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
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.
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.
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'.