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ATK > SEC Filings for ATK > Form 10-Q on 9-Aug-2012All Recent SEC Filings

Show all filings for ALLIANT TECHSYSTEMS INC

Form 10-Q for ALLIANT TECHSYSTEMS INC


9-Aug-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(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 ATK's 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, including impacts of potential sequestration under the Budget Control Act of 2011, and sourcing strategies,

intense competition,

increases in costs, which ATK may not be able to react to due to the nature of its U.S. Government contracts,

changes in cost and revenue estimates and/or timing of programs,

the potential termination of U.S. Government contracts and the potential inability to recover termination costs,

reduction or change in demand for commercial ammunition,

risks associated with expansion into commercial markets,

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,

greater risk associated with international business,

other risks associated with U.S. Government contracts that might expose ATK to adverse consequences,

costs of servicing ATK's debt, including cash requirements and interest rate fluctuations,

information security threats or other disruptions,

supply, availability, and costs of raw materials and components, including commodity price fluctuations,

government laws and other rules and regulations applicable to ATK, such as procurement and import-export control,

the novation of U.S. Government contracts,

performance of ATK's subcontractors,

development of key technologies and retention of a qualified workforce,

fires or explosions at any of ATK's facilities,

environmental laws that govern past practices and rules and regulations, noncompliance with which may expose ATK to adverse consequences,

impacts of financial market disruptions or volatility to ATK's customers and vendors,

results of acquisitions or other transactions, and 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, 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 ATK's 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 ATK's Annual Report on Form 10-K for the fiscal year ended March 31, 2012. Additional


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information regarding these factors may be contained in ATK's subsequent filings with the Securities and Exchange Commission, including Forms 8-K.

Executive Summary

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 Arlington, Virginia and has operating locations throughout the United States, Puerto Rico, and internationally.

Effective April 1, 2012, ATK realigned its business structure into three operating groups. As a result of this realignment, at July 1, 2012, ATK's three operating groups are:

Aerospace Group, which generated 27% of ATK's external sales in the quarter ended July 1, 2012, develops and produces rocket motor systems for human and cargo launch vehicles, conventional and strategic missiles, and missile defense interceptors. They also produce small and micro-satellites, satellite components, structures and subsystems, lightweight space deployables and solar arrays, and provide engineering and technical services. Additionally, the Aerospace Group operates in the military and commercial aircraft and launch structures markets. Other products include ordnance, such as decoy and illuminating flares.

Defense Group, which generated 48% of ATK's external sales in the quarter ended July 1, 2012, develops and produces military small, medium, and large caliber ammunition, propulsion systems for tactical missiles and missile defense applications, strike weapons, precision munitions, gun systems, aircraft survivability systems, fuzes and warheads, energetic materials and special mission aircraft.

Sporting Group, which generated 25% of ATK's external sales in the quarter ended July 1, 2012, develops and produces commercial ammunition and accessories and tactical systems.

The April 1, 2012 realignment is reflected in the information contained in this report for all periods presented.

Financial Highlights and Notable Events

Certain notable events or activities affecting our fiscal 2013 financial results include the following:

Financial highlights for the quarter ended July 1, 2012

Quarterly sales of $1.1 billion.

Diluted earnings per share of $2.16.

Orders for the quarter ending July 1, 2012 were $1.1 billion compared to $678 million in the quarter ending July 3, 2011.

Total backlog was $6.1 billion at July 1, 2012 compared to $6.3 billion at March 31, 2012.

Income before interest, income taxes, and noncontrolling interest ("operating profit") as a percentage of sales was constant quarter over quarter with increases within the Defense Group due to higher than anticipated production volumes and higher profit rates within Energetics. This increase was offset by lower sales volume in Aerospace on a commercial aerospace structures program and space systems operations, the absence of a gain on the sale of a non-essential parcel of land, a continued shift to lower margin products within the Sporting Group, and increased pension expense at Corporate.

A higher effective tax rate of 36.1% which was primarily due to the lack of the prior year discrete revaluation of the deferred tax assets caused by a change in state tax law, the expiration of the federal research and development tax credit, and a lower benefit from the domestic manufacturing deduction.

On May 1, 2012, ATK's Board of Directors declared a quarterly cash dividend of $0.20 per share to stockholders of record on June 11, 2012. The dividend was paid on June 28, 2012.

Notable events for fiscal 2013

During the quarter ATK repurchased 482,044 shares for $25,000.


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On August 6, 2012, ATK settled the examination of the fiscal 2009 and 2010 tax returns with the IRS. This settlement will result in the recognition of approximately $11,000 of tax benefit in the second quarter of fiscal 2013.

