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
For the quarterly period ended October 3, 2010
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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.) |
|
|
|
7480 Flying Cloud Drive |
| 55344-3720 |
(Address of principal executive offices) |
| (Zip Code) |
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x |
| Accelerated Filer o |
|
|
|
Non-Accelerated Filer o |
| Smaller Reporting Company 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 October 31, 2010, 33,301,205 shares of the registrant’s common stock, par value $.01 per share, were outstanding.
PART I — FINANCIAL INFORMATION
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited)
|
| QUARTERS ENDED |
| SIX MONTHS ENDED |
| ||||||||
(In thousands except per share data) |
| October 3, |
| October 4, |
| October 3, |
| October 4, |
| ||||
Sales |
| $ | 1,209,235 |
| $ | 1,207,964 |
| $ | 2,411,386 |
| $ | 2,417,098 |
|
Cost of sales |
| 958,145 |
| 962,262 |
| 1,908,032 |
| 1,911,551 |
| ||||
Gross profit |
| 251,090 |
| 245,702 |
| 503,354 |
| 505,547 |
| ||||
Operating expenses: |
|
|
|
|
|
|
|
|
| ||||
Research and development |
| 15,767 |
| 15,886 |
| 29,655 |
| 31,264 |
| ||||
Selling |
| 38,889 |
| 45,202 |
| 79,250 |
| 90,296 |
| ||||
General and administrative |
| 62,076 |
| 49,740 |
| 127,038 |
| 117,741 |
| ||||
Income before interest, income taxes, and noncontrolling interest |
| 134,358 |
| 134,874 |
| 267,411 |
| 266,246 |
| ||||
Interest expense |
| (20,345 | ) | (19,361 | ) | (38,044 | ) | (40,296 | ) | ||||
Interest income |
| 58 |
| 124 |
| 128 |
| 210 |
| ||||
Income before income taxes and noncontrolling interest |
| 114,071 |
| 115,637 |
| 229,495 |
| 226,160 |
| ||||
Income tax provision |
| 16,686 |
| 43,020 |
| 57,333 |
| 84,060 |
| ||||
Net income |
| 97,385 |
| 72,617 |
| 172,162 |
| 142,100 |
| ||||
Less net income attributable to noncontrolling interest |
| 139 |
| 107 |
| 272 |
| 159 |
| ||||
Net income attributable to Alliant Techsystems Inc. |
| $ | 97,246 |
| $ | 72,510 |
| $ | 171,890 |
| $ | 141,941 |
|
|
|
|
|
|
|
|
|
|
| ||||
Alliant Techsystems Inc.’s earnings per common share: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 2.93 |
| $ | 2.21 |
| $ | 5.19 |
| $ | 4.33 |
|
Diluted |
| 2.91 |
| 2.19 |
| 5.14 |
| 4.28 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Alliant Techsystems Inc.’s weighted-average number of common shares outstanding: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| 33,162 |
| 32,718 |
| 33,104 |
| 32,681 |
| ||||
Diluted |
| 33,426 |
| 33,139 |
| 33,413 |
| 33,151 |
|
See Notes to the Condensed Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Amounts in thousands except share data) |
| October 3, 2010 |
| March 31, 2010 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 265,660 |
| $ | 393,893 |
|
Net receivables |
| 1,052,048 |
| 902,750 |
| ||
Net inventories |
| 268,165 |
| 236,074 |
| ||
Income tax receivable |
| 23,032 |
| — |
| ||
Deferred income tax assets |
| 68,766 |
| 67,813 |
| ||
Other current assets |
| 85,564 |
| 118,448 |
| ||
Total current assets |
| 1,763,235 |
| 1,718,978 |
| ||
Net property, plant, and equipment |
| 553,158 |
| 561,931 |
| ||
Goodwill |
| 1,249,874 |
| 1,183,910 |
| ||
Deferred income tax assets |
| 126,737 |
| 140,439 |
| ||
Deferred charges and other non-current assets |
| 410,813 |
| 264,366 |
| ||
Total assets |
| $ | 4,103,817 |
| $ | 3,869,624 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Current portion of long-term debt |
| $ | 300,000 |
| $ | 13,750 |
|
Accounts payable |
| 271,917 |
| 273,718 |
| ||
Contract advances and allowances |
| 118,464 |
| 106,819 |
| ||
Accrued compensation |
| 137,075 |
| 172,630 |
| ||
Accrued income taxes |
| — |
| 14,609 |
| ||
Other accrued liabilities |
| 204,180 |
| 206,289 |
| ||
Total current liabilities |
| 1,031,636 |
| 787,815 |
| ||
Long-term debt |
| 1,190,743 |
| 1,379,804 |
| ||
Postretirement and postemployment benefits liabilities |
| 136,810 |
| 142,541 |
| ||
Accrued pension liability |
| 627,650 |
| 622,576 |
| ||
Other long-term liabilities |
| 114,878 |
| 129,466 |
| ||
Total liabilities |
| 3,101,717 |
| 3,062,202 |
| ||
Commitments and contingencies (Note 15) |
|
|
|
|
| ||
Common stock—$.01 par value: |
|
|
|
|
| ||
Authorized—180,000,000 shares |
|
|
|
|
| ||
Issued and outstanding—33,290,652 shares at October 3, 2010 and 33,047,018 shares at March 31, 2010 |
| 333 |
| 330 |
| ||
Additional paid-in-capital |
| 567,500 |
| 578,046 |
| ||
Retained earnings |
| 1,871,066 |
| 1,699,176 |
| ||
Accumulated other comprehensive loss |
| (806,764 | ) | (821,086 | ) | ||
Common stock in treasury, at cost— 8,264,797 shares held at October 3, 2010 and 8,508,431 shares held at March 31, 2010 |
| (639,135 | ) | (657,872 | ) | ||
Total Alliant Techsystems Inc. stockholders’ equity |
| 993,000 |
| 798,594 |
| ||
Noncontrolling interest |
| 9,100 |
| 8,828 |
| ||
Total stockholders’ equity |
| 1,002,100 |
| 807,422 |
| ||
Total liabilities and stockholders’ equity |
| $ | 4,103,817 |
| $ | 3,869,624 |
|
See Notes to the Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
| SIX MONTHS ENDED |
| ||||
(In thousands) |
| October 3, 2010 |
| October 4, 2009 |
| ||
Operating activities |
|
|
|
|
| ||
Net income |
| $ | 172,162 |
| $ | 142,100 |
|
Adjustments to net income to arrive at cash provided by (used for) operating activities: |
|
|
|
|
| ||
Depreciation |
| 47,416 |
| 49,571 |
| ||
Amortization of intangible assets |
| 5,500 |
| 2,479 |
| ||
Amortization of debt discount |
| 8,439 |
| 11,708 |
| ||
Amortization of deferred financing costs |
| 2,405 |
| 1,419 |
| ||
Asset impairment |
| — |
| 11,405 |
| ||
Deferred income taxes |
| 4,344 |
| 1,365 |
| ||
Loss (gain) on disposal of property |
| 2,727 |
| (483 | ) | ||
Share-based plans expense |
| 5,269 |
| 8,580 |
| ||
Excess tax benefits from share-based plans |
| (170 | ) | (981 | ) | ||
Changes in assets and liabilities: |
|
|
|
|
| ||
Net receivables |
| (221,485 | ) | (90,798 | ) | ||
Net inventories |
| (32,165 | ) | 45,707 |
| ||
Accounts payable |
| 12,398 |
| (113,315 | ) | ||
Contract advances and allowances |
| 11,645 |
| 9,875 |
| ||
Accrued compensation |
| (48,423 | ) | (54,405 | ) | ||
Accrued income taxes |
| (47,358 | ) | 33,260 |
| ||
Pension and other postretirement benefits |
| 39,101 |
| (124,960 | ) | ||
Other assets and liabilities |
| 50,422 |
| 20,039 |
| ||
Cash provided by (used for) operating activities |
| 12,227 |
| (47,434 | ) | ||
Investing activities |
|
|
|
|
| ||
Capital expenditures |
| (53,174 | ) | (67,147 | ) | ||
Acquisition of business (Note 4) |
| (172,251 | ) | 5,002 |
| ||
Proceeds from the disposition of property, plant, and equipment |
| 45 |
| 1,267 |
| ||
Cash used for investing activities |
| (225,380 | ) | (60,878 | ) | ||
Financing activities |
|
|
|
|
| ||
Payments made on bank debt |
| (3,438 | ) | (7,041 | ) | ||
Payments made to extinguish debt |
| (257,813 | ) | — |
| ||
Proceeds from issuance of long-term debt |
| 350,000 |
| — |
| ||
Payments made for debt issue costs |
| (5,819 | ) | — |
| ||
Proceeds from employee stock compensation plans |
| 1,820 |
| 2,651 |
| ||
Excess tax benefits from share-based plans |
| 170 |
| 981 |
| ||
Cash provided by (used for) financing activities |
| 84,920 |
| (3,409 | ) | ||
Decrease in cash and cash equivalents |
| (128,233 | ) | (111,721 | ) | ||
Cash and cash equivalents - beginning of period |
| 393,893 |
| 336,700 |
| ||
Cash and cash equivalents - end of period |
| $ | 265,660 |
| $ | 224,979 |
|
|
|
|
|
|
| ||
Supplemental Cash Flow Disclosure: |
|
|
|
|
| ||
Noncash investing activity: |
|
|
|
|
| ||
Capital expenditures included in accounts payable |
| $ | 1,421 |
| $ | 3,891 |
|
See Notes to the Condensed Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(Amounts in thousands except |
| Common Stock |
| Additional |
| Retained |
| Accumulated |
| Treasury |
| Noncontrolling |
| Total |
| |||||||||
share data) |
| Shares |
| Amount |
| Capital |
| Earnings |
| Loss |
| Stock |
| Interest |
| Equity |
| |||||||
For the six months ended October 3, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance at March 31, 2010 |
| 33,047,018 |
| $ | 330 |
| $ | 578,046 |
| $ | 1,699,176 |
| $ | (821,086 | ) | $ | (657,872 | ) | $ | 8,828 |
| $ | 807,422 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
|
|
| — |
| — |
| 171,890 |
| — |
| — |
| 272 |
| 172,162 |
| |||||||
Other comprehensive income (see Note 8): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Adjustments, net |
|
|
| — |
| — |
| — |
| 14,322 |
| — |
| — |
| 14,322 |
| |||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 186,484 |
| |||||||
Exercise of stock options |
| 32,108 |
| — |
| (663 | ) | — |
| — |
| 2,483 |
| — |
| 1,820 |
| |||||||
Restricted stock grants |
| 79,485 |
| — |
| (6,269 | ) | — |
| — |
| 6,269 |
| — |
| — |
| |||||||
Share-based compensation |
| — |
| — |
| 5,269 |
| — |
| — |
| — |
| — |
| 5,269 |
| |||||||
Performance shares issued net of treasury stock withheld |
| 137,008 |
| — |
| (16,928 | ) | — |
| — |
| 10,507 |
| — |
| (6,421 | ) | |||||||
Tax benefit related to share based plans and other |
| — |
| — |
| 7,881 |
| — |
| — |
| — |
| — |
| 7,881 |
| |||||||
Employee benefit plans and other |
| (4,967 | ) | 3 |
| 164 |
| — |
| — |
| (522 | ) | — |
| (355 | ) | |||||||
Balance at October 3, 2010 |
| 33,290,652 |
| $ | 333 |
| $ | 567,500 |
| $ | 1,871,066 |
| $ | (806,764 | ) | $ | (639,135 | ) | $ | 9,100 |
| $ | 1,002,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
For the six months ended October 4, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance at March 31, 2009 |
| 32,783,496 |
| $ | 328 |
| $ | 574,674 |
| $ | 1,420,462 |
| $ | (651,652 | ) | $ | (677,841 | ) | $ | 8,598 |
| $ | 674,569 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
|
|
| — |
| — |
| 141,941 |
| — |
| — |
| 159 |
| 142,100 |
| |||||||
Other comprehensive income (see Note 7): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Adjustments, net |
|
|
| — |
| — |
| — |
| 21,885 |
| — |
| — |
| 21,885 |
| |||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 163,985 |
| |||||||
Exercise of stock options |
| 56,390 |
| — |
| (1,707 | ) | — |
| — |
| 4,358 |
| — |
| 2,651 |
| |||||||
Restricted stock grants |
| 19,389 |
| — |
| (2,023 | ) | — |
| — |
| 2,023 |
| — |
| — |
| |||||||
Share-based compensation |
| — |
| — |
| 8,580 |
| — |
| — |
| — |
| — |
| 8,580 |
| |||||||
Performance shares issued net of treasury stock withheld |
| 71,540 |
| — |
| (8,439 | ) | — |
| — |
| 5,214 |
| — |
| (3,225 | ) | |||||||
Tax benefit related to share based plans and other |
| — |
| — |
| 6,454 |
| — |
| — |
| — |
| — |
| 6,454 |
| |||||||
Employee benefit plans and other |
| (2,856 | ) | 1 |
| 247 |
| — |
| — |
| (771 | ) | — |
| (523 | ) | |||||||
Balance at October 4, 2009 |
| 32,927,959 |
| $ | 329 |
| $ | 577,786 |
| $ | 1,562,403 |
| $ | (629,767 | ) | $ | (667,017 | ) | $ | 8,757 |
| $ | 852,491 |
|
See Notes to the Condensed Consolidated Financial Statements.
Alliant Techsystems Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Quarter Ended October 3, 2010
(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 condensed 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, 2010 (“fiscal 2010”). Management is responsible for the unaudited condensed consolidated financial statements included in this document. The condensed 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 October 3, 2010, and its results of operations and cash flows for the quarters and six months ended October 3, 2010 and October 4, 2009.
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.
This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its 2010 Annual Report on Form 10-K.
2. New Accounting Pronouncements
There have been no new accounting pronouncements issued or changes to existing guidance during the fiscal year ending March 31, 2011 (fiscal 2011) that would have a material impact on ATK’s financial results.
3. Fair Value of Financial Instruments
The current authoritative guidance on fair value clarifies the definition of fair value, prescribes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about the use of fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The valuation techniques required by the current authoritative literature are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Significant inputs to the valuation model are unobservable.
The following section describes the valuation methodologies used by ATK to measure its financial instruments at fair value.
Investments in marketable securities — ATK’s investments in marketable securities represent investments held in a common collective trust (“CCT”) that primarily invests in fixed income securities which are used to pay benefits under a nonqualified supplemental executive retirement plan for certain executives and highly compensated employees. Investments in a collective investment vehicle are valued by multiplying the investee company’s net asset value per share with the number of units or shares owned at the valuation date as determined by the investee company. Net asset value per share is determined by the investee company’s custodian or fund administrator
by deducting from the value of the assets of the investee company all its liabilities and the resulting number is divided by the outstanding number of shares or units. Investments held by the CCT, including collateral invested for securities on loan, are valued on the basis of valuations furnished by a pricing service approved by the CCT’s investment manager, which determines valuations using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders, or at fair value as determined in good faith by the CCT’s investment manager. The fair value of these securities is included within other current assets and deferred charges and other non-current assets on the consolidated balance sheet.
