Alliant Techsystems 10-Q 2011
Washington, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 2011
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)
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 July 31, 2011, 32,948,314 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 July 3, 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, 2011 (fiscal 2011). Management is responsible for the unaudited condensed consolidated financial statements included in this document. The condensed consolidated financial statements included in this document are unaudited but, in the opinion of management, include all adjustments necessary for a fair presentation of ATKs financial position as of July 3, 2011, and its results of operations and cash flows for the quarters ended July 3, 2011 and July 4, 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 fiscal 2011 Annual Report on Form 10-K.
2. New Accounting Pronouncements
On May 12, 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (ASU 2011-04). ASU 2011-04 clarifies the application of existing fair value measurement requirements including: (1) the application of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting entitys shareholders equity, and (3) quantitative information required for fair value measurements categorized within Level 3. ASU 2011-04 also provides guidance on measuring the fair value of financial instruments managed within a portfolio, and application of premiums and discounts in a fair value measurement. In addition, ASU 2011-04 requires additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. The amendments in this guidance are to be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011 (the fourth quarter of ATKs fiscal 2012). ATK does not believe the adoption of this ASU will have a material impact on its financial statements.
On June 16, 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, (ASU 2011-05). This update revises the manner in which entities must present comprehensive income in their financial statements. ASU 2011-05 gives entities the option to present total comprehensive income, the components of net income, and the components of other comprehensive income in either of the following ways: (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 is effective for fiscal years beginning after December 15, 2011 and interim periods within those years (ATKs fiscal 2013). ATK does not believe the adoption of this ASU will have a material impact on its financial statements.
3. Fair Value of Financial Instruments
The current authoritative guidance on fair value clarifies the definition of fair value, prescribes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about the use of fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The valuation techniques required by the current authoritative literature are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 Quoted prices for identical instruments in active markets.
Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Significant inputs to the valuation model are unobservable.
The following section describes the valuation methodologies used by ATK to measure its financial instruments at fair value.
Investments in marketable securities 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. Commodity derivatives are valued based on prices of futures exchanges and recently reported transactions in the marketplace. Foreign currency derivatives are valued based on observable market transactions of spot currency rates and forward currency prices. As discussed further in Note 7, ATK has outstanding commodity forward contracts that were entered into to hedge forecasted purchases of copper and zinc.
Long-Term Debt The fair value of the variable-rate long-term debt is calculated based on current market rates for debt of the same risk and maturities. The fair value of the fixed-rate debt is based on market quotes for each issuance.
The following tables set forth by level within the fair value hierarchy ATKs financial assets and liabilities that are measured at fair value on a recurring basis:
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. Blackhawk is a manufacturer of high quality tactical gear. ATK believes that the acquisition provides ATK with a strong tactical systems brand, an expanded portfolio of quality products, and additional design and development expertise for innovative tactical accessories which will strengthen 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 was completed in fiscal 2011. Most of the goodwill generated in this acquisition will be deductible for tax purposes.
ATK used the purchase method of accounting to account for this acquisition and, accordingly, the results of Blackhawk are included in ATKs consolidated financial statements at the date of acquisition. The purchase price for the acquisition was allocated to the acquired assets and liabilities based on estimated fair value. Pro forma information on the results of operations for fiscal 2011 as if the acquisition had occurred at the beginning of fiscal 2011 is not being presented because the acquisition is not material to ATK for that purpose.
5. Goodwill and Deferred Charges and Other Non-Current Assets
The carrying amount of goodwill by operating segment as of July 3, 2011 is as follows:
The goodwill recorded above within Aerospace Systems is presented net of $108,500 of accumulated impairment losses.
Deferred charges and other non-current assets consist of the following:
The long term receivables represent unbilled receivables on long term commercial aerospace contracts and other programs that ATK does not expect to collect within the next fiscal year.
