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ORB > SEC Filings for ORB > Form 10-Q on 25-Jul-2014All Recent SEC Filings

Show all filings for ORBITAL SCIENCES CORP /DE/

Form 10-Q for ORBITAL SCIENCES CORP /DE/


25-Jul-2014

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 Orbital's and ATK's ability to consummate the merger; Orbital's and ATK's ability to satisfy the conditions to the completion of the merger, including the receipt of approval of both Orbital's stockholders and ATK's stockholders; the regulatory approvals required for the merger not being obtained on the terms expected or on the anticipated schedule; the parties' ability to meet expectations regarding the timing, completion and accounting and tax treatments of the merger; reductions or changes in NASA or U.S. Government military spending, timing of payments and budgetary policies, including impacts of sequestration under the Budget Control Act of 2011, and sourcing strategies; intense competition; increases in costs, which the business may not be able to react to due to the nature of U.S. Government contracts; changes in cost and revenue estimates and/or timing of programs; the potential termination of U.S. Government contracts and the potential inability to recover termination costs; actual pension and other postretirement plan asset returns and assumptions regarding future returns, discount rates, service costs, mortality rates, and health care cost trend rates; greater risk associated with international business, including foreign currency exchange rates and fluctuations in those rates; other risks associated with U.S. Government contracts that might expose Orbital to adverse consequences; government investigations; security threats, including cybersecurity and other industrial and physical security threats, and other disruptions; changes in domestic and global economic conditions and unstable geopolitical conditions, including in Russia and Ukraine; supply, availability, and costs of raw materials and components, including commodity price fluctuations; government laws and other rules and regulations applicable to Orbital, such as procurement and import-export control; development of key technologies and retention of a qualified workforce; fires or explosions at any of Orbital's facilities; environmental laws that govern past practices and rules and regulations, noncompliance with which may expose Orbital to adverse consequences; impacts of financial market disruptions or volatility to customers and vendors; unanticipated changes in the tax provision or exposure to additional tax liabilities; and the costs and ultimate outcome of litigation matters and other legal proceedings 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, 2013. 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.


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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:

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.

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.

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

The following discussion should be read along with our 2013 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.
Merger Transaction Agreement

On April 28, 2014, we entered into a definitive transaction agreement (the "Transaction Agreement") with Alliant Techsystems Inc. ("ATK") that provides for the merger (the "Merger") of Orbital with the Aerospace and Defense Groups of ATK ("ATK A&D") following the spin-off of ATK's Sporting Group business ("Sporting") to ATK's stockholders (the "Distribution" and together with the Merger, the "Transaction"). At closing, the combined company will be named Orbital ATK, Inc. ("Orbital ATK"). The Transaction Agreement provides that each share of Orbital's common stock issued and outstanding immediately prior to the closing of the merger will be converted into the right to receive 0.449 shares of ATK common stock. Orbital's stockholders will own approximately 46.2% of Orbital ATK, and ATK's stockholders will own approximately 53.8% of Orbital ATK. This transaction is subject to stockholder approval and other customary closing conditions.


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Consolidated Results of Operations for the Quarters and Six Months Ended June 30, 2014 and 2013

Revenues - Our consolidated revenues were $318.1 million in the second quarter of 2014, a decrease of $15.0 million, or 4%, compared to the second quarter of 2013. Launch vehicles segment revenues decreased $8.2 million, or 6%, due to decreased activity on space launch vehicle and target vehicle contracts, partially offset by increased activity from missile defense interceptors. Satellites and space systems segment revenues decreased $6.6 million, or 7%, principally due to the completion of a science and remote sensing satellite contract in 2013, partially offset by higher communications satellite revenues. Advanced space programs segment revenues decreased $6.4 million, or 6%, primarily due to decreased activity on national security satellite contracts and the CRS contract, partially offset by activity on an advanced flight system contract awarded in 2013.

Intersegment revenue eliminations totaled $5.1 million in the second quarter of 2014 compared to $11.4 million in the second quarter of 2013. Intersegment revenues in the second quarter of 2013 included $8.6 million pertaining to Antares space launch vehicle production work reported as revenues in our launch vehicles segment and as costs in our advanced space programs segment as part of the Commercial Orbital Transportation Services ("COTS") research and development program with the National Aeronautics and Space Administration ("NASA"). The COTS program was completed in 2013.

