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ATK > SEC Filings for ATK > Form 10-K on 23-May-2013All Recent SEC Filings

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Form 10-K for ALLIANT TECHSYSTEMS INC


23-May-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands except share and per share data or 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 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, including the risk that placed orders exceed actual customer requirements,

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,

security threats, including cybersecurity and other industrial and physical security threats, and 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, and federal and state firearms and ammunition regulations,

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,


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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. Additional information regarding certain of these factors is contained in Item 1A of this report and may also be contained in ATK's filings with the Securities and Exchange Commission on Forms 10-Q and 8-K. All such risk factors are difficult to predict, contain material uncertainties that may affect actual results, and may be beyond our control.
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 commercial customers and law enforcement agencies. ATK is headquartered in Arlington, Virginia and has operating locations throughout the United States, Puerto Rico, and internationally.
As of March 31, 2013, ATK operated in three business segments. These operating segments are defined based on the reporting and review process used by ATK's chief executive officer and other management. As of March 31, 2013, ATK's three operating groups were:
Aerospace Group, which generated 29% of ATK's external sales in fiscal 2013, 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 45% of ATK's external sales in fiscal 2013, 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 fiscal 2013, develops and produces commercial ammunition and accessories and tactical systems.

Financial Highlights and Notable Events
Certain notable events or activities affecting our fiscal 2013 financial results included the following:
Financial highlights for fiscal 2013
Annual sales of $4.4 billion.

Diluted earnings per share of $8.34.

Total orders of $6.3 billion. Orders include strong orders in ATK's Sporting Group, which are cancelable and may not be indicative of future sales, as ATK believes there may have been a number of ammunition orders placed that exceed actual customer requirements.

Total backlog of $8.2 billion at March 31, 2013 compared to $6.3 billion at March 31, 2012. Backlog includes orders within the Sporting group which are cancelable, and ATK believes there may have been a number of ammunition orders placed that exceed actual customer requirements.

Income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest as a percentage of sales was 10.8% and 10.7% for the years ended March 31, 2013 and 2012, respectively. The current year rate reflects the loss of the Radford facility management contract . The prior year rate reflects an approximately $36,000 accrual regarding a previously disclosed lawsuit related to the manufacture of LUU flares, and a favorable contract settlement of $18,000 within Defense group.


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The decrease in the current period tax rate to 30.6% from 35.3% in fiscal 2012 is primarily due to the settlement of the examination of the fiscal 2009 and 2010 tax returns and the absence of the estimated nondeductible portion of the fiscal 2012 accrual related to the LUU flare litigation agreement.

During fiscal 2013, ATK paid quarterly cash dividends of $0.20 per share for the first and second quarters and $0.26 for the third and fourth quarters, totaling $30,033.

Notable events
During fiscal 2013 ATK repurchased 1,003,938 shares for $59,500.

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.

We successfully negotiated a contract amendment in the Aerospace Structures Division that includes the settlement of an outstanding receivable. As a result of that negotiation, we collected a $51,150 payment in the second quarter and an additional $51,150 payment in the third quarter.

During the second quarter, 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 second quarter. Proceeds of the Accordion were used to partially finance the redemption of the 6.75% Notes.

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.

On February 4, 2013, ATK announced it is freezing the pension formula for affected employees who currently earn a benefit under ATK's defined benefit pension plans. Effective July 1, 2013, affected employees will earn benefits under a new cash balance pension formula and will also be eligible for an enhanced company match under the 401(k) Plan. All of the changes are prospective. For additional information, see ATK's Current Report on Form 8-K dated January 31, 2013 and filed with the SEC on February 4, 2013. As a result of the Plans amendments the projected benefit obligation was reduced by $183,583.

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

ATK's Board of Directors appointed Jay Tibbets Senior Vice President and Interim President of the Sporting Group effective February 1, 2013, replacing Ronald P. Johnson who resigned on January 31, 2013.

On April 23, 2013 ATK announced that Steven J.Cortese, Senior Vice President, Government Relations and Communications, was leaving the company on May 1, 2013.

On May 1, 2013, ATK's Board of Directors declared a quarterly cash dividend of $0.26 per share, payable on June 27, 2013, to stockholders of record on June 3, 2013.

