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Executives

Steven P. Wold – VP & Investor Relationship

Mark W. DeYoung – President & CEO

Neal S. Cohen – VP & CFO

Analysts

Robert Bengon – Credit Suisse

Carter Copeland – Barclays Capital

David Strauss – UBS

Robert Sellars – RBC

Noah Poponak – Goldman Sachs

Howard Rubel – Jefferies

Michael Trimboli – KeyBanc Capital Markets

Alliant Techsystems, Inc. (ATK) Q3 2013 Earnings Conference Call February 5, 2013 9:00 AM ET

Operator

Please stand by. We’re about to begin. Good day everyone and welcome to the ATK Third Quarter Fiscal Year ‘13 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference over to ATK Vice President and Investor Relationship Mr. Steven Wold. Please go ahead sir.

Steven Wold

Thanks, Glen. Good morning, and thank you for joining us this morning at ATK’s third quarter FY ‘13 earnings call. With me this morning, I have, Mark DeYoung, ATK’s President and Chief Executive Officer; and Neal Cohen, EVP and Chief Financial Officer.

Before we begin, I’d like to remind everyone that during our call today, we’ll make several forward-looking statements. These statements we make under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. We make these statements based on our best estimates, based on the understanding we have today and information known to us today. They’re subject to the risks and uncertainties that face any business. We encourage you to review today’s press release and our SEC filings for more information on those risks and uncertainties.

Please note that we’ve also posted charts on our website, located at atk.com, which will supplement in our comments here this morning and we’ll also include reconciliation of non-GAAP financial measures.

With that said, I’ll turn the call to you, Mark.

Mark DeYoung

Okay. Thank you, Steve. Good morning, everyone. Thanks for joining us today on our call. Our results this past quarter reflect ATK’s strength in key markets, expanding capabilities and successful execution. I’ve note this morning that company raised its full year sales and EPS guidance and the Board of Directors has decoded $0.26 per share at quarterly dividend. We are focused on achieving sustainable revenues, improved earnings and generating meaning full free cash flow.

Our consistent performance and customer confidence led to a year-over-year increase in orders with important wins in all three business groups. I’d like to walk through out groups for a minute and I’ll start with the aerospace group where we recorded significant orders under the NASA Space Launch System and the Advanced Booster Programs.

In addition, we received an order from the U.S. air force to demonstrate ATK’s ability to host whether follow on instruments on small satellite. This one advances our strategy to provide small satellite capabilities for customers who are looking for sophisticated, quick to market affordable capabilities. In the defense group our missile products division received an initial order for the MK 437 Multi-Option Fuze for the navy.

This contract has a potential value of $84 million with delivery scheduled to begin later this year. Expanding our affordable procession weapon’s portfolio, the group secured in a war for the U.S. marine course procession extender range order or some of you may know what’s it’s from. ATK will serve as the prime factor to the Marine Corps for the two year development program.

Turning to this sporting group, we’ve announced the changes in leadership with the Board of Directors appointing Jay Tibbets as the group’s Interim President. Jay most recently served as our Senior Vice President for Business Development. Jay started for working for ATK in 2000 and in 2002 he helped to integrate the acquisition of our sporting capabilities. He’s familiar with the shooting sports, the group’s brands and products and our customers.

Jay is a results driven leader and I’m confident that he’ll provide excellent leadership to an already capable team. In November, the sporting group introduced a range of new product and began the shows sales season. I tend to be annual short show with our team last month and I was encouraged by the positive perceptions of afforded our ammunition and our accessories offerings.

In the third quarter, the group secured another strategic contract to provide the department of homeland security with duty ammunition. We were the sole award winner of the contract which includes the base year and four option years with the total projected value of approximately $56 million based on their historic procurement volumes.

We continue to see strong orders and improved sales in the group, the increased in sales was driven primarily by higher unit volume and the price increase which we previously discussed. Our margins across the group continue to improve year-over-year and overall I’m pleased with the strengthening of the company’s sporting platform.

A lot of the entire defense industry we continue to monitor and engage in discussion surrounding the upcoming sequestration deadline now set for March first and the intruding resolution which is set to expire march 27th.

Our updated guidance for the remainder of this fiscal year assumes no interruption and payments or execution of contracts underway and we are confident of delivering on these estimates.

We’ll issue guidance for our fiscal year 2014 later in the spring after we rapped up this fiscal year and gain greater clarity on the budget and the resolution of the sequestration.

I’ll now turn the call over to Neal who will provide more detail on the quarter and outline some new initiatives that are focused on improving our competitiveness, after that we look forward taking your questions. Neal?

Neal Cohen

Thank you, Mark. Good morning, everyone. As Mark mentioned, ATK experienced strong orders in the third quarter at $1.4 billion in total. Our book-to-built ratio for the year is more than $1.2 billion and that leaves us with the backlog position that now stands at $6.7 billion.

