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ATK > SEC Filings for ATK > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for ALLIANT TECHSYSTEMS INC

Form 10-Q for ALLIANT TECHSYSTEMS INC


8-Aug-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 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,


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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 the Company's 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,

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. 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, 2014. 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 the Company's 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.


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As of June 29, 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 June 29, 2014, ATK's three operating groups were:
Aerospace Group, which generated 26% of ATK's external sales in the quarter ended June 29, 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 30% of ATK's external sales in the quarter ended June 29, 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 44% of ATK's external sales in the quarter ended June 29, 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 the Company's fiscal 2015 financial results included the following:
Financial highlights for the quarter ended June 29, 2014
Quarterly sales of $1,275,391.

Diluted earnings per share of $2.59.

Orders for the quarter ended June 29, 2014 of $1,318,550 compared to $1,386,530 in the quarter ended June 30, 2013.

Total backlog of $7,482,000 at June 29, 2014 compared to $8,489,000 at June 30, 2013.

Income before interest, income taxes, and noncontrolling interest as a percentage of sales was 12.2% and 11.6% for the quarters ended June 29, 2014 and June 30, 2013, respectively. The increase was driven by increases in the Sporting Group, and lower pension expense.

The decrease in the current quarter's tax rate to 35.2% from 35.5% in the quarter ended June 30, 2013 is primarily due to nondeductible acquisition-related costs in the prior year offset by the absence of the Federal R&D tax credit in the current year.

ATK recorded a $10,623 facility rationalization charge in connection with the consolidation of the Eden Prairie, Minnesota corporate facility.

Other notable events for fiscal 2015

On July 30, 2014, ATK's Board of Directors declared a quarterly cash dividend of $0.32 per share, payable on September 25, 2014, to stockholders of record on September 3, 2014.

On April 28, 2014, ATK entered into a Transaction Agreement to spin-off the Sporting Group business and merge the remaining Aerospace and Defense Group businesses with Orbital Sciences Corporation. This transaction is subject to stockholder approval prior to closing.

In July 2014, ATK purchased $187,635 of its outstanding 3.00% convertible notes, for which ATK paid $337,988, including accrued interest. ATK then announced an offer to repurchase the remaining notes on August 15, 2014, as well as ATK's election to redeem any then remaining notes on August 20, 2014, in cash, for 100% of the principal amount plus any accrued but unpaid interest.

In July 2014, under the terms of the Senior Credit Facility, ATK exercised an option to increase the Term A Loan by $150,000 (the "Accordion") and also repaid $50,000 of its Term B Loan.


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Outlook

Transaction Agreement - On April 28, 2014, ATK 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 tax-free spin-off of the Sporting Group business to ATK stockholders (the "Distribution"), which will be immediately followed by the tax-free 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 $750,000, comprised of a $350,000 senior secured term loan and a $400,000 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 $1,740,000, 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.

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 $490,000,000 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 $50,000,000 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 Government Fiscal Year 2013 (GFY13), the first round of sequestration was triggered, reducing DoD accounts by $37,000,000. 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 potential for 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 more than $30,000,000 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 $17,500,000 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 funded the DoD at $499,000,000 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 $5,000,000 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.
The GFY15 President's Budget submission, and Congressional action to date, is in line with expectations and ATK FY15 plans. ATK has engaged with relevant offices and committees to assess issues and monitor the authorization and appropriations processes. Final decisions on the GFY15 annual appropriations will not occur before ATK's FY15 third quarter. A Continuing Resolution at current funding levels is almost certain to extend through November 2015, and may extend into the next calendar year (ATK FY15 fourth quarter) pending election outcomes in November 2014.


