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 |
For the quarterly period ended January 1, 2012
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
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.) |
|
|
|
1300 Wilson Boulevard, Suite 400 Arlington, Virginia |
| 22209-2307 |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: (703) 412-5960
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 January 29, 2012, 33,012,079 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 |
| NINE MONTHS ENDED |
| ||||||||
(In thousands except per share data) |
| January 1, |
| January 2, |
| January 1, |
| January 2, |
| ||||
Sales |
| $ | 1,117,484 |
| $ | 1,129,290 |
| $ | 3,302,157 |
| $ | 3,540,676 |
|
Cost of sales |
| 871,680 |
| 896,490 |
| 2,549,873 |
| 2,804,521 |
| ||||
Gross profit |
| 245,804 |
| 232,800 |
| 752,284 |
| 736,155 |
| ||||
Operating expenses: |
|
|
|
|
|
|
|
|
| ||||
Research and development |
| 14,624 |
| 12,733 |
| 41,711 |
| 42,388 |
| ||||
Selling |
| 39,989 |
| 39,011 |
| 121,421 |
| 118,262 |
| ||||
General and administrative |
| 85,767 |
| 54,628 |
| 205,781 |
| 181,666 |
| ||||
Income before interest, income taxes, and noncontrolling interest |
| 105,424 |
| 126,428 |
| 383,371 |
| 393,839 |
| ||||
Interest expense |
| (19,783 | ) | (25,234 | ) | (69,933 | ) | (63,278 | ) | ||||
Interest income |
| 203 |
| 190 |
| 431 |
| 318 |
| ||||
Income before income taxes and noncontrolling interest |
| 85,844 |
| 101,384 |
| 313,869 |
| 330,879 |
| ||||
Income tax provision |
| 36,085 |
| 31,108 |
| 112,308 |
| 88,440 |
| ||||
Net income |
| 49,759 |
| 70,276 |
| 201,561 |
| 242,439 |
| ||||
Less net income attributable to noncontrolling interest |
| 74 |
| 95 |
| 368 |
| 367 |
| ||||
Net income attributable to Alliant Techsystems Inc. |
| $ | 49,685 |
| $ | 70,181 |
| $ | 201,193 |
| $ | 242,072 |
|
|
|
|
|
|
|
|
|
|
| ||||
Alliant Techsystems Inc.’s earnings per common share: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 1.52 |
| $ | 2.11 |
| $ | 6.10 |
| $ | 7.28 |
|
Diluted |
| 1.51 |
| 2.09 |
| 6.06 |
| 7.21 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Alliant Techsystems Inc.’s weighted-average number of common shares outstanding: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| 32,781 |
| 33,320 |
| 32,966 |
| 33,267 |
| ||||
Diluted |
| 32,955 |
| 33,625 |
| 33,181 |
| 33,586 |
|
See Notes to the Condensed Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Amounts in thousands except share data) |
| January 1, 2012 |
| March 31, 2011 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 355,481 |
| $ | 702,274 |
|
Net receivables |
| 961,184 |
| 945,611 |
| ||
Net inventories |
| 333,226 |
| 242,028 |
| ||
Income tax receivable |
| — |
| 22,228 |
| ||
Deferred income tax assets |
| 70,990 |
| 65,843 |
| ||
Other current assets |
| 52,631 |
| 81,249 |
| ||
Total current assets |
| 1,773,512 |
| 2,059,233 |
| ||
Net property, plant, and equipment |
| 601,343 |
| 587,749 |
| ||
Goodwill |
| 1,251,536 |
| 1,251,536 |
| ||
Deferred income tax assets |
| 97,673 |
| 100,519 |
| ||
Deferred charges and other non-current assets |
| 527,003 |
| 444,808 |
| ||
Total assets |
| $ | 4,251,067 |
| $ | 4,443,845 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Current portion of long-term debt |
| $ | 25,000 |
| $ | 320,000 |
|
Accounts payable |
| 224,991 |
| 292,281 |
| ||
Contract advances and allowances |
| 120,638 |
| 121,927 |
| ||
Accrued compensation |
| 105,195 |
| 135,442 |
| ||
Accrued income taxes |
| 19,066 |
| — |
| ||
Other accrued liabilities |
| 281,974 |
| 193,836 |
| ||
Total current liabilities |
| 776,864 |
| 1,063,486 |
| ||
Long-term debt |
| 1,280,360 |
| 1,289,709 |
| ||
Postretirement and postemployment benefits liabilities |
| 118,868 |
| 126,012 |
| ||
Accrued pension liability |
| 636,671 |
| 671,356 |
| ||
Other long-term liabilities |
| 118,006 |
| 127,160 |
| ||
Total liabilities |
| 2,930,769 |
| 3,277,723 |
| ||
Commitments and contingencies (Note 15) |
|
|
|
|
| ||
Common stock—$.01 par value: |
|
|
|
|
| ||
Authorized—180,000,000 shares |
|
|
|
|
| ||
Issued and outstanding—32,976,504 shares at January, 1, 2012 and 33,519,072 shares at March 31, 2011 |
| 330 |
| 335 |
| ||
Additional paid-in-capital |
| 556,808 |
| 559,279 |
| ||
Retained earnings |
| 2,186,923 |
| 2,005,651 |
| ||
Accumulated other comprehensive loss |
| (777,751 | ) | (787,077 | ) | ||
Common stock in treasury, at cost— 8,578,945 shares held at January 1, 2012 and 8,036,377 shares held at March 31, 2011 |
| (655,744 | ) | (621,430 | ) | ||
Total Alliant Techsystems Inc. stockholders’ equity |
| 1,310,566 |
| 1,156,758 |
| ||
Noncontrolling interest |
| 9,732 |
| 9,364 |
| ||
Total stockholders’ equity |
| 1,320,298 |
| 1,166,122 |
| ||
Total liabilities and stockholders’ equity |
| $ | 4,251,067 |
| $ | 4,443,845 |
|
See Notes to the Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
| NINE MONTHS ENDED |
| ||||
(In thousands) |
| January 1, 2012 |
| January 2, 2011 |
| ||
Operating activities |
|
|
|
|
| ||
Net income |
| $ | 201,561 |
| $ | 242,439 |
|
Adjustments to net income to arrive at cash used for operating activities: |
|
|
|
|
| ||
Depreciation |
| 69,165 |
| 71,683 |
| ||
Amortization of intangible assets |
| 8,357 |
| 8,388 |
| ||
Amortization of debt discount |
| 10,651 |
| 12,795 |
| ||
Amortization of deferred financing costs |
| 3,753 |
| 3,766 |
| ||
Deferred income taxes |
| (7,945 | ) | 14,703 |
| ||
(Gain) loss on disposal of property |
| (4,679 | ) | 2,560 |
| ||
Share-based plans expense |
| 8,321 |
| 7,648 |
| ||
Excess tax benefits from share-based plans |
| (23 | ) | (465 | ) | ||
Changes in assets and liabilities: |
|
|
|
|
| ||
Net receivables |
| (112,251 | ) | (221,033 | ) | ||
Net inventories |
| (91,197 | ) | (33,496 | ) | ||
Accounts payable |
| (55,274 | ) | (28,094 | ) | ||
Contract advances and allowances |
| (1,289 | ) | 15,698 |
| ||
Accrued compensation |
| (40,852 | ) | (61,438 | ) | ||
Accrued income taxes |
| 37,500 |
| (41,384 | ) | ||
Pension and other postretirement benefits |
| 25,780 |
| 66,638 |
| ||
Other assets and liabilities |
| 73,162 |
| 66,297 |
| ||
Cash provided by operating activities |
| 124,740 |
| 126,705 |
| ||
Investing activities |
|
|
|
|
| ||
Capital expenditures |
| (97,916 | ) | (72,986 | ) | ||
Acquisition of business (Note 4) |
| — |
| (172,251 | ) | ||
Proceeds from the disposition of property, plant, and equipment |
| 7,329 |
| 333 |
| ||
Cash used for investing activities |
| (90,587 | ) | (244,904 | ) | ||
Financing activities |
|
|
|
|
| ||
Payments made on bank debt |
| (15,000 | ) | (8,438 | ) | ||
Payments made to extinguish debt |
| (300,000 | ) | (537,576 | ) | ||
Proceeds from issuance of long-term debt |
| — |
| 750,000 |
| ||
Payments made for debt issue costs |
| — |
| (19,893 | ) | ||
Purchase of treasury shares |
| (49,991 | ) | — |
| ||
Dividends paid |
| (19,921 | ) | — |
| ||
Proceeds from employee stock compensation plans |
| 3,943 |
| 7,645 |
| ||
Excess tax benefits from share-based plans |
| 23 |
| 465 |
| ||
Cash (used for) provided by financing activities |
| (380,946 | ) | 192,203 |
| ||
(Decrease) Increase in cash and cash equivalents |
| (346,793 | ) | 74,004 |
| ||
Cash and cash equivalents - beginning of period |
| 702,274 |
| 393,893 |
| ||
Cash and cash equivalents - end of period |
| $ | 355,481 |
| $ | 467,897 |
|
|
|
|
|
|
| ||
Supplemental Cash Flow Disclosure: |
|
|
|
|
| ||
Noncash investing activity: |
|
|
|
|
| ||
Capital expenditures included in accounts payable |
| $ | 2,102 |
| $ | 5,423 |
|
See Notes to the Condensed Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(Amounts in thousands except share |
| Common Stock |
| Additional |
| Retained |
| Accumulated |
| Treasury |
| Noncontrolling |
| Total |
| |||||||||
data) |
| Shares |
| Amount |
| Capital |
| Earnings |
| Loss |
| Stock |
| Interest |
| Equity |
| |||||||
For the nine months ended January 1, 2012: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance at March 31, 2011 |
| 33,519,072 |
| $ | 335 |
| $ | 559,279 |
| $ | 2,005,651 |
| $ | (787,077 | ) | $ | (621,430 | ) | $ | 9,364 |
| $ | 1,166,122 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
|
|
| — |
| — |
| 201,193 |
| — |
| — |
| 368 |
| 201,561 |
| |||||||
Other comprehensive income (see Note 8): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Adjustments, net |
|
|
| — |
| — |
| — |
| 9,326 |
| — |
| — |
| 9,326 |
| |||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 210,887 |
| |||||||
Exercise of stock options |
| 71,919 |
| — |
| (1,592 | ) | — |
| — |
| 5,535 |
| — |
| 3,943 |
| |||||||
Restricted stock grants |
| 72,646 |
| — |
| (7,188 | ) | — |
| — |
| 7,188 |
| — |
| — |
| |||||||
Share-based compensation |
| — |
| — |
| 8,339 |
| — |
| — |
| — |
| — |
| 8,339 |
| |||||||
Treasury stock purchased |
| (742,000 | ) | — |
| — |
| — |
| — |
| (49,991 | ) | — |
| (49,991 | ) | |||||||
Performance shares issued net of treasury stock withheld |
| 59,638 |
| — |
| (7,105 | ) | — |
| — |
| 4,773 |
| — |
| (2,332 | ) | |||||||
Tax benefit related to share based plans and other |
| — |
| — |
| 3,557 |
| — |
| — |
| — |
| — |
| 3,557 |
| |||||||
Dividends paid |
| — |
| — |
| — |
| (19,921 | ) | — |
| — |
| — |
| (19,921 | ) | |||||||
Employee benefit plans and other |
| (4,771 | ) | (5 | ) | 1,518 |
| — |
| — |
| (1,819 | ) | — |
| (306 | ) | |||||||
Balance at January 1, 2012 |
| 32,976,504 |
| $ | 330 |
| $ | 556,808 |
| $ | 2,186,923 |
| $ | (777,751 | ) | $ | (655,744 | ) | $ | 9,732 |
| $ | 1,320,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
For the nine months ended January 2, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
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 |
|
|
| — |
| — |
| 242,072 |
| — |
| — |
| 367 |
| 242,439 |
| |||||||
Other comprehensive income (see Note 8): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Adjustments, net |
|
|
| — |
| — |
| — |
| 36,466 |
| — |
| — |
| 36,466 |
| |||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 278,905 |
| |||||||
Exercise of stock options |
| 142,123 |
| — |
| (3,346 | ) | — |
| — |
| 10,991 |
| — |
| 7,645 |
| |||||||
Restricted stock grants |
| 82,885 |
| — |
| (6,617 | ) | — |
| — |
| 6,617 |
| — |
| — |
| |||||||
Share-based compensation |
| — |
| — |
| 7,648 |
| — |
| — |
| — |
| — |
| 7,648 |
| |||||||
Performance shares issued net of treasury stock withheld |
| 139,342 |
| — |
| (17,193 | ) | — |
| — |
| 10,689 |
| — |
| (6,504 | ) | |||||||
Tax benefit related to share based plans and other |
| — |
| — |
| 8,770 |
| — |
| — |
| — |
| — |
| 8,770 |
| |||||||
Dividends Declared. |
| — |
| — |
| — |
| (6,725 | ) | — |
| — |
| — |
| (6,725 | ) | |||||||
Employee benefit plans and other |
| (5,758 | ) | 4 |
| 239 |
| — |
| — |
| (658 | ) | — |
| (415 | ) | |||||||
Balance at January 2, 2011 |
| 33,405,610 |
| $ | 334 |
| $ | 567,547 |
| $ | 1,934,523 |
| $ | (784,620 | ) | $ | (630,233 | ) | 9,195 |
| $ | 1,096,746 |
|
See Notes to the Condensed Consolidated Financial Statements.
