NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions except share and per share data and unless otherwise indicated)
1. Summary of Significant Accounting Policies
Nature of Operations.
Orbital ATK, Inc. (the "Company") is an aerospace and defense systems company and supplier of related products to the U.S. Government, allied nations and prime contractors. The Company is headquartered in Dulles, Virginia and has operating locations throughout the United States. The Company was incorporated in Delaware in 1990.
On February 9, 2015, the Company completed a tax-free spin-off of and distribution (the "Distribution") of its former Sporting Group to its stockholders as a new public company called Vista Outdoor Inc. ("Vista Outdoor"). Immediately following the Distribution, the Company combined with Orbital Sciences Corporation ("Orbital") through the merger of a company subsidiary with Orbital (the "Orbital-ATK Merger"). As a result of the Distribution, the Sporting Group is reported as a discontinued operation for all prior periods presented.
Basis of Presentation.
The consolidated financial statements of the Company include all majority-owned affiliates. Intercompany transactions and accounts have been eliminated.
Fiscal Year.
Beginning January 1, 2016, the Company changed its fiscal year from the period beginning on April 1 and ending on March 31 to the period beginning on January 1 and ending on December 31. As a result, for the fiscal period ended December 31, 2015, in these consolidated statements, including the notes thereto, the financial results are for a nine-month transition period ended December 31, 2015 ("2015 transition period"). Audited results for the year ended December 31, 2017 and 2016 are for a twelve-month period.
Use of Estimates.
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires ("GAAP") management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ from those estimates.
Revenue Recognition.
The Company's sales come primarily from contracts with agencies of the U.S. Government and its prime contractors and subcontractors. The various U.S. Government customers, including the U.S. Navy, U.S. Army, NASA and the U.S. Air Force, make independent purchasing decisions. Consequently, each agency is regarded as a separate customer.
Contracts
— Substantially all of the Company's sales 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"). The majority of the Company's total revenue is accounted for using the cost-to-cost method of accounting.
Profits expected to be realized on contracts are based on management's 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 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 that include an allocation of overhead costs. In the period in which it is determined that a loss will be incurred on a contract, the entire amount of the estimated loss, based on gross profit along with general and administrative costs, 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. The cumulative effect of a change in estimate is recognized in the period a change in estimate occurs. The effect of the changes on future periods of contract performance is recognized as if the revised estimate had been used since contract inception or, in the case of contracts acquired in business combinations, from the date of acquisition.
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, termination of commercial contracts in the event of a lack of end user demand, 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 results of operations.
Generally, favorable changes in contract estimates recognized using the cumulative catch-up method of accounting represent margin improvement on programs where either estimated cost at completion was lower than previously
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
estimated or a change in contract scope on a program caused a higher profit rate. Conversely, the unfavorable changes in contract estimates represent margin declines on programs where either estimated cost at completion was higher than previously estimated or a change in contract scope on a program caused a lower profit rate.
Aggregate net changes in contract estimates recognized increased income before income taxes and noncontrolling interest by approximately
$105 million
(
$1.22
per diluted share) for the
year ended December 31, 2017
, approximately
$81 million
(
$1.00
per diluted share) for the
year ended December 31, 2016
, and approximately
$38 million
(
$0.43
per diluted share) in
the 2015 transition period
.
Estimated costs to complete on loss contracts at December 31, 2017 and 2016 are
$1,108 million
and
$1,333 million
, respectively.
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.
Other
— Sales not recognized under the long-term contract method 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.
Operating Expenses.
Research and development, selling and general and administrative costs are expensed in the period incurred. Research and development ("R&D") costs include costs incurred for experimentation and design testing. Company-funded R&D is primarily for the improvement of current products and for development of next-generation technology. Customer-funded R&D is comprised primarily of activities we conduct under contracts with the U.S. Government and its prime contractors. Selling costs include bid and proposal efforts related to products and services. Costs that are incurred pursuant to contractual arrangements are recorded over the period that revenue is recognized, consistent with the Company's contract accounting policy.
Environmental Remediation and Compliance.
Costs associated with environmental compliance, restoration and preventing future contamination that are estimable and probable are accrued and expensed, or capitalized as appropriate. Expected remediation, restoration and monitoring costs relating to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are accrued and expensed in the period that such costs become estimable. Liabilities are recognized for remedial and resource restoration activities when they are probable and the cost can be reasonably estimated. The Company expects that a portion of its environmental remediation costs will be recoverable under U.S. Government contracts and has recorded a receivable equal to the amounts the Company expects to recover.
The Company's engineering, financial and legal specialists estimate, based on current law and existing technologies, the cost of each environmental liability. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that other potentially responsible parties ("PRPs") will be able to fulfill their commitments at the sites where the Company may be jointly and severally liable. The Company's estimates for environmental obligations are dependent on, and affected by, the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, methods of remediation available, the technology that will be required, the outcome of discussions with regulatory agencies and other PRPs at multi-party sites, the number and financial viability of other PRPs, changes in environmental laws and regulations, future technological developments, and the timing of expenditures; accordingly, the Company periodically evaluates and revises such estimates based on expenditures against established reserves and the availability of additional information.
Cash Equivalents.
Cash equivalents are all highly liquid cash investments purchased with original maturities of
three
months or less.
Marketable Securities.
Investments in a common collective trust that primarily invests in fixed income securities are classified as available-for-sale securities and are recorded at fair value within other noncurrent assets on the consolidated balance sheet. Unrealized gains and losses are recorded in other comprehensive income ("OCI"). When such investments are sold, the unrealized gains or losses are reversed from OCI and recognized in the consolidated income statement.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Net Inventories.
Inventories are stated at the lower of cost or market. Inventoried costs relating to contracts in progress are stated at actual production costs, including factory overhead, initial tooling and other related costs incurred to date, reduced by amounts associated with recognized sales. Recorded amounts for raw materials, work in process and finished goods are generally determined using the average cost method.
Net Property, Plant and Equipment.
Property, plant and equipment is stated at cost and depreciated over estimated useful lives. Machinery and equipment is depreciated using the double declining balance method at most of the Company's facilities, and using the straight-line method at other Company facilities. Other depreciable property is depreciated using the straight-line method. Machinery and equipment is depreciated over
1
to
30
years and buildings and improvements is depreciated over
1
to
45
years. Leasehold improvements are depreciated over the shorter of the useful life of the asset or the length of the lease.
Property, plant and equipment is reviewed for impairment when indicators of potential impairment are present. When such impairment is identified, it is recorded as a loss in that period. Maintenance and repairs are charged to expense as incurred. Major improvements that extend useful lives are capitalized and depreciated. The cost and accumulated depreciation of property, plant and equipment retired or otherwise disposed of are removed from the related accounts, and any residual values are charged or credited to income.
Accounting for Goodwill and Identifiable Intangible Assets.
Goodwill
— Historically, the Company has tested goodwill for impairment on January 1 or upon the occurrence of events or changes in circumstances that indicate that the asset might be impaired. During 2015, the Company changed its fiscal year end to December 31st and as a result, has changed the timing of impairment testing, primarily in order to better align the timing with our annual operating plan, forecasting and budgeting process, to the first day of the fourth quarter and whenever events or circumstances indicate that the carrying value of goodwill may not be recoverable. The 2017 impairment analysis date was on October 2nd and the 2016 impairment analysis was October 3rd. The Company 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.
The impairment test is performed using a
two
-step process. In the first step, the Company estimates the 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 fair value, an indication of goodwill impairment exists and the second step is performed in order to determine the amount of the goodwill impairment. In the second step, the Company determines the implied fair value of the reporting unit's goodwill which it determines by allocating the estimated 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 is recognized for the excess.
Identifiable Intangible Assets
— The Company's primary identifiable intangible assets consist of contract backlog intangible assets recorded as part of the Orbital-ATK Merger. Identifiable intangible assets with finite lives are amortized and evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangibles with indefinite lives are not amortized, if applicable, and are tested for impairment annually on the first day of the fourth quarter, or more frequently if events warrant.
Treasury Stock.
Shares of Company common stock repurchased under the Company’s share repurchase program are held as treasury stock. Treasury stock is accounted for using the cost method. Shares held in treasury may be reissued to satisfy (i) the vesting of performance awards, total stockholder return performance awards ("TSR awards") and restricted stock units, (ii) the grant of restricted stock and (iii) the exercise of stock options. When treasury stock is reissued, the value is determined using a weighted-average basis.
Stock-based Compensation.
The Company's stock-based compensation plans, which are described more fully in Note 17,
Stock Based Compensation
, provide for the grant of various types of stock-based incentive awards, including performance awards, total stockholder return performance awards ("TSR awards"), restricted stock and options to purchase common stock. The types and mix of stock-based incentive awards are evaluated on an ongoing basis and may vary based on the Company's overall strategy regarding compensation, including consideration of the impact of expensing stock awards on the Company's results of operations.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Performance awards are valued at the fair value of the Company stock at the grant date and expense is recognized based on the number of shares expected to vest under the terms of the award under which they are granted. The Company uses an integrated Monte Carlo simulation model to determine the fair value of the TSR awards and the calculated fair value is recognized in income over the vesting period, which approximates the service period. Restricted stock issued vests over periods ranging from
one
to
three
years and is valued based on the market value of the Company stock on the grant date. The estimated grant date fair value of stock options is recognized in income on a straight-line basis over the requisite service period, generally
one
to
three
years. The estimated fair value of each option is calculated using the Black-Scholes option-pricing model.
Restructuring Costs.
In fiscal 2015 and during the 2015 transition period, the Company executed business restructuring initiatives aimed at reducing the Company's fixed cost structure. The remaining restructuring liability for these actions relates primarily to lease losses on terminated leases and was
$16 million
at December 31, 2017 and
$20 million
at December 31, 2016. The change in the liability was primarily due to cash payments. No additional charges are expected for these actions.
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 taxes and evaluating tax positions. The Company 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 the Company'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 those positions are also recorded in the consolidated financial statements. To the extent the Company's assessment of the tax outcome of these matters changes, such change in estimate will impact income taxes in the period of the change. It is the Company's policy to record any interest and penalties related to income taxes as part of the income taxes 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, the Company takes into account the amount and character of the income to determine if the carryforwards will be realized. Significant estimates and judgments are required for this analysis. Changes in the amounts of valuation allowance are recorded in tax expense in the period when the change occurs. For information on the effect of the Tax Cuts and Jobs Act (the "Tax Act") that was signed into law in December 2017, see Note 14,
Income Taxes
.
Derivative Instruments and Hedging Activities.
From time to time, the Company uses derivative instruments, consisting mainly of commodity forward contracts to hedge forecasted purchases of certain commodities, foreign currency exchange contracts to hedge forecasted transactions denominated in a foreign currency and interest rate swaps to manage interest rate risk on debt. The Company does not hold or issue derivatives for trading purposes. At the inception of each derivative instrument, the Company documents the relationship between the derivative instrument and the hedged item, as well as its risk-management objectives and strategy for undertaking the hedge transaction. The Company assesses, both at the derivative's inception and on an ongoing basis, whether the derivative instrument is highly effective in offsetting changes in the fair value of the hedged item. Derivatives are recognized on the balance sheet at fair value. The effective portion of changes in fair value of derivatives designated as cash flow hedges are recorded to accumulated OCI and recognized in earnings in the same account in which the hedged item is recognized when the hedged item impacts earnings, and the cash flows from the effective portion of cash flow hedges are classified in the same section of the cash flows as the hedged item. The ineffective portion of derivatives designated as cash flow hedges and changes in fair value of derivative instruments not designated in a qualifying hedging relationship are reflected in current earnings, and the cash flows from the ineffective portion of cash flow hedges are classified as investing activities. The Company's current derivatives are designated as cash flow hedges. See Note
3
,
Derivative Financial Instruments
for further details.
Earnings Per Share Data.
Basic earnings per share ("EPS") is computed based upon the weighted-average number of common shares outstanding for each period. Diluted EPS is computed based on the weighted-average number of common shares and common equivalent shares outstanding for each period. Common equivalent shares represent the effect of stock-based awards (see Note
17
,
Stock-Based Compensation
) during each period presented, which, if exercised or earned, would have a dilutive effect on earnings per share.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Non-financial Instruments.
The carrying amounts of receivables, inventory, accounts payable, accrued liabilities and other current assets and liabilities, approximate fair values due to the short maturity of these instruments. See Note
2
,
Fair Value of Financial Instruments
, for additional disclosure regarding fair value of financial instruments.
Accounting Standards Updates Adopted.
During the year ended December 31, 2017, the Company adopted the following Accounting Standard Updates:
In October 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-17,
Consolidation (Topic 810), Interests Held through Related Parties That Are under Common Control
("ASU 2016-17"). This ASU amends the consolidation guidance issued under ASU 2015-02,
Consolidation (Topic 810) Amendments to the Consolidation Analysis,
for those entities that are the single decision maker of a variable interest entity ("VIE") such that a single decision maker is not required to consider indirect interests held through related parties that are under common control with the single decision maker to be the equivalent of direct interest in their entirety. Instead, they are required to include those interests on a proportionate basis consistent with indirect interests held through other related parties. The amendments in this ASU were effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Accounting Standards Updates Issued But Not Yet Adopted.
In August 2017, the FASB issued ASU 2017-12,
Targeted Improvements to Accounting for Hedging Activities
("ASU 2017-12"). The ASU amends Accounting Standard Codification ("ASC")
Topic 815
,
Derivatives and Hedging
, in order to simplify hedge accounting by better aligning an entity's financial reporting for hedging relationships with its risk management activities. The ASU also simplifies the application of the hedge accounting guidance. ASU 2017-12 is effective for annual periods beginning after December 15, 2018, and interim periods therein. The ASU will be applied utilizing a modified retrospective approach to existing hedging relationships as of the adoption date. The Company does not expect the provisions of ASU 2017-12 to have a material impact on the Company's consolidated financial position, results of operations and cash flows.
In May 2017, the FASB issued ASU 2017-09,
Modification Accounting for Share-Based Payment Arrangements
("ASU 2017-09"), which identifies and provides guidance on the types of changes to share-based payment awards that an entity would be required to apply modification accounting under ASU 2016-09,
Stock Compensation
(
Topic 718
). Specifically, an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. ASU 2017-09 is effective for annual periods beginning after December 15, 2017 and will be applied prospectively to awards modified on or after the effective date. The Company does not expect the provisions of ASU 2017-09 to have a material impact on the Company's consolidated financial position, results of operations and cash flows.
