UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 30, 2012
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10582
Alliant Techsystems Inc.
(Exact name of registrant as specified in its charter)
Delaware |
| 41-1672694 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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 February 3, 2013, 32,772,442 shares of the registrant’s common stock, par value $.01 per share, were outstanding.
PART I — FINANCIAL INFORMATION
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(unaudited)
|
| QUARTERS ENDED |
| NINE MONTHS ENDED |
| ||||||||
(In thousands except per share data) |
| December 30, |
| January 1, |
| December 30, |
| January 1, |
| ||||
Sales |
| $ | 1,056,182 |
| $ | 1,117,484 |
| $ | 3,208,271 |
| $ | 3,302,157 |
|
Cost of sales |
| 836,555 |
| 871,680 |
| 2,510,754 |
| 2,549,873 |
| ||||
Gross profit |
| 219,627 |
| 245,804 |
| 697,517 |
| 752,284 |
| ||||
Operating expenses: |
|
|
|
|
|
|
|
|
| ||||
Research and development |
| 13,947 |
| 14,624 |
| 43,869 |
| 41,711 |
| ||||
Selling |
| 41,535 |
| 39,989 |
| 121,670 |
| 121,421 |
| ||||
General and administrative |
| 57,286 |
| 85,767 |
| 183,874 |
| 205,781 |
| ||||
Income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest |
| 106,859 |
| 105,424 |
| 348,104 |
| 383,371 |
| ||||
Interest expense |
| (14,074 | ) | (19,783 | ) | (51,986 | ) | (69,933 | ) | ||||
Interest income |
| 139 |
| 203 |
| 326 |
| 431 |
| ||||
Loss on extinguishment of debt |
| — |
| — |
| (11,773 | ) | — |
| ||||
Income before income taxes and noncontrolling interest |
| 92,924 |
| 85,844 |
| 284,671 |
| 313,869 |
| ||||
Income tax provision |
| 29,693 |
| 36,085 |
| 85,330 |
| 112,308 |
| ||||
Net income |
| 63,231 |
| 49,759 |
| 199,341 |
| 201,561 |
| ||||
Less net income attributable to noncontrolling interest |
| 56 |
| 74 |
| 276 |
| 368 |
| ||||
Net income attributable to Alliant Techsystems Inc. |
| $ | 63,175 |
| $ | 49,685 |
| $ | 199,065 |
| $ | 201,193 |
|
|
|
|
|
|
|
|
|
|
| ||||
Alliant Techsystems Inc.’s earnings per common share: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 1.95 |
| $ | 1.52 |
| $ | 6.13 |
| $ | 6.10 |
|
Diluted |
| 1.93 |
| 1.51 |
| 6.10 |
| 6.06 |
| ||||
Cash dividends paid per share |
| 0.26 |
| 0.20 |
| 0.66 |
| 0.60 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Alliant Techsystems Inc.’s weighted-average number of common shares outstanding: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| 32,454 |
| 32,781 |
| 32,493 |
| 32,966 |
| ||||
Diluted |
| 32,652 |
| 32,955 |
| 32,641 |
| 33,181 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income (from above) |
| 63,231 |
| 49,759 |
| 199,341 |
| 201,561 |
| ||||
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
| ||||
Pension and other postretirement benefit liabilities: |
|
|
|
|
|
|
|
|
| ||||
Reclassification of prior service (credit) costs for pension and postretirement benefit plans recorded to net income (loss), net of tax (expense) benefit of $841, $844, $2,524, and $2,533 |
| (1,352 | ) | (1,346 | ) | (4,055 | ) | (4,039 | ) | ||||
Reclassification of net actuarial loss for pension and postretirement benefit plans recorded to net income (loss), net of tax benefit of $(12,279), $(9,569), $(36,897), and $(28,705) |
| 19,519 |
| 15,198 |
| 58,561 |
| 45,475 |
| ||||
Valuation adjustment for pension and postretirement benefit plans, net of tax benefit of $0, $0, $(732), and $0 |
| — |
| — |
| 1,268 |
| — |
| ||||
Change in fair value of derivatives, net of income taxes of $681, $(3,875), $1,534, and $20,495, respectively |
| (1,064 | ) | 6,061 |
| (2,399 | ) | (32,056 | ) | ||||
Change in fair value of available-for-sale securities, net of income taxes of $(26), $60, $122, and $34, respectively |
| 41 |
| (95 | ) | (191 | ) | (54 | ) | ||||
Total other comprehensive income(loss) |
| $ | 17,144 |
| $ | 19,818 |
| $ | 53,184 |
| $ | 9,326 |
|
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income |
| 80,375 |
| 69,577 |
| 252,525 |
| 210,887 |
| ||||
Less comprehensive income attributable to noncontrolling interest |
| 56 |
| 74 |
| 276 |
| 368 |
| ||||
Comprehensive income attributable to Alliant Techsystems Inc. |
| $ | 80,319 |
| $ | 69,503 |
| $ | 252,249 |
| $ | 210,519 |
|
See Notes to the Condensed Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Amounts in thousands except share data) |
| December 30, 2012 |
| March 31, 2012 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 361,921 |
| $ | 568,813 |
|
Net receivables |
| 1,254,710 |
| 1,341,998 |
| ||
Net inventories |
| 303,252 |
| 258,495 |
| ||
Income tax receivable |
| 22,098 |
| — |
| ||
Deferred income tax assets |
| 108,123 |
| 101,720 |
| ||
Other current assets |
| 48,192 |
| 51,512 |
| ||
Total current assets |
| 2,098,296 |
| 2,322,538 |
| ||
Net property, plant, and equipment |
| 581,055 |
| 604,498 |
| ||
Goodwill |
| 1,251,536 |
| 1,251,536 |
| ||
Noncurrent deferred income tax assets |
| 112,518 |
| 134,719 |
| ||
Deferred charges and other non-current assets |
| 216,523 |
| 228,455 |
| ||
Total assets |
| $ | 4,259,928 |
| $ | 4,541,746 |
|
|
|
|
|
|
| ||
LIABILITIES AND EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Current portion of long-term debt |
| $ | 50,000 |
| $ | 30,000 |
|
Accounts payable |
| 210,010 |
| 333,980 |
| ||
Contract advances and allowances |
| 125,348 |
| 119,824 |
| ||
Accrued compensation |
| 114,958 |
| 121,901 |
| ||
Accrued income taxes |
| — |
| 6,433 |
| ||
Other accrued liabilities |
| 260,260 |
| 307,642 |
| ||
Total current liabilities |
| 760,576 |
| 919,780 |
| ||
Long-term debt |
| 1,047,118 |
| 1,272,002 |
| ||
Postretirement and postemployment benefits liabilities |
| 104,665 |
| 111,392 |
| ||
Accrued pension liability |
| 763,689 |
| 878,819 |
| ||
Other long-term liabilities |
| 126,083 |
| 123,002 |
| ||
Total liabilities |
| $ | 2,802,131 |
| $ | 3,304,995 |
|
Commitments and contingencies (Note 14) |
|
|
|
|
| ||
Common stock—$.01 par value: |
|
|
|
|
| ||
Authorized—180,000,000 shares |
|
|
|
|
| ||
Issued and outstanding—32,742,750 shares at December 30, 2012 and 33,142,408 shares at March 31, 2012 |
| 328 |
| 332 |
| ||
Additional paid-in-capital |
| 545,917 |
| 537,921 |
| ||
Retained earnings |
| 2,419,213 |
| 2,241,711 |
| ||
Accumulated other comprehensive loss |
| (857,414 | ) | (910,598 | ) | ||
Common stock in treasury, at cost— 8,812,699 shares held at December 30, 2012 and 8,413,014 shares held at March 31, 2012 |
| (660,479 | ) | (642,571 | ) | ||
Total Alliant Techsystems Inc. stockholders’ equity |
| 1,447,565 |
| 1,226,795 |
| ||
Noncontrolling interest |
| 10,232 |
| 9,956 |
| ||
Total equity |
| 1,457,797 |
| 1,236,751 |
| ||
Total liabilities and equity |
| $ | 4,259,928 |
| $ | 4,541,746 |
|
See Notes to the Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
| NINE MONTHS ENDED |
| ||||
(In thousands) |
| December 30, 2012 |
| January 1, 2012 |
| ||
Operating activities |
|
|
|
|
| ||
Net income |
| $ | 199,341 |
| $ | 201,561 |
|
Adjustments to net income to arrive at cash used for operating activities: |
|
|
|
|
| ||
Depreciation |
| 73,578 |
| 69,165 |
| ||
Amortization of intangible assets |
| 8,400 |
| 8,357 |
| ||
Amortization of debt discount |
| 5,116 |
| 10,651 |
| ||
Amortization of deferred financing costs |
| 2,948 |
| 3,753 |
| ||
Deferred income taxes |
| (17,655 | ) | (7,945 | ) | ||
Loss on extinguishment of debt |
| 11,773 |
| — |
| ||
Loss (gain) on disposal of property |
| 638 |
| (4,679 | ) | ||
Share-based plans expense |
| 10,878 |
| 8,321 |
| ||
Excess tax benefits from share-based plans |
| (2 | ) | (23 | ) | ||
Changes in assets and liabilities: |
|
|
|
|
| ||
Net receivables |
| 87,288 |
| (112,251 | ) | ||
Net inventories |
| (44,757 | ) | (91,197 | ) | ||
Accounts payable |
| (113,411 | ) | (55,274 | ) | ||
Contract advances and allowances |
| 5,525 |
| (1,289 | ) | ||
Accrued compensation |
| (7,076 | ) | (40,852 | ) | ||
Accrued income taxes |
| (22,976 | ) | 37,500 |
| ||
Pension and other postretirement benefits |
| (30,975 | ) | 25,780 |
| ||
Other assets and liabilities |
| (50,233 | ) | 73,162 |
| ||
Cash provided by operating activities |
| 118,400 |
| 124,740 |
| ||
Investing activities |
|
|
|
|
| ||
Capital expenditures |
| (61,351 | ) | (97,916 | ) | ||
Proceeds from the disposition of property, plant, and equipment |
| 19 |
| 7,329 |
| ||
Cash used for investing activities |
| (61,332 | ) | (90,587 | ) | ||
Financing activities |
|
|
|
|
| ||
Payments made on bank debt |
| (10,000 | ) | (15,000 | ) | ||
Payments made to extinguish debt |
| (409,000 | ) | (300,000 | ) | ||
Proceeds from issuance of long-term debt |
| 200,000 |
| — |
| ||
Payments made for debt issue costs |
| (1,458 | ) | — |
| ||
Purchase of treasury shares |
| (24,997 | ) | (49,991 | ) | ||
Dividends paid |
| (21,563 | ) | (19,921 | ) | ||
Proceeds from employee stock compensation plans |
| 3,056 |
| 3,943 |
| ||
Excess tax benefits from share-based plans |
| 2 |
| 23 |
| ||
Cash used for financing activities |
| (263,960 | ) | (380,946 | ) | ||
Decrease in cash and cash equivalents |
| (206,892 | ) | (346,793 | ) | ||
Cash and cash equivalents - beginning of period |
| 568,813 |
| 702,274 |
| ||
Cash and cash equivalents - end of period |
| $ | 361,921 |
| $ | 355,481 |
|
|
|
|
|
|
| ||
Supplemental Cash Flow Disclosure: |
|
|
|
|
| ||
Noncash investing activity: |
| $ | 4,418 |
| $ | 2,102 |
|
See Notes to the Condensed Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
| |||||||||
(Amounts in thousands except share |
| Common Stock |
| Additional |
| Retained |
| Other |
| Treasury |
| Noncontrolling |
| Total |
| |||||||||
data) |
| Shares |
| Amount |
| Capital |
| Earnings |
| Loss |
| Stock |
| Interest |
| Equity |
| |||||||
For the nine months ended December 30, 2012: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance at March 31, 2012 |
| 33,142,408 |
| $ | 332 |
| $ | 537,921 |
| $ | 2,241,711 |
| $ | (910,598 | ) | $ | (642,571 | ) | $ | 9,956 |
| $ | 1,236,751 |
|
Comprehensive income: |
|
|
|
|
|
|
| 199,065 |
| 53,184 |
|
|
| 276 |
| 252,525 |
| |||||||
Exercise of stock options |
| 51,975 |
| — |
| (838 | ) | — |
| — |
| 3,894 |
| — |
| 3,056 |
| |||||||
Restricted stock grants, net |
| (6,914 | ) | — |
| (1,463 | ) | — |
| — |
| 1,463 |
| — |
| — |
| |||||||
Share-based compensation |
| — |
| — |
| 10,878 |
| — |
| — |
| — |
| — |
| 10,878 |
| |||||||
Treasury stock purchased |
| (482,044 | ) | — |
| — |
| — |
| — |
| (24,997 | ) | — |
| (24,997 | ) | |||||||
Performance shares issued net of treasury stock withheld |
| 44,964 |
| — |
| (5,463 | ) | — |
| — |
| 4,003 |
| — |
| (1,460 | ) | |||||||
Tax benefit related to share based plans and other |
| — |
| — |
| 3,006 |
| — |
| — |
| — |
| — |
| 3,006 |
| |||||||
Dividends paid |
| — |
| — |
| — |
| (21,563 | ) | — |
| — |
| — |
| (21,563 | ) | |||||||
Employee benefit plans and other |
| (7,639 | ) | (4 | ) | 1,877 |
| — |
| — |
| (2,272 | ) | — |
| (399 | ) | |||||||
Balance at December 30, 2012 |
| 32,742,750 |
| $ | 328 |
| $ | 545,918 |
| $ | 2,419,213 |
| $ | (857,414 | ) | $ | (660,480 | ) | $ | 10,232 |
| $ | 1,457,797 |
|
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: |
|
|
|
|
|
|
| 201,193 |
| 9,326 |
|
|
| 368 |
| 210,887 |
| |||||||
Exercise of stock options |
| 71,919 |
| — |
| (1,592 | ) | — |
| — |
| 5,535 |
| — |
| 3,943 |
| |||||||
Restricted stock grants, net |
| 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 |
|
See Notes to the Condensed Consolidated Financial Statements.
