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Alliant Techsystems (NYSE:ATK)

Q2 2012 Earnings Call

November 03, 2011 10:00 am ET

Executives

Steven P. Wold - Vice President and Treasurer

Thomas G. Sexton - Interim Chief Financial officer and Vice President

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

Analysts

George D. Shapiro - Access 3:42, LLC

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Joseph Nadol - JP Morgan Chase & Co, Research Division

Kevin Ciabattoni - KeyBanc Capital Markets Inc., Research Division

Carter Copeland - Barclays Capital, Research Division

Mayur Manmohansingh - Barclays Capital, Research Division

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

Troy J. Lahr - Stifel, Nicolaus & Co., Inc., Research Division

Robert Takacs

Unknown Analyst -

David E. Strauss - UBS Investment Bank, Research Division

Giuseppe Incitti - Morgan Stanley, Research Division

Operator

Good day, everyone, and welcome to this ATK Second Quarter and Fiscal Year '12 Earnings Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to ATK VP of Treasury, Steve Wold. Please go ahead, sir.

Steven P. Wold

Good morning, and thank you for joining us for our Second Quarter Fiscal 2012 Earnings Call. With me today, we have Mark DeYoung, ATK's President and CEO; and Tom Sexton, Vice President and Interim CFO.

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

All right. Steve, thank you very much. Good morning, everybody. It's a pleasure to have you with us. We appreciate you joining us this morning.

Our second quarter orders were strong at $1.4 billion. Our sales were off 8% due to reduced NASA and DoD-related revenues. We reduced our debt to the lowest level in 6 years. We reported second quarter margins of 13.3%, the highest margins in the history of this company.

The quarter benefited from the favorable resolution of a contract-related issue. But even without that success, we delivered very strong margins of 11.9% for the quarter. We're aggressively managing costs, implementing sustainable efficiency improvements, becoming more competitive and challenging ourselves to identify opportunities for future growth. ATK remains a strong and profitable company with good order flow, strong cash flow and a strategic plan focused on delivering long-term value. With an improved debt-to-EBITDA ratio, we've increased our financial flexibility and we continue to assess the full spectrum of capital deployment alternatives. I'd like to mention a few operational highlights from the quarter.

In September, NASA announced the baseline design for the new heavy-lift launch vehicle designated Space Launch System, or now known as SLS. Our 5-segment solid rocket motors will provide propulsion for the initial test flights. This gives us significant leg-up on the competition for a larger follow-on production contract. In August, we opened our new Aircraft Commercial Center of Excellence or ACCE facility. ACCE will be the production home to the stringers and framework we're doing in support of Airbus A350 program. We're making very good progress on that program. We've delivered thousands of parts and our financial performance is in line our forecast. ACCE will also house other commercial composites, capabilities and programs, such as the GEnx fan containment cases, the work we're doing for Rolls-Royce's new engine, and the facility gives us expansion opportunity, where we will aggressively work to identify additional work in the commercial aerospace market.

The Army named our 5.56mm enhanced-performance round as its Invention of the Year. The new high-performance round was codeveloped with our customer and is a testament to the terrific work I believe we're doing in the ammunition front. Our precision weapon portfolio continues to win praise from the user community. We're making significant progress in our development programs. The XM25 shoulder-fired Airburst Weapon System has seen combat in Afghanistan and the Army has ordered additional weapons and ammunition. Our Mortar Guidance Kit is also [indiscernible] and we're getting favorable reports on its performance. On the test range, we recently concluded a series of successful test of our PGK, which is our Precision Guidance Kit for traditional artillery. Our Armed Forces continue to call for reduced collateral damage and affordable precision solutions. And we believe we're in a very good position to meet their needs. AARGM, our flagship missile designed to defeat enemy air defenses, is completing operational testing with several successful test fires, and then an award this week you may have noticed on the LRIP 3 phase of the program, which we're very pleased with.

The fall hunting season is in swing across the country. Early data indicates that sport shooting enthusiasts are purchasing increased volumes of our product. However, some of these consumers are buying lower-priced products, causing a reduction in the overall commercial ammunition margins from the shift in mix. On the upside, however, we're not seeing a slowdown in the demand for our ammunition and our branding strategy has captured additional market share in the quarter. We're successfully penetrating the commercial markets with our BLACKHAWK! brand. Our products and our margins in this business are doing very well and the margins, in fact, are the highest in the company.

Finally, we have achieved notable success in our commitment to soldier systems market. And last month, the U.S. Marines awarded our Eagle Industries subsidiary contracts for a new load-bearing pack and our BLACKHAWK! brand won a contract to provide the Marine Corps with an advanced capability holster. We continue to win new business. We deliver solid execution on our programs in the quarter. We achieved margin improvement across our portfolio. And with those highlights, I'll turn it over to Tom Sexton for more detail on the numbers. Tom?

Thomas G. Sexton

All right. Thanks, Mark. Good morning, everyone. As Mark mentioned, second quarter orders of $1.4 billion were very strong. The order strength was across the board. The only group where the book-to-bill didn't exceed 1 was in Aerospace Systems, which is typical, given the long-term nature of their contract base. We booked a $109 million JATAS contract in July. The quarter also benefited from $115 million Trident II D5 order, $75 million of orders for the new USMC pack and strong orders flow in medium-caliber ammunition, both domestic and international, as well as in our commercial ammunition business.

Sales in the quarter were $1.1 billion, down from $1.2 billion in the prior year quarter, primarily due to lower sales in the Armament Systems Group. For the full year, we are narrowing our sales guidance to a range of $4.6 billion to $4.7 billion, which also reflects the expected sales profile in Armament Systems. However, we expect Armament Systems and Missile Products to develop stronger sales in the back half of the year than they did in the first 6 months.