ATK’s year-over-year sales decreased 5.5% to $1 billion largely driven by the loss of the Radford contract. Our prior year results includes sales and profits related to the Radford army ammunition plant and the profit impact of previously disclosed settlement related to the (inaudible) litigation where the (inaudible) accrual.

To provide clear, year-over-year comparisons and similar to what we did in the second quarter, we have provided tables in the press release and investor slides that exclude sales and profits related to Radford and the prior year profit impact of the (inaudible) accrual.

As adjusted, margins were down for the quarter at 9.8% compared to 11.7% in the prior year. The decrease was driven by the higher pension expense and lower sales in higher margin programs in the energetic division as well as the lack of reversal in the prior year of the 2010 to 2012 long term incentive accrual. Partially offset by increased profits in sporting and aerospace groups.

Second quarter fully diluted EPS was a $1.93 per share. As adjusted EPS was $1.84 compared to $2.03 in the prior year. The tax rate for the quarter was $31.9% compared to 42% in the prior year. The lower rate is primarily driven by the absences of the impact of non-deductable portion of the (inaudible) accrual from the prior year as well as increased benefits from the domestic manufacturing deduction.

Interest expense was $14 million compared to $20 million in the prior year reflecting lower rates in borrowings. Year-to-date free cash flow was $57 million compared to $27 million in the prior year. This reflects the collection of a significant receivable and lower capital expenditures partially offset by higher pension contributions and tax payments.

Turning to each of the three business groups, sales in the aerospace group were flat at $301 million compared to $302 million in the prior year reflecting strength in the space structures and components division offset by lower sales in the space systems division.

Operating profit increased 8% to $37 million up from $35 million in the prior year reflecting a work (inaudible) in our proportion business. In the defense group, sales declined 18% to $467 million compared to $573 million in the prior year.

As shown in the table in the press release and the investor slides, excluding sales related through Radford, defense group as adjusted sales were down 12% to $461 million compared $526 million in the prior year. The decrease was driven by lower domestic and international sales in the small caliber and energetic divisions.

Operating profits for the defense group fell 39% to $53 million compared to $87 million in the prior year. Absence sales and profits related through Radford as adjusted operating profit of defense group were down 33% and this was driven by lower sales and mix as previously mentioned.

In the sporting group, sales, for the third quarter increased 18% to $288 million compared to $243 million in the prior year. The sales increase was driven by higher unit volume and as Mark mentioned the previously announced price increase for ammunition.

Operating profit for the group increased 33% to $30 million compared to $23 million in the prior period. This reflected higher unit volume and the price increase. The improved margin performance in the third quarter reflects an year-over-year improvement trend, which, as you know we are very focused on.

As Mark said, the ATK Board of Directors has declared a quarterly cash dividend of $0.26 per share. As you may know, last January, the Board of Directors authorized a share repurchase program of up to $200 million over two years. We repurchased $25 million in shares in the first quarter. The company did not make any purchases in the last quarter. We remain committed to the authorized repurchase plans and we will continue to update the market each quarter.

Now I’d like to provide some additional information on our financial guidance for the full year. Based on our continued successful execution of our business and operating plans, ATK is raising full year FY’13 sales guidance to $4.25 to $4.3 million up from our previous guidance of $4.1 to $4.2 billion. We’re also raising full year FY ‘13 EPS guidance to $7.90 to $8.10 cents per share up from previous guidance of $7.40 to $7.70 per share.

This reflects the higher sales expectation as well improved operating performance. Full year free cash flow guidance remained in the $175 to $200 million range. We continue to expect the effective tax rate for the year to be approximately 30%, which reflects the retroactive extension of the federal R&D tax credit as a result of the American Tax Payer Relief Act of 2012 which was signed in for law on January 2nd 2013.

Yesterday, we announced the change to the pension formula for effective employees who currently earned a benefit under ATK’s defined benefit plans, effective July 1 2013, effective employs will earn benefits under a new cash balance pension formula and they will also be eligible for an enhanced company match on the (inaudible) 1K plan.

All benefits earned through Jun 30 will be frozen our main unchanged. The new program provides our employees a competitive retirement benefits and brings us inline with our peer groups in the industry, while allowing ATK that predictable and sustainable pension cost for the long run.

We believe it’s necessary to make these changes in order to continue remain competitive in the marketplace. We will set the final pension discount rate on March 31 and we’ll include the estimated pension date savings in our fiscal 14 guidance.

Two other key items to note. In addition to pensions, in fiscal 14, we will not have $48 million in profit from Radford and also finally we also anticipate successfully implementing our competitive new contract at Lake City beginning in October 2013, which will likely result in margin pressure in the back half of fiscal ‘14.

On a whole, we expect to be able to deliver comparable ex-Radford total company FY ‘14 margins of approximately 10%. This excludes the risk of sequestration. We will provide you full year ‘14 and fiscal ‘14 guidance in the May timeframe. With that, Mark and I are now ready to open up for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll go first to Robert Bengon with Credit Suisse.

