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EX-31.1 - EXHIBIT 31.1 - ORBITAL SCIENCES CORP /DE/ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - ORBITAL SCIENCES CORP /DE/ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - ORBITAL SCIENCES CORP /DE/ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - ORBITAL SCIENCES CORP /DE/ex32-1.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 March 31, 2012

OR

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.)

45101 Warp Drive
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 April 24, 2012, 58,985,986 shares of the registrant’s Common Stock were outstanding.
 
 



 
 

 

ORBITAL SCIENCES CORPORATION


     
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FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

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


   
March 31,
   
December 31,
 
   
2012
   
2011
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 226,955     $ 259,219  
Receivables
    420,350       333,467  
Inventories
    65,771       64,335  
Deferred income taxes, net
    47,078       51,413  
Other current assets
    44,100       46,965  
Total current assets
    804,254       755,399  
Investments
    8,800       8,500  
Property, plant and equipment, net
    263,007       259,972  
Goodwill
    75,261       75,261  
Other non-current assets
    28,932       31,668  
Total assets
  $ 1,180,254     $ 1,130,800  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 245,364     $ 234,379  
Deferred revenues and customer advances
    126,298       104,970  
Total current liabilities
    371,662       339,349  
Long-term obligations
    132,670       131,182  
Other non-current liabilities
    17,056       16,990  
Total liabilities
    521,388       487,521  
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, 58,981,852 and
               
58,914,802 shares outstanding, respectively
    590       589  
Additional paid-in capital
    568,405       566,624  
Accumulated other comprehensive loss
    (2,547 )     (3,359 )
Retained earnings
    92,418       79,425  
Total stockholders’ equity
    658,866       643,279  
Total liabilities and stockholders’ equity
  $ 1,180,254     $ 1,130,800  

See accompanying notes to condensed consolidated financial statements.



ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
AND STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands, except per share data)


   
Quarters Ended March 31
 
   
2012
   
2011
 
Revenues
  $ 338,030     $ 317,703  
Cost of revenues
    258,964       271,040  
Research and development expenses
    27,878       17,135  
Selling, general and administrative expenses
    27,342       19,412  
Income from operations
    23,846       10,116  
Interest income and other
    188       11,489  
Interest expense
    (3,077 )     (2,533 )
Income before income taxes
    20,957       19,072  
Income tax provision
    (7,964 )     (6,737 )
Net income
  $ 12,993     $ 12,335  
                 
Basic income per share
  $ 0.22     $ 0.21  
Diluted income per share
  $ 0.22     $ 0.21  
                 
                 
Net income (from above)
  $ 12,993     $ 12,335  
Other comprehensive income
               
Unrealized gain on investments
    300       600  
Defined benefit plans, net of tax of $316 in 2012 and $18 in 2011
    512       29  
Total other comprehensive income
    812       629  
Comprehensive income
  $ 13,805     $ 12,964  

See accompanying notes to condensed consolidated financial statements.



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


   
Quarters Ended March 31,
 
   
2012
   
2011
 
Operating Activities:
           
Net income
  $ 12,993     $ 12,335  
    Adjustments to reconcile net income to net cash provided by (used in) operating activities:
         
Depreciation and amortization expense
    9,019       7,847  
Deferred income taxes
    7,171       5,461  
Stock-based compensation and other
    2,907       3,882  
Changes in assets and liabilities
    (53,015 )     (1,376 )
Net cash provided by (used in) operating activities
    (20,925 )     28,149  
                 
Investing Activities:
               
Capital expenditures
    (11,794 )     (17,317 )
Net cash used in investing activities
    (11,794 )     (17,317 )
                 
Financing Activities:
               
Net proceeds from issuances of common stock
    406       841  
Tax benefit of stock-based compensation
    49       558  
Net cash provided by financing activities
    455       1,399  
                 
Net increase (decrease) in cash and cash equivalents
    (32,264 )     12,231  
Cash and cash equivalents, beginning of period
    259,219       252,415  
Cash and cash equivalents, end of period
  $ 226,955     $ 264,646  

See accompanying notes to condensed consolidated financial statements.


ORBITAL SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March  31, 2012 and 2011
(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, 2011.

The preparation of 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 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.

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 March 31, 2012 are not necessarily indicative of the results expected for the full year.


(2)  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.


