ORBITAL SCIENCES CORP /DE/ - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)


X		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003

		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______

Commission file number 1-14279

ORBITAL SCIENCES CORPORATION
(Exact name of registrant as specified in charter)


Delaware		06-1209561
(State of Incorporation of Registrant)		(I.R.S. Employer Identification No.)

21839 Atlantic Boulevard
Dulles, Virginia 20166
(Address of principal executive offices)

(703) 406-5000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

As of April 22, 2003, 46,079,159 shares of the registrant’s Common Stock were outstanding.

PART 1

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)


					March 31,			December 31,
					2003			2002

					(unaudited)
				ASSETS
Current assets:
	Cash and cash equivalents				$	54,375		$	43,440
	Restricted cash and cash equivalents					10,300			10,301
	Receivables, net					125,633			135,176
	Inventories, net					17,608			17,136
	Other current assets					8,579			8,764

		Total current assets				216,495			214,817

Property, plant and equipment, net						86,523			88,751
Goodwill						95,293			95,293
Other non-current assets						16,946			17,449

		Total assets			$	415,257		$	416,310

			LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term obligations				$	1,844		$	1,854
	Accounts payable and accrued expenses					89,935			92,519
	Deferred revenues					24,735			28,094

		Total current liabilities				116,514			122,467

Long-term obligations, net of current portion						115,420			114,833
Other non-current liabilities						3,560			3,856

Allocated losses of affiliate in excess of cost of investment						40,586			40,586

Commitments and contingencies

Stockholders’ equity:
	Preferred Stock, par value $.01; 10,000,000 shares authorized, none outstanding					—			—
	Common Stock, par value, $.01; 80,000,000 shares authorized, 45,874,559 and 45,610,621 shares outstanding, respectively					459			456
	Additional paid-in capital					581,621			579,285
	Deferred compensation					(1,519	)		(353	)
	Accumulated deficit					(441,384	)		(444,820	)

		Total stockholders’ equity				139,177			134,568

		Total liabilities and stockholders’ equity			$	415,257		$	416,310

See accompanying notes to condensed consolidated financial statements.

ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share data)


		For the Quarters Ended
		March 31,

		2003			2002

Revenues		$	136,681		$	120,712
Costs of goods sold			110,447			101,718

Gross profit			26,234			18,994

Research and development expenses			1,582			755
Selling, general and administrative expenses			14,265			13,038
Settlement expense			1,000			—

Income from operations			9,387			5,201

Interest expense			(6,068	)		(3,025	)
Other income, net			117			216

Income before provision for income taxes and cumulative effect of change in accounting			3,436			2,392

Provision for income taxes			—			—

Income from continuing operations			3,436			2,392

Cumulative effect of change in accounting			—			(13,795	)

Net income (loss)		$	3,436		$	(11,403	)

Basic earnings per share:
	Income from continuing operations	$	0.08		$	0.06
	Cumulative effect of change in accounting		—			(0.33	)

	Net income (loss)	$	0.08		$	(0.27	)

Diluted earnings per share:
	Income from continuing operations	$	0.07		$	0.05
	Cumulative effect of change in accounting		—			(0.31	)

	Net income (loss)	$	0.07		$	(0.26	)

See accompanying notes to condensed consolidated financial statements.

ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)


					For the Quarters Ended
					March 31,

					2003			2002

Cash Flows From Operating Activities:
	Income from continuing operations				$	3,436		$	2,392
	Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
		Depreciation and amortization				3,893			3,741
		Amortization of debt issuance costs and debt discount				1,772			283
		Stock-based compensation and contributions to defined contribution plan				380			4,765
	Changes in assets and liabilities and other					3,379			(29,623	)

		Net cash provided by (used in) operating activities				12,860			(18,442	)

Cash Flows From Investing Activities:
			Capital expenditures			(1,660	)		(4,144	)

				Net cash used in investing activities		(1,660	)		(4,144	)

Cash Flows From Financing Activities:
		Principal payments on long-term obligations				(491	)		(2,357	)
		Net proceeds from issuances of long-term obligations				—			22,364
		Net proceeds from issuances of common stock				226			408

				Net cash provided by (used in) financing activities		(265	)		20,415

Net increase (decrease) in cash and cash equivalents						10,935			(2,171	)

Cash and cash equivalents, beginning of period						43,440			63,215

Cash and cash equivalents, end of period					$	54,375		$	61,044

See accompanying notes to condensed consolidated financial statements.