Robert Bengon – Credit Suisse

Good morning.

Neal Cohen

Good morning.

Mark DeYoung

Good morning, bob.

Robert Bengon – Credit Suisse

Mark, since your last call, we’ve seen some evolution down in DC. And unfortunately at least at this stage, there is talk of sequester actually triggering. The army specifically has discussed a short fall of the totals up around $18 billion from a variety of factors, $6 billion probably from sequestration, another number like that from CR and then excess Afghanistan cost, that being the case and specifically given that they’re talking about cancelling the training for four of six army brigades. How should we think about the ammunition and weapons business going forward in this environment with the army pressure?

Mark DeYoung

Yeah, Robert, I think that it’s likely that we will see some pressure on the ammunition accounts going forward. I think that will include small, medium and large account and risk of all being trimmed, of course as I mentioned in the past, on past call, it’s also important to understand those decisions were made not only on the trending that you discussed, but on the inventory that the army has. There isn’t a lot of clear visibility available to us on all those inventory balances, so there is some speculation I guess in terms of how deep those cuts could be, but we would not be surprised going forward outside of this fiscal year and may be in the back half of our next fiscal year to see some pressure or procurement of the category small, medium, large ammunition. I don’t have a good answer for you on what we think that number might be. But I think it’s likely we could see some pressure there.

Robert Bengon – Credit Suisse

Okay. And then just as it follow-up, what is the latest army Amaron (ph) motor situation? Given the changes that have happen there and what you are trying to do in West Virginia?

Mark DeYoung

Sure. So Amaron, as many of you have followed that had some very challenging chemical challenges within the propellant for the Amaron. It had challenges literally only at the lowest temperature configurations, which is the minus 65 temperature set, that’s where we were seeing our technical challenges from the chemistry. We work very closely with Raytheon; we work very closely with the Air Force. We have come to a path forward where we are developing and we’ll qualify this year a new propellant for Amaron, which will be much more robust. We’ll be able to handle those temperature margins and have our margins with safety at the low temperature, which has been our challenge. Raytheon has been in agreement with that program and very supportive of it. So we’re moving forward to re-qualify a propellant based upon existing chemistry that we have putting enhanced propellant for the Amaron.

As I mentioned that will take us about a year to complete in this calendar year and then we’ll be re-qualified and have that problem permanently behind us. So with the challenging situation, we appreciate the support of the air force and Raytheon if you’ve went through all the chemistry. We’ve brought in lots of resources, it was very complicated. But we’re confident that with this path forward to recall a new propellant, that will be the solution for the long-term.

Robert Bengon – Credit Suisse

Mark, since you are not running any volume through now, I assume what’s the upside if you get back in the program?

Mark DeYoung

That program is about $25 million a year revenue program. So it’s not huge, but still I would clarify the size of the program. It’s not a significant program, even though it’s a very important one. So we are continuing to sell cases. We manufacture metal cases, in West Virginia. We’ve been providing those cases to Raytheon, so another provider can case propellant into those cases in the interim. So that provides some revenue going forward, but largely this year other than case development, so we won’t be generating that typical run rate of $25 million until we recall the propellant.

Robert Bengon – Credit Suisse

Thank you very much.

Mark DeYoung

You’re welcome.

Operator

We’ll go next to (inaudible).

Unidentified Analyst

Yes, good morning.

Mark DeYoung

Good morning.

Neal Cohen

Good morning.

Unidentified Analyst

I’ve a couple of questions. I mean, how do you look at the commercial ammunition business at this point? Obviously, we’ve all been reading about the surgeon ahead of any kind of gun legislation that may come through. So, I mean, how do you look at this in terms of managing the business? And if there is a proposed ban on high capacity magazine, so how do that – is that changed?

Mark DeYoung

I’m sure. As I mentioned I went to the shop show last month, at that show, I was able to meet with all of our major customers, who are commercial ammunition offering including international customers law enforcement also attend that show. There has been an increase in demand in the last two months. That increase as we mentioned in the past, that increase comes against a situation for 80K, where we are running at near capacity at all of our facilities and have been for some time. We’re working seven days a week, largely 24 hours a day with downtime for maintenance and what not one multiple shift is obviously with our employees. So the demand continues to grow. The order, volumes coming in are at record highs for ammunition products. We will continue to focus on building quality ammunition and delivering on time to our orders. But there is a pent-up demand. In the back half of your question, George, you alluded to high capacity magazines, another may be legislation that has been contemplated. I wouldn’t want to speculate on what that legislation might be. We’re watching that carefully. We’re also focused on optimizing our production our throughput and our deliveries of our products to people who are ordering them. We don’t have a lot of business tied to the kinds of legislation which is focused on weapon systems. So we don’t see really an exposure from the magazine issue or any other weapon issues. We’re focused on our products, which are largely shooting sports, accessories and ammunition. So for us, we’re continuing to work very hard simply to meet the demand. But we’re seeing the increased order flow.

