UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended December 31, 2006 | |
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OR | |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to | |
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Commission file number 1-10582 |
Alliant Techsystems Inc.
(Exact name of Registrant as specified in its charter)
Delaware |
| 41-1672694 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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5050 Lincoln Drive |
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Edina, Minnesota |
| 55436-1097 |
(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (952) 351-3000 |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” as defined in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of January 28, 2007, 32,973,382 shares of the Registrant’s common stock, par value $.01 per share, were outstanding.
TABLE OF CONTENTS
2
PART I – FINANCIAL INFORMATION
ALLIANT TECHSYSTEMS INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
|
| QUARTERS ENDED |
| NINE MONTHS ENDED |
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(In thousands except per share data) |
| December 31, |
| January 1, |
| December 31, |
| January 1, |
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Sales |
| $ | 900,301 |
| $ | 770,029 |
| $ | 2,555,774 |
| $ | 2,299,113 |
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Cost of sales |
| 733,151 |
| 614,315 |
| 2,077,063 |
| 1,859,551 |
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Gross profit |
| 167,150 |
| 155,714 |
| 478,711 |
| 439,562 |
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Operating expenses: |
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Research and development |
| 13,461 |
| 11,024 |
| 39,012 |
| 35,101 |
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Selling |
| 19,882 |
| 19,527 |
| 67,337 |
| 56,812 |
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General and administrative |
| 41,381 |
| 37,001 |
| 118,639 |
| 111,042 |
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Total operating expenses |
| 74,724 |
| 67,552 |
| 224,988 |
| 202,955 |
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Income before interest, income taxes, and minority interest |
| 92,426 |
| 88,162 |
| 253,723 |
| 236,607 |
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Interest expense |
| (19,555 | ) | (17,189 | ) | (54,241 | ) | (51,703 | ) | ||||
Interest income |
| 199 |
| 573 |
| 743 |
| 941 |
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Income before income taxes and minority interest |
| 73,070 |
| 71,546 |
| 200,225 |
| 185,845 |
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Income tax provision |
| 21,734 |
| 24,323 |
| 69,871 |
| 61,039 |
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Income before minority interest |
| 51,336 |
| 47,223 |
| 130,354 |
| 124,806 |
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Minority interest, net of income taxes |
| 106 |
| 124 |
| 324 |
| 335 |
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Net income |
| $ | 51,230 |
| $ | 47,099 |
| $ | 130,030 |
| $ | 124,471 |
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Earnings per common share: |
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Basic |
| $ | 1.55 |
| $ | 1.28 |
| $ | 3.81 |
| $ | 3.39 |
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Diluted |
| 1.53 |
| 1.26 |
| 3.74 |
| 3.34 |
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Weighted-average number of common shares outstanding: |
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Basic |
| 32,953 |
| 36,714 |
| 34,169 |
| 36,716 |
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Diluted |
| 33,556 |
| 37,283 |
| 34,749 |
| 37,306 |
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See Notes to the Consolidated Financial Statements.
3
ALLIANT TECHSYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except share data) |
| December 31, 2006 |
| March 31, 2006 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 18,675 |
| $ | 9,090 |
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Net receivables |
| 802,255 |
| 738,909 |
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Net inventories |
| 177,804 |
| 139,876 |
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Deferred income tax assets |
| 75,689 |
| 77,848 |
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Other current assets |
| 26,974 |
| 53,728 |
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Total current assets |
| 1,101,397 |
| 1,019,451 |
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Net property, plant, and equipment |
| 447,756 |
| 453,958 |
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Goodwill |
| 1,163,186 |
| 1,163,186 |
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Prepaid and intangible pension assets |
| 79,093 |
| 82,254 |
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Deferred charges and other non-current assets |
| 184,115 |
| 183,131 |
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Total assets |
| $ | 2,975,547 |
| $ | 2,901,980 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Cash overdrafts |
| $ | 1,540 |
| $ | 63,036 |
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Current portion of long-term debt |
| 27,000 |
| 29,596 |
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Line of credit borrowings |
| 125,000 |
| — |
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Accounts payable |
| 145,291 |
| 165,955 |
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Contract advances and allowances |
| 76,382 |
| 49,667 |
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Accrued compensation |
| 99,879 |
| 114,537 |
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Accrued income taxes |
| 32,318 |
| 23,710 |
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Other accrued liabilities |
| 165,188 |
| 224,443 |
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Total current liabilities |
| 672,598 |
| 670,944 |
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Long-term debt |
| 1,375,750 |
| 1,096,000 |
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Deferred income tax liabilities |
| 49,754 |
| 2,909 |
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Postretirement and postemployment benefits liability |
| 170,733 |
| 175,314 |
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Minimum pension liability |
| 20,344 |
| 212,258 |
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Other long-term liabilities |
| 117,011 |
| 116,197 |
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Total liabilities |
| 2,406,190 |
| 2,273,622 |
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Contingencies (Note 12) |
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Common stock - $.01 par value |
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Authorized – 90,000,000 shares |
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Issued and outstanding 32,955,299 shares at December 31, 2006 and 35,207,335 at March 31, 2006 |
| 330 |
| 352 |
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Additional paid-in-capital |
| 468,844 |
| 472,861 |
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Retained earnings |
| 1,058,551 |
| 928,521 |
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Unearned compensation |
| — |
| (2,760 | ) | ||
Accumulated other comprehensive loss |
| (340,356 | ) | (333,136 | ) | ||
Common stock in treasury, at cost, 8,599,762 shares held at December 31, 2006 and 6,347,726 shares held at March 31, 2006 |
| (618,012 | ) | (437,480 | ) | ||
Total stockholders’ equity |
| 569,357 |
| 628,358 |
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Total liabilities and stockholders’ equity |
| $ | 2,975,547 |
| $ | 2,901,980 |
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See Notes to the Consolidated Financial Statements.
4
ALLIANT TECHSYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| NINE MONTHS ENDED |
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(In thousands) |
| December 31, 2006 |
| January 1, 2006 |
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Operating activities |
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Net income |
| $ | 130,030 |
| $ | 124,471 |
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Adjustments to net income to arrive at cash (used for) provided by operating activities: |
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Depreciation |
| 51,347 |
| 52,377 |
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Amortization of intangible assets |
| 5,537 |
| 6,554 |
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Amortization of deferred financing costs |
| 2,814 |
| 2,901 |
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Deferred income taxes |
| 53,184 |
| 5,459 |
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Loss on disposal of property |
| 124 |
| 296 |
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Minority interest, net of income taxes |
| 324 |
| 335 |
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Share-based plans expense |
| 27,268 |
| 15,735 |
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Excess tax benefits from share-based plans |
| (2,114 | ) | — |
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Changes in assets and liabilities: |
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Net receivables |
| (63,346 | ) | (19,694 | ) | ||
Net inventories |
| (37,928 | ) | (36,433 | ) | ||
Accounts payable |
| (13,906 | ) | (42,187 | ) | ||
Contract advances and allowances |
| 26,715 |
| 7,209 |
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Accrued compensation |
| (14,219 | ) | (3,306 | ) | ||
Accrued income taxes |
| 13,336 |
| 30,311 |
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Pension and other postretirement benefits |
| (267,828 | ) | (1,422 | ) | ||
Other assets and liabilities |
| 35,961 |
| 2,191 |
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Cash (used for) provided by operating activities |
| (52,701 | ) | 144,797 |
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Investing activities |
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Capital expenditures |
| (52,990 | ) | (36,694 | ) | ||
Proceeds from the disposition of property, plant, and equipment |
| 572 |
| 1,623 |
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Cash used for investing activities |
| (52,418 | ) | (35,071 | ) | ||
Financing activities |
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Change in cash overdrafts |
| (61,496 | ) | (6,092 | ) | ||
Net borrowings on line of credit |
| 125,000 |
| — |
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Payments made on bank debt |
| (20,250 | ) | (20,250 | ) | ||
Payments made to extinguish debt |
| (2,596 | ) | (266,553 | ) | ||
Proceeds from issuance of long-term debt |
| 300,000 |
| 270,000 |
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Purchase of call options |
| (50,850 | ) | — |
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Sale of warrants |
| 23,220 |
| — |
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Payments made for debt issue costs |
| (7,478 | ) | (728 | ) | ||
Net purchase of treasury shares |
| (208,027 | ) | (78,498 | ) | ||
Proceeds from employee stock compensation plans |
| 15,067 |
| 18,846 |
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Excess tax benefits from share-based plans |
| 2,114 |
| — |
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Cash provided by (used for) financing activities |
| 114,704 |
| (83,275 | ) | ||
Increase in cash and cash equivalents |
| 9,585 |
| 26,451 |
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Cash and cash equivalents - beginning of period |
| 9,090 |
| 12,772 |
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Cash and cash equivalents - end of period |
| $ | 18,675 |
| $ | 39,223 |
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Supplemental Cash Flow Disclosure: |
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Noncash investing activity: |
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Capital expenditures included in accounts payable |
| $ | 3,050 |
| $ | 3,396 |
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See Notes to the Consolidated Financial Statements.
5
Alliant Techsystems Inc.
Notes to the Consolidated Financial Statements (Unaudited)
Quarter Ended December 31, 2006
(Dollar amounts in thousands except share and per share data and unless otherwise indicated)
1. Basis of Presentation and Responsibility for Interim Financial Statements
The unaudited consolidated financial statements of Alliant Techsystems Inc. (the Company or ATK) as set forth in this quarterly report have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted. ATK’s accounting policies are described in the notes to the consolidated financial statements in its Annual Report on Form 10-K for the fiscal year ended March 31, 2006 (fiscal 2006). Management is responsible for the unaudited consolidated financial statements included in this document. The consolidated financial statements included in this document are unaudited but, in the opinion of management, include all adjustments necessary for a fair presentation of ATK’s financial position as of December 31, 2006, and its results of operations and cash flows for the quarters and nine months ended December 31, 2006 and January 1, 2006.
ATK has made certain reclassifications to the fiscal 2006 consolidated financial statements, as previously reported, to conform to current presentation. These reclassifications did not change net income or stockholders’ equity as previously reported.
Sales, expenses, cash flows, assets, and liabilities can and do vary during the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.
2. New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R), which requires recognition of the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in the statement of financial position and requires recognition of changes in the funded status in the year in which the changes occur through comprehensive income. These provisions are applicable as of the end of the first fiscal year ending after December 15, 2006 (ATK’s fiscal 2007). SFAS No. 158 also requires measurement of the funded status of a plan as of the date of the year-end statement of financial position. This provision is applicable for fiscal years ending after December 15, 2008 (ATK’s fiscal 2009). ATK is evaluating the impact the adoption of SFAS No. 158 will have on its financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007 (ATK’s fiscal 2009). ATK is evaluating the impact the adoption of SFAS No. 157 will have on its financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ATK must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, Accounting for Income Taxes. FIN 48 is applicable for fiscal years beginning after December 15, 2006 (ATK’s fiscal 2008). The cumulative effect of applying the provisions of FIN 48, if any, will be reported as an adjustment to the opening balance of retained earnings on April 1, 2007. ATK is evaluating the impact the adoption of FIN 48 will have on its financial statements.
Effective April 1, 2006, ATK adopted SFAS 123(R), Share-Based Payments, and related Securities and Exchange Commission (SEC) rules included in Staff Accounting Bulletin (SAB) No. 107. ATK adopted SFAS 123(R) on a modified prospective basis, which requires the application of the accounting standard to all share-based awards issued on or after the date of adoption and any
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outstanding share-based awards that were issued but not vested as of the date of adoption. SFAS 123(R) requires stock options and other share-based payments made to employees to be accounted for as compensation expense and recorded at fair value. See Note 11.
3. Goodwill and Other Intangible Assets
The carrying amount of goodwill by operating segment as of December 31, 2006 and March 31, 2006 was as follows:
| December 31, 2006 |
| March 31, 2006 |
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Mission Systems Group |
| $ | 534,450 |
| $ | 534,450 |
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Ammunition Systems Group |
| 171,337 |
| 171,337 |
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Launch Systems Group |
| 457,399 |
| 457,399 |
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Total |
| $ | 1,163,186 |
| $ | 1,163,186 |
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No acquisitions or adjustments were made during the quarter or nine months ended December 31, 2006.
Included in deferred charges and other non-current assets as of December 31, 2006 are other intangible assets of $87,973, which consist of trademarks, patented technology, and brand names that are not being amortized because ATK considers their estimated useful lives to be indefinite. Also included in deferred charges and other non-current assets as of December 31, 2006 and March 31, 2006 are amortizing intangible assets, as follows:
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| December 31, 2006 |
| March 31, 2006 |
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| Gross carrying |
| Accumulated |
| Total |
| Gross carrying |
| Accumulated |
| Total |
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Contracts |
| $ | 19,944 |
| $ | (15,614 | ) | $ | 4,330 |
| $ | 19,944 |
| $ | (11,827 | ) | $ | 8,117 |
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Customer relationships |
| 27,109 |
| (6,563 | ) | 20,546 |
| 27,109 |
| (4,813 | ) | 22,296 |
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Total |
| $ | 47,053 |
| $ | (22,177 | ) | $ | 24,876 |
| $ | 47,053 |
| $ | (16,640 | ) | $ | 30,413 |
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These assets are being amortized over their estimated useful lives, which range from four to 12 years. Amortization expense for the quarter and nine months ended December 31, 2006 was $1,319 and $5,537, respectively. Amortization expense for the quarter and nine months ended January 1, 2006 was $2,192 and $6,554, respectively. ATK expects amortization expense related to these assets to be as follows:
Remainder of fiscal 2007 |
| $ | 1,384 |
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Fiscal 2008 |
| 5,303 |
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Fiscal 2009 |
| 2,988 |
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Fiscal 2010 |
| 2,266 |
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Fiscal 2011 |
| 2,263 |
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Thereafter |
| 10,672 |
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Total |
| $ | 24,876 |
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During fiscal 2003, ATK acquired the assets of Science and Applied Technology, Inc. (now included in the Mission Systems Group). The sellers of this acquired business have the ability to earn up to an additional $7,500 of cash consideration if certain pre-specified milestones are attained with respect to one of the contracts acquired. Any additional contingent consideration paid to the sellers will be recorded by ATK as goodwill.
7
4. Earnings Per Share Data
Basic earnings per share (EPS) is computed based upon the weighted-average number of common shares outstanding for each period. Diluted EPS is computed based on the weighted-average number of common shares and common equivalent shares. Common equivalent shares represent the effect of stock-based awards during each period presented, which, if exercised or earned, would dilute EPS. In computing EPS for the quarters and nine months ended December 31, 2006 and January 1, 2006, net income as reported for each respective period is divided by (in thousands):
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| Quarters Ended |
| Nine Months Ended |
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| December 31, 2006 |
| January 1, 2006 |
| December 31, 2006 |
| January 1, 2006 |
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Basic shares outstanding |
| 32,953 |
| 36,714 |
| 34,169 |
| 36,716 |
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Dilutive effect of stock-based awards |
| 603 |
| 569 |
| 580 |
| 590 |
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Diluted shares outstanding |
| 33,556 |
| 37,283 |
| 34,749 |
| 37,306 |
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Stock-based awards excluded from the calculation of diluted EPS because the option exercise/threshold price was greater than the average market price of the common shares |
| 36 |
| 13 |
| 38 |
| 13 |
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Contingently issuable shares related to ATK’s Convertible Senior Subordinated Notes, as discussed in Note 8, are not included in diluted EPS because ATK’s average stock price was below the conversion price during the quarters and nine months ended December 31, 2006 and January 1, 2006. The Warrants, as discussed in Note 8, are not included in diluted EPS as ATK’s average stock price during the quarter and nine months ended December 31, 2006 did not exceed $116.75. The Call Options, also discussed in Note 8, are anti-dilutive and are therefore excluded from the calculation of diluted shares outstanding.