Alliant Techsystems Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Quarter Ended January 1, 2012
(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, 2011 (“fiscal 2011”). 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 January 1, 2012, and its results of operations for the quarters and nine months ended January 1, 2012 and January 2, 2011, and cash flows for the nine months ended January 1, 2012 and January 2, 2011.
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 fiscal 2011 Annual Report on Form 10-K.
2. New Accounting Pronouncements
On May 12, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”). ASU 2011-04 clarifies the application of existing fair value measurement requirements including: (1) the application of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, and (3) quantitative information required for fair value measurements categorized within Level 3. ASU 2011-04 also provides guidance on measuring the fair value of financial instruments managed within a portfolio, and application of premiums and discounts in a fair value measurement. In addition, ASU 2011-04 requires additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. The amendments in this guidance are to be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011 (the fourth quarter of ATK’s fiscal 2012). ATK does not believe the adoption of this ASU will have a material impact on its financial statements.
On June 16, 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, (“ASU 2011-05”). This update revises the manner in which entities must present comprehensive income in their financial statements. ASU 2011-05 gives entities the option to present total comprehensive income, the components of net income, and the components of other comprehensive income in either of the following ways: (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 is effective for fiscal years beginning after December 15, 2011 and interim periods within those years (ATK’s fiscal 2013). On December 23, 2011, the FASB deferred the effective date for the changes that related to the presentation of reclassification adjustments and their presentation in the financial statements. ATK does not believe the adoption of ASU 2011-05 will have a material impact on its financial statements.
On September 15, 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”). Under the revised guidance, entities testing goodwill for impairment will have the option to perform a qualitative assessment before calculating the fair value of their reporting units (i.e., step 1 of the goodwill impairment test under the historical rules). If entities determine, on the basis of qualitative factors, that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The new guidance does not change how goodwill is calculated or assigned to reporting units, nor does it amend the requirement to test goodwill annually or between annual tests if circumstances warrant. ASU No. 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 (ATK’s fiscal 2013). ATK does not believe the adoption of this ASU will have a material impact on its financial statements.
On December 16, 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 360), Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). The amendments in this update require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments in this guidance are to be retrospectively applied for all comparative periods presented for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods, beginning in fiscal 2014 for ATK. ATK does not believe the adoption of this ASU will have a material impact on its financial statements.
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. 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. As discussed further in Note 7, ATK has outstanding commodity forward contracts that were entered into to hedge forecasted purchases of copper and zinc.
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 January 1, 2012 |
| |||||||
|
| Fair Value Measurements Using Inputs Considered as |
| |||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| |||
Assets |
|
|
|
|
|
|
| |||
Marketable securities |
| $ | — |
| $ | 10,877 |
| $ | — |
|
Derivatives |
| — |
| 9,791 |
| — |
| |||
|
|
|
|
|
|
|
| |||
Liabilities |
|
|
|
|
|
|
| |||
Derivatives |
| $ | — |
| $ | 12,934 |
| $ | — |
|
|
| As of March 31, 2011 |
| |||||||
|
| Fair Value Measurements Using Inputs Considered as |
| |||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| |||
Assets |
|
|
|
|
|
|
| |||
Marketable securities |
| $ | — |
| $ | 9,470 |
| $ | — |
|
Derivatives |
| — |
| 49,407 |
| — |
| |||
|
|
|
|
|
|
|
| |||
Liabilities |
|
|
|
|
|
|
| |||
Derivatives |
| $ | — |
| $ | — |
| $ | — |
|
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 January 1, 2012 |
| As of March 31, 2011 |
| ||||||||
|
| Carrying |
| Fair Value |
| Carrying |
| Fair Value |
| ||||
Fixed rate debt |
| $ | 930,360 |
| $ | 974,381 |
| $ | 1,219,709 |
| $ | 1,303,466 |
|
Variable rate debt |
| 375,000 |
| 352,500 |
| 390,000 |
| 386,100 |
| ||||
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. Blackhawk is a manufacturer of high quality tactical gear. ATK believes that the acquisition provides ATK with a strong tactical systems brand, an expanded portfolio of quality products, and additional design and development expertise for innovative 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 was 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 was allocated to the acquired assets and liabilities based on estimated fair value. Pro forma information on the results of operations for fiscal 2011 as if the acquisition had occurred at the beginning of fiscal 2011 is not being presented because the acquisition is not material to ATK for that purpose.
5. Goodwill and Deferred Charges and Other Non-Current Assets
The carrying amount of goodwill by operating segment as of January 1, 2012 is as follows:
|
| Aerospace |
| Armament |
| Missile |
| Security and |
| Total |
| |||||
Balance at January 1, 2012 |
| $ | 676,516 |
| $ | 124,558 |
| $ | 242,389 |
| $ | 208,073 |
| $ | 1,251,536 |
|
The goodwill recorded above within Aerospace Systems is presented net of $108,500 of accumulated impairment losses.
Deferred charges and other non-current assets consist of the following:
|
| January 1, 2012 |
| March 31, 2011 |
| ||
Gross debt issuance costs |
| $ | 27,613 |
| $ | 34,823 |
|
Less accumulated amortization |
| (8,591 | ) | (12,047 | ) | ||
Net debt issuance costs |
| 19,022 |
| 22,776 |
| ||
Other intangible assets |
| 123,494 |
| 131,850 |
| ||
Long term receivables |
| 285,614 |
| 188,935 |
| ||
Long term inventory |
| 13,743 |
| 11,061 |
| ||
Environmental remediation receivable |
| 29,465 |
| 26,761 |
| ||
Commodity forward contracts |
| 1,824 |
| 12,619 |
| ||
Other non-current assets |
| 53,841 |
| 50,806 |
| ||
Total deferred charges and other non-current assets |
| $ | 527,003 |
| $ | 444,808 |
|
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 deferred charges and other non-current assets in the table above is $38,988 of other intangible assets consisting of trademarks and brand names that are not being amortized as their estimated useful lives are considered indefinite, and amortizing assets as follows:
|
| January 1, 2012 |
| March 31, 2011 |
| ||||||||||||||
|
| Gross |
| Accumulated |
| Total |
| Gross carrying |
| Accumulated |
| Total |
| ||||||
Trade name |
| $ | 66,060 |
| $ | (7,945 | ) | $ | 58,115 |
| $ | 66,060 |
| $ | (4,592 | ) | $ | 61,468 |
|
Technology |
| 17,400 |
| (4,218 | ) | 13,182 |
| 17,400 |
| (2,410 | ) | 14,990 |
| ||||||
Customer relationships and other |
| 34,185 |
| (20,987 | ) | 13,198 |
| 34,185 |
| (17,791 | ) | 16,394 |
| ||||||
Total |
| $ | 117,645 |
| $ | (33,150 | ) | $ | 84,495 |
| $ | 117,645 |
| $ | (24,793 | ) | $ | 92,852 |
|
The assets identified in the table above are being amortized over their estimated useful lives over a weighted average remaining period of approximately 10.7 years. Amortization expense for the quarter and nine months ended January 1, 2012 was $5,568 and $8,357, respectively. Amortization expense for the quarter and nine months ended January 2, 2011 was $2,888 and $8,388, respectively. ATK expects amortization expense related to these assets to be as follows:
Remainder of fiscal 2012 |
| $ | 2,719 |
|
Fiscal 2013 |
| 11,077 |
| |
Fiscal 2014 |
| 10,210 |
| |
Fiscal 2015 |
| 9,260 |
| |
Fiscal 2016 |
| 7,829 |
| |
Thereafter |
| 43,400 |
| |
Total |
| $ | 84,495 |
|
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 nine months ended January 1, 2012 and January 2, 2011, net income as reported for each respective period is divided by (in thousands):
|
| Quarters Ended |
| Nine Months Ended |
| ||||
|
| January 1, |
| January 2, |
| January 1, |
| January 2, |
|
Weighted-average basic shares outstanding |
| 32,781 |
| 33,320 |
| 32,966 |
| 33,267 |
|
Dilutive effect of stock-based awards |
| 174 |
| 305 |
| 215 |
| 319 |
|
Weighted-average diluted shares outstanding |
| 32,955 |
| 33,625 |
| 33,181 |
| 33,586 |
|
|
|
|
|
|
|
|
|
|
|
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 |
| 29 |
| 5 |
| 5 |
| 5 |
|
As discussed further in Note 11, contingently issuable shares related to ATK’s various convertible senior subordinated notes are not included in diluted EPS for the periods presented because ATK’s average stock price during the periods did not exceed the triggering price.
