Alliant Techsystems' (ATK) CEO Mark DeYoung on Q1 2015 Results - Earnings Call Transcript

Jul.31.14 | About: Orbital ATK, (OA)

Alliant Techsystems (ATK) Q1 2015 Earnings Call July 31, 2014 9:00 AM ET

Executives

Michael Pici -

Mark W. DeYoung - Chief Executive Officer, President and Director

Neal S. Cohen - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Jose Caiado De Sousa - Crédit Suisse AG, Research Division

Christopher Sands - JP Morgan Chase & Co, Research Division

Steven Cahall - RBC Capital Markets, LLC, Research Division

Gautam Khanna - Cowen and Company, LLC, Research Division

Greg Konrad - Jefferies LLC, Research Division

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

David E. Strauss - UBS Investment Bank, Research Division

George D. Shapiro - Shapiro Research

Herbert A. Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

Operator

Good day, everyone, and welcome to the this ATK First Quarter Fiscal Year '15 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Mr. Michael Pici, ATK's Director of Investor Relations. Please go ahead, sir.

Michael Pici

Thank you. Good morning, and thank you for joining us for our first quarter fiscal year 2015 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 W. DeYoung

Okay, Mike. Thank you very much. Good morning, everyone. Thanks for joining us this morning. ATK recorded strong financial results in the first quarter. We had significant year-over-year growth in sales, operating profit and earnings per share. I'm pleased with ATK's performance, the execution on our strategy to secure additional International business and our preparation to successfully complete the transaction to merge our A&D businesses with Orbital and spin off our Sporting business.

Reflecting our recent performance in the quarter and our confidence in the full year, we have raised our full year EPS and free cash flow guidance. Neal will expand on guidance in just a moment.

Just a quick update on the transaction. It was announced, as you know, on April 29. As we've said before, this proposed transaction will create 2 strong stand-alone companies committed to sustained leadership and success in their markets. This transaction presents a compelling opportunity to position and build durable, focused enterprises that will deliver long-term shareholder value. ATK has formed teams to prepare for both the proposed merger and the spin, and we continue to target the end of the calendar year for the closing.

Turning to the recent successes in our business groups. The Aerospace Group delivered strong first quarter results, driven by solid safety performance, program execution and strategic wins. The group has done a tremendous job capturing new awards and our propulsion technologies continued to play an integral role on commercial and government programs.

Most recently, ATK's CASTOR 30B Solid Rocket Motor provided the additional thrust needed to launch Orbital's Antares rocket to its second NASA commercial resupply services mission to the International Space Station. During the quarter, our capability supported the successful launch of a ULA Delta IV rocket from Cape Canaveral, Florida. The group also secured a GEM-60 motor contract with ULA valued at $127 million, which will support the Delta IV launch vehicle through 2017.

We continue to make steady and significant progress on NASA's SLS program. All 4 SLS Orion prime contractors are on schedule for the planned 2017 test flight, and we continue to see strong bipartisan support for the program.

The Navy conducted successful flight tests of 2 Trident D5 missiles, each with motors manufactured by ATK, reaching a milestone of 150 consecutive successful launches.

Also, ATK's Orion motors played a vital role in a ground-based interceptor test for the Missile Defense Agency. The group is on track with our commercial composites business and is executing to our plan. The team continues to drive innovation and affordable solutions to meet our customers' needs and deliver returns to the company and shareholders.

We are currently engaged on the A350 program, the A400M program, Boeing 787 program, and Rolls-Royce programs. We are on schedule and on cost for the A350 program, including the fabrication of the first Pathfinder parts for the dash 1000 program. ATK was formally qualified and listed as a Boeing 787-approved source for composites processing, and we have successfully begun to fabricate the first Pathfinder parts for this program.

To top it off, the Aerospace Structures division won the Society of Manufacturing Engineers Excellence in Composite Manufacturing Award.

Moving to the Defense Group. Defense Group opened the fiscal year with continued success in new international orders. Following our significant ammunition services order in the fourth quarter, we recently won a $220 million contract to supply medium-caliber cannons and cannon system integration and product lifecycle support to U.S. allies. The company made significant progress with our weaponized aircraft program during the first quarter. Teamed with Alenia, we completed the first phase of flight and ground test for the MC-27J multi-mission aircraft. The aircraft was modified with ATK-developed Roll-On/Roll-Off weapon systems and our 30-millimeter cannon.

We also delivered 2 AC-235 gunships to Jordan. Working with the Kingdom of Jordan, we modified the transport aircraft into a highly capable and cost-effective special-mission aircraft. The group continues to execute on AARGM, booking the third full-rate production contract from the U.S. Navy for approximately $96 million.

Lastly, with regard to the Defense Group, I want to reaffirm that we expect to continue to deliver double-digit margins for the full year.

In the Sporting Group, we continue to see sustained demand for pistol and rimfire ammunition. Our legacy sporting business has grown significantly and the group recorded organic sales growth of 13% and an operating profit increase of 50% during the quarter. While the group did see some expected reductions in ammunition backlog, our overall backlog remained strong. We are confident that with our iconic brands, our innovative solutions and our focus on customer relations and solid business execution we will continue to see long-term growth in this business. The Sporting Group received Outdoor Life Great Buy Awards for the Bushnell G-force DX laser rangefinder and for the Bushnell Excursion HD binocular.

To conclude, I'm very proud of our strong performance in the quarter and year-over-year increases in sales, operating profit and EPS, as well as our increased guidance. I'm excited about our future in all 3 groups and excited about the transactions with Orbital.

