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Alliant Techsystems 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31
  3. Ex-32
  4. Graphic
  5. Graphic

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 October 4, 2009

 

OR

 

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                   

 

Commission file number 1-10582

 

 

Alliant Techsystems Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

41-1672694

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

7480 Flying Cloud Drive
Minneapolis, Minnesota

 

 

55344-3720

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (952) 351-3000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  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 November 1, 2009, 32,927,781 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 INCOME STATEMENTS

(Unaudited)

 

 

 

QUARTERS ENDED

 

SIX MONTHS ENDED

 

(In thousands except per share data)

 

October 4,
2009

 

September 28,
2008 (1)

 

October 4,
2009

 

September 28,
2008 (1)

 

Sales

 

$

1,207,964

 

$

1,091,951

 

$

2,417,098

 

$

2,216,816

 

Cost of sales

 

962,262

 

851,720

 

1,911,551

 

1,757,313

 

Gross profit

 

245,702

 

240,231

 

505,547

 

459,503

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

15,886

 

25,419

 

31,264

 

47,140

 

Selling

 

45,202

 

39,121

 

90,296

 

77,808

 

General and administrative

 

49,740

 

55,046

 

117,741

 

105,578

 

Income before interest, income taxes, and noncontrolling interest

 

134,874

 

120,645

 

266,246

 

228,977

 

Interest expense

 

(19,361

)

(22,727

)

(40,296

)

(45,277

)

Interest income

 

124

 

232

 

210

 

599

 

Income before income taxes and noncontrolling interest

 

115,637

 

98,150

 

226,160

 

184,299

 

Income tax provision

 

43,020

 

36,672

 

84,060

 

68,339

 

Net income

 

72,617

 

61,478

 

142,100

 

115,960

 

Less net income attributable to noncontrolling interest

 

107

 

16

 

159

 

106

 

Net income attributable to Alliant Techsystems Inc.

 

$

72,510

 

$

61,462

 

$

141,941

 

$

115,854

 

 

 

 

 

 

 

 

 

 

 

Alliant Techsystems Inc.’s earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

2.21

 

$

1.87

 

$

4.33

 

$

3.53

 

Diluted

 

2.19

 

1.77

 

4.28

 

3.31

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

32,829

 

32,819

 

32,793

 

32,823

 

Diluted

 

33,139

 

34,796

 

33,151

 

34,994

 

 


(1) Restated due to the adoption of new accounting standards as discussed in Note 2

 

See Notes to the Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

ALLIANT TECHSYSTEMS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In thousands except share data)

 

October 4, 2009

 

March 31, 2009 (1)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

224,979

 

$

336,700

 

Net receivables

 

932,860

 

899,543

 

Net inventories

 

192,893

 

238,600

 

Income tax receivable

 

10,966

 

34,835

 

Deferred income tax assets

 

47,583

 

29,223

 

Other current assets

 

52,487

 

39,843

 

Total current assets

 

1,461,768

 

1,578,744

 

Net property, plant, and equipment

 

529,583

 

540,041

 

Goodwill

 

1,190,984

 

1,195,986

 

Deferred income tax assets

 

35,796

 

69,582

 

Deferred charges and other non-current assets

 

266,804

 

192,992

 

Total assets

 

$

3,484,935

 

$

3,577,345

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

13,750

 

$

289,859

 

Accounts payable

 

165,009

 

294,971

 

Contract advances and allowances

 

95,955

 

86,080

 

Accrued compensation

 

119,127

 

168,059

 

Other accrued liabilities

 

193,080

 

166,341

 

Total current liabilities

 

586,921

 

1,005,310

 

Long-term debt

 

1,378,520

 

1,097,744

 

Postretirement and postemployment benefits liabilities

 

118,698

 

121,689

 

Accrued pension liability

 

421,292

 

552,671

 

Other long-term liabilities

 

127,013

 

125,362

 

Total liabilities

 

2,632,444

 

2,902,776

 

Contingencies (Note 14)

 

 

 

 

 

Common stock - $.01 par value

 

 

 

 

 

Authorized – 90,000,000 shares

 

 

 

 

 

Issued and outstanding – 32,927,959 shares at October 4, 2009 and 32,783,496 at March 31, 2009

 

329

 

328

 

Additional paid-in-capital

 

577,786

 

574,674

 

Retained earnings

 

1,562,403

 

1,420,462

 

Accumulated other comprehensive loss

 

(629,767

)

(651,652

)

Common stock in treasury, at cost – 8,627,489 shares held at October 4, 2009 and 8,771,565 shares held at March 31, 2009

 

(667,017

)

(677,841

)

Total Alliant Techsystems Inc. stockholders’ equity

 

843,734

 

665,971

 

Noncontrolling interest

 

8,757

 

8,598

 

Total equity

 

852,491

 

674,569

 

Total liabilities and equity

 

$

3,484,935

 

$

3,577,345

 

 


(1) Restated due to the adoption of new accounting standards as discussed in Note 2

 

See Notes to the Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

ALLIANT TECHSYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

SIX MONTHS ENDED

 

(In thousands)

 

October 4, 2009

 

September 28, 2008 (1)

 

Operating activities

 

 

 

 

 

Net income

 

$

142,100

 

$

115,960

 

Adjustments to net income to arrive at cash (used for) provided by operating activities:

 

 

 

 

 

Depreciation

 

49,571

 

38,148

 

Amortization of intangible assets

 

2,479

 

2,808

 

Amortization of debt discount

 

11,708

 

11,718

 

Amortization of deferred financing costs

 

1,419

 

1,438

 

Asset impairment

 

11,405

 

3,753

 

Deferred income taxes

 

1,365

 

(18

)

Gain on disposal of property

 

(483

)

(3,439

)

Share-based plans expense

 

8,580

 

9,718

 

Excess tax benefits from share-based plans

 

(981

)

(3,151

)

Changes in assets and liabilities:

 

 

 

 

 

Net receivables

 

(33,317

)

(147,178

)

Net inventories

 

45,707

 

2,934

 

Accounts payable

 

(113,315

)

(10,063

)

Contract advances and allowances

 

9,875

 

(6,036

)

Accrued compensation

 

(54,405

)

(32,606

)

Accrued income taxes

 

33,260

 

(17,003

)

Pension and other postretirement benefits

 

