ATK Reports Fourth Quarter and FY14 Full-Year Operating Results

ARLINGTON, Va., May 15, 2014 /PRNewswire/ -- ATK (NYSE: ATK) today reported operating results for the fourth quarter and Fiscal Year 2014 (FY14), which ended on March 31, 2014. 

FOURTH QUARTER

ATK reported operating profit in the fourth quarter of $170 million, an approximately $49 million increase from the prior-year period. Excluding the Radford Army Ammunition Plant (RFAAP) pension segment close out, an environmental settlement, and acquisition inventory step-up, FY14 fourth quarter operating profit as adjusted was approximately $153 million compared to $122 million in the fourth quarter of FY13 (see reconciliation table for details). The increase was driven primarily by higher sales and profit in the Sporting Group and lower pension expense. Fully diluted earnings per share (EPS) in the quarter were $2.90 compared to $2.23 in the prior-year period. As adjusted fourth quarter fully diluted EPS was $2.59 (see reconciliation table for details). Fourth quarter EPS increased due to higher Sporting Group results and lower pension expense.

Fourth quarter sales of $1.3 billion were up 17 percent from the prior-year quarter. Excluding the RFAAP pension segment close out, as adjusted sales for the quarter were $1.3 billion, due to increased sales in the Sporting Group, partially offset by a decline in the Aerospace and Defense Groups (see reconciliation table for details). Fourth quarter orders were $1.6 billion, down from $2.5 billion, mostly driven by lower orders in ATK's Sporting Group, partially offset by an increase in the Defense Group. The decline in Sporting Group orders is due to unusually high orders in the prior year, which ATK previously noted might not have been indicative of future sales. ATK's book-to-bill ratio for the quarter was 1.2. Please see segment and corporate results below.

"ATK achieved record profitability in the quarter," said Mark DeYoung, ATK President and Chief Executive Officer. "We have proactively positioned the company to compete in new markets and adjacent lanes to ensure we continue to deliver stability and long-term growth to our shareholders. We have strategically invested in our international market opportunities, while driving execution excellence and new innovation in our core businesses."

FISCAL YEAR 2014

Full-year operating profit was $590 million compared to $470 million in the prior year.  Excluding the RFAAP pension segment close out, transaction costs associated with acquisitions, an environmental settlement, and inventory step-up, as adjusted operating profit was $598 million (see reconciliation table for details) driven by higher sales and profit in the Sporting Group and lower pension expense, partially offset by a decrease in sales and profit in the Defense Group. For the full year, net income was up 25 percent to $341 million, compared to $272 million in the prior year. As adjusted net income was $346 million compared to $231 million in the prior year (see reconciliation table for details). Full-year EPS was $10.42, compared to $8.34 in the prior year. As adjusted EPS increased from $7.10 to $10.59, driven by higher Sporting Group results and lower pension expense compared to the prior year, partially offset by increased interest expense and a higher tax rate (see reconciliation table for details).

The company achieved full-year sales of $4.8 billion, up 9 percent from the prior year. Excluding the RFAAP pension segment close out, as adjusted full-year sales were $4.7 billion (see reconciliation table for details), largely driven by increased sales in the Sporting and Aerospace Groups, partially offset by a decline in the Defense Group. Orders for the year were $5.8 billion, down from $6.3 billion, resulting in a full-year book-to-bill ratio of 1.2. The decrease in orders was due to lower orders in the Sporting Group, partially offset by increases in the Defense and Aerospace Groups.

"This was an outstanding year full of accomplishments," said DeYoung. "The company recorded exceptional performance. ATK delivered record-level operating income and generated strong free cash flow, grew during a time of government budget uncertainty, and completed two strategic acquisitions and secured new business to position the company for future success."

SUMMARY OF REPORTED RESULTS

ATK operates in a three business group structure: the Aerospace Group, the Defense Group and the Sporting Group.  The following table presents the company's results for fiscal year 2014 and the fourth quarter ended March 31, 2014 (in thousands).

