Orbital Sciences (ORB) 10-Q 2006 Q1 Quarterly report

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, 2006

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
(State of Incorporation of Registrant) 06-1209561
(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.

Yesþ Noo

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filero Accelerated filerþ Non-accelerated filero

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

          As of April 24, 2006, 55,054,957 shares of the registrant’s Common Stock were outstanding.

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

	March 31,			December 31,
	2006			2005
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	180,559		$	158,849
Restricted cash		6,294			6,294
Receivables, net		146,677			131,251
Inventories, net		21,465			19,006
Deferred income taxes, net		32,053			30,614
Other current assets		4,048			6,473
Total current assets		391,096			352,487
Property, plant and equipment,net		86,648			85,640
Goodwill		55,551			55,551
Deferred income taxes,net		160,308			166,248
Other non-current assets		8,668			8,864
Total assets	$	702,271		$	668,790
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term obligations	$	76		$	76
Accounts payable and accrued expenses		118,282			116,153
Deferred revenues		53,243			30,281
Total current liabilities		171,601			146,510
Long-term obligations, net of current portion		126,441			126,459
Other non-current liabilities		65			87
Total liabilities		298,107			273,056
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, 55,194,946 and 55,032,244 shares outstanding, respectively		552			550
Additional paid-in capital		591,242			591,604
Accumulated deficit		(187,630	)		(196,420	)
Total stockholders’ equity		404,164			395,734
Total liabilities and stockholders’ equity	$	702,271		$	668,790

See accompanying notes to condensed consolidated financial statements.

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

	Quarters Ended March 31,
	2006			2005
	(unaudited)			(unaudited)
Revenues	$	192,137		$	167,149
Costs of goods sold		154,309			139,338
Gross profit		37,828			27,811
Research and development expenses		2,171			1,032
Selling, general and administrative expenses		19,800			14,562
Income from operations		15,857			12,217
Interest expense		(3,059	)		(2,780	)
Interest income and other		2,357			757
Income before income taxes		15,155			10,194
Provision for income taxes		(6,365	)		(4,042	)
Net income	$	8,790		$	6,152
Basic net income per share	$	0.16		$	0.11
Diluted net income per share	$	0.14		$	0.10

See accompanying notes to condensed consolidated financial statements.

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

	Quarters Ended March 31,
	2006			2005
	(unaudited)			(unaudited)
Cash Flows From Operating Activities:
Net income	$	8,790		$	6,152
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense		3,534			3,636
Deferred taxes		4,501			3,896
Amortization of debt issuance costs		153			153
Other		732			(204	)
Changes in assets and liabilities		10,561			(4,090	)
Net cash provided by operating activities		28,271			9,543
Cash Flows From Investing Activities:
Capital expenditures		(5,651	)		(4,467	)
Change in cash restricted for letters of credit, net		—			30
Net cash used in investing activities		(5,651	)		(4,437	)
Cash Flows From Financing Activities:
Payments on long-term obligations		(18	)		(77	)
Repurchase of common stock		(7,954	)		—
Net proceeds from issuances of common stock		5,523			427
Tax benefit of share-based compensation		1,539			—
Net cash (used in) provided by financing activities		(910	)		350
Net increase in cash and cash equivalents		21,710			5,456
Cash and cash equivalents, beginning of period		158,849			125,504
Cash and cash equivalents, end of period	$	180,559		$	130,960

See accompanying notes to condensed consolidated financial statements.

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ORBITAL SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 and 2005
(Unaudited)

(1) Basis of Presentation

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

     In the opinion of management, the accompanying unaudited interim financial information reflects all adjustments, consisting of normal recurring accruals, necessary for a fair presentation on a going concern basis. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America 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, 2005.

     Operating results for the quarter ended March 31, 2006 are not necessarily indicative of the results expected for the full year.

(2) Preparation of Condensed Consolidated Financial Statements

     The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions, including estimates of future contract costs and earnings. Such estimates and assumptions affect the reported amounts of assets and liabilities at the date of the 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.