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

   
Quarters Ended March 31,
 
   
2012
   
2011
 
Launch Vehicles:
         
 
 Revenues
 $126,122
  $
105,273
 
 
 Operating income
 8,916
   
 (5,049)
 
 
 Identifiable assets
 229,056
   
 210,642
 (2)
 
 Capital expenditures
 7,251
   
 10,512
 
 
 Depreciation and amortization
 3,733
   
 3,320
 
Satellites and Space Systems:
         
 
 Revenues
 $111,283
  $
152,659
 
 
 Operating income
 7,376
   
 10,310
 
 
 Identifiable assets
 277,429
   
 282,344
 (2)
 
 Capital expenditures
 2,286
   
 1,829
 
 
 Depreciation and amortization
 1,964
   
 1,745
 (3)
Advanced Space Programs:
         
 
 Revenues
 $114,963
  $
92,710
 
 
 Operating income
 7,554
   
 4,855
 
 
 Identifiable assets
 331,575
   
 254,769
 (2)
 
 Capital expenditures
 1,974
   
 4,716
 
 
 Depreciation and amortization
 1,763
   
 1,083
 (3)
Corporate and Other:
         
 
 Revenues(1)
 $(14,338)
  $
(32,939)
 
 
 Operating income
 —
   
 —
 
 
 Identifiable assets
 342,194
   
 383,045
 (2)
 
 Capital expenditures
 283
   
 260
 
 
 Depreciation and amortization
 1,559
   
 1,699
 
Consolidated:
         
 
 Revenues
 $338,030
  $
317,703
 
 
 Operating income
 23,846
   
 10,116
 
 
 Identifiable assets
 1,180,254
   
 1,130,800
 (2)
 
 Capital expenditures
 11,794
   
 17,317
 
 
 Depreciation and amortization
 9,019
   
 7,847
 

 
(1)         
Corporate and other revenues are comprised solely of the elimination of intersegment revenues summarized as follows (in millions):
 
   
Quarters Ended March 31,
 
   
2012
   
2011
 
           Launch Vehicles
  $ 12.5     $ 31.4  
           Satellites and Space Systems
    1.7       1.1  
           Advanced Space Programs
    0.1       0.4  
Total intersegment revenues
  $ 14.3     $ 32.9  
 
 (2)      As of December 31, 2011.
 (3)      Prior period amounts have been reclassified to conform to the current period presentation.



(3)  Earnings Per Share

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

       
Quarters Ended March 31,
 
Numerator
 
2012
   
2011
 
   
Net income
  $ 12,993     $ 12,335  
   
Percentage allocated to shareholders (1)
    99.4%       98.8%  
   
Numerator for basic and diluted earnings per share
  $ 12,915     $ 12,187  
                     
Denominator
               
   
Denominator for basic earnings per share -
               
   
   weighted-average shares outstanding
    58,941       58,299  
   
Dilutive effect of stock options and restricted stock units
    334       490  
   
Denominator for diluted earnings per share
    59,275       58,789  
                     
Per share income
               
   
Basic
  $ 0.22     $ 0.21  
   
Diluted
    0.22       0.21  
_________________________
               
                     
     (1)
Basic weighted-average shares outstanding
    58,941       58,299  
     
Basic weighted-average shares outstanding and
               
     
   unvested restricted share units expected to vest
    59,286       58,982  
     
Percentage allocated to shareholders
    99.4%       98.8%  

The calculation of earnings per share shown above excludes the income attributable to the company’s unvested restricted stock units that include rights to receive non-forfeitable dividends from the numerator and excludes the impact of those units from the denominator.  Diluted weighted-average shares for all periods exclude the effect of those units as well as the effect of the company’s convertible notes that were anti-dilutive.

(4)  Receivables

The components of receivables were as follows (in thousands):

       
March 31,
   
December 31,
 
       
2012
   
2011
 
  Billed    $ 59,330     $ 77,505  
 
Unbilled
  361,020       255,962  
 
 
Total    $ 420,350     $ 333,467  

Under the terms of the company’s Commercial Resupply Services (“CRS”)  contract with NASA, a substantial percentage of the customer cash receipts are billable and collectible only upon the satisfaction of certain key milestones, including the successful completion of each mission.  Unbilled receivables at March 31, 2012 and December 31, 2011 include $204.8 million and $130.4 million, respectively, pertaining to the CRS contract.


As of March 31, 2012 and December 31, 2011, unbilled receivables included $9.9 million and $10.2 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 March 31, 2012, the company could be required to refund up to approximately $14.0 million to customers if certain completed satellites were to fail to satisfy performance criteria.  Orbital generally procures insurance policies under which the company believes it would recover satellite incentive fees that are not earned and performance refund obligations.
 
