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Executives

Steven P. Wold - Former Vice President and Treasurer

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

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

Analysts

Robert Spingarn - Crédit Suisse AG, Research Division

Christopher Sands - JP Morgan Chase & Co, Research Division

Greg Konrad - Jefferies & Company, Inc., Research Division

Carter Copeland - Barclays Capital, Research Division

Gautam Khanna - Cowen and Company, LLC, Research Division

Carl Gardiner - Schafer Cullen Capital Management, Inc.

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

George Shapiro

Cecile Ferrie

Alliant Techsystems (ATK) Q1 2013 Earnings Call August 9, 2012 10:00 AM ET

Operator

Good day, everyone, and welcome to today's ATK First Quarter and Fiscal Year 2013 Earnings Results Conference Call. Today's call is being recorded, and at this time, I would like to turn the conference over to ATK's Vice President of Investor Relations and Corporate Finance, Mr. Steve Wold. Please go ahead, sir.

Steven P. Wold

Thanks, Melody. Good morning, and thank you for joining us today on our first quarter of fiscal '13 earnings call. With me today, I have Mark DeYoung, ATK's President and Chief Executive Officer; and Neal Cohen, Executive VP and Chief Financial Officer.

Before we begin today, I'd like to remind everyone that we'll be making several forward-looking statements that are made pursuant to the Private Securities Litigation Reform Act of 1995. These forward-looking statements are made based on our best estimates, based on the understanding we have today, that are subject to the risks and uncertainties that face all businesses. We'd 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 posted charts on our website at atk.com, which will supplement the comments we make this morning and you'll see a reconciliation of non-GAAP financial measures there.

And with that said, I'll turn the call over to you, Mark.

Mark W. DeYoung

All right. Thank you, Steve. Good morning, everyone. Thanks for joining us again today. We appreciate it. We just completed our first quarter, operating under our streamlined 3-group structure. It's delivering the expected benefits of improved customer engagement on existing and future programs, improved efficiency, reduced costs and enhanced support of our customers' needs; to remain competitive and grow in a challenging environment, and to support evolving customer needs. ATK will continue to focus on efficiency improvement, cost reduction and our execution excellence initiatives. In addition, we'll strengthen our balance sheet, we'll invest in the future, and we'll focus on delivering long-term growth and shareholder value.

I want to take a moment today and break down some of the performance in each of the 3 business groups. The Aerospace Group is meeting expectations and delivering as planned on the Airbus A350 program. The group has shipped aircraft 6 and has manufactured more than 8,000 quality parts. We learned last week, that NASA did not select ATK's Liberty System for commercial crew, but we offered a safe, mature, affordable solution to NASA, and we're looking forward to learning more about their decision.

NASA did announce that we received the Space Launch System advanced booster award. Our proposed motor design leveraged our broad experience in composites, advanced propellants and emerging propulsion technologies. ATK also, with our technologies, have played a critical role on the NASA "Curiosity" Rover that recently landed on Mars, and we're proud of our contributions and congratulate NASA on a great achievement in space exploration.

Moving to Defense Group. The U.S. Air Force designated our Mk44 Bushmaster Automatic Cannon ready for operational use on airborne platforms. We've integrated this reliable weapon system into a palletized mount for weaponizing small aircraft. We displayed a version of the system in an Alenia MC-27J gunship at the Farnborough Air Show, and we're happy to report we received numerous inquiries from potential new international customers for that solution.

We successfully completed transition of operations at the Radford Army Ammunition Plant, and we supported the Army in every aspect of that transition, including delivering increased quantities of product to our customers in the last quarter. As we completed our production contracts during the transition, the group achieved higher sales, improved efficiencies and as a result, higher profit rates. As a side note, our New River Energetics business, that manufactures both gunpowder and medium-caliber ammunition, will continue to operate at the Radford facility.

We recently completed the transition of the Army's enhanced performance round or the M855A1 to modernize high-speed production lines, improving our ability to meet volume demands and reducing the cost of this new round. In terms of the Lake City competition, we still expect the Army will make an award this fall.

The Precision Guidance Kit, which we refer to as PGK, continues to perform well, and we're approaching the Milestone C decision on the program. Passing Milestone C will allow us to make this affordable and innovative guided artillery capability available to international allies. We anticipate the Navy will declare our AARGM ready for initial operational capability and potentially award a production contract later this year. This is a new missile that provides a much-needed capability to DoD, and it will establish a new growth platform for the Defense Group.

In addition, our third stage rocket motor contributed to 2 recent successful ballistic missile defense tests and the Joint Allied Threat Awareness System, or you may know it as JTAS, that team recently reached a significant milestone on the program, we conducted a very successful critical design review.

Turning now to Sporting. We saw solid orders in sales in the first quarter. Our margins improved 200 basis points from 5.6% in quarter 4 of last year to 7.6% in quarter 1 of this year. Our accessories business continues to grow with wholesalers, regional chains and mass merchants across the country expanding their offering of our BLACKHAWK! Champion and other branded accessory products. Commercial and security-related demand for ammunition are also up. We're winning at retail, with creative point-of-sale promotions and marketing initiatives, and we're winning significant international security contracts. As an example, most recently, we received an award for $50 million from the Saudi Arabia for a newly developed ammunition solution.

