UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 1-10582

 

 

Alliant Techsystems Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware		41-1672694
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
5050 Lincoln Drive Edina, Minnesota		55436-1097
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (952) 351-3000

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý   No o

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý   No o

 

As of October 29, 2004, 37,678,884 shares of the Registrant’s common stock, par value $.01 per share, were outstanding.

 

 

TABLE OF CONTENTS

 

PART I – Financial Information
Item 1.  Financial Statements
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
Item 4.  Controls and Procedures
PART II – Other Information
Item 1.  Legal Proceedings
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.  Defaults Upon Senior Securities
Item 4.  Submission of Matters to a Vote of Security Holders
Item 5.  Other Information
Item 6.  Exhibits
Signatures
Exhibit Index

 

2

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CONSOLIDATED INCOME STATEMENTS

(Unaudited)

 

		QUARTERS ENDED						SIX MONTHS ENDED
(In thousands except per share data)		October 3, 2004			September 28, 2003			October 3, 2004			September 28, 2003
Sales		$	673,050		$	566,551		$	1,317,445		$	1,125,689
Cost of sales		552,472			446,947			1,084,029			884,990
Gross profit		120,578			119,604			233,416			240,699
Operating expenses:
Research and development		7,513			8,294			13,482			16,375
Selling		16,302			16,328			34,144			30,736
General and administrative		35,317			25,302			66,005			55,896
Total operating expenses		59,132			49,924			113,631			103,007
Income before interest, income taxes, and minority interest		61,446			69,680			119,785			137,692
Interest expense		(15,549		)	(15,133		)	(30,532		)	(30,178		)
Interest income		388			168			483			368
Income before income taxes and minority interest		46,285			54,715			89,736			107,882
Income tax provision		16,369			17,873			32,120			38,076
Income before minority interest		29,916			36,842			57,616			69,806
Minority interest, net of income taxes		18			195			144			255
Net income		$	29,898		$	36,647		$	57,472		$	69,551
Earnings per common share:
Basic		$	0.80		$	0.95		$	1.53		$	1.80
Diluted		0.78			0.93			1.51			1.77

 

See Notes to the Consolidated Financial Statements.

 

3

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In thousands except share data)		October 3, 2004			March 31, 2004
ASSETS
Current assets:
Cash and cash equivalents		$	95,879		$	56,891
Net receivables		612,458			528,848
Net inventories		126,715			134,676
Deferred income tax asset		58,444			53,105
Other current assets		27,755			32,165
Total current assets		921,251			805,685
Net property, plant, and equipment		459,309			465,786
Goodwill		1,173,551			1,063,711
Prepaid and intangible pension assets		317,683			331,860
Deferred income tax asset		17,476			38,940
Deferred charges and other non-current assets		182,330			127,347
Total assets		$	3,071,600		$	2,833,329
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	4,000		$	4,000
Accounts payable		120,836			142,941
Contract advances and allowances		35,403			46,221
Accrued compensation		86,484			117,333
Accrued income taxes		50,447			10,278
Other accrued liabilities		137,289			107,618
Total current liabilities		434,459			428,391
Long-term debt		1,274,000			1,076,000
Postretirement and postemployment benefits liability		215,436			218,755
Minimum pension liability		401,314			401,314
Other long-term liabilities		129,646			144,669
Total liabilities		2,454,855			2,269,129
Contingencies (Note 11)
Common stock - $.01 par value
Authorized – 90,000,000 shares
Issued and outstanding 37,672,127 shares at October 3, 2004 and 37,439,972 at March 31, 2004		416			416
Additional paid-in-capital		446,248			468,044
Retained earnings		678,571			621,099
Unearned compensation		(1,623		)	(1,015		)
Accumulated other comprehensive income		(261,153		)	(263,687		)
Common stock in treasury, at cost, 3,884,971 shares held at October 3, 2004 and 4,117,126 shares held at March 31, 2004		(245,714		)	(260,657		)
Total stockholders’ equity		616,745			564,200
Total liabilities and stockholders’ equity		$	3,071,600		$	2,833,329

 

See Notes to the Consolidated Financial Statements.

 

4

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		SIX MONTHS ENDED
(In thousands)		October 3, 2004			September 28, 2003
Operating activities
Net income		$	57,472		$	69,551
Adjustments to net income to arrive at cash provided by operating activities:
Depreciation		32,949			30,811
Amortization of intangible assets and unearned compensation		4,667			2,675
Deferred income tax		(1,604		)
Loss (gain) on disposal of property		2,102			(497		)
Minority interest, net of income taxes		144			255
Changes in assets and liabilities:
Net receivables		(65,570		)	5,181
Net inventories		13,411			6,269
Accounts payable		(25,461		)	(17,424		)
Contract advances and allowances		(12,275		)	(10,055		)
Accrued compensation		(34,018		)	(18,700		)
Accrued income taxes		42,327			35,333
Accrued environmental		138			(643		)
Pension and other postretirement benefits		10,858			(40,535		)
Other assets and liabilities		17,582			7,422
Cash provided by operating activities		42,722			69,643
Investing activities
Capital expenditures		(24,603		)	(19,103		)
Acquisition of business		(164,198		)
Proceeds from the disposition of property, plant, and equipment		289			1,627
Cash used for investing activities		(188,512		)	(17,476		)
Financing activities
Payments made on bank debt		(2,000		)	(25,571		)
Proceeds from issuance of long-term debt		200,000
Payments made for debt issue costs		(5,567		)
Net purchase of treasury shares		(25,988		)	(2,426		)
Proceeds from employee stock compensation plans		18,333			7,561
Cash provided by (used for) financing activities		184,778			(20,436		)
Increase in cash and cash equivalents		38,988			31,731
Cash and cash equivalents - beginning of period		56,891			14,383
Cash and cash equivalents - end of period		$	95,879		$	46,114

 

See Notes to the Consolidated Financial Statements.

 

5

 

Notes to the Consolidated Financial Statements (Unaudited)

Quarter Ended October 3, 2004

 

(Dollar amounts in thousands except share and per share data and unless otherwise indicated)

 

1.              Basis of Presentation and Responsibility for Interim Financial Statements

 

The unaudited consolidated financial statements of Alliant Techsystems Inc. (the Company or ATK) as set forth in this quarterly report have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted. ATK’s accounting policies are described in the notes to the consolidated financial statements in its Annual Report on Form 10-K for the fiscal year ended March 31, 2004 (fiscal 2004). Management is responsible for the unaudited consolidated financial statements included in this document. The consolidated financial statements included in this document are unaudited but, in the opinion of management, include all adjustments necessary for a fair presentation of ATK’s financial position as of October 3, 2004, and its results of operations and cash flows for the quarters and six months ended October 3, 2004 and September 28, 2003.

 

ATK has made certain reclassifications to the fiscal 2004 consolidated financial statements, as previously reported, to conform to current classification. These reclassifications did not change net income or stockholders’ equity as previously reported.

 

Sales, expenses, cash flows, assets, and liabilities can and do vary during the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.