(124,960

)

13,435

 

Other assets and liabilities

 

(37,442

)

51,168

 

Cash (used for) provided by operating activities

 

(47,434

)

31,586

 

Investing activities

 

 

 

 

 

Capital expenditures

 

(67,147

)

(59,000

)

Acquisition of business, net (Note 4)

 

5,002

 

(7,511

)

Proceeds from the disposition of property, plant, and equipment

 

1,267

 

321

 

Cash used for investing activities

 

(60,878

)

(66,190

)

Financing activities

 

 

 

 

 

Payments made on bank debt

 

(7,041

)

 

Payments made for debt issue costs

 

 

(5

)

Net purchase of treasury shares

 

 

(31,616

)

Proceeds from employee stock compensation plans

 

2,651

 

6,454

 

Excess tax benefits from share-based plans

 

981

 

3,151

 

Cash used for financing activities

 

(3,409

)

(22,016

)

Decrease in cash and cash equivalents

 

(111,721

)

(56,620

)

Cash and cash equivalents - beginning of period

 

336,700

 

119,773

 

Cash and cash equivalents - end of period

 

$

224,979

 

$

63,153

 

 

 

 

 

 

 

Supplemental Cash Flow Disclosure:

 

 

 

 

 

Noncash investing activity:

 

 

 

 

 

Capital expenditures included in accounts payable

 

$

3,891

 

$

3,387

 

Acquisition costs included in other accrued liabilities

 

$

 

$

7,500

 

 


(1) Restated due to the adoption of new accounting standards as discussed in Note 2

 

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 six months ended October 4, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2009

 

32,783,496

 

$

328

 

$

574,674

 

$

1,420,462

 

$

(651,652

)

$

(677,841

)

$

8,598

 

$

674,569

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

141,941

 

 

 

159

 

142,100

 

Other comprehensive income (see Note 7):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments, net

 

 

 

 

 

 

21,885

 

 

 

21,885

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

163,985

 

Exercise of stock options

 

56,390

 

 

(1,707

)

 

 

4,358

 

 

2,651

 

Restricted stock grants

 

19,389

 

 

(2,023

)

 

 

2,023

 

 

 

Share-based compensation

 

 

 

8,580

 

 

 

 

 

8,580

 

Performance shares issued net of treasury stock withheld

 

71,540

 

 

(8,439

)

 

 

5,214

 

 

(3,225

)

Tax benefit related to share based plans and other

 

 

 

6,454

 

 

 

 

 

6,454

 

Employee benefit plans and other

 

(2,856

)

1

 

247

 

 

 

(771

)

 

(523

)

Balance at October 4, 2009

 

32,927,959

 

$

329

 

$

577,786

 

$

1,562,403

 

$

(629,767

)

$

(667,017

)

$

8,757

 

$

852,491

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended September 28, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2008

 

32,795,800

 

$

328

 

$

573,321

 

$

1,279,696

 

$

(376,636

)

$

(666,365

)

$

8,411

 

$

818,755

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

115,854

 

 

 

106

 

115,960

 

Other comprehensive income (see Note 7):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments, net

 

 

 

 

 

 

4,161

 

 

 

4,161

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

120,121

 

Exercise of stock options

 

116,206

 

1

 

(2,407

)

 

 

8,861

 

 

6,455

 

Restricted stock grants

 

10,652

 

 

(1,134

)

 

 

1,134

 

 

 

Share-based compensation

 

 

 

9,718

 

 

 

 

 

9,718

 

Treasury stock purchased

 

(299,956

)

(3

)

3

 

 

 

 

 

(31,609

)

 

 

(31,609

)

Performance shares issued net of treasury stock withheld

 

94,997

 

1

 

(11,530

)

 

 

5,715

 

 

(5,814

)

Tax benefit related to share based plans and other

 

 

 

5,699

 

 

 

 

 

5,699

 

Employee benefit plans and other

 

(7,360

)

 

320

 

 

 

(1,110

)

 

(790

)

Balance at September 28, 2008

 

32,710,339

 

$

327

 

$

573,990

 

$

1,395,550

 

$

(372,475

)

$

(683,374

)

$

8,517

 

$

922,535

 

 

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 October 4, 2009

 

(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, 2009 (fiscal 2009).  Management is responsible for the unaudited condensed consolidated financial statements included in this document. The condensed consolidated financial statements included in this document are unaudited but, in the opinion of management, include all adjustments necessary for a fair presentation of ATK’s financial position as of October 4, 2009, and its results of operations and cash flows for the quarters and six months ended October 4, 2009 and September 28, 2008.

 

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.

 

Certain amounts presented for prior periods have been restated to conform to the current year presentation. As discussed further in Note 2, effective April 1, 2009, ATK adopted new accounting pronouncements as required.  The accounting pronouncements related to convertible debt instruments and noncontrolling interests in subsidiaries and require retrospective application.  See Note 2 for the impact to the Company’s financial position and results of operations.

 

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its 2009 Annual Report on Form 10-K.

 

2.     New Accounting Pronouncements

 

Adoption of New Accounting Pronouncements.   In May 2008, the Financial Accounting Standards Board (FASB) issued a new accounting standard which specifies that issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The provisions of this new standard apply to ATK’s $199,453 aggregate principal amount of 3.00% Convertible Notes due 2024 (the 3.00% Convertible Notes due 2024), the $279,763 aggregate principal amount of 2.75% Convertible Notes due 2024 (the 2.75% Convertible Notes due 2024), and the $300,000 aggregate principal amount of 2.75% Convertible Notes due 2011 (the 2.75% Convertible Notes due 2011), discussed in Note 10. ATK retrospectively adopted the standard on April 1, 2009, as required.  Therefore, previously reported balances (prior to April 1, 2009), have been restated to effectively record a debt discount equal to the fair value of the equity component, a deferred tax liability for the tax effect of the recorded debt discount, and an increase to additional paid-in capital for the after-tax fair value of the equity component as of the date of issuance of the underlying notes.  Previously reported balances have also been adjusted to provide for the amortization of the debt discount through interest expense and the associated decrease in the deferred tax liability recorded through income tax expense.

