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ATK > SEC Filings for ATK > Form 10-Q on 7-Feb-2014All Recent SEC Filings

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Form 10-Q for ALLIANT TECHSYSTEMS INC


7-Feb-2014

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, timing of payments 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, firearms or accessories, 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, including foreign currency exchange rates and fluctuations in those rates,

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, including our ability to successfully integrate acquired businesses and realize anticipated synergies, cost savings and other benefits, 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 December 29, 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 December 29, 2013, ATK's three operating groups were:
Aerospace Group, which generated 27% of ATK's external sales in the nine months ended December 29, 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 35% of ATK's external sales in the nine months ended December 29, 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 38% of ATK's external sales in the nine months ended December 29, 2013, develops and produces commercial ammunition, accessories, rifles and shotguns for the hunting, shooting, law enforcement, outdoor and sporting markets.

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 December 29, 2013
Quarterly sales of $1.2 billion.

Diluted earnings per share of $2.46.

Orders for the quarter ended December 29, 2013 of $1.3 billion compared to $1.4 billion in the quarter ended December 30, 2012. Orders include orders in ATK's Sporting Group, which are cancelable and may not be indicative of future sales.

Total backlog of $7.6 billion at December 29, 2013 compared to $6.7 billion at December 30, 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.


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Income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest as a percentage of sales was 12.1% and 10.1% for the quarters ended December 29, 2013 and December 30, 2012, respectively. The increase was driven by increases in the Sporting Group, and lower pension expense.

The increase in the current quarter's tax rate to 32.7% from 31.9% in the quarter ended December 30, 2012 is primarily due to nondeductible acquisition-related costs and lower benefits from the domestic manufacturing deduction, partially offset by a favorable true-up of prior year taxes and extension of the federal R&D tax credit in 2013.

On November 1, 2013, ATK acquired Bushnell Group Holdings, Inc., a leading global designer, marketer and distributor of branded sports optics, outdoor accessories and performance eyewear, for $985,000 in cash, net of cash acquired, and subject to a customary working capital adjustment.

On November 1, 2013, ATK entered into a Third Amended and Restated Credit Agreement (the "2013 Senior Credit Facility"), which replaced the 2010 Senior Credit Facility and issued $300,000 aggregate principal amount of 5.25% Senior Notes ('the "5.25% Notes'') that mature on October 1, 2021 to pay for the Bushnell acquisition.

On November 5, 2013, ATK's Board of Directors declared a quarterly cash dividend of $0.26 per share to stockholders of record on November 20, 2013. The dividend was paid on December 12, 2013.

Other notable events for fiscal 2014

On January 29, 2014, ATK's Board of Directors declared a quarterly cash dividend of $0.32 per share, payable on March 27, 2014, to stockholders of record on March 4, 2014.

On January 29, 2014 ATK's Board of Directors extended the share repurchase program through March 31, 2015.

On June 21, 2013, ATK acquired Caliber Company, parent company of Savage Sports Corporation ("Savage"), a leading manufacturer of sporting long guns.

During the nine months ended December 29, 2013, ATK repurchased 609,922 shares for $52,130.

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.
The government budget structure remains constrained by the 2011 Budget Control Act which initially reduced the DoD topline 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 defense budget cuts of approximately $50 billion per year (or sequestration) beginning in March 2013. Until recently, Congress and the Administration had been unable to reach a broader fiscal agreement that would amend the Budget Control Act and avoid the impacts of sequestration. For GFY13, the first round of sequestration was triggered, reducing DoD accounts by $37 billion. The NASA budget was under similar sequestration pressure but had greater flexibility to manage the reductions across the portfolio and decided to preserve funding for key priorities such as the Space Launch System ("SLS").
In GFY14, the Administration faced the threat of an additional year of sequestration and deeper cuts requiring an additional reduction of $20 billion from the defense topline budget. The Budget Control Act Amendment adopted in December 2013 provided some relief to the deeper cuts required under sequestration in GFY14 and GFY15. For defense spending, the agreement effectively holds flat the topline budget at $499 billion for both GFY14 and GY15, providing over $30 billion in sequester relief. For NASA, similar relief provided for non-defense discretionary spending should allow the NASA budget to remain flat over the same period at approximately $17.5 billion annually. On January 17, 2014, Congress approved, and the President signed, the Omnibus Appropriations Act replacing the Continuing Resolution for the remainder of GFY14 and removing the threat of future government shutdowns. Consistent with the budget deal, the Omnibus Appropriations Act funds the DoD at $499 billion and replaces the across-the-board sequester