In March 2017, the FASB issued ASU 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
("ASU 2017-07"). The ASU amends ASC
Topic 715, Compensation
—
Retirement Benefits
, to require employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic pension costs and net periodic postretirement benefit cost in operating expenses. The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. This guidance is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. Disclosures of the nature of and reason for the change in accounting principle are required in the first interim and annual periods of adoption. The Company is currently evaluating the provisions of ASU 2017-07 and its impact on the Company's consolidated financial position, results of operations and cash flows.
In February 2017, the FASB issued ASU 2017-06,
Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965), Employee Benefit Plan Master Trust Reporting
(“ASU 2017-06”). The ASU relates primarily to the reporting by an employee benefit plan for its interest in a master trust. The amendments in ASU 2017-06 are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. An entity should apply the amendments in ASU 2017-06 retrospectively to each period for which financial statements are presented. The Company does not expect the provisions of ASU 2017-06 to have a material impact on the Company's consolidated financial position, results of operations and cash flows.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
("ASU 2017-04")
,
which simplifies the accounting for goodwill impairments by eliminating Step 2 from the goodwill impairment test. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, versus determining an implied fair value in Step 2 to measure the impairment loss. ASU 2017-04 is effective for annual periods beginning after December 15, 2019. The Company does not expect the provisions of ASU 2017-04 to have a material impact on the Company's consolidated financial position, results of operations and cash flows.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which requires recognition of lease assets and lease liabilities for those leases classified as operating leases under previous U.S. GAAP. The new standard is effective for annual reporting periods beginning after December 15, 2018 with early adoption permitted. The Company currently is evaluating the potential changes from this ASU to its future financial reporting and disclosures.
During 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230)
,
Classification of Certain Cash Receipts and Cash Payments
and ASU 2016-18,
Statement of Cash Flows
(Topic 230),
Restricted Cash
. These ASUs clarify how entities should classify certain cash receipts and cash payments on the statement of cash flows and requires that the statement of cash flows explain the change during the period in the total cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. These standards will be adopted on January 1, 2018 and are not expected to have a material impact on the Company's consolidated statement of cash flows.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606)
, which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The new standard is effective for annual reporting periods beginning after December 15, 2017. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which such company expects to be entitled in exchange for those goods or services. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application.
The Company will adopt the standard on January 1, 2018 and apply the modified retrospective method. The Company has completed its analysis of ASU 2014-09, and the associated impact on the Company's business processes, systems and internal controls. As part of this analysis, the Company compared existing policies and procedures to the requirements of the standard and prepared modifications to ensure appropriate application of the standard. Additionally, the Company has designed and implemented specific controls over the adoption of the new standard. The Company did not experience significant changes to current controls. The Company is finalizing its assessment of the quantitative impact of adopting ASU 2014-09. The current anticipated financial impact of adoption is a reduction to retained earnings of approximately
$325 million
, a reduction to unbilled accounts receivable of approximately
$475 million
and increases in inventory and other current assets of approximately
$150 million
. The primary area of anticipated change relates to the determination of performance obligations in a contract. While not impacting the total amount of revenue recognized over the life of a contract, this determination will alter the timing of revenue recognition for certain contracts in the Company's portfolio. In addition, the Company will present expanded disclosures related to revenues and contracts with customers as required by ASU 2014-09.
Under ASU 2014-09, revenue is recognized as the Company satisfies a performance obligation by transferring control to the customer. For performance obligations satisfied over time, the objective is to measure progress in a manner which depicts the performance of transferring control to the customer. As such, the Company expects contract revenue will generally be recognized over time using a cost incurred input measure. This is consistent with the percentage of completion cost-to-cost revenue recognition model currently used for the majority of the Company's contracts.
Other new pronouncements issued but not effective for the Company until after December 31, 2017 are not expected to have a material impact on the Company's continuing financial position, results of operations and cash flows.
2. Fair Value of Financial Instruments
The current authoritative guidance on fair value clarifies the definition of fair value, prescribes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about the use of fair value measurements. Fair value is defined as the price that would be
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The valuation techniques required by the current authoritative literature are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1—Quoted prices for identical instruments in active markets.
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3—Significant inputs to the valuation model are unobservable.
The following section describes the valuation methodologies used by the Company to measure its financial instruments at fair value.
Derivative financial instruments and hedging activities
— In order to manage its exposure to commodity pricing and foreign currency risk, the Company periodically utilizes commodity and foreign currency derivatives, which are considered Level 2 instruments. As discussed further in Note
3
,
Derivative Financial Instruments
, the Company has outstanding commodity forward contracts that were entered into to hedge forecasted purchases of copper and zinc, as well as outstanding foreign currency forward contracts that were entered into to hedge forecasted transactions denominated in a foreign currency. Commodity derivatives are valued based on prices of futures exchanges and recently reported transactions in the marketplace. The Company currently holds
one
interest rate swap with a total notional value of
$100 million
. The swap is valued based on future LIBOR, and the established fixed rate is based primarily on quotes from banks. Foreign currency derivatives are valued based on observable market transactions of spot currency rates and forward currency prices.
Long-term Debt
— The fair value of the variable rate long-term debt is calculated based on current market rates for debt of the same risk and maturities. The fair value of the fixed rate debt is based on market quotes for each issuance. The Company considers these to be Level 2 instruments.
The Company's non-financial instruments measured at fair value on a non-recurring basis include goodwill, indefinite-lived intangible assets and long-lived tangible assets. The valuation methods used to determine fair value require a significant degree of management judgment to determine the key assumptions. As such, the Company generally classifies non-financial instruments as either Level 2 or Level 3 fair value measurements. At December 31, 2017 and 2016, the Company did not have any non-financial instruments measured at fair value on a non-recurring basis.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth, by level within the fair value hierarchy, the Company's financial assets and liabilities that are measured at fair value on a recurring basis
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Fair Value Measurements
Using Inputs Considered as
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
Derivatives
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
Derivatives
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Fair Value Measurements
Using Inputs Considered as
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
Derivatives
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
Derivatives
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Recorded carrying amount and fair value of debt was as follows
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Fixed rate debt
|
$
|
700
|
|
|
$
|
732
|
|
|
$
|
700
|
|
|
$
|
727
|
|
Variable rate debt
|
$
|
710
|
|
|
$
|
706
|
|
|
$
|
750
|
|
|
$
|
746
|
|
Investments in marketable securities
— The Company has investments in marketable securities held in a common collective trust ("CCT") that are primarily fixed income securities used to pay benefits under a nonqualified supplemental executive retirement plan for certain executives and highly compensated employees. Investments in a collective investment vehicle are valued by multiplying the investee company's net asset value per share, as determined by the investee company, with the number of units or shares owned at the valuation date. Net asset value per share is determined by the investee company's custodian or fund administrator by deducting from the value of the assets of the investee company all its liabilities and the resulting number is divided by the outstanding number of shares or units. Investments held by the CCT, including collateral invested for securities on loan, are valued on the basis of valuations furnished by a pricing service approved by the CCT's investment manager, which determines valuations using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders, or at fair value as determined in good faith by the CCT's investment manager. The fair value of these securities, not subject to leveling, is included within other noncurrent assets on the Company's consolidated balance sheet. The fair value of these securities is measured on a recurring basis and was
$15 million
and
$13 million
at
December 31, 2017
and
2016
, respectively.
3
. Derivative Financial Instruments
The Company is exposed to market risks arising from adverse changes in commodity prices affecting the cost of raw materials and energy, interest rates and foreign exchange risks. In the normal course of business, these risks are managed through a variety of strategies, including the use of derivative instruments.
Cash Flow Hedges
The Company periodically uses interest rate swaps to hedge forecasted interest payments and the risk associated with variable interest rates on long-term debt.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company entered into interest rate swaps during fiscal 2014 requiring fixed rate payments on a total notional amount of
$400 million
, of which
$100 million
remains outstanding, and receives one-month LIBOR. The fair value of interest rate swap agreements approximates the amount at which they could be settled, based on future LIBOR, and the established fixed rate is based primarily on quotes from banks.
Interest rate swap agreements entered into to manage interest costs and risk associated with variable interest rates outstanding at December 31, 2017 were as follows
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
Fair Value
|
|
Pay Fixed
|
|
Receive Floating
|
|
Maturity Date
|
Non-amortizing swap
|
|
$
|
100
|
|
|
$
|
—
|
|
|
1.69
|
%
|
|
1.57
|
%
|
|
August 2018
|
The amount to be paid or received under these swaps is recorded as an adjustment to interest expense.
The counterparties to the interest rate swap agreements expose the Company to credit risk in the event of nonperformance. However, at
December 31, 2017
, the outstanding swap agreements were in a net liability position which would require the Company to make the net settlement payments to the counterparties if the agreements were settled as of that date. The Company does not anticipate nonperformance by counterparties and does not hold or issue derivative financial instruments for trading purposes.
Commodity forward contracts are periodically used to hedge forecasted purchases of certain commodities. The contracts essentially establish a fixed price for the underlying commodity and are designated and qualify as effective cash flow hedges of purchases of the commodity. Ineffectiveness is calculated as the amount by which the change in the fair value of the derivatives exceeds the change in the fair value of the anticipated commodity purchases.
Commodity forward contracts outstanding that hedge forecasted commodity purchases were as follows:
|
|
|
|
|
|
|
|
(Amounts in millions of pounds)
|
|
December 31,
|
|
|
2017
|
|
2016
|
Copper
|
|
17
|
|
|
10
|
|
Zinc
|
|
6
|
|
|
3
|
|
Due to the customer contract requirements, the benefits associated with the commodity contracts may be passed on to the customer and not realized by the Company.
The Company enters into foreign currency forward contracts to hedge forecasted transactions, denominated in foreign currencies. These transactions qualify as effective cash flow hedges and are designated as such.
Ineffectiveness with respect to forecasted transactions is calculated based on changes in the forward rate until the anticipated purchase or cash receipt occurs; ineffectiveness of the hedge of the accounts payable is evaluated based on the change in fair value of its anticipated settlement.
As of December 31, 2017, the Company had the following outstanding Euro currency forward contracts in place:
|
|
|
|
|
|
|
|
|
|
(Amounts in millions of Euros)
|
|
December 31,
|
|
|
2017
|
|
2016
|
Euros Sold
|
|
€
|
7
|
|
|
€
|
33
|
|
Euros Purchased
|
|
36
|
|
|
45
|
|
The gains or losses on the commodity forward contracts are recorded in inventory as the commodities are purchased and in cost of sales when the related inventory is sold. The gains or losses on the foreign currency forward contracts are recorded in earnings when the related inventory is sold or customer cash receipts are received.
The fair values of the commodity and foreign currency forward contracts are recorded in other assets or liabilities, as appropriate, and the effective portion is reflected in accumulated other comprehensive income (loss) in the financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Fair values in the consolidated balance sheets related to derivative instruments designated as hedging instruments were as follows
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
Fair Value
|
|
Liability Derivatives
Fair Value
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
December 31, 2017
|
|
December 31, 2016
|
Commodity forward contracts
(1)
|
|
$
|
11
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency forward contracts
(1)
|
|
2
|
|
|
3
|
|
|
2
|
|
|
—
|
|
Foreign currency forward contracts
(2)
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Interest rate swap contracts
(2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Total
|
|
$
|
13
|
|
|
$
|
9
|
|
|
$
|
2
|
|
|
$
|
1
|
|
____________________________________________________________
(1)
Location - Other current assets/Other current liabilities
(2)
Location - Other noncurrent assets/Other noncurrent liabilities
Gains and (losses) reclassified from Accumulated Other Comprehensive Loss to the consolidated statements of comprehensive income related to derivative instruments were as follows
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
Commodity forward contracts
|
|
Cost of sales
|
|
$
|
2
|
|
|
$
|
(3
|
)
|
Interest rate swap contracts
|
|
Interest expense
|
|
(1
|
)
|
|
(3
|
)
|
Foreign currency forward contracts
|
|
Cost of sales
|
|
4
|
|
|
—
|
|
The Company expects the remaining unrealized losses will be realized and reported in cost of sales or interest expense depending on the type of contract consistent with realized gains and losses noted in the table above. Estimated and actual gains or losses will change as market prices change.
The Company performs assessments of the effectiveness of hedge instruments on a quarterly basis and determined the hedges to be highly effective.
There was no ineffective portion of derivative instruments and no derivatives were excluded from effectiveness testing during the years ended December 31, 2017 and December 31, 2016; accordingly, the Company did not recognize any related gains or losses in the income statement.
All derivatives used by the Company during the periods presented were designated as hedging instruments for accounting purposes.
4
. Mergers and Divestiture
Northrop Grumman.
On September 17, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Northrop Grumman Corporation (“Northrop Grumman”) and Neptune Merger, Inc., a wholly owned subsidiary of Northrop Grumman (“Sub”), under which Sub will merge with and into the Company,
with the Company continuing as the surviving corporation and a wholly-owned subsidiary of Northrop Grumman (the “Merger”).
Upon the closing of the Merger, each outstanding share of Company common stock, other than shares owned by the Company, Northrop Grumman or Sub (which will be canceled) and appraisal shares, will automatically be converted into the right to receive
$134.50
in cash, without interest and less any applicable withholding taxes.
The stockholders of the Company voted in favor of approving the Merger Agreement at a special meeting held on November 29, 2017. Closing remains subject to customary closing conditions, including obtaining required
regulatory approvals. The Company received a request for additional information from the Federal Trade Commission ("FTC") on December 6, 2017.
Orbital.
On February 9, 2015, the Company completed the spin-off and Distribution of its former Sporting Group to its stockholders and merged with Orbital pursuant to a transaction agreement dated April 28, 2014 (the "Transaction Agreement"). Both the Distribution and Orbital-ATK Merger were structured to be tax-free to U.S. stockholders for U.S. federal income tax purposes. Under the Transaction Agreement, a subsidiary of the Company merged with and into Orbital, with Orbital continuing as a wholly-owned subsidiary of the Company.
Ongoing Business with Vista Outdoor
In conjunction with the Distribution of the Company's former Sporting Group
,
the Company entered into
two
supply agreements and
one
Transition Services Agreement ("TSA") with Vista Outdoor. The supply agreements call for Vista Outdoor to purchase certain minimum quantities of ammunition and gun powder from the Company through 2018 or 2017, as applicable. The supply agreements, which are priced at arms-length, expire in 2018 for the ammunition agreement with the gun powder agreement expiring in 2017. The supply agreements had an option to be extended in one-to-three year increments. The agreements were not extended and expired or will expire according to their original terms. Under the terms of the TSA, the Company provided Vista Outdoor with administrative services for
12
months following the Distribution and provided tax-related services for
18
months following the Distribution, extendable to
30
months. At the option of Vista Outdoor, the Company is currently providing tax-audit related services. Fees for services under the TSA are charged to Vista Outdoor.
