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EXCEL - IDEA: XBRL DOCUMENT - ALION SCIENCE & TECHNOLOGY CORP | Financial_Report.xls |
EX-31.1 - EX-31.1 - ALION SCIENCE & TECHNOLOGY CORP | d299764dex311.htm |
EX-31.2 - EX-31.2 - ALION SCIENCE & TECHNOLOGY CORP | d299764dex312.htm |
EX-32.1 - EX-32.1 - ALION SCIENCE & TECHNOLOGY CORP | d299764dex321.htm |
EX-32.2 - EX-32.2 - ALION SCIENCE & TECHNOLOGY CORP | d299764dex322.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2011
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 33389756
Alion Science and Technology Corporation
(Exact name of registrant as specified in its charter)
Delaware | 542061691 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1750 Tysons Boulevard, Suite 1300
McLean, VA 22102
(Address, of principal executive offices) (Zip Code)
(703) 9184480
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by 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 x No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-Accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
The number of shares outstanding of Alion Science and Technology Corporation Common Stock as of February 14, 2012 was: 5,910,260.
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2011
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Balance Sheets (unaudited)
As of December 31, 2011 and September 30, 2011
December 31, | September 30, | |||||||
2011 | 2011 | |||||||
(In thousands, except share and per share information) |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 16,711 | $ | 20,818 | ||||
Accounts receivable, net |
183,275 | 180,364 | ||||||
Prepaid expenses and other current assets |
5,833 | 6,086 | ||||||
|
|
|
|
|||||
Total current assets |
205,819 | 207,268 | ||||||
Property, plant and equipment, net |
11,338 | 10,367 | ||||||
Intangible assets, net |
10,041 | 11,734 | ||||||
Goodwill |
398,921 | 398,921 | ||||||
Other assets |
16,145 | 16,198 | ||||||
|
|
|
|
|||||
Total assets |
$ | 642,264 | $ | 644,488 | ||||
|
|
|
|
|||||
Current liabilities: |
||||||||
Interest payable |
$ | 15,800 | $ | 17,392 | ||||
Trade accounts payable |
62,167 | 52,355 | ||||||
Accrued liabilities |
49,040 | 48,435 | ||||||
Accrued payroll and related liabilities |
36,732 | 39,738 | ||||||
Billings in excess of revenue earned |
2,487 | 2,752 | ||||||
|
|
|
|
|||||
Total current liabilities |
166,226 | 160,672 | ||||||
Senior secured notes |
294,879 | 291,003 | ||||||
Senior unsecured notes |
242,279 | 242,064 | ||||||
Accrued compensation and benefits, excluding current portion |
6,031 | 5,729 | ||||||
Non-current portion of lease obligations |
11,921 | 10,762 | ||||||
Deferred income taxes |
45,925 | 44,181 | ||||||
Other liabilities |
980 | 980 | ||||||
Redeemable common stock, $0.01 par value, 8,000,000 shares authorized, 5,933,042 and 6,041,029 shares issued and outstanding at December 31, 2011 and September 30, 2011 |
124,297 | 126,560 | ||||||
Commitments and contingencies |
| | ||||||
Common stock warrants |
20,785 | 20,785 | ||||||
Accumulated other comprehensive loss |
(123 | ) | (123 | ) | ||||
Accumulated deficit |
(270,936 | ) | (258,125 | ) | ||||
|
|
|
|
|||||
Total liabilities, redeemable common stock and accumulated deficit |
$ | 642,264 | $ | 644,488 | ||||
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
1
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Three Months Ended | ||||||||
December 31, | ||||||||
2011 | 2010 | |||||||
(In thousands, except share and per share information) |
||||||||
Contract revenue |
$ | 189,891 | $ | 200,768 | ||||
Direct contract expense |
146,344 | 155,514 | ||||||
|
|
|
|
|||||
Gross profit |
43,547 | 45,254 | ||||||
|
|
|
|
|||||
Operating expenses: |
||||||||
Indirect contract expense |
12,496 | 9,634 | ||||||
General and administrative |
12,707 | 16,303 | ||||||
Rental and occupancy expense |
7,809 | 7,730 | ||||||
Depreciation and amortization |
2,854 | 2,990 | ||||||
|
|
|
|
|||||
Total operating expenses |
35,866 | 36,657 | ||||||
|
|
|
|
|||||
Operating income |
7,681 | 8,597 | ||||||
Other income (expense): |
||||||||
Interest income |
7 | 20 | ||||||
Interest expense |
(18,641 | ) | (18,404 | ) | ||||
Other |
(113 | ) | (61 | ) | ||||
Gain on debt extinguishment |
| 460 | ||||||
|
|
|
|
|||||
Total other income (expense) |
(18,747 | ) | (17,985 | ) | ||||
Loss before taxes |
(11,066 | ) | (9,388 | ) | ||||
Income tax expense |
(1,744 | ) | (1,744 | ) | ||||
|
|
|
|
|||||
Net loss |
$ | (12,810 | ) | $ | (11,132 | ) | ||
|
|
|
|
|||||
Basic and diluted loss per share |
(2.12 | ) | (1.97 | ) | ||||
|
|
|
|
|||||
Basic and weighted average common shares outstanding |
6,037,875 | 5,655,405 | ||||||
|
|
|
|
|||||
Net loss |
$ | (12,810 | ) | $ | (11,132 | ) | ||
Other comprehensive income before taxes |
||||||||
Postretirement medical plan actuarial gains |
| | ||||||
|
|
|
|
|||||
Comprehensive loss |
$ | (12,810 | ) | $ | (11,132 | ) | ||
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
2
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ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Statements of Cash Flows (unaudited)
Three Months Ended | ||||||||
December 31, |
||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (12,810 | ) | $ | (11,132 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
2,860 | 3,006 | ||||||
Bad debt expense |
302 | | ||||||
Paid-in-kind interest |
1,593 | 1,564 | ||||||
Amortization of debt issuance costs |
2,619 | 2,519 | ||||||
Incentive and stock-based compensation |
473 | 868 | ||||||
Gain on debt extinguishment |
| (460 | ) | |||||
Deferred income taxes |
1,744 | 1,744 | ||||||
Other gains and losses |
(102 | ) | (1 | ) | ||||
Changes in assets and liabilities: |
||||||||
Accounts receivable, net |
(3,213 | ) | 410 | |||||
Other assets |
52 | (832 | ) | |||||
Trade accounts payable |
9,812 | 2,071 | ||||||
Accrued liabilities |
(2,719 | ) | (6,806 | ) | ||||
Interest payable |
(1,592 | ) | (1,394 | ) | ||||
Other liabilities |
(170 | ) | 170 | |||||
|
|
|
|
|||||
Net cash used in operating activities |
(1,151 | ) | (8,273 | ) | ||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(694 | ) | (340 | ) | ||||
Proceeds from sale of fixed assets |
| 8 | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(694 | ) | (332 | ) | ||||
Cash flows from financing activities: |
||||||||
Repayment of unsecured notes |
| (1,510 | ) | |||||
Loan to ESOP Trust |
| (776 | ) | |||||
ESOP loan repayment |
| 776 | ||||||
Redeemable common stock purchased from ESOP Trust |
(2,262 | ) | (3,197 | ) | ||||
Redeemable common stock sold to ESOP Trust |
| 1,896 | ||||||
|
|
|
|
|||||
Net cash used in financing activities |
(2,262 | ) | (2,811 | ) | ||||
Net decrease in cash and cash equivalents |
(4,107 | ) | (11,416 | ) | ||||
Cash and cash equivalents at beginning of period |
20,818 | 26,695 | ||||||
|
|
|
|
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Cash and cash equivalents at end of period |
$ | 16,711 | $ | 15,279 | ||||
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|
|
|
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Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 16,008 | $ | 15,702 | ||||
Cash paid for taxes |
| | ||||||
Non-cash financing activities: |
||||||||
Paid-in-kind notes issued |
$ | 3,171 | $ | 3,103 | ||||
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Description and Formation of the Business
Alion Science and Technology Corporation and its subsidiaries (collectively, the Company or Alion) provide scientific, engineering and information technology expertise to research and develop technological solutions for problems relating to national defense, homeland security, and energy and environmental analysis. Alion provides services to federal government departments and agencies and, to a lesser extent, to commercial and international customers.
Alion was established in October 2001 as a for-profit S-Corporation to purchase substantially all of the assets and certain liabilities of IIT Research Institute (IITRI), a not-for-profit corporation controlled by Illinois Institute of Technology (IIT). In December 2002, Alion acquired substantially all of IITRIs assets and liabilities except for its Life Sciences Operation, for $127.3 million. Prior to that, the Companys activities were organizational in nature.
On March 22, 2010, the Company became a C-Corporation because it no longer met the Internal Revenue Code S-corporation requirement that it have only a single class of stock. In connection with the sale of the Secured Note Units, Alion issued deep-in-the-money common stock warrants considered to be a second class of stock. See Note 11.
(2) Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Alion Science and Technology Corporation (a Delaware corporation), and its wholly-owned subsidiaries and have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with generally accepted accounting principles, have been omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The statements are prepared on the accrual basis of accounting and include the accounts of Alion and its wholly-owned subsidiaries from their date of acquisition or formation. All inter-company accounts have been eliminated in consolidation. There were no changes to Alions subsidiaries in the current fiscal year.
In managements opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments and reclassifications that are necessary for fair presentation of the periods presented. The results for the three months ended December 31, 2011 are not necessarily indicative of the results to be expected for the full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Companys latest annual report on Form 10-K for the year ended September 30, 2011.
Fiscal, Quarter and Interim Periods
Alions fiscal year ends on September 30. The Company operates based on a three-month quarter, four-quarter fiscal year with quarters ending December 31, March 31, June 30, and September 30.
Use of Estimates
Preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported for assets and liabilities, disclosures of contingent assets and liabilities as of financial statement dates and amounts reported for operating results for each period presented. Actual results are likely to differ from those estimates, but management does not believe such differences will materially affect Alions financial position, results of operations, or cash flows.
Reclassifications
Beginning in fiscal 2012, the Company reorganized certain administrative functions. As a result, approximately $2.9 million in expenses formerly reported as general and administrative costs in fiscal 2011 are currently reported as indirect expenses. The Companys aggregate indirect and general and administrative expenses for the quarters ended December 31, 2011 and 2010 were $25.2 million and $25.9 million.
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Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Alion derives its revenue from delivering technology services under three types of contracts. Some contracts provide for reimbursement of costs plus fees; others are fixed-price or time-and-material type contracts. We recognize revenue when a contract has been executed, the contract price is fixed or determinable, delivery of services or products has occurred and our ability to collect the contract price is considered reasonably assured. Alion applies the percentage of completion method in Accounting Standards Codification (ASC) 605 Revenue Recognition to recognize revenue.
Alion recognizes revenue on cost-reimbursement contracts as it incurs costs and includes estimated fees earned. The Company recognizes time-and-material contract revenue at negotiated, fixed, contractually billable rates as it delivers labor hours and incurs other direct expenses. We use various performance measures under the percentage of completion method to recognize revenue for fixed-price contracts. Estimating contract costs at completion and recognizing revenue appropriately involve significant management estimates. Actual costs may differ from estimated costs and affect estimated profitability and revenue recognition timing. From time to time, facts develop that require us to revise estimated total costs or expected revenue. We record the cumulative effect of revised estimates in the period when the facts requiring revised estimates become known. We recognize the full amount of anticipated losses on any contract in the period a loss becomes known. For each of the periods presented, the cumulative effects of revised estimates were immaterial to the Companys financial performance.
Federal government contracts are subject to periodic funding by our contracting agency customers. A customer may fund a contract at inception or incrementally throughout the period of performance as services are provided. If we determine contract funding is not probable, we defer revenue recognition until realization is probable. The federal government can audit Alions contract costs and adjust amounts through negotiation. The federal government considers Alion a major contractor and maintains an office on site. DCAA is currently auditing our 2006 and 2007 claimed indirect costs. We are negotiating our 2005 indirect rates and have settled our rates through 2004. We timely submitted our indirect cost proposals for all open fiscal years and expect to submit this years incurred cost proposal next March 2012 as required. We have recorded revenue on federal government contracts in amounts we expect to realize.
Alion recognizes revenue on unpriced change orders as it incurs expenses and only to the extent it is probable it will recover such costs. The Company recognizes revenue in excess of costs on unpriced change orders only when management can also estimate beyond a reasonable doubt the amount of excess and experience provides a sufficient basis for recognition. Alion recognizes revenue on claims as expenses are incurred and only to the extent it is probable that it will recover such costs and can reliably estimate the amount it will recover.
Income Taxes
Alion accounts for income taxes by applying the provisions in currently enacted tax laws. The Company determines deferred income taxes based on the estimated future tax effects of differences between the financial statement and tax bases of its assets and liabilities. Deferred income tax provisions and benefits change as assets or liabilities change from year-to-year. In providing for deferred taxes, Alion considers the tax regulations of the jurisdictions where it operates; estimates of future taxable income; and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies change, the carrying value of deferred tax assets and liabilities may require adjustment.
Alion has a history of operating losses for both tax and financial statement purposes. The Company has recorded valuation allowances equal to deferred tax assets based on the likelihood that it may not be able to realize the value of these assets. Alion recognizes the benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the Companys position following an audit. For tax positions meeting the more likely than not threshold, the Company recognizes the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
Cash and Cash Equivalents
The Company considers cash in banks, and deposits with financial institutions with maturities of three months or less at time of purchase which it can liquidate without prior notice or penalty, to be cash and cash equivalents.
Accounts Receivable and Billings in Excess of Revenue Earned
Accounts receivable include billed accounts receivable, amounts currently billable and revenue in excess of billings on uncompleted contracts that represent accumulated project expenses and fees which have not been billed or are not currently billable as of the date of the consolidated balance sheet. Revenue in excess of billings on uncompleted contracts is stated at
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Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
estimated realizable value. Unbilled accounts receivable include revenue recognized for customer-related work performed by Alion on new and existing contracts for which the Company had not received contracts or contract modifications. The allowance for doubtful accounts is Alions best estimate of the amount of probable losses in the Companys existing billed and unbilled accounts receivable. The Company determines the allowance using specific identification and historical write-off experience based on age of receivables. Billings in excess of revenue and advance collections from customers represent amounts received from or billed to customers in excess of project revenue recognized to date.
Property, Plant and Equipment
Leasehold improvements, software and equipment are recorded at cost. Maintenance and repairs that do not add significant value or significantly lengthen an assets useful life are charged to current operations. Software and equipment are depreciated on the straight-line method over their estimated useful lives (typically 3 years for software and 5 years for equipment). Leasehold improvements are amortized on the straight-line method over the shorter of the assets estimated useful life or the life of the lease. Upon sale or retirement of an asset, costs and related accumulated depreciation are deducted from the accounts, and any gain or loss is recognized in the consolidated statements of operations.
Goodwill
Alion assigns the purchase price it pays to acquire the stock or assets of an entity to the net assets acquired based on the estimated fair value of the assets acquired. Goodwill is the purchase price in excess of the estimated fair value of the tangible net assets and separately identified intangible assets acquired. Purchase price allocations for acquisitions involve significant estimates and management judgments may be adjusted during the purchase price allocation period. There are no acquisitions with open measurement periods.
The Company accounts for goodwill and other intangible assets in accordance with the provisions of ASC 350, Intangibles, Goodwill and Other. We are required to review goodwill at least annually for impairment or, more frequently if events and circumstances indicate goodwill might be impaired. We perform our annual review at the end of each fiscal year. Alion is required to recognize an impairment loss to the extent that goodwill carrying amount exceeds fair value. Evaluating any impairment to goodwill involves significant management estimates. To date, these annual reviews have resulted in no goodwill adjustments.
