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ATK > SEC Filings for ATK > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for ALLIANT TECHSYSTEMS INC

Form 10-Q for ALLIANT TECHSYSTEMS INC


8-Nov-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 or other transactions 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 September 30, 2012, ATK's three operating groups are:

Aerospace Group, which generated 28% of ATK's external sales in the six months ended September 30, 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 46% of ATK's external sales in the six months ended September 30, 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 26% of ATK's external sales in the six months ended September 30, 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 September 30, 2012

Quarterly sales of $1.1 billion compared to $1.1 billion in the prior year quarter.

Diluted earnings per share of $2.00 compared to $2.43 in the prior year quarter.

Orders for the quarter ending September 30, 2012 were $1.3 billion compared to $1.4 billion in the quarter ending October 2, 2011.

Total backlog was $6.4 billion at September 30, 2012 compared to $6.3 billion at March 31, 2012.

Income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest as a percentage of sales was 10.3% compared to 13.3% in the prior year second quarter. This decrease was driven by the loss of the Radford facility management contract as well as the absence of an $18,000 change in profit expectations from a favorable contract resolution on a program in the prior year and increased pension expense.

In the second quarter, ATK settled the examination of the fiscal 2009 and 2010 tax returns with the IRS. This settlement resulted in the recognition of approximately $11,123 of tax benefit in the quarter which was the primary driver in the reduction of the tax rate to 19.4%.

During the quarter ended September 30, 2012, the Company redeemed its "6.75% Notes" for $409,000 including a premium of $9,000, plus accrued interest. The transaction resulted in the write-off of the remaining $2,773 of deferred debt issuance costs.

Under the terms of the Senior Credit Facility, ATK exercised its option to increase the Term A Loan by $200,000 (the "Accordion") during the quarter ended September 30, 2012. Proceeds of the Accordion were used to partially finance the redemption of the 6.75% Notes.


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

Notable events for fiscal 2013

During the first six months of fiscal 2013 ATK repurchased 482,044 shares for $24,997.

On September 28, 2012, ATK was notified by the U.S. Army that it was selected for both the production of ammunition and continued operation and maintenance of the Lake City Army Ammunition Plant ("LCAAP"). The production contract runs through September 2019 and the facility contract runs through September 2020.

On October 30, 2012, ATK's Board of Directors declared a quarterly cash dividend of $0.26 per share, payable on December 13, 2012, to stockholders of record on November 21, 2012.

We successfully negotiated a contract amendment in the Aerospace Structures Division that includes the settlement of a long-term outstanding receivable. As a result of that negotiation we collected a $51,150 payment in the second quarter and an additional $51,150 payment is expected to be received in the second half of fiscal 2013.

ATK's Board of Directors appointed Scott Chaplin as Senior Vice President, General Counsel, and Secretary of ATK effective October 1, 2012.

Outlook

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

In August 2011, the Budget Control Act ("the Act") reduced the DoD top line budget by approximately $490 billion over 10 years starting in fiscal year 2012. In addition, barring Congressional action, further budget cuts (or sequestration) as outlined in the Act will be implemented starting in January 2013 which would lead to additional reductions of approximately $500 billion from the defense top line budget over the next nine years, resulting in aggregate reductions of about $1 trillion through 2021. In September 2012, the Office of Management and Budget ("OMB") provided a report to Congress stating that it was unable to determine the amount of sequestration at the program, project, or activity level until consistent, government-wide definitions are established. The DoD has taken the position that such reductions would generate significant operational risks and may require the termination of certain, as yet undetermined, procurement programs. Given the uncertainty regarding how the Congress will reduce the U.S. deficit and a lack of specifics on how cuts will be implemented, we are unable to predict the impact, which could be material, on our programs or financial outlook, including our revenues, operating earnings and margins, cash flow, orders and backlog and recovery of long lived assets.

In September 2012, Congress passed, and the President signed, legislation making continuing appropriations from October 1, 2012 through March 27, 2013. This will enable programs to continue at the same operations rate through the remainder of fiscal year 2013.

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, aircrafts, 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 six months of fiscal 2013, NASA sales relating to the SLS programs were approximately $125,000 and as of September 30, 2012 ATK had approximately:

          $39,899 of billed and unbilled receivables directly related to the
program

          $70,413 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,


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at the outset of a major program, the contract is usually incrementally funded, and additional monies are normally committed to the 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 Radford Army Ammunition Plant ("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 $62,780 and $42,225, 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.

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 fiscal 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.

Results of Operations

Acquisitions

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


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Sales

The military small-caliber ammunition contract, which is reported within the Defense Group, contributed approximately 17% and 14% of total external sales during the six months ended September 30, 2012 and October 2, 2011, respectively.

