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EX-32.2 - EXHIBIT 32.2 - ALION SCIENCE & TECHNOLOGY CORP | c11674exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - ALION SCIENCE & TECHNOLOGY CORP | c11674exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - ALION SCIENCE & TECHNOLOGY CORP | c11674exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - ALION SCIENCE & TECHNOLOGY CORP | c11674exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2010
COMMISSION FILE NUMBER 333-89756
Alion Science and Technology Corporation
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE (State or Other Jurisdiction of Incorporation of Organization) |
54-2061691 (I.R.S. Employer Identification No.) |
|
10 West 35th Street Chicago, IL 60616 (312) 567-4000 |
1750 Tysons Boulevard, Suite 1300 McLean, VA 22102 (703) 918-4480 |
(Address, including Zip Code and Telephone Number with Area Code, of Principal Executive Offices)
(Former name, former address and former fiscal year, if changed since last report)
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.
o Yes þ No
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).
o Yes o No
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. (Check one):
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer þ | Smaller Reporting Company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
The number of shares outstanding of Alion Science and Technology Corporation Common Stock as
of February 4, 2011 was: Common Stock 5,537,967
ALION SCIENCE AND TECHNOLOGY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2010
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2010
1 | ||||||||
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4 | ||||||||
26 | ||||||||
39 | ||||||||
40 | ||||||||
40 | ||||||||
40 | ||||||||
40 | ||||||||
40 | ||||||||
40 | ||||||||
40 | ||||||||
40 | ||||||||
41 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Balance Sheets (unaudited)
As of December 31, 2010 and September 30, 2010
December 31, | September 30, | |||||||
2010 | 2010 | |||||||
(In thousands, except share and per | ||||||||
share information) | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 15,279 | $ | 26,695 | ||||
Accounts receivable, net |
173,622 | 174,032 | ||||||
Receivable due from ESOP Trust |
| 1,896 | ||||||
Prepaid expenses and other current assets |
5,911 | 5,159 | ||||||
Total current assets |
194,812 | 207,782 | ||||||
Property, plant and equipment, net |
9,817 | 10,798 | ||||||
Intangible assets, net |
15,942 | 17,694 | ||||||
Goodwill |
398,921 | 398,921 | ||||||
Other assets |
11,115 | 11,107 | ||||||
Total assets |
$ | 630,607 | $ | 646,302 | ||||
Current liabilities: |
||||||||
Interest payable |
$ | 15,823 | $ | 17,217 | ||||
Trade accounts payable |
46,556 | 44,486 | ||||||
Accrued liabilities |
44,362 | 43,145 | ||||||
Accrued payroll and related liabilities |
33,071 | 40,221 | ||||||
Billings in excess of revenue earned |
3,097 | 2,917 | ||||||
Total current liabilities |
142,909 | 147,986 | ||||||
Senior secured notes |
279,625 | 275,831 | ||||||
Senior unsecured notes |
244,375 | 246,126 | ||||||
Accrued compensation and benefits, excluding current portion |
6,168 | 6,174 | ||||||
Non-current portion of lease obligations |
7,778 | 7,848 | ||||||
Deferred income taxes |
38,951 | 37,207 | ||||||
Redeemable common stock, $0.01 par value, 8,000,000 shares
authorized, 5,538,289 and 5,658,234 shares issued and outstanding
at December 31, 2010 and September 30, 2010 |
147,595 | 150,792 | ||||||
Common stock warrants |
20,785 | 20,785 | ||||||
Accumulated other comprehensive loss |
(177 | ) | (177 | ) | ||||
Accumulated deficit |
(257,402 | ) | (246,270 | ) | ||||
Total liabilities, redeemable common stock and accumulated deficit |
$ | 630,607 | $ | 646,302 | ||||
See accompanying notes to condensed consolidated financial statements.
1
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated
Statements of Operations (unaudited)
Three Months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
(In thousands, except share and | ||||||||
per share information) | ||||||||
Contract revenue |
$ | 200,768 | $ | 205,738 | ||||
Direct contract expense |
155,514 | 158,996 | ||||||
Gross profit |
45,254 | 46,742 | ||||||
Operating expenses: |
||||||||
Indirect contract expense |
9,634 | 9,286 | ||||||
Research and development |
88 | 261 | ||||||
General and administrative |
16,215 | 16,007 | ||||||
Rental and occupancy expense |
7,730 | 7,986 | ||||||
Depreciation and amortization |
2,990 | 4,231 | ||||||
Total operating expenses |
36,657 | 37,771 | ||||||
Operating income |
8,597 | 8,971 | ||||||
Other income (expense): |
||||||||
Interest income |
20 | 45 | ||||||
Interest expense |
(18,404 | ) | (16,886 | ) | ||||
Other |
(61 | ) | (111 | ) | ||||
Gain on debt extinguishment |
460 | | ||||||
Total other income (expense) |
(17,985 | ) | (16,952 | ) | ||||
Loss before taxes |
(9,388 | ) | (7,981 | ) | ||||
Income tax (expense) benefit |
(1,744 | ) | 40 | |||||
Net loss |
$ | (11,132 | ) | $ | (7,941 | ) | ||
Basic and diluted loss per share |
(1.97 | ) | (1.46 | ) | ||||
Basic and weighted average common shares outstanding |
5,655,405 | 5,424,031 | ||||||
See accompanying notes to condensed consolidated financial statements.
2
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
Condensed Consolidated Statements of Cash Flows (unaudited)
Three Months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (11,132 | ) | $ | (7,941 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
3,006 | 4,231 | ||||||
Accretion of debt to face value |
1,564 | 606 | ||||||
Amortization of debt issuance costs |
2,519 | 966 | ||||||
Change in fair value of redeemable common stock warrants |
| (160 | ) | |||||
Incentive and stock-based compensation |
868 | 605 | ||||||
Gain on extinguishment of debt |
(460 | ) | | |||||
Deferred income taxes |
1,744 | | ||||||
Other gains and losses |
(1 | ) | 19 | |||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
410 | (4,988 | ) | |||||
Other assets |
(832 | ) | (536 | ) | ||||
Trade accounts payable |
2,071 | (11,400 | ) | |||||
Accrued liabilities |
(6,806 | ) | (750 | ) | ||||
Interest payable |
(1,394 | ) | 6,381 | |||||
Other liabilities |
170 | 1,333 | ||||||
Net cash used in operating activities |
(8,273 | ) | (11,634 | ) | ||||
Cash flows from investing activities: |
||||||||
Cash paid for acquisition-related obligations |
| (50 | ) | |||||
Capital expenditures |
(340 | ) | (814 | ) | ||||
Proceeds from sale of assets |
8 | | ||||||
Net cash used in investing activities |
(332 | ) | (864 | ) | ||||
Cash flows from financing activities: |
||||||||
Change in book overdraft |
| 5,074 | ||||||
Repurchase Senior Unsecured Notes |
(1,510 | ) | | |||||
Payment of debt issue costs |
| (3,127 | ) | |||||
Repayment of Term B Loan |
| (608 | ) | |||||
Revolver borrowings |
| 15,900 | ||||||
Revolver repayments |
| (15,900 | ) | |||||
Loan to ESOP Trust |
(776 | ) | | |||||
ESOP loan repayment |
776 | | ||||||
Redeemable common stock purchased from ESOP Trust |
(3,197 | ) | (26 | ) | ||||
Redeemable common stock sold to ESOP Trust |
1,896 | | ||||||
Net cash (used in) provided by financing activities |
(2,811 | ) | 1,313 | |||||
Net decrease in cash and cash equivalents |
(11,416 | ) | (11,185 | ) | ||||
Cash and cash equivalents at beginning of period |
26,695 | 11,185 | ||||||
Cash and cash equivalents at end of period |
$ | 15,279 | $ | | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 15,702 | $ | 7,916 | ||||
Cash paid for taxes |
| (40 | ) |
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Description and Formation of the Business
Alion Science and Technology Corporation and its subsidiaries (collectively, the Company or
Alion) provide scientific, engineering and information technology expertise to research and develop
technological solutions for problems relating to national defense, homeland security, and energy
and environmental analysis. Alion provides services to departments and agencies of the federal
government and, to a lesser extent, to commercial and international customers.
Alion was established in October 2001 as a for-profit S-Corporation to purchase substantially
all of the assets and certain liabilities of IIT Research Institute (IITRI), a not-for-profit
corporation controlled by Illinois Institute of Technology (IIT). In December 2002, Alion acquired
substantially all of IITRIs assets and liabilities except for its Life Sciences Operation, for
$127.3 million. Prior to that, the Companys activities were organizational in nature.
On March 22, 2010, the Company became a C-Corporation because it no longer met the Internal
Revenue Code S-corporation requirement that it have only a single class of stock. In connection
with the sale of the Secured Note Units, Alion issued deep-in-the-money common stock warrants
considered to be a second class of stock. See Note 12.
(2) Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts
of Alion Science and Technology Corporation (a Delaware corporation), and its wholly-owned
subsidiaries and have been prepared pursuant to the rules and regulations of the United States
Securities and Exchange Commission. Certain information and note disclosures normally included in
the annual financial statements, prepared in accordance with generally accepted accounting
principles, have been omitted pursuant to those rules and regulations, although the Company
believes that the disclosures made are adequate to make the information presented not misleading.
The statements are prepared on the accrual basis of accounting and include the accounts of Alion
and its wholly-owned subsidiaries from their date of acquisition or formation. All inter-company
accounts have been eliminated in consolidation. There were no changes to Alions subsidiaries in
the current fiscal year.
In managements opinion, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments consisting of normal recurring adjustments and reclassifications
that are necessary for fair presentation of the periods presented. The results for the three months
ended December 31, 2010 are not necessarily indicative of the results to be expected for the full
fiscal year. These unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes thereto included in
the Companys latest annual report on Form 10-K for the year ended September 30, 2010.
Fiscal, Quarter and Interim Periods
Alions fiscal year ends on September 30. The Company operates based on a three-month quarter,
four-quarter fiscal year with quarters ending December 31, March 31, June 30, and September 30.
Use of Estimates
Preparing financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect
amounts reported for assets and liabilities, disclosures of contingent assets and liabilities as of
financial statement dates and amounts reported for operating results for each period presented.
Actual results are likely to differ from those estimates, but management does not believe such
differences will materially affect Alions financial position, results of operations, or cash
flows.
Revenue Recognition
Alion derives its revenue from delivering technology services under a variety of contracts.
Some contracts provide for reimbursement of costs plus fees; others are fixed-price or
time-and-material type contracts. The Company generally recognizes revenue when a contract has been
executed, the contract price is fixed or determinable, delivery of services or products has
occurred and collectibility of the contract price is considered reasonably assured. Alion applies
the percentage of completion method in Accounting Standards Codification (ASC) 605 Revenue
Recognition to recognize revenue.
4
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Alion recognizes revenue on cost-reimbursement contracts as it incurs costs and includes
estimated fees earned. The Company recognizes time-and-material contract revenue at negotiated,
fixed, contractually billable rates as it delivers labor hours and incurs other direct expenses.
Alion uses various performance measures under the percentage of completion method to recognize
revenue for fixed-price contracts. Estimating contract costs at completion and recognizing revenue
appropriately involve significant management estimates. Actual costs may differ from estimated
costs and affect estimated profitability and timing of revenue recognition. From time to time,
facts develop that require Alion to revise estimated total costs or expected revenue. Alion records
the cumulative effect of revised estimates in the period in which the facts requiring revised
estimates become known. Alion recognizes the full amount of anticipated losses on any type of
contract in the period in which a loss becomes known. For each of the periods presented, the
cumulative effects of revised estimates were immaterial to the Companys financial performance.
Federal government agency contracts are subject to periodic funding. A customer may fund a
contract in its entirety at inception or incrementally throughout its period of performance as
services are provided. If Alion determines contract funding is not probable, it defers revenue
recognition until realization is probable. The federal government can audit Alions contract costs
and adjust amounts through negotiation. The government considers Alion a major contractor; its
auditors maintain an office on site. The government has audited the Companys claimed costs through
fiscal year 2004. The Company negotiated and settled indirect rates through fiscal year 2004 with
no material adverse effect on operating results or cash flows. DCAA is currently auditing the
Companys indirect cost proposals for fiscal 2005 and 2006. The Company submitted its fiscal year
2009, 2008 and 2007 indirect cost proposals in March 2010, 2009 and 2008. Alion has recorded
federal government contract revenue in amounts it expects to realize.
Alion recognizes revenue on unpriced change orders as it incurs expenses and only to the
extent it is probable it will recover such costs. The Company recognizes revenue in excess of costs
on unpriced change orders only when management can also estimate beyond a reasonable doubt the
amount of excess and experience provides a sufficient basis for recognition. Alion recognizes
revenue on claims as expenses are incurred only to the extent it is probable that it will recover
such costs and can reliably estimate the amount it will recover.
Alion generates software-related revenue from licensing software and providing services. In
general, professional services are essential to the functionality of the solutions the Company
sells.
Income Taxes
From its inception until March 22, 2010, Alion was an S-corporation and was not subject to
federal or most state income taxes. As a pass-through entity Alions income and losses were
allocated to its tax-exempt shareholder, the Alion Science and Technology Corporation Employee
Stock Ownership, Savings and Investment Trust (the ESOP Trust). All of Alions subsidiaries were
qualified S-corporation subsidiaries or disregarded entities included in its consolidated federal
tax returns.
On March 22, 2010, Alion issued deep-in-the-money warrants deemed to constitute a second class
of stock. Because it was deemed to have two classes of stock, the Company ceased to qualify as an
S-corporation and automatically became a C-corporation subject to federal and state income taxes.
Some Alion subsidiaries also became subject to separate state income tax and reporting
requirements. From its formation, Alion Science and Technology (Canada) Corporation has been
subject to Canadian federal and provincial income taxes.
Alion accounts for income taxes by applying the provisions in currently enacted tax laws. The
Company determines deferred income taxes based on the estimated future tax effects of differences
between the financial statement and tax bases of its assets and liabilities. Deferred income tax
provisions and benefits will change as assets or liabilities change from year-to-year. In providing
for deferred taxes, Alion considers the tax regulations of the jurisdictions where it operates;
estimates of future taxable income; and available tax planning strategies. If tax regulations,
operating results or the ability to implement tax-planning strategies change, the carrying value of
deferred tax assets and liabilities may require adjustment.
Alion has a history of operating losses for both tax and financial statement purposes. The
Company has recorded valuation allowances equal to deferred tax assets based on the likelihood that
it may not be able to realize the value of these assets. Alion recognizes the benefit of a tax
position only after determining that the relevant tax authority would more likely than not
sustain the Companys position following an audit. For tax positions meeting the more likely than
not threshold, the Company recognizes the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the relevant tax authority.
5
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Company considers cash in banks, and deposits with financial institutions with maturities
of three months or less at time of purchase which it can liquidate without prior notice or penalty,
to be cash and cash equivalents.
Accounts Receivable and Billings in Excess of Revenue Earned
Accounts receivable include billed accounts receivable, amounts currently billable and revenue
in excess of billings on uncompleted contracts that represent accumulated project expenses and fees
which have not been billed or are not currently billable as of the date of the consolidated balance
sheet. Revenue in excess of billings on uncompleted contracts is stated at estimated realizable
value. Unbilled accounts receivable include revenue recognized for customer-related work performed
by Alion on new and existing contracts for which the Company had not received contracts or contract
modifications. The allowance for doubtful accounts is Alions best estimate of the amount of
probable losses in the Companys existing billed and unbilled accounts receivable. The Company
determines the allowance using specific identification and historical write-off experience based on
age of receivables. Billings in excess of revenue and advance collections from customers represent
amounts received from or billed to customers in excess of project revenue recognized to date.
