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Alliant Techsystems (NYSE:ATK)

Q2 2013 Earnings Call

November 01, 2012 9:00 am ET

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

Noah Poponak - Goldman Sachs Group Inc., Research Division

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

Gautam Khanna - Cowen and Company, LLC, Research Division

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

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

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

George Shapiro

Operator

Good day, ladies and gentlemen, and welcome to this ATK Second Quarter Fiscal Year '13 Earnings Conference Call. One note that today's call is being recorded. At this time for opening remarks and instructions, I'd like to turn the conference over to ATK Vice President, Investor Relations, Mr. Steve Wold. Please go ahead, sir.

Steven P. Wold

Thanks, Sarah. Good morning, and thank you for joining us for ATK's second quarter FY '13 earnings call. With me this morning are Mark DeYoung, our President and Chief Executive Officer; and Neal Cohen, EVP and Chief Financial Officer.

Before we begin, I'd like to remind everyone that during today's call, we will make several forward-looking statements. These statements are made under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. We make these statements based on our best estimates, based on the understanding of information we have today. They're subject to the risks and uncertainties that face any business. We encourage you to review today's press release, as well as our SEC filings for more information on those risks and uncertainties.

Also note that we've posted charts on our website, which is found at atk.com, and those will supplement our comments this morning as well. We'll include reconciliations of non-GAAP financial measures.

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

Mark W. DeYoung

Okay, Steve, thank you. Thanks for joining, everyone, this morning. We appreciate it. First, I'd like to report that our employees at facilities across the East Coast are safe. Our business has weathered the storm without any significant damage or incident. And our thoughts are certainly with those affected by the storm as they return home and begin to recover. We have a number of topics and accomplishments we'd like to cover today.

Our second quarter reflected solid operating results across the board, and our confidence in ATK's performance has allowed us to update our financial guidance for the year. In addition, ATK's Board of Directors has declared a 30% increase in the quarterly cash dividend, all of which Neal will elaborate on here in a few minutes.

In the last few months, the company secured strategic orders that confirm our competitiveness in leading market positions. We've delivered continued operating performance improvements in our businesses. We executed opportunities to further strengthen the balance sheet, and we continue to return value to our shareholders.

Aerospace Group achieved significant milestones in the second quarter. We received a $385 million in orders from Airbus, associated with our win of content on the A400M military cargo plane and changes to the current A350 program.

We also won new awards in our Propulsion business for the SLS advanced booster and GEM-40 motors and our small satellites and components programs continue to win new business, including continued growth in our classified programs.

Our Defense Group continues to secure new contracts, meeting key milestones and delivering affordable innovation. U.S. Army selected ATK to continue operating in the Lake City Army Ammunition Plant for an additional 7 years with the potential for a total of 10 years. ATK submitted a proposal to capture our vision to contribute to the future stability of the ammunition's industrial base, as well as highlighted our successful operation of this facility and a productive partnership with our customer. The new contracts will take effect in October of 2013.

The Navy awarded ATK a full rate production contract in the Defense Group for advanced argon missile, and we're very pleased with that. The Army recently named our precision mortar system as one of the Army's greatest inventions in 2011. And the XM25 continues to receive customer support, and we were recently awarded a contract to prepare that program for high-rate production.

In the Sporting Group, we continue to see solid orders and sales volume across the group. We recently won a strategic 5-year contract for a major law enforcement organization to provide training, duty and frangible ammunition. Our BLACKHAWK! products are gaining momentum across the globe including new international orders. Consumer demand for our products continues to be strong, and we're seeing new consumer groups entering into the shooting sports.

Our margins continue to improve, and our recent ammunition price increase is now fully in effect. Our focus on new products and innovation in our commercial product lines continues, and we'll be introducing new ammunition and accessories products for sale to our customers in 2013.

Let me conclude by saying ATK executed a second quarter and first half of the fiscal year that delivered results meeting or exceeding our plans. We continue to deliver program success, execution excellence, customer satisfaction and a commitment to safety and environmental stewardship. Our ability to continue to secure strategic orders, our platform agnostic positions and our focus on emerging international markets provides ATK a foundation for continued success.

I'll now turn the call over to Neal so he can walk us through the second quarter financials, and then we'd be happy to take your questions. Neal?

Neal S. Cohen

Thanks, Mark, and good morning, everyone. In terms of the second quarter, ATK experienced strong orders across all groups. We reported $1.3 billion in orders in total. That's a book-to-bill ratio of more than 1.2, and we now stand at a backlog position of $6.4 billion. As most of you know, our prior year results included sales and profits related to the Radford Army Ammunition Plant and a favorable contract resolution in fiscal '12. To provide clear year-over-year comparisons, we have provided tables in the press release and investor slides that excludes sales and profits related to Radford, the fiscal year favorable contract resolution, a fiscal '13 loss on early debt extinguishment which I'll cover later and a favorable fiscal '13 IRS tax settlement.

