10-K 1 oa-3312015x10xk.htm 10-K oa-3312015x10-K

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2015
 
OR
 
 
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from                    to                  
Commission file number 1-10582
ORBITAL ATK, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
41-1672694
(I.R.S. Employer
Identification No.)
45101 Warp Drive
 
 
Dulles, Virginia
 
20166
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code: (703) 406-5000

Alliant Techsystems Inc.
1300 Wilson Boulevard, Suite 400, Arlington, Virginia 22209-2307
(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $.01
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
____________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ý
 
Accelerated Filer o
 
Non-Accelerated Filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
As of September 28, 2014, the aggregate market value of the registrant's voting common stock held by non-affiliates was approximately $4.160 billion (based upon the closing price of the common stock on the New York Stock Exchange on September 26, 2014).
As of May 26, 2015, there were 59,428,722 shares of the registrant's voting common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive Proxy Statement for the 2015 Annual Meeting of Stockholders are incorporated by reference into Part III.
 



TABLE OF CONTENTS
 
 
Page
 
 
 
 




PART I
ITEM 1.    BUSINESS
Orbital ATK, Inc. (the "Company", "we", "us" or "our") is an aerospace and defense company that operates in the United States and internationally. The Company was incorporated in Delaware in 1990. Prior to February 9, 2015, the Company was known as Alliant Techsystems Inc. (“ATK”). The Company designs, builds and delivers space, defense and aviation-related systems to customers around the world both as a prime contractor and as a merchant supplier. Its main products include launch vehicles and related propulsion systems; satellites and associated components and services; composite aerospace structures; tactical missiles, subsystems and defense electronics; and precision weapons, armament systems and ammunition. The Company is headquartered in Dulles, Virginia.
The Company completed the following acquisitions over the past five years, all of which were integrated into the Company's former Sporting Group business: Blackhawk Industries Products Group Unlimited, LLC ("Blackhawk") in April 2010, Caliber Company, parent company of Savage Sports Corporation ("Savage") in June 2013, and Bushnell Group Holdings, Inc. ("Bushnell") in November 2013.
On February 9, 2015, the Company completed a tax-free spin-off and distribution of its Sporting Group, including the Blackhawk, Savage and Bushnell businesses, to its stockholders (the “Distribution”) 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 "Merger"). Following the Distribution and Merger, the Company changed its name from Alliant Techsystems Inc. to Orbital ATK, Inc.
In connection with the Distribution, the Company's stockholders received two shares of Vista Outdoor for each share of Company common stock held. As a result of the Distribution, the Sporting Group is no longer reported within the Company’s results from continuing operations but is reported as a discontinued operation in the consolidated financial statements for all periods presented.
In connection with the Merger, Orbital stockholders received 0.449 shares of Company stock for each share of Orbital common stock held. Both transactions were structured to be tax-free to U.S. stockholders of Orbital and the Company for U.S. federal income tax purposes. Immediately following the Merger, Orbital stockholders owned 46.2% of the common stock of the Company and existing Company stockholders owned 53.8%. The Company used the acquisition method to account for the Merger; accordingly, the results of Orbital have been included in the Company's consolidated financial statements since the date of the Merger.
Following the Distribution and Merger, the Company reorganized its business groups and realigned its reporting segments. The Company’s remaining businesses, combined with the businesses of Orbital, are now reported in three segments: Flight Systems Group, Defense Systems Group and Space Systems Group, which are described in greater detail below. All historical periods presented in this annual report on Form 10-K (the "10-K") reflect this change in the Company’s segment reporting. The Company conducts its business operations through a number of separate legal entities that are listed in Exhibit 21 to this report.
Flight Systems Group is comprised of Orbital's former Launch Vehicles segment and a portion of the Company's former Aerospace Group (Aerospace Structures division and Space Systems Operations' Launch Systems business). Our new Flight Systems Group is well-positioned in its markets, as follows:
premier producer of solid rocket propulsion systems and specialty energetic products,
leading provider of small- and medium-class space launch vehicles for civil, military and commercial missions,
major supplier of interceptor boosters and target vehicles for missile defense applications, and
manufacturer of composite structures for commercial and military aircraft and launch vehicles.
Defense Systems Group is comprised entirely of the Company's former Defense Group (Armament Systems, Defense Electronic Systems, Missile Products and Small-caliber Systems divisions). Our Defense Systems Group is also well-positioned in its markets:
leader in propulsion and controls for air-, sea- and land-based tactical missiles and missile defense interceptors as well as in fusing and warheads for tactical missiles and munitions,
supplier of advanced defense electronics for next-generation strike weapon systems, missile-warning and aircraft survivability, and special-mission aircraft,
leading producer of medium- and large-caliber ammunition, medium-caliber gun systems and precision munitions guidance kits, and
leading U.S. producer of small-caliber ammunition.

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Space Systems Group is comprised of Orbital's former Advanced Space Programs and Satellite and Space Systems segments and a portion of ATK's former Aerospace Group (Space Components division and part of the Space Systems Operations division). Our Space Systems Group is also well-positioned in its markets:
leading provider of small- and medium-class commercial satellites used for global communications and high-resolution Earth imaging,
leading provider of small- and medium-class spacecraft that perform scientific research and national security missions for government customers,
provider of commercial cargo delivery services to the International Space Station and developer of advanced space systems, and
premier provider of spacecraft components and subsystems and specialized engineering services.
Sales; Income from continuing operations, before interest, income taxes and noncontrolling interest; Total assets; and other financial data for each segment for the three years ended March 31, 2015 are set forth in Note 16 to the consolidated financial statements, included in Item 8 of this report.
References in this report to a particular fiscal year refer to the year ended March 31 of that calendar year.
Flight Systems Group
Flight Systems Group develops rockets 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. Other products include illuminating flares and aircraft countermeasures.
The following is a description of the operating units (“divisions”) within Flight Systems Group:
Launch Vehicles Division
The Launch Vehicles division includes both small- and medium-class rockets for government, civil and commercial payloads. Our innovative Pegasus® rocket is launched from the Company's "Stargazer" L-1011 carrier aircraft and has proven to be the small space-launch workhorse for U.S. government customers, having conducted 45 missions from six different launch sites worldwide since 1990. Our Minotaur C (Commercial) launch vehicle combines our Pegasus upper-stage motors with a commercially-provided first stage propulsion system for increased performance. Our Minotaur I, IV, V and VI rockets combine decommissioned Minuteman and Peacekeeper rocket motors with proven Company avionics and fairings to provide increased lifting capacity for government-sponsored payloads.

The division’s Antares rocket is a two-stage vehicle (with optional third stage) that provides low-Earth orbit ("LEO") launch capability for payloads weighing over 7,000 kg. The Antares rocket has been used in the execution of the company's Commercial Resupply Services ("CRS I") contract with NASA to deliver cargo to the International Space Station ("ISS"). As a result of an October 2014 launch failure, the Antares design is being upgraded with newly-built RD-181 first stage engines to provide greater payload performance and increased reliability. The Company is modifying the rocket’s first-stage systems in anticipation of hot-fire testing in early 2016, and is currently targeting three launches of the reconfigured Antares rocket in 2016 in connection with CRS-I contract.

As the industry-leading provider of suborbital launch vehicles for the nation's missile defense systems, the division has conducted over 75 launches for the U.S. Missile Defense Agency ("MDA"), the U.S. Air Force, Army and Navy, and allied nations during the last 10 years. Additionally, the division is the sole provider of interceptor boosters for the U.S. Missile Defense Agency's Ground-based Midcourse Defense ("GMD") system designed to intercept and destroy long-range enemy missiles. We are also a primary supplier of highly-reliable target vehicles that serve as "threat simulators" to provide high-fidelity facsimiles of enemy missile threats in the testing and verification of missile defense systems.
Propulsion Systems Division
The Propulsion Systems division is the developmental production center for the Company's solid rocket motors for NASA's current and planned human spaceflight programs, including the Space Launch System ("SLS") heavy lift vehicle and the launch abort system ("LAS") motor for the Orion crew capsule that is designed to safely pull the crew capsule away from the launch vehicle in the event of an emergency during launch.


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The division also produces medium-class solid rocket motors for the U.S. Navy's Trident II ("D5") Fleet Ballistic Missile program and conducts solid rocket propulsion sustainment activities for the U.S. Air Force's Minuteman III Intercontinental Ballistic Missile. These two programs provide the backbone of the United States' strategic deterrence program. Additional solid rocket motors being produced by the division include GEM 60 motors for the Delta IV, Orion® motors for the Company's Pegasus, Taurus, and Minotaur launch vehicles, and CASTOR® motors for the Company's Antares rocket and Taurus rocket, and U.S. Missile Defense Agency targets. The division supplies Orion® motors for all three stages of the GMD system as well as other Orbital ATK launch vehicles. In addition, the division produces advanced flares and decoys that provide illumination for search and rescue missions and countermeasures against missile attacks.
Aerospace Structures Division
The Aerospace Structures division is a provider of advanced composite aircraft components for military and commercial aircraft manufacturers, using highly automated composite fabrication techniques, including automated fiber placement and stiffener forming processes. It provides a wide variety of composite parts for the F-35 II Lightning, a fifth-generation fighter aircraft for the U.S. military and its allies. It also provides composite radomes and apertures for a number of military aircraft and provides wing stiffeners for the A400M military transport aircraft. The division provides very large fiber-placed and hand lay-up structures for the Atlas and Delta launch vehicles, and filament-wound composite cases for solid rocket motors and composite overwrapped pressure vessels.

The division has a commercial aerospace composites center of excellence facility in Clearfield, Utah, to support its commercial aerospace customers, including Airbus, Rolls Royce, and Boeing. The division is under contract to produce the majority of the composite stringers and frames for the Airbus A350 XWB wide-body passenger jetliner. Additional major commercial programs include a partnership with Rolls Royce to produce the aft fan case for the Trent XWB engine, which will be used to power the Airbus A350 aircraft, and a contract to produce composite frames for the Boeing 787-9 and 787-10 commercial aircraft.
Defense Systems Group
Defense Systems Group develops and produces military small-, medium-, and large-caliber ammunition, small-caliber commercial ammunition, precision weapons and munitions, high-performance gun systems, and propellant and energetic materials. It operates the Lake City Army Ammunition Plant in Independence, MO ("LCAAP") and a Naval Sea Systems Command (“NAVSEA”) facility in Rocket Center, WV. Defense Systems Group is also a leader in tactical solid rocket motor development and production for a variety of air-, sea- and land-based missile systems. The Group serves a variety of domestic and international customers in the defense and security markets in either a prime contractor, partner or supplier role.  Defense Systems Group also provides propulsion control systems that support Missile Defense Agency and NASA programs, airborne missile warning systems, advanced fuzes, and defense electronics.  The Group produces the U.S. Navy's Advanced Anti-Radiation Guided Missile (“AARGM”) and the Multi-Stage Supersonic Target (“MSST”), and has developed advanced air-breathing propulsion systems and special mission aircraft for specialized applications.
The following is a description of the divisions within Defense Systems Group:
Armament Systems Division
The Armament Systems division is home to the Company's precision fire weapons and medium- and large-caliber ammunition programs. It is under contract to produce the Precision Guidance Kit ("PGK") for 155mm artillery and is the developer and producer of the PGK units for 120mm mortars that are fielded as the U.S. Army's Advanced Precision Mortar Initiative. An additional program of note is the XM-25 Counter Defilade Target Engagement System (“XM-25”) under development for the U.S. Army. The division also produces the family of medium-caliber Bushmaster® chain guns and is a global systems designer and integrator of medium-caliber ammunition for integrated gun systems. These gun systems are used on a variety of ground combat vehicles, helicopters and naval vessels, including the Bradley Fighting Vehicle, the Light Armored Vehicle, coastal patrol craft and Apache helicopters. To date, the division has supplied approximately 18,000 medium-caliber gun systems to the U.S. military and allied forces worldwide. New products include a link-fed variant of the Apache gun-system for ground and naval applications. Armament Systems also leads Defense Systems Group's international co-production efforts and provides munitions support to allied nations.
Defense Electronics Division
The Defense Electronics division provides customers with advanced capabilities for offensive and defensive electronic warfare and specializes in weaponized airborne intelligence, surveillance and reconnaissance platforms and advanced anti-radiation homing missile systems, special-mission aircraft, missile warning systems, and mission support equipment. Key programs include the AARGM missile, the AAR-47 missile warning system used by U.S. and allied fixed and rotor-wing

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aircraft to defeat incoming missile threats and the MSST for the U.S. Navy. The division also provides special-mission aircraft that integrate sensors, fire control software, gun systems and air-to-ground weapons capability for use in counterinsurgency, border/coastal surveillance and security missions.
Missile Products Division
The Missile Products division provides customers with high-performance tactical solid rocket motor propulsion for a variety of surface and air-launched missile systems including Hellfire, Maverick, Advanced Medium-Range Air-to-Air Missile and Sidewinder. The division also produces fuzing and sensors for various artillery, mortar, grenade and air-dropped weapons including the Hard Target Void Sensing Fuze. The division produces metal components for various medium-caliber ammunition and 120mm tank ammunition and also produces specialty composite and ceramic structures used on military platforms and in energy applications. The division provides customers with the third-stage propulsion and the Solid Divert and Attitude Control System used to guide the kinetic warhead on the Standard Missile defense interceptor.  Additional capabilities include the STAR™ family of satellite orbit insertion motors, high performance rocket boosters, and advanced air-breathing propulsion for platforms designed for Mach 3+ flight. The Company continues to operate its New River Energetics facility located on the Radford Army Ammunition Plant (“RFAAP”) in Radford, VA, which provides energetics to support international program efforts and other business.
Small Caliber Systems Division
The Small Caliber Systems division is the largest producer of military small-caliber ammunition for the U.S., operating the LCAAP. The division provides non-NATO munitions and weapons systems to the U.S. Army for use by allied security forces. The division also provides commercial ammunition to Vista Outdoor. Since 2000, the Company has operated and modernized the LCAAP, and is currently under contract with the U.S. Army to operate LCAAP through September 2020. In fiscal 2015, the Company produced approximately 1.4 billion rounds of small-caliber ammunition in the facility, including the U.S. Army’s 5.56mm and 7.62mm enhanced performance rounds. In 2015, the Company also completed a move of 20mm production equipment to a remodeled facility in preparation for resumption of production in fiscal 2016.
Space Systems Group
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 other 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 re-supplying the ISS. This Group is also a provider of spacecraft components and subsystems and specialized engineering and operations services to U.S. government agencies.
The following is a description of the divisions within Space Systems Group:
Commercial Satellites Division
The Commercial Satellites division develops and produces small- and medium-class satellites that are used to enable global and regional communications and broadcasting and to collect imagery and other remotely-sensed data about the Earth. The Company's GEOStar™ -2 and -3 geostationary Earth orbit ("GEO") satellites are among the industry’s best-selling small- and medium-class communications satellites for 2 to 8 kilowatt missions. The world’s leading satellite communications service providers rely on our lower-cost, highly reliable GEOStar satellites for their broadband, television broadcasting, mobile communications, business data networks and other telecommunications missions The Company is also an industry pioneer in the design and production of commercial imaging satellites as well as in the incorporation of civil and military hosted payloads on its commercial spacecraft.

Government Satellites Division

The Government Satellites division develops and produces small- and medium-class satellites that conduct space-related scientific research, carry out interplanetary and other deep-space exploration missions, and demonstrate new space technologies. It also provides human-rated space systems for Earth-orbit and deep-space exploration. This includes cargo missions to the ISS under the CRS I program. The Company is currently under contract to deliver up to 20,000 kg of cargo to the ISS between 2013 and 2016. This division also designs and produces small- and medium-class satellites used for national security space programs and satellites used to conduct astrophysics, earth science/remote sensing, heliophysics, planetary exploration and technology demonstrations.



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Space Components Division
The Space Components division is a major supplier of satellite mechanical components and assemblies for a wide variety of commercial, civil, and defense spacecraft programs. It has strong market positions in spacecraft composite primary and secondary structures, satellite fuel and oxidizer tanks, precision structures, solar power arrays, deployable structures, and thermal control systems. ​

Technical Services Division
The Technical Services division provides a full spectrum of cost-effective engineering, manufacturing and program management services to NASA and other civil government and military space agencies. The division manages high-profile NASA science programs including its scientific sounding rocket and high-altitude balloon program offices.
Customers
Our sales have come primarily from contracts with agencies of the U.S. Government and its prime contractors and subcontractors and from major domestic and international commercial satellite operators and aircraft manufacturers. As the various U.S. Government customers, including the U.S. Army, U.S. Navy, NASA, and the U.S. Air Force, make independent purchasing decisions, we do not generally regard the U.S. Government as one customer. Instead, we view each agency as a separate customer.
Sales by customer as a percent of total sales were as follows:
 
 
Fiscal Year
 
 
2015
 
2014
 
2013
Sales to:
 
 
 
 
 
 
U.S. Army
 
27
%
 
33
%
 
38
%
U.S. Navy
 
15
%
 
16
%
 
16
%
NASA
 
13
%
 
14
%
 
14
%
U.S. Air Force
 
6
%
 
7
%
 
9
%
Other U.S. Government customers
 
14
%
 
14
%
 
10
%
Total U.S. Government customers
 
75
%
 
84
%
 
87
%
Commercial and foreign customers
 
25
%
 
16
%
 
13
%
Total
 
100
%
 
100
%
 
100
%
Sales to the U.S. Government and its prime contractors during the last three fiscal years were as follows:
Fiscal
U.S. Government
Sales
 
Percent of
Sales
2015
$
2,389
 million
 
75
%
2014
2,465
 million
 
84
%
2013
2,781
 million
 
87
%
Our reliance on U.S. Government contracts entails inherent benefits and risks, including those particular to the aerospace and defense industry. The military small-caliber ammunition contract, which is reported within Defense Systems Group, contributed 13%, 9% and 19% to the Company's sales in fiscal 2015, 2014 and 2013, respectively. No other single contract contributed more than 10% of our sales in fiscal 2015. Our top five contracts accounted for approximately 30% of fiscal 2015 sales.

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The breakdown of our fiscal 2015 sales to the U.S. Government as a prime contractor and a subcontractor was as follows:
Sales as a prime contractor
62
%
Sales as a subcontractor
38
%
Total
100
%
No single customer, other than the U.S. Government customers listed above, accounted for more than 10% of our fiscal 2015 sales.
International sales for each of the last three fiscal years are summarized below:
Fiscal
International Sales
 
Percent of
Sales
2015
$
613
 million
 
19.3
%
2014
348
 million
 
11.9
%
2013
330
 million
 
10.3
%
Sales to foreign governments and other international customers may require approval by the U.S. Department of Defense ("DoD") and the U.S. State Department or the U.S. Commerce Department. Our products are sold directly to U.S. allies as well as through the U.S. Government. Approximately 31% of these sales were in Flight Systems Group, 57% were in Defense Systems Group, and 12% were in Space Systems Group. Sales to no individual country outside the United States accounted for more than 4% of the Company's sales in fiscal 2015.
Backlog
Firm backlog is the estimated value of contracts for which orders have been recorded, but for which revenue has not yet been recognized. The total amount of firm backlog was approximately $8.0 billion and $5.6 billion as of March 31, 2015 and 2014, respectively. Approximately $1.6 billion of firm backlog was not yet funded as of March 31, 2015. We expect that approximately 43% of the March 31, 2015 firm backlog will be recognized as revenue in the following twelve months.
Total backlog, which includes firm backlog plus the value of unexercised options, was approximately $12.1 billion as of March 31, 2015 and $6.0 billion as of March 31, 2014.
Seasonality
Our business is not seasonal.
Competition
We compete against other U.S. and foreign prime contractors and subcontractors, many of which have substantially more resources to deploy than we do in the pursuit of government and industry contracts. Our ability to compete successfully in this environment depends on a number of factors, including the effectiveness and innovativeness of research and development programs, our ability to offer better program performance than our competitors at a lower cost, our readiness with respect to facilities, equipment, and personnel to undertake the programs for which we compete, and our past performance and demonstrated capabilities.
Additional information on the risks related to competition can be found under "Risk Factors" in Item 1A. of this report.
The Company generally faces competition from a number of competitors in each business area, although no single competitor competes along all of the Company's segments. The Company's principal competitors in each of its segments are as follows:
Flight Systems Group:    Aerojet-Rocketdyne Holdings, Inc.; Lockheed Martin Corporation; United Launch Alliance (a joint venture between Lockheed Martin Corporation and The Boeing Company); Space Exploration Technologies Corporation (SpaceX); Coleman Aerospace, a division of L-3 Communications Holdings, Inc.; Kratos Defense & Security Solutions, Inc.; Arianespace SA; Kilgore Flares Company, LLC, a subsidiary of Chemring North American; Northrop Grumman Aerospace Systems; GKN Aerospace Company; Vought Aircraft, a division of Triumph Aerostructures; Exelis Aerostructures; Daher Group; HITCO Aerostructures; and Spirit Aerosystems Company.

