10-Q 1 oa_10qx040316xdoc.htm 10-Q 10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 2016
 
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



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 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 May 2, 2016, there were 58,557,150 shares of the registrant's common stock outstanding.
 




TABLE OF CONTENTS



PART I— FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
ORBITAL ATK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
 
Quarters Ended
 
(Amounts in thousands except per share data)
 
April 3, 2016
 
March 31, 2015
 
Sales
 
$
1,064,954

 
$
969,539

 
Cost of sales
 
842,695

 
756,998

 
Gross profit
 
222,259

 
212,541

 
Operating expenses:
 
 
 
 
 
Research and development
 
19,779

 
25,368

 
Selling
 
27,048

 
20,908

 
General and administrative
 
59,529

 
133,057

 
   Goodwill impairment
 

 
34,300

 
Income (loss) from continuing operations, before interest, income taxes and noncontrolling interest
 
115,903

 
(1,092
)
 
Net interest expense
 
(20,691
)
 
(20,579
)
 
Loss on extinguishment of debt
 

 
(26,626
)
 
Income (loss) from continuing operations, before income taxes and noncontrolling interest
 
95,212

 
(48,297
)
 
Income taxes
 
25,367

 
(7,398
)
 
Income (loss) from continuing operations, before noncontrolling interest
 
69,845

 
(40,899
)
 
Less net income (loss) attributable to noncontrolling interest
 
9

 
(192
)
 
Income (loss) from continuing operations of Orbital ATK, Inc.
 
69,836

 
(40,707
)
 
Discontinued operations:
 
 
 
 
 
Income from discontinued operations, before income taxes
 

 
17,505

 
Income taxes
 

 
668

 
Income from discontinued operations
 

 
16,837

 
Net income (loss) attributable to Orbital ATK, Inc.
 
$
69,836

 
$
(23,870
)
 
 
 
 
 
 
 
Basic earnings per common share from:
 
 
 
 
 
Continuing operations
 
$
1.20

 
$
(0.87
)
 
Discontinued operations
 

 
0.36

 
Net income (loss) attributable to Orbital ATK, Inc.
 
$
1.20

 
$
(0.51
)
 
Weighted-average number of common shares outstanding
 
58,298

 
46,465

 
Diluted earnings per common share from:
 
 
 
 
 
Continuing operations
 
$
1.19

 
$
(0.87
)
 
Discontinued operations
 

 
0.36

 
Net income (loss) attributable to Orbital ATK, Inc.
 
$
1.19

 
$
(0.51
)
 
Weighted-average number of diluted common shares outstanding
 
58,881

 
46,928

 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
Net income (loss) attributable to Orbital ATK, Inc. and noncontrolling interest (from above)
 
$
69,845

 
$
(24,062
)
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
Pension and other postretirement benefit liabilities:
 
 
 
 
 
Reclassification of prior service credits for pension and postretirement benefit plans recorded to net income, net of tax benefit of $2,470 and $2,876, respectively
 
(3,972
)
 
(4,621
)
 
Reclassification of net actuarial loss for pension and postretirement benefit plans recorded to net income, net of tax expense of $(11,944) and $26,561, respectively
 
19,232

 
(42,078
)
 
Valuation adjustment for pension and postretirement benefit plans, net of tax (expense) benefit of $0 and $139,583, respectively
 

 
(224,389
)
 
Change in fair value of derivatives, net of tax (expense) benefit of $129 and $(981), respectively
 
(204
)
 
1,535

 
Other, net of tax (expense) benefit of $(565) and $21, respectively
 
1,064

 
(38
)
 
Change in cumulative translation adjustment, net of tax expense of $0 and $(9,650) respectively
 

 
(21,381
)
 
Total other comprehensive income (loss)
 
16,120

 
(290,972
)
 
Comprehensive income (loss)
 
85,965

 
(315,034
)
 
Less comprehensive (loss) income attributable to noncontrolling interest
 
9

 
(192
)
 
Comprehensive income (loss) attributable to Orbital ATK, Inc.
 
$
85,956

 
$
(314,842
)
 
See Notes to the Condensed Consolidated Financial Statements.

2


ORBITAL ATK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Amounts in thousands except share data)
 
April 3, 2016
 
December 31, 2015
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
73,524

 
$
104,032

Net receivables
 
1,972,333

 
1,784,434

Net inventories
 
233,721

 
211,712

Other current assets
 
128,558

 
140,264

Total current assets
 
2,408,136

 
2,240,442

Net property, plant and equipment
 
797,027

 
806,187

Goodwill
 
1,835,711

 
1,832,066

Other noncurrent assets
 
428,169

 
460,697

Total assets
 
$
5,469,043

 
$
5,339,392

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current portion of long-term debt
 
$
40,000

 
$
40,000

Accounts payable
 
171,456

 
129,312

Accrued compensation
 
111,705

 
125,278

Other current liabilities
 
631,037

 
672,389

Total current liabilities
 
954,198

 
966,979

Long-term debt
 
1,551,481

 
1,435,836

Pension and other postretirement benefits
 
801,327

 
820,834

Other noncurrent liabilities
 
171,775

 
167,798

Total liabilities
 
3,478,781

 
3,391,447

Commitments and contingencies (Notes 12 and 15)
 

 

Common stock—$.01 par value: authorized—180,000,000 shares; issued and outstanding— 58,607,941 shares at April 3, 2016 and 58,729,995 shares at December 31, 2015
 
586

 
587

Additional paid-in-capital
 
2,173,657

 
2,187,940

Retained earnings
 
1,357,799

 
1,305,550

Accumulated other comprehensive loss
 
(769,788
)
 
(785,908
)
Common stock in treasury, at cost—10,327,083 shares held at April 3, 2016 and 10,205,029 shares held at December 31, 2015
 
(782,805
)
 
(771,029
)
Total Orbital ATK, Inc. stockholders' equity
 
1,979,449

 
1,937,140

Noncontrolling interest
 
10,813

 
10,805

Total equity
 
1,990,262

 
1,947,945

Total liabilities and equity
 
$
5,469,043

 
$
5,339,392

See Notes to the Condensed Consolidated Financial Statements.

3


ORBITAL ATK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Quarters Ended
(Amounts in thousands)
 
April 3, 2016
 
March 31, 2015
Operating Activities
 
 
 
 
Continuing operations:
 
 
 
 
Net income (loss)
 
$
69,845

 
$
(24,062
)
Net income from discontinued operations
 

 
(16,837
)
Income (loss) from continuing operations
 
69,845

 
(40,899
)
Adjustments to reconcile income from continuing operations to cash provided by (used for) operating activities of continuing operations:
 
 
 
 
Depreciation and amortization
 
40,866

 
28,485

Amortization and write-off of deferred financing costs
 
644

 
1,270

Deferred income taxes
 
3,264

 
(40,205
)
Goodwill impairment
 

 
34,300

Loss on the extinguishment of debt
 

 
26,626

Share-based plans expense
 
4,747

 
13,320

Other
 
194

 
774

Changes in assets and liabilities:
 
 
 
 
Net receivables
 
(187,899
)
 
113,384

Net inventories
 
(22,009
)
 
15,847

Accounts payable
 
43,134

 
(31,869
)
Accrued compensation
 
(13,571
)
 
(16,917
)
Pension and other postretirement benefits
 
6,865

 
(15,610
)
Other assets and liabilities
 
(21,151
)
 
57,898

 Cash provided by (used for) operating activities of continuing operations
 
(75,071
)
 
146,404

 Cash provided by (used for) operating activities of discontinued operations
 

 
10,741

 Cash provided by (used for) operating activities
 
(75,071
)
 
157,145

Investing Activities
 
 
 
 
Continuing operations:
 
 
 
 
Capital expenditures
 
(22,573
)
 
(51,343
)
Cash acquired in Merger with Orbital
 

 
253,734

Cash dividend received from Vista Outdoor, net of cash transferred to Vista Outdoor in conjunction with the Distribution of Sporting Group
 

 
188,878

Other
 

 
132

 Cash provided by (used for) investing activities of continuing operations
 
(22,573
)
 
391,401

 Cash provided by (used for) investing activities of discontinued operations
 

 
49

 Cash provided by (used for) investing activities
 
(22,573
)
 
391,450

Financing Activities
 
 
 
 
Borrowings on revolving credit facilities
 
290,000

 
163,000

Payments on revolving credit facilities
 
(165,000
)
 
(263,000
)
Payments made on bank debt
 
(10,000
)
 
(29,999
)
Payments made to extinguish debt
 

 
(372,758
)
Purchase of treasury shares
 
(30,754
)
 
(7,787
)
Dividends paid
 
(17,590
)
 
(10,399
)
Proceeds from employee stock compensation plans
 
480

 

Tax benefits from share-based plans
 

 
21

Cash provided by (used for) financing activities
 
67,136

 
(520,922
)
Effect of foreign exchange rate fluctuations on cash
 

 
(1,340
)
Decrease in cash and cash equivalents
 
(30,508
)
 
26,333

Cash and cash equivalents at beginning of period
 
104,032

 
112,920


4


Cash and cash equivalents at end of period
 
$
73,524

 
$
139,253

 
 
 
 
 
Supplemental Cash Flow Disclosures
 
 
 
 
Cash paid for:
 
 
 
 
Interest, net
 
$
24,605

 
$
23,200

Income taxes, net
 
2,437

 
31,438

Noncash investing and operating activity:
 
 
 
 
Capital expenditures included in accounts payable
 
$
2,992

 
$
2,567

Noncash financing and operating activity:
 
 
 
 
Issuance of shares for noncash assets and liabilities of Orbital
 
$

 
$
1,504,243

Treasury shares purchased included in accounts payable
 
533

 


See Notes to the Condensed Consolidated Financial Statements.