I'll now turn the call over to Neal. He'll discuss the financial results for the quarter and share more on our outlook for the year. After Neal's comments, as usual, we'll do Q&A. Neal?

Neal S. Cohen

Thanks, Mark, and good morning, everyone. ATK recorded strong operating results in the quarter. Year-over-year sales increased 18% to $1.3 billion compared to $1.1 billion in the prior year. Growth was driven by higher sales in the Sporting Group, which included Savage Arms and Bushnell acquisitions, and sales in the Aerospace Group, partly offset by a decrease in the Defense Group. Operating profit also increased 24% year-over-year to $156 million in the quarter, representing a $30 million increase from the prior year period.

As we've done in previous quarters, I will also discuss our as-adjusted results. Please review the reconciliation table in our online web slides for more information. Adjusted operating profit for the quarter increased 35% to $170 million. The adjusted numbers exclude: a $11 million facilities write-off that we discussed on our last quarter's call related to rightsizing our corporate office space requirements; $7 million in transaction related cost; and a $3 million positive pension segment closeout related to the Radford Army Ammunition Plant contract. The increase in adjusted operating profit was driven primarily by higher profits in the Sporting Group, including acquisitions, and lower FAS pension expense of $11 million, partially offset by lower profits in the Defense Group. The company expected the lower profits following the transition to a new operating contract and the absence of a prior year performance improvement in the Small Caliber Systems division.

As-adjusted operating margin for the quarter also increased from 11.6% in the prior year to 13.3% this year. Net income for the quarter was up 19% to $85.6 million compared to $72 million in the prior year. Adjusted net income increased 31% to $94.4 million. The year-over-year increase was due to higher adjusted operating profit, partially offset by higher interest expense related from increased debt. Fully diluted earnings per share were $2.59 compared to $2.24 in the prior year. As-adjusted EPS increased 28% to $2.86 driven by higher adjusted net income, partially offset by increased share count.

ATK's first quarter orders were $1.3 billion, down from $1.4 billion, driven by lower orders in ATK's Sporting and Aerospace groups. As we've previously communicated both in the fourth quarter of FY '13 and the first quarter of FY '14, we saw unusually high orders that ATK did not expect would be indicative of future business. Order impacts were partially offset by orders in ATK's Defense Group. The team is executing on the company's international growth strategy, and in the quarter, the Defense Group received significant orders from U.S. allies totaling $220 million. ATK's book-to-bill ratio for the quarter was 1.0. We finished the quarter with a backlog of $7.5 billion.

Interest expense in the quarter was $23 million compared to $14 million in the prior year, primarily reflecting the increased average debt level resulting from the Bushnell acquisition. The tax rate for the quarter increased to 35.2% compared to 35 -- pardon me, decreased to 35.2% compared to 35.5% in the prior year, primarily due to nondeductible acquisition-related costs in the prior year, offset by the absence of federal R&D tax credit in the current year.

Free cash flow use was $128 million, down from a use, in the prior year quarter, of $165 million, reflecting lower pension contribution.

Now turning to the groups, starting with the Aerospace Group. Our first quarter sales increased 8% to $333 million compared to $307 million. Operating profit in the quarter was up 3% to $38 million compared to $37 million in the prior year quarter.

In the Defense Group, sales in the first quarter were down 7% to $442 million compared to $475 million in the prior year quarter. Excluding the Radford pension segment closeout, adjusted first quarter sales were $439 million. Operating profit for the quarter was down 27% to $45 million compared to $62 million in the prior year quarter. This reflects expected lower profits in the new contract in the Small Caliber Systems division.

Turning to the Sporting Group. First quarter sales increased 57% to $564 million compared to $358 million in the prior year quarter. Organic sales increased 13%. Sales from Savage and Bushnell were $42 million and $125 million, respectively. Operating profit in the first quarter increased 79% to $79 million compared to $44 million in the prior period. Organic operating profit increased 50%, driven by additional sales, product mix and the absence of a prior year restructuring inventory write-off for military accessories. Operating profit for Savage and Bushnell were $8 million and $5 million, respectively, including transition costs for Bushnell.

During the first quarter, ATK launched its tender offer and recently retired approximately 90% to 95% of its convertible notes. The company was required to -- retire the convertible notes as a condition of the merger transaction, but we initiated the tender offer earlier in June. Due to ATK's tender offer for its outstanding 3% convertible notes, the FY '15 share count is now expected to be approximately 32 million shares.

ATK is reaffirming its sales guidance in the range of $5.15 billion to $5.25 billion for the year. Given the strong first quarter operating performance and successful results of the tender offer and lower expected tax rate, the company has raised its EPS and free cash flow guidance for the full year. We expect full year FY '15 EPS guidance in the range of $11.50 to $11.90 per share, up from $10.80 to $11.20 per share. This increase in EPS guidance is due to strong operating performance in the quarter across all 3 groups, continued strong outlook for the full year including double-digit margins in defense, the retirement of convertible notes and a change in our expected tax rate.

In terms of the pieces, this increase of $0.70 per share includes $0.30 per share for stronger operating performance, $0.25 per share for the impact of the retirement of the convertible notes, and $0.15 per share due to the lower expected tax rate. The guidance range excludes any transaction-related cost for the full year. Included in the EPS guidance is $0.14-per-share cost impact from the nonrecurring items which include the building rationalization mentioned earlier and the Radford pension segment closeout.

ATK expects full year free cash flow guidance in the range of $280 million to $305 million, up from $250 million to $275 million, due to increased performance for the year. The effective tax rate for the year is expected to be 34%, down from the previous guidance of approximately 35%, due primarily to higher Domestic Manufacturing Deduction and lower sales tax. This also assumes retroactive extension of the Federal R&D tax credit that expired on December 31, 2013.

