Alliant Techsystems 10-Q 2011
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the transition period from to
Commission file number 1-10582
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of January 30, 2011, 33,492,991 shares of the registrants common stock, par value $.01 per share, were outstanding.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
See Notes to the Condensed Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
See Notes to the Consolidated Financial Statements.
ALLIANT TECHSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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 January 2, 2011
(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, 2010 (fiscal 2010). 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 January 2, 2011, and its results of operations and cash flows for the quarters and nine months ended January 2, 2011 and January 3, 2010.
Sales, expenses, cash flows, assets, and liabilities can and do vary during the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.
This Quarterly Report on Form 10-Q should be read in conjunction with the Companys consolidated financial statements and notes included in its 2010 Annual Report on Form 10-K.
2. New Accounting Pronouncements
There have been no new accounting pronouncements issued or changes to existing guidance during the fiscal year ending March 31, 2011 (fiscal 2011) that would have a material impact on ATKs financial results.
3. Fair Value of Financial Instruments
The current authoritative guidance on fair value clarifies the definition of fair value, prescribes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about the use of fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The valuation techniques required by the current authoritative literature are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 Quoted prices for identical instruments in active markets.
Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Significant inputs to the valuation model are unobservable.
The following section describes the valuation methodologies used by ATK to measure its financial instruments at fair value.
Investments in marketable securities 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. The fair value of these securities is included within other current assets and deferred charges and other non-current assets on the consolidated balance sheet.
Derivative financial instruments and hedging activities In order to manage its exposure to commodity pricing and foreign currency risk, ATK periodically utilizes commodity and foreign currency derivatives, which are considered Level 2 instruments. As discussed further in Note 7, ATK has outstanding commodity forward contracts that were entered into to hedge forecasted purchases of copper and zinc, as well as outstanding foreign currency forward contracts that were entered into to hedge forecasted transactions denominated in a foreign currency. Commodity derivatives are valued based on prices of futures exchanges and recently reported transactions in the marketplace. Foreign currency derivatives are valued based on observable market transactions of spot currency rates and forward currency prices.
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:
In addition to the assets and liabilities at March 31, 2010 noted in the table above, ATK also had intangible and other long-lived assets that were written down to their fair value of $0 during fiscal 2010, resulting in impairment charges of $38,008 and $11,405, respectively, during the fourth quarter of fiscal 2010. These are considered Level 3 assets.
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:
In accordance with the accounting standards regarding business combinations, the results of acquired businesses are included in ATKs consolidated financial statements from the date of acquisition. For each acquisition, the purchase price is allocated to the acquired assets and liabilities based on fair value. The excess purchase price over estimated fair value of the net assets acquired is recorded as goodwill.
On April 9, 2010, ATK acquired Blackhawk Industries Products Group Unlimited, LLC (Blackhawk) for a purchase price of $172,251, subject to purchase price adjustments expected to be finalized in fiscal 2011. Blackhawk is a leading manufacturer of high quality tactical gear. ATK believes that the acquisition provides ATK with a leading tactical systems brand, an expanded portfolio of quality products, and additional design and development expertise for innovative tactical accessories which will strengthen ATKs position in tactical accessories and equipment for domestic and international military, law enforcement, security, and sport enthusiast markets. Blackhawk employs approximately 300 employees and is included in the Security and Sporting group. The purchase price allocation will be completed in fiscal 2011. Most of the goodwill generated in this acquisition will be deductible for tax purposes.
ATK used the purchase method of accounting to account for this acquisition and, accordingly, the results of Blackhawk are included in 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. Subsequent to the April 2010 acquisition, ATK has recorded sales of approximately $21,000 and $60,000 and income before interest, income taxes, and noncontrolling interest of approximately $4,400 and $6,900 in the quarter and nine months ended January 2, 2011, respectively, associated with the operations of this acquired business. Pro forma information on the results of operations for fiscal 2010 as if the acquisition had occurred at the beginning of fiscal 2010 is not being presented because the acquisition is not material to ATK for that purpose.
There were no acquisitions during fiscal 2010.
5. Goodwill and Deferred Charges and Other Non-Current Assets
The changes in the carrying amount of goodwill by operating segment during the nine months ended January 2, 2011 and year ended March 31, 2010 were as follows:
The goodwill recorded above within Aerospace Systems is presented net of $108,500 of accumulated impairment losses.
The fiscal 2011 acquisition in Security and Sporting relates to the preliminary purchase price allocation of Blackhawk, as previously discussed in Note 4.
The fiscal 2010 adjustment within Security and Sporting was the result of a preliminary purchase price adjustment of $5,002 received in September 2009 which reduced the purchase price of Eagle Industries, as well as the finalization of the fair value determination of certain assets and liabilities.
