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Alliant Techsystems Inc. (NYSE:ATK)

Q4 2014 Results Earnings Conference Call

May 15, 2014 9:00 AM ET

Executives

Mike Pici - Director, Investor Relations

Mark DeYoung - President and CEO

Neal Cohen - Executive Vice President and CFO

Analysts

Steven Cahall - Royal Bank of Canada

Joe Nadol - J.P. Morgan

Robert Spingarn - Credit Suisse

Gautam Khanna - Cowen and Company

David Strauss - UBS

Howard Rubel - Jefferies

Michael Ciarmoli - KeyBanc Capital Markets

George Shapiro - Shapiro Research

Herbert Hardt - Monness

Operator

Please standby, we are about to begin. Good day, everyone. And welcome to this ATK Fourth Quarter Fiscal Year 2014 Earnings Conference. Today's call is being recorded.

At this time, I would like to turn the conference over to Mr. Mike Pici, Director of Investor Relations. Please go ahead, sir.

Michael Pici

Thank you. Good morning. And thank you for joining us for our fourth quarter fiscal year 2014 earnings call. With me this morning are Mark DeYoung, ATK's President and Chief Executive Officer; and Neal Cohen, Executive Vice President and Chief Financial Officer.

Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements and we make these statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act.

These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to the risks and uncertainties that face ATK and the industries in which we operate. We encourage you to review today's press release and ATK's SEC filings for more information on these risk factors and uncertainties.

Please also note that we have posted presentation materials on our website at atk.com, which supplement our comments this morning and include a reconciliation of non-GAAP financial measures.

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

Mark DeYoung

All right. Great. Thank you, Mike. Good morning, everyone. Thanks for joining us today. This morning we will discuss our fourth quarter and our fiscal year 2014 results, as well as outline for you the outlook for FY15.

We reported excellent operating results in both the fourth quarter and fiscal year ‘14. As you -- I am sure you read in our press release, the company reported year-over-year improved operating profit, strong earnings growth and increase sales. In fact, our fourth quarter and our fiscal year ’14 operating income was the highest quarter and the highest year in the history of the company.

I'm pleased with management's focus on executing the company's vision and strategy, and with our employees who remain committed to execution excellence and on-time delivery of quality products.

ATK made a commitment to our shareholders and customers to provide a forego innovation, highly engineered products, execution excellence and our operations, and superior shareholder returns overtime.

As part of our vision, we strategically pursued opportunities to become leaders in our markets and through the investment of time, resources and top talent. We’ve proactively position the company to compete, secure new business and grow.

During fiscal year, ATK executed numerous initiatives to improve our operational and financial performance. We also delivered higher dividends paid to our investors and executed share repurchases.

In addition, we have changed our pension formula to align all employees to a new and more competitive cash balance pension formula. This decision will help ensure the long-term sustainability of our pension program and enhance the company's ability to grow and compete.

We also rationalize several facilities and continue to drive the execution of our performance enterprise system or PES operation model to deliver continuous improvement in cost and in quality.

We are delivering as a value supplier and partner of choice across the spectrum of capabilities of products, including solid propulsion solutions, aircraft solutions, satellites and advanced weapon systems.

Focusing for a moment on some key FY14 accomplishments in our businesses, in the Aerospace group, we expanded our AerospaceStructures Commercial business with marquee when on the Boeing 787 Dreamliner and also secured significant additional business from Airbus.

Our Commercial Launch business secured a key role on the new Stratolaunch air launch system. Demonstrating proven performance and reliability, the Aerospace Group completed the state-of-the-art primary mirror support structure for the James Webb Space Telescope, earning our team the Rotary National Award for space achievement, Stellar Award on this NASA flagship mission.

The company continues to make progress on NASA space launch system or SLS, meeting technical requirements and moving into the implementation phase of that program. We secured new orders for classified satellite programs and we have signed term sheets with two customers for three ViviSat satellite mission extension vehicle.

As we discussed on past earnings call, ATK is investing in pursuing new international business. During the fourth quarter, the Defense Group secured one of the largest international orders in company history and set the stage for additional international expansion and growth. These international contracts with U.S. allies totaled about $186 million for ammunition and ammunition-related services.

Also international the Group has secured a contract with the Italian Air Force for the multi-mission aircraft featuring our Roll-On/Roll-Off Palletized weapon system. And recently the Group completed its first test flight of the AC-235 Light Gunship and delivered it to the Kingdom of Jordan.

The Group also secured its second full rate production contract from U.S. Navy for the Advanced Anti-Radiation Guided Missile or AARGM, which included the Australian Air Force as a new international customer and we also delivered the 100 AARGM to the Navy.

ATK produces the fuze and warheads for the AI3 Interceptor, which had 100% success during all 24 live fire test during the past year and we continue to make progress for the qualification of the new Hard Target Void Sensing Fuze for the U.S. Air Force, which represents a significant advancement in fuze technology.

Lake City produced the 1 billion M855A1 round known as the U.S. Army's enhance performance round and our Lake City team received the Secretary of the Army Environmental Award in the Sustainability category for industrial installations. This is the highest honor in the field of environmental science and sustainability offered by the army.

Turning to the Sporting Group, growth was driven by continued market demand for ammunition and firearms, military and government customer wins for training and duty ammunition and/or acquisitions of Savage and Bushnell. I am pleased to report the integration of Savage is basically completed as planned and the Bushnell integration is achieving key milestone and remains on track.

The Sporting Group continues to deliver solid results through initiatives like SKU rationalization, facility rationalization, new product introductions and improved operating efficiencies.