Sales at $1.1 billion increased 2% on an as-adjusted basis, primarily reflecting higher sales volume in the Sporting Group. As adjusted, margins were down for the quarter, margins of 10.3% compared to 11.5% in the prior year quarter on an as-adjusted basis. The decrease was primarily driven by pension expense and sales mix in the Defense Group.

As adjusted, net income for the quarter was down 4% to $61 million compared to $63 million in the prior year. We reported second quarter fully diluted earnings of $2 per share and on an as-adjusted basis, EPS was $1.86 compared to $1.92 in the prior year quarter. The tax rate for the quarter was 19.4% compared to 35.3% in the prior year. The lower rate reflects the settlement of the IRS audit of fiscal '09 and '10 tax results, as well as lower expected tax expense due to the recently approved highway bill.

Interest expense was $18 million compared to $24 million in the prior year quarter, reflecting reduced rates and debt levels. Year-to-date free cash flow use was $73 million compared to a use of $68 million in the prior year period. The higher use reflects pension contributions of approximately $140 million, up from $62 million in the prior year, and that was partially offset by working capital improvements, including a $51 million collection of a long-term receivable.

As we reported last quarter, ATK called its $400 million in senior 6.75% notes maturing in 2016. Calling these notes resulted in a debt extinguishment charge of approximately $12 million that was reflected in the second quarter results.

ATK partially financed the call in these notes by increasing its Senior Secured Term Loan A borrowing by $200 million. The remaining balance of the redemption was paid from the company's available cash. These actions provide ATK with overall lower cost of borrowings and will increase future earnings per share by reducing annual interest expense by approximately $20 million.

I'd like to take a moment and address each of the 3 business groups. As expected, the Aerospace Group reported a 7% decrease in sales to $310 million compared to $333 million. Lower NASA revenue in the Space Systems operation and lower revenue in commercial aerostructures contributed to this reduction. Operating profit decreased 2% to $37 million, down from $38 million in the prior year. Lower sales revenue contribute to this decline, but that was partially offset by improved operating performance.

Turning to the Defense Group. As shown in the table in the press release and the investor slides, excluding sales and profits related to the Radford facility and a favorable contract resolution in the prior year, Defense Group on an as-adjusted basis reported sales that were up 5% year-over-year at $483 million compared to $461 million. This increase was driven by increased sales volume in the small caliber systems division, which was partially offset by lower sales in armament systems division due to a prior year completion of an international contract. Again, as adjusted, operating profit in the Defense Group was down 2% at $64 million compared to $65 million in the prior quarter. Profit results were driven by sales mix change associated with the completion of the international contract.

In the Sporting Group, sales increased 11% in the second quarter to $275 million compared to $249 million in the prior year. This sales increase was driven by higher volume in both ammunition and accessories. Operating profit for the group increased 8% to $25 million compared to $23 million in the prior year. This increase reflects higher sales volume and lower commodity costs, which were partially offset by a $3 million increase in the reserve for obsolete inventory balances associated with military programs. Absent this charge, margins improved year-over-year.

As Mark said, given our confidence in the business, ATK's Board has declared a 30% increase in its quarterly cash dividend to $0.26 per share. ATK will continue to evaluate its capital deployment initiatives going forward. Although no shares were repurchased in the second quarter, we will continue to update the market quarterly on share repurchases based on our previously announced program of up to $200 million over 2 years.

Now I'd like to provide some additional information on our financial guidance for the full year. Based on our strategic wins, our second quarter financial performance and increased confidence in the year, ATK is raising its full year fiscal '13 sales guidance to $4.1 billion to $4.2 billion, up from our previous guidance of $4.05 billion to $4.15 billion. We now expect the effective tax rate for the year to be approximately 30%, down from the previous expectations of 32%. We're also raising full year fiscal '13 EPS guidance to $7.40 per share to $7.70 per share, up from the previous guidance of $7 to $7.30. This reflects the higher sales expectations, as well as improved expectations around the company's fiscal '13 tax rate.

We will also be raising our full year fiscal '13 free cash flow guidance to a range of $175 million to $200 million, up from the previous $140 million to $165 million, and this partially -- this reflects better performance and improved working capital, which is partially offset by cash flow impacts of the pension -- near-term forecasted pension contributions and associated tax payments as a result of the Highway Bill.

Again, although we are operating in a challenging environment, our first half of the year confidence is strong as evidenced by the significant wins across the business, increased guidance and significant dividend increase.

Mark and I are now ready to -- available to take any questions you might have.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Just wondered with the outlook revision, you mentioned the Defense and Sporting Groups, I just wondered if you could maybe get a little bit more granular on specific programs and products that are different in the new outlook versus the prior.

