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Executives

Steven P. Wold - VP, Treasurer, and IR

John L. Shroyer - Sr. VP and CFO

Daniel J. Murphy - Chairman, President and CEO

Analysts

Troy Lahr - Stifel Nicolaus

Robert Spingarn - Credit Suisse

Joseph Nadol - JPMorgan

David Strauss - UBS

Robert Stallard - Macquarie Research Equities

Howard Rubel - Jefferies & Co.

Patrick McCarthy - Friedman, Billings, Ramsey & Co

Gautam Khanna - Cowan & Company

Richard Safran - Goldman Sachs

Herbert Hardt - Monness

Christopher Robertson - Cardinal Capital

Alliant Techsystems, Inc. (ATK) Q2 FY09 Earnings Call October 30, 2008 10:00 AM ET

Operator

Good day everyone and welcome to this ATK's Second Quarter Fiscal Year '09 Earnings Release Conference Call. As a reminder, today's conference is being recorded.

For opening remarks and introduction, it is my pleasure to turn the call over to Vice President of Investor Relations and Treasurer, Mr. Steve Wold. Please go ahead, sir.

Steven P. Wold - Vice President, Treasurer, and Investor Relations

Thanks, Elea [ph], and good morning. Thanks for joining us on our second quarter fiscal 2009 earnings call and webcast.

With me this morning, I have Dan Murphy, ATK's Chairman and CEO; and John Shroyer, Senior VP and Chief Financial Officer.

During today's call we will be making several forward-looking statements regarding our current projections for future results. These statements are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward statements are made based on our best estimates. Estimates made based on our understanding of information known to us today and are subject to the risks and uncertainties that face any businesses. Many of those risks and uncertainties are discussed in detail in our SEC filings, including our most recent 10-Qs, 10-Ks, and 8-Ks and I encourage you to review those filings.

Actual results of course could differ materially from the projections that we make. Certain financial measures that we use today were be considered non-GAAP financial measures. So we include a reconciliation of those measures to the most comparable GAAP measures on our website at atk.com, where we provide other additional background data as well.

Dan will open up the call today with some brief context as to the quarter and comments on the outlook, and then John then will discuss some of the financial details of the quarter. At that point, we will open up the phones for questions from our listeners.

With all of that said, I turn the call over to you Dan.

Bottom line, we are aggressively executing our strategy across all fronts; financial, operational, and business expansion. The expansion strategy in Armament Systems is well underway. We're strengthening our traditional ammunition capabilities and moving into integrated weapon systems, guided rockets, next generation improved performance ammunition, and tactical accessories.

With our partner FN Herstal of Belgium, we're awarded this quarter a contract to produce the Mark 19 Cruise Served Weapon System. This was our first win of a major gun system beyond our world leading chain gun family of weapons and points to the continued portfolio expansion of ATK gun systems.

Through our partnership with Day & Zimmerman, we captured the facility management contract for two additional Army ammunitions plants becoming the nation's leading operator of military manufacturing facilities. Like Armament Systems, we are steadfastly expanding our product portfolio in mission systems.

During the quarter we won two key systems level program; the new Multi-Stage Supersonic Target and the Excalibur 1b guided artillery projectile. Operationally, we successfully completed the ARGM development program on time and on budget, and our transitioning this Advanced Air to Ground standup missile production. This competitive wins and customer approval of ARGM production represents key milestones in our long term strategy to carve out an industry and leadership position in precision weaponry.

Elsewhere at mission systems, the electronic warfare, ISR, proportion, and Aircraft Structures businesses continued to deliver strong performance. In Space systems, we significantly improve margin performance over first quarter results. The turnaround in the Spacecraft Structures is on track.

Looking to the future, we captured two key wins in the new market of small, affordable, rapidly deployable satellites. With the award last week to Goodrich and ATK of the first operationally responsive space satellite system, which is now termed ORS SAT-1, we are confident our small satellite strategy and our competitive position are both strong.

And in the launch area, we continued to execute exceptionally well on Ares 1, our strategic program in its own right and stepping stone to expanded ATK content within the NASA constellation program.

What's next on the horizon? Our opportunities that continues to expand with our partner BAE systems, we are bidding on the next generation missile warning system termed JATAS. This is multibillion dollar opportunity we are well-positioned to win. We are jointly pursing a future multi role air launch missile along with partners Lockheed Martin and Northrop Grumman again with potential sales in the billions of dollars. And we're in the process of securing three significant commercial aerospace composite structures opportunities that will formed the basis of a multi-billion dollar non-government business lag.

We're also pursuing significant opportunities in small satellites, integrated weapon systems, non-standard ammunition, and aircraft modernization in support of Secretary Gates top priority, ISR search. Beyond our core opportunities that we are pursuing several proprietary awards in support of various U.S agencies and the military services. We expect those opportunities to exceed $2 billion over the next decade.

In sum, we're are successfully building a growth company for the long-term. We see strong support for our core defense space and aerospace products, and considerable customer enthusiasm for our low cost approach to solutions for quick turn needs.

