Exhibit 99.1
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
| Page |
Report of Independent Registered Public Accounting Firm | 2 |
Consolidated Statements of Comprehensive Income | 3 |
Consolidated Balance Sheets | 4 |
Consolidated Statements of Stockholders’ Equity | 5 |
Consolidated Statements of Cash Flows | 6 |
Notes to Consolidated Financial Statements | 7 |
Schedule II — Valuation and Qualifying Accounts | 23 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Orbital Sciences Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Orbital Sciences Corporation and its subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
February 24, 2014
ORBITAL SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
|
| Years Ended December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
|
|
|
|
|
|
|
| |||
Revenues |
| $ | 1,365,271 |
| $ | 1,436,769 |
| $ | 1,345,923 |
|
Cost of revenues |
| 1,062,466 |
| 1,097,190 |
| 1,074,389 |
| |||
Research and development expenses |
| 89,233 |
| 114,205 |
| 102,751 |
| |||
Selling, general and administrative expenses |
| 100,027 |
| 112,803 |
| 88,989 |
| |||
Income from operations |
| 113,545 |
| 112,571 |
| 79,794 |
| |||
Interest income and other, net |
| (5,368 | ) | 749 |
| 19,335 |
| |||
Interest expense |
| (4,556 | ) | (11,275 | ) | (11,096 | ) | |||
Debt extinguishment expense |
| — |
| (10,261 | ) | — |
| |||
Income before income taxes |
| 103,621 |
| 91,784 |
| 88,033 |
| |||
Income tax provision |
| (35,255 | ) | (30,778 | ) | (20,639 | ) | |||
Net income |
| $ | 68,366 |
| $ | 61,006 |
| $ | 67,394 |
|
|
|
|
|
|
|
|
| |||
Basic income per share |
| $ | 1.13 |
| $ | 1.03 |
| $ | 1.14 |
|
|
|
|
|
|
|
|
| |||
Diluted income per share |
| $ | 1.13 |
| $ | 1.02 |
| $ | 1.13 |
|
|
|
|
|
|
|
|
| |||
Net income (from above) |
| $ | 68,366 |
| $ | 61,006 |
| $ | 67,394 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
| |||
Defined benefit plans, net of tax of $813, $263 and ($773), respectively |
| 1,278 |
| 418 |
| (1,248 | ) | |||
Unrealized gain (loss) on investments |
| (50 | ) | 700 |
| (100 | ) | |||
Unrealized gain (loss) on foreign exchange derivative instruments, net of tax of $135 and ($339) |
| 212 |
| (540 | ) | — |
| |||
Total other comprehensive income (loss) |
| 1,440 |
| 578 |
| (1,348 | ) | |||
Comprehensive income |
| $ | 69,806 |
| $ | 61,584 |
| $ | 66,046 |
|
See accompanying notes to consolidated financial statements.
ORBITAL SCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
| December 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 265,837 |
| $ | 232,324 |
|
Receivables |
| 583,518 |
| 499,222 |
| ||
Inventories |
| 61,675 |
| 61,251 |
| ||
Deferred income taxes, net |
| 30,154 |
| 38,216 |
| ||
Other current assets |
| 9,889 |
| 17,810 |
| ||
Total current assets |
| 951,073 |
| 848,823 |
| ||
Property, plant and equipment, net |
| 246,060 |
| 251,360 |
| ||
Goodwill |
| 71,260 |
| 75,261 |
| ||
Other non-current assets |
| 16,368 |
| 36,010 |
| ||
Total assets |
| $ | 1,284,761 |
| $ | 1,211,454 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable and accrued expenses |
| $ | 281,631 |
| $ | 257,113 |
|
Deferred revenues and customer advances |
| 21,250 |
| 62,098 |
| ||
Current portion of long-term debt |
| 8,236 |
| 7,500 |
| ||
Total current liabilities |
| 311,117 |
| 326,711 |
| ||
Long-term debt |
| 135,000 |
| 143,236 |
| ||
Deferred income taxes, net |
| 26,611 |
| 10,879 |
| ||
Other non-current liabilities |
| 16,732 |
| 17,082 |
| ||
Total liabilities |
| 489,460 |
| 497,908 |
| ||
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, 60,515,556 and 59,616,736 shares outstanding, respectively |
| 605 |
| 596 |
| ||
Additional paid-in capital |
| 587,240 |
| 575,300 |
| ||
Accumulated other comprehensive loss |
| (1,341 | ) | (2,781 | ) | ||
Retained earnings |
| 208,797 |
| 140,431 |
| ||
Total stockholders’ equity |
| 795,301 |
| 713,546 |
| ||
Total liabilities and stockholders’ equity |
| $ | 1,284,761 |
| $ | 1,211,454 |
|
See accompanying notes to consolidated financial statements.
ORBITAL SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| |||||
|
|
|
|
|
| Additional |
| Other |
|
|
|
|
| |||||
|
| Common Stock |
| Paid-In |
| Comprehensive |
| Retained |
|
|
| |||||||
|
| Shares |
| Amount |
| Capital |
| Loss |
| Earnings |
| Total |
| |||||
Balance, December 31, 2010 |
| 58,240 |
| $ | 582 |
| $ | 558,015 |
| $ | (2,011 | ) | $ | 12,031 |
| $ | 568,617 |
|
Shares issued to employees, officers and directors |
| 675 |
| 7 |
| 2,884 |
|
|
|
|
| 2,891 |
| |||||
Stock-based compensation, net |
|
|
|
|
| 4,490 |
|
|
|
|
| 4,490 |
| |||||
Tax effect of stock-based compensation, net |
|
|
|
|
| 1,235 |
|
|
|
|
| 1,235 |
| |||||
Comprehensive income (loss) |
|
|
|
|
|
|
| (1,348 | ) | 67,394 |
| 66,046 |
| |||||
Balance, December 31, 2011 |
| 58,915 |
| 589 |
| 566,624 |
| (3,359 | ) | 79,425 |
| 643,279 |
| |||||
Shares issued to employees, officers and directors |
| 702 |
| 7 |
| 3,500 |
|
|
|
|
| 3,507 |
| |||||
Stock-based compensation, net |
|
|
|
|
| 4,960 |
|
|
|
|
| 4,960 |
| |||||
Tax effect of stock-based compensation, net |
|
|
|
|
| 216 |
|
|
|
|
| 216 |
| |||||
Comprehensive income (loss) |
|
|
|
|
|
|
| 578 |
| 61,006 |
| 61,584 |
| |||||
Balance, December 31, 2012 |
| 59,617 |
| 596 |
| 575,300 |
| (2,781 | ) | 140,431 |
| 713,546 |
| |||||
Shares issued to employees, officers and directors |
| 899 |
| 9 |
| 4,824 |
|
|
|
|
| 4,833 |
| |||||
Stock-based compensation, net |
|
|
|
|
| 4,733 |
|
|
|
|
| 4,733 |
| |||||
Tax effect of stock-based compensation, net |
|
|
|
|
| 2,383 |
|
|
|
|
| 2,383 |
| |||||
Comprehensive income (loss) |
|
|
|
|
|
|
| 1,440 |
| 68,366 |
| 69,806 |
| |||||
Balance, December 31, 2013 |
| 60,516 |
| $ | 605 |
| $ | 587,240 |
| $ | (1,341 | ) | $ | 208,797 |
| $ | 795,301 |
|
See accompanying notes to consolidated financial statements.