On August 7, 2012, ATK's Board of Directors declared a quarterly cash dividend of $0.20 per share, payable on September 27, 2012, to stockholders of record on September 5, 2012.

On August 8, 2012, ATK notified the trustee of its 6.75% Senior Subordinated Notes of its intention to redeem the notes (the "6.75% Notes"). In accordance with the indenture, the redemption price will be 102.25% of the principal amount, or $409,000 including a premium of $9,000, plus accrued interest. ATK expects that the holders of the notes will be paid by September 30, 2012. The transaction will result in the write-off of the remaining $2,770 of deferred debt issuance costs. The terms of ATK's existing Second Amended and Restated Credit Agreement, dated October 7, 2010 (the "Senior Credit Facility"), allow ATK to request an increase of the Term Loan A by up to $350,000 (the "Accordion"). It is ATK's intention to increase its Term Loan A borrowings by $200,000 through the terms of the Accordion to partially finance the redemption of the 6.75% Notes. The balance of the redemption, including the premium and the accrued interest owed, would be paid from available cash and/or ATK's existing Senior Credit Facility. Terms of the Term Loan A increase are expected to be similar to the terms of the existing Term Loan A, with the exception that it will mature two years after the existing Term Loan A.

Outlook

Government Funding - ATK is dependent on funding levels of the U.S. Department of Defense ("DoD") and NASA.

The U.S. defense industry has experienced significant changes over the years. ATK's management believes that the key to ATK's continued success is to focus on performance, innovation, simplicity, and affordability. ATK is positioning itself where management believes there will be continued strong defense funding, even as pressures mount on procurement and research and development accounts. ATK will concentrate on developing systems that will extend the life and improve the capability of existing platforms. ATK anticipates budget pressures will increasingly drive the life extension of platforms such as ships, aircraft, and main battle tanks.

Congress and the President signed the NASA Authorization Act in October 2010 that directed the development of a Space Launch System. Consistent with the NASA Authorization Act, the President's GFY 2012 budget released in February 2011 identified funding for the replacement to Constellation's crew launch vehicle, designated the Space Launch System ("SLS"). Congress directed that, to the maximum extent possible, the SLS should utilize hardware developed for the Constellation program. On September 14, 2011, NASA and key legislative leaders jointly announced the baseline design for SLS. ATK's five-segment solid rocket motors were selected as the propulsion system for the first two SLS test flights (2017 and 2021). At the same time, NASA announced that it will hold a competition for the final design of the propulsion system for SLS, in which ATK will be eligible to participate.

On November 18, 2011, President Obama signed the GFY 2012 NASA Appropriations bill, which provided $1.8 billion for the SLS. This legislation further specified the configuration of the Heavy Lift Vehicle consistent with the September 14, 2011 announcement by the NASA Administrator on the SLS configuration. The President's government fiscal year 2013 budget includes a stable funding request for SLS for GFY13 through GFY17. Congress will determine the GFY13 funding level for NASA as well as the amount of the line item in NASA's budget for the SLS program. In the event the program is terminated, the Company believes that it will be reimbursed for certain amounts previously incurred by ATK, as well as amounts to be incurred by ATK, as part of that termination (e.g., severance, environmental liabilities, termination administration). There can be no assurance that ATK will be successful in collecting reimbursement of any termination liability costs.

During the first quarter of fiscal 2013, NASA sales relating to the SLS programs were approximately $65,000 and as of July 1, 2012 ATK had approximately:

$45,527 of billed and unbilled receivables directly related to the program

$72,060 of net property, plant, and equipment and other assets related to the SLS and other contracts, and

$518,000 of goodwill recorded related to the Space Systems Operations reporting unit

All of these assets would be subject to impairment testing if significant changes are made to the SLS program and related contracts in future periods.

U.S. Government contracts are also dependent on the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take more than one year. As a result, at the outset of a major program, the contract is usually incrementally funded, and additional monies are normally committed to the


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contract by the procuring agency only as Congress makes appropriations for future fiscal years. In addition, most U.S. Government contracts are subject to modification if funding is changed. Any failure by Congress to appropriate additional funds to any program in which ATK participates, or any contract modification as a result of funding changes, could materially delay or terminate the program. This could have a material adverse effect on ATK's operating results, financial condition, or cash flows.

On January 23, 2012, ATK was notified that the U.S. Army had completed its review of ATK's revised proposal for a contract to continue operating and maintaining the RFAAP and that ATK had not been awarded the contract. Loss of the Radford facility management contract will reduce the Defense Group's and ATK's sales and profit. ATK will continue to operate its New River Energetics facility located at RFAAP, which supports ATK's commercial business, international program efforts and other business not directly associated with the RFAAP contract, and therefore ATK does not expect to lose all revenues associated with this division. Sales and operating profit associated with the RFAAP contract during fiscal 2013 were $61,000 and $41,000, respectively, which includes a gain on sale of residual assets, higher sales production volumes, and changes in profit rates. The RFAAP contract concluded June 30, 2012 and the plant has been transitioned to the successor contractor.