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(3) Industry Segment Information

     Orbital’s products and services are grouped into three reportable segments: (i) launch vehicles; (ii) satellites and related space systems; and (iii) transportation management systems. 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 interceptor and target vehicles for missile defense systems, small-class space launch vehicles that place satellites into low-Earth orbit, and suborbital launch vehicles that place payloads into a variety of high-altitude trajectories.

• Satellites and Related Space Systems.Satellites and interplanetary spacecraft for communications, remote sensing, scientific and military missions, satellite subsystems and space-related technical services.

• Transportation Management Systems.Software-based systems that combine satellite navigation and wireless communications to enable municipal transit and other fleet operators to manage and dispatch vehicles.

     Intersegment sales are generally negotiated and accounted for under terms and conditions that are similar to 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 March 31,
	2006			2005
Launch Vehicles:
Revenues	$	78,712		$	79,977
Operating income		9,015			8,988
Identifiable assets		114,141			114,882	(1)
Capital expenditures		1,283			2,217
Depreciation		1,242			1,390
Satellites and Related Space Systems:
Revenues(2)	$	107,484		$	82,410
Operating income		6,486			2,833
Identifiable assets		154,752			135,903	(1)
Capital expenditures		3,579			1,931
Depreciation		1,375			1,207
Transportation Management Systems:
Revenues	$	7,948		$	7,067
Operating income		356			396
Identifiable assets		18,496			19,251	(1)
Capital expenditures		86			134
Depreciation		144			168
Corporate and Other:
Revenues(2)	$	(2,007	)	$	(2,305	)
Operating income		—			—
Identifiable assets		414,882			398,754	(1)
Capital expenditures		703			185
Depreciation		773			871
Consolidated:
Revenues	$	192,137		$	167,149
Operating income		15,857			12,217
Identifiable assets		702,271			668,790	(1)
Capital expenditures		5,651			4,467
Depreciation		3,534			3,636

(1)	As of December 31, 2005.
(2)	Corporate and other revenues are comprised solely of the elimination of intersegment sales. Satellites and related space systems revenues include $1.4 million and $2.2 million of the intersegment sales in the quarters ended March 31, 2006 and 2005, respectively.

(4) Receivables

     Receivables consisted of the following(in thousands):

	March 31, 2006			December 31, 2005
Billed	$	30,020		$	31,546
Unbilled		116,772			99,820
Allowance for doubtful accounts		(115	)		(115	)
Total	$	146,677		$	131,251

     As of March 31, 2006 and December 31, 2005, unbilled receivables included $17.0 million and $16.8 million, respectively, of incentive fees on certain satellite contracts that become due incrementally over periods of up to 15 years, subject to the achievement of performance criteria. Additionally, some 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,

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2006 and December 31, 2005, up to $31.3 million and $27.9 million, respectively, of revenues recognized under such contracts could be reversed if satellite performance criteria were not met. The company generally procures insurance policies that would indemnify the company for satellite incentive fees that are not earned and for performance refund obligations.

(5) Inventories

     Inventories consisted of the following(in thousands):

	March 31, 2006			December 31, 2005
Inventories	$	22,085		$	19,626
Allowance for inventory obsolescence		(620	)		(620	)
Total	$	21,465		$	19,006

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

(6) Warranties

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

	Quarter Ended			Quarter Ended
	March 31, 2006			March 31, 2005
Balance at beginning of period	$	2,028		$	3,145
Accruals during the period		151			343
Reductions during the period		(390	)		(689	)
Balance at end of period	$	1,789		$	2,799

(7) Earnings Per Share

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

	Quarter Ended		Quarter Ended
	March 31, 2006		March 31, 2005
Weighted average of outstanding shares for basic EPS		55,083		55,157
Dilutive effect of outstanding stock options, units and warrants		7,239		8,304
Shares for diluted EPS		62,322		63,461

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(8) Comprehensive Income

     Comprehensive income in the quarters ended March 31, 2006 and 2005 was equal to net income. Accumulated other comprehensive income as of March 31, 2006 and December 31, 2005 was $0.

(9) Debt

     As of March 31, 2006 and December 31, 2005, the company had $126.4 million of 9% senior notes due in July 2011 with interest due semi-annually. The fair value of the company’s senior notes at March 31, 2006 and December 31, 2005 was estimated at $135.6 million and $135.3 million, respectively, based on market trading activity.

