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ORB > SEC Filings for ORB > Form 10-Q on 29-Oct-2012All Recent SEC Filings

Show all filings for ORBITAL SCIENCES CORP /DE/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ORBITAL SCIENCES CORP /DE/


29-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements contained in this Item 2 and elsewhere in this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include, but are not limited to, those related to our financial outlook, liquidity, goals, business strategy, projected plans and objectives of management for future operating results, and forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include the words "anticipate," "forecast," "expect," "believe," "should," "will," "intend," "plan" and words of similar substance. Such forward-looking statements are subject to risks, trends and uncertainties that could cause the actual results or performance of the company to be materially different from the forward-looking statement. Uncertainty surrounding factors such as continued government support and funding for key space and defense programs, including impacts of potential sequestration under the Budget Control Act of 2011, new product development programs, product performance and market acceptance of products and technologies, achievement of contractual milestones, government contract procurement and termination risks and income tax rates may materially impact Orbital's actual financial and operational results. Other risks, uncertainties and factors are discussed under the caption "Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2011. We are under no obligation to, and expressly disclaim any obligation or undertaking to update or alter any forward-looking statement, whether as a result of new information, subsequent events or otherwise, except as required by law.

We develop and manufacture small- and medium-class rockets and space systems for commercial, military and civil government customers. Our primary products and services include the following:

ท Launch Vehicles - Rockets that are used as small- and medium-class space launch vehicles that place satellites into Earth orbit and escape trajectories, interceptor and target vehicles for missile defense systems and suborbital launch vehicles that place payloads into a variety of high-altitude trajectories.

ท Satellites and Space Systems - Small- and medium-class satellites that are used to enable global and regional communications and broadcasting, conduct space-related scientific research, collect imagery and other remotely-sensed data about the Earth, carry out interplanetary and other deep-space exploration missions and demonstrate new space technologies.

ท Advanced Space Programs - Human-rated space systems for Earth-orbit and deep-space exploration, and small- and medium-class satellites primarily used for national security space programs and to demonstrate new space technologies.


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The following discussion should be read along with our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission, and with the unaudited condensed consolidated financial statements included in this Form 10-Q.

Consolidated Results of Operations for the Quarters and Nine Months Ended September 30, 2012 and 2011

Revenues - Our consolidated revenues were $372.9 million in the third quarter of 2012, an increase of $30.7 million, or 9%, compared to the third quarter of 2011 due to higher revenues in our launch vehicles segment and advanced space programs segment, partially offset by a reduction in satellites and space systems segment revenues. Launch vehicles segment revenues increased $24.1 million, or 21%, due to increased activity on space launch vehicles and target launch vehicles, partially offset by decreased activity on missile defense interceptors. Advanced space programs segment revenues increased $8.0 million, or 7%, due to increased activity on the International Space Station Commercial Resupply Services ("CRS") contract with the National Aeronautics and Space Administration ("NASA"), partially offset by decreased activity on national security satellite contracts. Satellites and space systems segment revenues decreased $11.6 million, or 8%, due to decreased activity on communications satellite contracts partially offset by increased activity on science and remote sensing satellite contracts.

The growth in revenues also reflects a net decrease of $10.2 million in intersegment revenue eliminations in the third quarter of 2012 compared to the third quarter of 2011, principally due to a lower level of activity on Antares launch vehicles for the Commercial Orbital Transportation Services ("COTS") research and development program with NASA. Intersegment revenues included $15.4 million and $26.1 million in the third quarter of 2012 and 2011, respectively, pertaining to Antares production work reported in our launch vehicles segment as part of the COTS program that is reported in our advanced space programs segment.

Our consolidated revenues were $1,082.2 million in the first nine months of 2012, an increase of $71.7 million, or 7%, compared to the first nine months of 2011 due to higher revenues in our advanced space programs segment and our launch vehicles segment, partially offset by a reduction in revenues in the satellites and space systems segment. Advanced space programs segment revenues increased $60.0 million, or 19%, due to increased activity on the CRS contract and national security satellite contracts. Launch vehicles segment revenues increased $40.0 million, or 11%, primarily due to increased activity on target launch vehicles, partially offset by decreased activity on missile defense interceptors. Satellites and space systems segment revenues decreased $61.1 million, or 14%, principally due to decreased activity on communications satellite contracts partially offset by increased activity on space technical services contracts.