Alliant Techsystems Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Quarter Ended December 30, 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, 2012 (“fiscal 2012”). 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 December 30, 2012, and its results of operations for the quarters and nine months ended December 30, 2012 and January 1, 2012, and cash flows for the nine months ended December 30, 2012 and January 1, 2012.
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 2012 Annual Report on Form 10-K.
2. 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 5, 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. We have considered these to be Level 2 instruments.
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 December 30, 2012 |
| |||||||
|
| Fair Value Measurements Using Inputs Considered as |
| |||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| |||
Assets |
|
|
|
|
|
|
| |||
Marketable securities |
| $ | — |
| $ | 8,530 |
| $ | — |
|
Derivatives |
| — |
| 2,135 |
| — |
| |||
|
|
|
|
|
|
|
| |||
Liabilities |
|
|
|
|
|
|
| |||
Derivatives |
| $ | — |
| $ | 404 |
| $ | — |
|
|
| As of March 31, 2012 |
| |||||||
|
| Fair Value Measurements Using Inputs Considered as |
| |||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| |||
Assets |
|
|
|
|
|
|
| |||
Marketable securities |
| $ | — |
| $ | 8,546 |
| $ | — |
|
Derivatives |
| — |
| 12,182 |
| — |
| |||
|
|
|
|
|
|
|
| |||
Liabilities |
|
|
|
|
|
|
| |||
Derivatives |
| $ | — |
| $ | 6,518 |
| $ | — |
|
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 December 30, 2012 |
| As of March 31, 2012 |
| ||||||||
|
| Carrying |
| Fair Value |
| Carrying |
| Fair Value |
| ||||
Fixed rate debt |
| $ | 537,118 |
| $ | 595,644 |
| $ | 932,002 |
| $ | 986,394 |
|
Variable rate debt |
| 560,000 |
| 557,200 |
| 370,000 |
| 370,000 |
| ||||
3. Goodwill and Deferred Charges and Other Non-Current Assets
The carrying amount of goodwill by operating segment as of December 30, 2012 is as follows:
|
| Aerospace Group |
| Defense Group |
| Sporting Group |
| Total |
| ||||
Balance at December 30, 2012 |
| $ | 676,516 |
| $ | 366,947 |
| $ | 208,073 |
| $ | 1,251,536 |
|
The goodwill recorded above within the Aerospace Group is presented net of $108,500 of accumulated impairment losses.
Deferred charges and other non-current assets consist of the following:
|
| December 30, 2012 |
| March 31, 2012 |
| ||
Gross debt issuance costs |
| $ | 21,341 |
| $ | 27,613 |
|
Less accumulated amortization |
| (7,590 | ) | (9,602 | ) | ||
Net debt issuance costs |
| 13,751 |
| 18,011 |
| ||
Other intangible assets |
| 112,601 |
| 121,001 |
| ||
Long term inventory |
| 11,454 |
| 13,032 |
| ||
Environmental remediation receivable |
| 29,597 |
| 28,888 |
| ||
Other non-current assets |
| 49,120 |
| 47,523 |
| ||
Total deferred charges and other non-current assets |
| $ | 216,523 |
| $ | 228,455 |
|
Deferred charges and other non-current assets in the table above includes $38,998 of other intangible assets consisting of trademarks and brand names that are not being amortized as their estimated useful lives are considered indefinite. Amortizable assets within deferred charges and other non-current assets are as follows:
|
| December 30, 2012 |
| March 31, 2012 |
| ||||||||||||||
|
| Gross |
| Accumulated |
| Total |
| Gross |
| Accumulated |
| Total |
| ||||||
Trade name |
| $ | 66,060 |
| $ | (12,414 | ) | $ | 53,646 |
| $ | 66,060 |
| $ | (9,062 | ) | $ | 56,998 |
|
Technology |
| 17,400 |
| (6,628 | ) | 10,772 |
| 17,400 |
| (4,820 | ) | 12,580 |
| ||||||
Customer relationships and other |
| 34,185 |
| (25,000 | ) | 9,185 |
| 34,185 |
| (21,760 | ) | 12,425 |
| ||||||
Total |
| $ | 117,645 |
| $ | (44,042 | ) | $ | 73,603 |
| $ | 117,645 |
| $ | (35,642 | ) | $ | 82,003 |
|
The assets identified in the table above are being amortized over their estimated useful lives over a weighted average remaining period of approximately 10.1 years. Amortization expense for the quarter and nine months ended December 30, 2012 was $2,665 and $8,400, respectively. Amortization expense for the quarter and nine months ended January 1, 2012 was $5,568 and $8,357, respectively. ATK expects amortization expense related to these assets to be as follows:
Remainder of fiscal 2013 |
| $ | 2,788 |
|
Fiscal 2014 |
| 10,320 |
| |
Fiscal 2015 |
| 9,304 |
| |
Fiscal 2016 |
| 7,707 |
| |
Fiscal 2017 |
| 5,417 |
| |
Thereafter |
| 38,068 |
| |
Total |
| $ | 73,604 |
|
4. Earnings Per Share Data
Basic earnings per share (“EPS”) is computed based upon the weighted-average number of common shares outstanding for each period. Diluted EPS is computed based on the weighted-average number of common shares and common equivalent shares. Common equivalent shares represent the effect of stock-based awards and contingently issuable shares related to ATK’s Convertible Senior Subordinated Notes (see Note 10) 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 December 30, 2012 and January 1, 2012, net income as reported for each respective period is divided by (in thousands):
|
| Quarters Ended |
| Nine Months Ended |
| ||||
|
| December 30, |
| January 1, |
| December 30, |
| January 1, |
|
Weighted-average basic shares outstanding |
| 32,454 |
| 32,781 |
| 32,493 |
| 32,966 |
|
Dilutive effect of stock-based awards |
| 198 |
| 174 |
| 148 |
| 215 |
|
Weighted-average diluted shares outstanding |
| 32,652 |
| 32,955 |
| 32,641 |
| 33,181 |
|
|
|
|
|
|
|
|
|
|
|
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 |
| 150 |
| 29 |
| 151 |
| 5 |
|
As discussed further in Note 10, contingently issuable shares related to ATK’s 3.00% Convertible Senior Subordinated Notes due 2024 are not included in diluted EPS for either period presented because ATK’s average stock price during these periods did not exceed the triggering price.
5. 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 2013 and 2012. 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 2013. 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. As of the end of the third quarter, all foreign currency forward contracts were settled.
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 December 30, 2012, ATK had the following outstanding commodity forward contracts in place:
|
| Quantity Hedged |
|
Copper |
| 5,220,000 |
|
Zinc |
| 750,000 |
|
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 |
| December 30, |
| March 31, |
| December 30, |
| March 31, |
| ||||
Commodity forward contracts |
| Other current assets / other accrued liabilities |
| $ | 2,135 |
| $ | 12,182 |
| $ | 404 |
| $ | 6,518 |
|
Due to the nature of ATK’s business, the benefits and risks associated with the commodity and foreign currency 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 gain (loss) reclassified |
| Gain or (loss) recognized in income on |
| ||||||
|
| Location |
| Amount |
| Location |
| Amount |
| ||
Quarter ended December 30, 2012 |
|
|
|
|
|
|
|
|
| ||
Commodity forward contracts |
| Cost of Sales |
| $ | (1,884 | ) | Cost of Sales |
| $ | — |
|
Foreign currency forward contract |
| Cost of Sales |
| — |
| Cost of Sales |
| — |
| ||
Quarter ended January 1, 2012 |
|
|
|
|
|
|
|
|
| ||
Commodity forward contracts |
| Cost of Sales |
| $ | 2,908 |
| Cost of Sales |
| $ | — |
|
Foreign currency forward contract |
| Cost of Sales |
| — |
| Cost of Sales |
| — |
| ||
|
|
|
|
|
|
|
|
|
| ||
Nine Months ended December 30, 2012 |
|
|
|
|
|
|
|
|
| ||
Commodity forward contracts |
| Cost of Sales |
| $ | (5,846 | ) | Cost of Sales |
| $ | — |
|
Foreign currency forward contract |
| Cost of Sales |
| (30 | ) | Cost of Sales |
| — |
| ||
Nine Months ended January 1, 2012 |
|
|
|
|
|
|
|
|
| ||
Commodity forward contracts |
| Cost of Sales |
| $ | 22,138 |
| Cost of Sales |
| $ | — |
|
Foreign currency forward contract |
| Cost of Sales |
| — |
| Cost of Sales |
| — |
|
The pretax amount of gain(loss) recognized in Other Comprehensive Income(Loss) is included in Note 6. All derivatives used by ATK during fiscal 2013 and 2012 were designated as and qualify to be accounted for as hedging instruments. The recognized but unrealized net gains on the commodity forward contracts on December 30, 2012 are expected to be realized on settlement prior to the end of fiscal year 2013.