 
 (5)  Inventories

Total inventories were $65.8 million at March 31, 2012 and $64.3 million at December 31, 2011.  Substantially all of the company’s inventory consisted of component parts, raw materials and milestone payments for future delivery of component parts.

(6)  Investments

As of March 31, 2012, 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 13 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):

   
March 31, 2012
   
December 31, 2011
 
   
Cost or Amortized Cost
   
Net Unrealized Gain (Loss)
   
Fair Value
   
Cost or Amortized Cost
   
Net Unrealized Gain (Loss)
   
Fair Value
 
Debt
  $ 7,150     $ (1,050 )   $ 6,100     $ 7,150     $ (1,050 )   $ 6,100  
Equity(1)
    2,000       700       2,700       2,000       400       2,400  
Total
  $ 9,150     $ (350 )   $ 8,800     $ 9,150     $ (650 )   $ 8,500  
                                                 
(1)  As of March 31, 2012 and December 31, 2011, cost and fair value of the two preferred stock investments were $0.


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

   
Quarters Ended
 
   
March 31,
 
   
2012
   
2011
 
Debt Securities
           
Fair value at beginning of period
  $ 6,100     $ 6,700  
Temporary impairment credits, net
          100  
 Net change in fair value
          100  
Fair value at end of period
  $ 6,100     $ 6,800  
                 
                 
Equity Securities
               
Fair value at beginning of period
  $ 2,400     $ 1,900  
Temporary impairment credits, net
    300       500  
 Net change in fair value
    300       500  
Fair value at end of period
  $ 2,700     $ 2,400  
                 
                 
Total
               
Fair value at beginning of period
  $ 8,500     $ 8,600  
Temporary impairment credits, net
    300       600  
 Net change in fair value
    300       600  
Fair value at end of period
  $ 8,800     $ 9,200  
 
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 March 31, 2012, 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.


For the quarters ended March 31, 2012 and 2011, the company did not record any other-than-temporary impairment charges.  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 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.

(7)  Debt Obligations

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.

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, for cash equal to 100% of the principal amount of the convertible notes, plus any unpaid interest, if any, accrued to the redemption date.  In addition, holders of the convertible notes may require the company to repurchase the convertible notes, in whole or in part, for cash equal to 100% of the principal amount of the convertible notes, plus any unpaid interest, if any, accrued to the redemption date, if a “fundamental change” occurs prior to maturity of the convertible notes.

The fair value of the company’s convertible notes at March 31, 2012 and December 31, 2011 was estimated at $143.7 million and $145.2 million, respectively.  The fair value was determined based on market prices quoted by a broker-dealer and is a Level 1 valuation.

Credit Facility

The company has a five-year $300 million revolving secured credit facility (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 assets except for real property.

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 quarterly commitment fee for the unused portion of the Credit Facility, if any, at a rate ranging from 0.30% to 0.50%.

As of March 31, 2012, there were no borrowings under the Credit Facility, although $15.4 million of letters of credit were issued under the Credit Facility.  Accordingly, as of March 31, 2012, $284.6 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.  As of March 31, 2012, the company was in compliance with all of these covenants.

 (8)  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, 2011
    782,112     $ 16.07       902,287     $ 7.25  
Granted (1)
    38,096       14.54              
Exercised
                (8,483 )     6.31  
Vested
    (27,563 )     17.10              
Forfeited
    (2,865 )     16.33              
Expired
                       
Outstanding at March 31, 2012
    789,780     $ 15.96       893,804  (2)   $ 7.25  

(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 1.36 years.



   
As of March 31
(in millions)
 
2012
 
2011
Stock-based compensation expense
  $
1.5
    $
1.4
 
Income tax benefit related to stock-based compensation expense
   
 0.5
     
 0.5
 
Intrinsic value of options exercised computed as the market
               
     price on the exercise date less the price paid to exercise the options
   
 0.1
     
 1.3
 
Cash received from exercise of options
   
 0.1
     
 0.5
 
Tax benefit recorded as credits to additional paid-in capital related
               
     to stock-based compensation transactions
   
 —
     
 0.5
 

   
As of
 
(in millions)
 
March 31, 2012
 
Shares of common stock available for grant under stock-based incentive plans
    0.9  
Aggregate intrinsic value of restricted stock units that are expected to vest
  $ 10.4  
Unrecognized compensation expense related to non-vested restricted stock units, expected to
       
be recognized over a weighted-average period of 1.91 years
    9.3  
Aggregate intrinsic value of stock options outstanding, all fully vested
    5.3  

(9)  Research and Development

In 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 $472 million.  The company expects to complete this project in the second half 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 March 31, 2012 and December 31, 2011, deferred revenue and customer advances on the accompanying balance sheet included $0 and $6.2 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):

   
First Quarter
   
Inception
 
   
2012
   
2011
   
To Date
 
Research and development costs incurred (1)
  $ 21.2     $ 42.0     $ 439.1  
Less  amounts funded by NASA
    (11.0 )     (34.1 )     (271.3 )
Net research and development expenses
  $ 10.2     $ 7.9     $ 167.8  
__________________________________________
(1) Includes associated general and administrative expenses.
 