Eliminations of intersegment revenues decreased to $49.9 million in the first nine months of 2012 compared to $82.8 million in the first nine months of 2011. Intersegment revenues included $42.9 million and $77.8 million in the first nine months of 2012 and 2011, respectively, pertaining to Antares production work reported in our launch vehicles segment as part of the COTS program that is reported in our advanced space programs segment.


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The CRS contract accounted for 25% and 14% of consolidated revenues in the third quarter of 2012 and 2011, respectively, and 24% and 18% of consolidated revenues in the first nine months of 2012 and 2011, respectively. The launch vehicle portion of the CRS contract is reported in our launch vehicles segment and the remainder of the CRS contract is reported in our advanced space programs segment. CRS contract revenues totaled $91.4 million in the third quarter of 2012, an increase of $44.7 million, or 96%, compared to the third quarter of 2011, due to a higher level of production activity in the third quarter of 2012. CRS contract revenues totaled $259.9 million in the first nine months of 2012, an increase of $80.8 million, or 45%, compared to the first nine months of 2011, due to increased production activity. Under the terms of the CRS contract, approximately 25% of the contract value is billable to the customer and collectible only upon the completion of launch and delivery milestones for each of eight CRS contract missions. Since the inception of the CRS contract through September 30, 2012, a total of $888 million of revenues have been recognized on the contract, which has a total contract value of approximately $1.9 billion.

Cost of Revenues - Our cost of revenues was $284.3 million in the third quarter of 2012, an increase of $16.8 million, or 6%, compared to the third quarter of 2011. Cost of revenues includes the costs of personnel, materials, subcontractors and overhead. The increase in our cost of revenues was primarily attributable to the increase in contract activity in the launch vehicles segment and advanced space programs segment, partially offset by decreased contract activity in the satellites and space systems segment. Cost of revenues increased $18.1 million in the launch vehicles segment and $4.3 million in the advanced space programs segment and decreased $15.8 million in the satellites and space systems segment. Eliminations of intersegment cost of revenues decreased $10.2 million consistent with the decrease in intersegment revenues discussed above.

Our cost of revenues was $833.3 million in the first nine months of 2012, an increase of $12.0 million, or 1%, compared to the first nine months of 2011. Cost of revenues increased $35.8 million in the advanced space programs segment and $10.4 million in the launch vehicles segment. These increases were offset by a $67.0 million decrease in cost of revenues in the satellites and space systems segment. Eliminations of intersegment cost of revenues decreased $32.8 million consistent with the decrease in intersegment revenues discussed above.

Research and Development Expenses - Our research and development expenses totaled $32.9 million, or 9% of revenues, in the third quarter of 2012, a $6.2 million increase compared to $26.7 million, or 8% of revenues, in the third quarter of 2011. The increase in research and development expenses was attributable to an increase in COTS research and development expenses as well as expenditures for product enhancements in the satellites and space systems segment.

Our research and development expenses totaled $82.7 million, or 8% of revenues, in the first nine months of 2012, a $15.4 million increase compared to $67.3 million, or 7% of revenues, in the first nine months of 2011. The increase in research and development expenses was attributable to an increase in COTS research and development expenses, increased expenditures


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for product enhancements in the satellites and space systems segments and increased expenditures for our Antares launch vehicle development program.

The majority of our research and development expenses in 2012 and 2011 were attributable to the COTS program and our Antares launch vehicle development program. The COTS program is being accounted for as a best-efforts research and development cost-sharing arrangement. As such, the amounts funded by NASA are recognized proportionally as an offset to our COTS project research and development expenses, including associated general and administrative expenses. Under the COTS agreement, as amended, as of September 30, 2012, NASA has agreed to pay us $288 million in cash milestone payments, partially funding our program costs which are currently estimated to be approximately $495 million. We expect to substantially complete this program in early 2013. The following table summarizes the COTS program costs incurred and amounts funded by NASA recorded in research and development expenses (in millions):

                                       Third Quarter             First Nine Months          Inception
                                    2012          2011           2012          2011          To Date
Research and development costs
incurred (1)                      $    21.2     $    36.8     $     53.5     $   115.1     $     471.4
Less amounts funded by NASA            (6.0 )       (23.0 )        (21.5 )       (82.3 )        (281.8 )
Net research and development
expenses                          $    15.2     $    13.8     $     32.0     $    32.8     $     189.6


ญญญญญญ__________________________________________


(1) Includes associated general and administrative expenses.

