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ALLIANT TECHSYSTEMS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(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, timing of payments and budgetary policies, including impacts of sequestration under the Budget Control Act of 2011, and sourcing strategies, • intense competition for U.S. Government contracts and programs, • increases in costs, which ATK may not be able to react to due to the nature of its U.S. Government contracts, • changes in cost and revenue estimates and/or timing of programs, • the potential termination of U.S. Government contracts and the potential inability to recover termination costs • other risks associated with U.S. Government contracts that might expose ATK to adverse consequences, • government laws and other rules and regulations applicable to ATK, including procurement and import-export control, • the novation of U.S. Government contracts, • intense competition in the commercial ammunition, firearms, and accessories markets, • reduction or change in demand and manufacturing costs for commercial ammunition, firearms or accessories, including the risk that placed orders exceed actual customer requirements, • changes in the regulation of the manufacture, sale and purchase of firearms and ammunition could adversely affect ATK, • the manufacture and sale of products that create exposure to potential product liability, warranty liability or personal injury claims and litigation, • risks associated with expansion into new and adjacent commercial markets, • results of acquisitions or other transactions, including our ability to successfully integrate acquired businesses and realize anticipated synergies, cost savings and other benefits, and costs incurred for pursuits and proposed acquisitions that have not yet or may not close, including the announced spin-off of the Sporting Group and ATK's merger with Orbital Sciences Corporation, • greater risk associated with international business, including foreign currency exchange rates and fluctuations in those rates, • federal and state regulation of defense products, ammunition, and firearms, • costs of servicing ATK's debt, including cash requirements and interest rate fluctuations, • actual pension and other postretirement plan asset returns and assumptions regarding future returns, discount rates, service costs, mortality rates, and health care cost trend rates, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Amounts in thousands except share and per share data and unless otherwise indicated) --------------------------------------------------------------------------------• security threats, including cybersecurity and other industrial and physical security threats, and other disruptions, • supply, availability, and costs of raw materials and components, including commodity price fluctuations, • new regulations related to conflict minerals, • performance of ATK's subcontractors, • development of key technologies and retention of a qualified workforce, • fires or explosions at any of ATK's facilities, • environmental laws that govern past practices and rules and regulations, noncompliance with which may expose ATK to adverse consequences, • impacts of financial market disruptions or volatility to ATK's customers and vendors, • unanticipated changes in the tax provision or exposure to additional tax liabilities, and • the costs and ultimate outcome of litigation matters and other legal proceedings. This list of factors is not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact ATK's business. Additional information regarding 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, firearms and shooting accessories and, with the Bushnell acquisition, ATK has become a leader in the hunting, shooting sports, and outdoor recreation markets. ATK is headquartered in Arlington, VA and has operating locations throughout the United States, Puerto Rico, and internationally. As of March 31, 2014, ATK operated in three business segments. These operating segments are defined based on the reporting and review process used by ATK's chief executive officer and other management. As of March 31, 2014, ATK's three operating groups were: • Aerospace Group, which generated 26% of ATK's external sales in fiscal 2014, develops and produces rocket motor systems for human and cargo launch vehicles, conventional and strategic missiles, and missile defense interceptors. They also produce small and micro-satellites, satellite components, structures and subsystems, lightweight space deployables and solar arrays, and provide engineering and technical services. Additionally, the Aerospace Group operates in the military and commercial aircraft and launch structures markets. Other products include ordnance, such as decoy and illuminating flares. • Defense Group, which generated 35% of ATK's external sales in fiscal 2014, develops and produces military small-, medium-, and large-caliber ammunition, propulsion systems for tactical missiles and missile defense applications, strike weapons, precision munitions, gun systems, aircraft survivability systems, fuzes and warheads, energetic materials and special mission aircraft. • Sporting Group, which generated 39% of ATK's external sales in fiscal 2014, develops and produces ammunition, accessories, rifles and shotguns for the hunting, shooting, law enforcement, outdoor and sporting markets. Financial Highlights and Notable Events Certain notable events or activities affecting our fiscal 2014 financial results included the following: Financial highlights for fiscal 2014 • Annual sales of $4,775,128. • Diluted earnings per share of $10.42. • Total orders of $5,804,567. 30 --------------------------------------------------------------------------------• Total backlog of $7,605,000 at March 31, 2014 compared to $8,227,000 at March 31, 2013. • Income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest as a percentage of sales was 12.4% and 10.8% for the years ended March 31, 2014 and 2013, respectively. The current year rate reflects lower pension expense including the effect of the Radford segment close-out and improvements in the Sporting Group. The prior year rate reflects the loss of the Radford facility management contract. • The increase in the current period tax rate to 33.2% from 30.6% in fiscal 2013 is primarily due to the absence of the settlement of the examination of the fiscal 2009 and 2010 tax returns, partially offset by the revaluation of unrecognized tax benefits due to proposed IRS regulations. • ATK recorded sales and profit of $27,387 in the fourth quarter of fiscal 2014 for a pension segment close-out associated with the Radford facility contract which ended in fiscal 2013. • On June 21, 2013, ATK acquired Caliber Company, the parent company of Savage Sports Corporation, for $315,000 in cash, net of cash acquired, and subject to a customary working capital adjustment. • On November 1, 2013, ATK acquired