Our consolidated revenues were $641.4 million in the first half of 2014, a decrease of $26.5 million, or 4%, compared to the first half of 2013. Satellites and space systems segment revenues decreased $24.6 million, or 13%, mainly due to the completion of a science and remote sensing satellite in 2013. Advanced space programs segment revenues decreased $12.4 million, or 5%, principally due to decreased activity levels on national security satellite contracts and the CRS contract, partially offset by activity on an advanced flight system contract awarded in 2013. Launch vehicles segment revenues decreased $5.2 million, or 2%, due to decreased activity on space launch vehicle and target vehicle contracts, partially offset by increased activity on missile defense interceptors.

Intersegment revenue eliminations totaled $9.2 million in the first half of 2014 compared to $24.9 million in the first half of 2013. Intersegment revenues in the first half of 2013 included $19.0 million pertaining to Antares space launch vehicle production work reported as revenues in our launch vehicles segment and as costs in our advanced space programs segment as part of the COTS program. The COTS program was completed in 2013.

The CRS contract accounted for 22% and 24% of our consolidated revenues in the second quarter of 2014 and 2013, respectively, and 23% of consolidated revenues in each of the first halves of 2014 and 2013. 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 $69.4 million in the second quarter of 2014, a decrease of $10.5 million, or 13%, compared to the second quarter of 2013, and totaled $149.5 million in the first half of 2014, a decrease of $5.7 million, or 4%, compared to the first half of


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2013. CRS revenues were down in the first half of 2014 due to lower activity levels in connection with the timing and scheduling of production work. Since the commencement of the CRS contract through June 30, 2014, a total of approximately $1.5 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 $262.0 million in the second quarter of 2014, an increase of $3.0 million, or 1%, compared to the second quarter of 2013. Cost of revenues includes the costs of personnel, materials, subcontractors and overhead. Cost of revenues increased $2.4 million, or 3%, in the satellites and space systems segment, and $2.1 million, or 2%, in the advanced space programs segment and decreased $7.8 million, or 7%, in the launch vehicles segment. Eliminations of intersegment cost of revenues decreased $6.3 million attributable to the reduction in intersegment revenues discussed above.

Our cost of revenues was $530.8 million in the first half of 2014, an increase of $25.4 million, or 5%, compared to the first half of 2013. Cost of revenues increased $12.5 million, or 7%, in the advanced space programs segment, and $0.8 million, or less than 1%, in the launch vehicles segment and decreased $3.6 million, or 3%, in the satellites and space systems segment. Eliminations of intersegment cost of revenues decreased $15.7 million attributable to the reduction in intersegment revenues discussed above.

Research and Development Expenses - Our research and development expenses totaled $7.4 million, or 2% of revenues, in the second quarter of 2014, a $15.8 million decrease compared to $23.2 million, or 7% of revenues, in the second quarter of 2013. Our research and development expenses totaled $14.3 million, or 2% of revenues, in the first half of 2014, a $41.0 million decrease compared to $55.3 million, or 8% of revenues, in the first half of 2013. These decreases in research and development expenses were principally attributable to the completion of the COTS program in 2013, and a significant reduction in Antares launch vehicle development 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 with respect to approximately $178 million of such costs incurred through June 30, 2014. 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 $33.5 million and $24.6 million, or 11% and 7% of revenues, in the second quarter of 2014 and 2013, 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 $8.9 million, or 36%, in the second quarter of 2014 compared to the second quarter of 2013 primarily due to $6.6 million


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of professional fees and other costs incurred in the second quarter of 2014 pertaining to the planned Orbital ATK merger discussed above.

Selling, general and administrative expenses were $58.1 million and $49.8 million, or 9% and 7% of revenues, in the first half of 2014 and 2013, respectively. Selling, general and administrative expenses increased $8.3 million, or 17%, in the first half of 2014 compared to the first half of 2013 primarily due to the professional fees and other costs pertaining to the planned Orbital ATK merger discussed above.

Operating Income - Our consolidated operating income was $15.3 million in the second quarter of 2014, a decrease of $11.0 million, or 42%, compared to the second quarter of 2013. Satellites and space systems segment operating income decreased $7.9 million, or 74%, principally due to the completion of a science and remote sensing satellite in 2013 and profit improvements recorded in the second quarter of 2013 in connection with the successful completion of certain communications satellite contracts. Advanced space programs segment operating income increased $3.0 million, or 58%, primarily due to a profit improvement in connection with the substantial completion of important milestones on a national security satellite contract. Launch vehicles segment operating income increased $0.5 million, or 5%, largely due to profit improvement from missile defense interceptors. A $6.6 million loss was reported in corporate and other in the second quarter of 2014 consisting solely of professional fees and other costs pertaining to the planned Orbital ATK merger discussed above.

