Orbital ATK Inc.'s Revenue Growth Stalls Out

By Markets Fool.com

Image source: Courtesy of Orbital ATK.

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Orbital ATK (NYSE: OA) reported preliminary second-quarter results before the market opened on Wednesday. The company is currently undergoing an accounting review for a contract in its defense systems group, which is causing it to delay its annual report and limiting it to reporting unaudited second-quarter results.

Speaking of those results, the quarter was quite mixed. Revenue slumped due to softness in the company's commercial satellite product line, while earnings soared thanks to improving margins. Those mixed results forced the company to adjust its outlook for the full year.

Orbital ATK results: The raw numbers

Metric

Q2 2016 Preliminary

Q2 2015 Restated

Growth (YOY)

Revenue

$1.05 billion

$1.08 billion

-2.3%

Net income

$72.1 million

$54.8 million

31.6%

EPS

$1.23

$0.92

33.7%

YOY = year over year.Data source: Orbital ATK.

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What happened with Orbital ATK this quarter?

Orbital ATK reported mixed results.

  • Revenue in the company's flight systems group slid 5.4% to $370 million because of lower revenue from the launch vehicles division. That said, margins were better than expected in that segment, which drove operating income up 5.6% to $54.4 million.
  • Defense systems group revenue surged 8.6% because of higher revenue in the defense electronics and missile products divisions. Meanwhile, operating income jumped 14.9% to $35.5 million thanks to stronger margins in those two divisions. Partially offsetting these results were lower revenue and margins in the company's small caliber systems division.
  • The space systems group's revenue slumped 10.8% because of lower satellite systems division revenue. However, operating income jumped 8.1% thanks to stronger margins in the company's advanced programs division.
  • New order growth was solid, with Orbital ATK recording $1.6 billion in new firm and option contract bookings to go with another $255 million in option exercises under existing contracts. These orders nudged the company's firm backlog up to $8.5 billion, which is up 1% from the year-ago quarter, while its total backlog rose to $15.2 billion, which is 25% higher than it was last year.

What management had to say

In commenting on the quarter, CEO David Thompson said:

Orbital ATK's second quarter was characterized by solid operational performance, excellent new orders, and strong earnings and cash flow. While the company experienced revenue softness in certain market areas, especially in our commercial satellite product line, we exceeded our initial profit margin expectations, enabling us to maintain our outlook for 2016 earnings. In addition, we continued to implement a disciplined cash deployment strategy that includes a mix of dividends, share repurchases and investments in long-term growth initiatives that will benefit the company in the years ahead.

Image source: Courtesy of Orbital ATK.

While its second-quarter earnings were solid, the overhang of an accounting restatement clouded the quarter. The company noted that it expects to restate its financial statements for its fiscal year that ended on March 31, 2015, as well as the nine-month transition period through last December, and the first quarter of this year. This restatement is related to its $2.3 billion long-term contract to manufacture and supply small-caliber ammunition to the U.S. Army. As a result, the company anticipates that the contract will result in a net loss over its 10-year term, and it will therefore need to record that loss for fiscal 2015 because it was the first year of large-scale production under that contract.

Looking forward

Orbital is adjusting its full-year outlook. The company is reducing its full-year revenue guidance as a result of the softer-than-expected second-quarter revenue. It now anticipates revenue to be in the range of $4.45 billion to $4.5 billion, which is down from its prior expectation of $4.575 billion to $4.65 billion. That said, thanks to stronger margins, the company is boosting the bottom end of its earnings guidance range by $0.05 per share, giving it a new range of $5.30 to $5.50 per share.

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Matt DiLallo owns shares of Orbital ATK. The Motley Fool recommends Orbital ATK. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.