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ATK > SEC Filings for ATK > Form 10-K on 23-May-2014All Recent SEC Filings

Show all filings for ALLIANT TECHSYSTEMS INC

Form 10-K for ALLIANT TECHSYSTEMS INC


23-May-2014

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, timing of payments and budgetary policies, including impacts of sequestration under the Budget Control Act of 2011, and sourcing strategies,

intense competition for U.S. Government contracts and programs,

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

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

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

the novation of U.S. Government contracts,

intense competition in the commercial ammunition, firearms, and accessories markets,

reduction or change in demand and manufacturing costs for commercial ammunition, firearms or accessories, including the risk that placed orders exceed actual customer requirements,

changes in the regulation of the manufacture, sale and purchase of firearms and ammunition could adversely affect ATK,

the manufacture and sale of products that create exposure to potential product liability, warranty liability or personal injury claims and litigation,

risks associated with expansion into new and adjacent commercial markets,

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, including the announced spin-off of the Sporting Group and ATK's merger with Orbital Sciences Corporation,

greater risk associated with international business, including foreign currency exchange rates and fluctuations in those rates,

federal and state regulation of defense products, ammunition, and firearms,

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

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,

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands except share and per share data and unless otherwise indicated)


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,

new regulations related to conflict minerals,

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,

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 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, firearms and shooting accessories and, with the Bushnell acquisition, ATK has become a leader in the hunting, shooting sports, and outdoor recreation markets. ATK is headquartered in Arlington, VA and has operating locations throughout the United States, Puerto Rico, and internationally.
As of March 31, 2014, 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, 2014, ATK's three operating groups were:
Aerospace Group, which generated 26% of ATK's external sales in fiscal 2014, 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 fiscal 2014, 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 39% of ATK's external sales in fiscal 2014, develops and produces 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 fiscal 2014
Annual sales of $4,775,128.

Diluted earnings per share of $10.42.

Total orders of $5,804,567.


Total backlog of $7,605,000 at March 31, 2014 compared to $8,227,000 at March 31, 2013.

Income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest as a percentage of sales was 12.4% and 10.8% for the years ended March 31, 2014 and 2013, respectively. The current year rate reflects lower pension expense including the effect of the Radford segment close-out and improvements in the Sporting Group. The prior year rate reflects the loss of the Radford facility management contract.

The increase in the current period tax rate to 33.2% from 30.6% in fiscal 2013 is primarily due to the absence of the settlement of the examination of the fiscal 2009 and 2010 tax returns, partially offset by the revaluation of unrecognized tax benefits due to proposed IRS regulations.

ATK recorded sales and profit of $27,387 in the fourth quarter of fiscal 2014 for a pension segment close-out associated with the Radford facility contract which ended in fiscal 2013.

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 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, refinancing of the 2010 Senior Credit facility, and payment of debt financing costs.

During fiscal 2014, ATK paid quarterly cash dividends of $0.26 per share for the first, second, and third quarters and $0.32 for the fourth quarter, totaling $35,134.

Notable events
During fiscal 2014, ATK repurchased 609,922 shares for $52,130.

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

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

On February 26, 2014, Michael Callahan was elected as an independent director to ATK's Board of Directors and appointed to its Audit Committee, effective March 1, 2014.

On May 6, 2014, ATK's Board of Directors declared a quarterly cash dividend of $0.32 per share, payable on June 26, 2014, to stockholders of record on June 2, 2014.

Outlook
Transaction Agreement - On April 28, 2014, we entered into a Transaction Agreement (the "Transaction Agreement") with Vista SpinCo Inc., a Delaware corporation and a wholly owned subsidiary of ATK ("Sporting"), Vista Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of ATK, and Orbital Sciences Corporation, a Delaware corporation ("Orbital"), providing for the spin-off of our Sporting Group business to our stockholders (the "Distribution"), which will be immediately followed by the merger of Vista Merger Sub Inc. with and into Orbital (the "Merger" and together with the Distribution, the "Transaction"), with Orbital surviving the Merger as a wholly owned subsidiary of ATK. This transaction is subject to stockholder approval prior to closing.

On April 28, 2014, ATK's Sporting Group, ATK and certain financial institutions executed a commitment letter pursuant to which the financial institutions have agreed to provide debt financing to Sporting in an aggregate principal amount of $750 million, comprised of a $350 million senior secured term loan and a $400 million senior secured revolving credit facility, in each case on the terms and conditions set forth therein. Sporting will use a portion of the proceeds of the debt financing to pay a cash dividend (the "Sporting Dividend") to ATK in an amount equal to the amount by which ATK's gross indebtedness for borrowed money as of the closing date exceeds $1,740 million, subject to certain adjustments. ATK expects to use the proceeds


of the Sporting Dividend to repay a portion of ATK's debt including the 6.875% Senior Subordinated Notes due 2020 and 3.00% Convertible Senior Subordinated Notes due 2024.

In connection with the transaction, ATK intends, at the time such notes become redeemable at ATK's option, to issue a notice of redemption with respect to any outstanding 3.00% Convertible Senior Subordinated Notes due 2024 (the "2024 Notes") in accordance with the redemption provisions of the indenture governing the 2024 Notes. ATK has agreed to settle any 2024 Notes that are converted (whether prior to or following ATK's notice of redemption) entirely in cash. 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 GFY15, providing over $30 billion in sequestration 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 during the year. Consistent with the budget deal, the Omnibus Appropriations Act funds the DoD at $499 billion and replaces the across-the-board sequestration 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. Initial review of the GFY15 President's Budget submissions is in line with expectations and ATK FY15 plans. ATK continues to monitor potential impacts as the Congressional budget review and annual appropriations process gets underway. Final decisions on GFY15 annual appropriations would not be expected before ATK's third quarter of fiscal 2015 and may be subject to a Continuing Resolution at current levels pending political outcomes in November 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 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
A substantial portion of our sales come 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:

                                        Percent of Sales
                                     For Fiscal Years Ended:
                                   2014        2013       2012
Sales to:
U.S. Army                           20 %        29 %        28 %
U.S. Navy                           10 %        13 %        12 %
NASA                                 9 %        10 %        10 %
U.S. Air Force                       4 %         6 %         6 %
Other U.S. Government customers     10 %         9 %         9 %
Total U.S. Government customers     53 %        67 %        65 %
Commercial and foreign customers    47 %        33 %        35 %
Total                              100 %       100 %       100 %

Long-Term Contracts-The majority of ATK's sales to the U.S. Government and commercial and foreign customers within the Defense and Aerospace groups 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 an 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 2014, 2013 and 2012, the Company recognized favorable operating income adjustments of $210,920, $215,945, and $187,718, and unfavorable operating income adjustments of $127,574, $122,568 and $80,745, 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, 2014 were primarily driven by higher profit expectations of $41,357 in the Small Caliber Systems division due to operational efficiencies, a successful in-sourcing initiative, and reduced operational risk as a contract nears completion, and for programs in the Space Systems Operations. As a result of the pension close-out settlement, 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) for the Radford facility management contract resulted in Corporate recording income of $28,986 which has been excluded from the increase in operating income resulting from the cumulative catch-up method of accounting noted above.
The prior year adjustments were primarily driven by greater than expected performance of $28,261 in Small-Caliber Systems, increased production volumes in 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.
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 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 and price discounts.
Fiscal 2014 sales by revenue recognition method were as follows:

                            Percent
                           of Sales
Sales recorded under:
Long-term contracts method     61 %
Other method                   39 %
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 . . .

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