In closing, ATK had a strong first quarter. We recorded sales growth, improved earnings, improved margin, we continued to strengthen the balance sheet by retiring the convertible notes and we raised our earnings and free cash flow outlook for the year.

With that, Mark and I are now ready to open it up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Robert Spingarn with Crédit Suisse.

Jose Caiado De Sousa - Crédit Suisse AG, Research Division

This is actually Joe on for Rob. Nice quarter. Mark, I wanted to ask about your outlook for the Sporting Group, particularly regarding your expectations for organic growth for the remainder of the year. I think last quarter, you had noted an expectation for something in the high single-digit range? And you did, obviously, 13% this quarter. So hopefully you can give us an update on your latest thoughts on that. And then secondly, also on the Sporting margin, you had previously suggested that the record sort of 15.5% margins in the second half of last year were unlikely to be sustainable going forward, and that you did 14% this quarter. So I wanted to ask if that's a more sort of normalized sustainable level to think about going forward for Sporting Group.

Mark W. DeYoung

Sure. All right. You bet. In terms of Sporting, yes, we're very happy about, first, the organic growth of 13% in the quarter. Very pleased with that. As you said, it exceeded some of the expectations we thought we may see. I think the group is doing a tremendous job in utilizing and capitalizing upon our sales, marketing and distribution leadership positions in that industry. I think also, our brands and the strength of our brands and the pull of our brands is manifest in our excellent performance in the quarter. I know I've looked at other competitor information and we surely are outpacing our competitors substantially in terms of our performance in the past quarter. So we're happy with the organic growth. As many other companies who have already reported have stated, it appears that calendar year '13 may have been the peak in demand in the sporting industry. However, we are off, as you said, to a very strong start in '14 and we're quite excited about that start and pleased with our leadership positions. So I think organic growth going forward, based upon the strength we saw in the quarter, may edge above even my expectations of this mid to upper single-digit growth. I think that the 13% reassures us of the strength of our capabilities in the market. So I'm optimistic that we're going to be able to continue to deliver organic growth in this business, long-term growth and the shareholder value which will go with that. We clearly have a demonstrated, now, and validated leadership positions where we can outpace the market and competitors. So in terms of the margins, the margins for the quarter, I think, are still fantastic margins. Being able to deliver margins at 14% in this industry, traditionally, would be what some would have called an amazing result. So we're still very happy with those margins in that range. As expected, we thought there may be some margin pressures in the market and some demand softening in the market, and we are seeing some of that, but it was basically right on track with what we hoped we'd be able to do, and we're very, very pleased with those results. And going forward, we anticipate being able to continue to deliver both organic growth and margins in the range we're delivering now.

Operator

And we'll go next to Joe Nadol with JPMorgan.

Christopher Sands - JP Morgan Chase & Co, Research Division

It's actually Chris on for Joe. Mark, I wanted to ask you about the outlook for Bushnell, and I think the revenue where it is now is a little bit below your original expectations. So any commentary on whether that's demand or integration? Or any of the trends there would be helpful.

Mark W. DeYoung

Sure. Sure, Chris. So as you know, we disclosed and talked about Bushnell revenue at around a $600 million-per-year annual run rate. And if you just take our first quarter and normalize it, you're going to be about $500-ish million coming out of the quarter. We think that there's still long-term upside for Bushnell. It has not shaken any confidence we have in that. Our strategy is sound. The company is sound. The brands that came with that acquisition are exciting and leading brands. I remain very committed and excited about that business and what we will be able to do with that business over the long term. There have been some weaknesses in optics demand in the market. We have some transition costs that we're still incurring and will throughout the course of the year, impacting that business' performance. So there are also some mix issues that occurred in the quarter in terms of margins in that business with mix. So I remain very bullish on the future of that acquisition. I remain very bullish that we'll continue to be able to deliver new products and new innovative solutions. One of the things that's impacting us here in our first couple of quarters of operation is really a lack of exciting new products post acquisition. We are fixing that. We have a very strong focus on innovation and affordable innovation. That group has put in place a very, I think, robust process to manage product development and insert innovative and creative and value-creating demand in our products through new product introductions. We'll be introducing some new products in November and January, which is the classic time in the sporting business as we work up wholesalers and retailers and attend the SHOT Show. So we're excited about those new products. And I believe the pace and magnitude of new-product development in Bushnell will continue to grow in the years to come as ATK continues to invest and drive disciplines and innovative solutions into Bushnell. And that will bolster its future. So I think that the run rate appears to be a little light. We're going to work on that and drive that. The margins appear to be a little light. There's reason for that. We're going to work on that and correct that. And so we remain committed to that strategy, and I remain very bullish on the Bushnell acquisition and the brands we acquired.

Christopher Sands - JP Morgan Chase & Co, Research Division

From a margin perspective, with the investment you'll be making on new products, do you think that will weigh on margins relative to your original expectation? Or how do you think about that?

Mark W. DeYoung

No, I mean originally, what I said is that I believe this is a double-digit EBIT business. And I believe that once we get the business properly operating and we get the innovation in place and the investments and the transition in place, I believe it can be better than just double-digit margins. I've said in the past, I think you can get this thing into the low teens, potentially. I absolutely am not backing off that. I absolutely know that, that's the case and will be the fact going forward. So I do think, as we invest in this and as we spend some of these transition costs, it will put some pressure on margins for a period of time, but that is an investment worth making and that the long-term results will be outstanding.