Mark W. DeYoung

A couple of things there, I guess, this is Mark, that I would mention. We have been very focused on, for the last couple of years, driving efficiency improvement, uptime and operational availability of our equipment in our factories. And I think that is all beginning to pay off. We're beginning to see -- even increased momentum, we did very well last year, we did very well in the first quarter, I think, on some of those initiatives. And I think the momentum of that focus is increasing at our factories. I think we'll see the ability to produce additional small caliber ammunition through efficiency improvement and volume increases at Lake City. And we're working very hard in our commercial ammunition business to ensure that our capacity is delivered. And so I think those are contributing to some of the momentum that we're seeing in the year.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. Anything from a top line perspective that you could point out?

Mark W. DeYoung

Well, those same discussions are going to drive sales, so we're going to be able to ship more volume. We're going to generate revenue on those sales, and with those sales at higher levels comes better margins. You get to the point where we've absorbed our overheads, we've covered our fixed costs, and so the volume is our friend both in revenue generation and in profitability and sustaining margins. We're seeing that in both the Defense business and in the Sporting business.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. And then just on the order side, can you tell us what, from the Lake City win, is in the order number in the quarter? And then maybe what you expect from an order and book-to-bill perspective in the back half of the year?

Mark W. DeYoung

The Army did not issue another order with the win. They issued a contract win. So the orders do not include any future orders on the -- or those are yet to come. So...

Noah Poponak - Goldman Sachs Group Inc., Research Division

When should we see that start to flow?

Mark W. DeYoung

Well, the government's, depending on how their fiscal year money flows, and when they flow, we typically receive an order on Lake City in our fourth quarter. They have not announced any changes to that, so we'll wait and see what they do. But typically, we receive an order in the February, March, timeframe for Lake City.

Operator

And from KeyBanc Capital Markets, we'll hear from Michael Ciarmoli.

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

Maybe just a follow-up on Noah's questioning. What sort of are your expectations for Lake City? I mean, can you give us any other details aside from the big kind of headline numbers we saw, maybe the margin profile, the revenue run rate that you guys are realistically thinking about, given the kind that drawdown of troops and maybe even forced structure cuts in the out years?

Mark W. DeYoung

Mike, first, let me start by saying how pleased are with our win of Lake City, how excited we are about the ability to continue the great relationship we've had with our Army customer. As you know, and I think those who follow the company know, we've been engaged in a significant modernization program at Lake City for several years in taking that facility into the 21st century with modernized equipment, machine tool control equipment in the factory. It's been able to generate for our customer an improved quality product. It's been able to create a sustainable business base for ammunitions industrial base for the future of Lake City. So we're very pleased with our award, we're excited about that. We continue to focus on modernizing the plant and continuing to go forward and generate quality product for our customers. And I'd like to thank the ATK employees there at Lake City that do such a great job and the proposal team that I think did a great job. Going forward, the Army in the course of the proposal, they issued a variety of quantity ranges for which we submitted a proposal. Since we have not received any orders under the new contract, we really don't have a definitive answer to your question in terms of what we might build. We have a backlog at Lake City on our current contract right now of about $700 million, so we'll be executing against that as we go forward in addition to other orders. The orders we receive at Lake City, we typically have almost the 2-year turnaround from order receipt to final delivery, so we expect that relationship will continue. And based upon the budget environment or other decisions, we'll wait and see what kind of volumes are actually ordered on the contract. We simply don't have those facts. We are driving efficiency improvement. We're going to be focused on ensuring profitability from the facility as we have done in the past. We have a great track record, I think, within ATK of being able to deliver on our commitments and drive margin improvement over time, and we'll be focusing all of those things as we continue to operate that plant. But we simply don't have any facts to answer that question with yet.

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

Okay, that's fair. What about -- do you have flexibility in this contract, if there is free capacity? Or as you look to maybe optimize production to maybe run through some commercial volumes or commercial programs to that facility?

Mark W. DeYoung

Yes, we do. In our proposal to the Army and subsequently in the contract they awarded us, that provision was covered. So much as we have done in the past, we've been able to take excess capacity or we've been able to take certain types of ammunition from Lake City which are not demanded or needed by the government. And we have been able to distribute those for sale to law enforcement and into the consumer market. That relationship will continue and, in fact, in our proposal, we discussed that relationship strategically with our customer. They're very supportive of that, and that will continue to happen going forward.

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

Okay, perfect. And then just the last question, I'll jump off. In the Sporting Group, do you guys expect to see any sort of a -- kind of post-Presidential election hangover with sales trending lower or sales falling off the next quarter? Or do you think the momentum kind of continues through the remainder of the year?

