XNYS:ATK Alliant Techsystems Inc Quarterly Report 10-Q Filing - 1/1/2012
Effective Date 1/1/2012
| • 10-Q • EX-31.1 • EX-31.2 • EX-32 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION LABELS LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UNITED STATES Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended January 1, 2012
OR
For the transition period from to
Commission file number 1-10582
Alliant Techsystems Inc. (Exact name of registrant as specified in its charter)
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of January 29, 2012, 33,012,079 shares of the registrant’s common stock, par value $.01 per share, were outstanding.
PART I — FINANCIAL INFORMATION
ALLIANT TECHSYSTEMS INC. CONDENSED CONSOLIDATED INCOME STATEMENTS (unaudited)
See Notes to the Condensed Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
See Notes to the Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
See Notes to the Condensed Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)
See Notes to the Condensed Consolidated Financial Statements.
Alliant Techsystems Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) Quarter Ended January 1, 2012
(Dollar amounts in thousands except share and per share data and unless otherwise indicated)
1. Basis of Presentation and Responsibility for Interim Financial Statements
The unaudited condensed consolidated financial statements of Alliant Techsystems Inc. (“the Company” or “ATK”) as set forth in this quarterly report have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted. ATK’s accounting policies are described in the notes to the consolidated financial statements in its Annual Report on Form 10-K for the fiscal year ended March 31, 2011 (“fiscal 2011”). Management is responsible for the unaudited condensed consolidated financial statements included in this document. The condensed consolidated financial statements included in this document are unaudited but, in the opinion of management, include all adjustments necessary for a fair presentation of ATK’s financial position as of January 1, 2012, and its results of operations for the quarters and nine months ended January 1, 2012 and January 2, 2011, and cash flows for the nine months ended January 1, 2012 and January 2, 2011.
Sales, expenses, cash flows, assets, and liabilities can and do vary during the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.
This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its fiscal 2011 Annual Report on Form 10-K.
2. New Accounting Pronouncements
On May 12, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”). ASU 2011-04 clarifies the application of existing fair value measurement requirements including: (1) the application of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, and (3) quantitative information required for fair value measurements categorized within Level 3. ASU 2011-04 also provides guidance on measuring the fair value of financial instruments managed within a portfolio, and application of premiums and discounts in a fair value measurement. In addition, ASU 2011-04 requires additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. The amendments in this guidance are to be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011 (the fourth quarter of ATK’s fiscal 2012). ATK does not believe the adoption of this ASU will have a material impact on its financial statements.
On June 16, 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, (“ASU 2011-05”). This update revises the manner in which entities must present comprehensive income in their financial statements. ASU 2011-05 gives entities the option to present total comprehensive income, the components of net income, and the components of other comprehensive income in either of the following ways: (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 is effective for fiscal years beginning after December 15, 2011 and interim periods within those years (ATK’s fiscal 2013). On December 23, 2011, the FASB deferred the effective date for the changes that related to the presentation of reclassification adjustments and their presentation in the financial statements. ATK does not believe the adoption of ASU 2011-05 will have a material impact on its financial statements.
On September 15, 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”). Under the revised guidance, entities testing goodwill for impairment will have the option to perform a qualitative assessment before calculating the fair value of their reporting units (i.e., step 1 of the goodwill impairment test under the historical rules). If entities determine, on the basis of qualitative factors, that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The new guidance does not change how goodwill is calculated or assigned to reporting units, nor does it amend the requirement to test goodwill annually or between annual tests if circumstances warrant. ASU No. 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 (ATK’s fiscal 2013). ATK does not believe the adoption of this ASU will have a material impact on its financial statements.
On December 16, 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 360), Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). The amendments in this update require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments in this guidance are to be retrospectively applied for all comparative periods presented for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods, beginning in fiscal 2014 for ATK. ATK does not believe the adoption of this ASU will have a material impact on its financial statements.
3. Fair Value of Financial Instruments
The current authoritative guidance on fair value clarifies the definition of fair value, prescribes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about the use of fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The valuation techniques required by the current authoritative literature are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 — Significant inputs to the valuation model are unobservable.
The following section describes the valuation methodologies used by ATK to measure its financial instruments at fair value.