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 2012, 2011 and 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.
ATK also entered into foreign currency forward contracts during fiscal 2011 and fiscal 2010. These contracts were used to hedge forecasted inventory purchases and subsequent payments, or customer receivables, denominated in foreign currencies and were designated and qualified as effective cash flow hedges. Ineffectiveness with respect to forecasted inventory purchases was calculated based on changes in the forward rate until the anticipated purchase occurs; ineffectiveness of the hedge of the accounts payable was evaluated based on the change in fair value of its anticipated settlement.
The fair value of the commodity and foreign currency forward 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 the commodity forward contracts are recorded in inventory as the commodities are purchased. The gains or losses on the foreign currency forward contracts are recorded in earnings when the related inventory is sold.
As of January 1, 2012, ATK had the following outstanding commodity forward contracts in place:
|
| Quantity Hedged |
|
Copper |
| 25,750,000 |
|
Zinc |
| 8,595,000 |
|
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 the periods presented:
|
|
|
| Asset Derivatives |
| Liability Derivatives |
| ||||||||
|
|
|
| Fair value as of |
| Fair value as of |
| ||||||||
|
| Location |
| January 1, 2012 |
| March 31, 2011 |
| January 1, 2012 |
| March 31, 2011 |
| ||||
Commodity forward contracts |
| Other current assets / other accrued liabilities |
| $ | 7,967 |
| $ | 36,398 |
| 12,686 |
| $ | — |
| |
Commodity forward contracts |
| Deferred charges and other non-current assets / other long-term liabilities |
| 1,824 |
| 12,619 |
| 248 |
| — |
| ||||
Foreign currency forward contracts |
| Other current assets / other accrued liabilities |
| — |
| 390 |
| — |
| — |
| ||||
Total |
|
|
| $ | 9,791 |
| $ | 49,407 |
| $ | 12,934 |
| $ | — |
|
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 January 1, 2012 |
|
|
|
|
|
|
|
|
|
|
| |||
Commodity forward contracts |
| $ | (3,143 | ) | Cost of Sales |
| $ | 2,908 |
| Cost of Sales |
| $ | — |
|
Quarter ended January 2, 2011 |
|
|
|
|
|
|
|
|
|
|
| |||
Commodity forward contracts |
| $ | 64,585 |
| Cost of Sales |
| $ | 12,747 |
| Cost of Sales |
| $ | — |
|
Foreign currency forward contract |
| 75 |
| Cost of Sales |
| — |
| Cost of Sales |
| — |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Nine Months ended January 1, 2012 |
|
|
|
|
|
|
|
|
|
|
| |||
Commodity forward contracts |
| $ | (3,143 | ) | Cost of Sales |
| $ | 22,138 |
| Cost of Sales |
| $ | — |
|
Nine Months ended January 2, 2011 |
|
|
|
|
|
|
|
|
|
|
| |||
Commodity forward contracts |
| $ | 64,585 |
| Cost of Sales |
| $ | 29,552 |
| Cost of Sales |
| $ | — |
|
Foreign currency forward contract |
| 75 |
| Cost of Sales |
| — |
| Cost of Sales |
| — |
|
All derivatives used by ATK during fiscal 2012 and 2011 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 periods presented below were as follows:
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||
|
| January 1, |
| January 2, |
| January 1, |
| January 2, |
| ||||
Net income |
| $ | 49,759 |
| $ | 70,276 |
| $ | 201,561 |
| $ | 242,439 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
| ||||
Pension and other postretirement benefit liabilities, net of income taxes of $(8,724), $(7,539), $(26,173), and $(22,804), respectively |
| 13,812 |
| 12,366 |
| 41,436 |
| 36,860 |
| ||||
Change in fair value of derivatives, net of income taxes of $(3,875), $(6,210), $20,495, and $169, respectively |
| 6,061 |
| 9,711 |
| (32,056 | ) | (264 | ) | ||||
Change in fair value of available-for-sale securities, net of income taxes of $60, $(43), $34 and $83, respectively |
| (95 | ) | 67 |
| (54 | ) | (130 | ) | ||||
Total other comprehensive income |
| 19,778 |
| 22,144 |
| 9,326 |
| 36,466 |
| ||||
Comprehensive income |
| 69,537 |
| 92,420 |
| 210,887 |
| 278,905 |
| ||||
Comprehensive income attributable to noncontrolling interest |
| 74 |
| 95 |
| 368 |
| 367 |
| ||||
Comprehensive income attributable to Alliant Techsystems Inc. |
| $ | 69,463 |
| $ | 92,325 |
| $ | 210,519 |
| $ | 278,538 |
|
The components of accumulated OCI, net of income taxes, are as follows:
|
| January 1, 2012 |
| March 31, 2011 |
| ||
Derivatives |
| $ | (1,957 | ) | $ | 30,099 |
|
Pension and other postretirement benefit liabilities |
| (776,980 | ) | (818,416 | ) | ||
Available-for-sale securities |
| 1,186 |
| 1,240 |
| ||
Total accumulated other comprehensive loss |
| $ | (777,751 | ) | $ | (787,077 | ) |
The pre-tax activity in OCI related to the forward contracts discussed in Note 7 was as follows:
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||
|
| January 1, 2012 |
| January 2, 2011 |
| January 1, |
| January 2, |
| ||||
Beginning of period unrealized (loss) gain in accumulated OCI |
| $ | (13,080 | ) | $ | 50,797 |
| $ | 49,408 |
| $ | 65,582 |
|
Increase (Decrease) in fair value of derivatives |
| 12,845 |
| 26,610 |
| (30,413 | ) | 28,630 |
| ||||
Gains reclassified from OCI, offsetting the price paid to suppliers |
| (2,908 | ) | (12,747 | ) | (22,138 | ) | (29,552 | ) | ||||
End of period unrealized (loss) gain in accumulated OCI |
| $ | (3,143 | ) | $ | 64,660 |
| $ | (3,143 | ) | $ | 64,660 |
|
There was no ineffectiveness recognized in earnings for these contracts during fiscal 2012 or 2011. 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:
|
| January 1, 2012 |
| March 31, 2011 |
| ||
Raw materials |
| $ | 96,769 |
| $ | 97,942 |
|
Work/Contracts in process |
| 116,195 |
| 53,499 |
| ||
Finished goods |
| 120,262 |
| 90,587 |
| ||
Net inventories |
| $ | 333,226 |
| $ | 242,028 |
|
10. Other Liabilities
The major categories of other current and long-term accrued liabilities are as follows:
|
| January 1, 2012 |
| March 31, 2011 |
| ||
Employee benefits and insurance, including pension and other postretirement benefits |
| $ | 74,565 |
| $ | 63,956 |
|
Warranty |
| 24,376 |
| 18,076 |
| ||
Litigation liability |
| 25,500 |
| — |
| ||
Interest |
| 18,084 |
| 2,103 |
| ||
Environmental remediation |
| 5,104 |
| 4,160 |
| ||
Rebate |
| 12,550 |
| 6,934 |
| ||
Deferred lease obligation |
| 25,132 |
| 22,212 |
| ||
Commodity forward contracts |
| 12,686 |
| — |
| ||
Federal excise tax |
| 14,904 |
| 12,609 |
| ||
Other |
| 69,073 |
| 63,786 |
| ||
Total other accrued liabilities — current |
| $ | 281,974 |
| $ | 193,836 |
|
|
|
|
|
|
| ||
Environmental remediation |
| $ | 53,607 |
| $ | 47,726 |
|
Management nonqualified deferred compensation plan |
| 19,152 |
| 21,483 |
| ||
Non-current portion of accrued income tax liability |
| 20,673 |
| 28,024 |
| ||
Deferred lease obligation |
| 13,792 |
| 14,448 |
| ||
Commodity forward contracts |
| 248 |
| — |
| ||
Other |
| 10,534 |
| 15,479 |
| ||
Total other long-term liabilities |
| $ | 118,006 |
| $ | 127,160 |
|
The litigation liability represents an accrual booked during the third quarter of fiscal 2012 related to a tentative litigation settlement (see Note 15).
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 generally 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. During the third quarter of fiscal 2012, ATK adjusted the pre-existing LUU flare warranty reserve to capture the additional costs to retrofit existing customer inventory related to the tentative litigation settlement referenced above. The following is a reconciliation of the changes in ATK’s product warranty liability during fiscal 2012:
Balance at April 1, 2011 |
| $ | 18,076 |
|
Warranties issued |
| 571 |
| |
Payments made |
| (11 | ) | |
Changes related to preexisting warranties |
| (352 | ) | |
Balance at July 3, 2011 |
| $ | 18,284 |
|
Warranties issued |
| 92 |
| |
Payments made |
| (92 | ) | |
Changes related to preexisting warranties |
| (1,706 | ) | |
Balance at October 2, 2011 |
| $ | 16,578 |
|
Warranties issued |
| 196 |
| |
Payments made |
| (12 | ) | |
Changes related to preexisting warranties |
| 7,614 |
| |
Balance at January 1, 2012 |
| $ | 24,376 |
|
11. Long-Term Debt
Long-term debt, including the current portion, consisted of the following:
|
| January 1, 2012 |
| March 31, 2011 |
| ||
Senior Credit Facility dated October 7, 2010 (1): |
|
|
|
|
| ||
Term A Loan due 2015 |
| $ | 375,000 |
| $ | 390,000 |
|
Revolving Credit Facility due 2015 |
| — |
| — |
| ||
2.75% Convertible Senior Subordinated Notes due 2011 (2) |
| — |
| 300,000 |
| ||
6.75% Senior Subordinated Notes due 2016 |
| 400,000 |
| 400,000 |
| ||
6.875% Senior Subordinated Notes due 2020 (3) |
| 350,000 |
| 350,000 |
| ||
3.00% Convertible Senior Subordinated Notes due 2024 (4) |
| 199,453 |
| 199,453 |
| ||
Principal amount of long-term debt |
| 1,324,453 |
| 1,639,453 |
| ||
Less: Unamortized discounts |
| 19,093 |
| 29,744 |
| ||
Carrying amount of long-term debt |
| 1,305,360 |
| 1,609,709 |
| ||
Less: current portion |
| 25,000 |
| 320,000 |
| ||
Carrying amount of long-term debt, excluding current portion |
| $ | 1,280,360 |
| $ | 1,289,709 |
|
(1) On October 7, 2010, ATK entered into a Second Amended and Restated Credit Agreement (“the 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 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 is 1.25% and the current Eurodollar margin is 2.25%. The weighted
average interest rate for the Term A Loan was 2.68% at January 1, 2012. ATK pays 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% at January 1, 2012. As of January 1, 2012, ATK had no borrowings against its $600,000 Revolving Credit Facility and had outstanding letters of credit of $174,631 which reduced amounts available on the Revolving Credit Facility to $425,369. ATK has had no short term borrowings under its Revolving Credit Facility since the date of issuance. Debt issuance costs of approximately $12,800 are being amortized over the term of the 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 matured on September 15, 2011. During the quarter ended July 3, 2011, ATK purchased $50,427 aggregate principal amount from holders of the notes at market price. All but $3 of the remaining $249,573 was repaid in the quarter ended October 2, 2011. Holders of the remaining $3 chose to convert their notes at a conversion rate of 10.4208 shares of ATK’s common stock per $1 principal amount (a conversion price of $95.96), as allowed during the last month prior to maturity. The remaining $3 was paid in cash in October 2011. The contingently issuable shares had no impact on the number of ATK’s diluted shares outstanding during any of the periods presented because ATK’s average stock price during those periods was below the conversion price.
