials;
- the funded status of the Company’s defined benefit pension plan and the Company’s obligation to make cash contributions in excess of the amount that the Company can recover in its current period overhead rates;
- effects of changes in discount rates and actuarial estimates, actual returns on plan assets, and government regulations on defined benefit pension plans;
- the possibility that environmental and other government regulations that impact the Company become more stringent or subject the Company to material liability in excess of its established reserves;
- environmental claims related to the Company’s current and former businesses and operations including the inability to protect or enforce previously executed environmental agreements;
- reductions in the amount recoverable from environmental claims;
- significant risk exposures and potential liabilities that are inadequately covered by indemnity or insurance;
- inability to protect the Company’s patents and proprietary rights;
- business disruptions to the extent not covered by insurance;
- the substantial amount of debt which places significant demands on the Company’s cash resources and could limit the Company’s ability to borrow additional funds or expand its operations;
- the Company’s ability to comply with the financial and other covenants contained in the Company’s debt agreements;
- risks inherent to the real estate market;
- changes in economic and other conditions in the Sacramento, California metropolitan area real estate market or changes in interest rates affecting real estate values in that market;
- additional costs related to past or future divestitures;
- the loss of key employees and shortage of available skilled employees to achieve anticipated growth;
- a strike or other work stoppage or the Company’s inability to renew collective bargaining agreements on favorable terms;
- fluctuations in sales levels causing the Company’s quarterly operating results and cash flows to fluctuate;
- restatement of previously issued consolidated financial statements may lead to additional risks and uncertainties;
- failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act; and
- those risks detailed in the Company’s reports filed with the SEC.
About Aerojet Rocketdyne Holdings, Inc.
Aerojet Rocketdyne Holdings, Inc., headquartered in El Segundo, California, is an innovative technology-based manufacturer of aerospace and defense products and systems, with a real estate segment that includes activities related to the entitlement, sale, and leasing of the company’s excess real estate assets. More information can be obtained by visiting the company’s website at www.aerojetrocketdyne.com.
Contact information:
Investors:
Paul R. Lundstrom, vice president and chief financial officer 310.252.8142
Brendan King, vice president, investor relations 916.351.8618
| Aerojet Rocketdyne Holdings, Inc. | |||||||
| Unaudited Condensed Consolidated Statement of Operations | |||||||
| Three months ended March 31, | |||||||
| 2018 | 2017 | ||||||
| (In millions, except per share amounts) | |||||||
| Net sales | $ | 492.0 | $ | 405.3 | |||
| Operating costs and expenses: | |||||||
| Cost of sales (exclusive of items shown separately below) | 426.8 | 339.4 | |||||
| Selling, general and administrative expense | 6.7 | 13.5 | |||||
| Depreciation and amortization | 17.7 | 16.3 | |||||
| Other expense, net | 1.2 | 1.7 | |||||
| Total operating costs and expenses | 452.4 | 370.9 | |||||
| Operating income | 39.6 | 34.4 | |||||
| Non-operating (income) expense: | |||||||
| Retirement benefits expense | 14.4 | 18.3 | |||||
| Interest income | (1.6 | ) | (0.5 | ) | |||
| Interest expense | 8.1 | 7.4 | |||||
| Total non-operating expense, net | 20.9 | 25.2 | |||||
| Income before income taxes | 18.7 | 9.2 | |||||
| Income tax provision | 4.7 | 3.3 | |||||
| Net income | $ | 14.0 | $ | 5.9 | |||
| Earnings Per Share of Common Stock | |||||||
| Basic | |||||||
| Basic net income per share | $ | 0.19 | $ | 0.08 | |||
| Diluted | |||||||
| Diluted net income per share | $ | 0.18 | $ | 0.08 | |||
| Weighted average shares of common stock outstanding, basic | 73.7 | 72.3 | |||||
| Weighted average shares of common stock outstanding, diluted | 74.7 | 72.3 | |||||
The Company adopted the new revenue recognition guidance effective January 1, 2018, using the modified retrospective method, with the cumulative effect recognized during the three months ended March 31, 2018. The primary impact of the new guidance was a change in the timing of revenue recognition on certain long-term contracts in the Company’s Aerospace and Defense segment. The new guidance does not change the total sales or operating income on the related customer contracts, only the timing of when sales and operating income are recognized. Under this new guidance, the Company discontinued the use of the unit-of-delivery method on certain customer contracts and re-measured the performance obligations using the cost-to-cost method. The unit-of-delivery method was utilized for 48% of net sales for the year ended December 31, 2017. The cumulative impact of adoption was $37.6 million.
