XNYS:ATK Alliant Techsystems Inc Quarterly Report 10-Q Filing - 7/1/2012

Effective Date 7/1/2012

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Table of Contents

 

 

 

UNITED STATES
S
ECURITIES 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 July 1, 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

 

GRAPHIC

 

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 August 1, 2012, 32,665,132 shares of the registrant’s common stock, par value $.01 per share, were outstanding.

 

 

 




Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

ALLIANT TECHSYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(unaudited)

 

 

 

QUARTERS ENDED

 

(In thousands except per share data)

 

July 1, 2012

 

July 3, 2011

 

Sales

 

$

1,082,301

 

$

1,075,255

 

Cost of sales

 

832,679

 

830,031

 

Gross profit

 

249,622

 

245,224

 

Operating expenses:

 

 

 

 

 

Research and development

 

14,008

 

12,202

 

Selling

 

40,527

 

39,426

 

General and administrative

 

64,399

 

63,056

 

Income before interest, income taxes, and noncontrolling interest

 

130,688

 

130,540

 

Interest expense

 

(19,815

)

(26,452

)

Interest income

 

65

 

152

 

Income before income taxes and noncontrolling interest

 

110,938

 

104,240

 

Income tax provision

 

39,997

 

32,546

 

Net income

 

70,941

 

71,694

 

Less net income attributable to noncontrolling interest

 

112

 

176

 

Net income attributable to Alliant Techsystems Inc.

 

$

70,829

 

$

71,518

 

 

 

 

 

 

 

Alliant Techsystems Inc.’s earnings per common share:

 

 

 

 

 

Basic

 

$

2.17

 

$

2.15

 

Diluted

 

2.16

 

2.13

 

Cash dividends paid per share

 

0.20

 

0.20

 

 

 

 

 

 

 

Alliant Techsystems Inc.’s weighted-average number of common shares outstanding:

 

 

 

 

 

Basic

 

32,632

 

33,302

 

Diluted

 

32,741

 

33,578

 

 

 

 

 

 

 

Net Income (from above)

 

70,941

 

71,694

 

Other comprehensive income, net of tax:

 

 

 

 

 

Pension and other postretirement benefit liabilities, net of income taxes of $(12,204) and $(8,724), respectively

 

19,465

 

13,812

 

Change in fair value of derivatives, net of income taxes of $2,818, and $5,234 respectively

 

(4,408

)

(8,186

)

Change in fair value of available-for-sale securities, net of income taxes of $57 and $(55) respectively

 

(90

)

86

 

Total other comprehensive income

 

$

14,967

 

$

5,712

 

 

 

 

 

 

 

Comprehensive income

 

85,908

 

77, 406

 

Less comprehensive income attributable to noncontrolling interest

 

112

 

176

 

Comprehensive income attributable to Alliant Techsystems Inc.

 

$

85,796

 

$

77,230

 

 

See Notes to the Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

ALLIANT TECHSYSTEMS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

(Amounts in thousands except share data)

 

July 1, 2012

 

March 31, 2012

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

212,356

 

$

568,813

 

Net receivables

 

1,151,814

 

1,029,155

 

Net inventories

 

277,563

 

258,495

 

Deferred income tax assets

 

101,717

 

101,720

 

Other current assets

 

51,062

 

51,512

 

Total current assets

 

1,794,512

 

2,009,695

 

Net property, plant, and equipment

 

589,522

 

604,498

 

Goodwill

 

1,251,536

 

1,251,536

 

Noncurrent deferred income tax assets

 

125,391

 

134,719

 

Deferred charges and other non-current assets

 

552,454

 

541,298

 

Total assets

 

$

4,313,415

 

$

4,541,746

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

35,000

 

$

30,000

 

Accounts payable

 

204,088

 

333,980

 

Contract advances and allowances

 

119,041

 

119,824

 

Accrued compensation

 

100,801

 

121,901

 

Accrued income taxes

 

29,207

 

6,433

 

Other accrued liabilities

 

274,267

 

307,642

 

Total current liabilities

 

762,404

 

919,780

 

Long-term debt

 

1,263,681

 

1,272,002

 

Postretirement and postemployment benefits liabilities

 

109,094

 

111,392

 

Accrued pension liability

 

744,388

 

878,819

 

Other long-term liabilities

 

138,233

 

123,002

 

Total liabilities

 

$

3,017,800

 

$

3,304,995

 

Commitments and contingencies (Note 15)

 

 

 

 

 

Common stock—$.01 par value:

 

 

 

 

 

Authorized—180,000,000 shares Issued and outstanding—32,654,725 shares at July 1, 2012 and 33,142,408 shares at March 31, 2012

 

327

 

332

 

Additional paid-in-capital

 

542,530

 

537,921

 

Retained earnings

 

2,306,010

 

2,241,711

 

Accumulated other comprehensive loss

 

(895,631

)

(910,598

)

Common stock in treasury, at cost— 8,900,724 shares held at July 1, 2012 and 8,413,041 shares held at March 31, 2012

 

(667,689

)

(642,571

)

Total Alliant Techsystems Inc. stockholders’ equity

 

1,285,547

 

1,226,795

 

Noncontrolling interest

 

10,068

 

9,956

 

Total equity

 

1,295,615

 

1,236,751

 

Total liabilities and equity

 

$

4,313,415

 

$

4,541,746

 

 

See Notes to the Consolidated Financial Statements.