On May 10, 2013, Alliant Techsystems Inc. ("ATK") entered into an agreement to acquire Caliber Company, the parent company of Savage Sports Corporation and a portfolio company of Norwest Equity Partners for $315,000 in cash subject to a customary working capital adjustment.

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 January 2013, the "American Taxpayer Relief Act of 2012" was enacted triggering further budget cuts (or sequestration) as outlined in the Act beginning in March 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. Neither the OMB nor DoD have issued final guidance subsequent to passage of the FY13 Appropriations Act directing the specific level of reductions required by each Department and Agency for each program. Given the uncertainty regarding how the Congress will reduce the U.S. deficit, the lack of specifics on how sequestration cuts will be implemented in the current fiscal


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year, and how these same factors will be decided in the government's fiscal 2014 budget, 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. 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.
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 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 reduced 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 $73,967 and $48,200, 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. Critical Accounting Policies
ATK's discussion and analysis of its financial condition and results of operations are based upon ATK's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the consolidated financial statements, ATK makes 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 the following are its critical accounting policies that affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Revenue Recognition
Our sales come primarily from contracts with agencies of the U.S. Government and its prime contractors and subcontractors. As the various U.S. Government customers, including the U.S. Army, U.S. Navy, NASA, and the U.S. Air Force, make independent purchasing decisions, we do not generally regard the U.S. Government as one customer. Instead, we view each agency as a separate customer. Sales by customer were as follows:


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                                        Percent of Sales
                                     For Fiscal Years Ended:
                                   2013        2012       2011
Sales to:
U.S. Army                           29 %        28 %        30 %
U.S. Navy                           13 %        12 %        11 %
NASA                                10 %        10 %        13 %
U.S. Air Force                       6 %         6 %         7 %
Other U.S. Government customers      9 %         9 %         7 %
Total U.S. Government customers     67 %        65 %        68 %
Commercial and foreign customers    33 %        35 %        32 %
Total                              100 %       100 %       100 %

Long-Term Contracts-The majority of ATK's sales to the U.S. Government and commercial and foreign customers are accounted for as long-term contracts. Sales under long-term contracts are accounted for under the percentage-of-completion method and include cost-plus and fixed-price contracts. Sales under cost-plus contracts are recognized as costs are incurred. Sales under fixed-price contracts are either recognized as the actual cost of work performed relates to the estimate at completion ("cost-to-cost") or based on results achieved, which usually coincides with customer acceptance ("units-of-delivery"). ATK predominately accounts for revenue using the cost-to-cost method of accounting. Profits expected to be realized on contracts are based on management 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 amount is reliably estimatible and 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 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. In fiscal 2013, 2012 and 2011, the Company recognized favorable operating income adjustments of $215,945, $187,718, and $121,108, and unfavorable operating income adjustments of $122,568, $80,745 and $69,600, respectively, consisting of changes in estimates on contracts accounted for under the percentage-of-completion method of accounting. The adjustments recorded during the year ended March 31, 2013 were primarily driven by greater than expected performance in Small-Caliber Systems, increased production volumes Defense Electronic Systems , better performance at the Radford facility as the contracts and sale of residual assets were completed, and increase in Space System Operations due to performance improvements. These improvements were offset by decreases in Missile Products due to requalification expenses on a program.
The prior year adjustments were primarily driven by greater than expected performance at the Radford facility due to increased production volumes, changes in estimates as contracts near completion in energetics and small-caliber systems programs, the absence of a reduction in sales and profit on a commercial aerospace program recorded in fiscal 2011, and changes in expectations on an international program in Armament Systems, a defense electronic systems program, and others.
Contracts may contain provisions to earn incentive and award fees if specified targets are achieved as well as penalty provisions related to performance. Incentive and award fees and penalties that can be reasonably estimated and are probable are recorded over the performance period of the contract. Incentive and award fees that cannot be reasonably estimated are recorded when awarded. The complexity of the estimation process and all issues related to assumptions, risks, and uncertainties inherent with the application of the cost-to-cost method of accounting affect the amounts reported in ATK's financial statements. A number of internal and external factors affect the cost of sales estimates, including labor rate and efficiency variances, overhead rate estimates, revised estimates of warranty costs, estimated future material prices, and customer specification and testing requirement changes. If business conditions were different, or if ATK had used different assumptions in the application of this