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Defense Systems Group:   Aerojet-Rocketdyne Holdings, Inc.; General Dynamics Corporation; Lockheed Martin Corporation; Raytheon Company; L-3 Communications Holdings, Inc.; Northrop Grumman Corporation; BAE Systems, Chemring Group; Nammo AS; and various international producers of ammunition and guns.
Space Systems Group: Lockheed Martin Corporation; Airbus Defense and Space; The Boeing Company; Space Systems/Loral, a subsidiary of MacDonald, Dettwiler and Associates Ltd.; Reshetnev Company - Information Satellite Systems; Thales Alenia Space; Mitsubishi Electric Corp.; Ball Aerospace and Technologies Corp.; Sierra Nevada Corporation; Surrey Satellite Technology Limited, a subsidiary of Airbus Group; Space Exploration Technologies Corp..
Research and Development
We conduct extensive research and development ("R&D") activities. Company-funded R&D is primarily for the 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. R&D expenditures were as follows:
Fiscal
Company-funded
 
Customer-funded
2015
$
49.3
 million
 
$
499.0
 million
2014
48.5
 million
 
495.1
 million
2013
56.0
 million
 
538.7
 million
Raw Materials and Components
We use a broad range of raw materials in manufacturing our products, including aluminum, steel, copper, lead, graphite fiber, epoxy resins, zinc, and adhesives. We monitor the sources from which we purchase raw materials in an attempt to ensure there are adequate supplies to support our operations. We monitor the price of materials, particularly commodity metals like copper, which have fluctuated dramatically over the past several years.
We also use sub-assemblies and instruments in our products and obtain parts and equipment that are used in the production of our products or in the provision of our services from domestic and foreign suppliers and the U.S. Government. Generally, we have not experienced material difficulty in obtaining product components or necessary parts and equipment and we believe that alternatives to our existing sources of supply are available in most cases.
We procure materials and components from a variety of sources. In the case of our government contracts, we are often required to purchase from sources approved by the U.S. Department of Defense. When our suppliers or others choose to eliminate certain materials or components we require from their product offering, we attempt to qualify other suppliers or replacement materials to ensure there are no disruptions to our operations.
We rely upon sole-source suppliers for many of our satellite and launch vehicle components, including our liquid-propellant rocket engines. The inability of our current suppliers to provide us with key components could result in significant contract delays, cost increases and loss of revenues due to the time, resources and effort that would be required to develop or adapt other engines or components for use in our products. For example, our Antares launch vehicle has used liquid-propellant AJ-26 engines, which are modified Russian rocket engines, for its first stage. Following the Antares launch failure in October 2014, the Company discontinued use of these engines and has signed an agreement to purchase another Russian-manufactured engine, the RD-181, for use as a replacement, which will require testing and expense to integrate with the Antares launch vehicle.
Additional information on the risks related to raw materials and components can be found under "Risk Factors" in Item 1A of this report.
Intellectual Property
As of March 31, 2015, we owned 411 U.S. patents and 257 foreign patents. We also had approximately 126 U.S. patent applications and approximately 146 foreign patent applications pending.
Although we manufacture various products covered by patents, we do not believe that any single existing patent, license, or group of patents is material to our success. We believe that unpatented research, development, and engineering skills also make an important contribution to our business. The U.S. Government typically receives royalty-free licenses to inventions made under U.S. Government contracts. Consistent with our policy to protect proprietary information from unauthorized disclosure, we ordinarily require employees to sign confidentiality agreements as a condition of employment.
As many of our products are complex and involve patented and other proprietary technologies, we face a risk of claims that we have infringed upon third-party intellectual property rights. Such claims could result in costly and time-consuming litigation, the invalidation of intellectual property rights, or increased licensing costs.

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Regulatory Matters
U.S. Governmental Contracts
We are subject to the procurement policies and procedures set forth in the Federal Acquisition Regulation ("FAR"). The FAR governs all aspects of government contracting, including competition and acquisition planning; contracting methods and contract types; contractor qualifications; and acquisition procedures. Every government contract contains a list of FAR provisions that must be complied with in order for the contract to be awarded. The FAR provides for regular audits and reviews of contract procurement, performance, and administration. Failure to comply with the provisions of the FAR could result in contract termination.
The U.S. Government may terminate its contracts with its suppliers, either for convenience or in the event of a default as a result of our failure to perform under the applicable contract. If a cost-plus contract is terminated for convenience, we are entitled to reimbursement of our approved costs and payment of a total fee proportionate to the percentage of the work completed under the contract. If a fixed-price contract is terminated for convenience, we are entitled to payment for items delivered to and accepted by the U.S. Government and fair compensation for work performed plus the costs of settling and paying claims by terminated subcontractors, other settlement expenses, and a reasonable profit on the costs incurred or committed. If a contract termination is for default, we are paid an amount agreed upon for completed and partially completed products and services accepted by the U.S. Government and may be liable to the U.S. Government for repayment of any advance payments and progress payments related to the terminated portions of the contract, as well as excess costs incurred by the U.S. Government in procuring undelivered items from another source. Additional information on the risks related to government contracts can be found under "Risk Factors" in Item 1A. of this report.
We also must comply with U.S. and foreign laws governing the export of munitions and other controlled products and commodities. These include regulations relating to import-export control, exchange controls, the Foreign Corrupt Practices Act, and the anti-boycott provisions of the U.S. Export Administration Act.
Environmental
Our operations are subject to a number of federal, state and local environmental laws and regulations, as well as applicable foreign laws and regulations that govern the discharge, treatment, storage, remediation and disposal of certain materials and wastes, and restoration of damages to the environment. Compliance with these laws and regulations is a responsibility we take seriously. We believe that forward-looking, proper, and cost-effective management of air, land, and water resources is vital to the long-term success of our business. Our environmental policy identifies key objectives for implementing this commitment throughout our operations. Additional information on the risks related to environmental matters can be found under "Risk Factors" in Item 1A of this report.
Employees
As of March 31, 2015, the Company had approximately 12,300 employees. The Company has union-represented employees at five locations, comprising less than 20% of its total workforce.  One location has two separate bargaining units, each with its own collective bargaining agreement (“CBA”).  One location is currently negotiating its initial CBA with the Company.  The Company’s current CBAs expire in calendar years 2015, 2016 and 2017.
Executive Officers
The following table sets forth certain information with respect to the Company's executive officers as of May 6, 2015:
Name
Age
 
Title
David W. Thompson
61
 
President and Chief Executive Officer
Blake E. Larson
55
 
Chief Operating Officer
Garrett E. Pierce
70
 
Chief Financial Officer
Frank L. Culbertson, Jr.
65
 
Executive Vice President and President, Space Systems Group
Antonio L. Elias
66
 
Executive Vice President and Chief Technical Officer
Ronald J. Grabe
69
 
Executive Vice President and President, Flight Systems Group
Michael A. Kahn
56
 
Executive Vice President and President, Defense Systems Group
Thomas E. McCabe
60
 
Senior Vice President, General Counsel and Secretary
Christine A. Wolf
55
 
Senior Vice President, Human Resources

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Each of the above individuals serves at the pleasure of the Board of Directors and is subject to reelection annually on the date of the Annual Meeting of Stockholders. No family relationship exists among any of the executive officers or among any of them and any director of the Company. There are no outstanding loans from the Company to any of these individuals. Information regarding the employment history (in each case with the Company unless otherwise indicated) of each of the executive officers is set forth below.
David W. Thompson has served in his present position since the Merger on February 9, 2015. Mr. Thompson has also been a director of the Company since the Merger. He co-founded Orbital and served as Chairman of the Board and Chief Executive Officer of Orbital from 1982 until the Merger. From 1982 until October 1999, he also served as President of Orbital, a role he resumed in mid-2011. Prior to founding Orbital, Mr. Thompson was employed by Hughes Electronics Corporation as special assistant to the President of its Missile Systems Group and by NASA at the Marshall Space Flight Center as a project manager and engineer, and also worked on the Space Shuttle’s autopilot design at the Charles Stark Draper Laboratory. Mr. Thompson is an Honorary Fellow of the American Institute of Aeronautics and Astronautics, a Fellow of the American Astronautical Society and the Royal Aeronautical Society, and is a member of the U.S. National Academy of Engineering. He also serves as a member of the Board of Trustees of the California Institute of Technology.
Blake E. Larson has served in his present position since the Merger on February 9, 2015. From April 2010 until February 9, 2015, he served as the Company's Senior Vice President and President Aerospace Group. From 2009 to March 2010, he was Senior Vice President and President Space Systems. From 2008 to 2009, he was Executive Vice President Space Systems, and also General Manager Spacecraft Systems from August 2008 to January 2009. From 2006 to 2008, he was Executive Vice President of Mission Systems Group. Prior to that, Mr. Larson held a variety of key leadership positions in operations of several businesses within the Company's aerospace and defense portfolio.
Garrett E. Pierce has served in his present position since the Merger on February 9, 2015. He was Vice Chairman and Chief Financial Officer of Orbital from 2002 until the Merger, and was Executive Vice President and Chief Financial Officer of Orbital from 2000 to 2002. From 1996 until 2000, he was Executive Vice President and Chief Financial Officer of Sensormatic Electronics Corp., a supplier of electronic security systems, where he was also named Chief Administrative Officer in July 1998. Prior to joining Sensormatic, Mr. Pierce was the Executive Vice President and Chief Financial Officer of California Microwave, Inc., a supplier of microwave, radio frequency, and satellite systems and products for communications and wireless networks. From 1980 to 1993, Mr. Pierce was employed by Materials Research Corporation, a provider of thin film equipment and high purity materials to the semiconductor, telecommunications and media storage industries, where he progressed from Chief Financial Officer to President and Chief Executive Officer. Materials Research Corporation was acquired by Sony Corporation in 1989. From 1972 to 1980, Mr. Pierce held various management positions with The Signal Companies. Mr. Pierce is a director of Kulicke and Soffa Industries, Inc.
Frank L. Culbertson, Jr. has served in his present position since the Merger on February 9, 2015. He was Orbital's Executive Vice President and General Manager, Advanced Programs Group from September 2012 until the Merger. From 2008 to 2012, he served as Orbital's Senior Vice President in the Advanced Program Group, where he headed human space systems efforts. Prior to joining Orbital, Mr. Culbertson was a Senior Vice President at Science Applications International Corporation from 2002 to 2008. Before entering the private sector, Mr. Culbertson served as a NASA astronaut for 18 years, flying three Space Shuttle missions, and began his career as a pilot in the U.S. Navy.
Antonio L. Elias has served in his present position since the Merger on February 9, 2015. He was Executive Vice President and Chief Technical Officer of Orbital from September 2012 until the Merger. From October 2001 to September 2012, he served as Orbital's Executive Vice President and General Manager, Advanced Programs Group, and was Orbital's Senior Vice President and General Manager, Advanced Programs Group from 1997 to 2001. From 1996 until 1997, Dr. Elias served as Senior Vice President and Chief Technical Officer of Orbital. From 1993 through 1995, he was Orbital's Senior Vice President for Advanced Projects, and was Orbital's Senior Vice President, Space Systems Division from 1990 to 1993. He was Vice President, Engineering of Orbital from 1989 to 1990 and was Orbital's Chief Engineer from 1986 to 1989. From 1980 to 1986, Dr. Elias was an Assistant Professor of Aeronautics and Astronautics at Massachusetts Institute of Technology. He was elected to the National Academy of Engineering in 2001.
Ronald J. Grabe has served in his present position since the Merger on February 9, 2015. He was Orbital's Executive Vice President and General Manager, Launch Systems Group from 1999 until the Merger. From 1996 to 1999, he was Senior Vice President and Assistant General Manager of Orbital's Launch Systems Group and was Senior Vice President of Orbital's Launch Systems Group from 1995 to 1996. From 1994 to 1995, Mr. Grabe served as Vice President for Business Development in Orbital's Launch Systems Group. From 1980 to 1993, Mr. Grabe was a NASA astronaut, during which time he flew four Space Shuttle missions and was lead astronaut for development of the International Space Station.

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Michael A. Kahn has served in his present position since the Merger on February 9, 2015. From April 2012 until February 9, 2015, he served as the Company's Senior Vice President and President Defense Group. From August 2010 through March 2012, he was Senior Vice President and President Missile Products Group. From 2009 to August 2010, he was Executive Vice President Aerospace Systems. From 2008 to 2009, he was Vice President and General Manager Launch Systems and, from 2001 to 2008, he was Vice President Space Launch Systems. From 1997 to 2001 he was Vice President Operations and played a key role in the integration of Thiokol and ATK. From 1989 to 1997, he held a number of senior leadership positions across a variety of programs and operations of the Company. Prior to that he was with Rockwell International, Rocketdyne Division and held a number of positions across engineering, quality and reliability assurance, launch site operations, and rocket engine testing.
Thomas E. McCabe has served in his present position since the Merger on February 9, 2015. He was Senior Vice President, General Counsel and Corporate Secretary of Orbital from January 2014 until the Merger. Before joining Orbital, he served from 2010 to 2014 as Senior Vice President, General Counsel and Secretary of Alion Science and Technology Corporation, a provider of advanced engineering and technology solutions. From 2008 to 2010 he served as Executive Vice President and General Counsel, and President of the Federal business, of Braintech, Inc., which provided automated vision systems for industrial and military robots. Earlier in his career, he was Vice President and Deputy General Counsel of XM Satellite Radio from 2005 through its merger with Sirius Satellite Radio in 2008. He also served as President, CEO and a director of software provider MicroBanx Systems from 2001 to 2005, and President, CEO and a director of its parent company, COBIS Corporation, from 2004 to 2005. From 1992 to 2000, he was a senior executive at GRC International, Inc., a provider of advanced software and technology solutions, serving as Senior Vice President, General Counsel, Secretary and Director of Corporate Development through its sale to AT&T in 2000. He was an attorney in private practice from 1982 to 1991. He began his career as judicial clerk for Judge Charles R. Richey at the United States District Court for the District of Columbia from 1981 to 1982.
Christine A. Wolf has held her present position since joining the Company in March 2011. She has more than 30 years of experience in the Human Resources field. Prior to joining the Company, she was the Senior Vice President and Chief Human Resources Officer for Fannie Mae from 2008 to March 2011. Prior to that, she was the Chief Human Resources Officer for E*Trade from 2004 to 2008.
Available Information
You can find reports on our Company filed with the Securities and Exchange Commission ("SEC") on our Internet site at www.orbitalatk.com under the "Investors" heading free of charge. These include our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. We make these reports available as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.
You can also obtain these reports from the SEC's Public Reference Room, which is located at 100 F Street NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room is available by phone (1-800-SEC-0330) or on the Internet (www.sec.gov). This site contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
The content on any website referred to in this Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.
ITEM 1A.    RISK FACTORS
The Company is subject to a number of risks, including those related to being a U.S. Government contractor and those related to domestic and international commercial sales. The material risks facing the Company are discussed below.
The Company's business could be adversely impacted by reductions or changes in NASA or U.S. Government military spending.
As a substantial portion of the Company's sales are to the U.S. Government and its prime contractors, the Company depends heavily on the contracts underlying these programs. Significant portions of the Company's sales come from a small number of contracts. The military small-caliber ammunition contract, which is reported within Defense Systems Group, contributed 13%, 9% and 19% to the Company's sales in fiscal 2015, 2014 and 2013, respectively. No other single contract contributed more than 10% of our sales in fiscal 2015. The Company's top five contracts, all of which are contracts with the U.S. Government, accounted for approximately 30% of fiscal 2015 sales. The loss or significant reduction of a material program in which the Company participates could have a material adverse effect on the Company's operating results, financial condition, or cash flows.

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U.S. Government contracts are dependent on the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take more than one year. As a result, at the outset of a major program, the contract is usually incrementally funded, and additional monies are normally committed to the contract by the procuring agency only as Congress makes appropriations for future fiscal years. In addition, most U.S. Government contracts are subject to modification if funding is changed. Key programs in which the Company participates must compete with other programs for consideration during the federal budgeting and appropriation process, and support and funding for any U.S. Government program may be influenced by general economic conditions, political considerations and other factors. A decline in U.S. Government support and funding for programs in which the Company participates could result in contract terminations, delays in contract awards, the failure to exercise contract options, the cancellation of planned procurements and fewer new business opportunities, any of which could have a material adverse effect on the Company's operating results, financial condition or cash flows.
The government budget structure remains constrained by the 2011 Budget Control Act, which initially reduced the DoD topline budget by approximately $490 billion over 10 years starting in fiscal year 2012, and subsequent amendments that continue to keep DoD spending flat or down compared to previous years. Budget pressures, such as rising personnel costs despite significant force reductions in the Army and Marine Corps, present challenges to modernization and research and development accounts. The Company is experiencing a period where force reductions and a winding-down of overseas contingency operations, coupled with reduced training cycles and fairly healthy inventory levels for many ammunition and missile items, are resulting in less demand in some categories of products, a trend which is expected to continue for the foreseeable future.
In December 2014, Congress approved, and the President signed, an omnibus spending bill for the remainder of Government Fiscal Year ("GFY15"), removing the threat of future government shutdowns and the difficulties of operating under a continuing resolution for GFY15. Total GFY15 funding, including funding for most DoD programs, remain flat at GFY14 levels. NASA funding received a modest increase for the GFY15 budget, including an increase in the budget for the SLS program, for which the Company is a key supplier. However, continuing concerns about deficit spending, along with ongoing economic challenges, continue to place pressure on U.S. Government budgets. In addition, should a continuing resolution be used to fund U.S. Government operations after GFY15 or should the threat of sequestration remain a concern, such uncertainties may cause government contract awards to be delayed, canceled or funded at lower levels. The Company has several significant U.S. government contracts or subcontracts, including those discussed below and elsewhere in this Form 10-K, which could negatively impact the financial condition and operating results of the Company if they were canceled or funded at reduced levels.
In the event NASA were to cancel the SLS program, the Company believes that it will be reimbursed for certain amounts previously incurred by the Company, as well as amounts to be incurred by the Company, as part of that termination, (e.g., severance, environmental liabilities, and termination administration). There can be no assurance, however, that the Company would be successful in collecting reimbursement of any termination liability costs. As of March 31, 2015, the Company had $56 million of net property, plant, and equipment and other assets related to the SLS program and other contracts, and $440 million of goodwill recorded related to the Flight Systems Group. These assets would be subject to impairment testing if significant changes are made to the SLS program and related contracts in future periods.
The Company's CRS I contract with NASA to deliver cargo to the International Space Station is a significant part of the Company's business. On October 28, 2014, Orbital's Antares launch vehicle that was carrying the Company's unmanned Cygnus spacecraft on a cargo delivery mission to the ISS for NASA under Orbital's CRS I contract experienced a launch failure shortly after liftoff from the Wallops Flight Facility in Virginia. The accident investigation board's review is ongoing and the final outcome of such review cannot be assured. The ultimate impact of the Antares incident on the Company depends upon a number of factors and circumstances, as described herein.
The Company has developed plans to fulfill its obligations to deliver all remaining cargo to the ISS under the CRS I contract. However, there can be no assurance that the planned future Cygnus missions will occur on the contemplated timetable or will be successful. The Company believes that its plans will allow it to deliver all of the required cargo under the CRS I contract in four future Cygnus missions to the ISS rather than the five that had been previously planned. The Company expects the increased costs associated with the use of one or two non-Antares launch vehicles to be substantially offset by the cost savings of delivering the requisite cargo to the ISS using one less Cygnus mission (four instead of five). However, the assumptions underlying the estimated increase in costs and the amount of cost savings are inherently uncertain and, although considered reasonable by the management of the Company, are subject to significant risks and uncertainties that could cause actual results to differ materially from those contained in the estimates. In addition, the ability to achieve cost savings will depend on the ability of the Company's subcontractors to deliver necessary components on-budget and in a timely manner. Given the right of U.S. Government customers to terminate contracts for convenience, there can be no assurance that the remaining backlog for this contract will ultimately be recognized in the Company's revenue. NASA could cancel this contract