Derivative financial instruments and hedging activities — In order to manage its exposure to commodity pricing and foreign currency risk, ATK periodically utilizes commodity and foreign currency derivatives, which are considered Level 2 instruments. As discussed further in Note 7, ATK has outstanding commodity forward contracts that were entered into to hedge forecasted purchases of copper and zinc, as well as outstanding foreign currency forward contracts that were entered into to hedge forecasted transactions denominated in a foreign currency. Commodity derivatives are valued based on prices of futures exchanges and recently reported transactions in the marketplace. Foreign currency derivatives are valued based on observable market transactions of spot currency rates and forward currency prices.
Long-Term Debt — The fair value of the variable-rate long-term debt is calculated based on current market rates for debt of the same risk and maturities. The fair value of the fixed-rate debt is based on market quotes for each issuance.
The following tables set forth by level within the fair value hierarchy ATK’s financial assets and liabilities that are measured at fair value on a recurring basis:
|
| As of October 3, 2010 |
| |||||||
|
| Fair Value Measurements Using Inputs Considered as |
| |||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| |||
Assets |
|
|
|
|
|
|
| |||
Marketable securities |
| $ | — |
| $ | 11,676 |
| $ | — |
|
Derivatives |
| — |
| 50,797 |
| — |
| |||
|
|
|
|
|
|
|
| |||
Liabilities |
|
|
|
|
|
|
| |||
Derivatives |
| $ | — |
| $ | — |
| $ | — |
|
|
| As of March 31, 2010 |
| |||||||
|
| Fair Value Measurements Using Inputs Considered as |
| |||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| |||
Assets |
|
|
|
|
|
|
| |||
Marketable securities |
| $ | — |
| $ | 21,925 |
| $ | — |
|
Derivatives |
| — |
| 66,354 |
| — |
| |||
|
|
|
|
|
|
|
| |||
Liabilities |
|
|
|
|
|
|
| |||
Derivatives |
| $ | — |
| $ | 772 |
| $ | — |
|
In addition to the assets and liabilities at March 31, 2010 noted in the table above, ATK also had intangible and other long-lived assets that were written down to their fair value of $0 during fiscal 2010, resulting in impairment charges of $38,008 and $11,405, respectively, during the fourth quarter of fiscal 2010. These are considered Level 3 assets.
The following table presents ATK’s assets and liabilities that are not measured at fair value on a recurring basis. The carrying values and estimated fair values were as follows:
|
| As of October 3, 2010 |
| As of March 31, 2010 |
| ||||||||
|
| Carrying |
| Fair Value |
| Carrying |
| Fair Value |
| ||||
Fixed rate debt |
| $ | 1,490,743 |
| $ | 1,580,392 |
| $ | 1,132,304 |
| $ | 1,243,095 |
|
Variable rate debt |
| — |
| — |
| 261,250 |
| 252,106 |
| ||||
4. Acquisitions
In accordance with the accounting standards regarding business combinations, the results of acquired businesses are included in ATK’s consolidated financial statements from the date of acquisition. For each acquisition, the purchase price is allocated to the acquired assets and liabilities based on fair value. The excess purchase price over estimated fair value of the net assets acquired is recorded as goodwill.
On April 9, 2010, ATK acquired Blackhawk Industries Products Group Unlimited, LLC (“Blackhawk”) for a purchase price of $172,251 subject to purchase price adjustments expected to be finalized in fiscal 2011. Blackhawk is a leading manufacturer of high quality tactical gear. ATK believes that the acquisition provides ATK with a leading tactical systems brand, an expanded portfolio of quality products, and additional design and development expertise for innovative and tactical accessories which will strengthen ATK’s position in tactical accessories and equipment for domestic and international military, law enforcement, security, and sport enthusiast markets. Blackhawk employs approximately 300 employees and is included in the Security and Sporting group. The purchase price allocation will be completed in fiscal 2011. Most of the goodwill generated in this acquisition will be deductible for tax purposes.
ATK used the purchase method of accounting to account for this acquisition and, accordingly, the results of Blackhawk are included in ATK’s consolidated financial statements at the date of acquisition. The purchase price for the acquisition will be allocated to the acquired assets and liabilities based on estimated fair value. Subsequent to the April 2010 acquisition, ATK has recorded sales of approximately $22,000 and $39,000 and income before interest, income taxes, and noncontrolling interest of approximately $3,500 and $2,500 in the quarter and six months ended October 3, 2010, respectively, associated with the operations of this acquired business. Pro forma information on the results of operations for fiscal 2010 as if the acquisition had occurred at the beginning of fiscal 2010 is not being presented because the acquisition is not material to ATK for that purpose.
There were no acquisitions during fiscal 2010.
5. Goodwill and Deferred Charges and Other Non-Current Assets
The changes in the carrying amount of goodwill by operating segment during the six months ended October 3, 2010 and year ended March 31, 2010 were as follows:
|
| Aerospace |
| Armament |
| Missile |
| Security and |
| Total |
| |||||
Balance at April 1, 2009 |
| $ | 676,516 |
| $ | 124,558 |
| $ | 242,389 |
| $ | 152,523 |
| $ | 1,195,986 |
|
Adjustment |
| — |
| — |
|
|
| (12,076 | ) | (12,076 | ) | |||||
Balance at March 31, 2010 |
| $ | 676,516 |
| $ | 124,558 |
| $ | 242,389 |
| $ | 140,447 |
| $ | 1,183,910 |
|
Acquisition |
| — |
| — |
| — |
| 65,964 |
| 65,964 |
| |||||
Balance at October 3, 2010 |
| $ | 676,516 |
| $ | 124,558 |
| $ | 242,389 |
| $ | 206,411 |
| $ | 1,249,874 |
|
The goodwill recorded above within Aerospace Systems is presented net of $108,500 of accumulated impairment losses.
The fiscal 2011 acquisition in Security and Sporting relates to the preliminary purchase price allocation of Blackhawk, as previously discussed in Note 4.
The fiscal 2010 adjustment within Security and Sporting was the result of a preliminary purchase price adjustment of $5,002 received in September 2009 which reduced the purchase price of Eagle Industries, as well as the finalization of the fair value determination of certain assets and liabilities.
Deferred charges and other non-current assets consist of the following:
|
| October 3, 2010 |
| March 31, 2010 |
| ||
Gross debt issuance costs |
| $ | 20,758 |
| $ | 18,060 |
|
Less accumulated amortization |
| (9,296 | ) | (10,011 | ) | ||
Net debt issuance costs |
| 11,462 |
| 8,049 |
| ||
Other intangible assets |
| 137,879 |
| 64,779 |
| ||
Long term receivables |
| 151,560 |
| 78,025 |
| ||
Environmental remediation receivable |
| 27,570 |
| 26,161 |
| ||
Commodity forward contracts |
| 15,066 |
| 27,744 |
| ||
Other non-current assets |
| 67,276 |
| 59,608 |
| ||
Total deferred charges and other non-current assets |
| $ | 410,813 |
| $ | 264,366 |
|
The long term receivables represent unbilled receivables on long term commercial aerospace contracts and other programs that ATK does not expect to collect within the next fiscal year.
Included in other intangible assets in the table above is $38,998 of non-amortizing intangible assets consisting of trademarks and brand names that are not being amortized as their estimated useful lives are considered indefinite, and $98,881 of amortizing intangible assets which include the following:
|
| October 3, 2010 |
| March 31, 2010 |
| ||||||||||||||
|
| Gross |
| Accumulated |
| Total |
| Gross carrying |
| Accumulated |
| Total |
| ||||||
Contracts |
| $ | — |
| $ | — |
| $ | — |
| $ | 23,404 |
| $ | (23,404 | ) | $ | — |
|
Trade name |
| 66,060 |
| (2,358 | ) | 63,702 |
| 860 |
| (123 | ) | 737 |
| ||||||
Technology |
| 17,400 |
| (1,205 | ) | 16,195 |
| 10,700 |
| — |
| 10,700 |
| ||||||
Customer relationships and other |
| 35,002 |
| (16,018 | ) | 18,984 |
| 28,557 |
| (14,213 | ) | 14,344 |
| ||||||
Total |
| $ | 118,462 |
| $ | (19,581 | ) | $ | 98,881 |
| $ | 63,521 |
| $ | (37,740 | ) | $ | 25,781 |
|
As discussed in Note 4, in April 2010 ATK acquired Blackhawk and has recorded the preliminary fair value of intangible assets associated with the acquisition. These assets include items such as a trade name, technology, and customer relationships. The fair value recorded related to these intangibles increased the gross carrying amount of amortizing intangibles in the table above by $78,600 from March 31, 2010. The final purchase price allocation will be completed in fiscal 2011.
During fiscal 2011 ATK wrote-off the $23,659 gross carrying amount and associated accumulated amortization of fully amortized intangible assets primarily relating to customer contracts acquired in past business combinations that have now expired.
On March 31, 2010, ATK determined that $10,700 of patented technology that had previously been determined to have an indefinite life now has a finite useful life. Effective April 1, 2010, ATK began amortizing this asset over an estimated useful life of 10 years.
The assets identified in the table above are being amortized over their estimated useful lives over a weighted average remaining period of approximately 11.4 years. Amortization expense for the quarter and six months ended October 3, 2010 was $2,711 and $5,500, respectively. Amortization expense for the quarter and six months ended October 4, 2009 was $1,239 and $2,479, respectively. ATK expects amortization expense related to these assets to be as follows:
Remainder of fiscal 2011 |
| $ | 5,659 |
|
Fiscal 2012 |
| 11,145 |
| |
Fiscal 2013 |
| 11,145 |
| |
Fiscal 2014 |
| 10,278 |
| |
Fiscal 2015 |
| 9,328 |
| |
Thereafter |
| 51,326 |
| |
Total |
| $ | 98,881 |
|
6. 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 and contingently issuable shares related to ATK’s Convertible Senior Subordinated Notes (see Note 11) during each period presented, which, if exercised, earned, or converted, would have a dilutive effect on EPS. In computing EPS for the quarters and six months ended October 3, 2010 and October 4, 2009, net income as reported for each respective period is divided by (in thousands):
|
| Quarters Ended |
| Six Months Ended |
| ||||
|
| October 3, |
| October 4, |
| October 3, |
| October 4, |
|
Weighted-average basic shares outstanding |
| 33,162 |
| 32,718 |
| 33,104 |
| 32,681 |
|
Dilutive effect of stock-based awards |
| 264 |
| 421 |
| 309 |
| 448 |
|
Dilutive effect of contingently issuable shares |
| — |
| — |
| — |
| 22 |
|
Weighted-average diluted shares outstanding |
| 33,426 |
| 33,139 |
| 33,413 |
| 33,151 |
|
|
|
|
|
|
|
|
|
|
|
Stock options excluded from the calculation of diluted EPS because the option exercise/threshold price was greater than the average market price of the common shares |
| 5 |
| 5 |
| 5 |
| 5 |
|
As discussed further in Note 11, contingently issuable shares related to ATK’s 3.00% Convertible Senior Subordinated Notes due 2024, 2.75% Convertible Senior Subordinated Notes due 2024, and 2.75% Convertible Senior Subordinated Notes due 2011 are not included in diluted EPS for the quarter or six months ended October 3, 2010 as ATK’s average stock price during both periods did not exceed the triggering price of $79.75, $79.46, or $96.51, respectively. These contingently issuable shares are also excluded from diluted EPS for the quarter ended October 4, 2009 as the triggering prices mentioned above were not met during that period.
Contingently issuable shares related to ATK’s 3.00% Convertible Notes due 2024 and 2.75% Convertible Notes due 2024 are included in diluted EPS for the six months ended October 4, 2009, based on ATK’s average stock price during that period; however, contingently issuable shares related to ATK’s 2.75% Convertible Senior Subordinated Notes due 2011 are not included in diluted EPS for the six months ended October 4, 2009 as ATK’s average stock price during the quarters did not exceed $96.51.
The Warrants, as discussed in Note 11, are not included in diluted EPS as ATK’s average stock price during the quarters and six months ended October 3, 2010 and October 4, 2009 did not exceed $116.75.
The Call Options, also discussed in Note 11, are anti-dilutive and are therefore excluded from the calculation of diluted shares outstanding.
7. Derivative Financial Instruments
ATK is exposed to market risks arising from adverse changes in:
· commodity prices affecting the cost of raw materials and energy,
· interest rates, and
· foreign exchange risks
In the normal course of business, these risks are managed through a variety of strategies, including the use of derivative instruments. Commodity forward contracts are periodically used to hedge forecasted purchases of certain commodities, foreign currency exchange contracts are used to hedge forecasted transactions denominated in a foreign currency, and ATK periodically uses interest rate swaps to hedge forecasted interest payments and the risk associated with variable interest rates on long-term debt.
ATK entered into forward contracts for copper and zinc during fiscal 2011 and fiscal 2010. The contracts essentially establish a fixed price for the underlying commodity and are designated and qualify as effective cash flow hedges of purchases of the commodity. Ineffectiveness is calculated as the amount by which 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 is recorded within other assets or liabilities, as appropriate, and the effective portion is reflected in accumulated Other Comprehensive Income (Loss) in the financial statements. The gains or losses on these contracts are recorded in inventory as the commodities are purchased. As of October 3, 2010, ATK had the following outstanding commodity forward contracts that were entered into to hedge forecasted purchases:
|
| Number of Pounds |
|
Copper |
| 40,975,000 |
|
Zinc |
| 15,775,000 |
|
ATK entered into foreign currency forward contracts during fiscal 2011 and fiscal 2010. These contracts are used to hedge forecasted inventory purchases and subsequent payments denominated in Euros and are designated and qualify as effective cash flow hedges. Ineffectiveness with respect to forecasted inventory purchases is calculated based on changes in the forward rate until the anticipated purchase occurs; ineffectiveness of the hedge of the accounts payable is evaluated based on the change in fair value of its anticipated settlement. The fair value of these contracts is recorded within other accrued liabilities and the effective portion is reflected in
accumulated Other Comprehensive Income (Loss) in the financial statements. The gains or losses on these contracts are recorded in earnings when the related inventory is sold. As of October 3, 2010, ATK had the following outstanding foreign currency forward contract in place:
|
| Number of Euros |
|
Euros |
| 5,076,072 |
|
The table below presents the fair value and location of ATK’s derivative instruments designated as hedging instruments in the condensed consolidated balance sheet as of October 3, 2010 and March 31, 2010:
|
|
|
| Asset Derivatives |
| Liability Derivatives |
| ||||||||
|
|
|
| Fair value as of |
| Fair value as of |
| ||||||||
|
| Location |
| October 3, 2010 |
| March 31, 2010 |
| October 3, 2010 |
| March 31, 2010 |
| ||||
Commodity forward contracts |
| Other current assets |
| $ | 35,619 |
| $ | 38,610 |
| $ | — |
| $ | — |
|
Commodity forward contracts |
| Deferred charges and other non-current assets |
| 15,066 |
| 27,744 |
| — |
| — |
| ||||
Foreign currency forward contracts |
| Other non-current assets / other accrued liabilities |
| 112 |
| — |
| — |
| 772 |
| ||||
Total |
|
|
| $ | 50,797 |
| $ | 66,354 |
| $ | — |
| $ | 772 |
|
Due to the nature of ATK’s business, the benefits and risks associated with the commodity contracts may be passed on to the customer and not realized by ATK.