     The company has a $50.0 million revolving credit facility (the “Revolver”) with the option to increase the amount of the Revolver up to $25 million to the extent that any one or more lenders commit to be a lender for such amount. Loans under the Revolver bear interest at either LIBOR plus a margin ranging from 1.5% to 2.25% or at a prime rate plus a margin ranging from zero to 0.75%, with the applicable margin in each case varying according to the company’s ratio of total debt to earnings before interest, taxes, depreciation and amortization. The Revolver is collateralized by the company’s intellectual property and accounts receivable. Up to $40.0 million of the Revolver may be reserved for letters of credit. As of March 31, 2006, there were no borrowings under the Revolver, although $22.4 million of letters of credit were issued under the Revolver. Accordingly, as of March 31, 2006, $27.6 million of the Revolver was available for borrowing.

     Orbital’s 9% senior notes due 2011 and the Revolver contain covenants limiting the company’s ability to, among other things, incur additional debt, pay cash dividends, make investments, redeem or repurchase Orbital stock, enter into transactions with affiliates, merge or consolidate with others and dispose of assets or create liens on assets. In addition, the Revolver contains financial covenants with respect to leverage, secured leverage, fixed charge coverage, consolidated net worth and the ratio of accounts receivable to senior secured indebtedness. As of March 31, 2006, the company was in compliance with all of these covenants.

(10) Share-Based Compensation

     Effective January 1, 2006, the company adopted the provisions of Statement of Financial Accounting Standards No. 123(R) (“SFAS No. 123(R)”),“Share-Based Payment,”which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS No. 123(R), share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). Prior to January 1, 2006, the company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,”and related interpretations. The company also followed the disclosure requirements of Statement of

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Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation(“SFAS No. 123”).

     The company elected to adopt the modified prospective transition method as provided by SFAS No. 123(R). Accordingly, financial statement amounts for the prior periods have not been restated to reflect the fair value method of expensing share-based compensation. For the three months ended March 31, 2006, the company recorded a total of $2.6 million of share-based compensation expense and $0.8 million of related income tax benefit. At January 1, 2006, the company had no material cumulative effect associated with adopting SFAS No. 123(R).

Share-Based Compensation Plans

     The company’s share-based incentive plans permit the company to grant restricted stock units, restricted stock, incentive or non-qualified stock options, and certain other instruments to employees, directors, consultants and advisers of the company. Restricted stock units and stock options generally vest over three years. The exercise price of options granted under the plans must be at least equal to the fair market value of the company’s common stock on the date of grant. Options expire no more than ten years following the grant date. Shares issued under the plans upon option exercise or stock unit conversion are generally issued from authorized but previously unissued shares. As of March 31, 2006, up to 2.2 million shares of common stock were available for grant under the plans.

     The company also has an Employee Stock Purchase Plan (“ESPP”) whereby employees may purchase shares of stock at the lesser of 85% of the fair market value of shares at the beginning or the end of quarterly offering periods. As of March 31, 2006, up to 1.2 million shares of common stock were available for purchase under the ESPP. During the quarter ended March 31, 2006, compensation expense associated with the ESPP was $0.2 million.

Share-Based Transactions

     The following tables summarize restricted stock unit and stock option transactions during the quarter ended March 31, 2006:

	Restricted Stock Units					Options
											Weighted
				Weighted					Weighted		Average
				Average					Average		Remaining
	Number of			Grant Date		Number of			Exercise		Contractual
	Units			Fair Value		Shares			Price		Term (Years)
Outstanding at December 31, 2005		745,000		$	11.28		6,532,139		$	10.06		5.28
Granted		8,000			14.79		55,000			12.98
Exercised		—			—		(670,433	)		7.70
Forfeited		(5,000	)		11.28		(8,538	)		7.05
Expired		—			—		(159,682	)		13.02
Outstanding at March 31, 2006		748,000		$	11.32		5,748,486		$	10.28		5.16

     The fair value of the restricted stock units granted was based on the closing market price of the company’s common stock on the date of the award.