We are diversified across the broad range of products and platforms. The consumable nature of our core products and our focus on affordable solutions, position us well in the future budget environment. We are executing our expansion strategy successfully diversifying beyond our traditional propulsion in ammunition businesses and staking out future large market positions in precision weapons, military and commercial aircraft structures, electronic warfare, classified programs, small satellites, gun systems and shooting accessories.

In the short term, we are bullish on the remainder of fiscal year '09 across all metrics. We are confirming sales guidance with continuing growth in RM systems more than offsetting the lower immediate space systems outlook pushing full year sales growth to greater than 9%. We are raising our earnings guidance and we continue to see strong cash flow to support our capital deployment.

John let me turn it over to you for a few more of the numbers.

John L. Shroyer - Senior Vice President and Chief Financial Officer

Thanks, Dan, and good morning, everyone. To reiterate what Dan said, we had a very strong quarter and half way through the year are positioned to meet all of our guidance target including the increased EPS target, which we now expect to be in a range from 740 to 750.

On particular note is the 11% margin we achieved in the quarter. The margin improvement initiatives underway across the company are performing as expected. Not only are we confident that our full year margins will be in the mid 10% range, we're on track to deliver margins in excess of 11% for fiscal year '10.

I'll breakdown the quarter specific in just a minute, but I want to address a couple of issues, which we know are important to investors right now, specifically our pension and liquidity. As you know, we made the decision just over two years ago to fully fund our pension plan. It was the right move for our stakeholders.

Second, every 1% deviation of actual performance from our my long-term asset return assumptions, changes next years' pension expense by approximately 700k.

Third, in terms of the long-term rate of return, every quarter point change in performance assumptions, changes annual pension expense by approximately $5 million.

Fourth, on the liability side, every quarter point variance in the discount rate from our assumptions, translates into an approximate $6.5 million change to the pension expense.

As the markets stabilize, we'll have more clarity on plan performance, and discount rate, and our related expense. We'll provide you an update on the third quarter call.

Onto liquidity, we are very comfortable with our available access to capital. Our short-term borrowing capacity includes $500 million revolver, which matures in 2012. It is important to note in our revolver, we are currently carrying no debt, and do not envision the need to tap into it to finance operations.

In addition, our bank financing was refinanced in the spring of 2007. We have minimal required debt repayment obligations for the next three years, adding to our comfort on liquidity.

Our bank facilities include approximately 20 separate institutional lenders, none of whom are part of the small group of banks that have reportedly failed. No single lender comprises more than 10% of the total loaned commitment. We have three sets of convertible bond offerings. Based on our stock price at the quarter's close, two are contingently convertible and classified as current debt on the balance sheet.

If any of our investors decide to convert there bonds, we have adequate liquidity from our cash flow generation, cash on the balance sheet, and cash in the revolver, to cover the conversion.

I want to touch on free cash flow too. As is normally the case, we start off the fiscal year in the whole on free cash. We generated strong free cash in the second quarter, with free cash flow exceeding net income by 25%. But, the quarter also included approximately $50 million more in cash tax payments from the prior year, due to timing.

We continue to feel good about the strength, of the back half of the year, which should generate the cash for us to hit our $260 million guidance. As is normally the case, our working capital needs are higher in the first half of the year, based in large part on commercial ammunition. This working capital turns into free cash during the third and early part of the fourth quarter.

Now, I'll turn back to the performance in the quarter. Sales remained strong, up 6%. Once again, they were led by the strength of our Armament Systems Group performance, which was up 19% year-over-year.

Net income for the quarter was up 27% to $65 million, and EPS rose 30%. We're raising our full year EPS guidance to a range of 7.40 to 7.50 based in part on execution of the core business, but also because of the lower share count and the extension of the federal R&D tax credit.

Orders on the quarter and year-to-date remain in line with expectations, but are down from the last year quarter, due to large multi-year orders in the prior year. We expect strong orders growth in the second half of the year, and look forward to updating you on our progress in our next call.

CapEx continues to roll up to approximately 120 million for the year. The tax rate for the year is now expected to be slightly less than 37%, as a result of the federal R&D tax credit extension.

During the quarter, we repurchased approximately 300,000 shares under our share repurchase authorization to offset dilution related to company benefit plans. Coupled with the lower than expected dilutions from our convertible debt, as a result of the current share price, we now expect an outstanding share count of approximately $34.5 million.

Let's turn to the groups, starting with Armament Systems. As I mentioned earlier, the group recorded sales of $423 million, a 19% year-over-year increase. Military small-caliber ammunition which was predicted to be flat is holding strong and we feel real opportunities for growth in medium-caliber gun systems and continued strength in commercial products.

In the last call, I told you we expected the group sales to grow by lower double-digits. We are increasing that guidance and now believe the group will grow by mid-teen. The EBIT rate for Armament Systems was 10.2% versus 9.1% a year ago, reflecting execution and excellence across the Board in the group.

We continue to expect full year margins of approximately 10%. Sales in the Mission Systems group grew moderately up 3% from a year ago to $281 million reflecting higher sales of tactical rocket motor in NASA program. The group is positioned for a very strong second half, and we continue to expect full year sales to be up by approximately 10%.

