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 January 2, 2005
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 January 31, 2005, 37,806,214 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

 

ALLIANT TECHSYSTEMS INC.

CONSOLIDATED INCOME STATEMENTS

(Unaudited)

 

		QUARTERS ENDED						NINE MONTHS ENDED
(In thousands except per share data)		January 2, 2005			December 28, 2003			January 2, 2005			December 28, 2003
Sales		$	684,493		$	563,817		$	2,001,938		$	1,689,506
Cost of sales		546,683			440,106			1,630,712			1,325,096
Gross profit		137,810			123,711			371,226			364,410
Operating expenses:
Research and development		10,203			5,814			23,685			22,189
Selling		16,454			15,629			50,598			46,365
General and administrative		29,250			31,817			95,255			87,713
Total operating expenses		55,907			53,260			169,538			156,267
Income before interest, income taxes, and minority interest		81,903			70,451			201,688			208,143
Interest expense		(17,492		)	(14,302		)	(48,024		)	(44,480		)
Interest income		162			112			645			480
Income before income taxes and minority interest		64,573			56,261			154,309			164,143
Income tax provision		16,621			14,256			48,741			52,332
Income before minority interest		47,952			42,005			105,568			111,811
Minority interest, net of income taxes		104			148			248			403
Net income		$	47,848		$	41,857		$	105,320		$	111,408
Earnings per common share:
Basic		$	1.27		$	1.08		$	2.80		$	2.89
Diluted		$	1.25		$	1.06		$	2.76		$	2.83

 

See Notes to the Consolidated Financial Statements.

 

3

 

ALLIANT TECHSYSTEMS INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In thousands except share data)		January 2, 2005			March 31, 2004
ASSETS
Current assets:
Cash and cash equivalents		$	47,121		$	56,891
Net receivables		575,742			528,848
Net inventories		144,872			134,676
Deferred income tax asset		56,991			53,105
Other current assets		27,703			32,165
Total current assets		852,429			805,685
Net property, plant, and equipment		453,457			465,786
Goodwill		1,158,080			1,063,711
Prepaid and intangible pension assets		342,056			331,860
Deferred income tax asset		6,972			38,940
Deferred charges and other non-current assets		216,748			127,347
Total assets		$	3,029,742		$	2,833,329
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	3,096		$	4,000
Accounts payable		95,245			142,941
Contract advances and allowances		39,234			46,221
Accrued compensation		95,194			117,333
Accrued income taxes		64,404			10,278
Other accrued liabilities		124,586			107,618
Total current liabilities		421,759			428,391
Long-term debt		1,184,130			1,076,000
Postretirement and postemployment benefits liability		212,750			218,755
Minimum pension liability		401,314			401,314
Other long-term liabilities		139,506			144,669
Total liabilities		2,359,459			2,269,129
Contingencies (Note 11)
Common stock - $.01 par value
Authorized - 90,000,000 shares
Issued and outstanding 37,793,898 shares at January 2, 2005 and 37,439,972 at March 31, 2004		416			416
Additional paid-in-capital		442,590			468,044
Retained earnings		726,419			621,099
Unearned compensation		(1,869		)	(1,015		)
Accumulated other comprehensive income		(259,267		)	(263,687		)
Common stock in treasury, at cost, 3,763,200 shares held at January 2, 2005 and 4,117,126 shares held at March 31, 2004		(238,006		)	(260,657		)
Total stockholders’ equity		670,283			564,200
Total liabilities and stockholders’ equity		$	3,029,742		$	2,833,329

 

See Notes to the Consolidated Financial Statements.

 

4

 

ALLIANT TECHSYSTEMS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		NINE MONTHS ENDED
(In thousands)		January 2, 2005			December 28, 2003
Operating activities
Net income		$	105,320		$	111,408
Adjustments to net income to arrive at cash provided by operating activities:
Depreciation		50,613			46,447
Amortization of intangible assets and unearned compensation		8,117			3,637
Deferred income tax					(6,713		)
Loss (gain) on disposal of property		2,386			(498		)
Minority interest, net of income taxes		248			403
Changes in assets and liabilities:
Net receivables		(28,853		)	24,369
Net inventories		(4,745		)	8,784
Accounts payable		(51,052		)	(29,155		)
Contract advances and allowances		(8,444		)	(3,782		)
Accrued compensation		(25,102		)	(16,294		)
Accrued income taxes		56,284			52,325
Accrued environmental		454			(796		)
Pension and other postretirement benefits		(16,201		)	(61,781		)
Other assets and liabilities		4,552			(8,118		)
Cash provided by operating activities		93,577			120,236
Investing activities
Capital expenditures		(36,533		)	(30,993		)
Acquisition of businesses		(164,198		)	(43,312		)
Proceeds from the disposition of property, plant, and equipment		305			1,646
Cash used for investing activities		(200,426		)	(72,659		)
Financing activities
Payments made on bank debt		(92,774		)	(26,590		)
Proceeds from issuance of long-term debt		200,000
Payments made for debt issue costs		(6,144		)
Net purchase of treasury shares		(26,085		)	(2,526		)
Proceeds from employee stock compensation plans		22,082			9,320
Cash provided by (used for) financing activities		97,079			(19,796		)
(Decrease) increase in cash and cash equivalents		(9,770		)	27,781
Cash and cash equivalents - beginning of period		56,891			14,383
Cash and cash equivalents - end of period		$	47,121		$	42,164