Christopher Sands - JP Morgan Chase & Co, Research Division

And do you have an expectation for timing there, when you may get to -- just even excluding the transaction cost, when you may get to kind of the double-digit range for margin?

Mark W. DeYoung

Yes. I think we are focused on that potential in our next full fiscal year. We had mentioned synergy benefits would materialize after the first full year. We are still actually ahead of our synergy plan, and I see more opportunity for continued synergies in the future. So we had identified that as FY '16 opportunities. And I would say, in FY '16, I believe that should still be the case.

Operator

And we'll get go next to Steven Cahall with Royal Bank of Canada.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Maybe just first question, another one on Sporting. One of your competitors talked about their mix and seeing weakness in shot and centerfire, and more strength in rimfire and pistol. So I was wondering if you could maybe talk about how your mix has been in response to that. And are you seeing the same trends? And without maybe saying exactly what your ammo mix is, is it more or less favorable versus the trends in those different product lines versus your peer? And related, if you could quantify maybe what the sequential change in the ammo backlog has been or at least give us some directional trend, that would be helpful.

Mark W. DeYoung

All right. So on the mix front, we are seeing strong and continued demand for pistol ammunition in nearly all of its configurations and rimfire ammunition in all of its configurations. And we, like others, have seen some softening in rifle ammunition, centerfire rifle products. Those are traditionally hunting products with the exception of .223 and 5.56, which are largely range products. We mentioned last quarter and the quarter before that, actually, in our third quarter, that we believed there were multiple orders in the system, that those orders that were in the system which were creating a unsustainable backlog position would rationalize themselves out, that those orders were duplicative. That began to occur in our fourth quarter and it's continuing to straighten itself out in our first quarter, which was fully expected. But the demand for pistol and rimfire is outstanding. Small rifle remains soft, particularly, as I said, in .223 and 5.56, which is largely our Lake City product that we sell through the Sporting Group. So I think that's really the issue in terms of mix. And then in terms of just the order and demand that goes with that, again, I would say we're not surprised at all by cleaning up of the backlog with some cancellations of duplicate orders, and we're not surprised at all that the small rifle, meaning our Lake City product, has seen softening in demand and cancellation of orders.

Steven Cahall - RBC Capital Markets, LLC, Research Division

And so are the plants still essentially loaded on a 24/7 basis? And how far do you feel like the current backlog takes you out?

Mark W. DeYoung

Yes, we are still running 24/7 at our plants. As you know, we did SKU rationalization and we put a real focus on managing margins in this business by making sure that we are producing profitable products and managing our mix as best we can to improve that SKU. That has proven to be exactly the right thing to do. It's working very well for us. And because of that, we've been able, also, to drive efficiency into our plants on a 24/7 schedule by reducing the amount of changeovers we do, and frankly, by reducing the number of SKUs we produce. So although we're still operating 24/7, we're doing so more efficiently. I anticipate that we will continue in most of our plants to operate on a 24/7 schedule, clearly, through the next few quarters. And I don't see anything in front of me right now which is leading me to make a decision where we would change that operating schedule. Our backlog position, although we did not give backlog by group, it's many, many, many months of backlog still in our ammunition products. So we have lots of work to do.

Steven Cahall - RBC Capital Markets, LLC, Research Division

And just lastly, any reason to think of headwind or tailwind from input pricing, in the same lines?

Mark W. DeYoung

From product pricing?

Steven Cahall - RBC Capital Markets, LLC, Research Division

From input pricing. So brass, zinc, any headwinds or tailwinds you're seeing from...

Mark W. DeYoung

No, as I've said before, Steve, we have a very disciplined practice and process in how we buy materials, commodities, long-lead items with -- from our supply chain. And that practice, as I've said in the past, is based upon spot buying, it's based upon hedging, it's based upon putting in place long-term contracts. And we manage that to avoid volatility. We manage that to get appropriate pricing so we're sure we can be competitive and profitable, but we also do it so that we are not surprised by major swings in our cost structure or in impacts from the supply chain that then have me talking to you about those. So I think we're in a good, stable position on our input costs and we understand them, and that's giving me confidence as well in sustainability of the margins.

Operator

And we'll go next to Gautam Khanna with Cowen & Company.

Gautam Khanna - Cowen and Company, LLC, Research Division

So I just wanted to explore the comment you made about demand softening on the margin in the Sporting business. And if you could just talk about the dynamics. You mentioned some of the backlog was canceled or some of the double and triple orders were taken out. What has the book-to-bill been? I mean, has it been basically kind of close to 0? In this -- how bad a flush-out have we seen that gives you comfort that we're not going to see incremental pain from here?

Mark W. DeYoung

Yes. So 2 things on that I guess, Gautam. First, we don't talk about book-to-bill at the group level. So I'm not going to be able to answer your question in the detail you would like, so I apologize for that, but we just don't do that. So we're not going to go down into groups and talk about book-to-bill. ATK had a book-to-bill of 1. So we're very happy with that. It continues to be on pace to sustain the business. In terms of Sporting and the cancellations in the orders and that portion of your question, as you know, we expected that to continue to happen. There was a time in the sporting business, not too many years ago, and I think it actually might still be true today, where backlog is a bad thing. Aerospace and defense companies love backlog because they -- it's long-term contract, it's multiyear contracts and it speaks to security of future sales. If you're in commercial products and you have backlog, you basically have a situation where you're unable to meet sales which, otherwise, you would be able to put on your books. And so there was a time in commercial business when our backlog was 0, and we thought that was a good thing because we were driving orders through the facility and delivering them, and we didn't have opportunity cost of undelivered orders, which is really what backlog is. So although it is softening, we still have a significant backlog, as I just described in our ammunition products and in some of our accessories categories as well. And so that gives us a bit of a security blanket. But at the same time, to me, that is an opportunity lost because we haven't been able, because of the capacity or other things, to meet those sales. But we are very comfortable, Gautam, in the backlog, and we're not at all uncomfortable in the continued support and order flow into Sporting.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And maybe you can also opine on pricing dynamics, just given supply and demand seem to be in closer balance than they've been the last couple of years. What do you anticipate will happen when supply catches up? I mean, do you expect pricing to be under pressure? A. And if you could also just elaborate on the Savage margins in the quarter, which were down a little bit from what they were the past 2 quarters. Was that due to any pricing dynamic? Or was it mix or seasonality? Whatever color you can provide.