Investments in marketable securities — ATK’s investments in marketable securities represent investments held in a common collective trust (“CCT”) that primarily invests in fixed income securities which are used to pay benefits under a nonqualified supplemental executive retirement plan for certain executives and highly compensated employees. Investments in a collective investment vehicle are valued by multiplying the investee company’s net asset value per share with the number of units or shares owned at the valuation date as determined by the investee company. Net asset value per share is determined by the investee company’s custodian or fund administrator by deducting from the value of the assets of the investee company all its liabilities and the resulting number is divided by the outstanding number of shares or units. Investments held by the CCT, including collateral invested for securities on loan, are valued on the basis of valuations furnished by a pricing service approved by the CCT’s investment manager, which determines valuations using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders, or at fair value as determined in good faith by the CCT’s investment manager. The fair value of these securities is included within other current assets and deferred charges and other non-current assets on the consolidated balance sheet.
Derivative financial instruments and hedging activities — In order to manage its exposure to commodity pricing and foreign currency risk, ATK periodically utilizes commodity and foreign currency derivatives, which are considered Level 2 instruments. Commodity derivatives are valued based on prices of futures exchanges and recently reported transactions in the marketplace. Foreign currency derivatives are valued based on observable market transactions of spot currency rates and forward currency prices. As discussed further in Note 7, ATK has outstanding commodity forward contracts that were entered into to hedge forecasted purchases of copper and zinc.
Long-Term Debt — The fair value of the variable-rate long-term debt is calculated based on current market rates for debt of the same risk and maturities. The fair value of the fixed-rate debt is based on market quotes for each issuance.
The following tables set forth by level within the fair value hierarchy ATK’s financial assets and liabilities that are measured at fair value on a recurring basis:
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:
4. Acquisitions
In accordance with the accounting standards regarding business combinations, the results of acquired businesses are included in ATK’s consolidated financial statements from the date of acquisition. For each acquisition, the purchase price is allocated to the acquired assets and liabilities based on fair value. The excess purchase price over estimated fair value of the net assets acquired is recorded as goodwill.
On April 9, 2010, ATK acquired Blackhawk Industries Products Group Unlimited, LLC (“Blackhawk”) for a purchase price of $172,251. Blackhawk is a manufacturer of high quality tactical gear. ATK believes that the acquisition provides ATK with a strong tactical systems brand, an expanded portfolio of quality products, and additional design and development expertise for innovative tactical accessories which will strengthen ATK’s position in tactical accessories and equipment for domestic and international military, law enforcement, security, and sport enthusiast markets. Blackhawk employs approximately 300 employees and is included in the Security and Sporting group. The purchase price allocation was completed in fiscal 2011. Most of the goodwill generated in this acquisition will be deductible for tax purposes.
ATK used the purchase method of accounting to account for this acquisition and, accordingly, the results of Blackhawk are included in ATK’s consolidated financial statements at the date of acquisition. The purchase price for the acquisition was allocated to the acquired assets and liabilities based on estimated fair value. Pro forma information on the results of operations for fiscal 2011 as if the acquisition had occurred at the beginning of fiscal 2011 is not being presented because the acquisition is not material to ATK for that purpose.
5. Goodwill and Deferred Charges and Other Non-Current Assets
The carrying amount of goodwill by operating segment as of January 1, 2012 is as follows:
The goodwill recorded above within Aerospace Systems is presented net of $108,500 of accumulated impairment losses.
Deferred charges and other non-current assets consist of the following:
The long term receivables represent unbilled receivables on long term commercial aerospace contracts and other programs that ATK does not expect to collect within the next fiscal year.