 

The unamortized debt discount associated with the convertible notes was as follows:

 

 

 

October 4, 2009

 

March 31, 2009

 

3.00% Convertible Notes due 2024

 

$

32,704

 

$

35,452

 

2.75% Convertible Notes due 2024

 

 

3,820

 

2.75% Convertible Notes due 2011

 

22,367

 

27,507

 

Total

 

$

55,071

 

$

66,779

 

 

The unamortized discount will be amortized through interest expense into earnings over the remaining expected term of the convertible notes.  The following table is a summary of the effect of applying these provisions in ATK’s prior and current period consolidated statements of income:

 

7



Table of Contents

 

 

 

Six months ended

 

 

 

October 4,
2009

 

September 28,
2008

 

Increase in interest expense

 

$

(11,708

)

$

(11,718

)

Tax benefit

 

4,683

 

4,723

 

Decrease in net income

 

(7,025

)

(6,995

)

Decrease in diluted earnings per share

 

$

(0.21

)

$

(0.20

)

 

The adoption of the new standard had the following effect on ATK’s consolidated balance sheet as of March 31, 2009:

 

 

 

Increase
(Decrease)

 

Current deferred income tax assets

 

$

(1,528

)

Long-term deferred income tax assets

 

(14,290

)

Current portion of long-term debt

 

(3,820

)

Long-term debt

 

(62,959

)

Additional paid-in-capital

 

101,541

 

Retained earnings

 

(50,581

)

 

As of April 1, 2008, the cumulative effect of the change in accounting principle on retained earnings and additional paid-in-capital was approximately $(36,000) and $105,000, respectively.  The adoption had no impact on ATK’s cash provided by (used for) operating, investing, or financing activities on the condensed consolidated statements of cash flows for the periods presented.

 

In December 2007, the FASB issued a new standard which amends previous existing guidance to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. ATK adopted the new standard on April 1, 2009 and retrospectively reclassified the “Minority interest in joint venture” balance previously included in the “Other long-term liabilities” line of the consolidated balance sheet to a new component of equity with respect to ATK’s noncontrolling interest in a joint venture.  The adoption also impacted certain captions previously used on the consolidated income statement.  The adoption did not have a material impact on ATK’s consolidated financial position or results of operations.

 

In May 2009, the FASB issued a new standard that provides guidance on management’s assessment of subsequent events.  The new standard clarifies that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued or are available to be issued.  In addition to current disclosure requirements, the new standard also requires disclosure of the date through which subsequent events have been evaluated.  For the quarter ended October 4, 2009, ATK evaluated subsequent events through the time of filing this Form 10-Q with the SEC on November 12, 2009.

 

In September 2006, the FASB issued a new standard which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  In January 2008, the FASB deferred the effective date of the standard for certain nonfinancial assets and liabilities to the fiscal year beginning after November 15, 2008 (ATK’s fiscal 2010). On April 1, 2009 ATK adopted the previously deferred provisions relating to nonfinancial assets and liabilities recorded at fair value, as required.  The adoption did not have a material impact on its financial statements. See Note 3 for additional disclosures.

 

In December 2007, the FASB issued a new standard relating to business combinations.  The statement retains the fundamental requirements in the previous guidance that the acquisition method of accounting (also referred to as the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The prospective adoption of the new guidance on April 1, 2009 did not have an impact on ATK’s consolidated financial statements as there were no acquisitions during the six months ended October 4, 2009.  The adoption is, however, expected to have a significant effect on how future acquisition transactions are reflected in the financial statements.  The acquisition of Eagle Industries on March 31, 2009, as discussed further in Note 4, was accounted for under the old methodology, as it was acquired prior to the adoption of the new standard on April 1, 2009.

 

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In June 2008, the FASB ratified the consensus reached on its guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock.  The adoption of the new guidance on April 1, 2009 did not change the conclusion that the net cost of ATK’s warrants and options are classified within equity (as discussed in Note 10) in accordance with existing guidance, therefore, the adoption did not have a material impact on the financial statements.

 

In December 2008, the FASB issued a standard which amends the plan asset disclosures required under historical guidance to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan.  Guidance provided by this FSP relates to disclosures about investment policies and strategies, categories of plan assets, fair value measurements of plan assets, and significant concentrations of risk.  ATK’s adoption of the new standard in fiscal 2010 will require additional disclosure regarding plan assets of ATK’s defined benefit pension and other postretirement plans in ATK’s Form 10-K filed for the year ending March 31, 2010.

 

In June 2009, the FASB issued a new standard that establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) has become the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the Codification have become nonauthoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009.  ATK began to use the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the quarter ended October 4, 2009.  As the Codification was not intended to change or alter existing GAAP, there was no material impact on ATK’s consolidated financial statements.

 

3.  Fair Value of Financial Instruments

 

As discussed in Note 2, ATK has adopted all provisions of the new standard on fair value.  The standard 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 new standard 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.

 

Cash equivalents – The estimated fair value of cash equivalents approximates their carrying value due to the short-term maturities of these investments.  Accordingly, cash equivalents are classified as Level 1.

 

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.

 

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Derivative financial instruments and hedging activities – In order to manage its exposure to commodity pricing risk, ATK periodically utilizes commodity derivatives, which are considered Level 2 instruments.  Commodity derivatives are valued using an income approach based on the present value of the commodity index price less the contract rate multiplied by the notional amount.

 

Long-Term Debt – The fair value of the variable-rate long-term debt is calculated based on current market rates for debt of the same risk and maturities.  The fair value of the fixed-rate debt is based on market quotes for each issuance.

 

The following tables set forth by level within the fair value hierarchy ATK’s financial assets and liabilities that are measured at fair value on a recurring basis:

 

 

 

As of October 4, 2009

 

 

 

Fair Value Measurements Using Inputs Considered as

 

 

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

Cash equivalents (1)

 

$

231,665

 

$

 

$

 

Marketable securities (2)

 

 

13,435

 

 

Derivatives (3)

 

 

24,119

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Derivatives

 

$

 

$

 

$

 

 

 

 

As of March 31, 2009

 

 

 

Fair Value Measurements Using Inputs Considered as

 

 

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

Cash equivalents (1)

 

$

372,528

 

$

 

$

 

Marketable securities (2)

 

 

10,420

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Derivatives

 

$

 

$

 

$

 

 


(1)   Balance is greater than cash and cash equivalents as presented on the consolidated balance sheet primarily due to checks outstanding to vendors.