EBIT for Mission Systems was 12.8% versus 10.9% a year ago. The improvement reflects higher volumes, execution across many programs, partially offset by fees programs. For the year, we now expect margins in the upper 11% range.

Sales in the Space System group were up slightly to $389 million compared to $401 million in the prior year quarter.

As you will recall, the group experienced issues in the first quarter specifically in the Spacecraft division. We're already seeing positive results and expect this business to return the profitability in the next 12 months.

In the near term, we expect the group to finish the year with sales growth in the low single-digits. EBIT for the Space System group was up slightly from last year to 12.3% and in line with our expectations for the full year of approximately 12%.

To recap the quarter, we had solid sales growth of 6%. Our margins improved significantly to 11%. Net income jump 27%, EPS was up 30%. We are raising our full year EPS guidance to a range of 740 to 750. We expect strong orders growth and free cash generation in the second half of the year, and are well-positioned to write off the volatility in the market.

With that, I will turn it back over to Dan.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Thank you, John. Elea, we are ready for questions.

Question And Answer

Operator

Thank you. Ladies and gentlemen, today's question-and-answer session will be conducted electronically. [Operator Instructions]. And we'll take our first question from Troy Lahr with Stifel Nicolaus.

Troy Lahr - Stifel Nicolaus

Thanks. Could you guys talk a little bit about Mission Systems on why you think it's going to be so strong in the back part of the year? And then also, why were sales a little later than expected in the second quarter for Mission Systems?

John L. Shroyer - Senior Vice President and Chief Financial Officer

The growth for the balance of the year coming with some of the key orders that Dan mentioned that we have received in the second quarter will start to generate revenue in the third and fourth quarter, as well as we're expecting a few more orders early in the third quarter, which are really going to drive up that revenue starting in the third quarter and even more so in the fourth quarter. In terms of year-to-date, the growth for Mission is right on track with what we've expected.

Troy Lahr - Stifel Nicolaus

Do you expected second quarter to be 2.5%, I guess?

John L. Shroyer - Senior Vice President and Chief Financial Officer

Right around 3%. That's right.

Troy Lahr - Stifel Nicolaus

Okay. And then can you talk a little bit about why Boeing joined your COT Service team, kind of what they bring and how much you guys are really going to invest in that program?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

That was the PlanetSpace is the prime contractor there, and that decision was made by PlanetSpace and our content is to develop and manufacture the launch vehicle itself, but we are actually not prepared to talk about the details of the arrangement.

Troy Lahr - Stifel Nicolaus

Okay. Fair enough. And then just a last question, should we see margin improvement at Armament with copper prices coming in a little bit?

John L. Shroyer - Senior Vice President and Chief Financial Officer

We have as you know been very opportunistic in our supply agreements on copper over the last couple of years. And right now, we're in the middle of the agreements for the next few months, but should copper and the other commodities continue to stay down, which should see some slight improvement towards the end of next year and into the following year.

Troy Lahr - Stifel Nicolaus

Okay. But not this year?

John L. Shroyer - Senior Vice President and Chief Financial Officer

Not this year.

Troy Lahr - Stifel Nicolaus

Okay. Thanks guys.

Operator

And we'll take our next question from Rob Spingarn with Credit Suisse.

Robert Spingarn - Credit Suisse

Good morning.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Hey, Rob.

Robert Spingarn - Credit Suisse

Just sticking with ammunition for a minute, if you could talk a little bit more about the various components there. How the sequential decline, and then also, what kind of effect if any, frankly you're seeing in the commercial area, from the economy, especially given this time a year, hunting season etcetera?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Okay. So just to summarize, our ammunition is in small-caliber, medium-caliber and small-caliber broken into three customer sets, which is the U.S military, being the largest of the three. Law enforcement being the smallest of the three, and then, sporting ammunition being holding the middle position. In sporting ammunition, just this month we've seen some softening of orders, in the 10%, 15% range. But, we're just in the second week of the hunting season. And so, at this point, we really don't know whether this is a trend or whether this is just a blip. And we have a lot better understanding by the end of the calendar year. So that's again year-over-year being measured against very, very strong prior year October.

And Law enforcement, we continue to see very high demand across all of small-caliber ammunition, we are operating at maximum capacity. And Lake City, we continue to see year-in, year-out production in the 1.4 billion rounds per year category. We have increased our customer base by 97,000 trigger pullers. That's what the added fourth structure approved by United States Congress earlier, in the year means to us, because those are Army Infantry and Marine Corps, all of them are combat troops. And that's nearly 15% increase for our military customer demand.

Medium-cal is continuing to grow, we anticipate that it will. Afghanistan conflict represents substantial daily use of medium-caliber ammunition by both airborne and land platforms. And that we expect to actually ratchet up as the focus shifts to Afghanistan over the course of the next year.

So in total, we see our ammunition of under our Armaments group as expanding although we... as we have anticipated previously don't expect the rapid growth rate to be sustained. But the growth rate, growth will be positive.

Robert Spingarn - Credit Suisse

Okay. And that's very helpful, Pete. You had a couple.