The following tables summarize the effect of adoption of the new revenue recognition standard on the Company’s unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2018.
| Aerojet Rocketdyne Holdings, Inc. | |||||||||||
| Unaudited Condensed Consolidated Statement of Operations | |||||||||||
| Three months ended March 31, 2018 | |||||||||||
| As Reported | Effect of Adoption | Amounts Excluding Effect of Adoption | |||||||||
| (In millions, except per share amounts) | |||||||||||
| Net sales | $ | 492.0 | $ | (22.6 | ) | $ | 469.4 | ||||
| Operating costs and expenses: | |||||||||||
| Cost of sales (exclusive of items shown separately below) | 426.8 | (14.7 | ) | 412.1 | |||||||
| Selling, general and administrative expense | 6.7 | — | 6.7 | ||||||||
| Depreciation and amortization | 17.7 | — | 17.7 | ||||||||
| Other expense, net | 1.2 | — | 1.2 | ||||||||
| Total operating costs and expenses | 452.4 | (14.7 | ) | 437.7 | |||||||
| Operating income | 39.6 | (7.9 | ) | 31.7 | |||||||
| Non-operating (income) expense: | |||||||||||
| Retirement benefits expense | 14.4 | — | 14.4 | ||||||||
| Interest income | (1.6 | ) | — | (1.6 | ) | ||||||
| Interest expense | 8.1 | — | 8.1 | ||||||||
| Total non-operating expense, net | 20.9 | — | 20.9 | ||||||||
| Income before income taxes | 18.7 | (7.9 | ) | 10.8 | |||||||
| Income tax provision | 4.7 | (2.0 | ) | 2.7 | |||||||
| Net income | $ | 14.0 | $ | (5.9 | ) | $ | 8.1 | ||||
| Earnings Per Share of Common Stock | |||||||||||
| Basic | |||||||||||
| Basic net income per share | $ | 0.19 | $ | (0.08 | ) | $ | 0.11 | ||||
| Diluted | |||||||||||
| Diluted net income per share | $ | 0.18 | $ | (0.07 | ) | $ | 0.11 | ||||
| Weighted average shares of common stock outstanding, basic | 73.7 | — | 73.7 | ||||||||
| Weighted average shares of common stock outstanding, diluted | 74.7 | — | 74.7 | ||||||||
| Aerojet Rocketdyne Holdings, Inc. | |||||||
| Unaudited Operating Segment Information | |||||||
| Three months ended March 31, | |||||||
| 2018 | 2017 | ||||||
| (In millions) | |||||||
| Net Sales: | |||||||
| Aerospace and Defense | $ | 490.4 | $ | 403.7 | |||
| Real Estate | 1.6 | 1.6 | |||||
| Total Net Sales | $ | 492.0 | $ | 405.3 | |||
| Segment Performance: | |||||||
| Aerospace and Defense | $ | 36.6 | $ | 38.2 | |||
| Environmental remediation provision adjustments | (1.3 | ) | (0.6 | ) | |||
| GAAP/CAS retirement benefits expense difference | (1.0 | ) | (3.5 | ) | |||
| Unusual items | — | 0.6 | |||||
| Aerospace and Defense Total | 34.3 | 34.7 | |||||
| Real Estate | 0.6 | 0.8 | |||||
| Total Segment Performance | $ | 34.9 | $ | 35.5 | |||
| Reconciliation of segment performance to income before income taxes: | |||||||
| Segment performance | $ | 34.9 | $ | 35.5 | |||
| Interest expense | (8.1 | ) | (7.4 | ) | |||
| Interest income | 1.6 | 0.5 | |||||
| Stock-based compensation expense | (1.5 | ) | (6.8 | ) | |||
| Corporate retirement benefits expense | (3.3 | ) | (5.0 | ) | |||
| Corporate and other expense, net | (4.9 | ) | (6.6 | ) | |||
| Unusual items | — | (1.0 | ) | ||||
| Income before income taxes | $ | 18.7 | $ | 9.2 | |||
The Company evaluates its operating segments based on several factors, of which the primary financial measure is segment performance. Segment performance represents net sales less applicable costs, expenses and unusual items relating to the segment operations. Segment performance excludes corporate income and expenses, unusual items not related to the segment operations, interest expense, interest income, and income taxes. The Company believes that segment performance provides information useful to investors in understanding its underlying operational performance. Specifically, the Company believes the exclusion of the items listed above permits an evaluation and a comparison of results for ongoing business operations. It is on this basis that management internally assesses the financial performance of its segments.