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cuts with specific reductions across most accounts. Total funding, and funding for most programs, remains flat at GFY13 levels. Overseas Contingency Operations funding was increased by $5 billion above the requested amount, providing some additional relief to the defense budget.

With the budget agreement now in place, sequestration (the after-the-fact across-the-board cuts) will be replaced in GFY15 with budget submissions expected to be in-line with these lower funding levels and programs adjusted to fit the lower expected funding levels. Budget pressures, such as rising personnel costs despite significant force reductions in the Army and Marine Corps, will present challenges to modernization and research and development accounts. ATK is preparing for a period where force reductions and a winding-down of overseas contingency operations, coupled with reduced training cycles and fairly healthy inventory levels for many ammunition and missile items, will result in less demand in some categories of products.
Given the lack of details provided by the DoD of how it plans to implement the new budget deal, and the expected delay in submission of the GFY15 budget plan, ATK is unable to predict the impact, which could be material, on its programs or financial outlook beyond FY14, including our revenues, operating earnings and margins, cash flow, orders and backlog and recovery of long-lived assets. Further refinement of these assessments will be made after reviewing the Administration's budget submission, expected in March 2014.
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.
The Bipartisan Budget Act of 2013, which was signed by President Obama on December 26, 2013, reduced the allowable compensation costs for employees of government contractors to $487 thousand from the current level of $952 thousand. This Act will limit the amount of compensation that ATK can propose and bill on contracts awarded after the law is codified into the Federal Acquisition Regulation, expected to be sometime within the next 12 months. This new limit will be phased in as old contracts that are subject to the old limit are completed and new contracts subject to the new limit are received. Once fully phased in, ATK believes this Act will reduce the amount of cost ATK can bid and collect.

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


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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, Loss on Extinguishment of Debt, 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 acquisition 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 $116,908 for fiscal year 2014 and $53,920 for the quarter ended December 29, 2013 and income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest of approximately $18,887 for fiscal year 2014 and $13,266 for the quarter ended December 29, 2013 associated with the operations of this acquired business which reflects the expense of the inventory step-up cost of $0 and $9,000 for inventory sold in the quarter and nine months ended December 29, 2013, respectively.

On November 1, 2013, ATK acquired Bushnell Group Holdings, Inc. Bushnell is a leading global designer, marketer and distributor of branded sports optics, outdoor accessories and performance eyewear. The purchase price was $985,000 in cash, subject to customary post-closing adjustments expected to be settled in fiscal 2014. ATK believes the acquisition will broaden our existing capabilities in the commercial shooting sports market and expand our portfolio of branded shooting sports products. In addition, this transaction will enable the Company to enter new sporting markets in golf and snow skiing. ATK will leverage Bushnell's strong sourcing, marketing, branding and distribution capabilities and capitalize on Bushnell's track record of successfully integrating acquisitions and delivering profitable growth. Bushnell employs approximately 1,100 employees and will be included in the Sporting Group. The purchase price allocation will be completed within 12 months of the acquisition date. A portion of the goodwill generated in this acquisition will be deductible for tax purposes.