 

See Notes to the Consolidated Financial Statements.

 

5

 

Alliant Techsystems Inc.

Notes to the Consolidated Financial Statements (Unaudited)

Quarter Ended January 2, 2005

 

(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 January 2, 2005, and its results of operations and cash flows for the quarters and nine months ended January 2, 2005 and December 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. FAS 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 No. 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 No. 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.

 

In November 2004, the FASB issued SFAS No. 151, Inventory Costs.  This Statement requires that abnormal amounts of idle facility expense, freight, handling costs, and spoilage be recognized as current-period charges.  The Statement also requires that fixed production overhead be allocated to conversion costs based on the normal capacity of the production facilities.  SFAS No. 151 is effective for inventory costs incurred by ATK beginning in fiscal 2007.  ATK is in the process of determining the impact adoption of this Statement will have on its results of operations.

 

In December 2004, the FASB revised SFAS No. 123, Share Based Payment (SFAS No. 123R).  This Statement supercedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, which resulted in no stock-based employee compensation cost related to stock options if the options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.   SFAS No. 123R requires recognition of employee services provided in exchange for a share-based payment based on the grant date fair market value.  ATK is required to adopt SFAS No. 123R as of July 4, 2005 but may

 

6

 

elect to early adopt.  As of the effective date, this Statement applies to all new awards granted as well as awards modified, repurchased, or cancelled.  Additionally, compensation cost for stock-based awards that has not previously been recognized will be recognized as the remaining service is rendered.  ATK may also elect to restate prior periods by applying a modified retrospective method to periods prior to the effective date.  ATK is in the process of determining which method of adoption it will elect as well as the potential impact on its consolidated financial statements upon adoption.

 

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.

 

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 which is included in “Other” in the table below. 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 was 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 of approximately $155,000 generated in this acquisition is 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 acquisition 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.

 

7

 

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
Adjustments											(15,319		)	(152		)	(15,471		)
Balance at January 2, 2005		$	462,696		$	113,865		$	131,712		$	295,198		$	154,609		$	1,158,080

 

The adjustment to Ammunition’s goodwill during the quarter ended October 3, 2004 was due to adjustments of deferred taxes related to previous acquisitions.  The adjustments to Advanced Propulsion and Space Systems’ goodwill during the six months ended October 3, 2004 were primarily due to the recording of other intangible assets for ATK GASL resulting in a deduction from goodwill and adjustments of deferred taxes related to previous acquisitions while the adjustment during the quarter ended January 2, 2005 was due to the recording of other intangible assets for the PSI Group.  The adjustments to the Other goodwill were primarily due to the recording of other intangible assets for ATK Mission Research as well as adjustments of deferred taxes. The acquisition in Advanced Propulsion and Space Systems was the PSI Group.

 

Included in deferred charges and other non-current assets as of January 2, 2005 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 January 2, 2005 are amortizing intangible assets consisting of contracts and customer relationships, as follows:

 

Gross carrying amount		$	64,380
Accumulated amortization		(5,420		)
Net carrying amount		$	58,960

 

These assets are being amortized over their estimated useful lives, which range from two to 12 years. Amortization expense for the quarter and nine months ended January 2, 2005 was $2,411 and $5,420, respectively. ATK expects amortization expense related to these assets over the next five years to be as follows:

 

Remainder of fiscal 2005		$	2,411
Fiscal 2006		9,644
Fiscal 2007		9,278
Fiscal 2008		9,278
Fiscal 2009		6,995

 

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 nine months ended January 2, 2005 and December 28, 2003, net income as reported for each respective period is divided by (in thousands):

 

8

 

		Quarters Ended				Nine Months Ended
		January 2, 2005		December 28, 2003		January 2, 2005		December 28, 2003
Basic shares outstanding		37,718		38,624		37,576		38,589
Dilutive effect of stock options		524		709		556		715
Diluted shares outstanding		38,242		39,333		38,132		39,304
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		106		541		106		541