5. Comprehensive Income
The components of comprehensive income, net of income taxes, for the quarters and nine months ended December 31, 2006 and January 1, 2006 were as follows:
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| Quarters Ended |
| Nine Months Ended |
| ||||||||
|
| December 31, |
| January 1, |
| December 31, |
| January 1, |
| ||||
Net income |
| $ | 51,230 |
| $ | 47,099 |
| $ | 130,030 |
| $ | 124,471 |
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Other comprehensive income (OCI): |
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Change in fair value of derivatives, net of income taxes of $969, $(2,427), $5,540, and $(6,027), respectively |
| (1,439 | ) | 3,960 |
| (8,225 | ) | 9,835 |
| ||||
Change in fair value of available-for-sale securities, net of income taxes of $(416), $(183), $(677), and $(530), respectively |
| 618 |
| 299 |
| 1,005 |
| 865 |
| ||||
Total other comprehensive (loss) income |
| (821 | ) | 4,259 |
| (7,220 | ) | 10,700 |
| ||||
Total comprehensive income |
| $ | 50,409 |
| $ | 51,358 |
| $ | 122,810 |
| $ | 135,171 |
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The components of accumulated OCI, net of income taxes, are as follows:
|
| December 31, 2006 |
| March 31, 2006 |
| ||
Derivatives |
| $ | (893 | ) | $ | 7,332 |
|
Minimum pension liability |
| (340,747 | ) | (340,747 | ) | ||
Available-for-sale securities |
| 1,284 |
| 279 |
| ||
Total accumulated other comprehensive loss |
| $ | (340,356 | ) | $ | (333,136 | ) |
Commodity Forward Contracts
ATK uses derivatives to hedge certain commodity price risks. As of December 31, 2006, ATK had forward contracts for copper and zinc through February 2007 that had a combined fair value of $695. The contracts essentially establish a fixed price for the underlying commodities and have been designated and qualify as effective cash flow hedges of purchases of these commodities. Ineffectiveness is calculated as the amount the change in the fair value of the derivatives exceeds the change in the fair value of the anticipated commodity purchases. The fair value of these contracts was recorded as a current asset and the effective portion was reflected in accumulated OCI in the financial statements as of December 31, 2006. The following table summarizes the pre-tax activity in OCI related to these forward contracts during the quarters and nine months ended December 31, 2006 and January 1, 2006:
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| Quarters Ended |
| Nine Months Ended |
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|
| December 31, |
| January 1, |
| December 31, |
| January 1, |
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Beginning of period unrealized gain (loss) in accumulated OCI |
| $ | 3,389 |
| $ | 6,759 |
| $ | 15,162 |
| $ | (627 | ) |
(Decrease) increase in fair value of derivatives |
| (249 | ) | 8,701 |
| 14,670 |
| 16,737 |
| ||||
Gains reclassified from OCI, offsetting the price paid to suppliers |
| (2,445 | ) | (3,670 | ) | (29,137 | ) | (4,320 | ) | ||||
End of period unrealized gain in accumulated OCI |
| $ | 695 |
| $ | 11,790 |
| $ | 695 |
| $ | 11,790 |
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The amount of ineffectiveness recognized in earnings for these contracts was insignificant during the quarters and nine months ended December 31, 2006 and January 1, 2006. ATK expects that substantially all of the unrealized gains will be realized and reported in cost of sales during the next 12 months as the cost of the commodities is included in cost of sales. Estimated and actual gains or losses will change as market prices change.
8
6. Inventories
Inventories consist of the following:
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| December 31, 2006 |
| March 31, 2006 |
| ||
Raw materials |
| $ | 61,551 |
| $ | 40,282 |
|
Work in process |
| 29,888 |
| 35,415 |
| ||
Finished goods |
| 32,336 |
| 33,184 |
| ||
Contracts in progress |
| 54,029 |
| 30,995 |
| ||
Net inventories |
| $ | 177,804 |
| $ | 139,876 |
|
7. Other Liabilities
Other current and long-term accrued liabilities consisted of the following:
|
| December 31, 2006 |
| March 31, 2006 |
| ||
Employee benefits and insurance |
| $ | 72,759 |
| $ | 147,529 |
|
Warranty |
| 15,491 |
| 17,100 |
| ||
Interest |
| 14,890 |
| 2,775 |
| ||
Environmental remediation |
| 6,087 |
| 6,011 |
| ||
Share repurchase |
| — |
| 6,147 |
| ||
Other |
| 55,961 |
| 44,881 |
| ||
Total other accrued liabilities – current |
| $ | 165,188 |
| $ | 224,443 |
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Environmental remediation |
| $ | 49,905 |
| $ | 49,584 |
|
Management nonqualified deferred compensation plan |
| 32,820 |
| 27,055 |
| ||
Supplemental employee retirement plan |
| 25,549 |
| 30,819 |
| ||
Minority interest in joint venture |
| 7,908 |
| 7,584 |
| ||
Other |
| 829 |
| 1,155 |
| ||
Total other long-term liabilities |
| $ | 117,011 |
| $ | 116,197 |
|
ATK provides product warranties in conjunction with sales of certain products. These warranties entail repair or replacement of non-conforming items. Provisions for warranty costs are generally recorded when the product is shipped and are based on historical information and current trends. The product warranties relate primarily to the commercial rocket motors (within the Launch Systems Group). The following is a reconciliation of the changes in ATK’s product warranty liability during the quarter and nine months ended December 31, 2006:
Balance at March 31, 2006 |
| $ | 17,100 |
|
Warranties issued |
| 484 |
| |
Changes related to preexisting warranties |
| (88 | ) | |
Balance at July 2, 2006 |
| 17,496 |
| |
Warranties issued |
| 492 |
| |
Payments made |
| (109 | ) | |
Changes related to preexisting warranties |
| (2,500 | ) | |
Balance at October 1, 2006 |
| 15,379 |
| |
Warranties issued |
| 203 |
| |
Changes related to preexisting warranties |
| (91 | ) | |
Balance at December 31, 2006 |
| $ | 15,491 |
|
9
8. Long-Term Debt and Interest Rate Swaps
Long-term debt, including the current portion, consisted of the following:
|
| December 31, 2006 |
| March 31, 2006 |
| ||
Senior Credit Facility dated March 31, 2004: |
|
|
|
|
| ||
Term A Loan due 2009 |
| $ | 222,750 |
| $ | 243,000 |
|
Revolving Credit Facility due 2009 |
| 125,000 |
| — |
| ||
8.50% Senior Subordinated Notes |
| — |
| 2,596 |
| ||
2.75% Convertible Senior Subordinated Notes due 2011 |
| 300,000 |
| — |
| ||
6.75% Senior Subordinated Notes due 2016 |
| 400,000 |
| 400,000 |
| ||
2.75% Convertible Senior Subordinated Notes due 2024 |
| 280,000 |
| 280,000 |
| ||
3.00% Convertible Senior Subordinated Notes due 2024 |
| 200,000 |
| 200,000 |
| ||
Total long-term debt |
| 1,527,750 |
| 1,125,596 |
| ||
Less current portion |
| 152,000 |
| 29,596 |
| ||
Long-term debt |
| $ | 1,375,750 |
| $ | 1,096,000 |
|
In September 2006, ATK completed a private offering of $300,000 aggregate principal amount of 2.75% Convertible Senior Subordinated Notes (the 2.75% Convertible Notes due 2011) that mature on September 15, 2011. Interest on these notes is payable on March 15 and September 15 of each year, beginning on March 15, 2007. Holders may convert their notes at a conversion rate of 10.3617 shares of ATK’s common stock per $1 principal amount of these notes (a conversion price of $96.51 per share) under the following circumstances: (1) during any fiscal quarter commencing after December 31, 2006, if the last reported sale price of ATK stock is greater than or equal to 130% of the conversion price, or $125.46, for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) upon the occurrence of certain corporate transactions; or (3) during the last month prior to maturity. ATK is required to satisfy 100% of the principal amount of these notes solely in cash, with any amounts above the principal amount to be satisfied in cash, common stock, or a combination of cash and common stock, at the sole election of ATK. If certain fundamental changes occur prior to maturity, ATK will in certain circumstances increase the conversion rate by a number of additional shares of common stock or, in lieu thereof, ATK may in certain circumstances elect to adjust the conversion rate and related conversion obligation so that these notes are convertible into shares of the acquiring or surviving company. ATK has agreed to register these notes for resale by the holders of the notes within 180 days after the closing of the offering; if the notes are not registered within the 180 days, ATK would be assessed additional interest of up to 0.50% of the principal amount. These contingently issuable shares are not included in ATK’s diluted share count for the quarter or nine months ended December 31, 2006 because ATK’s average stock price during those periods was below the conversion price. Debt issuance costs of approximately $7,500 are being amortized to interest expense over five years. Approximately $100,000 of the net proceeds from the issuance of these notes was used to concurrently repurchase 1,285,200 shares of ATK’s common stock.
In connection with the issuance of the 2.75% Convertible Notes due 2011, ATK purchased, at a cost of $50,850, call options (the Call Options) on its common stock. The Call Options, which become exercisable upon conversion of the related convertible notes, allow ATK to purchase approximately 3.1 million shares of ATK’s common stock and/or cash from the counterparty at an amount equal to the amount of common stock and/or cash related to the excess conversion value that ATK would pay to the holders of the related convertible notes upon conversion. For income tax reporting purposes, the related convertible notes and the Call Options are integrated. This creates an original issue discount for income tax reporting purposes, and therefore the cost of the Call Options will be accounted for as interest expense over the term of the convertible notes for income tax reporting purposes. The associated income tax benefits will be recognized in the period in which the deduction is taken for income tax reporting purposes as an increase in additional paid-in capital (APIC) in stockholders’ equity. In addition, ATK sold warrants (the Warrants) to issue approximately 3.3 million shares of ATK’s common stock at an exercise price of $116.75 per share. The proceeds from the sale of the Warrants totaled $23,220. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), and Emerging Issues Task Force (EITF) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, ATK recorded the net cost of the Call Options and the Warrants of $27,630 in APIC and will not recognize any changes in the fair value of the instruments. On a combined basis, the Call Options and the Warrants are intended to reduce the potential dilution of ATK’s common stock in the event that the 2.75% Convertible Notes due 2011 are converted by effectively increasing the conversion price of these notes from $96.51 to
10
$116.75. The Call Options are anti-dilutive and are therefore excluded from the calculation of diluted shares outstanding. The Warrants will result in additional diluted shares outstanding if ATK’s average common stock price exceeds $116.75. The Call Options and the Warrants are separate and legally distinct instruments that bind ATK and the counterparty and have no binding effect on the holders of the convertible notes.
In fiscal 2006, ATK made a cash tender offer for any and all of its outstanding $400,000 aggregate principal amount 8.50% Senior Subordinated Notes due 2011 (the 8.50% Notes). As of March 31, 2006, $397,404 principal amount of these notes had been repaid by ATK at a price of 104.75% of the principal amount. ATK redeemed the remaining $2,596 principal amount during the first quarter of fiscal 2007 at a price of 104.25% of the principal amount.
In fiscal 2006, ATK issued $400,000 aggregate principal amount of 6.75% Senior Subordinated Notes (the 6.75% Notes) that mature on April 1, 2016. These notes are general unsecured obligations. Interest on these notes accrues at a rate of 6.75% per annum and is payable semi-annually on April 1 and October 1 of each year, beginning on December 31, 2006. ATK has the right to redeem some or all of these notes from time to time on or after April 1, 2011, at specified redemption prices. Prior to April 1, 2011, ATK may redeem some or all of these notes at a price equal to 100% of their principal amount plus accrued and unpaid interest to the date of redemption and a specified makewhole premium. In addition, prior to April 1, 2009, ATK may redeem up to 35% of the aggregate principal amount of these notes, at a price equal to 106.75% of their principal amount plus accrued and unpaid interest to the date of redemption, with the proceeds of certain equity offerings. Debt issuance costs related to these notes of approximately $7,700 are being amortized to interest expense over ten years.
ATK’s Senior Credit Facility dated March 31, 2004 (the Senior Credit Facility), as amended in fiscal 2006, is comprised of a Term A Loan of $222,750 and a $300,000 Revolving Credit Facility maturing in 2009. The Term A Loan had an original balance of $270,000. ATK made scheduled payments of $27,000 in fiscal 2006 and $20,250 in the nine months ended December 31, 2006. The Term A Loan requires quarterly principal payments of $6,750 through December 2008 and a final payment of $168,750 in March 2009. Substantially all domestic, tangible and intangible assets of ATK and its subsidiaries are pledged as collateral under the Senior Credit Facility. Debt issuance costs of approximately $4,500 are being amortized over the term of the Senior Credit Facility. Borrowings under the Senior Credit Facility bear interest at a rate equal to the sum of a base rate or a Eurodollar rate plus an applicable margin, which is based on ATK’s consolidated total leverage ratio, as defined by the Senior Credit Facility. The weighted average interest rate for the Term A Loan was 6.76% at December 31, 2006. The annual commitment fee in effect on the unused portion of ATK’s Revolving Credit Facility was 0.375% at December 31, 2006. As of December 31, 2006, ATK had borrowed $125,000 against its $300,000 revolving credit facility and had outstanding letters of credit of $77,731, which reduced amounts available on the revolving facility to $97,269. ATK’s weighted average interest rate on short-term borrowings was 7.94% during the quarter ended December 31, 2006. During fiscal 2006, ATK terminated its $100,000 notional amount interest rate swap against the Term A Loan, resulting in a cash payout of $2,496. This amount is included in accumulated other comprehensive loss and is being amortized to interest expense through November 2008, the original maturity date of the swap.
