ORBITAL SCIENCES CORP /DE/ - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - ORBITAL SCIENCES CORP /DE/	ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - ORBITAL SCIENCES CORP /DE/	ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - ORBITAL SCIENCES CORP /DE/	ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - ORBITAL SCIENCES CORP /DE/	ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________

FORM 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2011

o	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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of July 26, 2011, 58,459,394 shares of the registrant’s Common Stock were outstanding.

ORBITAL SCIENCES CORPORATION

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			Page

PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010	1

		Condensed Consolidated Income Statements for the Quarters and Six Months Ended June 30, 2011 and 2010	2

		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010	3

		Notes to Condensed Consolidated Financial Statements	4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

	Item 4.	Controls and Procedures	31

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	32

	Item 1A.	Risk Factors	32

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

	Item 3.	Defaults Upon Senior Securities	32

	Item 4.	Removed and Reserved	32

	Item 5.	Other Information	32

	Item 6.	Exhibits	33

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ORBITAL SCIENCES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share data)

	June 30,			December 31,
	2011			2010
ASSETS
Current assets:
Cash and cash equivalents	$	286,742		$	252,415
Receivables, net		447,418			326,543
Inventories		52,531			56,217
Deferred income taxes, net		34,260			24,348
Other current assets		8,067			18,111
Total current assets		829,018			677,634
Investments		9,700			8,600
Property, plant and equipment, net		249,061			232,706
Goodwill		75,261			74,747
Deferred income taxes, net		33,923			47,806
Other non-current assets		27,294			21,043
Total assets	$	1,224,257		$	1,062,536

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	298,164		$	248,835
Deferred revenues and customer advances		183,960			112,182
Total current liabilities		482,124			361,017
Long-term obligations		128,308			125,535
Other non-current liabilities		5,764			7,367
Total liabilities		616,196			493,919
Commitments and contingencies
Stockholders’ equity:
Preferred Stock, par value $.01; 10,000,000 shares authorized, none outstanding		—			—
Common Stock, par value $.01; 200,000,000 shares authorized, 58,458,374 and
58,239,875 shares outstanding, respectively		585			582
Additional paid-in capital		562,931			558,015
Accumulated other comprehensive loss		(1,038	)		(2,011	)
Retained earnings		45,583			12,031
Total stockholders’ equity		608,061			568,617
Total liabilities and stockholders’ equity	$	1,224,257		$	1,062,536

See accompanying notes to condensed consolidated financial statements.

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ORBITAL SCIENCES CORPORATION

CONDENSED CONSOLIDATED INCOME STATEMENTS

(Unaudited, in thousands, except per share data)

	Quarters Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Revenues	$	350,599		$	337,726		$	668,302		$	633,916
Cost of revenues		282,758			271,297			553,798			499,199
Research and development expenses		23,432			30,268			40,567			60,431
Selling, general and administrative expenses		21,602			23,933			41,013			44,693
Income from operations		22,807			12,228			32,924			29,593
Interest income and other		703			408			12,192			746
Interest expense		(2,804	)		(2,341	)		(5,337	)		(4,702	)
Income before income taxes		20,706			10,295			39,779			25,637
Income tax benefit (provision)		511			(3,950	)		(6,227	)		(10,024	)
Net income	$	21,217		$	6,345		$	33,552		$	15,613

Basic income per share	$	0.36		$	0.11		$	0.57		$	0.27

Diluted income per share	$	0.36		$	0.11		$	0.56		$	0.27

See accompanying notes to condensed consolidated financial statements.

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ORBITAL SCIENCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Six Months Ended June 30,
	2011			2010
Operating Activities:
Net income	$	33,552		$	15,613
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization expense		16,476			11,393
Deferred income taxes		4,055			7,170
Stock-based compensation and other		7,102			6,188
Changes in assets and liabilities, net of effect of acquisition		6,777			(93,584	)
Net cash provided by (used in) operating activities		67,962			(53,220	)

Investing Activities:
Capital expenditures		(32,774	)		(33,591	)
Payment for business acquisition		—			(55,000	)
Net cash used in investing activities		(32,774	)		(88,591	)

Financing Activities:
Net proceeds from issuances of common stock		1,364			10,311
Debt issuance costs		(2,938	)		—
Tax benefit of stock-based compensation		713			1,958
Net cash (used in) provided by financing activities		(861	)		12,269

Net increase (decrease) in cash and cash equivalents		34,327			(129,542	)
Cash and cash equivalents, beginning of period		252,415			372,986
Cash and cash equivalents, end of period	$	286,742		$	243,444

See accompanying notes to condensed consolidated financial statements.

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ORBITAL SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011 and 2010

(Unaudited)

(1) Basis of Presentation

Orbital Sciences Corporation (together with its subsidiaries, “Orbital” or the “company”), a Delaware corporation, develops and manufactures small- and medium-class rockets and space systems for commercial, military and civil government customers.

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 disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the U.S. 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, 2010.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP 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 condensed 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 liabilities recorded for various reserves, contract risks and other uncertainties. Actual results could differ from these estimates and assumptions.

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

The company has evaluated subsequent events in accordance with U.S. GAAP. Management has evaluated the events and transactions that have occurred through the date the financial statements were issued, and noted no items requiring adjustment or disclosure in the financial statements. Operating results for the quarter ended June 30, 2011 are not necessarily indicative of the results expected for the full year.

(2) Business Acquisition and Goodwill

On April 2, 2010, the company acquired certain assets and liabilities of the spacecraft development and manufacturing business of General Dynamics Advanced Information Systems, a subsidiary of General Dynamics Corporation (the “Seller”), for $55 million in cash, subject to a potential working capital adjustment. The company’s consolidated financial statements reflect

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the operations of the acquired business since the date of acquisition. The company and the Seller are each disputing the other party’s claim for a purchase price adjustment based on the calculation of working capital as of the closing date.

The allocation of the purchase price for the tangible and identifiable intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition using established valuation techniques. The company may recognize changes to the acquired assets or liabilities as a result of a working capital adjustment or if new information is obtained about facts and circumstances that existed as of the acquisition date. During the quarter ended June 30, 2011, the company recorded an additional $0.5 million of goodwill related to the update of purchase accounting associated with the acquisition.

(3) Industry Segment Information

Orbital’s products and services are grouped into three reportable business segments: launch vehicles, satellites and space systems and advanced space programs. Reportable segments are generally organized based upon product lines. 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 primary products and services from which the company’s reportable segments derive revenues are:

•

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, and small- and medium-class satellites primarily used for national security space programs and to demonstrate new space technologies.

Intersegment sales are generally negotiated and accounted for under terms and conditions that are similar to other commercial and government contracts. Substantially all of the company’s assets and operations are located within the United States.