Bushnell Group Holdings, Inc., a leading global designer, marketer and distributor of branded sports optics, outdoor accessories and performance eyewear, for $985,000 in cash, net of cash acquired, and subject to a customary working capital adjustment. • On November 1, 2013, ATK entered into a Third Amended and Restated Credit Agreement (the "2013 Senior Credit Facility"), which replaced the 2010 Senior Credit Facility, and issued $300,000 aggregate principal amount of 5.25% Senior Notes (the "5.25% Notes'') that mature on October 1, 2021, to pay for the Bushnell acquisition, refinancing of the 2010 Senior Credit facility, and payment of debt financing costs. • During fiscal 2014, ATK paid quarterly cash dividends of $0.26 per share for the first, second, and third quarters and $0.32 for the fourth quarter, totaling $35,134. Notable events • During fiscal 2014, ATK repurchased 609,922 shares for $52,130. • ATK's Board of Directors appointed Jay Tibbets as Senior Vice President and President Sporting Group effective July 31, 2013. • ATK's Board of Directors appointed Stephen Nolan as Senior Vice President Strategy and Business Development effective July 31, 2013. • On February 26, 2014, Michael Callahan was elected as an independent director to ATK's Board of Directors and appointed to its Audit Committee, effective March 1, 2014. • On May 6, 2014, ATK's Board of Directors declared a quarterly cash dividend of $0.32 per share, payable on June 26, 2014, to stockholders of record on June 2, 2014. Outlook Transaction Agreement - On April 28, 2014, we entered into a Transaction Agreement (the "Transaction Agreement") with Vista SpinCo Inc., a Delaware corporation and a wholly owned subsidiary of ATK ("Sporting"), Vista Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of ATK, and Orbital Sciences Corporation, a Delaware corporation ("Orbital"), providing for the spin-off of our Sporting Group business to our stockholders (the "Distribution"), which will be immediately followed by the merger of Vista Merger Sub Inc. with and into Orbital (the "Merger" and together with the Distribution, the "Transaction"), with Orbital surviving the Merger as a wholly owned subsidiary of ATK. This transaction is subject to stockholder approval prior to closing. On April 28, 2014, ATK's Sporting Group, ATK and certain financial institutions executed a commitment letter pursuant to which the financial institutions have agreed to provide debt financing to Sporting in an aggregate principal amount of $750 million, comprised of a $350 million senior secured term loan and a $400 million senior secured revolving credit facility, in each case on the terms and conditions set forth therein. Sporting will use a portion of the proceeds of the debt financing to pay a cash dividend (the "Sporting Dividend") to ATK in an amount equal to the amount by which ATK's gross indebtedness for borrowed money as of the closing date exceeds $1,740 million, subject to certain adjustments. ATK expects to use the proceeds 31 -------------------------------------------------------------------------------- of the Sporting Dividend to repay a portion of ATK's debt including the 6.875% Senior Subordinated Notes due 2020 and 3.00% Convertible Senior Subordinated Notes due 2024. In connection with the transaction, ATK intends, at the time such notes become redeemable at ATK's option, to issue a notice of redemption with respect to any outstanding 3.00% Convertible Senior Subordinated Notes due 2024 (the "2024 Notes") in accordance with the redemption provisions of the indenture governing the 2024 Notes. ATK has agreed to settle any 2024 Notes that are converted (whether prior to or following ATK's notice of redemption) entirely in cash. Government Funding-ATK is dependent on funding levels of the U.S. Department of Defense ("DoD") and NASA. The government budget structure remains constrained by the 2011 Budget Control Act which initially reduced the DoD topline budget by approximately $490 billion over 10 years starting in fiscal year 2012. In January 2013, the American Taxpayer Relief Act of 2012 was enacted, triggering further defense budget cuts of approximately $50 billion per year (or sequestration) beginning in March 2013. Until recently, Congress and the Administration had been unable to reach a broader fiscal agreement that would amend the Budget Control Act and avoid the impacts of sequestration. For GFY13, the first round of sequestration was triggered, reducing DoD accounts by $37 billion. The NASA budget was under similar sequestration pressure but had greater flexibility to manage the reductions across the portfolio and decided to preserve funding for key priorities such as the Space Launch System ("SLS"). In GFY14, the Administration faced the threat of an additional year of sequestration and deeper cuts requiring an additional reduction of $20 billion from the defense topline budget. The Budget Control Act Amendment adopted in December 2013 provided some relief to the deeper cuts required under sequestration in GFY14 and GFY15. For defense spending, the agreement effectively holds flat the topline budget at $499 billion for both GFY14 and GFY15, providing over $30 billion in sequestration relief. For NASA, similar relief provided for non-defense discretionary spending should allow the NASA budget to remain flat over the same period at approximately $17.5 billion annually. On January 17, 2014, Congress approved, and the President signed, the Omnibus Appropriations Act replacing the Continuing Resolution for the remainder of GFY14 and removing the threat of future government shutdowns during the year. Consistent with the budget deal, the Omnibus Appropriations Act funds the DoD at $499 billion and replaces the across-the-board sequestration cuts with specific reductions across most accounts. Total funding, and funding for most programs, remains flat at GFY13 levels. Overseas Contingency Operations funding was increased by $5 billion above the requested amount, providing some additional relief to the defense budget. With the budget agreement now in place, sequestration (the after-the-fact across-the-board cuts) will be replaced in GFY15 with budget submissions expected to be in-line with these lower funding levels and programs adjusted to fit the lower expected funding levels. Budget pressures, such as rising personnel costs despite significant force reductions in the Army and Marine Corps, will present challenges to modernization and research and development accounts. ATK is preparing for a period where force reductions and a winding-down of overseas contingency operations, coupled with reduced training cycles and fairly healthy inventory levels for many ammunition and missile items, will result in less demand in some categories of products. Initial review of the GFY15 President's Budget submissions is in line with expectations and ATK FY15 plans. ATK continues to monitor potential impacts as the Congressional budget review and annual appropriations process gets underway. Final decisions on GFY15 annual appropriations would not be expected before ATK's third quarter of fiscal 2015 and may be subject to a Continuing Resolution at current levels pending political outcomes in November 2014. 