 

(2)   Represents securities held under a nonqualified supplemental executive retirement plan for certain executives and highly compensated employees.  The fair value of these securities is included within deferred charges and other non-current assets on the consolidated balance sheet.

 

(3)   Balance represents the fair value of outstanding commodity forward contracts that were entered into to hedge forecasted purchases of copper and zinc.

 

The following table presents ATK’s assets and liabilities that are not measured at fair value on a recurring basis.  The carrying values and estimated fair values were as follows:

 

 

 

As of October 4, 2009

 

As of March 31, 2009

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

Fixed rate debt

 

$

1,124,145

 

$

1,218,275

 

$

1,112,603

 

$

1,154,304

 

Variable rate debt

 

268,125

 

257,400

 

275,000

 

254,375

 

 

4.     Acquisitions, Goodwill, and Other Intangible Assets

 

There were no acquisitions during the quarter ended October 4, 2009.

 

On March 31, 2009, ATK acquired Eagle Industries (Eagle), a leading manufacturer of high-quality, individual operational nylon gear and equipment for military, homeland security, and law enforcement agencies for $63,000 net of cash acquired, subject to purchase price adjustments expected to be settled in fiscal 2010.  During the second quarter of fiscal 2010, ATK received a preliminary purchase price adjustment of $5,002, as determined by a working capital adjustment identified in the preliminary audited financial

 

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statements.  Eagle manufactures more than 5,000 products which include tactical assault vests, load-bearing equipment, weapon transporting gear, holsters, personal gear carriers, and other high quality accessories.   ATK believes that the acquisition provides an opportunity to expand its position in the domestic and international tactical accessories markets serving military and law enforcement customers.  Headquartered in Fenton, Missouri, Eagle employs approximately 1, 280 employees and is included in ATK Armament Systems.  The purchase price allocation has not yet been completed pending final valuation of certain acquired assets and liabilities.  At October 4, 2009 and March 31, 2009, substantially the entire purchase price was recorded as goodwill.  The final purchase price allocation could be significantly different than the estimate currently recorded.  The Company anticipates completion of the final purchase price allocation by March 31, 2010.  A portion of the goodwill generated in this acquisition will be deductible for tax purposes.

 

ATK used the purchase method of accounting to account for this acquisition and, accordingly, the results of Eagle are included in ATK’s consolidated financial statements at the date of acquisition.  The purchase price for the acquisition will be allocated to the acquired assets and liabilities based on estimated fair value.  Pro forma information on the results of operations for fiscal 2009 as if the acquisition had occurred at the beginning of fiscal 2009 is not being presented because the acquisition is not material to ATK for that purpose.

 

The changes in the carrying amount of goodwill by operating segment during the six months ended October 4, 2009 and year ended March 31, 2009 were as follows:

 

 

 

ATK Armament
Systems

 

ATK Mission
Systems

 

ATK Space
Systems

 

Total

 

Balance at April 1, 2008

 

$

171,337

 

$

354,976

 

$

709,883

 

$

1,236,196

 

Goodwill Impairment

 

 

 

(108,500

)

(108,500

)

Acquisitions

 

60,790

 

 

 

60,790

 

Adjustment

 

 

7,500

 

 

7,500

 

Balance at March 31, 2009

 

$

232,127

 

$

362,476

 

$

601,383

 

$

1,195,986

 

Adjustments

 

(5,002

)

 

 

(5,002

)

Balance at October 4, 2009

 

$

227,125

 

$

362,476

 

$

601,383

 

$

1,190,984

 

 

During the Company’s fiscal 2009 annual test of goodwill impairment, ATK determined that goodwill related to Spacecraft Systems was impaired by $108,500 and the non-cash goodwill impairment charge was recognized in the fourth quarter of fiscal 2009.  The goodwill impairment charge was attributed to changes in future estimated cash flows and the substantial reduction in current market multiples.

 

The fiscal 2009 acquisitions in ATK Armament Systems primarily related to Eagle as previously discussed.

 

The fiscal 2009 adjustment within ATK Mission Systems relates to the fiscal 2003 acquisition of assets of Science and Applied Technology, Inc.  The sellers of this acquired business were given the ability to earn up to an additional $7,500 of cash consideration if certain pre-specified milestones were attained with respect to one of the contracts acquired.  The pre-specified milestones were met in September 2008 and the additional contingent consideration earned pursuant to the purchase agreement resulted in an increase to goodwill.

 

The fiscal 2010 adjustment within ATK Armament Systems was the result of a preliminary purchase price adjustment received in September 2009, as discussed above, which reduced the purchase price of Eagle.

 

Included in deferred charges and other non-current assets as of October 4, 2009 and March 31, 2009 are other intangible assets of $74,504 which consist primarily of trademarks, patented technology, and brand names that are not being amortized as their estimated useful lives are considered indefinite.  Other intangible assets also include amortizing intangible assets, as follows:

 

 

 

October 4, 2009

 

March 31, 2009

 

 

 

Gross carrying amount

 

Accumulated amortization

 

Total

 

Gross carrying amount

 

Accumulated amortization

 

Total

 

Contracts

 

$

22,644

 

$

(22,153

)

$

491

 

$

22,644

 

$

(21,662

)

$

982

 

Trade name

 

16,777

 

(2,517

)

14,260

 

16,777

 

(1,678

)

15,099

 

Customer relationships and other

 

27,407

 

(12,813

)

14,594

 

27,407

 

(11,664

)

15,743

 

Total

 

$

66,828

 

$

(37,483

)

$

29,345

 

$

66,828

 

$

(35,004

)

$

31,824

 

 

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These assets are being amortized over their estimated useful lives over a weighted average remaining period of approximately 7.3 years. Amortization expense for the quarter and six months ended October 4, 2009 was $1,239 and $2,479, respectively.  Amortization for the quarter and six months ended September 28, 2008 was $1,404 and $2,808, respectively.  ATK expects amortization expense related to these assets to be as follows:

 

Remainder of fiscal 2010

 

$

2,464

 

Fiscal 2011

 

3,955

 

Fiscal 2012

 

3,946

 

Fiscal 2013

 

3,916

 

Fiscal 2014

 

3,916

 

Thereafter

 

11,148

 

Total

 

$

29,345

 

 