ORBITAL SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 and 2002
(Unaudited)

(1) Basis of Presentation

Orbital Sciences Corporation (together with its subsidiaries, “Orbital” or the “company”), a Delaware corporation, develops and manufactures small space systems for commercial, civil government and military customers. The company’s primary products are spacecraft and launch vehicles, including low-orbit, geosynchronous and planetary spacecraft for communications, remote sensing, scientific and military missions; ground- and air-launched rockets that deliver satellites into orbit; and suborbital rockets that are used as interceptor boost and target vehicles. Orbital also offers space-related technical services to government agencies and develops and builds satellite-based transportation management systems for public transit agencies and private vehicle fleet operators.

In the opinion of management, the accompanying unaudited interim financial information reflects all adjustments, consisting of normal recurring accruals, necessary for a fair presentation on a going concern basis. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the Securities and Exchange Commission. The company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim condensed consolidated financial statements are read in conjunction with the audited consolidated financial statements contained in the company’s Annual Report on Form 10-K/A for the year ended December 31, 2002.

Operating results for the quarter ended March 31, 2003 are not necessarily indicative of the results expected for the full year.

(2) Preparation of Condensed Consolidated Financial Statements

The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions, including estimates of future contract costs and earnings. Such estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and earnings during the current reporting period. Management periodically assesses and evaluates the adequacy and/or deficiency of estimated liabilities recorded for various reserves, liabilities, contract risks and uncertainties. Actual results could differ from these estimates.

Certain reclassifications have been made to the 2002 financial statements and footnote disclosures to conform to the 2003 financial statement presentation. All financial amounts are stated in U.S. dollars unless otherwise indicated.

(3) Stock-Based Compensation

In December 2002, Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123,” was issued. SFAS No. 148 amended Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 related to disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of SFAS No. 148 are applicable to interim or annual periods that end after December 15, 2002, and as such have been incorporated below.

SFAS No. 123, as amended by SFAS No. 148, permits companies to (i) recognize as expense the fair value of stock-based awards, or (ii) continue to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations (“APB 25”), and provide pro forma net income and earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The company continues to apply the provisions of APB 25 and provide the pro forma disclosures in accordance with the provisions of SFAS Nos. 123 and 148 to its Stock Option and Incentive Plan. Under APB 25, the company has not recorded any stock-based employee compensation cost associated with the company’s stock option plan, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant.

The company uses the Black-Scholes option-pricing model to determine the pro forma impact under SFAS Nos. 123 and 148 on the company’s net income and earnings per share. The model utilizes certain information, such as the interest rate on a risk-free security maturing generally at the same time as the option being valued, and requires certain assumptions, such as the expected amount of time an option will be outstanding until it is exercised or it expires, to calculate the fair value of stock options granted. This information and the assumptions used for the quarters ended March 31, 2003 and 2002 are summarized as follows:


	Quarters Ended March 31,

	2003			2002

Additional shares authorized for grant at March 31		3,299,164			2,942,263
Volatility		67	%		66	%
Risk-free interest rate		2.09	%		3.41	%
Weighted-average fair value per share at grant date	$	5.22		$	4.43
Expected dividend yield		—			—
Average expected life of options (years)		4.5			4.5

The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of SFAS No. 123 to its stock option plan (in thousands, except per share amounts):


		Quarters Ended March 31,

		2003			2002

Net income (loss), as reported		$	3,436		$	(11,403	)
Deduct: Net stock-based employee compensation expense determined under
fair value based method			(551	)		(1,113	)

Pro forma net income (loss)		$	2,885		$	(12,516	)

Earnings per share:
	Basic—as reported	$	0.08		$	(0.27	)
	Basic—pro forma	$	0.06		$	(0.30	)

	Diluted—as reported	$	0.07		$	(0.26	)
	Diluted—pro forma	$	0.06		$	(0.29	)

Pro forma net income (loss) reflects only options granted through March 31, 2003 and, therefore, may not be representative of the effects for future periods.