Included in deferred charges and other non-current assets in the table above is $38,998 of other intangible assets consisting of trademarks and brand names that are not being amortized as their estimated useful lives are considered indefinite and amortizing assets as follows:
The assets identified in the table above are being amortized over their estimated useful lives over a weighted average remaining period of approximately 11.0 years. Amortization expense for the quarters ended July 3, 2011 and July 4, 2010 was $2,784 and $2,789, 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 quarter ended July 3, 2011 and July 4, 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 September 2011 are not included in diluted EPS for either period presented because ATKs average stock price during these periods did not exceed the triggering price of $79.75 or $96.51, respectively.
The Warrants, as discussed in Note 11, are not included in diluted EPS as ATKs average stock price during the quarters ended July 3, 2011 and July 4, 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 2010, and for copper during fiscal 2012. The contracts essentially establish a fixed price for the underlying commodity and are designated and qualify as effective cash flow hedges of purchases of the commodity. Ineffectiveness is calculated as the amount by which the change in the fair value of the derivatives exceeds the change in the fair value of the anticipated commodity purchases.
ATK also entered into foreign currency forward contracts during fiscal 2011 and fiscal 2010. These contracts were used to hedge forecasted inventory purchases and subsequent payments, or customer receivables, denominated in foreign currencies and were designated and qualified as effective cash flow hedges. Ineffectiveness with respect to forecasted inventory purchases was calculated based on changes in the forward rate until the anticipated purchase occurs; ineffectiveness of the hedge of the accounts payable was evaluated based on the change in fair value of its anticipated settlement.
The fair value of the commodity and foreign currency forward contracts is recorded within other assets or liabilities, as appropriate, and the effective portion is reflected in accumulated Other Comprehensive Income (Loss) in the financial statements. The gains or losses on the commodity forward contracts are recorded in inventory as the commodities are purchased. The gains or losses on the foreign currency forward contracts are recorded in earnings when the related inventory is sold.
As of July 3, 2011, ATK had the following outstanding commodity 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 the periods presented:
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 fiscal 2012 and 2011 were designated as and qualify to be accounted for as hedging instruments.
8. Comprehensive Income
The components of comprehensive income, net of income taxes, for the periods presented below were as follows:
The components of accumulated OCI, net of income taxes, are as follows:
The pre-tax activity in OCI related to the forward contracts discussed in Note 7 was as follows:
There was no ineffectiveness recognized in earnings for these contracts during fiscal 2012 or 2011. ATK expects that any unrealized losses will be realized and reported in cost of sales as the cost of the commodities is included in cost of sales. Estimated and actual gains or losses will change as market prices change.
Inventories consist of the following:
10. Other Liabilities
The major categories of other current and long-term accrued liabilities are as follows:
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 fiscal 2012:
11. Long-Term Debt
Long-term debt, including the current portion, consisted of the following:
(1) On October 7, 2010, ATK entered into a Second Amended and Restated Credit Agreement (the Senior Credit Facility), which is comprised of a Term A Loan of $400,000 and a $600,000 Revolving Credit Facility, both of which mature in 2015. The Term A Loan is subject to annual principal payments of $20,000 in each of the first and second years and $40,000 in each of the third, fourth, and fifth years, paid on a quarterly basis, with the balance due on October 7, 2015. Substantially all domestic tangible and intangible assets of ATK and its subsidiaries are pledged as collateral under the Senior Credit Facility. Borrowings under the Senior Credit Facility bear interest at a rate equal to either the sum of a base rate plus a margin or the sum of a Eurodollar rate plus a margin. Each margin is based on 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 2.44% at July 3, 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 July 3, 2011. As of July 3, 2011, ATK had no borrowings against its $600,000 Revolving Credit Facility and had outstanding letters of credit of $181,678, which reduced amounts available on the Revolving Credit Facility to $418,322. ATK has had no short term borrowings under its Revolving Credit Facility since the date of issuance. Debt issuance costs of approximately $12,800 will be amortized over the term of the Senior Credit Facility.