(3) 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 of approximately $7,100 related to these notes are being amortized to interest expense over ten years.
(4) 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 January 1, 2012 and March 31, 2011. 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 12.7013 shares of ATK’s common stock per $1 principal amount of 3.00% Convertible Notes (a conversion price of $78.73 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 January 1, 2012; therefore the remaining principal amount was classified as long-term. These contingently issuable shares did not impact the number of ATK’s diluted shares outstanding during any of the periods presented because ATK’s average stock price during those periods was below the conversion price.
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:
|
| 3.00% due 2024 |
| |
As of January 1, 2012: |
|
|
| |
Carrying amount of the equity component |
| $ | 56,849 |
|
Principal amount of the liability component |
| 199,453 |
| |
Unamortized discount of liability component |
| 19,093 |
| |
Net carrying amount of liability component |
| 180,360 |
| |
Remaining amortization period of discount |
| 152 months |
| |
Effective interest rate on liability component |
| 7.000 | % | |
|
| 2.75% due 2011 |
| 3.00% due 2024 |
| Total |
| |||
As of March 31, 2011: |
|
|
|
|
|
|
| |||
Carrying amount of the equity component |
| $ | 50,779 |
| $ | 56,849 |
| $ | 107,628 |
|
Principal amount of the liability component |
| 300,000 |
| 199,453 |
| 499,453 |
| |||
Unamortized discount of liability component |
| 5,875 |
| 23,869 |
| 29,744 |
| |||
Net carrying amount of liability component |
| 294,125 |
| 175,584 |
| 469,709 |
| |||
Remaining amortization period of discount |
| 6 months |
| 161 months |
|
|
| |||
Effective interest rate on liability component |
| 6.800 | % | 7.000 | % |
|
| |||
Based on ATK’s closing stock price of $57.16 on January 1, 2012, 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, 2011 for additional information regarding the terms and conditions of the Company’s outstanding debt agreements.
Rank and Guarantees
The 3.00% Convertible Notes, the 6.875% Notes, and the 6.75% Notes rank equal in right of payment with each other and all of ATK’s future senior subordinated indebtedness and are subordinated in right of payment to all existing and future senior indebtedness, including the Senior Credit Facility. The outstanding notes are guaranteed on an unsecured basis, jointly and severally and fully and unconditionally, by substantially all of ATK’s domestic subsidiaries. The parent company has no independent assets or operations. 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.
Scheduled Minimum Loan Payments
As of January 1, 2012, the scheduled minimum payments on outstanding long-term debt are as follows:
Remainder of fiscal 2012 |
| $ | 5,000 |
|
Fiscal 2013 |
| 30,000 |
| |
Fiscal 2014 |
| 40,000 |
| |
Fiscal 2015 |
| 239,453 |
| |
Fiscal 2016 |
| 260,000 |
| |
Thereafter |
| 750,000 |
| |
Total payments |
| $ | 1,324,453 |
|
ATK’s total debt (current portion of debt and long-term debt) as a percentage of total capitalization (total debt and stockholders’ equity) was 50% as of January 1, 2012 and 58% as of March 31, 2011.
Covenants and Default Provisions
ATK’s Senior Credit Facility and the indentures governing the 6.75% Notes, the 6.875% Notes, and the 3.00% Convertible Notes impose restrictions on ATK, including limitations on its ability to incur additional debt, enter into capital leases, grant liens, pay dividends and make certain other payments, sell assets, or merge or consolidate with or into another entity. In addition, the Senior Credit Facility limits ATK’s ability to enter into sale-and-leaseback transactions. The Senior Credit Facility also requires that ATK meet and maintain specified financial ratios, including a minimum interest coverage ratio and 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 Senior Credit Facility are subject to compliance with these covenants. As of January 1, 2012, ATK was in compliance with the financial covenants.
Cash Paid for Interest on Debt
Cash paid for interest totaled $39,211 in the nine months ended January 1, 2012 and $30,467 during the nine months ended January 2, 2011.
12. Employee Benefit Plans
|
| Pension Benefits |
| ||||||||||
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||
Components of Net Periodic Benefit Cost |
| January 1, 2012 |
| January 2, 2011 |
| January 1, 2012 |
| January 2, 2011 |
| ||||
Service cost |
| $ | 16,178 |
| $ | 17,476 |
| $ | 48,533 |
| $ | 52,428 |
|
Interest cost |
| 37,321 |
| 37,717 |
| 111,963 |
| 113,151 |
| ||||
Expected return on plan assets |
| (43,898 | ) | (44,173 | ) | (131,692 | ) | (132,519 | ) | ||||
Amortization of unrecognized net loss |
| 23,983 |
| 21,362 |
| 71,950 |
| 64,086 |
| ||||
Amortization of unrecognized prior service cost |
| (95 | ) | (97 | ) | (286 | ) | (292 | ) | ||||
Net periodic benefit cost |
| $ | 33,489 |
| $ | 32,285 |
| $ | 100,468 |
| $ | 96,854 |
|
|
| Postretirement Benefits (“PRB”) |
| ||||||||||
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||
Components of Net Periodic Benefit Cost |
| January 2, 2012 |
| January 2, 2011 |
| January 1, 2012 |
| January 2, 2011 |
| ||||
Service cost |
| $ | 19 |
| $ | 22 |
| $ | 57 |
| 176 |
| |
Interest cost |
| 1,953 |
| 2,130 |
| 5,860 |
| 6,689 |
| ||||
Expected return on plan assets |
| (878 | ) | (846 | ) | (2,634 | ) | (2,537 | ) | ||||
Amortization of unrecognized net loss |
| 744 |
| 819 |
| 2,230 |
| 2,264 |
| ||||
Amortization of unrecognized prior service cost |
| (2,096 | ) | (2,166 | ) | (6,286 | ) | (6,381 | ) | ||||
Net periodic benefit (income) cost before curtailment gain |
| (258 | ) | (41 | ) | (773 | ) | 211 |
| ||||
Curtailment gain |
| — |
| — |
| — |
| (448 | ) | ||||
Net periodic benefit income |
| $ | (258 | ) | $ | (41 | ) | $ | (773 | ) | $ | (237 | ) |
Employer Contributions. During the nine months ended January 1, 2012, ATK contributed $61,600 directly to the pension trust and $1,888 directly to retirees under its supplemental (nonqualified) executive retirement plan. ATK also contributed $9,976 to its other PRB plans. ATK anticipates making additional contributions of $3,128 directly to retirees under the nonqualified plan and $4,048 to its other PRB plans during the remainder of fiscal 2012. There are no additional funding requirements to the pension trust for the remainder of fiscal 2012.
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 January 1, 2012 and January 2, 2011 represent effective tax rates of 42.0% and 30.7%, respectively. The increase in the current quarter rate is primarily due to the estimated nondeductible portion of an accrual related to the LUU flare tentative litigation agreement, the absence of the benefit that was realized in fiscal 2011 from the retroactive extension of the Federal Research and Development (“R&D��) credit for calendar 2010 and 2011, decreased benefits from the domestic manufacturing deduction (“DMD”), and the unfavorable true-up of prior-year taxes.
The income tax provisions for the nine months ended January 1, 2012 and January 2, 2011 represent effective tax rates of 35.8% and 26.7%, respectively. The increase in the current period rate is primarily due to the absence of the benefit that was realized in fiscal 2011 from the settlement of the examination of the fiscal 2007 and 2008 tax returns, the estimated nondeductible portion of an accrual related to the LUU flare tentative litigation agreement, and the retroactive extension of the R&D credit discussed above, partially offset by a discrete revaluation of the deferred tax assets caused by a change in state tax law.
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 2005. As of January 1, 2012 the IRS had completed the audits of ATK through fiscal 2008. The IRS is currently auditing ATK’s tax returns for fiscal years 2009 and 2010. 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 $15,128 reduction of the unrecognized tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings from $0 to $12,715.
14. Stock-Based Compensation
ATK sponsors multiple stock-based incentive plans, which include 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 January 1, 2012, ATK has authorized up to 2,382,360 common shares under the 2005 Stock Incentive Plan, of which 488,186 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 January 1, 2012 and January 2, 2011 was $2,737 and $2,379, respectively. Total pre-tax stock-based compensation expense recognized during the nine months ended January 1, 2012 and January 2, 2011 was $8,339 and $7,648, respectively.
The total income tax benefit recognized in the income statement for share-based compensation during the quarters ended January 1, 2012 and January 2, 2011 was $1,142 and $909, respectively. Total income tax benefit recognized in the income statement for share-based compensation during the nine months ended January 1, 2012 and January 2, 2011 was $3,228 and $2,957, respectively.
ATK has the following 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 January 1, 2012, there were up to 502,268 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 23,365 shares will become payable only upon achievement of certain financial performance goals, including sales and EPS, for the fiscal 2010 through fiscal 2012 period;
· up to 211,458 shares will become payable only upon achievement of certain performance goals, including sales, EPS, and return on invested capital, for the fiscal 2011 through fiscal 2013 period; and
· up to 267,445 shares will become payable only upon achievement of certain performance goals, including sales growth relative to industry peers and return on invested capital, for the fiscal 2012 through fiscal 2014 period.
In May 2011, 93,649 shares were distributed or deferred based upon achievement of certain financial performance goals, including EPS, for the fiscal 2009 through fiscal 2011 period.