(4) Industry Segment Information

Orbital’s space-related products and services are grouped into three reportable segments: (i) launch vehicles and advanced programs, (ii) satellites and related space systems and (iii) electronic systems. Reportable segments are generally organized based upon product lines. Corporate and other includes the elimination of intercompany revenues and certain corporate office general and administrative expenses that have not been attributed to a particular segment.

Intersegment sales are generally negotiated and accounted for under terms and conditions that are similar to other commercial and government contracts. Intersegment sales of $1.6 million and $0.8 million were recorded in the quarters ended March 31, 2003 and 2002, respectively.

The following table presents operating information for the quarters ended March 31, 2003 and 2002 and identifiable assets at March 31, 2003 and December 31, 2002 by reportable segment (in thousands).


		Quarters Ended March 31,

		2003			2002

Launch Vehicles and Advanced Programs:
	Revenues	$	80,539		$	44,701
	Operating income		9,229			4,160
	Identifiable assets		129,917			131,863	⁽¹⁾
	Capital expenditures		965			1,138
	Depreciation and amortization		1,389			1,420
Satellites and Related Space Systems:
	Revenues	$	48,511		$	60,828
	Operating income		2,668			100
	Identifiable assets		137,145			137,644	⁽¹⁾
	Capital expenditures		403			2,537
	Depreciation and amortization		1,436			1,189
Electronic Systems:
	Revenues	$	9,205		$	16,007
	Operating income (loss)		(1,510	)		1,240
	Identifiable assets		38,429			43,312	⁽¹⁾
	Capital expenditures		15			142
	Depreciation and amortization		198			210
Corporate and Other:
	Revenues	$	(1,574	)	$	(824	)
	Operating loss		(1,000	)		(299	)
	Identifiable assets		109,766			103,491	⁽¹⁾
	Capital expenditures		277			327
	Depreciation and amortization		870			922
Consolidated:
	Revenues	$	136,681		$	120,712
	Operating income		9,387			5,201
	Identifiable assets		415,257			416,310	⁽¹⁾
	Capital expenditures		1,660			4,144
	Depreciation and amortization		3,893			3,741

⁽¹⁾ As of December 31, 2002

(5) Receivables

Receivables consisted of the following (in thousands):


		March 31, 2003			December 31, 2002

Billed		$	47,288		$	76,148
Unbilled			79,697			61,114
Allowance for doubtful accounts			(1,352	)		(2,086	)

	Total	$	125,633		$	135,176

(6) Inventories

Inventories consisted of the following (in thousands):


		March 31, 2003			December 31, 2002

Components and raw materials		$	10,975		$	9,772
Work-in-process			9,696			10,597
Allowance for inventory obsolescence			(3,063	)		(3,233	)

	Total	$	17,608		$	17,136

(7) Warranties

The company occasionally assumes warranty obligations in connection with certain contracts. The company records a liability for estimated warranty claims based upon historical data and customer information. During the first quarter of 2003, activity in the warranty liability consisted of the following (in thousands):


Balance at January 1, 2003	$	4,554
Accruals during the period		669
Settlements made during the period		(301	)

Balance at March 31, 2003	$	4,922

(8) Interest Expense

Interest expense consisted of the following (in thousands):


		March 31, 2003		March 31, 2002

Interest		$	4,296	$	2,742
Amortization of debt issuance costs			694		283
Amortization of debt discount			1,078		—

	Total	$	6,068	$	3,025

(9) Earnings Per Share

The following table presents the shares used in computing basic and diluted earnings per share (“EPS”) for the first quarters of 2003 and 2002 (in thousands):


		March 31, 2003				March 31, 2002