The company is engaged in a major product development program of a medium-capacity rocket named Antares.  Approximately $11.6 million and $7.1 million of the company’s research and development expenses in the first quarters of 2012 and 2011, respectively, were attributable


to the Antares program.  Since the inception of the Antares program through March 31, 2012, the company has incurred $203.8 million of such costs.

(10)  Income Taxes

The company’s effective tax rates were 38.0% and 35.3% for the three months ended March 31, 2012 and 2011, respectively.  The tax rate in 2011 included the effect of federal research and development tax credits that are not expected to be available to the company in 2012.

(11)  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 Antares development program (see Note 9) are allowable, although the U.S. Government has not yet made a final determination.  The company incurred $11.6 million and $7.1 million of such expenses that have been recorded as allowable costs for the quarter ended March 31, 2012 and 2011, respectively.  Since the inception of the Antares program through March 31, 2012, the company has incurred $165.0 million of such expenses that have been recorded as allowable costs.  If such costs were determined to be unallowable, the company could be required to record revenue and profit reductions in future periods.
 
 

 
Terminated Contracts

The Orion Launch Abort System contract was terminated for convenience by the customer in 2010.  The company has recognized its best estimates of the revenues and profit that will ultimately be realized in the final termination settlement.

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 the outcome of such litigation or other legal proceedings; however, the company believes that none of these matters will have a material adverse effect on the company’s results of operations or financial condition.

Discussions with U.S. Securities and Exchange Commission

As previously disclosed, in December 2011, the company received a comment letter from the staff of the U.S. Securities and Exchange Commission (“SEC”) in connection with a routine review of the company’s Annual Report on Form 10-K for the year ended December 31, 2010 and Quarterly Report on Form 10-Q for the quarter ended September 30, 2011.  The SEC comment letter included, among other things, a request for supplemental information on certain of the company’s accounting policies and disclosures related to the timing of revenue recognition, including for the company’s Commercial Resupply Services (“CRS”) contract with NASA to resupply cargo to the International Space Station.  The company and the SEC staff are currently engaged in discussions regarding the company’s accounting for launch and delivery milestones under the CRS contract.  The launch and delivery milestones comprise approximately 25% of total CRS contract value.  CRS contract revenues recognized through March 31, 2012 totaled approximately $703 million.  The company’s consolidated results contained in this Form 10-Q were prepared in accordance with the company's existing accounting policies and using assumptions which the company believes are appropriate based on current facts and circumstances, all of which are consistent with those applied in prior audited periods.  Until these discussions are resolved, the company cannot determine if it will be required to supplement its disclosures or restate or make other changes to its historical consolidated financial statements, including the financial information contained in this Form 10-Q.

Other

On April 2, 2010, the company acquired certain assets and liabilities of the spacecraft development 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 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.


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,” “will,” “intend,” “plan” and words of similar substance.  Such forward-looking statements are subject to risks, trends and uncertainties that could cause the actual results or performance of the company to be materially different from the forward-looking statement.  Uncertainty surrounding factors such as continued government support and funding for key space and defense programs, new product development programs, product performance and market acceptance of products and technologies, achievement of contractual milestones, government contract procurement and termination risks, income tax rates and the outcome of our current discussions with the SEC regarding our financial reporting 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, 2011.  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:

·  
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.
 
The following discussion should be read along with our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission, and with the unaudited condensed consolidated financial statements included in this Form 10-Q.


Consolidated Results of Operations for the Quarters Ended March 31, 2012 and 2011

Revenues - Our consolidated revenues were $338.0 million in the first quarter of 2012, an increase of $20.3 million, or 6%, compared to the first quarter of 2011 due to higher revenues in our launch vehicles segment and advanced space programs segment partially offset by a reduction in satellites and space systems segment revenues.  Advanced space programs segment revenues increased $22.3 million, or 24%, due to increased activity on national security satellite contracts, partially offset by decreased activity on the International Space Station Commercial Resupply Services (“CRS”) contract with NASA.  Launch vehicles segment revenues increased $20.8 million, or 20%, due to increased activity on target launch vehicles partially offset by decreased activity on missile defense interceptors and space launch vehicles.  Satellites and space systems segment revenues decreased $41.4 million, or 27%, due to decreased activity on communications satellite contracts and science and remote sensing satellite contracts partially offset by increased activity on space technical services contracts.

