By Calvin Biesecker

ATK [ATK] yesterday posted strong gains in its net income in the first quarter driven in part by higher sales of ammunition for the military, strong performance in its new Security and Sporting group and improved operating efficiencies, despite posting a scant overall decline in sales.

Net income increased 8 percent to $74.8 million, $2.24 earnings per share (EPS), from $69.5 million ($2.12 EPS) a year ago, handily beating consensus estimates by 26 cents EPS. The net income was a record for the company in a first quarter. Margins increased 20 basis points to 11.1 percent despite higher pension expenses.

Sales were down less than a percent, still around $1.2 billion as growth in the Armament Systems and Security and Sporting segments was narrowly outweighed by double-digit declines at the Aerospace Systems and Missile Products segments.

Still, with the strong earnings gains in the quarter, combined with a $22 million tax benefit that will show up in the second quarter, stronger than expected margin improvements at Armament Systems, and cost management initiatives, ATK raised its earnings guidance for the year. The company now projects earnings to between $8.50 and $8.80 EPS versus prior guidance of between $8 and $8.50, an increase of 40 cents at the mid-point.

Several analysts on yesterday’s earnings call indicated that the guidance appeared overly conservative. Company officials said they would provide updates throughout the fiscal year, noting that they are very “encouraged” but that there are some uncertainties related to NASA spending on its space program.

Congressional support for accelerating NASA’s space exploration program as expressed in both the House and Senate authorization bills bodes well for the company’s long-term solid rocket business, said Mark DeYoung, ATK’s president and CEO. These prospects led the company to narrow its sales guidance for the year at the high end of the range. ATK is forecasting revenues between $4.8 billion and $4.9 billion.

For the quarter, Security and Sporting was the top performing segment, boosting sales by nearly 50 percent and operating profit almost 11 percent. Most of the growth came from ATK’s recent acquisition of Blackhawk Industries, a provider of tactical accessories for the law enforcement and sporting recreation markets. The company said that organic growth was up slightly in the segment.

The Armament Systems segment, which posted a 16 percent jump in sales and a 9 percent increase in profits, benefited from growth in military small-caliber ammunition, energetics products and the precision mortar program.

The Aerospace Systems group reported double-digit declines in sales and profits on less work on the Space Shuttle Reusable Solid Rocket Motor program, the Minuteman III ICBM, and the cancellation of a government satellite program.

Missile Products also posted a 12 percent decline in sales on less volume on NASA program and the Standard Missile-3 program. Operating profits held steady as improved operating efficiencies and cost management efforts offset the impact from fewer sales.

Free cash in the quarter was a $126.8 million outflow, but for the year ATK held its fee cash guidance at between $275 million and $300 million. Bookings in the quarter were $1 billion and backlog at the end of the quarter was $6.7 billion, down $400 million since the end of FY ’10. ATK said that orders are on track this year to be in line with sales.