[May 23, 2013] ALLIANT TECHSYSTEMS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Tweet (Edgar Glimpses Via Acquire Media NewsEdge) (Dollar amounts in thousands except share and per share data or unless otherwise indicated) Forward-Looking Information is Subject to Risk and Uncertainty Some of the statements made and information contained in this report, excluding historical information, are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements give ATK's current expectations or forecasts of future events. Words such as "may," "will," "expected," "intend," "estimate," "anticipate," "believe," "project," or "continue," and similar expressions are used to identify forward-looking statements. From time to time, ATK also may provide oral or written forward-looking statements in other materials released to the public. Any or all forward-looking statements in this report and in any public statements ATK makes could be materially different. They can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Any change in the following factors may impact the achievement of results: • reductions or changes in NASA or U.S. Government military spending and budgetary policies, including impacts of sequestration under the Budget Control Act of 2011, and sourcing strategies, • intense competition, • increases in costs, which ATK may not be able to react to due to the nature of its U.S. Government contracts, • changes in cost and revenue estimates and/or timing of programs, • the potential termination of U.S. Government contracts and the potential inability to recover termination costs, • reduction or change in demand for commercial ammunition, including the risk that placed orders exceed actual customer requirements, • risks associated with expansion into commercial markets, • actual pension and other postretirement plan asset returns and assumptions regarding future returns, discount rates, service costs, mortality rates, and health care cost trend rates, • greater risk associated with international business, • other risks associated with U.S. Government contracts that might expose ATK to adverse consequences, • costs of servicing ATK's debt, including cash requirements and interest rate fluctuations, • security threats, including cybersecurity and other industrial and physical security threats, and other disruptions, • supply, availability, and costs of raw materials and components, including commodity price fluctuations, • government laws and other rules and regulations applicable to ATK, such as procurement and import-export control, and federal and state firearms and ammunition regulations, • the novation of U.S. Government contracts, • performance of ATK's subcontractors, • development of key technologies and retention of a qualified workforce, • fires or explosions at any of ATK's facilities, • environmental laws that govern past practices and rules and regulations, noncompliance with which may expose ATK to adverse consequences, • impacts of financial market disruptions or volatility to ATK's customers and vendors, 25-------------------------------------------------------------------------------- Table of Contents • results of acquisitions or other transactions, and costs incurred for pursuits and proposed acquisitions that have not yet or may not close, • unanticipated changes in the tax provision or exposure to additional tax liabilities, and • the costs and ultimate outcome of litigation matters and other legal proceedings. This list of factors is not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact ATK's business. Additional information regarding certain of these factors is contained in Item 1A of this report and may also be contained in ATK's filings with the Securities and Exchange Commission on Forms 10-Q and 8-K. All such risk factors are difficult to predict, contain material uncertainties that may affect actual results, and may be beyond our control. Executive Summary ATK is an aerospace, defense, and commercial products company and supplier of products to the U.S. Government, allied nations, and prime contractors. ATK is also a major supplier of ammunition and related accessories to commercial customers and law enforcement agencies. ATK is headquartered in Arlington, Virginia and has operating locations throughout the United States, Puerto Rico, and internationally. As of March 31, 2013, ATK operated in three business segments. These operating segments are defined based on the reporting and review process used by ATK's chief executive officer and other management. As of March 31, 2013, ATK's three operating groups were: • Aerospace Group, which generated 29% of ATK's external sales in fiscal 2013, develops and produces rocket motor systems for human and cargo launch vehicles, conventional and strategic missiles, and missile defense interceptors. They also produce small and micro-satellites, satellite components, structures and subsystems, lightweight space deployables and solar arrays, and provide engineering and technical services. Additionally, the Aerospace Group operates in the military and commercial aircraft and launch structures markets. Other products include ordnance, such as decoy and illuminating flares. • Defense Group, which generated 45% of ATK's external sales in fiscal 2013, develops and produces military small-, medium-, and large-caliber ammunition, propulsion systems for tactical missiles and missile defense applications, strike weapons, precision munitions, gun systems, aircraft survivability systems, fuzes and warheads, energetic materials and special mission aircraft. • Sporting Group, which generated 26% of ATK's external sales in fiscal 2013, develops and produces commercial ammunition and accessories and tactical systems. Financial Highlights and Notable Events Certain notable events or activities affecting our fiscal 2013 financial results included the following: Financial highlights for fiscal 2013 • Annual sales of $4.4 billion. • Diluted earnings per share of $8.34. • Total orders of $6.3 billion. Orders include strong orders in ATK's Sporting Group, which are cancelable and may not be indicative of future sales, as ATK believes there may have been a number of ammunition orders placed that exceed actual customer requirements. • Total backlog of $8.2 billion at March 31, 2013 compared to $6.3 billion at March 31, 2012. Backlog includes orders within the Sporting group which are cancelable, and ATK believes there may have been a number of ammunition orders placed that exceed actual customer requirements. • Income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest as a percentage of sales was 10.8% and 10.7% for the years ended March 31, 2013 and 2012, respectively. The current year rate reflects the loss of the Radford facility management contract . The prior year rate reflects an approximately $36,000 accrual regarding a previously disclosed lawsuit related to the manufacture of LUU flares, and a favorable contract settlement of $18,000 within Defense group. 26-------------------------------------------------------------------------------- Table of Contents • The decrease in the current period tax rate to 30.6% from 35.3% in fiscal 2012 is primarily due to the settlement of the examination of the fiscal 2009 and 2010 tax returns and the absence of the estimated nondeductible portion of the fiscal 2012 accrual related to the LUU flare litigation agreement. • During fiscal 2013, ATK paid quarterly cash dividends of $0.20 per share for the first and second quarters and $0.26 for the third and fourth quarters, totaling $30,033. Notable events • During fiscal 2013 ATK repurchased 1,003,938 shares for $59,500. • On September 28, 2012, ATK was notified by the U.S. Army that it was selected for both the production of ammunition and continued operation and maintenance of the Lake City Army Ammunition Plant ("LCAAP"). The production contract runs through September 2019 and the facility contract runs through September 2020. • We successfully negotiated a contract amendment in the Aerospace Structures Division that includes the settlement of an outstanding receivable. As a result of that negotiation, we collected a $51,150 payment in the second quarter and an additional $51,150 payment in the third quarter. • During the second quarter, the Company redeemed its "6.75% Notes" for $409,000 including a premium of $9,000, plus accrued interest. The transaction resulted in the write-off of the remaining $2,773 of deferred debt issuance costs. • Under the terms of the Senior Credit Facility, ATK exercised its option to increase the Term A Loan by $200,000 (the "Accordion") during the second quarter. Proceeds of the Accordion were used to partially finance the redemption of the 6.75% Notes. • In the second quarter, ATK settled the examination of the fiscal 2009 and 2010 tax returns with the IRS. This settlement resulted in the recognition of approximately $11,123 of tax benefit. • On February 4, 2013, ATK announced it is freezing the pension formula for affected employees who currently earn a benefit under ATK's defined benefit pension plans. Effective July 1, 2013, affected employees will earn benefits under a new cash balance pension formula and will also be eligible for an enhanced company match under the 401(k) Plan. All of the changes are prospective. For additional information, see ATK's Current Report on Form 8-K dated January 31, 2013 and filed with the SEC on February 4, 2013. As a result of the Plans amendments the projected benefit obligation was reduced by $183,583. • ATK's Board of Directors appointed Scott Chaplin as Senior Vice President and General Counsel of ATK effective October 1, 2012. • ATK's Board of Directors appointed Jay Tibbets Senior Vice President and Interim President of the Sporting Group effective February 1, 2013, replacing Ronald P. Johnson who resigned on January 31, 2013. • On April 23, 2013 ATK announced that Steven J.Cortese, Senior Vice President, Government Relations and Communications, was leaving the company on May 1, 2013. • On May 1, 2013, ATK's Board of Directors declared a quarterly cash dividend of $0.26 per share, payable on June 27, 2013, to stockholders of record on June 3, 2013. • On May 10, 2013, Alliant Techsystems Inc. ("ATK") entered into an agreement to acquire Caliber Company, the parent company of Savage Sports Corporation and a portfolio company of Norwest Equity Partners for $315,000 in cash subject to a customary working capital adjustment. Outlook Government Funding-ATK is dependent on funding levels of the U.S. Department of Defense ("DoD") and NASA. In August 2011, the Budget Control Act ("the Act") reduced the DoD top line budget by approximately $490 billion over 10 years starting in fiscal year 2012. In January 2013, the "American Taxpayer Relief Act of 2012" was enacted triggering further budget cuts (or sequestration) as outlined in the Act beginning in March 2013 which would lead to additional reductions of approximately $500 billion from the defense top line budget over the next nine years, resulting in aggregate reductions of about $1 trillion through 2021. In September 2012, the Office of Management and Budget ("OMB") provided a report to Congress stating that it was unable to determine the amount of sequestration at the program, project, or activity level until consistent, government-wide definitions are established. The DoD has taken the position that such reductions would generate significant operational risks and may require the termination of certain, as yet undetermined, procurement programs. Neither the OMB nor DoD have issued final guidance subsequent to passage of the FY13 Appropriations Act directing the specific level of reductions required by each Department and Agency for each program. Given the uncertainty regarding how the Congress will reduce the U.S. deficit, the lack of specifics on how sequestration cuts will be implemented in the current fiscal 27-------------------------------------------------------------------------------- Table of Contents year, and how these same factors will be decided in the government's fiscal 2014 budget, we are unable to predict the impact, which could be material, on our programs or