6. Comprehensive Income
The components of accumulated OCI, net of income taxes, are as follows:
|
| December 30, 2012 |
| March 31, 2012 |
| ||
Derivatives |
| $ | 1,017 |
| $ | 3,416 |
|
Pension and other postretirement benefit liabilities |
| (859,236 | ) | (915,010 | ) | ||
Available-for-sale securities |
| 805 |
| 996 |
| ||
Total accumulated other comprehensive loss |
| $ | (857,414 | ) | $ | (910,598 | ) |
The pre-tax activity in OCI related to the forward contracts discussed in Note 5 was as follows:
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||
|
| December 30, |
| January 1, |
| December 30, |
| January 1, |
| ||||
Beginning of period unrealized (loss) gain in accumulated OCI |
| $ | 3,482 |
| $ | (13,080 | ) | $ | 5,664 |
| $ | 49,408 |
|
Net increase (decrease) in fair value of derivatives |
| (3,635 | ) | 12,845 |
| (9,809 | ) | (30,413 | ) | ||||
Net (gains) losses reclassified from OCI, offsetting (increasing) the price paid to suppliers |
| 1,884 |
| (2,908 | ) | 5,876 |
| (22,138 | ) | ||||
End of period unrealized gain (loss) in accumulated OCI |
| $ | 1,731 |
| $ | (3,143 | ) | $ | 1,731 |
| $ | (3,143 | ) |
There was no ineffectiveness recognized in earnings for these contracts during fiscal 2013 or 2012. 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.
7. Receivables
Receivables, including amounts due under long-term contracts (contract receivables) recorded in current assets, are summarized as follows:
|
| December 30, |
| March 31, |
| ||
Billed receivables |
| $ | 408,068 |
| $ | 431,307 |
|
Unbilled receivables |
| 828,746 |
| 896,292 |
| ||
Other receivables |
| 17,896 |
| 14,399 |
| ||
Net receivables |
| $ | 1,254,710 |
| $ | 1,341,998 |
|
Billed Receivable balances are shown net of customer progress payments of $371,182 as of December 30, 2012 and $461,743 as of March 31, 2012, and net of the allowance for doubtful accounts of $11,155 and $11,648 respectively. Unbilled receivables represent the balance of recoverable costs and accrued profit, comprised principally of revenue recognized on contracts for which billings have not been presented to the customer because the amounts were earned but not contractually billable as of the balance sheet date. These amounts include expected additional billable general overhead costs and fees on flexibly priced contracts awaiting final rate negotiations, and are expected to be billable and collectible within one year.
In the prior year the Company classified certain unbilled receivables as long term as they were not expected to be collected within the next fiscal year, however the predominant practice for contractors whose operating cycle exceeds one year is to classify all contract-related assets and liabilities as current so long as those assets and liabilities will be realized within the current operating cycle. Accordingly, the Company determined that it had misclassified certain contract related unbilled receivables in its previously issued Consolidated Balance Sheet as of March 31, 2012. In the accompanying Consolidated Balance Sheet as of March 31, 2012, $312,843 of unbilled receivables previously presented as “Deferred charges and other non-current assets” have now been presented as “Net receivables”.
As of December 31, 2012 and March 31, 2012, the net receivable balance includes contract related unbilled receivables that ATK does not expect to collect within the next fiscal year of $253,520 and $312,843, respectively.
8. Inventories
Inventories consist of the following:
|
| December 30, 2012 |
| March 31, 2012 |
| ||
Raw materials |
| $ | 109,677 |
| $ | 122,072 |
|
Work/Contracts in process |
| 72,600 |
| 53,018 |
| ||
Finished goods |
| 120,975 |
| 83,405 |
| ||
Net inventories |
| $ | 303,252 |
| $ | 258,495 |
|
9. Other Liabilities
The major categories of other current and long-term accrued liabilities are as follows:
|
| December 30, 2012 |
| March 31, 2012 |
| ||
Employee benefits and insurance, including pension and other postretirement benefits |
| $ | 77,851 |
| $ | 76,646 |
|
Warranty |
| 23,058 |
| 24,221 |
| ||
Litigation |
| — |
| 25,500 |
| ||
Interest |
| 10,459 |
| 15,293 |
| ||
Environmental remediation |
| 5,144 |
| 5,135 |
| ||
Rebate |
| 16,121 |
| 6,050 |
| ||
Deferred lease obligation |
| 29,181 |
| 27,782 |
| ||
Commodity forward contracts |
| 404 |
| 6,518 |
| ||
Federal excise tax |
| 20,926 |
| 15,338 |
| ||
Other |
| 77,116 |
| 105,159 |
| ||
Total other accrued liabilities — current |
| $ | 260,260 |
| $ | 307,642 |
|
|
|
|
|
|
| ||
Environmental remediation |
| $ | 52,314 |
| $ | 52,361 |
|
Management nonqualified deferred compensation plan |
| 17,023 |
| 19,704 |
| ||
Non-current portion of accrued income tax liability |
| 22,743 |
| 20,396 |
| ||
Deferred lease obligation |
| 14,585 |
| 14,932 |
| ||
Other |
| 19,418 |
| 15,609 |
| ||
Total other long-term liabilities |
| $ | 126,083 |
| $ | 123,002 |
|
ATK provides product warranties, which entail repair or replacement of non-conforming items, in conjunction with sales of certain products. Estimated costs related to warranties are recorded in the period in which the related product sales occur. The warranty liability recorded at each balance sheet date reflects the estimated liability for warranty coverage for products delivered based on historical information and current trends. The following is a reconciliation of the changes in ATK’s product warranty liability during fiscal 2013:
Balance at April 1, 2012 |
| $ | 24,221 |
|
Warranties issued |
| 472 |
| |
Payments made |
| (1,218 | ) | |
Changes related to preexisting warranties |
| (43 | ) | |
Balance at July 1, 2012 |
| $ | 23,432 |
|
Warranties issued |
| 542 |
| |
Payments made |
| (189 | ) | |
Changes related to preexisting warranties |
| — |
| |
Balance at September 30, 2012 |
| $ | 23,785 |
|
Warranties issued |
| 1,754 |
| |
Payments made |
| (1,948 | ) | |
Changes related to preexisting warranties |
| (533 | ) | |
Balance at December 30, 2012 |
| $ | 23,058 |
|
10. Long-Term Debt
Long-term debt, including the current portion, consisted of the following:
|
| December 30, 2012 |
| March 31, 2012 |
| ||
Senior Credit Facility dated October 7, 2010 (1)(2) |
|
|
|
|
| ||
Term A Loan due 2015 |
| $ | 360,000 |
| $ | 370,000 |
|
Term A Loan due 2017 |
| 200,000 |
| — |
| ||
Revolving Credit Facility due 2015 |
| — |
| — |
| ||
6.75% Senior Subordinated Notes due 2016 (2) |
| — |
| 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 |
| 1,109,453 |
| 1,319,453 |
| ||
Less: Unamortized discounts |
| 12,335 |
| 17,451 |
| ||
Carrying amount of long-term debt |
| 1,097,118 |
| 1,302,002 |
| ||
Less: current portion |
| 50,000 |
| 30,000 |
| ||
Carrying amount of long-term debt, excluding current portion |
| $ | 1,047,118 |
| $ | 1,272,002 |
|
(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 on October 7, 2015. Under the terms of the Senior Credit Facility, ATK exercised its option to increase the Term A Loan by $200,000 (the “Accordion”) during the quarter ended September 30, 2012. Proceeds of the Accordion were used to partially finance the redemption of the 6.75% Notes, as discussed below. Terms of the Accordion are the same as the existing Term A Loan with the exception that it will mature on September 5, 2017, approximately two years after the existing Term A Loan. The existing 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. The
Accordion is subject to annual principal payments of $10,000 in each of the first and second years and $20,000 in each of the third, fourth, and fifth years, paid on a quarterly basis, with the balance due on September 5, 2017. 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 2.46% at December 30, 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 December 30, 2012. As of December 30, 2012, ATK had no borrowings against its $600,000 Revolving Credit Facility and had outstanding letters of credit of $172,318, which reduced amounts available on the Revolving Credit Facility to $427,682. 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 and as a result of the increase in the Term A Loan, ATK recorded $1,458 of deferred financing costs, which will be amortized over the term of the Accordion.
(2) In fiscal 2006, ATK issued $400,000 aggregate principal amount of 6.75% Senior Subordinated Notes (“the 6.75% Notes”) that were due to mature on April 1, 2016. During the second quarter of fiscal 2013 the Company redeemed these notes. In accordance with the indenture, the redemption price was 102.25% of the principal amount, or $409,000, including a premium of $9,000, plus accrued interest. The transaction resulted in the write-off of the remaining $2,773 of deferred debt issuance costs.
(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 December 30, 2012 and March 31, 2012. 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 into shares of ATK’s common stock. These notes had an initial conversion rate of 12.5392 shares per $1 principal amount (a conversion price of $79.75). Pursuant to provisions in the indenture requiring adjustment of the conversion rate upon the payment of dividends, the conversion rate for these notes is now 12.9038, which correspondingly has changed the conversion price per share to $77.50. The stock price condition was met during fiscal 2009 and $547 of these notes were then converted. The stock price condition was not satisfied during the quarter ended December 30, 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 the quarters ended December 30, 2012 or January 1, 2012 because ATK’s average stock price did not exceed the conversion price during that period.
In fiscal 2007, ATK issued $300,000 aggregate principal amount of 2.75% Convertible Senior Subordinated Notes. During the quarter ended July 3, 2011, ATK purchased $50,427 aggregate principal amount from holders of the notes at market price and repaid the remaining principal amount following their maturity in September 2011.
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 table provides additional information about ATK’s 3.00% Convertible Notes:
|
| December 30, 2012 |
| March 31, 2012 |
| ||
Carrying amount of the equity component |
| $ | 56,849 |
| $ | 56,849 |
|
Principal amount of the liability component |
| 199,453 |
| 199,453 |
| ||
Unamortized discount of liability component |
| 12,335 |
| 17,451 |
| ||
Net carrying amount of liability component |
| 187,118 |
| 182,002 |
| ||
Remaining amortization period of discount |
| 140 months |
| 149 months |
| ||
Effective interest rate on liability component |
| 7.00 | % | 7.00 | % | ||
Based on ATK’s closing stock price of $61.06 on December 30, 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 fiscal year ended March 31, 2012 for additional information regarding the terms and conditions of the Company’s outstanding debt agreements.
Rank and Guarantees
The 3.00% Convertible Notes and the 6.875% 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 December 30, 2012, the scheduled minimum payments on outstanding long-term debt are as follows:
Remainder of fiscal 2013 |
| $ | 25,000 |
|
Fiscal 2014 |
| 50,000 |
| |
Fiscal 2015 |
| 256,953 |
| |
Fiscal 2016 |
| 280,000 |
| |
Fiscal 2017 |
| 20,000 |
| |
Thereafter |
| 477,500 |
| |
Total payments |
| $ | 1,109,453 |
|
ATK’s total debt (current portion of debt and long-term debt) as a percentage of total capitalization (total debt and stockholders’ equity) was 43% as of December 30, 2012 and 58% as of March 31, 2012.
Covenants and Default Provisions
ATK’s Senior Credit Facility and the indentures governing 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. ATK’s 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 December 30, 2012, this limit was approximately $794,000. As of December 30, 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.
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 December 30, 2012, ATK was in compliance with all covenants.
Cash Paid for Interest on Debt
Cash paid for interest totaled $48,345 in the nine months ended December 30, 2012 and $39,211 during the nine months ended January 1, 2012.