We reported second quarter fully diluted EPS of $2.43. When you back out the $0.33 related to the favorable resolution of the contract negotiation, EPS was still very strong at $2.10 per share. We continue to expect full year EPS in the range of $8.50 to $9. The full year will also benefit from our continued focus on operating efficiencies and a reduced share count due to the Q1 share repurchase, partially offset by slightly lower sales volume in Armament Systems and a higher expected tax rate.

Adjusting for the benefit of the contract negotiation, operating margins in the quarter were 11.9%, an 80 basis point improvement over the prior year quarter. The company-wide emphasis on margin improvement helps us post solid bottom line results, even in the face of slightly lower sales volume. During the quarter, we retired $250 million of convertible debt and paid down another $5 million of term debt. The debt pay down strengthens our balance sheet, reduces our interest expense in the back half of the year and gives us a debt-to-EBITDA ratio of approximately 2.

Also in the quarter, we returned $7 million to shareholders in the form of our quarterly cash dividend. Free cash flow through the first 6 months was down $27 million from the same time last year, but this includes a $62 million pension contribution in the first quarter. We remain on track for full year free cash flow of $225 million to $250 million. Year-to-date CapEx is $74 million, keeping us on track for full year CapEx of approximately $130 million. After a lower tax rate in the first quarter due to a discrete state tax benefit, the second quarter tax rate was 35.3%. For the year, we now expect a tax rate of approximately 34.5%, up from previous guidance of approximately 34%. The increase reflects lower federal and state R&D tax credits.

Now I'd like to give you a little more color for each of business groups, starting with Aerospace Systems. The biggest news for the group was NASA's recent announcement that our 5-segment solid rocket motors will be baseline for the first 2 test flights of the new heavy-lift launch vehicle. We continue to expect total FY '12 revenues from our NASA programs to be north of $300 million. Total second quarter sales for the group were $333 million, down 12% from the prior year quarter, in line with our expectations and reflective of the shuttle closeout and transition from the Constellation Program. Operating margins were 11.3%, which benefited from operating efficiencies, primarily on our flares in commercial aerospace businesses.

Armament Systems sales in the quarter were $358 million, down 19% from the prior year quarter. Lower small- and medium-caliber ammunition sales and reduced modernization funding were the primary drivers. The lower sales within the energetics business at Radford and lower volumes of nonstandard ammunition and weapons also contributed to the decline. As I mentioned, sales should be stronger in the last 6 months, driven by small- and medium-caliber ammunition, as well as barrier systems. As you know, we protested the Army's award of the Radford contract, and that protest is ongoing. We expect to learn the outcome of the Radford award later this fiscal year. Due to the delay in making a final contract award, we are now under contract to operate the facility through the end of February 2012, although at a lower production level than the prior year. The group's operating margins benefited from an $18 million settlement of a contract dispute related to the 10-year contract for small-caliber ammunition at our Lake City facility. This drove the quarterly operating margin up to 21.1%. Backing up the settlement, operating margins were 16.9%, benefiting from a favorable sales mix and operating efficiencies.

Missile Products turned in a strong quarter. Sales of $170 million were up 7% from the prior year quarter with JATAS, SM-3 and tactical rocket motors all contributing to the growth. These programs in AARGM will continue ramping up during the back half of the year. Operating margins in the quarter were 12.3%. The quarter benefited from a continued focus on execution and operating efficiencies.

Sales in Security and Sporting were up 8% to $249 million. We continue to experience strong volume in our commercial sports shooting ammunition business, as well as many of our soldier system products. Operating margins were challenged. As we mentioned on the last call, we implemented a pricing increase to mitigate higher raw material costs. However, some commercial consumers have opted to migrate to less-expensive, lower-margin ammunition lines, and we were not able to pass along the full impact of the commodity price increases. Consequently, operating margins for the group were 9.4%.

To recap, orders in the quarter were very strong, giving us a healthy backlog of $6.5 billion and confidence for the long-term. Sales were down quarter-over-quarter, but we expect sales to be stronger in the back half of the year. We continue to drive operating efficiencies and margin improvements across all of our businesses. While we are nearing our full year sales guidance to a range of $4.6 billion to $4.7 billion, we are maintaining our EPS range of $8.50 to $9, even though we increased our full year tax rate assumption. We're also maintaining our cash flow guidance of $225 million to $250 million. And with that, I think we're ready for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the site of Heidi Wood with Morgan Stanley.

Giuseppe Incitti - Morgan Stanley, Research Division

This is Giuseppe on for Heidi. I was wondering if you could give us a bit more color on the strategic growth initiatives that drove corporate expense in the quarter.

Mark W. DeYoung

Yes, I'll be happy to do that. We've had an initiative, which we actually call SGI, which is our strategic growth initiative. That initiative has focused us on opportunities for growth and adjacency and in lanes where we believe we have core capability which could be deployed into other markets, faster-growing markets or higher-margin markets. During the quarter, we employed the support of others to come in from outside to help us understand those markets at a global perspective and help us look at that strategy and refine that strategy. And that's what we're doing with SGI.

Operator

Our next question comes from the site of Troy Lahr with Stifel, Nicolaus.

Troy J. Lahr - Stifel, Nicolaus & Co., Inc., Research Division

We've heard a lot about how DoD budgets might be impacted by the Super Committee. How do you think -- NASA budgets hold up? I mean, are you hearing anything?