The growth in revenues also reflects a net decrease of $18.6 million in intersegment revenue eliminations in the first quarter of 2012 compared to the first quarter of 2011, due to a diminishing level of activity on Antares launch vehicles for the Commercial Orbital Transportation Services (“COTS”) research and development program with NASA.  Intersegment revenues included $11.8 million and $31.4 million in the first quarter of 2012 and 2011, respectively, pertaining to Antares production work performed in our launch vehicles segment as part of the COTS program that is being conducted in our advanced space programs segment.

The CRS contract accounted for 22% and 21% of consolidated revenues in the first quarter of 2012 and 2011, respectively.  The launch vehicle portion of the CRS contract is reported in our launch vehicles segment and the remainder of the CRS contract is reported in our advanced space programs segment.  CRS contract revenues totaled $74.4 million in the first quarter of 2012, an increase of $6.7 million, or 10%, due to a higher level of contract activity in the first quarter of 2012.  Since the inception of the CRS program through March 31, 2012, a total of $703 million of revenues have been recognized on the contract.

Cost of Revenues - Our cost of revenues was $259.0 million in the first quarter of 2012, a decrease of $12.1 million, or 5%, compared to the first quarter of 2011.  Cost of revenues includes the costs of personnel, materials, subcontractors and overhead.  The decrease in our cost of revenues was primarily attributable to the decrease in contract activity in the satellites and space systems segment.  Cost of revenues decreased $39.9 million in the satellites and space systems segment and increased $8.6 million in the advanced space programs segment and $0.6 million in the launch vehicles segment.  Eliminations of intersegment cost of revenues decreased $18.6 million consistent with the decrease in intersegment revenues discussed above.

Research and Development Expenses - Our research and development expenses totaled $27.9 million, or 8% of revenues, in the first quarter of 2012, a $10.7 million increase compared to $17.1 million, or 5% of revenues, in the first quarter of 2011.  The majority of our research and development expenses in 2012 and 2011 were attributable to the COTS program and our Antares


launch vehicle development program.  The increase in research and development expenses was attributable to activities related to the planned launch of the Antares rocket and completion of the COTS program in 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.  Under the COTS agreement, as amended, as of March 31, 2012, NASA has agreed to pay us $288 million in cash milestone payments, partially funding our program costs which are currently estimated to be approximately $472 million.  We expect to complete this program in the second half of 2012.  The following table summarizes the COTS program costs incurred and amounts funded by NASA recorded in research and development expenses (in millions):

   
First Quarter
   
Inception
 
   
2012
   
2011
   
To Date
 
Research and development costs incurred (1)
  $ 21.2     $ 42.0     $ 439.1  
Less  amounts funded by NASA
    (11.0 )     (34.1 )     (271.3 )
Net research and development expenses
  $ 10.2     $ 7.9     $ 167.8  
­­­­­­__________________________________________
(1)  Includes associated general and administrative expenses.

Research and development expenses attributable to our Antares launch vehicle development program were $11.6 million and $7.1 million in the first quarter of 2012 and 2011, respectively.

We believe that the majority of our research and development expenses are recoverable and billable under our contracts with the U.S. Government.  Charging practices relating to research and development and other costs that may be charged directly or indirectly to government contracts are subject to audit by U.S. Government agencies to determine if such costs are reasonable and allowable under government contracting regulations and accounting practices.  We believe that the research and development costs incurred in connection with our Antares development program are allowable, although the U.S. Government has not yet made a final determination.  We incurred $11.6 million and $7.1 million of such expenses that have been recorded as allowable costs for the quarter ended March 31, 2012 and 2011, respectively.  Since the inception of the Antares program through March 31, 2012, we have incurred $165.0 million of such expenses that have been recorded as allowable costs.  If such costs were determined to be unallowable, we could be required to record revenue and profit reductions in future periods.

