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Executives

Steven P. Wold - Vice President and Treasurer

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

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

Thomas G. Sexton - Vice President

Analysts

Joseph Nadol - JP Morgan Chase & Co, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Carter Copeland - Barclays Capital, Research Division

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

George Shapiro

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

Andrew Feinman

Mark Hokanson

Robert Spingarn - Crédit Suisse AG, Research Division

Alliant Techsystems (ATK) Q4 2012 Earnings Call May 3, 2012 10:00 AM ET

Operator

Good day, everyone, and welcome to this ATK Fourth Quarter and Fiscal Year '12 Earnings Release Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to ATK Treasurer and VP of Investor Relations, Mr. Wold. Please go ahead.

Steven P. Wold

Thanks, Kathryn. Good morning, and thank you for joining us for our fourth quarter fiscal 2012 earnings call. With me this morning, I have Mark DeYoung, ATK's President and CEO; Neal Cohen, our EVP and CFO; and Tom Sexton, VP and Corporate Controller.

Before we begin, I'd like to remind you all that during the call today, we'll make several forward-looking statements. We make these statements pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. And these 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, also, for more information on those risks and uncertainties.

Also note that we have posted charts on our website at atk.com, which supplement our comments this morning and also include reconciliations of non-GAAP financial measures.

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

Mark W. DeYoung

Okay, Steve. Thank you very much, and good morning, everyone. Thanks for joining us today. This morning, we'll discuss our fourth quarter fiscal year 2012 results and our outlook for fiscal year '13, which we entered effective April 1.

Last quarter, we announced ATK's new Executive Vice President and Chief Financial Officer, Neal Cohen. I'm confident Neal will be an important part of our leadership team as we deliver performance against our business plans and create shareholder value. And I'm pleased to have Neal here with us here today.

In FY '12, ATK streamlined our group operating structure. We expanded our accessories business. We distributed $77 million to shareholders in dividends and share repurchases. We retired $320 million in debt to strengthen our balance sheet. We continue to look for opportunities to strengthen the company again this year.

We're sustaining our previously issued FY '13 guidance for sales and cash, but now expect higher earnings per share in the range of $6.25 to $6.55. This increase reflects the benefit of lower-than-expected pension expense.

The President's 2013 Budget request was released in February. This is an election year, so there'll be continued discussion on DoD cuts under the Budget Control Act, the NASA marks from the House and Senate are now out. ATK is generally platform independent, and our diversified approach to a wide range of existing platforms gives us additional confidence.

Our business plans are built with a budget-constrained environment in mind, and near-term opportunities for sustainment of our business and growth include projects like: our Liberty solution for NASA's Commercial Crew mission; Lake City upcoming competition, which we're in now; and the MOLLE tactical gear award, just to name a few.

In terms of what we're seeing with NASA budget, there's continued bipartisan support for the President's Budget. And we believe that fiscal year '13 legislation will result in sustained support for the projections we've made regarding our NASA programs.

I'd like to highlight what's happening in each group and then talk briefly about fiscal year '13. In Aerospace Systems, our 5-segment booster will be used for initial space launch system missions beginning in 2017, with the first full-scale ground test in the spring of 2013. This transition by NASA to a heavy-lift vehicle provides a sustainable base for our large rocket motor production programs.

The group continues to deliver solid performance on Airbus A350 program. We're at the beginning of a multiyear ramp up to full-scale production of the composite stringers and frames for that aircraft.

Multiple opportunities in our satellite business continue to present themselves. We recently won a major satellite systems award that lent stability to our core capability in satellites.

In Armament Systems, they maintained solid production record this year, that the group delivered more than 250 million rounds of the new 5.56 Enhanced Performance Round or the M855A1 round. We submitted a strong proposal for continued operation and maintenance of the Lake City facility. We'll expect to hear award results later this fall.

The XM25 program continues to demonstrate game-changing capability during operational use in theater. The program is progressing to Milestone C, with a critical design review scheduled this summer. And our major precision programs continue to have the support of our Army customer, and we're confident our innovative solutions will support the mission-critical needs of the warfighter.

In Missile Products, the U.S. Navy completed its operational testing and evaluation of the Advanced Anti-Radiation Guided Missile, or AARGM. We look forward to hearing from the Navy on their overall assessment of the missile and its readiness for the next production milestone.