ORBITAL SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Years Ended December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
|
|
|
|
|
|
|
| |||
Operating Activities: |
|
|
|
|
|
|
| |||
Net income |
| $ | 68,366 |
| $ | 61,006 |
| $ | 67,394 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
| |||
Depreciation and amortization expense |
| 41,479 |
| 37,339 |
| 32,739 |
| |||
Deferred income taxes |
| 22,843 |
| 26,886 |
| 18,788 |
| |||
Stock-based compensation |
| 7,722 |
| 6,402 |
| 6,222 |
| |||
Amortization of debt costs |
| 570 |
| 6,751 |
| 6,590 |
| |||
Debt extinguishment expense |
| — |
| 10,261 |
| — |
| |||
Other |
| 3,598 |
| (1,876 | ) | (1,703 | ) | |||
Changes in assets and liabilities: |
|
|
|
|
|
|
| |||
Receivables |
| (84,296 | ) | (165,670 | ) | (6,969 | ) | |||
Inventories |
| (425 | ) | 3,084 |
| (8,118 | ) | |||
Other assets |
| 9,070 |
| 30,609 |
| (37,346 | ) | |||
Accounts payable and accrued expenses |
| 24,818 |
| 20,260 |
| (14,915 | ) | |||
Deferred revenue and customer advances |
| (40,848 | ) | (42,872 | ) | (7,212 | ) | |||
Other liabilities |
| (282 | ) | 154 |
| 9,666 |
| |||
Net cash provided by (used in) operating activities |
| 52,615 |
| (7,666 | ) | 65,136 |
| |||
Investing Activities: |
|
|
|
|
|
|
| |||
Capital expenditures |
| (35,655 | ) | (52,175 | ) | (59,815 | ) | |||
Proceeds from sale of investments |
| 12,836 |
| — |
| — |
| |||
Purchase price adjustment |
| 4,000 |
| — |
| — |
| |||
Proceeds from disposition of property |
| — |
| 25,589 |
| — |
| |||
Net cash provided by (used in) investing activities |
| (18,819 | ) | (26,586 | ) | (59,815 | ) | |||
Financing Activities: |
|
|
|
|
|
|
| |||
Net proceeds from issuance of common stock |
| 4,824 |
| 3,507 |
| 2,891 |
| |||
Tax benefit of stock-based compensation |
| 2,393 |
| 495 |
| 1,676 |
| |||
Repayment of long-term debt |
| (7,500 | ) | (145,179 | ) | — |
| |||
Proceeds from issuance of long-term debt |
| — |
| 150,000 |
| — |
| |||
Debt issuance costs |
| — |
| (1,466 | ) | (3,084 | ) | |||
Net cash provided by (used in) financing activities |
| (283 | ) | 7,357 |
| 1,483 |
| |||
Net increase (decrease) in cash and cash equivalents |
| 33,513 |
| (26,895 | ) | 6,804 |
| |||
Cash and cash equivalents, beginning of year |
| 232,324 |
| 259,219 |
| 252,415 |
| |||
Cash and cash equivalents, end of year |
| $ | 265,837 |
| $ | 232,324 |
| $ | 259,219 |
|
See accompanying notes to consolidated financial statements.
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Summary of Significant Accounting Policies
Business Operations
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.
Principles of Consolidation
The consolidated financial statements include the accounts of Orbital and its wholly owned subsidiaries. All significant intersegment balances and transactions have been eliminated.
Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States (“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.
Revenue Recognition
Orbital’s revenues are derived primarily from long-term contracts. Revenues on long-term contracts are recognized using the percentage-of-completion method of accounting. Such revenues are recorded based on the percentage that costs incurred to date bear to the most recent estimates of total costs to complete each contract. Estimating future revenues, costs and profit is a process requiring a high degree of management judgment, including management’s assumptions regarding the company’s operational performance as well as general economic conditions. In the event of a change in total estimated contract revenue, cost or profit, the cumulative effect of such change is recorded in the period the change in estimate occurs. Aggregate net changes in contract estimates recognized using the cumulative catch-up method of accounting increased operating income by $59 million and $61 million in 2013 and 2012, respectively, and decreased operating income by $1 million in 2011. The adjustments in 2013 and 2012 were primarily attributable to improved operating results during the latter stages of completion of communications satellite contracts. Frequently, the period of performance of a contract extends over a long period of time and, as such, revenue recognition and the company’s profitability from a particular contract may be affected to the extent that estimated costs to complete or incentive or award fee estimates are revised, delivery schedules are delayed, performance-based milestones are not achieved or progress under a contract is otherwise impeded. Accordingly, the company’s recorded revenues and operating profit from period to period can fluctuate significantly. In the event cost estimates indicate a loss on a contract, the total amount of such loss, excluding general and administrative expenses, is recorded in the period in which the loss is first estimated.