11. Employee Benefit Plans
|
| Pension Benefits |
| ||||||||||
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||
Components of Net Periodic Benefit Cost |
| December 30, |
| January 1, |
| December 30, |
| January 1, |
| ||||
Service cost |
| $ | 16,007 |
| $ | 16,178 |
| $ | 48,022 |
| $ | 48,533 |
|
Interest cost |
| 36,145 |
| 37,321 |
| 108,458 |
| 111,963 |
| ||||
Expected return on plan assets |
| (41,839 | ) | (43,898 | ) | (125,853 | ) | (131,692 | ) | ||||
Amortization of unrecognized net loss |
| 31,134 |
| 23,983 |
| 93,467 |
| 71,950 |
| ||||
Amortization of unrecognized prior service cost |
| (97 | ) | (95 | ) | (294 | ) | (286 | ) | ||||
Net periodic benefit cost before settlement cost |
| 41,350 |
| 33,489 |
| 123,800 |
| 100,468 |
| ||||
Settlement cost |
| — |
| — |
| 2,000 |
| — |
| ||||
Net periodic benefit cost |
| $ | 41,350 |
| $ | 33,489 |
| $ | 125,800 |
| $ | 100,468 |
|
|
| Postretirement Benefits (“PRB”) |
| ||||||||||
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||
Components of Net Periodic Benefit Cost |
| December 30, |
| January 1, |
| December 30, |
| January 1, |
| ||||
Service cost |
| $ | 1 |
| $ | 19 |
| $ | 3 |
| $ | 57 |
|
Interest cost |
| 1,623 |
| 1,953 |
| 4,870 |
| 5,860 |
| ||||
Expected return on plan assets |
| (813 | ) | (878 | ) | (2,440 | ) | (2,634 | ) | ||||
Amortization of unrecognized net loss |
| 663 |
| 744 |
| 1,990 |
| 2,230 |
| ||||
Amortization of unrecognized prior service cost |
| (2,095 | ) | (2,096 | ) | (6,286 | ) | (6,286 | ) | ||||
Net periodic benefit income |
| $ | (621 | ) | $ | (258 | ) | $ | (1,863 | ) | $ | (773 | ) |
During the nine months ended December 30, 2012, ATK recorded a settlement expense of $2,000 to recognize the impact of lump sum benefit payments made in the non-qualified supplemental executive retirement plan.
Employer Contributions. During the nine months ended December 30, 2012, ATK contributed $140,000 directly to the pension trust and $5,757 directly to retirees under its supplemental (nonqualified) executive retirement plan. ATK also contributed $8,725 to its other PRB plans. ATK anticipates making additional contributions of $1,390 directly to retirees under the nonqualified plan and $4,253 to its other PRB plans during the remainder of fiscal 2013. As a result of the enactment of the Moving Ahead for Progress in the 21st Century Act on July 6, 2012, ATK is not required to make any additional minimum contributions to the pension trust during the remainder of fiscal 2013.
12. Income Taxes
ATK’s provision for income taxes includes federal, foreign, 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 December 30, 2012 and January 1, 2012 represent effective tax rates of 31.9% and 42.0%, respectively. The decrease in the rate from the prior year quarter is primarily due to the absence of the impact of the nondeductible portion of the LUU flares accrual from the prior year and increased benefits from the domestic manufacturing deduction (“DMD”).
The income tax provisions for the nine months ended December 30, 2012 and January 1, 2012 represent effective tax rates of 30.0% and 35.8%, respectively. The decrease in the rate from the prior year period is primarily due to the settlement of the examination of the fiscal 2009 and 2010 tax returns and the absence of the impact of the nondeductible portion of the LUU flares accrual from the prior year.
The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013. This law retroactively extended the federal research and development (“R&D”) tax credit from January 1, 2012 through December 31, 2013. The effect of this extension will be recorded in the fourth quarter.
During the second quarter of fiscal 2013, ATK settled the examination of the fiscal 2009 and 2010 tax returns with the Internal Revenue Service (“IRS”). This settlement resulted in the recognition of $11,123 of tax benefits in the second quarter of fiscal 2013. This benefit includes the federal and state impact from the closure of the federal audit as well as a reduction to the reserves for subsequent years.
ATK or one of its subsidiaries files income tax returns in the U.S. federal, various U.S. state, and foreign jurisdictions. With few exceptions, ATK is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2006. The IRS is currently auditing ATK’s tax returns for fiscal years 2011 and 2012. 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 $373 reduction of the unrecognized tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings up to $251 based on current estimates.
13. 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 December 30, 2012, ATK has authorized up to 3,982,360 common shares under the 2005 Stock Incentive Plan, of which 1,802,719 common shares are yet available to be granted. Commencing August 7, 2012, the number of shares available for awards under the 2005 Stock Incentive Plan is subject to a fungible share-counting provision, under which each share issued pursuant to an award of options or stock appreciation rights reduces the aggregate Plan award limit by one share and each share issued pursuant to a full-value award (i.e., an award other than options or stock appreciation rights) reduces the aggregate Plan limit by 2.38 shares. Furthermore, for any full-value award granted on or after August 7, 2012, any shares underlying such full-value award that become available for future grant under the 2005 Stock Incentive Plan (e.g., as a result of cancellation or forfeiture) are added back to the Plan in an amount equal to 2.38 shares for each share subject to such award. No new grants will be made out of the other three plans.
Total pre-tax stock-based compensation expense recognized during the quarters ended December 30, 2012 and January 1, 2012 was $4,441 and $2,737, respectively. Total pre-tax stock-based compensation expense recognized during the nine months ended December 30, 2012 and January 1, 2012 was $10,878 and $8,339, respectively.
The total income tax benefit recognized in the income statement for share-based compensation during the quarters ended December 30, 2012 and January 1, 2012 was $1,723 and $1,142 respectively. Total income tax benefit recognized in the income statement for share-based compensation during the nine months ended December 30, 2012 and January 1, 2012 was $4,219 and $3,228, 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 December 30, 2012, there were up to 552,439 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 194,585 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,
· up to 242,610 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, and
· up to 115,244 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 2013 through fiscal 2015 period.
There were no shares earned during fiscal 2012 because the financial performance goals, including sales growth relative to industry peers and EPS, for the fiscal 2010 through 2012 period were not achieved and, therefore, 23,365 shares were forfeited during fiscal 2012.
As of December 30, 2012, there were up to 80,072 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 interest 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. There were no additional TSR shares granted during the nine months ended December 30, 2012.
Of the shares reserved for TSR awards for key employees,
· 27,446 shares will become payable only upon achievement of a relative shareholder return goal measured against an industry peer group established for the fiscal 2011 through 2013 period, and
· 52,626 shares will become payable only upon achievement of a relative shareholder return goal measured against an industry peer group established for the fiscal 2012 through 2014 period.
No shares were earned during fiscal 2012 because the Company’s total shareholder return did not reach the threshold ranking within the industry peer group for the fiscal 2010 through 2012 period and, therefore, 33,371 TSR awards were forfeited during fiscal 2012.
Restricted stock granted to non-employee directors and certain key employees during the first nine months of fiscal 2013 totaled 19,494 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 interest 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 seven 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 3,759 options during the first nine months of fiscal 2013.
14. 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 adverse effect on its operating results, financial condition, or cash flows.
On or about April 10, 2006, a former ATK employee filed a qui tam complaint in federal court in Utah alleging that ATK knowingly submitted claims for payment to the U.S. Government for defective LUU series illuminating flares that failed to conform to certain safety specifications and falsely certified compliance with those specifications. On January 23, 2012, the parties met in a mediation session that resulted in an agreement to settle the lawsuit. As a result of the settlement agreement, ATK established a litigation accrual of $25,500 during fiscal 2012. This payment was made in April 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.
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 December 30, 2012, based on progress to date on certain contracts, there is approximately $26,931 included in unbilled receivables for contract claims, compared to $131,379 as of March 31, 2012.
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 0.5% and 1.00% as of December 30, 2012 and March 31, 2012, 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:
|
| December 30, 2012 |
| March 31, 2012 |
| ||||||||
|
| Liability |
| Receivable |
| Liability |
| Receivable |
| ||||
Amounts (payable) receivable |
| $ | (59,561 | ) | $ | 35,507 |
| $ | (61,227 | ) | $ | 35,638 |
|
Unamortized discount |
| 2,103 |
| (1,129 | ) | 3,731 |
| (1,925 | ) | ||||
Present value amounts (payable) receivable |
| $ | (57,458 | ) | $ | 34,378 |
| $ | (57,496 | ) | $ | 33,713 |
|
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 $57,458 discounted liability as of December 30, 2012, $5,144 was recorded within other current liabilities and $52,314 was recorded within other long-term liabilities. Of the $34,378 discounted receivable, ATK recorded $4,781 within other current assets and $29,597 within other non-current assets. As of December 30, 2012, the estimated discounted range of reasonably possible costs of environmental remediation was $57,458 to $81,930.
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 fiscal year ended March 31, 2012
15. Share Repurchases
On August 5, 2008, ATK’s Board of Directors authorized the repurchase of up to 5,000,000 shares. During 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 new share repurchase program of up to $200,000 worth of shares of ATK common stock, executable 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. The new repurchase authorization also allows the Company to make repurchases under Rule 10b5-1 of the Securities Exchange Act of 1934. This share repurchase program replaces the prior program authorized in 2008. During the first nine months of fiscal 2013, ATK repurchased 482,044 shares for $24,997.
16. Changes in Estimates
The majority of ATK’s sales are accounted for as long-term contracts, which are accounted for under the percentage-of-completion method. Accounting for contracts under the percentage-of-completion (“POC”) method requires judgment relative to assessing risks and estimating contract revenues and costs. 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, including scope and claims, are included in contract sales only when realization is estimated to be probable. Assumptions used for recording sales and earnings are adjusted in the period of change to reflect revisions in contract value and estimated costs. In the period in which it is determined that a loss will be incurred on a contract, the entire amount of the estimated gross margin loss is charged to cost of sales. Changes in estimates of contract sales, costs, or profits are recognized using the cumulative catch-up method of accounting. This method recognizes in the current period the cumulative effect of the changes on current or prior periods. The effect of the changes on future periods of contract performance is recognized as if the revised estimate had been used since contract inception.
Changes in contract estimates occur for a variety of reasons including changes in contract scope, unforeseen changes in contract cost estimates, positive or negative, due to unanticipated cost growth or risks affecting contract costs and/or the resolution of contract risks at lower costs than anticipated, as well as changes in contract overhead costs over the performance period. Changes in estimates could have a material effect on the company’s consolidated financial position or annual results of operations. Aggregate net changes in contract estimates recognized using the cumulative catch-up method of accounting increased operating income by $28,904 and $29,662 for the quarters ended December 30, 2012 and January 1, 2012, respectively. The current quarter adjustments were primarily driven by changes in estimates in Small-Caliber Systems and Space System Operations offset by a reduction in Armament. Prior year quarter adjustments were driven by changes in estimates in Small-Caliber Systems and Defense Electronic Systems offset by a reduction in estimates at the Armament Division. Aggregate net changes in contract estimates were $101,532 and $93,893 for the nine months ended December 30, 2012 and January 1, 2012, respectively. The current year nine month period adjustments were primarily driven by changes in estimates in Small-Caliber Systems and Energetic Systems as contracts near completion, and changes in estimates in Space System operations due to performance improvements. Prior year nine month period adjustments were driven by a favorable contract resolution on a program in the Small-Caliber Systems and changes in estimates within Small-Caliber Systems, Energetics, Defense Electronic Systems, and Space Systems Operations.