For the periods presented below, the derivative gains and losses in the consolidated income statements related to commodity forward contracts and foreign currency forward contracts were as follows:
|
| Pretax amount of |
| Pretax amount of gain (loss) |
| Gain or (loss) recognized in |
| |||||||
|
| Amount |
| Location |
| Amount |
| Location |
| Amount |
| |||
Quarter ended October 3, 2010 |
|
|
|
|
|
|
|
|
|
|
| |||
Commodity forward contracts |
| $ | 50,685 |
| Cost of Sales |
| $ | 7,845 |
| Cost of Sales |
| $ | — |
|
Foreign currency forward contract |
| 112 |
| Cost of Sales |
| — |
| Cost of Sales |
| — |
| |||
Quarter ended October 4, 2009 |
|
|
|
|
|
|
|
|
|
|
| |||
Commodity forward contracts |
| $ | 24,119 |
| Cost of Sales |
| $ | — |
| Cost of Sales |
| $ | — |
|
Six Months ended October 3, 2010 |
|
|
|
|
|
|
|
|
|
|
| |||
Commodity forward contracts |
| $ | 50,685 |
| Cost of Sales |
| $ | 16,805 |
| Cost of Sales |
| $ | — |
|
Foreign currency forward contract |
| 112 |
| Cost of Sales |
| — |
| Cost of Sales |
| — |
| |||
Six Months ended October 4, 2009 |
|
|
|
|
|
|
|
|
|
|
| |||
Commodity forward contracts |
| $ | 24,119 |
| Cost of Sales |
| $ | — |
| Cost of Sales |
| $ | — |
|
All derivatives used by ATK during the quarters and six months ended October 3, 2010 and October 4, 2009 were designated as and qualify to be accounted for as hedging instruments.
8. Comprehensive Income
The components of comprehensive income, net of income taxes, for the quarters and six months ended October 3, 2010 and October 4, 2009 were as follows:
|
| Quarters Ended |
| Six Months Ended |
| ||||||||
|
| October 3, |
| October 4, |
| October 3, |
| October 4, |
| ||||
Net income |
| $ | 97,385 |
| $ | 72,617 |
| $ | 172,162 |
| $ | 142,100 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
| ||||
Pension and other postretirement benefit liabilities, net of income taxes of $(7,632), $(1,826), $(15,265), and $(3,498), respectively |
| 12,247 |
| 2,881 |
| 24,494 |
| 5,913 |
| ||||
Change in fair value of derivatives, net of income taxes of $(11,355), $(6,638), $6,378, and $(9,467), respectively |
| 17,761 |
| 10,319 |
| (9,975 | ) | 14,652 |
| ||||
Change in fair value of available-for-sale securities, net of income taxes of $(135), $(406), $126 and $(853), respectively |
| 211 |
| 635 |
| (197 | ) | 1,320 |
| ||||
Total other comprehensive income |
| 30,219 |
| 13,835 |
| 14,322 |
| 21,885 |
| ||||
Comprehensive income |
| 127,604 |
| 86,452 |
| 186,484 |
| 163,985 |
| ||||
Comprehensive income attributable to noncontrolling interest |
| 139 |
| 107 |
| 272 |
| 159 |
| ||||
Comprehensive income attributable to Alliant Techsystems Inc. |
| $ | 127,465 |
| $ | 86,345 |
| $ | 186,212 |
| $ | 163,826 |
|
The components of accumulated OCI, net of income taxes, are as follows:
|
| October 3, 2010 |
| March 31, 2010 |
| ||
Derivatives |
| $ | 29,731 |
| $ | 39,706 |
|
Pension and other postretirement benefit liabilities |
| (837,862 | ) | (862,356 | ) | ||
Available-for-sale securities |
| 1,367 |
| 1,564 |
| ||
Total accumulated other comprehensive loss |
| $ | (806,764 | ) | $ | (821,086 | ) |
The pre-tax activity in other comprehensive income related to the forward contracts discussed in Note 7 was as follows:
|
| Quarters Ended |
| Six Months Ended |
| ||||||||
|
| October 3, |
| October 4, |
| October 3, |
| October 4, |
| ||||
Beginning of period unrealized gain in accumulated OCI |
| $ | 20,885 |
| $ | 7,162 |
| $ | 65,582 |
| $ | — |
|
Increase in fair value of derivatives |
| 37,757 |
| 16,957 |
| 2,020 |
| 24,119 |
| ||||
Gains reclassified from OCI, offsetting the price paid to suppliers |
| (7,845 | ) | — |
| (16,805 | ) | — |
| ||||
End of period unrealized gain in accumulated OCI |
| $ | 50,797 |
| $ | 24,119 |
| $ | 50,797 |
| $ | 24,119 |
|
There was no ineffectiveness recognized in earnings for these contracts during the quarters or six months ended October 3, 2010 or October 4, 2009. ATK expects that any unrealized losses will be realized and reported in cost of sales as the cost of the commodities is included in cost of sales. Estimated and actual gains or losses will change as market prices change.
9. Inventories
Inventories consist of the following:
|
| October 3, 2010 |
| March 31, 2010 |
| ||
Raw materials |
| $ | 97,145 |
| $ | 69,002 |
|
Work in process |
| 83,718 |
| 91,338 |
| ||
Finished goods |
| 87,302 |
| 75,734 |
| ||
Net inventories |
| $ | 268,165 |
| $ | 236,074 |
|
10. Other Liabilities
The major categories of other current and long-term accrued liabilities are as follows:
|
| October 3, 2010 |
| March 31, 2010 |
| ||
Employee benefits and insurance, including pension and other postretirement benefits |
| $ | 80,715 |
| $ | 70,594 |
|
Government grant |
| — |
| 24,768 |
| ||
Warranty |
| 15,139 |
| 14,010 |
| ||
Interest |
| 3,864 |
| 3,957 |
| ||
Environmental remediation |
| 6,384 |
| 5,641 |
| ||
Rebate |
| 9,314 |
| 5,433 |
| ||
Deferred lease obligation |
| 20,602 |
| 17,837 |
| ||
Other |
| 68,162 |
| 64,049 |
| ||
Total other accrued liabilities – current |
| $ | 204,180 |
| $ | 206,289 |
|
|
|
|
|
|
| ||
Environmental remediation |
| $ | 49,493 |
| $ | 46,543 |
|
Management nonqualified deferred compensation plan |
| 21,407 |
| 19,871 |
| ||
Non-current portion of accrued income tax liability |
| 14,782 |
| 32,380 |
| ||
Deferred lease obligation |
| 14,263 |
| 13,754 |
| ||
Other |
| 14,933 |
| 16,918 |
| ||
Total other long-term liabilities |
| $ | 114,878 |
| $ | 129,466 |
|
The government grant represented amounts received from the government that were paid back during fiscal 2011 because it was determined that the future investment and employment levels would not be met.
ATK provides product warranties, which entail repair or replacement of non-conforming items, in conjunction with sales of certain products. Estimated costs related to warranties are recorded in the period in which the related product sales occur. The warranty liability recorded at each balance sheet date reflects the estimated liability for warranty coverage for products delivered based on historical information and current trends. The following is a reconciliation of the changes in ATK’s product warranty liability during the six months ended October 3, 2010:
Balance at April 1, 2010 |
| $ | 14,010 |
|
Warranties issued |
| 684 |
| |
Payments made |
| (367 | ) | |
Changes related to preexisting warranties |
| 23 |
| |
Balance at July 4, 2010 |
| $ | 14,350 |
|
Warranties issued |
| 850 |
| |
Payments made |
| (4 | ) | |
Changes related to preexisting warranties |
| (57 | ) | |
Balance at October 3, 2010 |
| $ | 15,139 |
|
11. Long-Term Debt
Long-term debt, including the current portion, consisted of the following:
|
| October 3, 2010 |
| March 31, 2010 |
| ||
Senior Credit Facility dated March 29, 2007 (1): |
|
|
|
|
| ||
Term A Loan due 2012 |
| $ | — |
| $ | 261,250 |
|
Revolving Credit Facility due 2012 |
| — |
| — |
| ||
2.75% Convertible Senior Subordinated Notes due 2011 (2) (3) |
| 300,000 |
| 300,000 |
| ||
6.75% Senior Subordinated Notes due 2016 |
| 400,000 |
| 400,000 |
| ||
6.875% Senior Subordinated Notes due 2020 (4) |
| 350,000 |
| — |
| ||
2.75% Convertible Senior Subordinated Notes due 2024 (5) |
| 279,763 |
| 279,763 |
| ||
3.00% Convertible Senior Subordinated Notes due 2024 (6) |
| 199,453 |
| 199,453 |
| ||
Principal amount of long-term debt |
| 1,529,216 |
| 1,440,466 |
| ||
Less: Unamortized discounts |
| 38,473 |
| 46,912 |
| ||
Carrying amount of long-term debt |
| 1,490,743 |
| 1,393,554 |
| ||
Less: current portion |
| 300,000 |
| 13,750 |
| ||
Carrying amount of long-term debt, excluding current portion |
| $ | 1,190,743 |
| $ | 1,379,804 |
|
(1) Borrowings under the Senior Credit Facility bear interest at a rate equal to the sum of a base rate (currently equal to the bank’s prime rate) or a Eurodollar rate plus an applicable margin, which is based on ATK’s senior secured credit ratings. There were no borrowings on the Term A Loan at October 3, 2010. In connection with the payoff of the remaining Term A Loan balance, ATK wrote-off the remaining deferred debt issuance costs of $936 in the quarter ended October 3, 2010. The annual commitment fee in effect on the unused portion of ATK’s Revolving Credit Facility was 0.20% at October 3, 2010. As of October 3, 2010, ATK had no borrowings outstanding against its $500,000 revolving credit facility and had outstanding letters of credit of $160,457, which reduced amounts available on the revolving facility to $339,543. ATK had no short-term borrowings during the six months ended October 3, 2010 and October 4, 2009.
On October 7, 2010, ATK entered into a Second Amended and Restated Credit Agreement (“the New Senior Credit Facility”), which is comprised of a Term A Loan of $400,000 and a $600,000 Revolving Credit Facility, both of which mature in 2015. The Term A Loan is subject to annual principal payments of $20,000 in each of the first and second years and $40,000 in each of the third, fourth, and fifth years, paid on a quarterly basis, with the balance due on October 7, 2015. Substantially all domestic tangible and intangible assets of ATK and its subsidiaries are pledged as collateral under the New Senior Credit Facility. Borrowings under the New Senior Credit Facility bear interest at a rate equal to either the sum of a base rate plus a margin or the sum of a Eurodollar rate plus a margin. Each margin is based on ATK’s senior secured credit ratings. Based on ATK’s current credit rating, the current base rate margin in 1.25% and the current Eurodollar margin is 2.25%. ATK will pay an annual commitment fee on the unused portion of the Revolving Credit Facility based on its senior secured credit ratings. Based on ATK’s current rating, this fee is 0.35%. Debt issuance costs will be amortized over the term of the New Senior Credit Facility.
(2) In fiscal 2007, ATK issued $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. As these notes are due within one year, they are classified as current as of October 3, 2010. Interest on these notes is payable on March 15 and September 15 of each year. The contingently issuable shares had no impact on the number of ATK’s diluted shares outstanding during the quarters and six months ended October 3, 2010 or October 4, 2009 because ATK’s average stock price during those periods was below the conversion price.
(3) 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. 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 current authoritative guidance, ATK recorded the net cost of the Call Options and the Warrants of $27,630 in additional paid-in-capital 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.
(4) In September 2010, ATK issued $350,000 aggregate principal amount of 6.875% Senior Subordinated Notes (“the 6.875% Notes”) that mature on September 15, 2020. These notes are general unsecured obligations. Interest on these notes is payable on March 15 and September 15 of each year. ATK has the right to redeem some or all of these notes from time to time on or after September 15, 2015, at specified redemption prices. Prior to September 15, 2015, 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 make-whole premium. In addition, prior to September 15, 2013, ATK may redeem up to 35% of the aggregate principal amount of these notes, at a price equal to 106.875% 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 will be amortized to interest expense over ten years.
(5) In September 2010, ATK notified holders of its 2.75% Convertible Senior Subordinated Notes (“the 2.75% Convertible Notes”), that were to mature on February 15, 2024, of its intention to redeem the notes on October 14, 2010. Following notification of the redemption, holders of these notes had the right to convert their notes at a conversion rate of 12.5843 shares of ATK’s common stock per $1 principal amount (a conversion rate of $79.46 per share). Of the $279,763 aggregate principal amount outstanding, $279,735 were redeemed, which ATK paid in cash. Holders of the remaining $28 elected to convert their Notes and will be paid following the end of the conversion period in November. Because ATK has the intent and ability to refinance the 2.75% Convertible Notes due 2024 with long-term debt, as evidenced by the New Senior Revolving Credit Facility entered into in October 2010 (as discussed above), these notes are classified as long-term as of October 3, 2010.
Prior to the redemption, holders could have converted their 2.75% Notes under specified conditions. The condition was met in fiscal 2009 and $71 of these notes were converted in fiscal 2009. The condition was not satisfied during the quarter ended October 3, 2010. These contingently issuable shares did not impact the number of ATK’s diluted shares outstanding during
the quarter or six months ended October 3, 2010, or the quarter ended October 4, 2009, because ATK’s average stock price did not exceed the conversion price during those periods; however, the contingently issuable shares did increase the number of diluted shares by 18,198 during the six months ended October 4, 2009 because ATK’s average stock price exceeded the conversion price during that period.
(6) 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. Under select conditions, ATK will pay contingent interest on these notes, which is treated as an embedded derivative; the fair value of this feature was insignificant at October 3, 2010 and March 31, 2010. ATK may redeem some or all of these notes in cash, for 100% of the principal amount plus any accrued but unpaid interest, at any time on or after August 20, 2014. Holders of these notes may require ATK to repurchase in cash, for 100% of the principal amount plus any accrued but unpaid interest, some or all of these notes on August 15, 2014 and August 15, 2019. Under specified conditions, 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). The stock price condition was met during fiscal 2009 and $547 of these notes were converted in fiscal 2009. The stock price condition was not satisfied during the quarter ended October 3, 2010, therefore the remaining principal amount of $199,453 was classified as long-term. These contingently issuable shares did not impact the number of ATK’s diluted shares outstanding during the quarter or six months ended October 3, 2010, or the quarter ended October 4, 2009, because ATK’s average stock price did not exceed the conversion price during those periods; however, the contingently issuable shares increased the number of diluted shares by 3,979 during the six months ended October 4, 2009 because ATK’s average stock price did exceed the conversion price during that period.