ATK was awarded a contract from the U.S. Army for the production of 300-Win Mag rifle ammunition. This is the first year of the contract, which has the potential maximum value of $20 million and this ammunition is being manufactured in our Anoka, Minnesota facility.

The U.S. Army recently selected the BLACKHAWK! SERPA tactical holster for its holster program awarding ATK with a five-year $24 million contract. The SERPA holster is now current platform for the U.S. Marine Corps, U.S. Army, Army Military Police, the German Army and other law enforcement military agencies, both domestic and international.

BLACKHAWK! holsters, Bushnell Optics and Federal Premium Ammunition all continue to receive industry recognition and honors during the year and the Sporting Group also received several customer awards and honors including Wal-Mart’s Sporting-Goods Supplier of the Year and Cabela's Hunting Vendor of the Year, both of these awards for our second straight year.

Now in terms of our position related to government budgets, the federal legislative season has started back up and at this point we don't see any surprises in funding levels or policy direction.

It is a busy time on Capitol Hill and as always we continue to work with our Congressional partners and customers in the Pentagon and at NASA to understand priorities and issues driving the budgetary decisions and then position ourselves to support those priorities.

Fiscal year ‘14 provide a strong foundation for fiscal year ‘15, with exceptional execution and unprecedented performance. ATK continues to deliver growth, especially in time of budgetary uncertainties. We recorded record levels of production and profitability, and delivered impressive EPS growth and we remained committed to delivering strong results in the coming year.

Neal is going to walk through our forecast looking forward provide some additional details on our fourth quarter and full year, and also introduce you to the guidance for fiscal year ‘15. Neal?

Neal Cohen

Thank you, Mark, and good morning, everyone. ATK completed a strong fourth quarter and outstanding fiscal year. Similar to previous quarters, we provided tables and explanations in the press release and investor slides provide year-over-year comparison for sales, margins and EPS. Please see these reconciliation tables for additional details.

Our results for the quarter include sales and profit related to a pension segment close out at the Radford Army Ammunition Plant, an environmental settlement and acquisition-related inventory step up costs. I’d like to provide some additional color on the Radford pension segment close out.

During the fourth quarter, the U.S. government firm to ATK that it was responsible to reimburse us for portion of the unfunded pension obligation costs under our Radford contract, which ended June 30, 2012. Discussions are ongoing with the government to complete the pension close out process and we have recorded an estimated amount for a recovery.

Excluding sales and profit related to the Radford pension, the environmental settlement and the inventory step-up, fourth quarter adjusted operating profit was approximately $153 million, compared to $122 million in the prior year period. This increase was primarily driven by higher sales and profit in the Sporting Group and lower pension expense.

Fourth quarter fully diluted earnings per share was $2.90, compared to $2.23 in the prior year. Adjusted fully diluted EPS was $2.59. Fourth quarter sales were up 17%, a $1.3 billion, compared with the prior year. Excluding the Radford pension segment close out, fourth quarter sales were also $1.3 billion. This is due to increased sales in the Sporting Group, partially offset by a decline in Aerospace and Defense.

In the quarter, ATK orders were 1.6 billion, a decrease from the 2.5 billion in the prior year period. This decrease was driven by lower orders in the Sporting and Aerospace Group’s, partially offset by an increase in the Defense Group. The book-to-bill ratio for the quarter was 1.2 times. As you may recall, we indicated a year ago and in recent quarters that ATK had recorded strong orders in those period that may or may not be indicative of future volume sales.

For the fiscal year 2014, ATK recorded an increasing in full-year operating profit of $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, adjusted operating profit was $598 million, compared to $421 million in the prior year. This was driven by higher sales and profit in the Sporting Group and lower pension expense, partially offset by lower sales and profit in the Defense Group.

ATK’s full year net income increased by 25%, $341 million compared to $272 million in the prior period. Adjusted net income was $346 million, compared to $231 million in the prior year.

Full year EPS was up 25% at $10.42, compared to $8.34 in the prior year. Adjusted EPS was $10.59, up from $7.10 in the prior year. The year-over-year increase was driven by higher Sporting results and lower pension expense, partially offset by an increase in interest expense and a higher tax rate.

The company's full year sales were up 9% at $4.8 billion, compared to $4.4 billion in the prior year. Adjusted full year sales were $4.7 billion, compared to $4.3 billion adjusted sales in the prior year.

The increase in sales was primarily driven by an increase in sales in the Sporting Group and the Aerospace Group, partially offset by a decline in the Defense Group. The full year -- for the full year ATK’s book-to-bill ratio was 1.2.

Now, turning to the businesses, in the ATK Aerospace Group, fourth quarter sales were $333 million, down 4% compared to $348 million in the prior year quarter. This decrease was primarily driven by lower sales in the space systems operations division.

Fourth quarter operating profit was $31 million, compared to 35 million in the prior year quarter. The 12% decrease was driven by lower sales and increased R&D costs. Fiscal year 2014 full year sales were relatively flat at $1.3 billion. For the full year operating profit was down 2% from $144 million to $142 million.

In the Defense Group, fourth quarter sales were up 3% to $549 million, compared to $534 million in the prior year. Adjusted fourth quarter sales were $521 million. The decreased was driven by the Armament Systems and Defense Electronic Systems divisions, partially offset by an increase in the Small Caliber Systems division.

Fourth quarter operating profit was down 34% to $40 million, compared to $61 million in the prior year quarter. Adjusted operating profit was $42 million, compared to $61 million in the prior period.

The decrease was driven by lower profit in Defense Electronic Systems division and lower profit in the Small Caliber Systems division as ATK transitions to new contract at the Lake City, Army ammunition plant.