financial outlook, including our revenues, operating earnings and margins, cash flow, orders and backlog and recovery of long-lived assets. The U.S. defense industry has experienced significant changes over the years. ATK's management believes that the key to ATK's continued success is to focus on performance, innovation, simplicity, and affordability. ATK is positioning itself where management believes there will be continued strong defense funding, even as pressures mount on procurement and research and development accounts. ATK will concentrate on developing systems that will extend the life and improve the capability of existing platforms. ATK anticipates budget pressures will increasingly drive the life extension of platforms such as ships, aircraft, and main battle tanks. U.S. Government contracts are also dependent on the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take more than one year. As a result, at the outset of a major program, the contract is usually incrementally funded, and additional monies are normally committed to the contract by the procuring agency only as Congress makes appropriations for future fiscal years. In addition, most U.S. Government contracts are subject to modification if funding is changed. Any failure by Congress to appropriate additional funds to any program in which ATK participates, or any contract modification as a result of funding changes, could materially delay or terminate the program. This could have a material adverse effect on ATK's operating results, financial condition, or cash flows. On January 23, 2012, ATK was notified that the U.S. Army had completed its review of ATK's revised proposal for a contract to continue operating and maintaining the Radford Army Ammunition Plant ("RFAAP") and that ATK had not been awarded the contract. Loss of the Radford facility management contract reduced the Defense Group's and ATK's sales and profit. ATK will continue to operate its New River Energetics facility located at RFAAP, which supports ATK's commercial business, international program efforts and other business not directly associated with the RFAAP contract, and therefore ATK does not expect to lose all revenues associated with this division. Sales and operating profit associated with the RFAAP contract during fiscal 2013 were $73,967 and $48,200, respectively, which includes a gain on sale of residual assets, higher sales production volumes, and changes in profit rates. The RFAAP contract concluded June 30, 2012 and the plant has been transitioned to the successor contractor. Critical Accounting Policies ATK's discussion and analysis of its financial condition and results of operations are based upon ATK's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the consolidated financial statements, ATK makes estimates and judgments that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosure of contingent assets and liabilities. ATK re-evaluates its estimates on an on-going basis. ATK's estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. ATK believes the following are its critical accounting policies that affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Revenue Recognition Our sales come primarily from contracts with agencies of the U.S. Government and its prime contractors and subcontractors. As the various U.S. Government customers, including the U.S. Army, U.S. Navy, NASA, and the U.S. Air Force, make independent purchasing decisions, we do not generally regard the U.S. Government as one customer. Instead, we view each agency as a separate customer. Sales by customer were as follows: 28-------------------------------------------------------------------------------- Table of Contents Percent of Sales For Fiscal Years Ended: 2013 2012 2011 Sales to: U.S. Army 29 % 28 % 30 % U.S. Navy 13 % 12 % 11 % NASA 10 % 10 % 13 % U.S. Air Force 6 % 6 % 7 %Other U.S. Government customers 9 % 9 % 7 % Total U.S. Government customers 67 % 65 % 68 % Commercial and foreign customers 33 % 35 % 32 % Total 100 % 100 % 100 % Long-Term Contracts-The majority of ATK's sales to the U.S. Government and commercial and foreign customers are accounted for as long-term contracts. Sales under long-term contracts are accounted for under the percentage-of-completion method and include cost-plus and fixed-price contracts. Sales under cost-plus contracts are recognized as costs are incurred. Sales under fixed-price contracts are either recognized as the actual cost of work performed relates to the estimate at completion ("cost-to-cost") or based on results achieved, which usually coincides with customer acceptance ("units-of-delivery"). ATK predominately accounts for revenue using the cost-to-cost method of accounting. Profits expected to be realized on contracts are based on management estimates of total contract sales value and costs at completion. Estimated amounts for contract changes, including scope and claims, are included in contract sales only when amount is reliably estimatible and realization is estimated to be probable. Assumptions used for recording sales and earnings are adjusted in the period of change to reflect revisions in contract value and estimated costs. In the period in which it is determined that a loss will be incurred on a contract, the entire amount of the estimated gross margin loss is charged to cost of sales. Changes in estimates of contract sales, costs, or profits are recognized using the cumulative catch-up method of accounting. This method recognizes in the current period the cumulative effect of the changes on current or prior periods. The effect of the changes on future periods of contract performance is recognized as if the revised estimate had been used since contract inception. Changes in contract estimates occur for a variety of reasons including changes in contract scope, unforeseen changes in contract cost estimates due to unanticipated cost growth or risks affecting contract costs and/or the resolution of contract risks at lower costs than anticipated, as well as changes in contract overhead costs over the performance period. Changes in estimates could have a material effect on the Company's consolidated financial position or annual results of operations. In fiscal 2013, 2012 and 2011, the Company recognized favorable operating income adjustments of $215,945, $187,718, and $121,108, and unfavorable operating income adjustments of $122,568, $80,745 and $69,600, respectively, consisting of changes in estimates on contracts accounted for under the percentage-of-completion method of accounting. The adjustments recorded during the year ended March 31, 2013 were primarily driven by greater than expected performance in Small-Caliber Systems, increased production volumes Defense Electronic Systems , better performance at the Radford facility as the contracts and sale of residual assets were completed, and increase in Space System Operations due to performance improvements. These improvements were offset by decreases in Missile Products due to requalification expenses on a program. The prior year adjustments were primarily driven by greater than expected performance at the Radford facility due to increased production volumes, changes in estimates as contracts near completion in energetics and small-caliber systems programs, the absence of a reduction in sales and profit on a commercial aerospace program recorded in fiscal 2011, and changes in expectations on an international program in Armament Systems, a defense electronic systems program, and others. Contracts may contain provisions to earn incentive and award fees if specified targets are achieved as well as penalty provisions related to performance. Incentive and award fees and penalties that can be reasonably estimated and are probable are recorded over the performance period of the contract. Incentive and award fees that cannot be reasonably estimated are recorded when awarded. The complexity of the estimation process and all issues related to assumptions, risks, and uncertainties inherent with the application of the cost-to-cost method of accounting affect the amounts reported in ATK's financial statements. A number of internal and external factors affect the cost of sales estimates, including labor rate and efficiency variances, overhead rate estimates, revised estimates of warranty costs, estimated future material prices, and customer specification and testing requirement changes. If business conditions were different, or if ATK had used different assumptions in the application of this 29-------------------------------------------------------------------------------- Table of Contents and other accounting policies, it is likely that materially different amounts would be reported in ATK's financial statements. In the past, ATK's estimates and assumptions have been materially accurate. Other Revenue Recognition Methodology-Sales not recognized under the long-term contract method primarily relate to sales within the Sporting group which are recognized when persuasive evidence of an arrangement exists, the product has been delivered and legal title and all risks of ownership have been transferred, written contract and sales terms are complete, customer acceptance has occurred, and payment is reasonably assured. Sales are reduced for allowances, price discounts, and shipping costs. Fiscal 2013 sales by revenue recognition method were as follows: Percent of Sales Sales recorded under: Long-term contracts method 74 % Other method 26 % Total 100 % Employee Benefit Plans Defined Benefit Pension Plans. ATK's noncontributory defined benefit pension plans (the "Plans") cover substantially all employees hired prior to January 1, 2007. Eligible non-union employees hired on or after January 1, 2007 and certain union employees are not covered by a defined benefit plan but substantially all receive an employer contribution through a defined contribution plan. On January 31, 2013, the Plans were amended to freeze the current pension formula benefits effective June 30, 2013 and to implement a new cash balance formula applicable to pay and service starting July 1, 2013. The cash balance formula provides each affected employee with pay credits based on the sum of that employee's age plus years of pension service as of December 31 of each calendar year, plus 4% annual interest credits. Prior to the effective date of the amendment, the Plans provide either pension benefits based on employee annual pay levels and years of credited service or based on stated amounts for each year of credited service. ATK funds the Plans in accordance with federal requirements calculated using appropriate actuarial methods. Plan assets for ATK are held in a trust and are invested in a diversified portfolio of equity investments, fixed income investments, real estate, timber, energy investments, hedge funds, private equity, and cash. For certain Plan assets where the fair market value is not readily determinable, estimates of the fair value are determined using the best available information including the most recent audited financial statements. ATK also sponsors nonqualified supplemental executive retirement plans which provide certain executives and highly compensated employees the opportunity to receive pension benefits in excess of those payable through tax qualified pension plans.The Company implemented similar changes as those noted above to ATK's nonqualified supplemental executive retirement plans for certain highly compensated employees. ATK recorded pension expense for the Plans of $167,952 in fiscal 2013, an increase of $33,995 from $133,957 of pension expense recorded in fiscal 2012. The expense related to these Plans is calculated based upon a number of actuarial assumptions, including the expected long-term rate of return on plan assets, the discount rate, and the rate of compensation increase. The following table sets forth ATK's assumptions used in determining pension expense for fiscal 2013, 2012, and 2011, and projections for fiscal 2014: Years Ending March 31 2014 2013 2012 2011 Expected long-term rate of return on plan assets 7.25 % 7.50 % 8.00 % 8.00 % Discount rate 4.35 % 4.90 % 5.60 % 5.90 % Rate of compensation increase: Union 