The Sporting Group remains focused on improving ammunition margins through the introduction of innovative new products, strategic marketing programs, cost and pricing strategies and a continued focus on improving operational efficiencies.

We continue to consolidate Sporting facilities' footprint as well and align our facilities with our core capabilities. We recently opened a modern warehousing facility in Minnesota. We opened a new plastic molding center of excellence in Montana. And we consolidated metal machining into a center of excellence in California. These facilities will allow us to eliminate redundancies, improve our efficiencies, and as a result, reduce our operating costs and improve our margins.

Based on the early success associated with these initiatives and current market conditions, we anticipate further margin improvement throughout the course of this year.

Now looking on the national front. We're carefully studying and engaging on the evolving political dynamic here in Washington D.C. We're encouraged by the agreement between the White House and Congress on a continuing resolution that ensures there will not be a government funding crisis before the election. ATK is focused on strong program execution, supporting the mission of our customers through high-quality affordable products, and we're maturing a culture of success that adds to our bottom and top line performance.

And with that, I'd like to turn it over to Neal, in which we'll look at our first quarter and the outlook for the remainder of the year. Neal?

Neal S. Cohen

Thanks, Mark, and good morning, everyone. First quarter orders were strong across the company, especially in our Defense and Sporting Groups, totaling $1.1 billion. This is a book-to-billed ratio of approximately 1, which brings our backlog position to approximately $6.1 billion.

Sales in the first quarter were relatively flat compared to prior year at $1.1 billion, reflecting higher sales in both Defense and Sporting Groups, and as we had expected, we had a decrease in sales in our Aerospace Group.

In Defense segment, as Mark discussed, the primary driver to year-over-year improvement in sales was sales at Radford. In Sporting, we continued to build backlog, and we have good sales visibility going forward this year. In Aerospace, the driver in our year-over-year decrease was the reduction in NASA and commercial air structure sales.

Operating margins were flat for the quarter at 12.1. Drivers contributing to the first quarter operating margins include higher profit rates and the completion of contracts in the Defense Group, partially offset by lower margins in the Sporting and Aerospace Groups, increased pension costs, the sale of -- the impact of the results of the sale of land that took place last year that wasn't in the results this year, as well as some facility closure costs this year.

Net income for the first quarter was down 1% to $71 million compared to $72 million in the prior quarter. This was due to a higher tax rate partially offset by lower interest expense. The tax rate for the quarter was 36.1% compared to 31.2% in the prior quarter. This increase reflects the absence of the benefit from the state tax law change and the absence of the benefit of the Federal R&D tax credit closed from the prior year. We continue to expect the R&D tax credit will be extended for the full year.

Interest expense was $19.7 million compared to $26.3 million in the prior year -- in the prior quarter, reflecting reduced rates and debt levels year-over-year. We reported first quarter fully diluted earnings per share of $2.16 compared to $2.13 in the prior year period.

Free cash flow use for the quarter was $320 million, which is up $127 million from the prior year. The higher use reflected pension contributions of approximately $140 million, up from $62 million in the prior quarter, and the payment of approximately $25 million related to the LUU flares legal settlement that was accrued in the prior year but paid in the first quarter of this year.

The company returned approximately $32 million to our shareholders during the quarter, made up of $25 million in share repurchases and approximately $7 million in our quarterly dividend payment.

To continue strengthening the balance sheet, ATK elected this month to call its $400 million 6.75% notes maturing in 2016. Calling these notes will result in debt extinguishment cost of approximately $12 million that will be reflected in our second quarter results ending September 30. ATK intends to partially finance the call of these notes by increasing its Senior Secured Term Loan A borrowing by $200 million. The remaining balance of the redemption will be paid from the company's cash and/or existing credit facilities. These actions will be completed during our second quarter, and will provide ATK with an overall lower cost of borrowing while still providing adequate liquidity levels to meet our financial obligations -- appropriate liquidity levels to meet our financial obligations. On a full year basis, this refinancing should save the company approximately $20 million a year in annual interest cost.

I mentioned a moment ago that this will also incur a $12 million debt extinguishment cost in the second quarter. Given those charges, the net income -- the net impact for fiscal year '13 will be a reduced EPS by approximately $0.07.

Looking at our segment results. The Aerospace Group reported a 17% decrease in sales to $295 million compared with $354 million in the prior year due to lower NASA revenue in the space systems operations division and lower revenue in our commercial aerospace. Operating profit decreased in the group to $35 million, down 18% from $43 million in the prior year. Contributing to the profit results were the lower sales revenue, which I just mentioned, plus the absence of the gain in sales from a non-central parcel of land last year. Increased profit within the space structures and components divisions partially offset this decrease.

The Defense Group saw sales of $514 million in the first quarter, up 5% from $492 million in the prior quarter. As ATK completed contracts at the Radford Ammunition Plant, the group exceeded our production and sales expectations, driven by higher volumes as its contract was completed.

Defense Group operating income for the quarter increased 48% to $91 million from $62 million in the prior year quarter. Again, the margins were mainly driven by updated profit rates from the completion of the contract at Radford and the gain on sale of residual assets.