ATK will use the acquisition method of accounting to account for this acquisition and, accordingly, the results of Bushnell will be included in ATK's consolidated financial statements at the date of acquisition. Subsequent to November 1, 2013, ATK has recorded sales of approximately $85,074 for the quarter and nine months ended December 29, 2013, and income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest of approximately $3,123 for the quarter and nine months ended December 29, 2013 associated with the operations of this acquired business which reflects transition costs and the expense of the inventory step-up cost of $1,377 for inventory sold in the quarter and nine months ended December 29, 2013. The income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest excludes transaction costs of $10,200 for the quarter ended December 29, 2013. Pro forma financial statement information has been included within Footnote 4.


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There were no acquisitions during fiscal 2013. Sales
The military small-caliber ammunition contract, which is reported within the Defense Group, contributed approximately 16% of total external sales during the nine months ended December 30, 2012. No contract contributed more than 10% of total external sales during the nine months ended December 29, 2013. The following is a summary of each operating segment's sales:

                                               Quarters Ended                                                       Nine Months Ended
                      December 29, 2013     December 30, 2012     $ Change     % Change     December 29, 2013     December 30, 2012     $ Change     % Change
Aerospace Group      $         318,078     $         305,050     $  13,028        4.3  %   $         944,669     $         920,062     $  24,607        2.7  %
Defense Group                  455,249               508,155       (52,906 )    (10.4 )%           1,401,966             1,575,173      (173,207 )    (11.0 )%
Sporting Group                 524,228               294,127       230,101       78.2  %           1,303,894               857,580       446,314       52.0  %
Eliminations                   (89,151 )             (51,150 )     (38,001 )     74.3  %            (221,003 )            (144,544 )     (76,459 )     52.9  %
Total external sales $       1,208,404     $       1,056,182     $ 152,222       14.4  %   $       3,429,526     $       3,208,271     $ 221,255        6.9  %

The fluctuation in sales was driven by the program-related changes within the operating segments as described below.
Quarter:
Aerospace Group. The increase in sales was primarily driven by:
a $13,900 increase in Space System Operations due to increased activity on classified programs and

a $6,200 increase in the Aerospace Structures division due to increased production on commercial aircraft programs.

These increases were partially offset by a decrease of $9,500 in the Space Components division due to lower production volumes. Defense Group. The decrease in sales was primarily driven by:
a $32,100 decrease in Armament Systems division due to lower volumes on medium-caliber ammunition programs and completion of programs and

a $17,700 decrease in Small Caliber Systems due to reduced volume as programs neared completion and impacts from federal budget reductions.

Sporting Group. The increase in sales was primarily driven by:
a $139,000 increase due to the acquisition of Bushnell and Savage and

a $91,700 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.

Corporate. The increase in intergroup eliminations is due to increased intergroup sales within the Defense Group. Nine Months:
Aerospace Group. The increase in sales was primarily driven by:
a $16,700 increase in Space System Operations due to increased activity on classified programs and

a $9,000 increase in Aerospace Structures Division due to increased production on commercial aircraft programs.

Defense Group. The decrease in sales was primarily driven by:


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a $70,000 decrease in Small Caliber Systems due to reduced volume as programs neared completion and impacts from federal budget reductions,

a $63,700 decrease in Armament Systems driven by lower volumes on medium-caliber ammunition programs and completion of programs, and

a $36,600 decrease in Missile Products driven by the loss of the Radford facility management contract.

Sporting Group. The increase in sales was primarily driven by:
a $244,300 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

a $202,000 increase due to the acquisition of Bushnell and 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                                                        Nine Months Ended
                        December 29, 2013     December 30, 2012     $ Change      % Change      December 29, 2013     December 30, 2012     $ Change      % Change
Aerospace Group        $         254,077     $         238,437     $  15,640          6.6  %   $         746,355     $         713,781     $  32,574         4.6  %
Defense Group                    360,987               403,907       (42,920 )      (10.6 )%           1,105,062             1,217,576      (112,514 )      (9.2 )%
. . .
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