Full year sales in the Defense Group were $2 billion, compared to $2.1 billion in the prior year, as adjusted sales for the year $1.9 billion, compared to $2 billion the prior period. This decrease reflects lower sales in the Armament Systems and Small Caliber Systems division, Defense Electronic Systems division, partially offset by an increase in the Missile production due to increased missile sales -- due to increase production.

Fiscal ‘14 operating profit was $211 million, a decreased of 22% from $270 million in the prior period. Adjusted operating profit was down 5% to $212 million versus $222 million. This decrease was primarily due to reduced sales volume and lower profit as ATK transitions to the new contract in the Small Caliber Systems division, partially offset by performance improvement in Small Caliber Systems on previous operating contract at Lake City.

In the Sporting Group, fourth quarter sales increased approximately 71% to $558 million, compared to $326 million in the prior year quarter. Sales for Savage was $62 million and sales for Bushnell were $132 million. Sales related to the groups legacy businesses increased 12% in the quarter due to volume and previously announced price increase for ammunition. This increase was partially offset by a decrease in demand for military accessories.

Operating profit for the fourth quarter increased 107% to $87 million, compared to $42 million in the prior year. This increase was driven by additional sales volume, price increase, the recent acquisitions and product mix.

Operating profit for Savage was $15 million and operating profit for Bushnell was $5 million. Fourth quarter operating profit for Bushnell includes both inventory step-up and transition costs. For the full year, the group recorded sales of $1.9 billion, up 57% increase from $1.2 billion in the prior year.

Organic sales were driven by increased volume and price increase offset by a decrease in demand for military accessories. Sales for Savage were $179 million and sales for Bushnell were $217 million. Operating profit for the full year increased 129% to $271 million compared to $118 million in the prior year. This increase includes Savage and Bushnell, the price increase and improved product mix. Operating profit for Savage was $33 million and Bushnell reported $9 million in operating profit, again these numbers includes inventory step-up and transition costs.

Looking to the companies -- looking to the corporation performance in the fourth quarter, ATK's tax rate was 34.5% compared to 32.4% in the prior year. The higher tax rate is primarily driven by the retroactive extension of the federal R&D tax credit in the prior year partially offset by higher DMD deductions this year.

Interest expense was $24 million compared to $14 million in the prior year, primarily affecting 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 the reduction in pension expense including the Radford 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% compared to 30.6% in FY ‘13. This increase reflects the favorable settlement of the IRS audit of the company's tax return in the prior year. The company generated free cash flow of $242 million compared to $177 million in the prior year.

This increase reflects reduced pension contributions and increased net income, partially offset by increased capital expenditures and the fact that the prior fiscal year included a significant receivable collected in FY ‘13. ATK's capital expenditures for the year were $146 million and the company completed 52 million of share repurchases.

The company's results for the quarter and the year are outstanding. We had record -- we had record profitability and we are very pleased with the operating performance and execution excellence across the enterprise. We achieved significant progress in our aerospace and defense groups including expanding our presence internationally and commercially.

The company also resolved long-standing issues with our pension plan and formulas -- pension plan formulas in July 2013. This action led to a significant reduction in ATK's go-forward pension costs and liabilities. Exceptional performance in our Sporting Group included strategic acquisitions and business integration with strong organic growth and actions to optimize the business.

The company's increased earnings year-over-year margin improvement, sales growth and increase in cash provided by operating activities are the result of strategic planning and disciplined execution. The sharp focus has delivered a strong balance sheet also.

Looking forward, the company expects FY ‘15 sales in the range of $5.15 billion to $5.25 billion. We expect EPS in the range of $10.80 to $11.20. It should be noted as we continue to support ongoing PES initiatives, the company is rationalizing its corporate facility costs by reducing footprint in a corporate office building. This will generate first quarter nonrecurring restructuring charge of $10 million or $0.19 per share, which is included in the guidance.

The company expects capital expenditures of approximately $135 million and free cash flow in a range of $250 million to $275 million in FY ‘15. The effective tax rate for the year is expected to be approximately 35%. The average share count is expected to be approximately 33 million shares, which includes the suspension of the balance of our share repurchase program and also includes the diluted effect of the convertible debt for the entire year.

Pension expense is expected to be approximately $83 million compared to $130 million in the prior year. This reflects the pension redesign implemented in July 2013 and a slightly higher discount rate. Our guidance does not include the impact of the April 29th announced transaction. And it specifically excludes any associated transaction and transition costs related to that announcement.

We look forward to another strong year in fiscal ’15. And I look forward to updating you on our progress in terms of our continuing to improve operating performance after the first quarter.

With that, we'll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question will come from Steven Cahall with Royal Bank of Canada.

Steven Cahall - Royal Bank of Canada

Yeah. Thank you. Good morning.

Mark DeYoung

Morning.

Neal Cohen

Good morning.

Steven Cahall - Royal Bank of Canada

Maybe if we could just kick-off with Sporting, so very strong margin in the quarter. I was wondering if you could give us a sense of how the components look for the remainder of FY ‘15 based on what you're seeing now and some of the other trends. And if you could also just comment, maybe on sales and backlog in Sporting and particularly what sort of organic growth rate range you might be expecting for FY ‘15? Thank you.

Mark DeYoung

Okay. All right. Thanks Steven. You know we don't give formal guidance by group but I’ll do the best I can to fill in and answer that question. Give you as much color as I can in terms of direction. Sporting Group continues to execute very well as you referenced the fourth quarter results. We though we’re tremendous with significant growth being our own expectations in terms of market strength for the year.

We believe that market strength is going to continue into FY ‘15. We have taken a position of being what we would call cautiously optimistic about the future of Sporting as we look at ‘15, as we’ve developed our guidance. There is uncertainties in that market, of course, as you might expect but so far we’re off to a very good start in that market on Sporting.