Sales:

Income before Interest, Income Taxes, and Noncontrolling Interest (Operating Profit):

AEROSPACE GROUP

Fourth quarter sales were down 4 percent to $333 million compared to $348 million in the prior-year quarter, primarily driven by lower sales in the Space Systems Operations division.

Operating profit in the quarter was down 12 percent to $31 million compared to $35 million in the prior-year quarter. The decrease was driven by lower sales and increased research and development costs.

Full-year sales in the Aerospace Group were relatively flat at $1.3 billion.

For the full year, operating profit decreased 2 percent to $142 million, compared to $144 million in the prior year. The decrease was due to program mix across the group.

DEFENSE GROUP

Sales in the fourth quarter increased 3 percent to $549 million compared to $534 million in the prior-year quarter. Excluding the RFAAP pension segment close out, adjusted fourth quarter sales were $521 million (see reconciliation table for details). The decrease was driven by decreases in the Armament Systems and Defense Electronic Systems divisions, partially offset by an increase in the Small Caliber Systems division.

Operating profit for the quarter was down 34 percent to $40 million compared to $61 million in the prior-year quarter. Excluding the RFAAP pension segment close out, as adjusted operating profit was $42 million compared to $61 million in the prior-year quarter (see reconciliation table for details). The decrease in as adjusted operating profit was driven by lower profit in the Small Caliber Systems division as ATK transitions to a new contract, and the Defense Electronics Systems division, partially offset by performance improvements on programs in the Armament Systems division.

For the full year, sales in the Defense Group declined 8 percent to $2.0 billion, compared to $2.1 billion in the prior year. Excluding the RFAAP pension segment close out and prior-year results of RFAAP, as adjusted sales were $1.9 billion compared to $2.0 billion in the prior-year (see reconciliation table for details). The decrease reflects lower sales in the Armament Systems division, the Small Caliber Systems division as ATK transitions to a new contract, and the Defense Electronics Systems division. The decrease is partially offset by an increase in the Missile Products division, due to increased production.

Operating profit for the year decreased 22 percent to $211 million from $270 million in the prior year.  As adjusted profit was down 5 percent to $212 million from $222 million (see reconciliation table for details). The decrease in profit was due to reduced sales volumes, and lower profit as ATK transitions to a new contract, offset by performance improvements in the Small Caliber Systems division on the previous contract.

SPORTING GROUP

Fourth quarter sales increased 71 percent to $558 million compared to $326 million in the prior-year quarter. Organic sales increased 12 percent due to volume and a previously announced price increase for ammunition, partially offset by a decrease in demand for military accessories. Sales from Savage and Bushnell were $62 million and $132 million, respectively.

Operating profit in the fourth quarter increased 107 percent to $87 million compared to $42 million in the prior-year quarter, driven by additional sales volume and the price increase as noted above, the FY14 acquisitions, and product mix. Operating profit from Savage and Bushnell was $15 million and $5 million, respectively. Fourth quarter operating profit includes inventory step-up and transition costs for the Savage and Bushnell acquisitions.

For the full year, the Sporting Group achieved record sales of $1.9 billion, up 57 percent from $1.2 billion in the prior year. Organic sales were driven by increased volume and the price increase referenced above, offset by decreased demand for military accessories. Sales from Savage and Bushnell were $179 million and $217 million, respectively.

Full-year operating profit increased 129 percent to $271 million, compared to $118 million in the prior year. This increase reflects the increased volume and price increase as noted above, Savage and Bushnell, and improved product mix.  Operating profit from Savage and Bushnell was $33 million and $9 million, respectively, including inventory step-up and transition costs.