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 quarters and six months ended October 4, 2009 and September 28, 2008, net income as reported for each respective period is divided by (in thousands):

 

 

 

Quarters Ended

 

Six Months Ended

 

 

 

October 4,
2009

 

September 28,
 2008

 

October 4,
2009

 

September 28,
 2008

 

Weighted-average basic shares outstanding

 

32,718

 

32,819

 

32,681

 

32,823

 

Dilutive effect of stock-based awards

 

421

 

446

 

448

 

460

 

Dilutive effect of contingently issuable shares

 

 

1,531

 

22

 

1,711

 

Weighted-average diluted shares outstanding

 

33,139

 

34,796

 

33,151

 

34,994

 

 

 

 

 

 

 

 

 

 

 

Stock options excluded from the calculation of diluted EPS because the option exercise/threshold price was greater than the average market price of the common shares

 

5

 

 

5

 

 

 

As discussed further in Note 10, contingently issuable shares related to ATK’s 3.00% Convertible Notes due 2024, 2.75% Convertible Notes due 2024, and 2.75% Convertible Notes due 2011 are not included in diluted EPS for the quarter ended October 4, 2009 as ATK’s average stock price during the quarter did not exceed $79.75, $79.46, or $96.51, respectively.  Contingently issuable shares related to ATK’s 2.75% Convertible Notes due 2024 and 2.75% Convertible Notes due 2024 are included in diluted EPS for the six months ended October 4, 2009.  Contingently issuable shares related to ATK’s 2.75% Convertible Notes due 2011, are not included in diluted EPS for the six months ended October 4, 2009 as ATK’s average stock price during the quarter did not exceed $96.51.  The contingently issuable shares related to all three Notes are, however, included in diluted EPS for the quarter and six months ended September 28, 2008.

 

The Warrants, as discussed in Note 10, are not included in diluted EPS as ATK’s average stock price during the quarters or six months ended October 4, 2009 and September 28, 2008 did not exceed $116.75.

 

The Call Options, also discussed in Note 10, are anti-dilutive and are therefore excluded from the calculation of diluted shares outstanding.

 

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

 

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·                  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 the six months ended October 4, 2009 and for lead during the six months ended September 28, 2008.  The contracts essentially establish a fixed price for the underlying commodity and are designated and qualify as effective cash flow hedges of purchases of the commodity. Ineffectiveness is calculated as the amount by which the change in the fair value of the derivatives exceeds the change in the fair value of the anticipated commodity purchases.  The fair value of these contracts is recorded within other assets or liabilities, as appropriate, and the effective portion is reflected in accumulated Other Comprehensive Income (OCI) in the financial statements.  The gains or losses on these contracts are recorded in inventory as the commodities are purchased.   As of October 4, 2009, ATK had the following outstanding commodity forward contracts that were entered into to hedge forecasted purchases:

 

 

 

Number of
Pounds

 

Copper

 

60,550,000

 

Zinc

 

22,920,000

 

 

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 October 4, 2009.  At March 31, 2009, ATK had no outstanding contracts.

 

 

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

 

 

Fair value as of

 

Fair value as of

 

 

 

Location

 

October 4, 2009

 

March 31, 2009

 

October 4, 2009

 

March 31, 2009

 

Commodity forward contracts

 

Other current assets

 

$

16,232

 

$

 

$

 

$

 

Commodity forward contracts

 

Deferred charges and other non-current assets

 

7,887

 

 

 

 

Total

 

 

 

$

24,119

 

$

 

$

 

$

 

 

The derivative gains and losses in the consolidated income statements for the six months ended October 4, 2009 related to commodity 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

 

Commodity forward contracts

 

$

24,119

 

Cost of Sales

 

$

 

Cost of Sales

 

$

 

 

All derivatives used by ATK during the six months ended October 4, 2009 and the fiscal year ended March 31, 2009 were designated as hedging instruments.

 

7.     Comprehensive Income

 

The components of comprehensive income, net of income taxes, for the quarters and six months ended October 4, 2009 and September 28, 2008 were as follows:

 

 

 

Quarters Ended

 

Six Months Ended

 

 

 

October 4,
 2009

 

September 28,
2008

 

October 4,
 2009

 

September
28, 2008

 

Net income

 

$

72,617

 

$

61,478

 

$

142,100

 

$

115,960

 

Other comprehensive income (OCI):

 

 

 

 

 

 

 

 

 

Pension and other postretirement benefit liabilities, net of income taxes of ($1,826), ($755), ($3,498), and $(2,881), respectively

 

2,881

 

1,112

 

5,913

 

4,345

 

Change in fair value of derivatives, net of income taxes of $(6,638), $(381), $(9,467), and $7, respectively

 

10,319

 

572

 

14,652

 

(10

)

Change in fair value of available-for-sale securities, net of income taxes of $(406), $175, $(853), and $115, respectively

 

635

 

(262

)

1,320

 

(174

)

Total OCI

 

13,835

 

1,422

 

21,885

 

4,161

 

Comprehensive income

 

86,452

 

62,900

 

163,985

 

120,121

 

Comprehensive income attributable to noncontrolling interest

 

107

 

16

 

159

 

106

 

Comprehensive income attributable to Alliant Techsystems Inc.

 

$

86,345

 

$

62,884

 

$

163,826

 

$

120,015

 

 

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

 

 

 

October 4, 2009

 

March 31, 2009

 

Derivatives

 

$

14,652

 

$

 

Pension and other postretirement benefit liabilities

 

(644,930

)

(650,843

)

Available-for-sale securities

 

511

 

(809

)

Total accumulated other comprehensive loss

 

$

(629,767

)

$

(651,652

)

 

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

 

 

 

Quarters Ended

 

Six Months Ended

 

 

 

October 4,
 2009

 

September 28,
2008

 

October 4,
2009

 

September 28,
2008

 

Beginning of period unrealized gain (loss) in accumulated OCI

 

$

7,162

 

$

(1,203

)

$

 

$

 

Increase (decrease) in fair value of derivatives

 

16,957

 

356

 

24,119

 

(847

)

Losses reclassified from OCI, increasing the price paid to suppliers

 

 

363

 

 

363

 

End of period unrealized gain (loss) in accumulated OCI

 

24,119

 

(484

)

24,119

 

(484

)

 

There was no ineffectiveness recognized in earnings for these contracts during the quarters and six months ended October 4, 2009 and September 28, 2008.  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.     Inventories