(2) In fiscal 2007, ATK issued $300,000 aggregate principal amount of 2.75% Convertible Senior Subordinated Notes (the 2.75% Convertible Notes due 2011) that mature on September 15, 2011. During the quarter ended July 3, 2011, ATK purchased $50,427 aggregate principal amount from holders of the notes at market price. As the remaining notes are due within one year, they are classified as current as of July 3, 2011. Holders may convert these notes at a conversion rate of 10.4208 shares of ATKs common stock per $1 principal amount (a conversion price of $95.96) during the last month prior to maturity. ATK is required to satisfy 100% of the principal amount of these notes solely in cash, with any amounts above the principal amount to be satisfied in cash, common stock, or a combination of cash and common stock, at the sole election of ATK. 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 ended July 3, 2011 or July 4, 2010 because ATKs average stock price during those 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 September 2010, ATK issued $350,000 aggregate principal amount of 6.875% Senior Subordinated Notes (the 6.875% Notes) that mature on September 15, 2020. These notes are general unsecured obligations. Interest on these notes is payable on March 15 and September 15 of each year. ATK has the right to redeem some or all of these notes from time to time on or after September 15, 2015, at specified redemption prices. Prior to September 15, 2015, ATK may redeem some or all of these notes at a price equal to 100% of their principal amount plus accrued and unpaid interest to the date of redemption and a specified make-whole premium. In addition, prior to September 15, 2013, ATK may redeem up to 35% of the aggregate principal amount of these notes, at a price equal to 106.875% of their principal amount plus accrued and unpaid interest to the date of redemption, with the proceeds of certain equity offerings. Debt issuance costs of approximately $7,100 related to these notes will be amortized to interest expense over ten years.
(5) In fiscal 2005, ATK issued $200,000 aggregate principal amount of 3.00% Convertible Senior Subordinated Notes (the 3.00% Convertible Notes) that mature on August 15, 2024. Interest on these notes is payable on February 15 and August 15 of each year. Under select conditions, ATK will pay contingent interest on these notes, which is treated as an embedded derivative; the fair value of this feature was insignificant at July 3, 2011 and March 31, 2011. ATK may redeem some or all of these notes in cash, for 100% of the principal amount plus any accrued but unpaid interest, at any time on or after August 20, 2014. Holders of these notes may require ATK to repurchase in cash, for 100% of the principal amount plus any accrued but unpaid interest, some or all of these notes on August 15, 2014 and August 15, 2019. Under specified conditions, holders may also convert their 3.00% Convertible Notes at a conversion rate of 12.5392 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 July 3, 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 quarters ended July 3, 2011 or July 4, 2010 because ATKs average stock price did not exceed the conversion price during that period.
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 $72.07 on July 3, 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, 2011 for additional information regarding the terms and conditions of the Companys outstanding debt agreements.
Rank and Guarantees
The 3.00% Convertible Notes, the 2.75% Convertible Notes due 2011, the 6.875% Notes, and the 6.75% Notes rank equal in right of payment with each other and all of ATKs future senior subordinated indebtedness and are subordinated in right of payment to all existing and future senior indebtedness, including the Senior Credit Facility. The outstanding notes are guaranteed on an unsecured basis, jointly and severally and fully and unconditionally, by substantially all of ATKs domestic subsidiaries. The parent company has no independent assets or operations. Subsidiaries of ATK other than the subsidiary guarantors are minor. All of these guarantor subsidiaries are 100% owned by ATK. These guarantees are senior subordinated obligations of the applicable subsidiary guarantors.
Scheduled Minimum Loan Payments
As of July 3, 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 57% as of July 3, 2011 and 58% as of March 31, 2011.
Covenants and Default Provisions
ATKs 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 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 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 Senior Credit Facility are subject to compliance with these covenants. As of July 3, 2011, ATK was in compliance with the financial covenants.
Cash Paid for Interest on Debt
Cash paid for interest totaled $3,185 in the quarter ended July 3, 2011 and $939 during the quarter ended July 4, 2010.