 

2.              New Accounting Pronouncements

 

In December 2003, the Financial Accounting Standards Board (FASB) revised Statement of Financial Accounting Standards (SFAS) No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, to require additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension and other postretirement plans. The revised annual disclosure requirements were effective for ATK’s financial statements for fiscal 2004. The interim-period disclosures were effective for ATK beginning in fiscal 2005 – see Note 8.

 

In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act introduces a prescription drug benefit under Medicare beginning in 2006 as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least “actuarially equivalent” to Medicare. FSP 106-2 requires an employer to initially account for any subsidy received under the Act as an actuarial experience gain to the accumulated postretirement benefit obligation (APBO), which would be amortized over future service periods. Future subsidies would reduce service cost each year. FSP 106-2 became effective for ATK beginning in the quarter ended October 3, 2004. ATK believes that one of its postretirement benefit (PRB) plans is actuarially equivalent to Medicare, but does not believe that the subsidies it may receive under the Act will be significant. Because ATK believes that participation levels in its other PRB plans will decline, the impact of adopting this FSP reduced ATK’s APBO by approximately $31,000. The impact to ATK’s results of operations in any period is not expected to be significant.

 

3.              Acquisitions and Goodwill

 

On September 23, 2004, ATK acquired the PSI Group, which includes Pressure Systems Inc., Programmed Composites Inc., and Able Engineering Company, Inc. for $164,198 in cash. The PSI Group is a leader in the design and manufacture of components for military and commercial space-based applications, including global positioning, navigation and communication satellites, satellite bus structures, struts, reflectors and deployable mast booms. ATK believes that the acquisition strengthens ATK’s advanced space systems portfolio and positions it to capture emerging opportunities in spacecraft integration and satellite technology. ATK expects to increase its content on space missions while expanding into new advanced space technology roles. Headquartered in Commerce, CA, the PSI Group employs approximately 350 people. The PSI Group is included in the Advanced Propulsion and Space Systems segment. The purchase price allocation for the PSI Group has not yet been completed pending final valuation of acquired assets. None of the goodwill generated in this acquisition will be deductible for tax purposes.

 

6

 

During fiscal 2004, ATK made the following two acquisitions:

 

•                  On March 15, 2004, ATK acquired Mission Research Corporation (MRC) for $215,000 in cash and now operates the company as a separate segment under the name ATK Mission Research. ATK Mission Research is a leader in the development of advanced technologies that address emerging national security and homeland defense requirements. ATK believes that the acquisition of ATK Mission Research is a strategic transaction that gives ATK an advanced aerospace and defense technology pipeline spanning concept development to full-scale production. ATK Mission Research has a reputation as a national asset in such areas as directed energy, electro-optical and infrared sensors, aircraft sensor integration, high-performance antennas and radomes, advanced signal processing, and specialized composites. Each of these areas is attractive in its own right, but of significantly greater potential value when coupled with ATK’s precision weapons and energetics capabilities. As of the date of acquisition, ATK Mission Research had approximately 560 employees at 16 facilities in 10 states. The purchase price allocation for ATK Mission Research was finalized as of October 3, 2004. None of the goodwill generated in this acquisition will be deductible for tax purposes.

 

•                  On November 21, 2003, ATK acquired two businesses, Micro Craft and GASL, from Allied Aerospace for $43,312 in cash. Micro Craft and GASL (now known together as ATK GASL) are leaders in the development of hypervelocity and air-breathing systems for next-generation space vehicles, missiles, and projectiles. ATK believes that the transaction adds leading-edge propulsion and airframe technologies for aerospace and defense applications to ATK’s portfolio. Micro Craft is located in Tullahoma, TN, and GASL is located in Ronkonkoma, NY. ATK GASL is included in the Advanced Propulsion and Space Systems segment. The purchase price allocation for ATK GASL was finalized as of July 4, 2004. Goodwill related to Micro Craft of approximately $16,000 is not deductible for tax purposes, while the goodwill related to GASL of approximately $18,000 is deductible.

 

ATK used the purchase method of accounting to account for these acquisitions and, accordingly, the results of each entity are included in ATK’s consolidated financial statements since the date of each acquisition. The purchase price for each acquisition was allocated to the acquired assets and liabilities based on fair value. The excess purchase price over estimated fair value of the net assets acquired for each of these transactions was recorded as goodwill. Pro forma information on results of operations for fiscal 2005 and 2004, as if all the fiscal 2005 and 2004 acquisitions had occurred at the beginning of fiscal 2004, are not being presented because the acquisitions are not material to ATK for that purpose.

 

The changes in the carrying amount of goodwill by operating segment were as follows:

 

		ATK Thiokol			Ammunition			Precision Systems			Advanced Propulsion & Space Systems			Other			Total
Balance at March 31, 2004		$	462,696		$	114,886		$	131,712		$	169,446		$	184,971		$	1,063,711
Adjustments											(4,706		)	(20,643		)	(25,349		)
Balance at July 4, 2004		462,696			114,886			131,712			164,740			164,328			1,038,362
Adjustments					(1,021		)				(1,635		)	(9,567		)	(12,223		)
Acquisition											147,412						147,412
Balance at October 3, 2004		$	462,696		$	113,865		$	131,712		$	310,517		$	154,761		$	1,173,551

 

The adjustments to Ammunition’s and Advanced Propulsion and Space Systems’s goodwill during the quarters were primarily due to adjustments of deferred taxes related to previous acquisitions. The adjustments to the Other goodwill were primarily due to the recording of other intangible assets for ATK Mission Research, resulting in deductions from goodwill. The acquisition in Advanced Propulsion and Space Systems was the PSI Group.

 

Included in deferred charges and other non-current assets as of October 3, 2004 are other intangible assets of $87,973, which consist of trademarks, patented technology, and brand names that are not being amortized because ATK considers their estimated useful lives to be indefinite.

 

Also included in deferred charges and other non-current assets as of October 3, 2004 are amortizing intangible assets consisting of  contracts and customer relationships, as follows:

 

7

 

Gross carrying amount		$	39,597
Accumulated amortization		(3,009		)
Net carrying amount		$	36,588

 

These assets are being amortized over their estimated useful lives, which range from two to 12 years. Amortization expense for the quarter and six months ended October 3, 2004 was $1,382 and $3,009, respectively. ATK expects amortization expense related to these assets over the next five years to be as follows:

 

Remainder of fiscal 2005		$	2,698
Fiscal 2006		5,398
Fiscal 2007		5,031
Fiscal 2008		5,031
Fiscal 2009		2,749

 

4.              Earnings Per Share Data

 

Basic earnings per share (EPS) is computed based upon the weighted-average number of common shares outstanding for each period. Diluted EPS is computed based on the weighted-average number of common shares and common equivalent shares. Common equivalent shares represent the effect of stock options during each period presented, which, if exercised, would have a dilutive effect on EPS. In computing EPS for the quarters and six months ended October 3, 2004 and September 28, 2003, net income as reported for each respective period is divided by (in thousands):