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The following table presents operating information and identifiable assets by reportable segment (in thousands):

	Quarters Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Launch Vehicles:
Revenues(1)	$131,367		$95,702		$236,640		$196,044
Operating income	6,870		3,469		1,821		8,000
Identifiable assets	200,116		212,360	(2)	200,116		212,360	(2)
Capital expenditures	10,184		12,209		20,696		22,425
Depreciation and amortization	3,952		1,808		7,272		3,614
Satellites and Space Systems:
Revenues(1)	$138,174		$139,423		$290,833		$239,944
Operating income	8,474		7,512		18,784		15,219
Identifiable assets	293,661		268,804	(2)	293,661		268,804	(2)
Capital expenditures	2,016		1,797		3,845		3,327
Depreciation and amortization	2,805		2,515		5,516		4,780
Advanced Space Programs:
Revenues(1)	$103,188		$120,926		$195,898		$228,469
Operating income	7,463		2,867		12,319		7,994
Identifiable assets	307,228		188,184	(2)	307,228		188,184	(2)
Capital expenditures	2,480		3,672		7,196		6,182
Depreciation and amortization	118		116		235		119
Corporate and Other:
Revenues(1)	$(22,130	)	$(18,325	)	$(55,069	)	$(30,541)
Operating loss	—		(1,620	) (3)	—		(1,620	) (3)
Identifiable assets	423,252		393,188	(2)	423,252		393,188	(2)
Capital expenditures	778		816		1,037		1,657
Depreciation and amortization	1,754		1,711		3,453		2,880
Consolidated:
Revenues	$350,599		$337,726		$668,302		$633,916
Operating income	22,807		12,228		32,924		29,593
Identifiable assets	1,224,257		1,062,536	(2)	1,224,257		1,062,536	(2)
Capital expenditures	15,458		18,494		32,774		33,591
Depreciation and amortization	8,629		6,150		16,476		11,393

(1)	Corporate and other revenues are comprised solely of the elimination of intersegment revenues summarized as follows (in millions):

	Quarters Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Launch Vehicles	$	20.3	$	16.5	$	51.7	$	27.0
Satellites and Space Systems		1.3		1.5		2.5		2.8
Advanced Space Programs		0.5		0.3		0.9		0.7
Total intersegment revenues	$	22.1	$	18.3	$	55.1	$	30.5

(2) As of December 31, 2010.

(3)

The corporate and other operating loss in 2010 is comprised solely of transaction expenses incurred in connection with a business acquisition (see Note 2).

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(4) Earnings Per Share

The computation of basic and diluted earnings per share (“EPS”) is as follows (in thousands, except per share amounts):

			Quarters Ended June 30,						Six Months Ended June 30,
Numerator			2011			2010			2011			2010
		Net income	$	21,217		$	6,345		$	33,552		$	15,613
		Percentage allocated to shareholders (1)		98.9	%		99.2	%		98.9	%		99.2	%
		Numerator for basic and diluted earnings per share	$	20,984		$	6,294		$	33,183		$	15,488

Denominator
		Denominator for basic earnings per share -
		weighted-average shares outstanding		58,422			57,682			58,361			57,373
		Dilutive effect of stock options		454			667			472			729
		Denominator for diluted earnings per share		58,876			58,349			58,833			58,102

Per share income
		Basic	$	0.36		$	0.11		$	0.57		$	0.27
		Diluted		0.36			0.11			0.56			0.27
_________________________

	(1)	Basic weighted-average shares outstanding		58,422			57,682			58,361			57,373
		Basic weighted-average shares outstanding and
		unvested restricted share units expected to vest		59,096			58,155			59,039			57,847
		Percentage allocated to shareholders		98.9	%		99.2	%		98.9	%		99.2	%

The calculation of EPS shown above excludes the income attributable to the company’s unvested restricted stock units (“RSUs”) from the numerator and excludes the impact of those units from the denominator.

For the quarter and six months ended June 30, 2011, diluted weighted-average shares outstanding included the effect of all stock options. For the quarter and six months ended June 30, 2010, diluted weighted-average shares outstanding excluded the effect of less than 0.1 million of stock options that were anti-dilutive. Diluted weighted-average shares outstanding also excluded the effect of the RSUs and the company’s $143.8 million of 2.4375% convertible senior subordinated notes that were anti-dilutive.

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(5) Receivables

Receivables consisted of the following (in thousands):

	June 30,		December 31,
	2011		2010
Billed	$	61,774	$	56,035
Unbilled		385,644		270,508
Total	$	447,418	$	326,543

As of June 30, 2011 and December 31, 2010, unbilled receivables included $14.3 million and $14.9 million, respectively, of incentive fees on certain completed satellite contracts that become due incrementally over periods of up to 15 years, subject to the achievement of performance criteria. In addition, certain satellite contracts require the company to refund cash to the customer if performance criteria, which cover periods of up to 15 years, are not satisfied. As of June 30, 2011, the company could be required to refund up to approximately $18.2 million to customers if certain completed satellites were to fail to satisfy performance criteria. Orbital generally procures insurance policies that the company believes would indemnify the company for satellite incentive fees that are not earned and for performance refund obligations.

(6) Inventories

Total inventories were $52.5 million at June 30, 2011 and $56.2 million at December 31, 2010. Substantially all of the company’s inventory consisted of component parts, raw materials and milestone payments for future delivery of component parts. The company had no significant allowances for obsolete inventory as of June 30, 2011 and December 31, 2010.

(7) Investments

As of June 30, 2011, the company held investments consisting of three auction-rate debt securities (life insurance company capital reserve funds), an auction-rate equity security (financial guarantee company capital reserve fund) and two preferred stock investments. These investments are classified as available for sale securities and as non-current assets on the company’s balance sheet. Contractual maturities for the debt securities are 14 years or greater and the remaining securities have no fixed maturity. The amortized cost and fair value of these investments were as follows (in thousands):

	June 30, 2011							December 31, 2010
	Cost or Amortized Cost		Net Unrealized Gain (Loss)			Fair Value		Cost or Amortized Cost		Net Unrealized Gain (Loss)			Fair Value
Debt	$	7,150	$	(250	)	$	6,900	$	7,150	$	(450	)	$	6,700
Equity(1)		2,000		800			2,800		2,000		(100	)		1,900
Total	$	9,150	$	550		$	9,700	$	9,150	$	(550	)	$	8,600

(1) As of June 30, 2011 and December 31, 2010, cost and fair value of the two preferred stock investments were $0.

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The changes in fair value of the investments were recorded as follows (in thousands):

	Quarters Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Debt Securities
Fair value at beginning of period	$	6,800	$	10,500	$	6,700	$	10,900
Temporary impairment credits (charges), net		100		—		200		(400	)
Fair value at end of period	$	6,900	$	10,500	$	6,900	$	10,500


Equity Securities
Fair value at beginning of period	$	2,400	$	2,100	$	1,900	$	2,200
Temporary impairment credits (charges), net		400		—		900		(100	)
Fair value at end of period	$	2,800	$	2,100	$	2,800	$	2,100


Total
Fair value at beginning of period	$	9,200	$	12,600	$	8,600	$	13,100
Temporary impairment credits (charges), net		500		—		1,100		(500	)
Fair value at end of period	$	9,700	$	12,600	$	9,700	$	12,600

There was no sale, purchase, issuance, settlement or transfer activity related to these investments during the periods presented.

Auction-rate securities are intended to be structured to provide liquidity through an auction process that resets the applicable interest rate at predetermined calendar intervals. This mechanism allows existing investors either to roll over or liquidate their holdings by selling such securities at par. Since the third quarter of 2007 and through June 30, 2011, the auctions, which occur approximately every 28 days for the auction-rate securities held by the company, have not had sufficient buyers to cover investors’ sell orders, resulting in unsuccessful auctions. These unsuccessful auctions result in a resetting of the interest rate paid on the securities until the next auction date, at which time the process is repeated.

The company has estimated the fair value of these securities based on an income approach using a discounted cash flow analysis which considered the following key inputs: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions and the relevant risk associated with each security; and (iii) the time horizon until each security will be sold. The discount rates used in the present value calculations are based on yields on U.S. Treasury securities with similar time horizons plus interest rate risk premiums that are intended to compensate for general market risk and the risk specific to each security. The risk premiums are based upon current credit default swap pricing market data for similar or related securities or credit spreads for corporate bonds with similar credit ratings and similar maturities. The discounted cash flow analysis is a Level 3 valuation.

The company records other-than-temporary impairment charges with respect to equity securities based on the company’s assessment that it is likely that the fair value of the investment will not fully recover in the foreseeable future given the duration, severity and continuing

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declining trend of the fair value of the security, as well as the uncertain financial condition and near-term prospects of the issuer. The company determines other-than-temporary impairment charges for its debt securities based on credit losses.

