| ALLIANT TECHSYSTEMS INC ITEM 1A RISK FACTORS ATK is subject to a number of risks, including those related to being a US Government contractor |
| Some of the risks facing ATK are discussed below |
| 26 ______________________________________________________________________ ATK’s business could be adversely impacted by reductions or changes in NASA or US Government military spending |
| As the majority of ATK’s sales are to the US Government and its prime contractors, ATK depends heavily on the contracts underlying these programs |
| Also, significant portions of ATK’s sales come from a small number of contracts |
| ATK’s top five contracts, all of which are contracts with the US Government, accounted for approximately 39prca of fiscal 2006 sales |
| ATK’s largest contract, the military small-caliber ammunition contract, contributed approximately 14prca of total fiscal 2006 sales, and ATK’s contract with NASA for the Reusable Solid Rocket Motors (RSRM) for the Space Shuttle represented 13prca of ATK’s total fiscal 2006 sales |
| The loss or significant reduction of a material program in which ATK participates could have a material adverse effect on ATK’s operating results, financial condition, or cash flows |
| ATK’s small-caliber ammunition operations for the US military and US allies are conducted at the Lake City Army Ammunition Plant (Lake City) in Independence, Missouri |
| Lake City is the Army’s principal small-caliber ammunition production facility and is the primary supplier of the US military’s small-caliber ammunition needs |
| ATK took over operation of this facility on April 1, 2000 and is responsible for managing it, including leasing excess space to third parties in the private sector |
| ATK has a 10-year production contract to supply the Army’s small-caliber ammunition needs that expires April 1, 2010 |
| Although the facilities-use contract expires 15 years after the plant production contract, if the plant production contract is not renewed, ATK believes the US Army would relieve ATK of all of its obligations under the facilities-use contract |
| Future ATK production under this contract or levels of government spending cannot be predicted with certainty |
| In January 2004, President Bush announced a new vision for space exploration, which commits the United States to a long-term human and robotic program to explore the solar system, starting with a return to the Moon |
| The program anticipates the Space Shuttle will be retired from service as early as 2010, to be replaced by a new spacecraft and supporting exploration launch systems |
| On September 19, 2005, NASA announced the results of its architecture study from which NASA chose the shuttle-derived option for its new launch system due to its superior safety, cost and its availability |
| This option includes the current four-segment, or an upgraded five-segment Shuttle Solid Rocket Booster as the first stage for its new Apollo-style CLV and two five-segment Shuttle Solid Rocket Boosters as the initial thrust for its HLLV for the future NASA launch systems |
| A technical directive under ATK’s current RSRM contract has been received from NASA for ATK to begin studying and planning for the use of the ATK RSRM in these two new systems |
| Although ATK believes that its RSRM and RSRM derivatives will be important to achieving an affordable launch system, future programs and levels of government spending cannot be predicted with certainty |
| US 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 US Government contracts are subject to modification if funding is changed |
| Any failure by Congress to appropriate additional funds to any program in which ATK participates, or any contract modification as a result of funding changes, could materially delay or terminate the program |
| This could have a material adverse effect on ATK’s operating results, financial condition, or cash flows |
| 27 ______________________________________________________________________ ATK may not be able to react to increases in its costs due to the nature of its US Government contracts |
| ATK’s US Government contracts can be categorized as either “cost-plus” or “fixed-price |
| Cost-plus-fixed-fee contracts allow ATK to recover its approved costs plus a fixed fee |
| Cost-plus-incentive-fee contracts and cost-plus-award-fee contracts allow ATK to recover its approved costs plus a fee that can fluctuate based on actual results as compared to contractual targets for factors such as cost, quality, schedule, and performance |
| Under firm-fixed-price contracts, ATK agrees to perform certain work for a fixed price and absorb any cost underruns or overruns |
| Fixed-price-incentive contracts are fixed-price contracts under which the final contract prices may be adjusted based on total final costs compared to total target cost, and may be affected by schedule and performance |
| Fixed-price-level-of-effort contracts allow for a fixed price per labor hour, subject to a contract cap |
| All fixed-price contracts present the inherent risk of unreimbursed cost overruns, which could have a material adverse effect on operating results, financial condition, or cash flows |
| The US Government also regulates the accounting methods under which costs are allocated to US Government contracts |