 

4



Table of Contents

 

ALLIANT TECHSYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

QUARTERS ENDED

 

(In thousands)

 

July 1, 2012

 

July 3, 2011

 

Operating activities

 

 

 

 

 

Net income

 

$

70,941

 

$

71,694

 

Adjustments to net income to arrive at cash used for operating activities:

 

 

 

 

 

Depreciation

 

26,383

 

23,474

 

Amortization of intangible assets

 

2,983

 

2,784

 

Amortization of debt discount

 

1,679

 

4,999

 

Amortization of deferred financing costs

 

1,011

 

1,432

 

Deferred income taxes

 

3

 

(3,942

)

Loss (gain) on disposal of property

 

140

 

(5,215

)

Share-based plans expense

 

3,222

 

3,344

 

Excess tax benefits from share-based plans

 

 

(23

)

Changes in assets and liabilities:

 

 

 

 

 

Net receivables

 

(137,889

)

(100,701

)

Net inventories

 

(19,068

)

(73,331

)

Accounts payable

 

(117,570

)

(59,829

)

Contract advances and allowances

 

(783

)

(12,768

)

Accrued compensation

 

(22,291

)

(29,182

)

Accrued income taxes

 

38,684

 

35,659

 

Pension and other postretirement benefits

 

(105,060

)

(32,612

)

Other assets and liabilities

 

(38,433

)

22,738

 

Cash used for operating activities

 

(296,048

)

(151,479

)

Investing activities

 

 

 

 

 

Capital expenditures

 

(23,884

)

(41,564

)

Proceeds from the disposition of property, plant, and equipment

 

2

 

6,364

 

Cash used for investing activities

 

(23,882

)

(35,200

)

Financing activities

 

 

 

 

 

Payments made on bank debt

 

(5,000

)

(5,000

)

Payments made to extinguish debt

 

 

(50,427

)

Purchase of treasury shares

 

(24,997

)

(49,991

)

Dividends paid

 

(6,530

)

(6,737

)

Proceeds from employee stock compensation plans

 

 

2,522

 

Excess tax benefits from share-based plans

 

 

23

 

Cash used for financing activities

 

(36,527

)

(109,610

)

Decrease in cash and cash equivalents

 

(356,457

)

(296,289

)

Cash and cash equivalents - beginning of period

 

568,813

 

702,274

 

Cash and cash equivalents - end of period

 

$

212,356

 

$

405,985

 

 

 

 

 

 

 

Supplemental Cash Flow Disclosure:

 

 

 

 

 

Noncash investing activity:

 

 

 

 

 

Capital expenditures included in accounts payable

 

$

2,654

 

$

3,707

 

 

See Notes to the Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

ALLIANT TECHSYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)

 

(Amounts in thousands except share

 

Common Stock
$.01 Par Value

 

Additional
Paid-In

 

Retained

 

Accumulated
Other
Comprehensive

 

Treasury

 

Noncontrolling

 

Total

 

data)

 

Shares

 

Amount

 

Capital

 

Earnings

 

Loss

 

Stock

 

Interest

 

Equity

 

For the quarters ended July 1, 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

 

 

 

 

 

 

 

70,829

 

14,967

 

 

 

112

 

85,908

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock grants, net

 

(7,154

)

 

(152

)

 

 

152

 

 

 

Share-based compensation

 

 

 

3,222

 

 

 

 

 

3,222

 

Treasury stock purchased

 

(482,044

)

 

 

 

 

(24,997

)

 

(24,997

)

Performance shares issued net of treasury stock withheld

 

6,447

 

 

(794

)

 

 

590

 

 

(204

)

Tax benefit related to share based plans and other

 

 

 

1,716

 

 

 

 

 

1,716

 

Dividends paid

 

 

 

 

(6,530

)

 

 

 

(6,530

)

Employee benefit plans and other

 

(4,932

)

(5

)

617

 

 

 

(863

)

 

(251

)

Balance at July 1, 2012

 

32,654,725

 

$

327

 

$

542,530

 

$

2,306,010

 

$

(895,631

)

$

(667,689

)

10,068

 

$

1,295,615

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the quarters ended July 3, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

71,518

 

5,712

 

 

 

176

 

77,406

 

Exercise of stock options

 

42,358

 

 

(753

)

 

 

3,275

 

 

2,522

 

Restricted stock grants, net

 

72,900

 

 

(6,035

)

 

 

6,035

 

 

 

Share-based compensation

 

 

 

3,344

 

 

 

 

 

3,344

 

Treasury stock purchased

 

(742,000

)

 

 

 

 

(49,991

)

 

(49,991

)

Performance shares issued net of treasury stock withheld

 

58,388

 

 

(6,964

)

 

 

4,665

 

 

(2,299

)

Tax benefit related to share based plans and other

 

 

 

3,012

 

 

 

 

 

3,012

 

Dividends paid

 

 

 

 

(6,737

)

 

 

 

(6,737

)

Employee benefit plans and other

 

(2,504

)

(5

)

369

 

 

 

(534

)

 

(170

)

Balance at July 3, 2011

 

32,948,214

 

$

330

 

$

552,252

 

$

2,070,432

 

$

(781,365

)

$

(657,980

)

$

9,540

 

$

1,193,209

 

 

See Notes to the Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

Alliant Techsystems Inc.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Quarter Ended July 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, 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 July 1, 2012, and its results of operations and cash flows for the quarters ended July 1, 2012 and July 3, 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 2012 Annual Report on Form 10-K.

 

2.     New Accounting Pronouncements

 

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).  ATK has implemented this guidance. Refer to the Condensed Consolidated Statement of Comprehensive Income.

 

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.