Sales to Vista Outdoor under the
two
supply agreements, reported within Defense Systems Group, were
$181 million
for the
year ended December 31, 2017
,
$238
million for the year ended December 31, 2016 and
$138 million
for the 2015 transition period.
5
. Net Receivables
Net receivables, including amounts due under long-term contracts, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(in millions)
|
Billed receivables
|
|
|
|
|
U.S. Government contracts
|
|
$
|
159
|
|
|
$
|
132
|
|
Commercial and other
|
|
92
|
|
|
112
|
|
Unbilled receivables
|
|
|
|
|
U.S. Government contracts
|
|
850
|
|
|
806
|
|
Commercial and other
|
|
793
|
|
|
691
|
|
Less allowance for doubtful accounts
|
|
(1
|
)
|
|
—
|
|
Net receivables
|
|
$
|
1,893
|
|
|
$
|
1,741
|
|
Receivable balances are shown net of customer progress payments received of
$697 million
at
December 31, 2017
and
$601 million
at
December 31, 2016
.
Unbilled receivables represent the balance of recoverable costs and accrued profit, comprised principally of revenue recognized on contracts for which billings have not been presented to the customer because the amounts were earned but not contractually billable at the balance sheet date. These amounts include expected additional billable general overhead costs and fees on flexibly priced contracts awaiting final rate negotiations.
Progress payments received from customers relating to the uncompleted portions of contracts are offset against unbilled receivable balances or applicable inventories. Any remaining progress payment balances are classified as contract advances.
At December 31, 2017 and 2016, the aggregate amount of contract-related unbilled receivables the Company does not expect to collect within the next 12 months was
$275 million
and
$287 million
, respectively.
The Company records an allowance for doubtful accounts, reducing the receivables balance to an amount the Company estimates is collectible from customers. Estimates used in determining the allowance for doubtful accounts are based on current trends, aging of accounts receivable, periodic credit evaluations of customers' financial condition and historical collection experience.
6
. Net Inventories
Net inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(in millions)
|
Raw materials
|
|
$
|
89
|
|
|
$
|
93
|
|
Work/contracts in process
|
|
113
|
|
|
121
|
|
Finished goods
|
|
19
|
|
|
1
|
|
Net inventories
|
|
$
|
221
|
|
|
$
|
215
|
|
7
. Net Property, Plant and Equipment
Net property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(in millions)
|
Land
|
|
$
|
29
|
|
|
$
|
29
|
|
Buildings and other improvements
|
|
412
|
|
|
383
|
|
Machinery, equipment and other
|
|
1,432
|
|
|
1,313
|
|
Property not yet in service
|
|
280
|
|
|
212
|
|
Gross property, plant and equipment
|
|
2,153
|
|
|
1,937
|
|
Less accumulated depreciation
|
|
(1,219
|
)
|
|
(1,121
|
)
|
Net property, plant and equipment
|
|
$
|
934
|
|
|
$
|
816
|
|
Depreciation expense was
$118 million
for the
year ended December 31, 2017
,
$116 million
in the
year ended December 31, 2016
and
$89 million
in
the 2015 transition period
.
8
. Goodwill and Net Intangibles
Changes in goodwill by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight Systems Group
|
|
Defense Systems Group
|
|
Space Systems Group
|
|
Total
|
|
|
(in millions)
|
Balance, December 31, 2015
|
|
$
|
923
|
|
|
$
|
363
|
|
|
$
|
542
|
|
|
$
|
1,828
|
|
Measurement period adjustments
|
|
6
|
|
|
—
|
|
|
(2
|
)
|
|
4
|
|
Balance, December 31, 2016
|
|
929
|
|
|
363
|
|
|
540
|
|
|
1,832
|
|
Adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at December 31, 2017
|
|
$
|
929
|
|
|
$
|
363
|
|
|
$
|
540
|
|
|
$
|
1,832
|
|
The goodwill impairment analysis conducted for the years ended December 31, 2017 and 2016 and for the 2015 transition period concluded there were no impairments.
Goodwill recorded within Defense Systems Group and Space Systems Group is presented net of accumulated impairment losses totaling
$4 million
and
$143 million
, respectively, at
December 31, 2017
.
Net intangibles consisted of the following amortizing intangibles:
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Total
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Total
|
|
(in millions)
|
Contract backlog
|
$
|
173
|
|
|
$
|
(115
|
)
|
|
$
|
58
|
|
|
$
|
173
|
|
|
$
|
(79
|
)
|
|
$
|
94
|
|
Patented technology
|
11
|
|
|
(8
|
)
|
|
3
|
|
|
11
|
|
|
(7
|
)
|
|
4
|
|
Customer relationships and other
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
(2
|
)
|
|
—
|
|
Net intangibles
|
$
|
184
|
|
|
$
|
(123
|
)
|
|
$
|
61
|
|
|
$
|
186
|
|
|
$
|
(88
|
)
|
|
$
|
98
|
|
The contract backlog asset in the table above is being amortized as underlying costs are recognized under the contract. The other assets in the table above are being amortized using a straight-line method. Amortization expense related to these assets was $
37 million
for the
year ended December 31, 2017
,
$43 million
for the
year ended December 31, 2016
and
$33 million
in
the 2015 transition period
.
Scheduled amortization is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Backlog
|
|
Patented Technology
|
|
Total
|
|
|
(in millions)
|
2018
|
|
$
|
25
|
|
|
$
|
1
|
|
|
$
|
26
|
|
2019
|
|
22
|
|
|
1
|
|
|
23
|
|
2020
|
|
11
|
|
|
1
|
|
|
12
|
|
2021
|
|
—
|
|
|
—
|
|
|
—
|
|
2022
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
58
|
|
|
$
|
3
|
|
|
$
|
61
|
|
9
. Other Current Liabilities
Other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(in millions)
|
Employee benefits and insurance
|
|
$
|
81
|
|
|
$
|
74
|
|
Deferred lease obligation
|
|
2
|
|
|
2
|
|
Interest
|
|
10
|
|
|
10
|
|
Accrued tax liabilities
|
|
26
|
|
|
28
|
|
Environmental liability
|
|
5
|
|
|
6
|
|
Other
|
|
86
|
|
|
63
|
|
Total other current liabilities
|
|
$
|
210
|
|
|
$
|
183
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10
. Long-term Debt
Long-term debt, including the current portion, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(in millions)
|
Senior Credit Facility:
|
|
|
|
|
Term Loan A due 2020
|
|
$
|
710
|
|
|
$
|
750
|
|
Revolving Credit Facility due 2020
|
|
—
|
|
|
—
|
|
5.25% Senior Notes due 2021
|
|
300
|
|
|
300
|
|
5.50% Senior Notes due 2023
|
|
400
|
|
|
400
|
|
Carrying amount of long-term debt
|
|
1,410
|
|
|
1,450
|
|
Unamortized debt issuance costs:
|
|
|
|
|
Senior Credit Facility
|
|
4
|
|
|
5
|
|
5.25% Senior Notes due 2021
|
|
1
|
|
|
2
|
|
5.50% Senior Notes due 2023
|
|
4
|
|
|
5
|
|
Unamortized debt issuance costs
|
|
9
|
|
|
12
|
|
Long-term debt less unamortized debt issuance costs
|
|
1,401
|
|
|
1,438
|
|
Less: Current portion of long-term debt
|
|
40
|
|
|
40
|
|
Long-term debt
|
|
$
|
1,361
|
|
|
$
|
1,398
|
|
Senior Credit Facility
In September 2015, the Company refinanced its former senior credit facility (the "Former Senior Credit Facility") with a new senior credit facility (the "Senior Credit Facility"), which is comprised of a term loan of
$800 million
(the "Term Loan A") and a revolving credit facility of
$1,000 million
(the "Revolving Credit Facility"), both of which mature in 2020. The Term Loan A is subject to quarterly principal payments of
$10
million, with the remaining balance due at maturity. Substantially all tangible and intangible assets of the Company and certain domestic subsidiaries, excluding real property, are pledged as collateral under the Senior Credit Facility. Borrowings under the Senior Credit Facility bear interest at a per annum rate equal to either the sum of a base rate plus a margin or the sum of a LIBOR rate plus a margin. Borrowings under the Former Senior Credit Facility were charged 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 the Company's total leverage ratio. In compliance with the terms of the Senior Credit Facility, the current base rate margin is
0.25%
and the current LIBOR margin is
1.25%
. The weighted-average interest rate for the Term Loan A, after taking into account the interest rate swaps discussed below, was
2.84%
at
December 31, 2017
. The Company pays a quarterly commitment fee on the unused portion of the Revolving Credit Facility based on its total leverage ratio. Based on the Company's current total leverage ratio, this current fee is
0.20%
. At
December 31, 2017
, the Company had
no
borrowings outstanding on the Revolving Credit Facility and had outstanding letters of credit of
$240 million
, which reduced amounts available on the Revolving Credit Facility to
$760 million
.
As a result of the refinancing in September 2015, the Company recorded a charge
of
$10 million
, reported in net interest expense, to write off a portion of the unamortized debt issuance costs associated with the Former Senior Credit Facility. There are debt issuance costs totaling
$6 million
associated with the Former Senior Credit Facility in addition to debt issuance costs incurred related to the new Senior Credit Facility that are being amortized to interest expense over
five years
, the term of the Senior Credit Facility.
5.25%
Senior Notes
In fiscal 2014, the Company issued
$300
million 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. The Company has the right to redeem some or all of these notes on or after October 1, 2016, at specified redemption prices. Debt issuance costs of
$3
million related to these notes are being amortized to interest expense over
eight years
, the term of the notes.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5.50%
Senior Notes
In September 2015, the Company issued
$400
million aggregate principal amount of
5.50%
Senior Notes (the "
5.50%
Notes") that mature on October 1, 2023. These notes are general unsecured obligations. Interest on these notes is payable on April 1 and October 1 of each year. The Company has the right to redeem some or all of these notes from time to time on or after October 1, 2018, at specified redemption prices. Debt issuance costs of
$6
million related to these notes are being amortized to interest expense over
eight years
, the term of the notes.
Interest Rate Swaps
In fiscal 2014, the Company entered into floating-to-fixed interest rate swap agreements in order to hedge the Company's forecasted interest payments on its outstanding variable rate debt, which has included the term loans associated with the Senior Credit Facility and Former Senior Credit Facility.
At
December 31, 2017
, the Company had the following cash flow hedge interest rate swaps in place:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
Fair Value
|
|
Pay Fixed
|
|
Receive Floating
|
|
Maturity Date
|
|
|
(in millions)
|
|
|
|
|
|
|
Non-amortizing swap
|
|
$
|
100
|
|
|
$
|
—
|
|
|
1.69
|
%
|
|
1.57
|
%
|
|
August 2018
|
The amount to be paid or received under these swaps is recorded as an adjustment to interest expense.
Rank and Guarantees
The
5.25%
Notes and the
5.50%
Notes are the Company's general unsecured and unsubordinated obligations and rank equally in right of payment with all of the Company's existing and future unsecured and unsubordinated indebtedness, rank senior in right of payment to all of the Company's existing and future subordinated indebtedness, and are effectively subordinated to all existing and future senior secured indebtedness, including the Senior Credit Facility, to the extent of the collateral. The
5.25%
Notes and the
5.50%
Notes are guaranteed on an unsecured basis, jointly and severally and fully and unconditionally, by substantially all of the Company's domestic subsidiaries. The Senior Credit Facility obligations are guaranteed on a secured basis, jointly and severally and fully and unconditionally, by substantially all of the Company's domestic subsidiaries. All of these guarantor subsidiaries are
100%
owned by the Company. The Company, exclusive of these guarantor subsidiaries, has no independent operations or material assets.
Scheduled Minimum Loan Payments
Scheduled minimum loan payments are as follows:
|
|
|
|
|
|
(in millions)
|
2018
|
$
|
40
|
|
2019
|
40
|
|
2020
|
630
|
|
2021
|
300
|
|
2022
|
—
|
|
Thereafter
|
400
|
|
Total
|
$
|
1,410
|
|
Covenants and Default Provisions
The Company's Senior Credit Facility and the indentures governing the
5.25%
Notes and the
5.50%
Notes impose restrictions on the Company, 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 the Company's ability to enter into sale-and-leaseback transactions. The
5.25%
Notes and
5.50%
Notes limit the aggregate sum of dividends, share repurchases and other designated restricted payments. The Senior Credit Facility also requires the Company to meet and maintain
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
specified financial ratios, including a minimum interest coverage ratio and a maximum consolidated total leverage ratio. The Company's debt agreements contain cross-default provisions so that noncompliance with the covenants within one debt agreement that would give rise to the right to accelerate repayment of any outstanding indebtedness could cause a default under other debt agreements as well. The Company's ability to comply with these covenants and to meet and maintain the financial ratios may be affected by events beyond its control. Borrowings under the Senior Credit Facility are subject to compliance with these covenants. The Company is in compliance with its credit agreement covenants as of
December 31, 2017
.
11
. Accumulated Other Comprehensive Loss
Changes in Accumulated Other Comprehensive Income (Loss) ("AOCI"), net of income taxes, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Derivatives
|
|
Pension and Other Post-
retirement Benefits
|
|
Available-for-sale Securities
|
|
Total
|
|
Derivatives
|
|
Pension and Other Post-
retirement Benefits
|
|
Available-for-sale Securities
|
|
Total
|
|
(in millions)
|
Beginning of period unrealized gain (loss) in AOCI
|
$
|
5
|
|
|
$
|
(771
|
)
|
|
$
|
2
|
|
|
$
|
(764
|
)
|
|
$
|
(3
|
)
|
|
$
|
(784
|
)
|
|
$
|
1
|
|
|
$
|
(786
|
)
|
Net increase in fair value of derivatives
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Net (gains) losses reclassified from AOCI, offsetting the price paid to suppliers
(1)
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Net actuarial losses reclassified from AOCI
(2)
|
—
|
|
|
82
|
|
|
—
|
|
|
82
|
|
|
—
|
|
|
79
|
|
|
—
|
|
|
79
|
|
Prior service costs reclassified from AOCI
(2)
|
—
|
|
|
(17
|
)
|
|
—
|
|
|
(17
|
)
|
|
—
|
|
|
(17
|
)
|
|
—
|
|
|
(17
|
)
|
Valuation adjustment for pension and postretirement benefit plans
|
—
|
|
|
(83
|
)
|
|
—
|
|
|
(83
|
)
|
|
—
|
|
|
(49
|
)
|
|
—
|
|
|
(49
|
)
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
End of period unrealized gain (loss) in AOCI
|
$
|
7
|
|
|
$
|
(789
|
)
|
|
$
|
2
|
|
|
$
|
(780
|
)
|
|
$
|
5
|
|
|
$
|
(771
|
)
|
|
$
|
2
|
|
|
$
|
(764
|
)
|
_________________________________________
|
|
(1)
|
Amounts related to derivative instruments that were reclassified from AOCI and recorded as a component of cost of sales or interest expense for each period presented.
|
|
|
(2)
|
Amounts related to pension and other postretirement benefits that were reclassified from AOCI and recorded as a component of net periodic benefit cost for each period presented (Note 13,
Employee Benefit Plans
).