 

		Quarters Ended				Six Months Ended
		October 3, 2004		September 28, 2003		October 3, 2004		September 28, 2003
Basic shares outstanding		37,590		38,583		37,507		38,572
Dilutive effect of stock options		504		710		569		718
Diluted shares outstanding		38,094		39,293		38,076		39,290
Stock options excluded from the calculation of diluted EPS because the option exercise price was greater than the average market price of the common shares		47		542		48		542

 

5.              Comprehensive Income

 

The components of comprehensive income, net of income taxes, for the quarters and six months ended October 3, 2004 and September 28, 2003 were as follows:

 

		Quarters Ended						Six Months Ended
		October 3, 2004			September 28, 2003			October 3, 2004			September 28, 2003
Net income		$	29,898		$	36,647		$	57,472		$	69,551
Other comprehensive income (OCI):
Change in fair value of derivatives, net of income taxes of $1,557, $1,824, $1,608, and $1,584, respectively		2,540			2,976			2,623			2,584
Change in fair value of available-for-sale securities, net of income taxes of $(34), $38, $(55), and $174, respectively		(55		)	62			(89		)	284
Total other comprehensive income		2,485			3,038			2,534			2,868
Total comprehensive income		$	32,383		$	39,685		$	60,006		$	72,419

 

6.              Other Liabilities

 

Other current and long-term accrued liabilities consisted of the following:

 

8

 

		October 3, 2004			March 31, 2004
Employee benefits and insurance		$	42,809		$	35,713
Warranty		14,052			14,559
Interest		13,242			10,838
Environmental remediation		8,571			6,709
Legal		1,767			1,767
Other		56,848			38,032
Total other current accrued liabilities		$	137,289		$	107,618
Environmental remediation		$	42,083		$	40,941
Management deferred compensation plan		24,611			24,258
Supplemental employee retirement plan		23,028			29,158
Interest rate swaps		18,573			22,805
Minority interest in joint venture		6,873			6,729
Other		14,478			20,778
Total other long-term liabilities		$	129,646		$	144,669

 

ATK provides product warranties in conjunction with sales of certain products. These warranties entail repair or replacement of non-conforming items. Provisions for warranty costs are generally recorded when the product is shipped and are based on historical information and current trends. The following is a reconciliation of the changes in ATK’s product warranty liability during the quarter ended October 3, 2004:

 

Balance at July 4, 2004		$	14,088
Payments made		(11		)
Warranties issued		47
Changes related to preexisting warranties		(72		)
Balance at October 3, 2004		$	14,052

 

7.              Long-Term Debt and Interest Rate Swaps

 

Long-term debt, including the current portion, consisted of the following:

 

		October 3, 2004			March 31, 2004
Senior Credit Facility dated March 31, 2004:
Term Loan B due 2011		$	398,000		$	400,000
Revolving Credit Facility due 2009
8½% Senior Subordinated Notes due 2011		400,000			400,000
2.75% Convertible Senior Subordinated Notes due 2024		280,000			280,000
3.00% Convertible Senior Subordinated Notes due 2024		200,000
Total long-term debt		1,278,000			1,080,000
Less current portion		4,000			4,000
Long-term debt		$	1,274,000		$	1,076,000

 

In August 2004, ATK issued $200,000 aggregate principal amount of 3.00% Convertible Senior Subordinated Notes (the 3.00% Convertible Notes) that mature on August 15, 2024. Interest on the 3.00% Convertible Notes is payable on February 15 and August 15 of each year, beginning on February 15, 2005. Starting with the period beginning on August 20, 2014 and ending on February 14, 2015, and for each of the six-month periods thereafter beginning on February 15, 2015, ATK will pay contingent interest during the applicable interest period if the average trading price of the 3.00% Convertible Notes on the five trading days ending on the third day immediately preceding the first day of the applicable interest period equals or exceeds 120% of the principal amount of the 3.00% Convertible Notes. The contingent interest payable per note within any applicable interest period will equal an annual rate of 0.30% of the average trading price of a note during the measuring period. ATK may redeem some or all of the 3.00% Convertible Notes in cash at any time on or after August 20, 2014. Holders of the 3.00% Convertible Notes may require ATK to repurchase in cash some or all of the 3.00% Convertible Notes on August 15, 2014 and August 15, 2019. Holders may convert their 3.00% Convertible Notes at a conversion rate of 12.5392 shares of ATK’s common stock per $1 principal amount of 3.00% Convertible Notes (a conversion price of $79.75) under the following circumstances: (1) when, during any fiscal quarter, the last reported sale price of ATK stock is greater than or equal to

 

9

 

130% of the conversion price, or $103.68, for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) if ATK calls the 3.00% Convertible Notes for redemption; or (3) upon the occurrence of certain corporate transactions. On October 26, 2004, ATK amended the indenture to require ATK to satisfy 100% of the principal amount of the 3.00% Convertible Notes solely in cash, with any amounts above the principal amount to be satisfied in cash, common stock, or a combination of cash and common stock, at the sole election of ATK. If certain fundamental changes occur on or prior to August 15, 2014, ATK will in certain circumstances increase the conversion rate by a number of additional shares of common stock or, in lieu thereof, ATK may in certain circumstances elect to adjust the conversion rate and related conversion obligation so that the 3.00% Convertible Notes are convertible into shares of the acquiring or surviving company. These contingently issuable shares are not included in diluted earnings per share because ATK’s stock price is below the conversion price. Debt issuance costs of approximately $6,000 are being amortized to interest expense over ten years, the period until the first date on which the holders can require ATK to repurchase the 3.00% Convertible Notes.

 

In March 2004, ATK entered into a new $700,000 Senior Credit Facility (the Senior Credit Facility) and repaid the Tranche C term loan under the previous senior credit facility dated April 20, 2001. The Senior Credit Facility is comprised of a Term Loan B of $400,000 maturing in 2011 and a $300,000 Revolving Credit Facility maturing in 2009. The Term Loan B requires quarterly principal payments of $1,000 through March 2010 and $94,000 from June 2010 through March 2011. Substantially all domestic, tangible and intangible assets of ATK and its subsidiaries are pledged as collateral under the Senior Credit Facility. Debt issuance costs of approximately $4,000 are being amortized over the term of the Senior Credit Facility. Borrowings under the Senior Credit Facility bear interest at a rate equal to the sum of a base rate or a Eurodollar rate plus an applicable margin, which is based on ATK’s consolidated total leverage ratio, as defined by the Senior Credit Facility. As of October 3, 2004, the weighted average interest rate for the Term Loan B was 3.23%. As of October 3, 2004, the interest rate on the Term Loan B was 5.54% per annum after taking into account the related interest rate swap agreements, which are discussed below. The annual commitment fee in effect on the unused portion of ATK’s Revolving Credit Facility was 0.375% at October 3, 2004. As of October 3, 2004, ATK had no borrowings against its $300,000 revolving credit facility and had outstanding letters of credit of $65,940, which reduced amounts available on the revolving facility to $234,059. ATK’s weighted average interest rate on short-term borrowings was 3.45% during the quarter ended October 3, 2004. 