| Aerojet Rocketdyne Holdings, Inc. | |||||||
| Unaudited Condensed Consolidated Balance Sheet | |||||||
| March 31, 2018 | December 31, 2017 | ||||||
| (In millions) | |||||||
| ASSETS | |||||||
| Current Assets | |||||||
| Cash and cash equivalents | $ | 432.8 | $ | 535.0 | |||
| Marketable securities | 20.0 | 20.0 | |||||
| Accounts receivable | 170.1 | 64.5 | |||||
| Contract assets | 266.0 | 268.1 | |||||
| Other current assets, net | 156.7 | 129.1 | |||||
| Total Current Assets | 1,045.6 | 1,016.7 | |||||
| Noncurrent Assets | |||||||
| Property, plant and equipment, net | 352.8 | 359.0 | |||||
| Recoverable environmental remediation costs | 228.1 | 231.1 | |||||
| Deferred income taxes | 253.1 | 145.8 | |||||
| Goodwill | 161.3 | 161.3 | |||||
| Intangible assets | 82.1 | 85.5 | |||||
| Other noncurrent assets, net | 262.9 | 259.3 | |||||
| Total Noncurrent Assets | 1,340.3 | 1,242.0 | |||||
| Total Assets | $ | 2,385.9 | $ | 2,258.7 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current Liabilities | |||||||
| Current portion of long-term debt | $ | 27.7 | $ | 25.0 | |||
| Accounts payable | 133.4 | 100.9 | |||||
| Reserves for environmental remediation costs | 36.4 | 35.2 | |||||
| Contract liabilities | 212.6 | 276.8 | |||||
| Other current liabilities | 267.6 | 156.9 | |||||
| Total Current Liabilities | 677.7 | 594.8 | |||||
| Noncurrent Liabilities | |||||||
| Long-term debt | 586.3 | 591.4 | |||||
| Reserves for environmental remediation costs | 302.0 | 306.2 | |||||
| Pension benefits | 480.3 | 492.8 | |||||
| Other noncurrent liabilities | 170.4 | 171.1 | |||||
| Total Noncurrent Liabilities | 1,539.0 | 1,561.5 | |||||
| Total Liabilities | 2,216.7 | 2,156.3 | |||||
| Commitments and contingencies | |||||||
| Stockholders’ Equity | |||||||
| Common stock | 7.4 | 7.4 | |||||
| Other capital | 505.8 | 503.1 | |||||
| Treasury stock at cost | (64.5 | ) | (64.5 | ) | |||
| Accumulated deficit | (19.4 | ) | (71.0 | ) | |||
| Accumulated other comprehensive loss, net of income taxes | (260.1 | ) | (272.6 | ) | |||
| Total Stockholders’ Equity | 169.2 | 102.4 | |||||
| Total Liabilities and Stockholders’ Equity | $ | 2,385.9 | $ | 2,258.7 | |||
| Aerojet Rocketdyne Holdings, Inc. | |||||||
| Unaudited Condensed Consolidated Statements of Cash Flows | |||||||
| Three months ended March 31, | |||||||
| 2018 | 2017 | ||||||
| (In millions) | |||||||
| Operating Activities | |||||||
| Net income | $ | 14.0 | $ | 5.9 | |||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||
| Depreciation and amortization | 17.7 | 16.3 | |||||
| Amortization of debt discount and deferred financing costs | 2.1 | 2.1 | |||||
| Stock-based compensation | 1.5 | 6.8 | |||||
| Retirement benefits, net | 3.3 | 7.7 | |||||
| Insurance proceeds | (1.9 | ) | — | ||||
| Loss on disposal of long-lived assets | — | 0.1 | |||||
| Changes in assets and liabilities, net of effects from acquisition in 2017: | |||||||
| Accounts receivable | (76.2 | ) | (30.1 | ) | |||
| Contract assets | (20.4 | ) | 2.3 | ||||
| Other current assets, net | (17.4 | ) | (6.2 | ) | |||
| Recoverable environmental remediation costs | 3.0 | 4.1 | |||||
| Other noncurrent assets | (3.9 | ) | (3.4 | ) | |||
| Accounts payable | 29.8 | 1.1 | |||||
| Contract liabilities | (30.8 | ) | (16.0 | ) | |||
| Other current liabilities | (21.9 | ) | 7.7 | ||||
| Deferred income taxes | 9.0 | 2.3 | |||||
| Reserves for environmental remediation costs | (3.0 | ) | (4.2 | ) | |||
| Other noncurrent liabilities and other | (0.3 | ) | 0.4 | ||||
| Net Cash Used in Operating Activities | (95.4 | ) | (3.1 | ) | |||
| Investing Activities | |||||||
| Purchase of Coleman Aerospace | — | (15.0 | ) | ||||
| Insurance proceeds | 1.9 | — | |||||
| Capital expenditures | (4.1 | ) | (2.7 | ) | |||
| Net Cash Used in Investing Activities | (2.2 | ) | (17.7 | ) | |||
| Financing Activities | |||||||
