TEXT - Fitch affirms Alliant Techsystems
Feb 15 - Fitch Ratings has affirmed Alliant Techsystems Inc.'s (ATK) Issuer Default Rating (IDR) at 'BB+'. The Rating Outlook is Stable. Approximately $1.1 billion of outstanding debt is covered by Fitch's ratings which are detailed at the end of this release. The ratings are supported by ATK's strong credit metrics for the ratings; positive free cash flow (FCF; cash from operations less capital expenditures and dividends); steady margins which are projected to slightly decline in fiscal 2014; solid liquidity; increasing commercial sales; and ATK's role as a sole source provider for many of its products to the U.S. Government. Fitch notes that a renewal of the Lake City Army Ammunition plant (Lake City) contract was a significant win for the company because ATK generates approximately 15% of its revenues from the plant's operations. ATK decreased its leverage (debt to EBITDA) for the second consecutive year by retiring approximately $200 million long-term indebtedness during fiscal 2013. In the second quarter of fiscal 2013 (ended March 31, 2013), ATK redeemed $400 million 6.75% senior subordinated notes due in 2016. The redemption was funded by cash and by the proceeds of a new $200 million senior secured term loan A maturing in fiscal 2018. At Dec. 30, 2012, ATK's leverage was approximately 1.9 times (x), down from 2.2x and 2.5x at the end of fiscal 2012 and fiscal 2011, respectively. Fitch anticipates leverage to stay relatively stable over the next several years as ATK will be making mandatory debt repayments of its term loans. Fitch's concerns include an anticipated decline in small caliber ammunition demand and lower contract rates which resulted from the renewal of the operating contract for the Lake City earlier in fiscal 2013. Fitch's financial projections incorporate expected sales declines and margin pressures in ATK's Defense Group. ATK's financial performance may be further pressured by lower modernization activities in Lake City and risks to core defense spending and NASA funding priorities after fiscal 2013. Fitch is also concerned with low funded status of ATK's pension liabilities (71% funded). Fitch notes the company's history of increasing leverage for acquisitions; commodities exposure; and exposure to significant margin fluctuation in its Sporting Group. The senior secured facilities are rated one-notch above ATK's IDR because they are backed by a first lien security position in substantially all of the company's assets. The senior subordinated notes are rated one-notch below ATK's IDR due to their subordinated position to the company's senior unsecured obligations. At the end of the third quarter of fiscal 2013, ATK had liquidity of approximately $790 million, slightly up from $780 million at the end of 2011. Liquidity consisted of $362 million in cash and approximately $428 million in availability under its $600 million credit revolving facility, after giving effect to approximately $162 million of outstanding letters of credit. ATK managed to maintain solid liquidity at the end of the third fiscal quarter despite retiring approximately $200 million of debt and repurchasing approximately $25 million worth of common shares during the first three fiscal quarters. Fitch expects ATK's liquidity to remain within a range of $700 million to $900 million over the next several years. ATK generated approximately $366 million of cash flow from operating activities during the last 12 months ended (LTM) Dec. 30, 2012, slightly down from $372 million at the end of fiscal 2012. ATK expects its FCF to total from $175 million to $200 million in fiscal 2013 (excluding dividends). Fitch expects ATK's FCF to be lower in fiscal 2014 and total approximately $170 million excluding dividends. Historically, ATK generated an average of approximately $220 million FCF over the past four years. Historically, ATK focused its cash deployment towards acquisitions, capital expenditures and pension contributions. Beginning with fiscal 2012, ATK's cash deployment shifted towards a balanced approach which includes deploying cash towards shareholders in form of dividends and share repurchases; capital expenditures; and pension contributions. Over the past two years, ATK achieved financial flexibility by reducing its long-term debt while maintaining solid liquidity. The company has adequate financial flexibility to make small to medium sized strategic acquisitions and to address uncertainties surrounding U.S. Government budgetary pressures, more specifically, Department of Defense (DoD) and NASA. Fitch expects ATK to further refine its cash deployment strategies following the resolution of sequestration. On Jan. 31, 2012, ATK's Board of Directors authorized a share repurchase program of up to $200 million worth of shares, which ATK expects to execute through 2013. This share repurchase program replaces the