In fiscal 2005, ATK issued $200,000 aggregate principal amount of 3.00% Convertible Senior Subordinated Notes (the 3.00% Convertible Notes) that mature on August 15, 2024. Interest on these notes is payable on February 15 and August 15 of each year. Starting with the period beginning on August 20, 2014 and ending on February 14, 2015, and for each of the six-month periods thereafter beginning on February 15, 2015, ATK will pay contingent interest during the applicable interest period if the average trading price of these notes on the five trading days ending on the third day immediately preceding the first day of the applicable interest period equals or exceeds 120% of the principal amount of these notes. The contingent interest payable per note within any applicable interest period will equal an annual rate of 0.30% of the average trading price of a note during the measuring period. The contingent interest feature is treated as an embedded derivative under SFAS No. 133, and the fair value of this feature was insignificant at December 31, 2006 and March 31, 2006. ATK may redeem some or all of these notes in cash at any time on or after August 20, 2014. Holders of these notes may require ATK to repurchase in cash some or all of these notes on August 15, 2014 and August 15, 2019. Holders may also convert their 3.00% Convertible Notes at a conversion rate of 12.5392 shares of ATK’s common stock per $1 principal amount of 3.00% Convertible Notes (a conversion price of $79.75 per share) under the following circumstances: (1) when, during any fiscal quarter, the last reported sale price of ATK stock is greater than or equal to 130% of the conversion price, or $103.68, for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) if ATK calls these notes for redemption; or (3) upon the occurrence of certain corporate transactions. In fiscal 2005, ATK amended the indenture to require ATK to satisfy 100% of the principal amount of these notes solely in cash, with any amounts above the principal amount to be satisfied in cash, common stock, or a combination of cash and common stock, at the sole election of ATK. If certain fundamental changes occur on or prior to August 15, 2014, ATK will in certain circumstances increase the conversion rate
11
by a number of additional shares of common stock or, in lieu thereof, ATK may in certain circumstances elect to adjust the conversion rate and related conversion obligation so that these notes are convertible into shares of the acquiring or surviving company. These contingently issuable shares are not included in ATK’s diluted share count for the quarters or nine months ended December 31, 2006 or January 1, 2006 because ATK’s average stock price during those periods was below the conversion price. Debt issuance costs of approximately $4,700 are being amortized to interest expense over ten years, the period until the first date on which the holders can require ATK to repurchase these notes.
In fiscal 2004, ATK issued $280,000 aggregate principal amount of 2.75% Convertible Senior Subordinated Notes (the 2.75% Convertible Notes due 2024) that mature on February 15, 2024. Interest on these notes is payable on February 15 and August 15 of each year. Starting with the period beginning on August 20, 2009 and ending on February 14, 2010, and for each of the six-month periods thereafter beginning on February 15, 2010, ATK will pay contingent interest during the applicable interest period if the average trading price of these notes on the five trading days ending on the third day immediately preceding the first day of the applicable interest period equals or exceeds 120% of the principal amount of these notes. The contingent interest payable per note within any applicable interest period will equal an annual rate of 0.30% of the average trading price of a note during the measuring period. The contingent interest feature is treated as an embedded derivative under SFAS No. 133, and the fair value of this feature was insignificant at December 31, 2006 and March 31, 2006. ATK may redeem some or all of these notes in cash at any time on or after August 20, 2009. Holders of these notes may require ATK to repurchase in cash some or all of these notes on August 15, 2009, February 15, 2014, or February 15, 2019. Holders may also convert their 2.75% Convertible Notes at a conversion rate of 12.5843 shares of ATK’s common stock per $1 principal amount of 2.75% Convertible Notes (a conversion price of $79.46 per share) under the following circumstances: (1) when, during any fiscal quarter, the last reported sale price of ATK stock is greater than or equal to 130% of the conversion price, or $103.30, for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) if ATK calls these notes for redemption; or (3) upon the occurrence of certain corporate transactions. In fiscal 2005, ATK amended the indenture to require ATK to satisfy 100% of the principal amount of these notes solely in cash, with any amounts above the principal amount to be satisfied in cash, common stock, or a combination of cash and common stock, at the sole election of ATK. These contingently issuable shares are not included in ATK’s diluted share count for the quarters or nine months ended December 31, 2006 or January 1, 2006 because ATK’s average stock price during those periods was below the conversion price. Debt issuance costs of approximately $8,600 are being amortized to interest expense over five years, the period until the first date on which the holders can require ATK to repurchase these notes.
The 3.00% Convertible Notes, the 2.75% Convertible Notes due 2024, the 2.75% Convertible Notes due 2011, and the 6.75% Notes rank equal in right of payment with each other and all of ATK’s future senior subordinated indebtedness and are subordinated in right of payment to all existing and future senior indebtedness, including the Senior Credit Facility. The outstanding notes are guaranteed on an unsecured basis, jointly and severally and fully and unconditionally, by substantially all of ATK’s domestic subsidiaries. Subsidiaries of ATK other than the subsidiary guarantors are minor. All of these guarantor subsidiaries are 100% owned by ATK. The parent company has no independent assets or operations, as defined by SEC Regulation S-X Rule 3-10. These guarantees are senior subordinated obligations of the applicable subsidiary guarantors.
The scheduled minimum payments on outstanding long-term debt are as follows:
Remainder of fiscal 2007 |
| $ | 81,750 |
|
Fiscal 2008 |
| 77,000 |
| |
Fiscal 2009 |
| 189,000 |
| |
Fiscal 2010 |
| — |
| |
Fiscal 2011 |
| — |
| |
Thereafter |
| 1,180,000 |
| |
Total payments |
| $ | 1,527,750 |
|
Although the $125,000 revolving credit facility borrowings outstanding as of December 31, 2006, do not mature until 2009, ATK intends to repay approximately $75,000 of the borrowings in fiscal 2007. Therefore, this amount is included in the fiscal 2007 payments in the schedule above and the remaining $50,000 is included in fiscal 2008.
ATK’s total debt (current portion of debt and long-term debt) as a percentage of total capitalization (total debt and stockholders’ equity) was 73% as of December 31, 2006 and 64% as of March 31, 2006.
12
Net cash paid for interest totaled $38,363 in the nine months ended December 31, 2006 and $54,702 in the nine months ended January 1, 2006.
ATK’s Senior Credit Facility and the indentures governing the 6.75% Notes, the 2.75% Convertible Notes due 2011, the 2.75% Convertible Notes due 2024, and the 3.00% Convertible Notes impose restrictions on ATK, including limitations on its ability to incur additional debt, enter into capital leases, grant liens, pay dividends and make certain other payments, sell assets, or merge or consolidate with or into another entity. In addition, the Senior Credit Facility limits ATK’s ability to enter into sale-and-leaseback transactions and to make certain capital expenditures. The Senior Credit Facility also requires that ATK meet and maintain specified financial ratios, including: a minimum interest coverage ratio, a maximum consolidated leverage ratio, and a maximum senior leverage ratio. ATK’s ability to comply with these covenants and to meet and maintain the financial ratios may be affected by events beyond its control. Borrowings under the Senior Credit Facility are subject to compliance with these covenants. As of December 31, 2006, ATK was in compliance with the covenants.
ATK has limited payment requirements under the Senior Credit Facility over the next few years. ATK’s other debt service requirements consist principally of interest expense on its long-term debt. Additional cash may be required to repurchase or convert any or all of the convertible notes under certain circumstances, as discussed above. ATK’s short-term cash requirements for operations are expected to consist mainly of capital expenditures to maintain and expand production facilities and working capital requirements.
Interest Rate Swaps
ATK may use interest rate swaps to hedge forecasted interest payments and the risk associated with changing interest rates of long-term debt. ATK did not have any outstanding interest rate swaps as of December 31, 2006 or March 31, 2006.
9. Employee Benefit Plans
|
| Pension Benefits |
| ||||||||||
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||
Components of Net Periodic Benefit Cost |
| December 31, |
| January 1, |
| December 31, |
| January 1, |
| ||||
Service cost |
| $ | 13,416 |
| $ | 12,154 |
| $ | 41,512 |
| $ | 36,548 |
|
Interest cost |
| 29,645 |
| 29,169 |
| 91,729 |
| 87,803 |
| ||||
Expected return on plan assets |
| (36,773 | ) | (36,756 | ) | (113,785 | ) | (110,486 | ) | ||||
Amortization of unrecognized net loss |
| 11,255 |
| 8,970 |
| 34,827 |
| 26,915 |
| ||||
Amortization of unrecognized prior service cost |
| (204 | ) | (194 | ) | (632 | ) | (644 | ) | ||||
Net periodic benefit cost |
| $ | 17,339 |
| $ | 13,343 |
| $ | 53,651 |
| $ | 40,136 |
|
|
| Postretirement Benefits |
| ||||||||||
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||
Components of Net Periodic Benefit Cost |
| December 31, |
| January 1, |
| December 31, |
| January 1, |
| ||||
Service cost |
| $ | 124 |
| $ | 91 |
| $ | 372 |
| $ | 342 |
|
Interest cost |
| 3,174 |
| 3,459 |
| 9,522 |
| 10,498 |
| ||||
Expected return on plan assets |
| (963 | ) | (967 | ) | (2,889 | ) | (2,877 | ) | ||||
Amortization of unrecognized net loss |
| 1,302 |
| 1,590 |
| 3,906 |
| 4,858 |
| ||||
Amortization of unrecognized prior service cost |
| (2,257 | ) | (2,230 | ) | (6,771 | ) | (6,856 | ) | ||||
Net periodic benefit cost before curtailment gain |
| 1,380 |
| 1,943 |
| 4,140 |
| 5,965 |
| ||||
Curtailment gain |
| — |
| (603 | ) | — |
| (603 | ) | ||||
Net periodic benefit cost |
| $ | 1,380 |
| $ | 1,340 |
| $ | 4,140 |
| $ | 5,362 |
|
During the nine months ended January 1, 2006, ATK recorded a curtailment gain of $603 to recognize the impact on postretirement benefit (PRB) plans associated with the elimination of future subsidized medical benefits under a negotiated union contract.
Employer Contributions. During the nine months ended December 31, 2006, ATK contributed $312,671 to its qualified pension
13
plans, $6,339 directly to retirees, and $13,204 to its other postretirement benefit (PRB) plans. ATK anticipates making additional contributions to its qualified pension plans during fiscal 2007 of $73,500 and $4,600 to its other PRB plans. ATK also anticipates making additional contributions of $1,300 directly to retirees.
10. Income Taxes
ATK’s provision for income taxes includes both federal and state income taxes. The income tax provisions for the quarter and nine months ended December 31, 2006 represent effective tax rates of 29.7% and 34.9%, respectively. The income tax provisions for the quarter and nine months ended January 1, 2006 represent effective tax rates of 34.0% and 32.8%, respectively. Income tax provisions for interim periods are based on estimated effective annual income tax rates.
The effective tax rate of 34.9% for the nine months ended December 31, 2006 differs from the federal statutory rate of 35% due to state income taxes, which increase the rate, and the following items which decrease the rate: research and development (R&D) tax credits, extraterritorial income (ETI) exclusion tax benefits, qualified domestic manufacturing deduction (DMD) and a $239 net discrete tax benefit, as explained further below.
On December 20, 2006, the President signed the Tax Relief and Health Care Act of 2006 which reinstated the R&D tax credit from January 1, 2006 through December 31, 2007. The extension of the R&D credit is reflected in the tax rates noted above, which includes a discrete tax benefit of $1,566 during the nine months ended December 31, 2006.
In addition, during the nine months ended December 31, 2006, there was a discrete tax expense of $610 to adjust the fiscal 2006 tax provision amounts to the returns as filed and $717 of discrete tax expense to adjust the deferred tax balances due to an internal legal entity reorganization.
The effective tax rate of 32.8% for the nine months ended January 1, 2006 differs from the federal statutory rate of 35% due to state income taxes, which increase the rate, and the following items which decrease the rate: ETI benefits, R&D credits, DMD and a $4,403 net discrete tax benefit comprised of a $5,020 benefit from settlement of the Internal Revenue Service (IRS) audit for fiscal 2002 and 2003 and related revisions in state liabilities and a $617 expense for tax provision adjustments related to fiscal 2005 and prior years.
Amounts accrued for potential federal and state tax assessments total $31,602 and $23,386 at December 31, 2006 and March 31, 2006, respectively. The accruals relate to federal and state tax issues such as tax benefits from the ETI exclusion, the DMD deduction, the amount of R&D tax credits claimed, and other federal and state issues.
The IRS began its examination of the fiscal 2004 and 2005 tax returns in January 2006 and subsequently added fiscal 2006 to the scope of its examination. To the extent ATK were to prevail in matters for which accruals have been established or be required to pay amounts in excess of reserves, ATK’s tax provision in a given financial statement period may be materially impacted.
Net income tax payments totaled $3,476 during the nine months ended December 31, 2006 and $25,866 during the nine months ended January 1, 2006.
On May 17, 2006, the President signed the Tax Increase Prevention and Reconciliation Act of 2005, which repealed the ETI’s grandfathered provisions of the American Jobs Creation Act of 2004 effective for fiscal years beginning after the date of the enactment. As a result, fiscal 2007 will be the final year for recognizing ETI benefits.
11. Stock-Based Compensation
ATK sponsors four stock-based incentive plans, which are the Alliant Techsystems Inc. 1990 Equity Incentive Plan, the Non-Employee Director Restricted Stock Plan, the 2000 Stock Incentive Plan, and the 2005 Stock Incentive Plan. As of December 31, 2006, ATK has authorized up to 2,302,271 common shares to be awarded under the 2005 Stock Incentive Plan. No additional awards will be made out of the other three plans. Stock options are granted periodically, at the fair market value of ATK’s common stock on the date of grant, and generally vest from one to three years from the date of grant. Since fiscal 2004, options are generally issued with a seven-year term; grants issued prior to that generally had a ten-year term. Restricted stock issued to non-employee directors and certain key employees totaled 29,484 shares during the nine months ended December 31, 2006. Restricted shares vest over periods of one to five
14
years from the date of award. As of December 31, 2006, there were also performance awards of up to 1,009,877 shares reserved for key employees. Of these shares, up to 639,339 shares will become payable only upon achievement of certain financial performance goals through fiscal 2007; 178,320 shares will become payable only upon attainment of a specified performance goal at any point through the end of fiscal 2012; and up to 192,218 shares will become payable only upon achievement of certain financial performance goals for the period fiscal 2007 through fiscal 2009. ATK issues treasury shares upon the exercise of stock options or grant of restricted stock and payment of performance awards.
Effective April 1, 2006, ATK adopted SFAS 123(R), Share-Based Payments, and related Securities and Exchange Commission (SEC) rules included in Staff Accounting Bulletin (SAB) No. 107. ATK adopted SFAS 123(R) on a modified prospective basis, which requires the application of the accounting standard to all share-based awards issued on or after the date of adoption and any outstanding share-based awards that were issued but not vested as of the date of adoption. Accordingly, ATK did not restate the financial information for prior fiscal periods as a result of the adoption. SFAS 123(R) requires stock options and other share-based payments made to employees to be accounted for as compensation expense and recorded at fair value. ATK will continue to use the Black-Scholes option pricing model to estimate the fair value of stock options granted.
Total pre-tax stock-based compensation expense recognized during the quarter and nine months ended December 31, 2006 was $8,958 and $27,268, respectively, and $5,552 and $15,735 during the quarter and nine months ended January 1, 2006, respectively. The total income tax benefit recognized in the income statement for share-based compensation for the quarter and nine months ended December 31, 2006 was $3,439 and $10,355, respectively, and $2,111 and $5,983 for the quarter and nine months ended January 1, 2006, respectively. Due to the adoption of SFAS 123(R), ATK recognized incremental pre-tax stock-based compensation expense for stock options of $1,529 and $5,286, a decrease in net income of $914 ($0.03 impact on basic and diluted earnings per share) and $3,285 ($0.10 impact on basic earnings per share and $0.09 impact on diluted earnings per share), respectively, during the quarter and nine months ended December 31, 2006. Also as a result of the adoption of SFAS 123(R), ATK realized incremental pre-tax stock-based compensation expense on its performance awards granted prior to adoption of $1,183, a decrease in net income of $734 ($0.02 impact on basic and diluted earnings per share) during the quarter ended December 31, 2006. For the nine months ended December 31, 2006, ATK realized lower pre-tax stock-based compensation expense on these performance awards of $1,071, a benefit to net income of $664 ($0.02 impact on basic and diluted earnings per share). ATK also realized a reduction in cash flows from operating activities and an increase in cash flows from financing activities of $2,114 for the nine months ended December 31, 2006. Additionally, unearned compensation on non-vested restricted stock of $2,760 was reclassified to additional paid-in capital on April 1, 2006. The cumulative effect adjustment for forfeitures related to non-vested restricted stock and performance awards was not material.