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     The following table summarizes information about stock options outstanding at March 31, 2006:

	Options Outstanding						Options Exercisable
			Weighted Average		Weighted				Weighted
Range of	Number		Remaining Contractual		Average		Number		Average
Exercise Prices	Outstanding		Life (Years)		Exercise Price		Exercisable		Exercise Price
$1.30-$5.79		2,052,734		6.15	$	4.79		1,787,349	$	4.64
6.15-12.05		1,963,358		5.70		9.66		1,560,248		10.24
12.18-43.31		1,732,394		3.39		17.47		1,677,394		17.62
$1.30-$43.31		5,748,486		5.16	$	10.28		5,024,991	$	10.71

     The fair value of options granted during the quarter ended March 31, 2006 was estimated on the grant date using the Black-Scholes option pricing model. The model utilizes certain information, such as the interest rate on a risk-free security maturing generally at the same time as the option being valued, and requires certain assumptions, such as the expected amount of time an option will be outstanding until it is exercised or it expires and the volatility associated with the price of the underlying shares of common stock, to calculate the fair value of stock options granted. The company believes that this valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the company’s stock options granted in the quarter ended March 31, 2006. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

     The fair value of options granted during the quarter ended March 31, 2006 was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:

Volatility		51	%
Risk-free interest rate		4.35	%
Weighted-average fair value per share at grant date	$	6.11
Expected dividend yield		—
Expected life of options (years)		4.5

     The total grant date fair value of stock options that were granted during the quarter ended March 31, 2006 was $0.3 million.

     During the quarter ended March 31, 2006, the total intrinsic value of options exercised (i.e., the difference between the market price on the exercise date and the price paid by the employee to exercise the options) was $4.7 million, and the total amount of cash received from the exercise of these options was $5.1 million. The tax benefit recorded for tax deductions associated with share-based compensation plans totaled $1.5 million for the quarter ended March 31, 2006 and was recorded as a credit to additional paid-in capital.

     As of March 31, 2006, the aggregate intrinsic value of stock options that are fully vested or are expected to vest was $38.1 million. In addition, as of March 31, 2006, unrecognized compensation cost related to non-vested stock options was $0.5 million, substantially all of which will be fully amortized by December 31, 2006.

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     No restricted stock units vested during the quarter ended March 31, 2006. As of March 31, 2006, the aggregate intrinsic value of restricted stock units that are expected to vest was $11.2 million. In addition, as of March 31, 2006, unrecognized compensation cost related to non-vested restricted stock units was $4.5 million, which is expected to be recognized over a weighted-average period of 1.25 years.

     Prior to adoption of SFAS No. 123(R), the company did not recognize compensation expense for employee stock option grants, when the exercise price of the company’s employee stock options equaled the market price of the underlying stock on the date of grant. For the quarter ended March 31, 2005, the company used the Black-Scholes option-pricing model to determine the pro forma impact under SFAS No. 123 on the company’s net income and earnings per share. This information and the assumptions used for the quarter ended March 31, 2005 are summarized as follows:

Volatility		57	%
Risk-free interest rate		3.39	%
Weighted-average fair value per share at grant date	$	5.07
Expected dividend yield		—
Expected life of options (years)		3.5

     The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of SFAS No. 123 to its stock option plan for the quarter ended March 31, 2005(in thousands, except per share amounts):

Net income, as reported	$	6,152
Stock-based employee compensation expense per fair-value-based method		(722	)
Pro forma net income	$	5,430
Earnings per share:
Basic—as reported	$	0.11
Basic—pro forma	$	0.10
Diluted—as reported	$	0.10
Diluted—pro forma	$	0.09

(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

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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.

     In the second quarter of 2005, the U.S. government commenced an investigation which the company believes is focused on contracting matters related to certain U.S. government launch vehicle programs. The company cannot predict whether the government ultimately will conclude that there have been violations by the company of any federal contracting laws, policies or procedures, or any other applicable laws. Should any such violations be alleged or found, the company could face the possibility of criminal, civil and/or administrative penalties depending on the nature of such violations.