| Debt repayments | (5.1 | ) | (5.0 | ) | |||
| Repurchase of shares for withholding taxes and option costs under employee equity plans | (1.6 | ) | (4.7 | ) | |||
| Proceeds from shares issued under equity plans | 2.1 | 2.3 | |||||
| Net Cash Used in Financing Activities | (4.6 | ) | (7.4 | ) | |||
| Net Decrease in Cash and Cash Equivalents | (102.2 | ) | (28.2 | ) | |||
| Cash and Cash Equivalents at Beginning of Period | 535.0 | 410.3 | |||||
| Cash and Cash Equivalents at End of Period | $ | 432.8 | $ | 382.1 | |||
Use of Non-GAAP Financial Measures
In addition to segment performance (discussed above), the Company provides the Non-GAAP financial measure of its operational performance called Adjusted EBITDAP. The Company uses this metric to measure its operating performance. The Company believes that to effectively compare core operating performance from period to period, the metric should exclude items relating to retirement benefits (pension and postretirement benefits), significant non-cash expenses, the impacts of financing decisions on earnings, and items incurred outside the ordinary, ongoing and customary course of its operations. Accordingly, the Company defines Adjusted EBITDAP as GAAP net income adjusted to exclude income taxes, interest expense, interest income, depreciation and amortization, retirement benefits net of amounts that are recoverable under its U.S. government contracts, and unusual items which the Company does not believe are reflective of such ordinary, ongoing and customary activities. Adjusted EBITDAP does not represent, and should not be considered an alternative to, net income as determined in accordance with GAAP.
| Three months ended March 31, | |||||||
| 2018 | 2017 | ||||||
| (In millions, except percentage amounts) | |||||||
| Net income | $ | 14.0 | $ | 5.9 | |||
| Income tax provision | 4.7 | 3.3 | |||||
| Interest expense | 8.1 | 7.4 | |||||
| Interest income | (1.6 | ) | (0.5 | ) | |||
| Depreciation and amortization | 17.7 | 16.3 | |||||
| GAAP retirement benefits expense | 14.4 | 18.3 | |||||
| CAS recoverable retirement benefits expense | (10.1 | ) | (9.8 | ) | |||
| Unusual items | — | 0.4 | |||||
| Adjusted EBITDAP | $ | 47.2 | $ | 41.3 | |||
| Net income as a percentage of net sales | 2.8 | % | 1.5 | % | |||
| Adjusted EBITDAP as a percentage of net sales | 9.6 | % | 10.2 | % | |||
The Company also provides the Non-GAAP financial measure of Free Cash Flow. Free Cash Flow, a Non-GAAP financial measure, is defined as cash flow from operating activities less capital expenditures. Free Cash Flow should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to cash flows from operations presented in accordance with GAAP. The Company uses Free Cash Flow, both in presenting its results to stakeholders and the investment community, and in the Company’s internal evaluation and management of the business. Management believes that this financial measure is useful because it provides supplemental information to assist investors in viewing the business using the same tools that management uses to evaluate progress in achieving the Company’s goals (including under the annual cash and long-term compensation incentive plans).
| Three months ended March 31, | |||||||
| 2018 | 2017 | ||||||
| (In millions) | |||||||
| Net cash used in operating activities | $ | (95.4 | ) | $ | (3.1 | ) | |
| Capital expenditures | (4.1 | ) | (2.7 | ) | |||
| Free Cash Flow | $ | (99.5 | ) | $ | (5.8 | ) | |
Because the Company’s method for calculating these Non-GAAP measures may differ from other companies’ methods, the Non-GAAP measures presented above may not be comparable to similarly titled measures reported by other companies. These measures are not recognized in accordance with GAAP, and the Company does not intend for this information to be considered in isolation or as a substitute for GAAP measures.