ATK achieved key milestones of successful testing in several key programs, including Hard Target Void Sensing Fuze, Hellfire propulsion, Jordan light gunship and Joint Allied Threat Awareness System, or what we call JATAS.

In our Security and Sporting Group, they delivered record sales in the fourth quarter and for the entire year. The group also continued the expansion of our accessories business, and we successfully have introduced BLACKHAWK! brand and products into several new retail accounts. The Security and Sporting group also saw a strong order placement in our show season in the third and fourth quarters.

While demand for the products remained high, production delays and startup costs on DoD tactical gear programs, lower-margin ammunition products and higher raw material costs resulted in margin decreases for the quarter and for the full year. The fourth quarter and full year margins were also negatively impacted by delays, as I mentioned, in tactical gear.

We have taken some action to mitigate margin challenges in our Sporting Group. The group announced a price increase effective June 1 to help offset volatility and commodities costs. We don't expect the same level of impact from delays in DoD tactical gear business, and we continue to implement our Performance Enterprise System and deliver efficiency improvement in our factories.

In the fourth quarter, Security and Sporting implemented a facility rationalization plan. To rightsize its workforce, we are consolidating and closing facilities. This creates a more optimum footprint for productivity and managing our costs in supporting customer needs. These efforts, along with our strategy to expand and enter new markets in the accessories business, should help margins in FY '13.

Our 3 group operating structure is fully in place. It includes the Aerospace Group, the Defense Group and the Sporting Group. The new groups are off to a great start. I look forward to sharing with you their successes as they contribute to the performance of the company.

As we look forward now into fiscal year '13, which as I mentioned, we entered on April 1, we'll begin to execute on our authorization for share repurchase up to $200 million of ATK's common stock over 2 years. We will continue to execute our disciplined process-oriented business model to achieve efficiencies, drive margin improvement and strengthen our competitive position, and we'll focus on optimizing profitability and cash flow. This includes realizing improvements from our new 3 group operating structure. In addition, we will maintain and develop leading position on our core markets and continue to grow the company's commercial and international businesses.

Neal, I'll now turn the call over to you.

Neal S. Cohen

Thank you, Mark, and good morning, everyone. It's a pleasure to be here. Orders in the fourth quarter were $1.5 billion, which is a book-to-bill ratio of greater than 1. Fourth quarter orders were driven by demand in the Security and Sporting group. This brings total orders for the year to $4.2 billion. At the end of the year, our total backlog stood at $6.3 billion.

Full year sales of $4.6 billion were down 5% and in line with expectations. Sales in the fourth quarter were $1.3 billion, up 1% year-over-year. Higher sales in the Commercial Ammunition and Defense Electronic Systems contributed to this increase, offsetting declines in Aerospace and Armament Group. Operating margins were 10.7% for the full year compared with 10.9% in the prior year.

Let's talk a bit about the key year-over-year drivers: LUU flares accrual was $36 million; lower margins, which impacted -- which were impacted by commodity cost in the Security business and the Security group; higher pension expense of $13 million; and realignment charges of $9 million. These unfavorable impacts were partially offset by: the absence of the commercial aerostructures reduction of $25 million recorded in the prior year; a favorable contract resolution in the Armament Systems Group of $18 million; better performance and profit expectations on some programs; and finally, greater-than-expected performance at the Radford facility, due to increased production volumes in anticipation of the final contract completion.

The tax rate for the full year was 35.3% compared to 28.5% in the prior year. This increase reflects the absence of the favorable prior year settlement.

Earnings per share for the quarter were $1.86 and $7.93 for the full year. Adjusted EPS results increased to $8.78 from $8.65. Please see the table in the accompanying earnings slides for more detail.

Fourth quarter margins of 8.5% were down, reflecting continued margin pressure in the Security and Sporting group, startup costs associated with the new DoD contract in our tactical gear business, charges incurred in the company realignment and higher pension expense, partially offset by updated performance and profit expectations as ATK nears completion of some key contracts, one of which we covered earlier. As a reminder, in reviewing the financial statements, the year-over-year increase in G&A incorporates the cost of the LUU flares settlement and realignment costs.