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12
. Earnings per Share
The following is a reconciliation of the numerator and denominator used in the basic and diluted earnings per share ("EPS") calculations, with amounts in millions, except per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Nine Months Ended December 31, 2015
|
Numerator:
|
|
|
|
|
|
Income from continuing operations of Orbital ATK, Inc.
|
$
|
310
|
|
|
$
|
293
|
|
|
$
|
185
|
|
Income from discontinued operations
|
—
|
|
|
—
|
|
|
1
|
|
Net income attributable to Orbital ATK, Inc.
|
310
|
|
|
293
|
|
|
186
|
|
Earnings allocated to participating securities
|
—
|
|
|
—
|
|
|
—
|
|
Income available to common stockholders
|
$
|
310
|
|
|
$
|
293
|
|
|
$
|
186
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted-average shares of common stock
|
57.38
|
|
|
57.99
|
|
|
59.36
|
|
Dilutive effect of stock-based awards
|
0.53
|
|
|
0.47
|
|
|
0.56
|
|
Diluted weighted-average shares of common stock
|
57.91
|
|
|
58.46
|
|
|
59.92
|
|
Anti-dilutive stock options and other stock awards excluded from the calculation of diluted earnings per share
|
0.10
|
|
|
0.31
|
|
|
0.10
|
|
|
|
|
|
|
|
Net income per common share from:
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Continuing operations
|
$
|
5.39
|
|
|
$
|
5.05
|
|
|
$
|
3.12
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
0.02
|
|
Net income attributable to Orbital ATK, Inc.
|
$
|
5.39
|
|
|
$
|
5.05
|
|
|
$
|
3.14
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
5.34
|
|
|
$
|
5.01
|
|
|
$
|
3.09
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
0.02
|
|
Net income attributable to Orbital ATK, Inc.
|
$
|
5.34
|
|
|
$
|
5.01
|
|
|
$
|
3.11
|
|
Diluted earnings per share is calculated using net income available to common stockholders divided by the diluted weighted average number of common shares outstanding during each period determined using the treasury stock method.
13
. Employee Benefit Plans
The Company provides defined benefit pension plans and defined contribution plans for its employees. The Company has tax-qualified defined benefit plans, a supplemental (nonqualified) defined benefit pension plan, a defined contribution plan and a supplemental (non-qualified) defined contribution plan. A qualified plan meets the requirements of certain sections of the Internal Revenue Code and, generally, contributions to qualified plans are tax deductible. A qualified plan typically provides benefits to a broad group of employees and may not discriminate in favor of highly compensated employees in coverage, benefits or contributions. In addition, the Company provides medical and life insurance benefits to certain retirees and their eligible dependents through its postretirement plans.
Defined Benefit Plans
The Company's noncontributory defined benefit pension plans include the following legacy Alliant Techsystems Inc. plans: "Alliant Techsystems Inc. Pension and Retirement Plan" and "Thiokol Propulsion Pension Plan" (the "ATK Plans") and the legacy Orbital Sciences plans: "Fairchild Bargained Plan" and "Fairchild Space and Defense Plan" (the "Orbital Plans"). The Orbital Plans were merged into the Alliant Techsystems Inc. Pension and Retirement Plan on December 31, 2015 and the combined plan's name was changed to the "Orbital ATK, Inc. Pension and Retirement Plan." The Company's ongoing defined benefit pension plans are the Orbital ATK Inc. Pension and Retirement Plan and the Thiokol Propulsion Pension Plan (the "Orbital ATK Plans").
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company is required to reflect the funded status of the pension and other postretirement benefit ("PRB") plans on the consolidated balance sheet. The funded status of the plans is measured as the difference between the plan assets at fair value and the projected benefit obligation. The Company has recognized the aggregate of all underfunded plans within the accrued pension liability and postretirement and postemployment benefits liabilities. The Company has recognized the aggregate of all overfunded plans within other noncurrent assets. The portion of the amount by which the actuarial present value of benefits included in the projected benefit obligation exceeds the fair value of plan assets, payable in the next
12 months
, is reflected in other accrued liabilities.
Previously unrecognized differences between actual amounts and estimates based on actuarial assumptions are included in accumulated other comprehensive loss in the consolidated balance sheet and the difference between actual amounts and estimates based on actuarial assumptions has been recognized in other comprehensive income in the period in which they occur.
The Company's measurement date for remeasuring its plan assets and benefit obligations is December 31.
Pension Plans.
The ATK Plans are qualified noncontributory defined benefit pension plans that cover substantially all legacy ATK employees hired prior to January 1, 2007. Eligible legacy ATK non-union employees hired on or after January 1, 2007 and certain union employees are not covered by a defined benefit plan but receive an employer contribution through a defined contribution plan, discussed below. Prior to July 1, 2013 (January 1, 2014, January 1, 2015 and April 1, 2016 for certain union groups), the ATK Plans provided either pension benefits based on employee annual pay levels and years of credited service or stated amounts for each year of credited service. Effective July 1, 2013 and with certain collective bargaining agreements, pension benefits were frozen and a new cash balance formula applicable to pay and service was implemented. The cash balance formula provides each impacted employee with pay credits based on the sum of that employee's age plus years of pension service at December 31 of each calendar year, plus
4%
annual interest credits. The Orbital Plans were frozen in 1994 and no pension benefits are being accrued by those employees. The Company funds the Orbital ATK Plans in accordance with federal requirements calculated using appropriate actuarial methods. Depending on the plan they are covered by, employees generally vest after
three
or
five
years.
The Company also sponsors a nonqualified supplemental executive retirement plan which provides certain executives and highly compensated employees the opportunity to receive pension benefits in excess of those payable through tax-qualified pension plans. The benefit obligation of these plans is included in the pension information below.
Other Postretirement Benefit Plans.
Generally, employees who terminated employment from the Company on or before January 1, 2004 and were at least age
50
or
55
with at least
five
or
ten
years of service, depending on the provisions of the pension plan they are eligible for, are entitled to a pre- and/or post-65 health care company subsidy and retiree life insurance coverage. Employees who terminated employment after January 1, 2004, but before January 1, 2006, are eligible only for a pre-65 Company subsidy. The portion of the health care premium cost borne by the Company for such benefits is based on the pension plan the employees are eligible for, years of service and age at termination.
During the year ending December 31, 2016, the Company amended its retiree health care plan to provide coverage through a private exchange effective January 1, 2017. The exchange offers the retiree a broad choice of health care plans from which to choose. The Company will contribute fixed payments to a Health Retirement Account (HRA), when applicable, for those retirees that previously had subsidized health care coverage through the Company. The Company's contributions to the HRAs are retirees' funds to be spent on qualified health care premiums and eligible out-of-pocket expenses. This plan amendment caused a remeasurement that increased the Company's funded status by
$39 million
and will reduce expenses recorded in future periods.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table shows changes in the benefit obligation, plan assets and funded status of the Company's qualified and non-qualified pension plans and other PRB plans, including Orbital Plans. Benefit obligation balances presented below reflect the projected benefit obligation ("PBO") for pension plans and Accumulated PRB obligations ("APBO") or other PRB plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Year Ended
December 31, 2017
|
|
Year Ended December 31, 2016
|
|
|
(in millions)
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
|
$
|
2,926
|
|
|
$
|
2,953
|
|
|
$
|
69
|
|
|
$
|
114
|
|
Service cost
|
|
17
|
|
|
18
|
|
|
—
|
|
|
—
|
|
Interest cost
|
|
98
|
|
|
101
|
|
|
2
|
|
|
3
|
|
Plan amendments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(39
|
)
|
Actuarial loss (gain)
|
|
229
|
|
|
87
|
|
|
3
|
|
|
1
|
|
Retiree contributions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Benefits paid
|
|
(218
|
)
|
|
(233
|
)
|
|
(7
|
)
|
|
(15
|
)
|
Benefit obligation at end of period
|
|
3,052
|
|
|
2,926
|
|
|
67
|
|
|
69
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
2,208
|
|
|
2,190
|
|
|
61
|
|
|
60
|
|
Actual return on plan assets
|
|
277
|
|
|
131
|
|
|
4
|
|
|
4
|
|
Retiree contributions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Employer contributions
|
|
118
|
|
|
120
|
|
|
3
|
|
|
7
|
|
Benefits paid
|
|
(218
|
)
|
|
(233
|
)
|
|
(7
|
)
|
|
(15
|
)
|
Fair value of plan assets at end of period
|
|
2,385
|
|
|
2,208
|
|
|
61
|
|
|
61
|
|
Unfunded status
|
|
$
|
(667
|
)
|
|
$
|
(718
|
)
|
|
$
|
(6
|
)
|
|
$
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
(in millions)
|
Noncurrent assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
17
|
|
Other current liabilities
|
|
(4
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
(3
|
)
|
Postretirement benefit liabilities
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
|
(22
|
)
|
Pension liabilities
|
|
(663
|
)
|
|
(715
|
)
|
|
—
|
|
|
—
|
|
Net amount recognized
|
|
$
|
(667
|
)
|
|
$
|
(718
|
)
|
|
$
|
(6
|
)
|
|
$
|
(8
|
)
|
Accumulated other comprehensive loss (income) related to:
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial losses
|
|
$
|
1,376
|
|
|
$
|
1,398
|
|
|
$
|
16
|
|
|
$
|
15
|
|
Unrecognized prior service benefits
|
|
(90
|
)
|
|
(110
|
)
|
|
(36
|
)
|
|
(43
|
)
|
Accumulated other comprehensive loss (income)
|
|
$
|
1,286
|
|
|
$
|
1,288
|
|
|
$
|
(20
|
)
|
|
$
|
(28
|
)
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The estimated amount that will be amortized from AOCI into net periodic benefit cost in
2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other
Postretirement
Benefits
|
|
|
(in millions)
|
Recognized net actuarial losses
|
|
$
|
147
|
|
|
$
|
2
|
|
Amortization of prior service benefits
|
|
(20
|
)
|
|
(5
|
)
|
Total
|
|
$
|
127
|
|
|
$
|
(3
|
)
|
The accumulated benefit obligation for all defined benefit pension plans was
$3,052 million
at
December 31, 2017
and
$2,926 million
at
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(in millions)
|
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
|
|
|
|
|
Projected benefit obligation
|
|
$
|
3,052
|
|
|
$
|
2,926
|
|
Accumulated benefit obligation
|
|
$
|
3,052
|
|
|
$
|
2,926
|
|
Fair value of plan assets
|
|
$
|
2,385
|
|
|
$
|
2,208
|
|
Components of net periodic benefit cost were as follows
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Nine Months Ended December 31, 2015
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Nine Months Ended December 31, 2015
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
17
|
|
|
$
|
18
|
|
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
98
|
|
|
101
|
|
|
91
|
|
|
2
|
|
|
3
|
|
|
3
|
|
Expected return on plan assets
|
(157
|
)
|
|
(162
|
)
|
|
(120
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
(3
|
)
|
Amortization of unrecognized net loss
|
131
|
|
|
126
|
|
|
113
|
|
|
2
|
|
|
1
|
|
|
2
|
|
Amortization of unrecognized prior service benefit
|
(20
|
)
|
|
(21
|
)
|
|
(16
|
)
|
|
(7
|
)
|
|
(6
|
)
|
|
(5
|
)
|
Net periodic benefit cost before special termination benefits cost/curtailment
|
69
|
|
|
62
|
|
|
82
|
|
|
(6
|
)
|
|
(5
|
)
|
|
(3
|
)
|
Special termination benefits cost/curtailment
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
69
|
|
|
$
|
64
|
|
|
$
|
82
|
|
|
$
|
(6
|
)
|
|
$
|
(5
|
)
|
|
$
|
(3
|
)
|
The special termination benefits cost/curtailment cost in the table above represents a settlement expense to recognize the impact of lump sum benefit payments made in the non-qualified supplemental executive retirement plan.
At the end of the 2015 transition period, the Company changed the approach used to measure service and interest costs for pension and other postretirement benefits. For the 2015 transition period, the Company measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. For 2016 and 2017, the Company elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans' liability cash flows. The Company believes this approach provides a more precise measurement of service and interest costs by aligning the timing of the plans' liability cash
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our plan obligations. The Company accounted for this change as a change in accounting estimate and, accordingly, has accounted for it on a prospective basis.
Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Nine Months Ended December 31, 2015
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Nine Months Ended December 31, 2015
|
|
|
|
Weighted-average assumptions used to determine benefit obligations at the end of each period
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
3.65
|
%
|
|
4.14
|
%
|
|
4.40
|
%
|
|
3.36
|
%
|
|
3.62
|
%
|
|
3.98
|
%
|
Rate of compensation increase:
|
|
|
|
|
|
|
|
|
|
|
|
Union
|
2.90
|
%
|
|
3.11
|
%
|
|
3.13
|
%
|
|
|
|
|
|
|
Salaried
|
3.51
|
%
|
|
3.56
|
%
|
|
3.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Nine Months Ended December 31, 2015
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Nine Months Ended December 31, 2015
|
|
|
Weighted-average assumptions used to determine net periodic benefit cost for each period
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
4.14
|
%
|
|
4.40
|
%
|
|
3.90
|
%
|
|
3.63
|
%
|
|
3.98
|
%
|
|
3.55
|
%
|
Expected long-term rate of return on plan assets
|
7.00
|
%
|
|
7.25
|
%
|
|
7.25
|
%
|
|
4.00% / 6.00%
|
|
|
4.00% / 6.00%
|
|
|
5.00% / 6.25%
|
|
Rate of compensation increase:
|
|
|
|
|
|
|
|
|
|
|
|
Union
|
3.11
|
%
|
|
3.13
|
%
|
|
3.66
|
%
|
|
|
|
|
|
|
Salaried
|
3.56
|
%
|
|
3.60
|
%
|
|
3.14
|
%
|
|
|
|
|
|
|
In developing the expected long-term rate of return assumption, the Company considers input from its actuaries and other advisors, annualized returns of various major indices over a long-term time horizon and the Company's own historical
5
-year and
10
-year compounded investment returns. The expected long-term rate of return of
7.00%
used in the
year ended December 31, 2017
for the plans was based on an asset allocation range of
20 - 45%
in public equity investments,
35 - 50%
in fixed income investments,
0 - 10%
in real estate investments,
15 - 30%
collectively in hedge fund and private investments and
0 - 6%
in cash investments. The actual return in any fiscal year will likely differ from the Company's assumption, but the Company's estimate of its return is 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 developing the expected long-term rate of return assumption for other PRB plans, the Company considers input from actuaries, historical returns and annualized returns of various major indices over long periods. 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.
The Company amended its retiree health care plan to provide coverage through a private exchange effective January 1, 2017. The Company will contribute fixed payments to an HRA for those retirees who previously had subsidized health care coverage through the Company. As such, health care cost trend rates have no 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 no effect.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Plan Assets
Pension.
Pension plan weighted-average asset allocations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anticipated 2018
|
|
Actual
|
|
|
Low
|
|
High
|
|
December 31, 2017
|
|
December 31, 2016
|
Asset category:
|
|
|
|
|
|
|
|
|
Domestic equity
|
|
10.0
|
%
|
|
20.0
|
%
|
|
15.7
|
%
|
|
12.5
|
%
|
International equity
|
|
10.0
|
%
|
|
20.0
|
%
|
|
14.6
|
%
|
|
18.4
|
%
|
Fixed income
|
|
35.0
|
%
|
|
50.0
|
%
|
|
34.2
|
%
|
|
38.2
|
%
|
Real estate
|
|
2.0
|
%
|
|
6.0
|
%
|
|
3.6
|
%
|
|
3.5
|
%
|
Hedge funds/private equity
|
|
15.0
|
%
|
|
30.0
|
%
|
|
24.6
|
%
|
|
21.1
|
%
|
Other investments/cash
|
|
2.0
|
%
|
|
8.0
|
%
|
|
7.3
|
%
|
|
6.3
|
%
|
The Company has a committee which, assisted by outside consultants, evaluates the objectives and investment policies concerning its long-term investment goals and asset allocation strategies. Plan assets are invested in various asset classes that are expected to produce a sufficient level of diversification and investment return over the long term. The investment goals are (1) to meet or exceed the assumed actuarial rate of return over the long term within reasonable and prudent levels of risk, and (2) to preserve the real purchasing power of assets to meet future obligations. The nature and duration of benefit obligations, along with assumptions concerning asset class returns and return correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives. Pension plan assets for the Company's qualified pension plans are held in a trust for the benefit of the plan participants and are invested in a diversified portfolio of equity investments, fixed income investments, real asset investments, hedge funds, private equity and cash. Risk targets are established and monitored against acceptable ranges. All investment policies and procedures are designed to ensure that the plans' investments are in compliance with the Employee Retirement Income Security Act. Guidelines are established defining permitted investments within each asset class.
During the 2015 transition period, the Company implemented an investment strategy derived from the asset-liability study conducted during fiscal 2013. The results of the asset-liability study reinforced the emphasis on managing the volatility of pension assets relative to pension liabilities while still achieving a competitive investment return, achieving diversification between and within various asset classes and managing other risks. In order to manage the volatility between the value of pension assets and liabilities, the Company has maintained an allocation to long-duration fixed income investments. The Company regularly reviews its actual asset allocation and periodically rebalances its investments to the targeted allocation when considered appropriate. Target allocation ranges are guidelines, not limitations, and occasionally due to market conditions and other factors actual asset allocation may vary above or below a target.
The implementation of the investment strategy discussed above is executed through a variety of investment structures such as: direct share or bond ownership, common/collective trusts or registered investment companies. Valuation methodologies differ for each of these structures. The valuation methodologies used for these investment structures are as follows:
U.S. Government Securities, Corporate Debt, Common Stock and Registered Investment Companies:
Investments are valued at the closing price reported on the active market on which the individual securities are traded.
Common/Collective Trusts:
Investments in a collective investment vehicle are valued by multiplying the investee company's net asset value per share with the number of units or shares owned at the valuation date as determined by the investee company. Net asset value per share is determined by the investee company's custodian or fund administrator by deducting from the value of the assets of the investee company all of its liabilities and the resulting number is divided by the outstanding number of shares or units. Investments held by the common/collective trusts ("CCT"), including collateral invested for securities on loan, are valued on the basis of valuations furnished by a pricing service approved by the CCT's investment manager, which determines valuations using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders, or at fair value as determined in good faith by the CCT's investment manager.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Partnership/Joint Venture Interests:
Given the inherent illiquidity of many partnership/joint venture investments, these investments are generally valued based on unobservable inputs that reflect the reporting entity's own assumptions about the assumptions that market participants would use pricing the asset. While the valuation methodologies may differ among each entity, the method for valuing these assets is primarily net asset values; other methods may include, but are not limited to, discounted cash flow analysis and comparable trading data for similar investments. The General Partner or Account Manager for these investments aggregates the values of underlying account securities and assets, then determines a final net asset value at the overall fund or account level and apportions that among the various investors by percentage of partnership or account ownership percentages.
Funds in Insurance Company Accounts:
These investments are valued at fair value by discounting the related cash flows based on current yields of similar instruments with comparable durations considering the credit-worthiness of the issuer.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Fair Value:
Pension plan investments using the fair value hierarchy consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
|
(in millions)
|
Interest-bearing cash
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
U.S. Government securities
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Corporate debt
|
|
—
|
|
|
147
|
|
|
—
|
|
|
147
|
|
Common stock
|
|
83
|
|
|
—
|
|
|
—
|
|
|
83
|
|
Registered investment companies
|
|
28
|
|
|
—
|
|
|
—
|
|
|
28
|
|
Value of funds in insurance company accounts
|
|
—
|
|
|
40
|
|
|
—
|
|
|
40
|
|
Total assets in the fair value hierarchy
|
|
$
|
115
|
|
|
$
|
189
|
|
|
$
|
—
|
|
|
$
|
304
|
|
Investments measured at NAV
|
|
|
|
|
|
|
|
|
|
2,081
|
|
Total investments
|
|
|
|
|
|
|
|
$
|
2,385
|
|
Pension plan investments using the fair value hierarchy consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
|
(in millions)
|
Interest-bearing cash
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
U.S. Government securities
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Corporate debt
|
|
—
|
|
|
138
|
|
|
—
|
|
|
138
|
|
Common stock
|
|
62
|
|
|
1
|
|
|
—
|
|
|
63
|
|
Registered investment companies
|
|
56
|
|
|
—
|
|
|
—
|
|
|
56
|
|
Value of funds in insurance company accounts
|
|
—
|
|
|
39
|
|
|
1
|
|
|
40
|
|
Total assets in the fair value hierarchy
|
|
$
|
121
|
|
|
$
|
180
|
|
|
$
|
1
|
|
|
$
|
302
|
|
Investments measured at NAV
|
|
|
|
|
|
|
|
|
|
|
1,906
|
|
Total investments
|
|
|
|
|
|
|
|
$
|
2,208
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
There were no material changes in Level 3 assets during the
year ended December 31, 2017
or the
year ended December 31, 2016
.
There was no direct ownership of the Company's common stock included in plan assets at any of the periods presented.
Other Postretirement Benefits.
The Company's other PRB obligations were
91.0%
and
88.4%
pre-funded at
December 31, 2017
and
December 31, 2016
, respectively.
Portions of the assets are held in a 401(h) account held within the pension master trust and are invested in the same manner as the pension assets. Approximately
52%
and
47%
of the assets were held in the 401(h) account at
December 31, 2017
and
December 31, 2016
, respectively. The remaining assets are in fixed income investments. The Company's investment objective for the other PRB plan assets is the preservation and safety of capital.
Contributions
During the
year ended December 31, 2017
, the Company contributed
$115 million
directly to the Orbital ATK pension plans. The Company distributed
$3 million
directly to retirees under its supplemental (nonqualified) executive retirement plan and
$3 million
to its other PRB plans during the
year ended December 31, 2017
. The Company is not required to make any contributions to the Orbital ATK pension plans to meet its legally required minimum for
2018
. The Company also expects to distribute approximately
$4 million
directly to retirees under its supplemental executive retirement plans and to distribute approximately
$4 million
to its other postretirement benefit plans in
2018
.
Expected Future Benefit Payments
The following benefit payments, which reflect expected future service, are expected to be paid in the years ending December 31. The pension benefits will be paid primarily out of the pension trust.
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
|
|
(in millions)
|
2018
|
|
$
|
225
|
|
|
$
|
8
|
|
2019
|
|
197
|
|
|
7
|
|
2020
|
|
200
|
|
|
7
|
|
2021
|
|
203
|
|
|
7
|
|
2022
|
|
203
|
|
|
6
|
|
2023 through 2027
|
|
994
|
|
|
24
|
|
Termination
In the event the Company terminates any of the plans under conditions in which the plan's assets exceed that plan's obligations, U.S. Government regulations require that a fair allocation of any of the plan's assets based on plan contributions that were reimbursed under U.S. Government contracts will be returned to the U.S. Government.
Defined Contribution Plan
Through December 31, 2015, the Company also sponsored
two
defined contribution plans - the Alliant Techsystems Inc. 401(k) Plan and the Deferred Salary and Profit Sharing Plan for Employees of Orbital Sciences Corporation (the "Orbital Sciences 401(k) Plan"). Participation in these plans was available to substantially all U.S. employees. Effective January 1, 2016, the Orbital Sciences 401(k) Plan merged into the Alliant Techsystems Inc. 401(k) Plan, and the combined plan's name was changed to the Orbital ATK, Inc. 401(k) Plan.
The Orbital ATK, Inc. 401(k) Plan is a 401(k) plan, with an employee stock ownership ("ESOP") feature. Employees may contribute up to
50%
of their pay (highly compensated employees are subject to limitations). Employee contributions are invested, at the employees' direction, among a variety of investment alternatives including a Company common stock fund. Participants may transfer amounts into and out of the investment alternatives at any time, except for the Company common stock fund. Effective January 1, 2013, employees no longer had the option to invest in the Company common stock fund, other than for the reinvestment of dividends paid on the Company
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
common stock in participants' accounts. Balances in the fund prior to January 1, 2013 remain in the fund unless distributed or transferred. Any dividends declared on the Company common stock can be either reinvested within the Company common stock fund or provided as a cash payment.
The Company matching contributions and non-elective contribution to this plan are summarized below:
|
|
•
|
a matching contribution of
100%
of the first
3%
of the participant's contributed pay plus
50%
of the next
3%
of the participant's contributed pay for most employees (subject to
one
-year vesting), or
|
|
|
•
|
a matching contribution of
100%
of the first
6%
of the participant's contributed pay for Technical Services Division employees (subject to
one
-year vesting), or
|
|
|
•
|
a non-elective contribution based on the recognized compensation, age and service for most employees who are not earning a pension benefit (subject to
three
-year vesting).
|
The Company's contributions to the 401(K) plan were
$73 million
in the
year ended December 31, 2017
,
$56 million
in the
year ended December 31, 2016
and
$41 million
in
the 2015 transition period
. The Company also made a contribution to the 401(k) plan of
$4 million
in fiscal 2016 for a prior Orbital Sciences 401(k) Plan annual discretionary profit sharing contribution based on the participant's compensation earned prior to the merger.
14
. Income Taxes
On December 22, 2017, the Tax Act was signed into law. The Tax Act changes existing United States tax law and includes numerous provisions that will impact the Company, including reducing the corporate tax rate to 21% from 35% for years beginning after December 31, 2017. The Tax Act also introduces prospective changes beginning in 2018, including repeal of the domestic manufacturing deduction, acceleration of tax revenue recognition and additional limitations on executive compensation. The Company is continuing to evaluate the impact of the Tax Act on our business and results of operations.
In accordance with Staff Accounting Bulletin No. 118 ("SAB 118"), which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the Tax Act was signed into law, the Company recognized the income tax effects of the Tax Act in its 2017 financial statements. The income tax effects of the Tax Act that have been accounted for in 2017 are based on reasonable estimates. If the Company was able to make reasonable estimates for the effects of the Tax Act for which the Company's analysis was not complete, the Company recorded provisional adjustments in accordance with SAB 118.
The Company believes the reduction of the U.S. corporate income tax rate as a result of the Tax Act will have the most significant impact on the Company’s federal income taxes. The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. The company recognized income tax expense of
$39 million
for the year ended December 31, 2017 and a corresponding
$39 million
decrease in net deferred tax assets as of December 31, 2017 related to the remeasurement of deferred tax assets and liabilities to reflect the reduction in the U.S. corporate income tax rate from 35% to 21%, both which are complete under SAB 118.