We see continued organic growth opportunities in our accessories business. We continue to execute well on the integration of Bushnell and realigning Bushnell. We mentioned following the acquisition we needed this year through ‘15 to get everything lined up and integrated and running the ATK way. And I think we’re on track to accomplish that. We had excellent results coming out of Savage business and demand continues to look good for our Savage long gun products.

So we're very pleased with that acquisition and its performance so far as well. That market, I think, will continue to grow. We've anticipated the mid to upper single digit organic growth in the Sporting Group as what we've assumed going forward. And hopefully, we’ll be able to even do better than that. So we really don't see any red flags in that area, just a bit cautious with some uncertainties of the market strength.

Steven Cahall - Royal Bank of Canada

And is there reason to think that sort of high teens margin or seeing excluding Bushnell and Savage. And then also Savage, you talked about it being upper teens but it’s been in the 20s. I mean, should we expect some of that to fall in or are those relatively reasonable run rate based on what you see in the market at this point?

Neal Cohen

Well, they are certainly record level of profitabilities. Those -- the rates we’re seeing for example in our most recent quarter in the Sporting Group, we delivered 15.8%. That's certainly is the high watermark for the Sporting Group. You will remember last year we were at 10%. So there's a risk of some potential softening that could occur based on product mix, based on replenishment of inventories that begin to occur in the distribution chain, manifesting themselves at retail. That could impact some of the sales and growth and some margins on product.

We have not seen that really begin in a big way yet. We’ve had limited cancellations. Our back order position still represents over year’s worth of production in Sporting. So we have a good backlog position. So I think we’re in good shape for that. We’re going to do our best to sustain those margins but I wouldn’t be surprised if there's some pressure there.

Steven Cahall - Royal Bank of Canada

Okay. Thank you. That’s very clear. Thank you.

Operator

From J.P. Morgan, we’ll hear from Joe Nadol

Joe Nadol - J.P. Morgan

Thanks. Good morning. Just sticking with Sporting for a moment and looking at specifically at the fourth quarter, it looks like the base business sales were down about $20 million sequentially. I was wondering if you could just give a little more color on that, was that ammo or was it the accessories, the military accessories that you mentioned in terms of the weakness?

Mark DeYoung

Yeah. So the weakness we saw in the sporting group is in our Eagle branded products and if you recall, the Eagle branded products are military backpacks bags, first-aid and MP bags, holsters, those kinds of things and with the drawdown in Iraq and the drawdown in Afghanistan, the reduced deployments or reduced force structure, we have been predicting for you for some time, Joe, that we would see some pressure from that Eagle in terms of a year-over-year basis. There was also one major competition that occurred, for what was called the MOLLE equipment for the military that was won by another provider what we think was a very, very low margin and a very low price. We did not win that at those prices. So you are seeing some impacts from that ripple through the sporting group.

Neal Cohen

I think, Joe, the other thing to mention is the fact as Mark said, we continue to run the business for long-term sustainability and margin. And as we look at the product mix and continue to challenge ourselves to make sure we're delivering to our customers the best value products that will cause us to look at continue to refine the mix in that business. Having said that even with that, we still saw, as we know, we still saw 12% organic growth year-over-year in the fourth quarter.

Joe Nadol - J.P. Morgan

When you look at commercial ammo specifically, was it down sequentially from Q3 to Q4 and can you comment on where you are in terms of your capacity utilization?

Mark DeYoung

No, it wasn’t significant. There was no real material shift in ammunition, Joe. That market continues to be strong. I would remind you that we mentioned last quarter that the 223, 556 caliber ammunition, which is largely produced for us at Lake City is softening in the market. There's been inventory build. We mentioned to you in third quarter in the month of December that we saw some cancellation of orders occurred. We also had some cancellation of orders in January with that same Lake City product. It seemed largely in the market is a commodity product. There is lot of competition in those calibers of other manufacturers. So aside from some softening in that particular caliber for small rifle, ammunition has remain quite strong and in fact, rimfire ammunition and pistol ammunition remained very, very strong and overall organic profitability remained very strong in the quarter.

Joe Nadol - J.P. Morgan

Okay. Very good. Just one more for you over in defense. You called out the defense electronics systems division from a profit standpoint, what's going on there and was there a negative catch on the contract in the quarter?

Mark DeYoung

No, I think the big issue that happens in defense electronics, really two things occur there. One is the AARGM program, which we’ve no entered into LRIP on that program. It's doing fine. It is on track. The Navy has -- it is a priority program. We expect within the next five, we will be in the $96 million range. We’ve talked in the past about $100 million a year kind of annual run rate, that's being sustained. The other thing in that division is our AAR-47 product, which is an aircraft protection system. We’ve had some international sales for that. We also completed some major contracts and wrapped those up. So we are working as we’ve said in the past, our strategy is to take these capabilities from a domestic market to an international market. So it had some good international wins with AAR-47 in that division. But we are seeing some declines for demands of those same products domestically.

And then other -- on defense of course, in the larger strategy of offsetting domestic pressures and budget declines through international growth, I just have to mention how pleased I’m and how proud I’m with the defense team for that significant win, international win that occurred in the quarter for ammunition and ammunition manufacturing technology and ammunition support services. That is one of the largest international contracts in the history of the company. And then in our first quarter, which we haven’t reported out yet because we are in the middle of it, we’ve had another one where we recently announced, which is almost a $200 million international win in the defense group for our cannons business, so that is significant as well. And you probably saw the press release on that. So we are pretty pleased with the strategy to drive international growth to offset some of that softness in defense.