Our consolidated operating income was $38.2 million in the first half of 2014, a decrease of $19.2 million, or 33%, compared to the first half of 2013. Satellites and space systems segment operating income decreased $15.5 million, or 72%, principally due to profit improvements recorded in the first half of 2013 in connection with the successful completion of certain communications satellite contracts and the impact of a communications satellite anomaly in the first half of 2014, discussed below. Advanced space programs segment operating income increased $2.7 million, or 20%, primarily due to a profit improvement on a national security satellite contract in the first half of 2014, partially offset by a favorable contract closeout adjustment recorded in the first half of 2013. Launch vehicles segment operating income increased $0.2 million, or 1%. A $6.6 million loss was reported in corporate and other in the first half of 2014 consisting solely of professional fees and other costs pertaining to the planned Orbital ATK merger discussed above.

After its launch in March 2014, our Amazonas 4A communications satellite experienced an anomaly during in-orbit testing. Operating results for the first half of 2014 included a loss of approximately $10 million attributable to the anomaly investigation costs and the loss of performance incentives. In the second quarter of 2014, we recognized insurance income of $12 million in "interest income and other, net," pertaining to this incident.


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Total operating income from the CRS contract was $3.7 million and $4.1 million in the second quarter of 2014 and 2013, respectively, and $8.2 million and $8.0 million in the first half of 2014 and 2013, respectively. Since the commencement of the CRS contract through June 30, 2014, a total of $80 million of operating income has been recognized on the contract.

Our revenues, costs and operating income are derived primarily from long-term contracts that are accounted for using the percentage-of-completion method of accounting. Revenues are recorded based on the percentage that costs incurred to date bear to the most recent estimates of total costs to complete each contract. Estimating future revenues, costs and profit is a process requiring a high degree of management judgment, including management's assumptions regarding our operational performance as well as general economic conditions. In the event of a change in total estimated contract revenue, cost or profit, the cumulative effect of such change is recorded in the period the change in estimate occurs. Aggregate net changes in contract estimates recognized using the cumulative catch-up method of accounting increased operating income by approximately $5 million and $18 million in the second quarter of 2014 and 2013, respectively, and $12 million and $34 million in the first half of 2014 and 2013, respectively.

Interest Income and Other - Interest income and other was $11.9 million and $0.5 million in the second quarter of 2014 and 2013, respectively, and $11.8 million and $1.0 million in the first half of 2014 and 2013, respectively. The second quarter of 2014 included insurance income of $12 million pertaining to the satellite anomaly discussed above.

Interest Expense - Interest expense was $1.1 million and $1.2 million in the second quarter of 2014 and 2013, respectively, and $2.2 million and $2.3 million in the first half of 2014 and 2013, respectively.

Income Tax Provision - Our income tax provision was $9.5 million and $9.3 million in the second quarter of 2014 and 2013, respectively, and $17.5 million and $20.3 million in the first half of 2014 and 2013, respectively. Our effective tax rate for the first half of 2014 and 2013 was 36.6% and 36.1%, respectively.

Net Income - Net income was $16.5 million and $16.3 million, or $0.27 and $0.27 diluted earnings per share, in the second quarter of 2014 and 2013, respectively, and $30.3 million and $35.9 million, or $0.50 and $0.59 diluted earnings per share in the first half of 2014 and 2013, respectively.

Segment Results for the Quarters and Six Months Ended June 30, 2014 and 2013

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.


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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 23to 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
                             2014          2013      % Change             2014          2013      % Change
Revenues                $ 125,840     $ 134,027              (6 %)   $ 263,081     $ 268,319              (2 %)
Operating income           11,040        10,521               5 %       22,779        22,554               1 %
Operating margin              8.8 %         7.9 %                          8.7 %         8.4 %

Segment Revenues - Launch vehicles segment revenues decreased $8.2 million, or 6%, in the second quarter of 2014 compared to the second quarter of 2013 due to decreased revenues from space launch vehicle and target vehicle contracts, partially offset by increased revenues from missile defense interceptor contracts. Space launch vehicle revenues decreased $9.6 million, or 17%, primarily due to decreased activity on Antares launch vehicles and on certain Minotaur and Pegasus launch vehicles, partially offset by activity on a new Minotaur-C contract. Antares launch vehicle revenues related to the CRS contract were $36.0 million and $32.8 million in the second quarter of 2014 and 2013, respectively. Antares launch vehicle revenues related to the COTS program, which was completed in 2013, were $8.6 million in the second quarter of 2013. Antares launch vehicle revenues accounted for 29% and 31% of total launch vehicles segment revenues in the second quarter of 2014 and 2013, respectively. Target vehicle revenues decreased $5.6 million, or 12%, primarily due to decreased activity levels. Missile defense interceptor revenues increased $7.0 million, or 21%, 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 32% and 25% of total launch vehicles segment revenues in the second quarter of 2014 and 2013, respectively.