As of January 1, 2012, there were up to 124,213 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. ATK granted 4,288 TSR shares during fiscal 2012 at a weighted average fair value of $38.14. The weighted average assumptions used in estimating the value of the TSR award during fiscal 2012 were as follows:
|
| Assumptions |
|
Risk-free rate |
| 1.22 | % |
Expected volatility |
| 27.90 | % |
Expected dividend yield |
| 1.17 | % |
Expected award life |
| 3 years |
|
Of the shares reserved for TSR awards for key employees,
· 33,371 shares will become payable upon satisfaction of the market conditions stipulated for the fiscal 2010 through 2012 period,
· 31,422 shares will become payable upon satisfaction of the market conditions stipulated for the fiscal 2011 through 2013 period, and
· 59,400 shares will become payable upon satisfaction of the market conditions stipulated for the fiscal 2012 through 2014 period.
Restricted stock granted to non-employee directors and certain key employees during the first nine months of fiscal 2012 totaled 85,076 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 first nine months of fiscal 2012 or during fiscal 2011.
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, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings in any particular quarter, to be material to its business or likely to result in a material effect on its operating results, financial condition, or cash flows.
On or about April 10, 2006, a former employee filed a qui tam complaint in federal court 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. Discovery in the case is substantially complete, and ATK and the DOJ have each filed motions for summary judgment. A hearing on these motions is set for April 12, 2012. No trial date is currently set.
On November 14, 2011, the parties met in mediation in an attempt to settle this matter. That effort was unsuccessful. On January 23, 2012, however, the parties met in a second mediation session that resulted in a tentative agreement to settle the lawsuit. As a result of the tentative agreement, the Company increased its warranty liability by $7,805 to reflect the additional cost of retrofitting the existing flares, as well as increased its litigation reserve by $25,500 for the amount of cash it expects to pay for this settlement. The final agreement is subject to agreement upon certain terms and conditions and final internal DOJ approval. The agreement is expected in ATK’s fourth quarter.
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.
Claim Recovery. Profits expected to be realized on contracts are based on management’s estimates of total contract sales value and costs at completion. Estimated amounts for contract changes and claims are included in contract sales only when realization is estimated to be probable. At January 1, 2012, based on progress to date on certain contracts, there is approximately $117,949 included in unbilled receivables for contract claims.
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 0.75% and 2.50% as of January 1, 2012 and March 31, 2011, 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:
|
| January 1, 2012 |
| March 31, 2011 |
| ||||||||
|
| Liability |
| Receivable |
| Liability |
| Receivable |
| ||||
Amounts (payable) receivable |
| $ | (61,565 | ) | $ | 35,609 |
| $ | (59,869 | ) | $ | 34,337 |
|
Unamortized discount |
| 2,854 |
| (1,465 | ) | 7,983 |
| (3,862 | ) | ||||
Present value amounts (payable) receivable |
| $ | (58,711 | ) | $ | 34,144 |
| $ | (51,886 | ) | $ | 30,475 |
|
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 $58,711 discounted liability as of January 1, 2012, $5,104 was recorded within other current liabilities and $53,607 was recorded within other long-term liabilities. Of the $34,144 discounted receivable, ATK recorded $4,679 within other current assets and $29,465 within other non-current assets. As of January 1, 2012, the estimated discounted range of reasonably possible costs of environmental remediation was $58,710 to $91,277.
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 in Note 13 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011.
16. Share Repurchases
On August 5, 2008, ATK’s Board of Directors authorized the repurchase of up to 5,000,000 shares. The Board had determined that the repurchase program would serve primarily to offset dilution from the Company’s employee and director benefit compensation programs, but could also be used for other corporate purposes, as determined by the Board.
During the first nine months of fiscal 2012, ATK repurchased 742,000 shares for $49,991. During fiscal 2009, ATK repurchased 299,956 shares for $31,609.
On January 31, 2012, ATK’s Board of Directors authorized a share repurchase program of up to $200 million worth of shares of ATK common stock, which the Company expects to execute over the next two years. The shares may be purchased from time to time in open market, block purchase, or negotiated transactions, subject to compliance with applicable laws and regulations. This share repurchase program replaces the prior program authorized in 2008.
17. Operating Segment Information
ATK operates its business structure within 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. Each operating segment is described below:
· Aerospace Systems, which generated 30% of ATK’s external sales in the nine months ended January 1, 2012, 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, which generated 33% of ATK’s external sales in the nine months ended January 1, 2012, 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, which generated 15% of ATK’s external sales in the nine months ended January 1, 2012, operates across the following market areas: strike weapons, tactical propulsion, in-space propulsion, hypersonic research, missile defense and missile interceptor capabilities, fuzes and warheads, composites, special mission aircraft, and electronic warfare.
· Security and Sporting, which generated 22% of ATK’s external sales in the nine months ended January 1, 2012, develops and produces commercial products and tactical systems and equipment.
The military small-caliber ammunition contract, which is reported within Armament Systems, contributed approximately 15% of total external sales during each of the nine months ended January 1, 2012 and January 2, 2011.
The following table summarizes ATK’s results by operating segment:
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||
|
| January 1, 2012 |
| January 2, 2011 |
| January 1, 2012 |
| January 2, 2011 |
| ||||
Sales to external customers: |
|
|
|
|
|
|
|
|
| ||||
Aerospace Systems |
| $ | 301,843 |
| $ | 321,288 |
| $ | 988,148 |
| $ | 1,067,020 |
|
Armament Systems |
| 403,654 |
| 431,493 |
| 1,108,771 |
| 1,313,046 |
| ||||
Missile Products |
| 168,926 |
| 167,875 |
| 484,261 |
| 483,693 |
| ||||
Security and Sporting |
| 243,061 |
| 208,634 |
| 720,977 |
| 676,917 |
| ||||
Total external sales |
| 1,117,484 |
| 1,129,290 |
| 3,302,157 |
| 3,540,676 |
| ||||
Intercompany sales: |
|
|
|
|
|
|
|
|
| ||||
Aerospace Systems |
| 4,216 |
| 3,073 |
| 11,671 |
| 9,032 |
| ||||
Armament Systems |
| 30,280 |
| 21,585 |
| 107,542 |
| 74,931 |
| ||||
Missile Products |
| 34,006 |
| 24,862 |
| 93,354 |
| 82,605 |
| ||||
Security and Sporting |
| 5,632 |
| 3,561 |
| 16,207 |
| 7,776 |
| ||||
Eliminations |
| (74,134 | ) | (53,081 | ) | (228,774 | ) | (174,344 | ) | ||||
Total intercompany sales |
| — |
| — |
| — |
| — |
| ||||
Total sales |
| $ | 1,117,484 |
| $ | 1,129,290 |
| $ | 3,302,157 |
| $ | 3,540,676 |
|
|
|
|
|
|
|
|
|
|
| ||||
Income before interest, income taxes, and noncontrolling interest: |
|
|
|
|
|
|
|
|
| ||||
Aerospace Systems |
| $ | 34,839 |
| $ | 23,935 |
| $ | 115,060 |
| $ | 98,499 |
|
Armament Systems |
| 67,048 |
| 55,049 |
| 190,415 |
| 158,185 |
| ||||
Missile Products |
| 23,515 |
| 19,389 |
| 61,532 |
| 47,689 |
| ||||
Security and Sporting |
| 22,787 |
| 30,537 |
| 75,436 |
| 95,623 |
| ||||
Corporate |
| (42,765 | ) | (2,302 | ) | (59,072 | ) | (6,157 | ) | ||||
Total income before interest, income taxes, and noncontrolling interest |
| $ | 105,424 |
| $ | 126,428 |
| $ | 383,371 |
| $ | 393,839 |
|
During the third quarter of fiscal 2011, Aerospace Systems recognized a $25,000 reduction in sales and profit on a commercial aerospace structures program. This reduction in sales and profit resulted from increased program costs, scope changes, and new factory start-up costs.
On January 23, 2012, ATK and the DOJ met in a second mediation session regarding the LUU flare litigation as discussed in Note 15, which resulted in a tentative agreement to settle the lawsuit. As a result of the tentative agreement, the Company increased its warranty liability by $7,805 to reflect the additional cost of retrofitting the existing flares, as well as increased its litigation reserve by $25,500 for the amount of cash it expects to pay for this settlement.
Certain administrative functions are primarily managed by “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 generally 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 $8,738 and $5,582 for the quarters ended January 1, 2012 and January 2, 2011, respectively, and $24,370 and $16,224 for the nine months ended January 1, 2012 and January 2, 2011, respectively.
On February 2, 2012, ATK announced that at the beginning of fiscal year 2013, it will operate a three group structure. The segments will be the Aerospace Group, the Defense Group, and the Sporting Group. This realignment will maximize efficiency, reduce cost, support customer needs, leverage investments, and improve overall agility within ATK’s markets.
18. Subsequent Events
On January 23, 2012, ATK was notified that the Government Accountability Office did not uphold ATK’s pre-award protest of the request for proposal for the continued operation and maintenance of the Radford Army Ammunition Plan (“RFAAP”) in Radford, Virginia. On January 24, 2012, ATK was notified that the U.S. Army had completed its review of ATK’s revised proposal for the RFAAP contract and that ATK had not been awarded the contract.
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 expansion into commercial markets,
· changes in cost and revenue 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 and military 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,
· unanticipated changes in the tax provision or exposure to additional tax liabilities,
· security threats or other disruptions, and
· the costs and ultimate outcome of litigation matters and other legal proceedings.
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, 2011. 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 an aerospace, defense, and commercial products company and 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 Arlington, Virginia and has operating locations throughout the United States, Puerto Rico, and internationally.
ATK has aligned 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. As of January 1, 2012, ATK’s four operating groups are:
· Aerospace Systems, which generated 30% of ATK’s external sales in the nine months ended January 1, 2012, 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, which generated 33% of ATK’s external sales in the nine months ended January 1, 2012, 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, which generated 15% of ATK’s external sales in the nine months ended January 1, 2012, operates across the following market areas: strike weapons, 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, which generated 22% of ATK’s external sales in the nine months ended January 1, 2012, develops and produces commercial products and tactical systems and equipment.
On February 2, 2012, ATK announced that at the beginning of fiscal year 2013, it will operate a three group structure. The segments will be the Aerospace Group, the Defense Group, and the Sporting Group. This realignment will maximize efficiency, reduce cost, support customer needs, leverage investments, and improve overall agility within ATK’s markets.
Financial Highlights and Notable Events
Certain notable events or activities affecting our fiscal 2012 financial results include the following:
Financial highlights for the quarter ended January 1, 2012
· Quarterly sales of $1.1 billion compared to $1.1 billion in the prior year quarter.
· Diluted earnings per share of $1.51 compared to $2.09 in the prior year quarter.