Fourth quarter cash flow was very strong, bringing our full year free cash flow to $250 million, which included $122 million of capital expenditures. Year-end cash was $569 million, although for our normal seasonality, the company expects to draw down some of this cash in the first quarter.

Looking at the segment results. Aerospace Systems sales for the quarter were down 2%, with a 6% decrease for the full year. The decrease for the full year was primarily driven due to lower sales in the NASA human space flight programs. The sales decline was partially offset by stronger sales in commercial propulsion systems and flares and decoys, the absence of -- and the absence of the commercial aerostructures sales and profit reduction recorded in the prior year. Aerospace margins for the year were 10.7%. As you'll recall, 2011 was unfavorably impacted by $25 million in commercial aerostructures, which is driving the year-over-year margin increase.

Armament Systems saw sales decline 4% in the fourth quarter and 12% for the full year. The decrease was primarily driven by lower modernization funding at Radford and Lake City, lower sales on a variety of programs, including small-caliber ammunition, partially offset by favorable contract resolutions recorded in the second quarter. Armament operating margins for the year were 10.6%, up from 11.7% in the prior year due to better-than-expected profitability within energetics that I discussed earlier and advanced weapons business and the previously mentioned favorable contract resolution.

Missile Products sales increased by 5% in the fourth quarter and 2% for the full year. The increase reflects additional sales for the international special mission aircraft program and defense electronic systems. Full year margins in Missile system products improved to 12.8% from 10.2% last year, reflecting a new key program launch, international sales and improved performance on key programs.

Security and Sporting recorded its highest-ever quarter in -- and annual sales. Sales in the quarter grew 12% to $282 million and increased 8% for the full year to $1 billion. The increase reflects stronger domestic and international demand for the group's commercial and accessory business. As Mark mentioned earlier, the group has increased -- have seen increased interest in its accessory offerings, including the BLACKHAWK! brand.

I'd now like to provide you a bit more detail on our sales and earnings guidance for fiscal year '13. As Mark mentioned earlier, ATK reaffirms its fiscal year '13 sales guidance of $4 billion to $4.1 billion. As we indicated, we gave our initial guidance in March. This sales range reflects decreases in our Defense business, partially offset by growth in our Sporting Group.

As you know, our measurement date for pensions is March 31. Our discount rate came in at 4.9%, and our asset returns for fiscal year '12 were 8.6%. Putting it altogether, we now expect pension expense in fiscal year '13 to be $165 million compared to $134 million in fiscal year '12 and an improvement from our previous expectations for fiscal '13 of $180 million. We expect approximately $155 million in pension contributions in fiscal '13. We already made an initial $140 million contribution in April of this year. We included a table in the web slides that provide more detail on our pension assumptions.

We expect fiscal '13 margins of approximately 10%, down from fiscal '12 of 10.7%, which primarily reflects higher pension costs and updated profitability on contracts within our energetics businesses. We expect fiscal year '13 earnings per share to be in the range between $6.25 and $6.55 per share, higher than our previous guidance of $6.00 to $6.30.

We expect free cash flow for fiscal year '13 in the range of $125 million to $150 million. This includes the $155 million in pension contributions mentioned earlier and the capital expenditures of approximately $100 million. Our tax rate should be approximately $34.5 million -- 34.5% in fiscal '13, and that assumes the retroactive extension of the Federal R&D tax credit, which expired on December 31, 2011.

And with that, I'd like to open up the conference for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll hear first from Joe Nadol with JP Morgan.

Joseph Nadol - JP Morgan Chase & Co, Research Division

My first question is on Security and Sporting. Mark, I'm wondering if you could quantify in the quarter just with the 5.6% margins. You mentioned some of the items that hurt you, production delays, start-up costs, et cetera. Can you quantify any of these, and give us more -- help us get more confidence that the margin is going to bounce back next year?

Mark W. DeYoung

Yes. Joe, as I mentioned, there is a bit of an anomaly in those margins in the fourth quarter associated with a DoD tactical gear program, which was delayed and which required some additional start-up expense that was somewhere around $7 million of impact. So it was substantial. It took us lower than we had anticipated just on the sales mix alone. So I would identify that as probably the single, biggest variable that occurred in the quarter. We don't expect that to continue into '13. It was, as I mentioned, tied to a specific contract, Joe.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Okay. And when we look at the ammo part of the segment -- because it seems like a lot of the issues came in accessories and you think they're going to pass. It seems like in ammunition, the volume and the bookings are great. If you kind of x -- just carve out that part, are the margins there still under pressure, even though the bookings are good, or are things kind of flattening out there?