 

In February 2004, ATK issued $280,000 aggregate principal amount of 2.75% Convertible Senior Subordinated Notes (the 2.75% Convertible Notes) that mature on February 15, 2024. Interest on the 2.75% Convertible Notes is payable on February 15 and August 15 of each year, beginning on August 15, 2004. Starting with the period beginning on August 20, 2009 and ending on February 14, 2010, and for each of the six-month periods thereafter beginning on February 15, 2010, ATK will pay contingent interest during the applicable interest period if the average trading price of the 2.75% Convertible Notes on the five trading days ending on the third day immediately preceding the first day of the applicable interest period equals or exceeds 120% of the principal amount of the 2.75% Convertible Notes. The contingent interest payable per note within any applicable interest period will equal an annual rate of 0.30% of the average trading price of a note during the measuring period. ATK may redeem some or all of the 2.75% Convertible Notes in cash at any time on or after August 20, 2009. Holders of the 2.75% Convertible Notes may require ATK to repurchase in cash some or all of the 2.75% Convertible Notes on August 15, 2009, February 15, 2014, or February 15, 2019. Holders may convert their 2.75% Convertible Notes at a conversion rate of 12.5843 shares of ATK’s common stock per $1 principal amount of 2.75% Convertible Notes (a conversion price of $79.46) under the following circumstances: (1) when, during any fiscal quarter, the last reported sale price of ATK stock is greater than or equal to 130% of the conversion price, or $103.30, for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) if ATK calls the 2.75% Convertible Notes for redemption; or (3) upon the occurrence of certain corporate transactions. On October 26, 2004, ATK amended the indenture to require ATK to satisfy 100% of the principal amount of the 2.75% Convertible Notes solely in cash, with any amounts above the principal amount to be satisfied in cash, common stock, or a combination of cash and common stock, at the sole election of ATK. These contingently issuable shares are not included in diluted earnings per share because ATK’s stock price is below the conversion price. Debt issuance costs of approximately $7,000 are being amortized to interest expense over five years, the period until the first date on which the holders can require ATK to repurchase the 2.75% Convertible Notes.

 

In May 2001, ATK issued $400,000 aggregate principal amount of 8½% Senior Subordinated Notes (the Senior Subordinated Notes) that mature on May 15, 2011. The outstanding Senior Subordinated Notes are general unsecured obligations of the subsidiary guarantors of ATK. Interest on the outstanding Senior Subordinated Notes accrues at a rate of 8.50% per annum and is payable semi-annually on May 15 and November 15 of each year. As of October 3, 2004, the interest rate on the Senior Subordinated Notes was 5.74% after taking into account the related interest rate swap agreements, which are discussed below.

 

10

 

The 3.00% Convertible Notes, the 2.75% Convertible Notes, and the Senior Subordinated Notes rank equal in right of payment with each other and all of ATK’s future senior subordinated indebtedness and are subordinated in right of payment to all existing and future senior indebtedness, including the Senior Credit Facility. The outstanding notes are guaranteed on an unsecured basis by substantially all of ATK’s domestic subsidiaries. All of these guarantor subsidiaries are 100% owned by ATK. These guarantees are senior subordinated obligations of the applicable subsidiary guarantors.

 

The scheduled minimum loan payments on outstanding long-term debt are as follows:

 

Remainder of fiscal 2005		$	2,000
Fiscal 2006		4,000
Fiscal 2007		4,000
Fiscal 2008		4,000
Fiscal 2009		4,000
Thereafter		1,260,000
Total		$	1,278,000

 

ATK’s total debt (current portion of debt and long-term debt) as a percentage of total capitalization (total debt and stockholders’ equity) was 67% as of October 3, 2004 and 66% as of March 31, 2004.

 

Net cash paid for interest totaled $26,777 in the six months ended October 3, 2004 and $27,714 in the six months ended September 28, 2003.

 

ATK’s Senior Credit Facility and the indentures governing the Senior Subordinated Notes, the 2.75% Convertible Notes, and the 3.00% Convertible Notes impose limitations on ATK’s ability to, among other things, incur additional indebtedness, including capital leases, liens, pay dividends and make other restricted payments, sell assets, or merge or consolidate with or into another person. In addition, the Senior Credit Facility limits ATK’s ability to enter into sale-and-leaseback transactions and to make capital expenditures. The Senior Credit Facility also requires that ATK meet and maintain specified financial ratios, including: a maximum interest coverage ratio, a maximum consolidated leverage ratio, and a maximum senior leverage ratio. ATK’s ability to comply with these covenants and to meet and maintain the financial ratios may be affected by events beyond its control. Borrowings under the Senior Credit Facility are subject to compliance with these covenants. As of October 3, 2004, ATK was in compliance with the covenants.

 

ATK has limited amortization requirements under the Senior Credit Facility over the next few years. ATK’s other debt service requirements consist principally of interest expense on its long-term debt. Additional cash may be required to repurchase or convert the 3.00% Convertible Notes or the 2.75% Convertible Notes under certain circumstances, as discussed above. ATK’s short-term cash requirements for operations are expected to consist mainly of capital expenditures to maintain and expand production facilities and working capital requirements.

 

Interest Rate Swaps

 

ATK uses interest rate swaps to manage interest costs and the risk associated with changing interest rates of long-term debt. ATK does not hold or issue derivative instruments for trading purposes. Derivatives are used for hedging purposes only and must be designated as, and effective as, a hedge of identified risk exposure at the inception of the derivative contract. As of October 3, 2004, ATK had the following interest rate swaps:

 

								Interest Rate
		Notional Amount			Fair Value			Pay Fixed		Receive Floating		Maturity Date
Cash flow hedges:
Amortizing swap		$	25,508		$	(179	)	6.59	%	1.89	%	November 2004
Amortizing swap		60,000			(1,525		)	5.25	%	1.98	%	December 2005
Amortizing swap		60,000			(1,531		)	5.27	%	1.98	%	December 2005
Non-amortizing swap		100,000			(9,622		)	6.06	%	2.01	%	November 2008
Derivative obligation					(12,857		)

 

							Receive Fixed		Pay Floating
Fair value hedges:
Non-amortizing swap		100,000		1,358			8.50	%	6.01	%	May 2011
Non-amortizing swap		100,000		291			8.50	%	5.80	%	May 2011
Non-amortizing swap		200,000		(3,402		)	8.50	%	6.38	%	May 2011
Derivative obligation				(1,753		)
				$	(14,610	)

 

11

 

In March 2004, ATK entered into a seven-year swap, with a $200,000 notional value, against ATK’s Senior Subordinated Notes. This swap agreement involves the exchange of amounts based on a variable rate of six-month LIBOR plus an adder rate over the life of the agreement, without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment of interest expense related to the debt. 