3.23 % 3.26 % 3.79 % 3.84 % Salaried 3.49 % 3.55 % 4.02 % 4.05 % In developing the expected long-term rate of return assumption, ATK considers input from its actuaries and other advisors, annualized returns of various major indices over a long-term time horizon and ATK's own historical investment returns. The expected long-term rate of return of 7.5% used in fiscal 2013 for the Plans was based on an asset allocation range of 30 - 50% in equity investments, 30 - 40% in fixed income investments, 5 - 15% in real estate/real asset investments, 5 - 27% collectively in hedge fund and private equity investments, and 0 - 6% in cash investments. The expected long-term rate of 30-------------------------------------------------------------------------------- Table of Contents return assumed for fiscal 2014 has been decreased to 7.25%. This decrease is primarily a result of the lower interest rate environment and decreased expectations for the equity risk premium. The actual return in any fiscal year will likely differ from ATK's assumption, but ATK estimates its return based on long-term projections and historical results. Therefore, any variance in a given year does not necessarily indicate that the assumption should be changed. In determining its discount rate, ATK uses the current investment yields on high-quality corporate bonds (rated AA or better) that coincide with the cash flows of the estimated benefit payouts from ATK's plans. The model uses a yield curve approach to discount each cash flow of the liability stream at an interest rate specifically applicable to the timing of the respective cash flow. The model totals the present values of all cash flows and calculates the equivalent weighted average discount rate by imputing the singular interest rate that equates the total present value with the stream of future cash flows. This resulting weighted average discount rate is then used in evaluating the final discount rate. The discount rate was 4.35%, 4.90%, and 5.60% at March 31, 2013, March 31, 2012, and March 31, 2011, respectively. The discount rate as of March 31 impacts the following fiscal year's pension expense. Future actual pension expense can vary significantly depending on future investment performance, changes in future discount rates, legally required plan changes, and various other factors related to the populations participating in the Plans. If the assumptions of the discount rate, compensation increase, and/or expected rate of return for fiscal 2014 were different, the impact on fiscal 2014 expense would be as follows: each 0.25% change in the discount rate would change fiscal 2014 pension expense by approximately $6,200; each 0.25% change in the rate of compensation increase would change fiscal 2014 pension expense by approximately $300; and each 0.25% change in the expected rate of return on plan assets would change fiscal 2014 pension expense by approximately $5,700. ATK bases its determination of pension expense or income on a market-related valuation of assets, which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets. Since the market-related value of assets recognizes gains or losses over a five-year period, the future value of assets will be impacted as previously deferred gains or losses are recorded. ATK made contributions to the qualified pension trust of $180,000 during fiscal 2013. ATK made qualified pension plan trust contributions of $40,000 in April 2013 (fiscal 2014) and $40,000 in March 2013 (fiscal 2013) towards the legally required minimum contribution of $80,000 for fiscal year 2014. ATK distributed $8,218 under its supplemental executive retirement plans during fiscal 2013, and expects to make distributions directly to retirees of approximately $3,597 in fiscal 2014. A substantial portion of ATK's Plan contributions are recoverable from the U.S. Government as allowable indirect contract costs at amounts generally equal to the pension plan contributions, although not necessarily in the same year the contribution is made. ATK's funded pension status was approximately 77% as of March 31, 2013. Other Postretirement Benefits. ATK also provides postretirement health care benefits and life insurance coverage to certain employees and retirees. The following table sets forth ATK's assumptions used to determine net periodic benefit cost for other postretirement benefit ("PRB") plans for fiscal 2013, 2012, and 2011, and projections for fiscal 2014: Years Ending March 31 2014 2013 2012 2011 Expected long-term rate of return on plan assets: Held solely in fixed income investments 5.00 % 5.00 % 6.00 % 6.00 % Held in pension master trust and fixed income investments 6.25 % 6.25 % 7.00 % 7.00 % Discount rate 3.80 % 4.40 % 5.00 % 5.35 % Weighted average initial health care cost trend rate 7.60 % 7.70 % 7.60 % 7.70 % Health care cost trend rates are set specifically for each benefit plan and design. Health care cost trend rates used to determine the net periodic benefit cost for employees during fiscal 2013 were as follows: under age 65 was 8.5%; over age 65 was 7.5%; and the prescription drug portion was 8.5%. The health care cost ultimate trend rates are as follows: 31-------------------------------------------------------------------------------- Table of Contents Health care cost trend rate for employees under 65 5.0 % Health care cost trend rate for employees over 65 5.0 % Health care cost trend rate for prescription drugs 5.0 % Weighted average health care cost trend rate 5.0 % Each category of cost declines at a varying rate. The ultimate trend rate will be reached in fiscal 2021 for employees under age 65, in fiscal 2021 for employees over age 65, and in fiscal 2022 for prescription drugs. In developing the expected long-term rate of return assumption for other PRB plans, ATK considers input from actuaries, historical returns, and annualized returns of various major indices over long periods. As of March 31, 2013, approximately 40% of the assets were held in a 401(h) account held within the pension master trust and are invested in the same manner as the pension assets. The expected long-term rates of returns are based on the weighted average asset allocation between the assets held within the 401(h) and those held in fixed income investments. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage point increase or decrease in the assumed health care cost trend rates would have the following effects: One-Percentage One-Percentage Point Increase Point Decrease Effect on total service and interest cost $ 326 $ (284 ) Effect on postretirement benefit obligation 8,552 (7,479 ) ATK made other PRB plan contributions of $10,553 in fiscal 2013 and expects to make contributions of approximately $12,000 in fiscal 2014. A substantial portion of ATK's PRB plan contributions are recoverable from the U.S. Government as allowable indirect costs at amounts generally equal to the plan contributions, although not necessarily in the same year the contribution is made. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) reduced ATK's accumulated projected benefit obligation ("APBO") measured as of December 31, 2005. One of ATK's other PRB plans is actuarially equivalent to Medicare, but ATK does not believe that the subsidies it will receive under the Act will be significant. Because ATK believes that participation levels in its other PRB plans will decline, the impact to ATK's results of operations in any period has not been and is not expected to be significant. Defined Contribution Plan. ATK also sponsors a 401(k) defined contribution plan. Participation in this plan is available to substantially all U.S. employees. Income Taxes Provisions for federal, state, and foreign income taxes are calculated based on reported pre-tax earnings and current tax law. Such provisions differ from the amounts currently receivable or payable because certain items of income and expense are recognized in different time periods for financial reporting purposes than for income tax purposes. Significant judgment is required in determining income tax provisions and evaluating tax positions. ATK periodically assesses its liabilities and contingencies for all periods that are currently open to examination or have not been effectively settled based on the most current available information. Where it is not more likely than not that ATK's tax position will be sustained, the Company records the entire resulting tax liability and when it is more likely than not of being sustained, the Company records its best estimate of the resulting tax liability. Any applicable interest and penalties related to these positions are also recorded in the consolidated financial statements. To the extent ATK's assessment of the tax outcome of these matters changes, such change in estimate will impact the income tax provision in the period of the change. It is ATK's policy to record any interest and penalties related to income taxes as part of the income tax expense for financial reporting purposes. Deferred tax assets related to carryforwards are reduced by a valuation allowance when it is not more likely than not that the amount will be realized before expiration of the carryforward period. As part of this analysis ATK takes into account the amount and character to determine if the carryforwards will be realized. Significant estimates are required for this analysis. Changes in the amounts of valuation allowance are recorded in the tax provision in the period when the change occurs. Acquisitions The results of acquired businesses are included in ATK's consolidated financial statements from the date of acquisition. ATK allocates the purchase price of an acquired business to the underlying tangible and intangible acquired assets and liabilities assumed based on their fair value. Estimates are used in determining the fair value and estimated remaining lives of 32-------------------------------------------------------------------------------- Table of Contents intangible assets until the final purchase price allocation is completed. Actual fair values and remaining lives of intangible assets may vary from those estimates. The excess purchase price over the estimated fair value of the net assets acquired is recorded as goodwill. On April 9, 2010, ATK acquired Blackhawk for a purchase price of $172,251. Blackhawk is a manufacturer of high quality tactical gear. ATK believes that the acquisition provides ATK with a leading tactical systems brand, an expanded portfolio of quality products, and additional design and development expertise for innovative tactical accessories which will strengthen ATK's position in tactical accessories and equipment for domestic and international military, law enforcement, security, and sport enthusiast markets. Blackhawk employs approximately 300 employees and is included in the Security and Sporting group. The purchase price allocation was completed in fiscal 2011. Most of the goodwill generated in this acquisition will be deductible for tax purposes. Accounting for Goodwill ATK tests goodwill for impairment on the first day of its fourth fiscal quarter or upon the occurrence of events or changes in circumstances that indicate that the asset might be impaired. The Company has determined that the reporting units for its goodwill impairment review are its operating segments, or components of an operating segment, that constitute a business for which discrete financial information is available, and for which segment management regularly reviews the operating results. Based on this analysis, the Company has identified 10 reporting units within its reportable segments as of the fiscal 2013 testing date. The goodwill impairment test is performed using a two-step process. In the first step, ATK determines the estimated fair value of each reporting unit and compares it to the carrying value of the reporting unit, including goodwill. If the carrying amount of a reporting unit is higher than its estimated fair value, an indication of impairment exists and the second step must be performed in order to determine the amount of the impairment. In the second step, ATK must determine the implied fair value of the reporting unit's goodwill which