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ORB > SEC Filings for ORB > Form 10-Q on 25-Jul-2013All Recent SEC Filings

Show all filings for ORBITAL SCIENCES CORP /DE/

Form 10-Q for ORBITAL SCIENCES CORP /DE/


25-Jul-2013

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, as amended. 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 sequestration under the Budget Control Act of 2011, new product development programs, the availability of key product components, 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 our Annual Report on Form 10-K for the year ended December 31, 2012. 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 2012 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 Six Months Ended June 30, 2013 and 2012

Revenues - Our consolidated revenues were $333.1 million in the second quarter of 2013, a decrease of $38.2 million, or 10%, compared to the second quarter of 2012 due to lower revenues in our satellites and space systems and advanced space programs segments, partially offset by an increase in revenues in our launch vehicles segment. Launch vehicles segment revenues increased $7.7 million, or 6%, primarily due to increased activity on missile defense interceptors, partially offset by decreased activity on space launch vehicles.
Satellites and space systems segment revenues decreased $36.3 million, or 28%, principally due to decreased activity on communications satellite contracts, partially offset by increased activity on science and remote sensing satellites.
Advanced space programs segment revenues decreased $16.3 million, or 12%, primarily due to decreased activity on the International Space Station Commercial Resupply Services ("CRS") contract with the National Aeronautics and Space Administration ("NASA") and national security satellite contracts.

Eliminations of intersegment revenues were $11.4 million in the second quarter of 2013 compared to $18.1 million in the second quarter of 2012. Intersegment revenues included $8.6 million and $15.7 million in the second quarter of 2013 and 2012, respectively, pertaining to Antares launch vehicle production work that is reported in our launch vehicles segment which is part of the Commercial Orbital Transportation Services ("COTS") research and development program with NASA that is reported in our advanced space programs segment.

Our consolidated revenues were $667.9 million in the first half of 2013, a decrease of $41.4 million, or 6%, compared to the first half of 2012 due to lower revenues in our satellites and space systems and advanced space programs segments, partially offset by an increase in revenues in our launch vehicles segment. Launch vehicles segment revenues increased $15.9 million, or 6%, primarily due to increased activity on missile defense interceptors and target launch vehicles, partially offset by decreased activity on space launch vehicles. Satellites and space systems segment revenues decreased $46.8 million, or 19%, principally due to decreased activity on communications satellite contracts, partially offset by increased activity on science and remote sensing satellites. Advanced space programs segment revenues decreased $18.0 million, or 7%, primarily due to decreased activity on the CRS contract and on national security satellite contracts.

Eliminations of intersegment revenues were $24.9 million in the first half of 2013 compared to $32.5 million in the first half of 2012. Intersegment revenues included $19.0 million and $27.5 million in the first half of 2013 and 2012, respectively, pertaining to Antares launch vehicle production work that is reported in our launch vehicles segment which is part of the COTS program that is reported in our advanced space programs segment.


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The CRS contract accounted for 24% and 25% of our consolidated revenues in the second quarter of 2013 and 2012, respectively, and 23% and 24% of consolidated revenues in the first half of 2013 and 2012, 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 $80.0 million in the second quarter of 2013, a decrease of $14.2 million, or 15%, compared to the second quarter of 2012, and totaled $155.1 million in the first half of 2013, a decrease of $13.4 million, or 8%, compared to the first half of 2012. Since the commencement of the CRS contract through June 30, 2013, a total of approximately $1.1 billion of revenues has been recognized on the contract, which has a total contract value of approximately $1.9 billion.

Cost of Revenues - Our cost of revenues was $259.0 million in the second quarter of 2013, a decrease of $31.1 million, or 11%, compared to the second quarter of 2012. Cost of revenues includes the costs of personnel, materials, subcontractors and overhead. The decrease in our cost of revenues was primarily attributable to the decrease in contract activity in the satellites and space systems and advanced space programs segments, partially offset by an increase in activity in the launch vehicles segment. Cost of revenues increased $10.5 million, or 10%, in the launch vehicles segment, decreased $37.6 million, or 35%, in the satellites and space systems segment and decreased $10.7 million, or 10%, in the advanced space programs segment. Eliminations of intersegment cost of revenues decreased $6.7 million due to the decrease in intersegment revenues discussed above.