17. Realignment Obligations
In April of 2012, ATK commenced operations under a three-group structure. In conjunction with this realignment, ATK incurred realignment charges in the fourth quarter of fiscal 2012. The charges related primarily to termination benefits offered to employees, asset impairment charges, and costs associated with the closure of certain facilities. The following table summarizes ATK’s realignment liability activity during fiscal 2013 related to the termination benefits and facility closure and other costs:
|
| Termination |
| Facility |
| Total |
| |||
Balance at March 31, 2012 |
| $ | 7,148 |
| $ | 25 |
| $ | 7,173 |
|
Expense |
| — |
| — |
| — |
| |||
Cash paid |
| (5,744 | ) | — |
| (5,744 | ) | |||
Reversal |
| (1,090 | ) | — |
| (1,090 | ) | |||
Balance at December 30, 2012 |
| $ | 314 |
| $ | 25 |
| $ | 339 |
|
ATK expects to liquidate the majority of the remaining liability during fiscal 2013.
18. Operating Segment Information
Effective April 1, 2012, ATK realigned its business structure into three operating groups. These operating segments (“groups”) are defined based on the reporting and review process used by ATK’s chief executive officer and other management. The three-group
structure will maximize efficiency, reduce cost, support customer needs, leverage the Company’s investments and improve overall agility within its markets. Each group is described below:
· Aerospace Group, which generated 28% of ATK’s external sales in the nine months ended December 30, 2012, develops and produces rocket motor systems for human and cargo launch vehicles, conventional and strategic missiles, and missile defense interceptors. They also produce small and micro-satellites, satellite components, structures and subsystems, lightweight space deployables and solar arrays, and provide engineering and technical services. Additionally, the Aerospace Group operates in the military and commercial aircraft and launch structures markets. Other products include ordnance, such as decoy and illuminating flares.
· Defense Group, which generated 46% of ATK’s external sales in the nine months ended December 30, 2012, develops and produces military small, medium, and large caliber ammunition, propulsion systems for tactical missiles and missile defense applications, strike weapons, precision munitions, gun systems, aircraft survivability systems, fuzes and warheads, energetic materials and special mission aircraft.
· Sporting Group, which generated 26% of ATK’s external sales in the nine months ended December 30, 2012, develops and produces commercial ammunition and accessories and tactical systems.
The April 1, 2012 realignment is reflected in the information contained in this report for all periods presented.
The military small-caliber ammunition contract, which is reported within the Defense Group, contributed approximately 16% and 15% of total external sales during the nine months ended December 30, 2012 and January 1, 2012, respectively.
The following table summarizes ATK’s results by operating segment:
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||
|
| December 30, 2012 |
| January 1, 2012 |
| December 30, 2012 |
| January 1, 2012 |
| ||||
Sales to external customers: |
|
|
|
|
|
|
|
|
| ||||
Aerospace Group |
| $ | 301,124 |
| $ | 301,843 |
| $ | 906,078 |
| $ | 988,148 |
|
Defense Group |
| 467,477 |
| 572,580 |
| 1,466,089 |
| 1,593,032 |
| ||||
Sporting Group |
| 287,582 |
| 243,061 |
| 836,104 |
| 720,977 |
| ||||
Total external sales |
| 1,056,182 |
| 1,117,484 |
| 3,208,271 |
| 3,302,157 |
| ||||
Intercompany sales: |
|
|
|
|
|
|
|
|
| ||||
Aerospace Group |
| 3,926 |
| 4,216 |
| 13,984 |
| 11,671 |
| ||||
Defense Group |
| 40,679 |
| 28,749 |
| 109,084 |
| 102,811 |
| ||||
Sporting Group |
| 6,545 |
| 5,632 |
| 21,476 |
| 16,207 |
| ||||
Eliminations |
| (51,150 | ) | (38,597 | ) | (144,545 | ) | (130,689 | ) | ||||
Total intercompany sales |
| — |
| — |
| — |
| — |
| ||||
Total sales |
| $ | 1,056,182 |
| $ | 1,117,484 |
| $ | 3,208,271 |
| $ | 3,302,157 |
|
|
|
|
|
|
|
|
|
|
| ||||
Income before interest, income taxes, and noncontrolling interest: |
|
|
|
|
|
|
|
|
| ||||
Aerospace Group |
| $ | 37,478 |
| $ | 34,839 |
| $ | 109,506 |
| $ | 115,060 |
|
Defense Group |
| 53,389 |
| 87,000 |
| 209,295 |
| 241,695 |
| ||||
Sporting Group |
| 30,215 |
| 22,786 |
| 76,142 |
| 75,436 |
| ||||
Corporate |
| (14,223 | ) | (39,201 | ) | (46,839 | ) | (48,820 | ) | ||||
Total income before interest, income taxes, and noncontrolling interest |
| $ | 106,859 |
| $ | 105,424 |
| $ | 348,104 |
| $ | 383,371 |
|
|
|
|
| ||||||||||
|
| Period Ended |
| ||||||||||
Total assets: |
| December 30, 2012 |
| March 31, 2012 |
| ||||||||
Aerospace Group |
| $ | 1,129,145 |
| $ | 1,539,899 |
| ||||||
Defense Group |
| 1,490,823 |
| 1,193,503 |
| ||||||||
Sporting Group |
| 866,821 |
| 750,622 |
| ||||||||
Corporate |
| 773,139 |
| 1,057,722 |
| ||||||||
Total assets |
| $ | 4,259,928 |
| $ | 4,541,746 |
|
Certain administrative functions are primarily managed by ATK at the corporate headquarters (“Corporate”). Some examples of such functions are human resources, pension and postretirement benefits, corporate accounting, legal, tax, and treasury. Significant assets and liabilities managed at Corporate include those associated with debt, pension and postretirement benefits, environmental liabilities, litigation, and income taxes.
Costs related to the administrative functions managed by Corporate are either recorded at Corporate or allocated to the business units based on the nature of the expense. The difference between pension and postretirement benefit expense calculated under Financial Accounting Standards and the expense calculated under U.S. Cost Accounting Standards is recorded at the corporate level which provides for greater clarity on the operating results of the business segments. Administrative expenses such as corporate accounting, legal, and treasury costs, are allocated out to the business segments. Environmental expenses are allocated to each segment based on the origin of the underlying environmental cost. Transactions between segments are recorded at the segment level, consistent with ATK’s financial accounting policies. Intercompany balances and transactions involving different segments are eliminated at ATK’s consolidated financial statements level. These eliminations are shown above in “Corporate” and were $4,935 and $8,738 for the quarters ended December 30, 2012 and January 1, 2012, respectively, and $14,361 and $24,370 for the nine months ended December 30, 2012 and January 1, 2012, respectively.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands except share and per share data and unless otherwise indicated)
Forward-Looking Information is Subject to Risk and Uncertainty
Some of the statements made and information contained in this report, excluding historical information, are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements give ATK’s current expectations or forecasts of future events. Words such as “may,” “will,” “expected,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” and similar expressions are used to identify forward-looking statements. From time to time, ATK also may provide oral or written forward-looking statements in other materials released to the public. Any or all forward-looking statements in this report and in any public statements ATK makes could be materially different. They can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Any change in the following factors may impact the achievement of results:
· reductions or changes in NASA or U.S. Government military spending and budgetary policies, including impacts of potential sequestration under the Budget Control Act of 2011, and sourcing strategies,
· intense competition,
· increases in costs, which ATK may not be able to react to due to the nature of its U.S. Government contracts,
· changes in cost and revenue estimates and/or timing of programs,
· the potential termination of U.S. Government contracts and the potential inability to recover termination costs,
· reduction or change in demand for commercial ammunition,
· risks associated with expansion into commercial markets,
· 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,
· greater risk associated with international business,
· other risks associated with U.S. Government contracts that might expose ATK to adverse consequences,
· costs of servicing ATK’s debt, including cash requirements and interest rate fluctuations,
· information security threats or other disruptions,
· supply, availability, and costs of raw materials and components, including commodity price fluctuations,
· government laws and other rules and regulations applicable to ATK, such as procurement, import-export control, and federal and state firearms and ammunition regulations,
· the novation of U.S. Government contracts,
· performance of ATK’s subcontractors,
· 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,
· impacts of financial market disruptions or volatility to ATK’s customers and vendors,
· results of acquisitions or other transactions, and costs incurred for pursuits and proposed acquisitions or other transactions that have not yet or may not close,
· unanticipated changes in the tax provision or exposure to additional tax liabilities, 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, 2012 and subsequent
Quarterly Reports on Form 10-Q for the fiscal year ending March 31, 2013. 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.
Effective April 1, 2012, ATK realigned its business structure into three operating groups. As a result of this realignment, at December 30, 2012, ATK’s three operating groups are:
· Aerospace Group, which generated 28% of ATK’s external sales in the nine months ended December 30, 2012, develops and produces rocket motor systems for human and cargo launch vehicles, conventional and strategic missiles, and missile defense interceptors. They also produce small and micro-satellites, satellite components, structures and subsystems, lightweight space deployables and solar arrays, and provide engineering and technical services. Additionally, the Aerospace Group operates in the military and commercial aircraft and launch structures markets. Other products include ordnance, such as decoy and illuminating flares.
· Defense Group, which generated 46% of ATK’s external sales in the nine months ended December 30, 2012, develops and produces military small, medium, and large caliber ammunition, propulsion systems for tactical missiles and missile defense applications, strike weapons, precision munitions, gun systems, aircraft survivability systems, fuzes and warheads, energetic materials and special mission aircraft.
· Sporting Group, which generated 26% of ATK’s external sales in the nine months ended December 30, 2012, develops and produces commercial ammunition and accessories and tactical systems.
The April 1, 2012 realignment is reflected in the information contained in this report for all periods presented.
Financial Highlights and Notable Events
Certain notable events or activities affecting our fiscal 2013 financial results include the following:
Financial highlights for the quarter ended December 30, 2012
· Quarterly sales of $1.1 billion compared to $1.1 billion in the prior year quarter.
· Diluted earnings per share of $1.93 compared to $1.51 in the prior year quarter.
· Orders for the quarter ending December 30, 2012 were $1.4 billion compared to $701 million in the quarter ending January 1, 2012.
· Total backlog was $6.7 billion at December 30, 2012 compared to $6.3 billion at March 31, 2012.
· Income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest as a percentage of sales was 10.1% compared to 9.4% in the prior year third quarter. This increase was driven by the absence of a $33,305 accrual regarding a previously disclosed settlement related to LUU flares litigation recorded in the prior year partially offset by $13,565 due to the loss of the Radford facility management contract.On October 30, 2012, ATK’s Board of Directors declared a quarterly cash dividend of $0.26 per share, to stockholders of record on November 21, 2012. The dividend was paid on December 13, 2012.
Notable events for fiscal 2013
· During the first nine months of fiscal 2013 ATK repurchased 482,044 shares for $24,997.
· On September 28, 2012, ATK was notified by the U.S. Army that it was selected for both the production of ammunition and continued operation and maintenance of the Lake City Army Ammunition Plant (“LCAAP”). The production contract runs through September 2019 and the facility contract runs through September 2020.
· On February 1, 2013, ATK’s Board of Directors declared a quarterly cash dividend of $0.26 per share, payable on March 28, 2013, to stockholders of record on March 5, 2013.
· We successfully negotiated a contract amendment in the Aerospace Structures Division that includes the settlement of an outstanding receivable. As a result of that negotiation, we collected a $51,150 payment in the second quarter and an additional $51,150 payment in the third quarter.
· During the second quarter, the Company redeemed its “6.75% Notes” for $409,000 including a premium of $9,000, plus accrued interest. The transaction resulted in the write-off of the remaining $2,773 of deferred debt issuance costs.