is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The implied fair value is compared to the carrying amount and if the carrying amount of the reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss must be recognized for the excess. The fair value of each reporting unit is determined using both an income and market approach. The value estimated using a discounted cash flow model is weighted against the estimated value derived from two separate market approaches: the guideline company and transaction methods. These market approach methods estimate the price reasonably expected to be realized from the sale of the company based on comparable companies and recent transactional data. In developing its discounted cash flow analysis, ATK's assumptions about future revenues and expenses, capital expenditures, and changes in working capital are based on its three-year plan, as approved by the Board of Directors, and assumes a terminal growth rate thereafter. A separate discount rate is determined for each reporting unit and these cash flows are then discounted to determine the fair value of the reporting unit. Projecting discounted future cash flows requires ATK to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital, and the appropriate discount rate. The projections also take into account several factors including current and estimated economic trends and outlook, costs of raw materials, consideration of ATK's market capitalization in comparison to the estimated fair values of the Company's reporting units, and other factors which are beyond ATK's control. If the current economic conditions were to deteriorate, or if ATK were to lose a significant contract or business, causing a reduction in estimated discounted cash flows, it is possible that the estimated fair value of certain reporting units could fall below their carrying value resulting in the necessity to conduct additional goodwill impairment tests in future periods. ATK continually monitors the reporting units for impairment indicators and updates assumptions used in the most recent calculation of the estimated fair value of a reporting unit as appropriate. To test the reasonableness of the valuation, ATK compares the indicated fair value of the reporting units to the estimated public market capitalization value of ATK and the appropriateness of the assumed control premium. Results of ATK's fiscal 2013 Annual Impairment Test For the fiscal 2013 impairment assessment performed as of December 31, 2012, ATK utilized estimated cash flows from its three-year plan and assumed a terminal growth rate thereafter ranging from 0% to 3%. The cash flows were then discounted using a separate discount rate for each reporting unit which ranged from 9.5% to 11%. An assumed value was also determined using multiples from recent transactions in the industry and by comparing operating results from guideline companies. The results of ATK's fiscal 2013 annual goodwill impairment test indicated that no goodwill impairment existed as the estimated fair value for most reporting units exceeded their carrying value by greater than 10%. Although there is no indication of impairment, based on the annual test, ATK determined that three of its reporting units had estimated fair values that 33-------------------------------------------------------------------------------- Table of Contents exceeded their carrying values by less than 10% which ATK does not deem to be a significant excess. These reporting units include Space Systems Operations, Space Components, and Accessories and are discussed in further detail below. The Space Systems Operations reporting unit had an estimated fair value that exceeded its carrying value by approximately 9%, using a discount rate of 9.5% and a 3% terminal growth rate. The reporting unit had approximately $518,000 of goodwill recorded as of March 31, 2013. This reporting unit contains much of the work ATK does related to the Space Launch System ("SLS") program for NASA. As previously discussed, the baseline design for SLS has been announced and ATK's five-segment solid rocket boosters were selected as the propulsion system for the first two SLS test flights, however NASA intends to hold a competition for the final design of the propulsion system for SLS, in which ATK will be eligible to participate. Congress will determine, as part of the 2014 appropriations legislative process, what the policy and funding levels for NASA will be and allocate the GFY 2014 funding for the Space Launch System. ATK has assumed continuation of the SLS program in the estimated cash flows for Space Systems Operations. However, if Congress significantly changes NASA's FY 2014 budget or does not appropriate the expected funds to the SLS program, there could be an adverse effect on ATK's operating results, financial condition, and cash flows within the Space Systems Operations reporting unit. If significant changes are made to the program in future periods, or if the discount rate were to increase by more than 150 basis points, there would likely be an indication of impairment which would require the Company to perform a test for impairment. The Space Components reporting unit had an estimated fair value that exceeded its carrying value by approximately 7% using an 11% discount rate and a 3% terminal growth rate. This reporting unit had approximately $85,000 of goodwill recorded in fiscal 2013. In fiscal 2009, ATK recorded a non-cash goodwill impairment charge of $108,500 within this reporting unit and, given the fact that any excess estimated fair value over carrying value was written-off at that time, ATK would not expect any significant excess within this reporting unit. There have been no significant changes in the underlying business since the date of the impairment and, based on ATK's expected sales growth in the base business, ATK does not believe there is any indication of impairment. Holding all other assumptions the same, the discount rate would have to change by more than 125 basis points for this reporting unit to show an indication of impairment. The Accessories reporting unit had an estimated fair value that exceeded its carrying value by approximately 7% using an 11% discount rate and a 3% terminal growth rate. This reporting unit had approximately $125,000 of goodwill recorded at March 31, 2013. A majority of the goodwill recorded within this reporting unit, approximately $116,000, relates to goodwill acquired in the fiscal 2009 acquisition of Eagle and the fiscal 2011 acquisition of Blackhawk. ATK would not expect to see significant excess within this reporting unit given that the Company determined the fair value of goodwill within the last few years. Based on the expected sales growth for Accessories, ATK does not believe there is any indication of impairment given ATK's continuing expansion into the market. The Company has begun realignment activities in the military accessories business. However, should the Company not be successful in this activity, or there be future deterioration in the military accessories business due to changes in troop deployment, or the discount rate were to increase by more than 150 basis points, it is possible that the estimated fair value of this reporting unit could fall below its carrying value, and there could be an indication of impairment which would require the Company to perform a test for impairment. Results of Operations The following information should be read in conjunction with ATK's consolidated financial statements. The key performance indicators that ATK's management uses in managing the business are sales, income before interest and income taxes, and cash flows. Fiscal 2013 Sales The following is a summary of each operating segment's external sales: Years Ended March 31 2013 2012 $ Change % Change Aerospace Group $ 1,248,446 $ 1,347,802 $ (99,356 ) (7.4 )% Defense Group 1,957,650 2,262,777 (305,127 ) (13.5 )% Sporting Group 1,156,049 1,002,820 153,229 15.3 % Total external sales $ 4,362,145 $ 4,613,399 $ (251,254 ) (5.4 )% The fluctuation in sales was driven by the program-related changes within the operating segments as described below. Aerospace Group. The decrease in sales was driven by: 34-------------------------------------------------------------------------------- Table of Contents • a $73,500 decrease in Space Systems Operations sales volumes due to the completion of the Space Shuttle Program and a space services contract, and reduced production levels on multiple programs partially offset by higher sales on classified programs, and • a $31,800 decrease in Aerospace Structures Division primarily driven by completion of tool procurement/start-up activities, partially offset by higher sales on classified programs. This decrease was partially offset by an increase in Space Components of $12,500 due to increased production across multiple programs in the current year. Defense Group. The decrease in sales was driven by: • a decrease of $128,400 in energetics systems due primarily to the loss of the Radford facility management contract, • a $113,200 decrease in small-caliber systems due to decreased demand for non-standard ammunition, a reduction in modernization due to the program nearing completion, and completion of other contracts, • a decrease of $39,000 in armament systems driven by completion of an international contract and lower volumes on large-caliber ammunition programs, and decreases in projectile systems, partially offset by an increase in sales on combat systems programs, and • a decrease of $22,300 in Defense Electronic Systems due to startup and completions on multiple contracts. Sporting Group. The increase in sales was driven by: • a $113,100 increase in ammunition driven by increased demand for ammunition and a previously announced price increase in the commercial channels, and • an increase of $40,000 in accessories driven by the higher sales volume within the retail channels. Cost of Sales The following is a summary of each operating segment's cost of sales: Years Ended March 31 2013 2012 $ Change % Change Aerospace Group $ 976,442 $ 1,071,515 $ (95,073 ) (8.9 )% Defense Group 1,490,438 1,711,008 (220,570 ) (12.9 )% Sporting Group 897,462 797,284 100,178 12.6 % Corporate $ 56,934 $ 38,696 $ 18,238 47.1 % Total cost of sales $ 3,421,276 $ 3,618,503 $ (197,227 ) (5.5 )% The fluctuation in cost of sales was driven by the program-related changes within the operating segments as described below. Aerospace Group. The decrease in cost of sales was driven by: • a $59,500 decrease in Space Systems Operations volumes due to the completion of the Space Shuttle Program, a space services contract and reduced production levels on multiple programs partially offset by increased classified programs, and • a $33,200 decrease in Aerospace Structures Division primarily driven by completion of tool procurement/start-up activities, partially offset by increased classified programs. This decrease was partially offset by an increase in Space Components of $10,000 due to an increase in production across multiple programs in the current year. Defense Group. The decrease in cost of sales was driven by: • a decrease of $111,814 in energetics systems due primarily to the loss of the Radford facility management contract, 35-------------------------------------------------------------------------------- Table of Contents • a $107,836 decrease in small-caliber systems due to decreased demand for non-standard ammunition, reduced material purchases in preparation of a new contract, and a reduction in modernization due to the program nearing completion, and • a decrease of $12,240 in Defense Electronic Systems due to startup and completions on multiple contracts. These decreases were partially offset by a $15,533 increase within missile products due to production across multiple programs. Sporting Group. The increase in cost of sales was driven by: • a $63,200 increase in Ammunition driven by an increase in ammunition sales volume partially offset by commodity price decreases, and • a $40,700 increase in Accessories driven by an increase in accessories sale volume and a reserve for potentially obsolete inventory balances associated with military