Selling, General and Administrative Expenses - Selling, general and administrative expenses were $27.3 million and $19.4 million, or 8% and 6% of revenues, in the first quarter of 2012 and 2011, respectively.  Selling, general and administrative expenses include the costs of our finance, legal, administrative and general management functions, as well as bid, proposal and marketing costs.  Selling, general and administrative expenses increased $7.9 million, or 41%, in the first quarter of 2012 compared to the first quarter of 2011 primarily due to bid, proposal and marketing costs pertaining to new business prospects in the advanced space programs segment.


Operating Income - Our consolidated operating income was $23.8 million in the first quarter of 2012, an increase of $13.7 million, or 136%, compared to the first quarter of 2011 due to operating income increases in the launch vehicles segment and the advanced space programs segment partially offset by lower operating income in the satellite and space systems segment.  Launch vehicles segment operating income increased $14.0 million largely due to an adjustment in connection with a March 2011 Taurus XL launch failure that reduced operating income in the first quarter of 2011 by $11.3 million.  Advanced space programs segment operating income increased $2.7 million primarily due to increased activity on national security satellite contracts.  Satellites and space systems segment operating income decreased $2.9 million principally due to decreased activity on communications satellite contracts.

Total operating income from the CRS contract was $3.4 million and $3.3 million in the first quarter of 2012 and 2011, respectively.  Since the inception of the CRS program through March 31, 2012, a total of $35 million of operating income has been recognized on the contract.

Interest Income and Other - Interest income and other was $0.2 million in the first quarter of 2012, compared to $11.5 million in the first quarter of 2011.  Interest income and other in the first quarter of 2011 included the recognition of an $11.3 million insurance recovery pertaining to the Taurus XL launch failure discussed above.

Interest Expense - Interest expense was $3.1 million and $2.5 million in the first quarter of 2012 and 2011, respectively, primarily attributable to interest on our long-term convertible debt.   Interest expense also includes interest expense associated with our five-year $300 million revolving secured credit facility which we entered into in June 2011.

Income Tax Provision - Our income tax provision was $8.0 million and $6.7 million in the first quarter of 2012 and 2011, respectively.  Our effective income tax rate for the first quarter of 2012 and 2011 was 38.0% and 35.3%, respectively.  The tax rate in 2011 included the effect of federal research and development tax credits that are not expected to be available to us in 2012.

Net Income - Our net income was $13.0 million and 12.3 million, or $0.22 and $0.21 diluted earnings per share, in the first quarter of 2012 and 2011, respectively.

Segment Results for the Quarters Ended March 31, 2012 and 2011

Our products and services are grouped into three reportable segments: launch vehicles, satellites and space systems and advanced space programs.  Corporate office transactions that have not been attributed to a particular segment, as well as consolidating eliminations and adjustments, are reported in corporate and other.

The following tables of financial information and related discussion of the results of operations of our business segments are consistent with the presentation of segment information in Note 2 to the accompanying financial statements in this Form 10-Q.



Launch Vehicles

Launch vehicles segment operating results were as follows:

   
First Quarter
 
($ in thousands)
 
2012
   
2011
   
% Change
 
Revenues
  $ 126,122     $ 105,273       20 %
Operating income
    8,916       (5,049 )  
NM
 
Operating margin
    7.1%       (4.8% )        

Segment Revenues - Launch vehicles segment revenues increased $20.8 million, or 20%, in the first quarter of 2012 compared to the first quarter of 2011 primarily due to increased activity on target launch vehicles partially offset by decreased activity on missile defense interceptors and space launch vehicles.  Target launch vehicle revenues increased $29.5 million, or 136%, largely due to activity on new contracts that were awarded in 2011.  Missile defense interceptor revenues decreased $6.2 million, or 26%, due to decreased activity on our Ground-based Midcourse Defense contract.  Space launch vehicle revenues declined $3.2 million, or 5%.  Antares launch vehicle revenues were $46.7 million and $49.5 million in the first quarter of 2012 and 2011, respectively, which included $11.8 million and $31.4 million, respectively, related to the COTS program and $34.9 million and $18.1 million, respectively, related to the CRS contract.  Antares launch vehicle revenues accounted for 37% and 47% of total launch vehicles segment revenues in the first quarter of 2012 and 2011, respectively.

Segment Operating Income - Operating income in the launch vehicles segment increased $14.0 million in the first quarter of 2012 compared to the first quarter of 2011 primarily due to higher space launch vehicles and target launch vehicles operating income partially offset by lower operating income on missile defense interceptor contracts.  Operating income from space launch vehicles increased $11.6 million primarily due to an adjustment in connection with a March 2011 Taurus XL launch failure that reduced operating income in the first quarter of 2011 by $11.3 million.  This segment does not recognize any profit pertaining to the Antares rockets that are being built for the COTS program that is being conducted in our advanced space programs segment.  Operating income from target launch vehicles increased $2.8 million, or 129%, in the first quarter of 2012, primarily due to activity on new contracts awarded in 2011.