Many of the company’s contracts include provisions that increase or decrease contract value based on performance in relation to established targets or customer evaluations. Mission success milestones and incentive and award fees are included in estimated contract revenue when the company is able to make reasonable predictions about whether the performance targets will be achieved and make dependable estimates of such amounts based upon the company’s historical experience with similar types of activities and other objective criteria. The company includes the estimated amount of mission success milestones and incentive and award fees in estimated contract revenue at the inception of each contract, with reassessments made each quarter throughout the period of contract performance. If performance under such contracts were to differ from previous assumptions, or if the company were to revise its estimates or assumptions, current period revenues and profit would be adjusted and could fluctuate
significantly. The company’s assessments are guided by the historical performance of the company’s products and product families, the reliability record of the technology employed and assessments of technological considerations for each contract.
As part of the company’s risk management strategy, the company generally insures significant mission success milestones. Insurance recoveries are recorded as other income in the consolidated financial statements.
Research and Development Expenses
Expenditures for company-sponsored research and development projects are expensed as incurred. Research and development projects performed under contracts for customers are recorded as contract costs.
In 2013, the company completed the Commercial Orbital Transportation Services (“COTS”) research and development program for the National Aeronautics and Space Administration (“NASA”). The COTS program was accounted for as a best-efforts research and development cost-sharing arrangement. As such, the amounts funded by NASA were recognized proportionally as an offset to the company’s COTS program research and development expenses, including associated general and administrative expenses.
The following table summarizes the COTS program research and development expenses incurred and amounts funded by NASA through completion of the program in 2013 (in millions):
|
|
|
|
|
|
|
| Inception to December |
| ||||
|
| 2013 |
| 2012 |
| 2011 |
| 31, 2013 |
| ||||
Research and development costs incurred (1) |
| $ | 49.9 |
| $ | 62.6 |
| $ | 158.8 |
| $ | 530.4 |
|
Less amounts funded by NASA |
| (5.8 | ) | (21.9 | ) | (108.0 | ) | (288.0 | ) | ||||
Net research and development expenses |
| $ | 44.1 |
| $ | 40.7 |
| $ | 50.8 |
| $ | 242.4 |
|
(1) Includes associated general and administrative expenses.
The company has also been engaged in a major product development program of a medium capacity rocket named Antares. Approximately $15.8 million, $42.6 million and $34.3 million of the company’s research and development expenses in 2013, 2012 and 2011, respectively, were attributable to the Antares program. Since the inception of the Antares program through December 31, 2013, the company has incurred $250.6 million of such costs.
Stock-Based Compensation
The company determines the fair value of its restricted stock unit grants based on the closing price of Orbital’s common stock on the date of grant. The fair value of stock options granted is determined using the Black-Scholes valuation model, although the company has not granted stock options since 2006. Compensation expense pertaining to stock-based awards is recognized as expense over the service period, net of estimated forfeitures. The company uses the tax law ordering method to determine intra-period tax allocation related to the tax attributes of stock-based compensation.
Income Taxes
Orbital accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recorded for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. The company also recognizes liabilities for uncertain tax positions when it is more likely than not that a tax position will not be sustained upon ultimate settlement with a taxing authority. If a tax position does not meet the “more-likely-than-not” recognition threshold, despite the company’s belief that its filing position is supportable, the benefit of that tax position is not recognized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a tax rate change on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The company records valuation allowances to reduce net deferred tax assets to the amount considered more likely than not to be realized. Changes in estimates of future taxable income can materially change the amount of such valuation allowances.
Earnings per Share
Basic earnings per share is calculated using the weighted-average number of common shares outstanding during the periods. Diluted earnings per share includes the weighted-average effect of all potentially dilutive securities outstanding during the periods.
The computation of basic and diluted earnings per share is as follows (dollars in thousands, except per share amounts):
|
| Years Ended December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
Numerator |
|
|
|
|
|
|
| |||
Net Income |
| $ | 68,366 |
| $ | 61,006 |
| $ | 67,394 |
|
Percentage allocated to shareholders (1) |
| 99.8 | % | 99.6 | % | 99.1 | % | |||
Numerator for basic and diluted earnings per share |
| $ | 68,229 |
| $ | 60,762 |
| $ | 66,787 |
|
|
|
|
|
|
|
|
| |||
Denominator |
|
|
|
|
|
|
| |||
Denominator for basic earnings per share - weighted-average shares outstanding |
| 60,161 |
| 59,165 |
| 58,531 |
| |||
Dilutive effect of stock options and restricted stock units |
| 283 |
| 292 |
| 596 |
| |||
Denominator for diluted earnings per share |
| 60,444 |
| 59,457 |
| 59,127 |
| |||
|
|
|
|
|
|
|
| |||
Per share income |
|
|
|
|
|
|
| |||
Basic |
| $ | 1.13 |
| $ | 1.03 |
| $ | 1.14 |
|
Diluted |
| 1.13 |
| 1.02 |
| 1.13 |
|
(1) Basic weighted-average shares outstanding |
| 60,161 |
| 59,165 |
| 58,531 |
|
Basic weighted-average shares outstanding and unvested restricted stock units expected to vest |
| 60,247 |
| 59,428 |
| 59,078 |
|
Percentage allocated to shareholders |
| 99.8 | % | 99.6 | % | 99.1 | % |
Certain of the company’s unvested restricted stock units (“RSUs”) during 2013, 2012 and 2011 contained rights to receive non-forfeitable dividends, although as of December 31, 2013, all such RSUs had vested. In accordance with GAAP, the company accounted for unvested RSUs with non-forfeitable rights to dividends as a separate class of securities in calculating earnings per share using the two-class method. The calculation of earnings per share shown above excludes the income attributable to the unvested RSUs that included rights to receive non-forfeitable dividends from the numerator and excluded the impact of those units from the denominator.
In 2013, 2012 and 2011, diluted weighted-average shares outstanding excluded the effect of the company’s convertible notes that were anti-dilutive.
Fair Value Measurements
The company utilizes fair value measurement guidance prescribed by GAAP to value its financial instruments. The guidance includes a definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosures about the use of fair value measurements.
The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions.
These two types of inputs create the following fair value hierarchy:
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 - Significant inputs to the valuation model are unobservable.