Alion operates in one segment and tests goodwill at the reporting unit level. Each Alion reporting unit delivers a similar set of professional engineering services to a wide array of federal government customers, principally within the Department of Defense. Each reporting unit provides the full range of services Alion offers to customers overall. This holds true both for Alions current reporting units and for the Companys former reporting units.
Alions management has organized reporting units based on managerial responsibility and administrative structure, contract portfolios, and the availability of discrete financial information. Management evaluates reporting unit financial performance based on contract revenue and non-GAAP operating income. Alion does not maintain reporting unit balance sheets and the Company does not track cash flows by reporting unit.
Management identifies reporting units as sectors which in turn include lower level business units identified as groups consisting of still lower level operations. For each business combination, management assigned the goodwill arising from acquisitions to the reporting unit or units expected to benefit from the synergies of each business combination. Coincident with its goodwill determination and purchase price allocation, management assigned assets acquired to reporting units based on the unit or units anticipated to utilize such assets. Management did not allocate to reporting units the liabilities arising from business combinations.
In 2011, Alions reporting units were: the Engineering and Integration Solutions Sector (EISS) and the Technology, Engineering and Operational Solutions Sector (TEOSS). In 2010, Alions reporting units were EISS, the Defense Operations Integration Sector (DOIS), and the Engineering and Information Technology Sector (EITS).
In 2011, Alions TEOSS reporting unit had $437.0 million in contract revenue; the EISS reporting unit had $357.1 million in contract revenue. In 2010, EISS had $377.4 million in contract revenue; DOIS had $258.0 million in contract revenue; and EITS had $203.7 million in contract revenue. Total contract revenue for all reporting units exceeds Alions total reported revenue because reporting unit contract revenue does not include the effects of inter-company eliminations, discounts and GSA industrial funding fees that the Company does not track by reporting unit. These amounts were $6.8 million for fiscal 2011 and $5.1 million for fiscal 2010.
6
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In 2011, management reorganized Alions two smaller reporting units, DOIS and EITS, to form the new TEOSS reporting unit. Management undertook the reorganization to optimize Alions reporting structure, reduce the number of subsidiary organizations in its reporting units, eliminate duplicative staff and reduce operating expenses. As part of this reorganization, management reduced the number of groups within the new sector, and reorganized the remaining groups. Management realigned both contracts and staff at the group and operation level and re-configured the Companys financial reporting systems to accumulate information based on Alions new structure.
Management established TEOSS as part of Alions effort to respond to pricing pressures in the government contracting industry arising from actual and potential federal budget cuts and to improve the Companys competitive position in the market place. Management also reorganized various administrative functions to change the Companys cost structure with the goal of winning new contracts with higher negotiated fee rates. Management expects this reorganization will allow the Company to reduce operating costs and better position Alion to win new business in an increasingly price-sensitive, cost-conscious environment.
Establishing the TEOSS reporting unit did not affect the $197 million in goodwill previously allocated to EISS. When management established TEOSS, it assigned $201.9 million in aggregate goodwill to the new reporting unit. Management based its goodwill allocation on historical acquisitions attributable to the newly-formed reporting unit. TEOSS goodwill includes $124.3 million in goodwill previously assigned to DOIS and $77.6 million in goodwill previously assigned to EITS.
Management applied the guidance in Accounting Standards Codification (ASC) Topic 350 IntangiblesGoodwill and Other and the related guidance in ASC Topic 280 Segment Reporting to analyze Alions new reporting units to determine the appropriate level at which to test goodwill for potential impairment. Management specifically considered whether the former DOIS and EITS reporting units continued to exist as potential TEOSS components required to be tested separately for impairment. Changes to Alions financial information systems to accommodate tracking and reporting for the TEOSS segment preclude management from obtaining discrete financial information for either DOIS or EITS which ceased to exist as separately trackable organizations within the Company. The absence of discrete financial data for the former DOIS and EITS reporting units, and the material changes to them arising from the reorganization led management to conclude that neither DOIS nor EITS was capable of being tested individually for potential impairment to goodwill. Management also concluded that this reorganization did not affect the Companys determination of estimated fair value or its goodwill impairment analysis at the reporting unit level or in the aggregate.
The Company employs a reasonable, supportable and consistent method to assign goodwill to reporting units expected to benefit from the synergies arising from acquisitions. Alion determines reporting unit goodwill in a manner similar to the way it determines goodwill in a purchase allocation by using fair value to determine reporting unit purchase price, assets, liabilities and goodwill. Reporting unit residual fair value after this allocation is the implied fair value of reporting unit goodwill. The Companys 2011 reorganization from three into two reporting units is otherwise consistent in structure with goodwill analyses and allocations in prior periods. There have been no changes to goodwill carrying value since 2009.
The Company performs its own independent analysis to determine whether goodwill is potentially impaired. Management performs a discounted cash flow analysis and uses market-multiple-based analyses to estimate the enterprise fair value of Alion and its reporting units and the fair value of reporting unit goodwill in order to test goodwill for potential impairment. Management independently determines the rates and assumptions it uses: to perform its goodwill impairment analysis; to assess the probability of future contracts and revenue; and to evaluate the recoverability of goodwill. December 2011 contract backlog was approximately 7.8 times trailing twelve month revenue.
Alions cash flow analysis depends on several significant management inputs and assumptions. Management uses observable inputs, rates and assumptions generally consistent with those used by the independent third party to prepare the valuation report for the ESOP Trustee. However, Managements sensitivity analyses also incorporated a more conservative range of growth assumptions in addition to assumptions generally consistent with those used by the independent third party to prepare the valuation report for the ESOP Trust. Managements cash flow analysis includes the following significant inputs and assumptions: estimated future revenue and revenue growth; estimated future operating margins and EBITDA; observable market multiples for comparable companies; and a discount rate consistent with a market-based weighted average cost of capital. Management includes EBITDA in its analysis in order to use publicly available valuation data.
7
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the Companys most recent impairment testing, market multiples for trailing twelve month EBITDA for comparable companies (publicly traded professional services government contractors) ranged from a low of 10.9 to a high of 20.8, with a median value of 14.1. Market multiples for trailing twelve month revenue ranged from a low of 1.02 to a high of 2.3, with a median value of 1.36. Management based its valuation on projected revenue and EBITDA and discounted median market multiples by 20-40% to reflect Alions recent financial performance and the uncertainties of future financial performance. Management used a weighted average cost of capital rate of 13.0% derived from market-based inputs, the tax-effected interest cost of Alions outstanding debt and a hypothetical market participant capital structure. Management estimates future years EBITDA based on Alions historical adjusted EBITDA as a percentage of revenue. Management based its estimates of future revenue growth on existing contract backlog and recent contract wins. Management analyzed goodwill for impairment using a range of near-term growth values of 5-8% and a range of 0-3% for longer-term out year forecasts.
Prior year market multiples for trailing twelve month EBITDA for comparable professional services government contractors ranged from a low of 7.5 to a high of 11.1 with a median value of 8.1. Prior year market multiples for trailing twelve month revenue ranged from a low of 0.61 to a high of 0.76, with a median value of 0.71. The prior year weighted average cost of capital rate was 12.5% derived from market-based inputs, the tax-effected interest cost of Alions outstanding debt and a hypothetical market participant capital structure. Last year management discounted median market multiples by up to 22% to reflect Alions lower EBITDA margins compared to its peer group.
There were no changes to the methods used to evaluate goodwill in prior periods. Changes in one or more inputs could materially alter the calculation of Alions enterprise fair value and thus the Companys determination of whether its goodwill is potentially impaired. A hypothetical 10% increase or decrease in the weighted average cost of capital rate at September 30, 2011, would have produced a corresponding approximate 5% decrease or increase in estimated enterprise value. Alions enterprise value based on EBITDA multiples from mergers and acquisitions in the market place was approximately 16-18% higher than discounted cash flow enterprise value at September 30, 2011.
Management reviews the Companys internally computed enterprise fair value to confirm the reasonableness of the internal analysis and compares the results of its independent analysis with the results of the independent third party valuation report prepared for the ESOP Trustee. Management compares each reporting units carrying amount to its estimated fair value. If a reporting units carrying value exceeds its estimated fair value, the Company compares the reporting units goodwill carrying amount with the corresponding implied fair value of its goodwill. If the carrying amount of reporting unit goodwill exceeds its fair value, the Company recognizes an impairment loss to the extent that the carrying amount of goodwill exceeds implied fair value. Alion performs impairment testing on an enterprise value basis as there is no public market for the Companys common stock. The Company allocates the goodwill related to acquisitions on a specific identification basis consistent with reporting unit structure.
Management determined that, on an enterprise value basis, Alions reporting units have positive carrying value. In reviewing its discounted cash flow analysis prepared for testing goodwill for potential impairment, management considered macroeconomic and other conditions such as:
| the deterioration in general economic conditions arising from federal budget deficits; |
| Alions recent credit downgrade and the potential for limiting future access to capital; |
| An increase in market risks and a higher discount rate for valuing estimated future cash flows; |
| Defense and aerospace Industry and market concerns about the effects of federal budget deficits on future Department of Defense procurement actions; |
| a decline in market-dependent multiples and metrics in both absolute terms and for Alion relative to its peers; |
| the decline in Alions current year sales compared to last year; |
| the Companys ability to access increased liquidity as a result of its recently-amended larger revolving credit facility; |
| Alions success in obtaining $600 million of additional customer contract funding and new contracts from June through September 2011. |
Alion completed its most recent goodwill impairment analysis in the fourth quarter of fiscal year 2011 and concluded no goodwill impairment existed as of September 30, 2011. Management determined the totality of events and circumstances would not have supported a decision to roll forward its prior year goodwill impairment analysis and avoid performing a step one goodwill impairment analysis. Management chose to perform a step one analysis which supported a lower enterprise value for Alion as of September 2011 compared to September 2010. September 2011 estimated discounted future cash flows declined 10% compared to September 2010 while the estimated fair value of Alions outstanding debt declined less than one percent from September 2010 to September 2011. As a result of changes in Alions estimated enterprise fair value, the
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
estimated fair value of Alions outstanding common stock declined approximately 22% from September 2010 to September 2011. As of September 30, 2011, the estimated fair value of each reporting unit substantially exceeded its carrying value and enterprise value. Consistent with prior years disclosures, this years 10% decline in discounted cash flows compared to last years analysis, did not result in an impairment to goodwill. Given the results of the Companys impairment testing under step one; it is unlikely that a reasonably likely change in assumptions would have triggered an impairment. A hypothetical 10% decrease in fair value would not have resulted in impairment to goodwill for any reporting unit or triggered the need to perform additional step two analyses for any reporting unit. There were no changes to goodwill in the quarter ended December 31, 2011 nor were there any significant events in the quarter that indicated impairment to goodwill as of December 31, 2011.
The tables below set out for each reporting unit as of September 30, 2011 and 2010: the goodwill assigned to each reporting unit; reporting unit carrying value; reporting unit estimated fair value; and the excess of estimated fair value over carrying value for each reporting unit. The tables present values for EISS for 2011 and 2010; DOIS and EITS for 2010; and TEOSS for 2011. Management used the reporting unit estimated fair values presented below in testing goodwill for impairment in the fourth quarter of fiscal year 2011 and 2010.
Goodwill | Carrying Value |
Estimated Fair Value |
Excess of Estimated Fair Value over Carrying Value |
|||||||||||||||||
at September 30, 2011 | ||||||||||||||||||||
Sector |
(In millions, except percentages) | |||||||||||||||||||
TEOSS |
$ | 201.9 | $ | 212.8 | $ | 295.6 | $ | 82.8 | 39 | % | ||||||||||
EISS |
197.0 | 205.9 | 242.8 | 36.9 | 18 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 398.9 | $ | 418.7 | $ | 538.4 | $ | 119.7 | 29 | % | ||||||||||
|
|
|
|
|
|
|
|
Goodwill | Carrying Value |
Estimated Fair Value |
Excess of Estimated Fair Value over Carrying Value |
|||||||||||||||||
at September 30, 2010 | ||||||||||||||||||||
Sector |
(In millions, except percentages) | |||||||||||||||||||
DOIS |
$ | 124.3 | $ | 129.3 | $ | 204.7 | $ | 75.4 | 58 | % | ||||||||||
EITS |
77.6 | 81.3 | 154.5 | 73.2 | 90 | % | ||||||||||||||
EISS |
197.0 | 203.8 | 284.2 | 80.4 | 39 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 398.9 | $ | 414.4 | $ | 643.4 | $ | 229.0 | 55 | % | ||||||||||
|
|
|
|
|
|
|
|
Intangible Assets
Alion amortizes intangible assets as it consumes economic benefits over estimated useful lives. As of December 31, 2011, the Company had approximately $10.0 million in net intangible assets, primarily contracts purchased through the JJMA and Anteon contract acquisitions.
Purchased contracts |
1 13 years | |||
Internal use software and engineering designs |
2 3 years | |||
Non-compete agreements |
3 6 years |
Redeemable Common Stock
There is no public market for Alions redeemable common stock and therefore no observable price for its equity, individually or in the aggregate. The ESOP Trust holds all the Companys outstanding common stock. Under certain circumstances, ESOP beneficiaries can require the ESOP Trust to distribute the value of their beneficial interests. The Internal Revenue Code (IRC) and Employee Retirement Income Security Act (ERISA) require the Company to offer a liquidity put right to ESOP participants who receive Alion common stock. The put right requires the Company to purchase distributed shares at any time during two put option periods at then current fair market value. Common stock distributed by the ESOP Trust is subject to a right of first refusal. Prior to any subsequent transfer, the shares must first be offered to the Company and then to the ESOP Trust. Eventual redemption of shares of Alion common stock as a result of distributions is outside the Companys control; therefore, Alion classifies its outstanding shares of redeemable common stock as a liability.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At each reporting date Alion is required to increase or decrease the reported value of its outstanding common stock to reflect its estimated redemption value. Management estimates the value of this liability in part by considering the most recent price at which the Company was able to sell shares to the ESOP Trust (current share price multiplied by total shares issued and outstanding). In its fiduciary capacity the ESOP Trustee is independent of the Company and its management. Consistent with its fiduciary responsibilities, the ESOP Trustee retains an independent third party valuation firm to assist it in determining the fair market value (share price) at which the Trustee may acquire or dispose of investments in Alion common stock. The Audit and Finance Committee of Alions Board of Directors reviews the reasonableness of the liability Management has determined is appropriate for the Company to recognize in its financial statements for outstanding redeemable common stock. The Audit and Finance Committee considers various factors in its review, including, in part, the most recent valuation report and the share price selected by the ESOP Trustee.
Alion records changes in the reported value of its outstanding common stock through an offsetting charge or credit to accumulated deficit. There were no fair value adjustments to redeemable common stock in the current quarter. The accumulated deficit at December 31, 2011 included $16.6 million for changes in the Companys share redemption liability. Outstanding redeemable common stock had an aggregate fair value of approximately $124.3 million as of December 31, 2011. Management estimates the fair value price per share of Alion common stock by considering in part the most recent price at which the Company was able to sell shares to the ESOP Trust as well as information contained in the most recent valuation report that an independent, third-party firm prepares for the ESOP Trustee.
Concentration of Credit Risk
Alion is subject to credit risk for its cash equivalents and accounts receivable. The Company believes the high credit quality of its cash equivalent investments limits its credit risk with respect to such investments. Alion believes its concentration of credit risk with respect to accounts receivable is limited as the receivables are principally due from the federal government.