Mark W. DeYoung

The product mix shift, which we saw that started in our third quarter continued into the fourth quarter as we described, Joe. And then as we got toward the end of the year, that product mix really has not significantly improved. So what I expect to have happen is I expect we will see that the mix is going to continue into the first quarter. I think we'll see margin pressure in the first quarter. The spring season is typically not a high-margin season for that business anyway, because our -- most of our margin occurs in fall goods. So I think we will see softness continue as we exit out of the fourth quarter into the first quarter, and the product mix seems to also be soft. To offset part of that, we've taken action to try and improve these margins. We've issued a price increase, which is effective June 1, on ammunition products across-the-board. We have consolidated our facilities in the Security and Sporting Group. We will be closing facilities, consolidating into new, more efficient operating layouts in our factory floors to improve efficiency and support margins as well. And BLACKHAWK!, which has traditionally been a new brand, somewhat, as we transition it from law enforcement into retail, has significant margin opportunity for us, and we're seeing significant demand increase for BLACKHAWK!. Our accessories growth was about 16% year-over-year, and that tends to be a higher margin mix, frankly, in accessories and ammunition, with the exception of the DoD contract I mentioned earlier.

Joseph Nadol - JP Morgan Chase & Co, Research Division

That's all great. Just on that price increase, what was it as a percentage on average? And will that kick in at the very beginning of your second quarter or it should be on June 1.

Mark W. DeYoung

Yes. It should kick in immediately June 1. I prefer not to talk about exactly what that percentage is because it's a different percentage based upon the particular ammunition category that is purchased.

Operator

And we'll now go to Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc., Research Division

I just wondered if you could potentially provide a little more color on your expectations by segment within the fiscal '13 outlook. You started to do it a little bit on the revenue there, saying Defense down, some growth in Sporting. Can you quantify those? And then can you talk about expectations for segment margins?

Thomas G. Sexton

Sure, we can talk about that. The sale we're expecting on our Aerospace down roughly 10%. That's largely driven by the NASA program, as we've talked previously when we gave our initial guidance, as well as on our A350 program. We had -- our big initial tooling up on that program is done, and we're now into our initial stages of production, which will be down a little bit in FY '13. So Aerospace segment will be down about 10%. Our Defense segment will be down in the mid to upper teens, and that's largely driven by the last -- loss of the Radford program, as we've discussed previously. Our small-caliber ammunition production will be down, as well as the nonstandard ammo, again, because of things we talked about earlier in our March guidance. And then our Sporting business, we expect that to continue to grow in the low- to mid-single digit. So that's from a revenue standpoint. And I guess from a margin standpoint, Neal said overall, we'd be at about a 10% rate. I don't know that we'll give any further guidance by segments at this point in time.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. That's helpful. And then just back to the -- you just commented there that the NASA portion driving a lot of that revenue pressure. Can you just take a step back from a higher level, latest view on how -- on the outlook for manned space flight? And I think the company has kind of talked about a thought around a medium- to longer-term revenue range annually there. Can you update us on what that number is these days?

Mark W. DeYoung

Sure, you bet. This is Mark. Let me talk in a big picture, first, as you described, kind of looking at the Washington NASA budgets, what's happening there, and then I'll talk to you a little bit about the revenue range we expect from the funding levels we're seeing coming out of the Senate and the Congress. So the FY '13 budget, specifically funded levels for exploration programs, consistent with our expectations. SLS was funded in the FY '12 NASA Appropriation at $1.8 billion. We continue to see good, strong bipartisan congressional support for that funding level and for that mission. That baseline program, which was announced on September 14, I believe it was, in the fall of last year, baseline design, which included ATK solid propulsion, we're very pleased with that. That continues to be the case. White House and the Senate have reported on the FY '13 NASA Appropriations Bill to fully fund space launch systems, which is the SLS program at the requested $1.8 billion again this year. So there seems to be good bipartisan support for that. And we anticipate as we mentioned as part of our guidance, and as we mentioned in a couple of prior quarters, we anticipate the revenue level for human space flight programs within ATK will be around $225 million. There is some upside on a couple of programs as they come back in and resume production now under the new architecture beyond FY '13, and those could give us some upside approaching $250 million run rate beyond '13. So we need NASA to continue to just work with us on some of the alternatives we have in terms of proving out the 5-segment booster, which is expected to be part of SLS. As I mentioned, we'll have a test in the spring of next year in 2013 on that design configuration. So I think on the NASA front, my view of that is that it stabilized with good bipartisan support for the budget that we need and that has been assumed in our planning.