At this time it is uncertain if or when the liquidity issues relating to these investments will improve, and there can be no assurance that the market for auction-rate securities will stabilize. The fair value of the auction-rate securities could change significantly in the future and the company may be required to record additional temporary or other-than-temporary impairment charges if there are further reductions in fair value in future periods.

(8) Debt

Convertible Notes

On December 13, 2006, the company issued $143.8 million of 2.4375% convertible senior subordinated notes due 2027 with interest payable semi-annually each January 15 and July 15. As of June 30, 2011 and December 31, 2010, the net carrying amount of the convertible notes was $128.3 million and $125.5 million, respectively, and the related unamortized debt discount was $15.5 million and $18.3 million, respectively.

Under certain circumstances, the convertible notes are convertible into cash, or a combination of cash and common stock at the company’s election, based on an initial conversion rate of 40.8513 shares of the company’s common stock per $1,000 in principal amount of the convertible notes (equivalent to an initial conversion price of approximately $24.48 per share). At any time on or after January 21, 2014, the convertible notes are subject to redemption at the option of the company, in whole or in part, for cash equal to 100% of the principal amount of the convertible notes, plus unpaid interest, if any, accrued to the redemption date. Holders of the convertible notes may require the company to repurchase the convertible notes, in whole or in part, on January 15, 2014, January 15, 2017 or January 15, 2022, or, if a “fundamental change” (as such term is defined in the indenture governing the convertible notes) occurs, for cash equal to 100% of the principal amount of the convertible notes, plus any unpaid interest, if any, accrued to the redemption date.

The fair value of the company’s convertible notes at June 30, 2011 and December 31, 2010 was estimated at $149.0 million and $150.2 million, respectively. The fair value was determined based on market prices quoted by a broker-dealer.

Credit Facility

In June 2011, the company entered into a five-year $300 million revolving secured credit facility (“Credit Facility”), which replaced the company’s $100 million revolving credit facility that was established in 2007. All letters of credit outstanding under the terminated credit facility were transferred to the Credit Facility. The Credit Facility has a scheduled maturity date of June 7, 2016. The company’s obligations under the Credit Facility are secured by substantially all of the company’s personal property assets.

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The Credit Facility provides capacity for up to $300 million of revolving loans and permits the company to utilize up to $125 million of such capacity for the issuance of standby letters of credit. The company has the option to increase the amount of the Credit Facility by up to $150 million to the extent that any one or more lenders, whether or not currently party to the Credit Facility, commits to be a lender for such amount. Loans under the Credit Facility bear interest at LIBOR plus an applicable margin ranging from 1.75% to 2.50%, with the applicable margin varying according to the company’s total leverage ratio, or, at the election of the company, at a prime base rate plus 0.75% to 1.50%. Letters of credit issued under the Credit Facility accrue fees at a rate equal to the applicable margin for LIBOR loans. In addition, the company is required to pay a commitment fee for the unused portion of the Credit Facility, if any, at a quarterly rate ranging from 0.30% to 0.50%.

As of June 30, 2011, there were no borrowings under the Credit Facility, although $17.7 million of letters of credit were issued under the Credit Facility. Accordingly, as of June 30, 2011, $282.3 million of the Credit Facility was available for borrowings.

Debt Covenants

Orbital’s Credit Facility contains covenants limiting its ability to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase company stock, enter into transactions with affiliates, make investments, merge or consolidate with others or dispose of assets. In addition, the Credit Facility contains financial covenants with respect to leverage and interest coverage.

(9) Comprehensive Income

Comprehensive income consisted of the following (in thousands):

	Quarters Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net income	$	21,217		$	6,345		$	33,552		$	15,613
Unrealized gain (loss) on investments		500			—			1,100			(500	)
Defined benefit plans, net of tax		(155	)		(447	)		(127	)		(281	)
Total comprehensive income	$	21,562		$	5,898		$	34,525		$	14,832

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(10) Stock-Based Compensation

The following tables summarize information related to the company’s stock-based compensation:

	Restricted Stock Units						Stock Options
				Weighted Average						Weighted Average
	Number of			Measurement			Number of			Exercise
	Units			Date Fair Value			Options			Price
Outstanding at December 31, 2010		684,674			$	16.38		1,226,582			$	6.46
Granted (1)		26,860				17.47		—				—
Exercised		—				—		(135,971	)			4.60
Vested		(35,107	)			16.59		—				—
Forfeited		(8,145	)			16.73		—				—
Expired		—				—		(5,648	)			4.14
Outstanding at June 30, 2011		668,282			$	16.41		1,084,963	(2)		$	6.70

(1)	The fair value of restricted stock unit grants is determined based on the closing market price of Orbital’s common stock on the date of grant. Such value is recognized as expense over the service period, net of estimated forfeitures.

(2)	The weighted average remaining contractual term is 1.85 years.

	Quarters Ended June 30,
(in millions)	2011		2010
Stock-based compensation expense	$	1.5	$	1.7
Income tax benefit related to stock-based compensation expense		0.5		0.7
Intrinsic value of options exercised computed as the market
price on the exercise date less the price paid to exercise the options		0.5		1.2
Cash received from exercise of options		0.1		2.2
Tax benefit recorded as credits to additional paid-in capital related
to stock-based compensation transactions		0.2		0.4


	Six Months Ended June 30,
(in millions)	2011		2010
Stock-based compensation expense	$	2.9	$	3.5
Income tax benefit related to stock-based compensation expense		0.9		1.4
Intrinsic value of options exercised computed as the market
price on the exercise date less the price paid to exercise the options		1.8		5.4
Cash received from exercise of options		0.6		9.7
Tax benefit recorded as credits to additional paid-in capital related
to stock-based compensation transactions		0.7		2.0

	As of
(in millions)	June 30, 2011
Shares of common stock available for grant under stock-based incentive plans		1.3
Aggregate intrinsic value of restricted stock units that are expected to vest	$	11.3
Unrecognized compensation expense related to non-vested restricted stock units, expected to
be recognized over a weighted-average period of 1.80 years		6.1
Aggregate intrinsic value of stock options outstanding, all fully vested		11.0

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(11) Research and Development

In the first quarter of 2008, the company entered into an agreement with the National Aeronautics and Space Administration (“NASA”) to design, build and demonstrate a new space transportation system under a program called Commercial Orbital Transportation Services (“COTS”), for delivering cargo and supplies to the International Space Station. Under the agreement, as amended, NASA has agreed to pay the company $288 million in cash milestone payments, partially funding Orbital’s project costs which are currently estimated to be approximately $445 million. The company expects to complete this project in the first quarter of 2012.

The COTS agreement 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 the company’s COTS project research and development expenses, including associated general and administrative expenses. As of June 30, 2011 and December 31, 2010, deferred revenue and customer advances on the accompanying balance sheet included $49.9 million and $25.2 million, respectively, of cash received from NASA that had not yet been recorded as an offset to research and development expenses. The following table summarizes the COTS project research and development expenses incurred and amounts funded by NASA (in millions):

	Second Quarter				First Six Months				Inception
	2011		2010		2011		2010		To Date
Research and development costs incurred (1)	$	36.5	$	38.9	$	78.4	$	67.2	$	337.5
Less - amounts funded by NASA		25.2		18.1		59.3		33.1		211.6
Net research and development expenses	$	11.3	$	20.8	$	19.1	$	34.1	$	125.9

(1) Includes associated general and administrative expenses.

The company is engaged in a major product development program of a medium-capacity rocket named Taurus II. Approximately $8.2 million and $7.8 million of the company’s research and development expenses in the second quarter of 2011 and 2010, respectively, and $15.3 million and $23.1 million in the first six months of 2011 and 2010, respectively, were attributable to the Taurus II program.