Off-Balance Sheet Financing Arrangements
Alion accounts for operating leases entered into in the routine course of business in accordance with ASC 840 Leases. We have no off-balance sheet financing arrangements other than operating leases and letters of credit under our revolving credit agreement. Alion has no relationship with any unconsolidated or special purpose entity and has not issued any guarantees.
Fair Value of Financial Instruments
Alion is required to disclose the fair value of its financial instruments, but is not required to record its senior long term debt at fair value. See Note 9 for a discussion of Alions long term debt and Note 10 for the related fair value disclosures. The fair value of cash, cash equivalents, accounts payable and accounts receivable is not materially different from carrying value because of the short maturity of those instruments.
Recently Issued Accounting Pronouncements
In December 2010, FASB issued Accounting Standards Update 2010-28 (ASU 2010-28) Goodwill and Other Intangibles When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. ASU 2010-28 updates ASC 350 Intangibles Goodwill and Other (ASC 350). ASU 2010-28 modifies goodwill impairment testing for reporting units with zero or negative carrying amounts.
ASU 2010-28 requires an entity to perform a step two goodwill impairment analysis for reporting units with zero or negative carrying value as part of an annual goodwill impairment analysis; whenever an event occurs or circumstances indicate that a reporting units fair value is more likely than not below its carrying amount; whenever an event occurs or circumstances indicate that a goodwill impairment exists; and upon adoption of the standard.
ASU 2010-28 is effective for fiscal years beginning on or after December 15, 2010, and can only be applied prospectively. Any goodwill impairment recognized on adopting ASU 2010-28 is to be recorded as a cumulative effect adjustment to retained earnings in the period of adoption. Any goodwill impairments occurring subsequent to adoption are to be recognized in current earnings as required by ASC 350. The Company adopted ASU 2010-28 this quarter with no effect on Alions consolidated financial position or operating results.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In September 2011, the FASB issued Accounting Standards Update 2011-08 (ASU 2011-08), Intangibles Goodwill and Other (Topic 350) Testing Goodwill for Impairment. ASU 2011-08 permits an entity to first assess qualitative factors including the totality of events and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value and therefore whether to test goodwill for impairment. Under ASU 2011-08 an entity may bypass qualitative assessment for any reporting unit in any period and perform a Step One analysis and may resume using qualitative assessment in any subsequent period.
ASU 2011-08 removes the requirement that an entity calculate the fair value of a reporting unit unless the entity determines it is more likely than not that the reporting units fair value is less than its carrying value. Where an entity is required to test goodwill for impairment, ASU 2011-08 does not change existing guidance on how to test goodwill for impairment. The update improves the examples an entity should consider in determining whether to measure an impairment loss for a reporting unit with negative carrying value. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company adopted ASU 2011-08 this quarter with no effect on Alions consolidated financial position or operating results.
In May 2011, the FASB issued Accounting Standards Update 2011-04 (ASU 2011-04) Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 provides guidance on how to measure fair value; expands fair value disclosure requirements; and offers guidance on what disclosures to make about fair value measurements. Alion already provides the expanded fair value disclosures that ASU 2011-04 will require for all public companies effective for interim and annual periods beginning after December 15, 2011. The Company does not believe adopting ASU 2011-04 will affect Alions consolidated financial position or operating results.
In June 2011, the FASB issued Accounting Standards Update 2011-05 (ASU 2011-05) Comprehensive Income (Topic 220) Presentation of Comprehensive Income. ASU 2011-05 requires entities to present all non-owner changes in stockholders equity either in a continuous, single statement of comprehensive income or in two separate, but consecutive, statements. An entity that presents two statements must present total net income and its components in the first statement followed by a second statement that presents total other comprehensive income and its components, along with total comprehensive income.
ASU 2011-05 does not change how an entity calculates earnings per share; the items to be reported in other comprehensive income; or when items must be reclassified to net income. An entity is still permitted to present components of other comprehensive income net of tax effects or before tax effects with tax effects for all items of other comprehensive income presented in the aggregate. An entity must disclose the tax effects of each item of other comprehensive income in the notes to its financial statements. Alions only item of other comprehensive income is amortization of actuarial gains and losses for the Companys post-retirement medical benefit plan which has no effect on Alions provision for income taxes.
ASU 2011-05 is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2011. ASU 2011-05 is to be applied retrospectively; early adoption is permitted. The Company adopted ASU 2011-05 this quarter with no effect on Alions consolidated financial position or operating results.
(3) Employee Stock Ownership Plan (ESOP) and ESOP Trust
In December 2001, the Company adopted the Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan (the Plan) and the ESOP Trust. The Plan, a tax qualified retirement plan, includes an ESOP and a 401(k) component. In April 2010, the Internal Revenue Service (IRS) issued a determination letter that the ESOP Trust and the Plan, as amended and restated as of October 1, 2006, including Plan amendments executed in June 2009 and May 2010; qualify under Sections 401(a) and 501(a) of the IRC.
In August 2008, Alion amended the Trust Agreement between the Company and the ESOP Trust. In June 2011, the Company amended the Plan to eliminate the one year service requirement for employer 401(k) matching contributions; to automatically enroll new hires in the Plans 401(k) component; and to designate all future profit sharing contributions solely in Alion common stock. Alion believes that the Plan and the ESOP Trust have been designed and are being operated in compliance with applicable IRC requirements.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Alion makes 401(k) matching contributions in shares of its common stock. The Company matches the first 3% and one-half of the next 2% of eligible employee salary deferrals by contributing shares of Alion common stock to the ESOP Trust on March 31 and September 30 each year. The Company also makes profit sharing contributions of Alion common stock to the ESOP Trust on the same dates. Up through June 2011, Alion contributed 1% of eligible employee compensation in common stock to the ESOP Trust and 1.5% of eligible employee compensation in cash to the 401(k) component. As of July 2011, profit sharing contributions of 2.5% of eligible employee compensation are entirely in shares of Alion common stock.
Alion recognized $3.3 million and $3.1 million in expense for the Plan for the quarters ended December 31, 2011 and 2010. Current year expense will be satisfied by issuing common stock. Last year, $2.4 million in expense related to Alion common stock and $700 thousand was in cash.
(4) Loss Per Share
Basic and diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding excluding the impact of warrants. Even after including required adjustments to the earnings per share numerator, warrants are anti-dilutive for all periods presented. In March 2010, Alion issued its Secured Notes and warrants to purchase 602,614 shares of Alion common stock The Secured Note warrants have a penny per share exercise price and exercisable until March 15, 2017. The Secured Note warrants are not redeemable and do not have price protection; they are classified as permanent equity.
(5) Redeemable Common Stock Owned by ESOP Trust
The ESOP Trust owns all of Alions issued and outstanding common stock, for the benefit of current and former employee participants in the Alion KSOP. Participants and beneficiaries are entitled to a distribution of the fair value of their vested ESOP account balance upon death, disability, retirement or termination of employment. The Plan permits distributions to be paid over a five year period commencing the year after a participants retirement at age 65, death or disability. Alion can delay distributions to other terminating participants for five years before commencing payment over a subsequent five year period.
Terminating ESOP participants can hold or immediately sell their distributed shares to the Company. If a participant elects to hold distributed shares, the IRC and ERISA require Alion to offer a put option to allow the recipient to sell stock to Alion at the estimated fair value share price based on the most recent price at which the Company was able to sell shares to the ESOP Trust ($20.95 at September 30, 2011). The put right requires Alion to purchase distributed shares during two put option periods at then-current fair market value. Consistent with its duty of independence from Alion management and its fiduciary responsibilities, the ESOP Trustee retains an independent third party valuation firm to assist it in determining the fair market value (share price) at which the Trustee may acquire or dispose of investments in Alion common stock.
The Audit and Finance Committee of Alions Board of Directors reviews the reasonableness of the liability for outstanding redeemable common stock that Alion management has determined is appropriate for the Company to recognize in its financial statements. The Audit and Finance Committee considers various factors in its review, including in part, the valuation report and the share price selected by the ESOP Trustee. Management considers the share price selected by the ESOP Trustee along with other factors, in estimating Alions aggregate liability for outstanding redeemable common stock owned by the ESOP Trust. A limited number of participants who beneficially acquired shares of Alion common stock on December 20, 2002, can sell such shares distributed from their accounts at the greater of $10.00 or the current estimated fair value share price.
Although the Company and the ESOP retain the right to delay distributions consistent with the terms of the Plan, and to control the circumstances of future distributions, eventual redemption of shares of Alion common stock is deemed to be outside the Companys control.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(6) Accounts Receivable
Accounts receivable at December 31, 2011 and September 30, 2011 consisted of the following:
December 31, | September 30, | |||||||
2011 | 2011 | |||||||
(In thousands) | ||||||||
Billed receivables and amounts billable as of the balance sheet date |
$ | 82,289 | $ | 85,242 | ||||
Unbilled receivables: |
||||||||
Amounts billable after the balance sheet date |
43,518 | 40,621 | ||||||
Revenues recorded in excess of milestone billings on fixed price contracts |
2,487 | 2,737 | ||||||
Revenues recorded in excess of estimated contract value or funding |
34,257 | 30,759 | ||||||
Retainages and other amounts billable upon contract completion |
24,445 | 24,416 | ||||||
Allowance for doubtful accounts |
(3,721 | ) | (3,411 | ) | ||||
|
|
|
|
|||||
Total Accounts Receivable |
$ | 183,275 | $ | 180,364 | ||||
|
|
|
|
Revenues recorded in excess of milestone billings on fixed price contracts are not yet contractually billable. Unbilled amounts billable after the balance sheet date consist principally of amounts to be billed within the next year. Any remaining unbilled balance including retainage is billable upon contract completion or completion of DCAA audits. Revenue recorded in excess of contract value or funding is billable upon receipt of contractual amendments or other modifications. Costs and estimated earnings in excess of billings on uncompleted contracts totaled approximately $104.7 million as of December 31, 2011 and included approximately $34.3 million for customer-requested work for which the Company had not received contracts or contract modifications. At September 30, 2011, costs and estimated earnings in excess of billings on uncompleted contracts totaled approximately $98.5 million and included approximately $30.8 million for customer-requested work for which the Company had not received contracts or contract modifications. In keeping with industry practice, Alion classifies all contract-related accounts receivable as current assets based on contractual operating cycles which frequently exceed one year. Unbilled receivables are expected to be billed and collected within one year except for $24.4 million at December 31, 2011.
(7) Property, Plant and Equipment
December 31, | September 30, | |||||||
2011 | 2011 | |||||||
(In thousands) | ||||||||
Leasehold improvements |
$ | 12,466 | $ | 11,281 | ||||
Equipment and software |
33,887 | 33,373 | ||||||
|
|
|
|
|||||
Total cost |
46,353 | 44,654 | ||||||
Less: accumulated depreciation and amortization |
(35,015 | ) | (34,287 | ) | ||||
|
|
|
|
|||||
Net Property, Plant and Equipment |
$ | 11,338 | $ | 10,367 | ||||
|
|
|
|
Depreciation and leasehold amortization expense for fixed assets was approximately $940 thousand and $1.2 million for the quarters ended December 31, 2011 and 2010.
(8) Goodwill and Intangible Assets
As of December 31, 2011, Alion had approximately $399 million in goodwill. There were no changes in the goodwill carrying amount during the current quarter.
Intangible assets consist primarily of contracts acquired through the Anteon and JJMA transactions. The table below shows intangible assets as of December 31, 2011 and September 30, 2011.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 | September 30, 2011 | |||||||||||||||||||||||
Gross | Accumulated Amortization |
Net | Gross | Accumulated Amortization |
Net | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Purchased contracts |
$ | 111,635 | $ | (102,420 | ) | $ | 9,215 | $ | 111,635 | $ | (100,864 | ) | $ | 10,771 | ||||||||||
Internal use software and engineering designs |
3,182 | (2,356 | ) | 826 | 3,182 | (2,219 | ) | 963 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 114,817 | $ | (104,776 | ) | $ | 10,041 | $ | 114,817 | $ | (103,083 | ) | $ | 11,734 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining amortization period of intangible assets was approximately three years at December 31, 2011 and September 30, 2011. Amortization expense was approximately $1.7 million and $1.8 million for the quarters ended December 31, 2011 and 2010. Estimated aggregate amortization expense for the next five years and thereafter is as follows.
Fiscal year ending September 30, |
(In thousands) | |||
2012 (nine months remaining) |
$ | 4,413 | ||
2013 |
3,588 | |||
2014 |
1,079 | |||
2015 |
736 | |||
2016 |
141 | |||
2017 |
51 | |||
Thereafter |
33 | |||
|
|
|||
$ | 10,041 | |||
|
|
(9) Long-Term Debt
Alions current debt structure includes a $35 million revolving credit facility, $320.1 million in Secured Notes ($310 million in initial face value plus, $10.1 million in PIK interest notes issued) and $245 million of Unsecured Notes. The Company is in compliance with each of the affirmative and negative financial and non-financial covenants in its existing debt agreements as of December 31, 2011.
Credit Agreement
In March 2010, Alion entered into an agreement for a $25.0 million senior revolving credit facility that matures August 2014. In March 2011, Alion and its lenders amended the revolving credit facility agreement increasing the credit limit to $35 million. In August 2011, Alion and its lenders amended the revolving credit facility agreement to revise the definition of Consolidated EBITDA and increase the Minimum Consolidated EBITDA covenant. The Company can use its credit facility for working capital, permitted acquisitions and general corporate purposes, including up to $35.0 million in letters of credit and up to $5.0 million in short-term swing line loans. As of December 31, 2011, the Company had $687 thousand in outstanding letters of credit and no balance actually drawn.
Security. The Credit Agreement is secured by a first priority security interest in all current and future tangible and intangible property of Alion and its guarantor subsidiaries, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation. On March 22, 2010 Alion and the subsidiary guarantors entered into an Intercreditor Agreement with Wilmington Trust Company and Credit Suisse AG, Cayman Islands Branch to grant Credit Agreement lenders a super priority of payment with respect to the underlying collateral.
Guarantees. Alions Credit Agreement obligations are guaranteed by its subsidiaries, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation. These subsidiaries also guarantee all the Companys Secured Note and Unsecured Note obligations (described below).
Interest and Fees. Alion can choose whether the Credit Agreement loans bear interest at one of two floating rates using either a Eurodollar rate or an alternative base rate. The minimum interest rate is 8.5%. The minimum Eurodollar interest rate is 2.5% plus 600 basis points. The minimum alternate base rate is 3.5% plus 500 basis points.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Other Fees and Expenses. Each quarter Alion pays a commitment fee of 175 basis points per year on the prior quarters daily unused Credit Agreement balance. The Company paid approximately $152 thousand and $112 thousand in commitment fees for the quarters ended December 31, 2011 and 2010.
Alion pays letter-of-credit issuance and administrative fees, and up to a 25 basis point fronting fee and interest in arrears each quarter on all outstanding letters of credit. The interest rate is based on the Eurodollar loan rate which was 6.0% as of December 31, 2011. The Company also pays an annual agents fee.
Covenants. The Credit Agreement requires Alion to achieve minimum trailing twelve month Consolidated EBITDA levels which increase over the life of the agreement. The table below sets out the required minimum for the remaining life of the Credit Agreement.