Operator

And we'll continue on to Carter Copeland with Barclays.

Carter Copeland - Barclays Capital, Research Division

A couple of quick questions, just follow-ups on Security and Sporting. First of all, on the price increase. Do you have any visibility on whether or not the peers took a similar action and so increase the probability that, that will stick? And secondly, just thinking longer-term, Mark. It sounds like the issues you're facing there are about volume and mix and raw material prices and not necessarily about volume, based on your comments around orders. So as you think out longer term and what you're doing in terms of rationalization, it would seem that as some of those abate or as the mix goes back, the hope would be you could be more profitable than you once were in Security and Sporting. And I know that's something you probably don't want to commit to, but I wondered if you might talk to that a little bit.

Mark W. DeYoung

Yes. Carter, happy to do that. Let's start with your first part of your question. On the question you asked regarding our other competitors in the space issuing similar price increases due to the same things we're facing, and the answer to that is yes. One of our primary competitors, which is Winchester, as you may know, has issued a price increase of their own. I haven't seen their document. I don't know exactly what they've done. But I know they issued a price increase effective the same timeframe we are, which is in the June timeframe. So I believe that's an indication that peers in the space are feeling some of the same pressures and trying to drive pricing adjustments to offset the impacts. And then the second part of your question, I think, is actually a good question in terms of mix shifts. And as we consolidate our facilities and as we drive efficiencies into our operations, if the mix begins to shift back to a more profitable mix, will we be able to benefit from that and potentially even be more profitable because of the actions we're taking? I think that's a completely logical position. I just simply can't predict the market conditions, but your assumptions are good.

Carter Copeland - Barclays Capital, Research Division

Okay, that's completely fair. And one just follow-up with respect to repurchases. You said you made $140 million pension contribution in April. So that would seem to suggest that if we see share repo, it'll be more of a back half loaded phenomenon. But as we move through the year and get potential CR or closer to a sequestration outcome, is that something you intend to hold back on in that case and this might be authorization more in the second year of your sort of 2-year timeframe that you've outlined there? How should we think about how you're going to approach this as we march through the year?

Mark W. DeYoung

Yes. Carter, we -- as we mentioned when we disclosed, that the board had approved the $200 million of share repurchase. We have not tied that to particular timeframes, and we have not tied that to particular blocks within particular timeframes. What we stated is that we had authorization and that we would try and appropriately execute that authorization over a 2-year period. So we announced that in mid-March. We did not engage in share buyback, because we wanted to get the FY '13 guidance clear so that was out and available to all of our investors. Shortly after issuing the guidance, we entered into blackout period, which culminates here after we get through this week, and we'll be in a position where we can actually begin to address how and when we will execute that authorization. So we will work our way through the process, depending on events as we see them in the market, and we'll take appropriate action to execute share repurchase when we believe that the time and conditions are right.

Operator

And we'll now take a question from Michael Ciarmoli with KeyBanc Capital Markets.

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

Mark, maybe -- could you just elaborate on what else is happening within the commercial Aerospace side of the business? I know you've got the A350. You got some other engine programs. And maybe related to -- I think you've got a pretty big brand-new facility there. What are the thoughts about maybe trying to win business on legacy programs, or are you looking? If you're looking for M&A and deploying capital, is that a focus rather than maybe just relying on sort of the A350 at this point to populate that facility?

Mark W. DeYoung

Yes. No, let me answer that question. And while you've asked that question, we're on that theme, I also would talk a little bit about A350 progress, if that's okay with you, as part of the answer to that question.

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

Sure.