Research and development expenses attributable to our Antares launch vehicle development program were $9.9 million and $9.0 million in the third quarter of 2012 and 2011, respectively, and were $29.6 million and $24.2 million in the first nine months of 2012 and 2011, respectively. Since the inception of the Antares program through September 30, 2012, we have incurred $221.9 million of such costs.

We believe that the majority of our research and development expenses are recoverable and billable under our contracts with the U.S. Government. Charging practices relating to research and development and other costs that may be charged directly or indirectly to government contracts are subject to audit by U.S. Government agencies to determine if such costs are reasonable and allowable under government contracting regulations and accounting practices. We believe that the research and development costs incurred in connection with our Antares development program are allowable, although the U.S. Government has not yet made a final determination. Since the inception of the Antares program through September 30, 2012, we have incurred $183.0 million of such expenses that have been recorded as allowable costs. If such costs were determined to be unallowable, we could be required to record revenue and profit reductions in future periods.

Selling, General and Administrative Expenses - Selling, general and administrative expenses were $24.4 million and $23.3 million, or 7% of revenues, in the third quarter of 2012 and 2011, respectively. Selling, general and administrative expenses include the costs of our finance, legal, administrative and general management functions, as well as bid, proposal and marketing costs. Selling, general and administrative expenses increased $1.1 million, or 4%, in the third quarter of


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2012 compared to the third quarter of 2011 due to an increase in corporate-level expenses. As a percentage of revenues, selling, general and administrative expenses were unchanged in the third quarter of 2012 compared to the third quarter of 2011.

Selling, general and administrative expenses were $84.9 million and $64.3 million, or 8% and 6% of revenues, in the first nine months of 2012 and 2011, respectively. Selling, general and administrative expenses increased $20.6 million, or 32%, in the first nine months of 2012 primarily due to bid, proposal and marketing costs pertaining to new business prospects in the advanced space programs segment and launch vehicles segment. In addition, selling, general and administrative expenses in the first nine months of 2012 included $2.1 million of professional fees and other costs related to a potential acquisition that was not consummated.

Operating Income - Operating income was $31.3 million in the third quarter of 2012, an increase of $6.6 million, or 27%, compared to the third quarter of 2011 due to higher operating income in all three business segments. Launch vehicles segment operating income increased $4.0 million primarily due to a profit improvement in the space launch vehicles product line. Advanced space programs segment operating income increased $1.9 million primarily due to a favorable contract closeout adjustment and increased activity on the CRS contract, partially offset by lower income from national security satellite contracts. Satellites and space systems segment operating income increased $0.7 million principally due to higher operating income from communications satellite contracts partially offset by lower operating income from science and remote sensing satellite contracts.

Operating income was $81.3 million in the first nine months of 2012, an increase of $23.7 million, or 41%, compared to the first nine months of 2011 primarily due to operating income increases in the launch vehicles segment and the advanced space programs segment. Launch vehicles segment operating income increased $19.2 million primarily due to a 2011 adjustment in connection with a March 2011 Taurus XL launch failure that reduced operating income by $11.3 million and increased operating income from target launch vehicles. Advanced space programs segment operating income increased $6.7 million primarily due to a favorable contract closeout adjustment in addition to increased activity on the CRS contract and national security satellite contracts. Satellites and space systems segment operating income decreased marginally. Operating income in the first nine months of 2012 also included $2.1 million of professional fees and other costs recorded in corporate and other, related to a potential acquisition that was not consummated.

Total operating income from the CRS contract was $4.1 million and $2.3 million in the third quarter of 2012 and 2011, respectively. Total operating income from the CRS contract was $12.5 million and $9.0 million in the first nine months of 2012 and 2011, respectively. Since the inception of the CRS program through September 30, 2012, a total of $44 million of operating income has been recognized on the contract.