CORPORATE AND OTHER

In the fourth quarter, corporate and other income totaled $12 million compared to an expense of $17 million in the prior-year quarter, reflecting a reduction in pension expense including the RFAAP pension segment close out, partially offset by an environmental settlement. The tax rate for the quarter was 34.5 percent compared to 32.4 percent in the prior-year quarter. The higher tax rate is primarily due to the retroactive extension of the Federal R&D tax credit in the prior year, partially offset by a higher Domestic Manufacturing Deduction. Interest expense was $24 million compared to $14 million in the prior-year quarter, primarily reflecting the increased average debt level as a result of the acquisition of Bushnell.

For the full year, corporate and other expenses decreased to $33 million, compared to $64 million in the prior year, primarily driven by a reduction in pension expense including the RFAAP pension segment close out, partially offset by transaction costs related to acquisitions, increased intercompany profit eliminations, and an environmental settlement. The effective tax rate for the year was 33.2 percent, compared to 30.6 percent in FY13. The increase reflects the favorable settlement of the IRS audit of the company's tax returns in the prior year, partially offset by a discrete impact of several tax law changes during the current year.

The company generated free cash flow of $242 million compared to $177 million in the prior year (see reconciliation table for details), reflecting reduced pension contributions and increased net income, partially offset by increased capital expenditures of $146 million.

In FY14, the company completed $52 million of share repurchases and has suspended the remainder of its share repurchase program.

OUTLOOK

ATK is establishing initial FY15 financial guidance. The company expects FY15 sales in a range of $5.15 billion to $5.25 billion, and EPS in a range of $10.80 to $11.20. The company expects capital expenditures of approximately $135 million and free cash flow in a range of $250 million to $275 million (see reconciliation table for details). Average share count is expected to be approximately 33 million, which includes the dilutive effect of the convertible debt for the entire year. The effective tax rate for the year is expected to be approximately 35 percent. Pension expenses are expected to be approximately $83 million compared to $130 million in the prior year. This reflects the pension redesign, which was implemented on July 1, 2013, and a slightly higher discount rate.

Included in the guidance above, the company will record a $10 million ($0.19 of EPS) restructuring charge in the first quarter for facility rationalization.

On April 29, 2014, ATK announced it plans to create two independent, public companies with leadership in Outdoor Sports and Aerospace and Defense. The company's Board of Directors approved a definitive agreement that provides for the tax-free spin-off of the Company's Sporting Group to ATK shareholders. The spin-off will be immediately followed by a tax-free, all-stock merger between ATK's Aerospace and Defense Groups and Orbital Sciences Corporation ("Orbital") (NYSE: ORB), pursuant to which Orbital shareholders will receive shares of ATK common stock as consideration. ATK anticipates completing the transaction by the end of calendar year 2014. The FY15 guidance above is for ATK's ongoing operation in its current form and does not include any impact for this transaction.

"In FY14, ATK reached record levels of production and profitability and achieved significant earnings growth," said Neal Cohen, ATK Executive Vice President and Chief Financial Officer. "Additionally, ATK significantly reduced the company's go-forward pension costs and liabilities, refinanced long-term debt and delivered strong shareholder returns."

Reconciliation of Non-GAAP Financial Measures

Sales, Margins, and Earnings Per Share

The Sales, Margins, and Earnings Per Share (EPS) excluding transaction costs associated with acquisitions, write-off of deferred financing costs, acquisition inventory step-up, an environmental settlement, the results of the RFAAP and the RFAAP pension segment close out, a favorable settlement of the IRS audit of the company's tax returns in the prior year, and the discrete impact of several tax law changes during the current year 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.

Free Cash Flow

Free cash flow is defined as cash provided by 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.

ATK is an aerospace, defense, and commercial products company with operations in 22 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: the risk that the anticipated benefits and cost savings from the Bushnell transaction may not be fully realized or may take longer than expected to realize; assumptions regarding the demand for Bushnell's products; the ability of ATK to retain and hire key personnel and maintain relationships with customers, suppliers and other business partners of Bushnell; costs or difficulties related to the integration of Bushnell following completion of the transaction; and changes in the business, industry or economic conditions or competitive environment; 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; foreign currency exchange rates and fluctuations in those rates; 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.

SOURCE ATK

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