Mark W. DeYoung

Okay. So let me just give a little update in terms of commercial Aero in general. So the A350 program is progressing well. We have executed now 4 consecutive quarters of meeting the EAC expectations that we put in place over a year ago for performance, schedule and profitability. As I've mentioned previously, we are not on a critical path with Airbus on the A350 program or executing what we should be on our schedules. We are making good progress in terms of the new building and transitioning new equipment into our new building. We -- in our new building, we will house both our engine work programs, as well as the Airbus A350. So I can report that that's on track. The team has done an outstanding job in standing up the facility with the new equipment to drive efficiencies and productions so we're pleased with that. We did leave some capacity available in the new building. About 25% of the new building floor space is available for expansion, and we have done that on purpose so that we could continue to grow in that space, as you're alluding to. So in terms of overall aerostructures, obviously right now, we have a program in aerostructures, which is very important to us, and this is the A350 program, and we're executing it well. But we're still in the very early stages. We've delivered 4 full flight sets. We're in manufacturing right now the next couple of flights. That's for stringers and frames on that program. At the same time that we're very focused on that program, we're doing a very good job executing on the F-35 program for the military in structures. That is on track. That remains a good program for us. As I mentioned in the past, even with volume threats and quantity threats to the F-35, this will create growth opportunities for us, even at significantly lower volumes in the event that volumes on that program were cut. So we still feel very good about our performance on F-35, and we are on track there. In terms of other opportunities in commercial, that part of your question, we are submitting proposals. And we are working both to get on legacy programs and also to pursue regional BizJet opportunities as they emerge for potential new aircraft or upgrades to aircraft, and we also are looking at opportunities to expand our scope on the A350 program and with Airbus. So we had several discussions in the mix in terms of opportunities to get additional business in that space. As we're successful in winning that business, I assure you we will report that to you, and we'll be happy to talk about it. Our primary focus now is on execution on A350.

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

Okay, that's fair. And are strategic partnerships maybe a part of that equation for maybe some of the structure providers out there who are capacity constrained or just looking to outsource some?

Mark W. DeYoung

Yes, I think that's always a possibility. Blake Larson, that leads our Aerospace business and is the group president, was in Europe last week, meeting with suppliers and meeting with our Airbus customer, looking for those opportunities to partner, looking for those opportunities for additional scopes. So we remain engaged on all those fronts.

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

Okay, perfect. And then just last for housekeeping. The Lake City contract, how is that contemplated in the full year guidance with the recompete? I would imagine even if -- regardless of the outcome that, that really shouldn't have too much of an impact, or will it change that quickly if there is a program or contract loss there?

Mark W. DeYoung

No, that's a good point. Let me reclarify that a little bit. So the competition right now for Lake City, proposals were submitted in February. We believe there will be a contract award likely in the October timeframe, as the government enters its new government fiscal year. So that -- probably, October timeframe is likely. Our contract and our back order position will allow us to continue to build against our current contract until September of 2014. So there is quite a long transition period post award. So it has no impact to speak of in our guidance on FY '13. FY '14, just to clarify.

Operator

And we'll go on to George Shapiro with Shapiro Research.

George Shapiro

The small-caliber award that you got this year, just actually a few days ago, was $260 million versus $488 million last year and $572 million the year before. So what are you assuming for Lake City's small caliber revenues in fiscal '13? It looks like you're coming down quite a bit unless there's another award yet to come.

Mark W. DeYoung

We believe, George, we'll be around $500 million on the prime contract at Late City associated with small caliber. As you recall, when we gave our guidance for FY '13, we talked about softening, about $100 million in revenue, which was approximately 300 million rounds of softening we thought would occurred this year in demand. Our order quantity received for the $266 million you're referencing was consistent with our expectations in what we had seen in that area.

George Shapiro

Okay. And just one follow-up. Last year in the K, you gave the sales and EPS contribution for Radford. I assume this year, you're going do it for Lake City and Radford. And if so, could you give us those numbers now?

Mark W. DeYoung

The Radford sales this year were about $195 million.

Neal S. Cohen

$195 million, and from an EBIT perspective, would be in near $40 million.

Mark W. DeYoung

As Neal indicated earlier, that was more than we expected, given the additional production volume that we're awarded on that contract as the contract period was extended.

George Shapiro

And then are you going to give Lake City this year because that program's up for award or no?

