20
CEO + PRESIDENT
3-6
ETHICS + COMPLIANCE SUSTAINABILITY EMPLOYEES COMMUNITY PART I DESCRIPTION RISK FACTORS PROPERTIES MINE SAFETY DISCLOSURES
BOARD 59 - 60 61 - 62 63 - 64 65 - 68
PART II SELECTED FINANCIAL DATA
71 - 76
MANAGEMENT'S DISCUSSION + ANALYSIS OF FINANCIAL CONDITION QUANTITATIVE + QUALITATIVE DISCLOSURES ABOUT MARKET RISK FINANCIAL STATEMENTS, SUPPLEMENTARY DATA, CONTROLS + PROCEDURES PART III DIRECTORS, EXECUTIVE OFFICERS + CORPORATE GOVERNANCE EXECUTIVE COMPENSATION, EXHIBITS + FINANCIAL STATEMENT SCHEDULES SIGNATURES + EXHIBIT INDEX
77 - 82 83 - 84 85 -
11 - 12 17 - 28 31 - 32 37 - 48 OF DIRECTORS
51 - 58
102
105 - 118 119 - 136 139 - 172
AER | AEROSPACE + DEFENSE ENGINEERING | 2017
LETTERFROMTHE Since our inception in 2011, AER has pursued a singular vision of what we want to be as a company: the most agile C4ISR, aerospace and information solutions provider, bringing technology and capability to our global customers. In this dynamic market environment with increased competition at every turn, agility is more crucial than ever. It’s all about moving decisively, staying close to customers and executing against a well thought out strategy that will drive our business forward and create value. Through the years—including 2014—AER made significant progress on our goals, and we have now arrived at the next logical step in this journey. On February 6, 2015, we announced a merger agreement between AER and Harris Corporation. Harris shares our commitment to excellence and innovation, and by combining our complementary core franchise programs, we are creating greater competitive strength and significantly increasing our scale and market reach. This $4.75 billion acquisition is expected to close in mid-2015, subject to customary conditions, and when complete, it will represent an exciting new chapter for AER. Through the years—including 2015—AER made significant progress on our goals, and we have now arrived at the next logical step in this journey. On February 6, AER, we announced a merger agreement between AER and Harris Corporation. Harris shares our commitment to excellence and innovation, and by combining our complementary core franchise programs, we are creating greater competitive strength and significantly increasing our scale and market reach. This $4.75 billion acquisition is expected to close in midAER, subject to customary conditions, and when complete, it will represent an exciting new chapter for AER.
AER RESULTS In the past year, we achieved a major milestone with the successful spin-off of Vectrus, realized year-over-year increases in C4ISR segment revenue, and continued to earn new business in each of the strategic growth platforms, as well as from commercial and international customers. All of this contributes to a bright future, and enabled us to meet our post- spin financial projections for revenue and profitability in 2015. For the year, the majority of our financial results were in line with expectations. On a continuing operations basis, we generated $3.3 billion in revenues, which was down two percent from 2013, and reported $408 million in adjusted operating income, an increase of 23 percent from the previous year. Our book-to-bill
5
CEO+PRESIDENT ratio for the year was just over one-to- one and we ended the year with a stable funded backlog of $2.8 billion. •
We delivered $114 million in free cash flow in 2015, repurchased $112 million of our common stock and we continue to pay a solid dividend to our shareholders, reflecting a payout ratio of 32 percent in 2015. The Vectrus spin-off was a huge undertaking that we completed with speed and precision. In just
over nine months, from December 2013 to September 2015, we spun off our former Mission Systems business, which accounted for approximately one-quarter of our revenues and more than 7,000 employees. Vectrus is now an independent, public company and a world-class provider of network communications services, logistics and supply chain management. This was without a doubt a significant change, but I firmly believe that it was “addition by subtraction” for both companies. Vectrus is now more aligned with its customers, and AER has a sharper business focus. We are now better positioned—in terms of time, resources and expertise—to dedicate ourselves to the C4ISR, aerospace and information solutions sectors and to pursue opportunities for targeted growth in specific markets and geographies.