ATK submitted its Final Revised Price proposal for the continued operation of the Lake City Army Ammunition Plant ("Lake City" or "LCAAP") on August 6, 2012, in response to a request issued by the U.S. Army. The contract is expected to be awarded in the fall of 2012. ATK is currently under contract with the U.S. Army to operate the LCAAP until September 2013. Loss of the Lake City contract would reduce the Defense Group's and ATK's sales and profit. The prime contract at Lake City, which includes modernization, accounted for approximately 15% of ATK's total revenue in fiscal 2012.

Recent Developments in U.S. Cost Accounting Standards ("CAS") Pension Recovery Rules - The Company maintains defined benefit plans that are subject to CAS and Pension Protection Act of 2006 ("PPA") requirements. The CAS Board issued the final ruling on December 27, 2011 which allows for recognition of a minimum actuarial liability ("MAL") and minimum normal cost ("MNC"), determined on a PPA basis; shortens the amortization period for CAS actuarial gains/losses from 15 to 10 years; and allows for a five-year phase-in of PPA minimum actuarial liability. Due to the phase-in approach within the ruling, there will be minimal impact to ATK prior to fiscal 2015. ATK is currently bidding pension cost for new business using the new CAS standard, and will be entitled to an equitable adjustment for CAS-covered business that was booked prior to the effective date of the final rule. ATK is currently developing its equitable adjustment proposal.

Critical Accounting Policies

ATK's significant accounting policies are described in Note 1 to the consolidated financial statements included in ATK's Annual Report on Form 10-K for the year ended March 31, 2012 ("fiscal 2012"). The accounting policies used in preparing ATK's interim fiscal 2013 consolidated financial statements are the same as those described in ATK's Annual Report.

In preparing the consolidated financial statements, ATK follows accounting principles generally accepted in the United States. The preparation of these financial statements requires ATK to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosure of contingent assets and liabilities. ATK re-evaluates its estimates on an on-going basis. ATK's estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

ATK believes its critical accounting policies are those related to:

revenue recognition,

employee benefit plans,

income taxes,

acquisitions, and

accounting for goodwill.

More information on these policies can be found in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of ATK's Annual Report on Form 10-K for the fiscal year ended March 31, 2012.


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Results of Operations

Acquisitions

There were no acquisitions during the first quarter of fiscal 2013 or fiscal 2012.

Sales

The military small-caliber ammunition contract, which is reported within Defense Group, contributed approximately 16% and 15% of total external sales during the quarters ended July 1, 2012 and July 3, 2011, respectively.

The following is a summary of each operating segment's external sales:

                                          Quarters Ended
                                                                       %
                        July 1, 2012     July 3, 2011    $ Change    Change
Aerospace Group        $      294,656   $      353,647   $ (58,991 )  (16.7 )%
Defense Group                 514,479          492,349      22,130      4.5 %
Sporting Group                273,166          229,259      43,907     19.2 %
Total external sales   $    1,082,301   $    1,075,255   $   7,046      0.7 %

The fluctuation in sales was driven by the program-related changes within the operating segments as described below.

Aerospace Group. The decrease in sales was driven by:

a $36,500 decrease in Space Systems Operations resulting from reduced production levels and completion of contracts.

a $19,600 decrease in Aerospace Structures primarily driven by completion of tool procurement/start-up activities within commercial aerospace structures and production cycles of other commercial aircraft programs.

Defense Group. The increase in sales was driven by:

a $17,500 increase in Energetic Systems from higher than anticipated production volume and changes in profit rates.

an increase of $7,700 within Small Caliber Systems ammunition due to increased ammunition volume.

Sporting Group. The increase was driven by:

an increase of $25,000 within the Accessories Division, driven by full-scale production sales on a DoD contract in the tactical accessories business.

an $18,000 increase in Ammunition Division sales due to strong demand primarily in the domestic commercial channel.

Gross Profit



                                       Quarters Ended
                                 As a %                      As a %
                July 1, 2012    of Sales    July 3, 2011    of Sales   Change

Gross profit   $      249,622       23.1 % $      245,224       22.8 % $ 4,398

The increase in gross profit for the quarter is driven by higher sales within the Defense Group due to the close out of the Radford facility and increased orders within the Sporting Groups. These increases were partially offset by the decrease in Aerospace Group sales and the shift to lower margin products within the Sporting Group.