Mark W. DeYoung

Okay. Yes. So on the pricing front, as we mentioned before, we don't talk about what we might do with pricing. We're not going to talk about whether pricing may be increased on some products or may be decreased on others. So in specific detail, I just can't get in and talk about what we may or may not do with pricing. I think from a market perspective, there is still substantial demand in the market for our products. I think ammunition particularly, as I answered in the prior question, rimfire and pistol ammunition, we are still working, as I mentioned, 24/7. I think our pricing is right in the market. I think we've positioned ourselves right and we'll continue to manage that as we go forward, make appropriate decisions to maximize our returns in that market. In terms of Savage margins, Savage margins declined slightly in the quarter from about 20% to 18%. So some decline. Nearly all of that was driven by sales decline or volume decline going through the factory, associated with some softened demand for long guns. As you know, NICS checks for long guns saw some impact in the quarter downward, and that impacted our Savage business with some reduced demand. I would tell you, I'm still pretty dang excited about an 18% margin business, and I'll take every 18% business I can get. So we're very, very, very happy with Savage's performance. It is outpacing the model we had for the acquisition, and we're very happy about it. We paid a very modest price for Savage. And even with its results in the last quarter, that's a fantastic multiple that we've picked up that company for. So nothing's wrong at Savage. We're doing great. We've invested some money there to continue to streamline operations and give them the capacity that they need to be able to meet what we think is going to be ongoing demand for our products. So Savage was a great acquisition, it's a great company and we're still very, very pleased with their performance.

Gautam Khanna - Cowen and Company, LLC, Research Division

Mark, maybe you can answer this question, which is on the pricing side, which is the incoming orders you are receiving on -- in ammunition, anyway. Is the pricing -- has it changed much relative to what you saw in the last couple quarters in terms of pricing in the recent bookings you're receiving and supporting?

Mark W. DeYoung

In terms of pricing, no. I haven't seen any -- I mean, we're just not seeing a lot of pressure in the market. We're not seeing a lot of issues. There was -- I mean, there were some issues beginning in the market in some small niche categories. We're not reacting to that. We don't intend to react to those. So we believe we have a very strong leadership position. We have the largest portfolio of products in the shooting sports industry. We are using our ability to be a supplier of choice to retail, wholesale, mass merchants, regional chains, buy groups. They recognize the value that ATK's portfolio brings to them in managing their supply chain. As I've said before, Gautam, we're very focused on helping our customers understand we can be a one-stop shop for them on many, many, many products. No one else offers the breadth, depth and capability we do to be a strategic partner with these outlets for our products. And so we don't react to things that may be occurring with niche products, and we're not reacting to things that may occur here and there with other suppliers. We have a strategy. We're executing our strategy. I think our results are outpacing all of our competitors. We're happy about that. And yes, we anticipate that there may continue to be some order softening and some rationalization of orders and demand in the sporting market. But meeting here today, I am not seeing anything that is causing me to even begin to think about pricing or strategy changes.

Operator

And we'll go next to Greg Konrad with Jefferies.

Greg Konrad - Jefferies LLC, Research Division

I'm going to try to ask a non-Sporting question, but -- it could be refreshing. But just in terms of Aerospace structures, you saw some nice growth in the quarter. Can you maybe help us size the business? And just what you're seeing in terms of opportunities, both on current programs and to win new content, and just how the overall business is tracking versus your plan.

Mark W. DeYoung

Yes. I think on the structures business, let me start talking a little bit just about what's really happening. And we're very excited with our Aerospace structures business, I must tell you. We opened the ACCE facility out in Utah a couple of years ago after winning the substantial win on the Airbus A350 program. That facility is state-of-the-art. It's one of the most exciting, robotic, state-of-the-art composite manufacturing facilities in the world. I was just out there about 2 weeks ago and met with the leadership team and looked at some structures they built. Incredibly impressive technology and manufacturing capability. So we believe we've made some real significant and prudent strategic investments in aerospace structures, and we're really happy with the performance of our structures business. So let me just give you a few updates on that business. So on A350, obviously, that was an anchor program for us. We are now at a 3-rate on A350. So we continue to increase our manufacturing rate. That would be a ramp-up program. As I mentioned before, we're at a 3, with potentials in the program planned to go to a 12. So a lot of growth still in front of us. We have completed 36 equivalent ship sets of Airbus A350. So we know how to make the product. As I mentioned, we've started on the A350-1000. Our first production tooling for the dash 1000 has been delivered to us. And so we have initial pathfinder and test parts that have been completed on the dash 1000. The Rolls-Royce, as you know, we make engine containment cases for that program, and we're currently producing those cases in line with our expectations and schedule. And so that program is doing great with no real issues to talk about, other than we're very excited to be a key supplier to Rolls-Royce on their engine programs. We recently won the A400M program, not that many quarters ago. We have delivered 14 equivalent aircraft ship sets to date. We are 100% on-time delivery on that program and on budget. And we announced recently the win of composites -- components on the Boeing 787. I mentioned we were qualified in the quarter as a supplier of 4 787s, so we're excited about that. Excellent program progress to date. The first Pathfinder parts has been successfully fabricated already on the Boeing 787. So the aero structures business is hitting on all cylinders in terms of execution. We continue to look for other opportunities to grow that businesses. We still have capacity in the facility to be able to add additional work into our facilities there in Utah, in our Center of Excellence for commercial aero structures. So we continue to bid and pursue additional wins, but we are very happy and excited about the growth in that business and the execution.

