ATK [ATK] yesterday opened its new fiscal year with a small increase in net income due to lower interest expenses and taxes that were partially offset by a decline in operating profits.

ATK’s results blew by consensus earnings estimates and the company significantly raised its top and bottom line guidance for the year due in large part to the recent acquisition of sport gun maker Savage Sports.

Net income rose 2 percent to $72.1 million, $2.26 earnings per share, from $70.9 million ($2.16 EPS) a year ago, hammering analysts’ estimates of $1.92 EPS. Operating margins dipped 50 basis points to 11.6 percent as overall operating profits fell.

Sales were $1.1 billion, level with a year ago, while orders were a robust $1.4 billion, driven by demand in the Aerospace and Sporting Groups.

ATK’s American Classic Rifle from Savage Acquisition

For the year, ATK expects its earnings to be between $8.60 and $9, up from earlier guidance of $7.50 to $7.90, due to the contribution of Savage, higher than expected sales in the Sporting Group, and improved operating performance. Sales are projected to be between $4.3 billion and $4.4 billion, $200 million above prior guidance due mainly to the contribution of Savage, which is expected to add $180 million to $190 million.

At the segment level, ATK was led by a strong showing at its expanding Sporting Group, which benefited from increased volume, higher pricing on its products, demand for products that carry higher margins, and to a lesser extent the acquisition of Savage in June.

The Sporting segment boasted a whopping 112 percent increase in operating profit to $44.1 million on a 28 percent boost in sales to $358.3 million.

On yesterday’s earnings call, Mark DeYoung, ATK’s president and CEO, said the company’s entry into commercial gun manufacturing market won’t necessarily end with the Savage acquisition. He said there is growth to come in the guns area, both organic and inorganic, noting that more and more women and new gun enthusiasts continue to enter the sporting market.

DeYoung acknowledged that the sporting arms market is very fragmented but said that ATK’s size, broad sporting portfolio that offers distributors one-stop shopping, and the supply chain efficiencies it can offer its customers, provide it with a strategy for growth in the market.

In an interview with Defense Daily after the call, DeYoung said that Savage’s technical and innovation expertise combined with ATK’s engineering know-how offer the gun maker opportunities to expand the types of guns it produces. He also said that while long guns are Savage’s specialty, it also has a limited portfolio of shotguns and its portfolio overall is “ripe for expansion.”

The only sour spot on the Sporting business is the Eagle business unit, which makes tactical accessories for the military market. That business is suffering from the drawdown in force structure and the wars and is pressuring margins, DeYoung said.

While ATK’s Sporting business enjoyed an exceptional quarter overall, the company’s Defense Group suffered from constrained defense spending and the continued drawdown of U.S. forces in Afghanistan and Iraq, which contributed to declines in ammunition sales.

The group posted a 32 percent drop in operating profits to $62.1 million while sales fell 13 percent to $474.8 million.

As downward pressure continues on defense budgets, DeYoung said ATK is “relentless” in its pursuit of managing its costs and anticipating “changes in our markets.” Affordable innovation remains a cornerstone of the company’s strategy here, he said.

Higher volume for satellite components drove modest growth in ATK’s Aerospace Group, which also delivered solid operating profits. DeYoung told Defense Daily that the company’s commercial aerostructures business continues to trend upward. The company is a supplier to Airbus on a new passenger aircraft and a military transport plane, to Rolls-Royce for engine parts, and is bidding on a Boeing [BA] commercial aircraft project. 

DeYoung told Defense Daily that international business continues to account for 10 percent of ATK’s sales, and the goal is to get that to 15 percent within a few years. Noting that his “crystal ball is not completely clear” on the international front, he said some of the key emerging opportunities include co-producing medium caliber and tank ammunition in countries looking to develop an indigenous production capacity.

Co-production has a front end and a support component, starting with factory design and specifications for equipment, to helping with the start-up of manufacturing and continued manufacturing support, he said. 

Another opportunity includes providing the company’s new palletized gun system for customers looking to develop small gun ships. DeYoung also pointed to an ammunition and energetics production opportunity in Australia that is potentially worth $100 million annually for five to 10 years to the winning contractor.

 Backlog at the end of the quarter stood at $8.5 billion and free cash was a $165.3 million outflow. ATK hiked its free cash flow guidance for the year by $50 million to between $200 million and $225 million to account for the Savage contribution and better performance.

Investors reacted positively to yesterday’s results, closing at $95.34, up $2.24, or 2.41 percent.