Litigation

     The company is party to certain litigation or other legal proceedings arising in the ordinary course of business. In the opinion of management, the outcome of such legal matters will not 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

     With the exception of historical information, the matters discussed below under the headings “Consolidated Results of Operations for the Quarters Ended March 31, 2006 and 2005,” “Segment Results for the Quarters Ended March 31, 2006 and 2005,” “Backlog,” “Liquidity and Capital Resources,” “Off-Balance Sheet Arrangements” and elsewhere in this report on Form 10-Q include forward-looking statements that involve risks and uncertainties, many of which are beyond our control. A number of important factors, including those identified in our Annual Report on Form 10-K for the year ended December 31, 2005, may cause actual results to differ materially from those anticipated or expected in any forward-looking statement. We assume no obligation to update any forward-looking statements.

     We develop and manufacture small rockets and space systems for commercial, military and civil government customers. Our primary products are satellites and launch vehicles, including low-orbit, geosynchronous-orbit and planetary spacecraft for communications, remote sensing, scientific and defense missions; ground- and air-launched rockets that deliver satellites into orbit; and missile defense systems that are used as interceptor and target vehicles. We also offer space-related technical services to government agencies and develop and build satellite-based transportation management systems for public transit agencies and private vehicle fleet operators.

Consolidated Results of Operations for the Quarters Ended March 31, 2006 and 2005

     Revenues— Our first quarter 2006 revenues were $192.1 million, up 15% over first quarter 2005 revenues of $167.1 million. This increase was primarily due to a 30% increase in satellites and related space systems segment revenues that was driven by growth in the communications satellites product line related to progress on several new satellite contracts awarded in 2005. The growth in communications satellites revenues was offset partially by a revenue decrease in the science, technology and defense satellites product line due to a significant reduction in contract activity on a satellite that was substantially completed in the first quarter of 2006. Launch vehicles segment revenues decreased marginally due to lower revenues from the target vehicle and space launch vehicle product lines, partially offset by slightly higher interceptor launch vehicles product line revenues. Transportation management systems segment revenues increased 12% largely driven by work on several new contracts started in 2005.

     Gross Profit— Our consolidated gross profit increased 36% to $37.8 million in the first quarter of 2006 from $27.8 million in the first quarter of 2005. Gross profit in the first quarter of 2006, as compared to the same period in 2005, reflected increases of $7.8 million, or 74%, in our satellites and related space systems segment, $1.9 million, or 12%, in our launch vehicles segment and $0.3 million, or 18%, in our transportation management systems segment. The increase in gross profit in our satellites and related space systems segment was principally due to higher revenues, driven by an increased level of contract activity in 2006, and improved contract profitability in the communications satellites product line.

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     Research and Development Expenses— Research and development expenses are comprised of our self-funded product research and development activities and exclude direct customer-funded development activities. Research and development expenses were $2.2 million, or 1% of revenues, and $1.0 million, or 1% of revenues, in the first quarter of 2006 and 2005, respectively. These expenses related primarily to the development of enhanced launch vehicles and satellites.

     Selling, General and Administrative Expenses— Selling, general and administrative expenses were $19.8 million, or 10% of revenues, and $14.6 million, or 9% of revenues, in the first quarter of 2006 and 2005, respectively. Selling, general and administrative expenses include the costs of our finance, legal, administrative and general management functions, as well as the costs of marketing, advertising, promotional and other selling expenses. Selling, general and administrative expenses increased primarily due to stock-based compensation expenses that were recorded in 2006, as discussed below, and a $2.6 million increase in bid, proposal and marketing costs.

     On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R),“Share-Based Payment,”which establishes accounting for equity instruments exchanged for employee services. During the first quarter of 2006, we recorded $0.5 million in share-based compensation expense primarily related to stock options. In addition, the first quarter 2006 included $2.1 million of amortization expense related to restricted stock units granted in the fourth quarter of 2005. The majority of these costs are reported in selling, general and administrative expenses and the remainder are reported in cost of goods sold.

     Interest Expense— Interest expense was $3.1 million and $2.8 million for the first quarter of 2006 and 2005, respectively.