Deferred charges and other non-current assets consist of the following:
The long term receivables represent unbilled receivables, primarily relating to commercial aerospace programs, that ATK does not expect to collect within the next fiscal year.
Included in other intangible assets in the table above is $38,998 of non-amortizing intangible assets consisting of trademarks and brand names that are not being amortized as their estimated useful lives are considered indefinite, and $95,993 of net amortizing intangible assets which include the following:
As discussed in Note 4, in April 2010 ATK acquired Blackhawk and has recorded the preliminary fair value of intangible assets associated with the acquisition. These assets include items such as a trade name, technology, and customer relationships. The fair value recorded related to these intangibles increased the gross carrying amount of amortizing intangibles in the table above by $78,600 from March 31, 2010. The final purchase price allocation will be completed in fiscal 2011.
During fiscal 2011, ATK wrote-off the $23,659 gross carrying amount and associated accumulated amortization of fully amortized intangible assets primarily relating to customer contracts acquired in past business combinations that have now expired.
On March 31, 2010, ATK determined that $10,700 of patented technology that had previously been determined to have an indefinite life now has a finite useful life. Effective April 1, 2010, ATK began amortizing this asset over an estimated useful life of 10 years.
The assets identified in the table above are being amortized over their estimated useful lives over a weighted average remaining period of approximately 11.3 years. Amortization expense for the quarter and nine months ended January 2, 2011 was $2,888 and $8,388, respectively. Amortization expense for the quarter and nine months ended January 3, 2010 was $1,278 and $3,757, respectively. ATK expects amortization expense related to these assets to be as follows:
6. Earnings Per Share Data
Basic earnings per share (EPS) is computed based upon the weighted-average number of common shares outstanding for each period. Diluted EPS is computed based on the weighted-average number of common shares and common equivalent shares. Common equivalent shares represent the effect of stock-based awards and contingently issuable shares related to ATKs Convertible Senior Subordinated Notes (see Note 11) during each period presented, which, if exercised, earned, or converted, would have a dilutive effect on EPS. In computing EPS for the quarters and nine months ended January 2, 2011 and January 3, 2010, net income as reported for each respective period is divided by (in thousands):
As discussed further in Note 11, contingently issuable shares related to ATKs 3.00% Convertible Senior Subordinated Notes due 2024 and 2.75% Convertible Senior Subordinated Notes due 2024 are included in diluted EPS for the quarter and nine months ended January 3, 2010 as ATKs average stock price during those periods exceeded the triggering price of $79.75 and $79.46, respectively. Contingently issuable shares related to ATKs 2.75% Convertible Senior Subordinated Notes due 2011 were not included in diluted EPS for the quarter or nine months ended January 3, 2010 because ATKs average stock price during these periods did not exceed the triggering price of $96.51.
The contingently issuable shares related to all the outstanding notes mentioned above are excluded from diluted EPS for the quarter and nine months ended January 2, 2011 as the triggering prices mentioned above were not met during those periods.
The Warrants, as discussed in Note 11, are not included in diluted EPS as ATKs average stock price during the quarters and nine months ended January 2, 2011 and January 3, 2010 did not exceed $116.75.
The Call Options, also discussed in Note 11, are anti-dilutive and are therefore excluded from the calculation of diluted shares outstanding.
7. Derivative Financial Instruments
ATK is exposed to market risks arising from adverse changes in:
· commodity prices affecting the cost of raw materials and energy,
· interest rates, and
· foreign exchange risks
In the normal course of business, these risks are managed through a variety of strategies, including the use of derivative instruments. Commodity forward contracts are periodically used to hedge forecasted purchases of certain commodities, foreign currency exchange contracts are used to hedge forecasted transactions denominated in a foreign currency, and ATK periodically uses interest rate swaps to hedge forecasted interest payments and the risk associated with variable interest rates on long-term debt.
