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Orbital Announces Third Quarter 2011 Financial Results

20 October 2011

Orbital Sciences Corporation reported its financial results for the third quarter of 2011. Third quarter 2011 revenues were $342.2 million, up 9% compared to $314.5 million in the third quarter of 2010. Third quarter 2011 operating income was $24.7 million, compared to $19.4 million in the third quarter of 2010.

Net income was $16.5 million, or $0.28 diluted earnings per share, in the third quarter of 2011, compared to net income of $10.6 million, or $0.18 diluted earnings per share, in the third quarter of 2010. Orbital’s free cash flow* in the third quarter of 2011 was $16.3 million compared to $28.9 million in the third quarter of 2010.

Mr. David W. Thompson, Orbital’s Chairman and Chief Executive Officer, said, “The company’s third quarter 2011 revenues reflected strong growth in all business segments. Operating income increased 27%, boosted by substantial profit improvement in our satellites and space systems segment. With higher operating margins and lower tax rates, Orbital reported a 56% increase in net income and earnings per share as well. In addition, we successfully completed a number of operational activities during the quarter, including seven major rocket launches and space system deployments and four additional system deliveries.”
________
* “Free cash flow” is a non-GAAP financial measure. For additional details, please refer to the sections of this press release entitled “Cash Flow” and “Disclosure of Non-GAAP Financial Measure.”

Financial Highlights

Summary financial results were as follows:

   
Third Quarter
   
First Nine Months
 
($ in millions, except per share data)
 
2011
   
2010
   
2011
   
2010
 
Revenues
  $ 342.2     $ 314.5     $ 1,010.5     $ 948.4  
Operating Income
    24.7       19.4       57.6       48.9  
Net Income
    16.5       10.6       50.0 (1)     26.2  
Diluted Earnings Per Share
  $ 0.28     $ 0.18     $ 0.84 (1)   $ 0.45  
                                 
(1) Includes a favorable non-recurring income tax adjustment which increased net income by $7.7 million, or $0.13 diluted
 
earnings per share, in the second quarter of 2011.
 

Revenues increased $27.7 million, or 9%, in the third quarter of 2011 compared to the third quarter of 2010 due to revenue growth in each of the company’s three segments. Launch vehicles segment revenues increased $10.7 million, satellites and space systems segment revenues increased $19.3 million and advanced space programs segment revenues increased $9.0 million. The growth in segment revenues was partially offset by an $11.3 million increase in intersegment revenue eliminations.

Operating income increased $5.3 million, or 27%, in the third quarter of 2011 compared to the third quarter of 2010 primarily due to a $4.0 million increase in operating income in the satellites and space systems segment that was mainly attributable to increased contract activity and a profit improvement in the communications satellites product line.

Net income in the third quarter of 2011 increased to $16.5 million, or $0.28 diluted earnings per share, compared to $10.6 million, or $0.18 diluted earnings per share, in the third quarter of 2010. The company’s effective income tax rate decreased to 25.7% compared to 39.0% in the third quarter of 2010 due to federal research and development (R&D) tax credits that were recognized in the third quarter of 2011.

Segment Results

Third quarter operating results by business segment were as follows:

Launch Vehicles
   
Third Quarter
         
First Nine Months
       
($ in millions)
 
2011
   
2010
   
% Change
   
2011
   
2010
   
% Change
 
Revenues
  $ 116.5     $ 105.8       10%   $ 353.2     $ 301.8       17%  
Operating Income
    5.2       5.0       4%     7.1       13.0       (45% )
Operating Margin
    4.5 %     4.7 %             2.0 %     4.3 %        

Launch vehicles segment revenues increased $10.7 million in the third quarter of 2011 compared to the third quarter of 2010 primarily due to increased production work on target launch vehicles and Taurus II rockets, partially offset by decreased activity on Minotaur space launch vehicles and missile defense interceptors.