The Company’s accounting for the following effects of the Tax Act are not complete: (1) cost recovery, (2) limitation on the deductibility of certain executive compensation, (3) recovery of Alternative Minimum Tax credits and (4) valuation allowances against state tax attribute carryforwards. The Company was able to make reasonable estimates of certain effects and, therefore recorded provisional adjustments for such effects, none of which were material. The Company expects to finalize all provisional and non-estimable amounts within the measurement period as described in SAB 118.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Income Tax Expense
Substantially all of the Company’s income from continuing operations before income taxes for the three years ended December 31, 2017 was earned in the United States. The provision for income taxes related to continuing operations for each of the three years ended December 31, 2017 included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Nine Months Ended December 31, 2015
|
|
|
(in millions)
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
75
|
|
|
$
|
63
|
|
|
$
|
28
|
|
State
|
|
9
|
|
|
2
|
|
|
2
|
|
Non-US
|
|
—
|
|
|
4
|
|
|
—
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
72
|
|
|
39
|
|
|
55
|
|
State
|
|
(4
|
)
|
|
3
|
|
|
2
|
|
Income taxes
|
|
$
|
152
|
|
|
$
|
111
|
|
|
$
|
87
|
|
Differences between the federal statutory rate and the Company's effective rate related to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Nine Months Ended December 31, 2015
|
Statutory federal income tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal impact
|
|
3.3
|
|
|
2.8
|
|
|
2.1
|
|
Domestic manufacturing deduction
|
|
(1.9
|
)
|
|
(2.3
|
)
|
|
(1.5
|
)
|
True-up of prior year taxes
|
|
(3.2
|
)
|
|
(2.6
|
)
|
|
0.1
|
|
Research and development tax credit
|
|
(9.3
|
)
|
|
(12.6
|
)
|
|
(5.2
|
)
|
Change in prior year contingent tax liabilities
|
|
(1.3
|
)
|
|
0.1
|
|
|
1.0
|
|
Impacts related to the 2017 Tax Act
|
|
8.4
|
|
|
—
|
|
|
—
|
|
Other, net
|
|
(0.1
|
)
|
|
0.1
|
|
|
(1.2
|
)
|
Change in valuation allowance
|
|
2.1
|
|
|
7.0
|
|
|
1.6
|
|
Income tax provision
|
|
33.0
|
%
|
|
27.5
|
%
|
|
31.9
|
%
|
Deferred Income Taxes
Deferred income taxes arise because of temporary differences in the timing of the recognition of income and expense items for financial statement reporting and income tax purposes. The net effect of these temporary differences are classified in the consolidated financial statements of financial position as noncurrent assets or liabilities.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Deferred income tax assets and liabilities resulting from temporary differences related to the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(in millions)
|
Deferred income tax assets:
|
|
|
|
|
Retirement benefits
|
|
$
|
169
|
|
|
$
|
271
|
|
Federal carryforwards
|
|
31
|
|
|
13
|
|
State carryforwards
|
|
73
|
|
|
50
|
|
Other
|
|
8
|
|
|
19
|
|
Other reserves
|
|
10
|
|
|
21
|
|
Accruals for employee benefits
|
|
25
|
|
|
40
|
|
Inventory
|
|
13
|
|
|
25
|
|
Contract method of revenue recognition
|
|
42
|
|
|
80
|
|
Total deferred income tax assets before valuation allowance
|
|
371
|
|
|
519
|
|
Valuation allowance
|
|
(62
|
)
|
|
(42
|
)
|
Total deferred income tax assets
|
|
309
|
|
|
477
|
|
Deferred income tax liabilities:
|
|
|
|
|
Intangible assets
|
|
(47
|
)
|
|
(86
|
)
|
Property, plant and equipment
|
|
(104
|
)
|
|
(127
|
)
|
Debt-related
|
|
(3
|
)
|
|
(10
|
)
|
Total deferred income tax liabilities
|
|
(154
|
)
|
|
(223
|
)
|
Net deferred income tax assets
|
|
$
|
155
|
|
|
$
|
254
|
|
The Company believes it is more likely than not that the recorded deferred benefits will be realized through the reduction of future taxable income. The Company's recorded valuation allowance of
$62
million at
December 31, 2017
relates to certain capital loss, tax credits and net operating losses that are not expected to be realized before their expiration.
Included in the net deferred tax asset are net operating loss and credit carryovers of
$35 million
, net of valuation allowances, which expire in years ending from December 31, 2018 through December 31, 2038, and a
$9 million
federal AMT tax credit that will be utilized or fully refunded prior to 2022.
The following summarizes activity related to valuation allowances for deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Nine Months Ended December 31, 2015
|
|
(in millions)
|
Beginning Balance
|
$
|
42
|
|
|
$
|
13
|
|
|
$
|
9
|
|
Additions, charged to expense
|
21
|
|
|
37
|
|
|
5
|
|
Deductions
|
(1
|
)
|
|
(8
|
)
|
|
(1
|
)
|
Ending Balance
|
$
|
62
|
|
|
$
|
42
|
|
|
$
|
13
|
|
The Company has significant deferred tax assets in the U.S. against which valuation allowances have been established to reduce such deferred tax assets to an amount that is more likely than not to be realized. The establishment of valuation allowances requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. While the Company believes positive evidence exists with regard to the realizability of these deferred tax assets, it is not considered sufficient to outweigh the objectively verifiable negative evidence.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unrecognized Tax Benefits
Unrecognized tax benefits consist of the carrying value of the Company's recorded uncertain tax positions as well as the potential tax benefits that could result from other tax positions that have not been recognized in the financial statements under current authoritative guidance. At
December 31, 2017
and
December 31, 2016
, unrecognized tax benefits that have not been recognized in the financial statements amounted to
$137 million
and
$121 million
, respectively, of which
$125 million
and
$106 million
, 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
$30 million
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 million
to
$27 million
.
Changes in unrecognized tax benefits, excluding interest and penalties, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended
December 31, 2016
|
|
Nine Months Ended December 31, 2015
|
|
|
(in millions)
|
Unrecognized tax benefits, beginning of period
|
|
$
|
119
|
|
|
$
|
81
|
|
|
$
|
34
|
|
Gross increases—tax positions in prior periods
|
|
6
|
|
|
30
|
|
|
42
|
|
Gross decreases—tax positions in prior periods
|
|
(2
|
)
|
|
(4
|
)
|
|
(1
|
)
|
Gross increases—current-period tax positions
|
|
21
|
|
|
18
|
|
|
6
|
|
Settlements
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
Lapse of statute of limitations
|
|
(10
|
)
|
|
(1
|
)
|
|
—
|
|
Unrecognized tax benefits, end of period
|
|
$
|
134
|
|
|
$
|
119
|
|
|
$
|
81
|
|
The Company reports income tax-related interest income within income taxes. Penalties and tax-related interest expense are also reported as a component of income taxes. At
December 31, 2017
and
December 31, 2016
,
$3
million and
$2
million of income tax-related interest and an immaterial amount of penalties were included in accrued income taxes, respectively.
The Company or one of its subsidiaries files income tax returns in the U.S. federal, various U.S. state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2011. The IRS has completed the audits of the Company through fiscal 2014 and is currently auditing the Company's income tax returns for fiscal year 2015 and calendar year 2015. The Company believes appropriate provisions for all outstanding issues have been made for all remaining open years in all jurisdictions.
15
. Commitments
The Company leases land, buildings and equipment under various operating leases, which generally have renewal options of
one
to
five
years. Rent expense was
$95 million
in the
year ended December 31, 2017
,
$88 million
in the
year ended December 31, 2016
, and
$69 million
in
the 2015 transition period
.
Scheduled operating lease payments are as follows:
|
|
|
|
|
|
(in millions)
|
2018
|
$
|
85
|
|
2019
|
81
|
|
2020
|
67
|
|
2021
|
59
|
|
2022
|
48
|
|
Thereafter
|
60
|
|
Total
|
$
|
400
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As part of the Company's restructuring activities in connection with the Orbital-ATK Merger, certain leased spaces were vacated by the Company. The Company has subleased most of this space and sublease income was not material for the year ended December 31, 2017.
The Company currently leases land from a private party for its facility in Magna, Utah. This facility is used in the production and testing of some of the Company's rocket motors. The current lease extends through September 2022. The lease requires the Company to surrender the property back to its owner in its original condition. While the Company currently anticipates operating this facility indefinitely, the Company could incur significant costs if the Company were to terminate this lease.
The Company has known conditional asset retirement obligations, such as contractual lease restoration obligations, to be performed in the future, that are not reasonably estimable due to insufficient information about the timing and method of settlement of the obligation. Accordingly, these obligations have not been recorded in the consolidated financial statements. A liability for these obligations will be recorded in the period when sufficient information regarding timing and method of settlement becomes available to make a reasonable estimate of the liability's fair value.
16. Contingencies
Litigation
From time to time, the Company is subject to various legal proceedings, including lawsuits, which arise out of, and are incidental to, the conduct of the Company's business. The Company does not consider any of such proceedings that are currently pending, individually or in the aggregate to be material to its business or likely to result in a material adverse effect on its operating results, financial condition or cash flows, notwithstanding that the unfavorable resolution of any matter may have a material effect on net earnings in any particular quarter.
On April 29, 2016, US Space LLC filed a complaint against the Company and its subsidiary, ATK Space Systems Inc. in New York Supreme Court, alleging breach of contract and various other claims, and seeking unspecified damages, all related to ViviSat LLC, a former joint venture between the parties. The Company believes US Space’s claims are without merit. On May 27, 2016, the Company filed a countersuit in Loudoun County Circuit Court in the Commonwealth of Virginia (
ATK Space Systems
,
Inc. and Orbital ATK, Inc. v. U
.
S
.
Space LLC, Case No. CL-101847
) asserting claims for declaratory and injunctive relief against US Space LLC relating to ViviSat. The Company’s Virginia complaint alleged a failure of US Space to perform contractual obligations relating to obtaining financing for ViviSat, triggering certain rights of the Company that led to the dissolution of the venture. On November 11, 2016, the New York Supreme Court dismissed US Space’s New York case in its entirety. On January 6, 2017, US Space filed counterclaims against the Company, similar to its previous claims in its now-dismissed New York lawsuit. US Space’s initial counterclaims in the Virginia case sought damages of at least
$125 million
, but increased its damages demand to
$385 million
in the fourth quarter of 2017. A jury trial is currently ongoing. While the Company continues to believe that US Space’s counterclaims are without merit, the amount of the damages sought, if ever awarded, could be material to our cash flows and results of operations.
Securities Class Action
Seven
purported class actions challenging the Merger were filed in the United States District Court for the Eastern District of Virginia, captioned Lickteig v. Orbital ATK, Inc., et al., filed October 11, 2017 (the "Lickteig Action"), Ayzin v. Orbital ATK, Inc., et al., filed October 13, 2017 (the "Ayzin Action"), Sedon v. Orbital ATK, Inc., et al., filed October 16, 2017 (the "Sedon Action"), Berg v. Orbital ATK, Inc., et al., filed October 16, 2017 (the "Berg Action"), Simnowitz v. Orbital ATK, Inc., et al., filed October 18, 2017 (the "Simnowitz Action"), Cramer v. Orbital ATK, Inc., et al., filed October 25, 2017 (the "Cramer Action"), and Donato v. Orbital ATK, Inc., et al., filed on November 7, 2017 (the "Donato Action" and collectively with the Lickteig Action, Ayzin Action, Sedon Action, Berg Action, Simnowitz Action and Cramer Action, the "Actions"). The Actions alleged certain violations of the Securities and Exchange Act of 1934 (the "Exchange Act"), as amended, and sought, among other things, damages, attorneys' fees and injunctive relief to prevent the Merger from closing. While the Company believed that the Actions lacked merit and that the disclosures set forth in the proxy statement complied fully with applicable law, in order to moot plaintiffs' unmeritorious disclosure claims, avoid nuisance and possible expense and provide additional information to our stockholders, the Company determined to voluntarily supplement the proxy statement, as set forth in the Company's Schedule 14A filed with the SEC on November 20, 2017. On November 20, 2017, the Ayzin Action, Sedon Action, Berg Action, Cramer Action and Donato Action were each voluntarily dismissed with prejudice as to the plaintiffs. On
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 8, 2017, the Simnowitz Action was voluntarily dismissed with prejudice as to the plaintiff and on January 12, 2018, the Lickteig Action was voluntarily dismissed with prejudice as to the plaintiff. While each of the Actions have been voluntarily dismissed with prejudice as to the plaintiffs, additional plaintiffs may file lawsuits against the Company and/or its directors and officers in connection with the Merger.
On August 12, 2016, a putative class action complaint, naming the Company, our Chief Executive Officer and our Chief Financial Officer as defendants, was filed in the United States District Court for the Eastern District of Virginia (
Steven Knurr, et al. v. Orbital ATK, Inc., No. 16-cv-01031 (TSE-MSN)
). The class action complaint asserts claims on behalf of purchasers of Orbital ATK securities for violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder, arising out of allegedly false and misleading statements and the failure to disclose that: (i) the Company lacked effective control over financial reporting; and (ii) as a result, the Company failed to record an anticipated loss on its long-term contract with the U.S. Army to manufacture and supply small caliber ammunition at the U.S. Army's Lake City Army Ammunition Plant. On April 24, 2017 and October 10, 2017, the plaintiffs filed amended complaints naming additional defendants and asserting claims for violations of additional sections of the Exchange Act and alleged false and misleading statements in the Company's Form S-4 filed with the SEC relating to the Orbital-ATK Merger. The complaint seeks an award of damages, an award of reasonable costs and expenses at trial, including counsel and expert fees, and an award of such other relief as deemed appropriate by the Court.
SEC Investigation
The SEC is conducting a non-public investigation relating to our historical accounting practices as a result of the prior restatement of the Company's unaudited condensed consolidated financial statements for the quarterly periods ended July 5, 2015 and October 4, 2015 as described in the Company's Amendment to the Transition Report on Form 10-K for the nine-month transition period ending December 31, 2015 filed with the SEC on March 15, 2016. The Company has also voluntarily self-reported to the SEC regarding matters pertaining to the Restatement described in the Company's Amendment to the Transition Report on Form 10-K for the nine-month transition period ending December 31, 2015 filed on February 24, 2017. The Company is cooperating fully with the SEC in connection with these matters.
U.S. Government Investigations
The Company is also subject to U.S. Government investigations from which civil, criminal or administrative proceedings could result. Such proceedings could involve claims by the U.S. Government for fines, penalties, compensatory and treble damages, restitution and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. The Company believes, based upon all available information, that the outcome of any such pending government investigations will not have a material adverse effect on its operating results, financial condition or cash flows.
Claim Recovery
Profits expected to be realized on contracts are based on management's estimates of total contract sales value and costs at completion. Estimated amounts for contract changes and claims are included in contract sales only when realization is estimated to be probable. Unbilled receivables included
$17 million
and
$18 million
as of
December 31, 2017
and
December 31, 2016
, respectively, for contract claims based on progress to date on certain contracts.
Environmental Liabilities
The Company'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 the Company owns or operates or formerly owned or operated, there is known or potential contamination that the Company is required to investigate or remediate. The Company 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company has been identified as a potentially responsible party ("PRP"), along with other parties, in several regulatory agency actions associated with hazardous waste sites. As a PRP, the Company may be required to pay a share of the costs of the investigation and clean-up of these sites. While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities, based on currently available information, the Company has concluded that these matters, individually or in the aggregate, will not have a material adverse effect on operating results, financial condition or cash flows.