Interest Income and Other - Interest income and other was less than $0.1 million in the third quarter of 2012, compared to $0.4 million in the third quarter of 2011. Interest income and other was $0.7 million in the first nine months of 2012, compared to $12.6 million in the first nine


months of 2011. Interest income and other in the first nine months of 2011 included the recognition of an $11.3 million insurance recovery pertaining to the March 2011 Taurus XL launch failure discussed above.

Interest Expense - Interest expense was $2.5 million and $2.9 million in the third quarter of 2012 and 2011, respectively, and was $8.6 million and $8.2 million in the first nine months of 2012 and 2011, respectively, primarily attributable to interest on our long-term convertible debt.

Income Tax Provision - We recorded an income tax provision of $9.4 million in the third quarter of 2012, compared to $5.7 million in the third quarter of 2011. We recorded income tax provisions of $26.3 million and $11.9 million in the first nine months of 2012 and 2011, respectively. Our effective income tax rates for the first nine months of 2012 and 2011 were 35.9% and 19.2%, respectively. Our income tax provision for the first nine months of 2011 includes a non-recurring favorable income tax adjustment of $7.7 million in 2011 pertaining to our election to claim extraterritorial income exclusions related to export activities in prior years. In addition, our income tax provisions in 2011 included the effect of federal research and development tax credits that are not expected to be available to us in 2012.

Net Income - Our net income was $19.5 million and $16.5 million, or $0.33 and $0.28 diluted earnings per share, in the third quarter of 2012 and 2011, respectively, and $47.1 million and $50.0 million, or $0.79 and $0.84 diluted earnings per share, in the first nine months of 2012 and 2011, respectively.

Segment Results for the Quarters Ended September 30, 2012 and 2011

Our products and services are grouped into three reportable segments: launch vehicles, satellites and space systems and advanced space programs. Corporate office transactions that have not been attributed to a particular segment, as well as consolidating eliminations and adjustments, are reported in corporate and other.

The following tables of financial information and related discussion of the results of operations of our business segments are consistent with the presentation of segment information in Note 2 to the accompanying financial statements in this Form 10-Q.

Launch Vehicles

Launch vehicles segment operating results were as follows:

                               Third Quarter                           First Nine Months
($ in thousands)     2012          2011        % Change        2012          2011         % Change
Revenues           $ 140,673     $ 116,538           21%     $ 393,135     $ 353,178            11%
Operating income       9,252         5,242           76%        26,240         7,063           272%
Operating margin        6.6%          4.5%                        6.7%          2.0%

Segment Revenues - Launch vehicles segment revenues increased $24.1 million, or 21%, in the third quarter of 2012 compared to the third quarter of 2011 due to increased activity on space


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launch vehicles and target launch vehicles, partially offset by decreased activity on missile defense interceptors. Space launch vehicle revenues increased $15.0 million, or 28%, principally due to an increase in production activity on Antares launch vehicles for the CRS contract and the COTS program. Antares launch vehicle revenues were $53.4 million and $40.1 million in the third quarter of 2012 and 2011, respectively, which included $38.0 million and $14.0 million, respectively, related to the CRS contract and $15.4 million and $26.1 million, respectively, related to the COTS program. Antares launch vehicle revenues accounted for 38% and 34% of total launch vehicles segment revenues in the third quarter of 2012 and 2011, respectively. Target launch vehicle revenues increased $13.9 million, or 35%, largely due to activity on new contracts that were awarded in 2011. Missile defense interceptor revenues decreased $5.3 million, or 23%, due to decreased activity on our Ground-based Midcourse Defense ("GMD") contract.

Launch vehicles segment revenues increased $40.0 million, or 11%, in the first nine months of 2012 compared to the first nine months of 2011 primarily due to increased activity on target launch vehicles, partially offset by decreased activity on missile defense interceptors. Target launch vehicle revenues increased $52.1 million, or 53%, largely due to activity on new contracts that were awarded in 2011. Missile defense interceptor revenues decreased $13.9 million, or 21%, due to decreased activity on the GMD contract. Space launch vehicle revenues in the first nine months of 2012 decreased marginally compared to the first nine months of 2011. Antares launch vehicle revenues were $144.6 million and $142.1 million in the first nine months of 2012 and 2011, respectively, which included $101.7 million and $64.3 million, respectively, related to the CRS contract and $42.9 million and $77.8 million, respectively, related to the COTS program. Antares launch vehicle revenues accounted for 37% and 40% of total launch vehicles segment revenues in the first nine months of 2012 and 2011, respectively.

