A $25 million after tax charge associated with ATK’s [ATK] Thiokol business and lower margins on commercial ammunition led the company yesterday to post lower third quarter earnings while sales dipped a bit.

Meanwhile, the diversified aerospace and defense supplier said it will trim its operating group structure this spring, moving to three business segments from four, to address downward defense budget pressures.

The new group structure, effective at the start of ATK’s fiscal year 2013 on April 1, will consist of a Defense Group, an Aerospace Group and a Sporting Group. The Defense Group, which will be led by Mike Kahn in Baltimore, Md., will combine the current Armament Systems and Missile Products groups. Kahn currently heads the Missile Products segment.

The company expects the restructuring to result in a charge of between $6 million and $10 million in the fourth quarter, although this is factored into its guidance for FY ’12, Mark DeYoung, ATK’s president and CEO, said on yesterday’s earnings call.

Net income in the quarter slid 29 percent to $49.7 million, $1.51 earnings per share (EPS), from $70.2 million ($2.09 EPS), with the Thiokol-related charge chopping 77 cents EPS from the results. Analysts were projecting $2.03 EPS, which ATK beat handily minus the charge.

The $25 million charge stems from a previously disclosed lawsuit related to the manufacture of LUU flares prior to ATK’s acquisition of Thiokol in 2001. The charge, combined with the lower commercial ammo margins, drove a 180 basis point drop in overall margins to 9.4 percent.

Sales in the quarter fell a percent to $1.1 billion while orders totaled $701 million. Backlog stood at $6.1 billion at the end of the quarter, down $600 million since the end of FY ’11.

The LUU charge combined with continued pressure on margins in ATK’s commercial ammunition business led the company to lower its earnings guidance for FY ’12 to between $7.65 and $7.75 EPS versus previous projections of between $8.50 and $9 EPS. Sales are expected to be $4.6 billion, which is at the low end of the previous guidance, due to delays for some Armament Systems orders, said Tom Sexton ATK’s interim chief financial officer (CFO).

The company’s free cash flow for the year is still expected to be in the range of $225 million to $250 million. The company’s strong cash flow led it to announce a new $200 million share repurchase authorization over the next two years and to maintain the quarterly dividend at 20 cents per share.

Among ATK’s several announcements yesterday was the naming of a new CFO, Neal Cohen, who will join the company on Feb. 13. Cohen most recently was president and CEO for Laureate Education, a global university network, and he also spent 16 years with Northwest Airlines and U.S. Airways, including time as CFO.

In an interview on Wednesday, DeYoung old Defense Daily that he believes Cohen’s work in the airline industry will help ATK with its work in commercial aerospace, where the company provides composite parts to the Airbus A350 passenger plane that is in development.

In the third quarter, the decline in sales was driven by lower sales in the Aerospace and Armament Systems segments, which were down on lower NASA work, no modernization funding at the Radford Army Ammunition Plant, reduced modernization funding at the Lake City Army Ammunition Plant, and lower sales of medium-caliber guns.

Sales were up 17 percent in the Security and Sporting group but retail customers, just as they did in ATK’s second quarter, continued to favor lower-priced ammunition, which carries lower margins. That led to a 25 percent decline in operating profits at the group, the only segment to report lower income.

In addition to the lower margin product sales, higher commodity costs impacted operating earnings at the Security and Sporting group.

ATK won’t initiate guidance for FY ’13 until it closes its current fiscal year but the company did offer some general highlights, which anticipate the difficult environment. The loss to Britain’s BAE Systems last year to operate the Radford Ammunition Plant will take $170 million out of sales next year and additional pressure will come from lower volume for NASA and military ammunition.

DeYoung said that while the decrease in the military’s force structure will likely lower sales of shoulder-fired small-caliber ammunition in the coming years, how much downward pressure will depend on “inventory balances” and changes in “training consumption,” areas where clarity is currently lacking.

The company expects to do $320 million with NASA this FY ‘12, dropping to $275 million in FY ’12,  when it believes funding will stabilize as the agency’s Space Launch System program solidifies.

Despite the budget pressures, DeYoung sees some bright spots for the company to help mitigate the difficult revenue environment. One area is the company’s continued focus on affordable precision weapons.

The Advanced Anti-Radiation Guided Munition (AARGM) being developed for the Navy continues to make good progress in flight-testing and DeYoung sees this moving from a $30 million to $40 million business to $100 million-plus annually in a few years, he told Defense Daily. Sales from AARGM were up in the third quarter.

DeYoung is also pleased with progress on several other emerging Army precision weapons, including the Precision Guidance Kit that integrates a guidance system onto “dumb” artillery rounds, and the XM25 individual semi-automatic airburst weapon. So far, 13 XM25 units have been delivered for field-testing, some of which have been used in military operations, and another 36 will be delivered in the next year, he said.

PGK and XM25 are maturing and DeYoung sees sales for these growing over the next few years.

ATK’s work on the Advanced Precision Mortar Initiative also continues to mature, although its development still lags behind PGK and XM25. ATK still sees this precision mortar program gaining sales momentum in the next several years, DeYoung told Defense Daily.

As for the new business structure, Aerospace Systems will continue to be led by Blake Larson and the Sporting Group will still be headed by Ronald Johnson. Karen Davies, who head Armament Systems, will report to Kahn in the Defense Group.

In addition to streamlining operations and reducing costs, DeYoung said the new Defense Group will “strengthen ATK’s brand in the defense industry” and better align resources and investments for long-term growth, including international business.