· Under the terms of the Senior Credit Facility, ATK exercised its option to increase the Term A Loan by $200,000 (the “Accordion”) during the second quarter. Proceeds of the Accordion were used to partially finance the redemption of the 6.75% Notes.
· In the second quarter, ATK settled the examination of the fiscal 2009 and 2010 tax returns with the IRS. This settlement resulted in the recognition of approximately $11,123 of tax benefit.
· On February 4, 2013, ATK announced it is changing the pension formula for affected employees who currently earn a benefit under ATK’s defined benefit pension plans. Effective July 1, 2013, affected employees will earn benefits under a new cash balance pension formula and will also be eligible for an enhanced company match under the 401(k) Plan. All of the changes are prospective. For additional information, see ATK’s Current Report on Form 8-K dated January 31, 2013 and filed with the SEC on February 4, 2013.
· ATK’s Board of Directors appointed Jay Tibbets Senior Vice President and Interim President of the Sporting Group effective February 1, 2013, replacing Ronald P. Johnson who resigned on January 31, 2013.
· ATK’s Board of Directors appointed Scott Chaplin as Senior Vice President and General Counsel of ATK effective October 1, 2012.
Outlook
Government Funding — ATK is dependent on funding levels of the U.S. Department of Defense (“DoD”) and NASA.
In August 2011, the Budget Control Act (“the Act”) reduced the DoD top line budget by approximately $490 billion over 10 years starting in fiscal year 2012. In January 2013, the “American Taxpayer Relief Act of 2012” was enacted, which barring Congressional action, means further budget cuts (or sequestration) as outlined in the Act will be implemented starting in March 2013 which would lead to additional reductions of approximately $500 billion from the defense top line budget over the next nine years, resulting in aggregate reductions of about $1 trillion through 2021. In September 2012, the Office of Management and Budget (“OMB”) provided a report to Congress stating that it was unable to determine the amount of sequestration at the program, project, or activity level until consistent, government-wide definitions are established. The DoD has taken the position that such reductions would generate significant operational risks and may require the termination of certain, as yet undetermined, procurement programs. Given the uncertainty regarding how the Congress will reduce the U.S. deficit and a lack of specifics on how cuts will be implemented, we are unable to predict the impact, which could be material, on our programs or financial outlook, including our revenues, operating earnings and margins, cash flow, orders and backlog and recovery of long-lived assets.
In September 2012, Congress passed, and the President signed, legislation making continuing appropriations from October 1, 2012 through March 27, 2013. This will enable programs to continue at the same operations rate through the remainder of fiscal year 2013.
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.
Congress and the President signed the NASA Authorization Act in October 2010 that directed the development of a Space Launch System. Consistent with the NASA Authorization Act, 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, the 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 (2017 and 2021). At the same time, NASA announced that it will hold a competition for the final design of the propulsion system for SLS, in which ATK will be eligible to participate.
On November 18, 2011, President Obama signed the GFY 2012 NASA Appropriations bill, which provided $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 NASA Administrator on the SLS configuration. The President’s government fiscal year 2013 budget includes a stable funding
request for SLS for GFY13 through GFY17. Congress will determine the GFY13 funding level for NASA as well as the amount of the line item in NASA’s budget for the SLS program. In the event the program is terminated, the Company believes that it will be reimbursed for certain amounts previously incurred by ATK, as well as amounts to be incurred by ATK, as part of that termination (e.g., severance, environmental liabilities, termination administration). There can be no assurance that ATK will be successful in collecting reimbursement of any termination liability costs.
During the first nine months of fiscal 2013, NASA sales relating to the SLS programs were approximately $190,500 and as of December 30, 2012 ATK had approximately:
· $25,847 of billed and unbilled receivables directly related to the program
· $69,668 of net property, plant, and equipment and other assets related to the SLS and other contracts, and
· $518,000 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.
U.S. Government contracts are also dependent on the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take more than one year. As a result, at the outset of a major program, the contract is usually incrementally funded, and additional monies are normally committed to the contract by the procuring agency only as Congress makes appropriations for future fiscal years. In addition, most U.S. Government contracts are subject to modification if funding is changed. Any failure by Congress to appropriate additional funds to any program in which ATK participates, or any contract modification as a result of funding changes, could materially delay or terminate the program. This could have a material adverse effect on ATK’s operating results, financial condition, or cash flows.
On January 23, 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 Radford Army Ammunition Plant (“RFAAP”) and that ATK had not been awarded the contract. Loss of the Radford facility management contract will reduce the Defense Group’s 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. Sales and operating profit associated with the RFAAP contract during fiscal 2013 were $71,909 and $47,693, respectively, which includes a gain on sale of residual assets, higher sales production volumes, and changes in profit rates. The RFAAP contract concluded June 30, 2012 and the plant has been transitioned to the successor contractor.
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”) and minimum normal cost (“MNC”), 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. Due to the phase-in approach within the ruling, there will be minimal impact to ATK prior to fiscal 2015. ATK is currently bidding pension cost for new business using the new CAS standard, and will be entitled to an equitable adjustment for CAS-covered business that was booked prior to the effective date of the final rule. ATK is currently developing its equitable adjustment proposal.
General Outlook for Fiscal Year 2014
ATK expects that its operating results will be impacted by the following for fiscal year 2014:
· ATK expects pension savings from the changes to its defined benefit pension plans as described above, but the final fiscal year 2014 pension expense will be determined based on the discount rate as determined on March 31, 2013.
· ATK will not have $48 million in profit (recorded in the current fiscal year) from the RFAAP.
· ATK anticipates successfully implementing its competitive new contract at the LCAAP beginning in October 2013, which will result in margin pressure in the small-caliber systems division in the second half of fiscal year 2014.
· On the whole, ATK expects to be able to deliver total company fiscal year 2014 operating margins of approximately 10-percent.
· These expectations and estimates exclude the risks of sequestration, as described above.
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 fiscal year ended March 31, 2012 (“fiscal 2012”). The accounting policies used in preparing ATK’s interim fiscal 2013 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, 2012.
Results of Operations
Acquisitions
There were no acquisitions during the first nine months of fiscal 2013 or fiscal 2012.
Sales
The military small-caliber ammunition contract, which is reported within the Defense Group, contributed approximately 16% and 15% of total external sales during the nine months ended December 30, 2012 and January 1, 2012, respectively.
The following is a summary of each operating segment’s external sales:
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| Quarters Ended |
| Nine Months Ended |
| ||||||||||||||||||
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| December 30, |
| January 1, |
| $ Change |
| % |
| December 30, |
| January 1, |
| $ Change |
| % Change |
| ||||||
Aerospace Group |
| $ | 301,123 |
| $ | 301,843 |
| $ | (720 | ) | (0.2 | )% | $ | 906,078 |
| $ | 988,148 |
| $ | (82,070 | ) | (8.3 | )% |
Defense Group |
| 467,477 |
| 572,580 |
| (105,103 | ) | (18.4 | )% | 1,466,089 |
| 1,593,032 |
| (126,943 | ) | (8.0 | )% | ||||||
Sporting Group |
| 287,582 |
| 243,061 |
| 44,521 |
| 18.3 | % | 836,104 |
| 720,977 |
| 115,127 |
| 16.0 | % | ||||||
Total external sales |
| $ | 1,056,182 |
| $ | 1,117,484 |
| $ | (61,302 | ) | (5.5 | )% | $ | 3,208,271 |
| $ | 3,302,157 |
| $ | (93,886 | ) | (2.8 | )% |
The fluctuation in sales was driven by the program-related changes within the operating segments as described below.
Quarter:
Aerospace Group. The sales were flat, driven by a $9,800 decrease in Space Systems Operations resulting from the completion of the Space Shuttle Program and other contracts, offset by an increase in the Space Components division across multiple programs in the current year.
Defense Group. The decrease in sales was driven by:
· a decrease of $54,600 in Energetic Systems which was primarily driven by the loss of the Radford facility management contract,
· a decrease of $42,300 in Small Caliber Systems due to completion of an international contract and lower volume, and
· a decrease of $10,400 in Defense Electronic Systems due to startup and completions on multiple contracts.
Sporting Group. The increase in sales was driven by a $44,400 increase in Ammunition driven by higher volumes, and a previously announced price increase in the commercial channels due to demand.
Nine Months:
Aerospace Group. The decrease in sales was driven by:
· a $63,600 decrease in Space Systems Operations resulting from the completion of the Space Shuttle Program and other contracts as well as reduced production levels, and
· a $26,800 decrease in Aerospace Structures primarily driven by completion of tool procurement/start-up activities within Commercial Aircraft Structures.
These decreases were partially offset by an $8,400 increase in Space Components division across multiple programs in the current year.
Defense Group. The decrease in sales was driven by:
· a decrease of $81,100 in Energetic Systems which was primarily driven by the loss of the Radford facility management contract,
· a decrease of $11,500 in Defense Electronic Systems due to startup and completion of multiple contracts,
· a decrease of $9,600 in Small Caliber Systems due to the absence of an $18,000 change in profit expectation from a favorable contract resolution on a program in the prior year, and completion of an international contract, offset by higher volumes, and
· a decrease of $8,700 in Armament due to the completion of an international contract.
Sporting Group. The increase in sales was driven by:
· a $76,200 increase in Ammunition driven by higher volumes, and a previously announced price increase in the commercial channels, and
· an increase of $38,800 in Accessories resulting primarily from higher DoD sales volume.
Gross Profit
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| Nine Months Ended |
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| December 30, |
| As a % |
| January 1, |
| As a % |
| Change |
| December 30, |
| As a % |
| January 1, |
| As a % |
| Change |
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Gross profit |
| $ | 219,627 |
| 20.8 | % | $ | 245,804 |
| 22.0 | % | $ | (26,177 | ) | $ | 697,517 |
| 21.7 | % | $ | 752,284 |
| 22.8 | % | $ | (54,767 | ) |
Quarter:
The decrease in gross profit for the quarter is primarily driven by:
· a decrease of $19,700 in the Energetic Systems due primarily to the loss of the Radford facility management contract and other completed contracts, and
· a decrease of $10,400 due to an increase in pension expense.
These decreases were partially offset by increased sales in the Sporting Group and performance improvements on contracts in the Aerospace Group.
Nine Months:
The decrease in gross profit for the quarter is primarily driven by:
· a decrease of $28,800 due to an increase in pension expense, and
· a decrease of $18,000 in Small Caliber Systems due to the absence of a change in profit expectation from a favorable contract resolution on a program in the prior year quarter.
Operating Expenses
|
| Quarters Ended |
| Nine Months Ended |
| ||||||||||||||||||||||
|
| December 30, |
| As a % |
| January 1, |
| As a % |
| Change |
| December 30, |
| As a % |
| January 1, |
| As a % |
| Change |
| ||||||
Research and development |
| $ | 13,947 |
| 1.3 | % | $ | 14,624 |
| 1.3 | % | $ | (677 | ) | $ | 43,869 |
| 1.4 | % | $ | 41,711 |
| 1.3 | % | $ | 2,158 |
|
Selling |
| 41,535 |
| 3.9 | % | 39,989 |
| 3.6 | % | 1,546 |
| 121,670 |
| 3.8 | % | 121,421 |
| 3.7 | % | 249 |
| ||||||
General and administrative |
| 57,286 |
| 5.4 | % | 85,767 |
| 7.7 | % | (28,481 | ) | 183,874 |
| 5.9 | % | 205,781 |
| 6.2 | % | (21,907 | ) | ||||||
Total |
| $ | 112,768 |
| 10.7 | % | $ | 140,380 |
| 12.6 | % | $ | (27,612 | ) | $ | 349,413 |
| 10.9 | % | $ | 368,913 |
| 11.2 | % | $ | (19,500 | ) |
Quarter:
Operating expenses decreased $27,600 from the prior year period. Research and development costs were slightly lower compared to the prior year quarter due to reductions in Aerospace Structures. Selling expenses were higher due to higher sales in the Sporting Group. General and administrative expenses were lower due to the absence of the $33,305 LUU flares accrual recorded in the prior year quarter.