 

7



Table of Contents

 

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 6, 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 July 1, 2012

 

 

 

Fair Value Measurements Using Inputs Considered as

 

 

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

Marketable securities

 

$

 

$

8,503

 

$

 

Derivatives

 

 

5,918

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Derivatives

 

$

 

$

7,480

 

$

 

 

 

 

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 July 1, 2012

 

As of March 31, 2012

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

Fixed rate debt

 

$

933,681

 

981,675

 

$

932,002

 

$

986,394

 

Variable rate debt

 

365,000

 

365,000

 

370,000

 

370,000

 

 

4.     Goodwill and Deferred Charges and Other Non-Current Assets

 

The carrying amount of goodwill by operating segment as of July 1, 2012 is as follows:

 

8



Table of Contents

 

 

 

Aerospace Group

 

Defense Group

 

Sporting Group

 

Total

 

Balance at July 1, 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:

 

 

 

July 1, 2012

 

March 31, 2012

 

Gross debt issuance costs

 

$

27,613

 

$

27,613

 

Less accumulated amortization

 

(10,613

)

(9,602

)

Net debt issuance costs

 

17,000

 

18,011

 

Other intangible assets

 

118,217

 

121,001

 

Long-term receivables

 

328,072

 

312,843

 

Long-term inventory

 

10,513

 

13,032

 

Environmental remediation receivable

 

29,434

 

28,888

 

Other non-current assets

 

49,218

 

47,523

 

Total deferred charges and other non-current assets

 

$

552,454

 

$

541,298

 

 

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 $38,998 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:

 

 

 

July 1, 2012

 

March 31, 2012

 

 

 

Gross
carrying
amount

 

Accumulated
amortization

 

Total

 

Gross
carrying
amount

 

Accumulated
amortization

 

Total

 

Trade name

 

$

66,060

 

$

(10,179

)

$

55,881

 

$

66,060

 

$

(9,062

)

$

56,998

 

Technology

 

17,400

 

(5,422

)

11,978

 

17,400

 

(4,820

)

12,580

 

Customer relationships and other

 

34,185

 

(23,024

)

11,161

 

34,185

 

(21,760

)

12,425

 

Total

 

$

117,645

 

$

(38,625

)

$

79,020

 

$

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 10.4 years. Amortization expense for the quarters ended July 1, 2012 and July 3, 2011 was $2,983 and $2,784, respectively.  ATK expects amortization expense related to these assets to be as follows:

 

Remainder of fiscal 2013

 

$

8,204

 

Fiscal 2014

 

10,320

 

Fiscal 2015

 

9,304

 

Fiscal 2016

 

7,707

 

Fiscal 2017

 

5,417

 

Thereafter

 

38,068

 

Total

 

79,020

 

 

5.     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 quarter ended July 1, 2012 and July 3, 2011, net income as reported for each respective period is divided by (in thousands):

 

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Quarters Ended

 

 

 

July 1, 2012

 

July 3, 2011

 

Weighted-average basic shares outstanding

 

32,632

 

33,302

 

Dilutive effect of stock-based awards

 

109

 

276

 

Weighted-average diluted shares outstanding

 

32,741

 

33,578

 

 

 

 

 

 

 

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

 

159,825

 

5

 

 

As discussed further in Note 11, 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.

 

6.     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.

 

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 July 1, 2012, ATK had the following outstanding commodity forward contracts in place:

 

 

 

Quantity Hedged
(in pounds)

 

Copper

 

17,130,000

 

Zinc

 

4,655,000

 

 

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

 

July 1, 2012

 

March 31, 2012

 

July 1, 2012

 

March 31, 2012

 

Commodity forward contracts

 

Other current assets / other accrued liabilities

 

$

5,918

 

$

12,182

 

7,450

 

$

6,518

 

Foreign currency forward contracts

 

Other current assets / other accrued liabilities

 

 

 

30

 

 

Total

 

 

 

$

5,918

 

$

12,182

 

$

7,480

 

$

6,518

 

 

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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)
recognized in Other
Comprehensive
Income (Loss)

 

Pretax amount of gain (loss)
reclassified from Accumulated
Other Comprehensive Income
(Loss)

 

Gain or (loss) recognized in
income on derivative
(ineffective portion and
amount excluded from
effectiveness testing)

 

 

 

Amount

 

Location

 

Amount

 

Location

 

Amount

 

Quarter ended July 1, 2012

 

 

 

 

 

 

 

 

 

 

 

Commodity forward contracts

 

$

(1,532

)

Cost of Sales

 

$

(1,444

)

Cost of Sales

 

$

 

Foreign currency forward contracts

 

$

(30

)

Cost of Sales

 

$

 

Cost of Sales

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended July 3, 2011

 

 

 

 

 

 

 

 

 

 

 

Commodity forward contracts

 

$

35,987

 

Cost of Sales

 

$

11,276

 

Cost of Sales

 

$

 

Foreign currency forward contract

 

 

Cost of Sales

 

 

Cost of Sales

 

 

 

All derivatives used by ATK during fiscal 2013 and 2012 were designated as and qualify to be accounted for as hedging instruments.

 

7.     Comprehensive Income

 

The components of accumulated OCI, net of income taxes, are as follows:

 

 

 

July 1, 2012

 

March 31, 2012

 

Derivatives

 

$

(992

)

$

3,416

 

Pension and other postretirement benefit liabilities

 

(895,545

)

(915,010

)

Available-for-sale securities

 

906

 

996

 

Total accumulated other comprehensive loss

 

$

(895,631

)

$

(910,598

)

 

The pre-tax activity in OCI related to the forward contracts discussed in Note 6 was as follows:

 

 

 

Quarters Ended

 

 

 

July 1, 2012

 

July 3, 2011

 

Beginning of period unrealized gain in accumulated OCI

 

$

5,664

 

$

49,407

 

Net decrease in fair value of derivatives

 

(8,670

)

(2,144

)

Net losses (gains) reclassified from OCI, offsetting the price paid to suppliers

 

1,444

 

(11,276

)

End of period unrealized (loss) gain in accumulated OCI

 

(1,562

)

$

35,987

 

 

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.