(12) Income Taxes

The company’s effective tax rates were 15.7% and 39.1% for the six months ended June 30, 2011 and 2010, respectively. The lower tax rate in 2011 primarily resulted from a favorable income tax adjustment of $7.7 million recorded in the second quarter of 2011, pertaining to the company’s election to claim extraterritorial income (“ETI”) exclusions related to prior-year export activity. The tax rate in 2011 also includes the effect of the federal research and development tax credit that was reinstated in December 2010.

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(13) Commitments and Contingencies

U.S. Government Contracts

The accuracy and appropriateness of costs charged to U.S. Government contracts are subject to regulation, audit and possible disallowance by the Defense Contract Audit Agency or other government agencies. Accordingly, costs billed or billable to U.S. Government customers are subject to potential adjustment upon audit by such agencies.

Most of the company’s U.S. Government contracts are funded incrementally on a year-to-year basis. Changes in government policies, priorities or funding levels through agency or program budget reductions by the U.S. Congress or executive agencies could materially adversely affect the company’s financial condition or results of operations. Furthermore, contracts with the U.S. Government may be terminated or suspended by the U.S. Government at any time, with or without cause. Such contract suspensions or terminations could result in unreimbursable expenses or charges or otherwise adversely affect the company’s financial condition and/or results of operations.

Research and Development Expenses

The company believes that a majority of the company’s research and development expenses are recoverable and billable under contracts with the U.S. Government, from which the majority of the company’s revenues are derived. 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. The company believes that research and development costs incurred in connection with the company’s Taurus II development program (see Note 11) are allowable, although the U.S. Government has not yet made a final determination. If such costs were determined to be unallowable, the company could be required to record revenue and profit reductions in future periods.

Terminated Contracts

In 2010, the Orion Launch Abort System contract was terminated for convenience by the customer. The company has recognized its best estimates of the revenues and profit that will ultimately be realized in the final termination settlement. However, because of the inherent judgments associated with termination costs and profit assessments, it is possible that the company could recognize material adjustments to earnings upon resolution of this matter.

In April 2011, the company negotiated a settlement with the customer, subject to U.S. Government ratification, with respect to the Kinetic Energy Interceptor contract that had been terminated in 2009. The resolution of this matter did not have a material impact on the company’s financial statements.

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Litigation

From time to time the company is party to certain litigation or other legal proceedings arising in the ordinary course of business. Because of the uncertainties inherent in litigation, the company cannot predict whether the outcome of such litigation or other legal proceedings will have a material adverse effect on the company’s results of operations or financial condition.

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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,” “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, achievement of important performance milestones on significant contracts, new product development programs, product performance and market acceptance of products and technologies, government contract procurement and termination risks, insurance recovery 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, 2010. 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:

·	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.

The following discussion should be read along with our 2010 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.

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Consolidated Results of Operations for the Quarters and Six Months Ended June 30, 2011 and 2010

Revenues - Our consolidated revenues were $350.6 million in the second quarter of 2011, an increase of $12.9 million, or 4%, compared to the second quarter of 2010 primarily due to higher revenues in the launch vehicles segment partially offset by lower revenues in the satellites and space systems and advanced space programs segments. Launch vehicles segment revenues increased $35.7 million, or 37%, due to increased production work on Taurus II launch vehicles for the International Space Station Commercial Resupply Services (“CRS”) contract and the Commercial Orbital Transportation Services (“COTS”) program and increased activity on target launch vehicles, partially offset by decreased activity on missile defense interceptors. Satellites and space systems segment revenues decreased $1.2 million, or 1%, due to decreased activity on science and remote sensing satellite contracts partially offset by increased activity on space technical services contracts. Advanced space programs segment revenues decreased $17.7 million, or 15%, due to reduced activity on the CRS contract and the Orion Launch Abort System (“LAS”) contract, which was terminated in the second quarter of 2010, partly offset by increased activity on national security satellite contracts.

Eliminations of intersegment revenues increased to $22.1 million in the second quarter of 2011 as compared to $18.3 million in the second quarter of 2010. Intersegment revenues included $20.3 million and $16.5 million in the second quarter of 2011 and 2010, respectively, pertaining to Taurus II production work in the launch vehicles segment for the COTS program that is being conducted by our advanced space programs segment.

Our consolidated revenues were $668.3 million in the first half of 2011, an increase of $34.4 million, or 5%, compared to the first half of 2010 primarily due to higher revenues in the satellites and space systems and launch vehicles segments, partially offset by lower revenues in the advanced space programs segment. Satellites and space systems segment revenues increased $50.9 million, or 21%, due to increased activity on communications satellite contracts, space technical services contracts and science and remote sensing satellite contracts. Launch vehicles segment revenues increased $40.6 million, or 21%, due to increased production work on Taurus II launch vehicles for the CRS and COTS programs and increased activity on target launch vehicles, partly offset by decreased activity on missile defense interceptors and on certain Minotaur space launch contracts, and the effect of the Taurus XL launch failure discussed below. Advanced space programs segment revenues decreased $32.6 million, or 14%, due to decreased activity on the CRS contract and the Orion LAS contract, which was terminated in the second quarter of 2010, partly offset by increased activity on national security satellite programs.

Eliminations of intersegment revenues increased to $55.1 million in the first six months of 2011 as compared to $30.5 million in the first six months of 2010. Intersegment revenues included $51.7 million and $27.0 million in the first six months of 2011 and 2010, respectively, pertaining to Taurus II production work in the launch vehicles segment for the COTS program that is being conducted by our advanced space programs segment.

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The CRS contract accounted for 18% and 20% of consolidated revenues in the second quarter and six months ended June 30, 2011, respectively, and 21% and 20% of consolidated revenues in the second quarter and six months ended June 30, 2010. 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 $64.7 million in the second quarter of 2011, a decrease of $6.9 million, or 10%, due to a particularly high level of subcontractor activity in the second quarter of 2010. CRS contract revenues totaled $132.4 million in the first six months of 2011, an increase of $4.9 million, or 4%, due to increased overall activity.

Cost of Revenues - Our cost of revenues was $282.8 million in the second quarter of 2011, an increase of $11.5 million, or 4%, compared to the second quarter of 2010. Cost of revenues includes the costs of personnel, materials, subcontractors and overhead. The increase in our cost of revenues was primarily attributable to the increases in contract activity that drove the growth in revenues described above. Cost of revenues in the launch vehicles segment increased $32.3 million, or 43%, while cost of revenues in the advanced space programs segment decreased $13.3 million, or 14%, and cost of revenues in the satellites and space systems segment decreased $3.8 million, or 3%, in the second quarter of 2011 compared to the second quarter of 2010. Eliminations of intersegment cost of revenues increased $3.8 million attributable to the increase in intersegment revenues discussed above.

Our cost of revenues was $553.8 million in the first half of 2011, an increase of $54.6 million, or 11%, compared to the first half of 2010. The increase in our year-to-date cost of revenues was primarily attributable to the increases in contract activity that drove the growth in revenues described above. Cost of revenues in the launch vehicles segment increased $54.7 million, or 37%, and cost of revenues in the satellite and space systems segment increased $43.7 million, or 21%, which were partially offset by a decrease of $19.2 million, or 11%, in the advanced space programs segment in the first half of 2011 compared to the first half of 2010. Eliminations of intersegment cost of revenues increased $24.5 million attributable to the increase in intersegment revenues discussed above.

Research and Development Expenses - Our research and development expenses totaled $23.4 million, or 7% of revenues, in the second quarter of 2011, a $6.8 million decrease compared to $30.3 million, or 9% of revenues, in the second quarter of 2010. Our research and development expenses totaled $40.6 million, or 6% of revenues, in the first half of 2011, a $19.9 million decrease compared to $60.4 million, or 10% of revenues, in the first half of 2010. The majority of our research and development expenses in 2011 and 2010 were attributable to the COTS program and our Taurus II launch vehicle development program.