Prior to fiscal 2007, ATK accounted for its stock-based plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The following table illustrates the effect on net income and earnings per share if ATK had applied the fair value recognition provisions of SFAS No. 123(R) during fiscal 2006.
|
| Quarter Ended |
| Nine Months Ended |
| ||
|
|
|
|
|
| ||
Net income, as reported |
| $ | 47,099 |
| $ | 124,471 |
|
Stock-based employee compensation cost included in the determination of net income as reported, net of related tax effects |
| 3,443 |
| 9,753 |
| ||
Stock-based employee compensation cost determined under fair value-based method for all awards, net of related tax effects |
| (5,490 | ) | (15,148 | ) | ||
Pro forma net income |
| $ | 45,052 |
| $ | 119,076 |
|
|
|
|
|
|
| ||
Earnings per share: |
|
|
|
|
| ||
Basic—as reported |
| $ | 1.28 |
| $ | 3.39 |
|
Basic—pro forma |
| 1.23 |
| 3.24 |
| ||
Diluted—as reported |
| 1.26 |
| 3.34 |
| ||
Diluted—pro forma |
| 1.21 |
| 3.19 |
|
15
A summary of ATK’s stock option activity is as follows:
|
| Nine Months Ended December 31, 2006 |
| ||||||||
|
| Shares |
| Weighted Average |
| Weighted Average |
| Aggregate Intrinsic |
| ||
|
|
|
|
|
|
|
|
|
| ||
Outstanding at beginning of period |
| 1,964,718 |
| $ | 54.37 |
|
|
|
|
| |
Granted |
| 18,050 |
| 78.72 |
|
|
|
|
| ||
Exercised |
| (283,285 | ) | 46.55 |
|
|
|
|
| ||
Forfeited/expired |
| (41,327 | ) | 63.66 |
|
|
|
|
| ||
Outstanding at end of period |
| 1,658,156 |
| $ | 55.78 |
| 4.7 |
| $ | 37,170 |
|
Vested and expected to vest at end of period |
| 1,651,364 |
| $ | 55.73 |
| 4.7 |
| $ | 37,105 |
|
Options exercisable at end of period |
| 703,261 |
| $ | 45.06 |
| 4.5 |
| $ | 23,297 |
|
The weighted average fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model and represents the difference between fair market value on the date of grant and the estimated market value on the expected exercise date. The option pricing model requires ATK to make assumptions. The risk-free rate is based on U.S. Treasury zero-coupon issues with a remaining term that approximates the expected life assumed at the date of grant. Expected volatility is based on the historical volatility of ATK’s stock over the past five years. The expected option life is based on the contractual term of the stock option and expected employee exercise and post-vesting employment termination trends. There were no options granted during the quarter ended December 31, 2006. The weighted average fair value of options granted during the nine months ended December 31, 2006 was $28.58. The weighted average fair value of options granted during the quarter and nine months ended January 1, 2006 was $24.70 and $23.63, respectively. The following weighted average assumptions were used for grants:
|
| Nine Months Ended |
| ||
|
| December 31, 2006 |
| January 1, 2006 |
|
|
|
|
|
|
|
Risk-free rate |
| 4.9 | % | 4.0 | % |
Expected volatility |
| 30.9 | % | 30.2 | % |
Expected dividend yield |
| 0 | % | 0 | % |
Expected option life |
| 5 years |
| 5 years |
|
The total intrinsic value of options exercised during the nine months ended December 31, 2006 and January 1, 2006 was $9,914 and $3,809, respectively. Total cash received from options exercised during the nine months ended December 31, 2006 and January 1, 2006 was $13,187 and $13,281, respectively.
The total fair value of restricted shares vested and performance awards earned during the quarters ended December 31, 2006 and January 1, 2006 was $155 and $41, respectively. The total fair value of restricted shares vested and performance awards earned during the nine months ended December 31, 2006 and January 1, 2006 was $1,061 and $378, respectively. A summary of ATK’s restricted share and performance award activity is as follows:
|
| Nine Months Ended |
| |||
|
| Shares |
| Weighted Average |
| |
|
|
|
|
|
| |
Nonvested at April 1, 2006 |
| 713,736 |
| $ | 73.62 |
|
Granted |
| 402,774 |
| 77.81 |
| |
Canceled/forfeited |
| (550 | ) | 75.40 |
| |
Vested |
| (18,093 | ) | 58.67 |
| |
Nonvested at December 31, 2006 |
| 1,097,867 |
| $ | 75.35 |
|
As of December 31, 2006, the total unrecognized compensation cost related to nonvested stock-based compensation awards was $32,489 and is expected to be realized over a weighted average period of 2.9 years.
16
12. Contingencies
Litigation. From time to time, ATK is subject to various legal proceedings, including lawsuits, which arise out of, and are incidental to, the conduct of ATK’s business. ATK does not consider any of such proceedings that are currently pending, individually or in the aggregate, to be material to its business or likely to result in a material adverse effect on its operating results, financial condition, or cash flows.
Environmental Remediation. ATK’s operations and ownership or use of real property are subject to a number of federal, state, and local environmental laws and regulations. At certain sites that ATK owns or operates or formerly owned or operated, there is known or potential contamination that ATK is required to investigate or remediate. ATK could incur substantial costs, including remediation costs, fines, and penalties, or third-party property damage or personal injury claims, as a result of violations or liabilities of environmental laws or non-compliance with environmental permits.
The liability for environmental remediation represents management’s best estimate of the present value of the probable and reasonably estimable costs related to known remediation obligations. The receivable represents the present value of the amount that ATK expects to recover, as discussed below. Both the liability and receivable have been discounted to reflect the present value of the expected future cash flows, using a discount rate, net of estimated inflation, of 3.00% as of December 31, 2006 and 3.25% as of March 31, 2006. The decrease in the rate during the nine months ended December 31, 2006 resulted in additional expense of approximately $300. The following is a summary of the amounts recorded for environmental remediation:
|
| December 31, 2006 |
| March 31, 2006 |
| ||||||||
|
| Liability |
| Receivable |
| Liability |
| Receivable |
| ||||
Undiscounted (liability) receivable |
| $ | (65,833 | ) | $ | 40,346 |
| $ | (67,065 | ) | $ | 39,772 |
|
Unamortized discount |
| 9,841 |
| (5,317 | ) | 11,470 |
| (6,087 | ) | ||||
Discounted (liability) receivable |
| $ | (55,992 | ) | $ | 35,029 |
| $ | (55,595 | ) | $ | 33,685 |
|
Amounts expected to be paid or received in periods more than one year from the balance sheet date are classified as non-current. Of the $55,992 discounted liability as of December 31, 2006, $6,087 was recorded within other current liabilities and $49,905 was recorded within other long-term liabilities. Of the $35,029 discounted receivable, ATK recorded $5,364 within other current assets and $29,665 within other non-current assets. As of December 31, 2006, the estimated discounted range of reasonably possible costs of environmental remediation was $55,992 to $96,188.
ATK expects that a portion of its environmental compliance and remediation costs will be recoverable under U.S. Government contracts. Some of the remediation costs that are not recoverable from the U.S. Government that are associated with facilities purchased in a business acquisition may be covered by various indemnification agreements, as described below.
· As part of its acquisition of the Hercules Aerospace Company in fiscal 1995, ATK assumed responsibility for environmental compliance at the facilities acquired from Hercules (the Hercules Facilities). ATK believes that a portion of the compliance and remediation costs associated with the Hercules Facilities will be recoverable under U.S. Government contracts, and that those environmental remediation costs not recoverable under these contracts will be covered by Hercules Incorporated (Hercules) under environmental agreements entered into in connection with the Hercules acquisition. Under these agreements, Hercules has agreed to indemnify ATK for environmental conditions relating to releases or hazardous waste activities occurring prior to ATK’s purchase of the Hercules Facilities; fines relating to pre-acquisition environmental compliance; and environmental claims arising out of breaches of Hercules’s representations and warranties. Hercules is not required to indemnify ATK for any individual claims below $50. Hercules is obligated to indemnify ATK for the lowest cost response of remediation required at the facility that is acceptable to the applicable regulatory agencies. ATK is not responsible for conducting any remedial activities with respect to the Kenvil, NJ facility or the Clearwater, FL facility. In accordance with its agreement with Hercules, ATK notified Hercules of all known contamination on non-federal lands on or before March 31, 2000 and on federal lands on or before March 31, 2005.
· ATK generally assumed responsibility for environmental compliance at the Thiokol Facilities acquired from Alcoa Inc. in fiscal 2002. While ATK expects that a portion of the compliance and remediation costs associated with the acquired Thiokol Facilities will be recoverable under U.S. Government contracts, ATK has recorded an accrual to cover those environmental remediation costs at these facilities that will not be recovered through U.S. Government contracts. In accordance with its agreement with Alcoa, ATK notified Alcoa of all known environmental remediation issues as of January 30, 2004. Of these known issues, ATK is responsible for any costs not recovered through U.S. Government contracts at Thiokol Facilities up to $29,000, ATK and
17
Alcoa have agreed to split evenly any amounts between $29,000 and $49,000, and ATK is responsible for any payments in excess of $49,000.
· With respect to the civil ammunition business’ facilities purchased from Blount in fiscal 2002, Blount has agreed to indemnify ATK for certain compliance and remediation liabilities, to the extent those liabilities are related to pre-closing environmental conditions at or related to these facilities. Some other remediation costs are expected to be paid directly by a third party pursuant to an existing indemnification agreement with Blount. Blount’s indemnification obligations relating to environmental matters, which extend through December 7, 2006, are capped at $30,000, less any other indemnification payments made for breaches of representations and warranties. The third party’s obligations, which extend through November 4, 2007, are capped at approximately $125,000, less payments previously made.
ATK cannot ensure that the U.S. Government, Hercules, Alcoa, Blount, or other third parties will reimburse it for any particular environmental costs or reimburse ATK in a timely manner or that any claims for indemnification will not be disputed. U.S. Government reimbursements for cleanups are financed out of a particular agency’s operating budget and the ability of a particular governmental agency to make timely reimbursements for cleanup costs will be subject to national budgetary constraints. ATK’s failure to obtain full or timely reimbursement from the U.S. Government, Hercules, Alcoa, Blount, or other third parties could have a material adverse effect on its operating results, financial condition, or cash flows. While ATK has environmental management programs in place to mitigate these risks, and environmental laws and regulations have not had a material adverse effect on ATK’s operating results, financial condition, or cash flows in the past, it is difficult to predict whether they will have a material impact in the future.
Other Contingencies. ATK is also subject to a number of other potential risks and contingencies, including the following:
· reductions or changes in NASA or U.S. Government military spending,
· increases in costs, which ATK may not be able to react to due to the nature of its U.S. Government contracts,
· government laws and other rules and regulations applicable to ATK, such as procurement and environmental remediation,
· intense competition,
· program terminations,
· contract novation,
· supplier contract negotiations and difficulties in the supplier qualification process,
· supply, availability, and costs of raw materials and components, and
· fires or explosions at any of ATK’s facilities.
13. Restructuring Charges
In fiscal 2004 and 2005, ATK recorded costs for restructuring and related activities, the majority of which were the result of the U.S. Army’s announced plans to exit the Twin Cities Army Ammunition Plant (TCAAP) in Arden Hills, MN. As a result, ATK’s management decided to relocate medium-caliber ammunition metal parts manufacturing from TCAAP to ATK’s Tactical Systems facility in Rocket Center, WV. The product qualification and start of production for the primary medium-caliber ammunition products was completed during fiscal 2005. In connection with these restructuring and related activities, ATK recorded costs of approximately $15,000 through fiscal 2006, primarily for employee termination benefits (including $2,718 for special termination benefits for pension and other postretirement benefits (PRB) in fiscal 2005), facility clean-up, and accelerated depreciation. These costs were recorded within cost of sales, primarily within the Ammunition Systems Group. Approximately $9,500 was disbursed through fiscal 2006. The liability related to these costs as of March 31, 2006 was approximately $600 (not including the $2,718 impact on the pension and other PRB plans). During the nine months ended December 31, 2006, no additional expense was recorded and a majority of the $600 liability was paid. In September 2006, ATK received Army approval of the final accounting and closure for property accountability at TCAAP, which closes out the TCAAP restructure.
On January 14, 2005, ATK announced its plans to move its fuze production operations from Janesville, WI to Rocket Center, WV. In connection with this move, ATK recorded costs of approximately $9,800 during fiscal 2005 and fiscal 2006 related primarily to employee termination benefits, relocation, and accelerated depreciation. These costs were recorded within cost of sales in the Mission Systems Group. Approximately $6,500 was disbursed during fiscal 2006 and cash of $1,400 was received from the sale of the Janesville facility. The liability related to these costs as of March 31, 2006 was approximately $400. During the nine months ended
18
December 31, 2006, the remaining liabilities were paid and no additional costs were recorded, effectively completing this restructuring activity.
14. Stock Repurchases
On January 31, 2006, ATK’s Board of Directors authorized the repurchase of an additional 5,000,000 shares through January 31, 2008. In February and March 2006, ATK repurchased 1,315,104 shares for $100,000. Through the second quarter of fiscal 2007, ATK repurchased 2,585,200 shares for $201,880. ATK made no share repurchases during the quarter ended December 31, 2006.
15. Operating Segment Information
Effective April 1, 2006, ATK realigned its business operations. As a result of this realignment, ATK changed the name of its ATK Thiokol segment to Launch Systems Group and changed the name of its Ammunition segment to Ammunition Systems Group, and consolidated the Precision Systems, Advanced Propulsion and Space Systems, and ATK Mission Research segments into a new segment, Mission Systems Group. In addition, a program was transferred from the Mission Systems Group to the Launch Systems Group as of April 1, 2006. Following this realignment, ATK has three segments: Mission Systems Group, Ammunition Systems Group, and Launch Systems Group. These operating segments are defined based on the reporting and review process used by ATK’s chief executive officer.
· The Mission Systems Group (MSG) operates in four areas: Weapons Systems, Aerospace Systems, Space Systems, and Technical Services.
· In the Weapons Systems area, MSG develops and produces advanced missile systems, precision-guided munitions, speed-of-light weapons, soldier weapon systems, barrier systems, and large-caliber ammunition for the U.S. government or its allies; and is also a significant subcontractor to other prime contractors, supplying tactical and hypersonic propulsion systems, warheads, fuzes, and missile defense divert and control systems.
· In the Aerospace Systems area, MSG is a prime contractor on a variety of electronic warfare and aircraft integration contracts and also develops products for other prime contractors, including precision-engineered low-observable structural components, high-temperature engine components, and high-performance radomes and apertures.