 

8.  Receivables

 

Receivables, including amounts due under long-term contracts (contract receivables), are summarized as follows:

 

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July 1, 2012

 

March 31, 2012

 

Billed receivables

 

517,553

 

431,307

 

Unbilled receivables

 

609,866

 

583,449

 

Other receivables

 

24,395

 

14,399

 

Net receivables

 

$

1,151,814

 

$

1,029,155

 

 

Billed Receivable balances are shown net of customer progress payments of $427,050 as of July 1, 2012 and $461,743 as of March 31, 2012, and net of the allowance for doubtful accounts of $13,129 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.

 

9.     Inventories

 

Inventories consist of the following:

 

 

 

July 1, 2012

 

March 31, 2012

 

Raw materials

 

$

110,403

 

$

122,072

 

Work/Contracts in process

 

81,119

 

53,018

 

Finished goods

 

86,041

 

83,405

 

Net inventories

 

$

277,563

 

$

258,495

 

 

10.  Other Liabilities

 

The major categories of other current and long-term accrued liabilities are as follows:

 

 

 

July 1, 2012

 

March 31, 2012

 

Employee benefits and insurance, including pension and other postretirement benefits

 

$

72,876

 

$

76,646

 

Warranty

 

23,432

 

24,221

 

Litigation

 

 

25,500

 

Interest

 

16,196

 

15,293

 

Environmental remediation

 

5,226

 

5,135

 

Rebate

 

10,752

 

6,050

 

Deferred lease obligation

 

28,773

 

27,782

 

Commodity forward contracts

 

7,480

 

6,518

 

Federal excise tax

 

16,280

 

15,338

 

Other

 

93,252

 

105,159

 

Total other accrued liabilities – current

 

$

274,267

 

$

307,642

 

 

 

 

 

 

 

Environmental remediation

 

$

53,446

 

$

52,361

 

Management nonqualified deferred compensation plan

 

18,050

 

19,704

 

Non-current portion of accrued income tax liability

 

34,532

 

20,396

 

Deferred lease obligation

 

15,150

 

14,932

 

Other

 

17,055

 

15,609

 

Total other long-term liabilities

 

$

138,233

 

$

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:

 

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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

 

 

11.  Long-Term Debt

 

Long-term debt, including the current portion, consisted of the following:

 

 

 

July 1, 2012

 

March 31, 2012

 

Senior Credit Facility dated October 7, 2010 (1)(2):

 

 

 

 

 

Term A Loan due 2015

 

$

365,000

 

$

370,000

 

Revolving Credit Facility due 2015

 

 

 

6.75% Senior Subordinated Notes due 2016 (2)

 

400,000

 

400,000

 

6.875% Senior Subordinated Notes due 2020 (3)

 

350,000

 

350,000

 

3.00% Convertible Senior Subordinated Notes due 2024 (4)

 

199,453

 

199,453

 

Principal amount of long-term debt

 

1,314,453

 

1,319,453

 

Less: Unamortized discounts

 

15,772

 

17,451

 

Carrying amount of long-term debt

 

1,298,681

 

1,302,002

 

Less: current portion

 

35,000

 

30,000

 

Carrying amount of long-term debt, excluding current portion

 

$

1,263,681

 

$

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 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 2.50% at July 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 July 1, 2012.  As of July 1, 2012, ATK had no borrowings against its $600,000 Revolving Credit Facility and had outstanding letters of credit of $166,161, which reduced amounts available on the Revolving Credit Facility to $433,839.  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 2006, ATK issued $400,000 aggregate principal amount of 6.75% Senior Subordinated Notes (“the 6.75% Notes”) that mature on April 1, 2016. These notes are general unsecured obligations. Interest on these notes accrues at a rate of 6.75% per annum and is payable semi-annually on April 1 and October 1 of each year. ATK has the right to redeem some or all of these notes from time to time at specified redemption prices. Debt issuance costs related to these notes of $7,700 are being amortized to interest expense over ten years.

 

On August 8, 2012, ATK notified the trustee of its 6.75% Notes of its intention to redeem these notes.  In accordance with the indenture, the redemption price will be 102.25% of the principal amount, or $409,000, including a premium of $9,000, plus accrued interest. ATK expects that the holders of the notes will be paid by September 30, 2012.  The transaction will result in the write-off of the remaining $2,770 of deferred debt issuance costs. The terms of the Senior Credit Facility allow ATK to request an increase of the Term Loan A by up to $350,000 (the “Accordion”).  It is ATK’s intention to increase its Term Loan A borrowings by $200,000 through the terms of the Accordion to partially finance the redemption of the 6.75% Notes.  The balance of the redemption, including the premium and the accrued interest owed, would be paid from available cash and/or ATK’s existing Senior Credit Facility.  Terms of the Term Loan A increase are expected to be similar to the terms of the existing Term Loan A, with the exception that it will mature two years after the existing Term Loan A.

 

(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

 

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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 July 1, 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 12.7958, which correspondingly has changed the conversion price per share to $78.15. 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 July 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 the quarters ended July 1, 2012 or July 3, 2011 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:

 

 

 

July 1. 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

 

15,772

 

17,451

 

Net carrying amount of liability component

 

183,681

 

182,002

 

Remaining amortization period of discount

 

146 months

 

149 months

 

Effective interest rate on liability component

 

7.00

%

7.00

%

 

Based on ATK’s closing stock price of $50.57 on July 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, 2012 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.