Included in deferred charges and other non-current assets in the table above is $38,988 of other intangible assets consisting of trademarks and brand names that are not being amortized as their estimated useful lives are considered indefinite, and amortizing assets as follows:
The assets identified in the table above are being amortized over their estimated useful lives over a weighted average remaining period of approximately 10.7 years. Amortization expense for the quarter and nine months ended January 1, 2012 was $5,568 and $8,357, respectively. Amortization expense for the quarter and nine months ended January 2, 2011 was $2,888 and $8,388, respectively. ATK expects amortization expense related to these assets to be as follows:
6. Earnings Per Share Data
Basic earnings per share (“EPS”) is computed based upon the weighted-average number of common shares outstanding for each period. Diluted EPS is computed based on the weighted-average number of common shares and common equivalent shares. Common equivalent shares represent the effect of stock-based awards and contingently issuable shares related to ATK’s Convertible Senior Subordinated Notes (see Note 11) during each period presented, which, if exercised, earned, or converted, would have a dilutive effect on EPS. In computing EPS for the quarters and nine months ended January 1, 2012 and January 2, 2011, net income as reported for each respective period is divided by (in thousands):
As discussed further in Note 11, contingently issuable shares related to ATK’s various convertible senior subordinated notes are not included in diluted EPS for the periods presented because ATK’s average stock price during the periods did not exceed the triggering price.
7. Derivative Financial Instruments
ATK is exposed to market risks arising from adverse changes in:
· commodity prices affecting the cost of raw materials and energy, · interest rates, and · foreign exchange risks
In the normal course of business, these risks are managed through a variety of strategies, including the use of derivative instruments. Commodity forward contracts are periodically used to hedge forecasted purchases of certain commodities, foreign currency exchange contracts are used to hedge forecasted transactions denominated in a foreign currency, and ATK periodically uses interest rate swaps to hedge forecasted interest payments and the risk associated with variable interest rates on long-term debt.
ATK entered into forward contracts for copper and zinc during fiscal 2012, 2011 and 2010. The contracts essentially establish a fixed price for the underlying commodity and are designated and qualify as effective cash flow hedges of purchases of the commodity. Ineffectiveness is calculated as the amount by which the change in the fair value of the derivatives exceeds the change in the fair value of the anticipated commodity purchases.
ATK also entered into foreign currency forward contracts during fiscal 2011 and fiscal 2010. These contracts were used to hedge forecasted inventory purchases and subsequent payments, or customer receivables, denominated in foreign currencies and were designated and qualified as effective cash flow hedges. Ineffectiveness with respect to forecasted inventory purchases was calculated based on changes in the forward rate until the anticipated purchase occurs; ineffectiveness of the hedge of the accounts payable was evaluated based on the change in fair value of its anticipated settlement.
The fair value of the commodity and foreign currency forward contracts is recorded within other assets or liabilities, as appropriate, and the effective portion is reflected in accumulated Other Comprehensive Income (Loss) in the financial statements. The gains or losses on the commodity forward contracts are recorded in inventory as the commodities are purchased. The gains or losses on the foreign currency forward contracts are recorded in earnings when the related inventory is sold.
As of January 1, 2012, ATK had the following outstanding commodity forward contracts in place:
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:
Due to the nature of ATK’s business, the benefits and risks associated with the commodity contracts may be passed on to the customer and not realized by ATK.
For the periods presented below, the derivative gains and losses in the consolidated income statements related to commodity forward contracts and foreign currency forward contracts were as follows:
All derivatives used by ATK during fiscal 2012 and 2011 were designated as and qualify to be accounted for as hedging instruments.
8. Comprehensive Income
The components of comprehensive income, net of income taxes, for the periods presented below were as follows:
The components of accumulated OCI, net of income taxes, are as follows:
The pre-tax activity in OCI related to the forward contracts discussed in Note 7 was as follows:
There was no ineffectiveness recognized in earnings for these contracts during fiscal 2012 or 2011. ATK expects that any unrealized losses will be realized and reported in cost of sales as the cost of the commodities is included in cost of sales. Estimated and actual gains or losses will change as market prices change.
9. Inventories
Inventories consist of the following:
10. Other Liabilities
The major categories of other current and long-term accrued liabilities are as follows:
The litigation liability represents an accrual booked during the third quarter of fiscal 2012 related to a tentative litigation settlement (see Note 15).