12. Employee Benefit Plans
Employer Contributions. During the quarter ended July 3, 2011, ATK contributed $61,600 directly to the pension trust and $642 directly to retirees under its supplemental (nonqualified) executive retirement plan. ATK also contributed $3,450 to its other PRB plans. ATK anticipates making additional contributions of $4,374 directly to retirees under the nonqualified plan and $10,574 to its other PRB plans during the remainder of fiscal 2012. ATK is not required to make any additional minimum contributions to the pension trust during the remainder of 2012.
13. 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 July 3, 2011 and July 4, 2010 represent effective tax rates of 31.2% and 35.2%, respectively. The decrease in the rate from the prior year quarter is primarily due to a discrete revaluation of the deferred tax assets
caused by a change in state law and the extension of the federal research and development tax credit, partially offset by a lower domestic manufacturing deduction and higher state income tax expense.
ATK or one of its subsidiaries files income tax returns in the U.S. federal, various U.S. state, and foreign jurisdictions. With few exceptions, ATK is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2005. As of July 3, 2011, the IRS had completed the audits of ATK through fiscal 2008. We believe appropriate provisions for all outstanding issues have been made for all remaining open years in all jurisdictions.
Although the timing and outcome of audit settlements are uncertain, it is reasonably possible that a $638 reduction of the unrecognized tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings up to $409 based on current estimates.
14. Stock-Based Compensation
ATK sponsors multiple stock-based incentive plans, which include the Alliant Techsystems Inc. 1990 Equity Incentive Plan, the Non-Employee Director Restricted Stock Plan, the 2000 Stock Incentive Plan, and the 2005 Stock Incentive Plan. As of July 3, 2011, ATK has authorized up to 2,382,360 common shares under the 2005 Stock Incentive Plan, of which 417,237 common shares are yet available to be granted. No new grants will be made out of the other three plans.
Total pre-tax stock-based compensation expense recognized during the quarters ended July 3, 2011 and July 4, 2010 was $3,344 and $2,418, respectively. The total income tax benefit recognized in the income statement for share-based compensation during the quarters ended July 3, 2011, and July 4, 2010 was $1,262 and $940, respectively.
ATK has the following 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 July 3, 2011, there were up to 555,241 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 28,400 shares will become payable only upon achievement of certain financial performance goals, including sales and EPS, for the fiscal 2010 through fiscal 2012 period;
· up to 232,433 shares will become payable only upon achievement of certain performance goals, including sales, EPS, and return on invested capital, for the fiscal 2011 through fiscal 2013 period; and
· up to 294,408 shares will become payable only upon achievement of certain performance goals, including sales growth relative to industry peers and return on invested capital, for the fiscal 2012 through fiscal 2014 period.
In May 2011, 93,649 shares were distributed or deferred based upon achievement of certain financial performance goals, including EPS, for the fiscal 2009 through fiscal 2011 period.
As of July 3, 2011, there were up to 144,458 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. ATK granted 4,288 TSR shares during the quarter ended July 3, 2011. The weighted average fair value of TSR awards granted during fiscal 2012 was $38.14. The weighted average assumptions used in estimating the value of the TSR award during fiscal 2012 were as follows:
Of the shares reserved for TSR awards for key employees,
· 40,562 shares will become payable upon satisfaction of the market conditions stipulated for the fiscal 2010 through 2012 period,
· 36,522 shares will become payable upon satisfaction of the market conditions stipulated for the fiscal 2011 through 2013 period, and
· 67,374 shares will become payable upon satisfaction of the market conditions stipulated for the fiscal 2012 through 2014 period.
Restricted stock granted to non-employee directors and certain key employees during the quarter ended July 3, 2011 totaled 78,050 shares. Restricted shares vest over periods ranging from one to five years from the date of award and are valued at the fair value of 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 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. ATK granted no options during the quarter ended July 3, 2011 or during fiscal 2011.
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, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings in any particular quarter, to be material to its business or likely to result in a material adverse effect on its operating results, financial condition, or cash flows.