Property, Plant and Equipment
Leasehold improvements, software and equipment are recorded at cost. Maintenance and repairs
that do not add significant value or significantly lengthen an assets useful life are charged to
current operations. Software and equipment are depreciated on the straight-line method over their
estimated useful lives (typically 3 years for software and 5 years for equipment). Leasehold
improvements are amortized on the straight-line method over the shorter of the assets estimated
useful life or the life of the lease. Upon sale or retirement of an asset, costs and related
accumulated depreciation are deducted from the accounts, and any gain or loss is recognized in the
consolidated statements of operations.
Goodwill and Intangible Assets
Alion assigns the purchase price it pays to acquire the stock or assets of an entity to the
net assets acquired based on the estimated fair value of the assets acquired. Goodwill is the
purchase price in excess of the estimated fair value of the tangible net assets and separately
identified intangible assets acquired. Purchase price allocations for acquisitions involve
significant estimates and management judgments may be adjusted during the purchase price allocation
period. There are no acquisitions with open measurement periods.
The Company accounts for goodwill and other intangible assets in accordance with the
provisions of ASC 350 Intangibles, Goodwill and Other Assets. Alion is required to review
goodwill at least annually for impairment or, more frequently if events and circumstances indicate
goodwill might be impaired. The Company performs its annual review at the end of each fiscal year.
Alion is required to recognize an impairment loss to the extent that its goodwill carrying amount
exceeds fair value. Evaluating any impairment to goodwill involves significant management
estimates. To date, these annual reviews have resulted in no adjustments.
The Company operates in one segment and tests goodwill at the reporting unit level.
Management has identified three reporting units for the purpose of testing goodwill for impairment.
The reporting units are based on administrative organizational structure and the availability of
discrete financial information. Each reporting unit provides a similar range of scientific,
engineering and analytical services to departments and agencies of the U.S. government and
commercial customers. The Company employs a reasonable, supportable and consistent method to
assign goodwill to reporting units expected to benefit from the synergies arising from
acquisitions. Alion determines reporting unit goodwill in a manner similar to the way it
determines goodwill in a purchase allocation by using fair value to determine reporting unit
purchase price, assets, liabilities and goodwill. Reporting unit residual fair value after this
allocation is the implied fair value of reporting unit goodwill. The Companys reporting units
remained consistent in structure for all periods presented. The Company allocated changes in
goodwill carrying value to reporting units based on acquisitions attributable to each units
current structure.
The Company performs its own independent analysis to determine whether goodwill is potentially
impaired. The Company performs discounted cash flow and market-multiple-based analyses to estimate
the enterprise fair value of Alion and its reporting units and the fair value of reporting unit
goodwill in order to test goodwill for potential impairment. Management independently determines
the rates and assumptions it uses to perform its goodwill impairment analysis and assesses the
probability of future contracts and revenue to evaluate the recoverability of goodwill.
6
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Alions cash flow analysis depends on several significant management inputs and assumptions.
Management uses observable inputs, rates and assumptions generally consistent with those used by
the independent third party to prepare the valuation report for the ESOP Trustee. Managements cash
flow analysis includes the following significant inputs and assumptions: estimated future revenue
and revenue growth; estimated future operating margins and EBITDA; observable market multiples for
comparable companies; and a discount rate consistent with a market-based weighted average cost of
capital. Management includes EBITDA in its analysis in order to use publicly available valuation
data.
In the Companys most recent impairment testing, market multiples for trailing twelve month
EBITDA for comparable companies (publicly traded professional services government contractors)
ranged from a low of 7.5 to a high of 11.1, with a median value of 8.1. Market multiples for
trailing twelve month revenue ranged from a low of 0.61 to a high of 0.76, with a median value of
0.71. Management used median market multiples and a weighted average cost of capital rate of 12.5%
derived from market-based inputs, the tax-effected interest cost of Alions outstanding debt and a
hypothetical market participant capital structure. Management estimates future years EBITDA based
on Alions historical adjusted EBITDA as a percentage of revenue. Consistent with industry norms,
Management estimated future revenue would grow 7%-10% annually. Prior year market multiples for
trailing twelve month EBITDA for comparable professional services government contractors ranged
from a low of 9.0 to a high of 12.7, with a median value of 10.4. Prior year market multiples for
trailing twelve month revenue ranged from a low of 0.76 to a high of 1.22, with a median value of
0.99. The prior year weighted average cost of capital rate was 12.5% derived from market-based
inputs, the tax-effected interest cost of Alions outstanding debt and a hypothetical market
participant capital structure. There were no changes to the methods used to evaluate goodwill in
prior periods. Changes in one or more inputs could materially alter the calculation of Alions
enterprise fair value and thus the Companys determination of whether its goodwill is potentially
impaired. A hypothetical 10% increase or decrease in the weighted average cost of capital rate at
September 30, 2010 would have produced a corresponding approximate 5% decrease or increase in
estimated enterprise value. At September 30, 2010, market-multiple based enterprise value was not
materially different from discounted cash flow enterprise value.
Management reviews Alions internally computed enterprise fair value to confirm the
reasonableness of the internal analysis and compares the results of its independent analysis with
the results of the independent third party valuation report prepared for the ESOP Trustee.
Management compares each reporting units carrying amount to its estimated fair value. If a
reporting units carrying value exceeds its estimated fair value, the Company compares the
reporting units goodwill carrying amount with the corresponding implied fair value of its
goodwill. If the carrying amount of reporting unit goodwill exceeds its fair value, the Company
recognizes an impairment loss to the extent that the carrying amount of goodwill exceeds implied
fair value.
Alion completed its most recent goodwill impairment analysis in the fourth quarter of fiscal
year 2010 and concluded no goodwill impairment existed as of September 30, 2010. The estimated
fair value of each reporting unit substantially exceeded its September 2010 carrying value. A
hypothetical 10% decrease in fair value would not have resulted in impairment to goodwill for any
reporting unit or triggered the need to perform additional step two analyses for any reporting
unit. There were no changes to goodwill in the quarter ended December 31, 2010 nor were there any
significant events in the quarter that indicated impairment to goodwill as of December 31, 2010.
Alion amortizes intangible assets as it consumes economic benefits over estimated useful
lives. As of December 31, 2010, the Company had approximately $15.9 million in net intangible
assets, primarily contracts purchased through the JJMA and Anteon contract acquisitions.
Purchased contracts |
1 13 years | |||
Internal use software and engineering designs |
2 3 years | |||
Non-compete agreements |
3 6 years |
Redeemable Common Stock
There is no public market for Alions redeemable common stock and therefore no observable
price for its equity, individually or in the aggregate. The ESOP Trust holds all the Companys
outstanding common stock. Under certain circumstances, ESOP beneficiaries can require the ESOP
Trust to distribute the value of their beneficial interests. The Internal Revenue Code (IRC) and
ERISA require the Company to offer ESOP participants who receive Alion common stock a liquidity put
right. The put right requires the Company to purchase distributed shares at any time during two
put option periods at the then current fair market value. Common stock distributed by the ESOP
Trust is subject to a right of first refusal. Prior to any subsequent transfer, the shares must
first be offered to the Company and then to the ESOP Trust. Eventual redemption of shares of Alion
common stock as a result of distributions is outside the Companys control; therefore, Alion
classifies its outstanding shares of redeemable common stock as a liability.
7
Table of Contents
ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At each reporting date, Alion is required to increase or decrease the reported value of its
outstanding common stock to reflect its estimated redemption value. Management estimates the value
of this liability in part by considering the most recent price at which the Company was able to
sell shares to the ESOP Trust (current share price times total shares issued and outstanding). In
its fiduciary capacity the ESOP Trustee is independent of the Company and its management.
Consistent with its fiduciary responsibilities, the ESOP Trustee retains an independent third party
valuation firm to assist it in determining the fair market value (share price) at which the ESOP
Trustee may acquire or dispose of investments in Alion common stock. The Audit and Finance
Committee of Alions Board of Directors reviews the reasonableness of the liability Management has
determined is appropriate for the Company to recognize in its financial statements for outstanding
redeemable common stock. The Audit and Finance Committee considers various factors in its review,
including, in part, the most recent valuation report and the share price selected by the ESOP
Trustee.
Alion records changes in the reported value of its outstanding common stock through an
offsetting charge or credit to accumulated deficit. There were no fair value adjustments to
redeemable common stock in the current quarter. The accumulated deficit at December 31, 2010
included $49.1 million for changes in the Companys share redemption liability. Outstanding
redeemable common stock had an aggregate fair value of approximately $147.6 million as of December
31, 2010.
Concentration of Credit Risk
Alion is subject to credit risk for its cash equivalents and accounts receivable. The Company
believes the high credit quality of its cash equivalent investments limits its credit risk with
respect to such investments. Alion believes its concentration of credit risk with respect to
accounts receivable is limited as the receivables are principally due from the federal government.
Fair Value of Financial Instruments
The Company used the following methods and assumptions to estimate the fair value of each
class of financial instruments for which it is practicable to estimate fair value. For each of the
following items, the fair value is not materially different than the carrying value.
Cash, cash equivalents, accounts payable and accounts receivable. Carrying amounts approximate
fair value because of the short maturity of those instruments.
Senior long-term debt. The carrying amount of the Companys senior debt approximates fair
value, estimated based on current rates offered to the Company for debt of the same remaining
maturities, and reflects amounts Alion is contractually required to pay. Senior long-term debt
includes the Companys revolving credit agreement, its Secured Notes and its Unsecured Notes.
Redeemable Alion common stock. Management estimates the fair value price per share of Alion
common stock by considering in part the most recent price at which the Company was able to sell
shares to the ESOP Trust as well as information contained in the most recent valuation report that
an independent, third-party firm prepares for the ESOP Trustee.
Recently Issued Accounting Pronouncements
Accounting Standards Update 2010-28 (ASU 2010-28) Goodwill and Other Intangibles When to
Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying
Amounts was issued in December 2010 and updates ASC 350
Goodwill and Other Intangibles (ASC 350).
ASU 2010-28 modifies goodwill impairment testing for reporting units with zero or negative
carrying amounts.
ASU 2010-28 requires an entity to perform a step two goodwill impairment analysis for
reporting units with zero or negative carrying value as part of an annual goodwill impairment
analysis; whenever an event occurs or circumstances indicate that a reporting units fair value is
more likely than not below its carrying amount; whenever an event occurs or circumstances indicate
that a goodwill impairment exists; and upon adoption of the standard.
ASU 2010-28 is effective for fiscal years beginning on or after June 15, 2011, and can only be
applied prospectively. Any goodwill impairment recognized on adopting ASU 2010-28 is to be
recorded as a cumulative effect adjustment to retained earnings in the period of adoption. Any
goodwill impairments occurring subsequent to adoption are to be recognized in current earnings as
required by ASC 350. The Company is currently evaluating the effect, if any, that adopting ASU
2010-28 will have on Alions consolidated financial position and operating results.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(3) Employee Stock Ownership Plan (ESOP) and ESOP Trust
In December 2001, the Company adopted the Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Plan (the Plan) and the ESOP Trust. The Plan, a tax qualified
retirement plan, includes ESOP and non-ESOP components. In April 2010, the Internal Revenue Service
(IRS) issued a determination letter that the ESOP Trust and the Plan, as amended and restated as of
October 1, 2006, and including amendments to the Plan executed in June 2009 and May 2010, qualify
under Sections 401(a) and 501(a) of the IRC. In
August 2008, Alion amended the Trust Agreement between the Company and the ESOP Trust. Alion
believes that the Plan and the ESOP Trust have been designed and are being operated in compliance
with applicable IRC requirements.
(4) Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding excluding the impact of warrants and phantom
stock. Even after including required adjustments to the earnings per share numerator, the warrants
and phantom stock are anti-dilutive for all periods presented. The Companys 1,630,437
Subordinated Note warrants were outstanding through March 22, 2010 when they
were extinguished. Also on March 22, 2010, Alion issued 310,000 Units that include the Secured
Notes and warrants to purchase 602,614 shares of Alion common stock The Secured Note warrants
have a penny per share exercise price, are currently exercisable and expire March 15, 2017. The
Secured Note warrants are not redeemable and do not have price protection; they are classified as
permanent equity.
(5) Redeemable Common Stock Owned by ESOP Trust
The ESOP Trust owns all of Alions issued and outstanding common stock, for the benefit of
current and former employee participants in the Alion KSOP. Participants and beneficiaries are
entitled to a distribution of the fair value of their vested ESOP account balance upon death,
disability, retirement or termination of employment. The Plan permits distributions to be paid
over a five year period commencing the year after a participants retirement at age 65, death or
disability. Alion can delay distributions to other terminating participants for five years before
commencing payment over a subsequent five year period.
Because Alion is now a C-corporation, terminating ESOP participants have the right to hold or
immediately sell their distributed shares to the Company. If a participant elects to hold
distributed shares, the IRC and ERISA require that Alion provide a put option to permit a recipient
to sell the stock to the Company at the estimated fair value price per share based on the most
recent price at which the Company was able to sell shares to the ESOP Trust ($26.25 at September
30, 2010). The put right requires the Company to purchase distributed shares during two put option
periods at the then current fair market value. Consistent with its duty of independence from Alion
Management and its fiduciary responsibilities, the ESOP Trustee retains an independent third party
valuation firm to assist it in determining the fair market value (share price) at which the Trustee
may acquire or dispose of investments in Alion common stock. The Audit and Finance Committee of
Alions Board of Directors reviews the reasonableness of the liability for outstanding redeemable
common stock that Management has determined is appropriate for the Company to recognize in its
financial statements. The Audit and Finance Committee considers various factors in its review,
including in part, the valuation report and the share price selected by the ESOP Trustee.
Management considers the share price selected by the ESOP Trustee along with other factors, to
assist in estimating Alions aggregate liability for outstanding redeemable common stock owned by
the ESOP Trust. Certain participants who beneficially acquired shares of Alion common stock on
December 20, 2002, have the right to sell such shares distributed from their accounts at the
greater of the then current estimated fair value per share or the original $10.00 purchase price.
Although the Company and the ESOP retain the right to delay distributions consistent with the
terms of the Plan, and to control the circumstances of future distributions, eventual redemption of
shares of Alion common stock is deemed to be outside the Companys control.
The Company makes 401(k) matching contributions in shares of Alion common stock and
discretionary profit-sharing contributions in a combination of Alion common stock and cash. The
Company matches the first 3% and one-half of the next 2% of eligible employee salary deferrals by
contributing shares of Alion common stock to the ESOP Trust on March 31 and September 30 each year.
