Orbital ATK [OA] on the night of Feb. 29 posted strong fourth quarter earnings driven by a lower tax rate whiles sales ticked up slightly and the company provided initial guidance for 2016 that forecasts increases to the top and bottom lines.

Adjusted net income increased 15 percent to $86.5 million, $1.45 earnings per share (EPS), from $75 million ($1.26 EPS) a year ago, crushing consensus expectations by 34 cents per share. Orbital ATK’s tax rate in the fourth quarter reflects the retroactive extension of the federal research and development tax credit. Operating margin was 11.7 percent, a 30 basis point improvement.

At the operating level all three of the company’s reporting segments posted profit gains, led by a triple digit expansion at Space Systems and a high double-digit gain at the Flight Systems Group due to program execution on NASA’s Cargo Resupply Services (CRS) program and a successful CRS mission December 2015. The Defense Systems Group benefited from better performance in missile products.

Adjusted sales in the quarter increased $21 million, or nearly 2 percent, to $1.1 billion in the quarter from $1.1 billion a year ago. The gain was driven by increased revenue in Flight Systems due to the Launch Vehicles division and increased revenue in the Space System Group on increases in the Commercial, and Civil and Defense Satellite divisions.

Orbital Sciences and Alliant Techsystems (ATK) merged in February 2015 to create Orbital ATK. The adjusted financial results that the company has reported since then include the defense and space operations of ATK and exclude transaction and merger-related expenses.

For 2015, sales increased 2 percent to $4.5 billion and adjusted net income rose 20 percent to $298.9 million, $5.02 EPS. This year Orbital ATK is forecasting sales between $4.6 billion and $4.7 billion and per share earnings between $5.25 and $5.50, with operating margins between 11 and 11.5 percent.

At the time of the merger Orbital ATK had projected annual sales growth of 4 to 5 percent in 2016 and 2017 but has trimmed that outlook to between 3 and 4 percent due to reduced demand for commercial satellites, David Thompson, the company’s president and CEO, said on the March 1 earnings call.

Thompson also outlined investments in three new long-term growth initiatives that will chip away at the company’s earnings and free cash flow for the next two to three years. This year the investments will suppress operating margins by about 50 basis points and earnings by about 25 cents EPS, he said.

In return, these initiatives have the potential to add $400 million to $500 million in annual sales by the end of the decade, Thompson said. Moreover, the rates of return on these sales will range between the high-teens and 30 percent, he said.

In the Defense Systems Group the company is investing in new advanced precision ammunition under a three-year research and development program. Thompson said the initiative “builds on and extends our recent innovations in guided small caliber ammunition, precision artillery and mortar rounds, electronic fusing, and advanced ordnance.”

The company is working with the Army, Navy and Defense Advanced Research Projects Agency on the precision ammunition and will soon demonstrate some of the technology “that can be applied across multiple calibers and can be readily used across thousands of existing ground, sea, and air platforms,” Thompson said.

Barring any disruptions to plans, Thompson said initial production deliveries could begin in about two years. He said there will be a decision in the first half of 2017 on whether to continue with the launch vehicle program beyond the phase one design effort.

Within Flight Systems, Orbital ATK and the Air Force are in the first phase of a potential four-year effort to develop a “new, all domestic, intermediate and large class space launch vehicle family,” Thompson said. Through the jointly funded effort, which the Air Force is providing $50 million this year and the company $30 million, “our objective is to develop a modular vehicle system capable of launching national security payloads…the Evolved Expendable Launch Vehicle class, as well as scientific and commercial satellites, and to conduct initial launches using this new system by the end of the decade.”

Thompson said Orbital ATK’s ability to compete for the new launch vehicle is a result of technical synergies gained by the merger of Orbital and ATK, neither of which could have pursued this effort individually.

Orbital ATK is also bringing together capabilities from the former companies to develop “the market’s first in space commercial satellite service system,” Thompson said. He said the first geosynchronous service orbiting vehicle would begin operation in early 2019. More details on anchor customers and technical services will be announced later this year, he said.

Total backlog at the end of 2015 stood at $13.5 billion and firm backlog at $8.1 billion, up 12 percent and 2 percent, respectively, from a year ago. Thompson said 80 percent of forecasted revenues for this year are in backlog.

Free cash flow in the quarter was $122.2 million and for the year $290 million. Orbital ATK expects between $275 million and $325 million in free cash flow this year.