Greg Konrad - Jefferies LLC, Research Division

And then, the other thing, accounts receivable seemed to spike a little bit in the quarter. Was that just a timing issue? Or was there something else going on there?

Neal S. Cohen

There are 3 things going on there. One, obviously, the first quarter, we're building inventory around normal seasonality especially in our Commercial business, so that's a good time of the year, and we're getting ready to build inventory for to -- for the fall season. Second is we're build -- we had a build in the Airbus program that Mark talked about as we're launching the dash 1000 that created some increase in receivables. And we did have some timing, primarily in the defense business, some timing on receivables there that we'll see come back in the second and third quarter.

Greg Konrad - Jefferies LLC, Research Division

And then just lastly, any status on the progress with HSR and the timing of any proxy filing?

Mark W. DeYoung

So we have filed for HSR. We are waiting on regulatory response and our reaction to that response. And we are in preparation of the Form 10 and S-4 documents, so we have teams that are working on that. So in terms of the transaction from a regulatory perspective, we are pacing down the path we expected to be on. And we'll be as responsive as we need to be to any regulatory feedback that we get going forward.

Operator

And we'll go next to Kevin Ciabattoni with KeyBanc Capital Markets.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

It's actually Mike Ciarmoli. Maybe first on defense, Mark, just big picture, we obviously see the sanctions against Russia seemingly escalate here. There's obviously strong domestic support for a new rocket engine -- U.S. rocket engine. Can you talk in terms of -- I mean, there's obviously a lot of rhetoric right now with, basically, you guys, Orbital and GenCorp being the 2 players. I mean, how are you guys viewing this? Are you seeing funding? Just if you can maybe talk about that dynamic.

Mark W. DeYoung

Sure. Sure, Mike. So this is an interesting situation, obviously, that has developed with Russia. And it's created, I think, some very productive dialogue in Congress and the Senate and in the industry and with NASA, related to domestic capability. And I think this situation, regardless of how it is resolved, underscores the need for a viable, national alternative for these kinds of launch capabilities. And we think ATK is a solution which provides an affordable, proven, solid propulsion alternative. So I know that as we go forward, there'll be lots of continued discussions, Mike, about that and about the impacts of it. We are not being impacted one way or the other right now, but we clearly are positioning ourselves to explain and help people understand the propulsion capability which we have as part of what we believe is a national asset in ATK's solid propulsion business for not only space exploration but also tactical use of solid propulsion. And I know that our congressional relations folks and government relations folks are helping us carry that message forward not only to our customers but to Congress. I think that the -- as you probably know, there is an inventory of engines available. It's not an immediate impact to our space launch capability. There is an inventory of those engines in-country. The resolution of that, obviously, will require a long-term decision and a long-term strategic outlook. And all I can tell you is we're positioning ourselves to be part of the solution or potential solution that could come out of the debate.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Okay, that's helpful. And then one other one on -- more on sporting, and I don't know if you'll be able to answer this in the context of the spin and the merger with Orbital. But we've heard that once that transaction takes place, there's about $200 million of ammunition sales that can be recognized. Can you -- I mean, is that still the right level to think about given -- and I know you've said you're still working 24/7 -- and given pricing and then demand out there. But is that still a good level kind of flowing through, internally right now, to be thinking about?

Mark W. DeYoung

Yes, so let me try and answer that a couple of ways. One is just to make sure everybody understands the Lake City product flow-through. So what has happened to date within ATK is we have had intercompany sales and eliminations of Lake City products from Lake City to the Sporting Group, and we have been recording that revenue to the market in the Sporting Group, eliminating it internally from the Defense Group. So that's how we've been doing that. Going forward in the transaction, as you described, Orbital ATK will operate Lake City. Those sales will become external sales to a different company, Sporting spin, and so they will be recording sales, as you described, coming out of Lake City as external sales post the transaction. In and of itself, it's not a change in the Lake City business model and it's not a change in what Sporting is going to be able to do with the capacity at Lake City under a long-term supply agreement. But it is a fact that because of recording, internal versus external sales, those will be now able to be reported by Orbital ATK as external sales. The volume of those external sales, and whether it's $200 million or $100 million, whenever that happens, it's clearly going to be market-driven. And it's going to be driven by demand for those particular couple of SKUs that are manufactured at Lake City and will be manufactured for Orbital ATK. So I can't forecast what that number might be at the end of the year or next year or the year following, Mike, but that is the relationship. And we are working very closely, obviously, with Orbital on the transaction to sustain the ability for Lake City to be a supplier to Sporting of those products, and we're working very hard in the international market and the domestic commercial market to position, to sell and to bid for contracts with Lake City products that are supplied through the Sporting network, and we'll continue to do that you're.

Operator

And we'll go to David Strauss with UBS.