The Company also makes a profit sharing contribution of Alion common stock to the ESOP Trust on
the same dates equal to 1% of eligible employee compensation. Each pay period the Company makes a
cash contribution to the non-ESOP component of the KSOP equal to 1.5% of eligible employee
compensation. Alion recognized $3.1 million and $3.4 million in compensation expense for the KSOP
for the quarters ended December 31, 2010 and 2009.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(6) Accounts Receivable
Accounts receivable at December 31, 2010 and September 30, 2010 consisted of the following:
December 31, | September 30, | |||||||
2010 | 2010 | |||||||
(In thousands) | ||||||||
Billed receivables |
$ | 88,159 | $ | 94,662 | ||||
Unbilled receivables: |
||||||||
Amounts currently billable |
32,109 | 36,021 | ||||||
Revenues recorded in excess of milestone billings on fixed price contracts |
3,081 | 2,917 | ||||||
Revenues recorded in excess of estimated contract value or funding |
31,487 | 24,952 | ||||||
Retainages and other amounts billable upon contract completion |
22,586 | 19,278 | ||||||
Allowance for doubtful accounts |
(3,800 | ) | (3,798 | ) | ||||
Total Accounts Receivable |
$ | 173,622 | $ | 174,032 | ||||
Revenue recorded in excess of milestone billings on fixed price contracts is not yet
contractually billable. Amounts currently billable consist principally of amounts to be billed
within the next year. Any remaining unbilled balance including retainage is billable upon contract
completion or completion of Defense Contract Audit Agency (DCAA) audits. Revenue recorded in excess
of contract value or funding is billable upon receipt of contractual amendments or other
modifications. Contract revenue recognized in excess of billings totaled approximately $89.3
million as of December 31, 2010 and included approximately $31.5 million for customer-requested
work for which the Company had not received contracts or contract modifications. In keeping with
industry practice, Alion classifies all contract-related accounts receivable as current assets
based on contractual operating cycles which frequently exceed one year. Unbilled receivables are
expected to be billed and collected within one year except for $22.6 million at December 31, 2010.
(7) Property, Plant and Equipment
December 31, | September 30, | |||||||
2010 | 2010 | |||||||
(In thousands) | ||||||||
Leasehold improvements |
$ | 10,847 | $ | 10,862 | ||||
Equipment and software |
33,789 | 33,693 | ||||||
Total cost |
44,636 | 44,555 | ||||||
Less: accumulated depreciation and amortization |
(34,819 | ) | (33,757 | ) | ||||
Net Property, Plant and Equipment |
$ | 9,817 | $ | 10,798 | ||||
Depreciation and leasehold amortization expense for fixed assets was approximately $1.2
million and $1.4 million for the quarters ended December 31, 2010 and 2009.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(8) Goodwill and Intangible Assets
As of December 31, 2010, Alion had approximately $399 million in goodwill. There were no
changes in the goodwill carrying amount during the current quarter.
Intangible assets consist primarily of contracts acquired through the Anteon and JJMA
transactions. The table below shows intangible assets as of December 31, 2010 and September 30,
2010.
December 31, 2010 | September 30, 2010 | |||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||
Gross | Amortization | Net | Gross | Amortization | Net | |||||||||||||||||||
Purchased contracts |
$ | 111,635 | $ | (95,928 | ) | $ | 15,707 | $ | 111,635 | $ | (94,228 | ) | $ | 17,407 | ||||||||||
Internal use software and
engineering designs |
2,155 | (1,920 | ) | 235 | 2,155 | (1,868 | ) | 287 | ||||||||||||||||
Non-compete agreements |
725 | (725 | ) | | 725 | (725 | ) | | ||||||||||||||||
Total |
$ | 114,515 | $ | (98,573 | ) | $ | 15,942 | $ | 114,515 | $ | (96,821 | ) | $ | 17,694 | ||||||||||
The weighted-average remaining amortization period of intangible assets was approximately
five years at December 31, 2010 and September 30, 2010. Amortization expense was approximately
$1.8 million and $2.8 million for the quarters ended December 31, 2010 and 2009. Estimated
aggregate amortization expense for the next five years and thereafter is as follows.
(In thousands) | ||||
For the remaining nine months: |
||||
2011 |
$ | 5,090 | ||
For the year ending September 30: |
||||
2012 |
5,766 | |||
2013 |
3,246 | |||
2014 |
879 | |||
2015 |
737 | |||
2016 |
141 | |||
Thereafter |
83 | |||
$ | 15,942 | |||
(9) Long-Term Debt
Alions current debt structure includes a $25 million revolving credit facility, the Secured
Notes and the Unsecured Notes. On March 22, 2010, the Company retired its Term B Senior Credit
Agreement, its Subordinated Note and the Subordinated Note Warrants. The Company is in compliance
with each of the affirmative and negative financial and non-financial covenants in its existing
debt agreements.
Credit Agreement
On March 22, 2010, the Company entered into a Credit Agreement (Credit Agreement), which
consists of a $25.0 million senior revolving credit facility (Revolver) none of which was actually
drawn as of December 31, 2010.
Under the Credit Agreement, Alion may request up to $10.0 million in letters of credit and may
borrow up to $5.0 million in swing line loans for short-term borrowing needs. The Company must pay
all principal obligations under the Credit Agreement in full no later than August 22, 2014.
The Credit Agreement permits Alion to use the Revolver for working capital, other general
corporate purposes, and to finance permitted acquisitions.
Security. The Credit Agreement is secured by a first priority security interest in all
current and future tangible and intangible property of Alion and its guarantor subsidiaries, IPS,
CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation. On March 22, 2010 Alion
and the subsidiary guarantors entered into an Intercreditor Agreement with Wilmington Trust Company
and Credit Suisse AG, Cayman Islands Branch (Intercreditor Agreement). Under the Intercreditor
Agreement, Credit Agreement lenders have a super priority right of payment with respect to the
underlying collateral, which is superior to the Secured Note lenders rights.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Guarantees. The Companys obligations under the Credit Agreement are guaranteed by the
Companys subsidiaries, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US)
Corporation. These subsidiaries also guarantee all of the Companys obligations under the Secured
Notes and Unsecured Notes (each described below).
Interest and Fees. Alion can choose whether the Revolver bears interest at one of two
floating rates using either a Eurodollar rate or an alternative base rate. The minimum interest
rate on the Revolver is 8.50%. The Eurodollar interest rate is 500 basis points plus a 3.5%
minimum interest rate. The alternate base rate is 400 basis points plus a 4.5% minimum interest
rate.
Other Fees and Expenses. Each quarter Alion is required to pay a commitment fee of 175 basis
points per year on the prior quarters daily unused Revolver balance. The Company paid
approximately $112 thousand in commitment fees for the Revolver for the quarter ended December 31,
2010. For the quarter ended December 31, 2009, Alion paid $32 thousand in commitment fees on its
prior revolving credit facility.
Alion must pay letter-of-credit issuance and administrative fees, and up to a 25 basis point
fronting fee. Each quarter Alion must also pay interest in arrears for all outstanding letters of
credit. The interest rate is based on the Eurodollar loan rate which was 6.0% as of December 31,
2010. The Credit Agreement also requires the Company to pay an annual agents fee.
Covenants. The Credit Agreement requires the Company to achieve the following minimum
trailing twelve month Consolidated EBITDA levels for the periods indicated below:
Period | Minimum Consolidated EBITDA | |||
June 30, 2010 through March 31, 2011 |
$52.5 million | |||
April 1, 2011 through September 30, 2011 |
$55.0 million | |||
October 1, 2011 through September 30, 2012 |
$60.0 million | |||
October 1, 2012 through September 30, 2013 |
$62.5 million | |||
Thereafter |
$65.0 million |
Consolidated EBITDA is defined as: (a) net income (or loss), as defined therein; plus (b) the
following items, without duplication, to the extent deducted from net income or included in the net
loss, the sum of: (i) consolidated interest expense; (ii) provision for income taxes; (iii)
depreciation and amortization, including amortization of other intangible assets; (iv) cash
contributions to the ESOP in respect of the repurchase liability of the Company under the ESOP
Plan; (v) any non-cash charges or expenses including (A) non-cash expenses associated with the
recognition of the difference between the fair market value of the (now extinguished Subordinate
Note) Warrants and the exercise price of the Warrants, (B) non-cash expenses with respect to the
stock appreciation rights and phantom stock plans, and the Warrants and accretion of the Warrants
and (C) non-cash contributions to the ESOP; (vi) any extraordinary losses and (vii) any
nonrecurring charges and adjustments by third-party valuation firm that prepares valuation reports
in connection with the ESOP; minus (c) without duplication, (i) all cash payments made on account
of reserves, restructuring charges and other non-cash charges added to net income (or included in
net loss) pursuant to clause (b)(v) above in a previous period and (ii) to the extent included in
net income (or net loss), any extraordinary gains and all non-cash items of income, in accordance
with GAAP.
Secured Notes
On March 22, 2010, Alion issued and sold $310 million of its private units (Units) to Credit
Suisse, which informed the Company it had resold most of the units to qualified institutional
buyers. Each of the 310,000 Units sold consisted of $1,000 in face value of Alion private 12%
senior secured notes (Secured Notes) and a warrant to purchase 1.9439 shares of Alion common stock.
Security. The Secured Notes are secured by a first priority security interest in all current
and future tangible and intangible property of Alion and its guarantor subsidiaries, IPS, CATI,
METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation. The Secured Notes are senior
obligations of Alion and rank pari passu in right of payment with existing and future senior debt,
including the Credit Agreement, except to the extent that the Intercreditor Agreement provides
Credit Agreement lenders with a super priority right of payment with respect to the underlying
collateral.
Guarantees. The Companys obligations under the Secured Notes are guaranteed by the Companys
subsidiaries, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Interest and Fees. The Secured Notes bear interest at 12% per year; 10% is payable in cash and
2% increases the Secured Note principal (PIK Interest). Interest is payable semi-annually in
arrears on May 1 and November 1. Alion pays interest to holders of record as of the immediately
preceding April 15 and October 15. The Company must pay interest on overdue principal or interest
at 13% per annum to the extent lawful. The Secured Notes mature November 1, 2014.
Unsecured Notes
On February 8, 2007, Alion issued and sold $250.0 million of private 10.25% unsecured notes
due February 1, 2015 (Unsecured Notes) to Credit Suisse, which informed the Company it had resold
most of the notes to qualified institutional buyers. On June 20, 2007, Alion exchanged the private
Unsecured Notes for publicly tradable Unsecured Notes with the same terms.
Guarantees. Alions obligations under the Unsecured Notes are guaranteed by the Companys
subsidiaries, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation.
Interest and Fees. The Unsecured Notes bear interest at 10.25% per year, payable semi-annually
in arrears on February 1 and August 1. Alion pays interest to holders of record as of the
immediately preceding January 15 and July 15. The Company must pay interest on overdue principal
or interest at 11.25% per annum to the extent lawful.
Retired Term B Senior Credit Agreement
In August 2004, Alion entered into the Term B Senior Credit Agreement with a syndicate of
financial institutions. The Company borrowed and re-paid various sums over the life of the loan.
As of March 22, 2010, the Term B Senior Credit Agreement consisted of a $236.0 million senior term
loan, a $25.0 million senior revolving credit facility with no balance actually drawn, and
approximately $4.0 million in accrued interest payable. On March 22, 2010, the Company used
proceeds from issuing the Units to redeem and retire all amounts outstanding under the Term B
Senior Credit Agreement including all accrued and unpaid interest. Alion recognized a $6.9 million
loss on extinguishing the Term B loans.
As a cost of the consents and waivers the Company obtained from its lenders in September and
December 2009, the annual interest rate on the outstanding Term B loan balances increased by 100
basis points on February 1, 2010 and the Company paid the Term B lenders a 100 basis point penalty
on March 1, 2010. Management had originally expected to close a re-financing transaction prior to
the penalty payment due date and therefore the Company only recorded penalty-related interest when
paid.
Retired Subordinated Note
In December 2002, Alion issued a $39.9 million Subordinated Note to IITRI as part of the
purchase price for substantially all of IITRIs assets. In July 2004, IIT acquired the
Subordinated Note and related warrant agreement from IITRI. Over the life of the Subordinated Note,
IIT and Alion amended its terms to adjust interest accrual rates, timing and payments and to revise
the loan amortization schedule. Beginning December 2008, interest was payable at 10% for PIK notes
and 6% in cash with all notes due August 2013. PIK notes deferred most Subordinated Note interest
until maturity.
On December 21, 2009, IIT agreed to sell Alion the Subordinated Note and warrants for $25
million and to defer Alions January 2010 interest payment to April 2010. On March 22, 2010, the
Company used $25 million of the proceeds from issuing the Units to redeem the Subordinated Note and
related warrants held by IIT. Alion recognized a $57.6 million gain on retiring the Subordinated
Note and warrants. The Subordinated Note had an aggregate carrying value of $50.0 million ($60.1
million of principal, PIK and accrued interest net of $10.1 million in unamortized debt issue and
loan modification costs). The warrants had an estimated fair value of $32.6 million. The Company
was not required to make the deferred January interest payment and de-recognized the related
interest expense.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Interest Payable
Interest Payable consisted of the following balances:
December 31, | September 30, | |||||||
2010 | 2010 | |||||||
(In thousands) | ||||||||
Unsecured Notes |
$ | 10,593 | $ | 4,271 | ||||
Secured Notes |
5,230 | 12,946 | ||||||
Total |
$ | 15,823 | $ | 17,217 | ||||
As of December 31, 2010, Alion must make the following principal repayments (at face amount
before debt discount) for its outstanding debt.
Fiscal Year: | 2011 | 2012 | 2013 | 2014 | 2015 | Total | ||||||||||||||||||
Secured Notes and PIK Interest(1) |
$ | | $ | | $ | | $ | | $ | 339,788 | $ | 339,788 | ||||||||||||
Unsecured Notes(2) |
| | | | 248,000 | 248,000 | ||||||||||||||||||
Total Principal Payments |
$ | | $ | | $ | | $ | | $ | 587,788 | $ | 587,788 | ||||||||||||
1. | The Secured Notes due in 2015 include $310 million of debt issued in March 2010 and an estimated $29.8 million in PIK interest added to principal over the life of the notes. As of December 31, 2010, the $279.6 million carrying value on the face of the balance sheet included $310 million in principal, $4.8 million in accrued PIK interest and is net of $35.2 million in aggregate unamortized debt issue costs. Initial debt issue costs consist of $7.7 million in original issue discount, $13.5 million in third-party costs and $20.8 million for the initial fair value of the new Secured Note warrants. | |
2. | The Unsecured Notes on the face of the balance sheet include $248 million in principal and $3.6 million in unamortized debt issue costs as of December 31, 2010 (initially $7.1 million). |
(10) Fair Value Measurement
The Company adopted ASC 805 Fair Value Disclosures in fiscal year 2010 for all nonfinancial
assets and liabilities recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. Adopting ASC 805 for items such as goodwill and long lived assets measured at
fair value if impaired, did not materially affect the Companys consolidated financial position or
operating results.
ASC 805 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability (an exit price) in an orderly transaction between market participants at the
measurement date. It establishes a fair value hierarchy and a framework which requires categorizing
assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing
the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3
generally requires significant management judgment. Level 1 inputs are unadjusted, quoted market
prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs
other than quoted prices included in Level 1, such as quoted prices for similar assets or
liabilities in active markets or quoted prices for identical assets or liabilities in inactive
markets. Level 3 inputs include unobservable inputs that are supported by little, infrequent, or no
market activity and reflect managements own assumptions about inputs used in pricing the asset or
liability. The Company uses the following valuation techniques to measure fair value.
Level 1 primarily consists of financial instruments, such as overnight bank re-purchase
agreements or money market mutual funds whose value is based on quoted market prices published by a
financial institution, an exchange fund, exchange-traded instruments and listed equities.
Level 2 assets include U.S. Government and agency securities whose valuations are based on
market prices from a variety of industry-standard data providers or pricing that considers various
assumptions, including time value, yield curve, volatility factors, credit spreads, default rates,
loss severity, current market and contractual prices for the underlying instruments, and broker and
dealer quotes. All are observable in the market or can be derived principally from or corroborated
by observable market data for which the Company can obtain independent external valuation
information.