Neal Cohen

One of the thing, I would add to Mark’s comments is although we break out the year-over-year decline in our pension expense separately, our aerospace and defense groups represent lion share of that. And so there are implementations, the actions to implement the new cash balance plan. A lot of that -- the majority of that pension savings relate to actions that M&A, from our aerospace and defense group.

Joe Nadol - J.P. Morgan

Thanks, guys.

Mark DeYoung

Thank you, Joe.

Operator

Next question is from Robert Spingarn with Credit Suisse.

Robert Spingarn - Credit Suisse

Morning.

Mark DeYoung

Morning.

Robert Spingarn - Credit Suisse

I wanted to talk…

Mark DeYoung

Hello. Robert, I think we lost you.

Robert Spingarn - Credit Suisse

Yeah. Can you hear me now?

Mark DeYoung

Yeah. Now we can hear you again.

Robert Spingarn - Credit Suisse

Okay. On the guidance, I wanted to ask you about, you’ve got an implied growth rate of about 9% here at the midpoint of the guidance range. Of course, there is some acquisition in there. Mark, you talked about organic growth for the sporting business being in the mid to high single digits. How do we think about the other two pieces, if you can? I mean, we see aerospace here, of course was down a little bit on space in the quarter but you’ve got growth there in the composites business. So how should we think about that one perhaps and then, even though defense had a plus up in it as it bottoms?

Mark DeYoung

Yeah. Aerospace, I think when you think going forward in terms of guidance and what's happening in the portfolio within the company, I think aerospace, you can consider is largely flat. I don't think there's any significant growth that we anticipate coming out of aerospace. As you recall, we've been managing our aerospace strategy to avoid declines in that business by driving our commercial capabilities and commercial launch and commercial motors to offset trends that we saw post shuttle decline and post cancellation of constellation program. That has been largely a successful strategy. We stabilized that group over the last couple of years with flat to stable revenues. I think that is kind of the watchword going forward. We are excited about Stratolaunch. We are excited about where we are on SLS, we are 75% complete. Again, start work in preparation on the SLS booster. So, I think there's a lot of good work going on in the aerospace group.

There are continued pressures in the aerospace group, which are somewhat being offset by growth opportunities in commercial aerostructures. Airbus has done very well. The A350 continues to do well. We are in a two rate. We will be ramping up this summer to a 2.8 rates, so that continues to ramp up. The 787 win, although not a significant revenue generator this year will be a long-term opportunity for us. We are excited about that as well as the M400. So, I think in aerospace that portfolio is shifting from a group, which was largely propulsion-based to a group, which is much more balanced now across our composite capabilities as well as propulsion capabilities.

I think the watchword there, Robert, is stability. In the defense group, there are some continued pressures and declines. Defense group revenues were down this year, year-over-year, which should not be a surprise to anyone. We were down about $160 million year-over-year in revenues in the defense group. Some of those pressures continue. Small caliber, Lake City pressures continue in terms of military orders for small caliber. We are seeing declines in medium caliber ammunition, although we are doing a great job with international sales of medium caliber cannons. So there are some of those pressures, which I think are continuing in the defense group.

And again, our strategy has been to largely offset those as best we can, with key international expansion which is beginning to bear fruit. And then I think those growth ranges that we gave for the sporting group are consistent with what we believe will be able to accomplish. And as I said, we are being a bit cautiously optimistic on what FY ‘15 might hold from a market perspective for sporting. So, I think those are kind of the color I can give you, at least, on how the three groups stack up as we look forward.

Robert Spingarn - Credit Suisse

So, I guess you are saying, you continue to expect negative growth or at least slightly negative growth in defense?

Mark DeYoung

Yes. I think that's right. When we put our plan together for this year, we had to back-off a little bit. Again, some of that, as I mentioned is driven by just those munitions categories and others just by the invested market.

Robert Spingarn - Credit Suisse

Okay. And then just lastly on sporting in terms of mix, you’ve talked a little about the record profit there. How should we think about mix, as it factors into your performance in ’15?

Mark DeYoung

Yes. So, I think one of our goals and strategies is to drive this mix and introduce more and more accessories into our mix. So, a lot of the performance we've enjoyed over the history of having sporting and the company has been driven by our expertise in ammunition, new product development associated with ammunition, our branding and marketing strategies for ammunition, I think have been terrific and we’ve strengthened our distribution with those brands. I think going forward, the strategy is shifting and you’ve seen it with our recent acquisitions to balance this portfolio, so that we aren’t so ammunition latent but that we are also driving this mix, not just from an ammunition mix in terms of pistol shotshell, rimfire and centerfire but driving the mix to include more accessories. And that is our strategy going forward is to balance that portfolio, so we aren’t so heavily weighted and driven by ammunition sales.

Robert Spingarn - Credit Suisse

Mark, what kind of impact does that mix shift have on margins?

Mark DeYoung

It’s interesting. Traditionally, accessories have always sold at a higher margin than ammunition. The traditional margins for ammunition in years past were around 10% and accessories were around 14% to 15%. That had shifted little bit in the current market because the demand for ammunition outpacing the supply and pricing actions which have been taken. So in the past, you would've said that increasing your accessories demand would lift your margins. Now those accessory margins are about in line with ammunition margins.

Robert Spingarn - Credit Suisse

Okay. Thanks very much.

Mark DeYoung

Sure.

Operator

And next, we will go to Gautam Khanna with Cowen and Company.

Gautam Khanna - Cowen and Company

Good morning, Mark.

Mark DeYoung

Good morning.