Unidentified Analyst

Yes, hi guys. Just want to talk about space for a minute if I could. With the year-over-year revenue decline, you mentioned Minuteman III, you mentioned satellites, as well as Orion LAS, delays I think. And we just wonder if you could add some color there, in terms of how much Minuteman do you expect for the year. And then, satellites is that the classified arena, as well as it's gone over the LAS?

John L. Shroyer - Senior Vice President and Chief Financial Officer

On the Minuteman front we do expect about $200 million in revenues on that for the year. That's compared to $230 million a year ago. And on the satellite front, it's more in the tens of millions for this first win that Dan mentioned in your ORS 1. And that will just start kicking in here in the third quarter.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

And then let me amplify a bit of the strategic importance of the ORS SAT 1 win. The second award we won is for the initial concept development for a Standard Satellite Bus for all ORS missions.

And there were 20 competitors with the downs left to four. So we won that. That's ongoing right now, as a separate competition. But due to an urgent need by the Central Command, even before that competition is played out, we have been selected as... with Goodrich for an 18 month quick turn to launch first actual satellite mission under the ORS concept. So it puts us in a pretty good position for the longer term, very significant win that will develop out of the other competition that I just mentioned.

Unidentified Analyst

Very interesting, okay. And then the Orion LAS delay that you mentioned in the press release is that going to be ongoing for a while, or is that just timing thing?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

What we have is the funding profile for NASA can't support the earlier delivery in the 24 teen timeframe of the entire Aries 1. So Mike Griffin has done is said, rather than just continued stay on the schedule that we are and then, be ready to go with the Orion a year before we're ready to actually integrate Orion, let's take our time, and see if we can't improve margin and performance. And that effort has redirected some dollars away from what ATK would have been doing in this period. So that's what we referred to a slip in some of our Aries 1 content. But, it's not at all performance related. It's funding profile related.

Unidentified Analyst

Got you. Thanks guys, great quarter.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Thank you.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Thanks.

Operator

We'll take our next question from Joe Nadol.

Joseph Nadol - JPMorgan

Thanks, good morning.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Hi, Joe.

John L. Shroyer - Senior Vice President and Chief Financial Officer

Hi.

Joseph Nadol - JPMorgan

On the mission side, I was just wondering if you give a little more color on the margins, particularly because you said you talked about little bit of a fuse issue, but it sounded like there is some other good things that happened, what are those?

John L. Shroyer - Senior Vice President and Chief Financial Officer

Yes we did have some of the volume mix in our on our tactical rocket motor, which as you know in productions that carry a little bit higher margin rate and then the developments that helped. We also had an overall just a general execution improvement across the number of programs that help margin, and then we have one fuse program. It did have some deterioration in the quarter, a fairly small amount that did offset those two good things for the quarter.

Joseph Nadol - JPMorgan

If you net our the accumulatives, do you... are the margins go down a little bit. I was just wondering why we would expect margins to slip I guess in the second half of the year with regards to your guidance?

John L. Shroyer - Senior Vice President and Chief Financial Officer

The margins in the second half are driven by these developments wins we mentioned that are coming online the Excalibur 1b, the MSST...

Joseph Nadol - JPMorgan

Okay.

John L. Shroyer - Senior Vice President and Chief Financial Officer

Which as you know carry a little bit lower rate, and that what's going to bring the margins down versus any other kind of a slip.

Joseph Nadol - JPMorgan

Okay. And then secondly, what are your order expectations for the year?

John L. Shroyer - Senior Vice President and Chief Financial Officer

We're forecasting approximately $4 billion for the year, the guidance we've had.

Joseph Nadol - JPMorgan

Okay, and that takes up in the second half. It sounds that you're on track with your expectations, but definitely less than half of that so far. Is that fair?

John L. Shroyer - Senior Vice President and Chief Financial Officer

Right. We do expect a fairly large third quarter that will be ... I will update you at the next call.

Joseph Nadol - JPMorgan

And then on civil ammo, a big part of the growth certainly was volume driven the last couple of years and market share related and the big part of it was pricing, because of commodities, which have of course turned. So I'm wondering are you still expecting in that $500 million area and any view so far as to sort of what the dynamic is as commodities come down, as metals come down. Are others lowering their prices? Are you lowering your prices? What's going on there?

John L. Shroyer - Senior Vice President and Chief Financial Officer

We do still expect the commercial product in that $500 million range. You are correctly. We did have obviously some pricing increase with commodities over the last couple of years. So far we've been able to maintain those pricing as the competition and so at this point haven't seen anything so, but it is something that we are looking at it, or continuing to look at.

Joseph Nadol - JPMorgan

Could you think may be margin might be go up there if you're able hold up little bit of pricing there?

John L. Shroyer - Senior Vice President and Chief Financial Officer

That's certainly a possibility.

Joseph Nadol - JPMorgan

Okay, one more quicker one. In the mission, back to the missionary, and I started to jump around like this, but a lot of ISR spending are from Gates, as you mentioned Dan. Is that part of what you're expecting this second quarter or second half to encompass or is it somewhere else?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Yes, that is within mission, yes. And we were directed in support of L3 to deliver the first base and that's in the $50 million range and then, second phase coming behind that has an order value of about $60 million and those are, just the first 2Q increments. The rest of the program is building shape.