· In the Space Systems area, MSG primarily supports other prime contractors, classified customers, and other parts of ATK, developing and producing solar arrays, antenna reflectors, optical platforms, bus structures, launch structures, rocket motor casing, satellite pressurant and liquid propellant tanks, and in-space propulsion systems.
· In the Technical Services area, MSG supports government and prime contractor customers with high-end technical services and engineering support in a wide variety of technical disciplines, including radio frequency technology and testing, signal processing, optics, remote sensing, system survivability, and microelectronics.
· The Ammunition Systems Group supplies small-caliber military ammunition, medium-caliber ammunition, medium-caliber gun systems, ammunition and rocket propellants, energetic materials, commercial and military smokeless powder, law enforcement and sporting ammunition, and ammunition accessories.
· The Launch Systems Group is a provider of launch systems and solid propellant rocket motors for human access to space (NASA’s Space Shuttle and ARES I Crew Launch Vehicle), land- and sea-based strategic missiles, commercial and government space launch vehicles, advanced high speed weapons, and missile defense interceptors. The Group also provides advanced ordnance products, demilitarization products and services, operations and technical support for space launches, energetic materials, materials and structures for high temperature and hypersonic environments, and engineering and technical services for the advancement of propulsion systems and energetic materials.
The military small-caliber ammunition contract, which is reported within the Ammunition Systems Group, contributed approximately 14% of total external sales during the nine months ended December 31, 2006 and January 1, 2006. ATK’s contract with NASA for Reusable Solid Rocket Motors (RSRM) for the Space Shuttle, which is reported within the Launch Systems Group, represented approximately 11% and 13% of total external sales during the nine months ended December 31, 2006 and January 1, 2006, respectively.
19
The following summarizes ATK’s results by operating segment:
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||
|
| December 31, |
| January 1, |
| December 31, |
| January 1, |
| ||||
Sales to external customers: |
|
|
|
|
|
|
|
|
| ||||
Mission Systems Group |
| $ | 295,973 |
| $ | 269,451 |
| $ | 855,001 |
| $ | 812,813 |
|
Ammunition Systems Group |
| 330,549 |
| 265,773 |
| 900,136 |
| 764,787 |
| ||||
Launch Systems Group |
| 273,779 |
| 234,805 |
| 800,637 |
| 721,513 |
| ||||
Total external sales |
| 900,301 |
| 770,029 |
| 2,555,774 |
| 2,299,113 |
| ||||
Intercompany sales: |
|
|
|
|
|
|
|
|
| ||||
Mission Systems Group |
| 30,170 |
| 23,279 |
| 75,145 |
| 64,981 |
| ||||
Ammunition Systems Group |
| 5,263 |
| 4,331 |
| 15,044 |
| 10,152 |
| ||||
Launch Systems Group |
| 3,859 |
| 1,798 |
| 12,644 |
| 5,686 |
| ||||
Corporate |
| (39,292 | ) | (29,408 | ) | (102,833 | ) | (80,819 | ) | ||||
Total intercompany sales |
| — |
| — |
| — |
| — |
| ||||
Total sales |
| $ | 900,301 |
| $ | 770,029 |
| $ | 2,555,774 |
| $ | 2,299,113 |
|
|
|
|
|
|
|
|
|
|
| ||||
Income before interest, income taxes, and minority interest: |
|
|
|
|
|
|
|
|
| ||||
Mission Systems Group |
| $ | 30,054 |
| $ | 27,232 |
| $ | 83,545 |
| $ | 70,563 |
|
Ammunition Systems Group |
| 32,536 |
| 31,421 |
| 78,550 |
| 75,808 |
| ||||
Launch Systems Group |
| 34,611 |
| 33,931 |
| 107,684 |
| 101,377 |
| ||||
Corporate |
| (4,775 | ) | (4,422 | ) | (16,056 | ) | (11,141 | ) | ||||
Total income before interest, income taxes, and minority interest |
| $ | 92,426 |
| $ | 88,162 |
| $ | 253,723 |
| $ | 236,607 |
|
20
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands except share and per share data and unless otherwise indicated)
Forward-Looking Information is Subject to Risk and Uncertainty
Some of the statements made and information contained in this report, excluding historical information, are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events. Words such as “may,” “will,” “expected,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” and similar expressions are used to identify forward-looking statements. From time to time, we also may provide oral or written forward-looking statements in other materials released to the public. Any or all forward-looking statements in this report and in any public statements we make could be materially different. They can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Any change in the following factors may impact the achievement of results:
· reductions or changes in NASA or U.S. Government military spending and budgetary policies and sourcing strategy,
· increases in costs, which ATK may not be able to react to due to the nature of its U.S. Government contracts,
· the potential termination of U.S. Government contracts,
· government laws and other rules and regulations applicable to ATK, such as procurement and import-export control,
· the novation of U.S. Government contracts,
· other risks associated with U.S. Government contracts that might expose ATK to adverse consequences,
· changes in cost estimates and/or timing of programs,
· intense competition,
· performance of ATK’s subcontractors,
· supply, availability, and costs of raw materials and components,
· development of key technologies and retention of a qualified workforce,
· fires or explosions at any of ATK’s facilities,
· environmental rules and regulations, noncompliance with which may expose ATK to adverse consequences,
· actual pension asset returns and assumptions regarding future returns, discount rates, and service costs, and pension funding,
· greater risk associated with international business, including trading restrictions,
· unanticipated changes in the tax provision, tax rules or pronouncements, or exposure to additional tax liabilities,
· results of acquisitions,
· changing economic and political conditions in the United States and in other countries,
· changes in the number or timing of commercial and military space launches,
· outcome of periodic union negotiations,
· customer product acceptance,
· program performance,
· continued access to technical and capital resources,
· supplier contract negotiations and difficulties in the supplier qualification process,
· availability of insurance coverage at acceptable terms,
· unforeseen delays or other changes in NASA’s Space Shuttle program,
· changes in accounting or pension rules or pronouncements,
· changes in cost estimates related to restructuring or relocation of facilities,
· the timing and extent of changes in commodity prices and interest rates,
· access to capital markets and the costs thereof,
· legal proceedings, and
· other economic, political, and technological risks and uncertainties.
21
This list of factors is not exhaustive and new factors may emerge or changes to the foregoing factors may occur that would impact ATK’s business. We undertake no obligation to update any forward-looking statements. A more detailed description of risk factors can be found in Item 1A, Risk Factors, of ATK’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006. Additional information regarding these factors may be contained in ATK’s filings with the Securities and Exchange Commission, especially on Forms 8-K.
Overview
ATK is a supplier of aerospace and defense products to the U.S. Government, U.S. allies, and major prime contractors. ATK is also a supplier of ammunition to federal and local law enforcement agencies and commercial markets. ATK is headquartered in Edina, Minnesota and has operating locations throughout the United States.
Effective April 1, 2006, ATK realigned its business operations. As a result of this realignment, ATK changed the name of its ATK Thiokol segment to Launch Systems Group and changed the name of its Ammunition segment to Ammunition Systems Group, and consolidated the Precision Systems, Advanced Propulsion and Space Systems, and ATK Mission Research segments into a new segment, Mission Systems Group. In addition, a program was transferred from the Mission Systems Group to the Launch Systems Group as of April 1, 2006. Following this realignment, ATK has three segments: Mission Systems Group, Ammunition Systems Group, and Launch Systems Group.
· The Mission Systems Group (MSG), which generated 33% of ATK’s external sales in the nine months ended December 31, 2006, operates in four areas: Weapons Systems, Aerospace Systems, Space Systems, and Technical Services.
· In the Weapons Systems area, MSG develops and produces advanced missile systems, precision-guided munitions, speed-of-light weapons, soldier weapon systems, barrier systems, and large-caliber ammunition for the U.S. government or its allies; and is also a significant subcontractor to other prime contractors, supplying tactical and hypersonic propulsion systems, warheads, fuzes, and missile defense divert and control systems.
· In the Aerospace Systems area, MSG is a prime contractor on a variety of electronic warfare and aircraft integration contracts; and also develops products for other prime contractors, including precision-engineered low-observable structural components, high-temperature engine components, and high-performance radomes and apertures.
· In the Space Systems area, MSG primarily supports other prime contractors, classified customers, and other parts of ATK, developing and producing solar arrays, antenna reflectors, optical platforms, bus structures, launch structures, rocket motor casing, satellite pressurant and liquid propellant tanks, and in-space propulsion systems.
· In the Technical Services area, MSG supports government and prime contractor customers with high-end technical services and engineering support in a wide variety of technical disciplines, including radio frequency technology and testing, signal processing, optics, remote sensing, system survivability, and microelectronics.
· The Ammunition Systems Group, which generated 35% of ATK’s external sales in the nine months ended December 31, 2006, supplies small-caliber military ammunition, medium-caliber ammunition, medium-caliber gun systems, ammunition and rocket propellants, energetic materials, commercial and military smokeless powder, law enforcement and sporting ammunition, and ammunition accessories.
· The Launch Systems Group, which generated 31% of ATK’s external sales in the nine months ended December 31, 2006, is a provider of launch systems and solid propellant rocket motors for human access to space (NASA’s Space Shuttle and ARES I Crew Launch Vehicle), land- and sea-based strategic missiles, commercial and government space launch vehicles, advanced high speed weapons, and missile defense interceptors. The Group also provides advanced ordnance products, demilitarization products and services, operations and technical support for space launches, energetic materials, materials and structures for high temperature and hypersonic environments, and engineering and technical services for the advancement of propulsion systems and energetic materials.
The majority of ATK’s sales are recognized as costs are incurred. ATK’s customers pay ATK cash based on costs incurred and profit earned, upon achievement of program milestones, or upon delivery of the product.
As a supplier to the U.S. aerospace and defense industry, ATK is dependent on funding levels of the U.S. Department of Defense (DoD) and NASA. The U.S. defense industry has experienced significant changes over the past few years. During the 1990s, the DoD budget declined, but that trend has reversed during the 2000s due to continuing geopolitical uncertainties. While the DoD’s budget for
22
procurement and research, development, test, and evaluation continues to grow each year, the degree of future growth is not known and it may slow or even contract. However, ATK believes it is well positioned in this budget environment to maintain or even increase its relative participation in the DoD budget, as it derives the majority of its DoD sales from products that are consumed (and then reprocured) in both tactical and training operations. ATK anticipates that, to the extent that future budget pressures mount, the majority of budget cuts would come in the areas where the DoD is developing new “platforms” - the vehicles used to deliver the weapons, including ships, aircraft, tanks and helicopters. Much of ATK’s product portfolio is “platform independent,” meaning it can be used in the legacy platforms of today (for example, M1A1 battle tanks and F-16 fighters), as well as in the platforms being developed for future use (for example, Future Combat Systems and Joint Strike Fighter). Therefore, if and when these future platform development programs come under budget pressures, ATK believes that it has limited exposure, relative to its industry peers.
In January 2004, President Bush announced a new vision for space exploration, which commits the United States to a long-term human and robotic program to explore the solar system, starting with a return to the Moon. The new program anticipates that the Space Shuttle will be retired from service as early as 2010, to be replaced by a new spacecraft and supporting exploration launch systems. ATK is the sole manufacturer of the Reusable Solid Rocket Motors (RSRM) for NASA’s Space Shuttle and ATK is currently under contract with NASA to provide RSRMs and other related services through May 2007. On September 19, 2005, NASA announced the results of its architecture study from which NASA chose the shuttle-derived option for its new launch system due to its superior safety, cost and its availability. NASA’s current plan includes an upgraded five-segment Shuttle Solid Rocket Booster as the first stage for its new Apollo-style Crew Launch Vehicle, known as ARES I, and two five-segment Shuttle Solid Rocket Boosters as the initial thrust for its Heavy Lift Launch Vehicle (HLLV), known as ARES V, for the future NASA launch systems. A contract has been received from NASA for ATK to begin development of the first stage of ARES I.
ATK management believes that the key to ATK’s continued success is to focus on performance, simplicity, and affordability, and that ATK’s future lies in being a leading provider of advanced weapon and space systems. ATK is positioning itself where management believes there will be continued strong defense funding, even as pressures on procurement and research and development accounts mount. ATK will concentrate on developing the “faster, farther, more accurate, and more lethal” systems that will extend the life and improve the capability of existing platforms. ATK anticipates budget pressures will increasingly drive the life extension of platforms such as ships, aircrafts, and main battle tanks. ATK’s transformational weapons such as AARGM, PGMM and PGK are aimed squarely at this growing market. At the same time, ATK believes it is on the leading edge of technologies essential to “generation after next” weapons and platforms - advanced sensor/seeker integration, directed energy, high-speed, long-range projectiles, thermal-resistant materials, reactive materials, and scramjet engines are examples.
Critical Accounting Policies
ATK’s significant accounting policies are described in Note 1 to the consolidated financial statements included in ATK’s Annual Report on Form 10-K for the year ended March 31, 2006 (fiscal 2006). The accounting policies used in preparing ATK’s interim fiscal 2007 consolidated financial statements are the same as those described in ATK’s Annual Report, except as described in this report in Note 2, New Accounting Pronouncements, to the unaudited consolidated financial statements.
In preparing the consolidated financial statements, ATK follows accounting principles generally accepted in the United States. The preparation of these financial statements requires ATK to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. ATK re-evaluates its estimates on an on-going basis. ATK’s estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
ATK believes its critical accounting policies are those related to:
· revenue recognition,
· environmental remediation and compliance,
· employee benefit plans,
· income taxes, and
· acquisitions and goodwill.
More information on these policies can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of ATK’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.
23
Results of Operations
Sales
The military small-caliber ammunition contract, which is reported within the Ammunition Systems Group, contributed approximately 14% of total external sales during the nine months ended December 31, 2006 and January 1, 2006. The RSRM program, which is reported within the Launch Systems Group, represented approximately 11% and 13% of total external sales during the nine months ended December 31, 2006 and January 1, 2006, respectively.
The following is a summary of each operating segment’s external sales:
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||||||||||||
|
| December 31, |
| January 1, |
| $ Change |
| % |
| December 31, |
| January 1, |
| $ Change |
| % |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mission Systems Group |
| $ | 295,973 |
| $ | 269,451 |
| $ | 26,522 |
| 9.8 | % | $ | 855,001 |
| $ | 812,813 |
| $ | 42,188 |
| 5.2 | % |
Ammunition Systems Group |
| 330,549 |
| 265,773 |
| 64,776 |
| 24.4 | % | 900,136 |
| 764,787 |
| 135,349 |
| 17.7 | % | ||||||
Launch Systems Group |
| 273,779 |
| 234,805 |
| 38,974 |
| 16.6 | % | 800,637 |
| 721,513 |
| 79,124 |
| 11.0 | % | ||||||
Total external sales |
| $ | 900,301 |
| $ | 770,029 |
| $ | 130,272 |
| 16.9 | % | $ | 2,555,774 |
| $ | 2,299,113 |
| $ | 256,661 |
| 11.2 | % |
The increase in sales was due to organic growth in all of ATK’s segments.
Quarter.