ATK provides product warranties, which entail repair or replacement of non-conforming items, in conjunction with sales of certain products. Estimated costs related to warranties are generally recorded in the period in which the related product sales occur. The warranty liability recorded at each balance sheet date reflects the estimated liability for warranty coverage for products delivered based on historical information and current trends. During the third quarter of fiscal 2012, ATK adjusted the pre-existing LUU flare warranty reserve to capture the additional costs to retrofit existing customer inventory related to the tentative litigation settlement referenced above. The following is a reconciliation of the changes in ATK’s product warranty liability during fiscal 2012:
11. Long-Term Debt
Long-term debt, including the current portion, consisted of the following:
(1) On October 7, 2010, ATK entered into a Second Amended and Restated Credit Agreement (“the Senior Credit Facility”), which is comprised of a Term A Loan of $400,000 and a $600,000 Revolving Credit Facility, both of which mature in 2015. The Term A Loan is subject to annual principal payments of $20,000 in each of the first and second years and $40,000 in each of the third, fourth, and fifth years, paid on a quarterly basis, with the balance due on October 7, 2015. Substantially all domestic tangible and intangible assets of ATK and its subsidiaries are pledged as collateral under the Senior Credit Facility. Borrowings under the Senior Credit Facility bear interest at a rate equal to either the sum of a base rate plus a margin or the sum of a Eurodollar rate plus a margin. Each margin is based on ATK’s senior secured credit ratings. Based on ATK’s current credit rating, the current base rate margin is 1.25% and the current Eurodollar margin is 2.25%. The weighted
average interest rate for the Term A Loan was 2.68% at January 1, 2012. ATK pays an annual commitment fee on the unused portion of the Revolving Credit Facility based on its senior secured credit ratings. Based on ATK’s current rating, this fee is 0.35% at January 1, 2012. As of January 1, 2012, ATK had no borrowings against its $600,000 Revolving Credit Facility and had outstanding letters of credit of $174,631 which reduced amounts available on the Revolving Credit Facility to $425,369. ATK has had no short term borrowings under its Revolving Credit Facility since the date of issuance. Debt issuance costs of approximately $12,800 are being amortized over the term of the Senior Credit Facility.
(2) In fiscal 2007, ATK issued $300,000 aggregate principal amount of 2.75% Convertible Senior Subordinated Notes (“the 2.75% Convertible Notes due 2011”) that matured on September 15, 2011. During the quarter ended July 3, 2011, ATK purchased $50,427 aggregate principal amount from holders of the notes at market price. All but $3 of the remaining $249,573 was repaid in the quarter ended October 2, 2011. Holders of the remaining $3 chose to convert their notes at a conversion rate of 10.4208 shares of ATK’s common stock per $1 principal amount (a conversion price of $95.96), as allowed during the last month prior to maturity. The remaining $3 was paid in cash in October 2011. The contingently issuable shares had no impact on the number of ATK’s diluted shares outstanding during any of the periods presented because ATK’s average stock price during those periods was below the conversion price.
(3) In September 2010, ATK issued $350,000 aggregate principal amount of 6.875% Senior Subordinated Notes (“the 6.875% Notes”) that mature on September 15, 2020. These notes are general unsecured obligations. Interest on these notes is payable on March 15 and September 15 of each year. ATK has the right to redeem some or all of these notes from time to time on or after September 15, 2015, at specified redemption prices. Prior to September 15, 2015, ATK may redeem some or all of these notes at a price equal to 100% of their principal amount plus accrued and unpaid interest to the date of redemption and a specified make-whole premium. In addition, prior to September 15, 2013, ATK may redeem up to 35% of the aggregate principal amount of these notes, at a price equal to 106.875% of their principal amount plus accrued and unpaid interest to the date of redemption, with the proceeds of certain equity offerings. Debt issuance costs of approximately $7,100 related to these notes are being amortized to interest expense over ten years.
(4) In fiscal 2005, ATK issued $200,000 aggregate principal amount of 3.00% Convertible Senior Subordinated Notes (“the 3.00% Convertible Notes”) that mature on August 15, 2024. Interest on these notes is payable on February 15 and August 15 of each year. Under select conditions, ATK will pay contingent interest on these notes, which is treated as an embedded derivative; the fair value of this feature was insignificant at January 1, 2012 and March 31, 2011. ATK may redeem some or all of these notes in cash, for 100% of the principal amount plus any accrued but unpaid interest, at any time on or after August 20, 2014. Holders of these notes may require ATK to repurchase in cash, for 100% of the principal amount plus any accrued but unpaid interest, some or all of these notes on August 15, 2014 and August 15, 2019. Under specified conditions, holders may also convert their 3.00% Convertible Notes at a conversion rate of 12.7013 shares of ATK’s common stock per $1 principal amount of 3.00% Convertible Notes (a conversion price of $78.73 per share). The stock price condition was met during fiscal 2009 and $547 of these notes were converted in fiscal 2009. The stock price condition was not satisfied during the quarter ended January 1, 2012; therefore the remaining principal amount was classified as long-term. These contingently issuable shares did not impact the number of ATK’s diluted shares outstanding during any of the periods presented because ATK’s average stock price during those periods was below the conversion price.