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

                                 Quarters Ended                                         Six Months Ended
               September 30,    October 2,                             September 30,    October 2,
                   2012            2011       $ Change    % Change         2012            2011       $ Change    % Change
Aerospace
Group         $       310,298   $   332,657   $ (22,359 )     (6.7 )% $       604,954   $   686,305   $ (81,351 )    (11.9 )%
Defense
Group                 484,133       528,104     (43,971 )     (8.3 )%         998,613     1,020,453     (21,840 )     (2.1 )%
Sporting
Group                 275,356       248,657      26,699       10.7 %          548,522       477,915      70,607       14.8 %
Total
external
sales         $     1,069,787   $ 1,109,418   $ (39,631 )     (3.6 )% $     2,152,089   $ 2,184,673   $ (32,584 )     (1.5 )%

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

Quarter:

Aerospace Group. The decrease in sales was driven by:

a $17,300 decrease in Space Systems Operations resulting from the completion of the Space Shuttle Program and other contracts, and

a $6,700 decrease in Aerospace Structures primarily driven by completion of tool procurement/start-up activities within Commercial Aircraft Structures.

Defense Group. The decrease in sales was driven by:

a decrease of $43,900 in Energetic Systems which was driven by the loss of the Radford facility management contract, and

a decrease of $18,000 due to the absence of a change in profit expectation from a favorable contract resolution on a program in the prior year quarter.

These decreases were partially offset by a $25,000 increase in Small Caliber Systems driven by increased volume and updated profit expectations.

Sporting Group. The increase in sales was driven by:

a $16,500 increase in Ammunition driven by higher volumes and prices in the commercial channels due to demand, and

an increase of $10,200 in Accessories resulting primarily from higher volume.

Six Months:

Aerospace Group. The decrease in sales was driven by:

a $53,800 decrease in Space Systems Operations resulting from reduced production levels as well as the completion of the Space Shuttle Program and other contracts, and

a $26,300 decrease in Aerospace Structures primarily driven by completion of tool procurement/start-up activities within Commercial Aircraft Structures.

Defense Group. The decrease in sales was driven by:

a decrease of $26,400 in Energetic Systems which was driven by the loss of the Radford facility management contract,

        a decrease of $11,100 in Armament Systems due to lower sales volumes,
and

        a decrease of $18,000 due to the absence of a change in profit

expectation from a favorable contract resolution on a program in the prior year period.


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These decreases were partially offset by a $32,700 increase in Small Caliber Systems driven by increased volume and updated profit expectations.

Sporting Group. The increase in sales was driven by:

a $35,400 increase in Ammunition driven by higher volumes in the commercial channels, and

an increase of $35,000 in Accessories resulting primarily from higher DoD sales volume.

Gross Profit



                                        Quarters Ended                                                    Six Months Ended
                September 30,     As a %     October 2,     As a %                 September 30,     As a %     October 2,     As a %
                    2012         of Sales       2011       of Sales    Change          2012         of Sales       2011       of Sales    Change

Gross profit   $       228,267       21.3 % $    261,256       23.5 % $ (32,989 ) $       477,890       22.2 % $    506,480       23.2 % $ (28,590 )

Quarter:

The decrease in gross profit for the quarter is primarily driven by:

a decrease of $18,000 due to the absence of a change in profit expectation from a favorable contract resolution on a program in the prior year quarter,

a decrease of $9,500 in Energetic Systems due to the loss of the Radford facility management contract, and

a decrease of $9,000 due to increase in pension expense.

These decreases were partially offset by increased sales in the Sporting Group.

Six Months:

The decrease in gross profit for the quarter is primarily driven by:

a decrease of $18,000 due to the absence of a change in profit expectation from a favorable contract resolution on a program in the prior year quarter, and

a decrease of $17,800 due to an increase in pension expense.

These decreases were partially offset by increased sales in the Sporting Group.

Operating Expenses



                                           Quarters Ended                                                  Six Months Ended
                    September 30,     As a %     October 2,     As a %               September 30,     As a %     October 2,     As a %
                        2012         of Sales       2011       of Sales   Change         2012         of Sales       2011       of Sales   Change
Research and
development        $        15,914        1.5 % $     14,886        1.3 % $ 1,028   $        29,921        1.4 % $     27,088        1.2 % $ 2,833
Selling                     39,609        3.7 %       42,006        3.8 %  (2,397 )          80,136        3.7 %       81,432        3.7 %  (1,296 )
General and
administrative              62,188        5.8 %       56,958        5.1 %   5,230           126,588        5.9 %      120,014        5.5 %   6,574
Total              $       117,711       11.0 % $    113,850       10.3 % $ 3,861   $       236,645       11.0 % $    228,534       10.5 % $ 8,111

Quarter:

Operating expenses increased $3,861 from the prior year period. Research and development costs were higher in the Aerospace Group due to commercial launch vehicle development. Selling expenses were lower due to lower sales in the Defense Group. General and administrative expenses were higher due to higher compensation costs related to bonus accruals and higher bad debt expense.

Six Months:

Operating expenses increased $8,111 from the prior year period. Research and development costs were higher in the Aerospace


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Group due to commercial vehicle development. Selling expenses were lower due to lower sales in the Defense Group. General and administrative expenses were higher due to higher compensation costs related to bonus accruals and higher bad debt expense.

Income before Interest, Loss on Extinguishment of Debt, Income Taxes, and Noncontrolling Interest

                                    Quarters Ended                              Six Months Ended
                       September 30,     October 2,                 September 30,     October 2,
. . .
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