Mission Systems Group. The increase in sales was driven by:
· an increase of $14,300 in missile defense, primarily due to increased volume on the Standard Missile 3 (SM-3) program,
· an increase of $13,500 in aircraft integration due to increased demand and new program awards,
· a net increase of $7,800 in tank ammunition, specifically due to increased production on the M829A3 contract and the timing of 120MM training ammunition orders, partially offset by a reduction in international volume due to contract completions,
· an increase of $6,300 in aircraft structures due to the Joint Strike Fighter moving to production and new programs, primarily the GEnx fan containment case assembly, and
· an increase of $4,500 in barrier systems, primarily due to a new order for the Shielder canister.
These increases were partially offset by a decrease in precision munitions of $5,400 due to timing of program efforts.
Ammunition Systems Group. The increase in sales was driven by:
· a $32,000 increase in military small-caliber ammunition sales at the Lake City Army Ammunition Plant as a result of continued strong customer requirements,
· an increase of $20,000 in civil ammunition due to an increase in volume of domestic, law enforcement, and international sales, and
· an increase of $17,700 in medium-caliber guns and ammunition due to various ammunition programs that were not in active production during the same period of the prior year.
These increases were partially offset by a $6,600 decline in production on propellant and energetics programs.
Launch Systems Group. The increase in sales was due to:
· an increase of $23,400 on NASA’s new Crew Launch Vehicle, ARES I as discussed above,
· an increase of $5,200 on timing of material purchases for RSRM,
· an increase of $4,800 on increased demand for flares and decoys, and
· a $4,700 increase in the Minuteman III Propulsion Replacement program driven by higher orders for repair and replacement work.
24
These increases were partially offset by a decrease of $3,400 due to the completion of launch support on the Titan IV program during the second quarter of fiscal 2007.
Nine months.
Mission Systems Group. The increase in sales was driven by:
· an increase of $23,600 in aircraft integration due to increased demand and new program awards along with the timing of Maritime Patrol aircraft sales,
· an increase of $19,900 in missile defense primarily due to increased production volume and a successful flight intercept test on the SM-3 program,
· an overall increase of $17,800 in tank ammunition, specifically the M829A3 and M830A1 tactical programs, partially offset by a reduction in international volume,
· an increase of $13,300 in aircraft structures due to new programs, primarily the GEnx fan containment case assembly, along with Joint Strike Fighter moving to production during the period,
· an increase of $12,600 in electronic warfare sales, primarily higher volume and timing of milestones achieved on the AAR-47 missile warning system and its derivatives,
· an increase of $12,000 in fuzes and proximity sensors due to increased production upon completing the move of the fuze production operations, and
· an increase of $4,800 in missile systems due to a new AARGM contract with Italy and successful completion of the critical design review (CDR) on the Advanced Anti-Radiation Guided Missile (AARGM), partially offset by completion of the High Speed Anti-Radiation missile Demonstration (HSAD).
These increases were partially offset by:
· a $20,400 decrease in engineering services due to lower orders,
· a decrease in precision munitions of $19,500 due to timing of program effort,
· a $7,400 decrease in satellites due to completion of the A2100 contract in the prior period and timing of orders, and
· a $6,100 decrease in space stages due to higher amounts of non-recurring development efforts on the Orbus program in the same period of the prior year.
Ammunition Systems Group. The increase in sales was driven by:
· an increase of $53,400 in civil ammunition due to an increase in volume of domestic, law enforcement, OEM, and government sales,
· a $46,000 increase in military small-caliber ammunition sales at the Lake City Army Ammunition Plant as a result of continued strong customer requirements,
· an increase of $20,800 in medium-caliber guns and ammunition due to various programs that were not in active production during the same period of the prior year, and
· an increase of $5,100 in sales of various propellants and energetics programs due to higher demand.
Launch Systems Group. The increase in sales was due to:
· an increase of $43,200 on ARES I, which is a new program,
· a $25,800 increase on the Minuteman III Propulsion Replacement program mainly due to the timing of material purchases and higher orders for repair and replacement work, and
· a $21,600 increase in Trident II Missile program and related technology contracts as well as an increase in demand for flares and decoys.
These increases were partially offset by a reduction of $8,800 due to the completion of launch support on the Titan IV program, as well as a $6,600 reduction due to the completion of the repair system for the Space Shuttle Orbiter Wing Leading Edge and a reduction in Orion Motors of $5,900 due to the timing of production.
25
Gross Profit
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||||||||||||||||
|
| December 31, |
| As a % |
| January 1, |
| As a % |
| Change |
| December 31, |
| As a % |
| January 1, |
| As a % |
| Change |
| ||||||
Gross profit |
| $ | 167,150 |
| 18.6 | % | $ | 155,714 |
| 20.2 | % | $ | 11,436 |
| $ | 478,711 |
| 18.7 | % | $ | 439,562 |
| 19.1 | % | $ | 39,149 |
|
Quarter. The increase in gross profit was driven by higher sales which were offset by lower margin rates due to the lack of higher margin contracts that were closed out during the same period of the prior year, the absence of a flight incentive on the Titan program received in the prior year period within the Launch Systems Group, and lower margins on the TNT program within the Ammunition Systems Group.
Nine months. The increase in gross profit was driven by higher sales partially offset by a decreased margin rate within Ammunition Systems Group as a result of lower margins on the TNT program.
Operating Expenses
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||||||||||||||||
|
| December 31, |
| As a % |
| January 1, |
| As a % |
| Change |
| December 31, |
| As a % |
| January 1, |
| As a % |
| Change |
| ||||||
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
| ||||||
Research and development |
| $ | 13,461 |
| 1.5 | % | $ | 11,024 |
| 1.4 | % | $ | 2,437 |
| $ | 39,012 |
| 1.5 | % | $ | 35,101 |
| 1.5 | % | $ | 3,911 |
|
Selling |
| 19,882 |
| 2.2 | % | 19,527 |
| 2.5 | % | 355 |
| 67,337 |
| 2.6 | % | 56,812 |
| 2.5 | % | 10,525 |
| ||||||
General and administrative |
| 41,381 |
| 4.6 | % | 37,001 |
| 4.8 | % | 4,380 |
| 118,639 |
| 4.6 | % | 111,042 |
| 4.8 | % | 7,597 |
| ||||||
Total |
| $ | 74,724 |
| 8.3 | % | $ | 67,552 |
| 8.8 | % | $ | 7,172 |
| $ | 224,988 |
| 8.8 | % | $ | 202,955 |
| 8.8 | % | $ | 22,033 |
|
Quarter.
Operating expenses increased primarily due to higher general and administrative expenses as a result of increased headcount to support increasing sales as well as stock option expense of $1,529. Selling expenses also increased consistent with higher sales.
Nine months.
Operating expenses increased primarily due to higher selling expenses due to higher sales and increasing program proposal efforts. General and administrative expenses also increased as a result of increased headcount to support increasing sales as well as stock option expense of $5,286.
Income Before Interest, Income Taxes, and Minority Interest
| Quarters Ended |
| Nine Months Ended |
| |||||||||||||||
|
| December 31, |
| January 1, |
| Change |
| December 31, |
| January 1, |
| Change |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mission Systems Group |
| $ | 30,054 |
| $ | 27,232 |
| $ | 2,822 |
| $ | 83,545 |
| $ | 70,563 |
| $ | 12,982 |
|
Ammunition Systems Group |
| 32,536 |
| 31,421 |
| 1,115 |
| 78,550 |
| 75,808 |
| 2,742 |
| ||||||
Launch Systems Group |
| 34,611 |
| 33,931 |
| 680 |
| 107,684 |
| 101,377 |
| 6,307 |
| ||||||
Corporate |
| (4,775 | ) | (4,422 | ) | (353 | ) | (16,056 | ) | (11,141 | ) | (4,915 | ) | ||||||
Total |
| $ | 92,426 |
| $ | 88,162 |
| $ | 4,264 |
| $ | 253,723 |
| $ | 236,607 |
| $ | 17,116 |
|
The increase in income before interest, income taxes, and minority interest was due to higher sales along with program-related changes within the operating segments as described below.
Quarter.
Mission Systems Group. The increase relates to higher sales and improved margins on tank ammunition programs.
Ammunition Systems Group. The increase relates to higher sales along with improved margins on medium-caliber ammunition programs, partially offset by lower margins on the TNT program and higher raw material costs.
26
Launch Systems Group. The increase was mainly due to higher sales and favorable contract performance on strategic programs, partially offset by lower margins on the Orion program as a result of favorable contract close-outs recognized in the same period of the prior year and the absence of a flight incentive on the Titan program received in the prior year period.
Corporate. The net expense of Corporate primarily reflects expenses incurred for administrative functions that are performed centrally at the corporate headquarters and the elimination of intercompany profits. The increase is primarily due to the recognition of stock option expense during fiscal 2007.
Nine months.
Mission Systems Group. The increase relates to improved margins within tank ammunition, specifically the M829A3 and M830A1 tactical programs, the absence of a fuze restructure charge that was included in the prior year period, an award fee tied to a successful flight intercept test along with increased volume on the SM-3 program, and higher sales and improved margins on electronic warfare programs, barrier systems, and aircraft integration, as discussed above. These increases were partially offset by lower sales volume within precision munitions and engineering services, also discussed above.
Ammunition Systems Group. The increase relates to higher sales, including higher medium-caliber gun sales, which have higher margins, and the lack of lower margin programs within medium-caliber ammunition that were closed out in the same period of fiscal 2006. These increases were partially offset by a margin decline in the TNT program.
Launch Systems Group. The increase was mainly due to increased volume and favorable contract performance on strategic programs, partially offset by lower sales and lower margins on the Orion program as a result of favorable contract close-outs recognized in the same period of the prior year.
Corporate. The net expense of Corporate primarily reflects expenses incurred for administrative functions that are performed centrally at the corporate headquarters and the elimination of intercompany profits. The increase is primarily due to the recognition of stock option expense of $5,286 during fiscal 2007.
Interest Expense
Quarter.
Net interest expense for the quarter ended December 31, 2006 was $19,356, an increase of $2,740 compared to $16,616 in the comparable quarter of fiscal 2006 primarily due to an increase in the average outstanding debt balance, as discussed below within “Liquidity and Capital Resources” under the heading “Debt”.
Nine months.
Net interest expense for the nine months ended December 31, 2006 was $53,498, an increase of $2,736 compared to $50,762 in the comparable nine months of fiscal 2006 due to a higher average outstanding debt balance partially offset by a lower average borrowing rate.
Income Tax Provision
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||||||||||||||||
|
| December 31, |
| Effective |
| January 1, |
| Effective |
| Change |
| December 31, |
| Effective |
| January 1, |
| Effective |
| Change |
| ||||||
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| ||||||
Income tax provision |
| $ | 21,734 |
| 29.7 | % | $ | 24,323 |
| 34.0 | % | $ | (2,589 | ) | $ | 69,871 |
| 34.9 | % | $ | 61,039 |
| 32.8 | % | $ | 8,832 |
|
ATK’s provision for income taxes includes both federal and state income taxes. The income tax provisions for the quarter and nine months ended December 31, 2006 represent effective tax rates of 29.7% and 34.9%, respectively. The income tax provisions for the quarter and nine months ended January 1, 2006 represent effective tax rates of 34.0% and 32.8%, respectively. Income tax provisions for interim periods are based on estimated effective annual income tax rates.
27
The effective tax rate of 34.9% for the nine months ended December 31, 2006 differs from the federal statutory rate of 35% due to state income taxes, which increase the rate, and the following items which decrease the rate: research and development (R&D) tax credits, extraterritorial income (ETI) exclusion tax benefits, qualified domestic manufacturing deduction (DMD) and a $239 net discrete tax benefit, as explained further below.
On December 20, 2006, the President signed the Tax Relief and Health Care Act of 2006 which reinstated the R&D tax credit from January 1, 2006 through December 31, 2007. The extension of the R&D credit is reflected in the tax rates noted above, which includes a discrete tax benefit of $1,566 during the nine months ended December 31, 2006.
In addition, during the nine months ended December 31, 2006, there was a discrete tax expense of $610 to adjust the fiscal 2006 tax provision amounts to the returns as filed and $717 of discrete tax expense to adjust the deferred tax balances due to an internal legal entity reorganization.
The effective tax rate of 32.8% for the nine months ended January 1, 2006 differs from the federal statutory rate of 35% due to state income taxes, which increase the rate, and the following items which decrease the rate: ETI benefits, R&D credits, DMD and a $4,403 net discrete tax benefit comprised of a $5,020 benefit from settlement of the Internal Revenue Service (IRS) audit for fiscal 2002 and 2003 and related revisions in state liabilities and a $617 expense for tax provision adjustments related to fiscal 2005 and prior years.
Minority Interest
The minority interest in each period represents the minority owners’ portion of the income of a joint venture in which ATK is the primary owner. This joint venture is consolidated into ATK’s financial statements.
Net Income
Quarter.
Net income for the quarter ended December 31, 2006 was $51,230, an increase of $4,131 compared to $47,099 in the comparable quarter of fiscal 2006. This increase was due to an increase of $11,436 in gross profit and a decrease in income tax expense of $2,589, partially offset by an increase in net interest expense of $2,740 and an increase in operating expenses of $7,172.
Nine months.
Net income for the nine months ended December 31, 2006 was $130,030, an increase of $5,559 compared to $124,471 in the comparable nine months of fiscal 2006. This increase was due to increases in gross profit of $39,149, partially offset by increased operating expenses of $22,033, an increase in income tax expense of $8,832, and an increase in net interest expense of $2,736.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
|
| Nine Months Ended |
| |||||||
|
| December 31, 2006 |
| January 1, 2006 |
| Change |
| |||
|
|
|
|
|
|
|
| |||
Cash flows (used for) provided by operating activities |
| $ | (52,701 | ) | $ | 144,797 |
| $ | (197,498 | ) |
Cash flows used for investing activities |
| (52,418 | ) | (35,071 | ) | (17,347 | ) | |||
Cash flows provided by (used for) financing activities |
| 114,704 |
| (83,275 | ) | 197,979 |
| |||
Net cash flows |
| $ | 9,585 |
| $ | 26,451 |
| $ | (16,866 | ) |
Cash used for operating activities for the nine months ended December 31, 2006 totaled $52,701, compared to cash provided of $144,797 in the comparable period of the prior year. This change is primarily due to an increase in pension contributions of $286,873 over the prior period and an increase in cash used for compensation of $10,913 due to higher performance-based payments.
28
These increases were partially offset by a decrease in net cash paid for taxes of $22,390 due to the timing of higher pension contributions, a $16,339 decrease in cash paid for interest as the prior-year period included $17,000 of interest on the 8.50% Notes, which ATK repurchased through a tender offer in the fourth quarter of fiscal 2006, an increase in net income of $5,559 (which was impacted by increases in pension expense of $13,515 and share-based plans expense of $11,533 which were non-cash), and a $2,640 decrease in cash used for working capital (defined as net receivables plus net inventories less accounts payable less contract advances and allowances) primarily due to a higher receivables balance as a result of higher sales and timing of cash receipts, offset by an increase in accounts payable relating to timing of payments to vendors.