Fair value disclosures pertaining to financial instruments of the company that are included in these notes to the consolidated financial statements include money market funds (see Note 1, subsection “Cash and Cash Equivalents”), foreign exchange derivative instruments (see Note 1, subsection “Derivative Financial Instruments”) and long-term debt (see Note 6).
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid investments with maturities of 90 days or less. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. At December 31, 2013 and 2012, the company had invested approximately $260 million and $215 million, respectively, in cash equivalents in the form of money market funds with three financial institutions. The company considers these money market funds to be Level 1 financial instruments.
Inventories
Inventories are stated at the lower of cost or estimated market value. Cost is determined on an average cost or specific identification basis. Estimated market value is determined based on assumptions about future demand and market conditions. If actual market conditions were less favorable than those previously projected by management, inventory write-downs could be required.
Derivative Financial Instruments
Orbital occasionally uses foreign exchange derivative instruments to manage certain foreign currency rate exposures. Derivative instruments are viewed as risk management tools by Orbital and are not used for trading or speculative purposes. Derivatives used for hedging purposes are generally designated as effective hedges. Accordingly, changes in the fair value of a derivative contract are highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract. Derivative instruments are recorded on the balance sheet at fair value. The ineffective portion of all hedges, if any, is recognized currently in earnings.
As of December 31, 2013 and 2012, the company had foreign exchange contracts with total contract values of €16.4 million and €56.0 million, or $21.4 million and $72.9 million, respectively, with various expiration dates through January 2015. As of December 31, 2013 and 2012, the fair value of these foreign exchange contracts was a liability of $1.3 million. The company considers these fair value measures to be Level 2 measures that are based on quoted forward rates from a financial institution.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major improvements are capitalized while expenditures for maintenance, repairs and minor improvements are charged to expense. When assets are retired or otherwise
disposed of, the assets and related accumulated depreciation and amortization are eliminated from the accounts and any resulting gain or loss is recognized.
Depreciation expense is determined using the straight-line method based on the following useful lives:
Buildings |
| 20 years |
Machinery, equipment and software |
| 3 to 12 years |
Leasehold improvements |
| Shorter of estimated useful life or lease term |
The company self-constructs some of its ground and airborne support and special test equipment utilized in the manufacture, production and delivery of some of its products. Orbital capitalizes direct costs incurred in constructing such equipment and certain allocated indirect costs. The company also capitalizes certain costs incurred in connection with internally developed software. These capitalized costs generally include direct software coding costs and certain allocated indirect costs.
Recoverability of Long-Lived Assets
Orbital’s policy is to evaluate its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. When an evaluation indicates that an impairment has occurred, a loss is recognized and the asset or asset group is adjusted to its estimated fair value. Given the inherent technical and commercial risks within the aerospace industry and the special purpose use of certain of the company’s assets, future impairment charges could be required if the company were to change its current expectation that it will recover the carrying amount of its long-lived assets from future operations.
Goodwill
Goodwill is comprised of acquisition costs in excess of the fair values assigned to the underlying net assets of acquired businesses. Goodwill is evaluated for potential impairment at least annually or whenever events or circumstances indicate that the carrying value of goodwill may not be recoverable. The evaluation includes comparing the fair value of a reporting unit to its carrying value including goodwill. If the carrying value exceeds the fair value, impairment is measured by comparing the implied value of goodwill to its carrying value and recorded in the current period. Goodwill balances are included in the identifiable assets of the business segment to which they have been assigned. There was no impairment of goodwill recorded during the three years ending December 31, 2013.
Deferred Revenue and Customer Advances
The company accounts for cash receipts from customers in excess of amounts recognized on certain contracts as “deferred revenues and customer advances.” These amounts are recorded as current liabilities since the associated services are performed within one year.
Recent Accounting Pronouncements
On January 1, 2013, authoritative accounting guidance became effective for the company pertaining to the disclosure of amounts that are reclassified out of other comprehensive income and into net income. During 2013, such reclassifications in the company’s financial statements were not material.
2. 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 used for national security space programs and to demonstrate new space technologies, and advanced flight systems for atmospheric and space missions.
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):
|
| Years Ended December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
Launch Vehicles: |
|
|
|
|
|
|
| |||
Revenues |
| $ | 551,709 |
| $ | 527,287 |
| $ | 483,177 |
|
Operating income |
| 48,831 |
| 36,131 |
| 14,147 |
| |||
Identifiable assets |
| 195,294 |
| 206,194 |
| 210,642 |
| |||
Capital expenditures |
| 8,882 |
| 26,066 |
| 27,999 |
| |||
Depreciation and amortization |
| 17,990 |
| 15,891 |
| 14,293 |
| |||
Satellites and Space Systems: |
|
|
|
|
|
|
| |||
Revenues |
| $ | 387,505 |
| $ | 496,152 |
| $ | 553,797 |
|
Operating income |
| 33,938 |
| 46,222 |
| 37,623 |
| |||
Identifiable assets |
| 288,343 |
| 278,008 |
| 282,344 |
| |||
Capital expenditures |
| 18,359 |
| 16,345 |
| 12,433 |
| |||
Depreciation and amortization |
| 8,366 |
| 8,563 |
| 6,841 |
| |||
Advanced Space Programs: |
|
|
|
|
|
|
| |||
Revenues |
| $ | 469,400 |
| $ | 470,102 |
| $ | 434,036 |
|
Operating income |
| 30,776 |
| 32,309 |
| 28,024 |
| |||
Identifiable assets |
| 448,015 |
| 390,059 |
| 254,769 |
| |||
Capital expenditures |
| 4,652 |
| 5,781 |
| 13,515 |
| |||
Depreciation and amortization |
| 8,872 |
| 6,575 |
| 5,033 |
| |||
Corporate and Other: |
|
|
|
|
|
|
| |||
Revenues (1) |
| $ | (43,343 | ) | $ | (56,772 | ) | $ | (125,087 | ) |
Operating loss (2) |
| — |
| (2,091 | ) | — |
| |||
Identifiable assets |
| 353,109 |
| 337,193 |
| 383,045 |
| |||
Capital expenditures |
| 3,762 |
| 3,983 |
| 5,868 |
| |||
Depreciation and amortization |
| 6,251 |
| 6,310 |
| 6,572 |
| |||
Consolidated: |
|
|
|
|
|
|
| |||
Revenues |
| $ | 1,365,271 |
| $ | 1,436,769 |
| $ | 1,345,923 |
|
Operating income |
| 113,545 |
| 112,571 |
| 79,794 |
| |||
Identifiable assets |
| 1,284,761 |
| 1,211,454 |
| 1,130,800 |
| |||
Capital expenditures |
| 35,655 |
| 52,175 |
| 59,815 |
| |||
Depreciation and amortization |
| 41,479 |
| 37,339 |
| 32,739 |
|
(1) Corporate and other revenues are comprised solely of the elimination of intersegment revenues. Intersegment revenues are summarized as follows (in millions):
|
| Years Ended December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
Launch Vehicles |
| $ | 38.2 |
| $ | 50.2 |
| $ | 118.3 |
|
Satellites and Space Systems |
| 4.1 |
| 5.7 |
| 5.6 |
| |||
Advanced Space Programs |
| 1.0 |
| 0.9 |
| 1.2 |
| |||
Total intersegment revenues |
| $ | 43.3 |
| $ | 56.8 |
| $ | 125.1 |
|
(2) The corporate and other operating loss in 2012 is comprised solely of unallocated professional fees and other costs related to a potential acquisition that was not consummated.
