Orbital ATK Announces Fourth Quarter and Full Year 2016 Financial Results

Orbital ATK reported GAAP revenues of $1,272 million for the fourth quarter of 2016, up 11% compared to $1,145 million in the fourth quarter of 2015. GAAP income from continuing operations, before interest, income taxes and non-controlling interest (which the company refers to as operating income) was $114.9 million, or 9.0% operating margin, for the fourth quarter of 2016 compared to $94.3 million or 8.2% operating margin, in the comparable 2015 period. The company reported GAAP earnings per diluted share of $1.08 and $0.89 in the fourth quarters of 2016 and 2015, respectively. Free cash flow, which is a non-GAAP measure defined as GAAP cash from operating activities ($414.7 million) minus capital expenditures ($84.5 million), was $330.2 million in the fourth quarter of 2016 compared to $122.2 million in the fourth quarter of 2015.

The company also reported the following non-GAAP adjusted results for the fourth quarter of 2016. Adjusted operating income and profit margin were $131.6 million and 10.3%, respectively, in the fourth quarter of 2016, compared to $140.0 million and 12.2%, respectively, in the comparable 2015 period. Adjusted diluted earnings per share were $1.26 and $1.44 in the fourth quarter of 2016 and 2015, respectively. Adjusted free cash flow, which excludes certain merger and restatement related cash expenses of $9.7 million, was $339.9 million in the fourth quarter.

For the full year, Orbital ATK reported GAAP revenues of $4,455 million in 2016, compared to $4,363 million in 2015. Operating income was $474.0 million, or 10.6% operating margin, in 2016 compared to $336.2 million, or 7.7% operating margin, in 2015. The company reported GAAP earnings per diluted share of $5.00 in 2016 compared to $2.59 in 2015.

The company also reported the following non-GAAP adjusted results for the full year 2016. Revenues were $4,455 million in 2016 compared to $4,509 million in 2015. Adjusted operating income and profit margin were $518.4 million and 11.6%, respectively, in 2016, compared to $516.4 million and 11.5%, respectively, in 2015. Adjusted diluted earnings per share in 2016 were $5.55 compared to $5.10 in 2015. Adjusted free cash flow, which excludes certain merger and restatement related cash expenses totaling $29.9 million, was $360.9 million in 2016 compared to $290.0 million in 2015.

“Orbital ATK’s 2016 was characterized by solid operational performance, excellent new orders, and strong earnings and cash flow,” said David W. Thompson, Orbital ATK’s President and Chief Executive Officer. “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.”

Cash Flow and Capital Allocation Activities

Cash generated by operating activities totaled approximately $522 million, while capital expenditures were $191 million in 2016. Free cash flow in 2016 was about $331 million. Adjusted free cash flow was $361 million, which excludes $30 million of merger-and restatement-related cash expenses (see non-GAAP reconciliation tables below for details).

Orbital ATK repurchased approximately $124 million of its common stock and also paid dividends of approximately $70 million during 2016, returning a total of nearly $195 million to shareholders during the year. The company also invested about $305 million in research and development and capital equipment in 2016.

“Orbital ATK’s financial performance last year reflected solid profit margin and earnings per share results. The company generated over $360 million in adjusted free cash flow in 2016 on top of $290 million in 2015. We returned approximately $195 million to shareholders last year, and almost $135 million the previous year, in the form of dividends and share repurchases,” said Garrett E. Pierce, the company’s Chief Financial Officer.

New Business Summary

In the fourth quarter of 2016, Orbital ATK recorded approximately $1,225 million in new firm and option contract bookings. In addition, the company received approximately $750 million in option exercises under existing contracts. For the full year 2016, new firm and option orders totaled $6,615 million and option exercises under existing contracts were $1,850 million. As of December 31, 2016, the company’s firm backlog was approximately $9.34 billion, up 13% compared to a year ago, and its total backlog (including options, indefinite quantity contracts and undefinitized orders) was approximately $14.36 billion, 10% higher than in the prior year.

2017 Financial Outlook

The company also provided the following financial guidance for calendar year 2017. This guidance does not include any costs associated with the prior-year restatement that might be incurred in 2017.

