TOP CONTRIBUTORS

Tracey Shi

Dave Cleveland

ATK AT A GLANCE

P/E ► 15.6 AVG EV/EBITDA ► 7.61 AVG ROA ► 7.1% AVG ROE ► 21.4% AVG Debt to Equity ► 3.52 HIGH Current Ratio ► 1.54 AVG Interest Coverage Ratio ► 6.04 AVG

 

 

 

 

 

 

Alliant Techsystems Inc. (ATK) is major U.S. producer of advanced weapon and space systems. ATK was formed in 1990 as a spin off of Honeywell International's defense businesses. Headquartered in Edina, Minnesota, ATK currently has approximately 16,000 employees and operates in 21 states, producing defense products and weaponry, ammunition, and nonmilitary aerospace products such as components of satellites and space exploration vehicles. The company's clients are varied and range from the U.S. government, a major consumer of ATK's defense products, to commercial clients, who purchase ATK's sporting ammunition.

Given ATK's reliance on both the U.S. government U.S. foreign policy and military spending can significantly impact its businesses. The Iraq War, for instance has led to 64% increase in ATK's profits over the last 4 years. Since ATK is also involved in providing nonmilitary-use ammunition for commercial sale, it is also affected by trends in the nonmilitary market, such as the trend towards "green" ammunition, which uses less of heavy metals (e.g., lead) in wetlands, training ranges and combat settings. ATK's nonmilitary ammunition is purchased by law enforcement agencies across the country, as well as for consumer use in recreational hunting.

Business Model

Alliant Techsystems operates in three main segments:

• Mission systems: The mission systems segment designs and produces advanced missile systems, including large-caliber ammunition, guided missiles, laser applications, and integrated sensors for surveillance aircraft; aerospace systems; and a variety of satellite and spacecraft components.
• Arnament systems: Arnament systems manufactures military and nonmilitary ammunition, including small- and medium-caliber rounds, as well as explosives and missile propellant.
• Space systems: The space systems segment provides missile defense interceptors and rocket motor systems for human and cargo craft, such as NASA spacecraft.

Orders have been rapidly increasing over the past few years, with a large projected increase of over 30% in the 2008 fiscal year (see graph at right). This increase is due to ATK's expansion into new markets and its development of new products.

ATK's revenues and operating income have been increasing for several years. From 2001 to 2002, there was a significant jump in both sales and operating income, as the newly-declared Iraq War created a large and sudden increase in demand for ATK's military supplies. After that jump, growth has been consistently strong, because most of ATK's sales come from contracts that span across several years. The initial spike in revenue was accompanied by an increase in contract signings, which, along with new contracts due partially to the continuation of the war effort, has kept ATK's revenue growing.^[1]

Trends and Forces

U.S. Foreign Policy Impacts Demand for Defense Products

The majority of ATK's sales, just under 80%, are to the U.S. government, with the U.S. Army comprising 29% and the U.S. Air Force making up 17% of Alliant Techsystems's sales in 2007. As such, ATK's success is heavily dependent on the government's continuing demand for defense systems and other military products. The Iraq War benefits ATK, as it boosts government spending on defense products and military equipment.

Eco-Friendly Trend Shifts Towards "Greener" Ammunition

The United States has generally seen a shift towards "greener," more environmentally-friendly policies, most notably the shift towards renewable energy and increased environmental legislation. The equivalent shift in commercial hunting is a movement towards cleaner ammunition, which contains less heavy metal content, and thus pollutes the natural environment less than lead bullets. As the top producer of civil ammunition, ATK has also been a leader in developing methods to produce useable, low-lead content ammunition.^[2]

Higher Interest Rates Makes Paying Off Debt More Difficult

As of March 31, 2007, ATK had a total indebtedness of $1.455 billion. If interest rates increase, ATK may find it more challenging to make interest payments and still have enough capital for operating expenses. In addition, ATK may have trouble refinancing its debt when it becomes due, should higher interest rates prevail.

Higher Material Costs Cut Into ATK's Profit

Alliant Techsystems uses many different types of raw materials in manufacturing its products, including aluminum, steel, copper, lead, graphite fiber, and epoxy resins and adhesives. ^[3] The prices of these materials, especially copper, have risen significantly over the past several years, which increases ATK's costs of doing business. Since most of ATK's business comes from contracts, ATK is at risk of losing profits if commodity prices rise sharply.

Furthermore, for several of ATK's government contracts, the company is required to purchase its raw materials from sources approved by the U.S. Department of Defense. ^[4] This restricts ATK's freedom to shop around for cost-effective commodities, and can limit ATK's ability to adjust to rising materials prices.

Competitors

Alliant Techsystems's main competitors for aerospace and defense products are:

• Lockheed Martin (LMT): LMT is the world's largest defense contractor in terms of revenue. Lockheed Martin manufactures weapons, systems, and military vehicles, and is best known for providing its cutting edge airplanes and electronic systems to the U.S. Government.
• Raytheon Company (RTN): Raytheon specializes in manufacturing radars and elector-optical sensors (airborne, naval and ground based), missiles, satellite sensors, radios and digital communication systems, and missile defense. Raytheon diversifies in smaller subcontracts and relies on international contracts more than any of its competitors.
• General Dynamics (GD): GD serves clients including from domestic and international governments and militaries. It is also the leading manufacturer of corporate jets, with its Gulfstream fleet accounting for one fourth of all business jet sales.
• Orbital Sciences (ORB) ORB specializes in building satellites and rockets.

While ATK is significantly smaller than its competitors, it seeks to gain a competitive advantage by focusing on its research and development programs, in order to improve existing products and develop new ones to meet clients' needs. ATK and its competitors are susceptible to many of the same risks, as they are all substantially influenced by the U.S. Department of Defense budget and geopolitical factors.

In the civil ammunition and accessories market, ATK competes with:

• General Dynamics (GD)
• Winchester Ammunition, owned by Olin (OLN)

ATK captured the top spot in the civil ammunition market in 2007, and is devoted to expanding its position in this market. The company's primary strategy is the consistent introduction of novel products. Since price is a major factor in many retail purchasing decisions, ATK is also attempting to control its operating costs, particularly the costs of raw materials, in order to remain competitive.

Footnotes

1. ↑ Data for fiscal years ending March 31. Taken from ATK's 2007 Annual Report ("Selected Financial Data" section, page 28) and 2004 Annual Report ("Selected Financial Data" section, page 42).
2. ↑ from 2007 Annual Report (pages 4-5)
3. ↑ from 2007 Annual Report (under Item 1: Business, page 9)
4. ↑ from 2007 Annual Report (under Item 1: Business, page 9)
5. ↑ Since ATK ends its fiscal year on March 31, its data is given for the 2006 and 2007 fiscal years for comparability reasons.