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 32 -------------------------------------------------------------------------------- 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. The Bipartisan Budget Act of 2013, which was signed by President Obama on December 26, 2013, reduced the allowable compensation costs for employees of government contractors to $487 thousand from the current level of $952 thousand. This Act will limit the amount of compensation that ATK can propose and bill on contracts awarded after the law is codified into the Federal Acquisition Regulation, expected to be sometime within the next 12 months. This new limit will be phased in as old contracts that are subject to the old limit are completed and new contracts subject to the new limit are received. Once fully phased in, ATK believes this Act will reduce the amount of cost ATK can bid and collect. 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 A substantial portion of our sales come 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: Percent of Sales For Fiscal Years Ended: 2014 2013 2012 Sales to: U.S. Army 20 % 29 % 28 % U.S. Navy 10 % 13 % 12 % NASA 9 % 10 % 10 % U.S. Air Force 4 % 6 % 6 %Other U.S. Government customers 10 % 9 % 9 % Total U.S. Government customers 53 % 67 % 65 % Commercial and foreign customers 47 % 33 % 35 % Total 100 % 100 % 100 % Long-Term Contracts-The majority of ATK's sales to the U.S. Government and commercial and foreign customers within the Defense and Aerospace groups 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 an 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 33 -------------------------------------------------------------------------------- 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 2014, 2013 and 2012, the Company recognized favorable operating income adjustments of $210,920, $215,945, and $187,718, and unfavorable operating income adjustments of $127,574, $122,568 and $80,745, 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, 2014 were primarily driven by higher profit expectations of $41,357 in the Small Caliber Systems division due to operational efficiencies, a successful in-sourcing initiative, and reduced operational risk as a contract nears completion, and for programs in the Space Systems Operations. As a result of the pension close-out settlement, 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) for the Radford facility management contract resulted in Corporate recording income of $28,986 which has been excluded from the increase in operating income resulting from the cumulative catch-up method of accounting noted above. The prior year adjustments were primarily driven by greater than expected performance of $28,261 in Small-Caliber Systems, increased production volumes in 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. 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 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 and price discounts. Fiscal 2014 sales by revenue recognition method were as follows: Percent of Sales Sales recorded under: Long-term contracts method 61 % Other method 39 % 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, 34 -------------------------------------------------------------------------------- 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 $128,812 in fiscal 2014, a decrease of $39,140 from $167,952 of pension expense recorded in fiscal 2013. 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 2014, 2013, and 2012, and projections for fiscal 2015: Years Ending March 31 2015 2014 2013 2012 Expected long-term rate of return on plan assets 7.25 % 7.25 % 7.50 % 8.00 % Discount rate 4.50 % 4.35 % 4.90 % 5.60 % Rate of compensation increase: Union 3.22 % 3.23 % 3.26 % 3.79 % Salaried 3.47 % 3.49 % 3.55 % 4.02 % 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 7.25% used in fiscal 2014 for the Plans was based on an asset allocation range of 20 - 45% in equity investments, 35 - 50% in fixed income investments, 5 - 10% in real estate/real asset investments, 10 - 25% collectively in hedge fund and private equity investments, and 0 - 6% in cash investments. The expected long-term rate of return assumed for fiscal 2015 is 7.25%. 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 4.50%, 4.35%, and 4.90% at March 31, 2014, March 31, 2013, and March 31, 2012, 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 2015 were different, the impact on fiscal 2015 expense would be as follows: each 0.25% change in the discount rate would change fiscal 2015 pension expense by approximately $5,000; each 0.25% change in the rate of compensation increase would change fiscal 2015 pension expense by approximately $100; and each 0.25% change in the expected rate of return on plan assets would change fiscal 2015 pension expense by approximately $6,000. 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. 35 -------------------------------------------------------------------------------- ATK made contributions to the qualified pension trust of $40,000 during fiscal 2014. ATK distributed $5,149 under its supplemental executive retirement plans during fiscal 2014, and expects to make distributions directly to retirees of approximately $4,500 in fiscal 2015. 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 81% as of March 31, 2014. 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 2014, 2013, and 2012, and projections for fiscal 2015: Years Ending March 31 2015 2014 2013 2012 Expected long-term rate of return on plan assets: Held solely in fixed income investments 5.00 % 5.00 % 5.00 % 6.00 % Held in pension master trust and fixed income investments 6.25 % 6.25 % 6.25 % 7.00 % Discount rate 3.95 % 3.80 % 4.40 % 5.00 % Weighted average initial health care cost trend rate 6.10 % 7.60 % 7.70 % 7.60 % 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 2014 were as follows: under age 65 was 8.0%; over age 65 was 7.5%; and the prescription drug portion was 8.5%. The health care cost ultimate trend rates are as follows: 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, 2014, approximately 42% 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 $ 270 $ (240 ) Effect on postretirement benefit obligation 6,816 (6,068 ) ATK made other PRB plan contributions of $11,592 in fiscal 2014 and expects to make contributions of approximately $10,806 in fiscal 2015. 