11



for any reason, including as a result of reductions in appropriations or our failure to achieve milestones due to technical issues or delays resulting from the Antares launch failure. A cancellation of the CRS I contract could have a material adverse effect on our operating results, financial condition, or cash flows.
The Company's small-caliber ammunition operations for the U.S. military and U.S. allies are conducted at the LCAAP in Independence, Missouri. Lake City is the Army's principal small-caliber ammunition production facility and is the primary supplier of the U.S. military's small-caliber ammunition needs. The Company took over operation of this facility in 2000 and is responsible for the operation and management, including leasing excess space to third parties in the private sector. In September 2012, the Company was awarded a new contract for the continued production of ammunition and continued operation and maintenance of LCAAP. The production contract runs through September 2019 and the facility contract runs through September 2020, with an option to extend the contract to 2023. As a result of the significant competition for this contract, the Company has experienced a lower profit rate in the Small-Caliber Systems division following the implementation of our new contract. In addition, future levels of government spending cannot be predicted with certainty and thus the Company's production under this contract cannot be predicted with certainty.
The Company is subject to intense competition for U.S. Government contracts and programs and therefore may not be able to compete successfully.
The Company encounters competition for most contracts and programs, including in particular, U.S. government contracts. Some of our competitors have substantially greater financial, technical, marketing, manufacturing, distribution, and other resources. The Company's ability to compete for these contracts depends to a large extent upon:
its effectiveness and innovativeness of research and development programs,
its ability to offer better program performance at a lower cost than the competitors,
its readiness with respect to facilities, equipment and personnel to undertake the programs for which it competes, and
its past performance and demonstrated capabilities.
The Company is competing with at least three other companies for the next round of contracts for cargo resupply services to the International Space Station, known as the Commercial Resupply Services-2 ("CRS II") program. NASA has stated that it intends to award CRS II program contracts to one or more companies for six or more flights per contract. The awarded contracts will cover deliveries through 2020, with the option for NASA to purchase additional launches through 2024. NASA could decide not to award any CRS II program contracts to the Company for a number of reasons, including Orbital's October 2014 Antares launch failure. The failure to receive a contract award under the CRS II program could have a material adverse affect on the Company's revenues, profit and cash flows. Even if the Company is awarded a contract under the CRS II program, competitors may submit bid protests challenging the award on the basis of the Antares launch failure or other factors, which may result in NASA taking corrective action and making an award to another competitor. Any such bid protest may require the Company to expend considerable funds to defend the award and could delay the commencement of the CRS II program and any payments to the Company thereunder.
In some instances, the U.S. Government directs a program to a single supplier. In these cases, there may be other suppliers who have the capability to compete for the programs involved, but they can only enter or reenter the market if the U.S. Government chooses to open the particular program to competition and, as such, these types of programs are subject to risk of the U.S. Government providing new awards to other suppliers. The Company's sole-source contracts accounted for 63% of its U.S. Government sales in fiscal 2015.
The downsizing of the munitions industrial base has resulted in a reduction in the number of competitors through consolidations and departures from the industry. This has reduced the number of competitors for some contracts and programs, but has strengthened the capabilities of some of the remaining competitors. In addition, it is possible that there will be increasing competition from the remaining competitors in business areas where they do not currently compete, particularly in those business areas dealing with electronics, as a result of budget pressures caused by Congressional appropriations and sequestration.
The Company may not be able to react to increases in its costs due to the nature of its U.S. Government contracts.
The Company's U.S. Government contracts can be categorized as either "cost-plus" or "fixed-price."
Cost-Plus Contracts.    Cost-plus contracts are cost-plus-fixed-fee, cost-plus-incentive-fee, or cost-plus-award-fee contracts. Cost-plus-fixed-fee contracts allow the Company to recover its approved costs plus a fixed fee. Cost-plus-incentive-fee contracts and cost-plus-award-fee contracts allow the Company to recover its approved costs plus a fee that can fluctuate

12



based on actual results as compared to contractual targets for factors such as cost, quality, schedule, and performance. The award or incentive fees that are typically associated with these programs are subject to uncertainty and may be earned over extended periods. In these cases, the associated financial risks are primarily in lower profit rates or program cancellation if cost, schedule, or technical performance issues arise.
Fixed-Price Contracts.    Fixed-price contracts are firm-fixed-price, fixed-price-incentive, or fixed-price-level-of-effort contracts. Under firm-fixed-price contracts, the Company agrees to perform certain work for a fixed price and absorb any cost overruns. Fixed-price-incentive contracts are fixed-price contracts under which the final contract price may be adjusted based on total final costs compared to total target cost, and may be affected by schedule and performance. Fixed-price-level-of-effort contracts allow for a fixed price per labor hour, subject to a contract cap. All fixed-price contracts present the inherent risk of unreimbursed cost overruns. If the initial estimates used to calculate the contract price and the cost to perform the work prove to be incorrect, there could be a material adverse effect on operating results, financial condition, or cash flows. In addition, some contracts have specific provisions relating to cost, schedule, and performance. If the Company fails to meet the terms specified in those contracts, the cost to perform the work could increase or the Company's price could be reduced, which would adversely affect the Company's financial condition. The U.S. Government also regulates the accounting methods under which costs are allocated to U.S. Government contracts.
The following table identifies, by contract-type, the amount contributed to the Company's U.S. Government business in fiscal 2015:
Cost-plus contracts:
 
Cost-plus-fixed-fee
15
%
Cost-plus-incentive-fee/cost-plus-award-fee
12
%
Fixed-price contracts:
 
Firm-fixed-price
73
%
Total
100
%
The Company uses estimates in accounting for its programs. Changes in estimates could affect the Company's financial results.
Contract accounting requires judgment relative to assessing risks, estimating contract revenues, including the impact of scope change negotiations, estimating program costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of the Company's contracts, the estimation of total revenues and cost at completion is complex and subject to many variables. Assumptions are made regarding the length of time to complete the contract because costs also include expected increases in wages and prices for materials. Similarly, many assumptions are made regarding the future impacts of such things as the business base, efficiency initiatives, cost reduction efforts, contract changes and claim recovery. Incentives or penalties related to performance on contracts are considered in estimating revenue and profit rates, and are recorded when there is sufficient information to assess anticipated performance. Estimates of award and incentive fees are also used in estimating revenue and profit rates based on actual and anticipated awards.
Because of the significance of the judgments and estimation processes described above, it is possible that materially different amounts could be recorded if the Company used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect future period financial performance. Additional information on the Company's accounting policies for revenue recognition can be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the section titled "Critical Accounting Policies" in Item 7 of this report.
The Company's U.S. Government contracts are subject to termination.
The Company's direct and indirect contracts with the U.S. Government or its prime contractors may be terminated or suspended at any time, with or without cause, for the convenience of the government or in the event of a default by the contractor. If a cost-plus contract is terminated, the contractor is entitled to reimbursement of its approved costs. If the contractor would have incurred a loss had the entire contract been performed, then no profit is allowed by the U.S. Government.
If the termination is for convenience, the contractor is also entitled to receive payment of a total fee proportionate to the percentage of the work completed under the contract. If a fixed-price contract is terminated, the contractor is entitled to receive payment for items delivered to and accepted by the U.S. Government. If the termination is for convenience, the contractor is also entitled to receive fair compensation for work performed plus the costs of settling and paying claims by terminated

13



subcontractors, other settlement expenses, and a reasonable profit on the costs incurred or committed. While the contractor is entitled to these claims under either type of contract, there can be no assurance that these amounts will be recovered.
If a contract termination is for default:
the contractor is paid an amount agreed upon for completed and partially completed products and services accepted by the U.S. Government,
the U.S. Government is not liable for the contractor's costs for unaccepted items, and is entitled to repayment of any advance payments and progress payments related to the terminated portions of the contract, and
the contractor may be liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source.
Other risks associated with U.S. Government contracts may expose the Company to adverse consequences.
Like all U.S. Government contractors, the Company is subject to possible losses on contracts due to risks associated with uncertain cost factors related to:
scarce technological skills and components,
the frequent need to bid on programs in advance of design completion, which may result in unforeseen technological difficulties and/or cost overruns,
the substantial time and effort required for design and development,
design complexity,
rapid obsolescence, and
the potential need for design improvement.
The Company is subject to procurement and other related laws and regulations, and non-compliance may expose the Company to adverse consequences.
The Company is subject to extensive and complex U.S. Government procurement laws and regulations, along with ongoing U.S. Government audits and reviews of contract procurement, performance, and administration. As a result, U.S. Government agencies, including the Defense Contract Audit Agency, various agency Inspectors General and the Department of Justice, routinely audit and investigate government contractors. In addition, these agencies often investigate the Company's launch vehicle failures and other material occurrences relating to our products, including a current investigation of the Orbital 2009 OCO and 2011 Glory launch failures. These agencies review a contractor's performance under its contracts, cost structure and compliance with applicable laws, regulations and standards, including procurement integrity laws and the False Claims Act.
Charging practices relating to labor, research and development, and other costs that may be charged directly or indirectly to U.S. Government contracts are often scrutinized to determine that such costs are allowable under U.S. Government contracts and furthermore that such costs are reasonable. Any costs determined to be unallowable or unreasonable may not be reimbursed, and such costs already reimbursed may be subject to repayment. If the amount of such costs were significant, the Company's results of operations, financial condition and cash flow could be materially adversely affected. We expect to recover a significant portion of the Company's research and development expenses through billings under certain of our U.S. Government contracts in accordance with applicable regulations, but such billings could be reversed or rejected by the U.S. Government. Our inability to recover a significant portion of such expenses could materially adversely affect the Company's operating results, financial condition or cash flows.
U.S. Government agencies also review the adequacy of, and a contractor's compliance with, its internal control systems and policies, including the contractor's purchasing, property, estimating, compensation, accounting and information systems. Adverse findings relating to the Company's systems could result in the U.S. Government customer withholding a percentage of payments and also could impact the Company's ability to win new U.S. Government contracts or exercise contract options.
Responding to government audits, inquiries or investigations may involve significant expense and divert management attention. Also, if an audit or investigation were to uncover improper or illegal activities, the Company could be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or prohibition from doing business with the U.S. Government. In addition, the Company could suffer serious reputational harm if allegations of impropriety were to be made against the Company.

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Novation of U.S. Government contracts involves risk.
When U.S. Government contracts are transferred from one contractor to another, such as in connection with the sale of a business, the U.S. Government may require that the parties enter into a novation agreement. A novation agreement generally provides that:
the transferring contractor guarantees or otherwise assumes liability for the performance of the acquiring contractor's obligations under the contract,
the acquiring contractor assumes all obligations under the contract, and
the U.S. Government recognizes the transfer of the contract and related assets.
If the U.S. Government elects not to novate a particular contract, the Company may not recognize the full value of that contract over its lifetime.
Decreases in demand for military and commercial ammunition could adversely affect the Company's financial performance.
The Company sells military ammunition to DoD and commercial ammunition to Vista Outdoor Inc. under an ammunition supply agreement. Both the commercial and military markets for ammunition are subject to a number of risks and uncertainties that can cause demand to fluctuate. In particular, decreases in the demand for ammunition in either market could result in excess manufacturing capacity and increased overhead as a result, which could have an impact on the Company's operating results. The Company experienced a decrease in demand for commercial ammunition in fiscal 2015 and also has experienced a decline in demand for military ammunition in recent years. Further declines could materially affect the Company's business and results of operations. In addition, manufacturing costs for ammunition could rise as a result of a number of factors, including increases in commodity prices and increases in labor costs at our LCAAP, which could also have an adverse effect on the Company's operating results and profit margin.
The Company manufactures and sells products that create exposure to potential product liability, warranty liability or personal injury claims and litigation.
The Company's products may expose it to potential product liability, warranty liability or personal injury claims relating to the use of those products. The resolution of such claims is not expected to have a material adverse effect on the Company's business, and the Company maintains insurance coverage to mitigate a portion of these risks, which we believe to be adequate. However, the Company's reputation may be adversely affected by such claims, whether or not successful, including potential negative publicity about its products.
The Company is exposed to risks associated with expansion into new and adjacent commercial markets.
The Company's long-term business growth strategy includes further expansion into markets such as commercial aerospace structures. Such efforts involve a number of risks, including increased capital expenditures, market uncertainties, schedule delays, performance risk, extended payment terms, diversion of management attention, additional credit risk associated with new customers, and costs incurred in competing with companies with strong brand names and market positions. An unfavorable event or trend in any one or more of these factors could adversely affect the Company's operating results, financial condition, or cash flows.
International sales are subject to greater risks that sometimes are associated with doing business in foreign countries.
A growing portion of our business is derived from international markets. In fiscal 2015, approximately 19% of the Company's sales were to foreign customers, compared to 12% in the prior year, and the Merger has further increased the percentage of business derived from international markets. The Company also procures certain key components from non-U.S. vendors. The Company's international business may pose greater risks than its business in the United States because in some countries there is increased potential for changes in economic, legal and political environments. The Company's international business is also sensitive to changes in a foreign government's national priorities and budgets. International transactions frequently involve increased financial and legal risks arising from differing legal systems and customs in other countries. In addition, some international customers require contractors to agree to offset programs that may require in-country purchases or manufacturing or financial support arrangements as a condition to awarding contracts. The contracts may include penalties in the event the Company fails to perform in accordance with the offset requirements. Furthermore, the expansion of the Company's international business may create more difficulties and risks to the Company with respect to the maintenance of an integrated supply chain network. An unfavorable event or trend in any one or more of these factors could adversely affect the Company's operating results, financial condition, or cash flows. Foreign sales subject the Company to numerous stringent U.S. and foreign laws and regulations, including regulations relating to import-export control, exchange controls, the Foreign

15



Corrupt Practices Act and certain other anti-corruption laws, and the anti-boycott provisions of the U.S. Export Administration Act. Failure to comply with these laws and regulations could result in material adverse consequences to the Company.
The Company's products are subject to extensive regulation.
The Company is required to comply with extensive regulation of its products, including those rules and regulations administered by the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), the U.S. Department of Homeland Security, the U.S. Department of State and the U.S. Department of Commerce. These laws include, but are not limited to, the Foreign Corrupt Practices Act (FCPA), International Traffic in Arms Regulations (ITAR), and the Chemical Facility Anti-Terrorism Standards (CFATS). Compliance with these laws is costly and time consuming. A violation of these laws could result in significant fines and penalties and could have a material adverse effect on our business.
The Company is exposed to market risk from changes in foreign currency exchange rates which could negatively impact profitability.
Sales and purchases in currencies other than the U.S. dollar expose the Company to fluctuations in foreign currencies relative to the U.S. dollar and may adversely affect the Company's results of operations. Currency fluctuations may affect product demand and prices the Company pays for materials and, as a result, the Company's operating margins may be negatively impacted. Fluctuations in exchange rates may give rise to translation gains or losses when financial statements of the Company's non-U.S. businesses are translated into U.S. dollars. While the Company monitors its exchange rate exposures and seeks to reduce the risk of volatility through hedging activities, such activities bear a financial cost and are not always available or successful in mitigating such volatility.
The Company has a substantial amount of debt, and the cost of servicing that debt could adversely affect the Company's business and hinder the Company's ability to make payments on its debt.
As of March 31, 2015, the Company had total debt of $1.6 billion. In addition, the Company had $202.9 million of outstanding but undrawn letters of credit and, taking into account these letters of credit, an additional $497.1 million of availability under its revolving credit facility. Additional information on the Company's debt can be found under "Liquidity and Capital Resources" in Item 7 of this report.
The Company has demands on its cash resources in addition to interest and principal payments on its debt including, among others, operating expenses. These significant demands on the Company's cash resources could:
make it more difficult for the Company to satisfy its obligations,
require the Company to dedicate a substantial portion of its cash flow from operations to payments on its debt, thereby reducing the amount of cash flow available for working capital, capital expenditures, acquisitions, share repurchases, dividends, and other general corporate purposes,
limit the Company's flexibility in planning for, or reacting to, changes in the defense and aerospace industries,
place the Company at a competitive disadvantage compared to competitors that have lower debt service obligations and significantly greater operating and financing flexibility,
limit, along with the financial and other restrictive covenants applicable to the Company's indebtedness, among other things, the Company's ability to borrow additional funds,
increase the Company's vulnerability to general adverse economic and industry conditions, and
result in a default event upon a failure to comply with financial covenants contained in the Company's senior credit facilities which, if not cured or waived, could have a material adverse effect on the Company's business, financial condition, or results of operations.
The Company's ability to pay interest on and repay its long-term debt and to satisfy its other liabilities will depend upon future operating performance and the Company's ability to refinance its debt as it becomes due. The Company's future operating performance and ability to refinance will be affected by prevailing economic conditions at that time and financial, business and other factors, many of which are beyond the Company's control.
If the Company is unable to service its indebtedness and fund operating costs, the Company will be forced to adopt alternative strategies that may include:
reducing or delaying expenditures for capital equipment and/or share repurchases,
seeking additional debt financing or equity capital,

16



foregoing attractive acquisition opportunities,
selling assets, or
restructuring or refinancing debt.
There can be no assurance that any such strategies could be implemented on satisfactory terms, if at all.
The level of returns on pension and postretirement plan assets, changes in interest rates and other factors could affect the Company's earnings and cash flows.
The Company's earnings may be positively or negatively impacted by the amount of expense or income recorded for employee benefit plans, primarily pension plans and other postretirement plans. Generally accepted accounting principles ("GAAP") in the United States of America require the Company to calculate income or expense for the plans using actuarial valuations. These valuations are based on assumptions made relating to financial market and other economic conditions. Changes in key economic indicators can result in changes in these assumptions. The key year-end assumptions used to estimate pension and postretirement benefit expense or income for the following year are the discount rate, the expected long-term rate of return on plan assets, the rate of increase in future compensation levels, mortality rates, and the health care cost trend rate. The Company is required to remeasure its plan assets and benefit obligations annually, which may result in a significant change to equity through other comprehensive income (loss). The Company's pension and other postretirement benefit income or expense can also be affected by legislation or other regulatory actions. Additional information on how the Company's financial statements can be affected by pension plan accounting policies can be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the section titled "Critical Accounting Policies" in Item 7 of this report.
The Company's business could be negatively impacted by security threats, including cyber security and other industrial, insider and physical security threats, and other disruptions.
As a U.S. defense contractor, the Company faces cyber threats, threats to the physical security of our facilities and employees, and terrorist acts, as well as the potential for business disruptions associated with information technology failures, natural disasters, or public health crises. The Company also faces the risk of economic espionage, which involves the targeting or acquisition of sensitive financial, trade, proprietary or technological information.
The Company routinely experiences cyber security threats, threats to our information technology infrastructure and attempts to gain access to the Company's sensitive information, as do our customers, suppliers, subcontractors and joint venture partners. The Company may experience similar security threats at customer sites that we operate and manage.
Prior cyber-attacks directed at the Company have not had a material impact on the Company's financial results, and we believe that our threat detection and mitigation processes and procedures are generally adequate. The threats the Company faces vary from attacks common to most industries to more advanced and persistent threats from highly-organized adversaries who target us because we protect national security information. If the Company is unable to protect sensitive information, its customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures and, as a result, our present and future business could be negatively impacted. Due to the evolving nature of these security threats, however, the impact of any future incident cannot be predicted.
Although the Company works cooperatively with its customers, suppliers, subcontractors, joint venture partners, and acquired entities to minimize the impact of cyber threats, other security threats or business disruptions, the Company must rely on the safeguards put in place by these entities, which may in turn affect the security of its own information and that of other parties. The entities we work with have varying levels of cyber security expertise and safeguards and their relationships with government contractors, such as the Company, may increase the likelihood that they are targeted by the same cyber threats the Company faces.
The costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means. Occurrence of any of these events could adversely affect our internal operations, the services we provide to customers, loss of competitive advantages derived from our research and development efforts or other intellectual property, the obsolescence of our products and services, our financial results, our reputation and our stock price.
Disruptions in the supply of key raw materials or components and difficulties in the supplier qualification process, as well as increases in prices of raw materials, could adversely impact the Company.
Key raw materials used in the Company's operations include aluminum, steel, steel alloys, copper, zinc, lead, graphite fiber, prepreg, hydroxy terminated polybutadiene, epoxy resins and adhesives, ethylene propylene diene monomer rubbers, diethylether, x-ray film, plasticizers and nitrate esters, impregnated ablative materials, various natural and synthetic rubber compounds, polybutadiene, acrylonitrile, and ammonium perchlorate. The Company also purchases chemicals; electronic,

