ATK, formerly Alliant Techsystems, Inc., announced today that they plan to merge with Orbital Sciences in a $5 billion deal. The new company will be called Orbital ATK. As part of the merger, ATK will spin off their sporting group to shareholders as a new company.
From the Wall Street Journal:
ATK valued the all-stock combination with Orbital at $5 billion and its shareholders would retain 53.8% of the aerospace and defense business, to be known as Orbital ATK.
The proposed deal, which is expected to close by the end of 2014, would match the total level of defense M&A over the past three years combined, and puts 2014 within reach of the $9 billion in deals reached in 2008. Executives had shied away from transactions before securing more visibility of business trends from the fiscal 2014 and 2015 Pentagon budgets.
Mark DeYoung, ATK’s chief executive, would run the separated operation business which, with 2013 revenue of $2.2 billion, is less than half the size of the $4.5 billion aerospace and defense business.
Excerpts from ATK’s press release on the merger:
The company’s Sporting and A&D (aerospace and defense)businesses operate in two fundamentally different markets with very different operating dynamics, compliance requirements, customer sets and growth opportunities. As standalone companies, they will be more focused businesses, with clear and distinct strategic visions and objectives, additional operational flexibility and the financial strength to make the most of their unique opportunities in their respective industries.
Since entering the commercial ammunition and sporting accessories space in 2001, ATK has built a leading position in the shooting sports for hunters, shooting enthusiasts and law enforcement professionals. The acquisitions of Savage and Bushnell in 2013 enabled ATK to expand its core competencies while creating opportunities to enter into new, adjacent markets in the outdoor recreation industry.
In today’s growing market, the Sporting Group enjoys expanded distribution for some of the most widely known and respected brands in the industry: Federal Premium, Bushnell, Savage Arms, BLACKHAWK!, Primos, Final Approach, Uncle Mike’s, Hoppe’s, RCBS, Alliant Powder, CCI, Speer, Champion Targets, Gold Tip Arrows, Weaver Optics, Outers, Bolle, Cebe, and Serengeti.
“Sporting continues to deliver excellent performance,” said DeYoung. “Results from our recently completed fourth quarter demonstrated continued revenue and earnings growth, and margin expansion. Full details on our fourth quarter results will be discussed on our May 15 earnings call.”
ATK believes that separating Sporting into a standalone entity will facilitate opportunities to further drive growth and marshal resources to broaden and deepen its market leadership. ATK believes that a more focused corporate leadership team, operating within a clearly defined commercial market with a competitive business model, will contribute to unlocking significant value for ATK shareholders. Following the completion of the transaction, Sporting will also enjoy a strong balance sheet that will provide the ability to fund its growth strategy. Over the past 10 years, ATK’s Sporting Group has delivered annual sales growth of approximately 16 percent (14 percent organic growth).
And on the new management and location:
Upon completion of the transaction, Mr. DeYoung will serve as the Chairman and Chief Executive Officer of Sporting. Mr. DeYoung is working with ATK’s Board of Directors to develop detailed plans for an efficient and capable corporate structure with experienced management and strong governance policies and practices, as well as to establish the name and branding of Sporting. Sporting will be headquartered in Utah and is expected to employ nearly 5,800 workers in 11 states and worldwide.
And the details of the transaction which will be tax-free:
Under the terms of the transaction agreement, ATK will distribute ownership of Sporting to ATK shareholders in a spin-off transaction, following which, ATK shareholders will own 100 percent of Sporting. The spin-off will be immediately followed by a merger of Orbital with a subsidiary of ATK, with Orbital surviving the merger and becoming a wholly owned subsidiary of ATK. In connection with the merger, Orbital shareholders will receive 0.449 shares of ATK common stock for each share of Orbital common stock that they hold. Upon the closing of the merger, ATK shareholders will own approximately 53.8 percent of the combined company on a fully diluted basis and Orbital shareholders will own the remaining approximately 46.2 percent of the combined company on a fully diluted basis. As part of the transaction, Sporting has secured a $750 million senior secured financing commitment from BofA Merrill Lynch and will dividend $300-350 million of the proceeds of such new indebtedness to ATK immediately prior to the closing, which will be used by ATK to repay existing debt. Post issuing dividend to Orbital ATK, Sporting’s net debt and total debt will be equal to the dividend. At the closing, Orbital ATK is expected to have a total of approximately $1.7 billion in gross debt and $1.4 billion of net debt. The transaction is expected to be tax-free to both companies as well as to ATK and Orbital shareholders.