Our cost of revenues was $505.4 million in the first half of 2013, a decrease of $43.6 million, or 8%, compared to the first half of 2012. The decrease in our cost of revenues was primarily attributable to the decrease in contract activity in the satellites and space systems and advanced space programs segments, partially offset by an increase in activity in the launch vehicles segment.
Cost of revenues increased $20.1 million, or 10%, in the launch vehicles segment, decreased $55.5 million, or 28%, in the satellites and space systems segment and decreased $15.8 million, or 8%, in the advanced space programs segment. Eliminations of intersegment cost of revenues decreased $7.6 million due to the decrease in intersegment revenues discussed above.

Research and Development Expenses - Our research and development expenses totaled $23.2 million, or 7% of revenues, in the second quarter of 2013, a $1.3 million increase compared to $21.9 million, or 6% of revenues, in the second quarter of 2012. The increase in research and development expenses was primarily attributable to higher COTS program costs, partially offset by decreased costs on the Antares launch vehicle development program.

Our research and development expenses totaled $55.3 million, or 8% of revenues, in the first half of 2013, a $5.5 million increase compared to $49.8 million, or 7% of revenues, in the first half of 2012. The increase in research and development expenses in the first half of 2013 compared to the first half of 2012 was principally attributable to higher COTS program costs and product enhancements in the satellites and space systems segment, partially offset by decreased costs on the Antares launch vehicle development program.


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The COTS program is 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 program research and development expenses, including associated general and administrative expenses. Under the COTS agreement, as amended, NASA has agreed to pay us $288 million in cash milestone payments, partially funding our program costs which are currently estimated to be approximately $532 million. We expect to complete this program in the second half of 2013. The following table summarizes the COTS program costs incurred and amounts funded by NASA that are recorded in research and development expenses (in millions):

                                 Second Quarter                First Six Months            Inception
                              2013            2012           2013             2012          To Date
Research and development
costs incurred (1)         $      13.6     $     11.1     $      31.5      $     32.3     $     512.0
Less  amounts funded by                                                                                  (2)
NASA                              (1.3 )         (4.5 )          (3.8 )         (15.5 )        (286.0 )
Net research and
development expenses       $      12.3     $      6.6     $      27.7      $     16.8     $     226.0


ญญญญญญ________________________________________


(1) Includes associated general and administrative expenses.
(2) Through June 30, 2013, we have received $281 million in cash from NASA and as of June 30, 2013, we recorded an approximately $5 million receivable due from NASA.

Research and development expenses attributable to our Antares launch vehicle development program were $4.4 million and $8.1 million in the second quarter of 2013 and 2012, respectively, and were $12.3 million and $19.7 million in the first half of 2013 and 2012, respectively.

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 with respect to certain of these costs. Since the inception of the Antares program through June 30, 2013, we have incurred approximately $174 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 $24.6 million and $33.2 million, or 7% and 9% of revenues, in the second quarter of 2013 and 2012, 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 decreased $8.6 million, or 26%, in the second quarter of 2013 compared to the second quarter of 2012 primarily due to lower bid, proposal and marketing costs in the advanced space programs segment. Selling, general and administrative expenses in the second quarter of 2012 also included $2.1 million of professional fees and other costs related to a potential acquisition that was not consummated.


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Selling, general and administrative expenses were $49.8 million and $60.5 million, or 7% and 9% of revenues, in the first half of 2013 and 2012, respectively. Selling, general and administrative expenses decreased $10.8 million, or 18%, in the first half of 2013 compared to the first half of 2012 primarily due to the same factors that impacted second quarter results discussed above.

Operating Income - Our consolidated operating income was $26.3 million in the second quarter of 2013, an increase of $0.2 million, or 1%, compared to the second quarter of 2012. Launch vehicles segment operating income increased $2.4 million, or 30%, primarily due to increased activity on missile defense interceptors and a profit margin improvement on the Pegasus program that was largely attributable to the successful completion of a Pegasus launch mission in June 2013. Satellites and space systems segment operating income increased marginally principally due to profit margin improvements on certain satellites that were substantially completed in the first half of 2013 offset by decreased activity on other satellite contracts completed during the past twelve months.
Advanced space programs segment operating income decreased $4.4 million, or 46%, primarily due to favorable adjustments in the second quarter of 2012 on certain national security contracts and decreased activity on the CRS contract.
The consolidated results in the second quarter of 2012 included $2.1 million of unallocated corporate-level professional fees and other costs related to a potential acquisition that was not consummated.