     Interest Income and Other— Interest income and other was $2.4 million and $0.8 million for the first quarter of 2006 and 2005, respectively. The quarter-over-quarter increase was primarily due to larger interest income as a result of higher interest rates and higher short-term invested cash balances.

     Income Taxes— We recorded income tax expense of $6.4 million and $4.0 million in the first quarter of 2006 and 2005, respectively, reflecting an annualized effective income tax rate of 42.0% and 39.7%, respectively. The increase in the effective tax rate is primarily due to an increase in non-deductible expenses in 2006.

     Net Income— Our net income for the first quarter of 2006 was $8.8 million, compared to net income of $6.2 million in the first quarter of 2005.

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Segment Results for the Quarters Ended March 31, 2006 and 2005

     Our products and services are grouped into three reportable segments: (i) launch vehicles, (ii) satellites and related space systems and (iii) transportation management systems. 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 table summarizes revenues and income from operations for our reportable business segments and corporate and other(in thousands):

	Quarters Ended
	March 31,
	2006			2005
Revenues:
Launch Vehicles	$	78,712		$	79,977
Satellites and Related Space Systems		107,484			82,410
Transportation Management Systems		7,948			7,067
Corporate and Other		(2,007	)		(2,305	)
Total	$	192,137		$	167,149
Income from Operations:
Launch Vehicles	$	9,015		$	8,988
Satellites and Related Space Systems		6,486			2,833
Transportation Management Systems		356			396
Corporate and Other		—			—
Total	$	15,857		$	12,217

     Launch Vehicles— Launch vehicles segment revenues decreased 2% primarily due to marginal decreases in our target launch vehicles and our space launch vehicles product lines, partially offset by a marginal increase in our interceptor launch vehicles product line. In our interceptor launch vehicles product line, we are developing and manufacturing interceptor boosters designed to defend against ballistic missile attacks, including the midcourse-phase Orbital Boost Vehicle (“OBV”) and the boost-phase Kinetic Energy Interceptors (“KEI”) programs directed by the U.S. Missile Defense Agency. Our interceptor launch vehicles product line accounted for $46.2 million and $45.8 million in revenues, or 59% and 57% of total segment revenues in the first quarter of 2006 and 2005, respectively.

     Operating income in the launch vehicles segment remained relatively constant quarter-over-quarter. Operating income from our missile defense interceptor launch vehicles product line continued to be the largest contributor to this segment’s operating income, reporting $5.5 million operating profit in the first quarter of 2006 and $6.0 million in the first quarter of 2005, or 61% and 66%, respectively, of total operating income in this segment. The launch vehicles segment’s operating margin (as a percentage of revenues) improved slightly to 11.5% in the first quarter of 2006, compared to 11.2% in the first quarter of 2005.

     Satellites and Related Space Systems— Satellites and related space systems segment revenues increased 30% driven by significant growth in revenues in our communications satellites product line. Revenues increased $44.9 million in our communications satellites product line primarily related to progress on several new satellite contracts awarded in 2005. The growth in communications satellites revenues was offset partially by a revenue decrease in the science,

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technology and defense satellites product line largely due to a significant reduction in contract activity on a satellite that was substantially completed in the first quarter of 2006.

     Operating income in the satellites and related space systems segment increased 129% due to significant growth in our communications satellites product line primarily attributable to the new satellite contracts started in 2005 and a favorable profit adjustment on a communications satellite program. The improvement in communications satellite operating income was partially offset by an operating income decrease in our science, technology and defense satellites product line, consistent with the revenue decline in this product line. This segment’s operating margin (as a percentage of revenues) improved to 6.0% in the first quarter of 2006, compared to 3.4% in the first quarter of 2005, primarily due to the operating profit increase in the communications satellites product line.

     Transportation Management Systems— Transportation management systems segment revenues increased 12% largely driven by work on several new contracts started in 2005. Operating income remained relatively consistent quarter-over-quarter. This segment’s operating margin (as a percentage of revenues) was 4.5% in the first quarter of 2006, compared to 5.6% in the first quarter of 2005.

     Corporate and Other— Corporate and other revenues were comprised solely of the elimination of intercompany revenues.