Neal S. Cohen

I think what we just said, George, is that we think that for FY '13, small caliber revenues will be in the area of $500 million, it could be $500 million, $530 million. And for the year we just completed, was about -- a bit over $600 million, which included the contract adjustments, so think $590 million or so. So we'll be up close to the $100 million that Mark mentioned, $70 million to $90 million or so.

George Shapiro

And were you going to give the profitability for Lake City in '12?

Neal S. Cohen

No.

Operator

[Operator Instructions] And we'll go to Herb Hardt with Monness.

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

Couple of questions. One is on the last conference call, you talked about joint use of the Radford facilities for some of the commercial ammo -- you're being able to continue that. Does that still look possible, or is that in negotiation or not in the picture?

Mark W. DeYoung

No. Herb, that looks very possible. We've had good negotiations in working with BAE as they begin their transition to enter the plant. So we are on track. It appears we have some good structure and agreements in place to be able to continue commercial propellant manufacturing, as well as to continue to operate other elements of that business, which include our medium-caliber LAP line that we operate at Radford. Those businesses generate for us revenues in the $30 million to $40 million range, and it looks like that will continue.

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

Okay. Second question, I noticed your recent contract announcement of $266 million in ammunition was a indefinite delivery/indefinite quantity contract. Now does that imply -- first of all, is that -- this is a more recent term?

Mark W. DeYoung

No. In fact Herb, the entire 14 years or so we've operated Lake City, we've operated it under an IDIQ contract. That is no change.

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

Okay. So you can't read anything until [indiscernible]?

Mark W. DeYoung

No, that's the way Lake City has been ever since ATK operated it. It's basically a requirements contract under an IDIQ with a second source. As you may recall, it was issued a few years ago, 3 or 4 years ago. So that's a no change, and it's consistent with how we've operated.

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

Okay. And the last question is foreign. You've open several offices. Are things progressing in terms of potential contracts?

Mark W. DeYoung

Yes, I think our year-over-year revenue increases in international this year, as we look at what happened in FY '12 versus FY '11, we had about a 10% to 15% growth in international sales overall for the company. So we're fairly pleased with that. We had focused on generating double-digit year-over-year growth at the corporate level from international sales, and we were pleased to achieve that.

Operator

And Andrew Feinman with Iridian.

Andrew Feinman

I just wanted to ask if you're considering calling the $400 million of 6¾% senior subordinated notes that you have outstanding anytime soon.

Neal S. Cohen

Andrew, this is Neal. As Mark talked about earlier, last year, we were very pleased that we were able to return $77 million to our shareholders' dividends and repurchases and retire $320 million in debt. And as we look forward -- and that gave us a great opportunity to deploy our capital in ways that were very beneficial. And we'll continue to look forward into 2013 for opportunities to do that. Mark talked about the share repurchase, and we'll also look for other opportunistic ways to continue to improve the balance sheet.

Andrew Feinman

Okay. I mean, do you have enough borrowing capacity that if you wanted to, you could replace that with lower cost financing and still be comfortably liquid?

Neal S. Cohen

Andrew, the answer to the question is yes. As you well know, from our history, we tend to be a user of free cash. Financial -- as you saw today, about $570 million of cash is on balance sheet. But as we progress through the first quarter working capital usage, as well -- I think Mark pointed out earlier that we did make the pension contribution of $140 million at the beginning of April. And so to repurchase those notes now would require us to dip into the revolver. We could do that. We would certainly be more apt as we come out of the first quarter to give that more serious consideration, as we'd have wholly excess available liquidity on balance sheet without borrowing.

Operator

And Mark Hokanson with Cowen & Company.

Mark Hokanson

Three quick ones. First, could you call out the warranty expense in Aerospace in the quarter?

Mark W. DeYoung

Yes, the warranty was associated with the settlement of the LUU flare claim, which we settled in the quarter.

Mark Hokanson

Okay. And second, you called $18 million in favorable contract adjustments in the quarter. A lot of your big cap peers have begun to report what the adjustments were this year, last year and -- or continue to do so on an annual basis. Can you give us what the favorable contract adjustments were total for the quarter, and what they were last year?