David E. Strauss - UBS Investment Bank, Research Division

Mark, on the Defense side, obviously, we still have a couple of quarters of tough comparisons. But can you talk about kind of the absolute sales levels? So we're running kind of $430 million, $440 million a quarter right now. Can you talk about -- is that kind of a sustainable bottoming or are there other things that take down that sales number from here?

Mark W. DeYoung

Yes, that's obviously, a good question, David. That question was asked of me last quarter in a little bit different context, but it's the same kind of question, trying to figure it out, what I would call a stability in the Defense Group. Let me just remind you a little bit of what our strategy is, then we'll talk about the numbers. So our strategy in Defense Group is one of recognizing and expecting that we would see some declines in the ammunition accounts and some declines in demand for military ammunition, particularly at Lake City. And we had mentioned that now for, I think, 2 years, we've talked about the volume declines which were likely to settle into the Lake City demand curve, and those have happened. And we've talked about that, as I said, for many, many quarters. And so that was expected to see some reductions in Defense revenue, driven by reductions in government funding and demand for munitions. Small cal, primarily, but also medium caliber and large cal. So as we expected, that has manifested itself over the last few quarters. And then after completing the Lake City contract, the old contract, we also have said now for 18 months that, that was a very competitive competition and that there would be pricing reductions. Those also would have an impact on sales levels in Defense because we will produce fewer rounds at a lower price. So those are manifesting themselves. That is really the biggest issue that we see in Defense right now, is just munitions softening, which we've been talking about for a long time. Our strategy was, knowing that was coming and was on the horizon, our strategy is, we -- as you may recall, was that we were going to focus on international growth and international expansion of our portfolio in the Defense Group. And I'm very, very pleased with what the Defense Group has done, particularly manifesting itself in significant orders in the last 2 quarters. So our ammunition supply contracts, which we talked about in the fourth quarter, and our cannon and gun supply and services contract, which we just announced in the first quarter, those represent some of the largest international contracts and orders ever won in the 28 years or 30 years that ATK has been a company. So we're very excited about the focus we put on international. We're pleased with the awards that we have won. We're winning record-level volumes in international markets, which are offsetting -- in the long run, offsetting some of the pressures domestically. So I do think the Defense Group going forward is getting to a position where we'll be able to stabilize that group. I mentioned double-digit margins, I think, is the watchword of the day for us. We will not surrender that hill. So I reaffirmed today in my comments at the start of the call, that this is a 10% margin business this year. I had said that last year. They had a problem in the fourth quarter where their margins declined last quarter. It was really driven by a couple of programs and EAC profit expectations on those programs that impacted us and was recognized last quarter. Those are behind us and we're charging forward with a focus on double-digit margins and we delivered that in the first quarter and we will deliver that for the year. So in terms of where the exact stability will occur in Defense sales, we don't have that crystal ball to know exactly what might happen with government financing and orders in demand. What I can tell you is our strategy is working to drive diversity into our customer base that buys those portfolio of products. And as those orders turn into sales, that's going to go a long way to stabilizing that business and putting it, frankly, back on what I believe could be a growth trajectory going forward in the long run.

David E. Strauss - UBS Investment Bank, Research Division

Great. That's terrific color. I appreciate it. I wanted to ask about -- next question on Bushnell. Obviously, you highlighted the sales line coming under some pressure there. But can we talk about the EBIT contribution out of Bushnell? It was an 11% to 12% margin business before you acquired it. I understand there are transition costs running through and acquisition-related accounting, but can you just give us some help in terms of when we could see Bushnell kind of get back to that double-digit margin level?

Mark W. DeYoung

Yes. So let me start with just one clarification. At the acquisition, it was slightly below double-digit. It was high single-digit margin is what we acquired, just to make sure we get the base set correctly. It was slightly below double-digit margins when we acquired them. And their contributions, as I mentioned this quarter, their contributions were influenced by a few things: one, market shifts in terms of optics demand; two, transition costs incurred in the quarter as we continued to transition that, which will continue for some time; a shift to a less favorable product mix, both in golf and in rangefinders and a couple of other places in terms of the broad portfolio of products. We had some shift in mix and demand of some lower-margin products which impacted it. And then I mentioned that some -- with some detail, our -- what is a bit disappointing in terms of lack of new innovative products that we're able to offer to the market here in our first year and our fact that we're focused on solving that problem going forward with more innovative, compelling solutions under those brands. So all of those things, I think, inhibited some of the EBIT delivery that Bushnell was able to bring forward. We will be working on those issues as well as cost management and implementing our PES disciplines and supply-chain management disciplines into the Bushnell company. And I believe, as we go forward, as we work these issues and as we have time to solve some of these challenges, we'll see to that margin, as I mentioned before, increase. And I personally fully expect to run this business in a way in which it is a double-digit margin business going forward for the long term.

Operator

And we'll go next to George Shapiro David with Shapiro Research.

George D. Shapiro - Shapiro Research

I wanted to follow up a little bit on that Bushnell. So the transaction costs, are we done with those now?

Mark W. DeYoung

Transaction costs, transaction costs aren't included in Bushnell.

Neal S. Cohen

What Mark talked about was transition cost.

Mark W. DeYoung

Transition cost, George, is what I'm referring to.

George D. Shapiro - Shapiro Research

Yes. No, I'm sorry about that. I recognize that. I was just first asking a question about whether we're done with transaction costs. I realize they're below the line.

Neal S. Cohen

Well, George, is your question about transaction cost related to the announced transaction with Orbital? What -- can you maybe help me there? Is that -- or are you talking about Bushnell?

George D. Shapiro - Shapiro Research

I was talking about Bushnell.