Operating Expenses



                                                         Quarters Ended
                                               As a %                        As a %
                              July 1, 2012    of Sales      July 3, 2011    of Sales       Change
Research and development     $       14,008         1.3 %  $       12,202         1.1 %  $    1,806
Selling                              40,527         3.7 %          39,426         3.7 %       1,101
General and administrative           64,399         6.0 %          63,056         5.9 %       1,343
Total                        $      118,934        11.0 %  $      114,684        10.7 %  $    4,250


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Operating expenses increased $4,250 from the prior year period. Research and development costs were slightly higher, consistent with higher sales in the Defense and Sporting Groups. Selling expenses were slightly higher due to higher sales within the Ammunition Division and pursuit of satellite opportunities. General and administrative expenses were higher due to facility closure costs within Sporting Group, partially offset by continued management cost initiatives.

Income before Interest, Income Taxes, and Noncontrolling Interest

                                Quarters Ended
                   July 1, 2012     July 3, 2011     Change
Aerospace Group   $       34,950   $       42,546   $ (7,596 )
Defense Group             91,361           61,784     29,577
Sporting Group            20,794           29,320     (8,526 )
Corporate                (16,417 )         (3,110 )  (13,307 )
Total             $      130,688   $      130,540   $    148

The fluctuation in income before interest, income taxes, and noncontrolling interest from the prior year periods was due to program-related changes within the operating segments as described below.

Aerospace Group. The decrease relates to the lower sales volume across Aerospace Group, and the absence of a gain on the sale of a non-essential parcel of land to the State of Utah during fiscal 2012.

Defense Group. The increase was due to changes in profit rates driven by increased production volume and a gain on the sale of residual assets in Energetic Systems.

Sporting Group. The decrease primarily reflects the continued shift to lower margin products and costs associated with the closeout of facilities, partially offset by increased sales volumes.

Corporate. Corporate income before interest, income taxes, and noncontrolling interest primarily reflects expenses incurred for administrative functions that are performed centrally at the corporate headquarters, pension expense, and the elimination of intercompany profits. The increase from the prior year is driven by the higher pension expense.

The majority of ATK's sales are accounted for as long-term contracts, which are accounted for under the percentage-of-completion method. Accounting for contracts under the percentage-of-completion ("POC") method requires judgment relative to assessing risks and estimating contract revenues and costs. Profits expected to be realized on contracts are based on management's estimates of total contract sales value and costs at completion. Estimated amounts for contract changes, including scope and claims, are included in contract sales only when realization is estimated to be probable. Assumptions used for recording sales and earnings are adjusted in the period of change to reflect revisions in contract value and estimated costs. In the period in which it is determined that a loss will be incurred on a contract, the entire amount of the estimated gross margin loss is charged to cost of sales. Changes in estimates of contract sales, costs, or profits are recognized using the cumulative catch-up method of accounting. This method recognizes in the current period the cumulative effect of the changes on current or prior periods. The effect of the changes on future periods of contract performance is recognized as if the revised estimate had been used since contract inception.

Changes in contract estimates occur for a variety of reasons including changes in contract scope, unforeseen changes in contract cost estimates, positive or negative, due to unanticipated cost growth or risks affecting contract costs and/or the resolution of contract risks at lower costs than anticipated, as well as changes in contract overhead costs over the performance period. Changes in estimates could have a material effect on the company's consolidated financial position or annual results of operations. During the quarters ended July 1, 2012 and July 3, 2011, the Company recognized favorable operating income adjustments of $85,692 and $60,107, and unfavorable operating income adjustments of $39,999 and $30,864, respectively. The adjustments were primarily driven by greater than expected performance at the Radford facility due to increased production volumes, a gain on sale of residual assets, changes in estimates as contracts near completion in energetics and small-caliber systems programs.

Net Interest Expense

Net interest expense for the quarter ended July 1, 2012 was $19,750, a decrease of $6,550 compared to $26,300 in the comparable quarter of fiscal 2012 primarily due to the repayment of debt during the past year, as well as a reduction in the amortization of debt


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discount due to the repayment of a portion of the outstanding convertible notes.

Income Tax Provision



                                                Quarters Ended
                                        Effective                    Effective
                        July 1, 2012      Rate       July 3, 2011      Rate      Change

Income tax provision   $       39,997        36.1 % $       32,546        31.2 % $ 7,451

ATK's provision for income taxes includes federal, foreign, 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 1, 2012 and July 3, 2011 represent effective tax rates of 36.1% and 31.2%, respectively. The increase in the rate from the prior year quarter is primarily due to the lack of the prior year discrete revaluation of the deferred tax assets caused by a change in state tax law, the expiration of the federal research and development tax credit, and a lower benefit from the domestic manufacturing deduction.

ATK or one of its subsidiaries files income tax returns in the U.S. federal, . . .

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