· Orders for the quarter ended January 1, 2012 were $701 million compared to $1.2 billion in the quarter ended January 2, 2011.
· Total backlog was $6.1 billion at January 1, 2012 compared to $6.7 billion at March 31, 2011.
· Income before interest, income taxes, and noncontrolling interest as a percentage of sales was 9.4% for the quarter ended January 1, 2012. The rate reflects a $33 million accrual regarding a previously disclosed lawsuit related to the manufacture of LUU flares. The accrual includes a $25.5 million litigation liability and an increase of $7.8 million in warranty reserves. The prior year rate of 11.2% in the comparable period reflected a $25 million reduction in profit in a commercial aerospace program. Absent these charges, the current year margins are lower due to a shift in demand toward lower margin ammunition and higher commodity costs in the Security and Sporting group, partially offset by a $9 million reduction in the long-term incentive compensation accrual across the groups.
· A higher effective tax rate of 42.0% primarily due to the estimated nondeductible portion of the LUU flare accrual as discussed above, the absence of the benefit realized in the prior year from the retroactive extension of the R&D tax credit, a smaller benefit recorded this year for the Domestic Manufacturing Deduction, and the unfavorable true-up of prior-year taxes.
· On November 1, 2011, ATK’s Board of Directors declared a quarterly cash dividend of $0.20 per share to stockholders of record
on December 7, 2011. The dividend was paid on December 29, 2011.
Notable events for fiscal 2012
· On July 11, 2011, John L. Shroyer, Senior Vice President and Chief Financial Officer of ATK notified ATK of his intention to resign from his position following ATK’s release of its first quarter earnings. Effective August 8, 2011, Thomas G. Sexton became the Company’s Vice President and Interim Chief Financial Officer. Prior to the appointment, Mr. Sexton, served as ATK’s Vice President and Controller, and is a 25-year veteran of ATK with an extensive background in all aspects of both corporate and operational finance.
· Effective October 1, 2011, ATK relocated its corporate headquarters to Arlington, VA. ATK believes the move will provide the Company with opportunities for increased engagement with its customers and Congress, as well as with its aerospace and defense industry peers located in the region.
· On January 23, 2012, ATK was notified that the Government Accountability Office did not uphold ATK’s pre-award protest of the request for proposal for the continued operation and maintenance of the Radford Army Ammunition Plan (“RFAAP”) in Radford, Virginia. On January 24, 2012, ATK was notified that the U.S. Army had completed its review of ATK’s revised proposal for the RFAAP contract and that ATK had not been awarded the contract.
· On January 23, 2012, ATK and the DOJ met in a second mediation session regarding the LUU flare litigation as discussed above, which resulted in a tentative agreement to settle the lawsuit. As a result of the tentative agreement, the Company increased its warranty liability by $7,805 to reflect the additional cost of retrofitting the existing flares, as well as increased its litigation reserve by $25,500 for the amount of cash it expects to pay for this settlement.
· On January 31, 2012, ATK’s Board of Directors declared a quarterly cash dividend of $0.20 per share, payable on March 29, 2012, to stockholders of record on March 7, 2012.
· On January 31, 2012, ATK’s Board of Directors authorized a share repurchase program of up to $200 million worth of shares of ATK common stock, which the Company expects to execute over the next two years. The shares may be purchased from time to time in open market, block purchase, or negotiated transactions, subject to compliance with applicable laws and regulations. This share repurchase program replaces the prior program authorized in 2008.
· On February 2, 2012, ATK announced that Neal S. Cohen will become the company’s Executive Vice President and Chief Financial Officer, effective February 13, 2012. Mr. Cohen will have responsibility for accounting and controls, treasury, tax, financial planning and analysis, internal audit and investor relations. He will play a key role in developing business strategies to drive growth and profitability. Mr. Cohen brings nearly 30 years of experience working for several public companies, including those in the aviation and manufacturing industries.
· On February 2, 2012, ATK announced that at the beginning of fiscal year 2013, it will operate a three group structure. The segments will be the Aerospace Group, the Defense Group, and the Sporting Group. This realignment will maximize efficiency, reduce cost, support customer needs, leverage investments, and improve overall agility within ATK’s markets.
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’s 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.
The Administration’s fiscal year 2011 budget report, released on February 1, 2010, proposed canceling NASA’s Constellation space exploration program. The President’s GFY 2012 budget released in February 2011 identified funding for the replacement to Constellation’s crew launch vehicle, designated the Space Launch System (“SLS”). Congress directed that, to the maximum extent possible, SLS should utilize hardware developed for the Constellation program. On September 14, 2011, NASA and key legislative leaders jointly announced the baseline design for SLS. ATK’s five-segment solid rocket motors were selected as the propulsion system for the first two SLS test flights. At the same time, NASA announced that it will hold a competition for the final design of the propulsion system for SLS. ATK expects to aggressively compete for this future contract.
Congress will determine the funding level for NASA as well as the line item in NASA’s budget for the SLS program. Both the House and Senate Appropriations Committees have fully funded SLS, reflective of the broad, bi-partisan support this new launch vehicle has. ATK’s current best estimate of fiscal 2012 sales related to the program is approximately $300 million. In fiscal 2011, NASA sales relating to the Constellation contracts were approximately $415 million.
On November 18, 2011, President Obama signed the GFY 2012 NASA Appropriations bill, which provided the authorized level of $1.8 billion for the SLS. This legislation further specified the configuration of the Heavy Lift Vehicle consistent with the September 14, 2011 announcement by the Administrator on the SLS configuration. The Administration will submit the GFY 2013 NASA budget request on February 13, 2012. That submission will provide further clarification of the Administration’s future plans for space exploration.
As of January 1, 2012 ATK had approximately:
· $47 million of billed and unbilled receivables directly related to the program
· $80 million of net property, plant, and equipment and other assets related to the SLS 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 if significant changes are made to the SLS program and related contracts in future periods.
As discussed above, on January 24, 2012, ATK was notified that the U.S. Army had completed its review of ATK’s revised proposal for a contract to continue operating and maintaining the RFAAP and that ATK had not been awarded the contract. Loss of the Radford facility management contract will reduce Armament Systems’ and ATK’s sales and profit. ATK will continue to operate its New River Energetics facility located at RFAAP, which supports ATK’s commercial business, international program efforts and other business not directly associated with the RFAAP contract, and therefore ATK does not expect to lose all revenues associated with this division. External sales and income before interest, income taxes, and noncontrolling interest from the RFAAP contract were approximately $233 million and $14 million, respectively, during ATK’s fiscal 2011. ATK is currently under contract to operate the RFAAP through June 30, 2012. Therefore, there will be continued Radford revenues into fiscal 2013.
ATK submitted its proposal for the operation of the Lake City Army Ammunition Plant (“Lake City” or “LCAAP”) on January 23, 2012, in response to a competitive solicitation issued by the U.S. Army. The contract award is expected in September 2012. ATK is currently under contract with the U.S. Army to operate the LCAAP until fiscal 2014. Loss of the Lake City contract would reduce Armament Systems’ and ATK’s sales and profit. The prime contract at Lake City accounted for approximately 15% of ATK’s total revenue in fiscal 2011.
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. The CAS Board issued the final ruling on December 27, 2011 which allows for recognition of a minimum actuarial liability (“MAL”) determined on a PPA basis; shortens the amortization period for CAS actuarial gains/losses from 15 to 10 years; and allows for a five year phase-in of PPA minimum actuarial liability. ATK is currently in process of completing an analysis of the impact the final ruling will have. Due to the phase-in approach within the ruling, there will be no impact to ATK until fiscal 2015.
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, 2011 (“fiscal 2011”). 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, 2011.
Results of Operations
Acquisitions
On April 9, 2010, ATK acquired Blackhawk for a purchase price of $172,251. Blackhawk is a manufacturer of high quality tactical gear. ATK believes that the acquisition provides ATK with a strong tactical systems brand, an expanded portfolio of quality products, and additional design and development expertise for innovative 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 was 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 was allocated to the acquired assets and liabilities based on estimated fair value. Pro forma information on the results of operations for fiscal 2011 as if the acquisition had occurred at the beginning of fiscal 2011 is not being presented because the acquisition is not material to ATK for that purpose.
Sales
The military small-caliber ammunition contract, which is reported within Armament Systems, contributed approximately 15% of total external sales during the nine months ended January 1, 2012 and January 2, 2011.
The following is a summary of each operating segment’s external sales:
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||||||||||||
|
| January 1, |
| January 2, |
| $ Change |
| % |
| January 1, |
| January 2, |
| $ Change |
| % Change |
| ||||||
Aerospace Systems |
| $ | 301,843 |
| $ | 321,288 |
| $ | (19,445 | ) | (6.1 | )% | $ | 988,148 |
| $ | 1,067,020 |
| $ | (78,872 | ) | (7.4 | )% |
Armament Systems |
| 403,564 |
| 431,493 |
| (27,839 | ) | (6.5 | )% | 1,108,771 |
| 1,313,046 |
| (204,275 | ) | (15.6 | )% | ||||||
Missile Products |
| 168,926 |
| 167,875 |
| 1,051 |
| 0.6 | % | 484,261 |
| 483,693 |
| 568 |
| 0.1 | % | ||||||
Security and Sporting |
| 243,061 |
| 208,634 |
| 34,427 |
| 16.5 | % | 720,977 |
| 676,917 |
| 44,060 |
| 6.5 | % | ||||||
Total external sales |
| $ | 1,117,484 |
| $ | 1,129,290 |
| $ | (11,086 | ) | (1.1 | )% | $ | 3,302,157 |
| $ | 3,540,676 |
| $ | (226,712 | ) | (6.7 | )% |
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 $35,200 decrease in SLS program sales due to shifts in NASA funding priorities and the completion of the Space Shuttle Program, partially offset by a $7,300 increase in strategic and commercial system sales.
This decrease was partially offset by a $7,400 increase in aerospace structures resulting from the absence of a $25,000 profit reduction on a commercial aircraft structures program in the prior year quarter and lower sales volume in the current year.
Armament Systems. The decrease in sales was driven by:
· a $17,600 decrease in small caliber systems due to decreased demand for non- standard ammunition, and a reduction in modernization as the program nears completion.
· a $17,300 decrease in integrated weapon systems which was driven by lower sales volumes across multiple medium-caliber guns programs.
These decreases were partially offset by a $4,500 increase in energetic systems and a reduction in modernization due to completion of the program.
Missile Products. The increase in sales was primarily driven by an increase of the Advanced Anti-Radiation Guided Missile (“AARGM”) program of $9,000, which was partially offset by a decrease in sales across multiple tactical rocket motor and composite programs.
Security and Sporting. The increase in sales was driven by a $34,500 increase in ammunition driven by higher sales volumes in domestic and international trade channels due to higher demand.