Joseph Nadol - JPMorgan

Okay. Thank you.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

You're welcome.

Operator

And we'll take our next question from David Strauss with UBS.

David Strauss - UBS

Good morning.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Hi, David.

David Strauss - UBS

Dan, a while ago you had set out a long term organic growth forecast of 8% to 10%. Could you just give us an update there, how you're feeling about that as you look out into fiscal 2010 and what's the ramp down in the Minuteman program?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Sure. First of all, our fundamental are really strong, as I attempted to point out Mike in my opening remarks and we have orders potential on multibillion dollar programs now that have not previously been available at ATK. Now previously the only $1 billion or you could expect to see would been in for RSRM and supported NASA or the multi-year Lake City and now I described about a half a dozen that are in the works right now. They are our real growth engine for the future and in every case we are successfully entering new markets for ATK by developing affordable solutions and demonstrating performance on those solutions. That's got in a lot of customer attention and that's what's going to carry our continued growth. We do feel lot of enthusiasm and that was not an exaggeration from top people in the acquisition community John Young and others who see what we're doing has been different from the norm and in satellite business we're working to expand that proven approach from defense electronics and precision weapons into the prime for more affordable on responsive satellite.

So we're just now in the middle of our three year strategic planning process every January is when my team and I take the next rolling three year plan to the Board of Directors for approval and then as you know its...in that earnings call which in this case it is in 1st of February that we provide the guidance that your asking for. So we are premature now given that that our fiscal year ends on 31 March by calendar year. But, we're... for the long-term I'm very bullish on this company's future.

David Strauss - UBS

Okay. As a follow-up, the slip in Ares. What does that mean for the Shuttle program and how could that potentially benefit you? Just looking at the potential additional launches for Shuttle?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

If there were two to three additional launches, the revenue from those would more than make up for the short fall brought about by the extensions of areas...if you will a year. It's important to know though that ...we don't want to be over leased that us about expanding and extending the Space Shuttle program because if it goes beyond the availability within the supplier phase of Space Shuttle components then that extension will generate substantial increase cost to NASA and divert resources away from areas one and we've got to get out areas one, that's one priority for the nation. I do anticipate frankly that we will see one or two additional Space Shuttle flights beyond the ten that are current planned between now and 2010.

David Strauss - UBS

One last one. Could you update us on the timing for potential word on the A350 the work that you're going after?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Yes. We are in file discussions right now with Airbus and anticipate bring those to successful closure in the next month or so.

David Strauss - UBS

All right. Thanks, Dan.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

You're welcome.

Operator

We will take our next question come from Robert Stallard with Macquarie Securities.

Robert Stallard - Macquarie Research Equities

Good morning.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Hey, Rob.

John L. Shroyer - Senior Vice President and Chief Financial Officer

Hi, Rob.

Robert Stallard - Macquarie Research Equities

Just a couple of quick ones. First of all, on the Space System margin your guidance is just around 12% for the year. That would imply a pretty healthy step up in the second half. What do you think it is going to be driving them?

John L. Shroyer - Senior Vice President and Chief Financial Officer

Yes, that's correct. I think as you might recall, we always have the adjustment and the performance incentive fees we receive on the Space Shuttle Program in the fourth quarter which is a big piece of that margin uptake towards the last half of the year that we will get to that margin for the total year.

Robert Stallard - Macquarie Research Equities

Q3, we could reasonably expect to be like Q2 perhaps?

John L. Shroyer - Senior Vice President and Chief Financial Officer

Yes, that's correct. The pick up will be in Q4.

Robert Stallard - Macquarie Research Equities

Okay. And John, you talked about 2010 margins being up over 11%. What's your assumption on pension expense if it comes to that 11% number?

John L. Shroyer - Senior Vice President and Chief Financial Officer

Well as I mentioned, no significant change from our pension expense for this year Rob, based on where things stand today in the market.

Robert Stallard - Macquarie Research Equities

You're 11% number is basically flat pension expense your saying?

John L. Shroyer - Senior Vice President and Chief Financial Officer

That's correct.

Robert Stallard - Macquarie Research Equities

Okay. And Dan, just quickly on the Defense budget. 2009 got past, what would you say sort of key developments in that which relates to ATK?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

I think what was most surprising about this appropriation is built with that there are no surprises for us. Even prior year it always been a couple one way or the other but this will interrupting radiant line with our expectation. So we are happy with it and our guidance and our forward planning are both well supported by this built.

Robert Stallard - Macquarie Research Equities

I know its early days. But, if got any initial thoughts on what might be coming together for 2010 and beyond?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

In terms of defense budget?

Robert Stallard - Macquarie Research Equities

Yes.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

I think we will see, the government fiscal year '09 is already locked and historically we have seen a new administrations that take a while to get the radar over from where ever it maybe in such a large organizations department defense. What I've experienced professionally in my 11 years on the hearing is that when changes are made in order to get them made quickly, they're made to very large programs, because as the bank robber really said and like to say that's where the money is. And if there is an effort to cut defense spending, I would expect it to see come from the very large platform programs again because you'll have a fractional cut their produces substantial dollars right away.