Orbital ATK currently expects an effective tax rate of approximately 28% and interest expense of approximately $55 million for the year. Capital expenditures are projected to be approximately $225 million in 2017. Diluted weighted average shares outstanding are expected to be approximately 57 million on the basis of continued stock repurchase activity. The FAS/CAS favorable pension adjustment is expected to be approximately $100 million for the year.

Fourth Quarter Operational Highlights

Orbital ATK’s strong operational execution led to the achievement of numerous milestones in the fourth quarter of 2016. These included the following important events:

• In the Flight Systems Group, fourth quarter operational accomplishments were highlighted by two successful space launch missions for NASA, comprising the launch of an Antares rocket for a cargo delivery mission to the International Space Station and a Pegasus rocket carrying eight small weather satellites. Also in the quarter, the company carried out four successful target missions for the Missile Defense Agency and U.S. Navy, and supported three Atlas V and one Delta IV rocket launches with critical composite structures and propulsion systems.
• In the Defense Systems Group, the company produced approximately 400 million rounds of small-, medium-, and large-caliber ammunition, as well as about 5,000 tactical missile motors and 47,000 fuzes and warheads in the fourth quarter. The company also delivered over 50 advanced tactical missiles in the quarter, achieving the highest-ever quarterly production rate for the program.
• In the Space Systems Group, fourth quarter operational highlights included the completion of the sixth Cygnus cargo delivery mission and associated science experiments and micro-satellite deployments for NASA. The company initiated work on several newly-awarded government satellites and completed the first group of 10 Iridium NEXT satellites that were launched in January. The company also completed several high-altitude scientific balloon and research rocket missions.

“Fourth quarter operational results remained very solid as our teams completed several high-profile missions, including the return-to-flight of the Antares rocket and the 43^rd mission of our Pegasus space launcher,” said Chief Operating Officer Blake E. Larson. “Our operational execution on key programs across all three business groups was excellent in the final three months of 2016. We appreciate the hard work and attention to detail of our engineering and manufacturing teams, which is leading to high levels of product reliability and customer satisfaction throughout our business.”

Consolidated 2016 Financial Results

As a result of the prior years’ restatement and delays in 2016 quarterly filings, cumulative contract profitability adjustments occurring in the second half of 2016 were recorded in the second quarter of 2016. While this had no impact on full-year results, these adjustments resulted in lower reported operating income and earnings per share in the third and fourth quarters and increased operating income and earnings per share in the second quarter of 2016 (see Appendix, page 14).

GAAP Results

Revenues increased $127 million, or 11.1%, in the fourth quarter of 2016 compared to the fourth quarter of 2015, due to a $96 million increase in Space Systems Group (SSG), a $37 million increase in Defense Systems Group (DSG) and an $18 million increase in Flight Systems Group (FSG) revenues, partially offset by a $24 million increase in corporate revenue eliminations. Operating income increased $20.6 million, or 21.8%, in the fourth quarter of 2016 compared to the comparable 2015 period, due to a $17.5 million increase in SSG, a $9.3 million increase at corporate and a $1.1 million increase in FSG income, partially offset by a $7.3 million decrease in DSG income.

Revenues increased $92 million, or 2.1%, in 2016 compared to revenues in 2015, due to a $72 million increase in SSG, a $27 million increase in FSG and a $2 million increase in DSG revenues, partially offset by a $9 million increase in corporate eliminations. Operating income increased $137.8 million, or 41.0%, in 2016 compared to operating income in 2015, primarily due to a $100.1 million increase in corporate income driven by the absence of 2015 merger transaction costs and an increase in pension income in 2016 along with an $83.0 million increase in SSG income. These increases were partially offset by a $33.6 million decrease in FSG and an $11.7 million decrease in DSG operating income.

Net income and earnings per share reflected an income tax rate of 28.0% for 2016 compared to 36.2% for 2015. The tax rate in 2016 benefited from the absence of certain non-deductible costs in the prior-year period, a true-up of prior year taxes, research and development (R&D) tax credits (including the permanent extension of the federal credit that occurred in late 2015), and the favorable settlement of the IRS audit of prior-year tax returns.