Unidentified Analyst

Would it possible and to follow-up on that comment? Would it be possible give us a break say in your (inaudible) systems from hunting, target shooting, law enforcement roughly?

Mark DeYoung

No, George. I would like do that. But because it is such a competitive climate, we are the market share leader in all three of those categories you just mentioned. But we are very careful not to give too much information on that, because that is so competitive.

Unidentified Analyst

Okay. And then one last one, probably simple one. What would fresh cash be in ‘14, if it was determined today?

Mark DeYoung

George, I think we’re going to wait and give you guidance on that and (inaudible) ‘14 guidance. We’ve undertaken this significant change in our pension plans. But at the same time, interest rates are moving quite a lot. And so, we will be setting that this calendar year, at the end of March and we’ll make sure to set that in our guidance for ‘14 and make sure that we can give you as much information on that as possible.

Unidentified Analyst

Okay. Thanks very much. I’ll get back in the queue.

Mark DeYoung

Thank you.

Operator

I’ll take our next question from Carter Copeland with Barclays.

Carter Copeland – Barclays Capital

Hi, good morning, guys.

Mark DeYoung

Good morning.

Neal Cohen

Good morning.

Carter Copeland – Barclays Capital

Just a quick one to follow-up on George’s question about sporting and the capacity constraints you mentioned, Mark. Over the past six to eight quarters obviously, you saw mix shift that resulted in lower margins for the group. But now as you bump up against capacity constraints with record levels of demand. Do you have the ability to kind of shift – use your capacity in a more optimal way to the benefit of the margins of the group or as we think about margins going forward, given the capacity constraints and the demand that you mentioned?

Mark DeYoung

It’s very good question, Carter. And yes, we’ve looked at that very subject. And we’re in the process of trying to make sure that, as we use this capacity that we’re optimizing it. So the challenge we want to be able to create is we want to be able to balance the demands of our customers for a wide variety of products including low cost ammunition for target shooters and what not with performance ammunition for hunting and law enforcement. So we’re very focused on insuring our deliveries for law enforcement of their duty and training ammunition. We’re also very focused on trying to optimize the capacity we have to generate returns for the company, while at the same time meeting the diverse demands of our customers and consumers. So we’re attentive to it. It’s a great question. We’re focused on it. I believe we have opportunities for improvement, which we’ll continue to help to strengthen our margins in that business as we strike that appropriate balance and that’s what we are focused on in this quarter and we look forward in planning the fiscal year, we’ll remain focused on that appropriate balance.

Carter Copeland – Barclays Capital

But it sounds reasonable to assume that you’ll have the ability to push those margins upward as a result of the current condition.

Mark DeYoung

I believe there is opportunity for that. Yes.

Carter Copeland – Barclays Capital

Okay. And just a quick clarification, can you say what the book-to-bill was for the sporting group in the quarter?

Mark DeYoung

I don’t think we give that information Carter again I wish I could. And I would love to give you all the transparency you would ask, but again we’re very, very careful with the competitive information we share in terms of order flow, book-to-bill, backlog, those kinds of things and we just want to share those numbers.

Carter Copeland – Barclays Capital

Okay. That’s okay. Thanks.

Mark DeYoung

Thank you.

Operator

We’ll go next to David Strauss with UBS.

David Strauss – UBS

Good morning.

Mark DeYoung

Good morning.

David Strauss – UBS

Back to pension really quickly. I know you are not going to give us what (inaudible) might look like in ‘14, but can you give say help in terms of just the changes that you’ve implemented in the pension plan how much that in it of itself helps things relative to the ‘13?

Neal Cohen

Well, this is Neal, I would not expect any change relative to ‘13. I think, the changes go forward, allow the company to allow same time often very competitive benefits plans to our employees to adopt a more effective and sustainable pension plan we’ve put a lot of effort into this. About 55% of our employees are in the defined benefit plans which we are freezing and implementing and cash balance plan effective next July, so we believe these are the type changes that would give our employees benefit level was comparable for the market while giving us competitive cause and to improve our competitiveness to go forward. I think what we tried to do is give you a sense that go forward inform in ‘14 all the things that we see going on, although not – we are not giving explicit guidance, we think we can generate comparable margins of about 10%, which are comparable to our X-Radford margins for ‘13. But just right on point to your question, we would not expect any material change to ‘13 relative to the pension changes that we announced this week.

David Strauss – UBS

Okay. That’s helpful. E350 kind of goes with the receivable balance was in the quarter and how do you see that the balance progressing from here and when does it peek and then start coming down?

Neal Cohen

Once again on that I’ll try and answer your question, we don’t give program level financial detail like you just requested. We try and keep this at our reporting segment level. On airbus we’ve delivered I believe 11 now for ship sets, we are on track, we are green lighted across all of our and measures of airbus, so I think we have a pretty happy customer. We did receive some cash payments last year which we’ve noted previously totaled about $100 million against that receivable, so that program continues to execute against the EAC we put in place some time ago with no significant adjustments or changes, performance continues to be good and the 100 million dollars we talked about previously received in the third quarter was helpful for that front.