On or about April 10, 2006, a former ATK employee filed a qui tam complaint in federal court in Utah alleging that ATK knowingly submitted claims for payment to the U.S. Government for defective LUU series illuminating flares that failed to conform to certain safety specifications and falsely certified compliance with those specifications. 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. On January 3, 2011, the trial court issued a scheduling order setting a preliminary trial date of January 23, 2012. Recently, the trial court revised its schedule and moved the preliminary trial date to February 21, 2012. Fact discovery is substantially complete in the case. Expert witness discovery and pre-trial motion practice is underway.
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.
Claim Recovery. Profits expected to be realized on contracts are based on managements estimates of total contract sales value and costs at completion. Estimated amounts for contract changes and claims are included in contract sales only when realization is estimated to be probable. At July 3, 2011, based on progress to date on certain contracts, there is approximately $81,000 included in unbilled receivables for contract claims.
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 2.25% and 2.50% as of July 3, 2011 and March 31, 2011, 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:
Amounts expected to be paid or received in periods more than one year from the balance sheet date are classified as non-current. Of the $54,057 discounted liability as of July 3, 2011, $4,812 was recorded within other current liabilities and $49,245 was recorded within other long-term liabilities. Of the $32,417 discounted receivable, ATK recorded $4,353 within other current assets and $28,064 within other non-current assets. As of July 3, 2011, the estimated discounted range of reasonably possible costs of environmental remediation was $54,057 to $86,728.
ATK expects that a portion of its environmental compliance and remediation costs will be recoverable under U.S. Government contracts. Some of the remediation costs that are not recoverable from the U.S. Government that are associated with facilities purchased in a business acquisition may be covered by various indemnification agreements, as described in Note 13 to the audited consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended March 31, 2011.
16. Share Repurchases
On August 5, 2008, ATKs Board of Directors authorized the repurchase of up to an additional 5,000,000 shares. The Board has determined that the repurchase program will serve primarily to offset dilution from the Companys employee and director benefit compensation programs, but it may also be used for other corporate purposes, as determined by the Board. During the quarter ended July 3, 2011, ATK repurchased 742,000 shares for $49,991. During fiscal 2009, ATK repurchased 299,956 shares for $31,609. As of July 3, 2011, there were 3,958,000 remaining shares authorized to be repurchased.
17. Operating Segment Information
ATK operates its business structure within four operating groups. These operating segments are defined based on the reporting and review process used by ATKs chief executive officer and other management. The operating structure aligns ATKs capabilities and resources with its customers and markets and positions the Company for long-term growth and improved profitability. Each operating segment is described below:
· Aerospace Systems, which generated 33% of ATKs external sales in the quarter ended July 3, 2011, develops and produces rocket motor systems for human and cargo launch vehicles, conventional and strategic missiles, missile defense interceptors, small and micro-satellites, satellite components, structures and subsystems, lightweight space deployables and solar arrays, and provides engineering and technical services. Additionally, Aerospace Systems operates in the military and commercial aircraft and launch structures markets. Other products include ordnance, such as decoy and illuminating flares.
· Armament Systems, which generated 32% of ATKs external sales in the quarter ended July 3, 2011, develops and produces military small, medium, and large caliber ammunition, precision munitions, gun systems, and propellant and energetic materials. It also operates the U.S. Army ammunition plants in Independence, MO and Radford, VA.
· Missile Products, which generated 14% of ATKs external sales in the quarter ended July 3, 2011, operates across the following market areas: strike weapons, tactical propulsion, in-space propulsion, hypersonic research, missile defense and missile interceptor capabilities, fuzes and warheads, composites, special mission aircraft, and electronic warfare.
· Security and Sporting, which generated 21% of ATKs external sales in the quarter ended July 3, 2011, develops and produces commercial products and tactical systems and equipment.
The military small-caliber ammunition contract, which is reported within Armament Systems, contributed approximately 15% and 14% of total external sales during the quarters ended July 3, 2011 and July 4, 2010, respectively.
The following table summarizes ATKs results by operating segment:
Certain administrative functions are primarily managed by ATK at the corporate headquarters (Corporate). Some examples of such functions are human resources, pension and postretirement benefits, corporate accounting, legal, tax, and treasury. Significant assets and liabilities managed at Corporate include those associated with debt, pension and postretirement benefits, environmental liabilities, and income taxes.