 

Inventories consist of the following:

 

 

 

October 4, 2009

 

March 31, 2009

 

Raw materials

 

$

78,742

 

$

60,545

 

Work in process

 

32,128

 

46,436

 

Finished goods

 

65,264

 

93,050

 

Contracts in progress

 

16,759

 

38,569

 

Net inventories

 

$

192,893

 

$

238,600

 

 

9.     Other Liabilities

 

Other current and long-term accrued liabilities consist of the following:

 

 

 

October 4, 2009

 

March 31, 2009

 

Employee benefits and insurance, including pension and other postretirement benefits

 

$

70,805

 

$

57,455

 

Warranty

 

12,087

 

12,184

 

Interest

 

3,268

 

2,022

 

Environmental remediation

 

8,497

 

8,363

 

Rebate

 

14,879

 

5,344

 

Deferred lease obligation

 

15,650

 

13,150

 

Other

 

67,894

 

67,823

 

Total other accrued liabilities – current

 

$

193,080

 

$

166,341

 

 

 

 

 

 

 

Environmental remediation

 

$

45,342

 

$

47,919

 

Management nonqualified deferred compensation plan

 

23,324

 

20,362

 

Non-current portion of accrued income tax liability

 

28,432

 

25,570

 

Deferred lease obligation

 

13,549

 

11,853

 

Other

 

16,366

 

19,658

 

Total other long-term liabilities

 

$

127,013

 

$

125,362

 

 

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ATK provides product warranties, which entail repair or replacement of non-conforming items, in conjunction with sales of certain products. Estimated costs related to warranties are recorded in the period in which the related product sales occur. The warranty liability recorded at each balance sheet date reflects the estimated liability for warranty coverage for products delivered based on historical information and current trends.  The following is a reconciliation of the changes in ATK’s product warranty liability during the quarter and six months ended October 4, 2009:

 

Balance at April 1, 2009

 

$

12,184

 

Warranties issued

 

84

 

Payments made

 

 

Changes related to preexisting warranties

 

(235

)

Balance at July 5, 2009

 

$

12,033

 

Warranties issued

 

499

 

Payments made

 

(435

)

Changes related to preexisting warranties

 

(10

)

Balance at October 4, 2009

 

$

12,087

 

 

10.  Long-Term Debt

 

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

 

 

 

October 4, 2009

 

March 31, 2009

 

Senior Credit Facility dated March 29, 2007 (1):

 

 

 

 

 

Term A Loan due 2012

 

$

268,125

 

$

275,000

 

Revolving Credit Facility due 2012

 

 

 

2.75% Convertible Senior Subordinated Notes due 2011 (2) (3)

 

300,000

 

300,000

 

6.75% Senior Subordinated Notes due 2016

 

400,000

 

400,000

 

2.75% Convertible Senior Subordinated Notes due 2024 (5)

 

279,763

 

279,929

 

3.00% Convertible Senior Subordinated Notes due 2024 (4)

 

199,453

 

199,453

 

Principal amount of long-term debt

 

1,447,341

 

1,454,382

 

Less: Unamortized discounts

 

55,071

 

66,779

 

Carrying amount of long-term debt

 

1,392,270

 

1,387,603

 

Less: current portion

 

13,750

 

289,859

 

Carrying amount of long-term debt, excluding current portion

 

$

1,378,520

 

$

1,097,744

 

 


(1)         Borrowings under the Senior Credit Facility bear interest at a rate equal to the sum of a base rate (currently equal to the bank’s prime rate) or a Eurodollar rate plus an applicable margin, which is based on ATK’s senior secured credit ratings. The weighted average interest rate for the Term A Loan was 1.13% at October 4, 2009. The annual commitment fee in effect on the unused portion of ATK’s Revolving Credit Facility was 0.20% at October 4, 2009.   As of October 4, 2009, ATK had no borrowings outstanding against its $500,000 revolving credit facility and had outstanding letters of credit of $163,244, which reduced amounts available on the revolving facility to $336,756. ATK’s weighted average interest rate on short-term borrowings was 5.00% during both the quarter and the six months ended September 28, 2008.  ATK had no short-term borrowings during the quarter or six months ended October 4, 2009.

 

(2)         In fiscal 2007, ATK issued $300,000 aggregate principal amount of 2.75% Convertible Senior Subordinated Notes (the 2.75% Convertible Notes due 2011) that mature on September 15, 2011. Interest on these notes is payable on March 15 and September 15 of each year.  The contingently issuable shares increased the number of ATK’s diluted shares outstanding during the

 

 

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quarter and six months ended September 28, 2008 by 181,830 and 251,393 shares, respectively, because ATK’s average stock price exceeded the conversion price during that period.  There was no impact on the diluted shares outstanding for the quarter or six months ended October 4, 2009 because ATK’s average stock price during both periods was below the conversion price.

 

(3)         In connection with the issuance of the 2.75% Convertible Notes due 2011, ATK purchased, at a cost of $50,850, call options (the Call Options) on its common stock. The Call Options, which become exercisable upon conversion of the related convertible notes, allow ATK to purchase approximately 3.1 million shares of ATK’s common stock and/or cash from the counterparty at an amount equal to the amount of common stock and/or cash related to the excess conversion value that ATK would pay to the holders of the related convertible notes upon conversion. In addition, ATK sold warrants (the Warrants) to issue approximately 3.3 million shares of ATK’s common stock at an exercise price of $116.75 per share. The proceeds from the sale of the Warrants totaled $23,220.  In accordance with current authoritative guidance, ATK recorded the net cost of the Call Options and the Warrants of $27,630 in additional paid-in-capital and will not recognize any changes in the fair value of the instruments. On a combined basis, the Call Options and the Warrants are intended to reduce the potential dilution of ATK’s common stock in the event that the 2.75% Convertible Notes due 2011 are converted by effectively increasing the conversion price of these notes from $96.51 to $116.75. The Call Options are anti-dilutive and are therefore excluded from the calculation of diluted shares outstanding.  The Warrants will result in additional diluted shares outstanding if ATK’s average common stock price exceeds $116.75.