| The following table summarizes how much each of these types of contracts contributed to ATK’s US Government business in fiscal 2006: Cost-plus contracts: Cost-plus-fixed-fee 10 % Cost-plus-incentive-fee/cost-plus-award-fee 30 % Fixed-price contracts: Firm-fixed-price 60 % Total 100 % ATK’s US Government contracts are subject to termination |
| ATK is subject to the risk that the US Government may terminate its contracts with its suppliers, either for its convenience or in the event of a default by the contractor |
| If a cost-plus contract is terminated, the contractor is entitled to reimbursement of its approved costs |
| If the contractor would have incurred a loss had the entire contract been performed, then no profit is allowed by the US Government |
| If the termination is for convenience, the contractor is also entitled to receive payment of a total fee proportionate to the percentage of the work completed under the contract |
| If a fixed-price contract is terminated, the contractor is entitled to receive payment for items delivered to and accepted by the US Government |
| If the termination is for convenience, the contractor is also entitled to receive fair compensation for work performed plus the costs of settling and paying claims by terminated subcontractors, other settlement expenses, and a reasonable profit on the costs incurred or committed |
| If a contract termination is for default: · the contractor is paid an amount agreed upon for completed and partially completed products and services accepted by the US Government, · the US Government is not liable for the contractor’s costs for unaccepted items, and is entitled to repayment of any advance payments and progress payments related to the terminated portions of the contract, and · the contractor may be liable for excess costs incurred by the US Government in procuring undelivered items from another source |
| 28 ______________________________________________________________________ ATK is subject to procurement and other related laws and regulations, non-compliance with which may expose ATK to adverse consequences |
| ATK is subject to extensive and complex US Government procurement laws and regulations, along with ongoing US Government audits and reviews of contract procurement, performance, and administration |
| ATK could suffer adverse consequences if it were to fail to comply, even inadvertently, with these laws and regulations or with laws governing the export of munitions and other controlled products and commodities; or commit a significant violation of any other federal law |
| These consequences could include contract termination; civil and criminal penalties; and, under certain circumstances, ATK’s suspension and debarment from future US Government contracts for a period of time |
| In addition, foreign sales are subject to greater variability and risk than ATK’s domestic sales |
| Foreign sales subject ATK to numerous stringent US and foreign laws and regulations, including regulations relating to import-export control, exchange controls, the Foreign Corrupt Practices Act, and the anti-boycott provisions of the US Export Administration Act |
| Failure to comply with these laws and regulations could result in material adverse consequences to ATK Novation of US Government contracts involves risk |
| When US Government contracts are transferred from one contractor to another, such as in connection with the sale of a business, the US Government may require that the parties enter into a novation agreement |
| A novation agreement generally provides that: · the transferring contractor guarantees or otherwise assumes liability for the performance of the acquiring contractor’s obligations under the contract, · the acquiring contractor assumes all obligations under the contract, and · the US Government recognizes the transfer of the contract and related assets |
| ATK has completed novation agreements covering US Government contracts acquired in the Boeing Ordnance (now known as ATK Medium Caliber Systems) and Science and Applied Technology (now known as ATK Missile Systems) acquisitions |
| These novation agreements provide that ATK assumes all obligations under the acquired contracts and that the US Government recognizes the transfers to ATK of the acquired contracts and related assets |
| Under each novation agreement, the acquired contracts are scheduled to be performed over time, and it is not expected that they will be fully and finally discharged for several years |
| Under each novation agreement, the seller of the respective assets has agreed to indemnify ATK against any liability that ATK may incur under the novation agreement caused by any prior failure by the seller to perform its obligations under its respective novated contracts |
| ATK has agreed to indemnify the seller against any liability that the seller may incur under the novation agreement caused by any failure by ATK to perform its obligations under the novated contracts |
| ATK was not required to novate the US Government contracts acquired in the Thiokol acquisition because ATK acquired Cordant Technologies, Inc |
| ’s (the entity that owned the assets and liabilities of the Thiokol propulsion business) stock, rather than the assets of the business |
| ATK has provided the US Government with a corporate guarantee that its obligations under the contracts will be fulfilled |
