ATK [ATK] on Thursday reported a strong start to its new fiscal year with double digit gains in earnings and sales while the company raised its earnings guidance for the year due to better than expected performance in its first quarter, coupled with debt retirement and expectations of a lower tax rate.

Net income increased 19 percent to $85.6 million, $2.59 earnings per share (EPS), from $72 million ($2.24 EPS) a year ago, easily beating consensus estimates by 15 cents per share. An increase in ATK’s stock count somewhat mitigated the increase in per share results.

ATK President and CEO Mark DeYoung. Photo: ATK
ATK President and CEO Mark DeYoung. Photo: ATK

Sales increased 18 percent to $1.3 billion from $1.1 billion a year ago. Orders in the quarter were $1.3 billion, matching sales. Backlog at the end of the quarter stood at $7.5 billion, down $100 million from the end of fiscal year 2014.

The top and bottom line gains were driven primarily by the company’s sporting group and to a lesser extent by the aerospace group. Sales at the sporting business were up 57 percent to $564 million, driven by two acquisitions within the past year, and strong organic growth of 13 percent on the strength of commercial ammunition sales.

Mark DeYoung, ATK’s president and CEO, said on Thursday’s earnings call that the organic growth in the sporting group is ahead of the company’s expectations and he thinks there is the possibility to go “edge above” his prediction in May of mid- to upper single digit growth for the fiscal year.

“The 13 percent reassures of the strength of our capabilities in the market,” DeYoung said. “So I’m optimistic that we’re going to be able to continue to deliver organic growth in this business long-term growth, and the shareholder value which will go with that.”

Operating profit at the sporting group was up 79 percent to $79 million, driven by the increase in organic sales, a favorable mix toward higher profit products and the absence of some charges that hurt the group’s results a year ago.

DeYoung said the planned spin off of the sporting business and merger of the company’s aerospace and defense businesses with Orbital Sciences [ORB] remains on track for the end of 2014.

Sales at the aerospace group were up 8 percent to $333 million on higher sales in aerospace structures and in the space operations division. The group’s operating income edged up 3 percent to $38 million on the sales gain.

The defense group, as expected, posted declines in sales and operating income, with revenue off 7 percent to $442 million on lower volume and pricing for small caliber ammunition. Operating income was down 27 percent to $45 million on the lower sales.

DeYoung said the decline in government spending on ammunition, primarily small caliber and, to a lesser extent, medium- and large-caliber ammunition, combined with price pressure has “manifested itself the past few quarters.” He added that this is “the biggest issue that we see in defense right now. [It] is just munitions softening, which we’ve been talking about for a long time.”

To mitigate the impact of the weakness in the military ammunition market, ATK has been focusing on expanding its international defense business. The group has recorded strong international orders in the past two quarters, including $220 million from United States allies in the first quarter, DeYoung said.

The defense group is getting to a point of stability in terms of sales, although predicting when this will occur is difficult, DeYoung said. The group won’t surrender the commitment to double–digit margins, which are expected to be 10 percent this year, he added.

ATK increased its earnings outlook for the year by 70 cents EPS to between $11.50 and $11.90. The guidance reflects strong performance in the first quarter, debt retirement, and a lower tax rate. The company’s tax rate guidance assumes that Congress will approve a retroactive research and development (R&D) tax credit. Most defense companies that have reported quarterly earnings in the past two weeks haven’t assumed an extension of the R&D tax credit in their guidance.

ATK also boosted its fiscal year guidance for free cash flow by $30 million to between $280 million and $305 million. Free cash in the quarter was a $128 million outflow.