Costs related to the administrative functions managed by Corporate are either recorded at Corporate or allocated to the business units based on the nature of the expense. The difference between pension and postretirement benefit expense calculated under Financial Accounting Standards and the expense calculated under U.S. Cost Accounting Standards is recorded at the corporate level which provides for greater clarity on the operating results of the business segments. Administrative expenses such as corporate accounting, legal, and treasury costs, are allocated out to the business segments. Environmental expenses are allocated to each segment based on the origin of the underlying environmental cost. Transactions between segments are recorded at the segment level, consistent with ATKs financial
accounting policies. Intercompany balances and transactions involving different segments are eliminated at ATKs consolidated financial statements level. These eliminations are shown above in Corporate and were $7,645 and $5,003 for the quarters ended July 3, 2011 and July 4, 2010, respectively.
(Dollar amounts in thousands except share and per share data and unless otherwise indicated)
Forward-Looking Information is Subject to Risk and Uncertainty
Some of the statements made and information contained in this report, excluding historical information, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements give ATKs current expectations or forecasts of future events. Words such as may, will, expected, intend, estimate, anticipate, believe, project, or continue, and similar expressions are used to identify forward-looking statements. From time to time, ATK also may provide oral or written forward-looking statements in other materials released to the public. Any or all forward-looking statements in this report and in any public statements ATK makes could be materially different. They can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Any change in the following factors may impact the achievement of results:
· reductions or changes in NASA or U.S. Government military spending and budgetary policies and sourcing strategy,
· increases in costs, which ATK may not be able to react to due to the nature of certain contracts or for other reasons,
· the potential termination of U.S. Government contracts and the potential inability to recover termination costs,
· government laws and other rules and regulations applicable to ATK, such as procurement and import-export control,
· the novation of U.S. Government contracts,
· other risks associated with U.S. Government contracts that might expose ATK to adverse consequences,
· risks associated with expansion into commercial markets,
· changes in cost and revenue estimates and/or timing of programs,
· costs of servicing ATKs debt, including cash requirements and interest rate fluctuations,
· intense competition,
· reduced demand for commercial ammunition,
· performance of ATKs subcontractors,
· supply, availability, and costs of raw materials and components, including commodity price fluctuations,
· development of key technologies and retention of a qualified workforce,
· fires or explosions at any of ATKs facilities,
· environmental laws that govern past practices and rules and regulations, noncompliance with which may expose ATK to adverse consequences,
· actual pension and other postretirement plan asset returns and assumptions regarding future returns, discount rates, service costs, mortality rates, and health care cost trend rates,
· capital market volatility and corresponding assumptions related to ATKs capital structure such as share count and interest rates,
· impacts of financial market disruptions or volatility to ATKs customers and vendors,
· greater risk associated with international business,
· results of acquisitions,
· costs incurred for pursuits and proposed acquisitions that have not yet or may not close,
· unanticipated changes in the tax provision or exposure to additional tax liabilities,
· security threats or other disruptions, and
· the costs and ultimate outcome of litigation matters and other legal proceedings.
This list of factors is not exhaustive and new factors may emerge or changes to the foregoing factors may occur that would impact ATKs business. ATK undertakes no obligation to update any forward-looking statements. A more detailed description of risk factors can be found in Part 1, Item 1A, Risk Factors, of ATKs Annual Report on Form 10-K for the fiscal year ended March 31, 2011. Additional information regarding these factors may be contained in ATKs subsequent filings with the Securities and Exchange Commission, including Forms 8-K.
ATK is an aerospace, defense, and commercial products company and supplier of products to the U.S. Government, allied nations, and prime contractors. ATK is also a major supplier of ammunition and related accessories to law enforcement agencies and commercial customers. ATK is headquartered in Minneapolis, Minnesota and has operating locations throughout the United States, Puerto Rico, and internationally.