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and other accounting policies, it is likely that materially different amounts would be reported in ATK's financial statements. In the past, ATK's estimates and assumptions have been materially accurate.
Other Revenue Recognition Methodology-Sales not recognized under the long-term contract method primarily relate to sales within the Sporting group which are recognized when persuasive evidence of an arrangement exists, the product has been delivered and legal title and all risks of ownership have been transferred, written contract and sales terms are complete, customer acceptance has occurred, and payment is reasonably assured. Sales are reduced for allowances, price discounts, and shipping costs.
Fiscal 2013 sales by revenue recognition method were as follows:

                            Percent
                           of Sales
Sales recorded under:
Long-term contracts method     74 %
Other method                   26 %
Total                         100 %

Employee Benefit Plans
Defined Benefit Pension Plans. ATK's noncontributory defined benefit pension plans (the "Plans") cover substantially all employees hired prior to January 1, 2007. Eligible non-union employees hired on or after January 1, 2007 and certain union employees are not covered by a defined benefit plan but substantially all receive an employer contribution through a defined contribution plan. On January 31, 2013, the Plans were amended to freeze the current pension formula benefits effective June 30, 2013 and to implement a new cash balance formula applicable to pay and service starting July 1, 2013. The cash balance formula provides each affected employee with pay credits based on the sum of that employee's age plus years of pension service as of December 31 of each calendar year, plus 4% annual interest credits. Prior to the effective date of the amendment, the Plans provide either pension benefits based on employee annual pay levels and years of credited service or based on stated amounts for each year of credited service. ATK funds the Plans in accordance with federal requirements calculated using appropriate actuarial methods. Plan assets for ATK are held in a trust and are invested in a diversified portfolio of equity investments, fixed income investments, real estate, timber, energy investments, hedge funds, private equity, and cash. For certain Plan assets where the fair market value is not readily determinable, estimates of the fair value are determined using the best available information including the most recent audited financial statements. ATK also sponsors nonqualified supplemental executive retirement plans which provide certain executives and highly compensated employees the opportunity to receive pension benefits in excess of those payable through tax qualified pension plans.The Company implemented similar changes as those noted above to ATK's nonqualified supplemental executive retirement plans for certain highly compensated employees.
ATK recorded pension expense for the Plans of $167,952 in fiscal 2013, an increase of $33,995 from $133,957 of pension expense recorded in fiscal 2012. The expense related to these Plans is calculated based upon a number of actuarial assumptions, including the expected long-term rate of return on plan assets, the discount rate, and the rate of compensation increase. The following table sets forth ATK's assumptions used in determining pension expense for fiscal 2013, 2012, and 2011, and projections for fiscal 2014:

                                                       Years Ending March 31
                                                  2014     2013     2012     2011
Expected long-term rate of return on plan assets 7.25 %   7.50 %   8.00 %   8.00 %
Discount rate                                    4.35 %   4.90 %   5.60 %   5.90 %

Rate of compensation increase:
Union 3.23 % 3.26 % 3.79 % 3.84 % Salaried 3.49 % 3.55 % 4.02 % 4.05 %

In developing the expected long-term rate of return assumption, ATK considers input from its actuaries and other advisors, annualized returns of various major indices over a long-term time horizon and ATK's own historical investment returns. The expected long-term rate of return of 7.5% used in fiscal 2013 for the Plans was based on an asset allocation range of 30 - 50% in equity investments, 30 - 40% in fixed income investments, 5 - 15% in real estate/real asset investments, 5 - 27% collectively in hedge fund and private equity investments, and 0 - 6% in cash investments. The expected long-term rate of


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return assumed for fiscal 2014 has been decreased to 7.25%. This decrease is primarily a result of the lower interest rate environment and decreased expectations for the equity risk premium. The actual return in any fiscal year will likely differ from ATK's assumption, but ATK estimates its return based on long-term projections and historical results. Therefore, any variance in a given year does not necessarily indicate that the assumption should be changed. In determining its discount rate, ATK uses the current investment yields on high-quality corporate bonds (rated AA or better) that coincide with the cash flows of the estimated benefit payouts from ATK's plans. The model uses a yield . . .

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