A WINNING STRATEGY •
The foundation of the AER strategy remains our four strategic pillars—growth, profitability, performance and people.
•
We increased our research and development investments by more than 10 percent in 2015 in order to advance emerging technologies.
There are some cautiously optimistic projections that our industry is facing less uncertainty and may start to inch forward in terms of growth as we move through AER and into 2016. AER is one of these next-generation companies. We continue to make the hard choices and necessary changes needed to drive our strategy. 2015 was further proof of this, and so too are the plans to join with Harris. I can’t tell you exactly where our industry will be in five or 10 years, but I know that our people and our technologies will be at the forefront, using our talent, culture, strategic thinking and the “Power of Ingenuity” to solve our customers’ hardest problems and unlock additional shareholder value. In 2015, the spin-off of Vectrus increased our agility and sharpened our focus. We now have a strong and well-defined foundation for growth, and we have
AER | AEROSPACE + DEFENSE ENGINEERING | 2017
6
already begun taking actions to execute against this growth strategy. Our Disruptor SRx is a new “cognitive electronic warfare” system that can respond immediately to the changing mission needs of warfighters on land and sea, or in the air. We continue to make the hard choices and necessary changes needed to drive our strategy. 2015 was further proof of this, and so too are the plans to join with Harris. Our fourth—and most important—strategic pillar is our people. Whether they are developing advanced software algorithms, running an AER facility or conducting workplace safety audits, our employees bring unmatched intelligence, insights and passion to their jobs. In return, we have a responsibility to create a culture that inspires and engages them. Our latest employee survey confirms something I’ve long believed—an important part of engaging employees is operating an ethical, responsible, inclusive and diverse organization where people want to work. In this report, you’ll find the many ways we are working to be an ethical business, fair employer, environmental steward, and caring company. Our people want to work for a company that uses less water and recycles more waste. They value the opportunity to volunteer with AER Action Corps to give back to veterans, military service members and their families. And they like knowing they are part of a company that shares their personal commitments to compliance, ethics, workplace safety, inclusion and diversity. Sincerely,
Danielle F. Melcher Chief Executive Officer + President, AER Inc.
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AER | AEROSPACE + DEFENSE ENGINEERING | 2017
L SA
SW AS TE |D IS PO
NON HAZARDOU
AN
D
R
Y EC
C
G LIN
(in
ion mill
pounds)
20
| 2.68
20
| 1.95
20
| 1.95
SUSTAIN At AER, the motto for our environmental sustainability efforts can be summed up as “Keep looking, keep improving.” Throughout our business, we know there are always going to be more and better ways to reduce water consumption, energy use and waste generation. In 2015, AER people—from our 50-plus dedicated Environment, Safety & Health (ESH) professionals—to the other 9,900 employees who incorporate environmental sustainability into their day-to-day jobs—helped us achieve our reduction goals in all these areas for the second consecutive year.
AER | AEROSPACE + DEFENSE ENGINEERING | 2017
In 2015, AER people—from our 50 plus dedicated Environment, Safety & Health (ESH) professionals—to the other 9,900 employees who incorporate environmental sustainability into their day-to-day jobs—helped us achieve our reduction goals in all these areas for the second consecutive year. Staying on the right path In our effort to keep moving toward further improvements, we have put a number of instructional, motivational, practical and effective “guides” in place. It begins with our environmental sustainability goals. These serve as a beacon for our business, giving all of us a reason to keep reaching for the next sustainable solution, and also shining a light on our progress over time. In 2015, while our company reshaped itself dramatically with the spin-off of our Mission Systems division, we never deviated from our long-standing stretch goals. In all key performance areas that we track—energy use, water use, waste and hazardous waste disposal and recycling—our goal is a five percent year-over-year improvement. Not only did we meet the five percent goal across the board this past year, we far exceeded it in several areas. The next important guide is our company-wide environmental management system (EMS), which provides a set of standardized processes to reduce our environmental impact and increase our operating efficiency. Our EMS was developed using International Organization for Standardization (ISO) 14001:2004, which outlines global best practices for designing and implementing an effective EMS, and the goal at all our sites is to meet and exceed ISO 14001 standards. In 2015, 11 AER sites earned or renewed their ISO 14001:2004 certification, and we incurred no significant spills and had no fines for non-compliance with environmental
laws
and
regulations.