accessories programs. Corporate. The increase in cost of sales was driven by higher pension expense and intercompany profit eliminations partially offset by the absence of the LUU flares accrual and restructuring charges in the prior year. Operating Expenses Years Ended March 31 As a % As a % 2013 of Sales 2012 of Sales Change Research and development $ 64,678 1.5 % $ 66,403 1.4 % $ (1,725 ) Selling 162,359 3.7 % 169,984 3.7 % (7,625 ) General and administrative 244,189 5.6 % 262,923 5.7 % (18,734 ) Total $ 471,226 10.8 % $ 499,310 10.8 % $ (28,084 ) Operating expenses decreased by $28,084 year-over-year. Research and development costs decreased slightly year-over-year. Selling expenses decreased primarily due to absence of the Lake City Army Ammunition Plant competition expenses in the prior year. General and administrative costs decreased due to the absence of the LUU flares litigation accrual, and realignment charges, partially offset by the absence of the reversal of certain long-term incentive accruals in the prior year. Income before Interest, Loss on Extinguishment of Debt, Income Taxes, and Noncontrolling Interest Years Ended March 31 2013 2012 Change Aerospace Group $ 144,392 $ 143,817 $ 575 Defense Group 270,498 319,428 (48,930 ) Sporting Group 118,325 91,234 27,091 Corporate (63,572 ) (58,893 ) (4,679 ) Total $ 469,643 $ 495,586 $ (25,943 ) The decrease in income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest was due to decreased sales. Significant changes within the operating segments are also described below. Aerospace Group. Results were flat driven by higher award fees and reduced LUU flare warranty and settlement expense in Space Systems Operations and higher volume and improved performance on Space Components programs, offset by the lower sales volume. Defense Group. The decrease is the result of lower sales within the group, prior year completion of higher profit international contracts, and the absence of an $18,000 change in profit expectation from a favorable contract resolution on a program in the prior year. This was partially offset by a gain on the sale of residual assets in Energetic Systems and profit expectation improvements in Small Caliber Systems. Sporting Group. The increase primarily reflects higher sales volumes and prices, as well as lower raw material costs. This is partially offset by a reserve for potentially obsolete inventory balances within Eagle Industries. 36-------------------------------------------------------------------------------- Table of Contents Corporate. The income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest primarily reflects expenses incurred for administrative functions that are performed centrally at the corporate headquarters, the difference between pension and postretirement benefit expense calculated under Financial Accounting Standards (FAS) and the expense calculated under U.S. Cost Accounting Standards (CAS), and the elimination of intercompany profits. The change from the prior year is driven by higher pension expense and intercompany profit eliminations, partially offset by absence of the LUU flare accrual, and the realignment accrual in the prior year. Net Interest Expense Net interest expense for fiscal 2013 was $65,386, a decrease of $23,234 compared to $88,620 in fiscal 2012. The decrease was primarily due to the decrease in the average amount of debt outstanding and lower interest rates. Income Tax Provision Years Ended March 31 Effective Effective 2013 Rate 2012 Rate ChangeIncome tax provision $ 120,243 30.6 % $ 143,762 35.3 % $ (23,519 ) The decrease in the current period tax rate is primarily due to the settlement of the examination of the fiscal 2009 and 2010 tax returns and the absence of the nondeductible portion of the fiscal 2012 accrual related to the LUU flare litigation agreement. ATK's provision for income taxes includes both federal and state income taxes. The effective tax rate for fiscal 2013 of 30.6% differs from the federal statutory rate of 35.0% due to the settlement of the examination of the fiscal 2009 and 2010 tax returns, domestic manufacturing deduction (DMD), and the full year federal research and development (R&D) credit, offset by state income taxes which increased the rate. The effective tax rate for fiscal 2012 of 35.3% differs from the federal statutory rate of 35.0% due to state income taxes and the estimated nondeductible portion of the accrual related to the LUU flare litigation which increased the rate, as well as the DMD and partial year R&D credit which decreased the rate. ATK or one of its subsidiaries files income tax returns in the U.S. federal, various U.S. state, and foreign jurisdictions. With few exceptions, ATK is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2006. The Internal Revenue Service (IRS) is currently auditing ATK's tax returns for fiscal years 2011 and 2012. We believe appropriate provisions for all outstanding issues have been made for all remaining open years in all jurisdictions. As of March 31, 2013 and 2012, the total amount of unrecognized tax benefits was $27,760 and $37,906, respectively, of which $21,150 and $30,248, respectively, would affect the effective tax rate, if recognized. The remaining balance is related to deferred tax items which only impact the timing of tax payments. Although the timing and outcome of audit settlements are uncertain, it is reasonably possible that a $518 reduction of the uncertain tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings from $0 to $344. See Note 11 to the consolidated financial statements for further details. ATK believes it is more likely than not that the recorded deferred benefits will be realized through the reduction of future taxable income. ATK's recorded valuation allowance of $4,242 at March 31, 2013 relates to capital loss carryovers and certain state net operating loss and credit carryforwards that are not expected to be realized before their expiration. The valuation allowance decreased during fiscal 2013 due to a combination of the generation, expiration, and revaluation of certain net operating losses, capital losses, and credits. The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013. This law retroactively extended the federal R&D tax credit from January 1, 2012 through December 31, 2013. The impact of this extension was included in the tax rate for fiscal 2013. Net Income Before Noncontrolling Interest Net income before noncontrolling interest for fiscal 2013 was $272,241, an increase of $9,037 compared to $263,204 in fiscal 2012. This increase was driven by a $23,519 decrease in income tax expense, a $28,084 decrease in operating expenses, a $54,027 decrease in gross profit, and a decrease of $23,234 in net interest expense over the prior year. Noncontrolling Interest 37-------------------------------------------------------------------------------- Table of Contents The noncontrolling interest represents the noncontrolling owner's portion of the income of a joint venture in which ATK is the primary owner. This joint venture was acquired with Composite Optics, Inc. ("COI") and is consolidated into ATK's financial statements. Fiscal 2012 Sales The following is a summary of each operating segment's external sales: Years Ended March 31 2012 2011 $ Change % Change Aerospace Group $ 1,347,802 $ 1,432,678 $ (84,876 ) (5.9 )% Defense Group 2,262,777 2,480,033 (217,256 ) (8.8 )% Sporting Group 1,002,820 929,553 73,267 7.9 % Total external sales $ 4,613,399 $ 4,842,264 $ (228,865 ) (4.7 )% The fluctuation in sales was driven by the program-related changes within the operating segments as described below. Aerospace Group. The decrease in sales was driven by: • a $114,300 decrease in Space Systems Operations sales volumes due to shifts in NASA funding priorities, the completion of the Space Shuttle Program, and the termination of the Launch Abort System, partially offset by higher sales on programs in strategic and commercial systems, flare and decoy sales, and space systems and services operations. This decrease was partially offset by an increase in aerospace structures of $35,600 due to the absence of the $25,000 sales reduction in the third quarter of the prior year on a commercial aircraft structures program. Defense Group. The decrease in sales was driven by: • a $106,200 decrease in small-caliber systems due to lower volume of small-caliber ammunition sales, decreased demand for non-standard ammunition, and a reduction in modernization due to the program nearing completion, • a decrease of $71,300 in energetics systems due to a reduction in modernization resulting from completion of the program and energetics program sales volume, partially offset by increased volume on a propellant program, • a decrease of $38,100 in armament systems driven by lower volumes across multiple medium-caliber gun programs, and decreases in projectile systems, partially offset by an increase in sales on combat systems programs, and • a decrease of $34,500 across various programs within the composites and tactical rocket motor products. These decreases were partially offset by a $28,100 increase in sales across various programs within missile products and an $11,700 increase in sales within defense electronic systems driven by the award of the JATAS program. Sporting Group. The increase in sales was driven by: • a $56,800 increase in ammunition driven by an increase in ammunition sales volume resulting primarily from increased demand and new capacity, and • an increase of $17,000 in accessories driven by the higher sales volume within the retail channels. Cost of Sales The following is a summary of each operating segment's cost of sales: 38-------------------------------------------------------------------------------- Table of Contents Years Ended March 31 2012 2011 $ Change % Change Aerospace Group $ 1,071,515 $ 1,171,330 $ (99,815 ) (8.5 )% Defense Group 1,711,008 1,957,607 (246,599 ) (12.6 )% Sporting Group 797,284 688,297 108,987 15.8 % Corporate 38,696 23,464 15,232 64.9 %Total cost of sales $ 3,618,503 $ 3,840,698 $ (222,195 ) (5.8 )% The fluctuation in cost of sales was driven by the program-related changes within the operating segments as described below. Aerospace Group. The decrease in cost of sales was driven by: • a $110,852 decrease in Space Systems Operations due to a decrease in volumes due to shifts in NASA funding priorities, the completion of the Space Shuttle Program, and the termination of the Launch Abort System, partially offset by higher volumes on programs in strategic and commercial systems, flare and decoy sales, and space systems and services operations. This decrease was partially offset by an increase in Aerospace Structures of $16,036 due to timing of multiple contract start-ups. Defense Group. The decrease in cost of sales was driven by: • a $117,212 decrease in small-caliber systems due to lower volume of small-caliber ammunition sales, decreased demand for non-standard ammunition, a reduction in modernization due to the program nearing completion, and increased intercompany sales which were eliminated upon consolidation, • a decrease of $87,550 in energetics systems due to a reduction in modernization resulting from completion of the program, energetics program sales volume, and increased intercompany sales which were eliminated upon consolidation, partially offset by increased volume on a propellant program, and • a decrease of $49,306 in armament systems driven by lower volumes across multiple medium-caliber gun programs, and decreases in projectile systems, partially offset by an increase on combat systems programs. These decreases were partially offset by a $7,185 increase within missile products due to timing of multiple contracts. Sporting Group. The increase in cost of sales was driven by: • an $84,773 increase in Ammunition driven by an increase in ammunition sales volume, commodity price increases, and depreciation due to increased asset capitalization, and • a $25,701 increase in Accessories driven by an increase in accessories sale volume. Corporate. The increase in cost of sales was driven by higher pension expense and intercompany profit eliminations partially offset by