ATK has aligned its business structure into four operating groups. These operating segments are defined based on the reporting and review process used by ATKs chief executive officer and other management. The operating structure aligns ATKs capabilities and resources with its customers and markets and positions the Company for long-term growth and improved profitability. As of March 31, 2011, ATKs four operating groups are:
· Aerospace Systems, which generated 33% of ATKs external sales in fiscal 2011, develops and produces rocket motor systems for human and cargo launch vehicles, conventional and strategic missiles, missile defense interceptors, small and micro-satellites, satellite components, structures and subsystems, lightweight space deployables and solar arrays, and provides engineering and technical services. Additionally, Aerospace Systems operates in the military and commercial aircraft and launch structures markets. Other products include ordnance, such as decoy and illuminating flares.
· Armament Systems, which generated 32% of ATKs external sales in fiscal 2011, develops and produces military small-, medium-, and large-caliber ammunition, precision munitions, gun systems, and propellant and energetic materials. It also operates the U.S. Army ammunition plants in Independence, MO and Radford, VA.
· Missile Products, which generated 14% of ATKs external sales in fiscal 2011, operates across the following market areas: strike weapons, tactical propulsion, inspace propulsion, hypersonic research, missile defense and missile interceptor capabilities, fuzes and warheads, composites, special mission aircraft, and electronic warfare.
· Security and Sporting, which generated 21% of ATKs external sales in fiscal 2011, develops and produces commercial products and tactical systems and equipment.
Financial Highlights and Notable Events
Certain notable events or activities affecting our fiscal 2012 financial results include the following:
Financial highlights for the quarter ended July 3, 2011
· Quarterly sales of $1.1 billion.
· Diluted earnings per share of $2.13.
· Orders for the quarter ending July 3, 2011 were $678 million compared to $1.0 billion in the quarter ending July 4, 2010.
· Total backlog was $6.2 billion at July 3, 2011 compared to $6.7 billion at March 31, 2011.
· Higher income before interest, income taxes, and noncontrolling interest as a percentage of sales reflects a continued focus on company-wide cost management and efficiency improvements, as well as a one-time gain related to the sale of a non-essential parcel of land within Aerospace Systems.
· A lower effective tax rate of 31.2% which resulted primarily from a discrete revaluation of the deferred tax assets caused by a change in state tax law during the quarter.
· ATK repurchased 742,000 shares of its outstanding common stock for $49,991.
· ATK purchased $50,427 aggregate principal amount of its 2.75% Convertible Senior Subordinated Notes due 2011 (the 2.75% Convertible Notes due 2011).
· On May 3, 2011, ATKs Board of Directors declared a quarterly cash dividend of $0.20 per share to stockholders of record on June 6, 2011. The dividend was paid on June 30, 2011.
Notable events for fiscal 2012
· On May 12, 2011, ATK was notified by the U.S. Army that the Company had not been awarded a contract for the continued operation and maintenance of the Radford U.S. Army ammunition plant (RFAAP). ATK has requested a Government Accountability Office review of the RFAAP competition decision after receiving a debriefing from the United States Army. The decision to protest the award will not impact the facilities production or delivery schedules during the protest period. We
cannot give any assurances that ATK will be successful with the outcome of this review. The decision on ATKs protest is expected from the Government Accountability Office by September 1, 2011. See further discussion within the Outlook section below.
· On July 11, 2011, John L. Shroyer, Senior Vice President and Chief Financial Officer of ATK notified ATK of his intention to resign from his position following ATKs release of its first quarter earnings. Effective August 8, 2011, Thomas G. Sexton will become the Companys Vice President and Interim Chief Financial Officer. Mr. Sexton, ATKs current Vice President and Controller, is a 25-year veteran of ATK and has an extensive background in all aspects of both corporate and operational finance.
· On August 1, 2011, ATK announced that the holders of the Companys 2.75% Convertible Notes due 2011 are entitled to convert their Notes at any time between August 15, 2011 and the close of business on September 14, 2011. ATK will then repay any remaining aggregate principal balance upon the maturity of these Notes during the second quarter of fiscal 2012.