 

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Table of Contents

 

Scheduled Minimum Loan Payments

 

As of July 1, 2012, the scheduled minimum payments on outstanding long-term debt are as follows:

 

Remainder of fiscal 2013

 

$

25,000

 

Fiscal 2014

 

40,000

 

Fiscal 2015

 

239,453

 

Fiscal 2016

 

260,000

 

Fiscal 2017

 

400,000

 

Thereafter

 

350,000

 

Total payments

 

$

1,314,453

 

 

ATK’s total debt (current portion of debt and long-term debt) as a percentage of total capitalization (total debt and stockholders’ equity) was 50% as of July 1, 2012 and 58% as of March 31, 2012.

 

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.  ATK’s 6.75% Senior Subordinated Notes and 6.875% Senior Subordinated Notes limit the aggregate sum of dividends, share repurchases, and other designated restricted payments to an amount based on ATK’s net income, stock issuance proceeds, and certain other items, less restricted payments made, since April 1, 2001. As of July 1, 2012, this limit was approximately $715,000. As of July 1, 2012, the Senior Credit Facility allows ATK to make unlimited “restricted payments” (as defined in the credit agreement), which, among other items, would allow payments for future stock repurchases, as long as ATK maintains a certain amount of liquidity and maintains certain senior debt limits, with a limit, when those senior debt limits are not met, of $250,000 plus proceeds of any equity issuances plus 50% of net income since October 7, 2010.

 

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 July 1, 2012, ATK was in compliance with the financial covenants.

 

Cash Paid for Interest on Debt

 

Cash paid for interest totaled $16,208 in the quarter ended July 1, 2012 and $3,185 during the quarter ended July 3, 2011.

 

12.  Employee Benefit Plans

 

 

 

Pension Benefits
Quarters Ended

 

Other Postretirement Benefits
Quarters Ended

 

 

 

July 1, 2012

 

July 3, 2011

 

July 1, 2012

 

July 3, 2011

 

Components of Net Periodic Benefit Cost

 

 

 

 

 

 

 

 

 

Service cost

 

$

16,007

 

$

16,177

 

$

1

 

$

19

 

Interest cost

 

36,168

 

37,321

 

1,623

 

1,953

 

Expected return on plan assets

 

(42,007

)

(43,897

)

(813

)

(878

)

Amortization of unrecognized net loss

 

31,199

 

23,983

 

663

 

743

 

Amortization of unrecognized prior service cost

 

(98

)

(95

)

(2,095

)

(2,095

)

Net periodic benefit cost before settlement cost

 

41,269

 

33,489

 

(621

)

(258

)

Settlement Cost

 

2,000

 

 

 

 

Net periodic benefit cost

 

$

43,269

 

$

33,489

 

$

(621

)

$

(258

)

 

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During the quarter ended July 1, 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 quarter ended July 1, 2012, ATK contributed $140,000 directly to the pension trust and $4,599 directly to retirees under its supplemental (nonqualified) executive retirement plan.  ATK also contributed $2,963 to its other PRB plans.  ATK anticipates making additional contributions of $2,548 directly to retirees under the nonqualified plan and $10,016 to its other PRB plans during the remainder of fiscal 2013.  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.

 

13.  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 July 1, 2012 and July 3, 2011 represent effective tax rates of 36.1% and 31.2%, respectively.  The increase in the rate from the prior-year quarter is primarily due to the lack of the prior-year discrete revaluation of the deferred tax assets caused by a change in state tax law, the expiration of the federal research and development tax credit, and a lower benefit from the domestic manufacturing deduction.

 

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.  As of July 1, 2012, the Internal Revenue Service (“IRS”) had completed the audits of ATK through fiscal 2008 and on August 6, 2012, ATK settled the examination of the fiscal 2009 and 2010 tax returns with the IRS.  This settlement will result in the recognition of approximately $11,000 of tax benefit 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.  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 $15,000 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 $12,400, which includes the expected second quarter benefit of $11,000 discussed above.

 

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 July 1, 2012, ATK has authorized up to 2,382,360 common shares under the 2005 Stock Incentive Plan, of which 238,297 common shares are 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 July 1, 2012 and July 3, 2011 was $3,222 and $3,344, respectively.  The total income tax benefit recognized in the income statement for share-based compensation during the quarters ended July 1, 2012, and July 3, 2011 was $1,250 and $1,262, 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 July 1, 2012, there were up to 550,475 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 196,085 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 111,780 shares will become payable only upon achievement of certain performance goals, including sales growth relative

 

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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 July 1, 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 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 quarter ended July 1, 2012.

 

Of the shares reserved for TSR awards for key employees,

 

·      27,446 shares will become payable 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 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 quarter ended July 1, 2012 totaled 2,012 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 or ten-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 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 no options during the quarter ended July 1, 2012.

 

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 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

 

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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 July 1, 2012, based on progress to date on certain contracts, there is approximately $140,450 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 0.50% and 1.00% as of July 1, 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:

 

 

 

July 1, 2012

 

March 31, 2012

 

 

 

Liability

 

Receivable

 

Liability

 

Receivable

 

Amounts (payable) receivable

 

$

(60,968

)

$

35,518

 

$

(61,227

)

$

35,638

 

Unamortized discount

 

2,296

 

(1,188

)

3,731

 

(1,925

)

Present value amounts (payable) receivable

 

$

(58,672

)

$

34,330

 

$

(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 $58,672 discounted liability as of July 1, 2012, $5,226 was recorded within other current liabilities and $53,446 was recorded within other long-term liabilities. Of the $34,330 discounted receivable, ATK recorded $4,896 within other current assets and $29,434 within other non-current assets. As of July 1, 2012, the estimated discounted range of reasonably possible costs of environmental remediation was $58,672 to $81,731.

 

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, 2012.

 

16.  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 quarter of fiscal 2013, ATK repurchased 482,044 shares for $25,000.