In total, Radford sales for the quarter were $60 million and profits were $40 million, including the gain on sale of the residual assets.

Sporting Group sales increased 19% in the first quarter to $273 million compared to $229 million in the prior year period. The sales increase was primarily driven by higher orders in both ammunition and accessory businesses. Operating profit for the group fell 29% to $21 million compared to $29 million last year. This decrease primarily reflects the continued shift in lower demand towards lower margin ammunition and costs that were associated with the closure of certain facilities, partially offset by higher sales volume. However, as Mark mentioned earlier, Sporting achieved expanded margins from the fourth quarter of fiscal '12 to this first quarter of fiscal '13. We continue to see favorable movement in margins due to cost initiatives in our Sporting division. And maybe, while we see these initiatives, we remain very optimistic and we expect continued improvement in our margins in this business, especially from our price increase that took effect, June 1.

Now I'd like to provide some additional information on our financial guidance for fiscal '13. ATK is raising its full year fiscal '13 guidance from -- for sales guidance from $4.05 billion to $4.15 billion, up from previous guidance of $4 billion to $4.1 billion, reflecting volume strength in the Sporting business as well as higher-than-expected Radford results. We are also raising full year fiscal '13 EPS guidance to $7 to $7.30 per share, up from the previous guidance of $6.25 to $6.55 per share.

As we raise our full year, we are also raising our full year free cash flow guidance in the range of $140 million to $165 million, up from $125 million to $150 million. The increase in our fiscal guidance primarily reflects the higher sales and the profits in our energetics business and the lower-than-expected full year tax rate. We expect the effective tax rate for the year to be approximately 32%, down from the previous 34.5%. The lower rate which anticipates the retroactive extension of the Federal R&D tax credit is the result of the favorable resolution of uncertain tax positions.

Just to recap, ATK had strong orders in the first quarter, and we continued strengthening the balance sheet and returned value to our shareholders as we navigate the challenging environment in the current marketplace. In addition to this, we've positioned ourselves with the call of the 6.75% notes to see reduced interest expense going forward.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go to Robert Spingarn with Crédit Suisse.

Robert Spingarn - Crédit Suisse AG, Research Division

And I have a question about the guidance. And you just touched on this, but you beat by about $0.75 and raised at the midpoint by about the same. But when I net out the tailwind on tax and against the higher pension, the debt charge, it looks like there's net tailwind in the back end of the year. So I'm assuming that's accounted for at the higher end of your range? And I wanted to ask you what various factors might point you to the lower end?

Neal S. Cohen

I'm not sure -- this is Neal. I'm not sure I'm following your question. I apologize. There is a lot in your question, so maybe you could be a little bit more specific?

Robert Spingarn - Crédit Suisse AG, Research Division

Well, when we add it all together, and maybe we're not doing the math correctly, we see about $0.90 in incremental upside between this quarter and your guidance. Yet at the midpoint, you raised by $0.75. So the question essentially is, how are you thinking about the range? I'm guessing that the tailwind gets you to the high end of the range, but are there risks and what are they that would get you to the low-end?

Neal S. Cohen

I'm going to ask Steve Wold to address that.

Steven P. Wold

Rob, let's call out the specifics of the -- what we know has changed. We know that the Radford improvement, as Neal pointed out, was about $40 million of total EBIT. And that's in the area of $0.60, $0.65, $0.68 higher than you might have otherwise. I'm not sure what profit rate you might have had, but if you were using our fourth quarter rate that we talked about and gave some guidance to, you would attribute about that much to that overrun. The improved tax is probably going to add about, just over $0.30 as well, and then we pull back the guidance for the increased pension which is $0.12 and the debt refinance cost of $0.07. So I think all in, we're, for the most part, changing our guidance for the -- for those 4 nonoperational things. So I don't think we've tried to update much or provide new spin, if you will, for our full year outlook. This is the underlying operations.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. Well, fair enough. Let me try a different question then, and this is something that you get asked every quarter. Could you talk a little bit about, Mark, your expectations or your updated expectations by segment, essentially segment guidance, revenue and margins?