Mark W. DeYoung

Sure, yes. I was over on Capitol Hill yesterday. I had good visits there. We stay very, obviously, very in touch with what's happening on the NASA budget front, both through authorizations and appropriations. The $1.8 billion, which has been appropriated for that space exploration area in which we participate, remains intact. It was put intact last year, remains intact through the continuing resolution and going into the FY '12 budget, remains intact. So we believe that, that has sufficient funding to execute the mission. It supports our funding forecast and profiles for the next couple of years and is sustained in a bipartisan way. There's good bipartisan support for space exploration. I was over on the Hill yesterday meeting with members of the Intelligence Committee. The recent launch of the Chinese vehicle, I think, has our country's attention again and adds impetus to sustain America's lead in space. So we see that funding being sustained in a bipartisan way. Also, on the Super Committee, of course, that committee's outcome has yet to be seen. The outcome from that in terms of impact that might impact our business is actually about 2 years out in front of us. So our FY '11, FY '12, FY '13 forecast looks very healthy. The programs which we participate on appear to all be on pretty darn good shape and Super Committee adjustments, I think, are a couple of years out for us, if any.

Troy J. Lahr - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then I just wanted to clarify one point. When you talked about consumers switching on the ammunition side to lower price point items, can you maybe quantify that or explain that a little bit? Because in the past, you said that some of these consumers have been willing to pay higher price points for the better quality items. A lot of hunters have been able to do that in the past. Can you maybe just talk about that a little bit?

Mark W. DeYoung

Yes. I'd be happy to take that question as well. If you look at the number of products which we offer, ATK offers more products in that space than any other manufacturer. We have over 16,000 SKUs, which we sell in retail and ammunition configurations. Within those configurations, obviously, there's various price points and margin points. And our product mix, as I mentioned in past calls over the past few years, is always changing. What we're seeing now, and I think it can be attributed to economic pressures at home with hunters who are tightening their own belts at home in the current economic environment, is even though our premium sales remain very strong and even though our high-margin sales continue to gain market share in that space, there is a shift in the last quarter to people who have stepped to more of our value-brand, value-priced products. We have a multi-brand strategy that allows us to touch different price points with different quality of products. This recent shift to lower-priced products manifests itself in an impact to our margins, when you marry that with the increased raw material costs we've incurred. So for example, let me just put one more element of color to your question. We sell, on an annual basis, about $50 million of Lake City product in bulk pack configurations into the shooting sports market. That product is actually a product which is more of a commodity. It is typically lower-priced and lower-margin. We've seen dramatic increases in the purchase of that kind of bulk pack low-cost ammunition. That's what's driving this. However, I would point out that demand on the top line for our brands and our products remains very strong and we captured market share from our competitors again in the quarter. I also believe when you look at the space in which we operate, you will find we are more profitable than any of our competitors. We expect that to continue throughout the year. We expect to have a good solid profit year. One of our key competitors announced a price increase that they have issued effective January 1. So other competitors, I believe, will respond across the board, and we're very much watching what happens in that market.

Operator

Next question comes from George Shapiro from Access 3:24.

George D. Shapiro - Access 3:42, LLC

Following up in the security area, can you break out how much of the margin decline was due to commodity pressure versus the change in mix that you talk about?

Mark W. DeYoung

I don't think we want to break that out in a group level, George. It's a good question. I just hate -- it's a very competitive space, and I don't like to give information on those kinds of breakouts on public calls. It's just too competitive to do that. We did see increase. You've watched the copper market, the lead, zinc market. Those costs obviously impact us. We procure a lot of those materials. There's fluctuation in those costs, but we buy in a strategic buying pattern, which doesn't mean we buy everyday. We buy when we believe we're locking in a reasonable price around which we can create pricing and distribution strategies. So even though the price may fluctuate today, it doesn't fluctuate our cost today. So that's part of what happens. And then the commodity mix and then -- I mean, and then the product mix and the shift, it's somewhat like what I explained and I would prefer not to try to break that out either because it's just too competitive.

George D. Shapiro - Access 3:42, LLC

In armament, even if you back out the contract settlement, the margin is still extraordinarily high in that business. I'm just wondering, would you give some more color? I mean, I kind of look out and say maybe 45% of the business or so is Lake City, which should have relatively low margins since you're really just managing the facility there. So maybe if you could provide some more color. It just seems what struck me as an abnormally high margin.

Mark W. DeYoung

Yes, let me answer that. First of all, let me go to the last portion of your question. We operate Lake City Army ammunition contract under a firm-fixed-priced contract. That contract was bid 14 years ago. It was re-upped about 3 years ago in negotiations with the customer. Our ability to drive efficiency improvement gives us the opportunity to drive margin improvement because we can retain those savings. So even though we operate assets that are owned by the government, under a firm-fixed-price contract, which operates much more like a commercial contract, the efficiency improvements we're putting in place can fall to our bottom line. We're seeing significant success with that. And the margins, I believe, might be higher, George, than you would allude to or you would expect due to the good efficiency improvements and capital investments we've made in that facility. So that would be one. Two, the modernization work, which has been going on both at Radford, which is in this group's numbers, and also at Lake City, have traditionally been very low margin business for us, which makes sense because we're basically investing the government's dollars to buy government equipment and we're administering the contract in the investment of their dollar, so it's a very low margin rate. That has been dilutive to the rates in the Armament Systems Group now for some time. In fact, we've generated over $100 million in a year at very low margin rates in the past. As that work begins to mature and be completed, as we modernize these facilities, we'll see a shift of about $100 million of sales going away. But because it was very low margin, meaning low single-digit margin, then you see the margins for the group improve on lower sales, and that's really what's going on in that group.

Operator

Our next question comes from the site of Joseph Nadol from JPMorgan.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Just want to follow up on Security and Sporting. I heard your explanation and that all makes sense. But the margin drop was fairly sudden on a sequential basis, looking at the last couple of quarters where things may have been a little weaker than they had been before, but really kind of fell off. So understanding that this is competitively sensitive, is there anything else in there in terms of the timing of procurement of materials or hedging of some type that's involved? And looking forward, is the expectation this is a 9% or 10% margin business or a 13% to 14% margin business?