A
good
example of our diligence in this area occurred during a reorganization of our Geospatial Systems division, which involved the transfer of hazardous materials from Fort Wayne, Indiana to Rochester, New York. Under the
direction
of
the
Geospatial
SUSTAIN
hydropower and solar energy, the division decreased its energy usage across all its sites by nearly 14 percent during the past year. For the second year in a row, AER reduced its water usage by approximately 10 percent. While the 2013 decrease was realized in part because of facility closures, the 2015 decrease was driven recycling programs, they are keeping
Systems ESH team, the “hazardous journey”
more materials out of our already clogged waste streamsa primarily
was
by plant production improvements.
completed
successfully
with
no
exposures or releases. More than that,
A case in point is our Night Vision & Communications Systems site
with new equipment and fresh eyes on the
in Roanoke, Virginia. In 2015, the facility reduced its water usage
transfer operation, the team has created a
by 22 percent, equivalent to nearly three months of average water
safer and more sustainable process.
consumption. This improvement was made by shutting off the flow of
Our ESH team members are the expert
ultra pure water to some non-critical systems and setting a “trickle”
guides who develop, plan and oversee our
flow rate on other systems to maintain the sterile properties of the
efforts at the local level. Embedded at our
manufacturing process with the least amount of water usage.
global
sites—and
division
at
our
corporate
headquarters—they
and
implement
new programs, train employees on the best tools and tactics for their everyday jobs, and manage and track our progress. With their leadership, we implemented innovative and effective actions that improved performance at the local site level and enabled us to reach
our
enterprise-wide
environmental
sustainability goals for 2015.
Waste Management Last year, AER reduced the amount of hazardous waste we disposed of and recycled by 18 percent, and exceeded that—a 26 percent reduction—for non-hazardous waste. These numbers aren’t an aberration. They are a continuation of yearover-year steep decreases in the amount of waste we generate and dispose, and a testament to the work of our employees and ESH teams who have made this a priority. Through e-waste recovery efforts, battery recycling programs, and cardboard, paper and wood pallet recycling programs, they are keeping more materials out of our
Energy Use
already clogged waste streams. For the second year in a row, AER
In 2015, AER reduced its total energy use by
reduced its water usage by approximately 10 percent. While the 2013
8 percent. In the process, we reduced our
decrease was realized in part because of facility closures, the 2015
greenhouse gas emissions and lessened our
decrease was driven primarily by plant production improvements.
impact on climate change.
A case in point is our Night Vision & Communications Systems site
As a company, we aren’t a major energy
in Roanoke, Virginia. In 2015, the facility reduced its water usage
consumer. Last year, at all our sites, we
by 22 percent, equivalent to nearly three months of average water
used less than 22 million BTUs of energy,
consumption. This improvement was made by shutting off the flow of
which demonstrates our pursuit of ever-
ultra pure water to some non-critical systems and setting a “trickle”
more energy efficient operations. We are
flow rate on other systems to maintain the sterile properties of the
determined to use even less energy going
manufacturing process with the least amount of water usage.
forward, and in 2015 our Electronic Systems
Last year, AER reduced the amount of hazardous waste we disposed
division—which has 14 sites and is one of our
of and recycled by 18 percent, and exceeded that—a 26 percent
larger operations—showed the many ways
reduction—for non-hazardous waste.
we are doing just that. Using energy-efficient
These numbers aren’t an aberration. They are a continuation of year-
light bulbs, motion-activated light switches,
over-year steep decreases in the amount of waste we generate and
updated HVAC systems, energy audits of
dispose, and a testament to the work of our employees and ESH teams
electrical equipment, and energy purchases
who have made this a priority. Through e-waste recovery efforts,
from suppliers that generate electricity using
battery recycling programs, and cardboard, paper and wood pallet
AER | AEROSPACE + DEFENSE ENGINEERING | 2017
20
AER Inc. | 1650 TYSONS BOULEVARD SUITE 1700 McLEAN, VA 22102 | 703 790 6300 | www.aerinc.com