Cash used for investing activities totaled $52,418, an increase of $17,347 compared to $35,071 used in the comparable period of the prior year primarily as a result of higher capital expenditures including expenditures made at the end of fiscal 2006, but paid during the nine months ended December 31, 2006. ATK expects fiscal 2007 capital expenditures to approximate $75,000.
Cash provided by financing activities totaled $114,704, compared to $83,275 used in the comparable period of the prior year. Payments on debt decreased $263,957 along with a $155,000 increase in proceeds from the issuance of debt and line of credit borrowings. In connection with the issuance of its 2.75% Convertible Senior Subordinated Notes due 2011, ATK purchased call options for $50,850 and sold warrants for $23,220, as discussed below. Cash paid for debt issuance costs also increased by $6,750 as a result of the issuance of these notes. Cash paid for the purchase of treasury shares increased $129,529. The decrease in cash overdrafts was $61,496 compared to a decrease in the prior period of $6,092 due to the timing of payments.
Postretirement Benefit Plans Contributions
During the nine months ended December 31, 2006, ATK contributed $312,671 to its qualified pension plans, $6,339 directly to retirees, and $13,204 to its other postretirement benefit (PRB) plans. ATK anticipates making additional contributions to its qualified pension plans during fiscal 2007 of $73,500 and $4,600 to its other PRB plans. ATK also anticipates making additional contributions of $1,300 directly to retirees.
ATK typically generates cash flows from operating activities in excess of its commitments. ATK has several opportunities for capital deployment, which may include debt repayments, stock repurchases, pension funding, funding acquisitions, and other alternatives.
Debt
Long-term debt, including the current portion, consisted of the following:
|
| December 31, 2006 |
| March 31, 2006 |
| ||
Senior Credit Facility dated March 31, 2004: |
|
|
|
|
| ||
Term A Loan due 2009 |
| $ | 222,750 |
| $ | 243,000 |
|
Revolving Credit Facility due 2009 |
| 125,000 |
| — |
| ||
8.50% Senior Subordinated Notes |
| — |
| 2,596 |
| ||
2.75% Convertible Senior Subordinated Notes due 2011 |
| 300,000 |
| — |
| ||
6.75% Senior Subordinated Notes due 2016 |
| 400,000 |
| 400,000 |
| ||
2.75% Convertible Senior Subordinated Notes due 2024 |
| 280,000 |
| 280,000 |
| ||
3.00% Convertible Senior Subordinated Notes due 2024 |
| 200,000 |
| 200,000 |
| ||
Total long-term debt |
| 1,527,750 |
| 1,125,596 |
| ||
Less current portion |
| 152,000 |
| 29,596 |
| ||
Long-term debt |
| $ | 1,375,750 |
| $ | 1,096,000 |
|
In September 2006, ATK completed a private offering of $300,000 aggregate principal amount of 2.75% Convertible Senior Subordinated Notes (the 2.75% Convertible Notes due 2011) that mature on September 15, 2011. Interest on these notes is payable on March 15 and September 15 of each year, beginning on March 15, 2007. Holders may convert their notes at a conversion rate of 10.3617 shares of ATK’s common stock per $1 principal amount of these notes (a conversion price of $96.51 per share) under the following circumstances: (1) during any fiscal quarter commencing after December 31, 2006, if the last reported sale price of ATK stock is greater than or equal to 130% of the conversion price, or $125.46, for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) upon the occurrence of certain corporate transactions; or (3) during the last month prior to maturity. ATK is required to satisfy 100% of the principal amount of these notes solely in cash, with any amounts above the principal amount to be satisfied in cash, common stock, or a combination of cash and common stock, at the sole
29
election of ATK. If certain fundamental changes occur prior to maturity, ATK will in certain circumstances increase the conversion rate by a number of additional shares of common stock or, in lieu thereof, ATK may in certain circumstances elect to adjust the conversion rate and related conversion obligation so that these notes are convertible into shares of the acquiring or surviving company. ATK has agreed to register these notes for resale by the holders of the notes within 180 days after the closing of the offering; if the notes are not registered within the 180 days, ATK would be assessed additional interest of up to 0.50% of the principal amount. These contingently issuable shares are not included in ATK’s diluted share count for the quarter or nine months ended December 31, 2006 because ATK’s average stock price during those periods was below the conversion price. Debt issuance costs of approximately $7,500 are being amortized to interest expense over five years. Approximately $100,000 of the net proceeds from the issuance of these notes was used to concurrently repurchase 1,285,200 shares of ATK’s common stock.
In connection with the issuance of the 2.75% Convertible Notes due 2011, ATK purchased, at a cost of $50,850, call options (the Call Options) on its common stock. The Call Options, which become exercisable upon conversion of the related convertible notes, allow ATK to purchase approximately 3.1 million shares of ATK’s common stock and/or cash from the counterparty at an amount equal to the amount of common stock and/or cash related to the excess conversion value that ATK would pay to the holders of the related convertible notes upon conversion. For income tax reporting purposes, the related convertible notes and the Call Options are integrated. This creates an original issue discount for income tax reporting purposes, and therefore the cost of the Call Options will be accounted for as interest expense over the term of the convertible notes for income tax reporting purposes. The associated income tax benefits will be recognized in the period in which the deduction is taken for income tax reporting purposes as an increase in additional paid-in capital (APIC) in stockholders’ equity. In addition, ATK sold warrants (the Warrants) to issue approximately 3.3 million shares of ATK’s common stock at an exercise price of $116.75 per share. The proceeds from the sale of the Warrants totaled $23,220. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), and Emerging Issues Task Force (EITF) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, ATK recorded the net cost of the Call Options and the Warrants of $27,630 in APIC and will not recognize any changes in the fair value of the instruments. On a combined basis, the Call Options and the Warrants are intended to reduce the potential dilution of ATK’s common stock in the event that the 2.75% Convertible Notes due 2011 are converted by effectively increasing the conversion price of these notes from $96.51 to $116.75. The Call Options are anti-dilutive and are therefore excluded from the calculation of diluted shares outstanding. The Warrants will result in additional diluted shares outstanding if ATK’s average common stock price exceeds $116.75. The Call Options and the Warrants are separate and legally distinct instruments that bind ATK and the counterparty and have no binding effect on the holders of the convertible notes.
In fiscal 2006, ATK made a cash tender offer for any and all of its outstanding $400,000 aggregate principal amount 8.50% Senior Subordinated Notes due 2011 (the 8.50% Notes). As of March 31, 2006, $397,404 principal amount of these notes had been repaid by ATK at a price of 104.75% of the principal amount. ATK redeemed the remaining $2,596 principal amount during the first quarter of fiscal 2007 at a price of 104.25% of the principal amount.
In fiscal 2006, ATK issued $400,000 aggregate principal amount of 6.75% Senior Subordinated Notes (the 6.75% Notes) that mature on April 1, 2016. These notes are general unsecured obligations. Interest on these notes accrues at a rate of 6.75% per annum and is payable semi-annually on April 1 and October 1 of each year, beginning on December 31, 2006. ATK has the right to redeem some or all of these notes from time to time on or after April 1, 2011, at specified redemption prices. Prior to April 1, 2011, ATK may redeem some or all of these notes at a price equal to 100% of their principal amount plus accrued and unpaid interest to the date of redemption and a specified makewhole premium. In addition, prior to April 1, 2009, ATK may redeem up to 35% of the aggregate principal amount of these notes, at a price equal to 106.75% of their principal amount plus accrued and unpaid interest to the date of redemption, with the proceeds of certain equity offerings. Debt issuance costs related to these notes of approximately $7,700 are being amortized to interest expense over ten years.
ATK’s Senior Credit Facility dated March 31, 2004 (the Senior Credit Facility), as amended in fiscal 2006, is comprised of a Term A Loan of $222,750 and a $300,000 Revolving Credit Facility maturing in 2009. The Term A Loan had an original balance of $270,000. ATK made scheduled payments of $27,000 in fiscal 2006 and $20,250 in the nine months ended December 31, 2006. The Term A Loan requires quarterly principal payments of $6,750 through December 2008 and a final payment of $168,750 in March 2009. Substantially all domestic, tangible and intangible assets of ATK and its subsidiaries are pledged as collateral under the Senior Credit Facility. Debt issuance costs of approximately $4,500 are being amortized over the term of the Senior Credit Facility. Borrowings under the Senior Credit Facility bear interest at a rate equal to the sum of a base rate or a Eurodollar rate plus an applicable margin, which is based on ATK’s consolidated total leverage ratio, as defined by the Senior Credit Facility. The weighted average interest rate for the Term A Loan was 6.76% at December 31, 2006. The annual commitment fee in effect on the unused portion of ATK’s Revolving Credit Facility was
30
0.375% at December 31, 2006. As of December 31, 2006, ATK had borrowed $125,000 against its $300,000 revolving credit facility and had outstanding letters of credit of $77,731, which reduced amounts available on the revolving facility to $97,269. ATK’s weighted average interest rate on short-term borrowings was 7.94% during the quarter ended December 31, 2006. During fiscal 2006, ATK terminated its $100,000 notional amount interest rate swap against the Term A Loan, resulting in a cash payout of $2,496. This amount is included in accumulated other comprehensive loss and is being amortized to interest expense through November 2008, the original maturity date of the swap.
In fiscal 2005, ATK issued $200,000 aggregate principal amount of 3.00% Convertible Senior Subordinated Notes (the 3.00% Convertible Notes) that mature on August 15, 2024. Interest on these notes is payable on February 15 and August 15 of each year. Starting with the period beginning on August 20, 2014 and ending on February 14, 2015, and for each of the six-month periods thereafter beginning on February 15, 2015, ATK will pay contingent interest during the applicable interest period if the average trading price of these notes on the five trading days ending on the third day immediately preceding the first day of the applicable interest period equals or exceeds 120% of the principal amount of these notes. The contingent interest payable per note within any applicable interest period will equal an annual rate of 0.30% of the average trading price of a note during the measuring period. The contingent interest feature is treated as an embedded derivative under SFAS No. 133, and the fair value of this feature was insignificant at December 31, 2006 and March 31, 2006. ATK may redeem some or all of these notes in cash at any time on or after August 20, 2014. Holders of these notes may require ATK to repurchase in cash some or all of these notes on August 15, 2014 and August 15, 2019. Holders may also convert their 3.00% Convertible Notes at a conversion rate of 12.5392 shares of ATK’s common stock per $1 principal amount of 3.00% Convertible Notes (a conversion price of $79.75 per share) under the following circumstances: (1) when, during any fiscal quarter, the last reported sale price of ATK stock is greater than or equal to 130% of the conversion price, or $103.68, for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) if ATK calls these notes for redemption; or (3) upon the occurrence of certain corporate transactions. In fiscal 2005, ATK amended the indenture to require ATK to satisfy 100% of the principal amount of these notes solely in cash, with any amounts above the principal amount to be satisfied in cash, common stock, or a combination of cash and common stock, at the sole election of ATK. If certain fundamental changes occur on or prior to August 15, 2014, ATK will in certain circumstances increase the conversion rate by a number of additional shares of common stock or, in lieu thereof, ATK may in certain circumstances elect to adjust the conversion rate and related conversion obligation so that these notes are convertible into shares of the acquiring or surviving company. These contingently issuable shares are not included in ATK’s diluted share count for the quarters or nine months ended December 31, 2006 or January 1, 2006 because ATK’s average stock price during those periods was below the conversion price. Debt issuance costs of approximately $4,700 are being amortized to interest expense over ten years, the period until the first date on which the holders can require ATK to repurchase these notes.
In fiscal 2004, ATK issued $280,000 aggregate principal amount of 2.75% Convertible Senior Subordinated Notes (the 2.75% Convertible Notes due 2024) that mature on February 15, 2024. Interest on these notes is payable on February 15 and August 15 of each year. Starting with the period beginning on August 20, 2009 and ending on February 14, 2010, and for each of the six-month periods thereafter beginning on February 15, 2010, ATK will pay contingent interest during the applicable interest period if the average trading price of these notes on the five trading days ending on the third day immediately preceding the first day of the applicable interest period equals or exceeds 120% of the principal amount of these notes. The contingent interest payable per note within any applicable interest period will equal an annual rate of 0.30% of the average trading price of a note during the measuring period. The contingent interest feature is treated as an embedded derivative under SFAS No. 133, and the fair value of this feature was insignificant at December 31, 2006 and March 31, 2006. ATK may redeem some or all of these notes in cash at any time on or after August 20, 2009. Holders of these notes may require ATK to repurchase in cash some or all of these notes on August 15, 2009, February 15, 2014, or February 15, 2019. Holders may also convert their 2.75% Convertible Notes at a conversion rate of 12.5843 shares of ATK’s common stock per $1 principal amount of 2.75% Convertible Notes (a conversion price of $79.46 per share) under the following circumstances: (1) when, during any fiscal quarter, the last reported sale price of ATK stock is greater than or equal to 130% of the conversion price, or $103.30, for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) if ATK calls these notes for redemption; or (3) upon the occurrence of certain corporate transactions. In fiscal 2005, ATK amended the indenture to require ATK to satisfy 100% of the principal amount of these notes solely in cash, with any amounts above the principal amount to be satisfied in cash, common stock, or a combination of cash and common stock, at the sole election of ATK. These contingently issuable shares are not included in ATK’s diluted share count for the quarters or nine months ended December 31, 2006 or January 1, 2006 because ATK’s average stock price during those periods was below the conversion price. Debt issuance costs of approximately $8,600 are being amortized to interest expense over five years, the period until the first date on which the holders can require ATK to repurchase these notes.
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The 3.00% Convertible Notes, the 2.75% Convertible Notes due 2024, the 2.75% Convertible Notes due 2011, and the 6.75% Notes rank equal in right of payment with each other and all of ATK’s future senior subordinated indebtedness and are subordinated in right of payment to all existing and future senior indebtedness, including the Senior Credit Facility. The outstanding notes are guaranteed on an unsecured basis, jointly and severally and fully and unconditionally, by substantially all of ATK’s domestic subsidiaries. Subsidiaries of ATK other than the subsidiary guarantors are minor. All of these guarantor subsidiaries are 100% owned by ATK. The parent company has no independent assets or operations, as defined by SEC Regulation S-X Rule 3-10. These guarantees are senior subordinated obligations of the applicable subsidiary guarantors.
The scheduled minimum payments on outstanding long-term debt are as follows:
Remainder of fiscal 2007 |
| $ | 81,750 |
|
Fiscal 2008 |
| 77,000 |
| |
Fiscal 2009 |
| 189,000 |
| |
Fiscal 2010 |
| — |
| |
Fiscal 2011 |
| — |
| |
Thereafter |
| 1,180,000 |
| |
Total payments |
| $ | 1,527,750 |
|
Although the $125,000 revolving credit facility borrowings outstanding as of December 31, 2006, do not mature until 2009, ATK intends to repay approximately $75,000 of the borrowings in fiscal 2007. Therefore, this amount is included in the fiscal 2007 payments in the schedule above and the remaining $50,000 is included in fiscal 2008.