17



electro-mechanical and mechanical components; subassemblies; and subsystems that are integrated with the manufactured parts for final assembly into finished products and systems.
The Company monitors sources of supply to attempt to assure that adequate raw materials and other supplies needed in manufacturing processes are available. As a U.S. Government contractor, the Company is frequently limited to procuring materials and components from sources of supply approved by the DoD. In addition, as changes occur in business conditions, the DoD budget, and Congressional allocations, suppliers of specialty chemicals and materials sometimes consider dropping low volume items from their product lines, which may require, as it has in the past, qualification of new suppliers for raw materials on key programs. The supply of ammonium perchlorate, a principal raw material used in the Company's operations, is limited to a single source that supplies the entire domestic solid propellant industry. This single source, however, maintains two separate manufacturing lines a reasonable distance apart, which mitigates the likelihood of a fire, explosion, or other problem impacting all production. The Company may also rely on one primary supplier for other production materials. Although other suppliers of the same materials may exist, the addition of a new supplier may require the Company to qualify the new source for use. The qualification process may impact the Company's profitability or ability to meet contract deliveries.
We also rely on sole source suppliers for a number of key components, including the rocket motors and engines we use on our launch vehicles. If we are unable to obtain such components in the future, due to a supplier's financial difficulties or a supplier's failure to perform as expected, we could have difficulty procuring such components in a timely or cost effective manner. A disruption in the procurement of key components could result in substantial cost increases to the Company, significant delays in the execution of certain contracts or our inability to complete certain contracts, any of which could result in a materially adverse impact on the Company's financial results.
For example, as a result of the failure of Orbital's Antares launch vehicle in October 2014 and prior engine test failures, we have experienced additional costs, and we have ceased using the AJ-26 rocket engine in our Antares product line. In addition, the Company's recovery plan involves a third-party launch vehicle as well as a new engine for the Company's own launch vehicle, and the time, expense and effort associated with our recovery plan have resulted in additional costs and delays.
Certain suppliers of materials used in the manufacturing of rocket motors have discontinued the production of some materials. These materials include certain insulation and resin materials for rocket motor cases and aerospace-grade rayon for nozzles. The Company has qualified new replacement materials for some programs. For other programs, the Company or the Company's customer has procured sufficient inventory to cover current program requirements and is in the process of qualifying new replacement materials to be qualified in time to meet future production needs. The Company's profitability may be affected if unforeseen difficulties in developing and qualifying replacement materials occur.
The Company is also impacted by increases in the prices of raw materials used in production on commercial and fixed-price business. The Company has seen a significant fluctuation in the prices of commodity metals, including copper, lead, steel and zinc. The fluctuating costs of natural gas and electricity also have an impact on the cost of operating the Company's factories.
Prolonged disruptions in the supply of any of the Company's key raw materials or components, difficulty completing qualification of new sources of supply, implementing use of replacement materials, components or new sources of supply, or a continuing increase in the prices of raw materials, energy or components could have a material adverse effect on the Company's operating results, financial condition, or cash flows.
New regulations related to conflict minerals may force the Company to incur additional expenses.
The SEC has adopted disclosure rules applicable when certain minerals sourced from the Democratic Republic of Congo and adjacent countries, referred to as "conflict minerals," are necessary to the functionality of a product manufactured, or contracted to be manufactured, by an SEC reporting company such as the Company. These conflict minerals are tin, tantalum, tungsten and gold. Implementation of the new disclosure requirements could affect the sourcing and availability of some of the minerals that the Company uses in the manufacture of its products. The Company's supply chain is complex, and the Company may not be able to conclusively verify whether conflict minerals are used in its products or whether its products are "conflict free." The Company could incur significant costs related to the compliance process, including potential difficulty or added costs in satisfying the disclosure requirements.
Failure of the Company's subcontractors to perform their contractual obligations could materially and adversely impact the Company's prime contract performance and ability to obtain future business.
The Company relies on subcontracts with other companies to perform a portion of the services the Company provides its customers on many of its contracts. There is a risk that the Company may have disputes with its subcontractors, including disputes regarding the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontract, the Company's failure to extend existing task orders or issue new task orders under a subcontract, or the Company's hiring of

18



personnel of a subcontractor. A failure by one or more of the Company's subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may materially and adversely impact the Company's ability to perform its obligations as the prime contractor. Subcontractor performance deficiencies could result in a customer limiting payments or terminating a contract for default. A default termination could expose the Company to liability and have a material adverse effect on the ability to compete for future contracts and orders.
Failure to successfully negotiate or renew collective bargaining agreements, or strikes, slow-downs or other labor-related disruptions, could adversely affect the Company's operations and could result in increased costs that impair its financial performance.
 A number of the Company's employees are covered by collective bargaining agreements, which expire on various dates. In addition, the Company is currently negotiating an initial collective bargaining agreement with employees at one of its major locations. Strikes, slow-downs or other labor-related disruptions could occur if the Company is unable to either negotiate or renew these agreements on satisfactory terms, which could adversely impact the Company’s operating results. The terms and conditions of new or renegotiated agreements could also increase the Company's costs or otherwise affect its ability to fully implement future operational changes to enhance its efficiency.
The Company's future success and growth will depend significantly on its ability to develop new technologies and products that achieve market acceptance within acceptable margins while maintaining a qualified workforce to meet the needs of its customers.
Virtually all of the products produced and sold by the Company are highly engineered and require sophisticated manufacturing and system integration techniques and capabilities. The Company's commercial and government businesses both operate in global markets that are characterized by rapidly changing technologies, industry standards, market trends and customer demands. The product and program needs of the Company's government and commercial customers change and evolve regularly. Accordingly, the Company's future performance depends on its ability to identify emerging technological trends, develop and manufacture competitive products, enhance our products by adding innovative features that differentiate our products from those of our competitors, and bring those products to market quickly at cost-effective prices.
Our ability to develop new products based on technological innovation can affect our competitive position and requires the investment of significant resources. These development efforts divert resources from other potential investments in our businesses, and they may not lead to the development of new technologies or products on a timely basis or that meet the needs of our customers as fully as competitive offerings. In addition, the markets for our products may not develop or grow as we anticipate. The failure of our technologies or products to gain market acceptance due to more attractive offerings by our competitors could significantly reduce our revenues and adversely affect our competitive standing and prospects.
In addition, because of the highly specialized nature of its business, the Company must be able to hire and retain the skilled and appropriately qualified personnel necessary to perform the services required by its customers. The Company's operating results, financial condition, or cash flows may be adversely affected if it is unable to develop new products that meet customers' changing needs or successfully attract and retain qualified personnel.
There can be no assurance that the Company's products will be successfully developed or manufactured or that they will perform as intended.
Most of the products the Company develops and manufactures are technologically advanced and sometimes include novel systems that must function under highly demanding operating conditions. From time to time, the Company experiences product failures, cost overruns in developing and manufacturing its products, delays in delivery and other operational problems. The Company has experienced product and service failures, schedule delays and other problems in connection with certain of its launch vehicles, including the Antares launch vehicle, satellites, advanced space systems and other products. The Company may have similar occurrences in the future. Some of the Company's satellite and launch services contracts impose monetary penalties on the Company for delays and for performance failures, which penalties could be significant. In addition to any costs resulting from product warranties or required remedial action, product failures or significant delays may result in increased costs or loss of revenues due to the postponement or cancellation of subsequently scheduled operations or product deliveries and may have a material adverse effect on the Company’s operating results, financial condition, or cash flows. Negative publicity from a product failure could damage the Company's reputation and impair its ability to win new contracts.
Due to the volatile and flammable nature of its products, fires or explosions may disrupt the Company's business.
Many of the Company's products involve the manufacture and/or handling of a variety of explosive and flammable materials. From time to time, these activities have resulted in incidents which have temporarily shut down or otherwise disrupted some manufacturing processes, causing production delays and resulting in liability for workplace injuries and fatalities. The Company has safety and loss prevention programs which require detailed pre-construction reviews of process

19



changes and new operations, along with routine safety audits of operations involving explosive materials, to mitigate such incidents, as well as a variety of insurance policies. However, the Company cannot ensure that it will not experience similar incidents in the future or that any similar incidents will not result in production delays or otherwise have a material adverse effect on its operating results, financial condition, or cash flows.
The Company is subject to environmental laws and regulations that govern both past practices and current compliance which may expose the Company to adverse consequences.
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, remediate, or provide resource restoration. 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.
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.
While the Company has environmental management programs in place to mitigate risks, 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 it is difficult to predict whether they will have a material impact in the future.
Capital market volatility could adversely impact the Company's earnings because of the Company's capital structure.
The Company is exposed to the risk of fluctuation in interest rates. If interest rates increase, the Company may incur increased interest expense on variable interest-rate debt or short-term borrowings, which could have an adverse impact on the Company's operating results and cash flows.
The Company may pursue or complete acquisitions, or other strategic transactions, which represent additional risk and could impact future financial results.
The Company's business strategy includes the potential for future acquisitions or other similar strategic transactions. Acquisitions involve a number of risks including negotiating an appropriate price, successfully integrating the acquired company with the Company's operations, and unanticipated liabilities or contingencies related to the acquired company. The Company cannot ensure that the expected benefits of any future acquisitions or other transactions will be realized. Costs could be incurred on pursuits or proposed acquisitions that have not yet or may not close which could significantly impact the Company's operating results, financial condition, or cash flows. Additionally, after the acquisition, unforeseen issues could arise which adversely affect the anticipated returns or which are otherwise not recoverable as an adjustment to the purchase price. Even after careful integration efforts, actual operating results may vary significantly from initial estimates. Furthermore, the Company may engage in other strategic business transactions. Such transactions could cause unanticipated costs and difficulties, may not achieve intended results, and may require significant time and attention from management which could have an adverse impact on our business, operating results, financial condition, or cash flows.
The Company's profitability could be impacted by unanticipated changes in its tax provisions or exposure to additional income tax liabilities.
The Company's business operates in many locations under government jurisdictions that impose income taxes. Changes in domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain revenues or the deductibility of certain expenses, thereby affecting income tax expense and profitability. In addition, audits by income tax authorities could result in unanticipated increases in income tax expense.
The Company is involved in a number of legal proceedings. We cannot predict the outcome of litigation and other contingencies with certainty.
The Company is subject to lawsuits, investigations and disputes (some involving substantial amounts) that arise out of the conduct of the Company's business including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employment, employee benefits plans, intellectual property, import and export matters, and environmental, health and safety matters. Resolution of these matters can be prolonged and costly, and the Company's business may be adversely affected by the ultimate outcome of these matters that cannot be predicted with certainty.

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Moreover, the Company's potential liabilities are subject to change over time due to new developments, changes in settlement strategy, or the impact of evidentiary issues, and we may become subject to or be required to pay damage awards or settlements that could have a material adverse effect on our results of operations, cash flows, and financial condition. Additional information can be found in Item 3 of this report.
The integration of the Company's aerospace and defense businesses with Orbital may continue to present significant challenges.
There continues to be a significant degree of effort and management attention devoted to the process of integrating the Company's aerospace and defense businesses with Orbital following the Merger. The difficulties and challenges of this integration include:
integrating the two entities and carrying on their ongoing operations,
coordinating a variety of geographically separate business locations,
integrating the business cultures of the two entities, and
retaining key officers and personnel.
The continuing process of integrating operations could cause an interruption of, or loss of momentum in, the Company's activities. Members of the Company’s senior management team may be required to devote considerable amounts of time to this integration process, which decreases the time they have to manage the Company, service customers, attract new customers and develop new products or strategies. If senior management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, the Company's business could suffer. Furthermore, the failure to do so could have a material adverse effect on the Company’s business, operating results, financial condition, or cash flows.
The Company may not realize the growth opportunities and cost synergies that are anticipated from the Merger.
The success of the Merger depends, in part, on the ability of the Company to realize anticipated growth opportunities and cost synergies. The Company’s success in realizing these growth opportunities and cost synergies, and the timing of this realization, depends on the successful integration of the Company's business and operations. Even if the Company integrates its businesses and operations successfully, this integration may not result in the realization of the full benefits of the growth opportunities and cost synergies that the Company expects from this integration within the anticipated time frame or at all. The Company may be unable to eliminate duplicative costs, or the benefits from the Merger may be offset by costs incurred or delays in integrating the companies. In addition, integration expenses are difficult to estimate accurately, and may exceed current estimates.
If the Distribution does not qualify as a tax-free spin-off under Section 355 of the Internal Revenue Code (the "Code"), including as a result of subsequent acquisitions of stock of the Company or Vista Outdoor, then the Company or its stockholders immediately prior to the Distribution may be required to pay substantial U.S. federal income taxes.
The Distribution and the Merger are intended to qualify as tax-free to the Company, the stockholders of the Company, Vista Outdoor and Orbital for U.S. federal income tax purposes. However, there can be no assurance that the IRS or the courts will agree with the conclusion of the parties and their counsel regarding the tax treatment of the Distribution and Merger. If the Distribution or certain related transactions were taxable, the Company's stockholders would recognize income on their receipt of Vista Outdoor stock in the Distribution, and the Company would be considered to have made a taxable sale of certain of its assets to Vista Outdoor.
The Distribution will be taxable to the Company pursuant to Section 355(e) of the Code if there is a 50% or more change in ownership of either the Company or Vista Outdoor, directly or indirectly, as part of a plan or series of related transactions that include the Distribution. Because the Company's stockholders collectively owned more than 50% of the Company's common stock following the Merger, the Merger alone will not cause the Distribution to be taxable to the Company under Section 355(e). However, Section 355(e) could apply if other acquisitions of stock of the Company before or after the Merger, or of Vista Outdoor after the Merger, are considered to be part of a plan or series of related transactions that include the Distribution. If Section 355(e) was to apply, the Company would be considered to have made a taxable sale of certain assets to Vista Outdoor and could recognize a substantial taxable gain.
Under the tax matters agreement between the Company and Vista Outdoor (the "Tax Matters Agreement"), in certain circumstances, and subject to certain limitations, Vista Outdoor is required to indemnify the Company against taxes on the Distribution that arise as a result of actions or failures to act by Vista Outdoor, or as a result of Section 355(e) applying due to acquisitions of Vista Outdoor stock after the Distribution. In other cases, however, the Company might recognize taxable gain

21



on the Distribution without being entitled to an indemnification payment under the Tax Matters Agreement. If such tax is imposed on Vista Outdoor, then the Company generally will be required to indemnify Vista Outdoor for that tax. The possibility of the Company recognizing and not being indemnified for this gain may discourage, delay or prevent a third party from acquiring stock of the Company during the two years after the Merger in a transaction that stockholders of the Company might consider favorable.
The Company may be unable to take certain actions after the Merger because such actions could jeopardize the tax-free status of the Distribution or the Merger, and such restrictions could be significant.
Pursuant to the Tax Matters Agreement between the Company and Vista Outdoor, the Company is prohibited from taking actions or omissions that could reasonably be expected to cause the Distribution to be taxable or to jeopardize the conclusions of the opinions of counsel received by the Company or Orbital in connection with the Merger.
In particular, for two years after the Distribution, the Company may not:
enter into any agreement, understanding or arrangement or engage in any substantial negotiations with respect to any transaction involving the acquisition, issuance, repurchase or change of ownership of any of the Company’s capital stock, together with options or other rights in respect of that capital stock, subject to certain limited exceptions;
cease to be engaged in the active conduct of, or sell or transfer more than 30% of the gross assets or gross consolidated assets of, certain businesses;
redeem or otherwise repurchase its capital stock, subject to certain limited exceptions; or
liquidate, whether by merger, consolidation or otherwise.
Because of these restrictions, for two years after the Merger, the Company is limited in the amount of capital stock it can issue to make acquisitions or to raise additional capital or in the amount of stock that it can repurchase from investors.
ITEM 1B.    UNRESOLVED STAFF COMMENTS
There are no unresolved staff comments as of the date of this report.
ITEM 2.    PROPERTIES
Facilities.    As of March 31, 2015, the Company occupied manufacturing, assembly, warehouse, test, research, development, and office facilities having a total floor space of approximately 17 million square feet. These facilities are either owned or leased, or are occupied under facilities-use contracts with the U.S. Government.
As of March 31, 2015, the Company's operating segments had significant operations at the following locations:
Flight Systems Group
 
Brigham City/ Promontory, UT; Clearfield, UT; Magna, UT; Chandler, AZ; Dulles, VA; Iuka, MS; Dayton, OH; Vandenberg Air Force Base, CA; Wallops Island, VA; Huntsville, AL
Defense Systems Group
 
Mesa, AZ; Northridge, CA; Clearwater, FL; Elkton, MD; Elk River, MN; Plymouth, MN; Independence, MO; Fort Worth, TX; Radford, VA; Rocket Center, WV
Space Systems Group
 
Dulles, VA; Beltsville, MD; Gilbert, AZ; Greenbelt, MD; Commerce, CA; Goleta, CA; San Diego, CA; Wallops Island, VA
Corporate
 
Dulles, VA; Eden Prairie, MN
Note: the Company occupies a number of small facilities in countries around the world, which are not included above.

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The following table summarizes the floor space, in thousands of square feet, occupied by each operating segment as of March 31, 2015:
 
Owned
 
Leased
 
Government
Owned (1)
 
Total
Flight Systems Group
5,153

 
3,472

 
600

 
9,225

Defense Systems Group
647

 
954

 
4,365

 
5,966

Space Systems Group
354

 
1,277

 

 
1,631

Corporate

 
207

 

 
207

Total
6,153

 
5,910

 
4,966

 
17,029

Percentage of total
36
%
 
35
%
 
29
%
 
100
%
____________________________________
 
 
 
 
 
 
 
(1)
These facilities are occupied under facilities contracts that generally require the Company to pay for all utilities, services, and maintenance costs.
Land.    The Company also uses land that it owns or leases for assembly, test, and evaluation, in Brigham City, Corrine, and Magna, UT, which is used by Flight Systems Group; and in Elk River, MN, and Socorro, NM, which are used by Defense Systems Group.
Company personnel occupy space at the following facilities that are not owned or operated by the Company: Marshall Space Flight Center, Huntsville, AL; Kennedy Space Center, Cape Canaveral, FL; Vandenberg Air Force Base, Vandenberg, CA; and Picatinny Arsenal, Picatinny, NJ. The square footage of these facilities is included in the table above.
The Company's properties are well maintained and in good operating condition and are sufficient to meet the Company's near-term operating requirements.
ITEM 3.    LEGAL PROCEEDINGS
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, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings in any particular quarter, to be material to its business or likely to result in a material adverse effect on its future operating results, financial condition, or cash flows.
On July 30, 2013, Raytheon Company filed a lawsuit against the Company in the Superior Court of the State of Arizona.  The suit concerned the Company's longstanding production of rocket motors used in Raytheon's Advanced Medium-Range Air-to-Air Missiles (AMRAAM).  Raytheon’s primary allegation was that the Company breached certain of the production contracts by not delivering rocket motors.  Raytheon claimed damages in excess of $100 million. The parties settled this matter on March 27, 2015, with the Company paying $25 million to Raytheon, and the litigation was voluntarily dismissed on April 21, 2015.
On November 4, 2013, the Company filed a lawsuit against Spirit Aerosystems Inc. in the Second District Court in Farmington, Utah. In its suit, the Company has made various claims, including breach of contract, in relation to a contract with Spirit Aerosystems regarding the manufacture of aircraft parts. The Company is claiming damages of approximately $72 million. Spirit Aerosystems has disputed the Company's allegations and in its response to the Company's complaint it asserted a number of affirmative defenses and counterclaims. Although it is not possible at this time to predict the outcome of the litigation, the Company believes, based on all currently available information, that the outcome will not have a material adverse effect on its operating results, financial condition, or cash flows. 
Putative class action and derivative lawsuits challenging the merger of Orbital and the Company were filed in the Court of Chancery of the State of Delaware in May 2014, naming Orbital, the Company and Orbital's directors.  On November 14, 2014, the lawsuits were consolidated by the court under the caption In Re Orbital Corporation Stockholder Litigation (the “Consolidated Lawsuit”).  The plaintiffs alleged, among other things, that the directors of Orbital breached their fiduciary duties in connection with the Merger, and alleged that the Company aided and abetted such breaches of fiduciary duty.  On January 16, 2015, the parties entered into a memorandum of understanding (the “MOU”) regarding the settlement of this matter.  If the court approves the settlement contemplated by the MOU, the Consolidated Lawsuit will be dismissed with prejudice.  Under the terms of the MOU, the parties agreed to settle the Consolidated Lawsuit and release the defendants from all claims relating to the Merger, subject to court approval. Pursuant to the terms of the MOU, Orbital and the Company agreed

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to make available additional information to Orbital's stockholders in connection with the Merger vote, and the defendants agreed to negotiate regarding an appropriate amount of fees to be paid to plaintiffs’ counsel by Orbital or its successor.
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.
Environmental Liabilities.    The Company's operations and ownership or use of real property are subject to a number of federal, state, and local laws and regulations, including those for discharge of hazardous materials, remediation of contaminated sites, and restoration of damage to the environment. Due in part to their complexity and pervasiveness, such laws and regulations have resulted in the Company being involved with a number of related legal proceedings, claims, and remediation obligations. The Company routinely assesses, based on in-depth studies, expert analyses, and legal reviews, its contingencies, obligations, and commitments for remediation of contaminated sites and past practices, including assessments of ranges and probabilities of recoveries from other responsible parties. The Company's policy is to accrue and charge to expense in the current period any identified exposures related to environmental liabilities based on estimates of investigation, cleanup, monitoring, and resource restoration costs to be incurred.
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, we 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, we have concluded that these matters, individually or in the aggregate, will not have a material adverse effect on our 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 description of certain environmental matters contained in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Contingencies" is incorporated herein by reference.
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.