| ATK did not acquire any US Government contracts that required novation in the acquisitions of the civil ammunition business or the PSI Group |
| ATK was not required to novate the US Government contracts acquired in the acquisitions of Micro Craft Inc, GASL, Inc |
| (known together as ATK GASL), Composite Optics, Inc |
| or Mission Research Corporation (now known as ATK Mission Research) because ATK acquired the stock, rather than the assets of the businesses |
| 29 ______________________________________________________________________ Other risks associated with US Government contracts may expose ATK to adverse consequences |
| In addition, like all US Government contractors, ATK is subject to risks associated with uncertain cost factors related to: · scarce technological skills and components, · the frequent need to bid on programs in advance of design completion, which may result in unforeseen technological difficulties and/or cost overruns, · the substantial time and effort required for design and development, · design complexity, · rapid obsolescence, and · the potential need for design improvement |
| ATK uses estimates in accounting for many of its programs |
| Contract accounting requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues |
| Due to the size and nature of many of ATK’s contracts, the estimation of total revenues and cost at completion is complex and subject to many variables |
| Assumptions are made regarding the length of time to complete the contract because costs also include expected increases in wages and prices for materials |
| Similarly, assumptions are made regarding the future impacts of efficiency initiatives and cost reduction efforts |
| Incentives or penalties related to performance on contracts are considered in estimating revenue and profit rates, and are recorded when there is sufficient information to assess anticipated performance |
| Estimates of award and incentive fees are also used in estimating revenue and profit rates based on actual and anticipated awards |
| Because of the significance of the judgments and estimation processes described above, it is likely that materially different amounts could be recorded if ATK used different assumptions or if the underlying circumstances were to change |
| Changes in underlying assumptions, circumstances or estimates may adversely affect future period financial performance |
| Additional information on ATK’s accounting policies for revenue recognition can be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the section titled “Critical Accounting Policies” in Item 7 of this report |
| ATK has a substantial amount of debt, and the cost of servicing that debt could adversely affect ATK’s business and hinder ATK’s ability to make payments on its debt |
| ATK has a substantial amount of indebtedness |
| As of March 31, 2006, ATK had total debt of dlra1cmam126 million |
| In addition, ATK had dlra73dtta6 million of outstanding but undrawn letters of credit and, taking into account these letters of credit, an additional dlra226dtta4 million of availability under its revolving credit facility |
| Additional information on ATK’s debt can be found under “Liquidity and Capital Resources” in Item 7 of this report |
| ATK has demands on its cash resources in addition to interest and principal payments on its debt, including, among others, operating expenses |
| ATK’s level of indebtedness and these significant demands on ATK’s cash resources could: · make it more difficult for ATK to satisfy its obligations, 30 ______________________________________________________________________ · require ATK to dedicate a substantial portion of its cash flow from operations to payments on its debt, thereby reducing the amount of cash flow available for working capital, capital expenditures, share repurchases, acquisitions, and other general corporate purposes, · limit ATK’s flexibility in planning for, or reacting to, changes in the defense and aerospace industries, · place ATK at a competitive disadvantage compared to competitors that have lower debt service obligations and significantly greater operating and financing flexibility, · limit, along with the financial and other restrictive covenants applicable to ATK’s indebtedness, among other things, ATK’s ability to borrow additional funds, · increase ATK’s vulnerability to general adverse economic and industry conditions, and · result in an event of default upon a failure to comply with financial covenants contained in ATK’s senior credit facilities which, if not cured or waived, could have a material adverse effect on ATK’s business, financial condition, or results of operations |
| ATK’s ability to pay interest on and repay its long-term debt and to satisfy its other liabilities will depend upon future operating performance and ATK’s ability to refinance its debt as it becomes due |
| ATK’s future operating performance and ability to refinance will be affected by prevailing economic conditions at that time and financial, business and other factors, many of which are beyond ATK’s control |
| If ATK is unable to service its indebtedness and fund operating costs, ATK will be forced to adopt alternative strategies that may include: · reducing or delaying expenditures for capital equipment and/or share repurchases, · seeking additional debt financing or equity capital, · selling assets, or · restructuring or refinancing debt |