 

In fiscal 2003, ATK re-couponed two $100,000 notional value swap contracts against ATK’s Senior Subordinated Notes. The transaction resulted in the receipt of $16,750 cash, which is included in other long-term liabilities and is being amortized to reduce interest expense through May 2011.

 

The fair market value of ATK’s interest rate swaps was $(14,610) at October 3, 2004, an improvement of $6,527 since July 4, 2004. Of the fair market value of $(14,610), $(18,573) was recorded within other long-term liabilities on the balance sheet, $3,641 was within accrued interest in other current liabilities, and $322 was within other non-current assets.

 

8.              Employee Benefit Plans

 

Components of Net Periodic Benefit Cost

 

		Pension Benefits
		Quarters Ended						Six Months Ended
		October 3, 2004			September 28, 2003			October 3, 2004			September 28, 2003
Service cost		$	10,076		$	11,268		$	20,365		$	22,793
Interest cost		28,607			33,597			56,984			67,960
Expected return on plan assets		(37,431		)	(44,751		)	(74,794		)	(90,523		)
Amortization of unrecognized net loss		5,113			1,900			10,033			3,843
Amortization of unrecognized prior service cost		(224		)	1,368			(430		)	2,767
Net periodic benefit cost before settlement / special termination benefits cost		6,141			3,382			12,158			6,840
Settlement		6,402						6,402
Special termination benefits costs								813
Net periodic benefit cost		$	12,543		$	3,382		$	19,373		$	6,840

 

Components of Net Periodic Benefit Cost

 

		Postretirement Benefits
		Quarters Ended						Six Months Ended
		October 3, 2004			September 28, 2003			October 3, 2004			September 28, 2003
Service cost		$	255		$	150		$	502		$	281
Interest cost		4,521			5,570			9,813			10,420
Expected return on plan assets		(999		)	(922		)	(1,982		)	(1,725		)
Amortization of unrecognized net loss		1,300			2,036			3,578			3,809
Amortization of unrecognized prior service cost		(1,113		)	(1,134		)	(2,188		)	(2,121		)
Net periodic benefit cost before special termination benefits cost / curtailment		3,964			5,700			9,723			10,664
Special termination benefits costs								1,905
Curtailment											(7,179		)
Net periodic benefit cost		$	3,964		$	5,700		$	11,628		$	3,485

 

During the quarter ended October 3, 2004, ATK recorded a $6,402 settlement charge to recognize the impact of lump sum pension benefits that were paid. During the six months ended October 3, 2004, ATK also recorded special termination benefits costs in the pension plans of $813 and other postretirement benefit (PRB) plans of $1,905 in connection with the closure of the Twin Cities Army Ammunition Plant (TCAAP), as discussed in Note 12. The curtailment gain recorded during the six months ended September 28, 2003 of $7,179 was due to a change in some of ATK’s other PRB plans.

 

12

 

Employer Contributions.  During the six months ended October 3, 2004, ATK contributed $15,943 to its pension plans and $14,374 to its other PRB plans. Consistent with previous expectations, ATK anticipates contributing a total of $45,000 to its pension plans during fiscal 2005. ATK now anticipates contributing a total of $31,000 to its other PRB plans, a decrease of $1,000 from previous expectations, in fiscal 2005.

 

9.              Income Taxes

 

Income tax refunds, net of payments made, totaled $8,740 during the six months ended October 3, 2004. Income taxes paid, net of refunds received, totaled $2,744 during the six months ended September 28, 2003.

 

ATK’s provision for income taxes includes both federal and state income taxes. The income tax provisions for the quarter and six months ended October 3, 2004 represent effective tax rates of 35.4% and 35.8%, respectively.  The income tax provisions for the quarter and six months ended September 28, 2003 represent effective tax rates of 32.7% and 35.3%, respectively. 

 

Income tax provisions for interim periods are based on estimated effective annual income tax rates (and are based on laws in effect during those interim periods and therefore do not contemplate the impact of the legislation discussed below). The estimated effective tax rate for fiscal 2005 of 36.1% differs from the federal statutory rate of 35% due to state income taxes, which increase the rate, and Extraterritorial Income (ETI) exclusion tax benefits and research and development (R&D) tax credits, which decrease the rate.

 

On October 4, 2004, President Bush signed into law the “Working Families Tax Relief Act of 2004” which retroactively reinstated the R&D tax credit from June 30, 2004. Because the bill was not signed until after the close of second quarter, the extension of the R&D credit is not reflected in the tax rates noted above. ATK expects that the impact of this legislation will be to reduce the fiscal 2005 annual tax rate by approximately 2%. The change will be reflected in third quarter results.

 

On October 22, 2004, President Bush signed into law the “American Jobs Creation Act of 2004” which repealed the ETI exclusion with transition relief and created a domestic manufacturing deduction. The provisions of this new law, which generally are effective after December 31, 2004, are not expected to have a material impact on ATK’s tax rate for fiscal 2005.   

 

10.       Stock-Based Compensation

 

ATK offers stock-based employee compensation plans and accounts for those plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost related to stock options is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Restricted stock awards are recorded as compensation expense over the vesting periods based on the market value on the date of grant. Unearned compensation cost on restricted stock awards is shown as a reduction to stockholders’ equity. The following table illustrates the effect on net income and earnings per share if ATK had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock options.

 

		Quarters Ended						Six Months Ended
		October 3, 2004			September 28, 2003			October 3, 2004			September 28, 2003
Net income, as reported		$	29,898		$	36,647		$	57,472		$	69,551
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects		(1,537		)	(1,561		)	(2,997		)	(2,943		)
Pro forma net income		$	28,361		$	35,086		$	54,475		$	66,608
Earnings per share:
Basic—as reported		$	0.80		$	0.95		$	1.53		$	1.80
Basic—pro forma		0.75			0.91			1.45			1.73
Diluted—as reported		0.78			0.93			1.51			1.77
Diluted—pro forma		0.74			0.89			1.43			1.70

 

13

 

11.       Contingencies

 

Litigation.  From time to time, ATK is subject to various legal proceedings, including lawsuits, which arise out of, and are incidental to, the conduct of ATK’s business. Other than the matter discussed below, ATK does not consider any of such proceedings that are currently pending, individually or in the aggregate, to be material to its business or likely to result in a material adverse effect on its operating results, financial condition, or cash flows.

 

On March 12, 2002, a civil action was filed against ATK in the U.S. District Court for the Southern District of California, National Metal Technologies, Inc. and National Manufacturing Technologies, Inc. v. Alliant Techsystems Inc., et al., asserting various claims arising in connection with an agreement under which National Metal Technologies, Inc. (NMT) agreed to supply ATK with ammunition links for small- and medium-caliber ammunition. Specifically, the plaintiffs allege that they are entitled to damages in excess of $30,000 for alleged breach of contract, violation of the antitrust laws, and tortious interference with prospective economic advantage as a result of ATK’s termination of the supply agreement in 2001. ATK has denied these allegations and alleges that the agreement was terminated as a result of NMT’s default. On August 10, 2004, the trial court denied ATK’s motion for summary judgment. A trial date has not yet been set. 

