ATK [ATK] yesterday posted a steep drop in second quarter earnings due to lower sales and higher pension expenses, although the results still crushed analysts’ expectations due to strong operating performance, which combined with recent key contract wins that led the company to boost its financial guidance for its fiscal year.
The increased confidence and strong cash flow led ATK to increase its quarterly dividend by 30 percent to 26 cents per share.
Sales in the quarter fell 4 percent to just under $1.1 billion from just over $1.1 billion a year ago. The decrease stems from ATK’s loss of the contract to operate the Army’s Radford ammunition plant and a difficult comparison with a year ago when it recorded a favorable contract resolution.
Net income declined 19 percent to $65 million, $2 earnings per share (EPS), from $80 million ($2.43 EPS), due to the lower sales, higher pension expenses, charges for the early retirement of debt, partially offset by a lower tax rate. The results were far above consensus estimates of $1.48 EPS.
Margins were down 3 percent to 10.3 percent.
ATK pointed to several key wins and contracts in the quarter that boosted its confidence going forward, including maintaining its incumbency to operate the Army’s Lake City ammunition facility, a full-rate production contract on the Navy’s Advanced Anti-Radiation Guided Missile, additional work on commercial aerostructures for Airbus aircraft programs, and engineering and development work for the Advanced Concept Booster Development for NASA.
These recent orders “confirm our competitiveness and leading market positions,” Mark DeYoung, ATK’s president and CEO, said on yesterday’s earnings call.
Orders overall in the quarter were a robust $1.3 billion and ATK expects orders for the year to be level with sales. Backlog at the end of the quarter stood at $6.4 billion, up $300 million from the end of the first quarter.
ATK’s Sporting Group was the only operating segment to boast higher sales and profits in the quarter. Sales were up 11 percent to $275.4 million while profits increased 8 percent to $25.1 million. The group was buoyed by higher sales of ammunitions and accessories and lower commodity costs, overcoming a $3 million charge related to an increase in reserves for obsolete inventory balances around military programs.
ATK’s Defense Group drove the company’s lower overall earnings due to the Radford loss and favorable contract resolution from a year ago and also on a sales mix that lowered margins. The segment reported profit of $64.5 million, down 31 percent.
The company’s Aerospace Group posted single-digit declines in sales and earnings due to lower sales from NASA programs, which ATK now sees as stable, and commercial aerospace structures.
For its FY ’13, ATK now expects earnings between $7.40 and $7.70 EPS, up from previous guidance of $7 to $7.30. Sales are forecast to be between $4.1 billion and $4.2 billion, a $50 million increase from prior expectations while free cash flow is projected at between $175 million and $200 million, a $35 million increase in guidance.
Regarding capital deployment, Neal Cohen, ATK’s chief financial officer, said that company has set itself up for flexibility. Options continue to include share buybacks, although there were none in the quarter, further dividend increases, acquisitions, capital investments, or further debt reduction, Cohen and DeYoung said.