The current authoritative accounting literature requires that issuers of convertible debt instruments that may be settled in cash upon conversion separately account for the liability and equity components in a manner that reflects the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This provision applies to the convertible debt instruments discussed above. The unamortized discount is amortized through interest expense into earnings over the expected term of the convertible notes. The following tables provide additional information about ATK’s convertible notes:
|
| October 3, 2010 |
| ||||||||||
|
| 2.75% due 2011 |
| 3.00% due 2024 |
| 2.75% due 2024 |
| Total |
| ||||
Carrying amount of the equity component |
| $ | 50,779 |
| $ | 56,849 |
| $ | 43,568 |
| $ | 151,196 |
|
Principal amount of the liability component |
| 300,000 |
| 199,453 |
| 279,763 |
| 779,216 |
| ||||
Unamortized discount of liability component |
| 11,557 |
| 26,916 |
| — |
| 38,473 |
| ||||
Net carrying amount of liability component |
| 288,443 |
| 172,537 |
| 279,763 |
| 740,743 |
| ||||
Remaining amortization period of discount |
| 12 months |
| 167 months |
| — |
|
|
| ||||
Effective interest rate on liability component |
| 6.800 | % | 7.000 | % | 6.125 | % |
|
| ||||
|
| March 31, 2010 |
| ||||||||||
|
| 2.75% due 2011 |
| 3.00% due 2024 |
| 2.75% due 2024 |
| Total |
| ||||
Carrying amount of the equity component |
| $ | 50,779 |
| $ | 56,849 |
| $ | 43,568 |
| $ | 151,196 |
|
Principal amount of the liability component |
| 300,000 |
| 199,453 |
| 279,763 |
| 779,216 |
| ||||
Unamortized discount of liability component |
| 17,052 |
| 29,860 |
| — |
| 46,912 |
| ||||
Net carrying amount of liability component |
| 282,948 |
| 169,593 |
| 279,763 |
| 732,304 |
| ||||
Effective interest rate on liability component |
| 6.800 | % | 7.000 | % | 6.125 | % |
|
| ||||
Based on ATK’s closing stock price of $73.73 on October 3, 2010, the if-converted value of these notes does not exceed the aggregate principal amount of the notes.
See Note 9 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2010 for additional information regarding the terms and conditions of the Company’s outstanding debt agreements.
As of October 3, 2010, the scheduled minimum payments on outstanding long-term debt are as follows:
Remainder of fiscal 2011 |
| $ | 279,763 |
|
Fiscal 2012 |
| 300,000 |
| |
Fiscal 2013 |
| — |
| |
Fiscal 2014 |
| — |
| |
Fiscal 2015 |
| 199,453 |
| |
Thereafter |
| 750,000 |
| |
Total payments |
| $ | 1,529,216 |
|
ATK’s total debt (current portion of debt and long-term debt) as a percentage of total capitalization (total debt and stockholders’ equity) was 60% as of October 3, 2010 and 63% as of March 31, 2010.
Covenants and Default Provisions
ATK’s New Senior Credit Facility and the indentures governing the 6.75% Notes, the 6.875% Notes, 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 New Senior Credit Facility limits ATK’s ability to enter into sale-and-leaseback transactions. The New Senior Credit Facility also requires that ATK meet and maintain specified financial ratios, including a minimum interest coverage ratio, a maximum consolidated senior leverage ratio, and a maximum consolidated leverage ratio. Many of ATK’s debt agreements contain cross-default provisions so that non-compliance with the covenants within one debt agreement could cause a default under other debt agreements as well. 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 New Senior Credit Facility are subject to compliance with these covenants. As of October 3, 2010, ATK was in compliance with all financial covenants.
Debt Service Requirements
ATK’s debt service requirements over the next two years consist of the redemption of its 2.75% Convertible Notes due 2024 in October 2010, principal payments due under the New Senior Credit Facility, and the maturity of the Company’s 2.75% Convertible Notes due 2011 totaling approximately $620,000, as discussed further above. ATK’s other debt service requirements consist of interest expense on its debt. Additional cash may be required to repurchase or convert any or all of the convertible notes under certain circumstances. 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.
Cash Paid for Interest on Debt
Cash paid for interest totaled $26,294 in the six months ended October 3, 2010 and $26,517 during the six months ended October 4, 2009.
12. Employee Benefit Plans
|
| Pension Benefits |
| ||||||||||
|
| Quarters Ended |
| Six Months Ended |
| ||||||||
Components of Net Periodic Benefit Cost |
| October 3, 2010 |
| October 4, 2009 |
| October 3, 2010 |
| October 4, 2009 |
| ||||
Service cost |
| $ | 17,476 |
| $ | 13,651 |
| $ | 34,952 |
| $ | 27,302 |
|
Interest cost |
| 37,717 |
| 39,224 |
| 75,434 |
| 78,449 |
| ||||
Expected return on plan assets |
| (44,173 | ) | (42,763 | ) | (88,346 | ) | (85,527 | ) | ||||
Amortization of unrecognized net loss |
| 21,362 |
| 6,437 |
| 42,724 |
| 12,875 |
| ||||
Amortization of unrecognized prior service cost |
| (97 | ) | (97 | ) | (195 | ) | (195 | ) | ||||
Net periodic benefit cost |
| $ | 32,285 |
| $ | 16,452 |
| $ | 64,569 |
| $ | 32,904 |
|
|
| Postretirement Benefits |
| ||||||||||
|
| Quarters Ended |
| Six Months Ended |
| ||||||||
Components of Net Periodic Benefit Cost |
| October 3, 2010 |
| October 4, 2009 |
| October 3, 2010 |
| October 4, 2009 |
| ||||
Service cost |
| $ | 77 |
| $ | 51 |
| $ | 154 |
| $ | 103 |
|
Interest cost |
| 2,280 |
| 2,890 |
| 4,559 |
| 5,779 |
| ||||
Expected return on plan assets |
| (846 | ) | (668 | ) | (1,691 | ) | (1,336 | ) | ||||
Amortization of unrecognized net loss |
| 722 |
| 523 |
| 1,445 |
| 1,046 |
| ||||
Amortization of unrecognized prior service cost |
| (2,107 | ) | (2,158 | ) | (4,215 | ) | (4,315 | ) | ||||
Net periodic benefit cost before curtailment gain |
| 126 |
| 638 |
| 252 |
| 1,277 |
| ||||
Curtailment gain |
| (448 | ) | — |
| (448 | ) | — |
| ||||
Net periodic benefit income (cost) |
| $ | (322 | ) | $ | 638 |
| $ | (196 | ) | $ | 1,277 |
|
Employer Contributions. During the six months ended October 3, 2010, ATK contributed $16,966 directly to retirees. ATK also contributed $7,994 to its other postretirement benefit (“PRB”) plans. ATK anticipates making additional contributions of $3,577 directly to retirees and $5,745 to its other PRB plans during the remainder of fiscal 2011. ATK is not required to make any additional minimum contributions to the pension trust during the remainder of 2011.
13. Income Taxes
ATK’s provision for income taxes includes both federal and state income taxes. Income tax provisions for interim periods are based on estimated effective annual income tax rates.
The income tax provisions for the quarters ended October 3, 2010 and October 4, 2009 represent effective tax rates of 14.6% and 37.2%, respectively. The decrease in the rate from the prior year quarter is primarily due to the settlement of the examination of the fiscal 2007 and 2008 tax returns, increased benefits from the domestic manufacturing deduction, and a lower state tax rate partially offset by lack of the federal research and development tax credit.
The income tax provisions for the six months ended October 3, 2010 and October 4, 2009 represent effective tax rates of 25.0% and 37.2%, respectively. The decrease in the rate from the prior year period is primarily due to the settlement of the examination of the fiscal 2007 and 2008 tax returns, increased benefits from the domestic manufacturing deduction, and a lower state tax rate partially offset by lack of the federal research and development tax credit.
On July 13, 2010, ATK settled the examination of the fiscal 2007 and 2008 tax returns with the Internal Revenue Service (“IRS”). This settlement resulted in the recognition of $22,289 of tax benefits in the second quarter of fiscal 2011. This benefit includes the federal and state impact from the closure of the federal audit as well as a reduction to the reserves for subsequent years.
ATK or one of its subsidiaries files income tax returns in the U.S. federal, various U.S. state, and foreign jurisdictions. With few exceptions, ATK is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2004. As of October 3, 2010, the IRS had completed the audits of ATK through fiscal 2008. We believe appropriate provisions for all outstanding issues have been made for all remaining open years in all jurisdictions.
Although the timing and outcome of audit settlements are uncertain, it is reasonably possible that a $741 reduction of the uncertain tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings up to $309 based on current estimates.
14. 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 October 3, 2010, ATK has authorized up to 2,382,360 common shares under the 2005 Stock Incentive Plan, of which 834,829 common shares are yet available to be granted. No new grants will be made out of the other three plans.
Total pre-tax stock-based compensation expense recognized during the quarters ended October 3, 2010 and October 4, 2009 was $2,851 and $3,898, respectively. Total pre-tax stock-based compensation expense recognized during the six months ended October 3, 2010 and October 4, 2009 was $5,269 and $8,580, respectively.
The total income tax benefit recognized in the income statement for share-based compensation during the quarters ended October 3, 2010 and October 4, 2009 was $1,108 and $1,499, respectively. Total income tax benefit recognized in the income statement for share-based compensation during the six months ended October 3, 2010 and October 4, 2009 was $2,048 and $3,334, respectively.
There are four types of awards outstanding under ATK’s stock incentive plans: performance awards, total stockholder return performance awards (“TSR awards”), restricted stock, and stock options. ATK issues treasury shares upon the payment of performance and TSR awards, grant of restricted stock, or exercise of stock options.
As of October 3, 2010, there were up to 385,336 shares reserved for performance awards for key employees. Performance shares are valued at the fair value of ATK stock as of the grant date and expense is recognized based on the number of shares expected to vest under the terms of the award under which they are granted. Of these shares, up to 131,088 shares will become payable only upon achievement of certain financial performance goals, including sales, EPS, and return on invested capital (“ROIC”) for the fiscal 2009 through fiscal 2011 period; up to 28,910 shares will become payable only upon achievement of certain performance goals, including sales, EPS, and ROIC, for the fiscal 2010 through fiscal 2012 period; and up to 225,338 shares will become payable only upon achievement of certain financial performance goals, including sales, EPS, and ROIC, for the fiscal 2011 through fiscal 2013 period. In May 2010, 189,128 shares were distributed or deferred based upon achievement of certain financial performance goals, including EPS, for the fiscal 2008 through fiscal 2010 period.
As of October 3, 2010, there were up to 78,974 shares reserved for TSR awards for key employees. ATK uses an integrated Monte Carlo simulation model to determine the fair value of the TSR awards. The Monte Carlo model calculates the probability of satisfying the market conditions stipulated in the award. This probability is an input into the trinomial lattice model used to determine the fair value of the awards as well as the assumptions of other variables, including the risk-free interest rate and expected volatility of ATK’s stock price in future periods. The risk-free rate is based on the U.S. dollar-denominated U.S. Treasury strip rate with a remaining term that approximates the life assumed at the date of grant. The weighted average fair value of TSR awards granted was $44.91 during fiscal 2011. There were no TSR awards granted during fiscal 2010. The weighted average assumptions used in estimating the value of the TSR award during the fiscal 2011 were as follows:
|
| Assumptions |
|
Risk-free rate |
| 1.56 | % |
Expected volatility |
| 27.3 | % |
Expected dividend yield |
| 0 | % |
Expected award life |
| 3 years |
|
Restricted stock issued to non-employee directors and certain key employees during the six months ended October 3, 2010 totaled 80,574 shares. Restricted shares vest over periods ranging from one to five years from the date of award and are valued at the fair value of ATK’s common stock as of the grant date.
Stock options may be granted periodically, with an exercise price equal to the fair market value of ATK’s common stock on the date of grant, and generally vest three years from the date of grant. Since fiscal 2004, options are generally issued with a seven-year term; most grants prior to that had a ten-year term. 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. ATK granted no options during the six months ended October 3, 2010 or during fiscal 2010.
15. 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.
On or about April 10, 2006, a former ATK employee filed a qui tam complaint in federal court in Utah alleging that ATK knowingly submitted claims for payment to the U.S. Government for defective LUU series illuminating flares that failed to conform to certain safety specifications and falsely certified compliance with those specifications. The lawsuit was initially filed under seal. ATK was first informed of the lawsuit by the United States Department of Justice (DOJ) on March 13, 2007. Thereafter, the DOJ intervened in the qui tam action and filed an amended complaint on November 2, 2007. On May 29, 2008, ATK filed its answer to the complaint. On March 16, 2010, the trial court issued a scheduling order setting a preliminary trial date of July 11, 2011. Discovery is underway in the case.
ATK denies any allegations of improper conduct. Based on what is known to ATK about the subject matter of the complaint, ATK does not believe that it has violated any law or regulation and believes it has valid defenses to all allegations of improper conduct. Although it is not possible at this time to predict the outcome of the litigation, ATK believes, based on all available information, that the outcome will not have a material adverse effect on its operating results, financial condition or cash flows. Some potential, however, does remain for an adverse judgment that could be material to ATK’s financial position, results of operations, or cash flows. As a result of the uncertainty regarding the outcome of this matter, no provision has been made in the financial statements with respect to this contingent liability.
U.S. Government Investigations. ATK is also subject to U.S. Government investigations from which civil, criminal, or administrative proceedings could result. Such proceedings could involve claims by the U.S. Government for fines, penalties, compensatory and treble damages, restitution, and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. ATK believes, based upon all available information, that the outcome of any such pending government investigations will not have a material adverse effect on its operating results, financial condition, or cash flows.
Environmental Liabilities. ATK’s operations and ownership or use of real property are subject to a number of federal, state, and local environmental laws and regulations, including those for discharge of hazardous materials, remediation of contaminated sites, and restoration of damage to the environment. 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, resource restoration costs, fines, and penalties, or third-party property damage or personal injury claims, as a result of liabilities associated with past practices or violations 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 1.50% and 2.75% as of October 3, 2010 and March 31, 2010, respectively. ATK’s discount rate is calculated using the 20-year Treasury constant maturities rate, net of an estimated inflationary factor of 1.9%, rounded to the nearest quarter percent. The following is a summary of the amounts recorded for environmental remediation:
|
| October 3, 2010 |
| March 31, 2010 |
| ||||||||
|
| Liability |
| Receivable |
| Liability |
| Receivable |
| ||||
Amounts (payable) receivable |
| $ | (60,901 | ) | $ | 35,909 |
| $ | (60,908 | ) | $ | 35,622 |
|
Unamortized discount |
| 5,024 |
| (2,458 | ) | 8,724 |
| (4,280 | ) | ||||
Present value amounts (payable) receivable |
| $ | (55,877 | ) | $ | 33,451 |
| $ | (52,184 | ) | $ | 31,342 |
|
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 $55,877 discounted liability as of October 3, 2010, $6,384 was recorded within other current liabilities and $49,493 was recorded within other long-term liabilities. Of the $33,451 discounted receivable, ATK recorded $5,881 within other current assets and $27,570 within other non-current assets. As of October 3, 2010, the estimated discounted range of reasonably possible costs of environmental remediation was $55,877 to $87,558.
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. If ATK were unable to recover those environmental remediation costs under these contracts, ATK believes that these costs will be covered by Hercules Incorporated, a subsidiary of Ashland, Inc. (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 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.
ATK cannot ensure that the U.S. Government, Hercules, Alcoa, 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, 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.
16. Share Repurchases
On August 5, 2008, ATK’s Board of Directors authorized the repurchase of up to an additional 5,000,000 shares. The Board has determined that the repurchase program will serve primarily to offset dilution from the Company’s employee and director benefit compensation programs, but it may also be used for other corporate purposes, as determined by the Board. During fiscal 2009, ATK repurchased 299,956 shares for $31,609. ATK did not repurchase any shares during fiscal 2010 or the six months ended October 3, 2010. As of October 3, 2010, there were 4,700,044 remaining shares authorized to be repurchased.
