ATK Reports First Quarter Operating Results

ATK (NYSE: ATK) today reported operating results for the first quarter of its Fiscal Year 2014, which ended on June 30, 2013. Orders were $1.4 billion, representing a book-to-bill ratio of approximately 1.3, driven by strong orders in the Aerospace and Sporting Groups, partially offset by orders decline in the Defense Group. First quarter sales were flat year over year at $1.1 billion. Excluding sales from contracts at the Radford Army Ammunition Plant (RFAAP), prior-year first quarter as adjusted sales were $1.0 billion (see reconciliation table for details). The increase relative to prior-year adjusted sales was due to increased sales in the Aerospace and Sporting Groups, partially offset by a sales decline in the Defense Group.

Margins in the first quarter were 11.6 percent compared to the prior-year quarter at 12.1 percent. Excluding sales and associated profit from RFAAP, prior-year as adjusted margins were 8.7 percent (see reconciliation table for details). The increase relative to prior-year adjusted margins was driven primarily by higher sales and profit in the Sporting Group and higher profit in the Defense Group. Net income for the quarter was up 1.7 percent to $72.1 million compared to $70.9 million in the prior-year quarter. Excluding sales and associated profit from RFAAP, prior-year as adjusted net income was $45.6 million (see reconciliation table for details). The increase relative to prior-year adjusted net income was due to higher profit, lower interest expense, and a lower tax rate.

Fully diluted earnings per share (EPS) were $2.24 compared to $2.16 in the prior year period. Excluding sales and associated profit from RFAAP, as adjusted EPS in the prior year was $1.39 (see reconciliation table for details). The increase relative to prior-year adjusted EPS was due to higher profit, lower interest expense, a lower tax rate, and reduced share count compared to the prior-year quarter. The acquisition of Caliber Company, parent company of Savage Sports Corporation, had minimal impact to the first quarter financial results, given the transaction was completed on June 21, 2013.

“ATK had a strong first quarter, where we continue to see positive momentum from disciplined capital deployment, operational excellence initiatives and investments in technology and new product development,” said Mark DeYoung, ATK President and Chief Executive Officer. “Our continued focus is to generate superior shareholder returns over time through the application of affordable innovation and execution excellence as we develop and manufacture highly engineered products for our customers.

“The Company’s completion of the Savage acquisition builds upon strong Sporting Group performance and market leadership with a well-respected and recognized brand in the long guns market. We are well underway with the integration of Savage and I am confident our wholesalers, retailers, distributors and consumers will find value in our robust portfolio of product offerings.”

SUMMARY OF REPORTED RESULTS

The following tables present the company’s and business groups’ total sales (external and internal), income before interest, income taxes, and noncontrolling interest (operating profit) results for the first quarter of the fiscal year, which ended June 30, 2013 (in thousands).

SEGMENT RESULTS

ATK operates in a three business group structure: the Aerospace Group, the Defense Group and the Sporting Group.

AEROSPACE GROUP

First quarter sales increased 2.4 percent to $307.2 million, compared to $299.9 million in the prior-year period. The increase primarily reflects increased sales in the Space Components division.

Operating profit in the quarter increased 6.1 percent to $37.1 million, compared to $35.0 million in the prior-year quarter. The increase reflects improved profit expectations for Space Systems Operations programs.

DEFENSE GROUP

Sales in the first quarter decreased by 13.1 percent to $474.8 million compared to $546.2 million in the prior-year quarter. Excluding sales from RFAAP, prior-year as adjusted sales were $486.6 million (see reconciliation table for details). The decrease relative to prior-year adjusted sales was driven primarily by reduced sales in the Armament Systems division.

Operating profit for the quarter decreased 32.0 percent to $62.1 million, compared to $91.4 million in the prior-year quarter. Absent sales and profit related to RFAAP, prior-year as adjusted operating profit was $50.1 million (see reconciliation table for details). The increase relative to prior-year adjusted operating profit is primarily due to performance improvements as the current contracts for the Lake City Army Ammunition Plant near completion.

SPORTING GROUP

First quarter sales increased by 28.4 percent to $358.3 million, compared to $279.0 million in the prior-year quarter. First quarter results include $6.4 million of sales from Savage. Sporting Group sales are up year over year due to increased volume and previously announced price increases for ammunition, partially offset by a reduction in military accessories due to completion of programs.

Operating profit in the first quarter increased by 112.2 percent to $44.1 million, compared to $20.8 million in the prior-year quarter. This reflects increased volume and price increases noted above, product mix and $0.7 million of operating profit from Savage, partially offset by lower military accessories sales as noted above and facility rationalization costs.

CORPORATE AND OTHER

In the first quarter, corporate and other expenses totaled $17.7 million, compared to expenses of $16.4 million in the prior-year quarter, primarily reflecting acquisition-related costs and increases in inter-company transaction eliminations, partially offset by lower pension costs. The tax rate decreased for the quarter to 35.5 percent from 36.1 percent in the prior-year period, reflecting the expiration of the federal R&D tax credit in the prior year (which was subsequently extended), partially offset by current-year nondeductible acquisition-related costs. Interest expense was $13.9 million, down from $19.8 million in the prior-year quarter, which reflects a lower average debt level in the quarter. Free cash flow use was $165.3 million in the first quarter, down from the use of $319.9 million in the prior-year quarter (see reconciliation table for details). The reduced use reflects lower pension contributions and the absence of the LUU flares settlement that was paid in the prior-year period. A total of $24 million in shares was repurchased in the quarter, bringing the total value of share repurchases to $84 million since ATK’s Board of Directors established the two-year repurchase program.

