Orbital ATK Inc's Earnings Dip on a Tax Hit

Orbital ATK (NYSE: OA) reported a solid finish to 2017, posting higher revenue and delivering strong free cash flow. Further, it continues to win new business, which should propel future growth. That said, defense giant Northrop Grumman (NYSE: NOC), which agreed to acquire Orbital ATK in an all-cash deal in September, will be the beneficiary since it expects that deal to close in the first half of this year.

Orbital ATK results: The raw numbers

Metric	Q4 2017	Q4 2016	Year-Over-Year Change
Revenue	$1.35 billion	$1.27 billion	6%
Adjusted net income	$63.5 million	$75.4 million	(15.8%)
Adjusted EPS	$1.10	$1.31	(16%)

Data source: Orbital ATK.

A $100 bill faded into an American flag.

Changes to the U.S. tax law impacted Orbital's results. Image source: Getty Images.

What happened with Orbital ATK this quarter?

Taxes weighed on earnings:

• The defense systems group led the way, with revenue jumping 19.9% to $578 million due to higher activity in all product divisions. Revenue from the flight systems group, meanwhile, rose 13.3% to $459 million thanks to higher activity in all product divisions driven by new business wins. Those strong results more than offset a 13.6% dip in revenue from the space systems group, which dropped to $367 million due to lower activities on its satellite systems division contracts.

• For the full year, revenue rose 6.9% to $4.46 billion thanks to higher sales in all three of its operating groups.

• While earnings declined in the quarter, that was mainly due to the impact of the Tax Cuts and Jobs Act, which reduced adjusted net income by $41 million, or $0.71 per share. Acquirer Northrup Grumman reported a similar impact from the tax law change.

• Full-year adjusted earnings came in at $5.61 per share, which was only 1% higher than 2016 due to the impact of the changing tax code.

• Cash flow from operations was a healthy $363 million for the quarter and $520 million for the full year. Further, it generated $346 million of free cash flow in the quarter and $366 for the full year.

• Orbital ATK booked $1.57 billion of new orders during the quarter as well as receiving $685 million of option exercises. Those awards pushed the company's firm backlog up 9% to $10.2 billion, while its total backlog rose 12% to $16 billion.

What management had to say

"Orbital ATK reported excellent fourth-quarter and full-year financial results," according to CEO David Thompson, "reflecting strong revenues and profit along with robust free cash flow and new business wins." CFO Garrett Pierce echoed that statement, noting:

Orbital ATK reported very strong financial results both in the fourth quarter and for the full year, driven by substantial revenue and operating profit growth as well as robust free cash flow generation. Looking back over the past three years since the Orbital-ATK merger, we are happy to report that the company exceeded our 15% compound annual earnings growth and $1 billion cumulative free cash flow targets that were established in early 2015.

Looking forward

Orbital ATK didn't provide any outlook due to its pending merger with Northrup Grumman, which the defense giant currently expects to close in the first half of this year. The companies, meanwhile, received some positive news on that front this month when the European Commission approved the deal, leaving the U.S. Federal Trade Commission's review as the last hurdle to overcome before closing.

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