Mark W. DeYoung

Yes. We don't give, Rob, we don't give segment guidance, but I'm happy to give you some color on what I think is happening within the segments. I think on the Defense segment, we actually are seeing accelerated momentum, from my expectations as we've gone into the year. We came out of Farnborough with a lot of excitement about shifting ATK special mission aircraft business from a sensor business into a weaponization business. This is something I challenge the Defense Group to do with that company, was look at what we do, ATK, which creates a competitive differentiator and a sustainable competitive advantage if we're going to be in special mission aircraft. We settled onto something ATK is known for, and that is weaponization, ammunition and guns. And we've created some very creative solutions for small aircraft, very well-received, lots of interest, lots of momentum. So we're excited about that. I think that across Lake City performance, we've seen improved production rates. We're seeing more volumes of production being produced on a weekly basis than we were seeing last year. We'd focused on production improvements at Lake City and those are bearing fruit, so that's creating additional momentum for us this year, beyond what I would have expected in that group. The AARGM program, getting close to operational readiness, is going to be a great boost for us with a long-term program that's very well-supported by the Navy and in the budget. JTAS team is doing great. And I think the discussion we had down in Florida with a customer, with our partners, we did a great design view, very capable people working in that program with good success. That's also a new program, as you know, in development that will turn into production. So the group has lots of momentum in several pockets in Defense. So I'm feeling more bullish, frankly, about the performance of Defense this year than I might have 6 months ago. On the Aerospace side, as I mentioned, A350 is doing very well. We produced 8,000 parts. Our 0 defects are much improved as we produced those parts, so we're seeing great quality improvement, which will reduce our cost. Our delivery is good. We remain off the critical path with Airbus, as I mentioned in a couple of prior quarters. That's still the case today. We're executing in line with our estimates and our ATC on that program, and the relationship with Airbus, I think, continues to improve month by month as we demonstrate our ability to continue to execute with this new technology to produce these parts. I think the SLS program, that has been funded about $1.8 billion by NASA. It still has strong by-partisan support, I think, for NASA on SLS, so we're pleased we’ve been selected for that initial phase. Getting the advanced booster development program was important for us. That allows us to demonstrate our capabilities, as I mentioned, in composites and energetics and propellants to bring advanced capability to the next-generation booster. So we're very pleased that, that will strengthen our position in the long-term future on the SLS program. Our small-sat business is continuing to expand. We're getting new Darfur awards. We're getting new opportunities for buses. Business-sats, I think our business-sat strategy and joint venture continues to mature, and it's doing well in that business as well. So we have challenges there, no doubt about it from the decline of shuttle revenues in years past. And we are very disappointed in the loss of Liberty. We thought we had a very compelling solution, so we're anxious to learn more about what the decision set was on that. But all in all, I think we're holding our own there and performing consistent with our guidance and with our expectations. Sporting, the market continues to be strong in that space. And I think we continue to do well with our branded products and our sales marketing and distribution initiatives there, Rob, and we are pleased that we're able to drive 200 basis points of margin improvement from last quarter to this quarter. We're focused on continuing to improve that through the course of the year, so that business remains strong. So segment by segment, I think we're accomplishing what we set out to accomplish. We knew that FY '13 was going to have some revenue dips from some Defense pressures. We came out with that in our full year guidance and about the March timeframe. And so far, we're frankly performing very, very well in beating some of our own expectations.

Operator

Next, we'll hear from Joe Nadol with JPMorgan.

Christopher Sands - JP Morgan Chase & Co, Research Division

It's actually Chris Sands on for Joe this morning. Mark, you discussed the commercial crew program briefly. I was hoping you could, maybe, elaborate on kind of the future strategy there, maybe some of the financial implications, how much you had been funding, and what that might go to?

Mark W. DeYoung

Yes. Let me address that, maybe start first with the Liberty solution. So our Liberty solution, as you know, is a teaming arrangement between ourselves and Astrium, with again, what we thought was a very compelling solution. We've put together an approach to fund that, where each party was paying for its own expenses as we put together the marketing and the planning and the discussions for that. And we've been expensing that as we've gone. We did not put Liberty in our plan. So Liberty is not in our plan, nor was it in our 3-year strategic plan. We had SOS in the plan. We knew we had to win that. We had advanced booster anticipated as part of our plan. We knew we had to go after and win that. We were very successful on both of those. And Liberty was a little bit of a longer shot for us, so we hadn't planned on it. So from that view, it should not have any significant financial impact to the company. Going forward, we're going to focus on SLS. We're going to focus on the advanced booster. We're going to execute those programs. We're going to be prepared to continue with test of the motor. We'll have our next test in the spring of '13 on that motor. So as far as that is concerned, on crew, we were disappointed. We're moving on, and it really creates no significant financial impact.

Christopher Sands - JP Morgan Chase & Co, Research Division

Okay, so the items you were expensing previously, that I've -- presumably you won't be expensing going forward. It won't have a meaningful impact?

Mark W. DeYoung

No, no.

Christopher Sands - JP Morgan Chase & Co, Research Division

Okay, and then just a quick follow-up, is Radford completely out of the system now? Would there be any benefits next quarter?

Mark W. DeYoung

Radford is generally completely out of the system. We have a few reserves we've carried over for some potential environmental exposures, and a few things like that, that when you have operated a facility for 70 or 80 years, there are a few residual things. But for the most part, from a material perspective, I think we've exited the plan. We transitioned out. And the team did a great job, a very responsible, professional job, and doing a handoff to the incoming contractor, working closely with the Army. We got a lot of request in that last quarter from contracts to build additional product and we didn't anticipate those. Those orders came in. The team did a tremendous job building those orders safely and efficiently, and it gave us a strong boost as we wrapped up the operations there.

Operator

Our next question comes from Greg Konrad with Jefferies.

Greg Konrad - Jefferies & Company, Inc., Research Division

Just a quick question on the A350 program. With the recently announced delays, has there been any change to the contract, and how should we think about the unbilled receivables balance?

Mark W. DeYoung

Yes. So I'll touch on the delay question first. Obviously, there have been some delays. We have programmed those into our financial estimates and planning, by announcing our center of excellence, our Commercial Aircraft Center of Excellence in Utah. We've been able to generate, already, significant efficiency improvement over what was originally a baseline for the facility, which was in mind for that program. So we're seeing good efficiency improvement. We've been able to take those cost savings that we see through having a Commercial Center of Excellence in Utah, adjacent to our military composite business. That's allowed us, frankly, to offset any cost impact to the program from the schedule slips. So to date, the schedule slips have created no financial impact because we've offset them with efficiencies in the facility. So we have accounted for those things and we remain on track with our estimates.