prior program authorized in 2008. During the first nine months of fiscal 2013 and during fiscal 2012, ATK repurchased 482thousand shares for approximately $25 million and 742 thousand shares for approximately $50 million, respectively. ATK has averaged approximately $127 million in capital expenditures over the past four years and spent approximately $122 million in fiscal 2012. ATK anticipates spending approximately $100 million in fiscal 2013. Fitch expects future capital expenditures to remain in line with fiscal 2013. ATK declared its first quarterly dividend in fiscal 2011. ATK paid dividends totaling approximately $27 million on its common stock during fiscal 2012. On Nov. 1, 2012, the Board of Directors declared a $0.26 per share quarterly cash dividend, a 30% increase from the previously announced dividend. During the first nine months of fiscal 2013, ATK paid dividends of approximately $21.5 million. Fitch expects dividends to total approximately $30 million in fiscal 2013 and the dividend yield to increase in the near future. At the end of fiscal 2012, the company's pension plans were underfunded by $886 million equaling to a 71% funded status (compared to approximately $3 billion pension obligations obligation). Other post-employment benefit (OPEB) obligations totaled $154 million and were $98 million underfunded. In fiscal 2013, ATK has contributed $140 million to its defined benefit plans and is not required to make additional contributions in the fourth quarter of fiscal 2013. A discount rate of 4.9% was used to value ATK's pension obligations in fiscal 2012, and will likely be lowered at end of fiscal 2013 due to low interest rates prevailing in the financial markets. Fitch expects pension obligations to increase in at the end of fiscal 2013. On Feb. 4, 2013, ATK announced a change to its defined benefit pension plans. Effective July 1, 2013, eligible employees will earn benefits under a new cash balance pension formula which works similar to defined contribution pension plans. Also effective June 30, 2013, all defined benefits will be frozen and will remain unchanged going forward. Approximately 55% of ATK's employees will be affected by the change. Fitch views the change as credit positive as it will reduce ATK's future exposure to the interest rate volatility and funding requirement fluctuations associated with a defined benefit plan. Fitch expects pension contributions to be a large part of ATK's cash distribution policy in the near future. ATK's status as a defense contractor mitigates some of the risks associated with its pension obligations. Some of ATK's pension contributions are recoverable through government contracts because they qualify as allowable costs under government Cost Accounting Standards. Industry Overview: Approximately 48% of ATK's revenues are derived from the defense industry. High levels of defense spending currently support ATK's ratings, but the DoD budget environment is highly uncertain after fiscal 2013 because of large U.S. government budget deficits and the potential for large, automatic spending cuts beginning in fiscal 2013. Fitch expects 2013 to be a challenging year for the U.S. defense contractors. However, it does not anticipate a significant deterioration in ATK's credit profile. Sequestration continues to be a large threat in the near term, but Fitch's base case is that it could be avoided, at least in terms of the across the board nature of the cuts. However, DOD spending reductions are likely to be a part of any deal that avoids sequestration. The spending environment will likely continue to be uncertain through 2013. Also, most of the proposed spending 'cuts' are from projected budget growth and come off of the existing high spending levels - inflation adjusted spending will likely decline, but modestly, over 10 years. A key risk in the sector remains cash deployment to offset the impact on earnings from lower revenues. Fitch believes that modest declines in defense spending would not lead to negative rating actions given solid diversification of ATK's portfolio and increasing sales from the Sporting Group and higher exposure to commercial aircraft in the Aerospace Group. The exposure to DoD spending is also mitigated by ATK's good liquidity position and solid credit metrics. RATING SENSITIVITIES: Fitch is unlikely to consider a positive rating action in the near future due to significant uncertainties surrounding U.S. government budget and DoD spending. A negative rating action may be considered should the company's leverage increase due to a debt funded acquisition or if defense spending cuts have a more significant impact on the company's earnings and FCF than currently anticipated. Fitch has affirmed the following ratings: --Long-term IDR at 'BB+'; --Senior secured bank facility at 'BBB-'; --Convertible senior subordinated notes at 'BB'; --Senior subordinated notes at 'BB'.