Our consolidated operating income was $57.4 million in the first half of 2013, an increase of $7.5 million, or 15%, compared to the first half of 2012. Launch vehicles segment operating income increased $5.6 million, or 33%, primarily due to increased activity on missile defense interceptors and target launch vehicles, a profit margin improvement on the Pegasus program that was largely attributable to the successful completion of a Pegasus launch mission in June 2013, and improved profit margins on target launch vehicle contracts.
Satellites and space systems segment operating income increased $3.5 million, or 20%, principally due to profit margin improvements on certain completed or substantially completed satellites and the favorable resolution of a customer claim, partially offset by decreased activity on other completed satellite contracts. Advanced space programs segment operating income decreased $3.7 million, or 22%, primarily due to lower activity on national security satellite contracts, favorable adjustments in the first half of 2012 on certain national security contracts and decreased activity on the CRS contract, partially offset by a favorable contract closeout adjustment in the first half of 2013. The consolidated results in the first half of 2012 included $2.1 million of unallocated corporate-level professional fees and other costs related to a potential acquisition that was not consummated.

Total operating income from the CRS contract was $4.1 million and $5.0 million in the second quarter of 2013 and 2012, respectively, and $8.0 million and $8.4 million in the first half of 2013 and 2012, respectively. Since the commencement of the CRS contract through June 30, 2013, a total of $56.1 million of operating income has been recognized on the contract.


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Interest Income and Other - Interest income and other was $0.5 million and $0.4 million in the second quarter of 2013 and 2012, respectively, and $1.0 million and $0.6 million in the first half of 2013 and 2012, respectively.

Interest Expense - Interest expense was $1.2 million and $3.0 million in the second quarter of 2013 and 2012, respectively, and $2.3 million and $6.0 million in the first half of 2013 and 2012, respectively. The reduction in interest expense in 2013 was attributable to our debt refinancing transaction that was completed in December 2012.

Income Tax Provision - Our income tax provision was $9.3 million and $9.0 million in the second quarter of 2013 and 2012, respectively. We recorded income tax provisions of $20.3 million and $16.9 million in the first half of 2013 and 2012, respectively. Our effective tax rate for the first half of 2013 and 2012 was 36.1% and 38.0%, respectively. The tax rate in the first six months of 2013 included a favorable income tax adjustment of $0.5 million pertaining to federal research and development tax credits.

Net Income - Net income was $16.3 million and $14.6 million, or $0.27 and $0.25 diluted earnings per share, in the second quarter of 2013 and 2012, respectively, and $35.9 million and $27.6 million, or $0.59 and $0.46 diluted earnings per share, in the first half of 2013 and 2012, respectively.

Segment Results for the Quarters and Six Months Ended June 30, 2013 and 2012

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 (in thousands, except
percentages):

                               Second Quarter                            First Six Months
                     2013          2012         % Change        2013          2012         % Change
Revenues           $ 134,027     $ 126,340              6 %   $ 268,319     $ 252,462              6 %
Operating income      10,521         8,072             30 %      22,554        16,988             33 %
Operating margin         7.9 %         6.4 %                        8.4 %         6.7 %

Segment Revenues - Launch vehicles segment revenues increased $7.7 million, or 6%, in the second quarter of 2013 compared to the second quarter of 2012 primarily due to increased activity on missile defense interceptors, partially offset by decreased activity on space launch


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vehicles. Missile defense interceptor revenues increased $15.9 million, or 92%, due to increased activity on our Ground-based Midcourse Defense ("GMD") program.
Under our GMD program, we supply interceptor boosters for the U.S. Missile Defense Agency's GMD system. GMD program revenues accounted for 25% and 14% of total launch vehicles segment revenues in the second quarter of 2013 and 2012, respectively. Space launch vehicle revenues decreased $9.3 million, or 15%, principally due to decreased production activity on Antares launch vehicles for the COTS program and Minotaur space launch vehicles, partially offset by increased production activity on Antares launch vehicles for the CRS program.
Antares launch vehicle revenues were $41.4 million and $44.4 million in the second quarter of 2013 and 2012, respectively, which included $32.8 million and $28.7 million, respectively, related to the CRS contract and $8.6 million and $15.7 million, respectively, related to the COTS program. Antares launch vehicle revenues accounted for 31% and 35% of total launch vehicles segment revenues in the second quarter of 2013 and 2012, respectively. Target launch vehicle revenues increased marginally.