24



PART II
ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is listed and traded on the New York Stock Exchange under the symbol "OA". The following table presents the high and low sales prices of the common stock for the periods indicated:
Period
High
 
Low
Fiscal 2015:
 
 
 
Quarter ended March 31, 2015
$
140.61

 
$
60.23

Quarter ended December 28, 2014
132.33

 
100.36

Quarter ended September 28, 2014
139.89

 
122.97

Quarter ended June 29, 2014
158.13

 
118.11

Fiscal 2014:
 
 
 
Quarter ended March 31, 2014
$
145.16

 
$
119.30

Quarter ended December 29, 2013
123.34

 
95.16

Quarter ended September 29, 2013
103.77

 
81.92

Quarter ended June 30, 2013
82.44

 
69.12


The low sales price for the quarter ended March 31, 2015 reflects the effect of the Distribution and Merger, including the issuance of approximately 27.4 million shares of common stock to Orbital stockholders in connection with the Merger.
The number of holders of record of the Company's common stock as of May 26, 2015 was 4,916. This does not include 1,781 former holders of record of Orbital Sciences Corporation common stock who had not yet exercised their right to receive Orbital ATK, Inc. common stock pursuant to the Transaction Agreement relating to the Merger.
During fiscal 2015, the Company paid quarterly dividends of $0.32 per share, totaling $41.1 million. During fiscal 2014, the Company paid quarterly dividends of $0.26 per share for the first, second, and third quarters and $0.32 per share for the fourth quarter, totaling $35.1 million. We cannot be certain that the Company will continue to declare dividends in the future and, as such, the amount and timing of any future dividends are not determinable. The Company's dividend policy is reviewed by the Board of Directors in light of relevant factors, including our earnings, liquidity position, financial condition, capital requirements, and credit ratings, as well as the extent to which the payment of cash dividends may be restricted by covenants contained in the Company's 5.25% Senior Notes due 2012 (the "5.25% Notes"), and its Senior Credit Facility (as described under "Liquidity and Capital Resources" in Item 7 of this report). As of March 31, 2015, the Company's 5.25% Notes limit the aggregate sum of dividends, share repurchases, and other designated restricted payments to an amount based on the Company's net income, stock issuance proceeds, and certain other items, less restricted payments made, since April 1, 2001. As of March 31, 2015, the Senior Credit Facility allows the Company to make unlimited "restricted payments" (as defined in the credit agreement), which among other items, would allow payments for future share repurchases, as long as the Company maintains a certain amount of liquidity and maintains certain senior debt limits, with a limit, when those senior debt limits are not met, of $250 million plus proceeds of any equity issuances plus 50% of net income since October 7, 2010. The Senior Credit Facility also prohibits dividend payments if loan defaults exist or the financial covenants contained in the Facility are not met.

25



Equity Compensation Plan Information
The following table gives information about the Company's common stock that may be issued upon the exercise of options, warrants and rights under each of the Company's existing equity compensation plans as of March 31, 2015:

Plan category
 
Number of securities to
be issued upon exercise of
outstanding options, warrants and rights (a)
 
Weighted-average exercise price of outstanding
options, warrants
and rights (b)
 
Number of securities
remaining available for
future issuance under equity
compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders:
 
 
 
 
 
 
1990 Equity Incentive Plan (1)
 
 
 
 
 
 
Deferred Compensation (2)
 
27,879

 

 

Non-Employee Director Restricted Stock Plan (1)
 
 

 
 

 

Deferred Compensation (2)
 
6,924

 

 

2005 Stock Incentive Plan (3)
 
 

 
 

 
504,429

Stock Options
 
343,505

 
$
42.30

 

Restricted Stock Units
 
105,864

 

 

Performance Awards (4)
 
160,530

 

 

Deferred Compensation (2)
 
69,815

 

 

Equity compensation plans not approved by security holders:
 
 
 
 
 
 
Orbital Sciences 1997 Stock Option and Incentive Plan (1) (5)
 
 
 
 
 
 
Stock Options
 
11,225

 
27.45

 

Orbital Sciences Amended and Restated 2005 Stock Incentive Plan (1) (5)
 
 
 
 
 
 
Restricted Stock Units
 
395,076

 

 

Total
 
1,120,818

 
$
41.83

 
504,429

__________________________________________________________

(1)
No additional awards may be granted under this plan.
(2)
Shares reserved for payment of deferred stock units in accordance with the terms of the plan.
(3)
Under the 2005 Stock Incentive Plan, a total of 3,982,360 shares were authorized for awards. However, beginning on August 7, 2012, a fungible share counting provision was added, under which “full-value awards" (i.e., awards other than stock options and stock appreciation rights) are counted against the reserve of shares available for issuance under the plan as 2.38 shares for every one share actually issued in connection with the award. No more than 5% of the shares available for awards under the plan may be granted to the Company's non-employee directors in the aggregate.
(4)
Shares reserved for issuance in connection with outstanding performance awards. The amount shown assumes the maximum payout of the performance shares based on achievement of the highest level of performance. The actual number of shares to be issued depends on the performance levels achieved for the respective performance periods.
(5)
This plan was approved by the stockholders of Orbital prior to the Merger. Pursuant to the Transaction Agreement relating to the Merger, the Company assumed the obligation to issue shares under the terms of this plan.

26



ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total Number
of Shares
Purchased (1)
 
Average
Price Paid
per Share
 
Maximum
Number of
Shares that
May Yet Be
Purchased Under
the Program (2)
December 29 - February 8
237

 
$
133.34

 
 

February 9 - February 22
66,423

 
62.85

 
 

February 23 - March 31
48,104

 
74.42

 
 

Fiscal Quarter Ended March 31, 2015
114,764

 
$
67.84

 
1,153,064

____________________________________________________________

(1)
The 114,764 shares purchased represent shares withheld to pay taxes upon vesting of shares of restricted stock and restricted stock units, or payment of performance shares that were granted under the Company's incentive compensation plans.

(2)
On August 5, 2008, the Company's Board authorized the repurchase of up to 5 million shares. The Board had determined that the repurchase program would serve primarily to offset dilution from the Company's employee and director benefit compensation programs, but it could also be used for other corporate purposes, as determined by the Board. During fiscal 2012, 742,000 shares were repurchased for $50.0 million. On January 31, 2012, the Company's Board of Directors authorized a new share repurchase program of up to $200 million worth of shares of the Company common stock, executable over the next two years. The Company repurchased 1,003,938 shares for $59.5 million in fiscal 2013, and 609,922 shares for $52.1 million during fiscal 2014 under this program. On January 29, 2014, the Company's Board of Directors extended the share repurchase program through March 31, 2015. No shares were purchased under this extension. On March 11, 2015, the Board of Directors authorized a new repurchase program of up to the lesser of one million shares or $75 million through December 31, 2015. No shares were purchased under this program through March 31, 2015.

The maximum number of shares that may yet be purchased under the program was calculated using the Company's closing stock price of $76.63 on March 31, 2015.
The discussion of limitations upon the payment of dividends as a result of the indentures governing the Company's debt instruments as discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Debt," is incorporated herein by reference.

27



STOCKHOLDER RETURN PERFORMANCE GRAPH
The following graph compares, for the five fiscal years ended March 31, 2015, the cumulative total return for the Company's common stock with the comparable cumulative total return of two indexes:
Standard & Poor's Composite 500 Index, a broad equity market index; and

Dow Jones U.S. Aerospace and Defense Index, a published industry index.
The graph assumes that on April 1, 2010, $100 was invested in the Company's common stock (at the closing price on the previous trading day) and in each of the indexes. The comparison assumes that all cash dividends, were reinvested and takes into account the value of the Vista Outdoor shares distributed to stockholders in the Distribution as if it occurred prior to March 31, 2010. The graph indicates the dollar value of each hypothetical $100 investment as of March 31 in each of the years 2011, 2012, 2013, 2014, and 2015.


28



ITEM 6.    SELECTED FINANCIAL DATA
 
Years Ended March 31
(Amounts in thousands except per share data)
2015
 
2014
 
2013
 
2012
 
2011
Results of Operations:
 
 
 
 
 
 
 
 
 
Sales
$
3,173,967

 
$
2,925,237

 
$
3,206,096

 
$
3,610,579

 
$
3,912,710

Cost of sales
2,469,865

 
2,277,939

 
2,521,277

 
2,820,492

 
3,148,317

Gross profit
704,102

 
647,298

 
684,819

 
790,087

 
764,393

Operating expenses:
 

 
 

 
 

 
 

 
 

Research and development
49,349

 
48,536

 
55,958

 
58,906

 
57,785

Selling
89,941

 
87,554

 
90,219

 
106,065

 
105,797

General and administrative
298,559

 
209,251

 
200,568

 
234,922

 
221,311

Goodwill impairment
34,300

 

 

 

 

Income from continuing operations, before interest, income taxes and noncontrolling interest
231,953

 
301,957

 
338,074

 
390,194

 
379,500

Interest expense, net
(88,676
)
 
(79,792
)
 
(65,386
)
 
(88,620
)
 
(87,052
)
Loss on extinguishment of debt
(26,626
)
 

 
(11,773
)
 

 

Income from continuing operations, before income taxes and noncontrolling interest
116,651

 
222,165

 
260,915

 
301,574

 
292,448

Income taxes
39,117

 
62,542

 
73,746

 
107,321

 
73,995

Income from continuing operations, before noncontrolling interest
77,534

 
159,623

 
187,169

 
194,253

 
218,453

Less net income attributable to noncontrolling interest
99

 
171

 
436

 
592

 
536

Income from continuing operations of Orbital ATK, Inc.
$
77,435

 
$
159,452

 
$
186,733

 
$
193,661

 
$
217,917

Basic earnings per common share from continuing operations
$
2.18

 
$
5.03

 
$
5.76

 
$
5.89

 
$
6.55

Basic weighted-average number of common shares outstanding
35,469

 
31,671

 
32,447

 
32,874

 
33,275

Diluted earnings per common share from continuing operations
$
2.14

 
$
4.87

 
$
5.73

 
$
5.85

 
$
6.49

Diluted weighted-average number of diluted common shares outstanding
36,140

 
32,723

 
32,608

 
33,112

 
33,615

Financial Position:
 

 
 

 
 

 
 

 
 

Net current assets (1)
$
1,292,122

 
$
518,679

 
$
877,572

 
$
715,917

 
$
647,042

Net property, plant, and equipment (1)
807,057

 
508,455

 
478,716

 
486,273

 
474,427

Total assets (1)
5,504,402

 
3,423,521

 
3,575,256

 
3,785,219

 
3,704,203

Long-term debt (including current portion) (1)
1,588,501

 
2,092,978

 
1,073,877

 
1,302,002

 
1,609,709

Total Orbital ATK, Inc. stockholders' equity
1,776,998

 
1,911,575

 
1,502,169

 
1,226,795

 
1,156,758

Other Data:
 

 
 

 
 

 
 

 
 

Depreciation and amortization of intangible assets (1)
$
85,027

 
$
72,304

 
$
80,935

 
$
84,302

 
$
89,715

Capital expenditures (1)
112,704

 
105,730

 
73,494

 
100,820

 
104,305

Cash dividends per common share
1.28

 
1.10

 
0.92

 
0.80

 
0.20

Gross margin (gross profit as a percentage of sales) (1)
22.2
%
 
22.1
%
 
21.4
%
 
21.9
%
 
19.5
%
_________________________________________
(1)
Presented for continuing operations only.

Factors Affecting Comparability of our Selected Financial Data
As a result of the Distribution, the financial results of Sporting Group are presented as discontinued operations for all periods presented. The consolidated financial statements include the results of Orbital from February 9, 2015 through March 31, 2015. See Note 4 to the consolidated financial statements for a description of mergers, acquisitions and distributions made since the beginning of fiscal 2013.
In addition, the following non-recurring items impacted Income from continuing operations, before noncontrolling interest, for fiscal:
2015 - Costs associated with the Distribution and Merger, including: $34.9 million for professional services; $9.6 million for severance and other employee-related costs; $26.6 million for debt extinguishment; and $16.0 million for

29



facility rationalization costs. In addition, we recognized a litigation charge of $25.0 million for Raytheon lawsuit settlement; $34.3 million for goodwill impairment; and additional sales of $3.1 million for the RFAAP pension segment close-out.
2014 - Cost associated with refinancing our Senior Secured Credit Facility, of $6.2 million, and additional sales of $27.4 million for the Radford pension segment close-out.
2012 - Litigation charge of $36.5 million for LUU flares lawsuit settlement and $9.0 million for segment realignment charges including: termination benefits, asset impairment charges and costs associated with the closure of certain facilities.




30


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(amounts in thousands except share and per share data or unless otherwise indicated)
Forward-Looking Information is Subject to Risk and Uncertainty
Some of the statements made and information contained in this report, excluding historical information, are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements give the Company's current expectations or forecasts of future events. Words such as "may," "will," "expected," "intend," "estimate," "anticipate," "believe," "project," or "continue," and similar expressions are used to identify forward-looking statements. From time to time, the Company also may provide oral or written forward-looking statements in other materials released to the public. Any or all forward-looking statements in this report and in any public statements the Company makes could be materially different. They can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Any change in the following factors may impact the achievement of results:
reductions or changes in NASA or U.S. Government military spending, timing of payments and budgetary policies, including impacts of sequestration under the Budget Control Act of 2011, and sourcing strategies,
intense competition for U.S. Government contracts and programs,
increases in costs, which the Company may not be able to react to due to the nature of its U.S. Government contracts,
changes in cost and revenue estimates and/or timing of programs,
the potential termination of U.S. Government contracts and the potential inability to recover termination costs,
other risks associated with U.S. Government contracts that might expose the Company to adverse consequences,
government laws and other rules and regulations applicable to the Company, including procurement and import-export control,
the novation of U.S. Government contracts,
reduction or change in demand and manufacturing costs for commercial ammunition,
the manufacture and sale of products that create exposure to potential product liability, warranty liability or personal injury claims and litigation,
risks associated with expansion into new and adjacent commercial markets,
results of the Merger or other acquisitions or transactions, including our ability to successfully integrate acquired businesses and realize anticipated synergies, cost savings and other benefits, and costs incurred for pursuits and proposed acquisitions,
greater risk associated with international business, including foreign currency exchange rates and fluctuations in those rates,
federal and state regulation of defense products and ammunition,
costs of servicing the Company's debt, including cash requirements and interest rate fluctuations,
actual pension and other postretirement plan asset returns and assumptions regarding future returns, discount rates, service costs, mortality rates, and health care cost trend rates,
security threats, including cyber-security and other industrial and physical security threats, and other disruptions,
supply, availability, and costs of raw materials and components, including commodity price fluctuations,
new regulations related to conflict minerals,
performance of the Company's subcontractors,

31



development of key technologies and retention of a qualified workforce,
the performance of our products,
fires or explosions at any of the Company's facilities,
government investigations and audits,
environmental laws that govern past practices and rules and regulations, noncompliance with which may expose the Company to adverse consequences,
impacts of financial market disruptions or volatility to the Company's customers and vendors,
unanticipated changes in the tax provision or exposure to additional tax liabilities, and
the costs and ultimate outcome of litigation matters, government investigations and other legal proceedings.
This list of factors is not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact the Company's business. Additional information regarding these factors is contained in Item 1A of this report and may also be contained in the Company's filings with the Securities and Exchange Commission on Forms 10-Q and 8-K. All such risk factors are difficult to predict, contain material uncertainties that may affect actual results, and may be beyond our control.
Executive Summary
The Company is an aerospace and defense products company and supplier of products to the U.S. Government, allied nations, and prime contractors. The Company is headquartered in Dulles, VA and has operating locations throughout the United States and internationally. On February 9, 2015, the Company completed a tax-free spin-off and distribution of its Sporting Group to its stockholders (the “Distribution”) 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 "Merger"). Following the Distribution and Merger, the Company changed its name from Alliant Techsystems Inc. to Orbital ATK, Inc.
As a result of the Distribution, the Sporting Group is no longer reported within the Company’s results from continuing operations but is reported as a discontinued operation for all periods presented. The Company used the acquisition method to account for the Merger; accordingly, the results of Orbital have been included in the Company's consolidated financial statements since the date of the Merger.
Following the Distribution and Merger, the Company reorganized its business groups and realigned its reporting segments. The Company’s remaining businesses, combined with the businesses of Orbital, are now reported in three segments: Flight Systems Group, Defense Systems Group and Space Systems Group. These segments are defined based on the reporting and review process used by the Company's chief executive officer and other management. All historical periods presented in this annual report on Form 10-K (the "10-K") reflect this change in the Company’s segment reporting.
Flight Systems Group, which comprises a portion of the Company's former Aerospace Group (Aerospace Structures division and Space Systems Operations' Launch Systems business); and Orbital's former Launch Vehicles segment. Our Flight Systems Group develops rockets 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, our Flight Systems Group operates in the military and commercial aircraft and launch structures markets. Other products include illuminating flares and aircraft countermeasures.
Defense Systems Group, which comprises all of the Company's former Defense Group (Armament, Defense Electronic Systems, Missile Products and Small-caliber Systems divisions). Our Defense Systems Group develops and produces military small-, medium-, and large-caliber ammunition, small-caliber commercial 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, which comprises a portion of the Company's former Aerospace Group (Space Components division and part of Space Systems Components division); and Orbital's former Advanced Space Programs and Satellite and Space Systems segments. Our Space Systems Group develops and produces small- and medium-class satellites that

32



are used to enable global and regional communications and broadcasting, conduct space-related scientific research, and perform other 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 re-supplying the ISS. This group is also a provider of spacecraft components and subsystems and specialized engineering and operations services to U.S. government agencies.
References in this report to a particular fiscal year refer to the year ended March 31 of that calendar year.   As previously announced, the Company will be changing its fiscal year to a fiscal year beginning on January 1 and ending on December 31 of each year, beginning January 1, 2016.  The Company’s 2015 fiscal year ended on March 31, 2015, and there will be a transition period of April 1, 2015 to December 31, 2015 which will be reported on a Form 10-K.
Financial Highlights and Notable Events
Certain notable events or activities affecting our fiscal 2015 financial results included the following:
Financial highlights for fiscal 2015
Annual sales of $3.2 billion.

Diluted earnings per share of $5.60.

Total orders of $1.5 billion.

Total backlog of $12.1 billion at March 31, 2015 compared to $6.0 billion at March 31, 2014. Total backlog includes $4.3 billion of backlog from Orbital.

Income from continuing operations, before interest, income taxes and noncontrolling interest as a percentage of sales was 7.3% and 10.3% for the years ended March 31, 2015 and 2014, respectively. The current year rate reflects the impact of a goodwill impairment charge and increased costs associated with the Distribution and Merger. The prior year rate reflects lower pension expense including the effect of the Radford segment close-out.

The increase in the current period income tax rate to 33.5% from 28.2% in fiscal 2014 is primarily due to the goodwill impairment and nondeductible transaction costs, partially offset by increased benefits from the Domestic Manufacturing Deduction (DMD), true-up of prior-year taxes, change in valuation allowance and lower state income taxes.

During fiscal 2015, the Company paid quarterly dividends of $0.32 per share for all four quarters totaling $41,056. On March 11, 2015, the Company's Board of Directors declared a quarterly cash dividend of $0.26 per share payable on June 25, 2015, to stockholders of record on June 8, 2015.