Nine Months:
Aerospace Systems. The decrease in sales was driven by:
· a $182,000 decrease in Space Launch Systems sales volumes due to shifts in NASA funding priorities, the completion of the Space Shuttle Program, and the termination of the Launch Abort System, partially offset by higher strategic and commercial systems and flare and decoy sales of $48,000 over the prior year period.
This decrease was partially offset by a $40,900 increase in aerospace structures primarily driven by the absence of the $25,000 sales reduction in the prior year on a commercial aircraft structures program and increased production on commercial aircraft and space launch programs.
Armament Systems. The decrease in sales was driven by:
· a $108,700 decrease in small caliber systems due to lower volume of small-caliber ammunition sales, decreased demand for non-standard ammunition, and a reduction in modernization due to the program nearing completion.
· a decrease of $61,200 in energetic systems due to a reduction in modernization resulting from completion of the program and energetics program sales volume, partially offset by increased volume on a propellant program.
· $54,400 decrease in integrated weapon systems driven by lower volumes across multiple medium-caliber gun and ammunition programs.
These decreases were partially offset by a $15,300 increase in advanced weapons programs.
Missile Products. Results for this group were relatively flat period over period. The slight increase in sales was driven by:
· a $24,100 increase in propulsion and controls programs, which was partially offset by a $22,100 decrease in missile subsystems and components due to lower sales across multiple composite and tactical rocket motor programs.
Security and Sporting. The increase in sales was driven by:
· an increase of $31,200 in ammunition sales as well as an increase of $12,500 in accessories due to higher consumer demand.
Gross Profit
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||||||||||||||||
|
| January 1, |
| As a % |
| January 2, |
| As a % |
| Change |
| January 1, |
| As a % |
| January 2, |
| As a % |
| Change |
| ||||||
Gross profit |
| $ | 245,804 |
| 22.0 | % | $ | 232,800 |
| 20.6 | % | $ | 13,004 |
| $ | 752,284 |
| 22.8 | % | $ | 736,155 |
| 20.8 | % | $ | 16,129 |
|
Quarter.
The increase in gross profit for the quarter is primarily driven by the absence of the $25,000 reduction in the prior year quarter on a commercial aircraft structures program, and increased profit in energetics programs. These increases were partially offset by lower gross profit in Security and Sporting due to the sales mix.
Nine Months:
The increase in gross profit is driven by the absence of the $25,000 reduction in the prior year on a commercial aircraft structures program, increased sales across multiple energetic systems programs, and improved operating efficiencies and cost management initiatives. These increases were partially offset by lower modernization sales and lower gross profit in Security and Sporting due to sales mix.
Operating Expenses
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||||||||||||||||
|
| January 1, |
| As a % |
| January 2, |
| As a % |
| Change |
| January 1, |
| As a % |
| January 2, |
| As a % |
| Change |
| ||||||
Research and development |
| $ | 14,624 |
| 1.3 | % | $ | 12,733 |
| 1.1 | % | $ | 1,891 |
| $ | 41,711 |
| 1.3 | % | $ | 42,388 |
| 1.2 | % | $ | (677 | ) |
Selling |
| 39,989 |
| 3.6 | % | 39,011 |
| 3.5 | % | 978 |
| 121,421 |
| 3.7 | % | 118,262 |
| 3.3 | % | 3,159 |
| ||||||
General and administrative |
| 85,767 |
| 7.7 | % | 54,628 |
| 4.8 | % | 31,139 |
| 205,781 |
| 6.2 | % | 181,666 |
| 5.1 | % | 24,115 |
| ||||||
Total |
| $ | 140,380 |
| 12.6 | % | $ | 106,372 |
| 9.4 | % | $ | 34,008 |
| $ | 368,913 |
| 11.2 | % | $ | 342,316 |
| 9.6 | % | $ | 26,597 |
|
Quarter.
Operating expenses increased $34,008 from the prior year period, driven primarily by the LUU flares accrual and higher research and development costs across multiple defense electronic systems programs. Selling expenses also increased slightly period over period due to higher selling expenses in the commercial ammunition and accessories businesses.
Nine Months:
Operating expenses increased $26,597 from the prior year period. This increase was driven by the LUU flare accrual and higher selling expenses related to the Lake City Army Ammunition Plant competition. These increases were partially offset by cost management initiatives.
Income before Interest, Income Taxes, and Noncontrolling Interest
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||||||||
|
| January 1, |
| January 2, |
| Change |
| January 1, |
| January 2, |
| Change |
| ||||||
Aerospace Systems |
| $ | 34,839 |
| $ | 23,935 |
| $ | 10,904 |
| $ | 115,060 |
| $ | 98,499 |
| $ | 16,561 |
|
Armament Systems |
| 67,048 |
| 55,049 |
| 11,999 |
| 190,415 |
| 158,185 |
| 32,230 |
| ||||||
Missile Products |
| 23,515 |
| 19,389 |
| 4,126 |
| 61,532 |
| 47,689 |
| 13,843 |
| ||||||
Security and Sporting |
| 22,787 |
| 30,357 |
| (7,570 | ) | 75,436 |
| 95,623 |
| (20,187 | ) | ||||||
Corporate |
| (42,765 | ) | (2,302 | ) | (40,463 | ) | (59,072 | ) | (6,157 | ) | (52,915 | ) | ||||||
Total |
| $ | 105,424 |
| $ | 126,428 |
| $ | (21,004 | ) | $ | 383,371 |
| $ | 393,839 |
| $ | (10,468 | ) |
The fluctuation in income before interest, income taxes, and noncontrolling interest from the prior year periods includes the reversal of $9,000 of long-term incentive compensation accrual and the program-related changes within the operating segments as described below.
Quarter:
Aerospace Systems. The increase reflects the absence of the $25,000 profit reduction in the commercial aircraft programs in the prior year quarter, partially offset by lower sales volume within the human space flight programs.
Armament Systems. The increase is attributable to the favorable change to the sales mix and improved operating efficiencies across multiple programs.
Missile Products. The increase was primarily driven by operating efficiencies across multiple programs and improved performance on aircraft protection systems.
Security and Sporting. The decrease primarily reflects a shift in demand toward lower-margin ammunition and higher raw material costs.
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 increase from the prior year is driven primarily by the LUU flare accrual, costs related to higher pension expense, and higher intercompany profit eliminations.
Nine Months:
Aerospace Systems. The increase reflects the absence of the $25,000 profit reduction in the commercial aircraft program in the prior year quarter, partially offset by lower sales volume within the space systems operations as discussed above.
Armament Systems. The increase is the result of a $18,000 favorable contract resolution in the second quarter of fiscal 2012 within small caliber systems and improved operating efficiencies across multiple programs. These increases were partially offset by lower sales as discussed above.
Missile Products. The increase was primarily driven by improved operating efficiencies across multiple programs and improved performance on aircraft protection systems.
Security and Sporting. The decrease primarily reflects a shift in demand toward lower-margin ammunition and higher raw material costs.
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 increase from the prior year is driven by the LUU flare accrual, costs related to strategic growth initiatives, higher pension expense, and higher intercompany profit eliminations. These increases were slightly offset by the settlement of an insurance claim.
Net Interest Expense
Quarter:
Net interest expense for the quarter ended January 1, 2012 was $19,783, a decrease of $5,261 compared to $25,044 in the comparable quarter of fiscal 2011 primarily due to the repayment of the 2.75% Convertible Senior Subordinated Notes in September 2011 as well as the associated reduction in non-cash amortization of the debt discount.
Nine Months:
Net interest expense for the nine months ended January 1, 2012 was $69,933, an increase of $6,973 compared to $62,960 in the comparable quarter of fiscal 2011 primarily due to the issuance of new debt during the prior fiscal year which increased the amount outstanding and ATK’s average borrowing rate, partially offset by a reduction in non-cash amortization of the debt discount following the repayment of the 2.75% Convertible Senior Subordinated Notes in September 2011.
Income Tax Provision
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||||||||||||||||
|
| January 1, |
| Effective |
| January 2, |
| Effective |
| Change |
| January 1, |
| Effective |
| January 2, |
| Effective |
| Change |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income tax provision |
| $ | 36,085 |
| 42.0 | % | $ | 31,108 |
| 30.7 | % | $ | 4,977 |
| $ | 112,308 |
| 35.8 | % | $ | 88,440 |
| 26.7 | % | $ | 23,868 |
|
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 January 1, 2012 and January 2, 2011 represent effective tax rates of 42.0% and 30.7%, respectively. The increase in the current quarter rate is primarily due to the estimated nondeductible portion of an accrual related to the LUU flare tentative litigation agreement, the absence of the benefit that was realized in fiscal 2011 from the retroactive extension of the Federal Research and Development (“R&D”) credit for calendar 2010 and 2011, decreased benefits from the domestic manufacturing deduction (“DMD”), and the unfavorable true-up of prior-year taxes.
Nine Months.
The income tax provisions for the nine months ended January 1, 2012 and January 2, 2011 represent effective tax rates of 35.8% and 26.7%, respectively. The increase in the rate from the prior year period is primarily due to the absence of the benefit that was realized in fiscal 2011 from the settlement of the examination of the fiscal 2007 and 2008 tax returns, the estimated nondeductible portion of an accrual related to the LUU flare tentative litigation agreement, and the retroactive extension of the R&D credit discussed above, partially offset by a discrete revaluation of the deferred tax assets caused by a change in state tax law.
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 2005. As of January 1, 2012, the IRS had completed the audits of ATK through fiscal 2008. The IRS is currently auditing ATK’s tax returns for fiscal years 2009 and 2010. 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 $15,128 reduction of the unrecognized tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings from $0 to $12,715.
Net Income
Quarter:
Net income for the quarter ended January 1, 2012 was $49,685, a decrease of $20,496 compared to $70,181 in the third quarter of fiscal 2011. This decrease was driven by a $4,977 increase in income tax expense and a $34,008 increase in operating expenses. These increases were partially offset by lower net interest expense of $5,451 and an increase of $13,004 in gross profit.
Nine Months:
Net income for the nine months ended January 1, 2012 was $201,193, a decrease of $40,879 compared to $242,072 in the comparable period of fiscal 2011. This decrease was driven by a $23,868 increase in income tax expense and a $26,597 increase in operating expenses, partially offset by a decrease in interest expense of $6,655.
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, cash dividends, share repurchases, debt repayment, acquisitions, and other activities.
Cash Flow Summary
Cash flows provided by operations for the nine months ended January 1, 2012 included the impact of a $61,600 pension contribution, lower tax payments, as well as increased working capital, primarily due to the timing of payments and collections, and increased inventory to support expected sales growth in Security and Sporting. Capital expenditures during fiscal 2012 were $97,916 compared to $72,986 in the prior year, primarily due to investments to complete our new aerospace structures composites manufacturing facility in Utah during the first quarter.