Greg Konrad - Jefferies & Company, Inc., Research Division

Thanks, and then just one quick follow-up, you guys have been pretty aggressive with facility consolidation. Are there other items that are still left to complete, and then how shall we kind of think about the rest of the year in terms of restructuring?

Mark W. DeYoung

Yes, we attacked that facility footprint issue very aggressively this year. We've announced plant closures in a couple of different states, and we've got those closures well on their way to being completed. The 3 significant closures and consolidations we have done this year, which are about 80% to 90% complete, are the 3 that I mentioned in my script. That is taking all of our commercial metal machining capability and our optics business and weapons-related business, and consolidating that to a facility we had in California. That's -- there is one piece of equipment left to move, so that's largely completed, on schedule, on budget. We opened a new injection molding plastic center of excellence which allowed us to consolidate 3 different facilities, where we do plastic injection molding into one brand-new building and new facility in Montana. That is complete. And then we opened this new modernized warehouse in Sporting, as well, which is several miles away from a federal premiums facility. But it’s there in the Midwest, gives us a great centralized location for warehousing and distribution of Sporting projects. That is largely complete as well, so we're pleased with that. So those were our 3 that we really targeted to accomplish. In addition, we've consolidated on the Blackhawk side and Eagle side of our business with getting our Blackhawk headquarters in Virginia stood up, and we've consolidated our Eagle operations and are in the process of continuing to consolidate in Puerto Rico. So I think largely, we're done. We have a couple that are still in the works, but they've been very successful to date.

Operator

And our next question comes from Carter Copeland with Barclays.

Carter Copeland - Barclays Capital, Research Division

Just looking at Defense, it looks like x the Radford benefit in the quarter, the margins would have been about 11.3%. Is that the right sort of level we should consider for the business, going forward, now that Radford's out of there?

Mark W. DeYoung

Yes. We think that, that's about right. We had talked before this business trying to generate double-digit margins and stay above 10% in the Defense business. But I think somewhere around that range is what we would anticipate. And then we're constantly, as you know, Carter, we're constantly driving efficiency improvement and margin improvement, but that's in the ballpark.

Carter Copeland - Barclays Capital, Research Division

All right. And just one follow-up, as I look at the balance sheet on...

Mark W. DeYoung

Carter, we've lost your volume. Can you...

Carter Copeland - Barclays Capital, Research Division

Oh, yes. Can you hear me now?

Mark W. DeYoung

Thank you.

Carter Copeland - Barclays Capital, Research Division

Yes, okay, so on the balance sheet, with respect to the balance sheet, after the sort of pro forma after this call, you're going to be pretty low relative to your own history in terms of leverage. And I wondered if you might comment on that, if you're thinking this is the right leverage level going forward? Or you're leaving things open in terms of firepower for M&A or some other capital deployment decision I just -- this seems like a low level for what we've known for ATK over the years and I wondered if you might comment on it.

Mark W. DeYoung

Yes, let me start and then I want -- Neal can add his thoughts on that. I've mentioned now for 2 years that we were going to strengthen the balance sheet and reduce our debt because of the uncertainties that we see in our markets. So we continued to do that with this latest calling of the '14 notes. Those were 6.75%, we can get much lower rates today, so it's a bit of a no-brainer that we can move in that direction as we've strengthened the balance sheet last year. It allows us to do this again this year. We think with some of the uncertainties that are in the markets, that it's prudent to ensure our liquidity and to reduce our debt. And it also does create the opportunity for firepower. We've talked about being opportunistic on that front and we want to make sure that we -- when we see an opportunity, we'll be able to capture it if the valuation and price is right, but Neal, would you like to add more?

Neal S. Cohen

Yes, Mark. I think you hit the high points. First is, it's $0.40 a share on a steady-state basis and that will accrue in fiscal 2014, but we have lots of optionality. We think we could go to the market for terms better than that facility today. So by paying off that facility, we think we have very little regret cost and we're able to come back with $0.40 of higher earnings. And we have lots of flexibility around the accordion facility. We're going to use that to fund it. But that we'll be drawing at the same rate that we'd be drawing under our line of credit. And there's no prepayment penalty. So we really have the ability, that in an environment where we don't need liquidity, we have $0.40 in improved earnings and going into next year, while at the same time, I think we've retained and improved all the flexibility that we had to be able to respond to different changes in the market strategically.

Carter Copeland - Barclays Capital, Research Division

Is it safe to assume -- I know you made the comment you'd used cash and/or your existing credit facility, but if I look at the cash balance at the end of the quarter, it would seem that you'd probably lean more on that credit facility than cash balances. Is that fair?

Neal S. Cohen

Well, I think we expect to build cash from now through the balance of the year, and so depending upon the final timing in September, I think we anticipate to use mostly cash. And I don't think we have -- I don't think we really anticipate to have to use any of the credit facility in addition to $200 million in the accordion that we're exercising. But it will sort of depend on what time during the month and really some very, very incredibly short-term issues when the final call occurs in the month of September.