Level 3 consists of unobservable inputs. The Companys former Subordinated Note warrants were
classified as Level 3 liabilities. Assets and liabilities are considered Level 3 when their fair
value inputs are unobservable or not available, including situations involving limited market
activity, where determination of fair value requires significant judgment or estimation.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At March 22, 2010, Alion measured the fair value of the Secured Note warrants at issuance
based on the $34.50 underlying estimated fair value of a share of Alion common stock as of
September 30, 2009, the then most-recent valuation selected by the ESOP Trustee and presented to
the Board of Directors; a 3.39% risk-free U.S. Treasury interest rate for a comparable seven-year
investment period and a 36% equity volatility factor based on the historical volatility of the
common stock of publicly-traded companies considered to be comparable to Alion. The Secured Note
warrants are classified as permanent equity and are carried at the historical date-of-issue fair
value. As permanent equity, the value of the Secured Note warrants is not re-measured at future
reporting dates.
The Company froze the estimated fair value of its to-be retired Subordinated Note Warrants at
their reported value as of December 2009 when IIT agreed to sell the Subordinated Note and Warrants
to Alion. On March 22, 2010, the Company de-recognized its December 2009 Subordinated Note Warrant
liability when it re-purchased the Subordinated Note and related Warrants from IIT.
The following table provides a summary of the changes in fair value of all the Companys
financial liabilities that were measured at fair value on a recurring basis as of December 31,
2009, using significant unobservable inputs (Level 3). The Company had no other assets or
liabilities it was required to measure at fair value on a recurring basis. As of December 31,
2010, the Company had no assets or liabilities it was required to measure at fair value on a
recurring basis.
As of December 31, | ||||||||
2010 | 2009 | |||||||
Redeemable Common Stock | ||||||||
Warrants | ||||||||
Balance, beginning of period |
$ | | $ | (32,717 | ) | |||
Total realized and unrealized gains and
(losses) |
| |||||||
Included in interest expense |
| 160 | ||||||
Issuances and settlements |
| | ||||||
Balance, end of period |
$ | | $ | (32,557 | ) | |||
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Companys investment in VectorCommand is tested annually for impairment and is not
adjusted to market value at the end of each reporting period. Fair value would only be determined
on a nonrecurring basis if this investment were deemed to be other-than-temporarily impaired. The
Company has not recorded any other-than-temporary impairments to its VectorCommand investment
during the reporting period.
(11) Redeemable Common Stock Warrants
Alion used an option pricing model to estimate the fair value of its now-retired redeemable
common stock warrants. Management considered the share price selected by the ESOP Trustee along
with other factors, to assist in estimating the Companys aggregate liability for outstanding
redeemable common stock warrants. The Audit and Finance Committee of Alions Board of Directors
reviewed the reasonableness of the warrant liability Management determined was appropriate for the
Company to recognize. The Audit and Finance Committee considered various factors in its review,
including risk free interest rates, volatility of the common stock of comparable publicly traded
companies, and in part, the valuation report prepared for and the share price selected by the ESOP
Trustee.
In December 2002, the Company issued 1,080,437 detachable, redeemable common stock warrants at
an exercise price of $10.00 per share. Alion issued the warrants to IITRI in connection with the
Subordinated Note. The Company recognized approximately $7.1 million for the initial fair value of
the warrants as original issue debt discount to the $39.9 million face value of the Subordinated
Note. The Subordinated Note warrants were originally exercisable until December 2010. In June
2004, IITRI transferred the warrants to IIT.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In August 2008, Alion issued an additional 550,000 redeemable common stock warrants at an
exercise price of $36.95 per share. The Company issued the second set of warrants to IIT in
connection with amending the Subordinated Note. The Company recognized approximately $10.3 million
in debt issue costs for the fair value of the August 2008 warrants and the amendment to the
December 2002 warrants. Both sets of warrants were exercisable at the current fair value per
share of Alion common stock, less the exercise price. On March 22, 2010, the Company retired the
Subordinated Note and the related warrants for the aggregate price of $25 million.
In accordance with ASC 815 Derivatives, Alion classified the Subordinated Note warrants as
debt instruments indexed to and potentially settled in the Companys own stock and not as equity.
(12) Secured Note Common Stock Warrants
On March 22, 2010, Alion issued 310,000 Units. Each Unit consists of $1,000 of Secured Note
face value and a warrant to purchase 1.9439 shares of Alion common stock. The Secured Note
warrants entitle holders to purchase a total of 602,614 shares of Alion common stock. Each Secured
Note warrant has an exercise price of a penny per share; the Secured Note warrants are not
redeemable for cash.
The Company registered the Secured Notes, but is not required to register the warrants. The
Units separated into Secured Notes and warrants on June 22, 2010. Each warrant becomes exercisable
on March 22, 2011 and expires on March 15, 2017.
The Secured Note warrants had an initial fair value of approximately $20.8 million based on
Alions former share price of $34.50. Alion recognized the value of the warrants as part of the
debt issue costs for the Secured Notes and recorded the corresponding credit to equity. The
Company accounts for the Secured Note warrants as equity and must reassess this classification each
reporting period. The Company identified no required changes in accounting treatment as of
December 31, 2010.
(13) Leases
Future minimum lease payments under non-cancelable operating leases for buildings, equipment
and automobiles at December 31, 2010 are set out below. Under these operating leases, Alion
subleased some excess capacity to subtenants under non-cancelable operating leases. In connection
with certain acquisitions, Alion assumed operating leases at above-market rates; recorded loss
accruals of approximately $4.9 million based on the estimated fair value of the lease liabilities
assumed; and is amortizing these amounts over the lease terms. The remaining unamortized loss
related to these acquisitions was $125 thousand at December 31, 2010. Alion also acquired a related
sublease pursuant to which it received above-market rates. Based on the estimated fair value of the
sublease, Alion recognized a $586 thousand asset which it amortized over the lease term.
Lease Payments for Fiscal Years Ending | (In thousands) | |||
2011 (for the remainder of fiscal year) |
$ | 20,569 | ||
2012 |
24,129 | |||
2013 |
22,164 | |||
2014 |
15,402 | |||
2015 |
15,208 | |||
2016 |
11,576 | |||
And thereafter |
13,050 | |||
Gross lease payments |
$ | 122,098 | ||
Less: non-cancelable subtenant receipts |
(2,167 | ) | ||
Net lease payments |
$ | 119,931 | ||
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Composition of Total Rent Expense
December 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Minimum rentals |
$ | 5,543 | $ | 5,956 | ||||
Less: Sublease rental income |
(478 | ) | (467 | ) | ||||
Total rent expense, net |
$ | 5,065 | $ | 5,489 | ||||
(14) Long Term Incentive Compensation Plan
In December 2008, Alion adopted a long-term incentive compensation plan to provide cash
compensation to certain executives. Individual grants contain specific financial and other
performance goals and vest over varying time periods. Some grants are for a fixed amount; others
contain provisions that provide for a range of compensation from a minimum of 50% to a maximum of
150% of an initial grant amount. The Company periodically evaluates the probability of individuals
meeting the financial and other performance goals in grant agreements. Management estimates long
term incentive compensation expense based on the stated amounts of outstanding grants, estimated
probability of achieving stated performance goals and estimated probable future grant value. The
Company recognized $831 thousand and $603 thousand in long term incentive compensation expense for
the quarters ended December 31, 2010 and 2009.
(15) Stock Based Compensation
SAR Plan
Alions Stock Appreciation Rights Plan adopted in 2004 expires in 2014. The chief executive
officer may award SARs as he deems appropriate. Awards vest ratably over four years with payment
following the grant date fifth anniversary. Grants with no intrinsic value expire on their
year-five payment date. The Plan permits accelerated vesting in the event of death, disability or
a change in control of the Company. Approximately 710 thousand SARs were outstanding at December
31, 2010, at a weighted average grant date fair value of $36.60 per share. No outstanding grant
has any intrinsic value. For the quarters ended December 31, 2010 and 2009 the Company recognized
compensation expense of $33 thousand and $14 thousand.
Phantom Stock Plans
Alion formerly maintained an Executive and a Director Phantom Stock Plan. There is one
director phantom stock grant of 4,995 shares outstanding worth approximately $133 thousand, payable
in 2011. Phantom stock represents a theoretical share of Alion common stock which confers no
voting or other common stock ownership rights. The Company is authorized to issue up to 2.0 million
shares of phantom stock. At vesting, grantees are entitled to payment for their vested shares at
Alions then-current share price, based on the most recent ESOP Trust stock valuation. Alion
recognized $4 thousand in compensation expense and a $12 thousand credit to expense for the
quarters ended December 31, 2010 and 2009.
The Company uses a Black-Scholes-Merton option pricing model based on the fair market value of
a share of its common stock to recognize compensation expense for all grants. There is no
established public trading market for Alions common stock. The ESOP Trust is the only holder of
our common stock. Alion does not expect to pay any dividends on its common stock and intends to
retain future earnings, if any, to use in operating its business.
(16) Segment Information and Customer Concentration
The Company operates in one segment, delivering a broad array of scientific, engineering and
information technology expertise to research and develop technological solutions for problems
relating to national defense, homeland security, and energy and environmental analysis. Alion
provides services to departments and agencies of the federal government and, to a lesser extent, to
commercial and international customers. The Companys federal government customers typically
exercise independent contracting authority. Offices or divisions within an agency or department
may directly, or through a prime contractor, use the Companys services as a separate customer so
long as that customer has independent decision-making and contracting authority within its
organization.
Contract receivables from federal government agencies represented approximately $172.7
million, or 97.9%, and $172.3 million, or 99.0%, of accounts receivable as of December 31, 2010 and
September 30, 2010. Contract revenue from federal government departments and agencies represented
approximately 96.8% and 97.0%, of total contract revenue for the three months ended December 31,
2010 and 2009.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(17) Income Taxes
Deferred Taxes
Alion is subject to income taxes in the U.S., various states and Canada. Tax statutes and
regulations within each jurisdiction are subject to interpretation and require the application of
significant judgment. This quarter, we recorded $1.7 million in deferred tax expense and
liabilities related to tax-basis goodwill amortization. We recorded a full valuation allowance for
all deferred tax assets as continuing losses make it unlikely we will be able to realize these tax
benefits. Our effective tax rate for the three months ended December 31, 2010 was -18.6%. As of
December 31, 2010 and September 30, 2010 our net deferred tax liability was:
December 31, | September 30, | |||||||
2010 | 2010 | |||||||
(in thousands) | ||||||||
Current deferred tax asset |
$ | 8,009 | $ | 11,175 | ||||
Noncurrent deferred tax asset |
34,291 | 25,754 | ||||||
Valuation allowance |
(42,300 | ) | (36,929 | ) | ||||
Noncurrent deferred tax liability |
(38,951 | ) | (37,207 | ) | ||||
Net deferred tax liability |
$ | (38,951 | ) | $ | (37,207 | ) | ||
Tax Uncertainties
We periodically assess our liabilities and contingencies for all periods open to examination
by tax authorities based on the latest available information. Where we believe there is more than a
50 percent chance that our tax position will not be sustained, we record our best estimate of the
resulting tax liability, including interest. Any interest or penalties we incur related to income
taxes are reported separately from income tax expense. We have recorded liabilities for tax
uncertainties for all years that remain open to review. We do not expect resolution of tax matters
for these years to materially affect our operating results, financial condition, cash flows or
effective tax rate.
(18) Debt Extinguishment
On November 9, 2010, Alion re-purchased $2.0 million of its Senior Unsecured Notes at
approximately 25% less than face value and recognized a $460 thousand gain on the transaction.
(19) Commitments and Contingencies
Earn-Out and Hold-Back Commitments
The
Company has a $100 thousand maximum earn-out commitment through July 2011 for its
LogConGroup acquisition.
Legal Proceedings
The Company is involved in various claims and legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these matters will not have a
material adverse effect upon the Companys business, financial position, operating results or
ability to meet its financial obligations.
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Government Audits
The amount of federal government contract revenue and expense reflected in the consolidated
financial statements attributable to cost reimbursement contracts is subject to audit and possible
adjustment by DCAA. The federal government considers the Company a major contractor and DCAA
maintains an office on site to perform its various audits throughout the year. All the Companys
federal government contract indirect costs have been audited and indirect rates settled through
2004. The Company has recorded federal government contract revenue in amounts it expects to realize
on final settlement.
(20) Guarantor/Non-guarantor Condensed Consolidated Financial Information
Certain of Alions 100% owned domestic subsidiaries have jointly, severally, fully and
unconditionally guaranteed both the Secured Notes and the Unsecured Notes. Alions Unsecured Notes
are general obligations of the Company. In March 2010, the Unsecured Note Indenture was
amended to include as Unsecured Note guarantors all subsidiaries serving as Secured Note
guarantors. The financial information set out below includes the effects of adding additional
entities as guarantors of the Unsecured Notes and therefore differs from information the Company
previously presented as of September 30, 2009 and for the three months ended December 31, 2009.