17. Operating Segment Information
Effective April 1, 2010, ATK realigned its business structure into four operating groups. These operating segments are defined based on the reporting and review process used by ATK’s chief executive officer and other management. The new operating structure better aligns ATK’s capabilities and resources with its customers and markets and positions the Company for long-term growth and improved profitability. As a result of this realignment, ATK’s four operating groups are:
· Aerospace Systems, consisting of the former Space System’s businesses and the aerospace structures business formerly within Mission Systems. Aerospace Systems, which generated 31% of ATK’s external sales in the six months ended October 3, 2010, develops and produces rocket motor systems for human and cargo launch vehicles, conventional and strategic missiles, missile defense interceptors, small and micro-satellites, satellite components, structures and subsystems, lightweight space deployables and solar arrays, and provides engineering and technical services. Additionally, Aerospace Systems operates in the military and commercial aircraft and launch structures markets. Other products include ordnance, such as decoy and illuminating flares.
· Armament Systems, consisting of the former Armament System’s businesses (except for commercial products and tactical accessories) and the precision munitions business formerly within Mission Systems. Armament Systems, which generated 37% of ATK’s external sales in the six months ended October 3, 2010, develops and produces military small, medium, and large caliber ammunition, precision munitions, gun systems, and propellant and energetic materials. It also operates the U.S. Army ammunition plants in Independence, MO and Radford, VA.
· Missile Products, consisting of the remaining businesses within the former Mission Systems. Missile Products, which generated 13% of ATK’s external sales in the six months ended October 3, 2010, operates across the following market areas: tactical propulsion, inspace propulsion, hypersonic research, missile defense and missile interceptor capabilities, fuzes and warheads,
composites, special mission aircraft, and electronic warfare.
· Security and Sporting, consisting of the commercial products and tactical accessories businesses formerly within Armament Systems, as well as the April 2010 acquisition of Blackhawk. Security and Sporting, which generated 19% of ATK’s external sales in the six months ended October 3, 2010, develops and produces commercial products and tactical systems and equipment.
The April 1, 2010 realignment is reflected in the information contained in this report for all periods presented.
The military small-caliber ammunition contract, which is reported within Armament Systems, contributed approximately 14% and 12% of total external sales during the six months ended October 3, 2010 and October 4, 2009, respectively.
The following table summarizes ATK’s results by operating segment:
|
| Quarters Ended |
| Six Months Ended |
| ||||||||
|
| October 3, 2010 |
| October 4, 2009 |
| October 3, 2010 |
| October 4, 2009 |
| ||||
Sales to external customers: |
|
|
|
|
|
|
|
|
| ||||
Aerospace Systems |
| $ | 376,368 |
| $ | 417,411 |
| $ | 745,732 |
| $ | 832,870 |
|
Armament Systems |
| 442,653 |
| 415,457 |
| 881,553 |
| 817,445 |
| ||||
Missile Products |
| 159,505 |
| 176,700 |
| 315,818 |
| 353,570 |
| ||||
Security and Sporting |
| 230,709 |
| 198,396 |
| 468,283 |
| 413,213 |
| ||||
Total external sales |
| 1,209,235 |
| 1,207,964 |
| 2,411,386 |
| 2,417,098 |
| ||||
Intercompany sales: |
|
|
|
|
|
|
|
|
| ||||
Aerospace Systems |
| 3,095 |
| 4,881 |
| 5,960 |
| 11,005 |
| ||||
Armament Systems |
| 24,247 |
| 24,931 |
| 53,346 |
| 51,750 |
| ||||
Missile Products |
| 29,663 |
| 37,471 |
| 57,742 |
| 78,081 |
| ||||
Security and Sporting |
| 2,670 |
| 561 |
| 4,215 |
| 1,167 |
| ||||
Eliminations |
| (59,675 | ) | (67,844 | ) | (121,263 | ) | (142,003 | ) | ||||
Total intercompany sales |
| — |
| — |
| — |
| — |
| ||||
Total sales |
| $ | 1,209,235 |
| $ | 1,207,964 |
| $ | 2,411,386 |
| $ | 2,417,098 |
|
|
|
|
|
|
|
|
|
|
| ||||
Income before interest, income taxes, and noncontrolling interest: |
|
|
|
|
|
|
|
|
| ||||
Aerospace Systems |
| $ | 38,765 |
| $ | 40,529 |
| $ | 74,564 |
| $ | 81,395 |
|
Armament Systems |
| 53,495 |
| 29,246 |
| 103,136 |
| 71,891 |
| ||||
Missile Products |
| 11,776 |
| 16,479 |
| 28,300 |
| 33,033 |
| ||||
Security and Sporting |
| 32,289 |
| 37,721 |
| 65,265 |
| 60,104 |
| ||||
Corporate |
| (1,967 | ) | 10,899 |
| (3,854 | ) | 19,823 |
| ||||
Total income before interest, income taxes, and noncontrolling interest |
| $ | 134,358 |
| $ | 134,874 |
| $ | 267,411 |
| $ | 266,246 |
|
During the second quarter of fiscal 2010, ATK recorded an $11,400 noncash charge within Armament Systems related to the Company’s TNT production facility and ATK’s decision to procure all future TNT requirements from an off-shore vendor.
Certain administrative functions are primarily managed by ATK at the corporate headquarters (“Corporate”). Some examples of such functions are human resources, pension and postretirement benefits, corporate accounting, legal, tax, and treasury. Significant assets and liabilities managed at Corporate include those associated with debt, pension and postretirement benefits, environmental liabilities, and income taxes.
Costs related to the administrative functions managed by Corporate are either recorded at Corporate or allocated to the business units based on the nature of the expense. The difference between pension and postretirement benefit expense calculated under Financial Accounting Standards and the expense calculated under U.S. Cost Accounting Standards is recorded at the corporate level which provides for greater clarity on the operating results of the business segments. Administrative expenses such as corporate accounting, legal, and treasury costs, are allocated out to the business segments. Environmental expenses are allocated to each segment based on the origin of the underlying environmental cost. Transactions between segments are recorded at the segment level, consistent with ATK’s financial accounting policies. Intercompany balances and transactions involving different segments are eliminated at ATK’s consolidated financial
statements level. These eliminations are shown above in “Corporate” and were $5,639 and $4,893 for the quarters ended October 3, 2010 and October 4, 2009, respectively, and $10,642 and $10,027 for the six months ended October 3, 2010 and October 4, 2009, respectively.
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 ATK’s 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, ATK 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 ATK makes 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 certain contracts or for other reasons,
· the potential termination of U.S. Government contracts and the potential inability to recover termination costs,
· 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,
· risks associated with diversification into new markets,
· changes in cost estimates and/or timing of programs,
· costs of servicing ATK’s debt, including cash requirements and interest rate fluctuations,
· intense competition,
· reduced demand for commercial ammunition,
· performance of ATK’s subcontractors,
· supply, availability, and costs of raw materials and components, including commodity price fluctuations,
· development of key technologies and retention of a qualified workforce,
· fires or explosions at any of ATK’s facilities,
· environmental laws that govern past practices and rules and regulations, noncompliance with which may expose ATK to adverse consequences,
· actual pension and other postretirement plan asset returns and assumptions regarding future returns, discount rates, service costs, mortality rates, and health care cost trend rates,
· capital market volatility and corresponding assumptions related to ATK’s capital structure such as share count and interest rates,
· impacts of financial market disruptions or volatility to ATK’s customers and vendors,
· greater risk associated with international business,
· results of acquisitions,
· costs incurred for pursuits and proposed acquisitions that have not yet or may not close, and
· unanticipated changes in the tax provision or exposure to additional tax liabilities.
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. ATK undertakes no obligation to update any forward-looking statements. A more detailed description of risk factors can be found in Part 1, Item 1A, Risk Factors, of ATK’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010. Additional information regarding these factors may be contained in ATK’s subsequent filings with the Securities and Exchange Commission, including Forms 8-K.
Executive Summary
ATK is a premier aerospace and defense company and leading supplier of products to the U.S. Government, allied nations, and prime contractors. ATK is also a major supplier of ammunition and related accessories to law enforcement agencies and commercial customers.
ATK is headquartered in Minneapolis, Minnesota and has operating locations throughout the United States, Puerto Rico, and internationally.
Effective April 1, 2010, ATK realigned its business structure into four operating groups. As a result of this realignment, October 3, 2010, ATK’s four operating groups are:
· Aerospace Systems, consisting of the former Space System’s business and the aerospace structures business formerly within Mission Systems. Aerospace Systems, which generated 31% of ATK’s external sales in the six months ended October 3, 2010, develops and produces rocket motor systems for human and cargo launch vehicles, conventional and strategic missiles, missile defense interceptors, small and micro-satellites, satellite components, structures and subsystems, lightweight space deployables and solar arrays, and provides engineering and technical services. Additionally, Aerospace Systems operates in the military and commercial aircraft and launch structures markets. Other products include ordnance, such as decoy and illuminating flares.
· Armament Systems, consisting of the former Armament System’s business (except for commercial products and tactical accessories) and the precision munitions business formerly within Mission Systems. Armament Systems, which generated 37% of ATK’s external sales in the six months ended October 3, 2010, develops and produces military small, medium, and large caliber ammunition, precision munitions, gun systems, and propellant and energetic materials. It also operates the U.S. Army ammunition plants in Independence, MO and Radford, VA.
· Missile Products, consisting of the remaining businesses formerly within Mission Systems. Missile Products, which generated 13% of ATK’s external sales in the six months ended October 3, 2010, operates across the following market areas: tactical propulsion, inspace propulsion, hypersonic research, missile defense and missile interceptor capabilities, fuzes and warheads, composites, special mission aircraft, and electronic warfare.
· Security and Sporting, consisting of the commercial products and tactical accessories business formerly within Armament Systems, as well as the April 2010 acquisition of Blackhawk Industries Products Group Unlimited, LLC (“Blackhawk”). Security and Sporting, which generated 19% of ATK’s external sales in the six months ended October 3, 2010, develops and produces commercial products and tactical systems and equipment.
The April 1, 2010 realignment is reflected in the information contained in this report for all periods presented.
Financial Highlights and Notable Events
Certain notable events or activities affecting our fiscal 2011 financial results include the following:
Financial highlights for the quarter ended October 3, 2010
· Quarterly diluted earnings per share of $2.91
· Despite higher pension expense, income before interest, income taxes, and noncontrolling interest as a percentage of sales remains at 11.1% driven by company-wide cost management and efficiency improvements
· Orders for the quarter of $1.0 billion with total backlog of $6.6 billion
· Quarterly tax rate of 14.6% which reflects the favorable settlement of IRS audits for fiscal 2007 and 2008
· Aerospace Systems realized expected net reductions in quarterly sales of approximately $41 million compared to the prior year period driven primarily by the wind-down of the Space Shuttle program
Notable events for fiscal 2011
· On April 9, 2010, ATK acquired Blackhawk Industries Products Group Unlimited, LLC (“Blackhawk”) for a purchase price of $172.3 million, subject to purchase price adjustments expected to be finalized in fiscal 2011. Blackhawk is a leading manufacturer of high quality tactical gear.
· On July 13, 2010, ATK settled the examination of the fiscal 2007 and 2008 tax returns with the Internal Revenue Service (“IRS”). This settlement resulted in the recognition of $22,289 of tax benefits in the second quarter of fiscal 2011. This benefit includes the federal and state impact from the closure of the federal audit as well as a reduction to the reserves for subsequent years.
· On August 3, 2010, the ATK Board of Directors elected Michael A. Kahn to serve as Senior Vice President and President, Missile Products group. Prior to his appointment, Mr. Kahn most recently served as the Executive Vice President of the Aerospace Systems group. A 22-year veteran of ATK, Mr. Kahn has held a number of executive level leadership positions across a variety of programs and operations.
· On September 13, 2010, ATK issued $350,000 aggregate principal amount of 6.875% Senior Subordinated Notes that mature on September 15, 2020. Proceeds from the issuance of these notes were used to pay off the Term A Loan due 2012.
· On September 13, 2010, ATK notified holders of its 2.75% Convertible Senior Subordinated Notes, that were to mature on February 15, 2024, of its intention to redeem the notes on October 14, 2010. Of the $279,763 aggregate principal amount outstanding, $279,735 were redeemed in October, which ATK paid in cash. Holders of the remaining $28 elected to convert their Notes and will be paid following the end of the conversion period in November.
· On October 7, 2010, ATK entered into a Second Amended and Restated Credit Agreement which is comprised of a Term A Loan of $400,000 and a $600,000 Revolving Credit Facility, both of which mature in 2015.
· On November 4, 2010, ATK announced that its Board of Directors has declared the Company’s first quarterly cash dividend. The $0.20 per share dividend will be payable on March 4, 2011, to shareholders of record on February 8, 2011.
Outlook
Government Funding — 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 years. ATK management believes that the key to ATK’s continued success is to focus on performance, innovation, simplicity, and affordability. ATK is positioning itself where management believes there will be continued strong defense funding, even as pressures mount on procurement and research and development accounts. ATK will concentrate on developing 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.
On February 1, 2010 the Quadrennial Defense Review (“QDR”) and Defense budgets were announced. We believe there is continued overall budget funding support across ATK programs.
The Administration’s fiscal year 2011 budget request, released on February 1, 2010, included the proposed cancellation of NASA’s Constellation space exploration program. Congress has the responsibility to determine, as part of the 2011 authorization and appropriation legislative process, what the policy and funding levels for NASA will be and ultimately decide on the future funding level for ATK’s work in the future Exploration program. The appropriations are still being reviewed as part of NASA’s 2011 budget review. We expect a decision from Congress in early to mid calendar year 2011. Current law continues funding for Constellation under a continuing resolution and can be modified only by a subsequent appropriations Act from Congress. At this time the impacts of the Administration’s budget proposal are still being reviewed. However, if Congress significantly changes NASA’s budget or accepts the proposed cancellation of the Constellation program and related contracts without alternative replacement work in Exploration, there could be a material adverse effect on ATK’s operating results, financial condition, and cash flows, including the potential for substantial termination liability. If the program is terminated, the Company believes that it will be reimbursed for certain amounts previously incurred by ATK, as well as amounts to be incurred by ATK, as part of that termination (e.g. severance, environmental liabilities, termination administration). There can be no assurance that ATK will be successful in collecting reimbursement of any termination liability costs.
In fiscal 2010, NASA sales relating to the Constellation contracts were approximately $370 million and as of October 3, 2010 ATK had approximately:
· $119 million of billed and unbilled receivables directly related to the program,
· $103 million of net property, plant, and equipment and other assets related to the Constellation and other contracts, and
· $515 million of goodwill recorded related to the Space Systems Operations reporting unit.
All of these assets would be subject to impairment testing should there be significant changes made to the Constellation contracts in future periods. We are confident, however, that ATK’s world class capabilities in solid propulsion and space systems will continue to play an important role in the nation’s space exploration programs.