 

(4)         In fiscal 2005, ATK issued $200,000 aggregate principal amount of 3.00% Convertible Senior Subordinated Notes (the 3.00% Convertible Notes) that mature on August 15, 2024. Interest on these notes is payable on February 15 and August 15 of each year. Under select conditions, ATK will pay contingent interest on these notes, which is treated as an embedded derivative; the fair value of this feature was insignificant at October 4, 2009 and March 31, 2009.  ATK may redeem some or all of these notes in cash, for 100% of the principal amount plus any accrued but unpaid interest, at any time on or after August 20, 2014. Holders of these notes may require ATK to repurchase in cash, for 100% of the principal amount plus any accrued but unpaid interest, some or all of these notes on August 15, 2014 and August 15, 2019. Under specified conditions, holders may also convert their 3.00% Convertible Notes at a conversion rate of 12.5392 shares of ATK’s common stock per $1 principal amount of 3.00% Convertible Notes (a conversion price of $79.75 per share).  The stock price condition was met during fiscal 2009 and $547 of these notes were converted in fiscal 2009.  The stock price condition was not satisfied during the quarter ended October 4, 2009, therefore the remaining principal amount of $199,453 as of October 4, 2009 was classified as long-term.  These contingently issuable shares increased the number of ATK’s diluted shares outstanding during the six months ended October 4, 2009 by 3,979, and by 556,720 and 603,095, respectively, for the quarter and six months ended September 28, 2008, because ATK’s average stock price exceeded the conversion price during those periods.  There was no impact on the diluted shares outstanding for the quarter ended October 4, 2009 because ATK’s average stock price during that period was below the conversion price.

 

(5)         In fiscal 2004, ATK issued $280,000 aggregate principal amount of 2.75% Convertible Senior Subordinated Notes (the 2.75% Convertible Notes due 2024) that mature on February 15, 2024. Interest on these notes is payable on February 15 and August 15 of each year. Under select conditions, ATK will pay contingent interest on these notes, which is treated as an embedded derivative; the fair value of this feature was insignificant at October 4, 2009 and March 31, 2009.  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 with 30 days’ notice.  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 February 15, 2014 or February 15, 2019.  On August 14, 2009, $166 of these notes were repurchased, in cash for 100% of the principal amount plus accrued but unpaid interest, from holders who elected to surrender their notes.  Under specified conditions, holders may convert their 2.75% Convertible Notes at a conversion rate of 12.5843 shares of ATK’s common stock per $1 principal amount (a conversion price of $79.46 per share).  The stock price condition was met in fiscal 2009 and $71 of these notes were converted in fiscal 2009.  The stock price condition was not satisfied during the quarter ended October 4, 2009.  These contingently issuable shares increased the number of ATK’s diluted shares outstanding during the six months ended October 4, 2009 by 18,198, and by 792,036 and 856,962, respectively, for the quarter and six months ended September 28, 2008, because ATK’s average stock price exceeded the conversion price during those periods.  There was no impact on the diluted shares outstanding for the quarter ended October 4, 2009 because ATK’s average stock price during that period was below the conversion price.  As discussed above, ATK may redeem some or all of these notes at any time, with 30 days’ notice, however it is ATK’s current intent not to call these

 

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notes in the next twelve months; therefore, the remaining principal amount of $279,763 is classified as long-term as of October 4, 2009.

 

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, 2009 for additional information regarding the terms and conditions of the Company’s outstanding debt agreements.

 

The scheduled minimum payments on outstanding long-term debt are as follows:

 

Remainder of fiscal 2010

 

$

6,875

 

Fiscal 2011

 

13,750

 

Fiscal 2012

 

547,500

 

Fiscal 2013

 

 

Fiscal 2014

 

 

Thereafter

 

879,216

 

Total payments

 

$

1,447,341

 

 

ATK’s total debt (current portion of debt and long-term debt) as a percentage of total capitalization (total debt and stockholders’ equity) was 62% as of October 4, 2009 and 67% as of March 31, 2009.

 

ATK’s Senior Credit Facility and the indentures governing the 6.75% Senior Subordinated Notes due 2016, the 2.75% Convertible Notes due 2011, the 2.75% Convertible Notes due 2024, and the 3.00% Convertible Notes impose restrictions on ATK, including limitations on its ability to incur additional debt, enter into capital leases, grant liens, pay dividends and make certain other payments, sell assets, or merge or consolidate with or into another entity. In addition, the Senior Credit Facility limits ATK’s ability to enter into sale-and-leaseback transactions. The Senior Credit Facility also requires that ATK meet and maintain specified financial ratios, including a minimum interest coverage ratio and a maximum consolidated leverage ratio. ATK’s ability to comply with these covenants and to meet and maintain the financial ratios may be affected by events beyond its control. Borrowings under the Senior Credit Facility are subject to compliance with these covenants. As of October 4, 2009, ATK was in compliance with the financial covenants.

 

ATK has limited payment requirements under the Senior Credit Facility over the next two years. ATK’s other debt service requirements consist principally of interest expense on its long-term debt.  As discussed above, additional cash may be required to repurchase or convert any or all of the convertible notes under certain circumstances. ATK’s short-term cash requirements for operations are expected to consist mainly of capital expenditures to maintain and expand production facilities and working capital requirements.

 

Net cash paid for interest totaled $26,517 in the six months ended October 4, 2009 and $18,056 in the six months ended September 28, 2008.

 

11.  Employee Benefit Plans

 

Components of Net Periodic Benefit Cost

 

 

 

Pension Benefits

 

 

 

Quarters Ended

 

Six Months Ended

 

 

 

October 4,
2009

 

September 28,
2008

 

October 4,
2009

 

September 28,
2008

 

Service cost

 

$

13,651

 

$

15,088

 

$

27,302

 

$

30,176

 

Interest cost

 

39,224

 

34,949

 

78,449

 

69,898

 

Expected return on plan assets

 

(42,763

)

(46,915

)

(85,527

)

(93,830

)

Amortization of unrecognized net loss

 

6,437

 

6,968

 

12,875

 

13,936

 

Amortization of unrecognized prior service cost

 

(97

)

(97

)

(195

)

(194

)

Net periodic benefit cost

 

$

16,452

 

$

9,993

 

$

32,904

 

$

19,986

 

 

Components of Net Periodic Benefit Cost

 

 

 

Postretirement Benefits

 

 

 

Quarters Ended

 

Six Months Ended

 

 

 