Robert Stallard - Macquarie Research Equities

Thanks, Dan.

Operator

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

Howard Rubel - Jefferies & Co.

Thank you very much. The cash flow, John you point out was here was back-end loaded. If you look out at it, it will be very substantial and with the rates where they are today it doesn't seem likely leaving, you just kind of sit on it. Is there any ability or consideration to dealing with the convert as the year unfolds?

John L. Shroyer - Senior Vice President and Chief Financial Officer

All right, well it is true it is back half loaded has I mentioned in my opening comments Howard, but, at this point with the volatility in the markets are going right now is just preserve our financial and strategic flexibility Howard and continue to resolve our efforts here as we have in the past.

Howard Rubel - Jefferies & Co.

What was it? I mean it's receivables that's up sharply. Are there any unbilled receivables in there or is it all just normal course of a business items?

John L. Shroyer - Senior Vice President and Chief Financial Officer

We did have one receivable Howard of about 30 million, that we had expected at the end of the quarter, which slipped into the first week in October which really would have improved our cash flow performance even more if you adjust that out what you'd see is that, if we achieve that same run rate in the third and fourth quarter we'll be right on track for our $260 million guidance.

Howard Rubel - Jefferies & Co.

And also as you pointed out, I mean you had no deferred taxes through the six months and that's pretty unusual?

John L. Shroyer - Senior Vice President and Chief Financial Officer

Yes.

Howard Rubel - Jefferies & Co.

The Day & Zimmerman are the, the joint venture with Day & Zimmerman that was awarded in October, so it's really also a second half piece of business. Could you elaborate a little bit on Iowa and Milan?

John L. Shroyer - Senior Vice President and Chief Financial Officer

As we mentioned, it is a joint venture with Day & Zimmerman. Our portion of that, Howard will be more from a profit sharing role to start with versus a revenue generator. But think of it in terms of the similar analogy about a $50 million a year program which would generate $45 million of annual EBIT for us. And then on top of that, we do have opportunity working in that arrangement to pursue more large caliber ammunition and motor opportunities than we have in the past which will really support that strong growth outlook for the Armament System group.

Howard Rubel - Jefferies & Co.

So, one, I mean I know its a few pennies but I mean it sort of this is a little bit of one of those operation pluses that help you achieve your increased guidance for the year.

John L. Shroyer - Senior Vice President and Chief Financial Officer

That's true, Howard.

Howard Rubel - Jefferies & Co.

Thank you, gentlemen.

John L. Shroyer - Senior Vice President and Chief Financial Officer

Thank you.

Howard Rubel - Jefferies & Co.

Thanks, John.

Operator

We'll take our next question from Patrick McCarthy with FBR.

Patrick McCarthy - Friedman, Billings, Ramsey & Co

Hi, good morning. I was wondering if you just update us on a couple of different programs. For the MSST program any expectation is to when the protest will go away and you can start working on the program?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

We are geared up and ready to go as this... the decision is rendered but little bit file the protest on September 17 in GAO can use as much as hundred days to review the case I believe that if the Navy is asked the GAO for more rapid determination based on a Navy's assessment of the merits. And so, we're just stand quiet and ready to spring forward as soon as that process concludes.

Patrick McCarthy - Friedman, Billings, Ramsey & Co

Okay and then on the non standard ammunition opportunity. Any thoughts on when that might be awarded at this point?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Yeah, that's coming up pretty quick actually. In that first award for the per year one deliveries will be next month. And that award is valued about $150 million. And then there is another $30 million tranche that will be awarded in about the same time first may be the 1st of the year directed toward the Iraqi land forces which is... the larger number is directed toward the Afghan Army. And then beyond it, in the spring of 2009 we'll be awarded one or possibly multiple awards totaling over $1 billion in IDIQ type of structure for a multi year period or five year period. So there's quite a bit of opportunity there. We've got a strong team. We submitted our proposal in July and we're waiting for the announcement.

Patrick McCarthy - Friedman, Billings, Ramsey & Co

Okay. And then just on ARGON and the LRIP. Could you just talk about the profile over the next several quarters, is there going to be a bit of dip in that program as you rotate into production or how should we think about that program now?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Yeah. I think you should say, when we go into LRIP, as you know the profile, we've got development which is very strong and tapers down as you get into testing phase, which we have now concluded and then LRIP tends to be slightly less. For example, we expect an LRIP order in middle of next year for about $53 million. And then as we complete LRIP and what's the duration of LRIP I forget, anybody remember.

John L. Shroyer - Senior Vice President and Chief Financial Officer

It's right around 18 months.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

10 months then, then we rolled into production and here are just for all to keep in mind that's 1750 missiles for the Navy, U.S. Navy across 10 years and possibly 1200 for natal allies in that same period lead by Italy and it's a substantial revenue generated program force.

Patrick McCarthy - Friedman, Billings, Ramsey & Co

Okay. Thank you.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

You're welcome.

Operator

We'll take our next question from Gautam Khanna with Cowen & Company.