Radford Army Ammunition Plant Facility Contract — The final request for proposal (“RFP”) for the Radford Army ammunition plant facility management contract was released and ATK submitted its bid at the end of October. ATK’s current contract at Radford expires on March 31, 2011. Loss of the Radford facility contract would reduce Armament System’s sales and profit. Radford’s revenues represent approximately 5% of ATK’s total expected external sales for fiscal 2011; however, as there are multiple programs associated with Radford’s revenues, we would not expect to lose all sales should we lose the facility management contract.
Recent Developments in U.S. Cost Accounting Standards (“CAS”) Pension Recovery Rules — The Company maintains defined benefit plans that are subject to CAS and Pension Protection Act of 2006 (“PPA”) requirements. On May 10, 2010, the CAS Board published an Advance Notice of Proposed Rulemaking that if adopted would provide a framework to partially harmonize the CAS rules with the PPA requirements. The proposed CAS rule includes provisions for a transition period from the existing CAS requirement to a partially harmonized CAS requirement. As published, the proposed rule would partially mitigate the near-term mismatch between PPA-amended Employee Retirement Income Security Act (ERISA) minimum contribution requirements, which would not yet be recoverable under CAS. However, until the final rule is published, and to the extent that the final rule does not completely eliminate any mismatch between ERISA funding requirements and CAS, government contractors maintaining defined benefit pension plans in general would still experience a timing mismatch between required contributions and the CAS recoverable pension costs. The CAS Board has yet to issue a final rule. Depending on the timing of its ultimate release and effective date, the requirements of the final rule could apply to ATK’s contracts as early as fiscal 2012.
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, 2010 (“fiscal 2010”). The accounting policies used in preparing ATK’s interim fiscal 2011 consolidated financial statements are the same as those described in ATK’s Annual Report.
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, 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,
· employee benefit plans,
· income taxes,
· acquisitions, and
· accounting for 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, 2010.
Results of Operations
Acquisitions
On April 9, 2010, ATK acquired Blackhawk for a purchase price of $172,251. Blackhawk is a leading manufacturer of high quality tactical gear. ATK believes that the acquisition provides ATK with a leading tactical systems brand, an expanded portfolio of quality
products, and additional design and development expertise for innovative and tactical accessories which will strengthen ATK’s position in tactical accessories and equipment for domestic and international military, law enforcement, security, and sport enthusiast markets. Blackhawk employs approximately 300 employees and is included in the Security and Sporting group. The purchase price allocation will be completed in fiscal 2011. Most of the goodwill generated in this acquisition will be deductible for tax purposes.
ATK used the purchase method of accounting to account for this acquisition and, accordingly, the results of Blackhawk are included in ATK’s consolidated financial statements at the date of acquisition. The purchase price for the acquisition will be allocated to the acquired assets and liabilities based on estimated fair value. Subsequent to the April 2010 acquisition, ATK has recorded sales of approximately $22,000 and $39,000 and income before interest, income taxes, and noncontrolling interest of approximately $3,500 and $2,500 in the quarter and six months ended October 3, 2010, respectively, associated with the operations of this acquired business. Pro forma information on the results of operations for fiscal 2010 as if the acquisition had occurred at the beginning of fiscal 2010 is not being presented because the acquisition is not material to ATK for that purpose.
There were no acquisitions during fiscal 2010.
Sales
The military small-caliber ammunition contract, which is reported within Armament Systems, contributed approximately 14% and 12% of total external sales during the six months ended October 3, 2010 and October 4, 2009, respectively.
The following is a summary of each operating segment’s external sales:
|
| Quarters Ended |
| Six Months Ended |
| ||||||||||||||||||
|
| October 3, |
| October 4, |
| $ Change |
| % |
| October 3, |
| October 4, |
| $ Change |
| % Change |
| ||||||
Aerospace Systems |
| $ | 376,368 |
| $ | 417,411 |
| $ | (41,043 | ) | (9.8 | )% | $ | 745,732 |
| $ | 832,870 |
| $ | (87,138 | ) | (10.5 | )% |
Armament Systems |
| 442,653 |
| 415,457 |
| 27,196 |
| 6.5 | % | 881,553 |
| 817,445 |
| 64,108 |
| 7.8 |
| ||||||
Missile Products |
| 159,505 |
| 176,700 |
| (17,195 | ) | (9.7 | )% | 315,818 |
| 353,570 |
| (37,752 | ) | (10.7 | )% | ||||||
Security and Sporting |
| 230,709 |
| 198,396 |
| 32,313 |
| 16.3 | % | 468,283 |
| 413,213 |
| 55,070 |
| 13.3 | % | ||||||
Total external sales |
| $ | 1,209,235 |
| $ | 1,207,964 |
| $ | 1,271 |
| 0.1 | % | $ | 2,411,386 |
| $ | 2,417,098 |
| $ | (5,712 | ) | (0.2 | )% |
The fluctuation in sales was driven by the program-related changes within the operating segments as described below.
Quarter.
Aerospace Systems. The decrease in sales was driven by:
· a $63,300 decrease resulting from the wind-down of the Space Shuttle Program which was partially offset by $51,200 of higher Ares I program sales,
· a $13,200 reduction in strategic and commercial rocket motors across multiple programs, and
· a $9,800 decrease resulting from the completion of a space mission systems design program during fiscal 2010.
Armament Systems. The increase in sales was driven by:
· a $20,200 increase in small caliber systems due to higher facility modernization project and non-standard ammunition and weapon sales, and
· an increase of $16,000 in energetic systems at the Radford Army Ammunition Plant relating primarily to increased facility modernization sales.
These increases were partially offset by a $7,800 decrease in integrated weapon systems which was driven by the completion of international programs.
Missile Products. The decrease in sales was driven by:
· a $21,900 decrease within propulsion and controls primarily related to decreased scope and funding on the Attitude Control Motor and Standard Missile-3 programs, as well as completion of several programs during fiscal 2010.
This decrease was partially offset by a $9,100 increase in defense electronics driven by timing of sales within the division.
Security and Sporting. The increase was driven by:
· a $21,200 increase in tactical systems driven by the April 2010 acquisition of Blackhawk, and
· an increase of $11,400 in commercial products driven by an increase in ammunition sales volume resulting primarily from increased production capacity.
Six Months.
Aerospace Systems. The decrease in sales was driven by:
· a $127,800 decrease resulting from the wind-down of the Space Shuttle Program which was partially offset by $87,700 of higher Ares I program sales,
· a $28,500 reduction in strategic and commercial rocket motors driven by lower volume across multiple programs, and
· a $24,200 decrease resulting from the termination of a space mission systems program and completion of a design program during fiscal 2010.
These decreases were partially offset by a $10,400 increase in commercial aircraft structures driven by the Airbus A350 program.
Armament Systems. The increase in sales was driven by:
· a $49,900 increase in small caliber systems due to continued strong customer requirements for small-caliber ammunition and facility modernization project sales, and
· an increase of $44,900 in energetic systems at the Radford Army Ammunition Plant relating primarily to timing of TNT sales.
These increases were partially offset by:
· a $28,100 decrease in integrated weapon systems which was driven by the completion of international programs, and
· a decrease of $11,400 in advanced weapons driven by the wind-down of several large caliber programs partially offset by higher volume on guided projectile programs.
Missile Products. The decrease in sales was driven by:
· a $50,800 decrease within propulsion and controls primarily related to decreased scope and funding on the Attitude Control Motor and Standard Missile-3 programs, as well as completion of several programs during fiscal 2010.
These decreases were partially offset by a $20,100 increase in defense electronics driven by higher production activity within missiles and electronic warfare across multiple programs.
Security and Sporting. The increase was driven by:
· a $39,500 increase in tactical systems driven by the April 2010 acquisition of Blackhawk, and
· an increase of $16,100 in commercial products driven by an increase in ammunition sales volume resulting primarily from increased production capacity.
Gross Profit
|
| Quarters Ended |
| Six Months Ended |
| ||||||||||||||||||||||
|
| October 3, |
| As a % |
| October 4, |
| As a % |
| Change |
| October 3, |
| As a % |
| October 4, |
| As a % |
| Change |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross profit |
| $ | 251,090 |
| 20.7 | % | $ | 245,702 |
| 20.3 | % | $ | 5,388 |
| $ | 503,354 |
| 20.9 | % | $ | 505,547 |
| 20.9 | % | $ | (2,193 | ) |
Quarter.
The increase in gross profit for the quarter is driven by improved operating efficiencies and cost management initiatives as well as the lack of an $11,400 noncash charge in the prior year within Armament systems related to the TNT production facility and ATK’s decision to procure future TNT requirements from an off-shore vendor to meet future needs. Armament Systems received a $6,300 favorable settlement in the second quarter of fiscal 2011 related to legal action ATK initiated against the designer of the TNT production line. Sales remained relatively flat over the prior year period.
Six Months.
The decrease in gross profit for the six month period primarily relates to lower overall sales, particularly from the higher margin Space Shuttle and Minuteman programs. This is partially offset by sales growth in other programs, improved operating efficiencies and cost management initiatives, as well as the lack of an $11,400 noncash charge in the prior year within Armament Systems related to the TNT production facility and ATK’s decision to procure future TNT requirements from an off-shore vendor to meet future needs. Armament Systems received a $6,300 favorable settlement in the second quarter of fiscal 2011 related to legal action ATK initiated against the designer of the TNT production line.
Operating Expenses
|
| Quarters Ended |
| Six Months Ended |
| ||||||||||||||||||||||
|
| October 3, |
| As a % |
| October 4, |
| As a % |
| Change |
| October 3, |
| As a % |
| October 4, |
| As a % |
| Change |
| ||||||
Research and development |
| $ | 15,767 |
| 1.3 | % | $ | 15,886 |
| 1.3 | % | $ | (119 | ) | $ | 29,655 |
| 1.2 | % | $ | 31,264 |
| 1.3 | % | $ | (1,609 | ) |
Selling |
| 38,889 |
| 3.2 | % | 45,202 |
| 3.7 | % | (6,313 | ) | 79,250 |
| 3.3 | % | 90,296 |
| 3.7 | % | (11,046 | ) | ||||||
General and administrative |
| 62,076 |
| 5.1 | % | 49,740 |
| 4.2 | % | 12,336 |
| 127,038 |
| 5.3 | % | 117,741 |
| 4.9 | % | 9,297 |
| ||||||
Total |
| $ | 116,732 |
| 9.6 | % | $ | 110,828 |
| 9.2 | % | $ | 5,904 |
| $ | 235,943 |
| 9.8 | % | $ | 239,301 |
| 9.9 | % | $ | (3,358 | ) |
Quarter.
In total, operating expenses increased $5,904 from the prior year period. Research and development costs were relatively consistent with the prior year period and selling expenses were lower driven by Aerospace Systems and Missile Products to coincide with lower sales. These decreases were offset by higher general and administrative expenses resulting from higher pension expense and additional operating expenses generated for Blackhawk subsequent to the April 2010 acquisition. In addition, general and administrative expenses were lower in the prior year because of a decrease in the provision for bad debts resulting from a customer emerging from bankruptcy.
Six Months.
Operating expenses decreased $3,358 from the prior year period. This decrease was attributable to a reduction in research and development and general and administrative cost management initiatives put into place within Aerospace Systems to coincide with decreasing sales. Selling expenses also decreased consistent with lower sales within both Aerospace Systems and Missile Products. These decreases were partially offset by higher pension expense, lack of a decrease in the provision for bad debts that occurred in the prior year, as discussed above, and higher expenses generated for Blackhawk subsequent to the April 2010 acquisition.
Income before Interest, Income Taxes, and Noncontrolling Interest
|
| Quarters Ended |
| Six Months Ended |
| ||||||||||||||
|
| October 3, |
| October 4, |
| Change |
| October 3, |
| October 4, |
| Change |
| ||||||
Aerospace Systems |
| $ | 38,765 |
| $ | 40,529 |
| $ | (1,764 | ) | $ | 74,564 |
| $ | 81,395 |
| $ | (6,831 | ) |
Armament Systems |
| 53,495 |
| 29,246 |
| 24,249 |
| 103,136 |
| 71,891 |
| 31,245 |
| ||||||
Missile Products |
| 11,776 |
| 16,479 |
| (4,703 | ) | 28,300 |
| 33,033 |
| (4,733 | ) | ||||||
Security and Sporting |
| 32,289 |
| 37,721 |
| (5,432 | ) | 65,265 |
| 60,104 |
| 5,161 |
| ||||||
Corporate |
| (1,967 | ) | 10,899 |
| (12,866 | ) | (3,854 | ) | 19,823 |
| (23,677 | ) | ||||||
Total |
| $ | 134,358 |
| $ | 134,874 |
| $ | (516 | ) | $ | 267,411 |
| $ | 266,246 |
| $ | 1,165 |
|
The fluctuation in income before interest, income taxes, and noncontrolling interest from the prior year periods was due to program-related changes within the operating segments as described below.
Quarter.
Aerospace Systems. The decrease primarily relates to lower sales volume within space systems operations and higher costs associated with commercial aircraft programs.
Armament Systems. The increase relates to higher overall sales and improved margins in small caliber and energetic systems, as well as the lack of an $11,400 non-cash charge related to the TNT production facility taken in the prior year period, as previously discussed. In addition, Armament Systems received a $6,300 favorable settlement in the second quarter of fiscal 2011 related to legal action ATK initiated against the designer of the TNT production line.
Missile Products. The decrease was primarily driven by lower sales and investments made in the group’s precision missile programs.
Security and Sporting. The decrease was primarily driven by the absence of the benefit associated with a customer emerging from bankruptcy in fiscal 2010, partially offset by higher profit in tactical systems from the acquisition of Blackhawk in April 2010.
Corporate. Corporate income before interest, income taxes, and noncontrolling interest primarily reflects expenses incurred for administrative functions that are performed centrally at the corporate headquarters, pension expense, and the elimination of intercompany profits. The decrease from the prior year is driven by higher pension expense, slightly offset by cost-management initiatives.
Six Months.
Aerospace Systems. The decrease primarily relates to lower sales within space systems operations and higher costs associated with commercial aircraft programs.
Armament Systems. The increase primarily relates to higher overall sales and improved margins in small caliber and energetic systems, as well as the lack of an $11,400 non-cash charge related to the TNT production facility taken in the prior year period. In addition, Armament Systems received a $6,300 favorable settlement in the second quarter of fiscal 2011 related to legal action ATK initiated against the designer of the TNT production line.
Missile Products. The decrease was primarily driven by lower sales and investments made in the group’s precision missile programs.
Security and Sporting. The increase was primarily driven by higher sales and improved margins in commercial products as well as higher profit in tactical systems from the acquisition of Blackhawk in April 2010.
Corporate. Corporate income before interest, income taxes, and noncontrolling interest primarily reflects expenses incurred for administrative functions that are performed centrally at the corporate headquarters, pension expense, and the elimination of intercompany profits. The decrease from the prior year is driven by higher pension expense, slightly offset by cost-management initiatives.
Net Interest Expense
Quarter.
Net interest expense for the quarter ended October 3, 2010 was $20,287, an increase of $1,050 compared to $19,237 in the comparable quarter of fiscal 2010 primarily due to the issuance of new debt during the quarter which increased the amount outstanding and ATK’s average borrowing rate, as well as the $936 write-off of the remaining deferred debt issuance costs associated with our Term A Loan. These increases were partially offset by the reduction of $1,252 in non-cash amortization of the debt discount (which declined primarily because amortization for the 2.75% Convertible Notes due 2024 was complete in August 2009, the first date that holders of these notes could have required ATK to repurchase the notes).