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 36 -------------------------------------------------------------------------------- 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 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 provided ATK with a leading tactical systems brand, an expanded portfolio of quality products, and additional design and development expertise for innovative tactical accessories which strengthens 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 Sporting Group. The purchase price allocation was completed in fiscal 2011. Most of the goodwill generated in this acquisition is deductible for tax purposes. On June 21, 2013, ATK acquired Caliber Company, parent company of Savage Sports Corporation ("Savage"), a leading manufacturer of sporting long guns. Operating under the brand names of Savage Arms, Stevens and Savage Range Systems, the company designs, manufactures and markets centerfire and rimfire rifles, shotguns and shooting range systems used for hunting, as well as competitive and recreational target shooting. The purchase price was $315,000 net of cash acquired. ATK believes the acquisition complements ATK's growing portfolio of leading consumer brands and will allow us to build upon our offerings with Savage's prominent, respected brands known for accuracy, quality, innovation, value and craftsmanship. Savage's sales distribution channels, new product development, and sophistication in manufacturing will significantly increase ATK's presence with a highly relevant product offering to distributors, retailers and consumers. Savage employs approximately 600 employees and is included in the Sporting Group. The preliminary purchase price allocation is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. These adjustments will primarily relate to certain contingent liabilities and income tax-related items. None of the goodwill generated in this acquisition will be deductible for tax purposes. ATK used the acquisition method of accounting to account for this acquisition and, accordingly, the results of Savage are included in ATK's consolidated financial statements at the date of acquisition. The purchase price for the acquisition has been allocated to the acquired assets and liabilities based on estimated fair value. Pro forma information on the results of operations for fiscal 2013 as if the acquisition had occurred at the beginning of fiscal 2013 is not being presented because the acquisition is not material to ATK for that purpose. Subsequent to June 21, 2013, ATK has recorded sales of approximately $178,687 for fiscal year 2014 and income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest of 37 -------------------------------------------------------------------------------- approximately $33,438 for fiscal year 2014 associated with the operations of this acquired business, which reflects the expense of the inventory step-up cost of $12,000 for inventory sold in fiscal year 2014. On November 1, 2013, ATK acquired Bushnell Group Holdings, Inc. ("Bushnell"). Bushnell is a leading global designer, marketer and distributor of branded sports optics, outdoor accessories and performance eyewear. The purchase price was $985,000 net of cash acquired, subject to purchase price adjustments. ATK believes the acquisition broadens our existing capabilities in the commercial shooting sports market and expands our portfolio of branded shooting sports products. In addition, this transaction enables the Company to enter new sporting markets in golf and snow skiing. ATK will leverage Bushnell's strong sourcing, marketing, branding and distribution capabilities and capitalize on Bushnell's track record of successfully integrating acquisitions and delivering profitable growth. Bushnell employs approximately 1,100 employees and is included in the Sporting Group. The purchase price has been preliminarily allocated based on the estimated fair value of net assets acquired and liabilities assumed at the date of the acquisition. The preliminary purchase price allocation is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. These adjustments will primarily relate to working capital adjustments, certain contingent liabilities and income tax-related items. We expect the purchase price allocation to be completed within 12 months of the acquisition date. A portion of the goodwill generated in this acquisition will be deductible for tax purposes. Subsequent to November 1, 2013, ATK has recorded sales of approximately $217,095 for fiscal 2014 and income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest of approximately $9,177 for fiscal 2014 associated with the operations of this acquired business which reflects transition costs and $3,500 of inventory step-up costs. The income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest excludes transaction costs of $14,254 for fiscal 2014. Pro forma financial statement information has been included within Note 4 to the consolidated financial statements. 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 2014 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. 38 -------------------------------------------------------------------------------- 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 2014 Annual Impairment Test For the fiscal 2014 impairment assessment performed as of December 30, 2013, 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 12.5%. 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 2014 annual goodwill impairment test indicated that no goodwill impairment existed, as the estimated fair value for all reporting units exceeded their carrying value by greater than 10%, which ATK deems to be a sufficient excess. Results of Operations The following information should be read in conjunction with ATK's consolidated financial statements. The key performance indicators that ATK's management uses in managing the business are sales, income before interest and income taxes, and cash flows. Group total net Sales, Cost of Sales, and Income before Interest, Loss on Extinguishment of Debt, Income Taxes, and Noncontrolling Interest include intergroup sales and profit. Corporate and Eliminations includes intergroup sales and profit eliminations and corporate expenses. Fiscal 2014 Sales The following is a summary of each operating segment's sales: Years Ended March 31 2014 2013 $ Change % Change Aerospace Group $ 1,277,452 $ 1,267,719 $ 9,733 0.8 % Defense Group 1,950,784 2,109,671 (158,887 ) (7.5 )% Sporting Group 1,862,333 1,183,256 679,077 57.4 % Eliminations (315,441 ) (198,501 ) (116,940 ) 58.9 % Total sales $ 4,775,128 $ 4,362,145 $ 412,983 9.5 % The fluctuation in sales was driven by the program-related changes within the operating segments as described below. Aerospace Group. The increase in sales was driven by a $17,400 increase in Aerospace Structures sales volumes due to increased production on commercial aircraft programs, partially offset by a decrease in Space Systems Operations of $5,300 due to reduced production levels across multiple programs in the current year. Defense Group. The decrease in sales was driven by: • a decrease of $93,200 in Armament Systems due to lower volumes on medium-caliber ammunition programs and completion of programs, • a decrease of $51,800 in Small-Caliber