Period |
Minimum Consolidated EBITDA | |||
October 1, 2011 through September 30, 2012 |
$ | 60.5 million | ||
October 1, 2012 through September 30, 2013 |
$ | 63.0 million | ||
October 1, 2013 through August 22, 2014 |
$ | 65.5 million |
The Credit Agreement defines Consolidated EBITDA as net income or loss in accordance with GAAP, plus the following items, without duplication, to the extent deducted from or included in net income or loss:
| consolidated interest expense; |
| provision for income taxes; |
| depreciation and amortization; |
| cash contributed to the ESOP in respect of Alions repurchase liability |
| non-cash stock-based and incentive compensation expense; |
| non-cash ESOP contributions; |
| employee compensation expense payments invested in Alion common stock; |
| any extraordinary losses; and |
| nonrecurring charges and adjustments included in ESOP valuation reports as prepared by an independent third party. |
To the extent included in net income or loss, the following items, without duplication, are deducted in determining Consolidated EBITDA:
| all cash payments on account of reserves, restructuring charges or other cash and non-cash charges added to net income pursuant to the list above in a previous period; |
| any extraordinary gains; and |
| all non-cash items of income. |
Management believes that revenue will grow during the year ending September 30, 2012, and that Alion will be able to comply with the trailing twelve-month consolidated EBITDA covenant and non-financial covenants in the revolving credit agreement. However, as the Company depends heavily on federal government contracts, delays in the federal budget process including actions related to the debt ceiling or a federal government shutdown, or lowered federal spending could delay or reduce procurement of the products, services and solutions we provide. If Alion is unable to meet a given revolving credit agreement covenant because expected revenue growth is not forthcoming, or for any other reason, the Company can seek a waiver or an amendment to the revolving credit agreement. Management can provide no assurance that Alion would be able to obtain a requested covenant waiver or amend the revolving credit agreement on favorable terms.
The Credit Agreement restricts us from doing any of the following without the prior consent of syndicate lenders that extended more than 50 percent of the aggregate amount of all Credit Agreement loans then outstanding:
| incur additional debt other than permitted additional debt; |
| grant certain liens and security interests; |
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| enter into sale and leaseback transactions; |
| make certain loans and investments including acquisitions of businesses, other than permitted acquisitions; |
| consolidate, merge or sell all or substantially all our assets; |
| pay dividends or distributions other than distributions required by the ESOP Plan or by certain legal requirements; |
| enter into certain transactions with our shareholders and affiliates; |
| change lines of business; |
| repay subordinated debt before it is due; |
| redeem or repurchase certain equity; |
| enter into certain transactions not permitted under ERISA; |
| make more than $8 million in capital expenditures in any fiscal year; |
| pay certain earn-outs in connection with permitted acquisitions; or |
| change our fiscal year. |
The Credit Agreement contains customary events of default including, without limitation:
| breach of representations and warranties; |
| payment default; |
| uncured covenant breaches; |
| default under certain other debt exceeding an agreed amount; |
| bankruptcy and certain insolvency events; |
| incurrence of a civil or criminal liability in excess of $5 million of Alion or any subsidiary arising from a government investigation; |
| unstayed judgments in excess of an agreed amount; |
| failure of any Credit Agreement guarantee to be in effect; |
| failure of the security interests to be valid, perfected, first priority security interests in the collateral; |
| notice of debarment, suspension or termination under a material government contract; |
| actual termination of a material contract due to alleged fraud, willful misconduct, negligence, default or any other wrongdoing; |
| certain uncured defaults under our material contracts; |
| certain ERISA violations; |
| imposition on the ESOP Trust of certain taxes in excess of an agreed amount; |
| final determination the ESOP is not a qualified plan; |
| so long as any Secured Notes remain outstanding, the Intercreditor Agreement shall fail to be effective; |
| a borrowing which would cause us to exceed a certain cash balance limit; or |
| change of control (as defined below). |
Under the Credit Agreement a change of control generally occurs when, before Alion lists its common stock to trade on a national securities exchange and obtains at least $35 million in net proceeds from an underwritten public offering, the ESOP Trust fails to own at least 51 percent of Alions outstanding equity interests, or, after such a qualified public offering, any person or group other than the ESOP Trust owns more than 37.5 percent of Alions outstanding equity interests. A change of control may also occur if a majority of the seats (other than vacant seats) on Alions Board of Directors shall at any time be occupied by persons who were neither nominated by the board nor were appointed by directors so nominated. A change of control may also occur if a change of control occurs under any of Alions material debt including the Secured and Unsecured Note Indentures.
Senior Secured Notes
On March 22, 2010, Alion issued and sold $310 million of its private units (Units) to Credit Suisse, which informed the Company it had resold most of the units to qualified institutional buyers. Each of the 310,000 Units sold consisted of $1,000 in face value of Alions private 12% senior secured notes (Secured Notes) and a warrant to purchase 1.9439 shares of Alion common stock. On September 2, 2010, Alion exchanged the private Secured Notes for publicly tradable Secured Notes with the same terms.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Security. The Secured Notes are secured by a first priority security interest in all current and future tangible and intangible property of Alion and its guarantor subsidiaries, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation. The Secured Notes are senior obligations of Alion and rank pari passu in right of payment with existing and future senior debt, including the Credit Agreement, except to the extent that the Intercreditor Agreement provides Credit Agreement lenders with a super priority right of payment with respect to the underlying collateral.
Guarantees. The Companys obligations under the Secured Notes are guaranteed by the Companys subsidiaries, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation.
Interest and Fees. The Secured Notes bear interest at 12% per year; 10% is payable in cash and 2% increases the Secured Note principal (PIK Interest). Interest is payable semi-annually in arrears on May 1 and November 1. Alion pays interest to holders of record as of the immediately preceding April 15 and October 15. The Company must pay interest on overdue principal or interest at 13% per annum to the extent lawful. The Secured Notes mature November 1, 2014.
Covenants. As of December 31, 2011, Alion was in compliance with the covenants set forth in the Indenture governing its 12% Senior Secured Notes (Secured Note Indenture). The Secured Note Indenture does not contain any financial covenants.
A Secured Note Indenture covenant restricts our ability to incur additional debt. Defined terms in the Secured Note Indenture include: Net Available Cash, Total Assets, Restricted Subsidiaries, Indebtedness, Adjusted EBITDA and Consolidated Interest Expense. Alion and its Restricted Subsidiaries may not issue, incur, assume, guarantee, or otherwise become liable for any debt unless our Adjusted EBITDA to Consolidated Interest Expense ratio is greater than 2.0 to 1.0. Our ratio of Adjusted EBITDA to Consolidated Interest Expense was 0.86 as of December 31, 2011 and 0.86 as of September 30, 2011. Even if Adjusted EBITDA is not at least two times Consolidated Interest Expense, we may incur other permitted debt including:
| debt pursuant to certain agreements up to $25 million; |
| permitted inter-company debt; |
| the Secured Notes and any public notes exchanged for those notes; |
| debt pre-dating the Secured Notes; |
| permitted debt of acquired subsidiaries; |
| permitted refinancing debt; |
| hedging agreement debt; |
| performance, bid, appeal and surety bonds and completion guarantees; |
| ordinary course insufficient funds coverage; |
| permitted refinancing debt guarantees; |
| working capital debt of non-U.S. subsidiaries; |
| debt for capital expenditures, and capital and synthetic leases up to $25 million in the aggregate and 2.5% of Alions Total Assets; |
| permitted subordinated debt of Alion or any Restricted Subsidiary to finance a permitted acquisition, certain permitted ESOP transactions and refinancing debt of acquired non-U.S. subsidiaries up to $35 million in the aggregate; |
| letter of credit reimbursement obligations; |
| certain agreements in connection with a business disposition provided liabilities incurred in connection therewith do not exceed the cash and non-cash proceeds received and are not reflected on the Companys balance sheet; |
| certain deferred compensation agreements; and |
| certain other debt up to $20 million. |
The Secured Note Indenture has a covenant that restricts our ability to declare and pay any cash dividend or other distribution related to any equity interest in Alion, repurchase or redeem any equity interest of Alion, repurchase or redeem the Unsecured Notes or other subordinated debt, or make certain investments. However, within certain limits we may make such payments in limited amounts if Adjusted EBITDA is at least two times Consolidated Interest Expense. Even if Adjusted EBITDA to Consolidated Interest Expense is not greater than 2.0 to 1.0, we may make or pay:
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| such payments out of substantially concurrent contributions of equity and substantially concurrent incurrences of permitted debt; |
| certain limited and permitted dividends; |
| certain repurchases of the Companys equity securities deemed to occur upon exercise of stock options or warrants; |
| cash payments in lieu of the issuance of fractional shares in connection with the exercise of warrants, options or other securities convertible into or exchangeable for our equity securities; |
| the required Secured Note premium payable on a change of control; |
| certain permitted inter-company subordinated obligations; |
| certain repurchases and redemptions of subordination obligations of the Company or a Subsidiary Guarantor from Net Available Cash (as defined in the Secured Note Indenture); |
| repurchases of subordinated obligations in connection with an asset sale to the extent required by the Secured Note Indenture; |
| certain permitted ESOP transactions; |
| long-term incentive plan payments to our directors, officers and employees, subject to a $3 million annual cap that may increase annually; |
| any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of the Unsecured Notes, up to an aggregate amount of $10 million; and |
| certain other payments not exceeding $10 million in the aggregate. |
The Secured Note Indenture restricts our ability to engage in other transactions including restricting our subsidiaries from making distributions and paying dividends to parents, merging or selling all or substantially all our assets, issuing certain subsidiary equity securities, engaging in certain transactions with affiliates, incurring liens, entering into sale lease-back transactions and engaging in business unrelated to our business when we issued the Secured Notes.
Events of Default. The Secured Note Indenture contains customary events of default, including:
| payment default on interest obligations when due; |
| payment default on principal at maturity; |
| uncured covenant breaches; |
| default under an acceleration of certain other debt exceeding $30 million; |
| bankruptcy and certain insolvency events; |
| judgment for payment in excess of $30 million entered against the Company or any material subsidiary that remains outstanding for a period of 60 days and is not discharged, waived or stayed; |
| failure of any Secured Note guarantee to be in effect or any subsidiary guarantors denial or disaffirmation of its guaranty obligations; and |
| failure of any Secured Note security interest to constitute a valid and perfected lien with its applicable priority after a permitted cure period. |
Change of Control. Upon a change in control, each Secured Note holder has the right to require Alion repurchase its notes in cash for 101% of principal plus accrued and unpaid interest. Any of the following events constitutes a change in control:
| subject to certain exceptions, a person, other than the ESOP Trust, is or becomes the beneficial owner, directly or indirectly, of more than 35% of the total voting power or voting stock of Alion; |
| individuals who constituted Alions board of directors on March 22, 2010, (or individuals who were elected or nominated by them, or directors subsequently nominated or elected by them) cease for any reason to constitute a majority of the Companys board of directors; |
| the adoption of a plan relating to Alions liquidation or dissolution; and |
| subject to certain exceptions, the merger or consolidation of the Company with or into another person or the merger of another person with or into the Company, or the sale of all or substantially all the assets of Alion to another person. |
Optional Redemption. Prior to April 1, 2013, not more than once in any twelve month period, we may redeem up to $31 million of Secured Notes at a redemption price of 103% of the principal amount of the Secured Notes redeemed, plus accrued and unpaid interest to the redemption date. Prior to April 1, 2013, the Company may redeem all, but not less than all, of the Secured Notes at a redemption price equal to 100% of the principal amount of the Secured Notes plus accrued and unpaid interest to the redemption date plus an applicable make-whole premium as of the redemption date.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In addition, any time prior to April 1, 2013, subject to certain conditions, the Company may use the proceeds of a qualified equity offering to redeem Unsecured Notes in an aggregate principal amount not to exceed $108.5 million at a redemption price equal to the sum of 112% of the aggregate principal amount of the notes actually redeemed, plus accrued and unpaid interest to the redemption date.
On or after April 1, 2013, the Company may redeem all or a portion of the Secured Notes at the redemption prices set forth below (expressed in percentages of principal amount on the redemption date), plus accrued and unpaid interest to the redemption date, if redeemed during the periods set forth below:
Period |
Redemption Price | |||
April 1, 2013 to September 30, 2013 |
105.0 | % | ||
October 1, 2013 to March 31, 2014 |
103.0 | % | ||
April 1, 2014 and thereafter |
100.0 | % |
Unsecured Notes
On February 8, 2007, Alion issued and sold $250.0 million of its private 10.25% senior unsecured notes due February 1, 2015 (Unsecured Notes) to Credit Suisse, which informed the Company it had resold most of the notes to qualified institutional buyers. On June 20, 2007, Alion exchanged the private Unsecured Notes for publicly tradable Unsecured Notes with the same terms. IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation guarantee the Unsecured Notes. In November 2010, Alion repurchased $2 million of the Unsecured Notes. In June 2011, Alion repurchased another $3 million of Unsecured Notes.
Interest and Fees. The Senior Unsecured Notes bear interest at 10.25% per year, payable semi-annually in arrears on February 1 and August 1. Alion pays interest to holders of record as of the immediately preceding January 15 and July 15. The Company must pay interest on overdue principal or interest at 11.25% per annum to the extent lawful.
Covenants. There are no financial covenants in the Unsecured Note Indenture. As of December 31, 2011, we were in compliance with Unsecured Note Indenture non-financial covenants.
A covenant in the Unsecured Note Indenture restricts our ability to incur additional debt. Defined terms in the Unsecured Note Indenture include: Net Available Cash, Total Assets, Restricted Subsidiaries, Indebtedness, Adjusted EBITDA and Consolidated Interest Expense. Alion and its Restricted Subsidiaries may not issue, incur, assume, guarantee, or otherwise become liable for any indebtedness unless our Adjusted EBITDA to Consolidated Interest Expense ratio is greater than 2.0 to 1.0. Our ratio of Adjusted EBITDA to Consolidated Interest Expense was 0.86 as of December 31, 2011 and 0.86 as of September 30, 2011. Even if Adjusted EBITDA is not at least two times Consolidated Interest Expense, we may incur other permitted debt including:
| debt pursuant to our now terminated Term B Credit Facility and certain other contracts up to $360 million less principal repayments made under that indebtedness; |
| permitted inter-company debt; |
| the Unsecured Notes ; |
| debt pre-dating the Unsecured Notes; |
| permitted debt of acquired subsidiaries; |
| permitted refinancing debt; |
| hedging agreement debt; |
| performance, bid, appeal and surety bonds and completion guarantees; |
| ordinary course insufficient funds coverage; |
| permitted refinancing debt guarantees; |
| working capital debt of non-U.S. subsidiaries; |
| debt for capital expenditures, capital and synthetic leases up to $25 million in the aggregate and 2.5% of Alions Total Assets; |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| permitted subordinated debt of Alion or any Restricted Subsidiary to finance a permitted acquisition, certain permitted ESOP transactions and refinancing debt of acquired non-U.S. subsidiaries up to $35 million in the aggregate; |
| letters of credit reimbursement obligations; |
| certain agreements in connection with the disposition of a business provided liabilities incurred in connection therewith do not exceed the cash and non-cash proceeds received and are not reflected on the Companys balance sheet; |
| certain deferred compensation agreements; and |
| certain other debt up to $35 million. |
The Unsecured Note Indenture has a covenant that restricts our ability to declare and pay any cash dividend or other distribution with regard to any equity interest in the Company, make any repurchase or redemption of any equity interest in Alion, repurchase or redeem subordinated debt, and make certain investments. However, within certain limits we may make such payments in limited amounts if Adjusted EBITDA is at least two times Consolidated Interest Expense. Even if Adjusted EBITDA to Consolidated Interest Expense is not greater than 2.0 to 1.0, we may make or pay:
| such payments out of substantially concurrent contributions of equity and substantially concurrent incurrences of permitted debt; |
| certain limited and permitted dividends; |
| certain repurchases of the Companys equity securities deemed to occur upon exercise of stock options or warrants; |
| cash payments in lieu of the issuance of fractional shares for the exercise of warrants, options or other securities convertible into or exchangeable for our equity securities; |
| the required Unsecured Note premium payable on a change of control; |
| certain permitted inter-company subordinated obligations; |
| certain repurchases and redemptions of subordination obligations of the Company or a Subsidiary Guarantor from Net Available Cash; |
| repurchases of subordinated obligations in connection with an asset sale to the extent required by the Indenture; |
| repurchase of common stock from former Alion Joint Spectrum Center employees; |
| certain permitted transactions with the ESOP not exceeding $25 million in the aggregate; and |
| certain other payments not exceeding $30 million in the aggregate. |
The Unsecured Note Indenture restricts the Companys ability to engage in other transactions including restricting our subsidiaries from making distributions and paying dividends to parents, merging or selling all or substantially all our assets, issuing certain subsidiary equity securities, engaging in certain transactions with affiliates, incurring liens, entering into sale lease-back transactions and engaging in business unrelated to our business when we issued the Unsecured Notes.