Mark W. DeYoung

It's an interesting question. I would like to answer it by broadening the answer just a bit. If you look at our Sporting growth, we have a long-term CAGR growth of over 10%, well over a decade. We went back and looked at the performance of the Sporting Group since ATK acquired it back in December of 2001. And we've sustained growth through Presidential elections, whether it be Republican or whether it be Democrat. We have a very nice ability and a very nice track record to drive revenue growth in that business through our portfolio, through the growth of the accessories focus, through the capacity expansion we put in place and through our ability to be innovative and present new products to our customers. So it's very interesting when you look back at ATK's performance. It is not nearly as cyclical as you would believe. It has strong year-over-year growth over an extended period of time. I don't know exactly what will happen. We'll all know next Wednesday, Tuesday night, I guess, what happens in the election. We do not anticipate a big swing necessarily in demand either way. The shooting sports has grown tremendously over the past several years. There are more women shooters entering the sport. There are more youth shooters entering the sport. For the first time that I can remember, you have shooting sports television programs on major networks like A&E, for example, the History Channel. Other major channels are covering the shooting sports in a way to show how fun that sport can be. And we've never seen that kind of main media coverage before. So I think there's a ground shift going on in the shooting sports, and we're optimistic that'll allow us to sustain our growth in that segment regardless of which party maybe in power.

Operator

From Cowen and Company, we'll here from Gautam Khanna.

Gautam Khanna - Cowen and Company, LLC, Research Division

Mark, I have 2 questions. First, when you became CEO a couple of years back, you'd talked a little bit about portfolio shaping. And I wonder how you're thinking has changed kind of given the evolving landscape both of NASA, DoD and even in the commercial space.

Mark W. DeYoung

Yes, we focused on this portfolio for the last couple of years. You've heard me say since I got this job, one of our first initiatives was to shore up the performance of our portfolio. And I think we've done a very good job in doing that. In looking at particular business units that we're struggling in consolidating our organization structure as you recall, we had a structure which was 4 groups, we consolidated that portfolio structure to 3 groups. I mentioned previously that, that consolidation would generate north of $20 million a year in savings. We are harvesting and we're on track to realize those savings in our new Defense Group. So in some ways, we've focused on performance in the portfolio. We've rationalized the portfolio organizationally, and we will continue to look for opportunities to create shareholder value by appropriately managing this portfolio to be able to create value from it. We're doing that, we're looking at those options and we'll continue to look at those options.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And just a follow-up perhaps on the capital allocation, could you maybe talk about your expected pension contribution next year? And perhaps why we didn't see an even higher dividend increase given the payout ratio, still lags it appears or any buyback in the quarter?

Mark W. DeYoung

Okay. Neal, do you want to take those and I'll jump in?

Neal S. Cohen

Sure, sure. This is Neal. In regard to the cash pension contribution next year, as we said, we've rolled through the assumptions in our plan with regards to the newly enacted highway bill. So we're still determining the final numbers for next year. We would anticipate that our pension contributions next year under the highway bill provision would be substantially lower than this year, probably in the $100 million or -- range. So -- but we will still update you as we get better estimates based on interest rates and market conditions as we lock those numbers down for 2014. So with regard to cap deployment, clearly, we're very focused on, and we understand how important cap deployment is to the shareholders. And so we're very pleased that given the confidence in the business, the results that Mark talked about, that we are able to make a significant increase in the dividend to -- by 30% to $0.26 a share. That's about a 1.8% payout on the current value of the stock. We're going to continue to evaluate that. There are a number of uncertainties in the market today, and we're very mindful of those and not the least of which is sequestration. And hopefully as some of the clouds clear with regard to some of those uncertainties that will give us better forward visibility to continuously come back and revisit that assumption in fiscal '14. So that would be part of that in cap deployment. And as far as share repurchase, we're going to continue to work and keep the market up-to-date on a quarterly basis with regard to our share plan and our share program of the -- up to $200 million over 2 years.

Gautam Khanna - Cowen and Company, LLC, Research Division

But to that point, I thought previously, you'd indicated you would do it ratably over 2 years, the $200 million, which implies $25 million a quarter. And you did that, I believe, last quarter, the June quarter, so I just am wondering why that didn't happen in this quarter. Did it happen subsequent to the quarter? Any update there?

Neal S. Cohen

Yes. I'm sorry, I can't provide you more of an update than what we're really -- we are very much going to continue to -- as far as the share repurchase program, we're going to continue to work very closely to update the market on a quarterly basis. And we're not going to be able to sort of give forward-looking views on our timing on share repurchases other than the overall scope of the program of $200 million over 2 years.

Operator

Next, we'll here from Howard Rubel with Jefferies.

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

I just wanted to follow-up a little bit on cash flow. It appears as if the renegotiation of the Airbus 350 contract was an important element in the improvement in the long-term receivables, is that fair? And then just related to that, are there other milestone improvements that occurs as a consequence of that contract change?