 

5.              Comprehensive Income

 

The components of comprehensive income, net of income taxes, for the quarters and nine months ended January 2, 2005 and December 28, 2003 were as follows:

 

		Quarters Ended						Nine Months Ended
		January 2, 2005			December 28, 2003			January 2, 2005			December 28, 2003
Net income		$	47,848		$	41,857		$	105,320		$	111,408
Other comprehensive income (OCI):
Change in fair value of derivatives, net of income taxes of $811, $1,817, $2,419, and $3,401, respectively		1,323			2,965			3,946			5,549
Change in fair value of available-for-sale securities, net of income taxes of $345, $136, $291, and $310, respectively		563			222			474			506
Total other comprehensive income		1,886			3,187			4,420			6,055
Total comprehensive income		$	49,734		$	45,044		$	109,740		$	117,463

 

6.              Other Liabilities

 

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

 

		January 2, 2005			March 31, 2004
Employee benefits and insurance		$	33,315		$	35,713
Warranty		13,698			14,559
Interest		10,934			10,838
Environmental remediation		9,071			6,709
Other		57,568			39,799
Total other current accrued liabilities		$	124,586		$	107,618
Environmental remediation		$	53,728		$	40,941
Management deferred compensation plan		26,037			24,258
Supplemental employee retirement plan		23,821			29,158
Interest rate swaps		14,928			22,805
Minority interest in joint venture		6,977			6,729
Other		14,015			20,778
Total other long-term liabilities		$	139,506		$	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 January 2, 2005:

 

9

 

Balance at October 3, 2004		$	14,052
Warranties issued		536
Changes related to preexisting warranties		(890		)
Balance at January 2, 2005		$	13,698

 

7.              Long-Term Debt and Interest Rate Swaps

 

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

 

		January 2, 2005			March 31, 2004
Senior Credit Facility dated March 31, 2004:
Term Loan B due 2011		$	307,226		$	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		1,187,226			1,080,000
Less current portion		3,096			4,000
Long-term debt		$	1,184,130		$	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 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 $4,700 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 $300,000 Revolving Credit Facility maturing in 2009 and a Term Loan B of $307,226 maturing in 2011.  The Term Loan B had an original balance of $400,000 of which ATK paid $90,000 in optional prepayments along with $2,774 of scheduled payments during the nine months ended January 2, 2005.  The Term Loan B requires quarterly principal payments of approximately $774 through March 2010 and approximately $72,744 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 $3,900 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

 

10

 

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 January 2, 2005, the weighted average interest rate for the Term Loan B was 3.88%. As of January 2, 2005, the interest rate on the Term Loan B was 5.76% 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 0.50% at January 2, 2005. As of January 2, 2005, ATK had no borrowings against its $300,000 revolving credit facility and had outstanding letters of credit of $65,198, which reduced amounts available on the revolving facility to $234,802. ATK’s weighted average interest rate on short-term borrowings was 4.80% during the quarter ended January 2, 2005.

 

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 $8,600 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 January 2, 2005, the interest rate on the Senior Subordinated Notes was 6.54% after taking into account the related interest rate swap agreements, which are discussed below.

 

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		$	774
Fiscal 2006		3,096
Fiscal 2007		3,096
Fiscal 2008		3,096
Fiscal 2009		3,096
Thereafter		1,174,068
Total		$	1,187,226

 

ATK’s total debt (current portion of debt and long-term debt) as a percentage of total capitalization (total debt and stockholders’ equity) was 64% as of January 2, 2005 and 66% as of March 31, 2004.

 

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Net cash paid for interest totaled $45,931 in the nine months ended January 2, 2005 and $48,240 in the nine months ended December 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 January 2, 2005, 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 January 2, 2005, ATK had the following interest rate swaps:

 

								Interest Rate
		Notional Amount			Fair Value			Pay Fixed		Receive Floating		Maturity Date
Cash flow hedges:
Amortizing swap		$	42,000		$	(898	)	5.25	%	2.56	%	December 2005
Amortizing swap		42,000			(907		)	5.27	%	2.55	%	December 2005
Non-amortizing swap		100,000			(9,390		)	6.06	%	2.56	%	November 2008
Derivative obligation					(11,195		)

 

							Receive Fixed		Pay Floating
Fair value hedges:
Non-amortizing swap		100,000		476			8.50	%	6.60	%	May 2011
Non-amortizing swap		100,000		(285		)	8.50	%	6.81	%	May 2011
Non-amortizing swap		200,000		(4,826		)	8.50	%	7.18	%	May 2011
Derivative obligation				(4,635		)
				$	(15,830	)

 

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 $(15,830) at January 2, 2005, a decline of $1,220 since October 3, 2004. Of the fair market value of $(15,830), $(14,928) was recorded within other long-term liabilities on the balance sheet, $(1,167) was in other current liabilities, and $265 was within other non-current assets.