Gautam Khanna - Cowan & Company

Hi, could you please go out through your guidance puts and takes because I guess I calculate the R&D tax credit, and that's like $0.06 below where share count last quarter. We were thinking it was 35.5 million for year and now it's 34.5 that has, perhaps its $0.20 to EPS and how do we guess just the raise of $0.15?

John L. Shroyer - Senior Vice President and Chief Financial Officer

I think and in terms of share count, over our guide into approximately 34.5 based on the downturn in our stock price in the overall market. But the convert that are in the money, I think of that in terms of $0.07 on the dollars. So it's more into 700,000 range on the share count versus the 4 million. And then on the tax rate, we're still guiding the 37% which would include the R&D tax credit. We do normally through up our tax rate in the third quarter as we submit our provision for the year. And after we give through that process, we'll be able to see if the full value of the R&D tax credit will fall with the bottom line if you will.

Gautam Khanna - Cowan & Company

Okay. And now to scribble the 700,000 shares on the base of 35.5 plus 2%, you raised guidance by about that and you have that tax credit as well. So, are we not raising guidance for operating performance? Does that try take away?

John L. Shroyer - Senior Vice President and Chief Financial Officer

We have not changed our sales outlook nor have we changed our total margins for the year at this point, still staying with the 10.5%. So that's correct.

Gautam Khanna - Cowan & Company

Okay. Getting back to the Day & Zimmerman agreements, so this is going to be... so I understand that's just a fee that you'll recognize on the EBIT line starting on the second half. So shouldn't we see some margin improvement at Armament, or is that going to be some offsetting headwind?

John L. Shroyer - Senior Vice President and Chief Financial Officer

It is a joint venture. So the profit on that will show up below the line, below the Armament system segment rate if you will. And it will start up here in the third quarter but has fairly low level, we'll see more of the benefit of that in the next fiscal year.

Gautam Khanna - Cowan & Company

Okay. Could you also give us, what the sales were on Ares this quarter and a year ago?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

We get back to you on that, because we don't have it right at hand here? Can we do that?

Gautam Khanna - Cowan & Company

Yes, Sure in Ares as well if you wouldn't mind?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Okay.

John L. Shroyer - Senior Vice President and Chief Financial Officer

Do we have a there are 180 million versus 159 million last year.

Gautam Khanna - Cowan & Company

Okay. So do you have the components broken out?

John L. Shroyer - Senior Vice President and Chief Financial Officer

I don't. If you give either Steve or Jeff [ph] call I'll give you the details of that.

Gautam Khanna - Cowan & Company

Okay.

John L. Shroyer - Senior Vice President and Chief Financial Officer

Often on the components, the shuttle was up about 10 million versus the prior year. And the constellation was about 18 million it looks like in a totality. About 15 million if you include the launch of our decline.

Gautam Khanna - Cowan & Company

Great. And just a follow-up on Joe Nadol's question about the civilian ammo business I thought last year you did about $500 million and this year you're hoping it be up 12% to 15%. Is that still consistent with what your view is?

John L. Shroyer - Senior Vice President and Chief Financial Officer

Yes that's correct.

Gautam Khanna - Cowan & Company

So do 550 to 575 that numbers.

John L. Shroyer - Senior Vice President and Chief Financial Officer

That's correct.

Gautam Khanna - Cowan & Company

Okay. Thank you.

Operator

We'll take our next question is from Richard Safran with Goldman Sachs.

Richard Safran - Goldman Sachs

Hi, Good morning.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Good morning.

Richard Safran - Goldman Sachs

Just quickly, on your share buybacks it looks like a cash deployment priorities is going towards at least in near term. Just wanted if you could comment on what you think in the M&A environment or now that you don't go for your strategic planning process. What are you thinking about M&A going forward?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

M&A has been a key element of our growth strategy as it's well known and we anticipate that will continue to be so. We have acquisition targets identified across all three of the groups to expand the portfolio that we currently are executing on. But, I can't tell you that there is not a big ticket item like in MDA in the immediate offering.

Richard Safran - Goldman Sachs

So if you could put a bound on it, we're looking like 1 to 200 million arise?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

I'd say, in the framework of the, well under half a billion is Kind of what we would be targeting but again, I don't want to leave the impression that an acquisition is our number one priority for the next year. We work those priorities on an annual basis as part strategic prime cost as we talked about it earlier. We'll make those determination here in a next couple of months.

Richard Safran - Goldman Sachs

Okay, thank you.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Just one note over completeness is that, as we move substantially and significantly in the commercial Aerospace structures, there will be more internal investment necessary to succeed there and so that's very much on a radar screen. So I like think of the internal investment for growth as being essentially in same bucket as an acquisition but with less risk.

Richard Safran - Goldman Sachs

And you would say that show somewhat near term.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Yeah within the next 12 months or so I say, yeah.

Richard Safran - Goldman Sachs

Okay, thank you very much.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

You're Welcome.

Operator

[Operator Instructions]. Next we'll hear from Herb Hardt with Monness.