The current authoritative accounting literature requires that issuers of convertible debt instruments that may be settled in cash upon conversion separately account for the liability and equity components in a manner that reflects the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This provision applies to the convertible debt instruments discussed above. The unamortized discount is amortized through interest expense into earnings over the expected term of the convertible notes. The following tables provide additional information about ATK’s convertible notes:
Based on ATK’s closing stock price of $57.16 on January 1, 2012, the if-converted value of these notes does not exceed the aggregate principal amount of the notes.
See Note 9 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011 for additional information regarding the terms and conditions of the Company’s outstanding debt agreements.
Rank and Guarantees
The 3.00% Convertible Notes, the 6.875% Notes, and the 6.75% Notes rank equal in right of payment with each other and all of ATK’s future senior subordinated indebtedness and are subordinated in right of payment to all existing and future senior indebtedness, including the Senior Credit Facility. The outstanding notes are guaranteed on an unsecured basis, jointly and severally and fully and unconditionally, by substantially all of ATK’s domestic subsidiaries. The parent company has no independent assets or operations. Subsidiaries of ATK other than the subsidiary guarantors are minor. All of these guarantor subsidiaries are 100% owned by ATK. These guarantees are senior subordinated obligations of the applicable subsidiary guarantors.
Scheduled Minimum Loan Payments
As of January 1, 2012, the scheduled minimum payments on outstanding long-term debt are as follows:
ATK’s total debt (current portion of debt and long-term debt) as a percentage of total capitalization (total debt and stockholders’ equity) was 50% as of January 1, 2012 and 58% as of March 31, 2011.
Covenants and Default Provisions
ATK’s Senior Credit Facility and the indentures governing the 6.75% Notes, the 6.875% Notes, and the 3.00% Convertible Notes impose restrictions on ATK, including limitations on its ability to incur additional debt, enter into capital leases, grant liens, pay dividends and make certain other payments, sell assets, or merge or consolidate with or into another entity. In addition, the Senior Credit Facility limits ATK’s ability to enter into sale-and-leaseback transactions. The Senior Credit Facility also requires that ATK meet and maintain specified financial ratios, including a minimum interest coverage ratio and a maximum consolidated senior leverage ratio, and a maximum consolidated leverage ratio. Many of ATK’s debt agreements contain cross-default provisions so that non-compliance with the covenants within one debt agreement could cause a default under other debt agreements as well. ATK’s ability to comply with these covenants and to meet and maintain the financial ratios may be affected by events beyond its control. Borrowings under the Senior Credit Facility are subject to compliance with these covenants. As of January 1, 2012, ATK was in compliance with the financial covenants.
Cash Paid for Interest on Debt
Cash paid for interest totaled $39,211 in the nine months ended January 1, 2012 and $30,467 during the nine months ended January 2, 2011.
12. Employee Benefit Plans
Employer Contributions. During the nine months ended January 1, 2012, ATK contributed $61,600 directly to the pension trust and $1,888 directly to retirees under its supplemental (nonqualified) executive retirement plan. ATK also contributed $9,976 to its other PRB plans. ATK anticipates making additional contributions of $3,128 directly to retirees under the nonqualified plan and $4,048 to its other PRB plans during the remainder of fiscal 2012. There are no additional funding requirements to the pension trust for the remainder of fiscal 2012.
13. Income Taxes
ATK’s provision for income taxes includes both federal and state income taxes. Income tax provisions for interim periods are based on estimated effective annual income tax rates.