Segment operating income increased $0.2 million in the third quarter of 2011 compared to the third quarter of 2010 primarily due to the absence of unrecovered R&D expenses that were recognized in the third quarter of 2010, in addition to increased activity on target launch vehicle contracts. These factors were partially offset by decreased activity on certain space launch vehicles and missile defense interceptors, and profit margin reductions on certain space launch vehicle contracts. Segment operating margin decreased marginally primarily due to profit margin reductions on certain space launch vehicle contracts and higher Taurus II intersegment revenues (which do not generate profit) partially offset by the absence of unrecovered R&D expenses that were recognized in the third quarter of 2010.

Satellites and Space Systems
   
Third Quarter
         
First Nine Months
       
($ in millions)
 
2011
   
2010
   
% Change
   
2011
   
2010
   
% Change
 
Revenues
  $ 141.1     $ 121.8       16%   $ 432.0     $ 361.7       19%  
Operating Income
    11.5       7.5       53%     30.2       22.7       33%  
Operating Margin
    8.2 %     6.2 %             7.0 %     6.3 %        

Satellites and space systems segment revenues increased $19.3 million in the third quarter of 2011 compared to the third quarter of 2010 primarily due to increased activity on communications satellites and space technical services contracts, partially offset by decreased activity on science and remote sensing satellite contracts.

Segment operating income increased $4.0 million in the third quarter of 2011 compared to the third quarter of 2010 primarily due to increased contract activity and profit margin improvements on communications satellite contracts and space technical services contracts, partially offset by decreased activity on science and remote sensing satellite contracts. Communications satellite operating results improved in part due to the absence of costs incurred in the third quarter of 2010 pertaining to the successful resolution of a satellite anomaly that occurred in early 2010. Segment operating margin increased primarily due to profit margin improvements on communications satellite contracts and the absence of the satellite anomaly resolution costs.

Advanced Space Programs
   
Third Quarter
         
First Nine Months
       
($ in millions)
 
2011
   
2010
   
% Change
   
2011
   
2010
   
% Change
 
Revenues
  $ 112.2     $ 103.2       9%   $ 308.1     $ 331.7       (7% )
Operating Income
    8.0       7.8       3%     20.3       15.8       28%  
Operating Margin
    7.1 %     7.6 %             6.6 %     4.8 %        

Advanced space programs segment revenues increased $9.0 million in the third quarter of 2011 compared to the third quarter of 2010 primarily due to increased activity on national security satellite contracts partially offset by decreased revenues on the Commercial Resupply Services (CRS) contract, resulting from a higher level of subcontract activity in the third quarter of 2010, and decreased activity on the Orion LAS contract that was terminated in 2010.

Segment operating income increased $0.2 million in the third quarter of 2011 compared to the third quarter of 2010 primarily due to increased activity and profit margin improvements on national security satellite contracts, and the absence of a profit reduction in the third quarter of 2010 attributable to the termination of the Orion LAS contract. These factors were substantially offset by a $5.4 million profit improvement in the third quarter of 2010 related to an R&D expense adjustment. Segment operating margin decreased marginally in the third quarter of 2011 primarily due to the same factors that impacted segment operating income.

Cash Flow

Cash flow for the third quarter and first nine months of 2011 were as follows:
   
Third Quarter
 
First Nine Months
($ in millions)
 
2011
 
2011
Net Cash Provided by Operating Activities
  $
26.6
    $
94.6
 
Capital Expenditures
   
(10.3
)    
(43.1
)
Free Cash Flow
   
16.3
     
51.5
 
Other, Net
   
0.9
     
0.1
 
Net Increase in Cash
   
17.2
     
51.6
 
Beginning Cash Balance
   
286.8
     
252.4
 
Ending Cash Balance
  $
304.0
    $
304.0
 


New Business Highlights

During the third quarter of 2011, Orbital received approximately $275 million in new firm and option contract bookings. In addition, the company received approximately $245 million of option exercises under existing contracts. As of September 30, 2011, the company’s firm contract backlog was approximately $2.2 billion and its total backlog (including options, indefinite-quantity contracts and undefinitized orders) was approximately $4.9 billion.