Mark W. DeYoung

All right, let me answer that. There aren't any significant one-time events in terms of hedging or in terms of a particular material buy at some kind of expensive cost. There really isn't anything like that, that's going on behind the scenes with financial instruments or some kind of purchasing activity, which got us in a bit of a hump. I think what you have to understand about the Security and Sporting market is it is a very consumer-driven market, and it changes as consumer behavior changes. And therefore, it's also very unpredictable. So what we saw through the first quarter, which is actually a lull in the season. We're basically beginning to produce products for the fall season. We're filling orders for the fall season. And what happens is consumers begin to enter into the fall season, which is a very cyclical peak for this business because the hunting seasons across the country run from September to January, as those consumers actually go to the point of sell and begin to take products off the shelf, that's when we learn what they're buying, that's when the reorders begin to flow, that's when we're shipping trucks 24/7 out into the retail space to meet consumer demand. And that's when the shift materialize for us in September. So it appears as though it materialized suddenly. I would say you're absolutely right. It materialized suddenly. That's how that market works.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Okay. And then just moving back to armament. First of all, was that contract settlement at Lake City in your original guidance? And then I guess, kind of the same question I had on Security and Sporting, is this now really a 16% margin business? Ex-ing out obviously the contract settlement, the major reason you gave for margins improving was the mix shift away from the modernization, which makes sense. But does that mean that really this is sustainable going forward?

Mark W. DeYoung

Sure. Yes, let me talk to that. The resolution of the contract dispute, which we resolved for the $18 million, which came into the quarter, was not in our guidance. We don't put legal resolutions in our guidance because the timing associated with those are very difficult, obviously, to manage and the outcome is often unpredictable. So it was not in our original guidance, although it has been in the works for about 3 years from the time we filed to the time we were able to settle and collect. I consider it a great success for the business to able to pick up that resolution, by the way. So that's the first answer to the first question. The second part of your question is again the sustaining of the margins in Armament Systems. There are always challenges in your margin sustainment in any business. I think the next large challenge in terms of margin sustainment is going to be associated with the competition for the Lake City facility and what happens as we get through the Radford competition. Remember, both of those facilities are in the Armament Systems Group. The Radford competition, Radford had been generating solid margins for us. That competition is in question still. And the Lake City recompete, we have a draft RFP we're working on now with our proposal team. We believe the proposals will be submitted toward the end of this calendar year. A decision will be announced next September of next year, so we're almost a year away from that decision. As with any competition, price becomes a factor. And when price becomes a factor, so can margins. So I think we just have to work our way through the future of that. I think for the rest of this year, we believe we have a path to sustain the margin performance you're seeing in the quarter.

Operator

Our next question comes from Carter Copeland with Barclays Capital.

Carter Copeland - Barclays Capital, Research Division

One quick question on the variance and the guidance for the remainder of the year. You had described the $0.50 range in prior calls as attributable to the Radford contract. And now that you've got that locked in for the full -- well, at least through the end of February, I'm wondering, this 10% variance for the remaining quarters of the year. And I'm wondering what's driving that large amount of variability. Is it Sporting and Security on the margin front? Or is it this uptick in armaments in the back half? How should we be thinking about what's driving that variance?

Thomas G. Sexton

All right. I think you hit on a couple of things. But as you know, we brought our sales guidance down to the lower part of our range. I'm confident in that range. But we still have to have the balance of the year in front of us on that. We have a higher tax rate, and then the mix pressure that Mark talked to in the Security and Sporting. We're confident with our sales volume there, and as we play out this third and fourth quarter, on the margins on the product to the mix that we'll sell there. That really is why we've maintained the range of $8.50 to $9 at this point in time. Obviously, at the end of the third quarter, we'll feel we're in a position to revalidate or tighten that as appropriate.

Carter Copeland - Barclays Capital, Research Division

But just in general, the margin -- nailing down the margin, given some of these shifts, is a bit tougher than the second half.

Thomas G. Sexton

Correct.

Carter Copeland - Barclays Capital, Research Division

Okay. And just a bit of color, so I can help understand here, on armaments, obviously, you've called out the pressure on the top line in small cal, and then you made a brief comment about some growth in the second half, I think, in your prepared remarks. Can you walk us through what's happening there, just in terms of the movements, first half versus second half? Is there some sort of phasing that's driving the different growth rates?

Thomas G. Sexton

Yes, I indicated that the second half, we're going to see growth in small-, medium-caliber ammunition and the barrier systems. The small caliber is not the driver, but we do expect it to be up just based on timing of production there a little bit. And then medium-caliber ammunition and the barrier systems, really it's just timing of the program production on those based on the awards and delivery dates, that we see that to be up in the second half of the year and anything beyond that.

Mark W. DeYoung

The only other thing I would mention in addition to what Tom said is our focus on execution excellence, our focus on production optimization within our shop floor facilities, we continue to see benefit. We believe that benefit in a group like armament, particularly in a couple of their facilities where they have significant backlog, will allow them to begin to consume at a faster rate the backlog based upon the efficiency improvements we're seeing. And so one of the things we're driving ourselves to is make that also a reality in the back half of the year.

Operator

Our next question comes from the line of David Strauss with UBS.

David E. Strauss - UBS Investment Bank, Research Division

Mark, looking at cash and deploying that. You're through paying off the convert now. You're through the weaker part of the year for your cash flow. You're sitting on a couple of hundred million. You should generate a couple of hundred million through the second half. What is the current thinking on what to do with the cash?