Events of Default. The Unsecured Note Indenture contains customary events of default, including:
| payment default on interest obligations when due; |
| payment default on principal at maturity; |
| uncured covenant breaches; |
| default under an acceleration of certain other debt exceeding $30 million; |
| certain bankruptcy and insolvency events; |
| judgment for payment in excess of $30 million entered against the Company or any material subsidiary that remains outstanding for a period of 60 days and is not discharged, waived or stayed; and |
| failure of any Unsecured Note guarantee or any subsidiary guarantors denial or disaffirmation of its guaranty obligations. |
Change of Control. Upon a change in control, each Unsecured Note holder has the right to require Alion repurchase its notes in cash for 101% of principal plus accrued and unpaid interest. Any of the following events constitutes a change in control:
| subject to certain exceptions, a person, other than the ESOP Trust, is or becomes the beneficial owner, directly or indirectly, of more than 35% of the total voting power or voting stock of Alion; |
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| individuals who constituted Alions board of directors on February 8, 2007, (or individuals who were elected or nominated by them, or individuals who were elected or nominated by them) cease for any reason to constitute a majority of the Companys board of directors; |
| adoption of a plan relating to Alions liquidation or dissolution; and |
| subject to certain exceptions, Alions merger or consolidation with or into another person or the merger of another person with or into Alion, or the sale of all or substantially all our assets to another person. |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Optional Redemption. We may redeem all or a portion of the Unsecured Notes at the redemption prices set forth below (expressed in percentages of principal amount on the redemption date), plus accrued and unpaid interest to the redemption date, if redeemed during the 12-month period commencing on February 1 of the years set forth below:
Period |
Redemption Price | |||
2011 |
105.125 | % | ||
2012 |
102.563 | % | ||
2013 and thereafter |
100.000 | % |
Interest Payable
The table below sets out interest payable in cash on the Secured Notes and the Unsecured Notes as of December 31, and September 30, 2011.
December 31, | September 30, | |||||||
Interest payable in cash |
2011 | 2011 | ||||||
(In thousands) | ||||||||
Unsecured Notes |
$ | 10,465 | $ | 4,187 | ||||
Secured Notes |
5,335 | 13,205 | ||||||
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|
|
|
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Total |
$ | 15,800 | $ | 17,392 | ||||
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|
As of December 31, 2011, Alion must make the following principal repayments (at face amount before debt discount) for its outstanding debt.
Future Principal Payments | ||||||||||||||||||||
Fiscal Year: |
2012 | 2013 | 2014 | 2015 | Total | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Secured Notes and PIK Interest(1) |
$ | | $ | | $ | | $ | 339,788 | $ | 339,788 | ||||||||||
Unsecured Notes(2) |
| | | 245,000 | 245,000 | |||||||||||||||
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|
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Total Principal Payments |
$ | | $ | | $ | | $ | 584,788 | $ | 584,788 | ||||||||||
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1. | The Secured Notes due in 2015 include $310 million of debt issued in March 2010 and an estimated $29.8 million in PIK interest added to principal over the life of the notes. As of December 31, 2011, the $294.9 million carrying value on the face of the balance sheet included $310 million in principal, $10.1 million of PIK notes issued, $1.1 million in accrued PIK interest and is net of $26.3 million in aggregate unamortized debt issue costs. Initial debt issue costs consist of $7.7 million in original issue discount, $13.5 million in third-party costs and $20.8 million for the initial fair value of the new Secured Note warrants. |
2. | The Unsecured Notes on the face of the balance sheet include $245 million in principal and $2.7 million in unamortized debt issue costs as of December 31, 2011 (initially $7.1 million). |
(10) Fair Value Measurement
Alion applies ASC 820 Fair Value Measurements and Disclosures in determining the fair value to be disclosed for financial and nonfinancial assets and liabilities on a recurring or nonrecurring basis. The Company has no assets or liabilities, other than its redeemable common stock, which it is required to report at fair value. Valuation techniques utilized in the fair value measurement of assets and liabilities for each period presented were unchanged from previous practice.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. It establishes a fair value hierarchy and a framework which requires categorizing assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. Level 1inputs are unadjusted, quoted market prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included in Level 1, such as quoted prices for similar
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets. Level 3 inputs include unobservable inputs that are supported by little, infrequent, or no market activity and reflect managements own assumptions about inputs used in pricing the asset or liability. The Company uses the following valuation techniques to measure fair value.
Level 1 primarily consists of financial instruments, such as overnight bank re-purchase agreements or money market mutual funds whose value is based on quoted market prices published by a financial institution, an exchange fund, exchange-traded instruments and listed equities.
Level 2 assets include U.S. Government and agency securities whose valuations are based on market prices from a variety of industry-standard data providers or pricing that considers various assumptions, including time value, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments, and broker and dealer quotes. All are observable in the market or can be derived principally from or corroborated by observable market data for which the Company can obtain independent external valuation information.
Level 3 consists of unobservable inputs. The Companys former Subordinated Note warrants were classified as Level 3 liabilities. Assets and liabilities are considered Level 3 when their fair value inputs are unobservable or not available, including situations involving limited market activity, where determination of fair value requires significant judgment or estimation.
The table below sets out the face value, net carrying value and fair value of Alions Senior Secured and Senior Unsecured Notes. The fair values disclosed below are based on quoted market prices for Alions outstanding notes.
December 31, 2011 | September 30, 2011 | |||||||||||||||
(In thousands) | ||||||||||||||||
Senior Secured Notes |
Senior Unsecured Notes |
Senior Secured Notes |
Senior Unsecured Notes |
|||||||||||||
Face value of original notes outstanding |
$ | 310,000 | $ | 245,000 | $ | 310,000 | $ | 245,000 | ||||||||
PIK interest notes issued |
10,091 | | 6,920 | | ||||||||||||
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|
|||||||||
Face value of outstanding notes |
$ | 320,091 | $ | 245,000 | $ | 316,920 | $ | 245,000 | ||||||||
PIK interest notes to be issued |
1,064 | | 2,643 | | ||||||||||||
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Face value of notes outstanding and notes to be issued |
$ | 321,155 | $ | 245,000 | $ | 319,563 | $ | 245,000 | ||||||||
Less: unamortized debt issue costs |
(26,276 | ) | (2,721 | ) | (28,560 | ) | (2,936 | ) | ||||||||
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Carrying value |
$ | 294,879 | $ | 242,279 | $ | 291,003 | $ | 242,064 | ||||||||
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Fair value of outstanding notes |
$ | 293,665 | $ | 119,141 | $ | 278,727 | $ | 140,982 | ||||||||
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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Companys investment in VectorCommand is tested annually for impairment and is not adjusted to market value at the end of each reporting period. Fair value would only be determined on a nonrecurring basis if this investment were deemed to be other-than-temporarily impaired. The Company has not recorded any other-than-temporary impairments to its VectorCommand investment during the reporting period.
(11) Secured Note Common Stock Warrants
In 2010, Alion issued its Secured Notes and warrants to purchase a total of 602,614 shares of Alion common stock. Each Secured Note warrant has an exercise price of a penny per share; the Secured Note warrants are not redeemable for cash. The warrants are exercisable until March 15, 2017.
The Secured Note warrants had an initial fair value of approximately $20.8 million based on Alions former share price of $34.50. Alion recognized the value of the warrants as part of the debt issue costs for the Secured Notes and recorded the corresponding credit to equity. The Company accounts for the Secured Note warrants as equity and must reassess this classification each reporting period. The Company identified no required changes in accounting treatment as of December 31, 2011.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(12) Leases
Future minimum lease payments under non-cancelable operating leases for buildings, equipment and automobiles at December 31, 2011 are set out below. Alion subleased some excess capacity under its operating leases to subtenants under non-cancelable operating leases.
Lease Payments for Fiscal Years Ending September 30: |
(In thousands) | |||
2012 (for the nine months remaining) |
$ | 20,804 | ||
2013 |
26,272 | |||
2014 |
25,260 | |||
2015 |
24,942 | |||
2016 |
20,966 | |||
2017 |
15,479 | |||
And thereafter |
22,669 | |||
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Gross lease payments |
$ | 156,392 | ||
Less: non-cancelable subtenant receipts |
(737 | ) | ||
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Net lease payments |
$ | 155,655 | ||
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|
Composition of Total Rent Expense
December 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Minimum rentals |
$ | 5,233 | $ | 5,543 | ||||
Less: Sublease rental income |
(67 | ) | (478 | ) | ||||
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Total rent expense, net |
$ | 5,166 | $ | 5,065 | ||||
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(13) Long Term Incentive Plan Compensation
Alion adopted a long-term cash incentive compensation plan for certain executives in December 2008. Individual grants contain specific financial and performance goals and vest over varying periods. Some grants are for a fixed amount; others provide a range of values from a minimum of 50% to a maximum of 150% of initial grant value. The Company periodically evaluates the probability that individuals will achieve stated financial and performance goals.
Alion recognizes long term incentive compensation expense based on outstanding grants stated values, estimated probability of achieving stated goals and estimated probable future values of existing grants. Alion recognized $446 thousand and $831 thousand in incentive compensation expense for the quarters ended December 31, 2011 and 2010.
(14) Stock Based Compensation
Alions Stock Appreciation Rights Plan adopted in 2004 expires in 2014. The chief executive officer may award SARs as he deems appropriate. Awards vest ratably over four years with payment following the grant date fifth anniversary. Grants with no intrinsic value expire on their year-five payment date. The Plan permits accelerated vesting in the event of death, disability or a change in control of the Company. Approximately 645 thousand SARs were outstanding at December 31, 2011, at a weighted average grant date fair value of $32.76 per share. No outstanding grant has any intrinsic value. For the quarters ended December 31, 2011 and 2010 Alion recognized compensation expense of $27 thousand and $33 thousand.
The Company uses a Black-Scholes-Merton option pricing model based on the fair market value of a share of its common stock to recognize stock based compensation expense. There is no established public trading market for Alions common stock. The ESOP Trust owns all outstanding common stock. Alion does not expect to pay any dividends on its common stock and intends to retain future earnings, if any, to use in operating its business.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Alion formerly maintained Executive and Director Phantom Stock Plans which permitted the Company to issue up to 2 million phantom shares that conveyed no voting or other common stock ownership rights.
(15) Segment Information and Customer Concentration
The Company operates in one segment, delivering a broad array of scientific and engineering expertise to research and develop technological solutions for problems relating to national defense, public health and safety, and nuclear safety and analysis under contracts with the federal government, state and local governments, and commercial customers. The Companys federal government customers typically exercise independent contracting authority. Offices or divisions within an agency or department may directly, or through a prime contractor, use the Companys services as a separate customer so long as that customer has independent decision-making and contracting authority within its organization
Federal government agency prime contract receivables were approximately $130.2 million (70%), and $124.2 million (68%) of aggregate contract receivables as of December 31 and September 30, 2011. Prime contract federal government sales were approximately 84.9% and 84.2%, of total contract revenue for the quarters ended December 31, 2011 and 2010.
(16) Income Taxes
Deferred Taxes
Alion is subject to income taxes in the U.S., various states and Canada. Tax statutes and regulations within each jurisdiction are subject to interpretation requiring management to apply significant judgment. Alion recorded $1.7 million in deferred tax expense and liabilities related to tax-basis goodwill amortization this quarter.
Even though Alion has recorded a full valuation allowance for all deferred tax assets, the Company does not expect to pay any income taxes for the foreseeable future. Alions ability to utilize NOL tax benefits will depend upon how much future taxable income it has and may be limited under certain circumstances. Alion does not have any NOL tax benefits it can carry back to prior years.
Alions effective tax rate for the three months ended December 31, 2011 was -15.8%. As of December 31, 2011 and September 30, 2011 the net deferred tax liability was:
December 31, 2011 |
September 30, 2011 |
|||||||
(In thousands) | ||||||||
Current deferred tax asset |
$ | 8,663 | $ | 10,543 | ||||
Noncurrent deferred tax asset |
55,365 | 47,721 | ||||||
Valuation allowance |
(64,028 | ) | (58,264 | ) | ||||
Noncurrent deferred tax liability |
(45,925 | ) | (44,181 | ) | ||||
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Net deferred tax liability |
$ | (45,925 | ) | $ | (44,181 | ) | ||
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Tax Uncertainties
We periodically assess our liabilities and contingencies for all periods open to examination by tax authorities based on the latest available information. Where we believe there is more than a 50 percent chance that our tax position will not be sustained, we record our best estimate of the resulting tax liability, including interest. Any interest or penalties we incur related to income taxes are reported separately from income tax expense. We have recorded liabilities for tax uncertainties for all years that remain open to review. We do not expect resolution of tax matters for these years to materially affect our operating results, financial condition, cash flows or effective tax rate.
(17) Debt Extinguishment
In November 2010, Alion re-purchased $2.0 million of its Senior Unsecured Notes at approximately 25% less than face value and recognized a $460 thousand gain on the transaction. There were no similar transactions in the first quarter of fiscal 2012.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(18) Commitments and Contingencies
Government Audits
Federal government cost-reimbursement contract revenues and expenses in the consolidated financial statements are subject to DCAA audit and possible adjustment. Alion is a major contractor and DCAA maintains an office on site to perform its various audits throughout the year. The Company has settled indirect rates through 2004 based on completed DCAA audits. All subsequent years are open. Alion has recorded federal government contract revenue based on amounts it expects to realize upon final settlement.
Legal Proceedings
We are involved in routine legal proceedings occurring in the ordinary course of business. We believe these routine legal proceedings are not material to our financial condition, operating results, or cash flows.
As a government contractor, from time to time we may be subject to DCAA audits and federal government inquiries. The federal government may suspend or debar for a period of time any federal contractor it finds has violated the False Claims Act, or who has been indicted or convicted of violations of other federal laws. This could also result in fines or penalties. Given Alions dependence on federal government contracts, suspension or debarment could have a material effect on our business, financial condition, operating results, cash flows and our ability to meet our financial obligations. We are not aware of any such pending federal government claims or investigations.
(19) Guarantor/Non-guarantor Condensed Consolidated Financial Information
Certain of Alions wholly-owned domestic subsidiaries have jointly, severally, fully and unconditionally guaranteed both the Secured Notes and the Unsecured Notes which are general obligations of the Company. In March 2010, the Unsecured Note Indenture was amended to include as Unsecured Note guarantors all subsidiaries serving as Secured Note guarantors.