Six Months.
Net interest expense for the six months ended October 3, 2010 was $37,916, a decrease of $2,170 compared to $40,086 in the comparable period of fiscal 2010 primarily due to the reduction of $3,269 in non-cash amortization of the debt discount (which
declined primarily because amortization for the 2.75% Convertible Notes due 2024 was complete in August 2009, the first date that holders of these notes could have required ATK to repurchase the notes), partially offset by the issuance of new debt during fiscal 2011 which increased the amount outstanding and ATK’s average borrowing rate, as well as the $936 write-off of the remaining deferred debt issuance costs associated with our Term A Loan.
Income Tax Provision
|
| Quarters Ended |
| Six Months Ended |
| ||||||||||||||||||||||
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| October 3, |
| Effective |
| October 4, |
| Effective |
| Change |
| October 3, |
| Effective |
| October 4, |
| Effective |
| Change |
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Income tax provision |
| $ | 16,686 |
| 14.6 | % | $ | 43,020 |
| 37.2 | % | $ | (26,334 | ) | $ | 57,333 |
| 25.0 | % | $ | 84,060 |
| 37.2 | % | $ | (26,727 | ) |
ATK’s provision for income taxes includes both federal and state income taxes. Income tax provisions for interim periods are based on estimated effective annual income tax rates.
Quarter.
The income tax provisions for the quarters ended October 3, 2010 and October 4, 2009 represent effective tax rates of 14.6% and 37.2%, respectively. The decrease in the rate from the prior year quarter is primarily due to the settlement of the examination of the fiscal 2007 and 2008 tax returns, increased benefits from the domestic manufacturing deduction, and a lower state tax rate partially offset by lack of the federal research and development tax credit.
Six Months.
The income tax provisions for the six months ended October 3, 2010 and October 4, 2009 represent effective tax rates of 25.0% and 37.2%, respectively. The decrease in the rate from the prior year period is primarily due to the settlement of the examination of the fiscal 2007 and 2008 tax returns, increased benefits from the domestic manufacturing deduction, and a lower state tax rate partially offset by lack of the federal research and development tax credit.
On July 13, 2010, ATK settled the examination of the fiscal 2007 and 2008 tax returns with the IRS. This settlement resulted in the recognition of $22,289 of tax benefits in the second quarter of fiscal 2011. This benefit includes the federal and state impact from the closure of the federal audit as well as a reduction to the reserves for subsequent years.
ATK or one of its subsidiaries files income tax returns in the U.S. federal, various U.S. state, and foreign jurisdictions. With few exceptions, ATK is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2004. As of October 3, 2010, the IRS had completed the audits of ATK through fiscal 2008. We believe appropriate provisions for all outstanding issues have been made for all remaining open years in all jurisdictions.
Although the timing and outcome of audit settlements are uncertain, it is reasonably possible that a $741 reduction of the uncertain tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings up to $309 based on current estimates.
The federal R&D tax credit expired on December 31, 2009. If the federal R&D tax credit is retroactively extended there would be a favorable impact to ATK’s fiscal 2011 effective income tax rate.
Net Income
Quarter.
Net income for the quarter ended October 3, 2010 was $97,385, an increase of $24,768 compared to $72,617 in the second quarter of fiscal 2010. This increase was due to an increase in gross profit of $5,388 and a $26,334 decrease in income tax expenses, partially offset by higher operating expenses of $5,904 and higher net interest expense of $1,050.
Six Months.
Net income for the six months ended October 3, 2010 was $172,162, an increase of $30,062 compared to $142,100 in the comparable period of fiscal 2010. This increase was due to decreases in income tax expenses of $26,727, operating expenses of $3,358, and net interest expense of $2,170. These increases in net income were partially offset by a decrease of $2,193 in gross profit.
Noncontrolling Interest
The noncontrolling interest in each period represents the noncontrolling 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.
Liquidity and Capital Resources
ATK manages its business to maximize operating cash flows as the primary source of liquidity. In addition to cash on hand and cash generated by operations, sources of liquidity include a committed credit facility, long-term borrowings, and access to the public debt and equity markets. ATK uses its cash to fund its investments in its existing core businesses, acquisition activity, share repurchases, and other activities.
Cash Flow Summary
ATK’s cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows for the six months ended October 3, 2010 and October 4, 2009 are summarized as follows:
|
| October 3, |
| October 4, |
| Change |
| |||
Cash flows provided by (used for) operating activities |
| $ | 12,227 |
| $ | (47,434 | ) | $ | 59,661 |
|
Cash flows used for investing activities |
| (225,380 | ) | (60,878 | ) | (164,502 | ) | |||
Cash flows provided by (used for) financing activities |
| 84,920 |
| (3,409 | ) | 88,329 |
| |||
Net cash flows |
| $ | (128,233 | ) | $ | (111,721 | ) | $ | (16,512 | ) |
Operating Activities.
Net cash provided by operating activities was $12,227 compared to a use of cash of $47,434 in the prior year period. This improvement was primarily due to the absence of the $150,000 funding payment to the pension trust in fiscal 2010 and an increase in net income of $30,062. These decreases in the use of cash were partially offset by an $81,076 increase in cash used for working capital to support higher commercial aerospace sales which is driving the longterm receivable balances higher, more cash used to pay taxes in the current period, and the repayment of a government grant.
Cash used for working capital is defined as net receivables plus long-term receivables plus net inventories, less accounts payables and contract advances.
Investing Activities.
Net cash used for investing activities increased by $164,502 primarily due to the $172,251 paid in fiscal 2011 to acquire Blackhawk. This increase was partially offset by a decrease in the amount of cash used for capital expenditures in fiscal 2011, as well as the lack of $5,002 of cash received in September 2009 related to a preliminary purchase price adjustment for the fiscal 2009 acquisition of Eagle Industries.
Financing Activities.
Net cash provided by financing activities increased by $88,329 over the prior year primarily due to $350,000 in proceeds received from the issuance of the 6.875% Senior Subordinated Notes. This cash inflow was partially offset by $257,813 of cash used to pay-down and extinguish the Term A Loan, as discussed further below. ATK also paid $5,819 in cash for debt issuance costs during fiscal 2011.
Liquidity
In addition to ATK’s normal operating cash requirements, the Company’s principal future cash requirements will be to fund capital expenditures, debt repayments, employee benefit obligations, share repurchases, dividends, and any strategic acquisitions. 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. ATK’s debt service requirements over the next two years consist of the redemption of its 2.75% Convertible Notes due 2024 in October 2010, principal payments due under the new Senior Credit Facility, and the maturity of its 2.75% Convertible Notes due 2011 in fiscal year 2012, as discussed further below. ATK’s other debt service requirements consist of interest expense on its debt. Additional cash may be required to repurchase or convert any or all of the convertible notes under certain circumstances.
On November 4, 2010, ATK announced that its Board of Directors has declared the Company’s first quarterly cash dividend. The $0.20 per share dividend will be payable on March 4, 2011, to shareholders of record on February 8, 2011. The payment and amount of any future dividends are at the discretion of the Board of Directors and will be based on a number of factors, including our earnings, liquidity position, financial condition, tone of business, capital requirements, credit ratings and the availability and cost of obtaining new debt. We cannot be certain that ATK will continue to declare dividends in the future and as such, the amount and timing of any future dividends are not determinable.
Based on ATK’s current financial condition, management believes that ATK’s cash position, combined with anticipated generation of cash flows and the availability of funding, if needed, through ATK’s revolving credit facilities, access to debt and equity markets, as well as potential future sources of funding including additional bank financing, will be adequate to fund future growth as well as to service ATK’s currently anticipated long-term debt and pension obligations, make capital expenditures, and fund any share repurchases and payment of dividends over the next 12 months.
ATK’s access to liquidity sources has not been materially impacted by the current credit environment, and ATK does not expect that it will be materially impacted in the near future. There can be no assurance, however, that the cost or availability of future borrowings, if any, will not be materially impacted by capital market conditions. On October 7, 2010, ATK entered into a Second Amended and Restated Credit Agreement (the “New Senior Credit Facility”), which is comprised of a Term A Loan of $400,000 and a $600,000 Revolving Credit Facility, both of which mature in 2015. The Term A Loan is subject to annual principal payments of $20,000 in each of the first and second years and $40,000 in each of the third, fourth, and fifth years, paid on a quarterly basis, with the balance due on October 7, 2015. ATK will incur higher interest costs under its New Senior Credit Facility than were incurred under the prior Senior Credit Facility, due to changes in capital market conditions.
Long-Term Debt and Credit Facilities
As of October 3, 2010 ATK had actual total indebtedness of $1,490,743 and the $500,000 Revolving Credit Facility provided for the potential of additional borrowings up to $339,543. There were no outstanding borrowings under the Revolving Credit Facility as of October 3, 2010, although ATK had outstanding letters of credit of $160,457 which reduced amounts available under the facility.
ATK’s indebtedness at October 3, 2010 is comprised of the Company’s Senior Credit Facility which consists of a Term A Loan and a Revolving Credit Facility, the 2.75% Convertible Senior Subordinated Notes due 2011 (“the 2.75% Convertible Notes due 2011”), the 6.75% Senior Subordinated Notes due 2016 (“the 6.75% Notes due 2016”), the 6.875% Senior Subordinated Notes due 2020 (“the 6.875% Notes due 2020”), the 2.75% Convertible Senior Subordinated Notes due 2024 (“the 2.75% Convertible Notes due 2024”), and the 3.00% Convertible Senior Subordinated Notes due 2024 (“3.00% Convertible Notes due 2024”). See Note 11 “Long-Term Debt” to the consolidated financial statements in Part II, Item 8 for a detailed discussion of these borrowings.
Long-term debt, including the current portion, consisted of the following:
|
| October 3, 2010 |
| March 31, 2010 |
| ||
Senior Credit Facility dated March 29, 2007: |
|
|
|
|
| ||
Term A Loan due 2012 |
| $ | — |
| $ | 261,250 |
|
Revolving Credit Facility due 2012 |
| — |
| — |
| ||
2.75% Convertible Senior Subordinated Notes due 2011 |
| 300,000 |
| 300,000 |
| ||
6.75% Senior Subordinated Notes due 2016 |
| 400,000 |
| 400,000 |
| ||
6.875% Senior Subordinated Notes due 2020 |
| 350,000 |
| — |
| ||
2.75% Convertible Senior Subordinated Notes due 2024 |
| 279,763 |
| 279,763 |
| ||
3.00% Convertible Senior Subordinated Notes due 2024 |
| 199,453 |
| 199,453 |
| ||
Principal amount of long-term debt |
| 1,529,216 |
| 1,440,466 |
| ||
Less: Unamortized discounts |
| 38,473 |
| 46,912 |
| ||
Carrying amount of long-term debt |
| 1,490,743 |
| 1,393,554 |
| ||
Less: current portion |
| 300,000 |
| 13,750 |
| ||
Carrying amount of long-term debt, excluding current portion |
| $ | 1,190,743 |
| $ | 1,379,804 |
|
New Senior Credit Facility
As discussed above, on October 7, 2010, ATK entered into the New Senior Credit Facility. The Term A Loan and Revolving Credit Facility both mature in 2015. The Term A Loan is subject to annual principal payments of $20,000 in each of the first and second years and $40,000 in each of the third, fourth, and fifth years, paid on a quarterly basis, with the balance due on October 7, 2015.
Substantially all domestic, tangible and intangible assets of ATK and its subsidiaries are pledged as collateral under the New Senior Credit Facility. Borrowings under the Senior Credit Facility bear interest at a rate equal to either the sum of a base rate plus a margin or the sum of a Eurodollar rate plus a margin. Each margin is based on ATK’s senior secured credit ratings. Based on ATK’s current credit rating, the current base rate margin in 1.25% and the current Eurodollar margin is 2.25%. ATK must also pay an annual commitment fee on the unused portion of the Revolving Credit Facility.
It is currently expected that there will be no borrowings against the Revolving Credit Facility at March 31, 2011.
2.75% Convertible Notes due 2011
ATK’s 2.75% Convertible Notes due 2011 mature on September 15, 2011. Interest on these notes is payable on March 15 and September 15 of each year. 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) in the event that the ATK stock price exceeds certain levels, upon the occurrence of certain corporate transactions, or 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.
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. 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. 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 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.
6.75% Notes due 2016
ATK’s 6.75% Notes 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. 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 make-whole premium.
6.875% Notes due 2020
ATK’s 6.875% Notes mature on September 15, 2020. These notes are general unsecured obligations. Interest on these notes accrues at a rate of 6.875% per annum and is payable semi-annually on September 15 and March 15 of each year. ATK has the right to redeem some or all of these notes from time to time on or after September 15, 2015, at specified redemption prices. Prior to September 15, 2015, 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 make-whole premium.
2.75% Convertible Notes due 2024
In September 2010, ATK notified holders of its 2.75% Convertible Notes due 2024, that were to mature on February 15, 2024, of its intention to redeem the notes on October 14, 2010. Following notification of the redemption, holders of the notes had the right to convert their notes at a conversion rate of 12.5843 shares of ATK’s common stock per $1 principal amount (a conversion price of $79.46 per share). Of the $279,763 aggregate principal amount outstanding, $279,735 were redeemed, which ATK paid in cash. Holders of the remaining $28 elected to convert their Notes and will be paid following the end of the conversion period in November.
3.00% Convertible Notes due 2024
ATK’s 3.00% Convertible Notes due 2024 mature on August 15, 2024. Interest on these notes is payable on February 15 and August 15 of each year. Beginning August 20, 2014, ATK will be required to pay contingent interest at a rate driven by the average trading price of these notes if the trading price reaches specified levels during the measurement period.
ATK may redeem 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 the Notes on August 15, 2014 and August 15, 2019. Note holders may also convert their notes at a conversion rate of 12.5392 shares of ATK’s common stock per $1 principal amount of these notes (a conversion price of $79.75 per share) in the event that the ATK stock price exceeds certain levels, if ATK were to call these notes for redemption, or upon the occurrence of certain corporate transactions. 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.
Rank and Guarantees
The 3.00% Convertible Notes, the 2.75% Convertible Notes due 2024, the 2.75% Convertible Notes due 2011, the 6.875% Notes due 2020, and the 6.75% Notes due 2016 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. These guarantees are senior subordinated obligations of the applicable subsidiary guarantors.
Covenants
ATK’s Senior Credit Facility imposes 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. The Senior Credit Facility also requires that ATK meet and maintain the following financial ratios:
|
| Senior Leverage |
| Leverage Ratio |
| Interest |
|
Requirement |
| £2.50 |
| £4.00 |
| ³3.00 |
|
Actual at October 3, 2010 |
| 0.07 |
| 2.35 |
| 12.24 |
|
The Leverage Ratio is the sum of ATK’s total debt plus financial letters of credit divided by Covenant EBITDA (which includes adjustments for items such as non-recurring or extraordinary noncash expenses, non-cash charges related to stock-based compensation, and intangible asset impairment charges) for the past four fiscal quarters. The Senior Leverage Ratio is the sum of ATK’s senior debt plus financial letters of credit divided by Covenant EBITDA. The Interest Coverage Ratio is Covenant EBITDA divided by interest expense (excluding non-cash charges).
