By Ann Roosevelt

ATK [ATK] yesterday posted a strong start for the first quarter of its fiscal year driven by double-digit performance in its Armaments Systems segment, leading to greater confidence in the year and improving the full-year outlook.

Net income for the first quarter of fiscal year 2010 ending July 5 was up 28 percent to $69 million, with earnings per share (EPS) at $2.09, 35 percent growth over the $1.55 a year ago.

Sales for the quarter rose 7.5 percent to $1.2 billion, driven by continued strength in military ammunition, a strong demand for commercial ammunition products and new international ammunition sales, which partially offset expected lower sales in the Space Systems segment.

Based on the strength of the first quarter performance and with a strong outlook for orders and better visibility into the rest of the year, ATK is raising its full-year fully diluted EPS guidance to a range of $8.45-$8.60. The company also is raising its full-year sales guidance to a range of $4.80-$4.85 billion. This follows increased guidance announced at the end of the fourth quarter in May.

"We are now on track to deliver full-year earnings growth in excess of 15 percent, ATK Chairman and CEO Dan Murphy said in an earnings call. "The strength of ATK’s commercial and military ammunition businesses, coupled with long-term opportunities in aerostructures, precision weapons, and tactical accessories will fuel ATK’s continued growth."

In the Armament Systems segment, sales increased 25 percent to $552 million, compared to $442 million a year ago. The recent acquisition of Eagle Industries, now the Tactical Systems division, contributed $13 million of sales in the quarter.

Organic sales increased 22 percent in the Armaments group. The increase reflects significantly higher sales volume in commercial ammunition, increased modernization funds, and sales associated with the company’s non-standard ammunition contract for Afghan Security Forces, partially offset by lower sales volume in medium-caliber ammunition.

Mark DeYoung, senior vice president and president of ATK Armament Systems, said the group is executing its strategy of expanding capabilities and penetrating new markets.

There’s an unprecedented demand for the commercial ammunition product, he said, using new materials, new designs and new technologies leading to new, affordable products.

On the military side, troop training and readiness are the drivers for ATK small caliber military volume ammunition, not combat operations.

The addition of 21,000 new troops for Afghanistan will expand the customer base for mission essential tactical gear provided by the Tactical Systems division.

Also, the segment is performing well on the $87 million international small non-standard munition work for Afghanistan, and is well positioned to win an approximately $500 million multiyear award to continue supplying the ammunition.

"In an era of uncertainty, we believe demand will remain solid for military and law enforcement products," DeYoung said.

Earnings at Armaments Systems before interest, taxes, and noncontrolling interest (operating profit) in the first quarter rose 39 percent to $61 million compared to $44 million in the prior-year quarter, reflecting increased sales volume and improved profitability in both commercial ammunition and medium-caliber ammunition. These were partially offset by higher pension expense.

In the Mission Systems group, first quarter sales rose 6 percent to $293 million from $277 million in the same quarter a year ago. The increase reflects higher sales in commercial aircraft structures, precision weapons, and military composites, partially offset by lower sales volume in defense electronics, special mission aircraft, and tank ammunition.

Operating profit of $33 million remained steady from the prior-year quarter. The operating profit on increased sales volume was offset by higher pension expense.

As expected, first quarter sales in the Space Systems group declined by 11 percent to $364 million compared to $407 million a year ago. The decrease reflects the expected drawdown of the Minuteman III program and the termination of the Kinetic Energy Interceptor. Operating profit for the group rose 14 percent to $41 million, compared to $36 million in the prior-year quarter. The increase reflects the absence of $15 million of charges in the prior-year quarter partially offset by the draw down of the Minuteman III program and higher pension expense.

ATK continues to expect to generate free cash flow of $110-$130 million in FY ’10, reflecting a $150 million pension contribution made in the first quarter of FY ’10.