Notable events in fiscal 2015
In advance of the Distribution and Merger, the Company redeemed its 3.00% Convertible Senior Subordinated Notes due 2024.
In connection with the Merger, David W. Thompson, previously Orbital's Chairman, President and Chief Executive Officer, was appointed the Company's President and Chief Executive Officer; Blake E. Larson, previously the Company's Senior Vice President and President of the Company's Aerospace Group, was appointed the Company's Chief Operating Officer; Garrett E. Pierce, previously Orbital's Vice Chairman and Chief Financial Officer, was appointed the Company's Chief Financial Officer. In addition, the following individuals were appointed the Presidents of the Company's three business groups: Frank L. Culbertson, previously Orbital's Executive Vice President and General Manager, Advanced Programs Group, was appointed the Company's Executive Vice President and President, Space Systems Group; Ronald J. Grabe, previously Orbital's Executive Vice President and General Manager, Launch Systems Group, was appointed the Company's Executive Vice President and President, Flight Systems Group; and Michael A. Kahn, previously the Company's Senior Vice President and President of the Company's Defense Group, was appointed the Company's Executive Vice President and President, Defense Systems Group.
In connection with the Merger, the Company appointed to its board of directors the following members, all of whom had been members of Orbital's Board of Directors: General Kevin P. Chilton (Ret.), Lennard A. Fisk, Robert M. Hanisee, Lieutenant General Ronald T. Kadish (Ret.), Janice I. Obuchowski, James G. Roche, Harrison H. Schmitt, David W. Thompson and Scott L. Webster.

33



On February 9, 2015, the Company redeemed its 6.875% Senior Subordinated Notes due 2020 for $350,000 plus a make-whole premium of $22,904.
On February 9, 2015, the Company relocated its world headquarters to Orbital's headquarters in Dulles, Virginia.
In March 2015, the Company restructured its former Aerospace Group operating segment into two separate operating segments to account for the addition of the Orbital businesses: Flight Systems Group and Space Systems Group. The change was effective as of the Merger. The Company made no changes to its previously existing Defense Group operating segment, other than to rename it Defense Systems Group. Following the Distribution, Sporting is reported as discontinued operations in accordance with ASC Topic 205, “Presentation of Financial Statements,” beginning with the Company's financial statements for the fiscal year ended March 31, 2015.
On March 11, 2015, the Company's Board of Directors approved a stock repurchase program, authorizing management to repurchase shares of outstanding company stock through December 31, 2015, in an amount not to exceed the lesser of $75,000 or one million shares.
On March 27, 2015, the Company settled its lawsuit with Raytheon Company for $25,000.
Outlook
Government Funding—the Company is dependent on funding levels of the U.S. Department of Defense ("DoD") and NASA.
U.S. Government contracts are dependent on the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a government fiscal year ("GFY") basis even though contract performance may take more than one year. As a result, at the outset of a major program, the contract is usually incrementally funded, and additional monies are normally committed to the contract by the procuring agency only as Congress makes appropriations for future fiscal years. In addition, most U.S. Government contracts are subject to modification if funding is changed. Any failure by Congress to appropriate additional funds to any program in which the Company participates, or any contract modification as a result of funding changes, could materially delay or terminate the program. This could have a material adverse effect on the Company's operating results, financial condition, or cash flows.
The government budget structure remains constrained by the 2011 Budget Control Act, which initially reduced the DoD topline budget by approximately $490 billion over 10 years starting in fiscal year 2012, and subsequent amendments that continue to keep DoD spending flat or down compared to previous years. In addition, the Company is continuing to experience a period where force reductions and the wind down of overseas contingency operations, coupled with reduced training cycles and fairly healthy inventory levels for many ammunition and missile items, have resulted in less demand in some categories of products.
In GFY14, the Administration faced the threat of an additional year of sequestration and deeper cuts requiring an additional reduction of $20 billion from the defense topline budget. The Budget Control Act Amendment adopted in December 2013, and the subsequent Omnibus Appropriations Act approved in January 2014, provided some relief, however, to the deeper cuts required under sequestration in GFY14 and GFY15. For defense spending, the agreement effectively held flat the topline budget at $499 billion for both GFY14 and GFY15, providing over $30 billion in sequestration relief.
In December 2014, Congress approved, and the President signed, an omnibus spending bill for the remainder of GFY15, removing the threat of government shutdown and the difficulties of operating under a continuing resolution for GFY15. Total funding, including funding for most DoD programs, remains flat at GFY14 levels. NASA funding received a modest increase for the GFY15 budget, including an increase in the budget for the Space Launch System (“SLS”) program, for which the company is a key supplier. However, continuing concerns about deficit spending, along with ongoing economic challenges, continue to place pressure on U.S. Government budgets.
The President’s GFY16 budget submission includes modest increases to DoD and NASA spending. The DoD base budget of $534.3 billion reflects an increase of $38.2 billion over GFY2015. Spending for overseas contingency operations would be cut significantly, however, reflecting the continued drawdown of forces in Afghanistan, resulting in a requested combined DoD budget increase of approximately four percent. The DoD budget includes modernization investments in certain key areas including space and missile defense. Proposed NASA spending would be increased 2.9% above the GFY2015 appropriated level to $18.5 billion. Proposed funding for the SLS program would be substantially lower; however, Congress has provided funding levels higher than the Administration’s request for this program in recent years. In the event Budge Control Act caps are in effect in GFY2016 and GFY2017, overall NASA funding would remain flat at GFY2015 levels. The Company continues to monitor potential impacts as the GFY16 Congressional budget review and annual appropriations process gets underway. 

34



The U.S. defense industry has experienced significant changes over the years. The Company's management believes that the key to the Company's continued success is to focus on performance, innovation, simplicity and affordability. The Company is positioning itself where management believes there will be continued strong defense funding, even as pressures mount on procurement and research and development accounts. The Company is concentrating on developing systems that will extend the life and improve the capability of existing platforms. The Company anticipates budget pressures will increasingly drive the life extension of platforms such as ships, aircraft and main battle tanks.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the consolidated financial statements, the Company makes estimates and judgments that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosure of contingent assets and liabilities. The Company re-evaluates its estimates on an on-going basis. The Company's estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The Company believes the following are its critical accounting policies that affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Revenue Recognition
A substantial portion of our sales come from contracts with agencies of the U.S. Government and its prime contractors and subcontractors. As the various U.S. Government customers, including the U.S. Army, U.S. Navy, NASA, and the U.S. Air Force, make independent purchasing decisions, we do not generally regard the U.S. Government as one customer. Instead, we view each agency as a separate customer.
Sales from continuing operations by customer were as follows:
 
Percent of Sales for Years Ended March 31
 
2015
 
2014
 
2013
Sales to:
 
 
 
 
 
U.S. Army
27
%
 
33
%
 
38
%
U.S. Navy
15
%
 
16
%
 
16
%
NASA
13
%
 
14
%
 
14
%
U.S. Air Force
6
%
 
7
%
 
9
%
Other U.S. Government customers
14
%
 
14
%
 
10
%
Total U.S. Government customers
75
%
 
84
%
 
87
%
Commercial and foreign customers
25
%
 
16
%
 
13
%
Total
100
%
 
100
%
 
100
%
Long-term Contracts—The majority of the Company's sales to the U.S. Government and commercial and foreign customers 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 Company predominately accounts for revenue using the cost-to-cost method of accounting.
Profits expected to be realized on contracts are based on management estimates of total contract sales value and costs at completion. Estimated amounts for contract changes, including scope and claims, are included in contract sales only when an amount is reliably estimable and realization is estimated to be probable. Assumptions used for recording sales and earnings are adjusted in the period of change to reflect revisions in contract value and estimated costs. In the period in which it is determined that a loss will be incurred on a contract, the entire amount of the estimated gross margin loss is charged to cost of sales. Changes in estimates of contract sales, costs, or profits are recognized using the cumulative catch-up method of accounting. This method recognizes in the current period the cumulative effect of the changes on current or prior periods. The effect of the changes on future periods of contract performance is recognized as if the revised estimate had been used since contract inception.

35



Changes in contract estimates occur for a variety of reasons including changes in contract scope, unforeseen changes in contract cost estimates due to unanticipated cost growth or risks affecting contract costs and/or the resolution of contract risks at lower costs than anticipated, as well as changes in contract overhead costs over the performance period. Changes in estimates could have a material effect on our consolidated financial position or annual results of operations. In fiscal 2015, 2014 and 2013, we recognized favorable operating income adjustments of $144,741, $210,920, and $215,945, respectively, and unfavorable operating income adjustments of $57,736, $127,574 and $122,568, respectively, consisting of changes in estimates on contracts accounted for under the percentage-of-completion method of accounting. The adjustments recorded during fiscal 2015 were primarily driven by higher profit expectations in Defense Electronics, Armament Systems, Missile Products, Propulsion Systems and Small Caliber Systems divisions due to contract terminations and closeouts.
The adjustments recorded during fiscal 2014 were primarily driven by higher profit expectations of $41,357 in Small Caliber Systems division due to operational efficiencies, a successful in-sourcing initiative, and reduced operational risk as a contract nears completion, and for programs in Propulsion Systems. As a result of the pension close-out settlement, the difference between pension and postretirement benefit expense calculated under Financial Accounting Standards ("FAS") and the expense calculated under U.S. Cost Accounting Standards ("CAS") for the Radford facility management contract resulted in recording income of $28,986 at Corporate which has been excluded from the increase in operating income resulting from the cumulative catch-up method of accounting noted above.
Contracts may contain provisions to earn incentive and award fees if specified targets are achieved as well as penalty provisions related to performance. Incentive and award fees and penalties that can be reasonably estimated and are probable are recorded over the performance period of the contract. Incentive and award fees that cannot be reasonably estimated are recorded when awarded.
The complexity of the estimation process and all issues related to assumptions, risks, and uncertainties inherent with the application of the cost-to-cost method of accounting affect the amounts reported in the Company's financial statements. A number of internal and external factors affect the cost of sales estimates, including labor rate and efficiency variances, overhead rate estimates, revised estimates of warranty costs, estimated future material prices, and customer specification and testing requirement changes. If business conditions were different, or if the Company had used different assumptions in the application of this and other accounting policies, it is likely that materially different amounts would be reported in the Company's financial statements. In the past, the Company's estimates and assumptions have been materially accurate.
Other Revenue Recognition Methodology—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. Fiscal 2015 sales from continuing operations by revenue recognition method were as follows:
 
Percent of Sales
Sales recorded under:
 
Long-term contracts method
98
%
Other method
2
%
Total
100
%
Employee Benefit Plans
Defined Benefit Pension 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”). The Company acquired the following two pension plans applicable to legacy Orbital employees in connection with the Merger: "Fairchild Bargained Plan" and "Fairchild Space and Defense Plan" (the “Orbital Plans” and together with the ATK Plans, the “Plans”).
ATK Plans - The ATK Plans noncontributory defined benefit pension plans (the "Plans") cover substantially all Alliant Techsystems, Inc. employees hired prior to January 1, 2007. Eligible non-union employees hired on or after January 1, 2007 and certain union employees are not covered by a defined benefit plan but substantially all receive an employer contribution through a defined contribution plan. On January 31, 2013, the ATK Plans were amended to freeze the current pension formula benefits effective June 30, 2013 and to implement a new cash balance formula applicable to pay and service starting July 1, 2013. The cash balance formula provides each affected employee with pay credits based on the sum of that employee's age plus years of pension service as of December 31 of each calendar year, plus 4% annual interest credits. Prior to the effective date of the amendment, the Plans provide either pension benefits based on employee annual pay levels and years of credited service or

36



based on stated amounts for each year of credited service. The Company funds the Plans in accordance with federal requirements calculated using appropriate actuarial methods. Plan assets for the Company are held in a trust and are invested in a diversified portfolio of equity investments, fixed income investments, real estate, timber, energy investments, hedge funds, private equity, and cash. For certain Plan assets where the fair market value is not readily determinable, estimates of the fair value are determined using the best available information including the most recent audited financial statements.
Orbital Plans - The Orbital Plans were acquired by Orbital in connection with a 1994 business acquisition and were frozen at that time. These plans currently are overfunded. The Company funds the defined benefit pension plans in accordance with federal requirements calculated using appropriate actuarial methods. Plan assets for the Company are held in trusts and are invested in a diversified portfolio of equity investments, fixed income investments, real estate, timber, energy investments, hedge funds, private equity, and cash. For certain plan assets where the fair market value is not readily determinable, estimates of the fair value are determined using the best available information including the most recent audited financial statements.
The Company also sponsors nonqualified supplemental executive retirement plans which provide certain executives and highly compensated employees the opportunity to receive pension benefits in excess of those payable through tax-qualified pension plans. The Company implemented similar changes as those noted above to the Company's nonqualified supplemental executive retirement plans for certain highly compensated employees.
The Company recorded pension expense for the Plans of $84,986 in fiscal 2015, a decrease of $43,826 from $128,812 of pension expense recorded in fiscal 2014. The expense related to these Plans is calculated based upon a number of actuarial assumptions, including the expected long-term rate of return on plan assets, the discount rate, and the rate of compensation increase. The following table sets forth the Company's assumptions used in determining pension expense for fiscal 2015, 2014, and 2013, and projections for fiscal 2016:
 
Years Ending March 31
 
2016
 
2015
 
2014
 
2013
Expected long-term rate of return on plan assets
7.25
%
 
7.25
%
 
7.25
%
 
7.50
%
Discount rate
3.90
%
 
4.50
%
 
4.35
%
 
4.90
%
Rate of compensation increase:
 
 
 
 
 
 
 
Union
3.66
%
 
3.22
%
 
3.23
%
 
3.26
%
Salaried
3.14
%
 
3.47
%
 
3.49
%
 
3.55
%
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 investment returns. The expected long-term rate of return of 7.25% used in fiscal 2015 for the Plans was based on an asset allocation range of 20 - 45% in equity investments, 35 - 50% in fixed income investments, 0 - 10% in real estate/real asset investments, 15 - 30% collectively in hedge fund and private equity investments, and 0 - 6% in cash investments. The expected long-term rate of return assumed for fiscal 2016 is 7.25%. The actual return in any fiscal year will likely differ from the Company's assumption, but the Company estimates its return based on long-term projections and historical results. Therefore, any variance in a given year does not necessarily indicate that the assumption should be changed.
In determining its discount rate, the Company uses the current investment yields on high-quality corporate bonds (rated AA or better) that coincide with the cash flows of the estimated benefit payouts from the Company's plans. The model uses a yield curve approach to discount each cash flow of the liability stream at an interest rate specifically applicable to the timing of the respective cash flow. The model totals the present values of all cash flows and calculates the equivalent weighted average discount rate by imputing the singular interest rate that equates the total present value with the stream of future cash flows. This resulting weighted average discount rate is then used in evaluating the final discount rate. The discount rate was 3.90%, 4.50%, and 4.35% at March 31, 2015, March 31, 2014, and March 31, 2013, respectively. The discount rate as of March 31 impacts the following fiscal year's pension expense.
Future actual pension expense can vary significantly depending on future investment performance, changes in future discount rates, legally required plan changes, and various other factors related to the populations participating in the Plans. If the assumptions of the discount rate, compensation increase, and/or expected rate of return for fiscal 2016 were different, the impact on fiscal 2016 expense would be as follows: each 0.25% change in the discount rate would change fiscal 2016 pension expense by approximately $6,100; each 0.25% change in the rate of compensation increase would change fiscal 2016 pension expense by approximately $100; and each 0.25% change in the expected rate of return on plan assets would change fiscal 2016 pension expense by approximately $5,600.

37



The Company bases its determination of pension expense or income on a market-related valuation of assets, which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets. Since the market-related value of assets recognizes gains or losses over a five-year period, the future value of assets will be impacted as previously deferred gains or losses are recorded.
The Company made contributions to the qualified pension trust of $80,400 during fiscal 2015 and is required to make contribution of $48,000 in fiscal 2016. The Company distributed $6,750 under its supplemental executive retirement plans during fiscal 2015, and expects to make distributions directly to retirees of $3,743 in fiscal 2016. A substantial portion of the Company's Plan contributions are recoverable from the U.S. Government as allowable indirect contract costs at amounts generally equal to the pension plan contributions, although not necessarily in the same year the contribution is made. The Company's funded pension status was approximately 73% as of March 31, 2015.
Other Postretirement Benefits.    The Company also provides postretirement health care benefits and life insurance coverage to certain employees and retirees.
The following table sets forth the Company's assumptions used to determine net periodic benefit cost for other postretirement benefit ("PRB") plans for fiscal 2015, 2014, and 2013, and projections for fiscal 2016:
 
Years Ending March 31
 
2016
 
2015
 
2014
 
2013
Expected long-term rate of return on plan assets:
 
 
 
 
 
 
 
Held solely in fixed income investments
5.00
%
 
5.00
%
 
5.00
%
 
5.00
%
Held in pension master trust and fixed income investments
6.25
%
 
6.25
%
 
6.25
%
 
6.25
%
Discount rate
3.55
%
 
3.95
%
 
3.80
%
 
4.40
%
Weighted average initial health care cost trend rate
6.10
%
 
6.10
%
 
7.60
%
 
7.70
%
Health care cost trend rates are set specifically for each benefit plan and design. Health care cost trend rates used to determine the net periodic benefit cost for employees during fiscal 2015 were as follows: under age 65 was 7.5%; over age 65 was 6.0%; and the prescription drug portion was 6.5%.
The health care cost ultimate trend rates are as follows:
Health care cost trend rate for employees under 65
4.5
%
Health care cost trend rate for employees over 65
4.5
%
Health care cost trend rate for prescription drugs
4.5
%
Weighted-average health care cost trend rate
4.5
%
Each category of cost declines at a varying rate. The ultimate trend rate will be reached in fiscal 2021 for employees under age 65, in fiscal 2021 for employees over age 65, and in fiscal 2022 for prescription drugs.
In developing the expected long-term rate of return assumption for other PRB plans, the Company considers input from actuaries, historical returns, and annualized returns of various major indices over long periods. As of March 31, 2015, approximately 44% of the assets were held in a 401(h) account held within the pension master trust and are invested in the same manner as the pension assets. The expected long-term rates of returns are based on the weighted average asset allocation between the assets held within the 401(h) and those held in fixed income investments.
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage point increase or decrease in the assumed health care cost trend rates would have the following effects:
 
One Percentage
Point Increase
 
One Percentage
Point Decrease
Effect on total service and interest cost
$
284

 
$
(251
)
Effect on postretirement benefit obligation
7,995

 
(7,060
)

38



The Company made other PRB plan contributions of $9,769 in fiscal 2015 and expects to make contributions of approximately $8,281 in fiscal 2016. A substantial portion of the Company's PRB plan contributions are recoverable from the U.S. Government as allowable indirect costs at amounts generally equal to the plan contributions, although not necessarily in the same year the contribution is made.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") reduced the Company's accumulated projected benefit obligation ("APBO") measured as of December 31, 2005. One of the Company's other PRB plans is actuarially equivalent to Medicare, but the Company does not believe that the subsidies it will receive under the Act will be significant. Because the Company believes that participation levels in its other PRB plans will decline, the impact to the Company's results of operations in any period has not been and is not expected to be significant.
Defined Contribution Plan. The Company also sponsors the Alliant Techsystems, Inc. 401(k) defined contribution plan. Participation in this plan is available to substantially all legacy Alliant Techsystems, Inc. U.S. employees. In addition, the Company sponsors the Deferred Salary and Profit Sharing Plan for Employees of Orbital Sciences Corporation. Participation in this plan is currently available to substantially all legacy Orbital employees.
Income Taxes
Provisions for federal, state, and foreign income taxes are calculated based on reported pre-tax earnings and current tax law. Such provisions differ from the amounts currently receivable or payable because certain items of income and expense are recognized in different time periods for financial reporting purposes than for income tax purposes. Significant judgment is required in determining income tax provisions and evaluating tax positions. 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 these 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 the income tax provision 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 tax expense for financial reporting purposes. Deferred tax assets related to carryforwards are reduced by a valuation allowance when it is not more likely than not that the amount will be realized before expiration of the carryforward period. As part of this analysis the Company takes into account the amount and character to determine if the carryforwards will be realized. Significant estimates are required for this analysis. Changes in the amounts of valuation allowance are recorded in the tax provision in the period when the change occurs.
Mergers and Acquisitions
The results of merged or acquired businesses are included in the Company's consolidated financial statements from the date of merger or acquisition. The Company allocates the purchase price to the underlying tangible and intangible acquired assets acquired and liabilities assumed based on their fair value. Estimates are used in determining the fair value and estimated remaining lives of intangible assets until the final purchase price allocation is completed. Actual fair values and remaining lives of intangible assets may vary from those estimates. The excess purchase price over the estimated fair value of the net assets acquired is recorded as goodwill.
On April 28, 2014, the Company entered into a Transaction Agreement (the “Transaction Agreement”) with Orbital, Vista SpinCo Inc., a wholly-owned subsidiary of the Company , and Vista Merger Sub Inc., a wholly-owned subsidiary of the Company , providing for the Distribution of the Company’s Sporting Group as a new public company, Vista Outdoor, followed by the Merger of the Company, consisting of its Aerospace and Defense business, with Orbital, through the merger of a company subsidiary with Orbital. The Distribution and Merger were completed on February 9, 2015 and the Company changed its name to Orbital ATK, Inc. Pursuant to the Distribution and Merger, the Company's stockholders received two shares of Vista Outdoor for each share of Company common stock held and Orbital stockholders received 0.449 shares of Company stock for each share of Orbital common stock held. Both transactions were structured to be tax-free to our U.S. stockholders for U.S. federal income tax purposes. Immediately following the Merger, Orbital stockholders owned 46.2% of the common stock of the Company and existing Company stockholders owned 53.8%. The Merger was accounted for using the purchase method of accounting with the Company as the accounting acquirer.
Following the Distribution and Merger, the Company reorganized its business groups and changed its reporting segment structure. As noted, the Company divested the Sporting Group segment and will no longer report it within the Company’s results from continuing operations. The divested business is presented as a discontinued operation in the consolidated financial statements for all periods presented through February 9, 2015. Included in the Distribution, were those companies acquired in the following transactions:

39



Savage: On June 21, 2013, the Company acquired Caliber Company, parent company of Savage Sports Corporation ("Savage"), a leading manufacturer of sporting long guns, centerfire and rimfire rifles, shotguns and shooting range systems. The purchase price was $315,000 net of cash acquired.
    