3. Export Sales and Major Customers
Orbital’s revenues by geographic area, as determined by customer location, were as follows (in thousands):
|
| Years Ended December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
United States |
| $ | 1,225,217 |
| $ | 1,155,003 |
| $ | 1,035,090 |
|
Europe and Eurasia |
| 91,838 |
| 150,746 |
| 146,623 |
| |||
Mexico and South America |
| 8,071 |
| 96,147 |
| 131,240 |
| |||
East Asia |
| 40,145 |
| 34,873 |
| 32,970 |
| |||
Total |
| $ | 1,365,271 |
| $ | 1,436,769 |
| $ | 1,345,923 |
|
Approximately 83%, 79% and 71% of the company’s revenues in 2013, 2012 and 2011, respectively, were generated under contracts with the U.S. Government and its agencies or under subcontracts with the U.S. Government’s prime contractors.
4. Balance Sheet Accounts and Supplemental Disclosures
Receivables
The components of receivables were as follows (in thousands):
|
| December 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
Billed |
| $ | 68,474 |
| $ | 59,496 |
|
Unbilled |
| 514,238 |
| 439,372 |
| ||
Retainages due upon contract completion |
| 806 |
| 354 |
| ||
Total |
| $ | 583,518 |
| $ | 499,222 |
|
Under the terms of the company’s Commercial Resupply Services (“CRS”) contract with NASA, approximately 25% of the contract value is billable to the customer and collectible only upon the completion of launch and delivery milestones for each of eight CRS contract missions which currently are scheduled to occur through 2016. Unbilled receivables at December 31, 2013 and 2012 included $335 million and $277 million, respectively, pertaining to the CRS contract which will be collected as launches occur, scheduled through 2016. Since the inception of the CRS contract in December 2008 through December 31, 2013, a total of $1.3 billion of revenues have been recognized on the contract, which has a total contract value of approximately $1.9 billion.
As of December 31, 2013 and 2012, unbilled receivables also included $9.9 million and $8.7 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.
Certain satellite contracts require the company to refund a portion of the contract price to the customer if performance criteria, which cover periods of up to 15 years, are not satisfied. As of December 31, 2013, the company could be required to refund up to approximately $16.7 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.
Excluding the portion of unbilled receivables pertaining to the CRS contract discussed separately above, approximately 93% of unbilled receivables and retainages at December 31, 2013 are due within one year and will be billed on the basis of contract terms and delivery schedules. Approximately 90% and 91% of the company’s receivables at December 31, 2013 and 2012, respectively, were related to contracts with the U.S. Government and its agencies or under subcontracts with the U.S. Government’s prime contractors. Receivables from non-U.S. customers totaled $14.7 million and $34.1 million at December 31, 2013 and 2012, respectively.
Inventories
As of December 31, 2013 and 2012, inventories were $61.7 million and $61.3 million, respectively. The company’s inventory consisted of component parts, raw materials and milestone payments for future delivery of component parts.
Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
|
| December 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
Land |
| $ | 10,656 |
| $ | 10,656 |
|
Buildings and leasehold improvements |
| 88,390 |
| 85,803 |
| ||
Furniture, fixtures and equipment |
| 337,737 |
| 298,082 |
| ||
Assets under construction |
| 38,030 |
| 45,928 |
| ||
Software and other |
| 29,619 |
| 33,310 |
| ||
|
| 504,432 |
| 473,779 |
| ||
Accumulated depreciation and amortization |
| (258,372 | ) | (222,419 | ) | ||
Total |
| $ | 246,060 |
| $ | 251,360 |
|
The company received proceeds of $25.6 million in 2012 in connection with the sale of property and equipment at the Wallops Island Flight Facility to the Commonwealth of Virginia. Depreciation expense for the years ended December 31, 2013, 2012 and 2011 was $40.8 million, $36.6 million and $32.0 million, respectively.
Goodwill and Intangible Assets
The company’s goodwill balances by reportable business segment are as follows (in thousands):
|
|
|
| Satellites |
| Advanced |
|
|
| ||||
|
| Launch |
| and Space |
| Space |
|
|
| ||||
|
| Vehicles |
| Systems |
| Programs |
| Total |
| ||||
Balance at December 31, 2013 |
| $ | 10,310 |
| $ | 51,837 |
| $ | 9,113 |
| $ | 71,260 |
|
In 2013, the company recorded a $4 million reduction in total goodwill in connection with a purchase price adjustment.
