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Orbital ATK Inc's Results Soar Thanks to Across-the-Board Success

Orbital ATK (NYSE: OA) reported strong third-quarter results as revenue, earnings, and cash flow grew sharply versus last year's third quarter. The company also booked several new orders, which pushed its backlog up to a record level. However, the upside from those future sales appears poised to land in the hands of defense giant Northrop Grumman (NYSE: NOC), which agreed to acquire Orbital ATK in an all-cash deal in September.

Orbital ATK results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$1.22 billion

$1.04 billion

16.6%

Adjusted net income

$101.3 million

$66.8 million

51.6%

Adjusted EPS

$1.75

$1.15

52.2%

Data source: Orbital ATK.

Image source: Getty Images.

What happened with Orbital ATK this quarter?

Everything clicked for Orbital ATK:

  • Revenue in the flight systems group rose 17.4% versus the year-ago quarter to $426 million thanks to "robust new business activity in 2016 and 2017," according to the company. One of the highlights was the launch of its 26th Minotaur rocket for the U.S. Air Force, which continued its 100% success rate for this rocket family. As a result of that revenue growth and higher margins, operating income rocketed 39.9% to $61.4 million.
  • Defense systems group revenue jumped 12.9% to $515 million thanks to higher activity on armament systems and missile product division contracts. That rising revenue, along with improving margins, helped boost adjusted operating income by 38% to $48.3 million.
  • Sales in the space systems group soared 26.6% to $314 million thanks to higher activity on satellite systems and advanced program division contracts. One of the highlights was the integration and testing of the next Cygnus spacecraft in preparation for the OA-8 cargo-delivery mission to the International Space Station slated to take place later this month. Those soaring sales, when combined with much-higher margins, fueled a 102.1% surge in adjusted operating income to $39.4 million.
  • Orbital ATK received $1.435 billion of new firm and option orders during the quarter, while customers exercised contract options for another $400 million of firm orders. That pushed the company's firm backlog up 5% to a record $9.6 billion, while its total backlog rose 3% to a record $15.7 billion.
  • The company generated $153.6 million of adjusted free cash flow during the quarter and returned $25 million of that money to investors via dividends and stock repurchases. However, Orbital stopped buying back stock after agreeing to be acquired by Northrop Grumman, though it will continue paying dividends until the deal closes.

What management had to say

CEO David Thompson commented on the company's performance, stating:

Orbital ATK reported strong third quarter financial results, reflecting substantial increases in revenues, profit margins and earnings per share, along with excellent free cash flow. The company also maintained a very high level of operational performance for our customers in the quarter, with numerous space missions successfully carried out, continued solid execution of our production programs and good progress on our major growth initiatives.

Overall, Orbital delivered an excellent quarter, highlighted by the healthy growth in its backlog. The company noted that its book-to-bill ratio, which is the ratio of orders received to those shipped, was 117%. Because this number was over 100%, it means the company received more orders than it could fill, implying healthy demand and future revenue growth.

Looking forward

That growth is what drew Northrop Grumman to make an all-cash offer to acquire Orbital ATK during the third quarter. The companies anticipate closing the transaction in the first half of next year. Current Orbital investors would receive $134.50 in cash for each share that they own. While it's possible that a higher bid could emerge, most analysts don't see that happening, because a prospective buyer would have to pay Northrop a $275 million breakup fee in addition to topping its $9.2 billion bid, making it a much more pricey proposition.

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Matthew DiLallo owns shares of Orbital ATK. The Motley Fool recommends Orbital ATK. The Motley Fool has a disclosure policy.