Bushnell: On November 1, 2013, the Company acquired Bushnell Group Holdings, Inc. ("Bushnell"). Bushnell is a leading global designer, marketer and distributor of branded sports optics, outdoor accessories and performance eyewear. The purchase price was $985,000 net of cash acquired.

Accounting for Goodwill

The Company tests goodwill for impairment on the first day of its fourth fiscal quarter or upon the occurrence of events or changes in circumstances that indicate that the asset might be impaired. The Company determined that the reporting units for its goodwill impairment review are its operating segments, or components of an operating segment, that constitute a business for which discrete financial information is available, and for which segment management regularly reviews the operating results. Based on this analysis, the Company identified 10 reporting units within its reportable segments as of the fiscal 2015 testing date. Three of the reporting units, Ammunition, Accessories and Firearms were part of the Sporting group that was spun off on February 9, 2015 and the operating results of which are included in discontinued operations. There was no impairment for those reporting units for the annual impairment test however we did record an impairment of goodwill and intangible assets totaling $52,220, for the Firearms reporting unit in the third quarter, which is now recorded in discontinued operations.
The goodwill impairment test is performed using a two-step process. In the first step, the Company determines the estimated fair value of each reporting unit and compares it to the carrying value of the reporting unit, including goodwill. If the carrying amount of a reporting unit is higher than its estimated fair value, an indication of impairment exists and the second step must be performed in order to determine the amount of the impairment. In the second step, the Company must determine the implied fair value of the reporting unit's goodwill which is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The implied fair value is compared to the carrying amount and if the carrying amount of the reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss must be recognized for the excess.
The fair value of each reporting unit is determined using both an income and market approach. The value estimated using a discounted cash flow model is weighted against the estimated value derived from two separate market approaches: the guideline company and transaction methods (if recent transactions are available). These market approach methods estimate the price reasonably expected to be realized from the sale of the company based on comparable companies and recent transactional data.
In developing its discounted cash flow analysis, the Company's assumptions about future revenues and expenses, capital expenditures, and changes in working capital are based on its three-year plan, as approved by the Board of Directors, and assumes a terminal growth rate thereafter. A separate discount rate is determined for each reporting unit and these cash flows are then discounted to determine the fair value of the reporting unit.
Projecting discounted future cash flows requires the Company to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital, and the appropriate discount rate. The projections also take into account several factors including current and estimated economic trends and outlook, costs of raw materials, consideration of the Company's market capitalization in comparison to the estimated fair values of the Company's reporting units, and other factors which are beyond the Company's control. If the current economic conditions were to deteriorate, or if the Company were to lose a significant contract or business, causing a reduction in estimated discounted cash flows, it is possible that the estimated fair value of certain reporting units could fall below their carrying value resulting in the necessity to conduct additional goodwill impairment tests in future periods. The Company continually monitors the reporting units for impairment indicators and updates assumptions used in the most recent calculation of the estimated fair value of a reporting unit as appropriate.
To test the reasonableness of the valuation, the Company compares the indicated fair value of the reporting units to the estimated public market capitalization value of the Company and the appropriateness of the assumed control premium.

40



Results of the Company's fiscal 2015 Annual Impairment Test
For the fiscal 2015 impairment assessment performed as of December 28, 2014, the Company utilized estimated cash flows from its three-year plan and assumed a terminal growth rate thereafter ranging from 0% to 4%. The cash flows were then discounted using a separate discount rate for each reporting unit which ranged from 9% to 12.5%. An assumed value was also determined using multiples from recent transactions in the industry and by comparing operating results from guideline companies.
The results of the Company's fiscal 2015 annual goodwill impairment test indicated that the net book value of Space Systems Group's Space Components division exceeded the implied fair market value. The fair value of the reporting unit was determined using both an income and market approach. The value estimated using a discounted cash flow model was weighted against the estimated value derived from the guideline company market approach method. This market approach method estimated the price reasonably expected to be realized from the sale of the business based on comparable companies. As the net book value of the division exceeded fair market value, the second step analysis was performed and the fair value of goodwill was determined based on the allocation of the reporting unit's assets, in a manner similar to purchase price allocation. As a result of this second step, the Company recorded an impairment of $34,300 in the fourth quarter of fiscal 2015. The impairment was primarily driven by a reduction in near-term estimated cash flows compared to the prior year forecast, resulting from, among other things, government budget constraints and increased competitive pressures in the satellite and spacecraft manufacturing market. The remaining goodwill balance for this reporting unit is $50,800. A 0.5% change in the discount rate from 11.5% would change the impairment by $3,000. A 0.5 change in the EBITDA multiple from 6.5 would change the impairment by $4,000.
Other than the Space Components division, where we had an impairment, we estimated fair value for all other reporting units from continuing operations with significant goodwill balances exceeded their carrying value by greater than 10%, which the Company deems to be a sufficient excess.
Results of Operations
The following information should be read in conjunction with our consolidated financial statements. The key performance indicators that management uses in managing the business are sales, income before interest and income taxes, and cash flows.
Group Sales, Cost of Sales, and Income from Continuing Operations, Before Interest, Income Taxes and Noncontrolling Interest include intergroup sales and profit. Corporate and Eliminations includes intergroup sales and profit eliminations and corporate expenses. Our financial results include Orbital's results from February 9, 2015 to March 31, 2015.
Fiscal 2015
Sales
 
Years Ended March 31
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
Flight Systems Group
$
1,094,208

 
$
911,232

 
$
182,976

 
20.1
 %
Defense Systems Group
1,890,534

 
1,950,784

 
(60,250
)
 
(3.1
)%
Space Systems Group
413,295

 
371,200

 
42,095

 
11.3
 %
Eliminations
(224,070
)
 
(307,979
)
 
83,909

 
(27.2
)%
Total sales
$
3,173,967

 
$
2,925,237

 
$
248,730

 
8.5
 %
The fluctuation in sales was driven by the program-related changes within the operating segments as described below.
Flight Systems Group.   The increase in sales was driven primarily by increased sales volume in Aerospace Structures of $67,000 due to increased production on commercial aircraft programs, sales of $64,700 resulting from the inclusion of Orbital's former Launch Vehicles segment in our post-Merger fiscal 2015 results, and increased sales volume in Propulsion Systems of $41,300 driven by a termination settlement on a commercial rocket motor contract.
Defense Systems Group.   The decrease in sales was driven primarily by reduced sales of $68,700 in Small Caliber Systems largely due to lower volumes, a decrease in Missile Products of $23,600 due to the absence of a favorable RFAAP pension segment adjustment recorded in fiscal 2014, partially offset by a favorable contract adjustment in 2015, and a decrease in Defense Electronics of $19,100 as a result of completing several contracts in the current year, partially offset by increased sales in Armament Systems of $41,300 resulting from increased foreign sales.

41



Space Systems Group.    The increase in sales was driven by additional sales in Government Satellites of $56,100, Commercial Satellites of $42,200 and Technical Services of $21,000, resulting from the inclusion of Orbital's former Advanced Space Programs and Satellite and Space Systems segments in our post-Merger fiscal 2015 results, primarily offset by lower activity on two major proprietary programs that were completed in Space Components division.
Cost of Sales
 
Years Ended March 31
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
Flight Systems Group
$
843,326

 
$
706,338

 
$
136,988

 
19.4
 %
Defense Systems Group
1,525,046

 
1,563,816

 
(38,770
)
 
(2.5
)%
Space Systems Group
341,624

 
304,938

 
36,686

 
12.0
 %
Corporate
(240,131
)
 
(297,153
)
 
57,022

 
(19.2
)%
Total cost of sales
$
2,469,865

 
$
2,277,939

 
$
191,926

 
8.4
 %
The fluctuation in cost of sales was driven by the program-related changes within the operating segments as described below.
Flight Systems Group.    The increase was driven by increased cost of sales in Aerospace Structures of $54,600 resulting from increased production on commercial aircraft programs, cost of sales of $47,500 from Orbital's former Launch Vehicles segment included in our post-Merger fiscal 2015 results, and increased costs of sales in Propulsion Systems of $27,700 driven by termination costs on a commercial rocket motor contract.
Defense Systems Group.    The decrease in cost of sales was driven by lower cost of sales of $37,700 in Missile Products due primarily to a favorable RFAAP pension segment closing adjustment recorded in fiscal 2014, lower cost of sales in Defense Electronics of $30,000 as a result of completing several contracts in the current year, and a decrease of $12,000 in Small Caliber Systems due to lower sales volume. These decreases were partially offset by increased cost of sales of $35,700 in Armament Systems resulting from increased foreign sales.
Space Systems Group.    The increase in cost of sales was driven by additional cost of sales in Government Satellites of $42,700, Commercial Satellites of $39,700, and Technical Services of $19,300 resulting from the inclusion of Orbital's former Advanced Space Programs and Satellite and Space Systems segments in our post-Merger fiscal 2015 results, primarily offset by lower activity on two major proprietary programs in Space Components.
Corporate. The change in Corporate cost of sales was driven by a reduction in sales and cost of sales eliminations resulting from lower sales from the Defense Systems Group to the Sporting Group, reported in discontinued operations. Additionally, the change in Corporate cost of sales was impacted by increased intercompany profit eliminations resulting from post-Merger sales to business units that were formerly a part of Orbital.
Operating Expenses
 
Years Ended March 31
 
 
 
2015
 
As a %
of Sales
 
2014
 
As a %
of Sales
 
Change
Research and development
$
49,349

 
1.6
%
 
$
48,536

 
1.7
%
 
$
813

Selling
89,941

 
2.8
%
 
87,554

 
3.0
%
 
2,387

General and administrative
298,559

 
9.4
%
 
209,251

 
7.2
%
 
89,308

Goodwill impairment
34,300

 
1.1
%
 

 
%
 
34,300

Total
$
472,149

 
14.9
%
 
$
345,341

 
11.9
%
 
$
126,808


Operating expenses increased by $126,800 year-over-year primarily due to transaction costs, restructuring charges, and a fourth quarter 2015 goodwill impairment charge. During fiscal 2015 we incurred $34,900 of transaction fees for advisory, legal and accounting services in connection with the 2015 Distribution and Merger. Additionally, as a result of the Distribution and Merger we recorded restructuring costs of $25,600 in fiscal 2015 principally in connection with the consolidation of corporate facilities and personnel termination costs associated with management restructuring. The transaction costs and restructuring charges in fiscal 2015 were recorded in general and administrative expenses. During the

42



fourth quarter of 2015, we recorded a goodwill impairment charge of $34,300 pertaining to our Space Components division in our Space Systems Group, in connection with our annual goodwill impairment analysis, as discussed in "Accounting for Goodwill" above.
Income from Continuing Operations, Before Interest, Income Taxes and Noncontrolling Interest
 
Years Ended March 31
 
 
 
2015
 
2014
 
Change
Flight Systems Group
$
145,753

 
$
110,882

 
$
34,871

Defense Systems Group
188,963

 
210,669

 
(21,706
)
Space Systems Group
(3,824
)
 
30,810

 
(34,634
)
Corporate
(98,939
)
 
(50,404
)
 
(48,535
)
Total
$
231,953

 
$
301,957

 
$
(70,004
)
The fluctuations in Income from continuing operations, before income taxes and noncontrolling interest are described as follows:
Flight Systems Group.     Income from operations increased due to increased sales as noted above and profit from a contract termination within Propulsion Systems.
Defense Systems Group.    Income from operations decreased due to lower sales as noted above. In addition, operating expenses were down $7,400 on a year-over-year basis, due to lower research and development spending of $4,100 in Defense Electronics and $3,100 in Armament Systems.
Space Systems Group.   Operating results decreased primarily due to an increase in operating expenses of $38,900, principally due to a goodwill impairment charge of $34,300 in Space Components, partially offset by decreased research and development costs of $4,600.
Corporate.    Results reflect expenses incurred for administrative functions that are performed centrally at the corporate headquarters, the difference between pension and postretirement benefit expense calculated under FAS and the expense calculated under CAS, transaction-related costs, amortization of intangible assets recorded in connection with the Merger, and the elimination of intercompany profits. . The change from the prior year was driven primarily by costs associated with the Distribution and Merger including transaction costs of $34,900, restructuring costs of $25,600 and litigation settlement costs. These cost increases were partially offset by lower intercompany profit eliminations and the absence of the Radford pension segment close-out recorded in the prior year.
Net Interest Expense
Net interest expense for fiscal 2015 was $88,700, an increase of $8,900 compared to $79,800 in fiscal 2014. The increase was primarily due to the increase in the average amount of debt outstanding, partially offset by a lower weighted-average interest rate.
Income Taxes (from Continuing Operations)
 
Years Ended March 31
 
 
 
2015
 
Effective
Rate
 
2014
 
Effective
Rate
 
Change
Income taxes
$
39,117

 
33.5
%
 
$
62,542

 
28.2
%
 
$
(23,425
)
The increase in the current period tax rate is primarily due to the goodwill impairment and nondeductible transaction costs, partially offset by increased benefits from the Domestic Manufacturing Deduction (DMD), true-up of prior-year taxes, change in valuation allowance and lower state income taxes.
The Company's provision for income taxes includes both federal and state income taxes. The effective tax rate for fiscal 2015 of 33.5% differs from the federal statutory rate of 35.0% due to DMD, change in prior-year contingent tax liabilities, research and development (R&D) tax credit, change in valuation allowance and true-up of prior-year taxes, partially offset by goodwill impairment and nondeductible transaction costs which increased the rate.
The effective tax rate for fiscal 2014 of 28.2% differs from the federal statutory rate of 35.0% due to the revaluation of unrecognized tax benefits due to proposed IRS regulations, DMD and the R&D tax credit, partially offset by the true-up of prior-year taxes and state income taxes which increased the rate.

43



We or one of our subsidiaries file income tax returns in the U.S. federal, various U.S. state, and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2008. The IRS has completed the audits of the Company through fiscal 2012 and is currently auditing our tax returns for fiscal years 2013 and 2014. We believe appropriate provisions for all outstanding issues have been made for all remaining open years in all jurisdictions.
As of March 31, 2015 and 2014, the total amount of unrecognized tax benefits was $44,290 and $35,138, respectively, of which $40,411 and $29,046, 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 $466 reduction of the uncertain tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings from $0 to $299. See Note 11 to the consolidated financial statements for further details.
We believe it is more likely than not that the recorded deferred benefits will be realized through the reduction of future taxable income. Our recorded valuation allowance of $8,836 at March 31, 2015 relates to certain capital loss, tax credits and net operating losses that are not expected to be realized before their expiration.
The IRS released final regulations relating to the capitalization of tangible personal property on September 13, 2013. We are currently analyzing the impact of these new regulations. We do not believe they will have a material impact on our financial statements.

Income From Continuing Operations, Before Noncontrolling Interest
Net income before noncontrolling interest for fiscal 2015 was $77,500, a decrease of $82,100 compared to 159,600 in fiscal 2014. This decrease was driven by a $126,800 increase in operating expenses, and an increase of $8,900 in net interest expense over the prior year, partially offset by a $56,800 increase in gross profit and a $23,400 decrease in income tax expense.
Noncontrolling Interest
The noncontrolling interest represents the noncontrolling owner's portion of the income of a joint venture in which we are the primary owner. This joint venture was acquired with Composite Optics, Inc. ("COI") and is consolidated into our financial statements.
Fiscal 2014
Sales
 
Years Ended March 31
 
 
 
 
 
2014
 
2013
 
$ Change
 
% Change
Flight Systems Group
$
911,232

 
$
928,827

 
$
(17,595
)
 
(1.9
)%
Defense Systems Group
1,950,784

 
2,109,671

 
(158,887
)
 
(7.5
)%
Space Systems Group
371,200

 
347,870

 
23,330

 
6.7
 %
Eliminations
(307,979
)
 
(180,272
)
 
(127,707
)
 
70.8
 %
Total sales
$
2,925,237

 
$
3,206,096

 
$
(280,859
)
 
(8.8
)%
The fluctuation in sales was driven by the program-related changes within the segments as described below.
Flight Systems Group.    The decrease in sales was driven by a decrease in Propulsion Systems sales volume of $35,500 due to lower flare and decoy activity, partially offset by a $17,400 increase in Aerospace Structures sales volumes due to increased production on commercial aircraft programs.
Defense Systems Group.    The decrease in sales was driven by a decrease of $93,200 in Armament Systems due to lower volumes on medium-caliber ammunition programs and completion of programs, a decrease of $51,800 in Small Caliber Systems due to reduced volume as programs neared completion and impacts from federal budget reductions, and a decrease of $34,900 in Defense Electronics due to startup and completions on multiple contracts. These decreases were partially offset by a $20,600 increase in sales within Missile Products due to higher production levels across multiple programs and pension segment closeout, partially offset by the loss of the Radford facility management contract.
Space Systems Group.    The increase in sales was driven by increased activity on a major proprietary program.

44



Cost of Sales
 
Years Ended March 31
 
 
 
 
 
2014
 
2013
 
$ Change
 
% Change
Flight Systems Group
$
706,338

 
$
710,861

 
$
(4,523
)
 
(0.6
)%
Defense Systems Group
1,563,816

 
1,641,998

 
(78,182
)
 
(4.8
)%
Space Systems Group
304,938

 
284,554

 
20,384

 
7.2
 %
Corporate
(297,153
)
 
(116,136
)
 
(181,017
)
 
155.9
 %
Total cost of sales
$
2,277,939

 
$
2,521,277

 
$
(243,338
)
 
(9.7
)%
The fluctuation in cost of sales was driven by the program-related changes within the operating segments as described below.
Flight Systems Group.    The decrease in cost of sales was driven by a $29,100 decrease in Propulsion Systems due to lower sales volume attributable to lower flare and decoy activity, partially offset by an $8,500 increase in Aerospace Structures due to increased production on commercial aircraft programs.
Defense Systems Group.   The decrease in cost of sales was driven by a decrease of $72,600 in Armament Systems due to lower volumes on medium-caliber ammunition programs and completion of programs, a decrease of $32,600 in Small Caliber Systems due to reduced volume as programs neared completion and impacts from federal budget reductions, and a decrease of $13,100 in Defense Electronics due to startup and completions on multiple contracts. These decreases were partially offset by a $45,000 increase within Missile Products due to production improvements across multiple programs and pension segment closeout, partially offset by the loss of the Radford facility management contract.
Space Systems Group.    The increase in cost of sales was driven by increased activity on a major proprietary program.
Corporate. The decrease in cost of sales was driven by the reduction in pension expense including the effect of the Radford segment close-out.
Operating Expenses
 
Years Ended March 31
 
 
 
2014
 
As a %
of Sales
 
2013
 
As a %
of Sales
 
Change
Research and development
$
48,536

 
1.7
%
 
$
55,958

 
1.7
%
 
$
(7,422
)
Selling
87,554

 
3.0
%
 
90,219

 
2.8
%
 
(2,665
)
General and administrative
209,251

 
7.2
%
 
200,568

 
6.3
%
 
8,683

Total
$
345,341

 
11.9
%
 
$
346,745

 
10.8
%
 
$
(1,404
)
Total operating expenses were flat year-over-year. A marginal increase in general and administrative expenses was more than offset by marginal decreases in research and development costs and selling expenses year-over-year
Income From Continuing Operations, Before Interest, Income Taxes and Noncontrolling Interest
 
Years Ended March 31
 
 
 
2014
 
2013
 
Change
Flight Systems Group
$
110,882

 
$
117,367

 
$
(6,485
)
Defense Systems Group
210,669

 
270,498

 
(59,829
)
Space Systems Group
30,810

 
27,025

 
3,785

Corporate
(50,404
)
 
(76,816
)
 
26,412

Total
$
301,957

 
$
338,074

 
$
(36,117
)
The decrease in income from continuing operations, before interest, income taxes, and noncontrolling interest was principally due to lower sales. Significant changes within the operating segments are also described below.
Flight Systems Group.  Results were down slightly due to program mix across the group.

