By Calvin Biesecker

Alliant Techsystems [ATK] yesterday reported higher second quarter net income as a result of a favorable tax settlement, as sales and operating profits were flat.

Based on its ability to continually generate strong cash flow, ATK announced its first quarterly cash dividend, 20 cents earnings per share (EPS), that will be payable next March.

“Delivering long-term value to our shareholders is a top priority of the company,” Mark DeYoung, ATK’s president and CEO, said in a statement. “The demonstrated strength of ATK’s cash flow provides us the confidence and opportunity to initiate a quarterly cash dividend while maintaining the financial flexibility and capability to pursue profitable growth.” He said during the company’s earnings call that ATK remains committed to a balanced capital deployment strategy that also includes acquisitions, share repurchases, and investing for organic growth.

J.P. Morgan defense analyst Joseph Nadol said that while the new dividend is below that of large defense companies in terms of yield, “it is a good start.”

Free cash flow in the quarter was $86 million and guidance for the year was maintained at between $275 million and $300 million.

Net income increased 34 percent to a record $97 million ($2.91 EPS) from $73 million ($2.19 EPS), beating analysts’ estimates by 11 cents. The higher income was due to a lower tax rate stemming from favorable settlements of audits for the company’s FY ’07 and FY ’08 tax returns, resulting in a $22 million benefit.

Operating income at the segments was basically flat at $134.4 million on sales of $1.2 billion, which were the same as a year ago. ATK said that $15 million in higher pension expense was offset by continued margin strength due to cost management and efficiency improvements across the company. Margins were 11.1 percent, down just 10 basis points from a year ago despite the added expense.

Armament Systems was ATK’s top performing segment in the quarter, posting an 83 percent spike in operating income to $53.5 million driven by a 7 percent gain in sales, a favorable legal settlement, and an easier comparison to a year ago when the segment was hit with non-cash charges related to the early retirement of assets at its TNT production facility.

The income gains at Armament Systems were essentially wiped out at ATK’s other operating segments, all of which posted earnings declines. The Security and Sporting segment saw its profits fall despite a double-digit sales increase due to a tough comparison from a year ago when it benefited from a reversal of bad debt reserves.

Both the Missile Products and Aerospace Systems segments posted declines in sales and profits.

Despite a loss to Raytheon [RTN] in August to move forward with final design of the Army’s Excalibur 1b 155 mm precision artillery shell, DeYoung said that ATK remains focused on a “parallel path to affordable precision.” He added that the Excalibur munition is expensive and that lower cost solutions exist in line with Defense Secretary Gates’ call for the 80 percent solution at a low cost, citing ATK’s work on the Advanced Precision Mortar program and Precision Guidance Kit as examples.

Based on its solid performance so far this year and better visibility into its NASA-related business for the rest of the year, ATK raised its earnings guidance to between $8.90 and $9.10 EPS versus the previous outlook of between $8.50 and $8.80 EPS. Sales are still expected to be between $4.8 billion and $4.9 billion, essentially in line the previous fiscal year.

Backlog at the end of the quarter was $6.6 billion, down from $7.1 billion at the end of FY ’10.