Intangible assets consist of technology assets that were acquired in a 2010 spacecraft business acquisition. As of December 31, 2013 and 2012, the balance of intangible assets was $4.5 million and $5.2 million, respectively, reported in “other non-current assets.” Amortization expense was $0.7 million for each of the years ended December 31, 2013, 2012 and 2011.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following (in thousands):
|
| December 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
Contract related accruals |
| $ | 147,689 |
| $ | 169,146 |
|
Employee compensation and benefits related liabilities |
| 78,024 |
| 77,241 |
| ||
Accounts payable |
| 50,650 |
| 4,037 |
| ||
Other |
| 5,268 |
| 6,689 |
| ||
Total |
| $ | 281,631 |
| $ | 257,113 |
|
Cash Flow
Cash payments for interest and income taxes were as follows (in thousands):
|
| Years Ended December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
Interest paid |
| $ | 4,040 |
| $ | 6,733 |
| $ | 4,158 |
|
Income taxes paid |
| 11,480 |
| 2,699 |
| 2,242 |
| |||
The entire amount of cash disbursed in 2012 in connection with the repayment of certain of the company’s long-term notes payable (see Note 6) was classified as repayment of long-term debt in financing activities in the accompanying consolidated statement of cash flows.
5. Investments
In the fourth quarter of 2013, the company sold all of its investments in auction-rate securities and preferred stock that were recorded at a fair value of $9.2 million as of December 31, 2012. Accordingly, there were no such investments at December 31, 2013. The company received $12.8 million in proceeds from the sale, resulting in a $3.7 million gain in 2013 recorded in interest income and other, net. The sold investments were not significant to the accompanying consolidated financial statements taken as a whole; accordingly, additional related disclosures are omitted from these notes to the consolidated financial statements.
6. Long-Term Debt
Long-term debt consisted of the following (in thousands):
|
| December 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
Senior secured term loan |
| $ | 142,500 |
| $ | 150,000 |
|
Convertible senior subordinated notes |
| 736 |
| 736 |
| ||
|
| 143,236 |
| 150,736 |
| ||
Less current portion |
| (8,236 | ) | (7,500 | ) | ||
Long-term portion |
| $ | 135,000 |
| $ | 143,236 |
|
The fair value of the senior secured term loan (the “Term Loan”) under the company’s revolving secured credit facility (the “Credit Facility”) was $142.5 million and $150.0 million at December 31, 2013 and 2012, respectively, based on current market rates for debt of the same risk and maturity. The company considers these to be Level 2 measures.
Term Loan and Credit Facility
In December 2012, the company entered into an amendment (the “Amendment”) to its existing Credit Facility, discussed below. The Amendment provided for a new $150 million Term Loan and extended the scheduled maturity on the Credit Facility to December 12, 2017. The net proceeds received under the Term Loan were used to repay substantially all of the company’s outstanding 2.4375% convertible senior subordinated notes due 2027. Debt issuance costs incurred in connection with the Amendment and issuance of the Term Loan amounted to $1.5 million, which are being amortized to interest expense over the five-year term.
The Term Loan matures on December 12, 2017, is secured on the same basis as the Credit Facility and bears interest, at the company’s option, at the London Interbank Offered Rate (“LIBOR”) plus 1.75% per annum or a base rate plus 0.75% per annum. The company is required to make quarterly principal payments of approximately $1.9 million. The remaining principal amount of $114.4 million will be due at maturity. The Term Loan is otherwise subject to terms and conditions substantially similar to those in the Credit Facility regarding guarantees, covenants and events of default.
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 Credit Facility matures on December 12, 2017. The company’s obligations under the Credit Facility are secured by substantially all of the company’s assets except for real property. The company has the option to increase the amount of the Credit Facility
by up to $150 million, subject to obtaining additional loan commitments and the satisfaction of other specified conditions. 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 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 December 31, 2013, there were no revolving loan borrowings under the Credit Facility, although $4.0 million of letters of credit were issued under the Credit Facility. Furthermore, borrowing capacity under the Credit Facility is limited by certain financial covenants, discussed below. Accordingly, as of December 31, 2013, approximately $250 million of the Credit Facility was available for borrowings.
Debt Covenants
Orbital’s Credit Facility contains covenants limiting the company’s 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 December 31, 2013, the company was in compliance with all of these covenants.
Debt Extinguishment Expenses
During 2012, the company recorded $10.3 million of debt extinguishment expenses associated with the repurchase of the convertible notes, described above, consisting of $6.8 million of accelerated amortization of debt discount, $2.8 million in prepayment premiums and other expenses, and $0.7 million in accelerated amortization of debt issuance costs.
7. Income Taxes
The significant components of the company’s deferred tax assets and liabilities as of December 31, 2013 and 2012 were (in thousands):
|
| December 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
Current Deferred Tax Assets (Liabilities): |
|
|
|
|
| ||
U.S. federal and state net operating loss carryforwards |
| $ | 344 |
| $ | 8,909 |
|
Capitalized research and development costs |
| 10,507 |
| 8,921 |
| ||
Accruals, reserves and other |
| 24,661 |
| 25,374 |
| ||
Valuation allowance |
| (5,358 | ) | (4,988 | ) | ||
Current deferred tax assets (liabitlites), net |
| 30,154 |
| 38,216 |
| ||
|
|
|
|
|
| ||
Noncurrent Deferred Tax Assets (Liabilities): |
|
|
|
|
| ||
State net operating loss carryforwards |
| 432 |
| 1,136 |
| ||
Capitalized research and development costs |
| — |
| 15,847 |
| ||
Tax credit/capital loss carryforwards and other |
| 15,375 |
| 18,296 |
| ||
Excess tax depreciation and other |
| (40,591 | ) | (42,602 | ) | ||
Valuation allowance |
| (1,827 | ) | (3,556 | ) | ||
Noncurrent deferred tax (liabilities) assets, net |
| (26,611 | ) | (10,879 | ) | ||
Total deferred tax assets, net |
| $ | 3,543 |
| $ | 27,337 |
|
The company’s income tax provisions for the years ended December 31, 2013, 2012 and 2011 were comprised of the following (in thousands):
|
| Years Ended December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
Current: |
|
|
|
|
|
|
| |||
Federal |
| $ | 7,573 |
| $ | 1,889 |
| $ | 384 |
|
State |
| 2,858 |
| 1,862 |
| 841 |
| |||
Foreign |
| 61 |
| 102 |
| 115 |
| |||
Total current |
| 10,492 |
| 3,853 |
| 1,340 |
| |||
|
|
|
|
|
|
|
| |||
Deferred: |
|
|
|
|
|
|
| |||
Federal |
| 25,667 |
| 29,264 |
| 29,558 |
| |||
State |
| (904 | ) | (2,339 | ) | (10,259 | ) | |||
Total deferred |
| 24,763 |
| 26,925 |
| 19,299 |
| |||
Total income tax provision |
| $ | 35,255 |
| $ | 30,778 |
| $ | 20,639 |
|
The company’s income before income taxes included foreign income of $0.2 million, $0.3 million and $0.4 million in 2013, 2012 and 2011, respectively.
