Orbital ATK Announces First Quarter 2016 Financial Results

Orbital ATK reported GAAP revenues of $1,065 million for the first quarter of 2016, compared to $970 million in the comparable period of 2015. GAAP income from continuing operations, before interest, income taxes and noncontrolling interest (which we refer to as operating income) was $115.9 million, or 10.9%, profit margin in the first quarter of 2016 compared to an operating loss of $1.1 million in the comparable period of 2015. The company reported GAAP earnings per diluted share of $1.19 in the first quarter of 2016 compared to loss per diluted share of $0.87 in the comparable period of 2015. Net cash used in operating activities was $75.1 million in the first quarter, while unadjusted free cash flow, a non-GAAP measure, was negative $97.6 million in the quarter.

The company also reported the following non-GAAP adjusted results. Adjusted revenues were $1,065 million in the first quarter of 2016 compared to $1,116 million in the comparable period of 2015. Adjusted operating income and profit margin were $125.6 million and 11.8%, respectively, in the first quarter of 2016, compared to $116.7 million and 10.5%, respectively, in the comparable period of 2015. Adjusted diluted earnings per share in the quarter were $1.31, compared to $1.14 in the comparable period of 2015. Net cash used in operating activities was $75.1 million in the first quarter, while adjusted free cash flow was negative $85.6 million in the quarter.

“Orbital ATK began 2016 with a solid quarter that largely met our expectations for the beginning of the year,” said David W. Thompson, Orbital ATK’s President and Chief Executive Officer. “Of particular note was our very strong new business activity that resulted in a firm book-to-bill ratio of 152%. We also made progress on the growth initiatives announced last quarter, including contracting with Intelsat as the first customer for our commercial satellite servicing venture. In addition, as we entered the second year of the merger, the company continued to achieve cost and revenue synergies that are helping us lower costs for customers, improve profit margins and generate top-line growth in the years ahead.”

Consolidated Financial Highlights

GAAP Results

Adjusted Non-GAAP Results

All adjusted financial measures discussed below are non-GAAP adjusted financial results from continuing operations. See the reconciliation tables in the “Disclosure of Non-GAAP Financial Measures” section for details.

Adjusted revenues decreased $51 million, or 4.5%, in the first quarter of 2016 compared to adjusted revenues in the comparable period in 2015, driven primarily by a $65 million decrease in Defense Systems Group (DSG) sales.

Adjusted operating income increased $8.9 million, or 7.6%, in the first quarter of 2016 compared to adjusted operating income in the comparable period in 2015, driven by a $5.3 million increase in Flight Systems Group (FSG) income, a $9.0 million increase in Space Systems Group (SSG) income and a $6.5 million increase in corporate income, resulting from a positive pension adjustment as noted below. These increases were partially offset by an $11.9 million decrease in Defense Systems Group income.

Net income and earnings per share reflected an income tax rate of 26.6% for the first quarter of 2016 compared to 34.5% for the comparable period in 2015. The tax rate in the first quarter of 2016 reflected the benefit of the permanent extension of the R&D tax credit that occurred in late 2015 and other favorable adjustments.

“While the first quarter produced solid margins and earnings per share, our top-line revenues and cash flow were impacted by timing on certain programs and milestone payments,” said Garrett E. Pierce, the company’s Chief Financial Officer. “As we look to the remainder of 2016, the company expects to see revenue and cash flow strengthen, particularly in the second half, leading us to reaffirm our previous annual guidance.”

Segment Results

Orbital ATK conducts its operations in three business units: Flight Systems Group, Defense Systems Group and Space Systems Group. Each of these groups in turn consists of several product-line divisions. Segment operating results include pension expense recoverable under U.S. Government contracts as determined in accordance with government Cost Accounting Standards (CAS). The difference between pension expense recorded in accordance with GAAP Financial Accounting Standards (FAS) and pension costs recorded in accordance with CAS is reported at the corporate level. The amortization of intangible assets recorded in connection with the merger of Orbital and ATK is also reported in corporate results.

Flight Systems Group:

GAAP Results

Adjusted Non-GAAP Results

FSG adjusted revenues for the first quarter of 2016 decreased $10 million, or 2.8%. Adjusted operating income increased $5.3 million, or 11.8%. The changes are due mainly to lower revenues in the Propulsion Systems Division and higher revenues and stronger profit margins in the Launch Vehicles Division.

Defense Systems Group:

GAAP Results

Adjusted Non-GAAP Results

DSG adjusted revenues for the first quarter of 2016 decreased $65 million, or 13.0%, and adjusted operating income decreased $11.9 million, or 23.1%, primarily due to higher product shipments in the comparable period in the prior year.

Space Systems Group:

GAAP Results

Adjusted Non-GAAP Results

SSG adjusted revenues for the first quarter of 2016 were flat year-over-year, while adjusted operating income increased $9.0 million, or 40.7%, primarily due to higher profit margins in the Satellite Systems Division.

