Note: More details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: Flash Update: 3QFY15 Earnings Results
Prev. Ed.: 2QFY15 Earnings Update, Dec 17, 2014
Flash Update [Note: earnings update in progress; final report to follow]
On Jan 28, 2015, Alliant Techsystems Inc. reported third-quarter fiscal 2015 adjusted earnings of $3.02 per share, surpassing the Zacks Consensus Estimate of $2.89 by 4.5%. Quarterly earnings increased 5.2% year over year primarily on the back of a decline in share count and higher revenues.
The company’s quarterly GAAP earnings per share were $1.43 compared with $2.46 a year ago. The difference between adjusted and GAAP earnings was due to the combined per share effect of a goodwill/trade name impairment charge of $1.50 and transaction cost of $0.09.
Total Revenue
In the quarter under review, total revenue came in at $1,251.4 million, missing the Zacks Consensus Estimate of $1,252 million marginally. The reported revenues, however, exceeded the year-ago figure by 3.6% primarily due to higher contribution from the Defense Group (2.4%) and Aerospace Group (2.1%) segments. This was partially offset by a lower contribution from Sporting Group segment (3.3%).
Operational Highlights
In the third quarter of fiscal 2015, Alliant’s orders decreased to $1 billion from $1.3 billion a year ago due to lower orders in Aerospace Group and Sporting Group. The company’s backlog stood at $6.7 billion.
Cost of sales increased 3.1% year over year to $947.5 million in the reported quarter.
The company reported gross profit of $303.8 million in the quarter, up 5.1% from the prior-year level.
Total operating expenses increased 2.6% year over year to $146.9 million, primarily due to higher research and development, and selling expenses.
The company’s interest expenses decreased 24.9% year over year to $21.4 million.
Financial Update
As of Dec 28, 2014, Alliant had cash and cash equivalents of $112.9 million compared with $266.6 million as of Mar 31, 2014.
Long-term debt, as of Dec 28, 2014, was $1,908.5 million versus $1,843.8 million in fiscal 2014 end.
During the first nine months of fiscal 2015, cash from operating activities was $154.2 million versus $222.3 million in the year-ago period.
Alliant’s capital expenditure was $92.0 million during the nine months ended Dec 28, 2014 versus $80.6 million in the prior-year period.
Business Update
On Jan 27, 2015, stockholders of Alliant approved the issuance of shares to the stockholders of Orbital Sciences Corporation in connection with a proposed merger. Orbital stockholders also approve of the merger. Upon customary approvals, Alliant expects to conclude the transaction on Feb 9, 2015.
MORE DETAILS WILL COME IN LATER, IMMINENT EDITIONS OF ZACKS RD REPORTS ON ATK.
Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]
Arlington, VA-based Alliant Techsystems Inc. manufactures and sells a number of products in the aerospace and defense, and civilian markets including ammunition, solid fuel propellant systems, fuzes, composites, missile defense products and shooting and tactical accessories. The company operates under three segments: Aerospace Group, Defense Group and Sporting Group. Alliant has operations in 21 U.S. states with more than 60 facilities, Puerto Rico and overseas. The company is also represented in more than 50 countries throughout the world.
Of the 9 brokerage firms covering the stock, 7 provided neutral ratings and 2 assigned positive ratings. None of the firms provided a negative rating. The average Zacks Digest price target, as per the firms, is $138.00 (¯ $12.71 from the previous report and 24.6% upside from the current price). The price targets range from $125.00 (12.8% upside from the current price) to $150.00 (38.1% upside from the current price).
Neutral or equivalent (77.8%; 7/9 firms): The firms with a neutral outlook believe that improvement of the shooting sports market as well as productivity at the company’s manufacturing facilities, and a decline in effective tax rate will act as important growth drivers. They also believe that the company’s defense revenues will remain volatile in the coming years with an added risk of order cancellation.
Buy or equivalent (22.2%; 2/9 firms): The bullish firms expect Alliant’s steady effort toward reduction of costs to boost the company’s future results.
Dec 5, 2014
Overview [Note: Only highlighted material has been changed.]
The firms have identified the following factors for evaluating the investment merits of the company:
Key Positive Arguments / Key Negative ArgumentsTrack Record: The company has a history of consistent program execution, a diversified revenue mix and a high degree of revenue predictability.