| There can be no assurance that any such strategies could be implemented on satisfactory terms, if at all |
| ATK is subject to intense competition and therefore may not be able to compete successfully |
| ATK encounters competition for most contracts |
| Some of these competitors have substantially greater financial, technical, marketing, manufacturing, distribution, and other resources |
| ATK’s ability to compete for these contracts depends to a large extent upon: · its effectiveness and innovativeness of research and development programs, · its ability to offer better program performance than the competitors at a lower cost, · its readiness with respect to facilities, equipment, and personnel to undertake the programs for which it competes, and · its past performance and demonstrated capabilities |
| In some instances, the US Government directs a program to a single supplier |
| In these cases, there may be other suppliers who have the capability to compete for the programs involved, but they can only enter or reenter the market if the US Government chooses to open the particular program to competition |
| ATK’s sole-source contracts accounted for 71prca of US Government sales in fiscal 2006 and include the following programs: reusable solid rocket motor (RSRM) Space Shuttle boosters, Trident II 31 ______________________________________________________________________ missiles, Minuteman III Propulsion Replacement Program, Titan IV solid rocket motor upgrade space boosters, Advanced Medium-Range Air-to-Air Missile (AMRAAM), Hellfire, Sensor Fuzed Weapon propulsion systems, M830A1 multi-purpose tank ammunition rounds, Mk-90 propellant grains for the Hydra 70 and APKWS unguided and guided applications, M789 Lightweight 30 High Explosive Dual Purpose (HEDP) for medium-caliber ammunition, the AAR-47 missile warning system, Javelin launch tubes, M829A3 tank ammunition, Solid Divert and Attitude Control Systems and Third Stage Rocket Motors (SDACS/TSRM), STARTM Motors, the Nautilus program, Advanced Anti-Radiation Guided Missile (AARGM), Mobile Ground-to-Air Radar Jamming System (MGARJS), and the XM-8/XM-25 Family of Gun Systems |
| In the commercial ammunition and accessories markets, ATK competes against manufacturers that have well-established brand names and strong market positions |
| ATK generally faces competition from a number of competitors in each business area, although no single competitor competes along all five of ATK’s segments |
| ATK’s principal competitors in each of its segments are as follows: Ammunition: General Dynamics Ordnance and Tactical Systems, Inc, a subsidiary of General Dynamics Corporation; SNC Technologies Inc |
| ; Winchester Ammunition of Olin Corporation; Remington; and various smaller manufacturers and importers, including Hornady, Black Hills Ammunition, Wolf, Rio Ammunition, Fiocchi Ammunition, and Selliers & Belloitt |
| ATK Thiokol: Aerojet-General Corporation, a subsidiary of GenCorp Inc |
| Precision Systems: Aerojet-General Corporation, a subsidiary of GenCorp Inc |
| Advanced Propulsion and Space Systems: Pratt & Whitney Space and Missile Propulsion of United Technologies Corporation; Aerojet-General Corporation, a subsidiary of GenCorp Inc |
| ; Marion and Lincoln Composites, both subsidiaries of General Dynamics Corporation; Vought Aircraft Industries, Inc |
| ATK Mission Research: Science Applications International Corporation (SAIC); The Titan Corporation; L-3 Communications Corporation; Ball Aerospace & Technologies Corporation, a subsidiary of Ball Corporation; and Georgia University of Technology |
| The downsizing of the munitions industrial base has resulted in a reduction in the number of competitors through consolidations and departures from the industry |
| This has reduced the number of competitors for some programs, but has strengthened the capabilities of some of the remaining competitors |
| In addition, it is possible that there will be increasing competition from the remaining competitors in business areas where they do not currently compete, particularly in those business areas dealing with electronics |
| Failure of ATK’s subcontractors to perform their contractual obligations could materially and adversely impact ATK’s prime contract performance and ability to obtain future business |
| ATK relies on subcontracts with other companies to perform a portion of the services ATK provides its customers on many of its contracts |
| There is a risk that ATK may have disputes with its subcontractors, including disputes regarding the quality and timeliness of work performed by the subcontractor, customer 32 ______________________________________________________________________ concerns about the subcontract, ATK’s failure to extend existing task orders or issue new task orders under a subcontract, or ATK’s hiring of personnel of a subcontractor |
| A failure by one or more of ATK’s subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may materially and adversely impact ATK’s ability to perform its obligations as the prime contractor |
| Subcontractor performance deficiencies could result in a customer terminating a contract for default |
| A default termination could expose ATK to liability and have a material adverse effect on the ability to compete for future contracts and orders |