 

12

 

8.     Employee Benefit Plans

 

		Pension Benefits
		Quarters Ended						Nine Months Ended
		January 2, 2005			December 28, 2003			January 2, 2005			December 28, 2003
Components of Net Periodic Benefit Cost
Service cost		$	10,502		$	8,498		$	30,867		$	31,291
Interest cost		29,179			25,338			86,163			93,298
Expected return on plan assets		(38,859		)	(33,750		)	(113,653		)	(124,273		)
Amortization of unrecognized net loss		5,144			1,433			15,177			5,276
Amortization of unrecognized prior service cost		(222		)	1,031			(652		)	3,798
Net periodic benefit cost before settlement / special termination benefits cost		5,744			2,550			17,902			9,390
Settlement								6,402
Special termination benefits costs								813
Net periodic benefit cost		$	5,744		$	2,550		$	25,117		$	9,390

 

		Postretirement Benefits
		Quarters Ended						Nine Months Ended
		January 2, 2005			December 28, 2003			January 2, 2005			December 28, 2003
Components of Net Periodic Benefit Cost
Service cost		$	296		$	171		$	798		$	452
Interest cost		4,646			6,344			14,459			16,764
Expected return on plan assets		(1,166		)	(1,051		)	(3,148		)	(2,776		)
Amortization of unrecognized net loss		2,166			2,318			5,744			6,127
Amortization of unrecognized prior service cost		(2,551		)	(1,291		)	(4,739		)	(3,412		)
Net periodic benefit cost before special termination benefits cost / curtailment		3,391			6,491			13,114			17,155
Special termination benefits costs								1,905
Curtailment											(7,179		)
Net periodic benefit cost		$	3,391		$	6,491		$	15,019		$	9,976

 

During the nine months ended January 2, 2005, ATK recorded a $6,402 settlement charge to recognize the impact of lump sum pension benefits that were paid.  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 nine months ended December 28, 2003 of $7,179 was due to a change in some of ATK’s other PRB plans.

 

Employer Contributions.  During the nine months ended January 2, 2005, ATK contributed $44,555 to its pension plans and $19,800 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 $30,000 to its other PRB plans in fiscal 2005, a decrease of $1,000 from previous expectations.

 

9.              Income Taxes

 

Income tax refunds, net of payments made, totaled $7,682 during the nine months ended January 2, 2005. Income taxes paid, net of refunds received, totaled $6,917 during the nine months ended December 28, 2003.

 

ATK’s provision for income taxes includes both federal and state income taxes. The income tax provisions for the quarter and nine months ended January 2, 2005 represent effective tax rates of 25.7% and 31.6%, respectively. The income tax provisions for the quarter and nine months ended December 28, 2003 represent effective tax rates of 25.3% and 31.9%, respectively.  Income tax provisions for interim periods are based on estimated effective annual income tax rates.

 

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The estimated effective tax rate for fiscal year 2005 of 32.4% differs from the federal statutory rate of 35% due to state income taxes, which increase the rate, and the following items which decrease the rate:  extraterritorial income (ETI) exclusion tax benefits, research and development (R&D) tax credits and the net benefit of discrete tax items, as explained further below.

 

On October 4, 2004, President Bush signed into law the “Working Families Tax Relief Act of 2004” which reinstated the R&D credit from July 1, 2004 through December 31, 2005.  The extension of the R&D credit is reflected in the tax rates noted above.

 

In addition, during the quarter ended January 2, 2005, the Company recorded discrete tax benefits of $1,826 for federal and state R&D credits as a result of a settlement with the Internal Revenue Service (IRS) for fiscal years 2002 and 2003 and related revisions in estimates, $675 for fiscal year 2004 federal and state R&D credits based on the tax return as filed and revisions in the estimated benefit that is ultimately expected to be realized, and $699 for a change in estimate of ETI benefit ultimately expected to be realized for fiscal year 2004.