Nine Months:
Operating expenses decreased $19,500 from the prior year period. Research and development costs were higher compared to the prior year in the Aerospace Group due to commercial vehicle development. Selling expenses were flat compared to last year. General and administrative expenses were lower due to the $33,305 the LUU flares accrual in the prior year.
Income before Interest, Loss on Extinguishment of Debt, Income Taxes, and Noncontrolling Interest
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| Quarters Ended |
| Nine Months Ended |
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| December 30, |
| January 1, |
| Change |
| December 30, |
| January 1, |
| Change |
| ||||||
Aerospace Group |
| $ | 37,478 |
| $ | 34,839 |
| $ | 2,639 |
| $ | 109,506 |
| $ | 115,060 |
| $ | (5,554 | ) |
Defense Group |
| 53,389 |
| 87,000 |
| (33,611 | ) | 209,295 |
| 241,695 |
| (32,400 | ) | ||||||
Sporting Group |
| 30,215 |
| 22,786 |
| 7,429 |
| 76,142 |
| 75,436 |
| 706 |
| ||||||
Corporate |
| (14,223 | ) | (39,201 | ) | 24,978 |
| (46,839 | ) | (48,820 | ) | 1,981 |
| ||||||
Total |
| $ | 106,859 |
| $ | 105,424 |
| $ | 1,435 |
| $ | 348,104 |
| $ | 383,371 |
| $ | (35,267 | ) |
The fluctuation in income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest from the prior year periods includes the reversal of $9,000 of long-term incentive compensation accrual in the prior year and program-related changes within the operating segments as described below.
Quarter:
Aerospace Group. The increase relates to performance improvements in Space System Operations.
Defense Group. The decrease is primarily driven by lower sales within the group, the loss of the Radford facility management contract, and other completed contracts, partially offset by profit expectation improvement in Small Caliber Systems.
Sporting Group. The increase primarily reflects higher sales volumes and prices, as well as lower raw material costs.
Corporate. Corporate income before interest, loss on extinguishment of debt. 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 due to the absence of the $33,305 LUU flares accrual in the prior year quarter partially offset by higher pension expense.
Nine Months:
Aerospace Group. The decrease relates to the lower sales volume across the Aerospace Group as discussed above, and the absence of a gain on the sale of a non-essential parcel of land to the State of Utah during fiscal 2012.
Defense Group. The decrease was primarily driven by lower sales within the group, changes in profit expectations in the Missile Products Division, and the absence of an $18,000 change in profit expectation from a favorable contract resolution on a program in
the prior year. This was partially offset by a gain on the sale of residual assets in Energetic Systems and profit expectation improvements in Small Caliber Systems.
Sporting Group. The increase primarily reflects higher sales volumes and prices, as well as lower raw material costs. This is partially offset by a reserve for potentially obsolete inventory balances within Eagle Industries.
Corporate. Corporate income before interest, loss on extinguishment of debt, 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 due to the absence of the $33,305 LUU flares accrual in the prior year partially offset by higher pension expense.
The majority of ATK’s sales are accounted for as long-term contracts, which are accounted for under the percentage-of-completion method. Accounting for contracts under the percentage-of-completion (“POC”) method requires judgment relative to assessing risks and estimating contract revenues and costs. 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, including scope and claims, are included in contract sales only when realization is estimated to be probable. Assumptions used for recording sales and earnings are adjusted in the period of change to reflect revisions in contract value and estimated costs. In the period in which it is determined that a loss will be incurred on a contract, the entire amount of the estimated gross margin loss is charged to cost of sales. Changes in estimates of contract sales, costs, or profits are recognized using the cumulative catch-up method of accounting. This method recognizes in the current period the cumulative effect of the changes on prior periods. The effect of the changes on future periods of contract performance is recognized as if the revised estimate had been used since contract inception.
Changes in contract estimates occur for a variety of reasons including changes in contract scope, unforeseen changes in contract cost estimates, positive or negative, due to unanticipated cost growth or risks affecting contract costs and/or the resolution of contract risks at lower costs than anticipated, as well as changes in contract overhead costs over the performance period. Changes in estimates could have a material effect on the company’s consolidated financial position or annual results of operations. During the quarters ended December 30, 2012 and January 1, 2012, the Company recognized favorable operating income adjustments of $55,592 and $56,970, and unfavorable operating income adjustments of $26,688 and $27,308, respectively. The current quarter adjustments were primarily driven by changes in estimates in Small-Caliber Systems and Space System Operations offset by a reduction in Armament. Prior year quarter adjustments were driven by changes in estimates in Small-Caliber Systems and Defense Electronic Systems offset by a reduction in estimates at the Armament Division. During the nine months ended December 30, 2012 and January 1, 2012, the Company recognized favorable operating income adjustments of $188,598 and $154,155, and unfavorable operating income adjustments of $87,066 and $60,262, respectively. The current year nine-month period adjustments were primarily driven by changes in estimates in Small-Caliber Systems and Energetic Systems as contracts near completion, and changes in estimates in Space System operations due to performance improvements. Prior year nine-month period adjustments were driven by a favorable contract resolution on a program in the Small-Caliber Systems and changes in estimates within Small-Caliber Systems, Energetics, Defense Electronic Systems, and Space Systems Operations.
Net Interest Expense
Quarter:
Net interest expense for the quarter ended December 30, 2012 was $14,074, a decrease of $5,709 compared to $19,783 in the comparable quarter of fiscal 2012, primarily due to the decrease in the average amount of debt outstanding and lower interest rates.
Nine Months:
Net interest expense for the nine months ended December 30, 2012 was $51,986, a decrease of $17,947 compared to $69,933 in the comparable nine month period of fiscal 2012, primarily due to a decrease in the average amount of debt outstanding.
Income Tax Provision
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| Nine Months Ended |
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| December 30, |
| Effective |
| January 1, |
| Effective |
| Change |
| December 30, |
| Effective |
| January 1, |
| Effective |
| Change |
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Income tax provision |
| $ | 29,693 |
| 31.9 | % | $ | 36,085 |
| 42.0 | % | $ | (6,392 | ) | $ | 85,330 |
| 30.0 | % | $ | 112,308 |
| 35.8 | % | $ | (26,978 | ) |
ATK’s provision for income taxes includes federal, foreign, and state income taxes. Income tax provisions for interim periods are based on estimated effective annual income tax rates.
The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013. This law retroactively extended the federal R&D tax credit from January 1, 2012 through December 31, 2013. The favorable impact of approximately $3.5 million due to this extension will be included in the tax rate for the fourth quarter of fiscal 2013.
Quarter:
The income tax provisions for the quarters ended December 30, 2012 and January 1, 2012 represent effective tax rates of 31.9% and 42.0%, respectively. The decrease in the rate from the prior year quarter is primarily due to the absence of the impact of the nondeductible portion of the LUU flares accrual from the prior year and increased benefits from the DMD.
Nine Months:
The income tax provisions for the nine months ended December 30, 2012 and January 1, 2012 represent effective tax rates of 30.0% and 35.8%, respectively. The decrease in the rate from the prior year period is primarily due to the settlement of the examination of the fiscal 2009 and 2010 tax returns and the absence of the impact of the nondeductible portion of the LUU flares accrual from the prior year.
During the second quarter, ATK settled the examination of the fiscal 2009 and 2010 tax returns with the Internal Revenue Service (“IRS”). This settlement resulted in the recognition of $11,123 of tax benefits in the second quarter of fiscal 2013. This benefit includes the federal and state impact from the closure of the federal audit as well as a reduction to the reserves for subsequent years.
ATK or one of its subsidiaries files income tax returns in the U.S. federal, various U.S. state, and foreign jurisdictions. With few exceptions, ATK is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2006. The IRS is currently auditing ATK’s tax returns for fiscal years 2011 and 2012. 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 $373 reduction of the unrecognized tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings up to $251 based on current estimates.
Net Income
Quarter:
Net income for the quarter ended December 30, 2012 was $63,175, an increase of $13,490 compared to $49,685 in the third quarter of fiscal 2012. This increase was driven by a decrease of $27,612 in operating expenses, lower net interest expense of $5,709, and $6,392 decrease in income tax expense. These decreases were partially offset by a $26,177 decrease in gross profit.
Nine Months:
Net income for the nine months ended December 30, 2012 was $199,065, a decrease of $2,128 compared to $201,193 in comparable period of fiscal 2012. This decrease was driven by a $54,767 decrease in gross profit, and an $11,773 loss on the extinguishment of debt. These decreases to net income were partially offset by a decrease of $19,500 in operating expenses, lower net interest expense of $17,947, and a $26,978 decrease in income tax expense.
Noncontrolling Interest
The noncontrolling interest in each period represents the noncontrolling owners’ portion of the income of a joint venture in which ATK is the primary owner. This joint venture is consolidated into ATK’s financial statements.
Liquidity and Capital Resources
ATK manages its business to maximize operating cash flows as the primary source of liquidity. In addition to cash on hand and cash generated by operations, sources of liquidity include a committed credit facility, long-term borrowings, and access to the public debt and equity markets. ATK uses its cash to fund its investments in its existing core businesses, acquisition activity, share repurchases, and other activities.
Cash Flow Summary
Cash from operations was $118,400 for the first nine months of fiscal 2013. Cash flows provided by operations included a decrease in working capital primarily due to an Aerospace Structures collection of an outstanding receivable of $102,000 and the timing of other payments and collections, offset by the impact of a $140,000 pension contribution, and higher tax payments. Capital expenditures in the first nine months of fiscal 2013 were $61,351, slightly lower than normal. We expect capital expenditures to trend higher during the remainder of the fiscal year.
ATK’s cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows for the nine months ended December 30, 2012 and January 1, 2012 are summarized as follows:
|
| December 30, |
| January 1, |
| Change |
| |||
Cash flows (used for) provided by operating activities |
| $ | 118,400 |
| $ | 124,740 |
| $ | (6,340 | ) |
Cash flows used for investing activities |
| (61,332 | ) | (90,587 | ) | 29,255 |
| |||
Cash flows used for financing activities |
| (263,960 | ) | (380,946 | ) | 116,986 |
| |||
Net cash flows |
| $ | (206,892 | ) | $ | (346,793 | ) | $ | 139,901 |
|
Operating Activities.
Net cash provided by operating activities decreased $6,340 to $118,400 compared to $124,740 of cash generated in the prior year. This decrease was driven by a $140,000 funding payment to the pension trust during the current year compared to $61,600 in the prior year, an increase of $43,189 in tax payments, and $25,500 related to the payment of the LUU flare settlement. These decreases were partially offset by approximately $191,656 less cash required to fund working capital, primarily driven by Aerospace Structures collection of an outstanding receivable of $102,000.
Cash used for working capital is defined as net receivables plus net inventories, less accounts payables and contract advances.
Investing Activities.
Net cash used for investing activities decreased by $29,255, primarily due to less cash used for capital expenditures in fiscal 2013, partially offset by proceeds from the disposition of a non-essential parcel of land within Aerospace Systems during the prior year.
Financing Activities.