David Strauss – UBS

Mark, I guess, you won’t tell us where the balance is, but can you give us just an idea of when that number will peak?

Mark DeYoung

We began in about 2017 to turn to a cash positive situation on that program.

David Strauss – UBS

Okay. Thank you.

Mark DeYoung

Welcome.

Operator

And we’ll go next to Robert Sellars with RBC.

Robert Sellars – RBC

Good morning.

Mark DeYoung

Hi, Rob.

Robert Sellars – RBC

Mark, I was wondering if I could ask you a question about the pricing in the sporting area. Have you seen your competitors in the market of do similar things to what you have done or are you currently the head line (ph) on the pricing?

Mark DeYoung

No, in the market there are periodic price increases that are implemented by others in that space typically associated with cost shifts or changes associated with raw materials or market demand changes. We have not seen one to one correlation between what we are doing and what other people are doing which is absolutely find with us. We are running our business the way we believe we need to run it, what pricing we need to generate, the cost coverage and margin.

So we will remain focused on doing what is most important in terms of our ATK customers and the company and others will do what I assume they think is important for their business.

Robert Sellars – RBC

Okay. And only the cost front, what are you expectations for raw material input cost in this sporting area going forward?

Mark DeYoung

Over the past several years, I think we’ve been quite successful at being able to hedge and buy raw materials in way which mitigated any volatility or impact of the business I believe we’ll be able to continue to do that. Our raw materials are secured through the end of this fiscal year, so we have no volatility in front of us in the fourth quarter, we’ve got that all locked up and factored into our pricing adjustments that we have made. And going forward we’ll continue to operate at a very disciplined approach to how we buy commodities in the market to continue mitigate volatility.

And I – I think, our track record as been very good. We have great people to know how to do that and we will continue to focus on that. We haven’t seen any wild swings in raw materials like we did about three, four years ago, so that’s been comforting us as well.

Robert Sellars – RBC

Okay. And then just finally, you mentioned, you haven’t bought back any shares in the quarter. I was wondering if there is any particular reason for that and what your expectations might be for the buyback going forward.

Neal Cohen

Yeah, this is Neal. We definitely remain committed to the buyback. As we’ve said, we’re going to work very diligently to update the market every quarter with our purchase activity, but you know, we just can’t really comment on reasons why or why we don’t buy back shares in any particular quarter. So and we hope to continue to be updating you on a regular basis and try to answer your question at that time.

Robert Sellars – RBC

Okay. Thank you very much.

Operator

And we’ll go next to Noah Poponak with Goldman Sachs.

Noah Poponak – Goldman Sachs

Hi, good morning everybody.

Neal Cohen

Good morning.

Mark DeYoung

Good morning.

Noah Poponak – Goldman Sachs

Just a few questions on cash and deployment. So CapEx I guess is down pretty significantly in ‘13 versus ‘12, does that remain the case beyond ‘13 on the pension cash contribution I guess that’s up a lot in ‘13 versus ‘12, can you help us directionally there and then sort of just following up on the last question. I mean, if we look at the balance sheet leverage matrices today then we look at where they are in just a few quarters, given how much cash you can generate, I mean, I know you are raising the dividend, but the payout ratio is still pretty low relative to other defense companies and you know we have a buyback authorization, but you haven’t been buying back that much stock, you know, why not get significantly more aggressive of capital deployment, are you looking more at M&A, are you worried about sequestration, any more color you can give us there.

Mark DeYoung

Okay, there were a couple of questions there. Let me see if I can get that, you know, we… Mark and the team have a very disciplines, we have a very disciplined process on CapEx, so you are seeing some of the benefit to that, but at the same time, we don’t shy away from CapEx when it needs the great project that produce good returns, make us more efficient and continue to help build our businesses, so I can’t, I want to, you know, caution you not to assume that sort of CapEx is always going to be flat, but rather we’ll be looking for great opportunities to invest in the business when appropriate to produce good returns and improve our efficiency.

So on a CapEx side, I think that’s sort of there – on the sequestration side, and on our liquidity we said on the last call that we are very pleased to have paid to off to the $400 million in our most expensive in our 2016 unsecured notes, but we did also draw $200 million under our bank facility and expand that by $200 million and we explicitly said at that time that with sequestration and all those issues and without, at that point there was no CR in place, that we felt some additional liquidity.

We also felt at that time that we said and we still believe today that it was sort of very, gave us a flexibility, it was very low cost, there were no prepayment penalties and so you shouldn’t necessarily draw out from that, that we had any sort of hand cuts with regard to what to do with that liquidity if we didn’t wind needing it.