The income tax provisions for the quarters ended January 1, 2012 and January 2, 2011 represent effective tax rates of 42.0% and 30.7%, respectively. The increase in the current quarter rate is primarily due to the estimated nondeductible portion of an accrual related to the LUU flare tentative litigation agreement, the absence of the benefit that was realized in fiscal 2011 from the retroactive extension of the Federal Research and Development (“R&D”) credit for calendar 2010 and 2011, decreased benefits from the domestic manufacturing deduction (“DMD”), and the unfavorable true-up of prior-year taxes.
The income tax provisions for the nine months ended January 1, 2012 and January 2, 2011 represent effective tax rates of 35.8% and 26.7%, respectively. The increase in the current period rate is primarily due to the absence of the benefit that was realized in fiscal 2011 from the settlement of the examination of the fiscal 2007 and 2008 tax returns, the estimated nondeductible portion of an accrual related to the LUU flare tentative litigation agreement, and the retroactive extension of the R&D credit discussed above, partially offset by a discrete revaluation of the deferred tax assets caused by a change in state tax law.
ATK or one of its subsidiaries files income tax returns in the U.S. federal, various U.S. state, and foreign jurisdictions. With few exceptions, ATK is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2005. As of January 1, 2012 the IRS had completed the audits of ATK through fiscal 2008. The IRS is currently auditing ATK’s tax returns for fiscal years 2009 and 2010. We believe appropriate provisions for all outstanding issues have been made for all remaining open years in all jurisdictions.
Although the timing and outcome of audit settlements are uncertain, it is reasonably possible that a $15,128 reduction of the unrecognized tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings from $0 to $12,715.
14. Stock-Based Compensation
ATK sponsors multiple stock-based incentive plans, which include the Alliant Techsystems Inc. 1990 Equity Incentive Plan, the Non-Employee Director Restricted Stock Plan, the 2000 Stock Incentive Plan, and the 2005 Stock Incentive Plan. As of January 1, 2012, ATK has authorized up to 2,382,360 common shares under the 2005 Stock Incentive Plan, of which 488,186 common shares are yet available to be granted. No new grants will be made out of the other three plans.
Total pre-tax stock-based compensation expense recognized during the quarters ended January 1, 2012 and January 2, 2011 was $2,737 and $2,379, respectively. Total pre-tax stock-based compensation expense recognized during the nine months ended January 1, 2012 and January 2, 2011 was $8,339 and $7,648, respectively.
The total income tax benefit recognized in the income statement for share-based compensation during the quarters ended January 1, 2012 and January 2, 2011 was $1,142 and $909, respectively. Total income tax benefit recognized in the income statement for share-based compensation during the nine months ended January 1, 2012 and January 2, 2011 was $3,228 and $2,957, respectively.
ATK has the following types of awards outstanding under ATK’s stock incentive plans: performance awards, total stockholder return performance awards (“TSR awards”), restricted stock, and stock options. ATK issues treasury shares upon the payment of performance and TSR awards, grant of restricted stock, or exercise of stock options.
As of January 1, 2012, there were up to 502,268 shares reserved for performance awards for key employees. Performance shares are valued at the fair value of ATK stock as of the grant date and expense is recognized based on the number of shares expected to vest under the terms of the award under which they are granted. Of these shares,
· up to 23,365 shares will become payable only upon achievement of certain financial performance goals, including sales and EPS, for the fiscal 2010 through fiscal 2012 period; · up to 211,458 shares will become payable only upon achievement of certain performance goals, including sales, EPS, and return on invested capital, for the fiscal 2011 through fiscal 2013 period; and · up to 267,445 shares will become payable only upon achievement of certain performance goals, including sales growth relative to industry peers and return on invested capital, for the fiscal 2012 through fiscal 2014 period.
In May 2011, 93,649 shares were distributed or deferred based upon achievement of certain financial performance goals, including EPS, for the fiscal 2009 through fiscal 2011 period.