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In connection with the COTS agreement with NASA, we are designing, building and demonstrating a new space transportation system. 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 $445 million. During the first quarter of 2011, NASA agreed to increase its funding by $98 million under the COTS agreement for a Taurus II test flight in addition to the demonstration flight that was already planned under the program. This additional test flight is intended to provide greater information on the Taurus II rocket’s performance. We expect to complete the COTS program in the first quarter of 2012.

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. As of June 30, 2011, deferred revenue and customer advances on our balance sheet included $49.9 million of cash received from NASA that had not yet been recorded as an offset to research and development expenses. The following table summarizes the COTS program costs incurred and amounts funded by NASA recorded in research and development expenses (in millions):

	Second Quarter				First Six Months				Inception
	2011		2010		2011		2010		To Date
Research and development costs incurred (1)	$	36.5	$	38.9	$	78.4	$	67.2	$	337.5
Less - amounts funded by NASA		25.2		18.1		59.3		33.1		211.6
Net research and development expenses	$	11.3	$	20.8	$	19.1	$	34.1	$	125.9

(1) Includes associated general and administrative expenses.

Research and development expenses attributable to our Taurus II launch vehicle development program were $8.2 million and $7.8 million in the second quarter of 2011 and 2010, respectively, and were $15.3 million and $23.1 million in the first six months of 2011 and 2010, 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 Taurus II development program are allowable, although the U.S. Government has not yet made a final determination. Since the inception of the Taurus II program through June 30, 2011, we have incurred $134.5 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.

In the second quarter and first half of 2010, we recognized $5.1 million and $10.3 million, respectively, of research and development expenses in excess of a self-imposed ceiling on the amount of such expenses that we would recover under our U.S. Government contracts, although we believe that such expenses would otherwise be allowable and recoverable under U.S.

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Government contracting regulations and accounting practices. There were no unrecoverable research and development expenses incurred in 2011.

Selling, General and Administrative Expenses - Selling, general and administrative expenses were $21.6 million and $23.9 million, or 6% and 7% of revenues, in the second quarter of 2011 and 2010, 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 $2.3 million, or 10%, in the second quarter of 2011 compared to the second quarter of 2010 primarily due to the absence of $1.6 million of transaction expenses incurred in 2010 in connection with a business acquisition, and a decrease in bid, proposal and marketing costs pertaining to new business prospects.

Selling, general and administrative expenses were $41.0 million and $44.7 million, or 6% and 7% of revenues, in the first half of 2011 and 2010, respectively. Selling, general and administrative expenses decreased $3.7 million, or 8%, in the first half of 2011 primarily due to a decrease in bid, proposal and marketing costs pertaining to new business prospects and the absence of $1.6 million of transaction expenses incurred in 2010 in connection with a business acquisition.

Operating Income - Operating income was $22.8 million in the second quarter of 2011, an increase of $10.6 million, or 87%, compared to the second quarter of 2010 due to operating income increases in all of our business segments. Advanced space programs segment operating income increased $4.6 million primarily due to increased activity on national security satellite contracts and the absence of $3.3 million of unrecovered research and development expenses that were recognized in the second quarter of 2010. Launch vehicles segment operating income increased $3.4 million primarily due to the absence of $1.8 million of unrecovered research and development expenses that were recognized in the second quarter of 2010, in addition to favorable profit adjustments on missile defense interceptor contracts and increased activity on target launch vehicle contracts. Satellites and space systems segment operating income increased $1.0 million due to improved results from communications satellite contracts, partially offset by the reduction in activity on science and remote sensing satellite contracts. Communications satellite operating income increased primarily due to the absence of $2.5 million of costs incurred in the second quarter of 2010 pertaining to the successful resolution of the Galaxy 15 satellite anomaly that occurred in April 2010. Operating income in the second quarter of 2010 also included $1.6 million of transaction expenses attributable to a business acquisition.

Operating income was $32.9 million in the first half of 2011, an increase of $3.3 million, or 11%, compared to the first half of 2010 due to operating income increases in our advanced space programs and satellite and space systems segments, partially offset by a decrease in operating income in our launch vehicles segment. Advanced space programs segment operating income increased $4.3 million primarily due to increased activity on national security satellite contracts and the absence of $5.4 million of unrecovered research and development expenses that were recognized in 2010. Satellites and space systems segment operating income increased $3.6 million due to improved results from communications satellite contracts and increased activity on

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science and remote sensing satellite contracts. Communications satellite operating income increased primarily due to the $1.8 million reduction in costs pertaining to the successful resolution of the Galaxy 15 satellite anomaly discussed above. Launch vehicles segment operating income decreased $6.2 million primarily due to an approximately $12.2 million operating income reduction resulting from a Taurus XL launch failure during the first quarter of 2011 discussed below. The effect of the launch failure was partially offset by the absence in 2011 of $4.9 million of unrecovered research and development expenses that were recognized in 2010. Operating income in 2010 also included $1.6 million of transaction expenses attributable to a business acquisition.

On March 4, 2011, our Taurus XL rocket, which was carrying the Glory scientific satellite that we had built for NASA, experienced a launch failure. As a result, in the first quarter of 2011, we recorded an $11.3 million adjustment to reduce revenue and operating profit on the Taurus contract pertaining to a mission success incentive that was not earned. The unearned mission success incentive was recovered under an insurance policy. We recorded an $11.3 million insurance recovery accrual reported as “other income” in the first quarter of 2011.

Total operating income from the CRS contract was $3.3 million in the second quarter of 2011, a decrease of $0.2 million due to a particularly high level of subcontractor activity in the second quarter of 2010. Total operating income from the CRS contract was $6.7 million in the first half of 2011, an increase of $0.5 million compared to the first half of 2010.

Interest Income and Other - Interest income and other was $0.7 million in the second quarter of 2011, compared to $0.4 million in the second quarter of 2010. Interest income and other was $12.2 million in the first half of 2011, compared to $0.7 million in the first half of 2010. Interest income and other in the first half of 2011 included the $11.3 million insurance recovery pertaining to the Taurus XL launch failure discussed above.

Interest Expense - Interest expense was $2.8 million and $2.3 million in the second quarter of 2011 and 2010, respectively, and was $5.3 million and $4.7 million in the first half of 2011 and 2010, respectively, primarily attributable to interest on our long-term debt.

Income Tax Benefit (Provision) - We recorded an income tax benefit of $0.5 million in the second quarter of 2011, compared to an income tax provision of $4.0 million in the second quarter of 2010. We recorded income tax provisions of $6.2 million and $10.0 million in the first half of 2011 and 2010, respectively. Our effective income tax rate was 15.7% and 39.1% for the first half of 2011 and 2010, respectively. The reduction in income taxes was largely due to a favorable income tax adjustment of $7.7 million recorded in the second quarter of 2011 pertaining to our election to claim extraterritorial income (“ETI”) exclusions related to export activities in certain prior years. In addition, income taxes in 2011 reflected federal research and development tax credits as a result of legislation that was re-enacted in the fourth quarter of 2010.

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Net Income - Our net income was $21.2 million, or $0.36 diluted earnings per share, and $6.3 million, or $0.11 diluted earnings per share, in the second quarter of 2011 and 2010, respectively, and was $33.6 million, or $0.56 diluted earnings per share, and $15.6 million, or $0.27 diluted earnings per share, in the first half of 2011 and 2010, respectively.

Segment Results for the Quarters and Six Months Ended June 30, 2011 and 2010

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 3 to the financial statements in this Form 10-Q.