The transaction is expected to close by the end of calendar year 2014, and is subject to customary closing conditions including regulatory approvals and the approval of each of ATK’s and Orbital’s shareholders. ATK and Orbital will continue to operate separately until the transaction closes.
The two most interesting aspects of this whole merger is that the sporting group will be spun off and that the current ATK CEO Mark DeYoung has cast his lot with the sporting group and not the aerospace/defense groups. It says a lot for the strength of the shooting sports industry that a CEO sees his future prospects as being better there than in the defense industry.
There are a number of news items from the last few days regarding the firearms industry that are worthy of attention.
First, ArmaLite of Geneseo, Illinois was bought out by Strategic Armory Corps (SAC) of Phoenix, Arizona. SAC was formed in 2011 as an acquisition vehicle with which to buy out firearms and firearms related companies. In addition to ArmaLite, SAC owns high-end tactical bolt-rifle maker Surgeon Rifles, suppressor maker AWC Systems Technology, and AWC Ammo. The head of SAC had this to say on the acquisition.
“ArmaLite is a tremendous addition to our group of outstanding companies and broadens our product line so we can better meet the needs of our customers”, said Mark Johnson, SAC President and CEO. “The history of Mark Westrom over his 19 years of leading ArmaLite will provide a wealth of industry knowledge to our leadership team and allow us to further expand our ability to meet the ever increasing demands for the highest quality products by our customers and the marketplace.”
US Cavalry Retail Ownership Announcement
Chattanooga based ERMC Corporation, the parent company of Modern Firearms and ASR Uniforms announced today the acquisition of U. S. Cavalry Stores. ERMC purchased all U. S. Cavalry assets to include personnel, inventory and retail stores. I will be working with others in the company to integrate Modern Firearms, ASR Uniforms and U.S. Cavalry into a top notch provider of Military, Police, Fire and EMS uniforms, equipment and firearms.
Public companies are starting to report their sales and profits for the second quarter. Both ATK and Ruger reported their sales and earnings in the last couple of days.
ATK’s business is composed of three segments: aerospace group, defense group, and the sporting group. For me, it is the sporting group of companies that is of the most interest. While the overall sales for ATK were flat for the second quarter of 2013, the sporting group saw a 28.4% increase or $79,346,000. In terms of profit, the sporting group led ATK with a 112.2% increase compared to a single digit increase for the aerospace group and a loss for their defense group. This increase from the sporting group allowed them to beat stock analysts’ expectations of profits.
With the purchase of Savage Arms, the sporting group is now more than just ammo, reloading components and equipment, and other firearms related accessories. It appears that the company leadership also recognizes the importance of Savage to their bottom line. ATK’s President and CEO Mark DeYoung had this to say about Savage.
“The Company’s completion of the Savage acquisition builds upon strong Sporting Group performance and market leadership with a well-respected and recognized brand in the long guns market. We are well underway with the integration of Savage and I am confident our wholesalers, retailers, distributors and consumers will find value in our robust portfolio of product offerings.”
Ruger had another stellar quarter. Their earnings increased 79% for the second quarter when compared to the same quarter a year earlier. The earnings increase was driven by a 50% increase in sales for the quarter compared to a year earlier. Sales for the quarter were $179.5 million and the earnings per share were $1.63 per share. Both of these numbers blew away analysts’ expectations. Ruger was forecast to have earned $1.18 per share in profits on sales of $154.7 million.