Segment Operating Income - Operating income in the launch vehicles segment increased $4.0 million, or 76%, in the third quarter of 2012 compared to the third quarter of 2011 due to higher space launch vehicles and target launch vehicles operating income, partially offset by lower operating income from missile defense interceptor contracts. Operating income from space launch vehicles increased $3.7 million primarily due to profit improvements on certain space launch vehicle contracts and increased activity on Antares launch vehicles for the CRS contract. This segment does not recognize any profit pertaining to the Antares rockets that are being built for the COTS program that is reported in our advanced space programs segment. Operating income from target launch vehicle contracts increased $0.9 million, or 22%, largely due to activity on new contracts that were awarded in 2011. Operating income from missile defense interceptors decreased $0.6 million, or 25%, in the third quarter of 2012 due to decreased activity on the GMD contract.

Operating income in the launch vehicles segment increased $19.2 million, or 272%, in the first nine months of 2012 compared to the first nine months of 2011 due to higher operating income from space launch vehicles and target launch vehicles, partially offset by lower operating income from missile defense interceptor contracts. Operating income from space launch vehicles increased $16.2 million primarily due to an adjustment in the first nine months of 2011 in connection with a March 2011 Taurus XL launch failure that reduced operating income by $11.3


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million, and due to profit improvements on certain space launch vehicle contracts. As noted above, this segment does not recognize any profit pertaining to the Antares rockets that are being built for the COTS program that is reported in our advanced space programs segment. Operating income from target launch vehicles increased $5.2 million, or 57%, in the first nine months of 2012, primarily due to activity on new contracts awarded in 2011. Operating income from missile defense interceptors decreased $2.3 million, or 28%, due to decreased activity on the GMD contract and the effect of a favorable profit adjustment recorded in 2011 resulting from the settlement of a terminated contract.

Launch vehicles segment operating margins (as a percentage of revenues) increased to 6.6% in the third quarter of 2012 compared to 4.5% in the third quarter of 2011. The improvement in operating margin was principally attributable to the effect of profit improvements on certain space launch vehicle contracts. Segment operating margin increased to 6.7% in the first nine months of 2012 compared to 2.0% in the first nine months of 2011 primarily due to the effect of the March 2011 Taurus XL launch failure described above.

Satellites and Space Systems

Satellites and space systems segment operating results were as follows:

                               Third Quarter                           First Nine Months
($ in thousands)     2012          2011        % Change        2012          2011         % Change
Revenues           $ 129,490     $ 141,130           (8% )   $ 370,887     $ 431,963           (14% )
Operating income      12,178        11,460            6%        30,127        30,244              -
Operating margin        9.4%          8.1%                        8.1%          7.0%

Segment Revenues - Satellites and space systems segment revenues decreased $11.6 million, or 8%, in the third quarter of 2012 compared to the third quarter of 2011 primarily due to decreased activity on communications satellite contracts, partially offset by increased activity on science and remote sensing satellite contracts. Communications satellite revenues decreased $20.9 million, or 22%, largely attributable to a reduction in activity on contracts that are nearing completion. Communications satellite revenues accounted for 58% and 68% of total segment revenues in the third quarter of 2012 and 2011, respectively. Science and remote sensing satellite revenues increased $8.5 million, or 45%, due to activity on a contract that was awarded in 2011. Space technical services revenues increased $0.9 million, or 4%, due to increased contract activity.


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Satellites and space systems segment revenues decreased $61.1 million, or 14%, in the first nine months of 2012 compared to the first nine months of 2011 principally due to decreased activity on communications satellite contracts, partially offset by increased activity on space technical services contracts. Communications satellite revenues decreased $69.7 million, or 24%, largely attributable to a reduction in activity on contracts that are nearing completion. Communications satellite revenues accounted for 60% and 68% of total segment revenues in the first nine months of 2012 and 2011, respectively. Science and remote sensing satellite revenues decreased $1.1 million, or 2%, due to decreased contract activity. Space technical services . . .

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