Operator

Next, we'll hear from Gautam Khanna with Cowen and Company.

Gautam Khanna - Cowen and Company, LLC, Research Division

Could you update us on a couple things you mentioned last quarter? At Sporting specifically, the price hikes that went into effect, I think, it was June 1, and also how the startup costs are fading on the MOLLE program?

Mark W. DeYoung

Sure. I'll be happy to do that. We'll take them in that order. So from a pricing perspective, demand remains very strong, as I mentioned earlier, in that market for our products, in particular. I think our performance continues to outpace the competition in terms of our profitability and growth, so we're pleased with that. So that continues to be strong for us and continues to allow us to introduce new products, and work within the mix of products, which are being ordered and which are being delivered to our customers. So we remain focused on that, working through that process, managing what's going on in the Sporting side. And on the MOLLE contract, we had some startup costs as we begin to prepare that contract. We had to qualify a couple of facilities to ensure that we could make all of the components associated with qualification of the MOLLE. We anticipate receiving that contract. Right now, our largest volume in that business is a Marine Corps Pack. And we're doing well on the Marine Corps Pack. We're seeing improved performance. We look forward to an award on the MOLLE Pack, now that we're fully qualified and that'll be another boost to the soft gear business.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And Mark, you mentioned having dry powder for M&A, I think, but just wanted to get your thoughts on share repurchase. You've mentioned the $25 million-a-quarter pace being the one you'd like to go down. But I just wonder how that might change if indeed you had an adverse outcome on Lake City. Would you think about accelerating the pace of the buybacks?

Mark W. DeYoung

Yes. No, that's speculation that I hesitate to dive into because there's a lot of uncertainties that could impact decisions that we would make regarding that. We reported that we executed the $25 million of share repurchase in the first quarter. We continue to pay the dividend so we had about $32 million return to shareholders in Q1. That was consistent with our intent. And our intent was to execute the share repurchase as you described it. And there are so many other issues, which could impact the company, that if we begin to speculate on what happens with and without Lake City, what happens with and without an acquisition, we could go on and on. I guess I would prefer not to do that. We'll react to those. Neal, do have any thoughts on that?

Neal S. Cohen

Yes. I think obviously, we're going to work very hard to keep everyone updated on our share repurchase activity. And we feel the best way to do that is through our quarterly earnings release and through the Q. So that's going to be the vehicle for keeping everyone updated on our share repurchase activity.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay, and just one last one, I want to make sure I heard Steve correctly. Did you say the Defense margins benefited $40 million from the Radford close-out?

Steven P. Wold

The total EBIT from Radford operations, which included the manufacturing operations as well as the sale of the assets we spoke of was $40 million.

Gautam Khanna - Cowen and Company, LLC, Research Division

And is that on sales of roughly $40 million? Or how do we think about the top line, so we get the underlying margin?

Steven P. Wold

Sales were $60 million, Gautam.

Operator

Our next question comes from Carl Gardiner with Schafer Cullen Capital Management.

Carl Gardiner - Schafer Cullen Capital Management, Inc.

I would be interested in discussing all things pension-related. You gave the guidance for $168 million for fiscal '13 on expense, so I'm assuming it's GAAP expense. You made $140 million cash contribution, fiscal Q1. And I'm wondering how much more cash do you anticipate in contributing over the full fiscal year? And I'm very interested to hear your thoughts on the impact of the law change last month where the discount rate, I'm assuming, will be lower with the new approach, and that impact on both your GAAP pension accounting and your required cash contributions going forward.

Neal S. Cohen

Sure. This is Neal. Good question. Obviously, you flagged -- everyone knows the highway bill was passed last month. We contributed, as you said, we contributed $140 million this year, we did it in April. And right now, if under the terms of the highway bill, we now have substantially increased flexibility to be able to respond to this low interest rate environment. So if we haven't quite decided yet how to exercise that flexibility, that flexibility gives us the opportunity not to have to contribute anything during the balance of the year. We were otherwise planning to have to make some other modest contributions during the balance of the year, so that flexibility immediately benefits to us this year. On a pretax basis, we've done some modeling and think over the next 3 years that, that flexibility allows us to contain pension contributions by $140 million to $160 million over the 3-year period. That's a pretax number. So obviously, how we deal with that will be somewhat a function of how interest rates behave. If interest rates begin to go back up, the benefit of the highway bill begins to go down. If interest rates stay low, the highway -- the benefit of the highway bill goes on lower. So it sort of depends on what you think that's going to happen to an interest rate environment. That number I just quoted to you of $140 million to $160 million assumes a sort of small steady increase in interest rate environment. So we could actually have a bigger benefit if rates stay lower longer, or a smaller benefit if rates go back up quicker. But it does give the company a fairer degree of flexibility in its free cash flow. We -- the flip side though is, and as you alluded to in your question, that there is a connection because the amount you put in your plan also will have the effect of reducing your FAS expense. So if we come back and we exercise a little bit of, or some or all of that flexibility that could modestly drive up our FASB cost to the tune of, say, 7.5% times the amount that we don't otherwise fund. So I think the way we think about it is, it gives us a strategic flexibility to respond to different environments, different opportunities. If the opportunities to deploy that capital are there, earn better than a 7% return, we've got that flexibility. If rates stay low and the opportunity to deploy that capital aren't there, we know we have the flexibility to contribute under the highway bill. So gives us lots of flexibility, and I think we'll keep working hard to understand it better and keep informing this group as we make decisions about our pensions. But right now, we've contributed $140 million and we have the flexibility not to have to contribute anything for the balance of the year, although we have not necessarily made that final decision.