ATK entered into forward contracts for copper and zinc during fiscal 2011 and fiscal 2010. The contracts essentially establish a fixed price for the underlying commodity and are designated and qualify as effective cash flow hedges of purchases of the commodity. Ineffectiveness is calculated as the amount by which the change in the fair value of the derivatives exceeds the change in the fair value of the anticipated commodity purchases. 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 (Loss) in the financial statements. The gains or losses on these contracts are recorded in inventory as the commodities are purchased. As of January 2, 2011, ATK had the following outstanding commodity forward contracts that were entered into to hedge forecasted purchases:
ATK entered into foreign currency forward contracts during fiscal 2011 and fiscal 2010. These contracts are used to hedge forecasted inventory purchases and subsequent payments, as well as customer receivables, denominated in Euros and Canadian Dollars and are designated and qualify as effective cash flow hedges. Ineffectiveness with respect to forecasted inventory purchases is calculated based on changes in the forward rate until the anticipated purchase occurs; ineffectiveness of the hedge of the accounts payable is evaluated based on the change in fair value of its anticipated settlement. The fair value of these contracts is recorded within other current assets or other accrued liabilities and the effective portion is reflected in accumulated Other Comprehensive Income (Loss) in
the financial statements. The gains or losses on these contracts are recorded in earnings when the related inventory is sold. As of January 2, 2011, ATK had the following outstanding foreign currency forward contracts in place:
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 January 2, 2011 and March 31, 2010:
Due to the nature of ATKs business, the benefits and risks associated with the commodity contracts may be passed on to the customer and not realized by ATK.
For the periods presented below, the derivative gains and losses in the consolidated income statements related to commodity forward contracts and foreign currency forward contracts were as follows:
All derivatives used by ATK during the quarters and nine months ended January 2, 2011 and January 3, 2010 were designated as and qualify to be accounted for as hedging instruments.
8. Comprehensive Income
The components of comprehensive income, net of income taxes, for the quarters and nine months ended January 2, 2011 and January 3, 2010 were as follows:
The components of accumulated OCI, net of income taxes, are as follows:
The pre-tax activity in other comprehensive income related to the forward contracts discussed in Note 7 was as follows:
There was no ineffectiveness recognized in earnings for these contracts during the quarters or nine months ended January 2, 2011 or January 3, 2010. 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:
10. Other Liabilities
The major categories of other current and long-term accrued liabilities are as follows:
On November 4, 2010, the ATK Board of Directors declared a cash dividend. The $0.20 per share dividend is payable on March 4, 2011 to stockholders of record on February 8, 2011. As reflected above, the estimated liability associated with this cash dividend is recorded within other current accrued liabilities at January 2, 2011.
The government grant represented amounts received from the government that were paid back during fiscal 2011 because it was determined that the future investment and employment levels would not be met.
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 nine months ended January 2, 2011:
11. Long-Term Debt
Long-term debt, including the current portion, consisted of the following:
(1) On October 7, 2010, ATK entered into a Second Amended and Restated Credit Agreement (the New Senior Credit Facility), which is comprised of a Term A Loan of $400,000 and a $600,000 Revolving Credit Facility, both of which mature in 2015. The Term A Loan is subject to annual principal payments of $20,000 in each of the first and second years and $40,000 in each of the third, fourth, and fifth years, paid on a quarterly basis, with the balance due on October 7, 2015. Substantially all domestic tangible and intangible assets of ATK and its subsidiaries are pledged as collateral under the New Senior Credit Facility. Borrowings under the New Senior Credit Facility bear interest at a rate equal to either the sum of a base rate plus a margin or the sum of a Eurodollar rate plus a margin. Each margin is based on ATKs senior secured credit ratings. Based on ATKs current credit rating, the current base rate margin is 1.25% and the current Eurodollar margin is 2.25%. The weighted average interest rate for the Term A Loan was 2.55% at January 2, 2011. ATK pays an annual commitment fee on the unused portion of the Revolving Credit Facility based on its senior secured credit ratings. Based on ATKs current rating, this fee is 0.35% at January 2, 2011. As of January 2, 2011, ATK had no borrowings against its $600,000 Revolving Credit Facility and had outstanding letters of credit of $168,968, which reduced amounts available on the Revolving Credit Facility to $431,032. ATK has had no short term borrowings under its Revolving Credit Facility since the date of issuance. Debt issuance costs of approximately $12,600 will be amortized over the term of the New Senior Credit Facility.
(2) The New Senior Credit Facility discussed above replaced the Senior Credit Facility dated March 29, 2007 (the previous Senior Credit Facility). The Term A Loan balance associated with the previous Senior Credit Facility was paid off in the second quarter of fiscal 2011 and the remaining deferred debt issuance costs of $936 were written off at that time. ATK had no short term borrowings on this revolving credit facility during the nine months ended January 2, 2011 or January 3, 2010.
(3) 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. As these notes are due within one year, they are classified as current as of January 2, 2011. Interest on these notes is payable on March 15 and September 15 of each year. The contingently issuable shares had no impact on the number of ATKs diluted shares outstanding during the quarters and nine months ended January 2, 2011 or January 3, 2010 because ATKs average stock price during those periods was below the conversion price.
(4) 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.