Neal S. Cohen

We'll -- this is Neal. We're not -- we really can't be in a position where we comment on individual contracts. We're very pleased that in the quarter, we were able to collect $50 million against the long-term receivable. We're very focused across the board on working capital and the opportunities to continuously focus on and improve working capital. And so you'll -- we will be working closely to update you on further actions we'll be taking to focus on working capital including other long-term receivables. And that is certainly an area of high focus on the part of the management team.

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

Maybe I could just try a little bit differently. Is this change in this $50 million indicative of a further acceleration and pay down of that long-term receivable without mentioning where it might have generated from?

Neal S. Cohen

One of the things that we did mention in our guidance in upping our cash guidance to $175 million to $200 million is we do anticipate further improvement in working capital including receivables throughout the balance of the year. So we built that in, that's part of one of the drivers that is increasing our cash guidance for the year by $35 million versus our prior guidance.

Operator

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

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

My first question is on the extension of work on the A350. Early in the program, we had some issues with regard to performance on that and then things stabilized. And now we have a significant extension presumably after you've gained a lot of pricing knowledge or cost knowledge, I should say, which should influence pricing. So could you give a little more detail on how the outlook for that program looks now that you have that big extension? And then just very specifically from an accounting standpoint, is this all being considered one contract, or are we still just working on the first contract?

Mark W. DeYoung

Okay. So Joe, this is Mark, let me jump into the first part of your question. In terms of how the A350 program is progressing, yes, indeed, we did make an adjustment in the booking rate early on in the program. That booking rate has been sustained since that time with no additional issues, which have been reported. The program is executing actually very well. We think there's continued opportunity for improvement, frankly, to that booking rate and to the performance of that program continue to focus on that. And we'll continue to strive for that. We delivered 8 full ship sets. The parts are coming out very well, the quality is good. Our customers are very pleased with our performance. I think our team in Utah, at our new commercial Center of Excellence is doing great work. Much of the equipment we brought into this very modernized state-of-the-art facility is up and running producing quality parts. So we're very pleased with the performance that we have on the program and some of the improvements that we've seen through our focus on the Commercial Center of Excellence for aerostructure. So from a programmatic perspective, the program is doing well, and we're executing as planned. The -- one of the things we had said, Joe, along the way, was our best ability, I believe, to grow ATK's capability and therefore, our revenue and profitability in the aerostructures is to perform. So we've been very focused on performance. I believe that performance was directly attributable to the award of the A400 from Airbus to work on wing structures for that aircraft. Their confidence in our ability to produce these high-tech, highly structured parts, I think, has increased with our performance on the A350 program. And as I mentioned previously, that's how we'll get organic growth in this business and win new business, and A400 is a testament to that. So we continue to focus on performance and growing that business. And so I think we're in pretty good shape there, and we're excited about this next award. Also in terms of the extension and in terms of the press release we issued talking about our agreement with Airbus on the A350 for up to another 800 planes, we're excited about that. That gives us a long-term program. Our performance to date is against one program. We're working on our first contract. We're continuing to execute against that contract. And this extension typically for the time of duration we're talking about, which is long-term programs, will likely have more than one contract that we’ll book our EAC to and manage. And that's how we see that unfolding.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

So are you going to have -- this quarter, are you going to have a pickup in the EAC since it's assigned, I guess, after the end of your prior quarter? Or how should we think about that?

Mark W. DeYoung

No, Joe. We're in the process right now of going through all the analysis to answer the question you just asked, and we'll complete that analysis here in the third quarter and be able to respond to that question, I'm sure, when we chat next. So this, for us, is a third quarter process we're going through. That order came right at the end of the second quarter. We booked an incremental value on that order of about $250 million that we announced. We are definitizing the rest of the agreement with the customer, and this is probably going to be a third quarter discussion.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Got you, okay. Second question is 6, 9 months ago, you guys were talking a lot about the -- an adverse mix shift in civil ammo. And looking at the margins performance there x some of the items, that's kind of stabilized notwithstanding the inventory write-off there. And I'm just wondering what you're seeing in terms of that mix shift?

Mark W. DeYoung

Sure. That's a good question. That mix shift, as you mentioned, began to occur about this time a year ago, and it continued through the third and the fourth quarter. We are seeing some stability in our mix. We're also seeing efficiency improvement in our operations, which are helping drive margin improvement. We also have a price increase that we put into effect with a drop-dead date of September 1 on our orders. So it really took effect across all orders September 1, so that is now in place. That's a mid-single-digit price increase across generally, the portfolio of consumer and commercial products. I think if you look at the adjustment that was made on the inventory change, that is associated with soft goods tied to military programs, which is a very small component of our Sporting business. It equated to about a 1% impact on the EBIT rate. So less that, I think we are on track to get back to where we discussed previously of making sure that this group generates double-digit EBIT, so we're quite confident in our path to that at this point in the year.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Okay. And then just one more on the cash deployment balance sheet side of things. I might look at this from a different angle. You guys have been retiring debt seemingly with most of your incremental dollars of cash, and then obviously, we have the nice dividend hike this quarter. But looking at your net debt, it's now less than 2x EBITDA. What's the right level of debt for ATK? I understand this it somewhat of a function of EBITDA, and we have an uncertain time going forward, but how should we think about how you're managing -- what type of debt level you're managing the company towards?