The following information presents condensed consolidating balance sheets as of December 31,
2010 and September 30, 2010, condensed consolidating statements of operations for the quarters and
three months ended December 31, 2010 and 2009; and condensed consolidating statements of cash flows
for the three months ended December 31, 2010 and 2009 of the parent company issuer, the guarantor
subsidiaries and the non-guarantor subsidiaries. Investments include investments in subsidiaries
held by the parent company issuer presented using the equity method of accounting.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet as of December 31, 2010
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 15,341 | $ | (62 | ) | $ | | $ | | $ | 15,279 | |||||||||
Accounts receivable, net |
170,190 | 3,193 | 239 | | 173,622 | |||||||||||||||
Prepaid expenses and other current
assets |
5,863 | 48 | | | 5,911 | |||||||||||||||
Total current assets |
191,394 | 3,179 | 239 | | 194,812 | |||||||||||||||
Property, plant and equipment, net |
9,777 | 40 | | | 9,817 | |||||||||||||||
Intangible assets, net |
15,942 | | | | 15,942 | |||||||||||||||
Goodwill |
398,921 | | | | 398,921 | |||||||||||||||
Investment in subsidiaries |
20,154 | | | (20,154 | ) | | ||||||||||||||
Intercompany receivables |
1,278 | 20,968 | | (22,246 | ) | | ||||||||||||||
Other assets |
11,099 | 13 | 3 | | 11,115 | |||||||||||||||
Total assets |
$ | 648,565 | $ | 24,200 | $ | 242 | $ | (42,400 | ) | $ | 630,607 | |||||||||
Current liabilities: |
||||||||||||||||||||
Interest payable |
15,823 | | | | 15,823 | |||||||||||||||
Trade accounts payable |
46,298 | 258 | | | 46,556 | |||||||||||||||
Accrued liabilities |
42,536 | 1,802 | 24 | | 44,362 | |||||||||||||||
Accrued payroll and related liabilities |
32,209 | 840 | 22 | | 33,071 | |||||||||||||||
Billings in excess of revenue earned |
3,064 | 33 | | | 3,097 | |||||||||||||||
Total current liabilities |
139,930 | 2,933 | 46 | | 142,909 | |||||||||||||||
Intercompany payables |
20,968 | | 1,278 | (22,246 | ) | | ||||||||||||||
Senior secured notes |
279,625 | | | | 279,625 | |||||||||||||||
Senior unsecured notes |
244,375 | | | | 244,375 | |||||||||||||||
Accrued compensation and benefits,
excluding current portion |
6,168 | | | | 6,168 | |||||||||||||||
Non-current portion of lease obligations |
7,746 | 32 | | | 7,778 | |||||||||||||||
Deferred income taxes |
38,951 | | | | 38,951 | |||||||||||||||
Redeemable common stock |
147,595 | | | | 147,595 | |||||||||||||||
Common stock warrants |
20,785 | | | | 20,785 | |||||||||||||||
Common stock of subsidiaries |
| 2,801 | | (2,801 | ) | | ||||||||||||||
Accumulated other comprehensive loss |
(177 | ) | | | | (177 | ) | |||||||||||||
Accumulated deficit |
(257,401 | ) | 18,434 | (1,082 | ) | (17,353 | ) | (257,402 | ) | |||||||||||
Total liabilities, redeemable common
stock and accumulated deficit |
$ | 648,565 | $ | 24,200 | $ | 242 | $ | (42,400 | ) | $ | 630,607 | |||||||||
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet as of September 30, 2010
(In thousands)
(In thousands)
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 26,770 | $ | (75 | ) | $ | | $ | | $ | 26,695 | |||||||||
Accounts receivable, net |
170,676 | 3,312 | 44 | | 174,032 | |||||||||||||||
Receivable due from ESOP Trust |
1,896 | | | 1,896 | ||||||||||||||||
Prepaid expenses and other current
assets |
5,112 | 47 | | | 5,159 | |||||||||||||||
Total current assets |
204,454 | 3,284 | 44 | | 207,782 | |||||||||||||||
Property, plant and equipment, net |
10,755 | 43 | | | 10,798 | |||||||||||||||
Intangible assets, net |
17,694 | | | | 17,694 | |||||||||||||||
Goodwill |
398,921 | | | | 398,921 | |||||||||||||||
Investment in subsidiaries |
18,844 | | | (18,844 | ) | | ||||||||||||||
Intercompany receivables |
1,054 | 18,235 | | (19,289 | ) | | ||||||||||||||
Other assets |
11,091 | 13 | 3 | | 11,107 | |||||||||||||||
Total assets |
$ | 662,813 | $ | 21,575 | $ | 47 | $ | (38,133 | ) | $ | 646,302 | |||||||||
Interest payable |
$ | 17,217 | $ | | $ | | $ | | $ | 17,217 | ||||||||||
Trade accounts payable |
44,065 | 421 | | | 44,486 | |||||||||||||||
Accrued liabilities |
42,865 | 271 | 9 | | 43,145 | |||||||||||||||
Accrued payroll and related liabilities |
39,277 | 924 | 20 | | 40,221 | |||||||||||||||
Billings in excess of costs revenue
earned |
2,882 | 35 | | | 2,917 | |||||||||||||||
Total current liabilities |
146,306 | 1,651 | 29 | | 147,986 | |||||||||||||||
Intercompany payables |
18,236 | | 1,053 | (19,289 | ) | | ||||||||||||||
Senior secured notes |
275,831 | | | | 275,831 | |||||||||||||||
Senior unsecured notes |
246,126 | | | | 246,126 | |||||||||||||||
Accrued compensation and benefits,
excluding current portion |
6,174 | | | | 6,174 | |||||||||||||||
Non-current portion of lease obligations |
7,805 | 43 | | | 7,848 | |||||||||||||||
Deferred income taxes |
37,207 | | | | 37,207 | |||||||||||||||
Redeemable common stock |
150,792 | | | | 150,792 | |||||||||||||||
Common stock of subsidiaries |
| 2,801 | | (2,801 | ) | | ||||||||||||||
Common stock warrants |
20,785 | |||||||||||||||||||
Accumulated other comprehensive loss |
(177 | ) | | | | (177 | ) | |||||||||||||
Accumulated deficit |
(246,272 | ) | 17,080 | (1,035 | ) | (16,043 | ) | (246,270 | ) | |||||||||||
Total liabilities, redeemable common
stock and accumulated deficit |
$ | 662,813 | $ | 21,575 | $ | 47 | $ | (38,133 | ) | $ | 646,302 | |||||||||
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations for the Three Months Ended December 31, 2010
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Contract revenue |
$ | 195,761 | $ | 4,816 | $ | 191 | $ | | $ | 200,768 | ||||||||||
Direct contract expense |
152,591 | 2,789 | 134 | | 155,514 | |||||||||||||||
Gross profit |
43,170 | 2,027 | 57 | | 45,254 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Indirect contract expense |
9,023 | 610 | 1 | | 9,634 | |||||||||||||||
Research and development |
88 | | | | 88 | |||||||||||||||
General and administrative |
16,042 | 83 | 90 | | 16,215 | |||||||||||||||
Rental and occupancy expense |
7,627 | 91 | 12 | | 7,730 | |||||||||||||||
Depreciation and amortization |
2,987 | 3 | | | 2,990 | |||||||||||||||
Total operating expenses |
35,767 | 787 | 103 | | 36,657 | |||||||||||||||
Operating income |
7,403 | 1,240 | (46 | ) | | 8,597 | ||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
20 | | | | 20 | |||||||||||||||
Interest expense |
(18,404 | ) | | | | (18,404 | ) | |||||||||||||
Other |
(176 | ) | 115 | | | (61 | ) | |||||||||||||
Gain on extinguishment of debt |
460 | | | | 460 | |||||||||||||||
Equity in net income of
subsidiaries |
1,309 | | | (1,309 | ) | | ||||||||||||||
Total other expenses |
(16,791 | ) | 115 | | (1,309 | ) | (17,985 | ) | ||||||||||||
(Loss) income before taxes |
(9,388 | ) | 1,355 | (46 | ) | (1,309 | ) | (9,388 | ) | |||||||||||
Income tax (expense) benefit |
(1,744 | ) | | | | (1,744 | ) | |||||||||||||
Net income (loss) |
$ | (11,132 | ) | $ | 1,355 | $ | (46 | ) | $ | (1,309 | ) | $ | (11,132 | ) | ||||||
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations for the Three Months Ended December 31, 2009
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Companies | Companies | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Contract revenue |
$ | 197,274 | 5,087 | 3,377 | | $ | 205,738 | |||||||||||||
Direct contract expense |
153,466 | 2,998 | 2,532 | | 158,996 | |||||||||||||||
Gross profit |
43,808 | 2,089 | 845 | | 46,742 | |||||||||||||||
Indirect contract expense |
8,371 | 780 | 135 | | 9,286 | |||||||||||||||
Research and development |
261 | | | | 261 | |||||||||||||||
General and administrative |
15,777 | 162 | 68 | | 16,007 | |||||||||||||||
Rental and occupancy expense |
7,830 | 76 | 80 | | 7,986 | |||||||||||||||
Depreciation and amortization |
4,219 | 5 | 7 | | 4,231 | |||||||||||||||
Total operating expenses |
36,458 | 1,023 | 290 | | 37,771 | |||||||||||||||
Operating income |
7,350 | 1,066 | 555 | | 8,971 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
45 | | | | 45 | |||||||||||||||
Interest expense |
(16,886 | ) | | | | (16,886 | ) | |||||||||||||
Other |
(182 | ) | 74 | (3 | ) | | (111 | ) | ||||||||||||
Equity in net income (loss)
of subsidiaries |
1,731 | | (1,731 | ) | | |||||||||||||||
Total other expenses |
(15,292 | ) | 74 | (3 | ) | (1,731 | ) | (16,952 | ) | |||||||||||
(Loss) income before taxes |
(7,942 | ) | 1,140 | 552 | (1,731 | ) | (7,981 | ) | ||||||||||||
Income tax (expense) benefit |
| | 40 | | 40 | |||||||||||||||
Net income (loss) |
$ | (7,942 | ) | 1,140 | 592 | (1,731 | ) | $ | (7,941 | ) | ||||||||||
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2010
Non- | ||||||||||||||||
Guarantor | Guarantor | |||||||||||||||
Parent | Companies | Companies | Consolidated | |||||||||||||
(In thousands) | ||||||||||||||||
Net cash
(used in) provided by operating activities |
$ | (8,287 | ) | $ | 13 | $ | 1 | $ | (8,273 | ) | ||||||
Cash flows from investing activities: |
||||||||||||||||
Capital expenditures |
(340 | ) | | | (340 | ) | ||||||||||
Proceeds from sale of assets |
8 | | | 8 | ||||||||||||
Net cash used in investing activities |
(332 | ) | | | (332 | ) | ||||||||||
Cash flows from financing activities: |
||||||||||||||||
Sale of Secured Notes |
(1,510 | ) | | | (1,510 | ) | ||||||||||
Sale of Common Stock Warrants |
| | | | ||||||||||||
Revolver borrowings |
| | | | ||||||||||||
Revolver payments |
| | | | ||||||||||||
Loan to ESOP Trust |
(776 | ) | | | (776 | ) | ||||||||||
ESOP loan repayment |
776 | | | 776 | ||||||||||||
Redeemable common stock purchased from ESOP Trust |
(3,197 | ) | | | (3,197 | ) | ||||||||||
Redeemable common stock sold to ESOP Trust |
1,896 | | | 1,896 | ||||||||||||
Net cash used in financing activities |
(2,811 | ) | | | (2,811 | ) | ||||||||||
Net (decrease) increase in cash and cash equivalents |
(11,430 | ) | 13 | 1 | (11,416 | ) | ||||||||||
Cash and cash equivalents at beginning of period |
26,770 | (75 | ) | | 26,695 | |||||||||||
Cash and cash equivalents at end of period |
$ | 15,340 | $ | (62 | ) | $ | 1 | $ | 15,279 | |||||||
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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows for the Three Months Ended December 31, 2009
Non- | ||||||||||||||||
Guarantor | Guarantor | |||||||||||||||
Parent | Companies | Companies | Consolidated | |||||||||||||
(In thousands) | ||||||||||||||||
Net cash
(used in) provided by operating activities |
$ | (11,774 | ) | $ | 110 | $ | 30 | $ | (11,634 | ) | ||||||
Cash flows from investing activities: |
||||||||||||||||
Cash paid for acquisitions-related obligations |
(50 | ) | | | (50 | ) | ||||||||||
Capital expenditures |
(799 | ) | (15 | ) | | (814 | ) | |||||||||
Net cash
used in investing activities |
(849 | ) | (15 | ) | | (864 | ) | |||||||||
Cash flows from financing activities: |
||||||||||||||||
Change in book overdraft |
5,074 | | | 5,074 | ||||||||||||
Payment of debt issue costs |
| | | (3,127 | ) | |||||||||||
Payment of senior term loan principal |
(608 | ) | | | (608 | ) | ||||||||||
Revolver borrowings |
(15,900 | ) | | | (15,900 | ) | ||||||||||
Revolver payments |
15,900 | | | 15,900 | ||||||||||||
Redeemable common stock purchased from ESOP Trust |
(26 | ) | | | (26 | ) | ||||||||||
Net cash provided by financing activities |
1,313 | | | 1,313 | ||||||||||||
Net (decrease) increase in cash and cash equivalents |
(11,310 | ) | 95 | 30 | (11,185 | ) | ||||||||||
Cash and cash equivalents at beginning of period |
11,404 | (143 | ) | (76 | ) | 11,185 | ||||||||||
Cash and cash equivalents at end of period |
$ | 94 | $ | (48 | ) | $ | (46 | ) | $ | | ||||||
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of Alions financial condition and results of operations should be
read together with the condensed consolidated financial statements (unaudited) and the notes to
those statements. This updates the information contained in our Annual Report on Form 10-K for the
year ended September 30, 2010, and presumes that readers have access to, and will have read,
Managements Discussion and Analysis of Financial Condition and Results of Operations contained
in that report.
Overview
Alion provides scientific, engineering and information technology expertise to research and
develop technological solutions for problems relating to national defense, homeland security and
energy and environmental analysis, principally to U.S. government departments and agencies and, to
a lesser extent, to commercial and international customers.
The following table summarizes revenue attributable to each contract type for the periods
indicated.
For the Three Months Ended December 31, | ||||||||||||||||
Revenue by Contract Type | 2010 | 2009 | ||||||||||||||
(In thousands) | ||||||||||||||||
Cost-reimbursement |
$ | 164,534 | 81.9 | % | $ | 150,500 | 73.2 | % | ||||||||
Fixed-price |
13,794 | 6.9 | % | 22,938 | 11.1 | % | ||||||||||
Time-and-material |
22,441 | 11.2 | % | 32,300 | 15.7 | % | ||||||||||
Total |
$ | 200,768 | 100.0 | % | $ | 205,738 | 100.0 | % | ||||||||
Management expects Alions revenue will continue to come from government contracts, mostly
from contracts with the U.S. Department of Defense (DoD) and other federal agencies with some
revenue from a variety of commercial, state, local and international customers.
For the Three Months Ended December 31, | ||||||||||||||||
Revenue by Customer Type | 2010 | 2009 | ||||||||||||||
(In thousands) | ||||||||||||||||
U.S. Department of Defense (DoD) |
$ | 185,043 | 92.1 | % | $ | 189,560 | 92.1 | % | ||||||||
Other Federal Civilian Agencies |
9,359 | 4.7 | % | 10,092 | 4.9 | % | ||||||||||
Commercial / State / Local and International |
6,366 | 3.2 | % | 6,086 | 3.0 | % | ||||||||||
Total |
$ | 200,768 | 100.0 | % | $ | 205,738 | 100.0 | % | ||||||||
On January 6, 2011, Secretary of Defense Gates announced the next major steps in the Obama
Administrations reform agenda focused on eliminating unnecessary spending while protecting the
U.S. militarys size and strength.
Secretary Gates addressed the Departments efforts to reduce overhead, invest in high priority
programs and reduce defense budget spending growth. The Administrations budget plan proposes 3%
real growth over current continuing resolution levels declining to zero growth in fiscal 2015 and
2016. The proposed plan focuses on steady, sustainable and predictable growth.
Secretary Gates identified organizational and programmatic changes intended to eliminate
redundancies and duplicative efforts with savings to be invested in proven programs and systems.
Many of the program cuts affect large procurements or staffing activities in which Alion is not
involved. Because we deliver highly sophisticated scientific and engineering research services, we
continue to believe demand will persist for our higher end technical expertise. We do not expect
other acquisition program cuts or delays to adversely affect us significantly.
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Despite the changing procurement environment, our cost-reimbursable revenue remains steady.
We believe recently announced budget priorities will limit DoD in-sourcing efforts as the
Administration seeks to reduce civilian and military staffing for overhead functions. We expect
Alion will benefit from a focus on extending the service life and capabilities of existing systems
across all branches of the Defense Department because we provide these kinds of services. We think
cost-containment will help us sell the government services and technical solutions designed to
improve operating efficiency and effectiveness.
For the Three Months Ended | ||||||||||||||||
December 31, | ||||||||||||||||
Core Business Area | 2010 | 2009 | ||||||||||||||
(In thousands) | ||||||||||||||||
Naval Architecture and Marine Engineering |
$ | 81,691 | 40.7 | % | $ | 89,718 | 43.6 | % | ||||||||
Defense Operations |
48,418 | 24.1 | % | 50,295 | 24.4 | % | ||||||||||
Modeling and Simulation |
41,454 | 20.6 | % | 35,559 | 17.3 | % | ||||||||||
Technology Integration |
13,043 | 6.5 | % | 12,463 | 6.1 | % | ||||||||||
Energy and Environmental Sciences |
8,743 | 4.4 | % | 9,731 | 4.7 | % | ||||||||||
Information Technology and Wireless
Communications |
7,419 | 3.7 | % | 7,972 | 3.9 | % | ||||||||||
Total |
$ | 200,768 | 100.0 | % | $ | 205,738 | 100.0 | % | ||||||||
Backlog. Contract backlog represents an estimate, as of a specific date, of the future revenue
Alion expects from existing contracts. At December 31, 2010, backlog on existing contracts and
executed delivery orders totaled $2.4 billion, of which $321 million was funded. We estimate we
have an additional $3.8 billion of unfunded contract ceiling value for an aggregate total backlog
of $6.2 billion.