Mark W. DeYoung

That's a good question, David. We look at that all the time. We just had our board meeting, of course, on Monday and Tuesday here in Washington, and capital deployment is always a part of every discussion that we have with our board. So you're right. I mean, I'm really pleased that -- because I mentioned, our debt level is down to the lowest level it's been for at least 6 years. And I look back over some data that I had this morning, so we're pleased with that. The board authorized another dividend for the quarter. We're pleased with the fact we've got the dividend in place and continue to fund it. As I mentioned, we have a strategic growth initiative underway, looking at opportunities for growth, both by the way, organic and inorganic. And we have opportunity in this business as we drive this margin improvement for a capital investment, which we believe can generate significant returns on CapEx if we choose to do that to support organic growth in certain spaces. So we look at all the opportunities we have for cash deployment, including internal investment, as I described, and the strategic growth initiative. We want to make sure we sustain enough dry powder with outcome of the strategic growth initiative that we can do whatever the outcome is, whether it be organic, whether it be adjacency or whether it be some other alternatives, as well as the potential to always look at a reasonable share repurchase program and dividend program. So David, right now, we're in a position halfway through a year. We're in a very volatile economy. We are in a very volatile -- as you know probably as well as everybody, we're in a very volatile time within our markets and the capital markets. And we're ensuring that we have enough liquidity and dry powder to execute our strategy.

David E. Strauss - UBS Investment Bank, Research Division

Mark, how does this fit with the portfolio review that, I think, has been ongoing for a while? And when do you expect that to wrap up?

Mark W. DeYoung

Sure. I reported in August, at the August call, that we had executed through the summer season, a look at portfolio. We did that under the premise of rationalization of the portfolio. The outcome of that was quite interesting. The engagements we've put in place in terms of margin improvement and efficiency improvement over the last year have taken what otherwise would be lower-performing niche businesses and turned them into good performers. They're contributing to our top line and we're seeing significant margin improvement and execution excellence improvement, where they are contributing in a very meaningful way. Nearly every unit in this company now is contributing in a very meaningful way to both the top and bottom line as well as cash generation. So the bottom line as we went through that analysis, pieces of the pie have changed in terms of their ability to contribute and perform. I believe through portfolio rationalization, there are still a couple of pieces of the company where I don't see a long-term strategy to employ those pieces. And we're going to look to find potential opportunities to do something else with a couple of pieces of the pie. But in the larger picture, we've improved the performance of nearly all of the units, and they're contributing units. And we're also reordering the strategic growth initiative to look for opportunities for adjacency in some of those spaces. So it created basically a decision that said, "You don't have to take this thing apart. There's a couple of units you probably don't need. And most of the units, you can turn into real contributors, and they will support the strategy." So that's really where we are on that.

David E. Strauss - UBS Investment Bank, Research Division

Okay. Last one for me. A350, can you give us an update there? And if Airbus were to delay first delivery by, let's say, 6 to 12 months, how might that impact you? And do you have that kind of contingency baked into the program at this point from kind of an EAC standpoint?

Thomas G. Sexton

Okay, I guess, I'll take that one. First of all, I think we're very pleased with our progress on the A350 program. We're performing well to our rebates final [ph] EAC that we've put together, you recall, in the third quarter of last year. So we're very pleased with our performance there. Customers are very happy with our performance, our products. We've delivered over 2,000 parts. And as Mark indicated earlier, we opened the ACCE facility early in August, so we're very happy with where we're going on this important long-running program. As far as the delay, we had anticipated some delay in there, so I don't expect that, that would have any meaningful impact near-term at all to our current financial position on the program.

Operator

[Operator Instructions] Our next question comes from the side of Rob Takacs with SunTrust Robinson Humphrey.

Robert Takacs

Real quick question, could you talk a little bit about ATK's role or where you see it going on the heavy-lift program and how you see that program progressing going forward?

Mark W. DeYoung

Sure, yes. NASA constitutes a little more than 10% of our total revenue for the company so it's a great interest to us. But I just want to make sure I keep adding context. Heavy lift is an important of that 10% of our revenue, and we're doing very well. I think on the NASA front, we anticipate generating on the heavy-lift program around $350 million over the term of that program as we see it today. That's basically what we've been telling you for over a year, so I think we're in line with that. The $1.8 billion funding, that I mentioned was initially appropriated over a year ago, remains intact for the '12 budget as well. So we feel good about that. The unveiling of the architecture for heavy lift, or SLS as it's now called, baselines our 5-segment improved-performance shuttle motor design. As you'll remember, one of the requirements that Congress put in place in the law was that to the greatest extent possible, I believe, was the language, that NASA should look at proven technologies from the shuttle program which could be redeployed on next-generation space exploration vehicles. That obviously is both for economies and for the benefit of time. And so we fit nicely into that requirement under the law. So our 5-segment booster, we tested in a static test on September 8 out in Utah at our range. The 5-segment booster, that was the third test we've done on that design, I believe, it performed very well. The press was there and there was quite a bit of coverage witnessing that static test. We saw no anomalies or issues which caused us any concern. And the enhanced performance of that motor, I believe, has been validated. So with that said, we're pleased that we've been baselined into the heavy-lift program for solid launch propulsion units to take that out of initial gravitational pull from the Earth and get it up into orbit, where the liquids can kick in. We think that being baselined in that program gives us a significant competitive advantage for any future competition, which will come in place. We are ready to support the flight manifest that's been designed by NASA and scheduled by them, so we see no issues. We will not be the long pole in the tent for flight and flight test of that program. So we feel quite good about not only the funding but the bipartisan support and the technology we'll bring to the party.

Robert Takacs

And then real quick, where did you guys in the quarter with total backlog?

Thomas G. Sexton

$6.5 billion backlog at the end of the quarter.

Operator

Our next question comes from the side of Kevin Ciabattoni with KeyBanc Capital Markets.

Kevin Ciabattoni - KeyBanc Capital Markets Inc., Research Division

Just quickly looking again at armament. In terms of Radford, revenue looks like it was down there the last couple of quarters with the contract ending towards the end of your fiscal year here. Assuming that 16% kind of margin levels is sustainable in the group, what would a win of that recompete do to margins? And would we see revenues tick up materially? How much of that fall over the last couple of quarters is attributable to uncertainty around the contract versus lower demand?