Many of ATK’s debt agreements contain cross-default provisions so that non-compliance with the covenants within one debt agreement could cause a default under other debt agreements as well. 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 October 3, 2010, ATK was in compliance with the financial covenants and ATK expects to be in compliance with the covenants in all of its long-term debt agreements for the foreseeable future.
The indentures governing the 6.75% Notes, the 6.875% Notes due 2020, 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. As of October 3, 2010, ATK was in compliance with the indentures and expects to be in compliance with the indentures for the foreseeable future.
Share Repurchases
In fiscal 2009, ATK repurchased 299,956 shares for $31,609 and repurchased no additional shares in fiscal 2010. See Note 14 to the consolidated financial statements in Part II, Item 8 of ATK’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010. No significant share repurchase activity is currently expected through the remainder of fiscal 2011. Any additional authorized repurchases would be subject to market conditions and ATK’s compliance with its debt covenants. ATK’s 6.75% Senior Subordinated Notes limit the aggregate sum of dividends, share repurchases, and other designated restricted payments to an amount based on ATK’s net income, stock issuance proceeds, and certain other items, less restricted payments made, since April 1, 2001. As of October 3, 2010, this limit was approximately $520,000. As of October 3, 2010, the Senior Credit Facility allows ATK to make unlimited “restricted payments” (as defined in the credit agreement), which among other items, would allow payments for future stock repurchases, as long as ATK maintains certain senior debt limits, with an annual limit, when those debt limits are not met, of $50,000 plus proceeds of any equity issuances plus 50% of net income since March 29, 2007.
Shelf Registration.
On September 8, 2010, ATK filed a shelf registration statement with the Securities and Exchange Commission allowing ATK to issue an unspecified aggregate amount of debt and/or equity securities from time to time.
Other Contractual Obligations and Commitments
There have been no material changes with respect to the contractual obligations and commitments or off-balance sheet arrangements described in ATK’s Annual Report on Form 10-K for fiscal 2010.
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.
On or about April 10, 2006, a former ATK employee filed a qui tam complaint in federal court in Utah alleging that ATK knowingly submitted claims for payment to the U.S. Government for defective LUU series illuminating flares that failed to conform to certain safety specifications and falsely certified compliance with those specifications. The lawsuit was initially filed under seal. ATK was first informed of the lawsuit by the United States Department of Justice (DOJ) on March 13, 2007. Thereafter, the DOJ intervened in the qui tam action and filed an amended complaint on November 2, 2007. On May 29, 2008, ATK filed its answer to the complaint. On March 16, 2010, the trial court issued a scheduling order setting a preliminary trial date of July 11, 2011. Discovery is underway in the case.
ATK denies any allegations of improper conduct. Based on what is known to ATK about the subject matter of the complaint, ATK does not believe that it has violated any law or regulation and believes it has valid defenses to all allegations of improper conduct. Although it is not possible at this time to predict the outcome of the litigation, ATK believes, based on all available information, that the outcome will not have a material adverse effect on its operating results, financial condition or cash flows. Some potential, however, does remain for an adverse judgment that could be material to ATK’s financial position, results of operations, or cash flows. As a result of the uncertainty regarding the outcome of this matter, no provision has been made in the financial statements with respect to this contingent liability.
U.S. Government Investigations. ATK is also subject to U.S. Government investigations from which civil, criminal, or administrative proceedings could result. Such proceedings could involve claims by the U.S. Government for fines, penalties, compensatory and treble damages, restitution, and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. ATK believes, based upon all available information, that the outcome of any such pending government investigations will not have a material adverse effect on its operating results, financial condition, or cash flows.
Environmental Liabilities. ATK’s operations and ownership or use of real property are subject to a number of federal, state, and local environmental laws and regulations, including those for discharge of hazardous materials, remediation of contaminated sites, and restoration of damage to the environment. 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,
resource restoration costs, fines, and penalties, or third-party property damage or personal injury claims, as a result of liabilities associated with past practices or violations 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 1.50% and 2.75% as of October 3, 2010 and March 31, 2010, respectively. ATK’s discount rate is calculated using the 20-year Treasury constant maturities rate, net of an estimated inflationary factor of 1.9%, rounded to the nearest quarter percent. The following is a summary of the amounts recorded for environmental remediation:
|
| October 3, 2010 |
| March 31, 2010 |
| ||||||||
|
| Liability |
| Receivable |
| Liability |
| Receivable |
| ||||
Amounts (payable) receivable |
| $ | (60,901 | ) | $ | 35,909 |
| $ | (60,908 | ) | $ | 35,622 |
|
Unamortized discount |
| 5,024 |
| (2,458 | ) | 8,724 |
| (4,280 | ) | ||||
Present value amounts (payable) receivable |
| $ | (55,877 | ) | $ | 33,451 |
| $ | (52,184 | ) | $ | 31,342 |
|
As of October 3, 2010, the estimated discounted range of reasonably possible costs of environmental remediation was $55,877 to $87,558.
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. If ATK were unable to recover those environmental remediation costs under these contracts, ATK believes these costs will be covered by Hercules Incorporated, a subsidiary of Ashland Inc., (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 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.
ATK cannot ensure that the U.S. Government, Hercules, Alcoa, 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, 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 Part I of ATK’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010.
NEW ACCOUNTING PRONOUNCEMENTS
There are no new accounting pronouncements for the quarter ended October 3, 2010.
INFLATION AND COMMODITY PRICE RISK
In management’s opinion, inflation 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 as well as rising oil and energy costs. In particular, the prices of commodity metals, such as lead, steel, zinc, and copper, continue to be volatile. These prices generally impact our small-caliber ammunition business.
With respect to ATK’s commercial products business, ATK has improved manufacturing efficiencies and has initiated price increases to mitigate the impact of increased commodity costs. ATK will continue to evaluate the need for future price changes in light of these trends, ATK’s competitive landscape, and its financial results. If commodity costs continue to change, and if ATK is unable to offset these changes with ongoing manufacturing efficiencies and price changes, ATK’s future results from operations and cash flows would be materially impacted.
Significant increases in commodities can negatively impact operating results with respect to ATK’s firm fixed-price contract to supply the DoD’s small-caliber ammunition needs. Depending on market conditions, ATK has occasionally entered into futures contracts in order to reduce the impact of metal price fluctuations. The majority of the impact has been mitigated on the new four-year contract by the terms within that contract, which is expected to continue into 2014. However, if metal prices exceed pre-determined levels, Armament Systems’ 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 material changes in ATK’s market risk during the quarter ended October 3, 2010. For additional information, refer to Item 7A of ATK’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of October 3, 2010, 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 to ensure that information required to be disclosed by ATK in reports that ATK files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports ATK files or submits is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the quarter ended October 3, 2010, 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.
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 future operating results, financial condition, or cash flows.
On or about April 10, 2006, a former ATK employee filed a qui tam complaint in federal court in Utah alleging that ATK knowingly submitted claims for payment to the U.S. Government for defective LUU series illuminating flares that failed to conform to certain safety specifications and falsely certified compliance with those specifications. The lawsuit was initially filed under seal. ATK was first informed of the lawsuit by the United States Department of Justice (DOJ) on March 13, 2007. Thereafter, the DOJ intervened in the qui tam action and filed an amended complaint on November 2, 2007. On May 29, 2008, ATK filed its answer to the complaint. On March 16, 2010, the trial court issued a scheduling order setting a preliminary trial date of July 11, 2011. Discovery is underway in the case.
ATK denies any allegations of improper conduct. Based on what is known to ATK about the subject matter of the complaint, ATK does not believe that it has violated any law or regulation and believes it has valid defenses to all allegations of improper conduct. Although it is not possible at this time to predict the outcome of the litigation, ATK believes, based on all available information, that the outcome will not have a material adverse effect on its operating results, financial condition or cash flows. Some potential, however, does remain for an adverse judgment that could be material to ATK’s financial position, results of operations, or cash flows. As a result of the uncertainty regarding the outcome of this matter, no provision has been made in the financial statements with respect to this contingent liability.
ATK is also subject to U.S. Government investigations from which civil, criminal, or administrative proceedings could result. Such proceedings could involve claims by the U.S. Government for fines, penalties, compensatory and treble damages, restitution, and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. ATK believes, based upon all available information, that the outcome of any such pending government investigations will not have a material adverse effect on its 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 Part I of ATK’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010 and Item 1A of Part II of ATK’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2010, describe all known material 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. The discussion below includes updates to those risk factor disclosures.
ATK’s business could be adversely impacted by reductions or changes in NASA or U.S. Government military spending.
As the majority of ATK’s sales are to the U.S. Government and its prime contractors, ATK depends heavily on the contracts underlying these programs. Significant portions of ATK’s sales come from a small number of contracts. ATK’s top five contracts, all of which are contracts with the U.S. Government, accounted for approximately 30% of fiscal 2010 sales. ATK’s military small-caliber ammunition contract contributed approximately 13% of total fiscal 2010 sales. The loss or significant reduction of a material program in which ATK participates could have a material adverse effect on ATK’s operating results, financial condition, or cash flows.
ATK’s small-caliber ammunition operations for the U.S. military and U.S. allies are conducted at the Lake City Army Ammunition Plant (“Lake City”) in Independence, MO. Lake City is the Army’s principal small-caliber ammunition production facility and is the primary supplier of the U.S. military’s small-caliber ammunition needs. ATK took over operation of this facility on April 1, 2000 and is
responsible for the operation and management, including leasing excess space to third parties in the private sector. ATK had a 10-year production contract to supply the Army’s small-caliber ammunition needs that expired April 1, 2010. ATK has reached agreement with the U.S. Army on a four-year supply contract as the primary supplier of small-caliber ammunition to the U.S. DoD for both its training and tactical needs. Production on the new contract is expected to continue into fiscal 2014. During this same period, ATK will complete government funded projects for modernization of the facility. ATK also has a facilities-use contract for the plant that expires in April 2025. Although the facilities-use contract expires 11 years after the plant production contract, if the plant production contract is not renewed, ATK believes the U.S. Army would relieve ATK of all of its obligations under the facilities-use contract. Future ATK production under this contract or levels of government spending cannot be predicted with certainty.
In 2006, ATK was chosen by NASA to design, develop, and manufacture the first-stage for the next-generation Ares I Crew Launch Vehicle, which is intended to replace the Space Shuttle launch system scheduled for retirement from service as early as 2010. As the prime contractor for the first-stage, in addition to a new five-segment motor derived from the Space Shuttle’s four-segment Reusable Solid Rocket Motor (“RSRM”), ATK is also responsible for thrust vector control, stage separation motors, forward and aft interface structures, ordnance, and parachute recovery systems. ATK believes that its RSRM products used on the Space Shuttle and the Ares I Crew Launch Vehicle for NASA’s Constellation space exploration program will be important to achieving affordable launch systems for NASA. In August 2009, NASA released a study, referred to as the Augustine Report, which formed the basis of the Administration’s budget released on February 1, 2010. The Administration’s released budget included the proposed cancellation of NASA’s Constellation space exploration program. Congress has the responsibility to determine, as part of the 2011 authorization and appropriation legislative process, what the policy and funding levels for NASA will be and ultimately decide on the future funding level for ATK’s work in the future Exploration program. Congress passed a favorable NASA Authorization bill before adjourning in September, however the Appropriations bill is still being reviewed as part of NASA’s 2011 budgeting process. Current law continues funding for the Constellation program under a continuing resolution and can be modified only by a subsequent appropriations Act by Congress. At this time the impacts of the Administration’s budget proposal are still being reviewed. However, if Congress significantly changes NASA’s budget or accepts the proposed cancellation of the Constellation program and related contracts without alternative replacement work in Exploration, there could be a material adverse effect on ATK’s operating results, financial condition, and cash flows, including the potential for substantial termination liability.
In fiscal 2010, NASA sales relating to the Constellation contracts were approximately $370 million and as of October 3, 2010 ATK had approximately:
· $119 million of billed and unbilled receivables directly related to the program,
· $103 million of net property, plant, and equipment and other assets related to the Constellation and other contracts, and
· $515 million of goodwill recorded related to the Space Systems Operations reporting unit.
All of these assets would be subject to impairment testing should there be significant changes made to the Constellation contracts in future periods.
U.S. Government contracts are also dependent on the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take more than one year. As a result, at the outset of a major program, the contract is usually incrementally funded, and additional monies are normally committed to the contract by the procuring agency only as Congress makes appropriations for future fiscal years. In addition, most U.S. Government contracts are subject to modification if funding is changed. Any failure by Congress to appropriate additional funds to any program in which ATK participates, or any contract modification as a result of funding changes, could materially delay or terminate the program. This could have a material adverse effect on ATK’s operating results, financial condition, or cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
Period |
| Total Number |
| Average Price Paid per |
| Total Number of Shares |
| Maximum Number of |
| |
July 5 – August 1 |
| 1,128 |
| $ | 68.05 |
| — |
|
|
|
August 2 – August 29 |
| 27,312 |
| 77.83 |
| — |
|
|
| |
August 30 – October 3 |
| 937 |
| 73.18 |
| — |
|
|
| |
Fiscal quarter ended October 3, 2010 |
| 29,377 |
| $ | 77.30 |
| — |
| 4,700,044 |
|
(1) All of the shares purchased represent shares withheld to pay taxes upon vesting of restricted stock or payment of performance shares earned, which shares were issued under ATK’s stock-based incentive compensation plans.
(2) On August 5, 2008, ATK’s Board authorized the repurchase of 5 million shares. The Board has currently determined that the repurchase program will serve primarily to offset dilution from the Company’s employee and director benefit compensation programs, but it may also be used for other corporate purposes, as determined by the Board. During fiscal 2009, ATK repurchased 299,956 shares for $31.6 million. ATK repurchased no shares during fiscal 2010 or the quarter ended October 3, 2010. As of October 3, 2010, there were 4,700,044 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. (Removed and Reserved)
None.
Exhibit |
| Description of Exhibit (and document from |
|
|
|
4.1 |
| Second Supplemental Indenture, dated September 13, 2010, among the Registrant, as issuer, certain subsidiaries of the Registrant, as guarantors, and The Bank of New York Mellon Trust Company, N.A., as trustee (Exhibit 4.1 to Form 8-K dated September 8, 2010). |
10.1 |
| Second Amended and Restated Credit Agreement, dated as of October 7, 2010, among the Registrant as the Borrower; the Lenders named therein; Bank of America, N.A., as Administrative Agent; The Royal Bank of Scotland plc, U.S. Bank National Association, Wells Fargo Bank, National Association, and SunTrust Bank as Co-Syndication Agents; Banc of America Securities LLC, RBS Securities Inc., U.S. Bank National Association, Wells Fargo Securities, LLC, and SunTrust Robinson Humphrey, Inc. as Joint Lead Arrangers; and Banc of America Securities LLC, as Sole Bookrunning Manager (Exhibit 10.1 to Form 8-K dated October 7, 2010). |
31.1 |
| Certification of Chief Executive Officer. |
31.2 |
| Certification of Chief Financial Officer. |
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. |
101.INS |
| XBRL Instance Document |
101.SCH |
| XBRL Taxonomy Extension Schema Document |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB |
| XBRL Taxonomy Extension Labels Linkbase Document |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
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: November 9, 2010 | 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) |