Gautam Khanna - Cowen and Company

So I just wanted to follow up on the sporting margin kind of guidance implied in fiscal ’15, because was there anything unusual in the 18.5% margin kind of ex-Bushnell and Savage, and last quarter you had north of 16%? So given the growth rate you’re kind of assuming, it seems like we’re going to see a big decline in EBIT margin and the underlying business. Is that correct or…

Mark DeYoung

Well, we are concerned about. I think [Scott] (ph) the answer is we are little concerned about that. Again, the margin levels we have are unprecedented. So as we’ve said, I think over the last year, and I think as you've heard, Winchester who recently commented on this. They too had some caution associated with sustainability of these mid-teens margins on the ammunition, commercial ammunition category, that's driven by this excessive demand beyond supply.

So yes, I think the answer to your question is, we’re anticipating that there will be some sustainability pressures on those margins. And as we drive accessories to balance off that portfolio, our goal is to drive as much profitability obviously as we can out of the business. It will be interesting to see how the market materializes. I think there have been a lot of people, who have been predicting a downturn in the shooting sports market now for many years and they continue to be wrong, it’s shown amazing longevity and it’s remained amazingly robust. We will watch that as we go forward and capitalize on every opportunity.

Gautam Khanna - Cowen and Company

But as it stands now, is it fair to say you don’t expect this to occur imminently, it’s not like a…

Mark DeYoung

I have nothing on our radar screens from order volume. In fact, our book-to-bill ratio continues to be very strong. We are above 1. One has always been the magic number for ATK. I remember many quarters below 1 in my career. So we are well above that. As I mentioned, we have a back order, backlog positions in sporting, which equates to a year’s worth of production on ammunitions. Our order flow and backlog is still strong. Haven’t seen a lot of order cancellations. Our Savage product is selling well. Our accessories and Blackhawk products continues so well.

So no, I do not see anything imminent for us that causes me to be concerned, and I'm not sure that we will see a significant correction in the next full fiscal year. As I mentioned, we’re little cautiously optimistic on that however, but we don’t see anything now which would lead us to believe that there's any significant challenge on the horizon.

Gautam Khanna - Cowen and Company

Last one, if you could just comment on how Lake City’s margins have changed sequentially? I remembered in the December quarter, there was a one-off skew that you were still producing under the old contract. Is that totally out of the numbers in the March quarter? And then, how do we think about the margin profile at Lake City in the March quarter and how it will evolve over the year?

Mark DeYoung

I am glad you asked that question, because I wanted to add color back to that. Again remind everybody what that situation is like. So I appreciate the question. On M855A1, that was the round you referred to which was the round we built off the prior contract pricing in the fourth quarter. We completed the production of that build in the March timeframe which was the end of our fourth quarter, this reporting period. So that work, that carryover from the prior contract is now being completed. So we’re going to enter fiscal year ‘15 with full production against the new contract.

As you recall in the new contract, it was a highly contested plant. Lake City is the gem of the ammunitions industrial base. That highly contested proposal led us to be aggressive to ensure win which we think is a great strategic win for the company. However, we have said that we believe revenue will be down at that facility by a couple of $100 million a year and that is manifesting itself. And we said the margins which at some point have been able to be in the low-teens, but at average somewhere around 10% or double digits would decline in the first few years of our new contract to mid-single digits. That mid-single digits is manifesting itself right now in this quarter.

So that’s going to put pressure on our Defense Groups margins going forward until we drive the efficiency improvements, the supply chain improvements and modernization work that we are building at Lake City to increase efficiency and improve those margins.

So going forward, which is now this quarter we are in right now, first quarter and going forward under the new contract, mid-single digit margins, couple of $100 million, the military revenue in Small Cal, ammunition procurement being soft and we are working our way through that. So that's creating a year-over-year margin impact on Lake City of over $50 million due to that lower pricing.

Gautam Khanna - Cowen and Company

Thanks a lot.

Mark DeYoung

You are welcome.

Operator

(Operator Instructions) And next, we will hear from David Strauss with UBS.

David Strauss - UBS

Good morning

Mark DeYoung

Good morning.

David Strauss - UBS

Neal, could you maybe touch on the components of the free cash flow forecast for fiscal ’15, it looked a little later than what I was anticipating?

Neal Cohen

Yes. We’ve got improvement in earnings and we probably have a little bit of headwind on free cash flow around some tax areas associated with the timing on tax payments. So we have a little bit of -- so that maybe one of the things that’s contributing to your assessment of the free cash flow.

David Strauss - UBS

And what are you assuming in terms of a pension contribution, because obviously you are -- the cash recovery is about flat, but are you assuming in terms of your own pension contribution?

Neal Cohen

I will give you that in a second, I think it’s $85 million. I will get you that in a second.

David Strauss - UBS

Okay. As my follow-up, in terms of the guidance, so I guess on an adjusted basis you were a 10.59 for fiscal ’14. Pension looks like it’s about a $1 tailwind. Bushnell, looks like it’s going to contribute an extra $0.50, $0.60. Obviously you have the Lake City headwind to deal with. But what are the other big moving pieces, because on that basis it doesn’t seem like you are assuming much in terms of rest of the business and that still takes you to the top end of your range?

Neal Cohen

Yes. I think as Mark said, we are being cautiously optimistic at this point in terms of looking forward into FY’15 and one other thing that I think is -- you have to take into account is probably share count and there is increase in the share count as with the suspension of our share repurchase program and with the increased dilutive effect of the convert. You'll notice that our share count has gone up too.

David Strauss - UBS

Okay. Thank you.

Operator

And from Jefferies, we will hear from Howard Rubel.