As of January 1, 2012, there were up to 124,213 shares reserved for TSR awards for key employees. ATK uses an integrated Monte Carlo simulation model to determine the fair value of the TSR awards. The Monte Carlo model calculates the probability of satisfying the market conditions stipulated in the award. This probability is an input into the trinomial lattice model used to determine the fair value of the awards as well as the assumptions of other variables, including the risk-free interest rate and expected volatility of ATK’s stock price in future periods. The risk-free rate is based on the U.S. dollar-denominated U.S. Treasury strip rate with a remaining term that approximates the life assumed at the date of grant. ATK granted 4,288 TSR shares during fiscal 2012 at a weighted average fair value of $38.14. The weighted average assumptions used in estimating the value of the TSR award during fiscal 2012 were as follows:
Of the shares reserved for TSR awards for key employees,
· 33,371 shares will become payable upon satisfaction of the market conditions stipulated for the fiscal 2010 through 2012 period, · 31,422 shares will become payable upon satisfaction of the market conditions stipulated for the fiscal 2011 through 2013 period, and · 59,400 shares will become payable upon satisfaction of the market conditions stipulated for the fiscal 2012 through 2014 period.
Restricted stock granted to non-employee directors and certain key employees during the first nine months of fiscal 2012 totaled 85,076 shares. Restricted shares vest over periods ranging from one to five years from the date of award and are valued at the fair value of ATK’s common stock as of the grant date.
Stock options may be granted periodically, with an exercise price equal to the fair market value of ATK’s common stock on the date of grant, and generally vest three years from the date of grant. Since fiscal 2004, options are generally issued with a seven-year term; most grants prior to that had a ten-year term. The weighted average fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model and represents the difference between fair market value on the date of grant and the estimated market value on the expected exercise date. The option pricing model requires ATK to make assumptions. The risk-free rate is based on U.S. Treasury zero-coupon issues with a remaining term that approximates the expected life assumed at the date of grant. Expected volatility is based on the historical volatility of ATK’s stock over the past five years. The expected option life is based on the contractual term of the stock option and expected employee exercise and post-vesting employment termination trends. ATK granted no options during the first nine months of fiscal 2012 or during fiscal 2011.
15. Contingencies
Litigation. From time to time, ATK is subject to various legal proceedings, including lawsuits, which arise out of, and are incidental to, the conduct of ATK’s business. ATK does not consider any of such proceedings that are currently pending, individually or in the aggregate, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings in any particular quarter, to be material to its business or likely to result in a material effect on its operating results, financial condition, or cash flows.
On or about April 10, 2006, a former employee filed a qui tam complaint in federal court alleging that ATK knowingly submitted claims for payment to the U.S. Government for defective LUU series illuminating flares that failed to conform to certain safety specifications and falsely certified compliance with those specifications. The lawsuit was initially filed under seal. ATK was first informed of the lawsuit by the United States Department of Justice (“DOJ”) on March 13, 2007. Thereafter, the DOJ intervened in the qui tam action and filed an amended complaint on November 2, 2007. On May 29, 2008, ATK filed its answer to the complaint. Discovery in the case is substantially complete, and ATK and the DOJ have each filed motions for summary judgment. A hearing on these motions is set for April 12, 2012. No trial date is currently set.
On November 14, 2011, the parties met in mediation in an attempt to settle this matter. That effort was unsuccessful. On January 23, 2012, however, the parties met in a second mediation session that resulted in a tentative agreement to settle the lawsuit. As a result of the tentative agreement, the Company increased its warranty liability by $7,805 to reflect the additional cost of retrofitting the existing flares, as well as increased its litigation reserve by $25,500 for the amount of cash it expects to pay for this settlement. The final agreement is subject to agreement upon certain terms and conditions and final internal DOJ approval. The agreement is expected in ATK’s fourth quarter.
U.S. Government Investigations. ATK is also subject to U.S. Government investigations from which civil, criminal, or administrative proceedings could result. Such proceedings could involve claims by the U.S. Government for fines, penalties, compensatory and treble damages, restitution, and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. ATK believes, based upon all available information, that the outcome of any such pending government investigations will not have a material adverse effect on its operating results, financial condition, or cash flows.
Claim Recovery. Profits expected to be realized on contracts are based on management’s estimates of total contract sales value and costs at completion. Estimated amounts for contract changes and claims are included in contract sales only when realization is estimated to be probable. At January 1, 2012, based on progress to date on certain contracts, there is approximately $117,949 included in unbilled receivables for contract claims.
