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ATK > SEC Filings for ATK > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for ALLIANT TECHSYSTEMS INC

Form 10-Q for ALLIANT TECHSYSTEMS INC


7-Aug-2013

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 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 and firearms, 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. 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, 2013. Additional information regarding these factors may be contained in ATK's subsequent filings with the Securities and Exchange Commission, including 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, rifles and shotguns, 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 June 30, 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 June 30, 2013, ATK's three operating groups were:
Aerospace Group, which generated 28% of ATK's external sales in the quarter ended June 30, 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 39% of ATK's external sales in the quarter ended June 30, 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 33% of ATK's external sales in the quarter ended June 30, 2013, develops and produces commercial ammunition, accessories and tactical systems, and hunting rifles and shotguns.

Financial Highlights and Notable Events
Certain notable events or activities affecting our fiscal 2014 financial results included the following:
Financial highlights for the quarter ended June 30, 2013
Quarterly sales of $1.1 billion.

Diluted earnings per share of $2.24.

Orders for the quarter ended June 30, 2013 of $1.4 billion compared to $1.1 billion in the quarter ended July 1, 2012. 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 exceeds actual customer requirements.

Total backlog of $8.5 billion at June 30, 2013 compared to $6.1 billion at July 1, 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 exceeds actual customer requirements.

Income before interest, income taxes, and noncontrolling interest as a percentage of sales was 11.6% and 12.1% for the quarters ended June 30, 2013 and July 1, 2012, respectively. The prior year rate reflects the increased production volume and gain on sale of residual assets as a result of the loss of the Radford facility management contract.


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The decrease in the current period tax rate to 35.5% from 36.1% in the quarter ended July 1, 2012 is primarily due the expiration of the federal R&D tax credit in the prior year (which was subsequently extended), partially offset by current year nondeductible acquisition-related costs.

On June 21, 2013, ATK acquired Caliber Company, the parent company of Savage Sports Corporation, for $315,000 in cash, net of cash acquired, and subject to a customary working capital adjustment.

On June 21, 2013, ATK borrowed $200,000 against its $600,000 Revolving Credit Facility to fund the purchase of Savage.

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

Notable events
During the quarter ended June 30, 2013, ATK repurchased 321,596 shares for $24,322

On July 31, 2013, ATK's Board of Directors declared a quarterly cash dividend of $0.26 per share, payable on September 26, 2013, to stockholders of record on September 4, 2013.

ATK's Board of Directors appointed Jay Tibbets Senior Vice President and President Sporting Group effective July 31, 2013.

ATK's Board of Directors appointed Stephen Nolan Senior Vice President Strategy and Business Development effective July 31, 2013.

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. This 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. Congress and the Administration have been unable to reach a broader fiscal agreement that would amend the Budget Control Act, and in March of 2013 passed the FY13 Appropriations Act, triggering sequestration. In June, the DoD Comptroller issued guidance on the specific level of reductions required by each department and agency for each program and the funding sources available. For GFY13, the total reduction required in the DoD accounts is $37 billion. The NASA budget is under similar sequestration pressure but has greater flexibility to manage the reductions across the portfolio. In addition, the DoD has taken the position that any additional reductions in GFY14 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, the lack of specifics on if, or how, sequestration cuts will be implemented in GFY14, and how these same factors will be decided as Congress considers the GFY 2014 budget, we are unable to predict the impact, which could be material, on our programs or financial outlook beyond FY14, 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.