45



Defense Systems Group.  The decrease was the result of lower sales volume and the absence of the results from the Radford facility management contract, partially offset by profit expectation improvements in Small Caliber Systems.
Space Systems Group.  Results were up slightly due to program mix across the group.
Corporate.    The change from the prior year was driven by lower pension expense including the Radford segment close-out, partially offset by an increase in intercompany profit eliminations and an environmental settlement.
Net Interest Expense
Net interest expense for fiscal 2014 was $79,800, an increase of $14,400 compared to $65,400 in fiscal 2013. The increase was primarily due to the increase in the average amount of debt outstanding, partially offset by a lower weighted-average interest rate.
Income Taxes (from Continuing Operations)
 
Years Ended March 31
 
 
 
2014
 
Effective
Rate
 
2013
 
Effective
Rate
 
Change
Income taxes
$
62,542

 
28.2
%
 
$
73,746

 
28.3
%
 
$
(11,204
)
The decrease in the current period tax rate was primarily due to the lower state income taxes and higher research and development tax credit, partially offset by the true-up of prior year taxes.
Our provision for income taxes includes both federal and state income taxes. The effective tax rate for fiscal 2014 of 28.2% differs from the federal statutory rate of 35.0% due to the revaluation of unrecognized tax benefits due to proposed IRS regulations, Domestic Manufacturing Deduction and the R&D tax credit, partially offset by the true-up of prior-year taxes and state income taxes which increased the rate.
The effective tax rate for fiscal 2013 of 28.3% differs from the federal statutory rate of 35.0% due to the settlement of the examination of the fiscal 2009 and 2010 tax returns and DMD partially offset by state income taxes which increased the rate.
We or one of our subsidiaries files income tax returns in the U.S. federal, various U.S. state, and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2007. The IRS has completed the audits of the Company through fiscal 2010 and is currently auditing our tax returns for fiscal years 2011 and 2012. We believe appropriate provisions for all outstanding issues have been made for all remaining open years in all jurisdictions.
As of March 31, 2014 and 2013, the total amount of unrecognized tax benefits was $35,138 and $27,760, respectively, of which $29,046 and $21,150, respectively, would affect the effective tax rate, if recognized. The remaining balance is related to deferred tax items which only impact the timing of tax payments. Although the timing and outcome of audit settlements are uncertain, it is reasonably possible that a $4,799 reduction of the uncertain tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in earnings from $0 to $4,367. See Note 11 to the consolidated financial statements for further details.
We believe it is more likely than not that the recorded deferred benefits will be realized through the reduction of future taxable income. Our recorded valuation allowance of $7,167 at March 31, 2014 relates to certain capital loss, tax credits and net operating losses that are not expected to be realized before their expiration.
The IRS released final regulations relating to the capitalization of tangible personal property on September 13, 2013. We are currently analyzing the impact of these new regulations. We do not believe they will have a material impact on our financial statements.

Income From Continuing Operations, Before Noncontrolling Interest

Income from continuing operations, before noncontrolling interest for fiscal 2014 was $159,600, a decrease of $27,400 compared to $187,200 in fiscal 2013. This decrease was driven by a $37,500 decrease in gross profit.

46



Noncontrolling Interest
The noncontrolling interest represents the noncontrolling owner's portion of the income of a joint venture in which we are the primary owner. This joint venture was acquired with Composite Optics, Inc. ("COI") and is consolidated into our financial statements.
Liquidity and Capital Resources
We manage our business to maximize operating cash flows as the primary source of liquidity. In addition to cash on hand and cash generated by operations, sources of liquidity include a committed credit facility, long-term borrowings, and access to the public debt and equity markets. We use our cash to fund investments in our existing core businesses and for debt repayment, cash dividends, share repurchases, and acquisition or other activities.
Cash Flow Summary
Our cash flows from continuing operations for operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows for the years ended March 31, 2015, 2014, and 2013 are summarized as follows:
 
2015
 
2014
 
2013
Cash provided by operating activities of continuing operations
$
190,855

 
$
161,961

 
$
184,931

Cash provided by (used for) investing activities of continuing operations
332,198

 
(100,242
)
 
(73,322
)
Cash provided by (used for) financing activities of continuing operations
(737,317
)
 
903,254

 
(328,399
)
Net cash flows from continuing operations
$
(214,264
)
 
$
964,973

 
$
(216,790
)
Operating Activities
Net cash provided by operating activities of continuing operations increased $28,894 compared to the prior year. This increase was driven by working capital improvements of $51,525 and an increase in operating cash flows adjustments for non-cash items of $59,458, partially offset by a decrease in net income of from continuing operations of $82,017.

Net cash provided by operating activities of continuing operations decreased $22,970 in fiscal 2014 compared to fiscal 2013. This decrease was driven by lower income from continuing operations of $27,546 and working capital requirements of $2,410, primarily driven by the timing of receivable collections and vendor payments.
Investing Activities
Net cash provided by investing activities of continuing operations increased $432,440 primarily due to the receipt of cash acquired in the Merger of $253,734 and a cash dividend of $214,383 paid by Vista Outdoor to us, less cash distributed to Vista Outdoor of $25,505 in connection with the Distribution.
Net cash used for investing activities of continuing operations increased $26,920 in fiscal 2014 compared to fiscal 2013 primarily due to an increase in capital expenditures.
Financing Activities
Net cash used for financing activities in fiscal 2015 was $737,317 compared to cash provided by financing activities in fiscal 2014 of $903,254. This decrease of $1,640,571 was due to additional debt issued to finance the acquisitions of Bushnell and Savage in fiscal 2014 and net debt reductions in fiscal 2015 of $504,477.
Net cash provided by financing activities was $903,254 in fiscal 2014 compared to a use of cash of $328,399 in fiscal 2013. This increase of $1,231,653 was primarily the result of additional debt issued to finance the acquisitions of Bushnell and Savage in fiscal 2014.

47



Liquidity
In addition to our normal operating cash requirements, our principal future cash requirements will be to fund capital expenditures, debt repayments, employee benefit obligations, share repurchases, dividends and any strategic acquisitions. Our short-term cash requirements for operations are expected to consist mainly of capital expenditures to maintain and expand production facilities and working capital requirements. Our debt service requirements over the next two years consist of principal payments due under the Senior Credit Facility, as discussed further below. Our other debt service requirements consist of interest expense on its debt.
During fiscal 2015, we paid quarterly dividends of $0.32 per share for all four quarters totaling $41,056. On March 11, 2015, our Board of Directors declared a quarterly cash dividend of $0.26 per share payable on June 25, 2015, to stockholders of record on June 8, 2015. The payment and amount of any future dividends are at the discretion of the Board of Directors and will be based on a number of factors, including our earnings, liquidity position, financial condition, capital requirements, credit ratings and the availability and cost of obtaining new debt. We cannot be certain that we will continue to declare dividends in the future and, as such, the amount and timing of any future dividends are not determinable.
We refinanced the Senior Credit Facility in fiscal 2014 extending the debt maturities and adding capacity under our revolving credit facility, which increased our liquidity. Based on our current financial condition, management believes that our cash position, combined with anticipated generation of cash flows and the availability of funding, if needed, through our revolving credit facilities, access to debt and equity markets, as well as potential future sources of funding including additional bank financing and debt markets, will be adequate to fund future growth as well as to service our currently anticipated long-term debt and pension obligations, make capital expenditures, and payment of dividends over the next 12 months. Capital expenditures for fiscal 2016 are expected to be approximately $151,000.
We do not expect that our access to liquidity sources will be materially impacted in the near future. There can be no assurance, however, that the cost or availability of future borrowings, if any, will not be materially impacted by capital market conditions.
Long-term Debt and Credit Facilities
As of March 31, 2015, we had actual total indebtedness of $1,588,501, and the $700,000 Revolving Credit Facility provided for the potential of additional borrowings up to $497,085 (reduced by outstanding letters of credit of $202,915). There were no outstanding borrowings under the Revolving Credit Facility as of March 31, 2015.
Our indebtedness as of March 31, 2015 and 2014 consisted of the following:
 
 
March 31, 2015
 
March 31, 2014
Senior Credit Facility:
 
 
 
 
Term A Loan due 2018
 
$
946,875

 
$
997,375

Term A Loan due 2019
 
144,375

 

Term B Loan due 2020
 
197,251

 
249,375

Revolving Credit Facility due 2018
 

 

5.25% Senior Notes due 2021
 
300,000

 
300,000

6.875% Senior Subordinated Notes due 2020
 

 
350,000

3.00% Convertible Senior Subordinated Notes due 2024
 

 
199,440

Principal amount of long-term debt
 
1,588,501

 
2,096,190

Less: Unamortized discounts
 

 
3,212

Carrying amount of long-term debt
 
1,588,501

 
2,092,978

Less: Current portion of long-term debt
 
59,997

 
249,228

Long-term debt
 
$
1,528,504

 
$
1,843,750

See Note 9 "Long-term Debt" to the consolidated financial statements in Part II, Item 8 for a detailed discussion of these borrowings.
Senior Credit Facility
In fiscal 2014, we entered into a Third Amended and Restated Credit Agreement (the "Senior Credit Facility"), to refinance our Senior Credit Facility. The refinanced Senior Credit Facility is comprised of a Term A Loan of $1,010,000 and a

48



$700,000 Revolving Credit Facility, both of which mature in 2018, and a Term B Loan of $250,000, which matures in 2020. The Term A Loan is subject to quarterly principal payments of $12,625 with the remaining balance due on November 1, 2018. Under the terms of the Senior Credit Facility, we exercised our options to increase the Term A Loan by $150,000 (the "Accordion") during fiscal 2015. Proceeds of the Accordion were used to partially finance the redemption of the 3.00% Convertible Notes, as discussed below. Terms of the Accordion are the same as the existing Term A Loan with the exception that it will mature on January 31, 2019, approximately three months after the existing Term A Loan. The Accordion is subject to quarterly principal payments of $1,875, with the balance due on January 31, 2019. During fiscal 2015, we also repaid $50,000 of our Term B Loan. The Term B Loan is now subject to quarterly principal payments of $499 with the remaining balance due on November 1, 2020. As of March 31, 2015, we had no outstanding borrowings under the Revolving Credit Facility.
Substantially all of our domestic, tangible and intangible assets and our subsidiaries are pledged as collateral under the Senior Credit Facility. Borrowings under the Senior Credit Facility bear interest at a rate equal to either the sum of a base rate plus a margin or the sum of a Eurodollar rate plus a margin. Each margin is based on our senior secured credit ratings. Based on our current credit rating, the current base rate margin is 1.00% and the current Eurodollar margin is 2.00%. We must also pay an annual commitment fee on the unused portion of the Revolving Credit Facility.
5.25% Notes
In fiscal 2014, we issued $300,000 aggregate principal amount of 5.25% Senior Notes (the "5.25% Notes") that mature in 2021. These notes are general unsecured obligations. Interest on these notes is payable on April 1 and October 1 of each year. We have the right to redeem some or all of these notes from time to time on or after October 1, 2016, at specified redemption prices. Prior to October 1, 2016, we may redeem some or all of these notes at a price equal to 100% of their principal amount plus accrued and unpaid interest to the date of redemption and a specified make-whole premium. In addition, prior to October 1, 2016, we may redeem up to 35% of the aggregate principal amount of these notes with the net cash proceeds of certain equity offerings, at a price equal to 105.25% of their principal amount plus accrued and unpaid interest to the date of redemption.
6.875% Notes
Our 6.875% Notes were scheduled to mature on September 15, 2020. In February 2015, in connection with the Distribution and Merger, we redeemed these notes in full and paid $350,000 in principal amount, $12,236 in accrued interest plus a make-whole premium amount of $22,904.
3.00% Convertible Notes due 2024
In fiscal 2005, we issued $200,000 aggregate principal amount of 3.00% Convertible Senior Subordinated Notes (the 3.00% Convertible Notes) that were scheduled to mature on August 15, 2024. During the second quarter of fiscal 2015, we retired these notes and paid a total of approximately $354,000 in cash for $199,440 in principal amount. The amount paid in excess of the principal balance was recorded as a reduction to additional paid-in-capital of approximately $154,000. The convertible feature of the 3.00% Convertible Notes had an impact on diluted shares outstanding for the year ended March 31, 2015 and March 31, 2014 of 292,000 shares and 676,000 shares, respectively, because our average stock price exceeded the conversion price during those periods.
Rank and Guarantees
The 5.25% Notes are subordinated in right of payment to all existing and future senior secured indebtedness, including the Senior Credit Facility. The outstanding 5.25% Notes are guaranteed on an unsecured basis, jointly and severally and fully and unconditionally, by substantially all of our domestic subsidiaries. The Senior Credit Facility obligations are guaranteed on a secured basis jointly and severally and fully and unconditionally, by substantially all of our domestic subsidiaries. The parent company has no independent assets or operations. All of these guarantor subsidiaries are 100% owned by us.
Covenants
Our Senior Credit Facility imposes restrictions on us, including limitations on our 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 our ability to enter into sale-and-leaseback transactions. The Senior Credit Facility also requires that we meet and maintain the following financial ratios:

49



 
Senior Leverage
Ratio (1)
 
Leverage
Ratio (1)
 
Interest Coverage
Ratio (2)
Requirement
3.00

 
4.00

 
3.00

Actual at March 31, 2015
1.87

 
2.33

 
8.39

(1) Not to exceed the required financial ratio
 
 
 
 
 
(2) Not to be below the required financial ratio
 
 
 
 
 
The Leverage Ratio is the sum of our total debt plus financial letters of credit and surety bonds, net of up to $100,000 of cash, divided by Covenant EBITDA (which includes adjustments for items such as non-recurring or extraordinary non-cash items, non-cash charges related to stock-based compensation, and intangible asset impairment charges, as well as inclusion of EBITDA of acquired companies on a pro forma basis) for the past four fiscal quarters. The Senior Leverage Ratio is the sum of our senior debt plus financial letters of credit and surety bonds, net of up to $100,000 of cash, divided by Covenant EBITDA. The Interest Coverage Ratio is Covenant EBITDA divided by interest expense (excluding non-cash charges).
Many of our debt agreements contain cross-default provisions so that non-compliance with the covenants within one debt agreement could cause a default under other debt agreements as well. Our ability to comply with these covenants and to meet and maintain the requisite financial ratios may be affected by events beyond our control. Borrowings under the Senior Credit Facility are subject to compliance with these covenants. The indenture governing the 5.25% Notes impose restrictions on us, including limitations on its ability to incur additional debt, enter into capital leases, grant liens, pay dividends and make certain other payments, sell assets, or merge or consolidate with or into another entity. As of March 31, 2015, we were in compliance with the covenants in all of our debt agreements.
Share Repurchases
In fiscal 2014 and 2013 we repurchased 609,922 shares for $52,130 and 1,003,938 shares for $59,511, respectively, under previously authorized share repurchase programs. We made no share repurchases in fiscal 2015 under the share repurchase program.
On January 29, 2014, our Board of Directors extended the $200,000 share repurchase program which expired March 31, 2015.
On March 11, 2015, our Board of Directors approved a stock repurchase program, authorizing management to repurchase outstanding shares of our common stock through December 31, 2015, in an amount not to exceed the lesser of $75,000 or one million shares. The shares may be purchased in open market, subject to compliance with applicable laws and regulations. The new repurchase authorization also allows us to make repurchases under Rule 10b5-1 of the Securities Exchange Act of 1934. This share repurchase program replaces the prior program.
Any additional authorized repurchases would be subject to market conditions, our compliance with our debt covenants and the limitations imposed by the tax treatment of the Distribution and the related Tax Matters Agreement between us and Vista Outdoor. The Company's 5.25% Notes limit the aggregate sum of dividends, share repurchases, and other designated restricted payments to an amount based on our net income, stock issuance proceeds, and certain other items, less restricted payments made, since April 1, 2001. As of March 31, 2015, the Senior Credit Facility allows us to make unlimited "restricted payments" (as defined in the Senior Credit Facility Agreement), which, among other items, would allow payments for future share repurchases, as long as we maintain a certain amount of liquidity and maintains certain senior debt limits. When those requirements are not met, the limit is equal to $250,000 plus proceeds of any equity issuances plus 50% of net income since October 7, 2010. The Senior Credit Facility also prohibits dividend payments if loan defaults exist or the financial covenants contained in the Facility are not met.

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Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations and commercial commitments as of March 31, 2015:
 
 
 
Payments Due by Period
 
Total
 
Less than
1 Year
 
1 - 3 Years
 
3 - 5 Years
 
More than
5 Years
Contractual obligations:
 
 
 
 
 
 
 
 
 
Long-term debt
$
1,588,501

 
$
59,997

 
$
119,994

 
$
921,245

 
$
487,265

Interest on debt (1)
206,037

 
45,836

 
87,686

 
56,886

 
15,629

Operating leases
448,343

 
79,302

 
134,792

 
113,308

 
120,941

Environmental remediation costs, net
25,243

 
3,640

 
623

 
4,269

 
16,711

Pension and other postretirement plan contributions
479,224

 
61,818

 
191,185

 
126,040

 
100,181

Total contractual obligations, net
$
2,747,348

 
$
250,593

 
$
534,280

 
$
1,221,748

 
$
740,727


 
 
 
Commitment Expiration by Period
 
Total
 
Less than
1 Year
 
1 - 3 Years
 
3 - 5 Years
 
More than
5 Years
Other commercial commitments:
 
 
 
 
 
 
 
 
 
Letters of credit
$
202,915

 
$
126,194

 
$
19,248

 
$
21,920

 
$
35,553

________________________________
(1)
Includes interest on variable rate debt calculated based on interest rates at March 31, 2015. Variable rate debt was approximately 81% of the Company's total debt at March 31, 2015.
The total liability for uncertain tax positions at March 31, 2015 was approximately $44,290 (see Note 11), $466 of which could be paid within 12 months. We are not able to provide a reasonably reliable estimate of the timing of future payments relating to the noncurrent uncertain tax position obligations.
Pension plan contributions are an estimate of our minimum funding requirements through fiscal 2024 to provide pension benefits for employees based on expected actuarial estimated service accruals through fiscal 2024 pursuant to the Employee Retirement Income Security Act, although we may make additional discretionary contributions. These estimates may change significantly depending on the actual rate of return on plan assets, discount rates, discretionary pension contributions, and regulations. A substantial portion of our Plan contributions are recoverable from the U.S. Government as allowable indirect contract costs at amounts generally equal to the pension plan contributions, although not necessarily in the same year the contribution is made.
Contingencies
Litigation.    From time to time, we are subject to various legal proceedings, including lawsuits, which arise out of, and are incidental to, the conduct of our business. We do not consider any of such proceedings that are currently pending, individually or in the aggregate, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings in any particular quarter, to be material to our business or likely to result in a material adverse effect on our future operating results, financial condition, or cash flows.
On or about April 10, 2006, a former employee filed a qui tam complaint in federal court in Utah alleging that we knowingly submitted claims for payment to the U.S. Government for defective LUU series illuminating flares that failed to conform to certain safety specifications and falsely certified compliance with those specifications. On January 23, 2012, the parties met in a mediation session that resulted in an agreement to settle the lawsuit. As a result of the settlement agreement, we established a litigation accrual of $25,500 during fiscal 2012. This payment was made in April 2012. An additional warranty accrual of approximately $10,700 was recorded during fiscal 2012 as we agreed to retrofit up to 76,000 flares as part of the settlement.
On July 30, 2013, Raytheon Company filed a lawsuit against us in the Superior Court of the State of Arizona.  The suit concerned the Company's longstanding production of rocket motors used in Raytheon's Advanced Medium-Range Air-to-Air Missiles (AMRAAM).  Raytheon’s primary allegation was that we breached certain of the production contracts by not delivering rocket motors.  Raytheon claimed damages in excess of $100 million. The parties settled this matter on March 27, 2015, with us paying $25 million to Raytheon, and the litigation was voluntarily dismissed on April 21, 2015.

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