Operator

We'll go next to Michael Ciarmoli with KeyBanc Capital Markets.

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

Mark, I guess maybe to dig in, or Neal, on the Sporting segment, the 200 basis points of margin improvement, can you just help us understand, as we move forward here, what we can expect in terms of additional margin expansion? And maybe if you could help us understand, maybe what pricing contributed? I'm assuming you got, maybe a little bit of a tailwind in the quarter from lower raw material prices. Just how we should be thinking about the margins going forward there?

Mark W. DeYoung

Sure. So the 200 basis points, that I mentioned, took us from a quarterly performance rate in the fourth quarter of about 5.6 and we were able to get to 7.6 in this past quarter. It's a combination of several things, Mike, as you said. It's a combination we got some relief on raw materials, so that helped. And that helps us and hurts us, depending on the fluctuation in raw material cost. The mix is constantly changing. So this is an ever-evolving, constantly changing order and delivery day-by-day-by-day business. So the mix -- as the mix shifts and changes we're going to see some fluctuations. What really hurt us last year was in the third quarter, beginning in about October, the mix shifted pretty drastically to low cost, low margin ammunition. That mix, we've worked hard to work that mix. We implement a variety of marketing tools. We implement with point-of-sale strategies to position premium products. We offer rebates to encourage customers to buy certain products. So we are doing all of that. And it's a combination of many, many variables, including growth in our accessories business which operates at double-digit rates that help contribute to some of that improvement in the 200 basis points. And we will continue to do all of that, to do it thoughtfully but aggressively, to drive margin improvement. And I anticipate, as I mentioned, that as we execute those strategies and to continue to consolidate facilities and drive efficiencies and work the product mix and work our marketing and promotion strategies, that we can continue to see, I believe, some additional improvement in those margins through the remaining 3 quarters. And I'm anxious to be able to meet with you quarter after quarter and update you on this subject, and in those meetings, I anticipate being able to talk about margin improvement.

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

Perfect. How are you guys thinking about your volumes ahead of maybe the election season here? I mean, usually, any time there's a presidential election, it seems like we've got elevated sales. I mean, is that contemplated at all into your guidance?

Mark W. DeYoung

Yes. We obviously knew, obviously, that fiscal year '13 was an election year when we put together our plan. So I actually challenged the Sporting Group significantly in their plan, with additional revenue from what, I believe, would be an important year for that business to capture an opportunity in the election. So we agree with what you said, Mike. We believe that these kinds of periods spur demand, and we anticipated that in our plan and challenged ourselves with additional revenue to be able to go and capture that. And we're doing that. I think the first quarter results demonstrated that. So we anticipated it. We're poised and we're capturing it. And we'll deliver on it. And then of course, the American consumer, will determine what happens after the election. But we're going to harvest the period we're in right now because it does create a demand fluctuation.

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

Okay, great. That's good color. And then just, if we were looking -- obviously you have moving parts below the line here. If we were to look at just kind of the core segment margins, it would seem to -- the guidance would suggest you might have some headwinds in the next 2 quarters, maybe at the segment level, staying at that sort of 12% range for the year, or kind of the quarter will end maybe 10%, 10.5% range. I mean, is that the right way to think about the operating margins going forward here?

Mark W. DeYoung

Well, we are pursuing that 10-ish range that you discussed, so you're right on that. Our role operate is to be double-digit. And we do have some challenges. We have some uncertainties that remain, and 3 quarters remaining for the year. But we have targeted double-digit at the corporate level rates this year, and I believe there'll be some challenges quarter to quarter, but we're on track for that.

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

Okay, and then last one and I'll jump off here. How should we think about your kind of fiscal fourth quarter in light of sequestration? I mean, do you have everything you need in backlog for this current year, just when you guys put the plan together? How did you account for that, maybe uncertainty?

Mark W. DeYoung

Sure. And I know this is a question on everybody's mind. We have strong backlog. We have over $6 billion in backlog, so part of your answer to your own question is accurate. We have good backlog. Most of the backlog that we have, we are not penalized for delivering against that backlog even early. So we're going to drive production uptime and throughput, particularly in small caliber ammunition, and elsewhere in the business, we're going to capitalize on that. In the Sporting Group, obviously, we can capitalize on the growing backlog that's occurring in that group as demand outsources supply. Mix checks are at an all-time high again, for about 3 years in a row. So that gives us some confidence that we can build to that, on the Sporting side. Sequestration, we’ve done a lot of analysis with that. We've looked at our programs. We've looked at the budget. Mr. Cortese, here in D.C., has done a lot of work helping us understand those. We believe we have accounted for those, both in our guidance and in our plan. And we believe that we're positioned where we're fairly platform-independent, so -- and a lot of consumable products that we believe our customers are going to put dollars on contract before the end of the current government fiscal year. So we're working with them to get as many dollars on contract as we can by September 30, to bolster that backlog and allow us to build for our fourth quarter without a significant impact. And I believe we've taken all of that into account.

