SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission file number 1-14279

ORBITAL SCIENCES CORPORATION

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  o

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

     As of October 20, 2004, 51,569,774 shares of the registrant’s Common Stock were outstanding.

PART 1

ITEM 1. FINANCIAL STATEMENTS

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

See accompanying notes to condensed consolidated financial statements.

1

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

See accompanying notes to condensed consolidated financial statements.

2

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

See accompanying notes to condensed consolidated financial statements.

3

ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

See accompanying notes to condensed consolidated financial statements.

4

ORBITAL SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
(Unaudited)

(1)

Basis of Presentation

     Orbital Sciences Corporation (together with its subsidiaries, “Orbital” or the “company”), a Delaware corporation, develops and manufactures small space and rocket systems for commercial, military and civil government customers. The company’s primary products are satellites and launch vehicles, including low-orbit, geosynchronous and planetary spacecraft for communications, remote sensing, scientific and defense missions; ground- and air-launched rockets that deliver satellites into orbit; and missile defense systems that are used as interceptor 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 for the year ended December 31, 2003, as amended.

     Operating results for the quarter and nine months ended September 30, 2004 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.

     All financial amounts are stated in U.S. dollars unless otherwise indicated.

5

(3)

Stock-Based Compensation

     Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123,” requires 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. 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 quarter and nine-month periods ended September 30, 2004 and 2003 are summarized as follows:

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     The following table illustrates the effect on net income (loss) and earnings (loss) 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):

     Pro forma net income (loss) reflects only options granted through September 30, 2004 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 (formerly launch vehicles and advanced programs), (ii) satellites and related space systems and (iii) transportation management systems. Reportable segments are generally organized based upon product lines. Corporate and other is comprised of the elimination of intercompany revenues and certain corporate items 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 $2.1 million and $1.9 million were recorded in the quarters ended September 30, 2004 and 2003, respectively. Intersegment sales of $6.6 million and $5.1 million were recorded in the nine months ended September 30, 2004 and 2003, respectively.

     The following table presents operating information for the quarters and nine months ended September 30, 2004 and 2003 and identifiable assets at September 30, 2004 and December 31, 2003 by reportable segment (in thousands).

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(1)

As of December 31, 2003

(5)

Receivables

     Receivables consisted of the following (in thousands):

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(6)

Inventories

     Inventories consisted of the following (in thousands):

     Substantially all of the company’s inventory consisted of component parts and raw materials.

(7)

Warranties

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

(8)

Interest Expense

     Interest expense consisted of the following (in thousands):

9

(9)

Earnings (Loss) Per Share

     The following table presents the shares used in computing basic and diluted earnings per share (“EPS”) (in thousands):

     In periods of losses from operations, such as the quarter and nine months ended September 30, 2003, diluted per-share losses are the same as basic per-share losses because the effect of stock options and warrants would be anti-dilutive.

(10)

Comprehensive Income (Loss)

     Comprehensive income (loss) in the quarter and nine-month periods ended September 30, 2004 and 2003 was equal to net income (loss). Accumulated other comprehensive income (loss) as of September 30, 2004 and December 31, 2003 was $0.

(11)

Sale of ORBIMAGE Notes

     On December 31, 2003, Orbital received $2.5 million of senior subordinated notes due 2008 from its former affiliate, Orbital Imaging Corporation (“ORBIMAGE”), upon the consummation of ORBIMAGE’s plan of reorganization. In 2003, Orbital recorded $4.8 million of charges, including $4.5 million in the first nine months of 2003, in connection with a settlement agreement with ORBIMAGE. In the first quarter of 2004, the company sold the notes to a financial institution and recorded a $2.5 million gain on this transaction as a credit to settlement expense. Orbital does not have any equity or debt investment in ORBIMAGE’s successor company.

(12)

Debt

     The following table sets forth the company’s long-term obligations, excluding capital lease obligations (in thousands):

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     During the first nine months of 2004, the company repurchased and cancelled $8.6 million of its 9% senior notes at a cost of $9.6 million under a securities repurchase program. The company recorded $1.1 million in debt extinguishment expense during the nine months ended September 30, 2004 associated with the repurchases.

     The fair value of the company’s senior notes at September 30, 2004 and December 31, 2003 was estimated at $141.0 million and $145.1 million, respectively, based on market trading activity.

     The company has a $50.0 million four-year revolving credit facility (the “Revolver”) with Bank of America serving as the lead arranger in a syndicated line of credit. The Revolver bears interest at rates ranging from 2.25% to 3.0% over LIBOR (for LIBOR loans) or from 0.75% to 1.5% over a base rate related to the prime rate (for base rate loans), varying according to the company’s ratio of total debt to earnings before interest, taxes, depreciation and amortization. The Revolver is collateralized by substantially all of the company’s assets. The Revolver also permits the company to reserve up to $40.0 million of the facility for letters of credit, foreign exchange contracts or other arrangements. The maximum borrowing capacity under the Revolver is limited by a borrowing base formula that is tied to the company&