Launch vehicles segment revenues decreased $5.2 million, or 2%, in the first half of 2014 compared to the first half of 2013 due to decreased revenues from target vehicle and space launch vehicle contracts, partially offset by higher revenues from missile defense interceptor contracts. Target vehicle revenues decreased $20.1 million, or 20%, primarily due to decreased activity levels. Space launch vehicle revenues decreased $3.6 million, or 3%, primarily due to decreased activity on Antares launch vehicles and on certain Minotaur and Pegasus launch vehicles, partially offset by activity on a new Minotaur-C contract. Antares launch vehicle revenues related to the CRS contract were $76.8 million and $64.2 million in the first half of 2014 and 2013, respectively. Antares launch vehicle revenues related to the COTS program, which was completed in 2013, were $19.0 million in the first half of 2013. Antares launch vehicle revenues accounted for 29% and 31% of total launch vehicles segment revenues in the first half of 2014 and 2013, respectively. Missile defense interceptor revenues increased $18.5 million, or 34%,


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due to increased activity on our GMD program. GMD program revenues accounted for 28% and 21% of total launch vehicles segment revenues in the first half of 2014 and 2013, respectively.

Segment Operating Income - Operating income in the launch vehicles segment increased $0.5 million, or 5%, in the second quarter of 2014 compared to the second quarter of 2013, despite the decrease in revenues, primarily due to higher operating income from missile defense interceptors and target vehicles, partially offset by lower operating income from space launch vehicles. Segment operating results reflect the completion in 2013 of Antares production work for the COTS program that was recognized as revenue equal to cost, without any profit. Operating income from missile defense interceptors increased $1.3 million, or 41%, mainly due to a profit margin improvement on our GMD program. Operating income from target vehicles increased marginally, by less than $0.1 million. Operating income from space launch vehicles decreased $0.9 million, or 28%, mainly due to decreased activity.

Operating income in the launch vehicles segment increased $0.2 million, or 1%, in the first half of 2014 compared to the first half of 2013 due to higher operating income from missile defense interceptors and space launch vehicle contracts, partially offset by lower operating income from target vehicle contracts. Segment operating results reflect the completion in 2013 of Antares production work for the COTS program that was recognized as revenue equal to cost, without any profit. Operating income from missile defense interceptors increased $2.4 million, or 43%, primarily due to increased activity on our GMD contract. Operating income from space launch vehicles increased $0.6 million, or 9%, primarily due to increased activity on Antares rockets for the CRS contract and activity on a new Minotaur-C contract, partially offset by decreased activity on certain Minotaur launch vehicles. Operating income from target vehicles decreased $2.9 million, or 26%, primarily due to decreased activity.

Launch vehicles segment operating margins (as a percentage of revenues) were 8.8% in the second quarter of 2014, compared to 7.9% in the second quarter of 2013, and 8.7% in the first half of 2014, compared to 8.4% in the first half of 2013. These margin increases were principally attributable to the effect of revenues recognized in 2013 without any profit pertaining to Antares production for the COTS program that was completed in 2013.

Satellites and Space Systems

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

                             Second Quarter                           First Six Months
                       2014         2013     % Change            2014          2013     % Change
Revenues           $ 87,244     $ 93,828            (7 %)   $ 170,034     $ 194,611           (13 %)
Operating income      2,713       10,637           (74 %)       6,010        21,475           (72 %)

Operating margin 3.1 % 11.3 % 3.5 % 11.0 %

Segment Revenues - Satellites and space systems segment revenues decreased $6.6 million, or 7%, in the second quarter of 2014 compared to the second quarter of 2013 primarily due to lower science and remote sensing satellite revenues, partially offset by higher communications satellite


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revenues. Science and remote sensing satellite revenues decreased $12.9 million, or 37%, primarily due to the completion and launch of a satellite in 2013. Communications satellite revenues increased $7.0 million, or 23%, principally due to increased activity on recently awarded contracts. Communications satellite revenues accounted for 42% and 32% of total segment revenues in the second quarter of 2014 and 2013, respectively. Space technical services revenues decreased $1.4 million, or 5%.

Satellites and space systems segment revenues decreased $24.6 million, or 13%, in the first half of 2014 compared to the first half of 2013 primarily due to lower science and remote sensing satellite and communications satellite revenues. Science and remote sensing satellite revenues decreased $18.8 . . .

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