 

ATK believes that ATK lawfully terminated the agreement with NMT, and ATK believes it is likely that the trial court will conclude that ATK did not breach the agreement, violate the antitrust laws or interfere with the plaintiffs’ prospective economic advantage, and that no damages will ultimately be awarded to the plaintiffs. Although it is not possible at this time to predict the outcome of the trial or any subsequent appeals in this case, some potential does remain for an adverse judgment that could be material to ATK’s financial position, results of operations, or cash flows. As a result of the uncertainty regarding the outcome of this matter, no provision has been made in the financial statements with respect to this contingent liability.

 

Environmental Remediation.  ATK’s operations and ownership or use of real property are subject to a number of federal, state, and local environmental laws and regulations. At certain sites that ATK owns or operates or formerly owned or operated, there is known or potential contamination that ATK is required to investigate or remediate. ATK could incur substantial costs, including remediation costs, fines, and penalties, or third-party property damage or personal injury claims, as a result of violations or liabilities of environmental laws or non-compliance with environmental permits.

 

The liability for environmental remediation represents management’s best estimate of the present value of the probable and reasonably estimable costs related to known remediation obligations. The receivable represents the present value of the amount that ATK expects to recover, as discussed below. Both the liability and receivable have been discounted to reflect the present value of the expected future cash flows, using a discount rate, net of estimated inflation, of 3.25% as of October 3, 2004 and 3.50% as of March 31, 2004. The decrease in the rate during the quarter ended October 3, 2004 resulted in additional expense of approximately $400. The following is a summary of the amounts recorded for environmental remediation:

 

		October 3, 2004						March 31, 2004
		Liability			Receivable			Liability			Receivable
Undiscounted (liability) receivable		$	(60,396	)	$	28,702		$	(58,625	)	$	25,876
Unamortized discount		9,742			(3,310		)	10,975			(3,745		)
Discounted (liability) receivable		$	(50,654	)	$	25,392		$	(47,650	)	$	22,131

 

Amounts expected to be paid or received in periods more than one year from the balance sheet date are classified as non-current. As such, of the $50,654 discounted liability as of October 3, 2004, $8,571 was recorded within other current liabilities and $42,083 was recorded within other long-term liabilities. Of the $25,392 discounted receivable, $7,102 was recorded within other current assets and $18,290 was recorded within other non-current assets. As of October 3, 2004, the estimated discounted range of reasonably possible costs of environmental remediation was $50,654 to $77,084.

 

ATK expects that a portion of its environmental compliance and remediation costs will be recoverable under U.S. Government contracts. Some of the remediation costs that are not recoverable from the U.S. Government that are associated with facilities purchased in a business acquisition may be covered by various indemnification agreements, as described below.

 

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•                  As part of its acquisition of the Hercules Aerospace Company in fiscal 1995, ATK assumed responsibility for environmental compliance at the facilities acquired from Hercules (the Hercules Facilities). ATK believes that a portion of the compliance and remediation costs associated with the Hercules Facilities will be recoverable under U.S. Government contracts, and that those environmental remediation costs not recoverable under these contracts will be covered by Hercules Incorporated (Hercules) under environmental agreements entered into in connection with the Hercules acquisition. Under these agreements, Hercules has agreed to indemnify ATK for environmental conditions relating to releases or hazardous waste activities occurring prior to ATK’s purchase of the Hercules Facilities; fines relating to pre-acquisition environmental compliance; and environmental claims arising out of breaches of Hercules’s representations and warranties. Hercules is not required to indemnify ATK for any individual claims below $50. Hercules is obligated to indemnify ATK for the lowest cost response of remediation required at the facility that is acceptable to the applicable regulatory agencies. ATK is not responsible for conducting any remedial activities with respect to the Kenvil, NJ facility or the Clearwater, FL facility. Hercules’ environmental indemnity obligation relating to contamination on federal lands remains effective, provided that ATK gives notice of any claims related to federal lands on or before December 31, 2005.

 

•                  ATK generally assumed responsibility for environmental compliance at the Thiokol Facilities acquired from Alcoa Inc. in fiscal 2002. While ATK expects that a portion of the compliance and remediation costs associated with the acquired Thiokol Facilities will be recoverable under U.S. Government contracts, ATK has recorded an accrual to cover those environmental remediation costs at these facilities that will not be recovered through U.S. Government contracts. In accordance with its agreement with Alcoa, ATK notified Alcoa of all known environmental remediation issues as of January 30, 2004. Of these known issues, ATK is responsible for any costs not recovered through U.S. Government contracts at Thiokol Facilities up to $29,000, ATK and Alcoa have agreed to split evenly any amounts between $29,000 and $49,000, and ATK is responsible for any payments in excess of $49,000.

 

•                  With respect to the civil ammunition business’ facilities purchased from Blount in fiscal 2002, Blount has agreed to indemnify ATK for certain compliance and remediation liabilities, to the extent those liabilities are related to pre-closing environmental conditions at or related to these facilities. Some other remediation costs are expected to be paid directly by a third party pursuant to an existing indemnification agreement with Blount. Blount’s indemnification obligations relating to environmental matters, which extend through December 7, 2006, are capped at $30,000, less any other indemnification payments made for breaches of representations and warranties. The third party’s obligations, which extend through November 4, 2007, are capped at approximately $125,000, less payments previously made.

 

ATK cannot ensure that the U.S. Government, Hercules, Alcoa, Blount, or other third parties will reimburse it for any particular environmental costs or reimburse ATK in a timely manner or that any claims for indemnification will not be disputed. U.S. Government reimbursements for cleanups are financed out of a particular agency’s operating budget and the ability of a particular governmental agency to make timely reimbursements for cleanup costs will be subject to national budgetary constraints. ATK’s failure to obtain full or timely reimbursement from the U.S. Government, Hercules, Alcoa, Blount, or other third parties could have a material adverse effect on its operating results, financial condition, or cash flows. While ATK has environmental management programs in place to mitigate these risks, and environmental laws and regulations have not had a material adverse effect on ATK’s operating results, financial condition, or cash flows in the past, it is difficult to predict whether they will have a material impact in the future.

 

Other Contingencies.  ATK is also subject to a number of other potential risks and contingencies, including the following:

 

•                  reductions or changes in NASA or U.S. Government military spending,

 

•                  increases in costs, which ATK may not be able to react to due to the nature of its U.S. Government contracts,

 

•                  termination of its contracts,

 

•                  procurement and other related laws and regulations,

 

•                  contract novation,

 

•                  intense competition,

 

•                  disruptions in the supply of key raw materials and difficulties in the supplier qualification process, as well as increases in prices of raw materials, and

 

•                  fires or explosions at one of ATK’s facilities.