(5) In September 2010, ATK issued $350,000 aggregate principal amount of 6.875% Senior Subordinated Notes (the 6.875% Notes) that mature on September 15, 2020. These notes are general unsecured obligations. Interest on these notes is payable on March 15 and September 15 of each year. ATK has the right to redeem some or all of these notes from time to time on or after September 15, 2015, at specified redemption prices. Prior to September 15, 2015, ATK may redeem some or all of these notes at a price equal to 100% of their principal amount plus accrued and unpaid interest to the date of redemption and a specified make-whole premium. In addition, prior to September 15, 2013, ATK may redeem up to 35% of the aggregate
principal amount of these notes, at a price equal to 106.875% of their principal amount plus accrued and unpaid interest to the date of redemption, with the proceeds of certain equity offerings. Debt issuance costs of approximately $6,800 related to these notes will be amortized to interest expense over ten years.
(6) In September 2010, ATK notified holders of its 2.75% Convertible Senior Subordinated Notes (the 2.75% Convertible Notes), that were to mature on February 15, 2024, of its intention to redeem the notes on October 14, 2010. Following notification of the redemption, holders of these notes had the right to convert their notes at a conversion rate of 12.5843 shares of ATKs common stock per $1 principal amount (a conversion rate of $79.46 per share). Of the $279,763 aggregate principal amount outstanding, $279,735 were redeemed, which ATK paid in cash. Holders of the remaining $28 elected to convert their Notes and were paid that amount in cash following the end of the conversion period in November.
These contingently issuable shares did not impact the number of ATKs diluted shares outstanding during the quarter or nine months ended January 3, 2010; however, the contingently issuable shares did increase the number of diluted shares by 171,234 and 69,385during the quarter and nine months ended January 3, 2010 because ATKs average stock price exceeded the conversion price during those periods.
(7) In fiscal 2005, ATK issued $200,000 aggregate principal amount of 3.00% Convertible Senior Subordinated Notes (the 3.00% Convertible Notes) that mature on August 15, 2024. Interest on these notes is payable on February 15 and August 15 of each year. Under select conditions, ATK will pay contingent interest on these notes, which is treated as an embedded derivative; the fair value of this feature was insignificant at January 2, 2011 and March 31, 2010. 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 January 2, 2011, therefore the remaining principal amount was classified as long-term. These contingently issuable shares did not impact the number of ATKs diluted shares outstanding during the quarter or nine months ended January 2, 2011 because ATKs average stock price did not exceed the conversion price during those periods; however, the contingently issuable shares did increase the number of diluted shares by 113,083 and 40,472 during the quarter and nine months ended January 3, 2010 because ATKs average stock price did exceed the conversion price during those periods.
The current authoritative accounting literature requires that issuers of convertible debt instruments that may be settled in cash upon conversion separately account for the liability and equity components in a manner that reflects the entitys nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This provision applies to the convertible debt instruments discussed above. The unamortized discount is amortized through interest expense into earnings over the expected term of the convertible notes. The following tables provide additional information about ATKs convertible notes:
Based on ATKs closing stock price of $74.43 on January 2, 2011, the if-converted value of these notes does not exceed the aggregate principal amount of the notes.
See Note 9 to the audited consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended March 31, 2010 for additional information regarding the terms and conditions of the Companys outstanding debt agreements.
As of January 2, 2011, 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 60% as of January 2, 2011 and 63% as of March 31, 2010.
Covenants and Default Provisions
ATKs New Senior Credit Facility and the indentures governing the 6.75% Notes, the 6.875% Notes, the 2.75% Convertible Notes due 2011, 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 New Senior Credit Facility limits ATKs ability to enter into sale-and-leaseback transactions. The New Senior Credit Facility also requires that ATK meet and maintain specified financial ratios, including a minimum interest coverage ratio, a maximum consolidated senior leverage ratio, and a maximum consolidated leverage ratio. Many of ATKs debt agreements contain cross-default provisions so that non-compliance with the covenants within one debt agreement could cause a default under other debt agreements as well. 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 New Senior Credit Facility are subject to compliance with these covenants. As of January 2, 2011, ATK was in compliance with all financial covenants.
Debt Service Requirements
ATKs debt service requirements over the next two years consist of principal payments due under the New Senior Credit Facility and the maturity of the Companys 2.75% Convertible Notes due 2011 totaling approximately $345,000, as discussed further above. ATKs other debt service requirements consist of interest expense on its debt. 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.
Cash Paid for Interest on Debt
Cash paid for interest totaled $30,467 in the nine months ended January 2, 2011 and $27,205 during the nine months ended January 3, 2010.
12. Employee Benefit Plans