Free Cash Flow and Capital Allocation Activities

Adjusted free cash flow in the first quarter of 2016 was negative $85.6 million, which resulted from a $75.1 million use of cash from continuing operations and $22.6 million of capital expenditures offset by adjustments of $12.0 million (see non-GAAP reconciliation table for details). The use of cash was primarily driven by increases in accounts receivable in the Flight Systems and Defense Systems segments and timing of certain payments in the first quarter of 2016.

The company repurchased approximately $27 million of its common stock and paid dividends of approximately $18 million during the first quarter of 2016, returning a total of $45 million to shareholders in the period.

Operational Highlights

Orbital ATK’s strong operational execution led to the achievement of numerous milestones in the quarter. These included the following important events:

In the Flight Systems Group, the company carried out several missile defense-related launches and completed numerous production and testing milestones during the first quarter. Orbital ATK successfully launched its OABV long-range interceptor and a new intermediate range target vehicle in support of U.S. Missile Defense Agency testing of the Ground-based Midcourse Defense system. The company also launched four ramjet-powered naval targets during the quarter. In addition, progress continued on integration and testing of the new first stage propulsion system for the Antares rocket. Orbital ATK supported several United Launch Alliance (ULA) launches with propulsion systems and composite structures, including the Atlas V rocket that launched the company’s Cygnus spacecraft on a Space Station cargo mission in March, as well as a Delta IV launch that used two of the company’s GEM-60 solid rocket boosters. The company also reached production milestones in its aerospace structures division, including delivery of the 2,500th Boeing 787 part, just over one year after the start of the program.

In the Defense Systems Group, the company set a new monthly production record in February for the Hellfire missile program as part of more than 5,000 rocket motors, warheads and fuzes across all product lines delivered in the quarter. Orbital ATK also manufactured over 400 million rounds of small-caliber, medium-caliber and large-caliber ammunition for domestic and international customers. Additionally, U.S. Secretary of Defense Ashton Carter visited our AARGM missile final assembly operation in California and received a briefing on the program. The company also conducted a medium-caliber gun users conference in Arizona for over 100 customers, with live-fire demonstrations of our M230 and MK44 cannons and new air-bursting ammunition.

In the Space Systems Group, first quarter operations were highlighted by several milestones in the company’s cargo logistics services to the International Space Station (ISS) for NASA. In February, the Cygnus/OA-4 mission that was launched in December was successfully completed, and in March the Cygnus spacecraft for the OA-6 mission successfully berthed with the ISS following launch from Cape Canaveral, Florida. For the upcoming OA-5 mission this summer, all necessary hardware for the mission will be at the launch site by mid-May when the Cygnus service module is shipped from the company’s Dulles, Virginia manufacturing and test facility to Wallops Island. Other Space Systems Group operational highlights included three successful research rocket launches for NASA, the shipment of over 100 spacecraft components, including equipment for the 2020 Mars rover, and the transition to high-rate production of the Iridium Next satellite constellation at the company’s Gilbert, Arizona facility. In addition, Orbital ATK’s Dawn interplanetary spacecraft team was recognized as part of a NASA/Jet Propulsion Laboratory-led program that will receive this year’s prestigious Collier Trophy that annually recognizes the most outstanding achievement in the American aerospace industry.

“The company’s operational performance remained excellent in the first quarter, highlighted by the successful launch and in-orbit operations of our Cygnus spacecraft that is currently at the International Space Station, as well as the preliminary work leading up to the next cargo mission to the Station that will put the Antares rocket back in service this summer,” said Chief Operating Officer Blake E. Larson. “Our key programs across the company, from Airbus A350 composite structures and tactical missile propulsion to advanced precision weapons and government and commercial satellites, continued to be well executed in the quarter, getting Orbital ATK off to a strong start in 2016.”

“While a large fraction of our post-merger cost synergy targets were realized in 2015, we are continuing to pursue another $25 to $30 million in annual efficiency gains this year that, if achieved, will put us above the high end of our targeted range of $70 - $100 million in annual savings,” Larson added.

New Business Summary

In the first quarter of 2016, Orbital ATK recorded approximately $2,505 million in new firm and option contract bookings. In addition, the company received approximately $720 million in option exercises under existing contracts. As of April 3, 2016, the company’s firm backlog was approximately $8.6 billion, up 8% compared to a year ago, and its total backlog (including options, indefinite quantity contracts and undefinitized orders) was approximately $14.8 billion, 23% higher than this time last year.

Calendar Year 2016 Financial Guidance

The company reaffirmed the following financial guidance for calendar year 2016. The guidance does not include any merger integration-related expenses that may occur in 2016.

Orbital ATK currently expects an effective tax rate of approximately 30% for the year and interest expense of approximately $70 million, which includes approximately $60 million of debt-related interest expense and approximately $10 million of non-cash interest expense related to certain adjustments required in purchase accounting. Pension funding is expected to be approximately $40 million and capital expenditures are projected at about $200 million for the year. Diluted weighted average shares outstanding are expected to be about 58 million in 2016. The FAS/CAS favorable pension adjustment is expected to be about $80 million for the year.