Net cash used for financing activities decreased $116,986 compared to the prior year, primarily due to the early extinguishment of the $409,000 aggregate principal amount of 6.75% Senior Subordinated Notes including $9,000 premium, compared to payment of $299,997 to repay the 2.75% Convertible Notes due 2011 in the prior year period. This was offset by the exercise of an option to increase the Term A Loan by $200,000 (the “Accordion”) during the nine months ended December 30, 2012 and the reduction in common stock repurchased during the current year by $24,994 to $24,997 compared to $49,991 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 the $199,453 of convertible notes under certain circumstances.
ATK paid cash dividends totaling $21,563 on its common stock during the first nine months of fiscal 2013. On February 1, 2013, ATK’s Board of Directors declared a quarterly cash dividend. The $0.26 per share dividend will be payable on March 28, 2013, to stockholders of record on March 5, 2013. The payment and amount of any future dividends are at the discretion of the Board of Directors and will be based on a number of factors, including our earnings, liquidity position, financial condition, tone of business, capital requirements, credit ratings and the availability and cost of obtaining new debt. We cannot be certain that ATK will continue to declare dividends in the future and, as such, the amount and timing of any future dividends are not determinable.
Based on ATK’s current financial condition, management believes that ATK’s cash position, combined with anticipated generation of cash flows and the availability of funding, if needed, through ATK’s revolving credit facilities, access to debt and equity markets, as well as potential future sources of funding including additional bank financing 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.
Long-Term Debt and Credit Facilities
As of December 30, 2012 ATK had actual total indebtedness of $1,109,453 and the $600,000 Revolving Credit Facility provided for the potential of additional borrowings up to $427,682. There were no outstanding borrowings under the Revolving Credit Facility as of December 30, 2012, although ATK had outstanding letters of credit of $172,318 which reduced amounts available under the facility.
For the periods presented, ATK’s indebtedness consisted of the following:
|
| December 30, 2012 |
| March 31, 2012 |
| ||
Senior Credit Facility dated October 7, 2010: |
|
|
|
|
| ||
Term A Loan due 2015 |
| $ | 360,000 |
| $ | 370,000 |
|
Term A Loan due 2017 |
| 200,000 |
| — |
| ||
Revolving Credit Facility due 2015 |
| — |
| — |
| ||
6.75% Senior Subordinated Notes due 2016 |
| — |
| 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 |
| 1,109,453 |
| 1,319,453 |
| ||
Less: Unamortized discounts |
| 12,335 |
| 17,451 |
| ||
Carrying amount of long-term debt |
| 1,097,118 |
| 1,302,002 |
| ||
Less: current portion |
| 50,000 |
| 30,000 |
| ||
Carrying amount of long-term debt, excluding current portion |
| $ | 1,047,118 |
| $ | 1,272,002 |
|
See Note 9 “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, 2012, for a detailed discussion of these borrowings.
Senior Credit Facility
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 on October 7, 2015. Under the terms of the Senior Credit Facility, ATK exercised its option to increase the Term A Loan by $200,000 (the “Accordion”) during the quarter ended September 30, 2012. Proceeds of the Accordion were used to partially finance the redemption of the 6.75% Notes, as discussed below. Terms of the Accordion are the same as the existing Term A Loan with the exception that it will mature on September 5, 2017, approximately two years after the existing Term A Loan. The existing 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. The Accordion is subject to annual principal payments of $10,000 in each of the first
and second years and $20,000 in each of the third, fourth, and fifth years, paid on a quarterly basis, with the balance due on September 5, 2017.
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%. 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, 2013.
6.75% Notes due 2016
In fiscal 2006, ATK issued $400,000 aggregate principal amount of 6.75% Senior Subordinated Notes (“the 6.75% Notes”) that were due to mature on April 1, 2016. During the nine month period ended December 30, 2012, the Company redeemed these notes. In accordance with the indenture, the redemption price was 102.25% of the principal amount, or $409,000, including a premium of $9,000, plus accrued interest. The transaction resulted in the write-off of the remaining $2,773 of deferred debt issuance costs.
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 some or all of these notes on August 15, 2014 and August 15, 2019. Note holders may also convert their notes at a conversion rate of 12.9038 shares of ATK’s common stock per $1 principal amount of these notes (a conversion price of $77.50 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 and the 6.875% 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.
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 December 30, 2012 |
| 1.02 |
| 1.97 |
| 8.28 |
|
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 December 30, 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 6.875% 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. As of December 30, 2012, ATK was in compliance with the indentures and expects to be in compliance with the indentures for the foreseeable future.
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 it could also be used for other corporate purposes, as determined by the Board. In fiscal 2012, ATK repurchased 742,000 shares for $49,991 under this program. ATK repurchased no shares in fiscal years 2011 or 2010.
On January 31, 2012, ATK’s Board of Directors authorized a new share repurchase program of up to $200,000 worth of shares of ATK common stock, executable over the next two years. The shares may be purchased in open market, block purchase, or negotiated transactions, subject to compliance with applicable laws and regulations. The new repurchase authorization also allows the Company to make repurchases under Rule 10b5-1 of the Securities Exchange Act of 1934. This share repurchase program replaces the prior program authorized in 2008. During the first nine months of fiscal 2013, ATK repurchased 482,044 shares for $24,997.
Any additional authorized repurchases would be subject to market conditions and ATK’s compliance with its debt covenants. ATK’s 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 December 30, 2012, this limit was approximately $794,000. As of December 30, 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 2012.
Due to the President signing the Moving Ahead for Progress in the 21st Century Act, on July 6, 2012, ATK will not be required to make any additional minimum contributions to the pension trust during the remainder of fiscal 2013. Although the IRS has not yet
released the new interest rates, we expect the new rates could significantly reduce our required pension contributions for fiscal 2014 through fiscal 2015 by approximately $140,000 to $160,000, as compared to the amount disclosed in our 2012 Annual Report on Form 10-K. Our analysis indicates that required pension contributions would rise subsequent to fiscal 2015, resulting in minimal net impact to cumulative required contributions over a 10-year period.
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 adverse effect on its operating results, financial condition, or cash flows.
On or about April 10, 2006, a former ATK employee filed a qui tam complaint in federal court in Utah alleging that ATK knowingly submitted claims for payment to the U.S. Government for defective LUU series illuminating flares that failed to conform to certain safety specifications and falsely certified compliance with those specifications. On January 23, 2012, the parties met in a mediation session that resulted in an agreement to settle the lawsuit. As a result of the settlement agreement, ATK established a litigation accrual of $25,500 during fiscal 2012. This payment was made in April 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 0.5% and 1.00% as of December 30, 2012 and March 31, 2012, 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:
|
| December 30, 2012 |
| March 31, 2012 |
| ||||||||
|
| Liability |
| Receivable |
| Liability |
| Receivable |
| ||||
Amounts (payable) receivable |
| $ | (59,561 | ) | $ | 35,507 |
| $ | (61,227 | ) | $ | 35,638 |
|
Unamortized discount |
| 2,103 |
| (1,129 | ) | 3,731 |
| (1,925 | ) | ||||
Present value amounts (payable) receivable |
| $ | (57,458 | ) | $ | 34,378 |
| $ | (57,496 | ) | $ | 33,713 |
|
As of December 30, 2012, the estimated discounted range of reasonably possible costs of environmental remediation was $57,458 to $81,930.
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 fiscal year ended March 31, 2012.
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, 2012.
INFLATION AND COMMODITY PRICE RISK
In management’s opinion, inflation has not had a significant impact upon the results of ATK’s operations. The selling prices under contracts, the majority of which are long term, generally include estimated costs to be incurred in future periods. These cost projections can generally be negotiated into new buys under fixed-price government contracts, while actual cost increases are recoverable on cost-type contracts.
ATK, however, has been impacted by increases in the prices of raw materials used in production as well as rising oil and energy costs. In particular, the prices of commodity metals, such as lead, steel, zinc, and copper, continue to be volatile. These prices generally impact our small-caliber ammunition business.
With respect to ATK’s commercial ammunition business, ATK has improved manufacturing efficiencies and has initiated price increases to mitigate the impact of increased commodity costs. ATK has a strategic sourcing and price strategy to mitigate risk from commodity price fluctuation. 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 increase, and if ATK is unable to offset these increases with ongoing manufacturing efficiencies and price increases, ATK’s future results from operations and cash flows would be materially impacted.
Significant increases in commodities can negatively impact operating results with respect to ATK’s firm fixed-price contract to supply the DoD’s small-caliber ammunition needs. Depending on market conditions, ATK has entered into futures contracts in order to reduce the impact of metal price fluctuations. The majority of the impact has been mitigated on the four-year small-caliber ammunition supply contract as well as the new seven-year contract with the U.S. Army by the terms within that contract, which is expected to continue into 2019. However, if metal prices exceed pre-determined levels, Defense Group’s operating results could be adversely impacted.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion within Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the section titled “Inflation and Commodity Price Risk.”
There have been no material changes in ATK’s market risk during the quarter ended December 30, 2012. For additional information, refer to Item 7A of ATK’s Annual Report on Form 10-K for the fiscal year ended March 31, 2012.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of December 30, 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. On January 23, 2012, the parties met in a mediation session that resulted in an agreement to settle the lawsuit. As a result of the settlement agreement, ATK established a litigation accrual of $25,500 during fiscal 2012. This payment was made in April 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, 2012 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.
The following is an update of the fifth paragraph of the risk factor titled “ATK is subject to intense competition and therefore may not be able to compete successfully” included in Item 1A of Part I of ATK’s Annual Report on Form 10-K for the fiscal year ended March 31, 2012, which is now revised to disclose the Lake City contract award:
ATK submitted its proposal for the continued operation of the Lake City Army Ammunition Plant (“LCAAP”) on January 23, 2012, in response to a competitive solicitation issued by the U.S. Army. On September 28, 2012, ATK was notified by the U.S. Army that it was selected for both the production of ammunition and continued operation and maintenance of the LCAAP. The production contract runs through September 2019 and the facility contract runs through September 2020. Due to the competition for the new contract, ATK expects a lower profit rate in the Small Caliber Systems division as we implement the new contract beginning October of 2013.
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 1 — October 28 |
| 413 |
| $ | 50.76 |
| — |
|
|
|
October 29 — November 25 |
| 17,521 |
| 54,99 |
| — |
|
|
| |
November 26 — December 30 |
| 550 |
| 61.89 |
| — |
|
|
| |
Fiscal quarter ended December 30, 2012 |
| 18,484 |
| $ | 55.10 |
| — |
| 2,866,000 |
|
(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 has currently determined that the repurchase program will serve primarily to offset dilution from the Company’s employee and director benefit compensation programs, but it may also be used for other corporate purposes, as determined by the Board. During fiscal 2009, ATK repurchased 299,956 shares for $31.6 million, 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 new share repurchase program of up to $200 million worth of shares of ATK common stock, executable 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. The new repurchase authorization also allows the Company to make repurchases under Rule 10b5-1 of the Securities Exchange Act of 1934. This share repurchase program replaces the prior program authorized in 2008. During the first nine months of fiscal 2013, ATK purchased 482,044 shares for $25 million. The shares remaining is calculated utilizing the remaining $175 million authorized, divided by the closing price of $61.06 on December 28, 2012.
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. MINE SAFETY DISCLOSURES
Not applicable.
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.
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| ALLIANT TECHSYSTEMS INC. |
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Date: February 7, 2013 | By: | /s/ Neal S. Cohen | |
| Name: | Neal S. Cohen | |
| Title: | Executive Vice President and Chief Financial Officer | |
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| (On behalf of the Registrant and as principal financial and accounting officer) |