Systems due to reduced volume as programs neared completion and impacts from federal budget reductions, and • a decrease of $34,900 in Defense Electronic Systems due to startup and completions on multiple contracts. These decreases were partially offset by a $20,600 increase within Missile Products due to production across multiple programs and pension segment closeout, offset by loss of the Radford facility management contract. Sporting Group. The increase in sales was driven by: • an increase of $395,800 due to the acquisition of Bushnell and Savage and 39 --------------------------------------------------------------------------------• an increase of $283,300 in ammunition and accessories products driven by increased volume, and previously announced price increases for ammunition, partially offset by a reduction in military accessories due to completion of programs. Cost of Sales The following is a summary of each operating segment's cost of sales: Years Ended March 31 2014 2013 $ Change % Change Aerospace Group $ 1,006,296 $ 995,415 $ 10,881 1.1 % Defense Group 1,563,816 1,641,998 (78,182 ) (4.8 )% Sporting Group 1,370,166 924,525 445,641 48.2 % Corporate (304,792 ) (140,662 ) (164,130 ) 116.7 % Total cost of sales $ 3,635,486 $ 3,421,276 $ 214,210 6.3 % The fluctuation in cost of sales was driven by the program-related changes within the operating segments as described below. Aerospace Group. The increase in cost of sales was driven by a $8,500 increase in Aerospace Structures sales volumes due to increased production on commercial aircraft programs, partially offset by a decrease in Space Systems Operations of $2,600 due to reduced production levels across multiple programs in the current year. Defense Group. The decrease in cost of sales was driven by: • a decrease of $72,600 in Armament Systems due to lower volumes on medium-caliber ammunition programs and completion of programs, • a decrease of $32,600 in Small-Caliber Systems due to reduced volume as programs neared completion and impacts from federal budget reductions, and • a decrease of $13,100 in Defense Electronic Systems due to startup and completions on multiple contracts. These decreases were partially offset by a $45,000 increase within Missile Products due to production across multiple programs and pension segment closeout, offset by loss of the Radford facility management contract. Sporting Group. The increase in cost of sales was driven by: • an increase of $290,500 due to the acquisition of Bushnell and Savage and • an increase of $167,600 in ammunition and accessories products driven by increased volume, partially offset by a reduction in military accessories due to completion of programs, and product mix. Corporate. The change in cost of sales was driven by increased intercompany profit eliminations partially offset by the reduction in pension expense including the effect of the Radford pension segment closeout. Operating Expenses Years Ended March 31 As a % As a % 2014 of Sales 2013 of Sales Change Research and development $ 62,520 1.3 % $ 64,678 1.5 % $ (2,158 ) Selling 203,976 4.3 % 162,359 3.7 % 41,617General and administrative 282,840 5.9 % 244,189 5.6 % 38,651 Total $ 549,336 11.5 % $ 471,226 10.8 % $ 78,110 Operating expenses increased by $78,110 year-over-year. Research and development costs decreased year-over-year in the Defense Group due to timing of expenditures. Selling expenses increased primarily due to increased commissions and other selling costs within the Bushnell and Savage businesses. General and administrative costs increased due to transaction costs related to acquisitions and the addition of costs associated with the Bushnell and Savage businesses. 40 --------------------------------------------------------------------------------Income before Interest, Loss on Extinguishment of Debt, Income Taxes, and Noncontrolling Interest Years Ended March 31 2014 2013 Change Aerospace Group $ 141,692 $ 144,392 $ (2,700 ) Defense Group 210,669 270,498 (59,829 ) Sporting Group 270,523 118,325 152,198 Corporate (32,578 ) (63,572 ) 30,994 Total $ 590,306 $ 469,643 $ 120,663 The increase in income before interest, loss on extinguishment of debt, income taxes, and noncontrolling interest was due to increased sales and the Radford segment closeout. Significant changes within the operating segments are also described below. Aerospace Group. Results were down slightly due to program mix across the Group. Defense Group. The decrease is the result of lower sales within the Group and the absence of the results from the Radford facility management contract, partially offset by profit expectation improvements in Small Caliber Systems. Sporting Group. The increase primarily reflects higher sales volumes and prices, Bushnell and Savage results, as well as product mix. The increase is partially offset by lower military accessories sales, facility rationalization costs, and inventory step-up and transition costs associated with the Savage and Bushnell acquisitions. 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 lower pension expense including the Radford segment close-out, partially offset by an increase in intercompany profit eliminations, transaction costs associated with the Savage and Bushnell acquisitions, and an environmental settlement. Net Interest Expense Net interest expense for fiscal 2014 was $79,792, an increase of $14,406 compared to $65,386 in fiscal 2013. The increase was primarily due to the increase in the average amount of debt outstanding, partially offset by a lower weighted average interest rate. Income Tax Provision Years Ended March 31 Effective Effective 2014 Rate 2013 Rate ChangeIncome tax provision $ 169,428 33.2 % $ 120,243 30.6 % $ 49,185 The increase in the current period tax rate is primarily due to the absence of the settlement of the examination of the fiscal 2009 and 2010 tax returns, partially offset by the revaluation of unrecognized tax benefits due to proposed Internal Revenue Service (IRS) regulations. ATK's provision for income taxes includes both federal and state income taxes. The effective tax rate for fiscal 2014 of 33.2% differs from the federal statutory rate of 35.0% due to the domestic manufacturing deduction (DMD) and the revaluation of unrecognized tax benefits due to proposed IRS regulations, offset by state income taxes which increased the rate. 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, DMD, and the full-year federal research and development (R&D) credit, offset by 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 and recent acquisitions, ATK is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2007. The IRS has completed the audits of ATK through fiscal 2010 and is 41 -------------------------------------------------------------------------------- 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, 2014 and 2013, the total amount of unrecognized tax benefits was $35,138 and $27,760, respectively, of which $29,046 and $21,150, 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 $4,799 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 $4,367. 