Mark W. DeYoung

Well, let me take the first piece and Tom can jump in on anything he wants to here. But when you look at Radford and what we described about a year or so ago when we were talking about the Radford competition and the outcome of that, a couple of things we said. During the competitive period, modernization work was discontinued as was, frankly, production of some of the products, which are produced at Radford, were discontinued during this competitive period with the intent that the winner of the facility would then be releasing new orders and new production quantities and would enter into some rebuilds. That is impacting revenue. So win or lose, that was going to impact revenue this year, and it is doing that. And then in terms of the margin question, in terms of what happens as you go forward, as I mentioned at Lake City, any time you compete for a facility, price is always an element. We bid Radford. We were the low bidder on that competition and we bid a profitable price. So once again, I don't want to get into margin rates and I don't want to get into specific numbers by business units, but it's a profitable bid. We believe if we win the second protest, which we have now filed, that you will see an increase in revenue next year as we come into the first quarter, exiting this year and begin to ramp up against new production schedules. And you'll see a profit contribution from that business, which I think we'll all be pleased with. So in the event that we don't prevail in the protest, then we'll operate the plant basically through the end of this fiscal year and the benefits of that operation are included in our forecast.

Kevin Ciabattoni - KeyBanc Capital Markets Inc., Research Division

Okay, great. And then just real quick on commercial aero. What kind of utilization are you seeing or excess capacity, I guess, in the ACCE facility? And then what are you seeing in that kind of business pipeline for commercial aero?

Mark W. DeYoung

Yes, sure. I mean, we build or build out this ACCE facility under the expectation that we would leave ourselves room for growth. We've implemented the Airbus work. We've invested in new equipment, which is up and running and we're actually making and trimming parts, composite parts in that facility. There's a lot of room for continued expansion for Airbus as well. So right now, we're operating in 2 facilities. They're about 2 blocks apart from each other, so very close to each other, as we transition the old production line into the new building with new production equipment and a new production line. So we've just begun to fill out that capacity in the ACCE facility, and we'll do that in a very disciplined, regimented fashion, not to [indiscernible] our production schedules and deliveries on Airbus, as well as the engine work that I mentioned in GEnx and Rolls-Royce. We'll transition into that facility over time. And then the strategy for that facility, and we've got a very good price and a very good lease rate, long-term, strategic lease for that facility. We left ourselves about 20% of the facility to 25% of the facility, which is over 100,000 square feet of capacity and expansion for growth in the commercial aero business. And right now, as we speak, we are entertaining proposals. We are having customer visits. We're looking at biz jet business and other opportunities where we can take the success we're seeing in Airbus and the success we're seeing on other programs, as well as success on our military side, through both classified programs and Joint Strike Fighter, and take these now-proven solutions into other platforms. So we're working that as an adjacency strategy. In addition, I would mention that we're getting requests from our Airbus customers for potential scope increases on those programs, which will add additional work into the facility which we don't have currently. And that's actually looking very promising as well.

Operator

Our next question comes from the side of Herb Hardt with Monness.

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

Can you give us some sense of possible contract awards from now until the end of the fiscal year?

Mark W. DeYoung

In terms of key award spending?

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

Yes.

Mark W. DeYoung

Okay, Herb, the biggest one obviously is Lake City. Lake City gives us significant award. It ranges often between $300 million and $500 million, depending on whether they split the award across some product lines or what they're doing with colors of money. But we anticipate that will happen in the fourth quarter. So that's always a big order, typically occurs in March, which is the last month of our fiscal year. So that's still out ahead of us. Most of our other major contract awards, meaning major $100 million kinds of awards, we've been able to capture a lot of that business. You will see follow-on contracts that will continue to come. You'll see contracts continue to come in our tactical systems business. You'll see follow-on contracts continue to be executed in actually all of our groups. I think the biggest one that you should look for is the big Lake City contract in Q4.

Operator

Next question comes from the side of Alex Cook [ph] with Voyant Advisors.

Unknown Analyst -

What was unbilled receivables for your commercial aerospace contracts at the end of the period? And then when do you guys anticipate those receivables to be collected?

Thomas G. Sexton

We won't comment on the specifics of a program. But when our Q is filed, I think you'll see that we've got a magnitude of $240 million of long-term receivables. That's made up of primarily our commercial aerospace, but as well as some other programs. And then in terms of collection, as we deliver and we're starting to deliver parts, as I mentioned earlier, we will be collecting on those as we deliver the product.

Unknown Analyst -

And then generally on your accounts receivable, those have been building over the last few quarters. What's driving the increase in receivables?

Thomas G. Sexton

Yes, a lot of that is in our Security and Sporting business and our commercial ammunition business, and that is -- typically, our receivables are high at the end of the second quarter, just due to the, I'll call it, seasonality of that business and the timing of the collections of those. And that really is probably the big driver for us.

Operator

Next question comes from the side of Howard Rubel with Jefferies.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Mark, the focus that you have is sort of driving the business for growth. And the environment, on the other hand, is anything but hospitable. How do you think about some of the downside and manage that? For example, Afghanistan at some point is probably going to put some downward pressure on the business.