5


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)
1. Basis of Presentation and Responsibility for Interim Financial Statements
The unaudited condensed consolidated financial statements of Orbital ATK, Inc. ("the Company" or "Orbital ATK") as set forth in this quarterly report have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted. The Company’s accounting policies are described in the notes to the consolidated financial statements in its Transition Report on Form 10-K for the nine-month transition period ended December 31, 2015. Management is responsible for the unaudited condensed consolidated financial statements included in this document. The condensed consolidated financial statements included in this document are unaudited but, in the opinion of management, include all adjustments necessary for a fair presentation of the Company’s financial position as of April 3, 2016, and its results of operations and cash flows for the quarters ended April 3, 2016 and March 31, 2015.
On February 9, 2015, the Company completed a tax-free spin-off of and distribution of its former 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"). These transactions are discussed in greater detail in Note 4. Following the Distribution and Merger, the Company changed its name from Alliant Techsystems Inc. to Orbital ATK, Inc.
As a result of the Distribution, Sporting Group is no longer reported within the Company’s results from continuing operations but is reported as a discontinued operation for all prior 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, as discussed in Note 19. The business comprising Sporting Group is presented as a discontinued operation - see Note 4.
Sales, expenses, cash flows, assets and liabilities can and do vary during the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. Certain reclassifications have been made to prior year amounts to conform to current year presentation.
This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its Transition Report on Form 10-K for the nine-month transition period ended December 31, 2015.
Fiscal Year. The Company's interim quarterly periods are based on 13-week periods and end on Sundays. The quarter ended March 31, 2015 did not end on a Sunday because it was the last quarter of the Company's fiscal year ended March 31, 2015. On March 10, 2015, the Company's Board of Directors approved a change in the Company's fiscal year end from March 31 to a fiscal year ending on December 31 of each year. The Company filed a Transition Report on Form 10-K for the nine-month transition period ended December 31, 2015.
2. New Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-09, Compensation--Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, which requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase a greater number of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The guidance is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. The Company elected to early adopt this ASU effective for the quarter ended April 3, 2016. The adoption of this new standard did not have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires recognition of lease assets and lease liabilities for those leases classified as operating leases under previous generally accepted accounting principles in the United States ("U.S. GAAP"). The new standard is effective for annual reporting periods beginning after December 15, 2018 with early adoption permitted. The Company currently is evaluating the potential changes from this ASU to its future financial reporting and disclosures.

6

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Such investments should be disclosed separate from the fair value hierarchy. This ASU became effective retrospectively for the Company beginning in the quarter ended April 3, 2016. The adoption of this new standard did not have an impact on the Company's consolidated financial statements but impacted certain disclosures reflected in the notes to the accompanying condensed consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs and in August 2015, the FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” These ASUs more closely align the treatment of debt issuance costs with debt discounts and premiums and requires debt issuance costs to be presented as a direct deduction from the carrying amount of the related debt. The amendments in these ASUs became effective for the Company in the current quarter ended April 3, 2016. The adoption of these new standards impacted the presentation of the current and prior period debt issuance costs included in Note 11.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which simplifies the consolidation evaluation process by placing more emphasis on risk of loss when determining a controlling financial interest. This new standard is effective for interim and annual periods beginning after December 15, 2015. The adoption of this new standard did not have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Under the new standard, the Company expects to continue using the cost-to-cost percentage of completion method to recognize revenue for most of its long-term contracts. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company has not yet selected a transition method. The Company currently is evaluating the potential changes from this ASU to its future financial reporting and disclosures. In July 2015, the FASB approved the deferral of the new standard's effective date by one year. The new standard now will be effective for annual reporting periods beginning after December 15, 2017. The FASB will permit companies to adopt the new standard early, but not before the original effective date of annual reporting periods beginning after December 15, 2016.
Other new pronouncements issued but not effective for the Company until after April 3, 2016 are not expected to have a material impact on the Company's continuing financial position, results of operations or liquidity.

7

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

3. Fair Value of Financial Instruments
The current authoritative guidance on fair value clarifies the definition of fair value, prescribes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about the use of fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The valuation techniques required by the current authoritative literature are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1—Quoted prices for identical instruments in active markets.
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3—Significant inputs to the valuation model are unobservable.
The following section describes the valuation methodologies used by the Company to measure its financial instruments at fair value.
Investments in marketable securities—The Company's investments in marketable securities represent investments held in a common collective trust ("CCT") that primarily invests in fixed income securities which are used to pay benefits under a nonqualified supplemental executive retirement plan for certain executives and highly compensated employees. Investments in a collective investment vehicle are valued by multiplying the investee company's net asset value per share with the number of units or shares owned at the valuation date as determined by the investee company. Net asset value per share is determined by the investee company's custodian or fund administrator by deducting from the value of the assets of the investee company all of its liabilities and dividing the resulting number by the outstanding number of shares or units. Investments held by the CCT, including collateral invested for securities on loan, are valued on the basis of valuations furnished by a pricing service approved by the CCT's investment manager, which determines valuations using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders, or at fair value as determined in good faith by the CCT's investment manager. The fair value of these securities is included within other current assets and deferred charges and other noncurrent assets on the consolidated balance sheet. The fair value of these securities is measured on a recurring basis. The fair value of these securities was $10,751 and $12,065 as of April 3, 3016 and December 31, 2015, respectively.
Derivative financial instruments and hedging activities—In order to manage its exposure to commodity pricing, foreign currency risk and interest rate risk on debt, the Company periodically utilizes commodity, foreign currency and interest rate derivatives, which are considered Level 2 instruments. As discussed further in Note 7, the Company has outstanding commodity forward contracts that were entered into to hedge forecasted purchases of copper and zinc, as well as outstanding foreign currency forward contracts that were entered into to hedge forecasted transactions denominated in a foreign currency. Commodity derivatives are valued based on prices of futures exchanges and recently reported transactions in the marketplace. During the fiscal year ended March 31, 2014 ("fiscal 2014"), the Company entered into five interest rate swaps. These swaps are valued based on future LIBOR rates and the established fixed rate is based primarily on quotes from banks. Foreign currency derivatives are valued based on observable market transactions of spot currency rates and forward currency prices.
Long-term Debt—The fair value of the variable-rate long-term debt is calculated based on current market rates for debt of the same risk and maturities. The fair value of the fixed-rate debt is based on market quotes for each issuance. The Company has considered these to be Level 2 instruments.

8

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

The following table sets forth by level within the fair value hierarchy the Company's financial assets and liabilities that are measured at fair value on a recurring basis:
 
 
April 3, 2016
 
 
Fair Value Measurements Using Inputs Considered as
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
Derivatives
 
$

 
$
1,685

 
$

Liabilities:
 
 
 
 
 
 
Derivatives
 

 
6,943

 

 
 
December 31, 2015
 
 
Fair Value Measurements Using Inputs Considered as
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
Derivatives
 
$

 
$
3,979

 
$

Liabilities:
 
 
 
 
 
 
Derivatives
 

 
8,353

 

The following table presents the Company's assets and liabilities that are not measured at fair value on a recurring basis. The carrying values and estimated fair values were as follows:
 
 
April 3, 2016
 
December 31, 2015
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Fixed-rate debt
 
$
700,000

 
$
735,250

 
$
700,000

 
$
712,500

Variable-rate debt
 
905,000

 
899,606

 
790,000

 
787,697

4. Mergers, Acquisitions and Divestitures
On February 9, 2015, the Company completed the spin-off and Distribution of its former Sporting Group to its stockholders and merged with Orbital pursuant to a transaction agreement, dated April 28, 2014 (the "Transaction Agreement"). The Company completed the Merger with Orbital in order to create a global aerospace and defense company with greater technical and industrial capabilities and increased financial resources. Both the Distribution and Merger were structured to be tax-free to U.S. stockholders for U.S. federal income tax purposes. Under the Transaction Agreement, a subsidiary of the Company merged with and into Orbital, with Orbital continuing as a wholly-owned subsidiary of the Company.
Pursuant to the Distribution, Company stockholders received two shares of Vista Outdoor for each share of Company common stock held. The Company distributed a total of approximately 63.9 million shares of Vista Outdoor common stock to its stockholders of record as of the close of business on February 2, 2015 the record date for the Distribution. As a result of the Distribution, Sporting Group is no longer reported within the Company’s results from continuing operations but is reported as a discontinued operation for all prior periods presented in accordance with ASC Topic 205, "Presentation of Financial Statements." Sales reported as discontinued operations were $186 million in the quarter ended March 31, 2015.
In connection with the Merger, each outstanding share of Orbital common stock was converted into the right to receive 0.449 shares of Company common stock. The Company issued approximately 27.4 million shares of common stock to Orbital stockholders. Immediately following the Merger, Orbital stockholders owned 46.2% of the common stock of the Company and existing stockholders owned 53.8%. Based on the closing price of the Company's common stock following the Distribution on February 9, 2015 as reported on the New York Stock Exchange, the aggregate value of the consideration paid or payable to former holders of Orbital common stock was approximately $1.8 billion. 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.

9

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

Orbital's sales and pre-tax income included in the Company's financial statements for the post-Merger period of February 9, 2015 through March 31, 2015 were approximately $191 million and $16 million, respectively.
Valuation of Net Assets Acquired
The following amounts represent the final determination (as of the Merger date) of the fair value of identifiable assets acquired and liabilities assumed in the Merger, including adjustments made to date during the one year measurement period from the date of the Merger:
Purchase Price:
 
 
Value of common shares issued to Orbital shareholders (1)
 
$
1,749,323

Value of replacement equity-based awards to holders of Orbital equity-based awards (2)
 
8,654

Total purchase price
 
$
1,757,977

 
 
 
Value of assets acquired and liabilities assumed:
 


Cash
 
$
253,734

Net receivables
 
558,639

Net inventories
 
75,294

Intangibles
 
173,000

Property, plant and equipment
 
277,438

Deferred tax assets, net
 
64,821

Other assets
 
36,878

Goodwill
 
826,548

Accounts payable
 
(52,028
)
Contract fair value liabilities
 
(130,888
)
Other liabilities
 
(325,459
)
Total purchase price
 
$
1,757,977

(1) 
Equals 27.4 million Orbital ATK shares issued to Orbital shareholders multiplied by $63.94, the closing share price of the Company’s common stock on the closing date of the Merger.

(2) 
The fair value of replacement equity-based awards attributable to pre-Merger service was recorded as part of the consideration transferred in the Merger.
The consideration paid for Orbital's assets and liabilities was determined using the fair market value of the Company stock issued on the closing date of the Merger along with restricted stock awards granted to certain employees of Orbital.
Goodwill recognized from the Merger primarily relates to the expanded market opportunities, expected synergies and benefits of increased scale and scope of combined human, physical and financial resources attributable to merging the operations of the two companies. As stated above, the Merger was a tax-free transaction and as such, goodwill is not amortized for tax purposes.
In determining the fair values of identifiable assets acquired and liabilities assumed, a review was conducted for any significant contingent assets or liabilities existing as of the Merger date. There were no significant contingencies identified related to any legal or government action.
The accompanying condensed consolidated income statement for the quarter ended April 3, 2016 included a measurement period adjustment pertaining to the fair value of intangibles that was immaterial. All elements in the determination of the fair value of identifiable assets acquired and liabilities assumed in the Merger are final as of April 3, 2016.

10

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

Supplemental Pro Forma Data
The following unaudited supplemental pro forma data for the quarter ended March 31, 2015 presents consolidated information as if the Merger had been completed on April 1, 2013. The pro forma results were calculated by combining the results from continuing operations of the Company with the stand-alone results of Orbital for the pre-Merger period, which were adjusted to eliminate historical sales between the companies and to account for certain costs which would have been incurred during this pre-Merger period:
 
 
Quarter Ended March 31, 2015
 
Sales
 
$
1,086,680

 
Loss from continuing operations
 
(30,981
)
 
Basic earnings per common share from continuing operations
 
$
(0.52
)
 
Diluted earnings per common share from continuing operations
 
(0.51
)
 
The unaudited supplemental pro forma data above includes the following significant adjustments made to account for certain costs which would have been incurred if the Merger had been completed on April 1, 2013, as adjusted for the applicable income tax impact:

 
Quarter Ended March 31, 2015
 
Amortization of acquired Orbital intangible assets (1)
 
$
3,877

 
Interest expense adjustment (2)
 
(6,069
)
 
Transaction fees for advisory, legal and accounting services (3)
 
(19,134
)
 
_________________________________________
(1) Added the amortization of acquired Orbital intangible assets recognized at fair value in purchase accounting and eliminated historical Orbital intangible asset amortization expense.
(2) Reduced interest expense for the net reduction in debt of the Company and Orbital.
(3) Excluded transaction fees for advisory, legal and accounting services incurred in the quarter ended March 31, 2015.
The unaudited supplemental pro forma data above does not reflect the potential realization of cost savings related to the integration of the two companies. Further, the pro forma data should not be considered indicative of the results that would have occurred if the Merger had been completed on April 1, 2013, nor are they indicative of future results.
Ongoing Business with Vista Outdoor
In conjunction with the Distribution, the Company entered into two supply agreements and one transition services agreement ("TSA") with Vista Outdoor. The supply agreements call for Vista Outdoor to purchase certain minimum quantities of ammunition and gun powder from the Company through March 2017 or 2018, as applicable. The supply agreements which are priced at arms-length expire in 2017 (powder) and 2018 (ammunition) and may be extended in one-to-three year increments. Under the terms of the TSA, the Company provided various administrative services to Vista Outdoor for up to 12 months following the Distribution and will provide tax assistance services for 18 months following the Distribution, extendable to 30 months. Fees for services under the TSA are charged to Vista Outdoor.
Sales to Vista Outdoor under the supply agreements were $61,611 and $18,928 for the quarters ended April 3, 2016 and March 31, 2015, respectively. Sales to Sporting Group, previously reported as intercompany sales and eliminated in consolidation were $13,595 for the quarter ended March 31, 2015.

11

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

5. Goodwill and Net Intangibles
The changes in the carrying amount of goodwill by segment were as follows:
 
 
Flight Systems Group
 
Defense Systems Group
 
Space Systems Group
 
Total
Balance, December 31, 2015
 
$
922,991

 
$
366,947

 
$
542,128

 
$
1,832,066

Measurement period adjustments
 
5,467

 

 
(1,822
)
 
3,645

Balance, April 3, 2016
 
$
928,458

 
$
366,947

 
$
540,306

 
$
1,835,711

Net intangibles consisted of the following:
 
 
April 3, 2016
 
December 31, 2015
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Intangibles
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Intangibles
Amortizing intangibles:
 
 
 
 
 
 
 
 
 
 
 
 
Contract backlog
 
$
173,000

 
$
(47,239
)
 
$
125,761

 
$
179,000

 
$
(36,696
)
 
$
142,304

Patented technology
 
11,018

 
(6,476
)
 
4,542

 
11,018

 
(6,206
)
 
4,812

Customer relationships and other
 
24,294

 
(24,294
)
 

 
24,294

 
(24,254
)
 
40

Intangibles
 
$
208,312

 
$
(78,009
)
 
$
130,303

 
$
214,312

 
$
(67,156
)
 
$
147,156

The contract backlog asset in the table above is being amortized as underlying costs are recognized under the contract. The other assets in the table above are being amortized using a straight-line method. The weighted-average remaining period of amortization of total net intangible assets above is 3.8 years. Amortization expense for the quarter ended April 3, 2016 and March 31, 2015 was $10,850 and $6,942, respectively. The Company expects amortization expense related to these assets to be as follows:
 
 
Contract Backlog
 
Patents
 
Total
Remainder of 2016
 
$
31,629

 
$
912

 
$
32,541

2017
 
35,882

 
1,180

 
37,062

2018
 
25,609

 
1,120

 
26,729

2019
 
21,760

 
1,072

 
22,832

2020
 
10,881

 
258

 
11,139

Thereafter
 

 

 

Total
 
$
125,761

 
$
4,542

 
$
130,303

6. Earnings Per Share Data
Basic earnings per share ("EPS") is computed based upon the weighted average number of common shares outstanding for each period. Diluted EPS is computed based on the weighted-average number of common shares outstanding for each period.
In computing EPS for the quarters ended April 3, 2016 and March 31, 2015, earnings reported for each respective period were divided by weighted-average shares outstanding, determined as follows (in thousands):

12

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

 
 
Quarters Ended
 
 
 
April 3, 2016
 
March 31, 2015
 
Basic
 
58,298

 
46,465

 
Dilutive effect of stock-based awards
 
583

 
463

 
Diluted
 
58,881

 
46,928

 
Anti-dilutive stock options excluded from the calculation of diluted shares
 
147

 
73

 
7. Derivative Financial Instruments
The Company is exposed to market risks arising from adverse changes in commodity prices affecting the cost of raw materials and energy, interest rates and foreign exchange risks. In the normal course of business, these risks are managed through a variety of strategies, including the use of derivative instruments. Commodity forward contracts are periodically used to hedge forecasted purchases of certain commodities, foreign currency exchange contracts are used to hedge forecasted transactions denominated in a foreign currency, and the Company periodically uses interest rate swaps to hedge forecasted interest payments and the risk associated with variable interest rates on long-term debt.
The Company entered into forward contracts for copper and zinc during the quarter ended April 3, 2016. The contracts establish a fixed price for the underlying commodity and are designated and qualify as effective cash flow hedges of purchases of the commodity. Ineffectiveness is calculated as the amount by which the change in the fair value of the derivatives exceeds the change in the fair value of the anticipated commodity purchases.
The Company entered into interest rate swaps in fiscal 2014 whereby the Company pays a fixed rate on a total notional amount of $400,000 and receives one-month LIBOR. The fair value of interest rate swap agreements approximates the amount at which they could be settled, based on future LIBOR, and the established fixed rate is based primarily on quotes from banks. The Company performs assessments of the effectiveness of hedge instruments on a quarterly basis and determined the hedges to be highly effective. The counterparties to the interest rate swap agreements expose the Company to credit risk in the event of nonperformance. However, at April 3, 2016, five of the outstanding swap agreements were in a net liability position which would require the Company to make the net settlement payments to the counterparties. The Company does not anticipate nonperformance by the Company's counterparties. The Company does not hold or issue derivative financial instruments for trading purposes.
The Company entered into foreign currency forward contracts during the quarter ended April 3, 2016 to hedge forecasted cash payments to a customer. This transaction was designated and qualified as effective cash flow hedge. Ineffectiveness with respect to forecasted inventory purchases or customer cash receipts was calculated based on changes in the forward rate until the anticipated purchase or cash receipt occurs; ineffectiveness of the hedge of the accounts payable was evaluated based on the change in fair value of its anticipated settlement.
The fair value of the commodity and foreign currency forward contracts is recorded within other assets or liabilities, as appropriate, and the effective portion is reflected in accumulated other comprehensive income (loss) in the financial statements. The gains or losses on the commodity forward contracts are recorded in inventory as the commodities are purchased and in cost of sales when the related inventory is sold. The gains or losses on the foreign currency forward contracts are recorded in earnings when the related inventory is sold or customer cash receipts are received.
Commodity forward contracts outstanding that hedge forecasted commondity purchases were as follows:
 
Number of Pounds
Copper
16,575

Zinc
5,090


13

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

Interest rate swap agreements in order to manage interest costs and the risk associated with variable interest rates were as follows:
 
Notional
 
Fair Value
 
Pay Fixed
 
Receive Floating
 
Maturity Date
Non-amortizing swap
$
100,000

 
$
(173
)
 
0.87
%
 
0.43
%
 
August 2016
Non-amortizing swap
100,000

 
(921
)
 
1.29
%
 
0.43
%
 
August 2017
Non-amortizing swap
100,000

 
(2,236
)
 
1.69
%
 
0.43
%
 
August 2018
Non-amortizing swap
50,000

 
(37
)
 
0.65
%
 
0.43
%
 
November 2016
Non-amortizing swap
50,000

 
(921
)
 
1.10
%
 
0.43
%
 
November 2017
The amount to be paid or received under these swaps is recorded as an adjustment to interest expense.
Outstanding foreign currency forward contracts were as follows:
 
Quantity Hedged
Euros Sold
61,420

Euros Purchased
8,466

The table below presents the fair value and location of the Company's derivative instruments designated as hedging instruments in the consolidated balance sheets as of the periods presented.
 
 
 
 
Asset Derivatives
Fair Value
 
Liability Derivatives
Fair Value
 
 
Location
 
April 3, 2016
 
December 31, 2015
 
April 3, 2016
 
December 31, 2015
Commodity forward contracts
 
Other current assets /
other current liabilities
 
$
445

 
$

 
$
2,083

 
$
4,445

Commodity forward contracts
 
Other noncurrent assets /
other noncurrent liabilities
 
537

 

 

 

Foreign currency forward contracts
 
Other current assets /
other current liabilities
 
637

 
2,875

 
572

 
1,442

Foreign currency forward contracts
 
Other noncurrent assets /
other noncurrent liabilities
 
66

 
1,095

 

 
18

Interest rate contracts
 
Other current assets / other current liabilities
 

 
9

 

 

Interest rate contracts
 
Other noncurrent assets /
other noncurrent liabilities
 

 

 
4,288

 
2,448

Total
 
 
 
$
1,685

 
$
3,979

 
$
6,943

 
$
8,353

Due to the nature of the Company's business, the benefits associated with the commodity contracts may be passed on to the customer and not realized by the Company.

14

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

For the periods presented below, the derivative gains and losses in the condensed consolidated statements of comprehensive income related to derivative instruments were as follows:
 
 
Gain (Loss) Reclassified from AOCI
 
Gain (Loss) Recognized in Income
(ineffective portion and amount excluded from effectiveness testing)
 
 
Location
 
Amount
 
Location
 
Amount
 Quarter ended April 3, 2016
 
 
 
 
 
 
 
 
Commodity forward contracts
 
Cost of Sales
 
$
(2,035
)
 
Cost of Sales
 
$

Interest rate contracts
 
Interest expense
 
(758
)
 
Interest expense
 

Foreign currency forward contracts
 
Cost of Sales
 
49

 
Cost of Sales
 

 Quarter ended March 31, 2015
 
 
 
 
 
 
 
 
Commodity forward contracts
 
Cost of Sales
 
$
(2,618
)
 
Cost of Sales
 
$

Interest rate contracts
 
Interest expense
 
(1,010
)
 
Interest expense
 

Foreign currency forward contracts
 
Cost of Sales
 
(9,136
)
 
Cost of Sales
 

All derivatives used by the Company during the periods presented were designated as hedging instruments for accounting purposes.
The Company expects the remaining unrealized losses will be realized and reported in cost of sales as the cost of the commodities is included in cost of sales. Estimated and actual gains or losses will change as market prices change.
8. Accumulated Other Comprehensive Income (Loss) ("AOCI")
The following table summarizes the components of AOCI, net of income taxes:
 
April 3, 2016
 
December 31, 2015
Derivatives
$
(3,263
)
 
$
(3,059
)
Pension and Other Postretirement Benefits
(769,034
)
 
(784,294
)
Available-for-sale Securities
2,509

 
1,445

Total
$
(769,788
)
 
$
(785,908
)
9. Net Receivables
Net receivables, including amounts due under long-term contracts, consisted of the following:
 
 
April 3, 2016
 
December 31, 2015
Billed receivables
 
$
260,117

 
$
217,522

Unbilled receivables
 
1,713,163

 
1,567,940

Less allowance for doubtful accounts
 
(947
)
 
(1,028
)
Net receivables
 
$
1,972,333

 
$
1,784,434

Receivable balances are shown net of customer progress payments received of $567,774 as of April 3, 2016 and $584,325 as of December 31, 2015.
Unbilled receivables represent the balance of recoverable costs and accrued profit, comprised principally of revenue recognized on contracts for which billings have not been presented to the customer because the amounts were earned but not contractually billable as of the balance sheet date. As of April 3, 2016 and December 31, 2015, the net receivable balance includes contract-related unbilled receivables which the Company does not expect to collect within the next 12 months of $318,600 and $311,600, respectively.

15

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

10. Net Inventories
Net inventories consisted of the following:
 
 
April 3, 2016
 
December 31, 2015
Raw materials
 
$
99,641

 
$
86,865

Contracts in process
 
133,769

 
124,315

Finished goods
 
311

 
532

Net inventories
 
$
233,721

 
$
211,712

11. Long-term Debt
Long-term debt consisted of the following:
 
 
April 3, 2016
 
December 31, 2015
Senior Credit Facility:
 
 
 
 
Term Loan A due 2020
 
$
780,000

 
$
790,000

Revolving Credit Facility due 2020
 
125,000

 

5.25% Senior Notes due 2021
 
300,000

 
300,000

5.50% Senior Notes due 2023
 
400,000

 
400,000

Principal amount of long-term debt
 
1,605,000

 
1,490,000

Unamortized Debt Issuance Costs:
 
 
 
 
   Senior Credit Facility
 
5,932

 
6,302

   5.25% Senior Notes due 2021
 
1,832

 
1,915

   5.50% Senior Notes due 2023
 
5,755

 
5,947

Unamortized Debt Issuance Costs
 
13,519

 
14,164

Long-term Debt Less Unamortized Debt Issuance Costs
 
1,591,481

 
1,475,836

Less: Current portion of long-term debt
 
40,000

 
40,000

Long-term debt
 
$
1,551,481

 
$
1,435,836

Senior Credit Facility
In September 2015, the Company refinanced its Former Senior Credit Facility (as defined below) with a new senior credit facility (the "Senior Credit Facility"), which is comprised of a term loan of $800,000 (the "Term Loan A") and a revolving credit facility of $1,000,000 (the "Revolving Credit Facility"), both of which mature in 2020. The Term Loan A is subject to quarterly principal payments of $10,000, with the remaining balance due on September 29, 2020. Substantially all tangible and intangible assets of the Company and certain domestic subsidiaries, excluding real property, are pledged as collateral under the Senior Credit Facility. Borrowings under the Senior Credit Facility bear interest at a per annum rate equal to either the sum of a base rate plus a margin or the sum of a LIBOR rate plus a margin. Each margin is based on the Company's total leverage ratio. Based on the Company's current total leverage ratio, the current base rate margin is 0.5% and the current LIBOR margin is 1.5%. The weighted-average interest rate for the Term Loan A, after taking into account the interest rate swaps discussed below, was 2.07% at April 3, 2016. The Company pays a quarterly commitment fee on the unused portion of the Revolving Credit Facility based on its total leverage ratio. Based on the Company's current total leverage ratio, this fee currently is 0.25%. As of April 3, 2016, the Company had borrowings of $125,000 under the Revolving Credit Facility and had outstanding letters of credit of $130,316, which reduced amounts available on the Revolving Credit Facility to $744,684. There are unamortized debt issuance costs associated with the Former Senior Credit Facility of $3,361 that will be amortized to interest expense along with $3,306 of debt issuance costs incurred related to the Senior Credit Facility over five years, the term of the Senior Credit Facility.
5.50% Notes
In September 2015, the Company issued $400,000 aggregate principal amount of 5.50% Senior Notes (the "5.50% Notes") that mature on October 1, 2023. These notes are general unsecured obligations. Interest on these notes is payable on

16

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

April 1 and October 1 of each year. The Company has the right to redeem some or all of these notes from time to time on or after October 1, 2018, at specified redemption prices. Prior to October 1, 2018, the Company 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, 2018, the Company 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 105.5% of their principal amount plus accrued and unpaid interest to the date of redemption. Debt issuance costs of $5,994 related to these notes are being amortized to interest expense over eight years, the term of the notes.
5.25% Notes
In October 2013, the Company issued $300,000 aggregate principal amount of 5.25% Senior Notes (the "5.25% Notes") that mature on October 1, 2021. These notes are general unsecured obligations. Interest on these notes is payable on April 1 and October 1 of each year. The Company has the right to redeem some or all of these notes from time to time on or after October 1, 2016, at specified redemption prices. Prior to October 1, 2016, the Company 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, the Company 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. Debt issuance costs of approximately $2,625 related to these notes are being amortized to interest expense over eight years, the term of the notes.
Former Senior Credit Facility
In September 2015, the Company refinanced and paid off its former senior credit facility (the "Former Senior Credit Facility") which was comprised of a term loan of $1,160,000 (the "Former Term A Loan"), a term loan of $250,000 (the "Former Term B Loan") and a $700,000 revolving credit facility (the "Former Revolving Credit Facility"), all of which were to mature from 2018 to 2020. The Former Term A Loan and the Former Term B loan were subject to quarterly principal payments of $14,500 and $499, respectively. Substantially all domestic tangible and intangible assets of the Company and its subsidiaries were pledged as collateral under the Former Senior Credit Facility. Borrowings under the Former Senior Credit Facility were charged interest at a rate equal to either the sum of a base rate plus a margin or the sum of a Eurodollar rate plus a margin. Each margin was based on the Company's senior secured credit ratings. The Company paid an annual commitment fee on the unused portion of the Former Revolving Credit Facility based on its senior secured credit ratings.
Interest Rate Swaps
At April 3, 2016, the Company had interest rate swap agreements in order to manage interest costs and the risk associated with variable interest rates - see Note 7.
Rank and Guarantees
The 5.50% Notes and the 5.25% Notes are the Company’s general unsecured and unsubordinated obligations and rank equally in right of payment with all of the Company’s existing and future unsecured and unsubordinated indebtedness, rank senior in right of payment to all of the Company’s existing and future subordinated indebtedness and are effectively subordinated to all existing and future senior secured indebtedness, including the Senior Credit Facility, to the extent of the collateral. The 5.50% Notes and the 5.25% Notes are guaranteed on an unsecured basis, jointly and severally and fully and unconditionally, by substantially all of the Company's domestic subsidiaries. The Senior Credit Facility obligations are guaranteed on a secured basis, jointly and severally and fully and unconditionally, by substantially all of the Company's domestic subsidiaries. All of these guarantor subsidiaries are 100% owned by the Company. The Company, exclusive of these guarantor subsidiaries, has no independent operations or material assets. The guarantee by any Subsidiary Guarantor of the Company's obligations in respect of the 5.50% Notes and the 5.25% Notes will be released in each of the following circumstances:
if, as a result of the sale of its capital stock, such Subsidiary Guarantor ceases to be a Restricted Subsidiary;
if such Subsidiary Guarantor is designated as an "Unrestricted Subsidiary" with respect to the 5.25% Notes and the 5.50% Notes;
upon defeasance or satisfaction and discharge of the 5.25% Notes and the 5.50% Notes, as applicable; and
if such Subsidiary Guarantor has been released from its guarantees of indebtedness under the credit agreement governing the Senior Credit Facility (the "Credit Agreement") and all capital markets debt securities.

17

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

Scheduled Minimum Loan Payments
The scheduled minimum loan payments on outstanding long-term debt are as follows:
Remainder of 2016
$
30,000

Calendar 2017
40,000

Calendar 2018
40,000

Calendar 2019
40,000

Calendar 2020
755,000

Thereafter
700,000

Total
$
1,605,000

Covenants and Default Provisions
The Company's Senior Credit Facility and the indentures governing the 5.50% Notes and the 5.25% Notes impose restrictions on the Company, including limitations on its ability to incur additional debt, enter into capital leases, grant liens, pay dividends and make certain other payments, sell assets, or merge or consolidate with or into another entity. In addition, the Senior Credit Facility limits the Company's ability to enter into sale-and-leaseback transactions. The 5.50% Notes and 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 since April 1, 2001, less restricted payments made since that date. 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 stock repurchases, as long as the Company maintains a certain amount of liquidity and maintains certain senior secured debt limits, with a limit, when those senior secured debt limits are not met, of $250,000 plus proceeds of any equity issuances plus 50% of net income since October 7, 2010. The Senior Credit Facility also requires the Company to meet and maintain specified financial ratios, including a minimum interest coverage ratio and a maximum consolidated total leverage ratio. The Company's debt agreements contain cross-default provisions so that noncompliance with the covenants within one debt agreement could cause a default under other debt agreements as well. The Company's ability to comply with these covenants and to meet and maintain the financial ratios may be affected by events beyond its control. Borrowings under the Senior Credit Facility are subject to compliance with these covenants. As of April 3, 2016, the Company was in compliance with the financial covenants.
12. Employee Benefit Plans
The components of net periodic benefit cost are as follows:
 
 
Pension Benefits
 
 
Quarters Ended
 
 
 
April 3, 2016
 
March 31, 2015
 
Service cost
 
$
4,530

 
$
5,635

 
Interest cost
 
25,449

 
31,448

 
Expected return on plan assets
 
(40,718
)
 
(40,371
)
 
Amortization of unrecognized net loss
 
30,798

 
28,721

 
Amortization of unrecognized prior service cost
 
(5,151
)
 
(5,418
)
 
Net periodic benefit cost
 
14,908

 
20,015

 
Special termination benefit cost / curtailment
 
1,618

 
2,469

 
Net periodic benefit cost
 
$
16,526

 
$
22,484

 

18

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

The components of net periodic benefit income are as follows:
 
 
Other Postretirement Benefits
 
 
 
Quarters Ended
 
 
 
April 3, 2016
 
March 31, 2015
 
Service cost
 
$

 
$

 
Interest cost
 
855

 
1,194

 
Expected return on plan assets
 
(801
)
 
(888
)
 
Amortization of unrecognized net loss
 
397

 
402

 
Amortization of unrecognized prior service cost
 
(1,290
)
 
(2,080
)
 
Net periodic benefit income
 
$
(839
)
 
$
(1,372
)
 
During the quarter ended April 3, 2016, the Company recorded a settlement expense of $1,618 to recognize the impact of lump sum benefit payments made in the non-qualified supplemental executive retirement plan.
Effective January 1, 2016, the Company changed the approach used to measure service and interest costs for pension and other postretirement benefits. Prior to January 1, 2016, the Company measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. For 2016, the Company has elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. The Company believes the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our plan obligations. The Company has accounted for this change as a change in accounting estimate and, accordingly, has accounted for it on a prospective basis. This change resulted in approximately $6 million lower pension expense compared to the method used prior to January 1, 2016.
Employer Contributions. During the three months ended April 3, 2016, the Company contributed $3,334 directly to retirees under its nonqualified supplemental executive retirement plan. The Company also contributed $1,059 to its other postretirement benefit plans. During the remainder of 2016, the Company anticipates making pension contributions of approximately $37,600 in order to meet the minimum required contributions for 2016. The Company anticipates making additional contributions of approximately $2,048 directly to retirees under the nonqualified plan and $6,505 to its other postretirement benefit plans during the remainder of 2016.
13. Income Taxes
The Company’s income taxes include federal, foreign and state income taxes. Income taxes for interim periods are based on estimated effective annual income tax rates.
The effective income tax rate for the tax expense in the quarter ended April 3, 2016 was 26.6% compared to an effective income tax rate of 15.3% for the tax benefit in the quarter ended March 31, 2015, reflecting the impact of domestic manufacturing deductions and research and development tax credits in the quarter ended April 3, 2016 and the impact of certain non-deductible costs in the quarter ended March 31, 2015.
The Company or one of its subsidiaries files income tax returns in the U.S. federal, various U.S. state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2008. The IRS has completed the audits of the Company through fiscal 2012 and is currently auditing the Company's income tax returns for fiscal years 2013 and 2014. The Company believes appropriate provisions for all outstanding issues have been made for all remaining open years in all jurisdictions.
Although the timing and outcome of audit settlements are uncertain, it is reasonably possible that a $3,725 reduction of the uncertain tax benefits will occur in the next 12 months. The settlement of these unrecognized tax benefits could result in an increase in net income from $0 to $2,850.
14. Stockholders' Equity
The Company has authorized 5,000,000 shares of preferred stock, par value $1.00, none of which has been issued.

19

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

Total pretax stock-based compensation expense of $4,640 and $11,734 was recognized during the quarters ended April 3, 2016 and March 31, 2015, respectively.
The total income tax benefit recognized in the income statement for share-based compensation was $1,804 and $4,538 during the quarters ended April 3, 2016 and March 31, 2015, respectively.
The Company sponsors six stock-based incentive plans: the Orbital ATK, Inc. 2015 Stock Incentive Plan (the "2015 Stock Incentive Plan"); three legacy ATK plans (the Alliant Techsystems Inc. 2005 Stock Incentive Plan, the Non-Employee Director Restricted Stock Plan and the 1990 Equity Incentive Plan); and two legacy Orbital plans, under which the Company assumed the obligation to issue Company common stock pursuant to the terms of the Transaction Agreement relating to the Merger (the Orbital Sciences Corporation 2005 Amended and Restated Stock Incentive Plan and the Orbital Sciences Corporation 1997 Stock Option and Incentive Plan). At April 3, 2016, the Company had authorized up to 3,750,000 common shares under the 2015 Stock Incentive Plan, of which 2,853,398 common shares were available to be granted. No new grants will be made out of the other five plans.
There are five types of awards outstanding under the Company's stock incentive plans: performance awards, total stockholder return performance awards ("TSR awards"), restricted stock units, restricted stock and stock options. The Company issues treasury shares upon (i) the payment of performance awards, TSR awards and restricted stock units, (ii) the grant of restricted stock, and (iii) the exercise of stock options.
Pursuant to the terms of the Transaction Agreement and under the terms of the ATK 2005 Stock Incentive Plan, all of the performance awards and TSR awards outstanding as of February 9, 2015 were converted into time-vesting restricted stock units in connection with the Distribution, with vesting periods corresponding to the respective performance periods. As of December 31, 2015, there were 55,677 shares reserved for the vesting of restricted stock units for the fiscal 2015-2017 performance period on March 31, 2017 . During the quarter ended April 3, 2016, 40,707 shares reserved for the vesting of restricted stock units for the fiscal 2014-2016 performance period vested.
As of April 3, 2016, there were 55,677 shares reserved for the vesting of restricted stock units for the fiscal 2015-2017 performance period on March 31, 2017.
As of April 3, 2016, there were up to 82,042 shares reserved for performance awards for the fiscal 2015-2017 performance period for executive officers and key employees. Performance shares are valued at the fair value of the Company stock as of the grant date and expense is recognized based on the number of shares expected to vest under the terms of the award under which they are granted. Of these shares:
up to 50% will become payable only upon achievement of a financial performance goal relating to absolute earnings per share growth for the performance period beginning April 1, 2015 and ending December 31, 2017; and

up to 50% will become payable only upon achievement of a performance goal relating to absolute sales growth for the performance period beginning April 1, 2015 and ending December 31, 2017.
As of April 3, 2016, there were up to 73,447 shares reserved for performance awards for the fiscal 2016-2018 performance period for executive officers and key employees. Performance shares are valued at the fair value of the Company stock as of the grant date and expense is recognized based on the number of shares expected to vest under the terms of the award under which they are granted. Of these shares:
up to 50% will become payable only upon achievement of a financial performance goal relating to return on investment of capital for the performance period beginning April 1, 2016 and ending December 31, 2018; and

up to 50% will become payable only upon achievement of a performance goal relating to absolute sales growth for the performance period beginning April 1, 2016 and ending December 31, 2018.

As of April 3, 2016, there were up to 73,447 shares and 82,042 shares reserved for TSR awards for key employees for the fiscal year 2016-2018 and 2015-2017 performance periods, respectively. The Company used an integrated Monte Carlo simulation model to determine the fair value of the TSR awards. The Monte Carlo model calculates the probability of satisfying the market conditions stipulated in the award. This probability is an input into the trinomial lattice model used to determine the fair value of the awards as well as the assumptions of other variables, including the risk-free interest rate and expected volatility of the Company's stock price in future periods. The risk-free rate is based on the U.S. dollar-denominated U.S. Treasury strip

20

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

rate with a remaining term that approximates the life assumed at the date of grant. There were 73,447 TSR awards granted during the quarter ended April 3, 2016 with a fair value of $87.85 per share.
Restricted stock granted to non-employee directors and certain key employees totaled 153,815 shares during the quarter ended April 3, 2016. Restricted shares vest over periods generally ranging from one to three years from the date of award and are valued at the fair value of the Company's common stock as of the grant date.
Stock options may be granted periodically, with an exercise price equal to the fair market value of the Company's common stock on the date of grant, and generally vest from one to three years from the date of grant. Options are generally granted with seven-year or ten-year terms. The weighted-average fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model and represents the difference between fair market value on the date of grant and the estimated market value on the expected exercise date. The option pricing model requires the Company to make assumptions. The risk-free rate is based on U.S. Treasury zero-coupon issues with a remaining term that approximates the expected life assumed at the date of grant. Expected volatility is based on the historical volatility of the Company's stock over the past seven years. The expected option life is based on the contractual term of the stock option and expected employee exercise and post-vesting employment termination trends. There were 73,100 stock options granted during the quarter ended March 31, 2015 with a weighted average fair value of $39.81 per stock option. There were 72,328 stock options granted during the quarter ended April 3, 2016 with a weighted average fair value of $20.53 per stock option.
15. Contingencies
Litigation.    From time to time, the Company is subject to various legal proceedings, including lawsuits, which arise out of, and are incidental to, the conduct of the Company's business. The Company does not consider any of such proceedings that are currently pending, individually or in the aggregate, notwithstanding that the unfavorable resolution of any matter may have a material effect on net earnings in any particular quarter, to be material to its business or likely to result in a material adverse effect on its operating results, financial condition or cash flows.
U.S. Government Investigations.   The Company is also subject to U.S. Government investigations from which civil, criminal or administrative proceedings could result. Such proceedings could involve claims by the U.S. Government for fines, penalties, compensatory and treble damages, restitution and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. The Company believes, based upon all available information, that the outcome of any such pending government investigations will not have a material adverse effect on its operating results, financial condition or cash flows.
Claim Recovery.    Profits expected to be realized on contracts are based on management's estimates of total contract sales value and costs at completion. Estimated amounts for contract changes and claims are included in contract sales only when realization is estimated to be probable. At April 3, 2016, based on progress to date on certain contracts, there was approximately $26,747 included in unbilled receivables for contract claims compared to $25,042 as of December 31, 2015.
Environmental Liabilities.    The Company's operations and ownership or use of real property are subject to a number of federal, state, and local environmental laws and regulations, including those for discharge of hazardous materials, remediation of contaminated sites and restoration of damage to the environment. At certain sites that the Company owns or operates or formerly owned or operated, there is known or potential contamination that the Company is required to investigate or remediate. The Company could incur substantial costs, including remediation costs, resource restoration costs, fines, and penalties, or third party property damage or personal injury claims, as a result of liabilities associated with past practices or violations of environmental laws or noncompliance with environmental permits.
The liability for environmental remediation represents management's best estimate of the present value of the probable and reasonably estimable costs related to known remediation obligations. The receivable represents the present value of the amount that the Company expects to recover, as discussed below. Both the liability and receivable have been discounted to reflect the present value of the expected future cash flows, using a discount rate of 0.4% and 0.7% as of April 3, 2016 and December 31, 2015, respectively. The Company's discount rate is calculated using the 20-year Treasury constant maturities rate, net of an estimated inflationary factor of 1.9%, rounded to the nearest quarter percent. The following is a summary of the

21

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

amounts recorded for environmental remediation:
 
 
April 3, 2016
 
December 31, 2015
 
 
Liability
 
Receivable
 
Liability
 
Receivable
Amounts (payable) receivable
 
$
(42,921
)
 
$
18,675

 
$
(41,824
)
 
$
18,236

Unamortized discount
 
920

 
(286
)
 
1,718

 
(568
)
Present value amounts (payable) receivable
 
$
(42,001
)
 
$
18,389

 
$
(40,106
)
 
$
17,668

Amounts expected to be paid or received in periods more than one year from the balance sheet date are classified as noncurrent. Of the $42,001 discounted liability as of April 3, 2016, $5,323 was recorded within other current liabilities and $36,678 was recorded within other long-term liabilities. Of the $18,389 discounted receivable, the Company recorded $2,836 within other current assets and $15,553 within other noncurrent assets. As of April 3, 2016, the estimated discounted range of reasonably possible costs of environmental remediation was $42,001 to $80,536.
The Company expects that a portion of its environmental compliance and remediation costs will be recoverable under U.S. Government contracts. Some of the remediation costs that are not recoverable from the U.S. Government that are associated with facilities purchased in a business acquisition may be covered by various indemnification agreements, as described in Note 13 to the audited consolidated financial statements included in the Company’s Transition Report on Form 10-K for the nine-month transition period ended December 31, 2015.
The Company has been identified as a potentially responsible party ("PRP"), along with other parties, in several regulatory agency actions associated with hazardous waste sites. As a PRP, the Company may be required to pay a share of the costs of the investigation and clean-up of these sites. While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities, based on currently available information, the Company has concluded that these matters, individually or in the aggregate, will not have a material adverse effect on the Company's operating results, financial condition or cash flows.
16. Share Repurchases
On March 11, 2015, the Company's Board of Directors authorized the Company to repurchase up to the lesser of $75 million or 1.0 million shares of its common stock through December 31, 2015. On August 4, 2015, the Board of Directors increased the amount authorized for repurchase to the lesser of $100 million or 1.4 million shares of the Company's common stock. On October 29, 2015, the Board of Directors increased the amount authorized for repurchase to the lesser of $250 million or 3.25 million shares through December 31, 2016. Under the authorized repurchase program, shares of the Company common stock may be purchased from time to time in the open market, subject to compliance with applicable laws and regulations and the Company’s debt covenants, depending upon market conditions and other factors. The Company repurchased 334,101 shares for $27,402 during the quarter ended April 3, 2016.
In accordance with the Transaction Agreement entered into on April 28, 2014, the Company did not repurchase any outstanding shares prior to the closing of the Distribution and Merger during the quarter ended March 31, 2015.
17. Changes in Estimates
The majority of our sales are accounted for as long-term contracts, which are accounted for using the percentage-of-completion method ("POC"). Accounting for contracts under POC requires judgment relative to assessing risks and estimating contract revenues and costs. Profits expected to be realized on contracts are based on management’s estimates of total contract sales value and costs at completion. Estimated amounts for contract changes, including scope and claims, are included in contract sales only when realization is probable. Assumptions used for recording sales and earnings are modified 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.
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. Aggregate net changes in contract estimates recognized using the cumulative catch-up method of accounting increased operating income by

22

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

approximately $20 million and $25 million for the quarters ended April 3, 2016 and March 31, 2015, respectively. The changes in estimates for the quarter ended April 3, 2016 are primarily attributable to higher profit expectations in the Flight Systems Group and the Space Systems Group. The adjustments for the quarter ended March 31, 2015 were primarily due to profit margin improvements in the Flight Systems Group and Defense Systems Group.
18. Restructuring Costs
The Company had restructuring liabilities for termination benefits of $1,994 and $3,589 and facility related liabilities of $20,525 and $21,855 for the quarters ended April 3, 2016 and December 31, 2015, respectively. The change in restructuring liabilities for the quarter ending April 3, 2016, was primarily attributed to cash expenditures for termination benefits and facilities.
19. Operating Segment Information
The Company operates its business structure within three operating segments. These operating segments ("groups") are defined based on the reporting and review process used by the Company's chief executive officer and other management.  The operating structure aligns the Company's capabilities and resources with its customers and markets and positions the Company for long-term growth and improved profitability.
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, the Group operates in the military and commercial aircraft and launch structures markets. Other products include illuminating flares and aircraft countermeasures.
Defense Systems Group develops and produces small-, medium-, and large-caliber 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 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 has developed advanced air-breathing propulsion systems and special-mission aircraft for defense applications.
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 delivering cargo to the International Space Station. This Group is also a provider of spacecraft components and subsystems and specialized engineering and operations services to U.S. Government agencies.

23

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

The following summarizes the Company's results by segment:
 
 
Quarters Ended
 
 
 
April 3, 2016
 
March 31, 2015
 
Sales to external customers:
 
 
 
 
 
Flight Systems Group
 
$
352,226

 
$
304,468

 
Defense Systems Group
 
432,221

 
479,219

 
Space Systems Group
 
280,507

 
185,852

 
Total external sales
 
1,064,954

 
969,539

 
Intercompany sales:
 
 
 
 
 
Flight Systems Group
 
3,630

 
23,608

 
Defense Systems Group
 
4,291

 
15,414

 
Space Systems Group
 
6,087

 
4,808

 
Corporate
 
(14,008
)
 
(43,830
)
 
Net intercompany sales
 

 

 
Total sales
 
$
1,064,954

 
$
969,539

 
 
 
 
 
 
 
Income from continuing operations, before interest, income taxes and noncontrolling interest:
 
 
 
 
 
Flight Systems Group
 
$
49,965

 
$
42,686

 
Defense Systems Group
 
35,696

 
44,924

 
Space Systems Group
 
30,701

 
(18,482
)
 
Corporate
 
(459
)
 
(70,220
)
 
Total income from continuing operations, before interest, income taxes and noncontrolling interest
 
$
115,903

 
$
(1,092
)
 
 
 
April 3, 2016
 
December 31, 2015
Total assets:
 
 
 
 
Flight Systems Group
 
$
2,306,498

 
$
2,252,031

Defense Systems Group
 
1,425,686

 
1,346,463

Space Systems Group
 
1,322,421

 
1,247,546

Corporate
 
414,438

 
493,352

Total assets
 
$
5,469,043

 
$
5,339,392

Certain administrative functions are primarily managed by the Company at the corporate headquarters ("Corporate"). Some examples of such functions are human resources, pension and postretirement benefits, corporate accounting, legal, tax and treasury. Significant assets and liabilities managed at Corporate include those associated with debt, restructuring, pension and postretirement benefits, environmental liabilities, litigation liabilities, strategic growth costs and income taxes.
Costs related to the administrative functions managed by Corporate are either recorded at Corporate or allocated to the business units based on the nature of the expense. The difference between pension and postretirement benefit expense calculated under Financial Accounting Standards and the expense calculated under U.S. Cost Accounting Standards is recorded at the corporate level which provides for greater clarity on the operating results of the business segments. Administrative expenses such as corporate accounting, legal and treasury costs are allocated out to the business segments. Environmental expenses are allocated to each segment based on the origin of the underlying environmental cost. Transactions between segments are recorded at the segment level, consistent with the Company's financial accounting policies. Intercompany balances and transactions involving different segments are eliminated at the Company's consolidated financial statements level

24

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Amounts in thousands except share and per share data, unless otherwise indicated)

and are shown above in Corporate. The amortization expense related to purchase accounting attributed to the acquisition of Orbital is also recorded in Corporate.
ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands except share and per share data and 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 you 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,
reduction or change in demand and manufacturing costs for military and 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,

25


performance of the Company's subcontractors,
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 current and 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 income taxes 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 our business. We undertake no obligation to update any forward-looking statements, except as required by law. A more detailed description of risk factors can be found in Part 1, Item 1A, Risk Factors, of the Company’s Transition Report on Form 10-K for the nine-month transition period ended December 31, 2015. Additional information regarding these factors may be contained in the Company's subsequent filings with the Securities and Exchange Commission, including 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
We are an aerospace and defense systems company and supplier of products to the U.S. Government, allied nations, prime contractors and other customers. Our main systems and 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. We are headquartered in Dulles, Virginia and have operating locations throughout the United States.
On February 9, 2015, we completed a tax-free spin-off and distribution of our former Sporting Group to our stockholders (the “Distribution”) as a new public company called Vista Outdoor Inc. ("Vista Outdoor"). Immediately following the Distribution, we combined with Orbital Sciences Corporation ("Orbital") through the merger of a Company subsidiary with Orbital (the "Merger"). Following the Distribution and Merger, we changed our name from Alliant Techsystems Inc. to Orbital ATK, Inc.
We conduct business in three segments:
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.
Defense Systems Group develops and produces small-, medium-, and large-caliber 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 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 has developed advanced air-breathing propulsion systems and special-mission aircraft for defense applications.


26


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 cargo delivery to the ISS. This group is also a provider of spacecraft components and subsystems and specialized engineering and operations services to U.S. government agencies.
Financial Highlights for the Quarter Ended April 3, 2016
Quarterly sales of $1.06 billion.
Diluted earnings per share of $1.19.
New firm and option contract bookings of $2.5 billion and option exercises of $0.7 billion under existing contracts.
Total backlog of $14.8 billion at April 3, 2016.
Income from continuing operations, before interest, income taxes and noncontrolling interest as a percentage of sales of 10.9%.
Effective income tax rate of 26.6%.
The Company paid a quarterly dividend of $0.30 on March 24, 2016 to stockholders of record on March 7, 2016.
The Company repurchased 334,101 shares for $27,402 during the quarter ended April 3, 2016.
Critical Accounting Policies
The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company’s Transition Report on Form 10-K for the nine-month transition period ended December 31, 2015 ("fiscal 2015") and the same accounting policies are used in preparing the Company’s interim consolidated financial statements.
In preparing the consolidated financial statements, the Company follows accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make 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.
More information on these policies can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Transition Report on Form 10-K for the nine-month transition period ended December 31, 2015.
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 include intergroup sales and profit eliminations and corporate expenses.
As a general note, the increases in the results of Flight Systems Group and Space Systems Group discussed below were primarily attributable to the inclusion of Orbital’s results following the Merger. Our results for the three months ended April 3, 2016 include Orbital for the full quarter; however, the results for the three months ended March 31, 2015 include the results of Orbital only after the Merger date of February 9, 2015.

27


Sales
 
Quarters Ended
 
 
April 3, 2016
 
March 31, 2015
 
Change
 
Percent Change
 
Flight Systems Group
$
355,856

 
$
328,076

 
$
27,780

 
8.5
 %
 
Defense Systems Group
436,512

 
494,633

 
(58,121
)
 
(11.8
)%
 
Space Systems Group
286,594

 
190,660

 
95,934

 
50.3
 %
 
Corporate and Eliminations
(14,008
)
 
(43,830
)
 
29,822

 
(68.0
)%
 
Total sales
$
1,064,954

 
$
969,539

 
$
95,415

 
9.8
 %
 
Fluctuations in sales were driven by program-related changes within the operating segments and the impact of the Merger as described below.
Flight Systems Group.    The increase in sales was primarily due to the Merger. Sales for the three months ended April 3, 2016 include Orbital's former Launch Vehicles segment, now referred to as the Launch Vehicles division, for the full quarter; however, sales for the three months ended March 31, 2015 include the results of the Launch Vehicles division only after the Merger date. Launch Vehicles division sales were $131,000 for the three months ended April 3, 2016, compared to $64,700 for the three months ended March 31, 2015. This increase in sales was partially offset by a decrease in Propulsion Systems sales largely due to the termination in 2015 of a commercial contract.
Defense Systems Group.    The decrease in sales was primarily due to reductions in shipments of Armament Systems Division products.
Space Systems Group.    The increase in sales was primarily due to the Merger. Sales for the three months ended April 3, 2016 include Orbital's former Advanced Space Programs and Satellite and Space Systems segments for the full quarter; however, sales for the three months ended March 31, 2015 include the results of those former Orbital segments only after the Merger date. The legacy Orbital businesses generated sales of approximately $242,900 for the three months ended April 3, 2016, compared to $119,300 included in our results for the three months ended March 31, 2015.
Corporate. The change in eliminations was driven primarily by lower intergroup sales from Defense Systems Group, due to the spin-off of Vista Outdoor as a result of the Distribution.
Cost of Sales
 
Quarters Ended
 
April 3, 2016
 
March 31, 2015
 
Change
 
Percent Change
Flight Systems Group
$
268,854

 
$
244,829

 
$
24,025

 
9.8
 %
Defense Systems Group
362,970

 
408,916

 
(45,946
)
 
(11.2
)%
Space Systems Group
231,283

 
158,140

 
73,143

 
46.3
 %
Corporate/Eliminations
(20,412
)
 
(54,887
)
 
34,475

 
(62.8
)%
Total cost of sales
$
842,695

 
$
756,998

 
$
85,697

 
11.3
 %
The fluctuation in cost of sales was driven by program-related changes within the operating segments and the impact of the Merger as described below.
Flight Systems Group.    The increase in cost of sales was primarily due to the Merger. Cost of sales for the three months ended April 3, 2016 include Orbital's former Launch Vehicles segment, now referred to as the Launch Vehicles division, for the full quarter; however, cost of sales for the three months ended March 31, 2015 include the results of the Launch Vehicles division only after the Merger date. Launch Vehicles division cost of sales were $101,600 for the three months ended April 3, 2016, compared to $47,500 for the three months ended March 31, 2015. This increase in cost of sales was partially offset by a decrease in Propulsion Systems cost of sales largely due to the 2015 termination of a commercial contract.
Defense Systems Group.    The decrease in cost of sales was primarily driven by reduced cost of sales in Armament Systems that reflected decreased foreign sales.
Space Systems Group.    The increase in cost of sales was primarily due to the Merger. Cost of sales for the three months ended April 3, 2016 include Orbital's former Advanced Space Programs and Satellite and Space Systems segments for the full

28


quarter; however, sales for the three months ended March 31, 2015 include the results of those former Orbital segments only after the Merger date. The legacy Orbital businesses incurred cost of sales of approximately $196,000 for the three months ended April 3, 2016, compared to $101,700 for the three months ended March 31, 2015.
Corporate. The change in corporate/eliminations was driven primarily by lower intergroup sales from Defense Systems Group, due to the spin-off of Vista Outdoor in the Distribution.
Operating Expenses
 
Quarters Ended
 
April 3, 2016
 
Percent of Sales
 
March 31, 2015
 
Percent of Sales
 
Change
Research and development
$
19,779

 
1.9
%
 
$
25,368

 
2.6
%
 
$
(5,589
)
Selling
27,048

 
2.5
%
 
20,908

 
2.2
%
 
6,140

General and administrative
59,529

 
5.6
%
 
133,057

 
13.7
%
 
(73,528
)
Goodwill impairment
$

 
 
 
$
34,300

 
3.5
%
 
$
(34,300
)
Total operating expenses
$
106,356

 
10.0
%
 
$
213,633

 
22.0
%
 
$
(107,277
)
Operating expenses decreased $107,277 in the quarter ended April 3, 2016 compared to the quarter ended March 31, 2015 primarily due to $18,000 of transaction costs pertaining to the Merger and Distribution, $15,000 of restructuring charges and a goodwill impairment charge of $34,300 in the quarter ended March 31, 2015.
Income from Continuing Operations, Before Interest, Income Taxes and Noncontrolling Interest
 
Quarters Ended
 
April 3, 2016
 
March 31, 2015
 
Change
Flight Systems Group
$
49,965

 
$
42,686

 
$
7,279

Defense Systems Group
35,696

 
44,924

 
(9,228
)
Space Systems Group
30,701

 
(18,482
)
 
49,183

Corporate/Eliminations
(459
)
 
(70,220
)
 
69,761

Total
$
115,903

 
$
(1,092
)
 
$
116,995

The fluctuations in income from continuing operations, before interest, income taxes and noncontrolling interest are described as follows:
Flight Systems Group.    The increase in income was primarily due to the Merger. Income for the three months ended April 3, 2016 include Orbital's former Launch Vehicles segment, now referred to as the Launch Vehicles division, for the full quarter; however, income for the three months ended March 31, 2015 include the results of the Launch Vehicles division only after the Merger date. In addition, income for the three months ended April 3, 2016 included the impact of a favorable change in estimated profit adjustment associated with our CRS contract.
Defense Systems Group.    The decrease in income was largely due to lower revenues and unfavorable product mix in the Armament Systems Division.
Space Systems Group.    The increase in income was primarily due to the Merger. Income for the three months ended April 3, 2016 included Orbital's former Advanced Space Programs and Satellite and Space Systems segments in our results for the full quarter; however, income for the three months ended March 31, 2015 include the results of these former Orbital segments only after the Merger date. In addition, income for the three months ended April 3, 2016 included the impact of a favorable change in estimated profit adjustment associated with our CRS contract.
Changes in Estimates. The majority of our sales are accounted for as long-term contracts, which are accounted for using the percentage-of-completion method ("POC"). Accounting for contracts under POC requires judgment relative to assessing risks and estimating contract revenues and costs. Profits expected to be realized on contracts are based on management’s estimates of total contract sales value and costs at completion. Estimated amounts for contract changes, including scope and claims, are included in contract sales only when realization is probable. Assumptions used for recording sales and earnings are

29


modified 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.
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. Aggregate net changes in contract estimates recognized using the cumulative catch-up method of accounting increased operating income by approximately $20 million and $25 million for the quarters ended April 3, 2016 and March 31, 2015, respectively. The changes in estimates for the quarter ended April 3, 2016 are primarily attributable to higher profit expectations in the Flight Systems Group and the Space Systems Group. The adjustments for the quarter ended March 31, 2015 were primarily due to profit margin improvements in Flight Systems Group and Defense Systems Group.
Corporate.    Results reflect unallocated expenses incurred for administrative functions that are performed centrally at the corporate headquarters, 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"), merger and acquisition transaction related costs, amortization of intangible assets recorded in connection with the Merger, and the elimination of intercompany profits. The decrease in corporate expenses in the quarter ended April 3, 2016 compared to the quarter ended March 31, 2015 was largely driven by $18,000 of transaction costs pertaining to the Merger and Distribution, $15,000 of restructuring charges and a goodwill impairment charge of $34,300 recorded in the quarter ended March 31, 2015.
Net Interest Expense
Net interest expense for the quarter ended April 3, 2016 was $20,691, an increase of $112 compared to $20,579 in the quarter ended March 31, 2015.
Income Taxes (from Continuing Operations)
 
Quarters Ended
 
April 3, 2016
 
Effective Rate
 
March 31, 2015
 
Effective Rate
 
Change
Income taxes
$
25,367

 
26.6
%
 
$
(7,398
)
 
15.3
%
 
$
32,765

The effective income tax rate for the tax expense in the quarter ended April 3, 2016 was 26.6% compared to an effective income tax rate of 15.3% for the tax benefit in the quarter ended March 31, 2015, reflecting the impact of domestic manufacturing deductions and research and development tax credits in the quarter ended April 3, 2016 and the impact of certain non-deductible costs in the quarter ended March 31, 2015.
Income From Continuing Operations, Before Noncontrolling Interest
Net income from continuing operations before noncontrolling interest for the quarter ended April 3, 2016 was $69,845, an increase of $110,744 compared to $(40,899) in the quarter ended March 31, 2015.
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 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, acquisitions and other activities.
Cash Flow Summary
Our cash flows from continuing operations for operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows are summarized as follows:

30


 
Three Months Ended
 
April 3, 2016
 
March 31, 2015
Cash provided by (used for) operating activities of continuing operations
$
(75,071
)
 
$
146,404

Cash provided by (used for) investing activities of continuing operations
(22,573
)
 
391,401

Cash provided by (used for) financing activities of continuing operations
67,136

 
(520,922
)
Net cash flows from continuing operations
$
(30,508
)
 
$
16,883

Operating Activities
Cash used for operating activities of continuing operations during the three months ended April 3, 2016 was $75,071, compared to cash provided by operating activities of $146,404 during the three months ended March 31, 2015. The decrease in operating cash flow resulted primarily from the net effect of changes in working capital and other assets and liabilities partially offset by a $110,744 improvement in the income (loss) from continuing operations. During the three months ended April 3, 2016, changes in working capital and other assets and liabilities used $194,631 of cash, comprised of a $187,899 increase in net receivables, a $22,009 increase in inventories, a $13,571 decrease in accrued compensation and a $14,286 change in other assets and liabilities, partially offset by a $43,134 increase in accounts payable. During the three months ended March 31, 2015, changes in working capital and other assets and liabilities provided $122,733 of cash, comprised of a $113,384 decrease in net receivables, a $15,847 decrease in inventories and a $42,288 change in other assets and liabilities, partially offset by a $31,869 decrease in accounts payable and a $16,917 decrease in accrued compensation and changes in other assets and liabilities.
Investing Activities
Cash used for investing activities of continuing operations during the three months ended April 3, 2016 was $22,573, compared to cash provided by investing activities during the three months ended March 31, 2015 of $391,401. Capital expenditures during the three months ended April 3, 2016 were $22,573, compared to $51,343 during the three months ended March 31, 2015. Cash provided by investing activities during the three months ended March 31, 2015 included $253,734 of cash acquired in the Merger with Orbital and a cash dividend of $188,878 received from Vista Outdoor in conjunction with the distribution of Sporting Group.
Financing Activities
Cash provided by financing activities during the three months ended April 3, 2016 was $67,136, compared to cash used for financing during the three months ended March 31, 2015 of $520,922. The decrease in cash used for financing activities was largely attributable to debt extinguishment payments of $372,758 made during the three months ended March 31, 2015.
Liquidity
In addition to our normal operating cash requirements, our principal future cash requirements will be to fund capital expenditures, repay debt, satisfy employee benefit obligations, repurchase shares, pay dividends and complete 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 our debt.
During the three months ended April 3, 2016, we paid dividends totaling $17,590. On May 3, 2016, the Board of Directors declared a dividend of $0.30 per share payable on June 23, 2016 to holders of record on June 8, 2016. The payment and amount of any future dividends are at the discretion of our 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.
Based on our current financial condition, we believe our cash position, combined with anticipated generation of cash flows, as well as the availability of funding, if needed, through our Senior Credit Facility, access to debt and equity markets, and potential future sources of funding such as additional bank financing and debt markets, will be adequate to fund future growth as well as service our anticipated long-term debt and pension obligations, make capital expenditures and pay dividends over the next 12 months.
We do not expect 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.

31


Long-term Debt and Credit Facilities
As of April 3, 2016, we had outstanding total indebtedness of $1,605,000 and a $1,000,000 revolving credit facility provided for the potential of additional borrowings up to $744,684 reduced by outstanding borrowings of $125,000 and letters of credit of $130,316.
Our indebtedness consisted of the following:
 
 
April 3, 2016
 
December 31, 2015
Senior Credit Facility:
 
 
 
 
Term Loan A due 2020
 
$
780,000

 
$
790,000

Revolving Credit Facility due 2020
 
125,000

 

5.25% Senior Notes due 2021
 
300,000

 
300,000

5.50% Senior Notes due 2023
 
400,000

 
400,000

Principal amount of long-term debt
 
1,605,000

 
1,490,000

Unamortized Debt Issuance Costs:
 
 
 
 
   Senior Credit Facility
 
5,932

 
6,302

   5.25% Senior Notes due 2021
 
1,832

 
1,915

   5.50% Senior Notes due 2023
 
5,755

 
5,947

Unamortized Debt Issuance Costs
 
13,519

 
14,164

Long-term Debt Less Unamortized Debt Issuance Costs
 
1,591,481

 
1,475,836

Less: Current portion of long-term debt
 
40,000

 
40,000

Long-term debt
 
$
1,551,481

 
$
1,435,836

See Note 11 "Long-term Debt" to the condensed consolidated financial statements in Part I, Item 1 for a detailed discussion of these borrowings.
Covenants
As of April 3, 2016, we were in compliance with all of the covenants in our debt agreements, including specified financial ratios that our Senior Credit Facility requires us to meet as follows:
 
 
Total Leverage
Ratio (1)
 
Interest Coverage
Ratio (2)
Requirement
 
4.00

 
3.00

Actual at April 3, 2016
 
2.58

 
8.87

(1) Not to exceed the required financial ratio
 
 
 
 
(2) Not to be below the required financial ratio
 
 
 
 
The Total Leverage Ratio is the sum of our total debt plus financial letters of credit, 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.
See Note 11 "Long-term Debt" to the condensed consolidated financial statements in Part I, Item 1 for further discussion of the covenants in our debt agreements.
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 in the future and to meet and maintain the requisite financial ratios may be affected by events beyond our control.
Share Repurchases
On March 11, 2015, our Board of Directors authorized us to repurchase up to the lesser of $75 million or 1.0 million shares of our common stock through December 31, 2015. On August 4, 2015, the Board of Directors increased the amount authorized for repurchase to the lesser of $100 million or 1.4 million shares. On October 29, 2015, the Board of Directors increased the amount authorized for repurchase to the lesser of $250 million or 3.25 million shares through December 31, 2016.

32


Under the authorized repurchase program, shares of our common stock may be purchased from time to time in the open market, subject to compliance with applicable laws and regulations and our debt covenants, depending upon market conditions and other factors. We repurchased 334,101 shares for $27,402 during the quarter ended April 3, 2016.
In accordance with the Transaction Agreement entered into on April 28, 2014, we did not repurchase any outstanding shares prior to the closing of the Distribution and Merger during the quarter ended March 31, 2015.
Authorized repurchases of our shares are 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. Our 5.25% Notes and 5.50% 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 since April 1, 2001, less restricted payments made since that date. As of April 3, 2016, the Senior Credit Facility allows us to make unlimited "restricted payments" (as defined in the Credit Agreement), which, among other items, allows payments for future share repurchases, as long as we maintain a certain amount of liquidity and maintain certain senior secured 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 Credit Agreement also prohibits dividend payments if loan defaults exist or the financial covenants contained in the agreement are not met.
Contractual Obligations and Commercial Commitments
There have been no material changes with respect to the contractual obligations and commitments or off-balance sheet arrangements described in our Transition Report on Form 10-K for the nine-month transition period ended December 31, 2015.
Contingencies
Environmental Liabilities.  Our 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 we own or operate or formerly owned or operated, there is known or potential contamination that we are required to investigate or remediate. We 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 liability for environmental remediation represents management's best estimate of the present value of the probable and reasonably estimable costs related to known remediation obligations. The receivable represents the present value of the amount that we expect to recover, as discussed below. Both the liability and receivable have been discounted to reflect the present value of the expected future cash flows, using a discount rate of 0.40% and 0.70% as of April 3, 2016 and December 31, 2015, respectively. Our discount rate is calculated using the 20-year Treasury constant maturities rate, net of an estimated inflationary factor of 1.9%, rounded to the nearest quarter percent. The following is a summary of the amounts recorded for environmental remediation:
 
April 3, 2016
 
December 31, 2015
 
Liability
 
Receivable
 
Liability
 
Receivable
Amounts (payable) receivable
$
(42,921
)
 
$
18,675

 
$
(41,824
)
 
$
18,236

Unamortized discount
920

 
(286
)
 
1,718

 
(568
)
Present value amounts (payable) receivable
$
(42,001
)
 
$
18,389

 
$
(40,106
)
 
$
17,668

As of April 3, 2016, the estimated discounted range of reasonably possible costs of environmental remediation was $42,001 to $80,536.
We expect that a portion of our environmental compliance and remediation costs will be recoverable under U.S. Government contracts. Some of the remediation costs that are not recoverable from the U.S. Government that are associated with facilities purchased in a business acquisition may be covered by various indemnification agreements, as described in Note 13 to the audited consolidated financial statements included in our Transition Report on Form 10-K for the nine-month transition period ended December 31, 2015.
We have 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

33


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.
Other Contingencies. We are also subject to a number of other potential risks and contingencies. These risks and contingencies are described in Item 1A of Part I of our Transition Report on Form 10-K for the nine-month transition period ended December 31, 2015.
New Accounting Pronouncements
See Note 2 to the unaudited condensed consolidated financial statements in Item 1 of Part I of this report.
Inflation
In management's opinion, inflation has not had a significant impact upon the results of our operations. The selling prices under contracts, the majority of which are long term, generally include estimated costs to be incurred in future periods. These cost projections can generally be negotiated into new buys under fixed-price government contracts, while actual cost increases are recoverable on cost-type contracts.
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in our market risk during the quarter ended April 3, 2016. For additional information, refer to Item 7A of Part II of our Transition Report on Form 10-K for the nine-month transition period ended December 31, 2015.
ITEM 4.   CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of April 3, 2016, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). As described in Management’s Report on Internal Control over Financial Reporting in Item 9A of our Transition Report on Form 10-K for the nine-month transition period ended December 31, 2015, we previously reported material weaknesses in internal control over financial reporting related to: establishing and maintaining accounting policies and procedures related to complex transactions; maintaining a sufficient complement of personnel with appropriate levels of accounting and controls knowledge, experience and training commensurate with the nature and complexity of our business and contract activity; designing appropriate controls to ensure completeness and accuracy of purchase accounting--specifically, maintaining controls over measurement period adjustments and controls over the calculation of acquired contracts’ percentage of completion used to recognize revenue; and maintaining controls over the integration of accounting operations of the two merged companies and over the preparation, analysis and review of accounts of the combined business. As a result of the material weaknesses in our internal control over financial reporting, which were not remediated as of April 3, 2016, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were not effective as of April 3, 2016.
Remediation of Material Weaknesses
Management is in the process of improving and strengthening the internal controls related to the above matters including: i.) hiring sufficient complement of personnel with appropriate levels of accounting and controls knowledge, experience and training commensurate with the nature and complexity of our business, ii.) continuing to execute on our integration program moving the accounting operations towards centralized processing with standard tools and procedures and iii.) assessing existing policies and practices and related internal controls with respect to the extent and precision of controls impacting certain balance sheet accounts. Furthermore, during the quarter ended April 3, 2016 we finalized our purchase accounting related to the Merger and we maintained sufficient controls over measurement period adjustments.  In addition, for future acquisitions we will ensure the percent complete on contracts will be reset to zero in accordance with the accounting literature.
Changes in Internal Control over Financial Reporting
During the quarter ended April 3, 2016 there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

34


PART II—OTHER INFORMATION
ITEM 1.    LEGAL PROCEEDINGS
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.
Putative class action and derivative lawsuits challenging the merger of Orbital and our company were filed in the Court of Chancery of the State of Delaware in May 2014, naming Orbital, our 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 we 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. Pursuant to the terms of the MOU, we and Orbital made additional information available to Orbital's stockholders in connection with the Merger vote. On February 2, 2016, the case was dismissed.
U.S. Government Investigations.    We are 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. We believe, based upon all available information, that the outcome of any such pending government investigations will not have a material adverse effect on our operating results, financial condition or cash flows.
Environmental Liabilities.    Our 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 our company being involved with a number of related legal proceedings, claims and remediation obligations. We routinely assess, based on in-depth studies, expert analyses and legal reviews, our contingencies, obligations, and commitments for remediation of contaminated sites and past practices, including assessments of ranges and probabilities of recoveries from other responsible parties. Our 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.
We have 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.
We 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 noncompliance with environmental permits. While environmental laws and regulations have not had a material adverse effect on our operating results, financial condition or cash flows in the past, and we have 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 I, Item 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Contingencies," is incorporated herein by reference.
ITEM 1A.    RISK FACTORS
While our attempts to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Item 1A of Part I of our Transition Report on Form 10-K for the nine-month transition period ended December 31, 2015 describes all known material risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results and future prospects.

35


ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total Number
of Shares
Purchased (1)
 
Average
Price Paid
per Share
 
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Program (2)
 
Maximum
Number of
Shares that
May Yet Be
Purchased Under
the Program (3)
January 1 - January 31
35,507

 
$
86.10

 
35,507