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 $13,589 at March 31, 2014 relates to certain capital loss, tax credits and net operating losses that are not expected to be realized before their expiration. The valuation allowance increased during fiscal 2014 due to the acquisitions that occurred in fiscal 2014, generation of certain net operating losses and capital losses partially offset by carryover expirations. The IRS released final regulations relating to the capitalization of tangible personal property on September 13, 2013. ATK is currently analyzing the impact of these new regulations. We do not believe they will have a material impact on our financial statements. Net Income Before Noncontrolling Interest Net income before noncontrolling interest for fiscal 2014 was $341,086, an increase of $68,845 compared to $272,241 in fiscal 2013. This increase was driven by a $198,773 increase in gross profit, partially offset by a $78,110 increase in operating expenses, a $49,185 increase in income tax expense, and an increase of $14,406 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. Fiscal 2013 Sales The following is a summary of each operating segment's sales: Years Ended March 31 2013 2012 $ Change % Change Aerospace Group $ 1,267,719 $ 1,347,802 $ (96,515 ) (7.1 )% Defense Group 2,109,671 2,262,777 (284,560 ) (11.9 )% Sporting Group 1,183,256 1,002,820 159,407 15.6 % Eliminations (198,501 ) (168,915 ) (29,586 ) 17.5 % Total 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: • a decrease of $76,100 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 decrease of $39,100 in Aerospace Structures 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 $18,100 due to increased production across multiple programs in the current year. Defense Group. The decrease in sales was driven by: • a decrease of $129,700 in Missile Products due primarily to the loss of the Radford facility management contract, 42--------------------------------------------------------------------------------• a decrease $93,100 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 $39,100 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 $22,200 in Defense Electronic Systems due to startup and completions on multiple contracts. Sporting Group. The increase in sales was driven by increased demand for ammunition and a previously announced price increase in the commercial channels, and higher sales volume for accessories 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 $ 995,415 $ 1,091,514 $ (96,099 ) (8.8 )% Defense Group 1,641,998 1,841,686 (199,688 ) (10.8 )% Sporting Group 924,525 818,250 106,275 13.0 % Corporate (140,662 ) (132,947 ) (7,715 ) 5.8 % 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 decrease of $58,600 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 decrease of $40,200 in Aerospace Structures 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 $9,600 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 $95,000 in Missile Products due primarily to the loss of the Radford facility management contract, • a decrease of $87,800 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 $12,600 in Defense Electronic Systems due to startup and completions on multiple contracts. Sporting Group. The increase in cost of sales was driven by an increase in ammunition and accessories sales volume, and a reserve for potentially obsolete inventory balances associated with military accessories programs, partially offset by commodity price decreases. 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 litigation accrual and restructuring charges in the prior year. 43 -------------------------------------------------------------------------------- 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 increase 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 Missile Products 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. 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 flares litigation 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 ) 44 -------------------------------------------------------------------------------- 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 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. 45 -------------------------------------------------------------------------------- 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, 2014, 2013, and 2012 are summarized as follows: 2014 2013 2012 Cash flows provided by operating activities $ 388,020 $ 273,592 $ 372,307 Cash flows used for investing activities (1,441,989 ) (96,717 ) (114,957 ) Cash flows (used for) provided by financing activities 903,254 (328,399 ) (390,811 ) Net cash flows $ (150,715 ) $ (151,524 ) $ (133,461 ) Operating Activities. Net cash provided by operating activities increased $114,428 compared to the prior year period. This increase was driven by a $100,000 reduction in funding payment to the pension trust from $140,000 in the prior year to $40,000 during the current year, an increase in net income of $68,700, a reduction in income taxes of $75,564 in the current year, and the absence of a $25,500 payment of the LUU flare settlement in the prior year. These increases were partially offset by approximately $184,000 more cash required to fund working capital, primarily driven by the absence of a significant receivable collection in the prior year and timing of collections and payments. Net cash provided by operating activities decreased $98,715 in fiscal 2013 compared to fiscal 2012. 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. 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 increased $1,345,272 primarily due to the acquisition of Savage and Bushnell and an increase of cash used for capital expenditures of $46,000. Net cash used for investing activities decreased $18,240 in fiscal 2013 compared to fiscal 2012 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. Financing Activities. Net cash provided by financing activities was $903,254 in fiscal 2014 compared to a use of cash of $328,399 in fiscal 2013. This change of $1,231,653 was due to additional debt issued to finance the acquisitions of Bushnell and Savage, offset by an increase in payments to retire debt of $101,000 to $510,000 in the current year compared to $409,000 in the prior year, and an increase in debt financing costs of $20,183. Net cash used for financing activities decreased $62,412 in fiscal 2013 as compared to fiscal 2012. This increase 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. 46 --------------------------------------------------------------------------------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, any strategic acquisitions and the announced spin-off of the Sporting Group and the merger of ATK with Orbital. 