The following information presents condensed consolidating balance sheets as of December 31 and September 30, 2011, condensed consolidating statements of operations for the three months ended December 31, 2011 and 2010; and condensed consolidating statements of cash flows for the three months ended December 31, 2011 and 2010 of the parent company issuer, the guarantor subsidiaries and the non-guarantor subsidiaries. Investments include investments in subsidiaries held by the parent company issuer presented using the equity method of accounting.
26
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet as of December 31, 2011
Parent | Guarantor Companies |
Non-Guarantor Companies |
Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 16,772 | $ | (49 | ) | $ | (12 | ) | $ | | $ | 16,711 | ||||||||
Accounts receivable, net |
180,874 | 2,010 | 391 | | 183,275 | |||||||||||||||
Prepaid expenses and other current assets |
5,794 | 39 | | | 5,833 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
203,440 | 2,000 | 379 | | 205,819 | |||||||||||||||
Property, plant and equipment, net |
10,720 | 600 | 18 | | 11,338 | |||||||||||||||
Intangible assets, net |
10,041 | | | | 10,041 | |||||||||||||||
Goodwill |
398,921 | | | | 398,921 | |||||||||||||||
Investment in subsidiaries |
25,511 | | | (25,511 | ) | | ||||||||||||||
Intercompany receivables |
1,515 | 25,940 | | (27,455 | ) | | ||||||||||||||
Other assets |
16,141 | | 4 | | 16,145 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 666,289 | $ | 28,540 | $ | 401 | $ | (52,966 | ) | $ | 642,264 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Current liabilities: |
||||||||||||||||||||
Interest payable |
$ | 15,800 | $ | | $ | | $ | | $ | 15,800 | ||||||||||
Trade accounts payable |
61,881 | 284 | 2 | | 62,167 | |||||||||||||||
Accrued liabilities |
48,810 | 223 | 7 | | 49,040 | |||||||||||||||
Accrued payroll and related liabilities |
35,887 | 802 | 43 | | 36,732 | |||||||||||||||
Billings in excess of revenue earned |
2,478 | 5 | 4 | | 2,487 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
164,856 | 1,314 | 56 | | 166,226 | |||||||||||||||
Intercompany payables |
25,940 | | 1,515 | (27,455 | ) | | ||||||||||||||
Senior secured notes |
294,879 | | | | 294,879 | |||||||||||||||
Senior unsecured notes |
242,279 | | | | 242,279 | |||||||||||||||
Accrued compensation and benefits, excluding current portion |
6,031 | | | | 6,031 | |||||||||||||||
Non-current portion of lease obligations |
11,376 | 545 | | | 11,921 | |||||||||||||||
Deferred income taxes |
45,925 | | | | 45,925 | |||||||||||||||
Other liabilities |
980 | | | | 980 | |||||||||||||||
Redeemable common stock |
124,297 | | | | 124,297 | |||||||||||||||
Commitments and contingencies |
| | | | | |||||||||||||||
Common stock warrants |
20,785 | | | | 20,785 | |||||||||||||||
Common stock of subsidiaries |
| 4,084 | | (4,084 | ) | | ||||||||||||||
Accumulated other comprehensive loss |
(123 | ) | | | | (123 | ) | |||||||||||||
Accumulated deficit |
(270,936 | ) | 22,597 | (1,170 | ) | (21,427 | ) | (270,936 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities, redeemable common stock and accumulated deficit |
$ | 666,289 | $ | 28,540 | $ | 401 | $ | (52,966 | ) | $ | 642,264 | |||||||||
|
|
|
|
|
|
|
|
|
|
27
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet as of September 30, 2011
Parent | Guarantor Companies |
Non-Guarantor Companies |
Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 20,845 | $ | (27 | ) | $ | | $ | | $ | 20,818 | |||||||||
Accounts receivable, net |
177,618 | 2,358 | 388 | | 180,364 | |||||||||||||||
Prepaid expenses and other current assets |
5,991 | 93 | 2 | | 6,086 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
204,454 | 2,424 | 390 | | 207,268 | |||||||||||||||
Property, plant and equipment, net |
9,733 | 614 | 20 | | 10,367 | |||||||||||||||
Intangible assets, net |
11,734 | | | | 11,734 | |||||||||||||||
Goodwill |
398,921 | | | | 398,921 | |||||||||||||||
Investment in subsidiaries |
24,566 | | | (24,566 | ) | | ||||||||||||||
Intercompany receivables |
1,460 | 24,675 | | (26,135 | ) | | ||||||||||||||
Other assets |
16,181 | 12 | 5 | | 16,198 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 667,049 | $ | 27,725 | $ | 415 | $ | (50,701 | ) | $ | 644,488 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Current liabilities: |
| |||||||||||||||||||
Interest payable |
$ | 17,392 | $ | | $ | | $ | | $ | 17,392 | ||||||||||
Trade accounts payable |
52,092 | 257 | 6 | | 52,355 | |||||||||||||||
Accrued liabilities |
48,087 | 319 | 29 | | 48,435 | |||||||||||||||
Accrued payroll and related liabilities |
38,766 | 915 | 57 | | 39,738 | |||||||||||||||
Billings in excess of costs revenue earned |
2,723 | 5 | 24 | | 2,752 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
159,060 | 1,496 | 116 | | 160,672 | |||||||||||||||
Intercompany payables |
24,675 | | 1,460 | (26,135 | ) | | ||||||||||||||
Senior secured notes |
291,003 | | | | 291,003 | |||||||||||||||
Senior unsecured notes |
242,064 | | | | 242,064 | |||||||||||||||
Accrued compensation and benefits, excluding current portion |
5,729 | | | | 5,729 | |||||||||||||||
Non-current portion of lease obligations |
10,260 | 502 | | | 10,762 | |||||||||||||||
Deferred income taxes |
44,181 | | | | 44,181 | |||||||||||||||
Other liabilities |
| | | 980 | ||||||||||||||||
Redeemable common stock |
126,560 | | | | 126,560 | |||||||||||||||
Common stock of subsidiaries |
| 4,084 | | (4,084 | ) | | ||||||||||||||
Commitments and contingencies |
| | | | | |||||||||||||||
Common stock warrants |
20,785 | | | | 20,785 | |||||||||||||||
Accumulated other comprehensive loss |
(123 | ) | | | | (123 | ) | |||||||||||||
Accumulated deficit |
(258,125 | ) | 21,643 | (1,161 | ) | (20,482 | ) | (258,125 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities, redeemable common stock and accumulated deficit |
$ | 667,049 | $ | 27,725 | $ | 415 | $ | (50,701 | ) | $ | 644,488 | |||||||||
|
|
|
|
|
|
|
|
|
|
28
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations and Comprehensive Loss for the Three Months Ended December 31, 2011
Parent | Guarantor Companies |
Non-Guarantor Companies |
Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Contract revenue |
$ | 186,022 | $ | 3,604 | $ | 265 | $ | | $ | 189,891 | ||||||||||
Direct contract expense |
144,207 | 1,979 | 158 | | 146,344 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
41,815 | 1,625 | 107 | | 43,547 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating expenses: |
||||||||||||||||||||
Indirect contract expense |
11,887 | 593 | 16 | | 12,496 | |||||||||||||||
General and administrative |
12,571 | 55 | 81 | | 12,707 | |||||||||||||||
Rental and occupancy expense |
7,674 | 119 | 16 | | 7,809 | |||||||||||||||
Depreciation and amortization |
2,935 | (83 | ) | 2 | | 2,854 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
35,067 | 684 | 115 | | 35,866 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
6,748 | 941 | (8 | ) | | 7,681 | ||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
7 | | | | 7 | |||||||||||||||
Interest expense |
(18,641 | ) | | | | (18,641 | ) | |||||||||||||
Other |
(125 | ) | 12 | | | (113 | ) | |||||||||||||
Equity in net income of subsidiaries |
945 | | | (945 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other (expense) income |
(17,814 | ) | 12 | | (945 | ) | (18,747 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before taxes |
(11,066 | ) | 953 | (8 | ) | (945 | ) | (11,066 | ) | |||||||||||
Income tax (expense) benefit |
(1,744 | ) | | | | (1,744 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (12,810 | ) | $ | 953 | $ | (8 | ) | $ | (945 | ) | $ | (12,810 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive income before taxes |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive loss |
$ | (12,810 | ) | $ | 953 | $ | (8 | ) | $ | (945 | ) | $ | (12,810 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
29
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations and Comprehensive Loss for the Three Months Ended December 31, 2010
Parent | Guarantor Companies |
Non-Guarantor Companies |
Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Contract revenue |
$ | 195,761 | $ | 4,816 | $ | 191 | $ | | $ | 200,768 | ||||||||||
Direct contract expense |
152,591 | 2,789 | 134 | | 155,514 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
43,170 | 2,027 | 57 | | 45,254 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating expenses: |
||||||||||||||||||||
Indirect contract expense |
9,023 | 610 | 1 | | 9,634 | |||||||||||||||
General and administrative |
16,130 | 83 | 90 | | 16,303 | |||||||||||||||
Rental and occupancy expense |
7,627 | 91 | 12 | | 7,730 | |||||||||||||||
Depreciation and amortization |
2,987 | 3 | | | 2,990 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
35,767 | 787 | 103 | | 36,657 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
7,403 | 1,240 | (46 | ) | | 8,597 | ||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
20 | | | | 20 | |||||||||||||||
Interest expense |
(18,404 | ) | | | | (18,404 | ) | |||||||||||||
Other |
(176 | ) | 115 | | | (61 | ) | |||||||||||||
Gain on extinguishment of debt |
460 | | | | 460 | |||||||||||||||
Equity in net income of subsidiaries |
1,309 | | | (1,309 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other (expense) income |
(16,791 | ) | 115 | | (1,309 | ) | (17,985 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before taxes |
(9,388 | ) | 1,355 | (46 | ) | (1,309 | ) | (9,388 | ) | |||||||||||
Income tax (expense) benefit |
(1,744 | ) | | | | (1,744 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (11,132 | ) | $ | 1,355 | $ | (46 | ) | $ | (1,309 | ) | $ | (11,132 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive income before taxes |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive loss |
$ | (11,132 | ) | $ | 1,355 | $ | (46 | ) | $ | (1,309 | ) | $ | (11,132 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
30
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2011 |
Parent | Guarantor Companies |
Non-Guarantor Companies |
Consolidated | |||||||||||||
(In thousands) | ||||||||||||||||
Net cash used in operating activities |
$ | (1,123 | ) | $ | (15 | ) | $ | (13 | ) | $ | (1,151 | ) | ||||
Cash flows from investing activities: |
||||||||||||||||
Capital expenditures |
(687 | ) | (7 | ) | | (694 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash used in investing activities |
(687 | ) | (7 | ) | | (694 | ) | |||||||||
Cash flows from financing activities: |
||||||||||||||||
Redeemable common stock purchased from ESOP Trust |
(2,262 | ) | | | (2,262 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash used in financing activities |
(2,262 | ) | | | (2,262 | ) | ||||||||||
Net decrease in cash and cash equivalents |
(4,072 | ) | (22 | ) | (13 | ) | (4,107 | ) | ||||||||
Cash and cash equivalents at beginning of period |
20,845 | (27 | ) | | 20,818 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash and cash equivalents at end of period |
$ | 16,773 | $ | (49 | ) | $ | (13 | ) | $ | 16,711 | ||||||
|
|
|
|
|
|
|
|
31
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2010
Parent | Guarantor Companies |
Non-Guarantor Companies |
Consolidated | |||||||||||||
(In thousands) | ||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (8,287 | ) | $ | 13 | $ | 1 | $ | (8,273 | ) | ||||||
Cash flows from investing activities: |
||||||||||||||||
Capital expenditures |
(340 | ) | | | (340 | ) | ||||||||||
Proceeds from sale of assets |
8 | | | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash used in investing activities |
(332 | ) | | | (332 | ) | ||||||||||
Cash flows from financing activities: |
||||||||||||||||
Repayment of unsecured notes |
(1,510 | ) | | | (1,510 | ) | ||||||||||
Loan to ESOP Trust |
(776 | ) | | | (776 | ) | ||||||||||
ESOP loan repayment |
776 | | | 776 | ||||||||||||
Redeemable common stock purchased from ESOP Trust |
(3,197 | ) | | | (3,197 | ) | ||||||||||
Redeemable common stock sold to ESOP Trust |
1,896 | | | 1,896 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash used in financing activities |
(2,811 | ) | | | (2,811 | ) | ||||||||||
Net (decrease) increase in cash and cash equivalents |
(11,430 | ) | 13 | 1 | (11,416 | ) | ||||||||||
Cash and cash equivalents at beginning of period |
26,770 | (75 | ) | | 26,695 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash and cash equivalents at end of period |
$ | 15,340 | $ | (62 | ) | $ | 1 | $ | 15,279 | |||||||
|
|
|
|
|
|
|
|
32
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of Alions financial condition and results of operations should be read together with the condensed consolidated financial statements (unaudited) and the notes to those statements. This updates the information contained in our Annual Report on Form 10-K for the year ended September 30, 2011, and presumes that readers have access to, and will have read, Managements Discussion and Analysis of Financial Condition and Results of Operations contained in that report.
Forward Looking Statements
Information included and incorporated by reference in this Form 10-Q may contain forward-looking statements that involve risks and uncertainties. These statements relate to future plans, objectives, expectations and intentions and are for illustrative purposes only. These statements may be identified by the use of words such as believe, expect, intend, plan, anticipate, likely, will, pro forma, forecast, projections, could, estimate, may, potential, should, would, and similar expressions.
Factors that could cause actual results to differ materially from anticipated results include, but are not limited to:
| Any future inability to maintain adequate internal control over financial reporting; |
| Limits on financial and operational flexibility given our substantial debt and debt covenants; |
| ERISA law changes related to the KSOP; |
| Tax law changes that could affect tax liabilities or Alions effective tax rate; |
| Changes in SEC rules, and other corporate governance requirements; |
| Failure of government customers to exercise contract options; |
| U.S. government project funding decisions; |
| U.S. government shutdowns; |
| Government contract bid protest and termination risks; |
| Competitive factors such as pricing pressures and/or competition to hire and retain employees; |
| Results of current and/or future legal proceedings and government agency proceedings which may arise from operations and attendant risks of fines, liabilities, penalties, suspension and/or debarment; |
| Undertaking acquisitions that increase costs or liabilities or are disruptive; |
| Taking on additional debt to fund acquisitions; |
| Failing to adequately integrate acquired businesses; |
| Risks from private securities litigation, regulatory proceedings or government enforcement actions relating to prior covenant compliance disclosures; |
| Material changes in laws or regulations affecting our businesses; and |
| Other risk factors discussed in Alions annual report on Form 10-K for the year ended September 30, 2011 filed with the SEC on December 20, 2011 and any subsequent reports. |
Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect managements view only as of February 14, 2012. We undertake no obligation to update any of the forward-looking statements made herein, whether as a result of new information, future events, changes in expectations or otherwise. This discussion addresses only continuing operations.
33
Table of Contents
Overview
Alion provides scientific, engineering and information technology expertise to research and develop technological solutions for problems relating to national defense, homeland security and energy and the environmental. We principally serve U.S. government departments and agencies and, to a much lesser extent, commercial and international customers.
We expect most of our revenue will continue to come from contracts with the U.S. Department of Defense and other federal agencies. We believe we will continue to have some level of commercial, state, local and international sales. The tables below show our year-to-date sales by contract type and customer.