Results of Operations
Quarter Ended December 31, 2010 Compared to Quarter Ended December 31, 2009
Consolidated Operations of Alion | ||||||||||||||||
Quarter Ended December 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
% of | % of | |||||||||||||||
Selected Financial Information | revenue | revenue | ||||||||||||||
Total contract revenue |
$ | 200,768 | $ | 205,738 | ||||||||||||
Total direct contract costs |
155,514 | 77.5 | % | 158,996 | 77.3 | % | ||||||||||
Direct labor costs |
62,599 | 31.2 | % | 67,127 | 32.6 | % | ||||||||||
Material and subcontract costs |
88,668 | 44.2 | % | 88,143 | 42.8 | % | ||||||||||
Other direct costs |
4,247 | 2.1 | % | 3,726 | 1.8 | % | ||||||||||
Gross profit |
45,254 | 22.5 | % | 46,742 | 22.7 | % | ||||||||||
Total operating expense |
36,657 | 18.3 | % | 37,771 | 18.4 | % | ||||||||||
Major components of operating expense: |
||||||||||||||||
Indirect expenses including facilities costs |
17,364 | 8.6 | % | 17,272 | 8.4 | % | ||||||||||
General and administrative |
16,215 | 8.1 | % | 16,007 | 7.8 | % | ||||||||||
Depreciation and amortization |
2,990 | 1.5 | % | 4,231 | 2.1 | % | ||||||||||
Income from operations |
$ | 8,597 | 4.3 | % | $ | 8,971 | 4.4 | % |
Revenue. First quarter revenue this year was $200.8 million down $5.0 million (2.4%) over the
comparable period last year partly because we sold off HFA and several ONR contracts.
Cost-reimbursement revenue was up $14.0 million (9.3%); fixed price contract revenue declined $9.1
million (39.9%) and time and material contract revenue dropped $9.9
million (30.54%). DoD revenue slid $4.5 million (2.4%) and overall government contract
revenue declined $5.3 million (2.6%) compared to the similar quarter last year.
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Modeling and Simulation revenue continued its growth trend up $5.9 million (16.6%) over
first quarter 2010 performance. Most of this work came through Alions contracts with the Defense
Information Systems Agency. We had increased work from setting up a new Modeling and Simulation
laboratory in Norfolk; expanded information assurance support to SPAWAR; and reduced revenue from
work we completed for TARDEC. Naval Architecture and Marine Engineering revenue dropped $8.1
million (8.9%) as some of Alions key contracts in this area saw curtailed first quarter activity
and anticipated awards did not materialize. Defense Operations revenue declined $1.9 million
(3.7%) while revenue from other core business areas also declined $1.0 million (3.2%) compared to
first quarter last year. Our prime contract revenue was also down $3.5 million (2.1%). Contract
margins remained unchanged at 7.1% overall.
Direct Contract Expense and Gross Profit. First quarter 2011 direct contract expenses
decreased $3.5 million (2.2%) to $155.5 million compared to first quarter last year, consistent
with lower revenue levels. Direct labor costs declined $4.5 million to 31.2% of current quarter
sales. Material and subcontract costs and other direct costs increased minimally. Gross profit for
the current quarter at $45.3 million was down $1.5 million compared to first quarter 2010. This
quarters gross margin percentage is not materially different from first quarter results last year
and remains consistent with the level of third-party costs which typically generate lower margins.
Operating Expenses. First quarter operating expenses were down $1.1 million compared to the
same period last year as depreciation and amortization expenses declined approximately $1.2
million. There were no other significant expense variances.
Income from Operations. Operating income for the quarter ended December 31, 2010 decreased
4.2% to $8.6 million and 4.3% of quarterly revenue.
Other Expense. Net interest income, interest expense and other expense in the aggregate for
the quarter ended December 31, 2010 increased $1.5 million to $18.4 million compared to the first
quarter of 2010. The increase is the result of higher cash pay interest expense on greater
outstanding debt levels and related non-cash charges for amortizing the costs of issuing our Senior
Secured Notes. We recognized an almost $0.5 million gain on retiring $2.0 million of Senior
Unsecured Notes in November which partially offset higher quarterly interest expense.
Three Months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Cash Pay Interest |
||||||||
Revolver |
$ | 112 | $ | 3 | ||||
Senior Term Loan |
| 5,739 | ||||||
Secured Notes |
7,819 | | ||||||
Unsecured Notes |
6,377 | 6,406 | ||||||
Subordinated Note |
| 793 | ||||||
Other cash pay interest and fees |
13 | 1,355 | ||||||
Sub-total cash pay interest |
14,321 | 14,296 | ||||||
Deferred and Non-cash Interest |
||||||||
Secured Notes PIK interest |
1,564 | | ||||||
Debt issue costs and other non-cash items |
2,519 | 1,573 | ||||||
Subordinated Note interest |
| 1,177 | ||||||
Subordinated Note warrants |
| (160 | ) | |||||
Sub-total non-cash interest |
4,083 | 2,590 | ||||||
Total interest expense |
$ | 18,404 | $ | 16,886 | ||||
Income Tax Expense. In the first quarter this year, we recorded a full valuation allowance
for the deferred tax assets we recognized because our history of losses makes it unlikely that we
will reasonably be able to realize the full benefit of our deferred tax assets. We had $1.7
million in deferred tax expense and liabilities related to tax-basis goodwill amortization.
Net Loss. Increased interest expense on our long-term debt and deferred income tax expense
increased our net loss to $11.1 million this quarter. This quarters loss was $3.2 million greater
than our $7.9 million first quarter loss last year.
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Liquidity and Capital Resources
Alion requires liquidity to timely pay its vendors and debt obligations, to fund operations
while awaiting payment from customers and to invest in capital projects, Accounts receivable
require cash when balances increase as business grows or when customers delay contract funding
actions. We are funding our current business with cash from operating activities and the cash we
have from issuing the Secured Notes. We plan to fund future operations in a similar fashion. We
also have access to a $25 million revolving credit facility. Management does not currently
estimate Alion will need to use its revolving credit facility to any significant extent.
Cash Flows
We used approximately $8.3 million to fund our first quarter operations this year. Although
our higher net loss was primarily due to higher non-cash debt-related charges and income taxes, we
were still able to use $3.3 million less for operations than we did in our first quarter last year.
Last year, growth in receivables and reductions in payables consumed $16.4 million; interest
accruals offset this by $6.4 million. This year receivables and payables generated $2.5 million in
cash; while expense and interest accruals consumed $8.2 million in cash as we made an interest
payment on our Senior Secured Notes in November.
Alion collected almost $208 million in receivables through December 31, 2010, $4.7 million
more than we collected in the first quarter last year. Collections outpaced revenue by $7.2
million and kept this quarters days sales outstanding (DSO) stable at 76.4 days as of December
31, 2010. (We determine DSO based on trailing twelve month revenue). Unbilled receivables continue
at significant levels despite progress in obtaining previously delayed contract funding. Funding
limitations imposed by the continuing resolution are likely to slow the process of obtaining
contract funding documents for at least the next several months. However, we expect DSO will track
at current levels.
Although capital expenditures this quarter are slightly lower than they were last year, we
expect to invest in our business at levels consistent with last years expenditures. This year we
accelerated certain ESOP transactions into the first quarter. Share repurchases ($3.2 million)
were offset in part by employee investments from last year ($1.9 million) that we received this
quarter. Last year we had no first quarter ESOP proceeds and minimal share redemptions. Last year
we also had to spend $3.1 million for loan modifications and debt issue costs for our former
revolver. This year, we spent $1.5 million to retire $2 million in Unsecured Notes. We have
continued our practice (in place since our March 2010 re-financing) of not accessing our revolving
credit facility. In our first quarter last year, we used our revolver to a limited extent; our
maximum balance drawn was $3.5 million.
We have a long-term revolving credit facility through August 2014 and additional available
cash from re-financing activities. Management expects that for the next several years, Alion will
be able to meet existing debt covenants which are less stringent and restrictive than previous Term
B Loan covenants were. This will allow us to maintain access to our revolving credit facility, even
though Management does not foresee needing to draw on it in any material amount or for any extended
period. Management believes Alion will have sufficient cash on hand, cash flow from operations and
cash available from its $25 million revolving credit facility to continue to meet obligations as
they come due notwithstanding an overall increase in interest payments associated with the Secured
Notes. We retain the ability to restrict or defer certain types of cash payments that in the past
caused us to fail to comply with certain prior debt covenants. The Revolving Credit facility also
limits our ability to offer and fund certain types of discretionary diversification options that
create demands on Alions cash flows.
We cannot predict with any degree of accuracy the extent to which re-purchase and
diversification demands will increase in future years. As more employees meet statutory and
Plan-specific age and length of service requirements, potential diversification demands are likely
to increase. These demands can increase further with any increase in the price of a share of Alion
common stock. While a drop in our share price could reduce the value of each individual Plan
participants beneficial interest, such a potential price decline could be offset by increased
diversification demands and thus might not reduce the aggregate value of future demands on our
cash. Current debt agreements limit our ability to offer discretionary diversification options to
ESOP participants and this should reduce future cash flow demands. We try to monitor future
potential impacts by relying in part on internal and external financial models that incorporate
Plan census data and financial inputs intended to simulate changes in Alions share price.
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Cash flow effects and risks associated with equity-related obligations
Changes in the price of a share of Alion common stock used to affect warrant-related interest
expense. Our outstanding Secured Note warrants have a one penny exercise price and are in the
money. They do not have a cash liquidation option and therefore Alion will only recognize interest
expense for the debt issue cost associated with the initial fair value of these warrants. We no
longer have significant stock-based compensation liabilities as no outstanding SARs have any
intrinsic value; only a modest number of phantom shares remained outstanding at December 31, 2010.
Management is unable to forecast the share price the ESOP Trustee will determine in future
valuations.
Although current financial information includes the effects of the most recent ESOP Trust
transactions, future expenses for stock-based compensation are likely to differ from estimates as
the price of a share of Alion common stock changes. Our next regularly scheduled valuation period
ends in March 2011. Interest rates, market-based factors and volatility, as well as Alions
financial results will affect the future value of a share of our common stock.
Certain stock-based compensation grantees can choose to defer their payments by having us
deposit funds in a rabbi trust we own. Any such deferrals will not materially affect our planned
payments or our overall anticipated cash outflows.
After each semi-annual valuation period, the Plan permits former employees and beneficiaries
to request distribution of their vested ESOP account balances. Consistent with the terms of the
Plan and the IRC, we intend to pay distribution requests in five annual installments and to defer
initial payments as permitted. The Plan allows Alion to defer initial installment distributions
for five years for former employees who are not disabled, deceased or retired.
Discussion of Debt Structure
The discussion below describes our current debt structure which includes a $25 million
revolving credit facility, the Unsecured Notes and the Secured Notes. On March 22, 2010, we
retired the Term B Senior Credit Agreement, the Subordinated Note and the Subordinated Note
Warrants.
Credit Agreement
On March 22, 2010, we executed a new Credit Agreement (Credit Agreement), which consists of a
$25.0 million senior revolving credit facility (Revolver) none of which was actually drawn as of
December 31, 2010. The Credit Agreement lets us request up to $10.0 million in letters of credit
and borrow up to $5.0 million in swing line loans for short-term needs. We must pay all Credit
Agreement obligations in full by August 22, 2014. Alion can use the Revolver for working capital,
permitted acquisitions and other general corporate purposes.
Security. The Credit Agreement is secured by a first priority security interest in all
current and future tangible and intangible property of Alion and its guarantor subsidiaries, HFA,
IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation. On March 22, 2010
Alion and its subsidiary guarantors executed an Intercreditor Agreement with Wilmington Trust
Company and Credit Suisse AG, Cayman Islands Branch (Intercreditor Agreement) which gives Credit
Agreement lenders a super priority right of payment with respect to the underlying collateral.
Credit Agreement lender rights are superior to the Secured Note lender rights.
Guarantees. Our subsidiaries, HFA, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion
Canada (US) Corporation guaranteed our Credit Agreement obligations. They also guaranteed all our
Secured and Unsecured Note obligations (each described below).
Interest and Fees. We can choose whether the Revolver bears interest at one of two floating
rates using either a Eurodollar rate or an alternative base rate. The minimum interest rate on the
Revolver is 9.50%. The Eurodollar interest rate is 600 basis points plus a 3.5% minimum interest
rate. The alternate base rate is 500 basis points plus a 4.5% minimum interest rate.
Other Fees and Expenses. Each quarter Alion is required to pay a commitment fee of 175 basis
points per year on the prior quarters daily unused Revolver balance. As of December 31, 2010,
$112 thousand was allocated to outstanding letters of credit. We paid approximately $112 thousand
in commitment fees for the Revolver for the quarter ended December 31, 2010 and $179 thousand this
year.
Alion must pay letter-of-credit issuance and administrative fees and up to a 25 basis point
fronting fee. Each quarter we must also pay interest in arrears for all outstanding letters of
credit. The interest rate is based on the Eurodollar loan rate which was 6.0% as of December 31,
2010. The Credit Agreement also requires us to pay an annual agents fee.
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Covenants. The Credit Agreement requires us to achieve the following minimum trailing twelve month
Consolidated EBITDA levels for the periods indicated:
Period | Minimum Consolidated EBITDA | |
June 30, 2010 through March 31, 2011 |
$52.5 million | |
April 1, 2011 through September 30, 2011 |
$55.0 million | |
October 1, 2011 through September 30, 2012 |
$60.0 million | |
October 1, 2012 through September 30, 2013 |
$62.5 million | |
Thereafter |
$65.0 million |
Consolidated EBITDA is defined as: (a) net income (or loss); plus (b) the following items,
without duplication, to the extent deducted from net income or included in the net loss, the sum
of: (i) consolidated interest expense; (ii) provision for income taxes; (iii) depreciation and
amortization, including amortization of other intangible assets; (iv) cash contributions to the
ESOP in respect of the repurchase liability of the Company under the ESOP Plan; (v) any non-cash
charges or expenses including (A) non-cash expenses associated with the recognition of the
difference between the fair market value of the (now extinguished Subordinated Note) Warrants and
the exercise price of the Warrants, (B) non-cash expenses with respect to the stock appreciation
rights and phantom stock plans, and the Warrants and accretion of the Warrants and (C) non-cash
contributions to the ESOP; (vi) any extraordinary losses and (vii) any nonrecurring charges and
adjustments by third-party valuation firm that prepares valuation reports in connection with the
ESOP; minus (c) without duplication, (i) all cash payments made on account of reserves,
restructuring charges and other non-cash charges added to net income (or included in net loss)
pursuant to clause (b)(v) above in a previous period and (ii) to the extent included in net income
(or net loss), any extraordinary gains and all non-cash items of income, in accordance with GAAP.