Operational Highlights

In the third quarter of 2011, the company successfully conducted four launch vehicle missions and three satellite and space system deployments. The company also completed and shipped another four rockets and satellite systems to customers for missions to be carried out in the future. The missions completed in the quarter included two Minotaur IV launches: one deployed a suborbital hypersonic-flight research payload for the Defense Advanced Research Projects Agency (DARPA) and the other launched the U.S. Navy’s TacSat-4 satellite into Earth orbit. Orbital also conducted two flights of its Coyote supersonic sea-skimming target vehicle for the U.S. Navy. In addition, the SES-2 and SES-3 commercial communications satellites built by Orbital for SES of Luxembourg were deployed during the quarter. The SES-2 spacecraft also carried the Commercially Hosted Infrared Payload (CHIRP) experimental sensor for the U.S. Air Force that Orbital procured, tested and integrated with the spacecraft.

In addition, in early October, the Intelsat 18 commercial communications satellite built by Orbital for Intelsat S.A. was successfully launched and deployed. This was the fourth company-built geosynchronous satellite delivered and launched in 2011. The company also launched a medium-range target for the U.S. Missile Defense Agency earlier this month.

The company achieved important milestones in its Taurus II and Cygnus development programs in the last three months. Highlights included the delivery of the first pressurized cargo module for the Cygnus spacecraft to the Wallops Island launch site and the resumption of Taurus II main rocket engine testing with a successful hot-fire operation of an AJ26 engine at NASA’s Stennis Space Center in September. However, continued delays in completing construction and certification of the Wallops Island launch complex are expected to result in an approximately two-month schedule delay for the first Taurus II test flight, moving it from late December 2011 to late February or early March 2012.

For the remainder of 2011, Orbital is scheduled to complete up to seven more space missions and product deliveries as well as several additional major R&D milestones. These operations will increase the total number of major missions and system deliveries in 2011 to approximately 40 for the year.

2011 Financial Guidance

The company’s updated financial guidance for full year 2011 is as follows:
 
Current
Previous
Revenues ($ in millions)
$1,350 - $1,375
$1,325 - $1,375
Operating Income Margin
5.50% - 5.75%
5.25% - 5.75%
Diluted Earnings per Share
$1.00 - $1.05
$0.95 - $1.05
Free Cash Flow ($ in millions)
Breakeven - ($20)
($40 - $60)

The updated guidance for 2011 reflects narrower ranges for revenues, operating income margin and earnings per share. The guidance for free cash flow has improved substantially, primarily due to the timing of cash receipts on certain satellite contracts. The updated guidance assumes a full-year effective income tax rate of approximately 23%.

2012 Preliminary Outlook

The company’s preliminary financial outlook for full year 2012 is as follows:
   
2012
Revenues ($ in millions)
 
$1,475 - $1,525
Operating Income Margin
 
6.50% - 7.00%
Diluted Earnings per Share
 
$0.95 - $1.05
Free Cash Flow ($ in millions)
 
$10 - $30

The preliminary outlook for 2012 is based on a variety of assumptions about future business conditions and operational events, including new business bookings, U.S. Government budget levels and tax policies. This outlook assumes that the effective income tax rate will be in the range of 36% to 38% in 2012. The effective income tax rate is expected to be higher in 2012 as compared to 2011 due to tax credits and the one-time income tax adjustment noted above that reduced the 2011 income tax rate but are not expected to be applicable to the company in 2012.

Disclosure of Non-GAAP Financial Measure

Free cash flow is defined as GAAP (Generally Accepted Accounting Principles) net cash provided by operating activities less capital expenditures for property, plant and equipment. A reconciliation of free cash flow to net cash provided by operating activities is included above in the section entitled “Cash Flow.” Management believes that the company’s presentation of free cash flow is useful because it provides investors with an important perspective on the company’s liquidity, financial flexibility and ability to fund operations and service debt.

Orbital does not intend for the above non-GAAP financial measure to be considered in isolation or as a substitute for the related GAAP measure. Other companies may define this measure differently.