Howard Rubel - Jefferies

Thank you very much. I just have a couple of cleanup items. One, could you talk a little bit about channel, the channel, Mark, with respect to some of the new products that you're selling through Bushnell?

Mark DeYoung

Yes. Let me give a generic answer to that, Howard, and then we’ll talk more specifics, please just follow up and ask me. So Bushnell, in terms of channel distribution, it's very common channel distribution to our other accessories and our ammunition products. So that distribution channel includes functional wholesalers, which wholesale that product to independent dealers. It also includes regional chains and mass merchants as well as national chains like Wal-Mart and Cabela's and Dick's and Gander Mountain and Bass Pro Shop. So the distribution channel is very much the same as our classic ammunition distribution. Some of it is two steps through wholesalers. Some of it is direct to large retailers who are key strategic customers of ours.

So no real discrepancies or differences with the exception of a few unique products in Bushnell, the golf product where Bushnell is a leader in golf rangefinders that of course distribution goes through independent golf shops and regional gold shops as well as golf chains. So that’s a little bit of a new twist for us in terms of channel distribution. And then the international distribution for Bushnell’s sporting eyewear, of course that division is headquartered in France., and so there's a large international component in Australia and in Europe with performance eyewear and the winter sports, eyewear, so that’s a little bit different for us as well, but the bulk of it is a common distribution channel with our other products.

Howard Rubel - Jefferies

And then to change subjects a bit. There has been a lot of discussion about assured access to space. What kind of conversations are you having that might be able to enhance or improve your solids business?

Mark DeYoung

Yes. So a couple of things there I think that are literally interesting and there's been a lot of press recently about the Russian provided space access on their solids vehicle, which we've been using to launch US astronauts to the space station. Recently in the press with the issues that are being going on associated with Crimea and with Russia, we’re seeing a lot of political dialogue back and forth. We see the administration put out some policy changes in terms of support for Russian space. And then counter positions taken by the Russians.

In general, I think, Howard, in general, we do not see any imminent threats to ATK from those kinds of discussions. And in fact, I think as the Department of Defense and as NASA looks domestically to ensure that the United States has its own launch capability, we believe that actually could help ATK solid propulsion business. We have a longstanding history of reliability. We have a longstanding history of economics to be able to get those heavy payloads into the correct orbits at reasonable costs. And so I think if anything right now, we're somewhat optimistic that this will encourage the United States to look closer its own domestic launch capability, which could actually bolster the focus and attention on our solids propulsion capability, and the hopefully lead to new missions and new solutions that we could help provide for the country.

Howard Rubel - Jefferies

Thank you very much.

Operator

And next, we go to Michael Ciarmoli with KeyBanc Capital Markets.

Michael Ciarmoli - KeyBanc Capital Markets

Hey, good morning, guys. Thanks for taking the questions.

Mark DeYoung

Hey, Michael.

Michael Ciarmoli - KeyBanc Capital Markets

Maybe Mark just one kind of cleanup one, we’ve talked about -- I guess, you’ve talked about the pressures hitting the defense next year with Lake City. How do we think about maybe the positive impact of all these international orders? What is the expected duration of some of those orders? I would think with some of the volume games there and even just the international pricing, it would be a bit margin accretive. So how do we think about the ramping effect of some of those dynamics?

Mark DeYoung

Yeah. Michael, I think your basic assumption is correct. I think that for the most part as we go forward with these international wins, we are winning them at margins, which are accretive to the business. We are winning them as you would expect from international business a higher profit rates than you might see on some of the domestic, particularly, obviously, significantly higher than what you're seeing Lake City generate under the new contract terms.

So I think the challenge there is in FY’15 which we're guiding to today, you don't see a material manifestation of these recent wins and their margin improvement in the FY’15 year. The bulk of that benefit is going to be in ‘16 and beyond as we ramp up and begin deliver against those international contracts and deliver the sport services. Most of them are multi-year, so these are multi-year contracts, which we think is terrific, gives us backlog at higher margin and it offset some of the domestic sales pressures. The only challenge sitting here today is, it’s not a huge impact in fiscal year ‘15.

Michael Ciarmoli - KeyBanc Capital Markets

Got it. Perfect. Thank you. That’s all I had.

Mark DeYoung

You bet.

Operator

From Shapiro Research, we’ll hear from George Shapiro.

George Shapiro - Shapiro Research

Yes. Good morning.

Mark DeYoung

Good morning, George.

George Shapiro - Shapiro Research

I wanted to pursue the incremental margin in sporting on the organic business; it was like 67%, up from like the high-30s in prior quarters. Was the big part of that difference due to the price increase that you got and do I assume that that was like 3% or 4%?

Mark DeYoung

The price increases, we had mentioned George on our previous call we’ve done a price increase earlier in the year. The range, you’re giving that kind of mid-single digit. We said is what we believe we had retained in general across the business in terms of price increase was the kind of range that you suggested around that 4% to 5% being sustained and delivered to the company from the price increase so that certainly contributes to it.

The other part that contributes to it, I would just remind you of the SKU rationalization initiative that we undertook, where we looked at our mix of ammunition products and we focused on those. They were the higher profit margin products for us. That generates significant profitability improvements this year. It's a pretty big number that came from just rationalizing what we offer to our customers and how we offered it. So that really helped and contributed and continued to gain momentum.

Also in the period that we're talking about, there is some seasonality in these businesses and that seasonality drives higher margin products in our third and fourth quarter, which is the hunting seasons that begin October, November, December, and then go through late winter in January and February. Those typically are higher margin products. We did have an anomaly as you’ll recall a year or two ago when that flipped on us in the fourth quarter and we got surprised a bit by some consumer target ammunition, which overwhelmed volume at lower margin. That obviously didn't happen again. So we saw a nice year-over-year from that event not recurring and more of a standard offering of reduced dues, better pricing and a good mix.