 

15

 

12.       Restructuring Charges

 

In fiscal 2004, ATK recorded costs for restructuring and related activities, the majority of which were the result of the U.S. Army’s announced plans to exit the Twin Cities Army Ammunition Plant (TCAAP) in Arden Hills, MN. As a result, ATK’s management decided to relocate medium-caliber ammunition metal parts manufacturing from TCAAP to ATK’s Tactical Systems facility in Rocket Center, WV. During the quarter ended October 3, 2004, the relocation of assets was completed and the production of qualification parts was initiated. The qualification and start of production is expected to be completed by the end of November 2004. The final exit from TCAAP is expected to be completed by the end of March 2005. In connection with these restructuring and related activities, ATK recorded costs of approximately $8,000 in fiscal 2004, primarily for employee termination benefits, facility clean-up, and accelerated depreciation. These costs were recorded within cost of sales, primarily within the Ammunition segment. The liability related to these costs as of March 31, 2004 was approximately $6,000. During the quarter ended October 3, 2004, approximately $2,000 was disbursed and an additional $1,000 was expensed. During the six months ended October 3, 2004, approximately $6,000 was disbursed and an additional $6,000 was expensed (including $2,718 for special termination benefits for pension and other postretirement benefits (PRB)). The liability as of October 3, 2004 was approximately $3,000 (not including the impact on the pension and other PRB plans). ATK expects approximately $2,000 to $3,000 in additional costs will be recorded in fiscal 2005 related to the restructuring and related activities.

 

13.       Stock Repurchases

 

In February 2004, ATK’s Board of Directors authorized ATK to repurchase up to 2,000,000 shares of its common stock. In fiscal 2004, ATK repurchased 1,320,200 shares. ATK repurchased an additional 414,200 shares, at a cost of approximately $25,000, in the quarter ended July 4, 2004. On August 3, 2004, ATK’s Board of Directors canceled authorization for the 265,600 shares remaining under the February 2004 authorization and authorized the repurchase of up to 2,000,000 additional shares through March 2006.

 

14.       Operating Segment Information

 

Effective April 1, 2004 (fiscal 2005), ATK realigned its business operations, forming a new segment, Advanced Propulsion and Space Systems. Following this realignment, ATK has five segments: ATK Thiokol, Ammunition, Precision Systems, Advanced Propulsion and Space Systems, and ATK Mission Research. These operating segments are defined based on the reporting and review process used by ATK’s chief executive officer and other management.

 

•                  The ATK Thiokol segment is a solid propellant rocket motor manufacturer, providing motors for human access to space (Space Shuttle), land- and sea-based strategic missiles, commercial and government space launch vehicles, and missile defense interceptors. The segment also provides advanced ordnance products, demilitarization products and services, operations and technical support for space launches, energetic materials, materials/structures for high temperature and hypersonic environments, and engineering and technical services for the advancement of propulsion systems and energetic materials.

 

•                  The Ammunition segment supplies small-caliber military ammunition, medium-caliber ammunition, ammunition and rocket propellants, energetic materials, commercial and military smokeless powder, law enforcement and sporting ammunition, and ammunition-related products.

 

•                  The Precision Systems segment develops, demonstrates, and manufactures gun-launched guided and conventional large-caliber ammunition, tactical missile systems, tactical rocket motors and warheads, composite structures for aircraft and weapons systems, soldier weapon systems, air weapon systems, fuzes and proximity sensors, missile warning and radar jamming systems, electronic warfare support systems, barrier systems, lithium and lithium-ION batteries for military and aerospace applications, and medium-caliber gun systems.

 

•                  The Advanced Propulsion and Space Systems segment supplies solid propellant rocket motors, integrated boosters and upper stages, advanced ordnance, and control systems for missile defense, space, strategic, tactical, and commercial applications; high-performance composite structures for space launch vehicles, rocket motor casings, military and commercial aircraft; telescope, satellite and spacecraft structures, optical benches, and antenna reflectors; and advanced hypervelocity and air-breathing propulsion systems for aerospace vehicles and weapon systems.

 

16

 

•                  The ATK Mission Research segment, which is included in “Other” or “Corporate and other” in the table below, is a developer of advanced technologies that address emerging national security and homeland defense requirements in such areas as directed energy, electro-optical and infrared sensors, aircraft sensor integration, high-performance antennas and radomes, advanced signal processing, and specialized composites. This segment is not reported separately as it is not material to ATK.

 

The following summarizes ATK’s results by operating segment:

 

		Quarters Ended						Six Months Ended
		October 3, 2004			September 28, 2003			October 3, 2004			September 28, 2003
Sales to external customers:
ATK Thiokol		$	211,050		$	200,922		$	419,081		$	418,878
Ammunition		215,147			191,351			404,608			364,167
Precision Systems		127,904			119,138			250,106			228,405
Advanced Propulsion and Space Systems		85,683			55,140			163,573			114,239
Other		33,266						80,077
Total external sales		673,050			566,551			1,317,445			1,125,689
Intercompany sales:
ATK Thiokol		1,142			579			1,768			1,299
Ammunition		3,491			5,788			8,489			8,929
Precision Systems		5,900			3,221			10,251			5,597
Advanced Propulsion and Space Systems		9,462			7,787			17,547			16,955
Corporate and other		(19,995		)	(17,375		)	(38,055		)	(32,780		)
Total intercompany sales		—			—			—			—
Total sales		$	673,050		$	566,551		$	1,317,445		$	1,125,689
Income before interest, income taxes, and minority interest:
ATK Thiokol		$	27,382		$	36,517		$	60,248		$	70,599
Ammunition		19,941			19,371			30,171			35,267
Precision Systems		12,675			12,686			26,653			24,400
Advanced Propulsion and Space Systems		8,201			5,757			9,689			16,486
Corporate and other		(6,753		)	(4,651		)	(6,976		)	(9,060		)
Income before interest, income taxes, and minority interest		$	61,446		$	69,680		$	119,785		$	137,692

 

17

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 our 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, we 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 we make 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, and sourcing strategy,

•      increases in costs, which ATK may not be able to react to due to the nature of its U.S. Government contracts,

•      government laws and other rules and regulations applicable to ATK, such as procurement and environmental remediation,

•      contract pricing and timing of awards,

•      changing economic and political conditions in the United States and in other countries,

•      changes in the number or timing of commercial and military space launches,

•      international trading restrictions,

•      outcome of periodic union negotiations,

•      customer product acceptance,

•      intense competition,

•      program performance,

•      program terminations,

•      contract novation,

•      continued access to technical and capital resources,

•      supplier contract negotiations and difficulties in the supplier qualification process,

•      supply, availability, and costs of raw materials and components,

•      fires or explosions at one of ATK’s facilities,

•      availability of insurance coverage at acceptable terms,

•      pension asset returns,

•      unforeseen delays or other changes in NASA’s Space Shuttle program,

•      legal proceedings, and

•      other economic, political, and technological risks and uncertainties.

 

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. We undertake no obligation to update any forward-looking statements.