October 4,
2009

 

September 28,
2008

 

October 4,
 2009

 

September 28,
2008

 

Service cost

 

$

51

 

$

72

 

$

103

 

$

144

 

Interest cost

 

2,890

 

2,952

 

5,779

 

5,904

 

Expected return on plan assets

 

(668

)

(944

)

(1,336

)

(1,888

)

Amortization of unrecognized net loss

 

523

 

664

 

1,046

 

1,328

 

Amortization of unrecognized prior service cost

 

(2,158

)

(2,176

)

(4,315

)

(4,352

)

Net periodic benefit cost

 

$

638

 

$

568

 

$

1,277

 

$

1,136

 

 

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Employer Contributions.  During the six months ended October 4, 2009, ATK contributed $150,000 to the pension trust and $1,603 directly to retirees.  ATK also contributed $7,412 to its other postretirement benefit (PRB) plans.  ATK anticipates making additional contributions of $1,534 directly to retirees and $7,325 to its other PRB plans during the remainder of fiscal 2010. ATK is not required to make any additional minimum contributions to the pension trust during the remainder of 2010.
 

12.  Income Taxes

 

ATK’s provision for income taxes includes both federal and state income taxes.   Income tax provisions for interim periods are based on estimated effective annual income tax rates.

 

The income tax provisions for the quarters ended October 4, 2009 and September 28, 2008 represent effective tax rates of 37.2% and 37.4%, respectively.  The decrease in the rate for the second quarter of fiscal 2010 from the prior year quarter is primarily due to increased benefits related to deductible gains on life insurance policies related to the Company’s nonqualified deferred compensation plans and the federal research and development (R&D) tax credit which were partially offset by reduced benefit from the domestic manufacturing deduction (DMD).

 

The income tax provisions for the six months ended October 4, 2009 and September 28, 2008 represent effective tax rates of 37.2% and 37.1%, respectively.  The increase in the rate for the six months ended October 4, 2009 from the prior year period is primarily due to a reduced benefit from the DMD which was partially offset by an increased benefit in the R&D credit.

 

The Internal Revenue Service is currently examining fiscal 2007 and 2008.  With few exceptions, ATK is no longer subject to U.S. federal, state and local, or international examinations by tax authorities prior to fiscal 2003.  ATK believes adequate provisions have been made for outstanding issues for all open years in all jurisdictions.

 

Although the timing and outcome of audit settlements are uncertain, it is reasonably possible that a $20,951 reduction of the uncertain tax benefits will occur in the next twelve months.  The settlement of these unrecognized tax benefits could result in earnings up to $16,480 based on current estimates.

 

13.  Stock-Based Compensation

 

ATK sponsors four stock-based incentive plans, which are the Alliant Techsystems Inc. 1990 Equity Incentive Plan, the Non-Employee Director Restricted Stock Plan, the 2000 Stock Incentive Plan, and the 2005 Stock Incentive Plan. As of October 4, 2009, ATK has authorized up to 2,382,360 common shares under the 2005 Stock Incentive Plan, of which 1,115,545 common shares are yet available to be granted.  No new grants will be made out of the other three plans.

 

Total pre-tax stock-based compensation expense recognized during the quarter and six months ended October 4, 2009 was $3,898 and $8,580, respectively.  Total pre-tax stock-based compensation expense recognized during the quarter and six months ended September 28, 2008 was $4,820 and $9,718, respectively. The total income tax benefit recognized in the income statement for share-based compensation during the quarter and six months ended October 4, 2009 was $1,499 and $3,334, respectively. The total income tax benefit recognized in the income statement for share-based compensation during the quarter and six months ended September 28, 2008 was $1,909 and $3,849, respectively.

 

There are four types of awards outstanding under ATK’s stock incentive plans: performance awards, total stockholder return performance awards (“TSR awards”), restricted stock, and stock options.  ATK issues treasury shares upon the payment of performance and TSR awards, grant of restricted stock, or exercise of stock options.

 

As of October 4, 2009, there were up to 390,098 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 197,660 shares will become payable only upon achievement of certain financial performance goals, including sales and EPS, for the fiscal 2008 through fiscal 2010 period; up to 147,520 shares will

 

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become payable only upon achievement of certain financial performance goals, including sales and EPS, for the fiscal 2009 through fiscal 2011 period; and up to 44,918 shares will become payable only upon achievement of certain performance goals, including sales, EPS, and return on invested capital, for the fiscal 2010 through fiscal 2012 period.  In May 2009, 174,973 shares were distributed or deferred based upon achievement of certain financial performance goals, including EPS, for the fiscal 2007 through fiscal 2009 period.

 

As of October 4, 2009, there were up to 64,160 shares reserved for TSR awards for key employees.  ATK uses an integrated Monte Carlo simulation model to determine the fair value of the TSR awards.  The Monte Carlo model calculates the probability of satisfying the market conditions stipulated in the award.  This probability is an input into the trinomial lattice model used to determine the fair value of the awards as well as the assumptions of other variables, including the risk-free interest rate and expected volatility of ATK’s stock price in future periods. The risk-free rate is based on the U.S. dollar-denominated U.S. Treasury strip rate with a remaining term that approximates the life assumed at the date of grant.  The weighted average fair value of TSR awards granted was $30.56 during fiscal 2009. There were no TSR awards granted in the six months ended October 4, 2009.  The weighted average assumptions used in estimating the value of the TSR award in fiscal 2009 were as follows:

 

 

 

Year ended
March 31, 2009

 

Risk-free rate

 

1.17

%

Expected volatility

 

25.8

%

Expected dividend yield

 

0

%

Expected award life

 

3 years

 

 

Restricted stock issued to non-employee directors and certain key employees during the six months ended October 4, 2009 totaled 26,171. 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 from one to three years from the date of grant. Since fiscal 2004, options are generally issued with a seven-year term; most grants prior to that had a ten-year term.  The weighted average fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model and represents the difference between fair market value on the date of grant and the estimated market value on the expected exercise date. The option pricing model requires ATK to make assumptions.  The risk-free rate is based on U.S. Treasury zero-coupon issues with a remaining term that approximates the expected life assumed at the date of grant.  Expected volatility is based on the historical volatility of ATK’s stock over the past five years.  The expected option life is based on the contractual term of the stock option and expected employee exerci