Alliant Techsystems 10-Q 2009
Washington, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Alliant Techsystems Inc.
(Exact name of registrant as specified in its charter)
Registrants 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.
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 registrants common stock, par value $.01 per share, were outstanding.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(1) Restated due to the adoption of new accounting standards as discussed in Note 2
See Notes to the Condensed Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(1) Restated due to the adoption of new accounting standards as discussed in Note 2
See Notes to the Condensed Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(1) Restated due to the adoption of new accounting standards as discussed in Note 2
See Notes to the Condensed Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
See Notes to the Condensed Consolidated Financial Statements.
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. ATKs 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 ATKs 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 Companys financial position and results of operations.
This Quarterly Report on Form 10-Q should be read in conjunction with the Companys 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 entitys nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The provisions of this new standard apply to ATKs $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:
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 ATKs prior and current period consolidated statements of income:
The adoption of the new standard had the following effect on ATKs consolidated balance sheet as of March 31, 2009:
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 ATKs 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 ATKs 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 ATKs consolidated financial position or results of operations.
In May 2009, the FASB issued a new standard that provides guidance on managements 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 (ATKs 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 ATKs 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.
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 entitys own stock. The adoption of the new guidance on April 1, 2009 did not change the conclusion that the net cost of ATKs 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 employers 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. ATKs adoption of the new standard in fiscal 2010 will require additional disclosure regarding plan assets of ATKs defined benefit pension and other postretirement plans in ATKs 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 ATKs 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 ATKs 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 companys 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 companys 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 CCTs 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 CCTs investment manager.
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 ATKs financial assets and liabilities that are measured at fair value on a recurring basis:
(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 ATKs assets and liabilities that are not measured at fair value on a recurring basis. The carrying values and estimated fair values were as follows:
4. Acquisitions, 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
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 ATKs 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:
During the Companys 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:
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:
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 ATKs 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):
As discussed further in Note 10, contingently issuable shares related to ATKs 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 ATKs average stock price during the quarter did not exceed $79.75, $79.46, or $96.51, respectively. Contingently issuable shares related to ATKs 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 ATKs 2.75% Convertible Notes due 2011, are not included in diluted EPS for the six months ended October 4, 2009 as ATKs 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 ATKs 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
· 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:
The table below presents the fair value and location of ATKs 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.
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:
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:
The components of accumulated OCI, net of income taxes, are as follows:
The pre-tax activity in OCI related to the forward contracts discussed in Note 6 was as follows:
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.
Inventories consist of the following:
9. Other Liabilities
Other current and long-term accrued liabilities consist of the following:
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 ATKs product warranty liability during the quarter and six months ended October 4, 2009:
10. Long-Term Debt
Long-term debt, including the current portion, consisted of the following:
(1) Borrowings under the Senior Credit Facility bear interest at a rate equal to the sum of a base rate (currently equal to the banks prime rate) or a Eurodollar rate plus an applicable margin, which is based on ATKs 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 ATKs 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. ATKs 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 ATKs diluted shares outstanding during the
quarter and six months ended September 28, 2008 by 181,830 and 251,393 shares, respectively, because ATKs 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 ATKs 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 ATKs 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 ATKs 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 ATKs 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 ATKs 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 ATKs 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 ATKs 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 ATKs 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 ATKs 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 ATKs 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 ATKs 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 ATKs 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 ATKs 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 ATKs current intent not to call these
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 Companys Annual Report on Form 10-K for the year ended March 31, 2009 for additional information regarding the terms and conditions of the Companys outstanding debt agreements.
The scheduled minimum payments on outstanding long-term debt are as follows:
ATKs 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.
ATKs 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 ATKs 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. ATKs 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. ATKs 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. ATKs 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
Components of Net Periodic Benefit Cost
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
ATKs 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 Companys 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 ATKs 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
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 ATKs 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:
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 ATKs common stock as of the grant date.
Stock options may be granted periodically, with an exercise price equal to the fair market value of ATKs 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 ATKs stock over the past five years. The expected option life is based on the contractual term of the stock option and expected employee exercise and post-vesting employment termination trends. The fair value of options granted during fiscal 2009 was $24.83. There were no options granted in the six months ended October 4, 2009. The following assumptions were used for the fiscal 2009 grants:
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 ATKs business. ATK does not consider any of such proceedings that are currently pending, individually or in the aggregate, 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. The lawsuit was initially filed under seal. ATK was first informed of the lawsuit by the United States Department of Justice (DOJ) on March 13, 2007. Thereafter, the DOJ intervened in the qui tam action and filed an amended complaint on November 2, 2007. On May 29, 2008, ATK filed its answer to the complaint. The
DOJ subsequently filed a motion to strike the affirmative defenses set forth in ATKs answer. On July 14, 2008, ATK filed its opposition to the motion to strike. On October 16, 2008, the court granted the motion in part and denied it in part. Discovery is underway in the case.
ATK denies any allegations of improper conduct. Based on what is known to ATK about the subject matter of the complaint, ATK does not believe that it has violated any law or regulation and believes it has valid defenses to all allegations of improper conduct. Although it is not possible at this time to predict the outcome of the litigation, ATK believes, based on all available information, that the outcome will not have a material adverse effect on its operating results, financial condition or cash flows. Some potential, however, does remain for an adverse judgment that could be material to ATKs financial position, results of operations, or cash flows. As a result of the uncertainty regarding the outcome of this matter, no provision has been made in the financial statements with respect to this contingent liability.
U.S. Government Investigations. ATK is also subject to U.S. Government investigations from which civil, criminal, or administrative proceedings could result. Such proceedings could involve claims by the U.S. Government for fines, penalties, compensatory and treble damages, restitution, and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. ATK believes, based upon all available information, that the outcome of any such pending government investigations will not have a material adverse effect on its operating results, financial condition, or cash flows.
Environmental Liabilities. ATKs 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 managements 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 2.00% and 1.75% as of October 4, 2009 and March 31, 2009, respectively. ATKs 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: