Derivative Financial Instruments

9 Months Ended

Jan. 01, 2012

Derivative Financial Instruments

Derivative Financial Instruments

7. Derivative Financial Instruments

ATK 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 ATK periodically uses interest rate swaps to hedge forecasted interest payments and the risk associated with variable interest rates on long-term debt.

ATK entered into forward contracts for copper and zinc during fiscal 2012, 2011 and 2010.  The contracts essentially establish a fixed price for the underlying commodity and are designated and qualify as effective cash flow hedges of purchases of the commodity.  Ineffectiveness is calculated as the amount by which the change in the fair value of the derivatives exceeds the change in the fair value of the anticipated commodity purchases.

ATK also entered into foreign currency forward contracts during fiscal 2011 and fiscal 2010.  These contracts were used to hedge forecasted inventory purchases and subsequent payments, or customer receivables, denominated in foreign currencies and were designated and qualified as effective cash flow hedges.  Ineffectiveness with respect to forecasted inventory purchases was calculated based on changes in the forward rate until the anticipated purchase 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.  The gains or losses on the foreign currency forward contracts are recorded in earnings when the related inventory is sold.

As of January 1, 2012, ATK had the following outstanding commodity forward contracts in place:

	Quantity Hedged (in pounds)
Copper	25,750,000
Zinc	8,595,000

The table below presents the fair value and location of ATK’s derivative instruments designated as hedging instruments in the condensed consolidated balance sheet as of the periods presented:

		Asset Derivatives				Liability Derivatives
		Fair value as of				Fair value as of
	Location	January 1, 2012		March 31, 2011		January 1, 2012		March 31, 2011
Commodity forward contracts	Other current assets / other accrued liabilities	$	7,967	$	36,398	12,686		$	—
Commodity forward contracts	Deferred charges and other non-current assets / other long-term liabilities	1,824		12,619		248		—
Foreign currency forward contracts	Other current assets / other accrued liabilities	—		390		—		—
Total		$	9,791	$	49,407	$	12,934	$	—

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

For the periods presented below, the derivative gains and losses in the consolidated income statements related to commodity forward contracts and foreign currency forward contracts were as follows:

	Pretax amount of gain (loss) recognized in Other Comprehensive Income (Loss)			Pretax amount of gain (loss) reclassified from Accumulated Other Comprehensive Income (Loss)			Gain or (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)
	Amount			Location	Amount		Location	Amount
Quarter ended January 1, 2012
Commodity forward contracts	$	(3,143	)	Cost of Sales	$	2,908	Cost of Sales	$	—
Quarter ended January 2, 2011
Commodity forward contracts	$	64,585		Cost of Sales	$	12,747	Cost of Sales	$	—
Foreign currency forward contract	75			Cost of Sales	—		Cost of Sales	—
Nine Months ended January 1, 2012
Commodity forward contracts	$	(3,143	)	Cost of Sales	$	22,138	Cost of Sales	$	—
Nine Months ended January 2, 2011
Commodity forward contracts	$	64,585		Cost of Sales	$	29,552	Cost of Sales	$	—
Foreign currency forward contract	75			Cost of Sales	—		Cost of Sales	—

All derivatives used by ATK during fiscal 2012 and 2011 were designated as and qualify to be accounted for as hedging instruments.