Neal S. Cohen

No, the transaction cost for Bushnell were all last year. So there aren't any transaction costs this year. But you will obviously see transaction cost this year related to the Orbital transaction and the $7 million in transaction-related cost that we broke out for the quarter related to the transaction that we announced with Orbital and the spin.

George D. Shapiro - Shapiro Research

Okay. Now to the transition cost. So they seem like they probably would have been more like $8 million to $10 million this quarter, or are they still kind of running the way we've been estimating, around $4 million or $5 million?

Neal S. Cohen

Yes. We haven't given those numbers out separately, and we're spending at appropriate level to integrate the business, to develop the types of disciplines that Mark talked about, the integration with the rest of the ATK portfolio, with the existing accessories portfolio. So we haven't broken those out separately.

George D. Shapiro - Shapiro Research

Okay. And one last one. Savage had a significant sequential drop in revenues with a commensurate drop in margin from like 24% to 19%. And if you've mentioned this before, I apologize, because I was jumping between calls, but could you explain what was happening there on a sequential basis?

Mark W. DeYoung

Sure. Sure George, and we did talk about this briefly before, but I'm happy to answer your question and touch on it again. So on a sequential basis, the amounts you talked about, basically have a really high watermark of around 24% in Q4 and 19% in Q1, is the numbers that you're referring to. First, I would mention that indicative with the industry, NICS checks for long guns were down about 33% in the quarter. And as you know, Savage is a long guns-only manufacturer. So that's the kind of demand in terms of NICS checks reduction that occurred in the quarter. And Savage saw a decline both in revenue and then a subsequent decline in profitability. And as I mentioned before in terms of Savage, even at those levels, we are very excited about the Savage performance. I'll take 19% businesses all day long. And Savage is way outpacing our anticipated valuation model that we put together with acquisition. You'll remember, we paid a very modest multiple for Savage, and we are very excited about Savage as a strategic component. And although there is this softening occurring in long guns, we're really pleased with the 19% margin.

Operator

We'll go to Herb Hardt with Monness.

Herbert A. Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division

I noticed that both the selling expenses and G&A were up a fair amount in the quarter. Is that related to new programs in Aerospace or Sporting? Or could you give us any more detail on that?

Neal S. Cohen

Sure, great. This is Neal. In terms of G&A, I think what we have going on there in selling in G&A is we have -- that's where the expense related to the write-off of the lease that we took the charge on for rightsizing our Eden Prairie facility and that's -- and in terms of, in general, so -- so in G&A, you'll see that expense there. So that's driving year-over-year. But in addition, now both in selling and G&A, you now have the addition of the Bushnell business that you didn't have last year. So you see that today, in those, as -- those are businesses that have more of those expense items, especially on the selling side because of their gross margin profile. So you're seeing the inclusion of them year-over-year where they weren't in our financials last year.

Operator

And we'll go next to Patrick McCarthy with FBR Capital Markets.

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

My question is on the Defense business. Obviously, the international outlook is really positive. But I was wondering if you could give us a little bit more detail on what are the types of opportunities that are out there? And although I doubt you'll want to size it, could you give us a sense as to where you'd like to get it?

Mark W. DeYoung

Yes. I think there continues to be opportunities for us in our advanced warhead business. You know, or you may know about the GMLRS capabilities we've been working on in advanced warhead. We're in great shape to be the next provider of advanced GMLRS warhead capabilities. So I see continued opportunity in that business in the warhead domestically. I see continued opportunity in the long run to be the ammunition provider of choice and primary supplier of ammunition for small-, medium- and large-caliber solutions for domestic defense, as well as selling excess capacity internationally and in some cases, commercially with small rifle, small-caliber rifle ammunition. I think precision munitions and advanced munitions continues to be something of real interest for us. PGK, we have completed FAT on PGK. We continue to drive that program forward with good support from the customer on those kinds of precision capabilities. I think, as you may know, the XM25 is in testing and qualification. That will go on for about another 1.5 years, but it remains supported by the customer as part of that precision capability with the squad-fired weapon system. So there are some opportunities and challenges, I think, in the domestic market. But we're still quite confident that we can have a sustainable base in domestic defense and a growing capability in international defense.

Neal S. Cohen

Yeah. And I think it may be helpful just to remind people on the call that the transition Mark talked about at Lake City began and went through our third quarter last year. So you'll see that transition go on through the second and third quarter this year. And then programs that Mark talked about, outside of the impact of Lake City, although we don't break them out separately, they were growing in the first quarter, consistent with the types of successes that Mark talked about as he talked about those programs.

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

Okay. And then over on Aero, obviously you had the nice wins on some of the larger engines this quarter. I was just wondering what your outlook was for launches on the larger engines over the next couple of years.

Mark W. DeYoung

Yes. I think in terms of launches, the launch manifest, I think, is fairly stable. We're very pleased to be able to support Orbital, which has had several launches this year. The Delta IV award was a big award for us, which speaks to long-term launch capabilities. We support ULA with Delta IV. So we don't -- I guess I would answer it this way. We don't see anything in launch manifest or near-term future launch demand which is giving us concern about our Solid Rocket Motor business base.

Operator

That concludes today's question-and-answer session. I would like to turn the call back to Mr. Mark DeYoung for any additional or closing remarks.

Mark W. DeYoung

All right, well, I thank you very much, and I want to thank all of you for calling in today. We appreciate your interest in the company. We're very excited about the quarter we just delivered. We think it's terrific results, validating our leadership position in our markets, validating our international strategy and our commercial strategy. And look forward to talking to you again next quarter. Thank you very much.

Operator

Thank you. This concludes today's conference, and we appreciate your participation.

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