| Disruptions in the supply of key raw materials and difficulties in the supplier qualification process, as well as increases in prices of raw materials, could adversely impact ATK Key raw materials used in ATK’s operations include aluminum, steel, steel alloys, copper, zinc, lead, graphite fiber, prepreg, hydroxy terminated polybutadiene, epoxy resins and adhesives, ethylene propylene diene monomer rubbers, cotton fiber, wood pulp cellulose, diethylether, x-ray film, plasticizers and nitrate esters, impregnated ablative materials, various natural and synthetic rubber compounds, polybutadiene, acrylonitrile, and ammonium perchlorate |
| ATK also purchases chemicals; electronic, electro-mechanical and mechanical components; subassemblies; and subsystems that are integrated with the manufactured parts for final assembly into finished products and systems |
| ATK closely monitors sources of supply to assure that adequate raw materials and other supplies needed in manufacturing processes are available |
| As a US Government contractor, ATK is frequently limited to procuring materials and components from sources of supply approved by the US Department of Defense (DoD) |
| In addition, as business conditions, the DoD budget, and Congressional allocations change, suppliers of specialty chemicals and materials sometimes consider dropping low volume items from their product lines, which may require, as it has in the past, qualification of new suppliers for raw materials on key programs |
| The supply of ammonium perchlorate, a principal raw material used in ATK’s operations, is limited to a single source that supplies the entire domestic solid propellant industry |
| This single source, however, maintains two separate manufacturing lines a reasonable distance apart, which mitigates the likelihood of a fire, explosion, or other problem impacting all production |
| ATK may also rely on one primary supplier for other production materials |
| Although other suppliers of the same materials may exist, the addition of a new supplier may require ATK to qualify the new source for use |
| The qualification process may impact ATK’s profitability or ability to meet contract deliveries |
| Certain suppliers of materials used in the manufacturing of rocket motors have discontinued the production of some materials |
| These materials include certain insulation and resin materials for rocket motor cases and aerospace grade rayon for nozzles |
| ATK has qualified new replacement materials for some programs |
| For other programs, ATK or ATK’s customer has procured sufficient inventory to cover current program requirements and is in the process of qualifying new replacement materials to be qualified in time to meet future production needs |
| ATK’s profitability may be affected if unforeseen difficulties in developing and qualifying replacement materials occur |
| ATK is also impacted by increases in the prices of raw materials used in production on commercial and fixed-price business |
| Most recently, ATK has seen a significant increase in the price of commodity metals, primarily copper which has reached record high prices, along with lead, steel, and zinc |
| The increased cost of natural gas and electricity also has an impact on the cost of operating ATK’s factories |
| Prolonged disruptions in the supply of any of ATK’s key raw materials, difficulty completing qualification of new sources of supply, implementing use of replacement materials or new sources of supply, or a continuing increase in the prices of raw materials and energy could have a material adverse effect on ATK’s operating results, financial condition, or cash flows |
| 33 ______________________________________________________________________ ATK’s future success will depend, in part, on its ability to develop new technologies and maintain a qualified workforce to meet the needs of its customers |
| Virtually all of the products produced and sold by ATK are highly engineered and require sophisticated manufacturing and system integration techniques and capabilities |
| Both the commercial and government markets in which the company operates are characterized by rapidly changing technologies |
| The product and program needs of ATK’s government and commercial customers change and evolve regularly |
| Accordingly, ATK’s future performance in part depends on its ability to identify emerging technological trends, develop and manufacture competitive products, and bring those products to market quickly at cost-effective prices |
| In addition, because of the highly specialized nature of its business, ATK must be able to hire and retain the skilled and appropriately qualified personnel necessary to perform the services required by its customers |
| ATK’s sales and earnings may be adversely affected if it is unable to develop new products that meet customers’ changing needs or successfully attract and retain qualified personnel |
| Due to the volatile and flammable nature of its products, fires or explosions may disrupt ATK’s business |
| Many of ATK’s products involve the manufacture and/or handling of a variety of explosive and flammable materials |
| From time to time, these activities have resulted in incidents which have temporarily shut down or otherwise disrupted some manufacturing processes, causing production delays and resulting in liability for workplace injuries and fatalities |
