Orbital ATK Inc Earnings Rocket Higher

By Matthew DiLallo Markets Fool.com

Orbital ATK (NYSE: OA) is still working on an accounting review to resolve a legacy contract issue. As a result, it was only able to report preliminary numbers for the recently completed fourth quarter of 2016. However, that initial look was a good one and shows that its underlying operations are doing quite well right now, which is a trend the company expects will continue in 2017.

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Orbital ATK results: The raw numbers

Metric

Q4 2016

Q4 2015

Year-Over-Year Change

Revenue

$1.27 billion

$1.15 billion

11.1%

Net income

$62.1 million

$53.3 million

16.5%

Earnings per share

$1.08

$0.89

21.3%

Data source: Orbital ATK.

What happened with Orbital ATK this quarter?

Orbital ATK's space systems group propelled results this quarter.

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  • Flight systems group revenue rose 4.6% year over year to $406 million while operating income increased 2.1% to $53.2 million due to higher volume in the launch vehicle division. Meanwhile, full-year revenue was up 1.8% to $1.5 billion due to the inclusion of Orbital Sciences' results in 2016. That said, full-year operating income plunged 14.1% because of a favorable contract closeout adjustment in 2015.
  • Revenue in the defense systems group was up 8.3% from the year-ago quarter thanks to higher activity on armament systems division contracts. That said, operating income dropped 13.9% to $45.1 million due to favorable profit adjustments in 2015's fourth quarter. For the full year, revenue was flat at $1.8 billion while operating income slipped 6.4% to $171.5 million due to the favorable adjustments in 2015.
  • Space systems group revenue jumped 29.3% to $424 million while operating income rocketed 108% to $33.7 million as a result of higher activity on advanced program division and satellite systems division contracts. Full-year revenue was up 6.2% to $1.2 billion while operating income surged 178.5% due primarily to the exclusion of pre-merger Orbital results in 2015.
  • During the quarter the company recorded $1.225 billion in new firm and option contract bookings as well as receiving $750 million in option exercises under existing contracts. As a result, the company's firm backlog stood at $9.34 billion at the end of the year, up 13% versus year-end 2015. Meanwhile, Orbital's total backlog was $14.36 billion, up 10% year over year.

Image source: Orbital ATK.

What management had to say

CEO David Thompson commented on the company's performance:

Orbital ATK's 2016 was characterized by solid operational performance, excellent new orders, and strong earnings and cash flow. We exceeded our initial profit margin expectations, free cash flow targets and new business booking goals for the year. In addition, we continued to implement a disciplined cash deployment strategy that included a mix of share repurchases, dividend payments and investments in long-term growth initiatives that will benefit the company in the years ahead.

Despite working through some accounting issues, 2016 was an excellent year for the company on a financial and operational level. One of the highlights was free cash flow, which totaled $360 million for the full year and was above the high end of its $270 million to $325 million guidance range. The company returned $194 million of that cash to shareholders last year, repurchasing $124 million in stock and paying $70 million in dividends. The share repurchases reduced the company's share count by 3.2% year over year and was a contributor to the surge in earnings per share during the fourth quarter.

Looking forward

Orbital ATK expects its financial results to continue marching higher in 2017. The company sees revenue in the range of $4.55 billion to $4.625 billion, which is up 3% from 2016's revenue at the midpoint. Meanwhile, the company expects earnings in the range of $5.80 to $6.20 per share, up 20% at the midpoint. Finally, the company anticipates generating another $250 million to $300 million in free cash flow this year, which it plans to continue returning to investors via dividends and buybacks. In fact, Orbital ATK recently increased its dividend 6.5% and expanded its buyback program by $200 million.

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Matt DiLallo owns shares of Orbital ATK. The Motley Fool recommends Orbital ATK. The Motley Fool has a disclosure policy.