A reconciliation of the statutory federal income tax rate to the company’s effective tax rate for the years ended December 31, 2013, 2012 and 2011 is as follows:
|
| 2013 |
| 2012 |
| 2011 |
|
U.S. federal statutory rate |
| 35.0 | % | 35.0 | % | 35.0 | % |
State taxes |
| 3.3 |
| 3.6 |
| 3.3 |
|
Domestic manufacturing deduction |
| (2.1 | ) | — |
| — |
|
Extraterritorial income exclusion |
| (1.0 | ) | (3.1 | ) | (8.7 | ) |
Research and development credits |
| (0.7 | ) | (1.7 | ) | (4.5 | ) |
Other, net |
| (0.5 | ) | (0.3 | ) | (1.7 | ) |
Effective rate |
| 34.0 | % | 33.5 | % | 23.4 | % |
The company recognized research and development tax credits in all periods presented that were primarily attributable to the company’s Antares and COTS research and development programs that are further discussed in Note 1. In addition, the company recorded favorable income tax adjustments of $1.1 million, $2.8 million and $7.7 million in 2013, 2012 and 2011, respectively, pertaining to extraterritorial income exclusions.
At December 31, 2013, the company had U.S. capital loss carryforwards of $17.4 million, which expire beginning in 2015 through 2018. The deferred tax assets related to capital losses have been fully offset with a valuation allowance due to the uncertainty of realization. These capital loss carryforwards are subject to certain limitations and other restrictions.
At December 31, 2013, the company had no remaining U.S. federal net operating loss carryforwards.
Changes in the company’s unrecognized tax benefits were as follows (in thousands):
|
| 2013 |
| 2012 |
| 2011 |
| |||
Unrecognized tax benefits at beginning of year |
| $ | 18,200 |
| $ | 16,732 |
| $ | 12,386 |
|
Additions based on tax positions related to the current year |
| — |
| — |
| 2,325 |
| |||
Additions for tax positions of prior years |
| 646 |
| 1,548 |
| 2,351 |
| |||
Reduction resulting from lapse of statute of limitation |
| (10 | ) | (80 | ) | (330 | ) | |||
Unrecognized tax benefits at end of year |
| $ | 18,836 |
| $ | 18,200 |
| $ | 16,732 |
|
All unrecognized tax benefits, if recognized, would lower the effective tax rate.
The company is subject to U.S. federal income tax and income tax in multiple state jurisdictions. The company has substantially concluded all income tax matters for years through 1989. In addition, the IRS completed an audit of the company’s 2005 federal income tax return in 2008.
The company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. No interest or penalties have been recorded in the accompanying consolidated financial statements.
8. Commitments and Contingencies
Leases
Aggregate minimum commitments under non-cancelable operating leases, primarily for office space and equipment rentals, at December 31, 2013 were as follows (in thousands):
2014 |
| $ | 18,670 |
|
2015 |
| 18,604 |
| |
2016 |
| 17,765 |
| |
2017 |
| 15,049 |
| |
2018 |
| 16,992 |
| |
Thereafter |
| 42,070 |
| |
|
| $ | 129,150 |
|
Rent expense for 2013, 2012 and 2011 was $19.4 million, $19.7 million and $19.3 million, respectively.
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 are allowable, although the U.S. Government has not yet made a final determination with respect to approximately $177 million of such costs incurred through 2013. If such costs were determined to be unallowable, the company could be required to record revenue and profit reductions in future periods.
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.
In 2013, the company recorded a $10 million charge in interest income and other, net to write off an option payment pertaining to a business agreement that was terminated in the fourth quarter of 2013 in connection with the conclusion of litigation.
9. Stock Plans and Equity Transactions
Stock 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 and are not subject to any performance criteria. 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.
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 December 31, 2013, approximately 326,000 shares of common stock were available for purchase under the ESPP. Compensation expense associated with the ESPP was $0.4 million, $0.3 million and $0.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Equity Transactions
The following tables summarize information related to stock-based compensation transactions and plans:
|
| Restricted Stock Units |
| Stock Options |
| ||||||
|
|
|
| Weighted Average |
|
|
| Weighted Average |
| ||
|
| Number of |
| Measurement |
| Number of |
| Exercise |
| ||
|
| Units |
| Date Fair Value |
| Options |
| Price |
| ||
Outstanding at December 31, 2010 |
| 684,674 |
| $ | 16.38 |
| 1,226,582 |
| $ | 6.46 |
|
Granted (1) |
| 442,110 |
| 17.39 |
| — |
| — |
| ||
Exercised |
| — |
| — |
| (317,647 | ) | 4.26 |
| ||
Vested |
| (330,356 | ) | 18.47 |
| — |
| — |
| ||
Forfeited |
| (14,316 | ) | 16.57 |
| (448 | ) | 5.79 |
| ||
Expired |
| — |
| — |
| (6,200 | ) | 3.91 |
| ||
Outstanding at December 31, 2011 |
| 782,112 |
| 16.07 |
| 902,287 |
| 7.25 |
| ||
Granted (1) |
| 529,446 |
| 12.90 |
| — |
| — |
| ||
Exercised |
| — |
| — |
| (343,734 | ) | 6.28 |
| ||
Vested |
| (345,945 | ) | 15.77 |
| — |
| — |
| ||
Forfeited |
| (29,980 | ) | 14.85 |
| — |
| — |
| ||
Expired |
| — |
| — |
| (599 | ) | 5.79 |
| ||
Outstanding at December 31, 2012 |
| 935,633 |
| 14.42 |
| 557,954 |
| 7.84 |
| ||
Granted (1) |
| 513,490 |
| 18.65 |
| — |
| — |
| ||
Exercised |
| — |
| — |
| (480,379 | ) | 7.19 |
| ||
Vested |
| (476,811 | ) | 14.70 |
| — |
| — |
| ||
Forfeited |
| (23,468 | ) | 15.38 |
| — |
| — |
| ||
Expired |
| — |
| — |
| (2,575 | ) | 7.16 |
| ||
Outstanding at December 31, 2013 |
| 948,844 |
| $ | 16.55 |
| 75,000 | (2) | $ | 12.07 |
|
(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 1.5 years, and the range of exercise prices is $9.71-$12.98. All outstanding options were exercisable as of December 31, 2013.