Operator

Our next question comes from George Shapiro with Shapiro Research.

George Shapiro

Two questions. In the Aerospace segment, while the margins of 11.9% was pretty similar to the 12% in last year's first quarter, the subsequent quarters pretty much went -- trended down. So my question is, is there anything unique about the first quarter here that makes the margin higher than what we'll see for the rest of the year?

Mark W. DeYoung

No, I don't think so, George. I think what you're seeing in Aerospace -- a couple of things that you've opened that Aerospace dialogue, if it's okay with you, I'd expand your question, maybe even just a little bit. There was some reduction, quarter-over-quarter, in revenues in Aerospace, that's largely because we reduced our capital expenditures on the Airbus A350 program. That's actually a good thing even though it impacts us with some lower revenues, it means we're completing our investment in our new facility and our capital expenditures. So that's all that's happening with the revenue there. And in terms of the margin, there isn't anything significant that's changing in that business, I think, from a programmatic view. And I think last year's margin had a one-time gain in there on the sale of some land in...

Neal S. Cohen

$5 million.

Mark W. DeYoung

And so some of the effect that you may be seeing last year was somewhat driven by the shaping of the year based on that item.

George Shapiro

And so this year had nothing in it like that? So 12% should be a run rate? Because the last 3 quarters of last year were less than that.

Mark W. DeYoung

I think we're in that 11%, 12% range.

George Shapiro

Okay, and then just a quick other one. In terms of the -- your tax rate in the next quarter or 2, I assume that since the R&D credit hasn't been passed, the tax rate is going to stay relatively high at least for the next quarter or until it gets passed and then you'll queue the whole thing up?

Mark W. DeYoung

Well, what will happen in the second quarter, as we talked about, is we’ll reflect the benefit of our recent settlement with the IRS in the second quarter. So you should expect in the second quarter, for our tax rate to come down. It will still reflect no R&D credit since no R&D credit is passed. And we will continue to record our taxes with no R&D credit until the R&D credit is passed.

George Shapiro

And the R&D credit is worth how much in terms of this tax rate?

Mark W. DeYoung

About 1 point in our tax rate.

Operator

And next, we'll go to Cecile Ferrie with Silver Point.

Cecile Ferrie

I've got 2 questions, Mark. The first one is on sequestration. Can you please provide your views on how this process is likely to unfold, as well as your views on timing? Can you also please comment on what the anticipated impact on your business is likely to be? And how you're preparing for any assessment, Mark? And the second question, maybe just so I put it out there, so the second question relates to the level of ammunition, what stored in stock? Can you please provide color on the level of these stocks currently and how you expect for that to impact your Defense business, so more specifically, do you expect a restocking or destocking cycle? And what would be the expected timing and impact on your business, Mark?

Mark W. DeYoung

Okay. So let me, quickly, just repeat those 2 questions. I'll make sure I've got them right. So your one question is, what is our broad view of sequestration, timing of sequestration and potential impact? And your second question was to respond to current inventory levels and more reserve within the services, and any opportunity for replenishment?

Cecile Ferrie

Correct.

Mark W. DeYoung

Okay. All right. On sequestration, let me just start there. I know that all of you have heard a lot of discussion from DoD companies and there's been a lot of engagement, I think, in the press and elsewhere, regarding sequestration and its potential impact on Defense. ATK's view largely is consistent with the views that you've heard other defense companies who have chatted about this. We believe there's probably a better way to implement a management of Defense funds than in the sequestration law. Sequestration law is tabled to go into effect, January 3. I have no new information other than that. The continuing resolution, of course, would give us a bridge for DoD spending, which would allow us potentially to go through the first quarter of next calendar year to see the new Congress and others, before sequestrations begin to hit DoD under a continuing resolution. So we happen to see that as a reasonable bridge, which we're pleased that people are getting together working a way to do that. So we think that the continuing resolution provides some buffer to potential impacts. Remember that ATK's revenues generated from Defense are less than 50% of our revenue. So we've done some modeling of what we think the impact is. And we think that, that impact is manageable for the company, and certainly isn't something which would cause us to feel like as though we've taken a death shot or anything like that, if it were to occur on January 3 as is planned. On the ammo war reserve side of the equation, we obviously work closely with our Army customer, which is the single-point procurement entity for the military for procurement of ammunition. Whether you look at the inventories or if you look at production levels, we have forecasted, we have planned, and we have included in our guidance already, some reduction in ammo procurements because the war reserve and inventories appear to be fairly healthy. So we do not see a huge restocking in terms of war reserve and a restocking to rebuild post-war inventories, and we have accounted for that in our plan and guidance.

Operator

And we have no further questions in the queue.

Mark W. DeYoung

Okay. Thank you. I'd like to thank everyone for joining us on the call. We really appreciate your interest in the company, appreciate the quality questions in your time today. Thank you very much.

Operator

And ladies and gentlemen, that does conclude today's conference. We thank you, all, for joining.

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