 

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 are generally 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						Nine Months Ended
		January 2, 2005			December 28, 2003			January 2, 2005			December 28, 2003
Net income, as reported		$	47,848		$	41,857		$	105,320		$	111,408
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects		(1,693		)	(1,471		)	(4,690		)	(4,339		)
Pro forma net income		$	46,155		$	40,386		$	100,630		$	107,069
Earnings per share:
Basic—as reported		$	1.27		$	1.08		$	2.80		$	2.89
Basic—pro forma		1.22			1.05			2.68			2.77
Diluted—as reported		1.25			1.06			2.76			2.83
Diluted—pro forma		1.21			1.03			2.64			2.72

 

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

 

14

 

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 been tentatively set for February 22, 2005.

 

ATK believes that it 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 3.00% as of January 2, 2005 and 3.50% as of March 31, 2004. The decrease in the rate during the quarter ended January 2, 2005 resulted in additional expense of approximately $400. The following is a summary of the amounts recorded for environmental remediation:

 

		January 2, 2005						March 31, 2004
		Liability			Receivable			Liability			Receivable
Undiscounted (liability) receivable		$	(74,354	)	$	43,235		$	(58,625	)	$	25,876
Unamortized discount		11,555			(6,409		)	10,975			(3,745		)
Discounted (liability) receivable		$	(62,799	)	$	36,826		$	(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 $62,799 discounted liability as of January 2, 2005, $9,071 was recorded within other current liabilities and $53,728 was recorded within other long-term liabilities. Of the $36,826 discounted receivable, $6,806 was recorded within other current assets and $30,020 was recorded within other non-current assets. As of January 2, 2005, the estimated discounted range of reasonably possible costs of environmental remediation was $62,799 to $98,935.

 

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.

 

•                  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 March 31, 2005.

 

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•                  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.

 

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. The product qualification and start of production for the primary medium-caliber ammunition products occurred during the quarter ended January 2, 2005.   The final exit from TCAAP is expected to be completed by the end of March 2005, however, the timing is dependent on obtaining final exit approval from the Army.  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 January 2, 2005, approximately $1,000 was disbursed and an additional $400 was expensed. During the nine months ended January 2, 2005, approximately $8,000 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 January 2, 2005 was approximately $1,300 (not including the impact on the pension and other PRB plans).

 

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ATK expects approximately $1,400 in additional costs will be recorded, primarily in fiscal 2005, related to these restructuring and related activities.

 

On January 14, 2005, ATK announced its plans to move its fuze production operations from Janesville, WI to Rocket Center, WV.  In connection with this move, ATK expects to incur costs of approximately $5,000 during the fourth quarter of fiscal 2005 related primarily to employee termination benefits and accelerated depreciation.  ATK also expects to incur additional costs of approximately $5,000 in fiscal year 2006 primarily related to relocation and facility clean-up costs.  As the decision to move was made subsequent to January 2, 2005, no related costs or liabilities were recorded during or as of the quarter ended January 2, 2005.

 

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.

 

•                  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.

 

17

 

The following summarizes ATK’s results by operating segment:

 

		Quarters Ended						Nine Months Ended
		January 2, 2005			December 28, 2003			January 2, 2005			December 28, 2003
Sales to external customers:
ATK Thiokol		$	204,645		$	184,463		$	623,726		$	603,341
Ammunition		205,310			184,279			609,918			548,446
Precision Systems		132,712			126,571			382,818			354,976
Advanced Propulsion and Space Systems		109,556			68,504			273,129			182,743
Other		32,270						112,347
Total external sales		684,493			563,817			2,001,938			1,689,506
Intercompany sales:
ATK Thiokol		1,357			629			3,125			1,928
Ammunition		2,881			2,858			11,370			11,787
Precision Systems		11,982			2,720			22,233			8,317
Advanced Propulsion and Space Systems		12,056			7,410			29,603			24,365
Corporate and other		(28,276		)	(13,617		)	(66,331		)	(46,397		)
Total intercompany sales		—			—			—			—
Total sales		$	684,493		$	563,817		$	2,001,938		$	1,689,506
Income before interest, income taxes, and minority interest:
ATK Thiokol		$	28,105		$	31,052		$	88,357		$	101,648
Ammunition		21,046			19,416			49,704			53,649
Precision Systems		17,887			14,601			43,710			38,226
Advanced Propulsion and Space Systems		11,637			8,064			17,009			24,395
Corporate and other		3,228			(2,682		)	2,908			(9,775		)
Income before interest, income taxes, and minority interest		$	81,903		$	70,451		$	201,688		$	208,143

 

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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,

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

•                  changes in accounting or tax rules or pronouncements,

•                  actual pension asset returns and assumptions regarding future returns, discount rates, and service costs,

•                  changes in cost estimates related to restructuring or relocation of facilities,

•                  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 United States. Effective April 1, 2004 (fiscal 2005), ATK realigned its business

 

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