Mark W. DeYoung

No, Howard, it's a good question. I'm used to unhospitable situations, so actually that doesn't worry me as much as us making silly mistakes. So I think in terms of the environment, let me just talk to that a little bit. We do have an approach, which is a little contrary. We are not hunkering down and playing defense. We are, I think, playing a very balanced game of appropriately playing defense where we need to and aggressively pursuing offense where we should. So that's our approach. We believe that there are opportunities for a company our size. We're not a huge company that's struggling to say, "Where's my next big platform, where's my next big thing?" We're a good-sized company who's looking for good opportunities for extension into adjacencies and growth. And I believe because of our size, I also believe because of our broad spectrum of capabilities we possess in a company this size, we have lots of opportunity. So I believe that the glass is not half-empty. I believe the glass potentially, for a company like ATK, half-full. So we're looking at those opportunities. And yes, we have not surrendered growth. And yes, we are looking not only at organic growth by pushing ourselves everyday to look for opportunities to increase our scope, increase partnerships, drive international sales with sale of our current products. All of those things take market share, we're doing all of that everyday. Plus our strategic growth initiative is saying, "Let's open our aperture. Let's think about opportunities to take key capabilities that we have, which gives us a sustainable, competitive advantage, where we can differentiate ourselves from a competitor and potentially do something maybe better, and we're going to continue to look at that." And I think the environment in a macro sense is very challenging, but I think the environment in a micro sense, still has opportunities. And I think that we may even have a little help from macroeconomic and macro environments, which appear to be not as favorable, where companies may be looking at themselves to divest pieces or to spin off pieces or to partner with someone or to create JVs and other things. And we intend to be opportunistic for those and capture them. And so that's really our approach.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Yes, but I mean, there is going to be some business volume reductions in a number of places that, whether you try the best you can, you're going to face challenges. How do you think about flexibly sizing the business?

Mark W. DeYoung

Well, yes, that's a little bit different subject, Howard, so let me talk to that. I mean, one of things that I'm a big believer in is being proactive and not waiting until you've experienced the impact to decide how you're going to respond. So we have made significant reductions in costs already. We have made significant reductions in our overhead pools and how we manage the business. We believe that we shape our workforce on a go-forward-looking process. So as we need to, even if it's the hardest thing we do, as we need to, we make appropriate staffing and human resource adjustments. We are going to see headwinds. I'm not such an optimist that I don't believe in the reality of the headwinds either. So we are going to see headwinds, particularly in small-caliber ammunition, I believe, as we get into that procurement cycle in the next probably 2 years out. I think in the near-term, and the near-term meaning the next 18 months, we have significant backlog, orders are in place, funding is in place and we need to build product. I think when you begin to look beyond 18 months into the 2-year window is where I would get into some of the discussion you're having. And we do see headwinds there and we're going to use this interim time that we have to prepare ourselves to offset and address, in a proactive way, the impacts of those headwinds.

Operator

The next question comes from the side of Rob Spingarn from Crédit Suisse.

Robert Spingarn - Crédit Suisse AG, Research Division

I think you said NASA is running at about $300 million this year, and then the contract allows that to range $300 million to $350 million going forward, if I caught that correct.

Mark W. DeYoung

Yes, let me just clarify that a little bit. We're actually more than $300 million. All NASA business, including all of the -- not just the heavy-lift portion or the SLS program, but if you take all of our NASA work, we're closer to $500 million. And then when the question was asked in the context in which we were answering that question, Rob, was more focused on SLS, and that's about $300 million.

Robert Spingarn - Crédit Suisse AG, Research Division

That's about $300 million. So how does NASA look next year based on where SLS is going where other things are going?

Mark W. DeYoung

NASA right now next year, if you look at the F'12 budget, which is in place, and you look at the conferences that have held, you've got strong bipartisan support to sustain the $1.8 billion appropriation, which was put in place, which will sustain our revenue stream.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay, so that's flattish. And where I'm going is sort of where Howard was going as well. How should we think about Radford? If it goes away, how much Radford is in the current fiscal year? And how much, Lake City Army?

Thomas G. Sexton

Radford, we had -- as we've said before, we had about $233 million last year and we expect to do about 2/3 of that now this year with the extension through the end of February.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. And then on the Lake City side for the Army, that clearly is going to be trending down. You talked about the new contract being $300 million to $500 million. Where has it been?

Mark W. DeYoung

I think if you try to get some sense into it, we don't have that order yet, so it's hard for us answer that question definitively. But we expect a downturn in that ammunition business, including -- and don't forget, I mentioned modernization. So when you think of Lake City, I need you to think of 2 pieces. You need to think of the modernization, which actually, as it goes away, margins go up because it's so low margin. But I mentioned a number earlier on this call, Rob, that we believe there's about $100 million to $120 million of modernization revenues, which are going to begin to evaporate because we basically completed the work. And then I believe there will be somewhere in that same kind of range, potential reductions in order quantities for small-caliber ammunition, which are to be delivered basically 2 years from now or 18 months from now.

Robert Spingarn - Crédit Suisse AG, Research Division

So is it fair to say that right now Lake City's cadence with modernization and the full load of small-cal ammo is still in that $600 million to $700 million range?

Mark W. DeYoung

Yes. I think that as we go forward -- I'm not going to give you '12 guidance or anything like that today. But I think as we go forward, based upon the way that order quantity works, we basically receive an order, we need to start work on the order within a year and we can deliver within the following year. So we basically get a backlog that's running almost 2 years. And that's also part of what's cushioning us. So I know a lot of you are thinking there's some potential immediate impact from a lower order in March. What I'm trying to help you understand is based upon backlog and contract, it doesn't work that way, and that we have about 18 months ahead of us of production, which we believe can be sustained. And then we'll see what happens without your orders and we'll adjust appropriately.

Steven P. Wold

Rob, just to clarify, there's some eliminations that affect Lake City as well. From an external perspective, think about it more in the low $500 million or so right now between the modernization and where they'll end up with production as well.

Mark W. DeYoung

Yes, they do sell -- and that's a good point, Steve. Because they do sell, as I mentioned earlier, product from that facility into the commercial market. So when I look at Lake City, I look at their total revenue generated. And Steve's mentioning that we do some elims between the 2 groups because commercial markets distribute some of their products, so that's fair.

