ATK [ATK] yesterday reported higher third quarter earnings due to the absence of a charge that hampered results a year ago while sales dipped mainly on the loss of the Army’s contract to operate the Radford ammunition plant.
Net income soared 27 percent to $63.2 million, $1.93 earnings per share (EPS), from $49.7 million ($1.51 EPS) a year ago, easily topping analysts’ estimates of $1.71 EPS. Margins increased 70 basis points to 10.1 percent.
A year ago ATK’s earnings suffered from a $25 million after tax charge related to a lawsuit in the company’s Thiokol business unit that had been initiated before ATK’s acquisition of the firm in 2001 (Defense Daily, Feb. 3, 2012).
Excluding sales and profits related to the Radford contract and the impact from the charge, ATK’s adjusted after-tax income fell to $60.6 million ($1.84 EPS) from $66.7 million ($2.03 EPS).
Sales in the quarter slipped nearly 6 percent to nearly $1.1 billion from just over $1.1 billion a year ago. In addition to less revenue from the Radford contract, sales were off in domestic and international volume related to military small caliber ammunition and energetics, which was partially offset by increases in higher unit volume and price increases for sporting ammunition.
Backlog at the end of the quarter stood at $6.7 billion, up $600 million from a year ago. Orders in the quarter were $1.4 billion, with strong order activity in all three of the company’s operating groups, Mark DeYoung, ATK’s president and CEO, said on yesterday’s earnings call. Free cash flow through the first three-quarters of the year was $57 million and the company remains on track to achieve free cash between $175 million and $200 million for its fiscal year.
For the rest if its fiscal year, ATK raised its sales guidance to about $4.3 billion from prior guidance of between $4.1 billion and $4.2 billion. Due to the improved sales forecast and better than expected operating performance, earnings projections have been bumped up to between $7.90 and $8.10 EPS from prior guidance of between $7.40 and $7.70 EPS.
The guidance excludes the potential impacts from the possibility of a budget sequestration, which could begin trimming defense spending beginning in March if it goes into effect. However, DeYoung expects there to be “some pressure” on the military ammunition accounts going forward.
The company’s strong order flow was driven in part by increased bookings within its Sporting group, which sells commercial ammunition and gear, but DeYoung warned that those are purchase orders, which can be canceled, something that does happen and therefore may not result in sales. On the other hand, DeYoung said that the long-term trends in commercial ammunition–dating back to 1982–support growth and are not based on the “episodic spikes” stemming from presidential election outcomes and changes in legislation.
“Over the long haul you’re seeing a growth in the shooting sports which is pretty significant,” DeYoung said. He added that the company has invested in boosting its capacity in Sporting where it has bottlenecks and that capacity will come on line later this calendar year to enable increased deliveries.
DeYoung also provided an update on the company’s challenges with its chemistry on the rocket motor propellant for the Advanced Medium-Range Air-to-Air Missile for which it is a subcontractor to Raytheon [RTN]. He said the chemical challenges were confined to the lowest temperature configurations and that the company has identified a fix that will result in a path to requalification this year of a more robust propellant.
Overall, the program is worth about $25 million annually to ATK, but the company won’t achieve all of that this year due to the chemistry issues, DeYoung said.