Mark W. DeYoung

Let me start that, and I'll ask Neal to free to contribute. If you look back the last couple of quarters, in fact, if you look back the last couple of years, you'll find that I had said that we were going to focus on improving our liquidity, reducing our exposure on debt and retiring some of the higher-cost debt. So the 2014 notes that we retired in this quarter were 6.75% interest notes. With the cost of money today, obviously, that was a higher interest rate. We were able to do that for a reasonable charge and generate an interest savings of about $20 million or $0.40 a share. So clearly, that was the right thing to do. Clearly, it was the right kind of adjustment to make in terms of our cost of debt. The other thing you mentioned with the uncertain times that we're in. And because of that uncertainty, we've been focused on ensuring liquidity and ensuring that we're able to reduce our debt so we can weather any fluctuations that may come our way, so that has been a focus. And I'm pleased actually with what we've gotten ourselves to in terms of the ratio. Neal, do you want to add more to that?

Neal S. Cohen

Well, I think what we did in structuring our purchase is we created, we believe, a lot of optionality for the company. As we noted that we -- although we retired our most expensive debt, we also borrowed $200 million, but that borrowing is at a very low-cost. It -- there's no prepayment penalties. So the opportunity as the company continues to see some of the uncertainty resolve itself, there are opportunities to modestly reduce that, but at the same time, we have lots of flexibility to support the business as good investment opportunities present themselves in terms of opportunity for us to grow our product lines, invest in the future of the business. So I think we have a lot of good flexibility and optionality right now to basically further reduce debt, if necessary, as well as support the cash flow needs of the business to appropriately and reasonably invest in the future of the business. I feel very good about the balance of where we are today. And there's really not a lot of additional high-cost debt that we can get at, at this point. And so I feel like we positioned the balance sheet well to be flexible given some of the uncertainty. As the uncertainty resolves, we'll be able to continue to refine the balance sheet to basically make sure our cash is going to where the best opportunities are including investing in the business, as well as cap deployment.

Operator

Next, we'll hear from Robert Spingarn with Crédit Suisse.

Robert Spingarn - Crédit Suisse AG, Research Division

Mark, could talk a little bit about bookings on a forward basis? You've had pretty solid results here for the first 2 fiscal quarters. What are you thinking happens under the CR for the remaining 2 quarters of the year?

Mark W. DeYoung

Yes. We've obviously watched that very closely as have other companies in terms of the risk of sequestration. We are pleased with the continuing resolution, which was put in place, which gives some buffer to the near-term risk. We're pleased with the words that we've heard out of the current President regarding sequestration. We're pleased with the focus, I think, which is bipartisan on making sure that sequestration is done in a way which is more rational and reasonable, if done at all. So we're pleased with all of those moves. We believe we'll be at a book-to-bill ratio of approximately 1 for the entire year, which we're happy with. We had some concern, of course, with uncertainty this year going into the year. We had a Radford competition to be decided. We were disappointed in the outcome. We had a Lake City competition to be decided. We're very pleased with the outcome. We're pleased with the SLS win of the advanced booster, which secures our position on next-generation space exploration. Space exploration has been funded at $1.8 billion, securing the future of SLS. Our ability to design that advanced booster with a composite case with advanced propellant and advanced nozzle, I think is going to get some real performance enhancements which NASA is going to be very pleased with. And it positions us, I think, as a very strong competitor on our future competition in SLS. We're very pleased with AARGM, getting AARGM into production, getting it certified by the Navy and being able to drive that into production has been a focus of ours. We have some challenges in that program a couple of years ago. Our execution significantly improved and our risk has significantly been reduced, so we feel good about that, and that's going to create some additional booking momentum for us. That's a long-term program that has the potential for $1 billion in the budget. So there's been a lot of moving parts for us this year. '13 was a pivotal year, I believe, for ATK. We mentioned that early on. It was a bit of a reset for us in terms of some of the strategies we're pursuing and some of the costs we were investing. And we're quite pleased with our book-to-bill ratio. And as I mentioned, we believe we'll approximate 1 for the year, which we're pleased with that as well.