ATK’s Senior Credit Facility and the indentures governing the 6.75% Notes, the 2.75% Convertible Notes due 2024, the 2.75% Convertible Notes due 2011, and the 3.00% Convertible Notes impose restrictions on ATK, including limitations on its ability to incur additional debt, enter into capital leases, grant liens, pay dividends and make certain other payments, sell assets, or merge or consolidate with or into another entity. In addition, the Senior Credit Facility limits ATK’s ability to enter into sale-and-leaseback transactions and to make certain capital expenditures. The Senior Credit Facility also requires that ATK meet and maintain specified financial ratios, including: a minimum interest coverage ratio, a maximum consolidated leverage ratio, and a maximum senior leverage ratio. ATK’s ability to comply with these covenants and to meet and maintain the financial ratios may be affected by events beyond its control. Borrowings under the Senior Credit Facility are subject to compliance with these covenants. As of December 31, 2006, ATK was in compliance with the covenants.
Moody’s Investors Service has assigned ATK an issuer rating of Ba3 with a stable outlook. Standard & Poor’s Ratings Services has assigned ATK a BB corporate credit rating with a stable outlook.
ATK has limited payment requirements under the Senior Credit Facility over the next few years. ATK’s other debt service requirements consist principally of interest expense on its long-term debt. Additional cash may be required to repurchase or convert any or all of the convertible notes under certain circumstances, as discussed above. ATK’s short-term cash requirements for operations are expected to consist mainly of capital expenditures to maintain and expand production facilities and working capital requirements.
Shelf Registration. On March 2, 2006, ATK filed a shelf registration statement with the Securities and Exchange Commission allowing ATK to issue debt and/or equity securities at any time. As of December 31, 2006, ATK has the capacity to issue approximately 48.4 million shares of common stock and 5 million shares of preferred stock.
Interest Rate Swaps
ATK may use interest rate swaps to hedge forecasted interest payments and the risk associated with changing interest rates of long-term debt. ATK did not have any outstanding interest rate swaps as of December 31, 2006 or March 31, 2006.
Commodity Forward Contracts
ATK uses derivatives to hedge certain commodity price risks. As of December 31, 2006, ATK had forward contracts for copper and zinc through February 2007 that had a combined fair value of $695. The contracts essentially establish a fixed price for the underlying commodities and have been designated and qualify as effective cash flow hedges of purchases of these commodities. Ineffectiveness is
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calculated as the amount the change in the fair value of the derivatives exceeds the change in the fair value of the anticipated commodity purchases. The fair value of these contracts was recorded as a current asset and the effective portion was reflected in accumulated other comprehensive (loss) income (OCI) in the financial statements as of December 31, 2006. The following table summarizes the pre-tax activity in OCI related to these forward contracts during the quarters and nine months ended December 31, 2006 and January 1, 2006:
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||
|
| December 31, 2006 |
| January 1, 2006 |
| December 31, 2006 |
| January 1, 2006 |
| ||||
Beginning of period unrealized gain (loss) in accumulated OCI |
| $ | 3,389 |
| $ | 6,759 |
| $ | 15,162 |
| $ | (627 | ) |
(Decrease) increase in fair value of derivatives |
| (249 | ) | 8,701 |
| 14,670 |
| 16,737 |
| ||||
Gains reclassified from OCI, offsetting the price paid to suppliers |
| (2,445 | ) | (3,670 | ) | (29,137 | ) | (4,320 | ) | ||||
End of period unrealized gain in accumulated OCI |
| $ | 695 |
| $ | 11,790 |
| $ | 695 |
| $ | 11,790 |
|
The amount of ineffectiveness recognized in earnings for these contracts was insignificant during the quarters and nine months ended December 31, 2006 and January 1, 2006. ATK expects that substantially all of the unrealized gains will be realized and reported in cost of sales during the next twelve months as the cost of the commodities are included in cost of sales. Estimated and actual gains or losses will change as market prices change.
Share Repurchases
On January 31, 2006, ATK’s Board of Directors authorized the repurchase of an additional 5,000,000 shares through January 31, 2008. In February and March 2006, ATK repurchased 1,315,104 shares for $100,000. Through the second quarter of fiscal 2007, ATK repurchased 2,585,200 shares for $201,880. ATK made no share repurchases during the quarter ended December 31, 2006.
Contingencies
Litigation. From time to time, ATK is subject to various legal proceedings, including lawsuits, which arise out of, and are incidental to, the conduct of ATK’s business. ATK does not consider any of such proceedings that are currently pending, individually or in the aggregate, to be material to its business or likely to result in a material adverse effect on its operating results, financial condition, or cash flows.
Environmental Remediation. ATK’s operations and ownership or use of real property are subject to a number of federal, state, and local environmental laws and regulations. At certain sites that ATK owns or operates or formerly owned or operated, there is known or potential contamination that ATK is required to investigate or remediate. ATK could incur substantial costs, including remediation costs, fines, and penalties, or third-party property damage or personal injury claims, as a result of violations or liabilities of environmental laws or non-compliance with environmental permits.
The liability for environmental remediation represents management’s best estimate of the present value of the probable and reasonably estimable costs related to known remediation obligations. The receivable represents the present value of the amount that ATK expects to recover, as discussed below. Both the liability and receivable have been discounted to reflect the present value of the expected future cash flows, using a discount rate, net of estimated inflation, of 3.00% as of December 31, 2006 and 3.25% as of March 31, 2006. The decrease in the rate during the nine months ended December 31, 2006 resulted in additional expense of approximately $300. The following is a summary of the amounts recorded for environmental remediation:
|
| December 31, 2006 |
| March 31, 2006 |
| ||||||||
|
| Liability |
| Receivable |
| Liability |
| Receivable |
| ||||
Undiscounted (liability) receivable |
| $ | (65,833 | ) | $ | 40,346 |
| $ | (67,065 | ) | $ | 39,772 |
|
Unamortized discount |
| 9,841 |
| (5,317 | ) | 11,470 |
| (6,087 | ) | ||||
Discounted (liability) receivable |
| $ | (55,992 | ) | $ | 35,029 |
| $ | (55,595 | ) | $ | 33,685 |
|
As of December 31, 2006, the estimated discounted range of reasonably possible costs of environmental remediation was $55,992 to $96,188.
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ATK expects that a portion of its environmental compliance and remediation costs will be recoverable under U.S. Government contracts. Some of the remediation costs that are not recoverable from the U.S. Government that are associated with facilities purchased in a business acquisition may be covered by various indemnification agreements, as described below.
· As part of its acquisition of the Hercules Aerospace Company in fiscal 1995, ATK assumed responsibility for environmental compliance at the facilities acquired from Hercules (the Hercules Facilities). ATK believes that a portion of the compliance and remediation costs associated with the Hercules Facilities will be recoverable under U.S. Government contracts, and that those environmental remediation costs not recoverable under these contracts will be covered by Hercules Incorporated (Hercules) under environmental agreements entered into in connection with the Hercules acquisition. Under these agreements, Hercules has agreed to indemnify ATK for environmental conditions relating to releases or hazardous waste activities occurring prior to ATK’s purchase of the Hercules Facilities; fines relating to pre-acquisition environmental compliance; and environmental claims arising out of breaches of Hercules’s representations and warranties. Hercules is not required to indemnify ATK for any individual claims below $50. Hercules is obligated to indemnify ATK for the lowest cost response of remediation required at the facility that is acceptable to the applicable regulatory agencies. ATK is not responsible for conducting any remedial activities with respect to the Kenvil, NJ facility or the Clearwater, FL facility. In accordance with its agreement with Hercules, ATK notified Hercules of all known contamination on non-federal lands on or before March 31, 2000 and on federal lands on or before March 31, 2005.
· ATK generally assumed responsibility for environmental compliance at the Thiokol Facilities acquired from Alcoa Inc. in fiscal 2002. While ATK expects that a portion of the compliance and remediation costs associated with the acquired Thiokol Facilities will be recoverable under U.S. Government contracts, ATK has recorded an accrual to cover those environmental remediation costs at these facilities that will not be recovered through U.S. Government contracts. In accordance with its agreement with Alcoa, ATK notified Alcoa of all known environmental remediation issues as of January 30, 2004. Of these known issues, ATK is responsible for any costs not recovered through U.S. Government contracts at Thiokol Facilities up to $29,000, ATK and Alcoa have agreed to split evenly any amounts between $29,000 and $49,000, and ATK is responsible for any payments in excess of $49,000.
· With respect to the civil ammunition business’ facilities purchased from Blount in fiscal 2002, Blount has agreed to indemnify ATK for certain compliance and remediation liabilities, to the extent those liabilities are related to pre-closing environmental conditions at or related to these facilities. Some other remediation costs are expected to be paid directly by a third party pursuant to an existing indemnification agreement with Blount. Blount’s indemnification obligations relating to environmental matters, which extend through December 7, 2006, are capped at $30,000, less any other indemnification payments made for breaches of representations and warranties. The third party’s obligations, which extend through November 4, 2007, are capped at approximately $125,000, less payments previously made.
ATK cannot ensure that the U.S. Government, Hercules, Alcoa, Blount, or other third parties will reimburse it for any particular environmental costs or reimburse ATK in a timely manner or that any claims for indemnification will not be disputed. U.S. Government reimbursements for cleanups are financed out of a particular agency’s operating budget and the ability of a particular governmental agency to make timely reimbursements for cleanup costs will be subject to national budgetary constraints. ATK’s failure to obtain full or timely reimbursement from the U.S. Government, Hercules, Alcoa, Blount, or other third parties could have a material adverse effect on its operating results, financial condition, or cash flows. While ATK has environmental management programs in place to mitigate these risks, and environmental laws and regulations have not had a material adverse effect on ATK’s operating results, financial condition, or cash flows in the past, it is difficult to predict whether they will have a material impact in the future.
Other Contingencies. ATK is also subject to a number of other potential risks and contingencies. These risks and contingencies are described in Item 1A of ATK’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 to the unaudited consolidated financial statements in Item 1 of this report.
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INFLATION AND COMMODITY PRICE RISK
In management’s opinion, inflation in general has not had a significant impact upon the results of ATK’s operations. The selling prices under contracts, the majority of which are long term, generally include estimated costs to be incurred in future periods. These cost projections can generally be negotiated into new buys under fixed-price government contracts, while actual cost increases are recoverable on cost-type contracts.
ATK, however, has been impacted by increases in the prices of raw materials used in production. Most recently, we have seen significant increases in the prices of commodity metals, such as lead, zinc, and especially copper. These price increases generally impact our small caliber ammunition business.
With respect to ATK’s commercial ammunition business, ATK has improved manufacturing efficiencies and initiated price increases to offset these increased commodity costs. ATK will continue to evaluate the need for future price increases in light of these trends, ATK’s competitive landscape, and its financial results. If commodity costs continue to increase, and if ATK is unable to offset these increases with ongoing manufacturing efficiencies and price increases, ATK’s future results from operations and cash flows would be materially impacted.
With respect to ATK’s firm fixed-price contract to supply the DoD’s small-caliber ammunition needs through April 1, 2010, significant increases in commodities can negatively impact operating results. Depending on market conditions, ATKhas historically entered into futures contracts in order to reduce the impact of metal price fluctuations. The majority of ATK’s copper purchases under the small-caliber ammunition contract were hedged through September 30, 2006. Since September 30, ATK has purchased a majority of the copper for use in this contract at prevailing market prices. Depending on market conditions, ATK will continue to evaluate commodity hedging as a means to reduce the impact of commodity price fluctuations. ATK is currently working within the terms of its contract to mitigate impacts from the increased cost of copper. Depending on the timing and outcome of these actions, the Ammunition Systems Group’s operating results could be adversely impacted.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion within Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, in the section titled “Inflation and Commodity Price Risk”.
There have been no other material changes in ATK’s market risk during the quarter or nine months ended December 31, 2006. For additional information, refer to Item 7A of ATK’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.
ITEM 4. CONTROLS AND PROCEDURES
As of December 31, 2006, ATK’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of ATK’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) and have concluded that ATK’s disclosure controls and procedures are effective in timely alerting them to material information required to be disclosed by ATK in reports that ATK files or submits under the Securities Exchange Act of 1934 and that such information is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. During the quarter ended December 31, 2006, there were no changes in ATK’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, ATK’s internal control over financial reporting.
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From time to time, ATK is subject to various legal proceedings, including lawsuits, which arise out of, and are incidental to, the ordinary conduct of ATK’s business. ATK does not consider any of such proceedings, individually or in the aggregate, to be material to its business or likely to result in a material adverse effect on its future operating results, financial condition, or cash flows.
The description of certain environmental matters contained in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Contingencies,” is incorporated herein by reference.
While ATK attempts to identify, manage and mitigate risks and uncertainties associated with its business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Item 1A of ATK’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006 describes some of the risks and uncertainties associated with its business. These risks and uncertainties have the potential to materially affect ATK’s business, financial condition, results of operations, cash flows, projected results and future prospects. ATK does not believe that there have been any material changes to the risk factors previously disclosed in the fiscal 2006 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
Period |
| Total Number of |
| Average Price Paid per |
| Total Number of Shares |
| Maximum Number of |
| |
October 2 – October 29 |
| 1,969 |
| $ | 81.35 |
| — |
|
|
|
October 30 – November 26 |
| — |
| — |
| — |
|
|
| |
November 27 – December 31 |
| 140 |
| 77.31 |
| — |
|
|
| |
Fiscal quarter ended December 31, 2006 |
| 2,109 |
| $ | 81.08 |
| — |
| 1,099,696 |
|
(1) Of the transactions noted, 2,109 shares purchased represent shares withheld to pay taxes upon vesting of restricted stock, which were granted under ATK’s incentive compensation plans.
(2) On January 31, 2006, ATK’s Board of Directors authorized the repurchase of an additional 5,000,000 shares through January 31, 2008. In February and March 2006, ATK repurchased 1,315,104 shares for $100 million. During the nine months ended December 31, 2006, ATK repurchased 2,585,200 shares for $201.9 million. As of December 31, 2006, there were 1,099,696 remaining shares authorized to be repurchased.
The discussion of limitations upon the payment of dividends as a result of the indentures governing ATK’s debt instruments as discussed in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Debt,” is incorporated herein by reference.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
None.
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ITEM 6. EXHIBITS
Exhibit |
| Description of Exhibit (and document from |
10.1 |
| Non-Employee Director Restricted Stock Award and Stock Deferral Program Under the Alliant Techsystems Inc. 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 8-K dated October 30, 2006). |
10.2 |
| Amendment 1 to Alliant Techsystems Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.2 to Form 8-K dated October 30, 2006). |
10.3 |
| Alliant Techsystems Inc. Defined Contribution Supplemental Executive Retirement Plan, effective January 1, 2007 (incorporated by reference to Exhibit 10.3 to Form 8-K dated October 30, 2006). |
10.4 |
| Amendment 1 to Alliant Techsystems Inc. Management Compensation Plan. |
14.1 |
| ATK Business Ethics Code of Conduct (incorporated by reference to Exhibit 14.1 to Form 8-K dated October 30, 2006). |
31.1 |
| Rule 13a-14a Certification of Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
| Rule 13a-14a Certification of Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 |
| Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| ALLIANT TECHSYSTEMS INC. | ||
|
|
|
| |
|
|
|
| |
Date: February 2, 2007 | By: |
| /s/ John L. Shroyer |
|
| Name: |
| John L. Shroyer | |
| Title: |
| Senior Vice President and Chief Financial Officer | |
|
|
| (On behalf of the Registrant and as principal financial and accounting officer) |
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