Operator

The next question comes from the side of Carter Copeland with Barclays Capital.

Mayur Manmohansingh - Barclays Capital, Research Division

This is Mayur in for Carter. Just had a quick follow-up question. You mentioned earlier that the $0.18 contract adjustment was not contemplated in your prior guidance and your current updated guidance mentions a higher tax rate, but this is probably offset by a lower share count. Therefore, it seems that access [ph] adjustment, guidance was lowered. You mentioned also -- but I've noticed, of course, the low end of your guidance has not changed. And we've noticed that the guidance contemplates higher sales in H2 but lower EPS than in H1. So basically, we're wondering if there was any color that you can provide versus your prior guidance and how we should think about the sales margin performance across your segments. I think you talked about margin improvements at all segments. Do you still expect to see this at Sporting and Security, given the H1 performance?

Thomas G. Sexton

Yes, I guess, the drivers, as we talked earlier, we brought down our sales to the $4.6 billion to $4.7 billion, a higher tax rate. And then the margins that we talked about in Security and Sporting, some of the pressure that we're seeing from a mix. So it's a combination of all of those that lead us to believe that our previous guidance of $8.50 to $9 is still the appropriate guidance as we go forward to the back half of the year.

Mayur Manmohansingh - Barclays Capital, Research Division

Okay, now I was just wondering if there's any changes you can give beyond that with regard to the segments because I think, in the past, you guys have given some modest color with regards to the segments in terms of sales. Is there any changes from that versus the prior numbers?

Mark W. DeYoung

No, I think on the sales front, what we mentioned to you in the last quarter or so is still consistent. You've seen that we've been able to generate some pretty good growth both in Missile Products group and in Security and Sporting group. We have, I think, discussed in pretty good detail the mix issues that are impacting. Even though we have higher revenue in Security and Sporting, the mix issue is there. We are seeing growth in those segments. The performance of our aerospace group is consistent with prior discussions we've had, where we knew there would be some pressure from the delay now and the gap that we saw in NASA business and the retirement of the shuttle program this year, which impacted that group. And I think that's basically on track with what we've said in the past. And then Armament Systems sales, we mentioned that this would be a year in which modernization declined for us. We mentioned the Radford competition. We'd lose about 1/3 of those sales, which is about $70 million, from what traditionally would be delivered through Radford because of the competition. So I think generally, that's kind of the view of the 4 groups and what's happening in each group. And I don't think we have anything really that we haven't discussed that I'm aware of.

Mayur Manmohansingh - Barclays Capital, Research Division

Okay, great. Just one quick final -- with regard to share count, is there any change in what share count you're expecting for the full year?

Thomas G. Sexton

No, we're still sticking with our prior guidance of about 33.5 million.

Operator

And one last question from David Strauss with UBS.

David E. Strauss - UBS Investment Bank, Research Division

On Lake City, just to follow up, have you actually seen Lake City come down at this point? Because I guess, I'm struggling a little bit because at the beginning of the year, I think your guidance contemplated Radford going away. Now Radford's there, yet the entire business of armaments is coming a lot worse than I think...

Mark W. DeYoung

Now remember, the guidance we actually gave -- if you remember the first quarter call and the guidance we issued, John Shroyer made a statement, which said, "Our guidance spread of $4.6 billion to $4.8 billion includes Radford, win or lose." We did it that way because we didn't know. So the guidance didn't contemplate necessarily losing Radford. And at that time we created the full year guidance, we had only a draft RFP, and so the total scope of what the Army would order, what they wouldn't order, or what would happen during the interim period was unknown. So we established the $4.6 billion to $4.8 billion guidance to give us room. If you go back and look at that, you'll see we said win or lose. So I just want to make sure I clarify that.

David E. Strauss - UBS Investment Bank, Research Division

Okay. So I guess, looking at the other buckets of armament, has nonstandard been weaker, I mean, Lake City been weaker than your...

Mark W. DeYoung

Yes, that's a good question. I just want to clarify the first part. Now I'll try to get to what I know you're getting after. Nonstandard ammunition is off year-over-year by -- Steve, what we said yesterday, it was like $40 million. So we're off $40 million in top line revenue and the associated margin that goes with it because nonstandard ammo is off. So that's a $40 million year-over-year reduction. We expect that to be about the level that we exit the year, so it will be down. Modernization revenue will be down. And in that first half of the year, we believe our ramp rate was slower than it will be in the back half of the year and slower than, I believe, it should have been in the first half of the year. So as we focus on efficiency improvement, uptime and throughput, that's where we believe we'll see a bit of a catch-up, if you will, in the second half of the year at Lake City uptime, throughput and delivery.

David E. Strauss - UBS Investment Bank, Research Division

Okay. And then on corporate, you talked about the strategic growth initiatives driving that higher. What should we think about for corporate for the rest of the year?

Thomas G. Sexton

I don't think we'll be running at the rate that we did this last quarter. It will be back to our more typical kind of expenditures for the quarter, balance of the year, so that's [indiscernible] behind us here.

Mark W. DeYoung

Yes, that was a significant effort we put in place in a very constrained period of time, which you saw it come through, that exercise and that effort, I believe, is largely behind us.

Operator

There are no questions in the queue.

Mark W. DeYoung

All right. Well, I thank everybody for joining us today. I appreciate all the good questions that were asked and your interest in the company. We're pleased with what's happened in the quarter. Although we do face headwinds and although we are not blind to the macroeconomic issues that are occurring and what's happening both globally and within DoD budgets and within other sectors in which we operate, I think we turned in a very strong quarter and I think we are very charged-up, focused-forward and executing our business, I believe, in the best way to deliver long-term value, and appreciate your interest. Thanks.

Operator

This concludes today's conference. You may now disconnect.

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