Launch vehicles segment operating margins (as a percentage of revenues) were 7.0% in the first quarter of 2012 compared to negative 4.8% in the first quarter of 2011.  The improvement in operating margin was principally attributable to the effect of the March 2011 Taurus XL launch failure adjustment described above.


Satellites and Space Systems
 
 
Satellites and space systems segment operating results were as follows:

   
First Quarter
 
($ in thousands)
 
2012
   
2011
   
% Change
 
Revenues
  $ 111,283     $ 152,659       (27% )
Operating income
    7,376       10,310       (28% )
Operating margin
    6.6%       6.8%          
                         

Segment Revenues - Satellites and space systems segment revenues decreased $41.4 million, or 27%, in the first quarter of 2012 compared to the first quarter of 2011 due to decreased activity on communications satellite contracts and science and remote sensing satellite contracts partially offset by increased activity on space technical services contracts.  Communications satellite revenues decreased $38.7 million, or 38%, largely attributable to a reduction in activity on contracts that were awarded in 2010.   Communications satellite revenues accounted for 56% and 66% of total segment revenues in the first quarter of 2012 and 2011, respectively.  Science and remote sensing satellite revenues decreased $6.4 million, or 23%, due to decreased contract activity.  Space technical services revenues increased $3.0 million, or 14%, primarily due to increased contract activity.

Segment Operating Income - Operating income in the satellites and space systems segment decreased $2.9 million, or 28%, in the first quarter of 2012 compared to the first quarter of 2011 primarily due to decreased activity on communications satellite contracts.  Communications satellite operating income decreased $2.8 million, or 46%, primarily due to decreased contract activity.  Communications satellite operating income accounted for 45% and 60% of total segment operating income in the first quarter of 2012 and 2011, respectively.

Satellites and space systems segment operating margins (as a percentage of revenues) were 6.6% in the first quarter of 2012 and 6.8% in the first quarter of 2011.  The slight reduction in operating margin was principally due to lower profit margins on communications satellite contracts in 2012 compared to 2011.

Advanced Space Programs

Advanced space programs segment operating results were as follows:

   
First Quarter
 
($ in thousands)
 
2012
   
2011
   
% Change
 
Revenues
  $ 114,963     $ 92,710       24%  
Operating income
    7,554       4,855       56%  
Operating margin
    6.6%       5.2%          

Segment Revenues - Advanced space programs segment revenues increased $22.3 million, or 24%, in the first quarter of 2012 compared to the first quarter of 2011 due to increased revenues on national security satellite contracts partially offset by a reduction in activity on the CRS contract.  National security satellite revenues increased $31.6 million, or 78%, attributable to


increased contract activity.  Revenues from the CRS contract decreased $10.1 million, or 20%, attributable to decreased contract activity.  The CRS program accounted for 34% and 53% of total segment revenues in the first quarter of 2012 and 2011, respectively.

Segment Operating Income - Operating income in the advanced space programs segment increased $2.7 million, or 56%, in the first quarter of 2012 compared to the first quarter of 2011 driven by increased activity on national security satellite contracts.

Advanced space programs segment operating margins (as a percentage of revenues) were 6.6% and 5.2% in the first quarter of 2012 and 2011, respectively.  The increase in operating margin was largely due to profit margin improvements on national security satellite contracts.

Corporate and Other

Corporate and other revenues were comprised solely of the elimination of intersegment revenues of $14.3 million and $32.9 million in the first quarter of 2012 and 2011, respectively. Intersegment revenues were comprised primarily of Antares 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.  Antares revenues for the COTS program were $11.8 million and $31.4 million in the first quarter of 2012 and 2011, respectively.

Backlog

Our firm backlog was approximately $2.1 billion and $2.4 billion at March 31, 2012 and December 31, 2011, respectively.  While there can be no assurance, we expect to convert approximately $840 million of the March 31, 2012 firm backlog into revenue during the remainder of 2012.  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 $5.2 billion at March 31, 2012 and $5.3 billion at December 31, 2011.  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 quarter of 2012 was negative $20.9 million, as compared to positive $28.1 million in the first quarter of 2011.  The decrease in operating cash flow resulted primarily from unfavorable changes in working capital and certain other assets and liabilities.  During the first quarter of 2012, changes in working capital and certain other assets and liabilities used $53.0 million of cash, compared to a $1.4 million use of cash in the first quarter of 2011.  The changes in working capital in the first quarter of 2012 included an $86.9


million increase in receivables, primarily due to an increase in unbilled receivables 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 satisfaction of certain key milestones, including the successful completion of each mission.  The first CRS mission is scheduled to be completed in the first half of 2013.  The increase in receivables in the first quarter of 2012 was offset by a $21.3 million increase in deferred revenue principally due to cash proceeds received on communications satellites contracts and an $11.0 million increase in accounts payable and accrued expenses due to the timing of certain cash disbursements.