The Company could incur substantial costs, including cleanup costs, resource restoration, fines and penalties or third-party property damage or personal injury claims, as a result of violations or liabilities under environmental laws or non-compliance with environmental permits. While environmental laws and regulations have not had a material adverse effect on the Company's operating results, financial condition or cash flows in the past, and the Company has environmental management programs in place to mitigate these risks, it is difficult to predict whether they will have a material impact in the future.
The liability for environmental remediation represents management's best estimate of the probable and reasonably estimable costs related to known remediation obligations. The receivable represents the amount that the Company expects to recover, as discussed below.
The following is a summary of the amounts recorded for environmental remediation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
Liability
|
|
Receivable
|
|
Liability
|
|
Receivable
|
|
|
(in millions)
|
Current
|
|
$
|
5
|
|
|
$
|
3
|
|
|
$
|
6
|
|
|
$
|
3
|
|
Noncurrent
|
|
28
|
|
|
10
|
|
|
35
|
|
|
15
|
|
Total
|
|
$
|
33
|
|
|
$
|
13
|
|
|
$
|
41
|
|
|
$
|
18
|
|
At December 31, 2017, the estimated range of reasonably possible costs of environmental remediation was
$33 million
to
$59 million
.
The Company 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, the Company generally assumed responsibility for environmental compliance at the facilities acquired from Hercules ("the Hercules Facilities"). The Company believes that a portion of the compliance and remediation costs associated with the Hercules Facilities will be recoverable under U.S. Government contracts. If the Company were unable to recover those environmental remediation costs under these contracts, the Company believes that 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 the Company for environmental conditions relating to releases or hazardous waste activities occurring prior to the Company'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 the Company for any individual claims below
$50 thousand
. Hercules is obligated to indemnify the Company for the lowest cost response of remediation required at the facility that is acceptable to the applicable regulatory agencies. The Company is not responsible for conducting any remedial activities with respect to the Clearwater, FL facility. In accordance with its agreement with Hercules, the Company 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.
|
|
|
•
|
The Company generally assumed responsibility for environmental compliance at the Thiokol Facilities acquired from Alcoa Inc. ("Alcoa") in fiscal 2002. The Company expects that a portion of the compliance and remediation costs associated with the acquired Thiokol Facilities will be recoverable under U.S.
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Government contracts. In accordance with its agreement with Alcoa, the Company notified Alcoa of all known environmental remediation issues at January 30, 2004. Of these known issues, the Company is responsible for any costs not recovered through U.S. Government contracts at the Thiokol Facilities up to
$14 million
, the Company and Alcoa have agreed to split evenly any amounts between
$14 million
and
$34 million
, and the Company is responsible for any payments in excess of
$34 million
. At this time, the Company believes that costs not recovered through U.S. Government contracts will be immaterial.
The Company cannot ensure that the U.S. Government, Hercules, Alcoa, or other third parties will reimburse it for any particular environmental costs or reimburse the Company 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. The Company'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 the Company has environmental management programs in place to mitigate these risks, and environmental laws and regulations have not had a material adverse effect on the Company'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.
In December 2001, the Company received notice from the State of Utah of a potential claim against the Company 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 the Company to go forward with its currently-planned monitoring and remediation program. The State's preliminary estimate of damages contained in this claim was
$139 million
, which is based on known and alleged groundwater contamination at and near Bacchus and is related to Hercules' manufacturing operations at the site. The Company received similar notices related to the Promontory facility that was acquired from Alcoa in the acquisition of Thiokol and Kennecott’s Section 21 Well Field due to the presence of perchlorate. Although the Company has previously made accruals for its best estimate of the probable and reasonably estimable costs related to the remediation obligations known to the Company with respect to the affected areas, the Company cannot yet predict if or when a suit may be filed against it, nor can the Company determine any additional costs that may be incurred in connection with this matter.
Expected aggregate undiscounted environmental remediation payments, net of expected recoveries, are as follows:
|
|
|
|
|
|
(in millions)
|
2018
|
$
|
2
|
|
2019
|
1
|
|
2020
|
—
|
|
2021
|
2
|
|
2022
|
2
|
|
Thereafter
|
13
|
|
Total
|
$
|
20
|
|
There were no material insurance recoveries related to environmental remediation during any of the periods presented.
17
. Stock-Based Compensation
The Company has authorized
5,000,000
shares of preferred stock, par value
$1.00
, none of which has been issued.
During the year ended December 31, 2017, the Company sponsored
five
stock-based incentive plans, including: the Orbital ATK, Inc. 2015 Stock Incentive Plan (the "2015 Stock Incentive Plan");
three
legacy ATK plans (the Alliant Techsystems Inc. 2005 Stock Incentive Plan, the Non-Employee Director Restricted Stock Plan and the 1990 Equity Incentive Plan); and
one
legacy Orbital plan, under which the Company assumed the obligation to issue Company common stock pursuant to the terms of the transaction agreement ("the Transaction Agreement") relating to the Orbital-ATK Merger (the Orbital Sciences Corporation 2005 Amended and Restated Stock Incentive Plan). At
December 31, 2017
, the Company has authorized up to
3,750,000
common shares under the 2015 Stock Incentive
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Plan, of which
2,084,273
common shares are available to be granted. No new grants will be made out of the other
four
plans.
During the year ended December 31, 2016, the Company adopted an Employee Stock Purchase Plan ("ESPP") whereby eligible employees may purchase shares of the Company's common stock at the lesser of
85%
of the fair market value of a share of common stock at the beginning or at the end of the quarterly offering period. The ESPP is compensatory and the fair value of the shares purchased is determined using the Black-Scholes option pricing model. As of
December 31, 2017
, the Company had authorized up to
2,000,000
common shares, of which
1,781,318
shares of common shares were available for purchase under the ESPP. The Company recognized
$2 million
and
$1 million
of ESPP expense during the year ended December 31, 2017 and 2016, respectively. In connection with the Merger, the ESPP has been suspended as of October 1, 2017.
There are four types of awards outstanding under the Company's stock incentive plans: performance awards, total stockholder return performance awards ("TSR awards"), restricted stock and stock options. The Company issues treasury shares upon (i) the vesting of performance awards, TSR awards and restricted stock units, (ii) the grant of restricted stock, and (iii) the exercise of stock options.
The Company's nonvested stock-based compensation awards activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Share
and
TSR Awards
|
|
Restricted Stock
Units
|
|
Restricted Stock
Awards
|
|
Combined
Weighted Average
Grant Date
Fair Value
|
Nonvested, March 31, 2015
|
|
160,530
|
|
|
500,939
|
|
|
212,635
|
|
|
$
|
77.02
|
|
Granted
|
|
2,976
|
|
|
—
|
|
|
86,108
|
|
|
74.88
|
|
Canceled/forfeited
|
|
(5,374
|
)
|
|
(10,908
|
)
|
|
(9,914
|
)
|
|
80.88
|
|
Vested
|
|
(333
|
)
|
|
(191,084
|
)
|
|
(17,806
|
)
|
|
43.87
|
|
Nonvested, December 31, 2015
|
|
157,799
|
|
|
298,947
|
|
|
271,023
|
|
|
$
|
75.57
|
|
Granted
|
|
153,888
|
|
|
—
|
|
|
176,800
|
|
|
80.14
|
|
Canceled/forfeited
|
|
(706
|
)
|
|
(2,933
|
)
|
|
(7,720
|
)
|
|
78.73
|
|
Vested
|
|
—
|
|
|
(193,687
|
)
|
|
(128,854
|
)
|
|
64.68
|
|
Nonvested, December 31, 2016
|
|
310,981
|
|
|
102,327
|
|
|
311,249
|
|
|
$
|
82.31
|
|
Granted
|
|
118,786
|
|
|
—
|
|
|
161,207
|
|
|
99.55
|
|
Canceled/forfeited
|
|
(12,137
|
)
|
|
(1,016
|
)
|
|
(9,356
|
)
|
|
84.74
|
|
Vested
|
|
—
|
|
|
(101,311
|
)
|
|
(156,190
|
)
|
|
92.80
|
|
Nonvested, December 31, 2017
|
|
417,630
|
|
|
—
|
|
|
306,910
|
|
|
$
|
88.54
|
|
In the table above, the fair value of vested stock awards was
$26 million
,
$28 million
and
$15 million
for shares that vested during the
year ended December 31, 2017
, the
year ended December 31, 2016
and the 2015 transition period, respectively.
Performance Awards.
There were performance shares reserved for executive officers and key employees. Performance shares are valued at the fair value of the Company's stock as of the grant date and expense is recognized based on the number of shares expected to vest according to the terms of the awards under which they are granted. Of these performance shares outstanding:
|
|
•
|
up to
58,506
will become payable upon achievement of financial performance goals relating to absolute sales growth and return on investment of capital for the performance period beginning January 1, 2017 and ending December 31, 2019; and
|
|
|
•
|
up to
71,074
will become payable upon achievement of financial performance goals relating to absolute sales growth and return on investment of capital for the performance period beginning January 1, 2016 and ending December 31, 2018; and
|
|
|
•
|
up to
79,235
will become payable upon achievement of financial performance goals relating to absolute earnings per share growth and absolute sales growth for the performance period beginning April 1, 2015 and ending December 31, 2017.
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
TSR Awards.
There were
208,815
shares outstanding reserved for executive officers and key employees for the fiscal year 2017-2019, 2016-2018 and 2015-2017 performance periods. The Company used an integrated Monte Carlo simulation model to determine the fair value of the TSR awards. The Monte Carlo model calculates the probability of satisfying the market conditions stipulated in the award. This probability is an input into the trinomial lattice model used to determine the fair value of the awards as well as the assumptions of other variables, including the risk-free interest rate and expected volatility of the peer average and the Company's stock price in future periods. The risk-free rate is based on the zero-coupon U.S. Treasury bill with a remaining term that approximates the life assumed at the date of grant.
Weighted-average assumptions used in estimating the value of the TSR award were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Nine Months Ended December 31, 2015
|
Risk-free rate
|
|
1.42
|
%
|
|
1.00
|
%
|
|
1.02
|
%
|
Expected volatility
|
|
26.77
|
%
|
|
25.39
|
%
|
|
22.81
|
%
|
Expected dividend yield
|
|
1.28
|
%
|
|
1.51
|
%
|
|
1.78
|
%
|
Expected award life
|
|
2.8 years
|
|
|
2.8 years
|
|
|
2.8 years
|
|
Weighted average grant date fair value
|
|
$
|
115.26
|
|
|
$
|
87.85
|
|
|
$
|
94.93
|
|
Restricted Stock Units.
Pursuant to the terms of the Transaction Agreement and under the terms of the ATK 2005 Stock Incentive Plan, all of the performance awards and TSR awards outstanding at February 9, 2015 were converted into time-vesting restricted stock units in connection with the Distribution, with vesting periods corresponding to the respective performance periods. During the year ended December 31, 2017,
53,449
shares of restricted stock units vested for the performance period ending March 31, 2017. Pursuant to the terms of the Transaction Agreement, the Company also assumed the obligation to issue Company common stock from the legacy Orbital plan. At
December 31, 2017
, there were
no
restricted stock units outstanding under the legacy Orbital plan as
47,862
shares of restricted stock units vested and
1,016
shares were forfeited during the year ended December 31, 2017.
Restricted Stock Awards.
Restricted stock granted to non-employee directors and certain key employees vests over periods generally ranging from
one
to
three
years from the date of award and is valued at the fair value of the Company's common stock at the grant date.
Stock Options.
Stock options may be granted periodically, with an exercise price equal to the fair market value of the Company's common stock on the date of grant, and generally vest from
one
to
three
years from the date of grant. Options are generally granted with
seven
-year or
ten
-year terms.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company's stock option activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
Aggregate Intrinsic
Value
(per option)
|
Outstanding, March 31, 2015
|
|
354,730
|
|
|
$
|
41.83
|
|
|
7.8
|
|
$
|
34.80
|
|
Granted
|
|
1,443
|
|
|
73.13
|
|
|
|
|
|
Exercised
|
|
(122,893
|
)
|
|
30.90
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
233,280
|
|
|
$
|
47.79
|
|
|
7.7
|
|
$
|
41.55
|
|
Granted
|
|
72,328
|
|
|
79.43
|
|
|
|
|
|
|
Exercised
|
|
(33,629
|
)
|
|
29.93
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
271,979
|
|
|
$
|
58.41
|
|
|
7.6
|
|
$
|
29.32
|
|
Granted
|
|
58,434
|
|
|
93.51
|
|
|
|
|
|
Exercised
|
|
(84,544
|
)
|
|
41.52
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
245,869
|
|
|
$
|
72.56
|
|
|
7.6
|
|
$
|
58.94
|
|
Options exercisable at:
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
114,364
|
|
|
$
|
59.07
|
|
|
6.6
|
|
$
|
72.43
|
|
Options expected to vest:
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
131,505
|
|
|
$
|
84.30
|
|
|
8.4
|
|
$
|
47.20
|
|
The weighted-average fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The option pricing model requires the Company to make assumptions. The risk-free rate is based on U.S. Treasury securities with a remaining term that approximates the expected life assumed at the date of grant. Expected volatility is based on the historical volatility of peer companies' stock over the past
six
years. The expected option life was derived based on the "simplified" method under Staff Accounting Bulletins No. 107, "Share-Based Payment," as amended by Staff Accounting Bulletin No. 110 because of the Company's short history since the Orbital-ATK Merger and Distribution. The weighted-average fair value of options granted was
$24.47
,
$20.53
and
$20.80
during the year ended December 31, 2017, the year ended December 31, 2016 and the 2015 transition period, respectively.
Weighted-average assumptions used in estimating the value of the stock option grants were as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Nine Months Ended December 31, 2015
|
Risk-free rate
|
|
1.96%
|
|
1.62%
|
|
1.99%
|
Expected volatility
|
|
28.19%
|
|
26.89%
|
|
27.91%
|
Expected dividend yield
|
|
1.35%
|
|
1.36%
|
|
1.17%
|
Expected option life
|
|
6 years
|
|
7 years
|
|
7 years
|
The total intrinsic value of options exercised was
$6 million
,
$2 million
and
$5 million
during the
year ended December 31, 2017
, the
year ended December 31, 2016
, and the 2015 transition period, respectively. The tax benefit realized from stock options exercised was
$1 million
for the
year ended December 31, 2017
and was immaterial for the
year ended December 31, 2016
and the 2015 transition period. Total cash received from options exercised during the
year ended December 31, 2017
, the
year ended December 31, 2016
and the 2015 transition period was
$4
million,
$1 million
, and
$4 million
, respectively.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Total pre-tax stock-based compensation expense of
$21 million
,
$20 million
and
$19 million
was recognized during the
year ended December 31, 2017
, the
year ended December 31, 2016
and the 2015 transition period, respectively. The total income tax benefit recognized in the statement of operations for share-based compensation was
$8 million
,
$7 million
and
$8 million
during the
year ended December 31, 2017
, the
year ended December 31, 2016
and the 2015 transition period, respectively.