Robert Spingarn - Crédit Suisse AG, Research Division

Well you just mentioned space a moment ago, talked about some of the activity there. Do you think we've seen between the A350 to composite business and the space side, do you think we've seen -- we saw trough on a revenue basis in the first quarter at $295 million?

Mark W. DeYoung

Well, we knew that this year in '13 was going to be a challenge for us. We were coming off the completion of shuttle and cleaning up the shuttle program. At the same time, of course, we had the ramifications to the cancellation of constellation, which is rippled through what otherwise would have been our plan and our forecast for that business. We had high investment in the Aerostructures business in capital to be able to get that into a production-stable environment, which we have now entered. Now we have the rate ramp-up initiative in front of us. So from a global perspective, I think many of the challenges in the Aerospace Group are getting behind us. And I think going forward, if we can continue to execute and if we can continue to win programs like the 400 from Airbus and execute against the contracts we currently have, I believe our Space business is stabilized. Previously, I mentioned the number of the $255 million to $250 million range a year. I think we have stabilized at that range so from that view, I think the bleeding has stopped. I think some of our commercial space opportunities that we have with partners like Orbital and others are very interesting and we're very optimistic about the ability to continue there. Our small sat programs, we've had a few challenges there, but we're winning new business. We've won some significant classified business that we can't talk about, but it's exciting for us. So I do believe that we're beginning to bottom out on some of the challenges that we faced in that group, and we're excited about having stability and then pursuing growth.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. And then just lastly, as we think about the CR and the -- essentially the extension of '12 funding for another 6 months, which, of course, coincides with your fiscal year, what are the watch programs when we think about the President's request, which is essentially the budget of record so far for '13. What should be -- we should watch in terms of meaningful changes in program rates between the March quarter and then the subsequent quarter, which would, in theory, be the first '13 quarter?

Mark W. DeYoung

Well, one of the nice things about ATK's portfolio is we're generally platform-independent. So the big exposures, the big dollar bill payers are not high exposures for a company like ours. But I would think that Joint Strike Fighter is a program we obviously have to watch. If there's anything nice about that for us, we're just ramping up Joint Strike Fighter, so even a cut in total volumes probably allows us to continue to grow the revenue generation profitability from that program. But clearly, I think within our ATK portfolio, that's a watch program. I think on the munitions side, we need to just keep our eye on that. I had a question last quarter where I was asked about the inventory balances that the military may have in ammunition. And I stated in the last quarter that those inventory balances are probably where they should be. And that could allow for some focus to be given on potential reduced ammunition procurement. So I think we need to watch that in terms of the volumes that are awarded in ammunition. So I think those 2 things are probably the 2 things that come to mind when you ask a question about what are the watch programs, I'd say it's really ammunition and Joint Strike Fighter would probably be one -- a couple of our top 2.

Robert Spingarn - Crédit Suisse AG, Research Division

Anything on the precision weapon side?

Mark W. DeYoung

Precision weapons, we're really excited, the fact that the Army recognize our innovation and our ability to produce affordable innovation in the mortar program. So our advanced precision mortar being recognized as one of the Army's inventions of the year was exciting for us. It's not the first time we've been recognized with an award like that, by the way, so we're pleased to be part of that. Also PGK on the precision side continues, by the way, to have support for 155 artillery to make that dumb artillery guidable. That continues to be well-supported. If there's a risk on the precision side, I would suggest that may be in advanced precision mortar round, which by the way, we really haven't got a lot of volume on that program yet. So it could be watch program but it's not a significant program for us. And so that one, I think, may have some risk in terms of the future of precision.

Operator

And from Monness, we'll hear from Herb Hardt.

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

Question is whether there is anything else pending with NASA?

Mark W. DeYoung

Okay, no. I mean on the NASA front, Herb, that has really settled down. I had major, what I call "worry beads." I had worry beads I was worrying about with NASA probably 2 years ago and even last year. That has really settled down. There's good bipartisan support. There was good support bipartisan for the funding of NASA. As I mentioned, that exploration program's being funded at $1.8 billion was consistent with the request and consistent with the funding needed to support industry. That seems to have settled into a position going forward. Our role on the award we received in terms of next-generation booster for support of SLS seems to be settled down, and we're executing against that. We will static test our 5-segment booster this spring at our facility in Utah. The fly out test is scheduled for 2017. We're on track for that so we're excited about the advancements we can bring to that propulsion system. And I think NASA has settled down in terms of the budget and in terms of our scope.

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

And the other question is in the past, you've referred to the new offices you opened overseas. Any results coming along from that?

Mark W. DeYoung

Yes. Frankly, we're quite excited about that. The Middle East has proven to be an area where we've been able to compete and win. We secured a substantial order last quarter. It was the largest -- one of the largest international orders this company has ever achieved. It was achieved at the end of the last quarter -- the end of the first quarter with a very significant international order in the Middle East. So we believe now we've got the right kind of focus in the right regions with the right people, and we are seeing some international growth from that. The challenge, of course, I would mention, is that the world's in a bit of a financial and political turmoil, and that is the concern that we have about international growth, is the financial stability in international markets and the turmoil in the Middle East, which could either hurt or help a company like ours. But to date, we're pleased with our success there.