Cash Flow from Investing Activities

Cash used in investing activities was $11.8 million and $17.3 million in the first quarter of 2012 and 2011, respectively, and was entirely attributable to capital expenditures.  The decrease in capital expenditures in the first quarter of 2012 was largely due to decreased spending for equipment to support our Antares and COTS programs and our CRS contract.

Cash Flow from Financing Activities
 
Cash flow from financing activities in the first quarter of 2012 was $0.5 million, as compared to $1.4 million in the first quarter of 2011.  During the first quarter of 2012 and 2011, we received $0.4 million and $0.8 million, respectively, from the issuance of common stock in connection with stock option exercises and employee stock option 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 (the “Credit Facility”).  The 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 the company’s assets except for real property.  Up to $125 million of the Credit Facility may be reserved for letters of credit.  As of March 31, 2012, there were no borrowings under the Credit Facility, although $15.4 million of letters of credit were issued under the Credit Facility.  Accordingly, as of March 31, 2012, $284.6 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 March 31, 2012, we were in compliance with all of these covenants.

Available Cash and Future Funding

At March 31, 2012, we had $227.0 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 related to the Antares and COTS research and development programs during the remainder of 2012.  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 obtaining new bank debt or 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 6 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.


Discussions with U.S. Securities and Exchange Commission

As previously disclosed, in December 2011, we received a comment letter from the staff of the U.S. Securities and Exchange Commission (“SEC”) in connection with a routine review of our Annual Report on Form 10-K for the year ended December 31, 2010 and Quarterly Report on Form 10-Q for the quarter ended September 30, 2011.  The SEC comment letter included, among other things, a request for supplemental information on certain of the company’s accounting policies and disclosures related to the timing of revenue recognition, including for our CRS contract with NASA to resupply cargo to the International Space Station.  We are currently engaged in discussions with the SEC staff regarding our accounting for launch and delivery milestones under the CRS contract.  The launch and delivery milestones comprise approximately 25% of total CRS contract value.  CRS contract revenues recognized through March 31, 2012 totaled approximately $703 million.  Our consolidated results contained in this Form 10-Q were prepared in accordance with our existing accounting policies and using assumptions which we believe are appropriate based on current facts and circumstances, all of which are consistent with those applied in prior audited periods.  Until these discussions are resolved, we cannot determine if we will be required to supplement our disclosures or restate or make other changes to our historical consolidated financial statements, including the financial information contained in this Form 10-Q.

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 March 31, 2012, 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.

Investments

As discussed in Note 6 to the accompanying financial statements, we currently hold investments in auction-rate and preferred stock securities that have experienced a decline in fair value resulting in our recording certain other-than-temporary impairment charges.  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 March 31, 2012, we had $1.0 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 March 31, 2012, 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 March 31, 2012, 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 March 31, 2012 was $143.7 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 March 31, 2012, a hypothetical 100 basis point change in interest rates would result in an annual change of approximately $3.0 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 $11.0 million at March 31, 2012.  This liability is subject to fluctuation based upon the market value of the investment options selected by participants.

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 as of the end of the period covered by this report.


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.


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 the outcome of such litigation or other legal proceedings; however, we believe that none of these matters 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, 2011.

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.     MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.     OTHER INFORMATION

Not applicable.

ITEM 6.     EXHIBITS

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


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:  April 27, 2012
By:
/s/ David W. Thompson                                          
   
David W. Thompson
   
Chairman of the Board, President and Chief Executive Officer
     
     
DATED:  April 27, 2012
By:
/s/ Garrett E. Pierce                                               
   
Garrett E. Pierce
   
Vice Chairman and Chief Financial Officer


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 3.1 to the company’s Current Report on Form 8-K filed on October 31, 2011).
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).
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.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase
101.LAB*
XBRL Taxonomy Extension Labels Linkbase
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase
101.DEF*
XBRL Taxonomy Extension Definition Linkbase
   
*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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