 

17. 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

 

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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 $45,693 and $29,243 for the quarters ended July 1, 2012 and July 3, 2011 respectively. The adjustments were primarily driven by greater than expected performance at the Radford facility due to increased production volumes, a gain on the sale of residual assets, and changes in estimates as contracts near completion in energetic and small- caliber systems programs.

 

18. 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
Benefits

 

Facility
Closure and
Other Costs

 

Total

 

Balance at March 31, 2012

 

7,148

 

$

25

 

$

7,173

 

Expense

 

 

 

 

Cash paid

 

(3,488

)

 

(3,488

)

Non-cash settlements

 

 

 

 

Balance at July 1, 2012

 

$

3,660

 

$

25

 

$

3,685

 

 

ATK expects to liquidate the majority of the remaining liability during fiscal 2013.

 

19.  Operating Segment Information

 

Effective April 1, 2012, ATK realigned its business structure into three operating groups. These operating segments are defined based on the reporting and review process used by ATK’s chief executive officer and other management.  The operating structure aligns ATK’s capabilities and resources with its customers and markets and positions the Company for long-term growth and improved profitability.  Each operating segment is described below:

 

·      Aerospace Group, which generated 27% of ATK’s external sales in the quarter ended July 1, 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 48% of ATK’s external sales in the quarter ended July 1, 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.

 

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·      Sporting Group, which generated 25% of ATK’s external sales in the quarter ended July 1, 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 Defense Group, contributed approximately 16% and 15% of total external sales during the quarters ended July 1, 2012 and July 3, 2011, respectively.

 

The following table summarizes ATK’s results by operating segment:

 

 

 

Quarters Ended

 

 

 

July 1, 2012

 

July 3, 2011

 

Sales to external customers:

 

 

 

 

 

Aerospace Group

 

$

294,656

 

$

353,647

 

Defense Group

 

514,479

 

492,349

 

Sporting Group

 

273,166

 

229,259

 

Total external sales

 

1,082,301

 

1,075,255

 

Intercompany sales:

 

 

 

 

 

Aerospace Group

 

5,286

 

3,375

 

Defense Group

 

31,691

 

35,980

 

Sporting Group

 

5,798

 

3,900

 

Eliminations

 

(42,775

)

(43,255

)

Total intercompany sales

 

 

 

Total sales

 

$

1,082,301

 

$

1,075,255

 

 

 

 

 

 

 

Income before interest, income taxes, and noncontrolling interest:

 

 

 

 

 

Aerospace Group

 

$

34,950

 

$

42,546

 

Defense Group

 

91,361

 

61,784

 

Sporting Group

 

20,794

 

29,320

 

Corporate

 

(16,417

)

(3,110

)

Total income before interest, income taxes, and noncontrolling interest

 

$

130,688

 

$

130,540

 

 

Total assets:

 

 

 

 

 

Aerospace Group

 

$

1,573,700

 

$

1,486,319

 

Defense Group

 

1,223,343

 

1,160,656

 

Sporting Group

 

874,529

 

840,099

 

Corporate

 

641,843

 

804,370

 

Total assets

 

$

4,313,415

 

$

4,291,444

 

 

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 $4,103 and $4,541 for the quarters ended July 1, 2012 and July 3, 2011, respectively.

 

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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 and import-export control,

·      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 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.  Additional

 

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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 July 1, 2012, ATK’s three operating groups are:

 

·      Aerospace Group, which generated 27% of ATK’s external sales in the quarter ended July 1, 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 48% of ATK’s external sales in the quarter ended July 1, 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 25% of ATK’s external sales in the quarter ended July 1, 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 July 1, 2012

 

·      Quarterly sales of $1.1 billion.

·      Diluted earnings per share of $2.16.

·      Orders for the quarter ending July 1, 2012 were $1.1 billion compared to $678 million in the quarter ending July 3, 2011.

·      Total backlog was $6.1 billion at July 1, 2012 compared to $6.3 billion at March 31, 2012.

·      Income before interest, income taxes, and noncontrolling interest (“operating profit”) as a percentage of sales was constant quarter over quarter with increases within the Defense Group due to higher than anticipated production volumes and higher profit rates within Energetics. This increase was offset by lower sales volume in Aerospace on a commercial aerospace structures program and space systems operations, the absence of a gain on the sale of a non-essential parcel of land, a continued shift to lower margin products within the Sporting Group, and increased pension expense at Corporate.

·      A higher effective tax rate of 36.1% which was primarily due to the lack of the prior year discrete revaluation of the deferred tax assets caused by a change in state tax law, the expiration of the federal research and development tax credit, and a lower benefit from the domestic manufacturing deduction.

·      On May 1, 2012, ATK’s Board of Directors declared a quarterly cash dividend of $0.20 per share to stockholders of record on June 11, 2012.  The dividend was paid on June 28, 2012.

 

Notable events for fiscal 2013

 

·      During the quarter ATK repurchased 482,044 shares for $25,000.

 

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·      On August 6, 2012, ATK settled the examination of the fiscal 2009 and 2010 tax returns with the IRS. This settlement will result in the recognition of approximately $11,000 of tax benefit in the second quarter of fiscal 2013.

·      On August 7, 2012, ATK’s Board of Directors declared a quarterly cash dividend of $0.20 per share, payable on September 27, 2012, to stockholders of record on September 5, 2012.