Operator

Next, we'll hear from George Shapiro with Shapiro Research.

George Shapiro

Just a couple more strategic questions. You obviously increased your dividend quite a bit, but your dividend yield's still a lot lower than many of the other companies. I mean, do you have any objective as to how much you'd like that to be? Or do you have a payout ratio objective that you could share?

Mark W. DeYoung

Yes. This is one of those funny things in life, George. I typically and often say no good deed goes unpunished. So we increased our dividend by 30% and some will say it should have been more. A couple years we had -- ago, we had a dividend rate of 0. So I think we're making good progress on that as we go forward. We would like to be able to get to the point where we can offer a competitive yield with our peers. As Neal mentioned, we're driving our financial flexibility to allow us to have optionality to address that kind of a discussion as we go forward. I was pleased with the 30% increase being supported by the Board going forward. We'll continue to look at that. We recognize where our yield is compared to some of the bigger peers in the space and others in the space. And we're going to do the work that we can to improve our working capital, to grow the business, to generate cash and allow us to continue to compete not only on our programs but also in delivering shareholder value. So we're very attuned to that, and I believe we're making progress.

George Shapiro

Okay. No, you definitely are. And then the other question -- your Sporting and Ammunition business is a pretty attractive business. I mean, if the Sporting part of it was a standalone business. You'd obviously get a lot more value than what you're getting within the company. Now I know it's hard -- it would be hard to separate because it's kind of linked a lot to the Defense business. But have you given any thought to how you might kind of be able to better get that valuation?

Mark W. DeYoung

Of course. Of course, we've looked that and recognized what you have said, and there are some linked areas where we do have some benefits back and forth, and we've analyzed this portfolio in terms of that. We've looked at the opportunities we have within the portfolio. And so, yes, yes, George, we're aware and in tune with that. We continue to monitor opportunities in the market and in the portfolio to look at how we can best position our assets to create the greatest return. I can't get into prognosing nor do I want to get into speculating today. But we are very attuned to those issues. We're focused on them, and we're working through what we believe are the best ways to create shareholder value, and at the same time, ensure that we have strong capable entities competing in their respective markets.

Operator

And we do have a follow-up question from Gautam.

Gautam Khanna - Cowen and Company, LLC, Research Division

Mark, you just mentioned in response to George's question, targeting the competitive dividend yield over time. Maybe could you comment on your appetite for M&A and perhaps an early read on fiscal '14 CapEx, just to frame some context on what your uses of cash might be?

Mark W. DeYoung

Okay. On the M&A front, let me just start. I think Neal gave a very good rundown of what we've tried to do with the balance sheet, how we positioned ourselves for what we call optionality, being able to ensure we have options, whether that be in dividend increase, whether it be in CapEx for strategic growth opportunity, whether it would be in affordable and strategic M&A. So part of what we've attempted to do over the last couple of years is put the company in a position where we actually have the ability, the strength and the liquidity to have options. And so we constantly look at those options. Again, we're pleased with the dividend increase from that view in terms of how we've looked at cash and deployment of that cash. We're pleased with the structural changes we've made to the company and operating under a streamlined company this year, it's going very, very well. It's been very well-received by the customers, the employees and I think you'll see it in the Defense Groups deliverable results and sustainment of good margins. We're pleased with that. From a CapEx perspective, we are coming off some of our major investments in the aerostructures, commercial aero, as well as investments have slowed a little bit. You've seen an impact from that on the revenue, but you see an improvement from that in reducing CapEx to support cash, so we're pleased with that. From an M&A perspective, we're really focused on looking at value. We're focused on ensuring it's strategic. There's a lot of volatility in the markets now. We're going to be very attuned to what's coming on the market and what is available and what are the strategic and what kind of accretion and benefit and strategic role it could play. And we will look at those as we look at all of our options. We also have the $200 million share repurchase that Neal addressed earlier that we're focused on as we go forward. So I think we have several strategic plays in terms of cap deployment and in terms of ways to position the company for that optionality so that we can make decisions which are in the interest of the shareholder and really, that's our game plan.

Operator

And gentlemen, there are no further questions at this time. I'll turn the conference back over to you for any additional or closing comments.

Mark W. DeYoung

Well, thank you, everyone, for joining us. Hopefully, everyone is safe up in New York and in the Northeast from that storm. We appreciate your time today on the call and your attention and support of the company. Thank you very much.

Operator

Ladies and gentlemen, that does conclude today's conference. Thank you for joining.

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