Lower volume for military small-caliber ammunition, energetics and continued weakness in NASA programs combined with higher taxes led ATK [ATK] yesterday to post declines in its second quarter sales and income.
Like other defense firms that have reported this fall, ATK countered the weaker sales with strong margins, in particular in its Armament Systems group, which benefited from an $18 million contract resolution at the Lake City ammunition plant it manages for the Army. ATK’s margins jumped 2.3 percent to 13.3 percent including the contract resolution, the highest ever, and were still a strong 11.9 percent without it.
Also on the positive side were strong orders of $1.4 billion, resulting in a book-to-bill ratio of 1.2.
Net income in the quarter slid 18 percent to $80 million, $2.43 earnings per share (EPS), from $97.2 million ($2.91 EPS) a year ago. The earnings still whooped consensus estimates of $2.05 EPS largely due to the contract resolution. A year ago ATK benefited from a favorable tax settlement that contributed over $22 million to the bottom line.
Sales fell 8 percent to $1.1 billion from $1.2 billion a year ago.
Despite the drop in earnings, the company maintained its guidance for the fiscal year at between $8.50 to $9 EPS. The wide range leaves room for a lot of puts and takes, including the contract resolution, which was not factored in originally, as well as some headwinds in the form of lower than expected sales, higher than expected taxes, and declining operating margins at the Security and Sporting group.
The sales guidance was lowered to the narrow end of the previous range to between $4.6 billion and $4.7 billion. The upper end of the earlier outlook was $4.8 billion. Free cash flow is still expected to be between $225 million and $250 million.
Operating results were mixed. Despite the sales decline, operating income was actually up nearly 10 percent to $147.4 million, with the margins gains—absent the contract resolution–driven by a continued focus on cutting costs and overhead and improving efficiencies. ATK did incur cost growth in selling expenses due to the hiring of consultants to help it review strategic growth initiatives. Those efforts are now behind it.
ATK’s debt level is the lowest it has been in six years and the company will be keeping “dry powder” in reserve for both organic and other growth initiatives, Mark DeYoung, ATK’s president and CEO, said on yesterday’s earnings call.
As for the segments themselves, profit increases at Armament Systems and Missile Products outweighed declines at Security and Sporting, and Aerospace Systems. Sales were actually up at Security and Sporting, but the company said its retail customers for commercial ammunition moved away from purchasing premium products in favor of lower cost and lower margin ammo.
Sales increases at Security and Sporting, and Missile Products were more than offset by declines at Armament and Aerospace Systems.
ATK completed a portfolio review during the quarter and found that, for the most part, business units that it previously considered divesting are now performing well and will remain with the company. Efforts to boost margins and efficiencies the past year “have taken what otherwise would be lower performing niche businesses and turned them into good performers,” DeYoung said. He added that “nearly every unit in this company” is contributing in a “very meaningful way to both the top and bottom line as well as cash generation.”
There are still “still a couple pieces of the company” that long-term don’t fit and ATK will look for “opportunities” with these, DeYoung said, suggesting some paring of assets is forthcoming.