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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, 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 a 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 from previous level of $952. The limit will be adjusted annually to reflect the change in the Employment Cost Index for all workers as calculated by the Bureau of Labor Statistics. This Act limits the amount of compensation that ATK can propose and bill on contracts. The interim implementing rule was published in the Federal Register on June 24, 2014, and is effective for all contracts awarded after that date. 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 by approximately $9,000 per year.
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, 2014 ("fiscal 2014"). The accounting policies used in preparing ATK's interim fiscal 2015 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, 2014. 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


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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 the settlement of purchase price adjustments. ATK believes the acquisition complements ATK's growing portfolio of leading consumer brands and has allowed the Company to build upon its 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 ATK's Sporting Group. The purchase price allocation was completed during the first quarter of fiscal 2015. 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 has been allocated to the acquired assets and liabilities based on estimated fair value. Pro forma information on the results of operations for fiscal 2014 as if the acquisition had occurred at the beginning of fiscal 2014 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 $41,847 and $6,400 for the quarters ended June 29, 2014 and June 30, 2013 respectively, and income before interest, income taxes, and noncontrolling interest of approximately $7,521 and $700 for the quarters ended June 29, 2014 and June 30, 2013 associated with the operations of this acquired business. The June 30, 2013 income before interest, income taxes, and noncontrolling interest reflects the expense of a portion of the $12,000 inventory step-up cost.

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. ATK believes the acquisition broadened the Company's existing capabilities in the commercial shooting sports market and expands ATK's portfolio of branded shooting sports products. In addition, this transaction enables 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 is included in ATK's 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 used the acquisition method of accounting to account for this acquisition and, accordingly, the results of Bushnell was included in ATK's consolidated financial statements at the date of acquisition. Subsequent to November 1, 2013, ATK has recorded sales of approximately $124,778 for the quarter ended June 29, 2014, and income before interest, income taxes, and noncontrolling interest of approximately $5,321 for the quarter ended June 29, 2014 associated with the operations of this acquired business. Pro forma financial statement information has been included within Footnote 4.

There were no acquisitions during the first quarter of fiscal 2015. Sales
The military small-caliber ammunition contract, which is reported within the Defense Group, contributed approximately 15% of total external sales during the quarter ended June 30, 2013. No contract contributed more than 10% of total external sales during the quarter ended June 29, 2014. The following is a summary of each operating segment's sales:

                                            Quarters Ended
                      June 29, 2014      June 30, 2013      $ Change     % Change
Aerospace Group      $      332,920     $      307,188     $  25,732        8.4  %
Defense Group               442,151            474,816       (32,665 )     (6.9 )%
Sporting Group              563,612            358,310       205,302       57.3  %
Eliminations                (63,292 )          (61,571 )      (1,721 )      2.8  %
Total external sales $    1,275,391     $    1,078,743     $ 196,648       18.2  %

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 primarily driven by:


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a $24,700 increase in Aerospace Structures division due to increased production on commercial aircraft programs.

a $11,300 increase in the Space Systems Operations division due to new commercial programs partially offset by a decrease in classified programs.

These increases were partially offset by a decrease of $14,100 in the Space Components division due to lower production volumes.
Defense Group. The decrease in sales was primarily driven by a $31,400 decrease in Small Caliber Systems due to reduced volume as Company transitions to a new contract and impacts from federal budget reductions. Sporting Group. The increase in sales was primarily driven by:
a $160,200 increase due to the acquisition of Bushnell and Savage and

a $45,000 increase in ammunition and accessories products driven by increased volume for ammunition, partially offset by a reduced volume in accessories.

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

                                              Quarters Ended
                        June 29, 2014      June 30, 2013      $ Change     % Change
Aerospace Group        $      265,345     $      241,934     $  23,411        9.7  %
Defense Group                 356,637            369,327       (12,690 )     (3.4 )%
Sporting Group                415,725            274,439       141,286       51.5  %
Corporate/Eliminations        (72,901 )          (48,969 )     (23,932 )     48.9  %
Total cost of sales    $      964,806     $      836,731     $ 128,075       15.3  %

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 primarily driven by:
a $22,700 increase in the Aerospace Structures division due to increased production on commercial aircraft programs and

an $12,600 increase in the Space Systems Operations division due to new commercial programs and the absence of improved profit expectations in the prior year quarter, partially offset by a decrease in classified programs.

These increases were partially offset by a decrease of $10,300 in the Space Components division due to lower production volumes.
Defense Group. The decrease in cost of sales was primarily driven by:
a $6,200 decrease in Small Caliber Systems due to reduced volume as programs neared completion and impacts from federal budget reductions, partially offset by absence of improved profit expectations in the prior year quarter, and

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