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 Senior Credit Facility, as discussed further below. ATK's other debt service requirements consist of interest expense on its debt. Additional cash will be required to redeem all of the convertible notes and 6.875% notes as required under the Transaction Agreement. We believe we have sufficient liquidity to refinance those payments net of a dividend received as a result of the spin-off of the Sporting Group. During fiscal 2014, ATK paid quarterly dividends of $0.26 per share for the first, second, and third quarters and $0.32 per share for the fourth quarter totaling $35,134. On May 6, 2014, ATK's Board of Directors declared a quarterly cash dividend of $0.32 per share payable on June 26, 2014, to stockholders of record on June 2, 2014. 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. During the year ended March 31, 2014, ATK refinanced the Senior Credit Facility extending the debt maturities and adding capacity under our revolving credit facility, which increased our liquidity. 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 adequate to fund future growth as well as to service ATK's currently anticipated long-term debt and pension obligations, make capital expenditures, and payment of dividends over the next 12 months. Capital expenditures for fiscal 2015 are expected to be approximately $135,000. 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 On November 1, 2013, ATK refinanced its existing credit facility and entered into $300,000 in Senior Notes. As part of the refinancing, ATK increased its Revolving Credit Facility by $100,000 from $600,000 to $700,000. As of March 31, 2014, ATK had actual total indebtedness of $2,096,190, and the $700,000 Revolving Credit Facility provided for the potential of additional borrowings up to $558,242 (reduced by outstanding letters of credit of $141,758). There were no outstanding borrowings under the Revolving Credit Facility as of March 31, 2014. 47 --------------------------------------------------------------------------------ATK's indebtedness consisted of the following: March 31, 2014 March 31, 2013 Senior Credit Facility dated November 1, 2013: Term A Loan due 2018 $ 997,375 $ - Term B Loan due 2020 249,375 - Revolving Credit Facility due 2018 - - Senior Credit Facility dated October 7, 2010: Term A Loan due 2015 - 340,000 Term A Loan due 2017 - 195,000 Revolving Credit Facility due 2015 - - 5.25% Senior Notes due 2021 300,000 - 6.75% Senior Subordinated Notes due 2016 - - 6.875% Senior Subordinated Notes due 2020 350,000 350,000 3.00% Convertible Senior Subordinated Notes due 2024 199,440 199,453 Principal amount of long-term debt 2,096,190 1,084,453 Less: Unamortized discounts 3,212 10,576 Carrying amount of long-term debt 2,092,978 1,073,877 Less: current portion 249,228 50,000 Carrying amount of long-term debt, excluding current portion $ 1,843,750 $ 1,023,877 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 On November 1, 2013, ATK entered into a Third Amended and Restated Credit Agreement (the "2013 Senior Credit Facility"), which replaced its 2010 Senior Credit Facility. The 2013 Senior Credit Facility is comprised of a Term A Loan of $1,010,000 and a $700,000 Revolving Credit Facility, both of which mature in 2018, and a Term Loan B of $250,000, which matures in 2020. The Term A Loan is subject to quarterly principal payments of $12,625 beginning on March 31, 2014, with the remaining balance due on November 1, 2018. The Term B Loan is subject to quarterly principal payments of $625 beginning on March 31, 2014, with the remaining balance due on November 1, 2020. As of March 31, 2014, ATK had no outstanding borrowings under the Revolving Credit Facility. 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 1.00% and the current Eurodollar margin is 2.00%. ATK must also pay an annual commitment fee on the unused portion of the Revolving Credit Facility. 5.25% Notes On November 1, 2013, ATK issued $300,000 aggregate principal amount of 5.25% Senior Notes (the "5.25% Notes") that mature on October 1, 2021. These notes are general unsecured obligations. Interest on these notes is payable on April 1 and October 1 of each year. ATK has the right to redeem some or all of these notes from time to time on or after October 1, 2016, at specified redemption prices. Prior to October 1, 2016, 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. In addition, prior to October 1, 2016, ATK may redeem up to 35% of the aggregate principal amount of these notes with the net cash proceeds of certain equity offerings, at a price equal to 105.25% of their principal amount plus accrued and unpaid interest to the date of redemption. 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 48 -------------------------------------------------------------------------------- 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. In accordance with the Transaction Agreement entered into on April 28, 2014, ATK is required on or prior to the Closing to issue a notice of redemption of all of the outstanding 6.875% Notes. 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 of 0.30% of the average trading price of these notes if the average trading price of the notes is 120% or more of the principal amount 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 the stock price as of the end of fiscal 2014, ATK does not expect there to be a tax liability if the redemption occurs on August 15, 2014. Holders may also convert their notes at a conversion rate of 13.1023 shares of ATK's common stock per $1 principal amount of these notes (a conversion price of $76.32 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. As of March 31, 2014, the conditions necessary for the holders to request their notes be converted has been met and holders will be allowed to convert at any time during ATK's fiscal 2015 first quarter. In accordance with the Transaction Agreement entered into on April 28, 2014, ATK is required to satisfy 100% of the principal and any amounts above the principal solely in cash. Previously, any amounts above the principal amount could be settled in cash, common stock, or a combination of cash and common stock, at the sole election of ATK. In addition, under the terms of the Transaction Agreement, ATK is required on or prior to the Closing to issue a notice of redemption of all of the outstanding 3.00% Convertible Notes entirely in cash. Rank and Guarantees The 5.25% Notes rank senior in right of payment to the 3.00% Convertible Notes and the 6.875% Notes (the latter two of which rank equal with each other), all of which are subordinated in right of payment to all existing and future senior secured 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. See Note 16 for consolidating financial information of the guarantor and non-guarantor subsidiaries, as subsidiaries of ATK other than the subsidiary guarantors are more than 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 3.00 4.00 3.00 Actual at March 31, 2014 1.52 2.60 8.95 * 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 and surety bonds, net of up to $100,000 of cash, divided by Covenant EBITDA (which includes adjustments for items such as non-recurring or extraordinary non-cash items, non-cash charges related to stock-based compensation, and intangible asset impairment charges, as well as inclusion of EBITDA of acquired companies on a pro forma basis) for the past four fiscal quarters. The Senior Leverage Ratio is the sum of ATK's senior debt plus financial letters of credit and surety bonds, net of up to $100,000 of cash, divided by Covenant EBITDA. The Interest Coverage Ratio is Covenant EBITDA divided by interest expense (excluding non-cash charges). 