OUTLOOK

FY14 expectations for the Savage acquisition are as follows: sales of $180 million to $190 million and EBIT of $25 million to $28 million, which reflects $9 million of inventory step-ups and $2 million of transaction costs.

ATK is raising its full-year FY14 sales guidance, including Savage, to a range of approximately $4.3 billion to $4.38 billion, up from previous guidance of $4.05 billion to $4.15 billion. The increase is due to Savage and increased Sporting Group expectations, partially offset by the Company’s current expectations around FY14 impacts likely resulting from sequestration. Full-year FY14 EPS guidance is now $8.60 to $9.00, up from previous guidance of $7.50 to $7.90, reflecting Savage, updated sales expectations, and improved operating performance. Full-year FY14 free cash flow guidance is now in the range of $200 million to $225 million, up from $150 million to $175 million (see reconciliation table for details), due to Savage and improved performance. ATK now expects a full-year tax rate of approximately 35 percent, up from its previous guidance of approximately 34.5 percent.

ATK’s FY14 guidance assumes that an appropriations bill or continuing resolution for Government Fiscal Year 2014 will continue to support and fund ATK’s programs. FY14 guidance also assumes no disruption or shutdown of government operations resulting from a federal government debt ceiling breach and no cancellation or termination of any of ATK’s significant programs.

“Our guidance reflects our confidence in ATK’s performance,” said Neal Cohen, ATK Executive Vice President and Chief Financial Officer. “We remain committed to delivering earnings growth and enhancing returns to our shareholders, while managing through uncertainties in our government customers’ budgets and potential implications of sequestration. The acquisition of Savage complements the leading brands, unmatched distribution, innovative products and scale advantages in our Sporting Group, which is a world leader in shooting sports ammunition and accessories.”

Reconciliation of Non-GAAP Financial Measures

Sales, Margins, and Earnings Per Share

The Sales, Margins, and EPS excluding the results of RFAAP are non-GAAP financial measures that ATK defines as Sales, Margins, and EPS excluding the impact of these items. ATK management is presenting these measures so a reader may compare Sales, Margins, and EPS excluding these items as the measures provide investors with an important perspective on the operating results of the Company. ATK management uses these measurements internally to assess business performance, and ATK’s definition may differ from those used by other companies. Amounts in the following tables are in thousands (except EPS data).

Free Cash Flow

Free cash flow is defined as cash provided by (used for) operating activities less capital expenditures. ATK management believes free cash flow provides investors with an important perspective on the cash available for debt repayment, cash dividends, share repurchases and acquisitions after making the capital investments required to support ongoing business operations. ATK management uses free cash flow internally to assess both business performance and overall liquidity. Amounts in the following table are in thousands.

ATK is an aerospace, defense, and commercial products company with operations in 21 states, Puerto Rico, and internationally. News and information can be found on the Internet at www.atk.com, on Facebook at www.facebook.com/atk, or on Twitter @ATK.

Certain information discussed in this press release constitutes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Although ATK believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. Forward-looking information is subject to certain risks, trends, and uncertainties that could cause actual results to differ materially from those projected. Among these factors are: assumptions related to the profitability of commercial aerospace structures programs; uncertainties related to the development of NASA’s new Space Launch System; demand for commercial and military ammunition; sales levels of firearms; changes in federal and state firearms and ammunition regulation; changes in governmental spending, budgetary policies, including the impacts of sequestration under the Budget Control Act of 2011, and product sourcing strategies; the company’s competitive environment; risks inherent in the development and manufacture of advanced technology; risks associated with compliance and diversification into new markets, including international markets; assumptions regarding the company’s long-term growth strategy; assumptions regarding growth opportunities in international and commercial markets; increases in commodity costs, energy prices, and production costs; assumptions regarding orders; the terms and timing of awards and contracts; program performance; program terminations; changes in cost estimates related to relocation of facilities; the outcome of contingencies, including litigation and environmental remediation; cybersecurity and other industrial and physical security threats; actual pension asset returns and assumptions regarding future returns, discount rates and service costs; capital market volatility and corresponding assumptions related to the company’s shares outstanding; the availability of capital market financing; changes to accounting standards or policies; changes in tax rules or pronouncements; economic conditions; and the company’s capital deployment strategy, including debt repayment, dividend payments, share repurchases, pension funding, mergers and acquisitions — including the related costs and any integration thereof. ATK undertakes no obligation to update any forward-looking statements. For further information on factors that could impact ATK, and statements contained herein, please refer to ATK’s most recent Annual Report on Form 10-K and any subsequent quarterly reports on Form 10-Q and current reports on Form 8-K filed with the U.S. Securities and Exchange Commission.