As far as pension goes, you know, we did make, $140 million contribution to the pension plans under, since that time the new high way bill or what’s called map 21 pension rules have been passed, that created a new pension funding regime, gives us a little bit more flexibility on pension funding, yes, but at the same time you also know that, you know funding that you put in your pension can produce a return that’s attractive and it could also reduce your cost. We’re going to watch that very closely what you might expect under the normal – what’s called MK-21 (ph) funding rules. It is that the company has more flexibility on pension funding and so that the pension funding might go down slightly but in the long run the MK-21 just sort of provides the corridor that gives you that flexibility, eventually it resumes and targets at the traditional funding level over a period of time.

Finally on cap deployment we were very, very pleased to announce the improvement in the dividend last quarter. We understand, we get the feedback, we hear it, we’re very focused on it, we want to make sure that as we come forward on future actions with dividend like we want to be very certain that those actions lead to dividend levels in the long run that are sustainable, attracted to the market and will be part of the story of who is ATK. So we are very focused, your comment on dividend is very – but we’re very aware of it. We can’t tell you when or if we will take any future actions on the dividend but we can say that we’re very focused on improving and understanding our dividend and the role it plays and how important it is to our share holders.

Finally on the share repurchase, we are just as said on the earlier call, we’re committed to a share repurchase program we announced that worked to $200 million over two years and we hope to be updating you on a regular basis.

Noah Poponak – Goldman Sachs

Okay, it’s very helpful. Just one another one for me, any more detail you can provide on the booking strength in the current quarter and I guess also really over the past three or four quarters, any help you can provide in terms of where that’s coming from?

Mark DeYoung

Yeah, the booking strength I think comes from a variety of places obviously we have already mentioned that we have increased demand for orders in sporting. The one thing we don’t talk about on sporting very often is, those orders come in as purchase orders, they are cancelable. So I think you need to be careful when you look at this peak demand that maybe occurring and sporting with the rush of orders, those orders may or may not ever be converted into sales because they’re cancelable and it’s not uncommon in sporting for customers to place multiple orders of multiple manufacturers, take the product for whoever can deliver it first and cancel the other orders. So I want you to be mindful of that, also we had good orders coming in on the go forward NASA program, we had good orders in the quarter with advance booster program. We’re seeing some opportunities continue to emerge for international business, our small gunship is a very platform, its gaining attraction in the Middle East, so we’re seeing demand for that. So from an orders perspective it actually was all three groups that had some very strategic orders that we’ve received in the quarter.

Noah Poponak – Goldman Sachs

Did all three have booked-to-bill over one?

Mark DeYoung

I don’t think that’s correct, I think we have booked-to-bill over one in two of the three groups.

Noah Poponak – Goldman Sachs

Okay, thanks for taking my questions.

Mark DeYoung

You’re welcome.

Operator

And we’ll take our next question from Howard Rubel with Jefferies.

Howard Rubel – Jefferies

Thank you very much.

Mark DeYoung

Hi, Howard, I heard.

Howard Rubel – Jefferies

Thank you. If we assume that a lot of the increase in sporting was driven by probably (inaudible) then your accessories business is still struggling, is that a fair conclusion?

Mark DeYoung

No, I wouldn’t – I don’t think I would use the term struggling. Let me turn and add some flavor to that. The accessories growth year-over-year in shooting sports accessories was generally consistent with prior year’s which has averaged mid-teens growth, so that continued. Our accessories business continued to be quite robust in the shooting sports. We continue to see a downturn in the military gear that is in that accessories portion of the sporting group, it’s largely associated with our eagle business. That order volume and sales delivery is significantly down and continues to be under pressure due to reductions and deployments and poor structure, so that’s really where there’s pressure in the accessories side.

Howard Rubel – Jefferies

Okay, thank you. And then I want to sort of talk about – I mean you know answered the pension question in four different ways and I also want to try one more time. If we look at this strategically, does this – when you look at it at your cost going forward and you talked about reducing your cost, is the biggest factor here that you cap your actual real losses or your gains and that what we’ll see is relative stable service cost?

Mark DeYoung

Well, let me see – let me see how I can help you and today let me just sort of zoom up to thirty thousand feet. Today the company has defined benefit and defined contribution pension plans and obviously under the defined contribution plans you have very – you have good predictability. They’re arte pegged as a percent of pay and they don’t have the – they don’t have the risks and the volatility defined benefit plan have. So the company effective July, 1 is taking the defined benefit plan in which currently about 55% of the employees are under defined benefit plan. And freezing that formula as accrued to July, 1 protecting that benefit – that benefit remains and the funding associated to that will continue overtime and there will still be some volatility around that.

However going forward under the cash, new cash balance of plan, which will – which will have a lot of the same elements and be very similar to defined contribution plan and that the go forward contributions will be predictable will be part of a formula that’s percent of pay. Again giving the employee a very competitive benefit comparable to other companies in the industry but yet, now on a go forward basis those benefits will be both more competitive for the company and much less volatile. It will have the effect of reducing the liability overtime related to the prior defined benefit plan, it will have the effect of reducing the volatility of that overtime and it will have the effect of reducing some of the liability on the balance sheet. And all of those will – while still giving our employees a competitive benefit will allow us to reduce our pension cost, reduce the volatility around pension, reduce the liability on the balance sheet and make us a – continue to make us more competitive participant in the market place.

