Still sorting out the financial impacts from an Army ammunition contract that is in a loss position, Orbital ATK [OA] on Tuesday reported some third quarter highlights, including strong orders and record backlog that are expected to result in sales growth next year, the company’s chief executive said.
David Thompson, Orbital ATK’s president and CEO, said on a financial update call that “while it’s premature to provide specific guidance for 2017, I think I can say the company expects to resume solid top line growth next year from the strong backlog positions we’ve built up since the latter part of last year.” In particular, that growth will be driven by the Flight Systems and Defense Systems segments, he said.
Thompson and other company officials singled out the Aerostructures business line as the leading sales driver in the next two years.
Orders and option exercises in the quarter exceeded $2 billion and combined with about $600 million in orders in October pushed bookings to over $7.5 billion through the first 10 months of 2016, Orbital ATK said. The strong bookings led to firm backlog of $9.1 billion at the end of the third quarter and total backlog of $15.2 billion, up 5 and 10 percent, respectively, to record levels.
The current backlog provides 98 percent of Orbital ATK’s expected sales this year and nearly 90 percent in 2017, Thompson said.
Orbital ATK didn’t provide financial results for the third quarter due to the ongoing review of accounting issues disclosed in August related to its small ammunition contract with the Army that it won in 2012 over a bid from a BAE Systems–Olin Corp. [OLN] joint venture. The company has been scouring its other contracts but with the review largely complete the accounting issue is “isolated” to the $2.3 billion contract with the government-owned, contractor-operated Lake City Army Ammunition plant in Missouri, Garrett Pierce, Orbital ATK’s chief financial officer, said on the call.
The Lake City contract was won by the former Alliant Techsystems, which bid aggressively to win the recompete. In August Orbital ATK disclosed the accounting issue and at the time reported preliminary second quarter financial results, warning that it expected to take a $400 million to $450 million pre-tax charge–$250 million to $280 million after-tax—on the contract .
The ongoing accounting review, which will result in restating financial results back to 2013 instead of 2015 as previously thought, has led the company to now expect a pre-tax charge of $350 million and after-tax charge of $220 million.
Orbital ATK didn’t budge from its 2016 financial guidance provided in December, with sales still expected to be $4.5 billion, flat to slightly down versus 2015, adjusted per share earnings between $5.30 and $5.50, and free cash flow between $225 million and $275 million. The adjusted earnings results exclude $28 million in merger-related costs stemming from the combination of Orbital Sciences and Alliant Techsystems and $12 million related to the ongoing review.
Free cash flow of around $900 million is still expected in 2016 and 2017, Thompson said.
Company officials didn’t say when the accounting review would be complete or when the restated financial results would be disclosed. They said two independent auditors are conducting reviews, PricewaterhouseCoopers and Deloitte.
Capital deployment actions in the third quarter included $17 million in dividends and $44 million in stock repurchases. So far in the fourth quarter Orbital ATK has repurchased more than $25 million of its stock.
On a separate matter, Thompson said Orbital ATK is in talks with NASA about adding an Atlas launch to three planned Antares launches to resupply the International Space Station on cargo missions between early 2017 and early 2018. Negotiations between the parties haven’t been finalized, he said, adding the company will have more to say on this “in the near future.”