For the Three Months Ended December 31, | ||||||||||||||||
Revenue by Contract Type |
2011 | 2010 | ||||||||||||||
(In thousands) | ||||||||||||||||
Cost-reimbursement |
$ | 155,592 | 81.9 | % | $ | 165,330 | 82.3 | % | ||||||||
Fixed-price |
13,984 | 7.4 | % | 13,650 | 6.8 | % | ||||||||||
Time-and-material |
20,315 | 10.7 | % | 21,788 | 10.9 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 189,891 | 100.0 | % | $ | 200,768 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
For the Three Months Ended December 31, | ||||||||||||||||
Revenue by Customer Type |
2011 | 2010 | ||||||||||||||
(In thousands) | ||||||||||||||||
U.S. Department of Defense (DoD) |
$ | 174,504 | 91.9 | % | $ | 185,623 | 92.5 | % | ||||||||
Other Federal Civilian Agencies |
10,754 | 5.7 | % | 10,939 | 5.4 | % | ||||||||||
Commercial / State / Local and International |
4,633 | 2.4 | % | 4,206 | 2.1 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 189,891 | 100.0 | % | $ | 200,768 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
Uncertainty continues to be the order of the day in the professional services government contracting environment. The President and the Secretary of Defense are committed to mandating cost control and achieving savings from both programs and routine Defense Department operations. Programmatic and budgetary cuts are expected to affect both government spending and industry revenue. Many companies have already begun to see revenue declines. Even areas that we formerly believed would survive budgetary pressures and offer a strong demand for our services are showing signs of weakness. While the military is still focused on extending the service life and capabilities of existing systems, Secretary of Defense Panetta has already announced that he expects to achieve cost savings from these activities as well.
Last summers federal deficit legislation raises the specter of a sequester of funds with the potential for harsh program cut backs and contract funding reductions. The Department of Defense, the largest customer for Alions services, has already implemented actions to cut certain programs, and delay or reduce funding for other programs. Alion, like others in our industry, has responded to these challenges by reducing costs, reducing headcount for indirect and administrative staff, seeking to reduce office space and in general working to position the Company to serve its customers more effectively and at lower cost. We continue to believe demand will persist for our higher end technical expertise. We think the Department of Defenses focus on controlling and reducing costs will help us sell the government the services and technical solutions we offer to improve operating efficiency and effectiveness.
The table below sets out our revenue by core business area for the first quarter of this year and last year.
For the Three Months Ended December 31, | ||||||||||||||||
Core Business Area |
2011 | 2010 | ||||||||||||||
(In thousands) | ||||||||||||||||
Naval Architecture and Marine Engineering |
$ | 85,689 | 45.1 | % | $ | 77,612 | 38.7 | % | ||||||||
Defense Operations |
45,388 | 23.9 | % | 52,336 | 26.1 | % | ||||||||||
Modeling and Simulation |
24,016 | 12.6 | % | 43,640 | 21.7 | % | ||||||||||
Technology Design and Other Services |
34,798 | 18.4 | % | 27,180 | 13.5 | % | ||||||||||
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Total |
$ | 189,891 | 100.0 | % | $ | 200,768 | 100.0 | % | ||||||||
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Backlog. Contract backlog represents an estimate, as of a specific date, of the future revenue Alion expects from existing contracts. At December 31, 2011, backlog on existing contracts and executed delivery orders totaled $2.5 billion, of which $368 million was funded. We estimate we have an additional $3.6 billion of unfunded contract ceiling value for an aggregate total backlog of $6.1 billion.
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Results of Operations
Quarter Ended December 31, 2011 Compared to Quarter Ended December 31, 2010
Consolidated Operations of Alion | ||||||||||||||||
Three Months Ended December 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
% of | % of | |||||||||||||||
Revenue | Revenue | |||||||||||||||
Selected Financial Information |
||||||||||||||||
Total revenue |
$ | 189,891 | $ | 200,768 | ||||||||||||
Total direct contract costs |
146,344 | 77.1 | % | 155,514 | 77.5 | % | ||||||||||
Direct labor costs |
61,274 | 32.3 | % | 62,599 | 31.2 | % | ||||||||||
Material and subcontract costs |
80,432 | 42.4 | % | 88,668 | 44.2 | % | ||||||||||
Other direct costs |
4,638 | 2.4 | % | 4,247 | 2.1 | % | ||||||||||
Gross profit |
43,547 | 22.9 | % | 45,254 | 22.5 | % | ||||||||||
Total operating expense |
35,866 | 18.9 | % | 36,657 | 18.3 | % | ||||||||||
Major components of operating expense: |
||||||||||||||||
Indirect expenses including facilities costs |
20,305 | 10.7 | % | 17,364 | 8.6 | % | ||||||||||
General and administrative |
12,707 | 6.7 | % | 16,303 | 8.1 | % | ||||||||||
Depreciation and amortization |
2,854 | 1.5 | % | 2,990 | 1.5 | % | ||||||||||
Income from operations |
$ | 7,681 | 4.0 | % | $ | 8,597 | 4.3 | % |
Revenue. First quarter revenue this year was $189.9 million down $10.9 million (5.4%) over last years first quarter results. Budget constraints and uncertainties affected many of Alions Department of Defense customers as we saw a significant fall off in sales to Army and Air Force customers. Air Force contract revenue was down more than $14.0 million (23.1%) and Army contract revenue was down $7.5 million, almost 36% compared to prior year results. However, program delays that had adversely affected revenue from Navy contracts have begun to subside as contracts we won last year began to gear up. Sales to Navy customers were up $3.6 million (4.0%) compared to last year and sales to other Defense Department customers climbed by $6.8 million. Overall, first quarter Department of Defense sales were down $11.1 million (6.0%) this year compared to last year. Cost-reimbursement revenue declined $9.7 million (5.9%) and time and material contract revenue fell $1.5 million (6.8%). Our prime contract revenue was down $7.7 million (4.6%) and subcontract revenue was down $3.1 million this quarter.
Naval Architecture and Marine Engineering sales were up $8.1 million this quarter, consistent with the start-up of several of last years contract wins that had been delayed. Modeling and Simulation revenue suffered a significant decline, down $19.6 million (45.0%) compared to last years elevated first quarter revenue when we set up a new Modeling and Simulation laboratory in Norfolk and delivered expanded information assurance support to SPAWAR. Sales from our Technology Services core business area improved by $7.6 million (28.0%) compared to last year more than offsetting a $6.9 million decline (13.3%) in Defense Operations revenue. Air Force funding constraints coupled with the completion of certain programs accounted for the decline in Defense Operations work. Contract margins on target costs and rate variances improved slightly to 7.2% from last years 7.1% overall.
Direct Contract Expense and Gross Profit. First quarter 2012 direct contract expenses decreased $9.2 million (5.9%) to $146.3 million compared to first quarter last year. The decline is consistent with lower revenue levels. Direct labor costs declined $1.3 million but were a slightly higher percentage of current quarter sales (32.3% versus 31.2%). Material and subcontract costs were down 9.3% ($8.2 million) while other direct costs increased almost $400 thousand. Gross profit for the current quarter was $43.5 million, down $1.7 million compared to $45.2 million in the first quarter last year. This quarters gross margin percentage is a slightly higher percentage of sales (22.9% versus 22.5% last year). Our gross margins are normally higher when more of our sales come from staff labor costs. Third party costs usually generate lower profit margins.
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Operating Expenses. While first quarter operating expenses were down almost $800 thousand compared to the same period last year, several line items fluctuated materially. The majority of these differences arise from an internal reorganization that has contract administration and human resources functions reporting to business unit management as of October 1, 2011 and as a result recording these expenses as indirect labor rather than in general and administrative expense. As a result of this change, our indirect and facility costs climbed $2.9 million while our general and administrative expenses declined $3.6 million. General and administrative expenses declined beyond the effects of the reorganization as management took additional steps to control administrative expenses. Beginning late last fiscal year, management implemented cost reduction measures. This quarter we rolled out staffing reductions and further expense cuts. Costs were down for most administrative functions and departments as Alion continued to adapt to anticipated downward pricing pressures and the changing government contracting environment. Depreciation and amortization expenses fluctuated modestly as declines in contract amortization charges were partly offset by increased amortization expenses for intangible assets we deployed late last year.
Income from Operations. Operating income for the first quarter of fiscal 2012 was down more than $900 thousand to $7.7 million compared to last year. Operating income also declined as a percentage of top line revenue to 4.0% of sales. Last year, first quarter operating profit of $8.6 million was 4.3% of sales.
Other Expense. Aggregate net interest income, interest expense and other expense for the quarter ended December 31, 2011 was $300 thousand greater than similar expenses in the first quarter expense last year. The increase is the result of higher cash pay interest expense on greater outstanding debt levels along with higher non-cash and deferred interest charges for our Senior Secured Notes. Last year we recognized a $460 thousand gain on retiring $2.0 million of Senior Unsecured Notes at a discount. We had no debt extinguishment gain this year.
Three Months Ended December 31, |
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2011 | 2010 | |||||||
(In thousands) | ||||||||
Cash pay interest expense |
||||||||
Revolver |
$ | 162 | $ | 112 | ||||
Secured Notes |
7,976 | 7,819 | ||||||
Unsecured Notes |
6,278 | 6,377 | ||||||
Other cash interest expense and fees |
13 | 13 | ||||||
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Sub-total cash pay interest |
14,429 | 14,321 | ||||||
Deferred and non-cash interest |
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Secured Notes PIK interest |
1,593 | 1,564 | ||||||
Debt issue costs and other non-cash items |
2,619 | 2,519 | ||||||
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Sub-total deferred and non-cash interest |
4,212 | 4,083 | ||||||
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Total interest expense |
$ | 18,641 | $ | 18,404 | ||||
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Income Tax Expense. First quarter deferred income tax expense was $1.7 million both this year and last year. Our expense relates to tax-deductible goodwill. We continue to record a full valuation allowance for any deferred tax assets we recognize because our history of losses makes it unlikely we will be able to realize the full benefit of our deferred tax assets.
Net Loss. This quarter, although we cut operating expenses we could only partially offset reduced gross profit from lower overall revenue. Higher interest expense on our long-term debt increased our net loss, as did the absence of any debt extinguishment gain this year. This led our first quarter net loss to increase by $1.7 million compared to last year.
Liquidity and Capital Resources
Alion requires liquidity to timely pay its vendors and debt obligations, to fund operations while awaiting payment from customers and to invest in capital projects. Accounts receivable require cash when balances increase as business grows or when customers delay contract funding actions. We are funding our current business with cash from operating activities and the cash we have from issuing the Secured Notes. We plan to fund future operations in a similar fashion. We also have access to a $35 million revolving credit facility. Management does not currently estimate Alion will need to use its revolving credit facility to any significant extent.
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Cash Flows
We used approximately $1.2 million to fund our first quarter operations this year. Although our net loss was higher, we were still able to use $7.1 million less for operations than the $8.3 million we used in our first quarter last year. Last year, receivables and payables generated $2.5 million in cash and expense and interest accruals consumed $8.2 million in cash. This year non-cash expenses contributed $9.5 million to cash flow; accruals contributed $5.0 million; and receivables consumed $2.8 million. We made our scheduled interest payment on our Senior Secured Notes in November.
Alion collected $187 million in receivables through December 31, 2011. Collections lagged first quarter revenue by $2.1 million. Current year first quarter collections were approximately $21 million less than first quarter collections were last year. As a result, our days sales outstanding (DSO) increased 2.5 days to 86.1 days as of December 31, 2011. (We determine DSO based on trailing twelve month revenue). Unbilled receivables continue at elevated levels despite managements focus on resolving contract funding issues though company-wide efforts to accelerate contract funding and speed contract modifications. Shortening the performance-to-billing cycle is critical to improving the Companys cash flow. The pace at which we collect invoices once submitted is helping to offset the adverse impact that elevated unbilled levels have on DSO and overall cash receipts. For the near term, however, we expect DSO will track at current levels.
Our capital expenditures this quarter are higher than they were last year as we engage in developing a variety of internal use software applications to help us better monitor and manage contract performance. We expect to invest in our business at levels comparable to last years expenditures. This year, like last year, we handled certain ESOP repurchases in the first quarter. We spent $2.3 million for share repurchases. We received cash from employee investments in the ESOP at the end of last fiscal year and so there was no offsetting cash inflow in the current quarter. In January 2012 during our second quarter, we processed $447 thousand in required statutory diversifications. Despite the challenges we faced this quarter, we were able to avoid using our revolving credit facility, although our payables have continued to grow along with our unbilled receivables.
We have a long-term revolving credit facility through August 2014. Management expects that for the next several years, Alion will be able to meet existing debt covenants which are less stringent and restrictive than previous loan covenants were. This should allow us to maintain access to our revolving credit facility, even though Management does not foresee needing to draw on it in any material amount or for any extended period. Management believes Alion will have sufficient cash on hand, cash flow from operations and cash available from its $35 million revolving credit facility to continue to meet obligations as they come due notwithstanding an overall increase in interest payments associated with the Secured Notes. We retain the ability to restrict or defer certain types of cash payments that in the past caused us to fail to comply with certain prior debt covenants. The Revolving Credit facility also limits our ability to offer and fund certain types of discretionary diversification options that create demands on Alions cash flows.
We cannot predict with any degree of accuracy the extent to which re-purchase and diversification demands will increase in future years. As more employees meet statutory and Plan-specific age and length of service requirements, potential diversification demands are likely to increase. These demands can increase further with any increase in the price of a share of Alion common stock. While a drop in our share price could reduce the value of each individual Plan participants beneficial interest, such a potential price decline could be offset by increased diversification demands and thus might not reduce the aggregate value of future demands on our cash. Current debt agreements limit our ability to offer discretionary diversification options to ESOP participants and this should reduce future cash flow demands. We try to monitor future potential impacts by relying in part on internal and external financial models that incorporate Plan census data and financial inputs intended to simulate changes in Alions share price.
Cash flow effects and risks associated with equity-related obligations
Changes in the price of a share of Alion common stock used to affect warrant-related interest expense. Our outstanding Secured Note warrants have a one penny exercise price and are in the money. They do not have a cash liquidation option and therefore Alion will only recognize interest expense for the debt issue cost associated with the initial fair value of these warrants. We no longer have significant stock-based compensation liabilities as no outstanding SARs have any intrinsic value. Management is unable to forecast the share price the ESOP Trustee will determine in future valuations.
Although current financial information includes the effects of the most recent ESOP Trust transactions, future expenses for stock-based compensation are likely to differ from estimates as the price of a share of Alion common stock changes. Our next regularly scheduled valuation period ends in March 2012. Interest rates, market-based factors and volatility, as well as Alions financial results will affect the future value of a share of our common stock.
Certain stock-based compensation grantees can choose to defer their payments by having us deposit funds in a rabbi trust we own. Any such deferrals will not materially affect our planned payments or our overall anticipated cash outflows.
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After each semi-annual valuation period, the Plan permits former employees and beneficiaries to request distribution of their vested ESOP account balances. Consistent with the terms of the Plan and the IRC, we intend to pay distribution requests in five annual installments and to defer initial payments as permitted. The Plan allows Alion to defer initial installment distributions for five years for former employees who are not disabled, deceased or retired.
Discussion of Debt Structure
Alions current debt structure includes a $35 million revolving credit facility with $687 thousand in outstanding letters of credit; $320.1 million in Secured Notes which include $310 in original notes at face value plus $10.1 million in PIK interest notes issued; and $245 million of Unsecured Notes. See Note 9 Long term debt in the accompanying unaudited financial statements elsewhere in this report for a detailed discussion of Alions current debt structure.