Opportunities: The company has excellent growth opportunities in the Sporting Group segment, especially considering the proposed spin-off.
Long-Term Growth: Defense awards, strategic acquisitions and cash deployment strategies are expected to help the company sustain long-term growth. / Demand for Small and Medium-Caliber Ammunition: While demand has been high in both military and commercial sectors, changes in operations in Afghanistan, as well as changing consumer preferences, could lead to a decrease in demand.
Risk to Production: As a manufacturer of ammunitions, explosives and other highly flammable propellants, the company is prone to incidents, which may disrupt operations, often resulting in legal action as well.
Alliant Techsystems Inc. (ATK) is a weapon and space systems company. The company is a supplier of aerospace and defense products to the U.S. government, U.S. allies and major contractors. Alliant is also a supplier of ammunition and related accessories to law enforcement agencies and commercial customers.
Alliant operates in a three group structure. The company's three operating segments are:
Aerospace Group develops and produces rocket motor systems for human and cargo launch vehicles, missile defense interceptors, small and micro-satellites, conventional and strategic missiles, structures and subsystems, satellite components, lightweight space deployable and solar arrays, flares illumination and aircraft countermeasures. The group also provides engineering and technical services and functions in military and commercial aircraft while launching structure markets.
Defense Group, which includes armaments systems and missile products, develops and produces small, medium, and large caliber ammunition, precision munitions, gun systems, propulsion systems for tactical missiles and missile defense applications, strike weapons, aircraft survivability systems, fuzes and warheads, special mission aircraft, and propellant and energetic materials.
Sporting Group develops and produces commercial products and tactical systems and equipments.
In Apr 2014, Alliant announced that its board of directors has unanimously approved its plan to form two standalone public companies. Per the program, the company will spin-off its outdoor sports operations and the division will function as an independent company. In addition, Alliant will combine its Aerospace and Defense Group segments with Orbital Sciences Corporation. The second one will operate as Orbital ATK, Inc. Upon customary approvals, the transactions are expected to be concluded in Feb 2015.
Globally, Alliant provides solid rocket motors and is one of the largest manufacturers of ammunitions in the U.S. The company is the sole-source supplier of various calibers of ammunition to the U.S. Department of Defense (DoD). Alliant also has a solid contractual relationship with NASA.
Further information on Alliant can be found at its website: www.atk.com. The company’s fiscal year ends on Mar 31.
Dec 5, 2014
Long-Term Growth [Note: Only highlighted material has been changed.]
The U.S. defense industry has experienced significant changes over the years. Management of Alliant believes that focus on performance, innovation, simplicity and affordability holds the key to long-term success. The company expects to concentrate on developing systems to improve durability and capability of its existing platforms.
Alliant is a strong and profitable company with good order flow, strong cash flow and a strategic plan focused on delivering long-term value. The company continues to execute its strategy to improve profitability, maintain a leading market position, and bring development programs into production. Alliant also plans to grow its presence in commercial and international markets, by making strategic investments to strengthen its portfolio, improving its competitive position and delivering shareholder value.
Alliant is not dependent on any particular platform and provides a diverse product base. As the sole-provider of a number of products to the military and other defense contractors, a significant portion of the company’s business remains well insulated. Alliant thinks that there is potential in areas such as composites, special-mission aircraft and precision munitions, which might act as catalysts.
The company is also exploring the inorganic route to aid its future growth. Several acquisitions in the past, including those of Bushnell Group Holding Inc., Caliber Company, Blackhawk Industries Products Group Unlimited LLC and Eagle Industries have entrenched the company’s presence in the tactical accessories market as well as the hunting rifles, shotguns, commercial and security ammunitions and shooting sports domain. They have also enabled it to leverage its existing distribution network to gain share and realize synergies.
The Defense Group segment of Alliant delivered first light gunship to the Kingdom of Jordan. The company also integrated roll-on, roll-off palletized weapons system on the multi-mission MC-27J tactical transport aircraft jointly with the Italian Air Force and Finmeccanica-Alenia Aermacchi.