George Shapiro - Shapiro Research

And a follow-up Mark, at Bushnell, the transition cost and the inventory step up, do those costs continue into ’15?

Mark DeYoung

Yes. We have some of those costs which do continue into ’15, they're not all behind us. Yes, that’s correct.

George Shapiro - Shapiro Research

Could you roughly size how much is ahead of us?

Mark DeYoung

We didn’t give visibility on that post-acquisition. We didn't give visibility on our last quarter George, I would like to, but we would prefer not to do that, as I mentioned in the past on these calls. This is such a competitive marketplace. We would like to at least have a few cards, which we can compete with. And we just haven't disclosed those numbers. I can tell you in terms of the transition cost, we’re on track. We’re actually under running our budget slightly and what we expected in transition costs, we’re happy with the progress there. We aren’t incurring more cost than we expected or planned, so I think that's great. The team has done a very good job and we’re on track with the key milestones there.

George Shapiro - Shapiro Research

And last if I could get one more. Last year you started guidance at 750 to 790, we know what you wound up at. Now was that big difference between what you started and what you round up, pretty much solely due to much better performance in sporting, or is there something else involved in it?

Neal Cohen

Yeah. George, it is Neal. Clearly the sporting performance drove a lot of that upside. But I think the sporting performance you have to really breaking it down into various different buckets. Clearly the organic growth that we experienced last year was exceptional. But at the same time, I think the team the PES initiatives, the drive that Mark talked about to drive quality into the business to improve margins, really as you can see contributed to earnings growth well in excess of the revenue growth.

So, I think we saw lots of uptake on the initiatives that we drove a lot faster than we had anticipated, as well as frankly we didn't enter the market. We certainly expected the market to continue to be an attractive market but based on long-term trends and obviously the organic growth that we experienced in FY ‘14 was a multiple of our long-term expected growth rate. I think that also explains why we’re being a little cautious right now going into FY ‘15.

We've shared with this group that this has been a business that based on market dynamics, the change from the hunter to the new shooter. Based on our management, the business, we've been able to maintain double-digit growth rates in this market for a decade. But clearly in FY ‘14, we experienced growth rates that were 2.5x, 3x times that type of long-term sustainable growth rate. We think this is a great business. We think we have great brand, great products, a great team, we love serving this market.

But we have to be mindful of when you come off of the year like that, where expectations so exceeded the original expectations at the beginning of year that we have to understand how that will annualize going into FY ‘15. And that I think explains Mark’s comments about us being cautiously optimistic about next year. But we’re not cautiously optimistic is about the long-term prospects for this business.

Mark DeYoung

Yeah. Those remain very robust. We’re still very excited about the business. We’re very excited about our number one position in our markets. But I think, Neal’s point, I think is exactly right and yes, George, sporting blew the year away for us. And now we’ve got to figure out, how do we go into ’15 with that?

Neal Cohen

And I think, George, the same time our defense and aerospace groups executed very well in ’14, we had no surprises there. We drove a lot of initiatives in terms of the ramp rate on the Airbus program, the new wins in aerostructures, the international new wins, the implementation of the much more cost effective pension plan. I think all those at the same time, we had no surprises in our A&D business in FY ‘14. And in fact, really put a lot of -- in place a lot of things that will in the long run contribute to improvement in that business. But at the same time in FY ‘15, we’ve got to work through this implementation in the first full year of the new Lake City contract, which will have the impact of margins and profitability that Mark talked about.

George Shapiro - Shapiro Research

Okay. Thanks very much. Good color.

Mark DeYoung

Thank you, George.

Operator

And ladies and gentlemen, we have time for one last question and that final question will come from Herbert Hardt with Monness.

Herbert Hardt - Monness

Good morning. Question regarding margins on commercial ammunition. I see where copper prices are starting to inch higher. You talked about offset in some of those with mix but are there -- is there any sense of price pressure on say, the larger caliber rounds that are now building up in distribution?

Mark DeYoung

Yeah. So we have a very -- having sophisticated and successful way of managing and procuring major commodities like copper, zinc and lead in particular. Of course, copper and zinc are the key components of brass, which we consume a lot of in brass casings and lead based upon project our business. And that approach we take is we don't just buy spot on the market but we use hedging vehicles. We also use long-term supply contracts where we lock in a certain price points and actually lock in with purchase orders, long-term purchase.

So we have about a three-fold approach to buying those kinds of materials. And I think what we’ve demonstrated over the last decade is you've not heard us expressed to you very much in terms of impacts from volatility in commodities because of these balanced and thoughtful approach that I believe we take in how we purchase our commodity. So when we look at ’15 in particular going forward. And we look at how we positioned ourselves with those three approaches to managing commodity buys across zinc, copper and lead, I think we’re in really good shape to have stability in our cost structure which is our goal.

Our goal is not to make a much of money on commodities and not to lose a much of money on commodities but create stability in our cost structure, so that we can make that money on performance and on offering quality products at a profitable price to customers. I really don't see anything sitting here today in ’15, that's going to perturbate us going forward due to our exposure to the commodity pricing.

Herbert Hardt - Monness

Thank you.

Operator

And at this time, I would like to turn the conference back over to management for any additional or concluding remarks.

Mark DeYoung

All right. Well, thank you very much. We appreciate all of you joining the call today. We had a terrific year in ’14, a terrific fourth quarter as we described. We’re very excited about ‘15 going forward and we appreciate your interest in the business and your participation in questions today. Have a great day. Thank you.

Operator

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.

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