Senior Secured Note Indenture and Senior Unsecured Note Indenture
See Note 9 Long-term debt in the accompanying unaudited financial statements elsewhere in this report for a detailed listing of the terms and limitations of our existing long-term debt agreements including our Revolving Credit Agreement, the Secured Note Indenture and the Unsecured Note Indenture. There are no financial covenants in either the Senior Secured Note Indenture or the Senior Unsecured Note Indenture. Certain provisions in the Senior Secured Note Indenture and the Senior Unsecured Note Indenture limit our ability to incur additional debt or pay dividends if our ratio of trailing twelve month Adjusted EBITDA to trailing Consolidated Interest Expense is not greater than 2.0 to 1.0. Set out below are our actual ratios as of December 31, and September 30, 2011.
December 31, 2011 | September 30, 2011 | |||
TTM Adjusted EDBITA |
$ 63.6 million | $ 63.2 million | ||
TTM Consolidated Interest Expense |
$ 74.2 million | $ 73.9 million | ||
Ratio |
0.86 | 0.86 |
Revolving Credit Agreement Covenant Compliance
Alions Revolving Credit Agreement defines Consolidated EBITDA and requires the Company to achieve certain levels in order to maintain access to its credit facility and avoid cross default on the Senior Secured and Unsecured Notes. Neither EBITDA nor Consolidated EBITDA is a measure of financial performance in accordance with generally accepted accounting principles.
The Revolving Credit Agreement permits Alion to exclude certain expenses and requires it to exclude certain one-time gains when computing Consolidated EBITDA. The revolving credit agreement requires Alion to have a minimum $60.5 million in Consolidated EBITDA for the twelve months ended December 31, 2011. We had approximately $63.6 million in Consolidated EBITDA for the twelve months ended December 31, 2011 and exceeded the requirement by approximately $3.1 million.
During the rest of this year and the next three fiscal years the Company expects that at a minimum, it will have to make the estimated interest and principal payments set forth below.
Future Principal and Interest Payments by Fiscal Year | ||||||||||||||||
2012 | 2013 | 2014 | 2015 | |||||||||||||
(In thousands) | ||||||||||||||||
Bank revolving credit facility(1) |
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-Interest |
$ | 466 | $ | 621 | $ | 555 | $ | | ||||||||
Secured Notes(2) |
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-Interest |
16,005 | 32,491 | 33,144 | 16,821 | ||||||||||||
-Principal and PIK Interest |
| | | 339,788 | ||||||||||||
Unsecured Notes(3) |
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-Interest |
25,113 | 25,113 | 25,113 | 12,556 | ||||||||||||
-Principal |
| | | 245,000 | ||||||||||||
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Total cashpay interest |
41,584 | 58,225 | 58,812 | 29,377 | ||||||||||||
Total cashpay principal and PIK Interest |
| | | 584,788 | ||||||||||||
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Total |
$ | 41,584 | $ | 58,225 | $ | 58,812 | $ | 614,165 | ||||||||
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(1) | We expect we will occasionally use our $35.0 million revolving credit facility to meet working capital needs through 2014. Management expects the average utilized revolver balance will be immaterial and that interest expense will consist of commitment fees for unused balances. The current facility expires August 22, 2014. |
(2) | The Secured Notes bear interest at 10% in cash and 2% in PIK. Outstanding principal will increase over time for the 2% compounding PIK interest added to the initial $310 million in principal. The Secured Notes, including $29.8 million in PIK interest, mature November 1, 2014. |
(3) | The Senior Unsecured Notes bear interest at 10.25% and mature February 1, 2015. |
Contingent Obligations
Other contingent obligations which will impact the Companys cash flow
Management forecasts that continuing net operating losses for income tax purposes will permit Alion to avoid significant cash outflows for income taxes. Other contingent obligations which will impact our cash flow include:
| ESOP share repurchase and diversification obligations; and |
| Long-term incentive compensation plan obligations. |
As of December 31, 2011, Alion had spent a cumulative total of $88.9 million to repurchase shares of its common stock to satisfy ESOP distribution and diversification requests from former employees and Plan beneficiaries. In 2008, we changed our prior practice of immediately paying out all distribution requests in full. In March 2008, we began paying ESOP beneficiaries over the five-year distribution period permitted by ERISA and the terms of the Plan. Alion intends to continue this practice for the foreseeable future in part to offset the cash flow effects of annual employee diversification requests that began in fiscal 2008 and which are expected to continue for the foreseeable future. Our debt agreements limit our ability to fund certain discretionary ESOP diversification demands on our cash flow. The table below lists current and prior year share re-purchases.
Date |
Number of Shares Repurchased |
Share Price | Total Value Purchased (In thousands) |
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December 2009 |
745 | $ | 34.50 | $ | 26 | |||||||
March 2010 |
218,408 | $ | 34.50 | 7,535 | ||||||||
April 2010 |
52 | $ | 28.00 | 1 | ||||||||
May 2010 |
108 | $ | 28.00 | 3 | ||||||||
June 2010 |
62,875 | $ | 28.00 | 1,760 | ||||||||
July 2010 |
145 | $ | 28.00 | 4 | ||||||||
August 2010 |
89 | $ | 28.00 | 2 | ||||||||
September 2010 |
209 | $ | 28.00 | 6 | ||||||||
December 2010 |
119,945 | $ | 26.65 | 3,196 | ||||||||
February 2011 |
322 | $ | 26.65 | 8 | ||||||||
March 2011 |
136 | $ | 26.65 | 4 | ||||||||
April 2011 |
166 | $ | 27.15 | 5 | ||||||||
May 2011 |
3,677 | $ | 27.15 | 100 | ||||||||
June 2011 |
87,319 | $ | 27.15 | 2,371 | ||||||||
July 2011 |
2,300 | $ | 27.15 | 62 | ||||||||
August 2011 |
292 | $ | 27.15 | 8 | ||||||||
September 2011 |
289 | $ | 27.15 | 8 | ||||||||
November 2011 |
1,481 | $ | 20.95 | 31 | ||||||||
December 2011 |
106,505 | $ | 20.95 | 2,231 | ||||||||
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Total |
605,062 | $ | 17,359 | |||||||||
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Management believes cash flow from operations and cash available under its current revolving credit facility should provide sufficient capital to fulfill current business plans and fund working capital needs for at least the next two years. Management believes that because Alion has been able to manage its obligations without having had to significantly access its revolving credit facility since March 2010, that over the next 24 months Alion will likely have access to its revolver as and when necessary. Management believes Alion will more likely than not be able to meet its financial covenants and maintain access to its revolver.
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We are focusing on trying to achieve organic growth, improve contract margins and operating margins, and streamline our business processes. Over the next several quarters we expect to improve operating cash flow by carefully managing business processes, reducing indirect costs and optimizing our organizational structure. Although we expect to have positive annual operating cash flow, we need to generate significantly more revenue than we currently do and we need to earn net income to be able to meet our obligations. If we cannot do this, we will be unable to repay principal and interest on the Senior Secured Notes and Senior Unsecured Notes, and may be unable to meet ESOP repurchase and diversification obligations.
The Secured Note Indenture, the Unsecured Note Indenture and the Revolving Credit Facility allow Alion to make certain permitted acquisitions. If the Company were to have the available resources and were to identify a suitable candidate, it might use available financing to make a permitted acquisition. We will need to refinance some, if not all, our senior debt prior to maturity in November 2014 and February 2015 when we will have to payout more than $600 million over a three-month period. We are uncertain if we will be able to refinance these obligations or if refinancing terms will be favorable.
If we cannot refinance our senior debt, we will not have sufficient cash from operations to satisfy all our obligations. If plans or assumptions change, if assumptions prove inaccurate, if we make additional or larger investments than we currently plan, if we invest in or acquire other companies to a greater extent than we currently plan, if we experience unexpected costs or competitive pressures, or if existing cash and projected cash flow from operations prove insufficient, we may need to obtain additional financing sooner than we expect. We intend only to enter into new financing or refinancing we believe to be advantageous. However, given the volatile state of the credit markets and the recent downgrade of our debt, we cannot be certain sources of financing will be available in the future, or, if available, that financing terms would be favorable.
Off-Balance Sheet Financing Arrangements
Alion accounts for operating leases entered into in the routine course of business in accordance with ASC 840 Leases. We have no off-balance sheet financing arrangements other than operating leases and letters of credit under our revolving credit agreement. Alion has no relationship with any unconsolidated or special purpose entity and has not issued any guarantees.
Recently Issued Accounting Pronouncements
In December 2010, FASB issued Accounting Standards Update 2010-28 (ASU 2010-28) Goodwill and Other Intangibles When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. ASU 2010-28 updates ASC 350 Intangibles Goodwill and Other (ASC 350). ASU 2010-28 modifies goodwill impairment testing for reporting units with zero or negative carrying amounts.
ASU 2010-28 requires an entity to perform a step two goodwill impairment analysis for reporting units with zero or negative carrying value as part of an annual goodwill impairment analysis; whenever an event occurs or circumstances indicate that a reporting units fair value is more likely than not below its carrying amount; whenever an event occurs or circumstances indicate that a goodwill impairment exists; and upon adoption of the standard.
ASU 2010-28 is effective for fiscal years beginning on or after December 15, 2010, and can only be applied prospectively. Any goodwill impairment recognized on adopting ASU 2010-28 is to be recorded as a cumulative effect adjustment to retained earnings in the period of adoption. Any goodwill impairments occurring subsequent to adoption are to be recognized in current earnings as required by ASC 350. The Company adopted ASU 2010-28 this quarter with no effect on Alions consolidated financial position or operating results.
In September 2011, the FASB issued Accounting Standards Update 2011-08 (ASU 2011-08), Intangibles Goodwill and Other (Topic 350) Testing Goodwill for Impairment. ASU 2011-08 permits an entity to first assess qualitative factors including the totality of events and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value and therefore whether to test goodwill for impairment. Under ASU 2011-08 an entity may bypass qualitative assessment for any reporting unit in any period and perform a Step One analysis and may resume using qualitative assessment in any subsequent period.
ASU 2011-08 removes the requirement that an entity calculate the fair value of a reporting unit unless the entity determines it is more likely than not that the reporting units fair value is less than its carrying value. Where an entity is required to test goodwill for impairment, ASU 2011-08 does not change existing guidance on how to test goodwill for impairment. The update improves the examples an entity should consider in determining whether to measure an impairment loss for a reporting unit with negative carrying value. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company adopted ASU 2011-08 this quarter with no effect on Alions consolidated financial position or operating results.
In May 2011, the FASB issued Accounting Standards Update 2011-04 (ASU 2011-04) Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 provides guidance on how to measure fair value; expands fair value disclosure requirements; and offers
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guidance on what disclosures to make about fair value measurements. Alion already provides the expanded fair value disclosures that ASU 2011-04 will require for all public companies effective for interim and annual periods beginning after December 15, 2011. The Company does not believe adopting ASU 2011-04 will affect Alions consolidated financial position or operating results.
In June 2011, the FASB issued Accounting Standards Update 2011-05 (ASU 2011-05) Comprehensive Income (Topic 220) Presentation of Comprehensive Income. ASU 2011-05 requires entities to present all non-owner changes in stockholders equity either in a continuous, single statement of comprehensive income or in two separate, but consecutive, statements. An entity that presents two statements must present total net income and its components in the first statement followed by a second statement that presents total other comprehensive income and its components, along with total comprehensive income.
ASU 2011-05 does not change how an entity calculates earnings per share; the items to be reported in other comprehensive income; or when items must be reclassified to net income. An entity is still permitted to present components of other comprehensive income net of tax effects or before tax effects with tax effects for all items of other comprehensive income presented in the aggregate. An entity must disclose the tax effects of each item of other comprehensive income in the notes to its financial statements. Alions only item of other comprehensive income is amortization of actuarial gains and losses for the Companys post-retirement medical benefit plan which has no effect on Alions provision for income taxes.
ASU 2011-05 is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2011. ASU 2011-05 is to be applied retrospectively; early adoption is permitted. The Company adopted ASU 2011-05 this quarter with no effect on Alions consolidated financial position or operating results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk
We face interest rate risk for periodic borrowings on our $35.0 million senior revolving credit facility. Outstanding balances, if any, bear interest at a variable rate based on Credit Suisses prime rate plus a maximum spread of 600 basis points. Variable rates increase the risk that interest charges could increase materially if both market interest rates and outstanding balances were to increase. The Senior Secured Notes and the Senior Unsecured Notes are fixed-rate obligations. Other than the current revolving credit facility, Alion currently has no variable rate debt. We do not use derivatives for trading purposes. We invest excess cash in short-term, investment grade, and interest-bearing securities.
Foreign currency risk
International contract expenses and revenues are U.S. dollar-denominated. Alion does not believe operations are subject to material risks from currency fluctuations.
Risk associated with value of Alion common stock
Changes in the fair market value of Alions stock affect our estimated KSOP share repurchase obligations and, to a lesser extent, our stock appreciation rights obligations. The number of employees who seek to redeem shares of Alion common stock following termination of employment and the number of shares they seek to redeem affect the timing and amount of our repurchase obligations. The number of employees who exercise stock appreciation rights during any particular time period can affect the timing and amount of our stock appreciation right obligations.
Item 4. Controls and Procedures
Disclosure Controls and Procedures. The Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Companys disclosure controls and procedures (as such term is defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it is required to file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Companys management, including its Chief Executive and Chief Financial Officers, as appropriate to allow timely decisions regarding required disclosures. Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Companys disclosure controls and procedures are effective and timely.
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Changes in Internal Control Over Financial Reporting. There have not been any changes in the Companys internal control over financial reporting (as such term is defined in Rule 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2011 that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
See Note 18 to the Condensed Consolidated Financial Statements. Other than the actions discussed in the Companys most recent Annual Report on Form 10-K, the Company is not involved in any legal proceeding other than routine legal proceedings occurring in the ordinary course of business. Alion believes that these routine legal proceedings, in the aggregate, are not material to its financial condition or operating results.
As a government contractor, Alion may be subject from time to time to federal government inquiries relating to its operations and to DCAA audits. The federal government can suspend or debar, for a period of time, a contractor that is indicted or found to have violated the False Claims Act or other federal laws. Such an event could also result in fines or penalties.
There have been no material changes to the risk factors disclosed in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered securities during the quarter ended December 31, 2011.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
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Exhibit | ||
No. |
Description | |
31.1 | Certification of Chief Executive Officer of Alion Science and Technology Corporation pursuant to Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. | |
31.2 | Certification of Chief Financial Officer of Alion Science and Technology Corporation pursuant to 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. | |
32.1 | Certification of Chief Executive Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101* | The following materials from Alion Science and Technology Corporations Quarterly Report on Form 10-Q for the quarter ended December 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2011 and September 30, 2011; (ii) Consolidated Statements of Operations for the quarters ended December 31, 2011 and 2010; (iii) Consolidated Statements of Cash Flows for the quarters ended December 31, 2011and 2010; (iv) Notes to Consolidated Financial Statements tagged as blocks of text. |
* | As provided in Rule 406T of Regulation S-T, this information is furnished herewith and not filed for purposes of Sections 11 and 12 of the Securities Act and Section 18 of the Exchange Act. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ALION SCIENCE AND TECHNOLOGY CORPORATION | ||||||
By: | /s/ Michael J. Alber | |||||
Name: | Michael J. Alber | |||||
Title: | Principal Financial Officer and Duly Authorized Officer |
Date: February 14, 2012
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