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 49 -------------------------------------------------------------------------------- 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 5.25% Senior Notes, 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, 2014, 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 2014, 2013, and 2012 ATK repurchased 609,922 shares for $53,270, 1,003,938 shares for $58,371, and 742,000 for $49,991, respectively, under previously authorized share repurchase programs. On January 29, 2014, ATK's Board of Directors extended the $200,000 share repurchase program through March 31, 2015. 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. In accordance with the Transaction Agreement entered into on April 28, 2014, ATK will not repurchase any outstanding shares prior to the closing of the transaction. Any additional authorized repurchases would be subject to market conditions and ATK's compliance with its debt covenants. ATK's 5.25% Notes and 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, 2014, this limit was approximately $879,033. As of March 31, 2014, the Senior Credit Facility allows ATK to make unlimited "restricted payments" (as defined in the Senior Credit Facility agreement), which, among other items, would allow payments for future share 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, 2014: Payments due by period Less than More than Total 1 year 1 - 3 years 3 - 5 years 5 years Contractual obligations: Long-term debt $ 2,096,190 $ 252,440 $ 106,000 $ 850,875 $ 886,875 Interest on debt(1) 477,035 77,734 151,544 136,534 111,223 Operating leases 657,995 81,437 129,683 91,985 354,890 Environmental remediation costs, net 29,654 4,290 3,684 4,290 17,390 Pension and other PRB plan contributions 562,671 97,432 270,154 123,373 71,712 Total contractual obligations $ 3,823,545 $ 513,333 $ 661,065 $ 1,207,057 $ 1,442,090 NOTE: The Contractual obligations above do not reflect any changes due to the Transaction Agreement entered into on April 28, 2014. Commitment Expiration by period Total Within 1 year 1 - 3 years 3 - 5 years Other commercial commitments: Letters of credit $ 141,758 $ 125,644 $ 16,114 $ - ________________________________ (1) Includes interest on variable rate debt calculated based on interest rates at March 31, 2014. Variable rate debt was approximately 59% of ATK's total debt at March 31, 2014. The total liability for uncertain tax positions at March 31, 2014 was approximately $35,138 (see Note 11), $4,014 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. 50 -------------------------------------------------------------------------------- Pension plan contributions are an estimate of ATK's minimum funding requirements through fiscal 2024 to provide pension benefits for employees based on expected actuarial estimated service accruals through fiscal 2024 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 agreed to retrofit up to 76,000 flares as part of the settlement. On July 30, 2013, Raytheon Company filed a lawsuit against ATK in the Superior Court of the State of Arizona. The suit involves ATK's longstanding production of rocket motors used in Raytheon's Advanced Medium-Range Air-to-Air Missiles (AMRAAM). In the filing, Raytheon's primary allegation is that ATK breached certain of the production contracts by not delivering rocket motors. Raytheon is claiming damages exceeding $100,000. ATK disputes the allegations of Raytheon's complaint. Although it is not possible at this time to predict the outcome of the litigation, ATK believes, based on all currently available information, that the outcome will not have a material adverse effect on its operating results, financial condition or cash flows. As a result of the uncertainty regarding the outcome of this matter, no provision has been made in the financial statements with respect to this contingent liability. On May 5, 2014, a purported stockholder class action and derivative complaint was filed in the Circuit Court of Arlington County, Virginia by Michael Blank, who claims to be a stockholder of Orbital, alleging, among other things, that the directors of Orbital breached their fiduciary duties in connection with the Transaction between Orbital and ATK, as described above, and alleging that ATK aided and abetted such breaches of fiduciary duty. A similar purported class action was filed on May 9, 2014, by Gregory Ericksen in the Court of Chancery of the State of Delaware. Plaintiffs in Virginia and Delaware seek, among other relief, to enjoin the Transaction (or, in the Delaware action, to rescind it in the event it is consummated). ATK believes the allegations and claims asserted in the complaints in the Virginia and Delaware actions to be without merit and intends to defend those actions vigorously. 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, as well as applicable foreign 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 1.50% and 0.75% as of March 31, 2014 and 2013, 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: 51 -------------------------------------------------------------------------------- March 31, 2014 March 31, 2013 Liability Receivable Liability Receivable Amounts (payable) receivable $ (58,194 ) $ 28,540 $ (58,965 ) $ 34,190 Unamortized discount 4,706 (2,152 ) 2,745 (1,446 ) Present value amounts (payable) receivable $ (53,488 ) $ 26,388 $ (56,220 ) $ 32,744 As of March 31, 2014, the estimated discounted range of reasonably possible costs of environmental remediation was $53,488 to $78,062. 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. 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 $14,000, ATK and Alcoa have agreed to split evenly any amounts between $14,000 and $34,000, and ATK is responsible for any payments in excess of $34,000. 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, 2014, the aggregate undiscounted amounts payable for environmental remediation costs, net of expected recoveries, are estimated to be: 52 -------------------------------------------------------------------------------- Fiscal 2015 $ 4,290 Fiscal 2016 3,385 Fiscal 2017 299 Fiscal 2018 2,326 Fiscal 2019 1,964 Thereafter 17,390 Total $ 29,654 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, • 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. |