Launch Vehicles

Launch vehicles segment operating results were as follows:

	Second Quarter						First Six Months
($ in thousands)	2011		2010		% Change		2011		2010		% Change
Revenues	$	131,367	$	95,702		37%	$	236,640	$	196,044		21%
Operating income		6,870		3,469		98%		1,821		8,000		(77%	)
Operating margin		5.2%		3.6%				0.8%		4.1%

Segment Revenues - Launch vehicles segment revenues increased $35.7 million, or 37%, in the second quarter of 2011 compared to the second quarter of 2010 primarily due to increased activity on space launch vehicles, driven by Taurus II launch vehicles for the CRS contract and the COTS program, and increased activity on target launch vehicles, partially offset by decreased activity on missile defense interceptors. Space launch vehicle revenues grew $23.7 million primarily due to an $18.2 million increase in Taurus II launch vehicle revenues attributable to increased activity. Taurus II launch vehicle revenues were $52.5 million and $34.3 million in the second quarter of 2011 and 2010, respectively, which included $32.2 million and $17.8 million, respectively, related to the CRS contract and $20.3 million and $16.5 million, respectively, related to the COTS program. Target launch vehicle revenues increased $15.8 million, or 74%, primarily due to recently awarded contracts. Interceptor launch vehicle revenues decreased $3.6 million due to decreased activity on our Ground-based Midcourse Defense contract in the second quarter of 2011.

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Launch vehicles segment revenues increased $40.6 million, or 21%, in the first half of 2011 compared to the first half of 2010 principally due to the same factors that impacted our second quarter results, namely increased activity on space launch vehicles, driven by Taurus II launch vehicles, and increased activity on target launch vehicles, partially offset by decreased activity on missile defense interceptors. Space launch vehicle revenues increased $37.5 million in the first half of 2011 primarily due to increased production work on Taurus II launch vehicles partially offset by decreased activity on Minotaur space launch vehicles and the effect of the March 2011 Taurus XL launch failure discussed above. Taurus II launch vehicle revenues were $102.0 million and $60.5 million in the first half of 2011 and 2010, respectively, which included $50.3 million and $33.5 million, respectively, related to the CRS contract and $51.7 million and $27.0 million, respectively, related to the COTS program. Target launch vehicle revenues increased $13.2 million primarily due to certain new contracts awarded in the first quarter of 2011. Interceptor launch vehicle revenues decreased $7.2 million due to decreased activity on the Ground-based Midcourse Defense contract.

Segment Operating Income - Operating income in the launch vehicles segment increased $3.4 million, or 98%, in the second quarter of 2011 compared to the second quarter of 2010 primarily due to the absence of $1.8 million of unrecovered research and development expenses that were recognized in the second quarter of 2010 and due to higher operating income from missile defense interceptor and target launch vehicles. Operating income from missile defense interceptors increased to $3.5 million compared to $2.0 million in the second quarter of 2010, primarily due to favorable profit adjustments, including a $0.7 million favorable adjustment in connection with the close-out of the Kinetic Energy Interceptor (“KEI”) contract that had been terminated for convenience in 2009. Operating income from Taurus II launch vehicles for the CRS contract was $1.6 million and $0.9 million in the second quarter of 2011 and 2010, respectively. This segment does not recognize any profit pertaining to the intersegment Taurus II launch vehicle revenues associated with the COTS program, which is conducted by and reported as a research and development program in our advanced space programs segment. These increases in operating income were partially offset by a $1.0 million reduction in operating results from Taurus launch vehicles due to costs incurred in the second quarter of 2011 associated with the investigation of the Taurus XL launch failure discussed above.

Operating income in the launch vehicles segment decreased $6.2 million, or 77%, in the first half of 2011 compared to the first half of 2010 primarily due to a $12.2 million reduction in operating income resulting from the March 2011 Taurus XL launch failure discussed above, partially offset by the same factors that drove the improvement in our second quarter results. The operating results for the first half of 2010 were lowered by $4.9 million of unrecovered research and development expenditures, whereas there were no unrecovered research and development expenses in the first half of 2011. Operating income from missile defense interceptor contracts increased to $6.2 million compared to $4.3 million in the first half of 2010, primarily due to the favorable profit adjustments noted above. Operating income from Taurus II launch vehicle production work for the CRS contract was $2.6 million and $1.7 million in the first half of 2011 and 2010, respectively. This segment does not recognize any profit pertaining to the intersegment Taurus II launch vehicle revenues associated with the COTS program, which is

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conducted by and reported as a research and development program in our advanced space programs segment.

Segment operating margin (as a percentage of revenues) increased to 5.2% in the second quarter of 2011 compared to 3.6% in the second quarter of 2010 primarily due to the favorable profit adjustments on missile defense interceptor contracts and the absence of unrecovered research and development expenditures in 2011. Segment operating margin decreased in the first half of 2011 primarily due to the Taurus XL launch failure, partially offset by the absence of unrecovered research and development expenditures in 2011.

Satellites and Space Systems

Satellites and space systems segment operating results were as follows:

	Second Quarter							First Six Months
($ in thousands)	2011		2010		% Change			2011		2010		% Change
Revenues	$	138,174	$	139,423		(1%	)	$	290,833	$	239,944		21%
Operating income		8,474		7,512		13%			18,784		15,219		23%
Operating margin		6.1%		5.4%					6.5%		6.3%

Segment Revenues - Satellites and space systems segment revenues decreased $1.2 million in the second quarter of 2011 compared to the second quarter of 2010 due to decreased activity on science and remote sensing satellite contracts, offset by increased activity on space technical services contracts and marginally higher communications satellite revenues. Science and remote sensing satellite revenues decreased $7.3 million, or 26%, due to decreased contract activity. Space technical services revenues increased $5.8 million, or 36%, primarily due to production work on a contract awarded in the third quarter of 2010. Communications satellite revenues accounted for 68% and 67% of total segment revenues in the second quarter of 2011 and 2010, respectively.

Satellites and space systems segment revenues increased $50.9 million, or 21%, in the first half of 2011 compared to the first half of 2010 primarily due to increased activity on communications satellite contracts, space technical services contracts and science and remote sensing satellite contracts, including contracts acquired in our 2010 acquisition. Communications satellite revenues increased $25.7 million, or 15%, principally attributable to activity on new communications satellite contracts awarded in the fourth quarter of 2010 and the first half of 2011. Communications satellite revenues accounted for 67% and 71% of total segment revenues in the first half of 2011 and 2010, respectively. Space technical services revenues increased $13.4 million, or 43%, primarily due to production work on a contract awarded in the third quarter of 2010. Science and remote sensing satellite revenues increased $12.1 million, or 34%, primarily due to the addition of contracts acquired in our 2010 business acquisition.

Segment Operating Income - Operating income in the satellites and space systems segment increased $1.0 million in the second quarter of 2011 compared to the second quarter of 2010, primarily due to improved results from communications satellite contracts, partially offset by the

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reduction in activity on science and remote sensing satellite contracts. Communications satellite operating income increased $2.2 million, or 66%, primarily due to the absence of $2.5 million of costs incurred in the second quarter of 2010 pertaining to the successful resolution of the Galaxy 15 satellite anomaly that occurred in April 2010. Communications satellite results accounted for 64% and 44% of total segment operating income in the second quarter of 2011 and 2010, respectively. Science and remote sensing satellite operating income decreased $0.8 million, or 27%, consistent with the revenue reduction described above.

Operating income in the satellites and space systems segment increased $3.6 million in the first half of 2011 compared to the first half of 2010 primarily due to increased activity on communications satellite contracts and science and remote sensing satellite contracts, including contracts acquired in our 2010 acquisition. Communications satellite operating income increased $2.8 million, or 31%, principally attributable to activity on new communications satellite contracts awarded in the fourth quarter of 2010 and first half of 2011, and a $1.8 million reduction in costs pertaining to the successful resolution of the Galaxy 15 satellite anomaly discussed above. Communications satellite contracts accounted for 62% and 58% of total segment operating income in the first half of 2011 and 2010, respectively. Science and remote sensing satellite operating income increased $1.5 million, or 40%, primarily due to the addition of contracts acquired in our 2010 acquisition.