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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, 2013 ("fiscal 2013"). The accounting policies used in preparing ATK's interim fiscal 2014 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, 2013. Results of Operations
The following information should be read in conjunction with ATK's consolidated financial statements. The key performance indicators that ATK's management uses in managing the business are sales, income before interest and income taxes, and cash flows.
Group total net Sales, Cost of Sales, and Income before Interest, Income Taxes, and Noncontrolling Interest include intergroup sales and profit. Corporate and Eliminations includes intergroup sales and profit eliminations and corporate expenses.
Acquisitions

On June 21, 2013, ATK acquired Caliber Company, parent company of Savage Sports Corporation ("Savage"), a leading manufacturer of sporting long guns. Operating under the brand names of Savage Arms, Stevens and Savage Range Systems, the company designs, manufactures and markets centerfire and rimfire rifles, shotguns and shooting range systems used for hunting as well as competitive and recreational target shooting. The purchase price was $315,000 net of cash acquired, and is subject to purchase price adjustments expected to be settled in fiscal 2014. ATK believes the acquisition will complement ATK's growing portfolio of leading consumer brands and will allow us to build upon our offerings with Savage's prominent, respected brands known for accuracy, quality, innovation, value and craftsmanship. Savage's sales distribution channels, new product development, and sophistication in manufacturing will significantly increase ATK's presence with a highly relevant product offering to distributors, retailers and consumers. Savage employs approximately 600 employees and is included in the Sporting Group. The purchase price allocation will be completed in fiscal 2014. None 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 Savage are included in ATK's consolidated financial statements at the date of acquisition. The purchase price for the acquisition will be allocated to the acquired assets and liabilities based on estimated fair value. Pro forma information on the results of operations for fiscal 2013 as if the acquisition had occurred at the beginning of fiscal 2013 is not being presented because the acquisition is not material to ATK for that purpose. Subsequent to June 21, 2013 ATK has recorded sales of approximately $6,400 and income before interest, income taxes, and noncontrolling interest of approximately $700 associated with the operations of this acquired business.

There were no acquisitions during fiscal 2013. Sales
The military small-caliber ammunition contract, which is reported within Defense Group, contributed approximately 15% and 16% of total external sales during the quarters ended June 30, 2013 and July 1, 2012, respectively.


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

                              Quarters Ended
                      June 30, 2013      July 1, 2012     $ Change    % Change
Aerospace Group      $      307,188     $    299,942     $  7,246        2.4  %
Defense Group               474,816          546,170      (71,354 )    (13.1 )%
Sporting Group              358,310          278,964       79,346       28.4  %
Eliminations                (61,571 )        (42,775 )    (18,796 )     43.9  %
Total external sales $    1,078,743     $  1,082,301     $ (3,558 )     (0.3 )%

The fluctuation in sales was driven by the program-related changes within the operating segments as described below.
Aerospace Group. The increase in sales was driven by an $11,400 increase in Space Components Division sales volumes due to increased production across multiple programs. This decrease was partially offset by a decrease in Space Systems Operations due to completion of the Space Shuttle Program. Defense Group. The decrease in sales was driven by:
a decrease of $49,200 in Missile Products driven by the loss of the Radford facility management contract, and

a decrease of $27,700 in Armament Systems driven by lower volumes on medium-caliber ammunition programs, and completion of programs.

Sporting Group. The increase in sales was driven by:
a $76,400 increase in ammunition and accessories products driven by increased volume and previously announced price increases for ammunition, partially offset by a reduction in military accessories due to completion of programs, and

an increase of $6,400 due to the acquisition of Savage.

Corporate. The increase in intergroup eliminations is due to increased intergroup sales within the Defense Group. Cost of Sales
The following is a summary of each operating segment's cost of sales:

                                 Quarters Ended
                        June 30, 2013      July 1, 2012      $ Change    % Change
Aerospace Group        $      241,934     $     230,920     $ 11,014        4.8  %
Defense Group                 369,327           404,695      (35,368 )     (8.7 )%
Sporting Group                274,439           223,172       51,267       23.0  %
Corporate/Eliminations        (48,969 )         (26,108 )    (22,861 )     87.6  %
Total cost of sales    $      836,731     $     832,679     $  4,052        0.5  %

The fluctuation in cost of sales was driven by the program-related changes within the operating segments as described below.
Aerospace Group. The increase in cost of sales was driven by a $12,900 increase in Space Components Division due to increased production across multiple programs.
Defense Group. The decrease in cost of sales was driven by:
a decrease of $19,500 in Missile Products driven by the loss of the Radford facility management contract, and

a $17,900 decrease in Armament Systems driven by lower volumes on medium-caliber ammunition programs and completion of programs.