The Credit Agreement restricts us from doing any of the following without the prior consent of
syndicate bank members that extended more than 50 percent of the aggregate amount of all Credit
Agreement loans then outstanding:
| incur additional debt other than permitted additional debt; |
| grant certain liens and security interests; |
| enter into sale and leaseback transactions; |
| make certain loans and investments including acquisitions of businesses, other than permitted acquisitions; |
| consolidate, merge or sell all or substantially all our assets; |
| pay dividends or distributions other than distributions required by the ESOP Plan or by certain legal requirements; |
| enter into certain transactions with our shareholders and affiliates; |
| change lines of business; |
| repay subordinated debt before it is due and redeem or repurchase certain equity; |
| enter into certain transactions not permitted under ERISA; |
| make more than $8 million in capital expenditures in any fiscal year; |
| pay certain earn-outs in connection with permitted acquisitions; or |
| change our fiscal year. |
Events of Default. The Credit Agreement contains customary events of default including,
without limitation:
| breach of representations and warranties; |
| payment default; |
| uncured covenant breaches; |
| default under certain other debt exceeding an agreed amount; |
| bankruptcy and insolvency events; |
| incurrence of a civil or criminal liability in excess of $5 million of Alion or any subsidiary arising from a government investigation; |
| unstayed judgments in excess of an agreed amount; |
| failure of any Credit Agreement guarantee to be in effect; |
| failure of the security interests to be valid, perfected first priority security interests in the collateral; |
| notice of debarment, suspension or termination under a material government contract; |
| actual termination of a material contract due to alleged fraud, willful misconduct, negligence, default or any other wrongdoing; |
| certain ERISA violations; |
| imposition on the ESOP Trust of certain taxes in excess of an agreed amount; |
| final determination the ESOP is not a qualified plan; |
| so long as any Secured Notes remain outstanding, the Intercreditor Agreement shall fail to be effective; or |
| change of control (as defined below). |
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For purposes of the Credit Agreement, a change of control generally occurs when, before Alion
lists its common stock to trade on a national securities exchange and obtains net proceeds from an
underwritten public offering of at least $35.0 million, the ESOP Trust fails to own at least 51
percent of Alions outstanding equity interests, or, after such a qualified public offering, any
person or group other than the ESOP Trust owns more than 37.5 percent of Alions outstanding
equity interests. A change of control may also occur if a majority of the seats (other than vacant
seats) on Alions Board of Directors shall at any time be occupied by persons who were neither
nominated by the board nor were appointed by directors so nominated. A change of control may also
occur if a change of control occurs under any of Alions material indebtedness including the
Secured and Unsecured Note Indentures.
Secured Notes
On March 22, 2010, Alion issued and sold $310 million of its private units (Units) to Credit
Suisse, which informed the Company it resold most of the units to qualified institutional buyers.
Each of the 310,000 Units consisted of $1,000 in face value of Alion private senior secured notes
(Secured Notes) and a warrant to purchase 1.9439 shares of Alion common stock. The Company filed a
registration statement with the SEC offering to exchange the Secured Notes for publicly registered
notes. The SEC declared the registration statement effective July 30, 2010; the exchange offer
closed September 2, 2010; all outstanding notes were exchanged for publicly registered notes.
Security. The Secured Notes are secured by a first priority security interest in all current
and future tangible and intangible property of Alion and its guarantor subsidiaries, HFA, IPS,
CATI, METI, JJMA, BMH, WCI, WCGS and MA&D.
The Secured Notes are senior obligations of Alion and rank parri passu in right of payment
with existing and future senior debt, including the Credit Agreement, except to the extent that the
Intercreditor agreement provides Credit Agreement lenders with a super priority right of payment
with respect to the underlying collateral.
Guarantees. The Companys obligations under the Secured Notes are guaranteed by the Companys
subsidiaries, HFA, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation.
Interest and Fees. The Secured Notes bear interest at 12% per year; 10% is payable in cash and
2% increases the Secured Note principal (PIK Interest). Interest is payable semi-annually in
arrears on May 1 and November 1. Alion pays interest to holders of record as of the immediately
preceding April 15 and October 15. We must pay interest on overdue principal or interest at 13%
per annum to the extent lawful.
Covenants. There are no financial covenants in the Secured Note Indenture. As of December
31, 2010, we were in compliance with Secured Note Indenture non-financial covenants.
A Secured Note Indenture covenant restricts our ability to incur additional debt. Defined
terms in the Secured Note Indenture include: Net Available Cash, Total Assets, Restricted
Subsidiaries, Indebtedness, Adjusted EBITDA and Consolidated Interest Expense. Alion and its
Restricted Subsidiaries may not issue, incur, assume, guarantee, or otherwise becoming liable for
any debt unless our Adjusted EBITDA to Consolidated Interest Expense ratio is greater than 2.0 to
1.0. Even if Adjusted EBITDA is not at least two times Consolidated Interest Expense, we may incur
other permitted debt including:
| Debt pursuant to certain agreements up to $25 million; |
| Permitted inter-company debt; |
| The Secured Notes and any public notes exchanged for those notes; |
| Debt pre-dating the Secured Notes; |
| Permitted debt of acquired subsidiaries; |
| Permitted refinancing debt; |
| Hedging agreement debt; |
| Performance, bid, appeal and surety bonds and completion guarantees; |
| Ordinary course insufficient funds coverage; |
| Permitted refinancing debt guarantees; |
| Working capital debt of non-U.S. subsidiaries; |
| Debt for capital expenditures, and capital and synthetic leases up to $25 million in the aggregate $25 million and 2.5% of Alions Total Assets ; |
| Permitted subordinated debt of Alion or any Restricted Subsidiary to finance a permitted acquisition, certain permitted ESOP transactions and refinancing debt of acquired non-U.S. subsidiaries up to $35 million in the aggregate; |
| Letter of credit reimbursement obligations; |
| Certain agreements in connection with acquiring a business provided liabilities incurred in connection therewith are not reflected on the Companys balance sheet; |
| Certain deferred compensation agreements; and |
| Certain other debt up to $20 million. |
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The Secured Note Indenture has a covenant that restricts our ability to declare and pay any cash dividend or other distribution related to any equity interest in
Alion, repurchase or redeem any equity interest of Alion, repurchase or redeem the Unsecured Notes or other subordinated debt, or make certain investments. However,
within certain limits we may make such payments in limited amounts if Adjusted EBITDA is at least two times Consolidated Interest Expense. Even if Adjusted EBITDA to
Consolidated Interest Expense is not greater than 2.0 to 1.0, we may make or pay:
| Such payments out of substantially concurrent contributions of equity and substantially concurrent incurrences of permitted debt; | ||
| Certain limited and permitted dividends; | ||
| Certain repurchases of the Companys equity securities deemed to occur upon exercise of stock options or warrants; | ||
| Cash payments in lieu of issuing fractional shares for the exercise of warrants, options or other securities convertible into or exchangeable for our equity securities; | ||
| The required Secured Note premium payable on a change of control; | ||
| Certain permitted inter-company subordinated obligations; |
| Certain repurchases and redemptions of subordination obligations of the Company or a Subsidiary Guarantor from Net Available Cash; |
| Repurchases of subordinated obligations in connection with an asset sale to the extent required by the Secured Note Indenture; |
| Certain permitted ESOP transactions; |
| Long-term incentive plan payments to our directors, officers and employees, subject to a $3 million annual cap that may increase annually; |
| Any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of the Unsecured Notes, up to an aggregate amount of $10 million; and |
| Certain other payments not exceeding $10 million in the aggregate. |
The Secured Note Indenture restricts our ability to engage in other transactions including
restricting our subsidiaries from making distributions and paying dividends to parents, merging or
selling all or substantially all our assets, issuing certain subsidiary equity securities, engaging
in certain transactions with affiliates, incurring liens, entering into sale lease-back
transactions and engaging in business unrelated to our business when we issued the Secured Notes.
Events of Default. The Secured Note Indenture contains customary events of default,
including:
| Payment default; |
| Uncured covenant breaches; |
| Default under an acceleration of certain other debt exceeding $30 million; |
| Certain bankruptcy and insolvency events; |
| Judgment for payment in excess of $30 million entered against Alion or any material subsidiary that remains outstanding for a period of 60 days and is not discharged, waived or stayed; |
| Failure of any Secured Note guarantee to be in effect or any subsidiary guarantors denial or disaffirmation of its guaranty obligations; and |
| Failure of any Secured Note security interest to constitute a valid and perfected lien with its applicable priority after a permitted cure period. |
Change of Control. Upon a change in control, each Secured Note holder has the right to require
Alion to repurchase its notes in cash for 101% of principal plus accrued and unpaid interest. Any
of the following events constitutes a change in control:
| Subject to certain exceptions, a person, other than the ESOP Trust, is or becomes the beneficial owner, directly or indirectly, of more than 35% of the total voting power or voting stock of Alion; |
| Individuals who constituted Alions board of directors on March 22, 2010, cease for any reason to constitute a majority of the Companys board of directors; |
| Adoption of a plan relating to Alions liquidation or dissolution; and |
| Subject to certain exceptions, Alions merger or consolidation with or into another person or the merger of another person with or into Alion, or the sale of all or substantially all our assets to another person. |
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Optional Redemption. Prior to April 1, 2013, not more than once in any twelve month period, we
may redeem up to $31 million of Secured Notes at a redemption price of 103% of the principal amount
of the Secured Notes redeemed, plus accrued and unpaid interest to the redemption date.
Prior to April 1, 2013, the Company may redeem all, but not less than all, of the Secured
Notes at a redemption price equal to 100% of the principal amount of the Secured Notes plus accrued
and unpaid interest to the redemption date plus an applicable make-whole premium as of the
redemption date.
In addition, any time prior to April 1, 2013, subject to certain conditions, the Company may
use the proceeds of a qualified equity offering to redeem Unsecured Notes in an aggregate principal
amount not to exceed $108.5 million at a redemption price equal to the sum of 112% of the aggregate
principal amount of the notes actually redeemed, plus accrued and unpaid interest to the redemption
date.
On or after April 1, 2013, the Company may redeem all or a portion of the Secured Notes at the
redemption prices set forth below (expressed in percentages of principal amount on the redemption
date), plus accrued and unpaid interest to the redemption date, if redeemed during the periods set
forth below:
Period | Redemption Price | |||
April 1, 2013 to September 30, 2013 |
105.0 | % | ||
October 1, 2013 to March 31, 2014 |
103.0 | % | ||
April 1, 2014 and thereafter |
100.0 | % |
Exchange Offer; Registration Rights. On June 18, 2010, we complied with the requirement that
we file a registration statement with the SEC offering to exchange the Secured Notes for publicly
registered notes with the same terms. The registration statement was declared effective on July
30, 2010. The exchange offer will close September 2, 2010.
Unsecured Notes
On February 8, 2007, we issued and sold $250.0 million of private 10.25% unsecured notes due
February 1, 2015 (Unsecured Notes) to Credit Suisse, which informed us it had resold most of the
notes to qualified institutional buyers. On June 20, 2007, we exchanged the private Unsecured
Notes for publicly tradable Unsecured Notes with the same terms.
Guarantees. Alions obligations under the Unsecured Notes are guaranteed by our subsidiaries,
HFA, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation.
Interest and Fees. The Unsecured Notes bear interest at 10.25% per year, payable semi-annually
in arrears on February 1 and August 1. We pay interest to holders of record as of the immediately
preceding January 15 and July 15. We must pay interest on overdue principal or interest at 11.25%
per annum to the extent lawful.
Covenants. There are no financial covenants in the Unsecured Note Indenture. As of December
31, 2010, we were in compliance with Unsecured Note Indenture non-financial covenants.
A covenant in the Unsecured Note Indenture restricts our ability to incur additional debt.
Defined terms in the Secured Note Indenture include: Net Available Cash, Total Assets, Restricted
Subsidiaries, Indebtedness, Adjusted EBITDA and Consolidated Interest Expense. Alion and its
Restricted Subsidiaries may not issue, incur, assume, guarantee, or otherwise become liable for any
indebtedness unless our Adjusted EBITDA to Consolidated Interest Expense ratio is greater than 2.0
to 1.0. Even if Adjusted EBITDA is not at least two times Consolidated Interest Expense, we may incur
other permitted debt including:
| Debt pursuant to our now terminated Term B Senior Credit Facility and certain other contracts up to $360 million less principal repayments made under that debt; |
| Permitted inter-company debt; |
| The Unsecured Notes; |
| Debt pre-dating the Unsecured Notes; |
| Permitted debt of acquired subsidiaries; |
| Permitted refinancing debt; |
| Hedging agreement debt; |
| Performance, bid, appeal and surety bonds and completion guarantees; |
| Ordinary course insufficient funds coverage; |
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| Permitted refinancing debt guarantees; |
| Working capital debt of non-U.S. subsidiaries; |
| Debt for capital expenditures, and capital and synthetic leases up to $25 million in the aggregate $25 million and 2.5% of Alions Total Assets; |
| Permitted subordinated debt of Alion or any Restricted Subsidiary to finance a permitted acquisition, certain permitted ESOP transactions and refinancing debt of acquired non-U.S. subsidiaries up to $35 million in the aggregate; |
| Letter of credit reimbursement obligations; |
| Certain agreements in connection with acquiring a business provided liabilities incurred in connection therewith are not reflected on the Companys balance sheet; |
| Certain deferred compensation agreements; and |
| Certain other debt up to $35 million. |
The Unsecured Note Indenture has a covenant that restricts our ability to declare and pay any
cash dividend or other distribution related to any equity interest in Alion, repurchase or redeem
any equity interest of Alion, repurchase or redeem subordinated debt, or make certain investments.
However, within certain limits we may make such payments in limited amounts if Adjusted EBITDA is
at least two times Consolidated Interest Expense. Even if Adjusted EBITDA to Consolidated Interest
Expense is not greater than 2.0 to 1.0, we may make or pay:
| Such payments out of substantially concurrent contributions of equity and substantially concurrent incurrences of permitted debt; |
| Certain limited and permitted dividends; |
| Certain repurchases of the Companys equity securities deemed to occur upon exercise of stock options or warrants; |
| Cash payments in lieu of issuing fractional shares for the exercise of warrants, options or other securities convertible into or exchangeable for our equity securities; |
| The required Unsecured Note premium payable on a change of control; |
| Certain permitted inter-company subordinated obligations; |
| Certain repurchases and redemptions of subordination obligations of the Company or a Subsidiary Guarantor from Net Available Cash; |
| Repurchases of subordinated obligations in connection with an asset sale to the extent required by the Indenture; |
| Repurchase of common stock from former Alion Joint Spectrum Center employees; |
| Certain permitted transactions with the ESOP not exceeding $25 million in the aggregate; and |
| Certain other payments not exceeding $30 million in the aggregate. |
The Unsecured Note Indenture restricts our ability to engage in other transactions including
restricting our subsidiaries from making distributions and paying dividends to parents, merging or
selling all or substantially all our assets, issuing certain subsidiary equity securities, engaging
in certain transactions with affiliates, incurring liens, entering into sale lease-back
transactions and engaging in business unrelated to our business when we issued the Unsecured Notes.