New product sales accounted for 31% of sales in the quarter. New introductions include both the LC380 and SR45 pistols.
Ruger expects to spend upwards of $35 million on capital expenditures during 2013. Much of that will be related to new products and production capacity expansion. I’m sure part of that money will go to getting the Mayodan plant up and running after the expansion plans are finalized. The company is waiting on the tax incentives and grants package from North Carolina to be completed.
CEO Mike Fifer held a conference call today to discuss the company’s second quarter results. Fifer said he expected the third quarter to slow down as things start to return to more normal growth. As reported by CNN Money:
While the trend continued in the second quarter, Ruger CEO Mike Fifer said gun demand appears to be returning to “more normalized growth rates.”
“We haven’t seen any slowing in demand for Ruger products,” Fifer told analysts during a conference call. “But we have heard anecdotally that the normal seasonal slowdown is starting.”
He said sales in the current quarter could represent a “reset from the huge surge” that began late last year.
He was also asked about the damage to the Prescott plant. He said he thinks the total cost to Ruger will be less than $5 million in terms of damage to the roof, equipment, and lost production. They resumed production on Monday. The machinery that got soaked was not being used in current production and was intended for future projects.
Fifer was asked about the new Mayodan plant and what was needed to get it ready. He said that with the exception of adding a section for bluing and for heat treating they only needed to move in the new machinery. He was very complimentary towards the workforce in the Rockingham County area. He said the caliber of the potential employees was “really impressive.” He said the firearms to be produced in Mayodan would be new introductions so he couldn’t discuss what they were yet.
If the overall market demand is starting to slow, I’m going to go out on a limb and say we should expect to see a number of new product introductions from not only Ruger but the rest of the industry. SHOT 2014 should be interesting in that regard.
UPDATE: Steve at The Firearm Blog listened in on the ATK conference call for analysts. He has a review of it here. A couple of points from his review. First, Savage Arms is expected to make ATK around $25-28 million in profits. Second, Steve believes that ATK is in the market to pick up other firearms companies.
ATK – formerly known as Alliant Techsystems – announced today that they were buying Caliber Company. Caliber is the parent company of Savage Sports Corporation. This marks the first true firearms company owned by ATK. They make ammunition under a number of labels including Federal Premium, CCI, Fusion, Speer, Estate Cartridge and Blazer. They also own a number of companies in the firearm accessory and reloading field including BLACKHAWK!, Alliant Power, RCBS, Champion targets and shooting
equipment, Gunslick Pro and Outers gun-care products, and Weaver optics
and mounting systems.
Savage got an equity infusion early in 2012 from NorWest Equity Partners. While no numbers were mentioned when NEP made the investment in Savage, I’m sure the $315 million in cash that ATK is paying represents a significant return on their investment.
From ATK’s press release which provides more details:
ARLINGTON, Va., May 13, 2013 /PRNewswire/ — ATK (NYSE: ATK) announced it has entered into an agreement to acquire Caliber Company, the parent company of Savage Sports Corporation. Savage is one of the world’s largest manufacturers of hunting rifles and shotguns, delivering innovative products for more than 100 years. The acquisition would expand ATK’s portfolio offering by adding long guns to its leading brands in commercial and security ammunition, shooting sports and security-related accessories. The transaction is subject to regulatory approvals and customary closing conditions. ATK anticipates closing the transaction in the first quarter of its Fiscal Year 2014 (FY14), which ends June 30, 2013.
Under the terms of the transaction, ATK will pay $315 million in cash, subject to a customary working capital adjustment. This represents a trailing twelve months ended March 31, 2013 EBITDA multiple of approximately 5.5 times (unaudited). ATK believes the acquisition will be accretive to FY14 earnings per share. ATK will finance the acquisition with cash on hand and funds available under its existing credit facility.