reduced insurance charges. Operating Expenses Years Ended March 31 As a % As a % 2012 of Sales 2011 of Sales Change Research and development $ 66,403 1.4 % $ 64,960 1.3 % $ 1,443 Selling 169,984 3.7 % 164,063 3.4 % 5,921General and administrative 262,923 5.7 % 246,817 5.1 % 16,106 Total $ 499,310 10.8 % $ 475,840 9.8 % $ 23,470 Operating expenses increased by $23,470 year-over-year. Research and development costs were relatively flat year-over-year. The increase in selling expenses was primarily driven by the Lake City Army Ammunition Plant competition. General and administrative costs increased due to the LUU flares litigation accrual, the reversal of certain long-term incentive accruals, 39-------------------------------------------------------------------------------- Table of Contents realignment charges, and costs related to strategic growth initiatives. These increases were partially offset by cost management initiatives. Income before Interest, Income Taxes, and Noncontrolling Interest Years Ended March 31 2012 2011 Change Aerospace Group $ 143,817 $ 131,011 $ 12,806 Defense Group 319,428 269,232 50,196 Sporting Group 91,234 128,437 (37,203 ) Corporate (58,893 ) (2,954 ) (55,939 ) Total $ 495,586 $ 525,726 $ (30,140 ) The decrease in income before interest, income taxes, and noncontrolling interest was due to decreased sales. Significant changes within the operating segments are also described below. Aerospace Group. The increase reflects the absence of the $25,000 profit reduction in the commercial aircraft program in the third quarter of the prior year, partially offset by lower sales volume within the space systems operations as discussed above. Defense Group. The increase is the result of an $18,000 favorable contract resolution in the second quarter of fiscal 2012, greater than expected performance at the Radford facility due to increased production volumes in anticipation of contract completion, and better performance and profit expectations on programs within defense electronic systems and other programs. These increases were partially offset by lower sales as discussed above. Sporting Group. The decrease primarily relates to sales mix, with a shift to lower margin ammunition products as well as delays and start-up costs associated with a DoD contract in the tactical accessories business and higher raw material costs. These were partially offset by operating efficiencies and cost management initiatives. Corporate. The income before interest, income taxes, and noncontrolling interest primarily reflects expenses incurred for administrative functions that are performed centrally at the corporate headquarters, the difference between pension and postretirement benefit expense calculated under Financial Accounting Standards (FAS) and the expense calculated under U.S. Cost Accounting Standards (CAS), and the elimination of intercompany profits. The change from the prior year is driven by the LUU flare accrual, higher pension expense, the realignment accrual, higher intercompany profit eliminations, and costs related to strategic growth initiatives. Net Interest Expense Net interest expense for fiscal 2012 was $89,296, an increase of $1,684 compared to $87,612 in fiscal 2011. The increase was primarily due to increases in the average amount of debt outstanding as well as the average borrowing rate following the issuance of the new debt in the prior fiscal year, partially offset by a reduction of $4,875 in non-cash amortization of the debt discount, due to the repayment of the 2.75% Convertible Senior Subordinated Notes in September 2011, as well as the absence of the $936 write-off of the remaining deferred debt issuance costs associated with our previous Term A Loan. Income Tax Provision Years Ended March 31 Effective Effective 2012 Rate 2011 Rate Change Income tax provision $ 143,762 35.3 % $ 124,963 28.5 % $ 18,799 The increase in the current period tax rate is primarily due to the absence of the benefit that was realized in fiscal 2011 from the settlement of the examination of the fiscal 2007 and 2008 tax returns, the estimated nondeductible portion of the fiscal 2012 accrual related to the LUU flare litigation agreement, and the retroactive extension of the federal research and development ("R&D") credit in fiscal 2011, partially offset by increased benefit from the domestic manufacturing deduction ("DMD") and a discrete revaluation of the deferred tax assets caused by a change in state tax law. ATK's provision for income taxes includes both federal and state income taxes. The effective tax rate for fiscal 2012 of 35.3% differs from the federal statutory rate of 35.0% due to state income taxes and the estimated nondeductible portion of the 40-------------------------------------------------------------------------------- Table of Contents accrual related to the LUU flare litigation which increased the rate, as well as the DMD and partial year R&D credit which decreased the rate. The effective tax rate for fiscal 2011 of 28.5% differs from the federal statutory rate of 35.0% due to the contingent tax liability release, and the DMD and R&D tax credits which decreased the rate, as well as state income taxes which increased the rate. ATK or one of its subsidiaries files income tax returns in the U.S. federal, various U.S. state, and foreign jurisdictions. With few exceptions, ATK is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2005. The Internal Revenue Service ("IRS") has completed the federal audits of ATK through fiscal 2008. The IRS is currently auditing ATK's tax returns for fiscal years 2009 and 2010. We believe appropriate provisions for all outstanding issues have been made for all remaining open years in all jurisdictions. As of March 31, 2012 and 2011, the total amount of unrecognized tax benefits was $37,906 and $31,855, respectively, of which $30,248 and $25,206, respectively, would affect the effective tax rate, if recognized. The remaining balance is related to deferred tax items which only impact the timing of tax payments. Although the timing and outcome of audit settlements are uncertain, it is reasonably possible that a $15,252 reduction of the uncertain tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings from $0 to $12,788. See Note 11 to the consolidated financial statements for further details. ATK believes it is more likely than not that the recorded deferred benefits will be realized through the reduction of future taxable income. ATK's recorded valuation allowance of $4,754 at March 31, 2012 relates to capital loss carryovers and certain state net operating loss and credit carryforwards that are not expected to be realized before their expiration. The valuation allowance increased during fiscal 2012 due to the recognition of current year capital losses and a change in the amount of state carryforward benefits expected to be utilized before expiration, partially offset by the expiration of capital loss carryforwards, expiration of state credit carryforwards, and utilization of prior year capital loss carryforwards. Net Income Before Noncontrolling Interest Net income before noncontrolling interest for fiscal 2012 was $263,204, a decrease of 50,507 compared to $313,711 in fiscal 2011. This decrease was driven by an $18,799 increase in income tax expense, a $23,470 increase in operating expenses, a $6,670 decrease in gross profit, and an increase of $1,568 in net interest expense over the prior year. Noncontrolling Interest The noncontrolling interest represents the noncontrolling owner's portion of the income of a joint venture in which ATK is the primary owner. This joint venture was acquired with Composite Optics, Inc. ("COI") and is consolidated into ATK's financial statements. Liquidity and Capital Resources ATK manages its business to maximize operating cash flows as the primary source of liquidity. In addition to cash on hand and cash generated by operations, sources of liquidity include a committed credit facility, long-term borrowings, and access to the public debt and equity markets. ATK uses its cash to fund its investments in its existing core businesses and for debt repayment, cash dividends, share repurchases, and acquisition or other activities. Cash Flow Summary ATK's cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows for the years ended March 31, 2013, 2012, and 2011 are summarized as follows: 2013 2012 2011 Cash flows provided by operating activities $ 273,592 $ 372,307 $ 421,070 Cash flows used for investing activities (96,717 ) (114,957 ) (299,451 ) Cash flows (used for) provided by financing activities (328,399 ) (390,811 ) 186,762 Net cash flows $ (151,524 ) $ (133,461 ) $ 308,381 Operating Activities. 41-------------------------------------------------------------------------------- Table of Contents Net cash provided by operating activities decreased $98,715 compared to the prior year period. This decrease was driven by a $180,000 funding payment to the pension trust during the current year compared to $74,600 in the prior year, an increase of $46,645 in tax payments in the current year, a decrease in interest expense of $26,600 due to a reduction in the amount of debt outstanding, and $25,500 related to the payment of the LUU flare settlement in fiscal 2013. These decreases were partially offset by approximately $165,325 less cash required to fund working capital, primarily driven by Aerospace Structures collection of an outstanding receivable of $102,000. Net cash provided by operating activities decreased $48,763 in fiscal 2012 compared to fiscal 2011. This decrease was driven by a $74,600 funding payment to the pension trust during the current year and an increase in cash used for working capital. These decreases were partially offset by $25,460 less cash used to pay taxes in the current year and the absence of the repayment of a government grant which occurred in fiscal 2011. Cash used for working capital is defined as net receivables plus net inventories, less accounts payables and contract advances. Investing Activities. Net cash used for investing activities decreased $18,240 primarily due to a decrease of cash used for capital expenditures of $25,403. These decreases were partially offset by the absence of proceeds from the disposition of a non-essential parcel of land within Aerospace Systems during the prior year. Net cash used for investing activities decreased $184,494 in fiscal 2012 compared to fiscal 2011 primarily due to the lack of $172,251 paid in fiscal 2011 to acquire Blackhawk. In addition there was a decrease of cash used for capital expenditures of $7,909. These decreases were partially offset by proceeds from the disposition of a non-essential parcel of land within Aerospace Systems during the current year. Financing Activities. Net cash used for financing activities decreased $62,412 as compared to fiscal 2012. This decrease was due to the exercise of an option to increase the Term A Loan by $200,000 (the "Accordion"). This decrease was offset by a $109,000 increase in the amount of net cash used to retire debt ($400,000 aggregate principal amount of 6.75% Senior Subordinated Notes plus a $9,000 premium, compared to payment of $300,000 to repay the 2.75% Convertible Notes due 2011 in the prior year period), a $15,000 increase in the required payments on the Term A Loans, and an $8,380 increase in common stock repurchased. Net cash used for financing activities increased $577,573 in fiscal 2012 as compared to fiscal 2011. This increase was primarily due to the lack of $750,000 in proceeds received from the issuance of the 6.875% Senior Subordinated Notes in the prior year, the repurchase of $49,991 of ATK's common stock, and the payment of $26,552 of dividends to ATK stockholders during the current period. These increases were partially offset by the $300,000 used to repay the 2.75% Convertible Notes due 2011 this year compared to $280,000 used to repay the 2.75% Convertible Notes due 2024 and $290,000 used to extinguish the Term A Loan in the prior year period. Liquidity In addition to ATK's normal operating cash requirements, the Company's principal future cash requirements will be to fund capital expenditures, debt repayments, employee