At
December 31, 2017
, the total unrecognized compensation cost related to nonvested stock-based compensation awards was
$25 million
and is expected to be realized over a weighted average period of
1.7
years.
Share Repurchases
Shares of the Company's common stock may be purchased in the open market, subject to compliance with applicable laws and regulations and the Company's debt covenants, depending upon market conditions and other factors. During 2016, the Board of Directors authorized an increase to the amount for repurchase of the Company's common stock to the lesser of
$300 million
or
4 million
shares and extended the repurchase period through March 31, 2017. In February 2017, the Board of Directors further increased the amount authorized for repurchase to
$450 million
, removed the share quantity limitation, and extended the repurchase period through March 31, 2018. In connection with the Merger, the Company halted its share repurchase program.
The Company repurchased
230,918
shares for
$23 million
during the year ended December 31, 2017,
1,570,333
shares for
$124 million
in the
year ended December 31, 2016
, and
1,008,445
shares for
$76 million
in the 2015 transition period.
18
. Operating Segment Information
The Company operates its business structure within
three
operating segments. These operating segments ("Groups") are defined based on the reporting and review process used by the Company's chief executive officer and other management. The operating structure aligns the Company's capabilities and resources with its customers and markets and positions the Company for long-term growth and improved profitability. At
December 31, 2017
, the Company's three operating groups were:
|
|
•
|
Flight Systems Group
develops launch vehicles that are used as small- and medium-class space launch vehicles to place satellites into earth orbit and escape trajectories, interceptor and target vehicles for missile defense systems and suborbital launch vehicles that place payloads into a variety of high-altitude trajectories. The Group also develops and produces medium- and large-class rocket propulsion systems for human and cargo launch vehicles, strategic missiles, missile defense interceptors and target vehicles. Additionally,
Flight Systems Group
operates in the military and commercial aircraft and launch structures markets.
|
|
|
•
|
Defense Systems Group
develops and produces military small-, medium- and large-caliber ammunition, propulsion systems for tactical missiles and missile defense applications, strike weapons, precision weapons and munitions, high-performance gun systems, aircraft survivability systems, fuzes and warheads, energetic materials and special mission aircraft.
|
|
|
•
|
Space Systems Group
develops and produces small- and medium-class satellites that are used to enable global and regional communications and broadcasting, conduct space-related scientific research, and perform activities related to national security. In addition,
Space Systems Group
develops and produces human-rated space systems for earth orbit and deep space exploration, including cargo delivery to the International Space Station. This group is also a provider of spacecraft components and subsystems as well as specialized engineering and operations services to U.S. Government agencies.
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company derives the majority of its sales from contracts with, and prime contractors to, the U.S. Government. Sales to the U.S. Government and U.S. Government prime contractors were as follows:
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Sales
|
|
Percentage of sales
|
|
|
(in millions)
|
|
|
Year ended December 31, 2017
|
|
$
|
3,489
|
|
|
73
|
%
|
Year ended December 31, 2016
|
|
$
|
3,368
|
|
|
76
|
%
|
Nine months ended December 31, 2015
|
|
$
|
2,359
|
|
|
70
|
%
|
The CRS contracts with NASA, which are reported within
Flight Systems Group
and
Space Systems Group
, comprised
9%
,
13%
and
10%
of total sales in the year ended December 31, 2017, the year ended December 31, 2016 and the 2015 transition period, respectively.
The Company's small-caliber ammunition contract with the U.S. Army, which is reported within
Defense Systems Group
, comprised
5%
,
6%
and
6%
of total sales in the year ended December 31, 2017, the year ended December 31, 2016 and the 2015 transition period, respectively.
No
single commercial customer accounted for more than
10%
of the Company's sales in the year ended December 31, 2017, the year ended December 31, 2016 or the 2015 transition period, respectively.
The Company's international sales were $
878 million
in the year ended December 31, 2017,
$778 million
in the year ended December 31, 2016, and
$766 million
in the 2015 transition period. Sales to no individual country outside the United States accounted for more than
5%
,
4%
or
4%
of the Company's sales in the
year ended December 31, 2017
, the year ended December 31, 2016 and
the 2015 transition period
, respectively. Substantially all of the Company's assets are held in the United States.
Operating results and total assets by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
Flight Systems Group
|
|
Defense Systems Group
|
|
Space Systems Group
|
|
Corporate
|
|
Total
|
|
|
(in millions)
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
External customers
|
|
$
|
1,669
|
|
|
$
|
1,952
|
|
|
$
|
1,143
|
|
|
$
|
—
|
|
|
$
|
4,764
|
|
Intercompany
|
|
12
|
|
|
16
|
|
|
141
|
|
|
(169
|
)
|
|
—
|
|
Total
|
|
$
|
1,681
|
|
|
$
|
1,968
|
|
|
$
|
1,284
|
|
|
$
|
(169
|
)
|
|
$
|
4,764
|
|
Income (loss) before interest, income taxes and noncontrolling interest
|
|
$
|
211
|
|
|
$
|
193
|
|
|
$
|
142
|
|
|
$
|
(17
|
)
|
|
$
|
529
|
|
Capital expenditures
|
|
$
|
73
|
|
|
$
|
34
|
|
|
$
|
34
|
|
|
$
|
104
|
|
|
$
|
245
|
|
Depreciation
|
|
$
|
59
|
|
|
$
|
18
|
|
|
$
|
36
|
|
|
$
|
5
|
|
|
$
|
118
|
|
Amortization of intangibles
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
37
|
|
Total assets
|
|
$
|
2,262
|
|
|
$
|
1,337
|
|
|
$
|
1,256
|
|
|
$
|
811
|
|
|
$
|
5,666
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
Flight Systems Group
|
|
Defense Systems Group
|
|
Space Systems Group
|
|
Corporate
|
|
Total
|
|
|
(in millions)
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
External customers
|
|
$
|
1,483
|
|
|
$
|
1,804
|
|
|
$
|
1,168
|
|
|
$
|
—
|
|
|
$
|
4,455
|
|
Intercompany
|
|
13
|
|
|
19
|
|
|
70
|
|
|
(102
|
)
|
|
—
|
|
Total
|
|
$
|
1,496
|
|
|
$
|
1,823
|
|
|
$
|
1,238
|
|
|
$
|
(102
|
)
|
|
$
|
4,455
|
|
Income (loss) before interest, income taxes and noncontrolling interest
|
|
$
|
204
|
|
|
$
|
172
|
|
|
$
|
129
|
|
|
$
|
(33
|
)
|
|
$
|
472
|
|
Capital expenditures
|
|
$
|
78
|
|
|
$
|
44
|
|
|
$
|
56
|
|
|
$
|
9
|
|
|
$
|
187
|
|
Depreciation
|
|
$
|
54
|
|
|
$
|
18
|
|
|
$
|
31
|
|
|
$
|
13
|
|
|
$
|
116
|
|
Amortization of intangibles
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
42
|
|
|
$
|
43
|
|
Total assets
|
|
$
|
2,208
|
|
|
$
|
1,228
|
|
|
$
|
1,280
|
|
|
$
|
702
|
|
|
$
|
5,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31, 2015
|
|
|
Flight Systems Group
|
|
Defense Systems Group
|
|
Space Systems Group
|
|
Corporate
|
|
Total
|
|
|
(in millions)
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
External customers
|
|
$
|
1,115
|
|
|
$
|
1,314
|
|
|
$
|
962
|
|
|
$
|
—
|
|
|
$
|
3,391
|
|
Intercompany
|
|
27
|
|
|
6
|
|
|
15
|
|
|
(48
|
)
|
|
—
|
|
Total
|
|
$
|
1,142
|
|
|
$
|
1,320
|
|
|
$
|
977
|
|
|
$
|
(48
|
)
|
|
$
|
3,391
|
|
Income (loss) from continuing operations, before interest, income taxes and noncontrolling interest
|
|
$
|
197
|
|
|
$
|
126
|
|
|
$
|
67
|
|
|
$
|
(57
|
)
|
|
$
|
333
|
|
Capital expenditures
|
|
$
|
48
|
|
|
$
|
23
|
|
|
$
|
31
|
|
|
$
|
3
|
|
|
$
|
105
|
|
Depreciation
|
|
$
|
39
|
|
|
$
|
15
|
|
|
$
|
24
|
|
|
$
|
11
|
|
|
$
|
89
|
|
Amortization of intangibles
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
32
|
|
|
$
|
33
|
|
Total assets
|
|
$
|
2,224
|
|
|
$
|
1,184
|
|
|
$
|
1,273
|
|
|
$
|
643
|
|
|
$
|
5,324
|
|
Certain administrative functions are primarily managed by the Company at the corporate headquarters ("Corporate"). Some examples of such functions are human resources, pension and postretirement benefits, corporate accounting, legal, tax, treasury and certain strategic growth initiatives. Significant assets and liabilities managed at Corporate include those associated with debt, restructuring, pension and postretirement benefits, environmental liabilities, litigation liabilities, strategic growth costs and income taxes.
Costs related to the administrative functions managed by Corporate are either recorded at Corporate or allocated to the segments based on the nature of the expense. The difference between pension and postretirement benefit expense calculated under U.S. GAAP and the expense calculated under U.S. Cost Accounting Standards is recorded at the corporate level which provides for greater clarity on the operating results of the business segments. Administrative expenses such as corporate accounting, legal and treasury costs are allocated out to the business segments. Transactions between segments are recorded at the segment level, consistent with the Company's financial accounting policies. Intercompany balances and transactions involving different segments are eliminated at the Company's consolidated financial statements level and are shown above in Corporate. The amortization expense related to purchase accounting attributed to the acquisition of Orbital is also recorded in Corporate.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
19
. Transition Period Comparative Data
The following table presents certain financial information for the nine months ended December 31, 2015 and December 28, 2014 respectively:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
(in millions, except per share data)
|
December 31, 2015
|
|
December 28, 2014
|
|
|
|
(unaudited)
|
Sales
|
$
|
3,391
|
|
|
$
|
2,142
|
|
Gross profit
|
$
|
674
|
|
|
$
|
478
|
|
Income from continuing operations
|
$
|
185
|
|
|
$
|
109
|
|
Income from discontinued operations
|
$
|
1
|
|
|
$
|
108
|
|
Net income attributable to Orbital ATK, Inc.
|
$
|
186
|
|
|
$
|
217
|
|
Basic earnings per common share
|
|
|
|
Income from continuing operations
|
$
|
3.12
|
|
|
$
|
3.44
|
|
Income from discontinued operations
|
0.02
|
|
|
3.42
|
|
Net income attributable to Orbital ATK, Inc.
|
$
|
3.14
|
|
|
$
|
6.86
|
|
Diluted earnings per common share
|
|
|
|
Income from continuing operations
|
$
|
3.09
|
|
|
$
|
3.37
|
|
Income from discontinued operations
|
0.02
|
|
|
3.34
|
|
Net income attributable to Orbital ATK, Inc.
|
$
|
3.11
|
|
|
$
|
6.71
|
|
Note: earnings per share amounts may not recalculate due to rounding.
20
. Quarterly Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
|
Quarter Ended
|
(in millions, except per share data)
|
|
April 2,
|
|
July 2,
|
|
October 1,
|
|
December 31,
|
Sales
|
|
$
|
1,085
|
|
|
$
|
1,115
|
|
|
$
|
1,216
|
|
|
$
|
1,348
|
|
Gross profit
|
|
$
|
229
|
|
|
$
|
267
|
|
|
$
|
275
|
|
|
$
|
294
|
|
Net income attributable to Orbital ATK, Inc.
|
|
$
|
66
|
|
|
$
|
88
|
|
|
$
|
94
|
|
|
$
|
62
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
(1)
|
|
$
|
1.16
|
|
|
$
|
1.52
|
|
|
$
|
1.65
|
|
|
$
|
1.07
|
|
Diluted earnings per common share
(1)
|
|
$
|
1.15
|
|
|
$
|
1.51
|
|
|
$
|
1.64
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
57.33
|
|
|
57.41
|
|
|
57.31
|
|
|
57.38
|
|
Weighted-average diluted shares outstanding
|
|
57.78
|
|
|
57.73
|
|
|
57.76
|
|
|
57.97
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share:
|
|
|
|
|
|
|
|
|
Declared
|
|
$
|
0.32
|
|
|
$
|
0.32
|
|
|
$
|
0.32
|
|
|
$
|
0.32
|
|
Paid
|
|
$
|
0.32
|
|
|
$
|
0.32
|
|
|
$
|
0.32
|
|
|
$
|
0.32
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2016
|
|
|
Quarter Ended
|
(in millions, except per share data)
|
|
April 3,
|
|
July 3,
|
|
October 2,
|
|
December 31,
|
Sales
|
|
$
|
1,056
|
|
|
$
|
1,084
|
|
|
$
|
1,043
|
|
|
$
|
1,272
|
|
Gross profit
|
|
$
|
227
|
|
|
$
|
280
|
|
|
$
|
210
|
|
|
$
|
268
|
|
Net income attributable to Orbital ATK, Inc.
|
|
$
|
77
|
|
|
$
|
91
|
|
|
$
|
60
|
|
|
$
|
65
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
(1)
|
|
$
|
1.33
|
|
|
$
|
1.56
|
|
|
$
|
1.04
|
|
|
$
|
1.12
|
|
Diluted earnings per common share
(1)
|
|
$
|
1.31
|
|
|
$
|
1.55
|
|
|
$
|
1.04
|
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
58.30
|
|
|
58.19
|
|
|
57.93
|
|
|
57.30
|
|
Weighted-average diluted shares outstanding
|
|
58.88
|
|
|
58.64
|
|
|
58.26
|
|
|
57.69
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share:
|
|
|
|
|
|
|
|
|
Declared
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
Paid
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
(1)
Quarterly earnings per common share amounts may not total to annual earnings per common share amounts because quarterly and annual earnings per share are calculated separately based on earnings and basic and diluted weighted-average common shares outstanding during the respective periods.