Events of Default. The Unsecured Note Indenture contains customary events of default,
including:
| Payment default; |
| Uncured covenant breaches; |
| Default under an acceleration of certain other debt exceeding $30 million; |
| Certain bankruptcy and insolvency events; |
| Judgment for payment in excess of $30 million entered against Alion or any material subsidiary that remains outstanding for a period of 60 days and is not discharged, waived or stayed; and |
| Failure of any Unsecured Note guarantee to be in effect or any subsidiary guarantors denial or disaffirmation of its guaranty obligations. |
Change of Control. Upon a change in control, each Unsecured Note holder has the right to
require Alion to repurchase its notes in cash for 101% of principal plus accrued and unpaid
interest. Any of the following events constitutes a change in control:
| Subject to certain exceptions, a person, other than the ESOP Trust, is or becomes the beneficial owner, directly or indirectly, of more than 35% of the total voting power or voting stock of Alion; |
| Individuals who constituted Alions board of directors on February 8, 2007, cease for any reason to constitute a majority of the Companys board of directors; |
| Adoption of a plan relating to Alions liquidation or dissolution; and |
| Subject to certain exceptions, Alions merger or consolidation with or into another person or the merger of another person with or into Alion, or the sale of all or substantially all our assets to another person. |
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Optional Redemption. Prior to February 1, 2011, we may redeem all, but not less than all, the
Unsecured Notes at a redemption price equal to 100% of the principal amount plus accrued and unpaid
interest to the redemption date plus an applicable make-whole premium as of the redemption date.
On or after February 1, 2011, we may redeem all or a portion of the Unsecured Notes at the
redemption prices set forth below (expressed in percentages of principal amount on the redemption
date), plus accrued and unpaid interest to the redemption date, if redeemed during the 12-month
period commencing on February 1 of the years set forth below:
Period | Redemption Price | |||
2011 |
105.125 | % | ||
2012 |
102.563 | % | ||
2013 and thereafter |
100.000 | % |
Exchange Offer; Registration Rights. The Company filed a registration statement with the SEC
offering to exchange the Unsecured Notes for publicly registered notes. The registration statement
was declared effective May 10, 2007; the exchange offer closed June 20, 2007; all outstanding notes
were exchanged for publicly registered notes.
Retired Term B Senior Credit Agreement
In August 2004, Alion entered into the Term B Senior Credit Agreement with a syndicate of
financial institutions. On March 22, 2010, we used approximately $240 million in proceeds from
issuing the Units to redeem and retire all the outstanding Term B loans and pay all unpaid interest
accrued to redemption.
Retired Subordinated Note
In December 2002, Alion issued a $39.9 million Subordinated Note to IITRI as part of the
purchase price for substantially all of IITRIs assets. In July 2004, IIT acquired the
Subordinated Note and related warrant agreement from IITRI. On March 22, 2010, we used $25 million
in proceeds from issuing the Units to redeem the Subordinated Note and the related warrants held by
IIT.
Revolving Credit Agreement Covenant Compliance
Our revolving credit agreement defines Consolidated EBITDA and requires us to achieve certain
levels in order to maintain access to our credit facility and avoid cross default on our Senior
Secured and Unsecured Notes. Neither EBITDA nor Consolidated EBITDA is a measure of financial
performance in accordance with generally accepted accounting principles.
Our revolving credit agreement permits us to exclude certain expenses and requires us to
exclude certain one-time gains from Consolidated EBITDA. The revolving credit agreement requires
us to have a minimum $52.5 million in Consolidated EBITDA for the twelve months ended December 31,
2010. We had $62.3 million in Consolidated EBITDA for the twelve months ended December 31, 2010
and exceeded the requirement by $9.8 million.
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During the rest of this year and the next five fiscal years the Company expects that at a
minimum, it will have to make the estimated interest and principal payments set forth below.
(In thousands) | ||||||||||||||||||||
Fiscal Year: | 2011 | 2012 | 2013 | 2014 | 2015 | |||||||||||||||
Bank revolving credit facility(1) |
||||||||||||||||||||
- Interest |
$ | 332 | $ | 445 | $ | 444 | $ | 396 | $ | | ||||||||||
Secured Notes(2) |
||||||||||||||||||||
- Interest |
15,689 | 31,850 | 32,490 | 33,144 | 16,821 | |||||||||||||||
- Principal and PIK Interest |
| | | | 339,788 | |||||||||||||||
Unsecured Notes(3) |
||||||||||||||||||||
- Interest |
25,420 | 25,420 | 25,420 | 25,420 | 12,710 | |||||||||||||||
- Principal |
| | | | 248,000 | |||||||||||||||
Total cash pay interest |
41,441 | 57,715 | 58,354 | 58,960 | 29,531 | |||||||||||||||
Total cash pay principal and
PIK Interest |
| | | | 587,788 | |||||||||||||||
Total |
$ | 41,441 | $ | 57,715 | $ | 58,354 | $ | 58,960 | $ | 617,319 | ||||||||||
(1) | We expect we will occasionally use our $25.0 million revolving credit facility to meet working capital needs through 2014. Management expects the average utilized revolver balance will be immaterial and that interest expense will consist of commitment fees for unused balances. The current facility expires August 22, 2014. | |
(2) | The Secured Notes bear interest at 10% in cash and 2% in PIK. Outstanding principal will increase over time for the 2% compounding PIK interest added to the initial $310 million in principal. The Secured Notes, including $29.8 million in PIK interest, mature November 1, 2014. | |
(3) | The Senior Unsecured Notes bear interest at 10.25% and mature February 1, 2015. |
Contingent Obligations
Earn-outs
Alion has one remaining earn-out commitment arising from our July 2007 LogCon Group
acquisition. The maximum potential earn out is $100 thousand through July 2011; $100 thousand has
already been earned and paid. Management believes any future LogCon Group earn-outs will not
materially affect Alions cash flows, financial position or operating results.
Other contingent obligations which will impact the Companys cash flow
Management forecasts that continuing net operating losses for income tax purposes will permit
Alion to avoid significant cash outflows for income taxes. The Senior Secured Note Indenture
requires us to either make a tender offer to note holders and use the proceeds of the WCGS ONR
contract sale to redeem up to $5 million in Senior Secured Note principal at par, or re-invest the
proceeds in our business. Other contingent obligations which will impact our cash flow include:
| ESOP share repurchase and diversification obligations; and |
| Long-term incentive compensation plan obligations. |
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As of December 31, 2010, Alion had spent a cumulative total of $84.1 million to repurchase
shares of its common stock to satisfy ESOP distribution and diversification requests from former
employees and Plan beneficiaries. In 2008, we changed our prior practice of immediately paying out
all distribution requests in full. In March 2008, we began paying ESOP beneficiaries over the
five-year distribution period permitted by ERISA and the terms of the Plan. Alion intends to
continue this practice for the foreseeable future in part to offset the cash flow effects of annual
employee diversification requests that began in fiscal 2008 and which are expected to continue for
the foreseeable future. Our debt agreements limit our ability to fund certain discretionary ESOP
diversification demands on our cash flow. The table below lists current and prior year share
re-purchases.
Number of | ||||||||||||
Shares | Total Value | |||||||||||
Date | Repurchased | Share Price | Purchased | |||||||||
(In thousands) | ||||||||||||
December 2009 |
745 | $ | 34.50 | $ | 26 | |||||||
March 2010 |
218,408 | $ | 34.50 | 7,535 | ||||||||
April 2010 |
52 | $ | 28.00 | 1 | ||||||||
May 2010 |
108 | $ | 28.00 | 3 | ||||||||
June 2010 |
62,875 | $ | 28.00 | 1,760 | ||||||||
July 2010 |
145 | $ | 28.00 | 4 | ||||||||
August 2010 |
89 | $ | 28.00 | 2 | ||||||||
September 2010 |
209 | $ | 28.00 | 6 | ||||||||
December 2010 |
119,945 | $ | 26.65 | 3,197 | ||||||||
Total |
402,576 | $ | 12,534 | |||||||||
Management believes cash on hand, cash flow from operations and cash available under the
current revolving credit facility will provide sufficient capital to fulfill current business plans
and fund working capital needs for the next two to three years. Alion intends to focus on organic
growth and improving processes and margins.
Although we expect to have positive annual operating cash flow eventually, we will need to
generate significant additional revenue beyond current levels and earn net income in order to pay
interest on the Secured Notes and Unsecured Notes and satisfy ESOP repurchase and diversification
obligations.
The Secured Indenture, Unsecured Indenture and the revolving credit facility allow Alion to
make certain permitted acquisitions, and we intend to use available financing to do so. We will
ultimately have to refinance the Secured Notes and Unsecured Notes which mature in November 2014
and February 2015 and will require us to pay out more than $600 million over a three-month period.
We are uncertain whether, when and under what terms we can refinance these obligations. If we
cannot refinance these obligations, we will not have sufficient cash from operations to meet all
our obligations.
If plans or assumptions change, if assumptions prove inaccurate, if Alion consummates
additional or larger investments in or acquisitions of other companies than are currently planned,
if we experience unexpected costs or competitive pressures, or if existing cash and projected cash
flows from operations prove insufficient, we may need to obtain additional financing and sooner
than expected. We intend to only enter into new financing or refinancing we consider advantageous.
However, even with moderately improved conditions in the high-yield credit market, we cannot be
certain financing sources will be available in the future, or, if available, that financing terms
would be favorable.
Recently Issued Accounting Pronouncements
Accounting Standards Update 2010-28 (ASU 2010-28) Goodwill and Other Intangibles When to
Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying
Amounts was issued in December 2010 and updates ASC 350 Goodwill and Other Intangibles (ASC
350). ASU 2010-28 modifies goodwill impairment testing for reporting units with zero or negative
carrying amounts.
ASU 2010-28 requires an entity to perform a step two goodwill impairment analysis for
reporting units with zero or negative carrying value as part of an annual goodwill impairment
analysis; whenever an event occurs or circumstances indicate that a reporting units fair value is
more likely than not below its carrying amount; whenever an event occurs or circumstances indicate
that a goodwill impairment exists; and upon adoption of the standard.
ASU 2010-28 is effective for fiscal years beginning on or after June 15, 2011, and can only be
applied prospectively. Any goodwill impairment recognized on adopting ASU 2010-28 is to be
recorded as a cumulative effect adjustment to retained earnings in the period of adoption. Any
goodwill impairments occurring subsequent to adoption are to be recognized in current earnings as
required by ASC 350. The Company is currently evaluating the effect, if any, that adopting ASU
2010-28 will have on Alions consolidated financial position and operating results.
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Forward Looking Statements
Information included and incorporated by reference in this Form 10-Q may contain
forward-looking statements that involve risks and uncertainties. These statements relate to our
future plans, objectives, expectations and intentions and are for illustrative purposes only. These
statements may be identified by the use of words such as believe, expect, intend, plan,
anticipate, likely, will, pro forma, forecast, projections, could, estimate, may,
potential, should, would, and similar expressions.
Factors that could cause actual results to differ materially from anticipated results include,
but are not limited to:
| Any future inability to maintain adequate internal control over financial reporting; |
| Limits on our financial and operational flexibility given our substantial debt and debt covenants; |
| ERISA law changes related to the KSOP; |
| Tax law changes that could affect our tax liabilities or effective tax rate; |
| Changes in SEC rules, and other corporate governance requirements; |
| Failure of government customers to exercise contract options; |
| U.S. government project funding decisions; |
| Government contract bid protest and termination risks; |
| Competitive factors such as pricing pressures and/or competition to hire and retain employees; |
| Results of current and/or future legal proceedings and government agency proceedings which may arise from our operations with attendant risks of fines, liabilities, penalties, suspension and/or debarment; |
| Undertaking acquisitions that increase costs or liabilities or are disruptive; |
| Taking on additional debt to fund acquisitions; |
| Failing to adequately integrate acquired businesses; |
| Risks from private securities litigation, regulatory proceedings or government enforcement actions relating to prior covenant compliance disclosures; |
| Material changes in laws or regulations affecting our businesses; and |
| Other risk factors discussed in Alions annual report on Form 10-K for the year ended September 30, 2010 filed with the SEC on December 14, 2010 and any subsequent reports. |
Readers are cautioned not to place undue reliance on these forward-looking statements, which
reflect managements view only as of February 4, 2011. We undertake no obligation to update any of
the forward-looking statements made herein, whether as a result of new information, future events,
changes in expectations or otherwise. This discussion addresses only continuing operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk
We face interest rate risk for periodic borrowings on our $25.0 million senior revolving
credit facility. Outstanding balances, if any, bear interest at a variable rate based on Credit
Suisses prime rate plus a maximum spread of 500 basis points. Variable rates increase the risk
that interest charges could increase materially if both market interest rates and outstanding
balances were to increase.
We currently do not forecast drawing any material balance on our revolving credit facility.
Therefore, any rate increase is not expected to materially affect Alions operating results or cash
flows for any period from now through August 2014 when our revolving credit facility matures.
Our Senior Secured Notes and Senior Unsecured Notes are fixed-rate obligations. Other than
the current revolving credit facility, Alion has currently has no variable rate debt. We do not
use derivatives for trading purposes. We invest excess cash in short-term, investment grade, and
interest-bearing securities.
Foreign currency risk
Expenses and revenues from international contracts are generally denominated in U.S. dollars.
Alion does not believe operations are subject to material risks from currency fluctuations.
Risk associated with value of Alion common stock
Changes in the fair market value of Alions stock affect our estimated KSOP share repurchase
and stock-based compensation obligations. Several factors affect the timing and amount of these
obligations, including: the number of employees who seek to redeem shares of Alion stock following
termination of employment. Based on our current $26.65 share price, no outstanding stock
appreciation rights have any intrinsic value.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures. The Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the
Companys disclosure controls and procedures (as such term is defined in Rule 15d 15(e) under
the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period
covered by this report. Disclosure controls and procedures are designed to ensure that information
required to be disclosed by the Company in the reports it is required to file or submit under the
Exchange Act, is recorded, processed, summarized and reported, within the time periods specified by
the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Companys management, including its Chief Executive and Chief
Financial Officers, as appropriate to allow timely decisions regarding required disclosures. Based
on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Companys disclosure controls and procedures are
effective and timely.
Changes in Internal Control Over Financial Reporting. There have not been any changes in the
Companys internal control over financial reporting (as such term is defined in Rule 15d 15(f)
under the Exchange Act) during the quarter ended December 31, 2010 that have materially affected,
or are reasonably likely to materially affect, the Companys internal control over financial
reporting.
Item 4T. Controls and Procedures
See disclosure under Item 4.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Note 21 to the Condensed Consolidated Financial Statements. Other than the actions
discussed in the Companys most recent Annual Report on Form 10-K, the Company is not involved in
any legal proceeding other than routine legal proceedings occurring in the ordinary course of
business. Alion believes that these routine legal proceedings, in the aggregate, are not material
to its financial condition or operating results.
As a government contractor, Alion may be subject from time to time to federal government
inquiries relating to its operations and to DCAA audits. The federal government can suspend or
debar, for a period of time, a contractor that is indicted or found to have violated the False
Claims Act or other federal laws. Such an event could also result in fines or penalties.
Item 1A. Risk Factors
As of December 31, 2010, the risk factors included in the Companys Annual Report on Form
10-K for the fiscal year ended September 30, 2010, have not materially changed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered securities during the quarter ended December 31, 2010.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Removed and Reserved
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit | ||||
No. | Description | |||
31.1 | Certification of Chief Executive Officer of Alion Science and Technology Corporation pursuant
to Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. |
|||
31.2 | Certification of Chief Financial Officer of Alion Science and Technology Corporation pursuant
to 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. |
|||
32.1 | Certification of Chief Executive Officer of Alion Science and Technology Corporation,
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
|||
32.2 | Certification of Chief Financial Officer of Alion Science and Technology Corporation,
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ALION SCIENCE AND TECHNOLOGY CORPORATION |
||||
By: | /s/ Michael J. Alber | |||
Name: | Michael J. Alber | |||
Title: | Principal Financial Officer and Duly Authorized Officer |
Date:
February 4, 2011
42