Facing the same headwinds as other defense companies, Alliant Techsystems [ATK] recently reported lower earnings and sales in its first quarter but was able to mitigate the decline in earnings due to improved operating efficiencies.
Moreover, as with other defense firms, ATK boosted its earnings guidance for the year, in part driven by a lower than expected share count as the company repurchased $50 million of its stock in the quarter.
Net income declined 4 percent to $71.5 million, $2.13 earnings per share (EPS), from $74.6 million ($2.24 EPS), a year ago topping consensus estimates by 14 cents. Earnings benefited from two non-operational events, including a one-time tax benefit due to a state tax law change, which added 11 cents EPS, and the sale of a land parcel, which added 10 cents EPS.
The one-time gains were partially offset by higher pension and interest expenses.
Excluding the land sale gain, operating margins improved 50 basis points to 11.6 percent.
John Shroyer, ATK’s chief financial officer, attributed the improved margins to improved efficiencies and business execution combined with cost management. He said the company expects to sustain margins in the mid-11 percent range for the fiscal year.
Sales in the quarter fell 11 percent to $1.1 billion from $1.2 billion due to reduced volume at the Army Radford Ammunition plant, less work for NASA, less work on non-standard ammunition, a drop in defense electronics revenues due to timing of awards and a drop in commercial ammunition business. Bookings in the quarter were light at $678 million but are still expected to roughly equal sales for the fiscal year, Shroyer said.
Despite a soft environment for defense, ATK is not going to “surrender” its long-term objective of boosting organic growth, Mark DeYoung, the company’s president and CEO, said.
Free cash flow was negative $193 million but is still expected to be between $225 million and $250 million for the year.
All four of ATK’s operating segments posted declines in revenues while Aerospace Systems and Missile Products were able to boost their bottom lines by 19 percent and 3 percent, respectively. Aerospace Systems’ profits increased mainly due to the land sale, which added $5.4 million to the bottom line, improved operating efficiencies and higher sales of flares and decoys.
At Missile Products, operating profit benefited by improved operating efficiencies and a higher profit rate on tactical rocket motor programs.
Share repurchases, sustainable margins and the one-time gains enabled ATK to boost its earnings guidance to between $8.50 and $9 from the prior outlook of between $8 and $8.60 EPS. Despite soft sales in the first quarter, ATK maintained its sales guidance for the year at between $4.6 billion and $4.8 billion as it expects a stronger second half of the year.
Sales drivers in the second half of the fiscal year include continued production of the Advanced Anti-Radiation Guided Missile, a ramp up of work on the Joint and Allied Threat Awareness System for Navy and Marine Corps aircraft and next-generation ammunition for the Army’s Abrams Main Battle Tank, and demand for commercial ammunition and related tactical accessories, Shroyer said.
While ATK hasn’t pulled the trigger on an acquisition lately, the company is still actively reviewing potential purchases, DeYoung said. The company is also wrapping up its portfolio review and DeYoung said to expect some direction here in the coming months. DeYoung disclosed the portfolio review in May during ATK’s fourth quarter earnings call, saying divestitures would also be considered as the company looks to boost margins to the goal of 12 percent.
DeYoung also said that development work the company is doing on composite structures for Airbus’ new A350 aircraft is on track under a revised plan after problems arose that resulted in a charge as part of ATK’s third quarter results. Financial issues related to the development work are also tracking well, he said.