 

Overview

 

ATK is a supplier of aerospace and defense products to the U.S. Government, U.S. allies, and major prime contractors. ATK is also a supplier of ammunition to federal and local law enforcement agencies and commercial markets. ATK is headquartered in Edina, Minnesota and has operating locations throughout the U.S. Effective April 1, 2004 (fiscal 2005), ATK realigned its business operations, forming a new segment, Advanced Propulsion and Space Systems. Following this realignment, ATK has five segments: ATK Thiokol, Ammunition, Precision Systems, Advanced Propulsion and Space Systems, and ATK Mission Research:

 

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•      The ATK Thiokol segment, which generated 32% of ATK’s sales in the six months ended October 3, 2004, is a solid propellant rocket motor manufacturer, providing motors for human access to space (Space Shuttle), land- and sea-based strategic missiles, commercial and government space launch vehicles, and missile defense interceptors. The segment also provides advanced ordnance products, demilitarization products and services, operations and technical support for space launches, energetic materials, materials/structures for high temperature and hypersonic environments, and engineering and technical services for the advancement of propulsion systems and energetic materials.

 

•      The Ammunition segment, which contributed 31% of ATK’s sales in the six months ended October 3, 2004, supplies small-caliber military ammunition, medium-caliber ammunition, ammunition and rocket propellants, energetic materials, commercial and military smokeless powder, law enforcement and sporting ammunition, and ammunition-related products.

 

•      The Precision Systems segment, which generated 19% of ATK’s sales in the six months ended October 3, 2004, develops, demonstrates, and manufactures gun-launched guided and conventional large-caliber ammunition, tactical missile systems, tactical rocket motors and warheads, composite structures for aircraft and weapons systems, soldier weapon systems, air weapon systems, fuzes and proximity sensors, missile warning and radar jamming systems, electronic warfare support systems, barrier systems, lithium and lithium-ION batteries for military and aerospace applications, and medium-caliber gun systems.

 

•      The Advanced Propulsion and Space Systems segment, which accounted for 12% of ATK’s sales in the six months ended October 3, 2004, supplies solid propellant rocket motors, integrated boosters and upper stages, advanced ordnance, and control systems for missile defense, space, strategic, tactical, and commercial applications; high-performance composite structures for space launch vehicles, rocket motor casings, military and commercial aircraft; telescope, satellite and spacecraft structures, optical benches, and antenna reflectors; and advanced hypervelocity and air-breathing propulsion systems for aerospace vehicles and weapon systems.

 

•      The ATK Mission Research segment, which is included in “Intercompany and other” or “Corporate and other” in the Results of Operations section below, accounted for the remainder of ATK’s sales. ATK Mission Research is a developer of advanced technologies that address emerging national security and homeland defense requirements in such areas as directed energy, electro-optical and infrared sensors, aircraft sensor integration, high-performance antennas and radomes, advanced signal processing, and specialized composites.

 

The majority of ATK’s sales are recognized as costs are incurred. ATK’s customers pay ATK cash based on costs incurred and profit earned, upon achievement of program milestones, or upon delivery of the product.

 

As a supplier to the U.S. aerospace and defense industry, ATK is dependent on funding levels of the U.S. Department of Defense (DoD) and NASA. The U.S. defense industry has experienced significant changes over the past few years. During the 1990s, the DoD budget declined, however that trend has reversed during the 2000s due to continuing geopolitical uncertainties. While the DoD’s budget for procurement and research, development, test, and evaluation continues to grow each year, the degree of future growth is not known and it may slow or even contract. However, ATK believes it is well positioned in this budget environment to maintain or even increase its relative participation in the DoD budget, as it derives the majority of its DoD sales from products that are consumed (and then reprocured) in both tactical and training operations. ATK anticipates that, to the extent that future budget pressures mount, the majority of budget cuts would come in the areas where the DoD is developing new “platforms” - the vehicles used to deliver the weapons, including ships, aircraft, tanks and helicopters. Much of ATK’s product portfolio is “platform independent,” meaning it can be used in the legacy platforms of today (for example, M1A1 battle tanks and F-16 fighters), as well as in the platforms being developed for future use (for example, Future Combat Systems, Joint Strike Fighter, and F-22 stealth fighters/bombers). Therefore, if and when these future platform development programs come under budget pressures, ATK believes that it has limited exposure, relative to its industry peers.

 

In January 2004, President Bush announced a new space exploration program, which commits the United States to a long-term human and robotic program to explore the solar system, starting with a return to the Moon. The new program anticipates that the Space Shuttle will be retired from service as early as 2010, to be replaced by a new spacecraft. The impact of this change, if any, on ATK is not currently known, but ATK believes that the Reusable Solid Rocket Motors (RSRM) will be part of the NASA launch system supporting the follow-on to the Space Shuttle Program. ATK believes that its RSRM and RSRM derivatives will be important to achieving an affordable launch system for the alternatives now under consideration.

 

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ATK management believes that the key to its continued success is to focus on performance, simplicity, and affordability, and that its future lies in being a leading provider of advanced weapon and space systems. ATK is positioning itself where management believes there will be continued strong defense funding, even as pressures on procurement and research and development accounts mount. ATK will concentrate on developing the “faster, farther, more accurate, and more lethal” 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 strike fighters, guided-missile destroyers, and main battle tanks. ATK’s transformational weapons such as AARGM, BTERM, PGMM and MRM are aimed squarely at this growing market. At the same time, ATK believes it is pushing the envelope of technologies essential to “generation after next” weapons and platforms – advanced sensor/seeker integration, directed energy, weapon data links, high-speed, long-range projectiles, thermal-resistant materials, and scramjet engines are examples.

 

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, 2004 (fiscal 2004). The accounting policies used in preparing ATK’s interim fiscal 2005 consolidated financial statements are the same as those described in ATK’s Annual Report, except as described in this report in Note 2, New Accounting Pronouncements, to the unaudited consolidated financial statements.

 

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, and 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,

•      Environmental remediation and compliance, and

•      Employee benefit plans.

 

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 fiscal 2004 Annual Report on Form 10-K.

 

Pension Assumptions

 

ATK’s noncontributory defined benefit pension plans (the Plans) cover substantially all employees. The expense related to these Plans is calculated based upon a number of actuarial assumptions, including the expected long-term rate of return on plan assets, the discount rate, and the rate of compensation increase. The following table illustrates ATK’s assumptions used in determining pension expense for the years ending March 31, 2005 and 2004:

 

		Years Ending March 31
		2005		2004
Expected long-term rate of return on plan assets		9.00	%	9.00	%
Discount rate		6.25	%	6.75	%
Rate of compensation increase:
Union		3.00	%	3.00	%
Salaried		3.25	%	3.50	%

 

Based on these and other assumptions, ATK estimates that its pension expense will be approximately $31 million in fiscal 2005, an increase of approximately $20 million over fiscal 2004. Future actual pension expense will depend on future investment performance, changes in future discount rates, and various other factors related to the populations participating in the Plans.

 

ATK expects to make pension plan contributions of approximately $45 million in fiscal 2005, of which $28 million is above the minimum amount legally required for the year. A substantial portion of ATK’s pension plan contributions are recoverable from the U.S. Government as allowable indirect contract costs, although not necessarily in the same year the contribution is made.

 

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