Herbert Hardt - Monness

Good morning. This additional business in the non-standard ammo that you are talking about, will that be done and you have the capacity available?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Well, we would act as the purchasing agent here, Herb. So we wouldn't build any of the material... the requirement is for the ammunition to be produced in the former Soviet Union, were some Pact countries.

Herbert Hardt - Monness

And would you bring an expertise to the manufacturing process there as well?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Well, actually that's partly not much of it. Frankly, because as ammunition already exists, it's already in the inventories and what we bring is the expertise of knowing how that manage subcontractors and for us to do there, to your point really, to ensure that the quality is there in the standards necessary under the RFP or MAT. That's what we do better than anybody else in the ammunition business.

Herbert Hardt - Monness

Good. Second question is on the Day & Zimmer joint ventures, is that 50-50?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

No. We're a minority in that joint venture.

Herbert Hardt - Monness

Okay. And the last question is we do these quick term projects like the one on the satellite when you're talking about it. Second to be more profitable on a corporate average?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

I would not say that is a trend, no. Every fight for everyone of these, have early one by one as you know.

Herbert Hardt - Monness

Okay, fair enough. Thank you very much.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Okay, thank you.

Operator

And we have a follow-up question from Robert Spingarn with Credit Suisse.

Unidentified Analyst

Hey, guys Pete, again. Just want to verify on the Iowa and Milan when... was that protested or no?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

That's right now...but we're still in the protest period right now.

Unidentified Analyst

Okay, okay, got you. And then, what you expected here on the incremental Joint Strike Fighter composites work?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Well, I think early next year's spring time is when we expect to hear on whether or not we've been awarded additional scope in two key areas. Right now, we've got somewhere I think around 1.6, $1.7 million content on each Joint Strike Fighter. If we're bring both in that would elevate us a bit over to 2 million per aircraft which is a pretty substantial. Frankly, very substantial increase over the content that we had when we joined the program, number of years ago.

Unidentified Analyst

All right, got you. And then, Dan, just want some color if I could. In your opening remarks, you talked about the three significant commercial aero structures opportunities. You mentioned Airbus as well but can you just give us some color in terms of what those three opportunities are in timing and size?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

I can't provide any more specific detail regarding who are customers are because we are literally right now in file negotiations. But in terms of categories of product with Airbus what we bring to the table is ability to very efficiently manufacture the skeleton of the aircraft. Those are longitudinal and the frames. So you think if the backbone or ribs of the aircraft that are joined then to the airframes as they are produced by three of the first tier of manufactures and so that's compose the structures in one category for large commercial aircraft. Another category is to actually manufacture the entire fuselage for anyone of the number of business Jet manufacturers and we've been in discussion with all of them and that using our fiber placement techniques. And then third is in support of the Jet engine manufacturers using light weight composite structures on Gen engines to increase their efficiency and reduce their weight and as you we're supporting the GenEx engine right now for General Electric and we think we have other opportunities.

Unidentified Analyst

Okay. So all three areas, it sounds like they be in the next month or two. We'll here announcements or I just wonder of those?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

There is a good possibility of two of those being announced this calendar year.

Unidentified Analyst

Okay. And then on the entire fuselage for a business. That's a little bit of a departure for you, isn't it?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

It is but we have the tool and the experience. It's really not that much different for us than the rocket motor cases and bearings for space launch vehicles that we've been manufacturing very successfully since the early 1980's.

Unidentified Analyst

Okay I got you. Thank you very much.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

You're welcome.

Operator

And we'll take our next question from Chris Robertson with Cardinal Capital.

Christopher Robertson - Cardinal Capital

If can you talk briefly about missile defense and where you see the company playing out if we were to move into environment program cuts particularly in the Kinetic Energy and Standard Missile and ground based systems. Thank you?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

What we've been able to developed within the missile of defense portfolio of missiles is a family of motors concept. Then what we have in terms of ATK capability has been developed through billions of dollar of tax paid investment and over the course of three decades or more. And...but we offer to MDA and to other department of defense customers is the ability to provide that know how against established requirements and manufacture and integrate the entire proportions debt. And we've recruited about 70 systems engineers, who reside at our back as Utah facility, now towards that end. So, I believe as we see restructuring, and this will defense that ATK will have the opportunity then through what are more or more on ramps to expand its scope and its contribution.

Christopher Robertson - Cardinal Capital

Well essentially just moving toward, you think the ball is going versus what may currently be?

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Yeah and to be able to provide real value added as the leading solid propulsion company in the world in a systems level capacity, rather as a rocket motor component provider.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Thank you

Daniel J. Murphy - Chairman, President and Chief Executive Officer

You're welcome.

Operator

[Operator Instructions]. Now there are no further question at this time. I'll now turn the call back over for any additional remarks.

Daniel J. Murphy - Chairman, President and Chief Executive Officer

Okay Elea, thank you for your help today and I appreciate all those who are on the call and your visit ATK and look forward to talking with you again on 1st of February. Bye now.

Operator

And ladies and gentlemen that will conclude today's call. Thank you so much for your attendance. Have a great day. .

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Source: Alliant Techsystems Inc. F2Q09 (Qtr. End 09/30/08) Earnings Conference Call Transcript
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