“The acquisition will complement ATK’s growing portfolio of leading consumer brands,” said Mark DeYoung, ATK President and CEO. “This opportunity will allow us to build upon our offerings with Savage’s prominent, respected brands known for accuracy, quality, innovation, value and craftsmanship. Savage’s sales distribution channels, new product development, and sophistication in manufacturing will significantly increase our presence with a highly relevant product offering to distributors, retailers and consumers.”
Operating under the brand names of Savage Arms, Stevens, and Savage Range Systems, the company designs, manufactures and markets centerfire and rimfire rifles, shotguns and shooting range systems used for hunting as well as competitive and recreational target shooting. The company was organized in 1894 by Arthur Savage and has expanded into market-leading positions. Savage is located in Westfield, Mass. and Lakefield, Ontario, and employs approximately 600 skilled employees.
“Savage offers customers a unique value proposition that is unmatched by any other firearms manufacturer and will be a tremendous complement to ATK’s existing ammunition and shooting accessories portfolio,” said Al Kasper, Savage President and Chief Operating Officer.
ATK will integrate Savage within its Sporting Group business. ATK’s Sporting Group is the established leader in sporting and law enforcement ammunition and shooting accessories. ATK’s ammunition brands include Federal Premium, CCI, Fusion, Speer, Estate Cartridge and Blazer. ATK’s accessories brands include BLACKHAWK!, Alliant Power, RCBS, Champion targets and shooting equipment, Gunslick Pro and Outers gun-care products, and Weaver optics and mounting systems.
Caliber Company has been a portfolio company of Norwest Equity Partners (NEP), a leading middle market equity investment firm, since January 2012. NEP is headquartered in Minneapolis, Minn.
ATK is an aerospace, defense, and commercial products company with approximately 15,000 employees and operations in 21 states, Puerto Rico, and internationally. ATK is headquartered in Arlington, Va. News and information can be found on the Internet at www.atk.com, on Facebook at www.facebook.com/atk, or on Twitter @ATK.
Bill Dermody, director of marketing at Savage, he had no information about how the sale will impact operations and employment in Westfield. The deal doesn’t become official until June.
But he did say ATK doesn’t manufacture firearms now, despite the fact that its brand portfolio includes standbys like Federal ammunition. ATK’s shooting accessories businesses make backpacks, cartridge bags gun-cleaning kits and other products. Up until now, the company didn’t make guns themselves.
“They don’t have a firearms factory. There just doesn’t seem to be any redundancy there,” Dermody said. “They are bolting us on to their organization.”….
A private company, Savage has grown in each of the last five years. But Dermody said figures will not be released because it is a private company.
Savage sold 645,000 firearms last year, mostly bolt-action rifles. That is a third of the total market for traditional firearms. Savage’s guns are designed for the recreational market of target-shooters and hunters and are sold through major retailers such as Dick’s Sporting Goods and Cabela’s.
The stock market is seeing an across the board sell-off today. As I write at approximately 12pm EST, all major stock market averages – the Dow, S&P 500, and the NASDAQ – are down approximately 2.3%. Part of it is news from Europe that a recession there is all but a certainty and part is the election results along with the “fiscal cliff”.
Coal stocks, as might be expected given Obama’s jihad against coal, are down even more.
But guess what two companies are seeing strong increases in their stock prices.
That’s right – Ruger and Smith & Wesson. Currently, Ruger (RGR) is up $2.40 or a 5.38% increase while Smith & Wesson (SWHC) is up 77 cents or an 8.14% increase over yesterday. Both of these are pure plays on the firearms market.
The ammo makers Olin (Winchester) and ATK (Federal) are down. However, they have other businesses besides just ammunition production. ATK, in addition to making ammunition, is a significant defense contractor while Olin is a big producer of chlor-alkali.
UPDATE: Bloomberg TV has noticed just how well gun makers’s stock is doing today as well.