|
| Years Ended December 31, |
| |||||||
(in millions) |
| 2013 |
| 2012 |
| 2011 |
| |||
Stock-based compensation expense recognized |
| $ | 7.7 |
| $ | 6.4 |
| $ | 6.2 |
|
Income tax benefit related to stock-based compensation expense |
| 3.0 |
| 2.5 |
| 2.0 |
| |||
Intrinsic value of options exercised, computed as the market price on the exercise date less the price paid to exercise the options |
| 4.4 |
| 2.6 |
| 3.8 |
| |||
Cash received from exercise of options |
| 3.5 |
| 2.1 |
| 1.4 |
| |||
Grant date fair value of vested restricted stock units |
| 7.0 |
| 5.5 |
| 6.1 |
| |||
Tax benefit recorded as an increase to additional paid-in capital related to stock-based compensation transactions |
| 2.4 |
| 0.2 |
| 1.2 |
| |||
|
| As of |
| |
(in millions) |
| December 31, 2013 |
| |
Shares of common stock available for grant under the company’s stock-based incentive plans |
| 2.5 |
| |
Aggregate intrinsic value of restricted stock units that are expected to vest |
| $ | 22.1 |
|
Unrecognized compensation expense related to non-vested restricted stock units, expected to be recognized over a weighted-average period of 2.09 years |
| 12.4 |
| |
Aggregate intrinsic value of stock options outstanding, all fully vested |
| 0.8 |
| |
10. Employee Benefit Plans
The company has a defined contribution plan (the “Plan”) generally covering all full-time employees. Company contributions to the Plan are made based on plan provisions and at the discretion of the Board of Directors. The company made contributions of $19.9 million, $19.9 million and $18.6 million during 2013, 2012 and 2011, respectively.
The company also has two overfunded defined benefit plans that were frozen upon acquisition in a 1994 business combination. As of December 31, 2013 and 2012, the company had recorded a $4.9 million and $2.7 million asset, respectively, in other non-current assets related to the pension plans. The plans are not significant to the accompanying consolidated financial statements taken as a whole; accordingly, additional related disclosures are omitted from these notes to the consolidated financial statements.
The company has a deferred compensation plan for senior managers and executive officers. At December 31, 2013 and 2012, liabilities related to this plan totaling $13.5 million and $11.7 million, respectively, were included in accrued expenses.
11. Summary of Selected Quarterly Financial Data (Unaudited)
The following is a summary of selected quarterly financial data for the previous two years (in thousands, except per share data):
|
| Quarters Ended |
| ||||||||||
|
| March 31 |
| June 30 |
| Sept. 30 |
| Dec. 31 |
| ||||
2013 |
|
|
|
|
|
|
|
|
| ||||
Revenues |
| $ | 334,813 |
| $ | 333,081 |
| $ | 321,976 |
| $ | 375,401 |
|
Income from operations |
| 31,107 |
| 26,306 |
| 25,606 |
| 30,526 |
| ||||
Net income |
| 19,602 |
| 16,279 |
| 15,552 |
| 16,933 | (1) | ||||
Basic income per share |
| 0.33 |
| 0.27 |
| 0.26 |
| 0.28 |
| ||||
Diluted income per share |
| 0.33 |
| 0.27 |
| 0.26 |
| 0.28 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
2012 |
|
|
|
|
|
|
|
|
| ||||
Revenues |
| $ | 338,030 |
| $ | 371,268 |
| $ | 372,882 |
| $ | 354,589 |
|
Income from operations |
| 23,846 |
| 26,092 |
| 31,313 |
| 31,320 |
| ||||
Net income |
| 12,993 |
| 14,614 |
| 19,452 |
| 13,947 | (2) | ||||
Basic income per share |
| 0.22 |
| 0.25 |
| 0.33 |
| 0.29 |
| ||||
Diluted income per share |
| 0.22 |
| 0.25 |
| 0.33 |
| 0.29 |
|
(1) In December 2013, the company recorded a $10.0 million pretax charge ($6.1 million after tax) to write off a non-current asset and a $3.7 million gain (pretax and after tax) on the sale of investments.
(2) In December 2012, the company recorded a $10.3 million pretax debt extinguishment charge ($6.3 million after tax) related to a financing transaction.
ORBITAL SCIENCES CORPORATION
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
FORM 10-K FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(In thousands)
|
|
|
| Additions |
|
|
|
|
| |||||||
|
|
|
|
|
| Charged/ |
|
|
|
|
| |||||
|
| Balance at |
| Charged to |
| Credited to |
|
|
| Balance |
| |||||
|
| Start of |
| Costs and |
| Other |
|
|
| at End of |
| |||||
Description |
| Period |
| Expenses |
| Accounts |
| Deductions |
| Period |
| |||||
YEAR ENDED DECEMBER 31, 2011 |
|
|
|
|
|
|
|
|
|
|
| |||||
Deferred income tax valuation allowance |
| $ | 12,793 |
| $ | 75 |
| $ | 38 |
| $ | (3,513 | ) | $ | 9,393 |
|
YEAR ENDED DECEMBER 31, 2012 |
|
|
|
|
|
|
|
|
|
|
| |||||
Deferred income tax valuation allowance |
| 9,393 |
| 2 |
| (210 | ) | (641 | ) | 8,544 |
| |||||
YEAR ENDED DECEMBER 31, 2013 |
|
|
|
|
|
|
|
|
|
|
| |||||
Deferred income tax valuation allowance |
| 8,544 |
| 6,463 |
| 71 |
| (7,894 | ) | 7,184 |
| |||||