benefit obligations, share repurchases, dividends, and any strategic acquisitions. ATK's short-term cash requirements for operations are expected to consist mainly of capital expenditures to maintain and expand production facilities and working capital requirements. ATK's debt service requirements over the next two years consist of principal payments due under the new Senior Credit Facility, as discussed further below. ATK's other debt service requirements consist of interest expense on its debt. Additional cash may be required to repurchase or convert any or all of the convertible notes under certain circumstances. During fiscal 2013, ATK paid quarterly dividends of $0.20 per share for the first and second quarters and $0.26 per share for the third and fourth quarters totaling $30,033. On May 1, 2013, ATK's Board of Directors declared a quarterly cash dividend of $0.26 per share payable on June 27, 2013, to stockholders of record on June 3, 2013. The payment and amount of any future dividends are at the discretion of the Board of Directors and will be based on a number of factors, including our earnings, liquidity position, financial condition, capital requirements, credit ratings and the availability and cost of obtaining new debt. We cannot be certain that ATK will continue to declare dividends in the future and, as such, the amount and timing of any future dividends are not determinable. Based on ATK's current financial condition, management believes that ATK's cash position, combined with anticipated generation of cash flows and the availability of funding, if needed, through ATK's revolving credit facilities, access to debt and equity markets, as well as potential future sources of funding including additional bank financing and debt markets, will be 42-------------------------------------------------------------------------------- Table of Contents adequate to fund future growth as well as to service ATK's currently anticipated long-term debt and pension obligations, make capital expenditures, and fund any share repurchases and payment of dividends over the next 12 months. Capital expenditures for fiscal 2014 are expected to be approximately $125,000. ATK does not expect that its access to liquidity sources will be materially impacted in the near future. There can be no assurance, however, that the cost or availability of future borrowings, if any, will not be materially impacted by capital market conditions. Long-Term Debt and Credit Facilities As of March 31, 2013, ATK had actual total indebtedness of $1,084,453, and the $600,000 Revolving Credit Facility provided for the potential of additional borrowings up to $439,834. There were no outstanding borrowings under the Revolving Credit Facility as of March 31, 2013, although ATK had outstanding letters of credit of $160,166 which reduced amounts available under the facility. ATK's indebtedness consisted of the following: March 31, 2013 March 31, 2012 Senior Credit Facility dated October 7, 2010: Term A Loan due 2015 $ 340,000 $ 370,000 Term A Loan due 2017 195,000 - Revolving Credit Facility due 2015 - - 6.75% Senior Subordinated Notes due 2016 - 400,000 6.875% Senior Subordinated Notes due 2020 350,000 350,000 3.00% Convertible Senior Subordinated Notes due 2024 199,453 199,453 Principal amount of long-term debt 1,084,453 1,319,453 Less: Unamortized discounts 10,576 17,451 Carrying amount of long-term debt 1,073,877 1,302,002 Less: current portion 50,000 30,000 Carrying amount of long-term debt, excluding current portion $ 1,023,877 $ 1,272,002 See Note 9 "Long-Term Debt" to the consolidated financial statements in Part II, Item 8 for a detailed discussion of these borrowings. Senior Credit Facility In fiscal 2011, ATK entered into a Second Amended and Restated Credit Agreement ("the Senior Credit Facility"), which was comprised of a Term A Loan of $400,000 and a $600,000 Revolving Credit Facility, both of which mature in 2015. Under the terms of the Senior Credit Facility, ATK exercised its option to increase the Term A Loan by $200,000 (the "Accordion") during the quarter ended September 30, 2012. Proceeds of the Accordion were used to partially finance the redemption of the 6.75% Notes, as discussed below. Terms of the Accordion are the same as the existing Term A Loan with the exception that it will mature on September 5, 2017, approximately two years after the existing Term A Loan. The existing Term A Loan is subject to annual principal payments of $20,000 in each of the first and second years and $40,000 in each of the third, fourth, and fifth years, paid on a quarterly basis, with the balance due on October 7, 2015. The Accordion is subject to annual principal payments of $10,000 in each of the first and second years and $20,000 in each of the third, fourth, and fifth years, paid on a quarterly basis, with the balance due on September 5, 2017. Substantially all domestic, tangible and intangible assets of ATK and its subsidiaries are pledged as collateral under the Senior Credit Facility. Borrowings under the Senior Credit Facility bear interest at a rate equal to either the sum of a base rate plus a margin or the sum of a Eurodollar rate plus a margin. Each margin is based on ATK's senior secured credit ratings. Based on ATK's current credit rating, the current base rate margin is 1.25% and the current Eurodollar margin is 2.25%. ATK must also pay an annual commitment fee on the unused portion of the Revolving Credit Facility. 2.75% Convertible Notes due 2011 ATK's 2.75% Convertible Notes due 2011 were repaid in fiscal 2012. 6.75% Notes due 2016 43-------------------------------------------------------------------------------- Table of Contents In fiscal 2006, ATK issued $400,000 aggregate principal amount of 6.75% Senior Subordinated Notes ("the 6.75% Notes") that were due to mature on April 1, 2016. During the second quarter of fiscal 2013, the Company redeemed these notes. In accordance with the indenture, the redemption price was 102.25% of the principal amount, or $409,000, including a premium of $9,000, plus accrued interest. The transaction resulted in the write-off of the remaining $2,773 of deferred debt issuance costs. 6.875% Notes due 2020 ATK's 6.875% Notes mature on September 15, 2020. These notes are general unsecured obligations. Interest on these notes accrues at a rate of 6.875% per annum and is payable semi-annually on September 15 and March 15 of each year. ATK has the right to redeem some or all of these notes on or after September 15, 2015, at specified redemption prices. Prior to September 15, 2015, ATK may redeem some or all of these notes at a price equal to 100% of their principal amount plus accrued and unpaid interest to the date of redemption and a specified make-whole premium. 3.00% Convertible Notes due 2024 ATK's 3.00% Convertible Notes mature on August 15, 2024. Interest on these notes is payable on February 15 and August 15 of each year. Beginning August 20, 2014, ATK will be required to pay contingent interest at a rate driven by the average trading price of these notes if the trading price reaches specified levels during the measurement period. ATK may redeem all of these notes in cash at any time on or after August 20, 2014. Holders of these notes may require ATK to repurchase in cash some or all of the Notes on August 15, 2014 and August 15, 2019. Upon such note redemption or repurchase, ATK will also be required to satisfy certain deferred tax liabilities related to the notes. Based on current projections the tax liability is estimated to be about $40,000 if the redemption occurs on August 15, 2014. Holders may also convert their notes at a conversion rate of 12.9548 shares of ATK's common stock per $1 principal amount of these notes (a conversion price of $77.19 per share) in the event that the ATK stock price exceeds certain levels, if ATK were to call these notes for redemption, or upon the occurrence of certain corporate transactions. ATK is required to satisfy 100% of the principal amount of these notes solely in cash, with any amounts above the principal amount to be satisfied in cash, common stock, or a combination of cash and common stock, at the sole election of ATK. Rank and Guarantees The 3.00% Convertible Notes and the 6.875% Notes rank equal in right of payment with each other and all of ATK's future senior subordinated indebtedness and are subordinated in right of payment to all existing and future senior indebtedness, including the Senior Credit Facility. The outstanding notes are guaranteed on an unsecured basis, jointly and severally and fully and unconditionally, by substantially all of ATK's domestic subsidiaries. The parent company has no independent assets or operations. Subsidiaries of ATK other than the subsidiary guarantors are minor. All of these guarantor subsidiaries are 100% owned by ATK. These guarantees are senior subordinated obligations of the applicable subsidiary guarantors. Covenants ATK's Senior Credit Facility imposes restrictions on ATK, including limitations on its ability to incur additional debt, enter into capital leases, grant liens, pay dividends and make certain other payments, sell assets, or merge or consolidate with or into another entity. In addition, the Senior Credit Facility limits ATK's ability to enter into sale-and-leaseback transactions. The Senior Credit Facility also requires that ATK meet and maintain the following financial ratios: Senior Interest Leverage Leverage Coverage Ratio* Ratio* Ratio† Requirement 2.50 4.00 3.00 Actual at March 31, 2013 0.98 1.92 9.05 * Not to exceed the required financial ratio † Not to be below the required financial ratio The Leverage Ratio is the sum of ATK's total debt plus financial letters of credit divided by Covenant EBITDA (which includes adjustments for items such as non-recurring or extraordinary non-cash expenses, non-cash charges related to stock-based compensation, and intangible asset impairment charges) for the past four fiscal quarters. The Senior Leverage Ratio is the sum of ATK's senior debt plus financial letters of credit divided by Covenant EBITDA. The Interest Coverage Ratio is Covenant EBITDA divided by interest expense (excluding non-cash charges). 44-------------------------------------------------------------------------------- Table of Contents Many of ATK's debt agreements contain cross-default provisions so that non-compliance with the covenants within one debt agreement could cause a default under other debt agreements as well. ATK's ability to comply with these covenants and to meet and maintain the financial ratios may be affected by events beyond its control. Borrowings under the Senior Credit Facility are subject to compliance with these covenants. The indentures governing the 6.875% Notes and the 3.00% Convertible Notes also impose restrictions on ATK, including limitations on its ability to incur additional debt, enter into capital leases, grant liens, pay dividends and make certain other payments, sell assets, or merge or consolidate with or into another entity. As of March 31, 2013, ATK was in compliance with the covenants in all of its debt agreements and expects to be in compliance for the foreseeable future. Share Repurchases In fiscal 2012 and 2011 ATK repurchased 742,000 and no shares for $49,991 and $0, respectively, under a previously authorized share repurchase program. On January 31, 2012, ATK's Board of Directors authorized a new share repurchase program of up to $200,000 worth of shares of ATK common stock, executable over the next two years. The shares may be purchased in open market, block purchase, or negotiated transactions, subject to compliance with applicable laws and regulations. The new repurchase authorization also allows the Company to make repurchases under Rule 10b5-1 of the Securities Exchange Act of 1934. This share repurchase program replaces the prior program authorized in 2008. In fiscal 2013, ATK repurchased 1,003,938 shares for $59,511. Any additional authorized repurchases would be subject to market conditions and ATK's compliance with its debt covenants. ATK's 6.875% Senior Subordinated Notes limit the aggregate sum of dividends, share repurchases, and other designated