Launch vehicles segment revenues increased $15.9 million, or 6%, in the first half of 2013 compared to the first half of 2012 primarily due to increased activity on missile defense interceptors and target launch vehicles, partially offset by decreased activity on space launch vehicles. Missile defense interceptor revenues increased $20.6 million, or 59%, due to increased activity on our GMD program. GMD program revenues accounted for 21% and 14% of total launch vehicles segment revenues in the first half of 2013 and 2012, respectively. Target launch vehicle revenues increased $5.4 million, or 6%, largely due to increased activity on our Intermediate-Range Ballistic Missile ("IRBM") target vehicle contract. Space launch vehicle revenues decreased $11.6 million, or 10%, principally due to decreased production activity on Antares launch vehicles for the COTS program. Antares launch vehicle revenues were $83.2 million and $91.1 million in the first half of 2013 and 2012, respectively, which included $64.2 million and $63.6 million, respectively, related to the CRS contract and $19.0 million and $27.5 million, respectively, related to the COTS program. Antares launch vehicle revenues accounted for 31% and 36% of total launch vehicles segment revenues in the first half of 2013 and 2012, respectively.

Segment Operating Income - Operating income in the launch vehicles segment increased $2.4 million, or 30%, in the second quarter of 2013 compared to the second quarter of 2012 due to higher operating income from space launch vehicles and missile defense interceptors, partially offset by lower operating income from target launch vehicles. Operating income from space launch vehicles increased $1.9 million, or 150%, primarily due to a profit margin improvement on the Pegasus program that was largely attributable to the successful completion of a Pegasus launch mission in June 2013. Operating income from missile defense interceptors increased $1.2 million, or 54%, primarily due to increased activity on our GMD contract. Operating income from target launch vehicles decreased $0.6 million, or 13%.

Operating income in the launch vehicles segment increased $5.6 million, or 33%, in the first half of 2013 compared to the first half of 2012 due to higher operating income from all three launch vehicle product lines. Operating income from space launch vehicles increased $2.8 million, or 91%, primarily due to a profit margin improvement on the Pegasus program that was largely attributable to the successful completion of a Pegasus launch mission in June 2013.


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Operating income from missile defense interceptors increased $1.4 million, or 34%, due to increased activity on our GMD contract. Operating income from target launch vehicles increased $1.3 million, or 14%, principally due to increased activity and an improved profit margin on our IRBM contract.

Launch vehicles segment operating margins (as a percentage of revenues) were 7.9% in the second quarter of 2013, compared to 6.4% in the second quarter of 2012, and 8.4% in the first half of 2013, compared to 6.7% in the first half of 2012 . The improvement in operating margins in the second quarter and first half of 2013 was largely due to the profit margin improvement on the Pegasus program discussed above.

Satellites and Space Systems

Satellites and space systems segment operating results were as follows (in
thousands, except percentages):

                              Second Quarter                           First Six Months
                     2013         2012        % Change         2013          2012        % Change
Revenues           $ 93,828     $ 130,114           (28 %)   $ 194,611     $ 241,397           (19 %)
Operating income     10,637        10,572             -         21,475        17,949            20 %

Operating margin 11.3 % 8.1 % 11.0 % 7.4 %

Segment Revenues - Satellites and space systems segment revenues decreased $36.3 million, or 28%, in the second quarter of 2013 compared to the second quarter of 2012 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 $54.1 million, or 64%, principally due to the completion of several satellites during the past 12 months. Communications satellite revenues accounted for 32% and 65% of total segment revenues in the second quarter of 2013 and 2012, respectively. Science and remote sensing satellite revenues increased $17.7 million, or 102%, primarily due to increased activity to complete a recently deployed satellite and increased activity on a satellite contract that was awarded in 2011. Space technical services revenues increased $1.2 million, or 4%.

Satellites and space systems segment revenues decreased $46.8 million, or 19%, in the first half of 2013 compared to the first half of 2012 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 $70.2 million, or 48%, principally due to the completion of several satellites during the past 12 months.
Communications satellite revenues accounted for 39% and 61% of total segment revenues in the first half of 2013 and 2012, respectively. Science and remote sensing satellite revenues increased $23.0 million, or 59%, primarily due to increased activity to complete a recently deployed satellite and increased activity on a satellite contract that was awarded in 2011. Space technical services revenues increased $1.8 million, or 3%.

Segment Operating Income - Operating income in the satellites and space systems segment increased marginally in the second quarter of 2013 compared to the second quarter of 2012,


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