Segment operating margin (as a percentage of revenues) increased to 6.1% in the second quarter of 2011 from 5.4% in the second quarter of 2010, and to 6.5% in the first half of 2011 compared to 6.3% in the first half of 2010, due to improved margins on communications satellite contracts and science and remote sensing satellite contracts, in addition to lower costs pertaining to the successful resolution of the Galaxy 15 satellite anomaly discussed above.

Advanced Space Programs

Advanced space programs segment operating results were as follows:

	Second Quarter							First Six Months
($ in thousands)	2011		2010		% Change			2011		2010		% Change
Revenues	$	103,188	$	120,926		(15%	)	$	195,898	$	228,469		(14%	)
Operating income		7,463		2,867		160%			12,319		7,994		54%
Operating margin		7.2%		2.4%					6.3%		3.5%

Segment Revenues - Advanced space programs segment revenues decreased $17.7 million, or 15%, in the second quarter of 2011 compared to the second quarter of 2010 primarily due to a $21.2 million decrease in revenues on the CRS contract, which resulted from a particularly high level of subcontract activity in the second quarter of 2010. The CRS contract accounted for 32% and 44% of total segment revenues in the second quarter of 2011 and 2010, respectively. Segment revenues also decreased due to a $13.9 million reduction in revenues on the Orion LAS contract that was terminated for convenience by the customer in the second quarter of 2010. These revenue reductions were partially offset by a $17.1 million increase in activity on national security satellite contracts.

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Advanced space programs segment revenues decreased $32.6 million, or 14%, in the first half of 2011 compared to the first half of 2010 primarily due to a $32.3 million revenue reduction on the Orion LAS contract that was terminated in 2010 and an $11.9 million decrease in activity on the CRS contract. These revenue reductions were partially offset by an $11.6 million increase in activity on national security satellite contracts. In the first half of 2011 and 2010, the CRS contract accounted for 42% and 41%, respectively, of total segment revenues.

Segment Operating Income - Operating income in the advanced space programs segment increased $4.6 million, or 160%, in the second quarter of 2011 compared to the second quarter of 2010 primarily due to the absence of $3.3 million of unrecovered research and development expenses that were recognized in the second quarter of 2010 and a $1.2 million increase in operating results from national security satellite contracts. Segment operating income also improved due to the absence of an unfavorable profit adjustment recognized in the second quarter of 2010 resulting from the termination of the Orion LAS contract. These operating income improvements were partially offset by a $1.0 million decrease in operating results from the CRS contract associated with the reduction in revenues discussed above.

Operating income in the advanced space programs segment increased $4.3 million, or 54%, in the first half of 2011 compared to the first half of 2010, despite the decrease in revenues primarily due to the absence of unrecovered research and development expenses of $5.4 million and the unfavorable Orion LAS contract adjustment that was recognized in 2010.

This segment’s operating margin (as a percentage of revenues) increased to 7.2% in the second quarter of 2011 from 2.4% in the second quarter of 2010, and to 6.3% in the first half of 2011 from 3.5% in the first half of 2010, largely due to the absence of unrecovered research and development expenses and the 2010 Orion LAS contract adjustment discussed above.

Corporate and Other

Corporate and other revenues were comprised solely of the elimination of intersegment revenues of $22.1 million and $18.3 million in the second quarter of 2011 and 2010, respectively, and $55.1 million and $30.5 million in the first half of 2011 and 2010, respectively. Intersegment revenues are comprised primarily of Taurus II launch vehicle revenues recorded in the launch vehicles segment in connection with the COTS program that is conducted by and reported as a research and development program in our advanced space programs segment. Taurus II revenues for the COTS program were $20.3 million and $16.5 million in the second quarter of 2011 and 2010, respectively, and $51.7 million and $27.0 million in the first half of 2011 and 2010, respectively.

We reported an operating loss in “Corporate and Other” of $1.6 million in the second quarter and first half of 2010 that consisted solely of transaction expenses incurred in connection with our second quarter 2010 business acquisition. There was no corporate and other operating income or loss in the second quarter and first half of 2011.

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Backlog

Our firm backlog was approximately $2.1 billion and $2.0 billion at June 30, 2011 and December 31, 2010, respectively. While there can be no assurance, we expect to convert approximately $660 million of the June 30, 2011 firm backlog into revenue during the remainder of 2011. Firm backlog consists of aggregate contract values for firm product orders, excluding the portion previously included in revenues, and including government contract orders not yet funded and our estimate of potential award fees.

Total backlog was approximately $5.3 billion at June 30, 2011 and $4.6 billion at December 31, 2010. Total backlog includes firm backlog in addition to unexercised options, indefinite-quantity contracts and undefinitized orders and contract award selections.

Liquidity and Capital Resources

Cash Flow from Operating Activities

Cash flow from operating activities in the first half of 2011 was $68.0 million, as compared to cash used in operating activities of $53.2 million in the first half of 2010. The increase in operating cash flow resulted primarily from an increase in the net effect of changes in working capital and certain other assets and liabilities, in addition to the effect of increased net income in the first six months of 2011. During the first half of 2011, net changes in working capital and certain other assets and liabilities provided $6.8 million of cash, compared to a $93.6 million use of cash in the first half of 2010. The changes in working capital in the first half of 2011 included a $71.8 million increase in deferred revenues and customer advances primarily due to new communications satellite contract awards and increased accounts payable and accrued expenses of $51.1 million primarily due to timing of certain cash disbursements. These sources of cash were partially offset by a $120.9 million increase in receivables, primarily pertaining to the CRS contract. Under the terms of the CRS contract, a substantial percentage of the customer cash receipts are billable and collectible only upon the successful completion of certain key milestones, including the launch of each vehicle, the first of which is scheduled to occur in 2012.

Cash Flow from Investing Activities

Cash used in investing activities in the first half of 2011 was $32.8 million, as compared to $88.6 million in the first half of 2010. In the second quarter of 2010, we spent $55 million in connection with a business acquisition (see Note 2 to the accompanying financial statements). We spent $32.8 million for capital expenditures in the first half of 2011 as compared to $33.6 million in the first half of 2010.

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Cash Flow from Financing Activities

Cash flow used in financing activities in the first half of 2011 was $0.9 million, as compared to cash provided by financing activities of $12.3 million in the first half of 2010. In the second quarter of 2011, we paid $2.9 million of financing fees associated with establishing a new credit facility, as discussed below. During the first half of 2011 and 2010, we received $1.4 million and $10.3 million, respectively, from the issuance of common stock in connection with stock option exercises and employee stock plan purchases.

Convertible Notes - In December 2006, we issued $143.8 million of 2.4375% convertible senior subordinated notes due 2027 with interest payable semi-annually each January 15 and July 15. The convertible notes are convertible into cash, or a combination of cash and common stock at our election, based on an initial conversion rate of 40.8513 shares of our common stock per $1,000 in principal amount of the convertible notes (equivalent to an initial conversion price of approximately $24.48 per share) under certain circumstances.

At any time on or after January 21, 2014, the convertible notes are subject to redemption at our option, in whole or in part, for cash equal to 100% of the principal amount of the convertible notes, plus unpaid interest, if any, accrued to the redemption date.

Holders of the convertible notes may require us to repurchase the convertible notes, in whole or in part, on January 15, 2014, January 15, 2017 or January 15, 2022, or, if a “fundamental change” (as such term is defined in the indenture governing the convertible notes) occurs, for cash equal to 100% of the principal amount of the convertible notes, plus any unpaid interest, if any, accrued to the redemption date.