Howard Rubel – Jefferies

And then just – no, I – that I got it and I just to follow up to sort of maybe…

Mark DeYoung

Was number five better than the first four? (inaudible) explanation I am trying.

Howard Rubel – Jefferies

You did great – no, you did I got it and it more or less puts it into bow (ph) and allows to realize I think that there’s also an element of what’s going to happen with harmonization that gives you some discretion on how you can bid but it eliminates some of, what I would call the unknown in how you’re bidding and what you’re thinking about your cost, is that…

Mark DeYoung

I think it gives us – I think it gives us an improved cost, it reduces volatility and it – and in a world with or without harmonization makes us the more effective competitor while still protecting the fundamental propositions that we want our employees to have. Competitive benefit levels that give them the opportunity to earn a good retirement.

Howard Rubel – Jefferies

That’s – thank you it’s great. Thank you very much.

Operator

And we’ll go next to Michael Trimboli with KeyBanc Capital Markets.

Michael Trimboli – KeyBanc Capital Markets

Good morning guys.

Mark DeYoung

Good morning.

Michael Trimboli – KeyBanc Capital Markets

Maybe Mark, just to follow up on know this question on the commercial amount (ph). You’ve got maybe the electoral year that’s created a bit of a spike obviously the tragedy in Connecticut, you were saying some of these orders are or the orders can be cancelable – cancelable. What do you – how are you guys modeling for this internally, I mean you’re seeing me running at – at red hot levels right now, what kind of confidence do you guys have that that you can continue to build and grow these commercial amor (ph) related revenues on a go forward basis?

Mark DeYoung

Okay, so let me start with – let me start with a couple of big picture numbers. The National Shooting Sports Foundation recently published a study looking at excise tax collection on ammunition which is something you may know. We pay in an 11% excise tax on all the ammunition that we sell and that goes into a fund which is used and supports the shooting sports and was designed as the Robertson Pittman Act to provide conservation for wildlife and other programs like that. So based upon of the payment of excise tax you can see industry trends in terms of ammunition sales.

So a couple of interesting notes I think really shows steady growth based upon that metric, there’s been a fivefold increase since 1982, there’s been a threefold increase in excise tax collections on ammunitions since 2002. So these appear to be trends not kind of episodic spikes that are going on around elections, so yes those spikes do you occur, yes elections and changes in political parties and legislations do create changes in demand. But over the long haul, you’re seeing a growth in the shooting sports, which I think is pretty significant. In terms of ATK’s ability to continue to grow, we’ve invested I think wisely in our CapEx. Neil mentioned CapEx investment not static for us, we don’t pick a flat number like a $100 million this year and say that’s what it’s going to be in the future. We look at the projects opportunities we have and we invest a property into create returns. We’ve done that in sporting. We’ve invested right now in sporting additional monies to expand the capacity and the areas where we have bottlenecks. That capacity will come online latter in this calendar year and it’ll provide opportunity for hundreds of millions around of this additional deliveries for us as we get into the back half of next fiscal year. We also continue to drive our performance enterprise system or what we call PES doing pre-sufficiency, reduce downtime, reduce scrap and re-work and allow us to have more of our production producing quality ammunition, which we sold. All of those strings give us the opportunity I believe to continue to grow. And then, in addition, we have partnerships and relationships with other ammunition manufacture who are supporting some of the demand that we’re receiving to provide products in our 80K brands and in our 80K distribution.

In addition, just one other thought on the accessory side, that side of the business which also has been growing at about 15% per year now for several years. We don’t have capacity restrictions. A lot of that product is sourced to other manufacturers and so there is a lot more flexibility for continued growth in this group on those products.

Michael Trimboli – KeyBanc Capital Markets

Okay. That’s helpful. And then, if I could just shift to military (inaudible) may be back a little back to Rob’s question beginning. Can you give us any sense, you mentioned the 10% margin at the corporate level for ‘14, the Lake City contract, I’m always cognizing of the volume, say, if we’re going to see reductions in training and we’re seeing fore structure cut? Is it there going to be or can you model or assess your profitability, if volumes dip back down to the $500 million or 500 million unit range from today? I mean what kind of sensitivity or scenario analysis are you going through internally on that small caliber (inaudible) and how could impact your profitability on that program?