Environmental Liabilities. ATK’s operations and ownership or use of real property are subject to a number of federal, state, and local environmental laws and regulations, including those for discharge of hazardous materials, remediation of contaminated sites, and restoration of damage to the environment. At certain sites that ATK owns or operates or formerly owned or operated, there is known or potential contamination that ATK is required to investigate or remediate. ATK could incur substantial costs, including remediation costs,
resource restoration costs, fines, and penalties, or third-party property damage or personal injury claims, as a result of liabilities associated with past practices or violations of environmental laws or non-compliance with environmental permits.
The liability for environmental remediation represents management’s best estimate of the present value of the probable and reasonably estimable costs related to known remediation obligations. The receivable represents the present value of the amount that ATK expects to recover, as discussed below. Both the liability and receivable have been discounted to reflect the present value of the expected future cash flows, using a discount rate, net of estimated inflation, of 0.75% and 2.50% as of January 1, 2012 and March 31, 2011, respectively. ATK’s discount rate is calculated using the 20-year Treasury constant maturities rate, net of an estimated inflationary factor of 1.9%, rounded to the nearest quarter percent. The following is a summary of the amounts recorded for environmental remediation:
Amounts expected to be paid or received in periods more than one year from the balance sheet date are classified as non-current. Of the $58,711 discounted liability as of January 1, 2012, $5,104 was recorded within other current liabilities and $53,607 was recorded within other long-term liabilities. Of the $34,144 discounted receivable, ATK recorded $4,679 within other current assets and $29,465 within other non-current assets. As of January 1, 2012, the estimated discounted range of reasonably possible costs of environmental remediation was $58,710 to $91,277.
ATK expects that a portion of its environmental compliance and remediation costs will be recoverable under U.S. Government contracts. Some of the remediation costs that are not recoverable from the U.S. Government that are associated with facilities purchased in a business acquisition may be covered by various indemnification agreements, as described in Note 13 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011.
16. Share Repurchases
On August 5, 2008, ATK’s Board of Directors authorized the repurchase of up to 5,000,000 shares. The Board had determined that the repurchase program would serve primarily to offset dilution from the Company’s employee and director benefit compensation programs, but could also be used for other corporate purposes, as determined by the Board.
During the first nine months of fiscal 2012, ATK repurchased 742,000 shares for $49,991. During fiscal 2009, ATK repurchased 299,956 shares for $31,609.
On January 31, 2012, ATK’s Board of Directors authorized a share repurchase program of up to $200 million worth of shares of ATK common stock, which the Company expects to execute over the next two years. The shares may be purchased from time to time in open market, block purchase, or negotiated transactions, subject to compliance with applicable laws and regulations. This share repurchase program replaces the prior program authorized in 2008.
17. Operating Segment Information
ATK operates its business structure within four operating groups. These operating segments are defined based on the reporting and review process used by ATK’s chief executive officer and other management. Each operating segment is described below:
· Aerospace Systems, which generated 30% of ATK’s external sales in the nine months ended January 1, 2012, develops and produces rocket motor systems for human and cargo launch vehicles, conventional and strategic missiles, missile defense interceptors, small and micro-satellites, satellite components, structures and subsystems, lightweight space deployables and solar arrays, and provides engineering and technical services. Additionally, Aerospace Systems operates in the military and commercial aircraft and launch structures markets. Other products include ordnance, such as decoy and illuminating flares.
· Armament Systems, which generated 33% of ATK’s external sales in the nine months ended January 1, 2012, develops and produces military small, medium, and large caliber ammunition, precision munitions, gun systems, and propellant and energetic materials. It also operates the U.S. Army ammunition plants in Independence, MO and Radford, VA.
· Missile Products, which generated 15% of ATK’s external sales in the nine months ended January 1, 2012, operates across the following market areas: strike weapons, tactical propulsion, in-space propulsion, hypersonic research, missile defense and missile interceptor capabilities, fuzes and warheads, composites, special mission aircraft, and electronic warfare.
· Security and Sporting, which generated 22% of ATK’s external sales in the nine months ended January 1, 2012, develops and produces commercial products and tactical systems and equipment.
The military small-caliber ammunition contract, which is reported within Armament Systems, contributed approximately 15% of total external sales during each of the nine months ended January 1, 2012 and January 2, 2011.
The following table summarizes ATK’s results by operating segment:
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