Credit Facility - In June 2011, we entered into a five-year $300 million revolving secured credit facility (“Credit Facility”), which replaced our $100 million revolving credit facility that was established in 2007. The new Credit Facility includes the option to increase the amount of the Credit Facility by up to $150 million to the extent that any one or more lenders commit to be a lender for such additional amount. Loans under the Credit Facility bear interest at LIBOR plus an applicable margin ranging from 1.75% to 2.50%, with the applicable margin varying according to our total leverage ratio, or, at our election, at a prime base rate plus 0.75% to 1.50%. The Credit Facility expires in 2016 and is secured by substantially all of our personal property assets. Up to $125 million of the Credit Facility may be reserved for letters of credit. As of June 30, 2011, there were no borrowings under the Credit Facility, although $17.7 million of letters of credit were issued under the Credit Facility. Accordingly, as of June 30, 2011, $282.3 million of the Credit Facility was available for borrowings.

Debt Covenants - Our Credit Facility contains covenants limiting our ability to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase company stock, enter into transactions with affiliates, make investments, merge or consolidate with others or dispose of assets. In addition, the Credit Facility contains financial covenants with respect to leverage and interest coverage. As of June 30, 2011, we were in compliance with all of these covenants.

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Available Cash and Future Funding

At June 30, 2011, we had $286.7 million of unrestricted cash and cash equivalents. Management believes that available cash, cash expected to be generated from operations and the borrowing capacity under our Credit Facility will be sufficient to fund our operating and capital expenditure requirements, including research and development expenditures, over the next 12 months and for the foreseeable future. However, there can be no assurance that this will be the case. We believe that we will continue to incur significant costs during the remainder of 2011 related to the Taurus II and COTS research and development programs. Additionally, significant unforeseen events such as termination of major orders or late delivery or failure of launch vehicle or satellite products could adversely affect our liquidity and results of operations. If market opportunities exist, we may choose to undertake financing actions to further enhance our liquidity, which could include raising funds through capital market transactions; however, our ability to borrow additional funds is limited by the terms of our Credit Facility.

As discussed in Note 7 to the accompanying financial statements, we currently hold investments in auction rate securities and preferred stock that have experienced a decline in fair value. Given the sufficiency of our available cash and other funding sources as discussed above, we believe that we will not need, nor do we intend, to liquidate these investments in the foreseeable future. Accordingly, we do not believe that any fluctuations in the fair values of these securities will have a significant impact on our liquidity.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We believe that our market risk exposure is primarily related to the market value of certain investments that we hold as of June 30, 2011, changes in foreign currency exchange rates and interest rate risk. We manage these market risks through our normal financing and operating activities and, when appropriate, through the use of derivative financial instruments. We do not enter into derivatives for trading or other speculative purposes, nor do we use leveraged financial instruments.

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Investments

As discussed in Note 7 to the accompanying financial statements, we currently hold investments in auction-rate securities and preferred stock that have experienced a significant decline in fair value resulting in our recording certain other-than-temporary impairment charges. As a result of ongoing liquidity issues impacting these securities, we may be required to record additional impairment charges if there are further reductions in the fair value of these investments in future periods.

Foreign Currency Exchange Rate Risk

We believe that the potential change in foreign currency exchange rates is not a substantial risk to us because the large majority of our business transactions are denominated in U.S. dollars. At June 30, 2011, we had $1.8 million of receivables denominated in Japanese yen.

From time to time, we enter into forward exchange contracts to hedge against foreign currency fluctuations on receivables or expected payments denominated in foreign currency. At June 30, 2011, we had no foreign currency forward exchange contracts.

Interest Rate Risk

We are exposed to changes in interest rates in the normal course of our business operations as a result of our ongoing investing and financing activities, which include debt as well as cash and cash equivalents. As of June 30, 2011, we had $143.8 million of convertible senior subordinated notes with a fixed interest rate of 2.4375%. Generally, the fair market value of our fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of our convertible notes is affected by our stock price. The total estimated fair value of our convertible debt at June 30, 2011 was $149.0 million. The fair value was determined based on market prices quoted by a broker-dealer.

We believe that exposure to market risk related to interest rate fluctuations for cash and cash equivalents are not significant. As of June 30, 2011, a hypothetical 100 basis point change in interest rates would result in an annual change of approximately $2.8 million in interest income earned.

We assess our interest rate risks on a regular basis and do not currently use financial instruments to mitigate these risks.

Deferred Compensation Plan

We have an unfunded deferred compensation plan for senior managers and executive officers with a total liability balance of $10.4 million at June 30, 2011. This liability is subject to fluctuation based upon the market value of the investment options selected by participants.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective.

Changes in Internal Controls Over Financial Reporting

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time we are party to certain litigation or other legal proceedings arising in the ordinary course of business. Because of the uncertainties inherent in litigation, we cannot predict whether the outcome of such litigation or other legal proceedings will have a material adverse effect on our results of operations or financial condition.

ITEM 1A. RISK FACTORS

There are no material changes to the risk factors disclosed in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)	None.
(b)	None.
(c)	None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. REMOVED AND RESERVED

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

(a)	Exhibits – A complete listing of exhibits required is given in the Exhibit Index.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ORBITAL SCIENCES CORPORATION


DATED: July 29, 2011	By:	/s/ David W. Thompson
		David W. Thompson
		Chairman, President and Chief Executive Officer


DATED: July 29, 2011	By:	/s/ Garrett E. Pierce
		Garrett E. Pierce
		Vice Chairman and Chief Financial Officer

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EXHIBIT INDEX

The following exhibits are filed with this report unless otherwise indicated.

Exhibit No.	Description
3.1	Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.1 to the company’s Registration Statement on Form S-3 (File Number 333-08769) filed and effective on July 25, 1996).
3.2	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).
3.3	Certificate of Amendment to Restated Certificate of Incorporation, dated April 29, 1997 (incorporated by reference to Exhibit 3.3 to the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998).
3.4	Certificate of Amendment to Restated Certificate of Incorporation, dated April 30, 2003 (incorporated by reference to Exhibit 3.4 to the company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
4.1	Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.1 to the company’s Registration Statement on Form S-1 (File Number 33-33453) filed on February 9, 1990 and effective on April 24, 1990).
4.2	Indenture dated as of December 13, 2006, by and between Orbital Sciences Corporation and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to the company’s Current Report on Form 8-K filed on December 13, 2006).
4.3	Form of 2.4375% Convertible Senior Subordinated Note due 2027 (incorporated by reference to Exhibit 4.2 to the company’s Current Report on Form 8-K filed on December 13, 2006).
10.1	Credit Agreement, dated as of June 7, 2011, by and among Orbital Sciences Corporation, as Borrower, the subsidiaries of the Borrower party thereto as Guarantors, the Lenders party thereto, and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender, Wells Fargo Securities LLC, Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Joint Lead Arrangers and Joint Bookrunners, Citibank, N.A. and Bank of America, N.A. as Co-Syndication Agents and PNC Bank, N.A. and Sovereign Bank as Co-Documentation Agents (incorporated by reference to Exhibit 10.1 to the company’s Current Report on Form 8-K filed on June 10, 2011).

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10.2	Security and Pledge Agreement, dated as of June 7, 2011, between Orbital Sciences Corporation, the other obligors party thereto, and Wells Fargo Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.2 to the company’s Current Report on Form 8-K filed on June 10, 2011).
31.1	Certification of Chairman, President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (transmitted herewith).
31.2	Certification of Vice Chairman and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (transmitted herewith).
32.1	Written Statement of Chairman, President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (transmitted herewith).
32.2	Written Statement of Vice Chairman and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (transmitted herewith).
101	The following financial information from the company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010; (ii) Condensed Consolidated Income Statements for the quarters and six months ended June 30, 2011 and 2010 and (iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010.*

*Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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ORBITAL SCIENCES CORP /DE/ Reports

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