Mark DeYoung

Sure. We understand I think probably better any bills in the world, volatility associated with cost and profitability based on volume. At Lake City, we’ve modernized that plant by working with the government on 80K and government investment over $300 million. Over last several years which we’ve made improved efficiency up time and capacity. If that capacity is not needed and if we get reductions in volume, we have a very sophisticated model, which allows us to look at the cost impacts from overhead absorptions, how those fixed costs are spread across our factories as well as the variable and semi-variable costs in a factory. So we have a model that allows us to see what those changes are. And that we can adjust our workforce and our workflow to try and minimize the impacts from reductions in volume. But they’re clearly are those relationships. So going forward – we going forward do believe we’ll see reduced quantities order, which will put pressure on margins. So I believe that two things will challenge our margins at Lake City and in small cow, we won a very competitive competition to continue to climb, which was so strategically important for 80-K, because that opens the avenue to international business and other opportunities for us. In doing that, we mentioned for about the last year that we thought price would be part of that that competition, which would initially in the early years of the next contract put some pressure on margins. And then what reductions and volumes that you’re eluding to that could add some additional pressure in the back half of next year.

Michael Trimboli – KeyBanc Capital Markets

Okay. And then am I correct, if you guys are add capacity on the consumer commercial side. Can you basically use some of the free capacity at Lake City, if there is ongoing elevated demand at the commercial site, it may be take advantage or soften that impact of margin pressure?

Mark DeYoung

Yeah. We have three major ammunition manufacturing plants around the country. Those three plants manufacture a variety of products. And (inaudible) looking at opportunities to use those three facilities to be able to optimize against the demand in the mix that our customers are ordering and we’ll continue to look all three facilities and what they can manufacture and what they can deliver to help optimize our production capacity to meet demand.

Michael Trimboli – KeyBanc Capital Markets

Okay, sir, enough. Thanks, sir. Thanks for your call. I appreciate it.

Mark DeYoung

Thank you.

Operator

We’ll take our next question (inaudible).

Unidentified Analyst

Good morning.

Mark DeYoung

Good morning.

Unidentified Analyst

I know it’s in the Aerospace group, you talked about higher award fees your proportion business. Can I assume that’s performance fees and if so who will to be more that coming in the coming quarters?

Mark DeYoung

The award fees which are a lot of dwarfs on our performance on Aerospace contracts really are look back award fees where our customary viewership performance against specific criteria. And they evaluate how you performed against specific type criteria and then they have the right to authorize and award you those award fees for your performance. In this quarter, we had a look back adjustment, which was done on a particular contract to determine our performance. And the customer determines that our performance was such that we award tend to some additional profitability on pass work and they awarded that to us. So it’s really a look back whether and it’s a perspective go forward on those kinds of profits.

Unidentified Analyst

So it’s not predictable?

Mark DeYoung

It’s not necessarily predictable and it’s not necessarily requiring. It just depends on the scope of work and the milestones and the evaluation of the customer. Yes.

Unidentified Analyst

Okay. Thank you.

Mark DeYoung

You’re welcome.

Operator

(Operator Instructions) We’ll go next to (inaudible).

Unidentified Analyst

I asked a couple of follow-ups. In the commercial (inaudible) business now that’s you had full capacity, I mean, what’s the change you can get back to the 13% margins that you had several years ago or is that just not going to happen, because the mix is still different?

Mark DeYoung

Yeah, I think it might be the ladder, George. We enjoyed a period, where we had some significant reductions for a short of period. I’m actually in some raw material cost against what, but I think was in the market and it allowed us to pick up some additional profitability. We also had a different mix as you mentioned back in that period a couple of years ago. That shift appears to be being sustained, you know, we mentioned a shift about a year ago in our third quarter began to occur to some of the lower margin products. That shift appears to be sustained in terms of the mix what focused on as improving our margin with that mix. And I’m actually quite please and you can see in our numbers that we are delivering and our commitment that we made to you on prior calls that we would get that margin back even with that current mix. And that’s what we’re focused on.

Unidentified Analyst

Okay. And then just one another one. With the first quarter and over three years that Aerospace sales didn’t decline and with the shadow behind, you you’re your left seeming to stabilize. I mean do you look at Aerospace is actually growing a little bit here? And in terms of the margin it would seem like going forward, the mix would be on the negative side in terms of that and if you could comment on that?

Mark DeYoung

Okay. Yeah, again, we’re not getting into too much detail or we’re going to give you guidance here in the spring. But we do believe from everything we can see and based on the input from the group that we have stabilized that business at these levels and that we’re poised for some future modest growth over the next few years. And it also appears that margins with the current program mix are going to be stable going forward as well. So you’re absolutely correct in referencing the shuttle closure and the adjustments of the consolation program under the SOS program. The cancellation or the end is not the cancellation, but the end of the minute man, regrind program that was $10 million for us. Those things have worked away through the system now and we believe we’ve stabilized wise.

Unidentified Analyst

Okay. Thanks again.

Mark DeYoung

You’re welcome. Thank you.

Operator

And there are no other questions at this time. I’d like to turn the conference back to our speaker for any closing remark.

Mark DeYoung

All right. We would like to thank everyone for joining us today and for your questions and your interest in the company. We appreciate your attendants to the call. We’re pleased with the quarter. We look forward to reporting to you next time on the full result in our fourth quarter and the year. Thank you.

Operator

Thank you, everyone. That does conclude today’s conference. Thank you for your participation.

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