·      On August 8, 2012, ATK notified the trustee of its 6.75% Senior Subordinated Notes of its intention to redeem the notes (the “6.75% Notes”).  In accordance with the indenture, the redemption price will be 102.25% of the principal amount, or $409,000 including a premium of $9,000, plus accrued interest.  ATK expects that the holders of the notes will be paid by September 30, 2012.  The transaction will result in the write-off of the remaining $2,770 of deferred debt issuance costs. The terms of ATK’s existing Second Amended and Restated Credit Agreement, dated October 7, 2010 (the “Senior Credit Facility”), allow ATK to request an increase of the Term Loan A by up to $350,000 (the “Accordion”).  It is ATK’s intention to increase its Term Loan A borrowings by $200,000 through the terms of the Accordion to partially finance the redemption of the 6.75% Notes.  The balance of the redemption, including the premium and the accrued interest owed, would be paid from available cash and/or ATK’s existing Senior Credit Facility.  Terms of the Term Loan A increase are expected to be similar to the terms of the existing Term Loan A, with the exception that it will mature two years after the existing Term Loan A.

 

Outlook

 

Government Funding — ATK is dependent on funding levels of the U.S. Department of Defense (“DoD”) and NASA.

 

The U.S. defense industry has experienced significant changes over the years. ATK’s management believes that the key to ATK’s continued success is to focus on performance, innovation, simplicity, and affordability. ATK is positioning itself where management believes there will be continued strong defense funding, even as pressures mount on procurement and research and development accounts. ATK will concentrate on developing systems that will extend the life and improve the capability of existing platforms. ATK anticipates budget pressures will increasingly drive the life extension of platforms such as ships, aircraft, 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 quarter of fiscal 2013, NASA sales relating to the SLS programs were approximately $65,000 and as of July 1, 2012 ATK had approximately:

 

·      $45,527 of billed and unbilled receivables directly related to the program

·      $72,060 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

 

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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 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 $61,000 and $41,000, 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.

 

ATK submitted its Final Revised Price proposal for the continued operation of the Lake City Army Ammunition Plant (“Lake City” or “LCAAP”) on August 6, 2012, in response to a request issued by the U.S. Army.  The contract is expected to be awarded in the fall of 2012. ATK is currently under contract with the U.S. Army to operate the LCAAP until September 2013. Loss of the Lake City contract would reduce the Defense Group’s and ATK’s sales and profit.  The prime contract at Lake City, which includes modernization, accounted for approximately 15% of ATK’s total revenue in fiscal 2012.

 

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.

 

Critical Accounting Policies

 

ATK’s significant accounting policies are described in Note 1 to the consolidated financial statements included in ATK’s Annual Report on Form 10-K for the year ended March 31, 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.

 

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Results of Operations

 

Acquisitions

 

There were no acquisitions during the first quarter of fiscal 2013 or fiscal 2012.

 

Sales

 

The military small-caliber ammunition contract, which is reported within Defense Group, contributed approximately 16% and 15% of total external sales during the quarters ended July 1, 2012 and July 3, 2011, respectively.

 

The following is a summary of each operating segment’s external sales:

 

 

 

Quarters Ended

 

 

 

July 1, 2012

 

July 3, 2011

 

$ Change

 

%
Change

 

Aerospace Group

 

$

294,656

 

$

353,647

 

$

(58,991

)

(16.7

)%

Defense Group

 

514,479

 

492,349

 

22,130

 

4.5

%

Sporting Group

 

273,166

 

229,259

 

43,907

 

19.2

%

Total external sales

 

$

1,082,301

 

$

1,075,255

 

$

7,046

 

0.7

%

 

The fluctuation in sales was driven by the program-related changes within the operating segments as described below.

 

Aerospace Group.  The decrease in sales was driven by:

·      a $36,500 decrease in Space Systems Operations resulting from reduced production levels and completion of contracts.

·      a $19,600 decrease in Aerospace Structures primarily driven by completion of tool procurement/start-up activities within commercial aerospace structures and production cycles of other commercial aircraft programs.

 

Defense Group.  The increase in sales was driven by:

·     a $17,500 increase in Energetic Systems from higher than anticipated production volume and changes in profit rates.

·     an increase of $7,700 within Small Caliber Systems ammunition due to increased ammunition volume.

 

Sporting Group.  The increase was driven by:

·      an increase of $25,000 within the Accessories Division, driven by full-scale production sales on a DoD contract in the tactical accessories business.

·      an $18,000 increase in Ammunition Division sales due to strong demand primarily in the domestic commercial channel.

 

Gross Profit

 

 

 

Quarters Ended

 

 

 

July 1, 2012

 

As a %
of Sales

 

July 3, 2011

 

As a %
of Sales

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

$

249,622

 

23.1

%

$

245,224

 

22.8

%

$

4,398

 

 

The increase in gross profit for the quarter is driven by higher sales within the Defense Group due to the close out of the Radford facility and increased orders within the Sporting Groups. These increases were partially offset by the decrease in Aerospace Group sales and the shift to lower margin products within the Sporting Group.

 

Operating Expenses

 

 

 

Quarters Ended

 

 

 

July 1, 2012

 

As a %
of Sales

 

July 3, 2011

 

As a %
of Sales

 

Change

 

Research and development

 

$

14,008

 

1.3

%

$

12,202

 

1.1

%

$

1,806

 

Selling

 

40,527

 

3.7

%

39,426

 

3.7

%

1,101

 

General and administrative

 

64,399

 

6.0

%

63,056

 

5.9

%

1,343

 

Total

 

$

118,934

 

11.0

%

$

114,684

 

10.7

%

$

4,250

 

 

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Operating expenses increased $4,250 from the prior year period.  Research and development costs were slightly higher, consistent with higher sales in the Defense and Sporting Groups.  Selling expenses were slightly higher due to higher sales within the Ammunition Division and pursuit of satellite opportunities. General and administrative expenses were higher due to facility closure costs within Sporting Group, partially offset by continued management cost initiatives.