Neal S. Cohen

We'll be providing that information in the 10-K. And we'll have that information in there, and we'll have the year-over-year comparison. But I think what the one thing important for you is I try to walk through the year-over-year comparisons so that you got a sense of sort of what were the key drivers in terms of the LUU flares, what was going on in Sporting, pension expense, realignment, as well as some of the other items and in terms of what was impacting '11, in terms of the recording of the $25 million in aerostructures, the favorable contract resolution we had, which we just talked about, Radford, greater sales volume and better performance. So we try to sort of best break that out for you, but we will give the sort of the total contract expectations change information in the 10-K.

Thomas G. Sexton

One point of clarification that $18 million favorable contract resolution was reported in the second quarter. Neal's comments were talking the total year.

Mark W. DeYoung

While we're clarifying that, let's [indiscernible] all the light. So that was in Armament Systems Group in the second quarter. It was a issue associated with copper on the contract in the Armament Systems Group when we received a favorable resolution of $18 million. So that's what Tom's referring to. It was in Q2.

Mark Hokanson

Okay. But in Armament Systems in the release, you talked about in the fourth quarter having updated profitability expectations adding favorably to the quarter.

Mark W. DeYoung

Yes, that was driven primarily -- as Tom had mentioned, that was driven primarily by improvement on our Radford facility as we prepare to exit that facility. We have reduced staffing. We have reduced cost. And our customers' increased request for volume on particular products to associate inventory to support a transition to a new operator, and we've benefited from that.

Mark Hokanson

Okay. Just for some of your peers, that number is a pretty big number. So I just want to get a handle on that. And then finally, your guidance includes the R&D tax credit if it's extended at the end of the year. Can you give us some color on what the impact would be if it is not extended?

Steven P. Wold

Mark, we might have to get back to you on that. It seems to me that it's about half a point, but I'd want to be more precise.

Operator

[Operator Instructions] Robert Spingarn with Crédit Suisse.

Robert Spingarn - Crédit Suisse AG, Research Division

Mark, I jumped in a little late, so maybe you already talked about this. But on commercial aerostructures, I know you did discuss A350. You talked about a decrease in revs in Q4. And then secondarily, if you could update us on your contract for A350, what -- which variants are included in that, and what is yet to come?

Mark W. DeYoung

Well, our contract includes 800 units. So the initial contract is over an 800-unit contract under the current design configuration. There's an opportunity for a dash 1000 configuration, which would come as an extension or a quantity above the 800 units. And there's potential for other variants, which could be as high as 2,400 units over time. So right now, we're focused on that first 800 units in the current configuration.

Robert Spingarn - Crédit Suisse AG, Research Division

And that's the dash 900, the first one?

Mark W. DeYoung

Right. That's correct.

Robert Spingarn - Crédit Suisse AG, Research Division

And then just on that Q4 aerostructures revenue, was that discussed earlier?

Thomas G. Sexton

Really, it was the -- as I mentioned earlier, as we talked our guidance for FY '13 and FY '12, we really have completed the initial tool-up on that program, and we're now into the low-rate production. And that -- we saw some of that in the fourth quarter, and that's part of our guidance for the FY '13 as the Aerospace comes down a bit.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. And just as a final -- more of a housekeeping. How should we think about corporate expense in '13 given some of the variability that we've had here in '12?

Mark W. DeYoung

Well, if you look at some of the corporate expense that happened in '12 -- so let's first set a baseline maybe for your question. We settled the LUU flare. That was $33 million, which is included in corporate expense. There's an increased pension from FAS/CAS of $13 million. We've talked previously that in our Q2, Q3, we completed a strategic growth initiative, which reviewed the options available to us within the portfolio on our markets. That's about $8 million. And then we had realignment costs. As you'll recall, we discussed we're streamlining the org structure into 3 groups. That was about $9 million. That was captured in corporate expense. So when you look at the year-over-year growth in corporate expenses, it's largely attributable -- attributed to those 4 factors.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. So going in '13, nothing you expect other than the normal run rate?

Thomas G. Sexton

And the pension expense increase that we've talked about previously.

Neal S. Cohen

Right, exactly.

Operator

And we have no additional questions in the queue at this time. I'll turn things back over to our speakers for any additional or closing remarks.

Mark W. DeYoung

Thank you very much. We appreciate everyone joining us today. As always, we appreciate your questions and your interest in the company. We appreciate your time. Thank you.

Operator

And again, ladies and gentlemen, that does conclude today's conference. Thank you for your participation, and have a good day.

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