ATK’s cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows for the nine months ended January 1, 2012 and January 2, 2011 are summarized as follows:
|
| January 1, |
| January 2, |
| Change |
| |||
Cash flows provided by operating activities |
| $ | 124,740 |
| $ | 126,705 |
| $ | (1,965 | ) |
Cash flows used for investing activities |
| (90,587 | ) | (244,904 | ) | 154,317 |
| |||
Cash flows (used for) provided by financing activities |
| (380,946 | ) | 192,203 |
| (573,149 | ) | |||
Net cash flows |
| $ | (346,793 | ) | $ | 74,004 |
| $ | (420,797 | ) |
Operating Activities.
Net cash provided by operating activities decreased $1,965 compared to the prior year period. This decrease was driven by a $61,600 funding payment to the pension trust during the current year and an increase in cash used for working capital. These decreases were partially offset by $31,806 less cash used to pay taxes in the current year and the absence of the repayment of a government grant which occurred in fiscal 2011.
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 decreased by $154,317 primarily due to the lack of $172,251 paid in fiscal 2011 to acquire Blackhawk. Additionally, there was a $24,930 increase in the amount of cash used for capital expenditures which was primarily used to complete our new aerospace structures composites manufacturing facility in Utah during the first quarter of fiscal 2012. These increases were partially offset by proceeds from the disposition of a non-essential parcel of land within Aerospace Systems during the current year.
Financing Activities.
Net cash used for financing activities decreased $573,149 to $380,946 compared to $192,203 of cash generated in the prior year. This decrease was primarily due to the lack of $350,000 in proceeds received from the issuance of the 6.875% Senior Subordinated Notes in the prior year, the repurchase of $49,991 of ATK’s common stock, and the payment of $19,921 of dividends to ATK stockholders during the current period. In addition, ATK used $300,000 to repay the 2.75% Convertible Notes due 2011 this year compared to $257,813 used to extinguish the Term A Loan in the prior year period.
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 principal payments due under the Senior Credit Facility. 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 paid cash dividends totaling $19,921 on its common stock during the first nine months of fiscal 2012. On January 31, 2012, ATK’s Board of Directors declared a quarterly cash dividend. The $0.20 per share dividend will be payable on March 29, 2012, to stockholders of record on March 7, 2012. 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 ATK’s earnings, liquidity position, financial condition, 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.
On January 31, 2012, ATK’s Board of Directors authorized a share repurchase program of up to $200 million worth of shares of ATK common stock, which the Company expects to execute over the next two years. The shares may be purchased from time to time in open market, block purchase, or negotiated transactions, subject to compliance with applicable laws and regulations. This share repurchase program replaces the prior program authorized in 2008.
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 and debt markets, will be adequate to fund future organic and inorganic 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 “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 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 January 1, 2012 ATK had actual total indebtedness of $1,305,360 and the $600,000 Revolving Credit Facility provided for the potential of additional borrowings up to $425,369. There were no outstanding borrowings under the Revolving Credit Facility as of January 1, 2012, although ATK had outstanding letters of credit of $174,631, which reduced amounts available under the facility.
For the periods presented, ATK’s indebtedness consisted of the following:
|
| January 1, 2012 |
| March 31, 2011 |
| ||
Senior Credit Facility dated October 7, 2010: |
|
|
|
|
| ||
Term A Loan due 2015 |
| $ | 375,000 |
| $ | 390,000 |
|
Revolving Credit Facility due 2015 |
| — |
| — |
| ||
2.75% Convertible Senior Subordinated Notes due 2011 |
| — |
| 300,000 |
| ||
6.75% Senior Subordinated Notes due 2016 |
| 400,000 |
| 400,000 |
| ||
6.875% Senior Subordinated Notes due 2020 |
| 350,000 |
| 350,000 |
| ||
3.00% Convertible Senior Subordinated Notes due 2024 |
| 199,453 |
| 199,453 |
| ||
Principal amount of long-term debt |
| 1,324,453 |
| 1,639,453 |
| ||
Less: Unamortized discounts |
| 19,093 |
| 29,744 |
| ||
Carrying amount of long-term debt |
| 1,305,360 |
| 1,609,709 |
| ||
Less: current portion |
| 25,000 |
| 320,000 |
| ||
Carrying amount of long-term debt, excluding current portion |
| $ | 1,280,360 |
| $ | 1,289,709 |
|
See Note 11 “Long-Term Debt” 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, 2011, for a detailed discussion of these borrowings.
Senior Credit Facility
As discussed above, on October 7, 2010, ATK entered into a new Senior Credit Facility, which replaced the existing 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 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, 2012.
2.75% Convertible Notes due 2011
ATK’s 2.75% Convertible Notes due 2011 matured on September 15, 2011 and were repaid in cash.
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.
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.
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 12.7013 shares of ATK’s common stock per $1 principal amount of these notes (a conversion price of $78.73 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 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. The parent company has no independent assets or operations. 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 |
| >3.00 |
|
Actual at January 1, 2012 |
| 0.64 |
| 2.15 |
| 8.50 |
|
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 January 1, 2012, 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, 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 January 1, 2012, ATK was in compliance with the indentures and expects to be in compliance with the indentures for the foreseeable future.
Share Repurchases
ATK repurchased 742,000 shares of its outstanding common stock for $49,991 during the first three quarters of fiscal 2012. In fiscal 2009, ATK repurchased 299,956 shares for $31,609. 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, 2011. On January 31, 2012, ATK’s Board of Directors authorized a share repurchase program of up to $200 million worth of shares of ATK common stock, which the Company expects to execute over the next two years. The shares may be purchased from time to time in open market, block purchase, or negotiated transactions, subject to compliance with applicable laws and regulations. This share repurchase program replaces the prior program authorized in 2008. ATK’s 6.75% Senior Subordinated Notes and 6.875% 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 January 1, 2012, this limit was approximately $685,000. As of January 1, 2012, 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 a certain amount of liquidity and maintains certain senior debt limits, with a limit, when those senior debt limits are not met, of $250,000 plus proceeds of any equity issuances plus 50% of net income since October 7, 2010.
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 2011.
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, not withstanding that the unfavorable resolution of any matter may have a material effect on our net earnings in any particular quarter, to be material to its business or likely to result in a material effect on its operating results, financial condition, or cash flows.
On or about April 10, 2006, a former employee filed a qui tam complaint in federal court 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 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. Discovery in the case is substantially complete, and ATK and the DOJ have each filed motions for summary judgment. A hearing on these motions is set for April 12, 2012. No trial date is currently set.
On November 14, 2011, the parties met in mediation in an attempt to settle this matter. That effort was unsuccessful. On January 23, 2012, however, the parties met in a second mediation session that resulted in a tentative agreement to settle the lawsuit. The final agreement is subject to agreement upon certain terms and conditions and final internal DOJ approval. The agreement is expected in ATK’s fourth quarter of fiscal 2012.
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 0.75% and 2.50% as of January 1, 2012 and March 31, 2011, 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:
|
| January 1, 2012 |
| March 31, 2011 |
| ||||||||
|
| Liability |
| Receivable |
| Liability |
| Receivable |
| ||||
Amounts (payable) receivable |
| $ | (61,565 | ) | $ | 35,609 |
| $ | (59,869 | ) | $ | 34,337 |
|
Unamortized discount |
| 2,854 |
| (1,465 | ) | 7,983 |
| (3,862 | ) | ||||
Present value amounts (payable) receivable |
| $ | (58,710 | ) | $ | 34,144 |
| $ | (51,886 | ) | $ | 30,475 |
|
As of January 1, 2012, the estimated discounted range of reasonably possible costs of environmental remediation was $58,710 to $91,277.
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 in Note 13 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011.
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, 2011.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 to the unaudited condensed consolidated financial statements in Item 1 of this report.
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 commercial ammunition and small-caliber ammunition businesses. Depending on market conditions, ATK from time to time enters into futures contracts in order to reduce the impact of metal price fluctuations to these businesses.
With respect to ATK’s commercial ammunition business, ATK has a strategic sourcing and price strategy to mitigate risk from commodity price fluctuation. ATK has initiated price increases to minimize the impact of increased commodity costs. To date, our efforts have largely been successful, but some channels have been impacted due to market pressures, timing of price increases introduced into the marketplace, and timing of commodity purchases. 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 price changes, Security and Sporting’s future results from operations and cash flows could 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. The majority of the impact has been mitigated on the four-year small-caliber ammunition supply contract with the U.S. Army 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 January 1, 2012. For additional information, refer to Item 7A of ATK’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of January 1, 2012, 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
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, not withstanding that the unfavorable resolution of any matter may have a material effect on our net earnings in any particular quarter, 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 employee filed a qui tam complaint in federal court 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. Discovery in the case is substantially complete, and ATK and the DOJ have each filed motions for summary judgment. A hearing on these motions is set for April 12, 2012. No trial date is currently set.
On November 14, 2011, the parties met in mediation in an attempt to settle this matter. That effort was unsuccessful. On January 23, 2012, however, the parties met in a second mediation session that resulted in a tentative agreement to settle the lawsuit. The final agreement is subject to agreement upon certain terms and conditions and final internal DOJ approval. The agreement is expected in ATK’s fourth quarter of fiscal 2012.
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, 2011 describes 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.
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 |
| |
October 3- October 30 |
| 464 |
| $ | 56.95 |
| — |
|
|
|
October 30 — November 27 |
| 1,193 |
| 58.14 |
| — |
|
|
| |
November 27 — January 1 |
| 73 |
| 55.41 |
| — |
|
|
| |
Fiscal quarter ended January 1, 2012 |
| 1,730 |
| $ | 57.71 |
| — |
| 3,958,000 |
|
(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 had determined that the repurchase program would serve primarily to offset dilution from the Company’s employee and director benefit compensation programs, but it could also be used for other corporate purposes, as determined by the Board. During fiscal 2009, ATK repurchased 299,956 shares for $31.6 million, and during the quarter ended July 3, 2011, ATK repurchased 742,000 shares for $50.0 million. On January 31, 2012, ATK’s Board of Directors authorized a share repurchase program of up to $200 million worth of shares of ATK common stock, which the Company expects to execute over the next two years. The shares may be purchased from time to time in open market, block purchase, or negotiated transactions, subject to compliance with applicable laws and regulations. This share repurchase program replaces the prior program authorized in 2008.
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 |
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: February 7, 2012 | By: |
| /s/ Thomas G. Sexton |
| Name: |
| Thomas G. Sexton |
| Title: |
| Vice President and Interim Chief Financial Officer |
|
| (On behalf of the Registrant and as principal financial and accounting officer) |