| ATK has safety and loss prevention programs which require detailed pre-construction reviews of process changes and new operations, along with routine safety audits of operations involving explosive materials, to mitigate such incidents, as well as a variety of insurance policies |
| However, ATK cannot ensure that it will not experience similar incidents in the future or that any similar incidents will not result in production delays or otherwise have a material adverse effect on its results of operations, financial condition, or cash flows |
| ATK is subject to environmental rules and regulations, non-compliance with which may expose ATK to adverse consequences |
| ATK’s operations and ownership or use of real property are subject to a number of federal, state, and local environmental laws and regulations |
| At certain sites that ATK owns or operates or formerly owned or operated, there is known or potential contamination that ATK is required to investigate or remediate |
| ATK could incur substantial costs, including remediation costs, fines, and penalties, or third party property damage or personal injury claims, as a result of violations or liabilities of environmental laws or non-compliance with environmental permits |
| ATK expects that a portion of its environmental compliance and remediation costs will be recoverable under US Government contracts |
| Some of the remediation costs that are not recoverable from the US Government that are associated with facilities purchased in a business acquisition may be covered by various indemnification agreements, as described below |
| · As part of its acquisition of the Hercules Aerospace Company in fiscal 1995, ATK assumed responsibility for environmental compliance at the facilities acquired from Hercules (the Hercules Facilities) |
| ATK believes that a portion of the compliance and remediation costs associated with the Hercules Facilities will be recoverable under US Government contracts, and that those environmental remediation costs not recoverable under these contracts will be covered by Hercules Incorporated (Hercules) under environmental agreements entered into in connection with the Hercules acquisition |
| Under these agreements, Hercules has agreed to indemnify ATK for environmental conditions relating to releases or hazardous waste activities occurring prior to ATK’s purchase of the Hercules Facilities; fines relating to pre-acquisition environmental compliance; and environmental claims arising out of breaches of Hercules’ representations and warranties |
| Hercules 34 ______________________________________________________________________ is not required to indemnify ATK for any individual claims below dlra50cmam000 |
| Hercules is obligated to indemnify ATK for the lowest cost response of remediation required at the facility that is acceptable to the applicable regulatory agencies |
| ATK is not responsible for conducting any remedial activities with respect to the Kenvil, NJ facility or the Clearwater, FL facility |
| 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 |
| While ATK expects that a portion of the compliance and remediation costs associated with the acquired Thiokol Facilities will be recoverable under US Government contracts, ATK has recorded an accrual to cover those environmental remediation costs at these facilities that will not be recovered through US 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 US Government contracts at Thiokol Facilities up to dlra29 million, ATK and Alcoa have agreed to split evenly any amounts between dlra29 million and dlra49 million, and ATK is responsible for any payments in excess of dlra49 million |
| · With respect to the civil ammunition business’ facilities purchased from Blount in fiscal 2002, Blount has agreed to indemnify ATK for certain compliance and remediation liabilities, to the extent those liabilities are related to pre-closing environmental conditions at or related to these facilities |
| Some other remediation costs are expected to be paid directly by a third party pursuant to an existing indemnification agreement with Blount |
| Blount’s indemnification obligations relating to environmental matters, which extend through December 7, 2006, are capped at dlra30 million, less any other indemnification payments made for breaches of representations and warranties |
| The third party’s obligations, which extend through November 4, 2007, are capped at approximately dlra125 million, less payments previously made |
| ATK cannot ensure that the US Government, Hercules, Alcoa, Blount, or other third parties will reimburse it for any particular environmental costs or reimburse ATK in a timely manner or that any claims for indemnification will not be disputed |
| US 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 US Government, Hercules, Alcoa, Blount, or other third parties could have a material adverse effect on its operating results, financial condition, or cash flows |
| In December 2001, ATK received notice from the State of Utah of a potential claim against ATK under Section 107(f) of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) for natural resource damages at Bacchus, one of the Hercules Facilities, in Magna, Utah |