restricted payments to an amount based on ATK's net income, stock issuance proceeds, and certain other items, less restricted payments made, since April 1, 2001. As of March 31, 2013, this limit was approximately $788,000. As of March 31, 2013, the Senior Credit Facility allows ATK to make unlimited "restricted payments" (as defined in the credit agreement), which, among other items, would allow payments for future stock repurchases, as long as ATK maintains a certain amount of liquidity and maintains certain senior debt limits. When those requirements are not met, the limit is equal to $250,000 plus proceeds of any equity issuances plus 50% of net income since October 7, 2010. The Senior Credit Facility also prohibits dividend payments if loan defaults exist or the financial covenants contained in the Facility are not met. Contractual Obligations and Commercial Commitments The following table summarizes ATK's contractual obligations and commercial commitments as of March 31, 2013: Payments due by period Less than More than Total 1 year 1 - 3 years 3 - 5 years 5 years Contractual obligations: Long-term debt $ 1,084,453 $ 50,000 $ 536,953 $ 147,500 $ 350,000 Interest on debt(1) 283,990 44,101 80,623 64,959 94,307 Operating leases 428,751 73,089 122,953 92,746 139,963 Environmental remediation costs, net 24,775 2,357 603 4,606 17,209 Pension and other PRB plan contributions 696,545 56,731 250,709 304,664 84,441 Total contractual obligations $ 2,518,514 $ 226,278 $ 991,841 $ 614,475 $ 685,920 Commitment Expiration by period Total Within 1 year 1 - 3 years 3 - 5 years Other commercial commitments: Letters of credit $ 160,166 $ 143,724 $ 16,442 $ - ________________________________ (1) Includes interest on variable rate debt calculated based on interest rates at March 31, 2013. Variable rate debt was approximately 49% of ATK's total debt at March 31, 2013. 45-------------------------------------------------------------------------------- Table of Contents The total liability for uncertain tax positions at March 31, 2013 was approximately $27,760 (see Note 11), $97 of which could be paid within 12 months and is therefore classified within current taxes payable. ATK is not able to provide a reasonably reliable estimate of the timing of future payments relating to the non-current uncertain tax position obligations. Pension plan contributions are an estimate of ATK's minimum funding requirements through fiscal 2022 to provide pension benefits for employees based on expected actuarial estimated service accruals through fiscal 2022 pursuant to the Employee Retirement Income Security Act, although ATK may make additional discretionary contributions. These estimates may change significantly depending on the actual rate of return on plan assets, discount rates, discretionary pension contributions, and regulations. A substantial portion of ATK's Plan contributions are recoverable from the U.S. Government as allowable indirect contract costs at amounts generally equal to the pension plan contributions, although not necessarily in the same year the contribution is made. Contingencies Litigation. From time to time, ATK is subject to various legal proceedings, including lawsuits, which arise out of, and are incidental to, the conduct of ATK's business. ATK does not consider any of such proceedings that are currently pending, individually or in the aggregate, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings in any particular quarter, to be material to its business or likely to result in a material adverse effect on its future operating results, financial condition, or cash flows. On or about April 10, 2006, a former ATK employee filed a qui tam complaint in federal court in Utah alleging that ATK knowingly submitted claims for payment to the U.S. Government for defective LUU series illuminating flares that failed to conform to certain safety specifications and falsely certified compliance with those specifications. On January 23, 2012, the parties met in a mediation session that resulted in an agreement to settle the lawsuit. As a result of the settlement agreement, ATK established a litigation accrual of $25,500 during fiscal 2012. This payment was made in April 2012. An additional warranty accrual of approximately $10,700 was recorded during fiscal 2012 as the Company will retrofit up to 76,000 flares as part of the settlement. Environmental Liabilities. ATK's operations and ownership or use of real property are subject to a number of federal, state, and local environmental laws and regulations, including those for discharge of hazardous materials, remediation of contaminated sites, and restoration of damage to the environment. At certain sites that ATK owns or operates or formerly owned or operated, there is known or potential contamination that ATK is required to investigate or remediate. ATK could incur substantial costs, including remediation costs, resource restoration costs, fines, and penalties, or third party property damage or personal injury claims, as a result of liabilities associated with past practices or violations of environmental laws or non-compliance with environmental permits. The liability for environmental remediation represents management's best estimate of the present value of the probable and reasonably estimable costs related to known remediation obligations. The receivable represents the present value of the amount that ATK expects to recover, as discussed below. Both the liability and receivable have been discounted to reflect the present value of the expected future cash flows, using a discount rate of 0.75% and 1.00% as of March 31, 2013 and 2012, respectively. ATK's discount rate is calculated using the 20-year Treasury constant maturities rate, net of an estimated inflationary factor of 1.9%, rounded to the nearest quarter percent. The following is a summary of the amounts recorded for environmental remediation: March 31, 2013 March 31, 2012 Liability Receivable Liability Receivable Amounts (payable) receivable $ (58,965 ) $ 34,190 $ (61,227 ) $ 35,638 Unamortized discount 2,745 (1,446 ) 3,731 (1,925 ) Present value amounts (payable) receivable $ (56,220 ) $ 32,744 $ (57,496 ) $ 33,713 As of March 31, 2013, the estimated discounted range of reasonably possible costs of environmental remediation was $56,220 to $83,245. ATK expects that a portion of its environmental compliance and remediation costs will be recoverable under U.S. Government contracts. Some of the remediation costs that are not recoverable from the U.S. Government that are associated with facilities purchased in a business acquisition may be covered by various indemnification agreements, as described below. • As part of its acquisition of the Hercules Aerospace Company in fiscal 1995, ATK generally assumed responsibility for environmental compliance at the facilities acquired from Hercules(the "Hercules Facilities"). ATK believes that a portion of the compliance and remediation costs associated with the Hercules Facilities will be recoverable under U.S. 46-------------------------------------------------------------------------------- Table of Contents Government contracts. If ATK were unable to recover those environmental remediation costs under these contracts, ATK believes these costs will be covered by Hercules Incorporated, a subsidiary of Ashland Inc., (Hercules) under environmental agreements entered into in connection with the Hercules acquisition. Under these agreements, Hercules has agreed to indemnify ATK for environmental conditions relating to releases or hazardous waste activities occurring prior to ATK's purchase of the Hercules Facilities as long as they were identified in accordance with the terms of the agreement; fines relating to pre-acquisition environmental compliance; and environmental claims arising out of breaches of Hercules' representations and warranties. Hercules is not required to indemnify ATK for any individual claims below $50,000. Hercules is obligated to indemnify ATK for the lowest cost response of remediation required at the facility that is acceptable to the applicable regulatory agencies. ATK is not responsible for conducting any remedial activities with respect to the Clearwater, FL facility. In accordance with its agreement with Hercules, ATK notified Hercules of all known contamination on non-federal lands on or before March 31, 2000, and on federal lands on or before March 31, 2005. • ATK generally assumed responsibility for environmental compliance at the Thiokol Facilities acquired from Alcoa Inc. ("Alcoa") in fiscal 2002. ATK expects that a portion of the compliance and remediation costs associated with the acquired Thiokol Facilities will be recoverable under U.S. Government contracts, In accordance with its agreement with Alcoa, ATK notified Alcoa of all known environmental remediation issues as of January 30, 2004. Of these known issues, ATK is responsible for any costs not recovered through U.S. Government contracts at Thiokol Facilities up to $29,000, ATK and Alcoa have agreed to split evenly any amounts between $29,000 and $49,000, and ATK is responsible for any payments in excess of $49,000. At this time, ATK believes that costs not recovered through U.S. Government contracts will be immaterial. ATK cannot ensure that the U.S. Government, Hercules, Alcoa, or other third parties will reimburse it for any particular environmental costs or reimburse ATK in a timely manner or that any claims for indemnification will not be disputed. U.S. Government reimbursements for cleanups are financed out of a particular agency's operating budget and the ability of a particular governmental agency to make timely reimbursements for cleanup costs will be subject to national budgetary constraints. ATK's failure to obtain full or timely reimbursement from the U.S. Government, Hercules, Alcoa, or other third parties could have a material adverse effect on its operating results, financial condition, or cash flows. While ATK has environmental management programs in place to mitigate these risks, and environmental laws and regulations have not had a material adverse effect on ATK's operating results, financial condition, or cash flows in the past, it is difficult to predict whether they will have a material impact in the future. At March 31, 2013, the aggregate undiscounted amounts payable for environmental remediation costs, net of expected recoveries, are estimated to be: Fiscal 2014 $ 2,357 Fiscal 2015 299 Fiscal 2016 304 Fiscal 2017 2,543 Fiscal 2018 2,063 Thereafter 17,209 Total $ 24,775 There were no material insurance recoveries related to environmental remediation during any of the periods presented. Factors that could significantly change the estimates described in this section on environmental liabilities include: • the adoption, implementation, and interpretation of new laws, regulations, or cleanup standards, • advances in technologies, • outcomes of negotiations or litigation with regulatory authorities and other parties, • additional information about the ultimate remedy selected at new and existing sites, • adjustment of ATK's share of the cost of such remedies, • changes in the extent and type of site utilization, 47-------------------------------------------------------------------------------- Table of Contents • the discovery of new contamination, • the number of parties found liable at each site and their ability to pay, • more current estimates of liabilities for these contingencies, or • liabilities associated with resource restoration as a result of contamination from past practices. New Accounting Pronouncements See Note 1 to the consolidated financial statements in Item 8 of this report for discussion of new accounting pronouncements. Inflation In management's opinion, inflation has not had a significant impact upon the results of ATK's operations. The selling prices under contracts, the majority of which are long term, generally include estimated costs to be incurred in future periods. These cost projections can generally be negotiated into new buys under fixed-price government contracts, while actual cost increases are recoverable on cost-type contracts. [ Back To TMCnet.com's Homepage ]