Overall, the firms view Alliant as a well-diversified aerospace and defense contractor in possession of critical capabilities that are vital to the preservation of national security. The company is positioning itself well on a number of high-profile, next-generation platforms, expanding its presence into new attractive growth markets, and further diversifying its revenue base, all of which will likely help to drive growth in the future. The firms continue to believe that Alliant’s overall corporate strategy is fundamentally sound, which will enable it to tap additional growth markets while simultaneously filling in revenue gaps left by the conclusion of major space programs.
Dec 5, 2014
Target Price/Valuation [Note: Only highlighted material has been changed.]
Rating DistributionPositive / 22.2% ¯
Neutral / 77.8%
Negative / 0.0%
Avg. Target Price / $138.00 ¯
Highest Target Price / $150.00 ¯
Lowest Target Price / $125.00 ¯
No. of Brokerage Firms with Target Price/Total / 7/9
Key risks that could restrict the realization of the target price include over-dependence on government contracts and integration risks related to acquisitions. Other factors affecting the price target are uncertainty on the NASA funding, project execution problems and exchange rate as well as currency risks.
Recent News [Note: Only highlighted material has been changed.]
On Dec 4, 2014, Alliant Techsystems Inc. and Orbital Sciences Corporation announced that the U.S. Department of Justice has approved the proposed merger of Alliant’s Aerospace and Defense Groups with Orbital.
On Oct 30, 2014, Alliant Techsystems Inc. reported its second-quarter fiscal 2015 adjusted earnings of $3 per share, surpassing the Zacks Consensus Estimate by around 2%. However, quarterly earnings increased 6.4% year over year. Total revenue of $1.27 billion missed the Zacks Consensus Estimate by 0.6%. The reported revenue increased from the prior-year figure by 11.4%.
Revenue [Note: Only highlighted material has been changed.]
According to the company, total revenues in 2QFY15 came in at around $1.27 billion, up 11.4% year over year primarily due to higher contribution from all segments – Sporting Group (up 26.4% year over year), Defense Group (3.4%) and Aerospace Group (3.1%).
Guidance
Alliant narrowed its 2015 sales guidance to $5.15–$5.20 billion from the previous projection of $5.15–$5.25 billion.
Outlook
A few firms expect higher revenues from the Aerospace Group and Defense Group segments to boost 3QFY15 total revenues. This might be partially offset by a decline in Sporting Group segment revenues.
Many firms expect higher contribution from the Aerospace Group and Sporting Group segments to drive FY15 revenues.
Margins [Note: Only highlighted material has been changed.]
According to the company, cost of sales in 2QFY15 increased 11.2% to $973.2 million from $836.7 million a year-ago.
The company’s gross profit increased to around $300.1 million from $267.4 million registered in the prior-year period, indicating growth of 12.2%.
Total operating expenses in 2QFY15 were up 16.9% to $139.4 million from $119.2 million a year ago. Higher expenses were attributed to a rise in selling, general and administrative expenses. Alliant's interest expenses increased 53.3% year over year to $23.4 million in 2QFY15.
Guidance
Alliant Techsystems stated that the effective tax rate for the rest of FY15 will likely be around 33%, which is lower than the previous projection of nearly 34%.
Earnings per Share [Note: Only highlighted material has been changed.]
According to the company, 2QFY15 adjusted earnings was $3 per share, up 6.4% year over year primarily due to higher revenues and lower pension expenses.
On a GAAP basis, earnings came in at $2.97 per share in 2QFY15 compared with the prior-year figure of $2.86. The difference between the adjusted and GAAP earnings resulted from the combined impact of a transaction cost of $0.10 and a gain of $0.07 from tax settlement.
Guidance
For FY15, Alliant reiterated its earnings guidance in the range of $11.50–$11.90 per share.
Outlook
A few firms expect higher depreciation and amortization expenses and interest expenses, and unfavorable results of the Sporting Group segment to impact FY15 earnings negatively. This might be partially offset by an improvement in Aerospace Group and Defense Group segments.
Research Analyst / Priyam BhattacharyaCopy Editor / Jewel Saha
Content Ed. / Jewel Saha
Lead Analyst / Jewel Saha
QCA / Jewel Saha
No. of brokers reported/Total brokers
Reason for Update / Earnings Flash
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