| The notice letter, which was issued to preserve the State’s rights under CERCLA, also expressly acknowledged the State’s willingness to allow ATK to go forward with its currently-planned monitoring and remediation program |
| The State’s preliminary estimate of damages contained in this claim was dlra139 million, which is based on known and alleged groundwater contamination at and near Bacchus and is related to Hercules’ manufacturing operations at the site |
| ATK has had discussions with the State regarding this claim and entered into a tolling agreement with the State in fiscal 2002 |
| In fiscal 2003, ATK entered into a similar tolling agreement with the State regarding the Promontory facility that was acquired from Alcoa in the acquisition of Thiokol |
| These agreements effectively defer the bringing of any potential claim against ATK by the State for a period of at least 10 years |
| They allow ATK time to continue to identify and address the contamination by the normal and planned regulatory remediation processes in Utah |
| Although ATK has previously made accruals for its best estimate of the probable and reasonably estimable costs related to the 35 ______________________________________________________________________ remediation obligations known to ATK with respect to the affected areas, ATK cannot yet predict if or when a suit may be filed against it, nor can ATK determine any additional costs that may be incurred in connection with this matter |
| In February 2005, ATK entered into a Consent Agreement with the US Environmental Protection Agency |
| Pursuant to the agreement, ATK was required to pay a penalty of dlra675cmam000 |
| The penalty related to ATK’s alleged failure to have a financial assurance mechanism in place that satisfied the requirements of the federal Resource Conservation and Recovery Act (RCRA) |
| ATK paid the penalty and believes that it has a financial assurance mechanism in place that satisfies RCRA While ATK has environmental management programs in place to mitigate 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 |
| The level of returns on pension and postretirement plan assets, changes in interest rates and other factors could affect ATK’s earnings |
| ATK’s earnings may be positively or negatively impacted by the amount of expense recorded for employee benefit plans, primarily pension plans |
| Generally accepted accounting principles (GAAP) in the United States of America require ATK to calculate expense for the plans using actuarial valuations |
| These valuations are based on assumptions made relating to financial market and other economic conditions |
| Changes in key economic indicators can result in changes in these assumptions |
| The key year-end assumptions used to estimate pension expense for the following year are the discount rate, the expected long-term rate of return on plan assets and the rate of increase in future compensation levels |
| Additional information on how ATK’s financial statements can be affected by pension plan accounting policies can be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the section titled “Critical Accounting Policies” in Item 7 of this report |
| International sales are subject to greater risks that sometimes are associated with doing business in foreign countries |
| ATK’s international business may pose greater risks than its business in the United States because in some countries there is increased potential for changes in economic, legal and political environments |
| ATK’s international business is also sensitive to changes in a foreign government’s national priorities and budgets |
| International transactions frequently involve increased financial and legal risks arising from foreign exchange rate variability and differing legal systems and customs in other countries |
| In addition, some international customers require contractors to agree to offset programs that may require in-country purchases or manufacturing or financial support arrangements as a condition to awarding contracts |
| The contracts may include penalties in the event the company fails to perform in accordance with the offset requirements |
| An unfavorable event or trend in any one or more of these factors could adversely affect ATK’s sales and earnings associated with its international business |
| ATK may make acquisitions which represent additional risk and could impact our future financial results |
| ATK’s business strategy includes the potential for future acquisitions |
| Acquisitions involve a number of risks including integration of the acquired company with ATK’s operations and unanticipated liabilities or contingencies related to the acquired company |
| ATK cannot ensure that the expected benefits of any future acquisitions will be realized |
| 36 ______________________________________________________________________ ATK’s profitability could be impacted by unanticipated changes in its tax provisions or exposure to additional income tax liabilities |
| ATK’s business operates in many locations under government jurisdictions that impose income taxes |
| Changes in domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain revenues or the deductibility of certain expenses, thereby affecting income tax expense and profitability |
| In addition, audits by income tax authorities could result in unanticipated increases in income tax expense |