Backlog

     Our firm backlog was approximately $1.38 billion at March 31, 2006 and $1.26 billion at December 31, 2005. We expect approximately $485 million of the March 31, 2006 firm backlog to be recognized as revenue during the remainder of 2006. 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 $2.92 billion at March 31, 2006 and $2.90 billion at December 31, 2005. 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 2006 was $28.3 million as compared to $9.5 million in the first quarter of 2005. The increase in 2006 as compared to 2005 was primarily due to cash flows resulting from changes in assets and liabilities. The first quarter of 2006 includes a $10.6 million favorable adjustment resulting from net changes in assets and liabilities, primarily due to a $23.0 million increase in deferred revenues, offset partially by a $15.4 million increase in receivables. The increase in deferred revenues was due primarily to cash received in advance of contract performance related to

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communications satellite programs. The increase in receivables was consistent with revenue growth in the quarter.

     Cash Flow from Investing Activities— In the first quarter of 2006, we spent $5.7 million for capital expenditures, as compared to $4.5 million in the first quarter of 2005. The increase in capital expenditures is primarily related to additional integration and test equipment to support the growth requirements of our satellites and related space systems segment.

     Cash Flow from Financing Activities— In the first quarter of 2006, we repurchased and retired 552,500 shares of our common stock at a cost of $8.0 million.

     During the first quarter of 2006 and 2005, we received $5.5 million and $0.4 million respectively, from the issuance of common stock in connection with stock option and warrant exercises and our employee stock purchase plan.

     As of March 31, 2006 and December 31, 2005, we had $126.4 million of 9% senior notes due July 2011 with interest due semi-annually. The fair value of our senior notes at March 31, 2006 was estimated at $135.6 million, based on market trading activity.

     We have a $50.0 million revolving credit facility (the “Revolver”) with the option to increase the amount of the Revolver up to $25 million to the extent that any one or more lenders commit to be a lender for such amount. Loans under the Revolver bear interest at either LIBOR plus a margin ranging from 1.5% to 2.25% or at a prime rate plus a margin ranging from zero to 0.75%, with the applicable margin in each case varying according to our ratio of total debt to earnings before interest, taxes, depreciation and amortization. The Revolver is collateralized by our intellectual property and accounts receivable. Up to $40.0 million of the Revolver may be reserved for letters of credit. As of March 31, 2006, there were no borrowings under the Revolver, although $22.4 million of letters of credit were issued under the Revolver. Accordingly, as of March 31, 2006, $27.6 million of the Revolver was available for borrowing.

     Our 9% senior notes due 2011 and our $50 million Revolver contain covenants limiting our ability to, among other things, incur additional debt, pay cash dividends, make investments, redeem or repurchase Orbital stock, enter into transactions with affiliates, merge or consolidate with others and dispose of assets or create liens on assets. In addition, the Revolver contains financial covenants with respect to leverage, secured leverage, fixed charge coverage, consolidated net worth and the ratio of accounts receivable to senior secured indebtedness. As of March 31, 2006, we were in compliance with all of these covenants.

     Available Cash and Future Funding — At March 31, 2006, we had $180.6 million of unrestricted cash and cash equivalents. Management believes that available cash, cash expected to be generated from operations and borrowing capacity under the Revolver will be sufficient to fund our operating and capital expenditure requirements in the foreseeable future. However, there can be no assurance that this will be the case. Our ability to borrow additional funds is limited by the terms of our outstanding debt. Additionally, significant unforeseen events such as

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termination of major orders or late delivery or failure of launch vehicle or satellite products could adversely affect our liquidity and results of operations.

     In April 2005, our Board of Directors authorized the purchase of up to $50 million of our outstanding securities over a 12-month period. We purchased and retired 552,500 shares of our common stock at a cost of $8.0 million during the first quarter of 2006 under this securities purchase program. As of March 31, 2006, $7.5 million of additional possible purchases could be transacted under this purchase program.

Off-Balance Sheet Arrangements

     We believe that we do not have any material off-balance sheet arrangements, as defined by applicable securities regulations, 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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     At March 31, 2006, we had $3.5 million of receivables denominated in Japanese yen and $4.5 million denominated in Singapore dollars.