Sporting Group. The increase in cost of sales was driven by:


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a $46,600 increase in ammunition and accessories products driven by an increase in ammunition sales volume, and facility rationalization costs partially offset by product mix and a reduction in military accessories due to completion of programs, and

a $4,700 increase due to the acquisition of Savage.

Corporate. The increase in cost of sales was driven increased intercompany transaction eliminations partially offset by lower pension expense.

Operating Expenses
                                                    Quarters Ended
                                                  As a %                          As a %
                              June 30, 2013      of Sales      July 1, 2012      of Sales      $ Change
Research and development    $        10,425          1.0 %   $       14,008          1.3 %   $   (3,583 )
Selling                              42,764          4.0 %           40,527          3.7 %        2,237
General and administrative           63,198          5.9 %           64,399          6.0 %       (1,201 )
Total                       $       116,387         10.9 %   $      118,934         11.0 %   $   (2,547 )

Operating expenses decreased by $2,547 from the prior year period. Research and development costs decreased from the prior year period due to timing of expenditures in Space Systems Operations. Selling expenses increased primarily due to increased commissions as result of increased sales in the Sporting Group. General and administrative costs decreased due to cost management. Income before Interest, Income Taxes, and Noncontrolling Interest

                                 Quarters Ended
                        June 30, 2013      July 1, 2012       Change
Aerospace Group        $       37,086     $      34,950     $  2,136
Defense Group                  62,088            91,361      (29,273 )
Sporting Group                 44,117            20,794       23,323
Corporate/Eliminations        (17,666 )         (16,417 )     (1,249 )
Total                  $      125,625     $     130,688     $ (5,063 )

The decrease in income before interest, income taxes, and noncontrolling interest was due to decreased sales. Significant changes within the operating segments are also described below.
Aerospace Group. The increase was driven by improved profit expectations for a Space Systems Operations program.
Defense Group. The decrease is due to the lack of a gain on the sale of residual assets as a result of the loss of the Radford facility management contract, partially offset by performance improvements as the current contracts for the Lake City Army Ammunition Plant near completion.
Sporting Group. The increase primarily reflects higher sales volumes and prices, as well as product mix. This is partially offset by lower military accessories sales and facility rationalization costs.
Corporate. The income before interest, income taxes, and noncontrolling interest primarily reflects expenses incurred for administrative functions that are performed centrally at the corporate headquarters, the difference between pension and postretirement benefit expense calculated under Financial Accounting Standards (FAS) and the expense calculated under U.S. Cost Accounting Standards (CAS), and the elimination of intercompany profits. The change from the prior year is driven by acquisition related costs and increased intercompany transaction eliminations, partially offset by lower pension expenses. 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


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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 June 30, 2013 and July 1, 2012, the Company recognized favorable operating income adjustments of $57,927 and $85,692, and unfavorable operating income adjustments of $31,917 and $39,999, respectively. The current quarter adjustments were primarily driven by performance improvements as the current contracts for the Lake City Army Ammunition Plant near completion and improved profit expectations for a Space Systems Operations program. The prior year quarter adjustments were primarily driven by greater than expected performance at the Radford facility due to increased production volumes, a gain on the sale of residual assets, and changes in estimates as contracts near completion in energetic and small-caliber systems programs.
Net Interest Expense
Net interest expense for the quarter ended June 30, 2013 was $13,823, a decrease of $5,927 compared to $19,750 in the comparable quarter of fiscal 2013. The decrease was primarily due to a decrease in the average amount of debt outstanding and a lower weighted average interest rate.

Income Tax Provision
                                            Quarters Ended
                                        Effective                      Effective
                      June 30, 2013        Rate       July 1, 2012        Rate       $ Change
Income tax provision $        39,661        35.5 %   $       39,997        36.1 %   $    (336 )

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 June 30, 2013 and July 1, 2012 represent effective tax rates of 35.5% and 36.1%, respectively. The decrease in . . .

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