 

Income before Interest, Income Taxes, and Noncontrolling Interest

 

 

 

Quarters Ended

 

 

 

July 1, 2012

 

July 3, 2011

 

Change

 

Aerospace Group

 

$

34,950

 

$

42,546

 

$

(7,596

)

Defense Group

 

91,361

 

61,784

 

29,577

 

Sporting Group

 

20,794

 

29,320

 

(8,526

)

Corporate

 

(16,417

)

(3,110

)

(13,307

)

Total

 

$

130,688

 

$

130,540

 

$

148

 

 

The fluctuation in income before interest, income taxes, and noncontrolling interest from the prior year periods was due to program-related changes within the operating segments as described below.

 

Aerospace Group.  The decrease relates to the lower sales volume across Aerospace Group, 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 increase was due to changes in profit rates driven by increased production volume and a gain on the sale of residual assets in Energetic Systems.

 

Sporting Group.  The decrease primarily reflects the continued shift to lower margin products and costs associated with the closeout of facilities, partially offset by increased sales volumes.

 

Corporate.  Corporate income before interest, income taxes, and noncontrolling interest primarily reflects expenses incurred for administrative functions that are performed centrally at the corporate headquarters, pension expense, and the elimination of intercompany profits.  The increase from the prior year is driven by the 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 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. During the quarters ended July 1, 2012 and July 3, 2011, the Company recognized favorable operating income adjustments of $85,692 and $60,107, and unfavorable operating income adjustments of $39,999 and $30,864, respectively. The adjustments were primarily driven by greater than expected performance at the Radford facility due to increased production volumes, a gain on sale of residual assets, changes in estimates as contracts near completion in energetics and small-caliber systems programs.

 

Net Interest Expense

 

Net interest expense for the quarter ended July 1, 2012 was $19,750, a decrease of $6,550 compared to $26,300 in the comparable quarter of fiscal 2012 primarily due to the repayment of debt during the past year, as well as a reduction in the amortization of debt

 

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Table of Contents

 

discount due to the repayment of a portion of the outstanding convertible notes.

 

Income Tax Provision

 

 

 

Quarters Ended

 

 

 

July 1, 2012

 

Effective
Rate

 

July 3, 2011

 

Effective
Rate

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

$

39,997

 

36.1

%

$

32,546

 

31.2

%

$

7,451

 

 

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 July 1, 2012 and July 3, 2011 represent effective tax rates of 36.1% and 31.2%, respectively.  The increase in the rate from the prior year quarter is primarily due to the lack of the prior year discrete revaluation of the deferred tax assets caused by a change in state tax law, the expiration of the federal research and development tax credit, and a lower benefit from the domestic manufacturing deduction.

 

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.  As of July 1, 2012, the Internal Revenue Service had completed the audits of ATK through fiscal 2008 and on August 6, 2012, ATK settled the examination of the fiscal 2009 and 2010 tax returns with the IRS. This settlement will result in the recognition of approximately $11,000 of tax benefit in the second quarter of fiscal 2013.  This benefit includes the federal and state impact from the closure of the federal audit as well a reduction to the reserves for subsequent years.  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 $15,000 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 $12,400, which includes the expected second quarter benefit of $11,000 discussed above.

 

The federal R&D tax credit expired on December 31, 2011.  If the federal R&D tax credit is retroactively extended, there would be a favorable impact to ATK’s fiscal 2013 effective income tax rate.

 

Net Income

 

Net income for the quarter ended July 1, 2012 was $70,941, a decrease of $753 compared to $71,694 in the first quarter of fiscal 2012. This decrease was driven by a $7,451 increase in income tax expense, and an increase of $4,250 in operating expenses. These increases were partially offset by an increase in gross profit of $4,398 and a decrease in net interest expense of $6,550.

 

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

 

Following ATK’s normal profile, cash from operations was negative for the first quarter.  Cash flows used for operations included the impact of a $140,000 pension contribution, as well as increased working capital, primarily due to the timing of payments and

 

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Table of Contents

 

collections, and increased inventory to support expected sales growth in Sporting Group.  Capital expenditures in the quarter were $23,882. We expect capital expenditures to remain consistent during the remainder of the fiscal year.

 

ATK’s cash flows from operating, investing and financing activities, as reflected in the Condensed Consolidated Statement of Cash Flows for the quarters ended July 1, 2012 and July 3, 2011 are summarized as follows:

 

 

 

July 1, 2012

 

July 3, 2011

 

Change

 

Cash flows used for operating activities

 

$

(296,048

)

$

(151,479

)

$

(144,569

)

Cash flows used for investing activities

 

(23,882

)

(35,200

)

11,318

 

Cash flows used for financing activities

 

(36,527

)

(109,610

)

73,083

 

Net cash flows

 

$

(356,457

)

$

(296,289

)

$

(60,168

)

 

Operating Activities

 

Net cash used for operating activities increased $144,569 compared to the prior year period.  This increase was driven by higher pension contributions of $78,400 to the pension trust during the current year, a $28,680 increase in cash used for working capital, and a $25,500 payment to settle the LUU Flare litigation.

 

Cash used for working capital is defined as net receivables plus long-term receivables plus net inventories, less accounts payables and contract advances.

 

Investing Activities

 

Net cash used for investing activities decreased by $11,318 primarily due to a decrease in the amount of cash used for capital expenditures, partially offset by the absence of the proceeds from the disposition of a non-essential parcel of land within Aerospace Group in fiscal 2012.

 

Financing Activities

 

Net cash used for financing activities decreased $73,083 primarily due to the absence of $50,427 of cash used to extinguish debt and $25,004 less cash used to repurchase ATK’s common stock than the prior year.

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