     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, 2006, we had no material foreign currency forward exchange contracts.

     The fair market value of our outstanding 9% senior notes due 2011 was estimated at approximately $135.6 million at March 31, 2006, based on market trading activity.

     We have an unfunded deferred compensation plan for senior managers and executive officers with a total liability balance of $5.6 million at March 31, 2006. This liability is subject to fluctuation based upon the market value of certain investment securities selected by participants to measure the market fluctuations and to measure our liability to each participant.

ITEM 4. 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. There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On May 26, 2005, the United States Attorney’s Office for the District of Arizona commenced an investigation which we believe is focused on contracting matters related to certain U.S. government launch vehicle programs. We are cooperating fully with U.S. government authorities in connection with this investigation, and management strongly supports and is committed to the U.S. government’s procurement integrity processes. We cannot predict whether the government ultimately will conclude that there have been violations by us of any federal contracting laws, policies or procedures, or any other applicable laws. Should any such violations be alleged or found, we could face the possibility of criminal, civil and/or administrative penalties depending on the nature of such violations.

We are party to certain litigation or proceedings arising in the ordinary course of business. In the opinion of management, the probability is remote that the outcome of any such litigation or 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, 2005.

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

(a) None.

(b) None.

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(c) Issuer Purchases of Equity Securities

The following table sets forth information regarding our repurchase of common stock during the quarter ended March 31, 2006. The purchases were made in open market transactions.

					Total Number of		Maximum Number
					Shares		(or Approximate
					Purchased as		Dollar Value) of
	Total				Part of Publicly		Shares That May
	Number of		Average Price		Announced		Yet Be Purchased
	Shares		Paid Per		Plans or		Under the Plans or
Period	Purchased		Share		Programs1		Programs1
January 1, 2006 to January 31, 2006		132,700	$	12.95		132,700	$	13,713,615
February 1, 2006 to February 28, 2006		32,300	$	12.96		32,300	$	13,294,916
March 1, 2006 to March 31, 2006		387,500	$	15.02		387,500	$	7,472,881
TOTAL		552,500	$	14.41		552,500	$	7,472,881

(1) On April 21, 2005, we announced the company’s plan, subject to certain conditions, to repurchase up to $50 million of outstanding debt and equity securities, including our common stock. This plan expires on April 20, 2006.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     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.

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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: April 26, 2006	By:	/s/ David W. Thompson
		David W. Thompson
		Chairman and Chief Executive Officer
DATED: April 26, 2006	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).
3.5	Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred Stock, dated November 2, 1998 (incorporated by reference to Exhibit 2 to the company’s Registration Statement on Form 8-A filed on November 2, 1998).
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	Warrant Agreement, dated as of August 22, 2002, by and between Orbital Sciences Corporation and U.S. Bank, N.A., as Warrant Agent (incorporated by reference to Exhibit 4.2 to the company’s Current Report on Form 8-K filed on August 27, 2002).
4.3	Form of Common Stock Purchase Warrant for Warrants Expiring August 15, 2006 (restricted) (incorporated by reference to Exhibit 4.4 to the company’s Current Report on Form 8-K filed on August 27, 2002).
4.4	Form of Common Stock Purchase Warrant for Warrants Expiring August 15, 2006 (registered) (incorporated by reference to Exhibit 4.4 to the company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003).

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Exhibit No.	Description
4.5	Rights Agreement dated as of October 22, 1998 between Orbital Sciences Corporation and BankBoston N.A., as Rights Agent (incorporated by reference to Exhibit 1 to the company’s Report on Form 8-A filed on November 2, 1998).
4.6	Form of Rights Certificate (incorporated by reference to Exhibit 3 to the company’s Report on Form 8-A filed on November 2, 1998).
4.7	Indenture, dated as of July 10, 2003, by and between Orbital Sciences Corporation and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the company’s Current Report on Form 8-K filed on July 18, 2003).
4.8	Form of 9% Senior Note due 2011 (incorporated by reference to Exhibit 4.2 to the company’s Current Report on Form 8-K filed on July 18, 2003).
31.1	Certification of Chairman 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 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).

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